Corrected Updated Explanatory Notes NIRC 1-83

TAXATION 1
LATEST UPDATED EXPLANATORY NOTES

As Amended by R.A. No. 10963
NIRC SECTION 1 – 83
- NIRC being a special law prevails over a general law like Civil Code.
- Revenue law, is a law passed for the purpose of authorizing the levy and
collection of taxes.
- Revenue derived from taxes are exempt from execution.
- Revenue refers to all funds or income derived by the government whether from
tax or other source.
- Enforcement and collection of tax is executive in character.
La Suerte Cigar vs. CA, 134 SCRA 29 – when an administrative agency renders
an opinion by means of circular or memo, it merely interprets a pre-existing law,
and no publication is necessary for its validity. Construction by an executive
branch of government of a particular law although not binding upon the courts
must be given weight. These agencies are the one called to implement the law.
- Rulings or interpretation while entitled to great weight, are not judicially binding.
- BIR RULINGS and DOJ Opinions are less general interpretation of tax laws of
the administrative level issued by the BIR and the DOJ. These two will take a
character of substantive rules and are generally binding and effective, if not
otherwise contrary to law or constitution.
- It is the BIR who will seek DOJ opinion on tax laws not the taxpayer.
- Ruling of first impression means rulings, opinions & interpretations without
established precedents (Sec. 7, par. b). Only the CIR can issue this ruling. Those
with precedents are called Ruling with established precedents.
Requisites for valid regulations. – (a) They must not be contrary to law; (b)
They must be published in the Official Gazette; (c) They must be useful, practical
and necessary for law enforcement; (d) They must be reasonable in their provisions;
and (e) They must be in conformity with the legal provisions.
Rational Basis Test - It is sufficient that the legislative classification is
rationally related to achieving some legitimate state interest. (British American Tobacco
vs. Camacho, G.R. No. 163583, April 15, 2009)
“Assessment,” meaning. – With special reference to internal revenue taxes,
an assessment is merely a notice to the effect that the amount stated therein is due
as tax and a demand for the payment thereof. It is not an action or proceeding for the
collection of taxes. It is a step preliminary, but essential to warrant of distraint, if still
feasible, and also to establish a cause for judicial action as the phrase is used in the
Revenue Code.
Even an assessment based on estimates is prima facie valid and lawful where
it does not appear to have been arrived at arbitrarily or capriciously. (Marcos vs. CA,
273 SCRA 47, 1987)
Assessment is not an action or proceeding. It is a preliminary step.
Assessment as a general rule, is a condition sine quanon for the collection of
taxes but not for filing criminal actions.
Updated Explanatory Notes – NIRC Secs. 1-83 [Sept. 1, 2019] 1

An assessment fixes and determines the tax liability of a taxpayer. As soon as
it is served, an obligation arises on the part of the taxpayer concerned to pay the
amount assessed and demanded. Hence, assessments should not be based on
mere presumption no matter how reasonable or logical said presumption may be.
In order to stand the test of judicial scrutiny, the assessment must be based
on actual facts. The presumption of correctness of assessment being a mere
presumption cannot be made to rest on another presumption x x x. (Collector vs.
Benipayo, 4 SCRA 182)
A tax assessment is prima facie valid and correct and the taxpayer has the
burden of proof to impugn its validity. (Behn Meyer & Co. vs. Collector of Internal
Revenue, 27 Phil. 647) The validity of a tax assessment is a disputable presumption.
(Perez vs. CTA, et al., G.R. No. L-10507, prom. May 30, 1948; Collector vs. Bohol Land
Transportation, G.R. Nos. L-13099 and L13462, prom. April 29, 1960)
All presumptions are in favor of the correctness of tax assessments. The good
faith of tax assessors and the validity of their actions are presumed. The burden of
proof is upon the taxpayer to show clearly that the assessment is erroneous, in order
to relieve himself from it.
Where a taxpayer question the correctness of an assessment against him and
is apparently not acting in bad faith or merely attempting to delay payment, but is
deprived of the best means of proving his contention because his books of accounts
were lost by the BIR agent who examined them, said taxpayer must be given an
opportunity to prove by secondary evidence that the assessment is incorrect. (Santos
vs. Nable, et al., 2 SCRA 21)
As the law provides that any person who is aggrieved by an assessment

issued by the Commissioner of Internal Revenue is given only 30 days to appeal
therefrom to the Tax Court, the only effect should be that after that period, the
assessment can no longer be questioned by the taxpayer; otherwise, the
assessment which has become final, executory and demandable under Section 11 of
Republic Act No. 1125 would be an absurdity. (Republic vs. Antonio Albert, G.R. No. L-
12996, prom. Dec. 28, 1961)
The taxpayer’s failure to appeal to the Court of Tax Appeals in due time made
the assessment in question final, executory and demandable. (Republic vs. Manila Port
Service, G.R. No. L-18208, prom. Nov. 27, 1964) And when the present action for
collection of the tax was instituted, said taxpayer was already barred from disputing
the correctness of the assessment or invoking any defense that would reopen the
question of its tax liability on the merits. (Republic vs. Albert, 3 SCRA 717) Otherwise,
the period of thirty days for appeal to the Court of Tax Appeals would make little
sense. (Republic vs. Lopez, 2 SCRA 566)
Acquittal in a criminal case does not exonerate taxpayer’s civil liability to pay
the tax due (Republic vs. Patanao, G.R. No. L-22317, July 21, 1967)
“Best evidence obtainable,” explained. – It refers to the findings gathered
by internal revenue examiners and agents from the records of the register of deeds,
corporations, employers, clients or patients, tenants, lessees, vendees and the like
with whom the taxpayer had previous transactions or from whom he acquired any
income.

It will be noted that under Section 5 of the said Code, the Commissioner of
Internal Revenue may obtain information on potential taxpayers from government
offices or agencies.
Networth method of investigation. – As stated above, the Commissioner of
Internal Revenue may make tax assessments on the best evidence obtainable. He
can avail of methods in order to arrive at a correct and reasonable assessment of
taxes. One method is the networth method of investigation.
The power or authority of the Commissioner to choose the method of
determining taxable income is quite comprehensive, and the only limitation to the
exercise of such power of authority is that the method chosen or adopted must
“clearly reflect the income.“ Consequently, Tax Code (Sec. 43) authorizes the
Commissioner of Internal Revenue to employ the networth method, where a
taxpayer keeps no books or records or where such books or records do not clearly
reflect his income. (Commissioner vs. Enrique Avelino, G.R. No. L-14847, prom. Sept. 19,
1961)
It is not required in networth cases that the Government prove with absolute
certainty the sources from which petitioner derived his unreported income. It is
sufficient if evidence is adduced of the likely source or sources of such income. In
this case, there is ample evidence of the probable sources from which petitioner
could have derived his undeclared income such as flourishing business in optical
goods, office equipment, and haberdashery; horse racing, and real estate
transactions. (Reyes vs. Collector, G.R. Nos. L-11534 & L-11558, prom. Nov. 25, 1968)
CIR vs. Hantex, G.R. No. L-136075, March 31, 2005
- Mere photocopies not admissible. Exert effort to get the original
- Hearsay evidence is admissible. BIR not bound by the technical rules of
evidence. It depends on trustworthiness for evidence to be admissible.
A. SECRECY OF BANK DEPOSITS

Q. What guarantees on confidentiality do depositors enjoy under the law?
A. For peso deposits, Republic Act No. 1405 (Bank Deposits Secrecy Law) declares all
deposits of whatever nature with banks in the Philippines, including investments in
government bonds, as of an absolutely confidential nature and prohibits the examination or
inquiry into such deposits or investments by any person, government official, bureau or
office, as well as the disclosure by any official or employee of a bank of any information
concerning said deposits.
There are only four (4) instances under the law where bank deposits or investment in
government bonds may be disclosed or looked into, namely: (1) upon written permission of
the depositor; or (2) in cases of impeachment; or (3) upon order of a competent court in
cases of bribery or dereliction of duty; or (4) in cases where the money deposited or invested
is the subject matter of the litigation.
It may be noted that RA 1405 covers not only bank deposits but also investments in
government bonds.
For foreign currency deposits, Republic Act No. 6426 (The Foreign Currency Deposit Act)
similarly declares that these deposits are of an absolutely confidential nature and cannot be
examined, inquired or looked into by any person, government official, bureau or office
whether judicial or administrative or legislative or any other entity whether public or private.

There is only one instance for disclosure under said law and, that is, upon the written
permission of the depositor. RA 6426 also exempts foreign currency deposits from
attachment, garnishment, or any other order or process of any court, legislative body,
government agency or any administrative body whatsoever.
For investments in trust accounts or in deposit substitutes, if these are in the form of
investments in government bonds or deposits, the protection under RA 1405 and RA 6426
extends thereto accordingly. If these are in other forms of investments, the disclosure of
information related thereto is covered by Section 55 of the General Banking Law of 2000
(Republic Act No. 8791) which prohibits, unless there is an order of a court of competent
jurisdiction, the disclosure by any director, official, employee or agent of any bank any
information relative to the funds or properties in the custody of the bank belonging to private
individuals, corporations or any other entity.
NOTE:
Under par. (F) of the NIRC, it states:
(F) Authority of the Commissioner to Inquire into Bank Deposit Accounts and Other Related
Information Held by Financial Institutions. – Notwithstanding any contrary provision of
Republic Act No. 1405, Republic Act No. 6426, otherwise known as the Foreign Currency
Deposit Act of the Philippines, and other general or special laws, the Commissioner is
hereby authorized to inquire into the bank deposits and other related information held by
financial institutions of:
(1) A decedent to determine his gross estate; and
(2) Any taxpayer who has filed an application for compromise of his tax liability under
Sec. 204(A)(2) of this Code by reason of financial incapacity to pay his tax
liability.
In case a taxpayer files an application to compromise the payment of his tax liabilities on his
claim that hi financial position demonstrates a clear inability to pay the tax assessed, his
application shall not be considered unless and until he waives in writing his privilege under
Republic Act No. 1405, Republic Act No. 6426, otherwise known as the Foreign Currency
Act of the Philippines, or under other general or special laws, and such waiver shall
constitute the authority of the Commissioner to inquire into the bank deposits of the
taxpayer.
(3) A specific taxpayer or taxpayers subject of a request for the supply of tax
information from a foreign tax authority pursuant to an international
convention or agreement on tax matters to which the Philippines is a
signatory or a party of: Provided, That the information obtained from the
banks and other financial institutions may be used by the Bureau of Internal
Revenue for tax assessment, verification, audit and enforcement purposes.1
In case of a request from a foreign tax authority for tax information held by banks and
financial institutions, the exchange of information shall be done in a secure manner to
ensure confidentiality thereof under such rules and regulations as may be
promulgated by the Secretary of finance, upon recommendation of the Commissioner.
The Commissioner shall provide the tax information obtained from banks and
financial institutions pursuant to a convention or agreement upon request of the
foreign tax authority when such requesting foreign tax authority has provided the
1
As amended by RA 10021, entitled “An Act to Allow the Exchange of Information by the BIR on Tax Matters
Pursuant to Internationally-Agreed Tax Standards, otherwise known as “Exchange of Information on Tax
Matters Act of 2009”, Amending Secs. 6(F), 71, and 270 of the NIRC of 1997, as Amended, and for Other
Purposes” march 5, 2010

following information to demonstrate the foreseeable relevance of the information to
the request:
(a) The identity of a person under examination or investigation;
(b) A statement of the information being sought including its nature and the
form in which the said foreign tax authority prefers to receive the
information from the Commissioner;
(c) The tax purpose for which the information is being sought;
(d) Grounds for believing that the information requested is held in the
Philippines or is in the possession or control of a person within the
jurisdiction of the Philippines;
(e) To the extent known, the name and address of any person believed to be in
possession of the requested information;
(f) A statement that the request is in conformity with the law and
administrative practices of the said foreign tax authority, such that if the
requested information was within the jurisdiction of the said foreign tax
authority then it would be able to obtain the information under its laws or in
the normal course of administrative practice and that it is in conformity with
a convention or international agreement; and
(g) A statement that the requesting foreign tax authority has exhausted all
means available in its own territory to obtain the information, except those
that would give rise to disproportionate difficulties.
The Commissioner shall forward the information as promptly as possible to the
requesting foreign tax authority. To ensure a prompt response, the Commissioner
shall confirm receipt of a request in writing to the requesting tax authority and shall
notify the latter of deficiencies in the request, if any, within sixty (60) days from
receipt of the request.
If the Commissioner is unable to obtain and provide the information within ninety (90)
days from receipt of the request, due to obstacles encountered in furnishing the
information or when the bank or financial institution refuses to furnish the
information, he shall immediately inform the requesting tax authority of the same,
explaining the nature of the obstacles encountered or the reasons for refusal.
The term “foreign tax authority,” as used herein, shall refer to the tax authority or tax
administration of the requesting State under the tax treaty or convention to which the
Philippines is a signatory or a party of.
Q. How do banks respond to an order of a competent court?

A. For peso deposits, banks comply with orders for disclosure in court cases subject to these
requirements: (a) there must be a court order; (b) the order must be issued by a competent
court specifically directing the bank concerned to disclose the required information; and (c)
the bank should check and satisfy itself that the deposits or investment in government bonds
being inquired into are either the subject of a case of bribery or dereliction of duty of public
officials, or of a case where the deposit or investment itself is the subject matter of the
litigation. If these requirements are not met, there would be basis for the bank to request the
court to excuse compliance with the court order.
In impeachment cases, it is necessary that there be an order issued by the impeachment
court or by its authorized officer. For foreign currency deposits, the law does not provide an
instance for disclosure upon a court order. As mentioned above, there is only a single
instance for disclosure under RA 6426 and, that is, upon written permission of the depositor.
Thus, for foreign currency deposit accounts subject of a court order, the bank can invoke RA
6426 to excuse compliance.

Q. What is the liability of the banks and/or its officers and employees for violating the
laws against disclosure?
A. Violations of the prohibitions against disclosures under RA 1405, RA 6426 and under the
General Banking Law of 2000 are subject to stiff criminal penalties.
Under RA 1405, the offender is subject to imprisonment of not more than five years or a fine
of not more than P20,000, or both, in the discretion of the court. Under RA 6426, the penalty
is imprisonment of not less than one year not more than five years or a fine of not less than
P5,000 nor more than P25,000, or both, in the discretion of the court. The violation of Sec.
55 of the General Banking Law of 2000, the penalty is imprisonment of not less than two
years nor more than 10 years or a fine of not less than P50,000 nor more than P200,000, or
both, in the discretion of the court; and in addition, if the offender is a director or officer of a
bank, he is subject to suspension or removal by the Monetary Board.
B. USE OF ALIAS OR NUMBER IN OPENING DEPOSIT ACCOUNTS

Q. Are banks allowed to open accounts using an alias or a number?
A. There is no specific banking law up to the present prohibiting banks from opening deposit
accounts using an alias or a number. Prior to July 7, 2000, there is also no banking
regulation providing for such prohibition. On July 7, 2000 and in seeking the adoption of anti-
money laundering measures, the Bangko Sentral ng Pilipinas (BSP) issued a regulation,
Circular No. 251, providing that, unless otherwise prescribed under existing laws,
anonymous accounts or accounts under fictitious names are prohibited.
The exception referred to under Circular No. 251 was RA 6426 (The Foreign Currency
Deposit Act) which explicitly allows the keeping of numbered accounts for the recording and
servicing of deposits.
For peso accounts, when banks allow the opening of deposit accounts under pseudonyms, it
is assumed that: (1) they have exercised due diligence to ascertain the identity of their
clients; and (2) they are aware of the legal provisions and requirements on the use of
pseudonyms.
The above notwithstanding, it may be pointed out that in the Manual of Regulations issued
by BSP, or even before the issuance of Circular 251, there were already regulations
requiring the banks to: (a) adopt systems to establish the identity of their depositors; and (b)
require to set a minimum of three (3) specimen signatures from each of their depositors
subject to regular updating. Even for numbered accounts as authorized under RA 6426, BSP
has required banks, under Circular 258, to take necessary measures to establish and record
the true identity of their clients, which identification may be based on official or other reliable
documents and records.
Q. Are there other laws governing the use of pseudonyms or aliases?
A. Art. 178 of the Revised Penal Code penalizes the: (a) publicly using of a fictitious name
for the purpose of concealing a crime, evading the execution of a judgment, or causing
damage; and (b) concealment by any person of his true name and other personal
circumstances.
On the other hand, there is also Commonwealth Act No. 142, as amended by Republic Act
No. 6085 (Regulating the Use of Aliases) which provides that, except only as a pseudonym
for literary purposes and athletic events, it is unlawful for any person to use an alias, unless
the same is duly recorded in the proper local civil registry. Related thereto, Articles 379 and
380 of the Civil Code provide that no person shall use different names and surnames except
the employment of pen and stage names provided it is done in good faith and there is no
injury to third persons.

What can be noted is that the above provisions allow the use of aliases under certain
circumstances. Conversely stated, the use of aliases is not absolutely disallowed. Moreover,
the sanctions for any violation of the above provisions on aliases are mainly directed to the
one using the unauthorized alias.
Q. How does Circular No. 251 apply to existing numbered accounts?

A. For peso accounts, the banks should have their respective programs of compliance with
the Circular. For foreign currency deposit accounts, they are allowed to continue maintaining
numbered accounts opened in accordance with RA 6426 subject to the requirement that the
banks shall take necessary measures to establish and record the true identity of their clients.
Q. What penalties/sanctions are applicable for violating the laws/regulations?

A. Article 178 of the Revised Penal Code is directed to the person concealing his identity
publicly or using a fictitious name and the penalty would range from one day up to six
months imprisonment and/or a fine up to P500,000. For violation of Commonwealth Act 142,
which is likewise directed to the person using an unauthorized alias, the penalty is
imprisonment from one year to five years and a fine of P5,000 to P10,000. For the violation
of Circular 251, it is subject to the administrative sanction on the bank and/or responsible
directors/officers of fine up to P30,000 per transaction.
C. CONTINUED CONFIDENTIALITY/SECRECY OF DEPOSIT TRANSACTIONS

Q. Is confidentiality/secrecy of deposit accounts compromised with the issuance of
Circular 251?
A. No. Circular 251 merely disallowed the opening of fictitious and anonymous accounts and
has not in any way modified nor lessened the safeguards and protection to depositors under
RA 1405. This means that, notwithstanding Circular 251, deposit accounts cannot be
examined or looked into except under the limited circumstances provided for in RA 1405.
Q. Why are the BSP and the BAP advocating the amendment to bank secrecy laws?
A. The proposal of BSP and BAP is for access to deposit accounts only under exceptional
circumstances, such as deposits only above the P50-million level and in relation to the
commission of serious offenses like racketeering and illicit drug trade. Except for these
instances, depositors and those with legitimate transactions remain protected under RA
1405. The objective of the proposal is to institute this measure as an anti-money laundering
campaign so as to delete the Philippines as a non-cooperative country in the list of the
Financial Action Task Force against money laundering
Sec. 10, par. C – Issuance of Letters of Authority (LOA)
Read: 1. CIR vs. Sony, G.R. No. 178697, November 17, 2010
2. Medicard vs. CIR, G.R. No. 222743, April 5, 2017
INCOME TAXATION
A. Income Tax Systems

 There are three kinds of income tax systems:
o Global (unitary) tax system
 Here, all items of gross income, and deductions if applicable, are reported in
one income tax return and a single tax is imposed on all income received or
earned, regardless of the activities which produced the income.

 It is akin to putting all income into one basket and taxing the entire basket.
o Schedular tax system

 Here, different types of activities are subjected to different types of tax rates.
The tax rates depend on the classification of the taxable income and the
activities which produced the income.
o Semi-global, semi-schedular system

 Certain passive income and capital gains are subject to final taxes while
other income are added to arrive at the gross income (where deductions are
used to arrive at the taxable income)
 We follow the semi-global/semi-schedular system in the Philippines.
 Schedular can also mean that tax rates will differ based on the tax base.
 For instance, global is usually applied to corporations, as corporations are
taxes at a single rate, regardless of the tax base; while the schedular
system is applied to individuals as they are subjected to different tax rates
based on their tax bracket.
Section 23 – General principles of income taxation of the Philippines.
 Income taxation has an international aspect termed “international taxation”. It has 2

fundamental principles, to wit:
1) Residents-based taxation.
- Residents taxed on income from within and without the Philippines
2) Source-based taxation.
- Non-residents tax on territory or source of income.
SITUS
TAXPAYER WITHIN WITHOUT
A. Individual
1. Resident citizen  
2. Non-resident citizen  
3. Resident aliens  
4. Non-resident alien engaged in trade and business  
5. Non-resident alien not engaged in trade and business  
6. OFW / International seaman  
B. Estates (Phils.)  
Estates (Foreign)  
C. Trust (Phils.)  
Trust (Foreign)  
D. Corporation  
1. Domestic corporation  
2. Resident foreign corporation  
3. Non-resident foreign corporation  
D. Income Taxation of Individuals
Now that we know how to determine where income is geographically sourced, it

is time to focus on the different kinds of taxpayers. Let us begin with individual
taxpayers.

Individual taxpayers are classified into:
1. Citizens, who are divided into:
 Resident citizens – those citizens whose residence is within the Philippines;
and
 Non-resident citizens – those citizens whose residence is not within the
Philippines.
2. Aliens, who are divided into:
 Resident aliens – those individuals whose residence is within the Philippines
and are not citizens thereof; and
 Non-resident aliens – those individuals whose residence is not within the
Philippines but temporarily in the country and are not citizens thereof. They
are:
 Those engaged in trade or business within the Philippines; and
 Those who are not so engaged. (see NIRC, Sections 23-25)
3. OFW / International Seaman
It is important to know the definition of each kind of individual taxpayer because

the tax liability of each differs.
Resident aliens
 Resident alien is an individual:
1. Whose residence is within the Philippines, and
2. Who is not a citizen
 An alien who has acquired residence in the Philippines retains his status until he
abandons the same and actually departs from the Philippines.
 A mere intention to change his residence does not change his status from
resident alien to non-resident alien. An alien who has acquired a residence is
taxable as a resident for the remainder of his stay in the Philippines. (Section 6,
R.R. 2-1940)
 Mere physical or body presence is enough, not intention to make the country
one’s abode. (Garrison v. CA, G.R. No. L-44501, July 19, 1990)
 An alien actually present in the Philippines who is not a mere transient or
sojourner is a resident of the Philippines for purposes of income tax. Whether he
is a transient or not is determined by his intentions with regard to the length and
nature of his stay.
o A mere floating intention indefinite as to time, to return to another country is
not sufficient to constitute him a transient.
o If he lives in the Philippines and has no definite intention as to his stay, he is a
resident. One who comes to the Philippines for a definite purpose which in its
nature may be promptly accomplished is a transient.
o But if his purpose is of such a nature that an extended stay may be necessary
for its accomplishment, and to that end the alien makes his home temporarily
in the Philippines, he becomes a resident, though it may be his intention at all
times to return to his domicile abroad when the purpose for which he came
has been consummated or abandoned. (R.R. 2-1940)
 The BIR has ruled that there is intention on the part of an alien to stay in the
Philippines indefinitely when the alien:
o Had a Special Resident Retiree’s Visa;

o Acquired real property and is actually present most of the time in the
Philippines; and
o Registered as a taxpayer with the BIR. (BIR Ruling No, 252-11)
NON-RESIDENT CITIZENS
 Meaning of non-resident citizen:
1. Citizens who establishes to the satisfaction of the Commissioner the fact of
his physical presence abroad with a definite intention to reside therein;
2. Citizen who leaves the Philippines during the taxable year to reside abroad,
either as an immigrant or for employment on a permanent basis;
3. Citizen who works and derives from abroad and whose employment thereat
requires him to be physically present abroad most of the time during the
taxable year;
4. Citizen who has been previously considered as nonresident citizen and who
arrives in the Philippines at any time during the taxable year to reside
permanently in the Philippines shall likewise be treated as a nonresident
citizen for the taxable year in which he arrives in the Philippines with respect
to his income derived from sources abroad until the date of his arrival in the
Philippines.
 Who are non-resident citizens? (R.R. 1-1979)

1. Immigrant – one who leaves the Philippines to reside abroad as an immigrant
for which a foreign visa has been secured.
2. Permanent employee – one who leaves the Philippines to reside abroad for
employment on a more or less permanent basis.
3. Contract worker – one who leaves the Philippines on account of a contract of
employment which is renewed from time to time under such circumstance as
to require him to be physically present abroad most of the time (not less than
183 days)
 Non-resident citizens who are exempt from tax with respect to income derived
from sources outside the Philippines shall no longer be required to file
information returns from sources outside the Philippines beginning 2001. (R.R.
5-2001)
 The phrase “most of the time” shall mean that the said citizen shall have stayed
abroad for at least 183 days in a taxable year.
 However, citizens who work outside of the Philippines for at least 183 days in a
taxable year due to a contract of employment with a Philippines employer (such
as employees seconded to a foreign country) is not considered a non-resident
citizen because they are not considered employed abroad. They do not fall
within Section 22(E)(3) because their employment remains with the Philippines
employer. (BIR Ruling No. 116-12)
OFW/OCW/INTERNATIONAL SEAMAN
 The wage or income of an OFW/OCW which is earned from outside the
Philippines is exempt from income tax.
 An OCW is a Filipino citizen who:
 Holds a job outside the Philippines;
 Is physically present in that foreign country where the job is;

 Is registered with the POEA;
 Has valid overseas employment certificate;
 Their salaries and wages are paid by an employer abroad and is not borne
by any entity or person in the Philippines. (R.R. 1-2011)
Non-resident aliens engaged in business in the Philippines

 Who are non-resident aliens?
1. An individual whose residence is not within the Philippines, and
2. Not a citizen of the Philippines
 One who comes to the Philippines for a definite purpose which in its nature may
be promptly accomplished is a transient or non-resident. (R.R. 2-1940)
 Non-resident aliens are either:

 Engaged in trade or business, such as:
 One who actually derives income in the Philippines, or
 Stays in the Philippines for more than 180 days during any calendar year
(deemed to be a non-resident alien engaged in the Philippines, Section
25[A])
 Not engaged in trade or business.
Kinds of income and income tax of individuals (Secs. 24 & 25)
Under the amendments in R.A. No. 10963 (TRAIN LAW), there are four types of individual
income taxpayers:
1. Compensation income earners;

2. Self-employed;
3. Professional;
4. Mixed income earners.
Section 24 (A) – Taxation of income of resident citizen and resident aliens, and non-
resident citizen.
Among the different individual taxpayers, it is only the resident citizen who is taxable
on his income within and without the Philippines.
Observe the following rules:
1. The graduated rates from 0% to 35% effective January 1, 2018 until December 31,
2022, applies to taxable income of a resident citizen (within and without the
Philippines), resident alien (within the Philippines), and non-resident citizen (within
the Philippines), except on Passive Income (Sec. 24 B), Shares of Stocks (Sec. 24
C), and Capital Gains on Sale of real property. The latter has its own rates (Sec. 24
D). the tax base of the three (3) is gross income.
 The tax base subject to the tax rate would be the taxable income. Taxable income
means the pertinent items of gross income, less deductions (Sec. 31).

The first ₱250,000 of their income is not subject to income tax. Further, these
graduated rates will apply to all income coming from “blind sources”. It is also the
“basket rates” of other income which have no specific tax rates applicable.
Income tax formula for individuals (TAX BY THE GRADUATED RATES)

It is important to note the basic formula to determine the taxable income of an
individual. Think of it as a road map where the different provisions of the code will
plug into. The basic formula to determine the taxable income of an individual is as
follows:
Gross Income ₱xxxx

Less: Deductions (either itemized
of optional standard deduction) ₱xxxx
Taxable Income ₱xxxx
Tax Rate %_____
Tax Due ₱xxxx
Deductions
 Individuals, except those who earn purely compensation income can claim
itemized deductions (which we will discuss in more detail).
A. Compensation earners are individuals who receive compensation on their

employment who are not MWE are taxed on their income under Section 24 (a).
Compensation earners computation of their income tax, deducted from it are the non-
taxable benefits such as their contribution to the SSS, Pag-IBIG, and PhilHEalth.
Take note that under Section 24 (a), as to the graduated rates, the first ₱250,000.00
has no tax.
Under RR 8-2018, taxable income for compensation earners is the gross compensation
income less nontaxable income/benefits such as but not limited to the 13th month pay and
other, benefits, de minimis benefit, and employees share in the SSS, GSIS, PhilHealth, Pag-
IBIG contributions and union dues.
B. The MWE is exempt from the payment of income tax on their taxable income,
including holiday pay, overtime pay, nightshift differential pay, and hazard pay,
received by the MWE. As to the MWE, even if his income exceeds ₱250,000, being
an MWE, he will not be liable to pay the income tax. The term minimum wage
earners (MWE) is defined in Section 22 (hh).
C. Individuals who earned income purely from self-employment and or

professions.
 Under Section 24 (a), they are given the opportunity whether to be taxed at 8%
based on the gross sales or gross receipts and other non-operating income, in
excess of ₱250,000.00 (the 1st ₱250,000 subject to 0% listed in the graduated rates)
in lieu of the graduated income tax rates, and will not also be liable to the
percentage tax under Section 116. Provided, that their gross sales or gross receipts
do not exceed the VAT threshold as provided in Section 109, in the amount of ₱3
Million. However, if their income exceeds the ₱3 Million threshold, they are not given
the option to be taxed by 8% without exemption of the percentage tax. To
emphasize, their option will be either be taxed under the graduated tax rates or 8%
and being exempted of percentage tax. This is a form of tax avoidance. Thus:

 The purely self-employed individuals/professionals if the gross sales/gross
receipts do not exceed the threshold amount of ₱3 Million for VAT, are given the
following options:
Option 1: To be taxed at 8% on gross sales/gross receipts and other non-
operating income in excess of ₱250,000, in lieu of the graduated
income tax rates.
If this option is availed, they are also exempted from the percentage
tax under Section 116 of the Tax Code.
Option 2: To be taxed using the graduated rates, of which the first ₱250,000 is
exempted. But, they will be liable to pay the percentage tax.
NOTE: If the gross sales/gross receipts exceeds ₱3 Million, the taxpayer cannot avail
the 8% option tax. Instead, he will be taxed based on the graduated rates and be liable
to pay the VAT.
 The taxpayer should communicate his intention to avail the 8% option, otherwise, he
would not be qualified to avail on it at the time of the filing of the income tax return.
Further, even if he intends to use the 8% rule, so that he initially selected the flat 8%
tax rate option, but if the gross sales exceeded the VAT threshold during the taxable
year, he can no longer avail of the 8% flat rate option, and instead to be taxed by the
graduated rates.
 Individual mixed income earners. (compensation income, self-employment, and

practice of profession)
(1) All income from compensation taxable under graduated rates.
(2) All income from business or practice of profession where the gross
sales/gross receipts and other non-operating income do not exceed ₱3
Million, can avail Option 1 (but not allowed to deduct the 1st ₱250,000) or
Option 2.
(3) If the gross sales/gross receipts and other non-operating income exceeds ₱3
Million VAT threshold, he cannot avail the 8% option tax. But, instead be
taxed by the graduated rates and will be liable to pay the VAT.
Section 24 (b) – Final tax on certain passive income. (earned within the Philippines)
 Memorize it as to what are the items covered and the respective rates.
 This applies only on income derived within the Philippines.
 On the 20% final tax of the interest of bank deposits, it includes deposit substitutes.
Tax treatment on deposit substitutes.
Interest income FROM deposit substitutes are taxed at 20% final tax.
When is a deposit considered deposit substitutes?

Read Section 22 (y), which gives you the meaning of deposits substitutes.

Under this provision, if the individuals or corporate lenders at any one time did not
reach 20, the deposits will not be considered as deposit substitutes. Thus, the
interest income would not be subjected to final tax.
This is the concept of the 19 Lender Rule, under Revenue Regulation No. 14-2012,
and Revenue Memorandum Circular No. 77-2012.
Read: PEACE BOND CASE.

BDO vs. Republic of the Phils., G.R. No. 198756, January 13, 2015
 Section 24 (b) also talks about taxation on income on cash and or property dividends.
There are several types of dividends. Other from cash and property dividends, the
stockholder can receive stock dividends.
On receipt of stock dividends, the shareholder will be not subjected to income tax.
Because the stocks dividend is not yet an income.
For example: Juan has 100 shares of common stocks with ABC Corp. The value of
the 100 shares is ₱100,000. Thus, the stocks has a par value of ₱1,000 per share.
XYZ Corp. declares stock dividend of 10%. Thus, the shares of stocks of Juan will be
increased to 110 per share. If the total value of ₱100,000 will be divided by 110
shares, the par value now will become ₱909.09. Thus, there is no income earned by
Juan. Hence, the stock dividends would not be taxable as income.
However, if the stock dividend given to Juan is different from the common stocks that
he owns, let us say, that he is given a preferred share of stocks, the latter being not a
common stock will be considered income on the part of Juan. The amount of the fair
market value to determine the value of the preferred share of stocks dividend will be
considered and be subject to dividend tax.
STOCK DIVIDEND
- The payment by a corporation of a dividend in the form of shares usually
of its own stocks without change in per value.
- The stock distributed is a stock dividend. It is not subject to a dividend tax
or passive income. However, if the stockholder owns a common stock and
the stock dividend is preferred stock or vice – versa, then the stock
dividend is subject to tax because there is already a change of interest.
Dividends out of quarterly profits. – This refers to your letter requesting

opinion as to whether your company can declare cash and/or stock dividends out of
quarterly profits and/or surplus.
It is represented that your company has been issuing cash and stock
dividends for the last five (5) years; that during the early part of this year, you have
issued 50% dividend out of accumulated retained earnings; and that since your
company has been making profits as early as the first quarter of this year, you intend
to declare cash and/or stock dividend out of quarterly profit.
Ruling: An ordinary dividend is the most common type of corporate

distribution, and is defined as (1) a distribution of property by a corporation to its
stockholder (2) made in the ordinary course of its business (3) out of its earnings and
profits. (par. 2251, 2d Am. Jur. 33) Thus, a dividend is a corporate profit set aside,

declared and ordered by the directors to be paid to the stockholders on demand or at
a fixed time. (Fisher vs. Trinidad, 43 Phil. 973)
It is distinguished from “profits” for the profits in thousands of a corporation do

not become dividends until they have been set apart, or at least declared, as
dividends and transferred to the separate property of the individual stockholders.
Such being the case, your company can declare cash and/or stock dividends out of
its quarterly profit. (BIR Ruling No. 87-172)
Section 24 (c) – Capital gains from sale of shares of stock not traded in the stock
exchange.
 The sale is on the shares of stock within the Philippines.

 If it is traded through a local stock exchange, the applicable provision is Section 127.
Section 24 (d) - Capital Gains Tax (CGT) from sale of real property.
1. Capital gains tax on sale by real property by individuals.
 6% capital gains tax on selling price or Fair Market Value or zonal value,
whichever is higher, on sale of real properties which are CAPITAL ASSETS,
located in the Philippines.
 What is being taxed is the presumed gain
 If the proceeds of the sale will be used by the seller to buy or construct a new
house, the proceeds will be exempted from the capital gains tax. The exemption
will be once every ten years.
If the proceeds will not be entirely used, the unused part will be subjected to capital
gains tax.
Under the present revenue regulation, the seller will be required to pay the capital gains
tax even he intends to use the proceeds to buy or construct a new house. But, he can ask
for a tax refund if indeed he used the proceeds to buy or construct a new house.
 Real properties referred to the immovable properties defined and enumerated in

Article 415 of the Civil Code of the Philippines.
 The disposition is on properties located in the Philippines.
Any mode of disposition of real property that transfers rights and title to another,
provided it is a Capital Asset is subject to the CGT.
Capital Assets refers to properties which are not Ordinary Assets as defined under the
NIRC (Section 39, NIRC)
Ordinary assets are the following:

1. Stock in trade or inventory
2. Properties held by the taxpayer primarily for sale to customers in ordinary
course of trade or business
3. Property used in the trade or business which is subject to the allowance or
depreciation
4. Real property used in trade or business of the taxpayer

- If the taxpayer will sell real property to the government, he will have the option
to be taxed under Section 24 of the graduated rates. It is an option because he
can either be taxed under the 6% capital gain tax or under Section 24 which are
the graduated rates. It is a form of tax avoidance.
Read: RR No. 7-2003
Section 25 (A) – Tax on non-resident alien engaged in trade or business within the
Philippines
 The same treatment with that of a resident alien but only on income derived within
the Philippines.
The length of stay is the criterion. Hence, a non-resident alien shall not be
considered engaged in trade or business in the Philippines if he stays in the
Philippines for less than 180 days notwithstanding the fact that during such stay he
actually performs personal services, or engages in a commercial activity therein. And
the whole period of more than 180 days must cover a calendar year.
“Engaged in trade or business”, explained. – The phrase “engaged in

trade or business within the Philippines” includes the performance of the functions of
a public office or the performance of personal services within the Philippines. (Sec. 8,
Rev. Regs. No. 2)
“To engage in business” is uniformly construed as signifying to follow the

employment or occupation which occupies the time, attention, and labor for the
purpose of a livelihood or profit.
The 180 Day Rule
A nonresident alien who shall come to the Philippines and stay there in an
aggregate period of more than one hundred eighty days during any calendar year
shall be deemed a nonresident alien doing business in the Philippines. (Sec. 25A)
The entire gross income of non-resident aliens not engaged in trade or
business received from all sources within the Philippines is subject to income tax. He
must not be engaged in trade or business in the Philippines.
The sources of the income are interests, dividends, rents, salaries, wages,
premiums, annuities, compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical or casual gains, profits and income, and capital
gains.
 Take note also on the final tax of a non-resident alien engaged in trade or business
within the Philippines on their passive income (Sec. 25, par. 2). Especially on the
interest where it does not refer solely refer to interest on bank deposits.
 A non-resident alien who will sell shares of stock not through a local stock exchange
and real properties, which are capital assets are governed by the same rules with
that under Section 24 (c) & (d), respectively.

Sec. 25 (B). Non-resident individual not engaged in trade or business within the
Philippines.
 Taxable on all their income within the Philippines based on gross income at 25%
Final Tax, except on dealings of shares of stocks and capital assets, which has the
same rule with that under Section 24 (c) & (d), respectively.
Sec. 25 (C). SPECIAL ALIEN INDIVIDUALS
Any alien individual employed by the regional headquarters, offshore banking units,
and petroleum service contractor and sub-contractor, which are under the old law
(Sec. 25, par. c) are taxed at 15% based on gross income preferential rate, are now
taxed under Section 24 (a), the same with that of a resident alien individual.
Under the Train Law, it was proposed that the 15% preferential tax will be retained.
The latter was vetoed by the President. Hence, those who are working with the
regional headquarters, offshore banking units, and petroleum service contractor and
sub-contractor, on their income from employment are not taxed under Sec. 24, par. A
(graduated rates).
Tax Liability of Members of General Professional Partnerships (GPP). (Sec. 26)

The GPP as a juridical entity is exempted from income taxes. It would be the
individual members who will be liable on their net income share from the GPP.
A partner in a general professional partnership shall report in his income tax
return, whether distributed or not, his share of the profits of the partnership. If he
reports his net share in the profits, he shall be deemed to have elected the itemized
deduction and may no longer claim the optional standard deduction. In case he
declares his distributive share in the gross income undiminished by his share in the
deduction, he may avail the 40% optional standard deduction in lieu of the itemized
deduction.
Professional partnership. – Your professional partnership of Certified Public
Accountants is exempt from income tax pursuant to Section 26 of the Tax Code, as
amended. Accordingly, payments to said partnership for professional services
rendered are exempt from the withholding tax provisions of Revenue Regulations
No. 13-78 as amended by Revenue Regulations No. 6-79, both implementing
Section 50 (now 43) of the Tax Code, as amended by Presidential Decree No. 1351.
(BIR Ruling No. 84-142)
Professional partnership are not required to file income tax return. –

Requesting confirmation of your opinion to the effect that professional partnerships
are not required to file quarterly returns of their income; and that individual partners
of a professional partnership should not be required to file quarterly returns if they
received their shares in the net income of the partnership at the end of the calendar
year or the fiscal year of the partnership.
In reply thereto, I have the honor to inform you that pursuant to Sections 2 &
3, Revenue Regulations No. 7-93 prescribing the procedures for the filing of
quarterly returns and payment of the quarterly income tax by individuals receiving
self-employment income, a return of summary declaration or gross income and
deductions (BIR Form No. 1701 Q) for each of the first three quarters of the calendar

year, and a final or adjustment return (BIR Form No. 1701) shall be filed by all
individuals, including estates and trusts. The tax returns shall be filed on or before
indicated dates:
First quarterly return - May 15 of the current year;

Second quarterly return - August 15 of the current year;
Third quarterly return - November 15 of the current year;
Final return - April 15 of the following year.
The corresponding income tax, as computed, shall be paid at the same time
that the returns are filed based on declarations of actual income and deductions for
the particular quarter. The filing of the returns and payment of taxes shall be in lieu of
the filing of a declaration of estimated income for the current taxable year and the
payment of the estimated tax as provided for in Section 67(a) and (b) (now 60) of the
NIRC primarily for the reason that the procedure prescribed in Section 67 (now 60) of
the NIRC of estimating the amount of income and tax to be paid by the individual.
Such being the case, your opinion that professional partnerships are not
required to file quarterly returns of their income is hereby confirmed. However,
individual partners of a professional partnership are required to file a return of
summary declaration of gross income and deduction for each of the first three
quarters of the calendar year and a final or adjustment return. The corresponding
tax, as computed, shall be paid at the same time that the returns are filed based on
declarations of actual income and deductions for the particular quarter. (BIR Ruling
No. 94-60)
Taxation of Co-ownership
Read 1. Ona vs. Commissioner, 45 SCRA 74
2. Pascual vs. Commissioner, 166 SCRA 560
3. Obillos vs. Commissioner, 139 SCRA 436
 A co-ownership is defined by Article 484 of the Civil Code of the Philippines.
Taxation of Domestic Corporations and Foreign Corporations

Section 22 (B)
The term Corporation for purposes of taxation refers to the following:
1. Corporation defined under B.P. No. 8, known as the Corporation Code of the
Philippines;
2. General partnership;
3. All juridical entities such as joint venture, joint accounts, etc.
Note: General professional partnership, although a juridical entity is not considered
corporation for taxation purposes. So that a general professional partnership as a
juridical entity (Sec. 26), is exempted from corporate tax. However, the individual
members of the general profession partnership is taxable in their individual personality
as to the share of partnership income that each member will get from the general
professional partnership.
 A partnership is defined by Article 1767 of the Civil Code of the Philippines.

The term “domestic,” when applied to a corporation means created or
organized in the Philippines or under its laws (Se. 22[C], NIRC), while the term
“foreign,” when applied to a corporation, means a corporation which is not domestic
(Sec. 22[D], NIRC). The branches of a domestic corporation, whether located in the
Philippines or abroad, are merely extensions of the local head office. Accordingly,
their incomes in the Philippines and abroad of the head office and foreign branches
are to be reported by the Philippine head office in its corporate income tax return,
and the branch profits remitted by its foreign branches to the Philippine head office
shall no longer be subject to the branch profit remittance tax because (a) the income
of the foreign branch had already been subjected to Philippine income tax, and (b)
the branch profit remittance tax applies only to Philippine branches of foreign
corporations operating in the Philippines operating in the customs territory and
exempts from the tax profits remitted by the Philippine branch operating in special
economic zones to their head offices abroad.
A “resident foreign corporation” is a foreign corporation engaged in trade or

business within the Philippines (Sec. 22[H], NIRC), and a “nonresident foreign
corporation” is a foreign corporation not engaged in trade or business within the
Philippines (Sec. 22[I], NIRC).
Test in determining Status of Corporations

Following the above provisions, it can be said that the Philippines adopted the
“law of incorporation test” under which a corporation is considered (a) as a
domestic corporation,, if it is organized or created in accordance with or under the
laws of the Philippines, or (b) as a foreign corporation, if it is organized or created in
accordance with or under the laws of a foreign country. Corollarily, a domestic
corporation may be formed or organized by foreigners under the Philippine
Corporation Code, provided that it is organized under the laws of the Philippines. On
the other hand, a corporation established by Filipino citizens under the laws of a
foreign country will be treated as a foreign corporation, and the branch that such
foreign corporation sets up in the Philippines is a resident foreign corporation. In
other words, the nationality of the owners of the corporation has no bearing in
ascertaining the status or residence of corporations, for income tax purposes.
The term “doing business” implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or
the exercise of some of the functions normally incident to, and in progressive
prosecution of commercial gain or for the purpose of business organization. In order
that a foreign corporation may be regarded as doing business within a State, there
must be continuity of conduct and intention to establish a continuous
business, such as the appointment of a local agent, and not one of a temporary
character (BOAC v. Commissioner, 149 SCRA 395).
General Partnerships
Except for a general professional partnership and an unincorporated joint
venture or consortium in construction or energy-related projects, which in reality are
also partnerships, Section 22(B) of the 1997 Tax Code considers any other type of
partnership (described here as “business partnership”) as a corporation subject to
income tax. Indeed, Section 24(B) of the 1997 Tax Code places a business
partnership and an ordinary corporation on a similar footing, by imposing the 10%

dividend tax on the cash and/or property dividends actually or constructively received
by an individual stockholder of a corporation, or in the distributable net income after
tax of a partnership of which he is a partner, except a general professional
partnership, received by a partner. The term “after-tax net profit” means the net
profit of the partnership computed in accordance with generally accepted principles
of accounting, less the corporate income tax imposed in Section 27 of the Tax Code
(Sec. 2 Rev. Regs. No. 2-84, January 16, 1984). Sec 73(D) of the 1997 Tax Code,
however, provides that “the taxable income declared by a partnership for a taxable
year which is subject to tax under Section 27(A) of this Code, after deducting the
corporate income tax imposed therein, 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.”
Taxation of Joint Ventures (Subject to corporate tax, unless exempted)
Joint venture. – A joint venture was created when two corporations while
registered and operating separately were placed under one sole management which
operated the business affairs of said companies as though they constituted a single
entity thereby obtaining substantial economy and profits in the operation. (Collector
vs. Bantangas Transportation, et al, 102 Phil. 822; See also BIR Ruling Nos. 020(b)-020-80-
187-82 dated June 3, 1982; 24-000-00-115-86 dated July 17, 1986; 069-90 dated May 9,
1990)
Thus, Empire Venture which has been constituted as a single entity whereby
Empire and Uniphil agreed to pool their resources for the development of a parcel of
land and the construction of condominium units thereon as well as the eventual sale
of said units is a joint venture which is subject to the 35% Section 27 of the Tax
code, as amended. However, the respective 70% and 30% shares of Uniphil and
Empire from the profits of the joint venture are not subject to income tax Section 27
of the Tax Code, as amended. (BIR Ruling No. 91-254)
The term “corporation” mentioned in joint venture refers to a corporation as

defined by the corporation law.
Elements of joint venture. – To constitute a “joint venture,” certain factors

are essential. Thus, each party to the venture must make a contribution, not
necessarily of capital, but by way of services, skill, knowledge, material or money;
profits must be shared among the parties; there must be a joint proprietary interest
and right of mutual control over the subject matter of the enterprise; and usually,
there is single business transaction (BIR Ruling No. 317-92).
Exempt joint venture or consortium is an unincorporated joint venture
or consortium engaged in construction activity or energy-related project. – The
term “joint venture or consortium,” referred to in Section 22(B) of the 1997 Tax
Code that is not considered as a separate taxable entity, means an unincorporated
entity formed by two (2) or more persons (individuals, partnerships or corporations)
for the purpose of undertaking construction project (P.D. 929, May 4, 1976), or
engaging in petroleum and other energy operations with operating contract with the
government. The term “joint venture” was clarified by the Secretary of Finance
when he issued Revenue Regulations No. 10-2012 on June 1, 2012. In said
Regulation, the joint venture that is not taxable as a corporation must comply with
the following requisites: (a) the joint venture or consortium is formed for the purpose

of undertaking construction activity; (b) It involves jointing or pooling of resources by
licensed local contractors; i.t., licensed as a general contractor by the Philippine
Contractors Accreditation Board (PCAB) of the Department of Trade and Industry;
(c) the local contractors are engaged in construction business; and (d) the joint
venture itself is licensed as such by PCAB. If all the above requisites are not met, the
joint venture becomes liable to the corporate income tax. Each member of the joint
venture not taxable as a corporation shall report and pay taxes on their respective
shares to the joint venture profit. Since it is not considered as a separate taxable
entity, the net income or loss of the joint venture or consortium is taken up and
reported by the co-venturers or consortium members in accordance with their
participation in the project as set forth in their agreement. The participation in the
project as set forth in their agreement. The two (2) elements – unincorporated entity
(or entity not registered with the Securities and Exchange Commission) and for the
purpose of undertaking construction or energy-related project – must be present in
order that the joint venture or consortium may not be considered as a separate
taxable entity.
Tax-exempt joint venture shall not include those who are mere suppliers of
goods, services or capital to a construction project.
Joint Venture (JV) involving foreign contractors may be treated as non-taxable
corporation only if:
1. Member foreign contractor is covered by a special license as contractor by
PCAB; and
2. Construction project is certified by the appropriate Tendering Agency
(government office) that the project is a foreign-financed/internationally-
funded project and that international bidding is allowed under the Bilateral
Agreement entered into by and between the Philippine government and
the foreign/international financing institution, pursuant to the rules and
regulations of R.A. 4566 (Contractor’s License Law)
Each member of the joint venture not taxable as corporation shall report and
pay taxes on their respective shares on the joint venture profit, received by a joining
corporation.
All licensed local contractors must enroll to BIR’s eFPS at the RDO where
local contractors are registered as taxpayers.
Foreign joint venture or consortium that does not sell goods nor
perform services in the Philippines. – A joint venture or consortium formed among
non-resident foreign corporations in connection with a local project in the Philippines
is not subject to Philippine income tax, where said foreign joint venture or consortium
does not sell goods nor perform any service in the Philippines. This rule is anchored
on the fact that a foreign corporation is taxable only on income from sources within
the Philippines (BIR Ruling No. 23-95). Accordingly, no withholding tax is required to
be deducted and withheld by the Philippine payor from income payments from
foreign sources made to the foreign joint venture or consortium.
Exempt joint venture or consortium may become taxable partnership. –
An exempt joint venture or consortium undertaking a construction of office tower
project may subsequently become subject to income tax as a separate joint venture
or consortium, where after the construction period, the joint venture partners

engaged in the business of leasing the building floors or portions thereof separately
owned by them (BIR Ruling No. 317-92, October 28, 1992). The tax exemption of the
joint venture granted under the law is valid only up to the completion of the
construction project and does not extend to the subsequent sale or lease of the
developed condominium floors or units to customers.
BIR Rulings prior to Revenue Regulations No. 10-2012:

Corporations does not include joint venture undertaking construction
activity; allocation of floors, units, or lots is a mere return of capital. – The joint
ventures described above are not subject to corporate income tax under Section 27
of the 1997 Tax Code, since the term “corporation” does not include a joint venture
or consortium formed for the purpose of undertaking construction projects pursuant
to Section 22(B) of the 1997 Tax Code. Accordingly, the memorandum of
agreement, joint venture agreement, or exclusive development and marketing
agreement between or among the contracting parties, as the case may be, will not
give rise to a taxable joint venture, and the allocation of specific floors or units or
subdivision lots in the project is not a taxable event and is not subject to income tax
and expanded withholding tax, because the allocation is a mere return of the capital
that each party has contributed to the project.
Transfer of land to joint venture is similar to capital contribution;
distribution of developed lots/units is merely an act of partitioning commonly
owned property. – Joint venture agreements for the construction and development
of real property may or may not be treated as a separate taxable unit, depending on
whether or not a separate taxable unit, depending on whether or not a separate
taxable entity is established by the joint venture partners. If the parties did not form
nor register a separate entity and merely agreed to pool their resources to a common
fund, no separate taxable unit is created. In this case, each joint venture partner has
to account for his respective share in the net revenue earned from the joint venture
project separate income tax returns partners. Hence, the partners may file separate
income tax returns for its net revenue for the project less its respective proportionate
share in the joint venture expenses. The contribution of land to the joint venture is
not a taxable event that will give rise to capital gains tax on sale or transfer of land.
Such transfer is similar to a capital contribution that does not give rise to income tax.
The distribution of developed lots/units is merely an act of partitioning the commonly
owned property. It is nothing more than an act of terminating the co-ownership by
making each partner specific owner of the identifiable lot or unit. At this stage, no
taxable sum has yet been realized by the joint venture partners. That act of
allocation or assigning portions of the developed lots to each member of the joint
venture cannot be treated as a taxable event. The same is true despite the fact that
the shares allocated to or received by the partners may not necessarily correspond
to the lot area originally contributed by them to the joint venture. Hence, the titling of
the land back to the joint venture partners is not subject to income tax, expanded
withholding tax, and value added tax (BIR Ruling DA-165-03-18-99).
Sale of developed floor, unit or lot is subject to income tax. – Should the
corporate landowner or developer sell any of the floors or portions of the floors
allocated to them to third parties, the gain that may be realized by them from such
sale will be subject to the regular corporate income tax and to the expanded
withholding tax under Revenue Regulations No. 6-85 (now Rev. Regs. No. 2-98), as

amended (BIR Ruling No. 274-92, September 30, 1992). This rule applies even if the
sale takes place before or during the construction period.
Taxable Joint Ventures
There are two (2) instances when a joint venture becomes a taxable entity.
First, a domestic corporation jointly owned by individuals and by two or more existing
domestic corporations and/or foreign corporations that is incorporated under the laws
of the Philippines (e.g., D.M. Consunji, Inc.), or duly registered with or licensed by
the Securities and Exchange Commission [e.g., Marubeni Corporation – Philippine
Branch] is a taxable corporation, even if it is engaged in the business of construction
or energy-related activity. Second, if the unincorporated joint venture or consortium
(or unregistered partnership) is engaged in any other line of business than
construction or energy-related activity with operating contract with the government,
the same will also be treated as a taxable corporation. The income and expenses of
the taxable joint venture must be reported by it during the taxable year.
Unregistered partnerships. – They, in order to be subject to corporate

income tax, must be engaged in joint venture for profit. To constitute said
unregistered partnership, the character of habituality peculiar to business
transactions for the purpose of gain must be present. (BIR Ruling No. 89-124)
1. Domestic corporation
 30% of taxable income from all sources within and without the Philippines. (this
will be the tax rate on other income that has no specific applicable rates)
 However, if the domestic corporation has a tax effort ratio of 20% of the GNP, or
a ratio of 40% of income tax collection to total tax revenues or a VAT tax effort of
4% of GNP, and a 0.90% ratio of Consolidated Public Sector Financial Position
(CPSFP) to GNP, they have the option to be taxed at 15% of their gross income
instead of the regular income tax of 30%.
 The election of gross income tax option will be irrevocable for three (3)
consecutive taxable years.
 This is a form of tax avoidance.
2. Proprietary educational institutions and non-profit hospitals has a preferential

treatment to be taxed at 10%. However, under the pre-dominance test, if their total
income from unrelated trade, business, or other activity exceeds 50% of the total
gross income derived by the proprietary educational institutions and non-profit
hospitals, they will be taxed under the regular income tax of 30%.
Read the meaning of:

1) Unrelated trade, business or other activity
2) Proprietary educational institution
Example:
XYZ is a stock and profit educational institution. The following are their income;
Education business ₱1,000,000
Non-education business (unrelated to education) ₱2,000,000
Total income ₱3,000,000 x 50% (₱1,500,000)

The unrelated income of ₱2 Million exceeds the 50% which is ₱1,500,000.
The preferential 10% tax will not apply. The tax rate to apply will be the regular
corporate tax of 30%. This is the meaning of the pre-dominance test.
Read: CIR vs. St. Luke, G.R. No. 195909 – 60, September 26, 2012
CIR vs. St. Luke, G.R. No. 203514, February 13, 2017
3. Government owned or controlled operations are exempted, to wit:

(1) GSIS
(2) SSS
(3) PHIC
(4) Local Water Districts
Exception: If the GOCC charters or any other special laws exempt them from income
tax.
NOTE: PCSO and PAGCOR are now subject to tax.
4. Final tax on certain passive incomes. Read Section 27 (D)

 Capital gains tax from sale of shares of stock not traded in stock exchange 15%
based on capital gains.
 Tax on income derived under the expanded foreign currency deposit system.
Read Section 27 (D) (3).
Read: PAL vs. CIR, G.R. No. 206079-80, January 27, 2018/Tax on savings
interests/refund.
 Intercorporate dividends are exempted from tax if received by a domestic

corporation from another domestic corporation.
 Capital gains realized from sales, exchange or disposition of lands and/or
buildings, final tax of 6% of the selling price or FMV whichever is higher.
Take note that it only refers to lands and buildings and not on real properties
 Minimum Corporate Income Tax (MCIT)on domestic corporations.

Read: CIR vs. PAL, G.R. No. 180066, July 2009
Manila Bank vs. CIR, G.R. No. 168118, August 28, 2006
 The MCIT is 2% of the gross income. The rule is whichever is higher between the
2% MCIT or Regular Corporate Tax.
Notes: A new concept introduced by the 1997 amendments to the NIRC in the Minimum
Corporate Income Tax (MCIT). In the case of Chamber of Real Estate and Builders
Association, Inc. vs. Hon. Executive Secretary (G.R. No. 160756, March 9, 2010), the
Supreme Court held that the MCIT is imposed on gross income and not on capital.
Gross income is arrived at by deducting the capital spent by a corporation in the
sale of its goods including cost and other expenses from gross sales.
MCIT came about as a result of the perceived inadequacy of the present self-
assessment system in capturing the true income of firms that should be subject to
tax. The MCIT is expected to provide a reasonable measure of the actual corporate

income tax that a corporation ought to be paying on the basis of its available
resources.
A minimum corporate tax of 2% is imposed on the gross income as defined in

Section 27(E)(4) of corporations beginning on the fourth taxable year after their
respective commencement of operations. This applies only if the normal corporate
income tax is less than the amount of the minimum corporate income tax.
The excess of the minimum corporate income over the normal corporate income
tax can be carried forward to the three succeeding years and credited against the
normal income tax for the said succeeding years.
The imposition of the minimum corporate income tax on certain corporations may
be deferred by the Secretary of Finance upon showing by a corporation that it has
suffered losses because of a prolonged labor dispute, force majeure or business
reverses.
I. Rates of income tax on foreign corporations
A. Resident foreign corporations

 30% of gross income or optional tax of 15%. (the same conditions with that
of the domestic corporations 15% of gross income)
B. Minimum corporate income tax on resident foreign corporations. (the same
with that of the domestic corporations)
C. International carrier
 2 ½% of Gross Philippine Billings.
 Study the meaning of Gross Philippine Billings (frequently asked in the BAR
Exam
 Read these cases:
 CIR vs. BOAC, 149 SCRA 395
 CIR vs. American Airlines, 180 SCRA 274
 CIR vs. Air India, 157 SCRA 648
 CIR vs. JAL, 202 SCRA 450
D. Offshore banking units
 Exempted on their income from foreign currency transactions
 On foreign currency loans, interest income is subject to 10% final tax
 Any other income of non-residents, whether individuals or corporations from
transaction with the offshore banking units shall be exempt from income tax
(R.A. No. 9294, April 28, 2004)
E. Tax on branch profits remittances
 15% of the total profits earmarked for the remittance without any deduction
for the tax component.
Notes: The proviso giving a special tax rate (7½% instead of the usual 15%) on
remittances of branches to head offices authorized to engage in
petroleum operations in the Philippines has been deleted. It must be
emphasized that dividends received by a domestic corporation from
another domestic corporation shall not be subject to tax. Same rule shall
apply to dividends received by resident foreign corporations from a
domestic corporation, i.e., not subject to tax. However, dividends

received by non-resident foreign corporations from a domestic
corporation shall be imposed a 15% final withholding tax, provided the
national law of the non-resident foreign corporation allows taxpayer
clause. Otherwise it will be subject to the normal domestic rate as
provided in Section 28(B)(5)(b) of the Tax Reform Act of 1997.
Read: Bank of America vs. CA, 234 SCRA 302
F. Rate of tax on non-resident foreign corporation
 Read further Section 28
G. Imposition of Improperly Accumulated Earnings Tax
 10% of the Improperly accumulated taxable income
 Read: Section 29, NIRC
Improperly Accumulated Earnings Tax.
 This tax applies to every corporation which is formed or availed of for the
purpose of avoiding the imposition of income tax on the income received
by shareholders of the corporation by permitting its earnings or profits to
accumulate, instead of being divided or distributed.
Reasonable Needs of Company (Immediacy Test) (Cyanamid vs. CA, G.R. No. 108067,
January 20, 2000)
Section 30 - Exemption from Tax on Corporations. The corporations covered by this
section are exempted from income tax because it is generally organized not for profit but
exclusively for the benefit of their respective members. So that no income inuring to the
benefit of the individual members but for the benefit of the organization as a whole.
However, a corporation is not simply exempted from tax because it is not
organized and operated for profit, it is still subjected to income tax no matter how
these corporation are created. Hence, if they will have income of whatever kind and
character from any of their properties real or personal or from any of their activities
conducted for profit regardless of the disposition made of such income, they will be
liable for income tax.
For instance a non-profit corporation will sell their property and derive income
therein, that income would be subjected to income tax.
The rule that “regardless of their disposition made of such income” do not apply
to non-profit educational institution, because under the constitution all revenues and
assets of these institutions it actually, directly and exclusively used for educational
purposes will make these institution exempted from all taxes. Thus, if Xavier
University, for example, who is a non-stock, non-profit educational institution will use
their rental income from the gym for education purposes, the same is not subject to
income tax. However, if the gym rental is used for charitable purposes it would
already be subjected to income tax because what the constitution provides is only to
educational purposes.
READ : 1) CIR vs. Court of Appeals, 298 SCRA 83
2) Commissioner vs. YMCA, G.R. No. 124043, October 14, 1998
3) CIR vs. St. Luke, G.R. No. 195909 – 60, September 26, 2012
4) CIR vs. St. Luke, G.R. No. 203514, February 13, 2017
5) CIR vs. De la Salle University, G.R. No. 196596, November 9, 2016

Section 31 - Taxable Income means “Gross Income”, less deductions (Business
Deductions.
The following are the deductions under the tax code:
1. Business deduction (Sec. 34, par. A – J and M): available to corporations or

individual taxpayer who are taxed on taxable income derived from business,
trade, or exercise of profession.
2. Optional standard deduction (Sec. 34, par. L); available to corporations or
individual taxpayer who are taxed on taxable income derived from business,
trade, or exercise of profession.
Section 32 - Gross Income
(A) General Definition – the term “all income derived from whatever source
(means from legal or illegal sources).
The enumeration of items of income from no. 1 to 11 is not exclusive. It is only an

example. Meaning that incomes that are not mentioned in the enumeration are also
included as part of gross income.
Sources of income might be from the following activity:
1. Exercise of profession;
2. Services rendered;
3. Rentals;
4. Profits from sale or exchange of asset;
5. Business or trade;
6. And from other sources such as interest in bank deposits, dividends, and
royalties.
Definition of Income
“Income” means an amount of money coming to a person or corporation

within a specified time, whether as payment for services, interest or profit from
investment. Unless otherwise specified, income means cash or its equivalent (Conwi
v. CTA and Commissioner, 213 SCRA 83). Income is a flow of service rendered by
capital by the payment of money from it or any other benefit rendered by a fund of
capital in relation to such fund through a period of time (Madrigal v. Rafferty, 38 Phil.
414). Income covers gain derived from capital, from labor, or from both combined,
provided it be understood to include profit gained through a sale or conversion of
capital assets (Fisher v. Trinidad, supra). Income includes earnings, lawfully or
unlawfully acquired, without consensual recognition, express or implied, of an
obligation to repay and without restriction as to their disposition (James v. U.S., 366
U.S. 213). Thus, income from illegal drug and gambling activities is taxable as well.
Income may include: (a) increase in inventory at the end of the taxable year;
however, mere increase in the value of property is not income but increase in capital;
(b) transfer of appreciated property to employee for services rendered; and (c) just
compensation paid by government for property acquired by expropriation.
Income is an amount of money coming to a person within a specified time,

whether as payment of services, interests or profits from investments.

Presumed Gain (Capital Gains on Sale of Real Property) is also income.
Gain is synonymous with income.
Gain may be derived from capital, labor or both.
“Income in taxation does not solely mean profit. Hence, SP may be considered
an income if provided by law. But capital is never treated as “Income”.
Profits or gain may also derive through sale or conversion of an asset.
There is no statutory definition of income under the tax code. However, under
Section 36 of the Revenue Regulation No. 2. Income is defined that in its broad
sense, it means all wealth that flows into the taxpayer, other than as a mere return of
capital (Flow of Wealth Theory).
An income to be considered as taxable must be:
1. It must be realized (earned);

2. Actually or constructively received.
Test in determining INCOME.
a. Realization test. – There is no taxable income until there is a separation

from capital of something of exchangeable value, thereby supplying the
realization or transmutation which would result in the receipt of income
(Eisner v. Macomber, 252 U.S. 189). Thus, stock dividends are not income
subject to income tax on the part of the stockholder, because he merely
holds more shares representing the same equity interest in the corporation
that declared the stock dividends (Fisher v. Trinidad, supra).
b. Claim of right doctrine. – A taxable gain is conditioned upon the
presence of a claim of right to the alleged gain and the absence of a
definite unconditional obligation to return or repay that which would
otherwise constitute a gain. To collect a tax would give the government an
unjustified preference as to the part of the money that rightfully and
completely belongs to the victim. The embezzler’s title is void
(Commissioner v. Wilcox, 286 U.S. 417, 424).
c. Material Benefit Rule. - (Commissioner v. Javier, 199 SCRA 824).
The Material Benefit rule (CIR vs. Javier, 199 SCRA 824), means that under
the solutio indebiti rule, if the holder of the property has the obligation to
return it and instead use it for his own benefit, the amount to be returned
would be considered an income.
On May 27, 1977, Dolores Ventosa requested the transfer of US$1,000

from the First National Bank, West Virginia to Victoria Javier in Manila
through the Prudential Bank. Accordingly, the First National Bank
requested the Mellon Bank to effect the transfer. Unfortunately, the
wire sent by Mellon Bank to Manufacturers Hanover Bank, a
correspondent bank of Prudential Bank, indicated the amount
transferred as “US$1,000,000.00” instead of US$1,000.00. Hence,
Manufacturers Hanover Bank transferred one million dollars less bank

charges to Prudential Bank for the account of Victoria Javier. On June
3, 1977, Javier opened a new dollar account (No. 343) in the Prudential
Bank and deposited $999,943.70. Immediately thereafter, Victoria
Javier and her husband, Melchor Javier, Jr. made withdrawals from the
account, deposited them in several banks only to withdraw them later
in an apparent plan to conceal, lauder and dissipate the erroneously
sent amount. Spouses Melchor and Victoria Javier filed their
consolidated income tax return for the ear with the notation “The
taxpayer was the recipient of some money from abroad which he
presumed to be a gift but turned out to be an ‘error’ and is now
subject of litigation,” but they did not declare it as income. The
court ruled that the amount received is income subject to tax, but
the tax return filed cannot be considered as fraudulent because
petitioner literally “laid his cards on the table” for respondent to
examine. Error or mistake of fact or law is not fraud.
d. Income from whatever source. – All income not expressly excluded or
exempted from the class of taxable income, irrespective of the voluntary or
involuntary action of the taxpayer in producing the income, and regardless
of the source of income, is taxable (Blas Gutierrez v. Collector, 101 Phil. 713).
e. Economic benefit test. – Any economic benefit to the employee that
increases his networth (i.e., total assets less total liabilities), whatever may
have been the mode by which it is effected, is taxable. Thus, in stock
options, the difference between the fair market value of the shares at the
time the option is exercised and the option price constitutes additional
compensation income to the employee at the time of exercise (not upon
the grant or vesting of the right) (Commissioner v. Smith, 324 US 177).
f. Severance test – as capital or investment is not income subject to tax, the
gain or profit derived from the exchange or transaction of said capital by
the taxpayer for his separate use benefit or disposed income subject to
tax.
g. Substantial alteration of interest lost – income to be returnable for
taxation must be fully and completely realized. When there is no
separation of gain or profit, or separation of the increase in value from
capital, there is no income subject to tax.
h. Flow of wealth test –anything/implying not existence of capital
a) Capital is fund income is the flow;
b) Capital is wealth income service of wealth;
c) Property is tree income is fruit;
d) Labor is tree income is fruit.
i. Doctrine of Constructive Receipt of Income means that it was already set
aside, without limitations, restrictions or conditions for its withdrawal.
Example share of the partner in a general partnership.
j. Doctrine of Cash Equivalent in Transaction means that if a property is
exchanged with another property the difference of a Fair Market Value
(FMV) would be considered income.
Significance of knowing the Type of Character of Income
- In general, it is important to know the types of income realized by the

taxpayer, since the Philippines has adopted the semi-global or semi-schedular tax

system. Under this tax system, compensation income, and other income not subject
to final income tax, are added together to arrive at the amount of gross income of an
individual, and after deducting the allowable deductions from business and
professional income, capital gains, passive income, and other income not subject to
final income tax, zero percent to 35% (TRAIN LAW), if qualified, the graduated
income tax rates ranging from 32% are applied in the resulting net taxable income to
arrive at the income tax due and payable. Taxpayer will file the appropriate income
tax return.
The passive investment income are generally subject to the final withholding
tax; hence, the income recipient does not file a tax return covering such passive
investment incomes, although the withholding agent-payor of income is held
responsible under the law to deduct, withhold and remit the final income tax thereon
to the BIR.
Capital assets subject to the final capital gains tax such as shares of stock of
a domestic corporation and real property located in the Philippines subject to CGT of
6%, except when sold or transferred by a dealer in securities or real estate dealer,
are covered by the capital gains tax return; hence, not included in the taxable income
of the individual taxpayer subject to the global tax system and the graduated income
tax rates.
The rules for individuals discussed above apply also to a corporation, except
that the corporation does not receive compensation income.
Compensation Income
In general, the term “compensation” means all remuneration for services

performed by an employee for his employer under an employer-employee
relationship (See Sec. 2.78.3, Rev. Regs. No. 2-98, as amended), unless specifically
excluded by the Tax Code. In determining the existence of an employer-employee
relationship, the elements that are generally considered are: (a) the selection and
engagement of the employee; (b) the payment of wages; (c) the power of dismissal;
and (d) the employer’s power to control the employee with respect to the means and
methods by which the work is to be accomplished. It is the so-called “control test”
that is the most important element (Brotherhood Labor Unity Movement of the Philippines
v. Zamora, L-48645, January 7, 1987).
Who is an employee?
For taxation purposes, a director is considered an employee under Section 5

of Revenue Regulations No. 12-86, to wit: “An individual, performing services for a
corporation, whether as an officer and director or merely as a director whose duties
are confined to attendance at and participation in the meetings of the Board of
Directors, is an employee.” The non-inclusion of the names of some of petitioner’s
directors in the company’s Alpha List for 1997 does not ipso facto create a
presumption that they are not employees of the corporation, because the imposition
of withholding tax on compensation hinges upon the nature of work performed by
such individuals in the company. Moreover, Section 2.57.2.A(A) of Revenue
Regulations No. 2-98 cannot be applied to this case as the latter is a later regulation,
while the accounting books examined were for the year 1997 (First Lepanto Taisho
Insurance Corporation v. CIR, G.R. No. 197117, April 10, 2013). [NOTE: Beginning 1998,

a director who is not an officer or employee of a corporation is NOT an employee of
said corporation; hence, the applicable withholding tax to be deducted from such
income shall be 10% EWT, which is creditable against his ordinary income tax
liability for the year, provided it is evidenced by BIR Form 2307. However, said
director’s fee is taxed also under the global tax system].
The term “employee” refers to any individual who is the recipient of wages
and includes an officer, employee or elected official of the government or any
political subdivision, agency or instrumentality thereof. It includes also an officer of a
corporation. Thus, a juridical entity that performs services to another person is not an
employee of the latter. Accordingly, the proper withholding tax on such income
payment is the expanded withholding tax (not withholding tax on compensation
income). To create an employer-employee relationship, the person that performs the
service to another must be an individual.
The term “compensation income” means all remuneration for services

performed by an individual employee for his employer, including the cash value of all
remuneration paid in any medium other than cash. There are various types of
taxable compensation income, such as salaries, wages, bonus, remuneration,
honorarium, benefits and allowances (including representation and transportation
allowance (RATA), personal emergency relief allowance (PERA), longevity pay,
subsistence allowance, hazard pay, annuities, pensions, etc. Additional
compensation allowance (ACA) given to government employees pursuant to E.O.
219 shall not be subject to withholding tax pending its formal integration into the
basic pay. While its nature shall continue to be that of compensation, it shall be
treated as part of the “other benefits” which are excluded from compensation
income, provided that the total amount does not exceed ₱30,000 (BIR ruling No. 034-
2002, August 16, 2002 modified BIR ruling No. 179-99, November 22, 1999). BIR Ruling
Nos. 120-96, November 8, 1996 and 062-2000, November 20, 2000 exempt benefits
and allowances such as longevity pay, subsistence allowance, and hazard pay
granted to uniformed policemen and jail guards under R.A. 6975 (DILG Act of
1990). However, if the recipient is an AFP personnel, all remunerations (monetary
and non-monetary) are taxable, except allowances for quarters, clothing and
subsistence which are exempt from income tax pursuant to RMC 15-87 (BIR Ruling
No. 143-96, December 24, 1996).
Compensation Income of Philippine Nationals and Aliens Employed by Foreign

Governments and International Organizations in the Philippines
Section 23 of the Tax Code lays down the general principles in taxing citizens
and alien individuals. Resident citizens are taxed on worldwide income, while
resident aliens are taxed only on their Philippine-source income. As an exception to
the general rule, most international agreements which grant withholding tax immunity
to foreign governments/embassies/diplomatic missions and international
organizations also provide exemption to their officials and employees who are
foreign nationals and/or non-Philippines residents from paying income taxes on their
salaries and other emoluments.
Since the withholding tax is merely a method of collection of income tax, the
exemption from withholding taxes on compensation income of foreign
governments/embassies/diplomatic missions and international organizations does

not equate to the exemption from paying the income tax itself by the recipients of
said income.
Foreign Embassies and Diplomatic Missions
Articles 34 and 37, Vienna Convention on Diplomatic Relations, exempts: (a)

diplomatic agents who are not nationals or permanent residents of the Philippines;
(b) members of family of diplomatic agent forming part of his/her household who are
not Philippine nationals; (c) members of administrative and technical staff of the
mission plus members of their families who are not Philippine nationals or permanent
residents of the Philippines; (d) members of service staff of the mission who are not
Philippine nationals or permanent residents of the Philippines; and (e) private
servants of members of the mission who are not Philippine nationals or permanent
residents of the Philippines. The applicable rules are as follows:
Aid Agencies of Foreign Governments

JICA: Only JICA resident representatives and his/her staff who were
“dispatched from japan” shall not be subject to Philippine income tax.
GIZ: (Germany): Only German specialist of German construction and
consulting firms shall be exempt.
AUSAID: Salaries and other remuneration paid by the Government of
Australia or by Australian personnel, firms, institutions or organizations
to any person performing work under the Memorandum shall be
exempt.
CIDA: Only Canadian personnel who derive income from Canadian aid funds
as provided under the subsidiary agreement shall be exempt.
Advisory Committee on Voluntary Foreign Aid-USA

CARE: Only Care employees who are not Philippine nationals are exempt.
FPPI or PLAN: Only non-Filipino staff members of the PLAN who receive
salaries and stipends in US dollars shall be exempt.
Aid Agencies
Ford Foundation, Rockefeller Foundation, Agricultural dev Council, and Asia
Foundation: only non-Filipino staff members thereof who receive
salaries and stipends in US dollars shall be exempt.
IRRI (PD 728 and RA 3538)
Catholic Relief Services – NCWC and Tools for Freedom Foundation (R.A.
4481)
Asian Development Bank (ADB) – Section 45(b), Article XII of the

Agreement between ADB and RP: Only officers and staff of ADB who are not
Philippine nationals shall be exempt from Philippine income tax (because exemption
is “subject to the power of the Government to tax its nationals.” Any exemption
from Philippine income tax must be granted under duly recognized international
agreements or particular provisions of existing law. Affected individuals (of foreign
embassies and international organizations) who were not granted such exemption
must file their income tax returns and pay the tax due thereon on or before the 15 th
day of April following the close of the taxable year (RMC 31-2013, April 12, 2013).
Read: Section 78, Tax Code. (Withholding on Wages)

Statutory Minimum Wage
Compensation income falling within the meaning of “statutory minimum

wage” (SMW) under R.A. 9504, effective July 6, 2008, as implemented by Revenue
Regulations No. 10-2008 dated July 8, 2008, shall be exempt from income tax and
withholding tax. Holiday pay, overtime pay, night shift differential pay, and hazard
pay earned by Minimum Wage Earner (MWE) shall likewise be covered by the above
compensation such as commissions, honoraria, fringe benefits. Benefits in excess of
the allowable statutory amount of ₱30,000, taxable allowances and other taxable
income other than the SMW, holiday pay, overtime pay, hazard pay and night shift
differential pay, shall not enjoy the privilege of being a MWE and, therefore, his/her
entire earnings are not exempt from income tax and withholding tax.
Hazard pay shall mean the amount paid by the employer to MWE’s who were
actually assigned to danger or strife-torn areas, disease-infested places, or in
distressed or isolated stations and camps, which expose them to great danger of
contagion or peril to life. Any hazard pay paid to MWE’s which does not satisfy the
above criteria is deemed subject to income tax and withholding tax.
When an award of backwages is made, there is an acceptance that the

employee was illegally or unjustly dismissed, and the backwages are the salaries he
was supposed to have earned had he not been dismissed. It is as though he was not
separated from employment, and as though he actually rendered service (Escareal v.
Court of Tax Appeals, et al., CA-GR SP No. 41989, September 30, 1998). In this
connection, RMC 39-2012 dated August 3, 2012 provides that the employee should
report as income and pay the corresponding income taxes by allocating or spreading
his back wages, allowances and benefits through the years from his separation up to
the final decision of the court awarding the backwages. The said backwages,
allowances and benefits are subject to withholding tax on wages. However, when the
judgment awarded in a labor dispute is enforced through garnishment of debts due
to the employer or other credits to which the employer is entitled, the person owning
such debts or having in possession or control of such credits (e.g.., banks or other
financial institutions) would normally release and pay the entire garnished amount to
the employee. As a result, employers who are mandated to withholding taxes on
wages pursuant to Section 79 of the Tax Code, as implemented by Revenue
Regulations No. 2-98, cannot withhold the appropriate tax due thereon. In this
regard, the “employer” also refers to the person having control of the payment of the
compensation in cases where the services are or were performed for a person who
does not exercise such control. Thus, the person owning or having possession or
control of the credit shall withhold the required tax.
Backwages, Allowances, and Benefits Awarded in Labor Dispute
Backwages, allowances, and benefits awarded in a labor dispute constitute

remuneration for services that would have been performed by the employee in the
year when actually received, or during the period of his dismissal from the service
which was subsequently ruled to be illegal.
The employee should report as income and pay the corresponding income
taxes by allocating or spreading his backwages, allowances and benefits thru the

years from his separation up to the final decision of the court awarding the
backwages.
The backwages, allowances, and benefits are subject to withholding tax on

wages.
However, when the judgment awarded in a labor dispute is enforced thru

garnishment of debts or having in possession or control of such credits (e.g., banks
or other financial institutions) would normally release and pay the entire garnished
amount to the employee. As a result, employers who are mandated to withhold taxes
on wages cannot withhold the appropriate tax due thereon.
In order to ensure the collection of the appropriate withholding tax on wages,

garnishees of a judgment award in a labor dispute are constituted as withholding
agents with the duty to withhold tax on wages equivalent to five percent (5%) of the
portion of the judgment award, representing the taxable backwages, allowances and
benefits (RMC 39-2012, August 3, 2012).
Items Not Included as Compensation Income
Compensation shall not include remuneration paid: (a) for agricultural labor
paid entirely in products of the farm where the labor is performed; or (b) for domestic
service in a private home; or (c) for causal labor not in the course of the employer’s
trade or business; or (d) for services by a citizen or resident of the Philippines for a
foreign government or an international organization (Sec. 78[A], NIRC).
As a general rule, the income recipient is the person liable to pay the income
tax. In order to improve the collection of income on the compensation income of
employees, the State requires the employer to withhold the tax upon payment of the
compensation income, such that at the end of the calendar year, the employee
needs only to file a tax return and no tax is paid, because his total withholding tax
during the year is equal to his income tax liability. [Beginning 2002, qualified
employees need not file their income tax returns and the employer may file a
substituted return for its employees.]
Income from whatever source (Section 32)
- The phrase “income from any source whatever” is broad enough to cover
gains contemplated here. These words disclose a legislative policy to include
all income not expressly exempted within the class of taxable income under
our laws, irrespective of the voluntary or involuntary action of the taxpayer in
producing the gains (Blas Gutierrez v. Collector, 101 Phil. 743).
- It includes coming from the illegal sources.
Any economic benefit to the employee, whatever may have been the
mode by which it is implemented, is income subject to tax. Thus, in stock
options, the difference between the fair market value of the shares at the time the
option is exercised and the option price constitutes additional compensation income
to the employee. A stock option is a right, but not an obligation, to purchase (call
option) or sell (put option) a specified number of shares at a fixed price before or at a
certain date in the future

The principle underlying the taxability of an increase in the net worth of a
taxpayer rests on the theory that such an increase in net worth, if unreported and
not explained by the taxpayer, comes from income derived from a taxable
source. In this case, the increase in net worth was not the result of the receipt by it
of taxable income. It was merely the outcome of the correction of an error in the
entry in its books relating to its indebtedness to the insurance company. The income
tax law imposes a tax on income; it does not tax any or every increase in networth
whether or not derived from income (Fernandez Hermanos, Inc. v. Commissioner, CTA
Case 787, June 10, 1963)
READ : Madrigal vs. Rafferty, 38 Phil. 414

The tax code (Sec. 32) did not indicate the source (ACTIVITY) of income (Blinds
Sources). What it enumerates are specific items of income.
Are the following items considered income?
1. Found treasure – other forms of gain;
2. Punitive damages/damages for breach of promise or alienation of affection;
3. Recovery of bad debts;
4. Tax refund;
5. Non-cash benefits;
6. Income from illegal sources;
7. Prizes, scholarship, fellowship;
8. Forgiveness of debt.
In the case of Commissioner vs. Tours Specialist, 183 SCRA 402, the Supreme
Court stated that taxable income, however, does not include items received which do
not add to the taxpayer’s net worth or redound to his benefit such as amounts merely
deposited or entrusted to him.
The following are not income: (a) deposit of property that does not increase
networth of taxpayer (e.g., the increase in asset has a corresponding increase in
liability); (b) increase in networth is due to correction of errors in book entries; (c)
voluntary assessments by a corporation paid by its shareholders under Revenue
Regulations No. 2; (d) security deposit paid to a lessor until it is applied in payment
of accrued rent; (e) contributions by lot owners for the memorial park care fund; and
(f) loan proceeds received by the borrower.
(B) Exclusion from Gross Income – an income can be exempted from income
tax based on the following reasons:
1. Exemption by the fundamental law of the land (non-stock, non-profit
educational institution);
2. Exempted by the statute (Sec. 32 [B]);
3. It does not come within the definition of income, e.g., stock dividend or
increase in the appraisal of the FMV of the property.
- A tax free income is different from a tax free organization.

 These are items of income excluded from the coverage of income tax:
1. Exempted by the Constitution.
2. Exempted by the statute or law.
3. When it does not come within the definition of income.

1. Life Insurance – proceeds of life insurance being an indemnity of life lost is
not subject to income tax. However, it can be subjected to estate tax if the
rules of the estate taxes will apply. If it is an accident insurance and it includes
coverage of life insurance the proceeds would not be subjected to income tax.
2. Return of Premium not subject to income tax because it is just a mere return
of capital. But if the return of premium is higher than what was actually paid,
the difference is income.
3. Gifts, Bequests, and Devises not subject to income tax but subject to estate
tax or donor’s tax.
4. Compensation for Injuries or Sickness includes physical, moral and
psychological injuries.
Lost profits recovered are subject to income tax.
5. Income Exempt under Treaty would not be subject to tax because of the
treaty (International Comity) entered into by the government with other
countries.
MOST FAVOURED COUNTRY RULE or Most Favoured Nation Clause)
 Requires a country to provide any concessions, privileges, or immunities
granted to one nation in a trade agreement to all other World Trade
Organization member countries. Although its name implies favoritism
toward another nation, it denotes the equal treatment of all countries.
6. A. Voluntary Retirement.
- Benefits covered by a private benefit plan maintained by the employer
would be exempted from income tax if all of the following conditions are
present:
(1) The retiring employee is in the service of the same employer for at least
ten (10) years;
(2) He is not less than fifty (50) years of age at the time of retirement.
(3) Retired under the private benefit plan of the employer.
- Voluntary retiring person which has no private retirement plan by the
employer:
a. Private Employee - labor code will govern. Requirements are the following to
be not taxable:
(1) At least sixty (60) years old but not more than sixty-five (65) years old.
(2) Has served at least five (5) years of service with the same employer.
(3) Entitled retirement ½ salary for every year of service but not less than one
month salary.
If he is a government employee, retirement will be governed either by the
retirement plan of the government agency or by the GSIS.
B. Pseudo retirement, or involuntary retirement, or compulsory retirement.
Involuntary retirement is present if the employee did not ask, did not initiate, and
it is not of his own choice that he is retired. The reasons may be because of the
death, sickness or other physical disability, or for any cause beyond the control of
the said official or employee. Some other grounds like retrenchment, redundancy,
closure of business, are also other forms of involuntary retirement. The retirement
benefits received from involuntary retirement not subject to income tax.

BIR Ruling No. 071-95, April 11, 1995 – retirement under CBA is taxable for
being voluntary. If the company has no BIR approved retirement plan an employee
who is separated against his will but who signed a CBA, the retirement benefits
under the CBA is taxable because by signing the CBA it will make his separation
voluntary.
C. Foreign retirement benefits gratuitously received by a resident or non-

resident citizen of the Philippines or alien who come to reside permanently in the
Philippines are exempted from income tax.
D. Benefits given to persons residing in the Philippines whether alien or citizen

by the USVA exempted from income tax.
E. SSS and GSIS benefits are exempted from income tax.
7. Miscellaneous Items (READ: CIR vs. Mitsubishi, G.R. No. 54908, Jan. 22,
1990).
a) Income Derived from Foreign Government are exempt because of

reciprocity between countries, if there is a treaty or law that exempts it.
Take note of the source of income.
b) Income Derived by the Government or its Political subdivisions not
subject to tax because it is an inherent limitation, provided that the
government agency is performing governmental function.
c) Prizes and Awards – conditions to exempt from income tax:
I. The award is primarily:

(1) religious;
(2) Charitable;
(3) Scientific;
(4) Educational;
(5) Artistic;
(6) Literary;
(7) Or civic achievement;
II. There was involuntary participation by the recipient
III. The award is unconditional meaning he is not required to render
substantial future service as a condition to receiving the prize or
award.
All the above three (3) conditions must be present to be exempted from income
tax.
Mnemonics to remember: R E L A C C S
READ: R.A. 7549, May 22, 1992 (Exemptions of Athletes from income tax on
prizes or winnings received.)
F. 13th Month Pay and Other Benefits – Gross benefits received by officials and
employees of public and private entities: Provided, however, that the total exclusion
under this subparagraph shall not exceed ₱90,000.00. (R.A. 10963, Section 9)

13th month pay are exempted if received by public or private employees. The first
₱90,000.00 is exempted. The excess will be subject to income tax.
The term other benefits includes Christmas bonus, monthly bonus, quarterly
bonus, etc.
Nota Bene – take note of the tax provisions for Minimum Wage Earners which
exempt compensation and other benefits.
G. GSIS, SSS, Medicare, Pag-IBIG contributions (refers to employees’ share

deducted from their salaries) are excluded from gross income including union dues
of individuals. These are exclusive.
H. Self-explanatory.
I. Self-explanatory.
Section 33 - Fringe Benefit – this tax is imposed on the supervisory/managerial
employee but payable by the employer under the withholding tax system.
The tax base is grossed up monetary value of the FB.
Memo Meaning of FB (Sec. 33 B).
Only supervisory or managerial employee are liable to pay FBT (general rule).
The following FB is exempted even if received by a supervisory of managerial
employee:
1) The FB is required by the nature of the employment;
2) Necessary to the trade, business or profession of the employer;
3) FB is for the convenience and advantage of the employer.
FB are perks or privileges not given to all employees.
FB given to employees which are non-residents alien individual not engaged in
trade or business within the Philippines (Sec. 25 A) including the special alien
individuals (Section 25 [B] [C] [D]) shall not be subject to FBT but the rates imposed
under Section 25.
FB are employees benefits supplementary to a money wage or salary.
Example of FB - see par. B, Section 33, no. 1-10
FB that are not taxable – refer to par. C, Section 33. (memorize)
If the FB is already subjected to FBT it is no longer subject to tax as
compensation income. So that if the FB is exempted from FBT it would still be
subject to compensation income tax unless the employee is also exempted from the
income tax or excluded from Gross Income.
Rank and file employees are always exempt from Fringe Benefit Tax (FBT)
1. Honda Cars vs. Honda Cars Technical, G.R. No. 204142, November 19, 2014
2. Duty Free vs. COA, G.R. No. 210991, July 12, 2016

De minimis benefits (benefits of small value) is exempted both from FBT and
compensation income tax.
Read: RR No. 5-2011 (March 16, 2011)
1. Soriano vs. Secretary of Finance, G.R. No. 184450, January 24, 2017
Examples of De minimis benefits cited by R.R. No. 5-2011, March 16, 2011:
Memorize:
1) monetized unused vacation leave not exceeding ten (10) days for private
employees; for public employees no limit.
2) Medical cash allowance to dependents not exceeding ₱1,500.00/semester or
₱250.00/month;
3) Rice subsidy ₱2,000.00/month or one (1) sack of kg. rice per month
amounting to not more than ₱2,000.00;
4) Uniform allowance ₱6,000.00/annum;
5) Medical benefits ₱1,000.00/annum;
6) Laundry allowance ₱300.00/month.
Those not mentioned by RR No. 5-2011 are not included in De Minimis Benefits.
CHAPTER VII. Allowable Deductions.
A. Business Expenses in general: (Sec. 34 A)
J. Ordinary and Necessary Trade, Business or Professional Expenses.

Requisites:
1. Ordinary (common and accepted) and necessary (helpful and

appropriate)
- Expense is not indispensable to be considered necessary.
2. Paid or incurred during the taxable year (fiscal or calendar year)
3. Connected and related to the taxpayer’s business
- MARCELO STEEL DOCTRINE – a loss in one line of business is not
permitted as a deduction from gain in another line of business of the
same company.
Remember my lecture on Mr. Nakahiga.
4. To be deducted in the category it belongs (e.g. taxes cannot be
deducted as losses)
5. Reasonable expense
6. Not contrary to law, morals, public policy, public order, good customs.
7. Substantiated by receipts or invoices’ (par b(1)A)
Bribes, kickbacks and other similar payments NOT ALLOWED as expense.
Private Educational Institutions (Proprietary) is given the option to deduct the

expenditures which are capital outlay for expansion of school facilities either:
1. Deduct the entire amount of expenditures during the taxable year, or

2. Deduct as depreciation expense

II. Itemized Deductions (has the same requisites with the ordinary and
necessary but with additional conditions):
1. Interest Expense (4 requisites)

- there must be an indebtedness
- proceeds of the loan is utilized in the business
- there must be a legal liability to pay interest
- indebtedness must be that of the taxpayer
- Tax Arbitrage Scheme – the amount of interest of loans will be
deducted from business income net of the interest income received by the
taxpayer from his bank deposits subject to Final Tax
Example:
Interest Expense ₱ 60,000
Less : Bank deposit interest income
₱50,000 x 38% (effective Jan. 1, 2000) ₱ 19,000
Deductible interest expense ₱ 41,000
- Different treatment if the taxpayer used the CASH METHOD and the
interest on loans was prepaid interest expense. The entire prepaid interest
expense will not be deducted on the year the loan was incurred. The interest
to be deducted must be prorated with the payment of the principal loan.
- Sec. 36(b). interest expense on loans obtained from related persons
[Sec. 36(b)] NOT DEDUCTIBLE.
- Interest on indebtedness incurred to finance petroleum exploration
NOT DEDUCTIBLE.
- Optional treatment of Interest Expense when loans are incurred to
acquire property to be used in business:
1. Deduct the interest as outrightly; or

2. Treat the interest as capital expenditures. To be deducted
through depreciation.
2. Taxes
The following taxes cannot be deducted:

1. Income Tax
2. Foreign Income Tax
- However it will be allowed if Foreign Tax credit is not utilized
3. Estate and Donor’s Taxes
4. Transfer Tax on sale of shares of stocks (Sec. 127d)
5. Special Assessments
Taxes that are not enumerated above are deductible from business income
provided it is connected and related, e.g. VAT
Foreign Tax Credit (FTC) – is a portion of foreign income tax which can be used
as a deduction from the Philippine Income Tax due.
Two approaches:
1. Gross Income (within and without) ₱xxx
Less : Deductions (including Foreign Income Tax) ₱xxx

Taxable income ₱xxx
OR
2. Gross Income (within and without) ₱xxx
Less : Deductions (not including Foreign Income Tax) ₱xxx
Taxable income ₱xxx
Phil. Income Tax Due ₱xxx

Less : Foreign Tax Credit (FTC) ₱xxx
Tax still due ₱xxx
FTC will only arise if the taxpayer is taxable in the Philippines of income derived
within and without the Philippines
To determine FTC there is a Formula. The entire foreign tax paid cannot be used
as FTC. FTC are deductions from Philippine income tax. Not a business deduction.
Modes of eliminating International Double Taxation

1. Exempt Method
- International Treaty
- NRC are exempted from Philippine tax on income derived without the
Phils.
2. Deduction Method
- Foreign Income Taxes are deductions if FTC is not availed off.
3. Credit Method
- Foreign Tax Credit
4. Tax Sparing Method
- Tax Sparing policies are especially important to developing countries in
their efforts to attract investments.
- a method where a country applies a Tax Credit against taxes owed on
foreign income that is equivalent to the tax exemption provided by the
foreign country
Example: Sec. 28 (B, 5, b) on intercorporate dividends from Domestic
Corp. to a NRFC.
3. Losses
Kinds of Losses
A. Ordinary losses – operation of the business
- NOLCO will apply
- connected with business
B. Casualty losses - properties used in business
- loss arises from fires, storms, shipwreck, or
other casualties, robbery, theft or
embezzlement.
- to be reported to the BIR not less than 30 days
and not more than 90 days.
- not used as a losses deduction for estate tax
purposes
- proof of loss (par. 2 of par. D). study carefully.

- should not be compensated by insurance to be
deductible.
C. Capital losses - (to be discussed with Capital Gains)
D. Losses from Wash Sales - (to be discussed in Sec. 38)
E. Wagering losses (gambling) – to be deducted only from gambling

gains [Sec. 39 (a)]
F. Abandonment losses – read
4. Bad Debts (A/R that cannot be collected)

READ : Pareño vs. Sandigan. 256 SCRA 242
- Connected to business
- Actual bad debts or write-offs, not the estimated bad debts
- If the bad debts deducted from Gross Income are recovered
later, the recovered bad debts is to be included as part of gross
income in the taxable year it was recovered. This is the Tax
Benefit Rule.
- The tax benefit rule applies also to taxes previously used as a
deduction and later the taxpayer was able to get a tax
refund/tax credit.
5. Depreciation
- property, plant and equipment are normally usable for a
number of years. A point will be reached when such property
may not be useful anymore in the business die to exhaustion,
wear and tear.
- the owner will be able to recover the cost of the property
because it will gradually or periodically deducted from his gross
income as deduction called depreciation.
- depreciation will only apply to extraordinary expenditures or
capital expenditures.
Depreciation – for income tax purposes, depreciation means the reduction in

service value or property used in business or trade arising from exhaustion, wear
and tear, and obsolescence. (Sec. 195, Rev. Reg. No. 2)
Depreciation commences with the acquisition of the property or with its erection.
Depreciation of properties used in petroleum operations is allowable.
Requisites for claiming depreciation deductible are as follows:
(a) It must be charged off

(b) Must be deducted directly from the book value of the assets
(c) Must be reasonable allowance
(d) Property must be used or employed in business or trade or must be
determined if it is not being used.

The proper allowance for depreciation of any property used in trade or business,
or out of its not being used, is that sum which should be set aside for the taxable
year in accordance with a reasonable consistent plan whereby the aggregate of the
sums so set aside, plus salvage value, will, at the end of the useful life of the
property, suffice to provide an amount equal to the original cost. (Sec. 195, Rev. Regs.
No. 2)
Depreciation – a deduction from gross income for depreciation is allowed but

limits the recovery to the capital invested in the asset being depreciated. The law
does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a
deduction over and above such cost cannot be claimed and allowed. The reason is
that deductions from gross income are privileges not matters of right. They are not
created by implication but upon clear expression of the law. (Basilan Estates, Inc. vs.
Commissioner, G.R. No. L-22492, Sept. 5, 1967)
Goodwill, trademarks, formulas.
(1) Business and income producing property other than land, generally
depreciates or loses its usefulness and value with the passage of time. A deduction
for such depreciation is allowed in computing taxable income. As such, your opinion
that the assigned cost on the plant as determined at the time of purchase can be
depreciated for tax purposes is hereby confirmed.
(2) Goodwill, including trademarks, trade names, and trade brands, are not
such property as are subject to exhaustion. Accordingly, the value assigned on the
trademarks which is computed on the basis of future sales cannot be discounted to
its present value at the time of acquisition and cannot be amortized for tax purposes
over the average remaining lives of the different trademarks purchased.
(3) Right to receive royalties over a given term is depreciable. Accordingly, your
opinion that discounted or present value at the time of acquisition and that it is
acceptable for tax purposes to amortize the said present values and royalties to be
paid on the basis of future sales may be discounted, to determine the present values
and may be paid at said price (i.e., the cash price as discounted) over the agreed
period (say 5 to 8 years) when royalties will have to be paid is hereby confirmed.
Moreover, said royalty payment is subject to the 20% final withholding tax.
(4) Formulas are not subject to annual depreciation. If, however, after
acquisition, a formula is found to be worthless, its cost may be deducted in full as a
loss for the year in which the formula is abandoned as being worthless. Accordingly,
the cost of the different formulas cannot be amortized over the (a) remaining life of
the trademarks purchased or (b) the expected period within which your client
proposes to continue manufacturing said products using the said formulas.
(5) Amounts paid for an agreement not to compete in a trade or business,
where the taxpayer can prove the existence of such an agreement, are capital
expenditures and subject to allowances for depreciation ratably spread over the
period mentioned in the agreement but only where the elimination of competition is
for a definite and limited term may the cost be exhausted over such a term.
Accordingly, your opinion that the value agreed between your client and seller may
not compete in the same line of business that was sold to your client is hereby
confirmed.

(6) Goodwill is not such property as is subject to exhaustion. Accordingly, your
opinion that any amount of goodwill paid for by your client may not be deducted for
tax purposes unless the same business or the assets related to the said goodwill is
sold by your clo9ent is hereby confirmed. (BIR Ruling No. 88-206)
Patents, copyrights, etc. – Intangibles, the use of which in the trade or business is
definitely limited in duration, may be the subject of a depreciation allowance.
Examples are patents, copyrights and franchises. Intangibles, the use of which in the
business or trade is not so limited, will not usually be a proper subject of such an
allowance. If, however, an intangible asset acquired through capital outlay is known
from experience to be of value in the business for only a limited period, the length of
which can be estimated from experience with reasonable certainty, such intangible
asset may be the subject of a depreciation allowance provided the facts are fully
shown in the return or prior thereto the satisfaction of the Commissioner of Internal
Revenue. (Sec. 107, Income Tax Regulations)
Such being the case, the value assigned on the trademarks which is computed
on the basis of future sales can be discounted to its present value at the time of
acquisition and can be amortized for tax purposes over the average remaining lives
of the different trademarks purchased. Moreover, the cost of the different formulae
can be amortized over the (a) remaining life of the trademarks purchased or (b) the
expected period within which your client proposes to continue manufacturing said
products using the said formulae.
- Methods
Cost – Salvage Value
1. Straightline method - Life (years)
2. Declining balance method

3. Sum of the years digit method. Read very well par. 4 (petroleum
operations) and par. 6.
6. Depletion
- it is the cost or value of the exhaustion of natural resources,
such as mines and oil and gas wells, as a result of severance of
production. Only persons having an economic interest in a
mineral land or oil gas wells are entitled to a depletion allowance
(which should not be more than the capital invested). To acquire
an economic interest, the taxpayer must have a capital
investment in the property and not a mere economic advantage.
7. Charitable and Other Contributions (par. H)

Two kinds
1) Deductible in Full (see par 2(a), (b), (c), and (d)
2) Deductible subject to limitation on the following:
1. Public purpose
2. Religious, charitable, scientific, youth, sports development,
cultural or educational purposes

Individual donor – not in excess of 10% of taxable income without
including the charitable contribution as a deduction, whichever is
lower with the original contribution.
Corporate donor – the same rule above except the rate is 5%
In both cases (full or with limitation) the contribution is given to a juridical

person.
8. Research and Development – self-explanatory (read)
9. Pension Trust
Requisites:
1. Employer contributes for the pension trust for the payment of
reasonable pension for employees. The contribution is a deductible
business expense.
10. Optional Standard Deduction (OSD)
- in lieu of the business deductions that required receipts
- OSD can be availed by individuals subject to tax under Sec. 24 but
does not include non-resident alien doing business in the
Philippines
- a corporation taxable under Sec. 27 (A) (Domestic Corporation) and
Sec. 28 (A-1) (Resident Foreign Corporation) is allowed to avail
OSD.
- election of OSD is irrevocable for the taxable year for which the
return was made
- deduction rate is 40% of Gross Income/Gross Sales/Gross Receipt
- there is no need to support the deduction with receipts
- a source of tax avoidance
- Financial statements not required to be allowed to tax return if OSD
claimant is Individual.
- That a general professional partnership and the partners comprising
such partnership may avail of the optional standard deduction only
once, either by the general professional partnership or the partners
comprising the partnership
Read: RR 8-2018, (p. 154, Dascil)
- If the taxpayer failed to elect the kind of deduction in his income tax return,
he shall be considered as having availed himself of the itemized deduction.
Deduction elected for one taxable year is irrevocable for that year. If the taxpayer
elected both deductions in one taxable year, the optional standard deduction will be
disregarded. It must be emphasized that for one taxable year, a taxpayer must elect
only one kind of deduction.
- COHAN RULE. A common law rule whereby taxpayers, when unable to

produce records of actual expenditures, may rely on reasonable estimates provided
there is some factual basis for it. COHAN RULE is not applicable in the Philippines.

Section 36. - Items not deductible. Explanation.
1. Personal, living, or family expenses (not related to business)

2. Capital expenditures absorb by depreciation
3. Extraordinary repairs. To be deducted through depreciation. The cost of repair
added to the value of the property to be depreciated.
4. Not allowed if the taxpayer (employer) is the beneficiary of the life insurance.
If the beneficiary is the employee or the heirs of the employee, the premium is
a deductible business expense.
Query: A lawyer, exercising his profession, paid premium for his own life insurance.
If he dies the proceeds will go to his estate. Premium is deductible? How
about if the beneficiary is his GF and he is married?
5. Not allowed in order to avoid evasion and collusion. The prohibition is on

losses. It includes also interests on loans and other deductions, e.g. bad
debts. See notes on interest expenses.
Why? (Sec. 36B)

1. Between members of the family. Take note of the degree of relationship
being covered.
No. 2-6 -- considered one (1) personality in the eyes of the law.
Section 38 – Losses from Wash Sales (WS)
- WS is a taxpayer scheme to recognize a deductible loss in his tax return by

selling shares at a loss when the shares sold are substantially identical stock
or securities of that which were purchased or acquired beginning 30 days
before the date of sale and ending 30 days after the sale.
- wash sales losses are not deductible from gains derived from wash sales
transactions
- this rule applies only to securities (e.g., bonds) which are capital assets. Not
on the stocks because of the capital gains on sale of stocks rule on taxation.
- wash sales gains are to be reported and recognized as income
- this rule of nondeduction does not apply if the dealer’s transaction of stocks
and securities is made in the ordinary course of business.
- loss of WS is disallowed to prevent the taxpayer from manipulating a
“pretended” or “engineered” loss purely to establish a tax deduction
- WS gains are taxable under schedular rates (individual) and regular corporate
tax (corporation).
Income Tax vs. CGT
Section 39 – Taxation of Capital Gains and Losses on Capital Assets

- the rules do not apply to sale of capital assets (real property) of an
individual and sale of capital assets (land or buildings) of corporations,
which are subject to Final Taxes. This rule will not also apply to capital

gains on sale of shares of stocks, because subject also to final taxes (5%
or 10% rates).
- if the capital gain/net capital gain arise the applicable tax rates would be
schedular rates (individual) and the regular corporate tax (corporation)
- memorize the following:

1. Ordinary Assets (four groups)
a. Stock in Trade and Inventories for sale in the regular conduct of
business.
b. Properties primarily held for sale in trade or business.
c. Property used in trade or business subject to depreciation.
d. Real property used in business.
2. Net Capital Gain (NCG)
3. Net Capital Loss (NCL)
4. Net Capital Loss Carry Over (NCLCO)
- Rules Individual Corporation

1. A capital loss is only deductible Applicable Applicable
from a capital gain
2. Percentage of gain or loss to
be recognized
- 100% Gain/Loss recognition if
held not more than 12 months
- 50% Gain/Loss recognition if
Held more than 12 months -do- Not Applicable
Holding Period Rule
3. Net Capital Loss Carry Over -do- -do-
- Difference
NOLCO NCLCO
- losses from business operation - arise from capital assets
transaction [Sec. 39(D)]
- has a carry over of 3 years - to be carried over only
once,
following the year of such loss following the year the
NCLCO
Ex. Business operating losses in 2010 was sustained.
Can be carried over to 2011, 2012, and
2013. Ex. Net capital loss in 2010
can be deducted from the
- Sec. 34 (D-3) NOLCO net capital gain in 2011. If
after the deduction there is
still a balance of the 2010
net capital loss, it can no
longer be carried over to
2012.
- the entire Net operating loss - subject to limitation. What
can

can be carried over be carried over is not more
than the ordinary net
income of that year the net
capital loss was sustained
(2010) or the actual net
capital loss, whichever is
lower, that can be carried
over to the following taxable
year and will be a deduction
from the net capital gains of
that year it was carried over
(2011)
- applies to corporate and - applies only to individual
individual
READ: Calasanz vs. CIR, 144 SCRA 664

Section 39 (F) – Gains and Losses from Short Sales
- Short Sales (SS) is the taxpayer’s advanced sale of shares of stocks to
another person even before the seller actually owns the said shares. A SS
can be at the same time a WS (Wash Sales) whenever the selling and the
subsequent buying (to meet the commitment to sell) happens within the 30
day period rule of WS.
- Any loss from SS is deductible from the gain of SS except it is a WS. (Not
applicable under the present tax laws)
- SS a typical capital asset transaction in the stock market.
- Short Sale – For income tax purposes, a short sale is not deemed to be
consummated until the delivery of property to cover the short sale. If the
short sale is made through a broker and the broker borrows property to
make delivery, the short sale is not deemed to be consummated until the
obligation of the seller created by the short sale is finally discharged by
delivery of the property to the broker to replace the property borrowed by
such broker.
Section 40.
(A) Query: How is the gain or loss computed?
What includes the amount of gain or loss to be realized?
(B) What are the basis?
(C) - No gain or loss to be recognized if it’s a merger or consolidation.
Merger/Consolidation are forms of business combinations for
corporations (corporations as defined by the Corporation Code)
Merger - two corporations combined and one of the name survived.
Consolidation - two corporations combined and a new name emerged.
Forms of exchange which are exceptions (par. c(2), Sec. 40)
a. Property vs. Stock
b. Stock vs. Stock

c. Securities (bonds or debentures) vs. Stocks/Securities
Reason : They became one entity after the combination.
(3) Exchanges not solely in kind (Income Recognition)
- Exchanges where it not only involves property (stocks/securities) but
also cash and/or properties (which are not stocks/securities), the gains
will be recognized but not the losses. The gain to be recognized is in
an amount not in excess of the cash and the FMV of such properties
(e.g., tangible properties, lands or buildings)
Memorize the terms in par. 6 (Definitions)
Source Rules – Section 42
Situs of Taxation
Under the tax code, only resident citizens and domestic corporations are taxed
from income whose geographical sources is worldwide. It is important to determine
whether such income is realized in the Philippines or abroad.
 Section 42 is NOT relevant to domestic corporations and resident citizens
because they are taxed worldwide. This section comes into play when it
comes to determination of geographical sources of income of taxpayers who
are only taxed on income sourced within the Philippines.
 The following are treated as gross income from sources within the
Philippines (Read Secs. 152-165, Revenue Regulations No. [“R.R.”] 2-1940)
1. Interests – including interests on bonds, notes and other interest bearing
obligations:
a. The loan was used here in the Philippines, or
b. The debtor is in the Philippines
2. Dividends –
a. From a domestic corporation; and
b. A foreign corporation, unless less than 50% of the gross income of
the foreign corporation was derived from the Philippines for the three-
year period (the amount will be based on the same ratio to dividends
as the gross income for such period derived from sources within
Philippines to its gross income from all sources.)
i. For example, We make kaijus, Inc., a Japanese corporation,
derives more than 50% of its gross income in the Philippines from
the sale of kaiju action figures for the past three years. If it
declares dividends to a non-resident Filipino, the dividend income
will be considered sourced within the Philippines.
3. Services – compensation for labor or personal services performed in the
Philippines.
4. Rentals and Royalties – from property located in the Philippines or from any
interest in such property for:
a. The use of any copyright, patent, design or model, plan, secret
formula or process, goodwill, trademark, trade brand or other similar
stuff
b. The use of any industrial, commercial or scientific equipment

c. The supply of scientific, technical, industrial or commercial knowledge
or info
d. The supply of services by a non-resident person in connection with
those of property or rights, or the installation or operation of any
brand, machinery, or other apparatus purchased form such non-
resident person
e. Technical advice, assistance or services rendered in connection with
technical management of any scientific, industrial or commercial
undertaking
f. The use of motion picture films, films for TV, tapes for radio broadcast
5. Sale of real property – the gains, profits and income from sale of real
property located in the Philippines.
6. Sale of personal property – gains, profits and income from sale of personal
property, determined by subsection (E).
 The place of the signing of a contract is NEVER an issue or a factor for

determining the source of income.
 Do not forget the “turnkey contract” case of CIR v. Marubeni (G.R. No. 137377,
December 18, 2001), when it comes to situs problems.
 Expenses of a multinational corporation directly allocated or identified with the
operations of the Philippine branch. So, the company can claim as its deductible
share a ratable part of such expenses based upon the ratio of the local branch’s
gross income to the total gross income, worldwide, of the multinational
corporation. (CIR v. CTA and Smith Kline & French Overseas Co., G.R. No. L-
54108, January 17, 1984)
 The source of income is the property, activity, or service that produced the
income.
o It is the place of activity creating the income which is controlling, and not the
place of business or residence of a corporation.
 Hence, reinsurance premiums ceded to foreign reinsurers are considered
income from Philippine sources. (Howden & Co., Ltd. V. CIR, G.R. No. L-
19392, April 14, 1965)
 Also, the sale of airline tickets through a general sales agent in the
Philippines is considered income from Philippine sources, even if the
tickets pertain to an airline company which does not maintain any flights
to and from the Philippines. (CIR v. British Overseas Airways Corporation,
G.R. No. L-65773, April 30, 1987, wherein the Court considered the sale
of the tickets as the source of income, and not the activity of actually
transporting passengers)
 When the sale is consummated within the Philippines (as in the title to the
property was transferred in the country), the situs of the sale is in the
Philippines and is therefore taxable here. (A. Soriano Y Cia v. CIR, G.R.
No. L-5896, August 31, 1955)
Income Test of Source of Income

Interest income Residence of DEBTOR
Dividend Income: Income within
1) From domestic corporation Income within, if 50% or more of the

gross income of the foreign company (for

2) From foreign corporation the past 3 years) was derived from
sources within the Philippines
Income without, if less than 50% of the

gross income of the foreign company (for
the past 3 years) was derived from
Service Income Place of performance
Rent income Location of Property
Royalty income Place of use of intangible
Gain on sale of real property Location of property
Gain on sale of personal property Place of sale
Gain on sale of domestic shares of stock Income within
Gross income from sources outside (without) the Philippines.

1. Interests other than those derived from sources within
2. Dividends other than those derived from sources within
3. Compensation for labor or personal services performed outside the
Philippines
4. Rentals or royalties from property located outside the Philippines or any
interest in such property
5. Gains, profits, income from sale of real property located outside the
Philippines
Income from sources partly within and partly without the Philippines.
 For the gross income items allocated to sources partly within and partly
without the Philippines,
o There shall be deducted the expenses, losses and other deductions
properly apportioned, and
o A ratable part of other expenses, losses and deductions which cannot
properly be allocated to some item of gross income.
 If there is any remainder, it shall be included in full as taxable income from
Situs of sale of personal property

 Gains, profits and income derived from purchase of personal property within
and sold without, or from purchase without and sale within, are treated as
derived entirely form sources with the country in which it is SOLD.
Situs of sale of stocks in a domestic corporation

 Gains from sale of shares of stock in a domestic corporation are treated as
DERIVED ENTIRELY from sources within the Philippines regardless of where
the said shares are sold.
The source rules to determine whether income shall be treated as income

from within or outside the Philippines can be found in Section 42 of the 1997 Tax
Code. There are different source rules for different types of income. The following
incomes are considered as income from sources within the Philippines:
1. Interests: Residence of the debtor or obligor. – If the obligor or debtor
(corporation or otherwise) is a resident of the Philippines, the interest

income is treated as income from within the Philippines. It does not matter
whether the loan agreement is signed in the Philippines or abroad or the
loan proceeds will be used in a project inside or outside the country.
2. Dividends: Residence of the corporation paying dividend. – Dividends
received from a domestic corporation or from a foreign corporation are
treated as income from sources within the Philippines, unless less than
50% of the gross income of the foreign corporation for the three (3)-year
period preceding the declaration of such dividends was derived from
sources within the Philippines, in which case, only the amount which bears
the same ratio to such dividends as the gross sources within the
Philippines bears to its gross income from all sources shall be treated as
income from sources within the Philippines.
3. Services: Place of performance of the service. – If the service is
performed in the Philippines, the income is treated as from sources within
the Philippines.
Gross income from sources within the Philippines includes compensation for
labor or personal services performed within the Philippines, regardless of the
residence of the payor, of the place in which the contract for service was made, or of
the place of payment. If a specific amount is paid for labor or personal services
performed in the Philippines, such amount shall be included in the gross income. If
there is no accurate allocation or segregation of compensation for labor or personal
services performed in the Philippines, the amount to be included in the gross income
shall be determined on apportionment of time basis; i.e., there shall be included in
the gross income an amount which bears the same relation to the total
compensation as the number of days of performance of the labor or services within
the Philippines bears to the total number of days of performance of labor or services
for which the payment is made. Wages received for services rendered inside the
territorial limits of the Philippines and wages of an alien seaman earned on a
coastwise vessel are to be regarded as from source within the Philippines (Sec. 155,
Rev. Regs. No. 2).
A non-resident alien is taxed only on her commission income for

services rendered in the Philippines. – Baier-Nickel, a non-resident German, is
the President of Jubanitex, Inc., a domestic corporation engaged in manufacturing,
marketing, acquiring, importing and exporting and selling embroidered textile
products. Through its General Manager, the corporation engaged the services of
Baier-Nickel as commission agent, who will receive 10% sales commission on all
sales actually concluded and collected through her efforts. In 1995, Baier-Nickel
received commission income, which Jubanitex withheld 10% and remitted to the BIR.
Baier-Nickel filed her income tax return on October 17, 1997 and on April 14, 1998,
she filed a claim for refund, contending that her commission income is not taxable in
the Philippines because it was compensation for her services rendered in Germany.
Non-resident aliens, whether or not engaged in trade or business, are subject

to Philippine income tax on their income received from all sources with the
Philippines. The underlying theory is that the consideration for taxation is protection
of life and property and that the income rightly to be levied upon to defray the
burdens of the Government is that income which is created by activities and property
protected by the Government or obtained by persons enjoying that protection. The

important factor, therefore, which determines the source of income of personal
services is not the residence of the payor, or the place where the contract for service
is entered into, of the place of payment, but the place where the services were
actually rendered (Baier-Nickel v. Commissioner, G.R. No. 156305, February 17, 2003).
In this case, however, the appointment letter of Baier-Nickel, as agent of
Jubanitex, stipulated that the activity or the service which would entitle her to 10%
commission income, are sales actually concluded and collected through her efforts.
What she presented as evidence to prove that she performed income-producing
activities abroad were copies of documents she allegedly faxed to Jubanitex and
bearing instructions as to the sizes of, or designs and fabrics to be used in the
finished products as well as samples of sales orders purportedly relayed to her by
clients. However, these documents do not show whether the instructions or orders
faxed ripened into concluded or collected sales in Germany. At the very least, these
pieces of evidence show that while Baier-Nickel was in Germany, she sent
instructions/orders to Jubanitex. Thus, claim for refund was denied (Commissioner v.
Baier-Nickel, G.R. No. 153793, August 29, 2006).
Income from turnkey contract with onshore and offshore portions. – While
the construction and installation work were completed within the Philippines, the
evidence is clear that some pieces of equipment and suppliers were completely
designed and engineered in Japan. The two (2) sets of ship unloader and loader, the
boats and the mobile equipment for the NDC project and the ammonia storage tanks
and refrigeration units were made and completed in Japan. They were already finished
products when shipped to the Philippines. The other construction supplies listed under
the Offshore Portion such as steel sheets, pipes and structures, electrical and
instrument apparatus, were not finished products when shipped to the Philippines.
They, however, were likewise fabricated and manufactured by the sub-contractors in
Japan. All services for the design, fabrication, engineering and manufacture of the
materials and equipment under Japanese Portion Yen I were made and completed in
Japan. These services were rendered outside the taxing jurisdiction of the Philippines
and are therefore not subject to tax on the part of a foreign corporation (Commissioner
v. Marubeni Corporation, G.R. No. 137377, December 18, 2011).
TURNKEY CONTRACT – a contract in which a company is given full responsibility
to plan and build something that the client must be able to use as soon as it is
finished without needing to do any further work on it themselves.
A tax sparing credit is a credit granted by the residence country for foreign
taxes that for some reasons were not actually paid to the source country but that
would have been paid under the country’s normal tax rules. The usual reason for the
tax not being paid is that the source country has provided a tax holiday or other tax
incentive to foreign investors as an encouragement to invest or conduct business in
the country. In the absence of tax sparing, the actual beneficiary of a tax incentive
provided by a source country rather than the foreign investment may be the
residence country rather than the foreign investor. This result occur whenever the
reduction in source-country tax is replaced by an increase in residence-country tax.
In the leading case of Commissioner v. Procter & Gamble PMC (160 SCRA
560), the court ruled that the preferential 15% tax on dividend paid to a non-resident
foreign corporation is inapplicable because of the failure of the claimant to show the
actual amount credited by the U.S. government, to present the U.S. income tax
returns of PGMC-USA, and to submit a duly authenticated document evidencing the

tax credit of the 20% differential. Upon motion for reconsideration, the Supreme
Court in an en banc resolution reversed the earlier decision of the court. It
pronounced that the 15% preferential tax rate was applicable to the case at bar,
because it was established that the Philippine Tax Code only requires that the U.S.
shall “allow” Procter & Gamble USA “deemed paid” the tax credit equivalent to 20%.
Clearly, the “deemed paid” which must be allowed by U.S. law to P&G USA is the
same “deemed paid” tax credit that Philippine law allows to a Philippine corporation
with a wholly-or-majority-owned subsidiary in the U.S. The “deemed paid” tax credit
allowed in Section 902, U.S. Tax Code, is no more a credit for “phantom taxes” than
is the “deemed paid” tax credit granted in Section 30(C)(8) (now Sec. 28[B][5][b],
NIRC). The legal question should be distinguished from questions of administrative
implementation arising after the legal question has been answered. (Commissioner v.
Procter & Gamble PMC, 204 SCRA 377)
The fact that Switzerland does not impose any tax on the dividends received
from a domestic corporation should be considered as full satisfaction of the condition
that the 20% differential is deemed credited by the Swiss government (as against the
Commissioner’s contention that the tax-sparing credit should apply only if the foreign
country allows a foreign tax credit). The court observed that to deny private
respondent the privilege to withhold only 15% provided for under P.D. 369 would run
counter to the very spirit and intent of said law and definitely will adversely affect
foreign corporations’ interest and discourage them from investing capital in our
country (Commissioner v. Wander Philippines, 160 SCRA 573).
What are disguised dividends in income taxation? Give an example.
Disguised dividends are those income payments made by a domestic

corporation, which is a subsidiary of a non-resident foreign corporation, to the latter
ostensibly for services rendered by the latter to the former, but which payments are
disproportionately larger than the actual value of the services rendered. In such
case, the amount over and above the true value of the service rendered shall be
treated as a dividend, and shall be subjected to the corresponding tax of 35% on the
Philippine sourced gross income, or such other preferential rate as may be provided
under a corresponding Tax Treaty.
Example: Royalty payments under a corresponding licensing agreement.
(A) Gross Income (GI) from sources within the Philippines.

- this provision enumerates certain kinds of income that would be
considered derived within the Philippines.
Example:
1. X is an American residing in Canada but he has bank deposits in the
Philippines. His interest income from the bank deposits will be
considered derived within the Philippines. – this is an application of the
territoriality rule as source of income.
2. Supposing X is also a stockholder of SMC. The dividend he will receive

is also taxable in the Philippines.

3. If the dividend is from a FC Corporation (doing business in the
Philippines)
(1) General rule: considered derived within the Philippines;
(2) Pro-rata rule: if less that 50% of the FC gross income was derived
in the Philippines for the three (3) year period preceding the
declaration of the dividend.
Example: In the 2010 FC declared dividend. The accumulated gross

income FC derived in the Philippines for the years 2007, 2008 and
2009 was P1 Million. FC total gross income (2007, 2008 and 2009)
within and without the Philippines was P3 Million. The dividend
declared would be prorated to get the portion taxable within the Phils.
Thus:
₱1 million
Dividend declared x ₱3 million
b. Services – read par. 3
c. Rentals and Royalties – read par. 4

.
d. Sale of Real Property – read par. 5
e. Sale of Personal Property (PP)

- PP is bought within the Phil., then sold outside the Phil. OR PP is bought
outside of the Phil. then sold within the Phil. = Gains or profits derived
will be considered DERIVED within the Phil.
- Gain from the sale of SS of a domestic corporation always treated

derived within the Phil. even if it is sold outside the Phil.
Rationale : Protection/benefit rule.
f. Taxable Income within the Philippines

General Rule: The deductions/business expenses must be
connected/related to the income derived within the Philippines.
Hence, Gross Income within the Philippines (trade, business or profession) shall
only be deducted by expenses incurred within the Philippines. Application of the
connected/related rule on expenses.
Except : Interest paid on loans abroad, the proceeds of the loans is actually
used in connection with the conduct or operation of the business in the
Philippines.
(B) GI from sources without the Philippines.

- self-explanatory (par. C of Sec. 42)
- Taxable income means GI without the Philippines less expenses
without the Philippines.
(C) Sources Partly within and Partly without the Philippines

- Allocation rule will apply on gross income and expenses.

GI Partly within
Example: GI partly within and without x GI within and without
- same computation for expenses
Section 43 – 50. - Accounting Periods and Methods of Accounting
- Method and Accounting Period (Fiscal or Calendar) as basis of computing

taxable income and the method of accounting, it is the taxpayer who will
choose. If no period or method is used or the method used do not clearly
reflect the income, the CIR will compute using the method in the opinion of the
CIR clearly reflects the income.
- No uniform method of accounting can be prescribed for all taxpayers.
METHODS OF ACCOUNTING – There are two main methods generally

followed by taxpayers. They are (a) the cash method, and (b) the accrual method.
“Cash method” is nearly used by individuals. All items of taxable income

whether cash, property, or services actually or constructively received are
classed as receipts. Only amounts actually paid for deductible expenses are
classed as disbursements. Business expenses must be paid within the taxable
year. There is no such thing as constructive payment.
CASH METHOD in Accounting is different from CASH METHOD for Taxation.

Under the cash method for taxation purposes, there is constructive receipt of
income to be reported but no constructive payment of expenses to be reported.
“Accrual method” is used mostly by business concerns. Under this system,

net income is measured, in a broad sense, by the excess of income over
expenditures. Cash, property, or services earned during the taxable year, though
not received have accrued to the taxpayer, and are classed as income. In the
same way, expenses incurred during the taxable year are usually deductible even
if they are not received during that year.
All events test means all events fixing an accrued method, taxpayer’s right to receive
income, or incur expenses must occur before the taxpayer can report an item of
income or expense. (CIR vs. Isabela Cultural Corp., G.R. No. 172231, February 12, 2007)
All events test (deductions) is met:

1. All events have occurred that fix the fact of liability
2. The liability can be determined with reasonable accuracy.
- Computation of Business deductions based on accrual method
TAXABLE PERIOD – the rule is that the taxable period of a taxpayer covers a
period of 12 months (either Calendar year of Fiscal year). The exceptions are as
follows:
(a) In case of dissolution of a corporation.

(b) In case of change of accounting period.
(c) In case of corporation newly established.
(d) Final return of decedent.
(e) Return for the decedent’s estate.
(f) In case the Commissioner of Internal Revenue terminates the tax period of
a taxpayer.
Other accounting methods. –
(a) “Percentage of completion basis” is a method available in the case of

building, installation or construction contracts covering a period in excess of one
year, where there should be deducted from gross income all expenditures made
during the taxable year on account of the contract, account being taken of the
materials and supplies on hand at the beginning and end of the taxable period for
use in connection with the work done under the contract but not yet so applied.
(b) “Completion of contract basis” is a method available to contractors for

building, installation or construction covering a period more than one year where
income is reported in case the contract is finally completed and accepted.
(c) “Crop year basis” is a method where a farmer engaged in producing crops
which take more than a year from the time of planting to the process of gathering
and dispositions, the law allows expenses deducted to be determined upon such
basis and such deductions must be taken in the year in which the gross income from
the crop has been realized.
(d) “Installment plan or method” is a method which is available to sales by

dealers of personal property on the installment basis, where the returnable income in
the taxable year which the gross profit realized or to be realized when payment is
completed bears to the total contract price expressed in the following formula:
Gross profit times installments received divided by total contract price equals
returnable income.
The method applies also to sales of realty where the initial payment does not
exceed 25% of the selling price; if the initial payment of the selling price exceeds
25% thereof, then the income shall be reported in full.
This applies further to casual sales of personality (other than property includible
in the taxpayer’s inventory) for a price exceeding ₱1,000 and where the initial
payment does not exceed 25% of the selling price.
Methods of determining taxable income (Best Evidence Obtainable)

(a) Percentage method
(b) Net-worth method
(c) Excess cash expenditure method
(d) Bank deposits
(e) Benchmark Method
Requirements for use of net-worth method

(a) That the taxpayer’s books do not clearly reflect the income, or the taxpayer
has no books, or if he has books, he refuses to produce them.
(b) That there is evidence of a possible source or sources of income to account

for the increases in the networth or for expenditures.
(c) That there is a fixed starting point or opening networth, a date beginning
with the taxable year or prior to it at which the taxpayer’s financial condition
can be affirmatively established, with same definiteness; and
(d) That the circumstances are such that the method does clearly reflect the
taxpayer’s income with reasonable accuracy and certainty, and proper and
just additions of personal expenses and other non-deductible expenditures
were made, and correct, fair and equitable credit adjustments were given
by way of eliminating non-taxable items.
- Period for which deductions and credits taken = apply as “paid or incurred rule”
Section 51-59. – Returns and Payment of Taxes
Individuals
A. Required to file Income Tax Return
1. RC – within and without income
2. NRC – within income
3. RA – within income
4. NRA engaged in trade or business – within income
B. NOT REQUIRED
1. An individual whose taxable income does not exceed ₱250,000.00
under Section 24(A)(2)(a): Except, a citizen of the Philippines and
any alien individual engaged in business or practice of profession
within the Philippines shall file an income tax return, regardless of
the amount of gross income (₱250,000 or less than ₱250,000).
2. Pure compensation earners purely derived within the Philippines and
the income tax was correctly withheld. This rule of not filing ITR does
not apply if deriving compensation income concurrently from two (2)
employers within the taxable year.
SEC. 51-A. Substituted Filing of Income Tax Returns by

Employees Receiving Purely Compensation Income. – Individual
taxpayers receiving purely compensation income, regardless of
amount, from only one employer in the Philippines for the calendar
year, the income tax of which has been withheld correctly by the said
employer (tax due equals tax withheld) shall not be required to file
an annual income tax return. The certificate of withholding filed by
the respective employers, duly stamped “received” by the BIR, shall
be tantamount to the substituted filing of income tax returns by said
employees. (As Amended by Sec. 14 of RA 10963)
3. Those whose sole income is subject to the final withholding taxes.

4. Minimum wage earner (Sec. 22 [HH])

Questions:
1. How many copies of tax return will be filed?
2. Where to file the income tax returns?
3. When to file? (Sec. 51, par. C)
4. If both H and W are working, who will file? (Sec. 51, par. D)
5. If the child is a minor, but has income, who will file his return?
How about persons under disability?
NOTE: GPP are exempted from income tax. But will still file INFORMATION
RETURN. (For purposes of contributing the distributive share of the partners, the net
income of the partnership shall be computed in the same manner as a corporation.)
Sec. 74. - Annual Declaration and Quarterly Payments of Income tax for
Individual Taxpayers. (Applies only to those who are engage in trade, business
or exercise of their profession).
1. On or before May 15 of the following year for the taxable income of the
previous year.
2. On or before May 15 of the same taxable year for the estimated income of the
current year.
In general, except as otherwise provided by the law, every individual subject to

income tax under Sections 24 and 25 (A) of the National Internal Revenue Code who
is receiving self-employment income, whether it constitutes the sole source of his
income or in combination with salaries, wages and other fixed or determinable
income, shall make and file a declaration of estimated income for the current taxable
year on or before May 15 of the same taxable year.
3. Return and Payments of Individual’s Estimated Income tax.
FILING OF DECLARATIONS
AND PAYMENTS DATES
First At the time of declaration
Second August 15 of the current taxable year
Third November 15 of the current taxable year
Fourth May 15 of the following calendar year

When final adjusted income tax return
Is due for filing.
CORPORATE RETURNS
Section 52 (A) of the National Internal Revenue Code provides that every
corporation (includes taxable partnership) subject to the tax herein imposed, except
foreign corporations not engaged in trade or business in the Philippines, shall render,

in duplicate, a true and accurate quarterly income tax return and final or adjustment
return.
The return shall be filed by the president, vice president or other principal officers
and shall be sworn to by such officer and by the treasurer or assistant treasurer.
Taxable Year of Corporation
A corporation may employ either calendar year or fiscal year as a basis for filing
its annual income tax return.
A corporation shall not change the accounting period employed without prior
approval from the Commissioner in accordance with the prohibitions of Section 47 of
the Tax Code.
Rules in filing and payment of corporate income tax:
1. The corporate quarterly return shall be filed within sixty (60) days following the
close of each of the first three quarters of the taxable year. (three times)
Example:
Calendar Year – Jan., Feb., Mar. = File in the months of April and May
Fiscal Year – June, July, Aug. = file in the months of Sept. and Oct.
2. The income tax due on the corporate quarterly returns and the final adjusted
income tax returns computed in accordance with Section 75 and 76 shall be
paid at the time the declaration or return is filed. (Pay as you file system)
3. The final adjustment return shall be filed on or before the 15 th day of April, or
on before the 15th day of the fourth month following the close of the fiscal
year, as the case may be.
Note : Corporate Returns are filed four (4) times a year. Three quarterly and one
final adjustment return
CORPORATE QUARTERLY TAX
To ease the burden of paying taxes for a lump-sum amount, income tax expense
of a corporation may be paid in an aggregate quarterly periodic payment.
Rules:
1. A corporation files a quarterly income tax return within 60 days after the end
of each first three quarters of the taxable year.
2. A final income tax return covering the total taxable income of the taxable year
should be filed on or before April 15 of the following year. The amount of total
income tax computed thereof shall be reduced by income taxes paid during
the first three quarters of the taxable year.
3. The amount of tax previously paid for the preceding quarters should reduce
the amount of tax computed on the cumulative taxable income.

4. If the total quarterly tax paid during the taxable year is more than the tax due
on the final return the corporation may claim tax credit carry over or refunded
with the excess amount.
Section 76. Concept of Final Adjustment Return. (see p. 31 of this material)

- If Corporate quarterly payments is not equal or more than of tax due, the
Corporation shall either:
A. Pay the balance of tax still due; or
B. Carry over the excess credit; or
C. Be credited or refunded with the excess amount paid, as the case may
be.
Section 57 to 59. – Withholding Taxes
Withholding of taxes is a systematic way of collecting taxes at source. It is an

indispensable method for collecting taxes in order that the government can obtain
adequate revenue. The withholding tax agent who is usually an employer or a
person from whom the income is derived does this process through withholding the
appropriate amount of taxes from taxpayers. It is designed to ensure the collection at
source of income taxes.
If withholding tax is not withheld from income payments, there will be a

disallowance of deductible business expenses claimed by the withholding agent in
this income tax return or a penalty shall be imposed on withholding tax agent for
failure to withhold the tax.
Withholding Tax at Source
A taxation at source is that part of tax system which collects through withholding
agents or employers the appropriate income taxes due as they are earned and
before earnings are paid to the employees.
The income paid to the employees is the net amount after deducting the taxes
withheld which is based on the taxable income after adjustments with respect to
personal, additional exemptions and or other adjustments allowed by the law, if any.
The primary objective of the system is to ensure accurate payment of taxes and
to be able to use taxes collected at an earlier time to finance the operations and
projects of the government.
Classification of Withholding Tax at Source
Withholding tax may be classified into two categories such as

1) Final Withholding Tax, and
2) Creditable Withholding Tax
Final Withholding Tax (FWT)
Under the final withholding tax system the amount of income tax withheld by the
withholding agent is constituted as a full and final payment of the income tax due
from the payee on the said income. The liability for the payment of the tax rests

primarily on the payor as a withholding agent. Thus, in case of failure to withhold or
in case of under withholding, the deficiency tax shall be collected from the
payor/withholding agent. The payee is not required to file an income tax return for
the particular income, the final tax on which has been withheld.
The finality of the withholding tax is limited only to the payee or recipient’s income
tax liability on the particular income. It does not extend to the payee’s other tax
liability on said income, such as when the said income is further subject to a
percentage tax.
Creditable Withholding Tax (CWT)
Under the creditable withholding tax system, taxes withheld on certain payments
are intended to equal or at least approximate the tax due of the payee on said
income. The income recipient is still required to file his income tax return as
prescribed in the Section 51 of the NIRC, either to report the income and/or pay the
difference between the tax withheld and the tax due on the income. A tax withheld in
income payments covering the expanded withholding tax from compensation income
is creditable in nature.
Difference between FWT and CWT

- in FWT no more tax liability if properly withheld. In CWT it may or may not
result to a balance of tax liability.
Taxes withheld on compensation is an example of CWT.
Section 60 to 66. - Estates and Trusts
TAX ON INCOME OF ESTATE (Individual Rules Apply)
The estate is composed of all properties, rights and obligations including those
properties, earnings or obligations that have accrued thereto since the opening of the
succession. The estate is to be transferred from the decedent to his successors.
During the period when the title to the properties is not yet finally transferred to
the successors, there may be earnings generated from the estate. These earning are
subject to income tax.
Estates’ or Trusts Taxable Income and Tax
For taxation purposes, the taxable income of the estate/trust shall be determined
in the same manner and basis as in the case of individual taxpayers. The items
composing the taxable income and tax of the income from estates/trusts are as
follows:
Treated as Individual Taxpayers
1. Gross Income
The items of gross income of the estate are the same items with the items
of gross income of individual taxpayers.
2. Deduction

Deductions from the gross income of the estates/trusts are the same with
the items of deduction allowed to individual taxpayer.
3. Tax Rate
- The tax rate applicable is the tax rate prescribed for individual taxpayers.
- Sec. 60, par. C. – Computation and Payment. In general – the tax shall
be computed upon the taxable income of the estate or trust and shall be
paid by the fiduciary, except as provided in Sec. 63 (relating to revocable
trusts) and Sec. 64 (relating to income for the benefit of the grantor).
TAX ON INCOME OF TRUSTS (Individual Rules Apply)
A trust is an obligation imposed or a right to administer over a property given to a

person for a benefit of another.
This is a legal institution used to administer funds in behalf of individuals or

organizations. Trust device is used frequently to transfer property from one
generation to another.
Illustration.
Suppose Juan wants his wife to have the income from his estate as long as she
lives. Juan may place his property in a trust, the income of which would go to his wife
for life; the trust might be dissolved at her death and the property distributed to the
children. The trust is assigned to be administered by Attorney Nilo, a trustee.
Under this arrangement, the trustee is required by law to manage the trust strictly
in accordance with the terms of the trust instrument.
When a trust is created, a new entity comes into being, for which returns must be
filed and taxes paid.
Income accumulated in trust and/or to be distributed to beneficiary are subject to
income tax.
A trust created by a written instrument other than a will is known as a “trust inter-
vivos,” if created by will is known as a “testamentary trust.”
Income Derived from Trusts.
Tax imposed upon individual taxpayers shall apply to the income of any property
held in trust, including:
1. Income accumulated in trust for the benefit of unborn or unascertained

person/s with contingent interests, and income accumulated or held for future
distribution under the terms of the will or trust;
2. Income that is to be distributed currently by the fiduciary to the beneficiaries,

and income collected by a guardian of an infant that is to be held or
distributed as the court may direct; and

3. Income that, in the discretion of the fiduciary, may be either distributed to the
beneficiaries or accumulated.
The trust, or the beneficiaries or the grantor may pay the tax on income derived
from trusts.
Computation of Trust’s Income Tax
The computation of the net taxable income of trust shall be in the same manner
with the net taxable income of estate. The net taxable income shall be taxed by
using the scheduler tax of an individual taxpayer based on Sec. 24 A of the Tax
Code.
Two or More Trusts
In the case of two or more trusts created by the same person, for the same
beneficiary, the taxable income of all trusts shall be consolidated and the tax shall be
computed based on the consolidated income.
The proportionate amount of the tax computed based on the consolidated income
shall be assessed and collected from each trustee which should be equal to the
proportion of the taxable income of the trust administered by the trustee to the
consolidated income of the several trusts.
REVOCABLE TRUSTS
Generally, revocable trusts exist when the trustor (grantor) reserves the power to
change at any time any part of the terms of the trust. For tax purposes, the rule is
that the grantor is liable for the income of a revocable trust (because the revocable
trust by itself is not subject to income tax except if the trust is irrevocable (because
irrevocable trust is subject to income tax, so that the grantor is already exempted
from income tax on the income derived from the irrevocable trust).
Illustration:
Mrs. Caduda Duda created a trust naming his eldest son as revocable beneficiary
who will receive the income of the trust. If the eldest son could not abide with the
rules provided in the trust instrument, Mrs. Duda could change outright the terms of
the trust. For the year, the trust earned a total income of ₱200,000. How much would
be the taxable income of the trust?
There is no taxable income of the trust because it is a revocable trust. The

income should be reported as taxable income of the grantor, Mrs. Caduda Duda.
“Trusts”, explained. – These are taxable entities created by will or trust deeds
where the transfer of property to such trusts is irrevocable and the income of which is
to be accumulated for designated beneficiaries other than the grantor.
Estates and trusts are subject to the rates of income tax applicable to individuals.
Income of estate or trust includes the following:

(a) Income accumulated in trust for the benefit of unborn or unascertained
person or persons with contingent interests, and income accumulated or held
for future distribution under the terms of the will or trust.
(b) Income which is to be distributed currently by the fiduciary to the

beneficiaries, and income collected by a guardian of an infant which is to be
held or distributed as the court may direct.
(c) Income received by estates of deceased persons during the period of

administration or settlement of the estate; and
(d) Income which, in the discretion of the fiduciary, may be either distributed to
the beneficiaries or accumulated.
Trusts not subject to tax. –
(a) Revocable trusts the income of which is held or distributed for the benefit of
the grantor
(b) Employee’s pension trusts.
The taxable income of the estate or trust shall be computed in the same manner
and on the same basis as in the case of an individual. However, when it comes to
allowable deductions, the guidelines in Section 61 of the Tax Code, should be
followed.
Income for the benefit of grantor. – Where any part of the income of a trust –
(a) is, or in the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income may be held or
accumulated for future distribution to the grantor;
(b) may, in the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income, be distributed
to the grantor;
(c) is, or in the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income may be, applied
to the payment of premiums upon policies of insurance on the life of the
grantor; such part of the income of the trust shall be included in computing
the net income of the grantor.
Requisites for exemption of employee’s pension trust. –
(a) The employee’s trust must be part of a pension, stock bonus or profit-sharing
plan of an employer for the benefit of some or all of his employees;
(b) Contributions are made to the trust by such employer, such employees, or
both;
(c) Such contributions are made for the purpose of distributing to such
employees both the earning and principal of the fund accumulated by the
trust;

(d) The fund is accumulated by the trust in accordance with the plan of which the
trust is a part;
(e) The trust instrument makes it impossible for any part of the trust corpus or
income to be used for, or diverted to, purposes other than for the exclusive
benefit of such employees.
It may be noted that under Republic Act No. 4917, retirement benefits received
by officials and employees of private firms under a reasonable private benefit plan
maintained by the employer are exempt from all taxes.
Section 78 to 83. – Withholding on Wages
INCOME TAX COLLECTED AT SOURCE ON COMPENSATION INCOME
Basic Rules on Withholding Taxes
As a general rule, all salaries earned by persons as government or non-

government employees are subject to withholding tax, except of the following items:
1. Commissions paid by an insurance agent to his sub-agents.

2. Compensation for services by a citizen or resident of the Philippines for a
foreign government or an international organization.
3. Remuneration for causal labor not in the course of employer’s trade or
business.
4. Remuneration for private service performed by maids, cooks, gardeners,
family drivers and the like.
5. Remuneration paid to agricultural labor and paid entirely in products of the
farm.
Requirement of Withholding Tax Due
Every employer must withhold taxes from compensation paid arising from
employer employee relationship. However, no withholding of tax shall be required
where the total compensation income of an individual does not exceed the statutory
minimum wage of ₱5,000.00 monthly or ₱60,000.00 a year, whichever is higher.
It is to be noted that employees whose total annual compensation does not

exceed ₱60,000.00 in a year shall be given two options with which to pay his income
tax due as follows:
1. His compensation shall be subjected to withholding tax, but he shall not be
required to file the income tax return, or
2. His compensation income shall not be subject to a withholding tax but he
shall file his annual income tax return and pay the tax due thereon, annually.
Where the employee has opted to have his compensation income subjected to
withholding so as to be relieved of the obligation of filing an annual income tax return
and paying his tax due on a lump sum basis, he shall execute a waiver in a
prescribed BIR form of his exemption form withholding which shall constitute the
authority for the employer to apply the withholding tax table provided under these
Regulations.

The employee who opts to file the Income Tax Return shall file the same not later
than April 15 of the year immediately following the taxable year.
Cumulative Average Method
This method is used if the compensation of a particular employee is exempt from

withholding because the amount thereof is below the compensation level, but
supplementary compensation is paid during the year; or the supplementary
compensation is equal to or more than the regular compensation to be paid; or the
employee was newly hired and had a previous employer(s) within the calendar year,
other than the present employer doing this cumulative computation, the present
employer shall determine the tax to be deducted and withheld in accordance with the
cumulative average method.
The cumulative average method, once applicable to a particular employee at any

time during the calendar year shall be the same method to be consistently used for
the remaining payroll periods of the same calendar year.
Annualized Withholding Tax Method
This method is used when an employer – employee relationship is terminated

before the end of the calendar year and when computing for the year-end adjustment
the employer shall determine the amount to be withheld from the compensation on
the last month of employment or in December of the current calendar year in
accordance with the following procedures.
PERSONS REQUIRED TO DEDUCT AND WITHHOLD
Section 2.57.3 enumerated the following persons who are hereby constituted as
withholding agents for purposes of the creditable taxes that are required to be
withheld in income payments enumerated in Section 2.57.2:
1. In general, any juridical person, whether or not engaged in business or trade;
2. An individual, with respect to payments made in connection with his trade or
business. However, insofar as taxable sale, exchange or transfer of real
property is concerned, individual buyers who are not engaged in trade or
business are also constituted as withholding agents;
3. All government offices including government-owned or controlled
corporations, as well as provincial, city and municipal governments.
Time of Withholding
The obligation of the payor to deduct and withhold the tax under Section 25.7 of
these regulations arises at the time an income is paid or payable, whichever comes
first. The term “payable” refers to the date the obligation becomes due, demandable
or legally enforceable.
Exemption from Withholding
The withholding of creditable withholding tax prescribed in these Regulations

shall not apply to income payments made to the following:

1. The National government and its instrumentalities, including provincial, city or
municipal governments;
2. Persons enjoying exemption from payment of income taxes pursuant to the
provisions of any law, general or special such as but not limited to the
following:
a. Sales of real property by a corporation which is registered and

certified by the Housing and Land Use Regulatory Board (HLURB)
or HUDCC as engaged in socialized housing project where the
selling price of the house and lot or only the lot does not exceed
₱180,000.00 in Metro Manila and other highly urbanized areas and
₱150,000.00 in other areas or such adjusted amount of selling price
for socialized housing as may later be determined and adopted by
the HLURB, as provided under Republic Act No. 7279 and its
implementing regulations.
b. Corporations registered with the Board of Investments and enjoying

exemption from the income tax provided by R.A. No. 7916 and the
Omnibus Investment Code of 1987.
c. Corporations which are exempt from the income tax under Section
10 of NIRC, to wit: The GSIS, the SSS, the Phil. Health Insurance
Corp., the PCSO and the PAGCOR; However, the income payments
arising from any activity is conducted for profit or income derived
from real or personal property shall be subjected to a withholding tax
as prescribed in these regulations.
Where to File
Creditable and final withholding taxes deducted and withheld by the withholding
agent shall be paid upon filing a return in duplicate with the authorized agent banks
located within the Revenue District Office (RDO) having jurisdiction over the
residence or principal place of business of the withholding agent. In places where
there is no authorized agent banks, the return shall be filed directed with the
Revenue District Officer, Collection Officer or the duly authorized Treasurer of the
city or municipality where the withholding agent’s residence or principal place of
business is located, or where the withholding agent is a corporation, where the
principal office is located except in cases where the Commissioner otherwise
permits.
When to file
The withholding tax return, whether creditable or final shall be filed and payments
should be made within 10 days after the end of each month except for taxes withheld
for December, which shall be filed on or before January 25 of the following year.
For large taxpayers, the filing of the return and the payment of tax shall be made
within 25 days after the end of each month.

The return for final withholding taxes on interest from any currency bank deposit
and yield, or any other monetary benefit from deposit substitutes and from trust
funds and similar arrangements shall be filed and the payment made within 25 days
from the close of each calendar quarter.
Withholding Tax Statement
Every payer required to deduct and withhold taxes under there regulations shall
furnish each payee, whether individual or corporate, with a withholding tax
statement, using the prescribed form (BIR Form 2307) showing the income payments
made and the amount of taxes withheld there from, for every month of the quarter
within 20 days following the close of the taxable quarter employed by the payee in
filing his/its quarterly income tax return. Upon request of the payee, simultaneously
with the income payment. For final withholding taxes, the statement should be given
to the payee on or before January 31 of the succeeding year.
Annual Information Return for Income Tax Withheld
The payor is required to file to the Commissioner, Revenue Regional Director,

Revenue District Officer, Collection Agent in the city or municipality where the payor
has his legal residence or principal place of business, where the government office is
located in the case of a government agency, on or before January 31 of the following
year in which payments were made, and Annual Information Return of Income Tax
Withheld at Source (Form No. 1604), showing among others the following information:
1. Name, address and taxpayer’s identification number (TIN);

2. Nature of income payments, gross amount and amount of tax withheld from
each payee and such other information as may be required by the
Commissioner.
If the payor is the Government of the Philippines or any political subdivision or

agency thereof, or any government-owned or controlled corporation, the return shall
be made by the officer or employee having control of the payments or by any
designated officer or employee.
DUE DATES
Due dates refer to the last day for filing return and payment of tax. The following
are the due date prescribed by laws for filing of return and payment of taxes.
Events Due Date

1. Income tax (taxpayer is individual) …………………………… April 15 succeeding year
2. Income tax (taxpayer is individual, in
Business/practice of profession)
a. First quarter (Jan-March) …………………………………. April 15 same year (new)
b. Second quarter (April-June) ……………………………… August 15 same year
c. Third quarter (Jul-Sept) …………………………………… November 15 same year
d. Annual (final return) ……………………………………… April 15 succeeding year
3. Income tax (corporate taxpayers)

a. First quarter ………………………………………………… 60th day after end of quarter
b. Second quarter ……………………………………………. 60th day after end of quarter
c. Third quarter ……………………………………………….. 60th day after end of quarter
d. Final/adjustment return …………………………………… 15th day of the 4th month after
close of taxable year
4. Estate tax
a. Notice of death …………………………………………….. 2 months after death
b. Estate tax return …………………………………………… 6 months after death
5. Donor’s tax ……………………………………………………… 30th day after each donation
6. Value-added tax:
a. On sale of goods, services or property
(1) Monthly declaration …………………………………. 25th day after month’s end
(2) Quarterly return ……………………………………… 25th day after quarter’s end
b. On importation …………………………………………….. Before release from Customs
7. Other percentage taxes (quarterly return) …………………… 25th day after quarter’s end
8. Capital gains tax on sale of shares of stock
(not traded through local stock exchange)
a. Per transaction return …………………………………….. 30th day after sale
b. Final/consolidated return …..……………………………. 15th day of 4th month after close
of taxable year
9. Capital gains tax on sale of real property
(capital asset) by individual
a. Cash sale ………………………………………………….. 30th day after sale
b. Installment sale …………………………………………… 30th day after receipt of
installment
10. Remittance of tax withheld
a. In general
January to November ……………………………………. On or before 10th day of the
which withholding was made
December …………………………………………………. Not later than January 25 of the
succeeding year
b. Large taxpayers …………………………………………… On or before 25th day of the
month
following the month in which
withholding was made
Nota Bene – A withholding agent (WA) is a “taxpayer” but not a statutory

taxpayer. WA can claim a tax refund if there is overpayment.
Take note of the following:
Meaning of : 1. Employee (Sec. 78(a))

2. Employer (Sec. 78(d))
3. Husband and Wife (Sec. 79 F)
4. Sec. 80b
pc3
September 2019

Corrected Updated Explanatory Notes NIRC 1-83

Hochgeladen von

Dokumentinformationen

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Corrected Updated Explanatory Notes NIRC 1-83

Hochgeladen von

Copyright:

Verfügbare Formate

TAXATION 1

LATEST UPDATED EXPLANATORY NOTES

Updated Explanatory Notes – NIRC Secs. 1-83 [Sept. 1, 2019] 1

As the law provides that any person who is aggrieved by an assessment

Updated Explanatory Notes – NIRC Secs. 1-83 [Sept. 1, 2019] 2

A. SECRECY OF BANK DEPOSITS

Updated Explanatory Notes – NIRC Secs. 1-83 [Sept. 1, 2019] 3

Updated Explanatory Notes – NIRC Secs. 1-83 [Sept. 1, 2019] 4

Q. How do banks respond to an order of a competent court?

Updated Explanatory Notes – NIRC Secs. 1-83 [Sept. 1, 2019] 5

B. USE OF ALIAS OR NUMBER IN OPENING DEPOSIT ACCOUNTS

Updated Explanatory Notes – NIRC Secs. 1-83 [Sept. 1, 2019] 6

Q. How does Circular No. 251 apply to existing numbered accounts?

Q. What penalties/sanctions are applicable for violating the laws/regulations?

C. CONTINUED CONFIDENTIALITY/SECRECY OF DEPOSIT TRANSACTIONS

A. Income Tax Systems

Updated Explanatory Notes – NIRC Secs. 1-83 [Sept. 1, 2019] 7

o Schedular tax system

o Semi-global, semi-schedular system

Section 23 – General principles of income taxation of the Philippines.

 Income taxation has an international aspect termed “international taxation”. It has 2

D. Income Taxation of Individuals

Now that we know how to determine where income is geographically sourced, it

Updated Explanatory Notes – NIRC Secs. 1-83 [Sept. 1, 2019] 8

It is important to know the definition of each kind of individual taxpayer because

Updated Explanatory Notes – NIRC Secs. 1-83 [Sept. 1, 2019] 9

 Who are non-resident citizens? (R.R. 1-1979)

Updated Explanatory Notes – NIRC Secs. 1-83 [Sept. 1, 2019] 10

Non-resident aliens engaged in business in the Philippines

 Non-resident aliens are either:

Kinds of income and income tax of individuals (Secs. 24 & 25)

1. Compensation income earners;

Observe the following rules:

Updated Explanatory Notes – NIRC Secs. 1-83 [Sept. 1, 2019] 11

Income tax formula for individuals (TAX BY THE GRADUATED RATES)

Gross Income ₱xxxx

A. Compensation earners are individuals who receive compensation on their

C. Individuals who earned income purely from self-employment and or

Updated Explanatory Notes – NIRC Secs. 1-83 [Sept. 1, 2019] 12

 Individual mixed income earners. (compensation income, self-employment, and

 This applies only on income derived within the Philippines.

Tax treatment on deposit substitutes.

When is a deposit considered deposit substitutes?

Updated Explanatory Notes – NIRC Secs. 1-83 [Sept. 1, 2019] 13

Read: PEACE BOND CASE.

Dividends out of quarterly profits. – This refers to your letter requesting

Ruling: An ordinary dividend is the most common type of corporate

Updated Explanatory Notes – NIRC Secs. 1-83 [Sept. 1, 2019] 14

It is distinguished from “profits” for the profits in thousands of a corporation do

 The sale is on the shares of stock within the Philippines.

1. Capital gains tax on sale by real property by individuals.

 What is being taxed is the presumed gain

 Real properties referred to the immovable properties defined and enumerated in

Ordinary assets are the following:

Updated Explanatory Notes – NIRC Secs. 1-83 [Sept. 1, 2019] 15

Read: RR No. 7-2003

“Engaged in trade or business”, explained. – The phrase “engaged in

“To engage in business” is uniformly construed as signifying to follow the

The 180 Day Rule

Updated Explanatory Notes – NIRC Secs. 1-83 [Sept. 1, 2019] 16

Sec. 25 (C). SPECIAL ALIEN INDIVIDUALS

Tax Liability of Members of General Professional Partnerships (GPP). (Sec. 26)

Professional partnership are not required to file income tax return. –