Income Tax Outline Final

Bachelor of Accountancy
Batch
2017-18
Table of Contents
TAXABLE INCOME ................................................................................................................................................................... 1
COMPONENTS ..................................................................................................................................................................... 1
COMPENSATION INCOME ................................................................................................................................................... 1
Compensation Income Subject to Income Tax ............................................................................................................... 1
Valuation of Compensation Income ............................................................................................................................... 4
BUSINESS & PROFESSIONAL INCOME ................................................................................................................................. 5
Business & Professional Income Subject to Income Tax ................................................................................................. 5
Accounting Methods of Reporting Business Income ...................................................................................................... 6
FRINGE BENEFIT TAX ........................................................................................................................................................... 7
Fringe Benefits Subject to Fringe Benefits Tax (FBT) ...................................................................................................... 7
Fringe Benefits Not Subject to Fringe Benefits Tax (FBT) ............................................................................................... 9
CAPITAL GAINS TAX ........................................................................................................................................................... 10
Capital Assets Subject to Final Tax ................................................................................................................................ 10
Capital Assets Subject to Normal Tax ........................................................................................................................... 10
Capital Assets ................................................................................................................................................................ 11
PASSIVE INCOME............................................................................................................................................................... 13
Passive Income Subject to Income Tax ......................................................................................................................... 13
Summary of Tax Rates of Passive Income ..................................................................................................................... 14
OTHER TAXABLE INCOME ................................................................................................................................................. 14
Interest income ............................................................................................................................................................. 14
Rent Income .................................................................................................................................................................. 15
Dividend Income ........................................................................................................................................................... 16
Annuities ....................................................................................................................................................................... 17
Prizes and Winnings ...................................................................................................................................................... 17
Recovery of Accounts Written Off ................................................................................................................................ 17
Tax Refund or Credit ..................................................................................................................................................... 17
Damages Recovery ........................................................................................................................................................ 18
Income from Whatever Source ..................................................................................................................................... 18
Allocation of Unidentified Gross Income ...................................................................................................................... 18
ALLOWABLE DEDUCTION ...................................................................................................................................................... 19
COMPONENTS ................................................................................................................................................................... 19
OPTIONAL STANDARD DEDUCTION (OSD) ........................................................................................................................ 19
ITEMIZED DEDUCTIONS .................................................................................................................................................... 19
Business Expenses ......................................................................................................................................................... 19
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Interest .......................................................................................................................................................................... 19
Taxes ............................................................................................................................................................................. 20
Losses ............................................................................................................................................................................ 20
Bad Debts ...................................................................................................................................................................... 21
Depreciation.................................................................................................................................................................. 22
Depletion of Oils & Gas Wells & Mines ......................................................................................................................... 22
Charitable & Other Contributions ................................................................................................................................. 23
Research & Development Costs .................................................................................................................................... 24
Pension Trust ................................................................................................................................................................ 25
SPECIAL DEDUCTIONS ....................................................................................................................................................... 25
Premium Payment on Health &/or Hospitalization Insurance ..................................................................................... 25
Insurance Companies .................................................................................................................................................... 25
Mutual Insurance Companies ....................................................................................................................................... 25
Mutual Marine Insurance Companies........................................................................................................................... 25
Assessment Insurance Companies ................................................................................................................................ 25
NON-DEDUCTIBLE ITEMS .................................................................................................................................................. 25
NON-TAXABLE INCOME ........................................................................................................................................................ 26
COMPONENTS ................................................................................................................................................................... 26
STATUTORY MINIMUM WAGE EARNER (MWE) ............................................................................................................... 26
Tax Rules on Statutory Minimum Wage Earner (MWE) ............................................................................................... 26
LIFE INSURANCE PROCEEDS .............................................................................................................................................. 26
Tax Rules on Life Insurance Proceeds ........................................................................................................................... 26
AMOUNT RECEIVED BY INSURED AS RETURN OF PREMIUM ............................................................................................ 27
Tax Rules on Amount Received by Insured as Return of Premium............................................................................... 27
GIFTS, BEQUEST & DEVICES .............................................................................................................................................. 27
Tax Rules on Gifts, Bequest & Devices .......................................................................................................................... 27
COMPENSATION FOR INJURIES ......................................................................................................................................... 27
Tax Rules on Compensation for Injuries ....................................................................................................................... 27
INCOME EXEMPT UNDER TREATY ..................................................................................................................................... 27
Tax Rules on Income Exempt Under Treaty .................................................................................................................. 27
RETIREMENT BENEFITS, PENSION, GRATUITIES, ETC. ....................................................................................................... 27
Tax Rules on Retirement Benefits, Pension, Gratuities, Etc. ........................................................................................ 27
TAX-EXEMPT CORPORATIONS........................................................................................................................................... 28
Tax Rules on Tax-Exempt Corporations ........................................................................................................................ 28
TAX-EXEMPT INTEREST INCOME ....................................................................................................................................... 28
Tax Rules on Tax-Exempt Interest Income .................................................................................................................... 28
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TAX-EXEMPT QUALIFIED SENIOR CITIZEN ......................................................................................................................... 28
Tax Rules on Tax-Exempt Qualified Senior Citizen........................................................................................................ 28
TAX-EXEMPT INVESTORS AND INVENTIONS ..................................................................................................................... 28
Tax Rules on Tax-Exempt Investors and Inventions...................................................................................................... 28
BARANGAY MICRO BUSINESS ENTERPRISE (BMBE) .......................................................................................................... 28
Tax Rules on Barangay Micro Business Enterprise ....................................................................................................... 28
TAX-EXEMPT EDUCATIONAL INSTITUTION ....................................................................................................................... 29
Tax Rules on Tax-Exempt Educational Institution ......................................................................................................... 29
TAX-EXEMPT COOPERATIVE INCOME ............................................................................................................................... 29
Tax Rules on Tax-Exempt Cooperative Income ............................................................................................................. 29
Taxability of Cooperatives............................................................................................................................................. 29
OTHER NON-TAXABLE INCOME ........................................................................................................................................ 29
Tax Rules on Other Non-Taxable Income...................................................................................................................... 29
TAXATION FOR INDIVIDUALS & CORPORATION ................................................................................................................... 31
COMPONENTS ................................................................................................................................................................... 31
INCOME TAX OF INDIVIDUALS .......................................................................................................................................... 31
Classification of Individual Taxpayers ........................................................................................................................... 31
Personal Exemption ...................................................................................................................................................... 32
Health/Hospitalization Insurance Premium (HHIP) ...................................................................................................... 33
Taxable Income Based on Classification of Individual Taxpayers ................................................................................. 34
Summary of Tax Base and Tax Rates on Individual Taxpayers ..................................................................................... 35
Normal (Schedular) Tax Rate ........................................................................................................................................ 36
Computation of Income Tax Due .................................................................................................................................. 36
Income Tax of Corporations .............................................................................................................................................. 37
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TAXABLE INCOME
COMPONENTS
1. Compensation Income
2. Business & Professional Income
3. Fringe Benefit Tax
4. Capital Gains Tax
5. Passive Income
6. Other Taxable Income
COMPENSATION INCOME
Compensation Income Subject to Income Tax
Salary & Wage
Tax-Exempt Compensation Income
1. Compensation income of minimum wage earners in private sector
2. Compensation income of minimum wage earners in public sector not exceeding the minimum
wage in the non-agricultural private sector
3. Minimum wage earners are also exempted from income tax:
a. Holiday pay
b. Overtime pay
c. Night shift differential pay
d. Hazard pay
4. Additional Information:
- Minimum wage earners receiving other income (e.g. practice of profession) except income subject
to final tax are subject to tax on their entire income
- Minimum wage earner is subject to income tax if the latter receives additional compensation
Statutory Minimum Wage
- Rate fixed by RTWPB, BLES, DOLE
- Computation of minimum wage is based on normal working time of eight hours a day
- Formulas to determine the monthly statutory minimum wage:
1. Those who don’t work and aren’t considered paid on Saturday & Sunday or rest days
Applicable Daily Rate x 261 days
Equivalent Month Rate=
12 months
2. Those who don’t work and aren’t considered paid on Sunday or rest days
12 months
3. Those who do not work but are considered paid on rest days, special days, and regular
holidays
12 months
4. Those who are required to work every day, including Sunday or rest days, special days, and
regular holidays
Applicable Daily Rate x 392.5 days
12 months
1
Fee
Director’s Fee
1. Fees paid to directors (employee of the company) is considered as compensation income subject
to withholding tax on wages
2. Fees paid to directors (not employee of the company) is considered gross income from trade or
business or exercise of profession:
a. Such fees are subject to 10% withholding tax if P720 000 or below
b. Such fees are subject to 15% withholding tax if it exceeds P720 000
Commission
- Taxable even if employee is minimum wage earner
Honoraria
- Taxable even if employee is minimum wage earner receiving statutory minimum wage or not
Allowances
- Fixed or variable allowance are compensation subject to withholding tax
- Fixed or variable allowance are not compensation subject to withholding tax if the following
conditions are satisfied:
1. It is ordinary & necessary expenses incurred by the employee in the pursuit of the trade, business
or profession
2. The employee is required to account/liquidate for the foregoing expenses (Sec. 34; tax code)
a. Excess of actual expenses over advances made shall constitute taxable income if such amount
is not returned to the employer
b. Reasonable amounts of reimbursement/advances for traveling and entertainment expenses
which are pre-computed on a daily basis and are paid to an employee while on duty are not
subject to withholding tax and substantiation
Common Types of Allowances
1. Cost of living allowances (COLA)
- Non-taxable if granted to government officials and employees
2. Representation and traveling allowances (RATA)
- Non-taxable if granted to government officials and employees incurred in the performance of
government personnel’s office duties.
3. Personal economic relief allowance (PERA)
- Non-taxable if granted to government officials and employees
Latest Ruling on Allowances
1. Transportation & cellphone allowances given to call center employees are not taxable
compensation
a. Fixed monthly transportation allowance P1 500 for rank-&-file employees & P3 000 for
supervisory employees pre-computed on a daily basis
b. Mobile phone allowances P1 200 for supervisors, managers and directors who are expected
to be on call 24 hrs./day
2. “Transportation & night shift allowance” granted to night shift employees and “meal and/or out
of town allowances granted to employees assigned to conduct fieldwork are not subject to income
tax, FBT, withholding tax
3. Taxi/transportation allowance P100 per day given BPO company servicing global businesses 24
hrs./day to employees who work overtime beyond 10 pm or whose work shifts start at 10 pm
onwards are exempt from tax
- Taxi/transportation allowance pre-computed on a daily basis and paid to employees are not subject
to substantiation and withholding tax
2
Thirteenth Month Pay & Other Benefits
- 13th mo. pay & other benefits (including excess of de minimis) are not taxable if the amount is 82 000
or less
- Any amount exceeding P82 000 is taxable
- Other Benefits:
1. Bonuses received by officials & employees of both government & private offices
2. Loyalty award received by officials & employees of both government & private offices
3. Gift in cash or kind received by officials & employees of both government & private offices
4. Benefits of similar nature received by officials & employees of both government & private offices
5. Other than the above benefits, 82 000 exemption shall not apply to:
a. Other compensation received by employee under an employer-employee relationship
b. Self-employed individuals & income generated from business
Holiday Pay, Overtime pay, Night Shift Differential Pay & Hazard/Emergency Pay
- Hazard, overtime, night shift differential, and holiday pay is generally taxable
- Hazard, overtime, night shift differential, and holiday pay of a minimum wage earner (MWE) is non-
taxable
- Any hazard pay paid to MWE that does not satisfy the criteria for a hazard pay is subject to income
tax
Tips & Gratuities
- Tip or gratuities paid directly to employer (by a customer of the employer) which are not accounted
for by the employee to the employer are considered taxable income but not subject to withholding
tax
Separation Pay
1. It is taxable if the separation is voluntary made by the employee
2. Separation pay is not taxable to any cause beyond the control of the employee (involuntary):
a. Sickness
b. Disability
c. Death
d. Reorganization of company
e. Bankruptcy of company
3. Any payment made by employer to employee on account of dismissal constitutes compensation
Retirement Pay
- Retirement pay is taxable except when:
1. Retirement pay from SSS or GSIS
2. Retirement pay from employer provided that the following requirements (all) are compiled:
a. The retirement plan of the company has been approved by the BIR commissioner
b. The retiree should have been connected to the company for 10 years
c. The retiree should be at least 50 years old
d. The retiree availed the retirement for the first time
e. The retirement plan is fairly and equitable to all employees, regardless of position
Sick Leave Pay/Vacation Leave Pay
- If paid or availed of as salary of an employee who is on vacation or sick leave notwithstanding his
absence from work constitutes taxable compensation income
Pension Pay
- Pension pay is taxable unless:
1. Law states otherwise
2. The BIR approves the pension plan of a private company
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Valuation of Compensation Income
Cash
- Value at face value
Non-Cash
Property
- Value at fair value
Services
- Remuneration of casual labor:
1. Remuneration of casual labor not in the course of an employer’s trade or business is not
considered compensation
2. Any remuneration paid for casual labor in the course of an employer’s trade or business
is considered compensation
3. Any remuneration paid for casual labor performed for a corporation is considered as
compensation
Debt Cancellation
- Same as compensation for services rendered
- Results into:
1. Recognition of income
a. If the employer/creditor cancels debt of the employee/debtor in lieu of the services
rendered by the latter
b. Taxable (compensation income) to the extent of the amount of debt cancelled
2. Cancelation of debt resulting in donation
a. If the employer/creditor cancels debt of the employee/debtor without any
consideration
b. Subject to donor’s tax (final tax) as a gift
3. Cancelation of debt resulting in capital transaction
a. If a corporation to which a stockholder is indebted forgives the debt without any
consideration
b. Taxable (compensation income) as payment of dividend income to debtor
Issuance of Stocks
- Stock option
1. Can either be:
a. Equity-settlement option
b. Cash-settlement option
2. Grant of option
a. If stock options were granted without payment, the option is not subject to income
tax, and at the same time the stock option can no longer be deducted as salary
expense of the employer corporation
b. If option was granted for a price, the full consideration shall be subject to capital gains
tax
3. Sale or transfer of option
a. Sale of stock option not listed on the stock exchange is subject to capital gains tax
b. If option is sold or transferred without any consideration, it shall be subject to donor’s
tax (30%) base on FMV of the option at time of donation
4. Exercise of options
a. Rank-and-file employees
- Subject to income and withholding tax on compensation
b. Supervisory employees
- Subject to fringe benefit tax (final tax)
c. Supplier of goods and services
4
- Subject to the relevant withholding tax at source and other taxes applicable
d. Person, natural or juridical, who is not an employee or supplier
- Subject to donors’ tax (final tax)
Issuance of Notes
Interest Bearing
1. In the year the interest-bearing note is received, the taxable amount is equal to the
face value of the note
2. At the time of collection, the taxable amount is equal to maturity value of the note
minus its face value
3. The difference between the maturity value and the face value of the note represents
interest income realized
- Interest income, is not treated as compensation income
Non-Interest Bearing
1. In the year the interest-bearing note is received, the taxable amount is equal to the
present value of the note
2. At the time of collection, the taxable amount is equal to maturity value of the note
minus its present value
3. The difference between the maturity value and the present value of the note
represents interest income realized
- Interest income, is not treated as compensation income
BUSINESS & PROFESSIONAL INCOME
Business & Professional Income Subject to Income Tax
Gross Income from Business
1. Manufacturing
2. Merchandising or trading
3. Servicing
4. Farming
- Determine gross income using the following methods:
a. Cash basis
b. Accrual basis
c. Crop-year basis
5. Construction
- Determine gross income using the following methods:
a. Percentage of completion
b. Completed contract
6. Long-term contract
Cost of Sales
- Cost of Goods Manufactured and Cost of Goods Sold for manufacturing concern
- Cost of Goods Sold for trading or merchandising concern
- Cost of service for service concern
a. Salaries
b. Benefits of personnel, consultants and specialist directly rendering the service
c. Cost of facilities directly utilized in providing the service
d. In case of banks, cost of services shall include interest expense
5
Accounting Methods of Reporting Business Income
- No prescribed method of reporting business income
- Taxpayer shall adopt an accounting method of recording business income that is best suited to his purpose
and will reflect the true results of operation
- Accounting methods are:
1. Accrual basis
2. Cash basis
- The following individuals usually report their income under cash basis:
a. Taxpayer who do not keep books of accounts and other accounting records
b. Taxpayer who employ cash receipt and disbursement method
c. Taxpayer with inadequate accounting records
3. Hybrid method
- Combination of accrual and cash basis
4. Crop-year basis
- All operating and production expenses are deducted when income is realized
5. Installment method
a. The following individuals may report their income under installment method:
- Taxpayer who regularly sells a personal property on installment
- Taxpayer who makes a casual sale of personal property, other than inventory on installment basis
provided the selling price exceeds P1 000 and the initial payment does not exceed 25% of the
selling price
- Taxpayer who sells or disposes real property on installment basis provided the initial payment
does not exceed 25% of the selling price
b. Formula to compute income using installment method
i. The property sold without mortgage or with mortgage it be assumed by the buyer, but mortgage
does not exceed the cost to the seller
Gross profit
Income to be reported= x Amount of installment collection received
Contract price
- However, if a mortgage assumed by the buyer exceed the cost to the seller, the following
formulas may be used to compute for income:
a. On date of sale
Gross profit
Income to be reported= x Initial payment
Contract price
b. On subsequent collection
Gross profit
Income to be reported= x Amount of installment collection received
Contract price
ii. Components:
a. Gross profit
- Excess of the selling price over the cost or adjusted value
b. Initial payment
- Includes:
i. Down payment during the year of sale
ii. Additional payment made during the taxable year
iii. Excess of mortgage assumed by the buyer over the cost to the seller
c. Contract price
- May refer the following:
i. The gross selling price (if no mortgage)
ii. The gross selling price minus mortgage assumed by the buyer
iii. The gross selling price minus mortgage assumed by the buyer, as case may be, the
excess of the mortgage assumed over the original cost of the property
d. The property sold
- May be either be:
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i. Without mortgage to be assumed by the buyer
ii. With mortgage to be assumed, but the mortgage does not exceed the cost of the
seller
iii. With mortgage to be assumed, but the mortgage exceeds the cost of the seller
6. Deferred payment method
- Used if exceed 25% of the initial payment in the selling price
7. Percentage of completion and completed contract method
a. Percentage of completion
- Income based on the progress of work
b. Completed contract
- income only upon completion of project
8. Spread out and outright method
FRINGE BENEFIT TAX
Fringe Benefits Subject to Fringe Benefits Tax (FBT)
RC NRC RA NRA-ETB NRA-NETB RHQ OBU PETROLEUM
Fringe
32% 25% 15%
Benefit Tax
≠ the actual amount received by the employee.
MONETARY VALUE Needs to be grossed up.
Value of FB:
(1) Money/directly paid for – amount granted/paid for.
(2) In property and ownership is transferred – FMV of the property
1. HOUSING PRIVILEGES (3) In property but ownership is not transferred – depreciation value of the
property.
Fringe
Employer to Grossed-up
Annual Value Monetary Value Benefit
Employee Monetary Value
Tax
a. Leases residential
property for Multiply by 50%
residential use of (rental paid)
employees
b. Assignment of
Multiply by 5%
residential property Multiply by 50%
(MV or ZV, whichever
for use of
is higher)
employees
c. Purchases a
residential property Multiply by 5%
Multiply by 50%
on installment basis (Acquisition Cost,
for the use of exclusive of Interest) Multiply
Divide by 68%
employees by 32%
d. Purchases a
residential property
AC or ZV, whichever
and transfers
is higher
ownership to
employee
e. Purchases a
(FV or ZV, whichever
residential property
is higher)
and transfers
Minus
ownership to
(Cost to Employee)
employee with cost
to employee
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Note: (1) FMV – Real Property Tax Declaration Form; ZV – Commissioner
(2) Director paid on a retainer basis is not an employee of the company. Hence, the assistance granted
to him shall not be considered as fringe benefit. It shall be considered as part of the Director’s Gross Income
subject to applicable tax rate.
2. Expense Account Incurred by the employee but are paid for/reimbursed by the employer.
Exception:
3. Motor Vehicle of any (1) When duly receipted for, (2) in the name of the employer
Kind (3) Not for personal expense.
Grossed-up Monetary
Employer Monetary Value Fringe Benefit Tax
Value
a. Purchases in the
name of the Acquisition Cost
employee
b. Gives cash to
purchase;
ownership is
Cash received
placed in the
name of the
employee
c. Purchases on
installment basis;
Acquisition Cost,
ownership is
exclusive of interest,
placed in the
divided by (5 years)
name of the
employee
d. Employee partially
shoulders the
purchase price;
Amount shouldered by
ownership is
the employer Divide by 68% Multiply by 32%
placed in the
name of the
employee
e. Owns and
maintains a fleet
for the use of
business and (Acquisition Cost) divided
employees*; by (5 years) multiply by
ownership is (50%)
placed in the
name of the
employee
f. Employer leases
and maintains a
fleet of motor
Rental payment multiply
vehicles for the
by 50%
use of the
business and the
employees
*Note: Motor Vehicles not normally used for sales, freight, delivery, service and other non-personal use.
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Grossed-up Monetary
Employer Monetary Value Fringe Benefit Tax
Value
g. Leases and (Rental Payment)
maintains a fleet multiplied by (50%)
Divided by 68% Multiply by 32%
Depreciation of the yacht
h. Yacht
(20 years)
i. Aircraft (including
helicopters)
owned and
Not subject to the fringe benefits tax
maintained,
treated for
business
Borne by the employer:
4. Household Expenses
(1) Salaries of household help(2) Personal Driver (3) Other personal expenses
Lends money to his employee free of interest or at a rate lower than 12%.
5. Interest on loan at Taxable:
less than market rate (1) Interest Foregone (2) Difference between 12% and the interest assumed by
the employer
6. Membership Fees,
dues and other Borne by the employer for his employee
expenses
Taxable:
(1) 30% of the cost of first class airplane ticket
(2) No supporting documents proving the actual occurrences of the
7. Expenses for foreign
meetings/conventions
travel
(3) Not proven as legitimate business expenses
(4) Lodging cost, in a hotel or similar establishment, incurred in excess of
US$300.00
8. Holiday & vacation
Borne by the employer for his employee
Expenses
General Rule:
The cost of educational assistance to the employee/his dependents is generally a
taxable fringe benefit.
9. Educational
Exception:
assistance to the
(1) The employee’s education is directly connected w/ the employer’s
employee/his
business
dependents
(2) Expense incurred for the convenience and furtherance of her’ trade &
business
(3) Provided through a competitive scheme under the scholarship program
In excess what the law allows.
10. Life/Health Insurance
Exception:
& other non-life
(1) Contributions to SSS & GSIS
insurance premiums
(2) Cost of premiums borne by the employer for the group of his employees
Fringe Benefits Not Subject to Fringe Benefits Tax (FBT)
4. If the grant of fringe benefits to the employee is
1. FB which are authorized & exempted from
required by the nature of, or necessary to the trade,
income tax under the Code/special law.
business or profession of the employer.
2. Contributions of the employer for the
5. If the grant of fringe benefit is for the convenience of
benefit of the employee to retirement,
the employer.
insurance and hospitalization benefit plans.
9
3. Benefits given to the rank-and-file 6. De minimis benefits
Note: Exemption of any fringe benefit tax ≠ Exemption from any other income tax. It may still form part of the
Employee’s GROSS COMPENSATION INCOME SUBJECT TO INCOME TAX.
DE MINIMIS BENEFITS Recipients/Prestation Not exceeding Excess thereof
a. Monetized unused vacation leave
private employees 10 days
credits
b. Monetized value of vacation and Government officials
sick leave credits and employees
P750 per employee per Form part of
Dependents of
c. Medical cash allowance semester (P125 per “Other
employees
month) Benefits”
d. Rice Subsidy of 1,500 1 sack of 50 kg P1,500 per month of the
e. Uniforms and clothing allowance P4,000 per year Employee and
shall be
f. Actual Medical Assistance P10,000 per year
TAXABLE
g. Laundry allowance P300 per month if such excess is
Tangible Personal beyond the
h. Employees achievement awards P10,000 per year
Property P82,000 ceiling
i. Gifts given during Christmas & P5,000 per employee
major anniversary celebrations per year
25% of the basic
j. Daily meal allowance for overtime
minimum wage on a
work and night/graveyard shift
per region basis
Note: (1) De minimis benefits are not considered in determining the 82,000 ceiling of Other Benefits.
(2) Any amount given by the employer as benefits (whether de minimis/fringe) shall constitute as DEDUCTIBLE
EXPENSE upon such employer.
General Rule:
The amount of taxable fringe benefit and the fringe benefits tax shall constitute allowable deductions from
Gross Income of the Employer.
If expenses have already accrued but not yet paid, the accounts fringe benefit payable & fringe benefit tax
payable are used.
Basis for FBT is the depreciation value, ZV or FMV:
1. Only the Actual Fringe benefits tax paid shall constitute a deductible expense for the employer.
2. The value of the fringe benefit shall be presumed to have been claimed as depreciation expense.
3. If the ZV/FMV > COST subject to Depreciation, the excess amount shall be allowed as deduction from the
employer’s gross income as Fringe Benefit Expense.
CAPITAL GAINS TAX
Capital Assets Subject to Final Tax
1. Sale of real property is subject to 6% CGT based on selling price, zonal value or fair value whichever is higher
2. Sale of securities is subject to:
a. CGT of 5% on 1st P100 000 capital gain and 10% on the excess on 1st P100 000 capital gain if securities are
NOT traded in stock-exchange
b. Other percentage tax (OPT) of ½ of 1% based on selling price if securities are traded in stock-exchange
Capital Assets Subject to Normal Tax
- Sales of other capital assets other than those listed are subject to normal tax and shall be govern by the
following rules:
1. Net gain is added to ordinary gain but net capital loss is not deducted from ordinary gain
2. Net ordinary loss is deductible from net capital gain
3. Capital loss is deductible only to the extent of the capital gain
10
4. For the individuals the reportable percentage of capital gain or loss shall be:
a. 100% if the capital asset is held for one year or less than one year
b. 50% if capital asset is held for more than one year
5. Conditions for net capital loss carry over (NCLCO)
a. The taxpayer is other than a corporation
b. Amount of NCLCO does not exceed the taxable income (before exemptions) at the year when capital
loss was sustained
c. The NCLCO shall be treated in the following year as loss from the sale or exchange of a capital asset
held for not more than 12 months
Capital Assets
Real Property
Determination of Cost of Property
Mode of Acquisition Meaning of Cost
By purchase Acquisition cost
By inheritance FMV at the date of inheritance
By donation or as gift FMV at the time of gift or the value in the hand of
the donor, whichever is higher
With less consideration The amount paid for the property
Real Property Classified as Held for Sale
1. CWT if seller is member of CREBA
a. Real property sold is for low income people with selling price not more than P175
000. The CWT rate is 0%.
b. Real property sold with selling price ranging from:
i. P350 000 – 375 000 – 0%
ii. P375 001 – 500 000 – 1.5%
iii. P500 001 – 2 000 000 – 3%
iv. More than P2 000 000 – 5%
2. CWT if seller is not member of CREBA
- For non-members, the CWT is 7.5% on the sale of real property (ordinary asset)
Sale of Housing Unit to Government
1. Be subject to 6% final tax
2. Be subject to normal tax
Real Property Classified as Principal Residence
Sale of Principal Residence Located within the Philippines
- As a general rule, the sale of principal residence is subject to CGT on 6% based on
selling price or zonal value whichever is higher.
- The proceeds from the disposal of principal residence located within the Philippines
are tax-exempt subject to the following condition:
1. Historical Cost or adjusted basis of property sold is carried over to the new
principal residence
2. The Commissioner is notified within 30 days from the date of disposition
3. Tax exemption can only be availed once every 10 years.
4. Unutilized portion of the proceeds is subject to CGT of 6% based on portion of the
gross selling price or zonal value whichever is higher, to be computed
proportionately as expressed in the formula:
Unutilized selling price
Taxable amount= ( x Gross Selling price or Zonal Value, whichever is higher) x 6%
Gross selling price
5. The tax on the unutilized portion shall be paid within 30 days after the expiration
of the 18-month period
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Basis of New Principal Residence
1. Sales proceeds fully utilized. The cost of the new principal residence is the same
amount as the cost of the old residence sold
2. Sales proceeds partially applied. The basis of new principal would be:
Partially utilized selling price
Basis of the new principal residence= x Basis of the old principal residence sold
Gross selling price
3. Acquisition cost exceeds the entire sales proceeds. The basis of the new principal
residence would comprise the following:
a. Cost of old principal residence sold, plus
b. Additional cost in acquiring the new principal residence
Sale of Principal Residence not located within the Philippines
- The proceeds from sale of new principal residence located outside the Philippines are
included in the gross taxable income
Securities
Determination of Cost of Stocks
Mode of Acquisition Meaning of Cost
By purchase If the shares of stock can be identified. Actual purchase price plus all
cost of acquisition
If the shares of stock cannot be identified. FIFO
If the books of accounts are maintained by seller for every
transaction of a particular stock recorded. Moving Average
Stock dividend received shall be assigned with a cost basis which
shall be determined by allocating the cost of the original shares held
after receipt of stock dividends
By inheritance FMV at the date of inheritance
By donation or as gift FMV at the time of gift or the value in the hand of the donor,
whichever is higher
Inadequate consideration The amount paid for the stock
Sale or Issuance of Shares of Stocks through IPO
Proportion of Disposed Shares to Outstanding Tax Rates
Shares
Up to 25% 4%
Over 25% but not over 33 1/3% 2%
Over 33 1/3% 1%
Installment Payment of Capital Gains Tax:
- NIRC allows an option to pay CGT on installment basis subject to the following conditions:
1. The tax payer is an individual
2. The initial payment does not exceed 25% of the gross selling price
Computation of Installment Amount of Capital Gains Tax
1. No mortgage on property sold or the mortgage assumed by buyer does not exceed the cost
of the seller
Collection
Installment Amount= x Capital Gains Tax
Contract price
2. Mortgage assumed exceeds the cost to the seller

a. For collection on date of sale
Collection + Excess of mortgage over cost
Contract price
b. For subsequent collection

Collection
Contract price
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PASSIVE INCOME
- Subject to final tax which shall be withheld by the payor who acts as the withholding agent and remits the
same to the BIR.
Passive Income Subject to Income Tax
Yield from deposit substitutes and trust fund
- Both deposit substitute and trust fund yield earnings are to be treated as interest income.
Deposit Substitute
- A debt instrument issued by the bank to borrow money from the public other than from the
client’s deposit.
Trust Fund
- Any estate, especially stock, securities, or money which is held in trust by a person in behalf
of another person.
Interest income
- An earning derived from depositing or lending of money, goods or credit
Classification of interest income
Exempt from income tax
1. By members from a duly registered cooperative
2. BSP prescribed form of investment maturing more than 5 years
3. Expanded foreign currency deposit system by non-resident citizen/alien
- If OFW is a co-depositor in the Philippines, subject to 50% of 7.5% final tax
4. For individuals except non-resident citizen not engage in trade or business in the
Philippines, interest income from long-term deposit or investment shall be exempt
from the income tax, provided the ff. conditions must be met:
a. The investment must be evidenced by certificates conforming to BSP
prescribed form.
b. The same must have a maturity period not less than 5 years and in
denominations of 10 000 or other denominations approved by BSP issued
banks (not by non-bank financial intermediaries or finance companies).
Subject to final withholding tax
- Subject to 20% final tax
Subject to normal tax
- When lending is the main course of business.
Royalty income
- Payment or portion proceeds paid to the owner of a right.
Classification of royalty income
1. In general, royalty income includes those which are derived from natural sources are subject
to 20% final tax.
2. Royalties on books, literary works, and musical composition are subject to 10% final tax.
Prizes and winnings
- Subject to 20% final tax except if the amount is 10 000 or less which subject to normal tax.
Prize
- Reward for a contest or a competition.
Winnings
- Reward for an event that depends on chance such as winnings from gambling, lottery or raffle
ticket.
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Summary of Tax Rates of Passive Income
 Resident citizen - Non-
 Non-resident resident
citizen alien
Type of Passive Income  Resident alien engage in
business
or trade in
the
Philippines
a. interest income
Interest income in the
20% 20%
Philippines
Yields or any other
monetary benefits
substitutes, trust funds, 20% 20%
and similar arrangement
in the Philippines
Interest income from
long-term deposits
evidenced by certificates
Exempted Exempted
prescribed by BSP with
maturity of five years or
more
If long-term deposit is pre-
terminated before 5th
year, the final tax shall be:
4 years – less than 5 years 5% 5%
3 years – less than 4 years 12% 12%
Less than 3 years 20% 20%
Interest income under the
7.5%
expanded foreign
Non-resident citizen – Exempted
currency deposit system
exempted
(FCDS)
b. royalty income
In general 20% 20%
On books, literary works,
10% 10%
musical works in the Phil.
c. prizes and winnings
In general 20% 20%
Prizes less than 10 000 Subject to basic tax Subject to basic tax
From PCSO and lotto Exempted Exempted
OTHER TAXABLE INCOME
Interest income
Tax Rules on Interest Income
1. Interest income on bank deposit in the Philippines is subject to final tax of 20%.
2. Interest income on bank deposit outside the Philippines is subj. to basic tax.
- This type of interest income includes interest on loan receivable or interest on long overdue accounts
receivable.
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Rent Income
- Earnings derived from leasing real estate as well as personal property.
Forms of Rent Income
Current Rent or Lease Payment
Advance Rent Payment or Security Deposit without Restriction
1. (Prepaid rent) if the advance payment is prepaid rental received without restriction as to its use, the entire
amount is taxable in the year it is received whether the lessor uses cash or accrual method of accounting.
2. (Security deposit with restriction) if the advanced payment is a security deposit which restrict the lessor as
to its use, such amount should be excluded in the determination of the rental income.
3. (Security deposit with an acceleration clause) if the advanced payment is a loan deposit, or option money
for the property, or a security deposit for the faithful compliance of the lessee contract, such advance
payment is not an income to the lessor. The income to the lessor inures when the lessee violates the terms
of the contract.
Payment of Lessee to Third Parties like Interest, Taxes, and Loans Insurance Premium in behalf
of the Lessor
Uncollected Rent Income Earned already (Accruals) at the end of the period
Income from Leasehold Improvements
1. Additions, improvements, major renovation or complete new structure to the existing property to
improve the present condition, appearance or working capacity.
2. The monetary value of the leasehold improvement should be recognized as income by the lessor in
addition to the annual rent income.
3. Method of computing income from leasehold improvements:
a. Outright method
- The income from leasehold improvement shall be recognized when the improvement is
completed at its fair market value.
b. Spread-out method
- The estimated book value of the leasehold improvement at the end of the lease is spread over
the term of the lease and is reported as income for each year of the lease an aliquot part
thereof.
i. Annual income from leasehold improvement is equal to:
Estimated book value of the leasehold at the end of the lease contract
Remaining term of the lease in years
4. Termination of the contract of lease
a. If there is improvement (immovable) made and the termination of contact of lease is made before the
expiration of the lease term, the ff. rules should regulate the circumstances:
- If the improvement is destroyed before the expiration of the lease, the lessor is entitled to deduct
as a loss for the year.
i. When such destruction takes place, the amount previously reported as income less any
salvage value, to the extent that such loss was not compensated for by insurance.
- If for any reason other than bona fide purchase from the lessee by the lessor, the lease is
terminated so that the lessor comes into possession of the property prior to the final fixed income
of the year if the value of improvement exceeds the amount of income already reported.
i. No appreciation in value due to causes other than premature termination of lease shall be
included.
ii. If the lessor is using an outright method, additional income shall not be recognized.
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Dividend Income
- A form of earnings derived from the distribution made by a corporation out of its earnings or profits.
Tax Rules on Dividend Income
1. Dividends are tax-exempt if:
a. Received from a domestic corporation by:
- Another domestic corporation
- Resident foreign corporation
b. Received from a cooperative
c. Pure stock dividend
d. Pure liquidating dividend (return of capital)
2. Dividends (cash or property) are subject to final tax if received from a domestic corporation by a:
a. Citizen or resident alien = 10% final tax
b. Non-resident alien doing business in the Philippines = 20% final tax
c. Non-resident alien not doing business in the Philippines = 25% final tax
d. Non-resident foreign corporation = 15% final withholding tax
3. Dividends are subject to year-end normal tax of individuals or corporations if such dividend are:
a. Dividend received by individual taxpayers from resident foreign corporation.
b. Dividends received by corporate entity subject to tax from resident foreign corporation.
c. In case of gross income of a resident foreign corporation derived from the Philippines for a 3 year
period preceding the declaration of dividend is:
i. Less than 50% of the total gross income (within and without), the dividend is deemed earned
from outside the Philippines and shall not be a part of the gross taxable income
ii. More than 50% but not more than 85% of the total gross income (within and without), the
dividend is deemed earned partly within and partly without the Philippines and shall be
prorated, and the amount realized from the Philippines shall be included in the gross income.
iii. More than 85% of the total gross income (within and without), the dividend is deemed earned
from the Philippines and shall be a part of the gross taxable income
d. In case the problem is silent, dividend income earned is deemed 100% earned from within the
Philippines.
- The allocation shall be computed using the formula:
Gross income - Phil. 3 year period
Dividend income within = Contract income - world 3-year period
x Dividend income from a resident
e. Not included as tax-exempt dividends.
f. Not subject to final tax.
g. Distribution of shares of partner in professional partnership.
Forms and Valuations of Dividend Income
1. Cash dividend
2. Property dividend
a. Taxable to the extent of the FMV of the property.
b. Forms of property dividends:
i. Merchandise inventory, supplies, etc.
ii. Shares of stock of another corporation.
iii. Treasury shares of issuing corporation if acquired at cost different from its par value.
3. Stock dividend
a. Not subject to tax except when following circumstances exist:
i. There is an option that some stockholders could take cash or property dividends instead of stock
dividends.
ii. Some stockholders exercised the option to take cash or property dividends (subject to final tax).
iii. The exercise of option resulted in a change of the stockholders’ proportionate share in the
outstanding shares of the corporation.
4. Scrip dividend
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a. Subject to final tax based on the FMV of the note.
- Interest shall not be part of the dividend income declared but a part interest income.
5. Indirect dividend
6. Liquidating dividend
- The excess amount of liquidating dividends over cost of shares surrendered is taxable.
i. If excess is a gain (capital gain tax) realized such gain is taxable.
ii. If stockholder sustains a loss, such loss is deductible.
Annuities
- Installment payments received for life insurance sold by insurance companies.
Tax Rules on Annuities
1. If the part of the annuity payment represents interest, it is taxable.
2. If the part of the annuity payment represents return of premium, it is not taxable.
Prizes and Winnings
Tax Rules on Prizes and Winnings
1. Prizes, winnings and awards shall be included in the gross compensation income if:
a. Received by an individual taxpayer from Philippine sources and the amount of prizes or winnings are 10
000 or less.
b. Received by an individual taxpayer from foreign sources regardless of amount.
c. Received by corporation from Phil. or foreign source regardless of the amount.
2. Prizes, winnings, and awards received by an individual taxpayer from Philippines are subject to 20% final tax.
3. Prizes, winnings, and awards are tax-exempt:
a. Winnings from PCSO, such as winnings from lotto.
b. Prizes or awards to athletes in national and international sports competition held in the Philippines and
abroad and governed by recognized sport associations.
c. Prizes and awards in recognition of religious, charitable, educational, scientific, artistic or literary
performance or achievement provided the recipient was selected without action on his/her part, and
he/she is not required to render substantial future service in view of the award.
Recovery of Accounts Written Off
Tax Rules on Recovery of Accounts Written Off
1. Recovery of bad debts written off should be included in the gross taxable income of the taxpayer in the year of
recovery.
2. The following are requisites for deductibility of bad debts:
a. There must be a valid and existing debt arising from business or trade of the taxpayer.
b. The debt must be actually ascertained to be worthless and uncollectible during taxable year.
c. The debt must be charged off during the taxable year.
Tax Refund or Credit
Tax Rules on Tax Refund or Credit
1. If the tax paid is treated as deductible expense, tax refund is considered income, hence, taxable (subject to
normal tax).
2. If the tax payment cannot be deducted or classified as allowable deduction from the gross income, the tax
refund is not taxable.
3. Refund from taxes paid are taxable expect:
a. Estate or donor’s tax
b. Philippine income tax, except FBT
c. Stock transaction tax
d. VAT, claimed as input tax
e. Income tax paid in foreign country where taxpayer claimed it as a tax credit
f. Income tax deficiency and special assessment
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Damages Recovery
Tax Rules on Damages Recovery
1. Recoveries of damage representing compensation for loss of profit or income are taxable (subject to normal
tax).
2. Recoveries that are to compensation for the damages to property, injury to person or loss of life are not
taxable.
Income from Whatever Source
Income Derived from Legal or Illegal Sources
1. Forms of income from legal sources:
a. Employee’s salary, bonus
b. Commission/rebates of a medical representative
2. Forms of income from illegal sources:
a. Gambling
b. Kidnapping
c. Extortion
d. Smuggling
e. Embezzlement
3. Illegally obtained income is taxable
4. Embezzlement of funds are income without consent (express or implied) with an obligation to repay
5. If income received under a mistake of fact or law, the income is included in the gross taxable income of the
recipient notwithstanding the fact that the recipient may be required to return the income item to the payor
when the error is discovered.
Allocation of Unidentified Gross Income
Tax Rules on Allocation of Unidentified Gross Income
- Formula to compute for the income earned from within the Philippines is:
Identified gross income (Philippines)
Income from within the Philippines = x Unidentified gross income
Identified gross income (World)
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ALLOWABLE DEDUCTION
COMPONENTS
1. Optional Standard Deduction
2. Itemized Deduction
3. Special Deduction
OPTIONAL STANDARD DEDUCTION (OSD)
- 40% allowable deductions of the (RC, NRC, NRA & taxable estate) gross sales/gross receipts.
- If an individual is on ACCRUAL BASIS, OSD shall be based in gross sales during the year.
- If an individual employs CASH BASIS, OSD shall be based on gross receipts during the year.
- For individual seller of goods, COST of SALES/COST OF SERVICES is not deducted for the purposes of determining
the basis of OSD.
ITEMIZED DEDUCTIONS
Business Expenses
Salaries
- Wages and other forms of compensation for personal services rendered including FBT paid by
company.
Travel Expenses
Rental Expenses
Entertainment & Representation Expenses (EAR)
- Allowable amount is subject to the following limitation:
1. Taxpayers engaged in sale of goods (inventories) – ½% of sales
2. Taxpayers engaged in sale of services, exercise
of profession & rental of properties – 1% of sales
- Allowable amount shall be the actual amount incurred or the limitation whichever is lower.
Interest
Deductible Interest expense subject to limitation
- If taxpayer incurs interest expense in connection with business & earns interest income subject to
20% final tax, the allowable interest expense shall be reduced by the gross interest income multiplied
by 33%.
Deductible Interest Expense in Full Amount
1. Interest for tax delinquency. Late filing of return & late payment of tax liabilities are imposed with 20%
interest.
2. Interest payment on scrip dividends.
3. Interest payments on deposits. Interest paid by banks & other financial institutions on deposits of the
customers.
4. Interest payments on bonds.
Non-Deductible Interest Expense
1. Interest paid in advance by taxpayer using cash basis method of accounting
2. Interest expense arising between related taxpayers
3. Interest expense if the indebtedness is incurred to finance petroleum exploration
4. Interest on preferred stock
5. Interest agreed orally
6. Interest on indebtedness that has prescribed
Optional Treatment of Interest Expense
1. Outright expense. The whole amount of interest is deducted in the year incurred.
2. Capital expenditure. The interest is added to the cost of asset acquired & is deducted in the form of
depreciation.
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Taxes
Non-Deductible Taxes
1. Philippine income tax
2. Estate tax
3. Donor’s tax
4. Value-added tax
5. Special assessment
Deductible Taxes
1. Import duties
2. Excise taxes
3. Occupation taxes
4. Documentary stamp taxes
5. Privileged & licensed taxes
6. Business taxes expect taxes on sale of shares of stock through the local stock exchange
7. Local business & municipal taxes
8. Automobile registration fees
Limitation on Taxes as Deduction
1. For NRA-ETRB & resident foreign corporation, deductible amount is limited to the extent of income
from within the Philippines.
2. For NRA, whose income from sources within such foreign country, only that portion which
corresponds to his/her net income subject to Philippine income tax shall be allowed as deduction.
Net income from within the Philippines
Deductible foreign taxes = x Taxes paid to foreign country
Net income − World
Losses
Deductible Losses
1. Business losses & losses from theft, robbery or embezzlement
- Losses of income due to worthless debts are either deductible or not
- The rules to follow are:
1. Taxpayers report income using accrual basis. Business losses are deductible from gross taxable
income.
2. Taxpayers using the cash basis method & income has not been reported. Business losses related
thereto are non-deductible.
2. Casualty losses arising from storm, fire or shipwreck
3. Net operating loss carry-over (NOLCO)
- Limitations of NOLCO
1. The operating loss had not been previously offset as deduction from gross income.
2. Any net loss incurred in a taxable year that the taxpayer was from income tax should not be
allowed as a deduction.
3. NOLCO shall be allowed only if there has been on substantial change in the ownership of the
business or enterprise in that:
a. Not less than 75% in the nominal value of outstanding issued shares
b. Not less than 75% of the paid-up capital of the corporation
4. The net operating loss can be carried over only for the next three consecutive taxable years
immediately following the year of the incurrence of the loss.
5. For mines other than oil & gas wells, net operating loss incurred in any of the 1 st 10 years of
operation may be carried over as deduction from taxable income for the next five years
immediately following the year of such loss.
- Taxpayers Entitled to NOLCO
1. Self-employed individual taxpayers
2. Estate & trust
3. Domestic & resident foreign corporations covered by normal tax
4. Domestic & resident foreign corporation subject to preferential tax rate
20
- Taxpayer not Entitled to NOLCO
1. Individual taxpayers earning income purely from compensation
2. Offshore banking unit of foreign banks as duly authorized by BSP
3. Foreign currency deposit units of both domestic & foreign bank duly authorized by BSP
4. Taxpayers who are exempt by law from income taxation
4. Other types of losses
1. Capital losses
2. Loss from wash sales of stock or securities
3. Wage losses
a. There is only wagering gain. The gain is included in the gross taxable income.
b. There is both a wagering gain & a wagering loss. The wagering loss is deducted from the
wagering gain & the result is treated as follows:
- Net wagering gain is included in the gross taxable income.
- Net wagering loss is non-deductible item.
4. Losses from diminished value of shares of stock
- Loss is not deductible unless the shares of stock are actually sold.
5. Losses from securities becoming worthless
6. Abandonment losses
Non-Deductible Losses
1. Losses incurred between members of the family
2. Losses arising between an individual & a corporation where more than 50% in value of the outstanding
stock of which is owned
3. Losses on sale between two corporations where more than 50% in value of the outstanding stock of
which is owned
4. Losses between the grantor & a fiduciary of any trust
5. Losses between the fiduciary of another trust, if the same person is a grantor with respect to each
trust
6. Losses incurred between fiduciary of a trust & a beneficiary of such trust
Measurement of the Amount of Loss
- The amount of deductible loss depends on the extent of loss, that is, total or partial
1. If the loss is total, the deductible amount is equal to the book value of the lost asset.
2. If the loss is partial, the deductible loss is equal to the book value of the asset at the time of
the loss or replacement cost, whichever is lower.
- Whether the loss is partial or total, the amount of loss shall be reduced by:
1. Scrap or salvage value of the damaged property
2. Recoverable amount of insurance
Bad Debts
Deductible Bad Debts
- Those uncollectible accounts that have met the requirements set by taxation law.
Non-Deductible Bad Debts
1. Bad debts incurred not related to trade, business or exercise of profession
2. Bad debts arising from a related party transaction
3. Bad debts sustained from unpaid wages, salaries, rents, & other similar items unless an income from
such item has been included & reported as part of the gross taxable income from which a bad debt
deduction has been made in previous year
Meaning of Related Parties
1. Between members of the family
2. Except in the case of distribution in liquidation between an individual & a corporation more than 50%
in value of the outstanding stock of which is owned
3. Except in the case of distribution in liquidation between two corporation more than 50% in value of
the outstanding stock of which is owned
21
4. Between the grantor & a fiduciary of any trust
5. Between the fiduciary of another trust, if the same person is a grantor with respect to each trust
6. Between fiduciary of a trust & a beneficiary of such trust
Depreciation
Methods Used in Computing Depreciation
1. Straight-line method
2. Declining balance method
3. Sum-of-years digit (SYD) method
4. Miscellaneous provision on depreciation
a. Agreement as to useful life on which depreciation rate is based
b. Depreciation of properties used in petroleum operations
c. Depreciation of properties used in mining operations
d. Depreciation deductible by NRA-ETRB or resident foreign corporations
e. Option of private educational institutions
Depletion of Oils & Gas Wells & Mines
General Guidelines in Handling Depletion of Oil & Gas Wells & Mines
1. A reasonable allowance for depletion computed in accordance with the cost-depletion method shall
be allowed as deductible item.
- Three methods of determining depletion
a. Cost-depletion method
b. Percentage depletion method
c. Discovery depletion method
2. The amount of allowance for depletion is limited only to the capital invested.
3. After production in commercial quantities has commenced, certain intangible exploration &
developing drilling cost:
- Shall be deducted in the year incurred if such expenditures are incurred for non-producing wells
&/or mines
- Shall be deductible in full in the year incurred or at the election of the taxpayer may be
capitalized & amortized if such expenditures incurred are for producing wells &/or mines in the
same contract
4. Any intangible exploration, drilling, or development expenses may be handled in the following
manner:
- Incurred for non-producing wells &/or mines, which means efforts are not successful. The
expenditures are deductible in the year incurred
- Incurred for producing wells &/or mines, which means efforts are successful. The expenditures
are deductible in the year incurred or may be capitalized & amortized
5. Any intangible exploration, drilling, & development expenses allowed as a deduction in computing
taxable income during the year shall not be considered in computing the adjusted cost basis for the
purpose of computing allowable cost depletion.
General Guidelines in Deducting Exploration & Development Expenditures
1. In computing taxable income from mining operations, the taxpayer may deduct exploration &
development expenditures accumulated as cost or adjusted basis for depletion as of date of
prospecting, as well as exploration & development expenditures paid or incurred during the taxable
year.
2. The total amount deductible for exploration & development expenditures shall not exceed 25% of the
net income from mining operations computed without the benefit of any tax incentives under existing
laws.
3. The actual exploration & development expenditures minus 25% of the net income from mining shall
be carried forward to the succeeding years until fully deducted.
4. The election by the taxpayer to deduct the exploration & development expenditures is irrevocable &
shall be binding in the succeeding taxable years.
22
Guidelines in deducting Depletion by a NRA or a Foreign Corporation
- Allowance for depletion of oil & gas wells or mines shall by authorized only with respect to oil & gas well
or mines located in the Philippines.
Charitable & Other Contributions
Deductible Charitable Contributions
1. Charitable contributions deductible in full.
- Donations to the following entities or institution are deductible in full:
1. Government of the Philippines or to any of its agencies or political subdivisions, including
fully-owned government corporations exclusively to finance, to provide for or to be used in
undertaking priority activities in:
a. Education
b. Health
c. Youth & sports development
d. Human settlement
e. Science & culture
f. Economic development
2. Donations for economic development shall be in accordance with the National
Development Authority (NEDA), in consultation with appropriate government agencies.
2. Foreign institution or international organization
- In compliance with agreements, treaties or commitments entered into by the government & the
foreign institution or international organization or in pursuance of special laws.
3. Accredited non-government agencies
- Organized & operated exclusively for scientific, research, educational, character-building, youth
& sport development, health, social welfare, cultural & charitable purposes; provided the
following conditions are fully complied with, otherwise deduction will be subject to limitations:
1. The donation must be utilized directly for the active conduct for which it was organized
not later than the 15th day of the 3rd month after the close of the taxable year.
2. The amount of administrative expenses shall in no case exceed 30% of the total expenses.
3. In case of dissolution, the asset would be transferred to another non-profit domestic
corporation organized for a similar purpose.
- The following are non-profit organizations recognized by the government where donations are
fully deductible:
1. Cultural Center of the Philippines (CCP)
2. Roxas Magsaysay Award Foundation (RMAP)
3. Boy Scout of the Philippines (BSP)
4. Girls Scout of the Philippines (GSP)
5. Integrated Bar of the Philippines (IBP)
6. Roxas Educational & Welfare Committee
7. National Social Action Council (NASAC)
8. International Rice Research Foundation
9. Development Academy of the Philippines (DAP)
10. State Colleges and Universities (SUCs)
11. School of Deaf and Blind (SDB)
12. Philippine Amateur Athletic Association (PAAF)
13. Artesian Well Fund
14. National Museum, Library & Archives
Charitable Contribution Subject to Limitation
1. Government of Philippines or any of its political subdivision exclusively for public purpose.
2. Domestic corporations, associations or institution organized & are operating exclusively for the
following purpose:
a. Religious
b. Charitable
23
c. Scientific
d. Youth & sports development
e. Cultural or educational
f. Rehabilitation of veterans
3. Social welfare institutions
4. Non-government organization (NGO)
Amount of Limitation
- The ceiling of charitable contribution subject to limitation are:
1. 10% if donor is an individual taxpayer
2. 5% if donor is a corporation
- The basis of 10% or 5% is the taxable business income before the contribution.
- The deductible amount is the limitation or the actual contribution, whichever is lower.
Non-Deductible Charitable Contribution
- Charitable & other contribution not expressly covered by taxation law or any special law that did not
meet the requirements of the law are non-deductible contributions.
Basic Procedures in Computing the Deductible Amount
1. Determine whether contribution are deductible or non-deductible.
2. If the contribution is deductible, determine whether donation is deductible in full or subject to
limitation.
3. If the contribution is subject to limitation, compute the taxable income before personal exemptions.
4. Multiply the taxable income before contribution by the following percentages:
a. 10% if donor is an individual taxpayer
b. 5% if donor is a corporation
5. Compare the actual contribution & the limitation & use the lower amount as deductible contribution.
Valuation of Property Donated Other than Money
- The amount of any charitable contribution of the property other than money shall be based on the
acquisition cost of said property.
Research & Development Costs
Tax Treatment of Research & Development Cost
1. Ordinary & necessary expenses recognized in the period incurred
- Research & development expenditures may be treated as an outright expense deductible during
the taxable year when incurred.
2. Capitalized & amortized over a period not less than 5 years
- Deferred expenses are allowed as deduction ratably distributed over a period of not less than 60
months beginning with the month in which taxpayer first realized benefits from such
expenditures.
- Amortization shall start when the taxpayer starts to recognize income from research &
development undertaken.
Limitations on Deduction
- Deductions on research & development shall not apply to:
1. Any expenditure for the acquisition or improvement of land, or for the improvement of property
to be used in connection with research & development of a character which is subject to
depreciation & depletion.
2. Any expenditure for paid or incurred for the purpose of ascertaining the existence, location,
extent or quality of any deposit of ore or other mineral including oil or gas.
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Pension Trust
Deductible Pension Trust
Deductible Pension Trust Contribution Proper Tax Treatment
Contribution or payments to cover pension Deduct the full amount
liabilities accruing during the taxable year
Contribution or payments to cover pension Prorated in equal period of 10 years
trust in excess of the contributions or beginning in the year in which payment is
contributions for past pensions made
SPECIAL DEDUCTIONS
Premium Payment on Health &/or Hospitalization Insurance
Insurance Companies
- For insurance companies, whether domestic or foreign doing business in the Philippines, the following may
be deducted from their gross income:
1. Net additions, if any, required by law to be made within the year to reserve funds.
2. Sums other than dividends paid within the year on policy & annual contracts.
Mutual Insurance Companies
- In cases of mutual insurance companies requiring their member to make premium deposits to provide for
losses & expense may deduct any portion of the premium deposit returned to their policyholders.
Mutual Marine Insurance Companies
- Mutual marine insurance companies shall deduct the following from their gross premiums collected &
received:
1. Amount paid for reinsurance
2. Amount repaid to policyholders on account of premium previously paid by them
3. Interest paid upon those amounts between the ascertainment any payment thereof
Assessment Insurance Companies
- Assessment insurance companies, whether domestic or foreign may deduct from their gross income the actual
deposit of sums with the officers of the Government of Philippines pursuant to law, as additions to guarantee
or reserve funds.
NON-DEDUCTIBLE ITEMS
- In computing net income, no deduction shall, in any case, be allowed in respect to:
1. Personal, living or family expenses
2. Any amount paid out for new buildings or for permanent improvements or betterment made or increase the value
of any property or estate
3. Any amount expensed in restoring property or in making good the exhaustion thereof for which an allowance is or
has been made
4. Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially
interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly
or indirectly a beneficiary under such policy
5. Losses from sale or exchange or property:
a. Between members of the family
b. Except in the case of distribution in liquidation between an individual & a corporation more than 50% in value
of the outstanding stock of which is owned
c. Except in the case of distribution in liquidation between two corporation more than 50% in value of the
outstanding stock of which is owned
d. Between the grantor & a fiduciary of any trust
e. Between the fiduciary of another trust, if the same person is a grantor with respect to each trust
f. Between fiduciary of a trust & a beneficiary of such trust
25
NON-TAXABLE INCOME
COMPONENTS
1. Statutory Minimum Wage Earner (MWE)
2. Life Insurance Proceeds
3. Amount Received by Insured as Return of Premium
4. Gifts, Bequest & Devices
5. Compensation for Injuries
6. Income Exempt Under Treaty
7. Retirement Benefits, Pension, Gratuities, Etc.
8. Tax-Exempt Corporations
9. Tax-Exempt Interest Income
10. Tax-Exempt Qualified Senior Citizen
11. Barangay Micro Business Enterprise (BMBE)
12. Tax-Exempt Educational Institution
13. Tax-Exempt Cooperative Income
14. Other Non-Taxable Income
STATUTORY MINIMUM WAGE EARNER (MWE)
Tax Rules on Statutory Minimum Wage Earner (MWE)
1. Under R.A. No. 9504, the compensation income of MWEs who work in the private sector or public sector and
being paid the Statutory Minimum Wage (SMW) applicable to the place where he/she is assigned is exempt
from income and not subject to withholding tax.
2. The tax exemption includes:
a. Holiday pay
b. Overtime pay
c. Night shift differential pay
d. Hazard pay earned by the aforementioned MWEs
3. An employee who receives additional compensation such as commission, honoraria, fringe benefits, benefits
in excess of the allowable statutory amount of P82 000, taxable allowances and other taxable income other
than the SMW, holiday pay, overtime pay, night shift differential pay and hazard pay shall not enjoy the
privilege of being a MWE and, therefore, his/her entire earnings are no longer exempt from income tax.
4. MWEs receiving other income such as income from conduct of trade, business or practice of profession,
except income subject to final tax, in addition to compensation income are not exempted from income tax on
their entire income earned during the year. This rule, notwithstanding, the SMW, holiday pay, overtime pay,
night shift differential pay and hazard pay shall still be subject to income tax and consequently to withholding
tax.
5. Any reduction/diminution of wages for purposes of exemption from income tax shall constitute
misrepresentation. It shall result to the automatic disallowance of expense. Offenders may be criminally
prosecuted under the existing laws.
LIFE INSURANCE PROCEEDS
Tax Rules on Life Insurance Proceeds
1. As a general rule, proceeds of life insurance policies received by the heirs or beneficiaries are not taxable.
2. If the proceeds of the life insurance policy are being held by the insurer with the agreement that an interest
is to be paid thereon, the interest received shall be included in the gross taxable income.
3. The proceeds of life insurance policy are subject to tax, if the beneficiary himself/herself or his/her estate
subject to estate tax.
4. If the insured transfers the life insurance to another person with consideration, and the proceeds upon the
death of the insured are paid to the transferee, the proceeds are taxable to the extent that exceeds the
consideration made.
26
AMOUNT RECEIVED BY INSURED AS RETURN OF PREMIUM
Tax Rules on Amount Received by Insured as Return of Premium
1. As a general rule, premium return on life insurance policy is not taxable.
2. If the amount returned exceeded the total premium made, the excess is taxable and shall be included as part
of the gross taxable income.
GIFTS, BEQUEST & DEVICES
Tax Rules on Gifts, Bequest & Devices
1. As a general rule, gifts, bequest, and devices are not subject to income tax.
2. Gifts are usually subject to donor’s tax, while bequest and devices are subject to estate tax
3. If income from such property, in cases of transfers of dividend interest, shall be included in the gross income.
COMPENSATION FOR INJURIES
Tax Rules on Compensation for Injuries
1. Generally, amounts representing compensation for injuries and sickness, including amounts of damages paid
on accounts of such injuries and sickness, are not taxable.
2. Compensation of the following damages are not taxable:
a. Moral damages for grief, anxiety
b. Exemplary damages
c. Actual and liquidated damages for injuries
d. Damages for loss of earnings capacity and for loss of goods or belongings
3. The following compensation for injuries are taxable:
a. Damages for loss of earnings in property
b. Compensatory damages
c. Payment of interest on non-taxable damages
INCOME EXEMPT UNDER TREATY
Tax Rules on Income Exempt Under Treaty
- Income earned by taxpayers, whether individual or corporate, covered by any treaty binding upon the
government of the Philippines, is tax-exempt.
RETIREMENT BENEFITS, PENSION, GRATUITIES, ETC.
Tax Rules on Retirement Benefits, Pension, Gratuities, Etc.
- The following retirement benefits shall not be included in the gross income, and shall be exempt from
taxation:
1. Retirement benefits received under R.A. No. 7641 and those received by officials and employees of private
firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained
by the employer provided that:
a. The retiring official or employee has been in the service of the same employer for at least 10 years.
b. The retiring official or employee is not less than 50 years of age at the time of his/her retirement.
c. The benefit granted shall be availed of by an official or employee only once.
2. Separation benefits received by an official or employee from employer due to:
a. Sickness
b. Death
c. Physical/mental disability beyond control of the official or employee
3. Benefits received from or enjoyed under the Social Security System (SSS) in accordance with the provisions
of R.A. No. 8282.
4. Benefits received from the Government Service Insurance System (GSIS) under R.A. No. 8291, including
retirement gratuity received by government officials and employees.
5. Payment of benefits due or to become due to any person residing in the Philippines as called for by the
law of the United States and administered by the U.S. Veterans Administration (USVA).
27
6. Social security benefits, retirement gratuities, pensions, and other similar benefits received by resident or
non-resident citizen of the Philippines or alien who come to reside permanently in the Philippines from
foreign government agencies and other institutions, private or public.
TAX-EXEMPT CORPORATIONS
Tax Rules on Tax-Exempt Corporations
- Income received by the following corporations shall be exempted from tax:
1. Government education institution
2. Non-stock and nonprofit educational institutions
3. Nonprofit labor, agricultural or horticultural organizations
4. Associations of farmers, fruit growers, and the like whose primary function is to market the product of
their members
5. Organizations with a purely local operation whose income is derived only from assessments, dues, and
fees collected from their members to meet operational expenses such as fire insurance company, farmers’
or other mutual typhoon associations, mutual ditch or irrigation company and mutual or cooperative
telephone company
6. Non-stock Corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes or for the rehabilitation of veterans; provided that no individual
person owns its assets or no individual person owns its assets or no individual person receives benefit on
its earnings
7. Non-stock/nonprofit mutual savings bank or non-stock/nonprofit cooperative bank.
8. Nonprofit civic league or organization operating exclusively for the promotion of social welfare
9. Cemetery company owned and operated exclusively for the benefit of its members
10. Nonprofit business league, chamber of commerce, or board of trade
11. Associations, orders, beneficiary societies operating for exclusive benefits of their members.
TAX-EXEMPT INTEREST INCOME
Tax Rules on Tax-Exempt Interest Income
1. Interest income derived by the Philippine National Red Cross (PNRC) from currency bank deposit and yield or
any monetary benefit from deposits substitutes and from trust funds and similar arrangements are exempted
from 20% final tax.
2. PAG-IBIG Mortgage Certificates (PMCs) that are categorized under the definition of long-term
deposit/investment, the interest income of which is exempt from income tax.
TAX-EXEMPT QUALIFIED SENIOR CITIZEN
Tax Rules on Tax-Exempt Qualified Senior Citizen
- The income of a qualified senior citizen is exempt from the payment of income tax provided that he qualifies
to be minimum wage earner in accordance with R.A. No. 9504.
TAX-EXEMPT INVESTORS AND INVENTIONS
Tax Rules on Tax-Exempt Investors and Inventions
1. Sec. 5 and Sec. 6 of R.A. No. 7459 (The Inventors and Inventions Act of 1991) provides tax exemption for 10-
year period of the income generated from commercial sale of the invention which starts from the date of first
commercial sale.
2. This income tax exemption does not apply to the prizes awarded to the individual inventor which is still subject
to a final tax of 20%.
BARANGAY MICRO BUSINESS ENTERPRISE (BMBE)
Tax Rules on Barangay Micro Business Enterprise
1. BMBEs are exempt from income taxation and exempt from the coverage of minimum wage law.
- “Barangay Micro Business Enterprise: refers to any business entity or enterprise engaged in the
production, processing or manufacturing of products or commodities, including agro-processing,
28
trading and services, whose total assets including those arising from loans but exclusive of the land
on which the particular business entity’s office, plant and equipment are situated, shall not be more
than P3 000 000.
2. A registered BMBE shall be issued a Certificate of Authority (CA) as proof of registration, which will be effective
for a period of 2 years, thereafter.
TAX-EXEMPT EDUCATIONAL INSTITUTION
Tax Rules on Tax-Exempt Educational Institution
1. The following educational institution are exempt from income tax:
a. Government educational institution
b. Non-stock and nonprofit education institutions.
2. Revenue or income not actually, directly or exclusively related to educational purposes shall be subject to
internal revenue taxes.
TAX-EXEMPT COOPERATIVE INCOME
Tax Rules on Tax-Exempt Cooperative Income
1. As stated in Revenue Regulations 20-2001, duly registered cooperatives dealings/transacting business with
members only shall be exempt from paying the following taxes for which they are directly liable:
a. Income tax on income from operations
b. Value Added Tax (output tax on sale)
c. 3% percentage tax
d. Donor’s tax on donations to duly accredited charitable research and educational institutions, and re-
investment to socio-economic projects within the area of operation of cooperatives
e. Excise tax
f. Documentary stamp tax
g. Annual registration fee of P500
2. Duly registered cooperative dealings/transacting business with both members and non-members are
exempted from all National Internal Revenue Taxes on their transactions to member.
3. Cooperatives with accumulated reserves and undivided net savings of not more than P10 000 000 are also
exempted from income tax for a period of 10 years from date of registration with CDA, provided, that at least
25% of the net income of the cooperative is returned to the members in the form of interest and/or patronage
refund.
Taxability of Cooperatives
- As a rule, cooperatives are tax-exempt except for the following:
1. 20% final income tax on interest from any currency bank deposit and yield or any other monetary benefit
from deposit substitutes and from trust funds and similar arrangements and royalties derived from
sources within the Philippines.
2. 7.5% final income tax on interest income derived from a derived from a depository bank under the
expanded foreign currency deposit system.
3. Capital gains tax on sales or exchanges of real property classified as capital assets or shares of stock.
4. Documentary stamp taxes on transactions of cooperatives dealings with non-members when the
accumulated reserves and undivided net savings of such cooperatives exceed P10 000 000.
5. VAT billed on purchases of goods and services.
OTHER NON-TAXABLE INCOME
Tax Rules on Other Non-Taxable Income
1. Income derived by foreign government
- Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or
from interest on deposit in banks in the Philippines by:
i. Foreign government
29
ii. Financing institution owned or enjoying financing from foreign governments
iii. International or regional financial institution established by foreign governments
2. Income derived by the government or its political subdivisions
- Income derived from any public utility or from the exercise of any essential governmental function accruing
to the government of the Philippines or to any political subdivisions thereof are tax-exempt.
3. Prize and awards
- Prizes and awards are made primarily in recognition of religious, charitable, scientific, educational, artistic,
literary or civic achievement but only if:
i. The recipient was selected without any action on his/her part to enter the contest or proceeding.
ii. The recipient is not required to render substantial future service as a condition to receiving the prize
or award.
4. Prize and awards in sports competitions
- All prizes and awards granted to athletes in local and international sports competitions and tournaments,
whether held in the Philippines or aboard and sanctioned by their respective national sports associations,
shall not be included in the gross income and shall be tax-exempt.
- Prizes and awards granted by association not accredited by Philippine Olympic Sport Committee (POSC)
are subject to income tax and consequently to 20% withholding tax.
th
5. 13 month pay and other benefits
- These includes gross benefits received by officials and employees of public and private entities provided
that the total exclusion shall not exceed P82 000 which shall cover:
i. Benefits received by official and employees of the national and local government pursuant to R.A. No.
6686.
ii. Benefits received by employees pursuant to P.D. No. 851, as amended by Memorandum Order No. 28
dated August 13, 1986.
iii. Other benefits such as productivity incentives and Christmas bonus.
6. GSIS, SSS, Medicare, and other contributions
- Contributions to the GSIS, SSS, and Medicare, including union dues of individuals are excluded from gross
taxable compensation income. In other words, the amount of taxable salary or compensation should be
the net of such contributions.
7. Gains from sale of bonds, debentures or other certificate of indebtedness
- Gains from sale of these kinds of investments are tax-exempt, provided the investments have a maturity
period of 5 years or more.
8. Gains from redemption of shares in mutual funds
- These includes gains derived by an investor upon redemption of shares of stock in a mutual fund company.
- Additional items to be excluded from gross income tax:
i. Income tax subject to final tax
ii. De minimis benefits
iii. Fringe benefits to supervisory/managerial employee
9. Interest on long-term deposits or investments in banks (with maturity of 5 years or more) received by
individuals (except nonresident aliens not engaged in business or practice of profession in the Philippines).
10. Interest received by a nonresident individual or a nonresident corporation from deposits with the depository
banks under the expanded foreign currency deposit system.
11. Interest on price of land covered by CARP (Comprehensive Agrarian Reform Program).
12. Intercorporate dividend, or dividend received by a domestic corporation or resident foreign corporation from
a domestic corporation.
13. Philippines Charity Sweepstakes winnings and Philippines Lotto winnings.
14. Income earned by non-resident and by alien from sources outside the Philippines.
30
TAXATION FOR INDIVIDUALS & CORPORATION
COMPONENTS
1. Income Tax of Individuals
2. Income Tax of Corporations
INCOME TAX OF INDIVIDUALS
Classification of Individual Taxpayers
Citizen of the Philippines
- The following individuals are citizens of the Philippines:
1. Those who are citizen of the Philippines at the time of the adoption of the 1987 Constitution.
2. Those whose fathers or mothers are citizens of the Philippines.
3. Those who are born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship
upon reaching age of majority.
4. Those who are naturalized in accordance with law.
a. Natural-born citizens are those who are citizen of the Philippines from birth without having
to perform any act to acquire or perfect their Philippine citizenship.
b. Citizens of the Philippines who marry aliens shall retain their citizenship, unless, by their act
or omission, they are deemed under the law to have renounced it.
c. Dual allegiance of citizen is inimical to the national interest and shall be dealt with by law.
Resident Citizen
- A resident citizen is a Filipino citizen who:
1. Resides or stays in the Philippines permanently.
2. Stays outside the Philippines for less than 183 days during a particular taxable year.
Non-Resident Citizen
- A non-resident citizen is a Filipino Citizen who may be:
1. A citizen of the Philippines who establishes to the satisfaction of the BIR Commissioner
the fact of his/her physical presence abroad with a definite intention to reside therein.
2. A citizen of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis.
3. A citizen of the Philippines who works and derives income from abroad and whose
employment threat requires him/her to be physically present abroad most of the time
during the taxable year.
- An individual, to be considered physically present abroad most of the time, must be
outside of the Philippines for more than 183 days during the taxable year.
4. A citizen who has been previously considered as a non-resident citizen and who arrives in
the Philippines at any time during the taxable year to reside permanently therein, with
income derived from sources abroad until the date of his/her arrival.
Alien
- Aliens, for income tax purposes, are those taxpayers who are considered foreigners, or who have not
acquired Filipino citizenship under the Philippines Constitution.
Resident Alien
- Resident alien refers to an individual who resides in the Philippines, but is not a citizen
thereof.
- Resident alien includes foreign individuals whose stay in the Philippines has exceeded one
year from the date of their arrival.
Non-Resident Alien
Engaged in Business
- A non-resident alien engaged in trade or business refers to:
31
1. An individual who is not a citizen and who is not a resident of the Philippines, but
has a business, particularly a sole proprietorship, established and operating in the
Philippines.
2. A non-resident alien who comes to the Philippines and stays for an aggregate
period of more than 180 days during the taxable year.
Not Engaged in Business
Special Individual
- Special alien or individual employed by:
1. Regional or area headquarters and regional operating headquarters of
multinational corporations in the Philippines
2. Petroleum service contractors or sub-contractor
3. Offshore banking units in the Philippines
Personal Exemption
Basic Personal Exemption
- The new R.A. 9504 provides that the basic personal exemption for individual taxpayer amounts to P50
000 whether he/she is married, head of the family or single.
Individual Taxpayers Entitled to Basic Personal Exemption
1. Resident citizen with income within or outside the Philippines
2. Non-resident citizen with income within the Philippines
3. Resident alien if there is an income within the Philippines
4. Estate and trust with compensation or business income in the Philippines
5. Non-resident alien engaged in business or trade in the Philippines provided the following
requisites have been complied with:
a. The country of which the non-resident alien is a subject or a citizen has an income tax law.
b. Such income tax law of the foreign country allows personal exemption to a Filipino citizen
deriving income therefrom but not residing therein (principle of reciprocity).
c. The non-resident alien files an income tax return (ITR) in the Philippines in due time.
d. Such ITR is true and accurate, covering all income received from sources within the
Philippines.
Taxpayers Not Entitled to Basic Personal Exemption
1. Non-resident alien not engaged in business or trade in the Philippines
2. Non-resident alien engaged in business or trade in the Philippines, and there is no reciprocity
Principle of Reciprocity
1. Under the principle of reciprocity, the allowance for personal exemption for a non-resident alien
engaged in trade or business is equal to the amount of exemptions allowed in the income tax law in
the country of which he is a citizen not to exceed the amount fixed as personal exemption in the
Philippines.
2. The term “personal exemption” in the Philippines includes both the basic personal exemption and
additional personal exemption for qualified dependent children not exceeding 4.
3. If the reciprocity tax treaty stipulates to allow only basic personal exemption, the Philippines will only
allow basic personal exemption subject to limit.
4. If the tax treaty stipulates that both basic personal and additional exemptions be allowed as
exemptions, based on reciprocity principle the Philippines will also grant both basic and additional
exemptions subject to limit.
Additional Personal Exemption
- The new R.A. 9504 provides that the amount of additional exemption for each qualified dependent
child (not exceeding 4) is P25 000.
32
Qualified Dependent Child
- The dependent must be:
1. A taxpayer’s child, whether legitimate, illegitimate, natural or legally adopted.
2. Chiefly depending for support on the taxpayer
3. Living with the taxpayer
4. Not married, not gainfully employed, and not more 21 years old except when such dependent,
regardless of age, is incapable of self-supporting because of mental or physical defect.
Tax Rules on Grant of Additional Personal Exemption
- The following guidelines should be observed in granting additional personal exemption:
1. The following individual taxpayers with income within the Philippines are entitled to
additional personal exemption:
a. A citizen, whether resident or non-resident
b. A resident alien, provided the qualified dependent children are living with him/her in the
Philippines
2. Non-resident aliens, whether engaged in business in the Philippines or not, cannot claim for
additional personal exemption.
3. Head of the family or married individuals shall be entitled to additional personal exemption
for his/her/their qualified dependent children.
4. In the case of legally separated spouses, only the spouse who has custody of the child, in may
claim additional exemption.
- If both spouses are custodian of the dependent, the total amount of additional exemption
that they shall claim shall not exceed the maximum allowable amount.
5. The benefactor of a qualified senior citizen cannot claim additional personal exemption for
the senior citizen.
6. The husband is the proper claimant of additional exemption for qualified dependent children.
However, the wife shall claim full additional exemption for children in the following cases:
a. The husband is unemployed.
b. The husband is a non-resident citizen deriving income from foreign sources.
c. The husband losses the custody of the qualified dependent through lawsuit.
d. The husband formally waiver his right to claim exemption of children. The waiver should
be for all children
i. A waiver shall take effect until revoked by the husband.
ii. Any waiver revocation shall take effect only starting the succeeding calendar year.
In no case should wife’s employer deduct exemptions for children from her income,
unless the waiver by the husband has been duly acknowledge by the employer.
7. In case only one spouse earns an income subject to income tax, the said spouse shall claim
the additional personal exemption.
8. The additional personal exemptions for qualified dependent shall be claimed by only one of
the spouses in the case of married individuals.
Tax Rules on Change of Filling Status
1. If the taxpayer has an additional dependent during the taxable year, he/she may claim the
corresponding additional exemption in full for such year.
2. If the taxpayer dies during taxable year, his/her estate may still claim the personal and additional
exemptions for himself/herself and his/her dependent as if he/she died at the close of such year.
Health/Hospitalization Insurance Premium (HHIP)
1. Heath and hospitalization insurance premium refers to the premium payment of individual taxpayer on health
and hospitalization insurance contract secured principally to cover his/her expenses and those of his/her
dependents in times of sickness and hospitalization.
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2. The tax code allows premium payment on health and hospitalization as a special deduction from the gross
income of the taxpayer.
HHIP Requirements
1. There shall have an actual health and hospitalization insurance for himself/herself and his/her family.
- Premium payment other than health and hospitalization is not allowed as a special deduction.
2. The amount of allowable deduction on health and hospitalization shall not exceed P2 400 per year or
P200 per month.
3. The total gross income of the family shall not exceed P250 000 for the taxable year.
4. If the taxpayer is married, the spouse claiming the additional personal exemption shall likewise
deduction of the HHIP.
5. The husband shall claim deduction for premium on health/hospitalization in case the married couple
does not have qualified dependent children.
Taxpayer Entitled to Claim HHIP
- The following taxpayers, with income within the Philippines can claim deduction for HHIP.
1. Resident citizen
2. Non-resident citizen
- An individual taxpayer classified as non-resident alien whether engaged in business or not in
the Philippines, or as special alien/individual cannot claim premium paid on health and
hospitalization as deduction from gross income.
3. Resident alien
Taxable Income Based on Classification of Individual Taxpayers
Resident Citizen (RC)
- Resident citizens are taxable on income derived from within and outside the Philippines and is subject
to normal tax.
Non-Resident (NRC)
- This type of individual taxpayer is taxable on his/her income from within the Philippines only and is
subject to normal tax.
Resident Alien (RA)
- The resident alien is taxable on his/her income from within the Philippines only and is subject to
normal tax.
Non-Resident Alien Engaged in Trade or Business in the Philippines (NRA-ETBP)
- This type of individual taxpayer is taxable on his/her income from within the Philippines only and is
subject to normal tax.
Non-Resident Alien Not Engaged in Trade or Business in the Philippines (NRA-NETBP)
- This taxpayer is taxable on his/her gross income from within the Philippines at 25%. The taxpayer
cannot claim personal exemptions and expenses as deductions.
Special Individual/Alien (SI/A)
- The taxpayer is taxable on his/her income within the Philippines at 15% based on gross income.
34
RC NRC RA NRA-ETBP NRA-NETBP SI/A
Basic Exemption Yes Yes1 Yes1 Yes2 No No
Additional Exemption Yes1 Yes1 Yes3 No No No

Taxable Income
Within Yes Yes Yes Yes No No
Without Yes No No No No No
4
Tax Base NI NI NI NI GI5 GI
1
Provided taxpayer has income within the Philippines
2
Provided principle of reciprocity applies
3
Provided dependents are living with the taxpayer
4
NI – Net Income
5
GI – Gross Income
Summary of Tax Base and Tax Rates on Individual Taxpayers
Resident Non Resident
Citizen Alien Citizen NRA-EBT NRA-NEBT SI/A
Category of Income
All Within Within Within Within Within
Sources Philippines Philippines Philippines Philippines Philippines
1. Compensation,
Based on Taxable Income
Business/Profession
Schedular Normal Tax rate: NIRC Sec. 24
2. Prizes of P10 000 or less **GIW **GIW
3. Cinematographic Film & the 25% 15%
GIW 25%
like
4. *Interest, Royalty,
Winnings/Prizes except Prizes GIW 20% **FWT
P10 000 & below GROSS GROSS
5. *Royalties – books, literary, INCOME INCOME
GIW 10% **FWT WITHIN WITHIN
musical
6. *Interest (long-term EXEMPT (GIW) 25% (GIW) 15%
investment) – savings, In case of pre-termination, remaining maturity of:
common or individual trust 4 years to less than 5 years – 5%
funds, deposit substitute 3 years to less than 4 years – 12%
investment management Less than 3 years – 20%
account in denomination of
P10 000 or as prescribed by
BSP.
7. Cash/Property Dividends GIW 20%
GIW 10% FWT
FWT
8. *Interest (Foreign Currency
GIW 7.5% FWT EXEMPT
Deposit System)
9. Capital Gains on Sale of
Net capital gains within: 5% (Not over P100 000): 10% (In excess of P100
Shares (not traded-stock
000)
exchange)
10. Sales of Shares (traded in
½ of 1% of the Selling Price, Business Tax
stock exchange)
11. Capital Gains on Sale of
Cross sales price or FMV, whichever is higher 6%
Real Property
12. Winnings on Philippine
EXEMPTED
Sweepstakes/Philippine Lotto
35
*FWT – Final Withholding Tax
**GIW – Gross Income Within
Normal (Schedular) Tax Rate
Normal (Schedular) Tax Rate on Individual Taxpayer (Sec. 24(A) of NIRC)
Not over P10 000 5%
Over P10 000 but not over P30 000 P500 + 10% of excess over P10 000
Over P30 000 but not over P70 000 P2 500 + 15% of excess over P30 000
Over P500 000 P125 500 + 32% of excess over P500 000
Computation of Income Tax Due
Individual Taxpayers Deriving Income Purely from Compensation
Gross Taxable Compensation Income xxxxx
Less: Personal Exemptions
Basic Personal Exemption xxxxx
Additional Personal Exemption xxxxx
Special Deductions (HHIP) xxxxx xxxxx
Taxable Compensation Income xxxxx
Tax Due (Using the Schedular Table) xxxxx

Less: Withholding Tax per BIR Form No. 231 xxxxx
Tax Still Due xxxxx
Individual Taxpayers Deriving Income from Business or Exercise of Profession
Self-Employed Without Compensation Income
Gross Sales/Receipts xxxxx
Less: Sales Returns & Allowances xxxxx
Net Sales/Receipts xxxxx
Less: Cost of Sales/Services xxxxx
Gross Taxable Income xxxxx
Less: Allowable Deductions xxxxx
Income before Personal Deduction xxxxx
Taxable Income xxxxx
36
Self-Employed Without Compensation Income
Gross Taxable Compensation Income xxxxx
Taxable Compensation Income xxxxx
Add: Taxable Business Income
Gross Sales/Receipts xxxxx
Less: Sales Returns & Allowances xxxxx
Net Sales/Receipts xxxxx
Less: Cost of Sales/Services xxxxx
Gross Taxable Income xxxxx
Less: Allowable Deductions xxxxx xxxxx
Taxable Income xxxxx

Less: Withholding Tax per BIR Form No. 231 xxxxx
Tax Still Due xxxxx
Income Tax of Corporations

CORPORATION
TAX RATE TAX BASE
BUSINESS INCOME
Domestic Corporation
1.
a. In General 30% Taxable Income from all sources
b. Minimum Corporate Income Tax 2% Gross Income
c. Improperly Accumulated Earnings 10% Improperly Accumulated Taxable
Income
2. Proprietary Educational Institution
a. In general 10%
b. Gross Income from unrelated trade/business/
other activity is more than 50% of the total 30% Taxable Income from all sources
gross income from all sources
3. Non-stock, Non-profit Hospital 10%
4. Non-stock Corporation/Association operated
Tax exempt
exclusively for Charitable purposes
Income of whatever kind & character from any
real/ personal property or any activity operated 10% Taxable Income from all sources
for profit
5. GOCC, Agencies & Instrumentalities
-Government Service Insurance System (GSIS)
-Social Security System (SSS)
-Philippine Health and Insurance Corporation Tax Exempt
(PHIC)
-Philippine Charity and Sweepstakes Office (PCSO)
-Local Water Districts
6. Power Sector Assets and Liabilities Management
Corporation
37
a. Sale of National Power Corporation generation
Tax Exempt
assets & real properties to winning bidders
b. Rental income from generation assets & real
properties before sale to winning bidders 30% Taxable Income from all sources
c. Income from operations
7. National Government & LGUs Tax Exempt
8. Mutual Life Insurance Companies 30%
9. Homeowners’ Association
In general 30% Taxable Income from all sources
Income and dues are used only for cleanliness, May be Tax Exempt if
safety, security, & other basic services complied all the
conditions
10. Recreational Clubs
30% Taxable Income from all sources
11. Taxable Partnership
12. Exempt Corporation
13. General Professional Partnership Tax Exempt
14. Corporation covered by Special Laws Rate specified under the special law
Resident Foreign Corporation

1.
a. In General 30% Taxable Income from WITHIN the
b. Minimum Corporate Income Tax 2% Philippines
c. Improperly Accumulated Earnings 10% Gross Income
Improperly Accumulated Taxable
Income
2. International Carriers 2.50% Gross Philippine Billings
3. Regional Operating Headquarters (ROH) 10% Taxable Income
4. Branch Remittances except those registered with Total Profits Applied/Earmarked for
PEZA 15% remittance without deduction for tax
component
5. Corporation Covered by Special Laws Rate specified under the special law
6. Offshore Banking Units (OBUs)
a. Foreign Currency Transactions 10%FT Gross Taxable Income
b. Other than foreign currency transaction 30% Taxable Income
7. Foreign Currency Deposit Units (FCDU)
a. Foreign Currency Transactions 10% Gross Taxable Income
b. Other than foreign currency transaction 30% Taxable Income
Non-Resident Foreign Corporation

1. In General 30%
Gross Income
2. Cinematographic Film Owner, Lessor, Distributor 25%
3. Owner or Lessor of Vessels chartered by 4.50%
Philippine Nationals Gross Rentals/Lease/Charter
4. Owner or Lessor of Aircraft, Machinery, & other 7.50% Fees/Other Fees
Equipment
PASSIVE INCOME (final tax on gross) Domestic/Resident Foreign Non-Resident

Foreign
1. Interest from
a. Deposits and yield 20%FT
38
b. Any monetary benefit from deposit substitutes
and trust funds
c. Depository bank under expanded Foreign
7.5%FT
Currency Deposit System (FCDS)
d. Long-term deposit or Investment 30%FWT
e. Long-term deposit NOT issued by banks or 20%CWT
Investment certificates NOT considered as -Part of Taxable Income and subject to 30%
deposit substitute regular tax
f. Foreign Loans
-In General 20%FT
-from US Corporation to domestic Tax exempt
Corporation Tax exempt
-from Korea 15%FT
-from Singapore 15%FT
-from Thailand 10%FT
-from Belgian Corporation
2. Income
derived by a depository bank under the
expanded Foreign Currency Deposit System
(FCDS)
a. From Foreign Currency Transactions with Local
Banks and branches of foreign banks 10%FT
b. Interest income from foreign currency loans
Derived by a bank from its FCDUs/EFCDUs or
OBUs with respect to foreign currency Tax exempt
transactions
3. Royalties 20%FT
Paid By PEZA-registered enterprise to non-
resident Japanese Corporation subject to:
a. Payor-company is registered with Board of
10%FT
Investments (BOI)
b. Payment for Cinematographic films,
15%FT
radio/television broadcasting
c. All other cases 10%FT (2009)
Paid by domestic corporation to non-resident
corp:
a. UK 15%FT
b. US 10%FT
c. French Corporation 15%FT
4. Dividends
-received from:
a. Domestic Corporation
 in General Exempt 15%FT
 paid to resident of Netherlands Rate not exceeding
10%
 paid to Singaporean Company Rate not exceeding
15%
 paid to German Company Rate not exceeding
10%
 paid to Australian and Hong Kong Company 15%FWT
39
 paid to Switzerland citizen Rate not exceeding
10%
 paid to Swiss Foundation 15%FWT
b. Foreign Corporation Taxable as Income
CAPITAL GAINS (final tax on gross)
1) Sale of shares of stock not traded in stock 5%FT- P100,000 (Selling Price-Cost)
exchange 10%FT- Excess of P100,000
2) Sale of shares of stock traded in stock exchange 0.50% (Stock Transaction Tax)
6%FT on Gross Selling Price/Current Fair
3) Sale of real property
Market Value (higher)
“doing business”
TERMS: - soliciting orders, service contracts, opening
 Corporation- taxable partnerships offices, appointing
-joint-stock companies representatives or distributors domiciled in the
-joint accounts Philippines
-associations - stayed in the country for 180 days or more
-insurance companies - more than 180 days (Japan)
Except: (tax exempt) - more than 183 days (Thailand)
-general professional partnership
-joint venture/consortium formed for: Does not include:
=Construction projects -investment by foreign entity in domestic
=engage in Petroleum, Coal, Geothermal and corporation
other energy operations under a service -exercise of rights by the foreign investor
contract with the government -foreign entity having a nominee director or officer
Requisites for exemption: to represent its interest in domestic corporation
1)For construction project -appointing a representative/distributor domiciled
2)Involve in joining or pooling of resources by in the Philippines
licensed local contracts
-licensed as general contractor by PCAB
 Non-Resident Foreign Corporation- not engaged in trade
3)Local contractors are engaged in construction
or business within the Philippines
business
 Real Estate Investment Trust (REIT)- considered as a
4)Joint Venture must be licensed by the Philippine
taxpayer engaged in the real estate business
Contractors Accreditation Board (PCAB) of
 Cooperative- refers to autonomous and duly registered
Department of Trade and Industry (DTI)
association of persons, with a common bond of interest,
* Joint Venture involving Foreign Contractors are non-
who have voluntarily joined together- to achieve their
taxable if:
social, economic, and cultural needs and aspirations by
1)foreign contractor is covered by a special license as making equitable contributions to the capital required,
contractor by PCAB patronizing their products and services and accepting a
2)Construction project is certified by the appropriate fair share of the risks and benefits, of the undertaking in
Tendering Agency (government office) accordance with universally accepted cooperative
3)Project is foreign-financed/internationally-funded principles.
and allowed under Bilateral agreement
*Shall not include those who are mere suppliers of
IN GENERAL REIT
goods, services or capital to a construction project
Sales/Revenues/Rece Sales/Revenues/Rece
 Domestic Corporation- created/organized in the ipts/Fees xx ipts/Fees xx
Philippines Cost of Sales/Services (xx) Cost of Sales/Services (xx)
 Foreign Corporation- not domestic GROSS INCOME xx GROSS INCOME xx
 Resident Foreign Corporation- engaged in trade or Other taxable income xx Other taxable income xx
business in the Philippines
40
TOTAL GROSS xx TOTAL GROSS xx 1. With members only- exempt from paying taxes and
INCOME INCOME fees
Allowable Allowable 2. With both members and non-members
Deductions: Deductions: a. Cooperatives with accumulated reserves and
OSD or Itemized (xx) OSD or Itemized (xx) undivided net savings of not more than P10M
Dividends (xx) -EXEMPT from paying taxes and fees
Paid/Declared b. Cooperatives with accumulated reserves and
TAXABLE NET xx TAXABLE NET xx undivided net savings of more than P10M
INCOME INCOME  Business transactions w/members- tax exempt
 Business transactions w/non-members- liable
*To be deductible in REIT’s income, the dividends for:
distributed should be at least 90% of the distributable i. Income tax
income for the taxable year. ii. Value Added Tax
*Dividends should be paid to shareholders not later than iii. Percentage Tax- except sales by agricultural
the last day of the 5th month from the close of the taxable cooperatives
year. Entitled to:
i. Limited/full deductibility of donations to
CORPORATIONS EXEMPT FROM INCOME TAX: duly accredited charitable, research and
1. Labor, agricultural, horticultural organization educational institutions and reinvestment to
2. Mutual Savings Bank and Cooperative Bank without socio-economic projects within the area of
capital stock organized & operated for mutual operation of such cooperative
purposes and without profit ii. Tax exempt on transactions with insurance
3. Beneficiary Society/ Order/ Association operated companies and banks
EXCLUSIVELY for the benefit of its members Unrelated Income of Cooperatives
4. Cemetery Company owned and operated EXCLUSIVELY Subject to:
for the benefit of its members 1. Capital Gains Tax
5. Non-stock Corporation/Association organized and 2. Documentary Stamp Tax- except transactions with
operated exclusively for religious, charitable, scientific, banks and insurance companies
athletic, or cultural purposes, or for rehabilitation of 3. VAT-except on importation by agricultural
veterans cooperatives
6. Business league, chamber of commerce, or board of 4. Withholding Tax on Compensation/Wages
trade 5. Other taxes that cooperatives are directly liable
7. Civic league/organization Members/Shareholders of Cooperative
8. Non-stock & non-profit educational institution -liable to pay all internal revenue taxes except:
9. Government educational institution 1. Any tax and fee on member’s deposits or fixed
10. Farmers’/other mutual typhoon/fire insurance deposits (share capital) with cooperatives
company, mutual ditch/irrigation company, 2. Documentary tax on transactions of members with
mutual/cooperative telephone company the cooperative
11. Farmers’, fruit growers’ operated as sales agent 3. Patronage Refund- all refunds, returns, rebates of
12. Philippine National Red Cross net savings generated from the operation of the
13. Child-caring/child-placing institution licensed and cooperative
accredited by DSWD
*all shall be not organized for profit & no part of the net PAL AND OTHER FRANCHISE GRANTEES
income of which inures to the benefit of any private Liable for the lower amount between:
stockholder or individual  Basic Corporate Income Tax
 2% Franchise Tax
Gross revenue:
TAXATION ON COOPERATIVES  Passenger revenue
Duly registered cooperatives which transact business:  Cargo revenue
 Other transport Revenue
41
Cost of Services:
 Salaries
MINIMUM CORPORATE INCOME TAX
 Wages
 Other employee benefits directly engaged in - 2% of the GROSS INCOME as of the end of the taxable
transport of passenger, cargo, or mail year.
 Commissions paid to sales agents
 Fuel and oil used in transport - Conceived to address the non-declaration & under-
 Insurance expense declaration of corporate income & revenues.
 Traffic, aircraft, passenger servicing expenses
 Depreciation of and rental charges for aircraft,
flight & ground equipment Who may apply: Domestic Corporation & Resident Foreign
 Maintenance and repairs Corporation
ENTERPRISES REGISTERED UNDER SUBIC BAY

METROPOLITAN AUTHORITY (SBMA), CLARK Rules in application of MCIT:
DEVELOPMENT AUTHORITY (CDA), PHILIPPINE
ECONOMIC ZONE (PEZA) 1. MCIT vs. Normal Income Tax. The income liability/due
Registered Activities is equal to whichever is higher.
Subject to as specified in the terms of registration: 2. Begins at the 4th taxable year whether fiscal/calendar
1. 5% preferential tax rate year.
3. Applied on operations covered by the regular income
2. Income tax holiday (ITH)
tax system (unregistered activity) and not the special
3. Regular income tax rate
income system (registered activity).
*no taxes shall be imposed on business establishment
4. Income exempt from income tax and passive income
operating within the ecozone except for real property
subject to FT shall not form part of gross income.
taxes on land
5. Even if the operations result in a net loss, it will still be
*shall be subject to a tax of 5% on gross income earned
subject to MCIT.
(GIE):
Exceptions:
3%- paid to National Government
2%- paid to treasurer’s office of the municipality/city The Secretary of Finance may suspend the
imposition of MCIT upon submission of proof by the
applicant-corporation that sustained
Gross Sales/Revenue xx
Sales Discount (xx)  Substantial losses on account of a prolonged labor
Sales Return and Allowances (xx) dispute – arises from a strike staged by the
NET SALES xx employees w/c lasted for more than 6 months w/c
Cost of Sales or Direct Costs: caused a temporary shutdown.
Direct salaries, wages xx  Force majeure – due to an irresistible force as by
Production Supervision salaries xx “Act of God”
Raw materials used in manufacture of xx  Legitimate business reverses – Fire, robbery,
products theft/embezzlement, or for other economic reason.
Decrease in goods in process account xx
Decrease in finished goods account xx
Supplies and fuels used in production xx
Depreciation of machinery , equipment,
building used in production xx
Financing Charges xx
Rent and utility expense xx (xx)
GROSS INCOME EARNED (GIE) xx
Unregistered Activities
-subject to the regular internal revenue
taxes
42
For Trading/Merchandising & Manufacturing Concerns
Gross Sales xx Gross Sales xx
Less: Sales Returns xx Less: Sales Returns xx
Sales Discounts xx Sales Discounts xx
Sales Allowances xx xx Sales Allowances xx xx
Net Sales xx Net Sales xx
Less: COGS/COGMS xx Less: COGS/COGMS xx
Gross Profit from Sales xx
Add: Other Income xx
Gross Income xx Gross Income xx
Less: Deductions xx
Net Income xx
Multiply by Tax Rate 30% Multiply by 2%
Normal Tax xxx MCIT xxx
For Sale of Service
Gross Receipts xx Gross Receipts (Cash) xx
Net Receipts xx Net Sales xx
Add: Other Gross Income xx Less: COGS/COGMS xx
Gross Income xx Gross Income xx
Less: Deductions xx Multiply by 2%
Net Income xx MCIT xxx
Gross Receipts (Accrual) xx
Multiply by Tax Rate 30% Multiply by 2%
Normal Tax xxx MCIT xxx
CORPORATIONS NOT SUBJECT TO MCIT Income from

Final
Offshore Banking Units Foreign
DOMESTIC Income tax
Subject to Income (OBUs) Currency
CORPORATIONS at 10%
Transactions
As Proprietary Taxable Regional Operating Taxable
10% 10%
Educational Institution Income Headquarters Income
Engaged in Non-profit Taxable Firms that are taxed
10%
Hospital Operations Income under a special income
As Depository Banks Income from tax regime
Final
under the Expanded Foreign
Income tax
Foreign Deposit System Currency
at 10% Accounting Treatment of Excess MCIT Paid
(FCDUs) Transactions
Firms that are taxed
under a special income
tax regime Deferred Charges – MCIT
RESIDENT FOREIGN - The amount paid as excess MCIT recorded in the
CORPORATIONS
corporation’s books as asset.
Gross
International Carrier 2.5% Philippine - Shall be carried forward and may be credited against the
Billings normal income tax due for a period not exceeding 3
43
taxable years immediately succeeding the taxable year/s
in w/c the same has been paid.
- any amount w/c has not/cannot be credited against

normal income taxes due for the 3-year reglementary
period shall lose its creditability with a debit to “Retained
Earnings”.
Rules in application of excess MCIT:
1. On the next year, the corporation shall not be

allowed to deduct excess MCIT against income tax
liability if MCIT > NIT.
2. If NIT > MCIT, the corporation shall deduct the
cumulative excess MCIT w/c has not been credited
against income tax liability provided that it did not
exceed 3 years.
44
Journal Entries  Purpose behind the accumulation
To record income tax liability using the NIT:

Exception:
Provision for Income Tax xx
If failure to pay dividends is due to some other causes,
Income Tax Payable xx such as the use of undistributed earnings & profits for the
reasonable needs of the business, such purpose would not
generally make the accumulated earnings subject to tax.
To record excess MCIT:
Deferred Charges-MCIT xx
Determination of Reasonable Needs of the Business
Income Tax Payable xx
- Immediate needs of the business including reasonably
anticipated needs.
To record payment of income tax due for the year: - use of Immediacy Test
Income Tax Payable xx a. Allowance for the increase in the accumulation of
Cash in Bank xx earnings up to 100% of the paid-up capital
b. Earnings received for definite corporate expansion
projects requiring considerable capital expenditure
c. Earnings received for building, plants or equipment
To record application of excess MCIT against Normal acquisition
Income Tax Liability: d. Earnings reserved for compliance w/ any loan
covenant
Income Tax Payable xx
e. Earnings required by law/applicable regulations to be
Deferred Charges-MCIT xx retained
To record the expired portion of Deferred Charges-MCIT:

Computation of IAET
Retained Earnings xx
1. Compute the Taxable Income & Tax Due using NIT &
Deferred Charges-MCIT xx MCIT
2. Compute the IAET
IMPROPERLY ACCUMULATED EARNINGS TAX
- a tax of 10% of the improperly accumulated taxable Taxable Income xx

income of corporations formed/availed for the purpose of Add:
avoiding the income tax. Income exempt from tax xx
Income excluded from Gross Income xx
- a tax is being imposed in the nature of a penalty to the Income subject to Final Tax Xx
corporation for the improper accumulation of its earnings. Amount of NOLCO deducted xx xx
Total xx
Less:
It shall apply to: Closely-Held Domestic Corporations Income Tax paid/payable for the year xx
Dividends actually or constructively xx
 At least 50% in value of the outstanding capital stock paid or issued
is owned directly/indirectly by or for not more than Amount reserved for the Reasonable xx
20 individuals. Needs
 Once the profit has been subjected to IAET, the same Final Tax xx xx
shall no longer be subjected to IAET in later years
Improperly Accumulated Earnings xx
even if not declared as dividend.
45
Multiply by 10% 1. A tax effort ratio of 20% of GNP
IAET xxx 2. A ratio of 40% of income tax collection to total
revenues
Period for Payment of Dividend/Payment of IAET 3. A VAT tax effort of 4% of GNP
4. A 0.9% ratio of the Consolidated Public Sector
The dividends must be declared & paid/issued not later Financial Position to GNP
than 1 year following the close of the taxable year,
otherwise, the IAET, if any should be paid w/n 15 days
Rules in Application of GIT:
thereafter.
 The option to be shall be available only to firms whose
ratio of COS to Gross Sales/Receipts from all sources
GROSS INCOME TAX does not exceed 55%.
 The gross income tax option by the corporation shall
- The President may allow corporations to be taxed at be irrevocable for 3 consecutive taxable years.
15% of Gross Income after the ff conditions have been
satisfied:
For Trading/Merchandising & Manufacturing Concerns For Sale of Service
Gross Sales xx Gross Receipts xx
Net Sales xx Gross Income xx
Less: COGS/COGMS xx
Gross Income xx
Multiply by 15% Multiply by 15%
GIT Due xxx GIT Due xxx
46
47

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Bachelor of Accountancy

2. Mortgage assumed exceeds the cost to the seller

b. For subsequent collection

Additional Exemption Yes1 Yes1 Yes3 No No No

Tax Due (Using the Schedular Table) xxxxx

Tax Due (Using the Schedular Table) xxxxx

Tax Due (Using the Schedular Table) xxxxx

Income Tax of Corporations

Resident Foreign Corporation

Non-Resident Foreign Corporation

PASSIVE INCOME (final tax on gross) Domestic/Resident Foreign Non-Resident

ENTERPRISES REGISTERED UNDER SUBIC BAY

CORPORATIONS NOT SUBJECT TO MCIT Income from

- any amount w/c has not/cannot be credited against

Rules in application of excess MCIT:

1. On the next year, the corporation shall not be

To record income tax liability using the NIT:

To record the expired portion of Deferred Charges-MCIT:

- a tax of 10% of the improperly accumulated taxable Taxable Income xx

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