Income Taxation Atty - Florin PDF

JD2A/JD2B INCOME TAXATION ATTY.
FLORIN
16 FEBRUARY 2019
INCOME – means all wealth that flows into the taxpayer other than as a mere return of capital. It includes gains
derived from the sale of capital assets. (Dimaampao, Basic Approach to Income Taxation)
Gross receipts – all wealth that flows into the taxpayer, which includes return of capital. (Teodoro & De Leon,
The Law on Income Taxation, p.16)
Severance Test Theory – separate the capital from the gain to determine income. (Dimaampao, Basic
Approach to Income Taxation)
Capital – is the fund or property existing at one distinct point of time. (Teodoro & De Leon, The Law on Income
Taxation)
Gain – a profit or something of exchangeable value derived from exchange.
Sec. 39 (A) (1), NIRC
Capital Assets – means property held by the taxpayer (whether or not connected with his trade or business), but
does not include:
1. Stock in trade; or
2. Other property of a kind which would properly be included in the inventory of the taxpayer if on hand at
the close of the taxable year; or
3. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;
or
4. Property used in trade or business, of a character which is subject to allowance for depreciation; or
5. Real property used in trade or business of the taxpayer.
Trade or business – that which occupies the time, attention, labor of men for purposes of livelihood or profit.
(Dimaampao, Basic Approach to Income Taxation, p.163)
Ordinary course of trade or business – regular or usual in the pursuit or carrying on of the business.
Thus, excludes isolated transactions which are incidental or accidental to the business (Dimaampao, Basic
Approach to Income Taxation, p.163)
Allowance for depreciation – allowance for the exhaustion, wear and tear (including obsolescence) of property
used in the trade or business. (Sec. 34 (F), NIRC)
SOURCES OF INCOME:
1. Labor
2. Use of Capital or property
3. Activity, such as sale/exchange of capital assets
- Activity may be lawful or not. (Dimaampao, Basic Approach to Income Taxation, p.5)
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JD2A/JD2B INCOME TAXATION ATTY. FLORIN
OTHER FORMS OF INCOME:
1. Treasure funds (Dimaampao, Basic Approach to Income Taxation, p.6)
2. Punitive damages representing profits lost. (Dimaampao, Basic Approach to Income Taxation, p.6)
3. Amount received by mistake where the duty to return is not clear or disputed (Teodoro & de Leon, The
Law on Income Taxation, p. 18)
Claim of right doctrine – if a taxpayer receives income under a claim or right, income is taxable
even if he may still be adjudged liable to restore the same. (Dimaampao, Basic Approach to Income
Taxation, p.6)
4. Cancellation of taxpayer’s indebtedness in consideration of services (Teodoro & De Leon, The Law on
Income Taxation, p.23)
5. Recovery of bad debts previously written-off to the extent of the income tax benefit (Sec. 34 (E)(1), NIRC)
6. Refund of taxes previously claimed as deduction from gross income to the extent of the income tax benefit
(Sec. 34 (C)(1), NIRC
Income tax benefit rule – limits the recognition of income to the extent of tax savings generated by the
deduction previously claimed. (Dimaampao, Basic Approach to Income Taxation, p.7)
Requisites for income to be taxable:
1. There must be gain or profit, whether in cash or its equivalent.

2. The gain must have been realized or received.
- Thus, a mere increase in the value of the property is not income (unrealized)
3. The gain must not be exempt from tax (Dimaampao, Basic Approach to Income Taxation, p.9)
4. Income has tax situs in the Philippines (refer to Sec. 23, 22 (E)(F)(G)(H)(I) and 42 (A)(C), NIRC)
When is gain/income considered realized or earned?
All-events test (realization test)
1. The right to receive the income is fixed (“enforeceable”); and

2. The amount of such income or liability is determinable with reasonable accuracy.
(CIR vs. Isabela Cultural Corp)
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When gain/income considered received?
1. Actual receipt;
2. Constructive receipt
- Control test – income which is credited to the account of the taxpayer and which may be drawn by
him at any time (no limitation or condition upon which payment is to be made) is subject to tax even
if not actually received. (Dimaampao, Basic Approach to Income Taxation, p. 9)
Examples of constructive receipt:
a. Matured interest coupons;

b. Interest credited on savings bank deposit;
c. Rental payment under judicial deposit;
d. Dividends applied by the Corporation against the indebtedness of a stockholder (under Sec. 43,
Corporation Code) (Dimaampao, Basic Approach to Income Taxation, p.9)
e. Sec. 26, NIRC – each partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the (general partnership) partnership.
3. Presumed or deemed received by law

i.e., Sec. 73 (D), NIRC
The taxable income declared by a partnership (business), after deducting the corporate income tax,
shall be deemed to have been actually or constructively received by the partners in the same taxable year
and shall be taxed to them in their individual capacity, whether actually distributed or not.
INCOME TAX SITUS
Sec.23 – General Principles of Income Taxation in the Philippines

Sec. 42 (A) – Gross Income from sources within the Philippines
Sec. 42 (C) - Gross income from sources without the Philippines.
FEATURES OF INCOME TAX SYSTEM:
1. Schedular Tax treatment – income is classified and treated differently

- Regular rate; special rate.
2. Global Tax Treatment – income is generally not classified and subjected to uniform tax rate.
3. Net Income Taxation
4. Gross Income Taxation (Dimaampao, Basic Approach to Income Taxation, p.1)
5. Yearly Tax – tax is computed on the basis of the annual accounting period (calendar year or fiscal year)
(see Sec. 22 (Q).
6. Final Tax on income/gain derived from each transaction.
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SYSTEM OF PAYMENT:
1. Pay as you file system (Sec. 56)

- Self-assessment system
2. Pay upon notice and demand in case of assessment of deficiency tax (Sec. 56 (B))
3. Withholding Tax System (Sec. 57 & 58)
a. Creditable withholding tax at source
- Withholding tax on certain income payments (Sec. 57 (B))
- Withholding tax on wages (Sec. 79 (B))
b. Final withholding tax on certain income (Sec. 57 (A))
c. Withholding tax on tax-free covenant bonds (Sec. 57 (C)
RR 2-98, as amended
EWT FWT
Amount withheld from the income is intended to Amount withheld from the income is constituted as
equal or at least approximate the tax due of the a full and final payment of the income tax due from
payee. payee on such income
Payee is required to file an income tax return for the Payee is NOT required to file income tax return for
income subjected to EWT and pay the difference the particular income subjected to FWT.
between the tax due and the tax withheld
Accounting for Income and Deductions
General rule: The amount of all items of gross income shall be included in the gross income for the taxable year
in which received by the taxpayer, unless, under other methods of accounting permitted, any such amounts are to
be properly accounted for as of a different period. (Sec. 44)
The deductions allowed shall be taken for the taxable year in which “paid or received” or “paid or incurred”
dependent upon the method of accounting upon the basis of which the net income is computed. (Sec. 45)
General rule: The taxable income (Sec.31) shall be computed upon the basis of the taxpayer’s annual accounting
period (Fiscal or Calendar Year) in accordance with the method of accounting regularly employed in keeping the
books of such taxpayer. (Sec. 43)
ACCOUNTING PERIOD – coincides with the return period.
- Generally, Taxable year (Calendar or Fiscal Year)

- Exception: Shorter period (i.e., Sec. 6(D) when taxable period is terminated)
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Individual taxpayer – calendar year (mandatory)
Corporate taxpayer – fiscal or calendar year at its option
- Mandatory use of Calendar year

• If the taxpayer has no annual accounting period, or
• Does not keep books (Sec. 43)
ACCOUNTING METHOD – dictates how and when a transaction is recorded (and reported)
- CASH-BASIS ACCOUNTING
- ACCRUAL ACCOUNTING
• Subject to special methods prescribed under the law and the rules.
CASH-BASIS ACCOUNTING
- Expense is recorded (and reported) when the cash/property is actually paid out.
- Revenue is recorded (and reported) when cash/property is received.
ACCRUAL ACCOUNTING
- Income is recorded (and reported) when earned or realized, even if the customer hasn’t paid yet.
- Expense is recorded (and reported) when incurred, even if not yet paid.
- Expense is recorded (and reported) when the cash/property is actually paid out.
- Revenue is recorded (and reported) when cash/property is received.
SPECIAL METHODS OF ACCOUNTING:
Sec. 48 – Accounting for Long-term contracts
- Shall report income from long-term contracts for tax purposes upon the basis of percentage of
completion.
Long-term contracts – means, buildings, installation or construction contracts covering a period in excess
of one (1) year.
PERCENTAGE OF COMPLETION METHOD
To illustrate:
Contract Price: P5,000,000
Contract Period: 3 years (2017-2019)
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2017 2018 2019

Materials Inventory, 0 500,000 100,000
Beg
Expenditures for 2,000,000 1,000,000 500,000
Materials, Labors,
Overhead
Materials Inventory, 500,000 100,000 0

End
Percentage of 40% 70% 100%
completion
Taxable Year 2017
Gross Income (P5M x 40%) P2,000,000

Less: Deductions
Materials, Beg
Expenditures (M,L,O) 2,000,000
Materials, End (500,000) P1,500,00
Net Income P500,000
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23 FEBRUARY 2019
Sec. 49 – Installment basis
B. Casual Sale or other casual disposition of personal property on the installment plan:
Requisites:
1. Personal property is not of a kind which would properly be included in the inventory if on hand at the
close of the taxable year.
2. Price exceeds P1,000
3. Initial payments do not exceed 25% of the selling price.
B. Sale or other disposition of real property on the installment plan:
Requisites:
1. Initial payments do not exceed 25% of the Selling Price.
“initial payments” mean the payments received in cash or property other than evidence of indebtedness of
the taxpayer during the taxable period in which the sale or other disposition is made.
Sec. 49B. Installment Basis
- Casual Sale or other casual disposition of personal property AND

- Sale or other disposition of real property
- If initial payments exceed 25% of the selling price – whole profit/gain is taxable in the year of sale.
- “deferred payment sale not on the installment plan”
(Teodoro & De Leon, The Law on Income Taxation, p. 439)
Example:
Date of Sale: Jan. 1, 2018

Selling price: P100,000 100%
Cost: P70,000 70%
Gross profit: P30,000 30%
Payment terms: 20,000 downpayment; balance is payable in 24 equal months installments.
2018 2019
Actual receipts P60,000 P40,000
Gross Income (30%) P18,000 P12,000
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OTHER METHODS OF ACCOUNTING
• The computation of taxable income shall be made in accordance with such method as in the opinion
of the CIR clearly reflects the income.
1. If no method of accounting has been so employed by the taxpayer; or
2. If the method employed does not clearly reflect the income (Sec. 43)
• Net worth method

- An increase in net worth plus non-deductible disbursements minus non-taxable receipts equal income.
(Teodoro & De Leon, The Law on Income Taxation, p. 455 citing Perex vs. CTA)
• Excess expenditures method

- Expenditures exceed the available cash and the excess is not accounted for by the taxpayer as coming
from loans or similar sources. (Teodoro & De Leon, The Law on Income Taxation, p. 455)
• Presumptive gross sales, receipts and taxable income. (Sec. 6(C))
Sec. 50. Allocation of Income and Deductions (between or among controlled taxpayers)
• CIR is authorized to distribute, apportion or allocate gross income or deduction between or among
controlled taxpayers if such is necessary to prevent tax evasion or to reflect clearly the income of
a controlled taxpayer.
Controlled taxpayer – any one of two or more organizations, trades, or businesses owned or controlled directly
or indirectly by the same interests (Sec. 179 (B) RR No. 2, cited in CIR vs. Filinvest)
The interest controlling this group (organizations, trades or businesses) is assumed to have the power to
manipulate the transactions between the controlled taxpayers and records. Thus,
Standard: if the controlled taxpayer’s taxable income is not reflective of that which it would have realized
had it been dealing at arm’s length with an uncontrolled taxpayer, CIR may exercise such power to prevent evasion
of taxes. (CIR vs. Filinvest)
NET INCOME VS. GROSS INCOME TAX
Gross Income – all income derived from whatever source, except when otherwise provided in this Title (Sec. 32)
Source: labor, capital, activity such as from sale of capital assets
Taxable Income – means the pertinent items of income specified in this Code, less the deductions, if any,
authorized for such types of income by this Code or other special law. (Sec. 31)
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ITEMS EXCLUDED FROM GROSS INCOME (“IMPERTINENT”)
1. Items which are not included in Gross Income and exempt from income tax
- Exclusions from Gross Income (Sec. 32(B))
2. Items not included in Gross Income but subject to Income tax
Ex. Income subject to final tax
Exclusions under Sec. 32 (B)
1. Life insurance proceeds – paid to the heirs or beneficiaries upon the death of the insured.
- But interest on the amount held by the insurer pursuant to an agreement with the beneficiary – included
in gross income.
2. Amount received by the insured as return of premiums paid under life insurance, endowment, or annuity
contracts.
(During the term, at maturity, or upon surrender of the contract)
3. Value of property acquired by gift, bequest, devise or descent.
- But (a) income from such property, as well as (b) gift, bequest, devise, or descent of income, in case
of transfers of divided interest, are included in gross income.
- i.e., transfer of usufruct and naked title
- Tips and gratuities paid directly to an employee by a customer which are not accounted for by the
employee to the employer are considered taxable income. (RR-2-98)
4. Compensation for injuries or sickness

a. From accident or health insurance
b. From Workmen’s Compensation Act
c. As disability benefits under a life insurance
d. As damages (by suit or agreement), except damages for loss of profits (Dimaampao, p. 18)
5. Income exempt under treaty
6. Retirement benefits, Pensions, Gratuities, etc.

a. Those received under R.A. No. 7641 (60 to 65 with at least 5 years of service); and
b. Those received by officials and employees or private firms
Requisites for exemption:
1. Must be received in accordance with a reasonable private benefit plan maintained by the employer and
approved by the BIR (at no time shall any part of the corpus or income of the fund shall be used for,
or be diverted to, any purpose other than for the exclusive benefit of the officials and employees;
6a:
2. Retiree has been in the service of the same employer for at least 10 years;
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3. Retiree is not less than 50 years of age at the time of retirement;
4. Retiree has not previously availed of the exemption (exemption can be availed of only once)
6b: Separation pay/benefit on account of death, sickness, physical disability, or any cause beyond the control
of the official or employee.
- Separation must not be caused by the employee

- Thus, if the employee resigned or is dismissed for just causes, separation pay (contractual or statutory)
is taxable.
- Terminal leave pay (commutation of leave credits) upon retirement
-not considered as salary or compensation for services hence not subject to income tax;
-in the nature of retirement/separation benefit. (Teodoro & De Leon, p. 59)
6c: Those received by citizens or aliens who come to reside permanently in the Philippines from Foreign
government agencies and other institutions (private or public)
6d: Benefits to any resident under the laws of the U.S. administered by the US Veterans Administration.
6e: SSS Benefits
6f: GSIS Benefits
7a: income derived from investments (In loans, stocks, bonds, other domestic securities) in the Philippines or
interest from deposits in banks in the Philippines by:
- Foreign governments (FGs)

- FI’s owned or controlled or enjoying refinancing from FGs
- International or Regular FI’s established by FGs
7b: Income derived by the Government or its political subdivisions from any public utility or from the exercise
of any essential government function.
7c: Prizes and awards
Requisites:
1. Given in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement;
2. Recipient was selected without any action on his part to enter the contest or proceeding; and
3. Recipient is not required to render substantial future service as a condition to receiving the prize or award.
7d: Prizes and awards in Sports Competition – granted to athletes in local or international sports competition
and tournaments whether held in the Philippines or abroad, and sanctioned by their national sports associations.\
7e: 13th month Pay and other benefits, provided that the total exclusion shall not exceed P90,000.00
- i.e., productivity incentives, Christmas bonus, loyalty award, gifts in cash or in kind and other benefits
of similar nature, including ACA paid to public officials and employees (RR 8-2000)
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INCOME EXEMPT UNDER SPECIAL LAWS
- also not included in gross income
OTHER ITEMS EXEMPT UNDER THE TAX CODE
1. wage, holiday pay, overtime pay, night shift differential pay and hazard pay received by Minimum Wage
Earners (R.A. No. 9504)
The term “minimum wage earner” shall refer to a worker in the private sector paid the statutory minimum
wage, or to an employee in the public sector with compensation income of not more than the statutory
minimum wage in the non-agricultural where he/she is assigned. (Sec. 22, NIRC)
Provided, that minimum wage earners as defined in Section 22 (HH0 of this code shall be exempt from
the payment of income tax on their taxable income. Provided, further, That the holiday pay, overtime pay, night
shift differential pay and hazard pay (received by such minimum wage earners shall likewise be exempt from
income tax. (Sec. 24(A)(2), as amended by R.A. No. 9504)
Minimum Wage Earners (MWE) – refers to a worker in the private sector who is paid with statutory
minimum wage (SMW) rates, or to an employee in the public sector with compensation income of not more than
the statutory minimum wage rates in the non-agricultural sector where the worker employee is assigned. Such
statutory minimum wage rates are exempted from income tax. Likewise, the exemption covers the holiday pay,
overtime pay, night shift differential pay, and hazard pay earned by an MWE (RR 8-2018)
The following income of MWE are taxable:
1. Additional compensation
- i.e., commissions, honoraria, fringe benefits, taxable “other benefits” (in excess of 90K), taxable
allowances.
2. Income from other sources:
- Income from other concurrent employers, income from the conduct of trade, business, or practice of
profession (except income subject to final tax) (RR 11-2018)
7f. GSIS, SSS, Medicare and Pag-ibig contributions and union dues of an individual.
7g. Gains realized from sale, exchange, or retirement of bonds, debentures or other certificates of indebtedness
with maturity of more than 5 years.
7h. Gains realized by the investor upon redemption of shares of stock in a mutual fund company.
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ITEMS OF GROSS INCOME (Sec. 32)
1. Compensation for services in whatever form paid, including but not limited to fees, salaries, wages,
commissions, and similar items.
Compensation Income – in general, means all remuneration for services performed by an employee for
his employer under an employer-employee relationship, unless specifically excluded by the Code. (RR 8-
2018)
Basis of payment of compensation (RR 2-98)
Compensation may be paid on the basis of:

1. Piece-work;
2. Percentage of profits; or
3. Paid hourly, daily, weekly, monthly or annually
Forms of Compensation (RR 2-98)
1. Money or Property (stocks, bonds, other forms of property)
- Basis of valuation of property received: (FMV or the Cash Equivalent)

- Fair market value
- Stipulated price of the service is presumed to be the FMV of the compensation received;
- If corporation transfers to its employees its own shares of stock, FMV of the stock at the time the
services were rendered.
2. Promissory Notes or other evidence of indebtedness received as payment and not merely as security to
secure payment.
• Interest-bearing note
- Upon receipt-report as income the Face Value
• Non-interest-bearing note
- Upon payment at maturity – report as income the difference between Face Value and income
previously reported upon receipt (Teodoro & De Leon, p. 22)
3. Living Quarters or Meals

- The value to the employee of the quarters or meals shall be deemed compensation income.
EXCEPTION: Convenience of the employer rule

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- Not considered as compensation income if the living quarters or meals are furnished to an employee
for the convenience of the employer.
4. Cancellation of employee’s indebtedness to the employer, as payment for services

- Report as income the amount of debt cancelled
(Teodoro & De Leon, p. 23)
- Note: Gratuitous remission or condonation of debt – excluded from Gross Income & exempt from
income tax under Sec. 32
5. Premiums paid by the employer on the life insurance policy of the employee where the beneficiary is not
the employer.
- Report as income the amount of premiums paid
- (deductible expense on the part of the employer) (Dimaampao, p. 32)
- Note: if the beneficiary is the employer (directly or indirectly) – partakes the nature of an investment;
thus, premiums paid are not deductible as expense (Sec. 36 (A)(4))
ITEMS OF GROSS INCOME (Sec. 32)
The name by which the remuneration for services is designated is immaterial:
Thus, the following constitute Compensation Income:
- Salaries
- Wages
- Emoluments and honoraria
- Allowances
- Commissions (e.g. transportation, representation, entertainment and the like)
- Fees including director’s fees, if the director is, at the same time, an employee of the employer
corporation
- Taxable bonuses
- Taxable pensions and retirement pay; and
- Fringe benefits, except
-those which are subject to the fringe benefits tax under Sec. 33 of the Code;
-and the allowance “de minimis” benefits (RR 8-2008)
- Fixed or variable Transportation, Representation and other allowances
Exceptions:
1. RATA and PERA granted to public officers and employees under GAA – not subject to income
tax since considered as reimbursement for expenses incurred in the performance of official
duties.
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2. Advances or reimbursements for travelling, representation and other bona fide ordinary and
necessary expenses, if:
a. Travelling, representation, entertainment, expense is paid or incurred by the employee in
the pursuit of the trade business or profession; and
b. The employee is required to account/liquidate
-but no need to liquidate if amounts are reasonable and pre-computed on a daily basis and
are paid to an employee while he is on assignment or duty.
• Excess of the advance over the actual expense if not returned to the employer – taxable income.
- Vacation and Sick leave allowances which are paid to an employee despite his absence from work.
EXCEPTIONS:
1. Monetized value of unutilized vacation leave credits of 10 days or less paid to private employees
during the year
2. Monetized value of leave credits paid to officials and employees of the government (RR 10-2000)
MANNER OF PAYMENT OF TAX ON COMPENSATION
Generally, by Withholding Tax (Sec. 79)
Note: Any compensation exempt from income tax is not subject to withholding tax.
- i.e., SMW, “13th month pay and other benefits” not exceeding P90k.
- But compensation income not subject to withholding tax does not necessarily mean that it is exempt
from income tax (RR 11-2018)
COMPENSATION INCOME NOT SUBJECT TO WITHHOLDING TAX (Sec. 78 (A), RR 2-98)
1. Income exempt from tax

(i.e., Exclusions under Sec. 32)
2. Remuneration paid for agricultural labor paid entirely in products of the farm where the labor is performed.
Thus, if paid in cash or other form, subject to withholding tax.
FARM includes stock, dairy, poultry, fruits, plantations, ranches, nurseries, ranges, orchards.
Agricultural labor includes:
- Cultivation of soil;
- Raising or caring for livestock, bees, poultry or wildlife;
- Raising or harvesting of agricultural or horticultural commodities;
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- Handling, planting, drying, packing, processing, freezing, grading, storing, delivering to storage,
market or carrier for transportation to market of any agricultural or horticultural commodities produced
by the farmer-employer.
Agricultural labor does not include:
- Making of copra, stripping of abaca;

- Hatching of poultry;
- Raising of fish;
- Operation or maintenance of ditches, canals, reservoirs, or waterways used for farming purposes;
- Production, harvesting, processing of crude gum
3. Remuneration for domestic services (household services in a private home)
e.g. Cooks, maids, butlers, valets, laundresses, gardeners, chauffers of family car
if services be performed in rooming or lodging houses, boarding houses, clubs, hotels, hospitals
or commercial offices or establishments – subject to withholding tax.
4. Remuneration for casual labor not in the course of an employer’s trade or business
- Casual labor means labor which is occasional, incidental or irregular.

- E.g. services of a carpenter employed to repair a home
5. Compensation for services by a Citizen or Resident for a Foreign Government or an international
Organization.
i.e., ambassadors, ministers and other diplomatic officers and employees, consular or other officer or
employee.
6. Compensation income not exceeding 250,000 during the year. (RR 11-2018)
FRINGE BENEFITS – means any good, service or other benefit furnished or granted in cash or in kind
by an employer to an individual employee (except rank and file employee)
- Sec. 33 (B)
- Thus, to be taxable under Sec. 33, the recipient must be holding a supervisory or managerial position.
SPECIAL TREATMENT OF FRINGE BENEFITS (Sec. 33)
Examples of Fringe Benefits:

1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel, such as maid, driver, and others
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5. Interest on loan at less than market rate to the extent of the difference between the market rate and
the actual rate granted.
6. Membership fees, dues and other expenses borne by the employer for the employee in social and
athletic clubs or other similar organizations
7. Expenses for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his dependents; and
10. Life or health insurance and other non-life insurance premiums or similar amounts in excess of
what the law allows.
Features of Fringe Benefits Tax:
- The tax is payable by the employer by way of Final Withholding Tax
- Tax Base – is the Grossed-up monetary value of the FB (actual monetary value divided by either 65%
or 75%)
- Tax Rate – is either 35% or 25%
- Grossed-up monetary value of FB is deductible expense, provided that FBT is paid (Sec. 34
(A)(1)(a)(i)
Classification of Taxpayer Grossed-up monetary value FB Tax Rate

Non-resident alien not engaged in Actual Monetary Value divided by 25%
trade or business in the Philippines 75%
Citizens (resident or non-resident); Actual Monetary Value divided by 35%

and 65%
Other Aliens (resident or non-resident
engaged in trade or business in the
Philippines
FB is not taxable under Sec. 33 (not subject to FBT)
1. FB required by the nature of, or necessary to the trade, business, or profession of the employer, or
2. When the FB is for the convenience or advantage of the employer;
(Convenience of the Employer Rule)

i.e., living quarters is situated within the business premises and the employee is required to accept the
lodging facility as condition of his employment (RAMO 1-87)
meals are furnished in the business premises for the convenience of the employer.
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Housing unit inside or adjacent to business premises or factory (RR3-98)
3. FB exempt from tax under the tax code or special laws

i.e., separation pay benefits under Sec. 32 (B)
4. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization
benefit plans;
5. FB given to rank-and-file employees
6. De minimis benefits
DE MINIMIS BENEFITS (RR 2-98)
Facilities or privileges which are of relatively small value offered or furnished by the employer merely as
means of promoting the health, goodwill, contentment, or efficiency of the employees.
Exempt from Income Tax (whether the employee is managerial, supervisory or rank and file)
a. Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year.
b. Monetized value of vacation and sick leave credits paid to government officials or employees.
c. Medical cash allowance to dependents of employees not exceeding P1,500 per employee per semester or
P250 per month.
d. Rice subsidy of P2,000 or 1 sack of 50kg rice per month amounting to not more than P2,000
e. Uniform and clothing allowance not exceeding P6,000 per annum (RR 11-2018)
f. Actual yearly medical benefits not exceeding P10,000 per annum. E.g. annual medical/executive check-
up, maternity assistance & routine consultation.
g. Laundry allowance not exceeding P300 per month
h. Employees achievement awards which must be in the form of a tangible personal property with an Annual
Monetary Value of Not exceeding P10,000 received under an established written plan.
e.g. award for length of service or safety achievement.
i. Gifts, given during Christmas & major anniversary celebrations not exceeding P5,000 per employee per
annum
j. Flowers, fruits, books or similar items given on account of special circumstances, e.g. illness, marriage,
childbirth, etc.
k. Daily meal allowance for overtime work and night/graveyard shift NOT exceeding 25% of the basic
minimum wage.
l. Benefits received by an employee by virtue of a CBA and productivity incentive schemes, the total annual
monetary value from both, combined do not exceed P10,000 per employee per taxable year. (RR 1-2015)
However, any amount paid in excess of the prescribed ceilings shall be taxable but falls within the category
of “other benefits” which, along with the “13th month pay” is exempt up to P90,000. (RR 2-98, RR 11-
2018)
17 |R P R M
2 MARCH 2019
Items of Gross Income (sec. 32)
(2) (a) Gross Income from the conduct of trade or business
Gross Income = total sales less cost of goods sold (Sec. 27 (A))
• Cost of goods sold for manufacturing concern

- Costs for raw materials used, freight cost, insurance while materials are still in transit, direct labor and
manufacturing overhead.
• Cost of goods sold for merchandising concern
- Invoice cost of the goods purchased, import duties, freight cost, insurance while in transit.
• For service enterprise

• Gross Income = means gross receipts less sales returns and allowances and discounts (Sec. 27 (A))
Gross receipts – refers to the total amount of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty including:
(a) The amount charged for materials supplied with the services, and deposits; and
(b) Advance payments
- Actually or constructively received during the taxable period for the services performed or to be
performed for another person, except returnable security deposits. (RR –2018)
(2) (b) Gross income from the exercise of profession
Professional - a person formally certified by a professional body belonging to a specific profession

by, virtue of having completed a required examination or course of studies and/or practice, whose
competence can usually be measured against an established set of standards.
-Also refers to a person who engages in some art or sport for money, as a
means of livelihood, rather than a hobby.
• It includes but is not limited to doctors, lawyers, engineers, CPAs, professional entertainers,
artists, professional athletes, directors, producers, insurance agents, insurance adjusters,
18 |R P R M
management and technical consultants, bookkeeping agents, and other recipients of
professional, promotional and talent fees. (RR 8-2018)
• Fees of directors who are not employees of the company paying such fees, whose duties are
confined to attendance at and participation in the meetings of the board of directors. (RR 8-
2018)
(6) Royalties – consideration for the use or privilege of using patents, copyrights, secret
processes and formula, goodwill, trademarks, trade brands, franchises and other like properties.
(Sec. 42)
(7) Rents – consideration for the use of property (real or personal) paid by the lessee to the
lessor. (Teodoro, p. 27)
Including:
a. Deposits and advance payments actually or constructively received during the taxable
period, except returnable security deposit. (RR 8-2018)
b. Security deposits applied in payment of unpaid rents.
c. Taxes paid by the lesser to or for the lessor.
d. permanent improvement built by the lessee on the leased property that becomes the
property of the lessor upon termination of the lease, which shall be reported as additional
income by the lessor under either of the following:
1. Outright method – report as income the FMV of the improvement in the year of completion;
(Dimaampao, p. 46) or
2. Spread-out method – report as income over the remaining term of the lease the
book/depreciated value of the improvement at the end of the lease. (Teodoro, p. 30)
Example:
Term of lease: 15 years (2011 to 2025)

Date of Completion of building: Jan. 1, 2016
FMV/ (Time of completion): 5,000,000.00

Useful life: 20 years
Year Outright method Spread-out method
2016 P5,000 P250,000
2017 and succeeding years 0 P250,000

within the term of lease
19 |R P R M
Annual Depreciation = 5,000,000/ 20 years = 250,000

Book/Depreciated value, end of lease = 5,000,000 – 2,500,000
(income to be allocated during the remaining term) = 2, 500,000
Additional rent income = 2,500,000/ 10 years
(under Spread-out Method) = 250,000
(7) Dividends – any distribution made by a corporation to its shareholders out of its earnings or profits and
payable to its shareholders, whether in money (cash dividends) or in other property (property dividend) Sec. 73
(A)
- Includes indirect dividends, i.e, cancellation by the corporation of stockholder’s indebtedness to the
corporation
- Property dividends, i.e., bonds, securities, stock investments of the corporation given to SH as
dividend (“dividend in stock”)
Stock dividend – representing the transfer of surplus to capital account shall not be subject to tax. (Sec. 73 (B))
Reason: no inflow of wealth; no gain realized
To illustrate:
Assets – 5,000,000
Liabilities – 1,000,000
Net assets – 4,000,000 (stockholder’s equity)
Outstanding common stocks – 2,000 shares
Stock dividends – 50% or 1,000 shares
Interest = number of shares held/ total number of shares

Stock dividends are not taxable
SH Shares Interest Value of Stock Shares Interest Value of

Held Interests Dividends Held after after SD interest
(SD) SD after SD
(1) (2) (3) (4) (5) (6) (7) (8)
A 1,000 50% 2M 500 1,500 50% 2M
B 500 25% 1M 250 750 25% 1M
C 200 10% 400K 100 300 10% 400K
D 200 10% 400K 100 300 10% 400K
E 100 5% 200K 50 150 5% 200K
Total 2,000 100% 4M 1,000 3,000 100% 4M
Exceptions (taxable stock dividends) Sec. 73 (B)
20 |R P R M
1. If a corporation cancels or redeems stock issued as stock dividend at such time and such manner as to
make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the
distribution of taxable dividend (cash property) (Sec. 73 (B))
2. Treasury shares distributed as stock dividends. (Teodoro citing CIR vs. Manning , (1994)
3. If the stock dividend changes the stockholder’s interest in the net assets of the corporation
Ex.
Assets – 5M
Liabilities – 1M
Net assets – 4M (stockholder’s equity)
Outstanding common stocks – 2,000 shares
Stock dividends – 50% or 1,000 shares
B opted to receive stock dividend; the rest opted for cash dividend
Net assets after cash dividends: P3,250,000
SH Shares Interest Value of Stock Shares Interest Value of

Held Interests Dividends Held after after SD interest
(SD) SD after SD
(1) (2) (3) (4) (5) (6) (7) (8)
A 1,000 50% 2M 0 1,000 44.44% 1.4M
B 500 25% 1M 250 750 33.33% 1.08M
C 200 10% 400K 0 200 8.88% 288.8k
D 200 10% 400K 0 200 8.88% 288.8k
E 100 5% 200K 0 100 4.44% 144.3k
Total 2,000 100% 4M 250 2,250 100% 3.25M
4. Stock dividends of different class from the stock held by the SH if the stock dividend changes the
stockholder’s interest in the net assets.
Illustration:
I. Not taxable
Outstanding common stock – 2M (2,000 shares)

Outstanding preferred stock – None
Surplus (retained earnings) – 1M
Net assets (Stockholder’s Equity) – 3M
50% stock dividend payable in preferred par stock – 1,000 shares @ P1000 par value)
21 |R P R M
SH Shares Interest in Value of Preferred Interest in Value of Value of Value

Held in Common Interests Stock Preferred interest in interest in of
Common stock in Net Dividends stocks Common Preferred Interest
stock Assets (SD) stock stock in Net
Assets
after
SD
(1) (2) (3) (4) (5) (6) (7) (8) (9)
A 1,000 50% 1.5M 500 50% 1M 500K 1.5M
B 500 25% 750K 250 25% 500K 250K 750K
C 200 10% 300K 100 10% 200K 100K 300K
D 200 10% 300K 100 10% 200K 100K 300K
E 100 5% 150K 50 5% 100K 50K 150K
Total 2,000 100% 3M 1000 100% 2M 1M 3M
II. Taxable
Outstanding common stock – P2M (2,000 shares)

Outstanding preferred stock – P1M (1,000 shares)
Surplus (retained earnings) – P1.5M
Net assets (Stockholder’s Equity) – P4.5M
50% stock dividend payable in preferred par stock – 1,500 shares @ P1000 par value)
CASH AND/OR PROPERTY DIVIDENDS RECEIVED FROM A DOMESTIC CORPORATION.
Recipient (Taxpayer) Tax treatment

RC (resident citizen) 10% Final tax (sec. 24 (B) (2)
NRC (non-resident citizen) 10% Final tax (sec. 24 (B) (2)
RA (resident alien) 10% Final tax (sec. 24 (B) (2)
NRAETB (non-resident alien engaged in trade and 20% Final tax (sec. 25 (A) (2)
business)
NRANETB (non-resident alien not engage in trade 25% final tax (sec.25 (B)
and business)
DC (domestic corporation) Tax exempt (sec. 27 (D) 4
RFC (resident foreign corporation) Tax exempt (sec. 28 (A) (7) (d)
NRFC (non-resident foreign corporation) 15 % Final tax (sec. 28 (B) (5) (b)
Subject to tax-sparing credit
22 |R P R M
Tax-sparing credit rule (condition) – the country in which the non-resident foreign corporation (NRFC) is
domiciled allows a credit against the tax due from the NRFC taxes deemed to have been paid in the Philippines
equivalent to 15% (representing the difference between the regular tax of 30% and the 15% on dividends).
❖ Tax on its gross income received in the Philippines.

❖ Tax credit does not represent tax in the Philippines.
Tax Situs within – if at least 50% of the entire (world) income of the FC was derived from the Philippines for
three (3) years preceding the declaration of the dividend (But only in such proportion of the Dividend which
the Gross income from Philippines bears to the entire gross income. (Sec. 42 (A) (2) (b)).

RC (resident citizen) Included in GI (TI) subject to regular tax
NRC (non-resident citizen) Included in GI (TI) subject to regular tax
RA (resident alien) Included in GI (TI) subject to regular tax
NRAETB (non-resident alien engaged in Included in GI (TI) subject to regular tax

trade and business)
NRANETB (non-resident alien not engage in 25% final tax (sec.25 (B)
trade and business)
❖ Manner of collection is by way of
final withholding tax.
DC (domestic corporation) Tax exempt (sec. 27 (D) 4
RFC (resident foreign corporation) Tax exempt (sec. 28 (A) (7) (d)
NRFC (non-resident foreign corporation) 15 % Final tax (sec. 28 (B) (5) (b)
Subject to tax-sparing credit
23 |R P R M

RC (resident citizen) Included in GI (TI) subject to regular
tax
NRC (non-resident citizen) Exempt
RA (resident alien) Exempt
NRAETB (non-resident alien engaged Exempt
in trade and business)
NRANETB (non-resident alien not Exempt
engage in trade and business)
DC (domestic corporation) Included in GI (TI) subject to regular

tax or MCIT
RFC (resident foreign corporation) Exempt
NRFC (non-resident foreign Exempt
corporation)
24 |R P R M
9 MARCH, 2019
GAINS DERIVED FROM DEALINGS AND PROPERTY:
TAX-FREE EXCHANGE UNDER SEC. 40 (C) (2)
• No gain or loss is recognized:
(1) If in pursuance of a plan of merger or consolidation

A. A party corporation exchanges property solely for stock in another party corporation.
B. A shareholder exchanges stock in a party corporation solely for the stock of another party
corporation.
C.
D. A security holder of a party corporation exchanges his securities in such corporation solely for
stock or securities in another party corporation.
• “merger” or “consolidation” mean:

1. The ordinary merger or consolidation; or
2. The acquisition by one corporation of all or substantially all the properties of another
corporation solely for stock.
• Undertaken for a bona fide business purpose and not solely for the purpose of escaping
the burden of taxation. (Sec. 40 (C)(6)(c))
• “Substantially all of the properties” means at least 80% of the assets (cash and non-
cash). (Gen. Cir. V-253, 7/16/57, Teodoro, p.226)
(2) If property is transferred to a corporation by a person in exchange for stock or unit of participation
in such a corporation of which as a result of such exchange said person, alone or together with
others not exceeding 4 persons, gains control of said corporation.
• Law applies even if the transferor or transferors of property in exchange of stock

already had control of the corporation at the time of the exchange. (BIR Ruling 4987,
Feb. 27, 1987 (Dimaampao, p. 183)
• “control” – means ownership of at least 51% of the total voting power of all classes
of stocks entitled to vote. (Sec. 40 (C) (6) (C))
EXCEPTIONS: (Taxable Exchange)
• (Gains, if any, is recognized but not the loss)
25 |R P R M
1. If the person (shareholder, security holder, individual) receives not only stock or securities, but also money
and/or property (“Boot”) – Sec. 40 (C)(3)(a) (Exchange not solely in Kind)
• Gains, if any – shall be in an amount not in excess of the sum of money and FMV of such
other property received.
Example:
Mr. B purchased real property in 2010 for P300,000. In 2018, he transferred his real property to X
Corporation in exchange of the following: (a) 2,800 shares of common stock (P100 par value) (Mr. B gained
control of X Corp as a result; (b) Cash – P10,000; (c) Other property – P20,000 FMV. How much is Mr. B’s gain?
Answer:
Amount realized (280,000 + P10,000 + 20,000) = 310,000

Less: Cost of property 300,000
Gain: 10,000
2. If the transferor corporation receives not only stock or securities but also money and/or property, which
is supposed to be distributed in pursuance of the plan of merger or consolidation, but such corporation
does not distribute the same. (Sec. (C)(3)(b) (“Exchange Not Solely in Kind”)
• Gain, if any – shall be in an amount not in excess of the sum of money and FMV of such other
property received which is not distributed.
3. If the party corporation receiving property in exchange of its stock or security assumes as part of the
consideration, a liability of the person (shareholder, security holder, individual, corporation) receiving
the stock or securities OR the property received by such corporation is subject to a liability, AND the
amount of the liability assumed plus the amount of liability to which the property is subject EXCEEDS
the adjusted basis of the property transferred, the EXCESS shall be considered either as capital gain or
ordinary gain depending on the nature of the property transferred. (Sec. (C)(4)(b))
Example:
Mr. B purchased real property in 2001 for P300,000. In 2016, he mortgaged his real property to Y bank
for P200,000. In 2018, he transferred his real property, with FMV of P600,000, to X corporation in exchange of
2,800 shares of common stock (100 par value). Mr. B gained control of X corp. as a result. At the time of the
transfer, X Corp. assumed the mortgage debt amounting to P310,000 inclusive of interests. How much is Mr. B’s
gain?
26 |R P R M
TAX-FREE EXCHANGE UNDER SEC. 40 (C)(2)
Liability assumed by X Corp: 310,000

Less: Cost of property transferred: 300,000
B’s Gain: 10,000
SEC. 40: DETERMINATION OF AMOUNT AND RECOGNITIONS OF GAIN OR LOSS
(A) Computation of Gain or loss
• Amount realized from sale of other disposition
• Less: basis/ Adjusted basis
• Gain (Loss)
• Amount realized – sum of money received plus FMV of property (other than money) received
• Expenses of sale (i.e., notarial fees, advertisement cost)?
(B) Basis of Property (depends upon the mode of acquisition)
• If acquired by purchase
• Acquisition cost (purchase price + all costs of acquisition such as commissions, documentary
stamp tax, transfer fees, etc.) (RR 6-2008)
• If acquired by inheritance
– FMV as of the date of acquisition (time of death) RR 6-2008
• If acquired by gift
– basis is the same as it would be in the hands of the donor.
• EXCEPTION: if basis > FMV at the time of gift, basis shall be the FMV for purposes of
determining the loss.
27 |R P R M
Example:
Basis in the hands of Donor P10,000

FMV at the time of gift 8,000
If selling price is P12,000, gain is P2,000

If selling price is P7,000, loss is P1,000
• If the property was acquired for less than an adequate consideration in money or money’s
worth
– basis is the amount paid by the transferee (or acquisition cost)
Example:
FMV at the time of acquisition – 10,000

Acquisition cost 9,000
If selling price is P11,000, gain is P2,000

If selling price is P8,000, loss is P1,000
• Basis of Property (real or personal), as well as stocks or securities, received in a tax-free exchange
of shares of stock under Sec. 40 (C)(2)
(A) (Substituted) Basis of stock or securities (bonds or debentures) received by the transferor. (Sec. 40
(5)(C)(a))
Formula:
Basis of property, stock, or securities exchanged
LESS: Money (including assumption of transferor’s liability) and FMV of property received, if
any
PLUS: Amount treated as dividend of the stockholder and amount of gain, if any
EQUALS: Basis of stock or securities (bonds or debentures) received.
(B) Property received as “boot” by the transferor – basis is FMV
“boot” – refers to the money and other property received in excess of the stocks or securities received by
the transferor on a tax-free exchange. (RR 6-2008)
28 |R P R M
(C) Basis of property in the hands of the transferee – same basis as it would be in the hands of the transferor
plus any gain recognized to the transferor on the transfer.
ILLUSTRATIONS:
(I) Corp. X and Corp. Y merged, with Y as the surviving corporation. Pursuant to the merger, Mr. A, a
shareholder in X, exchanged his 1 share of stock in X with 1 share of stock of Y (P10 par value). If
the basis (acquisition cost of X stock is P20), then the basis of Y stock is also P20. No gain or loss is
recognized. If Mr. A would later sell his Y stock at P50, then gain is P30.
(II) Mr. B purchased real property in 2010 for P300,000. In 2018, he transferred his real property to X
corporation in exchange of 2,800 shares of common stock (P100 par value). Mr. B gained control of
X corp. as a result. No gain or loss is recognized. Basis of X common stock is the same as the property
transferred. Thus, if Mr. B will sell the 2,800 shares of common stock for P110 per share (or for a total
price of P308,000), gain is P8,000.
(III) Mr. B purchased real property in 2010 for 300,000. In 2018, he transferred his real property to X
corporation in exchange of the following: a) 2,800 shares of common stock (P100 par value) (Mr. B
gained control of X Corp. as a result); b) Cash – P10,000; c) Other property – P5,000 FMV; d) X
Corporation to assume the mortgage liability of P20,000.
Question:
What is the basis of the P2,800 shares of stock?
Answer:
Basis of real property 300,000

Less: Money 10,000
Liability assumed 20,000
Other Property5,000 (35,000)
Plus: Gain realized 15,000
Basis of 2,800 shares of stock received 280,000
Question:
What is the basis of the property in the hands of the transferee?
Answer:
Basis of property in the hands of transferor P300,000

29 |R P R M
Plus: Gain recognized by the transferor 15,000
Basis of property in the hands of transferee 315,000
NATURE OF GAIN/ LOSS
• If ordinary asset – ordinary gain/loss

• If capital asset – capital gain/loss
(See, Sec. 39 (A) (1) for definition of Capital Assets)
SALE, EXCHANGE, OR OTHER DISPOSITION OF REAL PROPERTY:
• Real properties considered ORDINARY ASSET
1. RP which would properly be included in inventory of the taxpayer if on hand at the close of
the taxable year:
2. RP held by the taxpayer primarily for sale to customers in the ordinary course of trade or
business;
3. Real property used in trade or business of a character which is subject to the allowance for
depreciation (i.e., buildings and/or improvements);
4. Real property used in trade or business
Notes:
A mere discontinuance of the active use of the property does not change its character as
business property;
RP used by an exempt organization in its exempt operations (corps under Sec. 30) shall not be
considered as used for business (thus considered as capital assets).
5. RP acquired by banks through foreclosure sales;

6. RP purchased for future use in business (even though this purpose is later thwarted by
circumstances beyond the control of the taxpayer);
7. RP classified as ordinary asset which were later on abandoned or became idle, shall continue
to be treated as ordinary asset: (RR 7-2003)
30 |R P R M
Taxpayer RP located in the RP located in the Phil. (capital RP not located in the
Phil. (ordinary asset) Phil. (regardless of
asset) classification)
Citizens including Included in GI (TI) 6% CGT based on the Gross If seller is a resident
(Estates and Trusts) subject to regular selling price of FMV (determined citizen gain is included in
Resident Aliens, income tax under under Sec. 6 (E), whichever is GI (TI) subject to regular
NRAETB sec. 24 (A) higher; (Sec. 24 (D) (1); 25 (A)(3) income tax under Sec. 24
(A)
If the buyer is the government or If seller is an alien or a

any of its political subdivisions or non-resident citizen -
agencies, or a GOCC. Gain is exempt from tax
The tax liability on the gains shall

be computed on the basis of either
1.) 6% CGT under Sec.

24(D)(1);
25(A)(3); or
2.) Regular tax rate under
Sec. 24 (A) AT THE
OPTION OF THE
SELLER
NRANETB n/a 6% CGT based on the Gross Gain is exempt from tax
selling Price or FMV (determined
under Sec. 6 (E), whichever is
higher (Sec.25 (B))
Note: no option if buyer is

Government, etc.
Domestic Including in GI 6% CGT based on the Gross Included in GI (TI)

Corporation (TI) subject to selling price or FMV of land subject to regular income
regular income tax and/or buildings (determined tax or MCIT (Sec. 27 (A)
or MCIT (Sec. 27 under Sec. 6(E), whichever is or (E)
(A) or (E) higher; (Sec. 27(D)(5)
31 |R P R M
RFC Including in GI Included in GI (TI) subject to Gain is exempt from tax
(TI) subject to regular income tax or MCIT (Sec.
regular income tax 28 (A)(1) or (2)
or MCIT (Sec. 28
(A)(1) or (2)
NRFC n/a Gain is subject to final tax of 30% Gain is exempt from tax
(sec. 28 (B)(1)
• When to file CGT Returns: within 30 days after each sale or other disposition (Sec. 51
(C)(2)(b))
• Sale includes pacto de retro sale and other forms of conditional sales, forced sales such as
foreclosure sales and tax sales. (Dimaampao, p. 181)
In foreclosure sale:
• In case the mortgagor exercises his right of redemption within 1 year from the issuance if certificate of
sale, no CGT shall be imposed because capital gains has been derived by the mortgagor and no sale or
transfer of real property was realized.
• In case of non-redemption, the CGT shall become due based on the bid price of the highest bidder
but only upon expiration of the 1-year period of redemption and shall be paid within 30 days from the
expiration of the said redemption period. (RR 4-99)
EXEMPTED FROM CAPITAL GAINS TAX (UNDER SEC. 24 (D) (2))
1. Sale or disposition of Principal residence
Principal residence – refers to the dwelling house, including the land on which it is situated, where
the husband and wife or an unmarried individual, whether or not qualified as a head of a family,
and members of his family reside. Such principal residence must be characterized by permanency
in that it must be the dwelling house in which, whenever absent, the said individual intends to
return.
• Actual occupancy of such principal residence shall not be interrupted or abandoned by reason of
the individual’s temporary absence therefrom due to travel or studies or work abroad or such other
similar circumstances. (RR 14-2000)
• Requisites for exemption:

1. Seller-taxpayer is a natural person;
32 |R P R M
2. CIR must have been duly notified within 30 days from the date of sale or disposition by the
taxpayer of his intention to avail of the tax exemption;
3. The proceeds must be fully utilized in acquiring or constructing a new principal residence
within 18 calendar months from the date of sale;
4. Exemption can only be availed of once every 10 years.
• If there is partial utilization only of the proceeds – the portion of the gain presumed to have been realized
shall be taxed.
• Taxable portion = (Gross selling price or FMV, whichever is higher) X unutilized amount/Gross selling
Price)
• Taxpayer is liable for deficiency CGT with penalties and interests accruing from the 31st day following
the date of sale or disposition. (RR 17-2003)
SALE, EXCHANGE, OR OTHER DISPOSITION OF SHARES OF STOCK LISTED AND TRADED

THROUGH THE LOCAL STOCK EXCHANGE.
• “OTHER DISPOSITION” – includes cases where a corporation voluntarily buys back its own shares,
in which it becomes Treasury Shares. (RR 6-2008)
• Shares of stock – includes those issued by domestic and foreign corporations.
• Subject to Stock Transaction Tax (STI) of 6/10 of 1% of the Gross Selling Price or Gross Value in money
of the stock (Percentage tax under Sec. 127 (A)).
SALE, BARTER, EXCHANGE OR OTHER DISPOSITION OF SHARES OF STOCK IN A DOMESTIC

CORPORATION NOT TRADED IN THE STOCK EXCHANGE (REGARDLESS OF THE PLACE
(COUNTRY) OF SALE)
• Subject to Capital Gains Tax (Final Tax)
Note: if the seller is a dealer in securities, the sale is not subject to CGT.
• Shares of stock include: (Sec. 22 (L))

1. Shares of stock of a corporation
2. Warrants and/or options to purchase shares of stock;
33 |R P R M
3. Units of participation in a business/trade partnership; joint stock companies; joint accounts. (joint
ventures taxable as corporation, associations, and recreation or amusement clubs (golf, polo, or similar
club), and
4. Mutual fund certificate
SALE, EXCHANGE, OR OTHER DISPOSITION OF SHARES OF STOCK LISTED AND TRADED

THROUGH THE LOCAL STOCK EXCHANGE.
• Return – it shall be the duty of the stock broker to collect the tax and remit the same to the BIR within 5
banking days from date of collection (Sec. 127 (C)(1).
• Gain is exempt from Income tax (not subject to regular individual or corporate income tax nor Capital
Gain Tax (Final Tax) (sec. 127 (D)
Note: if the seller is a dealer in securities, the sale is not subject to STI (Sec. 127 (A))
34 |R P R M
16 MARCH 2019
Subject to capital gains (Final Tax)
Note: if the seller is a dealer securities, the sale is not subject to CGT.
Shares of stock include: (Sec. 22(L))
1. shares of stock of a corporation

2. warrants and/or options to purchase shares of stock:
3. exploits of participation in a business/trade partnership; join stock companies, joint accounts, joint
ventures taxable as corporation, associations, and recreation or amusement clubs (golf, polo or similar
clubs), and
4. Mutual fund certificate
Dealers in securities is not considered as capital gains tax because it is ordinary asset.
RC NRC RA NRAETB NRANETB DC RFC NRPC

TAX Not Not Not Not Capital Not Capital Not Not Capital Not Capital
BASE Capital Capital Capital Gains Gains during Capital Gains Gains
Gains Gains Gains during the the year Gains during the during the
during during during year during year year
the year the year the year the year
CGT 15% 15% 15% 15% Sec. 15% Sec. 15% Sec. Not over Not over
RATE Sec. Sec. Sec. 25(A)(3): 25(B); 24(C) 27(D)(2) 100k-5%; 100k-5%;
24(C) 24(C) 24(C) 24(C) amount un amount un
excess of excess of
100k-10% 100k-10%
Sec. Sec.
28(A)(7)(c) 28(B)(5)(c)
“OTHER DISPOSITIONS” – includes cases where a corporation voluntarily buys back its own shares, in which
it becomes Treasury Shares. (RR-6-2008)
SALE – includes wash sales of stocks (Sec. 38); and short sales of stocks. (Sec. 39 (F)(1).
SHORT SALE – a sale of security that the seller does not own or has not contracted for at the time of sales, and
that the seller must borrow to make the delivery. Such a sale is usually made when the seller expects the security’s
price to drop. Seller buys shares to pay back the borrowed shares. (Black’s Law)
WASH SALE – subject to “capital gain recognized, capital loss not recognized rule”. (Sec. 38 (A)).
35 |R P R M
WASH SALE OF STOCK – is a sale of stock where it appears that within a period beginning 30 days before
the date of sale or disposition and ending 30 days after such date, the taxpayer has acquired (by purchase or
exchange upon which the entire amount of gain or loss was recognized by law), or has entered into a contract
or option so to acquire, substantially identical stocks.
LIMITATION ON CAPITAL LOSS
Capital loss from sale, barter, exchange or other disposition of shares of stock subject to CGT is deductible only
to the extent of capitally gains from the same type of transaction during the same period. (Sec. 39 (C); Sec. 7 (c.4)
(RR 6-2008)
• Holding period rule - not applicable (Sec. 24 (C))

• Net capital loss carry-over – not applicable (RR 6-2008)
NOTES:
1. If the identical stocks were acquired in a tax-free exchange under sec. 40(C)(2) & in an exchange not
solely in kind under sec. 40(C)(3), not a “wash sale”.
2. If the taxpayer is a dealer in securities and the wash sale is made in the ordinary course of business,
loss is recognized as “ordinary loss” (Sec. 34(D)(5)) deductible against “ordinary income” (Sec. 22(Z))
When to File Return: within 30 days after each transaction and a
Final Consolidated Return on or before April 15 of each year covering all stock transaction of the preceding
taxable year for individual taxpayers. (Sec. 51 (C)(2))
Final Consolidated Return on or before the 15th day of the 4th month following the close of the taxable year for
corporate taxpayers. (Sec.52(D))
36 |R P R M
SALE, BARTER, EXCHANGE OR OTHER DISPOSITION OF SHARES OF STOCK IN A FOREIGN

CORPORATION NOT TRADED IN THE STOCK EXCHANGE (SOLD WITHIN THE PHILIPPINES)
RC NRC RA NRAETB NRANETB DC RFC NRFC

Tax Included Included Included Included 25% final Included Included Included
Treatment in GI in GI in GI in GI (TI) tax on in GI in GI in GI
of Capital (TI) (TI) (TI) subject to capital gain (TI) (TI) (TI)
Gain subject subject subject regular subject subject subject
to to to income tax to to to
regular regular regular regular regular regular
income income income income income income
tax tax tax tax tax tax
Legal Sec. Sec. 32; Sec. 32; Sec. 32; Sec. 32; 31; Sec. Sec. Sec.
basis 32;31 31 31 31 25(B)(1) 32;31; 28(A)(1) 28(A)(1)
27(A)
SALE, BARTER, EXCHANGE OR OTHER DISPOSITION OF SHARES OF STOCK IN A FOREIGN

CORPORATION NOT TRADED IN THE STOCK EXCHANGE (SOLD WITHOUT THE
PHILIPPINES)
RC NRC RA NRAETB NRANETB DC RFC NRFC

Tax Included in Not Not Not Not taxable Included in Not Not
Treatment GI (TI) taxable taxable taxable GI (TI) taxable taxable
of Capital subject to subject to
Gain regular regular
income tax income tax
Legal Sec. Sec. Sec. Sec. Sec. 23(D) Sec. Sec. Sec.
basis 32;31;23(A) 23(B) 23(D) 23(D) 32;31;23(E) 23(F) 23(F)
SALE OR EXCHANGE OF PERSONAL PROPERTY (OTHER THAN SHARES OF STOCK) HELD AS

CAPITAL ASSET
i.e., investment in bonds
SALE includes “wash sales” of security (Sec. 38); and short sales of security (Sec. 39 (F)(1)
Tax-exempt sale – gains realized from sale, exchange or retirement of bonds, debentures, or other certificate of
indebtedness with maturity of more than 5 years. (Sec. 32 (7)(g)
37 |R P R M
DEALINGS OR TRANSACTIONS (OTHER THAN SALE OR EXCHANGE) INVOLVING REAL

PROPERTY HELD AS CAPITAL ASSET
1. Surrender of shares upon dissolution of corporation and liquidation of assets and liabilities. (Sec. 73(A)(2);
Sec. 8, RR 6-2008)
2. Redemption of Shares (for cancellation or retirement) (Sec. 9, RR-6-2008)
Tax-Exempt Redemption:
Gains realized by the investor upon redemption of shares of stock in a mutual fund company. (Sec. 32
(7)(h))
3. Retirement of Bonds, etc. (Sec. 39 (E))

Retirement of bonds, debentures, notes or certificates, or other evidence of indebtedness, issued
by any corporation, including those issued by the government or political subdivision therof, with
interest coupons or in registered form.
Tax-exempt redemption - gains realized from sale, exchange or retirement of bonds, debentures, or other
certificate of indebtedness with maturity of more than 5 years. (Sec. 32 (7)(g)
4. Failure to exercise privileges or options to buy or sell property (Sec. 39 (F)(2))
5. Securities as defined in Sec. 22(T) becoming worthless (Sec. 34(D)(4(b); Sec. 34 (E)(2))
Securities means shares of stock in a corporation and rights to subscribe for or to receive such
shares. The term includes bonds, debentures, notes or certificates, or other evidence of
indebtedness issued by any corporation, including those issued by the government or political
subdivision thereof, with interest coupons or in registered form. (Sec. 22 (T))
Shares considered worthless – when offered for sale or requested for share redemption, no amount can be
realized by the owner of the share. (RR 6-2008)
REQUISITES OF SECURITIES BECOMING WORTHLESS
1. Securities are capital assets;

2. Ascertained to be worthless;
3. Changed off within the taxable year;
4. Considered as loss on “sale or exchange” of capital asset on the last day of such taxable year;
5. Not deductible against capital gains derived from Sale, Barter, exchange or other disposition of shares of
stock; (RR 6-2008)
6. Deductible only against “other capital gains”. (RR 6-2008)
38 |R P R M
NOTE:
If taxpayer (security holder) is a bank or trust company (domestic) as substantial part of whose business is the
receipt of deposits, the resulting loss is considered “ordinary loss” (deductible in full from ordinary income and
other net capital gains). (Sec. 34 (E)(2))
SPECIAL RULES ON CAPITAL GAINS AND LOSSES (Sec. 39)
Holding period rule (Sec. 39 (B)) – (Applicable to individuals only)
• In case of an individual taxpayer, only the following percentage of gain or loss shall be
taken into account in computing the net capital gain (loss) and net income:
➢ 100% if capital asset has been held for not more than 12 months;
➢ 50% if capital asset has been held for more than 12 months.
LIMITATION ON CAPITAL LOSS (Sec. 39 (C)) – Applicable to individuals and corporations)
• Losses from sale or exchange of capital assets shall be allowed only to the extent of capital
gains
EXCEPTIONS: (Sec. 39 (C))
If a bank or trust company (domestic) a substantial part of whose business is the receipt of deposits, sells
any bond, debentures, notes or certificates, or other evidences of indebtedness, issued by any corporation,
including those issued by the government or political subdivision thereof, with interest coupons or in registered
form, any loss resulting from such sale and shall not be subject to the limitation. (Sec. 39(C))
o Thus, the loss is treated as “ordinary loss” deductible against “ordinary
NET CAPITAL LOSS CARRY-OVER (Applicable to individuals only)
• If the taxpayer sustains in any taxable year a net capital loss, such loss (in an amount not in excess
of the net income for such year) shall be treated in the succeeding taxable year as loss from the
sale or exchange of capital asset held for not more than 12 months. (Sec. 39 (D))
• Expiration after one (1) year.
• Meaning, 100% of the net capital loss or an amount equal to the net income for the taxable year,
whichever is lower, shall be carried over as capital gain in the succeeding year only. Any excess
of such net capital loss over the capital gains in the succeeding year, can no longer be carried over
to the next succeeding taxable year.
39 |R P R M
CAPITAL LOSSES NOT RECOGNIZED OR ALLOWED (BUT GAIN IS RECOGNIZED)
1. Exchange not solely in kind (Sec. 40(C)(3(a))

2. Wash sale of stock or securities (Sec. 38)
(seller is not a dealer in securities)
3. Transactions between related taxpayers involving capital assets. (Sec. 36 (B))
In computing net income, no deduction shall in any case be allowed in respect of losses from sales or exchanges
of property directly or indirectly;
1. Between members of a family.

Family – includes only brothers and sisters (whole or half-blood), spouse, ancestors, and lineal
descendants.
2. Between an individual and a corporation more than 50% in value of the OCS of which is owned, directly
or indirectly, by or for such individual
Exception:
3. Between two corporations more than 50 % in value of the OCS of each of which is owned, directly or
indirectly, by or for the same individual. If either one, with respect the taxable year of the corp. preceding
the date of sale or exchange, was a personal holding company (exception: distribution in liquidation where
loss is recognized)
• Holding company – a company formed to control other corporations, usually confining its
role to owning stock and supervising management (Blacks law)
• Personal holding company – a holding company that has usually limited number of
shareholders, with most of its revenue
4. Between the grantor and a fiduciary of any trust:

5. Between the fiduciary of a trust and the fiduciary of another trust,
If the same person is the grantor with respect of another trust
6. Between fiduciary of a trust and a beneficiary of such trust.
40 |R P R M
23 MARCH 2019
INDIVIDUAL INCOME TAX
Sec. 24. Income Tax on Citizens and Resident Aliens
Resident Alien – one whose residence is within the Philippines therefore not mere transients or sojourners,
includes:
1. Aliens who lives in the Philippines with no definite intention as to his stay;
2. One who comes to the Philippines for a definite purpose which in its nature would require an extended
stay and to that end makes his home temporarily in the Philippines.
• An alien who has acquired residence in the Phils. Retain his status as such until he abandons the same
actually departs from the Phils. (Teodoro, p.311)
Taxable Income – pertinent items of GI less allowable or authorized deductions (Sec. 31).
Pertinent items of income – includes income with tax situs in the Philippines, which are not exempt from tax
and subject to final tax.
For tax Situs – refer to Sec. 23; 42
Examples:
1. Compensation income
2. Gross income derived from the conduct of trade or business
3. Gross income derived from the exercise of a profession
4. Rent income
5. Annuities
6. Capital gains not subject to final taz
7. Taxable pensions
8. Prizes of 10k or less
9. Tax refunds
10. Recovery of bad debts
11. Partner’s distributive share from the net income of the general professional partnership
Sec. 26: Tax liability of members of General Professional Partnerships
• Partners in a GPP shall be liable for income tax only in their separate and individual
capacities.
41 |R P R M
• Each partner shall report as gross income his distributive share, actually or constructively
received, in the net income of the general professional partnership.
• Net income of the GPP shall be computed in the same manner as a corporation.
• But, a GPP as such shall not be subject to income tax.
Allowable or Authorized Deductions (Sec. 34)

a. Itemized Deductions (Sec. 34 (A) to (J)
1. Expenses (Ordinary and Necessary Trade, Business or Professional Expenses)
2. Interest;
3. Taxes;
4. Losses;
5. Bad debts;
6. Depreciation;
7. Depletion of oil and gas wells and mines;
8. Charitable and other contributions;
9. Research and development;
10. Pension trusts.
• No deductions shall be allowed to individual taxpayers earning compensation income arising from
personal services rendered under an employer-employee relationship in computing taxable income.
(Sec. 34)
Additional requirements for Deductibility or certain payments (Sec. 34 (K))
1. Any amount paid or payable

a. Which is otherwise deductible from Gross Income; or
b. Which is taken into account in computing Gross Income; or
c. For which depreciation or amortization may be allowed
Shall be allowed as deduction only IF it is shown that the tax required to be deducted and withheld
therefrom has been paid to the BIR in accordance with Sec. 58 and 81
2. Deductible amount for a particular item shall not exceed the ceiling, if any, imposed by law or as
prescribed by rules and regulations. (Sec 34(L))
B. Optional Standard Deduction (Sec. 34 (L))
An individual subject to tax under Sec. 24 (Other than a Non-resident Alien) may elect a standard
deduction in an amount not exceeding 40% of the Gross Sales or Gross Receipts, in lieu of the itemized
deductions.
42 |R P R M
Sec. 24: Income Tax on Citizens and Resident Aliens
1. The election must be made in the OITR filed for the 1st Quarter of the taxable year.
Once the election is made, OSD must be applied in all succeeding QITR and the final ITR for the
Taxable year. (RR 8-2018)
2. An individual who claimed the OSD shall not be required to submit with his tax return Financial
Statements.
3. Without such election, taxpayer can claim itemized deductions;
• For a corporation subject to tax under Section 27 (A) (Domestic Corporation) or Section
28 (A)(1) (resident Foreign Corporation), it may elect a standard deduction in an amount
not exceeding 40% of its Gross Income as defined under Section 32.
• A GPP and the partners comprising such partnership may avail of the Optional Standard
Deductions (OSD) only once, either by the GPP or the partners comprising the
partnership. (Sec. 34 (L)).
• The distributable net income of the GPP may be determined by claiming either itemized
deduction or OSD.
• The partners comprising the GPP can no longer claim further deduction from their
distributive share in the net income of the GPP since their distributive share from the
GOO is already net of cost and expenses (RR 8-2018)
• If the partner also derives other income from trade, business, or practice of profession
apart and distinct from the share in the net income of the GPP, the deduction that can be
claimed from the other income would either be the itemized deductions or OSD (RR 8-
2018)
ITEMS NOT DEDUCTIBLE (Sec. 36)
1. Personal, living or family expenses

2. Any amount paid out for new buildings or for permanent improvements or betterments made to increase
the value of any property or estate; (except intangible drilling and development costs incurred in petroleum
operations which are deductible under Sec. 34 (G)(1))
3. Any amount expended in restoring property or in making good the exhaustion thereof for which an
allowance is or has been made;
43 |R P R M
4. Premiums paid on any life insurance policy covering the life or any other 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 sales or exchanges of property directly or indirectly between related taxpayers (Sec. 36(B))
Rates of Tax
Generally, Graduated Tax Rates (Sec. 24 (A)(2))
Note: if TI is not over 250k, tax rate is 0%.
• Option granted to purely self-employed individuals and/or Professionals whose Gross Sales or
Gross Receipts and Other Non-operating Income does not exceed 3M (Sec. 24 (A)(2)(b)).
- Pay an 8% Tax on Gross Sales or Gross Receipts and Other Non-operating Income in
excess of P250,000, in lieu of the graduated tax and the Percentage Tax under Sec. 116.
• Option granted to Mixed Income Earners whose Gross Sales or Gross Receipts and Other Non-
operating income does not exceed 3M. (Sec. 24 (A)(2)(c)
- Pay an 8% Tax on Gross Sales or Gross Receipts and Other Non-operating Income in
lieu of the graduated tax and the Percentage Tax under Sec. 116.
Note:
1. Compensation income of mixed income earners is not covered by the optional 8% tax, hence, subject
to graduated tax rates.
2. The tax base of the optional 8% tax for mixed income earners is the entire Gross Sales or Gross
Receipts and other non-operating income,
- as distinguished from the tax based in case of purely self-employed individual which is
“Gross sales or Gross Receipts and other non-operating income in excess of 250k”.
Thus, if the Taxable Compensation income is less than 250k, the excess of the 250K over the Taxable
Compensation Income is not deductible from the “Gross Sales or Gross Receipts and Other Non-
operating income” as tax base of the optional 8% tax. (RR 8-2018)
3. Should the mixed income earner qualified to avail of the optional 8% tax does not choose to avail of
the option, his combined taxable income shall be subject to the graduated tax rates;
44 |R P R M
4. If the mixed income earner is not qualified to avail of the optional 8% tax, his combined taxable
income shall be subjected to the graduated tax rates;
WHO ARE NOT ALLOWED TO AVAIL OF THE 8% TAX RATE?
1. An individual earning purely compensation income;

2. Non-vat taxpayers whose gross sales or gross receipt and other non-operating income exceeded 3M
3. VAT-registered taxpayers, regardless of amount of Gross Sales or Gross Receipts and Other Non-
operating Income
4. Taxpayers subject to Percentage taxes under Title V, except those covered by Sec. 116.
5. Partners of GPP since their distributive share in the net income of the GPP is already net of costs and
expenses. (RMC 50-2018)
• Husband and wife shall compute separately their individual income tax based on their respective
total taxable income.
• If any income cannot be attributed to or identifies as income exclusively earned by either or the
spouses, the same shall be divided equally between the spouses for the purpose of determining their
respective taxable income.
• If not purely compensation earners, married individuals shall jointly file a one return, unless it is
impracticable for the spouses to jointly file one return. (Sec 51(D))
WHEN TO FILE ITR:
QITR for 1st quarter – on or before May 15 (Sec. 74 (A)
QITR for 2nd quarter – on or before August 15
QITR for 3rd quarter – on or before Nov. 15 (sec. 74(B))
Annual ITR – on or before April 15 of the following year (Sec. 51(C)(1))
IS INSTALLMENT PAYMENT ALLOWED?
• Yes, when the tax due is in excess of P2,000, the individual may elect to pay the tax in 2 equal
installments.
• 1st instalment to be paid upon filing the annual ITR
• 2nd instalment to be paid on or before October 15 following the close of the taxable year. (Sec.
56(A)(2))
45 |R P R M
INDIVIDUALS NOT REQUIRED TO FILE INCOME TAX RETURN (Sec. 51; RR-8-2018)
1. An individual whose sole income has been subjected to final withholding tax;
i.e., NRAETB who is subject to final tax of 25% on his Gross income within the Philippines.
2. An individual earning purely compensation income whose taxable income does not exceed Two
Hundred Fifty Thousand Pesos.
3. An individual whose income tax has been correctly withheld by his employer, provided that
such individual has only one employer for the taxable year.
4. Minimum wage earner
• The certificate of Withholding Tax filed by the respective employers, duly stamped “received” by the
Bureau, shall be tantamount to the substituted filing of income tax returns by said employees (2, 3 and 4);
NOTES:
1. In all cases, individuals deriving compensation income, regardless of the income, from two (2) or more
concurrent or successive employers at any time during the taxable year are not qualified for
substituted filing. Thus, are still required to file a return.
2. A citizen and any alien individual engaged in business or practice of profession within the Philippines
shall file an ITR, regardless of the amount of gross income.
i.e. Mixed income earners even if the income tax on his compensation has been correctly withheld by his
employer
• A non-resident Alien individual who shall come to the Philippines and stay therein for an aggregate
period of more than 180 days during any calendar year shall be deemed a Non-Resident Alien doing
business in the Philippines. (Conclusive Legal Presumption)
• Thus, a non-resident Alien Engaged in Trade and Business in the Philippines is either actually so engaged
or presumed by law to be so engaged.
46 |R P R M
NON-RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES:
• In general, subject to an income tax in the same manner as an individual citizen and a resident alien
individual on taxable income received from all sources within the Phils. (Sec. 25(A))
• In general, the income tax rates applicable to this taxpayer shall be the rates imposed on individual citizen
and a resident alien individual on the taxable income derived within the Phils. (RR 8-2018)
• Subject to final tax of 25% on his entire income received from all sources within the Phils. (Sec.
25(B))
The Former “Special Group of Alien employees (and their Filipino counterparts) of:
1. Regional or area headquarter and regional operating headquarters of multinational companies

2. Offshore banking units and
3. Petroleum service contractors and subcontractors shall be subject to the “regular” income tax rate,
under Sec. 24 (A)(2)(a), without prejudice to existing tax treaties, if any, (RR 8-2018)
CORPORATE INCOME TAX
The term “Corporation” includes –
1. Trade or Business Partnerships, no matter how created or organized.
(does not include General professional Partnerships formed by persons
2. Joint ventures – a business undertaking by two or more persons engaged in a single defined project.
(Black’s Law)
Except joint ventures or consortium formed for the purpose of
a. Undertaking construction projects, or

b. Engaging in petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract with the Government.
3. Joint accounts (cuentas en participacion) – a partnership constituted in such manner that its existence
was only known to those who had an interest in the same and without a corporate name indicating to the
public in some way that there were other people besides the one ostensibly managed and conducted the
business (Dietrich v. Freeman, G.R. No. L-6252 January 28, 1911)
4. Joint stock companies – an unincorporated association of individuals possessing common capital, the
capital being contributed by the members and divided into shares, of which each member possesses a
47 |R P R M
number of shares proportionate to the member’s investment. Shares are transferrable without the express
consent of the members (Black’s law)
5. Associations – an unincorporated organization of persons.
6. Insurance companies – a corporation or association that issues insurance policies (black’s law)
7. Mutual Fund Company – an investment company that invests it shareholders’ money in usually
diversified selection of securities (Black’s law) (see also investment company act)
Domestic Corporation – means a corporation created or organized in the Philippines or under its
laws. (Sec. 22 (C)).
RATES OF INCOME TAX ON DOMESTIC CORPORATIONS:
A. In General – 30% upon taxable income derived during each taxable year
B. Proprietary Educational Institution which are non-profit hospitals – 10% on their Taxable
income.
• Unless, the gross income from “unrelated trade, business or activity” exceeds 50% of the
total gross income, 30% shall be imposed on the “entire taxable income”.
• “unrelated trade, business, or activity” – means any trade, business or other activity,
the conduct of which is not substantially related to the exercise or performance by such
educational institution or hospital of its primary purpose or function.
• “related” – when the trade, business or activity is ancillary to the primary purpose.
i.e., operation of canteens and bookstore within the school premises by the
educational institution (RMC 64-2016) Sec. 30 (h)
C. GOCCs- all corporations, agencies, or instrumentalities owned or controlled by the Gov’t.

Except: GSIS, SSS, PHIC, and Local Water Districts
- Shall pay such rate of tax upon their taxable income as are imposed upon a corporation
or association engaged in a similar business, industry or activity
48 |R P R M
i.e., interest income of government school from currency bank deposit – subject to 20%
Final Tax
- but interest income from currency bank deposit of a nonstock, nonprofit, nonprofit school
is exempt if used actually, directly and exclusively for educational purposes.
D. Rates of Tax on Certain Passive Income
E. Minimum Corporate Income Tax (MCIT) on Domestic Corporation
Q. WHO ARE COVERED BY THE MCIT SYSTEM
Ans.
Domestic Corporations with respect to their income subject to the regular tax rate (normal income tax
rate) under Sec. 27 (A), and Resident Foreign Corporations with respect to their income subject to the regular tax
rate (normal income tax rate) under Sec. 28(A)(1) beginning on the 4th taxable year immediately following the
year in which such corporation commenced its business operations (Sec. 27(E)(1); Sec. 28(A)(2))
• The year in which business operations shall be the year in which the corporation registered with the BIR
(RR 9-98, as amended)
• This grace period allows a new business to stabilize first and make its venture viable before it is subjected
to the MCIT. (Creba vs. Romulo, G.R. No. 160756, March 9, 2010. Citing manila banking corporation v.
CIR, C.T.A. Case no. 6442, 21 April 2003)
WHAT IS THE INTENT AND PURPOSE OF MCIT?
• Congress intend to put a stop to the practice of corporations which, while having large turn-overs,
report minimal or negative net income resulting in minimal or zero income taxes year in and year
out, through under-declaration of income or over-deduction of expenses otherwise called tax
shelters.
(CREBA v. Romulo G.R. No. 160756 March 9,2010 citing transcript, house of representatives
committee on ways on means hearing, april 23, 1997, pp. 53-61; Oct 9, 1997, pp 95-99; Oct. 10,
1997, pp 11-14)
• As a tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes
achieved through sophisticated and artful manipulations of deductions and other stratagems.
49 |R P R M
• It was devised as a relatively simple and effective revenue-raising instrument compared to the
normal income tax which is more difficult to control and enforce. It is a means to ensure that
everyone will make some minimum contribution to the support of the public sector. (CREBA v.
Romulo)
WHO ARE NOT COVERED?
ANS. Those whose operation or income is subject to special tax rate, such as:
1. Proprietary educational institutions subject to 10% tax on their taxable income;
2. Non-profit hospitals subject to 10% tax on their taxable income;
3. Foreign currency deposit units subject to 10% final tax on their interest income from foreign
currency loans granted to residents (other than OBUs) or other depository banks under the
expanded foreign currency deposit system (Sec. 27(D)(3))
4. International carriers (RFCs) subject to 2.5% final tax on their gross Philippine Billings (Sec.
28(A)(3))
5. Offshore banking units (RFCs) subject to 10% final tax on their interest income derived from
currency loans granted to residents (other than OBU’s, local commercial banks, local branches
of foreign banks) (Sec. 28(A)(4))
6. Regional operating headquarters of multinational companies subject to 10% tax on their

taxable income (sec. 28(A)(6)(b))
7. Corporations subject to special tax rates under special laws (i.e. PEZA law) (RR 9-98, as
amended)
WHEN IS MCIT IMPOSED/PAYABLE
ANS. When the corporation has zero or negative taxable income OR when the amount of the
MCIT is greater than the normal income tax (NIT).
• Rate of MCIT: 2% of the gross income as of the end of the taxable year as defined herein. (Sec.
27 (E)(1)).
50 |R P R M
Gross income
- For purposes of applying the MCIT, “gross income” shall mean gross sales less sales return,
discounts and allowances and cost of goods sold. (Sec. 27(E)(4))
- Or in case of taxpayers engaged in the sale of service, “gross income” means gross receipts less
sales returns, allowances, discounts and cost of services. (Sec. 27(E)(4))
Gross Receipts – means amount actually or constructively received during the taxable year
• For taxpayers using the accrual basis of accounting, Gross receipts shall mean amounts
earned as gross income. (RR 2-98)
Cost of Services – mean all direct costs and expenses necessarily incurred to provide the services required by the
customers and clients including:
a. Salaries and employee benefits of personnel, consultants and specialists directly rendering the service,
and
b. Cost of facilities directly utilized in providing the service such as
1. Depreciation or rental of equipment used and
2. Cost of supplies
In case of banks,
• Cost of services shall include interest expense.
MINIMUM CORPORATE INCOME TAX (MCIT)
• 2% of the gross income as of the end of the taxable year as defined herein, (Sec. 27 (E)(1)).
• This rule notwithstanding, if apart from deriving income from these core of business activities
there are other items of gross income realized or earned by the taxpayer during the taxable period
which are subject to the NIT, the same items must be included as part of the taxpayer’s gross
income for computing MCIT (RR 12-2007).
NOTES:
1. MCIT applies upon filing the quarterly ITRs and the Annual ITR: (RR 12-2007);
2. Any excess of the MCIT over the NIT shall be carried forward and credited against the NIT for the 3
immediately succeeding taxable years. (Sec. 27 (E)(2)); Thus, the excess MCIT cannot be credited
against MCIT due.
51 |R P R M
3. If MCIT is greater than the NIT due in the QTIR excess MCIT from the previous taxable year shall
not be allowed to be credited;
4. If NIT due in the QITR is greater than the MCIT, excess MCIT from the previous taxable year shall
be allowed to be credited against the NIT due.
RELIEF FROM THE MCIT (Sec. 27 (E)(3))
The Secretary of Finance may suspend the imposition of the MCIT on any corporation which suffers
losses.
1. on account of prolonged labor dispute
- means losses arising from a strike staged by the employees which lasted for more than 6 months within the
taxable period and which has caused the temporary shutdown of business operations.
2. because of force majeure
- means a cause due to an irresistible force as by “act of God” like lightning, earthquake, storm, flood and the
like. This term shall also include armed conflicts like war or insurgency.
3. Because of legitimate business reverses
- shall include substantial losses sustained due to fire, robbery, theft or embezzlement, or for economic reason as
determined by the Sec. of Finance. (RR 9-98)
52 |R P R M
30 MARCH 2019
Improperly Accumulated Earnings Tax (IAET)(sec.29)
Concept
• The Tax is being imposed in the nature of penalty to the corporation for the improper accumulation
of its earnings, and as a form of deterrent to the avoidance of tax upon shareholders who are supposed to
pay dividends tax on the earnings distributed to them by the corporation. (RR 2-2001)
Who are covered?
• Domestic corporations which are classified as closely held corporations formed or availed for the
purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other
corporation, by the permitting earnings and profits to accumulate instead of being divided or distributed
(Sec. 29 (B)(1); (RR 2-2001))
Closely-held corporations
• Are those corporations at least fifty percent (50%) in value of the outstanding capital stock or at least
fifty percent (50%) of the total combined voting power of all classes of stock entitled to vote is owned
directly or indirectly by or for not more than twenty (20) individuals.
• Domestic corporations not falling under the aforesaid definition are, therefore, publicly-held
corporations. (RR 2-2001)
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) (Sec. 29)
Concept:
• The tax is being imposed in the nature of a penalty to the corporation for the improper
accumulation of its earnings, and as a form of deterrent to the avoidance of tax upon
shareholders who are supposed to pay dividends tax on the earnings distributed to them by
the corporation. (RR-2-2001)
Who are not covered?
a. Banks and other non-bank financial intermediaries;

b. Insurance companies;
c. Publicly-held corporations; (Sec. 29 (B)(2))
d. Taxable partnerships; (see Sec. 73 (D))
e. General professional partnerships;
f. Non-taxable joint ventures; and
A. Construction
B. Energy
53 |R P R M
g. Enterprises duly registered with the Philippine Economic Zone Authority (PEZA) under R.A. 7916,
and enterprises registered pursuant to the Bases Conversion and Development Act of 1992 under R.A.
7227, as well as other enterprises duly registered under special economic zones declared by law which
enjoy payment of special tax rate on their registered operations or activities in lieu of other taxes,
national or local.
How is the purpose to avoid income tax determined? (Sec. 29 (C))
1. The fact that a corporation is a mere holding company or investment company shall be prima facie
evidence of a purpose to avoid the tax upon its shareholders or members.
“Holding or investment company” shall refer to a corporation having practically no activities except
holding property, and collecting the income there from investing the same. (RR 2-2001)
2. The fact that the earnings of profits of a corporation are permitted to accumulate beyond the reasonable
needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or
members.
• In both instances, the corporation may, by clear preponderance of evidence in its favour, prove the
contrary.
• “Reasonable needs of the business” mean the immediate needs of the business.
(Immediacy Test/Doctrine)
• The corporation may not with impunity permit its earnings to pile up merely because at some future time
certain outlays would have to be made.
• If the corporation did not prove an immediate of need for the accumulation of the earnings and profits, the
accumulation was not for the reasonable needs of the business, and the penalty tax would apply.
• [G.R. No. L-26145 Feb. 20 1984. THE MANILA WINE MERCHANTS, INC. Vs. THE
COMMISSIONER OF INTERNAL REVENUE]
• “Reasonable needs of the business” includes reasonably anticipated needs. (Sec. 29 (E))
• Profits may only be accumulated for the reasonable needs of the business, and implicit in this is further
requirement of a reasonable time. [THE MANILA WINE MERCHANTS, INC. v.
THE COMMISSIONER OF INTERNAL REVENUE]
54 |R P R M
Examples of accumulation of earnings for the reasonable needs of the business:
a. Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital
of the corporation as of balance sheet date, inclusive of accumulations taken from other years;
b. Earnings reserved for definite corporation expansion projects or programs requiring

considerable capital expenditure as approved by the Board of Directors or equivalent body;
c. Earnings reserved for building, plants or equipment acquisition as approved by the board of
directors or equivalent body;
d. Earnings reserved for compliance with any loan covenant or pre-existing obligation established
under a legitimate business agreement;
e. Earnings required by law or applicable regulations to be retained by the corporation or in

respect of which there is legal prohibition against its distribution;
f. In the case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings
intended or reserved for investments within the Philippines as can be proven by corporate
records and/or relevant documentary evidence.
• The following are prima facie instances of accumulation of profits beyond the reasonable needs of a
business and indicative of purpose to avoid income tax upon shareholders;
a. Investment of substantial earnings and profits of the corporation in unrelated business or in stock
or securities of unrelated business;
b. Investment in bonds and other long-term securities;
c. Accumulation of earnings in excess of 100% of paid-up capital, not otherwise intended for the
reasonable needs of the business.
• Rate and Tax based: 10% of the improperly accumulated taxable income
55 |R P R M
• Improperly accumulated taxable income for a particular year is first determined by adding to that
year’s taxable income the following;
a. income exempt from tax;
b. income excluded from gross income;
c. income subject to final tax; and
d. the amount of net operating loss carry-over (NOLCO) deducted.
• The taxable income as thus determined shall be reduced by the sum of:
a. Income tax paid/payable for the taxable year;
b. Dividends actually or constructively paid/issued from the applicable year’s taxable income;
c. Amount reserved for the reasonable needs of the business emanating from the covered year’s
taxable income.
How to avoid the IAET?
• The dividends must be declared and paid or issued not later than one year following the close of the
taxable year.
• Due date of IAET: IAET, if any, should be paid within fifteen (15) days following the close of the 1year
grace period.
Resident foreign Corporation – a foreign corporation engaged in trade or business within the Philippines
(Sec. 22(H))
1. In General – subject to
a. an income tax equivalent to 30% of the taxable income derived in the preceding taxable year from
all sources within the Philippines OR
b. MCIT of 2% of gross income (imposed under the same conditions prescribed under Sec. 27(E)
2. RFCs subject to special rate
a. International Carriers – subject to 2.5% on its Gross Philippine Billings
1) International Air Carrier

• Gross Philippine Billings - refers to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo and mail originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue and the place of payment of
the ticket or passage document (Sec. 28(A)(3)(a))
• Tickets revalidated, exchanged and/or indorsed to another international airline shall from part
of the GPB is the passenger boards a plane in a port or point in the Philippines.
56 |R P R M
• In case of transshipment of passenger at any point outside the Phils., only the aliquot portion
of the cost of the ticket corresponding to the leg flown from the Phils. To the point of
transshipment shall from part of the GPB.
2) International Shipping
• Gross Philippine Billings - means gross revenue whatever for persons, cargo or mail originating
from the Philippines up to final destination, regardless of the place of sale or payments of passage
or freight document.
• GPB Tax is Subject to Tax Treaty and Reciprocity Clause
• “Provided, That international carriers doing business in the Philippines may avail of a
preferential rate or exemption from the tax herein imposed on their gross revenue derived from
the carriage of persons and their excess baggage.
1) On the basis of an applicable tax treaty or international agreement to which the Philippines is
a signatory or,
b. Offshore Banking Units – subject to 10% Final Tax on Their interest income derived from currency
loans granted to residents (other than OBU’s, local commercial banks, local branches of foreign banks)
(Sec. 28(A)(4))
c. Regional operating headquarters of Multinational Companies subject to 10% tax on their taxable
income (Sec. 28(A)(6)(b))
• Regional Operating Headquarters – mean a branch established in the Phils. By Multinational

Companies which are engaged in any of the services enumerated in Sec. 22(EE)
Note: Regional or area headquarters – not subject to tax (Sec. 28(A)(6)(a))
• Regional or Area headquarters – mean a branch established in the Phils. By multinational

companies which do not earn or derive income tax from the Phils. And which as supervisory,
communications and coordinating center of their affiliates, subsidiaries or branch in the Asia-
Pacific Region and other foreign Markets (Sec. 22(DD))
e. Foreign Currency Deposit Units subject to 10% Final tax on their interest income from foreign
currency loans granted to residents (other than OBUs) or other depository banks under the expanded
foreign currency deposit system (Sec. 28(A)(7)(b))
3) Branch Profit Remittance Tax (Final Tax)
• Any profit remitted by a branch to its head office shall be subject to 15% Final Tax.
57 |R P R M
• Tax Base is the total profits applied or earmarked for remittance without any deduction for
the tax component thereof.
Exempted from BPRT:
a) Activities which are registered with the PEZA.
b) Interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages,
premium, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits,
income and capital gains received by a foreign corporation during each taxable year from all sources
within the Philippines shall not be treated as branch profits unless the same is effectively connected
with the conduct of its trade or business in the Philippines (sec. 28(A)(5))
Examples of income not treated as branch profits subject to BPRT

1. Remittances to the head office by the Philippines branch representing income derived from services
rendered outside the Philippines (BIR Ruling 83-13 cited in NIRC by Gonzales)
2. Dividends remitted by a domestic corporation to the foreign corporation’s Head Office which owns 30%
of the stocks of the corporation. Such Dividends do not represent profit earned by the Philippine Branch
which are effectively Connected with its trade or business in the Philippines.
(BIR Ruling 86-49 cited in NIRC by Gonzales)
Non-Resident Foreign Corporation – a foreign corporation not engaged in trade or business within the
Philippines (Sec. 22(1))
1. In General – subject to Final Tax of 30% on its gross income received during each taxable year from
all sources within the Philippines.
2. NRFs subject to special Rates
a) Cinematographic Film Owner, Lessor or Distributor – 25% Final Tax on its gross income from
all sources within the Philippines.
b) Owner or Lessor of Vessels Chartered by Philippine Nationals – 4.5% Final Tax on gross rentals,
lease or charter fees
c) Owner or Lessor of Aircrafts, Machineries and Other Equipment – 7.5% Final Tax on gross
rentals or fees
Passive Income
• Income derived without active participation in the activity or business producing the income.
• It is income generated by the taxpayer’s assets.
58 |R P R M
• These assets can be in the form of real properties that return rental income, shares of stock in a
corporation that earn dividends or interest income received from savings. (CREBA v Romulo)
Deposit substitutes - an alternative form of obtaining funds from the public, other than deposits, through the
issuance, endorsement, or acceptance of debt instruments for the borrower’s own account, for the purpose of
a) Relending, or
b) Purchasing of receivables and other obligations, or
c) Financing their own needs or the needs of their agent or dealer
Deposit substitutes
Except:
1. Debt instruments issued for inter-Bank call loans with maturity of not more than 5 days to cover
deficiency in reserves against deposit liabilities;
2. Debt instruments issued between and among banks and quasi-banks (Sec. 22(Y))
Interest on Long-term deposit or investment certificate
• Requisites for Exemption

1. Depositor or investor is a citizen (resident or non-resident), resident alien, or NRAETB in the
Philippines;
2. Long-term Deposit or investment must be in the form of savings, common or individual trust funds,
deposit substitutes, investment management accounts in such form prescribed by the BSP;
3. Long-term deposit or investment must be issued by banks only
4. Long-term deposit or investment must have a maturity period of not less than 5 years
5. Long-term deposit or investment must be in denominations of P10,000 and other denominations as
may be prescribed by the BSP
6. Long-term deposit or investment must not be terminated by the depositor or investor before the
5th year; (Sec. 24(B)(1); (Sec. 25(A)(2); RMC 18-2011)
Note:
• Only the interest income is exempted, not gains from trading (RMC 18-2011)
59 |R P R M
Exempt prizes under Sec. 32
• Prizes and awards –requisites for exemption:

1. Given in recognition of religious, charitable, scientific, educational, artistic, literary or civic
achievement;
2. Recipient was selected without any action on his part to enter the contest or proceeding; and
3. Recipient is not required to render substantial future services as a condition to receiving the
prize or award.
• Prizes and awards in sports competition

- Granted to athletes in local or international sports competitions and tournaments whether held in the
Phils. Or abroad, and sanctioned by their national sports associations.
Dividends
• Intercorporate Dividends –
• Dividends received by a domestic corporation from another domestic corporation shall not be subject
to tax. (Sec. 27(D)(4))
• Dividends received by a resident foreign corporation from a domestic corporation liable to tax under
thus code shall not be subject to tax under this Title. (Sec. 28(A)(7)(d))
• “Dividends” (Sec. 73(A) para.2);
• Shareholder (Sec. 22(M));
• Corporation (Sec. 22(B));
• Domestic corporation (Sec. 22(C))
60 |R P R M

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JD2A/JD2B INCOME TAXATION ATTY.

Gain – a profit or something of exchangeable value derived from exchange.

Sec. 39 (A) (1), NIRC

OTHER FORMS OF INCOME:

1. Treasure funds (Dimaampao, Basic Approach to Income Taxation, p.6)

Requisites for income to be taxable:

1. There must be gain or profit, whether in cash or its equivalent.

When is gain/income considered realized or earned?

All-events test (realization test)

1. The right to receive the income is fixed (“enforeceable”); and

(CIR vs. Isabela Cultural Corp)

When gain/income considered received?

Examples of constructive receipt:

a. Matured interest coupons;

3. Presumed or deemed received by law

INCOME TAX SITUS

Sec.23 – General Principles of Income Taxation in the Philippines

FEATURES OF INCOME TAX SYSTEM:

1. Schedular Tax treatment – income is classified and treated differently

1. Pay as you file system (Sec. 56)

Accounting for Income and Deductions

ACCOUNTING PERIOD – coincides with the return period.

- Generally, Taxable year (Calendar or Fiscal Year)

Individual taxpayer – calendar year (mandatory)

Corporate taxpayer – fiscal or calendar year at its option

- Mandatory use of Calendar year

SPECIAL METHODS OF ACCOUNTING:

Sec. 48 – Accounting for Long-term contracts

PERCENTAGE OF COMPLETION METHOD

Contract Price: P5,000,000

Contract Period: 3 years (2017-2019)

2017 2018 2019

Materials Inventory, 500,000 100,000 0

Taxable Year 2017

Gross Income (P5M x 40%) P2,000,000

Sec. 49 – Installment basis

B. Sale or other disposition of real property on the installment plan:

1. Initial payments do not exceed 25% of the Selling Price.

Sec. 49B. Installment Basis

- Casual Sale or other casual disposition of personal property AND

Date of Sale: Jan. 1, 2018

OTHER METHODS OF ACCOUNTING

• Net worth method

• Excess expenditures method

• Presumptive gross sales, receipts and taxable income. (Sec. 6(C))

NET INCOME VS. GROSS INCOME TAX

Source: labor, capital, activity such as from sale of capital assets

ITEMS EXCLUDED FROM GROSS INCOME (“IMPERTINENT”)

Exclusions under Sec. 32 (B)

4. Compensation for injuries or sickness

5. Income exempt under treaty

6. Retirement benefits, Pensions, Gratuities, etc.

Requisites for exemption:

- Separation must not be caused by the employee

6e: SSS Benefits

6f: GSIS Benefits

- Foreign governments (FGs)

7c: Prizes and awards

INCOME EXEMPT UNDER SPECIAL LAWS

- also not included in gross income

OTHER ITEMS EXEMPT UNDER THE TAX CODE

The following income of MWE are taxable:

ITEMS OF GROSS INCOME (Sec. 32)