REVENUE REGULATIONS NO.

02-98
SUBJECT
:
Implementing Republic Act No. 8424 , "An Act Amending The
National Internal Revenue Code, as Amended" Relative to the Withholding on Income
Subject to the Expanded Withholding Tax and Final Withholding Tax, Withholding of
Income Tax on Compensation, Withholding of Creditable Value-Added Tax and Other
Percentage Taxes
TO

All Internal Revenue Officers and Others Concerned

Pursuant to Sec. 244 of the National Internal Revenue Code, as amended, in relation to Sections
57 to 59 , Sections 78 to 83 , Section 114(C) and Sections 116 to 127 of Republic Act 8424,
these regulations are hereby promulgated which shall govern the collection at source on income
paid on or after January 1, 1998 and prescribing the Revised Withholding Tax Tables on
compensation.
SECTION 2.57.

Withholding of Tax at Source

(A)
Final Withholding Tax. Under the final withholding tax system the amount of income tax
withheld by the withholding agent is constituted as a full and final payment of the income tax due
from the payee on the said income. The liability for payment of the tax rests primarily on the
payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of under
withholding, the deficiency tax shall be collected from the payor/withholding agent. The payee is
not required to file an income tax return for the particular income. LLpr
The finality of the withholding tax is limited only to the payee's income tax liability on the
particular income. It does not extend to the payee's other tax liability on said income, such as
when the said income is further subject to a percentage tax. For example, if a bank receives
income subject to final withholding tax, the same shall be subject to a percentage tax. cdasia
(B)
Creditable Withholding Tax. Under the creditable withholding tax system, taxes withheld
on certain income payments are intended to equal or at least approximate the tax due of the
payee on said income. The income recipient is still required to file an income tax return, as
prescribed in Sec. 51 and Sec. 52 of the NIRC , as amended, to report the income and/or pay the
difference between the tax withheld and the tax due on the income. Taxes withheld on income
payments covered by the expanded withholding tax (referred to in Sec. 2.57.2 of these
regulations) and compensation income (referred to in Sec. 2.78 also of these regulations) are
creditable in nature.
SECTION 2.57.1.
Income Payments Subject to Final Withholding Tax. The following forms of
income shall be subject to final withholding tax at the rates herein specified;
(A)

Income payments to a citizen or to a resident alien individual;

(1)
Interest from any peso bank deposit, and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements; royalties (except on books as well as
other literary works and musical compositions), prizes (except prizes amounting to ten thousand
pesos (P10,000.00) or less which shall be subject to tax under Sec. 24 (A) of the Code) and other
winnings (except Philippine Charity Sweepstakes winnings and lotto winnings) derived from
sources within the Philippines Twenty percent (20%).
(2)
Royalties on books, as well as other literary works and musical compositions Ten percent
(10%).
(3)
Interest income received by a resident individual taxpayer from a depository bank under
the Foreign Currency Deposit System Seven and one-half percent (7.5%).
(4)
Interest income from long-term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas
which was pre-terminated by the holder before the fifth (5th) year at the rates herein prescribed
to be deducted and withheld from the proceeds thereof based on the length of time that the
instrument was held by the taxpayer

Holding Period

Rate

Four (4) years to less than five (5) years

5%

Three (3) years to less than four (4) years 12%

Less than three (3) years

20%

(5)
Cash and/or property dividends actually or constructively received from a domestic
corporation, joint stock company, insurance or mutual fund companies or on the share of an
individual partner in the distributable net income after tax of a partnership (except general
professional partnership) or on the share of an individual in the net income after tax of an
association, a joint account or a joint venture or consortium of which he is a member or a coventurer.
6% - beginning January 1, 1998
8% - beginning January 1, 1999 and
10% - beginning January 1, 2000 and thereafter
The tax on cash and property dividends shall only be imposed on dividends which are declared
from profits of corporations made after December 31, 1997. prLL
(6)
On capital gains presumed to have been realized from the sale, exchange or other
disposition of real property located in the Philippines, classified as capital assets, including pacto
de retro sales and other forms of conditional sales based on the gross selling price or fair market
value as determined in accordance with Sec. 6(E) of the Code (i.e. the authority of the
Commissioner to prescribe the real property values), whichever is higher Six percent (6%).
In case of dispositions of real property made by individuals to the government or any of its
political subdivisions or agencies or to government-owned or controlled corporations, the tax to
be imposed shall be determined either under Section 24(A) of the Code for normal income tax for
individual citizens and residents or under Section 24(D)(1) of the Code for the final tax on capital
gains from sale of property at six percent (6%), at the option of the taxpayer. LLphil
(B)
Income Payment to Non-resident Aliens Engaged in Trade or Business in the Philippines.
The following forms of income derived from sources within the Philippines shall be subject to final
withholding tax in the hands of a non-resident alien individual engaged in trade or business
within the Philippines, based on the gross amount thereof and at the rates prescribed therefor:
(1)
On Certain Passive Income A tax of twenty (20%) percent is hereby imposed on certain
passive income received from all sources within the Philippines.
(a)
Cash and/or property dividend from a domestic corporation or from a joint stock company,
or from an insurance or mutual fund company or from a regional operating headquarter of a
multinational company;
(b)
Share in the distributable net income after tax of a partnership (except general
professional partnership) of which he is a partner, or share in the net income after tax of an
association, a joint account, or a joint venture of which he is a member or a co-venturer;
(c)
Interests from any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements;
(d)
Royalties (except royalties on books, as well as other literary works and musical
compositions which shall be subject to 10% final withholding tax);
(e)
Prizes (except prizes amounting to ten thousand pesos (P10,000.00) or less subject to tax
under Sec. 25 (A) (1) of the Code for the normal rates of income tax for individuals) and other
winnings (except Philippine Charity Sweepstakes winnings and lotto winnings);
(2)
Interest income derived from long-term deposit or investment in the form of savings,
common or individual trust funds, deposit substitutes, investment management accounts and
other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng
Pilipinas which was pre-terminated by the holder before the fifth (5th) year at the rates herein

prescribed to be deducted and withheld from the proceeds thereof based on the length of time
that the instrument was held by the taxpayer
Holding Period

Rate

Four (4) years to less than five (5) years

5%

Three (3) years to less than four (4) years 12%

Less than three (3) years

20%

(3)
On capital gains presumed to have been realized from the sale exchange or other
disposition of real property located in the Philippines, classified as capital assets, including pacto
de retro sales and other forms of conditional sales based on the gross selling price or fair market
value as determined in accordance with Sec. 6(E) of the Code (i.e. the authority of the
Commissioner to prescribe zonal values), whichever is higher Six percent (6%).
In case of dispositions of real property made by individuals to government or any of its political
subdivisions or agencies or to government-owned or controlled corporations, the tax to be
imposed shall be determined either under Section 24(A) of the code for the normal rate of income
tax for individual citizens and residents or under Section 24(D)(1) of the Code for the final tax on
capital gains from sale of property at six percent (6%), at the option of the taxpayer.
(C)
Income Derived from All Sources Within the Philippines by a Non-resident Alien Individual
Not Engaged in Trade or Business Within the Philippines. The following forms of income derived
from all sources within the Philippines shall be subject to a final withholding tax in the hands of a
non-resident alien individual not engaged in trade or business within the Philippines based on the
following amounts and at the rates prescribed therefor:
(1)
On the gross amount of income derived from all sources within the Philippines by a nonresident alien individual who is not engaged in trade or business in the Philippines as interest,
cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation,
remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains,
profits and income and capital gains Twenty five percent (25%). Cdpr
(2)
On capital gains presumed to have been realized from the sale, exchange or other
disposition of real property located in the Philippines, classified as capital assets, including pacto
de retro sales and other forms of conditional sales based on the gross selling price or fair market
value as determined in accordance with Sec. 6(E) of the Code (i.e. the authority of the
Commissioner to prescribe the real property values), whichever is higher Six percent (6%).
In case of dispositions of real property made by individuals to government or any of its political
subdivisions or agencies or to government-owned or controlled corporations, the tax to be
imposed shall be determined either under Sec. 24(a) of the Code for the rates of income tax for
individual citizens and residents or under Sec. 24(D)(1) of the Code for the final tax on capital
gains from sale of property at six percent (6%), at the option of the taxpayer.
(D)
Income Derived by Alien Individuals Employed by Regional or Area Headquarters and
Regional Operating Headquarters of Multinational Companies.
A final withholding tax
equivalent to fifteen percent (15%) shall be withheld by the withholding agent from the gross
income received by every alien individual occupying managerial and technical positions in
regional or area headquarters and regional operating headquarters and representative offices
established in the Philippines by multinational companies as salaries, wages, annuities,
compensation, remuneration, and other emoluments, such as honoraria and allowances, except
income which is subject to the fringe benefits tax , from such regional or area headquarters and
regional operating headquarters.
The same tax treatment shall apply to Filipinos employed and occupying the same as those of
alien employed by these multinational companies.
The term "multinational company" means a foreign firm or entity engaged in international trade
with its affiliates or subsidiaries or branch offices in the Asia Pacific Region and other foreign
markets.

(E)
Income Derived by Alien Individuals Employed by Offshore Banking Units. A final
withholding tax equivalent to fifteen (15%) shall be withheld by the withholding agent from the
gross income of alien individuals occupying managerial or technical positions in offshore banking
units established in the Philippines, as salaries, wages, annuities, compensations, remuneration
and other emoluments such as honoraria and allowances, received from such offshore banking
units. cdphil
The same tax treatment shall apply to Filipinos employed and occupying the same positions as
those of aliens who are employed by these offshore banking units.
(F)
Income of Aliens Employed by Foreign Petroleum Service Contractors and Subcontractors.
A final withholding tax equivalent to fifteen percent (15%) shall be withheld from the gross
income of an alien individual who is a permanent resident of a foreign country but who is
employed and assigned in the Philippines by a foreign service contractor or by a foreign service
subcontractor who is engaged in petroleum operations in the Philippines. His gross income
includes salaries, wages, annuities, compensation, remuneration and other emoluments, such as
honoraria and allowances, received from such contractor or subcontractor.
The same tax treatment shall apply to Filipinos who are employed and occupying the same
positions as those of aliens employed by a foreign petroleum service contractor or subcontractor.
(G)
Income Payment to a Domestic Corporation. The following items of income shall be
subject to a final withholding tax in the hands of a domestic corporation, based on the gross
amount thereof and at the rate of tax prescribed therefor:
(1)
Interest from any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust fund and similar arrangements derived from sources within the
Philippines Twenty Percent (20%).
(2)

Royalties derived from sources within the Philippines Twenty percent (20%).

(3)
Interest income derived from a depository bank under the Expanded Foreign Currency
Deposit System, otherwise known as a Foreign Currency Deposit Unit (FCDU) Seven and onehalf percent (7.5%).
(4)
Income derived by a depository bank under the Expanded Foreign Currency Deposit
System from foreign transactions with local commercial banks including branches of foreign
banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with
Foreign Currency Deposit System Units and other depository banks under the expanded foreign
currency deposit system including interest income from foreign currency loans granted by such
depository bank under the said expanded foreign currency deposit system to residents Ten
percent (10%).
(5)
On capital gains presumed to have been realized from the sale, exchange or other
disposition of real property located in the Philippines classified as capital assets, including pacto
de retro sales and other forms of conditional sales based on the gross selling price or fair market
value as determined in accordance with Sec. 6(E) of the Code, whichever is higher Six percent
(6%).
(H)
Income Payment to a Resident Foreign Corporation. The following forms of income shall
be subject to a final withholding tax in the hands of a foreign corporation, based on the gross
amount thereof and at the rate of tax prescribed therefor:
(1)
Offshore Banking Units On income derived by offshore banking units authorized by the
Bangko Sentral ng Pilipinas (BSP) from foreign currency transactions with local commercial banks
and branches of foreign banks that may be authorized by the BSP to transact business with
offshore banking units and other OBUs including interest income derived from foreign currency
loans granted to resident Ten percent (10%).
(2)
Tax on Branch Profit Remittances On any profit remitted by the Philippine branch of a
foreign corporation to its head office abroad based on the total profits applied or earmarked for
remittance without any deduction for the tax component thereof except those registered with the
Philippine Economic Zones Authority (PEZA) and other companies within the special economic

zones such as Subic Bay Metropolitan Authority (SBMA) and Clark Development Authority (CDA)
Fifteen percent (15%).
Interests, dividends, rents, royalties (including remunerations for technical services), salaries,
wages, premiums, annuities, emoluments or other fixed or determinable annual periodic or
casual gains, profits, income and capital gains received by a foreign corporation during each
taxable year from all sources within the Philippines shall not be considered as branch profits
unless the same are effectively connected with the conduct of its trade or business in the
Philippines.
(3)
Interest on any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements and royalties derived from
sources within the Philippines Twenty percent (20%).
(4)
Interest income derived from a Depository Bank under the Expanded Foreign Currency
Deposit system Seven and one-half percent (7.5%).
(5)
Income derived by a depository bank under the expanded foreign currency deposit system
from foreign currency transactions with local commercial banks including branches of foreign
banks that may be authorized by the Bangko Sentral ng Pilipinas to transact business with foreign
currency deposit system units and other depository banks under the expanded foreign currency
deposit system including interest income from foreign currency loans granted by such depository
banks under the said expanded foreign currency deposit system to resident Ten percent (10%).
(I)
Income Derived From all Sources Within the Philippines by Non- Resident Foreign
Corporation. The following shall be subject to final withholding tax based on the gross amount
of income and at the rate of tax prescribed therefor:
(1)
In general On gross income derived from all sources within the Philippines such as
interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums),
annuities, emoluments, or other fixed or determinable annual, periodic or casual gains, profits
and income and capital gains (except capital gains realized from sale, exchange, disposition of
shares of stock in any domestic corporation which is subject to capital gains tax under Sec. 28(B)
(5)(c) at the following rates:
34% - beginning January 1, 1998
33% - beginning January 1, 1999 and
32% - beginning January 1, 2000 and thereafter
(2)
Gross income from all sources within the Philippines derived by
cinematographic film owners, lessors or distributors Twenty five percent (25%).

non-resident

(3)
On the gross rentals, lease and charter fees, derived by non-resident owner or lessor of
vessels from leases or charters to Filipino citizens or corporations as approved by the Maritime
Industry Authority Four and one-half percent (4.5%).
(4)
On the gross rentals, charter and other fees derived by non-resident lessor of aircraft,
machineries and other equipment Seven and a half percent (7.5%).
(5)

Interest on foreign loans contracted on or after August 1, 1986 Twenty percent (20%).

(6)
Dividends received from a domestic corporation Fifteen percent (15%) of the cash
and/or property dividends received from a domestic corporation subject to the condition that the
country in which the nonresident foreign corporation is domiciled (a) shall allow a credit against
the tax due from the said nonresident foreign corporation which are equivalent to taxes deemed
to have been paid in the Philippines equal to twenty percent (20%) for 1997, nineteen percent
(19%) for 1998, eighteen percent (18%) for 1999 and seventeen percent (17%) thereafter, which
represents the difference between the regular income tax of thirty-five percent (35%) in 1997,
thirty four percent (34%) in 1998, thirty three percent (33%) in 1999, and thirty two percent
(32%) thereafter on corporations and the fifteen percent (15%) tax on dividends as herein
provided; or, (b) does not impose any income tax on dividends received from a domestic
corporation.

(J)
Fringe Benefits Granted to the Employee (Except Rank and File Employee) . There shall
be imposed a final tax of 34% beginning January 1, 1998; 33% beginning January 1, 1999 and
32% beginning January 1, 2000 and thereafter, on the grossed-up monetary value of fringe
benefits, granted or furnished by the employer to his employees (except rank and file as defined
in the Code). Fringe benefits however, which are required by the nature of or necessary to the
trade, business or profession of the employer, or where such fringe benefit is for the convenience
and advantage of the employer shall not be subject to the fringe benefits tax. prcd
The term fringe benefit means any good, service or other benefit furnished or granted in cash or
in kind by an employer to an individual employee (except rank and file employees) such as but
not limited to, the following:
(1)

Housing;

(2)

Expense account;

(3)

Vehicle of any kind;

(4)

Household personnel, such as maid, driver and others;

(5)
Interest on loan at less than market rate to the extent of the difference between the
market rate and actual rate granted;
(6)
Membership fees, dues and other expenses borne by the employer for the employee in
social and athletic clubs or other similar organizations;
(7)

Expenses for foreign travel;

(8)

Holiday and vacation expenses;

(9)

Educational assistance to the employee or his dependents; and

(10) Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows.
Fringe benefits granted to the following employees and taxable under Sec. 25 (B), (C), (D) and (E)
shall also be subject to the fringe benefit tax to wit:
Sec. 25(B)

Non-resident alien individual not engaged in trade or business in the Philippines.

Sec. 25(C)
Alien individual employed by regional or area headquarters and regional operating
headquarters of a multinational company, including any of its Filipino employees employed and
occupying the same position as those of its aforesaid alien employees;
Sec. 25(D)
Alien individual employed by an offshore banking unit of a foreign bank established
in the Philippines, including any of its Filipino employees employed and occupying the same
position as those of its aforesaid alien employees;
Sec. 25(E)
Alien individual employed by a foreign service contractor and subcontractor
engaged in petroleum operations in the Philippines, including any of its Filipino employees
employed and occupying the same position as those of its aforesaid alien employees.
The computation and the scheme for withholding the tax on fringe benefits shall be governed by
such revenue orders that the Commissioner shall issue as guidelines and clarifications for its
proper and consistent implementation.
(K)
Informer's Reward to Persons Instrumental in the Discovery of Violations of the National
Internal Revenue Code and the Discovery and Seizure of Smuggled Goods. The following
rewards shall be subject to a final withholding tax at the rate of ten percent (10%):
(1)
Those given to persons, except an internal revenue official or employee, or other public
official or employee or his relative within the sixth degree of consanguinity, who voluntarily gives
definite and sworn information not yet in the possession of the BIR, leading to the discovery of
frauds upon the Internal Revenue Laws or violations of any of the provisions thereof, thereby
resulting in the recovery of revenues, surcharges and fees and/or the conviction of the guilty
party and/or imposition of any fine or penalty.

(2)
Those given to an informer where the offender has offered to compromise the violation of
law committed by him and his offer has been accepted by the Commissioner and collected from
the offender.
The amount of reward shall be equivalent to ten percent (10%) of the revenues, surcharges or
fees recovered and/or fine or penalty imposed and collected or one million pesos (P1,000,000.00)
per case whichever is lower.
The reward shall be paid under the rules and regulations issued by the Secretary of Finance, upon
the recommendation of the Commissioner. However, such person shall not be entitled to a
reward, should no revenue, surcharges or fees be actually recovered or collected nor shall apply
to a case already pending or previously investigated or examined by the Commissioner or any of
his deputies or agents or examiners, or the Secretary of Finance or any of his deputies or agents.
(3)

Those given to persons instrumental in the discovery and seizure of such smuggled goods.

The amount of reward shall be equivalent to ten percent of the market value of the smuggled and
confiscated goods or one million pesos (P1,000,000.00) per case whichever is lower. prLL
SECTION 2.57.2.
Income Payment Subject to Creditable Withholding Tax and Rates Prescribed
Thereon. Except as herein otherwise provided, there shall be withheld a creditable income tax
at the rates herein specified for each class of payee from the following items of income payments
to persons residing in the Philippines:
(A)
Professional fees, talent fees, etc., for services rendered by individuals On the gross
professional, promotional and talent fees or any other form of remuneration for the services of
the following individuals Ten percent (10%);
(1)
Those individually engaged in the practice of professions or callings: lawyers; certified
public accountants; doctors of medicine; architects; civil, electrical, chemical, mechanical,
structural, industrial, mining, sanitary, metallurgical and geodetic engineers; marine surveyors;
doctors of veterinary science; dentist; professional appraisers; connoisseurs of tobacco;
actuaries; and interior decorators;
(2)
Professional entertainers such as but not limited to actors and actresses, singers and
emcees;
(3)

Professional athletes including basketball players, pelotaris and jockeys;

(4)

All directors involved in movies, stage, radio, television and musical productions;

(5)

Insurance agents and insurance adjusters;

(6)

Management and technical consultants;

(7)

Bookkeeping agents and agencies;

(8)

Other recipients of talent fees;

(9)
Fees of directors who are not employees of the company paying such fees, whose duties
are confined to attendance at and participation in the meetings of the board of directors.
The amounts subject to withholding under this paragraph shall include not only fees, but also per
diems, allowances and any other form of income payments. In the case of professional
entertainers, athletes, and all recipient of talent fees, the amount subject to withholding tax shall
also include amounts paid to them in consideration for the use of their names or pictures in print,
broadcast, or other media or for public appearances, for purposes of advertisements or sales
promotion.
(B)
Professional fees, talent fees, etc. for services of taxable juridical persons On the gross
professional, promotional and talents fees, or any other form of remuneration enumerated in the
preceding subparagraph for the services of taxable juridical persons Five percent (5%).
(C)
Rentals On gross rental for the continued use or possession of real property used in
business which the payor or obligor has not taken or is not taking title, or in which he has no
equity Five percent (5%).

(D)
Cinematographic film rentals and other payments On gross payments to resident
individuals and corporate cinematographic film owners, lessors or distributors Five percent
(5%).
(E)
Income payments to certain contractors On gross payments to the following contractors,
whether individual or corporate One percent (1%).
(1)
General engineering contractors Those whose principal contracting business in
connection with fixed works requiring specialized engineering knowledge and skill including the
following divisions or subjects:
(a)

Reclamation works;

(b)

Railroads;

(c)

Highways, streets and roads;

(d)

Tunnels;

(e)

Airports and airways;

(f)

Waste reduction plants;

(g)

Bridges, overpasses, underpasses and other similar works;

(h)
Pipelines and other systems for the transmission of petroleum and other liquid or gaseous
substances;
(i)

Land leveling;

(j)

Excavating;

(k)

Trenching;

(l)

Paving; and

(m)

Surfacing work.

(2)
General Building contractors Those whose principal contracting business is in
connection with any structure built, for the support, shelter and enclosure of persons, animals,
chattels, or movable property of any kind, requiring in its construction the use of more than two
unrelated building trades or crafts, or to do or superintend the whole or any part thereto. Such
structure includes sewers and sewerage disposal plants and systems, parks, playgrounds, and
other recreational works, refineries, chemical plants and similar industrial plants requiring
specialized engineering knowledge and skills, powerhouse, power plants and other utility plants
and installation, mines and metallurgical plants, cement and concrete works in connection with
the above-mentioned fixed works.
(3)
Specialty Contractors Those whose operations pertain to the performance of
construction work requiring special skill and whose principal contracting business involves the
use of specialized building trades or crafts. cdasia
(4)

Other contractors

(a)

Filling, demolition and salvage work contractors and operators of mine drilling apparatus;

(b)

Operators of dockyards;

(c)
Persons engaged in the installation of water system, and gas or electric light, heat or
power;
(d)

Operators of stevedoring, warehousing or forwarding establishments;

(e)
Transportation contractors which include common carriers for the carriage of goods and
merchandise of whatever kind by land, air or water, where the gross payments by the payor to
the same payee amounts to at least two thousand pesos (P2,000) per month, regardless of the
number of shipments during the month ;
(f)

Printers, bookbinders, lithographers and publishers except those principally engaged in

the publication or printing of any newspaper, magazine, review or bulletin which appears at
regular intervals, with fixed prices for subscription and sale;
(g)
Messengerial, janitorial, private detective and/or security agencies, credit and/or collection
agencies and other business agencies;
(h)

Advertising agencies, exclusive of gross payments to media;

(i)

Independent producers of television, radio and stage performances or shows;

(j)

Independent producers of "jingles";

(k)

Labor recruiting agencies

(l)
Persons engaged in the installation of elevators, central air conditioning units, computer
machines and other equipment and machineries and the maintenance services thereon;
(m)

Persons engaged in the sale of computer services;

(n)

Persons engaged in landscaping services;

(o)

Persons engaged in the collection and disposal of garbage;

(p)

TV and radio station operators on sale of TV and radio airtime; and

(q)

TV and radio blocktimers on sale of TV and radio commercial spots.

(F)
Income distribution to the beneficiaries. On income distributed to the beneficiaries of
estates and trust as determined under Sec. 60 of the Code, except such income subject to final
withholding tax and tax exempt income Fifteen percent (15%);
(G)
Income payments to certain brokers and agents. On gross commissions of customs,
insurance, real estate and commercial brokers and fees of agents of professional entertainers
Five percent (5%);
(H)
Income payments to partners of general professional partnerships . Income payments
made periodically or at the end of the taxable year by a general professional partnership to the
partners, such as drawings, advances, sharings, allowances, stipends, etc. Ten percent (10%);
(I)
Professional fees paid to medical practitioners. Any amount collected for and paid to
medical practitioners by hospitals and clinics or paid by patients to the medical practitioners
through the hospital or clinic Ten percent (10%);
(J)
Gross selling price or total amount of consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer of . Real property, other than capital assets, sold
by an individual, corporation, estate, trust, trust fund or pension fund and the seller/transferor is
habitually engaged in the real estate business in accordance with the following schedule
Those which are exempt from a withholding
tax at source as prescribed in Sec. 2.57.5 of
these regulations

Exempt

With a selling price of five hundred thousand

pesos (P500,000.00) or less 1.5%
With a selling price of more than five hundred
thousand pesos (P500,000.00) but not more
than two million pesos (P2,000,000.00)

3.0%

With selling price of more than two million pesos

(P2,000,000.00)

5.0%

A seller/transferor must show proof of registration with HLURB or HUDCC to be considered as

habitually engaged in the real estate business.

Real property, other than capital asset, by an individual, estate, trust, trust fund or pension fund
or by a corporation who is not habitually engaged in the real estate business Seven and onehalf percent (7.5%). LLphil
Gross selling price shall mean the consideration stated in the sales document or the fair market
value determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher.
In an exchange, the fair market value of the property received in exchange, as determined in the
Income Tax Regulations shall be used.
Where the consideration or part thereof is payable on installment, no withholding of tax is
required to be made on the periodic installment payments where the buyer is an individual not
engaged in trade or business. In such a case, the applicable rate of tax based on the entire
consideration shall be withheld on the last installment or installments to be paid to the seller.
However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax
shall be deducted and withheld by the buyer on every installment.
(K)
Additional income payments to government personnel from importers, shipping and airline
companies, or their agents . On gross additional payments by importers, shipping and airline
companies, or their agents to government personnel for overtime services as authorized by law
Fifteen percent (15%);
For this purpose, the importers, shipping and airline companies or their agents, shall be the
withholding agents of the Government;
(L)
Certain income payments made by credit card companies. On the gross amounts paid
by any credit card company in the Philippines to any business entity, whether a natural or
juridical person, representing the sales of goods/services made by the aforesaid business entity
to cardholders One half percent (1/2%);
(M)
Income payments made by the top five thousand (5,000) corporations. Income
payments made by any of the top five thousand (5,000) corporations, as determined by the
Commissioner, to their local supplier of goods One percent (1%);
(1)
The term "goods" pertains to tangible personal property. It does not include intangible
personal property as well as real property.
(2)
The term "local suppliers of goods" pertains to a supplier from whom any of the top five
thousand (5,000) corporations, as determined by the Commissioner, regularly makes its
purchases of goods. As a general rule, this term does not include a casual purchase of goods, that
is, purchases made from non-regular suppliers and oftentimes involving single purchases.
However, a single purchase which involves one hundred thousand pesos (P100,000.00) or more
shall be subject to a withholding tax.
(3)
A corporation shall not be considered a withholding agent for purposes of this Section,
unless such corporation has been determined and duly notified in writing by the Commissioner
that it has been selected as one of the top five thousand (5,000) corporations.
(4)
The withholding agent shall submit on a semestral basis a list of its regular suppliers of
goods to the Revenue District Office (RDO) having jurisdiction over the withholding agent's
principal place of business on or before July 31 and January 31 of each year.
(N)
Income payments by government . Income payments, except any single purchase which
is P10,000 and below, which are made by a government office, national or local, including
government-owned or controlled corporations, on their purchases of goods from local suppliers
One percent (1%);
A government-owned or controlled corporation which is listed as one of the top five thousand
(5,000) corporations shall withhold the tax in its capacity as a government-owned or controlled
corporation rather than as one of the top five thousand (5,000) corporations. cdasia
SECTION 2.57.3.
Persons Required to Deduct and Withhold. The following persons are
hereby constituted as withholding agents for purposes of the creditable tax required to be
withheld on income payments enumerated in Section 2.57.2:

(A)

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

(B)
An individual, with respect to payments made in connection with his trade or business.
However, insofar as taxable sale, exchange or transfer of real property is concerned, individual
buyers who are not engaged in trade or business are also constituted as withholding agents;
(C)
All government offices including government-owned or controlled corporations, as well as
provincial, city and municipal governments.
SECTION 2.57.4.
Time of Withholding . The obligation of the payor to deduct and withhold
the tax under Section 2.57 of these regulations arises at the time an income is paid or payable,
whichever comes first, the term "payable" refers to the date the obligation become due,
demandable or legally enforceable.
SECTION 2.57.5.
Exemption from Withholding. The withholding of creditable withholding
tax prescribed in these Regulations shall not apply to income payments made to the following:
(A)
National government and its instrumentalities, including provincial, city or municipal
governments;
(B)
Persons enjoying exemption from payment of income taxes pursuant to the provisions of
any law, general or special, such as but not limited to the following:
(1)
Sales of real property by a corporation which is registered with and certified by the
Housing and Land Use Regulatory Board (HLURB) or HUDCC as engaged in socialized housing
project where the selling price of the house and lot or only the lot does not exceed one hundred
eighty thousand pesos (P180,000) in Metro Manila and other highly urbanized areas and one
hundred fifty thousand pesos (P150,000) in other areas or such adjusted amount of selling price
for socialized housing as may later be determined and adopted by the HLURB, as provided under
Republic Act No. 7279 and its implementing regulations;
(2)
Corporations registered with the Board of Investments and enjoying exemption from the
income tax provided by Republic Act No. 7916 and the Omnibus Investment Code of 1987;
(3)
Corporations which are exempt from the income tax under Sec. 30 of the NIRC, to wit: the
Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine
Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO) and the
Philippine Amusement and Gaming Corporation (PAGCOR); However, the income payments
arising from any activity which is conducted for profit or income derived from real or personal
property shall be subject to a withholding tax as prescribed in these regulations.
SECTION 2.58.
(A)

Returns and Payment of Taxes Withheld at Source.

Monthly return and payment of taxes withheld at source

(1)
WHERE TO FILE Creditable and final withholding taxes deducted and withheld by the
withholding agent shall be paid upon filing a return in duplicate with the authorized agent banks
located within the Revenue District Office (RDO) having jurisdiction over the residence or principal
place of business of the withholding agent. In places where there is no authorized agent banks,
the return shall be filed directly with the Revenue District Officer, Collection Officer or the duly
authorized Treasurer of the city or municipality where the withholding agent's residence or
principal place of business is located, or where the withholding agent is a corporation, where the
principal office is located except in cases where the Commissioner otherwise permits.
(2)

WHEN TO FILE

(a)
The withholding tax return, whether creditable or final, shall be filed and payments should
be made within ten (10) days after the end of each month except for taxes withheld for December
which shall be filed on or before January 25 of the following year.
(b)
For large taxpayers , the filing of the return and the payment of tax shall be made within
twenty five (25) days after the end of each month.
(c)
The return for final withholding taxes on interest from any currency bank deposit and yield
or any other monetary benefit from deposit substitutes and from trust funds and similar

arrangements shall be filed and the payment made within twenty five (25) days from the close of
each calendar quarter.
(B)
Withholding tax statement for taxes withheld Every payor required to deduct and
withhold taxes under these regulations shall furnish each payee, whether individual or corporate,
with a withholding tax statement, using the prescribed form (BIR Form 2307) showing the income
payments made and the amount of taxes withheld therefrom, for every month of the quarter
within twenty (20) days following the close of the taxable quarter employed by the payee in filing
his/its quarterly income tax return. Upon request of the payee, however, the payor must furnish
such statement to the payee simultaneously with the income payment. For final withholding
taxes, the statement should be given to the payee on or before January 31 of the succeeding
year. dctai
(C)
Annual information return for income tax withheld at source. The payor is required to
file with the Commissioner, Revenue Regional Director, Revenue District Officer, Collection Agent
in the city or municipality where the payor has his legal residence or principal place of business,
where the government office is located in the case of a government agency, on or before January
31 of the following year in which payments were made, an Annual Information Return of Income
Tax Withheld at Source (Form No. 1604), showing among others the following information:
(1)

Name, address and taxpayer's, identification number (TIN); and

(2)
Nature of income payments, gross amount and amount of tax withheld from each payee
and such other information as may be required by the Commissioner.
If the payor is the Government of the Philippines or any political subdivision or agency thereof, or
any government-owned or controlled corporation, the return shall be made by the officer or
employee having control of the payments or by any designated officer or employee.
SECTION 2.58.1.
Income of Recipient. Income upon which any creditable tax is required to
be withheld at source shall be included in the return of its recipient. The excess of the withheld
tax over the tax due on his return shall be refunded to him subject to the authority of the
Commissioner to refund taxes under Sec. 204 of the NIRC. If the income tax collected at source is
less than the tax due on his return, the difference shall be paid in accordance with the provisions
of Sec. 56 of the Code.
The taxes withheld by the withholding agents shall be maintained in separate accounts and
should not be commingled with any other funds of the withholding agent. They shall be
considered as a trust fund held for government until they are remitted.
SECTION 2.58.2.
Registration with the Register of Deeds. Deeds of conveyances of land or
land and building/improvement thereon arising from sales, barters, or exchanges subject to the
creditable expanded withholding tax shall not be recorded by the Register of Deeds unless the
Commissioner or his duly authorized representative has certified that such transfers and
conveyances have been reported and the expanded withholding tax, inclusive of the
documentary stamp tax, due thereon have been fully paid, pursuant to the provisions of Sections
57 and 196 of the Code , respectively.
The Register of Deeds shall annotate on the Transfer Certificate of Title of the said property such
information required under Section 58 (E) of the Code. In case of any violation of the said
requirement, he shall be liable to the penalties provided under Section 269 of the said Code.
SECTION 2.58.3.

Claim for Tax Credit or Refund.

(A)
The amount of creditable tax withheld shall be allowed as a tax credit against the income
tax liability of the payee in the quarter of the taxable year in which income was earned or
received.
(B)
Claims for tax credit or refund of any creditable income tax which was deducted and
withheld on income payments shall be given due course only when it is shown that the income
payment has been declared as part of the gross income and the fact of withholding is established
by a copy of the withholding tax statement duly issued by the payor to the payee showing the
amount paid and the amount of tax withheld therefrom.

Proof of remittance is the responsibility of the withholding agent.

(C)
Excess Credits An individual or corporate taxpayer's excess expanded withholding tax
credits for the taxable quarter/year shall automatically be allowed as a credit against his income
tax due for the taxable quarters/years immediately succeeding the taxable quarters/years in
which the excess credit arose, provided he submits with his income tax return, a copy of the first
page of his income tax return for the previous taxable period showing the amount of his excess
withholding tax credits, and on which return he has not opted for a cash refund or tax credit
certificate. cdtai
(1)
If in lieu of the automatic application of his excess credit, the taxpayer wants a cash refund
or a tax credit certificate for use in payment of his other national internal revenue tax liabilities,
he shall make a written request therefor, within two years after the payment of the tax (Ref. Secs.
204(c) and 229 of the Code ), provided however, that if the taxpayer has indicated in his income
tax return his option for either a cash refund or a tax credit certificate, such indication shall be
considered sufficient for the purpose. Upon filing of his request, the taxpayer's income tax return
showing the excess expanded withholding tax credits shall be examined. The excess expanded
withholding tax so determined, shall be refunded/credited to the taxpayer.
(2)

Sample computation of application of excess credits-ordinary

Taxable Period
1997 1998-QTR1
Tax Due

1998-QTR2

1998-QTR3

1,000 200

200

500

(1,500)

(500) (300) 0

Less: Tax
Withheld
Net Tax
Payable/
Creditable

(500) (300) (100) 500

In the above illustration, there is an excess credit in 1997 that can be applied to the subsequent
quarter. And if the option to apply the excess credit is initiated in the first quarter of 1998, the
taxpayer cannot avail of a refund/tax credit certificate of the excess credit of P500 in 1997.
SECTION 2.58.4.
Verification of Returns and Statement. Any return, statement or other
documents required to be filed under these Regulations shall contain a written declaration that it
is made under penalties of perjury and such declaration shall be under oath.
It shall be the duty of tax officials to accept the income tax return or other documents submitted
under oath.
SECTION 2.58.5.
Requirement for Deductibility. Any income payment which is otherwise
deductible under the Code shall be allowed as a deduction from the payor's gross income only if
it is shown that the income tax required to be withheld has been paid to the Bureau in
accordance with Secs. 57 and 58 of the Code.
A deduction will also be allowed in the following cases where no withholding of tax was made:
LexLib
(A)
The payee reported the income and the withholding agent/taxpayer pays the tax,
including the interest incident to the failure to withhold the tax, and surcharges, if applicable, at
the time of the original audit and investigation;
(B)
The recipient/payee failed to report the income on the due date thereof, but the
withholding agent/taxpayer pays the tax, including the interest incident to the failure to withhold
the tax and surcharges, if applicable, at the time of the original audit and investigation;
(C)
The withholding agent erroneously underwithheld the tax but pays the difference between
the correct amount and the amount of tax withheld, including the interest, incident to such error,
and surcharges, if applicable, at the time of the original audit and investigation.

SECTION 2.58.6.
Tax Paid by Recipient of Income. Every person who is required to withhold
the tax from the compensation of an employee is liable for the payment of such tax to the BIR.
Such liability stays even if the employee subsequently pays the tax. The payment of the tax by
the employee does not relieve the employer from the liability for penalties and/or additions to the
tax for failure to deduct and withhold within the time prescribed by law or regulations. The
employer will not be relieved of his liability for payment of the tax required to be withheld unless
he can show that the tax has been paid by the employee. The amount of any tax
withheld/collected by the employer is a special fund in trust for the government of the
Philippines.
SECTION 2.78.
Withholding Tax on Compensation. The withholding of tax on
compensation income is a method of collecting the income tax at source upon receipt of the
income. It applies to all employed individuals whether citizens or aliens, deriving income from
compensation for services rendered in the Philippines. The employer is constituted as the
withholding agent.
SECTION 2.78.1.

Withholding of Income Tax on Compensation Income.

(A)
Compensation Income Defined. In general, the term "compensation" means all
remuneration for services performed by an employee for his employer under an employeremployee relationship, unless specifically excluded by the Code.
The name by which the remuneration for services is designated is immaterial. Thus, salaries,
wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation,
entertainment and the like); fees including director's fees, if the director is, at the same time, an
employee of the employer/corporation; taxable bonuses and fringe benefits except those which
are subject to the fringe benefits tax under Sec. 33 of the Code; taxable pensions and retirement
pay; and other income of a similar nature constitute compensation income.
The basis upon which the remuneration is paid is immaterial in determining whether the
remuneration constitutes compensation. Thus, it may be paid on the basis of piece-work, or a
percentage of profits; and may be paid hourly, daily, weekly, monthly or annually. cdrep
Remuneration for services constitutes compensation even if the relationship of employer and
employee does not exist any longer at the time when payment is made between the person in
whose employ the services had been performed and the individual who performed them.
(1)
Compensation paid in kind. Compensation may be paid in money or in some medium
other than money, as for example, stocks, bonds or other forms of property. If services are paid
for in a medium other than money, the fair market value of the thing taken in payment is the
amount to be included as compensation subject to withholding. If the services are rendered at a
stipulated price, in the absence of evidence to the contrary, such price will be presumed to be the
fair market value of the remuneration received. If a corporation transfers to its employees its own
stock as remuneration for services rendered by the employee, the amount of such remuneration
is the fair market value of the stock at the time the services were rendered .
(2)
Living quarters or meals. If a person receives a salary as remuneration for services
rendered, and in addition thereto, living quarters or meals are provided, the value to such person
of the quarters and meals so furnished shall be added to the remuneration paid for the purpose
of determining the amount of compensation subject to withholding. However, if living quarters or
meals are furnished to an employee for the convenience of the employer, the value thereof need
not be included as part of compensation income.
(3)
Facilities and privileges of a relatively small value. Ordinarily, facilities and privileges
(such as entertainment, medical services, or so called "courtesy" discounts on purchases),
furnished or offered by an employer to his employees generally, are not considered as
compensation subject to withholding if such facilities or privileges are of relatively small value
and are offered or furnished by the employer merely as a means of promoting the health,
goodwill, contentment, or efficiency of his employees.
Where compensation is paid in property other than money, the employer shall make necessary
arrangements to ensure that the amount of the tax required to be withheld is available for

payment to the Commissioner.

(4)
Tips and gratuities. Tips or gratuities paid directly to an employee by a customer of the
employer which are not accounted for by the employee to the employer are considered as
taxable income but not subject to withholding.
(5)
Pensions, retirement and separation pay. Pensions, retirement and separation pay
constitute compensation subject to withholding, except those provided under Subsection B of this
section.
(6)

Fixed or variable transportation, representation and other allowances

(a)
IN GENERAL, fixed or variable transportation, representation and other allowances which
are received by a public officer or employee or officer or employee of a private entity, in addition
to the regular compensation fixed for his position or office, is compensation subject to
withholding.
(b)
Any amount paid specifically, either as advances or reimbursements for travelling,
representation and other bonafide ordinary and necessary expenses incurred or reasonably
expected to be incurred by the employee in the performance of his duties are not compensation
subject to withholding, if the following conditions are satisfied:
(i)
It is for ordinary and necessary travelling and representation or entertainment expenses
paid or incurred by the employee in the pursuit of the trade, business or profession; and
(ii)
The employee is required to account/liquidate for the foregoing expenses in accordance
with the specific requirements of substantiation for each category of expenses pursuant to Sec.
34 of the Code. The excess of actual expenses over advances made shall constitute taxable
income if such amount is not returned to the employer. Reasonable amounts of
reimbursements/advances for travelling and entertainment expenses which are pre-computed on
a daily basis and are paid to an employee while he is on an assignment or duty need not be
subject to the requirement of substantiation and to withholding.
(7)
Vacation and sick leave allowances. Amounts of "vacation allowances or sick leave
credits" which are paid to an employee constitute compensation. Thus, the salary of an employee
on vacation or on sick leave, which are paid notwithstanding his absence from work, constitutes
compensation. However, the monetized value of unutilized vacation leave credits of ten (10) days
or less which were paid to the employee during the year are not subject to income tax and to the
withholding tax .
(8)
Deductions made by employer from compensation of employee. Any amount which is
required by law to be deducted by the employer from the compensation of an employee including
the withheld tax is considered as part of the employee's compensation and is deemed to be paid
to the employee as compensation at the time the deduction is made.
(9)
Remuneration for services as employee of a nonresident alien individual or foreign entity.
The term "compensation" includes remuneration for services performed by an employee of a
nonresident alien individual, foreign partnership or foreign corporation, whether or not such alien
individual or foreign entity is engaged in trade or business within the Philippines. Any person
paying compensation on behalf of a non-resident alien individual, foreign partnership, or foreign
corporation which is not engaged in trade or business within the Philippines is subject to all
provisions of law and regulations applicable to an employer.
(10) Compensation for services performed outside the Philippines. Remuneration for services
performed outside the Philippines by a resident citizen for a domestic or a resident foreign
corporation or partnership, or for a non-resident corporation or partnership, or for a non-resident
individual not engaged in trade or business in the Philippines shall be treated as compensation
which is subject to tax.
A non-resident citizen as defined in these regulations is taxable only on income derived from
sources within the Philippines. In general, the situs of the income whether within or without the
Philippines, is determined by the place where the service is rendered.
(B)

Exemptions from withholding tax on compensation. The following income payments are

exempted from the requirement of withholding tax on compensation:

(1)

Remunerations received as an incident of employment, as follows:

(a)
Retirement benefits received under Republic Act under 7641 and those received by
officials and employees of private firms, whether individual or corporate, under a reasonable
private benefit plan maintained by the employer which meet the following requirements:
(i)

The plan must be reasonable;

(ii)

The benefit plan must be approved by the Bureau;

(iii)
The retiring official or employee must have been in the service of the same employer for
at least ten (10) years and is not less than fifty (50) years of age at the time of retirement; and
(iv)
The retiring official or employee should not have previously availed of the privilege under
the retirement benefit plan of the same or another employer.
(b)
Any amount received by an official or employee or by his heirs from the employer due to
death, sickness or other physical disability or for any cause beyond the control of the said official
or employee, such as retrenchment, redundancy, or cessation of business. cdrep
The phrase "for any cause beyond the control of the said official or employee" connotes
involuntariness on the part of the official or employee. The separation from the service of the
official or employee must not be asked for or initiated by him. The separation was not of his own
making. Whether or not the separation is beyond the control of the official or employee, being
essentially a question of fact, shall be determined on the basis of prevailing facts and
circumstances. It shall be duly established by the employer by competent evidence which should
be attached to the monthly return for the period in which the amount paid due to the involuntary
separation was made.
Amounts received by reason of involuntary separation remain exempt from income tax even if
the official or the employee, at the time of separation, had rendered less than ten (10) years of
service and/or is below fifty (50) years of age.
Any payment made by an employer to an employee on account of dismissal, constitutes
compensation regardless of whether the employer is legally bound by contract, statute, or
otherwise, to make such payment.
(c)
Social security benefits, retirement gratuities, pensions and other similar benefits received
by residents or non-resident citizens of the Philippines or aliens who come to reside permanently
in the Philippines from foreign government agencies and other institutions private or public;
(d)
Payments of benefits due or to become due to any person residing in the Philippines under
the law of the United States administered by the United States Veterans Administration;
(e)
and

Payments of benefits made under the Social Security System Act of 1954 as amended ;

(f)
Benefits received from the GSIS Act of 1937, as amended , and the retirement gratuity
received by government officials and employees.
(2)

Remuneration paid for agricultural labor

(a)
Remuneration for services which constitute agricultural labor and paid entirely in products
of the farm where the labor is performed is not subject to withholding. In general, however, the
term, "agricultural labor" does not include services performed in connection with forestry,
lumbering or landscaping.
(b)
Remuneration paid entirely in products of the farm where the labor is performed by an
employee of any person in connection with any of the following activities is excepted as
remuneration for agricultural labor:
(i)

The cultivation of soil;

(ii)
The raising, shearing, feeding, caring for, training, or management of livestock, bees,
poultry, or wildlife; or

(iii)
The raising or harvesting of any other agricultural or horticultural commodity. The term
"farm" as used in this subsection includes, but is not limited to stock, dairy, poultry, fruits and
truck farms, plantations, ranches, nurseries ranges, orchards, and such greenhouse and other
similar structures as are used primarily for the raising of agricultural or horticultural commodities.
(c)
The remuneration paid entirely in products of the farm where labor is performed for the
following services in the employ of the owner or tenant or other operator of one or more farms is
not considered as remuneration for agricultural labor, provided the major part of such services is
performed on a farm:
(i)
Services performed in connection with the operation, management, conservation,
improvement, or maintenance of any such farms or its tools or equipments; or
(ii)
Services performed in salvaging timber, or clearing land brush and other debris left by a
hurricane or typhoon.
The services described in (i) above may include for example, services performed by carpenters,
painters, mechanics, farm supervisors, irrigation engineers, bookkeepers, and other skilled or
semi-skilled workers, which contribute in any way to the conduct of the farm or farms, as such,
operated by the person employing them, as distinguished from any other enterprise in which
such person may be engaged. Since the services described in this paragraph must be performed
in the employ of the owner or tenant or other operator of the farm, the exception does not extend
to remuneration paid for services performed by employees of a commercial painting concern, for
example, which contracts with a farmer to renovate his farm properties. cdasia
(d)
Remuneration paid entirely in products of the farm where labor is performed by an
employee in the employ of any person in connection with any of the following operations is not
considered as remuneration for agricultural labor without regard to the place where such services
are performed:
(i)

The making of copra, stripping of abaca, etc.;

(ii)

The hatching of poultry;

(ii)

The raising of fish;

(iv)
The operation or maintenance of ditches, canals, reservoirs, or waterways used exclusively
for supplying or storing water for farming purposes; and
(v)
The production or harvesting of crude gum from a living tree or the processing of such
crude gum into gum spirits or turpentine and gum resin, provided such processing is carried on
by the original producer of such crude gum.
(e)
Remuneration paid entirely in products of the farm where labor is performed by an
employee in the employ of a farmer or a farmer's cooperative, organization or group in the
handling, planting, drying, packing, packaging, processing, freezing, grading, storing or delivering
to storage or to market or to carrier for transportation to market, of any agricultural or
horticultural commodity, produced by such farmer or farmer-members of such organization or
group, is excepted as remuneration for agricultural labor. Services performed by employees of
such farmer or farmer's organization or group in handling, planting, drying, packaging,
processing, freezing, grading, storing, or delivering to storage or to market or to carrier for
transportation to market of commodities produced by persons other than such farmer or
members of such farmer's organization or group are not performed "as an incident to ordinary
farming operation".
All payments made in cash or other forms other than products of the farm where labor is
performed, for services constituting agricultural labor as explained above, are not within the
exception.
(3)
Remuneration for domestic services. Remuneration paid for services of a household
nature performed by an employee in or about the private home of the person by whom he is
employed is not subject to withholding. However, the services of household personnel furnished
to an employee (except rank and file employees) by an employer shall be subject to the fringe
benefits tax pursuant to Sec. 33 of the Code, as amended.

A private home is the fixed place of abode of an individual or family. If the home is utilized
primarily for the purpose of supplying board or lodging to the public as a business enterprise, it
ceases to be a private home and remuneration paid for services performed therein is not
exempted.
In general, services of a household nature in or about a private home include services rendered
by cooks, maids, butlers, valets, laundresses, gardeners, chauffeurs of automobiles for family
use.
The remuneration paid for the services above enumerated which are performed in or about
rooming or lodging houses, boarding houses, clubs, hotels, hospitals or commercial offices or
establishments is considered as compensation;
Remuneration paid for services performed as a private secretary, even if they are performed in
the employer's home is considered as compensation;
(4)
Remuneration for casual labor not in the course of an employer's trade or business. The
term "casual labor" includes labor which is occasional, incidental or regular. The expression "not
in the course of the employer's trade or business" includes labor that does not promote or
advance the trade or business of the employer.
Thus, any remuneration paid for labor which is occasional, incidental or irregular, and does not
promote or advance the employer's trade or business, is not considered as compensation.
cdasia
EXAMPLE: A's business is that of operating a sawmill. He employs B, a carpenter, at an hourly
wage to repair his home. B's work is irregular and he spends, the greater part of two days in
completing the work. Since B's labor is casual and is not in the course of A's business, the
remuneration paid for such services is exempted.
Any remuneration paid for casual labor, that is, labor which is occasional, incidental or irregular,
but which is rendered in the course of the employer's trade or business, is considered as
compensation.
EXAMPLE: E is engaged in the business of operating a department store. He employs additional
clerks for a short period. While the services of the clerks may be casual, they are rendered in the
course of the employer's trade or business and therefore the remuneration paid for such services
is considered as compensation.
Any remuneration paid for casual labor performed for a corporation is considered as
compensation;
(5)
Compensation for services by a citizen or resident of the Philippines for a foreign
government or an international organization. Remuneration paid for services performed as an
employee of a foreign government or an international organization is exempted. The exemption
includes not only remuneration paid for services performed by ambassadors, ministers and other
diplomatic officers and employees but also remuneration paid for services performed as consular
or other officer or employee of a foreign government or as a non-diplomatic representative of
such government.
(6)
Damages. Actual, moral, exemplary and nominal damages received by an employee or
his heirs pursuant to a final judgment or compromise agreement arising out of or related to an
employer-employee relationship.
(7)
Life Insurance. The proceeds of life insurance policies paid to the heirs or beneficiaries
upon the death of the insured, whether in a single sum or otherwise, provided however, that
interest payments agreed under the policy for the amounts which are held by the insured under
such an agreement shall be included in the gross income.
(8)
Amount received by the insured as a return of premium. The amount received by the
insured, as a return of premium or premiums paid by him under life insurance, endowment, or
annuity contracts either during the term or at the maturity of the term mentioned in the contract
or upon surrender of the contract.

(9)
Compensation for injuries or sickness. Amounts received through Accident or Health
Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or
sickness, plus the amount of any damages received whether by suit or agreement on account of
such injuries or sickness.
(10) Income exempt under treaty. Income of any kind to the extent required by any treaty
obligation binding upon the Government of the Philippines.
(11)

Thirteenth (13th ) month pay and other benefits.

(a)
Thirteenth (13th) month pay equivalent to the mandatory one (1) month basic salary of
officials and employees of the government, (whether national or local), including governmentowned or controlled corporations, and or private offices received after the twelfth (12th) month
pay; and
(b)
Other benefits such as Christmas bonus, productivity incentive bonus, loyalty award, gifts
in cash or in kind and other benefits of similar nature actually received by officials and employees
of both government and private offices.
The above stated exclusions (a) and (b) shall cover benefits paid or accrued during the year
provided that the total amount shall not exceed thirty thousand pesos (P30,000.00) which may be
increased through rules and regulations issued by the Secretary of Finance, upon
recommendation of the Commissioner, after considering, among others, the effect on the same of
the inflation rate at the end of the taxable year.
(12) GSIS, SSS, Medicare and other contributions. GSIS, SSS, Medicare and Pag-Ibig
contributions, and union dues of individual employees.
SECTION 2.78.2.
Payroll Period . The term "payroll period" means the period of services for
which a payment of compensation is ordinarily made to an employee by his employer. It is
immaterial that the compensation is not always paid at regular intervals.
EXAMPLE: if an employer ordinarily pays the weekly wages of his employees at the end of the
week, but if for some reason a particular employee receives payment of his salaries for the past
week in the middle of the current week and receives the remainder at the end of the same week,
the payroll period is still the calendar week; or if, instead, the employee is sent on a three (3)week trip by his employer and receives at the end of the trip a single compensation payment for
three (3)-week services, the payroll period is still the calendar week, and the compensation
payment shall be treated as though it were three (3) separate weekly compensation payments.
LLphil
For the purpose of determining the tax, an employee can have but one payroll period with respect
to the compensation paid by any one employer. Thus, if an employee is paid a regular
compensation for the weekly payroll and in addition thereto is paid supplemental compensation
(for example taxable bonuses) determined with respect to a different period, the payroll period is
the weekly payroll period.
SECTION 2.78.3.
Employee . The term "employee" is an individual performing services
under an employer-employee relationship. The term covers all employees, including officers and
employees, whether elected or appointed, of the Government of the Philippines, or any political
subdivision thereof or any agency or instrumentality.
In general, the relationship of the employer and employee exists when the person for whom
services were performed has the right to control and direct the individual who performs the
services, not only as to the result to be accomplished by the work but also as to the details and
means by which the result is accomplished. An employee is subject to the will and control of the
employer not only as to what shall be done, but how it shall be done. In this connection, it is not
necessary that the employer actually directs or controls the manner in which the services are
performed. It is sufficient that he has the right to do so.
The right to dismiss an employee is also an important factor indicating that the person
possessing that right is an employer. Other factors or characteristics of an employer, which may
not be necessarily present in every case, are furnishing the tools and furnishing of a place to

work, to the individual who performs the services. In general, an individual is not considered an
employee if he is subject to the control or direction of another merely on to the result to be
accomplished by the work, and not on to the means and methods for accomplishing the result.
In general, individuals who follow an independent trade, business, or profession, in which they
offer their services to the public, are not employees.
The measurement, method or designation of compensation is also immaterial if the relationship
of employer and employee in fact exists.
No distinction is made between classes or grades of employees. Thus superintendents,
managers, and others belonging to similar levels are employees. An officer of a corporation is an
employee of the corporation. An individual, performing services for a corporation, both as an
officer and director, is an employee subject to withholding on compensation, including director's
fees.
SECTION 2.78.4.
Employer. The term employer means any person for whom an individual
performs or performed any service, of whatever nature, under an employer-employee
relationship. It is not necessary that the services be continuing at the time the wages are paid in
order that the status of employer may exist. Thus for purposes of withholding, a person for whom
an individual has performed past services and from whom he is still receiving compensation is an
"employee".
(A)
Person for whom the services are or were performed does not have control. The term
"employer" also refers to the person having control of the payment of the compensation in cases
where the services are or were performed for a person who does not exercise such control. For
example, where compensation, such as certain types of pensions or retirement pay, are paid by a
trust and the person for whom the services were performed has no control over the payment of
such compensation, the trust is deemed to be the "employer".
(B)
Person paying compensation on behalf of a nonresident. The term "employer" also
means any person paying compensation on behalf of a non-resident alien individual, foreign
partnership, or foreign corporation, who is not engaged in trade or business within the
Philippines.
It is the responsibility of the employer to withhold, pay, or refund the tax and furnish the
statements required under these Regulations. The term "employer" as defined in (A) and (B)
above is intended to determine who is the withholding agent.
As a matter of business administration, certain mechanical details of the withholding process may
be handled by representatives of the employer. Thus, in the case of a corporate employer with
branch offices, the branch manager or other representative may actually, as a matter of internal
administration, withhold the tax or prepare the statements required under the law. Nevertheless,
the legal responsibility for withholding, paying and returning the tax and furnishing such
statements rests with the corporate employer.
An employer may be an individual, a corporation, a partnership, a trust, an estate, a joint-stock
company, an association, or a syndicate, group, pool, joint venture, or other unincorporated
organization, group or entity. A trust or estate, rather than the fiduciary acting for or on behalf of
the trust or estate, is generally the employer.
The term "employer" embraces not only an individual and an organization engaged in trade or
business, but it also includes an organization exempt from income tax, such as charitable and
religious organizations, clubs, social organizations and societes, as well as the Government of the
Philippines, including its agencies, instrumentalities, and political subdivisions .
(C)
Compensation paid on behalf of two or more employers. If a payment of compensation
is made to an employee by an employer through an agent, fiduciary, or other person who has the
control, receipt, custody, or disposal of, or pays the compensation payable by another employer
to such employee, the amount of tax required to be withheld on each compensation payment
made through such agent, fiduciary, or person shall, whether the compensation is paid separately
on behalf of each employer or paid in lump-sum on behalf of all such employers, be determined
based on the aggregate amount of such compensation payment or payments in the same

manner as if such aggregate amount had been paid by one employer. Hence, the tax shall be
determined based on the aggregate amount of the compensation paid. prcd
In any such case, each employer shall be liable for the return and payment of a pro-rata portion
of the tax so determined in accordance with the ratio of the amount contributed by each
employer relative to the aggregate of such compensation.
A fiduciary, agent, or other person acting for two or more employers may be authorized to
withhold the tax under these regulations with respect to the wages of the employees of such
employers. Such fiduciary, agent, or other person may also be authorized to make and file returns
of the tax withheld at source on such compensation and to furnish the receipts required under
these Regulations. Application for the authorization to perform such act should be addressed to
the Commissioner or his duly authorized representative. If such authority is granted by the
Commissioner, all provisions of the law (including penalties) and regulations prescribed in
pursuance of the law applicable in respect of an employer for whom such fiduciary, agent or
other person acts shall remain subject to all provisions of law (including penalties) and
regulations prescribed in pursuance of the law applicable in respect of employers.
SECTION 2.79.

Income Tax Collected at Source on Compensation Income.

(A)
Requirement of Withholding. Every employer must withhold from compensations paid,
an amount computed in accordance with these regulations. Provided, that no withholding of tax
shall be required where the total compensation income of an individual does not exceed the
statutory minimum wage or five thousand pesos (P5,000.00) monthly (sixty thousand pesos
(P60,000.00) a year), whichever is higher.
Employees whose total annual compensation, as determined in the preceding paragraph, does
not exceed P60,000.00 shall be given two options with which to pay his income tax due to wit:
(1)
His compensation income shall be subjected to withholding tax, but he shall not be
required to file the income tax return prescribed in Sec. 51 of the Code (filing of an individual
return) except when covered by any of the situations enumerated in Sec. 2.83.4 of these
Regulations.
(2)
His compensation income shall not be subject to a withholding tax but he shall file his
annual income tax return and pay the tax due thereon, annually.
Where the employee has opted to have his compensation income subjected to withholding so as
to be relieved of the obligation of filing an annual income tax return and paying his tax due on a
lump sum basis, he shall execute a waiver in a prescribed BIR form of his exemption from
withholding which shall constitute the authority for the employer to apply the withholding tax
table provided under these Regulations.
The employee who opts to file the Income Tax Return shall file the same not later than April 15 of
the year immediately following the taxable year.
(B)
Computation of Withholding Tax on Compensation Income in General. The procedures
provided herein below shall govern the computation of withholding tax on the taxable
compensation income of the employees. Provided, however, that taxable fringe benefits received
by employees other than the rank and file, as defined in the Labor Code of the Philippines, as
amended, shall be subject to a Fringe Benefits Tax , instead of the rates prescribed in the
Withholding Tax Tables pursuant to Sec. 24(A) of the Code, as amended (refer to Sec. 2.79.D of
these Regulations).
(1)
Use of Withholding Tax Tables. In general, every employer making payment of
compensation shall deduct and withhold from such compensation a tax determined in accordance
with the prescribed new withholding tax tables effective January 1, 1998 (Annex A) of these
Regulations.
There are four (4) withholding tables prescribed in these regulations, as follows:
(a)

Monthly Tax Table to be used by employers using the monthly payroll period;

(b)

Semi-Monthly Tax Table to be used by employers using the semi-monthly payroll period;

(c)

Weekly Tax Table to be used by employers using the weekly payroll period;

(d)

Daily Tax Table to be used by employers using the daily payroll period.

If the compensation is paid other than daily, weekly, semi-monthly or monthly, the tax to be
withheld shall be computed as follows:
(a)
Annually use the annualized computation referred to in Sec. 2.79 (B)(5)(b) of these
Regulations;
(b)
Quarterly and semi-annually divide the compensation by three (3) or six (6),
respectively, to determine the average monthly compensation. Use the monthly withholding tax
table to compute the tax, and the tax so computed shall be multiplied by three (3) or six (6)
accordingly.
(2)

Components of the Withholding Tax Table.

(a)

Each tax table is grouped into Tables A, B and C.

A Table for employees without dependent children

B Table for heads of family with dependent children
C Table for married employees with qualified dependent children
b)

The columns in the Tables reflect the following:

1st column reflects the exemption status of employee represented by letter symbols. (refer to
the explanation of the legend of symbols in letter (d) below)
2nd column reflects the total amount of personal and additional exemption, in pesos, to which
an employee is entitled.
(c)
Column numbers 1 to 10 reflect the portion of the amount of taxes to be withheld on the
amount of compensation of the employees. Every amount in all the columns within Tables A, B
and C represent the compensation level.
(d)
Legend of symbols The symbols used in the new withholding tax table represent the
following:
Z Zero exemption for (a) employee with multiple employers simultaneously, with respect to
second, third, etc., employer and (b) for employee who fails to file an application for registration
(BIR Form 1902) or an exemption certificate; (BIR Form 2305)
S Single, legally separated spouses/widow/widower without any qualified dependent; Cdpr
ME Married employee who is not legally separated;
HF Head of the family who is either single/legally separated spouse/widow or widower with a
qualified dependent parent; sister or brother; legitimate, recognized natural or legally adopted
child; or a qualified senior citizen as defined by these regulations pursuant to Sec. 2 of R.A. No.
7432 .
In view however, of the promulgation of the Family Code which makes no distinction between the
spurious and natural child, an illegitimate child can now be considered as a qualified dependent
and qualifies the claimant to the status of head of the family.
The numerals (1-4) affixed to the status symbols "ME" and HF" represent the number of qualified
legitimate, illegitimate, or legally adopted children;
Exemption means the amount of exemption in thousand pesos an employee is entitled to claim
as a deduction from gross compensation income in accordance with the status and number of
qualified dependent children.
(3)

Steps to determine the amount of tax to be withheld:

Step 1.
Use the appropriate tables for the payroll period; monthly semi-monthly weekly or
daily as the case may be.

Step 2.
Determine the total monetary and non-monetary compensation paid to an
employee for the payroll period, segregating gross benefits which includes thirteenth (13th)
month pay, productivity incentives, Christmas bonus, and other benefits received by the
employee per payroll period. Gross benefits which are received by officials and employees of
public and private entities in the amount of thirty thousand pesos (P30,000) or less shall be
exempted from income tax and from withholding tax.
Step 3.
Segregate the taxable compensation from the non-taxable income paid to the
employee for the payroll period. The taxable income refers to all remuneration paid to an
employee not otherwise exempted by law from income tax and consequently from withholding
tax. The non-taxable income are those which are specifically exempted from income tax by the
Code or by other special laws as listed in Sec. 2.78.1 (B) of these Regulations (e.g. benefits not
exceeding P30,000, non-taxable retirement benefits and separation pay).
Step 4.
Segregate the taxable compensation income as determined in Step 3 into regular
taxable compensation income and supplementary compensation income. Regular compensation
includes basic salary, fixed allowances for representation, transportation and other allowances
paid to an employee per payroll period. Supplementary compensation includes payments to an
employee in addition to the regular compensation such as commission, overtime pay, taxable
retirement pay, taxable bonus and other taxable benefits, with or without regard to a payroll
period.
Step 5.

Fix the compensation level as follows:

(i)
Determine the line (horizontal) corresponding to the status and number of qualified
dependent children using the appropriate symbol for the taxpayer status.
(ii)
Determine the column to be used by taking into account only the total amount of taxable
regular compensation income. The compensation level is the amount indicated in the line and
column to which the regular compensation income is equal to or in excess, but not to exceed the
amount in the next column of the same line.
Step 6.
Compute the withholding tax due by adding the tax predetermined in the
compensation level indicated at the top of the column, to the tax on the excess of the total
regular and supplementary compensation over the compensation level, which is computed by
multiplying the excess by the rate also indicated at the top of the same column. cdrep
(4)

Sample Computations on the use of the Withholding Tax Table:

EXAMPLE I: Mr. A, single, with no qualified dependent receives P6,000 as regular monthly
compensation.
COMPUTATION: Using the monthly withholding tax table, the monthly withholding tax is computed
by referring to Table A line 2 of column 4 which shows a tax of P208.33 on P4,167.00 plus 15% of
the excess (P6,000.00 - 4,167.00 = P1,833.00)
Total taxable compensation P 6,000.00
Less: compensation level
(line A-2 Column 4) 4,167.00

P 1,833.00

Tax on P4,167.00

208.33

Tax on excess (P1,833.00 x 15%)

274.95

Monthly withholding tax

483.28

EXAMPLE II: Mr. B, head of the family (with a qualified dependent parent) receives P6,200.00 as
monthly regular compensation and P800.00 as supplementary compensation for January or a
total of P7,000.00.
COMPUTATION: Using the monthly withholding tax table, the withholding tax for January is
computed by referring to Table A line 3 HF of column 4 (fix compensation level taking into
account only the regular compensation income of P6,200.000) which shows a tax of P208.33 on
P4,583.00 plus 15% of the excess (P7,000.00 - 4,583.00 = P2,417.00).
Total taxable compensation P 7,000.00
Less: compensation level
(line A-3 Column 4) 4,583.00

Excess P 2,417.00

Tax on (P4,583.00)

208.33

Tax on excess (P2,417.00 x 1 5%) 362.55

Withholding tax for January P

570.88

EXAMPLE III: Mrs. C, married with two (2) qualified dependent children receives P5,500.00 as
regular monthly compensation. Mr. C, her husband is also employed and claims for the additional
exemptions.
COMPUTATION: Using the monthly withholding tax table, the withholding tax due is computed by
referring to table A line 4 ME of column 4 which shows a tax of P208.33 on P5,167.00 plus 15% of
the excess (P5,500.00 - P5,167.00 = P333.00).
Total taxable compensation P 5,500.00
Less: compensation level
(Line A- 4 Column 4) 5,167.00

Excess P

333.00

Tax on P5,167,00

208.33

Tax on excess (P333.00 x 15%)

49.95

Monthly withholding tax

258.28

EXAMPLE IV: Mr. D, married with two (2) qualified dependent children receives P3,550.00 as
regular semi-monthly compensation. Mrs. D, his wife is also employed. Mr. D did not waive his
right in favor of the wife to claim for the additional exemptions.
COMPUTATION: Using the semi-monthly withholding tax tables, the withholding tax due is
computed by referring to Table C line 2 ME 2 of column 4 which shows a tax of P104.17 on
P3,250.00 plus 15% of the excess (P3,550.00 - 3,250.00 = P300.00)
Total taxable compensation P3,550.00

Less: compensation level (line C-2 Column 4)

3,250.00

Excess P 300.00

Tax on P3,250.00

P 104.17

Tax on excess (P300.00 x 15%)

45.00

Semi-monthly withholding tax

P 149.17

EXAMPLE V: Mr. E, married with two (2) qualified dependent children receives P3,300.00 as
regular semi-monthly compensation. Mrs. E, his wife is not employed.
COMPUTATION: Using the semi-monthly withholding tax tables, the withholding tax due is
computed by referring to Table C line 2 ME2 of Column 4 which shows a tax of P104.17 on P3,250
plus 15% of the excess (3,300 - 3,250 = P50.00)
Total taxable compensation P3,300.00
Less: compensation level (Line C-2 Column 4)

3,250.00

Excess P

50.00

Tax on P3,250.00

P 104.17

Tax on excess (P50.00 x 15%)

7.50

Semi-monthly withholding P 111.67

EXAMPLE VI: On June, 1998, Mr. F, single receives P30,000.00 as regular monthly salary and half
of his 13th month pay amounting to P15,000.00 plus other benefits such as productivity pay of
P10,000.00 and loyalty pay of P6,000.00. Compute the withholding tax of Mr. F for the month of
June, 1998.
COMPUTATION:
Regular WageP30,000.00
Gross Benefits:
13th month pay
Productivity

10,000

Loyalty pay

P6,000

P15,000

Total Gross Benefits P 31,000.00

Add Taxable Gross Benefits (P31,000 - 30,000 = P1,000)*

Total Taxable Compensation Income

P31,000.00

1,000.00

Less Compensation level

22 500.00

Excess P 8,500.00

Tax on P22,500 (line A2, col. 7)

P 4,166.67

Tax on excess (P8,500.00 x 30%)

2,550.00

Withholding tax for the month of June

P 6,716.67

* gross benefit of P31,000 less the maximum total exemptions of the gross benefit of P30,000
(5)

Use of Exceptional Computations

(a)
Cumulative average method. If in respect of a particular employee, the regular
compensation is exempt from withholding because the amount thereof is below the
compensation level, but supplementary compensation is paid during the calendar year; or the
supplementary compensation is equal to or more than the regular compensation to be paid; or
the employee was newly hired and had a previous employer/s within the calendar year, other
than the present employer doing this cumulative computation, the present employer shall
determine the tax to be deducted and withheld in accordance with the cumulative average
method provided hereunder:
Step 1.
Add the amount of taxable regular and supplementary compensation to be paid to
an employee for the payroll period subject of computation to the sum of the taxable regular and
supplementary compensation since the beginning of the current calendar year including the
compensation paid by the previous employers within the same calendar year, if any;
Step 2.
Divide the aggregate amount of compensation computed in step 1 by the number
of payroll period to which the amount relates;
Step 3.
Compute the tax to be deducted and withheld on the cumulative average
compensation determined in Step No. (2) in accordance with the withholding tax table; cdphil
Step 4.
it relates;

Multiply the tax computed in Step No. (3) by the number of payroll period to which

Step 5.
Determine the excess, if any, of the amount of tax computed in Step No. (4) over
the total amount of tax already deducted and withheld from the beginning payroll period to the
last payroll period, including that withheld by the previous employer/s within the calendar year, if
any. The excess, as computed, shall be deducted and withheld from the compensation to be paid
for the last payroll period of the current calendar year.
The cumulative average method, once applicable to a particular employee at any time during the
calendar year, shall be the same method to be consistently used for the remaining payroll
period/s of the same calendar year.
EXAMPLE VII: (Regular monthly compensation is exempt from withholding but supplementary
compensation is paid during the calendar year) Mr. G, married with three (3) qualified
dependent children whose spouse is not employed received the following compensation:
Month Regular

Supplementary

Total

Compensation

Compensation

Compensation

Jan.

P4,500.00

P1,750.00

P6,250.00

Feb.

4,500.00

1,750.00

6,250.00

Mar.

4,400.00

1,500.00

5,500.00

COMPUTATION:
1.

For Jan. -

P6,250.00 + 0

P 6,250.00

For Feb. -

P6,250.00 + 6,250.00

P12,500.00

For Mar. -

P6,250 + 6,250 + 5,500

P18,000.00

2.

For Jan. -

P6,250/1

P 6,250.00

For Feb. -

P12,500/2

P 6,250.00

For Mar. -

P18,000/3

P 6,000.00

3.

For January

Tax on P5,500.00 (Line C.3, Col. 3) P

Tax on excess (P750.00 x 10%)

41.67

75.00

Tax on P6,250.00

116.67

For February
Tax on P5,500 (line C.3, col. 3)

41.67

Tax on excess (P750.00 x 10%)

75.00

Tax on P6,250P

116.67

For March
Tax on P5,500 (line C.3, col. 3)

41.67

Tax on excess (P500.00 x 15%)

50.00

Tax on P6,000.00

91.67

4.

For Jan. -

P116.67 x 1

116.67

For Feb. -

P116.67 x 2

233.34

For Mar. -

P91.67 x 3

275.01

116.67

5.

For Jan. -

P116.67 - 0

For Feb. -

P233.34 - 116.67

116.67

For Mar. -

P275.01 - 233.34

41.67

EXAMPLE VIII: (Supplemental compensation is equal to or more than the regular compensation)
Mr. H, married with one (1) qualified dependent and whose spouse is also employed received the
following compensation. Mr. H waived his right to claim for the additional exemptions in favor of
his wife.
Month Regular

Supplementary

Total

Compensation

Compensation

Compensation

Jan.

P3,000.00

P3,000.00

P6,000.00

Feb.

3,000.00

3,500.00

6,500.00

Mar.

3,000.00

5,000.00

8,000.00

COMPUTATION:
1.

For Jan. -

P6,000.00 + 0

P 6,000.00

P12,500.00

For Feb. -

P6,000.00 + 6,500.00

For Mar. -

P8,000.00 + 6,000.00 + 6,500.00 =

2.

For Jan. -

P6,000/1

P 6,000.00

For Feb. -

P12,500/2

P 6,250.00

For Mar. -

P20,500/3

P 6,833.33

3.

P20,500.00

For January

Tax on P5,167.00 (line A4, col. 4)

208.33

Tax on excess (P833.00 x 15%)

124.95

Tax on P5,167.00 (line A4, col. 4)

208.33

Tax on excess (P1,083.00 x 15%)

162.45

Tax on P5,167.00 (line A 4 col. 4)

208.33

Tax on excess (P1,666.33 x 15%)

249.95

P
741.56

Tax on P6,000.00

333.28

For February

Tax on P6,250.00

370.78

For March

Tax on P6,833.33

458.28

4.

For Jan. -

P333.28 x 1

333.28

For Feb. -

P370.78 x 2

For Mar. -

P458.28 x 3

P 1,374.84

5.

For Jan. -

P333.28 - 0

333.28

For Feb. -

P741.56 - 333.28

408.28

For Mar. -

P1,374.84 - 741.56

633.28

EXAMPLE IX: (Computation of monthly withholding tax for a new employee with previous
employer during the year) Ms. I, single was hired by X Co. on July, 1998. Her total taxable
income per month is P10,000.00. She was previously employed by W Co. from January to June
with a monthly taxable income of P6,000.00. Per Form No. 2316 (Certificate of Income Tax
Withheld on Compensation) issued by the previous employer, which was presented by Ms. I to her
present employer, the total tax withheld is P2,899.68. In computing for the tax withheld on the
compensation of Ms. I starting the month of July, X Co. shall use the cumulative average method,
as follows: llcd

Present

Total

Total

Compensation

Previous

Taxable

Month Income

Income

Income

JULY

10,000.00

36,000.00

46,000.00

AUG

10,000.00

10,000.00

SEPT

10,000.00

10,000.00

OCT

10,000.00

10,000.00

NOV

10,000.00

10,000.00

DEC

10,000.00

10,000.00

60,000.00

36,000.00

96,000.00

COMPUTATION:
Step 1
For July 36,000 +10,000

For August 46,000 + 10,000

46,000.00
=

56,000.00

For September 46,000 + 10,000 + 10,000

For October 46,000 + 10,000 + 10,000 + 10,000

66,000.00
=

76,000.00

For November 46,000 + 10,000 + 10,000 + 10,000 + 10,000 =

Step 2
For July 46,000/7

6,571.43

For August 56,000/8 =

7,000.00

For September 66,000/9

7,333.33

For October 76,000/10

7,600.00

For November 86,000/11

7,818.18

Step 3
For July P6,571.43
Tax on P4,167=

P 208.33

Tax on excess (2,404.43 x 15%)

360.66

Tax on P6,571.43

P568.99

For August P7,000.00

Tax on P4,167=

P208.33

Tax on excess (P2,833.00 x 15%)

Tax on P7,000=

P633.28

424.95

86,000.00

For September P7,333.33

Tax on P4,167=

P208.33

Tax on excess (P3,166.33 x 15%)

474.95

Tax on P7,333.33

P683.28

For October P7,600.00

Tax on P7,500=

P708.33

Tax on excess (P100 x 20%) =

20.00

Tax on P7,600=

P728.33

For November P7,818.18

Tax on P7,500=

P708.33

Tax on excess (P318.18 x 20%)

63.64

Tax on P7,818.18

P771.97

Step 4
For July

P568.99 X 7

P3,982.93

For August

P633.28 X 8

P5,066.24

For September
For October

P683.28 X 9

P728.33 X 10 =

For November

P6,149.52

P7,283.30

P771.97 X 11 =

P8,491.67

For July

P3,982.93 - 2,899.68=

P1,083.26

For August

P5,066.24 - 3,982.93=

P1,083.31

For Sept.

P6,149.52 - 5,066.24=

P1,083.28

For October

P7,283.30 - 6,149.52=

P1,133.78

For Nov.

P8,491.67 - 7,283.30=

P1,208.37

Step 5

(b)
Annualized withholding tax method. (i) When the employer-employee relationship is
terminated before the end of the calendar year; and (ii) when computing for the year-end
adjustment, the employer shall determine the amount to be withheld from the compensation on
the last month of employment or in December of the current calendar year in accordance with the
following procedures:
Step 1.
Determine the taxable regular and supplementary compensation paid to the
employee for the entire calendar year. Refer to Steps 2 to 5 of Sec. 2.79 (B)(1)(b) of these
Regulations, using as basis the compensation received for the calendar year. cdphil
Step 2.
If the employee has previous employment/s within the year, add the amount of
taxable regular and supplementary compensation paid to the employee by the previous employer
doing the annualized computation to the taxable compensation income received from previous

employer/s during the calendar year:

(i)
When the employer-employee relationship is terminated before December The taxable
regular and supplementary compensation income shall be the amount paid since the beginning
of the current calendar year to the termination of employment.
(ii)
Year-end adjustment The taxable regular and supplementary compensation income
shall be the amount paid since the beginning of the current calendar year to December.
(iii)
Taxable fringe benefits received by employees holding managerial or supervisory positions
shall be subject to a final fringe benefit tax as prescribed in Section 2.79 (D) of these
Regulations . Hence, the same shall not form part of the taxable supplementary compensation, of
managers and supervisors, subject to the withholding tax tables.
Step 3.
Deduct from the aggregate amount of compensation computed in Step No. (2) the
amount of the total personal and additional exemptions of the employee.
Step 4.
Deduct the amount of premium payments on Health and/or Hospitalization
Insurance of employees who have presented evidence that they have paid during the taxable
year premium payments (the deductible amount shall not exceed P2,400 or P200 per month
whichever is lower) and that their family's total gross income does not exceed P250,000 for the
calendar year. For purposes of substantiating the claim of insurance expense, the policy contract
shall be presented to the employer together with the original official receipt of the premium
payment, in addition to the documents which will be prescribed by the BIR in a separate
regulation to determine the aggregate of his family income.
Total family income includes primary income and other income from sources received by all
members of the nuclear family, i.e. father, mother, unmarried children living together as one
household, or a single parent with children. A single person living alone is considered as a nuclear
family.
The spouse claiming the additional exemptions for the qualified dependent children shall be the
same spouse to claim the deductions for premium payments.
Step 5.
Compute the amount of tax on the difference arrived at in Step 4, in accordance
with the schedule provided in Sec. 24 (A) of the Code, as follows:
Over

But Not

Over

Over

Amount Rate Of Excess

not over

10,000

5%

10,000

30,000

500+10%

10,000

30,000

70,000

2,500+15%

30,000

70,000

140,000

8,500+20%

70,000

140,000

250,000

22,500+25% 140,000

250,000

500,000

50,000+30% 250,000

500,000

over

125,000+34%

500,000

(33% in 1999)
(32% in 2000 and thereafter)
Step 6.
Determine the deficiency or excess, if any, of the tax computed in Step 5 over the
cumulative tax already deducted and withheld since the beginning of the current calendar year.
The deficiency tax (when the amount of tax computed in Step 5 is greater than the amount of
cumulative tax already deducted and withheld or when no tax has been withheld from the
beginning of the calendar year) shall be deducted from the last payment of compensation for the
calendar year. If the deficiency tax is more than the amount of last compensation to be paid to an
employee, the employer shall be liable to pay the amount of tax which cannot be collected from
the employee. The obligation of the employee to the employer arising from the payment by the

latter of the amount of tax which cannot be collected from the compensation of the employee is a
matter of settlement between the employee and employer.
The excess tax (when the amount of cumulative tax already deducted and withheld is greater
than the tax computed in Step 5) shall be credited or refunded to the employee not later than
January 25 of the following year. However, in case of termination of employment before
December, the refund shall be given to the employee at the payment of the last compensation
during the year. In return, the employer is entitled to deduct the amount refunded from the
remittable amount of taxes withheld from compensation income in the current month in which the
refund was made, and in the succeeding months thereafter until the amount refunded by the
employer is fully repaid.
EXAMPLE X: (Use of annualized computation when employer-employee relationship was
terminated before December) Mr. X, head of the family with a qualified dependent brother
receives P8,000 as monthly regular compensation starting January 1, 1998. On June 1, 1998, he
filed his resignation effective June 30, 1998. The tax withheld from January to May was P3,624.65.
COMPUTATION: (To be done before payment of the compensation for June 1998):
Total compensation received from
January 1 to May 31, 1998 P40,000.00
Add: Compensation to be received on June

8,000.00

Gross compensation Jan-June

Less: Personal Exemption

P48,000.00

25,000.00

Net Taxable Compensation P23,000.00

Tax Due*

P1,800.00

Less: Tax Withheld from Jan to May 3,624.00

To be refunded to Employee Mr. X (P1,824.65)

Tax on P10,000.00

500.00

Tax on excess (P13,000 x 10%)

1,300.00

Tax on P36,000

P 1,800.00

EXAMPLE XI. (Year-end adjustments computation) For taxable year 1998, Asian Mfg. has the
following employees:
1.
Mr. K, married with 2 qualified dependent children who received the following
compensation for the year:
Basic Monthly Salary P45,000
Overtime Pay for November P 5,000
Thirteenth Month pay
Other Benefits

P45,000

P12,000

2.
Mr. L, married, whose wife is also employed, with two dependent children. The second
child was born in December. He received for the year, the following:
Basic Monthly Salary P6,500
Thirteenth Month Pay
Other Benefits
3.

P6,500

P6,000

Ms. M, single, who was hired in July received the following:

Basic Monthly Salary P20,000

Thirteenth Month Pay

P20,000

Monthly Salary from Previous Employer (January-June) P 6,000

She paid for the year an annual premium on health and hospitalization insurance amounting to
P2,400.00.
4.

Mrs. N, married, whose husband is also working received the following:

Basic Monthly Salary P35,000

Thirteenth Month Pay (50%)

P17,500

She resigned effective, July 30, 1998

COMPUTATION OF WITHHOLDING TAX FOR DECEMBER:
1.

Mr. K

Received
Compensation

for the year

Basic Salary P540,000

Non-Taxable Taxable

P540,000

Overtime (Nov.)

5,000 5,000

13th month pay

45,000

30,000

Other benefits

12,000

12,000

Totals P602,000

15,000

P30,000

P572,000

Less: Personal and additional exemptions 48,000

Net taxable compensation P 524,000

Tax due*

P133,160.00

Less: Tax w/held from previous months (Jan-Nov.)

130,788.79

Tax to be withheld for December

P 2,371.21

*
Tax Due is computed by using the rates prescribed in Sec. 24 (A), NIRC (refer to
schedule on page 43 of these regulations)
2.

Mr. L

Received
Compensation

for the year

Non-Taxable Taxable

Basic Salary P 78,000

P78,000.00

13th month pay

6,500 P6,500

Other benefits

6,000 6,000

Totals P90,500

P12,500

P 78,000.00

Less: Personal and additional exemptions 48,000.00

Net taxable compensation P 30,000.00

Tax due

P 2,500.00

Less: Tax withheld from previous month (Jan-Nov.)

2,291.63

Amount to be withheld for December

208.37

3.

Ms. M. Single Computation of withholding tax for December

Compensation from previous employer (Jan. to June)

P 36,000.00

Compensation from present employer (July to Dec)

120,000.00

Total Taxable Compensation (Jan. to Dec.) P156,000.00

Less:

Personal and additional exemptions

P20,000.00

Premium payments on health &

hospitalization insurance

2,400.00

22,400.00

Net Taxable Compensation P133,600.00

Tax Due

P 21,220.00

Less: Taxes withheld

*Previous employer P2,899.68
**Present employer 15,591.98

18,491.66

Amount of taxes withheld for the month of December

P 2,728.34

Refer to Certificate of Income Tax Withheld on Compensation issued by previous employer.

**
Taxes withheld from July to December computed by the present employer using the
cumulative computation.
4.

Mrs. N married (computation of tax upon resignation):

Total compensation
Received for the year

Non-Taxable Taxable

Basic Salary P245,000

P245,000

13th month pay

17,500

P17,500

Other benefits

6,000 6,000

P268,500

P23,000

P245,000

Less: Personal and additional exemptions 32,000

Net taxable compensation income P213,000

Tax due (Jan. to July 30)

P40,750.00

Less Tax withheld (Jan. to June)

45,700.02

Over withheld Tax to be Refunded in the month of July

P(4,950.02)

The annualized computation done for each employee shall be reflected by the employer at the
alphabetical list attached to the Form No. 1604.
(3)
If the compensation is paid other than daily, weekly, semi-monthly or monthly, compute
the tax to be deducted and withheld as follows:
a)

Annually refers to computation on annualized income;

b)
Quarterly and semi-annually divide the compensation by three (3) or six (6),
respectively, to determine the average monthly compensation. Use the monthly withholding tax
table to compute the tax, and the tax so computed shall be multiplied by three (3) or six (6),
accordingly; LLjur
c)
Bi-weekly divide the compensation by two (2) to determine the average weekly
compensation. Use the weekly withholding tax table to compute the tax, and the tax so computed
shall be multiplied by two (2);
d)
Miscellaneous if compensation is paid irregularly, or for a period other than those
mentioned above, divide the compensation by the number of days from last payment to date of
payment (excluding Sundays and holidays). Use the daily tax table, the tax so computed shall be
multiplied by the number of days.
(C)
Computation of Withholding Tax on Salaries and Benefits Received by Employees other
than rank and file. The procedures provided herein below shall govern the computation of
withholding tax on the taxable compensation income of employees other than the rank and file
pursuant to Sec. 2.79 (B) of these regulations.
(1)
Determine the total monetary and non-monetary compensation, segregating gross
benefits which includes thirteenth (13th) month pay, productivity incentives, Christmas bonus
and fringe benefits received by the employee per payroll period. When computing under the
annualized computation, the total monetary and non-monetary compensation shall be that
received for the calendar year. Gross benefits received by officials and employees of public and
private entities shall be exempted from income tax and from withholding tax; provided that the
amount of exemption shall not exceed thirty thousand pesos (P30,000); llcd
(2)
Segregate the taxable from the non-taxable compensation (excluding the fringe benefits )
paid to the employee. The taxable income refers to all remuneration paid to an employee not
otherwise exempted by law from income tax and consequently from withholding tax. The nontaxable income are those which are specifically exempted from income tax by the Code or other

special laws as listed in Sec. 2.78.1 (B) of these Regulations (e.g. benefits not exceeding P30,000,
non-taxable retirement benefits and separation pay);
(3)
Segregate the taxable fringe benefit and subject the same to withholding pursuant to
Subsection D of these section of the Regulations;
(4)
Compute withholding tax on the taxable regular and supplementary compensation in
accordance with the procedures prescribed in Sec. 2.79(B)(1)(b) of these regulations, for purposes
of withholding per payroll period; and Sec. 2.79(B)(2) for purposes of computing under the
cumulative average method or for the year-end adjustment.
(D)

Computation of Withholding Tax on Fringe Benefit.

(1)
Final withholding tax on Fringe Benefits paid to employees other than rank and file.
There shall be imposed a final tax of 34% beginning January 1, 1998, 33% beginning January 1,
1999 and 32% beginning January 1, 2000 and thereafter, on the grossed-up monetary value of
fringe benefits pursuant to Sec. 33 of the Code and its implementing regulations, granted or
furnished by the employer to his employees (except rank and file employees) unless the fringe
benefit is required by the nature of or necessary to the trade, business or profession of the
employer, and when the fringe benefit is for the convenience and advantage of the employer.
The fringe benefit tax shall be paid by the employer in the same manner as provided in Sec. 2.58
of these Regulations. It shall not form part of the gross income of the employee. The imposition of
the fringe benefits tax should be the subject of a separate set of rules and regulations which
shall be issued for the purpose.
(2)

Grossed-up monetary value of Fringe Benefit.

(a)
In general the grossed-up monetary value of the fringe benefit shall be determined by
dividing the monetary value of the fringe benefit by sixty six percent (66%) in 1998; sixty seven
percent (67%) in 1999; and sixty eight percent (68%) in 2000 and thereafter.
(b)
The grossed-up monetary value of fringe benefits furnished to employees and which are
taxable under subsections B, C, D, and E of Section 25 of the Code shall be determined by
dividing the monetary value of the fringe benefit by the difference between one hundred percent
(100%) and the applicable rates of income tax prescribed on the aforesaid sub-sections of Section
25, to wit: cdasia
Subsection (B) Twenty-five percent on income derived from sources within the Philippines by a
non-resident alien individual not engaged in trade or business in the Philippines.
Subsection (C) Fifteen percent (15%) on income of an alien individual employed by regional or
area headquarters of a multinational company or regional operating headquarters of a
multinational company, including any of its Filipino employees employed and occupying the same
position as those of its aforesaid alien employees.
Subsection (D) Fifteen percent (15%) on income of an alien individual employed by an offshore
banking unit of a foreign bank established in the Philippines, including any of its Filipino
employees employed and occupying the same position as those of its aforesaid alien employees.
Subsection (E) Fifteen percent (15%) on the income of an alien individual employed by a
foreign service subcontractor engaged in petroleum operations in the Philippines, including any
of its Filipino employees employed and occupying the same position as those of its aforesaid
alien employees.
(3)
Non-taxable Fringe Benefits. The following fringe benefits are not subject to the fringe
benefits tax.
(a)
Fringe benefits paid to rank and file employees. Fringe benefits furnished or granted to
rank and file employees shall form part of the employees gross compensation income subject to
the withholding tax table on compensation under Section 2.79 (B) of these Regulations.
(b)
Fringe benefits which are authorized and exempted from income tax and consequently
from withholding tax under the Code, as amended, or under any special law.

(c)
Contributions of the employer for the benefit of the employee to retirement, insurance and
hospitalization benefit plans.
(d)
De minimis benefits. For purposes of determining whether the fringe benefit shall be
considered payments of de minimis benefits, the employer shall submit a written representation
to the Commissioner for the issuance of a ruling taking into account the peculiar nature and
special need of the said employer's trade, business or profession.
The term "de minimis benefits" which is exempt from the fringe benefit tax shall, in general, be
limited to facilities or privileges (such as entertainment, Christmas party and other cases similar
thereto; medical and dental services; or the so-called courtesy discount on purchases), furnished
or offered by an employer to his employees, provided such facilities or privileges are of relatively
small value and are offered or furnished by the employer merely as a means of promoting the
health, goodwill, contentment, or efficiency of his employees. LLpr
(E)
Computation of Withholding Tax on Compensation Paid to Alien Employees of Certain
Employers. There shall be imposed a final withholding tax of fifteen percent (15%) on the
salaries, annuities, compensation, remuneration and other emoluments such as honoraria and
allowances paid to its alien employees occupying managerial and technical positions and Filipino
employees occupying similar positions by the following employers:
(1)
Area or regional headquarters of multinational corporations and regional operating
headquarters under Sec. 25 (C);
(2)

Offshore banking units under Sec. 25 (D) and FCDU;

(3)

Petroleum service contractors and sub-contractors under Sec. 25 (E) of the Code.

(F)
Requirement for Deductibility. The provisions of Sec. 2.58.5 of these Regulations shall
apply.
(G)

Tax Paid by Recipient. The provisions of Sec. 2.58.6 of these Regulations shall apply.

(H)
Non-deductibility of Tax and Credit for Tax Withheld. The tax deducted and withheld at
source on compensation income shall neither be allowed as a deduction from the employer's
gross income nor from the recipient's gross compensation income. The entire amount of the
compensation from which the tax is withheld shall be included in gross income to be reported in
the return required to be made by the recipient of the income without deduction for such tax. The
creditable tax withheld at source, however, is allowable as a credit against the tax imposed by
the NIRC to the recipient of the income. Any excess of the tax withheld at source, over the tax
ascertained to be due on the income tax return shall be refunded or automatically credited, at the
taxpayer's option, to the recipient of the income. Such refund or credit shall be without prejudice
to whatever adjustments may be proper after field investigation or upon information relative to
the taxpayer's income tax liability under the main provisions of the Code, as amended. If the tax
has actually been withheld at source, a credit or a refund shall be made to the recipient of the
income even though such withheld tax has not been paid to the government by the employer. For
the purpose of the credit, the recipient of the income is the person subject to tax, on whose
compensation the tax was withheld. cdtai
Any excess of the tax which was withheld on compensation over the tax due from the taxpayer
shall be returned not later than July 15 of the following year. Refunds made after such time shall
earn interest at the rate of six percent (6%) per annum, starting after the lapse of the three
month period up to the date when the refund is made.
Refunds shall be made upon warrants drawn by the Commissioner or by his authorized
representative without the necessity of counter-signature by the Chairman, Commission on Audit
or the latter's duly authorized representative as an exception to the requirement prescribed by
Section 49 , Chapter 8, Subtitle B, Title I of Book V of Executive Order No. 292 , otherwise known
as the Administrative Code of 1987.
(I)
Right to Claim Withholding Exemptions. An employee receiving compensation shall be
entitled to withholding exemptions as provided in the Code, as amended. In order to receive the
benefit of such exemptions, the employee must file the Application for Registration (BIR Form No.

1902), upon employment and a Withholding Compensation and Exemption Certificate (Form No.
2305), in case of updates on changes in his exemptions. The withholding exemptions to which an
employee is entitled depends upon his status as single, married, head of the family and the
number of dependents qualified for additional exemptions. Each employee shall be allowed to
claim the following amount of exemptions, with respect to compensation paid on or after January
1, 1998.
(1)

Personal and additional exemptions.

(a)

Basic personal exemptions.

(i)
For single individual or married individual judicially decreed as legally separated with no
qualified dependents, the amount of personal exemption allowed is twenty thousand pesos
(P20,000.00);
(ii)
For each legally married employee, the amount of personal exemption allowed is thirty two
thousand pesos (P32,000.00). A married individual deriving income within the Philippines whose
spouse is unemployed or is a non-resident citizen deriving income from foreign sources, shall be
entitled to a personal exemption of thirty two thousand pesos (P32,000.00) only;
(iii)
For head of a family, the amount of personal exemption allowed is twenty five thousand
pesos (P25,000.00). Head of the family means an unmarried or legally separated man or woman
with one or both parents or one or more brothers or sisters whether of the whole or half blood or
with one or more legitimate or illegitimate, recognized natural or legally adopted children living
with and dependent upon him for their chief support, where such brothers or sisters or children
are not more than twenty one (21) years of age, unmarried and not gainfully employed or where
such children, brothers, or sisters, regardless of age are incapable of self-support because of
mental or physical defect. The term also includes an unmarried or legally separated man or
woman who is the benefactor of a qualified senior citizen.
A senior citizen is any resident citizen of the Philippines of at least sixty (60) years old, including
those who have retired from both government offices and private enterprises, and has an income
of not more than Sixty thousand pesos (P60,000) per annum subject to the review of the National
Economic Development Authority (NEDA) every three years (definition taken from Republic Act
No. 7432).
(b)
Additional exemptions for taxpayer with dependents. A married individual or a head of
family shall be allowed an additional exemption of eight thousand pesos (P8,000) for each
qualified dependent child, provided that the total number of dependents for which additional
exemptions may be claimed shall not exceed four (4) dependents. The additional exemptions for
qualified dependent children shall be claimed by only one of the spouses in the case of married
individuals. LLpr
A dependent means a legitimate, illegitimate or legally adopted child chiefly dependent upon and
living with the taxpayer if such dependent is not more than twenty-one (21) years of age,
unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of
self-support because of mental or physical defect.
The husband shall be the proper claimant of the additional exemption for qualified dependent
children unless he explicitly waives his right in favor of his wife in the application for registration
(BIR Form 1902) or in the withholding exemption certificate (BIR Form 2305). Provided, however,
that where the spouse of the employee is unemployed or is a non-resident citizen deriving
income from foreign sources, the employed spouse within the Philippines shall be automatically
entitled to claim the additional exemptions for children.
SECTION 2.79.1.
Application for Registration for Individuals Earning Compensation Income
(BIR Form No. 1902). The application for registration of employees shall be accomplished by
both employer and employee relating to the following information and other requirements:
(A)

Employee.

(1)
Name/Taxpayer's Identification Number (TIN)/Address of employee/other information
required by the form;

(2)
Status of employee whether SINGLE/legally separated/widow or widower with no
dependent child, married, or head of the family;
(3)
Status of spouse of the employee. If the employee is legally married, the Name/TIN, if
any, of the spouse and whether said spouse is employed, unemployed, employed abroad, or is
engaged in trade or business should be indicated on the application;
(4)
Qualified dependents. Name and date of birth of qualified dependent/s (children,
parent/s, brother/s, sister/s or senior citizens);
(5)
Claimant of exemption for children. The husband is the proper claimant of additional
exemptions for qualified children. However, the wife shall claim full additional exemption for
children in the following cases:
(a)

Husband is unemployed;

(b)

Husband is a non-resident citizen deriving income from foreign sources;

(c)
The husband waives his right to claim the exemptions of children (waiver should be for all
children) in a sworn statement to be attached to his application form for registration (1902) and
that of his wife's, in accordance with the procedures prescribed in this Section;
(6)
Required forms and attachments. Upon filing the Application for registration (BIR Form
No. 1902), the taxpayer is required to attach any of the following documents to establish the
status of the taxpayer, if applicable, to the application:
(a)

Marriage contract;

(b)

Court decision of legal separation;

(c)

Birth Certificate of each qualified dependent brother, sister or child;

(d)

Certificate of employment of the husband if he is working abroad;

(e)
Waiver of exemptions of children by the husband in case wife is claiming the additional
exemptions of the children;
(f)
Waiver from exemption on withholding tax of taxpayers whose total compensation income
in a year does not exceed P60,000.00.
(g)
Medical Certificate of dependent brother, sister or child, if physically or mentally
incapacitated;
(h)

Court decision of legal adoption of children;

(i)

Death certificate;

(j)

Current certificate of income tax exemption of qualified senior citizen;

(k)

Other documentary evidence, where the above documents are not available.

(7)
Concurrent multiple employments. An employee who is employed concurrently by two
or more employers within the same period of time during the taxable year shall file the
Application (BIR Form No. 1902) with his main employer (employer paying the higher/est wage)
and shall furnish a copy of the duly received Application with his secondary employers (2nd, 3rd,
etc. employers). The employed husband and wife shall each file a separate application with their
respective employers;
(8)
Successive multiple employment. An employee who transferred to another employer
during the taxable year, shall furnish his new Employer with an Exemption Certificate (Form No.
2305) indicating therein his previous employments during the taxable year (name of employer/s,
address/s, TIN/s and the date/s of his separation) and attach to the said certificate, a copy of the
Certificate of Income Tax Withheld on Compensation (BIR Form No. 2316) for the calendar year
issued by previous employer/s;
(9)
Mixed income. An individual receiving a combination of compensation and
business/professional income shall first deduct the allowable personal and additional exemptions
from compensation income only the excess therefrom can be deducted, from business or

professional income. In the case of husband and wife, the husband shall be the proper claimant
of the exemptions unless he waives it in favor of his wife.
(B)
Employer. The employer with whom the employee's Application for Registration (Form
No. 1902) is filed, must indicate the date of receipt thereon and accomplish Part V of the said
Application pertaining to Employer's Information such as TIN, Employer's Registered Name, and
other relevant information. LLphil
(C)

Procedures for the filing of the Application (Form No. 1902)

(1)
All employers shall require their employees to accomplish in duplicate the Application for
Registration described above as follows:
(a)
All employees who have not filed the Application for Registration (BIR Form 1902), as of
December 31, 1997, shall accomplish and file the application with their employers not later than
April 30, 1998;
(b)
New employees shall accomplish and file the Application within ten (10) days from the
date of commencement of employment;
(c)
In case of changes in the information data in the Application (BIR Form 1902) previously
submitted by the employee, consisting of changes in personal and additional exemptions,
employment/working status of the spouse of the employee, multiple employment status and
amount of compensation income, an Exemption Certificate (BIR Form 2305) reflecting the
changes, together with the required documents/evidence of changes must be submitted to the
employer within ten (10) days after such change. The employer shall then make the necessary
adjustments on the withholding tax of the employee based on the new information;
(2)
The employer shall transmit both the original and duplicate copies of the Application or
Certificate (after accomplishing the portion for Employer's information of either forms) to the
Revenue District Officer of the City or Municipality where the employer has his legal residence or
place of business within thirty (30) days following its receipt from the employee. The duplicate
copy duly stamped received by the BIR shall be given to the employee.
(3)
The employer shall review the exemptions of the employees and shall, in the computation
of taxes required to be withheld on the compensation of employees, apply the correct and
applicable exemptions as provided in these regulations.
(4)
In case the husband waives his right to claim the additional exemptions of children in favor
of his wife, he shall accomplish a waiver form (BIR Form No. ____) in accordance with the following
procedures:
(a)

Fill up three (3) copies of the prescribed waiver form (BIR Form No. ____)

(b)
Submit to his employer within ten (10) days from employment, together with the BIR Form
1902 said waiver form for acknowledgment in the space provided for that purpose.
The employer of the husband shall:
(i)
After filling up the acknowledgment portion of the waiver form, retain the duplicate copy of
the form and furnish the employee the original and triplicate copies for submission to the
employer of the wife and for file of the employee, respectively.
(ii)
Stop deductions of exemptions of children from the husband's compensation income
starting the following month.
The employer of the wife shall:
Upon receipt of copy of the waiver form duly acknowledged by the employer of the husband, start
deducting exemptions of children from the wife's income on the month when the employer of the
husband stopped deducting the exemptions of children from the husband's income. prLL
(c)
The employed husband and wife shall apply the waiver in the computation of their
respective taxable income in the income tax return required to be filed by them following the
procedure for filing the waiver under Section 2.79.1 (C)(4) of these regulations, that is, the
husband shall not deduct exemptions of children from his compensation income because he has

waived the same (exemptions of children) in favor of his wife who will now deduct said
exemptions from her income in computing her tax due.
Waiver exercised during the calendar year shall be made only once in a calendar year and shall
take effect for the present calendar year and succeeding year/s until revoked by the husband.
Any waiver/revocation of such waiver shall take effect only starting the succeeding calendar year.
In no case should an employer of the wife deduct exemptions of children from the wife's income
unless the waiver by the husband has been duly acknowledged by the employer of the husband.
SECTION 2.79.2.
Failure to File Application for Registration (Form No. 1902 or Exemption
Certificate). Where an employee, in violation of these regulations either fails or refuses to file
an Application for Registration (1902) together with the required attachments, the employer shall
withhold the taxes prescribed under the Schedule for Zero Exemption of the Revised Withholding
Tax Table effective January 1, 1998. In case of failure to file the Exemption Certificate (2305)
together with the attachments, the employer shall withhold the taxes based on the reported
personal exemptions existing prior to the change of status and without reflecting any change.
Any refund or underwithholding that shall arise due to the violations shall be covered by the
penalties prescribed in Section 80 of the NIRC, as amended (Liability for Tax).
SECTION 2.79.3.
Withholding on the Basis of Average Compensation. The employer may
withhold the tax under the NIRC, as amended, on the basis of the employee's average estimated
compensation, with the necessary adjustments, for any month/quarter/year.
SECTION 2.79.4.
Husband and Wife. Where both husband and wife are each recipients of
compensation either from the same or different employers, taxes to be withheld shall be
determined on the following basis:
(A)
The husband shall be deemed the proper claimant of the additional exemption in respect
to any dependent children, unless he explicitly waives his right in favor of his wife in the
application for registration or in the withholding exemption certificate. The waiver may be done
any time during the year.
(B)
In general, taxes shall be withheld from the wages of the wife in accordance with the
schedule for a married person without any qualified dependent.
SECTION 2.79.5.
Non-Resident Aliens. Compensation for services rendered in the
Philippines paid to non-resident aliens engaged in trade or business shall be subject to
withholding under these Regulations.
SECTION 2.79.6.
Year-End Adjustment. On or before the end of the calendar year, and prior
to the payment of the compensation for the last payroll period, the employer shall determine the
sum of the taxable regular and supplementary compensation paid to each employee for the
entire year, including the last compensation to be paid and compute for the amount of income
tax on the annualized gross compensation income; Provided however, that the taxable fringe
benefits received by employees except those given to the rank and file shall be subject to a final
fringe benefits tax .
SECTION 2.80.
(A)

Liability for Tax.

Employer.

(1)
In general, the employer shall be responsible for the withholding and remittance of the
correct amount of tax required to be deducted and withheld from the compensation income of his
employees. If the employer fails to withhold and remit the correct amount of tax, such tax shall
be collected from the employer together with the penalties or additions to the tax otherwise
applicable.
(2)
The employer who required to collect, account for and remit any tax imposed by the NIRC,
as amended, who willfully fails to collect such tax, or account for and remit such tax or willfully
assist in any manner to evade any payment thereof, shall in addition to other penalties, provided
for in the Code, as amended, be liable, upon conviction, to a penalty equal to the amount of the
tax not collected nor accounted for or remitted. Cdpr
(3)

Any employer/withholding agent who fails, or refuses to refund excess withholding tax not

later than January 25 of the succeeding year shall, in addition to any penalties provided in Title X
of the Code , as amended, be liable to a penalty equal to the total amount of refund which was
not refunded to the employee resulting from any excess of the amount withheld over the tax
actually due on their return.
(B)
Employee. Where an employee fails or refuses to file the withholding exemption
certificate or willfully supplies false or inaccurate information thereunder after due written notice
by the employer, the tax otherwise to be withheld by the employer shall be collected from him
including penalties or additions to the tax from the due date of remittance until the date of
payment. On the other hand, where the employee, after due written notice from the employer,
willfully fails or refuses to file the application for registration OR the withholding exemption
certificate or willfully supplies false and inaccurate information, the excess taxes withheld by the
employer shall not be refunded to the employee but shall be forfeited in favor of the government.
(C)

Additions to Tax.

(1)
There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to
twenty five percent (25%) of the amount due, in the following cases:
(a)
Failure to file any return and pay the tax due thereon as required under the provisions of
the Code or these regulations on the date prescribed; or
(b)
Unless otherwise authorized by the Commissioner, filing a return with an internal revenue
officer other than those with whom the return is required to be files; or
(c)
Failure to pay the deficiency tax within the time prescribed for its payment in the notice of
assessment; or
(d)
Failure to pay the full or part of the amount of tax shown on any return required to be filed
under the provisions of the Code or these regulations, or the full amount of tax due for which no
return is required to be filed, or before the date prescribed for its payment; or
(e)
In case of willful neglect to file the return within the period prescribed by the Code or
regulations, or in case a false or fraudulent return is willfully made, the penalty to be imposed
shall be fifty percent (50%) of the deficiency tax, in case any payment has been made on the
basis of such return before the discovery of the falsity or fraud.
(f)
The penalties imposed hereunder shall apply in the case of a deficiency tax assessment
which has become final and executory but which is not paid within the time prescribed for
payment. The interest shall be imposed on the total amount due, inclusive of the deficiency
increments.
(2)
Interest There shall be assessed and collected on any unpaid amount of tax, an interest
at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed for
payment until the amount is fully paid.
(3)
Deficiency Interest Any deficiency in the basic tax due, as the term is defined in the
Code, shall be subject to the interest prescribed in paragraph (a) hereof, which interest shall be
assessed and collected from the date prescribed for its payment until the full payment thereof.
Cdpr
If the withholding agent is the government or any of its agencies, political subdivisions, or
instrumentalities or a government-owned or controlled corporation, the employee thereof
responsible for the withholding and remittance of tax shall be personally liable for the surcharge
and interest imposed herein .
(D)
Failure to File Certain Information Returns (Sec. 250 of the Code). In the case of each
failure to file an information return, statement or list, or keep any record, or supply any
information required by this Code or by the Commissioner on the date prescribed therefor, unless
it is shown that such failure is due to reasonable cause and not to willful neglect, there shall,
upon notice and demand by the Commissioner, be paid by the person failing to file, keep or
supply the same, one thousand pesos (P1,000) for each such failure: Provided, however, That the
aggregate amount to be imposed for all such failures during a calendar year shall not exceed
twenty-five thousand pesos (P25,000).

(E)
Specific Penalties. Notwithstanding the penalties hereunder provided, the following
violations may be extrajudicially settled through compromise pursuant to Sec. 204 of the Code.
(1)
Failure to file return, supply correct and accurate information, pay tax, withhold and remit
tax and refund excess tax withheld on compensation (Sec. 255 of the Code). Any person
required under the Code, as amended, or by regulations to pay any tax, make a return, keep any
record/s, or supply correct and accurate information, who willfully fails to pay such tax, make such
return, keep any record/s, or supply correct and accurate information, or withhold or remit taxes
withheld, or refund excess taxes withheld on compensation, at the time or times required by law,
shall in addition to the other penalties provided by law, upon conviction thereof, be fined not less
than ten thousand pesos (P10,000) and imprisonment of not less than one (1) year but not more
than the (10) years.
(2)
Declarations under penalties of perjury (Sec. 267 of the Code). Any declaration, return
and other statements required under the Code, as amended, shall, in lieu of an oath, contain a
written statement that they are made under the penalties of perjury. Any person who willfully files
a declaration, return or statement containing information which is not true and correct as to every
material matter shall, upon conviction, be subject to the penalties prescribed for perjury under
the Revised Penal Code.
(3)
Violation of withholding tax provision by a government officer (Sec. 272 of the Code).
Every officer or employee of the government of the Republic of the Philippines or any of its
agencies and instrumentalities, its political subdivisions, as well as government-owned or
controlled corporation including the Central Bank who, under the provisions of the Code, as
amended, or regulations promulgated thereunder, is charged with the duty to deduct and
withhold any internal revenue tax and to remit the same in accordance with the provisions of the
Code as amended, and other laws shall be guilty of any offense herein below specified and upon
conviction of each act or omission, be fined in a sum not less than five thousand pesos (P5,000)
but not more than fifty thousand pesos (P50,000) or imprisoned for a term of not less than six
months and one day but not more than two years, or both:
(a)
Those who fail or cause the failure to deduct and withhold any internal revenue tax under
any of the withholding tax laws and implementing regulations;
(b)
Those who fail or cause the failure to remit taxes deducted and withheld within the time
prescribed by law, and implementing regulations; and
(c)
Those who fail or cause the failure to file a return or statement within the time prescribed,
or render or furnish a false or fraudulent return or statement required under the withholding tax
laws and regulations.
(4)
Violation of other provisions of the Code or regulations in general (Sec. 275 of the Code).
A person who violates any provision of the Code, as amended, or any regulation, for which no
specific penalty is provided by law shall, upon conviction for its act or omission, be fined in a sum
of not more than one thousand pesos or imprisoned for a term of not more than six months, or
both.
The specific schedule of penalties shall be provided in a separate regulation.
SECTION 2.81.
Filing of Return and Payment of Income Tax Withheld on Compensation (Form
No. 1601). Every person required to deduct and withhold the tax on compensation shall make
a return and pay such tax on or before the 10th day of the month following the month in which
withholding was made to any authorized agent bank within the Revenue District Office (RDO) or
in places where there are no agent banks, to the Revenue District Officer of the City or
Municipality where the withholding agent/employers legal residence or place of business or office
is located; provided, however, that taxes withheld from the last compensation (December) for the
calendar year shall be paid not later than January 25 of the succeeding year; Provided, further,
that large taxpayers as determined by the Commissioner shall remit taxes withheld on or before
the 25th day of the following month. LibLex
If the person required to withhold and pay the tax is a corporation, the return shall be made in the
name of the corporation and shall be signed and verified by the president, vice-president, or

authorized officers.
With respect to any tax required to be withheld by a fiduciary, the returns shall be made in the
name of the individual, estate, or trust for which such fiduciary acts, and shall be signed and
verified by such fiduciary. In the case of two or more joint fiduciaries the return shall be signed
and verified by one of such fiduciaries.
SECTION 2.82.
Return and Payment in Case Where the Government is the Employer. If
the Government of the Philippines, its political subdivision or any agency or instrumentality, as
well as government-owned or controlled corporation is the employer, the returns of the tax may
be made by the officer or employee having control of payment of compensation or other officer or
employee appropriately designated for the purpose.
SECTION 2.83.

Statement and Returns.

SECTION 2.83.1.
Employees Withholding Statements (BIR Form No. 2316) . In general,
every employer or other person who is required to deduct and withhold the tax on compensation
and fringe benefits shall furnish every employee from whose compensation taxes have been
withheld the Certificate of Income Tax Withheld on Compensation (Form No. 2316, formerly Form
No. W-2) on or before January 31 of the succeeding calendar year, or if his employment is
terminated before the close of such calendar year, on the day on which the last payment of
compensation is made.
The employer shall furnish each employee with the original and duplicate copies of Form No.
2316 showing the name and address of the employer; employer's TIN; name and address of the
employee; employee's TIN; amount of exemptions claimed; amount of premium payments on
medical insurance not exceeding P2,400.00, if any; the sum of compensation paid including the
non-taxable benefits; the amount of tax due; the amount of tax withheld during the calendar year
and such other information as may be required. The statement must be signed by both the
employer or other authorized officer and the employee, and shall contain a written declaration
that it is made under the penalties of perjury. If the employer is the Government of the
Philippines, its political subdivision, agency or instrumentality or government-owned or controlled
corporation, the statement shall be signed by the duly designated officer or employee.
An extra copy of Form 2316 shall be furnished by the employee, duly certified by him, to his new
employer. cdphil
SECTION 2.83.2.
Annual Information Return of Income Tax Withheld on Compensation (Form
No. 1604, Formerly Form No. 1743IR) . Every employer or other person required to deduct and
withhold the tax shall, on or before January thirty-first of the succeeding year, file with either the
Collection Agent or Authorized Municipal Treasurer or Revenue District Officer or Commissioner
the Annual Information Return of Income Tax Withheld on Compensation (BIR Form No. 1604), to
be submitted with an alphabetical list of employees, both in duplicate copies.
(A)
The Annual Information Return of Income Tax Withheld on Compensation must show
among others, the following:
(1)

Withholding Agent's registered name, address and Taxpayer's Identification Number (TIN);

(B)

The alphabetical list of employees must show the following:

(1)

Name and TIN of employees;

(2)

Gross compensation paid by present and previous employers for the calendar year;

(3)

(a) Taxable 13th month pay/Other benefits for the rank and file employees

(b) Taxable fringe benefits for managerial employees

(4)

Non-taxable 13th month pay/Other benefits (Present employer)

(5)

Amount of exemptions;

(6)

Amount of premium payments on medical insurance not exceeding P2,400.00, if any;

(7)

Tax required to be withheld computed in accordance with Sec. 24(A) of the Code;

(8)

Tax withheld by all present employers for calendar year; and

(9)

Adjustment, if any.

(C)
The alphabetical list of employees shall be prepared indicating among others, separate
listings of the following:
(1)
Employees as of December 31 of the taxable year without previous employment during
the year;
(2)
Employees as of December 31 of the taxable year with previous employment within the
year;
(3)
Employees who were terminated prior to the year-end adjustment computation showing
the month of termination/month of last payment of compensation during the year of termination;
and
(4)

Alien employees subject to final withholding tax.

In cases where no information was provided by a previous employer, such fact should be
annotated in Form 1604 and the present employer shall not be liable to any penalties.
SECTION 2.83.3.
Requirement for Income Payees List. In lieu of the manually prepared
alphabetical list of employees and list of payees and income payments subject to creditable and
final withholding taxes which are required to be attached as integral part of the Annual Return
(Form No. 1604), the Withholding Agent may, at its option, submit computer-processed tapes or
cassettes or diskettes, provided that the said list has been encoded in accordance with the
formats prescribed by Form 1604. dctai
SECTION 2.83.4.
Filing of Income Tax Returns by Employees Receiving Purely Compensation
Income. Individual taxpayers receiving purely compensation income from Philippine sources
which does not exceed an aggregate amount of P60,000 for the calendar year and the income tax
on which has been withheld correctly by the employer (tax withheld equals tax due) shall no
longer file an income tax return (1700) required under Sec. 51 of the Code. The following
individuals, however, are still required to file their income tax returns:
(A)
Individuals deriving compensation concurrently from two or more employers at anytime
during the taxable year.
(B)

Individuals whose purely compensation income for the taxable year exceeds P60,000.

(C)
Individuals receiving a combination of compensation and business income (mixed
income). This includes a married individual receiving purely compensation income whose spouse
derives income from business.
In case of married individuals who are still required to file returns, only one return for the taxable
year shall be filed by either spouse to cover the income of both spouses.
(D)
Employees whose total 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, that is, that the total withholding tax does not equal the total tax due on total
compensation income for the taxable year.
(E)
In case of married individuals where one of the spouses received compensation income
exceeding P60,000, a return shall be filed to include the income of the other spouse whose
compensation is P60,000 or less.
SECTION 2.83.5.
Registration as Withholding Agent. Every person who makes payment or
expects to make payment of compensation in the amount of sixty thousand pesos (P60,000.00)
or more a year or five thousand pesos (P5,000.00) monthly, to any single employee shall register
by filing in duplicate, with the Revenue District Office (RDO) of the City or Municipality where his
legal residence or place of business is located, an Application for Registration as a withholding
agent using the form prescribed by the Bureau not later than ten (10) days after becoming an
employer.
SECTION 2.83.6.

Applicability of Constructive Receipt of Compensation. The withholding

tax on compensation shall apply to compensation actually or constructively paid. Compensation

is constructively paid within the meaning of these Regulations when it is credited to the account
of or set apart for an employee so that it may be drawn upon by him at any time although not
then actually reduced to possession. To constitute payment in such a case, the compensation
must be credited or set apart for the employee without any substantial limitation or restriction as
to time or manner of payment or condition upon which payment is to be made, and must be
made available to him so that it may be drawn upon at any time, and its payment brought with
his control and disposition. A book entry, if made, should indicate an absolute transfer from one
account to another. If the income is not credited, but it is set apart, such income must be
unqualifiedly subject to the demand of the taxpayer. Where a corporation contingently credits its
employees with a bonus stock, which is not available to such employees until some future date,
the mere crediting on the books of the corporation does not constitute payment. LexLib
SECTION 2.83.7.
Extension of Time for Furnishing Statements to Employee. An extension
of time, not exceeding thirty (30) days, within which to furnish the Certificate of Income Tax
Withheld on Compensation (Form No. 2316) required by Sec. 2.83 of these Regulations upon
termination of employment is hereby granted to any employer with respect to any employee
whose employment is terminated during the calendar year. In the case of intermittent or
interrupted employment where there is a reasonable expectation on the part of both employer
and employee or further employment, there is no requirement that an employee's withholding
statement be immediately furnished the employee; but when such expectation cease to exist, the
statement must be furnished within thirty (30) days from the date of termination of employment.
The extension mentioned under this Section refers to extension of time for furnishing the
Certificate of Income Tax Withheld on Compensation (Form No. 2316) upon termination of
employment.
SECTION 4.114.

Withholding of Creditable Value-Added Tax

In general, value-added tax due on sales of goods and services are not subject to withholding
since the tax is not determinable at the time of sale. However, sale of goods and services to the
government subject to VAT shall be subject to withholding pursuant to Sec. 114 (C) of RA 8424.
(A)
Rates and basis of creditable value-added tax to be withheld. The gross payments made
by the government to sellers of goods and services shall be subject to withholding tax at the
rates herein prescribed:
(1)
In general, payments by the government or any of its political subdivisions,
instrumentalities or agencies including government-owned or controlled corporations (GOCCs) on
account of its purchase of goods from sellers and services rendered by contractors who are
subject to the value-added tax
On gross payment for the purchase of goods

On gross payment for services rendered -

6%

3%

(2)

Payments made to government public works contractors 8.5%

(3)

Payments for lease or use of property or property rights to non-resident owners 10%

(B)
Persons required to deduct and withhold. All local government units, represented by the
Provincial Treasurer in provinces, the City Treasurer in cities, the Municipal Treasurer in
municipalities, and Barangay Treasurer in barangays, Treasurers of GOCCs and the Chief
Accountant or any person holding similar position and performing similar function in national
government offices, as withholding agents, shall deduct and withhold the prescribed creditable
value-added tax before making any payment to seller of goods and services.
Where the government as herein defined has regional offices, branches or units, the withholding
and remittance of the creditable VAT may be done on a decentralized basis as such, the treasurer
or the chief accountant or any person holding similar function in said regional office, branch or
unit shall deduct and withhold the creditable VAT before making any payment to the seller of
goods and services.
(C)

Returns and payment of taxes withheld. The withholding agents shall accomplish the

Monthly Value-Added Tax Declaration (BIR Form 2550M) in duplicate and the amount withheld
paid upon filing the return with the authorized agent banks located within the Revenue District
Office (RDO) having jurisdiction over the place where the government office is located. In places
where there are no authorized agent bank, the return shall be filed directly with the Revenue
District Offices, Collection Offices or the duly authorized Treasurer of the city or municipality
where the government office is located except in cases where the Commissioner otherwise
permits.
The required return shall be filed and payments made within ten (10) days following the end of
the month the withholding was made except taxes withheld for the 3rd month of the quarter
which shall be remitted through a Quarterly Value-Added Tax Return (BIR Form 2550Q) to be filed
not later than the 25th day after the end of the calendar quarter. cda
(D)
Certificate of Value Added Tax Withheld. Every withholding agent shall furnish each
seller of goods and services from whom taxes has been deducted and withheld, the Certificate of
Creditable Tax Withheld at Source (BIR Form 2307) to be accomplished in quadruplicate, the first
three copies of which shall be given to the seller/payee not later than the fifteenth day of the
following month. The fourth copy shall be the file copy of the withholding agent.
(E)

Liability of designated officers.

(1)
Additions to the tax. The designated Treasurers, Chief Accountants and other persons
holding similar positions, who have the duty to withhold and remit the value added tax in their
respective offices shall be personally liable for the additions to the tax prescribed in Sec. 247 of
the Code.
(2)
Punishable acts or omissions. Every officer or employee of the government of the
Republic to the Philippines or any of its agencies and instrumentalities, its political subdivisions,
as well as government owned or controlled corporations charged with the duty to deduct and
withhold any internal revenue tax and to remit the same in accordance with these regulations
shall, upon conviction for each act or omission herein-below specified, be fined in a sum of not
less than five thousand pesos (P5,000.00) but not more than fifty thousand pesos (P50,000.00) or
imprisoned for a term of not less than six months and one day but not more than two years, or
both.
(a)
Fails or causes the failure to deduct and withhold any internal revenue tax covered by
these regulations;
(b)
Fails or causes the failure to remit the taxes deducted and withheld within the time
prescribed therein;
(c)

Fails or causes the failure to file the return or issue certificate required.

SECTION 5.116.

Withholding of Percentage Tax

Bureaus, offices and instrumentalities of the government, including government-owned or

controlled corporations as well as their subsidiaries, provinces, cities and municipalities making
any money payment to private individuals, corporations, partnerships and/or associations are
required to deduct and withhold the taxes due from the payees on account of such money
payments.
(A)
Internal revenue taxes required to be withheld. Percentage taxes on gross money
payments, to the following shall be subjected to withholding at the rates herein prescribed:
(1)
Persons exempt from value-added tax (VAT). On gross payments to persons who are
exempt under Sec. 109 (z) of the Code from payment of value-added tax and who is not a VAT
registered person except payment to cooperatives Three percent (3%) Cdpr
(2)
Domestic carriers and keepers of garages. On gross payments to operators of cars for
rent or hire driven by the lessee, transportation contractors, including those who transports
passengers for hire, and other domestic carriers by land, air or water, for transport of passengers,
except owner of bancas and owners of animal-drawn two wheeled vehicle, and keepers of
garages Three percent (3%)

(3)

International carriers

(a)
On gross payments to international air carriers doing business in the Philippines Three
percent (3%)
(b)
On gross payments to international shipping carriers doing business in the Philippines
Three percent (3%)
(4)

Franchises

(a)
On gross payments to all franchises on radio and/or television broadcasting companies
whose annual gross receipts of the preceding year does not exceed P10,000.00 Three percent
(3%)
(b)

On gross payments to franchises on electric, gas and water utilities Two percent (2%)

(5)

Banks and non-bank financial intermediaries

(a)
On interest, commissions and discounts paid or given to banks and non-bank financial
intermediaries arising out of lending activities as well as financial leasing, on the basis of the
remaining maturities of the instrument
Short-term maturity (not exceeding 2 years)

5%

Medium-term maturity (over 2 year but not exceeding 4 years) 3%

Long-term maturity
(i) over 4 years but not exceeding 7 years1%
(ii) over 7 years
(b)

0%

On dividends 0%

(c)
On royalties, rentals of property, real or personal, profits from exchange and all other gross
income Five percent (5%)
(6)

Finance companies

(a)
On interest, discounts and other items of gross income paid to finance companies and
other financial intermediaries not performing quasi-banking functions Five percent (5%)
(b)
On interests, commissions and discounts paid from their loan transactions from finance
companies as well as financial leasing based on the remaining maturities of the instruments:
Short-term maturity (not exceeding 2 years)

5%

Medium-term maturity (over 2 years but not exceeding 4 years)

3%

Long-term maturity
(i) over 4 years but not exceeding 7 years1%
(ii) over 7 years

0%

(7)
Life insurance premiums On the total premiums paid to persons doing life insurance
business of any sort in the Philippines Five percent (5%)
However the following shall not be included in the taxable receipts and consequently not subject
to withholding tax:
(a)
Premiums refunded within six (6) months after payment on account of rejection of risk or
returned for other reasons to the insured;
(b)

reinsurance premiums where the tax has previously been paid;

(c)
premiums collected or received by any branch of a domestic corporation, firm or
association doing business outside the Philippines on account of any life insurance of a nonresident insured, if any tax on such premium is imposed by a foreign country where the branch is
established;

(d)
premiums collected or received on account of any reinsurance, if the insured, in case of
personal insurance resides outside the Philippines, if any tax on such premiums is imposed by a
foreign country where the original insurance has been issued or perfected; LLphil
(e)
portion of the premiums collected or received by the insurance companies on variable
contracts in excess of the amounts necessary to insure the lives of the variable contract workers.
(8)

Agents of foreign insurance companies

(a)
On premiums paid to every fire, marine, or miscellaneous insurance agent legally
authorized under the Insurance Code to procure policies of insurance on risk located in the
Philippines for companies not authorized to transact business in the Philippines except on
reinsurance premium Ten percent (10%)
(b)
On premium payments obtained directly with foreign companies where the owner of the
property does not make use of the services of any agent, company or corporation residing or
doing business in the Philippines, in which case, it shall be the duty of said owners to report to
the Insurance Commissioner and to the BIR Commissioner each case where insurance has been
so effected Five percent (5%)
(9)
Amusements On gross payments to the proprietor, lessee, or operator of cockpits,
cabarets, night or day clubs, boxing exhibitions, professional basketball games, jai-alai and
racetracks at the rates herein prescribed:
(a)

cockpits Eighteen percent (18%)

(b)

Cabarets, night and day clubs Eighteen percent (18%)

(c)
Boxing exhibitions except those wherein World or Oriental Championship in any division is
at stake and at least one of the contenders is a citizen of the Philippines and promoted by a
citizen/s of the Philippines or by a corporation or association at least 60% of the capital of which
is owned by such citizens Ten percent (10%)
(d)
Professional basketball games as envisioned in Presidential Decree No. 871
percent (15%)

Fifteen

(e)
Jai-alai and racetracks irrespective of whether or not any amount is charged for admission
Thirty percent (30%)
(10) Sale, barter or exchange of shares of stock listed and traded through the local stock
exchange. On the gross selling price or gross value in money derived on every sale, barter or
other disposition of shares of stock listed and traded through the local stock exchange other than
the sale by a dealer in securities One-half of one percent (1/2 of 1%)
(11) Shares of stock sold or exchanged through initial public offering . On the gross selling
price or gross value in money derived on every sale, barter, exchange or other disposition
through initial public offering of shares of stock in closely held corporations in accordance with
the proportion of such shares to the total outstanding shares of stock after the listing in the local
stock exchange at the rates herein prescribed:
Not over 25% 4%
Over 25% but not exceeding 33 1/3%

2%

Over 33 1/3% 1%
(B)
Returns and payments of taxes withheld. No money payments shall be made by any
government office or agency unless the taxes due thereon shall have been deducted and
withheld.
Taxes deducted and withheld shall be covered by the Monthly Return of Internal Revenue Taxes
withheld on Government Money Payments (BIR Form 1600) in duplicate to be filed and the tax to
be paid to the Authorized Agent Bank located within the Revenue District Office (RDO) having
jurisdiction over the place where the government office is located. In places where there are no
authorized agent bank, the return shall be filed directly with the Revenue District Officer,
Collection Officer or the duly authorized Treasurer of the City or Municipality where the

government office is located except in cases where the Commissioner otherwise permits. The
required return shall be filed and payments made within ten (10) days following the end of the
month the withholding was made. prcd
(C)
Certificate of internal revenue taxes withheld. Every withholding government office,
agency or entity shall furnish each proprietor, operator, common carrier, franchise holder, bank
and non-bank financial intermediaries, finance company, insurance company or agent from
whom taxes under these regulations had been deducted and withheld the Certificate of
Creditable Tax Withheld at Source (BIR Form 2307) to be accomplished in triplicate, two copies to
be given to the payee simultaneously with the money payments not later than the fifteenth
(15th) day of the month following the close of the calendar quarter. The third copy of the
certificate shall be the file copy of the withholding government office, agency or entity.
(D)

Liability of designated officers

(1)
Additions to the tax The designated Treasurers, Chief Accountants and other persons
holding similar positions, who have the duty to withhold and remit the value added tax in their
respective offices shall be personally liable for the additions to the tax prescribed in Sec. 247 of
the Code .
(2)
Punishable acts or omissions Every officer or employee of the government of the
Republic of the Philippines or any of its agencies and instrumentalities, its political subdivisions,
as well as government owned or controlled corporations charged with the duty to deduct and
withhold any internal revenue tax and to remit the same in accordance with these regulations
shall, upon conviction for each act or omission herein-below specified, be fined in a sum of not
less than five thousand pesos (5,000.00) but not more than fifty thousand pesos (50,000.00) or
imprisoned for a term of not less than six months and one day but not more than two years, or
both.
(a)
Fails or causes the failure to deduct and withhold any internal revenue tax covered by
these regulations;
(b)
Fails or causes the failure to remit the taxes deducted and withheld within the time
prescribed therein;
(c)

Fails or causes the failure to file the return or issue certificate required.

REPEALING CLAUSE. All existing rules and regulations or parts thereof which are inconsistent
with the provisions of these regulations are hereby revoked.
EFFECTIVITY. These regulations shall take effect on compensation income paid beginning
January 1, 1998. No penalties shall apply until May 15, 1998 for non-compliance with the new
features of the Code as implemented in these regulations. cdasia
(SGD.) MILWIDA M. GUEVARA
Acting Secretary of Finance
Recommending Approval:
(SGD.) LIWAYWAY VINZONS-CHATO
Commissioner of Internal Revenue
C o p y r i g h t 2 0 0 8 C D T e c h n o l o g i e s A s i a, I n c.
04-08-1998 Revenue Regulations No. 01-98
Re-Defining the Term "Large Taxpayers"
April 8, 1998

REVENUE REGULATIONS NO. 01-98

SUBJECT
:
Re-Defining the Term "Large Taxpayers", Modifying the Criteria for
Determining Large Taxpayers, and Prescribing the Time, Place and Manner of Filing of Tax Returns
and Payment of Taxes by Large Taxpayers Amending Further RR No. 12-93, as Amended by RR 394
TO

SECTION 1.

All Internal Revenue Officers and Others Concerned

Objectives. These regulations are hereby promulgated to:

1.
Re-define the term "Large Taxpayers", in view of the passage of the Comprehensive Tax
Reform Package under Republic Act No. 8424, also known as the Tax Reform Act of 1997;
2.
Modify the criteria in determining Large Taxpayers in consideration of inflation, volume of
business, wage and employment levels and similar economic factors pursuant to the provisions of
Section 245 (j) of the National Internal Revenue Code (NIRC) of 1997; prcd
3.
Expand the selection of one thousand (1,000) Large Taxpayers initially identified under
Revenue Regulations (RR) No. 12-93 (as amended by RR No. 3-94), to one thousand five hundred
(1,500), at the outset, and provide for the continuous expansion of the selection, until such time
that eighty-five percent (85%) of the Bureau's total collections shall have been captured and
monitored through the database of Large Taxpayers; and
4.
Prescribe the time, place and manner of filing of tax returns and payment of taxes of Large
Taxpayers in relation to the pertinent provisions of the NIRC and further amending RR No. 2-93 as
amended by RR No. 3-94.
SECTION 2.

Coverage.

1.
The initial 1,500 Large Taxpayers to be identified and covered under these Regulations
shall comprise those Large Taxpayers located within the following Revenue Regions:
1.1

Revenue Region No. 4, San Fernando, Pampanga;

1.2

Revenue Region No. 5, Valenzuela; cdtai

1.3

Revenue Region No. 6, Manila, with the exception of:

1.3.1 Revenue District No. 35, Romblon

1.3.2 Revenue District No. 36, Puerto Princesa, and
1.3.3 Revenue District No. 37, San Jose, Occidental Mindoro
1.4

Revenue Region No. 7, Quezon City

1.5

Revenue Region No. 8, Makati City; and

1.6

Revenue Region No. 9, San Pablo City, with the exception of:

1.6.1 Revenue District No. 62, Boac, Marinduque; and

1.6.2 Revenue District No. 63, Calapan, Oriental Mindoro.
2.
Large Taxpayers whose offices are not located in any of the aforementioned Revenue
Regions, but who maintain branch offices in any of said Revenue Regions, may also be classified
as Large Taxpayers, and shall be duly notified by the Commissioner of their status as such.
3.
Any taxpayer not located in or maintaining branch offices in any of the aforementioned
Revenue Regions, but who may in the future, be classified as a Large Taxpayer and duly notified
by the Commissioner of Internal Revenue of its status as such, shall be covered by these
Regulations, and shall fall under the jurisdiction of the Large Taxpayers Offices that shall be
created in other areas. cdlex
4.
Additional Large Taxpayers may be selected and notified by the Commissioner of Internal
Revenue, and covered by these Regulations.
5.

Separate venues may also be designated by the Commissioner of Internal Revenue for the

filing of tax returns and payment of taxes by said Large Taxpayers.

6.
Once a taxpayer has been identified and notified of his/its status as a Large Taxpayer by
the Commissioner of Internal Revenue, he/it shall continue to be classified as such, and shall
therefore be covered by these Regulations, until otherwise notified.
SECTION 3. Criteria for Determination of Large Taxpayers. A "Large Taxpayer" is a taxpayer
who has been classified as such, and has been duly notified by the Commissioner of Internal
Revenue as having satisfied any or a combination of the following criteria:
1.

As to tax payment:

a.
Value-Added Tax (VAT) Any taxpayer with net VAT paid or payable of at least P100,000
per quarter;
b.

Excise Tax Any taxpayer with annual excise tax paid or payable of at least P1,000,000;

c.

Income Tax Any taxpayer with annual income paid or payable of at least P1,000,000;

d.
Withholding Tax Any taxpayer with annual withholding tax payment/remittance for all
kinds of withholding taxes (i.e., on compensation, expanded, final and government money
payment) of at least P1,000,000; (For taxpayers, business establishments and government offices
with branches/units, the basis is the total annual taxes withheld by the Head Office and all the
branches/units.)
e.
or

Percentage Taxes Any taxpayer with percentage taxes of at least P100,000 per quarter;

f.
Documentary Stamp Taxes Any taxpayer with aggregate annual documentary stamp
taxes of at least P1,000,000.
2.

As to financial condition and results of operations:

a.
Gross Sales/Receipts
P1,000,000,000; and

Any

taxpayer

with

total

annual

gross

sales/receipts

of

b.
Net Worth Any taxpayer with a total Net Worth at the close of each calendar or fiscal
year of at least P300,000,000. LLphil
SECTION 4.
1.

Filing of Returns and Payment of Taxes.

Where to File and Pay: lexlib

All Large Taxpayers shall file all internal revenue tax returns, information returns or declarations,
and other required documents at the Large Taxpayers Division, Ground Floor, BIR National Office
Building; and pay the taxes thereon at either the Development Bank of the Philippines (DBP) or
the Land Bank of the Philippines (LBP) branches located at the same place. This constitutes an
exception to the place of filing and payment as provided for in Sections 58, 77, 81, 114, 128,
130 and 200 of the NIRC.
2.

Modes of Payment:

Payments may be made only through any or a combination of the following modes:
2.1

Bank Debit Memo/Advice against the taxpayer's account with the DBP of LBP; and

2.2
Tax Debit Memo applied by the taxpayer against the unutilized portion of duly issued tax
credit certificates for all taxes except for withholding taxes.
3.

When to File and Pay:

3.1

Income Tax

3.1.1 Corporate Large Taxpayers shall file quarterly tax returns, and pay the taxes thereon, not
later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year,
whether calendar or fiscal. The final return and the corresponding income tax shall be paid on or
before the fifteenth (15th) day of the fourth (4th) month following the close of the calendar or
fiscal year, as the case may be, in accordance with Sections 75, 76 and 77 of the NIRC.

3.1.2 Individual Taxpayers who may, in the future, be classified as Large Taxpayers and notified
by the Commissioner of Internal Revenue of their status as such, shall file a declaration of their
estimated income for the current taxable year on or before April 15 of the same taxable year,
pursuant to Section 74 (A) of the NIRC, and shall file the tax returns and pay the taxes due in four
(4) installments, with the first installment to be paid at the time of declaration and the second
and third to be paid on August 15 and November 15 of the current year, respectively. The fourth
installment shall be paid on or before April 15 of the following calendar year when the final
adjustment return is due to be filed in accordance with Section 74 (B) of the NIRC. Cdpr
3.1.3 In the matter of quarterly and final annual income tax returns, in case separate income tax
returns are prepared for each operational unit (e.g. banks filing separate income tax returns for
their regular banking operations, trust operations and foreign currency units), these taxpayers
may continue to do so.
However, the returns shall be forwarded to the Head Office of the Large Taxpayer who shall file a
consolidated return and pay the total income taxes due. The said Head Office shall prepare a
covering schedule (Annex A) of all its units/departments showing the following information:
a.

Quarter/year covered;

b.

Head office and unit names and addresses; and

c.

Amounts of income taxes payable.

3.2

Withholding Tax Remittance and Information Returns

All withholding taxes of the Head Office and/or any branch/unit of a Large Taxpayer shall be
covered by a consolidated return, and remitted within twenty five (25) days after the close of
each month.
An accompanying schedule (Annex B) shall be attached to the return filed with the following
information:
a.

Month covered;

b.

Name and addresses of Head Office and branches/units; and

c.

Amount of withholding taxes to be remitted.

Annual information returns on final withholding taxes shall be filed on or before January 31 of the
succeeding year, and for creditable withholding taxes, not later than March 1 of the year following
the year for which the annual report is being submitted.
3.3

Value-Added Tax (VAT)

Monthly VAT declarations and quarterly VAT returns of Large Taxpayers shall be filed, and the
taxes paid, not later than the 25th day following the end of each month and quarter, respectively,
in accordance with Section 114 of the NIRC. cdrep
3.4

Other Percentage Taxes

Large Taxpayers who are presently preparing separate percentage tax returns shall file a
consolidated return, and pay the aggregate percentage taxes due, within twenty five (25) days
after the end of each taxable quarter subject to the pertinent provisions of Section 128 (A) of the
NIRC. The Head Office shall prepare a schedule (Annex C) of all percentage tax returns of the
branches/units with the following information:
a.

Quarter/period covered;

b.

Head office and branch/unit names and addresses; and

c.

Kind and amount of percentage tax payable.

3.5

Excise Tax

Payments of Large Taxpayers, as indicated in the corresponding Authorities to Accept Payment

(ATAPs) issued for excise taxes, shall be made before removal from the place of production or
before release of the articles from the customs house subject to the pertinent provisions of

Sections 130 (A) (2) and 131 (A) of the NIRC.

3.6

Documentary Stamp Taxes

Large Taxpayers shall pay their documentary stamp taxes within ten (10) days after the close of
the month when the taxable document was made, signed, issued, accepted or transferred as
provided under Sec. 200 B of the NIRC, by the filing of the documentary stamp tax returns,
through purchase or actual affixture or by imprinting the documentary stamps through a
documentary stamp metering machine. cda
3.7

Capital Gains Tax and Withholding Tax on Gains Realized on the Sale/Transfer of Property

A Large Taxpayer shall file capital gains and withholding tax returns, and pay the corresponding
taxes, for gains from the sale or disposition of real property under Section 24 (D) or Section 27
(D)(5) of the NIRC, within thirty (30) days following each sale or disposition.
3.8
Capital Gains and Withholding Taxes on Gains Realized on the Sale/Transfer of Share of
Stock
3.8.1 Large Taxpayers (Individuals) shall file capital gains and withholding tax returns, and pay
the corresponding taxes, for gains from the sale or exchange of shares of stock not traded thru a
local stock exchange as prescribed under Section 24(C) of the NIRC, within thirty (30) days
following each transaction, and a final consolidated return on or before April 15, of each year
covering all stock transactions of the preceding taxable year.
3.8.2 Large Taxpayers (Corporate) deriving capital gains from the sale or exchange of shares of
stock not traded thru a local stock exchange as prescribed under Sections 24 (C), 25 (A)(3), 27
(E)(2), 28 (A)(7)(c), and 28 (B)(5)(c), shall file a return within thirty (30) days after each
transaction, and a final consolidated return of all transactions during the taxable year on or
before the fifteenth (15th) day of the fourth (4th) month following the close of the taxable year.
SECTION 5. Amendments to Selection Criteria. The Commissioner of Internal Revenue may
recommend to the Secretary of Finance the amendment/modification to any or all of the criteria in
the determination and selection of Large Taxpayers after considering such factors as inflation,
volume of business, wage and employment levels, and similar economic factors. LLjur
SECTION 6. Repealing Clause. All rules and regulations or parts thereof inconsistent with the
provisions of these regulations are hereby amended accordingly. cdrep
SECTION 7.

Effectivity. These regulations shall take effect immediately.

(SGD.) SALVADOR ENRIQUEZ

Secretary of Finance
MILWIDA M. GUEVARA
Acting Secretary
Recommending Approval:
LIWAYWAY VINZONS-CHATO
Commissioner of Internal Revenue
REVENUE REGULATIONS NO. 02-98
REVENUE REGULATIONS NO. 02-98
REVENUE REGULATIONS NO. 02-98
REVENUE REGULATIONS NO. 02-98
REVENUE REGULATIONS NO. 02-98
REVENUE REGULATIONS NO. 02-98

REVENUE REGULATIONS NO. 01-79

SUBJECT

TO

All Internal Revenue Officers and Others Concerned

Regulations Governing the Taxation of Non-resident Citizens

Pursuant to the provision of Section 326 in relation to Section 4 of the National Internal Revenue
Code of 1977, as amended, the following regulations revising Revenue Regulations No. 9-73 to
implement the latest amendments to Section 20 of the same Code by P.D. No. 1457 are hereby
promulgated.
SECTION 1. Scope. These amended regulations shall govern the manner of taxation of nonresident citizens as provided for under Section 21 of the Tax Code, as amended, and shall be
known as Revenue Regulations No. 1-79.
SECTION 2.

Who are considered as nonresident citizens.

The term "non-resident citizen" means one who establishes to the satisfaction of the
Commissioner of Internal Revenue the fact of his physical presence abroad with the definite
intention to reside therein and shall include any Filipino who leaves the country during the
taxable year as:
(a)
Immigrant one who leaves the Philippines to reside abroad as an immigrant for which a
foreign visa as such has been secured.
(b)
Permanent employee one who leaves the Philippines to reside abroad for employment
on a more or less permanent basis.
(c)
Contract worker one who leaves the Philippines on account of a contract of employment
which is renewed from time to time within or during the taxable year under such circumstances
as to require him to be physically present abroad most of the time during the taxable year. To be
considered physically present abroad most of the time during the taxable year, a contract worker
must have been outside the Philippines for not less than 183 days during such taxable year. aisa
dc
Any such Filipino shall be considered a non-resident citizen for such taxable year with respect to
the income he derived from foreign sources from the date he actually departed from the
Philippines.
A Filipino citizen who has been previously considered as a non-resident citizen and who arrives in
the Philippines at any time during the taxable year to reside therein permanently shall also be
considered a non-resident citizen for the taxable year in which he arrived in the Philippines with
respect to his income derived from sources abroad until the date of his arrival.
SECTION 3. Proof of intention. A Filipino citizen who leaves the Philippines to reside abroad
either as an immigrant or for permanent employment or a contract worker, shall submit to the
Commissioner of Internal Revenue proof of his intention of leaving the Philippines to reside
permanently abroad. A returning non-resident citizen, on the other hand, must present proof of
his intention to return to and reside permanently in the Philippines. Such proof of intention shall
be attached to his income tax return (BIR Form No. 1701C) and may consist of the following:
(a)

In the case of an immigrant, photostat or xerox copy of his foreign visa.

(b)
In the case of one leaving for permanent employment abroad, a certificate from his
employer showing the nature and duration of his employment.
(c)

In the case of a contract worker

(1)

Certificate of the employer; or

(2)

Copy of the contract of employment; or

(3)

Other documentary evidence.

(d)

In the case of a returning non-resident citizen

(1)

Xerox copy of his passport bearing the stamp of Philippine immigration authorities showing

that he is a returning resident as distinguished from a mere Balikbayan.

(2)

Other documentary evidence.

SECTION 4. Manner of filing returns. Every non-resident citizen must file an income tax return
covering all his income earned abroad on BIR Form No. 1701C. When husband and wife are both
non-resident citizens, only one return containing their consolidated income is required to be filed
on BIR Form No. 1701C. cdta
If aside from the foreign income, the non-resident citizen also derives income from Philippine
sources, two separate returns should be filed, one on BIR Form No. 1701C covering the income
derived from foreign sources and the other on BIR Form No. 1701 or 1701A, as the case may be,
covering the income from sources within the Philippines. However, if the Philippine income is
derived solely from salaries, wages, remunerations or other similar compensation for services
rendered and such gross income does not exceed P2,000, if the taxpayer is single, or P3,333.33,
if married or a head of the family, the non-resident citizen is exempt from filing an income tax
return with respect to such income.
The income tax return of non-resident citizen covering his taxable income earned abroad shall be
accompanied by a copy of the income tax return filed with the national government of the foreign
country of his residence as well as the evidences of tax payment.
SECTION 5.
A.

Computation of income and tax.

On income derived from all sources outside the Philippines.

1.
What to include as gross income. The gross income of a non-resident citizen derived
from sources outside the Philippines includes all income enumerated under Section 29 of the
National Internal Revenue Code, whether or not such income is exempted from income tax in the
foreign country where it was derived.
If the income is in foreign currency other than US dollars, it shall first be converted into US dollars
at the average annual rate of exchange of the foreign currency and the US dollar for the year in
which the income was earned.
2.
Rate of tax. Beginning with the taxable year 1978, there shall be imposed on the
adjusted gross income of non-resident citizen a tax computed as follows:
On the amount not exceeding
$6,000

1%

On the amount exceeding $6,000

but not exceeding $20,000 $60.00 plus
2% of excess
over $6,000.
On the amount exceeding
$20,000

$340.00 plus

3% of excess
over $20,000.
3.
Computation of Adjusted Gross Income. The adjusted gross income is arrived at by
deducting from the gross income the following:
a.
Personal exemption of $2,000 if the non-resident citizen is single or a married person
legally separated from his or her spouse, or $4,000 if married or head of a family;
b.
The total amount of the national income tax actually paid to the national government of
the foreign country of his residence.
4.
Head of Family. The term "head of family" is defined as "an unmarried man or woman
with one or both parents, or one or more brothers or sisters, or one or more legitimate,

recognized natural, or adopted children living with and dependent upon him or her for their chief
support where such brothers, sisters, or children are not more than twenty-one years of age,
unmarried and not gainfully employed or where such children are incapable of self-support
because they are mentally or physically defective.
5.
Computation of tax. The computation of the tax due from a non-resident citizen on
income derived abroad is illustrated as follows:
Mr. Juan de la Cruz, 35 years old, Filipino, married to Maria, with a dependent son, Jose and a
resident of Los Angeles, California.
For U.S. Federal Income Tax purposes, he filed a joint return containing the following data and
claimed the optional standard deductions and used the optional tax tablets:
Income:
Wage, Salaries, Tips, Others

$7,814.65

Dividends received from qualified U.S.

domestic corporation $482.50 less
exclusion $200.00

282.50

Interest Income on savings deposit

110.17

Income other than wages (Wife's prize

in photo contest)

200.00

TOTAL GROSS INCOME

$8,407.32

LESS: Adjustment to income (moving

expenses)

60.00

Adjusted Gross Income

$8,347.32

TAX DUE PER IRS TABLES

$ 325.00

Tax payments and credits

Total Federal income tax
withheld

$484.30

Other payments (gasoline

tax, etc.)

32.67

Total payments and credits

$516.97

AMOUNT REFUNDABLE

(191.97)

======
For Philippine income tax purposes, his income shall be computed as follows:
Gross Income

$8,407.32

ADD: Excluded dividend income taxable

under Philippine Income Tax Law

200.00

Total Gross Income

$8,607.32

LESS:
(a)

Personal Exemption as

married
(b)

$4,000

Foreign National Income

Tax paid (Attach copy

of Federal Income Tax
Return and evidence
of payment) 325

Total Deductions [add (a) & (b)]

4,325.00

ADJUSTED GROSS INCOME SUBJECT TO TAX

$4,282.32

=======
Tax Due:
Adjusted Gross Income

$4,282.32

At 1% rate (not over $6,000.00)

.01

Amount payable

$42.82

B.

On income derived from sources within the Philippines.

The tax due on income derived by a non-resident citizen from sources within the Philippines shall
be computed in the same manner as the income tax payable by resident citizens and resident
aliens.
SECTION 6. When and where to file. The return must be filed, and the tax due, if any, must
be paid on or before April 15 following the year for which the return is being filed with the
Philippine Embassy or Office of the Consulate General nearest to the taxpayer's place of
residence or direct to the Commissioner of Internal Revenue, BIR Bldg., Diliman, Quezon City,
Philippines.
If the return and payment, if any, are sent by mail, the same should be mailed on such a date as
to reach the Philippine Embassy, Philippine Consulate General or the Commissioner of Internal
Revenue on or before April 15. The payment should be made in the form of an international
money order, bank draft or manager's check payable to the Commissioner of Internal Revenue.
If the return is filed and payment of the tax made in the Philippines by or for the non-resident
citizen, the tax may be paid in Philippine currency, the dollar amount of the tax to be converted
into pesos at the rate of exchange prescribed by Revenue Memorandum Circular No. 21-78 for
internal revenue tax purposes.
When the tax due is in excess of two hundred dollars (U.S.$200.00), the non-resident citizen may
elect to pay the tax in two equal installments in which case, the first installment shall be paid at
the time the return is filed and the second installment, on or before the fifteenth day of July
following the close of the calendar year. If any installment is not paid on or before the date fixed
for its payment, the whole amount of the tax unpaid becomes due and payable together with the
delinquency penalties.
SECTION 7.

Repealing Clause. These regulations supersede Revenue Regulations No. 9-73

dated November 26, 1973. All existing rules, regulations, administrative orders and general
circulars or portion thereof, which are inconsistent herewith are hereby repealed, amended or
modified accordingly.
SECTION 8. Effectivity. These regulations shall take effect immediately and shall apply to
income earned beginning January 1, 1978.
CESAR VIRATA
Minister of Finance
Recommending Approval:
EFREN I. PLANA
Acting Commissioner
ANNEX "A"
REPUBLIC OF THE PHILIPPINES
MINISTRY OF FINANCE
Manila
January 15, 1979
RULES AND REGULATIONS IMPLEMENTING P.D. 1469
SUBJECT
:
REGISTRATION OF EXPORT PRODUCERS AND TRADERS WITH THE PHILIPPINE
EXPORT COUNCIL AND AVAILMENT OF TAX BENEFITS FOR INDIRECT EXPORTS UNDER
PRESIDENTIAL DECREE NO. 1469.
Pursuant to the provisions of Section 6 of Presidential Decree No. 1469 in relation to Sections 4
and 326 of the National Internal Revenue Code of 1977, as amended, these regulations are
hereby promulgated.
SECTION 1. Scope. These regulations shall govern the registration of export producers and
traders with the Philippine Export Council and the availment of tax benefits for indirect exports
under Presidential Decree No. 1469.
SECTION 2. Definition of Terms. For purposes of these regulations, the following definitions of
terms are hereby adopted:
(a)
"Registered Export Producer" shall have the same meaning as defined under Section
187(y) of the National Internal Revenue Code, as amended by P.D. 1469.
(b)
"Registered Export Trader" shall be understood as defined under Section 187(z) of the
National Internal Revenue Code, as amended by P.D. 1469.
(c)
"Export Sales" shall have the same meaning as defined under Section 187(aa) of the
National Internal Revenue Code, as amended by P.D. 1469.
(d)
For purposes of registration, "Philippine-made products" shall mean articles or products for
export, manufactured, produced or processed by registered export producers.
(e)
"Tax Exemption Certificate" shall mean the certificate issued by the Bureau of Internal
Revenue that a registered export producer is entitled to exemption from the payment of
percentage tax on its export sales.
(f)
"Tax Credit Certificate" shall mean the certificate issued by the Bureau of Internal Revenue
evidencing credits against internal revenue taxes extended to registered export producers under
Presidential Decree No. 1469. A tax credit certificate shall be non-transferable and it may be used
by the registered export producer against all internal revenue tax liabilities but in no case may it
be used so as to result, in effect, in a refund.
SECTION 3. Qualification for Registration. Any person, corporation, partnership or other entity
doing business in the Philippines shall, before registration, satisfy the Philippine Export Council
that:

(a)
He or it is actually engaged in the manufacture, production or processing of articles or
products in commercial quantity for export which meet the quality standards set by the Bureau of
Standards for such articles or products.
(b)
He or it is engaged or will engage in buying Philippine-made products from a registered
export producer and subsequently exporting the same.
SECTION 4.

Application for Registration.

(a)
Processing and Evaluation. In processing of applications for registration, the Council
may, in its sound discretion, designate any competent government agency to evaluate the
applications, make factual determinations in relation thereto and submit its recommendations to
the Council. This is without prejudice to the automatic registration prescribed in P.D. 1584.
(b)
Filing. Applications for registration shall be filed with the Philippine Export Council or its
delegate.
(c)
fees.

All applications shall be in the prescribed form and shall be subject to the payment of filing

(d)
Supporting documents. The documents to be submitted by the applicant in support of
its application are:
1.
In the case of juridical entities Articles of Incorporation or Partnership or any other
document evidencing the legal existence of the applicant.
2.
Resolution of the Board of Directors authorizing the filing of the application, in case of
corporation, or by the Managing Partners in case of a partnership.
3.
Audited financial statements of the applicant, viz: profit and loss statements and balance
sheets for the two immediately preceding years if applicant has been in operation for such
period; otherwise only such financial statements during the period it has been in operation.
4.
Export market projections showing expected revenues, selling and other administrative
costs.
5.
Other papers as may reasonably be required by the Philippine Export Council and/or its
delegate.
The foregoing documents shall be certified true copies of the original documents.
(e)
Incomplete Papers. Upon filing of the application, the Philippine Export Council and/or
its delegate shall require the applicant to submit all required papers not filed with the application
within a period to be prescribed by the Philippine Export Council or its delegate. Failure to comply
within said period shall be construed as abandonment of the application.
SECTION 5. Certificate of Registration. The Certificate of Registration shall be issued by the
Philippine Export Council. Copies of the Certificate shall be furnished the delegate of the
Philippine Export Council and the Bureau of Internal Revenue.
SECTION 6. All conditions and requirements for registration prescribed by the Council and/or its
delegate shall be taken into account by the Bureau of Internal Revenue in the determination of
tax benefits for indirect exports.
SECTION 7. Availment of Tax Benefits. The tax benefits for indirect exports provided in
Section 3 of P.D. 1469 shall be available to registered export producers who are registered with
the Council.
(a)
Tax Exemption The Bureau of Internal Revenue shall issue a Certificate of Tax Exemption
covering the sales of registered export producers to:
1.

other registered export producers, or cdtai

2.

registered exports traders, or

3.

foreign tourists and travelers;

provided the articles or products sold were actually exported on or before the 20th day of the

month following the calendar quarter when the sale took place.
In order to substantiate the claim for tax exemption, the registered export producer must submit
to the Bureau of Internal Revenue the following documents:
1.
and

A photostatic copy of the certificate of registration issued by the Philippine Export Council;

2.
Copies of invoices, bills of lading, inward letters of credit, landing certificates, and other
commercial documents evidencing the actual exportation of products and/or articles sold.
(b)
Tax Credit The Bureau of Internal Revenue shall issue appropriate tax credit certificates
only to export producers registered with the Council.
A registered export producer can avail of the tax credit in the following situations:
A.

Sale by a registered export producer to another registered export producer:

1)
Where the tax is billed as a separate item in the sales invoice, the purchaser (2nd
registered export producer) can claim tax credit for the taxes paid on raw materials, parts or
components purchased and utilized in the manufacture or production of its export articles;
2)
Where the tax is not billed as a separate item in the sales invoice, the seller (1st registered
export producer) is the one entitled to claim the tax credit for taxes paid on raw materials, parts
or components utilized in the manufacture or production of finished articles and/or products
together with sales taxes paid on said articles or products sold to another registered export
producer.
B.
Sale by registered export producer to a registered export trader and/or foreign tourists and
travelers:
Whether or not the sales tax is billed as a separate item in the sales invoice, only the registered
export producer can claim the tax credit for taxes paid on raw materials, parts or components
utilized in the manufacture or production of finished articles and/or products sold to a registered
export trader and/or foreign tourists and travelers.
In order to avail of the tax credit benefit pursuant to Section 202(f), second paragraph of the Tax
Code, the following documents shall be submitted to the Bureau of Internal Revenue:
1.
A written application for said tax credit, which must be filed within one (1) year from date
of the actual exportation of the product and/or article, together with the copies of shipping or
other documents evidencing actual exportation; and
2.
Sales invoices or other documents from suppliers or sellers of raw materials, part,
accessory or other article forming part of the finished product exported.
Illustrative examples on the manner of availment of incentives are shown in Illustration Nos. 1, 2,
3 and 4 of Annex "A".
SECTION 8. Cancellation of Registration. Any Certificate of Registration issued under this
Decree may be revoked/cancelled by the Philippine Export Council on its own initiative or upon
recommendation of its designated government agency on the following grounds:
(a)

Violation of the provisions of Presidential Decree 1469 or of these rules and regulations; or

(b)
Violation of any law relating to taxation, currency, immigration national security and
economy; or
(c)

Failure to meet the standards set by the Bureau of Standards on their products for export.

SECTION 9. Applicability to Existing Enterprises. Registered export producers and export

traders with the Board of Investments shall be automatically registered with the Council:
Provided, however, that an export producer registered under this Decree, which is entitled to
benefits under other laws, shall not concurrently avail of the tax benefits accruing to its
registered activity under this Decree and other laws.
SECTION 10. Repealing Clause. All rules and regulations inconsistent herewith shall be

deemed revoked or amended accordingly.

SECTION 11. Publication and Effectivity. These rules and regulations shall take effect fifteen
(15) days after its publication in a newspaper of general circulation.
CESAR VIRATA
Minister of Finance
Recommending Approval:
CONRADO P. DIAZ
Acting Commissioner of Internal Revenue
ANNEX "B"
ILLUSTRATIVE EXAMPLES
SITUATION NO. 1. SALE BY REGISTERED EXPORT PRODUCER TO
ANOTHER REGISTERED EXPORT PRODUCER.
Illustration No. 1. Where the tax is Billed as a Separate Item in the Sales Invoice.
(A)
Sale by a Registered Export Producer to Another Registered Export Producer Considered
"Export Sales" During the Quarter When the Sale was Consummated.
FACTS: On February 5, 1979, "B", a registered export producer, purchased from "A", a domestic
manufacturer, P88,000.00 worth of raw materials of which the sales tax in the amount of
P8,000.00 was separately billed in the sales invoice. "B" utilized these raw materials in the
manufacture of his finished articles which he thereafter sold to "C", another registered export
producer, for P110,000.00 wherein the P10,000.00 sales tax was billed as a separate item in the
sales invoice. "C" also utilized these finished articles he purchased from "B" as raw materials or
input in the manufacture of his finished articles which he exported on March 20, 1979.
(1)

Manner of Invoicing:

(a)

Invoicing by "A" to "B":

Selling Price

P80,000.00

10% Sales Tax

8,000.00

Total

P88,000.00

=========
(b)

Invoicing by "B" to "C":

Selling Price

P100,000.00

10% Sales Tax

10,000.00

Total

P110,000.00

=========
(2)

Recommended Accounting Entries:

IN THE BOOKS OF "B"

Purchases

P80,000.00

Deferred Tax Credit 8,000.00

Cash/Accts. Payable

P88,000.00

To record purchase of raw materials from "A".

#
Cash/Accounts Receivable
P110,000.00
Sales

P100,000.00

Sales Tax Payable

10,000.00

To record sales of manufactured articles to "C".

IN THE BOOKS OF "C "
Purchases

P100,000.00

Deferred Tax Credit 10,000.00

Cash/Accts. Payable

P110,000.00

To record purchase of raw materials from "B".

#
(3)

Determination of Sales Tax Liability:

The sale made by "B" to "C" is not subject to sales tax. The sale between them and the
subsequent actual exportation by "C" of his manufactured products both occurred within the
quarter when the sale took place. Since the sales tax was billed as a separate item in the sales
invoice issued by "B" to "C", the following are the recommended accounting entries:
IN THE BOOKS OF "B"
Sales Tax Payable

P10,000.00

Miscellaneous Income

P2,000.00

Deferred Tax Credit P8,000.00

To take up recognition of income and to offset sales tax payable against deferred tax credit as a
result of exemption from sales tax.
#
IN THE BOOKS OF "C"
Purchases

P2,000.00

Tax Credit Receivable

8,000.00

Deferred Tax Credit P10,000.00

To set up tax credit receivable from BIR and to charge purchases for the unrecovered amount paid
on the raw materials used in the finished products sold.
#
or the following alternative entries:
IN THE BOOKS OF "B"
Sales Tax Payable

P10,000.00

Accts. Payable, C

P2,000.00

Deferred Tax Credit 8,000.00

To offset sales tax payable against deferred tax credit and to set up account payable to "C"
representing excess amount collected from "C" as a result of exemption from sales tax.
IN THE BOOKS OF "C"
Accts. Receivable, "B"

P2,000.00

Tax Credit Receivable

8,000.00

Deferred Tax Credit P10,000.00

To set up tax credit receivable from BIR and accounts receivable from "B" for tax previously paid
on raw materials used.
The sales tax billed separately by "B" to "C" was not remitted to the Bureau of Internal Revenue
for the sale was exempt from sales tax. The sales tax liability of "B" was extinguished by actual
exportation of the finished articles by "C" before the due date for the payment of the sales tax by
"B" (on or before April 20, 1979). In this particular situation, "B" can no longer claim tax credit for
P8,000.00 taxes previously paid on raw materials because he has, in effect, been reimbursed by
"C" for the P8,000.00 plus the additional P2,000.00 which he should recognize as miscellaneous
income or as a liability to "C". On the other hand, "C" can claim only P8,000.00 tax credit
representing the actual amount collected by the government from "A", and "C" can charge the
P2,000.00 collected from him by "B" to purchases or set up accounts receivable from "B".
(B)
Sale by a Registered Export Producer to Another Registered Export Producer Considered
"Domestic Sales" During the Quarter When the Sale was Consummated.
FACTS: Similar Facts as in Illustration No. 1(A) except that the sale made by "B" to "C" occurred on
February 5, 1979 while the actual exportation of the finished articles by "C" happened on May 5,
1979. The sale between "B" and "C" will be considered as "Domestic sales" for the quarter ending
March 31, 1979 and "export sales" only for the quarter ending June 30, 1979. In this situation, "B"
can no longer claim tax credit for he has already been reimbursed by "C".
The sales tax liability by "B" for the quarter ending March 31, 1979 is computed, as follows:
Selling Price P100,000.00
=========
Sales Tax DueP10,000.00
Less: Tax Credit

8,000.00

Net Sales Tax Due & Payable

P2,000.00

=========
In the books of accounts of "B" and "C", the following are the recommended accounting entries:
IN THE BOOKS OF "B"
Sales Tax Payable
Cash

P10,000.00

P2,000.00

Deferred Tax Credit 8,000.00

To take up remittance of final sales tax and application of tax credit.
#
IN THE BOOKS OF "C"
Tax Credit Receivable BIRP10,000.00
Deferred Tax Credit P10,000.00
To take up availment of Tax Credit in the quarter when the sales was considered as export sales.
ILLUSTRATION NO 2. Where the tax is not billed as a separate item in the sales invoice.
(A)
Similar facts as in Illustration No. 1(A) but the tax is not billed as a separate item in the
sales invoice made by "B" to "C".
IN THE BOOKS OF "B"

Cash/Accounts Receivable P110,000.00

Sales P110,000.00
To take up sales of manufactured articles to "C".
#
IN THE BOOKS OF "C"
Purchases

P110,000.00

Cash/Accounts Payable

P110,000.00

To record purchases from "B".

The following are the recommended accounting entries:
IN THE BOOKS OF "B"
Tax Credit Receivable BIRP8,000.00
Deferred Tax Credit P8,000.00
To set up receivable from BIR for the availment of tax credit.
#
IN THE BOOKS OF "C"
NONE
When the tax is not billed separately and the transaction is considered exempt during the
quarter, only "B" can claim P8,000.00 taxes paid on raw materials which he can apply against all
other internal revenue tax liabilities.
(B)
Similar facts as in Illustration No. 2(A) except that actual exportation by "C" was made
after the 20th day of the month following the calendar quarter when the sale took place between
"B" and "C".
Determination of sales tax liability by "B" and the accounting entries that should be made in the
books of "B" and "C".
Selling Price P110,000.00
=========
Tax Due

P11,000.00

LESS: Tax Credit

8,000.00

Net Sales Tax Due and Payable

P3,000.00

=========
#
IN THE BOOKS OF "B"
Deferred Tax Credit P3,000.00
Cash

P3,000.00

To payment of final sales tax during the quarter when sale was considered domestic sale.
Tax Credit Receivable

P11,000.00

Deferred Tax Credit P11,000.00

To set up availment of tax credit when sale was considered as export sale.
#

OR THE FOLLOWING ALTERNATIVE ENTRIES:

Sales Tax Expense

P11,000.00

Deferred Tax Credit P8,000.00

Cash

3,000.00

To take up payment of the final sales tax during the quarter when sale was considered domestic
sale.
#
Tax Credit Receivable

P11,000.00

Miscellaneous Income

P11,000.00

To record availment of tax credit in the quarter when the sale was considered export sales.
#
IN THE BOOKS OF "C"
NONE
SITUATION NO. 2 SALE BY REGISTERED EXPORT PRODUCER TO A REGISTERED EXPORT TRADER.
ILLUSTRATION NO. 3. Where the tax is billed as a separate item in the sales invoice.
(A)
FACTS: X, a registered export producer, purchased P88,000.00 worth of raw materials of
which P8,000.00 tax was billed as a separate item in the sales invoice which he utilized in the
manufacture or production of his finished articles he sold to "Z", a registered export trader, on
February 5, 1979 and who subsequently exported the same on March 20, 1979. The manner of
invoicing the sale by "X" was as follows:
Selling Price P100,000.00
10% Sales Tax

10,000.00

TOTAL P110,000.00
=========
The sale of "X" to "Z" and the subsequent actual exportation by "Z" occurred within the same
quarter and the sales tax was billed as a separate item in the sales invoice of "X".
Recommended Accounting Entries:
IN THE BOOKS OF "X"
Purchases

P80,000.00

Deferred Tax Credit 8,000.00

Cash/Accounts Payable

P88,000.00

To take up purchases of raw materials.

#
Accts. Receivable/Cash

P110,000.00

Sales P100,000.00
Sales Tax Payable

10,000.00

To take up sales made.

#
IN THE BOOKS OF "Z"

Purchases

P110,000.00

Cash/Accounts Payable

P110,000.00

Purchase of raw materials from "X".

Determination of the sales tax liability of "X":
Selling Price P100,000.00
=========
Sales Tax DueEXEMPT
Recommended Accounting Entries:
Sales Tax Payable

P10,000.00

Deferred Tax Credit P8,000.00

Misc. Income 2,000.00
To take up recognition of income and to offset sales tax payable against deferred tax credit as a
result of exemption from sales tax.
IN THE BOOKS OF "Z"
NONE
(B)
Similar facts as in Illustration No. 3(A) except that the exportation was made after the 20th
day of the month following the close of the calendar quarter when the sale between "X" and "Z"
took place.
Since the sales tax was billed as a separate item in the invoice and that the actual exportation by
"Z" took place after the 20th day of the month following the close of the preceding calendar
quarter, the sale of "X" to "Z" shall be considered "domestic sale" during the said quarter.
Determination of Sales Tax Liability of "X":
Selling Price P100,000.00
=========
Sales Tax DueP10,000.00
LESS: Tax Credit

8,000.00

Net Sales Tax Due and Payable

P2,000.00

=========
Recommended Accounting Entries:
IN THE BOOKS OF "X"
Sales Tax Payable

P10,000.00

Deferred Tax Credit P8,000.00

Cash

2,000.00

To take up payment of final sales tax during the quarter when the sale was considered.
Tax Credit Receivable

P10,000.00

Miscellaneous Income

P10,000.00

To set up availment of tax credit in the quarter when the sale was considered export sales.
IN THE BOOKS OF "Z"
NONE

ILLUSTRATION NO. 4 Where the tax is not billed as a separate item in the sales invoice.
(A)
Similar facts as in Illustration No. 3(A) except that the sales tax was not billed as a
separate item in the invoice and the sale of "X" to "Z", and the actual exportation of the finished
articles by "Z" occurred within the same quarter:
Selling Price P110,000.00
=========
Accounting Entries:
IN THE BOOKS OF "X"
Cash/Accounts Receivable P110,000.00
Sales P110,000.00
To record sales of manufactured products to "Z".
Tax Credit Receivable

P8,000.00

Deferred Tax Credit P8,000.00

To set up availment of tax credit (when sales was considered as domestic sale.)
#
IN THE BOOKS OF "Z"
NONE
(B)
Similar facts as in Illustration No. 3(A) except that the sales tax was not billed as a
separate item in the sales invoice and the sale of "X" to "Z" and actual exportation by "Z" was
made after the 20th day of the month following the preceding calendar quarter when the sale
between "X" and ''Z" took place and therefore considered as "domestic sale".
Determination of sales tax liability of "X":
Selling Price P110,000.00
=========
Sales Tax DueP11,000.00
LESS: Tax Credit

8,000.00

NET SALES TAX DUE AND PAYABLE P3,000.00

=========
Recommended Accounting Entries:
IN THE BOOKS OF "X"
Deferred Tax Credit P3,000.00
Cash

P3,000.00

To take up remittance of final sales tax in the quarter when sale was considered as domestic sale.
#
Tax Credit Receivable

P11,000.00

Deferred Tax Credit P11,000.00

To set up availment of tax credit in the quarter when the sale was considered as export sale.
#
IN THE BOOKS OF "Z"

NONE
OR THE FOLLOWING ALTERNATIVE ENTRIES :
Sales Tax Expense

P11,000.00

Deferred Tax Credit P8,000.00

Cash

3,000.00

To take up payment of final tax during the quarter when the sale was considered export sales.
#
Tax Credit Receivable

P11,000.00

Miscellaneous Income

P11,000.00

To take up availment of tax credit in the quarter when the sale was considered export sales.

REVENUE REGULATIONS NO. 09-99

SUBJECT
:
Amending Revenue Memorandum Order No. 30-99 dated March 17,
1999 prescribing the filing of returns by those individuals exempt from tax as provided
under Section 23 (B) and (C) in relation to Section 51 (A) (2) (d) and (A) (3) of Republic
Act No. 8424 (NIRC of 1997)
TO

All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. Pursuant to Section 244 of the Tax Code of 1997, in relation to Section 23
(B) (C) , Section 51 (A) (2) (d) and (A) (3) of the same Code, this Regulation is hereby
promulgated amending Revenue Memorandum Order No. 30-99 prescribing the filing of returns
by non-resident citizens, overseas contract workers (OCWs), and seamen. This covers all income
earned by non-resident citizens from abroad beginning January 1, 1998. cdtai
SECTION 2.

Pertinent Provisions:

Section 22 (E) "The term 'non resident citizen' means:

(1)
A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact
of his physical presence abroad with a definite intention to reside therein.
(2)
A citizen of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis.
(3)
A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time during the
taxable year.
(4)
A citizen who has been previously considered as non-resident citizen and who arrives in
the Philippines at any time during the taxable year to reside permanently in the Philippines shall
likewise to treated as a non-resident citizen for the taxable year in which he arrives in the
Philippines with respect to his income derived from sources abroad until the date of his arrival in
the Philippines.
The taxpayer shall submit proof to the Commissioner to show his intention of leaving the
Philippines to reside permanently abroad or to return to and reside in the Philippines as the case
may be for the purpose of this Section."
Section 23 (B) "A non-resident citizen is taxable only on income derived from sources within the
Philippines." cda
Section 23 (C) "An individual citizen of the Philippines who is working and deriving income abroad
as an overseas contract worker is taxable only on income from sources within the Philippines:
Provided, That a seaman who is a citizen of the Philippines and who receives compensation for
services rendered abroad as a member of the complement of a vessel engaged exclusively in
international trade shall be treated as an overseas contract worker."
Section 51 (A) (2) (d) "The following individuals shall not be required to file an income tax return:
(a)

...;

(b)

...;

(c)

...;

(d)
An individual who is exempt from income tax pursuant to the provisions of this Code and
other laws, general or special."
Section 51 (A) (3) "The foregoing notwithstanding, any individual not required to file a return may
nevertheless be required to file an information return pursuant to rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the Commissioner."
Section 244 "Authority of Secretary of Finance to Promulgate Rules and Regulations The
Secretary of Finance upon recommendation of the Commissioner, shall promulgate all needful
rules and regulations for the effective enforcement of the provisions of this Code."

SECTION 3.

Compliance and Administrative Procedures:

1.
Every person classified within the scope of this Revenue Regulation, shall make an
information return by accomplishing BIR Form 1701C or the new computerized Form 1703
properly labelling among others the appropriate "tax due space" as EXEMPT .
The accomplished BIR Form 1701C or new BIR Form 1703 whichever is applicable, together with
other relevant supporting papers (e.g. Employer's Declaration of Income Earned, Financial
Statements), shall be filed not later than April 15 following the taxable year, to the Foreign Post or
the Revenue District Office which has jurisdiction over the place of residence of the taxpayer. cdll
2.
The Foreign Posts shall in turn forward these returns to the Revenue District Office No. 51
Pasay City for compilation/processing purposes.
3.
The respective Revenue District Offices receiving similar returns shall likewise process and
file returns within their own premises.
4.
The Revenue District Offices concerned shall submit to the Chief, International Tax Affairs
Division, an annual report consisting of statistical information covering the aforementioned
returns for the preceding taxable year, as follows (Please refer to Annex A for the format of the
report):
a.

Gross Income per country total and per type of income

b.

Number of filers according to the above classification

This report must be submitted not later than July 30 following the taxable year being reported.
SECTION 4. Transitory Provision. 1998 returns filed for this purpose after April 15 but not later
than July 15, 1999 shall not be subject for penalty charges. BIR Form 1701C or 1703 shall be used
until such time that a new form specifically designed for this purpose shall be printed and be
made available. LibLex
SECTION 5. Repealing Clause: All internal revenue issuances, or parts thereof, which are
contrary to or inconsistent with this Regulation are hereby repealed, amended, or modified
accordingly.
SECTION 6.

Effectivity: This Regulation shall take effect immediately.

(SGD.) EDGARDO B. ESPIRITU

Secretary of Finance
Recommending Approval:
(SGD.) BEETHOVEN L. RUALO
Commissioner of Internal Revenue
ANNEX A

RA 9994
RULE
PRIVILEGES FOR THE SENIOR CITIZENS

IV

Article 6. OSCA-issued Senior Citizens' Identification Card. - For the availment of benefits and
privileges under the Act and these Rules, the senior citizen, or his/her duly authorized
representative, shall present as proof of eligibility, a valid and original Senior Citizens'
Identification Card issued by the Head of the Office of Senior Citizens Affairs (OSCA) of the place
where the senior citizen resides, and which shall be honored nationwide.
Article 7. Twenty Percent (20%) Discount and VAT Exemption - The senior citizens shall be
entitled to the grant of twenty percent (20%) discount and to an exemption from the value-added
tax (VAT), IF APPLICABLE, on the sale of the goods and services covered by Section 1 to 6 of this
Article, from all establishments for the exclusive use and enjoyment or availment of senior
citizens.
For this purpose, the Department of Finance (DOF) through the Bureau of Internal Revenue (BIR)
shall come up with the appropriate Revenue Regulations on the 20% senior citizens discount and
VAT exemption within thirty (30) days from effectivity of these Rules that shall cover among
others, new invoicing procedures, reportorial requirements, and a system for claiming tax
deductions.
Section 1. MEDICAL_RELATED PRIVILEGES

(a) MEDICINE AND DRUG PURCHASES - The 20% discount and VAT exemption shall
apply to the purchase of generic or branded medicines and drugs by or for senior citizens,
including the purchase of influenza and pneumococcal vaccines. The 20% discount and
VAT exemption shall also be granted to the purchase of vitamins and mineral supplements
which are medically prescribed by an attending physician for prevention and treatment of
diseases, illness, or injury.

(b) ESSENTIAL MEDICAL SUPPLIES, ACCESSORIES AND EQUIPMENT - The 20%

discount and VAT exemption privilege shall also apply to the purchase of eyeglasses,
hearing aids, dentures, prosthetics, artificial bone replacements like steel, walkers,
crutches, wheelchairs whether manual or electric-powered, canes/quad canes, geriatric
diapers, and other essential medical supplies, accessories and equipment by or for senior
citizens.

The purchase under Sections 1 (a) and (b) from drug stores, hospital pharmacies, medical
and optical clinics and similar establishments including non-traditional outlets dispensing
medicines, shall be subject to guidelines that shall be issued by the DOH within thirty (30)
days from effectivity of these Rules, in coordination with the Food and Drug Administration
(FDA) and the Philippine Health Insurance Corporation (PHILHEALTH). Said guidelines shall
also indicate what constitutes discounted essential medical supplies, accessories and
equipment as contemplated by Section 1 (b), and will be subjected to a regular review as
deemed necessary in keeping with the changes, demands and needs of senior citizens.

The guidelines issued by the DOH, in consultation with the DOF and the BIR, shall also
establish mechanisms of compulsory rebates in the sharing of burden of discounts among
retailers, manufacturers and distributors, taking into consideration their respective
margins. When necessary, the DOF and the BIR shall come up with the appropriate
Revenue Regulations for this purpose.

(c) MEDICAL AND DENTAL SERVICES IN THE PRIVATE FACILITIES - Medical and
dental services, diagnostic and laboratory tests such as but not limited to X-Rays,
computerized tomography scans, and blood tests, that are requested by a physician as
necessary for the diagnosis and/or treatment of an illness or injury are subjected to the
20% discount and VAT exemption.

(d) PROFESSIONAL FEES OF ATTENDING PHYSICIAN/S in all private hospitals, medical

facilities, outpatient clinics and home health care facilities shall be subjected to the 20%
discount and VAT exemption.

(e) PROFESSIONAL FEES OF LICENSED HEALTH WORKERS PROVIDING HOME

HEALTH CARE SERVICES as endorsed by private hospitals or employed through home
health care employment agencies are entitled to the 20% discount and VAT exemption.
The burden of the discount shall be borne solely by the employment agency given the
health worker's very minimal share compared to the agency fee.

Section 2. DOMESTIC TRANSPORTATION PRIVILEGES

The Department of Transportation and Communication (DOTC), in coordination with the Maritime
Industry Authority (MARINA), Philippine Ports Authority (PPA), the Civil Aeronautics Board (CAB),
Light Rail Transit Authority (LRTA), Philippine National Railways (PNR), Mass Rail Transit Authority
(MRTA) and Land Transportation Franchising and Regulatory Board (LTFRB), shall within thirty (30)
days from effectivity of these Rules issue the necessary circulars or directives on the following
transportation privileges of senior citizens:

(a) AIR AND SEA TRANSPORTATION PRIVILEGES - Fare for domestic air, and sea travel,
including \f0 advanced booking, shall be subject to the 20% discount and VAT exemption,
if applicable.

(b) PUBLIC LAND TRANSPORTATION PRIVILEGES - Fare in the public railways including
LRT, MRT, and PNR, fares in buses (PUB), jeepneys (PUJ), taxi and shuttle services (AUV),
are likewise subject to the 20% discount and VAT exemption, if applicable.

Section 3. HOTELS, RESTAURANTS, RECREATIONAL CENTERS, AND PLACES OF LEISURES, AND

FUNERAL SERVICES
The Department of Interior and Local Government (DILG) and Department of Tourism (DOT) shall,
within thirty (30) days from effectivity of these Rules, issue the necessary circulars or directives to
establishments for its implementation to ensure compliance herewith.

(a) HOTELS AND SIMILAR LODGING ESTABLISHMENTS - The discount shall be for
room accommodation and other amenities offered by the establishment such as but not
limited to hotel-based parlors and barbershops, restaurants, massage parlor, spa, sauna
bath, aromatherapy rooms, workout gyms, swimming pools, Jacuzzis, ktv bars, internet
facilities, food, drinks and other services offered. The term "hotel" shall include beach and
mountain resorts,

(b) RESTAURANTS - The discount shall be for the purchase of food, drinks, dessert, and
other consumable items served by the establishments offered for the consumption of the
general public.

(c) For Dine-in services under paragraphs (a) and (b) of Section 3, and Section 4,
paragraph 2 of Article 7, the privilege must be personally availed of by the senior citizen

as defined under these Rules, and no proxies or authorization in favor of another person
who is not a senior citizen will be honored.

(d) Consistent with the intent of the Act, the phrase "exclusive use and enjoyment" of the
senior citizen shall mean "for the senior citizen's personal consumption" only. As such, the
20% senior citizen discount shall not apply to "children's meals" which are primarily
prepared and intentionally marketed for children. Similarly, the 20% senior citizen discount
shall not apply to "pre-contracted" party packages or bulk orders.

(e) Food, drinks and other consumable items provided in Section 3 (a) and (b), and Section
4, paragraph 2 of Article 7 purchased by the senior citizen shall be processed separately
as an independent transaction from his/her non-eligible companions to ensure that it is for
his/her exclusive consumption and to enable computation of the 205 discount and the
exemption from the Value Added Tax (VAT), which only the senior citizen is entitled to.

However, if the group of diners is composed entirely of senior citizens, all of whom present
valid senior citizens IDs, each shall be entitled to a 20% discount and exemption from
Value Added Tax.

(f) The 20% discount shall apply to Take-Out/Take-Home/Drive-Thru orders as long as it is

the senior citizen himself/herself who is present and personally ordering, and he/she can
show a valid senior citizen ID card.

(g) For Delivery Orders, the 20% discount shall likewise apply subject to certain conditions;
i.e. senior citizen ID card number must be given while making the order over the
telephone; the senior citizen ID card must also be presented upon delivery to verify the
identity of the senior citizen entitled to the 20% discount.

(h) For the above-mentioned transactions under paragraphs (f) and (g) of Section 3 of
Article 7, the Most Expensive Meal Combination (MEMC) shall apply to food purchases by
senior citizens. The MEMC is an amount corresponding to the combination of the most
expensive and biggest single-serving meal with beverage served in a quick service
restaurant, is deemed flexible and is adjusted accordingly by food establishments to
estimate a single food purchase for an individual senior citizen.

Section 4. RECREATION CENTERS - The discount shall be for the utilization of services in the form
of fees, charges and rental for sport facilities or equipment, including golfcart rentals and green
fees, or venues for ballroom dancing, yoga, badminton courts, bowling lanes, table or lawn
tennis, workout gyms, martial arts facilities.
Non-profit, stock golf and country clubs which are not open to the general public, and are private
and for exclusive membership only as duly proven by their official Securities and Exchange (SEC)
registration papers, are not mandated to give the 20% senior citizens discount. However, should
restaurants and food establishments inside these country clubs be independent concessionaires
and food sold are not consumable items under club membership dues, they must grant the 20%
senior citizen discount.
Section 5. ADMISSION FEES PRIVILEGE - The discount shall be applied to admission fees charged
by theaters, cinema houses and concert halls, circuses, carnivals, and other similar places of
culture, leisure and amusement such as museums and parks.
Section 6. FUNERAL AND BURIAL SERVICES - The beneficiary or any person who shall shoulder
the funeral and burial expenses of the deceased senior citizen, shall claim the discount under this

Rule for the deceased senior citizen upon presentation of the death certificate. Such expenses
shall cover the purchase of casket or urn, embalming, hospital morgue, transport of the body to
intended burial site in the place of origin, but shall exclude obituary publication and the cost of
the memorial lot.
Article 8. CREDIT CARD PAYMENTS - The 20% discount and VAT exemption shall also apply to
purchases of goods and services by senior citizens paying through credit cards.
Article 9. NO DOUBLE DISCOUNTS - In the purchase of goods and services which are on
promotional discount, the senior citizen can avail of the establishment's offered discount or the
20% discount provided herein, whichever is higher and more favorable.
In cases where the senior citizen is also a person with disability (PWD) entitled to a 20% discount
under his/her valid PWD identification card (ID), the senior citizen shall use either his/her OSCAissued ID card or PWD ID card to avail of the 20% discount.
Article 10. TAX DEDUCTION - The establishment may claim the discounts provided herein as
tax deductions based on the cost of the goods sold or services rendered: Provided. That the cost
of the discount shall be allowed as deduction from the gross income for the same taxable year
that the discount is granted: Provides, further, That the total amount of the claimed tax deduction
net of VAT, if applicable, shall be included in their gross sales receipts for tax purposes and shall
be subject to proper documentation and to the provisions of the National Internal Revenue Code
(NIRC), as amended.
For this purpose, the Department of Finance (DOF) through the Bureau of Internal Revenue (BIR)
shall come up with the appropriate Revenue Regulations on the 20% senior citizens discount and
VAT exemption within thirty (30) days from effectivity of these Rules.

RA 9257

SECTION 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the
following:
(a)
the grant of twenty percent (20%) discount from all establishments relative to the
utilization of services in hotels and similar lodging establishments, restaurants and recreation
centers, and purchase of medicines in all establishments for the exclusive use or enjoyment of
senior citizens, including funeral and burial services for the death of senior citizens;
(b)
a minimum of twenty percent (20%) discount on admission fees charged by theaters,
cinema houses and concert halls, circuses, carnivals, and other similar places of culture, leisure
and amusement for the exclusive use or enjoyment of senior citizens;
(c)
exemption from the payment of individual income taxes; Provided, That their annual
taxable income does not exceed the poverty level as determined by the National Economic and
Development Authority (NEDA) for that year;
(d)

exemption from training fees for socio-economic programs;

(e)
free medical and dental services, diagnostic and laboratory fees such as, but not limited
to, x-rays, computerized tomography scans and blood tests, in all government facilities, subject
to the guidelines to be issued by the Department of Health in coordination with the Philippine
Health Insurance Corporation (PHILHEALTH);
(f)
the grant of twenty percent (20%) discount on medical and dental services, and diagnostic
and laboratory fees provided under Section 4(e) hereof, including professional fees of attending
doctors in all private hospitals and medical facilities, in accordance with the rules and regulations
to be issued by the Department of Health, in coordination with the Philippine Health Insurance
Corporation;
(g)
the grant of twenty percent (20%) discount in fare for domestic air and sea travel for the
exclusive use or enjoyment of senior citizens;
(h)
the grant of twenty percent (20%) discount in public railways, skyways and bus fare for the
exclusive use and enjoyment of senior citizens;
(i)
educational assistance to senior citizens to pursue post secondary, tertiary, post tertiary,
as well as vocational or technical education in both public and private schools through provision
of scholarship, grants, financial aid, subsidies and other incentives to qualified senior citizens,
including support for books, learning materials, and uniform allowance, to the extent feasible:
Provided, That senior citizens shall meet minimum admission requirements;
(j)
to the extent practicable and feasible, the continuance of the same benefits and privileges
given by the Government Service Insurance System (GSIS), Social Security System (SSS) and
PAG-IBIG, as the case may be, as are enjoyed by those in actual service.
(k)
retirement benefits of retirees from both the government and private sector shall be
regularly reviewed to ensure their continuing responsiveness and sustainability, and to the extent
practicable and feasible, shall be upgraded to be at par with the current scale enjoyed by those in
actual service.
(l)
to the extent possible, the government may grant special discounts in special programs
for senior citizens on purchase of basic commodities, subject to the guidelines to be issued for
the purpose by the Department of Trade and Industry (DTI) and the Department of Agriculture
(DA); and
(m)
provision of express lanes for senior citizens in all commercial and government
establishments; in the absence thereof, priority shall be given to them.
In the availment of the privileges mentioned above, the senior citizen or elderly person may
submit as proof of his/her entitlement thereto any of the following:

(a)
an ID issued by the city or municipal mayor or of the barangay captain of the place where
the senior citizen or the elderly resides;
(b)

the passport of the elderly person or senior citizen concerned; and

(c)
other documents that establish that the senior citizen or elderly person is a citizen of the
Republic and is at least sixty (60) years of age.
The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction
based on the net cost of the goods sold or services rendered: Provided, That the cost of the
discount shall be allowed as deduction from gross income for the same taxable year that the
discount is granted. Provided, further, That the total amount of the claimed tax deduction net of
value added tax if applicable, shall be included in their gross sales receipts for tax purposes and
shall be subject to proper documentation and to the provisions of the National Internal Revenue
Code, as amended."

RA 7432
SECTION 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the
following:
a)
the grant of twenty percent (20%) discount from all establishments relative to utilization of
transportation services, hotels and similar lodging establishment, restaurants and recreation
centers and purchase of medicine anywhere in the country: Provided, That private establishments
may claim the cost as tax credit;
b)
a minimum of twenty percent (20%) discount on admission fees charged by theaters,
cinema houses and concert halls, circuses, carnivals and other similar places of culture, leisure,
and amusement; cdt
c)
exemption from the payment of individual income taxes: Provided, That their annual
taxable income does not exceed the property level as determined by the National Economic and
Development Authority (NEDA) for that year;
d)
exemption form training fees for socioeconomic programs undertaken by the OSCA as part
of its work;
e)
free medical and dental services in government establishment anywhere in the country,
subject to guidelines to be issued by the Department of Health, the Government Service
Insurance System and the Social Security System; aisa dc
f)
to the extent practicable and feasible, the continuance of the same benefits and privileges
given by the Government Service Insurance System (GSIS), Social Security System (SSS) and
PAG-IBIG, as the case may be, as are enjoyed by those in actual service.

REVENUE REGULATIONS NO. 10-98

SUBJECT
:
Implementing the Provisions of the National Internal Revenue Code,
As Amended By Republic Act No. 8424, Relative to the Imposition of Income Taxes on
Income Derived Under the Foreign Currency Deposit and Offshore Banking Systems
TO

All Internal Revenue Officers and Others Concerned

SCOPE Pursuant to Section 244, in relation to Sections 24, 25, 27 and 28 of the National
Internal Revenue Code of 1997, as amended by R.A. No. 8424, these Regulations are hereby
promulgated to govern the imposition of income taxes on income derived under the Foreign
Currency Deposit and Offshore Banking Systems. cdphil
SECTION 2.22.

Definition of Terms.

(A)
Foreign Currency Deposit System shall refer to the conduct of banking transactions
whereby any person whether natural or juridical may deposit foreign currencies forming part of
the Philippine international reserves, in accordance with the provisions of Republic Act No. 6426
entitled "An Act Instituting a Foreign Currency Deposit System in the Philippines, and For Other
Purposes."
(B)
Foreign Currency Deposit Unit (FCDU) shall refer to that unit of a local bank or of a local
branch of a foreign bank authorized by the Bangko Sentral Ng Pilipinas (BSP) to engage in foreign
currency-denominated transactions, pursuant to the provisions of R.A. 6426, as amended. ("Local
bank" shall refer to a thrift bank or a commercial bank organized under the laws of the Republic of
the Philippines. "Local branch of a foreign bank" shall refer to a branch of a foreign bank doing
business in the Philippines, pursuant to the provisions of R.A. No. 337 , as amended).
(C)
Offshore Banking System shall refer to the conduct of banking transactions in foreign
currencies involving the receipt of funds principally from external and internal sources and the
utilization of such fund pursuant to Presidential Decree No. 1034 as implemented by CB (now
BSP) Circular No. 1389, as amended.
(D)
Offshore Banking Unit (OBU) shall mean a branch, subsidiary or affiliate of a foreign
banking corporation which is duly authorized by the Bangko Sentral Ng Pilipinas (BSP) to transact
offshore banking business in the Philippines in accordance with the provisions of Presidential
Decree No. 1034 as implemented by CB (now BSP) Circular No. 1389, as amended.
(E)
Deposits shall mean funds in foreign currencies which are accepted and held by an
Offshore Banking Unit or Foreign Currency Deposit Unit in the regular course of business, with the
obligation to return an equivalent amount to the owner thereof, with or without interest.
(F)

Resident shall mean

(1)

an individual citizen of the Philippines residing therein; or

(2)

an individual who is not a citizen of the Philippines but is permanently residing therein; or

(3)

a corporation or other juridical person organized under the laws of the Philippines; or

(4)
a branch, subsidiary, affiliate, extension office or other unit of corporations or juridical
persons organized under the laws of any foreign country operating in the Philippines.
(G)
"Non-resident" shall mean an individual, corporation or other juridical person not
included in the above definition of "resident". prcd
(H)
Filipino Overseas Contract Worker (OCW) means an individual citizen of the Philippines
referred to under Section 23(C) of the Code.
A Filipino Seaman is a citizen of the Philippines who receives compensation for services rendered
abroad as a member of the complement of an ocean-going vessel engaged exclusively in
international trade as referred to under Section 23(C) of the Code.
SECTION 2.24.
(A)

Income Tax Rate of Interest Income from Foreign Currency Deposit.

Individual Income Tax on Interest Income from a Depository Bank under the Foreign

Currency Deposit System

(1)
Interest income which is actually or constructively received by a resident citizen of the
Philippines or by a resident alien individual from a foreign currency bank deposit shall be subject
to a final withholding tax of seven and one-half percent (7.5%). The depository bank shall
withhold and remit the tax pursuant to Sections 57 and 58 (withholding tax at source) of the
Code.
(2)
If a bank account is jointly in the name of a non-resident citizen such as an overseas
contract worker, or a Filipino seaman, and his spouse or dependent who is a resident in the
Philippines, fifty percent (50%) of the interest income from such bank deposit shall be treated as
exempt while the other fifty percent (50%) shall be subject to a final withholding tax of seven and
one-half percent (7.5%). cdll
(B)
Compliance and Administrative Procedures for Non-Resident Citizen and Non-Resident
Alien. The tax on interest income from foreign currency deposit shall be imposed unless the
depositor who is a non-resident citizen or a non-resident alien can present documentary evidence
that he is not a resident of the Philippines. Such evidence shall consist of the original or certified
copy of any of the following:
(1)
an immigration visa issued by the foreign government in the country where he is a
resident of; or
(2)
a certificate of residency which is issued by the Philippine Embassy or Consulate in the
foreign country of his residence; or
(3)
a certificate of the contract of employment of an overseas contract worker which is duly
registered with the Philippine Overseas Employment Agency (POEA); or a Seaman's Certificate, in
the case of a Filipino seaman; or
(4)
a certification from the Bureau of Immigration of the Philippines that a non-resident alien is
not a resident of the Philippines; or
(5)
a certification from the Department of Foreign Affairs (DFA) of the Philippines that the
individual is a regular member of the diplomatic corps of a foreign government and is entitled to
income tax exemption under an international agreement to which the Philippines is a signatory.
(C)
Name of the Foreign Currency Bank Account To be entitled to an exemption from the tax
on interest income on foreign currency deposit, the Foreign Currency Bank Account shall be in the
name of the non-resident individual or non-resident corporation. Otherwise, the interest income
therefrom shall be considered as subject to the tax imposed herein.
(D)

Illustration.

Mr. Juan de la Cruz, a Filipino citizen who is residing in the Philippines has a US dollar account with
ABC Bank. His gross interest earnings from his bank deposit for the first quarter of 1998 (i.e. from
January 1 to March 31, 1998) amounted to US$1,000.00. This gross interest earning shall be
considered as constructively received by Mr. De la Cruz during the first quarter of 1998 and shall
be subject to a seven and one-half percent (7.5%) final withholding tax. The 7.5% final
withholding tax which is due thereon is US$75.00.
SECTION 2.27 and SECTION 2.28 Corporate Income Tax on Interest Income from a Depository
Bank under the Foreign Currency Deposit System.
(A)
Interest income which is actually or constructively received by a domestic corporation or a
resident foreign corporation from a foreign currency bank deposit shall be subject to a final
withholding tax at the rate of seven and one-half percent (7.5%) based on the gross amount of
such interest income. The depository bank shall withhold and remit the tax pursuant to the
provisions of Sections 57 and 58 (withholding tax at source) of the Code.
(B)
Compliance and Administrative Procedures for a Non-resident Corporation. The tax on
interest income from foreign currency deposit shall be imposed unless the depositor, which is a
non-resident corporation, can present documentary evidence that it is not a resident of the
Philippines. Such evidence shall consist of the original or certified copy of all the following

requirements:
(1)

Certificate of registration of the corporation abroad; and

(2)
Certification from the Securities and Exchange Commission (SEC) that the non-resident
corporation is not licensed to do business in the Philippines. Cdpr
(C)
Taxation of Income of an FCDU or OBU from Foreign Currency Transactions. In general,
income derived by an FCDU or an OBU from foreign currency transactions with residents of the
Philippines, including local commercial banks, local branches of foreign banks, and other
depository banks under the foreign currency deposit system, shall be subject to a final
withholding tax of ten percent (10%) based on gross income pursuant to Sec. 27(D)(3) and Sec.
28(A)(4) of the Code. Income from foreign currency transactions shall include interest income
from lending operations, including bank charges, commissions, service fees, and net foreign
exchange transaction gains.
Income from foreign currency transactions with non-residents of the Philippines shall not be
subject to income tax.
The person making the income payment shall withhold and remit the tax withheld pursuant to the
provisions of Sections 57 and 58 of the Code. Thus, in the case of interest payment by a resident
of the Philippines on a foreign currency loan from an OBU or an FCDU, the withholding agent shall
be the said resident.
(D)
Taxation of Other Incomes of an FCDU or an OBU . Income derived by an FCDU or an OBU
from activities other than foreign currency transactions shall be subject to the pertinent income
tax/taxes prescribed under Section 27 or Section 28 of the Code. To illustrate: Income derived by
an FCDU from consultancy services and rentals shall be subject to an income tax based on net
income at the tax rates prescribed under Section 27(A) of the Code. Capital gains derived from
the sale, barter, exchange or disposition of shares of stocks in a domestic corporation shall be
subject to tax prescribed under Section 27(D) of the Code.
The aforesaid depository bank shall file its corporate income tax return for income referred to in
the preceding paragraph in accordance with the provisions of Section 52 of the Code. It shall also
declare thereunder all other incomes derived during the taxable period which are subject to the
final withholding taxes, the fact that such final withholding taxes have been withheld therefrom
by the payor notwithstanding, indicating the following information:
(a)

Name of the withholding agent;

(b)

His/its address;

(c)

His/its Taxpayer Identification Number (TIN);

(d)

Period covered;

(e)

Gross Income;

(f)

Rate of final withholding tax applied; and

(g)

Amount of final withholding tax withheld.

The submission of the foregoing information shall not be required with respect to its interest
income derived from bank deposits. LLphil
SECTION 2.58.
Information Requirement for Depositors/Taxpayers Exempt from Withholding
Tax on Interest Income from Foreign Currency Deposits.
The Depository Bank shall submit with its quarterly withholding tax remittance prescribed under
Sec. 58(A) of the Code a list of all persons and corporations who were given exemption from the
tax on interest income on foreign currency deposits.
To avail of the exemption from the tax on interest income from foreign currency deposit, the
depositor is required to execute a written permission allowing its depository bank to inform the
Commissioner of Internal Revenue that as a non-resident, the depositor is exempt from the tax. A
depositor who fails to comply with this requirement, which constitutes a limited waiver of the

confidentiality of foreign currency deposits, shall not be entitled to the exemption privilege.
EFFECTIVITY CLAUSE. These Regulations shall apply on taxable income derived beginning January
1, 1998 pursuant to the provisions of Section 8 of RA 8424. In case of deposits which were made
in 1997, only that portion of interest which was actually or constructively received by a depositor
starting January 1, 1998 is taxable.
TRANSITORY PROVISION. No penalty shall be imposed for late payment of the tax herein
prescribed for the first three quarters of calendar year 1998, provided, however, that the
taxpayer's corresponding tax returns for the said taxable quarters are filed and the taxes due are
paid not later than October 25, 1998. cda
(SGD.) EDGARDO B. ESPIRITU
Secretary of Finance
Recommending Approval:
(SGD.) BEETHOVEN L. RUALO
Commissioner of Internal Revenue

REVENUE REGULATIONS NO. 08-98

SUBJECT
:
Revenue Regulations Amending Pertinent Portions of Revenue
Regulations Nos. 11-96 and 2-98 Relative to the Tax Treatment on the Sale, Transfer or
Exchange of Real Property and for this Purpose Revising the Time and Place of
Payment of the Capital Gains Tax Due Thereon
TO

All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. Pursuant to Section 244 of the Tax Code of 1997, in relation to Sections
24(D)(1) and 27(D)(5) of the same Code , these Regulations are hereby promulgated amending
pertinent portions of Revenue Regulations Nos. 11-96 and 2-98 and other relevant regulations
and issuances regarding the tax treatment on the sale, transfer or exchange of real property and
amending for this purpose the date and venue for the filing of capital gains tax returns and
payment of taxes due on transactions involving real properties classified as capital assets and
likewise amending the venue for the filing and payment of creditable withholding tax due on
transactions involving real properties classified as ordinary assets. cdasia
SECTION 2. Final Tax on Sales, Exchanges or Transfers of Real Properties Classified as Capital
Assets. The rate of six percent (6%) shall be imposed on capital gains presumed to have been
realized by the seller from the sale, exchange or other disposition of real properties located in the
Philippines, classified as capital assets, including pacto de retro sales and other forms of
conditional sales based on the gross selling price or fair market value as determined in
accordance with Section 6(E) of the Code (i.e., the authority of the Commissioner to prescribe the
real property values), whichever is higher.
In case of disposition of real property made by individuals to the government or to any of its
political subdivisions or agencies or to government-owned or -controlled-corporations, the tax to
be imposed shall be determined either under the normal income tax rate imposed in Section
24(A) or under a final capital gains tax of six percent (6%) imposed under Section 24(D)(1) , both
of the Tax Code of 1997, at the option of the taxpayer.
SECTION 3. Time and Place of Payment of Capital Gains Tax. Within thirty (30) days following
each sale or disposition, the Capital Gains Tax Return shall be filed by the seller and payment
made to an Authorized Agent Bank (AAB) located within the Revenue District Office (RDO) having
jurisdiction over the place where the property being transferred is located. Cdpr
SECTION 4. Creditable Withholding Tax on the Sale, Transfer or Exchange of Real Property
Classified as Ordinary Asset . A creditable withholding tax based on the gross selling price/total
amount of consideration or the fair market value determined in accordance with Section 6(E) of
the Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real
property, other than capital asset, shall be imposed upon the withholding agent/buyer, in
accordance with the following schedule:
A.

Upon the following values of real property, where the

seller/transferor is habitually engaged in the real estate

business as per proof of registration with the HLURB
or HUDCC:
With a selling price of Five hundred thousand
pesos (P500,000.00) or less 1.5%
With a selling price of more than Five hundred
thousand pesos (P500,000.00) but not more
than Two million pesos (P2,000,000.00)

3.0%

With a selling price of more than Two million

pesos (P2,000,000.00)

5.0%

B.

Where the seller/transferor is not habitually

engaged in the real estate business

C.

7.5%

Where the seller/transferor is exempt from creditable

withholding tax in accordance with Section 2.57.5

of Revenue Regulations No. 2-98

Exempt

SECTION 5. Time and Place of Payment of Creditable Withholding Tax . Creditable withholding
taxes deducted and withheld by the withholding agent/buyer on the sale, transfer or exchange of
real property classified as ordinary asset, shall be paid by the withholding agent/buyer upon filing
of the return with the Authorized Agent Bank (AAB) located within the Revenue District Office
(RDO) having jurisdiction over the place where the property being transferred is located within
ten (10) days following the end of the month in which the transaction occurred. Provided,
however, that taxes withheld in December shall be filed on or before January 25 of the following
year.
SECTION 6. Tax Clearance Certificate. Upon presentation of the Capital Gains Tax Return or
Creditable Withholding Tax Return with a bank validation evidencing full payment of the capital
gains tax or the creditable withholding tax due on the sale, transfer, barter, exchange or other
disposition of real property classified as capital or ordinary asset, as the case may be, the
Revenue District Officer (RDO) of the revenue district where the property being transferred is
located shall issue the corresponding Tax Clearance (TCL) or Certificate Authorizing Registration
(CAR) for the registration of the real property in favor of the transferee.
SECTION 7. Repealing Clause. The provisions of any revenue regulations, revenue
memorandum order, revenue memorandum circular or any other issuance of the Bureau of
Internal Revenue inconsistent with these Regulations are hereby repealed, amended, or modified
accordingly. cdll
SECTION 8. Effectivity Clause. These Regulations shall take effect fifteen (15) days after
publication in any newspaper of general circulation.
(SGD.) EDGARDO B. ESPIRITU
Secretary of Finance
Recommending Approval:
(SGD.) BEETHOVEN L. RUALO
Commissioner of Internal Revenue

PRESIDENTIAL DECREE NO. 1354

IMPOSING FINAL INCOME TAX ON SUBCONTRACTORS AND ALIEN EMPLOYEES OF
SERVICE
CONTRACTORS
AND
SUBCONTRACTORS
ENGAGED
IN
PETROLEUM
OPERATIONS IN THE PHILIPPINES UNDER PRESIDENTIAL DECREE NO. 87
WHEREAS, foreign subcontractors involved in petroleum operations in the Philippines are taxable
as resident foreign corporations; cd i
WHEREAS, the said foreign subcontractors perform transitory activities during the taxable year
and neither maintain regular office or fixed place of business nor keep books of accounts in the
Philippines;
WHEREAS, the aliens employed by the said service contractors and by their subcontractors are
likewise taxable on their income from Philippine sources;
WHEREAS, it is also difficult to determine whether the said aliens are resident aliens or
nonresident aliens engaged or not engaged in trade or business in the Philippines which in turn
make it difficult to determine their income tax;
WHEREAS, it is therefore necessary to simplify the method of taxing the said foreign
subcontractors and the aliens involved in petroleum operations in the Philippines so as to insure
the collection of whatever tax that is due from them;
WHEREAS, in order to place local or domestic subcontractors on equal footing and to make them
competitive with foreign subcontractors, they should similarly be taxed as foreign subcontractors;
aisa dc
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers
vested in me by the Constitution, do hereby decree as follows:
SECTION 1. Tax on subcontractors. Every subcontractor, whether domestic or foreign,
entering into a contract with a service contractor engaged in petroleum operations in the
Philippines shall be liable to a final income tax equivalent to eight percent (8%) of its gross
income derived from such contract, such tax to be in lieu of any and all taxes, whether national or
local: Provided, however, that any income received from all other sources within and without the
Philippines in the case of domestic subcontractors and within the Philippines in the case of
foreign subcontractors shall be subject to the regular income tax imposed under the National
Internal Revenue Code. The term "gross income" means all income earned or received as a result
of the contract entered into by the subcontractor with a service contractor engaged in petroleum
operations in the Philippines under Presidential Decree No. 87.
SECTION 2. Taxation of aliens employed by petroleum service contractors and subcontractors.
Aliens who are permanent residents of a foreign country but who are employed and assigned
in the Philippines by service contractors or by subcontractors engaged in petroleum operations in
the Philippines, shall be liable to a final income tax equal to fifteen percent (15%) of the salaries,
wages, annuities, compensations, remunerations and emoluments received from such contractors
or subcontractors. Any income earned from all other sources within the Philippines by the said
alien employees shall be subject to the income tax imposed under the National Internal Revenue
Code. cda
SECTION 3. Manner of collecting the tax. (a) Every service contractor shall deduct, withhold,
and pay the tax imposed in Section 1 of this Decree from the amounts paid by the service
contractor to the subcontractor under the contract entered into by and between them in the same
manner and subject to the same conditions as provided in Section 54 of the National Internal
Revenue Code.
(b)
Every service contractor shall also deduct, withhold and pay the tax imposed in Section 2
of this Decree from the salaries, wages, annuities, compensations, remunerations and
emoluments paid to (1) its alien employees and (2) the aliens employed by its foreign
subcontractors in the same manner and under the same conditions as provided in Section 54 of
the National Internal Revenue Code.

(c)
Every domestic subcontractor shall deduct, withhold and pay the tax imposed in Section 2
of this Decree from the salaries, wages, annuities, compensations, remunerations and
emoluments paid to its alien employees in the same manner and under the same conditions as
provided in Section 54 of the National Internal Revenue Code.
SECTION 4. Registration of service contracts. All contracts relating to oil operations entered
into between the service contractor and a subcontractor engaged in petroleum operations in the
Philippines shall be registered with the Bureau of Energy Development. cdasia
SECTION 5. Additional conditions for reimbursement of operating expense. The cost of
subcontracts shall be considered as part of reimburseable operating expenses of the service
contractor under Presidential Decree No. 87 only if it is shown that the contract has been properly
registered with the Bureau of Energy Development and the taxes due under this Decree have
been withheld and paid in accordance with the provisions of Sections 53 and 54 of the National
Internal Revenue Code.
SECTION 6. Repealing Clause. Any provision of existing general and special laws inconsistent
with the provisions of this Decree is hereby modified, amended or repealed accordingly.
SECTION 7.

Effectivity. This Decree shall take effect upon approval.

DONE in the City of Manila, this 21st day of April, in the year of Our Lord, Nineteen Hundred and
Seventy-Eight.
Published in the Official Gazette, Vol. 74 No. 34, 6557-F Supp., on August 21, 1978.

PRESIDENTIAL DECREE NO. 87

AMENDING PRESIDENTIAL DECREE NO. 8 ISSUED ON OCTOBER 2, 1972, AND
PROMULGATING AN AMENDED ACT TO PROMOTE THE DISCOVERY AND PRODUCTION OF
INDIGENOUS PETROLEUM AND APPROPRIATE FUNDS THEREFOR
WHEREAS, Presidential Decree No. 8 dated October 2, 1972 was issued to promote the discovery
and development of the country's indigenous petroleum resources and adopting therefore as part
of the law of the land the provisions of Senate Bill No. 531 (An Act to Promote the Discovery,
Production of Indigenous Petroleum and Appropriate Funds Therefor);
WHEREAS, it was found necessary for the national interest to amend Senate Bill No. 531 among
others things to provide more meaningful incentives to prospective service contractors.
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers
vested in me by the Constitution as Commander-in-Chief of all the Armed Forces of the
Philippines, and pursuant to Proclamation No. 1081, dated September 21, 1972, and General
Order No. 1, dated September 22, 1972, as amended, do hereby amend Presidential Decree No. 8
as follows: acd
An Act To Promote The Discovery and Production of Indigenous Petroleum, and Appropriating
Funds Therefor.
SECTION 1. Short Title. This Act shall be known and may be cited as "THE OIL EXPLORATION
AND DEVELOPMENT ACT OF 1972."
SECTION 2. Declaration of Policy. It is hereby declared to be the policy of the State to hasten
the discovery and production of indigenous petroleum through the utilization of government
and/or private resources, local and foreign, under the arrangements embodied in this Act which
are calculated to yield the maximum benefit to the Filipino people and the revenues to the
Philippine Government for use in furtherance of national economic development, and to assure
just returns to participating private enterprises, particularly those that will provide the necessary
services, financing and technology and fully assume all exploration risks.
SECTION 3. Definition of Terms. As used in this Act, the following shall have the following
respective meanings: casia
(a)
"Petroleum" shall include any mineral oil hydrocarbon gas, bitumen, asphalt, mineral gas
and all other similar or naturally associated substances with the exception of coal, peat,
bituminous shale and/or other stratified mineral fuel deposits.
(b)
"Crude oil" or "crude" means oil in its natural state before the same has been refined or
otherwise treated. It does not include oil produced through destructive distillation of coal,
bituminous shales or other stratified deposits, either in its national state or after the extraction of
water, and sand or other foreign substances therefrom.
(c)
"Natural gas" means gas obtained from boreholes and wells and consisting primarily of
hydrocarbons.
(d)
"Petroleum operations" means searching for and obtaining petroleum within the
Philippines through drilling and pressure or suction or the like, and all other operations incidental
thereto. It includes the transportation, storage, handling and sale (whether for export or for
domestic consumption) of petroleum so obtained but does not include any: (1) transportation of
petroleum outside the Philippines; (2) processing or refining at a refinery; or (3) any transactions
in the products so refined.
(e)
"Petroleum in commercial quantity" means petroleum in such quantities which will permit
its being economically developed as determined by the contractor after taking into consideration
the location of the reserves, the depths and number of wells required to be drilled and the
transport and terminal facilities needed to exploit the reserves which have been discovered.
(f)
"Posted price" refers to the FOB price established by the Contractor in consultation with
the Petroleum Board for each grade, gravity and quality of crude oil offered for sale to buyers
generally for export at the particular point of export, which price shall be based upon

geographical location, and the fair market export values for crude oil of comparable grade,
gravity and quality. acd
(g)
"Market Price" shall mean the price which would be realized for petroleum produced under
a contract as hereinafter defined if sold in a transaction between independent persons dealing at
arm's length in a free market.
(h)

"Barrel" means 42 U.S. gallons or 9702 cubic inches at temperature of 60 Fahrenheit.

Any reference in this Act to the value of any crude oil at the posted price or market price shall be
construed as a reference to the amount obtained by multiplying the number of barrels of that
crude oil by the posted price or market price per barrel applicable to that crude oil.
(i)
"Crude oil exported" shall include not only crude oil exported as such but also indigenous
crude oil refined in the Philippines for export. cd i
(j)

"Government" means the Government of the Republic of the Philippines.

(k)
"Contractor" means the contractor in a service contract whether acting alone or in
consortium with others.
(l)

"Contract" refers to a service contract.

(m)
"Filipino participation incentive" means the allowance which may be given the Contractor
with Filipino participation as provided in Section 28 hereof.
(n)
"Philippine corporation" means a corporation organized under Philippine laws at least sixty
per cent of the capital of which is owned and held by citizens of the Philippines. acd
(o)
"Affiliate" means (a) a company in which a contractor holds directly or indirectly at least
fifty per cent of its outstanding shares entitled to vote; (b) a company which holds directly or
indirectly at least fifty per cent of the contractor's outstanding shares entitled to vote; or (c) a
company in which at least fifty per cent of its share outstanding and entitled to vote are owned by
a company which owns directly or indirectly at least fifty per cent of the shares outstanding and
entitled to vote of the contractor.
(p)
"Gross income" means the gross proceeds from the sale of crude, natural gas or
casinghead petroleum spirit produced under the contract and sold during the taxable year at
posted or market price, as the case may be, and such other income which are incidental to and
arising from any one or more of the petroleum operations of the contractor.
(q)

"Taxable net income" means the gross income less the deductions allowed in this Act.

(r)

"Taxable year" means the calendar or fiscal year of the contractor.

(s)
"Casinghead petroleum spirit" means any liquid hydrocarbon obtained from natural gas by
separation or by any chemical or physical process.
(t)

"Petroleum Board" refers to the Petroleum Board created in Section seventeen of this Act.

(u)
"Operating Expenses" means the total expenditures for petroleum operations made by the
Contractor both within and without the Philippines as provided in a service contract. cda
(v)
'Deepwater Contract' refers to a service contract at least eighty-five percent (85%) of the
total contract area are in water depths beyond 200 meters.
(w)
'Deepwater Contractor' means the contractor in a deepwater contract, whether acting
alone or in consortium with others.
(x)
'Deepwater Well' refers to a well drilled on water depths beyond 200 meters, whether
within or without a deepwater contract.
SECTION 4. Government May Undertake Petroleum Exploration and Production. Subject to
the existing private rights, the Government may directly explore for and produce indigenous
petroleum. It may also indirectly undertake the same under service contracts as hereinafter
provided. These contracts may cover free areas, national reserve areas and/or petroleum
reservations, as provided for in the Petroleum Act of 1949, whether on-shore or off-shore. In every

case, however, the contractor must be technically competent and financially capable as
determined by the Board to undertake the operations required in the contract.
SECTION 5. Execution of Contract Authorized in this Act. Every contract herein authorized
shall, subject to the approval of the President, be executed by the Petroleum Board created in this
Act, after due public notice pre-qualification and public bidding or concluded through
negotiations. In case bids are requested or if requested no bid is submitted or the bids submitted
are rejected by the Petroleum Board for being disadvantageous to the Government, the contract
may be concluded through negotiation.
In opening contract areas and in selecting the best offer for petroleum operations, any of the
following alternative procedures may be resorted to by the Petroleum Board, subject to prior
approval of the President:
(a)
The Petroleum Board may select an area or areas and offer it for bid, specifying the
minimum requirements and conditions; or
(b)
The Petroleum Board may open for bidding a large area wherein bidders may select
integral areas not larger than the maximum provided in this Act. Only the best offer shall be
accepted and the selection thereon shall be made by a weighted system of evaluating the
different aspects of each bid; or casia
(c)
An area may be selected by an interested party who shall negotiate with the Petroleum
Board for a contract under the terms and conditions provided in this Act.
SECTION 6. Nature of Service Contract. In a service contract, service and technology are
furnished by the service contractor for which it shall be entitled to the stipulated service fee while
financing is provided by the Government to which all petroleum produced shall belong.
SECTION 7. Special Stipulation in Service Contract. Where the Government is unable to
finance petroleum exploration operations or in order to induce the contractor to exert the
maximum efforts to discover and produce petroleum as soon as possible, the service contract
shall stipulate that if the contractor shall furnish services, technology and financing, the proceeds
of sale of the petroleum produced under the contract shall be the source of funds for payment of
the service fee and the operating expenses due the contractor.
SECTION 8. Obligation of Contractor in Service Contract. The arrangement pursuant to the
preceding section seven shall be such that the contractor, which may be a consortium, shall
undertake, manage and execute petroleum operations. The contract may authorize the
Contractor to take and dispose of and market either domestically or for export all petroleum
produced under the contract subject to supplying the domestic requirements of the Republic of
the Philippines on a pro-rata basis. The Government shall oversee the management of the
operations contemplated in the contract and in this connection shall require the contractor to
(a)

Provide all necessary services and technology;

(b)

Provide the requisite financing;

(c)
Perform the exploration work obligations and program prescribed in the agreement
between the Government and the Contractor, which may be more but shall not be less than the
obligations prescribed in this Act; cda
(d)
Once petroleum in commercial quantity is discovered, operate the field on behalf of the
Government in accordance with accepted good oil field practices using modern and scientific
methods to enable maximum economic production of petroleum; avoiding hazards to life, health
and property; avoiding pollution of air, land and waters; and pursuant to an efficient and
economic program of operation;
(e)
Assume all exploration risks such that if no petroleum in commercial quantity is discovered
and produced, it will not be entitled to reimbursement;
(f)
Furnish the Petroleum Board promptly with geological and other information, data and
reports which it may require;
(g)

Maintain detailed technical records and accounts of its operations;

(h)
Conform to regulations regarding, among others, safety, demarcation of agreement
acreage and work areas, non-interference with the rights of other petroleum, mineral and natural
resources operators;
(i)
Maintain all meters and measuring equipment in good order and allow access to these as
well as to the exploration and production sites and operations to inspectors authorized by the
Petroleum Board;
(j)
Allow examiners of the Bureau of Internal Revenue and other representatives authorized
by the Petroleum Board full access to their accounts, books and records, for tax and other fiscal
purposes; and
(k)

Be subject to Philippine income tax. cda

On the other hand, the Petroleum Board shall

(1)
On behalf of the Government, reimburse the Contractor for all operating expenses not
exceeding seventy percent (70%) of the gross proceeds from production in any year: Provided,
that if in any year, the operating expenses exceed seventy percent (70%) of gross proceeds from
production, then the unrecovered expenses shall be recovered from the operations of succeeding
years.
The provisions of Sections 21, 22 and 23 hereof to the contrary notwithstanding, reimbursement
of all operating expenses of the contractor includes amortization, depreciation and interest as
provided hereunder:
(a)
Amortization and Depreciation. Intangible exploration costs may be reimbursed in full.
All tangible exploration costs such as capital expenditures and other recoverable capital assets
are to be depreciated for a period of five (5) years under the straight-line or double-declining
balance method of depreciation at the option of the contractor. cdasia
(b)
Any interest or other consideration paid or suffered in respect of the financing as approved
by the Government of its development and production operations, shall be reimbursed to the
extent of two-thirds (2/3) of the amount thereof, except interest on loans or indebtedness incurred
to finance exploration operations.
(2)
Pay the Contractor a service fee the net amount of which shall not exceed forty per cent of
the balance of the gross income after deducting the Filipino participation incentive, if any, and all
operating expenses recovered pursuant to Section 8 (1) above.
(3)
Reimbursement of operating expenses and payment of the service fee shall be in such
form and manner as provided for in the contract.
SECTION 9. Minimum Terms and Conditions. In addition to those elsewhere provided in this
Act, every contract executed in pursuance hereof shall contain the following minimum terms and
conditions:
(a)
Every contractor shall be obliged to spend in direct prosecution of exploration work and in
delineation and development following the discovery of oil in commercial quantity not less than
the amounts provided for in the contract between the Government and the Contractor and these
amounts shall not be less than the total obtained by multiplying the number of hectares covered
by the contract by the following amounts for hectare: cdtai
Period On-shore
Year 1 P3.00 P3.00
Year 2 3.00

3.00

Year 3 3.00

6.00

Year 4 3.00

6.00

Year 5 3.00

6.00

Year 6 9.00

18.00

Of-shore

Year 7 9.00

18.00

Year 8 9.00

18.00

Year 9 9.00

18.00

Year 10

9.00

18.00

Provided, That if during any contract year the Contractor shall spend more than the amount of
money required to be spent, the excess may be credited against the money required to be spent
by the Contractor during the succeeding contract years: Provided, further, That in case the same
Contractor holds two or more areas under different contracts of service, the total amount of work
obligations for exploration required for the initial term of all contracts may be spent within any
one or more of them as if they are covered by a single contract of service: Provided, further, That
should the Contractor fail to comply with the work obligations provided for in the contract, it shall
pay to the Government the amount it should have spent but did not in direct prosecution of its
work obligations: Provided, finally, That the Contractor shall drill a minimum footage of test wells
before the end of periods of time as may be specified in the contract with the Petroleum Board in
order to be entitled to the extension of the exploration period for 3 years as provided for in
paragraph (e) herein.
(b)
In case the Contractor renounces or abandons wholly or partly the area covered by his
contract within two years from its effective date, it shall in respect of the abandoned area pay the
Government the amount it should have spent, but did not, for exploration work during said two
years, for which payment, among other obligations, the performance guarantee posted by the
contractor shall be answerable. cdtai
(c)
Every contract shall provide for the compulsory relinquishment of at least twenty-five per
cent of the initial area at the end of five years from its effective date and in the event of an
extension of the contract from seven to ten years, an additional relinquishment of at least twentyfive per cent of the initial area at the end of seven years from its effective date. But the portion
already delineated as production area pursuant to the succeeding paragraph shall not be taken
into account in ascertaining the extent of relinquishment required. Any area renounced or
abandoned under Sec. 9(b) above shall be credited against the portion of the area subject to the
contract which is required to be surrendered hereunder.
(d)
The Contractor shall, from the discovery of petroleum in commercial quantity, delineate
the production area within the period agreed upon in the contract.
(e)
The exploration period under every contract shall be seven years, extendible for three
years if the Contractor has not been in default in its exploration work obligations and other
obligations after which the contract shall lapse unless petroleum has been discovered by the end
of the tenth year and the Contractor requests a further extension of one year to determine
whether it is in commercial quantity, in which event, another extension of one year for
exploration may be granted. If petroleum in commercial quantity has been discovered, the
Contractor may retain after the exploration period and during the effectivity of the contract
twelve and one-half per cent of the initial area in addition to the delineated production area:
Provided, however, That the Contractor shall pay annual rentals on such retained area which shall
not be less than ten pesos per hectare or fraction thereof for on-shore areas and not less than
twenty pesos as determined by the Petroleum Board per hectare or fraction thereof for off-shore
areas: Provided, further, That such rentals can be offset against exploration expenditures actually
spent on such area. casia
(f)
Where petroleum in commercial quantity is discovered during the exploration period in
any area covered by the contract, the contract with respect to said area shall remain in force for
production purposes during the balance of the ten year exploration period and for an additional
period of twenty-five years, thereafter renewable for a period not exceeding fifteen years under
such terms and conditions as may be agreed upon by the parties at the time of renewal.
(g)
All materials, equipment, plants and other installations erected or placed on the
exploration and/or production area of a movable nature by the Contractor shall remain properties
of the Contractor unless not removed therefrom within one year after the termination of the

contract.
(h)
The Contractor shall be subject to the provisions of laws of general application relating to
labor, health, safety, and ecology insofar as they are not in conflict with the provisions otherwise
contained in this Act.
(i)
Every contract executed in pursuance of this Act shall contain provisions regarding the
discovery, production, sale and disposal of natural gas and casinghead petroleum spirit that shall
be in line with the rules herein prescribed for crude oil except that:
(1)

The market price shall be the basis for tax and all other purposes;

(2)
After meeting requirements in secondary recovery operations priority shall be given to
supplying prospective demand in the Philippines.
SECTION 10. Contract Areas. Subject to Section eighteen hereof, a contractor or its affiliate
may enter into one or more contracts with the Government. Contracts for off-shore areas may
cover any portion beneath the Philippine territorial waters or its continental shelf, or portion of
the continental slope, terrace or areas which are or may be subject to Philippine jurisdiction:
Provided, That for off-shore areas beyond water depths of 200 meters, the Petroleum Board may
provide for more liberal terms than that provided for herein with respect to contract areas,
exploration period and relinquishment. cd i
SECTION 10-A.

Deepwater Contract, Deepwater Contractor and Deepwater Well.

(a)
Cross Recovery Allowed. Subject to cost recovery limitation as provided in the Contract,
there shall be allowed the cross recovery of the operating expenses incurred by a deepwater
contractor or its affiliate in two or more areas under different deepwater contracts and in the
drilling of deepwater wells as if they are covered by a single contract. cda
(b)

Cross Recovery Rules.

(1)
Year to Which Cross Recovery May be Carried. Operating expenses incurred preceding
the date of production shall be cross-recoverable starting on the date of production; aisa dc
(2)

Amount of Cross Recovery.

(a)
the entire amount of operating expenses incurred within ten (10) years preceding the date
of production shall be cross-recoverable;
(b)
Operating expenses incurred more than 10 years preceding the date of production shall be
reduced by an amount equal to twenty percent (20%) thereof, for each year beyond ten (10)
years preceding the date of production.
(3)
Time to Avail Incentive. Cross Recovery of operating expenses set forth in this section
shall be allowed for a period of ten (10) years from the effectivity of this amendatory decree,
unless extended by law. aisa dc
(c)
Cross Recovery Defined. For purposes of this section, the term "Cross Recovery" means
that the operating expenses incurred by a deepwater contractor or its affiliate in two or more
areas under different deepwater contracts and the operating expenses it incurred in the drilling of
deepwater wells may be recovered from the gross proceeds resulting from the sale of all
petroleum produced within any one or more of the deepwater contracts (or contract where the
deepwater well is located), as if they are covered by a single contract.
(d)
Operating Expenses Defined. For purposes of this section, the term "Operating
Expenses" means the total expenditures for petroleum operations incurred by the contractor,
both within and without the Philippines except administrative items, as provided in the service
contract.
(e)

Special Rules.

(1)
Cross Recovery may be allowed under the service contract in other areas upon the
determination and recommendation of the Minister of Energy and subject to the approval by the
President, taking into consideration factors such as exploration conditions, high operation cost,
location, requirements for transport and terminal facilities.

(2)
Cross Recovery shall apply to any corporation authorized to engage in petroleum
operations in the Philippines pursuant to a service contract entered into by said corporation and
the Bureau of Energy Development for: cd i
(a)
Contracts entered into pursuant to this decree, as amended, before the effectivity of this
amendatory decree; and
(b)

New contracts entered into after the effectivity of this amendatory decree.

(f)
Exploration Period in Deepwater Contract and Deepwater Well Contract. The provisions
of subparagraph (e), Section Nine of the Decree shall apply to deepwater contract and deepwater
well, except that when petroleum has been discovered by the end of the tenth year in deepwater
contract and deepwater well, the deepwater contract or contract for deepwater well shall be
further extended to determine whether the discovery is in commercial quantity, in which event,
another extension for a period not exceeding five (5) years shall be granted. In the event the
deepwater contract or contract for deepwater well shall remain in force for production purpose,
the extension period of not exceeding five (5) years shall be credited as part of the initial twentyfive (25) years production term. casia
SECTION 11. Transfer and Assignment. The rights and obligations under a contract executed
under this Act shall not be assigned or transferred without the prior approval of the Petroleum
Board: Provided, That with respect to the transfer or assignment of contractual rights and
obligations under this Act to an affiliate of the transferor, the approval thereof by the Petroleum
Board shall be automatic, if the transferee is as qualified as the transferor to enter into such
contract with the Government: Provided, further, That the affiliate relationships between the
original transferor or a company which holds at least fifty per cent of the contractor's outstanding
shares entitled to vote and each transferee shall be maintained during the existence of the
contract.
SECTION 12. Privileges of Contractor.
The provisions of any law to the contrary
notwithstanding, a contract executed under this Act may provide that the Contractor shall have
the following privileges:
(a)

Exemption from all taxes except income tax.

(b)
Exemption from payment of tariff duties and compensating tax on the importation of
machinery and equipment, and spare parts and all materials required for petroleum operations
subject to the conditions that said machinery, equipment, spare parts and materials of
comparable price and quality are not manufactured domestically; and directly and actually
needed and will be used exclusively by the Contractor in its operations or in operations for it by a
subcontractor are covered by shipping documents in the name of the Contractor to whom the
shipment will be delivered direct by the customs authorities; and prior approval of the Petroleum
Board was obtained by the Contractor before the importation of such machinery, equipment,
spare parts and materials which approval shall not be unreasonably withheld: Provided, however,
That the Contractor or its subcontractor may not sell, transfer or dispose of these machinery,
equipment, spare parts and materials without the prior approval of the Petroleum Board and
payment of taxes due the Government: Provided, further, That should the Contractor or its
subcontractor sell, transfer or dispose of these machinery equipment, spare parts or materials
without the prior consent of the Petroleum Board, it shall pay twice the amount of the tax
exemption granted: Provided, finally That the Petroleum Board shall allow and approve the sale,
transfer, or disposition of the said items without tax if made (1) to another contractor; (2) for
reasons of technical obsolescence; or (3) for purposes of replacement to improve and/or expand
the operations of the contract; cd i
(c)
Exemption upon approval by the Petroleum Board from laws, regulations and/or ordinances
restricting the (1) construction, installation, and operation of power plant for the exclusive use of
the Contractor if no local enterprise can supply within a reasonable period and at reasonable cost
the power needed by the Contractor in its petroleum operations, (2) exportation of machinery and
equipment which were imported solely for its petroleum operation when no longer needed
therefor;
(d)

Exemption from publication requirements under Republic Act Numbered Five thousand four

hundred fifty-five; and the provisions of Republic Act Numbered Sixty-one hundred and seventythree with respect to the exploration, production, exportation or sale or disposition of crude oil
discovered and produced in the Philippines;
(e)
Exportation of petroleum subject to the prior filing pro-rata of domestic needs as
elsewhere provided in this Act;
(f)
Entry, upon the sole approval of the Petroleum Board which shall not be unreasonably
withheld, of alien technical and specialized personnel (including the immediate members of their
families), who may exercise their professions solely for the operations of the contractor as
prescribed in its contract with the Government under this Act: Provided, That if the employment
or connection of any such alien with contractor ceases, the applicable laws and regulations on
immigration shall apply to him and his immediate family: Provided, further, That Filipinos shall be
given preference to positions for which they have adequate training: And provided, finally, That
the Contractor shall adopt and implement a training program for Filipinos along technical or
specialized lines, which program shall be reported to the Petroleum Board;
(g)
Rights and obligations in any contract concluded pursuant to this Act shall be deemed as
essential considerations for the conclusion thereof and shall not be unilaterally changed or
impaired; and
(h)
The privileges and benefits granted to a contractor under the provisions of this Act
together with any applicable obligations shall likewise be made available to concessionaires
under the Petroleum Act of 1949 and their authorized contractors and/or service operators,
whether local or foreign, if they so elect. cdasia
(i)
Exemption from the investment requirements of foreign corporations under Section 126 in
relation to Section 148 of the Corporation Code of the Philippines.
SECTION 13. Repatriation of Capital and Retention of Profits Abroad. The Contractor shall be
entitled to (1) repatriate over a reasonable period the capital investment actually brought into the
country in foreign exchange or other assets and registered with the Central Bank; (2) retain
abroad all foreign exchange representing proceeds arising from exports accruing to the
Contractor over and above (a) the foreign exchange to be converted into pesos in an amount
sufficient to cover, or equivalent to, the local costs for administration and operations of the
exported crude and (b) revenues due the Government on such crude: Provided, however, That the
Government and the Contractor shall stipulate in the contract the currency in which the
Government revenues arising under (b) above are to be paid; (3) convert into foreign exchange
and remit abroad at prevailing rates no less favorable to Contractor than those available to
Contractor than those available to any other purchaser of foreign currencies, any excess balances
of their peso earnings from petroleum production and sale over and above the current working
balances they require, and (4) convert foreign exchange into Philippine currency for all purposes
in connection with its petroleum operations at prevailing rates no less favorable to contractor
than those available to any other purchaser of such currency.
SECTION 14. Full Disclosure of Interest in Contractor. Interest held in the contractor by
domestic mining and petroleum companies and/or the latter's stockholders may be allowed to
any extent after full disclosure thereof to, and approved by the Petroleum Board.
SECTION 15. Arbitration. The Petroleum Board may stipulate in a contract executed under this
Act that disputes in the implementation thereof between the Government and the Contractor may
be settled in accordance with generally accepted international arbitration practice.
SECTION 16. Performance Guarantee. In order to guarantee compliance with the obligations of
the Contractor in contracts executed under this Act, the Contractor shall post a bond or other
guarantee of sufficient amount in favor of the Government and with surety or sureties satisfactory
to the Petroleum Board, conditioned upon the faithful performance by the contractor of any or all
of the obligations under and pursuant to said contracts. acd
Implementing Agency
SECTION 17. There is hereby created a Petroleum Board composed of the Secretary of
Agriculture and Natural Resources, as Chairman, and the Secretary of Finance, the Secretary of

Justice, the Chairman of the Board of Investments, the Governor of the Central Bank, the
Secretary of Trade and Tourism and the Director of Mines as members. The Director of Mines shall
be its Executive Officer. The Board shall be attached to the National Economic Development
Authority.
The President of the Philippine National Oil Company shall relinquish the chairmanship of the
board and abstain from participating in the deliberations whenever matters involving the
Philippine National Oil Company directly or indirectly resulting in a conflict of interest are
presented for consideration of the Board. In such cases, a temporary presiding officer shall be
elected from the members of the Board. casia
SECTION 18. Functions of Petroleum Board. In accordance with the provisions and objectives
of this Act, the Petroleum Board shall:
(a)

Define and give public notice when applicable of the areas available for service contract;

(b)
Enter into contracts herein authorized with such terms and conditions as may be
appropriate under the circumstances including the grant of special allowance: Provided, however,
That no depletion allowance shall be granted: Provided, further, That except as provided in
Sections twenty-six and twenty-seven hereof, no contract in favor of one contractor and its
affiliates shall cover less than fifty thousand nor more than seven hundred and fifty thousand
hectares for on-shore areas, or less than eighty thousand nor more than one million five hundred
thousand hectares for off-shore areas: Provided, finally, That in no case shall the annual net
revenue or share of the Government, including all taxes paid by or on behalf of the Contractor, be
less than sixty per cent of the difference between the gross income and the sum of operating
expenses and Filipino participation incentive; acd
(c)
Provide for the manner and form of the income tax payment, the reimbursement of
operating expenses, the payment of service fee, and payment of Filipino participation incentive
allowance, if any, in the service contract;
(d)
Make specific proposals to Congress for the grant of subsidy to contractors and petroleum
companies at least sixty per cent of the capital of which is owned by Philippine citizens, to be
derived from the revenue or share that will accrue to the Government in pursuance of this Act;
(e)

Undertake intensive studies and researches on oil field practices, procedures, and policies;

(f)
Promulgate such rules and regulations as may be necessary and assess charges for
services rendered, to implement the intent and provisions of this Act;
(g)
Appoint, discipline and remove, and determine the compensation of, its technical staff and
other personnel: Provided, That positions which are highly technical or primarily confidential shall
not be subject to the Civil Service Laws and Rules, and of the Wage and Position Classification
Office;
(h)
Within four months after the close of every fiscal year, submit to the President and
Legislature an annual report on its activities, with appropriate recommendation; and
(i)
cda

Generally, exercise all powers necessary or incidental to attain the objectives of this Act.

Tax Provisions
SECTION 19. Imposition of Tax. The Contractor shall be liable each taxable year for Philippine
income tax on income derived from its petroleum operations under its contract of service,
computed as provided in Section 20, through 25.
SECTION 20. Determination of Gross Income. The gross income shall consist of:
(a)
In respect of crude oil exported, the gross proceeds from the sale of crude oil at the posted
price;
(b)
In respect of crude oil sold for consumption in the Philippines, the gross income shall
consist of the gross proceeds from the sale thereof at market price per barrel;
(c)

In respect of natural gas and/or casinghead petroleum exported or sold for consumption in

the Philippines the gross income shall consist of the total quantity sold at the prevailing market
price thereof; and
(d)

Such other income which are incidental to and/or arising from any petroleum operation.

SECTION 21. Deductions from Gross Income. In computing the taxable net income, there shall
be allowed as deductions:
(1)

Filipino participation incentive; and

(2)
Operating expenses reimbursed pursuant to Section 8 (1) which includes amortization and
depreciation as provided in Section 22.
SECTION 22. Amortization and Depreciation. Intangible exploration costs may be deductible in
full; all tangible exploration costs such as capital expenditures and other recoverable capital
assets are to be depreciated for a period of ten years. cd
SECTION 23. Deductions Not Allowed. In ascertaining the taxable net income, no deduction
from gross income shall be allowed in respect of any interest or other consideration paid or
suffered in respect of the financing of its petroleum operations.
SECTION 24. Return and Payment of Tax. Every party to a service contract shall render to the
Petroleum Board a return for each taxable year in duplicate in such form and manner as provided
by law setting forth its gross income and the deductions herein allowed. The return shall be filed
by the Petroleum Board with the Commissioner of Internal Revenue or his deputies or other
persons authorized by him to receive such return within the period specified in the National
Internal Revenue Code and the Rules and Regulations promulgated thereunder. Every party to a
service contract shall be subject to tax separately on its share of taxable income arising from
such contract.
SECTION 25. Applicability of the Provisions of the National Revenue Code. All provisions of the
National Internal Revenue Code and rules and regulations promulgated in relation therewith
which are not inconsistent with the provisions of this Act shall be applicable to the Contractor. cd
i
Special Provisions
SECTION 26. Option of Exploration Concessionaires. A holder of a valid and subsisting
petroleum exploration concession under the Petroleum Act of 1949 may, at his option enter into a
contract of service under the rules of the Petroleum Act of 1949, subject to constitutional
restrictions, with any local or foreign oil company under such terms and conditions as may be
agreed upon by the concessionaire and the service contractor. As an alternative the
concessionaire may convert his concession into a service contract as provided in this Act through
negotiations, with all the rights and privileges herein authorized: Provided, That the contract
which may be concluded after said negotiation shall contain at least the minimum terms and
conditions provided in this Act and shall take into account terms and conditions more favorable to
the Government contained in contracts involving exploration pursuant to this Act: Provided,
further, That the exploration period shall commence to run from the effective date of the original
concession, except when the concession has been effective for a period of seven years or more,
in which case the contractor shall be required to commence exploratory drilling operations within
a period of not exceeding eighteen months from the date of effectivity of the service contract. If
the contractor is not in default in the drilling operations as hereunder required, an extension of
the exploration period may be granted as provided in Section nine, paragraph (e) of this Act. cd
SECTION 27. Alternative Option of Exploration Concessionaire. The concessionaire referred to
in the preceding section may form a consortium with another company or companies and jointly
enter into a service contract with the Government under this Act, with the right to assign to the
consortium, subject to the approval of the Petroleum Board, the area covered by his concession
which shall thereupon be governed by the provisions of this Act: Provided, That the voluntary
relinquishment of the concession and its assignment, as well as all technical data on the area
resulting from studies conducted by the concessionaire subsisting improvement introduced by
him thereon, shall be evaluated and given a fair value which may constitute his contribution,
wholly or in part, to the consortium: Provided, however, That the exploration period under the

new contract shall commence to run from the date of the effectivity of the contract if it covers
areas in addition to the assigned areas; otherwise the provisions of the preceding section shall
apply: Provided, further, That duly published applications, for exploration concessions or bids
therefor already awarded by the Secretary of Agriculture and Natural Resources under the
provisions of the Petroleum Act of 1949 shall be recognized and the corresponding deeds of
concessions issued accordingly: Provided, finally, That exploration concessions on which the
holder thereof failed to perform the three consecutive years the exploration work required under
the provisions of the Petroleum Act of 1949, as amended by Republic Act Numbered Five
Thousand Eighty-Six shall be considered automatically cancelled.
SECTION 28. Filipino Participation Incentive. The Contractor under a service contract in which
Philippine citizens or corporations have a minimum participating interest of fifteen per cent in the
contract area may be subject to reasonable conditions imposed by the Petroleum Board be
granted by a government subsidy, commensurate with the scope of Filipino participation, i.e., a
Filipino participation incentive, not exceeding seven and one-half per cent, which shall be
computed by deducting the said allowance from the posted or market price, whichever, is the
higher, of crude oil exports produced in the contract area, and from the market price of crude oil
produced in the contract area, sold or disposed of for consumption in the Philippines.
SECTION 29. Publicity. Negotiation with the Government for the conclusion of a contract under
this Act and every contract concluded hereunder shall be given publicity consistent with the best
interest of the Government. cdt
SECTION 30. Provisions of Petroleum Act applicable. The provisions of the Petroleum Act of
1949, as amended, shall not be applicable to the service contract provided in this Act, except the
following Articles:
(a)

Article 16, referring to public easements on lands covered by concessions;

(b)
Article 17, providing that petroleum operations are subject to existing mining rights,
permits, leases and concessions in respect of substances other than petroleum and to existing
petroleum rights;
(c)
Article 18, referring to the right of the Government to establish reservations or grant
mining rights on petroleum concessions;
(d)
Article 20, granting exploration and exploitation concessionaires the right to enter private
lands covered by their concessions; cdt
(e)
Article 21, referring to easement and the exercise of the right of eminent domain over
private lands for the purpose of carrying out any work essential to petroleum operations;
(f)
Article 22, providing for easements over public land for the purpose of carrying out any
work essential to petroleum operations; and
(g)
Article 23, which grants concessionaires the right to utilize for any of the work to which the
concession relates, timber, water, and clay from any public lands within their concessions.
SECTION 31. Preference to Local Labor. The Contractor shall give priority in employment to
qualified personnel in the municipality or municipalities or province where the exploration or
production operations are located.
SECTION 32. Foreign Assistance. Nothing in this Act or of any other law shall preclude the
Government of the Republic of the Philippines, through the Petroleum Board or any other proper
office or agency, from negotiating or entering into any agreement with any foreign country or
government for assistance in terms of equipment, technical know-how and financing for the
exploration and production of indigenous crude oil and its by-products.
SECTION 33. Funds. To carry out the purpose of this Act, there is hereby appropriated, out of
any funds in the National Treasury not otherwise appropriated, the sum of five hundred thousand
pesos for the fiscal year nineteen hundred seventy-three. Hereafter, the necessary appropriations
shall be included in subsequent General Appropriations Act. cd
SECTION 34. Repealing Clause. All laws, executive orders and regulations inconsistent with the

provisions of this Act are hereby repealed, provided that no existing rights shall be prejudiced
thereby.
SECTION 35. Effectivity Date. This Act shall take effect upon its approval.
DONE in the City of Manila, this thirty first day of December, in the year of Our Lord, Nineteen
Hundred and Seventy-Two.

REVENUE REGULATIONS NO. 01-95

SUBJECT
:
Rules and Regulations to implement the tax incentives provisions
under paragraphs (b) and (c) of Section 12, Republic Act No. 7227 otherwise known as
the Bases Conversion and Development Act of 1992.
TO

All Internal Revenue Officers and Others Concerned.

SECTION 1. Scope. Pursuant to the provisions of Section 245 of the National Internal
Revenue Code, in relation to Section 5(m) and 13 (b) (11) of Republic Act No. 7227, these
regulations are hereby promulgated to implement the tax incentives provided for under
paragraphs (b) and (c), Section 12 of said Act.
SECTION 2. Declaration of Policy. Within the framework and subject to the mandate of the
Constitution and the pertinent provisions of the Local Government Code of 1991, it is hereby
declared the policy of the State of develop the Subic Special Economic Zone into a selfsustaining, industrial, commercial, financial and investment center to generate employment
opportunities in an around the Zone, and to attract and promote productive foreign investments.
SECTION 3. Definition. For purposes of these Regulations, the terms used herein shall be
construed to have the following meanings:
a.
Act refers to RA 7227 otherwise known as the Bases Conversion and Development Act of
1992.
b.
SBMA refers to the Subic Bay Metropolitan Authority, established and created pursuant
to Section 13 of the Act.
c.
Zone refers to the Subic Special Economic and Freeport Zone, (SSEFZ), outside the
Customs Territory and the authority of the customs laws, consisting of the City of Olongapo and
the municipality of Subic, Province of Zambales, the lands occupied by the Subic Bay Naval Base
and its contiguous extensions, embraced, covered, and defined by the 1947 Philippine U.S.
Military Base Agreement, whose metes and bounds shall be delineated in a Proclamation to be
issued by the President of the Republic of the Philippines, (or any portion of the foregoing
designated by the Subic Bay Metropolitan Authority as an area to which duty and tax-free
benefits are limited pending the establishment of a secure perimeter around the entire Zone.)
d.
SECURED AREA refers to the presently fenced-in former Subic Naval Base which shall be
the only completely tax and duty-free area in the Zone and within which there shall be a free and
unimpeded flow of goods and merchandise from one registered enterprise to another or to
residents and along the boundaries of the area shall be set up a Customs checkpoint through
which goods authorized to leave or enter the Secured Area for some destination inside or outside
the Zone must pass. The boundaries of the secured area may be readjusted from time to time
jointly by the SBMA and the Department of Finance as the requirements of the business in the
Zone may demand or permit.
e.

Customs means the Philippine Bureau of Customs

f.
Customs Territory refers to the portion of the Republic of the Philippines where the
customs laws are in force and effect, which is separate from the Zone.
g.
Articles refers to any goods, wares, merchandise and in general, any things may, under
the Tariff and Customs Code of the Philippines, as amended, be made the subject of importation
or exportation.
h.
Domestic Articles refers to articles which are the growth, product, or manufacture of the
Philippines on which all national internal revenue taxes have been paid, if subject thereto, and
upon which no drawback or bounty has been allowed; and articles of foreign origin on which all
duties and taxes have been paid and upon which no drawback or bounty has, been allowed, or
which have previously been entered into Customs Territory free of duties or taxes.
i.
Foreign Articles refers to articles of foreign origin on which duties and taxes have not
been paid, or if paid, upon which drawback or a bounty has been allowed, or which have not
previously been entered into Customs Territory; or articles which are the growth, product, or

manufacture of the Philippines on which not all national internal revenue taxes have been paid, if
subject thereto, or if paid, upon which drawback or a bounty has been allowed.
j.
Resident refers to any individual who is registered and authorized by the SBMA to
establish and maintain a personal residence in the Secured Area of the Zone.
k.
Registered Enterprise refers to any corporation registered with the SBMA to do business
in the Secured Area of the Zone.
l.
Transshipment refers to transshipment of articles discharged at ports or airports of entry
located in Customs territory destined for delivery to the Zone, and articles coming from the latter
intended for export thru a Philippine Customs port/airport of entry may be transported under
bond, upon examination, and consigned to the Collector at the port of destination/export who will
allow the consignor or consignee, as the case may be, to make entry exportation.
m.
Retail Sale refers to the sale of articles in the Secured Area of the Zone, in small
quantities to an individual for his or her own personal use and account and not for resale.
n.
Foreign Exchange shall mean any currency other than the Philippine Peso acceptable for
international reserve or authorized for international transaction by the Central Bank of the
Philippines.
o.
Gross income earned refers to gross sales or gross revenues derived from the business
activity within the zone, net of sales discounts and sales returns and allowances and minus costs
of sales or direct costs but before any deduction for administrative expenses or incidental losses
during a given taxable period. For financial enterprises, gross income shall include interest
income, gains from sales, and other income, net of allowable deductions. The following
deductions shall be allowable for the calculation of gross income earned for specific types of
enterprises:
1)

Trading and manufacturing enterprises

Direct salaries, wages or labor expenses

Production supervision salaries
Raw materials used in the manufacture of Products Goods in process (Intermediate goods)
Finished goods
Supplier and fuels used in production
Depreciation of machineries and equipment used in production, and buildings owned and or
constructed by SBMA-registered enterprise
Rent and utility charges associated with building, equipment and warehouses, or handling of
goods
Financing charges associated with fixed assets
2)

Service enterprises

Direct salaries, wages or labor expense

Service supervision salaries
Direct Materials, supplies used or resold to another SBMA registered enterprise
Depreciation of machineries, equipment and buildings owned and/or constructed
Financing Charges associated with fixed assets
Rent and utility charges for buildings and capital equipment
3)

Financial Institutions

Depreciation
Financing Charges associated with fixed assets

Rent and utility charges

SECTION 4.

Exemptions and Incentives.

A.
All SBMA registered enterprises doing business within the Secured Area in the Zone shall
enjoy the following:
a.
Exemption from customs and import duties and national internal revenue taxes on
importations of raw materials for manufacture into finished products and capital goods and
equipment needed for their business operation within the Secured Area. Consumption items,
however, must be consumed within the Secured Area. Removal of raw materials, capital goods,
equipment and consumer items out of the Secured Area for sale to non-SMBA registered
enterprises shall be subject to the usual taxes and duties, except as may be provided herein:
a.1
Residents of the ZONE living outside the Secured Area can enter the Secured Area and
consume any quantity of consumption items in hotels and restaurants within the Secured Areas.
However, these residents can purchase and bring out of the Secured Area to other parts of the
Philippine territory tax and duty free, consumer items worth not exceeding US$100 per month per
person. Only residents age 15 and over are entitled to this privilege.
a.2
Filipinos not residing within the ZONE can enter the Secured Area and consume any
quantity of consumption items in hotels and restaurants within the Secured Area. However, they
can purchase and bring out of the Secured Area to other parts of the Philippine territory tax and
duty free consumer items worth not exceeding US$200 per year per person. Only Filipinos age 15
and over are entitle to this privilege.
a.3
There shall be no pooling, tacking, or advance use of the US$100 or US$200 entitlement
which is a privilege similar to the entitlement enjoyed by returning residents who shop at existing
government-owned tourist duty-free shops.
a.4
The sale of tax and duty-free consumer items in the Secured Area shall only be allowed in
duly authorized duty-free shops. Duty-free shops shall be subject to the joint regulations of the
Bureau of Customs and the SMBA to insure proper accounting of imports and sales.
a.5
Foreign tourists, balikbayans and returning residents (from abroad) passing through the
Secured Area shall be entitled to the same prevailing tax and duty-free privileges they presently
enjoy. However, the selling of duty and tax free goods to individuals other than tourists,
balikbayan and returning residents shall be held in abeyance pursuant to E.O. 97-A until a control
system shall have been approved by the SBMA and Customs authorities as a condition precedent
to a duty free outlet being allowed to operate.
a.6
A control system shall be set up by duty-free shop operators at their own expense. This
system shall be approved by the SMBA and Customs authorities before any duty-free outlet is
permitted to operate.
In the meantime that control measures have not been defined and set in place, the SMBA shall
order duty free shops located within the Secured Area to desist from further selling duty and tax
free goods to individuals other than tourist, balikbayans and returning residents.
a.7
The SBMA shall install a computerized identification system to insure compliance with the
guidelines governing the SSEFPZ, particularly the Secured Area.
b.
Exemption from the internal revenue taxes, such as gross receipts tax, VAT, ad valorem
and excise taxes on their sales of goods and services for which they shall otherwise have been
directly liable.
c.
Exemption from franchise, common carrier or value added taxes and other percentage
taxes on public and service utilities and enterprises within the Secured Area in the Zone.
d.
Preferential income tax treatment on income earned/derived from business operations
within the Secured Area or from foreign sources. However, in the case of telecommunications
service, the income of the enterprise within the Secured Area shall be net of the share of the
foreign telecommunications company, and in the case of common carriers by land, air or water,
only that portion of the income and expenses for the transport of cargoes and passengers within

the Secured Area shall be covered by the preferential income tax treatment and what is not
covered shall be subject to the regular corporate income tax.
e.
Purchases of raw materials, capital goods and equipment and services by the SBMA and
SBF accredited enterprises from enterprises in the Customs Territory shall be considered
effectively zero-rated for VAT purposes. However, the VAT registered enterprises in the Customs
Territory shall apply for effective zero-rating of their sales of goods and services to SBMA and to
SBF enterprises pursuant to Revenue Regulations No. 5-87 as amended.
f.
Registered Enterprises may generate income from sources within the Customs Territory of
up to Thirty Percent (30%) of its total income from all sources; provided, that should the
registered Enterprise's income from sources within the Customs Territory exceed Thirty Percent
(30%) of its total income from all sources, then the entire income from within the Customs
Territory and the Secured Area shall be subject to the internal revenue laws of the Customs
Territory.
g.
Carriers who undertake to tranship articles to and/or from the Secured Area to a Customs
Bonded warehouse within the Customs Territory shall be bonded in an amount to be determined
by the SBMA and Bureau of Customs which shall not be less than fifty thousand (P50,000) pesos
conditioned that the carrier shall transport and deliver without delay, and in accordance with
rules and regulations in effect in the Customs Territory, to the Collector of Customs at the port of
destination/export. The provisions of the Tariff and Customs Code, as amended, on
transshipment, and its implementing regulations shall govern cases of transshipment for foreign
articles to and/or from the Secured Area.
h.
Articles which are manufactured in the Secured Area and exported therefrom to a foreign
country shall, upon subsequent importation into customs territory, be subject to the laws import
applicable to like articles manufactured in a foreign country.
B.
Business enterprises operating within the Secured Area, but which are not registered by or
accredited with SBMA, shall not be entitled to the preferential income tax treatment provided for
in the Act.
SECTION 5. Notwithstanding the above-mentioned tax and duty exemptions, foreign articles
removed, withdrawn or otherwise disposed to the customs territory, shall be subject to the
payment of customs duties and internal revenue taxes as ordinary importations in accordance
with the provisions of the Tariff and Customs Code of the Philippines, as amended and National
Internal Revenue Code and other applicable laws. Articles removed customs territory will be
presumed to be foreign unless there is sufficient evidence presented to satisfy Customs officials
that they are domestic articles, as defined in these regulations.
a.
Articles which are admitted to the Secured Area from the Customs territory under proper
permit shall considered to be effectively zero-rated. Articles which under proper permit are
returned to the customs territory from the Secured Area shall be considered imported.
b.
Foreign articles to be used in the production, manufacture, processing of finished products
may be brought from the Secured Area to designated Special Economic Zones, Bonded
Warehouses, Export Processing Zones, or under other duty or tax-exempt treatment in the
Customs Territory by accredited subcontractors under bond acceptable to the SBMA and the
Bureau of Customs which shall not be less than fifty thousand pesos (P50,000) to guaranty the
return of the finished goods to the Secured Area, for export or for sale within the Secured Area
and to protect government revenues.
c.
Foreign articles sold by enterprises established within the Secured Area to residents of the
Secured Area and to travelers, tourists, and investors under Section 12 (g) of the Act shall be
exempt from duties and taxes, provided that they are actually exported to a foreign country upon
their departure or are actually consumed within the Secured Area.
d.
Foreign articles purchased within the Secured Area worth not exceeding US$200, and
brought out of the Secured Area and entered into the Customs Territory for personal use shall not
be subject to customs duties and taxes as ordinary importations, provided that this privilege shall
be availed of only once a year.

e.
Foreign articles withdrawn, transported or taken in commercial quantities from the Secured
Area to the Customs Territory without payment of duties and taxes shall be subject to seizure and
forfeiture pursuant to the pertinent provisions of the Tariff and Customs Code and the National
Internal Revenue Code, without prejudice to the criminal/administrative actions that may be
instituted against the person/persons liable/responsible therefor.
SECTION 6.

Taxes and Fiscal Obligations.

Obligations and Liabilities.

a.
Pursuant to Section 12(c) of the Act, registered enterprises within the Secured Area in the
Zone shall, in lieu of local and national taxes, be liable to the payment of the following, based on
gross income earned.
(1)

To the National Government

3%

(2)

To the Local Government units

affected by the declaration of

the Zone
(3)

1%

To the Special Development Fund

to be utilize for the development

of municipalities outside the City
of Olongapo and the Municipality
of Subic and other municipalities
contiguous to the base area

1%

b.
The equivalent amount of 3% of gross income earned as defined in Section 3 (o) of these
Regulations, paid/payable to the National Government of the Philippines, shall be considered for
purposes of any claim for credit against taxes paid to foreign government by the foreign
corporation accredited by the SBMA to operate within the Secured Area.
c.
Registered enterprises operating within the Secured Area shall be responsible for the
safekeeping and accounting of all articles received by them and shall be relieved from
responsibility for the articles upon removal under proper permit from the Secured Area, transfer
to another registered enterprise or to a Secured Area resident, destruction in the Secured Area, or
abandonment to the SBMA in the Secured Area. Articles which are missing or cannot be
accounted for in the Secured Area shall be presumed to have been transferred to the Customs
Territory without permit and therefore subject to taxes and duties.
Articles which are found in the Secured Area but cannot be accounted for in the records of a
registered enterprise shall be treated as having been received in the Secured Area without permit
and therefore should be reported to the SBMA and the Bureau of Customs.
d.
Registered enterprises operating in the Secured Area and registered residents are
responsible for compliance with the provisions of any Operations Manual issued by the SBMA or
Customs Authority, and any such Manual shall have the same force and effect as these
regulations.
e.
A registered enterprise operating within the Secured Area shall be constituted as
withholding agent for the government (1) if it acts as an employer and its employees received
compensation income subject to the withholding tax under Sec. 72 (a), Chapter X, Title II of the
NIRC as implemented by Revenue Regulations No. 12-86 as amended, or (ii) if it makes income
payments to individuals or corporations subject to the expanded withholding tax pursuant to Sec.
50 (b) of the NIRC, as amended, and as implemented by Revenue Regulations No. 6-85 as
amended; or (iii) if it makes payment/remittance of certain income subject to the final withholding

tax under Sec. 50 (a) in relation to Sec. 51 of the NIRC.

f.
Interest from any Philippine currency bank deposits and yield or any other monetary
benefit from deposit substitutes, and from trust fund and similar arrangements received by a
registered enterprise engaged in business within the Secured Area shall be subject to the
preferential tax rate. All other interest, yield or monetary benefit from deposit substitutes, trust
funds and other similar arrangements and royalties derived from sources within the Philippines by
a person other than a registered enterprises operating within the Secured Area in the Zone shall
be subject to the appropriate tax law rates of the Customs Territory.
SECTION 7. Returns and Payment of Tax. Tax total amount representing 5% of the gross
income earned by the registered enterprise from the operation of its business activity within the
Secured Area in the Zone shall be paid and remitted to the Commissioner of Internal Revenue or
his duly authorized agent on or before the 15th day of the fourth month following the close of its
taxable year.
a.
Requirements. Every registered enterprise operating within the Secured Area subject to
the 5% on gross income earned prescribed in Section 12(c) of the Act, shall render in duplicate a
true and accurate quarterly return and final or adjustment return in accordance with the
provisions of Section 68 and 69, Chapter IX, Title II of the National Internal Revenue Code, (NIRC)
as amended. The return shall be filed by the President, Vice-President or other responsible officer
of the enterprise and shall be sworn to by such officer and by the treasurer or assistant treasurer.
b.
Place of filing. The quarterly return and the final or adjustment return required in the
preceding paragraph (a) shall be filed with the Revenue District Officer or the collection
agent/accredited bank located within the Zone.
c.
Time for filing the return/payment of tax. The provisions of Sections 68 and 69 of the
NIRC, as amended, and existing regulations regarding the time for filing of quarterly and final or
adjustment returns and payment of the tax imposed herein, as well as the requirement of
withholding and remittance of the tax under Sections 50 (a) and (b) and 51, Chapter VI of Title II
of the NIRC and the implementing Regulations shall apply to registered enterprises operating
within Secured Area in the Zone.
SECTION 8.

Disposition of Funds.

Amount representing 5% of gross income earned by registered enterprises operating within the
Secured Area and collected by the BIR shall be remitted to the National Treasury; the proceeds
from the 3% shall form part of the general fund; proceeds from the 1% shall be allocated to the
local governments units affected by the declaration of the Zone; and the balance of 1% for the
special development fund to be utilized for the development of municipalities outside the City of
Olongapo and the Municipality of Subic, and other municipalities contiguous to the base areas.
SECTION 9.

Bookkeeping and Reportorial Requirements.

All registered and enterprises operating within the Secured Area in the Zone shall keep regular
and accurate records of their transactions, and maintain books of accounts and allied documents
in accordance with the bookkeeping rules and regulations prescribed by the Bureau of Internal
Revenue and/or the SBMA, which shall be open to inspection and verification by authorized
officers of the SBMA or of the Bureau of Internal Revenue. For this purpose, the Bureau of Internal
Revenue is authorized to conduct at any time during office hours an audit, check, or inventory
count for verification and reconciliation of the records with the inventory of articles in the Secured
Area.
SECTION 10. Applicability of Existing Laws, Rules and Regulations.
For the effective implementation of the Act, pertinent provisions of the National Internal Revenue
Code, as amended, including Title IX on the Requirements of Keeping of Books of Accounts and
Records, Title X on Statutory Penalties and Offenses as well as their implementing rules and
regulations shall apply to registered enterprises operating within the Secured Area in the Zone.
SECTION 11. Effectivity. These Regulations shall take effect fifteen days after its complete
publication in the Official Gazette or any newspaper of general circulation, whichever comes first.

ROBERTO F. DE OCAMPO
Secretary of Finance
Recommended by:
LIWAYWAY VINZONS-CHATO
Commissioner of Internal Revenue

REVENUE REGULATIONS NO. 16-99

SUBJECT
:
Amending Revenue Regulations No. 1-95, as amended, and other
related rules and regulations to implement the provisions of paragraphs (b) & (c) of
Section 12 of Republic Act No. 7227, otherwise known as the "Bases Conversion and
Development Act of 1992" relative to the tax incentives granted to enterprises
registered in the Subic Special Economic and Freeport Zone
TO

All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. Pursuant to the provisions of Sections 244 and 245 of Republic Act No.
8424 or the National Internal Revenue Code of 1997, as amended, in relation to Sections 5 (m)
and 13 (b) (11) of Republic Act No. 7227, these regulations are hereby promulgated to
implement the tax incentives provisions under Section 12 (c) of R.A. No. 7227, particularly the
definition of the term gross income earned and the creditable character of the tax paid therein
against taxes paid to foreign governments.
SECTION 2. Declaration of Policy. Within the framework and subject to the mandate of the
Constitution, it is hereby declared the policy of the State to enhance the attractiveness and
provide for the greater competitiveness of the Philippines, its various economic zones, including
the Subic Special Economic and Freeport Zone Bay, as preferred area/s of foreign and local
investments, particularly in the Asia-Pacific region.
SECTION 3. Section 3 of Revenue Regulations No. 1-95
is hereby amended by adding
paragraph (4) under sub-section (o) thereof and by adding thereto a sub-section (p), to read as
follows: cda
"o.

Gross Income Earned. . . .

1)

Trading and manufacturing enterprises . . .;

2)

Service enterprises . . .;

3)

Financial Institutions . . .;

4)
Subic Bay Regional Enterprise. For purposes of this paragraph, the term "Gross income
earned" refers to the gross sales or gross revenues derived from the business activity within the
zone, net of sales discounts and sales returns and allowances and minus the costs of sales or
direct costs and other costs that are material in the operations of the business and involves a
significant amount in determining the profitability and viability of the business (but before any
deduction for administrative expenses or incidental losses during a given taxable period). For
financial enterprises, gross income shall include interest income, gains from sales, and other
income, net of allowable deductions. The following deductions shall be allowable for the
calculation of gross income earned for the following specific types of enterprises:
(a)

Trading and manufacturing enterprises

Direct salaries
Production supervision salaries
Raw materials used in the manufacture of products
Goods in process (Intermediate goods)
Finished goods
Supplier and fuels used in production
Toll manufacturing fees
Commission expenses
Distribution expenses
Depreciation of machineries and equipment used in production
and building owned and/or constructed by SBMA-registered

enterprise
Equipment lease payments
Rent and utility charges associated with. building,
equipment and warehouses, or handling of goods
Financing charges associated with fixed assets
Corporate management salaries
Administrative salaries
Marketing and sales salaries
Advertising
Research & Development
Royalty Fees
Travel expense
Communication Expenses
Outside Professional Services
Interest & financial charges on working capital
Loss on foreign exchange translation
Loss on disposal of merchandise inventory
(b)

Service enterprises

Direct salaries
Service supervision salaries
Direct Materials, supplies used or resold to
another SBMA registered enterprise
Depreciation of machineries, equipment and
buildings owned and/or constructed
Equipment lease payments
Financing Charges associated with fixed assets
Rent and utility charges for buildings and capital
Equipment
Corporate management salaries
Administrative salaries
Marketing and sales salaries
Advertising
Research & Development
Royalty Fees
Travel and Entertainment expenses
Communication expenses
Outside Professional Services
Interest & financial charges on working capital

Loss on foreign exchange translation

(c)

Financial Services

Depreciation
Equipment lease payments
Financing Charges associated with fixed assets
Rent and Utility
Corporate management salaries
Administrative salaries
Marketing and sales salaries
Materials & supplies used
Advertising
Royalty Fees
Travel and Entertainment expenses
Communication expenses
Outside Professional Services
Insurance
Cost of securities
Bad debts actually ascertained to be worthless and
written-off
Interest & financial charges
Loss on foreign exchange translation
(p)
Registration of Subic Bay Regional Enterprises. Any multinational company, whose
purpose, as expressed in its organizational documents or by resolution of its Board of Directors or
its equivalent, is to engage in regional and/or international trade/services and in business
activities such as, but not limited to, manufacturing, including entering into toll and contract
manufacturing arrangements, employing commission agents and/or distributors; trading,
marketing, financial services and treasury services may establish in the Subic Special Economic
and Freeport Zone (SSEFZ) its seat of management and the situs of its business transactions,
including the recording of its income, from some or all countries in the Asia-Pacific region and or
other parts of the world, including the Philippines, by registering as a Subic Bay Regional
Enterprise with the Subic Bay Metropolitan Authority. cdtai
The following minimum requirements shall, however, be complied with by the said multinational
company:
(a)
A certification from the appropriate government agency in the multinational company's
home country that said multinational company is an entity engaged in regional and/or
international trade/service in the Asia-Pacific Region and/or other parts of the world.
1.
The Regional Enterprise is engaged in regional and/or international trade/services and in
business activities such as, but not limited to manufacturing, including entering into toll and
contract manufacturing arrangements, employing commission agents and/or distributors; trading,
marketing, financial services and treasury services in some or all of the countries in the AsiaPacific region and/or other parts of the world, including the Philippines.
2.
The Regional Enterprise will establish in the SSEFZ its seat of management and the situs of
its business transactions from some or all of the countries in the Asia-Pacific region and/or other
parts of the world, including the Philippines.

(b)
An undertaking that the multinational company will have an investment in the SSEFZ in an
amount not less than US $250,000.00, an inward remittance of not less than US $250,000.00 and
that it will employ at least twenty (20) direct employees.
(c)
Any violation by the Subic Bay Regional Enterprise of any of the provisions of R A. No.
7227 or the Bases Conversion and Development Act or its implementing rules and regulations, or
other terms and conditions of its registration, or any provision of existing laws, shall constitute
sufficient cause for the cancellation of its license or registration. cdll
SECTION 4. Section 4 (A) (f) of Revenue Regulations No. 1-95 is hereby amended to insert
thereunder sub-section (f.1), to read as follows:
f. . . . .
f. 1.

Subic Bay Regional Enterprise.

(1)
The Subic Bay Regional Enterprise shall pay a tax of 5% on Gross Income Earned from
business transactions in some or all of the countries in the Asia Pacific region and/or other parts
of the world, including the Philippines.
(2)
The Subic Bay Regional Enterprise shall establish in the SSFEZ its seat of management
and situs of its business transactions, including the recording of income, in some or all of the
Asia-Pacific region and/or other parts of the world. The Regional Enterprise may engage the
services of toll manufacturers, commission agents, and/or distributors in some or all of the
countries in the Asia-Pacific region and/or other parts of the world.
(3)
The Subic Bay Regional Enterprise may generate revenues from sources within the
Customs Territory up to 50% of its total revenues. The income generated from the customs
territory will be subject to the tax of 5% on gross income earned as defined under Sec. 3 (o)(4) of
these Regulations; Provided, That, if the revenues derived from the customs territory exceed 50%
of its total revenues, the excess of the income generated by the Regional Enterprise will be
subject to the regular income tax rates in the customs territory.
SECTION 5.
follows:

Section 6 (b) of Revenue Regulations No. 1-95 is hereby amended, to read as

"b.
Tax Credits for Foreign Corporations. The 5% tax on gross income earned paid herein by
foreign corporations that are registered as Subic Bay Regional Enterprises shall be considered as
payment of income tax. Said tax shall be in lieu of income tax, for purposes of application for tax
credits by said foreign corporations in their respective home countries. In addition, no other
national or local taxes shall be imposed on the Subic Bay Regional Enterprises.
SECTION 6. Monitoring and Reporting Requirements. All registered enterprises embraced
under these Regulations shall keep separate Books of Accounts, for each country in the Asia
Pacific Region in which its operates, which books shall be duly registered with the concerned
Revenue District Office, showing among others all transactions within and without the Philippines
and the gross income earned therefrom for purposes of the tax herein imposed. Schedules
showing sales and gross income earned per country shall be included as part of the enterprise's
duly audited financial statement to be filed with its annual final adjustment return. LexLib
SECTION 7.

Applicability of Existing Laws, Rules and Regulations.

For the effective implementation of the Act, pertinent provisions of the National Internal Revenue
Code, as amended, including Title X on Statutory Penalties and Offenses as well as their
implementing rules and regulations shall apply to registered Subic Bay Regional Enterprises
operating within the SSEFZ.
SECTION 8. Effectivity. These Regulations shall take effect fifteen days after its complete
publication in the Official Gazette or any newspaper of general circulation, whichever comes first.
(SGD.) EDGARDO B. ESPIRITU
Secretary of Finance
Recommended by:

(SGD.) BEETHOVEN L. RUALO

Commissioner of Internal Revenue

REVENUE REGULATIONS NO. 20-02

SUBJECT
:
Clarifying the Tax Treatment of Income Earned from Unregistered
Activities by Enterprises Registered under the Bases Conversion and Development Act
of 1992 and the Philippine Economic Zone Act of 1995
TO

All Internal Revenue Officers and Others Concerned

These Regulations are issued to clarify the internal revenue tax treatment of income earned from
unregistered activities by enterprises that are registered with the Subic Bay Metropolitan
Authority, the Clark Development Authority, or the Philippine Economic Zone Authority, as the
case may be. ESTcIA
SECTION 1. Tax Treatment. Income derived by an enterprise registered with the Subic Bay
Metropolitan Authority (SBMA), the Clark Development Authority (CDA), or the Philippine
Economic Zone Authority (PEZA) from its registered activity/ies shall be subject to such tax
treatment as may be specified in its terms of registration (i.e., the 5% preferential tax rate, the
income tax holiday, or the regular income tax rate, as the case may be). Nonetheless, whatever
the tax treatment of said enterprise with respect to its registered activity/ies, income realized by
such registered enterprise that is not related to its registered activity/ies shall be subject to the
regular internal revenue taxes, such as the 20% final income tax on interest from Philippine
Currency bank deposits and yield or any other monetary benefit from deposit substitutes, and
from trust funds and similar arrangements, the 7.5% tax on foreign currency deposits and the
5%/10% capital gains tax or 1/2 % stock transaction tax , as the case may be, on the sale of
shares of stock.
Income payments made by a registered enterprise to an entity in the Customs Territory shall not
be subject to the preferential tax rates or tax exemption enjoyed by the registered enterprise.
Thus, dividends paid to the shareholders of a registered enterprise, interest payments to creditors
of such registered enterprise (regardless of any tax provision for grossing up of taxes), and other
such payments shall be subject to the appropriate rate of tax imposable on the recipient of such
income.
SECTION 2. Repealing Clause. Section 6 (f) of Revenue Regulations No. 1-95 and the
provisions of all other internal revenue issuances inconsistent herewith are hereby repealed,
modified or amended accordingly.
SECTION 3. Effectivity. Except for the second paragraph of Section 1 which is a mere
reiteration of the law already enforced, these regulations shall take effect after fifteen (15) days
following publication in the Official Gazette or any newspaper of general circulation in the
Philippines. ASaTHc
(SGD.) JOSE ISIDRO N. CAMACHO
Secretary of Finance
Recommending Approval:
(SGD.)

REVENUE REGULATIONS NO. 02-05

SUBJECT
:
Consolidated
Revenue
Regulations
Implementing
Relevant
Provisions of Republic Act No. 7227 otherwise known as "Bases Conversion and
Development Act of 1992", Republic Act 7916 as amended otherwise known as "Special
Economic Zone Act of 1995", Republic Act No. 7903 otherwise known as "Zamboanga
City Special Economic Zone Act of 1995" and Republic Act No. 7922 otherwise known
as "Cagayan Special Economic Zone Act of 1995" Thereby Amending Revenue
Regulations No. 1-95 as amended by Revenue Regulations No. 16-99.
TO

All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. Pursuant to the provisions of Sections 244 and 245 of the National
Internal Revenue Code of 1997 as amended, these regulations are hereby promulgated to
implement:
1.
Sections 12(b) and 12(c) of Republic Act No. 7227 governing businesses and enterprises
within the Subic Special Economic and Freeport Zone (SUBIC-ECOZONE);
2.
Sections 23, 24, 26, 50 and 51 of Republic Act No. 7916 governing businesses and
enterprises within the Special Economic Zones (ECOZONE);
3.
Sections 4(e) and 4(f) of Republic Act No. 7903 governing businesses and enterprises
within the Zamboanga City Special Economic Zone (ZAMBO-ECOZONE); and
4.
Sections 4(b) and 4(c) of Republic Act No. 7922 governing businesses and enterprises
within the Cagayan Special Economic Zone and Free Port (CAGAYAN-ECOZONE)
SECTION 2. Definitions. For purposes of these Regulations the terms used herein shall be
construed to have the following meanings:
a.
SUBIC-ECOZONE refers to the Subic Special Economic and Freeport Zone, created under
Section 12 of R.A. No. 7227.
b.
SUBIC-ECOZONE Registered Enterprise refers to any business entity or concern located
within the SUBIC-ECOZONE and duly registered with and/or licensed by the SBMA to operate any
lawful economic activity within the SUBIC-ECOZONE.
c.
SUBIC-ECOZONE Facilities Operator refers to a SUBIC-ECOZONE Enterprise which
operates facilities or services within the SUBIC-ECOZONE, including the subleasing of land or
other property to other SUBIC-ECOZONE Enterprise
d.
SBMA refers to the Subic Bay Metropolitan Authority, established and created pursuant
to Section 13 of the Republic Act No. 7227
e.
ECOZONES or "Special Economic Zones" shall refer to selected areas with highly
developed or which have the potential to be developed into agro-industrial, industrial, tourist,
recreational, commercial, banking, investment and financial centers established in accordance
with Sec 5 & 6 of Republic Act No. 7916. EIDTAa
f.
ECOZONE Registered Enterprise refers to any business entity or concern within the
ECOZONE duly registered with and/or licensed by the PEZA to operate any lawful economic
activity within the ECOZONE. An ECOZONE Registered Enterprise may be classified as follows:
f.1
"ECOZONE Export Enterprise" refers to an individual, association, partnership,
corporation or other form of business organization which has been registered with the PEZA to
engage in manufacturing, assembling or processing activity falling within the purview of the Act
and resulting in the exportation of 100% of its production, unless a lower percentage of its
production for exportation is prescribed by the PEZA Board subject to such terms and conditions
as the latter may determine.
f.2
"ECOZONE Domestic Market Enterprise" refers to an individual, association, partnership,
corporation or other form of business organization which has been registered with the PEZA to
engage in manufacturing, assembling or processing activity falling within the purview of the Act
resulting in the sale of its finished products in the customs territory or in the non-restricted or

authorized areas within the ECOZONE in its entirety or if exporting a portion of its production
output, it continually fails to export at least fifty percent (50%) thereof for a period of three (3)
years without any justifiable reason in case at least 60% of its working capital is owned by
Philippine nationals or in case more than 40% of its working capital is owned by foreign nationals,
it continually fails to export at least seventy percent (70%) of its production output for a period of
three (3) years without any justifiable reason.
f.3
"ECOZONE Pioneer Enterprise" shall mean an ECOZONE enterprise (1) engaged in the
manufacture, processing or production and not merely in the assembly or packaging of goods,
products, commodities or raw materials that have not been or are not being produced in the
Philippines on a commercial scale or (2) which uses a design, formula, scheme, method, process
or system of production or transformation of any element, substance or raw materials into
another raw material or finished goods which is new and untried in the Philippines or (3) which
produces non-conventional fuels or manufactures equipment which utilizes non-conventional
sources of energy or uses or converts to coal or other non-conventional fuels or sources of energy
in its production, manufacturing or processing operations: or (4) engaged in the pursuit of agriexport processing zone development or (5) given such status under the Investment Priorities
Plan: Provided, That the final product in any of the foregoing instances involves or will involve
substantial use and processing of domestic raw materials, whenever available, taking into
account the risk and magnitude of investment.
f.4
"ECOZONE Free Trade Enterprise" refers to an individual, association, partnership,
corporation or other form of business organization which has been registered with the PEZA to
engage in the importation of goods or merchandise within the restricted or free trade area in the
ECOZONE tax and duty-free for immediate transshipment or for storage, repacking, sorting,
mixing or manipulation and subsequent exportation unless the Board allows the sale thereof in
the customs territory subject to the payment of customs duties and internal revenue taxes and to
such other terms and conditions as it may determine. TCaEAD
f.5
"ECOZONE Utilities Enterprise" shall refer to a business entity or concern within the
ECOZONE duly registered with and/or franchised/licensed by the PEZA with or without the
incentives provided under Republic Act No. 6957, as amended, (the Build-Operate-Transfer Law)
and/or with or without financial exposure on the part of the PEZA, such as contractors/operators
of light and power systems, water supply and distribution systems, communications and
transportation systems within the ECOZONE and other similar or ancillary activities as may be
determined by the PEZA Board.
f.6
"ECOZONE Facilities Enterprise" shall refer to a business entity or concern within the
ECOZONE duly registered with and/or franchised/licensed by the PEZA with or without incentives
provided under Republic Act No. 6957, as amended, (the Build-Operate-Transfer Law) and/or with
or without financial exposure on the part of the PEZA such as contractors/operators of buildings,
structures, warehouses, site development and road network, ports, sewerage and drainage
system and other facilities for the development, operation and maintenance of the ECOZONE and
other similar or ancillary activities as may be determined by the PEZA Board.
f.7
"ECOZONE Developer/Operator" refers to a business entity or concern duly registered
with and/or licensed by the PEZA to develop, operate and maintain an ECOZONE or any or all of
the component IE, EPZ, Free Trade Zone or Tourist/Recreational Center and the required
infrastructure facilities and utilities such as light and power system, water supply and distribution
system, sewerage and drainage system, pollution control devices, communication facilities,
paved road network, administration building and other facilities as may be required by the PEZA.
The term shall include the PEZA and/or the Local Government Unit when by themselves or in joint
venture with a qualified private entity, shall act as the Developer/Operator of the ECOZONES. As
such, they shall be entitled to the same incentives under Rule XIV of these Rules in accordance
with the pertinent provisions of Republic Act No. 7916 and the Omnibus Investments Code.
f.8
"ECOZONE Service Enterprise" shall refer to a business entity or concern within the
ECOZONE such as but not limited to those engaged in customs brokerage, trucking/forwarding
services, parcel services, janitorial services, security services, insurance, and/or banking services,
consultancy services, restaurants or such other services within the ECOZONE as may be

determined by the Board, duly registered and/or licensed by the PEZA whose income derived
within the ECOZONE shall be subject to taxes under the National Internal Revenue Code pursuant
to Section 25 of the Republic Act No. 7916 as amended by Republic Act No. 8748.
f.9
"ECOZONE Tourism Enterprise" shall refer to an individual, association, partnership,
corporation or other business organization duly registered with the PEZA proposing to engage in
the establishment and operation of tourist-oriented accommodations, restaurants operated as an
integral part of a tourism facility (e.g. hotels, resorts, recreational centers), sports and
recreational facilities within the ECOZONE.
g.
Restricted Area shall mean a specific area within the ECOZONE, which has been
classified and/or fenced-in as export processing zone, free trade zone or such other similar areas
as may be declared by governing Board.
h.

PEZA shall refer to the Philippine Economic Zone Authority

i.
ZAMBO-ECOZONE refers to the Zamboanga City Special Economic Zone and Freeport
created pursuant to Sec. 3 of the Republic Act No. 7903.
j.
ZAMBO-ECOZONE Enterprise refers to any business entity or concern within the ZAMBOECOZONE, duly registered with and/or licensed by the ZAMBO-ECOZONE Authority to operate any
lawful economic activity within the ZAMBO-ECOZONE.
k.
ZAMBO-ECOZONE Authority refers to the Zamboanga City Special Economic Zone
Authority created under Sec. 5 of Republic Act No. 7903.
l.
CAGAYAN-ECOZONE refers to the Cagayan Special Economic Zone and Freeport created
pursuant to Sec. 3 of the Republic Act No. 7922.
m.
CAGAYAN-ECOZONE Enterprise refers to any business entity or concern within the
CAGAYAN-ECOZONE, duly registered with and/or licensed by the CEZA to operate any lawful
economic activity within the CAGAYAN-ECOZONE.
n.
CEZA refers to Cagayan Economic Zone Authority created under Sec. 5 of Republic Act
No. 7922.
o.
Zone refers to the SUBIC-ECOZONE, ECOZONES, ZAMBO-ECOZONE or CAGAYANECOZONE, as the context may require.
p.
Resident refers to any individual who is registered and authorized by the SBMA, PEZA,
ZAMBO-ECOZONE Authority or CEZA to establish and maintain a personal residence in the Zone
where they are registered. CHIScD
q.
Certificate of Registration refers to the certificate issued by the SBMA, PEZA, ZAMBOECOZONE Authority or CEZA evidencing the registration of the business entity as an Enterprise in
the applicable Zone where registered.
r.
Certificate of Residency refers to the certificate issued by the SBMA, PEZA, ZAMBOECOZONE Authority or CEZA evidencing the registration of an individual as a Resident of the
applicable Zone where registered.
s.
Date of Registration shall refer to the date appearing in the Certificate of Registration or
Certificate of Residency.
t.

Customs means the Philippine Bureau of Customs.

u.
Customs Territory refers to the portion of the Republic of the Philippines outside of
SUBIC-ECOZONE, ECOZONE, ZAMBO-ECOZONE or the CAGAYAN-ECOZONE, as the case may be.
v.
Articles refers to any goods, wares, merchandise and in general, any thing which under
the Tariff and Customs Code of the Philippines or other laws may be made or is the subject of
importation or exportation.
w.
Domestic Articles refers to articles which are the growth, produce, or manufacture of the
Philippines on which all national internal revenue taxes have been paid, if subject thereto, and
upon which no drawback or bounty has been allowed; and articles of foreign origin on which all

duties and taxes have been paid and upon which no drawback or bounty has been allowed, or
which have previously been entered into Customs Territory free of duties or taxes.
x.
Foreign Articles refers to articles of foreign origin on which duties and taxes have not
been paid, or if paid, upon which drawback or a bounty has been allowed, or which have not
previously been entered into Customs Territory; or articles which are the growth, produce, or
manufacture of the Philippines on which not all national internal revenue taxes have been paid, if
subject thereto, or if paid, upon which drawback or a bounty has been allowed.
y.
Transshipment refers to transshipment of articles discharged at ports or airports of entry
located in Customs territory destined for delivery and actually delivered to the Zone, and articles
coming from the latter intended for export and actually exported thru a Philippine Customs
port/airport of entry which may be transported under bond, upon examination, and consigned to
the Collector at the port of destination/export who will allow the consignor or consignee, as the
case may be, to make entry exportation.
z.
Retail Sale refers to the sale of articles in the Zone, in small quantities to any person,
natural or juridical, for his/her/its own personal use and account and not for resale.
aa.
Foreign Exchange shall mean any currency other than the Philippine Peso acceptable for
international reserve or authorized for international transaction by the Central Bank of the
Philippines. aScIAC
SECTION 3. National Tax Exemption and Incentives to Zone Registered Enterprises. All
ECOZONE-registered enterprises, CAGAYAN-ECOZONE registered enterprises and ZAMBOECOZONE registered enterprises who are covered by the special tax regime of 5%, including all
SUBIC-ECOZONE registered enterprises doing business within the Zone shall enjoy the following:
a.
Exemption from national internal revenue taxes on importations of raw materials for
manufacture and actually manufactured into finished products, and capital goods and equipment
needed for their business operation, within the Zone. Removal of raw materials, capital goods,
equipment and consumer items out of the Zone for sale to non-Zone registered enterprises shall
be subject to the usual taxes and duties provided for in Republic Act No. 7227 for SUBICECOZONE.
b.
Exemption from the national internal revenue taxes, such as gross receipts tax, VAT, ad
valorem and excise taxes on their sales of goods and services for which they shall otherwise have
been directly liable, except for local sales as discussed in sub-section f of this Section and unless
provided for in other laws to the contrary.
c.
Exemption from franchise, common carrier or value added taxes and other percentage
taxes on public and service utilities and enterprises within the Zone for services rendered within
Zone.
d.
Preferential tax treatment on income earned/derived from business operations within the
Zone or from foreign sources. However, in the case of telecommunications service, the income of
the enterprise within the Zone shall be net of the share of the foreign telecommunications
company, and in the case of common carriers by land, air or water, only that portion of the
income and expenses for the transport of cargoes and passengers within the Zone shall be
covered by the preferential income tax treatment and what is not covered shall be subject to the
regular corporate income tax.
e.
Purchases from enterprises in the Customs Territory of raw materials forming part of
finished goods exported by the Zone registered enterprises shall be considered effectively zerorated or exempt for VAT purposes depending on the fiscal incentives availed of by the Zone
registered enterprise. The application of this rule on VAT will however be covered by a separate
Revenue Regulations discussing in particular the VAT implications of transaction within, into and
outside the Zone.
f.
Zone registered enterprises may generate income from sources within the Customs
Territory of but up to Thirty Percent (30%) of its total income from all sources only. All of the
income of Zone registered enterprises generated from sources within the Customs Territory shall
be subject to the internal revenue laws of the Customs Territory and the regular internal revenue

taxes and rate imposed for enterprises in the Customs Territory.

Provided, however, that in the event SUBIC-ZONE registered enterprises shall generate income
from sources within the Customs Territory in excess of thirty percent (30%) of its total income
from all sources, all of its income shall be subject to the regular internal revenue tax rate imposed
for enterprise in the Customs Territory.
g.
Carriers who undertake to transship articles to and/or from the Zone to a Customs Bonded
warehouse within the Customs Territory shall be bonded in an amount to be determined by the
SBMA, PEZA, ZAMBO-ECOZONE Authority or CEZA and Bureau of Customs which shall not be less
than fifty thousand (P50,000) pesos conditioned upon the carrier transporting and delivering
without delay, and in accordance with rules and regulations in effect in the Customs Territory, to
the Collector of Customs at the port of destination/export. The provisions of the Tariff and
Customs Code, as amended, on transshipment, and its implementing regulations shall govern
cases of transshipment for foreign articles to and/or from the Zone. EcTCAD
h.
Articles which are manufactured in the Zone and exported therefrom to a foreign country
shall, upon subsequent importation into customs territory, be subject to the laws on importation
applicable to like articles manufactured in a foreign country.
Business enterprises operating within the Zone, but which are not registered by or accredited
with SBMA, PEZA, ZAMBO-ECOZONE Authority or CEZA shall not be entitled to the preferential tax
treatment provided for in Section 12(c) of the Republic Act No. 7227; Section 24 of Republic Act
No. 7916; Section 4(f) of Republic Act No. 7903; and Section 4(c) of Republic Act No. 7922.
SECTION 4. Tax and Fiscal Obligation. Pursuant to Section 12(c) of the Republic Act No. 7227;
Section 24 of Republic Act No. 7916; Section 4(f) of Republic Act No. 7903; and Section 4(c) of
Republic Act No. 7922:
a.
Zone registered enterprises doing business within the Zone shall, in lieu of local and
national taxes, be liable to the pay 5% of gross income earned, broken down as follows:
RA 7227

RA 7916

Subic-Ecozone

RA 7903

Ecozones

RA 7922

Zambo-Ecozone

Cagayan-Ecozone

(1) 3% to the National

(1) 3% to the (1) 2% to the (1) 2% to the

Government; National

National

National Government;

(2) 1% to the Local

Government; Government; (2) 1% to the

Government units

(2) 2% which shall

affected by the

be directly

(2) 2% to the City

Province of Cagayan;

of Zamboanga; and (3) 1/2% to be shared

declaration ofremitted by the

(3) 1% to the by municipalities

the Zone; and

barangay special

business

(3) 1% to the Specialestablishments to

affected by the

development fund,

declaration of the

Development Fund to be

the treasurer's

which is hereby

utilize for the office of the

created, for the

to their income

development of

municipality or

development and

municipalities outside

city where the

the City of Olongapo and

enterprise is barangays within

the Municipality of Subic

located

and other municipalities

contiguous to the base
area

Zone in proportion

from business

improvement of the activities within the

the City of

Zamboanga CEZA

Zone; and

(4) 1 1/2% to the

b.
The equivalent amount of tax paid/payable to the National Government of the Philippines
shall be considered for purposes of any claim for credit against taxes paid to foreign government
by the foreign corporation accredited by the SBMA, PEZA, ZAMBO-ECOZONE Authority or CEZA to
operate within the Zone. THcaDA
c.
Zone registered enterprises operating within the Zone shall be responsible for the
safekeeping and accounting of all articles received by them. Articles which are missing or cannot
be accounted for in the Zone shall be presumed to have been transferred to the Customs Territory
without permit and therefore subject to taxes and duties.
Articles which are found in the Zone but cannot be accounted for in the records of a zone
registered enterprise shall be treated as having been received in the Zone without permit and
therefore should be reported to the SBMA, PEZA, ZAMBO-ECOZONE Authority or CEZA and the
Bureau of Customs.
d.
A zone registered enterprise operating within the Zone shall be constituted as withholding
agent for the government (1) if it acts as an employer and its employees receive compensation
income subject to the withholding tax under Sec. 72 (a), Chapter X, Title II of the NIRC as
implemented by Revenue Regulations No. 12-86 as amended, or (ii) if it makes income payments
to individuals or corporations subject to the expanded withholding tax pursuant to Sec. 50 (b) of
the NIRC, as amended, and as implemented by Revenue Regulations No. 6-85 as amended; or (iii)
if it makes payment/remittance of certain income subject to the final withholding tax under Sec.
50 (a) in relation to Sec. 51 of the NIRC.
e.
Interest from any Philippine currency bank deposits and yield or any other monetary
benefit from deposit substitutes, and from trust fund and similar arrangements received by a
zone registered enterprise engaged in business within the Zone shall be subject to the internal
revenue taxes under the National Internal Revenue Code as amended.
SECTION 5. Removal or Withdrawal from the Zone to Customs Territory. Notwithstanding the
above-mentioned tax and duty exemptions, foreign articles removed, withdrawn or otherwise
disposed to the customs territory, shall be subject to the payment of customs duties and internal
revenue taxes as ordinary importations in accordance with the provisions of the Tariff and
Customs Code of the Philippines, as amended and National Internal Revenue Code and other
applicable laws. Articles removed customs territory will be presumed to be foreign unless there is
sufficient evidence presented to satisfy Customs officials that they are domestic articles, as
defined in these regulations. aEHIDT
SECTION 6. Service Establishments. On income derived service establishments within the
Zone, the following rules shall apply:
a)
On income derived within ECOZONES: All income derived by persons and by all service
establishments rendering their services within the ECOZONES, whether registered or not with
PEZA, which may qualify as ECOZONE Service Enterprise as defined herein shall be subject to all
internal revenue taxes under the National Internal Revenue Code, as amended.
However, all service establishments registered with the PEZA as ECOZONE locators which export
their services or are rendering their services abroad through the use of information technologies
shall remain to enjoy the five percent (5%) preferential tax rate under these revenue regulations,
provided that such services are paid in foreign currency inwardly remitted through the Banko
Sentral ng Pilipinas.
b)
On income derived within SUBIC-ECOZONE, ZAMBO-ECOZONE and CAGAYAN-ECOZONE: all
income derived by persons shall be subject to withholding taxes under existing tax laws, rules
and regulations. All income derived by service establishments within SUBIC-ECOZONE, ZAMBOECOZONE and CAGAYAN-ECOZONE shall be subject to the five percent (5%) preferential tax rate,
provided that such services are paid in foreign currency inwardly remitted through the Banko
Sentral ng Pilipinas.
SECTION 7. Gross income earned. For purposes of the application of these Regulations
"gross income earned" shall refer to gross sales or gross revenue derived from registered
business activity within the Zone net of sales discounts, sales returns and allowances minus cost

of sales or direct costs but before any deductions for administrative, marketing, selling, operating
expenses or incidental losses during a given taxable. For financial enterprises, gross income shall
include interest income, gains from sales, and other income. CHaDIT
For purposes of computing the total five percent (5%) tax rate imposed by Republic Act No. 7227,
Republic Act No. 7903, Republic Act No. 7922 and Republic Act No. 7916, the cost of sales or
direct cost shall consist only of the following cost or expense items which shall be computed in
accordance with Generally Accepted Accounting Principles (GAAP):
For SUBIC-ECOZONE, ZAMBO-ECOZONE and CAGAYAN-ECOZONE
1)

Trading Enterprises:

Cost of Sales

(Cost of Sales which is equal to Inventory beginning plus purchases minus Inventory of goods
ending)
2)

Manufacturing enterprises:

Direct salaries, wages or labor expenses

Production supervision salaries

Raw materials used in the manufacture of products

Decrease in Goods in Process Account (Intermediate goods)

Decrease in Finished Goods Account

Supplies and fuels used in production

Depreciation of machineries and equipment used in production

Rent and utility charges associated with building, equipment and warehouses used in
production

Financing charges associated with fixed assets used in production the amount of which
were not previously capitalized
3)

Services enterprises:

Direct salaries, wages or labor expense

Service supervision salaries

Direct materials, supplies used

Depreciation of machineries equipment used in the rendition of registered services

Financing charges associated with fixed assets used in the service business the amount of
which were not previously capitalized

Rent and utility charges for buildings and capital equipment used in the rendition of
registered services
For ECOZONES under R.A. No. 7916
1.

ECOZONE Export Enterprises, Free Trade Enterprises and Domestic Market Enterprises:

Direct salaries, wages or labor expenses

Production supervision salaries

Raw materials used in the manufacture of products

Decrease in Goods in Process Account (intermediate goods)

Decrease in Finished Goods Account

Supplies and fuels used in production

Depreciation of machinery and equipment used in production

Rent and utility charges associated with building, equipment and warehouses used in
production

Financing charges associated with fixed assets used in production the amount of which
were not previously capitalized
2.

ECOZONE Developer/Operator, Facilities, Utilities and Tourism Enterprises:

Direct salaries, wages or labor expense

Service supervision salaries

Direct materials, supplies used

Depreciation of machinery and equipment used in registered activities

Financing charges associated with fixed assets used in registered activities the amount of
which were not capitalized

Rent and utility charges for buildings and capital equipment used in undertaking
registered activities
SECTION 8. Repealing Clause. Revenue Regulations No. 1-95 and 16-99 are hereby repealed.
Any existing regulations, order or instructions or portions thereof that are inconsistent with these
regulations are likewise repealed, amended or modified accordingly.
SECTION 9. Effectivity Clause. These regulations shall take effect fifteen (15) days after
publication in a newspaper of general circulation in the Philippines. DHEACI
(SGD.) JUANITA D. AMATONG
Secretary of Finance
Recommending Approval:
(SGD.) GUILLERMO L. PARAYNO, JR.
Commissioner of Internal Revenue

REPUBLIC ACT NO. 9399

AN ACT DECLARING A ONE-TIME AMNESTY ON CERTAIN TAX AND DUTY LIABILITIES,
INCLUSIVE OF FEES, FINES, PENALTIES, INTERESTS AND OTHER ADDITIONS THERETO,
INCURRED BY CERTAIN BUSINESS ENTERPRISES OPERATING WITHIN THE SPECIAL
ECONOMIC ZONES AND FREEPORTS CREATED UNDER PROCLAMATION NO. 163, SERIES
OF 1993; PROCLAMATION NO. 216, SERIES OF 1993; PROCLAMATION NO. 420, SERIES
OF 1994; AND PROCLAMATION NO. 984, SERIES OF 1997, PURSUANT TO SECTION 15 OF
REPUBLIC ACT NO. 7227, AS AMENDED, AND FOR OTHER PURPOSES
SECTION 1. Grant of Tax Amnesty. Registered business enterprises operating prior to the
effectivity of this Act within the special economic zones and freeports created pursuant to Section
15 of Republic Act No. 7227, as amended, such as the Clark Special Economic Zone created under
Proclamation No. 163, series of 1993; Poro Point Special Economic and Freeport Zone created
under Proclamation No. 216, series of 1993; John Hay Special Economic Zone created under
Proclamation No. 420, series of 1994; and Morong Special Economic Zone created under
Proclamation No. 984, series of 1997, may avail themselves of the benefits of remedial tax
amnesty herein granted on all applicable tax and duty liabilities, inclusive of fines, penalties,
interests and other additions thereto, incurred by them or that might have accrued to them due
to the rulings of the Supreme Court in the cases of John Hay People's Coalition v. Lim, et al., G.R.
No. 119775 dated 23 October 2003 and Coconut Oil Refiners Association, Inc. v. Torres, et al., G.R.
No. 132527 dated 29 July 2005, by filing a notice and return in such form as shall be prescribed
by the Commissioner of Internal Revenue and the Commissioner of Customs and thereafter, by
paying an amnesty tax of Twenty-five thousand pesos (P25,000.00) within six months from the
effectivity of this Act: Provided, That the applicable tax and duty liabilities to be covered by the
tax amnesty shall refer only to the difference between: (i) all national and local tax impositions
under relevant tax laws, rules and regulations; and (ii) the five percent (5%) tax on gross income
earned by said registered business enterprises as determined under relevant revenue regulations
of the Bureau of Internal Revenue and memorandum circulars of the Bureau of Customs during
the period covered: Provided, however, That the coverage of the tax amnesty herein granted
shall not include the applicable taxes and duties on articles, raw materials, capital goods,
equipment and consumer items removed from the special economic zone and freeport and
entered in the customs territory of the Philippines for local or domestic sale, which shall be
subject to the usual taxes and duties prescribed in the National Internal Revenue Code (NIRC) of
1997, as amended, and the Tariff and Customs Code of the Philippines, as amended. IDEScC
SECTION 2. Immunities and Privileges. Those who have availed themselves of the tax
amnesty and have fully complied with all its conditions shall be relieved of any civil, criminal
and/or administrative liabilities arising from or incident to the nonpayment of taxes, duties and
other charges covered by the tax amnesty granted under Section 1 herein.
SECTION 3. Implementing Rules and Regulations. The Department of Finance, in coordination
with the Bureau of Internal Revenue and the Bureau of Customs, and in consultation with the
Bases Conversion and Development Authority, the Clark Development Corporation, the John Hay
Management Corporation, the Poro Point Management Corporation, and the Bataan Technology
Park, Inc., shall promulgate and publish the necessary rules and regulations for the effective
implementation of this Act within two months from the date of effectivity of this Act.
SECTION 4. Separability Clause. If any portion or provision of this Act is declared
unconstitutional, the remainder of this Act or any provision not affected thereby shall remain in
force and effect.
SECTION 5. Repealing Clause. All laws, decrees, orders, rules and regulations or other
issuances or parts thereof inconsistent with the provisions of this Act are hereby repealed or
modified accordingly.
SECTION 6. Effectivity. This Act shall take effect fifteen (15) days after its publication in the
Official Gazette or in any two newspapers of general circulation, whichever comes earlier. CITcSH
Approved: March 20, 2007

REPUBLIC ACT NO. 9400

AN ACT AMENDING REPUBLIC ACT NO. 7227, AS AMENDED, OTHERWISE KNOWN AS
THE BASES CONVERSION AND DEVELOPMENT ACT OF 1992, AND FOR OTHER
PURPOSES
SECTION 1. Section 12 of Republic Act No. 7227, as amended, otherwise known as the Bases
Conversion and Development Act of 1992, is hereby amended to read as follows: cSEaDA
"SEC. 12.
"(a)

Subic Special Economic Zone. . . . .

...

"(b)
The Subic Special Economic Zone shall be operated and managed as a separate customs
territory ensuring free flow or movement of goods and capital within, into and exported out of the
Subic Special Economic Zone, as well as provide incentives such as tax and duty-free
importations of raw materials, capital and equipment. However, exportation or removal of goods
from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory
shall be subject to customs duties and taxes under the Tariff and Customs Code of the Philippines,
as amended, the National Internal Revenue Code of 1997, as amended, and other relevant tax
laws of the Philippines;
"(c)
The provision of existing laws, rules and regulations to the contrary notwithstanding, no
national and local taxes shall be imposed within the Subic Special Economic Zone. In lieu of said
taxes, a five percent (5%) tax on gross income earned shall be paid by all business enterprises
within the Subic Special Economic Zone and shall be remitted as follows: three percent (3%) to
the National Government, and two percent (2%) to the Subic Bay Metropolitan Authority (SBMA)
for distribution to the local government units affected by the declaration of and contiguous to the
zone, namely: the City of Olongapo and the municipalities of Subic, San Antonio, San Marcelino
and Castillejos of the Province of Zambales; and the municipalities of Morong, Hermosa and
Dinalupihan of the Province of Bataan, on the basis of population (50%), land area (25%), and
equal sharing (25%).
"xxx
SECTION 2.
follows:

xxx

xxx."

Section 15 of Republic Act No. 7227, as amended, is hereby amended to read as

'"SEC. 15.
Clark Special Economic Zone (CSEZ) and Clark Freeport Zone (CFZ). Subject to
the concurrence by resolution of the local government units directly affected, the President is
hereby authorized to create by executive proclamation a Special Economic Zone covering the
lands occupied by the Clark military reservations and its contiguous extensions as embraced,
covered and defined by the 1947 Military Bases Agreement between the Philippines and the
United States of America, as amended, located within the territorial jurisdiction of Angeles City,
municipalities of Mabalacat and Porac, Province of Pampanga, and the municipalities of Capas
and Bamban, Province of Tarlac, in accordance with the provisions as herein provided insofar as
applied to the Clark military reservations. The Clark Air Base proper with an area of not more than
four thousand four hundred hectares (4,400 has.) with the exception of the twenty-two-hectare
commercial area situated near the main gate and the Bayanihan Park consisting of seven and a
half hectares (7.5 has.) located outside the main gate of the Clark Special Economic Zone, is
hereby declared a freeport zone.
"The CFZ shall be operated and managed as a separate customs territory ensuring free flow or
movement of goods and capital equipment within, into and exported out of the CFZ, as well as
provide incentives such as tax and duty-free importation of raw materials and capital equipment.
However, exportation or removal of goods from the territory of the CFZ to the other parts of the
Philippine territory shall be subject to customs duties and taxes under the Tariff and Customs
Code of the Philippines, as amended, the National Internal Revenue Code of 1997, as amended,
and other relevant tax laws of the Philippines. TCIEcH
"The provisions of existing laws, rules and regulations to the contrary notwithstanding, no
national and local taxes shall be imposed on registered business enterprises within the CFZ. In

lieu of said taxes, a five percent (5%) tax on gross income earned shall be paid by all registered
business enterprises within the CFZ and shall be directly remitted as follows: three percent (3%)
to the National Government, and two percent (2%) to the treasurer's office of the municipality or
city where they are located:
"The governing body of the Clark Special Economic Zone shall likewise be established by
executive proclamation with such powers and functions exercised by the Export Processing Zone
Authority pursuant to Presidential Decree No. 66, as amended: Provided, That it shall have no
regulatory authority over public utilities, which authority pertains to the regulatory agencies
created by law for the purpose, such as the Energy Regulatory Commission created under
Republic Act No. 9436 and the National Telecommunications Commission created under Republic
Act No. 7925.
"xxx

xxx

xxx

"Subject to the concurrence by resolution of the local government units directly affected and
upon recommendation of the Philippine Economic Zone Authority (PEZA), the President is hereby
authorized to create by executive proclamation Special Economic Zones covering the City of
Balanga and the municipalities of Limay, Mariveles, Moring, Hermosa, and Dinalupihan, Province
of Bataan.
"Subject to the concurrence by resolution of the local government units directly affected and
upon recommendation of the PEZA, the President is hereby authorized to create by executive
proclamation Special Economic Zones covering the municipalities of Castillejos, San Marcelino,
and San Antonio, Province of Zambales.
"Duly registered business enterprises that will operate in the Special Economic Zones to be
created shall be entitled to the same tax and duty incentives as provided for under Republic Act
No. 7916, as amended: Provided, That for the purpose of administering these incentives, the
PEZA shall register, regulate, and supervise all registered enterprises within the Special Economic
Zones."
SECTION 3. A new Section 15-A is hereby inserted, amending Republic Act No. 7227, as
amended, to read as follows:
"SEC. 15-A. Poro Point Freeport Zone (PPFZ) The two hundred thirty-six and a half-hectare
(236.5 has) secured area in the Poro Point Special Economic and Freeport Zone created under
Proclamation No. 216, series of 1993, shall be operated and managed as a freeport and separate
customs territory ensuring free flow or movement of goods and capital equipment within, into
and exported out of the PPFZ. The PPFZ shall also provide incentives such as tax and duty-free
importation of raw materials and capital equipment. However, exportation or removal of goods
from the territory of the PPFZ to the other parts of the Philippine territory shall be subjected to
customs duties and taxes under the Tariff and Customs Code of the Philippines, as amended, the
National Internal Revenue Code of 1997, as amended, and other relevant tax law of the
Philippines.
"The provisions of existing laws, rules and regulations to the contrary notwithstanding, no
national and local taxes shall be imposed on registered business enterprises within the PPFZ. In
lieu of said taxes, a five percent (5%) tax on gross income earned shall be paid by all registered
business enterprises within the PPFZ and shall be directly remitted as follows: three percent (3%)
to the National Government, and two percent (2%) to the treasurer's office of the municipality or
city where they are located. aEcDTC
"The governing body of the PPFZ shall have no regulatory authority over public utilities, which
authority pertains to the regulatory agencies created by law for the purpose, such as the Energy
Regulatory Commission created under Republic Act No. 9136 and the National
Telecommunications Commission created under Republic Act No. 7925."
SECTION 4. A new Section 15-B is hereby inserted, amending Republic Act No. 7227, as
amended, to read as follows:
"SEC. 15-B. Morong Special Economic Zone (MSEZ). Duly registered business enterprises
operating within the MSEZ created under Proclamation No. 984, series of 1997, shall be entitled

to tax and duty-free importation of raw materials and capital equipment. In lieu of all national and
local taxes except real property tax on land, a five percent (5%) tax on gross income earned shall
be paid by all registered business enterprises which shall be directly remitted as follows: three
percent (3%) to the National Government, and two percent (2%) to the treasurer's office of the
municipality or city where they are located."
SECTION 5. A new Section 15-C is hereby inserted, amending Republic Act No. 7227, as
amended, to read as follows:
"SEC. 15-C. John Hay Special Economic Zone (JHSEZ). Registered business enterprises which
will operate after the effectivity of this Act, within the JHSEZ, created under Proclamation No. 420,
series of 1994, shall be entitled to the same tax and duty incentives as provided for under
Republic Act No. 7916, as amended: Provided, That for the purpose of administering these
incentives, the PEZA shall register, regulate, and supervise all registered enterprises within the
JHSEZ: Provided, further, That the Conversion Authority and the John Hay Management
Corporation (JHMC) shall only engage in acquiring, owning, holding, administering or leasing real
properties, and in other activities incidental thereto."
SECTION 6. In case of conflict between national and local laws with respect to the tax
exemption privileges in the CFZ, PPFZ, JHSEZ and MSEZ, the same shall be resolved in favor of
the aforementioned zones: Provided, That the CFZ and PPFZ shall be subject to the provisions of
paragraphs (d), (e), (f), (g), (h), and (i) of Section 12 of Republic Act No. 7227, as amended.
SECTION 7. Business enterprises presently registered and granted with tax and duty incentives
by the Clark Development Corporation (CDC), Poro Point Management Corporation (PPMC) JHMC,
and Bataan Technological Park Incorporated (BTPI), including such governing bodies, shall be
entitled to the same incentives until the expiration of their contracts entered into prior to the
effectivity of this Act.
SECTION 8. Administration, Implementation and Monitoring of Incentives. The governing
authorities shall be responsible for the administration and implementation of the incentives
granted to their respective registered enterprises. They shall submit to the Department of Finance
(DOF) their respective annual tax expenditures based on the computed costs in terms of revenue
foregone on the tax incentives granted to their registered enterprises. For proper monitoring, the
DOF shall create a single database of all incentives provided by all these authorities. The DOF
shall monitor and review the incentives granted and submit an annual report to the President.
SECTION 9. Penal Provision. Any registered business enterprise found guilty of smuggling by
final judgment, either as principal, accomplice or accessory shall be perpetually barred from
doing business in any freeport and special economic zone, in addition to the penalties and
sanctions imposed by existing laws. TAacHE
SECTION 10. Implementing Rules and Regulations. The DOF, in coordination with the PEZA, the
Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC), and in consultation with the
Bases Conversion Development Authority (BCDA), the SBMA, the CDC, the JHMC, the PPMC, and
the BTPI, shall promulgate and publish the necessary rules and regulations for the effective
implementation of this Act within two months from the date of effectivity of this Act.
SECTION 11. Separability Clause. If any portion or provision of this Act is declared
unconstitutional, the remainder of this Act or any provision not affected thereby shall remain in
force and effect.
SECTION 12. Repealing Clause. All laws, decrees, orders, proclamation, rules and regulations
or other issuances or parts thereof inconsistent with the provisions of this Act are hereby repealed
or modified accordingly.
The provision of Section 50 of Republic Act No. 7916, as amended, is hereby repealed.
The provisions of Section 13(b)(3) of Republic Act No. 7227, as amended, with respect to public
utilities engaged in the provision of electric power and telecommunications services are hereby
repealed.
SECTION 13. Effectivity. This Act shall take effect fifteen (15) days after its publication in the

Official Gazette or in any two newspapers of general circulation, whichever comes earlier.
Approved: March 20, 2007.
Published in The Manila Times on April 4, 2007.

REVENUE MEMORANDUM CIRCULAR NO. 55-80

Subject
:
Publishing Section 24(b) (2) (b) of the National Internal Revenue
Code, as amended by Presidential Decree No. 1705.
To

All Internal Revenue Officers and Others Concerned.

For the information and guidance of all concerned, Section 24(b) (2) (b) of the Tax Code, as
amended by P.D. No. 1705, is quoted as follows:
"(b)
Tax on branch profits remittances. Any profit remitted abroad by a branch office to its
mother company shall be subject to a tax of fifteen (15%) per cent (Except those registered with
the Export Processing Zone Authority): Provided, that, any profit remitted by a branch office to its
mother company authorized to engage in petroleum operations in the Philippines shall be subject
to tax at seven and one-half (7.5%) per cent; And provided, further that fixed or determinable
annual periodical gains, profits, and income or certain gains described in Section 24(b) (1) or
53(b)(2) of this code shall not be considered as branch profits unless the same are effectively
connected with the conduct of a trade or business in the Philippines by foreign corporation."
cdtai
FEATURES OF THE AMENDMENT
Two (2) amendments to Sec. 24(b) (2) (b) of the 1977 Tax Code on branch profit remittances have
been effected by P.D. No. 1705. They are:
1.
Reduction of the tax rate on the profits remitted by a branch office to its mother company
authorized to engage in petroleum operations. The tax on profits remitted by a branch office to
its mother company authorized to engaged in petroleum operations in the Philippines has been
reduced to 7.5%.
2.
Imposition of a branch profits tax on income effectively connected with business. Fixed
or determinable annual periodical gains, profits, and income on certain gains described in Section
24 (b)(1) or 53(b) (2) of the 1977 Tax Code, (i.e. income earned from Philippine sources by nonresident foreign corporations) are generally not considered branch profits subject to the 15%
remittance tax unless the same are effectively connected with the conduct of a trade or business
in the Philippines by the foreign corporation.
To be "effectively connected" it is not necessary that the income be derived from the actual
operation of taxpayer-corporation's trade or business; it is sufficient that the income arises from
the business activity in which the corporation is engaged. casia
For example, if a resident foreign corporation is engaged in the buying and selling of machineries
in the Philippines and invests in some shares of stock on which dividends are subsequently
received, the dividends thus earned are not considered effectively connected with its trade or
business in this country.
On the other hand, if a resident foreign corporation with a branch office in the Philippines
engaged in the canning business allows its trade name or brand to be used and royalties are
received by its parent company, such royalties which constitute passive income, are effectively
connected with its trade or business and should be subject to tax, if remitted abroad.
Effectivity. The foregoing amendment took effect upon the promulgation of P.D. No. 1705 on
August 1, 1980.
Enforcement. It is desired that this Circular be given as wide a publicity as possible. cdasia
RUBEN B. ANCHETA
Acting Commissioner

REVENUE REGULATIONS NO. 09-98

SUBJECT
:
Implementing Republic Act No. 8424, "An Act Amending the National
Internal Revenue Code, as Amended" Relative to the Imposition of the Minimum
Corporate Income Tax (MCIT) on Domestic Corporations and Resident Foreign
Corporations
TO

All Internal Revenue Officers and Others Concerned

Pursuant to Section 244, in relation to Section 27(E) and Section 28(A)(2) , these Regulations are
hereby promulgated to govern the imposition of the minimum corporate income tax on domestic
and resident foreign corporations. Cdpr
SECTION 2.27(E)

MINIMUM CORPORATE INCOME TAX (MCIT) ON DOMESTIC CORPORATIONS

(1)
Imposition of the Tax A minimum corporate income tax (MCIT) of two percent (2%) of the
gross income as of the end of the taxable year (whether calendar or fiscal year, depending on the
accounting period employed) is hereby imposed upon any domestic corporation beginning the
fourth (4th) taxable year immediately following the taxable year in which such corporation
commenced its business operations. The MCIT shall be imposed whenever such corporation has
zero or negative taxable income or whenever the amount of minimum-corporate income tax is
greater than the normal income tax due from such corporation.
For purposes of these Regulations, the term, "normal income tax" means the income tax rates
prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code at 34% on January 1, 1998; 33%
effective January 1, 1999; and at 32% effective January 1, 2000 and thereafter.
In the case of a domestic corporation whose operations or activities are partly covered by the
regular income tax system and partly covered under a special income tax system, the MCIT shall
apply on operations covered by the regular income tax system. For example, if a BOI-registered
enterprise has a "registered" and an "unregistered" activity, the MCIT shall apply to the
unregistered activity.
(2)
Carry forward of excess minimum corporate income tax Any excess of the minimum
corporate income tax (MCIT) over the normal income tax as computed under Sec. 27(A) of the
Code shall be carried forward on an annual basis and credited against the normal income tax for
the three (3) immediately succeeding taxable years. LLphil
Illustration on how to carry forward excess minimum corporate income tax
Excess of MCIT
Normal Income

Over the Normal

Year

Income Tax

Tax

MCIT

1998 P50,000

P75,000

P25,000

1998 amount of tax payable

P75,000

1999 P60,000

P40,000

P100,000

1999 amount of tax payable

2000 P100,000

P100,000

P60,000

Computation of Net Amount of Tax Payable in 2000:

Amount of tax payable

P100,000

Less:
1998 excess MCIT

(25,000)

1999 excess MCIT

(40,000)

P65,000

Net amount of tax payable P35,000

The taxpayer shall pay the MCIT whenever it is greater than the regular or normal corporate

income tax which is imposed under Sec. 27(A) of the Code. The comparison between the normal
income tax payable by the corporation and the MCIT shall be made at the end of the taxable year.
Thus, under the example, the taxpayer will pay the MCIT of P75,000.00 since this amount is
greater than the normal income tax of P50,000.00 in 1998.
In 1999, the firm will also pay the MCIT since the MCIT of P100,000.00 is greater than the normal
income tax of P60,000.00.
In the year 2000, where the normal or regular corporate income tax of P100,000.00 is greater
than the MCIT of P60,000.00, the firm will pay the normal income tax.
The corporation can credit the excess of its MCIT over the normal income tax for 1998 (i.e.
P25,000) and 1999 (i.e. P40,000), or a total amount of P65,000 from the amount of normal
income tax which is payable by the firm in the year 2000. Thus, the amount of income tax
payable by the firm is P35,000 after deducting P65,000 from P100,000.
The excess MCIT is creditable against the normal income tax within the next three (3) years from
payment thereof. Thus, in the illustration above where the corporation had an excess MCIT of
P25,000 over its normal income tax in 1998, the P25,000 can be claimed as a tax credit against
the normal income tax up to the year 2001 and only when the normal income tax is greater than
the MCIT. The excess MCIT cannot be claimed as a credit against the MCIT itself or against any
other losses.
(3)
Relief from the Minimum Corporate Income Tax under Certain Conditions The Secretary
of Finance, upon recommendation of the Commissioner, may suspend imposition of the MCIT
upon submission of proof by the applicant-corporation, duly verified by the Commissioner's
authorized representative, that the corporation sustained substantial losses on account of a
prolonged labor dispute or because of "force majeure" or because of legitimate business
reverses.
(4)

Definition of Terms

(a)
"Gross Income" defined For purposes of the minimum corporate income tax prescribed
under this Subsection, the term "gross income" means gross sales less sales returns, discounts
and allowances and cost of goods sold. "Gross sales" shall include only sales contributory to
income taxable under Sec. 27(A) of the Code. "Cost of goods sold" shall include all business
expenses directly incurred to produce the merchandise to bring them to their present location
and use.
Passive incomes which have been subject to a final tax at source shall not form part of gross
income for purposes of the minimum corporate income tax.
For a trading or merchandising concern, "cost of goods sold" means the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are
actually sold, including insurance while the goods are in transit. cdtai
For a manufacturing concern, "cost of goods manufactured and sold" means all costs of
production of finished goods, such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to
the factory or warehouse.
In the case of sales of services, the term "gross income" means gross receipts less sales returns,
allowances, discounts and cost of services. "Cost of services" means all direct costs and expenses
necessarily incurred to provide the services required by the customers and clients including (a)
salaries and employee benefits of personnel, consultants and specialists directly rendering the
service, and (b) cost of facilities directly utilized in providing the service such as depreciation or
rental of equipment used and cost of supplies: Provided, however, that "cost of services" shall not
include interest expense except in the case of banks and other financial institutions. The term
"gross receipts" as used herein means amounts actually or constructively received during the
taxable year; Provided, that for taxpayers employing the accrual basis of accounting, the term
"gross receipts" shall mean amounts earned as gross income.
(b)

The term "substantial losses from a prolonged labor dispute" means losses arising from a

strike staged by the employees which lasted for more than six (6) months within a taxable period
and which has caused the temporary shutdown of business operations.
(c)
The term "force majeure" means a cause due to an irresistible force as by "Act of God" like
lightning, earthquake, storm, flood and the like. This term shall also include armed conflicts like
war or insurgency.
(d)
The term "legitimate business reverses" shall include substantial losses sustained due to
fire, robbery, theft or embezzlement, or for other economic reason as determined by the
Secretary of Finance.
(5)
Specific Rules for Determining the Period When a Corporation Becomes Subject to the
MCIT
For purposes of the MCIT, the taxable year in which business operations commenced shall be the
year in which the domestic corporation registered with the Bureau of Internal Revenue (BIR).
Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT
beginning January 1, 1998.
Firms which were registered with BIR in any month in 1998 shall be covered by the MCIT three
calendar years thereafter (i.e. after the lapse of three calendar years from 1998). For example, a
firm which was registered in May 1998 shall be covered by the MCIT in 2002.
The reckoning point for firms using the fiscal year shall also be 1998. For example, a firm which
registered with the BIR on July 1, 1998 shall be subject to an MCIT on his gross income earned for
the entire fiscal year ending in the year 2002.
Transitory Rule for determining the MCIT for 1998 on firms which are taxable on a fiscal year
basis. For firms using the fiscal year basis and whose first taxable period under the minimum
corporate income tax covers month/months in 1997 (i.e. prior to the imposition of MCIT under RA
8424), the MCIT which is due for 1998 shall be computed using an apportionment formula. The
ratio to be applied is the number of months in 1998 to twelve (12) months (i.e. the total number
of months in a fiscal year). cda
Illustration. Firm A registered with the BIR in July 1994. It becomes subject to the MCIT in 1998.
Since it is using a fiscal year as basis of its taxable period, a part of the tax base for the MCIT was
earned by the corporation in 1997 prior to the imposition of the MCIT (i.e. gross income from July
to December 1997). The MCIT which is due from the firm is computed using the gross income of
the firm for 1998 (January to June) which is computed on an apportionment basis as follows:
Gross income of the firm for the entire fiscal year
Multiply: 0.50 (i.e. ratio of 6 months in 1998 to 12 months covering FY 97-98)
Equals: Tax base of the MCIT for 1998
Multiply: 2% (i.e. MCIT tax rate)
Equals: MCIT for 1998.
(6)
Manner of filing and payment The minimum corporate income tax (MCIT) shall be paid
on a taxable year basis. It shall be covered by a tax return designed for the purpose which will be
submitted together with the corporation's annual final adjustment income tax return. Domestic
corporations shall not be required to pay the minimum corporate income tax on a quarterly basis,
the provisions of Sec. 75 of the Code notwithstanding.
(7)
Accounting treatment of the excess minimum corporate income tax paid Any amount
paid as excess minimum corporate income tax shall be recorded in the corporation's books as an
asset under account title "deferred charges-minimum corporate income tax". This asset account
shall be carried forward and may be credited against the normal income tax due for a period not
exceeding three (3) taxable years immediately succeeding the taxable year/s in which the same
has been paid. Any amount of the excess minimum corporate income tax which has not or cannot
be so credited against the normal income taxes due for the 3-year reglementary period shall lose
its creditability. Such amount shall be removed and deducted from "deferred charges-minimum

corporate income tax" account by a debit entry to "retained earnings" account and a credit entry
to "deferred charges-minimum corporate income tax" account since this tax is not allowable as
deduction from gross income it being an income tax. dctai
Illustration on the accounting treatment of the excess minimum corporate income tax paid
Assume that ABC Corporation commenced business operations in calendar year 1991. It is
already more than four (4) years in operation as of calendar year 1998 hence, subject to the
minimum corporate income tax beginning taxable year 1998. Assume, further, that its income
taxes during the years from 1998 to year 2005 are as follows:
EXCESS OF
MCIT OVER
NORMAL INCOME

NORMAL

YEAR TAX

INCOME TAX

MCIT

1998 P25,000

P100,000

P75,000

1999 130,000

150,000

20,000

2000 200,000

190,000

2001 -

300,000

300,000

2002 10,000

50,000

40,000

2003 15,000

60,000

45,000

2004 8,000 40,000

32,000

2005 1,000 50,000

49,000

In this case, ABC Corporation shall not be allowed to carry forward and credit the 1998 excess
MCIT against the income tax liability for 1999 since the 1999 MCIT is greater than the normal
income tax for said year. However, for year 2000, where the normal income tax is greater than
the computed MCIT, ABC Corporation shall be allowed to apply the excess MCIT of 1998 and 1999
amounting to P95,000 (P75,000 plus P20,000) against the normal income tax liability of
P200,000.
The excess MCIT for the year 2001 (P300,000) may only be credited against normal income tax
liabilities for the succeeding three years from 2002 to 2004. However, since the normal income
tax liabilities for these succeeding years are lesser than the respective MCITs, the excess MCIT for
the year 2001 of P300,000 loses its creditability by the year 2005 hence, must be removed and
deducted from "Deferred charges-MCIT" account and charged to "Retained Earnings" account.
cdll
Illustrative accounting entries to record excess MCIT
(a)
For taxable year 1998 when MCIT is greater than the normal income tax liability of the
company
1998
(1)

Debit: Provision for income tax

P25,000

Credit: Income tax payable P25,000

To record income tax liability using the normal income tax rate
(2)

Debit: Deferred Charges-MCIT

P75,000

Credit: Income Tax Payable P75,000

To record excess MCIT (P100,000 - P25,000)
(3)

Debit: Income Tax Payable P100,000

Credit: Cash in bank P100,000

To record payment of income tax due for 1998

(b)
For taxable year 2000 when excess MCIT (1998 and 1999) is applied against normal
income tax liability
2000
(1)

Debit: Provision for income tax

P200,000

Credit: Income Tax Payable P200,000

To record income tax liability using the normal income tax rate
(2)

Debit: Income tax payable P95,000

Credit: Deferred Charges-MCIT

(P75,000 plus P20,000)

P95,000

To record application of excess MCIT against normal income tax liability for taxable year 2000
(3)

Debit: Income Tax Payable P105,000

Credit: Cash in Bank P105,000

To record payment of income tax due (P200,000 less P95,000)
(c)
For taxable year 2005 when the expired portion of excess MCIT (P300,000) for taxable year
2001 is closed to the retained earnings account due to its non-application.
2005
Debit: Retained Earnings

P300,000

Credit: Deferred Charges-MCIT

P300,000

To record the expired portion of Deferred Charges-MCIT

(8)
Exceptions The minimum corporate income tax (MCIT) shall apply only to domestic
corporations subject to the normal corporate income tax prescribed under these Regulations.
Accordingly, the minimum corporate income tax shall not be imposed upon any of the following:
(a)
Domestic corporations operating as proprietary educational institutions subject to tax at
ten percent (10%) on their taxable income; or
(b)
Domestic corporations engaged in hospital operations which are nonprofit subject to tax at
ten percent (10%) on their taxable income; and
(c)
Domestic corporations engaged in business as depository banks under the expanded
foreign currency deposit system, otherwise known as Foreign Currency Deposit Units (FCDUs), on
their income from foreign currency transactions with local commercial banks, including branches
of foreign banks, authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with
foreign currency deposit system units and other depository banks under the foreign currency
deposit system, including their interest income from foreign currency loans granted to residents
of the Philippines under the expanded foreign currency deposit system, subject to final income
tax at ten percent (10%) of such income.
(d)
Firms that are taxed under a special income tax regime such as those in accordance with
RA 7916 and 7227 (the PEZA law and the Bases Conversion Development Act, respectively).
SECTION 2.28(A)(2) MINIMUM CORPORATE INCOME TAX (MCIT) ON RESIDENT FOREIGN
CORPORATION A minimum corporate income tax of two percent (2%) of the gross income from
sources within the Philippines is hereby imposed upon any resident foreign corporation,
beginning on the fourth (4th) taxable year (whether calendar or fiscal year, depending on the
accounting period employed) immediately following the taxable year in which the corporation
commenced its business operations, whenever the amount of the minimum corporate income tax
is greater than the normal income tax due for such year.
In computing for the minimum corporate income tax due from a resident foreign corporation, the

rules prescribed under Sec. 2.27(E) of these Regulations shall apply: Provided, however, that only
the gross income from sources within the Philippines shall be considered for such purposes.
Exceptions The minimum corporate income tax shall only apply to resident foreign
corporations which are subject to normal income tax. Accordingly, the minimum corporate
income tax shall not apply to the following resident foreign corporations:
(a)
Resident foreign corporations engaged in business as "international carrier" subject to tax
at two and one-half percent (2 %) of their "Gross Philippine Billings";
(b)
Resident foreign corporations engaged in business as Offshore Banking Units (OBUs) on
their income from foreign currency transactions with local commercial banks, including branches
of foreign banks, authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with
Offshore Banking Units (OBUs), including interest income from foreign currency loans granted to
residents of the Philippines, subject to a final income tax at ten percent (10%) of such income;
and
(c)
Resident foreign corporations engaged in business as regional operating headquarters
subject to tax at ten percent (10%) of their taxable income.
(d)
Firms that are taxed under a special income tax regime such as those in accordance with
RA 7916 and 7227 (the PEZA law and the Bases Conversion Development Act, respectively).
cda
EFFECTIVITY CLAUSE. These Regulations shall apply to domestic and resident foreign corporations
on their aforementioned taxable income derived beginning January 1, 1998 pursuant to the
pertinent provisions of RA 8424, provided, however, that corporations using the fiscal year
accounting period and which are subject to MCIT on income derived pertaining to any month or
months of the year 1998 shall not be imposed with penalties for late payment of the tax.

REVENUE REGULATIONS NO. 02-01

SUBJECT
:
Implementing the Provision on Improperly Accumulated Earnings
Tax Under Section 29 of the Tax Code of 1997
TO

All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. Pursuant to Section 244 of the Tax Code of 1997, in relation to Section 29
of the same Code, these Regulations are being issued to prescribe the rules governing the
imposition of Improperly Accumulated Earnings Tax. aHIDAE
SECTION 2. Concept of Improperly Accumulated Earnings Tax (IAET). Pursuant to Section 29
of the Code, there is imposed for each taxable year, in addition to other taxes imposed under Title
II of the Tax Code of 1997, a tax equal to 10% of the improperly accumulated taxable income of
corporations formed or availed of for the purpose of avoiding the income tax with respect to its
shareholders or the shareholders of any other corporation, by permitting the earnings and profits
of the corporation to accumulate instead of dividing them among or distributing them to the
shareholders. The rationale is that if the earnings and profits were distributed, the shareholders
would then be liable to income tax thereon, whereas if the distribution were not made to them,
they would incur no tax in respect to the undistributed earnings and profits of the corporation.
Thus, a tax is being imposed in the nature of a penalty to the corporation for the improper
accumulation of its earnings, and as a form of deterrent to the avoidance of tax upon
shareholders who are supposed to pay dividends tax on the earnings distributed to them by the
corporation.
The touchstone of the liability is the purpose behind the accumulation of the income and not the
consequences of the accumulation. Thus, if the failure to pay dividends is due to some other
causes, such as the use of undistributed earnings and profits for the reasonable needs of the
business, such purpose would not generally make the accumulated or undistributed earnings
subject to the tax. However, if there is a determination that a corporation has accumulated
income beyond the reasonable needs of the business, the 10% improperly accumulated earnings
tax shall be imposed.
SECTION 3. Determination of Reasonable Needs of the Business. An accumulation of earnings
or profits (including undistributed earnings or profits of prior years) is unreasonable if it is not
necessary for the purpose of the business, considering all the circumstances of the case. To
determine the "reasonable needs" of the business in order to justify an accumulation of earnings,
these Regulations hereby adhere to the so-called "Immediacy Test" under American jurisprudence
as adopted in this jurisdiction. Accordingly, the term "reasonable needs of the business" are
hereby construed to mean the immediate needs of the business, including reasonably anticipated
needs. In either case, the corporation should be able to prove an immediate need for the
accumulation of the earnings and profits, or the direct correlation of anticipated needs to such
accumulation of profits. Otherwise, such accumulation would be deemed to be not for the
reasonable needs of the business, and the penalty tax would apply.
For purposes of these Regulations, the following constitute accumulation of earnings for the
reasonable needs of the business:
a)
Allowance for the increase in the accumulation of earnings up to 100% of the paid-up
capital of the corporation as of Balance Sheet date, inclusive of accumulations taken from other
years;
b)
Earnings reserved for definite corporate expansion projects or programs requiring
considerable capital expenditure as approved by the Board of Directors or equivalent body;
c)
Earnings reserved for building, plants or equipment acquisition as approved by the Board
of Directors or equivalent body;
d)
Earnings reserved for compliance with any loan covenant or pre-existing obligation
established under a legitimate business agreement;
e)
Earnings required by law or applicable regulations to be retained by the corporation or in
respect of which there is legal prohibition against its distribution;

f)
In the case of subsidiaries of foreign corporations in the Philippines, all undistributed
earnings intended or reserved for investments within the Philippines as can be proven by
corporate records and/or relevant documentary evidence.
SECTION 4. Coverage. The 10% Improperly Accumulated Earnings Tax (IAET) is imposed on
improperly accumulated taxable income earned starting January 1, 1998 by domestic
corporations as defined under the Tax Code and which are classified as closely-held corporations.
Provided, however, that Improperly Accumulated Earnings Tax shall not apply to the following
corporations:
a)

Banks and other non-bank financial intermediaries;

b)

Insurance companies;

c)

Publicly-held corporations;

d)

Taxable partnerships;

e)

General professional partnerships;

f)

Non- taxable joint ventures; and

g)
Enterprises duly registered with the Philippine Economic Zone Authority (PEZA) under R.A.
7916 , and enterprises registered pursuant to the Bases Conversion and Development Act of 1992
under R.A. 7227 , as well as other enterprises duly registered under special economic zones
declared by law which enjoy payment of special tax rate on their registered operations or
activities in lieu of other taxes, national or local. AScHCD
For purposes of these Regulations, closely-held corporations are those corporations at least fifty
percent (50%) in value of the outstanding capital stock or at least fifty percent (50%) of the total
combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or
for not more than twenty (20) individuals. Domestic corporations not falling under the aforesaid
definition are, therefore, publicly-held corporations.
For purposes of determining whether the corporation is closely held corporation, insofar as such
determination is based on stock ownership, the following rules shall be applied:
(1)
Stock Not Owned by Individuals. Stock owned directly or indirectly by or for a
corporation, partnership, estate or trust shall be considered as being owned proportionately by its
shareholders, partners or beneficiaries.
(2)
Family and Partnership Ownership. An individual shall be considered as owning the
stock owned, directly or indirectly, by or for his family, or by for his partner. For purposes of this
paragraph, the family of an individual includes his brothers or sisters (whether by whole or halfblood), spouse, ancestors and lineal descendants.
(3)
Option to Acquire Stocks. If any person has an option to acquire stock, such stock shall
be considered as owned by such person. For purposes of this paragraph, an option to acquire
such an option and each one of a series of option shall be considered as an option to acquire
such stock.
(4)
Constructive Ownership as Actual Ownership. Stock constructively owned by reason of
the application of paragraph (1) or (3) hereof shall, for purposes of applying paragraph (1) or (2),
be treated as actually owned by such person; but stock constructively owned by the individual by
reason of the application of paragraph (2) hereof shall not be treated as owned by him for
purposes of again applying such paragraph in order to make another the constructive owner of
such stock.
Provided, however, that a branch of a foreign corporation is not covered by these Regulations, the
same being a resident foreign corporation.
SECTION 5. Tax Base of Improperly Accumulated Earnings Tax. For corporations found subject
to the tax, the "Improperly Accumulated Taxable Income" for a particular year is first determined
by adding to that year's taxable income the following:
(a)

income exempt from tax;

(b)

income excluded from gross income;

(c)

income subject to final tax; and

(d)

the amount of net operating loss carry-over (NOLCO) deducted.

The taxable income as thus determined shall be reduced by the sum of:
(a)

income tax paid/payable for the taxable year;

(b)

dividends actually or constructively paid/issued from the applicable year's taxable income;

(c)
amount reserved for the reasonable needs of the business as defined in these Regulations
emanating from the covered year's taxable income.
The resulting "Improperly Accumulated Taxable Income" is thereby multiplied by 10% to get the
Improperly Accumulated Earnings Tax (IAET).
Once the profit has been subjected to IAET, the same shall no longer be subjected to IAET in later
years even if not declared as dividend. Notwithstanding the imposition of the IAET, profits which
have been subjected to IAET, when finally declared as dividends, shall nevertheless be subject to
tax on dividends imposed under the Tax Code of 1997 except in those instances where the
recipient is not subject thereto.
For purposes of determining the source of earnings or profits declared or distributed from
accumulated income for each taxable year, the dividends shall be deemed to have been paid out
of the most recently accumulated profits or surplus and shall constitute a part of the annual
income of the distributee for the year in which received pursuant to Section 73(C) of the Code.
Provided, however, that where the dividends or portion of the said dividends declared forms part
of the accumulated earnings as of December 31, 1997, or emanates from the accumulated
income of a particular year and, therefore, is an exception to the proceeding statement, such fact
must be supported by a duly executed Board Resolution to that effect.
SECTION 6. Period for Payment of Dividend/Payment of IAET. The dividends must be declared
and paid or issued not later than one year following the close of the taxable year, otherwise, the
IAET, if any, should be paid within fifteen (15) days thereafter.
SECTION 7. Determination of Purpose to Avoid Income Tax. The fact that a corporation is a
mere holding company or investment company shall be prima facie evidence of a purpose to
avoid the tax upon its shareholders or members. Likewise, the fact that the earnings or profits of
a corporation are permitted to accumulate beyond the reasonable needs of the business shall be
determinative of the purpose to avoid the tax upon its shareholders or members. In both
instances, the corporation may, by clear preponderance of evidence in its favor, prove the
contrary.
For purposes of these Regulations, the term "holding or investment company" shall refer to a
corporation having practically no activities except holding property, and collecting the income
therefrom or investing the same.
The following are prima facie instances of accumulation of profits beyond the reasonable needs
of a business and indicative of purpose to avoid income tax upon shareholders:
(a)
Investment of substantial earnings and profits of the corporation in unrelated business or
in stock or securities of unrelated business;
(b)

Investment in bonds and other long-term securities;

(c)
Accumulation of earnings in excess of 100% of paid-up capital, not otherwise intended for
the reasonable needs of the business as defined in these Regulations.
In order to determine whether profits are accumulated for the reasonable needs of the business
as to avoid the imposition of the improperly accumulated earnings tax, the controlling intention of
the taxpayer is that which is manifested at the time of accumulation, not subsequently declared
intentions which are merely the product of afterthought. A speculative and indefinite purpose will
not suffice. The mere recognition of a future problem or the discussion of possible and alternative
solutions is not sufficient. Definiteness of plan/s coupled with action/s taken towards its

consummation are essential.

IaDTES

SECTION 8. Transitory Provision. The IAET shall not apply on improperly accumulated income
as of December 31, 1997 in the case of corporations using the calendar year basis. In the case of
corporations adopting the fiscal year accounting period, the IAET shall not apply on improperly
accumulated taxable income as of the end of the month comprising the twelve-month period of
fiscal year 1997-1998.
Taxable income improperly accumulated, as heretofore discussed, prior to the effectivity of these
regulations if declared as dividend and paid/issued within one month from the effectivity hereof
will not be subjected to the 10% Improperly Accumulated Earnings Tax.
SECTION 9. Effectivity. These Regulations shall take effect fifteen (15) days after publication
in any newspaper of general circulation and shall cover Improperly Accumulated Taxable Income
earned starting January 1, 1998.
(SGD.) ALBERTO G. ROMULO
Secretary of Finance
Recommending Approval:
(SGD.) RENE G. BAEZ
Commissioner of Internal Revenue

REPUBLIC ACT NO. 7916

AN ACT PROVIDING FOR THE LEGAL FRAMEWORK AND MECHANISMS FOR THE
CREATION, OPERATION, ADMINISTRATION, AND COORDINATION OF SPECIAL ECONOMIC
ZONES IN THE PHILIPPINES, CREATING FOR THIS PURPOSE, THE PHILIPPINE ECONOMIC
ZONE AUTHORITY (PEZA), AND FOR OTHER PURPOSES
CHAPTER I
Purposes and Objectives; Establishment and Nature of Special Economic Zones; Coordination with
Other Similar Schemes
SECTION 1.
1995."

Title. This Act shall be known and cited as "The Special Economic Zone Act of

SECTION 2. Declaration of Policy. It is the declared policy of the government to translate into
practical realities the following State policies and mandates in the 1987 Constitution, namely:
acd
(a)
"The State recognizes the indispensable role of the private sector, encourages private
enterprise, and provides incentives to needed investments." (Sec. 20, Art. II)
(b)
"The State shall promote the preferential use of Filipino labor, domestic materials and
locally produced goods, and adopt measures that help make them competitive." (Sec. 12, Art. XII)
In pursuance of these policies, the government shall actively encourage, promote, induce and
accelerate a sound and balanced industrial, economic and social development of the country in
order to provide jobs to the people especially those in the rural areas, increase their productivity
and their individual and family income, and thereby improve the level and quality of their living
condition through the establishment, among others, of special economic zones in suitable and
strategic locations in the country and through measures that shall effectively attract legitimate
and productive foreign investments.
SECTION 3.
Act:

Purposes, Intents and Objectives. It is the purpose, intent and objective of this

(a)
To establish the legal framework and mechanisms for the integration, coordination,
planning and monitoring of special economic zones, industrial estates/parks, export processing
zones and other economic zones;
(b)
To transform selected areas in the country into highly developed agro-industrial, industrial,
commercial, tourist, banking, investment, and financial centers, where highly trained workers and
efficient services will be available to commercial enterprises; cda
(c)
To promote the flow of investors, both foreign and local, into special economic zones which
would generate employment opportunities and establish backward and forward linkages among
industries in and around the economic zones;
(d)
To stimulate the repatriation of Filipino capital by providing attractive climate and
incentives for business activity;
(e)
To promote financial and industrial cooperation between the Philippines and industrialized
countries through technology-intensive industries that will modernize the country's industrial
sector and improve productivity levels by utilizing new technological and managerial know-how;
and
(f)
To vest the special economic zones on certain areas thereof with the status of a separate
customs territory within the framework of the Constitution and the national sovereignty and
territorial integrity of the Philippines.
SECTION 4. Definition of Terms. For purposes of this Act, the following definitions shall apply
to the following terms:
(a)
"Special economic zones (SEZ)" hereinafter referred to as the ECOZONES, are selected
areas with highly developed or which have the potential to be developed into agro-industrial,

industrial, tourist/recreational, commercial, banking, investment and financial centers. An

ECOZONE may contain any or all of the following: industrial estates (IEs), export processing zones
(EPZs), free trade zones, and tourist/recreational centers.
(b)
"Industrial estate (IE)" refers to a tract of land subdivided and developed according to a
comprehensive plan under a unified continuous management and with provisions for basic
infrastructure and utilities, with or without pre-built standard factory buildings and community
facilities for the use of the community of industries.
(c)
"Export processing zone (EPZ)" a specialized industrial estate located physically and/or
administratively outside customs territory, predominantly oriented to export production.
Enterprises located in export processing zones are allowed to import capital equipment and raw
materials free from duties, taxes and other import restrictions.
(d)
"Free trade zone" an isolated policed area adjacent to a port of entry (as a seaport)
and/or airport where imported goods may be unloaded for immediate transshipment or stored,
repacked, sorted, mixed, or otherwise manipulated without being subject to import duties.
However, movement of these imported goods from the free-trade area to a non-free-trade area in
the country shall be subject to import duties. cdtai
Enterprises within the zone are granted preferential tax treatment and immigration laws are more
lenient.
SECTION 5. Establishment of ECOZONES. To ensure the viability and geographic dispersal of
ECOZONES through a system of prioritization, the following areas are initially identified as
ECOZONES, subject to the criteria specified in Section 6:
(a)
So much as may be necessary of that portion of Morong, Hermosa, Dinalupihan, Orani,
Samal, and Abucay in the Province of Bataan;
(b)
So much as may be necessary of that portion of the municipalities of Ibaan, Rosario,
Taysan, San Jose, San Juan, and cities of Lipa and Batangas;
(c)
So much as may be necessary of that portion of the City of Cagayan de Oro in the Province
of Misamis Oriental;
(d)
So much as may be necessary of that portion of the City of Iligan in the Province of Lanao
del Norte;
(e)

So much as may be necessary of that portion of the Province of Saranggani;

(f)
So much as may be necessary of that portion of the City of Laoag in the Province of Ilocos
Norte;
(g)
So much as may be necessary of that portion of Davao City and Samal Island in the
Province of Davao del Norte;
(h)
So much as may be necessary of that portion of Oroquieta City in the Province of Misamis
Occidental;
(i)
So much as may be necessary of that portion of Tubalan Cove, Malita in the Province of
Davao del Sur;
(j)
So much as may be necessary of that portion of Baler, Dinalungan and Casiguran
including its territorial waters and islets and its immediate environs in the Province of Aurora;
(k)
So much as may be necessary of that portion of cities of Naga and Iriga in the Province of
Camarines Sur, Legaspi and Tabaco in the Province of Albay, and Sorsogon in the Province of
Sorsogon;
(l)

So much as may be necessary of that portion of Batan Island in the Province of Batanes;

(m)
So much as may be necessary of that portion of Lapu-lapu in the Island of Mactan, and the
municipalities of Balamban and Pinamungahan and the cities of Cebu and Toledo and the
Province of Cebu, including its territorial waters and islets and its immediate environs;
(n)

So much as may be necessary of that portion of Tacloban City;

(o)
So much as may be necessary of that portion of the Municipality of Barugo in the Province
of Leyte;
(p)
So much as may be necessary of that portion of the Municipality of Buenavista in the
Province of Guimaras;
(q)
So much as may be necessary of that portion of the municipalities of San Jose de
Buenavista, Hamtic, Sibalom, and Culasi in the Province of Antique;
(r)
So much as may be necessary of that portion of the municipalities of Catarman, Bobon
and San Jose in the Province of Northern Samar, the Island of Samar; cda
(s)
So much as may be necessary of that portion of the Municipality of Ternate and its
immediate environs in the Province of Cavite;
(t)
So much as may be necessary of that portion of Polloc, Parang in the Province of
Maguindanao;
(u)
So much as may be necessary of that portion of the Municipality of Boac in the Province of
Marinduque;
(v)
So much as may be necessary of that portion of the Municipality of Pitogo in the Province
of Zamboanga del Sur;
(w)
So much as may be necessary of that portion of Dipolog City-Manukan Corridor in the
Province of Zamboanga del Norte;
(x)

So much as may be necessary of that portion of Mambajao, Camiguin Province;

(y)
So much as may be necessary of that portion of Infanta, Real, Polillo, Alabat, Atimonan,
Mauban, Tiaong, Pagbilao, Mulanay, Tagkawayan, and Dingalan Bay in the Province of Quezon;
(z)
So much as may be necessary of that portion of Butuan City and the Province of Agusan
del Norte, including its territorial waters and islets and its immediate environs;
(aa)
So much as may be necessary of that portion of Roxas City including its territorial waters
and islets and its immediate environs in the Province of Capiz;
(bb) So much as may be necessary of that portion of San Jacinto, San Fabian, Mangaldan,
Lingayen, Sual, Dagupan, Alaminos, Manaoag, Binmaley in the Province of Pangasinan;
(cc)

So much as may be necessary of that portion of the autonomous region;

(dd) So much as may be necessary of that portion of Masinloc, Candelaria, and Sta. Cruz in the
Province of Zambales;
(ee)

So much as may be necessary of that portion of the Palawan Island;

(ff)
So much as may be necessary of that portion of General Santos City in South Cotabato
and its immediate environs; acd
(gg) So much as may be necessary of that portion of Dumaguete City and Negros Oriental,
including its territorial waters and islets and its immediate environs;
(hh)

So much as may be necessary of that portion of the Province of Ilocos Sur;

(ii)

So much as may be necessary of that portion of the Province of La Union;

(jj)
So much as may be necessary of that portion of the Province of Laguna, including its
territorial waters and its immediate environs;
(kk)

So much as may be necessary of that portion of the Province of Rizal;

(ll)

All existing export processing zones and government-owned industrial estates; and

(mm) Any private industrial estate which shall voluntarily apply for conversion into an ECOZONE.
These areas shall be developed through any of the following schemes:
(i)

Private initiative;

(ii)

Local government initiative with the assistance of the national government; and

(iii)

National government initiative.

The metes and bounds of each ECOZONE are to be delineated and more particularly described in
a proclamation to be issued by the President of the Philippines, upon the recommendation of the
Philippine Economic Zone Authority (PEZA), which shall be established under this Act, in
coordination with the municipal and/or city council, National Land Use Coordinating Committee
and/or the Regional Land Use Committee.
SECTION 6. Criteria for the Establishment of Other ECOZONES. In addition to the ECOZONES
identified in Section 5 of this Act, other areas may be established as ECOZONES in a proclamation
to be issued by the President of the Philippines subject to the evaluation and recommendation of
the PEZA, based on a detailed feasibility and engineering study which must conform to the
following criteria:
(a)
The proposed area must be identified as a regional growth center in the Medium-Term
Philippine Development Plan or by the Regional Development Council;
(b)
The existence of required infrastructure in the proposed ECOZONE, such as roads,
railways, telephones, ports, airports, etc., and the suitability and capacity of the proposed site to
absorb such improvements;
(c)

The availability of water source and electric power supply for use of the ECOZONE;

(d)
The extent of vacant lands available for industrial and commercial development and future
expansion of the ECOZONE as well as of lands adjacent to the ECOZONE available for
development of residential areas for the ECOZONE workers; aisa dc
(e)
The availability of skilled, semi-skilled and non-skilled trainable labor force in and around
the ECOZONE;
(f)
The area must have a significant incremental advantage over the existing economic zones
and its potential profitability can be established;
(g)

The area must be strategically located; and

(h)
The area must be situated where controls can easily be established to curtail smuggling
activities.
Other areas which do not meet the foregoing criteria may be established as ECOZONES: Provided,
That the said area shall be developed only through local government and/or private sector
initiative under any of the schemes allowed in Republic Act No. 6957 (the build-operate-transfer
law), and without any financial exposure on the part of the national government: Provided,
further, That the area can be easily secured to curtail smuggling activities: Provided, finally, That
after five (5) years the area must have attained a substantial degree of development, the
indicators of which shall be formulated by the PEZA.
SECTION 7. ECOZONE to be a Decentralized Agro-Industrial, Industrial, Commercial/Trading,
Tourist, Investment and Financial Community. Within the framework of the Constitution, the
interest of national sovereignty and territorial integrity of the Republic, the ECOZONE shall be
developed, as much as possible, into a decentralized, self-reliant and self-sustaining industrial,
commercial/trading, agro-industrial, tourist, banking, financial and investment center with
minimum government intervention. Each ECOZONE shall be provided with transportation,
telecommunications, and other facilities needed to generate linkage with industries and
employment opportunities for its own inhabitants and those of nearby towns and cities.
The ECOZONE shall administer itself on economic, financial, industrial, tourism development and
such other matters within the exclusive competence of the national government.
The ECOZONE may establish mutually beneficial economic relations with other entities within the
country, or, subject to the administrative guidance of the Department of Foreign Affairs and/or
the Department of Trade and Industry, with foreign entities or enterprises.
Foreign citizens and companies owned by non-Filipinos in whatever proportion may set up

enterprises in the ECOZONE, either by themselves or in joint venture with Filipinos in any sector
of industry, international trade and commerce within the ECOZONE. Their assets, profits and
other legitimate interests shall be protected: Provided, That the ECOZONE through the PEZA may
require a minimum investment for any ECOZONE enterprise in freely convertible currencies:
Provided, further, That the new investment shall fall under the priorities, thrusts and limits
provided for in this Act.
SECTION 8. ECOZONE to be Operated and Managed as Separate Customs Territory. The
ECOZONES shall be managed and operated by the PEZA as separate customs territory.
The PEZA is hereby vested with the authority to issue certificates of origin for products
manufactured or processed in each ECOZONE in accordance with the prevailing rules of origin,
and the pertinent regulations of the Department of Trade and Industry and/or the Department of
Finance. casia
SECTION 9. Defense and Security. The defense of the ECOZONE and the security of its
perimeter fence shall be the responsibility of the national government in coordination with the
PEZA. Military forces sent by the national government for the purpose of defense shall not
interfere in the internal affairs of any of the ECOZONE and expenditure for these military forces
shall be borne by the national government. The PEZA may provide and establish the ECOZONES'
internal security and firefighting forces.
SECTION 10. Immigration. Any investor within the ECOZONE whose initial investment shall not
be less than One hundred fifty thousand dollars ($150,000), his/her spouse and dependent
children under twenty-one (21) years of age shall be granted permanent resident status within
the ECOZONE. They shall have freedom of ingress and egress to and from the ECOZONE without
any need of special authorization from the Bureau of Immigration.
The PEZA shall issue working visas renewable every two (2) years to foreign executives and other
aliens, possessing highly-technical skills which no Filipino within the ECOZONE possesses, as
certified by the Department of Labor and Employment. The names of aliens granted permanent
resident status and working visas by the PEZA shall be reported to the Bureau of Immigration
within thirty (30) days after issuance thereof.
CHAPTER II
Governing Structures
SECTION 11. The Philippine Economic Zone Authority (PEZA) Board. There is hereby created a
body corporate to be known as the Philippine Economic Zone Authority (PEZA) attached to the
Department of Trade and Industry. The Board shall have a director general with the rank of
department undersecretary who shall be appointed by the President. The director general shall be
at least forty (40) years of age, of proven probity and integrity, and a degree holder in any of the
following fields: economics, business, public administration, law, management or their
equivalent, and with at least ten (10) years relevant working experience preferably in the field of
management or public administration.
The director general, shall be assisted by three (3) deputy directors general each for policy and
planning, administration and operations, who shall be appointed by the PEZA Board, upon the
recommendation of the director general. The deputy directors general shall be at least thirty-five
(35) years old, with proven probity and integrity and a degree holder in any of the following
fields: economics, business, public administration, law, management or their equivalent.
The Board shall be composed of thirteen (13) members as follows: the Secretary of the
Department of Trade and Industry as Chairman, the Director General of the Philippine Economic
Zone Authority as Vice-chairman, the undersecretaries of the Department of Finance, the
Department of Labor and Employment, the Department of Interior and Local Government, the
Department of Environment and Natural Resources, the Department of Agriculture, the
Department of Public Works and Highways, the Department of Science and Technology, the
Department of Energy, the Deputy Director General of the National Economic and Development
Authority, one (1) representative from the labor sector, and one (1) representative from the
investors/business sector in the ECOZONE. In case of the unavailability of the Secretary of the

Department of Trade and Industry to attend a particular board meeting, the Director General of
PEZA shall act as Chairman.
SECTION 12. Functions and Powers of PEZA Board. The Philippine Economic Zone Authority
(PEZA) Board shall have the following functions and powers:
(a)
Set the general policies on the establishment and operations of the ECOZONES, industrial
estates, export processing zones, free trade zones, and the like;
(b)
Review proposals for the establishment of ECOZONES based on the set criteria under
Section 6 and endorse to the President the establishment of the ECOZONES, industrial estates,
export processing zones, free trade zones and the like. Thereafter, it shall facilitate and assist in
the organization of said entities; cd i
(c)
Regulate and undertake the establishment, operation and maintenance of utilities, other
services and infrastructure in the ECOZONE, such as heat, light and power, water supply,
telecommunications, transport, toll roads and bridges, port services, etc., and to fix just,
reasonable and competitive rates, fares, charges and fees therefor;
(d)

Approve the annual budget of the PEZA and the ECOZONE development plans;

(e)
Issue rules and regulations to implement the provisions of this Act insofar as its powers
and functions are concerned;
(f)

Exercise its powers and functions as provided for in this Act; and

(g)

Render annual reports to the President and the Congress.

SECTION 13. General Powers and Functions of the Authority.

following powers and functions:

The PEZA shall have the

(a)
To operate, administer, manage and develop the ECOZONE according to the principles and
provisions set forth in this Act;
(b)
To register, regulate and supervise the enterprises in the ECOZONE in an efficient and
decentralized manner;
(c)
To coordinate with local government units and exercise general supervision over the
development, plans, activities and operations of the ECOZONES, industrial estates, export
processing zones, free trade zones, and the like;
(d)
In coordination with local government units concerned and appropriate agencies, to
construct, acquire, own, lease, operate and maintain on its own or through contract, franchise,
license, bulk purchase from the private sector and build-operate-transfer scheme or joint venture,
adequate facilities and infrastructure, such as light and power systems, water supply and
distribution systems, telecommunications and transportation, buildings, structures, warehouses,
roads, bridges, ports and other facilities for the operation and development of the ECOZONE;
(e)
To create, operate and/or contract to operate such agencies and functional units or offices
of the authority as it may deem necessary;
(f)
To adopt, alter and use a corporate seal; make contracts, lease, own or otherwise dispose
of personal or real property; sue and be sued; and otherwise carry out its duties and functions as
provided for in this Act;
(g)
To coordinate the formulation and preparation of the development plans of the different
entities mentioned above;
(h)
To coordinate with the National Economic and Development Authority (NEDA), the
Department of Trade and Industry (DTI), the Department of Science and Technology (DOST), and
the local government units and appropriate government agencies for policy and program
formulation and implementation; and
(i)
To monitor and evaluate the development and requirements of entities in subsection (a)
and recommend to the local government units or other appropriate authorities the location,
incentives, basic services, utilities and infrastructure required or to be made available for said

entities.
SECTION 14. Powers and Functions of the Director General. The director general shall be the
overall coordinator of the policies, plans and programs of the ECOZONES. As such, he shall
provide overall supervision over and general direction to the development and operations of
these ECOZONES. He shall determine the structure and the staffing pattern and personnel
complement of the PEZA and establish regional offices, when necessary, subject to the approval
of the PEZA Board.
In addition, he shall have the following specific powers and responsibilities:
(a)
To safeguard all the lands, buildings, records, monies, credits and other properties and
rights of the ECOZONE;
(b)
To ensure that all revenues of the ECOZONE are collected and applied in accordance with
its budget; casia
(c)
To ensure that the investors/firms and employees of the ECOZONES are properly
discharging their respective duties;
(d)
To give such information and recommend such measures to the Board, as he shall deem
advantageous to the ECOZONE;
(e)
To submit to the Board, the ongoing and proposed projects, work and financial program,
annual budget of receipts, and expenditures of the ECOZONE;
(f)
To represent the ECOZONE in all its business matters and sign on its behalf after approval
of the Board, all its bonds, borrowings, contracts, agreements and obligations made in
accordance with this Act;
(g)
To acquire jurisdiction, as he may deem proper, over the protests, complaints, and claims
of the residents and enterprises in the ECOZONE concerning administrative matters;
(h)
To recommend to the Board the grant, approval, refusal, amendment or termination of the
ECOZONE franchises, licenses, permits, contracts, and agreements in accordance with the
policies set by the Board;
(i)
To require owners of houses, buildings or other structures constructed without the
necessary permit whether constructed on public or private lands, to remove or demolish such
houses, buildings, structures within sixty (60) days after notice and upon failure of such owner to
remove or demolish such house, building or structure within said period, the director general or
his authorized representative may summarily cause its removal or demolition at the expense of
the owner, any existing law, decree, executive order and other issuances or part thereof to the
contrary notwithstanding;
(j)
To take such emergency measures as may be necessary to avoid fires, floods and mitigate
the effects of storms and other natural or public calamities;
(k)
To prepare and make out plans for the physical and economic development of the
ECOZONE, including zoning and land subdivision, and issue such rules and regulations which
shall be submitted to the Board for its approval; and
(l)
To perform such other duties and exercise such powers as may be prescribed by the Board,
and to implement the policies, rules and regulations set by the PEZA.
SECTION 15. Administration of Each ECOZONE. Except for privately-owned, managed or
operated ECOZONES, each ECOZONE shall be organized, administered, managed and operated
by the ECOZONE executive committee composed of the following:
(a)
The administrator who shall be appointed by the PEZA Board upon recommendation of the
director general; and
(b)
One (1) deputy administrator to be appointed by the Board upon recommendation of the
director general.
An ECOZONE advisory body shall be created with the following members:

(1)

The president of the association of investors in the ECOZONE; cdasia

(2)

The governor of the province where the ECOZONE is located;

(3)

The mayor/s of the municipality/ies or city/ies where the ECOZONE is located;

(4)

The president of an accredited labor union in the ECOZONE;

(5)

The representative of the business sector in the periphery of the ECOZONE; and

(6)

The representative of the PEZA.

The ECOZONE advisory shall have the following functions:

(i)

Advise the ECOZONE management on matters pertaining to policy initiatives; and

(ii)
Assist the ECOZONE management in settling problems arising between labor and any
enterprise in the ECOZONE.
Privately-owned ECOZONES shall retain autonomy and independence but shall be monitored by
the PEZA for the implementation of incentives and operations for adherence to the law.
SECTION 16. The PEZA Board of Directors shall provide for an organization and staff of officers
and employees of the PEZA, and upon recommendation of the director general with the approval
of the Secretary of the Department of Trade and Industry, appoint and fix the remunerations and
other emoluments: Provided, That the Board shall have exclusive and final authority to promote,
transfer, assign or reassign officers of the PEZA, any provision of existing law to the contrary
notwithstanding: Provided, further, That the director general may carry out removal of such
officers and employees.
All positions in the PEZA shall be governed by a compensation, position classification system and
qualification standards approved by the director general with the concurrence of the Board of
Directors based on a comprehensive job analysis and audit of actual duties and responsibilities.
The compensation plan shall be comparable with the prevailing compensation plans in the Subic
Bay Metropolitan Authority (SBMA), Clark Development Corporation (CDC), Bases Conversion and
Development Authority (BCDA) and the private sector and shall be subject to periodic review by
the Board no more than once every two (2) years without prejudice to yearly merit reviews or
increases based on productivity and profitability. The PEZA shall therefore be exempt from
existing laws, rules and regulations on compensation, position classification and qualification
standards. It shall however endeavor to make its system conform as closely as possible with the
principles under Republic Act No. 6758.
The PEZA officers and employees including all Members of the Board shall not engage directly or
indirectly in partisan activities or take part in any election, except to vote.
No officer or employee of the PEZA subject to Civil Service laws and regulations shall be removed
or suspended except for cause, as provided by law.
SECTION 17. Investigation and Inquiries. Upon a written formal complaint made under oath,
which on its face provides reasonable basis to believe that some anomaly or irregularity might
have been committed, the PEZA or the administrator of the ECOZONE concerned, shall have the
power to inquire into the conduct of firms or employees of the ECOZONE and to conduct
investigations, and for that purpose may subpoena witnesses, administer oaths, and compel the
production of books, papers, and other evidences: Provided, That to arrive at the truth, the
investigator(s) may grant immunity from prosecution to any person whose testimony or whose
possessions of documents or other evidence is necessary or convenient to determine the truth in
any investigation conducted by him or under the authority of the PEZA or the administrator of the
ECOZONE concerned.
SECTION 18. Prohibition Against Holding Any Other Office. The director general, deputy
directors general, administrators, officials and staff or assistants of the PEZA shall not hold any
other office or employment within or outside the PEZA during their tenure. They shall not, during
their tenure, directly or indirectly, practice any profession, participate in any business, or be
financially interested in any contract with, or in any franchise, or special privilege granted by the
PEZA or national government, or any subdivision, agency, or instrumentality thereof, including

any government-owned or -controlled corporation, or its subsidiary.

SECTION 19. Disbursement of Funds. No money shall be paid out of the funds of any ECOZONE
except in pursuance of the budget as formulated and approved by the PEZA.
SECTION 20. Full Disclosure of Financial and Business Interests. Every member of the Board of
the PEZA, the director general, the deputy directors general, and their staff shall, upon
assumption of office, make full disclosure of their financial and business interests. acd
CHAPTER III
Operations Within the Ecozone
SECTION 21. Development Strategy of the ECOZONE. The strategy and priority of
development of each ECOZONE established pursuant to this Act shall be formulated by the PEZA,
in coordination with the Department of Trade and Industry and the National Economic and
Development Authority: Provided, That such development strategy is consistent with the priorities
of the national government as outlined in the medium-term Philippine development plan.
It shall be the policy of the government and the PEZA to encourage and provide incentives and
facilitate private sector participation in the construction and operation of the public utilities and
infrastructure in the ECOZONE, using any of the schemes allowed in Republic Act No. 6957 (the
build-operate-transfer law).
SECTION 22. Survey of Resources. The PEZA shall, in coordination with appropriate authorities
and neighboring cities and municipalities, immediately conduct a survey of the physical, natural
assets and potentialities of the ECOZONE areas under its jurisdiction.
SECTION 23. Fiscal Incentives. Business establishments operating within the ECOZONES shall
be entitled to the fiscal incentives as provided for under Presidential Decree No. 66, the law
creating the Export Processing Zone Authority, or those provided under Book VI of Executive
Order No. 226, otherwise known as the Omnibus Investment Code of 1987.
Furthermore, tax credits for exporters using local materials as inputs shall enjoy the same
benefits provided for in the Export Development Act of 1994.
SECTION 24. Exemption from National and Local Taxes. Except for real property taxes on land
owned by developers, no taxes, local and national, shall be imposed on business establishments
operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by
all business enterprises within the ECOZONE shall be paid and remitted as follows:
(a)

Three percent (3%) to the National Government;

(b)
Two percent (2%) which shall be directly remitted by the business establishments to the
treasurer's office of the municipality or city where the enterprise is located.
SECTION 25. Applicable National and Local Taxes. All persons and service establishments in
the ECOZONE shall be subject to national and local taxes under the National Internal Revenue
Code and the Local Government Code.
SECTION 26. Domestic Sales. Goods manufactured by an ECOZONE enterprise shall be made
available for immediate retail sales in the domestic market, subject to payment of corresponding
taxes on the raw materials and other regulations that may be adopted by the Board of the PEZA.
casia
However, in order to protect the domestic industry, there shall be a negative list of industries that
will be drawn up by the PEZA. Enterprises engaged in the industries included in the negative list
shall not be allowed to sell their products locally. Said negative list shall be regularly updated by
the PEZA.
The PEZA, in coordination with the Department of Trade and Industry and the Bureau of Customs,
shall jointly issue the necessary implementing rules and guidelines for the effective
implementation of this section.
SECTION 27. Applicability of Banking Laws and Regulations. Existing banking laws and Bangko
Sentral ng Pilipinas (BSP) rules and regulations shall apply to banks and financial institutions to

be established in the ECOZONE and to other ECOZONE-registered enterprises. Among other

pertinent regulations, these include those governing foreign exchange and other current account
transactions (trade and non-trade), local and foreign borrowings, foreign investments,
establishment and operation of local and foreign banks, foreign currency deposit units, offshore
banking units and other financial institutions under the supervision of the BSP.
SECTION 28. After Tax Profits. Without prior Bangko Sentral approval, after tax profits and
other earnings of foreign investments in enterprises in the ECOZONE may be remitted outward in
the equivalent foreign exchange through any of the banks licensed by the Bangko Sentral ng
Pilipinas in the ECOZONE: Provided, however, That such foreign investments in said enterprises
have been previously registered with the Bangko Sentral.
SECTION 29. Eminent Domain. The areas comprising an ECOZONE may be expanded or
reduced when necessary. For this purpose, the government shall have the power to acquire,
either by purchase, negotiation or condemnation proceedings, any private lands within or
adjacent to the ECOZONE for:
(a)

Consolidation of lands for zone development purposes;

(b)

Acquisition of right of way to the ECOZONE; and

(c)
The protection of watershed areas and natural assets valuable to the prosperity of the
ECOZONE.
If in the establishment of a publicly-owned ECOZONE, any person or group of persons who has
been occupying a parcel of land within the Zone has to be evicted, the PEZA shall provide the
person or group of persons concerned with proper disturbance compensation: Provided, however,
That in the case of displaced agrarian reform beneficiaries, they shall be entitled to the benefits
under the Comprehensive Agrarian Reform Law, including but not limited to Section 36 of
Republic Act No. 3844, in addition to a homelot in the relocation site, and preferential
employment in the project being undertaken.
SECTION 30. Leases of Lands and Buildings. Lands and buildings in each ECOZONE may be
leased to foreign investors for a period not exceeding fifty (50) years, renewable once for a period
of not more than twenty-five (25) years, as provided for under Republic Act No. 7652, otherwise
known as the Investors' Lease Act. The leasehold right acquired under long-term contracts may
be sold, transferred or assigned, subject to the conditions set forth under Republic Act No. 7652.
SECTION 31. Land Conversion. Agricultural lands may be converted for residential,
commercial, industrial and other non-agricultural purposes, subject to the conditions set forth
under Republic Act No. 6657 and other existing laws.
SECTION 32. Shipping and Shipping Register. Private shipping and related business including
private container terminals may operate freely in the ECOZONE, subject only to such minimum
reasonable regulations of local application which the PEZA may prescribe.
The PEZA shall, in coordination with the Department of Transportation and Communications,
maintain a shipping register for each ECOZONE as a business register of convenience for oceangoing vessels and issue related certification. cdt
Ships of all sizes, descriptions and nationalities shall enjoy access to the ports of the ECOZONE,
subject only to such reasonable requirements as may be prescribed by the PEZA in coordination
with the appropriate agencies of the national government.
SECTION 33. Protection of Environment. The PEZA, in coordination with the appropriate
agencies, shall take concrete and appropriate steps and enact the proper measures for the
protection of the local environment.
SECTION 34. Termination of Business. Investors in the ECOZONE who desire to terminate
business or operations shall comply with such requirements and procedures which the PEZA shall
set, particularly those relating to the clearing of debts. The assets of the closed enterprises can
be transferred and the funds can be remitted out of the ECOZONE subject to the rules, guidelines
and procedures prescribed jointly by the Bangko Sentral ng Pilipinas, the Department of Finance
and the PEZA.

SECTION 35. Registration of Business Enterprises. Business enterprises within a designated

ECOZONE shall register with the PEZA to avail of all incentives and benefits provided for in this
Act.
SECTION 36. One Stop Shop Center. The PEZA shall establish a one stop shop center for the
purpose of facilitating the registration of new enterprises in the ECOZONE. Thus, all appropriate
government agencies that are involved in registering, licensing or issuing permits to investors
shall assign their representatives to the ECOZONE to attend to investors' requirements.
CHAPTER IV
Industrial Harmony in the Ecozones
SECTION 37. Labor and Management Relations. Except as otherwise provided in this Act, labor
and management relations in the ECOZONE shall be governed by the existing Labor Code of the
Philippines. Employees and personnel in the ECOZONE enterprises shall receive salaries and
benefits and shall enjoy working conditions not less than those provided under the Philippine
Labor Code and other relevant laws, issuances, rules and regulations of the Philippine
government and the Department of Labor and Employment.
SECTION 38. Promotion of Industrial Peace. In the pursuit of industrial harmony in the
ECOZONE, a tripartite body composed of one (1) representative each from the Department of
Labor and Employment, labor sector and business and industry sectors shall be created in order
to formulate a mechanism under a social pact for the enhancement and preservation of industrial
peace in the ECOZONE within thirty (30) days after the effectivity of this Act. cd i
SECTION 39. Master Employment Contracts. The PEZA, in coordination with the Department of
Labor and Employment, shall prescribe a master employment contract for all ECOZONE
enterprise staff members and workers, the terms of which provide salaries and benefits not less
than those provided under this Act, the Philippine Labor Code, as amended, and other relevant
issuances of the national government.
SECTION 40. Percentage of Foreign Nationals. Employment of foreign nationals hired by
ECOZONE enterprises in a supervisory, technical or advisory capacity shall not exceed five
percent (5%) of its workforce without the express authorization of the Secretary of Labor and
Employment.
SECTION 41. Migrant Worker. The PEZA, in coordination with the Department of Labor and
Employment, shall promulgate appropriate measures and programs leading to the expansion of
the services of the ECOZONE to help the local governments of nearby areas meet the needs of
the migrant workers.
SECTION 42. Incentive Scheme. An additional deduction equivalent to one-half (1/2) of the
value of training expenses incurred in developing skilled or unskilled labor or for managerial or
other management development programs incurred by enterprises in the ECOZONE can be
deducted from the national government's share of three percent (3%) as provided in Section 24.
The PEZA, the Department of Labor and Employment, and the Department of Finance shall jointly
make a review of the incentive scheme provided in this section every two (2) years or when
circumstances so warrant.
CHAPTER V
National Government and Other Entities
SECTION 43. Relationship with the Regional Development Council. The PEZA shall determine
the development goals for the ECOZONE within the framework of national development plans,
policies and goals, and the administrator shall, upon approval by the PEZA Board, submit the
ECOZONE plans, programs and projects to the regional development council for inclusion in and
as inputs to the overall regional development plan.
SECTION 44. Relationship with the Local Government Units. Except as herein provided, the
local government units comprising the ECOZONE shall retain their basic autonomy and identity.
The cities shall be governed by their respective charters and the municipalities shall operate and

function in accordance with Republic Act No. 7160, otherwise known as the Local Government
Code of 1991. cdt
SECTION 45. Relationship of PEZA to Privately-Owned Industrial Estates. Privately-owned
industrial estates shall retain their autonomy and independence and shall be monitored by the
PEZA for the implementation of incentives.
SECTION 46. Transfer of Resources. The relevant functions of the Board of Investments over
industrial estates and agri-export processing estates shall be transferred to the PEZA. The
resources of government-owned industrial estates and similar bodies, except the Bases
Conversion Development Authority and those areas identified under Republic Act No. 7227, are
hereby transferred to the PEZA as the holding agency. They are hereby detached from their
mother agencies and attached to the PEZA for policy, program and operational supervision.
The Boards of the affected government-owned industrial estates shall be phased out and only the
management level and an appropriate number of personnel shall be retained.
Government personnel whose services are not retained by the PEZA or any government office
within the ECOZONE shall be entitled to separation pay and such retirement and other benefits
they are entitled to under the laws then in force at the time of their separation: Provided, That in
no case shall the separation pay be less than one and one-fourth (1 1/4) month of every year of
service.
CHAPTER VI
Miscellaneous Provisions
SECTION 47. Appropriation. Upon the effectivity of this Act, all funds of the former Export
Processing Zone Authority (EPZA) shall be transferred to the newly-created Philippine Economic
Zone Authority. Thereafter, any sum as may be necessary to augment its capital outlay shall be
included in the General Appropriations Act to be treated as an equity of the national government.
Additional funding shall come from the following:
(a)
The annual subsidies, appropriations and/or other assets of the exports processing zone,
and the industrial estates and other economic areas that have been absorbed/transferred to the
PEZA as mandated in this Act;
(b)
The proceeds from the rent of lands, buildings, and other properties of the ECOZONES
concerned;
(c)
The proceeds from fees, charges and other revenue-generating instruments which the
PEZA is authorized to impose and collect under this Act;
(d)
and

The proceeds from bonds which the PEZA is authorized to float both domestic and abroad;

(e)
The advance rentals, license fees, and other charges which the PEZA is authorized to
impose under this Act and which an investor is willing to advance payment for. cd i
SECTION 48. Applicability of National Laws. National laws shall prevail vis-a-vis ECOZONE
rules, regulations and standards, unless there is a clear intent in this Act or other Acts of Congress
to vest the ECOZONE specific powers and privileges not otherwise allowed under existing laws.
SECTION 49. Authority of the President to Advance Initial Funding. Subject to existing laws, the
President of the Philippines is hereby authorized to advance out of the savings of the Office of the
President such funds as may be necessary to effect the organization of an ECOZONE which shall
be reimbursed by the PEZA at reasonable terms and conditions.
SECTION 50.
SECTION 51. Ipso-Facto Clause. All privileges, benefits, advantages or exemptions granted to
special economic zones under Republic Act No. 7227, shall ipso facto be accorded to special
economic zones already created or to be created under this Act. The free port status shall not be
vested upon the new special economic zones.

SECTION 52. Separability Clause. The provisions of this Act are hereby declared separable,
and in the event one or more of such provisions or part thereof are declared unconstitutional,
such declaration of unconstitutionality shall not affect the validity of the other provisions thereof.
SECTION 53. Interpretation/Construction. The powers, authorities and functions that are
vested in the Philippine Economic Zone Authority (PEZA) and the ECOZONES concerned are
intended to establish decentralization of governmental functions and authority as well as an
efficient and effective working relationship between the ECOZONE, the central government and
the local government units.
SECTION 54. Repealing Clause. All laws, acts, presidential decrees, executive orders,
proclamations and/or administrative regulations which are inconsistent with the provisions of this
Act, are hereby amended, modified, superseded or repealed accordingly.
SECTION 55. Implementing Rules and Regulations. The Department of Trade and Industry, the
National Economic and Development Authority, the Department of Finance, the Bureau of
Customs, the Department of Agrarian Reform, the Department of the Interior and Local
Government, the Philippine Economic Zone Authority, and the representatives from the technical
staff of the Committee on Economic Affairs of both Houses of Congress shall formulate the
implementing rules and regulations of this Act within ninety (90) days after its approval. Such
rules and regulations shall take effect fifteen (15) days after their publication in a newspaper of
general circulation in the Philippines. cda
SECTION 56. Transitory Provision. Prior to the effectivity of the implementing rules and
regulations of this Act, the provisions of Presidential Decree No. 66, amended, and its
implementing rules and regulations shall remain in force.
SECTION 57. Effectivity. This Act shall take effect upon its approval.
Approved: February 24, 1995

REPUBLIC ACT NO. 7227

AN ACT ACCELERATING THE CONVERSION OF MILITARY RESERVATIONS INTO OTHER
PRODUCTIVE USES, CREATING THE BASES CONVERSION AND DEVELOPMENT
AUTHORITY FOR THE PURPOSE, PROVIDING FUNDS THEREFOR AND FOR OTHER
PURPOSES
SECTION 1. Short Title. This Act shall be known as the "Bases Conversion and Development
Act of 1992." cdt
SECTION 2. Declaration of Policies. It is hereby declared the policy of the Government to
accelerate the sound and balanced conversion into alternative productive uses of the Clark and
Subic military reservations and their extensions (John Hay Station, Wallace Air Station, O'Donnell
Transmitter Station, San Miguel Naval Communications Station and Capas Relay Station), to raise
funds by the sale of portions of Metro Manila military camps, and to apply said funds as provided
herein for the development and conversion to productive civilian use of the lands covered under
the 1947 Military Bases Agreement between the Philippines and the United States of America, as
amended.
It is likewise the declared policy of the Government to enhance the benefits to be derived from
said properties in order to promote the economic and social development of Central Luzon in
particular and the country in general.
SECTION 3. Creation of the Bases Conversion and Development Authority. There is hereby
created a body corporate to be known as the Bases Conversion and Development Authority,
hereinafter referred to as the Conversion Authority, which shall have the attribute of perpetual
succession and shall be vested with the powers of a corporation.
It shall be organized within thirty (30) days after approval of this Act. It shall have a term of fifty
(50) years from its organization: Provided, That Congress, by a joint resolution, may dissolve the
Conversion Authority whenever in its judgment the primary purpose for its creation has been
accomplished. It shall establish its principal office in Metropolitan Manila unless otherwise
provided by the Conversion Authority and may put up such branches as may be necessary.
SECTION 4. Purposes of the Conversion Authority. The Conversion Authority shall have the
following purposes: cdtai
(a)
To own, hold and/or administer the military reservations of John Hay Air Station, Wallace
Air Station, O'Donnell Transmitter Station, San Miguel Naval Communications Station, Mt. Sta. Rita
Station (Hermosa, Bataan) and those portions of Metro Manila military camps which may be
transferred to it by the President;
(b)
To adopt, prepare and implement a comprehensive and detailed development plan
embodying a list of projects including but not limited to those provided in the LegislativeExecutive Bases Council (LEBC) framework plan for the sound and balanced conversion of the
Clark and Subic military reservations and their extensions consistent with ecological and
environmental standards, into other productive uses to promote the economic and social
development of Central Luzon in particular and the country in general;
(c)
To encourage the active participation of the private sector in transforming the Clark and
Subic military reservations and their extensions into other productive uses;
(d)
To serve as the holding company of subsidiary companies created pursuant to Section 16
of this Act and to invest in Special Economic Zones declared under Sections 12 and 15 of this Act;
cd i
(e)
To manage and operate through private sector companies developmental projects outside
the jurisdiction of subsidiary companies and Special Economic Zones declared by presidential
proclamations and established under this Act;
(f)
To establish a mechanism in coordination with the appropriate local government units to
effect meaningful consultation regarding the plans, programs and projects within the regions
where such plans, programs and/or project development are part of the conversion of the Clark

and Subic military reservations and their extensions and the surrounding communities as
envisioned in this Act; and
(g)
To plan, program and undertake the readjustment, relocation, or resettlement of
population within the Clark and Subic military reservations and their extensions as may be
deemed necessary and beneficial by the Conversion Authority, in coordination with the
appropriate government agencies and local government units.
SECTION 5. Powers of the Conversion Authority. To carry out its objectives under this Act, the
Conversion Authority is hereby vested with the following powers:
(a)
To succeed in its corporate name, to sue and be sued in such corporate name and to
adopt, alter and use a corporate seal which shall be judicially noticed;
(b)

To adopt, amend and repeal its bylaws;

(c)
To enter into, make, perform and carry out contracts of every class, kind and description
which are necessary or incidental to the realization of its purposes with any person, firm or
corporation, private or public, and with foreign government entities;
(d)
To contract loans, indebtedness, credit and issue commercial papers and bonds, in any
local or convertible foreign currency from any international financial institutions, foreign
government entities, and local or foreign private commercial banks or similar institutions under
terms and conditions prescribed by law, rules and regulations; aisa dc
(e)
To execute any deed of guarantee, mortgage, pledge, trust or assignment of any property
for the purpose of financing the programs and projects deemed vital for the early attainment of
its goals and objectives, subject to the provisions of Article VII, Section 20, and Article XII, Section
2, paragraphs (4) and (5) of the Constitution;
(f)
To construct, own, lease, operate and maintain public utilities as well as infrastructure
facilities; cd
(g)
To reclaim or undertake reclamation projects as it may deem necessary in areas adjacent
or contiguous to the Conversion Authority's lands described in Section 7 of this Act either by itself
or in collaboration with the Public Estates Authority (PEA) established under Presidential Decree
No. 1084 as amended;
(h)
To acquire, own, hold, administer, and lease real and personal properties, including
agricultural lands, property rights and interests and encumber, lease, mortgage, sell, alienate or
otherwise dispose of the same at fair market value it may deem appropriate;
(i)
To receive donations, grants, bequests and assistance of all kinds from local and foreign
governments and private sectors and utilize the same;
(j)
To invest its funds and other assets other than those of the Special Economic Zones under
Section 12 and 15 of this Act in such areas it may deem wise;
(k)

To exercise the right of eminent domain; cdasia

(l)
To exercise oversight functions over the Special Economic Zones declared under this Act
and by subsequent presidential proclamations within the framework of the declared policies of
this Act;
(m)

To promulgate all necessary rules and regulations; and

(n)
To perform such other powers as may be necessary and proper to carry out the purposes
of this Act.
SECTION 6. Capitalization. The Conversion Authority shall have an authorized capital of One
hundred billion pesos (P100,000,000,000) which may be fully subscribed by the Republic of the
Philippines and shall either be paid up from the proceeds of the sales of its land assets as
provided for in Section 8 of this Act or by transferring to the Conversion Authority properties
valued in such amount.
An initial operating capital in the amount of Seventy million pesos (P70,000,000) is hereby

authorized to be appropriated out of any funds in the National Treasury not otherwise
appropriated which shall be covered by preferred shares of the Conversion Authority retireable
within two (2) years. cda
SECTION 7. Transfer of Properties. Pursuant to paragraph (a), Section 4 hereof, the President
shall transfer forthwith to the Conversion Authority:
(a)

Station

Area in has.

(more or less)
John Hay Air Station 570
Wallace Air Station

167

O'Donnell Transmitter Station

1,755

San Miguel Naval Communications Station

1,100

Mt. Sta. Rita Station (Hermosa, Bataan)

(b)
Such other properties including, but not limited to, portions of Metro Manila military
camps, pursuant to Section 8 of this Act: Provided, however, That the areas which shall remain as
military reservations shall be delineated and proclaimed as such by the President.
SECTION 8. Funding Scheme. The capital of the Conversion Authority shall come from the
sales proceeds and/or transfers of certain Metro Manila military camps, including all lands
covered by Proclamation No. 423, series of 1957, commonly known as Fort Bonifacio and Villamor
(Nicholas) Air Base, namely: aisa dc
Camp Area in has.
(more or less)
Phase I (for immediate disposal)
1.

Camp Claudio

2.0

2.

Camp Bago Bantay 5.0

3.

Part of Villamor Air Base

135.10

4.

Part of Fort Bonifacio

498.40

Total

640.50

=======
Phase II
1.

Camp Ver

1.9

2.

Camp Melchor

1.0

3.

Camp Atienza

4.9

4.

Part of Villamor Air Base

37.9

5.

Part of Fort Bonifacio

224.90

6.

Fort Abad

.60

Total

271.20

=======
Provided, That the following areas shall be exempt from sale:

(a)
Approximately 148.80 hectares in Fort Bonifacio for the National Capital Region (NCR)
Security Brigade, Philippine Army (PA) officers' housing area, and Philippine National Police (PNP)
jails and support services (Presently Camp Bagong Diwa); cdasia
(b)
Approximately 99.91 hectares in Villamor Air Base for the Presidential Airlift Wing, one
squadron of helicopters for the NCR and respective security units;
(c)

The following areas segregated by Proclamation Nos.:

(1)

461, series of 1965; (AFP Officers Village)

(2)

462, series of 1965; (AFP Enlisted Men's Village)

(3)

192, series of 1967; (Veterans Center)

(4)

208, series of 1967; (National Shrines) aisa dc

(5)

469, series of 1969; (Philippine College of Commerce)

(6)

653, series of 1970; (National Manpower and Youth Council)

(7)

684, series of 1970; (University Center)

(8)

1041, series of 1972; (Open Lease Concession)

(9)

1160, series of 1973; (Manila Technical Institute)

(10)

1217, series of 1973; (Maharlika Village)

(11)

682, series of 1970; (Civil Aviation Purposes)

(12)

1048, series of 1975; (Civil Aviation Purposes)

(13)

1453, series of 1975; (National Police Commission)

(14)

1633, series of 1977; (Housing and Urban Development)

(15)

2219, series of 1982; (Ministry of Human Settlements, BLISS)

(16)

172, series of 1987; (Upper, Lower and Western Bicutan and Signal Housing) cd

(17)

389, series of 1989; (National Mapping and Resource Information Authority)

(18) 518, series of 1990; (CEMBO, SO CEMBO, W REMBO, E REMBO, COMEMBO, PEMBO,
PITOGO)
(19)

467, series of 1968; (Greater Manila Terminal Food Market Site)

(20)

347, series of 1968; (Greater Manila Food Market Site)

(21)

376, series of 1968; (National Development Board and Science Community)

(d)
A proposed 30.5 hectares as relocation site of families to be affected by circumferential
road 5 and radial road 4 construction: Provided, further, That the boundaries and technical
description of these exempt areas shall be determined by an actual ground survey. acd
The President is hereby authorized to sell the above lands, in whole or in part, which are hereby
declared alienable and disposable, pursuant to the provisions of existing laws and regulations
governing sales of government properties: Provided, That no sale or disposition of such lands will
be undertaken until a development plan embodying projects for conversion shall be approved by
the President in accordance with paragraph (b), Section 4, of this Act. However, six (6) months
after approval of this Act, the President shall authorize the Conversion Authority to dispose of
certain areas in Fort Bonifacio and Villamor as the latter so determines. The Conversion Authority
shall provide the President a report on any such disposition or plan for disposition within one (1)
month from such disposition or preparation of such plan. The proceeds from any sale, after
deducting all expenses related to the sale, of portions of Metro Manila military camps as
authorized under this Act, shall be deemed appropriated for the purposes herein provided for the
following purposes with their corresponding percent shares of proceeds:
(1)

Thirty five percent (35%) To primarily finance the self reliance and modernization

program of the AFP, the transfer of the AFP military camps and the construction of new camps
and the rehabilitation and expansion of the AFP's medical facilities, and the modernization of the
government arsenal;
(2)
Twenty-seven and a half percent (27.5%) To finance the construction and upgrading of
infrastructure such as highways, railways and other transport facilities to make Subic, Clark and
other former bases accessible: Provided, That other public works, utilities and irrigation projects
not specified herein shall be included: Provided, further, That the conversion into commercial
uses of the former military baselands proper and their extensions shall be undertaken as much as
practicable through the Build-Operate-Transfer (BOT) scheme or financed by locator enterprises:
Provided, finally, That this appropriation shall be retained by the Conversion Authority as part of
its paid-up capital, pursuant to Section 6 of this Act;
(3)
Twelve Percent (12%) To finance the National Shelter Program: Provided, That fifty
percent (50%) thereof shall be used to finance mass social housing project for the
underprivileged and homeless citizens of the country and the other fifty percent (50%) to
concessional and long-term housing loan assistance for the homeless of Metro Manila, Olongapo
City, Angeles City and other affected municipalities contiguous to the base areas;
(4)

Three percent (3%) To finance the National Health Insurance Program;

(5)
Five percent (5%) To finance critical infrastructure projects not covered by the BuildOperate-Transfer (BOT) program in areas surrounding the former baselands;
(6)
Two percent (2%) to finance the benefits/claims of Military War Veterans and their
dependents under Republic Act No. 7696;
(7)
One percent (1%) As contribution for the Higher Education Development Fund under
Section 10 of Republic Act No. 7722, otherwise known as the Higher Education Act of 1994, the
amount of Five hundred million pesos (P500,000,000) or so much thereof, and the balance to
finance students scholarship, faculty development and the improvement of physical plants of
colleges and universities under the Commission on Higher Education (CHED);
(8)
Two percent (2%) to finance the science and technology scholarships and training of
thousands of young Filipino scientists and students in selected countries to be identified by the
Department of Science and Technology; and the Study Now Pay Later Program for poor but
deserving youths who shall enroll or are enrolled in science and technology (S&T) courses which
will propel the country to achieve modernization and competitive excellence in the 21st century:
Provided, That at least one (1) scholar/trainee shall be selected from each municipality/city of the
country: Provided, further, That they shall render service to the Government for at least three (3)
years or shall engage in S&T entrepreneurial activities within the country;
(9)

One percent (1%) To finance the multi-year program of the prosecution service;

(10) Two percent (2%), but in no case exceeding Two billion pesos (P2,000,000,000) To
finance a multi-year modernization program of the National Bureau of Investigation (NBI), the
Philippine National Police (PNP) and improvement of prison facilities.
Provided, That seventy percent (70%) of this appropriations shall be used for capital outlay and
thirty percent (30% for training programs and early retirement schemes for their officers and
personnel.
(11) One percent (1%), but in no case to exceed One billion pesos (P1,000,000,000) To
finance a multi-year judicial reform program;
(12) Two percent (2%) to finance the establishment of pre-school and daycare centers
nationwide;
(13) One-half percent (1/2%) but not to exceed Five hundred million pesos (P500,000,000) for
the summer program for the education of students (SPES) in accordance with Republic Act No.
7323;
(14) One percent (1%) for the construction of Senior Citizens Centers as provided under
Republic Act No. 7876;

(15) Three percent (3%) to the emergency and contingent needs of the areas devastated by
the Mount Pinatubo eruptions;
(16) Two percent (2% for infrastructure development of future special economic zones to be
created;
Approximately forty hectares (40 has.) of land in Fort Bonifacio, Phase I, shall be retained as a
national government and local government centers, sports facilities and parks: Provided, That, in
the case of Fort Bonifacio, two and five tenths percent (2.5%) of the proceeds thereof in equal
shares shall each go to the Municipalities of Makati, Taguig and Pateros: Provided, further, That in
no case shall farmers affected be denied due compensation.
The provisions of law to the contrary notwithstanding, the proceeds of the sale thereof shall not
be diminished and, therefor, exempt from all forms of taxes and fees.
SECTION 9. Board of Directors: Composition. The powers and functions of the Conversion
Authority shall be exercised by a Board of Directors to be composed of nine (9) members, as
follows: cd i
(a)

A full-time chairman who shall also be the president of the Conversion Authority; and

(b)
Eight (8) other members from the private sector, two (2) of whom coming from the labor
sector.
The chairman and members shall be appointed by the President with the consent of the
Commission on Appointments. Of the initial members of the Board, three (3) including the
chairman, a representative from the private sector and a representative from the labor sector
shall be appointed for a term of six (6) years, three (3) for a term of four (4) years and the other
three (3) for a term of two (2) years. In case of vacancy in the Board, the appointee shall serve
the unexpired term of the predecessor.
No person shall be appointed or designated unless he is a natural-born Filipino citizen, of good
moral character, of unquestionable integrity, and of recognized competence in relevant fields
including, but not limited to, economics, management, international relations, law or engineering,
preferably naval or aeronautical.
The chairman and president of the Conversion Authority shall have a fixed term of six (6) years.
cdtai
All procedural matters in the conduct of board meetings shall be prescribed in its internal rules.
Members of the Board shall receive a per diem of not more than Five thousand pesos (P5,000) for
every board meeting: Provided, however, That the per diem collected per month does not exceed
the equivalent of four (4) meetings: Provided further, That the amount of per diem for every
board meeting may be increased by the President but such amount shall not be increased within
two (2) years after its last increase.
SECTION 10. Functions of the Board. The Board of Directors shall be the policy-making body of
the Conversion Authority and shall perform the following functions: casia
(a)
Determine the organizational structure of the Conversion Authority, define the duties and
responsibilities of all officials and employees and adopt a compensation and benefit scheme at
least equivalent to that of the Central Bank of the Philippines;
(b)
Appoint all officials down to the third level and authorize the president of the Conversion
Authority to appoint all others: Provided, That all appointments shall be on the basis of merit and
fitness and all personnel action shall be in pursuance of Civil Service Laws, rules and regulations,
except those coterminous employees of the members of the Board;
(c)

Prepare the annual and supplemental budgets of the Conversion Authority;

(d)
Submit an annual report of the operation of the Conversion Authority to the President of
the Philippines, President of the Senate and Speaker of the House of Representatives;
(e)
Carry out the purposes of the Conversion Authority with the following terms and
references:

(1)
As much as possible, major conversion projects shall be undertaken under the complete
project turnkey or build-operate-transfer (BOT) scheme, as provided under Republic Act
Numbered Sixty-nine hundred and fifty-seven (RA 6957); and
(2)
Starting the fourth year of the Conversion Authority's full operation, a privatization or
divestment program of its projects and subsidiaries shall begin under general guidelines
prescribed by the President of the Philippines. casia
SECTION 11. Duties and Responsibilities of the President of the Conversion Authority. The
president of the Conversion Authority shall have the following duties and responsibilities:
(a)

To act as Chief Executive Officer of the Conversion Authority;

(b)

To execute, administer and implement the policies and measures approved by the Board;

(c)

To direct and supervise the operations and administration of the Conversion Authority;

(d)
To represent the Conversion Authority in all dealings with offices, agencies and
instrumentalities of the Government and with all persons and entities, public or private, domestic
or foreign; acd
(e)
To direct and supervise the preparation of the agenda for the meeting of the Board, and to
submit for the consideration of the Board such policies and measures as he believes necessary to
carry out the purposes and objectives of this Act; and
(f)
To exercise such other powers and functions provided in the bylaws and as may be vested
in him by the Board.
SECTION 12. Subic Special Economic Zone. Subject to the concurrence by resolution of the
sangguniang panlungsod of the City of Olongapo and the sangguniang bayan of the
Municipalities of Subic, Morong and Hermosa, there is hereby created a Special Economic and
Free-port Zone consisting of the City of Olongapo and the Municipality of Subic, Province of
Zambales, the lands occupied by the Subic Naval Base and its contiguous extensions as
embraced, covered, and defined by the 1947 Military Bases Agreement between the Philippines
and the United States of America as amended, and within the territorial jurisdiction of the
Municipalities of Morong and Hermosa, Province of Bataan, hereinafter referred to as the Subic
Special Economic Zone whose metes and bounds shall be delineated in a proclamation to be
issued by the President of the Philippines. Within thirty (30) days after the approval of this Act,
each local government unit shall submit its resolution of concurrence to join the Subic Special
Economic Zone to the office of the President. Thereafter, the President of the Philippines shall
issue a proclamation defining the metes and bounds of the Zone as provided herein. casia
The abovementioned zone shall be subject to the following policies:
(a)
Within the framework and subject to the mandate and limitations of the Constitution and
the pertinent provisions of the Local Government Code, the Subic Special Economic Zone shall be
developed into a self-sustaining, industrial, commercial, financial and investment center to
generate employment opportunities in and around the zone and to attract and promote
productive foreign investments;
(b)
The Subic Special Economic Zone shall be operated and managed as a separate customs
territory ensuring free flow or movement of goods and capital within, into and exported out of the
Subic Special Economic Zone, as well as provide incentives such as tax and duty-free
importations of raw materials, capital and equipment. However, exportation or removal of goods
from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory
shall be subject to customs duties and taxes under the Tariff and Customs Code of the Philippines,
as amended, the National Internal Revenue Code of 1997, as amended, and other relevant tax
laws of the Philippines; casia
(c)
The provision of existing laws, rules and regulations to the contrary notwithstanding, no
national and local taxes shall be imposed within the Subic Special Economic Zone. In lieu of said
taxes, a five percent (5%) tax on gross income earned shall be paid by all business enterprises
within the Subic Special Economic Zone and shall be remitted as follows: three percent (3%) to
the National Government, and two percent (2%) to the Subic Bay Metropolitan Authority (SBMA)

for distribution to the local government units affected by the declaration of and contiguous to the
zone, namely: the City of Olongapo and the municipalities of Subic, San Antonio, San Marcelino
and Castillejos of the Province of Zambales; and the municipalities of Morong, Hermosa and
Dinalupihan of the Province of Bataan, on the basis of population (50%), land area (25%), and
equal sharing (25%).
In case of conflict between national and local laws with respect to tax exemption privileges in the
Subic Special Economic Zone, the same shall be resolved in favor of the latter;
(d)
No exchange control policy shall be applied and free markets for foreign exchange, gold,
securities and future shall be allowed and maintained in the Subic Special Economic Zone; acd
(e)
The Central Bank, through the Monetary Board, shall supervise and regulate the
operations of banks and other financial institutions within the Subic Special Economic Zone;
(f)
Banking and Finance shall be liberalized with the establishment of foreign currency
depository units of local commercial banks and offshore banking units of foreign banks with
minimum Central Bank regulation;
(g)
Any investor within the Subic Special Economic Zone whose continuing investment shall
not be less than Two hundred fifty thousand dollars ($250,000), his/her spouse and dependent
children under twenty-one (21) years of age, shall be granted permanent resident status within
the Subic Special Economic Zone. They shall have freedom of ingress and egress to and from the
Subic Special Economic Zone without any need of special authorization from the Bureau of
Immigration and Deportation. The Subic Bay Metropolitan Authority referred to in Section 13 of
this Act may also issue working visas renewal every two (2) years to foreign executives and other
aliens possessing highly-technical skills which no Filipino within the Subic Special Economic Zone
possesses, as certified by the Department of Labor and Employment. The names of aliens
granted permanent residence status and working visas by the Subic Bay Metropolitan Authority
shall be reported to the Bureau of Immigration and Deportation within thirty (30) days after
issuance thereof; cd i
(h)
The defense of the zone and the security of its perimeters shall be the responsibility of the
National Government in coordination with the Subic Bay Metropolitan Authority. The Subic Bay
Metropolitan Authority shall provide and establish its own internal security and firefighting forces;
and
(i)
Except as herein provided, the local government units comprising the Subic Special
Economic Zone shall retain their basic autonomy and identity. The cities shall be governed by
their respective charters and the municipalities shall operate and function in accordance with
Republic Act No. 7160, otherwise known as the Local Government Code of 1991. cd
SECTION 13. The Subic Bay Metropolitan Authority.
(a)
Creation of the Subic Bay Metropolitan Authority. A body corporate to be known as the
Subic Bay Metropolitan Authority, is hereby created as an operating and implementing arm of the
Conversion Authority.
(b)
Powers and Functions of the Subic Bay Metropolitan Authority. The Subic Bay
Metropolitan Authority, otherwise known as the Subic Authority, shall have the following powers
and functions:
(1)
To operate, administer, manage and develop the ship repair and ship building facility,
container port, oil storage and refueling facility and Subic Air Base within the Subic Special
Economic and Free-Port Zone as a free market in accordance with the policies set forth in Section
12 of this Act; cdasia
(2)
To accept any local or foreign investment, business or enterprise, subject only to such
rules and regulations to be promulgated by the Subic Authority in conformity with the policies of
the Conversion Authority without prejudice to the nationalization requirements provided for in the
Constitution;
(3)
To undertake and regulate the establishment, operation and maintenance of utilities, other
services and infrastructure in the Subic Special Economic Zone including shipping and related

business, stevedoring and port terminal services or concessions, incidental thereto and airport
operations in coordination with the Civil Aeronautics Board, and to fix just and reasonable rates,
fares, charges and other prices therefor;
(4)
To construct, acquire, own, lease, operate and maintain on its own or through contract,
franchise, license permits bulk purchase from the private sector and build-operate-transfer
scheme or joint-venture the required utilities and infrastructure in coordination with local
government units and appropriate government agencies concerned and in conformity with
existing applicable laws therefor; cda
(5)
To adopt, alter and use a corporate seal, to contract, lease, sell, dispose, acquire and own
properties; to sue and be sued in order to carry out its duties and functions as provided for in this
Act and to exercise the power of eminent domain for public use and public purpose;
(6)
Within the limitation provided by law, to raise and/or borrow the necessary funds from
local and international financial institutions and to issue bonds, promissory notes and other
securities for that purpose and to secure the same by guarantee, pledge, mortgage, deed of trust,
or assignment of its properties held by the Subic Authority for the purpose of financing its
projects and programs within the framework and limitations of this Act; cdt
(7)
To operate directly or indirectly or license tourism-related activities subject to priorities and
standards set by the Subic Authority including games and amusements, except horse racing, dog
racing and casino gambling which shall continue to be licensed by the Philippine Amusement and
Gaming Corporation (PAGCOR) upon recommendation of the Conversion Authority; to maintain
and preserve the forested areas as a national park;
(8)

To authorize the establishment of appropriate educational and medical institutions;

(9)
To protect, maintain and develop the virgin forests within the baselands which will be
proclaimed as a national park and subject to a permanent total log ban, and for this purpose, the
rules and regulations of the Department of Environment and Natural Resources and other
government agencies directly involved in the above functions shall be implemented by the Subic
Authority; cdtai
(10) To adopt and implement measures and standards for environmental pollution control of all
areas within its territory, including, but not limited to all bodies of water and to enforce the same.
For which purpose the Subic Authority shall create an Ecology Center; and
(c)
Board of Directors. The powers of the Subic Authority shall be vested in and exercised
by a Board of Directors, hereinafter referred to as the Board, which shall be composed of fifteen
(15) members, to wit:
(1)
Representatives of the local government units that concur to join the Subic Special
Economic Zone; cdtai
(2)

Two (2) representatives from the National Government;

(3)
Five (5) representatives from the private sector coming from the present naval stations,
public works center, ship repair facility, naval supply depot and naval air station; and
(4)
The remaining balance to complete the Board shall be composed of representatives from
the business and investment sectors.
The chairman and the members of the Board shall be appointed by the President to serve for a
term of six (6) years, unless sooner removed for cause except for the representatives of the local
government units who shall serve for a term of three (3) years. In case of removal for cause, the
replacement shall serve only the unexpired portion of the term. aisa dc
No person shall be appointed as a member of the Board unless he is a Filipino citizen, of good
moral character, and of recognized competence in relevant fields including, but not limited to
economics, management, international relations, law or engineering. Preference in the
appointment of the members of the Board shall be given to residents within the Subic Special
Economic Zone.
Members of the Board shall receive a per diem of not more than Five thousand pesos (P5,000.00)

for every board meeting: Provided, however, That the per diem collected per month does not
exceed the equivalent of four (4) meetings: Provided, further, That the amount of per diem for
every board meeting may be increased by the President: Provided finally, That the amount of per
diem shall not be increased within two (2) years after its last increase. cda
(d)
Chairman/Administrator. The President shall appoint a professional manager as
administrator of the Subic Authority with a compensation to be determined by the Board subject
to the approval of the Secretary of Budget, who shall be the ex officio chairman of the Board and
who shall serve as the chief executive officer of the Subic Authority: Provided, however, That for
the first year of its operations from the effectivity of this Act, the mayor of the City of Olongapo
shall be appointed as the chairman and chief executive officer of the Subic Authority.
(e)
Capitalization. The Subic Authority shall have an authorized capital stock of Twenty
billion pesos (P20,000,000,000) divided into twenty thousand (P20,000) no-par shares fully
subscribed and paid up by the Republic of the Philippines with:
(1)
All lands embraced, covered and defined in Section 12 hereof, as well as permanent
improvements and fixtures upon proper inventory not otherwise alienated, conveyed, or
transferred to another government agency; cda
(2)
All other assets which the President may transfer to the Subic Authority as part of the
equity contribution of the Government; and
(3)
Cash contribution by the Government in the amount of Three hundred million pesos
(P300,000,000) a year for the next three (3) years, which is hereby appropriated out of any fund
in the National Treasury not otherwise appropriated.
SECTION 14. Relationship with the Conversion Authority and the Local Government Units.
(a)
The provisions of existing laws, rules and regulations to the contrary notwithstanding, the
Subic Authority shall exercise administrative powers, rule-making and disbursement of funds over
the Subic Special Economic Zone in conformity with the oversight function of the Conversion
Authority. cdtai
(b)
In case of conflict between the Subic Authority and the local government units concerned
on matters affecting the Subic Special Economic Zone other than defense and security, the
decision of the Subic Authority shall prevail.
SECTION 15. Clark Special Economic Zone (CSEZ) and Clark Freeport Zone (CFZ). Subject to
the concurrence by resolution of the local government units directly affected, the President is
hereby authorized to create by executive proclamation a Special Economic Zone covering the
lands occupied by the Clark military reservations and its contiguous extensions as embraced,
covered and defined by the 1947 Military Bases Agreement between the Philippines and the
United States of America, as amended, located within the territorial jurisdiction of Angeles City,
municipalities of Mabalacat and Porac, Province of Pampanga, and the municipalities of Capas
and Bamban, Province of Tarlac, in accordance with the provision as herein provided insofar as
applied to the Clark military reservations. The Clark Air Base proper with an area of not more than
four thousand four hundred hectares (4,400 has.), with the exception of the twenty-two-hectare
commercial area situated near the main gate and the Bayanihan Park consisting of seven and a
half hectares (7.5 has.) located outside the main gate of the Clark Special Economic Zone, is
hereby declared a freeport zone. aisa dc
The CFZ shall be operated and managed as a separate customs territory ensuring free flow or
movement of goods and capital equipment within, into and exported out of the CFZ, as well as
provide incentives such as tax and duty-free importation of raw materials and capital equipment.
Howerver, exportation or removal of goods from the territory of the CFZ to the other parts of the
Philippine territory shall be subject to customs duties and taxes under the Tariff and Customs
Code of the Philippines, as amended, the National Internal Revenue Code of 1997, as amended,
and other relevant tax laws of the Philippines.
The provisions of existing laws, rules and regulations to the contrary notwithstanding, no national
and local taxes shall be imposed on registered business enterprises within the CFZ. In lieu of said
taxes, a five percent (5%) tax on gross income earned shall be paid by all registered business

enterprises within the CFZ and shall be directly remitted as follows: three percent (3%) to the
National Government, and two percent (2%) to the treasurer's office of the municipality or city
where they are located.
The governing body of the Clark Special Economic Zone shall likewise be established by
executive proclamation with such powers and functions exercised by the Export Processing Zone
Authority pursuant to Presidential Decree No. 66 as amended: Provided, That it shall have no
regulatory authority over public utilities, which authority pertains to the regulatory agencies
created by law for the purpose, such as the Energy Regulatory Commission created under
Republic Act No. 9136 and the National Telecommunications Commission created under Republic
Act No. 7925.
The policies to govern and regulate the Clark Special Economic Zone shall be determined upon
consultation with the inhabitants of the local government units directly affected which shall be
conducted within six (6) months upon approval of this Act.
Similarly, subject to the concurrence by resolution of the local government units directly affected,
the President shall create other Special Economic Zones, in the base areas of Wallace Air Station
in San Fernando, La Union (excluding areas designated for communications, advance warning and
radar requirements of the Philippine Air Force to be determined by the Conversion Authority) and
Camp John Hay in the City of Baguio. cd i
Upon recommendation of the Conversion Authority, the President is likewise authorized to create
Special Economic Zones covering the Municipalities of Morong, Hermosa, Dinalupihan, Castillejos,
and San Marcelino.
Subject to the concurrence by resolution of the local government units directly affected and upon
recommendation of the Philippine Economic Zone Authority (PEZA), the President is hereby
authorized to create by executive proclamation Special Economic Zones covering the City of
Balanga and the municipalities of Limay, Mariveles, Morong, Hermosa, and Dinalupihan, Province
of Bataan.
Subject to the concurrence by resolution of the local government units directly affected and upon
recommendation of the PEZA, the President is hereby authorized to create by executive
proclamation Special Economic Zones covering the municipalities of Castillejos, San Marcelino,
and San Antonio, Province of Zambales.
Duly registered business enterprises that will operate in the Special Economic Zones to be
created shall be entitled to the same tax and duty incentives as provided for under Republic Act
No. 7916, as amended: Provided, That for the purpose of administering these incentives, the
PEZA shall register, regulate, and supervise all registered enterprises within the Special Economic
Zones.
SECTION 15-A.
Poro Point Freeport Zone (PPFZ). The two hundred thirty-six and a halfhectare (236.5 has.) secured area in the Poro Point Special Economic and Freeport Zone created
under Proclamation No. 216, series of 1993, shall be operated and managed as a freeport and
separate customs territory ensuring free flow or movement of goods and capital equipment
within, into and exported out of the PPFZ. The PPFZ shall also provide incentives such as tax and
duty-free importation of raw materials and capital equipment.
However, exportation or removal of goods from the territory of the PPFZ to the other parts of the
Philippine territory shall be subject to customs duties and taxes under the Tariff and Customs
Code of the Philippines, as amended, the National Internal Revenue Code of 1997, as amended,
and other relevant tax laws of the Philippines.
The provisions of existing laws, rules and regulations to the contrary notwithstanding, no national
and local taxes shall be imposed on registered business enterprises within the PPFZ.
In lieu of said taxes, a five percent (5%) tax on gross income earned shall be paid by all registered
business enterprises within the PPFZ and shall be directly remitted as follows: three percent (3%)
to the National Government, and two percent (2%) to the treasurers office of the municipality or
city where they are located.

The governing body of the PPFZ shall have no regulatory authority over public utilities, which
authority pertains to the regulatory agencies created by law for the purpose, such as the Energy
Regulatory Commission created under Republic Act No. 9136 and the National
Telecommunications Commission created under Republic Act No. 7925.
SECTION 15-B.
Morong Special Economic Zone (MSEZ).
Duly registered business
enterprises operating within the MSEZ created under Proclamation No. 984, series of 1997, shall
be entitled to tax and duty-free importation of raw materials and capital equipment. In lieu of all
national and local taxes except real property tax on land, a five percent (5%) tax on gross income
earned shall be paid by all registered business enterprises which shall be directly remitted as
follows: three percent (3%) to the National Government, and two percent (2%) to the treasurers
office of the municipality or city where they are located.
SECTION 15-C.
John Hay Special Economic Zone (JHSEZ).
Registered business
enterprises which will operate after the effectivity of this Act, within the JHSEZ created under
Proclamation No. 420, series of 1994, shall be entitled to the same tax and duty incentives as
provided for under Republic Act No. 7916, as amended: Provided, That for the purpose of
administering these incentives, the PEZA shall register, regulate, and supervise all registered
enterprises within the JHSEZ: Provided, further, That the Conversion Authority and the John Hay
Management Corporation (JHMC) shall only engage in acquiring, owning, holding, administering
or leasing real properties, and in other activities incidental thereto.
SECTION 16. Subsidiaries. The Conversion Authority shall have the power to form, establish,
organize and maintain a subsidiary corporation or corporations. Such subsidiary or subsidiaries
shall be formed in accordance with the Philippine Corporation Law and existing rules and
regulations promulgated by the Securities and Exchange Commission, unless otherwise provided
in this Act. In all cases, the Conversion Authority shall own initially at least fifty-one per centum
(51%) of the capital stock of a subsidiary. The Conversion Authority shall also initially have the
majority of the Board of Directors of the subsidiaries, of which at least one (1) director shall be
the president of the Conversion Authority or his designated representative.
Such subsidiaries shall be exempt from the coverage of the Civil Service Laws, rules and
regulations. cdasia
SECTION 17. Supervision. The Conversion Authority shall be under the direct control and
supervision of the Office of the President for purposes of policy direction and coordination.
SECTION 18. Legal Counsel. Without prejudice to the hiring of an outside counsel, the
Government Corporate Counsel shall be the ex officio legal counsel of the Conversion Authority,
the governing boards of the Special Economic Zones and the subsidiaries wherein the Conversion
Authority owns the majority of the shares of stocks, and for this purpose he may designate a full
time representative whose compensation shall be approved by the Board.
SECTION 19. Auditor. The Commission on Audit shall appoint a representative who shall be the
full time auditor of the Conversion Authority, its subsidiaries and the Special Economic Zones and
such personnel as may be necessary to assist said representative in the performance of his
duties. He is mandated to impose pre-audit within thirty (30) days after submission of all
proposed substantial sales, transfers, and alienations of property. He shall likewise render a full
report thereof to Congress every sixty (60) days. The salaries of the auditor and his staff shall be
approved by the Board. cdt
SECTION 20. Interim Capacity. Except for the chairman of the Subic Authority, the chairman
and other members of the Board of the Conversion Authority and the Subic Authority shall act in
an interim capacity and shall serve until the 31st of July 1992 or until such time that their
successors shall have been duly appointed.
SECTION 21. Injunction and Restraining Order. The implementation of the projects for the
conversion into alternative productive uses of the military reservations are urgent and necessary
and shall not be restrained or enjoined except by an order issued by the Supreme Court of the
Philippines.
SECTION 22. Separability Clause. If any provision of this Act shall be held unconstitutional or

invalid, the other provisions not otherwise affected shall remain in full force and effect.
SECTION 23. Repealing Clause. All laws, executive issuances or parts thereof which are
inconsistent herewith are hereby repealed or amended accordingly.
SECTION 24. Effectivity Clause. This Act shall take effect upon its publication in at least one (1)
newspaper of general circulation. cd
Approved: March 13, 1992

REVENUE REGULATIONS NO. 02-95

SUBJECT
:
Implementing Republic Act No. 7833, An Act to Exclude the Benefits
Mandated Pursuant to Republic Act No. 6686 and Presidential Decree No. 851, as
Amended, and other Benefits from the Computation of Gross Compensation Income
for the Purposes of Determining Taxable Compensation Income, Amending for the
Purpose Section 28 (b) (8) of the National Internal Revenue Code, as Amended
TO

All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. Pursuant to Section 245 and 72 of the National Internal Revenue Code
(NIRC), as amended, in relation to Section 3 of Republic Act No. 7833, these Regulations are
hereby promulgated to implement the provisions of Section 28 (b) (9) (6) of the NIRC, as
amended, excluding from the computation of gross compensation income, for purposes of
determining taxable compensation income, the 13th month pay and other benefits.
SECTION 2. Definition of Terms. For purposes of these Regulations, the following definitions of
words and phrases are hereby adopted:

a)

"Act" refers to Republic Act No. 7933.

b)
"Exclusions" shall mean the total benefits which are not included in the computation of
gross compensation income for purposes of determining taxable compensation income and are,
therefore, exempt from the withholding tax on wages.
c)
"Gross compensation income" means all remunerations for services performed by an
employee for his employer, whether paid in cash or in kind, unless specifically excluded under
Secs. 27 and 28 of the NIRC, as amended.
d)
"Immediately succeeding payroll period" refers to the payroll period beginning January,
1995.
e)
"Other benefits" refer to all benefits other than the 13th month pay, such as, the annual
Christmas bonus given by private offices, 14th month pay, mid-year productivity incentive bonus,
gifts in cash or in kind and other similar benefits received by an official or employee for one
calendar year in an amount not exceeding Twelve Thousand Pesos (P12,000.00) as maximum
limit.
f)
"Taxable compensation income" means gross compensation income less personal and
additional exemptions provided for under Sec. 29 (l) of the NIRC, as amended.
g)
"13th month pay" refers to the mandatory one month basic salary of an official or
employee of the National Government, Local Government Units, agencies and instrumentalities,
including government-owned and -controlled corporations, and of private offices received after
the 12th month pay.
h)
"Total benefits" refer to the sum of all the benefits received by an official or employee
for one calendar year in accordance with the provisions of the "Act."
i)

"Which shall be integrated in" shall mean "which shall be added to".

SECTION 3. Benefits Exempted from Income Tax. For purposes of determining the taxable
compensation income, the following benefits shall be excluded from the gross compensation
income, viz:
a)
13th month pay equivalent to the mandatory one (1) month basic salary of officials and
employees of the Government (whether national or local), including government-owned and
-controlled corporations, and of private offices received after the 12th month pay beginning CY
1994; and
b)
Other benefits, such as, Christmas bonus given by, private offices to their officials and
employees, productivity incentives bonus, loyalty award, gifts in cash or in kind and other
benefits of similar nature actually received by officials and employees of both Government and
private offices in an amount not exceeding Twelve Thousand Pesos (12,000.00) for one (1)
calendar year.
The above-stated exclusions [(a) and (b)] shall cover benefits paid or accrued beginning January
1, 1994 but shall be limited only to an amount not exceeding Twelve Thousand Pesos
(P12,000.00) in the case of the "other benefits" contemplated under paragraph (b) above,
provided, however, that when added to the 13th month pay, the total amount of tax exempt
benefits shall not exceed Thirty Thousand Pesos (P30,000.00).
ILLUSTRATIONS:
CASE NO. 1.
During CY 1994, Mr. "A", and official of a private corporation, received the following 13th month
pay and other benefits from his employer, such as:
13th month pay

P30,000.00

Other benefits:
Christmas bonus

P15,000.00

14th month pay

30,000.00

Mid-year productivity
bonus 10,000.00

55,000.00

TOTAL BENEFITS RECEIVED

for CY 1994

P85,000.00
========

In this illustration, Mr. "A" shall only be exempted on his 13th month pay of P30,000. His "other
benefits" amounting to P55,000 are subject to the withholding tax on wages.
CASE NO. 2.
On the other hand, Mr. "B", a government employee, received the following 13th month pay and
other benefits, such as:
13th month pay/Christmas bonus

P8,000.00

Other benefits:
Productivity incentives bonus
Cash gift

1,000.00

P12,000.00

13,000.00

TOTAL BENEFITS RECEIVED

for CY 1994

P21,000.00
========

Mr. "B" shall only be exempt on a total of P20,000.00, representing 13th month pay of P8,000.00
plus "other benefits" of P12,000.00 only.
SECTION 4. Computation of Refundable/Creditable Taxes Withheld on the Exempt 13th Month
Pay and Other Benefits. (a) In general. The employer shall compute the
refundable/creditable amount of taxes withheld on the exempt 13th month pay and other benefits
of employees through the annualized computation prescribed in Section 71(8)(2)(b) of Revenue
Regulations No. 6-82, as amended by RR No. 4-93, implementing R.A. No. 7497, otherwise
known as the "Final Withholding Tax on Compensation Income."
(b)
Refund/Credit to Employees of Excess Taxes Withheld. Any excess in the taxes withheld
resulting from the annualized computation shall be credited/refunded to the employees. In return,
the employer is entitled to deduct the amount refunded/credited from the remittable amount of
taxes withheld from compensation income in the current month in which refund/credit was made,
and in the succeeding months thereafter until the amount refunded/credited by the employer is
fully repaid.
ILLUSTRATIONS:
1.

The year-end adjustment computation resulted to a REFUND.

(aa)

Employee with Only One Employee During the Year.

ABC COMPANY
Employee "A" (single)


Salaries

P78,000.00

13th month pay

12,000.00

Other Benefits

10,000.00

Gross Compensation Income

Less:

P100,000.00

Non-taxable
Benefits:

13th month pay

P12,000

Other benefits

10,000

22,000.00

P78,000.00
Less:

Personal Exemption

9,000.00

Taxable Compensation
Tax Due
Less:

P69,000.00

P7,785.00

Tax Withheld

(13,675.00)

AMOUNT TO BE REFUNDED by
ABC CO. to Employee "A"

(P5,890.00)
========

on or before JANUARY 25, 1995

OR
TO BE CREDITED against Taxes
Withheld due from the Employee
for Succeeding Month/s Beginning
following Sample Computation
No. 1 (cc).
(bb)

Employee with Successive Employment Within the Year.

Employee "B" (single)

ABC Co.

DEF. Co.

(Previous Employer) (Present Employer)

Jan.-June, 1994

Nov.-Dec., 1994

Salaries/Allowances P78,000.00

Salaries

13th Month Pay

12,000.00

13th month pay

8,000.00

Other Benefits

10,000.00

Other Benefits

3,000.00

P20,000.00

P100,000.00

P31,000.00

Less: Personal

ADD: Income From

Exemption

Previous Employer

9,000.00

100,000.00

LESS:
Net Taxable
Income

Non Taxable
91,000.00

Benefits:

13th Month Pay

TAX DUE

P11,965.00

TAX WITHHELD

ABC Co.

P12,000

P11,965.00

DEF Co.

8,000 P20,000

*Other Benefits
ABC Co.

P10,000

DEF Co.

3,000

P13,000

10,000

30,000.00

P101,000.00
LESS: Personal Exemption

9,000.00

Taxable Compensation
Income

P92,000.00

TAX DUE

P12,155.00

TAX WITHHELD
ABC Co.

P11,965.00

DEF Co.

3,279.66

(15,244.66)

AMOUNT TO BE REFUNDED BY DEF Co.

to EMPLOYEE "B" on or before
JANUARY 25, 1995

(P3,089.66)

OR
TO BE CREDITED against Taxes Withheld
due from Employee for Succeeding Month/s
beginning January 1995. (Please see
Sample Computation No. 1 (cc).

(cc)
Crediting of Refundable Amounts Against Taxes Withheld Due From Employees For The
Succeeding Month/s.
Amount of refund to be credited against taxes withheld due from Employee "B" [Based on Sample
Computation No. 1 (bb) above) beginning January, 1995 P 3,089.66

Computation of Taxes Withheld

for the month of
January, 1995
Salaries/Allowances
Taxable:

P10,000.00

Tax Required to be Withheld for the

month of January, 1995
(Use Line 2 Col. 8 of the
Withholding Tax Table):

P1,359.66

Less: Refund for CY 1994 due to

Non-Taxability of Bonus and
Other Benefits beginning
Jan. 1995

(3,035.66)

Balance to be credited in succeeding

month/s

(P1,730.00)

February. 1995
Tax Required to be Withheld for the
Month of February

P1,359.66

Amount to be credited
for February (1,730.00)

Balance of Amount to be Credited for the Month

of March

(P370.34)

March. 1995
Tax Required to be Withheld for the Month
of March

P1,359.66

Amount to be Credited
for March

(370.34)


Amount to be Remitted
for March on or before
April 10, 1995

P989.32

=======
2.

The year-end adjustment resulted to a COLLECTIBLE AMOUNT (instead of a refund).

During CY 1994, an employee (single) of a private corporation, received the following

compensation, month pay and other benefits:
Salaries/allowances P5,000/mo. x 12 mos.
13th Month pay

P60,000.00

5,000.00

Gift in kind

5,000.00

Cash gift

10,000.00

Christmas Bonus

5,000.00

Total Gross Compensation Income P85,000.00

Less: 13th Month Pay
Other Benefits

P5,000

12,000

17,000.00

Gross Compensation Income After
Deducting Exclusions Under RA 7333
Less: Personal Exemption

68,000.00

9,000.00

Taxable Compensation Income

Tax Due

P59,000.00

P3,925.00

Tax Withhold
Jan.-Nov., 1994

P393.80/mo. x 11 mos.

(4,331.80)

Tax Collectible to be Withheld fromP1,593.20

December salary

=========

Note: NO REFUND OF WITHHOLDING TAX FOR BONUS AND OTHER BENEFITS WOULD RESULT DUE
TO UNDER WITHHOLDING IN PREVIOUS MONTHS OF THE YEAR.
SECTION 5. Refund/Credit of Taxes Withheld from employees Separated from Employment. a)
An employee separate from the service of his previous employer but is presently employed by
another employer shall be refunded/credited the taxes withheld on his exempt 13th month pay
and other benefits by his present employer. The present employer shall compute the aforesaid
excess withholding tax using the annualized computation set forth in Section 7I (B) (2) (b) of RR
No., 6-82, as amended by RR No. 4-93.

(b)
An employee who has been separated from a previous employer but has no present
employment shall claim his refund of excess tax withheld on his 13th month pay and other
benefits by filing with the BIR a refundable income tax return for CY 1994, provided that the
refundable ITR for 1994 reflects the taxes withheld on his 13th month pay and other benefits.
SECTION 6. Concurrent Multiple Employments. An employee is employed by two or more
employers at the same time during the taxable year shall be refunded/credited the taxes withheld
on his 13th month pay and "other benefits" by his main employer, e.g., the employer paying the
highest wage/salary. The said main employer shall determine the maximum allowable 13th
month pay and "other benefits" received from both main and secondary employer/s in
annualizing the taxable compensation income at year-end adjustment. For this purpose, the
secondary employer/s shall furnish the main employer a certification as to the amount of the 13th
month pay and other benefits received by the employee.
SECTION 7. The Employee's Withholding Statement (W-2). The employer shall furnish each
employee with the original and duplicate copies of BIR Form W-2 showing the name and address
of the employer, employer's TIN, name and address of the employee, taxpayer/employee's TIN,
amount of exemptions claimed, the sum of compensation paid (excluding the total non-taxable
benefits), the amount of tax due and the amount of tax withheld during the calendar year.
The statement must be signed by both the employer or other authorized officer and the
employee and shall contain a written declaration that it is made under the penalties of perjury.
If the employer is the Government of the Philippines, its political subdivision, agency or
instrumentality or government-owned or controlled corporation, the statement shall be signed by
the duly designated officer or employee.
SECTION 8. Annual Return of Income Tax Withheld on Compensation. Every employer or
other person required to deduct and withhold the tax shall, on or before January 31st of the
succeeding year, file with either the Collection Agent or authorized Municipal Treasurer or
Revenue District Officer or Commissioner of Internal Revenue the Annual Return of Income Tax
Withheld on Compensation [BIR 1743-1R (Annex "A")] to be submitted with an alphabetical list of
employees both in duplicate copies.
The Annual Return of Income Tax Withheld on Compensation must show the following:
a)

Withholding agent's registered name, address and taxpayer's identification number (TIN);

b)

Amount and date of remittance for the 12 months of one calendar year; and

c)

Name of Bank, Bank Code/ROR (if any).

The alphabetical list of employees must show the following:

a)

Name and TIN of employees/taxpayers;

b)
Gross compensation paid by all present and previous employers for the calendar year
segregating the taxable from the non-taxable compensation income;
c)

Amount of exemptions;

d)

Tax required to be withheld computed in accordance with Section 21(a) of the Tax code;

e)

Tax withheld by all present and previous employers for the calendar year; and

f)

Adjustment, if any.

The alphabetical list of employees shall be prepared indicating separate listings of the following:
a.

Employees as of December 31 of the taxable year;

b.
Employees terminated prior to the year-end adjustment computation showing the month
of termination/month of last payment of compensation during the year of termination;
c.

Employees (non-resident citizen) whose services are rendered abroad; and

d.

Alien employees subject to final withholding tax.

SECTION 9. Transitory Provision. Employers who have already given the 13th month pay and
"other benefits" to their employees and had withheld and remitted the tax due thereon prior to
the approval of R.A. No. 7833 on December 8, 1994 shall, in annualizing and computing the
annual income and the tax due from their employees, exclude the 13th month pay and "other
benefits", which shall be limited only to an amount not exceeding Twelve Thousand Pesos
(P12,000.00) in the case of the "other benefits" contemplated under Sec. 3, par, (b) of these
Regulations and provided, further, that when the amount of these said "other benefits" is added
to the "13th month pay" contemplated under Sec. 3, par. (a) also of these Regulations, the total
amount of tax exempt benefits shall not exceed Thirty Thousand Pesos (P30,000.00).
SECTION 10. Repealing Clause. All laws, decrees, orders, rules, and regulations and other
issuances inconsistent with the "Act" and these Regulations are hereby amended, modified or
repealed accordingly.
SECTION 11. Effectivity. These Regulations shall take effect fifteen (15) days after its
publication in a newspaper of general circulation.

REVENUE MEMORANDUM CIRCULAR NO. 36-94

Subject
:
Publishing the full text of Republic Act No. 7833 an Act excluding
the benefits mandated pursuant to Republic Act No. 6686 and Presidential Decree No.
851, as amended, and other benefits from the computation of gross compensation
income for purposes of determining taxable compensation income, amending for the
purpose Section 28 (b) (8) of the National Internal Revenue Code, as amended.
To

All Internal Revenue Officers and Others Concerned.

For the information and guidance of all concerned, quoted hereunder is the full text of Republic
Act No. 7833:
"REPUBLIC ACT NO. 7833
"AN ACT TO EXCLUDE THE BENEFITS MANDATED PURSUANT TO REPUBLIC ACT NO. 6686 AND
PRESIDENTIAL DECREE NO. 851, AS AMENDED, AND OTHER BENEFITS FROM THE COMPUTATION
OF GROSS COMPENSATION INCOME FOR PURPOSES OF DETERMINING TAXABLE COMPENSATION
INCOME, AMENDING FOR THE PURPOSE SECTION 28 (b)(8) OF THE NATIONAL INTERNAL REVENUE
CODE, AS AMENDED.
"Sec. 1.
A new sub-paragraph to be known as sub-paragraph (F) is hereby inserted at the
end of Section 28 (b) (8) of the National Internal Revenue Code, as amended, which shall read as
follows:
"(F)

13th month pay and other benefits. cdasia

"(i)
Benefits received by officials and employees of the national and local governments
pursuant to Republic Act No. 6686.
"(ii)
Benefits received by employees pursuant to Presidential Decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986;
"(iii) Benefits received by officials and employees not covered by Presidential Decree No. 851,
as amended; and
"(iv) Other benefits such as productivity incentives and Christmas bonus in an amount not
exceeding Twelve Thousand Pesos (P12,000) which shall be integrated in the 13th month pay
solely for purposes of this Act.
"Provided, however, That the exclusion shall only apply to the first Thirty Thousand Pesos
(P30,000).
"Sec. 2.
The exclusion herein provided shall cover benefits paid or accrued beginning
January 1, 1994. cdasia
"For purposes of reimbursing the officials or employees who may have received the benefits
covered by this Act before its effectivity, the withholding agents are hereby authorized not to
deduct the withholding taxes in the immediately succeeding payroll periods corresponding to the
amount previously withheld from the benefits.
"Sec. 3.
The Secretary of Finance shall, upon the recommendation of the Commissioner of
Internal Revenue, promulgate the necessary rules and regulations for the effective
implementation of the provision of this Act.
"Sec. 4.
All laws, decrees, orders, rules and regulations and other issuances inconsistent
with this Act are hereby repealed or amended accordingly.
"Sec. 5.
This Act shall take effect fifteen (15) days after its complete publication in the
Official Gazette or in any two (2) newspapers of general circulation, whichever comes earlier.

"APPROVED.
(Sgd.) (Sgd.)
EDGARDO J. ANGARA

JOSE DE VENECIA, JR.

President of the Senate

Speaker of the House

of Representatives
"This Act which originated in the House of Representatives was finally passed by the House of
Representatives and the Senate on December 6, 1994. cdasia
EDGARDO E. TUMANGAN

CAMILO L. SABIO

Secretary of the Senate

Secretary General

House of Representatives
"APPROVED.
"December 8, 1994
(Sgd.)
FIDEL V. RAMOS
President of the Philippines"
SALIENT FEATURES
1.
Before the amendment of Section 28 (b) (8) of the National Internal Revenue Code (NIRC)
by R.A. No. 7833, the following benefits received by officials and employees of both public
(national and local) and private offices, viz:
(F)

13th month pay and other benefits. cd

a.
Annual Christmas bonus equivalent to one (1) month basic salary and additional cash gift
of One Thousand Pesos (P1,000.00) received by National and Local Government officials and
employees starting CY 1988 in accordance with R.A. No. 6686;
b.
Benefits received by employees pursuant to P.D. No. 851 , as amended by Presidential
Memorandum Order No. 28 dated August 13, 1986 requiring all employers to pay all their rankand-file employees a 13th month pay not later than December 24 of every year;
c.
and

Benefits received by officials and employees not covered by P.D. No. 851, as amended;

d.
Other benefits such as productivity incentives and Christmas bonus in an amount not
exceeding Twelve Thousand Pesos (P12,000.00) which shall be integrated in the 13th month pay
solely for purposes of R.A. No. 7833.
were taxable compensation income under Section 21(a) in relation to Section 72, both of the
NIRC, as amended, subject to withholding tax under Revenue Regulations No. 6-82, as amended
by Revenue Regulations No. 4-93.
2.
Under sub-paragraph (F) of Section 28 (b) (8) of the NIRC, as amended by R.A. No. 7833,
the 13th month pay and other benefits aforestated, received by officials and employees of the
National Government, Local Government Units and agencies, including government-owned and
controlled corporations, as well as by officials and employees of private corporations and entities,
are exempt from income tax, and consequently from the withholding tax on wages. Provided, that
the exclusions/exemptions from gross compensation income shall cover the 13th month pay and
"other benefits" in the aggregate amount not exceeding P30,000 received by the officials and

employees paid or accrued beginning January 1, 1994. The aforesaid "other benefits " as
contemplated under Section 1 (F) (iv) of R.A. No. 7833 shall not exceed P12,000, which amount
shall be integrated in the 13th month pay. Accordingly, benefits in excess of P30,000.00 shall be
taxable and subject to the withholding tax only insofar as the amount in excess of P30,000.00.
Illustration:
During CY 1994, Mr. "X", an employee of a private corporation, received the following 13th month
pay and other benefits from his employer, such as:
13th month pay

P15,000.00

Christmas bonus

10,000.00

Other benefits:
Gift in kind

2,000.00

Additional cash gift 1,000.00

Mid-year productivity
incentive bonus

5,000.00

_________
TOTAL

P33,000.00
========

Under the amendment introduced by R.A. No. 7833 to Section 28(b)(8) of the NIRC, wherein subparagraph (F) has been inserted at the end thereof, the computation of the amount of the
benefits which shall be excluded/exempted from the taxable compensation income and/or those
subject to withholding tax on wages, if any, shall be as follows:
I.

Computation of whether the full amount of subject "other benefits", as

contemplated under Section 1 (F) (iv) of RA 7833, is exempt from
withholding tax on wages.

Christmas bonus
Plus:

P10,000

Other benefits:
Gift in kind

P 2,000

Additional cash gift 1,000

Mid-year productivity
incentive bonus
--TOTAL
Less:

5,000 8,000

---

P18,000
P12,000 maximum exemption
for "other benefits" as
contemplated under Sec.
1(F)(iv) of RA 7833

(12,000)

--TAXABLE "OTHER BENEFITS"

SUBJECT TO WITHHOLDING TAX
ON WAGES

P 6,000
======

II.

Computation of total benefits excluded/exempted from withholding tax on

wages when the "other benefits" are integrated in the 13th month pay.

13th month pay

Plus:

P15,000

Maximum allowable exemption/

exclusion of P12,000 for
"other benefits" as contemplated
under Sec. 1 (F) (iv) of RA 7833
(please refer to Computation
No. I above)

12,000
---

TOTAL EXCLUSIONS/EXEMPTION FROM

TAXABLE COMPENSATION INCOME

P27,000

======
3.
For purposes of reimbursing the officials and employees of the income taxes withheld and
already remitted to the BIR, the following guidelines shall be followed:
a.
Employers who have already given the 13th month pay and other benefits to their
employees, and had withheld and remitted the tax due thereon prior to the approval of R.A. No.
7833 (December 8, 1994) shall, in annualizing and computing the annual income and the tax due
from their employees, exclude the 13th month pay and other benefits. Any excess in the tax
withheld shall be refunded by the employer to the respective employees or credited against the
tax required to be withheld from the compensation of the employees beginning January, 1995.
The employer shall then be allowed to credit and deduct from its subsequent remittances of taxes
withheld on compensation income of their employees for the succeeding months;
b.
Taxes withheld on the 13th month pay and other benefits given last November, which
should otherwise be remitted by the employer-withholding agent on December 12, 1994, shall no
longer be remitted to the BIR. Said withheld amount should be refunded to the employees
concerned; and
c.
The exemption/exclusion provided for under R.A. No. 7833 shall cover the 13th month pay
and "other benefits" in the aggregate amount not exceeding P30,000 received by the officials and
employees paid or accrued beginning January 1, 1994, provided, however, that the aforesaid
"other benefits" as contemplated under Sec. 1 (F) (iv) of R.A. No. 7833 shall not exceed P12,000
which amount shall be integrated in the 13th month pay.
It is desired that this Circular be given as wide a publicity as possible. aisa dc

REVENUE REGULATIONS NO. 03-98

SUBJECT
:
Implementing Section 33 of the National Internal Revenue Code, as
Amended by Republic Act No. 8424 Relative to the Special Treatment of Fringe Benefits
TO

All Internal Revenue Officers and Others Concerned

Pursuant to Section 244, in relation to Section 33 of the National Internal Revenue Code of 1997 ,
these Regulations are hereby promulgated to govern the collection at source of the tax on fringe
benefits which have been furnished, granted or paid by the employer beginning January 1, 1998.
cda
SEC. 2.33.

SPECIAL TREATMENT OF FRINGE BENEFITS

(A)
Imposition of Fringe Benefits Tax A final withholding tax is hereby imposed on the
grossed-up monetary value of fringe benefit furnished, granted or paid by the employer to the
employee, except rank and file employees as defined in these Regulations, whether such
employer is an individual, professional partnership or a corporation, regardless of whether the
corporation is taxable or not, or the government and its instrumentalities except when: (1) the
fringe benefit is required by the nature of or necessary to the trade, business or profession of the
employer; or (2) when the fringe benefit is for the convenience or advantage of the employer. The
fringe benefit tax shall be imposed at the following rates:
Effective January 1, 1998

34%

Effective January 1, 1999

33%

Effective January 1, 2000

32%

The tax imposed under Sec. 33 of the Code shall be treated as a final income tax on the
employee which shall be withheld and paid by the employer on a calendar quarterly basis as
provided under Sec. 57 (A) (Withholding of Final Tax on certain Incomes) and Sec. 58 A (Quarterly
Returns and Payments of Taxes Withheld) of the Code.

The grossed-up monetary value of the fringe benefit shall be determined by dividing the
monetary value of the fringe benefit by the following percentages and in accordance with the
following schedule:
Effective January 1, 1998

66%

Effective January 1, 1999

67%

Effective January 1, 2000

68%

The grossed-up monetary value of the fringe benefit represents the whole amount of income
realized by the employee which includes the net amount of money or net monetary value of
property which has been received plus the amount of fringe benefit tax thereon otherwise due
from the employee but paid by the employer for and in behalf of his employee, pursuant to the
provisions of this Section.
Coverage These Regulations shall cover only those fringe benefits given or furnished to
managerial or supervisory employees and not to the rank and file.
The term, "RANK AND FILE EMPLOYEES" means all employees who are holding neither managerial
nor supervisory position. The Labor Code of the Philippines, as amended, defines "managerial
employee" as one who is vested with powers or prerogatives to lay down and execute
management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or
discipline employees. "Supervisory employees" are those who, in the interest of the employer,
effectively recommend such managerial actions if the exercise of such authority is not merely
routinary or clerical in nature but requires the use of independent judgment. cdtai
Moreover, these regulations do not cover those benefits properly forming part of compensation
income subject to withholding tax on compensation in accordance with Revenue Regulations No.
2-98.
Fringe benefits which have been paid prior to January 1, 1998 shall not be covered by these
Regulations.
Determination of the Amount Subject to the Fringe Benefit Tax In general, the computation of
the fringe benefits tax would entail (a) valuation of the benefit granted and (b) determination of
the proportion or percentage of the benefit which is subject to the fringe benefit tax. That the Tax
Code allows for the cases where only a portion (i.e. less than 100 per cent) of the fringe benefit is
subject to the fringe benefit tax is clearly stated in Section 33 (a) of R.A. 8424 which stipulates
that fringe benefits which are "required by the nature of, or necessary to the trade, business or
profession of the employer, or when the fringe benefit is for the convenience or advantage of the
employer" are not subject to the fringe benefit tax. Thus, in cases where the fringe benefits entail
joint benefits to the employer and employee, the portion which shall be subject to the fringe
benefits tax and the guidelines for the valuation of fringe benefits are defined under these rules
and regulations.
Unless otherwise provided in these regulations, the valuation of fringe benefits shall be as
follows:
(1)
If the fringe benefit is granted in money, or is directly paid for by the employer, then the
value is the amount granted or paid for.
(2)
If the fringe benefit is granted or furnished by the employer in property other than money
and ownership is transferred to the employee, then the value of the fringe benefit shall be equal
to the fair market value of the property as determined in accordance with Sec. 6 (E) of the Code
(Authority of the Commissioner to Prescribe Real Property Values).
(3)
If the fringe benefit is granted or furnished by the employer in property other than money
but ownership is not transferred to the employee, the value of the fringe benefit is equal to the
depreciation value of the property.
Taxation of fringe benefit received by a non-resident alien individual who is not engaged in trade
or business in the Philippines A fringe benefit tax of twenty-five percent (25%) shall be
imposed on the grossed-up monetary value of the fringe benefit. The said tax base shall be

computed by dividing the monetary value of the fringe benefit by seventy-five per cent (75%).
Taxation of fringe benefit received by (1) an alien individual employed by regional or area
headquarters of a multinational company or by regional operating headquarters of a
multinational company; (2) an alien individual employed by an offshore banking unit of a foreign
bank established in the Philippines; (3) an alien individual employed by a foreign service
contractor or by a foreign service subcontractor engaged in petroleum operations in the
Philippines; and (4) any of their Filipino individual employees who are employed and occupying
the same position as those occupied or held by the alien employees. A fringe benefit tax of
fifteen per cent (15%) shall be imposed on the grossed-up monetary value of the fringe benefit.
The said tax base shall be computed by dividing the monetary value of the fringe benefit by
eighty-five per cent (85%). cdrep
Taxation of fringe benefit received by employees in special economic zones Fringe benefits
received by employees in special economic zones, including Clark Special Economic Zone and
Subic Special Economic and Free Trade Zone, are also covered by these regulations and subject to
the normal rate of fringe benefit tax or the special rates of 25% or 15% as provided above.
(B)
Definition of Fringe Benefit In general, except as otherwise provided under these
regulations, for purposes of this Section, the term "FRINGE BENEFIT" means any good, service, or
other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries,
to an individual employee (except rank and file employee as defined in these regulations) such
as, but not limited to the following:
(1)

Housing;

(2)

Expense account;

(3)

Vehicle of any kind;

(4)

Household personnel, such as maid, driver and others;

(5)
Interest on loan at less than market rate to the extent of the difference between the
market rate and actual rate granted;
(6)
Membership fees, dues and other expenses borne by the employer for the employee in
social and athletic clubs or other similar organizations;
(7)

Expenses for foreign travel;

(8)

Holiday and vacation expenses;

(9)

Educational assistance to the employee or his dependents; and

(10) Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows.
For this purpose, the guidelines for valuation of specific types of fringe benefits and the
determination of the monetary value of the fringe benefits are give below. The taxable value shall
be the grossed-up monetary value of the fringe benefit.
(1)

Housing privilege

(a)
If the employer leases a residential property for the use of his employee and the said
property is the usual place of residence of the employee, the value of the benefit shall be the
amount of rental paid thereon by the employer, as evidenced by the lease contract. The
monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit.
(b)
If the employer owns a residential property and the same is assigned for the use of his
employee as his usual place of residence, the annual value of the benefit shall be five per cent
(5%) of the market value of the land and improvement, as declared in the Real Property Tax
Declaration Form, or zonal value as determined by the Commissioner pursuant to Section 6(E) of
the Code (Authority of the Commissioner to Prescribe Real Property Values), whichever is higher.
The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit.
cda

The monetary value of the housing fringe benefit is equivalent to the following:
MV = [5%(FMV or ZONAL VALUE] X 50%
WHERE:
MV = MONETARY VALUE
FMV = FAIR MARKET VALUE
(c)
If the employer purchases a residential property on installment basis and allows his
employee to use the same as his usual place of residence, the annual value of the benefit shall
be five per cent (5%) of the acquisition cost, exclusive of interest. The monetary value of fringe
benefit shall be fifty per cent (50%) of the value of the benefit.
(d)
If the employer purchases a residential property and transfers ownership thereof in the
name of the employee, the value of the benefit shall be the employer's acquisition cost or zonal
value as determined by the Commissioner pursuant to Section 6(E) of the Code (Authority of the
Commissioner to Prescribe Real Property Values), whichever is higher. The monetary value of the
fringe benefit shall be the entire value of the benefit.
(e)
If the employer purchases a residential property and transfers ownership thereof to his
employee for the latter's residential use, at a price less than the employer's acquisition cost, the
value of the benefit shall be the difference between the fair market value, as declared in the Real
Property Tax Declaration Form, or zonal value as determined by the Commissioner pursuant to
Sec. 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values),
whichever is higher, and the cost to the employee. The monetary value of the fringe benefit shall
be the entire value of the benefit.
(f)
Housing privilege of military officials of the Armed Forces of the Philippines (AFP)
consisting of officials of the Philippine Army, Philippine Navy and Philippine Air Force shall not be
treated as taxable fringe benefit in accordance with the existing doctrine that the State shall
provide its soldiers with necessary quarters which are within or accessible from the military camp
so that they can be readily on call to meet the exigencies of their military service.
(g)
A housing unit which is situated inside or adjacent to the premises of a business or factory
shall not be considered as a taxable fringe benefit. A housing unit is considered adjacent to the
premises of the business if it is located within the maximum of fifty (50) meters from the
perimeter of the business premises.
(h)
Temporary housing for an employee who stays in a housing unit for three (3) months or
less shall not be considered a taxable fringe benefit. cdasia
(2)

Expense account

(a)
In general, expenses incurred by the employee but which are paid by his employer shall
be treated as taxable fringe benefits, except when the expenditures are duly receipted for and in
the name of the employer and the expenditures do not partake the nature of a personal expense
attributable to the employee.
(b)
Expenses paid for by the employee but reimbursed by his employer shall be treated as
taxable benefits except only when the expenditures are duly receipted for and in the name of the
employer and the expenditures do not partake the nature of a personal expense attributable to
the said employee.
(c)
Personal expenses of the employee (like purchases of groceries for the personal
consumption of the employee and his family members) paid for or reimbursed by the employer to
the employee shall be treated as taxable fringe benefits of the employee whether or not the
same are duly receipted for in the name of the employer.
(d)
Representation and transportation allowances which are fixed in amounts and are regular
received by the employees as part of their monthly compensation income shall not be treated as
taxable fringe benefits but the same shall be considered as taxable compensation income subject
to the tax imposed under Sec. 24 of the Code.

(3)

Motor vehicle of any kind

(a)
If the employer purchases the motor vehicle in the name of the employee, the value of the
benefit is the acquisition cost thereof. The monetary value of the fringe benefit shall be the entire
value of the benefit, regardless of whether the motor vehicle is used by the employee partly for
his personal purpose and partly for the benefit of his employer.
(b)
If the employer provides the employee with cash for the purchase of a motor vehicle, the
ownership of which is placed in the name of the employee, the value of the benefits shall be the
amount of cash received by the employee. The monetary value of the fringe benefit shall be the
entire value of the benefit regardless of whether the motor vehicle is used by the employee partly
for his personal purpose and partly for the benefit of his employer, unless the same was
subjected to a withholding tax as compensation income under Revenue Regulations No. 2-98.
(c)
If the employer purchases the car on installment basis, the ownership of which is placed in
the name of the employee, the value of the benefit shall be the acquisition cost exclusive of
interest, divided by five (5) years. The monetary value of the fringe benefit shall be the entire
value of the benefit regardless of whether the motor vehicle is used by the employee partly for
his personal purpose and partly for the benefit of his employer.
(d)
If the employer shoulders a portion of the amount of the purchase price of a motor vehicle
the ownership of which is placed in the name of the employee, the value of the benefit shall be
the amount shouldered by the employer. The monetary value of the fringe benefit shall be the
entire value of the benefit regardless of whether the motor vehicle is used by the employee partly
for his personal purpose and partly for the benefit of his employer. Cdpr
(e)
If the employer owns and maintains a fleet of motor vehicles for the use of the business
and the employees, the value of the benefit shall be the acquisition cost of all the motor vehicles
not normally used for sales, freight, delivery service and other non-personal used divided by five
(5) years. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the
benefit.
The monetary value of the motor vehicle fringe benefit is equivalent to the following:
MV = [(A)/5] X 50%
where:
MV = Monetary value
A = acquisition cost
(f)
If the employer leases and maintains a fleet of motor vehicles for the use of the business
and the employees, the value of the benefit shall be the amount of rental payments for motor
vehicles not normally used for sales, freight, delivery, service and other non-personal use. The
monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit.
(g)
The use of aircraft (including helicopters) owned and maintained by the employer shall be
treated as business use and not be subject to the fringe benefits tax.
(h)
The use of yacht whether owned and maintained or leased by the employer shall be
treated as taxable fringe benefit. The value of the benefit shall be measured based on the
depreciation of a yacht at an estimated useful life of 20 years.
(4)
Household expenses Expenses of the employee which are borne by the employer for
household personnel, such as salaries of household help, personal driver of the employee, or
other similar personal expenses (like payment for homeowners association dues, garbage dues,
etc.) shall be treated as taxable fringe benefits.
(5)

Interest on loan at less than market rate

(a)
If the employer lends money to his employee free of interest or at a rate lower than twelve
per cent (12%), such interest foregone by the employer or the difference of the interest assumed
by the employee and the rate of twelve per cent (12%) shall be treated as a taxable fringe
benefit.

(b)
The benchmark interest rate of twelve per cent (12%) shall remain in effect until revised
by a subsequent regulation.
(c)
This regulation shall apply to installment payments or loans with interest rate lower than
twelve per cent (12%) starting January 1, 1998. prcd
(6)
Membership fees, dues, and other expenses borne by the employer for his employee, in
social and athletic clubs or other similar organizations. These expenditures shall be treated as
taxable fringe benefits of the employee in full.
(7)

Expenses for foreign travel

(a)
Reasonable business expenses which are paid for by the employer for the foreign travel of
his employee for the purpose of attending business meetings or conventions shall not be treated
as taxable fringe benefits. In this instance, inland travel expenses (such as expenses for food,
beverages and local transportation) except lodging cost in a hotel (or similar establishments)
amounting to an average of US$300.00 or less per day, shall not be subject to a fringe benefit
tax. The expenses should be supported by documents proving the actual occurrences of the
meetings or conventions.
The cost of economy and business class airplane ticket shall not be subject to a fringe benefit tax.
However, 30 percent of the cost of first class airplane ticket shall be subject to a fringe benefit
tax.
(b)
In the absence of documentary evidence showing that the employee's travel abroad was
in connection with business meetings or conventions, the entire cost of the ticket, including cost
of hotel accommodations and other expenses incident thereto shouldered by the employer, shall
be treated as taxable fringe benefits. The business meetings shall be evidenced by official
communications from business associates abroad indicating the purpose of the meetings.
Business conventions shall be evidenced by official invitations/communications from the host
organization or entity abroad. Otherwise, the entire cost thereof shouldered by the employer shall
be treated as taxable fringe benefits of the employee.
(c)
Travelling expenses which are paid by the employer for the travel of the family members
of the employee shall be treated as taxable fringe benefits of the employee.
(8)
Holiday and vacation expenses Holiday and vacation expenses of the employee borne
by his employer shall be treated as taxable fringe benefits.
(9)

Educational assistance to the employee or his dependents

(a)
The cost of the educational assistance to the employee which are borne by the employer
shall, in general, be treated as taxable fringe benefit. However, a scholarship grant to the
employee by the employer shall not be treated as taxable fringe benefit if the education or study
involved is directly connected with the employer's trade, business or profession, and there is a
written contract between them that the employee is under obligation to remain in the employ of
the employer for period of time that they have mutually agreed upon. In this case, the
expenditure shall be treated as incurred for the convenience and furtherance of the employer's
trade or business.
(b)
The cost of educational assistance extended by an employer to the dependents of an
employee shall be treated as taxable fringe benefits of the employee unless the assistance was
provided through a competitive scheme under the scholarship program of the company. cda
(10) Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows The cost of life or health insurance and other non-life insurance
premiums borne by the employer for his employee shall be treated as taxable fringe benefit,
except the following: (a) contributions of the employer for the benefit of the employee, pursuant
to the provisions of existing law, such as under the Social Security System (SSS), (R.A. No. 8282,
as amended ) or under the Government Service Insurance System (GSIS) (R.A. No. 8291 ), or
similar contributions arising from the provisions of any other existing law; and (b) the cost of
premiums borne by the employer for the group insurance of his employees.
(C)

Fringe Benefits Not Subject to Fringe Benefits Tax In general, the fringe benefits tax shall

not be imposed on the following fringe benefits:

(1)
Fringe benefits which are authorized and exempted from income tax under the Code or
under any special law;
(2)
Contributions of the employer for the benefit of the employee to retirement, insurance and
hospitalization benefit plans;
(3)
Benefits given to the rank and file, whether granted under a collective bargaining
agreement or not;
(4)

De minimis benefits as defined in these Regulations;

(5)
If the grant of fringe benefits to the employee is required by the nature of, or necessary to
the trade, business or profession of the employer; or
(6)

If the grant of the fringe benefit is for the convenience of the employer.

The exemption of any fringe benefit from the fringe benefit tax imposed under this Section shall
not be interpreted to mean exemption from any other income tax imposed under the Code except
if the same is likewise expressly exempt from any other income tax imposed under the Code or
under any other existing law. Thus, if the fringe benefit is exempted from the fringe benefits tax,
the same may, however, still form part of the employee's gross compensation income which is
subject to income tax, hence, likewise subject to a withholding tax on compensation income
payment.
The term "DE MINIMIS" benefits which are exempt from the fringe benefit tax shall, in general, be
limited to facilities or privileges furnished or offered by an employer to his employees that are of
relatively small value and are offered or furnished by the employer merely as a means of
promoting the health, goodwill, contentment, or efficiency of his employees such as the following:
(1)
Monetized unused vacation leave credits of employees not exceeding ten (10) days during
the year ;
(2)
Medical cash allowance to dependents of employees not exceeding P750 per semester or
P125 per month ;
(3)

Rice subsidy of P350 per month granted by an employer to his employees ;

(4)

Uniforms given to employees by the employer ;

(5)

Medical benefits given to the employees by the employer ;

(6)

Laundry allowance of P150 per month ;

(7)
Employee achievement awards, e.g. for length of service or safety achievement, which
must be in the form of a tangible personal property other than cash or gift certificate, with an
annual monetary value not exceeding one-half (1/2) month of the basic salary of the employee
receiving the award under an established written plan which does not discriminate in favor of
highly paid employees ; dctai
(8)

Christmas and major anniversary celebrations for employees and their guests ;

(9)
Company picnics and sports tournaments in the Philippines and are participated
exclusively by employees ; and
(10) Flowers, fruits, books or similar items given to employees under special circumstances,
e.g. on account of illness, marriage, birth of a baby, etc. .
(D)
Tax Accounting for the Fringe Benefit Furnished to the Employee and the Fringe Benefit Tax
Due Thereon. As a general rule, the amount of taxable fringe benefit and the fringe benefits
tax shall constitute allowable deductions from gross income of the employer. However, if the
basis for computation of the fringe benefits tax is the depreciation value, the zonal value as
determined by the Commissioner pursuant to Section 6(E) of the Code or the fair market value as
determined in the current real property tax declaration of a certain property, only the actual
fringe benefits tax paid shall constitute a deductible expense for the employer. The value of the
fringe benefit shall not be deductible and shall be presumed to have been tacked on or actually

claimed as depreciation expense by the employer.

Provided, however, that if the aforesaid zonal value or fair market value of the said property is
greater than its cost subject to depreciation, the excess amount shall be allowed as a deduction
from the employer's gross income as fringe benefit expense.
Illustrations on fringe benefit furnished or granted by the employer to an employee (other than a
rank-and-file employee)
(1)
During the year 1998, ABC Corporation paid for the monthly rental of a residential house
of its branch manager (Mr. Dela Cruz) amounting to P66,000.00.
In this case, the monthly taxable grossed-up monetary value of the said fringe benefit furnished
or granted to its branch manager (Mr. Dela Cruz) shall be P50,000.00, computed as follows:
Monthly rental for the residential house

P66,000.00

Grossed-up monetary benefit granted

(P66,000.00 divided by 66% factor for
calendar year 1998 times 50% taxable portion) P50,000.00

Fringe benefit tax due thereon (34%)

P17,000.00

=========
ABC Corporation shall take up in its books of accounts the P66,000.00 fringe benefit furnished to
Mr. Dela Cruz, under account title "Fringe Benefit Expense" and the amount of 17,000.00 under
the account title "Fringe Benefit Tax Expense". The aforesaid amounts shall be fully allowed as
deductions from the gross income of ABC Corporation and shall be taken up in the said
employer's books of accounts as follows:
Debit: Fringe Benefit Expense

P66,000

Debit: Fringe Benefit Tax Expense P17,000

Credit: Cash P83,000
To record fringe benefit expense and fringe benefit tax paid on rental of the residential property
furnished to Mr. Dela Cruz for his residential use. (Note: If the fringe benefit expense of
P66,000.00 has already accrued but not yet paid, use the account title "fringe benefit payable". If
the fringe benefit tax has already accrued but not yet paid, use the account title "fringe benefit
tax payable").
(2)
XYZ Corporation owns a condominium unit. During the year 1998, the said corporation
furnished and granted the said property for the residential use of its Assistant Vice-President. The
fair market value of the said property as determined by the Commissioner pursuant to Section
6(E) of the Code amounts P10,000,000.00 while its fair market value as shown in its current Real
Property Tax Declaration amounts to P8,000,000.00. In this case, the higher fair market value of
P10,000,000.00 as determined by the Commissioner shall be used in computing the monetary of
the fringe benefit so furnished or granted to said employee and the fringe benefit tax due thereon
shall be computed as follows:
Monthly rental value of the property
(P10,000,000 times 5% thereof times 50%
divided by 12 months)

P20,833.33

Grossed-up monetary value thereof as fringe

benefit (P20,833.33 divided by 66% factor for
calendar year 1998) P31,565.66
Fringe Benefit tax due thereon (34%)

P10,732.32

=========
In general, under this illustration, the XYZ Corporation shall not further claim deduction for
allowing its Assistant Vice-President the use of its residential property since the cost for the use
thereof has already been recovered as deduction from its gross income under "Depreciation
Expense". However, since the fringe benefit tax in the amount of P10,732.32, assumed and paid
by XYZ corporation has not as yet been recovered by way of deduction from gross income, the
same shall be allowed as a deduction from its gross income. XYZ Corporation shall take up the
foregoing in its books of accounts, as follows:
Debit: Fringe Benefit Tax Expense P10,732.32
Credit: Cash/Fringe Benefit Tax Payable

P10,732.32

To record fringe benefit tax expense for the

residential property furnished to employees.
However, if the cost of the aforesaid condominium unit subject to depreciation allowance
(example: its acquisition cost is only P7,000,000.00) is lesser than its fair market value as
determined by the Commissioner (i.e. P10,000,000.00), the excess amount (i.e. P3,000,000.00)
shall be amortized throughout the remaining estimated useful life of the residential property used
in computing the said employer's depreciation expense and allowed as a deduction from the said
employer's gross income as fringe benefit expense. Thus, if the remaining estimated useful life
thereof during the year 1998 is fifteen (15) years, its monthly amortization shall be computed as
follows:
Monthly amortization (P3,000,000.00 divided by
15 years divided by 12 months)

P16,666.67

In this case, XYZ Corporation shall take up the foregoing in its books of accounts as follows:
Debit: Fringe benefit expense
Debit: Fringe benefit tax

P16,666.67

P10,732.32

Credit: Income constructively realized

P16,666.67

Credit: Cash/Fringe benefit tax payable

P10,732.32

To record fringe benefit and fringe benefit tax expenses and income constructively realized from
the use of company-owned residential property furnished to employees.
REPEALING CLAUSE All existing rules and regulations or parts thereof which are inconsistent
with the provisions of these regulations are hereby revoked. LibLex
EFFECTIVITY These regulations shall take effect on fringe benefits furnished, granted or paid
beginning January 1, 1998.
TRANSITORY PROVISIONS No penalty shall be imposed for late payment of the fringe benefit
tax for the first quarter ending March 1998: Provided, however, that the withholding tax return for
the first quarter shall be filed and the tax is paid not later than July 25, 1998. LLjur

REVENUE MEMORANDUM ORDER NO. 63-99

SUBJECT
:
Determination of Taxable Income on Inter-company Loans or
Advances applying Section 50 of the NIRC, as Amended
TO

All Revenue Officers Concerned

1.

Objectives:

1.1
To adopt the arm's length bargaining standard as the ultimate test for determining the
correct gross income and deductions between two or more enterprises under common control.
cdasia
1.2
To provide a means of redistributing or reapportioning income and expenses of taxpayers
under common control after applying Section 50 of the NIRC, as amended.
2.

Coverage:

This paper applies to all forms of bona fide indebtedness and includes:
2.1
Loans or advances of money or other consideration (whether or not evidence by a written
instrument);
2.2
Indebtedness arising in the ordinary course of business out of sales, leases, or the
rendition of services by or between members of the group, or any other similar extension;
2.3
But does not apply to alleged indebtedness which was in fact a contribution of capital or a
distribution by a corporation with respect to its shares.
3.

Applying Arm's Length on Section 50 of the NIRC, as amended

3.1
Section 50. Allocation of income and deductions. In any case of two or more
organizations, trades, or businesses (whether or not incorporated and whether or not organized in
the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner
of Internal Revenue is authorized to distribute, apportion, or allocate gross income or deductions
between or among such organizations, trades, or businesses, 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 organizations, trades or businesses.
3.2
Section 50 empowers the Commissioner to rectify abnormalities and distortions in income
brought about by common control through the adoption of standards considered fair, reasonable
or at arm's length.
3.3
This Order adopts the arm's length bargaining standard as the ultimate test for
determining the fairness of related party transactions - i.e., "the standard to be applied in every
case is that of an uncontrolled taxpayer dealing at arm's length with another uncontrolled
taxpayer".
4.

Determination of Taxable Income on Inter-company Loans or Advances

4.1
In general. Where one member of a group of controlled entities makes a loan or advances
directly or indirectly, or otherwise becomes a creditor of another member of such group, and
charges no interest, or charges interest at a rate which is not equal to an arm's-length rate as
defined in subparagraph (2) of this paragraph, the Commissioner may make appropriate
allocations to reflect an arm's length interest rate for the use of such loan or advance.
4.1.1 If payments are made to parties under common control according to a legally enforceable
contract, the contract may still be recognized as valid. However, for purposes of determining the
true taxable income of the parties involved, the interest rate charged may be subjected to
reallocation.
4.1.2 Section 50 does not apply only to taxable entities. Reallocation may also apply to taxexempt organizations.
4.2

Arm's Length interest rate.

4.2.1 In general. For purposes of this Order, the arm's length interest rate shall be the rate of
interest which was charged or would have been charged at the time the indebtedness arose in
independent transaction with or between unrelated parties under similar circumstances. All
relevant factors will be considered, including the amount and duration of the loan, the security
involved, the credit standing of the borrower, and the interest rate prevailing at the situs of the
lender or creditor for comparable loans.
4.2.2 For purposes of determining the arm's length rate in domestic transactions, the interest
rate to be used is the Bank Reference Rate (BRR) prescribed by the Bangko Sentral ng Pilipinas
(BSP).
4.2.3 The fact that the interest rate actually charged on a loan or advance is expressly indicated
on a written instrument does not preclude the application of Section 50 to such loan or advance.
5.

Interest Period

5.1
The interest period shall commence at the date the indebtedness arises, except that with
respect to indebtedness arising in the ordinary course of business out of sales, leases, or supply
of goods and services which are generally considered as trade accounts receivables or payables,
the interest period shall not commence if the taxpayer is able to establish that the normal trade
practice in a given industry is to allow balances, in the case of similar transactions with unrelated
parties, to remain outstanding for a longer period without charging interest.
5.2
For purposes of determining the period of time for which a balance is outstanding,
payments or credits shall be applied against the earliest balance outstanding. The taxpayer may,
in accordance with an agreement, apply such payments or credits in some other order in its
books only after establishing that the arrangement is customary for parties in that particular
business. LLjur
6.

Effectivity

This Order shall take effect immediately.

BIR RULING NO. 108-93 (note: datre in the syllabus is wrong)

PROPERTY DIVIDENDS OF SEACOM STOCKHOLDERS SUBJECT TO 0% FINAL
WITHHOLDING TAX
21 (c) (2) 276-91 108-93
Villaraza & Cruz
5/F LTA Building
118 Perea Street
Legaspi Village Makati,
Metro Manila
Attention: Attys. Inocencio P. Ferrer, Jr.
Lucito A. Tan
Othelo C . Carag

This refers to your letter dated 11 March 1993 stating that your client, SEA COMMERCIAL
COMPANY, INC. (SEACOM), is a domestic corporation with an authorized capital stock of Thirty
Million Pesos (P30,000,000.00), divided into Thirty Thousand (30,000) Preferred shares of stock
and Two Hundred Seventy Thousand (270,000) Common shares of stock, all with a par value of
One Hundred Pesos (P100.00) per share, of which One Hundred Fifty Five Thousand Three
Hundred Two (150,302) Common shares of stock are issued and outstanding as of 31 December
1991; and that as of 31 December 1991, it had a total stockholder's equity in the amount of
Thirty Four Million Seven Hundred Nine Thousand Five Hundred Five Pesos (P34,709,505.00),
which include unrestricted retained earnings in the amount of Nineteen Million Four Hundred
Sixty Nine Thousand Four Hundred Forty One Pesos (P19,469,441.00); that on 15 June 1992, the
Corporation declared all of its unrestricted retained earnings as of 31 December 1991 as
dividends in favor of stockholders of record as of 15 June 1992, payable on or before 15 April
1993, that said dividends shall be distributed in the form of cash in the amount of Seven Million
Five Hundred Twenty Thousand Three and 08/100 Pesos (P7,520,003.08), and the following
properties with a total book value of Eleven Million Nine Hundred Forty Nine Thousand Four
Hundred Thirty Seven and 92/100 Pesos (P11,949,437.92): cdta
Properties
1.

Book Value

a determined portion of a parcel of land situated

in Barrio Mapuntod, Municipality of Mandaluyong;

2.

a parcel of land situated in Barangay Labogon,

City of Mandaue;

3.

932,491.00

a parcel of land situated in Mandaue, Island

of Cebu;

4.

103,678.00

a parcel of land situated in Kauswagan and

Carmen, City of Cagayan de Oro;

5.

150,000.00

a parcel of land situated in Barrio of San Dionisio,

Municipality of Paraaque; and

6.

P375,206.55

60,000.00

a determined portion of a parcel of land situated

in Barrio San Dionisio, Municipality of Paraaque;
and

854,243.90

7.

a parcel of land situated in Cebu City.

8.

shares of stock of Sea Commercial Company, Inc.

in Rio Southeast Asia, Inc.

3,424,596.97

6,049,221.50

Total

P11,949,437.92
===========

that the aforementioned real and personal properties are capital assets of the Corporation, which
are not used and not intended to be used by the Corporation in its ordinary course of business;
that the properties declared as dividends were recorded in the books of the Corporation at their
book values; that the total book value of the property dividends is equivalent only to Twenty-Five
and 80/100 percent (25.8%) of SEACOM'S assets for the year ended 31 December 1991; and that
the Corporation continues to do business and its stockholders have no intention of liquidating the
corporation after the declaration of property dividends. cdtech
In connection therewith, you now request confirmation of your opinion as follows:
"1.
The declared property dividend consisting of real estate properties and shares of stock in
another corporation can be recorded at their respective book value in the books of SEACOM, and

SEACOM's stockholders can record the dividends thus received at SEACOM's book value. . . .;
"2.
the proposed property dividend which shall be received by the stockholders of SEACOM
shall be subject to a final withholding tax of zero (0%) percent, and the receiving stockholders
shall not be subject to any income or capital gains tax arising from their receipt of these real
estate properties as property dividend. ...;
"3.
SEACOM shall not be subject to any income or capital gains tax on the difference between
the fair market value and the real estate properties declared and distributed as property
dividends. ...;
"4.
Upon subsequent sale or other disposition of the real estate properties received as
property dividends by SEACOM's stockholders, the basis of the taxation of the subsequent sale or
other disposition shall also be its book value at the time of the dividend distributions; and acd
"5.
That the amount of the documentary stamp tax on the Deeds of Conveyance to be
executed between SEACOM and the recipient stockholders covering the real estate properties
declared as property dividend shall be based on the book value of said estate properties ..., at the
rate of ten (10) pesos for every one thousand pesos (P1,000.00), or a fractional part thereof, of
the book value of the real properties declared as dividends (Section 196, Tax Code, as amended).
On the other hand, the documentary stamp tax on the Deeds of Conveyance to be executed
between SEACOM and the recipient stockholders covering the shares of stock to be declared as
property dividend shall be based on the par value of the shares of stock at the rate of fifty
centavos (P0.50) for each two hundred pesos (P200.00), or fractional part thereof, of the par
value of the shares of stock declared as property dividends (Section 176, Tax Code, as amended).
In both cases, the documentary stamp tax shall be due and payable on the day of execution of
the Deeds of Conveyance (Section 173, Tax Code, as amended)."
In reply thereof, I have the honor to inform you as follows:
1.
That the property dividend shall be recorded at the book value in the books of both the
issuing corporation and the recipient stockholder. The BIR Ruling No. 21(c)(2)-028-89-130-89
applying Sections 250 and 251 of Revenue Regulations No. 2 stating that dividends paid in
securities or other property (other than its own stock) in which the earnings of a corporation have
been invested are income to the recipient to the amount of the full market value of such property
when receivable by individual stockholders has already been modified having been rendered
obsolete by Executive Order No. 37 (effective August 1, 1986) subjecting to income tax at 0%
effective January 1, 1989, dividends received from a domestic corporation and the share of an
individual partner in a partnership subject to tax under Section 24(a) of the Tax Code (BIR Ruling
No. 276-91 December 26, 1991)
2.
That we confirm your opinion that the proposed property dividend which shall be received
by the stockholders of SEACOM shall be subject to a final withholding tax of zero (0%) percent,
and the receiving stockholders shall not be subject to any income or capital gains tax arising from
their receipt of these properties as property dividend. (Section 21(c)(2) of the Tax Code, as
amended by Executive Order No. 37). However, certificates authorizing transfer of real estate
properties without payment of the capital gains tax shall be secured from the Revenue District
Officer of the Revenue District where the property is located before said properties are transferred
in the name of the recipient stockholders (BIR Ruling No. 028-89 dated February 22, 1989).
Similarly, certificates authorizing transfer of shares of stock without payment of the capital gains
tax shall be secured from the Revenue District Officer of the Revenue District where the principal
place of office of the corporation declaring the dividends is located. It shall be the ministerial duty
of the Revenue District Officer to issue said certificates.
3.
That we also confirm your opinion that SEACOM shall not be subject to any income or
capital gains tax on the difference between the fair market value and the book value of the real
estate properties declared and distributed as property dividends. This is because there is no
realized gain considering the fact that the value used at the time of distribution is the book value.
4.
That upon subsequent sale or other disposition of the property received as dividends by
the stockholders, the basis of such shall also be its book value at the time of the dividend
distribution.

5.
That the amount of the documentary stamp tax on the Deeds of Conveyance to be
executed between SEACOM and the recipient stockholders covering the real estate properties
declared as property dividends shall be based on the book value of said real estate properties.
The documentary stamp tax that shall be collected shall be at the rate of ten (10) pesos for every
one thousand pesos (P1,000.00), or fractional part thereof, of the book value of the real
properties declared as dividends (Section 196, Tax Code). On the other hand, the documentary
stamp tax on the Deeds of Conveyance to be executed between SEACOM and the recipient
stockholders covering the shares of stock to be declared as property dividends shall be based on
the par value of the shares of stocks, at the rate of fifty centavos (P0.50) for each two hundred
pesos (P200.00), or fractional part thereof, of the value of the shares of stock declared as
property dividends (Section 176, Tax Code). In both cases, the documentary stamp tax shall be
due and payable on the day of execution of the Deeds of Conveyance (Section 173, Tax Code)."
This shall serve as your authority to obtain, after payment of documentary stamp taxes due, the
necessary certificates authorizing transfer of the real estate properties from the Revenue District
Officer of the Revenue District where the real estate properties are located and the certificate
authorizing transfer of the shares of stock from the Revenue District Officer of the Revenue
District where the principal office of SEACOM is located. Aisadc

REVENUE MEMORANDUM CIRCULAR NO. 13-80

Subject

Treatment of Tax Refunds and Tax Credits When Received.

To

All Internal Revenue Officers and Others Concerned.

1.

Refunds/Tax Credits under Section 295 of the Tax Code.

Taxes previously claimed and allowed as deductions, but subsequently refunded or granted as tax
credit pursuant to Section 295 of the Tax Code, should be declared as part of the gross income of
the taxpayer in the year of receipt of the refund or tax credit. However, the following taxes, when
refunded or credited, are not declarable for income tax purposes inasmuch as they are not
allowable as deductions:
a.

Income tax imposed in Title III of the Tax Code;

b.
Income, war-profit and excess profits taxes imposed by authority of a foreign country; but
this deduction shall be allowed in the case of a taxpayer who does not signify in his return his
desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credit for
taxes of foreign countries); aisa dc
c.

Estate and gift taxes;

d.
Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed;
e.

Stock transaction tax;

f.

Energy tax; and

g.

Taxes which are not allowable as deductions under the law.

2.

Special Tax Credits granted under R.A. 5186; R.A. 6135 and P.D. 535.

These tax credits and their tax consequences are as follows:

a.
Sales, compensating and specific taxes are paid on supplies and raw materials imported
by a registered export producer. Said taxes are given as tax credit to be used in the payment of
taxes, duties, charges and fees due to the national government in connection with its operations.
(Sec. 7(a), R.A. No. 6135)
The tax credits granted should form part of the gross income to the enterprise in the year of
receipt of tax credit as said taxes paid are considered allowable deductions for income taxes
purposes.
b.
In some cases, a registered BOI and tourism enterprise assumes payment of taxes
withheld and due from the foreign lender-remittee on interest payments on foreign loans. In such
cases, the enterprise is given a tax credit for taxes withheld subject to certain conditions. (Sec.
7(f), R.A. No. 5186; Sec. 8(c), P.D. No. 535)
Said taxes assumed by the registered enterprise represent necessary and ordinary expenses
incurred by the enterprise; hence, deductible from its gross income. Therefore, the tax credits
granted necessarily constitute taxable income of the enterprise. casia
It is desired that this Circular be given as wide a publicity as possible.

REVENUE REGULATIONS NO. 03-98

SUBJECT
:
Implementing Section 33 of the National Internal Revenue Code, as
Amended by Republic Act No. 8424 Relative to the Special Treatment of Fringe Benefits
TO

All Internal Revenue Officers and Others Concerned

Pursuant to Section 244, in relation to Section 33 of the National Internal Revenue Code of 1997 ,
these Regulations are hereby promulgated to govern the collection at source of the tax on fringe
benefits which have been furnished, granted or paid by the employer beginning January 1, 1998.
cda
SEC. 2.33.

SPECIAL TREATMENT OF FRINGE BENEFITS

(A)
Imposition of Fringe Benefits Tax A final withholding tax is hereby imposed on the
grossed-up monetary value of fringe benefit furnished, granted or paid by the employer to the
employee, except rank and file employees as defined in these Regulations, whether such
employer is an individual, professional partnership or a corporation, regardless of whether the
corporation is taxable or not, or the government and its instrumentalities except when: (1) the
fringe benefit is required by the nature of or necessary to the trade, business or profession of the
employer; or (2) when the fringe benefit is for the convenience or advantage of the employer. The
fringe benefit tax shall be imposed at the following rates:
Effective January 1, 1998

34%

Effective January 1, 1999

33%

Effective January 1, 2000

32%

The tax imposed under Sec. 33 of the Code shall be treated as a final income tax on the
employee which shall be withheld and paid by the employer on a calendar quarterly basis as
provided under Sec. 57 (A) (Withholding of Final Tax on certain Incomes) and Sec. 58 A (Quarterly
Returns and Payments of Taxes Withheld) of the Code.
The grossed-up monetary value of the fringe benefit shall be determined by dividing the
monetary value of the fringe benefit by the following percentages and in accordance with the
following schedule:
Effective January 1, 1998

66%

Effective January 1, 1999

67%

Effective January 1, 2000

68%

The grossed-up monetary value of the fringe benefit represents the whole amount of income
realized by the employee which includes the net amount of money or net monetary value of
property which has been received plus the amount of fringe benefit tax thereon otherwise due
from the employee but paid by the employer for and in behalf of his employee, pursuant to the
provisions of this Section.
Coverage These Regulations shall cover only those fringe benefits given or furnished to
managerial or supervisory employees and not to the rank and file.
The term, "RANK AND FILE EMPLOYEES" means all employees who are holding neither managerial
nor supervisory position. The Labor Code of the Philippines, as amended, defines "managerial
employee" as one who is vested with powers or prerogatives to lay down and execute
management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or
discipline employees. "Supervisory employees" are those who, in the interest of the employer,
effectively recommend such managerial actions if the exercise of such authority is not merely

routinary or clerical in nature but requires the use of independent judgment. cdtai
Moreover, these regulations do not cover those benefits properly forming part of compensation
income subject to withholding tax on compensation in accordance with Revenue Regulations No.
2-98.
Fringe benefits which have been paid prior to January 1, 1998 shall not be covered by these
Regulations.
Determination of the Amount Subject to the Fringe Benefit Tax In general, the computation of
the fringe benefits tax would entail (a) valuation of the benefit granted and (b) determination of
the proportion or percentage of the benefit which is subject to the fringe benefit tax. That the Tax
Code allows for the cases where only a portion (i.e. less than 100 per cent) of the fringe benefit is
subject to the fringe benefit tax is clearly stated in Section 33 (a) of R.A. 8424 which stipulates
that fringe benefits which are "required by the nature of, or necessary to the trade, business or
profession of the employer, or when the fringe benefit is for the convenience or advantage of the
employer" are not subject to the fringe benefit tax. Thus, in cases where the fringe benefits entail
joint benefits to the employer and employee, the portion which shall be subject to the fringe
benefits tax and the guidelines for the valuation of fringe benefits are defined under these rules
and regulations.
Unless otherwise provided in these regulations, the valuation of fringe benefits shall be as
follows:
(1)
If the fringe benefit is granted in money, or is directly paid for by the employer, then the
value is the amount granted or paid for.
(2)
If the fringe benefit is granted or furnished by the employer in property other than money
and ownership is transferred to the employee, then the value of the fringe benefit shall be equal
to the fair market value of the property as determined in accordance with Sec. 6 (E) of the Code
(Authority of the Commissioner to Prescribe Real Property Values).
(3)
If the fringe benefit is granted or furnished by the employer in property other than money
but ownership is not transferred to the employee, the value of the fringe benefit is equal to the
depreciation value of the property.
Taxation of fringe benefit received by a non-resident alien individual who is not engaged in trade
or business in the Philippines A fringe benefit tax of twenty-five percent (25%) shall be
imposed on the grossed-up monetary value of the fringe benefit. The said tax base shall be
computed by dividing the monetary value of the fringe benefit by seventy-five per cent (75%).
Taxation of fringe benefit received by (1) an alien individual employed by regional or area
headquarters of a multinational company or by regional operating headquarters of a
multinational company; (2) an alien individual employed by an offshore banking unit of a foreign
bank established in the Philippines; (3) an alien individual employed by a foreign service
contractor or by a foreign service subcontractor engaged in petroleum operations in the
Philippines; and (4) any of their Filipino individual employees who are employed and occupying
the same position as those occupied or held by the alien employees. A fringe benefit tax of
fifteen per cent (15%) shall be imposed on the grossed-up monetary value of the fringe benefit.
The said tax base shall be computed by dividing the monetary value of the fringe benefit by
eighty-five per cent (85%). cdrep
Taxation of fringe benefit received by employees in special economic zones Fringe benefits
received by employees in special economic zones, including Clark Special Economic Zone and
Subic Special Economic and Free Trade Zone, are also covered by these regulations and subject to
the normal rate of fringe benefit tax or the special rates of 25% or 15% as provided above.
(B)
Definition of Fringe Benefit In general, except as otherwise provided under these
regulations, for purposes of this Section, the term "FRINGE BENEFIT" means any good, service, or
other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries,
to an individual employee (except rank and file employee as defined in these regulations) such
as, but not limited to the following:

(1)

Housing;

(2)

Expense account;

(3)

Vehicle of any kind;

(4)

Household personnel, such as maid, driver and others;

(5)
Interest on loan at less than market rate to the extent of the difference between the
market rate and actual rate granted;
(6)
Membership fees, dues and other expenses borne by the employer for the employee in
social and athletic clubs or other similar organizations;
(7)

Expenses for foreign travel;

(8)

Holiday and vacation expenses;

(9)

Educational assistance to the employee or his dependents; and

(10) Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows.
For this purpose, the guidelines for valuation of specific types of fringe benefits and the
determination of the monetary value of the fringe benefits are give below. The taxable value shall
be the grossed-up monetary value of the fringe benefit.
(1)

Housing privilege

(a)
If the employer leases a residential property for the use of his employee and the said
property is the usual place of residence of the employee, the value of the benefit shall be the
amount of rental paid thereon by the employer, as evidenced by the lease contract. The
monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit.
(b)
If the employer owns a residential property and the same is assigned for the use of his
employee as his usual place of residence, the annual value of the benefit shall be five per cent
(5%) of the market value of the land and improvement, as declared in the Real Property Tax
Declaration Form, or zonal value as determined by the Commissioner pursuant to Section 6(E) of
the Code (Authority of the Commissioner to Prescribe Real Property Values), whichever is higher.
The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit.
cda
The monetary value of the housing fringe benefit is equivalent to the following:
MV = [5%(FMV or ZONAL VALUE] X 50%
WHERE:
MV = MONETARY VALUE
FMV = FAIR MARKET VALUE
(c)
If the employer purchases a residential property on installment basis and allows his
employee to use the same as his usual place of residence, the annual value of the benefit shall
be five per cent (5%) of the acquisition cost, exclusive of interest. The monetary value of fringe
benefit shall be fifty per cent (50%) of the value of the benefit.
(d)
If the employer purchases a residential property and transfers ownership thereof in the
name of the employee, the value of the benefit shall be the employer's acquisition cost or zonal
value as determined by the Commissioner pursuant to Section 6(E) of the Code (Authority of the
Commissioner to Prescribe Real Property Values), whichever is higher. The monetary value of the
fringe benefit shall be the entire value of the benefit.
(e)
If the employer purchases a residential property and transfers ownership thereof to his
employee for the latter's residential use, at a price less than the employer's acquisition cost, the
value of the benefit shall be the difference between the fair market value, as declared in the Real
Property Tax Declaration Form, or zonal value as determined by the Commissioner pursuant to
Sec. 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values),

whichever is higher, and the cost to the employee. The monetary value of the fringe benefit shall
be the entire value of the benefit.
(f)
Housing privilege of military officials of the Armed Forces of the Philippines (AFP)
consisting of officials of the Philippine Army, Philippine Navy and Philippine Air Force shall not be
treated as taxable fringe benefit in accordance with the existing doctrine that the State shall
provide its soldiers with necessary quarters which are within or accessible from the military camp
so that they can be readily on call to meet the exigencies of their military service.
(g)
A housing unit which is situated inside or adjacent to the premises of a business or factory
shall not be considered as a taxable fringe benefit. A housing unit is considered adjacent to the
premises of the business if it is located within the maximum of fifty (50) meters from the
perimeter of the business premises.
(h)
Temporary housing for an employee who stays in a housing unit for three (3) months or
less shall not be considered a taxable fringe benefit. cdasia
(2)

Expense account

(a)
In general, expenses incurred by the employee but which are paid by his employer shall
be treated as taxable fringe benefits, except when the expenditures are duly receipted for and in
the name of the employer and the expenditures do not partake the nature of a personal expense
attributable to the employee.
(b)
Expenses paid for by the employee but reimbursed by his employer shall be treated as
taxable benefits except only when the expenditures are duly receipted for and in the name of the
employer and the expenditures do not partake the nature of a personal expense attributable to
the said employee.
(c)
Personal expenses of the employee (like purchases of groceries for the personal
consumption of the employee and his family members) paid for or reimbursed by the employer to
the employee shall be treated as taxable fringe benefits of the employee whether or not the
same are duly receipted for in the name of the employer.
(d)
Representation and transportation allowances which are fixed in amounts and are regular
received by the employees as part of their monthly compensation income shall not be treated as
taxable fringe benefits but the same shall be considered as taxable compensation income subject
to the tax imposed under Sec. 24 of the Code.
(3)

Motor vehicle of any kind

(a)
If the employer purchases the motor vehicle in the name of the employee, the value of the
benefit is the acquisition cost thereof. The monetary value of the fringe benefit shall be the entire
value of the benefit, regardless of whether the motor vehicle is used by the employee partly for
his personal purpose and partly for the benefit of his employer.
(b)
If the employer provides the employee with cash for the purchase of a motor vehicle, the
ownership of which is placed in the name of the employee, the value of the benefits shall be the
amount of cash received by the employee. The monetary value of the fringe benefit shall be the
entire value of the benefit regardless of whether the motor vehicle is used by the employee partly
for his personal purpose and partly for the benefit of his employer, unless the same was
subjected to a withholding tax as compensation income under Revenue Regulations No. 2-98.
(c)
If the employer purchases the car on installment basis, the ownership of which is placed in
the name of the employee, the value of the benefit shall be the acquisition cost exclusive of
interest, divided by five (5) years. The monetary value of the fringe benefit shall be the entire
value of the benefit regardless of whether the motor vehicle is used by the employee partly for
his personal purpose and partly for the benefit of his employer.
(d)
If the employer shoulders a portion of the amount of the purchase price of a motor vehicle
the ownership of which is placed in the name of the employee, the value of the benefit shall be
the amount shouldered by the employer. The monetary value of the fringe benefit shall be the
entire value of the benefit regardless of whether the motor vehicle is used by the employee partly
for his personal purpose and partly for the benefit of his employer. Cdpr

(e)
If the employer owns and maintains a fleet of motor vehicles for the use of the business
and the employees, the value of the benefit shall be the acquisition cost of all the motor vehicles
not normally used for sales, freight, delivery service and other non-personal used divided by five
(5) years. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the
benefit.
The monetary value of the motor vehicle fringe benefit is equivalent to the following:
MV = [(A)/5] X 50%
where:
MV = Monetary value
A = acquisition cost
(f)
If the employer leases and maintains a fleet of motor vehicles for the use of the business
and the employees, the value of the benefit shall be the amount of rental payments for motor
vehicles not normally used for sales, freight, delivery, service and other non-personal use. The
monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit.
(g)
The use of aircraft (including helicopters) owned and maintained by the employer shall be
treated as business use and not be subject to the fringe benefits tax.
(h)
The use of yacht whether owned and maintained or leased by the employer shall be
treated as taxable fringe benefit. The value of the benefit shall be measured based on the
depreciation of a yacht at an estimated useful life of 20 years.
(4)
Household expenses Expenses of the employee which are borne by the employer for
household personnel, such as salaries of household help, personal driver of the employee, or
other similar personal expenses (like payment for homeowners association dues, garbage dues,
etc.) shall be treated as taxable fringe benefits.
(5)

Interest on loan at less than market rate

(a)
If the employer lends money to his employee free of interest or at a rate lower than twelve
per cent (12%), such interest foregone by the employer or the difference of the interest assumed
by the employee and the rate of twelve per cent (12%) shall be treated as a taxable fringe
benefit.
(b)
The benchmark interest rate of twelve per cent (12%) shall remain in effect until revised
by a subsequent regulation.
(c)
This regulation shall apply to installment payments or loans with interest rate lower than
twelve per cent (12%) starting January 1, 1998. prcd
(6)
Membership fees, dues, and other expenses borne by the employer for his employee, in
social and athletic clubs or other similar organizations. These expenditures shall be treated as
taxable fringe benefits of the employee in full.
(7)

Expenses for foreign travel

(a)
Reasonable business expenses which are paid for by the employer for the foreign travel of
his employee for the purpose of attending business meetings or conventions shall not be treated
as taxable fringe benefits. In this instance, inland travel expenses (such as expenses for food,
beverages and local transportation) except lodging cost in a hotel (or similar establishments)
amounting to an average of US$300.00 or less per day, shall not be subject to a fringe benefit
tax. The expenses should be supported by documents proving the actual occurrences of the
meetings or conventions.
The cost of economy and business class airplane ticket shall not be subject to a fringe benefit tax.
However, 30 percent of the cost of first class airplane ticket shall be subject to a fringe benefit
tax.
(b)
In the absence of documentary evidence showing that the employee's travel abroad was
in connection with business meetings or conventions, the entire cost of the ticket, including cost

of hotel accommodations and other expenses incident thereto shouldered by the employer, shall
be treated as taxable fringe benefits. The business meetings shall be evidenced by official
communications from business associates abroad indicating the purpose of the meetings.
Business conventions shall be evidenced by official invitations/communications from the host
organization or entity abroad. Otherwise, the entire cost thereof shouldered by the employer shall
be treated as taxable fringe benefits of the employee.
(c)
Travelling expenses which are paid by the employer for the travel of the family members
of the employee shall be treated as taxable fringe benefits of the employee.
(8)
Holiday and vacation expenses Holiday and vacation expenses of the employee borne
by his employer shall be treated as taxable fringe benefits.
(9)

Educational assistance to the employee or his dependents

(a)
The cost of the educational assistance to the employee which are borne by the employer
shall, in general, be treated as taxable fringe benefit. However, a scholarship grant to the
employee by the employer shall not be treated as taxable fringe benefit if the education or study
involved is directly connected with the employer's trade, business or profession, and there is a
written contract between them that the employee is under obligation to remain in the employ of
the employer for period of time that they have mutually agreed upon. In this case, the
expenditure shall be treated as incurred for the convenience and furtherance of the employer's
trade or business.
(b)
The cost of educational assistance extended by an employer to the dependents of an
employee shall be treated as taxable fringe benefits of the employee unless the assistance was
provided through a competitive scheme under the scholarship program of the company. cda
(10) Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows The cost of life or health insurance and other non-life insurance
premiums borne by the employer for his employee shall be treated as taxable fringe benefit,
except the following: (a) contributions of the employer for the benefit of the employee, pursuant
to the provisions of existing law, such as under the Social Security System (SSS), (R.A. No. 8282,
as amended ) or under the Government Service Insurance System (GSIS) (R.A. No. 8291 ), or
similar contributions arising from the provisions of any other existing law; and (b) the cost of
premiums borne by the employer for the group insurance of his employees.
(C)
Fringe Benefits Not Subject to Fringe Benefits Tax In general, the fringe benefits tax shall
not be imposed on the following fringe benefits:
(1)
Fringe benefits which are authorized and exempted from income tax under the Code or
under any special law;
(2)
Contributions of the employer for the benefit of the employee to retirement, insurance and
hospitalization benefit plans;
(3)
Benefits given to the rank and file, whether granted under a collective bargaining
agreement or not;
(4)

De minimis benefits as defined in these Regulations;

(5)
If the grant of fringe benefits to the employee is required by the nature of, or necessary to
the trade, business or profession of the employer; or
(6)

If the grant of the fringe benefit is for the convenience of the employer.

The exemption of any fringe benefit from the fringe benefit tax imposed under this Section shall
not be interpreted to mean exemption from any other income tax imposed under the Code except
if the same is likewise expressly exempt from any other income tax imposed under the Code or
under any other existing law. Thus, if the fringe benefit is exempted from the fringe benefits tax,
the same may, however, still form part of the employee's gross compensation income which is
subject to income tax, hence, likewise subject to a withholding tax on compensation income
payment.
The term "DE MINIMIS" benefits which are exempt from the fringe benefit tax shall, in general, be

limited to facilities or privileges furnished or offered by an employer to his employees that are of
relatively small value and are offered or furnished by the employer merely as a means of
promoting the health, goodwill, contentment, or efficiency of his employees such as the following:
(1)
Monetized unused vacation leave credits of employees not exceeding ten (10) days during
the year ;
(2)
Medical cash allowance to dependents of employees not exceeding P750 per semester or
P125 per month ;
(3)

Rice subsidy of P350 per month granted by an employer to his employees ;

(4)

Uniforms given to employees by the employer ;

(5)

Medical benefits given to the employees by the employer ;

(6)

Laundry allowance of P150 per month ;

(7)
Employee achievement awards, e.g. for length of service or safety achievement, which
must be in the form of a tangible personal property other than cash or gift certificate, with an
annual monetary value not exceeding one-half (1/2) month of the basic salary of the employee
receiving the award under an established written plan which does not discriminate in favor of
highly paid employees ; dctai
(8)

Christmas and major anniversary celebrations for employees and their guests ;

(9)
Company picnics and sports tournaments in the Philippines and are participated
exclusively by employees ; and
(10) Flowers, fruits, books or similar items given to employees under special circumstances,
e.g. on account of illness, marriage, birth of a baby, etc. .
(D)
Tax Accounting for the Fringe Benefit Furnished to the Employee and the Fringe Benefit Tax
Due Thereon. As a general rule, the amount of taxable fringe benefit and the fringe benefits
tax shall constitute allowable deductions from gross income of the employer. However, if the
basis for computation of the fringe benefits tax is the depreciation value, the zonal value as
determined by the Commissioner pursuant to Section 6(E) of the Code or the fair market value as
determined in the current real property tax declaration of a certain property, only the actual
fringe benefits tax paid shall constitute a deductible expense for the employer. The value of the
fringe benefit shall not be deductible and shall be presumed to have been tacked on or actually
claimed as depreciation expense by the employer.
Provided, however, that if the aforesaid zonal value or fair market value of the said property is
greater than its cost subject to depreciation, the excess amount shall be allowed as a deduction
from the employer's gross income as fringe benefit expense.
Illustrations on fringe benefit furnished or granted by the employer to an employee (other than a
rank-and-file employee)
(1)
During the year 1998, ABC Corporation paid for the monthly rental of a residential house
of its branch manager (Mr. Dela Cruz) amounting to P66,000.00.
In this case, the monthly taxable grossed-up monetary value of the said fringe benefit furnished
or granted to its branch manager (Mr. Dela Cruz) shall be P50,000.00, computed as follows:
Monthly rental for the residential house

P66,000.00

Grossed-up monetary benefit granted

(P66,000.00 divided by 66% factor for
calendar year 1998 times 50% taxable portion) P50,000.00

Fringe benefit tax due thereon (34%)

=========

P17,000.00

ABC Corporation shall take up in its books of accounts the P66,000.00 fringe benefit furnished to
Mr. Dela Cruz, under account title "Fringe Benefit Expense" and the amount of 17,000.00 under
the account title "Fringe Benefit Tax Expense". The aforesaid amounts shall be fully allowed as
deductions from the gross income of ABC Corporation and shall be taken up in the said
employer's books of accounts as follows:
Debit: Fringe Benefit Expense

P66,000

Debit: Fringe Benefit Tax Expense P17,000

Credit: Cash P83,000
To record fringe benefit expense and fringe benefit tax paid on rental of the residential property
furnished to Mr. Dela Cruz for his residential use. (Note: If the fringe benefit expense of
P66,000.00 has already accrued but not yet paid, use the account title "fringe benefit payable". If
the fringe benefit tax has already accrued but not yet paid, use the account title "fringe benefit
tax payable").
(2)
XYZ Corporation owns a condominium unit. During the year 1998, the said corporation
furnished and granted the said property for the residential use of its Assistant Vice-President. The
fair market value of the said property as determined by the Commissioner pursuant to Section
6(E) of the Code amounts P10,000,000.00 while its fair market value as shown in its current Real
Property Tax Declaration amounts to P8,000,000.00. In this case, the higher fair market value of
P10,000,000.00 as determined by the Commissioner shall be used in computing the monetary of
the fringe benefit so furnished or granted to said employee and the fringe benefit tax due thereon
shall be computed as follows:
Monthly rental value of the property
(P10,000,000 times 5% thereof times 50%
divided by 12 months)

P20,833.33

Grossed-up monetary value thereof as fringe

benefit (P20,833.33 divided by 66% factor for
calendar year 1998) P31,565.66
Fringe Benefit tax due thereon (34%)

P10,732.32

=========
In general, under this illustration, the XYZ Corporation shall not further claim deduction for
allowing its Assistant Vice-President the use of its residential property since the cost for the use
thereof has already been recovered as deduction from its gross income under "Depreciation
Expense". However, since the fringe benefit tax in the amount of P10,732.32, assumed and paid
by XYZ corporation has not as yet been recovered by way of deduction from gross income, the
same shall be allowed as a deduction from its gross income. XYZ Corporation shall take up the
foregoing in its books of accounts, as follows:
Debit: Fringe Benefit Tax Expense P10,732.32
Credit: Cash/Fringe Benefit Tax Payable

P10,732.32

To record fringe benefit tax expense for the

residential property furnished to employees.
However, if the cost of the aforesaid condominium unit subject to depreciation allowance
(example: its acquisition cost is only P7,000,000.00) is lesser than its fair market value as
determined by the Commissioner (i.e. P10,000,000.00), the excess amount (i.e. P3,000,000.00)
shall be amortized throughout the remaining estimated useful life of the residential property used
in computing the said employer's depreciation expense and allowed as a deduction from the said
employer's gross income as fringe benefit expense. Thus, if the remaining estimated useful life
thereof during the year 1998 is fifteen (15) years, its monthly amortization shall be computed as
follows:

Monthly amortization (P3,000,000.00 divided by

15 years divided by 12 months)

P16,666.67

In this case, XYZ Corporation shall take up the foregoing in its books of accounts as follows:
Debit: Fringe benefit expense
Debit: Fringe benefit tax

P16,666.67

P10,732.32

Credit: Income constructively realized

P16,666.67

Credit: Cash/Fringe benefit tax payable

P10,732.32

To record fringe benefit and fringe benefit tax expenses and income constructively realized from
the use of company-owned residential property furnished to employees.
REPEALING CLAUSE All existing rules and regulations or parts thereof which are inconsistent
with the provisions of these regulations are hereby revoked. LibLex
EFFECTIVITY These regulations shall take effect on fringe benefits furnished, granted or paid
beginning January 1, 1998.
TRANSITORY PROVISIONS No penalty shall be imposed for late payment of the fringe benefit
tax for the first quarter ending March 1998: Provided, however, that the withholding tax return for
the first quarter shall be filed and the tax is paid not later than July 25, 1998.

REVENUE REGULATIONS NO. 10-02

SUBJECT
:
Implementing the Provisions of Section 34(A)(1)(a)(iv) of the Tax
Code of 1997, Authorizing the Imposition of a Ceiling on "Entertainment, Amusement
and Recreational Expenses"
TO

All Internal Revenue Officers and Others Concerned

Pursuant to Section 244 of the Tax Code of 1997, in relation to Section 34(A)(1)(a)(iv) of the
same Code, these Regulations are hereby promulgated to provide a ceiling on the amount of
entertainment, amusement and recreation expense claimed by individual taxpayers engaged in
business or in the practice of their profession and of domestic or resident foreign corporations, to
arrive at the taxable income subject to income tax under Sections 24(A) ; 25(A)(1) ; 26 ; 27(A), (B)
and (C) ; 28(A)(1); 28(A)(6)(b) and Section 61 , all of the Tax Code of 1997. THDIaC
SECTION 1. Coverage. These regulations shall cover entertainment, amusement and
recreation expenses of the following taxpayers:
a.

Individuals engaged in business, including taxable estates and trusts;

b.

Individuals engaged in the practice of profession;

c.

Domestic corporations;

d.

Resident foreign corporations;

e.

General professional partnerships, including its members.

SECTION 2. Definition of Terms. For purposes of these Regulations, the term "Entertainment,
Amusement and Recreation Expenses" includes representation expenses and/or depreciation or
rental expense relating to entertainment facilities, as described below.
The term "Representation Expenses" shall refer to expenses incurred by a taxpayer in connection
with the conduct of his trade, business or exercise of profession, in entertaining, providing
amusement and recreation to, or meeting with, a guest or guests at a dining place, place of
amusement, country club, theater, concert, play, sporting event, and similar events or places. For
purposes of these Regulations, representation expenses shall not refer to fixed representation
allowances that are subject to withholding tax on wages pursuant to appropriate revenue
regulations. CSAaDE
In the case particularly of a country, golf, sports club, or any other similar club where the
employee or officer of the taxpayer is the registered member and the expenses incurred in
relation thereto are paid for by the taxpayer, there shall be a presumption that such expenses are
fringe benefits subject to fringe benefits tax unless the taxpayer can prove that these are actually
representation expenses. For purposes of proving that said expense is a representation expense
and not fringe benefits, the taxpayer should maintain receipts and adequate records that indicate
the (a) amount of expense (b) date and place of expense (c) purpose of expense (d) professional
or business relationship of expense (e) name of person and company entertained with contact
details. ITHADC
The term "Entertainment Facilities" shall refer to (1) a yacht, vacation home or condominium; and
(2) any similar item of real or personal property used by the taxpayer primarily for the
entertainment, amusement, or recreation of guests or employees. To be considered an
entertainment facility, such yacht, vacation home or condominium, or item of real or personal
property must be owned or form part of the taxpayer's trade, business or profession, or rented by
such taxpayer, for which the taxpayer claims a depreciation or rental expense. A yacht shall be
considered an entertainment facility under these Regulations if its use is in fact not restricted to
specified officers or employees or positions in such a manner as to make the same a fringe
benefit for purposes of imposing the fringe benefits tax. cSaCDT
The term "Guests" shall mean persons or entities with which the taxpayer has direct business

relations, such as but not limited to, clients/customers or prospective clients/customers. The term
shall not include employees, officers, partners, directors, stockholders, or trustees of the
taxpayer.
SECTION 3. Exclusions. The following expenses are not considered entertainment,
amusement and recreation expenses as defined under Section 2 hereof.
a.
Expenses which are treated as compensation or fringe benefits for services rendered
under an employer-employee relationship, pursuant to Revenue Regulations 2-98 , 3-98 and
amendments thereto;
b.

Expenses for charitable or fund raising events;

c.

Expenses for bonafide business meeting of stockholders, partners or directors;

d.
Expenses for attending or sponsoring an employee to a business league or professional
organization meeting;
e.
Expenses for events organized for promotion, marketing and advertising including
concerts, conferences, seminars, workshops, conventions, and other similar events;
f.

Other expenses of a similar nature.

Notwithstanding the foregoing, such items of exclusions may, nonetheless, qualify as items of
deduction under Section 34 of the Tax Code of 1997, subject to conditions for deductibility stated
therein. DHESca
SECTION 4. Requisites of Deductibility of "Entertainment, Amusement and Recreation Expense".
The following are the requisites for deductibility of entertainment, amusement and recreation
expense as defined above subject to the ceiling prescribed under Section 5 of these Regulations:
a.

It must be paid or incurred during the taxable year;

b.
It must be: (i) directly connected to the development, management and operation of the
trade, business or profession of the taxpayer; or (ii) directly related to or in furtherance of the
conduct of his or its trade, business or exercise of a profession;
c.

It must not be contrary to law, morals, good customs, public policy or public order;

d.
It must not have been paid, directly or indirectly, to an official or employee of the national
government, or any local government unit, or of any government-owned or controlled corporation
(GOCC), or of a foreign government, or to a private individual, or corporation, or general
professional partnership (GPP), or a similar entity, if it constitutes a bribe, kickback or other
similar payment;
e.
It must be duly substantiated by adequate proof. The official receipts, or invoices, or bills
or statements of accounts should be in the name of the taxpayer claiming the deduction; and
f.
The appropriate amount of withholding tax, if applicable, should have been withheld
therefrom and paid to the Bureau of Internal Revenue.
SECTION 5. Ceiling on Entertainment, Amusement, and Recreation Expense. There shall be
allowed a deduction from gross income for entertainment, amusement and recreation expense,
as defined in Section 2 of these Regulations, in an amount equivalent to the actual
entertainment, amusement and recreation expense paid or incurred within the taxable year by
the taxpayer, but in no case shall such deduction exceed 0.50 percent (%) of net sales (i.e., gross
sales less sales returns/allowances and sales discounts) for taxpayers engaged in sale of goods or
properties; or 1.00 percent (%) of net revenue (i.e., gross revenue less discounts) for taxpayers
engaged in sale of services, including exercise of profession and use or lease of properties.
However, if the taxpayer is deriving income from both sale of goods/properties and services, the
allowable entertainment, amusement and recreation expense shall in all cases be determined
based on an apportionment formula taking into consideration the percentage of the net sales/net
revenue to the total net sales/net revenue, but which in no case shall exceed the maximum
percentage ceiling provided in these Regulations.
Apportionment Formula:

Net sales/net revenue

x Actual Expense

Total Net sales and net revenue

Illustration: ERA Corporation is engaged in the sale of goods and services with net sales/net
revenue of P200,000 and P100,000 respectively. The actual entertainment, amusement and
recreation expense for the second semester of 2002 totaled to P3,000. SACEca
Ent., Amusement
& Recreation
Expense (EAR)
based on
Net sales/

Max. Percentage

Apportionment

Net revenue Formula*

(1)
Sale of

(2)

Allowable Amt to be

(3)

claimed as EAR

Ceiling of

EAR Expense**

Expense (whichever is
lower of col. 2 and 3)

(4)

P200,000

P2,000 P1,000

100,000

1,000 1,000 1,000

P1,000

Goods
Sale of
Services
Total

P300,000

P3,000P2,000P2,000

*Apportionment Formula
Sale of Goods (P200,000/P300,000) x P3,000
Sale of Services(P100,000/P300,000) x P3,000
**Maximum Percentage Ceiling
Sale of Goods (P200,000 x 0.50%)
Sale of Services (P100,000 x 1%)
In the above illustration, ERA Corporation can only claim a total of P2,000 as entertainment,
amusement and recreation expense.
Notwithstanding the ceiling imposed on such expense, the claimed expense shall be subject to
verification and audit for purposes of determining its deductibility as well as compliance with the
substantiation requirements as provided in these Regulations. However, if after verification a
taxpayer is found to have shifted the amount of the entertainment, amusement and recreation
expense to any other expense in order to avoid being subjected to the ceiling herein prescribed,
the amount shifted shall be disallowed in its totality, without prejudice to such penalties as may
be imposed by the Tax Code of 1997. TCIEcH
SECTION 6. Reporting. The taxpayer is hereby required to use in its financial statements and
income tax return the account title "entertainment, amusement and recreation expense", or in
the alternative, to disclose in the notes to financial statements the amount corresponding thereto
when recording expenses paid or incurred of the nature as defined in Section 2 of these
Regulations. However, such expense should be reported in the taxpayer's income tax return as a
separate expense item.
SECTION 7. Repealing Clause. All existing rules, regulations and other issuances or portions
thereof inconsistent with the provisions of these Regulations are hereby modified, repealed or

revoked accordingly.
SECTION 8. Effectivity. The ceiling provided herein shall apply only to entertainment,
amusement and recreation expenses paid or incurred beginning Sept. 1, 2002, regardless of the
taxpayer's accounting period (i.e., whether calendar or fiscal year).

REVENUE REGULATIONS NO. 13-00

SUBJECT
:
Implementing Section 34(B) of the Tax Code of 1997 on the
Requirements for Deductibility of Interest Expense from the Gross Income of a
Taxpayer.
TO

All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. Pursuant to the provisions of Section 244 of the Tax Code of 1997, these
Regulations are hereby promulgated to implement the provisions of Section 34(B) of the same
Code on the requirements for deductibility of interest expense from the gross income of a
corporation or an individual engaged in trade, business or in the practice of profession. TaCEHA
SECTION 2. Definition of Terms. For purposes of these Regulations, the following words and
phrases shall have the following meanings, viz:
(a)
Interest shall refer to the payment for the use or forbearance or detention of money,
regardless of the name it is called or denominated. It includes the amount paid for the borrower's
use of money during the term of the loan, as well as for his detention of money after the due date
for its repayment. cAaETS
(b)
Taxpayer shall refer to a person, whether natural or juridical, engaged in trade, business
or in the exercise of profession, except one earning compensation income arising from personal
services rendered under an employer-employee relationship.
SECTION 3. Requisites for Deductibility of Interest Expense. In general, subject to certain
limitations, the following are the requisites for the deductibility of interest expense from gross
income, viz:
(a)

There must be an indebtedness;

(b)

There should be an interest expense paid or incurred upon such indebtedness;

(c)

The indebtedness must be that of the taxpayer,

(d)
The indebtedness must be connected with the taxpayer's trade, business or exercise of
profession;
(e)

The interest expense must have been paid or incurred during the taxable year;

(f)

The interest must have been stipulated in writing;

(g)

The interest must be legally due;

(h)
The interest payment arrangement must not be between related taxpayers as mandated
in Sec. 34(B)(2)(b), in relation to Sec. 36(B), both of the Tax Code of 1997 ;
(i)

The interest must not be incurred to finance petroleum operations; and

aDICET

(j)
In case of interest incurred to acquire property used in trade, business or exercise of
profession, the same was not treated as a capital expenditure.
SECTION 4.

Rules on the Deductibility of Interest Expense.

(a)
General Rule. In general, the amount of interest expense paid or incurred within a
taxable year on indebtedness in connection with the taxpayer's trade, business or exercise of
profession shall be allowed as a deduction from the taxpayer's gross income.
(b)
Limitation. The amount of interest expense paid or incurred by a taxpayer in connection
with his trade, business or exercise of a profession from an existing indebtedness shall be
reduced by an amount equal to the following percentages of the interest income earned which
had been subjected to final withholding tax depending on the year when the interest income was
earned, viz:
Forty-one percent (41%) beginning January 1, 1998;
Thirty-nine percent (39%) beginning January 1, 1999; and
Thirty-eight percent (38%).beginning January 1, 2000 and thereafter.
This limitation shall apply regardless of whether or not a tax arbitrage scheme was entered into
by the taxpayer or regardless of the date when the interest bearing loan and the date when the
investment was made for as long as, during the taxable year, there is an interest expense
incurred on one side and an interest income earned on the other side, which interest income had
been subjected to final withholding tax. This rule shall be observed irrespective of the currency
the loan was contracted and/or in whatever currency the investments or deposits were made.
DTAIaH
Illustration: Supposing on January 15, 1998, Company A, who has a deposit account with BCD
Bank, obtained a loan from XYZ Financing Corporation in connection with the operation of its
business. Assume that Company A's net income for the year 1998 before the deduction of the
interest expense amounted to P1,000,000. For the year 1998, the interest income it derived from
the said deposit with BCD Bank amounted to P180,000 on which a final tax of P36,000 had been
withheld. Its interest expense on the loan obtained from XYZ Financing Corporation during the
same year amounted to P150,000.
Under this illustration, the deductible interest expense, the taxable income and the income tax
due of Company A shall be computed as follows:
1998
Net income before interest expense
Less: Interest expense

P1,000,000

P150,000

Less: 41% of interest income from

deposit (41% x P180,000)

73,800

Deductible interest expense

Taxable income

P923,800

76,200

Income tax due for taxable year 1998 (34%)

P314,092

========
(c)
Interest on Unpaid Taxes. Provisions of Sec. 4(b) hereof to the contrary notwithstanding,
interest incurred or paid by the taxpayer on all unpaid business-related taxes shall be fully
deductible from gross income and shall not be subject to the limitation on deduction heretofore
mentioned. Thus, such interest expense incurred or paid shall not be diminished by the
percentage of interest income earned which had been subjected to final withholding tax.
CTSHDI
(d)
Other cases where interest expense is not deductible from gross income. No interest
expense shall be allowed as deduction from gross income in any of the following cases:
(1)
If within the taxable year, an individual taxpayer reporting income on the cash basis incurs
an indebtedness on which an interest is paid in advance through discount or otherwise: Provided,
That such interest shall be allowed as a deduction in the year the indebtedness is paid: Provided,
further, That if the indebtedness is payable in periodic amortization, the amount of interest which
corresponds to the amount of the principal amortized or paid during the year shall be allowed as
deduction in such taxable year.
Illustration: Mr. Cruz, a self-employed individual, consistently employs the cash-basis accounting
method in keeping his books of accounts. Assuming that on January 1, 1998, he contracted a loan
of P1,000,000 from XYZ Bank for use in his business operations. Terms: Payable in two (2) years
at 15% interest per annum, payable in advance. On January 1, 1998, he received from the bank
the proceeds of his loan in the sum of P700,000, net of interest paid in advance in the amount of
P300,000. cSaATC
In general, the interest expense shall be taken for the taxable year in which "paid or incurred" or
"paid or accrued" depending upon the method of accounting upon the basis of which the net
income is computed, unless in order to clearly reflect the income, the deduction should be taken
as of a different period. Thus, a self-employed individual is allowed to deduct from his gross
income the entire amount of interest expense actually paid during the taxable year. However, if
the interest expense is paid in advance and the accounting method used by the self-employed
individual is the cash-basis accounting method, such interest expense paid in advance shall only
be allowed as deduction in the year when he has fully paid his liability. So that if the said debtor
has fully paid his loan as of the end of the taxable year 1999, his interest expense paid in
advance on January 1, 1998 in the amount of P300,000 shall only be allowed as deduction from
his gross income in the taxable year 1999.
On the other hand, even if the interest expense is paid in advance but the indebtedness is
payable in periodic amortization, the amount of interest expense which corresponds to the
amount of the principal amortized or paid during the respective years 1998 and 1999 shall be
allowed as deduction in such respective taxable years. EATcHD
(2)
If both the taxpayer and the person to whom the payment has been made or is to be made
are persons specified under Sec. 36(B) of the Tax Code of 1997, viz:
(i)
Between members of a family. For purposes of this paragraph, the family of an individual
shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors
and lineal descendants; or
(ii)
Between an individual and a corporation more than fifty percent (50%) in value of the
outstanding stock of which is owned, directly and indirectly, by or for such individual; or
(iii)
Between two corporations more than fifty percent (50%) in value of the outstanding stock
of each of which is owned, directly or indirectly, by or for the same individual; or
(iv)

Between the grantor and a fiduciary of any trust; or

aCTHEA

(v)
Between the fiduciary of a trust and the fiduciary of another trust if the same person is a
grantor with respect to each trust; or
(vi)

Between a fiduciary of a trust and a beneficiary of such trust.

(3)
If the indebtedness on which the interest expense is paid is incurred to finance petroleum
exploration in the Philippines. The non-deductible interest expense herein referred to pertains to
interest or other consideration paid or incurred by a Service Contractor engaged in the discovery
and production of indigenous petroleum in the Philippines in respect of the financing of its
petroleum operations, pursuant to Section 23 of P.D. No. 8 , as amended by P.D. No. 87 ,
otherwise known as "The Oil Exploration and Development Act of 1972."
(e)
Optional treatment of interest expense on capital expenditure. At the option of the
taxpayer, interest expense on a capital expenditure incurred to acquire property used in trade,
business or exercise of a profession may be allowed as a deduction in full in the year when
incurred, the provisions of Sec. 36 (A)(2) and (3) of the Tax Code of 1997 to the contrary
notwithstanding, or may be treated as a capital expenditure for which the taxpayer may claim
only as a deduction the periodic amortization of such expenditure.
SECTION 5. Repealing Clause. The provisions of any revenue regulations or any revenue
issuance or ruling inconsistent with these Regulations are hereby repealed, amended, or modified
accordingly.
SECTION 6.

Effectivity Clause. These Regulations shall take effect immediately.

EHCDSI

REVENUE REGULATIONS NO. 12-77

SUBJECT
:
Substantiation Requirement for Losses Arising from Casualty,
Robbery, Theft or Embezzlement
TO

All Internal Revenue Officers and Others Concerned

Pursuant to the provisions of Section 326 in relation to Section 4 of the National Internal Revenue
Code of 1977, these regulations are hereby promulgated to govern the manner of reporting
losses arising from casualty, robbery, theft, or embezzlement, for income tax purposes. cdtai
SECTION 1. Nature of deductible losses. Any loss arising from fires, storms or other casualty,
and from robbery, theft or embezzlement, is allowable as a deduction under Section 30(d) for the
taxable year in which the loss is sustained. The term "casualty" is the complete or partial
destruction of property resulting from an identifiable event of a sudden, unexpected, or unusual
nature. It denotes accident, some sudden invasion by hostile agency, and excludes progressive
deterioration through steadily operating cause. Generally, theft is the criminal appropriation of

another's property to the use of the taker. Embezzlement is the fraudulent appropriation of
another's property by a person to whom it has been entrusted or into whose hands it has lawfully
come.
SECTION 2. Requirements of substantiation. The taxpayer bears the burden of proving and
substantiating his claim for deduction for losses allowed under Section 30(d) and should comply
with the following substantiation requirements:
(a)
A declaration of loss which must be filed with the Commissioner of Internal Revenue or his
deputies within a certain period prescribed in these regulations after the occurrence of the
casualty, robbery, theft or embezzlement.
(b)
Proof of the elements of the loss claimed, such as the actual nature and occurrence of the
event and amount of the loss.
SECTION 3. Declaration of loss. Within forty-five days after the date of the occurrence of
casualty or robbery, theft or embezzlement, a taxpayer who sustained loss therefrom and who
intends to claim the loss as a deduction for the taxable year in which the loss was sustained shall
file a sworn declaration of loss with the nearest Revenue District Officer. The sworn declaration of
loss shall contain, among other things, the following information:
(a)

The nature of the event giving rise to the loss and the time of its occurrence;

(b)

A description of the damaged property and its location;

(c)
The items needed to compute the loss such as cost or other basis of the property;
depreciation allowed or allowable if any; value of property before and after the event; cost of
repair;
(d)

Amount of insurance or other compensation received or receivable.

Evidence to support these items should be furnished, if available. Examples are purchase
contracts and deeds, receipted bills for improvements, and pictures and competent appraisals of
the property before and after the casualty.
SECTION 4. Proof of loss. (a) In general. The declaration of loss, being one of the essential
requirements of substantiation of a claim for a loss deduction, is subject to verification and does
not constitute sufficient proof of the loss that will justify its deductibility for income tax purposes.
Therefore, the mere filing of a declaration of loss does not automatically entitle the taxpayer to
deduct the alleged loss from gross income. The failure, however, to submit the said declaration of
loss within the period prescribed in these regulations will result in the disallowance of the
casualty loss claimed in the taxpayer's income tax return. The taxpayer should therefore file a
declaration of loss and should be prepared to support and substantiate the information reported
in the said declaration with evidence which he should gather immediately or as soon as possible
after the occurrence of the casualty or event causing the loss.
(b)
Casualty loss. Photographs of the property as it existed before it was damaged will be
helpful in showing the condition and value of the property prior to the casualty. Photographs
taken after the casualty which show the extent of damage will be helpful in establishing the
condition and value of the property after it was damaged. Photographs showing the condition and
value of the property after it was repaired, restored or replaced may also be helpful.
Furthermore, since the valuation of the property is of extreme importance in determining the
amount of loss sustained, the taxpayer should be prepared to come forward with documentary
proofs, such as cancelled checks, vouchers, receipts and other evidence of cost.
The foregoing evidence should be kept by the taxpayer as part of his tax records and be made
available to a revenue examiner, upon audit of his income tax return and the declaration of loss.
(c)
Robbery, theft or embezzlement losses. To support the deduction for losses arising from
robbery, theft or embezzlement, the taxpayer must prove by credible evidence all the elements
of the loss, the amount of the loss, and the proper year of the deduction. The taxpayer bears the
burden of proof, and no deduction will be allowed unless he shows the property was stolen, rather
than misplaced or lost. A mere disappearance of property is not enough, nor is a mere error or

shortage in accounts.
Failure to report theft or robbery to the police may be a factor against the taxpayer. On the other
hand, a mere report of alleged theft or robbery to the police authorities is not a conclusive proof
of the loss arising therefrom.
SECTION 5. Determination of amount deductible. (a) In general. The amount of casualty
loss deductible is limited to the difference between the value of the property immediately
preceding the casualty and its value immediately thereafter, but shall not exceed an amount
equal to the cost or other adjusted basis of the property, or depreciated cost in the case of
property used in business, reduced by any insurance or other compensation received.
(b)
Method of valuation. (i) The fair market value of the property immediately before and
immediately after the casualty for purposes of determining the amount of casualty loss
deductible under this section shall be ascertained by an impartial but competent appraisal. This
appraisal must recognize the effects of any general market decline affecting undamaged, as well
as damaged property, which may occur simultaneously with the casualty in order that any
deduction under this section shall be limited to actual loss resulting from damage to property.
(ii)
The cost of repairs to the property damaged is acceptable as evidence of the loss of value
if the taxpayer shows that (1) the repairs are necessary to restore the property to its condition
immediately before the casualty, (2) the amount spent for such repairs is not excessive, (3) the
repairs do not cover more than the damage suffered, and (4) the value of the property after the
repairs does not as a result of the repairs exceed the value of the property immediately before
the casualty.
(c) Examples.
The application of this section may be illustrated by the following examples:
(i)

Property not used in business:

Cost or adjusted basis

P18,000.00

Value of property before casualty 15,000.00

Value of property after casualty

10,000.00

Insurance recovered 3,000.00

The casualty loss is computed as follows:
Value of property before casualty P15,000.00
Value of property after casualty

10,000.00

Difference

P5,000.00

========
Loss to be taken into account for
purposes of Section 30(d):
lesser amount of property
actually destroyed (P5,000)
or adjusted basis of property
actually destroyed (P18,000)
Less: Insurance received

P5,000.00

3,000.00

AMOUNT OF LOSS DEDUCTIBLE

P2,000.00

=======
(ii)

Property used in business:

(A)
Total destruction. In case of losses arising from total destruction of property used in
business (ordinary asset) the net book value (cost less accumulated depreciation) immediately
preceding the casualty should be used as the basis in claiming losses, also to be reduced by any
amount of insurance or compensation received.
To illustrate:
Assume that
Acquisition cost of property P10,000
Accumulated depreciation 5,000
Insurance recovered 2,500
Amount deductible is computed as follows:
Acquisition cost

P10,000

Less: Accumulated depreciation

5,000

Amount of loss suffered

P5,000

Less: Amount recovered through insurance

2,500

AMOUNT DEDUCTIBLE

P2,500

======
(B)
Partial destruction. In case of losses arising from partial damages of property used in
business, the replacement cost to restore the property back to its normal operating condition
should be used for purposes of computing deductible losses, but in no case shall the deductible
loss be more, than the net book value of the property as a whole immediately before the casualty.
The excess over the net book value immediately before the casualty should be capitalized subject
to depreciation over the remaining useful life of the property.
To illustrate:
Assume:
Acquisition cost

P100,000

Accumulated depreciation 90,000

Net book value

P10,000

=======
Estimated remaining useful life

5 years

Replacement cost of damaged portion

P20,000

In the above example, the loss deductible for tax purposes would be limited to P10,000 which is
equal to the net book value of the whole property:
Net book value

P10,000

Replacement cost

20,000

Excess of replacement cost to be

capitalized

P10,000

======
Consequently, the new cost basis subject to depreciation charges over the remaining useful life of
the property which is five (5) years, would be P20,000 as shown hereunder:
Net book value before casualty

P10,000

Add: Excess of replacement cost over

book value

10,000

New cost basis

P20,000

======
Yearly depreciation
P20,000

5 years
(iii)

P4,000

Farm losses. In the case of losses sustained, by farmers, the following rules shall apply:

(a)
Loss of livestock. The loss sustained in the death of livestock shall be allowed as a
deduction to the extent of the acquisition cost only if no inventories are taken into account in
determining the income from the business of farming.
If inventories are taken into account in determining the income from the trade or business of
farming, no deduction shall be allowed for losses sustained during the taxable year upon
livestock or other products, whether purchased for resale or produced on the farm, to the extent
such losses are reflected in the inventory on hand at the close of the taxable year.
(b)
Other farm losses. Where ground is prepared and planted or stocked as in case of sugar,
coconut and other agricultural plantations, orchards, fishponds and other farms and its value is
completely destroyed by the overflow or seepage of water from natural causes, the cost of the
preparation and planting or stocking up to the time of the disaster shall be deductible loss in the
year in which it is incurred.
SECTION 6. Determination of amount deductible robbery, theft and embezzlement losses.
The amount deductible in respect of robbery, theft and embezzlement loss shall be determined
consistently with the manner prescribed in the preceding section for determining the amount of
casualty loss allowable as a deduction. In applying the provisions of the preceding section for this
purpose, the fair market value of the property immediately after the theft shall be considered to
be zero. This section does not apply to losses reflected in the inventories of the taxpayer.
Example:
In 1969, B purchases for personal use a diamond brooch costing P40,000. On November 30, 1975
at which time it has a fair market value of P35,000 the brooch was stolen. The brooch was fully
insured against theft. A controversy develops with the insurance company over its liability in
respect of the loss. However, in 1976; B has a reasonable prospect of recovery of the fair market
value of the brooch from the insurance company. The controversy is settled in March, 1977, at
which time B receives P20,000 in insurance proceeds to cover the loss from theft. No deduction
for loss is allowable for 1975 or 1976; but the amount of the deduction allowable for the taxable
year 1977 is P15,000, computed as follows:
Value of property immediately before theft
Less: Value of property immediately after
theft

-0-

P35,000


Loss to be taken into account (P35,000 but
not to exceed adjusted basis of P40,000
at the time of theft) P35,000
Less: Insurance received in 1977

20,000

Deduction allowable for 1977

P15,000

======
SECTION 7. Year of deduction. If a casualty occurs which may result in a loss and, in the year
of such casualty or event, there exist a claim for reimbursement with respect to which there is a
reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may
be received is sustained until it can be ascertained with reasonable certainty whether or not such
reimbursement will be received. Whether a reasonable prospect of recovery exist with respect to
a claim for a reimbursement of a loss is a question of fact to be determined upon an examination
of all facts and circumstances. Whether or not such reimbursement will be received may be
ascertained with reasonable certainty, for example, by a settlement of the claim, by an
adjudication of the claim, or by an abandonment of the claim. When a taxpayer claims that the
taxable year in which a loss is sustained is fixed by his abandonment of the claim for
reimbursement, he must be able to produce objective evidence of his having abandoned the
claim, such as the execution of a release.
SECTION 8. Effectivity of these regulations. These regulations shall be applicable to losses
sustained or arising from casualties, robbery, theft or embezzlement occurring on or after the
approval of these regulations.
With respect however to such losses arising before the approval of these regulations, the
declaration of loss required under these regulations should be filed within forty-five days from the
approval of these regulations.
ALFREDO PIO DE RODA, JR.
Acting Secretary of Finance
Recommended by:
EFREN I. PLANA
Acting Commissioner
ANNEX
B.I.R. Form No. 1746
DECLARATION OF LOSS ARISING FROM CASUALTY,
ROBBERY, THEFT OR EMBEZZLEMENT
Name of taxpayer: _____________________________________________________
Address: ____________________________________________________________
T.A.N. ______________________________________________________________
A. NATURE OF LOSS
1.

Event causing the loss ______________________________________________

2.

Date of occurrence of event __________________________________________

3.

Description of damaged property and its location (an itemized list should be attached)

________________________________________________________________

4.

Facts and circumstances surrounding the loss of the property:

5.

Name of insurance company or other entity from which recovery claim may be made:

_______________________________________________________________
B. VALUATION OF LOSS
1.

Nonbusiness property

Original cost or adjusted basis

P____________

Value immediately before casualty P____________ ____________

Value immediately after casualty

____________

____________

Amount of insurance recoverable ____________

2.

Business property Total destruction

Acquisition cost of property P____________

Accumulated depreciation ____________
Amount of insurance recovered
3.

____________

Business property partial damage

Net book value immediately before

P____________

Amount of replacement cost to restore the property

back to its normal operating condition

____________

BIR RULING NO. 144-85

30-d 000-00 144-85
Gentlemen :
This refers to your letter dated July 1, 1985 requesting a ruling as to whether foreign exchange
losses which have accrued by reason of devaluation are deductible for income tax purposes. The
losses arose from matured but unremitted principal repayments on loans affected by the debt
restructuring program in the Philippines.
In reply thereto, I have the honor to inform you that annual increase in value of an asset is not
taxable income because such increase has not yet been realized. The increase in value, i.e., the
gain, could only be taxed when a disposition of the property occurred which was of such a nature
as to constitute a realization of such gain, that is, a severance of the gain from the original capital
invested in the property. The same conclusion obtains as to losses. The annual decrease in the
value of property is not normally allowable as a loss. Hence, to be allowable the loss must be
realized. (Surrey and Warren, Federal Income Taxation (1950), pp. 422-4)
When foreign currency acquired in connection with a transaction in the regular course of business
is disposed of ordinary gain or loss results from the fluctuations. (Prentice-Hall Federal Taxes, Vol.
1, par. 6261) The loss is deductible only for the year it is actually sustained. It is sustained during
the year in which the loss occurs as evidenced by closed and completed transaction and as fixed
by identifiable events occurring in that year. (par. 6570, 34 Am Jur 2d, 1976) A closed transaction
is a taxable event which has been consummated. (p. 231 Black's Law Dictionary, Fifth Edition) No
taxable event has as yet been consummated prior to the remittance of the scheduled
amortization. Accordingly, foreign exchange losses sustained as a result of devaluation of the
peso vis-a-vis the foreign currency e.g., US dollar, but which remittance of scheduled amortization
consisting of principal and interests payments on a foreign loan has not actually been made are
not deductible from gross income for income tax purposes. cdasia

REVENUE MEMORANDUM CIRCULAR NO. 26-85

Subject
:
Amending Revenue Memorandum Circular No. 5-85 dated February
26, 1985 on the Applicable Uniform Exchange Rate of U.S. Dollar to Philippine Peso for
Internal Revenue Tax Purposes.
To

All Internal Revenue Offices and Other Concerned

For the information and guidance of all concerned, the following rules as amended are hereby
prescribed to govern the conversion of U.S. dollar and other foreign currencies to Philippine pesos
contained in Revenue Memorandum Circular No. 5-85 dated February 26, 1985:
a)
Beginning January 1, 1985, the conversion rate to be applied shall be the prevailing
interbank reference rate for the day of the transaction.
b)
In the event that the foreign exchange rate as stated in the above paragraph (a) is
impractical or not feasible, the average interbank reference during the year shall apply. aisa dc
c)
For the purpose of converting the tax liability in U.S. dollar to Philippine Peso, the
prevailing interbank rate at the time of payment shall be applied when paid before the due date
of the tax or the prevailing interbank reference rate at the due date of tax when paid on or after
the due date of the tax.
d)
When currency involved is other than U.S. dollar, the foreign currency shall first be
converted to U.S. dollar at the prevailing exchanges rate between the two currencies.
This circular does not apply to transaction covered by Revenue Memorandum Circular No. 30-84
dated October 19, 1984, regarding the imposition of additional one per cent (1%) gross receipts
tax on buying and selling of foreign exchange for peso by bank, non-bank financial intermediaries
and other authorized foreign exchange dealers or agents and Revenue Memorandum Circular No.
32-84 dated November 7, 1984, in determining (for income tax purposes) the cost basis of
certain commodities imported beginning January 1, 1984, the value and prices thereof are quoted
in the foreign currency. cdtai
ENFORCEMENT AND PUBLICITY
All internal revenue officers and other charged with the enforcement of internal revenue laws are
enjoined to adhere to the provisions of this circular and to give it the widest publicity possible.

REVENUE REGULATIONS NO. 14-01

SUBJECT
:
Implementing Section 34(D)(3) of the National Internal Revenue
Code of 1997 Relative to the Allowance of Net Operating Loss Carry-Over (NOLCO) as a
Deduction from Gross Income.
TO

All Internal Revenue Officers and Others Concerned.

SECTION 1. Scope. Pursuant to the provisions of Section 244 of the National Internal
Revenue Code of 1997 (hereinafter referred to as the Code), these Regulations are hereby
promulgated to govern the deduction from gross income of the Net Operating Loss Carry-Over
(NOLCO) pursuant to Section 34 (D) (3) of the Code, which provides:
"Net Operating Loss Carry-Over The net operating loss of the business or enterprise for any
taxable year immediately preceding the current taxable year which had not been previously
offset as deduction from gross income shall be carried over as a deduction from gross income for
the next three (3) consecutive taxable years immediately following the year of such loss:
Provided, however, That any net loss incurred in a taxable year during which the taxpayer was
exempt from income tax shall not be allowed as a deduction under this Subsection. Provided,
further, That a net operating loss carry-over shall be allowed only if there has been no substantial
change in the ownership of the business or enterprise in that
"(i)
Not less than seventy percent (75%) in nominal value of outstanding issued shares if the
business is in the name of a corporation is held by or on behalf of the same persons; or
"(ii)
Not less than seventy-five percent (75%) of the paid up capital of the corporation if the
business is in the name of a corporation, is held by or on behalf of the same persons.
"For purposes of this Subsection the term 'net operating loss' shall mean the excess of allowable
deduction over gross income of the business in a taxable year:
"Provided, That for mines other than oil and gas wells, a net operating loss without the benefit of
incentives provided for under Executive Order No. 226 , as amended otherwise known as the
Omnibus Investments Code of 1987, incurred in any of the first ten (10) years of operation may
be carried over as a deduction from taxable income for the next five (5) years immediately
following the year of such loss. The entire amount of the loss shall be carried over to the first of
the five (5) taxable years following the loss and any portion of such loss which exceeds the
taxable income of such first year shall be deducted in like manner from the taxable income of the
next remaining four (4) years."
SECTION 2.

General Principles and Policies.

2.1
For purposes of these Regulations, the allowance for deduction of NOLCO shall be limited
only to net operating losses accumulated beginning January 1, 1998.

2.2
In general, NOLCO shall be allowed as a deduction from the gross income of the same
taxpayer who sustained and accumulated the net operating losses regardless of the change in its
ownership. This rule shall also apply in the case of a merger where the taxpayer is the surviving
entity.
2.3
Unless otherwise provided in these Regulations, NOLCO of the taxpayer shall not be
transferred or assigned to another person, whether directly or indirectly, such as, but not limited
to, the transfer or assignment thereof through a merger, consolidation or any form of business
combination of such taxpayer with another person. ASaTCE
2.4
NOLCO shall also be allowed if there has been no substantial change in the ownership of
the business or enterprise in that not less than 75% in nominal value of outstanding issued
shares or not less than 75% of the paid up capital of the corporation, if the business is in the
name of the corporation, is held by or on behalf of the same persons.
The 75% equity, ownership or interest rule prescribed in these Regulations shall only apply to a
transfer or assignment of the taxpayer's net operating losses as a result of or arising from the
said taxpayer's merger or consolidation or business combination with another person. In case the
transfer or assignment of the taxpayer's net operating losses arises from the said taxpayer's
merger, consolidation or combination with another person, the transferee or assignee shall not be
entitled to claim the same as deduction from gross income unless, as a result of the said merger,
consolidation or combination, the shareholders of the transferor/assignor, or the transferor (in
case of other business combinations) gains control of at least 75% or more in nominal value of
the outstanding issued shares or paid up capital of the transferee/assignee (in case the
transferee/assignee is a corporation) or 75% or more interest in the business of the
transferee/assignee (in case the transferee/assignee is other than a corporation). DACaTI
2.5
Unless otherwise provided in these Regulations, an individual (including estate or trust)
engaged in trade or business or in the exercise of profession, or a domestic or resident foreign
corporation may be allowed to claim deduction of his/its corresponding NOLCO: Provided,
however, that an individual who claims the 10% optional standard deduction shall not
simultaneously claim deduction of the NOLCO: Provided, further, that the three-year reglementary
period shall continue to run notwithstanding the fact that the aforesaid individual availed of the
10% optional standard deduction during the said period. SDaHEc
2.6
The three-year reglementary period on the carry-over of NOLCO shall continue to run
notwithstanding the fact that the corporation paid its income tax under the "Minimum Corporate
Income Tax" computation.
2.7

NOLCO shall be availed of on a "first-in, first-out" basis.

2.8
The net operating loss incurred by a taxpayer in the year in which a substantial change in
ownership in such taxpayer occurs shall not be affected by such change in ownership,
notwithstanding subsections 2.3 and 2.4.
SECTION 3. Definition of Terms. For purposes of these Regulations, the words and phrases
herein provided shall mean as follows:
3.1
Gross Income Except as otherwise provided in these Regulations, the term "Gross
Income" means the pertinent items of income referred to in Section 32(A) of the Tax Code of 1997
which are required to be declared in the taxpayer's Income Tax Return for purposes of computing
his taxable income as defined in Section 31 of the same Code. All exempt income and other items
of income subject to final tax shall not form part of the gross income.
3.2
Allowable Deductions The term "Allowable Deductions" means the items of deduction
enumerated under Section 34(A) to (J) and Section 34(M) , including the special deductions
allowed to insurance companies under Section 37 of the Code, but excluding NOLCO and any
item of incentive deduction allowable under any special law that does not actually involve cash
outlay: Provided, that, in the case of an individual entitled to claim the Optional Standard
Deduction (OSD) under Section 34(L) , in lieu of the deductions enumerated under Section 34(A)
to (K) , the term "allowable deductions" shall mean the aforesaid OSD plus deduction of premium
payments on health and/or hospitalization insurance as provided under Section 34(M) of the

Code, if applicable. ICHDca

3.3
Net Operating Loss The term Net Operating Loss" shall mean the excess of allowable
deduction over gross income of the business in a taxable year.
3.4
Nominal Value of Outstanding Issued Shares The term "Nominal Value of Outstanding
Issued Shares " shall refer to the par value (in case of par value shares of stock) or stated value
(in case of no par value shares of stock) of shares of stock issued to the stockholders of the
corporation.
3.5
Paid Up Capital of the Corporation The term "Paid Up Capital of the Corporation" shall
refer to the total amount paid by stockholders for their subscriptions in the shares of stock of the
corporation, including any amount paid over and above the par value or stated value of the share
of stock (e.g., premium on capital). For this purpose, the taxpayers shall maintain complete and
accurate records of the paid-up capital of the shareholders.
3.6
Taxable Income The term "Taxable Income" means the excess amount of the pertinent
items of gross income over the allowable deductions and/or personal and additional exemptions,
if any, authorized under the Code or under any special law.
3.7
Taxable Year The term "Taxable Year" means the calendar year, or the fiscal year ending
during such calendar year, upon the basis of which the net income is computed under Title II of
the Code. Taxable year includes, in the case of a return made for a fractional part of a year, the
period for which such return is made. The term "Fiscal Year" means an accounting period of
twelve (12) months ending on the last day of any month other than December.
3.8
Substantial Change in the Ownership of the Business or Enterprise The term
"Substantial Change in the Ownership of the Business or Enterprise" shall refer to a change in the
ownership of the business or enterprise as a result of or arising from its merger or consolidation
or combination with another person in the manner as provided in subsection 2.4 of these
Regulations. Any change in ownership as a result of or arising thereunder shall not be treated as
a substantial change for as long as the stockholders of the party thereto, to whom the net
operating loss is attributable, gains or retains 75% or more interest after such merger or
consolidation or combination.
3.9
Merger For purposes of these Regulations, the term "Merger" shall refer to the
absorption of a corporation by another corporation, the latter retaining its own name and identity
and acquiring the assets, liabilities, franchises and powers of the former, and the absorbed
corporation ceasing to exist as a separate juridical person.
3.10 Consolidation For purposes of these Regulations, the term "Consolidation" shall refer to
a situation when two or more corporations are extinguished, and by the same process a new one
is created, taking over the assets and assuming the liabilities of the said extinguished
corporations; or the unification of two or more corporations into a single new corporation, having
the combined capital, franchises and powers of all its constituents.
3.11 Combination For purposes of these Regulations, the term "Combination" shall refer to a
situation when an owner of a business, organized as a sole proprietorship, admits a partner in his
business for the purpose of forming a co-partnership, or any such business combination which, in
effect, is similar or synonymous thereto.
3.12 By or on Behalf of the Same Persons The term "By or on Behalf of the Same Persons"
shall refer to the maintenance of ownership despite change as when:
1.
No actual change in ownership is involved in case the transfer involves change from direct
ownership to indirect ownership, or vice versa.
Illustration:
Facts: P Corporation owns Q Corporation that has NOLCO. P Corporation transfers Q Corporation's
shares to R Corporation in exchange for 100% of R Corporation shares.
Held: Q Corporation's NOLCO is retained because Q Corporation's shares are held "by" R
Corporation "on behalf of" P Corporation, the original owner.

2.
No actual change in ownership is involved as in the case of merger of the subsidiary into
the parent company.
Illustration:
Facts: X Corporation owns 100% of Y Corporation. Y Corporation owns 100%, of Z Corporation. Z
Corporation has NOLCO. Z Corporation is merged into Y Corporation.
Held: Z Corporation's NOLCO should be retained and transferred to Y Corporation. Prior to the
merger, X Corporation already indirectly owned Z Corporation, i.e., Z Corporation's shares were
held "by" Y Corporation "on behalf of" X Corporation. After the merger, X now directly owns Z
Corporation [absorbed corporation] which continues to exist in Y Corporation.
Any reference in these Regulations to the "75% equity, ownership, or interest rule", "75% or more
in nominal value", "75% or more interest", and other similar terms shall be construed within the
context of this definition.
Notwithstanding the above, in determining whether there is actual change in ownership in the
above-mentioned and similar cases, each and every step of the transaction shall be considered
and the whole transaction or series of transactions shall be treated as a single unit.
SECTION 4. Taxpayers Entitled to Deduct NOLCO from Gross Income. Any individual
(including estates and trusts) engaged in trade or business or in the exercise of his profession,
and domestic and resident foreign corporations subject to the normal income tax (e.g.,
manufacturers and traders) or preferential tax rates under the Code (e.g., private educational
institutions, hospitals, and regional operating headquarters) on their taxable income as defined in
Section 3 of these Regulations shall be entitled to deduct from his/its gross income for the current
year his/its accumulated net operating losses for the immediately preceding three (3) consecutive
taxable years: Provided, however, that net operating losses incurred or sustained prior to January
1, 1998 shall not qualify for purposes of the NOLCO. Provided, further, that any provision of these
Regulations notwithstanding, the following shall not be entitled to claim deduction of NOLCO:
4.1
Offshore Banking Unit (OBU) of a foreign banking corporation, and Foreign Currency
Deposit Unit (FCDU) of a domestic or foreign banking corporation, duly authorized as such by the
Bangko Sentral ng Pilipinas (BSP);
4.2
An enterprise registered with the Board of Investments (BOI) with respect to its BOIregistered activity enjoying the Income Tax Holiday incentive. Its accumulated net operating
losses incurred or sustained during the period of such Income Tax Holiday shall not qualify for
purposes of the NOLCO;
4.3
An enterprise registered with the Philippine Economic Zone Authority (PEZA), pursuant to
R.A. No. 7916 , as amended, with respect to its PEZA-registered business activity. Its accumulated
net operating losses incurred or sustained during the period of its PEZA registration shall not
qualify for purposes of the NOLCO;
4.4
An enterprise registered under R.A. No. 7227 , otherwise known as the Bases Conversion
and Development Act of 1992, e.g., SBMA-registered enterprises, with respect to its registered
business activity. Its accumulated net operating losses incurred or sustained during the period of
its said registered operation shall not qualify for purposes of the NOLCO;
4.5
Foreign corporations engaged in international shipping or air carriage business in the
Philippines; and
4.6
In general, any person, natural or juridical, enjoying exemption from income tax, pursuant
to the provisions of the Code or any special law, with respect to its operation during the period for
which the aforesaid exemption is applicable. Its accumulated net operating losses incurred or
sustained during the said period shall not qualify for purposes of the NOLCO.
SECTION 5.

Determination of Substantial Change in the Ownership of the Business.

5.1
Time of Determination of Substantial Change in the Ownership of the Business;
Determined as of the End of the Taxable Year The substantial change in the ownership of the
business or enterprise shall be determined as of the end of the taxable year when NOLCO is to be

claimed as deduction. Whether or not substantial change in ownership occurred shall be

determined on the basis of any change in the ownership of interest in the said business or
enterprise arising from or incident to its merger, or consolidation, or combination with another
person (e.g., in the case of merger or consolidation of two or more corporations, such change
shall be determined based on the ownership of the outstanding shares of stock issued or based
on paid-up capital as of the end of the taxable year, and as a result of or arising from the said
merger or consolidation).
5.2
When Change Occurs A change in the ownership of the business occurs when the
person who sustained net operating losses enters into a merger, or consolidation or combination
with another person, thereby resulting to the transfer or conveyance of the said net operating
losses, to another person, in the course of the said merger or consolidation or combination.
(a)
When No Substantial Change Occurs No substantial change in ownership of the
business occurs if, as a result of the said merger or consolidation or combination, the
stockholders of the transferor, or the transferor, in case of other business combinations, gains
control of at least 75% or more in nominal value of the outstanding issued shares or paid-up
capital of the transferee-assignee (in case the transferee-assignee is a corporation) or 75% or
more interest in the business of the transferee-assignee (in case the transferee-assignee is other
than a corporation).
(b)
When Substantial Change Occurs A substantial change in ownership of the business
occurs if, as a result of the transaction referred to in subsection 5.2 (a) hereof, the stockholders of
the transferor or the transferor, in case of other business combinations, gains control of the
aforesaid transferee-assignee only to the extent of less than 75%.
SECTION 6.

Entitlement to Net Operating Loss Carry-Over.

6.1
In General In general, only net operating losses incurred by a qualified taxpayer for the
period beginning January 1, 1998 may be carried over to the next three (3) immediately
succeeding taxable years following the year of such loss for purposes of the NOLCO deduction.
Provided, however, that for mines other than oil and gas wells, a net operating loss without the
benefit of incentives provided for under Executive Order No. 226, otherwise known as the
Omnibus Investments Code of 1987, as amended, incurred in any of the first ten (10) years of
operation may be carried over as a deduction from taxable income for the next five (5) years
immediately following the year of such loss. Provided, further, that the entire amount of the loss
shall be carried over to the first of the five (5) taxable years following the loss, and any portion of
such loss which exceeds the taxable income of such first year shall be deducted in like manner
from the taxable income of the next remaining (4) four years.
6.2
Transitory Apportionment of NOLCO, in Case of Corporation Using the Fiscal Year
Accounting Period In general, only net operating losses incurred beginning January 1, 1998
may be claimed as a NOLCO deduction. In the case of a corporation using a fiscal year accounting
period as of the said dates whose result of operations for the fiscal year 1997-1998 shows a net
operating loss, the allowable NOLCO for the succeeding fiscal years shall be determined, as
follows:
NOLCO for the entire fiscal year (1997-1998)
Multiplied by the ratio of:

xxx

No. of months in 1998

12 mos. covering FY 97-98 xxx

NOLCO to be carried over to FYs 1998-1999, 1999-2000,
and/or 2000-2001

xxx

6.3
Where Taxpayer is Exempt, or Partly Exempt from Income Tax, or Enjoying Preferential Tax
Treatment Under Special Laws Net operating loss or losses incurred by any person who is
exempt from income tax, or enjoying preferential tax treatment pursuant to the provisions of
special laws, shall not be allowed a NOLCO deduction (e.g., any BOI-registered enterprise
enjoying income tax holiday pursuant to E.O. No. 226, as amended, otherwise known as the

Omnibus Investments Code of 1987; or any PEZA-registered enterprise enjoying preferential tax
treatment or income tax holiday pursuant to R.A. No. 7916, as amended; any person enjoying
preferential tax treatment pursuant to R.A. No. 7227, otherwise known as the Bases Conversion
and Development Act of 1992. See Section 4 of these Regulations for further discussion).
In case any of the aforementioned persons is engaged in both registered and unregistered
business activities under any of the aforesaid laws (e.g., a corporation with a BOI-registered
activity enjoying income tax holiday; and other unregistered business activities not enjoying any
BOI incentive) the net operating loss or losses sustained or incurred by the said BOI-enterprise
from its registered activities shall not be allowed as NOLCO deduction from its gross income
derived from the unregistered business activities.
6.4
Quarterly and Annual Availment of NOLCO NOLCO shall be allowed as deduction in
computing the taxpayer's income taxes per quarter and annual final adjustment income tax
returns: Provided, however, that if per the taxpayer's final annual adjustment income tax return,
the entire operations for the year resulted to a net operating loss, such net operating loss may be
claimed as NOLCO deduction in the immediately succeeding taxable year: Provided, further, that
NOLCO may be claimed as deduction only within a period of three (3) consecutive taxable years
immediately following the year the net operating loss was sustained or incurred. In order that
compliance with this three-year statutory requisite may be effectively monitored, the taxpayer
shall, at all times, show its NOLCO deduction, in its income tax return, as a separate item of
deduction. In no case may NOLCO be claimed, as a part of the taxpayer's other itemized
deductions, like under deduction of "losses," in general.
6.5
NOLCO in Relation to the Minimum Corporate Income Tax (MCIT) In general, domestic
and resident foreign corporations subject to the normal income tax rate are liable to the 2% MCIT,
if applicable, computed based on gross income, whenever the amount of the MCIT is greater than
the normal income tax due (computed with the benefit of NOLCO, if any), pursuant to Sections 27
or 28 of the Code. Thus, such corporation cannot enjoy the benefit of NOLCO for as long as it is
subject to MCIT in any taxable year. Provided, however, that the running of the three-year period
for the expiry of NOLCO is not interrupted by the fact that such corporation is subject to MCIT in
any taxable year during such three-year period.
SECTION 7. Presentation of NOLCO in Tax Return and Unused NOLCO in the Income Statement.
The NOLCO shall be separately shown in the taxpayer's income tax return (also shown in the
Reconciliation Section of the Tax Return) while the Unused NOLCO shall be presented in the Notes
to the Financial Statements showing, in detail, the taxable year in which the net operating loss
was sustained or incurred, and any amount thereof claimed as NOLCO deduction within three (3)
consecutive years immediately following the year of such loss. Failure to comply with this
requirement will disqualify the taxpayer from claiming the NOLCO.
SECTION 8. Repealing Clause. Any revenue ruling or issuance inconsistent herewith shall be
considered repealed, amended or modified accordingly.
SECTION 9.

Effectivity Clause. These Regulations shall take effect beginning January 1, 1998.

REVENUE REGULATIONS NO. 05-99

SUBJECT
:
Implementing Section 34(E) of the Tax Code of 1997 on the
Requirements for Deductibility of Bad Debts from Gross Income
TO

All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. Pursuant to the provisions of Section 244 of the Tax Code of 1997, these
regulations are hereby promulgated to implement the provisions of Section 34(E) of the same
Code on the requirements for deductibility of bad debts from the gross income of a corporation or
an individual engaged in trade or business or a professional engaged in the practice of his
profession. cdasia
SECTION 2. Definition of Terms. For purposes of these regulations, the following words and
phrases shall have the following meaning, viz:
a.
"Bad debts" shall refer to those debts resulting from the worthlessness or
uncollectibility, in whole or in part, of amounts due the taxpayer by others, arising from money
lent or from uncollectible amounts of income from goods sold or services rendered.
b.
"Securities" shall mean shares of stock in a corporation and rights to subscribe for or to
receive such shares. The term includes bonds, debentures, notes or certificates, or other evidence
of indebtedness, issued by any corporation, including those issued by a government or political
subdivision thereof, with interest coupons or in registered form.
c.
"Actually ascertained to be worthless" In general, a debt is not worthless simply
because it is of doubtful value or difficult to collect. Worthlessness is not determined by an
inflexible formula or slide rule calculation but upon the exercise of sound business judgment. The
determination of worthlessness in a given case must depend upon the particular facts and the
circumstances of the case. A taxpayer may not postpone a bad debt deduction on the basis of a
mere hope of ultimate collection or because of a continuance of attempts to collect notes which
have long become overdue, and where there is no showing that the surrounding circumstances
differ from those relating to other notes which were charged off in a prior year. While a mere hope
probably will not justify postponement of the deduction, a reasonable possibility of recovery will
permit the account to be carried along notwithstanding that the probabilities are that the debt
may not be collected at all. The creditor may offer evidence to show some expectation that the
debt would have been paid in the intervening years, and that subsequently, the hope was
shattered or appeared to have been unfounded. If, for example, the creditor could show that
during the years he attempted to collect the debt, the debtor had property the title of which was
in dispute but which would enable him to pay his debts when the title was cleared, the creditor
would be entitled to defer the deduction on the ground that there was no genuine ascertainment
of worthlessness.
Thus, accounts receivable, the amount whereof is insignificant and the collection of which
through court action may be more costly to the taxpayer, may be written-off as bad debts even
without conclusive evidence that the taxpayer's receivable from a debtor has definitely become
worthless. LexLib
Good faith does not require that the taxpayer be an "incorrigible optimist" but on the other hand,
he may not be unduly pessimistic. Creditors do not have to wait until some turn of the wheel of
fortune may bring their debtors into affluence. The taxpayer may strike a middle course between
pessimism and optimism and determine debts to be worthless in the exercise of sound business
judgment based upon as complete information as is reasonably ascertainable. The taxpayer need
not have perfect discernment.

d.
"Actually charged off from the taxpayers books of accounts" This phrase means that the
amount of money lent by the taxpayer (in the course of his business, trade or profession) to his
debtor had been recorded in his books of account as a receivable has actually become worthless
as of the end of the taxable year, that the said receivable has been cancelled and written-off from
the said taxpayer's books of account. A mere recording in the taxpayer's books of account of
estimated uncollectible accounts does not constitute a write-off of the said receivable, hence,
shall not be a valid basis for its deduction as a bad debt expense. In no case may any bad debt
deduction be allowed unless the facts pertaining to the money or property lent and its
cancellation or write-off from the taxpayer's accounting records, after having been determined
that the same has actually become worthless, have been complied with by the taxpayer.
SECTION 3. Requisites for Valid Deduction of Bad Debts From Gross income. General Rule.
In general, the requisites for deductibility of bad debts are:
(1)
There must be an existing indebtedness due to the taxpayer which must be valid and
legally demandable;
(2)

The same must be connected with the taxpayer's trade, business or practice of profession;

(3)
The same must not be sustained in a transaction entered into between related parties
enumerated under Sec. 36(B) of the Tax Code of 1997 ;
(4)
The same must be actually charged off the books of accounts of the taxpayer as of the end
of the taxable year; and
(5)
The same must be actually ascertained to be worthless and uncollectible as of the end of
the taxable year.
Before a taxpayer may charge off and deduct a debt, he must ascertain and be able to
demonstrate with reasonable degree of certainty the uncollectibility of the debt. The
Commissioner of Internal Revenue will consider all pertinent evidence, including the value of the
collateral, if any, securing the debt and the financial condition of the debtor in determining
whether a debt is worthless, or the assigning of the case for collection to an independent
collection lawyer who is not under the employ of the taxpayer and who shall report on the legal
obstacle and the virtual impossibility of collecting the same from the debtor and who shall issue a
statement under oath showing the propriety of the deductions thereon made for alleged bad
debts. Thus, where the surrounding circumstances indicate that a debt is worthless and
uncollectible and that legal action to enforce payment would in all probability not result in the
satisfaction of execution on a judgment, a showing of those facts will be sufficient evidence of the
worthlessness of the debt for the purpose of deduction.
Exception: In the case of banks, however, in lieu of requisite No. 5 above, the Bangko Sentral ng
Pilipinas (BSP), thru its Monetary Board, shall ascertain the worthlessness and uncollectibility of
the bad debts and it shall approve the writing off of the said indebtedness from the banks' books
of accounts at the end of the taxable year. The bank though should still comply with requisites
Nos. 1-4 as enumerated above before it can avail of the benefit of deduction.
Also, in no case may a receivable from an insurance or surety company be written-off from the
taxpayer's books and claimed as bad debts deduction unless such company has been declared
closed due to insolvency or for any such similar reason by the Insurance Commissioner. cda
SECTION 4. Tax Benefit Rule. The recovery of bad debts previously allowed as deduction in
the preceding year or years shall be included as part of the taxpayer's gross income in the year of
such recovery to the extent of the income tax benefit of said deduction. Example: If in the year
the taxpayer claimed deduction of bad debts written-off, he realized a reduction of the income
tax due from him on account of the said deduction, his subsequent recovery thereof from his
debtor shall be treated as a receipt of realized taxable income. Conversely, if the said taxpayer
did not benefit from the deduction of the said bad debt written-off because it did not result to any
reduction of his income tax in the year of such deduction (i.e. where the result of his business
operation was a net loss even without deduction of the bad debts written-off), then his
subsequent recovery thereof shall be treated as a mere recovery or a return of capital, hence, not
treated as receipt of realized taxable income.

SECTION 5. Securities Becoming Worthless. If securities, as defined under Sec. 2(b) hereof,
held as capital asset, are ascertained to be worthless and charged off within the taxable year, the
loss resulting therefrom shall be considered as a loss from the sale or exchange of capital asset
made on the last day of such taxable year. The taxpayer, however, has to prove through clear
and convincing evidence that the securities are in fact worthless.
This rule, however, is not true in the case of banks or trust companies incorporated under the
laws of the Philippines, a substantial part of whose business is the receipt of deposits.
SECTION 6. Repealing Clause. The provision of any revenue regulations, revenue
memorandum order, revenue memorandum circular or any other revenue issuances inconsistent
with these Regulations are hereby repealed, amended, or modified accordingly. Cdpr
SECTION 7. Effectivity Clause. These Regulations shall take effect fifteen (15) days after
publication in any newspaper of general circulation.

REVENUE REGULATIONS NO. 05-76

SUBJECT
:
Prescribing Allowable Cost Depletion Allowance Beginning Calendar
Year 1975 and Fiscal Year Beginning July 1, 1975, pursuant to Section 30 (g) (1) of the
National Internal Revenue Code, as amended
TO

All Internal Revenue Officers and Others Concerned

Pursuant to Sections 30 (g)(1) and 338, in relation to Section 4 (1) of the National Internal
Revenue Code, as amended, the following regulations are hereby promulgated and shall be
known as Revenue Regulations No. 5-76. cdta
SECTION 1. Scope. These regulations shall cover cost depletion allowance, allowable as
deduction in computing taxable income beginning with the calendar year 1975 and fiscal year
beginning July 1, 1975, pursuant to Section 30 (g) (1) of the National Internal Revenue Code, as
amended.
SECTION 2. Allowance of Deduction for Depletion. In the case of mines, oil and gas wells and
other natural deposits, there shall be allowed as deductions in computing its taxable income a
reasonable allowance for depletion computed in accordance with the following sections beginning
calendar year 1975 and fiscal year beginning July 1, 1975.
SECTION 3. Who May Avail of the Cost Depletion. Annual depletion deductions are allowed
only to mining entities which own an economic interest in mineral deposits. An economic interest
is possessed in every case in which the taxpayer has acquired by investment any interest in
mineral, in place and secures, by any form of legal relationship, such as, but not limited to,
operating agreement and service contract agreement, income derived from the extraction of the
mineral, to which it must look for a return of its capital. A person who has no capital investment in
the mineral deposit does not possess an economic interest merely because through a contractual
relation he possesses a mere economic or pecuniary advantage derived from production.
SECTION 4. Basis of Cost Depletion. The basis upon which the cost depletion is to be allowed
in respect of a property being mined shall be the adjusted cost basis of the mining property being
mined as of December 31, 1974 for those on a calendar year basis and June 30, 1975 for those
on a fiscal year basis beginning July 1, 1975.

For this purpose, the adjusted cost basis shall be the accumulated exploration and development
expenses incurred on the mining properties as of December 31, 1974 for those on a calendar
year basis and June 30, 1975 for those on a fiscal year basis beginning July 1, 1975 minus
accumulated cost depletion that should have been deducted as of the same date on the same
property. cd
Accumulated exploration expenses shall include the amount paid or incurred for the purpose of
ascertaining the existence, location, extent or quality of any deposit of ore or other minerals
before the beginning of the development stage of mine or deposit of a particular mining property.
Exploration expenses shall not include expenditures for improvements subject to allowances for
depreciation. However, allowances for depreciation of such improvements which were used in the
exploration of ores or minerals shall form part of exploration expenditures.
Development expenditures shall include all capital expenditures paid or incurred during the
development stage of the mine or other natural deposits. The development stage of the mine or
other natural deposit will be deemed to begin at the time when, in consideration of all the facts
and circumstances (including the action of the taxpayer) deposits of ore or other minerals are
shown to exist in sufficient quantity and quality in a particular area to reasonably justify
commercial exploitation and actually commence commercial extraction. Development
expenditures shall not include expenditures for improvements subject to allowances for
depreciation. However, allowances, for depreciation of such improvements which are used in the
development of ores or mineral, shall form part of development expenditures.
SECTION 5.
(a)

Limitation of Cost Depletion.

The basis for cost depletion of mineral deposits does not include:

1.
Amounts recoverable through depreciation, through deferred expenses and through
deductions other than depletion;
2.

The residual value of improvements at the end of operation.

(b)
Such basis does not include exploration and development expenses incurred on mining
properties or areas other than those presently being mined. These expenses shall be treated as
deferred expenses (capitalized) to be taken into account as deduction in the future in the form of
allowances for cost depletion if ore mineral reserves warrant commercial production or as a writeoff, in case of abandonment, in the event commercial operation is not warranted as confirmed by
the Bureau of Mines.
(c)
The annual allowable cost depletion shall not exceed the market value as used for
purposes of imposing the mining ad valorem taxes in the mine of the product thereof which has
been mined and sold during the year for which the return and computation are made. Market
value shall mean the actual market value of the annual gross output of the minerals or mineral
extracted or produced from the particular mining property.
(d)
The allowable cost depletion deduction shall be limited only to the extent of the capital
invested in the particular mining property. For this purpose, capital invested in the particular
mining property shall include the accumulated exploration and development expenditures and
expenditures incurred on the on-going mine exploration and development on the same mining
area which
1.

increase the value of the mine;

2.

decreases the cost of production of mineral units; or

3.
restores property to its previous condition or in making good the exhaustion thereof for
which an allowance is or has been made.
In fine, no further deduction for cost depletion shall be allowed when the sum of the cost
depletion equals the cost of adjusted basis of the property plus allowable capital additions.
SECTION 6. Manner of Computation of Cost Depletion. The cost depletion for taxable year
beginning calendar year 1975 and fiscal year beginning July 1, 1975 shall be computed by
dividing the adjusted cost basis as of December 31, 1974 of June 30, 1875, as the case may be,

by the number of units of minerals remaining as of the taxable year and by multiplying the
depletion unit so determined by the number of units of minerals sold within the taxable year.
In the selection of a unit of mineral for depletion, preference shall be given to the principal or
customary unit or units paid for in the products sold, such as tons of ore, barrels of oil, or
thousands of cubic feet of natural gas.
As used in this regulation, the phrase
(1)
"the number of units of minerals remaining as of the taxable year" is the number of units
of minerals remaining at the end of the period to be recovered from the property (including units
recovered but not sold) plus the "number of units sold within the taxable year";
(2)

"number of units sold within the taxable year" is

a.
In the case of taxpayer reporting income on the cash basis include units for which
payments were received within the taxable year although extracted or sold prior to the period
and exclude units sold but not paid for in the taxable year; and
b.
In the case of taxpayer reporting income on the accrual method include all units extracted
and sold during the period, whether paid for or not, but does not include units with respect to
depletion deductions which were allowed or allowable prior to the taxable year.
In the case of natural gas or oil wells, the taxpayer may compute the cost depletion in respect of
such property for the taxable year by multiplying the adjusted cost basis of the property by a
fraction, the numerator of which is equal to the number of cubic feet or barrels of oil recovered
during the year and the denominator of which is equal to the expected recoverable number of
cubic feet of gas or barrels of oil at the end of the year plus the number of cubic feet of gas or
barrels of oil recovered during the year.
SECTION 7. Determination of Mineral Contents of Deposits Remaining as of the Taxable Year.
The mineral contents of deposits remaining as of the taxable year pertains to the estimated
mineral products reasonably known or on good evidence believed to have existed in place as of
the end of the taxable year, the estimate or determination of which was made according to the
method current in the industry and in the light of the most accurate and reliable information
obtainable.
For purposes of computing cost depletion allowable for the taxable year, the estimated mineral
products remaining as of the taxable year shall include both quantity and grade
(a)
The positive ores and mineral deposits, which include ores and minerals "blocked out" and
"developed" or "assured" in the usual conventional meaning; and
(b)
The probable or prospective ores and mineral deposits, which include ores or minerals that
are believed to exist on the basis of good evidence although not actually known to occur on the
basis of existing development. Such probable or prospective ores or minerals may be estimated:
1.
As to quantity, only in case they are extensions of known deposits or are new bodies or
masses whose existence is indicated by geological surveys or other evidence to a high degree of
probability; and
2.

As to grade, only in accordance with the best indications available as to richness.

If the quantity of recoverable units of minerals in the deposit has been previously estimated for
the prior year or years, and if there has been no known change in the facts upon which the prior
estimate was based, the quantity of recoverable units of mineral in the deposit as of the taxable
year will be the quantity remaining from the prior estimate. However, for any taxable year for
which it is ascertained, either by the taxpayer or the Commissioner of Internal Revenue, from any
source, such as operations or development work prior to the close of the taxable year, that the
remaining recoverable mineral units as of the taxable year are materially greater or less than the
quantity remaining from the prior estimate, then the estimate of the remaining recoverable units
shall be revised and the annual cost depletion allowance with respect to the property for the
taxable year and for subsequent taxable years will be based upon the revised estimate until a
change in the facts required another revision. Such revised estimate will not, however, change

the adjusted basis for depletion.

SECTION 8. Statement to be Attached to the Return. There shall be attached to the return of
the taxpayer for such taxable year a sworn statement by a responsible officer setting forth, in
complete and summary form, the pertinent information required by these regulations with
respect to each such mineral property or improvement (including oil and gas properties or
improvements) as enumerated hereunder:
(i)

Location plan and brief description of each property;

(ii)
The date of acquisition of each property and the accumulated cost to date of each
property;
(iii)

The accumulated cost depletion for each of the mineral property and improvements;

(iv)
The estimated number of units of each kind of mineral at the end of the taxable year as
estimated by the Head of the Geological and Mining Departments of the taxpayer and confirmed
by the Bureau of Mines;
(v)
The number of units sold and the number of units for which payment was received during
the year for which the return is made;
(vi)

The gross amount received from the sale of mineral;

(vii)
The amount and manner of computation of depreciation for the taxable year and the
amount of cost depletion for the taxable year; and
(viii)
be.

Such data as may be required by the Commissioner of Internal Revenue as the case may

SECTION 9. Records to be Kept. Every taxpayer claiming and making a deduction for
depletion of mineral property shall keep a separate account for each and every mining area in his
books of accounts in which shall be accurately recorded the cost or other basis of such property
and thereafter to be debited by any, and all capital additions. Likewise, the corresponding
depletion allowance account (reserve) shall be maintained which shall be credited annually with
the amounts of depletion acquired in accordance with these regulations.
In addition, the taxpayer must assemble, segregate and have readily available at his principal
place of business, all the supporting data which were used in compiling the summary statement
required to be attached to the income tax return to be filed as prescribed under Section 8 hereof.
SECTION 10. Basis of Depreciation of Improvements. There shall likewise be allowed as a
deduction a reasonable allowance for depreciation of improvements including, but not limited to,
mining and milling equipments. Such allowance shall include wear and tear and obsolescence.
The amount of depreciation that can be claimed as expenses in cases of certain equipment is
subject to the provision of Section 4 of these regulations regarding properties used in exploration
and development stages.
SECTION 11. Aggregation or Combination of Separate Properties. In the case of mining
companies with several mining properties, it may aggregate into one operating unit, several
mining properties for purposes of determining the adjusted cost basis recoverable thru depletion
subject to the following conditions:
(a)
All contiguous areas included in a single concession grant or in separate concession grants
may be constituted as a single operating unit;
(b)
Operating mineral interests which are geographically widespread may not be treated as
parts of the same operating unit;
(c)
Undeveloped operating mineral unit may be aggregated only those interests with which it
will be operated as a unit when it reaches the production stage.
For purposes of these regulations, the term
(1)
Operating mineral interest means a separate mineral interest in respect of which the cost
would be required to be taken into consideration of the mine, well or other natural deposit were in

the production stage.

(2)
Operating unit refers to the operating mineral interest which are operated together for the
purpose of producing minerals. It refers to a producing unit and not to an administrative or sales
organization. Among the factors which indicate that interests are operated as a unit are
i.

common field or operating unit; aisa dc

ii.

common supply and maintenance facilities;

iii.

common processing as treatment plants; and

iv.

common storage facilities.

Separate operating units shall have its own accounts to which all expenditures pertaining thereto
shall be debited and the credit to such amount may either be for future depletion or write-offs as
the case may be.
SECTION 12. Definition of Terms. (a) "Mineral's" means all naturally occurring inorganic
substances in solid, liquid, or any intermediate state including coal. Soil which supports organic
life, sand and gravel, guano, petroleum, geothermal energy and natural gas are included in this
term but are governed by special laws.
(b)
"Mineral Lands" are those lands in which minerals exist in sufficient quantity and grade to
justify the necessary expenditures in extracting and utilizing such minerals.
(c)

"Mineral Deposit" means a natural deposit or accumulation of minerals.

(d)
"Exploration" is the examination and investigation of lands supposed to contain valuable
minerals, by drilling, trenching, shaft sinking, tunneling, test pitting and other means, for the
purpose of probing the presence of mineral deposits and the extent thereof.
(e)
"Development" refers to steps necessarily taken to reach an ore body or mineral deposit
so that it can be mined.
(f)

"Exploitation" means the extraction and utilization of mineral deposits.

(g)
"Mining" or "to mine" means to extract, remove, utilize minerals, and includes operations
necessary for that purpose.
(h)
"Actual commercial production" shall mean the stage of mining operation attained by a
mine in which mineral or mineral products of marketable grade and quantity have been produced
and sold to local and/or foreign markets.
(i)
"Mining and Milling equipments" shall mean machineries, equipment, tools for production,
plants to convert mineral ores into saleable form, spare parts, supplies, materials, accessories,
explosives, chemicals and transportation, and communication facilities which shall include all the
items herein enumerated for commercial production which are necessary or incidental for mining,
as well as for the processing of ores into marketable form and grade, and shall include those
needed to explore and develop the mineral land for mining and the processing plants which may
be imported and installed before the actual commercial production.
(i)
"Positive ore" shall mean the full ore tonnage computed with good mining practice from
dimensions revealed in outcrops, trenches, underground working and drill holes and for which the
grade is computed from results of detailed sampling. The sites of inspection, sampling and
measurements shall be closely spaced and the geological character were so defined that the size,
shape and mineral content are well established.
(k)
"Probable" or "Prospective ore "shall mean the ore for which tonnage and grade are
computed partly specific measurement, samples and partly from projection for a reasonable
distance on geologic evidence. The sites available for inspection, measurement and sampling are
too wildly or otherwise inappropriately spaced to outline the ore completely or to establish its
grade throughout.
(1)
"Exploration stage" shall mean the step in exploring "new mines" or "old mines resuming
operations" consisting of shallow borings, trenches, test pitting, diamond drilling and

underground workings to prove the persistence and tonnage or the ore body laterally and in
depth.
SECTION 13. Repealing Clause. All existing rules and regulations or parts hereof in conflict
with the provisions of these regulations are hereby revoked.
SECTION 14. Effectivity. These regulations shall apply to depletion beginning calendar year
1975 and fiscal year beginning July 1, 1975.

REVENUE REGULATIONS NO. 13-98

SUBJECT
:
Implementing Republic Act No. 8424, "An Act Amending the National
Internal Revenue Code, as amended" Specifically Section 34 (H) Relative to the
Deductibility of Contributions or Gifts Actually Paid or Made to Accredited Donee
Institutions in Computing Taxable Income
SECTION 1. Definition of Terms. For purposes of these Regulations, the terms herein
enumerated shall have the following meanings:
a)
"Non-stock, non-profit corporation or organization" shall refer to a corporation or
association/organization referred to under Section 30 (E) and (G) of the Tax Code created or
organized under Philippine laws exclusively for one or more of the following purposes: cdasia
(i)

religious;

(ii)

charitable;

(iii)

scientific;

(iv)

athletic;

(v)

cultural;

(vi)

rehabilitation of veterans; and

(vii)

social welfare

no part of the net income or asset of which shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.
b)
"Non-government Organization (NGO)" shall refer to a non-stock, non-profit domestic
corporation or organization as defined under Section 34 (H)(2)(c) of the Tax Code organized and
operated exclusively for scientific, research, educational, character-building and youth and sports
development, health, social welfare, cultural or charitable purposes, or a combination thereof, no
part of the net income of which inures to the benefit of any private individual.
(i)
Which, not later than the fifteenth (15th) day of the third month after the close of the
NGO's taxable year in which contributions are received, makes utilization directly for the active
conduct of the activities constituting the purpose or function for which it is organized and
operated, unless an extended period is granted by the Secretary of Finance, upon
recommendation of the Commissioner;
(ii)
The level of administrative expenses of which shall, on an annual basis, not exceed thirty
percent (30%) of the total expenses for the taxable year; and
(iii)
The assets of which, in the event of dissolution, would be distributed to another accredited
NGO organized for similar purpose or purposes, or to the State for public purpose, or purposes, or
to the state for public purpose, or would be distributed by a competent court of justice to another
accredited NGO to be used in such manner as in the judgment of said court shall best accomplish
the general purpose for which the dissolved organization was organized.
(c)

"Utilization" by an accredited NGO shall refer to

(i)
Any amount in cash or in kind, including administrative expenses, paid or utilized by an
accredited NGO to accomplish one or more purposes for which it was created or organized; or
(ii)
Any amount paid to acquire an asset used, or held for use, directly in carrying out one or
more purposes for which the accredited NGO was created or organized; or
(iii)
Any amount set aside for a specific project which comes within one or more purpose or
purposes for which the accredited NGO was created, but only if at the time such amount is set
aside, the accredited NGO has established to the satisfaction of the Commissioner of Internal
Revenue that the amount will be utilized for a specific project within a period not to exceed five
(5) years, and the project is the one which can be better accomplished by setting aside such

amount than by immediate payments of funds: Provided, That, the utilization requirements
prescribed under Sec. 5 of these Regulations shall be complied with; or
(iv)
Any amount in cash or in kind invested in any activity related to the purpose for which it
was created or organized.
(v)
Any amount in cash or in kind invested in capital sustaining and generating activities, such
as but not limited to, endowment funds, trust funds, money market placements, shares of stock
and similar instruments: Provided, That, any income derived from these investments shall be
exclusively used in activities directly related to one or more purposes for which the accredited
NGO was created or organized.
(d)
"Accrediting Entity" shall refer to a non-stock, non-profit organization composed of NGO
networks, duly designated by the Secretary of Finance to establish and operationalize a system of
accreditation to determine the qualification of non-stock, non-profit corporations or organizations
and NGOs for accreditation as qualified-donee institutions. The Secretary of Finance and the
Commissioner of Internal Revenue shall oversee, monitor and coordinate with the Accrediting
Entity to ensure that the provisions of these Regulations are complied with. In this connection, the
Secretary of Finance or the Commissioner of Internal Revenue or their duly authorized
representative shall sit as ex-officio member of the Board of Trustees of the Accrediting entity
with the right to vote. The Secretary of Finance may also designate an official of a concerned
government agency, e.g. Department of Science and Technology, to assist the Board of Trustees
in the accreditation of foundations.
The Secretary of Finance shall designate an entity as an Accrediting Entity provided it has a
countrywide membership composed of (a) NGOs which belong to the sector that the Private
Accrediting Entity intends to certify; (b) NGOs which have been in existence for at least five (5)
years; and (c) NGOs not more than 50% of the members of which belong to other existing NGOs
or Private Accrediting Agencies. dctai
The Philippine Council for NGO Certification, Inc. (PCNC), a non-stock, non-profit corporation which
was established by several NGO networks (e.g., Caucus of Development NGO Networks (CODENGO); Philippine Business for Social Progress (PBSP); Association of Foundations (AF); League of
Corporate Foundations (LCF); Bishops-Businessmen's Conference for Human Development (BBC);
and the National Council for Social Development Foundation (NCSD), has been duly designated
by the Secretary of Finance as an Accrediting Entity pursuant to Memorandum of Agreement
dated January 29, 1998 executed by and between the Secretary of Finance and PCNC's Interim
Chairman.
(e)
"Religious purpose" shall refer to the promotion, propagation and accomplishment of
any form of religion, creed or religious belief recognized by the Government of the Republic of the
Philippines.
(f)
"Charitable Activity" shall refer to extending relief to the poor, distressed and
underprivileged and shall include fighting against juvenile delinquency and community
deterioration.
(g)
"Scientific and research purpose" shall refer to undertaking or assisting in pure or basic,
applied and scientific research in the field of agriculture, forestry, fisheries, industry, engineering,
energy development, food and nutrition, medicine, environment and biological, physical and
natural sciences for the public interest.
(i)
Basic research shall refer to an experimental or theoretical work undertaken primarily to
acquire new knowledge of the underlying foundations of phenomena and observable facts
without any particular application or use in view. It analyzes properties, structures or relationships
with a view to formulating and testing hypothesis, theories or laws. The results of basic research
are not generally sold but are usually published in scientific journals or circulars to interested
colleagues.
(ii)
Applied research shall refer to an original investigation undertaken in order to acquire new
knowledge. It is directed primarily towards a specific practical aim or objective. It is undertaken
either to determine possible uses for the findings of basic research or to determine new methods

or ways of achieving some specific and predetermined objectives. It involves the consideration of
the available knowledge and its extension in order to solve particular problems. Applied research
develops ideas into operational form.
(iii)
Scientific research will be regarded as carried on for public interest if the results of such
research are made available to the public on a non-discriminatory basis; or if such research is
performed for the Government of the Philippines or any of its agencies or political subdivisions; or
if such research is directed to benefit the public.
(h)
"Character building and youth and sports development (or athletic) purposes" shall
refer to and include conducting basic and applied research on youth development, initiating and
establishing youth organizations to promote and develop youth activities, including the
establishment of summer camps or centers for leadership training, conducting a program on
physical fitness and amateur sports development for the country; developing and maintaining
recreational facilities, playgrounds and sports centers; and conducting training programs for the
development of youth and athletes for national and international competitions. cdll
(i)
"Cultural activity" shall refer to and include undertaking and/or assisting in research
activities on all aspects of history, social system, customs and traditions; developing, enriching
and preserving Filipino arts and culture; developing and promoting the visual and performing
arts; and participating in vigorous implementation of bilingual policy through translation and
wider use of technical, scientific and creative publications, development of an adaptive technical
dictionary and use of Filipino as the medium of instruction.
(j)
"Educational activity" shall refer to and include the granting of scholarships to
deserving students and professional chairs for the enhancement of professional courses, and
instructing or training of individuals either through formal and informal methods, viz:
(i)
Formal method of instruction refers to the institutionalized, chronologically graded and
hierarchically structured educational system at all levels of education;
(ii)
Non-formal method of instruction refers to any deliberately organized, systematic
educational activity carried on outside the framework of the formal system to provide selected
types of learning to particular subgroups of the population, particularly out-of-school youths and
adults, for the purpose of communicating ideas, developing skills, changing attitudes or
modifying behavior or improve their character and to provide them with tools necessary for the
achievement of a higher standard of living. For the purpose of this section, a certification from the
Technical Education and Skills Development Authority (TESDA) is required for the accreditation of
the non-formal educational program which is implemented or carried out by a non-stock, nonprofit corporation, organization or an NGO.
It also includes upgrading of existing facilities to support the conduct of the above activities.
(k)
"Rehabilitation of veterans" shall include services extended to Philippine veterans and
members of their families because of financial difficulties and attendant problems; and services
extended to disabled veterans towards productive life.
(l)

"Social welfare purposes" shall refer to and include

(i)
undertaking and/or assisting in the amelioration of the living conditions of distressed
citizens particularly those who are handicapped by reasons of poverty, youth, physical and
mental disability, illness, old age, and natural disasters, including assistance to cultural
minorities;
(ii)
pursuing a program for the protection and development of children and youth, such as
providing services for drop-outs, pre-school children of low-income working mothers, and
physically handicapped children;
(iii)
providing for the rehabilitation of the youth and disabled adults, released prisoners, drug
addicts, alcoholics, mentally retarded, hansenites and similar cases; and
(iv)

providing for services to squatter families and to displaced workers.

(m)

"Health purposes" shall refer to include the pursuit of any of the following:

(i)
control, prevention and treatment of communicable and degenerative diseases, accidents
and other health disabilities;
(ii)
family planning program designed to indicate knowledge and understanding of population,
human growth and development of family life;
(iii)

environment sanitation, such as, public sewerage system and sanitary toilets; and

(iv)
nutrition, which aims to reduce the prevalence of malnutrition and increase the energy
and protein intake among households. prcd
SECTION 2.

Accreditation of non-stock, non-profit corporations/NGOs by the Accrediting Entity.

a)
The Accrediting Entity shall examine, evaluate and accredit non-stock, non-profit
corporations and NGOs as a pre-requisite for their registration with the BIR as qualified-donee
institutions under Section 34 (H)(1) and (2)(c) of the Tax Code.
(b)
Newly-organized and existing non-stock, non-profit corporations and NGOs shall apply with
the Accrediting Entity for accreditation and submit to a process of examination and evaluation.
The application for accreditation shall be accompanied by the following documents:
(i)

Articles of Incorporation and By-laws;

(ii)

Certificate of Registration with the Securities and Exchange Commission;

(iii)

Affidavit of Modus Operandi showing:

1.

the character of the organization;

2.

the purpose for which it is organized;

3.
the lists of projects/activities for the past two (2) years, or list of proposed
projects/activities for the first two (2) years of operations for newly-organized non-stock, nonprofit corporations/NGOs;
4.
the source of income and the utilization thereof, or target fund sources for newly-organized
non-stock, non-profit corporations/NGOs; and
5.
other facts relating to their operations which are relevant to their qualification as donee
institutions;
(iv)
Duly audited financial statements for the past two (2) years showing the assets, liabilities,
receipts and disbursements of existing organizations, or financial projections for the first two (2)
years for newly-organized non-stock, non-profit corporations/NGOs. prLL
(c)
The Accrediting Entity shall evaluate and accredit non-stock, non-profit corporations/NGOs
using the following major criteria:
(i)

Mission and Goals

The mission and goals of the non-stock, non-profit corporation/NGO should justify its existence.
Statements of mission and goals shall serve as guideposts for its planning and operations and a
framework for decision-making.
(ii)

Resources

The criterion focuses on the adequacy of the resources and the effectiveness of the structure and
systems of the non-stock, non-profit corporation/NGO. Areas that should be evaluated under this
criterion include the organization structure, human, financial and physical resources. Evaluation
shall take into account the names, positions and qualifications of the individuals or committee
members who manage and make decisions for the non-stock, non-profit corporation/NGO, its
sources of funds and distribution of financial resources, and the following exhibits at the time of
examination, among others:
1.

Minutes of the Board meetings

2.

Table of organization;

3.

Policy Manual, if any;

4.

Personnel Manual, if any;

5.
Budget for the past two (2) years, or proposed projects for the first two (2) years of
operations for newly-organized non-stock, non-profit corporations/NGOs; and
6.
Audited financial statements for the past two years for existing non-stock, non-profit
corporations/NGOs.
(iii)

Program Implementation and Evaluation

The non-stock, non-profit corporation/NGO must demonstrate that it is effectively using its
resources to accomplish the purposes for which it was created. There should be clearly defined
policies, priorities and guidelines for implementing the various programs and projects. Evaluation
shall consider programs and projects implemented within the last two years; description of how
its programs/projects/services are managed; how the following procedures are carried out; record
keeping, monitoring, evaluating and contingency planning; programs/projects vis-a-vis the needs
and priorities of its beneficiaries; the present documentation or results of evaluation and
provisions for adequate training, people participation, development of leaders and eventual selfsufficiency.
(iv)

Planning for the Future

The non-stock, non-profit corporation/NGO must provide evidence that it has the capability to
plan, implement and monitor its programs and projects. Evaluation shall provide evidence that
the non-profit corporation/NGO has mechanisms for planning, implementing and monitoring its
programs and projects and for ensuring the continuity of programs/projects even when external
funding has ceased. Evaluation shall also rely on the presentation of the following exhibits at the
time of visit:
1.

Organizational plan

2.

Monitoring and evaluation tools

(d)
The Secretary of Finance, upon the recommendation of the Board of Trustees of the
Accrediting Entity can waive the submission of duly audited financial statements for newlyorganized non-stock, non-profit corporations/NGOs which have been organized to carry out
programs of national significance, e.g. foundation to build the National Museum. They shall be
eligible to apply for a three (3)-year probationary accreditation and registration as qualified
donee institutions with the Accrediting Entity.
(e)
Existing non-stock, non-profit corporations/NGOs which have qualified as donee
institutions under BIR-NEDA Regulations 1-81, as amended , shall have three (3) years beginning
the effectivity of these rules and regulations within which to secure a Certificate of Accreditation
from the Accrediting Entity. Failure by the said non-stock, non-profit corporations/NGOs to secure
accreditation within the three-year period shall be a ground for the cancellation by the BIR of their
Certificates of Registration as qualified-donee institutions: Provided, however, That donations and
contributions to the said non-stock, non-profit corporations/NGOs during the three-year period
shall still be allowed as deductible expense on the part of the donors subject to the provisions of
Sec. 4 of these Regulations: Provided, further, That after the three-year period, only donations
and contributions to non-stock, non-profit corporations/NGOs which have been accredited under
these Regulations, shall be allowed as deductible expense on the part of the donors. LLpr
(f)
The Accrediting Entity shall issue a Certificate of Accreditation to a non-stock, non-profit
corporation/NGO upon determination that it meets the criteria for accreditation; Provided, that the
Certificate of Accreditation shall be valid for a maximum period of five (5) years for existing nonstock, non-profit corporations/NGOs and three (3) years for newly-organized non-stock, non-profit
corporations/NGOs.
(g)
The Accrediting Entity shall deny the applications of any non-stock, non-profit
corporation/NGO which does not meet the criteria for accreditation. The Private Accrediting Entity
shall notify the non-stock, non-profit corporation/NGO of the denial of the application, the reasons
therefor, and the evaluators' recommendation in order that the non-stock, non-profit

corporation/NGO may meet the criteria for accreditation. A non-stock, non-profit corporation/NGO
whose application for accreditation has been denied by the Private Accrediting Entity shall have
one (1) year within which to implement the evaluator's recommendations. After the one-year
implementation period, the non-stock, non-profit corporation/NGO may re-apply for accreditation.
(h)
The Secretary of Finance and the Commissioner of Internal Revenue shall oversee, monitor
and coordinate with the Accrediting Entity to ensure that the provisions of these Regulations are
complied with.
SECTION 3. Donations to Accredited Non-stock, Non-profit Corporations/NGOs. Donations to
accredited non-stock, non-profit corporations/NGOs shall be entitled to the following benefits:
(1)
Limited Deductibility. Donations, contributions or gifts actually paid or made within the
taxable year to accredited non-stock, non-profit corporations shall be allowed limited deductibility
in an amount not in excess of ten percent (10%) for an individual donor, and five percent (5%) for
a corporate donor, of the donor's income derived from trade, business or profession as computed
without the benefit of this deduction.
(2)
Full Deductibility. Donations, contributions or gifts actually paid or made within the
taxable year to accredited NGOs shall be allowed full deductibility, subject to the following
conditions:
(i)
The accredited NGO shall make utilization directly for the active conduct of the activities
constituting the purpose or function for which it is organized and operated, not later than the
fifteenth (15th) day of the third month after the close of the accredited NGOs taxable year in
which contributions are received, unless an extended period is granted by the Secretary of
Finance, upon recommendation of the Commissioner.
For this purpose, the term "utilization" shall have the meaning as defined under Sec. 1(c) of these
Regulations.
(ii)
The level of administrative expenses of the accredited NGO, shall, on an annual basis, not
exceed thirty percent (30%) of the total expenses for the taxable year;
(iii)
In the event of dissolution, the assets of the accredited NGO, would be distributed to
another accredited NGO organized for similar purpose or purposes, or to the State for public
purpose, or purposes, or to the state for public purpose, or would be distributed by a competent
court of justice to another accredited NGO to be used in such manner as in the judgment of said
court shall best accomplished the general purpose for which the dissolved organization was
organized. llcd
(iv)
The amount of any charitable contribution of property other than money shall be based on
the acquisition cost of said property
(v)
All the members of the Board of Trustees of the non-stock, non-profit corporation,
organization or NGO do not receive compensation or remuneration for their service to the
aforementioned organization.
(3)
Exemption from Donor's Tax Donations and gifts made in favor of accredited non-stock,
non-profit corporations/NGOs shall be exempt from donor's tax: Provided, however, That not more
than thirty percent (30%) of the said donations and gifts for the taxable year shall be used by
such accredited non-stock, non-profit corporations/NGOs institutions qualified-donee institution
for administration purposes pursuant to the provisions of Section 101 (A)(3) and (B)(2) of the Tax
Code .
SECTION 4. Utilization Requirements. Amounts set aside or to be set aside for a specific
project must have the prior approval of the Commissioner in writing: Provided, however, That a
certification issued by the Accrediting Entity that the accredited NGO's specific project is one
which can be better accomplished by setting aside the funds, shall be sufficient basis for the
Commissioner to grant his/her approval.
The application for the Commissioner's prior approval must contain the following:
(a)

the nature and purpose of the specific project and the amount programmed therefor;

(b)
a detailed description of the project, including estimated costs, sources of any future funds
expected to be used for completion of the project, and the location or locations (general or
specific) of any physical facility to be acquired or constructed as part of the project; and
(c)
a statement by an authorized official of the organization that the amount to be set aside
will actually be disbursed for the specific project within five (5) years from the date of approval by
the Commissioner, unless the nature of the project is such that the five-year period is
impracticable.
Amounts set aside shall be evidenced by book entries and documents showing evidence of
deposits or investments, including of the funds so set aside, or other documents that the
Commissioner may require. llcd
SECTION 5. Certificate of Donations. All accredited non-stock, non-profit corporation/NGO are
required to issue a certificate of donation in such form as prescribed by the BIR, on every
donation or gift they receive. Such certificate shall be accomplished by the said accredited nonstock, non-profit corporation/NGO in triplicate and distributed within thirty (30) days after the
receipt of the donation, as follows:
(a)

Original copy -

Donor

(b)

Duplicate copy

BIR

(c)

Triplicate copy

Donee

SECTION 6. Notice of Donations. The donor, on the other hand, should give a notice for every
donation worth over One Million pesos (P1,000,000) to the Revenue District Officer where his
place of business is located within thirty (30) days after the receipt of the Certificate of Donation
attaching to the said notice the copy of the Certificate of Donation issued to him by the
accredited non-stock, non-profit corporation/NGO.
SECTION 7.

Date and Place of Filing Returns.

(a)
Time of Filing. Claims for limited or full deductibility of donations and contributions by
the donors shall be filed by the donors at the time of filing their income tax returns.
On the other hand, the accredited non-stock, non-profit corporation/NGO shall file its annual
information return not later than the fifteenth (15th) day of the fourth month after the close of its
taxable year in order to maintain its status as an accredited non-stock, non-profit
corporation/NGO.
(b)
Place of Filing. The income tax return and/or the annual information return of the donor
or of the accredited non-stock, non-profit corporation/NGO shall be filed in the Revenue District
Office where the place of business of the donor or the donee, as the case may be, is located.
SECTION 8.

Substantiation Requirements.

(a)
For Donors. Donors claiming donations and contributions to accredited non-stock, nonprofit corporation/NGO as deductions from their taxable business income should submit
evidences or proofs to the BIR by showing the Certificate/s of Donation and indicating therein the
following:
(i)
Actual receipt by the accredited non-stock, non-profit corporation/NGO of the donation or
contribution and the date of receipt thereof; and
(ii)
The amount of the charitable donation or contribution, if in cash; if property, whether real
or personal, the acquisition cost of the said property.
On the other hand, donors claiming exemption from donor's tax on their donations and
contributions to accredited non-stock, non-profit corporations/NGOs should submit evidences or
proofs showing the amount of donation, if in cash; if real property, the zonal value thereof at the
time of donation; and if personal property, the acquisition cost thereof, but if said personal
property had already been used at the time of donation, the depreciated or book value thereof.
(b)
For Accredited Non-stock, Non-profit Corporations/NGOs. Accredited non-stock, nonprofit corporations/NGOs shall, upon filing their income tax returns/annual information returns,

furnish the Revenue District Officer of the place where the said accredited non-stock, non-profit
corporation/NGO is located, the following:
(i)
A list of the donations and income received during the year, showing the name and
address of the donors; the sources of income; the amount or market value of each donation and
items of income and the disposition thereof;
(ii)
A list of the activities and/or projects undertaken by the institution and the cost of each
undertaking indicating in particular where and how the donations has been utilized.
(iii)
A list of projects, their corresponding costs; the amount "set aside" and the status of funds
balances at the end of the year;
(iv)
A declaration that the utilization requirements under Section 2(c) and 8 of these
Regulations have been sufficiently complied with;
(v)
A declaration that no part of the net income of the accredited non-stock, non-profit
corporation/NGO inures to the benefit of any private stockholder or individual; and
(vi)

A declaration of the status of project implementation.

SECTION 9. Monitoring and Verification of Annual Information Return. Pursuant to the last
paragraph of Section 235 of the Tax Code , any provision of existing general or special law to the
contrary notwithstanding, the books of accounts and other pertinent records, as well as the
operations, of accredited non-stock, non-profit corporations/NGOs may be examined by the BIR
annually for purposes of ascertaining compliance with the conditions under which they have been
granted tax exemptions or tax incentives, and their tax liability, if any. Compliance by the
accredited non-stock, non-profit corporation/NGO with the conditions set forth in the grant of
incentives under Sec. 4 of these Regulations shall be strictly monitored to ascertain whether or
not they have met the requirements for maintaining the status as an accredited qualified-donee
institution. cdasia
SECTION 10. Prohibited Transactions. any accredited non-stock, non-profit corporation/NGO
enjoying the benefits provided for under Sec. 4 of these Regulations is prohibited from
undertaking any of the following transactions:
(a)
Lending any part of its income or property without adequate security and/or a reasonable
rate of interest unless the institution has a formal micro-credit or micro-finance program as
approved by their Board of Trustees;
(b)
Purchasing any security and/or property for more than an adequate consideration in
money or money's worth;
(c)
Selling any part of the security or other property for less than adequate consideration in
money or money's worth;
(d)
Diverting its income or transferring its property by way of lease or sale to any member of
its Board of Trustees, founder/s or principal officers or any member of their families or to any
corporation controlled directly or indirectly by the aforesaid individuals or their families in
accordance with the attribution of stock ownership under Section 73 (A) and (B) of the Tax Code ;
(e)
Using any part of its property, income or seed capital for any purpose other than that for
which the corporation was created or organized; or
(f)

Engaging in any activity which is contrary to law, public order or public policy.

SECTION 11. Withdrawal of Certificate of Accreditation and Revocation of the Certificate of

Registration.
(a)
The Accrediting Entity shall have the authority to withdraw the Certificate of Accreditation
which it issued to a non-stock, non-profit corporation/NGO upon a determination that the latter no
longer meets the criteria for accreditation under Sec. 2 (c) of these Regulations. The Private
Accrediting Entity concerned shall inform the Legal Service of the National Office or the
concerned division of the Regional Offices of the withdrawal of the Certificate of Accreditation and
recommend to the BIR the revocation of the Certificate of Registration of the non-stock, non-profit

corporation/NGO concerned.
(b)
The Accrediting Entity which issued the Certificate of Accreditation shall report to the Legal
Service of the National Office or to the concerned division of the Regional Offices any violation of
any provision of these Regulations by the accredited non-stock, non-profit corporation/NGO.
Violation of any provision of these Regulations shall constitute a ground for the withdrawal by the
Private Accrediting Entity concerned of the Certificate of Accreditation and the revocation by the
BIR of the Certificate of Registration.
(c)
Any donor found to have participated in or consented to the violation of these Regulations
shall be deprived of the benefits provided under Sec. 4 of these Regulations implementing
Sections 34 (H)(1), (2)(c) and 101(A)(3), (B)(2) of the Tax Code. Thus, the limited or full
deductibility of donations and contributions shall be disallowed and the corresponding donor's tax
due on the donation, including statutory increments or penalties thereto provided in the Tax
Code, shall be assessed and collected. The said penalties shall be in addition to any
administrative or criminal penalty provided for by law or regulations.
SECTION 12. Repealing Clause. All internal revenue issuances, rules and regulations, or parts
thereof, which are contrary to or inconsistent with these Regulations are hereby repealed,
amended or modified accordingly.
SECTION 13. Effectivity. These Regulations shall take effect fifteen (15) days after publication
in the Official Gazette or any newspaper of general circulation in the Philippines.

REVENUE MEMORANDUM ORDER NO. 38-83

Subject
:
Guidelines for Allowance of Deductions for Certain Income Payments
Under Section 30 (1) of the Tax Code.
To

All Internal Revenue Officers Concerned

1.

Background

1.1
Section 30 (1) of the National Internal Revenue Code, as amended by Batas Pambansa Blg.
135 , provides:
"(1)
Additional requirement for deductibility of certain payments. - Any amount paid or payable
which is otherwise deductible from, or taken into account in computing gross income for which
depreciation or amortization may be allowed under this section and Section 29 , 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 Bureau of Internal Revenue in accordance with this section, Sections 54 and 93
of this Code. " acd
1.2
The abovequoted provisions of the Tax Code is frequently cited by Revenue Examiners in
their reports of investigation to justify disallowances of certain expense and other itemized
deductions for which the taxpayer is obliged to make a withholding under Sections 54 and 93 of
the Code and implementing regulations. Since the amounts otherwise deductible are substantial,
some taxpayers have vigorously protested the literal application of the said provision in the audit
and investigation of their income tax liabilities.
1.3
In order to minimize audit controversies and to achieve uniformity in implementing the
aforequoted provision of Section 30(1), this Revenue Memorandum Order is hereby issued to
prescribe guidelines that shall be observed by revenue officers for allowing or disallowing items
of deductions referred to in the said Section.
2.

The Rationale of Section 30(1)

2.1
PD 1351 which became effective April 17, 1978 added Section 30(1) to the Code
(originally as paragraph (m) of Section 30) as an additional requirement for deductibility of
itemized deductions representing income payments which are subject to withholding. Batas
Pambansa Blg. 125 which was approved September 7, 1979 expanded the scope of the items of
deductions subject to the requirement by including amounts taken into account in computing
gross income for which depreciation or amortization may be allowed. The obvious purpose of this
provision is to compel compliance with the requirements of Sections 54 and 93.
2.2
Considering that the existing ad valorem (surcharges and interests), as well as the specific
penalties (fine and imprisonment), are adequate to compel taxpayers/withholding agents to
comply with the requirements of the withholding tax law and regulations, outright disallowance of
deductions representing income payment for mere failure to withhold and remit will in effect, in
case of corporations, be tantamount to the imposition of additional 25% or 35% "surcharge"
(equivalent to the normal corporate tax rates).
2.3
In order to minimize the onerous effect of literal application of Section 30(1), allowance or
disallowance of a deduction falling under the said paragraph of Section 30 shall be determined in
accordance with the following guidelines.
3.

Guidelines For Applying Section 30(1).

3.1
An amount claimed as deduction on which a tax is supposed to have been withheld under
Sections 54 and 93 shall be allowed if in the course of his audit and/or investigation, the
examiner discovers that: cda
3.1/1 No withholding of creditable or final tax was made but the payee reported the income and
the withholding agent/taxpayer pays during the original audit and investigation the surcharges,
interest and penalties incident to the failure to withhold the tax.
3.1/2 No withholding of creditable or final tax was made and the recipient-payee failed to report
the income on due date thereof, but the withholding agent pays during the original audit and
investigation the amount supposed to have been withheld, inclusive of surcharges, interest and
penalties incident to his failure to withhold.
3.1/3 The withholding agent erroneously underwithheld the tax but pays during the original
audit and investigation the difference in the amount supposed to have been withheld, inclusive of
surcharges, interest and penalties incident to such error.
3.2
Items of deductions disallowed due to non-compliance with Section 30 (1), the deficiency
income tax assessment for which had been issued before the effectivity of this Revenue
Memorandum Order may be allowed upon payment not later than May 15, 1984 of the
withholding tax required and supposed to have been withheld and/or surcharges, interest and
penalties. However, no refund or credit arising from such re-allowance of a previously disallowed
deduction shall be granted. cd
4.

Effectivity

This Revenue Memorandum Order shall take effect immediately.

REVENUE REGULATIONS NO. 07-03

SUBJECT
:
Providing the Guidelines in Determining Whether a Particular Real
Property is a Capital Asset or an Ordinary Asset Pursuant to Section 39(A)(1) of the
National Internal Revenue Code of 1997 for Purposes of Imposing the Capital Gains Tax
under Sections 24(D), 25(A)(3), 25(B) and 27(D)(5), or the Ordinary Income Tax under
Sections 24(A), 25(A) & (B), 27(A), 28(A)(1) and 28(B)(1), or the Minimum Corporate
Income Tax (MCIT) under Sections 27(E) and 28(A)(2) of the same Code
TO

All Internal Revenue Officials and Others Concerned

SECTION 1. Scope. Pursuant to Section 244 of the National Internal Revenue Code of 1997
(Code), these Regulations are hereby promulgated to implement Sec. 39(A)(1) , in relation to
Secs. 24(D) , 25(A)(3) , 25(B) and 27(D)(5) , and Secs. 24(A) , 25(A) & (B), 27(A) or 27(E) , 28(A)
(1) or 28(A)(2) , and 28(B)(1) , all of the said Code, providing for the purpose the guidelines in
determining whether a particular real property is a capital asset or an ordinary asset. EIaDHS
SECTION 2. Definition of Terms. For purposes of these Regulations, the following terms shall
be defined as follows:
a.
Capital assets shall refer to all real properties held by a taxpayer, whether or not
connected with his trade or business, and which are not included among the real properties
considered as ordinary assets under Sec. 39(A)(1) of the Code.
b.
Ordinary assets shall refer to all real properties specifically excluded from the definition of
capital assets under Sec. 39(A)(1) of the Code, namely:
1.
Stock in trade of a taxpayer or other real property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable year; or
2.
Real property held by the taxpayer primarily for sale to customers in the ordinary course of
his trade or business; or
3.
Real property used in trade or business (i.e., buildings and/or improvements) of a
character which is subject to the allowance for depreciation provided for under Sec. 34(F) of the
Code; or
4.

Real property used in trade or business of the taxpayer.

Real properties acquired by banks through foreclosure sales are considered as their ordinary
assets. However, banks shall not be considered as habitually engaged in the real estate business
for purposes of determining the applicable rate of withholding tax imposed under Sec. 2.57.2(J) of
Revenue Regulations No. 2-98 , as amended.

c.
Real property shall have the same meaning attributed to that term under Article 415 of
Republic Act No. 386, otherwise known as the "Civil Code of the Philippines."
d.
Real estate dealer shall refer to any person engaged in the business of buying and selling
or exchanging real properties on his own account as a principal and holding himself out as a full
or part-time dealer in real estate.
e.
Real estate developer shall refer to any person engaged in the business of developing real
properties into subdivisions, or building houses on subdivided lots, or constructing residential or
commercial units, townhouses and other similar units for his own account and offering them for
sale or lease.
f.
Real estate lessor shall refer to any person engaged in the business of leasing or renting
real properties on his own account as a principal and holding himself out as lessor of real
properties being rented out or offered for rent.
g.
Taxpayers engaged in the real estate business shall refer collectively to real estate
dealers, real estate developers, and/or real estate lessors. Conversely, the term "taxpayers not
engaged in the real estate business" shall refer to persons other than real estate dealers, real
estate developers and/or real estate lessors. A taxpayer whose primary purpose of engaging in
business, or whose Articles of Incorporation states that its primary purpose is to engage in the
real estate business shall be deemed to be engaged in the real estate business for purposes of
these Regulations.
SECTION 3. Guidelines in Determining Whether a Particular Real Property is a Capital Asset or
Ordinary Asset.
a.
Taxpayers engaged in the real estate business. Real property shall be classified with
respect to taxpayers engaged in the real estate business as follows:
1.
Real Estate Dealer. All real properties acquired by the real estate dealer shall be
considered as ordinary assets.
2.
Real estate Developer. All real properties acquired by the real estate developer, whether
developed or undeveloped as of the time of acquisition, and all real properties which are field by
the real estate developer primarily for sale or for lease to customers in the ordinary course of his
trade or business or which would properly be included in the inventory of the taxpayer if on hand
at the close of the taxable year and all real properties used in the trade or business, whether in
the form of land, building, or other improvements, shall be considered as ordinary assets.
3.
Real Estate Lessor. All real properties of the real estate lessor, whether land and/or
improvements, which are for lease/rent or being offered for lease/rent, or otherwise for use or
being used in the trade or business shall likewise be considered as ordinary assets.
4.
Taxpayers habitually engaged in the real estate business. All real properties acquired in
the course of trade or business by a taxpayer habitually engaged in the sale of real estate shall
be considered as ordinary assets. Registration with the HLURB or HUDCC as a real estate dealer or
developer shall be sufficient for a taxpayer to be considered as habitually engaged in the sale of
real estate. If the taxpayer is not registered with the HLURB or HUDCC as a real estate dealer or
developer, he/it may nevertheless be deemed to be engaged in the real estate business through
the establishment of substantial relevant evidence (such as consummation during the preceding
year of at least six (6) taxable real estate sale transactions, regardless of amount; registration as
habitually engaged in real estate business with the Local Government Unit or the Bureau of
Internal Revenue, etc.).
A property purchased for future use in the business, even though this purpose is later thwarted
by circumstances beyond the taxpayer's control, does not lose its character as an ordinary asset.
Nor does a mere discontinuance of the active use of the property change its character previously
established as a business property.
b.
Taxpayer not engaged in the real estate business. In the case of a taxpayer not engaged
in the real estate business, real properties, whether land, building, or other improvements, which
are used or being used or have been previously used in the trade or business of the taxpayer

shall be considered as ordinary assets. These include buildings and/or improvements subject to
depreciation and lands used in the trade or business of the taxpayer.
A depreciable asset does not lose its character as an ordinary asset, for purposes of the instant
provision, even if it becomes fully depreciated, or there is failure to take depreciation during the
period of ownership.
Monetary consideration or the presence or absence of profit in the operation of the property is not
significant in the characterization of the property. So long as the property is or has been used for
business purposes, whether for the benefit of the owner or any of its members or stockholders, it
shall still be considered as an ordinary asset. Real property used by an exempt corporation in its
exempt operations, such as a corporation included in the enumeration of Section 30 of the Code,
shall not be considered used for business purposes, and therefore, considered as capital asset
under these Regulations. IHCDAS
Real property, whether single detached; townhouse; or condominium unit, not used in trade or
business as evidenced by a certification from the Barangay Chairman or from the head of
administration, in case of condominium unit, townhouse or apartment, and as validated from the
existing available records of the Bureau of Internal Revenue, owned by an individual engaged in
business, shall be treated as capital asset.
c.
Taxpayers changing business from real estate business to non-real estate business. In
the case of a taxpayer who changed its real estate business to a non-real estate business, or who
amended its Articles of Incorporation from a real estate business to a non-real estate business,
such as a holding company, manufacturing company, trading company, etc., the change of
business or amendment of the primary purpose of the business shall not result in the reclassification of real property held by it from ordinary asset to capital asset. For purposes of
issuing the certificate authorizing registration (CAR) or tax clearance certificate (TCL), as the case
may be, the appropriate officer of the BIR shall at all times determine whether a corporation
purporting to be not engaged in the real estate business has at any time amended its primary
purpose from a real estate business to a non-real estate business.
d.
Taxpayers originally registered to be engaged in the real estate business but failed to
subsequently operate. In the case of subsequent non-operation by taxpayers originally
registered to be engaged in the real estate business, all real properties originally acquired by it
shall continue to be treated as ordinary assets.
e.
Treatment of abandoned and idle real properties. Real properties formerly forming part
of the stock in trade of a taxpayer engaged in the real estate business, or formerly being used in
the trade or business of a taxpayer engaged or not engaged in the real estate business, which
were later on abandoned and became idle, shall continue to be treated as ordinary assets. Real
property initially acquired by a taxpayer engaged in the real estate business shall not result in its
conversion into a capital asset even if the same is subsequently abandoned or becomes idle.
Provided however, that properties classified as ordinary assets for being used in business by a
taxpayer engaged in business other than real estate business as defined in Section 2(g) hereof
are automatically converted into capital assets upon showing of proof that the same have not
been used in business for more than two (2) years prior to the consummation of the taxable
transactions involving said properties.
f.
Treatment of real properties that have been transferred to a buyer/transferee, whether the
transfer is through sale, barter or exchange, inheritance, donation or declaration of property
dividends.
Real properties classified as capital or ordinary asset in the hands of the seller/transferor may
change their character in the hands of the buyer/transferee. The classification of such property in
the hands of the buyer/transferee shall be determined in accordance with the following rules:
1.
Real property transferred through succession or donation to the heir or donee who is not
engaged in the real estate business with respect to the real property inherited or donated, and
who does not subsequently use such property in trade or business, shall be considered as a
capital asset in the hands of the heir or donee.

2.
Real property received as dividend by the stockholders who are not engaged in the real
estate business and who do not subsequently use such real property in trade or business shall be
treated as capital assets in the hands of the recipients even if the corporation which declared the
real property dividend is engaged in real estate business. DaIACS
3.
The real property received in an exchange shall be treated as ordinary asset in the hands
of the transferee in the case of a tax-free exchange by taxpayer not engaged in real estate
business to a taxpayer who is engaged in real estate business, or to a taxpayer who, even if not
engaged in real estate business, will use in business the property received in the exchange.
g.
Treatment of real property subject of involuntary transfer. In the case of involuntary
transfers of real properties, including expropriation or foreclosure sale, the involuntariness of
such sale shall have no effect on the classification of such real property in the hands of the
involuntary seller, either as capital asset or ordinary asset, as the case may be.
For example, real properties forming part of the inventory of a real estate dealer, which are
foreclosed, shall, for purposes of determining the applicable tax on such foreclosure sale, be
treated as ordinary assets. On the other hand, the nature of such real property in the hands of the
foreclosure buyer shall be determined in accordance with the rules stated in sub-paragraph (f)
hereof.
SECTION 4. Applicable Taxes on Sale, Exchange or Other Disposition of Real Property.
Gains/Income derived from sale, exchange, or other disposition of real properties shall, unless
otherwise exempt, be subject to applicable taxes imposed under the Code, depending on whether
the subject properties are classified as capital assets or ordinary assets.
a.
In the case of individual citizens (including estates and trusts), resident aliens, and nonresident aliens engaged in trade or business in the Philippines.
(i)
Capital gains presumed to have been realized from the sale, exchange, or other
disposition of real property located in the Philippines, classified as capital assets, shall be subject
to the six percent (6%) capital gains tax imposed under Sec. 24(D)(1) or 25(A)(3) of the Code, as
the case may be, based on the gross selling price or current fair market value as determined in
accordance with Sec. 6(E) of the Code, whichever is higher, provided, that if the buyer is the
Government or any of its political subdivisions or agencies or a government-owned-or-controlled
corporation, the tax liability shall, at the option of the individual seller (including estate or trust),
be computed on the basis of either the six percent (6%) capital gains tax under Sec. 24(D)
(1)/25(A)(3) or the graduated tax rates under Sec. 24(A)(1)(c) or 25(A)(1) , all of the Code.
(ii)
The sale of real property located in the Philippines, classified as ordinary assets, shall be
subject to the creditable withholding tax (expanded) under Sec. 2.57.2(J) of Rev. Regs. No. 2-98,
as amended, based on the gross selling price or current fair market value as determined in
accordance with Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary
income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on
net taxable income.
b.
In the case of non-resident aliens not engaged in trade or business in the Philippines.
Capital gains presumed to have been realized by non-resident aliens not engaged in trade or
business in the Philippines on the sale of real property located in the Philippines shall be subject
to the six percent (6%) capital gains tax imposed under Sec. 25(B), in relation to Sec. 24(D)(1), of
the Code, based on the gross selling price or current fair market value as determined in
accordance with Sec. 6(E) of the Code, whichever is higher.
c.

In the case of domestic corporations.

(i)
Capital gains presumed to have been realized from the sale, exchange or disposition of
lands and/or buildings located in the Philippines, which are classified as capital assets, shall be
subject to a capital gains tax of six percent (6%) based on the gross selling price or current fair
market value as determined in accordance with Sec. 6(E) of the Code, whichever is higher, of
such land and/or buildings pursuant to Sec. 27(D)(5) of the Code.
(ii)
The sale of land and/or building classified as ordinary asset and other real property (other
than land and/or building treated as capital asset), regardless of the classification thereof, all of

which are located in the Philippines, shall be subject to the creditable withholding tax (expanded)
under Sec. 2.57.2(J) of Rev. Regs. No. 2-98, as amended, and consequently, to the ordinary
income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic
corporations may become subject to the minimum corporate income tax (MCIT) under Sec. 27(E)
of the Code, whichever is applicable. TaCDcE
d.
In the case of resident foreign corporations. Real property located in the Philippines,
regardless of classification, sold by a resident foreign corporation shall be subject to the
creditable withholding tax (expanded) under Sec. 2.57.2(J) of Rev. Regs. No. 2-98, as amended,
and consequently, to the ordinary income tax under Sec. 28(A)(1) or to the MCIT under Sec. 28(A)
(2), both of the Code, whichever is applicable.
e.
In the case of non-resident foreign corporations. The gain from the sale of real property
located in the Philippines by a non-resident foreign corporation shall be subject to the final
withholding tax at the rate of thirty-two percent (32%) imposed under Sec. 2.57.1(I) of Rev. Regs.
No. 2-98, as amended, in relation to Sec. 28(B)(1) of the Code.
f.
Income on sale of real property not located in the Philippines. Gain realized from the
sale, exchange, or other disposition of real property not located in the Philippines, regardless of
classification, by resident citizens or domestic corporations shall be subject to the income tax
imposed in Sec. 24(A)(1), or Sec. 27(A) or (E) of the Code, as the case may be. Such income/gain
shall be exempt pursuant to Sec. 23(B) , (D) and (F) of the Code, as the case may be, in the
case of non-resident citizens, alien individuals and foreign corporations,
SECTION 5. Repealing Clause. All existing BIR rulings, revenue rules, regulations and other
issuances or portions thereof inconsistent with the provisions of these regulations are hereby
modified, repealed or revoked accordingly.
SECTION 6. Effectivity. These Regulations shall take effect after fifteen (15) days following
publication in the Official Gazette or in any newspaper of general circulation. SDECAI

BIR RULING NO. 383-87

35-c-2 138-85 383-87

Gentlemen :
This refers to your letter dated August 4, 1987 requesting a ruling as to whether the merger of
Delta Farms, Inc. (DFI) and Evergreen Farms, Inc. (EFI) qualifies as a tax-exempt re-organization
under Section 35(c)(2) of the Tax Code, as amended.
It is represented that DFI and EFI are both domestic corporations duly registered to engage in
agricultural development projects in the Philippines; that 70% of the equity of both corporations
are owned by Mr. Juanito R. Ignacio (Ignacio) while 30% thereof, belongs to Philippine Packing
Corporation (PPC) which is another domestic corporation and its four (4) individual nominees who
are merely holders of one qualifying share each; that prompted by the desire of both companies
to achieve efficiency and economy of operation by reducing administrative and operating costs
and to strengthen DFI, a merger has been proposed wherein EFI shareholders will exchange all
their EFI shares solely for shares in DFI; that as a result of the merger, DFI will be the surviving
corporation which will continue to be owned 70% by Ignacio and 30% by PPC, with EFI then
ceasing to exist, that based on the Audited Financial Statements of EFI as of March 31, 1987,
since the net worth of EFI is P16,338,495.00, EFI stockholders shall receive the equivalent amount
in DFI shares of stock or P163,384.95 DFI shares with a par value of P100.00 per share; that
considering that 809,750 shares of EFI with a par value of P10.00 per share are issued and
outstanding, one (1) DFI share shall be issued for approximately 4.9561EFI shares; that Ignacio
shall receive 114,369.41 DFI shares for his 566,825 EFI shares, while PPC shall receive 40,015.48
DFI shares for its 242,925 EFI shares (including the four (4) qualifying shares in the names of its
four (4) nominees; that in order to avoid fractional shares, Ignacio and PPC agree that the latter
shall waive in favor of the former its fractional share, with the additional payment by Ignacio of
P5.00 to complete one (1) whole share, that the Articles of Incorporation of DFI shall
simultaneously be amended to increase its authorized capital stock by P40 million, or from P10
million to P50 million, and at least 25% of which increase or P16,338,500.00 equivalent to
163,385 shares shall be issued as aforementioned in exchange for the 809,750 outstanding
shares of EFI worth of P16,338,495.00 and the additional payment in cash of P5.00 as
aforementioned, that after the effective date of the merger, all EFI stockholders will become DFI
stockholders, and that simultaneous with the merger the Articles of Incorporation of the surviving
corporation, DFI shall be amended and its name shall be Evergreen Farms, Inc. immediately after
the effectivity of the merger. iatdc
In reply thereto, I have the honor to inform you that the above reorganization is a merger within
the contemplation of Section 35(c)(2) and (5(b) of the Tax Code because a corporation (DFI)
acquired all of the properties of another corporation (EFI) solely for stocks, the transaction
undertaken being for a bona fide business purpose and not solely for the purpose of escaping the
burden of taxation.
Accordingly, the transfer by EFI of all its assets and liabilities to DFI solely, in exchange for the
latter's shares of stock shall not give rise to the recognition of gain or loss pursuant to Section
35(c)(2) of the Tax Code. No gain or loss shall be recognized to EFI upon the distribution of DFI
shares to EFI stockholders in complete redemption of their stocks under Section 35(c)(2) of the
Tax Code. No gain or loss shall be recognized to EFI stockholders upon the exchange of their
stocks solely for DFI stocks under Section 35(c)(2) of the Tax Code.
The basis of the assets received by DFI shall be the same as it would be in the hands of EFI. The
basis of DFI stocks received by the stockholders of EFI shall be the same as the basis of the EFI
stocks surrendered in exchange therefor.
If the total liabilities to be assumed by DFI upon effective merger date exceed the historical or
original acquisition cost (cost basis) of the assets transferred by EFI, the excess shall be
recognized as gain of EFI. (Sec. 35(c)(4)(b), Tax Code, as amended by P.D. No. 1773)
It is understood, however, that upon the subsequent sale or exchange of the assets or shares of
stocks acquired by the parties, the gain derived from such sale or exchange shall be subject to
income tax.
The abovementioned transactions shall not be subject to the gift tax as there is no intention to
donate on the part of any of the parties.

However, in order that the above-described reorganization can be considered a merger under
Section 35(c)(2) of the Tax Code, the parties to the merger should comply with the following
requirements:
A.
The plan of reorganization should be adopted by each of the corporations, parties thereto,
the adoption being shown by the acts of its duly constituted responsible officers and appearing
upon the official records of the corporation. Each corporation, which is a party to the
reorganization, shall file, as part of its return for the taxable year within which the reorganization
occurred, a complete statement of all facts pertinent to the non-recognition of gain or loss in
connection with the reorganization, including:
(1)
A copy of the plan of reorganization, together with a statement executed under the
penalties of perjury showing in full the purposes thereof and in detail all transactions incident to
or pursuant to the Plan.
(2)
A complete statement of the cost or other basis of all property, including all stocks or
securities, transferred incident to the plan.
(3)
A statement of the amount of stock or securities and other property or money received
from the exchange, including a statement of all distributions or other disposition made thereof.
The amount of each kind of stock or securities and other property received shall be stated on the
basis of the fair market value thereof at the date of the exchange.
(4)
A statement of the amount and nature of any liabilities assumed upon the exchange, and
the amount and nature of any liabilities to which any of the property acquired in the exchange is
subject.
B.
Every taxpayer, other than a corporation a party to the reorganization, who received stock
or securities and other property or money upon a tax-free exchange in connection with a
corporate reorganization shall incorporate in his income tax return for the taxable year in which
the exchange takes place a complete statement of all facts pertinent to the non-recognition of
gain or loss upon such exchange including:
(1)
A statement of the cost or other basis of the stock or securities transferred in the
exchange; and
(2)
A statement in full of the amount of stock or securities and other property or money
received from the exchange, including any liabilities assumed upon the exchange, and any
liabilities to which property received is subject. The amount of each kind of stock or securities and
other property (other liabilities assumed upon the exchange) received shall be set forth upon the
basis of the fair market value thereto at the date of the exchange.
C.
Permanent records in substantial form shall be kept by every taxpayer who participates in
a tax-free exchange in connection with a corporate reorganization showing the cost or other basis
of the transferred property or money received (including any liabilities assumed on the exchange,
or any liabilities to which any of the properties received were subject), in order to facilitate the
determination of gain or loss from a subsequent disposition of such stock or securities and other
property received from the exchange. (par. 9803-B, P-H 1963 ed., p. 9611)
In addition to the foregoing requirements, permanent records in substantial form must be kept by
the corporations participating in the merger showing the information listed above in order to
facilitate the determination of gain or loss from a subsequent disposition of the stock received as
a consequence of the merger. asiadc

REVENUE REGULATIONS NO. 006-08

SUBJECT
:
Consolidated Regulations Prescribing the Rules on the Taxation of
Sale, Barter, Exchange or Other Disposition of Shares of Stock Held as Capital Assets
TO

All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. Pursuant to Section 244, in relation to Sections 24 (C), 25 (A) (3), 25 (B),
27 (D) (2), 28 (A) (7) (c), 28 (B) (5) (c), 34 (D) (4) (5), 38, 40, and Section 127 (A) and (B) of
the 1997 National Internal Revenue Code (Tax Code), as amended, these Regulations are hereby
promulgated in order to harmonize and consolidate the rules relative to the imposition of tax for
the sale, barter, exchange or other disposition of shares of stock of domestic corporation that are
listed and traded through the Local Stock Exchange, or disposition of shares through Initial Public
Offering (IPO) or disposition of shares not traded through the Local Stock Exchange. CTDacA
SECTION 2. Definition of Terms. For purposes of these Regulations, the following definitions of
words and phrases are hereby adopted:
(a)
"Stock Classified as Capital Assets" means all stocks and securities held by taxpayers
other than dealers in securities.
(b)
"Dealer in securities" means a merchant of stocks or securities, whether an individual,
partnership or corporation, with an established place of business, regularly engaged in the
purchase of securities and the resale thereof to customers; that is, one who, as merchant, buys
securities and re-sells them to customers with a view to the gains and profits that may be derived
therefrom. "Dealer in securities" means any person who buys and sells securities for his/her own
account in the ordinary course of business (Sec. 3.4, SRC). ESDHCa
(c)
"Shares of Stock" shall include shares of stock of a corporation; warrants and/or options to
purchase shares of stock; as well as units of participation in a partnership (except general
professional partnerships), joint stock companies, joint accounts, joint ventures taxable as
corporations, associations, and recreation or amusement clubs (such as golf, polo or similar
clubs); and mutual fund certificates.
(d)
"Option" refers to an option to acquire stock or an option to acquire such an option and
each one of a series of options to acquire stock. "Options" are contracts that give the buyer the
right, but not the obligation, to buy or sell an underlying security at a predetermined price, called
the exercise or strike price, on or before a predetermined date, called the expiry date, which can
only be extended by the Commission upon stockholders' approval. (SRC Rule 3 (1) (F) (1))
(e)
"Shareholder" shall include holders of a share/s of stock, warrants and/or options to
purchase shares of stock of a corporation, as well as a holder of a unit of participation in a
partnership (except general professional partnerships), in a joint stock company, a joint account,
a taxable joint venture, a member of an association, recreation or amusement club (such as golf,
polo or similar clubs) and a holder of a mutual fund certificate, a member in an association, joint
stock company or insurance company.

(f)
"Stockbroker" includes all persons whose business it is, for other brokers, to negotiate
purchases or sales of stocks, or engaged in the business of effecting transactions in securities for
the account of others but does not include a bank or underwriters for one or more investment
companies as defined in the Investment Company Act. "Broker" is a person engaged in the
business of buying and selling securities for the account of others. (Sec. 3.3, SRC)
(g)
"Local Stock Exchange" refers to any domestic organization, association, or group of
persons, whether incorporated or unincorporated, licensed or unlicensed, which constitutes,
maintains, or provides a market place or facilities for bringing together purchasers and sellers of
stocks, and includes the market place and the market facilities maintained by such exchange.
"Exchange" is an organized domestic marketplace or facility that brings together buyers and
sellers and executes trades of securities and/or commodities, duly registered with the Securities
and Exchange Commission. (Sec. 3.7, SRC)
(h)
"Gross selling price" refers to the total amount of money or its equivalent which the
purchaser pays the seller as consideration for the shares of stock. SEDaAH
(i)
"Gross value in money" means the "fair market value". In the case of shares traded thru
the stock exchange, "fair market value" shall consist of the actual selling price at which the
transaction was executed in the trading system and/or facilities of the Local Stock Exchange.
(j)
"Initial Public Offering (IPO)" refers to a public offering of shares of stock made for the first
time in the Local Stock Exchange.
(k)
"Primary Offering" refers to the original sale made to the investing public by the issuer
corporation of its unissued Shares of Stock. ECDAcS
(l)
"Secondary Offering" refers to an offer for sale to the investing public by the existing
shareholders of their securities which is conducted during an IPO or a follow-on/follow-through
offering.
(m)
"Follow-on/Follow-through Offering of Shares" refers to an offering of shares to the
investing public subsequent to an IPO.
(n)
"Shares Listed and Traded through the Local Stock Exchange", for purposes of these
Regulations, refers to all sales, trades or transactions of listed Shares of Stock executed through
the trading system and/or facilities of the Local Stock Exchange. This term includes block sale or
other types of sales, trades or transactions in the Local Stock Exchange and executed through the
trading system and/or facilities of the Local Stock Exchange in accordance with the rules of the
Local Stock Exchange as approved by the Securities and Exchange Commission.
(o)
"Net Capital Gain" means the excess of the gains from sales or exchanges of capital assets
over the losses from such sales or exchanges.
(p)
"Net Capital Loss" means the excess of the losses from sales or exchanges of capital
assets over the gains from such sales or exchanges.
(q)
"Closely-held Corporation" means corporation at least fifty percent (50%) in value of the
outstanding capital stock or at least fifty percent (50%) of the total combined voting power of all
classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20)
individuals.
Rules in Determining Whether the Corporation is a Closely-Held Corporation insofar as
such Determination is based on Stock Ownership: cDCaTH
(q.1) Stock not owned by individuals. Stock owned directly or indirectly by or for a
corporation, partnership, estate, or trust shall be considered as being owned proportionately by
its shareholders, partners, or beneficiaries.
(q.2) Family and partnership ownerships. An individual shall be considered as owning the
stock owned, directly or indirectly, by or for family, or by or for his partner. For purposes of this
paragraph, the family of an individual includes only his brothers and sisters (whether by the
whole or half blood), spouse, ancestors, and lineal descendants.
(q.3)

Option. If any person has an option to acquire stock, such stock shall be considered as

owned by such person. For purposes of this paragraph, an option to acquire such an option and
each one of a series of options shall be considered as an option to acquire such stock.
(q.4) Constructive ownership as actual ownership. Stock constructively-owned by reason of
the application of paragraph (q.1) or (q.3) shall, for purposes of applying paragraph (q.1) or (q.2),
be treated as actually owned by such person; but stock constructively owned by the individual by
reason of the application of paragraph (q.2) hereof shall not be treated as owned by him for
purposes of again applying such paragraph in order to make another constructive owner of such
stock.
(r)
"Family of an individual" includes only his brothers and sisters (whether by the whole or
half-blood), spouse, ancestors, and lineal descendants.
(s)
"Mutual Fund Company" means an open-end and close-end investment company as
defined under the Investment Company Act. TcHCDE
(t)
"Acquired" as used in Sec. 7 (c.6) of these Regulations when dealing with wash sales of
shares of stock, means acquired by purchase or by an exchange upon which the entire amount of
gain or loss was recognized by law, and comprehends cases where the taxpayer has entered into
a contract or option within the sixty-one-day period to acquire by purchase or by such an
exchange.
(u)
"Capital Asset" means property held by the taxpayer (whether or not connected with his
trade or business), but does not include stock in trade of the taxpayer or other property of a kind
which would properly be included in the inventory of the taxpayer if on hand at the close of the
taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business, or property used in the trade or business of a character which is
subject to the allowance for depreciation provided in Subsection (F) of Section 34 of the Tax
Code, as amended, or real property used in trade or business of the taxpayer.
(v)
"Book Value per Share" refers to the value per share computed by dividing the total
Stockholders' Equity of a corporation or net assets of the company by the number of outstanding
shares or units of participation in a company. In case there are preferred shares as well as
common shares, the book value per common share is computed by deducting the liquidation
value of the preferred shares from the total equity of the corporation and dividing the result by
the number of common shares outstanding as of balance sheet date. The liquidation value of the
preferred shares is equal to the redemption price as of balance sheet date, including any
premium and cumulative preferred dividends in arrears.
(w)
"Treasury Shares" are shares of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation by purchase, redemption which is not for
cancellation, donation or through some other lawful means. Such shares may again be disposed
of for a reasonable price fixed by the board of directors.
(x)
"Redeemed Shares" are shares bought back by the issuing corporation for the purpose of
retirement or cancellation. CTDHSE
(y)

"Acquisition Cost" shall include the purchase price, tax assumed and the commission paid.

(z)
"Shares Considered as Worthless" refers to shares when offered for sale or requested for
share redemption, no amount can be realized by the owner of the share. ETDAaC
SECTION 3. Persons Liable to the Tax. The following sellers or transferors of stock are liable to
the tax provided for in Sec. 5 of these Regulations:
(a)

Individual taxpayer, whether citizen or alien;

(b)

Corporate taxpayer, whether domestic or foreign; and

(c)
Other taxpayers not falling under (a) and (b) above, such as estates, trusts, trust funds
and pension funds, among others.
SECTION 4.
following:

Persons Not Liable to the Tax. The taxes imposed herein shall not apply to the

(a)

Dealers in securities;

(b)
Investors in shares of stock in a mutual fund company, as defined in Section 22 (BB) of
the Tax Code, as amended, and Sec. 2 (s) of these Regulations, in connection with the gains
realized by said investor upon redemption of said shares of stock in a mutual fund company; and
(c)
All other persons, whether natural or juridical, who are specifically exempt from national
internal revenue taxes under existing investment incentives and other special laws. SCEDaT
SECTION 5. Sale, Barter or Exchange of Shares of Stock Listed and Traded Through the Local
Stock Exchange. There shall be levied, assessed and collected on every sale, barter, exchange
or other disposition of Shares of Stock Listed and Traded through the Local Stock Exchange other
than the sale by a dealer of securities, under the following rules:
(a)
Tax Rate. A stock transaction tax at the rate of one-half of one percent (1/2 of 1%) based
on the amount determined in subsection (b) hereunder.
(b)
Tax Base. Gross selling price or gross value in money of the shares of stock sold,
bartered, exchanged or otherwise disposed which shall be assumed and paid by the seller or
transferor through the remittance of the stock transaction tax by the seller or transferor's broker.
SECTION 6. Sale, Barter or Exchange, or Issuance of Shares of Stock Through IPO. There shall
be levied, assessed and collected on every sale, barter, exchange or other disposition through
initial public offering (IPO) of shares of stock in closely held corporations, as defined in Sec. 2 (q)
hereof, under the following rules: CSTEHI
(a)
Tax Rates. A tax at the rates provided hereunder shall be imposed based on subsection
(b) hereof in accordance with the proportion of shares of stock sold, bartered, exchanged or
otherwise disposed to the total outstanding shares of stock after the listing in the Local Stock
Exchange:
Proportion of Disposed Shares to Outstanding Shares
Up to twenty-five percent (25%)

Tax Rate

4%

Over twenty-five percent (25%) but not over

thirty three and one-third percent (33 1/3%)

2%

Over thirty-three and one third percent (33 1/3%)

1%

(b)
Tax Base. Gross selling price or gross value in money of the shares of stock sold,
bartered, exchanged or otherwise disposed of.
(c)

Determination of the Persons Liable to Pay the Tax.

(c.1) Primary Offering. The tax herein imposed shall be paid by the issuer corporation with
respect to the Shares of Stock corresponding to the Primary Offering.
(c.2) Secondary Offering. The tax herein imposed shall be paid by the selling shareholder(s)
with respect to the Shares of Stock corresponding to the Secondary Offering. IDAaCc
(c.3) Illustration. RFB Corporation, a closely-held corporation, has an authorized capital stock
of 100,000,000 shares with par value of Php1.00/share as of January 1, 2008.
Of the 100,000,000 authorized shares, 25,000,000 thereof is subscribed and fully paid up by the
following stockholders:
Mr. Estoy B. Zabala 5,000,000
Mrs. Rowena V. Posadas

5,000,000

Mr. Conrado G. Cruz 5,000,000

Mr. Benedict O. Sison

5,000,000

Mrs. Linda O. Evangelista

5,000,000

Total Shares Outstanding

25,000,000

========
RFB Corporation finally decides to conduct an IPO and initially offers 25,000,000 of its unissued
shares to the investing public. After the IPO in March 2008, RFB Corporation's total issued shares
increased from 25,000,000 to 50,000,000 shares. CASTDI
At the IPO, one of the existing stockholders, Mrs. Linda O. Evangelista, has likewise decided to sell
her entire 5,000,000 shares to the public. Thus, 25,000,000 shares have been offered in the
primary offering and 5,000,000 shares in the secondary offering. CcEHaI
Computation of the percentage to be used.
(i)

Total Number of Shares Outstanding

Number of Shares issued by RFB prior to IPO

25,000,000 shares

Add: Number of Additional Shares Through

Primary Offering for IPO

25,000,000 shares

Total Shares Outstanding after Listing at the

Stock Exchange or IPO

50,000,000 shares

=========
(ii)

Computation of Percentage Ratio to the Total Outstanding Shares

(ii.a)

For Primary Offering:

Number of Shares offered by

RFB Corporation to the public

25,000,000 shares

Divide by the number of shares outstanding

after the Listing at the Stock Exchange

50,000,000 shares

Ratio of Percentage 50%

Percentage Ratio is 50% which is over 33 1/3% so the Rate of Tax to be used for Primary Offering
(IPO) of shares is 1%. ASDTEa
(ii.b)

For Secondary Offering:

Number of Shares offered by existing

Stockholder of RFB Corporation to the
public 5,000,000 shares
Divide by the number of shares outstanding
after the Listing at the Stock Exchange

50,000,000 shares

Ratio of Percentage 10%

Percentage Ratio is 10% which is under 25% so the Rate of Tax to be used for Secondary Offering
(IPO) of shares is 4%.
(iii)

Computation of the Tax

(iii.a) RFB Corporation newly issued shares

(25,000,000 shares x Php1.50/share x 1%)

Php375,000

(iii.b) Mrs. Linda O. Evangelista's shares

(5,000,000 shares x Php1.50/share x 4%) =

Php300,000

If in June 2008, RFB Corporation again decides to increase capitalization by offering

another 30,000,000 of unissued shares to the public at Php2.00/share consequently bringing the
total issued shares to 80,000,000 shares, such follow-on/follow-through sale which are shares
issued subsequent to IPO shall no longer be taxed pursuant to Section 6 hereof. The transaction,
however, is subject to Documentary Stamp Tax similar to the transaction covered by Primary
Offering as well as Secondary Offering of shares of stock. DcCASI
Nonetheless, in case another existing shareholder decides to offer his existing shares to
the public subsequent to IPO, as in the above illustration, if Mr. Benedict O. Sison ever decides to
sell his 5,000,000 shares to the public at Php2.00 per share (for the Php10,000,000 he received
as consideration for the shares he sold), he shall be taxed pursuant to Section 127 (A) of the Tax
Code as implemented by Sec. 5 of these Regulations which is 1/2 of 1% of the gross selling price
or PhpP50,000 (i.e., 5,000,000 shares x Php2.00/share = Php10,000,000 x 1/2 of 1%).
SECTION 7. Sale, Barter or Exchange of Shares of Stock Not Traded Through a Local Stock
Exchange Pursuant to Secs. 24 (C), 25 (A)(3), 25 (B), 27 (D) (2), 28 (A) (7) (C), 28 (B) (5) (C) of The
Tax Code, as Amended.
(a)
Tax Rate. The provisions of Sec. 39 (B) of the Tax Code, as amended, notwithstanding, a
final tax at the rates prescribed below is hereby imposed on the sale, barter or exchange of
shares of stock not traded through the Local Stock Exchange pursuant to Secs. 24 (C), 25 (A) (3),
25 (B), 27 (D) (2), 28 (A) (7) (c), 28 (b) (5) (c) of the said Tax Code, as amended. cIETHa
Amount of Capital Gain

Tax Rate

Not over Php100,000

5%

On any amount in excess of Php100,000 10%

(b)
Tax Base. The tax imposed in Subsection (a) above shall be upon the net capital gains
realized during the taxable year from the sale, barter, exchange or disposition of shares of stock,
except shares sold or disposed of through the Local Stock Exchange which is covered by the
provisions of Secs. 5 and 6 above.
(c)

Determination of Amount and Recognition of Gain or Loss.

(c.1) Determination of Selling Price. In determining the selling price, the following rules shall
apply:
(c.1.1)
of sale.

In the case of cash sale, the selling price shall be the total consideration per deed

(c.1.2)
If the total consideration of the sale or disposition consists partly in money and
partly in kind, the selling price shall be sum of money and the fair market value of the property
received.
(c.1.3)
In the case of exchange, the selling price shall be the fair market value of the
property received.
(c.1.4)
In case the fair market value of the shares of stock sold, bartered, or exchanged is
greater than the amount of money and/or fair market value of the property received, the excess
of the fair market value of the shares of stock sold, bartered or exchanged over the amount of
money and the fair market value of the property, if any, received as consideration shall be
deemed a gift subject to the donor's tax under Sec. 100 of the Tax Code, as amended. AHTICD
(c.2) Definition of "fair market value" of the Shares of Stock. For purposes of this Section, "fair
market value" of the shares of stock sold shall be:
(c.2.1)

In the case of listed shares which were sold, transferred, or exchanged outside of

the trading system and/or facilities of the Local Stock Exchange, the closing price on the day
when the shares are sold, transferred, or exchanged. When no sale is made in the Local Stock
Exchange on the day when the listed shares are sold, transferred, or exchanged, the closing price
on the day nearest to the date of sale, transfer or exchange of the shares shall be the fair market
value. caIDSH
(c.2.2)
In the case of shares of stock not listed and traded in the local stock exchanges, the
book value of the shares of stock as shown in the financial statements duly certified by an
independent certified public accountant nearest to the date of sale shall be the fair market value.
Illustrations.
(i)
Assume that Ms. Girl Cantillep sold on October 31, 2008, 100 shares of stock of "A
Corporation". The corporation's accounting period consistently employed in keeping its books of
accounts is on a calendar year basis. In this case, the book value of the shares of stock of "A
Corporation" shall be determined based on its audited financial statements for the calendar year
2007 since its audited financial statements for the calendar year 2008 is yet nonexistent as of the
date of sale.
(ii)
Assume that Ms. Mape Sison sold on March 31, 2008, 100 shares of stock of "B
Corporation". The corporation likewise uses calendar year basis accounting period. In this case,
the books of accounts of "B Corporation" have already been closed and adjusted for Calendar
Year 2007, but the independent Certified Public Accountant has yet to issue the audited financial
statements for said calendar year 2007 which financial statements together with the annual
income tax returns are due to be filed on or before April 15, 2008. ETDHaC
In this particular case, the book value of the shares of stock of "B Corporation" shall
tentatively be based on the financial statements for Calendar Year 2007 yet to be audited and not
on the audited financial statements of Calendar Year 2006. Once the 2007 audited financial
statements have been issued, adjustment to the book value shall be made for the difference.
(c.2.3)
In the case of a unit of participation in any association, recreation or amusement
club (such as golf, polo, or similar clubs), the fair market value thereof shall be its selling price or
the bid price nearest to the date of sale as published in any newspaper or publication of general
circulation, whichever is higher.
(c.3) Determination of Gain or Loss from Sale or Disposition of Shares of Stock. The gain from
the sale or other disposition of shares of stock shall be the excess of the amount realized
therefrom over the basis or adjusted basis for determining gain, and the loss shall be the excess
of the basis or adjusted basis for determining loss over the amount realized. The amount realized
from the sale or other disposition of property shall be the sum of money received plus the fair
market value of the property (other than money) received, if any. DTIaCS
(c.3.1)
Basis for Determining Gain or Loss from Sale or Disposition of Shares of Stock.
Gain or loss from the sale, barter or exchange of property, for a valuable consideration, shall be
determined by deducting from the amount of consideration contracted to be paid, the
vendor/transferor's basis for the property sold or disposed plus expenses of sale/disposition, if
any.
">(c.3.1.1)
Acquired by Purchase. If the property is acquired by purchase, the basis is the
cost of such property.
">
Determination of the Cost. The cost basis for determining the capital gains or losses for
shares of stock acquired through purchase shall be governed by the following rules: aACHDS
">(i) If the shares of stock can be identified, then the cost shall be the actual purchase price
plus all costs of acquisition, such as commissions, documentary stamp taxes, transfer fees, etc.
">(ii) If the shares of stock cannot be properly identified, then the cost to be assigned shall be
computed on the basis of the first-in first-out (FIFO) method.
">(iii) If books of accounts are maintained by the seller where every transaction of a particular
stock is recorded, then the moving average method shall be applied rather than the FIFO method.

">(iv) In general, stock dividend received shall be assigned with a cost basis which shall be
determined by allocating the cost of the original shares of stock to the total number shares held
after receipt of stock dividends (i.e., the original shares plus the shares of stock received as stock
dividends).
">
Illustration of cost allocated to stock dividends declared. Five (5) shares of stock in XYX
Company were acquired at a total cost of Php1,000.00 or at two hundred pesos per share
(Php200/share). XYX Company declared and issued five (5) shares of stock as stock dividend. In
this case, the cost basis for each of the ten (10) shares of stock shall be computed by dividing the
cost basis of the original shares by ten (10) shares, or one thousand pesos (Php1,000.00) divided
by ten (10) shares equals one hundred pesos (Php100.00) per share. ECTIHa
">(c.3.1.2)
Acquired by Devise, Bequest or Inheritance. If the property was acquired by
devise, bequest or inheritance, the basis shall be the fair market value of such property at the
time of death of the decedent.
">
The term "property acquired by bequest, devise or inheritance" as used herein means
acquisition through testamentary or intestate succession and includes, among others:
">(i) Property interests that the taxpayer received as a result of a transfer, or creation of a trust,
in contemplation of or intended to take effect in possession or enjoyment at or after death; and
ScHADI
">(ii) Such property interests as the taxpayer has received as the result of the exercise by a
person of a general power of appointment by will or by deed executed in contemplation of or
intended to take effect in possession or enjoyment at or after death, otherwise known as a
donation mortis causa or a donation in contemplation of death.
">(c.3.1.3)
Acquired by Gift. If the property was acquired by gift, the basis shall be the same
as it would be in the hands of the donor or the last preceding owner by whom it was not acquired
by gift, except that if such basis is greater than the fair market value of the property at the time
of the gift, then for the purpose of determining the loss, the basis shall be such fair market value.
">
Illustration. Assume that "Mr. Era" bought shares of stock in 1970 at a cost of
Php100,000. He donated these shares to "Mr. Aio" on January 1, 1998, during which time, the said
shares has a fair market value of Php1,000,000 and on the basis of such fair market value, "Mr.
Era" paid the corresponding donor's tax. "Mr. Aio", the donee, sold the shares on January 1, 1999
for a consideration of PhP2,000,000. In this case, the basis of "Mr. Aio" in computing his gain from
the sale shall be at the historical cost basis thereof in the hands of "Mr. Era", the donor, or at
Php100,000. The gain from the sale in the hands of "Mr. Aio" is Php1,900,000 (i.e., selling price of
Php2,000,000 less historical cost thereof in the hands of "Mr. Era" the donor, at Php100,000
equals gain from the sale made by "Mr. Aio" in the amount of Php1,900,000).
">(c.3.1.4)
Acquired for Inadequate Consideration. If the property was acquired for less than
an adequate consideration in money or money's worth, the basis of such property is the amount
paid by the transferee for the property.
">
Illustration. Assume that "Mr. Esq" sold to "Mr. Nma", shares of stock for a consideration
of Php1,000,000. At the time of the sale, its fair market value is Php3,000,000. If "Mr. Nma" later
on sells this property and he is taxable on his gain derived from the sale, his gain from the sale
shall be determined by deducting from the amount of consideration received his purchase price
thereof at Php1,000,000. However, at the time of sale by "Mr. Esq" to "Mr. Nma", the former
should pay Capital Gains Tax and Documentary Stamp Tax on the over-the-counter sale
transactions of shares and at the same time Donor's Tax on the indirect gift which is the
difference between fair market value of shares/stocks sold and the actual consideration for the
sold shares of stock. HEISca
(c.3.2)
Rules on Substituted Basis in cases of Tax-Free Exchanges of Shares of Stock under
Section 40 (C) (2) of the Tax Code, as Amended.
(c.3.2.1)
Substituted Basis of Stock or Securities Received by the Transferor. The
substituted basis of the stock or securities received by the transferor on a tax-free exchange shall
be as follows: AEDISC

(i)

The original basis of the property, stock or securities transferred;

(ii)
Less: (a) money received, if any, and (b) the fair market value of the other property
received, if any;
(iii)
Plus: (a) the amount treated as dividend of the shareholder, if any, and (b) the amount of
any gain that was recognized on the exchange, if any. However, the property received as 'boot'
shall have as basis its fair market value. The term "boot" refers to the money received and other
property received in excess of the stock or securities received by the transferor on a tax-free
exchange. SICaDA
If the transferee of property assumes, as part of the consideration to the transferor, a
liability of the transferor or acquires from the latter property subject to a liability, such
assumption or acquisition (in the amount of the liability) shall, for purposes of computing the
substituted basis, be treated as money received by the transferor on the exchange.
Finally, if the transferor receives several kinds of stock or securities, the Commissioner is
authorized to allocate the basis among the several classes of stocks or securities.
(c.3.2.2)
Substituted Basis of the Transferred Property in the Hands of the Transferee. The
substituted basis of the property transferred in the hands of the transferee shall be as follows:
(i)

The original basis in the hands of the transferor;

(ii)

Plus: the amount of the gain recognized to the transferor on the transfer.

(c.3.2.3)
The Original Basis of Property to be Transferred. The original basis of the property
to be transferred shall be the following, as may be appropriate:
(i)

The cost of the property, if acquired by purchase on or after March 1, 1913;

(ii)
The fair market price or value as of the moment of death of the decedent, if acquired by
inheritance;
(iii)
The basis in the hands of the donor or the last preceding owner by whom the property was
not acquired by gift, if the property was acquired by donation. If the basis, however, is greater
than the fair market value of the property at the time of donation, then, for purposes of
determining loss, the basis shall be such fair market value; or, aHTDAc
(iv)
The amount paid by the transferee for the property, if the property was acquired for less
than an adequate consideration in money or money's worth.
(v)
The adjusted basis of (i) to (iv) above, if the acquisition cost of the property is increased by
the amount of improvements that materially add to the value of the property or appreciably
prolong its life less accumulated depreciation.
(vi)
The substituted basis, if the property was acquired in a previous tax-free exchange under
Section 40 (C) (2) of the Tax Code, as amended.
(c.3.2.4)
Basis for Determining Gain or Loss on a Subsequent Sale or Disposition of Property
Subject of the Tax-free Exchange. The substituted basis as defined in Section 40 (C) (5) of the
Tax Code as amended, and implemented in Section (c.3.2.1) and (c.3.2.2) above, shall be the
basis for determining gain or loss on a subsequent sale or disposition of property subject of the
tax-free exchange.
(c.4) Limitation of Capital Losses. For sale, barter, exchange or other forms of disposition of
shares of stock subject to the 5%/10% capital gains tax on the net capital gain during the taxable
year, the capital losses realized from this type of transaction during the taxable year are
deductible only to the extent of capital gains from the same type of transaction during the same
period. If the transferor of the shares is an individual, the rule on holding period and capital loss
carry-over will not apply, notwithstanding the provisions of Section 39 of the Tax Code as
amended. HTSaEC
(c.5) Shares of Stock Becoming Worthless. Losses from shares of stock, held as capital asset,
which have become worthless during the taxable year shall be treated as capital loss as of the
end of the year. However, this loss is not deductible against the capital gains realized from the

sale, barter, exchange or other forms of disposition of shares of stock during the taxable year, but
must be claimed against other capital gains to the extent provided for under Section 34 of the Tax
Code, as amended. For the 5% and 10% net capital gains tax to apply, there must be an actual
disposition of shares of stock held as capital asset, and the capital gain and capital loss used as
the basis in determining net capital gain, must be derived and incurred respectively, from a sale,
barter, exchange or other disposition of shares of stock.
(c.6) Losses from Wash Sales of Shares of Stock. The following rules shall apply with respect
to losses from wash sales of shares of stock:
(c.6.1)
A taxpayer cannot deduct any loss claimed to have been sustained from the sale or
other disposition of stock, if, within a period beginning thirty (30) days before the date of such
sale or disposition and ending thirty (30) days after such date (referred to in this section as the
sixty-one (61)-day period), he has acquired (by purchase or by an exchange upon which the
entire amount of gain or loss was recognized by law), or has entered into a contract or option so
to acquire, substantially identical stock. However, this prohibition does not apply in the case of a
dealer in stock if the sale or other disposition of stock is made in the ordinary course of the
business of such dealer. ASEIDH
(c.6.2)
Where more than one loss is claimed to have been sustained within the taxable
year from the sale or other disposition of stock or securities, the provisions of this Section shall be
applied to the losses in the order in which the stock the disposition of which resulted in the
respective losses were disposed of (beginning with the earliest disposition). If the order of
disposition of stock disposed of at a loss on the same day cannot be determined, the stock or
securities will be considered to have been disposed of in the order in which they were originally
acquired (beginning with earliest acquisition).
(c.6.3)
Where the amount of stock or securities acquired within the sixty-one (61)-day
period is less than the amount of stock or securities sold or otherwise disposed of, then the
particular shares of stock or securities the loss from the sale or other disposition of which is not
deductible shall be those with which the stock or securities acquired are matched in accordance
with this rule: The stock or securities sold will be matched in accordance with the order of their
acquisition (beginning with the earliest acquisition) with an equal number of the shares of stock
or securities sold or otherwise disposed of.
(c.6.4)
Where the amount of stock or securities acquired within the sixty-one day period is
not less than the amount of stock or securities sold or otherwise disposed of, then the particular
shares of stock or securities the acquisition of which resulted in the non-deductibility of the loss
shall be those with which the stock or securities disposed of are matched in accordance with this
rule: The stock or securities sold or otherwise disposed of will be matched with an equal number
of the shares of stock or securities acquired in accordance with the order of acquisition (beginning
with the earliest acquisition) of the stock or securities acquired.
(c.6.5)
The acquisition of any share of stock or any security which results in the nondeductibility of a loss under the provisions of this Section shall be disregarded in determining the
deductibility of any other loss.
(c.6.6)
As provided in Sec. 2 of these Regulations, the word "acquired" as used in this
Section means acquired by purchase or by an exchange upon which the entire amount of gain or
loss was recognized by law, and comprehends cases where the taxpayer has entered into a
contract or option within the sixty-one-day period to acquire by purchase or by such an exchange
the subject shares of stock.
Examples of losses from wash sales of stock or securities.
(i)
On December 1, 2000, Ms. Rose Miranda whose taxable year is the calendar year,
purchased 100 shares of common stock of M company for Php10,000. On December 15, 2000,
she purchased 100 additional shares for Php9,000. On January 2, 2001, she sold the 100 shares
purchased on December 1, 2000 for Php9,000. Because of the provisions of this Section, no loss
from the sale is allowable as deduction. HDTSIE
(ii)

Ms. Karren Punzalan, whose taxable year is the calendar year, had the following stock

transactions:

On September 21, 2000, purchased 100 shares of the common stock of M Company for
Php5,000 or at Php50.00/share.

On December 21, 2000, she purchased 50 shares of substantially identical stock for
Php2,750 or at Php55/share. IDSaEA

On December 26, 2000, she purchased 25 additional shares of such stock for Php1,125 or
at Php45/share.

On January 2, 2001, she sold for Php4,000 the 100 shares purchased on September 21,
2000 or at Php40.00/share.
Computation of the Indicated Loss
Proceeds from sale of 100 shares Php4,000
Cost of shares bought on September 21, 2000

5,000

Indicated Loss from the sale

(Php1,000)

========
Computation of Non-deductible Loss due to the Sixty-one Day Period of Purchase of Substantially
Identical Shares.
Number of Shares Purchased Within the 61-day
period 75 shares
x Cost/share for shares bought on
September 21, 2000 Php50.00/share

Amount

Php3,750.00

Less: Proceeds from Sale on January 2, 2001

for 75 shares (i.e. 75 x P40/share) 3,000.00

Non-Deductible Loss Php750.00

========
The loss on the sale of the remaining 25 shares (Php1,250 less Php1,000 or Php250) is
deductible subject to the limitations provided in items (c.6.3) above and (c.4) above. TcaAID
(iii)
Ms. Ding Cruz, whose taxable year is the calendar year, had the following stock
transactions:

On September 15, 2000, purchased 100 shares of the stock of M Company for Php5,000.
ScHADI

On February 1, 2001, she sold these shares for Php4,000.

On each of the four days from February 15, 2001 to February 18, 2001, she purchased 50
shares per day of substantially identical stock for Php2,000 per purchase.
There is an indicated loss of P1,000 from the sale of the 100 shares on February 1, 2001, but
since within the sixty-one-day period she purchased not less than 100 shares of substantially
identical stock, the loss is not deductible. The particular shares of stock, the purchase of which
resulted in the nondeductibility of the loss are the first 100 shares purchased within such period,
that is, the 50 shares purchased on February 15, 2001, and the next 50 shares purchased on
February 16, 2001.

SECTION 8. Taxation of Surrender of Shares by the Investor Upon Dissolution of the Corporation
and Liquidation of Assets and Liabilities of Said Corporation. Upon surrender by the investor of
the shares in exchange for cash and property distributed by the issuing corporation upon its
dissolution and liquidation of all assets and liabilities, the investor shall recognize either capital
gain or capital loss upon such surrender of shares computed by comparing the cash and fair
market value of property received against the cost of the investment in shares. The difference
between the sum of the cash and the fair market value of property received and the cost of the
investment in shares shall represent the capital gain or capital loss from the investment,
whichever is applicable. If the investor is an individual, the rule on holding period shall apply and
the percentage of taxable capital gain or deductible capital loss shall depend on the number of
months or years the shares are held by the investor. Section 39 of the Tax Code, as amended,
shall herein apply in all possible situations. SHADEC
The capital gain or loss derived therefrom shall be subject to the regular income tax rates
imposed under the Tax Code, as amended, on individual taxpayers or to the corporate income tax
rate, in case of corporations.
SECTION 9. Taxation of Shares Redeemed for Cancellation or Retirement. When preferred
shares are redeemed at a time when the issuing corporation is still in its "going-concern" and is
not contemplating in dissolving or liquidating its assets and liabilities, capital gain or capital loss
upon redemption shall be recognized on the basis of the difference between the amount/value
received at the time of redemption and the cost of the preferred shares.
Similarly, the capital gain or loss derived shall be subject to the regular income tax rates imposed
under the Tax Code, as amended, on individual taxpayers or to the corporate income tax rate, in
case of corporations.
This section, however, does not cover situations where a corporation voluntarily buys back its
own shares, in which it becomes treasury shares. In such cases, the stock transaction tax under
Sec. 127 (A) of the Tax Code shall apply if the shares are listed and executed through the trading
system and/or facilities of the Local Stock Exchange. Otherwise, if the shares are not listed and
traded through the Local Stock Exchange, it is subject to the 5% and 10% net capital gains tax.
cHDaEI
SECTION 10. Time of Payment of Tax and Manner of Filing Returns. The tax imposed under
Section 5 of these Regulations shall be collected as follows:
(a)
Tax on Sale of Shares of Stock Listed and Traded through the Local Stock Exchange. The
stock broker who effected the sale has the duty to collect the tax from the seller upon issuance of
the confirmation of sale, issue the corresponding official receipt thereof and remit the same to the
collecting bank/officer of the Revenue District Officers (RDO) where the broker is registered within
five (5) banking days from the date of collection thereof and to submit on Mondays of each week
to the secretary of the Local Stock Exchange, of which he is a member, a true and complete
return, which shall contain a declaration, that he made under the penalties of perjury, of all the
transactions effected through him during the preceding week and of taxes collected by him and
turned over to the concerned RDO. The secretary of the Local Stock Exchange shall reconcile the
records of the Local Stock Exchange with the weekly reports of stockbrokers and in turn transmit
to the RDO, on or before the 15th day of the following month, a consolidated return of all
transactions effected during the preceding month through the Local Stock Exchange.
(b)
Tax on Shares of Stock Sold or Exchanged through IPO. The corporate issuer in Primary
Offering shall file the return and pay the corresponding tax to the RDO which has jurisdiction over
said corporate issuer within thirty (30) days from the date of listing of the shares of stock in the
Local Stock Exchange. The return shall be accompanied with a copy of the instrument of sale.
STaCIA
In the case of shares of stock sold or exchanged through Secondary Offering at the time of listing
at the Local Stock Exchange of shares of closely-held corporations, the provisions of subsection
(a) of this Section shall apply as to the time and manner of the payment of the tax on the sale
thereof.
(c)

Tax on Shares of Stock Not Traded through the Local Stock Exchange. Persons deriving

capital gains from the sale or exchange of listed shares of stock not traded through the Local
Stock Exchange as prescribed by these regulations shall file a return within thirty (30) days after
each transaction and a final consolidated return of all transactions during the taxable year on or
before the fifteenth (15th) day of the fourth (4th) month following the close of the taxable year.
IAEcCT
In the case of an individual taxpayer, the filing of the final consolidated return of all transactions
shall be during the calendar year. However, for corporate taxpayers, the filing of the final
consolidated return of all transactions shall be in accordance with the accounting period
employed by such taxpayer which may either be calendar or fiscal year basis.
SECTION 11. Effect of Non-Payment of Tax. No sale, exchange, transfer or similar transaction
intended to convey ownership of, or title to any share of stock shall be registered in the books of
the corporation unless the receipts of payment of the tax herein imposed is filed with and
recorded by the stock transfer agent or secretary of the corporation. It shall be the duty of the
aforesaid persons to inform the Bureau of Internal Revenue in case of non-payment of tax. Any
stock transfer agent or secretary of the corporation or the stockbroker, who caused the
registration of transfer of ownership or title on any share of stock in violation of the
aforementioned requirements shall be punished in accordance with the provisions of Title X,
Chapters I and II of the Tax Code, as amended.
SECTION 12. Penalties. In addition to the civil and criminal liabilities of the taxpayer, for
violation of the provisions of these Regulations, the following administrative penalties prescribed
under Secs. 248 and 249 of the same Tax Code shall be imposed, which shall be collected at the
same time, in the same manner and as part of the tax.
(a)

Surcharges.

(a.1) There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to
twenty-five percent (25%) of the amount due, in the following cases: TADIHE
(a.1.1) Failure to file any return and pay the tax due thereon as required by the provisions of the
Tax Code, as amended, and these Regulations, on the date prescribed;
(a.1.2) Unless otherwise authorized by the Commissioner, filing a return with an internal revenue
officer other than those with whom the return is required to be filed; or
(a.1.3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of
assessment; or
(a.1.4) Failure to pay the full or part of the amount of the tax shown on any return required to be
filed under the provisions of the Tax Code, as amended, and these Regulations, on or before the
date prescribed for its payment.
(a.2) In case of willful neglect to file the return within the period prescribed by the Tax Code or
these Regulations, or in case a false or fraudulent return is willfully made, the penalty to be
imposed shall be fifty percent (50%) of the tax or of the deficiency tax, in case any payment has
been made on the basis of such return before the discovery of the falsity or fraud. ASEIDH
(b)
Interest. There shall be assessed and collected on any unpaid amount of tax, interest at
the rate of twenty percent (20%) per annum.
(c)
Deficiency Interest. Any deficiency in the tax due shall be subjected to interest at the
rate of twenty percent (20%), which interest shall be assessed and collected from the date
prescribed for its payment until the full payment thereof.
(d)
Delinquency Interest. In case of failure to pay the amount of the tax due on the return
required to be filed, or a deficiency tax, or any surcharge or interest thereon on the due date
appearing in the notice and demand of the Commissioner of Internal Revenue, there shall be
assessed and collected on the unpaid amount, interest at the rate of twenty percent (20%) per
annum until the amount is fully paid, which interest shall form part of the tax. DTSaIc
SECTION 13. Repealing Clause. All regulations, rules, orders or portions thereof which are
inconsistent with the provisions of these Regulations are hereby amended, modified or repealed.

SECTION 14. Effectivity Clause. These Regulations shall take effect fifteen (15) days after its
publication in any newspaper of general circulation in the Philippines. EcHAaS

REVENUE AUDIT MEMORANDUM ORDER NO. 01-86

SUBJECT
:
Corporations.
TO

1.

Background

Procedure for Tax Audit of Philippine Branches of Foreign

All Internal Revenue Officers and Others Concerned.

1.1
Some branches of foreign corporations engage in business in the Philippines by soliciting
orders from local importers. These branches are called "liaison offices or branches." Sales made
from such solicitations are not reported by these branches as their own sales purportedly
because the branch office merely relays to its head office abroad purchase orders from local
importers and it is purportedly its head office that actually consummates the sales. At the end of

the taxable period, the branch office simply reports for income tax purposes its purported share
of the income generated from sales but the allocation of this purported share is left entirely at the
discretion of its head office. The revenue service is completely at the mercy of multi-national
companies. cda
1.2
Some branches engage in business in the Philippines by soliciting orders from local
importers and relays this information to its head office abroad. The head office in turn solicits
prospective exporters for a compensation. At the end of the taxable period, the head office
allocates a certain portion of the compensation to its branch in the Philippines. The branch in turn
reports its purported share for income tax purposes but does not pay the commercial broker's tax
thereon purportedly because the compensation was received from its head office and purportedly
because the branch cannot be legally considered a commercial broker in relation to its head
office since the branch and its head office possess only a single legal personality (PHILIPP
BROTHERS OCEANIC, INC. vs. COMMISSIONER OF INTERNAL REVENUE, CTA Case No. 3140, March
8, 1984).
Again, in this second situation, allocation of the compensation is left at the discretion of the head
office the revenue service also left at the mercy of these multi-national companies.
2.

Legal Consequences

2.1
The foregoing scope of activities of these branch offices is considered under R.A. 5455 as
business acts. "'Doing business' shall include soliciting orders, purchases, service contracts
opening offices, whether called 'liaison' offices or branches. . . . any other act or acts that imply a
continuity of commercial dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the functions normally incident to, and in
progressive prosecution of, commercial gain or of the purpose and object of the business
organization." (SEC. 1 (1), R.A. 5455).
2.2
These branch offices, like any other businesses, are required by law to account for their
business operations in accordance with generally accepted accounting practices (SEC. 38, NIRC).
Thus, a branch office although not possessing a separate and distinct juridical personality is,
however, considered under generally accepted accounting practices as a distinct character, a
separate business unit and should be "supplied by the home office with cash and merchandise
and such other assets as may be needed" (Advance Accounting by Simons and Karrenbrock, 4th
ed., p. 202). Generally accepted accounting practices also dictate that income and expenses of
the branch shall be segregated from those of the home office in order to clearly reflect their
respective operating results (ibid). cdasia
2.3
The doctrine on corporate fiction is not absolute the veil of corporate fiction may be
legally pierced should it be used to subvert just application of laws.
". . . Where the corporate form or organization is adopted or a corporate entity is asserted in an
endeavor to evade a statute or to modify its intent, courts will disregard the corporation or its
entity. This has been applied to violations of . . . tax laws, . . ." (FLETCHER, 170-171,
Commentaries and Jurisprudence on the Commercial Laws of the Philippines by Agbayani, Vol. 3,
1970 ed., p. 21).
". . . Where a corporation is a dummy, is unreal or a sham and serves no business purposes and is
intended only as a blind, the corporate form may be ignored for the law cannot countenance a
form that is bald and a mischievous fiction." (LIDDEL & CO. v. COLLECTOR OF INTERNAL REVENUE,
L-9687, June 30, 1961, citing Gregory v. Helvering, 293 US 465, L. ed. 596-599; Higgins v. Smith,
1940, 308 US 406 L. ed., cited in p. 20, Commentaries and Jurisprudence on the Commercial Laws
of the Philippines by Agbayani, Vol. 3, 1970 ed.).
". . . To allow a taxpayer to deny tax liability on the ground that the sales were made through
another and distinct corporation when it is proved that the latter is virtually owned by the former
or that they are practically one and the same is to sanction a circumvention of our tax laws."
(ibid).
Corporate fiction may be inquired upon where there is "inadequacy of capital . . ., confusion of
affairs . . . and direct intervention in management causing inequitable results (Ballantine, 314;

Rorhlick, 417-422).
3.

Branch Operation and Consequences

3.1
The Philippine branch solicits purchase orders from local buyers, relays the information to
its home office abroad, and the home office purportedly directly makes the sale.
In this type of operation: (i) Sales purportedly consummated abroad by the home office shall be
treated as sales constructively consummated in the Philippines and made by the branch office,
hence, income therefrom shall be considered income from sources within the Philippines; (ii) the
branch shall record and report the gross selling price of commodities sold thru its home office;
and (iii) report for income tax purposes its net income therefrom. (iv) Since under this situation,
the import taxes, duties and charges have already been paid by the local buyers, the same shall
not anymore be chargeable against the branch.
Under this paragraph, these transactions are treated sales constructively consummated by the
branch office in accordance with generally accepted accounting practices required under Section
38 of the Tax Code since the branch solicitations are actually trading acts. Accordingly, the home
office is obligated to supply its branch with merchandise in pursuing its trading business in the
Philippines. Hence, sales purportedly made directly by its home office shall be considered no
more than merely a constructive supplying of the merchandise to its branch which eventually
constructively sells the same to Philippine buyers. cdasia
3.2
The branch solicits purchase orders from local buyers, relays the information to its home
office, the home office solicits prospective sellers abroad and eventually receives compensation
for services rendered.
In this second type of operation: (i) the branch shall be considered "a commercial broker" or
indentor; (ii) its share from compensation as allocated by its home office shall be subject to
commercial broker gross receipts tax; (iii) the branch shall provide itself with the corresponding
fixed tax as a commercial broker; and (iv) pay income tax on its share of the compensation.
Under this paragraph, the branch office shall be considered a commercial broker since its
activities is well within the ambit of the term "broker". Brokers are ". . . those who are engaged for
others in the negotiation of contracts relative to property with the custody of which they have no
concern. They act as negotiators in bringing other persons together to bargain; generally, they
ought not to sell in their own names, have no implied authority to receive payment, are not
entrusted with the physical possession of the principal's goods when engaged to buy or sell, and
have no special property therein or lien thereon." (8 Am. Jur. 889-890, cited in Philipp Brothers
Oceanic, Inc. v. The Commissioner of Internal Revenue, CTA Case No. 3140, March 8, 1984).
4.

Audit Procedure

4.1

For constructive trading by branch office

(a)
Determine gross sales generated from branch's constructive trading (from solicitations
made by the branch);
(b)
Require the Philippine branch to submit duly authenticated (i) income statement; and (ii)
statement of cost of sales re worldwide operation of the entire corporation during the taxable
year;
(c)
Extract the gross income generated from such constructive sales by applying against the
gross constructive sales the gross profit rate shown in the cost of sale statement referred to in
paragraph (b) (ii) above.
Illustration: Assume that the gross profit ratio, based on worldwide statement of cost of sales, is
20% and the gross constructive sales amounts to P1,000,000. Gross income therefrom shall be
computed as follows:
Gross sales

P1,000,000

Gross income therefrom

(20% G/P rate)

P200,000

(d)
Check from the records of the Bureau of Customs all shipments coming from the branch's
home office during the taxable year in determining the branch's constructive sales in the
Philippines. cdasia
(e)

Require the branch to reconcile computations of its constructive sales in the Philippines.

4.2

For broker activity by branch office

(a)

Verify veracity of the amount of compensation allocated to the branch by its home office;

(b)
Require submission of sworn declaration from home office on the correctness of the
allocated share of the branch office and cross check this declaration in connection with the
branch records re extent of solicitations undertaken in the Philippines during the tax year;
(c)

Require the branch to pay the corresponding fixed tax as a commercial broker;

(d)
Require the branch to pay the corresponding commercial broker's gross receipts tax, based
on its total share from compensation derived for services rendered in the Philippines; and
(e)
Determine also the branch income tax obligation for the said income which is being
considered income from sources within the Philippines.
5.

Implementation

Strict enforcement of this Revenue Audit Memorandum Order is enjoined.

6.

Effectivity

This Order shall take effect immediately. cdt

7.

Publication

The Bureau shall give this Order as wide a publicity as possible for proper guidance of multinational companies doing business in the Philippines under a branch-head office relationship; and
for strict enforcement by revenue personnel.

REVENUE REGULATIONS NO. 16-86

SUBJECT
:
Amendment to Section 160 of the Income Tax Regulations (Rev.
Regulations No. 2) regarding the basis of determining ratable part of overseas
overhead expenses apportioned under Section 37(b) of the National Internal Revenue
Code.
TO

All Internal Revenue Officers and Others Concerned:

Pursuant to Sections 4 and 277 of the National Internal Revenue Code, the first paragraph of
Section 160 Revenue Regulations No. 2, otherwise known as the Income Tax Regulations, is
hereby amended to read as follows: cd i
Sec. 160.
(a) Apportionment of deductions. From the items specified in Section 37(a) as
being derived specifically from sources within the Philippines, there shall be deducted the
expenses, losses, and other deductions properly allocated thereto and a ratable part of any other
expenses, losses, and other deductions effectively connected with the business or trade
conducted exclusively within the Philippines which cannot be definitely allocated to some items
or class of gross income. The remainder shall be included in full as net income from sources
within the Philippines. The ratable part shall be based upon any of the following ratios
consistently allowed from year to year:
1.

Gross income from sources within the Philippines to the total gross income.

2.

Net sales in the Philippines to total net sales.

3.
If any other method of allocation is adopted, a written permission from the Commissioner
of Internal Revenue shall first be secured.
(b)
External Auditor's certificate. The income tax return to be filed should be accompanied
by a certification from an independent and reputable Certified Public Accountant containing the
following information:
1.
The home office deductions for the year involved have been examined in accordance with
generally accepted auditing standards and accordingly included such tests of accounting records
and such other auditing procedures as were considered necessary in the circumstances. cd
2.

The deductions pro-rated to the Philippine branch do not include

(a)

net losses of any operating unit or branch;

(b)

income tax payment;

(c)

capital expenditures; and

(d)

expenses directly changeable to any branch.

3.
The amount of allocable overhead expenses used in the pro-rata allocation to the
Philippine branch is the same amount used in the pro-ration to all branches worldwide and the
amount disallowed in other countries because of governmental requirement is not added back to
the allocable amount. casia
4.
Should there be an exception or qualification on the above requested certification, an
explanation with supporting documents should be submitted.

These regulations shall be effective on income tax returns to be filed for the taxable period which
begins on or after January 1, 1986.

REVENUE AUDIT MEMORANDUM ORDER NO. 04-86

SUBJECT
:
Audit Guidelines in the Allocation of Home Office Overhead
Expenses Under Section 37(b) of the National Internal Revenue Code.
TO

All Internal Revenue Officers and Others Concerned

In order to avoid delay and conflict in the determination of Philippine sources taxable net income
of foreign taxpayers for purposes of Philippine income tax, this Revenue Audit Memorandum is
issued.
1.

Background

1.1
In computing net income from sources within the Philippines, Section 37(b) provides that
from the gross income from sources within the Philippines ". . . there shall be deducted the
expenses, losses and other deductions properly allocated thereto and a ratable part of any
expenses, interests and losses and other deductions effectively connected with the business or
trade conducted exclusively within the Philippines which cannot be definitely allocated to some
items or class of gross income . . . " casia
1.2
These deductions are difficult to verify because substantial amounts thereof are incurred
in the head office or elsewhere and the corresponding supporting documents and books of
accounts are not accessible to local taxing authorities.
1.3
Heretofore only an audit certificate is presented to substantiate the deductions incurred
abroad which are allocated and pro-rated to Philippine source gross income.
1.4
In implementing the above provision of the National Internal Revenue Code, there is a
need for adequate and satisfactory proof and explanations in order that the claimed deductions
of the foreign taxpayer may be allowed for income tax purposes.
2.

Audit Procedure

2.1
Functional analysis At the start of investigation there should be a detailed examination
of the functions performed both by the Home Office and the Local Branch. For this purpose, an
organization and functional chart of the home office and local branch should be secured.
2.11 The functions should be determined and then listed. Who does what? What is required to
do it? Who needs whom for what?
2.12 After having listed the functions performed by each entity, the functions themselves must
be analyzed. Could anyone else perform these functions? How difficult are they? What skill,
equipment and processes are needed? cd i
2.2
On the basis of the functional analysis, the claimed deduction properly allocable can now
be determined by applying the tests of (a) relevance (necessary) to the local branch and (b)

reasonable (ordinary) charges keeping always in mind the arm's length principle in transactions
between related parties.
2.3

As to the deductions which cannot be definitely allocated, the following are required:

2.31 Breakdown or Schedule of Home or Foreign Office expenses being pro-rated, together with
an explanation of the nature of each expense. Take note of deductions which are directly
allocable to income earned outside the Philippines.
2.32 Basis of pro-ration (a) Determine if the basis and method of pro-ration are being applied
consistently from year to year. (b) Is the same amount of Home Office expenses being allocated
world-wide?
3.

In all instances, be on the lookout for:

a.
Charges applicable to newly opened foreign branches but are being claimed as deductions
by the Philippine branch;
b.
Functions are being performed for some branches but not for others, and yet no
adjustments are made on the allocation;
c.

or any other scheme of over-allocating costs to the Philippine branch. cdasia

4.
All pertinent provisions of these Audit Guidelines applicable in the investigations of
subsidiaries by multi-national companies should be observed by all internal revenue officers
concerned.

REVENUE AUDIT MEMORANDUM ORDER NO. 01-95

SUBJECT
:
Audit Guidelines and Procedures on the Proper Determination of the
Income Tax Liability of Philippine Branches and Liaison Offices of Multi-National
Enterprises (MNEs) Engaged in Soliciting Orders, Purchaser, Service Contracts,
Trading, Construction and Other Activities in the Philippines.
TO

All Internal Revenue Officers, Employees and Others Concerned

I.

Rationale

Whereas Revenue Audit Memorandum Order (RAMO) No. 1-86 dated April 25, 1986 imposes
income tax on the gross income generated from constructive trading and commission income
derived from brokering activities of Philippines branches of MNEs engaged in trading activities.
Whereas RAMO No. 1-86 makes no recognition of such factors as the nature of item traded, the
risk involved and participation of the local branch;
Whereas the implementation of RAMO No. 1-86 makes use of much approximations and
estimates;
Therefore, this Order is issued to revise RAMO No. 1-86 and to cover taxation of Philippine
branches and liaison offices of MNEs engaged in soliciting orders, purchases, services contracts,
trading, construction and other activities.
With this Order, taxation of Philippine branches and liaison offices of MNEs engaged in soliciting
orders, purchases, service contracts, trading, constructions and other activities becomes more
practical, easy and equitable. At the same time, this Order addresses taxation of construction and
other activities by the same Philippine branches and liaison offices of MNEs as separate
undertakings.
II.

Objectives

This Order is issued to:

a)
Amend and supersede RAMO No. 1-86 dated April 25, 1986 which provides for the
procedures for tax audit of Philippine branches or foreign corporation.
b)

Address the issue on the proper determination of the income tax liability of Philippine

branches and liaison offices of MNEs pursuant to Section 43 of the National Internal Revenue
Code (NIRC) wherein the Commissioner of Internal Revenue (CIR) is authorized to distribute,
apportion or allocate gross income or deduction among organizations in order to clearly reflect
the income of any such organization.
c)
Provide guidelines on implementation of policies on the proper determination of the
income tax liability of Philippine branches and liaison offices of MNEs.
d)
Prescribed the minimum procedure required in the audit of the income tax liability of
Philippine branches and liaison offices of MNEs.
III.

Coverage

a)
This Order shall pay only to Philippine branches and liaison of Japanese trading firms
which are members of the Sogo Shoshas and registered with the Japanese Chamber of Commerce
and Industry (JCCI), and also all other foreign trading companies similarly situated as determined
by the Commissioner of Internal Revenue.
b)
Furthermore, the content of this Order will apply only to income tax liabilities of Philippine
branches and liaison offices of MNEs and will not affect the withholding, including branch profit
remittance, and business tax obligations of the same Philippine branches and liaison offices of
MNEs which shall be subject to the provisions of the National Internal Revenue Code (NIRC).
IV.

Guidelines

1.
The Philippine income tax due from soliciting orders, purchaser, service contracts, trading,
construction and other activities of the Philippine branches and liaison offices of MNEs will be
ascertained using the following formula.
For solicitation and trading activities
{(Worldwide Operating Sales to the Philippines attribution tax)}
{(

Income

Worldwide Sales

rate

rate

)}

For construction and other activities

plus {(Net Income from construction and other activities X tax rate )}
2.
In implementing the above formula, the following terms shall be construed to mean as
follows:
(a)
Worldwide (W/W) shall include head office accounts and those of branches located in
difference countries but shall exclude subsidiary accounts.
(b)
W/W Operating Income shall include the Gross Income minus Selling General &
Administrative expenses. Operating Income does not include non-operating and extraordinary
items like interest expense, exchange profit/loss capital gains/losses or other income/loss not
related not related to operation.
(c)
Sales to the Philippines shall be defined as the aggregated amount of exports and offshore
transactions to the Philippines by the Head Office, all branches and liaison offices and shall
include the amount of indent transactions from which commissions are generated. These shall
also include imported materials and equipment of construction projects undertaken in the
Philippines, but shall exclude local service income from construction projects or onshore income
from local construction.
(d)
W/W Sales shall consist of domestic, export, import and offshore transactions which
include nor only principal transactions but also indent transactions from which commissions are
generated.
(e)

Attribution rate shall mean a rate of 75% to be applied against formula.

(f)
The tax rate to be applied shall be in accordance with Section 25(a) of the NIRC which is
35%.
(g)

Net income on construction shall consist of local service income from construction projects

income from construction projects less the costs associated with local construction projects
including the cost of locally purchased materials equipment, if any.
(h)
Net income on all other activities shall consist of income such as branches and liaison
offices of MNEs are engaged in, net of costs and expenses associated with such income.
3.
In the application of the formula, no offsetting of losses from one line of business to the
detriment of the other line of business shall be allowed. This would mean that the tax due from
each line of business shall be computed independently from the other line of business.
V.

Procedures

1.
Request documents containing information on the nature of business transactions of the
taxpayer as follows:
a)
the structure of the Philippine branch or liaison office, the Home Office, other branches or
more than 50% owned or controlled subsidiaries located outside the Philippines dealing with the
local branch;
b)
the ownership, relationship, extent of control, directors and officers of the Philippine
branch or liaison office and the Home Office;
c)
the business activity of the MNE and how it relates to the activity of the local branch or
liaison office and other branches or more than 50% owned or controlled subsidiaries dealing with
the local company
2.
Ascertain the mathematical accuracy and completeness of the income tax return, financial
statements and supporting schedules filed by the taxpayer.
3.
Require the submission of financial statements exclusive for transactions dealing with
construction and all other activities and have a certified public accountant render an opinion as to
its fairness and conformity with accepted accounting standards.
For solicitation/trading activities
4.
Obtain a copy of the Worldwide Financial Statement duly certified by an independent
public accountant of the country which issues the financial statements and authenticated by the
Philippine Embassy or Consulate situated within the country where the Home Office of the MNE is
located.
5.
Verify correctness of Worldwide Operating Income and the Worldwide Sales figures against
the financial statements obtained in 4 above.
6.
Request for a summary of Sales to the Philippines duly certified by an independent public
accountant and authenticated by the Philippine Embassy or Consulate situated within the country
where the Home Office of the MNE is located. The Sales to the Philippine shall include the
offshore portion of the local construction projects which includes the supply of machinery and
equipment.
7.
Request for presentation of copies of pertinent sales invoices, bills of lading, freight and
insurance coverages and other documents to verify Sales to the Philippines, on a test sampling
basis.
For construction activities
8.
Review all Contracts and analyze the nature of the Contracts, the parties involved, the
terms and conditions, the total contract price, the payment and other pertinent information.
9.
Determine method of accounting, whether completed contract or the percentage of
completion, and check the correctness of take up in the books of accounts.
10.
Segregate the income from exempt transactions from that of taxable transactions, if
applicable.
11.
Determine the total contract price and composition of the project. The total contract price
includes:

a.

Supply of Machinery and Equipment

(Sometimes referred to as the
"offshore portion")

b.

xx

Supply of Labor/Civil Works

(Sometimes referred to as the
"onshore portion")

xx

Total Contract Price xx

====
12.
Verify that only the supply of local/civil works (onshore portion) is included in computation
of profit/loss on local construction project.
13.
Determine if costs and expenses corresponded only to the service portion of the project
referred to in 11 above.
14.
Be aware of charging of income and expenses by mere book entries using the
branch/home office account.
For all other activities
15.

Verify that all income from other activities are included as part of the gross income

16.
Ensure that only expenses related to the activities above are included in the determination
of the net income.
VI.

Effectivity

This Order shall take effect immediately.

REVENUE MEMORANDUM CIRCULAR NO. 44-05

SUBJECT

TO

All Internal Revenue Officers and Others Concerned

Taxation of Payments for Software

SECTION 1. Scope. This Circular shall provide for the guidelines for the taxation of computer
software payments. EISCaD
SECTION 2. Definition of Software. "Software" is a program, or a series of programs,
containing instructions for a computer required either for the operational processes of the

computer itself (operational software) or for the accomplishment of other tasks (application
software). It can be transferred through a variety of media, for example in writing or
electronically, on a magnetic tape or disk, or on a laser disk or CD-ROM, or it can be downloaded
through the Internet or through a network. It may be standardized with a wide range of
application or be customized for specific users. It can be transferred as an integral part of
computer hardware or in an independent form available for use on a variety of hardware.
SECTION 3.

Payments For the Use of Software As Royalties.

a.
Definition of ROYALTIES The term "royalties", as generally used, means payments of any
kind received as a consideration for the use of, or the right to use, any copyright of literary,
artistic or scientific work including cinematograph films, or films or tapes used for radio or
television broadcasting, any patent, trade mark, design or model, plan, secret formula or process,
or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for
information concerning industrial, commercial or scientific experience.
The definition covers both payments made under a license and compensation
which a person would be obliged to pay for fraudulently copying or infringing the right.
b.
Definition of royalties includes payments for the use of copyright over software Software
is generally assimilated as a literary, artistic or scientific work protected by the copyright laws of
various countries. Thus, payments in consideration for the use of or the right to use a copyright
relating to software are generally royalties.
SECTION 4. Categories of Transactions. Transactions involving software may take any one or
more of the following categories:
a.

A (full or partial) transfer of a copyright right in software;

b.

A transfer of a copy of the software (a copyrighted article);

c.

The provision of services for the development or modification of the software; or

d.

The provision of know-how relating to software programming techniques.

Any transaction involving software which consists of more than one of the transactions above
shall be treated as a separate transaction, with the appropriate provisions of this Circular being
applied to each such transaction. However, any transaction that is de minimis, taking into
account the overall transaction and the surrounding facts and circumstances, shall not be treated
as a separate transaction, but merely as a part of another transaction.
SECTION 5. Characterization of Transactions. The character of payments received in a
transaction involving the transfer of computer software depends on the nature of the rights that
the transferee acquires under the particular arrangement regarding the use and exploitation of
the program.
a.
Transfers of copyright rights. A transfer of software is classified as a transfer of a
copyright right if, as a result of the transaction, a person acquires any one or more of the rights
described below:
i.
The right to make copies of the software for purposes of distribution to the public by sale
or other transfer of ownership, or by rental, lease or lending;
ii.

The right to prepare derivative computer programs based upon the copyrighted software;

iii.

The right to make a public performance of the software;

iv.

The right to publicly display the computer program; or

v.
Any other rights of the copyright owner, the exercise of which by another without his
authority shall constitute infringement of said copyright. cCTIaS
The determination of whether a transfer of a copyright right in a software is a sale or exchange of
property is made on the basis of whether, taking into account all facts and circumstances, there
has been a transfer of all substantial rights in the copyright. A transaction that does not
constitute a sale or exchange because not all substantial rights have been transferred will be

classified as a license generating royalty income.

When only copyright rights are transferred, payments made in consideration therefor are
royalties. On the other hand, when copyright ownership is transferred, payments made in
consideration therefor are business income.
b.
Transfer of copyrighted articles. A copyrighted article incorporating a software includes
a copy of a software from which the work can be perceived, reproduced, or otherwise
communicated, either directly or with the aid of a machine or device. The copy of the software
may be fixed in the magnetic medium of a floppy disk or a CD-ROM, or in the main memory or
hard drive of a computer, or in any other medium.
If a person acquires a copy of a software but does not acquire any of the rights described above
(or only acquires a de minimis grant of such rights), and the transaction does not involve the
provision of services or of know-how, the transfer of the copy of the software is classified solely as
a transfer of a copyrighted article and payments for which constitute business income.
The determination of whether a transfer of a copyrighted article or right in a software is a sale or
exchange of property is made on the basis of whether, taking into account all facts and
circumstances, the benefits and burdens of ownership have been transferred. A transaction that
does not constitute a sale or exchange because insufficient benefits and burdens of ownership of
the copyrighted article have been transferred, such that a person other than the transferee is
properly treated as the owner of the copyrighted article, will be classified as a lease generating
rental income.
c.
After-Sales Service. Contracts for the use of software are often accompanied with the
provision of services (e.g., installation, maintenance, and customization of the software) by
personnel of the relevant foreign licensor/owner or of the relevant local subsidiary, reseller, and
distributor. Payments as consideration for after-sales service in a mixed contract are not royalties
alone, but will include income from services. The appropriate course to take with such a contract
is, in principle, to break down, on the basis of the information contained in the contract or by
means of a reasonable apportionment, the whole amount of the stipulated payments according to
the various parts of what is being provided under the contract, and then to apply to each part of it
so determined the taxation treatment proper thereto. Thus, the part of the payments representing
the use of the software will be treated as royalties and taxable as such and the other part of the
payments representing the provision of services will be treated as income from services and
taxable as such.
If, however, one part of what is being provided constitutes by far the principal purpose of the
contract and the other parts stipulated therein are only of an ancillary and largely unimportant
character, then the treatment applicable to the principal part should generally be applied to the
whole amount of the consideration. (De minimis)
d.
"Site License" / "Enterprise License" / "Network License Arrangements". These refer to
arrangements in which the transferee obtains rights to make multiple copies of the program for
operation only within its own business. Although these arrangements permit the making of
multiple copies of the program, such rights are generally limited to those necessary for the
purpose of enabling the operation of the program on the licensee's computers or network, and
reproduction for any other purpose is not permitted under the license. Payments under such
arrangements will generally be dealt with as business income. SECAHa
e.
Supply of information. Another type of transaction involving the transfer of computer
software is the more unusual case where a software house or computer programmer agrees to
supply information about the ideas and principles underlying the program, such as logic,
algorithms or programming languages or techniques. In these cases, the payments may be
characterized as royalties to the extent that they represent consideration for the use of, or right
to use, secret formulas or for information concerning industrial, commercial or scientific
experience which cannot be separately copyrighted.
f.
Transfer of Ownership. Where consideration is paid for the transfer of full or partial
ownership of the rights in the copyright, the payments made therefore are, in general, not
royalties but business income or capital gains.

SECTION 6. Computer Hardware Bundled With Software. The tax treatment of payments
involving the sale of computer hardware bundled with software, where the software is bundled in
the Philippines, are covered by this Circular. On the other hand, computer hardware bundled with
software, where the software is bundled abroad will be dealt with in another revenue issuance.
SECTION 7.
A.

Modes of Acquiring Software And the Relevant Tax Treatment Thereof.

Acquisition of ownership over a copyright

1.
From a local owner of a copyright. Payments made to a copyright owner for a full or
partial transfer of a copyright shall be subject to Philippine income tax as follows:
a.
Transfer by a resident individual owner of copyright A resident individual owner of a
copyright is subject to the graduated income tax rates (5% - 32%) under Section 24 of the
National Internal Revenue Code of 1997 (NIRC). The amount paid in consideration of the copyright
or portions thereof transferred shall form part of the copyright owner's gross income (Section 32,
NIRC), from which his taxable income 1 shall be computed.
b.
Transfer by a domestic corporation owner The amount paid in consideration of the
copyright or portions thereof transferred shall form part of the copyright owner's gross income
(Section 32, NIRC), from which his taxable income, subject to 32% income tax under Section 27 of
the NIRC, shall be computed.
2.
From a foreign licensor. Payments made to a copyright owner for a full or partial transfer
of a copyright shall be subject to Philippine income tax as follows:
a.
Transfer by a nonresident alien individual A nonresident alien individual engaged in
trade or business in the Philippines shall be taxed in the same manner as a resident individual
owner of a copyright.
b.
Transfer by a foreign corporation The amount paid in consideration of the copyright or
portions thereof transferred by a resident foreign corporation engaged in trade or business within
the Philippines shall form part of the copyright owner's gross income (Section 32, NIRC), from
which his taxable income, subject to 32% income tax under Section 28 of the NIRC, shall be
computed.
The amount paid in consideration of the copyright or portions thereof transferred by
a nonresident foreign corporation shall be subject to a final tax of 32%, based on the gross
income (Section 28, NIRC). ISHaTA
However, if the foreign owner of the copyright is a resident of a country which has
an existing tax treaty with the Philippines, royalties paid to such owner are subject to the reduced
tax rates on royalties under the relevant tax treaty, provided the conditions prescribed therein are
complied with by the owner.
B.

Acquisition of copyright rights

1.

By a Local Subsidiary/Reseller/Distributor/Retailer

a.

From a local licensor or reseller/distributor licensee

Payments made by a local subsidiary/reseller/distributor/retailer to a domestic

corporation owner of a copyright or a reseller/distributor licensee of a copyright shall be subject
to a final income tax of 20%, based on the gross amount of royalties under Section 27(D) of the
NIRC, to be withheld by the local subsidiary/reseller/distributor/retailer making the payments.
b.

From a nonresident foreign licensor

Payments made by the local subsidiaries/resellers/distributors/retailers to a

nonresident foreign licensor/owner of the software are royalties subject to 32 percent final income
tax, based on the gross amount thereof (Section 28[B][1], NIRC), the full amount of which shall be
withheld and collected by the subsidiary/reseller/distributor/retailer making the payments
(Section 2.57-1[I][1], RR 2-98).
However, if the foreign licensor/owner is a resident of a country which has an
existing tax treaty with the Philippines, royalties paid to such licensor/owner are subject to the

reduced tax rates on royalties under the relevant tax treaty, provided the conditions prescribed
therein are complied with by the licensor/owner.
2.

By an End-user

a.

From local subsidiaries, resellers, distributors of resellers

Payments made by the end-user to the local subsidiaries, resellers, distributors of

resellers for the purchase of copyrighted articles are business income subject to 32 percent
income tax, based on the net taxable income of a domestic corporation (Section 27[A]), National
Internal Revenue Code of 1997 [NIRC]). When making payments to the local subsidiaries,
resellers, distributors of resellers, the end-user shall withhold 2 percent income tax of the gross
amount of the payments creditable against the taxable income of the local subsidiaries, reseller
or distributors (Section 2.57.2[E][4][m], Revenue Regulations [RR] 2-98, as amended by Section 2
of RR 14-02), provided the end-user is any of the following persons (under Section 2.57.3. of RR
2-98, as amended by Section 3 of RR 14-02) required to withhold such tax:
(a)

A juridical person, whether or not engaged in trade or business;

(b)

An individual, with respect to payments made in connection with his trade or business; or

(c)
A government office including a government-owned or controlled corporation, a provincial,
city, or municipal government. EacHCD
b.

Directly from the foreign owner and/or licensor of the software.

A local end-user may acquire license to use software directly from the foreign
licensor/owner of the software. Payments made by the end-user to the licensor/owner are
royalties subject to 32 percent income tax, based on the gross amount thereof, imposed on
royalties derived by a nonresident foreign corporation (Section 28[B][1], NIRC), which amount
shall be withheld and collected by the end-user making the payments (Section 2.57-1[I][1], RR 298).
However, if the foreign licensor/owner is a resident of a country which has an
existing tax treaty with the Philippines, royalties paid thereto are subject to the reduced tax rates
on royalties under the relevant tax treaty, provided the condition prescribed therein are complied
with by the licensor/owner.
* SECTION 7. Value-Added Tax.
A.
The following payments for software transactions shall be subject to the 10% value-added
tax (VAT) pursuant to Sections 106 and 108 of the NIRC:
1.

Royalty payments for the use of a copyright over a software;

2.
Payments made to resellers/distributors/retailers who are engaged in the trade or business
of distributing or selling software; and
3.

Payments for services rendered in the Philippine in connection with software purchased.

B.

Withholding of the VAT for nonresident payees

The payor in control of the payment of VAT in the software transactions enumerated under (A)
above shall be responsible for the withholding of VAT on such fees on behalf of the nonresident
payee, by filing a separate VAT return for and on behalf of such payee using BIR Form No. 1600
(Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly
filed BIR Form No. 1600 and proof of payment thereof shall serve as sufficient basis for the claim
of input tax to be applied against the output tax that may be due from the payor. In addition, the
payor is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307)
in quadruplicate upon the request of the nonresident payee, the first three copies thereof to be
given to the payee and the fourth copy to be retained by the payor as its file copy.
SECTION 8. Repealing Clause. All existing revenue issuances, including Revenue
Memorandum Circular No. 77-2003, or parts thereof which are inconsistent with the provisions of
this Circular are hereby revoked or amended accordingly.

SECTION 9. Effectivity. This Circular shall take effect immediately and shall cover software
payments paid or payable starting said effectivity date.

REVENUE REGULATIONS NO. 03-02

SUBJECT
:
Amending Section 2.58 and Further Amending Section 2.83 of
Revenue Regulations No. 2-98 as Amended, Relative to the Submission of the
Alphabetical Lists of Employees/Payees in Diskette Form and the Substituted Filing of
Income Tax Returns of Payees/Employees Receiving Purely Compensation Income from
Only One Employer for One Taxable Year Whose Tax Due is Equal to Tax Withheld and
Individual-Payees Whose Compensation Income is Subject to Final Withholding Tax.
TO

All Internal Revenue Officers, Employees and Others Concerned.

Pursuant to the provisions of Section 244 in relation to Sections 58 (B) & (C) , 83 and 51(A)(2)(b)
of the National Internal Revenue Code of 1997, these Regulations are hereby promulgated to
further amend pertinent provisions of Revenue Regulations No. 2-98 as amended. HcACTE
SECTION 1. Section 2.58(B) and (C) of Revenue Regulations No. 2-98, is hereby amended to
read as follows: AcIaST
"Section 2.58.
xxx

RETURNS AND PAYMENT OF TAXES WITHHELD AT SOURCE.

xxx

xxx

(B)
Withholding tax statement for taxes withheld. Every payor required to deduct and
withhold taxes under these regulations shall furnish, in triplicate, each payee, whether individual
or corporate, with a withholding tax statement, using the prescribed form (BIR Form No. 2307)
showing the income payments made and the amount of taxes withheld therefrom, for every
month of the quarter, within twenty (20) days following the close of the taxable quarter employed
by the payee in filing his/its quarterly income tax return. The payor, nonetheless, should always
retain a copy of duly issued BIR Form No. 2307. Failure to furnish the same shall be a ground for
the mandatory audit of payor's income tax liabilities (including withholding tax) upon verified
complaint of the payee.
For final withholding taxes, the statement should be given to the payee on or before January 31 of
the succeeding year. SCaIcA
Upon request of the payee, however, the payor must furnish such certificate simultaneously with
the income payment. CIaASH
(C)
Annual information return for income tax withheld at source. The payor is required to
file with the BIR-Large Taxpayers Assistance Division, Large Taxpayers District Office or the Excise
Taxpayers Assistance Division, or the Revenue District Office where the payor/employer is

registered as Withholding Agent, on or before March 1 of the following year in which payments
were made, an Annual Information Return of Creditable Income Taxes Withheld
(Expanded)/Income Payments Exempt from Withholding Tax (BIR Form No. 1604-E) and on or
before January 31 of the said year an Annual Information Return of Income Taxes Withheld on
Compensation and Final Withholding Taxes (BIR Form No. 1604-CF), showing among others, the
following information:
xxx

xxx

xxx

An individual whose sole income has been subjected to final withholding tax provided under
Section 57(A) shall not be required to file an income tax return pursuant to Section 51(A)(2)(c) of
the Tax Code. For purposes of documentation, as may be required by other agencies in the
government (including, but not limited to, the Bureau of Immigration as well as for purposes of
establishing financial capacity for bank loans or credit card application in private and public
entities and other purposes, BIR Form No. 2306 duly signed by the employer and the employee
shall suffice. The term "an individual whose compensation income has been subjected to final
withholding tax" shall include aliens or Filipino citizens occupying the same positions as the alien
employees, as the case may be, who are employed by regional operating headquarters, regional
or area headquarters, offshore banking units, petroleum service contractors and sub-contractors,
pursuant to pertinent provisions of Sections 25(C), (D), (E) and 57(A) of the Tax Code of 1997,
Republic Act No. 8756, Presidential Decree No. 1354, and other pertinent laws."
SECTION 2.
TAHCEc

Section 2.83.1 of Revenue Regulations 2-98 is hereby amended to read as follows:

"Section 2.83.1.
Employees Withholding Statements (BIR Form No. 2316). In general, every
employer or other person who is required to deduct and withhold the tax on compensation
including fringe benefits given to rank and file employees, shall furnish every employee from
whose compensation taxes have been withheld the Certificate of Income Tax Withheld on
Compensation (BIR Form No. 2316) on or before January 31 of the succeeding calendar year, or if
employment is terminated before the close of such calendar year, on the day on which the last
payment of compensation is made. Failure to furnish the same shall be a ground for the
mandatory audit of payor's income tax liabilities (including withholding tax) upon verified
complaint of the payee.
xxx

xxx

xxx

The employee who is qualified for substituted filing of income tax return under these regulations,
and the employer, shall issue a joint certification (Annex "A") to the effect that the employer's
filing of BIR Form No. 1604-CF shall be considered a substituted filing of the employee's income
tax return to the extent that the amount of compensation and tax withheld appearing in BIR Form
No. 1604-CF, as filed with the BIR, is consistent with the corresponding amounts indicated in BIR
Form No. 2316 and the certification. The parties shall likewise certify, under oath, that the
information stated in such certification is true and correct to the best of their knowledge. Such
employee shall no longer be required to file income tax return (BIR Form No. 1700) since BIR Form
No. 1604-CF shall be considered a substituted return filed by the employer with the consent of
such employee.
The joint certification shall serve the same purpose as if a BIR Form No. 1700 had been filed, such
as proof of financial capacity for purposes of loan, credit card, or other applications, or for the
purpose of availing tax credit in the employee's home country and for other purposes with
various government agencies. This may also be used for purposes of securing travel tax
exemption, when necessary."
SECTION 3. Section 2.83.3 of Revenue Regulations No. 2-98, as amended by Revenue
Regulations No. 7-2000, is hereby further amended to read as follows: IEaCDH
"Section 2.83.3.
Requirement for list of payees. In addition to the manually prepared
alphabetical list of employees and list of payees who are recipients of income payments
subjected to creditable and final withholding taxes which form part of the Annual Information
Returns (BIR Form Nos. 1604-CF/1604-E), the withholding agent may, at his option, submit 3.5
inch floppy diskettes, containing the said list.

However, taxpayers whose number of employees or income payees are ten (10) or more, are
mandatorily required to submit the said lists in a 3.5 inch floppy diskettes, using the existing CSV
data file format, together with the manually prepared alphabetical list. In order to comply with
this format, the withholding agents shall have the option to use any of the following: THCSEA
1.
the Excel format provided under Revenue Regulations No. 7-2000 with technical
specifications to be prescribed in a Revenue Memorandum Circular (RMC) to be issued by the BIR;
2.
their own extract program that shall meet the requirements specified in the abovementioned RMC; or
3.
the Data Entry Module using Visual Foxpro that will be available upon request or by
downloading from the BIR's web site at http://www.bir.gov.ph, with the corresponding job aid to be
provided in the above-mentioned RMC.
For those who would choose either option 1 or 2, such taxpayers shall use a validation module
developed by the BIR, which can be downloaded from the BIR website.
In any case, the withholding agents are required to save the same to a secondary storage as back
up for a period of three (3) years from submission of the diskette, as aforementioned, for future
reference.
For withholding agents classified as large taxpayers and excise taxpayers falling within the
jurisdiction of the Large Taxpayers Service and/or Large Taxpayers District Office, the Annual
Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes (BIR
Form No. 1604-CF) and the Annual Information Return of Creditable Income Taxes Withheld
(Expanded)/Income Payments Exempt from Withholding Tax (BIR Form No. 1604-E) shall be
submitted to the Large Taxpayers Assistance Division, Large Taxpayers District Offices or Excise
Taxpayers Assistance Division, as the case may be. For other withholding agents, the aforesaid
annual returns shall be submitted to their respective Revenue District Offices. BIR Form No. 1604CF shall be submitted on or before January 31 of the succeeding year while BIR Form No. 1604-E
shall be filed on or before March 1 of the following year. Only diskettes readable upon submission
shall be considered as duly filed "Alphabetical List of Employees/Payees" by the employer.
Violation hereof, shall be a ground for the mandatory audit of violator's income tax liabilities
(including withholding tax).
The manually prepared (hard copy) alphabetical list of employee shall be filed in triplicate copies
(two copies for the BIR) to be stamped "received" by the BIR-Large Taxpayers Assistance Division,
Large Taxpayers District Office or the Excise Taxpayers Assistance Division, or the Revenue
District Office where the payor/employer is registered as Withholding Agent.
Except for the submission of the manually prepared alphabetical list of employees, all other
requirements aforestated above shall apply to taxable year 2002."
SECTION 4. Section 2.83.4 of Revenue Regulations No. 2-98 is hereby amended to read as
follows: HAaDTI
"Section 2.83.4.
Substituted Filing of Income Tax Returns by Employees Receiving Purely
Compensation Income. Individual taxpayers receiving purely compensation income, regardless
of amount, from only one employer in the Philippines for the calendar year, the income tax of
which has been withheld correctly by the said employer (tax due equals tax withheld), shall not
be required to file BIR Form No. 1700. In lieu of BIR Form No. 1700, the Annual Information Return
of Income Taxes Withheld on Compensation and Final Withholding Taxes (BIR Form No. 1604-CF)
(hard copy) filed by their respective employers, duly stamped "received" by the BIR, shall be
tantamount to the substituted filing of income tax returns by said employees.
The following individuals, however, are not qualified for substituted filing and therefore, still
required to file BIR Form No. 1700 in accordance with existing regulations:
(A)
Individuals deriving compensation from two or more employers concurrently or
successively at anytime during the taxable year.
(B)
Employees deriving compensation income, regardless of the amount, whether from a
single or several employers during the calendar year, the income tax of which has not been

withheld correctly (i.e. tax due is not equal to the tax withheld) resulting to collectible or
refundable return. CSHEAI
(C)
Employees whose monthly gross compensation income does not exceed Five Thousand
Pesos (P5,000.00) or the statutory minimum wage, whichever is higher, and opted for nonwithholding of tax on said income.
(D)
Individuals deriving other non-business, non-profession-related income in addition to
compensation income not otherwise subject to a final tax. aTIEcA
(E)
Individuals receiving purely compensation income from a single employer, although the
income tax of which has been correctly withheld, but whose spouse falls under Section 2.83A(A),
(B), (C) and (D) of these Regulations.
(F)
Non-resident aliens engaged in trade or business in the Philippines deriving purely
compensation income, or compensation income and other non-business, non-profession-related
income.
In case of married individuals who are still required to file returns under existing provisions of the
law, i.e., in those instances not covered by the substituted filing of returns, only one return for the
taxable year shall be filed by either spouse to cover the income of the spouses, which return shall
be signed by the husband and wife unless it is physically impossible to do so, in which case
signature of one of the spouses would suffice."
SECTION 5. Transitory Provisions. Non-filing of BIR Form No. 1700, for employees who are
qualified for the substituted filing shall be optional for the taxable year 2001, the returns for
which are required to be filed on or before April 15, 2002. Thereafter, substituted filing where
applicable shall be mandatory. cSEAHa
For qualified employees who opted to avail of the substituted filing for taxable year 2001, the
joint certification of the employer and employee shall be executed on or before April 15, 2002,
copies of which should be retained by both parties. For subsequent years, the said joint
certification shall be executed on or before January 31 of the following year, together with BIR
Form No. 2316. Both parties shall always retain copies of the joint certification. IcAaSD
SECTION 6. Repealing Clause. All rules and regulations and parts thereof inconsistent with
the provisions of these Regulations are hereby amended accordingly. IcESDA
SECTION 7. Effectivity. These Regulations shall take effect immediately and shall cover
taxable year 2002 and succeeding years, subject to the provisions of Section 5 and last sentence
of Section 3 hereof.

REVENUE REGULATIONS NO. 16-02

SUBJECT
:
Modes of and Procedure for the Payment of Internal Revenue Taxes
Through Authorized Agent Banks Amending Revenue Regulations No. 4-97, as
amended by Revenue Regulations No. 6-98
TO

SECTION 1.

All Internal Revenue Officers, Authorized Agent Banks, and Others Concerned
Scope. Pursuant to Section 244 of the National Internal Revenue Code of 1997

(CODE) in relation to Sections 8, 12, 56, 58, 81, 103, 114, 128, 130, 200 and 245, all of the same
Code, these Regulations are hereby promulgated to amend Revenue Regulations No. 4-97, as
amended by Revenue Regulations No. 6-98, on the provisions relative to acceptable modes of
payment of internal revenue taxes coursed through authorized agent banks (AABs), the recording
of such payments and issuance of validated BIR-prescribed deposit slips which likewise serve as
acknowledgment receipts for payments of taxes deposited by taxpayers for BTR-BIR account, and
the control mechanisms to deter and detect the diversion of tax payments.
SECTION 2.

Recording of BIR Tax Payments by the AABs.

A)
All internal revenue taxes collected through authorized agent banks (AABs) shall be
credited to the demand deposit accounts opened and maintained by the Bureau of Treasury (BIR)
for BIR in the head offices of AABs;
B)
Head offices of AABs shall assign and maintain a separate general ledger account for said
BTr demand deposit accounts;
C)
Using the online tellering system, the bank tellers shall immediately post the BIR tax
payments they collect by crediting the BTr demand deposit accounts in the head offices of the
AABs, instead of recording them as mere payables to BTr at the end of each banking day in the
AABs backrooms.
D)
In filing a tax declaration and making payment to an AAB, a taxpayer must accomplish
and submit a BIRprescribed deposit slip which AABs must design, print and make available in all
participating branches. The deposit slip must in addition to those needed by the bank, provide for
the following information:

Transaction Date

Name of Taxpayer

TIN

BTR-BIR Account Number

Account Name which must be BTRBIR

Name of Drawee Bank

Check Number

Bank Debit Advice Number (for debit system payments)

Amount

E)
The bank teller shall machine validate the BIRprescribed deposit slip accomplished by the
taxpayer as evidence that the BIR tax payment was deposited to the account of the BTr. Said
deposit slip shall be accomplished and issued in triplicate copies, distributed as follows: original
(taxpayers copy), duplicate (AABs copy) and triplicate (to be attached to the tax return.
Additionally, the AAB receiving the tax return/payment form shall also machine validate and
stamp mark the word "Received" on the return/payment form as proof of filing the return/payment
form and payment of the tax by the taxpayer. The machine validation on the return/payment form
shall reflect the date of payment, amount paid and transaction code, the name of the bank,
branch code, tellers code and tellers initials.
F)
Before 12:00 NN of the following banking day, the head offices of the AABs shall provide to
BTR/BIR the daily total amount of BIR taxes they collected.
G)
After receipt of payment but not later than 24 hours thereafter, the AAB branch shall
encode into the LBDE System and transmit to the concerned BIR Data Center, the below data and
copy furnish the AAB head office.
1.

Date of the transaction;

2.

Name of the taxpayer;

3.

Taxpayer Identification Number (TIN) of the taxpayer;

4.

Tax type which is being paid for;

5.

Return period for the tax type being paid for;

6.

Amount of tax paid;

7.

Name of the drawee bank and check number, for tax payments through checks;

SECTION 3. Modes Of Payment To AABs. Aside from the electronic payment system currently
used by some taxpayers in paying their BIR taxes, the rest shall pay their tax liabilities through
any of the following modes: a) overthecounter cash payments; b) bank debit system; or c)
check payment system.
a)
"Overthecounter cash payment" refers to payment of tax liabilities to authorized agent
bank in the currencies (paper bills or coins) that are legal tender in the Philippines. The maximum
amount allowed per tax payment shall not exceed ten thousand pesos (P10,000.00)
b)
"Bank debit system" refers to the system whereby a taxpayer, through a bank debit
memo/advice, authorizes withdrawals from his/its existing bank accounts for payment of tax
liabilities.
The bank debit system mode is allowed only if the taxpayer has a bank account with the AAB
branch where he/it intends to file and pay his/its tax return/form/declaration, provided said AAB
branch is within the jurisdiction of the BIR Revenue District Office (RDO)/Large Taxpayers District
Office (LTDO) where the tax payment is due and payable.
c)
"Checks" refers to a bill of exchange or Order Instrument drawn on a bank payable on
demand.
In the issuance and accomplishment of checks for the payment of internal revenue taxes, as
illustrated below, the taxpayer shall indicate in the space provided for "PAY TO THE ORDER OF"
the following data: (1) presenting/collecting bank or the bank where the payment is to be coursed
and (2) FAO (For the Account Of) Bureau of Internal Revenue as payee; and under the "ACCOUNT
NAME" the taxpayer identification number (TIN).
(Below is a sample of a tax check payment where the drawee bank and presenting bank are
different from each other.)
(Below is sample of a check tax payment drawn from and presented to the same bank.)
The following checks are, however, not acceptable as check payments for internal revenue taxes:
1.
Accommodation checks checks issued or drawn by a party other than the taxpayer
making the payment;
2.
Second endorsed checks checks issued to the taxpayer as payee who indorses the
same as payment for taxes;
3.
Stale checks checks dated more than six (6) months prior to presentation to the
authorized agent bank;
4.
Postdated checks checks dated a day or several days after the date of presentation to
the authorized agent bank;
5.

Unsigned checks checks with no signature of the drawer;

6.

Checks with alterations/erasures.

AABs accepting checks for the payment of BIR taxes and other charges must see to it that the
check covers one tax type for one return period only. Moreover, AABs must strictly comply with
the systems and procedures for the reception, processing, clearing and accounting of the checks
to be prescribed under a separate regulation.
Second indorsement of checks which are payable to the Bureau of Internal Revenue or

Commissioner of Internal Revenue is absolutely prohibited.

SECTION 4. Tax Returns Partly Paid Thru Tax Debit Memos (TDMs) AABs are mandated to
accept tax returns/payment forms partly paid thru any of the modes of payment mentioned in
Section 3 hereof and partly thru TDMs duly and validly issued by the BIR. Before accepting the
BIR tax return/payment form partly paid thru tax debit memo, the AAB shall insure that the
number of the TDM is indicated in the BIR tax return/payment form in the same manner that the
check number/drawee bank and bank debit advice number are indicated in the tax
return/payment form paid thru check or bank debit system, respectively. A photocopy of the tax
credit certificate (TCC), front and back page, which was the source of the TDM, together with a
copy of the TDM, must be required from the taxpayer and attached to the BIR tax return/payment
form.
TDMs are, however, not acceptable as payments for withholding taxes, including Fringe Benefit
Tax (clarified and implemented under RR No. 2-98, as amended, and RR No. 3-98), and for taxes,
fees and charges collected under special schemes/procedures/programs of the Government / BIR
as discussed and elucidated in a separate revenue regulation. AABs shall see to it that this
restriction is strictly observed in the BIR tax returns/payment forms they receive.
SECTION 5. Enrollment Of Taxpayers With Authorized Agent Bank Not Required Taxpayers are
not required to enroll with any AAB where they intend to file tax returns/payment forms and/or
pay internal revenue taxes. Taxpayers may file tax returns/payment forms and pay internal
revenue taxes with any AAB of the appropriate BIR office (Revenue District Office (RDO), Large
Taxpayers District Office (LTDO), or Large Taxpayers Service, etc., whichever is applicable) where
they are required to file the particular return/payment form.
SECTION 6. Responsibility And Privilege Of Taxpayers. Taxpayers shall see to it that their tax
returns/payment forms with payment are filed with and internal revenue taxes paid to legitimate
AABs of the BIR. Nonetheless, they may confirm their tax payments with their home RDO/LTDO or
LTDO/RDO where they are required to file tax returns/payment form and pay internal revenue
taxes.
SECTION 7.

Additional Liabilities/Responsibilities Of Authorized Agent Banks (AABs).

(a)
Any diversion, non-remittance or under-remittance of the taxes collected by AABs through
fault or negligence of the bank accepting such payment as well as the diversion of any payment
for BIR taxes using the facilities of the bank through fault or negligence of any of the banks
personnel shall subject the bank to civil and criminal liabilities provided for under Sections 248
and 275 of the Tax Code, as amended, and other existing laws, rules and regulations. AABs shall
be liable to the BIR for double the amount of taxes diverted and unremitted, plus the increments
and penalties prescribed by the Tax Code, as amended, but the total penalties imposed may be
reduced on meritorious grounds subject to the approval of the majority of the members of the
Management Committee (MANCOM) of the BIR, composed of the Commissioner of Internal
Revenue and the four (4) Deputy Commissioners, where the Commissioner of Internal Revenue
votes for such reduction.
(b)
The reports of AABs to be submitted to BTr/BIR (under Sec. 2) of all the tax payments
collected shall be in accordance with the forms prescribed by BIR.
(c)
The requirements prescribed in these regulations shall be included in the accreditation
criteria to be mentioned in the Memorandum of Agreement to be signed by and among the BTR,
BIR and the AAB for compliance by all AABs.
SECTION 8. Repealing Clause. All rules and regulations or portions thereof inconsistent with
the provisions of these regulations are hereby modified, amended or repealed accordingly.
SECTION 9. Effectivity. These regulations shall take effect fifteen days from date of
publication in the Official Gazette or any newspaper of general circulation. However, to provide
sufficient time for AABs to make available to all participating branches the deposit slip required
under Section 2-D, the effectivity date of the switch-over from the current acknowledgment slip
shall be fifteen days from the effectivity of this Revenue Regulation.

REVENUE REGULATIONS NO. 03-04

SUBJECT
:
Suspending the implementation of withholding tax on income
payments made to suppliers of agricultural products under Section 2.57.2(S) of
Revenue Regulations 2-98, as amended by RR 17-2003, further amended by RR 302003 and 1-2004
TO
:
Concerned

All Withholding Agents, Internal Revenue Officers and Employees and Others

SECTION 1. Scope. Pursuant to the provisions of Section 244 , in relation to Section 57(B) of
the Tax Code of 1997, these regulations are hereby promulgated to suspend the implementation
of Section 2.57.2 (S) of Revenue Regulations No. 2-98 , as amended by Revenue Regulations Nos.
17-2003 , 30-2003 , and 1-2004 , which provides as follow: IAETSC
"(S) Income payments made to suppliers of agricultural products. Income payments made to
agricultural suppliers such as those, but not limited to, payments made by hotels, restaurants,
resorts, caterers, food processors, canneries, supermarkets, livestock, poultry, fish and marine
products dealers, hardwares, factories, furniture shops and all other establishments, except for
income payments to marginal income earners which, as defined in Revenue Regulations 11-2000
dated December 12, 2000, refer to individuals not otherwise deriving compensation as an
employee under an employee-employer relationship, but who are self-employed and deriving
gross sales/receipts not exceeding P100,000.00 during any 12-month period. One percent (1%).
The term "agricultural suppliers" refers to suppliers/sellers of agricultural, forest and marine food
and non-food products, livestock and poultry of a kind generally used as, or yielding or producing
foods for human consumption; and breeding stock and genetic materials therefor. "Livestock"
shall include cows, bulls and calves, pigs, sheep, goats and other animals similar thereto.
"Poultry" shall include fowls, ducks, geese, turkey and others similar thereto. "Marine products"
shall include fish and crustaceans, such as but not limited to, eels, trout, lobsters, shrimps,
prawns, oysters, mussels and clams, shells and other aquatic products.
Meat, fruits, fish, vegetables and other agricultural and marine food products, even if they have
undergone the simple processes of preparation or preservation for the market, such as freezing,
drying, salting, smoking or stripping, including those using advanced technological means of
packaging, such as shrink wrapping in plastics, vacuum packing, tetra-pak and other similar
packaging method, shall still be covered by this subsection.
Polished and/or husked rice, corn grits, locally produced raw cane sugar and ordinary salt shall be
considered as agricultural food products."
SECTION 2. Rationale. In relation to the proper implementation of above-quoted Section
2.57.2 (S) of Revenue Regulations Nos. 2-98, as amended, the Bureau recognizes that there is a

need:
1.
to conduct a comprehensive and extensive public education and information campaign to
ensure its uniform implementation in all regions all over the country, and
2.
to establish and maintain the necessary systems and control measures in order to ensure
that the withholding tax agents properly report and remit the amount of taxes actually withheld.
SECTION 3. Suspension. In view of the foregoing, the implementation of the above-quoted
Section 2.57.2 (S) of Revenue Regulations Nos. 2-98, as amended, is hereby suspended until
further notice. HCEaDI
SECTION 4. Action Programs. Pending the lifting of the suspension of the implementation of
the above-quoted Section 2.57.2(S) of Revenue Regulations Nos. 2-98, as amended, the following
action programs shall be undertaken immediately:
1.

Education and information program for Taxpayers end Revenue Officials.

2.
Development and implementation of an information and control system to ensure the
proper reporting and remittance of the amounts withheld by the withholding agents.
3.
Audit of withholding agents on their purchases of agricultural products from June 1, 2003
to February 29, 2004; Regional Directors and Revenue District Officers shall obtain from
agricultural suppliers in their respective jurisdictions information on transactions entered into by
said suppliers for which taxes were withheld and determine if these have been properly reported
and remitted, otherwise they shall take the necessary measures to collect said taxes.
SECTION 5. Transitory Provision. All withholding made on income payments in relation to
Section 2.57.2 (S) of Revenue Regulations Nos. 2-98, prior to the effectivity of this Regulations
shall be reported and remitted by the withholding agent to the Bureau on or before the tenth of
the following month for which the amount was withheld, provided, however, that the deadline for
electronic filing shall be in accordance with the rules and regulations governing EFPS. Provided,
further, that in order for any income payments made prior to the effectivity of this Regulations to
be deductible against the withholding agent's income, the amount required under the above
quoted Sec. 2.57.2 (S) of Revenue Regulations No. 2-98, as amended, must have been properly
withheld, reported and remitted.
SECTION 6. Effectivity. This Regulations shall take effect beginning March l, 2004. Provisions
of existing rules and regulations not otherwise inconsistent with this regulations shall continue to
be in force.

REVENUE MEMORANDUM CIRCULAR NO. 46-02

SUBJECT
:
Clarifying the implication of Article 12(2)(b) on Royalties of the RPChina tax treaty, in relation to Article 13(2)(b)(iii), otherwise known as the "mostfavored-nation" clause of the RP-US tax treaty.
TO

All Internal Revenue Officers and Others Concerned.

With the effectivity of the RP-China tax treaty on January 1, 2002, it is necessary to clarify the
implication of its Article 12(2)(b) insofar as it provides that the tax charged shall not exceed ten
per cent (10%) of the gross amount of royalties arising from the use of, or the right to use, any
patent, trade mark, design or model, plan, secret formula or process, or from the use of, or the
right to use, industrial, commercial, or scientific equipment, or for information concerning
industrial, commercial, or scientific experience, in relation to Article 13(2)(b)(iii), also known as
the "most-favored-nation" clause, of the RP-US tax treaty.
Article 13 of the RP-US tax treaty provides as follows:
"Article 13
"ROYALTIES
"1.
Royalties derived by a resident of one of the Contracting States from sources within the
other Contracting State may be taxed by both Contracting States.
"2.

However, the tax imposed by that other Contracting State shall not exceed

a)

In the case of the United States, 15 percent of the gross amount of the royalties, and

b)

In the case of the Philippines, the least of:

(i)

25 percent of the gross amount of the royalties,

(ii)
15 percent of the gross amount of the royalties, where the royalties are paid by a
corporation registered with the Philippine Board of Investments and engaged in preferred areas of
activities, and
(iii)
the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid
under similar circumstances to a resident of a third State.
3.
The Term 'royalties' as used in this Article means payments of any kind received as a
consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work,
including cinematographic films or films or tapes used for radio or television broadcasting, any
patent, trade mark, design or model, plan, secret formula or process, or other like right or
property, or for information concerning industrial, commercial or scientific experience. The term
'royalties' also Includes gains derived from the sale, exchange or other disposition of any such
right or property which are contingent on the productivity, use, or disposition thereof.
"xxx

xxx

xxx"

Article 13(2)(b)(iii) of the RP-US tax treaty speaks of the "lowest rate of Philippine tax that may be
imposed on royalties of the same kind paid under similar circumstances to a resident of a third
State." This is known as the "most-favored-nation" clause of the RP-US tax treaty. The purpose of
the "most-favored-nation" clause is to grant to the other Contracting State a tax treatment that is
no less favorable than that which is granted to the "most favored" among other countries.
Therefore, the tax treatment of royalty payments to a US entity must be taken in relation to other
tax treaties what provide for a lower rate of tax on the same type of income.
In this regard, Article 12 of the RP-China tax treaty provides as follows:
"Article 12
"ROYALTIES
"1.
Royalties arising in a Contracting State and paid to a resident of the other Contracting
State may be taxed in that other State.
"2.
However, such royalties may also be taxed in the Contracting State in which they arise and
according to the laws of that State, but if the recipient is the beneficial owner of the royalties, the
tax so charged shall not exceed:
a)
15 per cent of the gross amount of royalties arising from the use of, or the right to use, any
copyright of literary, artistic or scientific work including cinematograph films or tapes for
television or broadcasting, or
b)
10 per cent of the gross amount of royalties arising from the use of, or the right to use, any
patent, trade mark, design or model, plan, secret formula or process, or from the use of, or the
right to use, industrial, commercial, or scientific equipment, or for information concerning
industrial, commercial or scientific experience. DCIEac
For as long as the transfer of technology, under Philippine law, is subject to approval, the
limitation of the tax rate mentioned under (b) shall, in the case of royalties arising in the Republic
of the Philippines, only apply if the contract giving rise to such royalties has been approved by
the Philippine competes authorities.
"3.
The term 'royalties' as used in this Article means payments of any kind received as a
consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work
including cinematography films, or films or tapes for radio or television broadcasting, any patent,
trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use,
industrial, commercial, or scientific equipment, or for information concerning industrial,
commercial or scientific experience.
"xxx

xxx

xxx"

In the case of Commissioner of Internal Revenue vs. S.C. Johnson and Son., Inc. and Court of
Appeals (G.R. No. 127105, June 25, 1999), the Supreme Court interpreted the phrase "paid under
similar circumstances" under the most-favored-nation clause of the RP-US tax treaty as referring
to the payment of taxes and not royalties. The Court did not allow the application of the lower

rate of 10% under the RP-Germany tax treaty for royalties paid to US residents because the RP-US
tax treaty contains no "matching credit" provision similar to that found in Article 24 of the RPGermany tax treaty.
On the other hand, the RP-China tax treaty does not contain a "matching credit" provision similar
to that found in the RP-Germany tax treaty. Thus, the tax on royalty payments to residents of US
and China can be considered paid under similar circumstances.
Article 23 of the RP-US tax treaty reads:
"Article 23
"RELIEF FROM DOUBLE TAXATION
"Double taxation of income shall be avoided in the following manner:
"1.
In accordance with the provisions and subject to the limitations of the law of the United
States (as it may be amended from time to time without changing the general principle hereof),
the United States shall allow to a citizen or resident of the United States as a credit against the
United States tax the appropriate amount of taxes paid or accrued to the Philippines and, in the
case of a United States corporation owning at least 10 percent of the voting stock of a Philippine
corporation from which it receives dividends in any taxable year, shall allow credit for the
appropriate amount of taxes paid or accrued to the Philippines by the Philippine corporation
paying such dividends with respect to the profits out of which such dividends are paid. Such
appropriate amount shall be based upon the amount of tax paid or accrued to the Philippines, but
the credit shall not exceed the limitations (for the purpose of limiting the credit to the United
States tax on income from sources within the Philippines or on income from sources outside the
United States) provided by United States law or the taxable year . . ."
On the other hand, Article 23 of the RP-China tax treaty provides, viz:
"Article 23
"METHODS FOR THE ELIMINATION OF DOUBLE TAXATION
"1.

In China, double taxation shall be eliminated as follows:

Where a resident of China derives income from the Philippines the amount of tax on that income
payable in the Philippines in accordance with the provisions of this Agreement, may be credited
against the Chinese tax imposed on that resident. The amount of the credit, however, shall not
exceed the amount of the Chinese tax on that income computed in accordance with the taxation
laws and regulations of China.
"xxx

xxx

xxx"

Article 23 of the RP-US tax treaty and Article 23 of the RP-China tax treaty, though differently
worded, plainly reveal a similarity in the provisions on relief from or avoidance of double taxation
to their respective residents. Thus, the tax on royalty payments to residents of US and China are
paid under similar circumstances, i.e., the amount of royalty income tax paid or accrued to the
Philippines under the respective tax treaties is available as tax credit against the income tax
payable in their respective countries. US residents may, therefore, invoke the preferential tax rate
of 10% on royalties, accruing beginning January 1, 2002, arising in the Philippines "from the use
of, or the right to use, any patent, trademark, design or model, plan, secret formula or
process, . . ., or for information concerning industrial, commercial or scientific experience" under
the RP-China tax treaty, pursuant to the "most-favored-nation" clause of the RP-US tax treaty.
DcHSEa
It bears stressing, however, that there are two important requirements that should be complied
with before the 10% rate of withholding tax on royalties remitted to a resident of US and China
may be availed of, to wit:
1.
It is necessary that there be an agreement or a contract whereby the royalties paid to the
US must originate from the use of, or the right to use any patent, trade mark, design or model,
plan, secret formula or process, or from the use, or the right to use, industrial, commercial or
scientific experience; and

2.
For as long as the contract or agreement is subject to approval under Philippine law, the
same must be duly approved by the Philippine competent authorities.
All internal revenue officers, employees and others concerned are enjoined to give this Circular
the widest publicity possible.