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CHAPTER VI - COMPUTATION OF GROSS INCOME term or at the maturity of the term mentioned in the contract or upon

surrender of the contract.


Section 32. Gross Income. -
(3) Gifts, Bequests, and Devises. _ The value of property acquired
(A) General Definition. - Except when otherwise provided in this Title, by gift, bequest, devise, or descent: Provided, however, That income from
gross income means all income derived from whatever source, including such property, as well as gift, bequest, devise or descent of income from
(but not limited to) the following items: any property, in cases of transfers of divided interest, shall be included in
gross income.
(1) Compensation for services in whatever form paid, including,
but not limited to fees, salaries, wages, commissions, and similar items; (4) Compensation for Injuries or Sickness. - amounts received,
through Accident or Health Insurance or under Workmen's Compensation
Acts, as compensation for personal injuries or sickness, plus the amounts
(2) Gross income derived from the conduct of trade or business or of any damages received, whether by suit or agreement, on account of
the exercise of a profession; such injuries or sickness.

(3) Gains derived from dealings in property; (5) Income Exempt under Treaty. - Income of any kind, to the
extent required by any treaty obligation binding upon the Government of
(4) Interests; the Philippines.

(5) Rents; (6) Retirement Benefits, Pensions, Gratuities, etc.-

(6) Royalties; (a) Retirement benefits received under Republic Act No.
7641 and those received by officials and employees of private
(7) Dividends; firms, whether individual or corporate, in accordance with a
reasonable private benefit plan maintained by the employer:
Provided, That the retiring official or employee has been in the
(8) Annuities; service of the same employer for at least ten (10) years and is not
less than fifty (50) years of age at the time of his retirement:
(9) Prizes and winnings; Provided, further, That the benefits granted under this
subparagraph shall be availed of by an official or employee only
(10) Pensions; and once. For purposes of this Subsection, the term 'reasonable
private benefit plan' means a pension, gratuity, stock bonus or
profit-sharing plan maintained by an employer for the benefit of
(11) Partner's distributive share from the net income of the some or all of his officials or employees, wherein contributions are
general professional partnership. made by such employer for the officials or employees, or both, for
the purpose of distributing to such officials and employees the
(B) Exclusions from Gross Income. - The following items shall not be earnings and principal of the fund thus accumulated, and wherein
included in gross income and shall be exempt from taxation under this its is provided in said plan that at no time shall any part of the
title: corpus or income of the fund be used for, or be diverted to, any
purpose other than for the exclusive benefit of the said officials
(1) Life Insurance. - The proceeds of life insurance policies paid to and employees.
the heirs or beneficiaries upon the death of the insured, whether in a
single sum or otherwise, but if such amounts are held by the insurer (b) Any amount received by an official or employee or by
under an agreement to pay interest thereon, the interest payments shall his heirs from the employer as a consequence of separation of
be included in gross income. such official or employee from the service of the employer
because of death sickness or other physical disability or for any
(2) Amount Received by Insured as Return of Premium. - The cause beyond the control of the said official or employee.
amount received by the insured, as a return of premiums paid by him
under life insurance, endowment, or annuity contracts, either during the
(c) The provisions of any existing law to the contrary competitions and tournaments whether held in the Philippines or
notwithstanding, social security benefits, retirement gratuities, abroad and sanctioned by their national sports associations.
pensions and other similar benefits received by resident or
nonresident citizens of the Philippines or aliens who come to (e) 13th Month Pay and Other Benefits. - Gross benefits
reside permanently in the Philippines from foreign government received by officials and employees of public and private entities:
agencies and other institutions, private or public. Provided, however, That the total exclusion under this
subparagraph shall not exceed Thirty thousand pesos (P30,000)
(d) Payments of benefits due or to become due to any which shall cover:
person residing in the Philippines under the laws of the United
States administered by the United States Veterans Administration. (i) Benefits received by officials and employees of
the national and local government pursuant to Republic
(e) Benefits received from or enjoyed under the Social Act No. 6686;
Security System in accordance with the provisions of Republic Act
No. 8282. (ii) Benefits received by employees pursuant to
Presidential Decree No. 851, as amended by
(f) Benefits received from the GSIS under Republic Act Memorandum Order No. 28, dated August 13, 1986;
No. 8291, including retirement gratuity received by government
officials and employees. (iii) Benefits received by officials and employees
not covered by Presidential decree No. 851, as
(7) Miscellaneous Items. amended by Memorandum Order No. 28, dated
August 13, 1986; and
(a) Income Derived by Foreign Government. - Income
derived from investments in the Philippines in loans, stocks, bonds (iv) Other benefits such as productivity incentives
or other domestic securities, or from interest on deposits in banks and Christmas bonus: Provided, further, That the
in the Philippines by (i) foreign governments, (ii) financing ceiling of Thirty thousand pesos (P30,000) may be
institutions owned, controlled, or enjoying refinancing from increased through rules and regulations issued by
foreign governments, and (iii) international or regional financial the Secretary of Finance, upon recommendation of
institutions established by foreign governments. the Commissioner, after considering among
others, the effect on the same of the inflation rate
(b) Income Derived by the Government or its Political at the end of the taxable year.
Subdivisions. - Income derived from any public utility or from the
exercise of any essential governmental function accruing to the (f) GSIS, SSS, Medicare and Other Contributions. - GSIS,
Government of the Philippines or to any political subdivision SSS, Medicare and Pag-ibig contributions, and union dues of
thereof. individuals.

(c) Prizes and Awards. - Prizes and awards made primarily (g) Gains from the Sale of Bonds, Debentures or other
in recognition of religious, charitable, scientific, educational, Certificate of Indebtedness. - Gains realized from the same or
artistic, literary, or civic achievement but only if: exchange or retirement of bonds, debentures or other certificate
of indebtedness with a maturity of more than five (5) years.
(i) The recipient was selected without any action
on his part to enter the contest or proceeding; and (h) Gains from Redemption of Shares in Mutual Fund. -
Gains realized by the investor upon redemption of shares of stock
(ii) The recipient is not required to render in a mutual fund company as defined in Section 22 (BB) of this
substantial future services as a condition to receiving the Code.
prize or award.
GROSS INCOME v. NET INCOME v. TAXABLE INCOME
(d) Prizes and Awards in sports Competition. - All prizes
and awards granted to athletes in local and international sports CHAPTER V - COMPUTATION OF TAXABLE INCOME
Section 31. Taxable Income Defined. - The term taxable income means (7) Expenses for foreign travel;
the pertinent items of gross income specified in this Code, less the
deductions and/or personal and additional exemptions, if any, authorized (8) Holiday and vacation expenses;
for such types of income by this Code or other special laws.
(9) Educational assistance to the employee or his
COMPENSATION INCOME dependents; and

(1) Compensation for services in whatever form paid, including, but not (10) Life or health insurance and other non-life insurance
limited to fees, salaries, wages, commissions, and similar items; premiums or similar amounts in excess of what the law
allows.
SECTION 2.78. Withholding Tax on Compensation. The withholding of
tax on compensation income is a method of collecting the income tax at (C) Fringe Benefits Not Taxable. - The following fringe benefits are
source upon receipt of the income. It applies to all employed individuals not taxable under this Section:
whether citizens or aliens, deriving income from compensation for
services rendered in the Philippines. The employer is constituted as the
withholding agen (1) fringe benefits which are authorized and exempted
from tax under special laws;
The convenience of employer test mandates that any employee expenses
paid for by the employer must be solely for the convenience of the (2) Contributions of the employer for the benefit of the
employer, and must be incurred on the employer's premises if applicable. employee to retirement, insurance and hospitalization
If this is the case, then those expenses are not included in the employee's benefit plans;
income.
(3) Benefits given to the rank and file employees, whether
granted under a collective bargaining agreement or not;
and
FRINGE BENEFITS
(4) De minimis benefits as defined in the rules and
(B) Fringe Benefit defined. - For purposes of this Section, the term regulations to be promulgated by the Secretary of
'fringe benefit' means any good, service or other benefit furnished Finance, upon recommendation of the Commissioner.
or granted in cash or in kind by an employer to an individual
employee (except rank and file employees as defined herein) such
as, but not limited to, the following: The Secretary of Finance is hereby authorized to promulgate,
upon recommendation of the Commissioner, such rules and
regulations as are necessary to carry out efficiently and fairly the
(1) Housing; provisions of this Section, taking into account the peculiar nature
and special need of the trade, business or profession of the
(2) Expense account; employer

(3) Vehicle of any kind; DE MINIMIS BENEFITS

(4) Household personnel, such as maid, driver and others; REVENUE REGULATIONS NO. 3-98

(5) Interest on loan at less than market rate to the extent (May 21, 1998)
of the difference between the market rate and actual rate
granted; FRINGE BENEFITS TAX

(6) Membership fees, dues and other expenses borne by


the employer for the employee in social and athletic clubs
or other similar organizations;
These regulations govern the collection at source of the tax on fringe
benefits which have been furnished, granted or paid by the employer
beginning January 1, 1998. business in the Philippines

A final withholding tax called the Fringe Benefits Tax (FBT) is imposed on
the grossed-up monetary value of fringe benefit furnished, granted or paid
by an employer to an employee who is holding a managerialAlien or employed by
supervisory position. The FBT will be imposed regardless of whether such
employer is an individual, professional partnership or a corporation, regional
or or area headquarters
that the corporation is taxable or not, or the employer is the Philippine
representative office
government or one of its instrumentalities.
regional operating headquarters
Only fringe benefits given or furnished to managerial or supervisory
employees are subject to FBT. For this purpose, the term "managerial foreign service contractor/subcontractor
employees" refers to those who are vested with powers or prerogatives to
lay down and execute management policies and/or to hire, transfer, 85%
engaged in petroleum operations
suspend, lay-off, recall, discharge, assign or discipline
employees. "Supervisory employees" are those who effectively 15%
recommend such managerial actions if the exercise of such authority is
not merely routinary or clerical in nature but requires the use of individual employees who are employed
Filipino
independent judgment. "Rank and file employees" means all employees
who are holding neither managerial nor supervisory position.
and occupying the same position as those

Fringe benefits which have been paid prior to January 1, 1998 shall not be
occupied or held by the alien employees in the 85%
subject to FBT.

entities listed above 15%

FBT rates Fringe benefits received by employees in special economic zones are also
covered by these regulations. The FBT rate to be applied would be
In general, the fringe benefit tax rate is 34% in 1998, 33% in 1999 and governed by the same rules discussed above. Thus, if the fringe benefit is
32% in year 2000 and thereafter. The grossed-up monetary value of the given to employees of a representative office located in the zone, the FBT
fringe benefit is determined by dividing the monetary value of the fringe rate is 15%. On the other hand, if the company providing the benefits is a
benefit by 66% in 1998; 67% in 1999 and 68% beginning January 1, 2000. regular company, the normal rate of FBT will apply.

Fringe benefits refer to goods, services or other benefits furnished or


Fringe benefits given to certain managerial and supervisory employees are granted by an employer in cash or in kind, in addition to basic salaries, to
taxed at preferential rates, viz: managerial or supervisory employees such as, but not limited to the
following:

FBT Gross-up
Rate Factor o Housing;
o Expense account;

o Vehicle of any kind;


l who is not engaged in trade or 75%
o Household personnel, such as maid, driver and others;
25%
o Interest on loan at less than market rate to the extent of o Monetized unused vacation leave credits of employees not
the difference between the market rate and actual rate exceeding ten (10) days during the year;
granted; o Medical allowance for employees dependents not
exceeding P125 per month;
o Membership fees, dues and other expenses borne by the
employer for the employee in social and athletic clubs or o Rice subsidy of P350
other similar organizations;
o Uniform allowance
o Expenses for foreign travel;
o Medical benefits
o Holiday and vacation expenses;
o Laundry allowance of P150 per month
o Educational assistance to the employee or his dependents;
and o Employee achievement awards in the form of a tangible
property, with an annual monetary value not exceeding
o Life or health insurance and other non-life insurance of the basic salary of employee;
premiums or similar amounts in excess of what the law
allows. o Christmas and major anniversary celebration for
employees and their guests;
However, the following benefits are not covered by the FBT.
o Company picnics and sports tournaments in the
Philippines exclusively participated in by employees
a. Fringe benefits which are authorized and exempted from
income tax under the Code or under special law. o Flowers, fruits or similar items given under special
Separation benefits which are given to employees who are
circumstances, e.g. illness, marriage, etc.
involuntarily separated from work are not subject to FBT.
b. Contributions of the employer for the benefit of the
employee to retirement, insurance and hospitalization In addition, the following fringe benefits are also not subject to FBT
benefit plans; because they are necessary to the business of the employer, or granted for
the convenience of the employer:
c. Benefits given to the rank and file, whether granted under
a collective bargaining agreement or not; o Housing privilege of military officials of the AFP located
inside or near the military camps.
d. De minimis benefits o A housing unit which is situated inside or at most 50
meters from the perimeter of the business premises.
e. Benefits granted to employee as required by the nature of,
or necessary to the trade, business or profession of the
o Temporary housing for an employee for 3 months or less.
employer
o Expenses of the employee which are reimbursed by the
f. Benefits granted for the convenience of the employer
employer if they are supported by receipts in the name of
the employer and do not partake the nature of a personal
Although the benefit may be exempt from FBT, it may, however, still form expense of the employee.
part of the employees gross compensation income which is subject to
income tax, which is required to be covered by the withholding tax on o Motor vehicles used for sales, freight, delivery service and
wages. other non-personal uses

"De minimis" benefits refer to facilities or privileges furnished or offered o The use of aircraft (including helicopters) owned and
by an employer to his employees that are of relatively small value and are maintained by the employer
offered or furnished by the employer merely as a means of promoting the
health, goodwill, contentment or efficiency of his employees, such as the o Business expenses which are paid for by the employer for
following: the foreign travel of his employees in connection with
business meetings or conventions. The expenses should be fringe benefit shall be fifty percent (50%) of the value of
supported by documents proving the actual occurrences of the benefit.
the meetings/conventions, or official communications from
business associates If the employer purchases property on installment basis
and allows it to be used by its employee, the annual value
of the benefit shall be five percent (5%) of the acquisition
cost of the property, exclusive of interest. The monetary
Valuation of Benefits value of fringe benefit shall be fifty percent (50%) of the
value of the benefit.
The computation of the fringe benefits tax would entail valuation of the
benefit granted and determination of the proportion or percentage of the If the employer purchases a residential property and
benefit which is subject to the FBT. In cases where the fringe benefits transfers ownership thereof in the name of the employee,
entail joint benefits to the employer and employee, the portion which shall its monetary value is equal to the full amount of the
be subject to the FBT and the guidelines for the valuation of fringe acquisition cost or zonal value as determined by the BIR,
benefits are defined below. whichever is higher. In case the property is sold to the
employee at a price less than the acquisition cost, the
difference between the fair market value or zonal value,
In general, the valuation of fringe benefits shall be as follows: whichever is higher, and the cost of the property to the
employee will be the basis for FBT.
1. If benefit is granted in money or is paid directly paid for
by employer, then the value is the amount granted or paid b. Motor Vehicle
for.
2. If the employer gave the employee a property and the title
to the property is placed under his name, the fair market If the employer purchases the motor vehicle in the name
value of the property will be considered as the monetary of the employee, the acquisition price will be the value of
value of the fringe benefit. the benefit. The monetary value of the fringe benefit shall
be the entire value of the benefit, regardless of whether
3. However, if the employee is only allowed to use the the motor vehicle is used by the employee partly for his
property, and the title to the property remains with the personal purpose and partly for the benefit of the
employer, the monetary value of the benefit is equal to the employer.
depreciation value of the property.
If the employer pays for the car on installment basis and
Certain guidelines are set for the valuation and determination of the ownership of the car is placed in the name of the
monetary value of specific types of benefits. employee, the value of the benefit shall be the acquisition
cost exclusive of interest, divided by five (5) years. The
monetary value shall be the entire value of the benefit.
a. Housing

If instead of buying the car directly, the employer gave the


If employer leases a residential property for the use of his employee money to purchase the car, whether the full
employee, the value of the benefit shall be the amount of amount or just a portion of the price, the cash received by
rental paid by the employer, as evidenced by the lease the employee will be used as basis for FBT. However, the
contract. The monetary value shall be equal to fifty subsidy given by the employer is not subject to FBT if it
percent (50%) of the value of the benefit. was declared as part of the employees taxable
compensation income subject to withholding tax.
If the property provided for the use of the employee
belongs to his employer, the annual value of the benefit If the employer owns and maintains, or leases a fleet of
shall be equal to 5% of the market value of the land and motor vehicles for the use of the business and employees,
improvement as declared in the Real Property Tax the value of the benefit is equal to the acquisition cost of
Declaration Form or zonal value thereof as determined by all motor vehicles not normally used for sales, freight,
the BIR, whichever is higher. The monetary value of the delivery service and other non-personal use divided by five
(5) years. The monetary value shall be fifty percent (50%) employee and the rate of 12% shall be treated as taxable
of the value of the benefit. fringe benefit.

The use by the employee of the yacht owned or being This rule will apply to installment payments or loans with
leased by his employer is subject to FBT and the value of interest rate lower than 12% starting January 1, 1998.
the benefit is measures based on the depreciation of the
yacht at an estimated useful life of 20 years. f. Educational support

c. Foreign business travel The cost of the educational assistance to the employee
which are borne by the employer shall be treated as
If employee is given a first class airplane ticket, the taxable fringe benefit.
monetary value of the benefit is equal to 30% of the cost
of the first class airplane ticket. However, if the employer granted a scholarship to the
employee for an education or study which is directly
The full amount of the travelling expenses of the family connected with the employers business, it is not subject
members of the employee which are paid for by the to FBT if there is a written contract between them that the
employer is subject to FBT. employee is under obligation to remain in the employ of
the employer for a period of time that they have mutually
agreed upon.

d. Expense account The cost of educational assistance extended to the


employees dependents is not taxable if such assistance
was provided through a competitive scheme under the
In general, expenses incurred by the employee which are scholarship program of the company.
paid by his employer, and expenses paid for by the
employee but reimbursed by his employer shall be treated
as taxable benefits. However, expenditures which are not g. Insurance
in the nature of a personal expense of the employee are
not subject to FBT provided that these are supported by The cost of life or health insurance and other non-life
receipts in the name of the employer. insurance premiums borne by the employer for his
employee shall be treated as taxable fringe benefits.
Personal expenses of the employee paid for or reimbursed
by the employer are subject to FBT, even if the same are However, the cost of life or health insurance borne by the
duly receipted in the name of the employer. employer if made under the SSS or GSIS or similar
contributions arising from the provisions of any other
Representations and transportation allowances which are existing law is not taxable. Likewise, the cost of premiums
fixed in amounts and regularly received by the employee borne by the employer for the group insurance of his
as part of their monthly compensation income will be employees is not subject to FBT.
considered as taxable compensation income.
Payment of FBT
e. Loans Extended by Employers
The FBT is treated as a final income tax on the employee which is
If the employer lends money to his employee free of required to be withheld and paid by the employer on a calendar quarterly
interest, the interest waived which will be computed at the basis. The FBT return is required to be filed and the FBT withheld paid
rate of 12% is considered as a benefit to the employee. within 25 days from the close of the quarter when withholding was made.

If the loan was given with interest but at a rate lower than De Minimis Benefits
12%, the difference of the interest assumed by the
The BIR exempts de minimis benefits pursuant to Revenue Regulations enjoy higher tax exemption thresholds:
(RR) No. 3-98, as amended. Examples of de minimis benefits include
contributions of the employer for the benefit of the employee to o Rice allowance - from the current P1,000 per month to P1,500
retirement, insurance and hospitalization benefit plans; or certain benefits o Uniform and clothing allowance - from the current P3,000 per year to
given to rank and file, whether granted under a collective bargaining P4,000
agreement or not; or de minimis benefits; or fringe benefits to the
employee which is granted is required by the nature of or necessary to the All other benefits not mentioned above shall be not be considered as de
trade, business or profession of the employer; or such grant of the benefit minimis benefits and shall be subject to withholding tax on compensation
or allowance is for the convenience of the employer. as per Revenue Regulations No. 5-2011 on March 16, 2011 amending
the provisions of Revenue Regulations Nos. 2-98 and 3-98 pertaining to
The BIR sets a limit on the value of tax-exempt de minimis benefits. Under the exemption from income tax from compensation and from fringe
RR 8-00, as amended by RR 10-00, the BIR considers the following as de benefits tax of de minimis benefits.
minimis benefits:
SECTION 1. Section 2.78.1 (A)(3)(e) of RR 2-98, as last amended
*
by RR 5-2008, is hereby further amended to read as follows:
10 days monetized unused vacation leave credits;
*
medical cash allowance to dependents of employees not exceeding P750 "Sec 2.78.1 Withholding Tax on Compensation Income.-
per semester or P125 per month;
(A) . . .
*
actual medical benefits not exceeding P10,000.00;
xxx xxx xxx
*
laundry allowance of P300 per month;
* (3) Facilities and privileges of relatively small value. -
employee achievement awards in the form of tangible personal property
other than cash or gift certificate, with an annual monetary value not xxx xxx xxx
exceeding P10,000 received by the employee under an established written
plan; (e) Uniform and Clothing allowance not exceeding P5,000 per
*
annum;
flowers, fruits, books or similar items given to employees under special
circumstances, e.g. on account of illness, marriage, birth of a baby, etc.;
and xxx xxx xxx
*
daily meal allowance for overtime work not exceeding 25% of the basic SECTION 2. Section 2.33 (C)(e) of RR 3-98, as last amended by RR
minimum wage.
5-2008, is hereby further amended to read as follows:

Effective beginning May 10, 2008, (Revenue Regulations No. 5-2008)


employees receiving the following benefits from their employers shall "Sec 2.33. Special Treatment of Fringe Benefits. -
(10) Pensions; and
xxx xxx xxx
(11) Partner's distributive share from the net income of
(C) Fringe Benefits Not Subject to Fringe Benefit Tax.- the general professional partnership.

INCOME FROM DEALINGS IN PROPERTY


xxx xxx xxx
(3) Gains derived from dealings in property;
(e) Uniform and Clothing allowance not exceeding P5,000 per
CAPITAL ASSET
annum;
(A) General Definition. - Except when otherwise provided in this Title,
gross income means all income derived from whatever source, including
xxx xxx xxx
(but not limited to) the following items:

(1) Compensation for services in whatever form paid, including, but not
limited to fees, salaries, wages, commissions, and similar items;
INCOME FROM BUSINESS
LONG TERM CAPITAL GAIN v. SHORT TERM CAPITAL GAIN
Section 32. Gross Income. -
(B) Percentage Taken into Account. - In the case of a taxpayer, other than
(A) General Definition. - Except when otherwise provided in this a corporation, only the following percentages of the gain or loss
Title, gross income means all income derived from whatever recognized upon the sale or exchange of a capital asset shall be taken into
source, including (but not limited to) the following items: account in computing net capital gain, net capital loss, and net income:

(1) Compensation for services in whatever form paid, (1)One hundred percent (100%) if the capital asset has been held
including, but not limited to fees, salaries, wages, for not more than twelve (12) months; and
commissions, and similar items;
(2)Fifty percent (50%) if the capital asset has been held for more
(2) Gross income derived from the conduct of trade or than twelve (12) months
business or the exercise of a profession;
TYPES of GAINS FROM DEALING IN PROPERTY
(3) Gains derived from dealings in property;
Ordinary Gain v. Capital Gain
(4) Interests;
Section 39. Capital Gains and Losses. -
(5) Rents;
(A) Definitions. - As used in this Title -
(6) Royalties;
(1) Capital Assets. - the term 'capital assets' means
(7) Dividends; property held by the taxpayer (whether or not connected
with his trade or business), but does not include stock in
(8) Annuities; trade of the taxpayer or other property of a kind which
would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year, or
(9) Prizes and winnings;
property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business, any corporation (including those issued by a government or
or property used in the trade or business, of a character political subdivision thereof) with interest coupons or in
which is subject to the allowance for depreciation registered form, shall be considered as amounts received in
provided in Subsection (F) of Section 34; or real property exchange therefor.
used in trade or business of the taxpayer.
(F) Gains or losses from Short Sales, Etc. - For purposes of this
(2) Net Capital Gain. - The term 'net capital gain' means Title -
the excess of the gains from sales or exchanges of capital
assets over the losses from such sales or exchanges. (1) Gains or losses from short sales of property shall be
considered as gains or losses from sales or exchanges of
(3) Net Capital Loss. - The term 'net capital loss' means capital assets; and
the excess of the losses from sales or exchanges of capital
assets over the gains from such sales or exchanges. (2) Gains or losses attributable to the failure to exercise
privileges or options to buy or sell property shall be
(B) Percentage Taken into Account. - In the case of a taxpayer, considered as capital gains or losses.
other than a corporation, only the following percentages of the
gain or loss recognized upon the sale or exchange of a capital TITLE II
asset shall be taken into account in computing net capital gain, TAX ON INCOME
net capital loss, and net income:
CHAPTER I - DEFINITIONS
(1)One hundred percent (100%) if the capital asset has
been held for not more than twelve (12) months; and
Section 22. Definitions - When used in this Title:
(2)Fifty percent (50%) if the capital asset has been held
for more than twelve (12) months; (Z) The term 'ordinary income' includes any gain from the sale or
exchange of property which is not a capital asset or property
described in Section 39(A)(1). Any gain from the sale or exchange
(C) Limitation on Capital Losses. - Losses from sales or exchanges of property which is treated or considered, under other provisions
of capital assets shall be allowed only to the extent of the gains of this Title, as 'ordinary income' shall be treated as gain from the
from such sales or exchanges. If a bank or trust company sale or exchange of property which is not a capital asset as
incorporated under the laws of the Philippines, a substantial part defined in Section 39(A)(1). The term 'ordinary loss' includes any
of whose business is the receipt of deposits, sells any bond, loss from the sale or exchange of property which is not a capital
debenture, note, or certificate or other evidence of indebtedness asset. Any loss from the sale or exchange of property which is
issued by any corporation (including one issued by a government treated or considered, under other provisions of this Title, as
or political subdivision thereof), with interest coupons or in 'ordinary loss' shall be treated as loss from the sale or exchange of
registered form, any loss resulting from such sale shall not be property which is not a capital asset.
subject to the foregoing limitation and shall not be included in
determining the applicability of such limitation to other losses.
Actual v. Presumed Gain
(D) Net Capital Loss Carry-over. - If any taxpayer, other than a
corporation, sustains in any taxable year a net capital loss, such Section 6. Power of the Commissioner to Make assessments and
loss (in an amount not in excess of the net income for such year) Prescribe additional Requirements for Tax Administration and
shall be treated in the succeeding taxable year as a loss from the Enforcement. -
sale or exchange of a capital asset held for not more than twelve
(12) months. (E) Authority of the Commissioner to Prescribe Real Property
Values. - The Commissioner is hereby authorized to divide the
(E) Retirement of Bonds, Etc. - For purposes of this Title, amounts Philippines into different zones or areas and shall, upon
received by the holder upon the retirement of bonds, debentures, consultation with competent appraisers both from the private and
notes or certificates or other evidences of indebtedness issued by public sectors, determine the fair market value of real properties
located in each zone or area. For purposes of computing any
internal revenue tax, the value of the property shall be, whichever portion of the gain presumed to have been realized from
is the higher of; the sale or disposition shall be subject to capital gains tax.
For this purpose, the gross selling price or fair market
(1) the fair market value as determined by the value at the time of sale, whichever is higher, shall be
Commissioner, or multiplied by a fraction which the unutilized amount bears
to the gross selling price in order to determine the taxable
portion and the tax prescribed under paragraph (1) of this
(2) the fair market value as shown in the schedule of Subsection shall be imposed thereon.
values of the Provincial and City Assessors.
CHAPTER IV - TAX ON CORPORATIONS
Section 24. Income Tax Rates.
Section 27. Rates of Income tax on Domestic Corporations.
(D) Capital Gains from Sale of Real Property. -
(D) Rates of Tax on Certain Passive Incomes. -
(1) In General. - The provisions of Section 39(B)
notwithstanding, a final tax of six percent (6%) based on
the gross selling price or current fair market value as (5) Capital Gains Realized from the Sale, Exchange or
determined in accordance with Section 6(E) of this Code, Disposition of Lands and/or Buildings. - A final tax of six
whichever is higher, is hereby imposed upon capital gains percent (6%) is hereby imposed on the gain presumed to
presumed to have been realized from the sale, exchange, have been realized on the sale, exchange or disposition of
or other disposition of real property located in the lands and/or buildings which are not actually used in the
Philippines, classified as capital assets, including pacto de business of a corporation and are treated as capital assets,
retro sales and other forms of conditional sales, by based on the gross selling price of fair market value as
individuals, including estates and trusts: Provided, That determined in accordance with Section 6(E) of this Code,
the tax liability, if any, on gains from sales or other whichever is higher, of such lands and/or buildings.
dispositions of real property to the government or any of
its political subdivisions or agencies or to government- NET CAPITAL GAIN (loss)
owned or controlled corporations shall be determined
either under Section 24 (A) or under this Subsection, at Section 39. Capital Gains and Losses. -
the option of the taxpayer.
(A) Definitions. - As used in this Title -
(2) Exception. - The provisions of paragraph (1) of this
Subsection to the contrary notwithstanding, capital gains
presumed to have been realized from the sale or (1) Capital Assets. - the term 'capital assets' means
disposition of their principal residence by natural persons, property held by the taxpayer (whether or not connected
the proceeds of which is fully utilized in acquiring or with his trade or business), but does not include stock in
constructing a new principal residence within eighteen trade of the taxpayer or other property of a kind which
(18) calendar months from the date of sale or disposition, would properly be included in the inventory of the
shall be exempt from the capital gains tax imposed under taxpayer if on hand at the close of the taxable year, or
this Subsection: Provided, That the historical cost or property held by the taxpayer primarily for sale to
adjusted basis of the real property sold or disposed shall customers in the ordinary course of his trade or business,
be carried over to the new principal residence built or or property used in the trade or business, of a character
acquired: Provided, further, That the Commissioner shall which is subject to the allowance for depreciation
have been duly notified by the taxpayer within thirty (30) provided in Subsection (F) of Section 34; or real property
days from the date of sale or disposition through a used in trade or business of the taxpayer.
prescribed return of his intention to avail of the tax
exemption herein mentioned: Provided, still further, That (2) Net Capital Gain. - The term 'net capital gain' means
the said tax exemption can only be availed of once every the excess of the gains from sales or exchanges of capital
ten (10) years: Provided, finally, that if there is no full assets over the losses from such sales or exchanges.
utilization of the proceeds of sale or disposition, the
(3) Net Capital Loss. - The term 'net capital loss' means where gain or loss is not recognized under paragraph (C)
the excess of the losses from sales or exchanges of capital (2) of this Section.
assets over the gains from such sales or exchanges.
Basis of property exchanged in Corporate Readjustment
SPECIAL RULES PERTAINING TO INCOME/LOSS FROM DEALINGS IN
PROPERTY (B) Basis for Determining Gain or Loss from Sale or Disposition of
Property. - The basis of property shall be -
Computation of the Amount of the Gain (Loss)
(1) The cost thereof in the case of property acquired on or
Section 40. Determination of Amount and Recognition of Gain or Loss. - after March 1, 1913, if such property was acquired by
purchase; or
(A) Computation of Gain or Loss. - The gain from the sale or other
disposition of property shall be the excess of the amount realized (2) The fair market price or value as of the date of
therefrom over the basis or adjusted basis for determining gain, acquisition, if the same was acquired by inheritance; or
and the loss shall be the excess of the basis or adjusted basis for
determining loss over the amount realized. The amount realized
from the sale or other disposition of property shall be the sum of (3) If the property was acquired by gift, the basis shall be
money received plus the fair market value of the property (other the same as if it would be in the hands of the donor or the
than money) received; last preceding owner by whom it was not acquired by gift,
except that if such basis is greater than the fair market
value of the property at the time of the gift then, for the
Basis of the Property Sold purpose of determining loss, the basis shall be such fair
market value; or
(B) Basis for Determining Gain or Loss from Sale or Disposition of
Property. - The basis of property shall be - (4) If the property was acquired for less than an adequate
consideration in money or money's worth, the basis of
(1) The cost thereof in the case of property acquired on or such property is the amount paid by the transferee for the
after March 1, 1913, if such property was acquired by property; or
purchase; or
(5) The basis as defined in paragraph (C)(5) of this
(2) The fair market price or value as of the date of Section, if the property was acquired in a transaction
acquisition, if the same was acquired by inheritance; or where gain or loss is not recognized under paragraph (C)
(2) of this Section.
(3) If the property was acquired by gift, the basis shall be
the same as if it would be in the hands of the donor or the Recognition of Gain/Loss in Exchange of Property
last preceding owner by whom it was not acquired by gift,
except that if such basis is greater than the fair market (1) General Rule. - Except as herein provided, upon the sale or exchange
value of the property at the time of the gift then, for the or property, the entire amount of the gain or loss, as the case may be,
purpose of determining loss, the basis shall be such fair shall be recognized.
market value; or
Exceptions
(4) If the property was acquired for less than an adequate Where no gain/loss shall be recognized
consideration in money or money's worth, the basis of
such property is the amount paid by the transferee for the
property; or (2) Exception. - No gain or loss shall be recognized if in pursuance of a
plan of merger or consolidation -
(5) The basis as defined in paragraph (C)(5) of this
Section, if the property was acquired in a transaction
(a) A corporation, which is a party to a merger or consolidation,
exchanges property solely for stock in a corporation, which is a party to TRANSACTION WHERE GAIN IS RECOGNIZED BUT NOT THE LOSS
the merger or consolidation; or
Exchange Not Solely in Kind
(b) A shareholder exchanges stock in a corporation, which is a party to the
merger or consolidation, solely for the stock of another corporation also a (3) Exchange Not Solely in Kind. -
party to the merger or consolidation; or
(a) If, in connection with an exchange described in the above
(c) A security holder of a corporation, which is a party to the merger or exceptions, an individual, a shareholder, a security holder or a corporation
consolidation, exchanges his securities in such corporation, solely for receives not only stock or securities permitted to be received without the
stock or securities in such corporation, a party to the merger or recognition of gain or loss, but also money and/or property, the gain, if
consolidation. any, but not the loss, shall be recognized but in an amount not in excess of
the sum of the money and fair market value of such other property
No gain or loss shall also be recognized if property is transferred to a received: Provided, That as to the shareholder, if the money and/or other
corporation by a person in exchange for stock or unit of participation in property received has the effect of a distribution of a taxable dividend,
such a corporation of which as a result of such exchange said person, there shall be taxed as dividend to the shareholder an amount of the gain
alone or together with others, not exceeding four (4) persons, gains recognized not in excess of his proportionate share of the undistributed
control of said corporation: Provided, That stocks issued for services shall earnings and profits of the corporation; the remainder, if any, of the gain
not be considered as issued in return for property. recognized shall be treated as a capital gain.

Meaning of Tax-Free Exchange/Merger/Consolidation/De Facto Merger (b) If, in connection with the exchange described in the above
exceptions, the transferor corporation receives not only stock permitted
to be received without the recognition of gain or loss but also money
(6) Definitions. - and/or other property, then (i) if the corporation receiving such money
and/or other property distributes it in pursuance of the plan of merger or
(a) The term 'securities' means bonds and debentures but not 'notes" of consolidation, no gain to the corporation shall be recognized from the
whatever class or duration. exchange, but (ii) if the corporation receiving such other property and/or
money does not distribute it in pursuance of the plan of merger or
(b) The term 'merger' or 'consolidation', when used in this Section, shall consolidation, the gain, if any, but not the loss to the corporation shall be
be understood to mean: (i) the ordinary merger or consolidation, or (ii) recognized but in an amount not in excess of the sum of such money and
the acquisition by one corporation of all or substantially all the properties the fair market value of such other property so received, which is not
of another corporation solely for stock: Provided, That for a transaction to distributed.
be regarded as a merger or consolidation within the purview of this
Section, it must be undertaken for a bona fide business purpose and not (4) Assumption of Liability. -
solely for the purpose of escaping the burden of taxation: Provided,
further, That in determining whether a bona fide business purpose exists, (a) If the taxpayer, in connection with the exchanges described in
each and every step of the transaction shall be considered and the whole the foregoing exceptions, receives stock or securities which would be
transaction or series of transaction shall be treated as a single unit: permitted to be received without the recognition of the gain if it were the
Provided, finally , That in determining whether the property transferred sole consideration, and as part of the consideration, another party to the
constitutes a substantial portion of the property of the transferor, the term exchange assumes a liability of the taxpayer, or acquires from the
'property' shall be taken to include the cash assets of the transferor. taxpayer property, subject to a liability, then such assumption or
acquisition shall not be treated as money and/or other property, and shall
(c) The3term 'control', when used in this Section, shall mean ownership of not prevent the exchange from being within the exceptions.
stocks in a corporation possessing at least fifty-one percent (51%) of the
total voting power of all classes of stocks entitled to vote. (b) If the amount of the liabilities assumed plus the amount of the
liabilities to which the property is subject exceed the total of the adjusted
(d) The Secretary of Finance, upon recommendation of the Commissioner, basis of the property transferred pursuant to such exchange, then such
is hereby authorized to issue rules and regulations for the purpose excess shall be considered as a gain from the sale or exchange of a capital
'substantially all' and for the proper implementation of this Section.
asset or of property which is not a capital asset, as the case may of losses from sales or exchanges of property directly or indirectly
be.1avvphil.et -

Wash sales/compared with short selling (1) Between members of a family. For purposes of this
paragraph, the family of an individual shall include only
Section 38. Losses from Wash Sales of Stock or Securities. - his brothers and sisters (whether by the whole or half-
blood), spouse, ancestors, and lineal descendants; or
(A) In the case of any loss claimed to have been sustained from
any sale or other disposition of shares of stock or securities where (2) Except in the case of distributions in liquidation,
it appears that within a period beginning thirty (30) days before between an individual and corporation more than fifty
the date of such sale or disposition and ending thirty (30) days percent (50%) in value of the outstanding stock of which is
after such date, the taxpayer has acquired (by purchase or by owned, directly or indirectly, by or for such individual; or
exchange upon which the entire amount of gain or loss was
recognized by law), or has entered into a contact or option so to (3) Except in the case of distributions in liquidation,
acquire, substantially identical stock or securities, then no between two corporations more than fifty percent (50%) in
deduction for the loss shall be allowed under Section 34 unless value of the outstanding stock of which is owned, directly
the claim is made by a dealer in stock or securities and with or indirectly, by or for the same individual if either one of
respect to a transaction made in the ordinary course of the such corporations, with respect to the taxable year of the
business of such dealer. corporation preceding the date of the sale of exchange
was under the law applicable to such taxable year, a
(B) If the amount of stock or securities acquired (or covered by personal holding company or a foreign personal holding
the contract or option to acquire) is less than the amount of stock company;
or securities sold or otherwise disposed of, then the particular
shares of stock or securities, the loss form the sale or other (4) Between the grantor and a fiduciary of any trust; or
disposition of which is not deductible, shall be determined under
rules and regulations prescribed by the Secretary of Finance, (5) Between the fiduciary of and the fiduciary of a trust
upon recommendation of the Commissioner. and the fiduciary of another trust if the same person is a
grantor with respect to each trust; or
(C) If the amount of stock or securities acquired (or covered by
the contract or option to acquire which) resulted in the non- (6) Between a fiduciary of a trust and beneficiary of such
deductibility of the loss, shall be determined under rules and trust.
regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
Gains and losses attributable to the failure to exercise privileges or
options to buy/sell property
Section 39. Capital Gains and Losses. -
(F) Gains or losses from Short Sales, Etc. - For purposes of this
(F) Gains or losses from Short Sales, Etc. - For purposes of this Title -
Title -
(2) Gains or losses attributable to the failure to exercise
(1) Gains or losses from short sales of property shall be privileges or options to buy or sell property shall be
considered as gains or losses from sales or exchanges of considered as capital gains or losses.
capital assets;
Percentage of gain/loss taken into account (for individuals only); holding
Transactions Between Related Taxpayers period rule

(B) Losses from Sales or Exchanges of Property. - In computing (B) Percentage Taken into Account. - In the case of a taxpayer, other than
net income, no deductions shall in any case be allowed in respect a corporation, only the following percentages of the gain or loss
recognized upon the sale or exchange of a capital asset shall be taken into disposition of shares of stock in a domestic corporation, except shares sold,
account in computing net capital gain, net capital loss, and net income:
or disposed of through the stock exchange.
(1)One hundred percent (100%) if the capital asset has been held for not
more than twelve (12) months; and Not over P100,000 5%
On any amount in excess of P100,000 10%
(2)Fifty percent (50%) if the capital asset has been held for more than
twelve (12) months (D) Rates of Tax on Certain Passive Incomes. -

Income tax treatment of capital loss


(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock
(C) Limitation on Capital Losses. - Losses from sales or exchanges Exchange. - A final tax at the rates prescribed below shall be imposed on net
of capital assets shall be allowed only to the extent of the gains capital gains realized during the taxable year from the sale, exchange or
from such sales or exchanges. If a bank or trust company other disposition of shares of stock in a domestic corporation except shares
incorporated under the laws of the Philippines, a substantial part sold or disposed of through the stock exchange:
of whose business is the receipt of deposits, sells any bond,
debenture, note, or certificate or other evidence of indebtedness
issued by any corporation (including one issued by a government Not over P100,000 5%
or political subdivision thereof), with interest coupons or in
Amount in excess of P100,000 10%
registered form, any loss resulting from such sale shall not be
subject to the foregoing limitation and shall not be included in
determining the applicability of such limitation to other losses.
(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock
Net-loss Carry Over Rule Exchange. - A final tax at the rates prescribed below is hereby imposed upon
the net capital gains realized during the taxable year from the sale, barter,
(D) Net Capital Loss Carry-over. - If any taxpayer, other than a exchange or other disposition of shares of stock in a domestic corporation
corporation, sustains in any taxable year a net capital loss, such
loss (in an amount not in excess of the net income for such year) except shares sold or disposed of through the stock exchange:
shall be treated in the succeeding taxable year as a loss from the
sale or exchange of a capital asset held for not more than twelve Not over P100,0005%
(12) months.
On any amount in excess of P100,00010%
Dealings in Shares of Stock of Philippine Corporations
Section 127. Tax on Sale, Barter or Exchange of Shares of Stock Listed
and Traded through the Local Stock Exchange or through Initial Public
(L) The term 'shares of stock' shall include shares of stock of a Offering. -
corporation, warrants and/or options to purchase shares of stock, as well
as units of participation in a partnership (except general professional (A) Tax on Sale, Barter or Exchange of Shares of Stock Listed and
partnerships), joint stock companies, joint accounts, joint ventures taxable Traded through the Local Stock Exchange. - There shall be levied,
as corporations, associations and recreation or amusement clubs (such as assessed and collected on every sale, barter, exchange, or other
golf, polo or similar clubs), and mutual fund certificates disposition of shares of stock listed and traded through the local
stock exchange other than the sale by a dealer in securities, a tax
at the rate of one-half of one percent (1/2 of 1%) of the gross
Sec.24(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock selling price or gross value in money of the shares of stock sold,
Exchange. - The provisions of Section 39(B) notwithstanding, a final tax at bartered, exchanged or otherwise disposed which shall be paid by
the rates prescribed below is hereby imposed upon the net capital gains the seller or transferor.
realized during the taxable year from the sale, barter, exchange or other
(B) Tax on Shares of Stock Sold or Exchanged Through Initial (3) Option. - If any person has an option acquire stock,
Public Offering. - There shall be levied, assessed and collected on such stock shall be considered as owned by such person.
every sale, barter, exchange or other disposition through initial For purposes of this paragraph, an option to acquire such
public offering of shares of stock in closely held corporations, as an option and each one of a series of options shall be
defined herein, a tax at the rates provided hereunder based on the considered as an option to acquire such stock.
gross selling price or gross value in money of the shares of stock
sold, bartered, exchanged or otherwise disposed in accordance (4) Constructive Ownership as Actual Ownership. - Stock
with the proportion of shares of stock sold, bartered, exchanged constructively owned by reason of the application of
or otherwise disposed to the total outstanding shares of stock paragraph (1) or (3) hereof shall, for purposes of applying
after the listing in the local stock exchange: paragraph (1) or (2), be treated as actually owned by such
person; but stock constructively owned by the individual
Up to twenty-five percent by reason of the application of paragraph (2) hereof shall
(25%) ...................................................... 4% not be treated as owned by him for purposes of again
applying such paragraph in order to make another the
Over twenty-five percent (25%) but not over thirty-three constructive owner of such stock.
and one third percent (33
1/3%) ..................................................... 2% (C) Return on Capital Gains Realized from Sale of Shares of
Stocks. -
Over thirty-three and one third percent (33
1/3%) ......................... 1% (1) Return on Capital Gains Realized from Sale of Shares
of Stock Listed and Traded in the Local Stock Exchange. -
The tax herein imposed shall be paid by the issuing corporation in It shall be the duty of every stock broker who effected the
primary offering or by the seller in secondary offering. sale subject to the tax imposed herein to collect the tax
and remit the same to the Bureau of Internal Revenue
within five (5) banking days from the date of collection
For purposes of this Section, the term 'closely held corporation' thereof and to submit on Mondays of each week to the
means any corporation at least fifty percent (50%) in value of secretary of the stock exchange, of which he is a member,
outstanding capital stock or at least fifty percent (505) of the total a true and complete return which shall contain a
combined voting power of all classes of stock entitled to vote is declaration of all the transactions effected through him
owned directly or indirectly by or for not more than twenty (20) during the preceding week and of taxes collected by him
individuals. and turned over to the Bureau Of Internal Revenue.

For purposes of determining whether the corporation is a closely (2) Return on Public Offerings of Share Stock. - In case of
held corporation, insofar as such determination is based on stock primary offering, the corporate issuer shall file the return
ownership, the following rules shall be applied: and pay the corresponding tax within thirty (30) days from
the date of listing of the shares of stock in the local stock
(1) Stock Not Owned by Individuals. - Stock owned exchange. In the case of secondary offering, the provision
directly or indirectly by or for a corporation, partnership, of Subsection (C)(1) of this Section shall apply as to the
estate or trust shall be considered as being owned time and manner of the payment of the tax.
proportionately by its shareholders, partners or
beneficiaries. (D) Common Provisions. - any gain derived from the sale, barter,
exchange or other disposition of shares of stock under this Section
(2) Family and Partnership Ownerships. - An individual shall be exempt from the tax imposed in Sections 24(C), 27(D)(2),
shall be considered as owning the stock owned, directly or 28(A)(8)(c), and 28(B)(5)(c) of this Code and from the regular
indirectly, by or for his family, or by or for his partner. For individual or corporate income tax. Tax paid under this Section
purposes of the paragraph, the 'family of an individual' shall not be deductible for income tax purposes.
includes only his brothers and sisters (whether by whole
or half-blood), spouse, ancestors and lineal descendants. SALE of PRINCIPAL RESIDENCE
(2) Exception. - The provisions of paragraph (1) of this Subsection to the
contrary notwithstanding, capital gains presumed to have been realized
from the sale or disposition of their principal residence by natural
persons, the proceeds of which is fully utilized in acquiring or
constructing a new principal residence within eighteen (18) calendar
months from the date of sale or disposition, shall be exempt from the
capital gains tax imposed under this Subsection: Provided, That the
historical cost or adjusted basis of the real property sold or disposed shall
be carried over to the new principal residence built or acquired: Provided,
further, That the Commissioner shall have been duly notified by the
taxpayer within thirty (30) days from the date of sale or disposition
through a prescribed return of his intention to avail of the tax exemption
herein mentioned: Provided, still further, That the said tax exemption can
only be availed of once every ten (10) years: Provided, finally, that if there
is no full utilization of the proceeds of sale or disposition, the portion of
the gain presumed to have been realized from the sale or disposition shall
be subject to capital gains tax. For this purpose, the gross selling price or
fair market value at the time of sale, whichever is higher, shall be
multiplied by a fraction which the unutilized amount bears to the gross
selling price in order to determine the taxable portion and the tax
prescribed under paragraph (1) of this Subsection shall be imposed
thereon.