Sie sind auf Seite 1von 37

TABLE OF CONTENTS

I. Basic Concepts in Income Taxation 2


II. Persons Subject to Income Tax 2
INDIVIDUALS
III. Personal Exemptions 3
IV. Taxation of Individuals 5
V. Taxation of Fringe Benefits 11
CORPORATIONS
VI. Taxation of Corporations 12
VII. Exempt Corporations 17
VIII. Improperly Accumulated Earnings Tax 19
PARTNERSHIPS
IX. Taxation of Partnership 21
INCOME
X. Source of Income 23
XI. Gross Income 25
XII. Exclusions from Gross Income 28
DEDUCTIONS
XIII. Business Expense 29
XIV. Interest and Taxes 30
XV. Losses and Bad Debts 31
XVI. Depreciation and Depletion 34
XVII. Pension Trust and Charitable and Other Contributions 35
XVIII. Research and Development and Premium Payments
on Health and Hospitalization Insurance 37
XIX. Treatment of Foreign Income Tax 38
XX. Non-deductible Expenses 40
XXI. Losses from Wash Sales 41
CAPITAL GAINS AND LOSSES
XXII. Ordinary Gains and Losses 41
XXIII. Capital Gains and Losses 42
XXIV. Installment Method 44

BASIC CONCEPTS IN INCOME TAXATION


What is income tax?
An income tax is levied on the income from property or an occupation. It is impo
sed upon persons within the jurisdiction of the State to raise revenue for the s
upport of the Government.
Purpose
The imposition of income tax is intended to:
1. raise revenue to defray the expenses of the government;
2. mitigate the evils arising from the inequalities of wealth by a progressive s
cheme of taxation which places the burden on those best able to pay.
What is income?
Income means all wealth which flows to the taxpayer other than a mere return of
capital. It includes gain derived from the sale or other disposition of capital
assets.
Income v. Capital
Capital is a fund, income is a flow. Capital is wealth, while income is the serv
ice (fruit) of the wealth. Capital is a tree, income is the fruit. Amounts recei
ved as a return of capital are not income.
Increase of Property Value
A mere increase in the value of property is not income, but merely unrealized in
crease in capital. The increase in the value of property is also known as apprai
sal surplus or revaluation increment.
Classification of Income according to Source
1. Income from sources within the Philippines
2. Income from sources without the Philippines
3. Income from sources partly within and partly without the Philippines

PERSONS SUBJECT TO INCOME TAX


Who is a taxpayer?
Under Sec 22(N), a taxpayer is any person subject to tax imposed by this Title.
A person is defined in Sec 22(A) as an individual, a trust, estate or corporatio
n.
Classification of Taxpayers
Primary
Individuals
Sub-classification
Overseas
Domestic
Corporations
Resident
Non-resident
Joint
General
Partnerships
Association
Business
Under
Estates
Not
Ordinary
Trusts
Revocable
Irrevocable
Employee
under
venture
stock
accounts
judicial
Classification
Professional
Citizen
Contract
Alien
Corporation
Foreign
Partnerships
trust
strust
judicial
trust
companies
trust
Citizen
Alien
Foreign
for
(RA)
(cuentas
administration
(RC)
Corporation
Worker
construction
petroleum,
Engaged
NOT
administration
(NRC)
(DC)
Corporation
Partnerships
(BP)
Engaged
en(OCW)
incoal,
participacion)
(RFC)
Trade
in(NRFC)
projects
Trade
(GPP)
geothermal
or Business
or Business
or((NRAETB)
energy
((NRANETB)
operations
PERSONAL EXEMPTIONS
Legal Basis Sec 35
Concept
Personal exemptions are arbitrary amounts allowed by law to be deducted from inc
ome to cover personal, living, or family expenses of the taxpayer. These deducti
ons are allowed on the theory that the minimum requirements of subsistence of a
taxpayer should be free from tax.
Kinds
1. Basic Personal Exemptions (BPE) varies according to the status of taxpayer
2. Additional Exemptions (AE) depends on the number of qualified dependent child
ren
Amount of Basic Personal Exemptions
P20,000
Kind
Basic
Single
Married
ofPersonal
individuals
TaxpayerExemption
individual (includes
who are(BPE)widow/er)
* judicially decreed as legally separated &
* withmarried
Head
P20,000
Each
P25,000
P32,000
ofnoFamily
qualified
individual
dependents
* but note Sec 35(A) - In the case of married individuals where only one of the
spouses is deriving gross income, only such spouse shall be allowed the personal
exemption.

Who is a Head of the Family? [Sec 35(A), NIRC]


1. An unmarried or legally separated man or woman with dependents who may be
* one or both parents
* one or more brothers or sisters, or
* one or more legitimate, illegitimate or legally adopted children
2. Such dependent must be living with and dependent upon him for chief support
3. Such brothers or sisters or children are
* not more than 21 years old
* unmarried and
* not gainfully employed OR
* regardless of age, are incapable of self-support because of mental or physical
defect.
Additional Exemptions (AE) for Dependents
Who may claim?
1. Married individual
2. Head of family
3. Legally separated spouses
In the case of married individuals, AE is claimed by only one spouse usually the
husband, except in the following instances, where the wife claims the AE:
1. express waiver by the husband as embodied in the withholding exemption certif
icate
2. husband has no income
3. husband works abroad
In the case of legally separated spouses, AE can be claimed by the spouse with c
ustody of the child. [Sec 35(B), NIRC]
Amount of AE
P8,000 per dependent child
Limit of AE
Should not exceed 4 dependent children
Who is a dependent? [Sec 35(B), NIRC]
1. A legitimate, illegitimate or legally adopted child
2. chiefly dependent upon and living with the taxpayer
3. not more than 21 years old
4. unmarried and
5. not gainfully employed or
6. regardless of age, if incapable of self-support because of mental or physical
defect
Note: Only children may be considered dependent for purposes of AE. Compare with de
pendent for purposes of BPE.
Certain Terms
chief support principal or main support given regularly such that withdrawal wil
l result in destitute life for dependent
living with taxpayer living under one roof with taxpayer; includes situations wh
ere taxpayer is away from home on business, or dependent is away at school
Who are allowed BPE and AE?
1. Resident Citizen (RC)
2. Non-resident Citizen (NRC) inc. OFW
3. Resident Alien (RA)
4. Non-resident Alien engaged in trade or business (NRAETB) by virtue of recipro
city
Who are not allowed BPE and AE?
1. Non-resident Alien engaged in trade or business (NRAETB) if no reciprocity
2. Non-resident Alien not engaged in trade or business (NRANETB)
Amount of BPE and AE allowed to NRAETB
An amount equal to the exemptions allowed by NRA s country to Filipino citizens th
ere but not to exceed the amount fixed by NIRC [Sec 35(D), NIRC]
Change of Status [Sec 35(C), NIRC]
1. If taxpayer marries during taxable year, taxpayer may claim corresponding BPE
in full for such year.
2. If taxpayer should have additional dependent(s) during taxable year, taxpayer
may claim corresponding AE in full for such year.
3. If taxpayer dies during taxable year, his estate may still claim BPE and AE f
or himself and his dependent(s) as if he died at the close of such year.
4. If during the taxable year
a. spouse dies or
b. any of the dependents dies or marries, turns 21 or becomes gainfully employed
taxpayer may still claim same exemptions as if the spouse or any of the dependen
ts died, or married, turned 21 or became gainfully employed at the close of such
year.

TAXATION OF INDIVIDUALS
Individuals Subject to Tax
1. Resident Citizen (RC)
2. Non-resident Citizen (NRC)
3. Resident Alien (RA)
4. Non-resident Alien Engaged in Trade or Business (NRAETB)
5. Non-resident Alien Not Engaged in Trade or Business (NRANETB)
Resident Citizen (RC) - a citizen of the Philippines who resides within the Phil
ippines [Sec 23(A)]
Non-resident Citizen (NRC)
(1) A citizen of the Philippines who establishes the fact of his physical presen
ce abroad with a definite intention to reside therein.
(2) A citizen of the Philippines who leaves the Philippines during the taxable y
ear to reside abroad, either as an immigrant or for employment on a permanent ba
sis.
(3) A citizen of the Philippines who works and derives income from abroad and wh
ose employment thereat requires him to be physically present abroad most of the
time during the taxable year. (more than 182 days in a taxable year)
(4) A citizen who has been previously considered as nonresident citizen and who
arrives in the Philippines at any time during the taxable year to reside permane
ntly in the Philippines shall likewise be treated as a nonresident citizen for t
he taxable year in which he arrives in the Philippines with respect to his incom
e derived from sources abroad [Sec 22(E)]
(5) Overseas Contract Worker (OCW)
a) Filipino citizen who is working and deriving income from abroad
b) seaman who is Filipino citizen and who receives compensation for services ren
dered abroad as member of the complement of a vessel engaged exclusively in inte
rnational trade
Resident Alien (RA) an individual whose residence is within the Philippines and
who is not a citizen thereof [Sec 22(F)]
Non-resident Alien Engaged in Trade or Business (NRAETB)
An individual whose residence is not within the Philippines and who is not a cit
izen thereof. [Sec 22(F)]
A nonresident alien individual who shall come to the Philippines and stay therei
n for an aggregate period of more than 180 days during any calendar year shall b
e deemed a 'nonresident alien doing business in the Philippines.' [Sec 25(A)(1)]
The term trade or business shall not include performance of services by the taxpay
er as an employee. [Sec 22(CC)]
Non-resident Alien Not Engaged in Trade or Business (NRANETB)
A nonresident alien individual who shall come to the Philippines and stay therei
n for an aggregate period of less than 180 days during any calendar year
Tax Rates on Ordinary Income (Schedular Rates)
Income
But
of
Plus
Tax
*5%
32%*
125,000
30%
50,000
500,000
25%
22,500
250,000
20%
8,500
140,000
15%
2,500
70,000
30,000
10,000
10%
50034%
Excess
less
before
over
than
over1 January 1999, 33% after 1 January 1999, 32% starting 1 January 20
00

QUICK GLANCE
Individual
Source
Tax
Resident
Schedular
Non-resident
Within
Gross
25% Base
Rate
Income
ofAlien
and
the
Citizen
Taxable
Rates
Taxpayer
without
Philippines
Phils
Citizen
less
Alien
(RA)
(RC)
Income
BPE
the(NRC)
Engaged
Not and
Phils
Engaged
AEin Trade
in Trade
or Business
or Business
(NRAETB)
(NRANETB)
Taxation of Passive Income of Individuals
1. Interest Income
a. interest income from any currency bank deposit and yield or any other monetar
y benefit from deposit substitutes and from trust funds and similar arrangements
- 20% final tax
b. interest income received by individuals from a depository bank under the expa
nded foreign currency deposit system (EFCDS) - 7.5% final tax for residents, exe
mpt if non-residents
c. Interest income from long-term deposit or investment certificates (LTDIC) e.g
., savings, common or individual trust funds, deposit substitutes, investment ma
nagement accounts and other investments, which have maturity of 5 years or more
exempt
Should LTDIC holder pre-terminate LTDIC before the 5th year, a final tax shall b
e imposed on the entire income based on the remaining maturity:
4 years to less than 5 years - 5%
3 years to less than 4 years - 12%
less than 3 years - 20%
2. Dividends
a. cash and/or property dividends actually or constructively received by an indi
vidual from
i. a domestic corporation
ii. a joint stock company
iii. insurance or mutual fund companies
iv. regional operating headquarters of multinational companies
b. share of an individual in the distributable net income after tax of a partner
ship (except a general professional partnership) of which he is a partner
c. share of an individual member or co-venturer in the net income after tax of
i. an association
ii. a joint account
iii. a joint venture or consortium taxable as a corporation
Rate 10% for residents (RC, RA) and non-resident citizens (NRC),
20% for non-resident aliens engaged in trade or business (NRAETB
)
3. Capital Gains
a. Sale of Shares of Stock not Traded in the Stock Exchange
A final tax rate is imposed on Net Capital Gains (NCG) from the sale, barter, ex
change or other disposition of shares of stock in a domestic corporation in acco
rdance with following schedule:
Not over P100,000 ........ 5%
On any amount in excess of P100,000 10%
NCG = Selling Price Cost of Acquisition
If shares of domestic corporation are traded through the local stock exchange, t
he applicable tax rate is of 1% of the gross selling price (GSP) of the shares.
[Sec 127(A)] Therefore, the transaction is taxable whether the sale was at a pro
fit or at a loss.
b. Sale of Real Property (Capital Gains Tax CGT)
A final tax of 6% based on the gross selling price (GSP) or fair market value (F
MV) whichever is higher, is imposed on the sale, exchange, or other disposition
of real property located in the Philippines, classified as capital assets, inclu
ding pacto de retro sales and other forms of conditional sales, by individuals,
including estates and trusts
Capital Assets [Sec 39] - property held by the taxpayer (whether or not connecte
d with his trade or business) but does not include:
* stock in trade of the taxpayer or
* other property which would properly be included in the inventory of the taxpay
er 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 which is subject to the allowance for d
epreciation or
* real property used in trade or business of the taxpayer
e.g., residential house, vacant lot
Special Case. - No capital gains tax (CGT) if the following requirements
are met:
a. sale or disposition of their principal residence by natural persons
b. proceeds of sale is fully utilized in acquiring or constructing a new princip
al residence within 18 calendar months from the date of sale or disposition
c. historical cost or adjusted basis of the real property sold or disposed shall
be carried over to the new principal residence built or acquired
d. Commissioner shall have been duly notified by the taxpayer within 30 days fro
m the date of sale or disposition through a prescribed return of his intention t
o avail of the tax exemption
e. tax exemption can only be availed of once every 10 years
If there is no full utilization of the proceeds of sale or disposition, the port
ion of the gain presumed to have been realized from the sale or disposition shal
l be subject to capital gains tax (CGT).

Formula: Unutilized amount x (higher of ) GSP or FMV = Taxable p


ortion
GSP
GSP or FMV at the time of sale, whichever is higher, shall be multiplied by a fr
action which the unutilized amount bears to the gross selling price in order to
determine the taxable portion
Table Summarizing Rates and Bases of Passive Income Taxation
INTEREST
RA
NRANETB
Taxable
within
without
5-32%
25%
wRNRAETB
NRC
C of[24A]
ithin gross
Income
fromincome
any currency
[25A] bank deposit & yield or any other monetary benefit fr
om deposit substitutes and from trust funds and similar arrangements (PESO depos
its)
7.5%
INTEREST
ROYALTIES
10%
RA
NRANETB
PRIZES
within
without
Other
5-32%
20%
PCSO
exempt
NA
25%
exempt[25A]
exempt[24B]
Cash/property
wRNRAETB
NRC
C [25B]
ithin
[24B]
[25A]
[24B]
WINNINGS
[24B]
[25A]
WINNINGS
[24A]
[27D3]
<in
[24B]
from
income
P10,000
in books,
on
general
general
DOLLAR
DIVIDENDS
(except
from
(lottery)
(lottery)
literary
Long
deposits
PESO
PCSO)
received
Termworks
loans ofdeposit
individuals
from
anddomestic
or investment
musical compositions
corp orcertified
from joint
by stock
BSP company,
5-32%
NA
10%
20%
25%
SHARE
insurance
[24B]
[25A]
[25B]
[24A]
of partner
individual
or* received
mutual
in in
DISTRIBUTABLE
fund
fromcosof
NIAT foreign
and
association,
ROHQ
NIAT
corpof partnership
MNCs
joint account,
(except
or JV
GPP)or consortium t
axable
NA
10%
20%
25%
5/10%
CAPITAL
5-32%
6% of[25B]
[24B]
[25A]
ofasGAINS
[24A]
higher
NCG
corporation
[24C]
[25A]
[25B]
of
from
GSPSale
or FMV
of [25B]
SHARESPROPERTY
REAL
[24D]
[25A] of Stock not Traded
Legend:
NA Not Applicable
NIAT net income after tax
GPP general professional partnerships
JV joint venture
ROHQ Regional operating headquarters
MNCs Multinational corporations
NCG net capital gains
GSP gross selling price
FMV fair market value

Special Rates
Alien Individual Employed by
a. Regional or Area Headquarters (RAHQ) and Regional Operating Headquarters (RO
HQ) of Multinational Companies (MNCs)
b. Offshore Banking Units
c. Petroleum Service Contractor and Subcontractor
Tax Rate and Base - 15% of gross income
* The same tax treatment shall apply to Filipinos employed and occupying the sam
e position as those of aliens employed by these multinational companies [Sec 25(
C), (D), (E)]
Married Individuals
The husband and wife shall compute separately their individual income tax based
on their respective total taxable income: Provided, that if any income cannot be
definitely attributed to or identified as income exclusively earned or realized
by either of the spouses, the same shall be divided equally between the spouses
for the purpose of determining their respective taxable income. [Sec 24(A)]
Married individuals, whether citizens, resident or nonresident aliens, who do no
t derive income purely from compensation, shall file a return for the taxable ye
ar to include the income of both spouses, but where it is impracticable for the
spouses to file one return, each spouse may file a separate return of income but
the returns so filed shall be consolidated by the Bureau for purposes of verifi
cation for the taxable year. [Sec 51(D)]

TAXATION OF FRINGE BENEFITS


Legal Basis Sec 33, NIRC, Rev. Reg. No. 3-98
Fringe Benefit - 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 employ
ees (The fringe benefit covered by Sec 33 refers to those enjoyed by managerial
and supervisory employees.)
Managerial employee is one who is vested with the 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, effectivel
y recommend such managerial actions if the exercise of such authority is not mer
ely routinary or clerical in nature but requires the use of independent judgment
.
All employees not falling within any of the above definitions are considered ran
k-and-file employees.
Examples of fringe benefits
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 bet
ween the market rate and actual rate granted
6. Membership fees, dues and other expenses borne by the employer for the employ
ee 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
Tax Rate and Tax Base 32% on the grossed-up monetary value (GMV)
GMV represents the whole amount of income realized by the employee. GMV is dete
rmined by dividing the actual monetary value of the fringe benefit by 68% [100%
- tax rate of 32%]. For example, the actual monetary value of the fringe benefi
t is P1,000. The GMV is equal to P1,470.59 [P1,000 / 0.68].
Payor of Fringe Benefit Tax (FBT) the employer
Fringe Benefits which are not taxable
1. Fringe benefits which are authorized and exempted from tax under special laws
2. Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans
3. Benefits given to the rank and file employees, whether granted under a collec
tive bargaining agreement or not
4. If the grant of fringe benefits is for the convenience of the employer. (conv
enience of the employer rule)
5. De minimis benefits those which are of relatively small value are offered by
the employer as a means of promoting health, goodwill, and efficiency of employe
es. Examples are uniforms, rice subsidy, employee achievement awards, etc.
Special cases
For fringe benefits received by non-resident alien not engaged in trade of busin
ess (NRANETB), the tax rate is 25% of the grossed-up monetary value (GMV). The G
MV is determined by dividing the actual monetary value of the fringe benefit by
75% [100% - 25%].
For fringe benefits received by alien individuals and Filipino citizens employed
by regional or area headquarters, regional operating headquarters, offshore ban
king units (OBUs), or foreign service contractor, the tax rate is 15% of the gro
ssed-up monetary value (GMV). The GMV is determined by dividing the actual monet
ary value of the fringe benefit by 85% [100% - 15%].

INCOME TAX ON CORPORATIONS


Definition of a Corporation [Sec 22(B)]
The term corporation includes:
1. partnerships, no matter how created or organized
2. joint-stock companies
3. joint accounts (cuentas en participacion)
4. association
5. insurance companies
It does not include:
1. general professional partnerships (partnerships formed by persons for the sol
e purpose of exercising their common profession, no part of the income of which
is derived from engaging in any trade or business)
2. joint venture or consortium formed for the purpose of undertaking constructio
n projects or engaging in petroleum, coal, geothermal and other energy operation
s pursuant to an operating consortium agreement under a service contract with th
e Government.
Classification of Corporations
1. Domestic Corporation (DC) - when applied to a corporation, means created or o
rganized in the Philippines or under its laws [Sec 22(C)]
2. Resident Foreign Corporation (RFC) - a foreign corporation engaged in trade o
r business within the Philippines [Sec 22(H)]
3. Non-resident foreign coporation (NRFC) - a foreign corporation not engaged in
trade or business within the Philippines [Sec 22(I)]
QUICK GLANCE
Sources
Tax
Domestic
Resident
Net
Non-resident
Within
Gross
32% Base
Rates
income
Income
final
income
and
the
ofForeign
Corp
withholding
Taxable
without
Phils.
Foreign
(DC)Corp
Income
theCorp
(RFC)
tax
Phils.
(NRFC)
(FWT)
TAXATION OF PASSIVE INCOME OF CORPORATIONS
INTEREST
NRFC
Taxable
within
without
32%
wDRFC
C of
ithin
[27A]
[28A]
gross
Income
fromincome
any currency
[28B1] bank deposit & yield or any other monetary benefit fr
om deposit substitutes and from trust funds and similar arrangements (PESO depos
20% [27D]
its)
NA
32%
INTEREST [27A]
[28A7a]
[28A7d]
[28B1]incomeDOLLAR
from from deposits
LT depositoforindividuals
investmentorcertified
NON-BANKbycorp
BSP
7.5%
exempt
NRFC
INTEREST
within
without
32%
10%
NA
wDRFC
C [28A7b]
ithin
[27A]
[27D3]
[28A7a]
[27D1]
[28A7a]
[27D3]
income ofderived
fromEFCDS
PESObydepositary
loans
EFCDS depositary
banks from
BANKDOLLAR loans granted to non-resid
residents
ents
ROYALTIES
20%
PRIZES
NA
5/10%
CAPITAL
6%
INTERCORPORATE
32%
exempt
32%/15%
MCIT
NO
YESOther
of[27A]
[27D]
[28A7a]
[28A]
[28B1]
-[28B1]
of
higher
WINNINGS
in
[27D]
[28A7d]
2%
<[28B5b]
GAINS
NCG
P10,000
on
*general
of
inreceived
general
books,
[27A]
of
gross
[28A7c]
[28B5c]
from
DIVIDENDS
(except
GSP
(lottery)
(lottery)
Sale
income
literary
or
from
FMV
PCSO)
offrom
foreign
REAL
[27A]
SHARES
works
Domestic
PROPERTY
corp
ofandStock
musical
Corporation
(land
not and
compositions
Traded
buildings only)
Legend:
NA Not Applicable
NIAT net income after tax
JV joint venture
NCG net capital gains
GSP gross selling price
FMV fair market value
Capital Gains
1. Sale of Domestic Shares
a. If the shares are not traded through the local stock exchange, a final tax is
imposed on the net capital gains (NCG) in accordance with the following schedul
e:
Not over P100,000 ..... 5%
Amount in excess of P100,000 .. 10%
Net Capital Gains (NCG) = Gross Selling Price (GSP) Acquisition
Cost
b. If the shares are traded through the local stock exchange, a final tax of of
1% is imposed based on the gross selling price (GSP). [Sec 127] Therefore, the
transaction is taxable whether the sale was at a profit or at a loss.
2. Sale of Land and Buildings
a. The sale, exchange or disposition of lands and/or buildings which are not act
ually used in the business of a domestic corporation and are treated as capital
assets is subject to a final tax of 6% based on the based on the gross selling p
rice (GSP) or fair market value (FMV), whichever is higher.
b. If the seller is a resident foreign corporation (RFC), the income or gain is
included in the items of gross income and the net income of the resident foreign
corporation is subject to 32% tax rate.
c. If the seller is a non-resident foreign corporation (NRFC), the income or gai
n is subjected to a final tax rate of 32%.
Inter-corporate Dividends
A dividend paid by a domestic corporation to another corporation.
1. In the case of a domestic corporation (DC) or a resident foreign corporation
(RFC), the dividends received are not subject to tax.
2. In the case of a non-resident foreign corporation (NRFC), as a general rule,
a final withholding tax at the rate of 32% is imposed on the dividends received
from a domestic corporation.
However, if the country in which the NRFC is domiciled allows a tax credit for t
axes deemed paid in the Philippines, a final withholding tax at the rate of 15% is
imposed on the dividends received from domestic corporation with the remainder
of 17% [32%- 15%] being deemed paid.
Interest Income of Domestic Banks under the Expanded Foreign Currency Deposit Sy
stem (EFCDS)
Transactions subject to 10% final tax:
1. Income derived by a depository bank from foreign currency transactions with l
ocal commercial banks, including branches of foreign banks and other depository
banks
2. Interest income from foreign currency loans granted by depository banks to re
sidents
Corporations Subject to Special Tax Rates
1. Domestic Corporations
Proprietary Educational Institutions and Hospitals
Tax Rate and Base 10% on net income within and without the Philippines.
If gross income from unrelated trade or business or other activity exceeds 50% o
f total gross income derived from all sources, the tax rate of 32% shall be impo
sed on the entire taxable income.
The term 'unrelated trade, business or other activity' means any trade, business
or other activity, the conduct of which is not substantially related to the exe
rcise or performance by such educational institution or hospital of its primary
purpose or function.
A "Proprietary educational institution" is any private school maintained and adm
inistered by private individuals or groups with an issued permit to operate from
the DECS, CHED or TESDA.
2. Resident Foreign Corporations
a. International Carriers doing business in the Philippines 2.5% on Gross Philip
pine Billings (GPB)
In the case of International Air Carriers, GPB refers to the amount of:
* gross revenue derived from carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and uninterrupted flight, irre
spective of the place of sale or issue and the place of payment of the ticket or
passage document
* gross revenue from tickets revalidated, exchanged and/or indorsed to another i
nternational airline if the passenger boards a plane in a port or point in the P
hilippines
* for flights which originate from the Philippines, but transshipment of passeng
er takes place at any port outside the Philippines on another airline, the gross
revenue consisting of only the aliquot portion of the cost of the ticket corre
sponding to the leg flown from the Philippines to the point of transshipment
In the case of International Shipping, GPB means gross revenue whether for passe
nger, cargo or mail originating from the Philippines up to final destination, re
gardless of the place of sale or payments of the passage or freight documents.
b. Offshore Banking Units - final tax of 10%
c. Regional or Area Headquarters and Regional Operating Headquarters of Multinat
ional Companies
* Regional or area headquarters (RAHQ) not subject to income tax
RAHQ is a branch established in the Philippines by multinational companies and w
hich headquarters do not earn or derive income from the Philippines and which ac
t as supervisory, communications and coordinating center for their affiliates, s
ubsidiaries, or branches in the Asia-Pacific Region and other foreign markets.
* Regional operating headquarters (ROHQ) final tax of 10%
d. Tax on Branch Profits Remittances
* Taxable transaction any profit remitted by a branch to its head office
* Tax Rate and Base 15% based on the total profits applied or earmarked for remi
ttance without any deduction for the tax component
* Non-taxable activities those activities which are registered with the Philippi
ne Economic Zone Authority
* Income not treated as branch profits unless effectively connected with the con
duct of trade or business in the Philippines:
i. Interests, dividends, rents, royalties, including remuneration for technical
services
ii. salaries, wages premiums, annuities, emoluments
iii. other fixed or determinable annual, periodic or casual gains, profits, inco
me
iv. capital gains
3. Non-resident Foreign Corporations (NRFC)
a. Nonresident Cinematographic Film Owner, Lessor or Distributor 25% of gross in
come from all sources within the Philippines
b. Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals 4.5%
of gross rentals, lease or charter fees from leases or charters to Filipino cit
izens or corporations
c. Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment 7.5%
of gross rentals or fees
d. Interest Income from Foreign Loans 20% final tax
e. Income from transactions with depository banks under the expanded foreign cur
rency deposit system (EFCDS) exempt
Minimum Corporate Income Tax Rate (MCIT)
Who are subject to MCIT?
Domestic Corporations (DC) and Resident Foreign Corporations (RFC)
Rate and Base 2% on gross income
The MCIT is imposed if the amount resulting from the imposition of the 2% tax ra
te is greater than the amount resulting from the imposition of the regular corpo
rate tax rate of 32%.
The term 'gross income' shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. In the case of taxpayers engaged in the sal
e of service, 'gross income' means gross receipts less sales returns, allowances
, discounts and cost of services.
When does the MCIT become applicable?
beginning on the 4th taxable year from the time the corporation commenced its bu
siness operations
Carry-forward of excess minimum tax
Any excess of the minimum corporate income tax (2%) over the normal income tax (
32%) shall be carried forward and credited against the normal income tax for the
3 immediately succeeding taxable years.
EXEMPT CORPORATIONS
Legal Basis [Sec 30]
The following organizations shall not be taxed in respect to income received by
them as such:
(A) Labor, agricultural or horticultural organization not organized principally
for profit
(B) Mutual savings bank not having a capital stock represented by shares, and co
operative bank without capital stock organized and operated for mutual purposes
and without profit
(C) A beneficiary society, order or association, operating fort he exclusive ben
efit of the members such as a fraternal organization operating under the lodge s
ystem, or mutual aid association or a nonstock corporation organized by employee
s providing for the payment of life, sickness, accident, or other benefits exclu
sively to the members of such society, order, or association, or nonstock corpor
ation or their dependents
(D) Cemetery company owned and operated exclusively for the benefit of its membe
rs
(E) Nonstock corporation or association organized and operated exclusively for r
eligious, charitable, scientific, athletic, or cultural purposes, or for the reh
abilitation of veterans, no part of its net income or asset shall belong to or i
nures to the benefit of any member, organizer, officer or any specific person
(F) Business league chamber of commerce, or board of trade, not organized for pr
ofit and no part of the net income of which inures to the benefit of any private
stock-holder, or individual
(G) Civic league or organization not organized for profit but operated exclusive
ly for the promotion of social welfare
(H) A nonstock and nonprofit educational institution
(I) Government educational institution
(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or
irrigation company, mutual or cooperative telephone company, or like organizatio
n of a purely local character, the income of which consists solely of assessment
s, dues, and fees collected from members for the sole purpose of meeting its exp
enses and
(K) Farmers', fruit growers', or like association organized and operated as a sa
les agent for the purpose of marketing the products of its members and turning b
ack to them the proceeds of sales, less the necessary selling expenses on the ba
sis of the quantity of produce finished by them;
Notwithstanding the provisions in the preceding paragraphs, the income of whatev
er kind and character of the foregoing organizations from any of their propertie
s, real or personal, or from any of their activities conducted for profit regard
less of the disposition made of such income, shall be subject to tax. (YMCA v CI
R)

IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)


Legal Basis [Sec 29]
Nature and Purpose of the Tax
The improperly accumulated earnings tax applies to every corporation formed or a
vailed for the purpose of avoiding the income tax with respect to its shareholde
rs or the shareholders of any other corporation, by permitting earnings and prof
its to accumulate instead of being divided or distributed.
The tax is intended to discourage corporations from permitting its profits not n
eeded by business to accumulate instead of being distributed to stockholders in
the form of dividends.
Rate and Base 10% of the improperly accumulated taxable income

Corporations Not Subject to IAET


1. Publicly-held corporations
2. Banks and other non-bank financial intermediaries
3. Insurance companies
Evidence of Purpose to Avoid Income Tax
1. Prima Facie Evidence
The fact that any corporation is a mere holding company or investment company sh
all be prima facie evidence of a purpose to avoid the tax upon its shareholders
or members.
2. Evidence Determinative of Purpose
The fact that the earnings or profits of a corporation are permitted to accumula
te beyond the reasonable needs of the business shall be determinative of the pur
pose to avoid the tax upon its shareholders or members unless the corporation, b
y the clear preponderance of evidence, shall prove to the contrary.
Improperly Accumulated Taxable Income
Formula: Taxable Income
+ Income exempt from tax
+ Income excluded from gross income
+ Income subject to final tax + net operating loss carry-over
- Dividends actually or constructively paid
- Income tax paid for the taxable year
Improperly Accumulated Taxable Income

TAXATION OF PARTNERSHIP
Definition of Partnership
By the contract of partnership two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing t
he profits among themselves.
Two or more persons may also form a partnership for the exercise of a profession
. [Art. 1767, Civil Code]
Classification of Partnerships for Tax Purposes
1. Partnerships subject to tax (Business Partnerships)
2. Partnerships not subject to tax
a. General Professional Partnerships (GPP) partnerships formed by persons for th
e sole purpose of exercising their common profession, no part of the income of w
hich is derived from engaging in any trade or business
b. joint venture or consortium formed for the purpose of undertaking constructio
n projects
c. joint venture or consortium formed for the purpose of engaging in petroleum,
coal, geothermal and other energy operations pursuant to an operating consortium
agreement under a service contract with the Government.

General Professional Partnerships (GPP)


Legal Basis [Sec 26]
Rules:
1. A GPP as such shall not be subject to the income tax
2. Persons engaging in business as partners in a GPP shall be liable for income
tax only in their separate and individual capacities.
3. For purposes of computing the distributive share of the partners, the net inc
ome of GPP shall be computed in the same manner as a corporation.
4. Each partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership.
5. The income tax liability of a partner in a GPP is computed using the schedule
r rates.
Business Partnerships
Business partnerships include all partnerships, no matter how created or organiz
ed, except those mentioned above. [Sec 22(B)]
The share of a partner in the distributable net income after tax of a business p
artnership is subject to 10% final tax. [Sec24(B)(2)]
Co-ownership
There is co-ownership:
1. When two or more heirs inherit and undivided property from a decedent.
2. When a donor makes a gift of an undivided property in favor of two or more do
nees.
When Co-ownership not subject to tax
When the co-ownership s activities are limited merely to the preservation of the c
o-owned property. In such a case, the co-ownership, as such, is not subject to t
ax. The co-owners are liable for income tax in their separate and individual cap
acity.
When Co-ownership is subject to tax
When the income of the co-ownership is invested by the co-owners in business, th
e co-owners have in effect constituted themselves into a partnership. In such a
case, the co-ownership shall be subject to tax as a corporation.
For tax purposes, the co-ownership of inherited properties is automatically conv
erted into an unregistered partnership the moment the said common properties and
/or the incomes derived therefrom are used as a common fund with intent to produ
ce profits for the heirs in proportion to their respective shares in the inherit
ance as determined in a project partition either duly executed in an extrajudici
al settlement or approved by the court in the corresponding testate or intestate
proceeding. The reason for this is simple. From the moment of such partition, t
he heirs are entitled already to their respective definite shares of the estate
and the incomes thereof, for each of them to manage and dispose of as exclusivel
y his own without the intervention of the other heirs, and, accordingly he becom
es liable individually for all taxes in connection therewith. If after such part
ition, he allows his share to be held in common with his co-heirs under a single
management to be used with the intent of making profit thereby in proportion to
his share, there can be no doubt that, even if no document or instrument were e
xecuted for the purpose, for tax purposes, at least, an unregistered partnership
is formed. [Ona v CIR, G.R. No. L-19342, 25 May 1972]

SOURCE OF INCOME
Legal Basis [Sec 42]
Classification of Income according to Source
1. Income derived from sources within the Philippines
2. Income derived from sources without the Philippines
3. Income derived from sources partly within and partly without the Philippines
Basic Principles
1. Resident Citizens (RC) and Domestic Corporations (DC) are taxable on income d
erived from within and without the Philippines
2. Non-resident Citizens (NRC), Non-resident Aliens (NRA), Resident Foreign Corp
orations (RFC) and Non-resident Foreign Corporations (NRFC) are taxable only on
income derived from within the Philippines.
A. Gross Income From Sources Within the Philippines
The following items of gross income shall be treated as gross income from source
s within the Philippines:
1. Interests derived from sources within the Philippines, and interests on bonds
, notes or other interest-bearing obligation of residents
2. Dividends received:
a. from a domestic corporation; and
b. from a foreign corporation, unless less than 50% of its gross income for the
previous 3-year period was derived from sources within the Philippines. The inco
me which is considered as derived from within the Philippines is obtained by usi
ng the following formula:
Philippine Gross Income x Dividend = Income Within
Worldwide Gross Income
3. Compensation for labor or personal services performed in the Philippines
4. Rentals and royalties from property located in the Philippines or from any in
terest in such property
5. Gains, profits and income from the sale of real property located in the Phili
ppines
6. Gains, profits and income from the sale of personal property
Place offrom
Abroad
Treatment
Income
Philippines
Purchase
Sale
Without
Within
The gain from the sale of shares of stock in a domestic corporation shall be tre
ated as derived entirely from sources within the Philippines regardless of where
the said shares are sold.
Allowable Deductions to Gross Income From Sources Within the Philippines
1. General Rule
From the items of gross income above, the following are allowed as deductions:
a. expenses, losses and other deductions properly allocated to items of gross in
come
b. ratable part of expenses, interests, losses and other deductions effectively
connected with the business or trade conducted exclusively within the Philippine
s which cannot definitely be allocated to some items of gross income
Philippine Gross Income x Unallocated Expenses = Expenses to be
Worldwide Gross Income Allocated to Inco
me
from With
in
2. Exception
No deductions for interest paid or incurred abroad shall be allowed from the ite
m of gross income unless indebtedness was actually incurred to provide funds for
use in connection with the conduct or operation of trade or business in the Phi
lippines.
B. Gross Income From Sources Without the Philippines
The following items of gross income shall be treated as income from sources with
out the Philippines:
1. Interests other than those derived from sources within the Philippines
2. Dividends other than those derived from sources within the Philippines
3. Compensation for labor or personal services performed without the Philippines
4. Rentals or royalties from property located without the Philippines or from an
y interest in such property
5. Gains, profits and income from the sale of real property located without the
Philippines
Allowable Deductions to Gross Income From Sources Without the Philippines
From the items of gross income specified above, the following are allowed as ded
uctions:
1. expenses, losses, and other deductions properly apportioned to items of gross
income
2. ratable part of any expense, loss or other deduction which cannot definitely
be allocated to some items or classes of gross income
Gross Income from Without the Phils. x Unallocated Expenses = Expenses to
be
Worldwide Gross Income Allocated to
Income from Without

SUMMARY
Dividends
Item
Test
Residence
Interest
Income
Rental
Place
Royalty
Location
Gain
AlwaysofofIncome
on from
Income
Source
Sale
Performance
Use
of
ofthe
Services
the
of
Within
ofDomestic
the
Personal
Property
Debtor
Income
Intangible
Property
Sold
Shares
a. From Domestic Corporation
b. FromWithin,
Income Within
ForeignifCorporation
more than 50% of its gross income for the previous 3-year peri
od was derived from sources within the Philippines. Income within computed using
this formula:
Phil. Gross Income x Dividend = Income Within
Worldwide Gross
Income
Income without, if less than 50% of its gross income for the previous 3-year per
iod was derived from sources within the Philippines.
GROSS INCOME
Definition of Gross Income
Gross Income means the total income of a taxpayer subject to tax. It means all
income derived from whatever source. It does not include income which is exclud
ed or exempted by law.
Items of Gross Income
1. Compensation for services in whatever form paid, including, but not limited t
o fees, salaries, wages, commissions, and similar items
2. Gross income derived from the conduct of trade or business or the exercise of
a profession
3. Gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partner's distributive share from the net income of the general professional
partnership (GPP)
Compensation Income
Compensation income is that income arising from an employer-employee relationshi
p. It includes:
1. Salaries and wages
2. Commissions
3. Tips
4. Allowances
5. Bonuses
6. Fringe Benefits of rank and file employees
Fringe Benefits of Rank and File employees
Basic Rule: Convenience of the Employer Rule
If meals, living quarters, and other facilities and privileges are furnished to
an employee for the convenience of the employer, and incidental to the requireme
nt of the employee s work or position, the value of that privilege need not be inc
luded as compensation.
Gains Derived From Dealings In Property
Dealings in property such as sales or leases may result in gain or loss. The ga
in from the transaction shall be taxable income. [Sec 32(A)]. The loss shall be
deductible if incurred in the conduct of trade or business. [Sec 34(D)].
Basic Formula for Computing Gain or Loss:
Selling Price XX
Acquisition Cost XX X
Gain (Loss) XX
If Selling Price is greater than Acquisition Cost, there is a Gain.
If Selling Price is less than Acquisition Cost, there is a Loss.
Interest Income
Interest income received by citizens, resident aliens, and non-resident aliens e
ngaged in trade or business from long-term deposit or investment certificates (L
TDIC), e.g. savings, common or individual trust funds, deposit substitutes, inve
stment management accounts and other investments, shall be exempt from tax.
Interest income from Government securities such as Treasury Bills is subject to
tax.
Rental Income
Rental income of the lessor includes
1. the actual rent itself
2. prepaid or advance rent
3. Security deposit, only if applied as rent
Dividends
Kinds of Dividends
1. Cash Dividend
2. Stock Dividend
As a general rule, Stock Dividends are not subject to tax.
However, if a corporation cancels or redeems stock issued as a dividend in such
a manner as to make the distribution and cancellation or redemption essentially
equivalent to a distribution of a dividend, the amount distributed shall be cons
idered taxable income. (Unscrupulous individuals may declare stock dividends, ca
ncel or redeem them, and then distribute its cash equivalent, thus achieving two
objectives finding shelter in the non-taxability of stock dividends and circumv
enting the tax on cash dividends. With the rule, the loophole is plugged.)
3. Property Dividend measured at the fair market value (FMV) of the property rec
eived
4. Scrip Dividend measured at the fair market value (FMV) of the promissory note
received
5. Liquidating Dividend distribution of all the property of a corporation. It is
strictly not dividend income, but rather a sale of shares of stock resulting in
capital gain or loss.
Partner's Distributive Share From Net Income Of General Professional Partnership
(GPP)
1. A general professional partnership (GPP) as such shall not be subject to the
income tax.
2. Persons engaging in business as partners in a general professional partnershi
p (GPP) shall be liable for income tax only in their separate and individual cap
acities.
3. For purposes of computing the distributive share of the partners, the net inc
ome of the partnership shall be computed in the same manner as a corporation.
4. Each partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership. [Sec 26]
Other Sources of Income
1. Recovery of Damages representing compensation for loss of profits or income (
exclude damages which compensate for injury to property or person)
2. Recovery of Bad Debt Previously Written Off (Tax Benefit Rule)
If the deduction of the bad debt in a prior year resulted in an income tax benef
it in favor of the taxpayer, the bad debt recovered is taxable income in the yea
r of recovery.
There is an income tax benefit when the deduction of the bad debt in the prior y
ear resulted in lesser income and hence tax savings for the company.

EXCLUSIONS FROM GROSS INCOME


Legal Basis [Sec 32(B)]
The following are excluded from gross income:
1. Life Insurance
The proceeds of life insurance policies paid to heirs or beneficiaries upon the
death of the insured. (The reason is that insurance is a contract of indemnity a
nd hence, the proceeds should be treated as indemnity and not as gain or income.
)
2. Amount Received by Insured as Return of Premium
The amount received by the insured, as a return of premiums paid by him under li
fe insurance. (The rationale is that this is a return of capital and not income.
)
3. Gifts, Bequests, and Devises
The value of property acquired by gift, bequest, devise, or descent. (The reaso
n is that these transactions are subject to transfer taxes estate or donor s taxes
.)
However, income from such property, as well as gift, bequest, devise or descent
of income from any property, in cases of transfers of divided interest, shall be
included in gross income.
4. Compensation for Injuries or Sickness
The amounts received as compensation for personal injuries or sickness, plus the
amounts of any damages received, whether by suit or agreement, on account of su
ch injuries or sickness.
5. Income Exempt under Treaty
Income of any kind, to the extent required by any treaty obligation binding upon
the Government of the Philippines.
6. Retirement Benefits, Pensions, Gratuities, etc.-
a. Retirement benefits received under RA 7641 and those received by employees of
private firms in accordance with a reasonable private benefit plan maintained b
y the employer:
Requisites:
(1) The retiring employee has been in the service of the same employer for at le
ast 10 years
(2) The retiring employee is not less than 50 years of age at the time of his re
tirement
(3) The benefits shall be availed of by an employee only once.
(4) That there be a reasonable private benefit plan as defined below.
A 'reasonable private benefit plan' means
* a pension, gratuity, stock bonus or profit-sharing plan maintained by an emplo
yer for the benefit of some or all of his employees
* wherein contributions are made by such employer for the employees
* for the purpose of distributing to such employees the earnings and principal o
f the fund thus accumulated and
* wherein it is provided in the plan that at no time shall any part of the corpu
s or income of the fund be used for, or be diverted to, any purpose other than f
or the exclusive benefit of the said officials and employees.
b. Any amount received by an employee or by his heirs from the employer as a con
sequence of separation of such official or employee from the service of the empl
oyer because of
* death
* sickness or
* other physical disability or
* for any cause beyond the control of the employee
c. The social security benefits, retirement gratuities, pensions and other simil
ar benefits received from foreign government agencies and other institutions
d. Payments of benefits by the United States Veterans Administration
e. Benefits received from or enjoyed under the SSS
f. Benefits received from the GSIS
7. Miscellaneous Items
a. Income Derived by Foreign Government
Income derived from (1) investments in the Philippines in financial securities o
r (2) from interest on deposits in banks in the Philippines by
(i) foreign governments
(ii) financing institutions owned, controlled, or enjoying refinancing from fore
ign governments, and
(iii) international or regional financial institutions established by foreign go
vernments.
b. Income Derived by the Government or its Political Subdivisions
Income derived from any public utility or from the exercise of any essential gov
ernmental function accruing to the Government of the Philippines or to any polit
ical subdivision thereof.
c. Prizes and Awards
Prizes and awards made primarily in recognition of religious, charitable, scient
ific, educational, artistic, literary, or civic achievement but only if:
(i) recipient was selected without any action on his part to enter the contest o
r proceeding and
(ii) recipient is not required to render substantial future services as a condit
ion to receiving the prize or award
d. Prizes and Awards in Sports Competition
All prizes and awards granted to athletes (1) in local and international sports
competitions (2) sanctioned by their national sports associations.
e. 13th Month Pay and Other Benefits
Gross benefits received by employees of public and private entities provided tha
t the total exclusion shall not exceed P30,000 which shall cover:
i. Benefits received by government employees under RA 6686
ii. Benefits received by employees pursuant to PD 851 (13th Month Pay Decree)
iii. Benefits received by employees not covered by PD 851 and
iv. Other benefits such as productivity incentives and Christmas bonus
f. GSIS, SSS, Medicare and Other Contributions
GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of individuals
g. Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness
Gains realized from the sale or exchange or retirement of bonds, debentures or o
ther certificate of indebtedness with a maturity of more than 5 years.
Note that what is exempt is the sale or exchange of the instruments. Note furth
er that interest income from these instruments are likewise exempt if held by a
resident citizen (RC), non-resident citizen (NRC), resident alien (RA), or a no
n-resident alien engaged in trade or business (NRAETB). [Sec. 24(B)(1), 25(A)].
If held by a non-resident alien not engaged in trade or business (NRANETB) or
a corporation, the interest income becomes taxable income.
h. Gains from Redemption of Shares in Mutual Fund
Gains realized by the investor upon redemption of shares of stock in a mutual
fund company

DEDUCTIONS FROM GROSS INCOME


The term taxable income means the pertinent items of gross income specified in t
his Code [ref: Sec 32], less the deductions [ref: Sec 34] and/or personal and ad
ditional exemptions [ref: Sec 35], if any, authorized for such types of income b
y this Code or other special laws. [Sec 31]
Kinds of Deductions
1. Itemized Deductions
2. Optional Standard Deduction
Who can avail of deductions?
All taxpayers except for those earning compensation income arising from personal
services rendered under an employer-employee relationship
Rules:
1. Compensation income earners can avail themselves only of the deduction in Sec
34(M), i.e., premium payments on health and/or hospitalization insurance.
2. The following can claim itemized deductions:
a. Corporations, whether domestic or foreign
b. General Professional Partnerships
c. Individuals engaged in trade, profession or business
d. Estates and trusts engaged in trade or business
3. Only citizens (RC, NRC) and resident aliens (RA) can elect between itemized d
eductions and optional standard deduction.
Itemized Deductions
(A) Expenses
(B) Interest
(C) Taxes
(D) Losses
(E) Bad debts
(F) Depreciation
(G) Depletion
(H) Charitable and Other Contributions
(I) Research and Development
(J) Pension Trust
(M) Premium Payments on Health and Hospitalization Insurance of an Individual Ta
xpayer
Optional Standard Deduction (OSD)
* The Optional Standard Deduction is in lieu of the itemized deductions.
* The OSD is in an amount not exceeding 10% of gross income.
* The taxpayer shall signify in his return his intention to elect the OSD; other
wise he shall be considered as having availed himself of the itemized deductions
.
Note: Gross Income = Gross Sales or Receipts Cost of Sales or Services

BUSINESS EXPENSE
Legal Basis Sec 34(A)
In a nutshell, what is allowed as a deduction are ordinary and necessary trade,
business or professional expenses.
Requisites for Deductibility of Business Expense
1. It must be ordinary and necessary
2. It must be paid or incurred during the taxable year
3. It must be connected with the conduct of the trade, business or exercise of a
profession
4. The tax required to be withheld must have been paid to the BIR.
What are examples of ordinary and necessary expenses?
1. salaries, wages, and other forms of compensation for personal services actual
ly rendered, including the grossed-up monetary value (GMV) of fringe benefit fur
nished by the employer to the employee.
2. travel expenses, here and abroad, while away from home (meaning tax home or t
he place of work) in the pursuit of trade, business or profession
3. rentals and/or other payments which are required as a condition for the conti
nued use or possession of property
4. entertainment, amusement and recreation expenses
The term "Representation Expenses" shall refer to expenses incurred by a taxpaye
r in connection with the conduct of his trade, business or exercise of professio
n, in entertaining, providing amusement and recreation to, or meeting with, a gu
est or guests at a dining place, place of amusement, country club, theater, conc
ert, play, sporting event, and similar events or places.
Requisites for deductibility of entertainment, amusement and recreation expenses
:
a. It must be paid or incurred during the taxable year
b. It must be directly related to the conduct of 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 a government official
or employee or to a private individual, or corporation, or general professional
partnership (GPP), if it constitutes a bribe, kickback or other similar payment;
e. It must be duly substantiated by adequate proof. The official receipts should
be in the name of the taxpayer claiming the deduction and
f. The appropriate amount of withholding tax should have been withheld and paid
to the BIR.
Ceiling on entertainment, amusement and recreation expense
The amount of actual entertainment, amusement and recreation expense paid or inc
urred within the taxable year by the taxpayer, but in no case shall such deducti
on exceed
* 0.5% of net sales (i.e., gross sales less sales returns/allowances and sales d
iscounts) for taxpayers engaged in sale of goods or properties or
* 1.0% 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 prope
rties [Rev Reg. No. 10-2002]
Bribes, Kickbacks and Other Similar Payments
No deduction from gross income shall be allowed as business expense for any paym
ent made, directly or indirectly, to a government official or employee or to a p
rivate corporation, general professional partnership, or a similar entity, if th
e payment constitutes a bribe or kickback.
Expenses Allowable to Private Educational Institutions
In addition to the expenses allowable as deductions, a private educational insti
tution may at its option elect either:
1. to deduct expenditures otherwise considered as capital outlays of depreciable
assets incurred during the taxable year for the expansion of school facilities
or
2. to deduct allowance for depreciation

INTEREST AND TAXES


Legal Basis Sec 34(B) and 34(C)
Interest
The amount of interest paid or incurred within a taxable year on indebtedness in
connection with the taxpayer's profession, trade or business shall be allowed a
s deduction from gross income.
Requisites for Deductibility
1. There is an indebtedness.
2. The indebtedness is that of the taxpayer.
3. The indebtedness is connected with the taxpayer s trade, profession, or busines
s.
4. The taxpayer is liable to pay interest on the indebtedness.
5. The indebtedness must have been paid or accrued during the taxable year.
Reduction of Interest Expense as a Deductible Item
The taxpayer's allowable deduction for interest expense shall be reduced by an a
mount equal to 38% of the interest income subjected to final tax:
Non-deductible Interest
1. Interest paid in advance by the taxpayer who reports income on cash basis (be
cause such interest shall be allowed as a deduction in the year the indebtedness
is paid.)
2. Interest paid by one person to a family member or a related taxpayer (subsidi
ary, affiliate) Sec 36(B)
3. Interest on indebtedness incurred to finance petroleum exploration
Note: Interest for late payment of income tax is deductible, but fines and penal
ties for late payment are not deductible.
Optional Treatment of Interest Expense
At the option of the taxpayer, interest incurred to acquire property used in tra
de business or exercise of a profession may be either (1) allowed as a deduction
or (2) treated as a capital expenditure (asset).
Taxes
General Rule: Taxes paid or incurred within the taxable year in connection with
the taxpayer's profession, trade or business, shall be allowed as deduction.
Exceptions:
1. income tax
2. foreign income taxes, if claimed as tax credit
3. estate and donor's taxes
4. special assessment taxes assessed against local benefits of a kind tending to
increase the value of the property assessed
5. value added tax
6. fines and penalties due to late payment of tax
7. taxes which are final taxes
Requisites for Deductibility
1. It must be paid or incurred within the taxable year.
2. It must be paid or incurred in connection with the taxpayer s trade, profession
or business.
3. It must be imposed directly on the taxpayer.
Examples of Deductible Taxes
1. Import duties
2. Business taxes
3. Occupation taxes
4. Privilege and license taxes
5. Excise taxes
6. Documentary stamp taxes
7. Automobile registration fees
8. Real property taxes
Limitations on Deductions
In the case of a nonresident alien individual engaged in trade or business (NRAE
TB) and a resident foreign corporation (RFC), the deductions for taxes shall be
allowed only if and to the extent that they are connected with income from sourc
es within the Philippines.
Phil net income x Taxes paid to a foreign country = Deduct
ible foreign taxes
Worldwide Net income

LOSSES AND BAD DEBTS


Legal Basis Sec 34(d) and 34(E)
Losses
Losses actually sustained during the taxable year and not compensated for by ins
urance or other forms of indemnity shall be allowed as deductions.
Requisites for Deductibility
1. The loss must be actually sustained.
2. It must be sustained in a closed and completed transaction.
3. The property lost must be connected with the conduct of trade or business.
4. The loss must be that of the taxpayer.
5. The loss must not be compensated by insurance or other forms of indemnity.
6. The loss must be reported to the BIR within 45 days from the date of loss. (S
worn Declaration of Loss)
Examples of causes of loss:
Business loss those incurred in trade or business such as obsolescence, worthles
sness
Casualty loss fires, storms, shipwreck, robbery, theft or embezzlement
No loss shall be allowed as a deduction if at the time of the filing of the retu
rn, such loss has been claimed as a deduction for estate tax purposes in the est
ate tax return. (The purpose is to avoid the item from being deducted twice, to
the detriment of the Government.)
How (partial) loss is computed:
Formula: Book Value of property lost XX
Less: Salvage value of property lost XX
Insurance recovery XX
Loss (XX)
* If loss is total, the amount of book value is equivalent to the actual loss.
Obsolescence and Worthlessness
Obsolescence of property is deductible as a loss when the property has to be dis
carded permanently because its usefulness is suddenly terminated.
Worthlessness may be a ground for deductibility of the value of the property as
a loss when it can be satisfactorily shown that the property had indeed become v
alueless. If securities become worthless during the taxable year and are capita
l assets, the loss resulting therefrom shall be considered as a loss from the sa
le or exchange, on the last day of such taxable year, of capital assets. (See di
scussion under heading Gains and Losses)
Shrinkage in value of property is not a ground for deductibility as a loss. The
re has to be an actual loss sustained in order for it to be deductible.
Capital Losses
(See discussion under heading Gains and Losses)
Wagering Losses
Losses from wagering transactions shall be allowed only to the extent of the gai
ns from such transactions. (Therefore, if there are no wagering gains, wagering
loss cannot be deducted.)
Net Operating Loss Carry-Over (NOLCO)
Net operating loss is the excess of allowable deductions over gross income.
The net operating loss of the business of the immediately preceding taxable year
shall be carried over as a deduction from gross income for the next 3 consecuti
ve taxable years immediately following the year of such loss.
Requisites for application of NOLCO:
1. any net loss incurred in a taxable year during which the taxpayer was exempt
from income tax shall not be allowed as a deduction
2. a net operating loss carry-over (NOLCO) shall be allowed only if there has be
en no substantial change in the ownership of the business.
There is no substantial change when
1. not less than 75% in value of outstanding shares is held by or on behalf of t
he same persons; or
2. not less than 75% of the paid up capital is held by or on behalf of the same
persons.
Non-deductibility of certain losses
In computing net income, no deductions shall be allowed in respect of losses fro
m sales or exchanges of property directly or indirectly between members of a fam
ily or related taxpayers (subsidiaries, affiliates).
Bad Debts
Rule: Debts due to the taxpayer actually ascertained to be worthless and charge
d off within the taxable year are deductible from gross income.
Exceptions: The following are not deductible as bad debts:
1. those debts not connected with profession, trade or business
2. those sustained in a transaction entered into between family members or relat
ed taxpayers
Requisites for Deductibility:
1. There must be a valid and subsisting debt.
2. The debt must be connected with profession, trade or business.
3. The debt must be actually ascertained to be worthless or uncollectible. (e.g.
, bankrupt debtor)
4. The debt must be charged off within the taxable year.
Recovery of Bad Debts Previously Deducted
The recovery of bad debts previously allowed as deduction in the preceding years
shall be included as part of the gross income in the year of recovery to the ex
tent of the income tax benefit of said deduction. (Tax Benefit Rule)
If the deduction of the bad debt in a prior year resulted in an income tax benef
it in favor of the taxpayer, the bad debt recovered is taxable income in the yea
r of recovery.
There is an income tax benefit when the deduction of the bad debt in the prior y
ear resulted in lesser income and hence tax savings for the company.

DEPRECIATION AND DEPLETION


Legal Basis Sec 34(F) and 34(G)
Depreciation
Depreciation is the gradual diminution of the useful value of tangible property
resulting from wear and tear and normal obsolescence. There shall be allowed as
a depreciation deduction a reasonable allowance for the exhaustion, wear and te
ar (including reasonable allowance for obsolescence) of property used in the tra
de or business. The rationale for this is that property gradually approaches a p
oint where its usefulness is exhausted.
Requisites for Deductibility
1. The asset must be used in trade or business.
2. The asset must have a limited useful life.
3. The allowance must be reasonable.
4. The allowance must be charged off during the year.
5. The total allowances must not exceed the cost of the property.
Methods and Rates of Depreciation
1. Straight-line method (SL)
Formula: Cost Salvage Value X
Estimated Useful Life of the Property
2. Declining-balance method, using a rate not exceeding twice the rate for strai
ght line method
Under this method, the depreciation allowance per year varies. Depreciation is
largest in the first year and continually decreases towards the end of the usefu
l life of the property.
Example: Double Declining Balance Method (DDB)
Cost: P100,000.00 / Salvage Value: P5,000.00
Estimated Useful Life of the Property: 5 years
Straight Line rate: 1/ estimated useful life or 1/5 or 20%
Double Declining Rate: 20% x 2 = 40%
The depreciation for the first year is P40,000.00, computed as follows: [P100,00
0 x 40%]. Note that the salvage value is ignored in the declining balance metho
d. The depreciation for the second year is P24,000.00, computed as follows: [(P
100,000 P40,000) x 40%].
3. Sum-of-the-years-digit method (SYD)
Under this method, the annual depreciation is computed by applying a changing fr
action to the cost of the property reduced by the salvage value. In the fractio
n, the numerator is the number of remaining years of the estimated useful life o
f the property and the denominator is the sum of the numbers representing the ye
ars of the life of the property.
Example: Cost of the Property: P105,000
Salvage Value: P 5,000
Estimated Useful Life: 5 years
Depreciation Schedule
Year 1 5 / 15 x (P105,000 P5,000)
Year 2 4 / 15 x P100,000
Year 3 3 / 15 x P100,000
Year 4 2 / 15 x P100,000
Year 5 1 / 15 x P100,000
The denominator 15 is the sum of the years digits of the useful life of the prop
erty: 5 + 4 + 3 + 2 + 1.
The numerator is the remaining years in the useful life of the property.
Depreciation of Properties Used in Petroleum Operations
An allowance for depreciation in respect of all properties directly related to p
roduction of petroleum shall be allowed under the straight-line or declining-bal
ance method of depreciation at the option of the service contractor. If the ser
vice contractor initially elects the declining-balance method, it may shift to t
he straight-line method. The useful life of such property shall not be more tha
n 10 years. Properties not used directly in the production of petroleum shall b
e depreciated under the straight-line method on the basis of an estimated useful
life of 5 years.
Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business (NRAE
TB) or Resident Foreign Corporations (RFC)
A reasonable allowance for the deterioration of property shall be permitted only
when such property is located in the Philippines.
Depletion of Oil and Gas Wells and Mines
Depletion is the exhaustion of natural resources due to production. The rationa
le for depletion allowance is the recovery of the capital invested in the proper
ty.
In the case of oil and gas wells or mines, a reasonable allowance for depletion
computed using the cost-depletion method shall be granted provided that when the
allowance for depletion shall not exceed the capital invested. The cost deplet
ion method is based on the cost of a mine deposit to the taxpayer. The purpose
of cost depletion is to return to the taxpayer, free of tax, that portion of the
cost of mining resources which taxpayer spent in earning his taxable income.
Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien indiv
idual (NRA) or Foreign Corporation (RFC, NRFC)
In the case of a nonresident alien individual engaged in trade or business in th
e Philippines or a resident foreign corporation, allowance for depletion of oil
and gas wells or mines under paragraph (1) of this Subsection shall be authorize
d only in respect to oil and gas wells or mines located within the Philippines.

PENSION TRUST AND CHARITABLE AND OTHER CONTRIBUTIONS


Legal Basis Sec 34(H) and 34(J)
Pension Trusts
An employer may establish a pension trust to provide for the payment of reasonab
le pension to his employees.
Such employer who establishes a pension trust shall be allowed to deduct
1. Contributions to such trust during the taxable year to cover the pension liab
ility accruing during the year
2. Payments into such trust during the taxable year in excess of such contributi
ons
Payments mentioned in #2 above shall be allowed as a deduction only if such amou
nt
1. has not theretofore been allowed as a deduction AND
2. is apportioned equally over a period of 10 consecutive years beginning with t
he year in which the payment is made.
In summary, Contributions are deductible in full while Payments in excess of Con
tributions are deductible annually for 10 years and in equal parts.
Charitable and Other Contributions
Contributions made within the taxable year are allowed as deductions from gross
income.
Requisites for Deductibility
1. The contribution must be actually paid.
2. It must be given to the entity specified by law.
3. The net income of the entity must not inure to the benefit of any private sto
ckholder or individual.
4. The taxpayer making the contribution must be engaged in trade, business or pr
ofession.
Kinds of Contributions
1. Those deductible in full
2. Those subject to limit
Contributions Subject to Limit
1. Contributions made to the Government or any of its agencies or political subd
ivisions exclusively for public purposes
2. Contributions made to accredited domestic corporation or associations organiz
ed exclusively for
* religious
* charitable
* scientific
* youth and sports development
* cultural
* educational or
* rehabilitation of veterans
3. Contributions to social welfare institutions
4. Contributions to non-government organizations
Limit of Contribution
Individual 10% of taxable income derived from trade or business, before deductin
g contributions
Corporation 5% of taxable income, before deducting contributions
Contributions Deductible in Full
1. Donations to the Government, exclusively to finance priority activities in
* education (e.g., UP, IBP)
* health
* youth and sports development
* human settlements
* science and culture (e.g., CCP, National Museum) and
* economic development
2. Donations to Certain Foreign Institutions or International Organizations
3. Donations to Accredited Non-government Organizations (NGO)
A "non-government organization" means a non profit domestic corporation:
a. Organized and operated exclusively for scientific, research, educational, cha
racter-building and youth and sports development, health, social welfare, cultur
al or charitable purposes, no part of the net income of which inures to the bene
fit of any private individual.
b. Which makes utilization directly for the active conduct of the activities con
stituting the purpose for which it is organized and operated.
c. The level of annual administrative expense of which shall not exceed 30% of t
he total expenses.
d. The assets of which, in the event of dissolution, would be distributed to ano
ther nonprofit domestic corporation organized for similar purpose, or to the Sta
te for public purpose.
* Note that when the requisites above are not met, the contribution becomes s
ubject to limit.
Valuation of Charitable Contribution in Kind
The amount of any charitable contribution of property other than money (i.e., co
ntributions in kind) shall be based on the acquisition cost of said property.
Contributions Deductible by a General Professional Partnership (GPP)
A GPP is not subject to income tax. In determining its net income, the GPP can
deduct the contributions which are deductible in full. With respect to the cont
ributions subject to limit, they may be claimed an deducted by the partners in p
roportion to their respective interest.

RESEARCH AND DEVELOPMENT AND PREMIUM PAYMENTS ON HEALTH AND HOSPITALIZATION INSU
RANCE
Legal Basis Sec 34(L) and 34(M)
Research and Development
Research and Development (R&D) may be treated either as:
1. ordinary and necessary expenses or
2. deferred asset which is periodically subject to depreciation or amortization.
As an Ordinary and Necessary Expense
Requisites for Deductibility
1. The R&D expenses must have been paid or incurred during the taxable year.
2. The R&D expenses must be connected with the conduct of the trade or business
of the taxpayer.
As a Deferred Asset subject to Depreciation or Amortization
At the election of the taxpayer, the following R&D expenditures may be treated a
s deferred assets:
1. Those paid or incurred by the taxpayer in connection with his trade, business
or profession
2. Those not treated as expenses and
3. Those chargeable to capital account but not chargeable to depreciable propert
y
The deferred asset shall be allowed as deduction ratably distributed over a peri
od of not less than 60 months. The taxpayer may elect this alternative not late
r than April 15 of each taxable year.
Limitations on Deduction
The following are not allowed as R&D expenses:
1. Any expenditure for the acquisition or improvement of land or the improvement
of depreciable property.
2. Any expenditure incurred in ascertaining the existence, location, extent, or
quality of any deposit of ore or other mineral, including oil or gas.
Premium Payments on Health and/or Hospitalization Insurance of an Individual Tax
payer
The amount of premiums not to exceed P2,400 per family or P200 a month paid duri
ng the taxable year for health and/or hospitalization insurance taken by the tax
payer for himself or his family, shall be allowed as a deduction from his gross
income provided the gross family income for the taxable year is not more than P2
50,000.
Requisites for Deductibility
1. The taxpayer must be an individual, whether a compensation earner or engaged
in trade or business.
2. The premium payments is for health and/or hospitalization insurance of the ta
xpayer or his family.
3. The taxpayer s gross family income is not more than P250,000.
In the case of married taxpayers, only the spouse claiming the additional exempt
ion for dependents shall be entitled to this deduction.

TREATMENT OF FOREIGN INCOME TAX


Legal Basis Sec 34(C)
A taxpayer has the option to claim foreign income tax either as:
1. Tax Credit
2. Deduction from Gross Income
Deduction from Gross Income
If the taxpayer elects to claim the foreign income tax as a deduction from gross
income, the foreign income tax is included among the itemized deductions. Such
deduction is not subject to any limitation.
Tax Credit
Once the foreign income tax is claimed as a tax credit, it cannot anymore be cla
imed as a deduction from gross income and vice versa.
Tax Credit is amount of income tax paid or incurred to any foreign country allow
ed to be subtracted from the Philippine income tax due from the taxpayer. It is
a remedy against international double taxation.
Who may claim Tax Credit
Only those persons whose income from within and without the Philippines may clai
m tax credit:-
1. Resident Citizens (RC)
2. Domestic Corporations (DC)
3. Members of General Professional Partnership (GPP)
4. Beneficiary of an estate or trust
Who may not claim Tax Credit
1. Non-resident Citizens (NRC)
2. Resident Alien (RA)
3. Resident Foreign Corporation (RFC)
4. Non-resident Foreign Corporation (NRFC)
Amount of Tax Credit
The amount of tax credit allowed is equivalent to the tax paid or incurred to a
foreign country during the taxable year but not to exceed the following limits:
1. The amount of tax credit shall not exceed the same proportion of the tax agai
nst which such credit is taken, which the taxpayer's taxable income from sources
within such country bears to his entire taxable income for the same taxable yea
r; and
2. The total amount of the credit shall not exceed the same proportion of the ta
x against which such credit is taken, which the taxpayer's taxable income from s
ources without the Philippines taxable bears to his entire taxable income for th
e same taxable year.
In formula format, the limitations are as follows:
1. Taxable Income per Foreign Country x Philippine income tax = limit
Worldwide Taxable Income
2. Taxable Income for all Foreign Countries x Philippine income tax = limit
Worldwide Taxable Income
If there is only one foreign country involved, the first formula is used. If th
ere are two or more foreign countries are involved, both formulae are computed,
in which case the lower of the two limits is used as the amount of tax credit.

NON-DEDUCTIBLE EXPENSES
Legal Basis Sec 36
In General
In computing net income, no deduction shall be allowed in respect to:-
1. Personal, living or family expenses because not related to conduct of trade o
r business
2. Capital Expenditures amount paid for buildings or improvements made to increa
se the value of property.
3. Major Repairs amount spent in restoring property for which depreciation allowa
nce has been made
4. Premiums paid on any life insurance policy covering the life of any officer,
employee, or person financially interested in the trade or business carried on b
y the taxpayer, when the taxpayer is directly or indirectly a beneficiary under
such policy.
Case 1
Insured officer, employee, owner, stockholder, or other financially-interested p
erson
Beneficiary company
The premium is a non-deductible expense. [Sec 36]
Case 2
Insured officer, employee, owner, stockholder, or other financially-interested p
erson
Beneficiary officer, employee, owner, stockholder, or other financially-interest
ed person
The premium is a deductible expense. The premium is likewise a fringe benefit o
n the part of the beneficiary.
COMPUTATION OF INDIVIDUAL INCOME TAX
1. For Pure Compensation Income Earners
Gross Compensation Income
Less: Premium Payments for Health and Hospitalization Insurance
Net Income
Less: Personal and Additional Exemptions X
Taxable Income
Multiplied by: Tax Rate (Schedular Rates)
-
Income Tax Payable
2. For Business or Professional Income Earners
Gross Compensation Income
Less: Itemized Deductions or Optional Standard Deduction -
Net Income
Less: Personal and Additional Exemptions
-
Taxable Income
Multiplied by: Tax Rate (Schedular Rates)
-
Income Tax Payable

LOSSES FROM WASH SALES


Legal Basis Sec 38
Wash sale is a sale of stocks or securities at a loss, whereby the seller acquir
ed by purchase or exchange substantially identical stocks or securities within t
he 61-day period (within 30 days before or 30 days after) of such sale.
Requisites of a Wash Sale
1. The sale of stocks or securities is at a loss.
2. Within 30 days before or after such sale, the seller acquired by purchase or
exchange substantially identical stocks or securities.
3. The seller is not a dealer in stocks or securities.
The 61-day Period. The acquisition of stocks or securities within the 30 day-pe
riod before or after the date of sale is determinative of whether the sale is a
wash sale.
30 days before Date of Sale 30 days after
--------------------------------------- x --------------------------------------
--
Effects of Wash Sale Loss
1. The loss from a wash sale is not deductible.
2. If substantially identical shares are acquired within the 30-day period after
the date of sale, the loss from wash sale is added to the cost of the shares ac
quired. Hence, the loss from wash sale has the effect of increasing the cost of
reacquired shares.

ORDINARY GAINS AND LOSSES


Legal Basis Sec 40
The sale of property may result in a gain or a loss. The law provides that the
gain or loss be recognized.
Computation of Gain or Loss
1. The gain from the sale or other disposition of property shall be the excess o
f the amount realized therefrom over the basis.
2. The loss shall be the excess of the basis over the amount realized from such
sale or other disposition.
3. The amount realized from the sale or other disposition of property shall be t
he sum of money received plus the fair market value of the property (other than
money) received.
Amount Realized (Cash received + Fair Market Value [FMV] of property received)
Less: Basis (usually the Cost of Acquisition of Property)
Gain (or Loss, if basis is greater than amount realized)
Basis for Determining Gain or Loss from Sale or Disposition of Property
The basis of property shall be:-
1. The cost, if such property was acquired by purchase
2. The fair market value (FMV) as of the date of acquisition, if property was ac
quired by inheritance
3. If the property was acquired by gift, the basis shall be the same as if it wo
uld be in the hands of the donor
4. If the property was acquired for inadequate consideration, the basis is the a
mount paid by the transferee for the property
Exchange of Property
General Rule: Upon the exchange or property, the entire amount of the gain or lo
ss shall be recognized.
Exception: No gain or loss shall be recognized if in pursuance of a plan of mer
ger or consolidation, property is exchanged solely for shares of stock (asset-fo
r-stock swap).
Losses from Sales or Exchanges of Property
In computing net income, no deductions shall be allowed in respect of losses fro
m sales or exchanges of property directly or indirectly:-
1. Between members of a family, which shall include only his brothers and sister
s (whole or half-blood), spouse, ancestors, and lineal descendants
2. Between an individual and a corporation more than 50% in value of the outstan
ding stock of which is owned, directly or indirectly, by or for such individual
(major stockholder)
3. Between two corporations more than 50% in value of the outstanding stock of w
hich is owned, directly or indirectly, by or for the same individual (common maj
or stockholder)
4. Between the grantor and a fiduciary of any trust
5. Between the fiduciary of a trust and the fiduciary of another trust if the sa
me person is a grantor with respect to each trust (common grantor)
6. Between a fiduciary of a trust and beneficiary of such trust.

CAPITAL GAINS AND LOSSES


Legal Basis Sec 39
Definitions
Capital Assets property held by the taxpayer (whether or not connected with his
trade or business), but does not include:
1. stock in trade of the taxpayer
2. other property of a kind which would properly be included in the inventory of
the taxpayer
3. property held primarily for sale to customers in the ordinary course of trade
or business
4. property used in the trade or business, of a character which is subject to th
e allowance for depreciation
5. real property used in trade or business of the taxpayer
Examples are personal or non-business properties (family car), property held for
investment, and other property not used in business (vacant lot).
Ordinary Asset those not considered capital assets and includes:
1. stock in trade of the taxpayer
2. other property of a kind which would properly be included in the inventory of
the taxpayer
3. property held primarily for sale to customers in the ordinary course of his t
rade or business
4. property used in the trade or business, of a character which is subject to th
e allowance for depreciation
5. real property used in trade or business of the taxpayer
Net Capital Gain the excess of the gains from sales or exchanges of capital asse
ts over the losses from such sales or exchanges
Net Capital Loss means the excess of the losses from sales or exchanges of capit
al assets over the gains from such sales or exchanges
Holding Period The length of time the asset was held by the taxpayer
Percentage of Gain or Loss to be Taken Into Account
Ordinary Asset Gains are taxable in full (100%) and losses are deductible in ful
l (100%).
Capital Asset It depends on whether the taxpayer is an individual or a corporati
on.
Individual
100% of the capital gain or loss, if holding period for the capital asset is not
more than 12 months
50% of the capital gain or loss, if holding period for the capital asset is more
than 12 months
Corporation
100% of the capital gain or loss, regardless of the holding period
Limitation on Capital Losses
Losses from sales or exchanges of capital assets shall be allowed only to the ex
tent of the gains from such sales or exchanges.
If a bank or trust company incorporated under the laws of the Philippines, a sub
stantial part of whose business is the receipt of deposits or the sale of bond,
debenture, note, certificate or other evidence of indebtedness, any loss resulti
ng from such sale shall not be subject to the foregoing limitation and shall not
be included in determining the applicability of such limitation to other losses
. The reason is that the securities mentioned are ordinary assets of the bank o
r trust company.
Net Capital Loss Carry-over
If an individual taxpayer sustains a net capital loss in a taxable year, such lo
ss shall be treated in the succeeding taxable year as a loss from the sale or ex
change of a capital asset held for not more than 12 months (50% deduction). Not
e that corporations cannot carry-over net capital loss.
Summary of Rules for Corporations
1. Corporations shall recognize 100% of the capital gain or loss, regardless of
the holding period.
2. Corporations cannot carry-over net capital loss.
3. Losses from sales or exchanges of capital assets shall be allowed only to the
extent of the gains from such sales or exchanges.
Gains or Losses From Short Sales
1. Gains or losses from short sales of property shall be considered as gains or
losses from sales or exchanges of capital assets. (A short sale is the sale of
shares of stock which are not yet owned by the seller. For example, the seller
anticipates a drop in the price of SMC shares. Even though he doesn t own SMC sh
ares, he sells them to the buyer. When the price of SMC shares go down, he buys
them and delivers them to the buyer. In the process, he makes a neat profit. A
short sale is usually done through the stock exchange, where the seller can tak
e advantage of the lag in settlement of transactions.)
2. Gains or losses attributable to the failure to exercise privileges or options
to buy or sell property shall be considered as capital gains or losses.

INSTALLMENT METHOD
Legal Basis Sec 49
Sales in Which Income May be Reported in Installments
1. Sales of Dealers in Personal Property
A dealer or a person who regularly sells personal property on the installment pl
an may report as income in any taxable year that proportion of the installment p
ayments actually received in that year, which the gross profit realized bears to
the total contract price.
Formula: Total Gross Profit x Amount of Installment = Income fo
r Taxable Year
Total Contract Price
2. Casual Sales of Personality
Persons who make a casual sale of personal property under the following conditio
ns:
a. selling price exceeds P1,000
b. initial payments do not exceed 25% of the selling price
3. Sale of Real Property
The sale of real property where the initial payments do not exceed 25% of the se
lling price.
* The term "initial payments" means all the payments received during the taxable
year. It does not refer to the first payment or downpayment only.
GLOSSARY OF TERMS IN SECTION 22
corporation
an
person
includes:
individual, a trust, estate or corporation
6. partnerships, no matter how created or organized
7. joint-stock companies
8. joint accounts (cuentas en participacion)
9. association
10. insurance companies
does not include:
3. general professional partnerships (partnerships formed by persons for the sol
e purpose of exercising their common profession, no part of the income of which
is derived from engaging in any trade or business)
4. joint venture or consortium formed for the purpose of undertaking constructio
n projects or engaging in petroleum, coal, geothermal and other energy operation
s pursuant to an operating consortium agreement under a service contract with th
e Government.
when
domestic
applied to a corporation, means created or organized in the Philippines or
underAapplied
when
foreign
non-resident
(1) its laws.
citizen toofathe
citizen
corporation,
(NRC)
Philippines means
who establishes
a corporationthewhich
factisofnot
hisdomestic.
physical presen
ce abroad with a definite intention to reside therein.
(2) A citizen of the Philippines who leaves the Philippines during the taxable y
ear to reside abroad, either as an immigrant or for employment on a permanent ba
sis.
(3) A citizen of the Philippines who works and derives income from abroad and wh
ose employment thereat requires him to be physically present abroad most of the
time during the taxable year.
(4) A citizen who has been previously considered as nonresident citizen and who
arrives in the Philippines at any time during the taxable year to reside permane
ntly in the Philippines shall likewise be treated as a nonresident citizen for t
he taxable year in which he arrives in the Philippines with respect to his incom
e derivedalien
resident from (RA)
sources abroad until the date of his arrival in the Philippines.
an individual whose residence is within the Philippines and who is not a citizen
non-resident
thereof. alien (NRA)
an individual whose residence is not within the Philippines and who is not a cit
izen
aresident
fiduciary
foreign
guardian,
thereof.
foreign
corporation
trustee,
corporation
executor,
not engaged
(RFC)
administrator,
in trade or receiver,
business within
conservator
the Philippines.
or any perso
n acting
withholding
any
shares
person
ofinstock
required
any fiduciary
agent to deduct
capacity
and withhold
for any any
person.
tax under Section 57.
include shares of stock of a corporation, warrants and/or options to purchase sh
ares of stock, as well as units of participation in a partnership (except genera
l professional partnerships), joint stock companies, joint accounts, joint ventu
res taxable as corporations, associations and recreation or amusement clubs (suc
h asperson
include
shareholder
any
taxpayer
taxable
golf,
holders
yearpolo of
subject
or to
similar
shares
tax imposed
ofclubs),
stockbyas
andthis
defined
mutual
Title.
fund certificates.
above
the calendar year, or the fiscal year ending during such calendar year, upon the
fiscal
basis year
of which the net income is computed
an accounting period of twelve (12) months ending on the last day of any month o
ther
paidthan
or incurred
December.and paid or accrued
construed according to the method of accounting upon the basis of which the net
incomeoristhe
trade
includes
securitiesbusiness
computed
performance
under of
thistheTitle.
functions of a public office
shares of stock in a corporation and rights to subscribe for or to receive such
shares. It also includes bonds, debentures, notes or certificates, or other evid
ence or indebtedness, issued by any corporation, including those issued by a gov
ernment or political subdivision thereof, with interest coupons or in registered
dealer
form. in securities
a merchant of stocks or securities, whether an individual, partnership or corpor
ation, with an established place of business, regularly engaged in the purchase
of securities and the resale thereof to customers
one who, as a merchant, buys securities and re-sells them to customers with a vi
ew to the gains and profits that may be derived therefrom.
bank
every banking institution, as defined in General Banking Law. A bank may either
be a commercial bank, a thrift bank, a development bank, a rural bank or special
ized government
non-bank financialbank.
intermediary
a financial intermediary, as defined in General Banking Law, authorized by the B
angko Sentral activities
quasi-banking ng Pilipinas (BSP) to perform quasi-banking activities.
borrowing funds from twenty (20) or more personal or corporate lenders at any on
e time, through the issuance, endorsement, or acceptance of debt instruments of
any kind other than deposits for the borrower's own account, or through the issu
ance of certificates of assignment or similar instruments, with recourse, or of
repurchase agreements for purposes of relending or purchasing receivables and ot
her similar obligations: Provided, however, That commercial, industrial and othe
r non-financial companies, which borrow funds through any of these means for the
limited purpose of financing their own needs or the needs of their agents or de
alers, shall
deposit substitutes
not be considered as performing quasi-banking functions.
shall mean an alternative from of obtaining funds from the public (the term 'pub
lic' means borrowing from twenty (20) or more individual or corporate lenders at
any one time) other than deposits, through the issuance, endorsement, or accept
ance of debt instruments for the borrowers own account, for the purpose of relen
ding or purchasing of receivables and other obligations, or financing their own
needs or the needs of their agent or dealer. These instruments may include, but
need not be limited to bankers' acceptances, promissory notes, repurchase agreem
ents, including reverse repurchase agreements entered into by and between the Ba
ngko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of a
ssignment or participation and similar instruments with recourse: Provided, howe
ver, That debt instruments issued for interbank call loans with maturity of not
more than five (5) days to cover deficiency in reserves against deposit liabilit
ies, including those between or among banks and quasi-banks, shall not be consid
ered as deposit
ordinary income substitute debt instruments.
any gain from the sale or exchange of property which is not a capital asset or p
roperty described in Section 39(A)(1). Any gain from the sale or exchange of pro
perty which is treated or considered, under other provisions of this Title, as '
ordinary income' shall be treated as gain from the sale or exchange of property
which is not a capital asset as defined in Section 39(A)(1). The term 'ordinary
loss' includes any loss from the sale or exchange of property which is not a cap
ital asset. Any loss from the sale or exchange of property which is treated or c
onsidered, under other provisions of this Title, as 'ordinary loss' shall be tre
atedemployees
rank
all as loss
and filefrom
employees
who the holding
are sale or neither
exchangemanagerial
of propertynorwhich
supervisory
is not aposition
capital as
asset.
def
ined under
mutual fundexisting
company provisions of the Labor Code of the Philippines, as amended.
an open-end and close-end investment company as defined under the Investment Com
pany Act.
trade, business or profession
shall
aregional
branch
notestablished
orinclude
area headquarters
performance
in the Philippines
of servicesbybymultinational
(RAHQ) the taxpayercompanies
as an employee.
and which hea
dquarters do not earn or derive income from the Philippines and which act as sup
ervisory, communications and coordinating center for their affiliates, subsidiar
ies, or branches
regional operatinginheadquarters
the Asia-Pacific
(ROHQ)Region and other foreign markets.
a branch established in the Philippines by multinational companies which are eng
aged in any of the following services:
1. general administration and planning
2. business planning and coordination
3. sourcing and procurement of raw materials and components
4. corporate finance advisory services
5. marketing control and sales promotion
6. training and personnel management
7. logistic services
8. research and development services and product development
9. technical support and maintenance
10. data processing and communications
11. business
long-term deposit
development.
or investment certificates (LTDIC)
certificate of time deposit or investment in the form of savings, common or indi
vidual trust funds, deposit substitutes, investment management accounts and othe
r investments with a maturity period of not less than five (5) years, the form o
f which shall be prescribed by the BSP and issued by banks only (not by nonbank
financial intermediaries and finance companies) to individuals in denominations
of P10,000 and other denominations as may be prescribed by the BSP.
Sources:
Llamado and San Diego, Philippine Income Tax.
De Leon, The Fundamentals of Taxation.
Acknowledgements:
Thank you to Ron Morgia, CPA and Ronald Galura of the UP Pan Xenia Fraternity, C
ollege of Business Administration, for their valuable inputs.
Prepared by
Rudyard S. Arbolado
2004E UP Law
0917-4894205
??
??
??
??
INCOME TAX REVIEWER 1
UP LSG BAR OPS 2003

Bar Operations 2003, Law Student Government, College of Law, University of the P
hilippines
All Rights Reserved, 2003.