Tax1 Finals Tiu

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Green - RM 403, 10-02-12
TAX FINALS
RM 404
SY 2012-2013
CORPORATE INCOME TAXATION

A.
B.
General Principles, Section 23

1. A domestic corporation is taxable on all income derived from
sources within and without the Philippines
Domestic corp taxable on sources of income within and without
2. A foreign corporation whether engaged or not in trade or business
in the Philippines, is taxable only on income derived from sources
within the Philippines
Foreign corp whether doing business in the Philippines or not taxable
on sources of income within
Definition of Terms
1. Corporation - includes partnership no matter how created or
organized, joint account companies, insurance companies and
other associations, except:
a. General professional partnership
A partnership to exercise a common profession. So when you form
a partnership to practice law, you cannot invite other professionals
such as engineers or doctors to join your partnership. If you do
so, it will not be called a general professional partnership and
therefore, it will be taxable as a partnership already.
Although general professional partnerships are exempt from
corporate taxation, they are required to file an income tax return
and have their financial statements certified by an independent
auditor for the purpose of monitoring whether the individual
partners of such partnership are declaring their income properly.
The income of the partnership will be the expected income of the
individual partners. So if there is a declaration of P100M income
and there are two partners, then each partner have to declare the
P50M as part of their gross income subject to the 5-32% tax rate.
b. Joint venture for the purpose of undertaking construction
projects
Does it have to be with the government?
No. Joint ventures undertaking construction projects may be

with any private persons, juridical or natural
When there is a joint venture between two corporations to
undertake a construction project, will the income from the
activities of that joint venture be taxable at all?
It would depend on how they would divide the income from

the joint venture and any income that is received by each
party will be taxable to that party alone or separately.
When there are two corporations who wish to develop the entire
south reclamation project or the entire mountain of this area or
any development subdivisions, and they decide to distribute the
income 50-50, then that 50 will be taxable to one joint venturer
and the other 50 to the other joint venturer.
NOTE: Joint ventures not for construction projects are always

taxable as a corporation.
But of course, if the joint venture is already taxable as a
corporation because it is not for construction projects, that income
that is taxable to the joint venture will no longer form part to the
separate income of the two corporations.
c. Joint consortium for the purpose of engaging in petroleum,
geothermal and other energy operations pursuant to a
consortium agreement with the government
And the joint consortium for the petroleum, coal, and other
energy operations, it has strictly to be a contract with the
government otherwise if it is a private undertaking, then both
parties under the joint consortium is taxable as a corporation.
Partnership - an association of 2 or more persons where they may
contribute money, property or industry to a common fund with the
intention of dividing the profits among themselves.
Tests that will determine whether a partnership exists or not:
a. There must be a contribution to a common fund
b. There must be an intention to divide the profits among
themselves
There are 2 types of partnership
1) taxable
2) non-taxable
If 2 or more person creates a partnership without registering or the
non-compliance of the requirement will not benefit any association or
partnership they are subjected to the 30% corporate taxation
Professional partnership - partnerships formed by persons for the
sole purpose of exercising their common profession, no part of the
income of which is derived from engaging in any trade or business.
Co-ownership - one formed and organized not for profit but for the
common enjoyment of the property or for the preservation of the
property.
Lease of properties under common management
Where there is a series of transaction whose purpose is not limited
to the conservation of the common fund or even acquired
properties, a taxable partnership is formed.
The character of
habituality peculiar to business transactions engaged in for the
purpose of gain is present. (Evangelista vs. Collector, 102 Phil 140)
GR: not taxable if the co-onwed property is for the common
enjoyment.
XPN: if the property co-ownership so long as it is not to generate
profit.
Donor giving as a gift an undivided property to several donees without
the latter diving the property
Deceased that would give an estate to several heirs
Note: NCC provision that co-ownership only last for 10/20 yrs.
Joint Venture - created when 2 corporations, while registered and
operating separately, are place under 1 sole management which
operated the business affairs of said companies as though they
constituted a single entity thereby obtaining substantial economy
and profits in the operation.
Joint Account - created when 2 persons form or create a common
fund and such persons engage in a business for profit. This may
result in a taxable unregistered association or partnership.
2.
3.
4.
5.
6.
TAX FINALS - JEN, JASPER, REUVILLE, JADE, JARED, JAN, NEIL, RYAN, RIZA, PATRICIO, ANTHONY, KIM, KZ, SARAH, LOR, ANGGE | 1
J
oint Stock Companies - the midway between a corporation and a
partn
ershi
p, a
"hybr
id
personality", somewhat a corporation because this is managed by

a Board of Directors and such persons may transfer their share/s
without the consent of others, and somewhat a partnership
because it is an association, and persons
or members of the same contribute fund, money to a common fund.
C.
Corporate Taxpayers
1. Domestic Corporations
A corporation formed or organized under Philippine laws.
Situation: If a corporation composed of all American stockholder and
registered as a corporation in the Philippines it is considered as a DC,
but not a Philippine corporation (a because is not composed of all
Filipino).
If ABC Corporation is owned 100% by an American Citizen, registered
or organized in the Philippines, it is considered a Domestic Corporation
and is taxable for income within and without.
ABC Corporation, however, cannot be considered a Philippine
Corporation.
Domestic Corporation: Organized under Philippine Laws, without
regard to the owners
Philippine Corporation: 60% (or more) owned by Filipino Citizens
(Grandfather rule), without regard to where it is organized.
General Rule: GOCCs will be treated as a Domestic Corporation and
will be taxed as such.
2. Resident Foreign Corporations
A corporation formed, organized, authorized or existing under the
laws of any foreign country, and engaged in trade or business
within the Philippines.
"Engaged in trade or business" implies continuity of commercial
transactions or dealings - continuity of business or continuity of
intention to conduct continuous
business.
Corporation organized in any foreign country but is engaged in trade
or business in the Philippines. Engaged in trade or business means
continuity of commercial dealings and transactions for the purpose of
engaging in a profitable activity.
Examples: When it has a permanent physical establishment in the
Philippines, or when it appoints an agent domiciled in the Philippines,
or even when the agent is not domiciled in the Philippines but has
stayed in the country for more than 180 days or more. (Can now be
considered as engaged in trade or business in the Philippines)
The only requirement for residency (as a strict rule), is registration
and licensing with the SEC. It can either be considered as a Foreign
Corporation - Philippine Branch, or it can be a Regional Area
Headquarters (RAHQ) of a multination Corporation. It does not mean,
however, that those unregistered Foreign Corporations will be free
from taxation.
3. Non-Resident Foreign Corporations
A corporation formed, organized, authorized or existing under the
laws of any foreign country.
Corporation organized under the laws of any foreign corporation, not
habitually engaged in trade or business in the Philippines but may
enter into isolated transactions.
Example: Extending a loan payable in monthly intervals for 2 years.
The loan was a single isolated transaction, and even though payments
will be made over a period of time, it cannot be considered as having

regularly engaged in trade or business in the Philippines.
D.
Domestic Corporations
1. Rule on taxability of income
a. General Rule:
30% regular corporate income tax on net
income from sources within and sources without
GR: Taxable at 30% on their NET income coming from sources
within and without. NET income, because they are allowed certain
deductions.
Domestic Corporations have the option to be taxed at 15% on
their GROSS income. Lower rate, but no deductions allowed.
Formula:
Gross sales-return of capital= gross income
Gross income- itemized expenses or optional standard

deduction= net income
Gross Sales
Less: Cost on Return of Capital
15%
Gross Income
Less: Itemized Expenses/OSD
30%
Net Income
-0So the general rule is that corporations are going to be taxed
based on their net income. If the corporation is reporting 0
income, naturally, that corporation will not opt to be taxed 15 per
cent income tax on gross (optional Gross Income Tax). Why would
you volunteer paying 15 per cent on your gross income? But the
tax code provides an alternative rate and it is not an option. Even
if the corporation reports 0 income or its regular 30% income tax
is lower than that amount then the alternative tax will have to be
paid and that alternative rate is called Minimum Corporate Income
Tax (MCIT).
Exception:
i.
15%
30%
2% minimum corporate income tax (MCIT)

Revenue Regulations No. 09-98, as amended by 12-07
MCIT= 2% x gross income as of the end of the taxable year
What are the conditions for corporate income tax to
apply?
1. Whenever corporation incurs a net loss or negative
taxable income
2. Whenever the amount of 2% minimum corporate income
tax is greater than the 30% normal income tax due from
such corporation
Gross Sales
Less: Cost on Return of Capital
1. Net Loss
Gross Income
2% MCIT
Less: Itemized Expenses/OSD
2. 30% NCIT < 2% MCIT
Net Income
30% NCIT
Will the MCIT apply to corporations who are exempt as yet

because they are granted tax holidays? Will proprietary A
educational institutions with a tax rate of 10 percent be
included in the MCIT?
With regards to corporations granted tax holidays,

because they are not subject to the normal income tax of
30%, then there will be no 2% MCIT to speak of. So this
boils down to the conclusion that corporations who are
operations)
not subject to the 30% normal income tax shall not be liable to the
The year when the corporation was registered was 2011, the 4th
2%MCIT.
taxable year following the year of operations would be
Now about the school.
2015. So this is when MCIT will be compared as against the The school has
gross income from educational activities of
30% NCIT to see if whether or not the corporation would be
50M. Its gross income from non-educational activities is 60M
taxed with MCIT or NCIT.
for a total of 110M. It is subject to what rate?
(1) Imposition of MCIT
It will be subject to the NCIT of 30% because the gross

(a) Gross income, defined
income from non-educational activities is more than
MCIT is 2% based on the gross income, what do you
50%. So as we said, proprietary educational institutions
mean by gross income?
are subject to 10% tax so long as income from non
Gross sales less cost of goods sold or the return of
educational activities does not exceed more than 50% of
capital further reduced by the discounts given, the its total gross
income. In this case, since it is already
returns made by your customers or the allowances taxed NCIT, then it
will now be subject to the 2%MCIT.
that you have provided, and that would be the basis
of your MCIT of 2%.
GI
GI What about the income that have already been subjected Educ
Non-Educ
to final withholding tax? Should it form part of your gross
50M
+
60M
= 110M
*Subj. to 30%, GI - Non
income?
Educ exceeds 50% of GI
No, because final withholding tax has already been
subjected to tax with finality and does not form part of the
Would
all
corporations
incorporated
in
2012
be
subject
to
the
gross income subject to the 5-32% tax.

2%MCIT?
(b) Cost of goods sold, defined
What do cost of goods sold means?
When: beginning on the 4th taxable year immediately

following the taxable year in which such
Business expenses directly incurred to produce the
corporation commenced its business operations.

merchandise if you are engaged in the
CY
manufacturing and all other expenses that are
Sept. 15, 2012
2012
incurred
to bring the merchandise to the selling location
1
No MCIT
2013
which includes the freight cost, insurance and other
2
No MCIT No
2014
packaging cost.
3
MCIT
2015
(c) Cost of goods manufactured and sold, defined
4
MCIT
(d) Cost of services, defined
2016
And cost of services would be?
2017
Would include the services of employees but not all

In his first year registration is 2012, beginning the year
employees, only employees directly rendering the
following its registration so we count the 4 years starting from 2013 as
service such as if it is a banking institution, the
the law says MCIT shall be imposed beginning the 4th taxable year
salaries of the tellers, guards.
immediately following the year when the
corporation commenced its business operation.

MCIT vs. NCIT (normal corporate income tax)
First 4 years, no MCIT. So even if the corporation would be

reporting for losses during the first 4 years the 30% NCIT tax will
apply even if the 30% tax is lower than the 2% MCIT.
Is date of BIR registration the same as starting commercial
operation?
When the law provides that it is beginning the 4th taxable

year immediately following the year when such
coverage commences business operations in order to
make it easier the BIR considers the reckoning point
as the year when it has registered with the BIR, it is
not the actual year of commercial operations.
SEC
Nov. 15, 2011
SCO
(Start of commercial
Pay to the government
Jan. 2, 2012
How about interest expense?
It is our interest income as deposited, it is a

direct cost from the bank, and also includes the cost of
facilities that are directly used in providing service.
(2) Carry forward of excess MCIT
Any excess of the MCIT over the regular tax shall be carried
forward and credited against the regular tax for
the 3 immediately succeeding taxable years
Sale
Less: Cost
Gross income
Less: Expenses
Net income
NCIT (30% of Net income)
MCIT (2% of Gross income)
100K
ACTUAL payment to gov't
Excess MCIT (MCIT - NCIT)
100K
100K
100K
40K
5th year
10M
5M
5M
4.8M
200K
60K
100K
100K
100K
10K
6th year
7th year
10M
10M
5M
5M
5M
5M
4.7M
4.8M
300K
200K
90K
60K
100K
100K BIR
Dec.
120K
100K
30K
40K
0
8th year
10M
5M
5M
4.6M
400K
120K
1, 2011
Carry forward to Next Year
40K
50K
90K 0
You had good operations. Instead
of an expense of
Your actual tax liability is only 30% (referring to the

NCIT). The MCIT is there to help the government in its
tax collection. The reason why MCIT has been imposed
beginning 1998 is to get those companies who are always
reporting at a loss or a very low income to pay taxes.
In the case of year 5, the lower tax of 60,000 is your true
tax liability. But because MCIT as compared is higher,
then you have to pay the higher tax.
What happens to the difference between the MCIT and
the NCIT?
Any payment that is in excess of your normal income

tax of 30% is considered as an advance tax payment
to the government.
It will be treated as an asset of the corporation and

offset-able in the future.
It can be carried over for the next 3 succeeding

consecutive years after the year you paid MCIT in
excess of NCIT.
It can be credited and offset against the NCIT.
It cannot be offset against a Minimum Income Tax

Corporate liability (MCIT)
Year 5:
Pay the government = 100,000. (MCIT; it being

higher than the NCIT)
Excess/advance payment = MCIT - NCIT= 100,000
- 60,000 = 40,000. (difference between MCIT and
NCIT)
Carry forward the excess = 40,000

Carry forward the 40,000 to the next 3 years which
is year 6, 7, and 8.
Year 6:
Pay the government = 100,000 (MCIT)

Excess during the year = 10,000
Carry forward to the next year = 50,000. Derived

from 40,000 from last year + 10,000 from this year.
50,000 offset-able against any normal income tax
in year 7.
Reason why you are not able to offset 40,000

against the 100,000 tax liability: excess MCIT can
be offset against the Normal Income Tax liability
(NCIT).
Year 7:
Pay the government = 100,000 (MCIT)

Excess is 40,000
Carry-forward to the next year = 90,000; valid until
the 8th year. This is the last year wherein you can
consider the unused 40,000 as part of the asset.
its 5th
If the 40,000 cannot be utilized in year 8, then it will

not form part of the carry-forward of year 9. Why?
The 40,000 from year 5 can only be credited to the
succeeding 3 years. Year 6, year7, and year 8. If
not used in year 8: 0 na ang 40,000.
Year 8:
4.8M, you only have 4.6M in expenses. 400,000 in

net income.
NCIT is 120,000; as against 100,000 MCIT.
The higher amount is the NCIT. So you pay the

NCIT.
Actual payment to the government? 30,000. Instead

of paying 120,000 NCIT, you are only required to
pay 30,000. The 120,000 less the 90,000 from the
excesses for the last 3 years.
Do you still have any excess during the year? Do

you still carry any excess MCIT to the succeeding
year? No more. Because you fully consumed the
90,000.
In effect:
Your total payment for the 4 years is 330,000

(100+100+100+30).
Your NCIT liability is a total of 60+90+60+120 =

330,000. This is your tax liability, but you paid it
differently.
You paid for the first 3 years in advance because the

MCIT was higher, but eventually it catches up during
the year when crediting is still allowed. It's simply
an advance tax payment.
BUT if something is forfeited, f its 4.8M of net taxable
income of year 8. Still MCIT is higher then you have to
pay the MCIT. How much can be recovered in year 9?
You cannot anymore carry forward the 40k in year 5 to
year 9 then you can only carry forward the 10k of year 6
and the 40k of year 7 and the 10k if year 8. Which is the
total of 60k. If in year 9 your net income is 400k that will
normally form a tax liability of 120k which is higher than
the MCIT for that year which is 100k. How much will you
pay in year 9? 120k - (the carry forward)60k.Then there
is no more carry forward because of the deduction and
because there is no excess.
It would appear that your total payment for the 5 years is
460k while your liability is 400k. You should have only liability
paid 420k if MCIT was not provided by law. The
difference is that you pay the excess of 40k if you
allowed the 40k in the 5th year to be forfeited. Loss only
comes only when you forfeit an MCIT during the year or
allow it to expire. .
(3) Relief from the MCIT
The Secretary of Finance may suspend the imposition
of the MCIT on any corporation which suffers losses on
account of [i] prolonged labor dispute; [ii] force
majeure; and [iii] legitimate business reverses
Assuming that your business is already on
year operation and already covered by MCIT, in
what instances can you ask for the suspension of
payment of the MCIT?
Ask for relief from the Secretary of Finance on the

bases that the corporation is suffering from losses
due to:
1.
2.
Force majeure, or
Prolonged labor dispute (strike for more than 6
months)
3. Legitimate business reverses
(4) Applicability of the MCIT where a corporation is
governed both under the regular tax system and a
special income tax system
(5) Corporations exempt from the MCIT
What corporations are not covered by MCIT?
1. Domestic proprietary educational institution - But if
there unrelated businesses exceed 50% - they
become subject to MCIT
2. ROHQ/RAHQ
3. International Air Carrier/Shipping Carrier
4. Non-Resident Foreign Corporation - MCIT not
applicable to them
5. Those enjoying incentives - they are covered by the
income tax holiday (ITH) during their first 6 years of
operation - 5%
Example:
Here's ABC Corporation under Subic Bay Dev.

Authority. Its registration is only for manufacture of
TIMEX watches. And this is covered by the first 4
years under ITH or income tax holiday and the
subsequent years or forever would be 5% gross
income tax.
If it ventures into the manufacture of cellphones, not

covered by its registration. There will no ITH, there
be no 5%, and instead there will be 10%. IF this
is current financial, 70% of its income is subject to
5%, 30% of its income subject to 30%. You can
impose the 2% MCIT on the income that is not
registered because it is not covered by the special
rate, instead it is covered by the 30%, then it has to
be compared with the 2% MCIT.
ABC
Manufacture of Timex Watches
Manufacture of Cellphones
4
ITH
X
5 ->
5%
X
Income
30%
70%
30%
*not covered
by special rate
b.
Computing MCIT (2%) and NCIT (30%) without

using calculator:
For 2%, get the 1% x 2. For 30%, you get the

10% x 3.
In getting 1% just move two zeros backwards; if

10%, one movement backwards.
Illustration:
If you will know 1% of 5,000,000 then you will know

its 2%.
Since its 1%, move two zeros backwards, so it

becomes 50,000. 2% is 50,000 x 2 = 100,000.
If 30%, get the 10%, which is one movement

backwards, then times 3.
What's the 10% of 200,000? 20,000. So the

30% is 20,000 x 3 = 60,000.
ii. Special rate for special domestic corporations
(1) Proprietary educational institutions, 10% or 30%
(2) Non-profit hospital, 10% or 30%
Proprietary Educational institutions complete definition
SEC. 27 ( B) TAX CODE
Non profit hospital - in order for it to enjoy the 10 %
preferential rate it has to be a NON PROFIT HOSPITAL. If it is
operating as a profit hospital, meaning it is registered as such
then it will be taxable as a corporation at 30 %. The basis is
the Gross income.
If the gross income of educational or hospital activity would
be more than half of the total gross income (50%) of the
total gross income then it will enjoy the 10% for the total will
income earned. If it were the other way around, if non related
income were more than half of the gross income then 30%
would apply to the entire income.
What if it was 50% income from educational or hospital
activity and 50% from non related activities? Which would
apply?
10 % should apply because in order for the 30% to apply

the unrelated income should exceed the 50% gross
income
For a non-profit hospital and a proprietary educational
institution to lose the preferential rate the non-related income
should exceed 50% of the total gross income. If it's 50% then
the 10% tax rate is still maintained.
Optional: 15% gross income tax
i.
When conditions are satisfied
t
h
y
r
Gross Sale
Less:
Gross
Income
Less:
Net
Income
X 2% = 100,000 MCIT
X 30%= 60,000 NCIT
NCIT?
How much will you pay to the government? MCIT or
A tax effort ration of 20% of the Gross National

Product (GNP)
A ratio of 40% of income tax collection to total tax
revenues
A VAT tax effort ration of 4% of the GNP
A 0.9% ration of the Consolidated Public Sector
Financial Position to GNP
ii. Where ration of

cost of sales to gross
sales/receipts from
all source do not
100,000 MCIT - because the MCIT
is greater
exceed 55%
iii. Option is irrevocable for the 3 consecutive years
When will the 15% optional tax rate be allowed? When the ff.
conditions are satisfied:
A tax effort ratio of 20% of the Gross National Product (GNP)
which inures to the benefit of any private stockholder or
A ratio of 40% of income tax collection to total tax revenues
individual
A VAT tax effort ration of 4% of the GNP
xii. Civic league or organization not organized for profit but
A 0.9% ration of the Consolidated Public Sector Financial
operated exclusively for the promotion of social welfare
Position to GNP
xiii. Farmers associations or like associations, organized and
If the abovementioned conditions are present and it's beyond the
operated as a sales agent, for the purpose of marketing the
control of the taxpayer because it's an effort ratio, as performed by the
products of its members, and turning back to them the
government such as 40% income tax collection vis--vis a total tax
proceeds of sales, less the necessary selling expenses on
revenues at least 40% must come from income taxation and all others
the basis of the quantity of produce finished by them
present, then probably the 15% gross income tax maybe allowed
xiv. Farmers cooperative or other mutual typhoon or fire
corporations that are domestic and resident foreign corporations. A
insurance, mutual ditch or irrigation company, or like
further requirement is necessary, which is that the ratio of cost of sales
organization of a purely local character, the income of which
to gross sales/receipts from all sources does not exceed 55%. The
consists solely of assessments, dues and fees collected from
condition is that the cost of sales should not exceed 55% of the total
members for the sole purpose of meetings
gross sales. The reason why such ratio is necessary is that if no limit is
its expenses
provided then the gross income maybe presented at a very low
xv. Government-owned and controlled corporations
amount. If this is 90% of gross sales, then the amount that will be
(1) Government Service Insurance System
presented, the gross margin, is only 10% of the gross rate which will
(2) Social Security System
result to a very low tax collection by the government. So if gross sales
(3) Philippine Health Insurance Corporation
is 55%, the gross margin will be 45%. This is the lowest gross margin
(4) Philippine Charity Sweepstakes Office (5)
that will be subjected to the 15% gross income tax in order to avoid
Local Water Districts (RA No. 10026)
abuse in recognizing figures as part of cost of sales. Once, chosen it
NOTE on Exempt Entities under Section 30 of the Tax Code:
becomes irrevocable for 3 consecutive years, on the assumption that
Income of whatever kind and character from any of their
during those years the corporation is qualified under the gross income
properties, real or personal, or from any activities conducted
tax scheme, meaning your cost of sales would not exceed 55% of your
for profit, regardless of the disposition made of such income,
gross sales. If you exceed such rate, you go back to the 30% net
shall be taxable.
income taxation.
We can divide the list into exempt entities under the Constitution,
under Section 30 of the Tax Code, under Section 22 of the Tax
c.
Exempt corporations
Code defining what corporations are. First,
the Constitution
i.
General professional partnerships
provides that non-stock non-profit educational institutions are
ii. Government educational institutions
benefit of any member, organizer, officer or
iii. Non-stock, non-profit educational institutions
any specific person
iv. Joint venture, for purpose of undertaking construction
xi. Business league, chamber of commerce, or board of trade,
projects
not organized for profit, and no part of the net income of
v. Joint consortium, for purpose of engaging in petroleum,
geothermal and other energy operations pursuant to a
consortium agreement under service contract with the
gov't
vi. Regional area headquarters
vii. Labor, agricultural or horticultural organization not
organized principally for profit
viii. Mutual savings bank not having capital stock represented
by shares and cooperative bank without capital stock
organized and operated for mutual purposes and without
profit
ix. A beneficiary society, order or association, operating for
the exclusive benefits of the members
x. Non-stock corporation or association organized and
operated exclusively for religious, charitable, scientific, athletic
or cultural purposes, or for the rehabilitation of veterans, no
part of its income or asset shall belong to or inure to the
(1)
(2)
(3)
(4)
exempt from income tax. Second, the definition of corporations excludes

General professional partnerships, joint ventures undertaking construction
programs, and joint consortiums with the government for geothermal,
petroleum, coal and other energy operations. While Regional Area
Headquarters, since it does not derive any income as defined in the tax
code, it is not subject to income tax. And the very long list in section 30
on exempt corporations.
Section 30: List of Corporations exempt from tax which we can
summarize as associations or entities which are not ordinary principally for
profit, no income inures to the benefit of any private individual, or otherwise
they are exclusively for the benefit of members only.
For government owned and controlled corporations, we said

earlier that they are just like any other domestic corporations subject
to the 30% tax rate except for, under the tax code, there
are 4 GOCCs which are exempt from tax which are:
1. GSIS
2. SSS
3. PhilHealth
4. PCSO
Note: Another GOCC exempt - Local Water Districts (exempt by
RA 10026) and they are also exempt from other local government
taxes
While other GOCCs may be exempt from income tax, not thru the
tax code but because of their respective charters providing for
their exemptions.
Now there is that last provision in Section 30 which provides for
the exception to the exception: Income of whatever kind and
character from any of their properties, real or personal, or from
any activities conducted for profit, regardless of the disposition
made of such income, shall be taxable.
What activities are subject to income tax?
Proprietary activities
So of the list in section 30 of the tax code, these listed entities are
NOT exempt from income tax if they derive income of whatever
kind and character from any of their properties, real or personal,
or from any activities that are conducted for profit. So there are 3:
1. Activity conducted for profit - taxable, because their
exemption rest solely on the fact that they are not supposed
to be engaged principally for profit, OR income does not inure
to the benefit of any private individual OR they cater
exclusively to members alone; so that if they engaged in
activities conducted for profit, they will already be subject to
income tax - such as the farmers association conducting
reality shows "Ang Dakilang Magsasaka" and ticket sales
P1000 per entry
2. Any income either from the use of personal or real property
regardless of any profit made - so that if the use of real or
personal property is made and it generates income to any of
these entities in section 30, it is taxable regardless of whether
it was intended to be profitable or not because the word for
profit only defines the word "activities for profit" but NOT the
use of real or personal property. So if the USC allows rent of a
space in the campus to a commercial entity, whether it is for
a very minimal amount (not comparable to regular rates of
such), it is still taxable because it is income derived from the
use of real property. BUT let us take note that this comes in
conflict with the constitution insofar as NON-stock NON-profit
educational institutions are concerned; because in the tax
code, it provides that it becomes taxable regardless of how
the income was disposed of. So even if the ticket sales from
the reality show was used to finance fertilizers to the different
farmers for the purposes of the association itself, it is still
taxable because the law provides regardless of how the
income is disposed of - it will be taxable. But remember that
the constitution provides that if it is a non-stock non-profit
educational institution, the revenues and assets will be
exempt from taxation so long as it is actually, directly, and
exclusively used for educational purposes. Insofar as nonstock and non-profit educational institutions are concerned,
there is conflict, but for all other entities, it will be
implemented as provided by the tax code. Currently it is not
considered unconstitutional - so now it will depend on the
examiner on how to treat income of schools.
2.
end of the lease term is actually
What constitutes Gross Income of a corporation?
a. Income derived from trade, business, or profession - going thru
the list, these are basically the same types of income
a.
b.
derived/earned by any tax payer; it may be coming from trade,

business, or profession - but not from employment because you
cannot employ a juridical person as an employee.
b. Rental income
c. Income from dealings in property
d. Others
Gross income from trade or business
Rental income
Differentiate an operating lease or an ordinary lease from a
financial lease. So imagine a corporation having a real property. It
entered into an operating lease contract with a tenor. What is the
concept of an operating lease and how would the corporation
record the proceeds from the lease activity.
i.
Operating lease - 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 the re-lease of the returned assets
at the end of the primary lease period.
Operating Lease - ordinary lease or renting out of the
property without transfer of ownership; so when a corporation
receives proceeds from the operating lease, it will record it as
rental income. It's just like any ordinary lease - whether long or
short term lease - and the owner (in this case the
corporation) does not expect full amortization or recovery
from rental payments of the value of the property - the lease
would be minimum recovery for the temporary use of the
property
ii. Financial lease - also called the "full payout lease", a
contract involving payment over an obligatory period (also
called the primary or basic period) of specified rental
amounts for the use of a lessors' property, sufficient in
total to amortize the capital outlay of the lessor and to
provide for the lessors' borrowing costs and profits.
Obligatory period is primary non-cancellable period of the
lease which in no case shall be less than 730 days. Lessee
exercises choice over the asset.
Financial Lease - similar to purchasing a property on
installment basis; On the part of the lessee - not considered
as expense but rather an advance of regular payment of the
value of the property; But on the part of the corporation
where it expects that the lessee will become the owner of the
property at the end of the lease term - it is actually recorded
as an installments paid and not a rental income.
Financial lease - on the part of the lessee using the property,
is a purchase of a property he will not consider it as an
expense but rather as an advance or regular payments of the
value of the property.
What about on the part of the corporation entering into a
financial lease where in they expect the lessee becomes the
What constitutes income?
owner of the property on the
already an instalment sale. Recording it as an instalment sale
and not as an ordinary rental income
Being a financial lease the obligatory period is usually not less

than 730 days or 2years or more. The concept here is the
entire contract will result in the full recovery not only the
value of the property but plus interest rate and any profit that
wish to make.
Rental income only refers to operating lease while a financial
lease is not a rental income
Royalty income (the type not subject to final withholding tax)
Interest income (the type not subject to final withholding tax)
A corporation can earn royalty income or interest income in the
active or passive sense.
Active income= regular income that he earns, not the type that is
subject to withholding tax. It will be subject to the regular rate of
30%
E.g a credit lending company. The income he earns from lending
money to borrowers is subject not to the 20% but to the 30% .
not necessarily a banking institution.
A corporation lending money to its affiliates with interest. Subject
to 30% and not 20%, not that type that is subject to withholding
tax.
Gains derived from dealings in property
Gains derived in the dealings of property, we have to differentiate
an ordinary asset from a capital asset.
Capital gains derived from the sale of real property classified as
capital assets, 6% on GSP/FMV, whichever is higher
Capital gains from the sale of real property classified as a capital
asset. Corporation capital gains tax rate 6% of the gross selling
price or fair market value whichever is higher in selling capital
asset located within the Philippines just like individual tax.
Capital gains derived from the sale of shares of stock in any
domestic corporation
i.
Listed and traded through the local stock exchange, of
1%
ii. Not listed/not
traded through the
local stock exchange,
5%
and 10%
How about the sales of share of stock in the corporation? It
depends if it listed and traded in the stock exchange, tax rate is
of 1% of the Gross selling price. If not listed and not traded tax
rate 5% or 10%
h.
Similarly, if you remember our discussion on domestic corporations,
(subject to final withholding tax)
Same rate with individual tax payers in the sale of capital assets,
shares of stock and the passive income of interest income, 20% or
7.5% or exempt. Royalty income is 20%. Only difference will lie in
dividend income.
i.
Interest income, 20% or 7.5%
ii. Royalty income, 20%
Dividend income from a domestic corporation
Classification Tax rates
RC
10%
RA
10%
NRC
10%
NRA ETB 20%

NRA NETB 25%
c.
d
.
e.
f.
g.
If a domestic corporation recieving cash dividend or property

dividend from a domestic corporation. It is exempt as of yet..
it is taxable until it reaches the individual stockholder. If it is
owned further by a corporate stockholder, then further you
dividend is still exempt until it eventually reaches an
individual stock holder.
The concept is to avoid double
taxation referring to the same income tax earner.
If stock dividend is concerned. Still exempt because it is
simply a transfer of the surplus to the capital account unless
in two situation as exception to the rule that it changes the
interest of the stockholders a redeemable and cancellable
stock dividend
Liquidating dividend, corporate 30% tax rate.
Disguise dividend is not given out as a dividend declaration. It
is when the the corporations pays off its stock holder in the
guise of valid expenses. But this is really an expensive and
excessive payment to the stockholders it takes the form of
dividend payments. Once it is recognized really as a dividend
to avoid taxation it will be treated as any cash dividend. The
corporation can disguise it dividend by giving out cars to its
stockholders. Avoiding the 10% tax. If unjustified then
subject to the dividend tax. If given to a non-stockholder e.g.
an employee. Then not subject to dividend tax because the
employee is not a tax holder.
(1) Cash dividend, exempt (2)
Stock dividend, exempt
(3) Property dividend, exempt (4)
Liquidating dividend, 30%
Annuities, proceeds from life insurance or other types of
insurance
Income from any source whatever
i.
j.
E.
Resident Foreign Corporations

The reason why we cannot tax the income of resident foreign corporation
are not taxable on income outside the Philippines is because imposing a tax
on income outside the Philippines would actually violate the principle of
territoriality. We cannot extend any (?) or protection to the activities
outside the country. So RFC are taxed 30% on net income but only on
sources within the Philippines.
Passive investment income derived from sources within
domestic corporations have the option to be taxed at 15% gross income

tax.
Would RFC have the same option?
The answer is YES and according to the gross income taxation so long
as the conditions of the GNP and the tax effort ratios are met and that
the cost of sales of these RFC do not exceed 55% of the gross sales or
receipts, then gross income tax can be availed of. It becomes iii.
irrevocable in the year of choice and the next 2 years, so it is
irrevocable for 3 consecutive years on the condition that during those
3 years, the corporation is qualified as such. But since we are dealing
with RFC, take note that the gross income we are talking about subject
to the 15% gross income tax are only those gross income that has
been earned in the Philippines. The gross income excludes income
that is exempt from tax or income that has already been subjected to
final withholding tax.
1.
income tax. If a corporation is

subject to 30% normal or corporate income tax, we said that it comes with
the imposition of 2% minimum corporate income tax. In fact, payment
shall be equivalent to that which is higher between the 30% NCIT and the
2% MCIT. We have discussed this extensively with domestic corporations.
In so far as RFC, since they are doing business in the Philippines, they will
be treated similarly. Any income that they earn subject to 30% income tax
from sources within the Philippines will also be computed of the 2%
minimum corporate income tax. Again, gross income refers to the income
within the Philippines only for a RFC.
Rule on taxability of income
a. General Rule: 30% regular corporate income tax on net income
from sources within
Exception:
i.
2% minimum corporate income tax (MCIT), refer to
previous discussions
ii. Special rates for special resident foreign
corporations
Just like domestic corporations having special domestic
corporations, they are special RFC. First of in your outline are
the International Air Carriers and #2 - International Shipping
Carrier. Being international, we presume that these are
engaged in international trade or operations.
Airports,
aircrafts, vessels or ships for shipping carriers. And since the
discussion is under RFC, naturally, we cannot help but think
these are RFC. Do not ever think that International Air
Carriers subject to 2.5% tax on Gross Philippine Billings are
domestic corporations. They are not. They are not as well
NRFC, otherwise, if they are, then that will be
subject to 30% tax on net income for domestic corporations
30% on gross income as a NRFC.
(1) International air carrier, 2.5% on gross Philippine
billings
It's a foreign airline corporation doing business in the
Philippines. A foreign corporation doing business in the
Philippines, that has somehow been granted landing
rights in any port in the Philippines to perform
international
air
transportation
services
or
air
transportation or flight operations anywhere in the world.
So once a foreign corporation does business in the
Philippines with landing rights, it can either opt to really
have operations or flights coming from or originating
from port in the Philippines, from foreign airports or from
a foreign seaports or that we will call an international air
carrier with online/online air carrier.
It becomes online when there is a flight/ vessel
originating from Philippine port. It becomes offline when
its flight operations does not originate in the Philippines.
RULE ON TAXABILITY OF INCOME
Now, what is its taxability?
International Air Carriers as a RFC doing

business in the Philippines are taxed only at 2
1/2% on the Gross Philippine Billings. Of course,
the tax treaty would provide a lower and a
preferential rate. But the availment of a tax
treaty provision such as RP-US Tax Treaty
Let's go back to the 30% normal corporate

providing for 1 1/2% tax on Gross Philippine
Billings will have to apply for a ruling with the it
National Office of the BIR. Without any ruling
application, a taxpayer can only use the 2 1/2%
rate. It says there 2 1/2% of Gross Philippine
Billings.
Gross Philippine Billings
includes the total amount of gross revenues derived

from the passive of not only persons, including
excess baggages, cargoes and/or mails originating
from the Philippines in a continuous and
uninterrupted flight irrespective of the place of sale
or issue and irrespective of place of payment of such
passage document.
would be the total amount of gross revenue earned

by an international air carrier for the passage of
persons, excess baggage, cargo and/or mail
originating from the Philippines from a continuous
and uninterrupted flight irrespective of the place of
sale or issue of the passage document and
irrespective of where such passage document will be
paid.
-Now the issue of where it is sold, issued, and paid
becomes important only if the person, baggage, that
cargo or mail does not originate from the Philippines
and not in a continuous and uninterrupted flight. So,
if an International Air Carrier does not have any imputed
online operations or does not have flight originating
from the Philippines, will there income be subject to or
the 2 1/2% tax? The answer is NO.
If an international air carrier does not have any online
operations or does not have any flight originating in the
Philippines, will their income be subject to 2.5% tax? NO
And if it is registered as a business doing in the
Philippines, it will be subject to 30% net income tax.
Not all international air carriers are guaranteed the 2.5%
tax on gross Philippine billings. Only when all the
conditions are satisfied.
What are the three conditions?

1. Flight would originate from the Philippines
2. Continuous and uninterrupted flight
3. Irrespective of the place of sale or issue and the
place of payment of the ticket or passage
document
So what if the flight is interrupted or there is a stop
over? What will happen to the gross revenues? Will the
entire gross revenue on the ticket declared still as part
of Philippine billings or not?
No! The total revenue will be declared as part of

Philippine billings is only the portion related to the flight
from the Philippines until the stop-over or transshipment
in the foreign airport. Afterwards, the related income or
gross revenue will be subject to a different tax rate. No
longer the 2.5% because it is not anymore a gross
Philippine billing.
When will there be an interruption or transshipment?

So even of the 2.5% tax on gross Philippine billings is lower in
rate, take note that the amount computed is directed against
the entire payment, to the entire ticket cost. No deductions
allowed. Not even the fuel for the aircraft.
Question! Maning: Transfer to another same company but
different airline mam!
Atty: As long as it is the same airline company and does
not exceed 48 hours.
(Sorry cannot here the 2nd question.)
(2) International shipping, 2.5% on gross Philippine
billings
(3) Offshore banking units
Another special resident foreign corporation is be
offshore banking units. What are offshore banking
units?
Offshore banking units are branches, subsidiaries or

affiliates of foreign banking corporations duly
authorized by the Bangko Sentral ng Pilipinas to
perform banking operations in the Philippines.
What is the taxability of an OBU?
It depends.
Taxability of Offshore Banking Units (OBU's) - As

RFC also, OBUs are only taxable on income derived
within.
if the income is derived by the OBUs from

interests on loans of residents (citizens or
aliens), individual residents, taxable at 10%.
if they give up the interest, it's an interest

expense.
If the income is derived from non-residents,

whether individuals, aliens, corporations, OBUs,
tax exempt.
EXCEPTION to the rule - if the income is

derived from a Phil. commercial bank or a local
commercial bank, it is still exempt.( because it is
already subjected to withholding tax by depository
bank)
Income of OBU's on interests of deposits from non- billings
resident depositors under an expanded foreign currency
deposit system unit - Withholding Tax exempt
(a) Income derived from foreign currency transactions
with nonresidents, OBUs and local commercial
banks, exempt
(b) Income derived from foreign currency loans
granted to residents, 10%
(c) Income of non-residents from OBUs, exempt the
(4) Regional operating headquarters of
Does it mean to say when the flight is from Philippines

to Florida, there is no direct flight, if the foreign airline
company will have a stopover in Hong Kong or in
Korea, does it mean to say that we only consider the
gross revenue from the flight in the Philippines and
stopover in Hong Kong or Korea as part of gross
Philippine billings?
It depends.
If the interruption will result in the transfer of another

aircraft belonging into another airline company, that
becomes an interruption, then only aliquot portion from
the Philippines to the transshipment or stop over will only
considered as part of Philippine billings.
But if it is a simple stop over not exceeding 48 hours

within the same airline and same company, that will still
be considered as uninterrupted and continuous flight.
Another item that will form part of the gross Philippine billing
is the gross revenue from tickets that has been revalidated,
exchanged and endorsed to another international airline
company. It was sold by the first company and sell by the
passenger airline to another company. It will still form part of
gross Philippine billings.
But for international air carrier, if you look into your
tax code. Are the gross Philippine billings for
international air carrier the same as gross Philippine
billings for international shipping?
No!
What is missing? What phrase is missing?
In international carrier, gross Philippine billings mean

gross revenue 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.
What is missing? The phrase "continuous and

uninterrupted flight".
So in case of the international shipping the cost of ticket

will have to be included as part of the gross Philippine
subject to 2.5%.
It appears that gross Philippine billings for international air
carrier has stricter interpretation while in international
shipping it's more general in the sense that the entire ticket
cost, so long as it originated in the Philippines, will form part
of the gross Philippine billings.
If the foreign corporation opens a branch in the Philippines or
appoints an agent in the Philippines for the sale of tickets and
flights bought from these tickets will not originate in the
multinational
Philippines, will it be subject to tax in the Philippines? Yes, at
30%! The correct term will be is that it's not the gross
revenue that will be subject to Philippine income tax in that
but rather the net income. Why? Because we are talking
given the about the regular rate of 30% which is imposable on resident
occupying a
foreign corporations based on their taxable net income after
all expenses have been deducted.
companies, 10%
any profits, the taxable income of which, will be subject
to the special rate of 10%.(plus 12% VAT) case
the foreigner or Filipino employees are
preferential rate of 15% so long as they're
2.
position of managerial or technical.

b. Optional: 15% gross income tax, refer to previous discussions
What constitutes income?
a RFC that comes here in the Philippines to register and do
6. RA -10%
business
5. NRC
7. NRA-ETB are taxable in the same way as a DC. The income that they will
-10%
20%
a declare is subject to income tax of 30%.
.
Gross income from trade or business
b Rental
.
AB
income
C
ex. From personal property.
8. NRA-NETB 4. RC -10%
c
Corp -DC
Royalty income (the type not subject to final withholding
25%
.
tax) Subject to the ordinary rate of 30%.
Interest income (the type not subject to final withholding
d tax)
.
Those that are not a passive income that are NOT given out by
banking institutions subject to the ordinary rate of
3. NRFC -30% or 15%
30%
1. DC Ex. Interest income from the loans extended to another
2. RFC exempt
corporation
exempt
Loans extended to EEs forms part of the gross income subject
to
e
30% rate.
.
Div. - P10M
Gains derived from dealings in property
each
Whether real or personal will be subjected ENTIRELY to the rate
of
30%
The reason: sec. 28 of the tax code, doest mention any
The reason why it is not as yet subjected to final
reference
withholding
to the 6% capital gains tax. Therefore any sale of a real
tax at this stage of declaration and issuance or payment of
property classified as a capital asset will ALWAYS be subject
dividends is because eventually when these corporations
f
to the 30% net income tax in the hand of a RFC.
declare dividends to their stockholders and it so happens
.
that their stockholders are individuals then only at that
time will the tax rates apply.
i
Listed and trade through the local stock exchange, of
This is allowed to happen and it is not taxed in the first
.
1
instance is because, aside from the fact that we avoid
%
double
g
.
ii. Not listed/not traded through the local stock exchange,

5%
and
10%
Same rule as the other
Passive investment income derived from sources within
(subject to final withholding tax)
i
Interest income, 20% or
.
7.5%
ii. Royalty income,
20%
same), refer to sec. 24 and 25
(Encourage to
memorize)
iii. Dividend income from a domestic
corporation
If a DC declares dividends in favor of a RFC then the cash
dividends is not taxable until and unless it reaches the
individual stockholder.
Same holds true for property
taxation, these corporations are still within our control

both are registered in the Philippines, both are tasked as
withhold agents. If they declare themselves dividends to
stockholders, the Philippines will still have jurisdiction
over them. So the Government is assured that these two
corporations both
domestic and resident foreign corporation will be
withholding
dividends.
Ex. AbC corp a DC declares dividends of 10m for
the ff. tax
payers the rate shall be
as follows:
the tax from the dividends declared to their own stockholders.

Property dividends will fall under the same rules.
Stock Dividends, however as we have discussed, are not
income to the stockholders because these are mere entries to the
books of the corporationa transfer from the surplus to the
capital amount. These are inchoate income which has cannot be
translated into realized or actual income. The exceptions to this
rule are: when the stock dividends issued are cancellable

and redeemable and stock dividends which
distort the proportional interest before the
declaration.
Liquidating
Dividends
DIAGRAM
Company ABC is partly owned by a resident foreign
corpora
tion
ABC dissolved the

corporation.
If the resident foreign corporation receives

liquidating dividends beyond its cost of
investment,
the gain (liquidating gain), will be subject to
tax at a rate of 30%.
Annuities, proceeds from life insurance, and income
from
whatever sources, you can relate that with previous
discussions
(1) Cash dividend,
exempt (2) Stock
dividend, exempt
TAX FINALS - JEN, JASPER, REUVILLE, JADE, JARED, JAN, NEIL, RYAN, RIZA, PATRICIO, ANTHONY, KIM, KZ, SARAH, LOR,
ANGGE | 11
3.
(3) Property dividend, exempt

(4) Liquidating dividend, 30%
h. Annuities, proceeds from life insurance or other types of
insurance
i.
Income from any source whatever
Annuities, proceeds from life insurance, and income from
whatever sources, you can relate that with previous discussions
Branch profits remittances, 15% on the total profits applied or
earmarked for remittance without deduction for the tax
components thereof.
ING Bank, Manila Branch vs. CIR, CTA Case No. 6017, March 11,
2002
Of the three types of corporationsDomestic, RFC, and NRFCyou will
only see this topic under RFC. Domestic Corporations and NRFCs do
have branch profit remittances.
(Parent) NRFC
(Head Office)
15% Dividends
Branch Profit
Remmittance 15%
Interest
DC
Subsidiary
PEZA
4 years ITH
RFC
Phi. Branch
5% tax on gross
If a NRFC wishes to do business in the Philippines, it has two options:
In cases of profit distribution, if these operations in the PH

generates profit and it wishes to return the profit to its head
office, you call that branch profit remittances. It is no longer
dividends because it is not governed by shares of stocks but
rather it is simply remitting the profits generated to its head
office.
Whenever a resident foreign corporation remits profit to its head
office, it will be subject to the rate of 15%.
Will a Cebu branch remitting its profits to the Manila head office be
subject to the 15% BPRT?
No. So BPRT will only be applicable to resident foreign

corporations when it remits to its main office.
Would all Philippine Branches registered as resident foreign
corporations be subject to the 15%BPRT on all its remittances to head
office?
No, the exception is in cases of corporations registered in PEZA,
they will not be covered by the BPRT.

So if you are a corporation registered under the PEZA, a tax avoidance
scheme would be to register your business not as a subsidiary but a
Philippine Branch of a non-resident foreign corporation so that all the
profits that you will remit will not be subject to the final withholding
tax of 15%. If you register yourself as a subsidiary, you will be taxed

at 15% on dividends.
So if the corporation registered with PEZA is given 4 years income tax
holiday, and afterwards 5% tax on gross income, will the exemption
from BPRT apply during the income tax holiday? Or will it only apply if
the corporation is already enjoying the 5% special tax rate?
What does the tax code provide?
Usually corporations which seek registration under the PEZA are

granted tax holidays for the first 4 or 6 years of its operations and
thereafter will be subjected to the 5%tax rate at its option or it
may be taxed at 30% on its net income. But usually PEZA
corporations would avail of the 5% tax on its gross income instead
of the higher 30% tax rate on its net income. Now the exception
from the PBRT applies to corporations registered with PEZA not
regardless of whether it is still on its income tax holiday years or
when it is taxed 5% income tax. So it would not matter if the
corporation is exempt or 5%, the exception to that rule is the
PEZA company is engaged in activities that are not registered with
the PEZA which can happen, you call it unregistered business
activities. Any income from the unregistered business activities
that is remitted to its head office will already be subjected to the
15% BPRT. So what is covered by the exemption are only those
profits remitted abroad which arose from activities that were
registered with the PEZA.
So for example, when a head office sends 100M dollars for
construction of manufacturing plant. Of the 100M, only 90 M was
utilized. 10 M was sent back by the branch to its head office. Will it be
subject to BPRT assuming it is not a PEZA company?
No, because it is not a profit in the first place. It was only a capital
infusion made by the head office and any return will not in any
way will be subject to BPRT.
Another example.
If the head office and the branch had an arrangement that the
head office would send some personnel to help the branch
operation and the branch would shoulder the cost of lodging,
transportation, and other expenses of these personnel coming to
the Philippines and the arrangement was that the branch will send
out money to the head office for these expenses subject to
liquidation later on by the head office will that be subject to
branch profit remittance tax?
The concept is not remittance of profit, the arrangement

really was that its an advance given by the branch for the
expenses of the head office personnel. So since its actually an
expense and subject to liquidation later on, it is not a branch
profit remittance thus not subject to the 15% bprt
What is the basis of the 15% BPRT?
It is the total profit applied or earmarked for remittance without

any deduction to the tax component thereof, so if 100M is
earmarked for remittance to the head office then the tax to be
paid to the government would be 15M.
Note: Head office and the branch exist under one and the same entity,
therefore, if the non-resident foreign corporation through the branch
made an investment in the Philippines it becomes an investment of the
branch. But if the non-resident foreign corporation directly makes an
F.
investment in a corporation without going through the branch, then for

tax purposes that is a separate investment.
With regards to the profit, how do we arrive at the profit? do
we have a computation?
No, a Philippine branch is just the same as a domestic corporation,

at the end of the year of its operation it will have a separate books
of accounts. For Philippine tax purposes we only consider the
income of the branch not that of the foreign corporation. If it has
income or accumulated income of 500M pesos and all the
100M is earmarked for remittance, the rest will remain with the
branch for future working capital, then only that 100M wil be
subject to tax multiplied by 15%. You wont consider the net
income, only the earmarked amount.
Non-Resident Foreign Corporations

are corporations organized under the laws of a foreign country and is not
doing business in the Philippines. Although at some point in time they may
earning on isolated cases that is why even if they are not registered as
doing business in the Philippines we consider the taxability beforehand. So
any income earned by a non-resident foreign corporation on isolated
transactions in the Philippines will also be subject to the same tax rate of
30% but on the basis of its GROSS INCOME without the benefit of expense
deductions even if these expenses are related to the income which has
been earned. So it's the same as the taxability of a non-resident alien not
engaged in trade or business. And it is already a final tax. so any payer of a
non resident foreign corporation has no obligation to withhold the tax with
finality.
If the non-resident foreign corporation parent company enters into a
technical service agreement with its subsidiary domestic corporation to
transfer the manufacturing process know-how etc. the non-resident foreign
corporation will be earning royalty payment from the Philippines, even
if the contract provides that it will be paid on a monthly basis, 5% of the
gross sales generated by the domestic corporation does not make the
foreign corporation as doing business in the Philippines because there is
only one transaction entered into. Now being a non-resident foreign
corporation any royalty payment made by the domestic corporation will be
subject to the final withholding tax of 30% unless the tax treaty provides a
lower rate.
1. Rule on taxability of income
General Rule: 30% regular corporate income tax on the gross
income from sources within
Exception: Special rates for special non-resident foreign
corporations
a. Non-resident cinematographic film owner, lessor or distributor,
25%% on gross rental or fees
b. Non-resident owner or lessor of vessels chartered to Filipino
nationals/corporations, 4.5% on gross rentals, lease or charter
fees
c. Non-resident owner or lessor of aircraft, machinery and
equipment, 7.5% on gross rental or fees
2. What constitutes income?
a. Gross income which may include interests, dividends, rents,
royalties, salaries, premiums (except reinsurance premiums),
annuities, emoluments or other fixed or determinate annual,
periodic or causal gains, profits and income, and capital gains
(except capital gains from the sale of shares of stock not

traded in the stock exchange)
GR: Gross income may include: (subject to 30% on gross
income)
a. Interest,
b. Dividends,
c. Rents,
d. Royalties, net
e. Salaries,
f.
Premiums (except insurance premiums),
g. Annuities
h. Emoluments or other fixed or determinate annual, periodic or
casual gains, profits and income, and
i.
Capital gains (except capital gains from the sale of shares of
stock not traded in the stock exchange)
b.
Practically, ALL income of NRFC derived WITHIN the Philippines be

are subject to the rate of 30% final tax on gross income. Even the
capital gains on the real property classified as capital asset.
Exceptions: Certain other income where the rates are applied
differently:
Certain other income
i.
(1) Listed and trade through the local stock exchange, of
1%
(2) Not listed/not traded through the local stock exchange,
5% and 10%
This is the only type of tax that remains consistent all
throughout different types of taxpayers.
ii. Interest on foreign loans, 20%
Interest on foreign loans obtained in 1985 onwards will NOT
be subject to 30% tax rate, but only to 20% rate (this is the
tax code rate)
Note: Tax treaty provides 10% rate
iii. Intercorporate dividends, 15% under the Tax Sparing
Credit Rule
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
GR: 30% final tax
EXC: 15% under Tax Sparing Credit Rule
Condition: That the country in which the NRFC is domiciled,
shall allow a credit against the tax due from the NRFC taxes
deemed to have been pain in the Philippines.
Unless, Tax treaty provides a lower rate, let's say 10%. But if
you don't want to invoke the tax treaty where the country to
which you are declaring dividends, or the corporation is
domiciled in a country where we have no existing tax treaty,
we can only use the tax code provision (rate)
So when can a NRFC avail the lower rate of 15%?
The condition states that the country in which the NRFC

is domiciled, shall allow a credit against the tax due from
the NRFC taxes deemed to have been paid in the

Philippines.
So it is always considered, whether or not there is actual
payment, there is a tax credit deemed to have been paid of
15%.
Why 15%? The difference between the 30% regular tax rate
and 15% intercorporate dividend rate = 15%, is the taxes
deemed to have been paid in the PH by the NRFC.
Actually, we usually apply 15%, unless the tax treaty
provides for a lower rate.
NRFC
ABC
SUMMARY OF TAXABILITY OF CASH OR PROPERTY DIVIDENDS RECEIVED

BY A CORPORATION
Dividends
Received
BY:
DC
Received
FROM a
DC
EXEMPT
NRFC DEF
Received FROM a FC
Comments
30%; whether resident

or non-resident
DC is taxable on
We don't even talk of where

the foreign corporation is
operating:
whether
its
income
earned operation is more than 50%
within and without in the Philippines, it wouldn't
matter; because a DC is
taxable on income within and
4
0
D
i
RFC
ABC Branch
without.
DC
Dividend, EXEMPT
XYZ
Dividends declared by XYZ (DC) to DEF&ABC (NRFC), subject

to 15% intercorporate tax?
Yes
What about dividend declared by XYZ (DC) to ABC Philippine
Branch (RFC), subject to tax?
No. when RFC receives dividend from DC, it exempt from

tax.
How about the dividends declared by a DC to ABCPhilippine branch? Is that subject to tax?
We said that when a RFC receives dividends from a DC, it

is exempt from tax.
How about the dividends declared by a DC to a head
office of the Philippine branch? Subject to tax or not?
Yes, 15%.
Can the NRFC, ABC Corp, invoke the single entity
concept that being one and the same with the branch in
the Philippines (RFC), therefore any dividend
payment made to it by a domestic corporation is also
exempt
f
r
o
m
RFC
EXEMPT
Dividends coming from EXEMPT = not taxable

sources within: 30%
RFC
taxable
on income
Coming from sources earned within.
without: EXEMPT
NRFC
30% or
15%
Dividends coming from Did we not say that RFC and

sources within: 30%
NRFC are taxable on income
Coming from sources
within to the extent that we
without: EXEMPT
can identify such dividends
NRFC taxable on
from sources within.
income
earned
within
* The passive type of dividends granted exemption are only dividends received
from a DC.
RECAP: SUMMARY OF TAXABILITY OF CASH OR PROPERTY DIVIDENDS
RECEIVED BY INDIVIDUAL TAXPAYERS
Received by
a:
RC
From a
DC
10%
t
a
x
?
NO. As I've said before, in situations wherein it's an

investment made by the head office independently of the
branch, then that is the investment alone of the head
office.
So in this case since they have separate investments,
30% by the branch (RFC) and 30% by the NRFC, one is

still a payment to a NRFC subject to tax, and the other is
a payment to a RFC exempt from tax.
They will be in this case treated as 2 separate investors.
Reason why the dividends going out to a NRFC is not
Comments
Within or without: 5- Not 10% because FC cannot
32%
From a FC
withhold; no jurisdiction to
withhold; has to be declared
as part of gross income by R
C.
NRC
10%
Within:
5-32%
Without: exempt
RA
10%
Within:
exempt
5-32%
rom tax:
We do not have control over these corporations, if and

when finally or ultimately they declare their income to
their other stockholders, they are not considered as
withholding agents of the Philippine tax authority. So at
this point pa lang, we have to withhold na the tax from
the cash or property or strict (?) dividends.
NRAetb
20%
NRAnetb
25%
Without: exempt
Within:
5-32%
Without: exempt
Within:
Without: exempt
25%
G.
H.
1.
2.
NRA-etb taxable at the rate of 20% coming from a domestic

corporation, if coming from a foreign corporation taxable 532% on income coming within and without exempt.
NRA-netb - taxable at a rate of 25% if within and if without
then exempt
Partnerships
TAXABLE PARTNERSHIPS AND NON TAXABLE PARTNERSHIPS
There are generally 2 types of partnerships :

1. A partnership that is taxable
2. A partnership that is exempt from tax
General Professional partnerships are not subject to income tax but
the individual partners are based on the withdrawals they have made or
the net distributed share of partners
Taxable partnerships such as those engaged in trade or business, it will
be taxable as a corporation as long as all documentary requirements have
been complied with.
1. Business Partnerships
Similarly taxed as a taxable corporation.
2. General Professional Partnerships
Exempt from income taxation. However, for purposes of computing
distributive share of partners, the net income of the
partnership shall be computed in the same manner as a
corporation.
Each partner shall report as gross income his
distributive share, actually or constructively received, in the net
income of the partnership.
Kinds of Deductions
Our discussion on the kinds of deductions would not be strictly limited to
corporate income taxation. Way back in our outline on income taxation in
general, we identified already that as part of the deductible items of an
individual taxpayer is the itemized deductions and the optional standard
deduction so long as in some form or another the individual taxpayer is
earning income from trade, business or profession. So we are assuming
from this point forward that the taxpayer is engaged in trade, business
purposes if the school
or a profession. The kinds of deductions for business purposes would be
itemized deductions and the standard optional deductions.
May a corporation claim personal deductions or additional
exemptions?
NO.
Can a resident citizen, non-resident citizen and resident alien claim
itemized deduction or optional standard deduction if they are
purely employed without any other sources of income?
NO
How about a non resident alien engaged in trade and business? Can
they claim itemize deduction or OSD?
NRA-etb They are allowed itemized deduction because they are taxed
on net income but because they are non- resident then they cannot
claim optional standard deduction.
expense
How about a non resident alien not engaged in trade or business?
Both itemized and OSD are not available to them because they are
taxed at gross same with non resident foreign corporation.
The principle to be observed in claiming for itemized expenses or
deductions is that
1.
There must be a law allowing such deductions

That the taxpayer has proved that he is qualified to claim such
deductions
3. If such extent is required to be withheld of tax, it must be withheld of
tax
4. It must be strictly construed against the taxpayer.
The catch all phrase here in deductions is expense which refer to ordinary
and necessary expenses of the business which would depend on the
business the taxpayer is engaged in.
Itemized business expenses
a. Expenses
i.
Business expenses vs. capital expenses
A private educational institution may, at its option, elect
either:
(1) To deduct expenditures otherwise considered as capital
outlays of depreciable assets incurred during the table
year for the expansion of school facilities; or
(2) To deduct allowance for depreciation thereof
SPECIAL RULES:
We said that deductions must refer only to ordinary

expenses based on a day to day expenses.
Would capital expenses or capital expenditures be allowed as an the
outright deduction? No. But the non-deductible items that we have
learned is if there is a purchase of a capital asset it will not be
allowed as a deductible expense instead it will only be depreciated
over its usual life.
If a corporation makes a major capital expenditure which is used to
extend or prolong the life of the asset, such capital expenditure or
extra ordinary expense will not be expensed out right but instead it
will be capitalized and deducted over the usual life of the asset.
With regards to PRIVATE EDUCATIONAL INSTITUTIONS
A private educational institution at its option may elect to

deduct expenditures which are considered as capital outlays in
the taxable year when it was purchased or to deduct the
allowance of depreciation over its usual life. that
It would not make any difference for tax

is a non stock non profit or a stock corporation because it is the
exempt from income tax, whether the entire amount is
deducted in the year of purchase or all throughout the
estimated time of the property or capital (di ko ka dakop sa
unsa g ingon, murag "asset" ang g ingon).
What must be observed in deducting these instances?
Take note that the expense must be paid or incurred inorder

to generate the income. If the expense had been incurred to
pay for a number of years then it will not be deductible in the
year of incurrence or payment but also spread out over life in
which it seeks to benefit the income earner.
ii. Common requisites for deductibility:
(1) The expenses must be ordinary and necessary
When is it an expense ordinary? It is an ordinary
when it is normal or usual to the taxpayers business in
the surrounding circumstances. It is necessary when it is
appropriate and helpful in the development of the
taxpayers business and are intended to minimize the
losses or to increase the profits.
So if the expense is not necessary or ordinary in the

business then that expense becomes extraordinary
expense, not deductible for tax purposes.
Although, it
may be shown as part of the expenses but in computing
the income tax liability it will not reduce your net taxable
(2) It must be paid or incurred during the taxable year

So actually it depends on what method of accounting the
taxpayer is following. There are different methods. It can
be the cash basis accounting, the accrual method, or the
mixed type. Usually we follow the accrual method of
accounting that whenever income already earned or
realized regardless whether it is received it is already
taxable income and the expense whenever it has already
been incurred regardless if it when it is paid it becomes
deductible expense. It means to say that if the all-events
test has already been satisfied, in order for the right to
the income and the obligation to pay is already there
then we recognize the expense of the income already. So
income earned, expense incurred. If the taxpayer is
under the cash basis of accounting, expense becomes
deductible only when it is paid. But in accrual method of
accounting, when it is incurred, or when the obligation is
already due and demandable.
Exception: net operating loss carry-over
The exception there is the net operating loss carry over.
The concept of NOLCO is whenever a corporation suffers
net loss, instead of a net income, so the financials would
reflect that the expenses are higher than the gross
income, it would result to a negative, which we call as a
net operating loss. The tax code allows this to be carried
over and deducted against the gross income of the
taxpayer for the following year. This is an exception to
the rule that the expense must be paid or incurred during
the year. This is because when a net operating loss is
carried over to the succeeding year and deducted against
the gross income we are now talking about an expense
which is attributable to the credit income. That is a
deduction resulting from the past and the income
generated has no relation to the loss of the prior year.
(3) It must be paid or incurred in connection with the
trade, business or profession of the taxpayer
Any personal expense of the stockholder, employer, or
officers of a corporation can in no way be deducted from
expense. So if there are purchases, grocery, personal
motor vehicles it cannot be claimed as a deduction if it
cannot be connected to the trade, business or profession
of a taxpayer.
(4) It must be reasonable in amount
What is reasonable would depend not only on the amount
of the expense but has to be taken into consideration
with the size, the nature of operation of the business, the
current economic conditions, etc.
(5) It must be substantiated by sufficient evidence such as
official receipts and other official records
In order for an expense under itemized deductions to be

allowed as a deduction to reduce the gross income it
must be support by either official receipt, sales invoice,
or any other adequate records. If the expense you are
trying to claim is a transportation expense of an income.
employee riding a jeepney, you cannot get an official
receipt. So instead of official receipts, you can support
that with adequate records such as a trip ticket filled out
by the employee claiming for reimbursement. If the
company secures the services of a home-based person,
that person will not be able to issue official receipt or
invoice for service rendered. It will only be an
acknowledgment receipt. For purposes of claiming such
services an acknowledgment receipt will not suffice. It
has to be supported additionally by the contract entered
into for the subcontracting service. When you give out
salaries, do employees give out official receipts to
employers? No. So the substitute would be the payroll,
payslips, annual/monthly reporting by the employer to
the Bureau for taxes withheld. So that if expense is
claimed without any supporting document it will not be
allowed as a deduction. Except that which qualifies under
the common rule, that if there is a showing that an
expense is actually incurred but the taxpayer corporation
cannot show adequate document then it is up to the BIR
to determine the proximate amount that can be allowed
as deduction to the taxpayer so long as there is an
excuse for non-procurement of official receipts, invoices
and documents and it can be proven that the expense
was really incurred. Example, if you purchase from a
fisherman, the individual ones, you cannot expect them
to issue you an official receipt but the alternative is to
sign an acknowledgment receipt or if you can deposit it to
his bank account, then the deposit slip.
Can the BIR say that it is not justifiable?
It will be justifiable if you are in the business of

making canned sardines. Naturally, your cost will be
the purchase of raw materials from individual
fishermen who don't usually issue official receipts.
The only proof that they can show to the BIR are
those mentioned above plus delivery receipts plus
proof that it has been weighed over by some public
weighing company. In this case, by the Cohan Rule it
will be allowed.
It is now up to the BIR to determine as to what extent
the only will be allowed, not the entire amount.
In the production of his plays Cohan was obliged to be free-handed in entertaining
actors, employees, and, as he naively adds dramatic critics. He had also to travel
much, at times with his attorney. These expenses amounted to substantial sums,
but he kept no account and probably could not have done so. At the trial before
the Board he estimated that he had spent eleven thousand dollars in this fashion
during the first six months of 1921, twenty-two thousand dollars, between July
first, 1921 and June thirtieth, 1922, and as much for his following fiscal year, fiftyfive thousand dollars in all. The Board refused to allow him any part of this, on the
ground that it was impossible to tell how much he had in fact spent, in the absence
of any items or details. The question is how far
this refusal is justified, in
view of
the finding that he had spent much and that the sums were allowable
expenses. Absolute certainty in such matters is usually impossible and is
not necessary; the Board should make as close an approximation as it
can, bearing heavily if it chooses upon the taxpayer whose inexactitude
is of his own making. But to allow nothing at all appears to us
inconsistent with saying that something was spent. True, we do not
know how many trips Cohan made, nor how large his entertainments
were; yet there was obviously some basis for computation, if necessary
by drawing upon the Board's personal estimates of the minimum of such
expenses. The amount may be trivial and unsatisfactory, but there was
basis for some allowance, and it was wrong to refuse any, even though
it were the travelling expenses of a single trip. It is not fatal that the
result will inevitably be speculative; many important decisions must be
such. We think that the Board was in error as to this and must reconsider
the evidence. Cohan vs. Commissioner, 39 F. 2d 540 (2d Cir. 1930).
policy or
(6) It must not be against law, morals, public

public
order
What would be the type of expenses which
would
be contrary to law, morals, public policy,
or public
o
r
d
e
r
?
a. Payments to government
officials
Example you are being assessed P10M in
taxes and you are able to negotiate that
only P5M will be paid but the counter
negotiation was that only P2M in official
receipts will be issued, will you be able to
claim the difference of P3M as an expense?
You may reflect it as miscellaneous
expense but it will not be allowed as a
deduction in computing your tax
liabilities. But it has to be recorded
somehow because it was an outflow of
cash in the corporation (for private
purposes) BUT for TAX purposes, it cannot
be allowed as an expense deduction.
Now payments that are contrary to law, morals, etc.

compensation
are not deductible BUT any income derived from
including the illegal activities are taxable. But take note that it is
benefits subjected
allowed that illegal expenses can be allowed as a
have been paid deduction only to the extent of illegal gains. Now
expenses mentioned in
these illegal expenses can be deducted if you have
government otherwise the entire expense will not

be
allowed as a
deduction.
Example: [This is one way for the BIR to collect
taxes in
advance - the method of withholding. But this is
not the type that is subject to final withholding
tax; this is the creditable withholding tax.] The
regulations provide that rental payments by the
lessees to the lessor shall be subject to 5%
withholding tax. So that if there is a domestic
corporation A leasing from another domestic
corporation B worth P1.5M monthly. So if the
lessee pays P1.5M every month and there is that
requirement that it has to be withheld the 5%
withholding tax, then the lessee will only be
paying the lessor P1,425,000 every month. This
would constitute as a tax payment and the lessor
corporation would receive P1,425,000 (instead of
the P1.5M). The P75,000 withheld by the lessee
will be given to the government constituting as
an advance payment of the lessor because this is
a tax on the income of the lessor. If it is not
withheld, meaning to say the lessee paid entirely
the P1.5M, this amount will not be allowed as
expense in the books of the lessee corporation.
The lessee cannot deduct the P1.5M and sadly for
the entire year, all the rental payments will not be
deductible. BUT the lessor corporation has to
declare as well P1.5M as the monthly income
and any computation of the tax due will be
offsetted against what has been advanced to the
government. So the creditable withholding is
simply a scheme by the government to collect in
advance from the tax payers slowly towards the
end of the year.
Going back to expense requirements, if an
expense is
required to be withheld of tax, it has to be
withheld otherwise the expense will not be allowed
as a deduction.
iii. Salaries, wages, bonuses and other forms of

for personal services actually rendered,
grossed-up monetary value of the fringe
to fringe benefits tax which should
So what are the different types of
Section 34-A?
illegal income. But that would be self-incriminating corporation you wouldn't declare your activities to be illegal
the salaries therefore you cannot altogether claim these as an
individuals under an expenses
wages to be
Note: Any amount paid or payable which is
otherwise deductible form, or taken into
account in computing gross income or for
which depreciation or amortization may be
allowed, shall be allowed as a deduction only if
it is shown that the tax required to be
deducted and withheld therefrom has been
paid to the BIR.
Any amount paid or payable which is otherwise
deductible from the gross income may be
allowed as a deduction only if the requirement
of tax withholding has been complied with. In
other words, if an expense is required to be
withheld of tax by the payer, then such
withholding shall be made and remitted to
the
a. Salaries, wages, understandably, every

employing personnel will have to spend for
and wages, even bonuses of these
ER-EE relationship. BUT for salaries and
deductible, it must be reasonable in amount
especially bonuses - it must be given in good faith.
So that if an EE is able to close a transaction
worth P100M, is it reasonable to give him P50M
in bonuses? No, the corporation would get the
bulk of it, not the EE. So in order for bonuses to
be deductible from the income of the corporate
tax payer, it has to be given in good faith and it
has to be reasonable in amount and justifiable
according to the circumstances, the locality of
where the corporation is operating, and the
general economic conditions.
TAX FINALS - JEN, JASPER, REUVILLE, JADE, JARED, JAN, NEIL, RYAN, RIZA, PATRICIO, ANTHONY, KIM, KZ, SARAH,
LOR, ANGGE | 17
b Cost of materials and supplies insofar as it is actually
1 1st requirement, must be related to its business or trade,
incurred by the corporation is deductible
higher expenses in banks and other commercial
.
.
c. Advertising and Promotional expenses
establishments compared to manufacturing
sardines.
iv. Cost of materials and supplies
v. Advertising and promotional expenses
Three types of advertising
sales
1. Advertising is an act of making know the product or
expense
something. For the purpose of stimulating the sales of its
sales.
product is deductible in the year of its occurrence.
2. For the purpose of stimulating the future sales for its new
product. Sort of an investment. Deductibe not in the year
of the occurrence but spread out in the life of its future
morals.
benefit.
3. Advertisement to promote the sales of the shares of
receipts.
stock in the year of
incorporation is not deductible.
Because it is for the purpose of
advertising in the investment of
the corporation and not for the
purpose of increasing sales, or
its product in the corporation.
Advertisement for the sales of
bond deductible only in banking
institutions.
vi. Rentals and/or other payments for use or possession of
2. 2nd must be a reasonable amount If the business is

engaged in rendering service business, maximum ear
should not exceed 1% of the net
Engaged in the sale of goods maximum ear
should not exceed % of 1% its net
3. 3rd
pr
op
ert
y
Re
nta
ls,
the
ren
tal
If mixed, apportionment. 1% service related

activities. of 1% engaged in the production of
goods.
not contrary to law, public policy,
No constitute bribes and kickbacks. Must be
substantiated with
payment under operating lease then

deductible as expense but the financial lease which is an
x
i
i
.
c.
installment not recorded as expense but recorded as purchase
necessary
of an asset.
turn
vii. Expenses under lease agreements
ordinary viii. Travelling/transportation expenses
setting
Those incurred while away from home in the pursuit of
But if
trade and business Reasonable and necessary and
supported by adequate records. Transpo expense from
the head office to the branch, vice versa, office to the
expense?
client is deductible. But the expense of the employee
concur:
from home to the branch or office is a personal expense
trade and not deductible.
ix. Repairs and maintenance
a
In 2 forms.
deduction;
1. Minor ordinary expense to answer for the ordinary wear
necessary;
and tear of the asset. It is fully deductible in the year it is
incurred
2. Extra-ordinary or major repair deductible after it has
been capitalized. Its deductibility will be the depreciation
of the asset it has prolonged. Becomes an extra-ordinary
repair when the life of the asset is prolonged.
x. Expenses for professionals
that
Consultancy fees, professional fees deductible.
deductible?
xi. Entertainment, amusement and recreation expenses
it
Conditions and requisites under Revenue Regulations No.
writing.
10-02
be
Entertainment, amusement or recreation expenses providing
in
recreation to your clients so long as it does not violate laws,
morals, public policy or public order. Then deductible to some
stipulation extent, must be related to the business or trade. Must be a
deductible reasonable amount.
L
i
t
i
g
a
tion expenses
Litigation expenses if the issue is related to its trade or
business.
xiii. Political campaign expenses
Political campaign expenses, not related to trade or business
or operations. Not deductible unless you want make a
donation.
xiv. Training expenses
Interests
What is an interest
expense?
It ordinarily pertains in a banking institution as a

expense. It actually obtains loans from depositors and in
pays them interest and becomes a necessary and
business expense for them. But for a manufacturing
this is not an ordinary and necessary business expense.
the loan becomes delinquent for the detention of money,
interest has to be paid.
Is interest, generally, a deductible business
Yes, provided the ff. requisites
(1) It must be incurred in connection to the business,

or profession;
(2) It must be incurred in the taxable year it is claimed as
(3) It must be ordinary and

(4) It must be substantiated by the contract itself and
payment vouchers, etc.;
(5) It must be reasonable; and
(6) It must not be contrary to law.
If you obtained a loan and you paid the principal and the
interest and for such payment you were given either an
acknowledgment receipt or official receipt, can we say
it's enough for an interest expense to be
No, because in addition to substantiating it with receipts
has to be stipulated in
The most important requirement for interest expense to
deductible for tax purposes is that it has to be stipulated
writing. There has to be a written document for the loan
providing that interest is payable. Without such
even if interest is actually paid will not make it a
expense.
i
.
TAX FINALS - JEN, JASPER, REUVILLE, JADE, JARED, JAN, NEIL, RYAN, RIZA, PATRICIO, ANTHONY, KIM, KZ, SARAH, LOR, ANGGE |
18
Arbitrage rule: The amount of interest paid or incurred
ABC
XYZ
U Corp.
within a taxable year on indebtedness in connection
Bank
Bank
loa
loa
with the taxpayer's profession, trade or business shall
n
n
be allowed as deduction, reduced by an amount equal to
33% of the interest income earned by him which has
been subjected to final tax.
Interest
Interest
What is the arbitrage rule?
20% or
Incom
Expense
7.5%
e
When the amount of interest paid or incurred within a

I
E
30
P
P
taxable year on indebtedness in connection with the
20
30
%
5M
5M
taxpayer's profession, trade or business shall be allowed
%
%
as a deduction, reduced by an amount equal to 33%
10% /30% =
of
10% or
33%
22.5%
the interest income earned by him which has been
10/3
subjected to final tax.
0=
Ex.
XYZ
Bank
n
loa
U
Corp.
Interes
t
Interes
t
Expens
e
Incom
P
5M
-1.65M
33%
P3.35
M
e
P
5M
X
33%
P1.65
M
Not part
of
Passive
income
part of
GI
The part of the interest income earned by U Corp. is

not the type of passive income subject to final
withholding
Interest expense, so long as it has been paid or

incurred by the taxpayer in relation to trade,
business or
profession is generally deductible but reduced to
33% of the interest expense subject to final tax. If
there is no interest income earned by the taxpayer
then the interest expense is fully deductible. If there
is interest income earned by the taxpayer but is not
subject to final tax but rather subject to the 5-32%
ordinary tax, still the interest expense is fully
deductible. The arbitrage rule would only arise if
there is an interest income subject to
A
B
loa
3%
tax because it does not come from a banking

institution, it's not a deposit, it's not a deposit
substitute, it does not come from indebtedness or
bonds issued by a bank, therefore, it will form part of
the gross income of U Corp. subject to the ordinary
rate of 5-32%. Not subject to final tax, will it affect the
deductibility of the expense? No. The deductible
interest expense remains P5M.
final withholding tax of 20 or 7.5%, wherein 33% of

this amount will reduce the interest expense, and not
33% of
the interest expense. (Do not confuse)
Interest expense is generally deductible, unless
there
is an interest income subject to final withholding
tax.
W
h
y
?
H if the interest income was subject to final tax, U
o Corp.'s interest income of P5M x 33% is P1.65M. U
w Corp.'s interest expense of P5M - P1.65M, is P3.35M, the
e amount deductible as interest expense.
v
e
r
,
The taxpayer obtains a loan in order to deposit the

same amount of money and would generate an
expense. If he deposits it, it generates interest
income. There is then that portion which would
benefit the taxpayer, assuming all things equal,
meaning to say the interest rate for the loan
obtained and for the deposit is the same, the
What is the reason for the arbitrage
rule?
To discourage back-to-back loan transactions, where

one obtains loan from another bank and invests the
amount in another bank in order to benefit the
difference between the tax due on interest income
and the tax benefit from the interest expense.
Ex.
i
n
t
e
r
e
s
t income will have a tax benefit of 30% (the tax rate

on net taxable income of corporate taxpayer) plus an
expense is present it will reduce the net taxable
income by 30%. Wherein, if the same interest income
is earned in another transaction it will only be
withheld of
the 20% or 7.5% final withholding tax. Assuming
arbitrage rule is not applied, the tax benefit of the

taxpayer is a reduction in tax which is 30% of the
interest income, while interest income is only subject
to 20%. The difference is 10%. This is what is not
allowed.
However, if the amount is invested not with a banking

institution, the arbitrage rule does not apply because
the interest expense will reduce your net taxable
income by the 30% but your interest income will also
be subjected to 30%. You will not get any benefit.
Should there be a back-to-back loan transaction
for the
arbitrage rule to apply? Should it be the same
amount of money coming from the previous
loan deposited to
anoth
er
bank?
ANGGE | 19
No. As long as interest income is earned which is subject

to final withholding tax.
If you have income from services, then you reduce it
with interest expense, what is your benefit? Is it the
expense itself or the tax effect by deducting the tax
expense?
It is the tax effect because your liability to the

government is not to pay the full taxable income but
rather the 30% of the taxable income.
ii. Additional requisites for
deductibility
Additional requisites for interest expense to be deductible:
(1) There must be an obligation which is valid and
subsisting
This means that between the parties there must be a
creditor-debtor relationship. The indebtedness must be
that of the taxpayer and not of an affiliate or a third
person.
(2) There must be an agreement in writing to pay interest
It must also be legally due otherwise it is not yet
deductible.
(3) The amount shall observe the limitation under the
arbitrage rule
(4) It must not be between related taxpayers
Related taxpayers:
(a) Immediate family members
Spouse
Brother/Sister
Ascendants/Lineal descendants
(Does not include in-laws)
(b) Corporation and individual where the latter owns
more than 50% of the outstanding capital stock of
the corporation
(c) Between 2 corporations wherein one individual owns
both corporations with more than 50% of the
outstanding capital stock directly or indirectly, or one
is the holding company of the other.
(d) Between grantor and the fiduciary
(e) Between the fiduciary and the beneficiary
(f) Between 2 fiduciaries/trustees where there is only
one and same grantor.
If you are delinquent/deficient in paying your taxes,
you would be required to pay surcharge, compromise
penalties and interest. Will this payment be deductible
an expense?
Only the interest may be deductible because there is an

existing indebtedness in the form of the tax you owe the
government and there is a tax code which provides for
such interest. But such delinquency/deficiency must arise
from a deductible tax and not from a non-deductible tax,
such as estate and donor's tax.
iii. Non-deductible interest
expense
(1) Interest expense on preferred stock, its exception
Is interest payment in preferred stocks deductible?
No. The term preferred shares means that they have
more preference than those shareholders which own
common shares of stock. This simply means that a

preferred share may actually be paid dividends even if
common shareholders do not. Preferred shareholders
may receive dividends even if a corporation does not
generate profits.
As a general rule, they are not payments of interest
therefore, not deductible as interest expense, rather
they are payments for profits. Exception, they become
deductible when a corporation cannot pay cash
dividends and it issues promissory notes with a
promise to pay dividends with interest because it
already becomes an indebtedness of the corporation
since there is already a stipulation that payment of
dividends will be made even if there are no profits
earned and if it is not paid it will be paid in a future
time with interest.
(2) When there is no agreement in writing to pay interest
(3) Interest expense on loan entered into between related
taxpayers
(4) Interest paid or calculated for cost-keeping purposes
(5) Interest expense beyond the arbitrage rule limitation
(6) Interest expense on unclaimed salaries of employees
(7) Theoretical interest
Is theoretical interest deductible?
No. Interest expenses deductible are only those that

are actually paid or incurred. A theoretical interest is
not an actual payment, rather mere computations of
costs of investments.
iv. Special rules

(1) Interest paid in advance
(2) Interest periodically amortized
(3) Interest expense incurred to acquire property for use in
trade/business/profession
Optional treatment of interest expense:
(a) Deduction; or
(b) Capital expenditure
When do you capitalize an expense?
If a capital expenditure/outlay or major repairs or

maintenance, these cannot be deductible outright as
an expense, rather capitalized and depreciated over
a period of time.
Interest expense, on the other hand, is only

deductible in the year it is incurred. It can only be as
capitalized if it is related to the purchase of capital
assets or equipment used in trade or business.
However, you have the option to deduct it outright in
the year the interest expense was incurred or you
can opt to have it capitalized and will form part of
the value of the fixed asset and will be deducted
over the estimated useful life. That option will come
in handy if during the year of purchase the
corporation is operating at a loss because there is no
need to deduct outright another expense, it would be
better to capitalize it and benefit for the future which
may already be earning an income. The option to
d.
capitalize presupposes that there is a fixed asset

which has a life longer than 1 year.
Taxes
i.
All taxes, national or local, paid or incurred within the
taxable year in connection with the taxpayer's trade,
business or profession are deductible from gross income,
except:
Are taxes deductible?
General Rule - All taxes, national or local, paid or

incurred within the taxable year in connection with the
taxpayer's trade, business or profession are deductible
from gross income, except:
(1) Income tax - Philippine and Foreign Income taxes
Two types:
(a) Philippine
(b) Foreign
Income tax is not a deductible expense for purposes of
computing your income tax liability because income tax is
the bottom figure. It does not form part of the expense.
(2) Estate and donor's taxes
Deductible because they are not related to the trade,
business or profession of the taxpayer.
(3) Value-added taxes
Ex. You purchase from SM and there's a VAT component
to what you paid and that is remitted by SM to the BIR.
Will it form part of SM's deductible expenses? No.
Because it is an indirect tax which are passed on to the
consumers.
(4) Special assessment on real properties
It is for the improvements made by the government
which benefits the taxpayer's property. These are one
time assessments which can be paid over a period of 5
years by the taxpayer.
Ex. There is a property which ordinarily if use it for
business it will be subject to real property tax. If a
project of the government benefits the value on this
parcel of land on top of the real property tax you would
pay special assessment. As between real property
tax and special assessment, why do you think special
assessment is not deductible while real property tax is
deductible? Real property tax is deductible because it
relates to the trade, business or profession or acquisition
of the capital while special assessment is not in any way
to the trade, business or profession.
tax due but
(5) Electric energy consumption tax (BP No. 36)
If your corporation is able to dispose of a property
classified as a capital asset located in the Philippines
will be required to pay capital gains of 6%. Is the
a deductible tax?
It's not deductible. Though it is not specifically included

in the list it is a form of income tax liability and there is
always a presumption of profit even if it is sold at a loss.
If your corporation made payments to a non-resident
foreign corporation you are obliged to withhold the
final tax because the NRFC is not registered as a
taxpayer in the Philippines. Is the 30% you withhold as

tax a deductible tax?
Not deductible because it is not a burden on the

corporation but a tax of the NRFC.
ii. Requisites for deductibility
What are other deductible taxes?
Community tax, customs and duties, and business tax.

So long as the tax is incurred during the taxable year in
connection with the trade, business or profession and
was accrued as that of the taxpayer, meaning it's
personal and non-transferable, and it does not fall among
the list of the non-deductible taxes.
(1) It must be paid or incurred during the taxable year;
and
(2) It must be paid or incurred in connection with the
trade, business or profession of the taxpayer.
iii. Treatments of surcharges/interests/fines for delinquency
tax payments
iv. Taxes subsequently credited or refunded
v. Tax credit vis--vis deduction
Income tax, generally, is non-deductible. Taxes paid or
incurred in the Philippines is absolutely non-deductible.
However, in foreign income tax, wherein a resident citizen or a
domestic corporation incurs taxes outside the Philippines, and
there are now two taxing authorities, it becomes deductible.
Here, the taxpayer has the option to choose either tax credit or
tax deduction to avoid international double taxation.
If the taxpayer elects tax expense deduction, 30% of the tax
paid in the foreign country will be deducted from his assessed
tax in the Philippines. If he opts for tax credit, he will have
the foreign tax offset with the Philippine income tax.
What is the difference between a tax expense
deduction and a tax credit?
Ex. You pay P1M in taxes abroad. If tax expense
deduction it will form part of the expenses, which is
deductible, and will reduce the gross income and also also
reduce the net taxable income and reduce the tax due by
30% of the tax paid abroad or P300,000. If it is tax credit
the amount will be deducted from the net taxable
income. Your benefit will be to the extent of 100% of
whatever you paid or P1M. However, tax credit is limited
by the per country and global limitation. related
The tax credit will be offset against the
limited to the extent of the proportion where the ration of

your income from sources outside the Philippines against
your worldwide income against where such credit is you
taken. So your ratio of your Philippine income against 6%
your worldwide income against the Philippine income tax
due.
If you performed equally outside and in the Philippines that's
50%. Foreign income is 50% over your worldwide income, so
only half of the Philippine income tax is the limit. If your
Philippine income tax due is P2M then you can deduct fully
the P1M. But if your Philippine income tax due is P1.5M the
ratio says that only half will be deducted then this will be
limited to only half of the Philippine income tax.
vi. Limitations on Tax Credit
(1) Per Country Limitation
(2) Global Limitation
Can we say that his tax payment abroad is fully offsettable against the Philippine income tax due?
No, because it is subject to limitation to the extent of the

proportion
of
his
foreign
income
against
his
entire/worldwide income multiplied by his Philippine
income tax. It does not mean that the amount of tax
abroad will automatically be off-settable because the law
says the ratio of the foreign income to his worldwide
income. So if half of his worldwide income comes from
abroad, then only half of his Philippine income tax maybe
deducted. That's the limit.
Ex.
A
B
Limitation B, global limitation:

When we say global simply combine all foreign
income. [(Country A + Country B income) /
entire income] x (30% X entire income) = (P8M
/ P15M) x P4.5 = P2.4M. So the global limit is
2.4M, while the actual taxes paid abroad are
P2.45M. Applying the amount that is lower, we
deduct only P2.4M, or the global limit.
If there is more than one foreign country you have to

have both limitations and whatever is lower of the
two will be allowed. Since the per country limitation
is lower, P4.5M - P2.15M = P2.35M will be the tax
payable to the government. If only one foreign
country, go directly to the global limitation.
vii. Who may claim tax credits for foreign taxes paid?
If ABC Corp. is Resident Foreign Corporation, how much
Philippine Tax will be paid?
Only 30% of the income earned in the Philippines, or

30% of P7M, which is P2.1M.
C
C
o
r
p
.
(
d
o
m
e
s
t
i
c
c
o
r
p
.
)
Country A (25%)
Taxable Income
P 5,000,000
Tax Paid
P 1,250,000
TAX DUE
Can the gross income of a RFC be reduced by foreign

income taxes instead of the tax credit?
C
o
u
n
t
r
y
3,000,000
1,200,000
No. Option only applies to DC and RC.
B
(
4
0
%
)
P
h
i
l
i
p
p
i
n
e
s
7,000,000
P 15,000,000
P4,500,000 (30%x15M)
Will a subsequent tax refund or credit be subjected to

income tax?
(
3
0
%
)
TOTAL
Limitation A (Per Country)
Country A
5M
=
x
4.5 =
Global
15M
Country B
3M
=
x
4.5 =
Global
15M
Limitation B (Global)
To the extent of the amount the taxpayer was benefitted.

Generally, it would only pertain to deductible taxes. If it is
not deductible then it would not benefit the taxpayer
as a deduction hence, will not be subjected to income tax.
viii. Proof of Tax Credits
(1) The total amount of income 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; and
(3) All other information necessary for the verification and
computation of such credits.
What do we need to submit as proof of actual tax
payments to be allowed foreign tax credits?
(1) Tax return filed abroad;
(2) Receipt or deposit slip if payment was made in the bank;
(3) Further documents, i.e. certification from the foreign tax
Limit
Actual
Allowed
Paid to
1.5M
1.25
1.25M
9M
1.2
.9M
Gov't
4.5M
2.15M 2.15M
2.35M
4.5 =
2.4M
2.45
= 8M
15M x
ABC Corp. is a domestic corporation taxable for income
within and without. If country A tax is 25% and country B

is 40% and the Philippine tax 30%, then we cannot
expect that the tax payment abroad is the same as what
we expect in the Philippines.
How much is the Philippine tax due?
Limitation A, per country:
P4.5M which is 30% of P15M or the total taxable

income. Applying the formula, instead of
deduct
ing
directl
y the
e.
Losses
authorities that indeed you have paid foreign taxes there.
Are losses deductible?

P2.25M
or the total of the
Generally deductible.
taxes paid in country A and country B, we apply

the limitation for country A (5M/15M) X 4.5 =
1.5M, and the limitation for country B (3M/15M)
X 4.5 = 900K. Applying whichever is lower
between the actual tax paid and the limitation,
we get the value for country A as 1.25M or the
actual tax paid, while we use 900K, the limit, for
country B, with a total of P2.15M which you can
deduct from your taxable income.
i.
Classification of losses
Classified as:
(1) Ordinary losses
arising from ordinary transactions involving ordinary
assets;
(2) Capital losses
capital transactions not related to business, trade or
profession;
(3) Special Losses
ii. Additional requisites for deductibility
(1) Losses must be incurred in relation to the trade,
Ex. If the building of ABC Corp. is razed

by fire and is
business or profession of the taxpayer
insured, will it be a deductible loss?
(2) Losses must actually be sustained and charged off
No. All insured properties will not result to a deductible

within the taxable year, and not mere anticipated
loss if loss occurs. However, if compensated partially
losses
then that portion not paid by the insurance will be
(3) Must be evidenced by a closed and completed
deductible loss.
transaction
Ex. If the insurance company at first refused to pay the fixed
(4) Must not be compensation by insurance or other forms
value of the policy and still subject to negotiation on its
of indemnity
liability and eventually, 2 years passed, you were not able to
(5) The loss is not claimed as a deduction for estate tax
deduct the losses when it was sustained. Two years after,
purposes
insurance company volunteered to pay only 25% of the
(6) If it is a casualty loss, the taxpayer has filed a sworn
value of the loss. Will the 75% not compensated by the
declaration of loss within 45 days after the date of
insurance be deductible during the year when the
discovery
of
the
casualty,
robbery,
theft
or
insurance has paid the 25%?
embezzlement.
2011
Loss
What are casualty losses?
2011
Losses arising whenever a business suffers a major

2012
Insurance 25%
loss through a fire, storm, shipwreck, robbery,
75%
embezzlement and theft.
Though the losses, as a general rule, are only deductible

Requisites to be deductible:
in the year it was sustained, when the determination of
1. Must be incurred in relation to the business or trade;
the loss covered by the insurance policy is still subject to
2. Must be sustained during the year it is claimed;
negotiation then it may be postponed until it is settled.
3. Evidenced by a close and completed transaction;
Hence, the 75% can be deducted in 2012.
4. Actually sustained;
iii. Special rules
5. Must not be compensated by an insurance;
(1) Capital losses
6. Duly reported within 45 days by a sworn statement
(2) Wagering losses
to the tax authorities.
It can only be deducted against wagering gains. Similar
This last item is required only for casualty

to illegal gains and illegal losses, it can only be deductible
losses.
to the extent of illegal gains. Beyond that, ordinary gains
(7) It must be a personal loss of the taxpayer.
are no longer deducted of illegal losses.
If there are 2 affiliate companies and one of them suffers
(3) Net operation loss carry-over (NOLCO)
a loss, we do not transfer that loss to the other company
What is net operating loss?
in order for the other company to lower its income tax
The loss sustained from ordinary operations of the

liability because it's not a transferrable expense.
company. Because it is net it means that expense is
Exception to the rule that a loss can only be charged in the
higher than the gross income.
year it is incurred is the Net operation loss carry-over
What is net operating loss carry-over?
(NOLCO). This net loss must not be actually sustained and
It is a net operating loss not previously off-setted

not merely anticipated to be deductible and must be
against any gross income which can be carried over
evidenced by a closed and completed transaction.
the next 3 consecutive years.
Ex. You purchased raw materials from a foreign country.
If a corporation is operating at a loss this year, they can
You
use it as part of their expense in the next following 3
were given a 90-day credit line. You were expected to pay
years which will reduce their future income.
within 90 days from purchase or delivery. At the time of
If a corporation has been granted an income tax
purchase the exchange rate for US dollars to Philippines is
exemption either by virtue of the tax code or a
P41, but you are already apprised that there is a chance that
special holiday and a loss is sustained within the
the exchange rate at the end of the year, where you need to
period of exemption, can that loss be carried over
close your books, the dollar will already be at P42. So there is a
to the taxable years?
difference of P1. If you purchased P1M worth of US dollars,
that is P1M.
No.
Is that already a deductible foreign exchange loss?

Who are the taxpayers allowed to avail of the
No. Although there is already a closed and completed

NOLCO?
transaction because the sale was consummated, the
To any taxpayer engaged in a trade, business or

payment was not yet due. So it is an anticipated loss
profession. An individual may be allowed to claim
as of that period. There will be realized loss if on the
NOLCO if engaged in trade, business or profession.
day that you are required to pay you pay higher than
What are the corporations allowed to claim NOLCO?
P41 to a dollar, and will be deductible.
All except NRFC because NRFC do not perform
D
business in the country and they are only taxed from
Year 4
Year 5
Year 6
Year 7
C
income within and are not allowed deductions to
10,000,000
10,000,000
10,000,000
10,000,000
4 ITH
which NOLCO belongs.
5,000,000
5,000,000
5,000,000
5,000,000
Gross Sales
Less: Cost of Sales
Are proprietary educational institutions subject to
Gross Income
5,000,000
5,000,000
5,000,000
5,000,000
10%, Regional Operating Headquarters, can they
Less: Expense
5,500,000
6,000,000
4,500,000
2,000,000
claim NOLCO?
NOLCO
-0-01,000,000
-0
Unlike in MCIT which only applies to corporations
Income (Loss)
(500,000)
(1,000,000)
(500,000)
3,000,000
liable for 30% corporate tax, NOLCO can be availed
NCIT Tax Due 30%
-0-0-0900,000 =900,000
so long as the corporation is allowed to claim
MCIT 2%
100,000
100,000
-0100,000
allowable deductions under Sec. 34. So a proprietary
ID
ID
OSD
ID
educational institution, though taxed differently,
Tax Payment
100,000
100,000
700,000 =900,000
-0because the basis of 10% is net income, therefore, it
Excess MCIT
100,000
100,000
-0-0can claim NOLCO.
Carry Over MCIT
100,000
200,000
-0-0However, if we talk about international air carriers
Carry Over NOLCO
-01,000,000
500,000
500,000
subject to 2.5% not on net income but on gross special
billings then NOLCO is not available to them.
Rule - Whenever Sec. 34 is allowed then NOLCO is
allowed.
If on the 4th year of operations of a DC which

If a corporation or a taxpayer opts for optional
was granted a 4-year income tax holiday (ITH) it
standard deduction (OSD) instead of itemized
generated a gross income (GI) of P5M, while
deduction, may it claim the loss of the previous
expenses at P5.5M, there was no loss from year
year to be carried over?
3, therefore, NOLCO is 0. So loss for year 4 is
OSD is fixed at 40% of gross income in lieu of
500,000. Tax due to the government is also 0
itemized deduction. Since itemized deduction is not

because it operated at a loss. MCIT is 0 because
allowed during the year you claim OSD, NOLCO of
it is still on its 4th year and under an ITH. Tax
the previous year cannot be carried over.
paid to the government is zero. MCIT should be
Will the election of OSD suspend the running of the
applied beginning the fourth taxable year after it
3-year period?
was registered in BIR. Carry over is 0 because
If you sustained a loss last year and you opted
still under an ITH and if you are under a year of
for OSD this year and OSD next year and the
exemption no loss can be carried over to the
year after next, so 3 years after the net
succeeding years.
operating loss, will it suspend the running of
If you chose itemized deduction for year 4 and 5, in
the 3-year period so that NOLCO can still be
year 5 GI still P5M and expense is P6M, will you
applied on the 4th year after the loss was
have NOLCO to be deducted?
sustained
No, because there is 0 carry over due to ITH, hence,
?
not allowed. But in year 5 there is a net operating
If MCIT is paid by the taxpayer during the year,
loss of P1M. There is no 30% income tax due
that means you did not benefit from the NOLCO
because it is operating at a loss. However, it is now
because MCIT is based on gross income and
liable to MCIT because it is no longer under ITH and
NOLCO is after gross income. If you take MCIT,
its MCIT is greater than its tax due. So MCIT is 2%
will it not suspend the running of the 3-year
of P5M, or P100,000. How much is paid to the
period for
NOLCO?
Both OSD application and the payment of MCIT
government on year 5? P100,000. Excess MCIT,
will not suspend the 3-year period for NOLCO to

NCIT - MCIT (or 0 - 100,000), is P100,000. NOLCO
be applied. So if during those years NOLCO was
that can be carried over is P1M.
never used, it is forfeited at the end of 3-years
In year 6 your expense is lower than your gross
after the net operating loss was sustained.
income. How much is your NCIT or 30% of the net
income tax due?
Zero because while GI is P5M and expense is only

P4.5M, you deduct an additional expense of P1M
which is the NOLCO from year 5, making your NI a
negative P500,000 and your NCIT 0. MCIT remains
P100,000 or 2% of your GI. You pay to the
government P100,000 or your MCIT. While excess is

P100,000 or NCIT - MCIT. Is your MCIT of P100K
carried over to year 7? 200,000. While your
profession of the taxpayer, it has no business of
remaining NOLCO is
becoming a part of the deductible expense. As we
P500,000.
said, one of the requisites for an expense to be
In year 7 you opted for an OSD and GI is P5M you
deductible is that it must be for the account of the
deduct
business, trade or profession of the taxpayer.
40% of the GI, which is P2M, hence, your net
Give me a debt that is related to the business, trade or
income is P3M. How much is the 30% NCIT?
profession of a taxpayer.
P900,000. NOLCO cannot be deducted from the
NCIT because taxpayer opted for an OSD and the
period to apply NOLCO is not
suspended. MCIT remains 2% of P5M, which is P100K.
Purchase of personal items on credit.

When
How much do you pay to the government? Excess MCIT
ownership is transferred to the buyer, the
'proceeds' can be carried over and off-set against the NCIT. You are
(constructive receipt-once it is already in your
books, now liable for NCIT because the latter is higher than your
it will be considered realized) of the sale form
part of MCIT but you can carry over the excess of MCIT, which is
your gross income which will be subjected to
income P200K hence, you only have to pay P700K. Zero excess
tax. If years later, you were not paid and
there is no MCIT because you did not pay MCIT. Zero carry over
chance of recovering in the future, it is just
but because you already consumed the entire P200K. Can
proper that it becomes a deductible since you
did not you still carry over the P500,000 NOLCO to year 8? Yes.
receive the payment. Di ba? It was taxed
and you Because from year 5, you still have 3 years to year 8.
never received it. If it is already settled that
it is
When a corporation merges or consolidates with
uncollectible or worthless, then you are
allowed to
another corporation can that surviving corporation
reduce your income in the year that you
determined use the losses sustained?
it to be worthless to the extent of how much
was the
If there is no substantial change of ownership, then

debt that was uncollected. You have to
reduce your
NOLCO can be applied. Otherwise, NOLCO can no
current income of the income that was
never longer be used. There is no substantial change of
collected that's why bad debt is an
expense
ownership if at least 75% of the outstanding capital
deduction.
stock or paying capital stock remains with the same
deductibility person.
be complied with.
75% equity rule: NOLCO can still be claimed even in
indebtedness
cases of mergers or any business combinations so long
worthless
as there is no substantial change and there is no
worthless?
substantial change if after the business combination, at
undertake:
least 75% of capital stock is still held by the same
accounts
persons. If there are changes of stocks held amounting to
letter
26% , then NOLCO can no longer be applied because this
lawyer
means that what has been retained as the same
Demand letter
ii. Additional requisites for

But there are requisites that need to
(1) There must be valid and subsisting
(2) The debt must be ascertained to be
When can a debt be considered to be
There are steps that we need to

1. Sending statements of
2. A collection
3. Referral to
4.
ownership would only be 74%.

an
(4) Net capital loss carry-over (NCLCO)
court.
What are capital assets?
(supra)
These are assets which are not ordinary.

Net capital loss carry over, somehow similar but is not an
5. And if the debtor still fails to pay, you file

action in
Must all debts undergo the following steps
before it can be considered worthless and
uncollectible?
operating loss from ordinary transactions but pertains to
necessarily.
capital losses; but as to carry over, it can be carried over
becomes
to the next succeeding years. (still to be discussed once
insolvent.
we reach capital transactions)
follow the f.
of accounts, hiring
i.
Debts due to the taxpayer which are ascertained to be
on?
worthless and charged off within the taxable year
bankrupt/insolvent. What are Bad Debts?
the
These are debts due to the taxpayer which are usually

agree on
ascertained to be worthless and charged off within the
insolvent.
taxable year.
and the
So these are debts resulting from the worthlessness or

need to
uncollectability of accounts that are due to the taxpayer
lawyer
arising from transactions which are related to the trade,
income in the
business or profession. Otherwise, if the bad debt is for
non- an account not related to the trade, business or
corporation
Not
An example would be a person who
Any instances where you do not need to

Bad Debts
steps like sending of statement
a lawyer and so
If debtor is judicially declared
Because in insolvency, voluntary insolvency, all
creditors are gathered and they have to

how to distribute the properties of the
The indebtedness is so minimal in amount,
cost of hiring a lawyer is higher, you do not
hire a
Debtor consider property or any visible
Philippines, for example it's a corporation, a
resident corporation sets up a domestic
ANGGE | 25
in the Philippines engaged in I.T business in I.T park,

now the only properties that they actually have is
not big enough. If it's a small time business, they
cannot afford to buy a building of their own but
rather can only afford to rent a place then put in
computers. If they incur indebtedness from bank etc.
for example they maintained an account for the
rents of the space, it is very easy for the owner of
the property to declare such income receivable as
abandoned if there are no more visible properties, all
of the computers the laptops are taken by their
owners etc. and they can no longer be located then
in that case you don't need to hire a lawyer.
Would the death of the debtor automatically results
to a bad debt?
deducting bad debt expense as part of its itemized

deceased.
Debt was covered by a collateral or a real estate
mortgage, debtor failed to settle the debt so you
proceed
in
having
the
property
judicially
foreclosed, and you won the bid and you purchased
it for a price lower than the debt. Can you consider
the difference between the bid price and the
amount of debt as a bad debt?
No, its not deductible as a bad debt because the

property (already in your hands since you own the
auction) would stand in the place of the
indebtedness.
(3) The debt must be charged off and uncollectible within
the taxable year
What do you mean by "the debt must be charged
off and uncollectable within the taxable year"?
Apart from having a requirement that it should form

part of the receivable, and if you have no receivable,
then that is an indication that you will not have any
uncollectible in the future. No receivable, if it cannot
be collect, then it's an indication that nobody owes
you.
Having a receivable is a requirement. But the point of
when you recognize it as an expense is IMPORTANT. And
one of the requirements that an EXPENSE becomes
deductible is that, diba, apart from being in connection
with trade or business or profession, it must be PAID and
INCURRED during the taxable year.
A bad debt is NOT something that you need to pay. A bad
debt is NOT something that you need to incur. But it has
relation to that requirement, in the sense that, when
you recognize a debt to be worthless and uncollectible
during the year, then ONLY during such year you will
record the bad debt.
So it has to be charged off during the taxable year.
So if the taxpayer has been declared judicially bankrupt
this year, then claim it during such year.
It must be uncollectible in the near future
If the indebtedness is receivable from a related

taxpayer, can that indebtedness form part of the bad
debt expense?
Just like transactions of loan which bears interest

between related taxpayers, and same as exchange of
property resulting to losses between related taxpayers or
are NOT being deductible expenses. Then in the same
way bad debts from credit extended to related taxpaper
are also NOT DEDUCTIBLE.
Exceptions to the rule (bad debt as deductible
expense):
1. Banks cannot normally claim as bad debt expense any
outstanding loan to clients that not yet paid without an
approval of monetary board of the BSP.
2. Insurance/Security companies also have no privilege of
No because they can still go after the estate of the
g.
deduction.
iii. Bad debts charged off and subsequently collected
What then is the rule on bad debts already declared as
worthless and uncollectible but subsequently collected
or subsequently paid by the debtor?
Shall be recognized as part of the taxable income of the

creditor in the year of collection, but only to the extent of
the benefit derived from deducting it as an expense in
the year of charging-off as bad debt.
So if no benefit has been derived in the year of chargingoff, then subsequent collection cannot result to taxable
income on the part of the creditor.
Depreciation
i.
The gradual diminution of the useful value of the property
used in trade, business or profession of the taxpayer,
arising from wear and tear or natural obsolescence.
Depreciation is the gradual diminution of the useful or
serviceable value of a property that is tangible, used in trade,
business, or profession, arising from the normal wear and
tear or exhaustion of the property or even its natural
obsolescence.
This is an expense deduction.
Why would an asset, a tangible property be considered
an expense deduction?
Now if you have a business where you purchase fixed

assets or equipments for use in the business. These help
in the business.
In order for the taxpayer to recover the cost or the value

of the property, there is what you call depreciation to
cover for the usage of the property. If you answer for a
the exhaustion of the property, the normal wear and tear
process of the usage of the property.
It refers only to tangible property?
Depreciation only refers to the diminution of the value of

the property that is tangible.
If the property is intangible such as patents, copyrights,

or goodwill, for which value has been spent by the (4)
taxpayer, then you call the process of diminishing its
ii.
value as a way of recovering the cost of such property as

amortization instead of depreciation.
Additional requisites for deductibility
(1) There must be depreciable properties
Can you give us an example of a depreciable
property?
So in a funeral parlor, you diminish / depreciate the

value of the vehicle, the hearse.
Can land be subject to depreciation?
Land is not subject to deprecation, whether it

actually declines in value.
Buildings, improvements, real properties, personal

properties are subject to depreciation.
(2) The property must be used in trade, business or
profession of the taxpayer
Must be used in trade or business. The property must be
depreciable.
So land cannot be depreciated for tax purposes. So

let's talk about other types of tangible property.
It must be used in trade business; so personal property it
cannot be depreciated in the business tax.
Meaning to say, its value cannot be depreciated for

purposes of deducting it against the gross income.
Should depreciation apply only to properties that
are currently used by the trade, business, or
profession, OR can it include properties that are not
temporarily used in the trade, business, or
regulation 19profession?
It's not strictly required that the property is

CURRENTLY used in the trade or business. There are
instances when a property owned by the business or
the taxpayer is temporarily inactive or not used.
During those years when it is not used, so long as it
not for personal purposes, it will still be
depreciated because properties do depreciate over
So it's not strictly for those currently used, but also
for those not temporarily used, so long as all of them
are somehow related to the trade, business, or
profession of the taxpayer.
(3) The allowance for depreciation must be reasonable
When can you say that the allowance for depreciation
must be reasonable?
If it would follow the methods of depreciating a

property that were set by the taxing authority for the
depreciation of the property. Somehow depreciating
a property for tax purposes must follow the standard
methods. The methods allowed by law are:
Straight-line Method
2. Declining balance Method
of-years digit method
4. Whatever the tax payer and tax authority would
agree
(4) This must be charged off during the taxable year
(5) A statement on the allowance must be attached to the

return
(6) The method
in computing the allowance for
depreciation must be in accordance with the method
prescribed by the Secretary of Finance
iii. Methods of computing depreciation allowance
(1) Straight-line method
Assuming that you are using the Straight-line
Method, and years later, you decided to change to
Sum-of-years digit Method, do you need an
approval from the taxing authority before applying
the new method?
Yes. But not in all cases.

What is Estimated Useful life of the Property?
Estimated years that the property would last to be

used in trade, business or profession
Who usually determines how long the property will
last? If you purchase a vehicle, how many years do
you think that it will be depreciated?
When you see cars running, they are already 15

years old or 20 years. They still exist; some are still
in okay condition. While the purposes of depreciating
the motor vehicles and other fixed asset the useful
life must be reasonable in accordance with how you
will be using it and also with reference to the
guidelines set by the BIR or tax authority.
But the tax authority has issued new

86. It provides there some of the fixed assets or
personal properties or even building and other fixed
asset, and what their standard numbers of years for
depreciation are or the estimated useful life. So if it's
a vehicle, somewhere between 5 to 7 years old. If
it's a heavy equipment, 7 years. Computers software is
would not last for more than 3 years etcetera.
Buildings depend on the type of materials used, time.
some last 50 years, some only 40. Actually it starts
off with what the company policy is because it is the
company which knows the extent of usage of these
properties; so long as it's justifiable then it will be
the number of years that it was used.
If you decide to depreciate the motor vehicle from
10 years, you seldom use it. And on the second
year, you want to change the estimated useful life
to 5 years. Do you need approval of the taxing
authority before changing the useful life of the
asset?
If the value of the motor vehicle is 1M over 10 years,

your expense would only be 100K. On the 2nd year, 1.
after deducting 100K for the first year, the remaining
value of the motor vehicle of 900K will be 3. Sumdepreciated over the new useful life which depends if
you consider it 5 years from the start or 5 years
from change. If you say 5 years from the start, you
only have remaining 4 years to depreciate the 900K.
That would be a totally different amount from the
100K. 900K divided by 4 years is 225k. From 100K

expense, you drop off to 225k.
Do you need an approval or not?

Changing the method of depreciation
requires the prior approval, such as the
issuance of an opinion or ruling coming from
tax authority.
But changing the useful life of your asset
does not normally require that there be
prior approval. However, if the estimated
useful life has been subject to a prior
agreement with the BIR then any change to
that agreement will have to have a prior
approval. So if there was no agreement with
many years it will you depreciate the
property, subsequent changes in the useful
require prior approval.
What do you understand by Straight-Line Method?
The concept of straight line method of depreciation is

that the asset will be uniformly expensed all through
life. Uniformly expensed, meaning to say that
up
there is one factor dividing the value of the property.
It is a constant
depreciation rate
and a constant
depreciation expense
every year.
Salvage value refers to the receivable cost of any
property. If you have a property at the end of its useful
life you could either dispose of it for free without any
income going to the taxpayer or you could sell it for its
salvage value. That will have to be excluded from
depreciation method because you expect to recover that.
Ex. You purchased a motor vehicle for P5M and you know
that at the end of 5 years it can still be sold for P1M, you
can only depreciate the P4M value.
If the property under the straight line method of
depreciation is worth P5M and it stands to be used
for the next 5 years, how much is the depreciation
expense 5 years?
P5M, 0 salvage value and life is 5 years, every year
you have a fixed expense of P1M. The reason why

you are allowed this is to allow the taxpayer to
recover the cost of the property. If you go into
manufacturing products, the first thing you consider
as part of costs of your manufactured item is the raw
material. But would the fixed asset form part of the
cost on the manufactured product? No. This
depreciation method allows the company to consider
during the year as part of my manufactured product.
SL Method
S
L
0 Salva
= Cost -st. (UsefugeifValue)

E
lL e
5M - 0
5 yrs.
In declining balance you use a rate of (1 / number of

years), which is the depreciation rate or how fast a
property depreciates every year. For year 1, 1/5 is
20%. Multiply 20% with cost of asset which is P5M.
So P1M is your depreciation expense for year 1. For
year 2, you have to deduct from the expense the the
depreciation expense of last year. So P5M less P1M,
multiplied again by the constant depreciation rate of
20%, so P800K.
It has a constant depreciation rate but the basis of
depreciation diminishes over time so depreciation
expense declines every year.
In declining balance it is presumed that the asset is more
useful in the first few years.[Declining balance method - how
A common depreciation-calculation system that involves
applying the depreciation rate against the non- life will not
depreciated balance. Instead of spreading the cost of the
asset evenly over its life, this system expenses the asset
at a constant rate, which results in declining depreciation
charges each successive period. (investopedia.com)] its
Double declining balance method is simply doubling
the depreciation rate.

DB Method
1
EUL
20%
Yr. 1 = P5M x 20% = P1M

Yr. 2 = (P5M - P1M) x 20% = P800,000
(3) Sum-of-years digit method
Here the sum of years is added. Example 5 years, so
5+4+3+2+1 = 15. For year 1, If cost is P5M X
[5years/15] = 1.67M is your depreciation value. For year
2, P5M x [4years/15] = 1.33M. And so on.
[Sum of years digit method - An accelerated method for
calculating an asset's depreciation. This method takes the
asset's expected life and adds together the digits for each
year. So if the asset was expected to last for five years,
the sum of the years' digits would be obtained by adding: 5
+ 4 + 3 + 2 + 1 to get a total of 15. Each digit is then
divided by this sum to determine the percentage by
which the asset should be depreciated each year, starting
with the highest number in year 1. (investopedia.com)]
SYD
5+4+3+2+1
Life (UL +1)
2
DB Method
P1M
5
Yr 1
5M
15
.
6
(2) Declining balance method
What is declining balance method?
7
Yr 2
M
5M
15
1.33M
Assuming that using the straight line method in the 3rd
in the span of 2 years. After that there will be no more
year of depreciating the property you realized that the
extraction. So it does not depend on the years that the
property can no longer be used due to external forces will
asset will be used but on the expected recoverable units.
you continue on depreciating? If the property has not yet
been fully depreciated and obsolescence has already set
Cost of Depletion
in, there is no sense in continuing with the depreciation
100
M
m
is
=
1
e
recognize
M
t
d as
h
useless
K
o
as written
il
d
off or
o
.
obsolete
and its will
R
be
a
t
h
e
r
y
o
u
d
e
c
l
a
r
e
i
t
i
n
t
h
e
y
e
a
r
i
t
P100
h.
deducted according to the value that has not been

depreciated.
Can you still continue using the property that has
been fully depreciated? Will it not affect your tax
liability?
Yes. If the property has already been fully

depreciated in the books of the corporation and it
stands to be useful such as a motor vehicle behind 5
years and a building behind 30 years it can still be
used but without any benefit from recording any
further depreciation expense because the full value
had already been recovered.
Depletion
i.
The exhaustion of natural resources like mines and oil and
gas wells as a result of production or severance from such
mines or wells.
What is depletion?
The exhaustion of natural resources like mines and oil

sports
and gas wells as a result of production or severance from
such mines or wells.
ii. Additional requisites for deductibility
It has the same requisites for deductibility as depreciation.
Same as that of depreciation, except that the

properties involved are natural resources
iii. Determination of the amount of depletion cost, factors
(1) The basis of the property
(2) The estimated total recoverable units in the
property
(3) The number of units recovered during the taxable year
What formula would we use to deplete natural
resources? Will we still use the straight line method,
etc.?
Cost depletion method or units of production method.

Whatever you have spent for the exploration and
development of the natural resource it will have to be
depleted, not over its useful life, but over the extraction
and the recovery of the mines or wells.
education,
Ex. You expect to extract 1M kilos of gold and you
spent P100M in exploration. How will you compute your
depletion expense?
It would be based in how many units are recovered

during the taxable year. So cost per unit is 100/1 = 100.
So every time you extract 1 kilo of gold you deplete 100.
If you extract 500,000 kilos in the first year, how much is
depletion cost? If you extracted half of the expected
units then you would be able to deplete half of the cost.
In the next year if you were able to extract the remaining
recoverable units, you were able to deplete the property
Yr 1: P100 x 500K = P500M

i.
Charitable and other contributions

i.
Kinds of charitable contributions
What are the 2 kinds of Contributions?
(1) Ordinary - deductible, subject to the following
limitations:
(a) Must not exceed 10% of the taxable income, in the
case of an individual
(b) Must not exceed 5% of the taxable income, in the
case of a corporation
(2) Special - deductible in full
Who are these recipients that would make a
contribution fully deductible?
(a) To the Government or to any of its agencies or
political subdivisions, including GOCCs, exclusively
to finance, to provide for, or to be used in
undertaking
priority
projects
(i.e.,
development, science and invention, health and
human settlement, educational and economic
development)
Priority projects:
(i)
Youth and sports development
(ii)
Health and human settlement
(iii)
Education and economic development
(iv)
Science and invention
(b) Foreign government or institution and international
civic organizations
Must be one with whom we have an agreement as to
deductibility of donations in treaties or agreements.
(c) Accredited NGOs (NGO means non-profit domestic
corporation which are formed and organized for
any of the following purposes: research, health,
education, charitable, cultural, character building,
sports development and social welfare)
For purposes of research, health,
charitable, cultural, character building, sports
development and social welfare. Not same lists with
gov't priority projects.
Without any accreditation from DECS, DSWD or the
appropriate accrediting authority donations will be
limited in deduction.
Proceeds must not be used for administrative your
purposes in the amount exceeding 30% of the
contribution.
The difference between ordinary and special is that in special
you enjoy deduction in full whatever amount you donated.
j.
While in ordinary it is limited to 5% in case of corporation,

while 10% in case of an individual.
If you are a prospective donor, consider 2 things:
(1) Am I subject to donor's tax? Because if you donate to a
corporation, that is subject to 30% donor's tax unless it
an exempt donation.
(2) Will my donation be a deductible expense? Because if it's
not a deductible expense and it's a taxable donation, you
suffer from 30% donor's tax and you suffer from not
being able to deduct fully what you have donated.
If you decide to setup an entity or institution make sure it is
one of those donees for which donations are deductible in full
on the part of the donor to encourage donation to your
foundation.
(1) The contribution must actually be paid or made to the
Philippine government or to any of the domestic
corporations or associations specified by the Tax Code
(2) No part of the net income of the beneficiary must inure
to the benefit of any private person
(3) It must be made within the taxable year
(4) For ordinary contributions, it must observe the
limitations
(5) It must be evidenced by adequate records or receipts
Are you required to notify the government for donations
you make?
You have to notify the tax authority for donations made

amounting to at least P50,000. Less than P50,000, no notice
required.
Congress issued an adopt-a-school program wherein donors to
government schools does not only enjoy 100% deduction but also
50% more of what you donated. So if you donated P1M, you are
allowed to deduct P1.5M expenses. Individual taxpayers engaged
in business, trade or profession may avail of such deduction.
Contributions to pension trusts
What are contributions to pension trusts?
These are contributions made by a company to a retirement

or pension plan for the benefit of its employees. Issue is when
the corporation sets up a retirement plan will the
contributions be deductible.
Ex. A company sets up a retirement plan by opening up a bank
account where every year it puts in money and in case for a
retirement of an employee all payments will be taken from such
account.
Will
that
contribution
be
deductible?
No. The company has still the power or control over such amount,
which it may withdraw.
i.
Distribution of contributions:
How much can be deducted from the contribution?
(1) Current year - the contribution is considered as
ordinary and necessary expenses fully deductible.
(2) Past years if it refers to services rendered for the past
10 years, the contribution is deductible but apportioned
over the next 10 years (i.e., 1/10 deductible every
year)
Ex. A corporation has an actuary determine the contribution

to the retirement fund every year to address the issue of
future retirements of the employees. Its determined that you
have to contribute P1M this year. If A corp. does not make
any contribution. The second year it is determined that you is
have to contribute P1M also and it is only in the second year
that you made actual contributions of not only for the 2nd year
but also for 1st year. So contribution was only made in the 2nd
year for both years.
How much is deductible?

For the first year of operation only 1/10 or P100,000
for the current year while the rest of the 9/10 will be
spread over the next succeeding 10 years, while the
P1M for year 2 will be fully deductible.
How about if in year 2 there were no contributions

and in year 3 you contributed only P1M. How much
is deductible in year 3?
In case the contribution is not sufficient to cover the

current year and unpaid past year services, you
attribute the contribution to the current year
services. So entire P1M is deductible expense.
Yr 1
Yr 2
2.
1M
1M
2M
Cont.
-02M
Exp. Ded.
-0Current Yr. Services = P1M
Past Yr. Services = P100K
Cont.
Exp. Ded
Yr 1
1M
-0-0Yr 2
1M
-0-0Yr 3
1M
1M
1M
(1) There must be a pension or retirement plan established
by the employer
(2) The pension must be reasonable and actuarially sound
(3) Contribution must be given by the employer to that
pension plan
(4) The amount contributed must no longer be subject to
the control or disposition of the employer
(5) The payment has not yet been allowed as deduction
(6) This must be for the benefit of the employees
(7) The deduction is apportioned in equal parts over a
period of 10 consecutive years
In cases where a company taxpayer incurs research and development
expense it has the option, as long as it's not part of capital asset, to
consider it as an expense in the year it was incurred or to amortize it
over a period of 6 months or 5 years.
Optional standard deductions
a. A standard deduction available to domestic corporations and
resident foreign corporations in an amount not exceeding forty
(40%) of the gross income, in lieu of the itemized business
expenses
b. When elected, irrevocable for the taxable year in which the
return is made
earnings is more than 100%, it is a

I.
mere indication that there might

Improperly Accumulated Earnings of Corporations, Section 29 of the
Tax Code & RR No. 02-01
What is Improperly Accumulated Earnings Tax (IAET)?
A 10% IAET is imposed on improperly accumulated tax income or

when the profits of a corporation are permitted to improperly
accumulate without distributing profits in order to avoid paying income
- tax on dividends to stockholders.
1. A 10% tax based on the improperly accumulated taxable income of
a corporation formed or availed for the purpose of avoiding the
income tax with respect to shareholders or the shareholders of any
other corporation, by permitting earnings and profits to accumulate
instead of being distributed. Evidence of purpose to avoid income
t ax
Prima facie evidence: The fact that any corporation is a mere
holding company or investment company
Evidence determinative of purpose: The fact that the earnings or
profits of a corporation are permitted to accumulate beyond the
reasonable needs of the business (unless the corporation, by clear
preponderance of evidence, shall prove that it is not to avoid the
tax on shareholders or members)
What are the indications for IAE?
(1) The fact that any corporation is a mere holding company or
investment company;
(2) The fact that the earnings or profits of a corporation are permitted
to accumulate beyond the reasonable needs of the business;
(3) When the profits are accumulated to the extent of more than
100% of the capital stock.
2. Coverage
Improperly Accumulated Earnings of Corporations
If the profits accumulated is already in excess of 100% of its capital,
that is an indication that the must be improperly accumulating its
taxable income and it may be subject to improperly accumulated
income tax. But this is only an indication therefore, it may be subject
but it is not absolute that at all times it will be subject to improperly
accumulated income tax.
The formula:
IAET
Assets
- Liabilities
Net Worth
P300M
10M
290M
Capital Stock
100M
Profits/Ret. Earnings
190M
You will also encounter this similar provision in your corporation code;
that corporations are not actually allowed to retain profits beyond
100% of its capital stock. So if you have a net worth of 290M in the
business and your startup capital is only 100M, how much is your
retained earnings? 190M
Corporations are not allowed (under the corporation and the Tax Code)
to retain profits more than 100% of its capital stock. If the retained
be improper accumulated profit.

When did the improperly accumulated earnings tax start?
a. For corporations using the calendar year basis - the
accumulated earnings tax shall apply on improperly
accumulated income after the close of calendar year 1997
b. For corporations adopting the fiscal year accounting period
the accumulated earnings tax shall apply on improperly
accumulated income after the close of fiscal year 1998
(so all corporations adopting the fiscal year accounting
period will not be covered by the IAET on their fiscal
earnings in 1998 whether it is earning in January 31 or
November 30, 1998 then that is not covered by the IAET)
Therefore, profits accumulated prior to that period will never form
part of improperly accumulated tax.
So when are corporations allowed to accumulate more than 100%
of its capital stock?
1. All corporations are allowed to retain profits up to the extent of 100%
of its capital stock if justified under "reasonable needs of the business"
2. When the company is allowed to reserve its profits for corporate
expansion projects - what are the documents required? It must not be
a mere paper document; just prior to the end of its taxable year, the
Board of Directors will issue a resolution appropriating or reserving its
retained earning just to remove it as part of the unrestricted retained
earnings to make this lesser than 100%. But the following year, they
will reverse (?) it then appropriate again.
What is required exactly is not the paper report but the definiteness of
the plan. A definite action that is taken by the corporation towards the
completions for the actual start of the project
3. If you have an existing loan agreement with any national banks or
domestic banks or international banks wherein it is required that you
have to maintain a ratio of your profits against capital stock, therefore
you have to comply with that provision strictly, and so you will not be
liable for IAET to the extent of the compliance. It simply means that if
the bank requires you to maintain - not disposing of your retained
earnings, not declaring it as dividends - then you are allowed to
accumulate
4. If there is a law which requires a prohibition of distribution
5. It is not at all restricted to appropriate your profits for investments in
other types of corporations so long as it is not totally unrelated and
you're not simply a holding company
6. Reserves for building, plants or equipment acquisition also with the
requirement that it must be approved by the Board of Directors
It is not at all restrictive to appropriate your profits for investments in
other types of corporations, so long as it is not totally unrelated, and you
are not simply ____. Unrelated investments in other investments, using
substantially all your profits, then that may be prima facie evidence of
IAET.
with the
*Also in the research of buildings plant and equipment,
requirement approved by the board of directors
This is one of those types of taxes that are self assessed, normally
corporations do not assess themselves to be liable for IAET. they wait until
there is an audit made by the BIR. If at all if you are very honest in
declaring that you are liable for IAET, it has to be paid 15days from the
close of the taxable year.
3.
retained earnings ,no reservations for plant expansions or fixed

assets acquisitions.. How will you avoid?,
First thing you have too see is -illustration- if higher than 100% in
order to erase 100M of 190M, distribute it to the stockholders as
dividends, -naay illustration. Transfer the 100M excess to make this
200M???there is no change but Surplus to the capital stock. ???
Or declare dividends within a period of 1 yr from the close of the taxable
year, those corporations whose retained earnings is more than t100%
capital stocks are given 1 year allowance the corporation to declare
dividends, the close of December 31, 2011 you still have 1 year pay the
dividends on December 31, 2012 to avoid IAET, if the year closes and you
have not declared dividends, must pay the IAET within 15 days from the
close of the 1 year allowance.
Assuming you are liable for IAET. And subsequently you are back to 190 M.
You pay IAET, after paying you declared cash dividends, will you still be
liable for cash dividends after paying the IAET? The nature of the IAET is a
penalty. The BIR cannot wait for the taxes. they want to collect taxes as
soon as possible, that money will soon go out of the company. The only
way there is avoidance is from the domestic
Philippine branch in the
Economic zone, ???
Are foreign corporations governed by the IAET?
In a NRFC they have no control of their capital or their profits, they are
taxable for their gross income. The coverage of IAET is only domestic
corporation. Foreign corporations are not subject to IAET.
Improperly accumulated taxable income is taxable income adjusted
by:
a. Income exempt from tax
b. Income excluded from gross income
c. Income subject to final tax
d. Amount of net operating loss carry-over deducted and reduced
by the sum of:
i.
Dividends actually or constructively paid; and
ii. Income tax paid for the taxable year
So how do we compute IAET?
You will remember our illustration last meeting that assets less
liabilities equals your net worth. And you net worth consisted of both
your capital and your retained earnings.
We said the first indicator that we look into that tax authorities look into is
whether the retained earnings is more than 100% of capital stock. That is
just an indicator. It does not mean that you will automatically rely on it the
10% IAET. Further, that also means that 10% IAET will not be computed
directly against the retained earnings nor will not be computed with
difference against between retained earnings and the capital stock. There is
a formula.
The formula if used every year stays the same. It starts off with your
current year taxable income. Start from your taxable income of the
taxpayer. If taxable income is positive meaning that that income is not a
loss, you add all those incomes that have been excluded from the taxable
income. What you'll have to add in order to determine the true income or
the totality of income is. Add those income that subjected to final tax.
Why? Income subjected to final tax never formed part of the gross income
in order to arrive at taxable income. You have to add it back. Income
exempt from tax, why? Because income exempt from tax did not form part
of the gross income of the tax payer and income excluded - these are
If a corporation will have $100M in capital stocks and 100M in

actually the exclusions. The exclusion are under Sec. 32b of your Tax
Code. Adding all together you get the total income of the taxpayer both
taxable and non-taxable.
You deduct whatever has been distributed already by the taxpayer during
the year. So if dividends were distributed during the year, then deduct the
dividends. The income tax to be out of the taxable income either paid or
payable will have to be deduct. Then you will arrive at your improperly
accumulated taxable income during the year.
Taxable Income
Add: Income subj. to FTx
Income exempt from tax
Income excluded from GI
total
Less: Dividends
Income Tax Paid/payable
Imp. Acc. Tax Income during the year =+
Retained Earnings of the Past year
if 1st time
x 10%
+
100% of capital stock for reasonable needs
100M
10%
-50M
50M
That is found in the tax code.

Did you follow the formula?
You simply get the taxable income of the 3 rd year is. Add all the
income that has not been part of the gross income and deduct
whatever payments were made for the dividends and income tax.
Whatever the balance is, that is the improperly accumulated taxable
income subject to 10%.
If this is positive meaning, after all the additions and subtractions, if

this is still positive outcome, then you will multiply this with 10%, that
is your IAE taxable income on the assumption that you are paying your
IAET every year because this is IAE taxable income for the year.
If this is first time that you have been assessed after many years of
operations, when IAET took effect, then the BIR will have to include
your retained earnings of the past years. Then this would be subjected
to 10%.
Why would the BIR include your retained earnings for the past years?
Because this would be the first time to pay off the IAET. If you are
always required to pay or you voluntarily compute your IAET, no need

to add the retained earnings of the past years because by then every
time you would declare, the past years have been answered. But even
after that, you can always negotiate with BIR to remove from that
figure 100% of the capital stock to answer for reasonable needs of the
business, meaning to say you can retain 100% and it will not be
taxable.
If this is 100M and your capital stock is 50M, reasonable needs provide that
you can accumulate earnings up to the extent of 100% of your capital,
then deduct 50M which is 100% of your capital stock assuming your capital
stock is 50M, all you pay is 10% of the 50M IAET.
So actually what will reduce your IAETI, not only the dividends, not only
the income tax paid or payable but including 100% of your capital stock for
the reasonable needs of your business.
4.
Point 2 - IAET is not computed based on the difference between the capital
stock and the retained earnings. It is computed based on "that" formula. If
it turns out that IAETI is negative then you don't pay anything even if your
retained earnings is higher than your capital stock. So it's not a given that
every time retained earnings is higher that capital stock, you always liable
IAET. So you don't pay IAET for those retained earnings in the past if
have already paid IAET before. In that example I just included the
retained earnings for the past years on the assumption is it is the first time
you will be paying IAET.
Exceptions to improperly accumulated earnings tax
a. Publicly held corporations
Well you have there a long list of exceptions to improperly
accumulated earnings tax. Let's talk about publicly held
corporations, is it the same with publicly listed corporations?
No, publicly held corporation is not the same as publicly listed

corporation.
Which is easier to discuss first? Publicly held or publicly listed?
Publicly listed corporations are those corporations whose shares of

stocks are listed in the stocks exchange, Philippine Stock
Exchange, New York Stock Exchange, wherever stock exchange.
So what is publicly held corporations?
One which is not closely held.

Closely held, so what is closely held?
It is when at least 50% in value of the outstanding capital stock or

at least 50% of the total combined voting power is held directly
or indirectly by not more than 20 individuals.
So if it is held by 21 or more individuals, then it becomes publicly

held corporations.
clear class wherein a corporation in which 50% of its stock is
owned directly or indirectly by not more than 20 individuals, it is
closely held. But if at least 50% of the capital stocks is owned by,
directly or indirectly, by 21 or more individuals then it becomes
publicly held not covered by the IAET.
Let me give you an example, there are 41 individuals, 20 and
21. Basing on this alone, there are 21 stockholders, can we say
that it is closely held or publicly held?
The 20 group themselves and the other 20 group themselves.
Not yet, you should know on the combined voting power, so the
share of the individual stockholder.
Domestic
Corp.
21 - 2%
1 - 2.2%
20
48
56%
= 100%
44%
This corporation, a domestic corporation has 48 stockholders. 20
stockholders, they have 2.2% each, while the other 28
+
Point 1 - IAET is not computed on retained earnings alone

stockholders, they only have, per stockholder 2% each, for a total
of 100%.
Is it a closely held corporation or a publicly held

corporation?
I think it is not a publicly held corporation because xxx

Illustration: In a corporation, twenty stockholders own 2.2% share for
each, for a total of 44%, while twenty eight other stockholders own you
2.0% share each, for a total of 56%, combined, they make 100% of
the corporation. Is this a closely-held or a publicly-held corporation? that
Or is it partly closely-held and partly publicly-held corporation?
It is a publicly-held corporation. For purposes of determining

whether it is closely-held, the definition of closely-held is that, at
least 50% percent of the capital stock, is owned directly or
indirectly by not more than 20 individuals. So in this case, 21 or
more own the 56%, in order to consider whether it is publicly-held
or closely-held, first determine whether it is closely-held (because
its definition is provided for), if it is not closely-held, then it is
publicly-held.
So in this case, whatever combination you get, 10 stockholders

with 2.0% and 10 stockholders with 2.2%, it will still be less than
50%, because the highest number of percentage of stocks, which
is 2.2%, even if all of them combined, held by 20 individuals, it
will still be less than 50% (only 44%), therefore, in order to get at
least 50% capital stocks, you will always exceed 20 individuals.
So point is, combine the 20 stockholders who hold the highest

number or percentage of capital stock, if they reach at least 50%,
closely-held, if they don't, then it is publicly-held.
Corporations owned or partly owned by another corporation/s.
With regards to corporations owned by another corporation, Is it

before we determine the ownership of at least 50% in the
corporation, we have to trace the ownership ultimately to the
individuals owning the parent corporation. So if there are layers of
corporations, you have to trace it upward to the individual
stockholders. (Atty. Tiu did not give an example, it's up to you)
b. Banks and other non-bank financial intermediaries
Are not covered because they are mandated by the Insurance
Commission and the Banko Sentral ng Pilipinas to maintain a level
of liquidity.
c. Insurance companies
d. Taxable partnerships
Are not covered by the improperly accumulated earnings tax
because partners are deemed to have actually or constructively
received their income at the end of the taxable year. It forms part of
the gross income of the individual partners subject to 5-32% tax
(individual income tax).
e. General professional partnerships
are not subject to income tax.
f.
Nontaxable joint ventures
those undertaking join construction projects are not subject to
income tax and because the individual join venturers or those
constituting the join venture will individually be covered by the
income tax.
Non-taxable joint ventures are not subject to IAET. These are
those undertaking construction projects but nonetheless in their
separate capacities, they will still be covered by IAET.
g.
PEZA-registered enterprises enjoying the special tax in lieu of

national and local taxes
Companies registered in the economic zones, not only with PEZA
but also the Subic Bay and the Bases Conversion Zone, so long as this
corporations in the economic zones are enjoying the special tax or the
preferential rate of 5%. If they are still under income tax holiday or they are
covered by the 30% even if they are located in the economic zones then they
are liable for improperly accumulated earnings tax and also if they earn profits
from activities that are not registered with the economic zone authority.
Companies registered in economic zone whether it be with the
Mactan Economic Zone, under the Philippine Economic Zone Authority, the
Subic Bay Development Authority, they are exempted from improperly
accumulated earnings tax so long as they are enjoying the special income tax
rate of 5% in lieu of national and local taxes.
Now if these corporations opted to be taxed at 30% instead of
5%, why would they? 30% net income tax will enjoy expense deduction while
5% gross income tax will be directly applied against the gross income without
the benefit of itemized deduction.
So every corporation operating in the economic zone and
registered with each authority are taxable at special rate of 5% gross income
tax or the 30%. Once they choose the 5% then they are free from improperly
accumulated earnings tax. If they take the 30% net income tax rate, they will
be covered by the improperly accumulated earnings tax. What if they are still
under income tax holiday which usually is the case during the first 4 to 6 years of
operation? They will still be covered by improperly accumulated earnings tax
because during that period they are not subject to the special rate of 5%.
Any of these corporations undertaking activities which have not be
registered with the tax authority or they both have registered and unregistered
activities, any profit accumulated under that unregistered activity category will
still be subject to improperly accumulated earning tax.
Strictly speaking, only those income or profits accumulated from
registered activities for which they are subject to the special rate of 5% tax in
lieu of national and local taxes.
EXAM DISCUSSIONS:
2
0
0
8
2
0
0
9
NCIT
-0900,000
900,000
900,000
3,000,000
MCIT
1,000,000
1,000,000
1,000,000
1,000,000
3,000,000
wherever the situs is and not required to be included in the income within so
not subject to PE and AE.
XYZ Corp. is a RFC engaged in BPO. It purchased a condominium unit for
the purpose of making it a temporary living place of the foreign owners but
was never used because they prefer to stay in 5star hotels. Once the board
decided to dispose of the property what is the taxability of the transaction if
Mr. A the buyer of the property is a RC.
2
0
1
0
2
0
1
1
2
0
1
2
XYZ Corporation Philippine Branch, is a resident foreign corporation with

head office somewhere else. It registered its business activity with the
board of investments and granted of 6-year income tax holiday. During its
fifth year of operations, the head office had funds amounting to 200million
for the construction of second manufacturing plant. The construction was
completed in 10months with the construction amounting to 180million. The
excess of 20 million was transferred to head office. It also transferred 80
million as profits generated by the branch. Is the transfer of funds subject
to branch profit remittance?
Yes or No? Yes!
It's not no! Branch profits are not income of the Corporation in the Philippines! Not
included with the income tax holiday. The person liable of such action is the one
outside of the Philippines. That is why it is withheld. You have to analyze to whose
income we are talking about.
Answer: Yes, to extent of 80million declared as profits!
Not important:
If you were given the same exam, will you get perfect? No!
Talking about questions in the BAR! You will have 3 hours for tax! That includes
MCQ and essay!
(Barbara nagcomment sa exam ni mam vis-a-vis sa BAR Questions!)
Lesson: It will be much better if you learn the difficult questions now that you are in
school than when you face it for the first time!
The passing of San Carlos is very high!
XYZ a domestic corp. sold a property thru a broker for 30m the 12m profit was
entered as income. The corp. paid its 5 directors who are at the same time stock
holders a bonus of 2 million each for the successful sale. The bonuses were entered
as itemized expense deductions. Will the bonuses form part of the itemized
Subject to the 30% based on net income tax. The proceeds of the sale form
part of the gross income subject to 30% net income. Note: that the status of
the buyer is not important because the income earner is within the taxing
jurisdiction so there is no need to withhold the tax.
Essay:
STK corporation is a domestic corporation equally owned by the following
stock holders: ABC a RFC, Mr. S a RA, Mr. T NRA-ETB, Mr. K NA-NETB. In
order to complete the 5 seats in board 2 other RC are given 1 share each.
After 5 years of operating successfully the board and stockholders of STK
to agreed to invest a portion of their profit to UBE Corp, a profitable NRFC.
In 2012 both STK and UBE separately declared cash dividends to its stock
holders, will the dividends received by ABC a RFC, Mr. S a RA, Mr. T NRAETB, Mr. K NA-NETB and STK corporation be subject to income tax?
e no,
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Answer: a minimum wage earner who regularly receives royalty income.(royalties
are still exempt because it has a special rate of 10%)
Mr. X, a non resident citizen working in the college of nursing, has children
living in the country. He is supporting the following individuals: Mr. a 25 yr
old physically disabled, Mr. B turned 21 during the taxable year, Mr. C is Mr.
X's illegitimate child leaving with the mother, Mr. T is the illegitimate child of
Mr. X's wife leaving with the father. How much additional exemption can he
claim? Answer: none.
How much exemption is Mr. X entitled to?
None, even though NRC are included in those who can avail of the personal and
additional exemptions but his the income here is earned WITHOUT thus taxed
Mr. T
NRA-ETB
RC
RC
UBE
NRFC
Mr. T
NRA-NETB
STK (Domestic Corporation)

Stockholders are:
ABC (Resident Foreign Corporation)
Mr S (Resident Alien)
Mr K (Non Resident Alien NETB)
And two other resident citizens who hold 1 share each
STK invested in UBE.
If STK and UBE will declare cash dividends, what is the taxability of such cash
dividends received by the stockholders of the two corporations?
ABC (Resident Foreign

Corporation) - Not
taxable.
Mr S (Resident Alien) -Taxable, 10% FWT.
Mr T (Non Resident Alien ETB) -Taxable, 20% FWT.
Mr K (Non Resident Alien NETB) -Taxable, 25% FWT.
Dividends received by STK from UBE -Taxable, forms part of gross income which is subject to
30% Normal Corporate Income Tax because UBE is outside the jurisdiction of the Philippines
and cannot be a withholding agent.
A.
Withholding Tax
B. Persons Required to Withhold Tax
Who are required to withhold taxes?
Concept, Taxation at Source
1. Juridical persons
1. Taxes imposed or prescribed by the Tax Code are to be deducted
2. Individuals
and withheld by the payor-corporations and/or persons from
3. Government entities
payments made to payees-corporation and/or persons for the
We're talking of taxpayers who are required to withhold taxes or who are
former to pay the same directly to the BIR.
expected to be withholding agents in the payments that they make to the
2. The taxes are collected at the time the transaction is made or when
payee and income earner.
the taxable act occurs.
1. Juridical persons, whether or not engaged in trade or business
The general concept of withholding tax is it is a requirement for a payor Example: You organized an association that is exempt according to
the one paying to deduct or withhold the taxes before payments are made
Section 30 of the tax code. Being exempt, then we presume that it is
to the payee then remitted to the BIR. It's a concept of taxation at source at
not engaged in profitable activities. It makes payments for rents
the time of the transaction was committed, it is already collected. It is
(under the regulations, rental payments are to be withheld of taxes by
either final withholding tax or creditable withholding tax as you have
the lessee). The juridical person/exempt entity is the lessee making
mentioned. It is final if its taxed with finality and it's creditable if it's simply an
payments to the lessor, that juridical person/exempt entity is still
approximation of what could be the liability of the payee.
required to withhold taxes.
Who is the taxpayer here?
In the case of juridical persons, whether it is engaged in trade or
The buyer.
business or not, all juridical persons registered as
such will be tasked
Who is the withholding agent?
as withholding agents.
He is not the taxpayer.

2. Individuals, with respect to payments made in connection with his
He is simply a tax collector in behalf of the government, He becomes

trade or business
the withholding agent of the government.
Example: If you are a student renting an apartment unit and you're
The withholding agent every time he pays the someone, he would

making rental payments to the lessor, you are not required to withhold
have to withhold the tax and remit it to the government, either it be
taxes on the payments you made because you are engaged in trade or
taxed with finality or an advance tax payment that can be credited by
business.
the income earner.
But if you're an individual engaged in the exercise of you profession
Scenario withholding:
such as being a lawyer and you rent out a small office space, any
Once a corporation will declare dividends to its stockholders, the

payments you made to your lessor you have to withhold creditable
corporation will have the obligation to withheld the tax on dividends.
withholding.
Corporation- withholding agent

3. Individual buyers not engaged in trade or business insofar as
Stockholder- tax payer

taxable sale, exchange or transfer of real property is concerned
Example of creditable withholding:
But you were saying that individuals even if not engaged in trade or
Taxes on the salary of EE

business may be taxed at some point and become a withholding agent,
Withheld by the ER, same amount is deducted on the salary every

what is that example.
month. If there is an underpayment it shall be and overpayment shall
If you buy property from another individual, who will be liable for 6%
be refunded at the end of the year
CPGT, will it be you or the seller?
(Some of the reviewers and notes) does not categorize compensation
SELLER. CPGT is a final tax but it is not withholding.

as creditable, it is creditable in the sense that every time your ER
If you are an individual and you are going to purchase a real property
withholds taxes on your salary it is actually off-settable against
from whom so that you will be required to withhold the tax?
whatever your total tax liabilities to the government. It is not taxed
What is that which would, if it is a capital asset, the seller would have
with finality.
to pay 6% CPGT but if the property to be sold is an ordinary asset,
So the relationship we are talking about is the PAYOR-PAYEE relationship.
would the seller be required to pay the 6% CPGT?
Who is the PAYOR?
No. What will be the equivalent tax? It is an ordinary asset you
Can be an individual or a corporation. And this is the income earner.

will to declare as part of Gross Income of the seller but the
The withholding agent is only tasked to withhold and if he didn't then
government cannot wait for that payment at the end of the
there will be consequences.
quarter, at the end of the year. This is taxation at source. So
Reason why the government employ the method of withholding
every time, whether an individual or a corporation engaged in
tax?
trade, business or not, purchases a real property from someone
To ensure the collection of taxes specially in cases of income earners

who treats it as an ordinary asset, liable to the 30% tax, such as a
who are non-residents not required to file an income tax return or
corporation engaged in real estate business, but the buyer is over
the (?) jurisdiction (?).
tasked as the withholding agent.
Aside from that, in creditable withholding tax to have advance

For example:
collection of taxes due from the individual and corporations.
She's not engaged in trade or business. She wants to purchase a

condominium unit from Ayala. That transaction, Ayala will not be
paying 6% CGT, why? Because it is not a capital asset. Ayala will
C.
have to declare whatever income it has on that sale as part of its
you sell banana chips which is not registered, your preference of nongross income. But the government is not going to wait for Ayala to
withholding of taxes will only apply only to the activity of the banana
declare it as such by the end of the quarter or by the end of the
plantation but not the selling of banana chips. And those enjoying the
year. It wants to tax at the source of the transaction. SO in that
5%income tax, if they venture into other unregistered activities, same
transaction, she will be required to withhold from the agent.
scenario, they will be withheld of taxes for these unregistered
Two things can happen there. What rates? Different rates.

activities.
If the seller treats the property as an ordinary asset but not

4. Persons enjoying the 5% special tax under PEZA and similar
habitually engaged in trade or business, it will have the same rate
authorities
as a capital gains tax. You will have to withhold 6% creditable
In PEZA companies, the reason why they are not to be withheld of tax
withholding tax. Because the seller is not engaged in the real
is because the taxes cannot be off-setted against the 5% gross income
estate business. But if the seller is engaged in real estate
tax. But take note, that exempt organizations are liable, can be
business, there is a table of rates.
withheld of taxes if they venture into profitable activities or they earn
SO if you become a buyer of a property, you will be expected by

income from real or personal property.
the government to withhold the tax. But to make it easier, if you
D. When withheld
are not aware of how the transaction works, it will be Ayala who
At the time an income payment is paid or payable or accrued or
will prepare the documents, you simply pay it for Ayala and they
recorded as an expense or asset, whichever is applicable in the payor's will
remit it on your behalf. That's possible.
books, whichever comes first.
But that's the only instance where an individual not engaged in trade
At the instance when the amount paid it's recognized as payable or if not
or business is required to withhold the tax. In all other cases, if an
yet paid, not yet payable, it is recorded accrued or recorded as an
individual is not engaged in trade or business, you do not need to
expense.
withhold.
If you paid advance payment for rent, three months advance. When should
Let me give you an example, there is a requirement in the law which
you withhold? No payable in this sense since it is an advance payment. So if
provides that big businesses will have to withhold 100% from the
you purchase goods which are supposedly subject to withholding tax that
purchase of supplies. If you purchase bondpaper from National
were given a term of credit of 4 months, 120 days, you purchased it Jan. 2
Bookstore, will you tell the cashier that you are going to withhold 1%
you are required to pay May 2, payable or not? Payable
to immediately remit to BIR? NO, because you are someone not
When you say utang, it becomes payable due and demandable.

engaged in trade or business.
When you enter into a contract of lease and the lease contract
4. All government offices including GOCCs as well as local government
provides that you are only required to pay the monthly rent at the end
units
of every month, then, it becomes payable only at the end of every
And the final person is required to withhold the tax - all government
month. So if it is payable at the end of the month and you have not
offices including GOCCs as well as local government units.
So
paid it, nothing to withhold as nothing is paid anything. But because
government, for the interest of the government will have to withhold.
the law says that you are required to withhold, then advance
remittance to the government on your own.
When Withholding of Tax is Not Applicable
The accrued is the tricky part. Actually the government started off
What do you think is the reason why these types of corporations cannot be
with paid and payable and they amended to (?)
withheld of tax?
In the example of 4 months term of credit, the transaction was
Take note that this refers only to CWT. FWT (?) if it earns interest,
entered into on Jan. 2, and payable on May 2, When are you required
you cannot tell the bank not to withhold. With these 3 items - exempt
to withhold - Jan. 2 or May 2? Jan. 2 - there is no transaction, it is
organizations, persons under income tax holiday and the persons
just the delivery. Did you pay? No.
enjoying the 5% special tax cannot be withheld of the CWT because
Jan. 2 delivery of goods. Required to be paid after 4 months - May 2.

they are not liable for the basic income tax of 30%. If you withhold
But you actually paid it June 2 - one month later. When are you tax,
the concept of which is that whatever has been withheld
required to withhold the tax and tell the government that this is what
represents as advance payment of the income tax, there is nothing to
is due from them - May 2 or June 2?
offset these taxes at the end of the year if you are exempt. So
Whichever comes first of the 3. Income earner, the one from whom
whenever you are exempt, you will not be withheld of tax.
you bought the transaction is liable for income tax on what basis?
1. Payments to the National Government and its instrumentalities,
Quarterly basis. So at the end of march 31 which is the first quarter,
the payer when it purchased the goods on Jan. 2, by March 31 it is
political subdivisions & GOCCS
required to consolidate all the transactions. Will it record the purchase
2. Exempt organizations, except when income is derived from real or
made in Jan. 2 in March 31? YES. Because ownership transferred
personal property or from any activity conducted for profit
already when the goods were delivered, and in that case by March 31
3. Persons enjoying income tax exemption
the payer will have to recognize it as an expense. The purchase is an
Persons enjoying income tax holidays are only exempt from
expense, if it recognizes it as an expense there has to be income
withholding for activities that are registered and under income tax
somewhere. In order to match both the claiming of the expense the
holiday. It is possible that a corporation enjoying income tax holiday is
government expects that there has to be withholding already. Since
still liable for 30% on all those activities which are not included by the
March 31 came before May 2 and June 2, then even without actual
registration. So example, if your registration is banana plantation, and
E.
payment, even if the amount is not yet legally demandable, by March

31 there has to be withholding. Because it has to be whenever it is
made payable or whenever it has accrued as an expense,
whichever comes first!
Just take note that the payer corporation can recognize it as an

expense every quarter, it will reduce the taxable income of your payer
corporation every quarter. Provided if he don't make it a calendar year
because that's another story.
Even if we talk about fiscal year ending March 31, every quarter must
have 3 months. It will never change.
What if there is interest imposed after it became payable, what is the
taxability of the interest?
There's a provision in the regulation, what will be covered by

creditable withholding taxes are generally purchase of services but if
you belong to top 10,000 corporations you are also tasked as a
withholding agent on your purchase of goods. Since interest is a
service, then whether or not you're top 10,000 so long as you are
engaged in trade or business, you will have to withhold 2% creditable
withholding tax on the interest as well. Why? Because the interest will
also become the income of the payee, before it reaches the payee it
withhold of the 2%.
liable for the tax?
The payee if the transaction is covered by the withholding tax regulation,
the payee cannot refuse to withhold of the tax. If the payee will not
withhold in order to comply with the payor requested, the payor will still be
liable to the government for the tax it has not withheld, surcharges, and
interest.
For example, you are paying the government of some service fee, you
cannot deduct the service fee of withholding tax because you are paying to
the government.
If you are deficient or delinquent in paying taxes (?) surcharges and
interest, the regulations provide that you have to withhold taxes on
interest. Can you withhold taxes on interest because you paid your taxes
late? No because the recipient is the government.
How Tax is Withheld and Remitted

It is withheld by withholding agents and covered by a tax return and
paid to (except in cases where the Commissioner otherwise permits)
authorized agent bank, revenue district officer, collection agent, or
duly authorized treasurer of the city or municipality where the
withholding agent has his legal residence or principal place of business,
or where the withholding agent is a corporation, where the principal
office is located
By the withholding agent and remitted to the authorized agent bank,
revenue district officer, collective agent, or duly authorized treasurer of the
city. It is usually where the agent has his legal residence or his business is
principally located. It's NOT the payee's residence nor the location of (?).
Ex. If it involves final withholding tax and you withhold from a nonresident
foreign corporation you remit it to the RD or the bank where you are
registered as a business and not where the NRFC is domiciled.
What is the difference between a creditable withholding tax with a final
withholding tax?
(1) As to the income earned by the payee, whatever has been taxed
with the final withholding tax did not form part of the gross income.
Whatever has been withheld of creditable withholding tax the income
will still form part of the gross income and whatever tax has been
withheld can be offsetted against the taxes due because the tax
withheld under FWT already constitute the full and final payment of
the taxes due on the income. In CWT, the reason why it still forms
part of the gross income at the end of the year is because every time
it is deducted by the withholding agent these will only be an
approximation of the tax due from the payee.
For example, a payee engaged in leasing commercial spaces will be
covered by the 30% net income tax due on corporations. Rent income
will only be subjected to 5% CWT. It is not really the same tax rate the 30% rate on net income, a lower tax of 5%, the payee based on
the total net income. So the difference in tax rate simply tells you that
whatever taxes withheld is not the actual tax due but it approximates
what would be the liability. If at all it happens, at the end of the year,
the tax withheld is over, then there is excess taxes paid - can be
refunded. If the taxes withheld is under, meaning the tax due is still
higher than what is withheld, then the taxpayer who has been withheld
simply pays the difference.
(2) As to the liability, in CWT it is the taxpayer or payee that is liable. In
the FWT it's the payor or the withholding agent. has to be
What is the difference in the treatment as to who is
Because in final withholding tax the tax is already the full and final
payment, whenever tax is not withheld, the liability will naturally rest
on the withholding agent who has not paid the tax.
Why? Since it's a passive income subject to final tax, whoever

the income earner is not required to declare as part of his gross
income.
But if you talk of creditable withholding tax, which is not actually the
full and final payment of the taxes due, whenever no taxes have been
withheld by the payer, the payee is still ultimately liable because it is
required to declare all income as part of his gross income and compute
the tax due. It will still be liable.
Why? Because without withholding, that payee corporation or

individual will have nothing to offset against the tax computed.
Di ba, which would you prefer: there would be advance withholding

which constitutes as your advanced tax payments and at the end of
the year you pay lesser na lang because there were advance an
payments, OR you pay in bulk at the end of the year. That's the
difference between withholding and non-withholding.
Difference as to filing of income tax return:
No income tax return is required to be filed for those already withheld

of final withholding tax, BUT
The income recipient of an income subject to creditable withholding

tax is expected to file an income tax return every quarter in every year
and pay the difference between whatever the tax due is LESS
whatever has been withheld under creditable withholding tax.
DIFFERENCE
Final Withholding Tax
Creditable Withholding Tax
Liability for Tax
Withholding agent
Payee
Filing of Income
Tax Return
NONE
Required every quarter in every

year
F.
withholding
1. Creditable withholding tax
a. Expanded withholding tax
Do you know an example of an expanded withholding tax?
Professional athletes. Subject to 10% withholding tax but

these 10% tax that's been withheld from them can be
credited against whatever tax due they have at the end of the
year.
That's why these professional athletes, professional models,

etc. if at all they have been withheld of tax - for example,
their professional fee is P10M withheld of 15% final
withholding tax (because it's a range of 10%-15%), they only
receive P8.5M. But that P1.5M can be offsetted against
whatever tax they will have to pay at the end of the year.
These professionals would not actually declare the entire

P10M because in computing the entire P10M, naturally the tax
would still be higher, di ba? The result is that's what's been
withheld is way lower than what's expected from 5%-32%.
So some would only declare the half, the P5M in income,
compute the tax from P5M, then deduct the P1.5M.
Is it tax evasion, or tax avoidance? <no answer>
Professionals who are subject to creditable or expanded

withholding tax are generally subject to the 10%. BUT once
their expected income for the entire year will exceed P720k,
they elevate to 15%.
So if ever you're a lawyer, or let's say an individual

practitioner and your income every year is P10M, even by
January pa lang, you can ask your payors to deduct from
you 15% because you would exceed actually the P720k
Some rates on expanded withholding tax:
5% on rent
2% on services
1% on goods
10% on professionals
(all the others I have not mentioned yet)
b. Withholding tax on compensation
Withholding tax on compensation is so easy, I've made it as an
example already.
But what is covered by or what can be withheld of withholding tax
on compensation, is it the basic salary or would it include all the
other income that you have earned (total income)? So if he
receives commissions from the company, bonuses from the
company, fringe benefits? Withholding tax on salaries and wages
and compensation will it be applied only on basic salary or will it
be applied on the total income received by the individual?
LET'S SET THE RULES.
If an employee earns basic salary and other forms of

compensation with the company, it will generally be subject
to the withholding tax of compensation unless it is subject to
the tax of (?). So that for example, if you happen to be
member of the board of directors, for that company, the
question of how your honorarium will be taxed, the answer
actually depend. Are you a director and at the same time
employee of that company? If you are also an employee
Kinds
2.
3.
of that company, then you will be covered by the
tax on compensation. But if you are a director alone without

being an employee of that company who gave you the
honorarium then whatever payments that will given as that
and subject to the expanded withholding tax of 10%. That
means once you become employed, everything that you
received from your employer except when it is exempt or
subject to the fringe benefit tax, it will be subject to the
withholding tax on compensation. But take note if you're
receiving fringe benefits and you are rank and file, that would
be covered by withholding tax on compensation because once
you are rank and file, even the benefits that you receive will
not be subject to fringe benefit tax. Fringe benefit tax is that
creditable (?). So that means it will not form part - the
benefit will not form part of the wages of the employee.
Creditable withholding VAT
Final withholding tax
a. Final withholding tax on passive income
You are already familiar on FWT on passive income such as
dividends - cash or property.
b. Fringe benefits tax
c. Informer's reward
Informer's reward would apply to all corrections made by the BIR
as a result of any information that you have given for a tax then
evasion case. So if you happen to be reporting to the BIR in a
case of a tax evasion and it is actually supported and it will
eventually result in the conviction (?) actual collection of taxes,
you can receive a maximum of P1M from the government as an
informer or 10% of whatever has been collected. But the 10% cap.
should in a way be higher than the P1M limit. But that payment
that you will get as a reward will also be taxed by the government
because the government will not expect it to be part of your gross
income. So it will be taxed with finality subject to 10% FWT.
d. Final withholding VAT
Every time a non-resident performs a service in the Philippines
even at an isolated case, such payments made to the non-resident
will be paid of a value added tax of 12%. So if the transaction
between a non-resident, for example, you as an individual
engaged in trade or business, with a non-resident to provide
service in the Philippines for a value of P10M, then you as an
individual contracting with that non-resident will have to pay the
government the 12% of the P10M. Actually you don't withhold it
from the P10M contract. You will have to pay - it is creditable.
Whenever a domestic corporation or individual engaged in trade
or business enters into a transaction for service rendered in the
Philippines with a non-resident, all payments to the non-resident
will have to be paid by the payor 12% VAT to the government.
And why is it creditable? Because every taxpayer who has paid
can be deducted against your tax liability. That is why it is called
creditable. But the concept there is you don't really withhold, but
it is called withholding because if the contract is P10M, will you tell
the non-resident I will deduct 12% - NO. You pay on your own
the 12% to the government but you can deduct the 12% from will
your tax liability. If you're not liable for VAT, where will you offset an
the 12%- you file a claim for refund. FWT VAT is different,
whenever the government makes payment to you and your

business, everyone paying you through the course of trade or
business will have to pay the VAT. You're customers will have to
pay the VAT. So if your customer is the government entity, the
government is supposed to pay the (?) of 12%. Because it's the
government, they can withhold the VAT. They will be required to
the 12%. They will only pay 7%. They withhold the 5%. And
it's final because we cannot (?).
G.
Creditable Withholding Tax

1. Tax withheld and remitted - (Except for creditable withholding
VAT) The tax withheld is intended to equal or at least proximate
the tax due from the payee on the said income. It represents
advance payment of tax due.
Will there be year-end investments in all types of withholding taxes?
CWT?
Year-end investments will only apply for CWT because as we have
said earlier, these type of taxes will simply be an approximation of
what your tax liability is. So whatever you have withheld will be
off-setted in your total tax due, the difference will have to be
either: if there is an excess withholding, carry over to the next
period or apply for tax refund or if it is under withholding paid. In
FWT, that would not apply because whatever has been withheld
every time is considered a full and an exact payment of the tax
liability.
Liability for tax belongs to the taxpayer.
Filing of return - The income recipient is required to file an income
tax return and/or pay the difference between the tax withheld and
the tax due.
Year-end adjustment
Refunds or credits
2.
3.
4.
5.
H.
I.
J.
Payor
w/holding agent
Payee
Income earner
paid
payable
Accrued as an
expense
Expense
income
10M rent
Final Withholding Tax at Source

1. Tax withheld and remitted - The tax withheld constitutes the full
and final payment of the income due from the payee on the said
income
2. The liability for tax rests primarily on the withholding agent
3. Filing of return - the payee is not required to file an income tax
return for the income withheld of final tax
4. Refunds or credits
b.
c.
Consequences for Failure to Withhold

1. Liability for surcharges and penalties
2. Liability upon conviction to a
penalty equal to the total amount
of
the tax not withheld, or not accounted for and remitted
3. Any income payment which is otherwise deductible from the
payor's gross income will not be allowed as a deduction if it is
shown that the income tax required to be withheld is not paid to
the BIR
Remedies of Withholding Agent if the Expense is Disallowed
1. Non-withholding:
a. Pay the tax due, including the interest incident to the failure to
withhold tax, and surcharges, if applicable, at the time of the
audit or investigation.
What will happen if a withholding agent fails to withhold

the tax?
If this is a transaction involving rent and according to the
regulations every payor of rental income shall withhold 5%
creditable withholding tax. If the payor has paid a total of
P10M in rental payments without deducting the 5%, first pay
consequence is that the payor will have to pay 25% surcharge
and interest. So surcharge is P500,000 plus interest from the
time of not withholding up to the time of discovery and
payment. Second consequence, if upon conviction this
withholding agent who did not withhold the tax will not only
pay surcharge and interest but also the basic tax. And third
consequence, the P10M rental payment to the payee will not
be recognized as a deductible expense.
relationship
2.
5%
500,000
X 25% surcharge on interest
+ basic tax
Reinvestigation, provided the payees reported the income

Pay the amount that should have been withheld, including the
interest incident to the failure to withhold the tax, and
surcharge, if applicable, at the time of the audit or
investigation; or reinvestigation if the payees did not report the
income and pay the tax
Under-withholding
Pay the difference including the interest on the under-withheld
amount and surcharge, of applicable, at the time of the audit or
investigation.
If the remedy is availed of, the expenses not previously subjected
to withholding tax will be allowed as a deduction for income tax
purposes
What could be the payor's remedy?
(1) For not withholding, prove to the BIR that the P10M was declared by
the payee as part of his gross income. Hence, it will be computed as
part of the tax liability of the payee and it will actually be paid. The
payee cannot deduct any withholding because you have not issued a
certificate for withholding. It will be actually be paid. Here, what

remains as your liability would only be to pay surcharges and interest because
the payee will only declare and pay it at the end of the year while the
government has expected every month the 5% withholding to be remitted
every month. It is a delay on the part of the government so for the delayed
collection surcharges and interest has to be paid.
(2) If under withholding, just pay the difference between the taxes not
withheld and the taxes you actually withheld plus surcharge and interest on the
under withholding.
If the remedies are availed of and surcharges and interests and
deficiencies have been paid can the expense be deductible this
time?
Yes.
C
apital transaction
A.
B.
Types of properties
1. Ordinary assets, Section 39 of the Tax Code, as amended.
a. Stock in trade of a taxpayer or other real property of a kind
which maybe properly included in the inventory at the end
of the taxable year.
b. Real property primarily held for sale to customers in the
ordinary course of trade or business
c. Property used in trade or business subject to depreciation
d. Real property used in trade or business
So we have a strict listing or enumeration of what is ordinary
asset - the inventory, stocks in trade those ordinarily and
primarily held for sale in the course of trade or business, those
used in trade or business and depreciable properties. Beyond that
they are capital assets
2. Capital assets
a. Properties not included n the enumeration of ordinary
assets
b. Property not used in trade, business or exercise of
profession
c. Properties used in trade or business classified as capital
assets, such as accounts of the government, interest of a
partner in a partnership
Ordinarily accounts receivable would not be something that can be
sold by a company. If a corporation is engaged in trading, it has
customers on credit, it recognizes accounts receivables in its
books. It's just that accounts receivable are not inventory, it's not
an asset that can be sold regularly. But if a company will in the
future be in need of money, it can discount (called discounting)
the accounts with banks or financial institutions to receive money
in lieu of accounts receivable but discounted at a lower amount
that transaction actually of selling accounts receivable not in
the course of trade or business is a capital transaction and any
loss that you suffer will be a capital loss. Because accounts
receivable, although it arose because of business is really not
ordinarily held for sale
3. Conversion of asset
a. Ordinary asset to capital asset
When can an ordinary asset be converted to a capital
asset?
When a real estate broker engaged in selling lands dies,

these real properties will go to his heirs. And if these
heirs do not engage in selling them in trade or business
then the ordinary assets of the real estate broker will
become a capital asset.
b. Capital asset to ordinary asset
When can a capital asset become an ordinary asset?
When a decedent dies leaving lands to the heirs, then the

heirs will use them to engage in trade or real estate
business, then the capital assets become ordinary assets.
Types of transaction
Capital transactions are usually classified into three because there are
only three types of taxability:
1.
2.
3.
Sale of share of stock issued by a domestic corporation (refer

to previous discussion)
Sale of shares of stocks belonging to a domestic corporation if
sold not through the stock exchange because it is subject to
capital gains tax of 5 and 10%;
Sale of real properties classified as capital assets located in the
Philippines (refer to previous discussion)
a. Rules on real properties of:
i.
Taxpayers engaged in real estate business (dealer,
developer, lessor)
ii. Taxpayers not engage in the real estate business
iii. Taxpayers changing from real estate business to nonreal estate business
b. Taxpayers originally registered to be engaged in the real
estate business but failed to subsequently operate.
c. Treatment of abandoned and idle property of:
i.
Taxpayer engaged in the real estate business
ii. Taxpayers not engaged in the real estate business
d. Treatment of real properties transferred, whether the
transfer is through sale, barter or exchange, inheritance,
donation or declaration of property dividends.
e. Treatment of real property subject of involuntary transfer
Other capital transactions
How do you classify a real property that is subject to an
involuntary foreclosure or government expropriation? Example,
you own a property and here comes the government trying to
expropriate the property, what is its taxability?
The involuntary sale expropriation will have no effect on the

classification of the property. If the seller had the property as an
ordinary asset then it will be treated as such. If owned as a capital
asset, then it will be taxed as a capital asset. If the property is and
used for trade or business, even if you are not engaged in the real
estate business, it will be considered as an ordinary asset.
However, once an ordinary asset becomes idle or abandoned
will it be converted to a different classification?
If real property is owned by one engaged in real estate business

even if it is subsequently idle or abandoned, it will continue to be
an ordinary asset and in no way will be converted. If the real
property is owned by a business not engaged in real estate
business it will still be classified as an ordinary asset so long as it
is used in trade or business. However, if the latter becomes idle or
abandoned after 2 years from the time of the sale of the property
it will be converted to a capital asset.
A corporation which has changed from real estate business into a
non-real estate business by changing its primary purpose in its
articles of incorporation it will not convert the ordinary to capital
asset. It will remain as an ordinary asset. This holds true for
corporations which subsequently failed to subsequently operate
after 2 years. If it's ordinary asset it remains ordinary even after 2
years of operations.
If succession or donation, whenever the heir or donee receiving
the real property is not engaged in the real estate business or use
it for trade or business it will be classified as capital asset. If the
real property is declared by the corporation in favor of the
C.
D.
stockholders who are not engaged in real estate business and

does not also use it for trade or business it will be considered as a
capital asset.
For exchanges, barters or sale it will be treated as an ordinary
asset in the hands of the recipient transferee in the case of taxexchanges the taxpayer (bell rings - inaudible).
Ex. If a real property is transferred to a corporation and the

corporation uses it for trade, business or profession that will
be converted into an ordinary asset.
Types of gains from dealings in property (sale or exchange)

1. Ordinary income (refer to previous discussion)
If it is an ordinary asset or capital asset then the result in every
transaction it will also be an ordinary gain or ordinary loss or a
capital gain or a capital loss.
2. Capital gain
a. Actual gain vis--vis presumed gain
In capital gain you have an actual gain versus presumed gain.
Presumed gain only exists in capital transactions involving
real property classified as capital asset because it does not
matter whether the seller is actually enjoying the profits or
not because tax is based on the gross selling
price or fair market value, whichever is higher.
Actual gain, on the other hand, could occur on the
shares of stock and can also occur on other capital
transactions.
Ex. If you invest in a business and at the end of the year

you receive liquidating gain which is subject to 5-32% if
individuals or 30% if corporations. That gain enjoyed by
the stockholder is a capital transaction subject to the
same rate but subject to additional rules.
b. Long term capital gain vis--vis short term capital gain
That's 50% and 100% recognition.
c. Net capital gain, net capital loss
Net capital gain, net capital loss, simply means the difference
between the capital gain and the capital loss. Whatever the
net is would either a gain or a loss.
Computation of the amount of gain or loss
1. Basic formula: amount received or realized less cost or
adjusted basis
2. Determination of the cost or adjusted basis of property sold.
Section 40B
a. If acquired through purchase- cost of property
The acquisition cost
b. If acquired through inheritance - fair market value of the
property at the time of the acquisition
Ex. Land inherited 10 years ago with a FMV of P10M, now
FMV is P100M and you sold it for P200M. Profit is P200MP10M.
c. If acquired through donation - the same as it would be in
the hands of the donor, except if the basis is greater than
the fair market value at the time of the donation/ gift, then
for the purpose of determining the loss, the basis shall be
such fair market value
The same as it would be in the hands of the donor. But if FMV

at the time of sale is lower then use the lower amount.
Ex. 5 years ago you received motor vehicle whose FMV in

the hands of the donor was P10M. Today FMV is P5M but
you sold it for P12M. Profit is P12M-P5M because the free
latter is lower amount. However, if the FMV at the time of
donation is lower, then use the lower amount. If FMV at
time of donation is P11M, then use P10M as the cost. The
default is the value as if it were in the hands of the donor
unless the FMV at time of donation is lower. If its higher,
don't use the alternative amount.
d. If acquired for the less than adequate consideration - the
amount paid by the transferee
Ex. A motor vehicles was purchased for P1 peso even if it's
valued at P1M and sold for P2M, your cost is still P1, the
amount that which you purchased it.
10M
gift
5 years ago
Motor
vehicle
by ABC
Corp.
donation
sold
3.
4.
FMV
5M
if 11M, use
12M
Cost or basis of the property exchanged in corporate

readjustment.
a. Merger
b. Consolidation
c. Transfer to a controlled corporation (tax free exchanges)
Recognition of gain or loss in exchange of property a.
General Rule: Gain is taxable, loss is deductible
b. Exception: No gain or loss shall be recognized
i.
Merger or consolidation (otherwise known as tax
exempt transactions or transactions solely in kind)
-
A corporation, party to a merger or consolidation,

exchanges its properties solely for stock in a
corporation, which is a party to the merger or
consolidation
A stockholder of corporation, party to a merger or
consolidation, exchanges his stock in another
corporation party to that merger or consolidation
Merger is when 2 corporations combine and there is one
surviving entity.
Consolidation when different corporations combine.
Usually one corporation's property will be owned by the
other corporation and in exchange the one contributing
property will get stocks and become part owner of the
other corporation. Without any cash involvement it is
called transaction solely in kind, which is exempted from
tax. Usually these should be taxable because value of
properties and stocks are different. However, because it
is a transaction solely in kind it will be exempted from
taxation.
ii. Transfer to a controlled corporation
If a person, alone or together with others not
exceeding 4, exchanges his property for sock in a
corporation and this person or persons after the
exchange, acquired controlling interest over the
property
corporation (transaction solely in kind)
Prop Stocks
If a person (juridical or natural), alone or together with others
Corp.
Stocks Stocks
not exceeding 4, exchanges his property (or stock) for stock in
stocks
a corporation and this person or persons, after the exchange,
51%
acquired controlling interest (at least 51% and not 50.1%of
60M
the shares) over
the corporation. (transactions solely in kind)
property
100M
If the property mentioned is a capital asset transferring it would
Orig. CS =
60M
Corp.
entail the payment of 6% capital gains tax, if ordinary asset then
160M
its subject to 5-32% plus VAT and
stocks
documentary stamp tax. But it will be exempted because it is a
60/160 = 37.5
60M
transaction solely in kind.
Ex. A corporation with an original capital stock prior to transfer
80M
100M. Five persons transfer property valued at P60M. Corporation
gives out 60M worth of capital stocks.
property
100M
Did they acquire controlling interest? No. Because they now have
Orig. CS =
80M
Corp.
180M
a total of 160M shares because the original 100M is already owned
stocks
by other stockholders. So 60/160 = 37.5 %. They need to own at
least 51% of the stocks. Because somebody already owns 100M
60M
stocks they have to own more than 100M.
110M
Ex. Eleven person equally own P110M worth property, 10M each.
Five of them transferred to the corporation. The transaction will
property
not be exempt because they will not own 51% of the corporation.
110M
= 11ppl
Only 50M/210M.
Corp.
+110M
The law requires a limit of 5 persons for them to acquire
stocks
210M
controlling interest and be exempted from tax. In cases where the
110M
transferors exceed 5 in number tax free exchange could still be
possible so long as 5 individuals acquire controlling interest and

only the 5 individuals will be exempt from tax. In the example
above, if the 5 individuals acquired controlling interest the other
6
transferors will be subjected to capital gains tax based on
the value that they proportionately hold.
2.5M 1.5M
108M
100M
2.5 1.5 1.5 1.5
110M
.5 .5 .5 .5 .5 .5
Corp.
rty
Corp.
100M
= 110M
210M
110M
Would the rule on acquiring interest exclude tax
free exchanges when the transferor already owned the corporation
prior to the transaction solely in
kind which only increases the stocks?
It does not exclude further control. So if you

previously owned already 80% of the shares of the stock of another
corporation and you subsequently transact solely in kind to acquire
further shares that transaction is still exempt from tax. However, they
c.
are presently studying on making further control as

not exempted from tax.
Controlling interest means at least 51% of the
share
Special rule: gain is taxable, loss is no deductible
i
Wash sales
.
61 day sales of securities which are substantially identical
within the 61 day period beginning 30 days from sale or
60 days after sale. So you have one point in considering.
So if today is the date, within 30 days after the sale of
substantially the same securities it's actually of one way to
influence the market of making it appear that this
particular share of stock is not traded because of the
proximity of the dates of sale and purchase and
substantially identical (not similar) securities or stock
then the day of the gain is taxable but the loss is not
deductible. The exception is if the seller/dealer/broker of
securities engaged in the ordinary course of business loss
is deductible because they are (inaudible - a student
talks over the recording..zzz).
ii. Illegal transactions
Gain is taxable the loss is not deductible but only to the
extent of the illegal gain.
iii. Transactions involving related taxpayers
Any expense deductions are not deductible. Any
imputable income is taxable.
iv. Transaction not solely in kind
Transfers of stocks or property in exchange of stocks with
the inclusion of cash consideration.
E.
capital gain of 5M gain capital (for asset A), 2M loss (for
1. Holding Period Rule
a. Rule:
i.
If the property has been held by the taxpayer for a
period of not more than 12 months, the gain or loss is
ii. If the property has been held by the taxpayer for more
than 12 months, the gain or loss is 50% recognized
Ex. You invested in ABC Corp. last September 30, 2011.
This year the Corp. underwent liquidation. You receive
today, Oct. 2, a liquidating gain. Will that be 100%
taxable?
Expenses (4.5M)__
b. Applies only to individual taxpayers
Capital gains derived from capital transactions of
corporate taxpayers is always 100% recognized,
irrespective of the number of months during which the
property was in possession of the corporate taxpayer.
Assuming that the recipient of the liquidating gain is a
corporation, what is its tax liability?
Holding period rule only applies to individuals.

Capital gains derived from capital transaction of
corporate taxpayers is always 100% recognized,
irrespective of the number of months during which
2.
3.
the property was in possession of the corporate

taxpayer.
Capital loss limitation rule
a. Rule: Capital losses are deductible only to the extent of
capital gains
b. Applies to both individual and corporate taxpayers (except
banks and trust companies as they are considered dealer in
securities)
Losses that you suffer from the capital transactions are
actually deductible to the extent of your capital gain. It
cannot extend to your ordinary income. It cannot reduce your
ordinary taxable income.
Corporations that suffer liquidating losses, i.e. liquidating
dividend is P2M when your initial investment is 5M, it is
deductible but only to the extent that it has capital gains as
well. If no capital gain it cannot deduct the capital loss from
any other ordinary income. Except banks and trust companies
as they are considered dealer in securities because they only
have ordinary transactions.
Net capital loss carry-over rule
Not the same as NOLCO, the latter applies only to ordinary losses.
NCLCO applies only when there is a loss in a capital transaction it
can then be offset against the capital gain.
Let's say you are engaged in trading business and you also
ventured into some capital transactions. In 2010, you had gross
income from your trading business of 5M. Let's illustrate how it
can be carried over: you are allowed to deduct your expenses,
let's say 4.5M. Net income is 500,000-Ordinary capital. You had 3
capital transactions; you had assets which you held on to for 13
months (asset A), 12 months (asset B), and 11 months (asset C).
Rules Governing other capital transaction
You had a
asset B), and 1M loss (for asset C). How much is your net capital
gain or capital loss for 2010? Is it a net capital gain for 2010 or
net capital loss? Would you recognize the gain 100%? Only 50%
shall be recognized since it has been held for more than 12 100%
months - so the net capital gain would only be 2.5M. This asset
held for 12 months, you suffered a loss of 2M, will the loss be
100% recognized or 50% recognized? 12 months or less while
more than 12 months is 50%, so this would be 100%. And how
about his asset held for 11 months? Still 100% - 1M
Illustration A:
Gross Income from Trading Business5M
No. It is more than 12 months.
Net Income (Ordinary Income)500,000
Capital Assets
Asset A - gain of 2.5M
Asset B - loss of (2M)
Asset C - loss of (1M) __________
Net - (500,000) Net Capital Loss
So this is the Holding Period Rule, when to recognize the 50 or
100%
The second rule provides the Loss Limitation Rule.
You have a net capital loss of 500,000. Can you deduct this
500,000 from your ordinary income in order to reduce your
net income to zero? No, because Loss Limitation Rule
M
ORDINARY CAPITAL
provides that losses from net capital transactions cannot be
deducted against ordinary gains; it can only be deducted
s
5M
against capital gains.

The third rule provides for a carry-over. How much loss can we carry
over? You're saying carry over to the next year 2011. Can
we carry over the 1M capital loss?
Illustration B:
Gross Income from Trading Business5M
Expenses (4.5M)__
Net Income (Ordinary Income)500,000
Capital Assets
Asset A - gain of 2.5M Asset B
- loss of (2M)
Asset C - loss of (1.5M) _______
Net - (1M) Net Capital Loss
We can only carry over 500,000. Why? If any individual tax payer
sustains a net capital loss during the year, the loss can be carried
forward to the next year but not in an amount exceeding the net
income of ordinary transactions during the year. So what's the net income
during the year? 500,000 - So the 1M net capital loss can
be carried over for the year 2011, but not exceeding the net income
of ordinary transactions during the year which is 500,000. Let's say that
in year 2011, you have also 3 capital transactions: assets held for 18
months, 13 months, and 6 months; 3M loss, 4M gain, and 500,000
gain respectively. So for your capital transactions in 2011, how will
you recognize the losses and gains?
Capital Assets (for 2011)
18 months - 3M loss [50%] - (1.5M)
13 months - 4M gain [50%] - 2M
6 months - 500,000 [100%] - 500,000________
Net - 1M Net Capital Gain
In year 2011, also had 3 capital transactions for assets held for 18
months, 13 months and 6 months for P3M loss, P4m gain and P500K
gain respectively. How will you recognize the losses and gain? P1.5M
loss and P2M gain because 50% recognized, while P500K is recognized
100% because less than 12 months. Before NCLC you have P1M gain,
you can carry over the net capital loss to this year in an amount from
losses not more than 12 months, and the amount you can carry over
shall not exceed the net income during the year the loss was
sustained. Since the net income on 2010 is 500K you can carry over
that amount only and offset it against the succeeding year's capital gain
and not the net
income of that year when you try to claim the capital loss. The
500K that was never used cannot be claimed on the succeeding
years, it will expire if not used on the immediately succeeding
What is a short sale?
Alternative illustration:
Ord.
Expenses
Net
Capital
2.5M G (50% if > 12mos .)

2M L (100% exactly 12 mos.)
1M L (100% < 12mos.)
LOSS
Net capital 500,000
13 months - 5M gain
12 months - 2M loss 11
months - 1M loss
2011
Gross Income
Expenses
Net
Ord.
Capital
18 months - 3M loss
13 months - 4M gain 6
months - 500K gain
a.
b.
F.
4.5M
500,000
If 1.5M
1M loss can this be carried over?
1M
ORDINARY CAPITAL,000 500
5M
4.8M
200,000
1.5M
2M
500,000
1,000,000
500,000
500,000
5-32%
L
G NCLCO
GG
Rule: if any individual taxpayer 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 12 months.
Apples only to individual taxpayers
Applies only to individual taxpayers whether or not engaged
in trade or business, hence, loss for corporate taxpayers it cannot
apply the CLCO, unlike NOLCO. Because capital transactions
arise from transactions not in the ordinary course of business.
Special capital transactions

1. Wash sales
2. Short sales year.
The sale of securities during which time of sale ownership has

not been acquired by the seller but subsequently at the time
of delivery he acquires ownership already. They are just like any
ordinary transactions, the gain is recognized while losses are deductible.
Retirement of bonds
Securities becoming worthless
Failure to exercise option or privilege to buy or sell property
Readjustment of partner's interest in a partnership
3.
4.
5.
6.
7.
Distribution of asset or shares of stock upon liquidation of a

corporation.
Other special capital transactions, (items 3, 4, 5, 6, 7 on outline)
simply means that these are transactions that will be governed by the holding
period rule, the loss limitation rule if an individual, by the carry over rule if
individual as well.
Administrative Matters
A.
B.
Taxable Period
1. Kinds
There are 2 general periods for taxing taxpayers:
a. Calendar period
starts Jan. 1, ends Dec. 31
Who uses it?
It is the default period;

i.
If the taxpayer chooses the calendar year
ii. If the taxpayer has no annual accounting period
iii. If the taxpayer does not keep books
Number ii and iii BIR mandates in order for them to easily
determine the income of the taxpayers.
iv. If the taxpayer is an individual v.
If the taxpayer is a partnership
For iv and v at all times covered with calendar year tax
period.
b. Fiscal period
It starts any day other than Jan. 1 and ends 365 days after.
c. Short period
It's not really a constant taxable period. It comes only once in a
while because it is not a 1 year period.
i.
When the taxpayer dies
If taxpayer dies from Jan. 1 until time of death, that is the
short period. It can never extend after death because there is
an estate income tax return.
ii. When the corporation is newly organized
If corporation is newly organized, organized Dec. 1, it still has
to file a tax return for a short period of Dec. 1 to Dec. 31.
iii. When the corporation is dissolved
Corporation is dissolved, meaning from Jan. 1 up to time of
dissolution.
iv. When the corporation changes its accounting period
Ex. A corp. operates on a calendar year basis ending Dec. 31
and decides to have a fiscal year ending March 31,
somewhere along the year when the BIR will effect change in
accounting period the taxpayer has to submit a short period
return covering the fraction. Ex. You decide to change from
calendar to fiscal March 31 and that decision came January
then you have to file a tax return from Jan. 1 until the end of
January. And another short period from February until March.
Then after March that will be the regular period.
2. When the Commissioner is authorized to terminate the taxable
period
a. When a taxpayer retires from business subject to tax
b. When he intends to leave the Philippines
c. When he removes his property from the Philippines
d. When he hides or conceals his property
e. When he performs any act tending to obstruct the proceedings
for tax collection
f. When he renders the tax collection totally or partly ineffective
Methods of Accounting
1. Methods
a.
2.
3.
4.
Cash method - income is reported in the year payments are

received while expenses are deducted in the year payments are
made.
b. Accrual method - income is reported in the year it is earned
while expense is deducted in the year it is incurred regardless
of receipt or disbursement of cash.
"All Events Test", under the accrual method, an expense is
deductible for the taxable year in which all the events had
occurred which determined the fact of liability and the amount
can be determined with reasonable accuracy.
c. Mixed/Hybrid
d. Other methods which clearly reflects the income
i.
Installment method - appropriate when collections of the
proceeds of sales and incomes extend over relatively long
periods of time and there is strong possibility that full
collection will not be made.
Section 49, Tax Code as amended - A person who regularly
sells or otherwise disposes of personal property on the
installment plan may return as income 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.
Treatment of Sales (includes casual sale or other
disposition of personal property for a price exceeding
Php1,000 and sale or other disposition of real property):
(1) Installment basis - if the initial payments do not
exceed 25% of the selling price
(2) Deferred sales basis - if the initial payments exceed
25% of the selling price
ii. Percentage of completion method, Section 48 of the Tax
Code as amended - appropriate for long-term contracts
(i.e., building, installation or construction contracts)
covering a period in excess of 1 year.
iii. Crop year method - applicable for farmers engaged in the
production of crops which take more than a year from the
time of planting to the process of gathering and disposal of
the harvest. Expenses paid/incurred during the year are
deductible from the gross income realized from the sale of
the crops.
General rule: The taxable income shall be computed upon the basis
of the taxpayer's annual accounting period in accordance with the
method of accounting regularly employed in keeping the books of
such taxpayer.
Exception: Computations shall be made in accordance with such
method as in the opinion of the Commissioner clearly reflects the
income, if no such method of accounting has been so employed, or
if the method employed does not clearly reflect the income
Tax Accounting vs. Financial Accounting
While taxable income is based on the method of accounting used by
the taxpayer, it will always differ from accounting income.
Accounting attempts to match cost against revenue. Tax law is
aimed at collecting revenue.
Allocation of income and deductions, Section 50 of the Tax Code, as
amended
or not
incorporated or whether or not organized in the
In the case of 2 or more organizations, trades or business (whether
Philippines) owned or controlled, directly or indirectly, by the same

interest, the Commissioner is authorized to distribute, apportion or
allocate gross income or deductions between or among such
organization,
trade or business, if he determines 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.
C.
Filing of Income Tax Returns

1. Individuals required to file income tax returns, generally:
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 his income derived
from sources within the Philippines
d. Every non-resident alien engaged in trade or business or in the
exercise of a profession in the Philippines
e. Individuals deriving compensation income concurrently from 2
or more employers at any time during the taxable year
f. Individuals whose pure compensation income derived from
sources within exceeds Php60K
For married individuals, whether citizens, residents or non-resident
aliens, who do not derive income of both spouses. However, if it is
impracticable for the spouses to file 1 return, each spouse may file a
separate return of income but the returns so filed shall be
consolidated by the BIR for purposes of verification for the taxable
year.
For unmarried minors, the income from property received from a
living parent shall be included in the return of the parent, except
when the donor's tax has been paid on such property or when the
transfer of such property is exempt from donor's tax.
2. When individuals are not required to file income tax returns
a. An individual whose gross income does not exceed his total
personal and additional exemptions (however, a Filipino citizen
and any alien individual engaged in business or practice of
profession shall file an income tax return, regardless of the
amount of gross income)
b. An individual with respect to pure compensation income
derived from sources within the Philippines, the income tax on
which has been correctly withheld (however, an individual
deriving compensation concurrently from 2 or more employers
at any time during the taxable year and an individual whose
pure compensation income derived from sources within the
Philippines exceeds Php60,000 shall file an income tax return)
c. An individual whose sole income has been subjected to a final
withholding tax
d. An individual who is exempt from income tax
3. Substituted filing of income tax returns
When the employer's annual return may be considered as the
"substitute" income tax return of the employee inasmuch as the
information provided in his income tax return would exactly be the
same information contained in the employer's annual return.
a.
b.
You need not as an employee file an ITR because the annual return
filed by your employer already reflects whatever income you have
earned from them. Who are qualified
What are the qualifications?
For you to be qualified for substituted filing and no tax income

return is expected from you:
1. You have to be employed purely by one and same
employer, no 2nd employer
2. You have no other source of income; or even if you have
other source of income it is exempt or subject to FWT
3. The taxes withheld thru your employer is already correct,
tax due and tax withheld is equivalent (tax due=tax
equivalent)
4. Your spouse should also qualify for substituted filing
Now even if you have one employer and your tax has been
correctly withheld, but your spouse is a business man, you need
to consolidate diba, then both of you has to show income and
substituted filing is not allowed
i.
Individual taxpayers receiving purely compensation
income, regardless of the amount from one employer in the
Philippines for the calendar year, the income tax of which
has been withheld correctly by the employer (tax due = tax
withheld)
Additional requirements:
(a) The spouse also complies with the same requirement
(b) The employer files the annual information return
(c) The employer issues BIR Form 2316 to each employee
ii. A senior citizen who is a compensation income earner
deriving from only one employer an annual taxable income
exceeding the poverty level or the amount determined by
NEDA on a particular year, but whose income had been
subjected to the withholding tax on compensation
A senior citizen whose receiving compensation income from
one employer not more than 60K or receiving below poverty
line.
Who are not qualified
Who are not qualified for substituted filing, therefore required to
file ITR?
i.
Individuals deriving compensation from 2 or more
employers concurrently or successively at anytime during
the taxable year
If you have 2 or more employers, whether successively or
concurrently. So meaning January-June one employer, then
July to December, another employer. Dbah 1 employer at a
time, but because you have 2 employers for the year, you
have to file ITR
ii. 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, resulting to collectible or
refundable return
Employees deriving compensation income during the calendar
year, the tax of which has not been correctly withheld.
4.
iii. Employees whose gross compensation income do not

exceed the statutory minimum wage or Php5,000 per
month (Php60,000 a year), whichever is higher, including
employees of the government, or any of its political
subdivisions, agencies or instrumentalities, with salary
grades 1 to 3
Employees whose gross compensation income do not exceed
the statutory minimum wage
Individuals deriving other non-business, non-professionrelated income in addition to compensation income not
otherwise subject to final tax
EEs deriving from other non-business not subject to final tax,
understandably your income is not subject to final tax,
whatever type of income it is, even if it is illegal income, you
have to file income tax return, not qualified for substituted
filing
v. Individuals receiving purely compensation income from
single employer, although the income tax of which has
been correctly withheld, but whose spouse falls under i, ii,
iii, and iv above.
And when your spouse is not qualified for substituted filing,
you also are not qualified for substituted filing
vi. Non-resident aliens engaged in trade or business in the
Philippines deriving purely compensation income and other
non-business, non-profession related income.
And finally, this is interesting, NRA ETB "daw" deriving purely
compensation income is not qualified for substituted filing
BIR has been issuing now, summons or letters to alien
employees of different companies to file ITR because they are
not "daw" qualified for substituted filing. The problem with
BIR is they based their letters on this enumeration, but this
enumeration simply says that those who are not qualified are
not resident aliens. These aliens that they have been sending
letters to, are residents. So residents are not among the lists
who are not qualified for substituted filing. Therefore, resident
aliens are qualified to substituted filing
The tax shall be paid on the date the return is filed (unless
qualified under the Electronic Filing and Payment System).
When to file ITR?
If you are an individual, you also need to file quarterly tax returns
and one annual return: 3 quarterly, one annual.
Both corporation and individual would have to file, assuming they

are both in calendar year basis, their annual return on or before
April 15. If your
fiscal year basis is on
or before the 15th day
of the
4th month, by 15th day of the 4 th month by the close of the
taxable year, that is April 15 which is the 4 th month after
December.
So if you end March 31 fiscal year, your 15th day of the 4th month
is July 15.
But the quarterly is different:
If you are a corporation would have to be filed on or before

the 60th day after the close of the quarter.
But for individuals, quarterly is different: 1st quarter you have

to file on or before April 15, 2nd and 3rd quarter will have to be
filed on or before the 45th day after the close of the quarter.
When do you pay the taxes?
At the time that you file the tax return. It's what you call as the
pay as u file system. Except for corporation which have enrolled
under the electronic filing and payment system where you are
given additional 5 days after filing to pay the tax. You can file iv.
today, deadline April 15, but you can pay 5 days later under the
electronic filing and payment system.
So what happens in your annual tax return or your final
adjustment return? Do you pay the tax due?
Yes, if your tax due is higher than your tax credit from withholding.
But if your tax credit from withholding is higher than your tax due,
you need not pay the tax, whatever the excess maybe carried
forward to the next quarter/s or years. Or you can file for tax
refund.
Individual taxpayers
i.
Quarterly income tax return - the tax computed shall be
decreased by the amount of tax previously paid or assessed
during the preceding quarters and shall be paid not later
than 45 days from the close of each year of the first 3
quarters of the taxable year, whether calendar or fiscal
year.
ii. Final or adjustment return - if the sum of the quarterly tax
payments made during the said taxable year is not equal to
the total tax due on the entire taxable income of that year,
the corporation shall either:
(1) Pay the balance of the tax still due; or
(2) Carry-over the excess credit; or
(3) Be credited or refunded with the excess amount paid.
iii. Installment payments
A taxpayer, other than a corporation, may opt to pay the
tax in 2 installments when the tax due is in excess of
Php2,000. In such case, the 1st installment shall be paid at
the time the return is filed and the 2nd installment on or
When to file the tax return and pay the income taxes
before July 15 following the close of the calendar year.
Installment payments is avail only to individuals. We, as an
individual can opt to pay our income tax liability in
installments. 2 installments: 1st pay on or before April 15, 2nd
half on or before July 15. In no way will u allowed to pay
installments, if your tax liability is 2k or less. It has to be in
excess of 2K
Corporate taxpayers
i.
Quarterly income tax return - the tax computed shall be
decreased by the amount of tax previously paid or assessed
during the preceding quarters and shall be paid not later
than 60 days from the close of each of the first 3 quarters
a.
b.
of the taxable year, whether calendar or fiscal year.

ii. Final or adjustment return - if the sum of the quarterly tax
payments made during the said taxable year is not equal to
the total tax due on the entire taxable income of that year,
the corporation shall either:
(1) Pay the balance of the tax still due; or
(2) Carry-over the excess credit; or
5.
(3) Be credited or refunded with the excess amount paid.
c. Capital Gains Tax (sale or exchange of shares of stock not
traded through a local stock exchange or real property)
Capital gains tax must be filed within 30 days after every
transaction and a consolidated return on or before the 15th day of the 4th
month following the close of the taxable year.
i.
Within 30 days after each transaction, and a final
consolidated return of all transaction during the taxable year on or
before the 15th day of the 4th month following the close of the
taxable year.
ii. In case the taxpayer elects and is qualified to report the
gain by installments, the tax due form installment payment shall be
paid within 30 days from the receipt of such payments.
Where to file the return and pay the tax
Where to file tax return?
Usually, if that's zero return with BIR IBO (?), if it has payment,
you have to pay it in the bank, but not any bank, it has to be an authorized
agent.
Q from student: What if 13 months and 4m loss, then ang iya net
income is 1M sa ordinary transactions. So pili man ma carry over?
Atty: So if this 13th month so this is only 50% recognized, so if

50% recognize of 4M, so 2M, so what you can carry over, #1 rule,
not exceeding this amount. Has this amount exceeded this amount? No. Is
this amount coming from any asset held on for 12 months or less, you can
attribute this to this one. If less than 12 months, 100% recognized. So you
can say this is coming from
this transaction therefore you can carry this over in full by 1M.
a. Authorized agent bank
b. Revenue district officer
c. Collection agent
d. Duly-authorized treasurer of the city/municipality in which
such person has his/her legal residence or principal place of
business in the Philippines
e. Office of the Commissioner if there be no legal residence or
place of business in the Philippines

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CORPORATE INCOME TAXATION

General Principles, Section 23

No. Joint ventures undertaking construction projects may be

It would depend on how they would divide the income from

NOTE: Joint ventures not for construction projects are always

personality", somewhat a corporation because this is managed by

will be made over a period of time, it cannot be considered as having

Gross sales-return of capital= gross income

Gross income- itemized expenses or optional standard

2% minimum corporate income tax (MCIT)

Will the MCIT apply to corporations who are exempt as yet

With regards to corporations granted tax holidays,

It will be subject to the NCIT of 30% because the gross

gross income subject to the 5-32% tax.

When: beginning on the 4th taxable year immediately

corporation commenced its business operations.

Would include the services of employees but not all

corporation commenced its business operation.

First 4 years, no MCIT. So even if the corporation would be

When the law provides that it is beginning the 4th taxable

Nov. 15, 2011

Pay to the government

How about interest expense?

It is our interest income as deposited, it is a

Carry forward to Next Year

You had good operations. Instead

Your actual tax liability is only 30% (referring to the

Any payment that is in excess of your normal income

It will be treated as an asset of the corporation and

It can be carried over for the next 3 succeeding

It can be credited and offset against the NCIT.

It cannot be offset against a Minimum Income Tax

Pay the government = 100,000. (MCIT; it being

Carry forward the excess = 40,000

Pay the government = 100,000 (MCIT)

Carry forward to the next year = 50,000. Derived

Reason why you are not able to offset 40,000

Pay the government = 100,000 (MCIT)

If the 40,000 cannot be utilized in year 8, then it will

4.8M, you only have 4.6M in expenses. 400,000 in

NCIT is 120,000; as against 100,000 MCIT.

The higher amount is the NCIT. So you pay the

Actual payment to the government? 30,000. Instead

Do you still have any excess during the year? Do

Your total payment for the 4 years is 330,000

Your NCIT liability is a total of 60+90+60+120 =

You paid for the first 3 years in advance because the

Ask for relief from the Secretary of Finance on the

Here's ABC Corporation under Subic Bay Dev.

If it ventures into the manufacture of cellphones, not

Computing MCIT (2%) and NCIT (30%) without

For 2%, get the 1% x 2. For 30%, you get the

In getting 1% just move two zeros backwards; if

If you will know 1% of 5,000,000 then you will know

Since its 1%, move two zeros backwards, so it

If 30%, get the 10%, which is one movement

What's the 10% of 200,000? 20,000. So the

10 % should apply because in order for the 30% to apply

X 30%= 60,000 NCIT

How much will you pay to the government? MCIT or

A tax effort ration of 20% of the Gross National

ii. Where ration of