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PREFACE
to the 7th Edition
Due to the increase in the amount of the “13th month pay and
other benefits" from P30.000 to P82.000 effective taxable year
2015 (R.A, 10653 amending Section 32 (B) (7)(e) of 1997
XIRC), and the various issuances of new Revenue Regulations,
BIR Rulings. Revenue Memorandum Circulars, and Supreme
Court decisions, the authors urgently revised this book,
INCOME TAXATION, to its 7* edition.
This book is designed as a textbook in the course Income

Taxation covering comprehensive topics included in the CPA
and Bar Examinations.
The NIRC (R.A. 8424 as amended by R.A. 9337, R.A. 9504,

and R.A. 10653), the Court of Tax Appeals and Supreme Court
Decisions, latest Revenue Regulations, BIR Rulings, and
Revenue Memorandum Circulars are adequately 'used as
authoritative sources to support the authors’ discussions,
illustrations and explanations. The book can be used as an
easy reference of tax students and tax practitioners.
Materials included in this book are classroom tested, logically

arranged, improved and gradually presented in the clearest
possible manner. Illustrations and diagrams are also included
to facilitate the students’ learning and comprehension.
At the end of each chapter, the authors prepared new various

review questions/problems to assess the student’s
understanding and progress about the subject matter.
To our colleagues in the academe who would like to adopt this

modest work as their prescribed class textbook, we provide a
Teacher’s Manual to verify solutions of all end-of-chapter
problems.
The teacher’s manual will be given only to the professor and

will be included in the deliveiy of books ordered directly from
the VALENCIA EDUCATIONAL SUPPLY or from its authorized
distributor(s), whose addresses and contact numbers appear
at the back cover of this book.
TABLE OF CONTENTS
Income Taxation
Chapter 1: General Principles and Concepts of Taxation 1

Inherent Powers of the State 1
Nature of Police Power 1
Nature of Eminent Domain 2
Taxation Defined 2
Similarities of the Three Inherent Powers 3
Distinctions of the Three Inherent Powers 4
Nature of Taxation Power 5
Inherent Power of Sovereignty 5
Essentially a Legislative Function 6
For Public Purposes 8
Territorial in Operation 8
Tax Exemption of the Government 9
The Strongest among the Inherent Powers 10
Importance of Taxation 10
Basis of Taxation 11
Purposes of Taxation 12
Objects of Taxation 14
Scope of Taxation Power 15
Limitations to the Power of Taxation 16
Inherent Limitations 7 16
Constitutional Limitations 17
Due Process of Law 18
Equal Protection of Law 18
Rule of Uniformity and Equity in Taxation 19
Non-Impairment of the Contracts 20
Origination of Appropriation, Revenue or Tariff Bills 20
President’s Veto Power 21
Congress Granting Tax Exemption 21
Exemption from Property Taxation 21
Public Money Not for Religious Purposes 23
Power of Judicial Review 23
No Imprisonment for Non-payment of Poll Tax 24
Taxes as General Funds of the Government 25
Stages, Aspects or Processes of Taxation 25
Levy 25
Assessment ■ 26
Payment of Tax 26
Principles of a Sound Tax System 28
Fiscal Adequacy 28
Equality or Theoretical Justice 28
Administrative Feasibility 29
TABLE OF CONTENTS
INCOME TAXATION
Certain Doctrines in Taxation 29

Prospective Application of Tax Laws 29
Imprescriptivity of Taxes 30
Double Taxation 31
Escape from Taxation 32
Tax Evasion 33
Tax Avoidance 33
Tax Option 34
Shifting 34
Capitalization / 35
Transformation ' 35
Exemption from Taxation ’ ' 35
Classification of Tax Exemption 36
Tax Amnesty 'r 37
Tax Condonation or Tax Remission 38
Equitable Recoupment 38
Set-off Taxes . - 38
Taxpayer Suit ’ 39
, Compromises 39
Power to Destroy 40
Power to Build 40
Situs of Taxation 40
Nature of Taxes 41
Essential Characteristics of Taxes 42
Classifications of Taxes 44
Other Charges/Fees 46
Tax Law Defined 48
Nature of Tax Laws 49
Interpretation and Application of Tax Laws 49
Sequence of the Interpretation of Tax Laws 51
Sources of Philippine Tax Laws 52
Chapter 1 Review Questions and Problems 56
Chapter 2: Tax Administration 73

Tax Administrative Agencies 73
Other Tax Enforcers ' 74
The Bureau of Internal Revenue 75
Powers and Duties of the BIR 75
Powers of Internal Revenue Commissioner 76
Power to Interpret Tax Laws 76
Power to Decide Tax Cases 77
Power to Obtain Information 77
Power to Make Assessment 78
Authority to Compromise, Abate or Cancel Tax Liability 80
Power to Suspend Business Operations 81

TABLE OF CONTENTS
INCOME TAXATION
Authority to Delegate Power 81

Administrative Provisions 82
Registration Requirements 82
Printing of Receipts, Sales or Commercial Invoice 86
Issuance of Receipts, Sales or Commercial Invoice 87
Tax Returns 88
Certificate of Payment 89
Tax Remedies 89
Assessment 89
Presumption of Correctness 90
Who Makes Assessment 90
Assessment Period 90
When to Effect Tax Assessment 92
Kinds of Assessment 93
Preliminary Assessment Notice , 94
When Preliminary Assessment Notice Not Required 94
Requisites of a Valid Assessment 95
Ways to Contest the Validity of Assessment 95
Assessment Procedure 96
Collection of Taxes 97
Collection Remedies Available to Government 97
Distraint of Personal Property 98
Kinds of Distraint 98
Levy of Real Property 99
Other Collection Remedies 100
Imposition of Injunction 101
Tax Lien 101
Forfeiture 102
Compromise 102
When to Effect Compromise 103
Cases which may be Compromise 104
Cases that are Not Subject to Compromise 104
Minimum Compromise Percentage 105
Posting of Bonds 105
Requiring Proof of Filing Income Tax Return 107
Informer’s Reward 107
Making Arrest, Search and Seizure 108
Deportation in Case of Aliens 108
Inspection of Books 109
Keeping of Books of Accounts .109
Language and Translation of Books of Accounts 110
Use of National Tax Register 110
Civil and Criminal Actions 110
Due Dates for Filing and Payment of Tax 111
Additions to Tax 113
r \Bl .F OK C ONTENTS
INCOME TAXATION
Surcharges \^
Meaning of False or Fraudulent Return \ 15
huerest US
Installment Payment of Tax \ 15
Interest on IVficiency Tux vs. Delinquency Tux 115
Penalty on Criminal Offenses 118
Nature of Violations, Criminal Penalty Imposed and
Amount of Compromise t 19
Prescriptive Periods 120
Remedies Available to Taxpayer 121
Administrative Remedies 121
Judicial Remedies 124
Chapter 3: Concept of Income 151

Fax Treatment of Increase in the Value of Property 151
The Net worth Method 152
Return on Capital 154
Distinctions between Income and Other Terms 154
Nontaxable and Taxable Income 155
Characteristics of Taxable Income 156
Income Constructively Received 157
Sources of Income 158
Income from Sources Within the Philippines 158
income from Sources Outside the Philippines 160
Income Partly Within and Partly Outside the Philippines 160
Classifications of Income 161
Normal fax vs. Final fax 162
Forms and Valuation of Income 165
Tax Accounting Periods to Report Income 166
Accounting Periods and Methods 167
Methods of Reporting Income and Expenses 168
Cash Method lt>8
Accrual Method 169
Special Methods 170
Installment Method 171
Installment Methods Important Terms 171
When to Use Installment Method 174
Deferred Payment Method 176
Income from Long-term Construction Contracts 177
Cross Income from Fanning 179
Methods of Computing Gross Income from Fanning 180
TABIF OK CONTENTS
INCOME TAXATION
Chapter 4r Gro^s Inocvisve 205

Debited 205
O xnss CornTenSattOn lucerne 20b
A ^ art lAuRovee Relationship Rxtst? 20b
Dlaearboaston of Gross Oompensauon Income 207
8hates ot 8tvek Received as Oonvrensation 214
8tvx\x Cptxxt 215
Osanoedatton of Debt 218
'•'-^x-uxy Aeoaituns as Compensation 219
Income Tax Tax', as Compensation 219
Coirvemenee of the lAtrployer s Rule 220
a\”v Cuarcers 220
Veals 8ttbsmired by Rntployer 220
Remuneration tor Casual labor 221
Cross Income fbom business and tbofessiou
'business Debated. 222
Ibefession Defined 222
Cross Income from business 223
Tost of bales 223
Cos: of Goods Manufactured and bold 223
Cos: of Goods bold of Trading or Merchandising Concern 224
Cos: of8etxrces *MCn> 225
Telegraph and Cable bervtcea 22 o
Rental Income 228
Income fbom Iraaobodi Improvements 224
Do might Method 229
bpreab da: Method 224
Termination ofshe C entrant oft ease 230
Gams from tValais in Ftv>:vr^v 232
Fasslve income
Viotd from Deposit bubs tin: tee and Trust Fund
Interest Income -Os>
Dlassifioat torts of Interest Ur route 234
Tax Fxemo: Interest Utoonte 234
Interest income of OFW wrth Co-IVpoaitor 235
Interest Uroorne bubyect to Final \Yithholdmg Tax 235
Interest Utoonte budjeet to Normal Tax 23o
\>
Royalty Income mV> ,
’Dividend Income 238

Ta\ Roles of To idend Income 238
Tax bearing Rule 240
Forms ana Valuations of Dividend Utoome 240
Dash Dividend 240
Dcotvr ty Dtv idend 240
btook To idend 241
TABLE OF CONTENTS
INCOME TAXATION
Redemption of Stock Dividend 2-3

Stock Dividend Different from Shares Previously Acquired 2-u
Scrip Dividend
indirect Dividends 243
liquidating Dividend 243
Prises arid Winnings 246
Partners' Distributive Profits from Protes&iona!
Partnership s Net Income 2-"
Other Sources of Income 24'
Tax Benefit Rule 24'
Bad Debt Recovery 24'
Tax Refund or Credit 243
Damages Recovery 249
Annuities 250
Income from Whatever Sources IVfined 2c 1
illegally Obtained Income 2c 1
Kmbesrled Funds 251
Income Received by Error 2c2
Chapter 5: Exclusion from Gross Income 251

Nontaxable Compensation Income 251
Nontaxable Other Receipts 255
Tax exemption of Statutory Minimum Wage Earner 255
15* Month Pip , Bonuses and Other cVnefits 25c
Pe Minimus 255
Rules of Pe Minimis and Other Benefits 250
Pax Exempt Contributions 202
Benefits under Employer^ Benefit Rule 202
VYooeeds of Ute Insurance 245
Proceeds Received by the Insured Person 244
Cuffs, Bequests and IVvises JVc
Compensation tor V\amages 24-
Retirement Benefits* Pensions* Gratuities. Etc, 245
poo
Pax Rxempt C.overnment income
Pax Exempt income of Foreign Government 5vV
Tax Exempt Corporations 501
Pax Exempt IV,res and Awards 501
IVros and Awards in Sports Competition 501
Cam from Sale of Certificate oflndebtedness 502
Tax Exempt Interest Income 502
Tax Exempt Cuaiified Senior Oitiaen 505
Tax Exempt Inventors ami Inventions 505
Barangay Micro Business Enterprise d'MBE' 5P*
504
Tax Exempt Educational Institution
TABLE OF CONTENTS
INCOME TAXATION
Tax-Exempt Cooperative Income 305

Taxability of Cooperatives 306
Chapter 6: Fringe Benefit Tax 333

Fringe Benefit Defined 333
Rationale of Granting Fringe Benefits 333
Fringe Benefit Tax (FBT) 334
Fringe Benefit Tax Base and Rate 334
Classification of Fringe Benefits 335
FBT Concept and Summary 337
Journal Entries in the Employer’s Books 339
Importance of Fringe Benefit Tax 340
Valuation of Fringe Benefits 340
Housing Fringe Benefits 341
Nontaxable Housing Fringe Benefit 343
Motor Vehicle 344
Expense Account 346
Household Expenses 347
Interest on Loan at Lesser Than Market Rate 348
Membership Fees, Dues and Other Expenses 349
Expenses for Foreign Travel 349
Holiday and Vacation Expenses 351
Educational Assistance 352
Insurance Benefits 353
Fringe Benefits Tax on Special Aliens 354
Fringe Benefits Not Subject to FBT 355
Chapter 7: Dealing* in Property 373

Ordinary Assets 373
Capital Assets 374
Change of Purpose 374
Taxes on Ordinary and Capital Asset Transactions 375
Bank and Trust Companies 377
Measurement of Gain or Loss 378
Cost and Expenses of Assets Disposed 378
Special Rules in Determining Acquisition Cost 379
Ordinary Gain (Loss) vs. Capital Gain (Loss) 382
Net Capital Gain (Loss) 382
Preferential Tax Treatment for Capital Gain (Loss) 383
Capital Gains or Losses Sustained by a Corporation 385
Tax Treatment of Ordinary and Capital Assets 386
Disposition of Real Property 387
Real Property NOT Used in Business 387
TABLE OF CONTENTS
INCOME TAXATION
Disposition of Principal Residence 2SH

Exemption from Capital Gains Tax 339
Basis of the New Principal Residence 390
Sale or Exchange of Real Property Used in Business 39]
Seller Exempt from Creditable Withholding Tax 396
Installment Reporting of Sale of Real Property 396
Sale of Real Property Not Located in the Philippines 397
Stock Transactions 398
Valuation of Shares of Stock Not Listed and
Traded in the Local Stock Exchanges 401
Unidentified Shares of Stocks 402
Installment Sales of Shares of Stock 403
Wash Sales 406
Requisites of Wash Sale Loss 406
Treatment of Losses or Gains from Wash Sales 407
Short Sales 409
Securities Becoming Worthless 410
Liquidating Dividends 410
Corporation's Shares of Stock 411
Own Share Received in Exchange for Property 412
Sale of Treasury Stock 412
Sale of Corporate Bonds 413
Retirement of Bonds 413
Interest in Partnership 414
Abandoning Property for a Foreclosure Sale 414
Disguised Sale 414
Corporate Reorganization 415
Sale of Patents and Copyrights 418
Sale of Goodwill 419
Chapter 7 Review Questions and Problems / 393
Chapter 8: Deductions from Gross Income 447

Nature of Deductions 447
Revenue vs. Capital Expenditures 448
Expenditures After Acquisition 448
Situs of Expenses 449
Items Not Deductible from Gross Income 450
Tax Laws versus GAAP 451
Classification of Deductions from Gross Income 453
Optional Standard Deduction 454
Regular Allowable Itemized Deductions 456
Income Subject to Regular Allowable Itemized Deductions 456
Composition of Regular Allowable Itemized Deductions 457
General Business Expenses 457
Requisites of the Deductibility of General Expenses 458
TABKKOFCONTKNTS
INCOME TAXATION
Meaning “I <bdiuni v and Neeessatv -|{»0

Mranmg of Tiadc or Huriinens 430
Halaiioi and Wa^rM j‘4)
Compensation lot tnjntiesand Pensions 4(>0
Mateiiais and Supplier 4i>t
Tim'd inn Expenses 4b2
Kent Expenses 4p2
Whrn is Krnt Deductible 4t>2
Deductible Leasehold Improvement 4<>4
Representation Expenses 4b4
EAR Used Moth tor Trading and Servicing Husiuess 4bb
Interest Expense 4bb
interest Expense Deductible with Limit 4<>h
Interest Expense Deductible in Full 4(>7
Nondeductible Interest Expense 4bS
Related Debtor and Creditor 4b8
Prepaid interest by a Cash Masis individual Taxpayer 4(4>
Interest to Finance Petroleum Exploration 470
Optional Treatment of Interest Expense 470
'Mixes 470
Requisites of Deductibility of Taxes 471
Taxes Deductible from Gross Income 471
Taxes Not Deductible from Gross Income 471
Mad Debts Expense 473
When is a Claim Ascertained to be Worthless 473
Requisites for Deductibility of Mad Debts 473
Nondeductible Mad Debts 474
Valuation of Mad Debts 474
Accounting for Worthless Accounts 47b
Had Debts of Cash Masis Taxpayer 477
Depreciation Expense 477
Requisites for Deductibility of Depreciation 477
Methods of Depreciation 478
Depreciation and Other Related Expenses of Vehicles 478
Depreciation of Properties Used in Petroleum Operations 480
Depreciation of Properties Used in Mining Operations 481
Depletion Expense *181
Exploration and Development Expenditures 482
Capital Expenses of a Private Educational Institution 484
Deductible Pension Trusts *185
Charitable and Other Contributions 48(>
Requisites for the Deductibility of Contributions **87
Contribution Deductible in Full **87
Contribution Subject to Limit **88
Donations to Political Parties and Candidates
TABLE OF CONTENTS
INCOME TAXAViON
Research and Development 490

Premium Payments for Health/HospitauzaLon
Insurance 491
Special Allowable Itemized Deductions 492
Adopt-a- School Program 493
Valuation of Assistance or Donation 494
Senior Citizens’ Salaries and Discounts 494
Sales Discounts Granted to Person with Disability 496
Rooming-in and Breast-Feeding Practices 496
Free Legal Assistance 497
Qualified Productivity Bonuses 498
Chapter 9: Losses 533
Kinds of Losses 533 •

Requisites for Deductibiliy of Ordinary i .osses 534
Losses Not Allowed by Law as Deduction 534
Classification of Deductible Loss 535
Partial Loss 536
Loss with Insurance Recovery 537
Net Operating Loss 538
Net Operating Loss Cary-Over 539
Taxpayers Entitled to Deduct NOLCO 540
Persons Not Entitled to Deduct NOLCC 541
Entities Not Allowed of NOLCO 542
NOLCO for Business Combination 542
NOLCO of Mines Other than Wells 543
NOLCO in the Tax Return and Unused NOLCO * 544
Special Rules on Losses 544
The Marcelo Steel Doctrine on bosses 544
Losses between Related Taxpayers 545
Gambling Losses 545
Losses from Theft or Embezzlement 546
Mortgage Losses 547
Losses due to Voluntary Removal of Property 548
Losses due to Shrinkage in Value of Svocxs 549
Losses of Useful Value 549
Abandonment of Petroleum Operation 550
Losses from Farming A 551
Chapter 10: Basic Income Tax Patterns 565

Income Tax System 565
Global Income Tax System 565
TABLE OF CONTENTS
INCOME TAXATION
Gross Income Tax System 565

Schcdular Tax System 566
Basic Summary of Philippine Income Tax 566
Groups and Sources of Income Taxpayer 566
Summary of Groups of Income 567
Deductions from Business Income 567
Personal Exemptions 567
Collection Points of Income Tax 568
Basic Matrix of Income Taxation 569
Comparison of Individual and Estate/Trust Taxpayers 571
Comparison of Corporation and Partnership Taxpayers 571
Income Tax Return and Filing 572
Chapter 11: Income Tax of Individuals 583

Individual Taxpayers 583
Classifications of Citizens 583
Classifications of Aliens 585
Special Taxpayers 587
Marginal Income Earners (MIEs) 588
Personal Exemptions 588
Kinds of Personal Exemptions 589
Taxpayers Allowed for Personal Exemption 590
Taxpayers Not Allowed for Personal Exemption 591
Principle of Reciprocity 591
Requisites for Additional Exemptions 593
Meaning of Dependent 593
Meaning of Living with the Taxpayer 594
Meaning of Gainfully Employed 594
Meaning of Chief Support 594
Rules in Claiming Additional Exemptions 595
Change of Status 598
Dependents Other than Children 598
Dependent Senior Citizen 599
Classification of Taxes on Individuals 600
Normal (Tabular) Tax 600
Taxable Income 601
Income Tax Due 602
Passive Income 602
Capital Gains Tax 603
Nonresident Aliens’ Income Taxes 605
Tax Credit 607
Tax Credit for Taxes Paid to Foreign County' 608
Limit of Tax Credit Paid to Foreign Country 608
Salary from Employment
TABLE OF CONTENTS
INCOME TAXATION
Withholding Taxes on Salaries 610

Self-Employed Individuals 611
Tax on Professional or Talent Fees 612
Individual Income Tax Return 615
Exempt Individuals to File ITR 616
ITR of Parents to Include Income of Children 617
Financial Statements Attached to the ITR 617
Annual Declaration and Quarterly Payments
of Income Tax 618
Installment Payment of Tax 618
Chapter 12: Income Tax of Corporations 641

Concept of Corporation 641
Classification of Corporate Taxpayers 641
Corporations’ Taxable Base and Income Tax Rates 642
Tax-Exempt Corporations 643
Taxability of PAGCOR ’ 644
Income Taxes of Corporations 645
Normal Corporate Income Tax 645
Minimum Corporate Income Tax (MCIT) 646
Cany Forward of Excess of MCIT 647
Accounting Treatment of MCIT 648
Expanded Withholding Tax as Deduction from MCIT , 649
Quarterly Payment of MCIT or NCIT 650
Optional Gross Income Tax (OGIT) 652
Capital Gains Tax * 653
Passive Income Tax 655
Other Passive Income Tax of Domestic and Resident
Foreign Corporations 656
Other Passive Income Tax of Nonresident Foreign
Corporation 657
Special Corporations 658
Special Domestic Corporations 658
Domestic Private Educational Institutions and Hospitals 659
Special Resident Foreign Corporations 661
International Carrier ' 6 6 1
Offshore Banking Units (OBU) 662
Tax on Branch Profits Remittance 663
Regional Operating Headquarters 664
Special Nonresident Foreign Corporations 665
Insurance Companies 666
Franchising Companies 667
Corporate Income Tax Returns 4 667
ITR of Corporate Dissolution or Reorganization 668
TABI.E OF CONTENTS
INCOME TAXATION
Taxable Year of Corporation (>(>8

Annual hwmf Thx Return
Improperly Accumulated Rurmngs Tux (1AICT) (>()<}
Earmngs tor Reasonable Needs of the Business
Accumulated Profits Beyond Reasonable Needs ^
Dbnvtive of hnpraperly Accumulated Earnings ^7 |
Pax Base of Improperly Accumulated Earnings |
Accounting for l ART 570
Period of Payment of Dividend 673
EtTcvt of I O'V 1 ART 6?3
Chapter 1 - Review Questions and Problems 674
Chapter 13: Income Taxes of Partnerships*

Co-Ownerships* Joint Ventures 697
Partnership Defined 597
General Professional Partnership 697
General Go-Partnership 700
General Professional Partnership Engaged in
Commercial Activity 701
Partnership's Itemized Deduction vs. OSD 703
Partners Contributions 704
Sale of Partners Capital 705
Partnership with Other Income Subject to Final Tax 706
Profit Share of a Nonresident Alien Partner 708
Co-Ownership 708
When Co-Owner is Subject to Income Tax 709
Join: Venture 710
Income Tax of Joint Ventures 710
Chapter 14: Income Taxes of Estates and Trusts 725

Estates 725
Taxable Income and Tax Rates 725
Trusts 730
Income Derived from Trusts 730
Computation of Trust’s Income Tax 731
Two or More Trusts 732
Trust as a Derice to Lower Income Tax 734
Revocable Trusts 735
Chapter 15: Withholding Taxes 747

Withholding Taxes 747
n ad
hhholding Tax at Source 747

lassification of Withholding Tax at Source 747
TABLE OF CONTENTS
INCOME TAXATION
fjM y/;thhol'Uny/lf*x 748

C/edltabte Withholding Tax 751
'MWXtfAdiny/Utx on Omipnmbium Income 754
f'rr/iwi Monthly Withholding Tax '/'able 755
liability for 1 ft / 756
S**.r%nu% Vw\u\f**A to iMduot and Withhold 757
l'oyj%t rut tort of WJfhhnkJInf/ Ay/tni 757
'bma '4 Withholding 758
Kyj:tfil/iion from Withholding 758
7/her* anh V/h^ /i tn KIJ't 759
Meaning of Untyi Taxpnym 759
V/lthholdlnt/'lux ISt/itrmenI 760
Annual Inin; mat inn I'''!ijid tor ln<:o»ir Tax Wlthhehl 760
rAih\>t*n 1 6 )'<"/h v/ Oueatlnua nnh 762
Annnn A ?‘iUtnmni y of în it4nf lOyJonni Dally Minimum

Wttf// I'aU't*
hnn*t/t 11 Huml/t't ol Wotklny Dayt* in a Y«mi
Arifunr Clu-vltteh fV'|i*‘hul<« of DomiaomUti IVnally

Chapter 1
GENERAL PRINCIPLES
AND CONCEPTS OF
TAXATION
INHERENT POWERS OF THE STATE
When a Sovereign State is bom, it exists with indispensable

powers necessary for its survival. These powers are called
“inherent powers.” They naturally exist as essential force in order
that a government can command, maintain peace and order, and
survive, irrespective of any Constitutional provision.
The three inherent powers of the Sovereign State are summarized

as follows:
Nature of Police Power
Police poujer refers to the inherent power of the sovereign state to

legislate for the protection of health, welfare and morals of the
INCOME TAXATION
community. I: is exercised usually to guard against excesses or

abuses of individual liberty.
This power is restricted by the ‘due process clause" of the

Constitution which provides that no person may be deprived of
‘life, liberty, or property, without due process of law.* m. sec, ?,
The police power of the State may be exercised through taxation

because taxes may be levied for the promotion of the welfare of
the pUOliC. Uuzr :s Ansnets, 95 PhU 1 ■—5
Examples of police power are preservation of natural resources,

segregation of lepers from the public, imprisonment of convicted
criminals, and regulation of various professions.
Nature of Eminent Domain
ErrJnen: Domain refers to the power of the sovereign state to take

priv ate property for public purpose. It is founded upon the idea
that the common necessities and interests of the community
transcend individual rights in property.
Consequently, the State may expropriate private property when it

is necessary in the interest of national welfare. Since eminent
domain is inherent in sovereignty, pertinent provisions in the
Constitution are not grants of the power, but rather limitations
Upon itS exercise. -Art XU. Sec. IS. Pb2£ppc:e Consc^zdaev
Tne Constitution limits the exercise of the power by providing that

property" may not be taken without just compensation. (An, in, see. 9,
Ccrs-r-~c~
‘Just compensation’ means paving the owner the full monetary

equivalent of the property- taken for public use. (U.s v. Reynolds* Kv . 397
UJS. l^.SOS.Cz. SC3. S05, 251.Ed.'2d 12j
TAXATION DEFINED
Taxation is defined as
1. A poiver by which an Independent State, through its law

making body, raises and accumulates revenue from its
inhabitants to pav the necessary expenses of the government.
■ 5: Af-. Jilt. 3&: : r Cooley 72-93)
^ £ jctcx .t r*i?ers rr, bh* ithacsrA ycwer of a state > co-
exrsss;**? mrm sc*^£r*3gntr tc der.ia.rjd v\v.rartbufcfcorvS for public
1 A rr-acsss or xr cf hupcsmg a charge by governmental

cu prepemy. ir.urnûals ct transactions to raise
p U bbr gUTpCiSeS-. IShazi:* +.u.u; ThxicrtiArfJ
b> £ process.. h passes a legislative undertaking through the

enactment of tax iaws by doe Congress which will be
mpiementsd by the Executive Branch of the government
mrrngh its. Bureau ci mterraL Revenue (B1R) to raise revenue
-r~ the irfnahrtams in crier cc pay the necessary expenses o f
3. -b msmts by which the Sovereign State through its law-making

roiy demands fer revenue hi order to. support its existence
Ji*zrLUZE.:n+ 5t?izr± Jzrrj* Z^S‘~
As = means, it is a way of collecting and apportioning the cost
Similarities among Taxation, Eminent Domain and Police

Powers
The similarities among the three inherent powers of the State are
as :thews:
1 They are inherent in sovereignty (they can be exercised even

without being expressly granted in the Constitution);
_ ihy are all necessary attributes of sovereignty because there

can be no effective government without them.
3. They constitute the three ways by which the state interferes

with the private rights and property;
' They are all legislative in nature and character;
5. They presuppose an equivalent compensation; and
6 The provisions in the Constitution are just limitations on the

exercise of these pow ers.
4 INCOME TAXATION
Distinction of Taxation, Police Power, and Eminent Domain

::z z ■ i Taxation | Police Power ] [ Eminent Dom ain j
]. As to concept Power to Power to make Power to take
enforce and implement private property
contribution to | laws for the for public use
raise f general welfare ! with just
government compensation
funds 1
2. As to scope Plenary, Broader in | Merely a power
comprehensive ; application - to take private
and supreme 1 General power to : property for
make and ! public use
implement laws __j
3. As to authority Exercised only Exercised only May be granted
by government by government or to public service
or its political its political or public utility
subdivisions subdivisions companies______
i
4. As to purpose Money is taken Property is taken Private property
to support the or destroyed to is taken for
government promote general public use
welfare
! 5. As to necessity of The power to 1 Can be expressly Can be expressly
delegation i make tax laws j delegated to the 1 delegated to the
\ cannot be j local government j | local government
1 delegated units by the law : units by the law i
| making body L making body
6. As to person Operates on a Operates on a Operates on the
affected community or community or a particular private :
a class of class of property of an
| individual ! individual 1 individual
7. As to benefits Continuous Healthy Market value of
protection and economic the property
organized standard of expropriated
society society
8. As to amount of i Generally no Cost of ! No imposition
imposition | limit regulation,
j license and other
j necessary
| expenses
9. As to importance Inseparable for Protection, safety ; Common
the existence of and welfare of necessities and
a nation it society ^ interest of the
supports police community
power and transcend
eminent individual rights
domain in property
Chapter t General Principles and Concepts of Taxation 5
Taxation Police Power Eminent Domain
10. As to relationship Subject to Relatively free Superior to and

to Constitution Constitutional from may override
and Inherent ; Constitutional Constitutional
I limitations j limitations impairment
provision .
Inferior to non- ; Superior to non because the j
: impairment j impairment welfare of the
i clause J clause State is superior
to any private
contract
11. As to limitation ! Constraints by | Limited by the Bounded by
1 Constitutional j demand for public purpose
| ; and Inherent | public interest and just
' I limitations ! and due process compensation
NATURE OF TAXATION POWER
The power to tax is an attribute of sovereignty that is exercised by

the government for the betterment of the people within its
jurisdiction whose interest should be served, enhanced and
protected.
The nature of tax power includes the following:
1. Inherent power of sovereignty;
2. Essentially a legislative function;
3. For public purposes;
4. Territorial in operation;
5. Tax exemption of government;
6. The strongest among the inherent powers of the government;

and
7. Subject to Constitutional and inherent limitations.
Inherent Power of Sovereignty

Taxation is as old as government itself. Its existence commences
concurrently with the four elements of a state - people* territory,
sovereignty" and government.
6 INCOME TAXATION
From the moment a state is bom, it automatically possesses the

power to collect taxes from its inhabitants.
The government having sovereignty can enforce contributions

upon its citizens even without a specific provision in the
Constitution authorizing it. It is so because the State has the
supreme power to command and enforce obedience to its w33
from the people within its jurisdiction.
Any provision in the Constitution regarding taxation does not

create rights for the sovereignty to have the power to tax but it
merely constitutes limitations upon the supremacy of tax power.
Only the national government exercises the inherent power of

taxation of the state. Local government units do not possess the
inherent power. (National Pouvr Corporation Albay. 2$6 SCRA 29$)
In order for these government units or political subdivisions to

have the power to tax, there must be:
• an expressed Constitutional provision granting them the

power to tax.
• valid delegation of tax power through the statute from the

national legislature granting local government units or
political subdivisions to exercise such power (Le.. Local
Government Code of the Philippines), in the absence of a
Constitutional provision.
Essentially a Legislative Function
The law-making body of the government and its political

subdivisions exercise the power of taxation. The powers to enact
laws and ordinances, and to impose and collect taxes are given to
the Congress, The scope of legislative taxing power comprises the
following:
a. Subjects of taxation (persons, property, rights, transactions,

occupation, etc. to be taxed);
b. Amount or rate of the tax (e.g,, 5%-oh\> for individuals net
taxable income, 3CV\> for corporations net taxable income;
12°o value-added tax based on sales or gross receipts, etc.)
e. Purposes of tax (public purposes!:
1 Pr)wJpUit& iind Concept* of 1 ;»Xf*tion 7
 strict rjernc,

ih»‘ }»'»wn In malm tax lawa cannot be; delegated to other
bmn< b'-a of the government. Since peculiarly and exclusively
Irgirdalive m nature, the* power to make! tax Jaws canhot be
rxeu irjed by the executive or judicial branch of the government,
(Ijuo/i flhtmlothu) rt). ia*i Couil of Tax A wool*, I (>:t UCRA 047)
Therefore, when the power to tax is delegated to the local

government units (Will), only the legislative branch of the LGU
can exe rcise the power. Also, if delegated to the President, it is
limited to administrative discretion subject to valid standards,
Kxnmples of taxation power that cannot be delegated are the

following:
a, Power to select the coverage, object or property to be taxed;

1). Determining the nature and purposes for which taxes shall be
collected;
c. Determining the place or situs of tax imposition;
d. Fixing the amount to be imposed and tax rates;
e. Granting tax exemptions or condonations; and
f. Setting down the rules of taxation in general. (Petro vs. miia, 198
SCRA 82)
What may not be delegated is the power to make tax laws to a

non-legislative body. If the powers delegated are ministerial and
advisory (such as power to value property, assess and collect
taxes), they shall be allowed since they are not legislative but only
administrative in nature.
Therefore, whenever the delegation of legislative power is the

issue, it is important to know the distinction between tax
delegation and tax administration. This is so because if what is
delegated is tax legislation, the delegation is invalid, but if what is
involved is only tax administration, the non-delegability rule is
not violated. (197scra 77n
INCOME TAXATION
For Public Purposes

The 'A taxation flows forth from the legKimate objective of I
supporting the cervices of the government. ?
Public taxeft are public money They must be used to finance

recognized public need'*. Taxes are used to finance construction*
and maintenance of roads; health care, education, security,
promotion of science, commerce, industry, and others for the
welfare of the general public.
The Supreme Court also held that the legislature ha.s no power to
appropriate public revenues for anything but for public purpose -
general welfare of the nation. -Secretary c/zumic. jjopw. 331,
Thus, in order to consider appropriation of taxes valid, it must be

for the common good of the people, No individual or private
person shall primarily be enriched or benefited by the public
funds.
It has been held that tax has been utilized for public purpose if
the welfare of the nation or tlê greater portion of its population
has benefited with its use. <Comey. v&. Palnmjar, 25 SCRA S27; Republic, us.
IPj/jAod-!A Urdu Mittiriy CS, et. At, July 9, 1906; PhiL Guaranty Co., Iruc. m. Co T’vrds
'XJ'A 775)
Territorial in Operation
The taxing authority must observe “tax situs" because the

country's tax laws are effective and enforceable only within its
territorial limits. (5iAm.jur.ss)
As a rule, the power to tax can only be exercised within the

territorial jurisdiction of a taxing authority (5i Am. Jur. 88), except
when there exists a “privity of relationship" between the taxing
State and the object of tax based on the tax principle of reciprocal
duties.
This relationship implies contractual support or duty of care

afforded by the Government to its citizen residing outside the
country.
Where privity of relationship exists, the state can still exercise its
taxing powers over its citizen outside its territory. It is because
the fundamental basis of the right to tax is the capacity of the
Chapter 1 General Principles and Concepts of Taxation 9
government to provide benefits and protection to the object of the

tax. (Wells Fargo Bank & Union Trust Co. vs. Collector, 70 Phil.. 325; Meralco vs. Yatco, 69
PhiL 89)
The State cannot tax property wholly and exclusively within the
jurisdiction of another state since it does not afford protection on
property beyond its territorial boundaries for which a tax is
supposed to compensate.
Taxation is bound to observe International Comity. This is the

courteous recognition, friendly agreement, interaction and respect
accorded by one nation to the laws and institutions of another.
As a matter of international courtesy, property of one foreign state

may not be taxed by another because of the principle of sovereign
equality among states under international law. (Art. //,Sec. 2, Philippine
Constitution)
Sinfce one State cannot exercise its sovereign dominion over

another, a nation cannot impose taxes to the properties of other
nations. (69SCRA460)
An example of international comity limitation on the power of

taxation is the tax exemption of properties used by diplomats or
head of states in the exercise of sovereign powers and diplomatic
functions.
Tax Exemption of the Government

Exemption from taxation is a grant of tax immunity to a particular
class of persons or corporations. The State’s immunity from
taxation is inherent in its power to impose tax.
The state cannot be taxed without its consent; otherwise, such is

derogation to its sovereignty. (5i Am. Jur. 550-551; 1 Cooley 263)
Tax exemption applies only to government entities through which

the government immediately and directly exercises its
governmental functions like the Armed Forces of the Philippines
(AFP).
If, however, the government entities are performing proprietary

functions such as Philippine National Railways (PNR) and National
Power Corporation (NPC) they are generally subject to tax in the
10 INCOME TAXATION
absence of tax exemption provisions in their charters or the law

creating them, (Collector vs. Hisaya Land Transportation, 105 Phil 133S)
Agencies performing governmental functions are exempt from tax

unless expressly taxed, and those performing proprietary
functions are subject to tax unless expressly exempted, (p.d. 1177-
National A>uv?r Coloration vs. RIC, 16 October 1990, 190 SCRA 477)
The Strongest among the Inherent Powers
Taxation power is the strongest of all inherent powers of the

government iq.r. no. 59431,25Juiy 1984. i3oscra 654) because, without money,
the government can neither survive nor dispense any of its other
powers and functions effectively. (Sison vs. Ancheta, g.r. no. 594131, 25 July
OS4, 130 SCRA 654; Vera vs. Fernandez, 89 SCRA 199.)
IMPORTANCE OF TAXATION
Taxation power exists inseparably with the State. It is essential
for the existence of the government. (Luzon Stevedoring Co. vs. CTA, July 29,
19S8).
Taxation is very important for the continuous existence of a

nation. It is the primary source of government revenue that is
used to effectively and permanently perform government
functions.
The power to tax may be used as an implement of police power in

order to promote the general welfare of the people. (Lutz vs. Araneta, 98
Phil 148; Osmena vs. Orbos, G.R. No. 99886, Mar. 31, 1993)
Taxation is exercised to raise revenue for the very existence of the

government to serve the people for whose benefit taxes are
collected (Vera vs. Fernandez, 89 scra 199). These reasons make the
payment of taxes compulsory.
Without taxation, the other inherent powers (police and eminent

domain powers) would be paralyzed. For this reason, even the
police power of the government may be exercised through
taxation power. (Commissioner vs. Algue, Inc., L-28896, 17 February 1988, 158 SCRA 9;
Luz vs. Araneta 98 Phil. 148)
Without revenue, there can be no continuing government.

Without government, there can be no civilization.
1 Genouii Pilociplon and Concepts of Taxation 11
BASIS OF TAXATION
taxation is basically established based on the following
e; r.'.v'icU's;
Principle of Necessity, Taxation is a power emanating from

necessity to presence the State’s sovereignty. (Phil. Guaranty Co., inc.
:.>■ c:k. joScra rrsi
The government has a right to compel all its citizens,

residents and property within its territory to contribute
money. It is because the government cannot exist without any
means to pay its expenses - a necessary burden to preserve
the State's sovereignty.
Taxation is the “lifeblood” or the “bread and butter” of the

government and every citizen must pay his taxes. (Commissioner vs.
Pineda.. 21 SCRA 105, cited in Cebu Portland Cement vs. Court of Tax Appeals G.R. No. L-
29059. 15 December 1987, 156 SCRA 535; 21 SCRA 105)
Taxes, being the lifeblood of the government, their prompt and

certain availability are of the essence.” (Antero sison vs. Ruben Ancheta,
G.R. No. 59431, 25 July 1984, 130 SCRA 654.)
2. Principle of Benefits-Received or Benefits-Protection

Theory. Based on the reciprocal duties, the government
collects taxes from the subjects of taxation in order that it
may be able to perform its functions and provide services to
them.
The government’s right to tax income emanates from its being

a silent partner in the production of income through means of
providing protection, proper business climate, and peace and
order to the taxpayers in the making of earnings.
The citizen, on the other hand, pays taxes to support the

government in order that he may continuously be sustained
with security and benefits of an organized society. (5i Am. Jur. 42-
43;
The symbiotic relationship and partnership between the taxing

authority and the subject of taxation is enough to justify the
imposition of tax power. (Commissioner vs. Algue, Inc., 158 SCRA 9)
'- 'v'sJSfcS OF TAXATION
2. Regulatory Purpose. Regulatory, also known as Sumptuary,

is a secondary objective of imposing tax. This objective is
accomplished to
a. Regulate inflation.
b. Achieve economic and social stability, and
e. Serve as key instrument for social control.
The amount of taxes may be increased to curve spending

pouvr and minimize inflation in times of prosperity. It may be
reduced to expand business and ward off depression in times
ot declining economic condition.
Taxes may be imposed to encourage economic growth by

granting tax exemptions, tax relief and incentives to attract
investments that will create employment.
It may be implemented to serve the general welfare of the

people in promoting science and invention (r.a. no. 5448) or in
financing educational activities (r.a. No, 5447) or in improving the
efficiency of local police forces to maintain peace and order
through grant of subsidy, (ra.nq.6141).
Taxes may also be used as a tool and weapon in international

relations.
It is an instniment to encourage foreign trade by providing tax

incentives or protect local industries against foreign
competition by imposing additional taxes on imported goods.
For example, if the Philippines would like to restrict trade

relations with some foreign countries, it can impose higher
custom and tariff rates on imported products. On the other
hand, if the Philippines would like to open trade relations with
other countries, it can reduce taxes on importation.
As a tool to protect trade relation, special duties may be

created to protect new conditions, such as:
(1) Discriminatory duty - this special duty is designed to offset

any foreign discrimination against our local commerce.
(2) Countervailing duty - it may be imposed to offset any

foreign subsidy granted to imported goods to the prejudice
of our local industries.
IV03WE TJUJCr$3*
3: Mz~kznp mm - :; is gfnnraTy rnposef. es a5

tax on imported am ties and. a: :
classifications,
JO**,. »«1«>^_/£^S a, jeterS ..0 4— .tv 5ui'!**’T'iT**.—.. _.^.1 'f «sJ62i!i$
imposed on imported goods with lower xj^s cccipsrcc to

their fair market rdtifs re nrotem local —miseries.
3. Com.peasi.tarT Purpose *~£Sd3w —amj ?<? nr zx

the benefit received.. For example, at erase 3i nr as
consumed is imposed on vehicle owners tsm roads. 1
case, the tax is ccmnensatorr for me use of rnsfi-
•4-* 56
Taxation is a way of giving bark che expected
social benefits due to the inhabitants..
Taxes may be i: blc isrbnir. of z-&d

rtfi income in the socdetv
In in Dome taxation, Maher taxes are collected ±

e welfare oc the
people in general.
In estate taxation, the estate tax reduces the property received

by the successor through the portion of the property ocCeoted
by the government, which is to be used for the benefit asf the
public or to defray the expenses of the government.
OBJECTS OF TAXATION
Objects of Taxation may refer to the subject to which taxes are

imposed. Generally, taxes are imposed on the following:
1. Persons, whether natural or juridical persons
a. Xorurol person - refers to individual taxpayers.
b. Jiindtoci person - includes corporations, partnerships,

and any association.
2. Properties, whether real, personal, tangible or intangible

properties
a. Real properties - immovable properties such as land and

buildings.
b. Personal properties - movable properties such as car and

other personal belongings.
c. Tangible properties - that which may be felt or touched

and are necessarily corporeal, either real or personal
properties.
d. Intangible properties - properties that are “rights” rather

than physical objects. Examples are patents, stocks,
bonds, goodwill, trademarks, franchises and copyrights.
3. Excise objects, such as:
a. Transaction - the act of conducting activities related to any

business or profession. It may involve selling, servicing,
leasing, borrowing, mortgaging or lending.
b. Privilege - a benefit derived through gratuitous transfer by

fact of death or donation.
c. Right - a power, faculty or demand inherent in one person

and incidental to another.
d. Interest - an advantage accruing from anything.
Scope of Taxation Power
In the absence of limitations provided by the Constitution, the

power to tax is unlimited in its range, complete (plenary), with
wide extent of application (comprehensive) and with highest
degree (supreme). If there is any limitation at all, it is the sense of
responsibility by the members of the law-making body to the
people that restricts its exercise. (SCRA Mactan Cebu International Airport vs.
Marcos, 330 Phil. 392, 404, Sept. 11, 1996)
Taxation reaches every trade or occupation, every object of

industry, and every species of possession. It imposes a burden
which, in case of failure to discharge, may be followed by seizure
or confiscation of property. (Churchill, et al. vs Concepcion, 34 Phil 969)
Limitations to the Power of Taxation
Although taxaucn pcwer :s supreme. us exercise is not absolute

êcsui'f -i . s supxp. «.© ijL—.ereru arm Coristiniiionsi Restrictions.
As an inherem power, by :is very purpose and nature restrict

taxation.- Tax power should be exercised for its very nature,
purpose £l.»u . .Su.i.
'iVhile taxation is said to be the power to destroy, it is by no

means unlimited. It is equally correct to say that the “power to
tax is not the power to destroy while the Supreme Court sits,”
because of the Constitutional restraints placed on a taxing power
that violated fundamental rights. .Ssâsy «t at *s- cta. or l-25g*3 Aprs 26,
t
:955-
A violation of these inherent limitations is tantamount to taking a

property without due process of law. Repsz-Cctz us. Munadpasity of Tanauan.
69 SCRA far.
Our Constitution assumes the existence of taxation and it also

protides some provisions to limit the exercise of tax power. Its
main purpose is to protect the objects of taxation against its
abusive implementation.
Therefore, if a tax law violates the Constitution, such law shall be

declared null and void. Scson i's. Arxh&z , gjl so. 59431,25 July 19S4r 130 scra
e
Any tax law that contradicts the limitation of taxation is also

unconstitutional.
Inherent Limitations
Inherent limitations are the natural restrictions to safeguard and
ensure that the power of taxation shall be exercised by the
government only for the betterment of the people whose interest
should be served, enhanced and protected. (69scra 460j
1. Taxes may be levied only for public purposes;
2. Being inherently legislative, taxation may not be delegated;
3. Tax power is limited to territorial jurisdiction of the State;
4. Taxation is subject to international comity; and

5. Government entities are generally tax-exempt.
These inherent limitations have been discussed in the nature of

taxation power.
Constitutional Limitations
Constitutional limitations are provisions of the fundamental law of

the land that restrict the supreme, plenary, unlimited and
comprehensive power to tax by the State.
As a rule, the Constitution does not create the power to tax on the
State. Instead, it simply defines and regulates the exercise of tax
power in order to safeguard the interest of affected taxpayers.
It must be remembered that a tax law is of no legal force when it

violates the Constitution.
The 1987 Philippine Constitution sets limitations in the exercise

of the power to tax as follows:
1. Due process of law;
2. Equal protection of laws;
3. Rule of uniformity and equity;
4. Non-impairment of contracts;
5. Origination of appropriation, revenue and tariff bills;
6. President’s power to veto separate items in revenue or tariff

bills;
7. Congress granting tax exemption;
8. Exemption from taxation of properties actually, directly and

exclusively used for religious, charitable or educational
purposes;
9. No public money shall be appropriated for religious purposes;
10. The power of judicial review;
11. No imprisonment for nonpayment of poll tax; and

t INCOME TAXATION
^2, :sjc codecs or. shall generally be treated as general funds ef

the government.
Due Process of Law
Art 111. Section 1 of the Constitution provides that 'Wo person

snail he deprived of life, UJserty, or property uAthaut due process of
law, nor shall any person be denied th.e equal protection of the
laws I
The phrase *due process of Law* mandates a fundamental right of

protection that life, liberty or property shall only be taken away
mom any person (natural or juridical} if its exercise is not ‘contrary
to the fundamental Law of the Land and it is done after compliance
with the established procedure prescribed by law, a96 scra. 322;
Due process requires giving notice to the taxpayer, providing him

hearing, so as to be given fair opportunity to assert his
substantial rights before a competent court before he shall be
denied or deprived of his property for non-payment of tax, n'cierda
irs. Jzrr&rjez, 11 FkfL 492; Aragon as. Jorge, 3.5 PfdL 426;
Essentially, due process requires that the law should be

reasonable and not oppressive (substantive), and it requires
opportunity to be heard in proper court of litigation before
judgment is rendered affecting one’s person or property
(procedural). /Banco Espanot-FSqmo vs Polanco, 37 PfuL 921; MacabingkS vs. Yatco, L-
23174, Sept 18 1967; Pepsi Cola vs. Man. of Tanauan, 69, SCRA 460; Trigal vs. Tobias, 2
SCRA. 1154; ABS-CBH Broadcasting Corporation vs. CIA, 103 SCRA 143)
The purpose of due process is to secure the individual from the

abusive exercise of the taxing power of the government. This
prevents the latter to encroach against the life, liberty and
property of individual persons and thus protect property from
confiscation without proper trial. fPepsi-Cola us. Municipality of Tanuan, 69
SCRA 460)
Equal Protection of Laws
“Equal protection of law” means that all persons subject to

legislation shall be treated alike under similar circumstances and
conditions both in the privileges conferred and liabilities imposed.
(1 Cooley 824-825; Sison, Jr. vs. Ancheta, 130 SCRA 654, July 25, 1984)
It is the right of all persons to have the same access to the law
and courts, and to be treated equally by the law and courts, both
in procedures and in the substance of the law.
The purpose of this Constitutional mandate is to protect persons

belonging to the same class against intentional and arbitrary
discrimination.
There is denial of equal protection of laws if there is

discrimination in the implementation of tax laws. For instance, a
tax ordinance applicable to similar persons, firms or corporations
in the same class which are subject to the same rate are taxed
impartially imposing the ordinance to some and favoring the
others.
Rule of Uniformity and Equity in Taxation

Art. VI, Section 28. par. 1 of the Constitution states that “The rule
of taxation shall be uniform and equitable. Congress shall evolve a
progressive system of taxation.”
A tax is said to be riiniform in application” if it operates with the

same force and effect in eveiy place where the subject may be
found, not when it singles out one particular class for taxation or
exemption. (Commissioner vs. Lingayen Gulf Electric, GJL No. 23771, 4 August 1988, 164
SCRA 27]
A tax for a national purpose must be uniformly and equally

applied throughout the country. All taxable articles or kinds of
the same class shall be taxed at the same rate. In other words, a
tax for a province, city, municipality, or barangay must likewise
be uniformly and equally applied throughout the province, city,
municipality or barangay. (City of Baguio vs. De Leon, L-2456; Oct. 31, 1968)
“Equality in taxation” is similar to progressive system of taxation.

The tax laws and their implementation must be fair, just,
reasonable and proportionate to one's ability to pay.
The primary requisite of the equity principle is that a progressive
tax rate shall be applied equally to all persons, firms and
corporations, and transactions placed in similar classification and
situation. (Sison, Jr. us. Ancheta, 130 SCRA 654, July 25, 1984)
The progressive system of taxation means that the tax laws

shall give emphasis on the ability-to-pay principle of taxation
20 INCOME TAXATION
whereby motv direct rather than iniinvet taxes air \mpcsed An

example of this kind is the current individual income tax system
that imposes rates pt'ogtt^sauxg now aids as the tax base
(taxpayer's taxable income) increases
Non-Impairment of the Contracts
*r*
An example of impairment by law i
on a contract entered into by the go
taxing statute, *«s. n,w,. s eh* .ex
In entering into contracts, the tstate act

private individual or corporation and n
as justification in impairinga valid cont
has assumed.
revenues, appropiiation or tantf bills.
The provision has been confined to revenue bills to levy taxes, and ha>
not understood to extend to bills for other purposes. i?v
\etvv.-*, y>>.:SN>':y
Unless specifically authorijed by law, the other branches of the

government (executive and judicial branches') have no power to
promulgate bills to be enacted into revenue law's.
Chapter 1 General Principle* and Concepts of Taxation 21
President’s Veto Power
Art. VI, Section 27 (2) of the Constitution provides that “Every bill
passed by the Congress shall, before it becomes a law be
presented to the President If he approves the same, he shall sign
it; otherwise, he shall veto it and return the same with his
objections at large in its journal and proceed to reconsider it.,,.”
Veto power refers to the Executive’s power to refuse to sign into

law a bill that has been passed by a legislature. It can be
classified into:
• Item veto power - the power to veto items in appropriation bills

without affecting any other provisions of such bills, and
• Pocket veto power - the disapproval of a bill by inaction of the

President which shall make the bill fail to become law.
If the President vetoed the bill, two-thirds of the members of the

House are required to make such bill a law. (ibid.)
Under the Constitution, the President does not have the so-called
pocket veto power because his failure to communicate his veto of
any bill presented to him within thirty (30) days after the date of
receipt thereof automatically causes the bill to become a law. (ibid.)
Congress Granting Tax Exemption
Art. VI, Section 28, par. 4 of the Constitution provides that “No
law granting any tax exemption shall be passed without the
concurrence of a majority of all the members of the Congress ”
It shall be observed that the above Constitutional provision

requires the concurrence of a majority not of the attendees
constituting a quorum but of all the members of the Congress as a
safeguard against the indiscriminate grant of tax exemptions.
Exemption from Property Taxation

Art. VI, Section 28, par 3 of the Constitution provides that
“Charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques and non-profit cemeteries and all
lands, buildings and improvements actually, directly and
22 INCOME TAXATION
exclusively used for religious, charitable or educational purposes

shall be exem pt from taxation. *
This exemption is granted to them in return for the benefits they

have afforded to the public welfare.
The Supreme Court, however, held that such tax exemption for
the above provision should be applicable only to real property
taxes and not to transfer taxes (Hodges us. Municipal Board of noilo City, 19
scra 28}. Hence, if a land owned by religious order is sold, it is
subject to a final tax of 6% based on the selling price or fair
market value whichever is higher. (Sec, 24 d (i), nirc)
In general, special assessments arc not covered by the exemption

because by nature they are not classified as taxes (Apostolic Prefect vs.
City Treasurer o) Baguio, 71 1*1111, 547),
To be exempted from taxation, the real property must be

exclusively used for religious, educational and charitable
purposes.
It would appear; therefore, that “idle lands” or property used by

others for other purposes although owned by religious,
educational and charitable institutions could be subjected to real
estate tax (Aina Valley College, Inc, us, Aquino, O.R. No. 39086, June 15, 1988).
Furt hermore, the income of such organizations derived from profit
activities or sale of properties, regardless of the disposition made
of such income, is subject to tax.
For this reason, the issue of ownership is not relevant, as long as

the real property is used exclusively for religious, educational and
charitable purposes in which case such property shall be
exempted from real estate tax. (Roman Catholic Church us. Hastings, 5 PHU. 701;
Hishryi of Nuevo Segovia vs. Provincial Board, 51 Phil, 352)
Revenue or income from trade, business or other activity, the

conduct of which is not related to the exercise or performance of
religious, educational and charitable purposes or functions shall
be subject to internal revenue taxes when the same is not
actually, directly or exclusively used for the intended purposes.
(BIR Ruling 046 2000)
Art. XIV, Sec. 4 [3], of the Philippine Constitution states that "All
revenues and assets of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational

purposes shall he exempted from taxes and duties
Proprietary educational institutions, including those cooperatively

owned, may likewise be entitled to such exemptions subject to the
limitations provided by law including restrictions on dividends
and provisions for reinvestment.
Public Money Not for Religious Purposes
Art. VI, Section 29 of the Constitution provides that "No public

money or property shall ever be appropriated, applied, paid or
used directly or indirectly for the use, benefit, or support of any
sect, church, denomination, sectarian, institution, or system of
religion, or for the use, benefit or support of any priest, preacher,
minister, or other religious teacher or dignitary as such, except
when such priest, preacher, minister, or dignitary is assigned to
the armed forces, or to any penal institution, or government
orphanage or leprosarium."
This limitation is fundamentally supported by the principle -that

taxes can only be levied for public purposes. Thus, the Congress
has no power to appropriate funds for private purposes with the
exception specified in the above-cited Constitutional provision.
The doctrine stated above is to further stress the principle of the

separation of the church and the State. (Art. VI, Sec. 6, Philippine Constitution)
In concurrence with the Constitution, the State shall have no

official religion, or shall not set up a church, whether or not
supported with public funds (Art vui, sec. i7[3], constitution), or prefer one
religion over another.
Likewise, the church should not interfere in purely political

matters or affairs exclusively for the State. Consequently, the
Constitution prohibits any infringement of religious freedom. (Art.
HI, Sec. 5, Philippine Constitution)
The Power of Judicial Review

"The Supreme Court shall have the power to review, revise,
reverse, modify or affirm on appeal or certiorari, as the laws or the
Rules of Court may provide, final judgments and orders of lower
courts in all cases involving the legality of any tax, impost,
24 INCOME TAXATION
assessment, or toll or any penalty imposed in relation thereto. ” (Art

vm, Sec. 5, par. 2[bJ.)
Art. VI, Section 30 of the Constitution provides that "no law shall
be passed increasing the appellate jurisdiction of the Supreme
Court as provided in this Constitution without its advice and
concurrence. ”
The Power of Judicial Review in taxation is limited only to the

interpretation and application of tax laws. Judicial review is
limited only to the review where involves:
1. The determination of validity on the tax in relation to

Constitutional precepts or provision; and
2. The determination, in an appropriate case, of the application
of law.
The judicial tribunals have no concern on the wisdom of taxing

act. Its power does not include inquiry on the policy of legislation.
Neither can it legitimately question or refuse to sanction the
provisions of any law consistent with the Constitution. (Bisaya Land
Transportation Co. os. Collector, May 29, 1959)
The Congress may not deprive the Supreme Court of its

jurisdiction in all cases involving the legality of any tax, impost or
assessment or toll or any penalty imposed in relation to tax.
The Supreme Court, being the highest court of the land, may
provide final judgments in all tax cases.
No Imprisonment for Non-payment of Poll Tax

Art. Ill, Section 20 of the Philippine Constitution provides that
"no person shall be imprisoned for debt or non-payment of a poll
tax.”
The term "poll tax" means a tax imposed on a person as a

resident within a territory of the taxing authority without regard
to his property, business or occupation. A good example of a poll
tax is community tax.
It is to be noted that the prohibition of imprisonment applies only

to the nonpayment of poll tax. Consequently, imprisonment for
nonpayment of other taxes (not poll tax in nature! or imposition of

fine would not be contrary to the Constitution.
Taxes as General Funds of the Government

Art. VI. Section 29, par. 3 of the Philippine Constitution states
that *A'd money collected on any tax levied for a special purpose
shall be treated as a special fund and paid out for such purpose
only. If the purpose for which a special fund was created has been
fulfilled or abandoned? the balance, if any, shall be transferred to
the general funds of the Government.*
Thus, collection of fee with the nature of taxes intended for the
promotion of sugar industry shall be treated as a special fund.
Such fund shall be used for its intended purpose and none of its
part shall be used for exclusive benefit of any private person.
Once the purpose is achieved, the unspent amount shall be
transferred to the general fund of the government. Gasrcn itsr^Sc
rfpjzrsers Sank, 155 SCRA 626;
STAGES, ASPECTS OR PROCESSES OF TAXATION

Taxation involves three stages, namely:
1. uevy:
2. Assessment; and
3. Tax payment or collection.
Levy
Levy or imposition of taxes involves the passage of tax laws or

ordinances through the legislature. Strictly speaking, it refers to
taxation or the tax policy of the Sovereign State.
Tne tax laws to be passed shall determine the nature of taxes

kind), those to be taxed (subjects - person, property or rights),
the purpose of tax (objective), how much is to be collected (the
rate and the base of tax), and how taxes are to be implemented
‘the manner of imposing and collecting tax), <fvtro i«. pm*. i9$scra
llaruonaL Poujer Corporation vs Albay, 186 SCRA 198: Luzon Stevedoring Co, CTA, 29 July
26 INCOME TAXATION
It also involves the granting of tax exemptions, tax amnesties and

tax remedies that the government and taxpayers may avail for the
proper implementation Of tax measure. (Commissioner vs. Botelbo Shipping
Corporation, 20 SCRA 487; 51 Am. Jur, 509)
This gives the legislature the freedom to choose the objects of

taxation provided that the law-making body does not violate any
inherent and constitutional limitations.
It cannot be delegated to the executive and judicial branches of

the government because by nature it is a legislative function.
Examples of tax legislative functions are the following:
a. Prescribing general rules of taxation,

b. Selection of the object or subject to be taxed,
c. Determination of the purpose for which taxes shall be
imposed, and
d. Fixing the amount of the tax and/or tax rates to be imposed.
The power of the President to “remit fines and forfeitures” does

not include civil penalties regarding nonpayment of tax and other
violation of tax laws. Such power embraces only fines and
forfeitures involving criminal liabilities upon conviction by final
judgment. (Art. VII, Sec. 19, Philippine Constitution)
Assessment
Assessment involves the act of administration and
implementation of the tax laws by the executive through its
administrative agencies such as the BIR or Bureau of Customs.
Generally, taxes are self-assessing. It means that the taxpayer

can compute his taxes by himself.
Technically, the word “assessment,” as used here, means the

appraisal and valuation of the subject of taxation. This process is
important in the determination of tax prescription, surcharges
and interests to arrive at the specific sum of tax charged on a
person or property in accordance to prevailing tax law.
Payment of Tax
Payment of tax is a process involving the act of compliance by the

taxpayer in contributing his share to defray the expenses of the
government. It is also called “tax collection,” the process of

obtaining payment of tax. Payment of tax also includes the
options schemes or remedies as may be legally open or available
to the taxpayer.
The first two stages of taxation (levy and assessment) are referred
to as the im pact of taxation , and the third phase is referred to as
the incidence of taxation.
As a rule, the aspects of taxation that can be delegated are

assessm ent and collection of taxes since they are administrative in
nature.
Examples of tax administrative functions are the following:

a. Valuation of property for taxation,
b. Equalization of assessment, and
c. Collection of taxes.
ASPECTS OF TAXATION
Passage of Tax Law (Levy)

Legislative
Function • Define object of tax
(Congress) • Fix tax rates Tax
• Prescribe filing/payment date Policy
• Penalty for violations
• Tax exemptions
Administrative
Function
Tax Assessment
(Executive thru
BIR) Computation (tax base x rate = tax) { N
Note: In case there I Tax

is a question as to Adminis
the interpretation of Colic "
tration
the tax laws, the
Judicial Branch of
the Government
(Supreme Court)
shall give the final
resolution.
28 INCOME TAXATION
PRINCIPLES OF A SOUND TAX SYSTEM
The fundamental principles of a sound taxation system based on

Adam Smith's Canons of Taxation are
1. Fiscal Adequacy,
2. Equality or Theoretical Justice, and
3. Administrative Feasibility.
Fiscal Adequacy
The principle of fiscal adequacy states that the sources of revenue
of the government should be sufficient to meet the demand of
public expenditures regardless of business condition. The revenue
of the government should be capable of expanding or contracting
annually in response to variations in public expenditures.
Because of inelastic government revenue, there may be surplus in

budget if revenue is greater than government expenses and a
budget deficit if government expenses are more than government
revenue.
An ideal budget to achieve fiscal adequacy is a balance between

government revenue and government expenses. A balanced
budget is achieved when revenue equals the expenditures.
It is desirable that the government shall adopt effective measures

to collect taxes efficiently and reduce its expenditures to obtain a
balance and adequate fiscal budget. This could be done through
proper collection of taxes and reduction of government
expenditures to meet the available funds of the government.
Equality or Theoretical Justice

This principle states that the tax burden must be proportionate to
the taxpayer's ability to pay.
It is based on the philosophy that “he who received more should

give more.” The contribution of each individual to the government
should be fair enough according to his earnings and wealth.
Chapter t General Principles and Concepts of Taxation 29
fknce the Constitution provides that taxation must be equitable, a

:ax measure that violates equality or theoretical justice would
make such tax measure null and void. (An. vi sec. s, Phil, constitution)
Administrative Feasibility
Tax laws must be convenient, just, uniform and effective in their

udnmmstration - free from confusion and uncertainty. Their
exercise should be convenient as to the place, time and mode of
payment* and not burdensome or discouraging to business.
Competent public officials must enforce them uniformly.
Applications of administrative feasibility are
a. Collection of taxes at source (withholding tax),

b. Assigning of duly authorized banks to collect taxes,
c. Quarterly filing and payment of income taxes, and
d- Electronic filling of tax returns.
The principles of fiscal adequacy and theoretical justice represent

the nature of the government’s tax policy and the administrative
feasihEirv represents tax administration.
CERTAIN DOCTRINES IN TAXATION
In the exercise of taxation power, some underlying doctrines for

its implementation are as follows:
- Prospective application 7. Set„offtaxes

o: tax laws
„r . .. ... 8. Taxpayer suit
u .mprescriptibility of taxes
„ _ 9. Compromises
: -jouoie taxation
, _ . 10. Power to destroy
* escape from taxation
_ _ . 11. Situs of taxation
exemption from taxation
o. Equitable recoupment
Prospective Application of Tax Laws
The principle of ^prospective application of tax laws” states that a

tsx bill must only be applicable and operative after becoming a
f " - v /E-S^Y O- COPDiLLERAS
i____________ V"'"-''________________
30 INCOME TAXATION
law. Thun, the effectivity of the tax law commences upon its
approval and its scope would only cover the present and future
transactions.
The retroactive application of tax laws shall not be applied unless

there is a clear intent of the legislature that such law shall also be
imposed on past transactions. (Hydro Resources vs. Court of Appeals, 21
December 1990, 192 SCRA 604)
Consequently, the rule of uex post facto” is not applicable for tax
purposes. However, when it comes to civil penalties like fines and
forfeiture (not including interest), tax laws may be applied
retroactively unless they produce harsh and oppressive
consequences that violate the taxpayer’s constitutional rights
regarding equity and due process. (Republic vs. Fernandez, 99 Phil 934; Lorenzo
vs. Posadas, 4 Phil. 353; Commissioner vs. Filipinos Cia de Seguros, 107 Phil. 1055)
*. * , . .I
Black’s Law Dictionary explains that the law is said to be ex-post
facto if it provides for the infliction of punishment upon a person
for an act done which, when such act was committed, is not
subject to any punishment.
j . •
Imprescriptibility of Taxes '
The rule on “tax imprescriptibility” states that unless otherwise
provided by the tax law itself, taxes in general are not cancelable.
(Commissioner vs. Ayala Securities Corporation, 101 SCRA231)
Although the Tax Code provides for the limitation in the

assessment and collection of taxes imposed (Secs. 203 and 222, nirq,
such prescriptive period will only be applicable to those taxes that
were returnable. The prescriptive period shall start from the time
the taxpayer files the tax return and declares his tax liability.
(Collector vs. Bisaya Land Transportation Co., L-12100, 29 May 1958)
The Court held that there is no time limit on the right of the BIR
Commissioner to assess taxes on unreasonable accumulated
earnings of the corporation. (Sec. 25, nirq
The law on prescription being a remedial measure should be

interpreted liberally in order to protect the taxpayer. (Republic vs.
Ablaza, 108 Phil. 1105)
Double Taxation
Double Taxation means an act of the sovereign by taxing twice for
the same purpose in the same year upon the same property or
activity of the same person, when it should be taxed once, for the
same purpose and with the same kind of character of tax.
The Supreihe Court held that there is no Constitutional

prohibition against double taxation in the Philippines (vmanueva vs.
noiio, 26 scra 578); therefore, it is not a valid defense against the
Validity of a tax measure. (Pepsi- Cola vs. Tanauan, 69 SCRA 460)
This decision, however, springs valid constitutional defenses

against oppression and inequality in the implementation of tax
pOWer. (CUR vs. Lednicky, July 31, 1954)
To avoid injustice and unfairness, doubts as to whether double

taxation has been imposed should be resolved in favor of the
taxpayer.
Indirect Duplicate Taxation. This is double taxation in its broad

sense. It extends to all cases in which there is a burden of two or
more pecuniary impositions. It is usually allowed as long as there
is no violation of the equal protection and uniformity clauses of
the Constitution.
Indirect double taxation may be counteracted through the

application of:
1. Tax exemptions;
2. Reciprocity clause/tax treaty;
3. Tax credit; and
4. Allowance for deductions such as vanishing deduction in
Estate Tax.
Direct Duplicate Taxation. This is double taxation in its strict

sense. It is prohibited because it comprises imposition of the
same tax on the same property for the same purpose by the same
state during the same taxing period.
This kind of double taxation violates the constitutional provision

of uniformity and equal protection, as well as the principle that
tax must not be excessive, unreasonable and inequitable.
Therefore, such taxation should, whenever and wherever possible,
be avoided to prevent injustice or unfairness. (De wiata vs. Stanley. 32
32 INCOME TAXATION
F*hii 54}. Btm Miguel fimu+ry. Inc., vn. City of O.hu. L 20 tl2, February 26, lb?'/, Ot,4
fisjgmo m. G+ ls-ort, 2 > SC PA b tHj
There is no double taxation in the following ca^cs:
1 Uy taxing corporal/; income and stockholders' dividends from

the .same corporation,
2. A tax imposed by the state and the local government upon the
same occupation, calling or activity.
3. Real estate tax and income tax collected on the same real
estate property leased for earning purposes, (vuianueva vn. cay of
Iloilo, 26 SCR A 578)
4. Taxes are imposed on the taxpayer’s final product and the

storage of raw materials used in the production of the final
product. (Prater Sr. Gamble Philippines us. Municipality of Jana, 94 SCRA 894)
Escape from Taxation

“A tax evader breaks the law (tax evasion), the tax avoider
sidesteps it (tax avoidance)" (Schultz & Harris, American Public Finance).
The “doctrine of escape from taxation" permits the taxpayer to

minimize (if not to escape) payment of tax by lawful means.
Forms of Escape from Taxation

The ways by which a taxpayer could escape tax burdens may be
through the following ways:
1. Tax evasion (unlawful means); and

2. Tax avoidance (lawful means):
Several forms to tax avoidance, which could be legally used by

the taxpayer, to minimize his income tax liability are:
a. Tax option;
b. Shifting;
c. Capitation;
d. Transformation;
e. Exemption;
f- Tax Amnesty; and
g. Tax Condonation.
Chapter f Ge->e*^ P-r*ciDle$ r^ywr-51 c' 'ivatw 34
Tax Evasion
under this. method the taxpayer uses illegal ex unlawful means to

defeat, evade cr lessen the payment c: tax It presupposes malice,
fraud, baa faith or wilful intent cn the part cf the taxpayer v;T ;*.
Ganancs icscstf 555 to suhsturtrialiy underlie hare income -*-*«■ •. cia
i-.-nsr -.
Examples: Mon-inhusicn h sales, deliberate fabrication of

expenses, and forming an artmmal person to evade taxation or to
oeuDerarerr reduce taxable income: or malicious failure to report
income to defeat tax habilipt
These forms o: hax doegfrizT are prohibited and therefore subject

m civn anc. , cr crtmrna. penalties ard seek, Tax Et-asior, p. 21).
In Republic t: Gcuzhes E3 SCRA 633i, the Supreme Court

affirmed the assessment of a deficiency tax against Gonzales, a
private concessionaire engaged in the manufacturer of furniture
inside the Clank Air Base, for underdeclaration of his income.
SC held that the failure of the taxpayer to declare for taxation

purposes his true and actual income derived from his business
for two '2l consecutive years is an indication of his fraudulent
intent to cheat the government if its due taxes.
Tax Avoidance
This is also called Tax Minimization, It is reducing or totally
escaping payment of taxes through legally permissible means.
Examples of tax avoidance are:
h Selling shares of stock through a stock exchange in order to

avail of the lower tax rates. (Sec. 127[aj, nirq
2. Estate planning within the means sanctioned by the Tax Code

has been held to be one of permissible tax minimization. (Sec.
34 r iMRC; Deipher Trades Corporation vs. IAC, 157 SCRA 349)
The Supreme Court upheld the estate planning scheme

converting the taxpayers' property (Pachecho co-owners) to shares
of stock in a corporation which they themselves owned and
controlled by virtue of deed of exchange. The legal right of the
taxpayer to decreased the amount of what otherwise could be his
34 INCOME TAXATION
taxes or altogether avoid them by means which the law permits

cannot be doubted. (Delphers Traders Corp. v. Intermediate Appellate Court [157 SCRA
349)
Tax avoidance is valid if used by the taxpayer in good faith. The

law does not forbid it and it does not constitute tax fraud. (Heng r&ng
Textiles Co. Inc., us. Commissioner, August 26, 1968; Delpher Trades Corp. vs. IAC, 157 SCRA
349)
Tax Option
Taxpayers may choose to pay lower tax rate in some transactions
as permitted by Tax Laws.
For instance, a taxpayer who sells investments in stocks directly

to the buyer may opt to pay 5% to 10% tax based on capital
gains, but if he opted to sell the investments in stocks through
stock market, he is required to pay a tax of xh of 1% based on the
selling price.
Shifting
Shifting, basically, is the transfer of tax burden to another; the
imposition of tax is transferred from the statutory taxpayer to
another without violating the law. For instance, taxes paid by the
manufacturer may be shifted to the consumer by adding the
amount of the tax paid to the price of the product sold.
As a rule, only indirect taxes may be shifted; direct taxes cannot

be shifted.
Forms of Tax Shifting: The shifting of taxes may be made in the

following forms:
1. Forward Shifting - the burden of tax is transferred from the

manufacturer, then to the distributor and finally to the
ultimate consumer of the product.
This is best exemplified by indirect taxes like the value-added

tax (VAT).
2. Backward Shifting - the tax burden is transferred from the

ultimate consumer through factors of distribution to the
factors of production.
Chapter 1 Gotimal Principle* awl Concept! of Taxation 35
d. Onward Shifting the tux burden i n tdiiflwl I wo of more

HtUPfi either forward or bnekwnrd,
Capitalization
This refers to the reduction in thr price of thr taxed object equol
to the capitalized value of the full ire luxes which the purehnfter
expects to be called upon to pay,
In other words, tax capitalization is made when the price of the

property is lowered to accommodate thr* exclusion of the tax
which is expected to he paid by I fir seller as a result of sale
transaction.
For example, a reduction made by the seller on the price of the

Real Estate, in anticipation of the capital gains tax agreed to be
shouldered by the buyer.
Transformation
The producer absorbs the payment of tax to reduce prices and to
maintain market share. He recovers his additional tax expense by
improving the process of production. The tax, therefore, is
transformed into a gain through the medium of production.
Exemption from Taxation

Exemption from taxation denotes a grant of immunity, expressed
or implied, to a particular person, corporation, or to persons or
corporations of a particular class, from a tax upon property or on
excise which persons and corporation generally within the same
taxing district are obliged to pay. (5i Am. Jur. 503)
The grant of immunity is a freedom from financial charge,

obligation or tax burden to which others are subjected.
“Taxation is the rule and the exemption is the exception.”
In the exercise of its inherent power to tax, the State through its
law-making body has full power to exempt any person,
corporation or class of property from taxation.
i
36 JSCOWE TAJ£ATX)H
Tax exemption as a privilege is persorto ar.d in any way cancc:

be transferred or assigned by the p*ers-or. to whom it is
'without the consent of the state-
lax exemptions are generally granted on the basis c* to.

reciprocity, fbj public policy and. to contracts.
Tax exemptions, including its equivalent provisions such as

deductions, tax amnesty, and tax condonations shall be governed
by the following principles:
1. They are not presumed. .rtr-o .cemem xs. Sv-vspe.. too scsa
2. When granted, they are strictly construed against me

taxpayer. [.Luzon Steveridcrvig Co. us. Cvu~ of 7zx Appeal 163 S
3. They are highly disfavored and may almost he said fro be
directly contrary to the intention of tax laws/ HsrZs. s&kctc
Cornpojvj vs. Vera, 67 SCPA 351 ■
4. Hence, he who claims tax exemptions must be able to justly
his claim Or right. (Cvnrrassxrisr or Irzerr^L Pezerzae us, rU Server C
LTD.. 65 SCPA 143)
A tax cannot be imposed unless it is supported by the dear and

express language of law. Once the tax is unquestionably imposed,
“a claim of exemption from tax payments must be clearly shown
and based on language in the law too plain to be mistaken/ ncze*
Gulf vs- Corrvmsskmer, 293 SCPA 76 J19931
The partial tax refund authorized under Section 5, RA 1435, is in

the nature of a tax exemption, it must be construed strictissirni
juris against the grantee.
Classifications of Tax Exemption

Tax exemption may be classified as:
1. Expressed exemption. These tax exemptions are statutoiy

laws in nature as provided by constitution, statute, treaties,
ordinances, franchises or similar legislative acts. Examples of
statutory tax exemptions are
a Inter-corporate dividends by a domestic corporation from

another domestic corporation (Section 27d [4], mrq;
b. Section 105 of the Tariff and Customs Code;
1 Cone#*** of Utrt*fh
'if
I ;y( f - f i o t i y.'M of fbe t / t f ftl f t , f t f / , r ) p f ,//!/■■ nftft

<1 (>)U* t *pM ini Ift'x/n sn'b ** Onv,,ym ^
Ibby t f H t M rfbh t ' w l i W n f f * ^
/ wt), ton<1 f U ‘' 'y^
y !fr>pll«d «*«rnptlor. ut try otr*1m*r,, 'Hi*M

either inkhtiornd or fceddonte/. Tn/4*o (///>; ■rff'+l ' \ ' % / ■ .
iinpfisrrl on » I ' t t n i n <Iam of ^f*,*,*, *
frmisnetions without mentioning o f r ^ f ryÂ^%-f ^
fnrntlohrrf me fUf <1 exempted te/ omm>bm ' ''
11A AY VM '// y; ws/4* O'y
«V Contractual exftrnptJom C o o f o v # # / '*'■</'& %■*+

those lawfully entered i n t o by fhe gnvC-' t,asx, , ; , ooo^'aoftt
u n d r r existing laws. These exemptions m j$t not
with the tax exemptions granted unde/ fraochMe*, Moss'4/e
not contracts within the nontext of ty,^ oor> >rn
(9f the Constif 111ioo. »</</</** #**.*/*’ o* ^ <;*„**+,*.**,, ^ ^
Cont.rnot.unl fox exemptions covering masters *n.af

essentially government in nature, Such as Loose oo.vte.ncd ^
government bonds or debenture teniixe >n francn.sc?L may no*
be revoked without impairing the obligations of contracts,
(Casanovas us. Hfrrd, ft Wilt. I '/5)
Tax Amnesty
There is tax amnesty when the State grants genera, pardon or
intentionally overlooked its authority to impose penalties on
persons guilty of tax evasion or violation tax la to The govern men t
allows absolute forgiveness or waiver its right to coiect what fe
due in order to give the tax evader who wishes to reform a char.ee
become a part of the new society with a dean slate ,
Intermediate Appellate Court, 196SCRA 335)
Tax amnesty has limited applicability as to cover a parncu-ar

taxing period or transaction only.
Like tax exemption, tax amnesty is never favored nor presumed m

law. It is granted by statute. The terms of the amnesty must also
be construed against the taxpayer and liberally in favor of me
government.
m INu %'Mfc I A H A I M * N
T^tx \>i\ dx Ntimiti*loit
s tax vomUxuaium oi Us u mission whi n Hit blnh <!. .f,|(1i^

;r.rau\s trout intlu ting or i ulm* U h u m * IIiIuk m* w*;||
a> to i.estoro \xhac has ah cadv been Uilu-u. pmmo i uum Mdut t nutmimm,
v mu 7 y'\
condonation of a tax liability is eqiuvuleiil In and is in Mm

a a rare of a rax exemption, Thus, it should he yuslaiiud only
Vw _\ert expressed in the law, (S\piyau Consolidate I hUning a ('wrunitikiufm
M&rnaL Revenue, 9 SCR\ 72$'
Equitable Recoupment
This doctrine of law states that a tax claim for refund, which is
prevented by prescription, may be allowed to be used as payment
for unsettled tax liabilities if both taxes arise from the same
transaction in which overpayment is made and underpayment is
due. This doctrine is not applicable to cases where the taxes
involved are totally unrelated.
Set-off Taxes
This doctrine states that taxes are not subject to set-off or legal
compensation because the government and the taxpayer are not
mutual Creditor and debtor of each Other. (Republic vs. Mambulao Lumber
Co., 6 SCRA 622; Caltex Phils. Vs. COA, 208 SCRA 726)
A person cannot refuse to pay tax on the basis that the

government owes him an amount equal to or greater than the tax
being collected. The collection of a tax cannot await tlie results of
a Lawsuit against the government. (Philex Mining Corporation os. Commissioner
of Internal Revenue, CA and CTA, G.R. No. 125704, 28 August 1998; Francia vs. Intermediate
Court, 162 SCRA 753)
Exceptions:
1. Where both the claims of the government and the taxpayer

against each other have already become due, demandable and
fully liquidated (Domingo vs. Garlitos, 8 SCRA 443)\ and
2. When there is an actual compromise between the taxpayer

and the tax officer.
* ir»; 3nnanr«i & *dj^ 3$
** yw,*?’^ 5wa- bmez. tnrru^h rcur: Trccfetdrngs cou^d cs^y be

aIinw-c u me S- :Tt\TT5 * dmecs and Ocjl; msbursemen: of
nunhr run ns berTT'? ’ *S-3E£.*3m.- Pssejuo, ^xr-itar% 7f ûStiu 8'jrts .': Z
»!u. m: ~. <■". .fir ”S.:
ng j?cs- czesbsns 'arruld be inxire: :c be

rmssme:: as taxp
» nnre z ooes r.:; in funds raised bv

IIXIjX Gsrraciea: j-*. JfcrajR. 55 SCK* = n
vft *»*• . ** W"W- m

W‘M.4 ircn holding an. exercise
m sunranc nr miesnru its mar: tc cal, a specie! el-ectksn.
Osrmiar ;s Znrrrm si^cy^. zra. Ziarscra; P5 SCKa ? Izzz&z. 2n£ ixx is CsTWHcssaseri rra
r. Z- t ZO SS. r* .cnxua~* IPS?
I. Onb’ the BIR Commissioner is expressly authorized by the Tax

Code rc enter into compromise for both civil and criminal
liahfhn.es subject to certain conditions; -ses. nx jcsq
2 me Collector of Customs is given the power to compromise

•stth respect to customs duties limited to cases where
legitimate authority is specifically granted, such as in the
remission of duties; sec. tog. tcc,
3. The Customs Commissioner, subject to approval by the

Secretary for Finance, has the power to compromise cases
involving the imposition of fines, surcharges and forfeitures
3e- 23j£, reef, and
The Local Government Code has no provision regarding

compromise; however, tax liability (not criminal liability) is not
prohibited from being compromised (Arts. 2034 and 2035, cn* codei
40 INCOME TAXATION
Even so, there is no specific authority given to any public

official to execute the compromise so as to render it effective.
This topic is further discussed in Chapter 2 of this Book covering

the powers of the BIR Commissioner.
Power to Destroy
This tax doctrine is based on the Marshall Dictum which states
that the power to tax includes the power to destroy because the
taxpayer has no option but to pay the tax imposed to him.
(McCulloch vs. Maryland, 17 U.S. 316 (1819))
The government can compel payment of tax and forfeiture of

property through the exercise of police power.
A lawful tax cannot be defeated just because its exercise would be

destructive or would bring about insolvency to a taxpayer.
Power to Build
Under the Holmes Doctrine, tax power should not be viewed as a

power to destroy. The burden to pay tax is only a means to nation
building and a consequence of taxation.
While tax power is so extensive that it seems it can destroy, it is

primarily a tool that creates, builds and sustains the upliftment
of social condition of the people in general as it continuously
supports the other inherent powers of the State that preserve the
fundamental rights of the people.
Therefore, so long as the tax is exercised with caution to minimize

injury to the proprietary rights of a taxpayer (Roxas vs. court of Tax
Appeals, 23 scra 276) and does not violate any constitutional and
inherent limitations, it is valid and cannot be judicially restrained
merely because of its prejudicial effects to a particular taxpayer.
Situs of Taxation
Situs of Taxation refers to the place of taxation, or the state or
political unit which has jurisdiction to impose tax over its
inhabitants.
It is the application of the principle of territorial jurisdiction

which limits the exercise of tax power in defining the objects of
taxation. It defines boundaries of the taxing power over the
objects of taxation in terms of location whether or not they shall
be subject to tax. Protection is the basic consideration that
justifies tax situs.
The following factors are determinants to the situs of taxation:
1. Nature, kind or classification of the tax being imposed;
2. Subject matter of the tax (person, property, rights or activity);
3. Source of the income being taxed;
4. Place of the excise, privilege, business or occupation being

taxed;
5. Citizenship of the taxpayer; and
6. Residence of the taxpayer;
Summary Application
GENERAL RULES OF TAX SITUS
Source or Location
of Obiect Taxable?)
Within the Outside the
Nature of Tax Citizenship Residency. Philippines Philippines
T~ Income Tax Filipino Resident Yes Yes
Filipino Nonresident Yes “ " No
Aliens Resident Yes No
Aliens Nonresident Yes No
n. Transfer Tax Filipino Resident Yes Yes

Filipino Nonresident Yes Yes
.] Aliens Resident Yes Yes
Aliens Nonresident j Yes No
i
......................i‘ 1
Ml. i Business Tax j Yes | No
NATURE OF TAXES
Taxes are forced burdens, charges, exactions, impositions or

contributions assessed in accordance with some reasonable rule
of apportionment, by authority of a sovereign state, upon the
person, property, or rights exercised, within its jurisdiction, to
<2 1SCOWE TAXATION
provide public revenues for me sup-pert of the government. the

adininistrsTicri cf the law. or bee payment a: public expenses.
Taxes are obligations created by law. Taxes arise from law and
could only be imposed by the government- Taxes must be
imposed even without previous agreement between the
government and the taxpayers.
In taxation, it is ones civil Eability to pay taxes that gives rise to

criminal Eability, unlike criminal cases where criminal liability
gives rise to crril liability. vs. =s=2*ac. ju- 12, :9er,
Taxes axe generally personal to the taxpayer. Their payment

should be borne specifically by the person with tax Eability.
Since law vests a corporation with personality that is separate

and distinct from those persons composing it, its tax delinquency
cannot be enforced against its stockholders.
The stockholders, however, may be held Eable for the unpaid

taxes of a dissolved corporation if it appears that the corporate
assets have been transferred in favor of the said stockholders. (Tan
Tiong Bio vs. Commissioner, April 23, 1962; Supio us. SLRC, January 31, 1984)
Essential Characteristics of Taxes
The essential characteristics of tax are:
1. Enforced contribution. The imposition shall not be dependent

upon the will of the taxpayer;
2. Imposed by the legislative body. The Congress makes tax

laws;
3. Proportionate in character. The “ability to pay principle” is the

basic rule in colleting taxes. Those who earn more contribute
to the government’s coffer more than those with lesser
earnings;
4. Payable in the form of money. Money is the preferred payment

of taxes. If property is taken to satisfy tax liability, the
property is sold through pubEc auction to satisfy the tax
obligation;
Chuptot 1 Prlnt>l|»lM aihI Coimfrpt* of Tmuition 4:1
A /or (hr ptufH>sr 0/ tuisiny rrt'cmw, Tnxrh mm fhr

ptiuum rtotium ol ôvoi muon! Iiunln In Immnm ilh
OsprudilUiON mul pto|nlft;
0 l*sr\i for u t'Uhtie put post*. Money In Udfrn (mm Itm j>11 biir; ho
il, i’«n hr tmlutnrd to them in llir loi m ol public Imimlila;
7 Kq/brtvd on worm* prrnotiH, properties or riyhttt, Object!* nl

Uixotiou tur either hmp*ib!e 01 inlmifjlblr properlion, including
business trm\Ht\OtiooM!
8, t\»rmm>n/!/ mmired (0 he paid <t( reyular intervals, Tim dolma

tot paying ol tnxen hit bxNl by Ib8 low lo comply with flm
principle ol mttniiilrU ml Ivr IVîrWl »l 111 y: mid
Imposed hy (hr soverchitt state withiti its Jurisdiction, Tim

enforcement of Inx in mibjrol In I'nriloiinl jnriMdiction find
internntionnl comity,
SUMMARY Ol* TAXI It

MAJOR INCOMH
OBJECT CLASSIFICATION1)1 SCRUM ION Cl AttAIElCAllON
1 Pomon Pmnoiutl tnx Community lax
hoP"r,y Pioporty Inx Mnnl giopnd^ tnx , ... ...
JlKjahtV- Muxlnonn 0 Vnlun nddnd lux
Inxon!
(normol oourao h,of
Olhoi pprqnnlngn Inx
tuiftlnmin) o. PXolun lax * " ■ ’ --l.unt iHthtt,
1 rnnufnr Imxom m, !I nlnltt tnx
(grntultoua Irntmfn?)
I), Donor'«Inx ■
-------- .. Income tuxes n, I'lrtnl withholding Inx Income wlihlrt
f’ntstolvn
MM....-*. Bole of rool property
(Onpltel asset)
dnpllnl,mwlu
.rt,l,,MW.. .................... ............. gnio on.............
".... sale of ............
shnrn of stock outside
slock exchange
.............. h, Croditnhln with, Compensation
tnx Incomo
I VofossionAl foo
Moo|, Brokers, agent fee
p. Annunl IncomoCompensation Inx Income
Buninas* Income
_ Oeln, iyol« of other capital ass
' .......... i.. 1' ■ ,m'" Passive income earned outside
4-4 INCOME TAXATION
Classifications of Taxes
Taxes are grouped according to the following clas-sitications:
1, x eh. 'pose.
a. O" iPsom These taxes Are imposed sc«ep ^5cx the

purpose of raising revenue for the gcve.rn.ment ?e.g, .roome
rax, value added rax. and transfer taxes'.
b, Aeg.imn. A: war c5:.mn,.i7 These taxes are imposed

for the rumose of achieving some social or exnoreJc goa,s
having no relation to the raising of revenue ;e,g, customs
duties. Protective tariff cn imports to control toretgn trace
and excise tax*.
c, Cc''tr»?macrcn>, Taxes may be imposed for the equitaole

distribution of wealth and income in the society.
As ro vTriv: or f^.dp'oc: Afirmn
a, iVmsmmi. Pod, or cVuxmricu These taxes are fixed in

amount and imposed on persons residing wittun a
specified terriroiy regardless of the amount of their
property or their occupation or business v e. g. Community
Tax);
v.
<■ Proponu. These taxes are imposed on persona! t V -4 g v
property based on its proportionate value or in accordance
with some other reasonable method of apportionment,
(e.g, Real Estate Tax); and
c. jTvome, These taxes are imposed upon the pexforntance of

a right or act, the enjoyment of a privilege or the
engagement in an occupation g, Professional tax.
Income Tax, Estate Tax. Donor's Tax and Value-Added
Tax),
Note: Pie excise tax as used above should not be ccaxbased wild excise tax
von pwpexpl .r.wvscd cn certain specified Ardcies snanu&er.ued or predwexi
in or .nincned into lie Philippines for either docnesnc saN or coasxunpbon, s.xr
for arx other disposition.
As to Deiemibuztion o#'Amo:.x:,'
a Ad Valorem, These taxes are fixed amounts in proportion

to the value of the property with respect to which the tax
is assessed- It requires the intervention of Assessors to

estimate the value of such property before the amount due
from each taxpayer can be determined (e.g. Real Estate
Tax, Custom Duties and Excise Tax on fermented liquors,
cigars, cigarettes, gasoline and automobiles).
b. Specific. These taxes are fixed amounts imposed and

based on some standard of weight or measurement, head
or number, length or volume. It requires independent
assessment other than a listing or classification of the
subject to be taxed like excise taxes on distilled spirits,
wines, fireworks, and cinematographic films. (7scra887)
4. As to Who Bears the Burden:
a. Direct. These taxes are non-transferable. They are

demanded from persons who are bound by law to pay the
tax. The liability for the payment of tax as well as the
burden of the tax falls on the same person (e.g.
Community Tax, Income Tax, Transfer taxes, Traveler’s
Tax and Corporate Income Tax).
b. Indirect. These taxes are transferable. The liability for the

payment of tax fails on one person but the burden thereof
can be shifted or passed to another.
Note: JruMrvct twcea arc imposed on commodities. They form part of the
puroba&e price of the commodity or service and passed on to the
customers (e.g. VAT, Customs Duties, Amusement tax, Excise tax on
specified goods, and Percentage taxes).
r>. As to Sajpe or Authority Collecting tine Tax:
a. National. Those taxes collected by the National

Government. Examples of national taxes are:
1) Estate and Donor’s Taxes;

2) Income Tax;
3) Value - Added Tax;
4) Excise Tax;
5) Customs Duties; and
6) Documentary Stamp Taxes.
b. Local or Municipal Those taxes collected by the Municipal

Governments. Examples of local or municipal taxes:
l) Community tax;
46 INCOME TA/ATlOf
2) Municipal IictrtocA ^xe*.;

3) Professional tax; and
4j Real estate tax.
6, As to Rate or Gradualism:
a. Proportional or Flat RaXe, The rate of the tax i& based on a

fixed percentage of the amount of the property, receipt or
other basis to be taxed (e.g, Real estate tax and VAT),
b. Progressive or Graduated Rate, The rate of the tax

increases as the tax base or bracket increases (e.g, Income
Taxes, Estate Taxes and Donor's Taxes),
c. Regressive Rate. The rate of tax decreases as the tax base

or bracket increases. There is no regressive tax in the
Philippines.
Note: Regressive tax rate is not the same with “regressive taxation
system,” which exist when there are more indirect taxes than direct taxes
putting the burden more on the low-income sector of the population for
they buy more consumable goods on which indirect taxes are collected,
d. Digressive Rate. A fixed rate is imposed on a certain

amount but diminishes gradually on sums below it. In
digressive rate, the tax rate is arbitrary because the
increase in tax rate is not proportionate to the increase of
tax base.
e. Mixed Tax. It is a tax system that uses a combination of

the different tax rates.
OTHER CHARGES/ FEES
1. Penalty is any sanction imposed, as a punishment for

violations of law or acts deemed injurious. It arises from law
and/or contracts. It is imposed to regulate conduct through
punishment and suppression of injurious acts or unlawful
behaviors. The government or a private person may impose it.
2. Revenue refers to all funds or income derived by the

government whether from tax or from other sources. For
example, all national internal revenue taxes, financial
assistance from another government, donations from private
individuals, commercial revenues like tolls, postage, price
paid for goods and services produced by government-owned

enterprises and administrative revenues like penalties and
forfeitures.
3. Debt is an obligation to pay or render service for a definite

future period of time based on contract. It is payable in money
or in kind, subject to legal compensation, and may be
assigned.
Imprisonment is not covered by non-payment of debt. Debt

draws interest when there is an agreement between the
contracting parties or when there is default.
4. Toll is a compensation for the use of somebody else’s property

determined by the cost of the improvement. It is a demand of
proprietorship as compensation for the use of property, which
may be imposed by a private individual or entity or the
government. (65scra33)
5. License fee is a contribution enforced by the government

primarily to restrain and regulate business or occupation.
It is required for the commencement of a business or

profession rendering the business illegal in case of non
payment. However, it is always subject to revocation. The
power to collect license fee does not include the power to tax.
(65 SCRA 33)
Nonpayment of tax does not make the business illegal

although it might be a ground for criminal prosecution
against the person(s) violating the law.
6. Special Assessment is an amount collected by the

government for the purpose of reimbursing itself for certain
extended benefits regarding construction of public works. It is
levied only on land and not a personal liability of the person
assessed.
7. Customs duties are imposition on imported goods brought

into the country to protect local industry.
Taxes are broader than customs duties because all customs

duties are taxes but not all taxes are customs duties.
8. Subsidy is a monetary aid directly granted or given by the

government to an individual or private commercial enterprises
4X m c Q -m taxation
dee«<od Ik:.Hict-ta ry the |x;.t*-!iK:. A :i.ub-rrdv r- not a tax

.-iough :.*•*> may Nave' to be .imposed to pay n
Tariff a xdKdule or !i>.t of rate'% dulse* or taxes unpaged on

.rte*t gc<id*.
; Margin fo«j is a tax <m lor<^gn exchange designed to curb

i c t xc< >sive demands upon our international reserve*. r;75 aoe*
' Vi
TAX LAW DEFINED
7a* Lum is that body of laws which codifies ail national tax laws
including income, estate, gift, excise, stamp and other taxes.
Such haw comprises of the Republic Act 8424 entitled “The
Comprehensive Tax Reform of the Philippines/ otherwise known
os the "National Internal Revenue Code of 1997* or the “Tax
Code.* It also includes Republic Act.. 9337 ■ The VAT Reform Law,
and local tax ordinances issued by the local government.
The Tax Code is an example of a special law which prevails over a

general law such as the Civil Code or the Rules of Court. (FepubUcv*.
Si/)iTtin to Cu j Ht Vi yet}, .Juta 30, lOCfij
Internal Revenue Law - it includes all laws legislated pertaining

to ihe national government taxes, which is embodied in the NIRC.
Such legislation is commonly referred to under the general term
“revenue measures/
The main purpose of promulgating internal revenue laws is to

raise money to meet tlie pecuniary needs by the government.
Generally, it is imposed by the State over its subjects without
giving any direct and immediate equivalent in return for the
payment.
Internal Revenue Taxes - taxes imposed by the legislative body

other than custom duties on imports. The following national taxes
are classified as Internal Revenue 'faxes under the administration
of the B1R:
1, Income t a x ;
2, Transfer Taxes (Estate tax and Honor’s 'fax);
3, Business Taxes (VAT, Percentage tax and Excise tax);
4, Documentary Stamps fax (DST); and *
5, Such other taxes as may be imposed and collected by the BIR.
Ji, NIFCI
Nature of Tax Laws
The Philippine Internal Revenue laws are generally civil in nature;

they are neither political nor penal in nature. (Republic vs. Oasan vda. De
Fernandez et all, 99 Phil. 935)
Although tax laws dead with the fundamental symbiotic

relationship of people with the government, basically they are not
political in nature. They remain effective even if foreign invaders
occupy our country. They are deemed to be the laws of the
occupied territory and not of the occupying enemy (Hiiado vs. Collector
of Internal Revenue, et all., 100 Phil. 288). Hence, it is Valid and legal that
income tax returns shall be filed and paid by the inhabitants even
if foreign invaders occupy our country.
Even if there are some penalties provided for violation of tax laws,
they are not penal in nature because they do not define crimes
and provide for their punishment. The internal revenue law
provides for some penalties for tax delinquencies only to effect
timely payments of taxes or punishes tax evasion for neglect of
duty by those subjects of taxation. (Lorenzo vs. Posadas, 64 Phil. 353 - 356)
Revenue laws are not remedial laws. They do not include

procedures to protect rights, and prevent or rectify wrong doings.
The Tax Code (1997 NIRC) are special laws which prevail over
general laws such as Civil Code or Rules of Court (cm vs. Ragan Electric
and Ice Plant/ Sept. 30, 1969; Republic vs. Santiago Gancayco, June 30, 1964).
Accordingly, the provisions of the NIRC on prescription are given
priority over the provisions of Civil Code on prescriptions.
Interpretation and Application of Tax Laws
The Supreme Court has the exclusive power of constructing and

interpreting tax laws. As a rule, tax laws must be construed with
view to carrying out their purpose and intent.
The well-settled doctrine of “strict interpretation in the imposition

of taxes and other burdens” shall be followed in the application of
tax laws. (Commissioner of Internal Revenue vs. Court of Appeals, the Court of Tax Appeals
andAteneo de Manila, G.R. No. 115349, 18 April 1997, 82 SCAD 45, 271 SCRA 605)
Specifically, the following rules are generally followed for the

interpretation and application of various tax laws:
50 INCOME TAXATION
1. Tax statute must be enforced as written.
When there is ambiguity of tax laws, the rules of statutory

construction may be used to search for the legislative intent.
However, when the meaning of the law is clear, the statute
must be enforced as written.
Under the principle of "Pari Materia,” tax laws should be

interpreted with reference to other tax legislations and their
effect as a whole may be given consideration. (Madrigal vs. Raferty,
38 Phil. 414)
2. Imposition of tax burdens is not presumed.
Tax burdens shall neither be imposed nor presumed beyond

what the statutes expressly and clearly state because tax
statutes should be construed strictly against the government.
(Commissioner of Internal Revenue vs. C.A., Central Vegetable Mfg. Co. Inc., and CTA, C.R.
No. 122161, 23 February 1999)
A tax cannot be imposed without clear and express words for

that purpose and the provisions of a taxing act are not to be
extended by implication.
3. Doubts should be resolved liberally in favor of the taxpayer.
When the primary consideration is the legislative intent but

doubts exist in determining such intent, the doubts must be
resolved liberally in favor of taxpayers, and strictly against the
taxing authority since tax laws impose special burden upon
the taxpayer. (Commissioner vs. Fireman's Insurance Co., G.R. No. L-30644, 09
March 1987, 148 SCRA 315)
In order to protect the taxpayer against abuse application of

tax laws, the law on prescription being a remedial measure
should be interpreted liberally in favor of the taxpayer. (Republic
vs.Ablaza, 108 Phil. 1105)
4. Tax exemptions are strictly construed against the taxpayer.
There is no way to dispute the cardinal doctrine in taxation

that “exemptions therefrom are highly disfavored in law and he
who claims tax exemption must be able to justify his claim or
right.” (Commissioner of Internal Revenue vs. P.J. Kiener Company, LTD., 65 SCRA 143)
Tax exemption should be construed in strictissimi juris

against the taxpayer. (Philippine Acetylene Co. vs. CIR, 20 SCRA 1056)
Therefore, tax exemptions cannot be established by mere

implication but must be clearly expressed by the law. (Wonder
Mechanical Engineering Corporation us. Court of Tax Appeals, et aL, 64 SCRA 555)
Methods for collection of taxes mandated by law sire generally

exclusive and must be followed strictly, unless the law
Stipulates otherwise. (Republic vs. Patanao, 20 SCRA 712; People vs. Arnault, 92
Phil. 252)
5, Tax laws are applied prospectively.
A tax statute must be applicable and operative only upon

becoming a law. Tax laws are given retroactive effect only if:
there is a clear legislative intent in that regard. (Hydro Resources vs.
Court of Appeals, 21 December 1990, 192 SCRA 604)
For this reason, our tax laws are generally prospective in

operation except when it is clearly provided by the legislative
intent that a tax stature shall operate retrospectively, (ibid.; 51
Am. Jur. 359)
Tax laws, however, should not be given retroactive application

when it would be harsh and oppressive against the taxpayer
so as not to violate the constitutional limitation of due
process. (Republic vs. Fernandez, 99 Phil. 934)
6. Tax laws prevail over civil laws.
The Tax Code is a special law in relation to the Civil Code.

Whenever there is a conflict between the Tax Code and the
Civil Code, the former (Tax Code) shall prevail over the latter
(Civil Code). (Commissioner on Internal Revenue vs. Hagan Electric & Ice Plant, Inc.,
29 SCRA; Republic vs. Gancayco, 11 SCRA)
Sequence of the Interpretation of Tax Laws

The BIR commissioner issues BIR rulings on particular tax case
which could be overruled by BIR rulings of succeeding BIR
Commissioner.
The Revenue Regulations are issued by the Department of

Finance to cover the implementing guidelines pertaining to a
particular Section of the Tax Code.
~ UNIVERSITY OF THE CORDILLERAS
__________ libraries
MQOW TAXATION
' t h * I't- '/t-ttut: f ' * '/jiUiUfrti* are ov^nuled by Court dec!*ions upon
; < o f 4 xitfu r e s o l u t i o n .
'iourmjs of Philippino Tax Law*
fn »f4« I'titirw/fH \*t < ffccbvely exercise tax power, 1he Philippine
f-o-pubic make* fav/s y/bicb /nay be comprised of the following:
I Con«ddudou of the Philippines;

'x Judicial le /jsions;
.3, L/*''1 j11*/<’ Order*;
4, 'yperj/il l/#>y/s;
V 'If»x T/eofi^s sod Conventions v/jfh foreign countries;
O Revenue Regulations promulgated by the Deportment of
Fmaoee;
7. PIP Pevenu^ Memorandum Circulars and Bureau of Customs
Memorandum 'nders;
H, f'JP Pi dings; ;md
0, Local Government Code (Book 11)
Constitution of tho Philippines
The ter m Conrdit.uUon refers to that body of rules and maxims in

accordance with which the powers of sovereignty are habitually
exercised (Cooinj, f oriDihunonoi umiujdon^, p.'tj, It js often referred to as the
Suprernr or fo/n/Jamerital Lauj of the land because all other laws
must conform to it, It is the basis in determining the legality of
all-governmental actions and decisions,
A constitutional provision regarding taxation is primarily intended

to limit and regulate the exercise of taxation power. The State
can exercise the power to tax even if the Constitution is
completely silent about taxation.
Statutes
Statutes are laws enacted and established by the will of the
legislative department of the government. The present tax
statutes of the Philippines are embodied in the R.A. Act 8424,
which is now the prevailing NIRC effective January 1, 1998,
which was amended per R.A. 9337 - The VAT Reform Law.
The tax legislative process begins in the Department of Finance

and other government agencies where tax problems are analyzed
and solutions are proposed for the President’s consideration.
The President transmits his recommendations to the Congress,

where the two powerful tax committees, the “Ways and Means
Committee” and the “Finance Committee,” carefully review them.
In these committees, the bills are revised to compromise the

conflicts of major opposing interest, and are sent in turn to the
House and Senate floors for approval. A conference committee
settles differences between the two bills; the revised version is
returned to both houses for approval. The bill becomes law when
the President signs it or when Congress passes it over his veto.
Judicial Decisions
These refer to the decisions for application made concerning tax
issues by the proper courts exercising judicial authority of
competent jurisdiction. These courts may be the Supreme Court
and the Court of Tax Appeals. Their decisions on tax laws
comprise the greater portion of tax jurisprudence. They form part
of the legal system of the Philippines. (Art. 8, cm code)
By the nature of its jurisdiction, the decisions of the Court of Tax

Appeals are still appealable to the Supreme Court. The decision of
the Supreme Court on any matter is final and executory.
Executive Orders
Executive orders are regulations issued by the President or some
administrative authority under his direction for the purpose of
interpreting, implementing, or giving administrative effect to a
provision of the Constitution or of some law or treaty.
Tax Treaties and Conventions

These refer to the treaties or international agreements with
foreign countries regarding tax enforcement and exemptions.
They have the force and effect of law. A good example of a tax
treaty is the Philippine-United States Military Bases Agreement
(PUSMBA).
u INCOME TAXATION
ftevuttM j by the Department of Finance

*The Secrecy of Finance upon the recommendation of the
shall promulgate all needful rules and regulations
for hoe effective enforcement of the provisions of the Tax Code.*
fC** uap
R&sV';j& P^'jj&zkrus art rules or orders having force of law issued

by exec >n /t authority of the government to ensure uniform
application of the tax lavu
’n order that administrative regulations may be considered valid,

ah of the following requisites must be complied with:
The regulations must be useful, practical and necessary for

the enforcement of the law;
2. They must be reasonable in their provisions;

3. They must not be contrary to law; and
4. They must be duly published in the Official Gazette.
fv^rôviîcX/vvto 3us Co. vs. Collector, 52 Q.C. No. 2, p. 791; LimHoa Ting vs. Central
oovs,. UUOUUU Bepterr ’oer 24, 1958).
Regulations contrary to or inconsistent with law are null and void

iO*ee'J<e.c vs M&er, 77 Phil. 894; Wise 5c Co. vs. Meer, 78 Phil 755-756). Hence, a
regbafem that is merely an interpretation of the statute when
once determined to have been erroneous becomes inoperative and
of no legs! or binding force.
Polings of the Secretary of Finance are not binding on the courts

because the duty or power of interpreting laws ’is primarily a
function of the judiciary.
The Secretary of Finance is vested with authority to revoke, repeal

or abrogate acts or previous rulings of his predecessors in office
because these are not binding on their successors. (.miado vs. Collector
of bvjerrjs,. pje^rvjjk, et a4 iOO Phil 295)
Regulations and administrative rules usually implement tax laws.

Trie regulations cannot increase nor decrease the requirements of
hoe law, nor embrace matters not covered or intended to be
Covered by tne Statute. (Alejandro and Ndtledo, p. 47)
BIR Revenue Memorandum Circulars and Bureau of Customs

Memorandum Orders
These are administrative rulings or opinions which are less

general interpretations of tax laws being issued from time to time
by the Commissioner of the Internal Revenue or Commissioner of
the Bureau of Customs, as the case may be. They are primarily
intended to maintain uniform application of tax laws within the
department or area of authority.
Memoranda have the status of advisory or sort of information

service. For this reason, they can be reversed anytime.
As the chief legal officer of the government, the Secretary of

Justice may also give memorandum concerning tax issues.
It is to be noted that the Courts generally respect the

interpretations made by the executive officer whose duty is to
enforce the law. However, such interpretations are not conclusive
and shall be disregarded if found erroneous by the court. (Molina vs.
Rafferty. 37 Phil. 545; People vs. Fernandez, 59 272)
BIR Rulings
BIR Rulings are expressed official interpretations of the tax laws

as applied to specific transactions. Unlike a Revenue Regulation,
it is more limited in application.
A BIR Ruling is first published in an Internal Revenue Bulletin

and later transferred to the appropriate Cumulative Bulletin.
BIR Rulings are not the final interpretations of the tax laws. They
are considered the best opinion or advisory at the moment and
are considered sound law until changed by the court, (cm vs.
Ledesma, January 30, 1970)
Local Tax Ordinances

These are tax ordinances issued by the Province, City,
Municipality and Barrio subject to such limitations as provided
by the Local Government Code and the Real Property Tax Code.
56 INCOME TAXATION
Chapter 1 - REVIEW QUESTIONS

1. Define taxation.
2. Why is taxation important?
3. What are the bases of exercise of tax power?
4. Explain briefly the three main purposes in exercising taxation power.
5. Explain briefly the nature of police, eminent domain and taxation

powers of the State.
6. Why is taxation considered as the strongest among the three

inherent powers of the State?
7. What are the similarities among the three inherent powers of the
State?
8. Differentiate taxation power from, police power and eminent domain

power.
9. What are the inherent limitations of taxation power? Explain each.
10. Give the reason why a State can still exercise its taxing powers over
its citizen who resides outside its territory.
11. Does the Constitution create the power for the State to tax? Justify.
12. Explain the “due process of law” in relation to the exercise of taxation
power.
13. Explain the phrase “No public money shall be appropriated for
religious purposes.”
14. Describe the three stages of taxation.
15. Give the two administrative aspects of taxation?
16. What are the principles of a sound tax system?
17. Enumerate and explain some of the underlying doctrines in the
exercise of taxation power.
18. Explain the nature and essential characteristics of taxes.
19. Enumerate and explain the classifications of taxes.
20. Distinguish the following terms from tax:
a. Penalty e. License fee i. Margin fee
b. Revenue f. Custom duties j. Special assessment
c. Debt g. Subsidy
d. Toll h. Tariff
21. Describe the nature of Philippine Tax Laws.
22. Explain the prospective application of tax laws.
23. Enumerate and explain the sources of Philippine Tax Laws.
.*o«pi&r i Generai Principle* and Concept* of Taxation 57
Name; Score:
Pro&tenj 1-1 True or False

Wr:te T rue jf the eta tern/m* i* correct, or p'aloe if the statement is
incorrect
1 - The existence of a Const i* uiion ic necessary for the exercise of

■he inherent powers of the Sovereign State,
axauon ic the government** legitimate means of interfering with

the privato proper* je* of it* '4*j b j*:ctn,
; The benefit* from taxation have to be experienced to justify the

legitimacy of collection of taxes from the people.
4
Taxation is the primary cource of government revenue. Hence, all
government fund* come from taxes.
> Sovereign eoualjty dictates that, a nation cannot impose taxes on

the property of another country.
if he recidec outside the taxing StateS territory,

7. Ail government entities regardiecc of their functions are
exempted from taxes because it v/oujd be Impractical for the
government to he taxing itcelf.
b Peyenueo he;j ved from taxes cannot be uced for the exclusive
uV' of private per con c.
Local fax ordinance rnuct be uniformly and equally applied

throughout the country.
10, Taxation could be described ac a power, ac a process, or ac a

meano. Ae a pov/er, taxation ic a way of apportioning the cost of
government among fhoce v/ho are privileged to enjoy tfc benefit?*.
1 J, The State can enforce contributions upon Jtc citizens irj the form
of taxes even v/jtbout a oonetitutional jjrovinion authorizing it,
1 7 . Appropriation of faxes ic considered valid if intended for the

eommon good of the people without identifying a particular
per con to be benefited from it,
J T Taxation is inseparable in the existence of a nation,
1 4 Taxation ic considered as the lifeblood of the government and

every government unit muct exercise this power,
IT The amount of taxes may be increased to curve fipendl'ng power

and umutiM’/j- inflation.
1 0 The Omctifution ic the source of the Slate's taxing power.

INCOMF fAXATION
Nrntm Score
uhlam I 2 Trim or Pul*#

££
iili tun If fli'- « t l « f f f c f.omj/.f or fddfcc If the xtjitrm cn t ia

III! i|M< < I
I I mx allow* absolute for given wife to give fox evader* a

• ham r fo i dm m with m dean date,
v 'Imk m k r< mi | ft lot i applies only to gover nmrnt entitles that exercise
I h oj m Idai y I'm if .lion*.
$ 'I mx axueaxmenf lx a \ ) \ ores* of t a x a t i o n w h i c h Involves the

pannage ol Inx lawn Mod ordlnaia ex through leglnlafurc,
'I Taxation, like rmlornt floniMlii ix limited hy the Constitutional

piovinlou I hot private prope/ly may not he token without just
< oiiipenhMlIon.
h, The rxeirlxe ol police power In superior to the non-impairment

dause ol the (!onritItnlIon,
f>. Taxation, like police power Is rent rioted hy the due process
rim me ol the Conslllullmi,
7. Dumping duly Is the additional duly i n x imposed on Imported

goods wit 1» lower prices Ih/m their loir market values to protect
local Industries,
H, The doctrine of lax Imprescriptibility states that taxes in general

are not cancellable,
0, The primary rr<|uisile ol equity principle is that euch taxpayer

should he required to contribute equal amounts in the form of
taxes,
10, Tax assessment refers to the fiscal policy of the government.
11, An aspect of tax power that could be delegated to the President

(‘overs both legislative and administrative discretion.
12, Imminent domain and police power can effectively be performed

even without taxation,
13, When the power to tax Is delegated to the local government, only
the legislative branch of the local government can exercise the
power.
14, All inherent powers presuppose equivalent compensation.
15, There is no imposition of amount in police power.

16, Police power and eminent domain may defeat the Constitutional
rights of a person,
Name: _________________ __________ Score:
Problem 1-3 True or False

Write True if the statement is correct or False if the statement is
incorrect.
1. In tax capitalization, the buyer absorbs the payment of tax and

includes the same as part of the cost of the acquired property,
2. In tax condonation, the government has the option to restore

what has already been taken from the taxpayer.
3. The Pari Materia Doctrine requires that tax laws should be

interpreted with reference to other legislations and their effect as
a whole may be given consideration.
4. A tax may be levied for the support of religious activities as long

as all churches benefit from it.
5. In general, bills need not to be signed by the President to become

a law.
6. No law granting any tax exemption shall be passed without the

concurrence of two thirds of the members of the Congress,
7. The Constitution grants autonomous regions certain legislative

powers which shall include legislative power over taxation.
8. Taxes collected by the BIR are local taxes.
9. Real estate tax and income tax collected on the same real estate
property is not a form of double taxation.
10. A tax evader sidesteps the law, while the tax avoider breaks it.
11. All revenues and assets of non-stock, nonprofit educational

institutions used directly or indirectly for educational purposes
shall be exempt from taxes and duties.
12. Taxes may be exercised to encourage economic growth by

granting tax exemptions.
13. Taxes may be used as a tool and weapon in international

relations and to protect trade relations.
14. Protection is the basic consideration that justifies tax situs.
15. The tax situs for occupation is the place where occupation is
pursued even if the criterion for nationality is given.
16. There is direct double taxation by taxing corporate income and

corporate stockholders' dividends from the same corporation.
60 INCOME TAXATION
Name: __________________ Score:

incorrect.
1. Tax exemption is transferable and assignable.
2. Revenue regulations that are inconsistent with law have the

effect and force of law if they are useful and reasonable.
3. BIR Rulings are the best opinions regarding the interpretations

of tax laws and are considered sound law until changed by the
Court.
4. The tax doctrine of Marshall Dictum explains that tax is a power

to destroy.
5. Tax rulings of the Secretary of Finance are binding to the Courts

because the Department of Finance is the highest agency
regarding tax administration.
6. The power of Judicial Review in taxation is limited only to the

interpretation and application of tax laws.
7. Interpretations made by executive branch for the enforcement of

tax laws are generally respected by the Courts because they are
conclusive.
8. Tax laws are given retroactive effect because the rule of “ex post
facto law” is applicable for tax purposes.
9. In taxation, it is one’s civil liability to pay taxes which gives rise

to criminal liability.
10. No person shall be imprisoned for nonpayment of income tax.
11. Tax laws must be construed strictly against the government, and
tax exemptions must be construed strictly against the taxpayer.
12. As a rule, doubts as to imposition must be resolved liberally in

favor of the government and strictly against the taxpayer.
13. The Philippine tax laws are not political and penal in nature.
14. The doctrine of equitable recoupment is applicable to cases

where the taxes involved are totally unrelated.
15. When there is ambiguity of tax laws, the rules of statutory

construction may be used to search for the legislative intent.
However, when the meaning of the law is clear, the statute must
be enforced as written.
Name: ____ ___________________ Score:
Problem 1-5 Multiple Choice

Encircle the letter that contains the best answer.
1. Which of the following defines the country’s tax policy?

a. Philippine Constitution
b. National Internal Revenue Law
c. Pari Materia Principle
d. Tax Transformation
Taxation co-exist with the four elements of the state which includes
all, except
a. Government.
b. Property.
c. Sovereignty. '
d. Territory.
Which of the following statements is not correct?

a. The government automatically possesses the power to collect
taxes from its inhabitants.
b. The government can enforce contribution upon its citizen only
when the Constitution grants it.
c. Taxation power exists inseparably with the State.
el, The Stute has the supreme power to command and enforce
contribut ion from people within its jurisdiction.
Which of the following statements is/are correct?

i. Taxation is a process.
ii. Enactment of Tax Laws is part of the taxation process.
iii. The Constitution expressly conferred the power of Taxation to
the President of the Philippines.
iv. Taxation requires voluntary contribution from inhabitants to
support the government.
Choices:
a. i, ii, iii and iv.
b. i, ii and iii only.
c. i and ii only
d. i only
Which of the following is/are natural qualities of Taxation Power?

i. An inherent power
ii. Essentially an executive function
iii. An absolute power
iv. Territorial in operation
Choices:
a. i and iv only
b. ii and iii only
c. i and ii only
*») *MU*uwf*M* ^m* *WH/y\
juiWM wlJ ^M* A|u, / w }(j j*M>d ju^qut v*M
<**n »< mj >*M am w §t »)iijn j*NMi 4> u
hA'mM AM '«/AW| iVMW i>*' w
Cut here and submit this page t» your professor
Ih» I m *» lf«w
«tl|* V* h h m m - h h I m II m i i m
h HIM i* * IM i»***
i M m h i h i m i c I m i m m i tI m i q
»l | h i m I inn h h II h m i h o r
n
Name: _____________ ____________ Score:

1. It is a scheme of reducing payment of taxes through legally

permissible means.
a. Tax evasion
b. Tax avoidance
c. Tax remission
d. Tax amnesty
2. The power to tax includes the power to destroy because the taxpayer
has no option but to pay the tax imposed to him.
a. Marshall Dictum
b. Holmes Doctrine
c. Pari Materia Principle
d. Strictissimi Juris
3. This refers to the process of taxation to determine the amount of tax

based on existing tax law.
a. Levying
b. Imposition
c. Assessment
d. Collection
4. All of the following are legislative aspect of taxation except

a. selection of the object or subject of tax.
b. fixing of tax rates.
c. valuation of property for taxation.
d. prescribing the general rules of taxation.
5. Which of the following is/are elements of impuct of taxation?

i. Levy
ii. Assessment
iii. Collection
Choices:
a. i, ii and iii.
b. i and ii only.
c. ii and iii only.
d. iii only,
6. All of the following are administrative functions of taxation except

a. selection of object of tux
b. valuation of property for taxation
c. equalization of assessment
d. collection of taxes
64 INCOME TAXATION
7. The statement that “he who received more should give more” is based
on this basic tax principle.
a. Fiscal adequacy
b. Theoretical justice
c. Administrative feasibility
d. Due process of law
8. To spread the burden of taxation, the corresponding estimated tax is

collected at once every payroll period so that at the end of taxable
year, the amount of tax withheld will be equal or approximate to the
actual tax for the year. This taxation system of collection at source is
based on what tax principle?
a. Fiscal adequacy
b. Theoretical justice
c. Administrative feasibility
d. Due process of law
9. All of the following are inherent restrictions on the exercise of

taxation power, except
a. rule of uniformity.
b. for public purposes.
c. territorial jurisdiction.
d. international comity.
10. Which of the following is not correct?

a. In the absence of specific tax provision, taxes in general are not
cancelable.
b. Prescriptive period for assessment and collection is applicable to
returnable taxes.
c. The law on prescription being a remedial measure should be
interpreted liberally in order to protect the taxpayer.
d. The prescriptive period should be the shorter between the
required filing date and the actual date of filing.
1 1. Which of the following statements is correct?

a. Indirect double taxation is legal as long as there is no violation of
equal protection and uniformity clauses of the Constitution.
b. Indirect double taxation violates the Constitutional provision of
uniformity and equal protection,
c. There is direct double taxation in taxing the income of the
corporation and again subject the portion of that income
declared as dividend to final tax.
d. Direct double taxation is prohibited by the Constitution.
12, Which of the following remedies against double taxation requires tax
treaty?
a. Tax exemption
b. Tax credit
c. Reciprocity
d. Deduction allowance
j i| Chapter 1 General Principles and Concepts of Taxation 85
HljName Score:
l w Problem 1 ~ 7 Multiple Choice

kSiRncirrIf* the letter that contains the best answer.
Jjggl. Which of the following nature of laws describes tax laws?

a. remedial
b. political
c. criminal
d. civil
12. Statement 1: The State may not use its sovereignty to interfere into a
valid contract obligation.
Statement 2*. The Court’s power of judicial review is limited to the

interpretation and application of tax laws.
a. Only statement 1 is correct.

b. Only statement 2 is correct.
c. Both statements are correct,
d. Both statements are incorrect.
The following restrictions are inherent on the exercise of taxation

power, except
a. rule of uniformity.
b. for public purposes.
c. territorial jurisdiction.
d. international comity.
Which of the following statements is not correct?

a. The national and local government units exercise the inherent
power to tax.
b. Local government units could exercise the power of taxation
though legislated delegation.
National legislation is exercised by Congress.
Interpretation of Tax Laws is done by the judicial branch of the
government*
'fax affects the area or nation as a community rather than as

individuals. This is a specific explanation of
a. International comity.
b. Public purpose.
c. Supreme power,
d. Reciprocity.
Which of the following tax escape is permissible under Tax Code?

a. 'lax avoidance
b. Tax evasion
e. 'fax dodging
<1. Overstatement of expenses
m
-rnimf i. Cov<*rnm*m :.nmt per'krnring' Tnv'*r~.iTii*r32i. .htosfxmt

• irr ^rmp? fmm i'A* t.nli*SA expressly AS.trJit
('^:!^tn«; J fhoveromerM owned nr or.rtmiLerc trnrtrjzszxtKst.
pyrrrmm^ proprietary tanonorc £r*e ivrasKu* ^rziri ’*azr'KSsgr essempi
- f>niy ^(;:|PtViPr.{ i ifi eorreou
r> Only Ataiemrnf 2 is Correct,
o F :<>t h Ata (emeriti 'i ff. correct.
Fmth statement's ;:rr, nor correct.
Which 6f* the following is ar» innorrcnr. diesnriîdti cf "jsxgzrxZ?

*'■ lA&Mtitive. and inhereof for the tt:s$resaz cft^l
h Necessa ry a nd for pvi hi ip p reposes
c. Oupreme And An Absolute power of rise Statse
d. Restricted hy OonsUtutionAf and inherent;
(>. Which of fhe fcHewing is net rnA?

T Axaticn Fodoe &===«=:
cower Fewer
A. In hereof to the existence
of the govern meri t Yes '/Vs Yes
b. Not legislative in nature No No No
0. Superior to the non-
impairment clause Yes Ten Jfo
d. Rest r i cf ed by just
corrrperiaatlon No ■r i
No Yes j 5|
10. Which of the following fa a correct nature of restndtfbri II

to eacsrase
taxation power? ^1
Cortst&ritawial ~I
Inbersit
Ltrcfsaasoii li’ortatacr
a. Territoria I jo risd iction Yes Yes
b, Interna fionaI comity Yes No
c. Rule of uniformity and equity No No
d. fXjc process of law Yes No
1 1, Which statement refers to police power as distinguished from

tax; itiori?
It is restricted hry Constitutional provision.
It is stjp>crior to the non-impairment clause of the constitution.
It involves the taking of property by the government.
The amount imposed has no limit.
12. Police power is distinguished from taxation power because

a. it involves taking of property.
b, the amount collected is limited to the cost of regulation,
o, it is an inherent power of the state.
d« the benefit derived is the protection given by the state.
Name: Score:
Problem 1 - S Multiple Choice

Encircle the letter that contains the best answer,
1. It is achieved through the passage of tax law that defines the tax
system of a nation?
a. Tax legislation
b. Tax administration
c. Tax policy
d. Tax assessment
2. A fundamental rule in taxation is that the property of one country

may not be taxed by another country. This is known as
a. International law.
b. International comity.
c. Reciprocity.
d. International inhibition.
3. Which of the following statements is not correct?

a. Collections from taxes are public money.
b. Appropriation of taxes for the common good of the people is
valid.
c. Construction of private road from taxes is a valid appropriation.
d. Allocation of taxes for the benefit of greater portion of population
is considered for public purposes.
4. A taxpayer gives the following reasons in refusing to pay a tax. Which

of his reasons is not acceptable for legally refusing to pay the tax?
a. That he has been deprived of due process of law.
b. That there is lack of territorial jurisdiction.
c. That he derives no benefit from the tax.
d. That the prescriptive period for the tax has elapsed.
5. The following are the constitutional limitations on the power of

taxation, except
a. taxes are not subject to set-off or compensation.
b. only Congress can exercise the power of taxation.
c. non-impairment of the obligation of contracts.
d. the rule of taxation must be uniform. *
6. Which of the following is /are taxable only for income earned within
Jl thePhilippines?
fj i. Nonresident citizen
ii. Nonresident alien
iii. Resident citizen
iv. Resident alien
68 INCOME TAXATION
Choices:
a. i, ii and iii only.
b. i, ii and iv only.
c. i, and iii only.
d. iii and iv only.
7. The following are the characteristics of taxes.

i. Voluntary contribution
ii. Imposed by legislative body
iii. Proportionate in character
iv. Used for public purpose
Choices:
a. i, ii and iii only.
b. i, ii and iv only.
c. i, and iii only.
d. ii, iii and iv only.
8. The following are business taxes except

a. value-added tax.
b. other percentage tax.
c. excise tax.
d. custom duties.
9. All of the following are National taxes as to collecting authority

except
a. income tax.
b. real property tax.
c. estate tax.
d. value-added tax.
10. Which of the following tax rates behaves in the same direction with
the taxable value?
a. Proportionate
b. Progressive
c. Regressive
d. Digressive
j Name:____________________________________ ____________ Score: _________________

1. The US embassy donated vehicle to the Department of Foreign Affairs

of the Philippines. Which of the following statements is correct?
a. This transaction is exempted from payment of donor’s tax only.
b. This transaction is exempted only from payment of documentary
stamp tax.
c. This transaction is exempted from payment of both donor’s tax
and documentary stamp tax
d. This transaction is subject to both donor’s tax and documentary
stamp tax
2. All of the following are not taxes except

a. surcharge. (
b. special assessment.
c. custom duties.
d. license fee.
3. Which of the following could be an object of taxation?

i. Person
ii. Tangible property
iii. Intangible property
iv. Rights
Choices:
a. i and ii.
b. i, ii and iii.
c. i and iv.
d. i, ii, iii and iv.
Which of the following correctly describes the primary purpose of

taxation?
Fiscal Regulatory
purpose purpose
a. To raise revenue Yes Yes
b. To check inflation Yes No
c. To discourage consumption of
harmful products No No
d. To limit influx of foreign products No Yes
All of the following statements are true, except

a. Double taxation is taxing twice the same taxpayer for the same
purpose covering the same period and taxed 1 by the same
authority.
b. Double taxation is prohibited by the Philippine Constitution.
70 INCOME TAXATION
c. Indirect double taxation is allowed as long as this does not

violate the equal protection and uniformity principles.
d. Doubts regarding double taxation must be resolved in favor of
the taxpayer.
6. One of the following situs of taxation is not true.

Located or Earned
Within Outside
a. Taxable income of nonresident
citizen Yes No
b. Taxable estate of resident alien Yes Yes
c. Taxable donation of resident citizen Yes Yes
d. Taxable sale Yes Yes
7. Statement 1: The City of Baguio claims that it can impose additional

taxes on banks under the Local Government Code (in addition to the
percentage tax on banks imposed in the NIRC).
Statement 2: Such imposition is a direct double taxation.
a. Both statements are correct.
c. Only statement 2 is correct.
8. One of the following is incorrect regarding tax exemption.

Expressed Implied
Exemotion Exemotion
a. 13th month pay of P30,000 and
below Yes No
b. Inter-corporate dividend Yes No
c. Nontaxability of government units No No
d. Separation pay due to sickness Yes No

a. A tax bill must only be applicable and operative after becoming a
law.
b. The effectivity of the tax law commences upon its approval.
c. The applicability of the tax law covers the present and future
transactions.
d. Tax law is ex post factoin application.

a. In the absence of specific tax provision, taxes in general are not
cancelable. i
b. Ad valorem taxes are imposed based on the standard of weight or
measurement. 'j
c. Prescriptive period forassessmentand collection is applicable to >
returnable taxes. J
d. The law on prescription being a remedial measure should be
interpreted liberally in order to protect the taxpayer.
Name: Score: ________
problem 1 - 1 0 Multiple Choice

Encircle* the letter that contains the best answer.
1. Which of the following characteristics describes our internal revenue

laws?
a. Political in nature
b. Penal in nature
c. Retroactive in character
d. Generally prospective in operation although the tax statute may
nevertheless operate retrospectively provided it is clearly the
legislative intent
2. Statement 1: When the primary consideration is the legislative

intent, but doubts exist in determining such intent, the doubts must
be resolved strictly against the taxing authority.
Statement 2: Tax exemptions arc strictly construed against the
taxpayer.
a. Only statement 1 is true.
b. Only statement 2 is true.
c. Both statements are true.
d. Both statements arc false.
3. In case of deductions and exemptions on income tax returns, doubts

shall be resolved
a. liberally in favor of the taxpayer.
b. strictly against the government.
c. strictly against the taxpayer.
d. with compromise.
4. In case of conflict between the tax laws and generally accepted

accounting principles (GAAP) for preparation of tax returns,
a. GAAP shall prevail over tax law.
b. Tax laws shall prevail over GAAP.
c. The courts shall resolve the issue.
d. Both tax laws and GAAP shall be enforced.
5. Which of the following statement is not true?

a. If a taxpayer is acquitted in a criminal violation of the Tax Code,
this acquittal does not exonerate him from his civil liability to
pay the taxes.
b. A conviction for tax evasion is not a bar for collection of unpaid
taxes.
c. A tax assessment is necessary to a criminal prosecution for
willful attempt to defeat and evade payment of taxes.
d. Criminal proceedings under the Tax Code are now a mode of
collection of internal revenue taxes, fees or charges.
IKK'OMI- \ A X A t K > N
b Statement l HlR ruling* ar< Ihr Imal »»'*« > P«< * j * * « » l ih* l.«v
Code
Statement ' Suptemc I'tViiil IV< tainn ahull pirvnil OVd Hu HlR
Rulings
C, Out> 'Statement 1 \NCOn<Vt
b Out> xUtCmCUt ? \N COHCt I
v Hoth statement* me cot rect
d Hnth statement* are not correct.
All of the follow ing Statements are inconeel, except

a, Oeneval pwwiston nndet Tax code prevails ovei HIR Regulations,
b HIR Rulings pirvails ovei Local Tax Ordinance on matters
ooncernirtg barangay taxes.
s'. HIR Rulings air sound law until changed by court resolution,
si Tax Code could violate Constitutional provisions.
A. Which statement is wrong? A revenue bill:

a. Must originate twin the House of Representative and on which
same bill the Senate may propose amendments,
h. May originate from the Senate and on which same bill the House
of Representatives may propose amendments.
c. May have a House version and a Senate version approved
separately and then consolidated, with both houses approving
the consolidation version.
d. May be recommended by the President to Congress.
9. Which of the following statements is correct?

a. Revenue regulations have the force and effect of law and a
memorandum order of the Commissioner of Internal Revenue,
approved by the Secretary of Finance, has the same force and
effect as revenue regulations.
b. The revenue regulations in conflict with law' are null and void.
c. The interpretations of the former Secretary of Finance do not
necessarily bind their successors.
d. All of the above.
10. Statement 1: The law7 on prescription being a remedial measure

should be interpreted liberally.
Statement 2: Doubts as to w7hether double taxation has been
imposed should be resolved in favor of the taxpayer.
c. Both statements are correct.
d. Both statements are not correct.
Chapter 2
ADMINISTRATION
T A X ADMINISTRATION
uJmtntsn titum is a system of collecting taxes in neroJdance

with the countiys tax policies, k involves anlijra^njanf of faxes
through the* (allowing aspects of taxation (a) Assessmt*nt, and (l>)
Collection
It also includes the* execution ol judgment and capacity to act in

all tax eases decided by the court in favor of the Bureau o!
Internal Revenue (BIR),
Tax Administrative Agencies
The Department of Finance (IX)I') is principally responsible for the

fiscal policies and general management of the Philippine
Government's financial resources. It has executive supervision
and control over other agencies, such as:
1. Bureau of Internal Reuenue (BIR) - is the government agency

primarily in charge to assess and collect all taxes and charges
imposed by the N1RC, other tax laws and regulations. (Sec. 2,
X)RC>
Every time the government prepares the national budget,

attention is focused on the BIR because it is responsible for
raising the bulk of the country’s total government revenues.
2. Bureau of Customs (BC) and the Tariff Commission (TC) - the

main agencies tasked to enforce the Tariff and Customs Code
(TCC). The BC also collects the taxes on imports embodied in
the NIRC.
3. Land 'Transportation Office (LTO) - the office responsible to

collect registration fees and motor vehicle tax.
4. Duly and lawfully authorized collectors - these are persons,

agencies or duly accredited banks authorized by the BIR, BC,
TC and LTC to collect taxes.
74 INCOME TAXATION
5. Local offices in charge to enforce local taxation, such as:

a. Provincial, City, Municipal and Barangay Treasurers;
b. Provincial and City Assessors;
c. Provincial and City Board of Assessment Appeals; and
d. Central Board of Assessment Appeals.
Other Tax Enforcers
Other governmental offices, private entities and individuals that

may have incidental functions regarding tax enforcement are as
follows:
1. The Secretary of Justice, as the Chief Legal Officer of the

government, has the authority to ascertain the validity of tax
laws subject to review by the Courts of Justice.
2. Various offices that indirectly provide assistance in the

collection of taxes are the following:
a. The Courts;
b. Register of Deeds;
c. Secretary of Public Works and Highways Offices;
d. Philippine Economic Zone Authority;
e. Board of Investments;
f. City Fiscals; and
g. Notaries Public.
3. The head of the appropriate government office and his

subordinates, with respect to the collection of energy tax;
4. Banks duly accredited by the BIR Commissioner with respect

to receipt of payments of internal revenue taxes. (Sec. 12, nirq
Any officer or employee of an authorized agent bank assigned

to receive internal revenue tax payments and transmit tax
returns or documents to the BIR shall be subject to the same
sanctions and penalties prescribed for violations committed
by government enforcement officers. (Sec. 12, par. 2, nirc; Secs. 269 and
270, NIRC)
In general, taxpayers are constituted withholding agents with

regard to their income payments to other taxpayers.
Chapter 2 Tax Administration 75
THE BUREAU OF INTERNAL REVENUE

The BIR is principally tasked with the enforcement of the NIRC,
Sections 2, 10, 0, 13 and 14 of the N1RC list the following BIR
officers:
1. The Commissioner of the Internal Revenue;

2. Deputy Commissioners* of Internal Revenue;
3. Revenue Regional Director;
4. Revenue District Officer;
5. Revenue Rxaminers and Officers;
0. Division Chiefs of the BIR; and
7. BIR Collection Agents,
KO 430 dated duly 23, 1087, entitled "Rurther Streamlining the

BIR in line with its Computerised Integrated Tax System/*
designed each of the Deputy Commissioners to head the following
functional groups;
(1) Operations Croup;

(2) Legal and lCnforcement;
(3) Information Systems Croup; and
(•I) Resource Management Croup (Sec, 3, NIRO),
In 2003, however, the President appointed two (2) more Deputy

Commissioners to head the following:
(8) fax Reform Administration Croup; and

(h) Special Concerns Croup, ,•& jvinv no/
fcM iiM i/ /irtriofiifot up f«> I, «?<X)0, ;v J)
"There are now (> Deputy BIR Commissioners, 4 under Section 3,

Title I of NIRO and 2 under lid), 430 of former President Gloria
M a ca paga 1 A i toy o,
Powers and Duties of the Bureau of Internal Revenue

In the discharge of its functions, the BIR has the following powers
and duties as provided by Section 2 of the National Internal
Revenue Code;
l, Tosassess and collect all national internal revenue taxes, tees

and charges;
76 INCOME TAXATION
2. To enforce all forfeitures, penalties and fines connected with

the above;
3. To execute judgments in all cases decided in its favor by the

Court of Tax Appeals and the ordinary courts; and
4. To administer, supervise and effect police powers authorized

by the NIRC and other laws, such as:
a. Assigning Internal Revenue Officers to establishments

where articles subject to excise tax are produced;
b. Providing and distributing forms, receipts, certification,
stamps and other MR documents to concerned official*};
c. Issuing receipts for tax collected; and
d. Submitting annual report and pertinent informatioi
Congress.
Plie MR can exercise police power only when necessary in the

enforcement of its principal powers and duties consisting of the
collection of fees and charges, including the enforcement of all
forfeitures, penalties and fines connected therewith.
Powers of the BIR Commissioner
The ( 'o m m i s s i o n i ' r o f I n t e r n a l R e v e n u e (OR) is'the Chief Official of

the MR who has the following powers or authority as provided in
the Tax Code:
1. Interpret tax laws (Srt\ 4, NIRC)\

2. Decide disputed tax assessments f.svv. - i , n i r c k
3. Summon, and obtain information or testimony of persons
Nii<( v;
4. Make assessments and prescribe additional tax requirements
(*W. O, NII\C}\
5. Compromise, abate and refund or credit taxes ^sv<\ jch, nirci;
<>. Suspend the business operations of a taxpayer n s , n i r c r
and
7. Delegate powers, ( S * r . 7 , N I R C }
Power to Interpret Tax Laws

The OIR 1ms the exclusive and original power to interpret
provisions of the NIRC and other tax laws subject to review by the
Secretary of Finance, (sw -t, nirci
In the executive officials of the government, only the OR has the

power to interpret the provisions of the Tax Code and other tax
laws.
BIR Rulings issued by the OR that are prejudicial to taxpayers

may be appealed within a specified period for review by the
Secretary of Finance.
“Other tax laws” shall mean special laws that grant tax incentives
or exemptions to certain taxpayers and related tax laws
administered by the BIR such as E.O. 226 (Investment Incentive
Law), R.A. 7227 (Bases Conversion Development Act) and R.A.
7916 (PEZA Law) with proper consultation from the heads of
these government instrumentalities.
Power to Decide Tax Cases

The BIR Commissioner has the power to decide disputed
assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed arising under the Tax Code or other
tax laws, subject to the exclusive appellate jurisdiction of the
Court of Tax Appeals (CTA). (Sec. 4, par. 2, nirc)
The tax assessments issued by the Regional Directors, Assistant

Commissioners and Deputy Commissioners may be appealed
administratively tO the CIR. (Sec. 3.1.6, Rev. Regs. No. 12-99)
The taxpayer adversely affected by the decision of the CIR may

appeal to the CTA within 30 days, (rcbc vs. cm, g.r. no. 168498, ApnL 24,
2007)
Final decisions made by the CTA shall be taken for review to

higher courts within 15 days from notice of ruling, decision or
judgment of the CTA. (Supreme Court Circular No. 1-91, February 27, 1991)
Power to Obtain Information

This power of the BIR Commissioner is intended to ascertain the
correctness of tax return, and to determine the taxpayer’s liability
and compliance. In the exercise of this power, he is authorized to:
1- Examine taxpayer’s records;

2. Obtain taxpayer’s financial information;
3. Summon the person liable for tax;
70 INCOME TAXATION
'I, lake tcwtlmnny ol the prison concerned under oath; and

b. Conduct regular canvas concerning all persons linblo to pay
any internal revenue lax. (Stu.fi, nirc)
Thr H1R ran ikwhs the records of the taxpayer's customers or

suppliers to roufinn accuracy of the declared sales or purchases
in the tax returns subject to the presentation of Letter of
Authority.
Power to Mako Assessment

The powers of the BIN Commissioner to make assessment and
prescribe additional requirements for tax administration and
rntorcement are as follows:
1* ICxaminations of
a, Returns and determination of tax due, and
b. Statements, reports and other documents not submitted.
(Sec. f, (A ,H» li), Nlh'C)
The authority to make tax assessments may be delegated to

subordinate officers. Said assessment has the same force and
effect as that issued by the Commissioner, and deemed final
and executory subject to appeal to the CTA. (Oceanic wireless
Nctuvrk, Inc. ««. Clh\ U.h\ No. HtfJSO, Dec. 9. 2005)
In the absence of accounting records or other documents

necessary for the determination of taxpayer’s tax liabilities,
the assessment of the tax shall be determined based on the
“best evidence obtainable.” (rmcm qooo)
The power to assess the proper tax based on the best evidence
obtainable is appropriate only when the report or information
required by law is withheld or when there is reason to believe
that the report filed or submitted is false, incomplete or
erroneous.
2. Authority to
a. Conduct inventory and surveillance, and prescribe
presumptive gross sales and receipts.
The CIR may exercise this power at any time during the
taxable year only if there are reasons to believe that a
taxpayer is not declaring his correct income, sales or
receipts for tax purposes. (Sec. 6 (C), nirc)
0.- ' '*■* »<*; i* v
fv form **#*bir pt 'od

7h/- HP <u,»r.r;; *a.or.sr sra. declare v.e period
*cr:'ura*ch and demand .hr ■ m.mediase. paym.eru if -he cax
due wr.er, ‘he taxpayer
* PeP/es from business subject to tax.

* roter.de to leave the Philippines.:
* Removes hie property Iron. the Philappir-es:
* Hr dee or conceals hie property: and
* Per for roe any act tending to obstruct the proceedings
of the collection of tax for the past or current quarter,
or renders the same totally or partially inefficient- s*^ •:
•p.
7he termination, of the tax period is referred to as

*jeopardy acsessmenc'*
c. Prescribe real property values.

The CIR is authorized to divide the Philippines into
different zones or areas and shah, upon consultation with
competent appraisers both from the private and public
sectors, determine the fair market value of real properties
located in each zone or area.
For purposes of computing any internal revenue tax. the

value of the property shall be the higher o: the fair market
value as fa) determined by the Commissioner, or {hi as
shown in the schedule of values of the Provincial and City
Assessors, /sec. 6(fy,?*iRc;
d. inquire into bank deposit accounts.

The power of the BIR Commissioner to inquire into bank
deposit accounts of taxpayer should not violate the
Secrecy of Bonk Deposit Law qla. .vd. :*35, and other general
or special laws. He is therefore authorized only to inquire
into the bank deposits of
• A decedent to determine the gross estate of such

decedent; and
• Any taxpayer who has filed an application for

compromise of his tax liability under Section 204 (A) of
the Tax Code by reason of financial incapability to pay
his tax liability.
80 INCOME TAXATION
The application for compromise shall not be

considered unless the taxpayer waives in writing the
confidentiality of his bank deposits.
e. Accredit and register tax agents.
The CIR shall accredit and register based on their

professional competence, integrity and moral fitness,
individuals and general professional partnerships and
their representatives who prepare and file tax returns,
statements, reports, protests, and other papers with, or
who appear before the BIR for taxpayers for a valuable
consideration, /sec. 6 (G), nirc}
f. Prescribe additional procedural or documentary

requirements.
The CIR may prescribe the manner of compliance with

any documentary or procedural requirement in
connection with the submission or preparation of
financial statements accompanying the tax returns. /sec. 6
(H), NIRCJ
Authority to Compromise, Abate and Refund or Credit Taxes
The BIR Commissioner may compromise, abate, refund or credit

the payment of any internal revenue tax when:
1. A reasonable doubt as to the validity of the claim against the

taxpayer exists; or
2. The tax or any portion thereof appears to be unjustly or

excessively assessed; or
3. The financial position of the taxpayer demonstrates a clear

inability to pay the assessed tax. [Sec. 204 (A), nirc/
4. The administration and collection costs involved do not justify

the collection of the amount due. (Sec. 204 / b), nirc)
The taxpayer shall be informed in writing of the law and the facts
on which the assessment is made; otherwise, the assessment
shall be void /Sec. 228 (e), nircj. Being invalid, the assessment cannot
in turn be used as a basis for the perfection of a tax compromise.
(CIR vs. Azucena T. Reyes. GR. No. 159694; Azucena T. Reyes vs. CIR, GR. No. 163581,
January 27, 2006)
The BIR Commissioner may credit or refund taxes erroneously or

illegally received or penalties imposed without authority.
The BIR Commissioner may:
1. Credit or refund taxes erroneously or illegally received or

penalties imposed without authority;
2. Refund the value of internal revenue stamps when they are
returned in good condition by the purchaser; and
3. Redeem or change unused stamps that have been rendered
unfit for use and refund their value upon proof of destruction.
Power to Suspend Business Operations

The CIR or his authorized representative is empowered to
suspend the business operations and temporarily close the
business establishment of any person for any of the following
violations:
1. In the case of a VAT-registered person,
a. Failure to issue receipts or invoices;

b. Failure to file a VAT return as required under Section 114
of N1RC; or
c. Understatement of taxable sale or receipts by thirty
percent or more of his correct taxable sales or receipts for
the taxable quarter.
2. Failure by any person to register as required under Section

236 of NIRC.
The temporary closure of the establishment shall be for the

duration of not less than five (5) days and shall be lifted only
upon compliance with whatever requirements prescribed by the
Commissioner in the closure order. (Sec, U5,nirc)
Authority to Delegate Power

The BIR Commissioner may delegate the powers vested upon him
under the pertinent provisions of the Tax Code to any subordinate
official with a rank equivalent to a division chief or higher, subject
to such limitations and restrictions as may be imposed under the
rules and regulations to be promulgated by the Secretary of
82 INCOME TAXATION
Finance, upon the recommendation of the Commissioner. fSec. 7,

NIRC)
The following powers of the Commissioner shall NOT be

delegated:
1. The power to recommend the promulgation of rules and

regulations by the Secretary of Finance;
2. The power to issue first interpretation regarding rulings, or to

reverse, revoke or modify any existing ruling of the Bureau;
3. The power to assign or re-assign internal revenue officers to

establishments where articles subject to excise tax are
produced or kept; and
4. The power to compromise or abate. (Sec. 204 (aj and [B], nirc)
ADMINISTRATIVE PROVISIONS
For purposes of effectively and efficiently performing tax

collection, the Tax Code provides the following requirements for
compliance by the taxpayer employed or engaged in business, as
the case may be:
1. Registration;
2. Printing of receipts or sales or commercial invoices;
3. Issuance of receipts or sales or commercial invoices;
4. Exhibition of certificate of payment at place of business;
5. Requirements for continuance of business of deceased person;

and
6. Transfer of business to another location. (Sections 236 to 243, nirc)
Registration Requirements
A person subject to any internal revenue tax shall register once
with the appropriate revenue office. (Sec. 236, nirc)
Any person required to file a tax return, statement or document

shall be registered and assigned a Tax Identification Number
(TIN).
Only one TIN shall be assigned to a taxpayer. Any person who

shall secure more than one TIN shall be criminally liable. [Secs. 236
ffi and 275, NIRCJ
Exceptions:
1. When a foreign currency deposit unit, which is merely a
division of a local or foreign bank in the Philippines, is
assigned another TIN by the BIR, for purposes of filing its tax
returns and paying final tax on its foreign currency
transactions. The peso and other transactions of‘the regular
banking unit of the bank shall be declared in its regular
corporate income tax return (BIR Form 1702), using its other
TIN.
2. In cases where a registered taxpayer dies, the administrator or

executor shall register the estate of the decedent and a new
TIN shall be supplied to the “Estate of the Deceased Person.”
[Sec. 236 (I), NIRCj
Registration Period. Every person subject to any internal

revenue tax shall register once with the appropriate Revenue
District Officer (RDO)
1. Within ten (10) days from date of employment;

2. On or before the commencement of business;
3. Before payment of any tax due; or
4. Upon filing of a return, statement or declaration as required
in the Tax Code. [Sec. 236(A), nircj
Annual Registration Fee. The annual registration fee is P500 for

every separate or distinct establishment or place of business,
including facility types where sales transactions occur. It shall be
paid upon registration and every year thereafter on or before the
last day of January.
Cooperatives, individuals earning purely compensation income

and overseas contract workers are not liable to the registration fee
herein imposed. [Sec. 236 [B), nircj
BIR Forms. The BIR Forms that are needed for registration are
the following:
84 INCOME TAXATION
1. BIR Form 1901 - For registration of self-employed, mixed

income individuals, estates and trusts.
2. BIR Form 1902 - For individuals earning purely compensation

income.
3. BIR Form 1903 - For registration of corporations and

partnerships.
4. BIR Form 1904 - For registration of one-time taxpayer and

persons registering under E. O. No. 98 (securing TIN to be
able to transact with any government agencies).
5. BIR Form 1905 - For updating/cancellation of registration,

cancellation of TIN, new copy of certificate of registration.
Contents of Registration Form. The registration shall contain

the following:
1. Taxpayer’s name and style of business;

2. Place of residence and business; and
3. Other information as required by the Commissioner in the
form.
Any person maintaining a head office, branch or facility shall

register with the RDO having jurisdiction over the head office,
branch or facility.
BIR Form 605 shall be accomplished in the following instances:
1. Upon payment of annual registration fee for new business and

for renewals on or before January 31, every year.
2. Upon receipt of a demand letter/assessment notice and/or
collection letter from the BIR.
3. Every time a tax liability or penalty is due or an advance
payment is made.
Filings Payment and Updates. Every person who is required to

register with the BIR shall file a return and pay such taxes for
each type of internal revenue tax for which he is obligated. ys«x\ 236
/C/. NIRCj
Any person registered in accordance with Sec. 236 of NIRC shall,

whenever applicable, update his registration information with the
Revenue District Office where he is registered, specifying therein
'cTiy change in tax type and other taxpayer details fSec. 236 /£/, nirc).
This taxpayer is required to file BIR Form 1905.
Adoption of Electronic Filing and Payment System (EFPS).

The BIR primarily developed EFPS to provide taxpayers a more
convenient service in processing and immediate confirmation of
filing tax returns and payment of taxes due.
This system is paperless allowing the taxpayer to directly encode,

submit his tax returns and pay taxes due online over the internet
through BIR website.
EFPS also would minimize the government’s administrative and

operational costs in interacting with taxpayers and in collecting
taxes. (Rev. Memo. Order No. 5-2002)
Transfer of Ownership. When any individual who has paid the

annual registration fee dies, and the same business is continued
by other person or persons interested in his estate, the following
rules shall be observed:
1. No additional payment shall be required for the remaining

period within which the tax was paid;
2. The person who will continue the business should submit

inventories of goods or stocks to the BIR within 30 days from
the death of the decedent.
3. The same requirements (1 and 2) shall be applied in case of
transfer of ownership or change of name of the business
establishment. (Sec. 242, nirci
Transfer of Business Place. In case a registered person decides

to transfer his place of business or his head office or branches, it
shall be his duty to update his registration status by filing an
application for registration information update. (Sec. 236 (D), nircj
The transfer of registration requires no additional registration fee

to be paid by the taxpayer. (Sec. 243, nirc)
Before a taxpayer transfers his place of business to another

revenue district office, he must secure the necessary tax
clearance from the RDO where the head office or branch is
presently registered.
m S*CO%f£ "UAnOS
* — zsjt reczrr- cttr^nhy due -vast stul ix tiled with the KDO
■soerr the uccpcrer ss preserijjr registered in order to avoid any
2.zhn simrmsm3f ur rumg of the- tax tecum m a wrong RiXX /»*•. -<*
«Atr. v/*u
of Registutd-cfi., The registration of arty person who

^ses -- be bdriie rc * e&x t>r* shall be canceled upon thing with
the RTC ^here be is registered and where he applies for
re^surauicc. ibJerm^hcu update in a prescribed form. /£*<•'• u>'t> W>
*UPC
Pri-rtt-.-'g C‘# Receipts* S^'es or Commercial Invoice

‘Sales’ cc *Ccmmercuu Invoice^ is a document issued by the seller
of coeds or the buyer ‘Receipt* is a document issued for sales of
semuoes..
The recthrements before receipts, soles or commercial invoices

are printed are ns follows;
1, S~R s .lib: mm ro Fnm
AT persons wbo are engaged in business shall secure from the

SIR am Rmr.oan, ro Print receipts or sales or commercial
invoices before a printer cart print the same. is*c. css. mkv.)
SIR Form IvOd is to be accomplished by aLl taxpayers every

rune printing of receipts and Invoices is needed. Such form is
to be accomplished with the RDO having jurisdiction over the
bead emce or branch.
2, Gcbc^ requirements
The printed receipts or sales invoices should
a. 3e serially numbered:
b. Contain the name, business style. TIN and business
address of the person or entity to use such receipts or
invoices: and
c. Contain information that may be required by rules and
regulations to be promulgated by the Secretary of Finance*
upon recommendation of the Commissioner.
Issuance of Receipts, Sales or Commercial Invoice
The following rules are followed in the issuance of receipts or

invoices:
1. The time for issuance of receipts or invoices should be the time

u'hen.transaction is effected.
2. All persons subject to any internal revenue tax are required to

issue receipts or sales invoices when the value of merchandise
sold or sendee rendered is twenty-five pesos (P25.00) or more.
3. Receipt /invoice is not required
a. When the value of the merchandise sold or service

rendered is less than twenty-five pesos (P25.00); and
b. When exempted by the BIR Commissioner in meritorious
cases.
4. Regardless of amount, a receipt must be issued when
a. It covers payment made as rentals, commissions,

compensations or fees; or
b. A VAT-registered person makes the sale to another VAT-
registered person.
5. The receipt should indicate the name, business (if any),

address of the purchaser, customer or client when
a. It covers payment made as rentals, commissions,

compensations or fees;
b. The sale is made by a person liable to VAT to another
person also liable to VAT.
The phrase ain the case of sales, receipts or transfers in the

amount of PI00 or more, or regardless of amount, where the
sale or transfer is made by a person liable to value-added tax
to another person also liable to value-added tax” WAS
DELETED under R.A. 9337 of 2005.
6. The original receipt shall be issued to the purchaser, and the

issuer shall keep the duplicate in his place of business for
three years. v
7- The purchaser or the issuer should keep his copy of receipts

for a period of three years in his place of business from the
as INCOME TAXATION
close of the taxable year in which such invoice or receipt was

made. (Sec. 237 , nirq
Summary Application
ISSUANCE OF SALES INVOICE/ RECEIPTS
Tax Returns
Tax: return refers to a formal report prepared by the taxpayer or
his agent in a prescribed form showing an enumeration of taxable
amounts and description of taxable transactions, allowable
deductions, amount of tax and tax payable to the government.
Examples of tax returns are
1. BIR Form Nos. 1700 and 1701 - Annual Income Tax Returns
for Individual.
2. BIR Form No. 1702 - Annual Income Tax Return for
Corporations and Partnerships.
3. BIR Form No. 1800 - Donor's Tax Return.
4. BIR Form No. 1801 - Estate Tax Return.
Certificate of Payment
The taxpayer is required to observe the following with regard to
the certificate of payment:
1. The certificate or receipts showing payment of taxes issued to

a person engaged in business subject to annual registration
fee shall be kept in plain view at the place where the business
is conducted;
2. In case of a peddler or other persons not having a fixed place

of business, it shall be kept in the possession of the holder
thereof, and shall be presented upon demand of any internal
revenue officer. (Sec. 241, nirc)
TAX REMEDIES
Tax remedies are procedures or actions available both to the
government to collect taxes and to the taxpayer to avoid abuses in
the payment of taxes.
Due to the “lifeblood doctrine,” the government applies various

tax remedies to collect taxes in defraying its expenses. Examples
of government remedies are assessment of tax, compromise, tax
lien, levy or distraint, etc.
The tax remedies afforded by law to the taxpayer are supported by

the “due process of law” of the Constitution. Examples of
taxpayer’s remedies are disputing an assessment, compromise,
tax refund, amendment of returns, etc.
ASSESSMENT
By nature, internal revenue taxes are self-assessing. When the
taxpayer earns income, he has the responsibility to compute, file
and pay his tax to the BIR. Hence, the taxpayer creates his tax
liability even without the government’s assessment.
The tax assessment as used in the Tax Code involves the

following:
1. Determining of the correctness of tax due in accordance with

the prevailing tax laws;
2. Giving a written notice of the finding to the taxpayer; and

90 INCOME TAXATION
3. Issuing a demand for the payment of tax liability or tax

deficiency within a specified period.
Accordingly, a tax assessment is a formal letter made by the BIR

demanding the taxpayer to settle his tax liability within the
indicated period. It is based on actual facts and not on hearsay
evidence and it must be directed to the right party subject to tax
investigation.
Assessment made by the Government is relevant in the proper

pursuit of judicial and extra-judicial remedies to enforce
taxpayer’s liabilities. To some extent, it is relevant in the
imposition of surcharges and interest, in the application of
statutes of limitations and in the establishment of tax liens.
Assessment is not yet an action for the collection of taxes. It is,

however, an introduction to that purpose. It is the beginning and
the necessary step to the issuance of a warrant of distraint or
levy, and to establish a case for judicial action. (Alhambra cigar &
Cigarette Mfg., Co. vs. Collector, 105 PhiL 337, May 29, 1959}
Presumption of Correctness
Basically, an assessment is presumed correct and made in good

faith in the performance of official duties and failure to present
proof of error will prosper such assessment. (Atlas Consolidated Mining and
Development Corp. vs. CA, Comm, of Internal Revenue and CTA, 59 SCAD 870, G.R. No.
105563, 10 March 1995)
Who Makes Assessment

After the return has been filed, the BIR Commissioner or his duly
authorized representative may authorize the examination of any
taxpayer and the assessment of the correct amount of tax. Failure
on the part of the taxpayer to file a return shall not prevent the
Commissioner from authorizing the examination of any taxpayer.
(Sec. 6, NIRC)
Assessment Period
Assessment period refers to the span of time allowed by law to the
BIR to investigate a taxpayer’s tax discrepancy to enforce
collection of taxes.
Chapter 2 Tax Administration
The Tax Code provides the prescriptive periods in assessing taxes

that are returnable as follows:
Prescriptive Periods of Tax Assessment

Summary Application
Income Tax Return Filed Assessment Period
Violation:
(1) Regular Return
(Simple neglect)
• ITR without fraud Within 3 years from the
filing of ITR
(2) Fraudulent Return
(Willful neglect)
• ITR with fraud, falsity Within 10 years from the
failure to file return or discovery of fraud or
substantial omission omission
Or
No assessment needed
Court proceeding
for tax collection
within 10 years from
the discovery of fraud
or omission.
Notes:
1. If the tax deficiency is due to simple neglect, trie prescriptive period of
assessment is within 3 years starting from trie date of filing the return fS&c.
203, JVIRCJ, or its amendment.
The BIR and trie taxpayer may agree on the assessment period before trie
expiration of the 3-year period. (Sec. 222 (b), JVIRCJ
The return, statement or declaration can be modified, changed or amended

from within three years from trie date of filing as long as no tax investigation
has been served to trie taxpayer. (Sec. 6(A), JVZRCf
For purposes of this Section, a return filed before the last day prescribed by
law for the filing thereof shall be considered as filed on such last day. (BjRf tss.
cm. G.R. No. 139736, Oct. 17, 2005)
In a case where a return is filed beyond the period prescribed by law, the
three-year period shall be counted from tbe day the return was filed. fSec.
203, NIRCJ
If th e ta x retu rn is su b s ta n tia lly amended, the period starts from the

a m en d m en t. T h e ta x p a ye r h a s within three years from the date of filing of the
o rig in a l ta x retu rn to modify, change or amend his tax return. This privilege,
h o w eve r, is a va ila b le only while the BIR has not issued a notice of
in vestig a tio n a g a in st th e taxpayer. fSec. 6 fAJ, NZRC/
92 INCOME TAXATION
2. If the ITR is fraudulent or no tax return was filed, the tax may be assessed, or
a proceeding in court for the collection of such tax may be filed without
assessment at any time within ten (10) years after the discovery of the falsity,
fraud or omission. (Sec. 222 (a), NIRC)
In case of failure to file a return, the tax may be assessed at any time within
10 years after the omission, and any tax so assessed may be collected by levy
upon real property within 3 years following the assessment of the tax. (CIR us.
Arturo Tulio, G.R. No. 139858, October 5, 2000)
It is to be noted that assessment is not necessary before filing criminal

charges complaint for tax evasion. (CIR us. Pascor Realty and Dev’t Corp.,
G.R. No. 128315, June 29, 1999)
3. If the government has not assessed/or collected within this period, its right to
act has expired and thereafter the taxpayer is deemed to have paid the correct
amount of tax. (Sec. 203 and 222, NIRC; Collector vs. Bisaya Land
Transportation Co., L-12100, 29 May 1958)
4. The BIR may subject to jeopardy assessment (assessment anytime by

terminating taxable, period) the taxpayer who is retiring from business,
leaving the country, hiding his property or performing any act that tends to
obstruct the proceeding in the collection of tax. [Sec. 6 (D), NIRCJ
Jeopardy assessment terminates or condenses the taxpayer’s period. It

requires no audit because the taxpayer failed to comply with audit and
investigation requirements to present his books of accounts and other related
records and substantiate the deductions claimed in his return.
When to Effect Tax Assessment

Government tax assessment could be made:
1. Before a tax return is filed.
a. After prescription period expired
b. If the taxpayer intends to leave the country or close

business. (Jeopardy Assessment)
2. After a fraudulent tax return is uncovered.
A revenue officer’s computation of the taxpayer’s liability

communicated to the latter, giving him an opportunity to disprove
the BIR examiner’s findings, is not an assessment because it is
not yet definite.
In cases where the taxpayer refuses to acknowledge receipt of

assessment notice from the BIR, it is the burden of the latter to
prove that such notice was indeed received by the taxpayer
concerned. Mrpubticva. Court 6/Appeals, 149 SCRA 351)
Si2 Tax 93
IQrvcs of Tax Assessment
ABSCSsner. r: tajs&s se chs.sm-ed as. ib-Tcws:
; Self-Assessment - this rax assessment is made by the

taxpayer himself reflecnmg the amount of tax due in ±e HR
2. Prospective Assessment - also called a prelbrdnarj

assessment ncuae ?A1 v which informs the taxpayer about the
:m dings by the *ax examiner regarding the taxpayers tax
deficiency. The taxpayer is usually given 15 days mom notice
to explain his side.
3. Disputed Assessment - a tax assessment that is being

questioned by the taxpayer as to its validity or legality and
asks the same to be cancelled. The taxpayer or its authorized
representative or tax agent may protest administratively
against the aforesaid Formal letter of Demand FLD and Final
Assessment Notice TAN, within thirty 30j days horn the date
of receipt thereof. This may be done through /al request for
reconsideration or foj request for reinvesugahon.
4. Final Assessment - an official assessment which was not

disputed or properly appealed by the taxpayer within the
prescribed period and has become final and executory.
The taxpayer is barred from disputing the correctness of the

issued assessment by introduction of newly discovered or
additional evidence.
5. Deficiency Assessment - an assessment made by a tax

assessor showing the correct amount of tax after tax audit.
6. Jeopardy Assessment - an assessment without the benefit of

complete or partial tax audit intended to prevent the delay of
the assessment and collection of taxes cause by the taxpayer’s
failure to comply with tax investigation requirements and
substantiate his records with proper documents.
T Illegal or Void Assessment - an assessment made by a BIR

officer without authority or an assessment made in violation
of law.
94 INCOME TAXATION
Preliminary Assessment Notice

A preliminary assessment notice (PAN) of the BIR shows in detail
the facts and the law, rules and regulations, or jurisprudence on
which the proposed assessment is based. It is a due process
requirement in the issuance of a deficiency tax assessment.
It is issued after the Commissioner or his duly authorized

representative, as the case may be, reviewed, evaluated and found
out that there exists sufficient basis to assess the taxpayer for
any deficiency tax or taxes.
The BIR shall issue a Formal Letter of Demand (FLD) and Final
Assessment Notice (FAN) calling for the payment of deficiency tax
liability and the applicable penalties when:
1. The taxpayer fails to respond within 15 days from date of

receipt of the PAN (in default), or
2. He disagrees with the findings of deficiency tax. (Rev. Regs. No. i&
2013)
When Preliminary Assessment Notice Not Required
“Pursuant to Section 228 of the Tax Code, as amended, a PAN

shall not be required in any of the following cases:
1. Deficiency tax is the result of mathematical error appearing

on the face of the return;
2. Discrepancy has been determined between the tax withheld

and the amount actually remitted by the withholding agent;
3. Taxpayer opted to claim a refund or tax credit of excess

creditable withholding tax for a taxable period automatically
applied the same against the estimated tax liabilities for the
quarters of the succeeding taxable year;
4. Excise tax due (on excisable articles) has been paid; and
5. An article locally purchased or imported by an exempt person,
such as vehicles, capital equipment, machinery and spare
parts, has been sold, traded or transferred to non-exempt
persons.
In the above-cited cases, a FLD and FAN shall be issued outfight

calling for payment of the taxpayer's deficiency tax or taxes, it
shall state the facts, the law, rules and regulations, or
jurisprudence on which the assessment is based; otherwise the
assessment shall be void." (R?u. Reg*. No. is 2013)
Requisites of a Valid Assessment
A valid assessment must possess the following:
1. The tax official and the taxpayer have no agreement made

during the pre-assessment stage;
2. It must be in writing; and
3. It must state the facts, law, rules and regulations or

jurisprudence on which the assessment is made; otherwise,
the assessment notice shall be rendered NULL and VOID. (Sec.
228, NIRC)
Note: An assessment is issued by the BIR based on findings of fact and/or law by
the revenue officers. The factual findings and the law violated by the taxpayer
must be stated in the report and in the assessment or demand letter issued by the
BIR. Such requirement is indispensable, failure to do so would render the said
assessment null and void. (Sec. 228, NIRC) .
Ways to Contest the Validity of an Assessment

The taxpayer may dispute or protest the validity of an assessment
which may involve the question of fact or law or both by the
following written motions or requests:
1. Motion for Reconsideration. The taxpayer requests the BIR to

review the existing records without the need of additional
evidence.
2. Motion for Reinvestigation. The taxpayer requests the BIR to
have a second look based on the newly discovered or
additional evidence which must be submitted within sixty (60)
days from the date of filing of the protest.
3. Motion for Withdrawal The taxpayer requests the BIR or Court
to remove a tax plea bargain he entered because he was
pressured to accept the agreement which he believes not in
his best interest.
INCOME TAXATION
4. Motion for CanceikitiorL The taxpayer requests the BIR or

Court to stop the tax assessment due to prescription and
violation of due process of law.
Assessment Procedure
Relative to the due process requirement in the issuance of
deficiency tax assessment and to effect valid assessment, the
following summarised procedures as provided by Section 228 of
the NIRC must be observed;
TAX ASSESSMENT PROCEDURE
PAM Taxpayer
P.eeppr*H tfithin 15 <iayt

frprn receipt pf PAM
FaW* to rtrvj^fnJ, in default

)
; Fprrnal
1% w j * x
f Letter pf
f File* prptott *rfth*r» 'JO 4*y%
A*****’"*"! ■*"1 frorn receipt 'A »mnm«r>t
I ' mptipri
For fpr rein/etttyettpn,
.... ........ ...... t-vbrnit
j prppf* *//thin tO »3*/t frpfn frtiog pf prpteet
f>*pie*
i*/v*/*r*
prpteet pr —► Appeal* to tMe CtA M’rtMrt
V) 4»y% U*/m repel p* o1
tppppfttog 4k — pr frpfn tape* pf
4/SsWfHrtit* the period
t/itiun 1W 4»/*
pppr»
*.pUo»*%ipr» Mp appeal r/»err<»4*
MW< decleipH pri fa/
A»»»»wwrt final,
e/ec4#tpr y *n*J dernandaMa,
l
'/f JA* f/fo'wJu/r* i* U f j r f i t i f i i bu*rfJ on ihr,
f t -iAy iw-ir/i W' ,‘<p, 1 ^ fir- ///o k /i*tioo% ot H*>, 12 '/A Ofyvrrv^
tfp fb' Hoti** t/f inU/twfit (tt\C) «# <h/r
pf 'Wy p /*< y
Mt)>» » (»i both (if Ihrt5( irnif'dirtj rri/>y be punned sifnt df/me/iuiUy
in ih» i (>f |r( f jfiii of biKes omr fhe fetunerd hrroftiP.fi fjjriM tint}
< l( ii i n IM Id I »lr (xw Utn tout !U’-t : •>'*, NU*(, t tthUn* (rtn*tfi < utf, m Ofy
< n-u Nn fit (hieiffihrt ’/. I'Jtltt)
Any intrrnnl rrymue fnx fhof fj/1r, been /ifcftefc.ned within the
pice.c nbed hmibdion period mny hr rolleefed by difttrnfnt or \&/yt
m by n proceeding in court within f i v e (h) ynnrt, following the
Me.ju\n*;mcnt of tnx,
Distraint of Porsonal Property
Distraint of Personal Property is the seizure by the government of

personal property (tangible or intangible) to enforce the payment
of taxes, followed by its public sale if taxes accruing thereto are
not voluntarily paid. (sec. 207(A), nirq
This remedy shall not be availed of if the amount of tax involved

is not more than PI 00. (Sec. 205, nirq
Kinds of Distraint
Distraint of personal property may be classified as:
1. Constructive distraint - the government prohibits the taxpayer

from disposing his personal property to enforce collection of
taxes. (Secs. 206, NJRC)
2. Actual distraint - the government takes possession of the

taxpayer’s personal property and sells the same through
public auction to settle the latter’s unpaid tax liabilities. (Secs.
207-209, NJRC)
The amount to be paid by the delinquent taxpayer would be:

a. The total tax, or charge, together with any increment
thereto incident to delinquency; and
b. The expenses of the distraint and the cost of subsequent
sale. (Sec. 207, NIRC)
Any excess on what is required to pay the entire claim, including

expenses, shall be returned to the owner of the property sold. No
charge shall be imposed for the services of the local internal
revenue officer or his deputy. (Sec. 209. nircj
Release of Distrained Property upon Payment Prior to Sale. If,

a: any time prior to the consummation of the sale, all proper
charges are paid to the officer conducting the sale, the goods or
effects distrained shall be restored to the owner. (Sec. 210, nirc)
Purchase by Government at Sale Upon Distraint. When the

amount bid for the property under distraint is not equal to the
amount of the tax or when the amount of bid is substantially
lower than the actual market value of the articles offered for sale,
the BIR Commissioner or his deputy may purchase the same in
behalf of the National Government for the amount of taxes,
penalties, and costs due thereon. (Sec. 212, nircj
Further Distraint. The remedy of distraint of personal property

may be repeated if necessary until the full amount due and all
expenses are collected. (Sec.217 .Nmo
Kotes:
Bank deposit or account may be distrained without violating the Law on
Secrecy of Bank Deposits. (Opinion No. 54, Series of 1956, Secretary of Justice)
2. Property in custodia legis (court custody) may be distrained subject to the
outcome and effects of the court’s final judgment. (Collector us. Codinera, 102
Phil 1165)
Levy of Real Property
Levy of Real Property is the seizure by the government of

immovable property in order to enforce the payment of taxes. As
m distraint, the property may be sold at a public sale if, after
seizure, the taxes are not voluntarily paid. /sec. 207(B), nircj
This remedy shall not be availed of if the amount of tax involved

is not more than PI00. (Sec. 207,nirc)
After the expiration of the time required to pay the delinquent tax
or delinquent revenue as prescribed by law, real property may be
levied upon, before, simultaneously or after the distraint of
Personal property belonging to the delinquent taxpayer.
J-evy shall be effected in writing upon the certificate detailing a

description of the property upon which levy is made, A failure of
Notice is a fatal defect. (Sec. 207 (BJ, NJRC; Cabrera vs. Provincial Treasurer of
75 Phil. 780)
100 INCOME TAXATION
The levy, as a remedy on realty, may be repeated if necessary

until the full amount due, including all expenses, is collected. (Sec.
217, N1RC)
In case the proceeds of the sales exceed the claim and cost of
sale, the excess shall be turned over to the owner of the property.
(Sec. 213, N1RC)
Redemption of Property Sold. Within one year from the date of

sale, the delinquent taxpayer, or anyone for him, shall have the
right of paying to the RDO the amount of the public taxes,
penalties thereon from the date of delinquency to the date of sale,
together with interest on said purchase price at the rate of 15%
per annum from the date of purchase to the date of redemption.
The owner shall not, however, be deprived of the possession of the

said property and shall be entitled to the rent and other income
thereof until the expiration of the time allowed for its redemption.
(Sec. 214, NIRC)
In case the taxpayer does not redeem the property, the RDO shall
as grantor, execute a deed conveying to the purchaser how much
the property has been sold, free from all liens of any kind
whatsoever. (Sec. 202, nirc)
OTHER COLLECTION REMEDIES

Other remedies to enforce collection of taxes are as follows:
1. Imposition of injunction;
2. Enforcement of tax lien;
3. Enforcement of forfeiture;
4. Entering into compromise of tax case;
5. Requiring the filing of bonds;
6. Requiring proof of filing of income tax returns;
7. Giving of rewards to informers;
8. Making arrest, search and seizure;
9. Deportation of aliens;
10. Inspection of books of accounts;
11. Use of national tax register; and
12. Imposition of civil and criminal action.
Imposition of Injunction
An injunction a restraining order issued by the court having

jurisdiction over the filed suit intended to forbid the continuance
of the action of law for purposes of due process.
The Tax Law provides that injunctions are not available to restrain
collection of National internal Revenue Tax, fee or charge imposed
by the Tax Code rzec. 2in, mpq. The imposition of injunction is only
applicable within the discretion of the Tax Court fCotectcrvs. Zuiê^ :oo
m 872)
The Court of Tax Appeal may issue injunctions against

administrative collection by distraint and levy when collection
could jeopardize the interest of the government or the taxpayer
subject to the posting of the bond, at . . . ii25t
a vo
Note; Revenue Memorandum Order So. 42-2010 issued on May 4, 2010 prohibits
the issuance of Temporary Restraining Orders (TRO) on the collection of taxes
against the BIR by courts other than the Court of Tax Appeals (CTA), the issuance
of warrants of distraint and garnishment, and/or levy on final decisions of the BIR
on disputed assessments, cases filed before the CTA, and the sale of property
distrained and garnished.
Tax Lien
A tax lien is a legal claim granted to the government to secure the
proper payment of the tax, surcharges, interest and costs on all
property subject to levy or distraint.
A tax lien is directed to the property subject to tax regardless of

the owner of the property, irrespective of who is the possessor
thereof. It is enforced (a) by a seizure of the property, and (b) by a
sale of the property. (5i Am. Jur. 857)
By seizure, the proceeds of the property sold are applied to satisfy

the tax liability and the excess thereof shall be returned to the
taxpayer.
By forfeiture, no part of proceeds goes to the taxpayer because the

property is confiscated in favor of the government. (Hong Kong and
Shanghai Bank vs. Rafferty, 39 PhU 145)
This lien is not valid against any mortgage, purchaser or

judgment creditor until notice of such lien shall be filed by the
Commissioner in the Office of the Register of Deeds of the
102 INCOME TAXATION
province of city where the property of the taxpayer is situated or

located. (Sec. 219 , nirq
Forfeiture
Forfeiture of Confiscated Article implies taking of property without

compensation as a result of an offense committed,
When the sale of the articles confiscated for consumption or use

would be injurious to the public health, the Commissioner of
Internal Revenue may order that these be destroyed.
The seizure and sale or destruction of the specific forfeited

property shall enforce the forfeiture of chattel and removable
fixtures. The forfeiture of real property shall be enforced by a
judgment of condemnation and sale in a legal action or
proceeding, civil or criminal, as the case require. (Sec. 224 , nirq
As a form of evidence, forfeited property shall not immediately be

destroyed for at least 20 days after seizure. (Sec. 22s, nirq
Forfeiture of Government for Want of Bidder. In case there is

no bidder for real property exposed for sale or if the highest bid is
for an amount insufficient to pay the taxes, penalties and costs,
the Internal Revenue Officer conducting the sale shall declare the
property forfeited to the Government in satisfaction of the claim
in question. (Sec. 21 5,par. i,nirq
The forfeiture need not be for the whole tax liability which will
merely be for the amount equivalent to the fair market value of
the property. (Castro ux. Collector, 4 SCR A 1103)
Within one (1) year from the date of such forfeiture, the taxpayer,
or any one for him, may redeem said property. He must pay the
full amount of the taxes and penalties, together with interest
thereon and the costs of sale. If the property is not redeemed, the
forfeiture shall become absolute. (Sec. 21s, par. 2, nirq
Compromise
Compromise is a contract whereby the parties, by reciprocal
concessions, avoid litigation or put an end to one already
commenced.
A compromise of the tax liability is possible at any stage of the

litigation, even during appeal, although legal propriety demands
that prior leave of court should be obtained. (Pampanga Sugar Development
Corporation vs. Court of Industrial Relations, 114 SCRA 725)
As a rule, all criminal violations may be compromised except

those (a) already filed in court, or (b) involving fraud. (Sec. 204 [aj,
NIRC)
A criminal compromise is proper only if done before the filing of

the information with the court (Sec. 204, nirc). The Civil Code shall
govern the effects of compromise. (Arts. 2037-2041, civil Code)
When to Effect Compromise

The authority to compromise civil as well as criminal liability is
vested exclusively in the BIR Commissioner to ensure that no
improper compromise is made to the prejudice of the government.
Section 204 of the Tax Code provides that the Commissioner may
compromise the payment of any internal revenue tax when:
1. A reasonable doubt as to the validity of the claim against the
taxpayer exists; or
2. The financial position of the taxpayer demonstrates a clear

inability to pay the assessed tax.
The following shall be considered in a tax compromise agreement:
1. The taxpayer must have a tax liability;
2. There must be an offer by the taxpayer or Commissioner of an

amount to be paid by the taxpayer; and
3. There must be acceptance by the Commissioner or taxpayer,

as the case may be, of the offer in settlement of the original
claim.
However, under RR No. 9-2013, the compromise offer shall be

paid by the taxpayer upon filing of the application for compromise
settlement and the application for compromise shall not be
process unless the compromise amount is fully paid. In case of
disapproval of the application, the amount paid shall be deducted
from the total outstanding tax liabilities.
m h/j 'ts*
Cc*Sttfe whu.h t ' i * f v*
The ttaxpayers mX tb< 1*11' " ay ig'M ^/oy*np«vm4*:

< tifet. te.
J I) CIJ j lq U<‘.»J1 W ■* *>\ii ti$ f
2. C*&<>9 under *d.midtetr#ri.ye prvUart *dv# •i**ufc--'rf4 '/ tb* hx#

Assessment Noli** tv the taxpayer vveR/L 1&J. pe'iCurrg: k
the Regional Offi^s, Revenue j>Strict *M&**jt
Large Taxpayer tê/vicc, Q>lic<b;icn t/e/'hce, .brtlfec^n&rr
Service and other offices in the i^do'iW O f f ^ A y
3. Civil tax carets disputed before t/*e courts;
4. Collection cases tiled in courts; and
5. Criminal violations, other than those already €leb is co,rx <r

those involving criminal tax frwMis, r/<*v
Cases that are NOT Subject to Compromise
The following cases are not subject to compromises
1, Withholding tax cases, unless the applicant taxpayer mroxet

provisions of law that cast doubt on the taxpayer's ebKgafior
to withhold;
2, Criminal tax fraud cases confirmed as suer, by the
Commissioner of Internal Revenue or Ms duly a.nhonxer:
representative;
3, Criminal violations already filed in court;

4, Delinquent accounts with duly approved schedule of
installment payments;
5, Cases where final reports of reinvestigation or reconsideration
have been issued where the taxpayer is agreeable.
6, Cases which became final and executory after final judgment
of a court, where compromise is requested on the ground of
doubtful validity of the assessment; and
7, Estate tax cases where compromise is requested on the
ground ol financial incapacity of the taxpayer- (#*&. toy* 7~2ooif
1 ?u 105
Minimum Compromise Percentage
jjc-vc.iUit RrguUbons No. 7-0001 provides the following nunimum

..•turpronn.-r rate* on tax compromise settlement:
\ U>'.. cf basic tax assessed due to financial incapability for

.. an individual taxpayer whose only source of income is
from employment and whose monthly salary, if single, is
PI0,500 or less, or if married, whose salary together with
Ins spouse is P21,000/month, or less; the taxpayer,
however, must possess no other leviable/distrainable
assets, other than his family home;
b. An individual without any income;
c. Zero nerworth, negative networth taxpayer:
d. Non-operating companies for a period of 3 years or more
as of the date of application for compromise.
B. 20% o f basic tax assessed due to financial incapability for

a. Dissolved corporation;
b. Non-operating companies for a period of less than 3 years;
and
c. Corporations declared insolvent or bankrupt.
C. 40% of assessed tax due to financial incapability for surplus or

earnings deficit resulting to impairment in the original capital
by at least 50%
D. 40% for doubtful validity of assessment
Where the basic tax involved exceeds one million pesos

(PI,000,000) or where the settlement offered is less than the
prescribed minimum rates, the compromise shall be subject to
the approval of the Evaluation Board which shall be composed of
the BIR Commissioner and the six (6) Deputy Commissioners.
Posting of Bonds
Posting of bonds is mostly applicable to customs duties and
excise taxes.
in cases where the computation of required actual tax payment is

not readily done and will cause delays, an agreement shall be
made to the effect that a bond is secured instead of assuring
payment of tax that may still be due.
106 INCOME TAXATION
Exporter’s Bond. Exporters of good that would be subject to

excise tax, if sold or removed for consumption in the Philippines,
shall submit proof of exportation satisfactory to the
Commissioner.
When the same is deemed necessary, they shall be required to

give a bond prior to removal of the goods for shipment,
conditioned upon the exportation of the same in good faith. (Sec.
159, NIRC)
Manufacturers* and Importers’ Bond. Manufacturers and

importers of articles (alcohol and tobacco products) subject to
excise tax shall post a bond subject to the following conditions:
1. Initial bond - In case of initial bond, the amount shall be equal

to PI00,000. If after six (6) months of operation the amount of
initial bond is less than the amount of the total excise tax
paid during the period, the amount of the bond shall be
adjusted to twice the tax actually paid for the period.
2. Bond for succeeding years of operation - the bond for

succeeding years of operation shall be based on the actual
total excise tax paid during the year immediately preceding
the year of operation. (Sec. ieo, nirc)
Illustration
The initial importation of MXports Company requires to put

up a bond of PI 00,000 in lieu of the actual custom duties and
excise tax.
Suppose that after the actual taxes on first importation was

completed and amounted to PI 50,000 - which is good for 6
months then the next importation for the remaining 6-month
period would need a P300,000 bond.
Suppose further, that the actual taxes for the second

importation amounted to P200,000, thenthe bond would be
P350,000 for the next year’simportation, computed as
follows:
Actual taxes paid:
First importation PI50,000
Second importation 200.000
Required bond P35Q.00Q
f Frfrjyf*' > 16?
i \* f t f, t'* w/fiifhf'fs, of th' r sf+ pmyrr,* r, * . -4>,^

r.,ft/»,r,t (4 ff^rt/r h* f*) f> + .fit’+fl *hati rr .(, trXc,
t Sf t/ t*,lu,~'/itt% '4 h' y l> >\* (P*if Atff. f yOO'r,
M, niir/i ,m
ir,K •■»;> tf» P~,/4/t /44 > P'000 OOO
f **«Lf (’ ~ r f p / 1J 44 / )4j Ur P j 0,000,000 PO hoodoo
( >/*f P t f><44 tJ44) (/> (4 4>
t PO, oooooo
t's~/)//>/><>'t fip tf, Pr>C,000,000 P'S/XX,OOO
f '**t P^4)/44>/44i »>p Ur Fl(4>/44>/4>(> PO o,ooo/xo
t>/*t 0/00,000,000 1,(1, Ur 0~,00,600,000 PC >,OOOhOO
<>/# 1 0000,000/)60 i.#p Ur Pi />00/>00,600 PÔ,000,000
Ovrr Pi ,000,006,000 up Ur Pi 0,600,006,000 P'00,.000.000
f wt Pi (>/><><>,<>()().600 >p Ur l*?/)//>0/4> 0,600 P'VS/XX>0OO
<>«*t O>0,060,600,000 PO 00 ooo ooo
Requiring Proof of Filing Income Tax Return

hr fart* ,j r r news j of license to enyj*gc in trade, business or
fM-upntion fit prat t\f,c a profession can be issued to a taxpayer
ft] by jaw fo file an income tax return, the same rro^t
prrsmt to the officer issuing such license or permit proof that he
or /f b/iej 0/zvJ fbc income tax return during the preceding year
and h/af tnxes flue have been paid thereon.
Informer*% Reward
for voluntary sworn information given to the BIR which leads to
the dr:covery of frauds thereby resulting in revenue recoveries,
10% of such amount recovered may be rewarded to the informer.
h b'or Violation of NIRC Any person, except an internal revenue

official or employee, or other public official or employee, or his
relative wit fun the 6th degree of consanguinity shall be
rewarded in a sum equivalent to 10% of the revenue,
surcharges or fees recovered and or fine or penalty imposed
rmd collected or PI ,000,000 per case, whichever is lower if:
a //e voluntarily gives definite and sworn information not yet

in the possession of the BIR;
h. The said information leads to the discovery of frauds upon

internal revenue laws or violations of any of the provisions
thereof;
108 INCOME TAXATION
~ The discover}' of the frauds resulted in the recovery of

revenues, surcharges and fees and/or the conviction of
the guilty part>r and/or the imposition of any fine or
penalty. (Sec. 2S2 (B), nirq
The information mentioned herein shall not refer to cases

already pending or previously investigated, examined by the
Commissioner or any of his deputies, agents or examiners, or
the Secretary of Finance or any of his deputies/agents.
2. For discovery and seizure of smuggled goods - A cash reward

equivalent to 10% of the fair market value of the smuggled
and confiscated goods or PI,000,000 per case, whichever is
lower, shall be given to persons instrumental in the discovery
and seizure of such smuggled goods. The cash rewards of
informers shall be subject to income tax, collected as a final
withholding tax, at the rate of 10%. (Sec. 282(B), nirc)
Illustration
Juan provided information to the BIR that resulted in the

discovery of smuggling operation of a certain businessman in
Tawi-Tawi. The government was able to confiscate goods with
a fair market value amounting to P8,000,000.
The amount of reward, net of tax, to be received by Juan

would be:
Maximum reward PI.000.000
Limit (P8,000,000 x 10%) p 800,000
Less: Final tax on informer’s reward
(P800,000 x 10%) 80.000
Amount of reward, net of tax p 720.000
Making Arrest, Search and Seizure

An internal revenue officer has the authority to make arrests and
seizures for the violation of internal revenue code being
committed within his view.
Deportation in Case of Aliens

Any alien is subject to deportation if he knowingly and
fraudulently evades the payment of any Internal Revenue Tax, or
^►;**//*f > rivr. 109
'■••/ ;/"; ar.b k*, accessory per»altics after

Ram ar '■ * ■ /+ '■ s -' r f y Ti ,/ t f y.^ f .fy
Oom/nfosioner or t h e
'/,.r‘ V. 'Hz / W »r.y '//ropier/ judicial tribunal.
»h<u; 'or,/fct/-d of a crime p-srulirM by the Code, in addition to

v-r,!/ for n>' payment of the to*, shod be deported
rf. i«v./ «f‘c,- VTV)/,}/ <h,: w<f(wir/. without further
v'/"d,r of de"p//r*afjon.
Impaction of Booh*
/■ A >,<,*-•/: ,vy the 0(1% the Inferno! f'evenue Officers fIRO) ore
.'.zed to ezorrune and inspect boohs of accounts and other
iitZ/r *1^ r'd^ '/i taxpayer-*.
'■ '*••* ,;Jt > "rhal, %u\,y/A the emd bookx and record:* to examination
WA Ouch examination anti inspection shall he marie
v?."- >f/ a taxable year, except in the folfov/ink cases;
i krs>d, irregularity, mistakes as determined by the

'V/rnrmssioncr;
k 1 he taxpayer requests fur rcirivcstlf^tion;
'/ '/cub' atrun of compliance v/ith v/ithholdink tax laws and

ilift\*ft!*■ /, mud
A ‘/enUf-.oUtfti of capital pains tax liabilities,
mS'rnaj revenue officers and examiners may not examine a

’a/paycr's books of accounts and their anno unlink, record ft,
"*»,v/ut the necessary Jitter of Authority,
b Oaw /,/ Authority is s request to the taxpayer to permit the

r';»oi thereof to f/fTiriuet. the necessary examination of ftaid
books and records, and sipned either by the Blk Commissioner
fi‘:< deputy, officials of the invefttjpnt.jnp division, Regional
birtr tor> r»nf fmeotor, or the Revenue Oistriet Officer.
^9^pjng of Book** of Accounts
f orpornUons, companies, part nerships, or persons required by

x u, j>;jy internal revenno 1 oxen shall keep a journal arid a
*,y’k' r or t}(t ir equivalent jneludirip copies of audited financial
I' ffOjf'., -//if bin thrff' fA) yearn from due date of filinp tax returns.
'< » u //„ / .hitlf i, '/()<)/, ’,cr '/(, !, NU'Cf
no INCOME TAXATION
'Ibov whose quartc i l y % h U : h , earnings, receipt®, or output do not

exceed pf>o,000 h h n J1 keep and use a simplified set of
bookkeeping records duly out homed by the Secretory of Finance,
Taxpayers whose gross quarterly soles, earnings, receipts or

output exreed 1*150,000 shall hove their books of accounts
audited and examined yearly by an independent CPA and their
income tax returns accompanied with a duly accomplished
Account Information Form (AIF). (fine. 232, nirq
Language and Translation of Books of Accounts
'I he hooks or records mentioned above shall be kept in a native

language, ICnglish or Spanish.
If, m .addition to said books or records, the taxpayer keeps other

hooka or records in a language other than a native language,
Knglisli or Spanish, a true and complete translation of all the
entries shall hr made of the said required language. 7/fec. 234, NtRCj
Use of the National Tax Register
'the National tax register is a record of the names of persons

residing in each city or municipality kept and maintained by
every revenue regional director of every regional district.
It is available for use by any internal revenue or other tax
collecting officer as aid in the collection of taxes.
Civil and Criminal Actions
The approval of the B1R Commissioner required for the judicial

enforcement of fax merely affects the cause of action or capacity
tO SUe. (Arche:., us. lictlo:;ilio, 20 SCKA 32)
No civil or criminal action for the recovery of taxes or the

enforcement of any fine, penalty or forfeiture under this Code
shall be filed in court without the approval of the BIR
Commissioner. (See. 220. nirc)
A civil action is one that is brought to enforce, redress or protect

private rights. In general, all types of legal actions other than
criminal proceedings are civil actions, (cuuken us. GUUken, 248 n.c. 710,104
S.E. 2(1801, 803)
For tax purposes, this refers to civil actions instituted by the

government to collect national internal revenue taxes in the
ordinary courts.
Since the BIR or the Government cannot make an appeal to the

Court of Tax Appeals (Acting Collector of customs us. Court of Appeals, Oct. 31, 1957),
the filing of the government’s answer to the taxpayer’s petition for
review constitutes a civil action for the collection of tax in
question. (Alhambra cigar and Cigarette Mfg. Co. vs. Collector, 105 Phil. 1227)
A criminal action is a penal prosecution. It is an action, suit or

cause instituted to punish an infraction of the criminal laws.
(Black’s Law Dictionary)
The judgment in the criminal case shall not only impose the
penalty but also order payment of the taxes as- decided by the
CIR. (Sec. 205, NIRC)
The tax crime is committed when the violator has knowingly and
willfully filed a fraudulent return or neglected to file a return with
intent tO evade the tax. (Ungab vs. Cusi, L-41919-24, May 30, 1980)
As a rule, assessment is not necessaiy before filing criminal

complaint for tax evasion. (Sec. 222, NIRC; CIR vs. Pascor Realty and Dev’t. Corp.,
G.R. No, 128315, June 29, 1999)
A tax fraud or evasion case is basically a criminal case. In the

establishment of fraud, the burden of proof is on the BIR. The
presumption that an officer of the government has performed his
duty regularly (Sec. 5, Rule 131 of the New Rules of Court), Q.S in the Case of the
correctness of deficiency assessments, is not applicable in fraud
cases.
In criminal cases, the burden of proof as to the offense charged

lies on the prosecution (Sec. 2, Rule 131, New Rules of Court). Mere
suspicions and mere doubts on the intention of the taxpayer are
not sufficient proof of fraud. Fraud is never presumed; it must be
proven.
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.
INCOME TAXATION
c fbl’owir^ air the due date}? prescribed by laws for filing of

urn and payment of tuxes.
rs; Due Date
>
t acv>r.x :a\ psvixner is employee) April 15 succeeding year
(BIR Form 1700)
Irxvme :a\ itavxA>rr is individual, in
business practice of profession)
. Firs: quarter (Jan-March)...................
a April 15 same year (new)
b Se%cc;>d quarter (April-June)......... . August 15 same year
c Third quarter ( Jul-Sept).................... November 15 same year
d Annua’ ,final return)........................ April 15 succeeding year
(BIR Form 1701)
Ir.ec me tax ;oorponate taxpayers)
a Firstquarter...................................... 60th day after end of qtr.
d Second quarter................................ 60th day after end of qtr.
c Third quarter.................................... 60th day after end of qtr.
d. Final adjustment return................. . 15th day of the 4th month
after close of taxable year
Value-added tax (BIR Form 1702)
a On sale of goods, services or property
i 1 Monthly-declaration/payment.. 20th day after month’s end
s2 Quarterly return......................... 25th day after quarter’s end
(BIR Form 2550)
Excise tax
a. On importation.................................. Before release from BOC
b. On goods manufactured.................... Before transfer from factory
Non-VAT percentage tax (monthly return) 20th day after month’s end
(BIR Form 2551)
Estate tax..................................................
6 months after death
Donor’s tax............................................... 30th day after each donation
Capital gains tax - sale of shares of stock

hot traded thru local stock exchange) 30th day after sale
a. Per transaction return........................ 15th day of 4th month after
b. Final / consolidated return................. close of taxable year
CzÎibI 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 payment
Remittance of tax withheld
a. In general On or before 10th day of the
January to November.................... following month on which
withholding was made.
December Not later than Januaiy 25

of the succeeding year
barge taxpayers On or before 25th day of the

month following the month in
which withholding was made.
Additions to Tax
The government may impose surcharges and interest in addition
to basic taxes to ensure tax collection once a taxpayer neglects to
pay his taxes.
A surcharge is a civil penalty imposed by law in addition to the

main tax required to be paid due to delinquency or
misrepresentation of taxes.
The term “delinquency” means failure on the part of the taxpayer

to pay the tax due on the date fixed by law or indicated in the
assessment notice or letter of demand.
“Misrepresentation” may result from fraudulent returns reported

to the BIR by the taxpayer.
Surcharges
The payment of surcharge is mandatory and the BIR is not vested
with any authority to waive the collection thereof. (Phiiex Mining corp. vs.
CIR, G.R. No. 125704, August 28, 1998)
Tax surcharges are classified as simple neglect and willful neglect
A. Simple Neglect - twenty five percent (25%) surcharge.
A simple neglect surcharge of twenty-five percent in addition

to tax assessed to be paid shall be imposed when the
taxpayer:
1. Fails to file any return and pay the tax due on the date
prescribed;
2. Files income tax returns with an internal revenue officer

other than with whom the return is required to be filed;
3. Fails to pay the deficiency tax within the time prescribed

for its payment in the notice of assessment, or
4. Fails to pay the full or part of the amount of tax shown on

any return required to be filed, or the full amount of tax
due for which no return is required to be filed, on or
before the prescribed date for its payment. (Sec.248A, nirc)
114 INCOME TAXATION
Illustration
Mr. Mali Mutin, a businessman of Baguio City, forgot to file an*j

pay on time his 201A income tax amounting to P50,000 on ApnJ
L5, 20IB. Without prior authorization and notice from the BIR
he voluntarily filed and paid his income taxes in RDO at Dagupan
City. How much is the total amount of tax surcharges to be paid
by Mr. Mali Mutin?
The total amount of tax surcharge would be
Surcharges:
Late filing and payment (P50,000 x 25%) P 12,500
Wrong RDO (P50,000 x 25%) 12,500
Total surcharges P 25.000
The late filing and payment is considered as one violation and the
filing and paying to wrong Revenue District Office is another
violation. The P25,000 is a penalty in addition to the basic tax
plus interest.
B. Willful Neglect - 50% of the tax or of the deficiency tax.
A willful neglect surcharge of fifty percent in addition to tax

assessed to be paid shall be imposed when the taxpayer:
1. Presents false or fraudulent return to the BIR, or

2. Willfully (intentionally) neglects to file the return with the
period prescribed by the Tax Code or by rules and
regulations. (Sec.248B.NIRC)
The 50% surcharge on willful neglect to file shall be applied only

in case the taxpayer files only after prior notice in writing from
the Commissioner or his duly representative. (Rev. Regs. No. 12-99)
Illustration
Mr. Mali Mutin failed to file his tax return which was due on April
15, 201 A. He filed his tax return and paid the tax only after
receiving BIR notice on April 15, 20IB. The amount of income tax
due is P100,000.
The willful neglect surcharge of Mr. Muti would be
Surcharge of late filing and payment after notice

(P100,000 x 50%) P5Q..QQQ
Meaning of False or Fraudulent Return
Failure to report sales, receipts, or income in an a mount exceeding

thirty percent (30%) per declared tax return, and a claim of
deductions in an amount exceeding thirty percent (30%) of actual
deductions is considered false or fraudulent return. /*>✓ ;. 24H,W'C)
Interest
In general, rules and regulations require that from the date

prescribed for payment until the amount is fully paid, an interest
of twenty percent (20%) per annum or such higher rate as
determined by the BIR shall be imposed on the basic tax unpaid
after due date. (Sec. 249, njrc)
Illustration
For taxable year 201 A, X Corporation has P300,000 income tax

due but paid only on July 15, 201B without BIR assessment
notice. The computation of the total amount of taxes, surcharges
and interest is as follows:
Income tax due P300,000

Add: Surcharge - late payment
(P300,000 x 25%) - simple neglect P 75,000
Interest (P300,000 x 20% x 3/12) 15,000 90.000
Total amount due as of July 15, 20IB P390.000
Note: The three months overdue begins from April 15, 201B to July 15, 201B.
When the problem is silent as to whether the BIR assessment is issued or not,
assume that the violation is simple neglect. However, if the BIR issued an
assessment notice the surcharge would be 50%. (RR. No. 12-99; RR. No. 18-2013)
Installment Payments of Tax

The following rules are to be observed in installment payments of
tax:
a. The taxpayer’s request for extension of the period within

which to pay is made on or before the deadline prescribed for
the payment of the tax due.
b. When the tax due is in excess of two thousand pesos (P2,000),

the taxpayer other than a corporation may elect to pay the tax
in two equal installments. {Sec. 56 (A) (2), nirq
m income taxation
c. When deadline for payment has been duly extended, the 25%
surcharge shall not be imposed for the late payment of the
tax. However, 20% interest per annum for the extended
payment shall be imposed, computed based on the
diminishing balance of the “unpaid amount/ f&sc. 24%mkQ
d. ff the request for ex ten ti on is made after the deadline

prescribed for payment, the taxpayer shall already be treated
late in payment, in which case, the 25% surcharge shall be
imposed, even if payment of the delinquency be allowed in
partial amortization. (k«v. key*. Uo. 12 00 , .a
Illustration
X Corporation requested BfR that it be allowed to pay Its income

fax liability per fTR for calendar year 200A, in the amount of
P2,000,000, in four (4) equal monthly installments, starting April
1 5, 200B.
If X’s request has been duly approved its monthly installment

payments would be:
Income tax due per return, April 15, 200P,
First installment, April 1 5, 2001;

Principal (P2,000,000/4 months)
mm
O' cond installment, May 15, 200B
Principal (PI,500,000/5) P500,000
Add: interest (PI ,500,000 x 20% x I / J2) .215-00/2
'Hard installment, dune I 5, 200U

Principal (PI ,000,000/2) P500,000
Add; Interest (PJ ,000,000 x 20% x 1/12) 10-Ooy imw
I'ou r ♦ h installment, duly I 5, 2001/

PuncjpnJ (P500,000) P500,000
Add: Interest (p,500,000 x 20% x 1/12) ..&&& cmaa
Intoro^tft on Doficioncy Tax vr. Dollnquoncy Tax

I*t‘ftrit'df p ,n |}|/* amount still due mid collectible from the
taxpayer upon audit or investigation; while, delinquency is the
nonpay/iiffit ol ii»x on time altei Issuance of FLD and FAN.
Chflptor 7 Tux A(lmlriUtrnttr>n 117
Thr following mien Ml m 11 be applied for inferent on deficiency and

drtiiif|tif'1 1 < y fax
I Any lux due deficient y Minll be subject to the interest at the

ode of 70% pi era i it iff I in «;i ibserf ion (A) of Moot ion 240, which
intrient nbnll be assessed and collected from the date
pirn< tihrd foi its payment until the full payment thereof,
2, A defi< inn y tax, or’any surchh t f / c o r interest t h e r e o n o n t h e

(lur duff* appeatinp, in the notice and demand o f the
( 'ommirmionei m)mil hr asheased />r>fI collected o n t h e u r i p n i d
amount plus interest /it the mlr* of 20% per annum until t h e
nmouu! im fully paid, (r.m m o a . n i i H ' )
it, Interest ou extended payment (delinquency) shall bo assessed

nnd collected /1 1 I bo info of 20% per /m/iurn o n t h e t o y . o r
dHu irtu y or tiny pm I thereof unpaid from the d a t e ( ) t n o t i c e
mid drmnud until il in paid, (:u>t wu, Niue)
Thr Supreme ('our! In "SC (»K No, 1071 17 dated 10 April 2013”
|"SC (,ase,,| confirmed Ibr imposition of /i *20% delinquency
inlnTfil’* on n drlirirnry fox assessment Mint remains uripm'd
nlln Ihr deadline set foil 11 in Ibr formal assessment no tier (SAN)
ptusumil to Section 240(c)(3) of Ibr T/ix Code,
Tlir delinquency interest Is in nddilinn to the interest Met forth in

the SAN on n rein ill of I be taxpayer's failure lo pny I he deficiency
Inx assessed within Hie lime prescribed for ilm payment,
llliiMlmled Ik'Iow in n comparison of the imposition of delinquency

interest mid deficiency interest,
Drflcloiioy Intornut SDoltmpionoy Intrr©»t
Intjtvstnl O/i SIioiImk*' <>l Hie Inxe/i llml Imported on Ihr delny In payment of
should Imvr hern paid taxes due um provided In the KAN
loom thr dole pirxedhed I loom the due dole appearing in Hie
Cp/npnfrd l,'totn
Im (Ih payment until lull j PAN until lull payment of Ihr tax due,
payment ol thr tax due. i mnehmgr and drlirirnry Interest.
Revenue Kegulutions No. 12 00 was amended by a new Kevenue

Regulations No, 18 2013 providing specific illustrations in
eompulin^; the interest on deficiency tax, delinquency, and
penalties.
nn incomf: taxation
flluet ration
X ( n \> t * \v< {\ i lJ) mid I AN from the fAfc to be peod on *^'^7 ^

20 I 'I Odoled to fraudulent 2012 17H filed on April 15, 2013
t onliumtif' flu* following c ompi Jfof ion$:
liKonif Ii»x due pm invent igpfion P300,00G

I , < *;*, I n c o m e tux paid per 1TR _imm
I ) e f e it n' y i i i f i m i r f / * x P200.000
Add. Hum Im rye fraudulent return
(1*200,000 x 00%) PI 00,000
liHiurncy mlrirfit from April
I S, 2013 to July IS, 2014
I S mom (imoo.ooo x 2f/% x Ir>/J2) 50,000 150.000
Tot;il imioiml due pi * j /lUfirMfurient, July 15, 2014 E35.0.GQ2
Aniiiimr Hint X Co. pays its tax assessment only on October 15,
20 14. The total amount due would be;
1 )c*lic irury income tax P200,000

Add: Surcharge (1*200,000 x 50%) PI00,000
Deficiency intercut from April
15, 2013 to Oct. IS, 2014
I H Inc)n t hs (f'200,000 X 20% x I8/12) 60,000 160,000
Totnl amount due P360,000
Additional interest on assessment notice, July 15, 2014
Delinquency interest on amount due per
assessment from July 15, 2014
to October 15, 2014 = 3 mos.
(1*350,000 x 20% x 3/12) 17,500
Total amount due per assessment, Oct. 15, 2014
Note: The* updated computation is based on Rev. Regs. 18-2013 'amending Rev.
Regs. No. 12 99. This new computation provides smaller amount of penalties
because only interest charge and no additional surcharge imposed from the due
d;ite of assessment to the date of actual payment of tax deficiency.
PENALTY ON CRIMINAL OFFENSES

Any person convicted of crime penalized by this Code shall, in
addition to being liable for the payment of the tax, be subject to
the penalties imposed herein as follows:
1. If the offender is an alien, he shall be deported immediately
after serving the sentence without further proceedings of
deportation;
2. If the offender is a public officer or employee, the maximum

penalty prescribed for the offense shall be imposed.
Furthermore, he shall be dismissed from the public service
and perpetually disqualified from holding any public office;
3. If the offender is a CPA, his CPA certificate shall be
automatically revoked or cancelled upon conviction; and
4. In the case of associations, partnerships or corporations, the
penalty shall be imposed on the partner, president, general
manager, branch manager, treasurer, officer in-charge, and
employees responsible for the violation.
Nature of Violations, Criminal Penalty Imposed and Amount

of Compromise
Sections 236 to 278 of the National Internal Revenue Code (R.A,

8424) provide the nature of violations and criminal penalty
imposed.
The amounts of compromise on the said violations and criminal

penalties are provided in the Revised Schedule of Compromise
Penalty, (rmo 19 2007 ) Sec Appendix C for detailed summary.
Other Penalties. Other instances resulting in penalties related to

the filing and payment of tax are as follows;
1. Failure to file certain information returns due to simple neglect '

Certain tax information returns are;
a. The income tax return itself;
b. Records, statement or list; or
c. Any information required by the Tax Code or by the
Commissioner.
2. Failure of a withholding agent to collect and remit taxes or

refund excess withholding tax.
Penalty: One thousand pesos (PI,000) for each failure,

provided that the aggregate amount to be imposed for all such
failures during the calendar year shall not exceed twenty five
thousand pesos (P25,000), (Sec. 252, NJRC, Sec, 5, Rev. Req 2 2009)
PRESCRIPTIVE
v And 1A\ *\Ml«vtwm me
-»- - . .-, V ' < fU < *'• V
rhe ?rescn?^v^ ;v.
$ aTTLir. iLrrêc. ce'cw
Colksiixoii l>nod
I^_xgen.n ?Ug^ ^T%v.n :h:^ >r*u* W ilhm in r (8) yc\u$
Aguiar rec. " • • * • . - > , ^ t>* reiuvn tiwm hRsessment
T^ TT n nO ; ,}?:•'}_»*. an, o k . ,\rt
i lo'or.srv, j> -.? <jrx'A .vwi
V--^. ;v~xd in Within five' (5) years

y.-~- :hr?v ;-'i 1 twin the assossmrnt
^P' '‘' assessing | <»*. W tmxi
h^^xi expires (Stv. j
o v:aO
Within :en ■ 10) years ; Within th e (5) years

ruuhuTerih ddhse* ct
-___ :r.^ d'scoverv of ! from the assessment
T* :W*JL
^ >V*."1^X8: *»»
MtJv i. V V S**—.
**m ■. ^ ’•“Xk. *"•■ ^ «^*1*
‘ falsity. ' or I ( See. 222 y Jc] NIRO
cnifssien Sen 223. jo] j
102 !
Uu
Vfititcut assessment ; Court proceeding for
sk'-222.ItICRC) tax collection within
ten (10 ) years from the
discovers7 of fraud,
falsity7, or omission
■ /Sec. 222. [a] NIRC)
„ ^ -_____ .r-.-es limitations on oeriod in the collection of internal

Sccest The .ax ecce r~-
rescue taxes as tellers '
&eaer*l rule: "he 3u< three ,3) counted S'0111 the date of actual
__ ,.* ~ =x r^nirri to assess a national internal revenue tax, and no
assessment for die collection of such taxes shall
expm&hcn c: such period. /Sec. 203, NIRC)
•' vahdlv issues an assessment within the three (3)-vear period, it has
arcdier three* 3 vears withm which to collect the tax due by distraint, lew,
-^cceedm£ If the assessment of the tax was made, the three (3)-vear
hr ccdechcn c: the assessed tax begins to run on the date the
assessment r.cttoe had been released, mailed or sent to the taxpayer. (BPI vs.
CTr. G.R Sc.. 139736 . Avrl 26, 2005, 473 SCRA 205)
2. Exception: Lr. the case o: a false or fraudulent return with intent to evade tax
cr of failure to hie a rerun, the tax may be assessed, or a proceeding in court
tar the collection cf such tax may be filed without assessment at any time
within :0i years after the dtscovery of the falsity, fraud or omission. (Sec.
222, ICRCi *
Prescriptive period to assess the correct taxes in case of false returns is ten
AG, years from the discovery of the falsity. (CIR vs. the Estate of Berdgno P.
Icfda. Jr., G.R. No. 1*7188, SepL 14, 2004)
The civil penalties, such as surcharges and interest being dependent on the
principal tax liability, must be deemed to prescribe with the tax itself.
In case of failure to file a return, the tax may be assessed at any time within
10 years after the omission, and any tax so assessed may be collected by levy
upon real property within three (3) years following the assessment of the tax.
(CIR vs. Arturo Tulio, G.R. No. 139858, Oct 25, 2005)
It is noted that the collection period (of a false or fraudulent return, or failure
to file a return) as decided by the Court (under CIR vs. Arturo Tulio, G.R. No.
139858, Oct. 25, 2000) has a shorter period (3 years) to collect taxes by levy
following the assessment of the tax; while the Tax Code allows collection by
distraint or levy within five (5) years following the assessment of the tax in
cases of false or fraudulent, or failure to file a return. (Sec. 222 [c], NIRC)
REMEDIES AVAILABLE TO TAXPAYER

A person adversely affected by the action taken by the BIR can
avail of the administrative and judicial remedies to question the
enforcement of tax collection.
The administrative remedies should be first observed; otherwise,

the taxpayer’s right to seek judicial relief could be foreclosed.
Administrative Remedies
The administrative remedies usually availed by the taxpayer are
the following:
1. Tax Avoidance - Before the payment of tax, the taxpayer can

reduce or totally escape the payment of tax through legally
permissible means such as applying for tax exemption in the
sale of his principal residence classified as capital asset or
choosing the lesser tax rate applicable to the taxable
transaction.
Tax avoidance is valid if used by the taxpayer in good faith.

The law does not forbid it and it does not constitute tax fraud.
(Heng Tong Textiles Co. Inc., vs. Commissioner, August 26, 1968; Delpher Trades Corp. vs.
IAC, 157 SCRA349)
2. Amendment of Tax Returns - As a rule, a tax return once filed

cannot anymore be withdrawn but it can still be modified for
as long as (a) the amendment is made within three (3) years
from the date of the filing of such return; and (b) no notice for
audit or investigation of such return has been served to the
taxpayer. /sec. 6(A), nircj
122 INCOME TAXATION
Tentative Annual Income Tax Returns

(Revenue Memorandum Circular No. 50-2013)
It shall be the policy of the BIR to consider a “Tentative ITR”
as a final return, unless a final amended return is filed by the
concerned taxpayer within three years from the date of filing
such return. However, once an electronic Letter of Authority
or any other notice of audit is received by the concerned
taxpayers, they shall already be barred from making
amendments to their tentative ITRs subject of examination
pursuant to Section 6(A) of the Tax Code.
3. Demand for (he Letter of Authority (LA) - It authorizes or

empowers a particular Revenue Enforcement Officer (REO) to
go over, verify and scrutinize a taxpayer's books and records.
Only the Commissioner or the Deputy Commissioners who are

specially authorized by the Commissioner and the Regional
Directors /ire authorized to issue LAs.
This must he nerved or presented to the taxpayer within 30

days from its date of issue; otherwise, it becomes null and
void.
A taxpayer once serves! with an LA should first verify or check

from the MIR’s National Office whether he is listed or not for
Natioual ()ffioe audit.
II he is listed find the LA being served is issued by the

Regional Office, then such LA is not issued by the proper
nil ice or jurisdiction within the HIE and lie may refuse audit
under 1 hat particular LA.
On the other hand, if he is being served an LA issued by the

National Office, hut he is not listed in its list of taxpayers to
hr audited, thru the jurisdiction to audit belongs to the
Regional Ollier and he can immediately refuse to be audited
hy the National Oil ice, fl'ttxpoijei'it MU of Myitis, The Philippine Revenue
.loutnot, I'M)
*», Prvtestim/ an Assessment He fore payment, the taxpayer can

contest (hr assessment within 30 days from the receipt of the
notice of assessment. This is made by filing a petition for
ircoiisidriation or reinvestigation of the tax assessment
against him, (Sev, nim ')
!,. Eor a taxpayer to qualify

Applifnii for No Audit Pm*/ram (NAP)
lot the NAP, hr must satisfy all of the following:
a. Income tax payment for the current taxable year must

exceed the income tax payment for the base year by at
least 20%.
b. Ratio of income tax payment to gross sales/receipts for
the current taxable year must be at least equal to that of
the base year. (Sec. 3, Rev. Reg. 9-2006)
Taxpayers who are reporting net loss or have a Net Operating

Loss Carry-over without MC1T due shall be disqualified for
participating in the NAP. This includes taxpayers having net
income but having no tax payable due to their deduction of
personal and additional exemptions. (Sec. 4, Rev. Reg. 9-2006)
6. Entering into a Compromise - Before payment, the taxpayer

may offer an amount which is lesser than the amount of-âx
liability assessed to him. This topic has been explained in the
preceding discussions.
7. Filing of Claim for Tax Credit - After payment, a tax credit

certificate could be issued to the taxpayer, which may be
applied against any internal revenue tax for which the
taxpayer is liable. This is not applicable to withholding taxes.
8. Filing of Claim for Refund - After payment, a request for actual

return in cash of erroneously or illegally collected taxes
should be made through filing a claim for tax refund.
Note#:
1. Tax credit or tax refund remedies shall be filed in writing with the
Commissioner within 2 years after the payment of tax or penalty. (Sec. 229 and
230, NIRC)
2. If the taxpayer applying a tax credit makes payment, the 2-year period starts
when the tax crediting is allowed (U.S. vs. Swift, 282 U.S. 468). A partial payment
of the tax cannot be the subject to a claim for refund. (Collector vs. Prieto, 2 SCRA
1007)
3. In any case, no suit or proceeding shall be filed after the expiration of 2 years
from the date of payment of tax or penalty regardless of any new effective
cause that may arise after payment.
4. Even without a written claim, the BIR Commissioner may refund or credit any
tax if, on the face of the return upon which payment was made, it appears
clearly to have been erroneously paid.
5 Forfeiture of tax refund. A refund check or warrant issued in accordance
with the pertinent provisions of this Code, which shall remain unclaimed or
uncashed within 5 years from the date the said warrant or check was mailed
or delivered, shall be forfeited in favor of the Government and the amount
thereof shall revert to the general fund. (Sec. 230{A}, NIRC)
:t*ODME 7 AXi'TON
JUDICIAL REMEDIES
: C-xh A cho c
a Ap'/tifA to Ust Court of Toy, Appeal', (CTAvj - If the protest is
d'rrh-eh m v/hofe or ho port, or is not acted upon within 180
dayc from v/ryrrhw:.on of d ocu merits, the taxpayer
oo/envoy ^ffeched oy the decision or inaction may appeal
V, *r/; CTA within SO dayo from receipt of the said
oecvoor,, or from toe iapce of the 180-day period;
oôerv/fvr, the deci-dor. chalJ become final, executory and
oemandaoim 'V/. ////'C)
The CTA io & regular court that specializes in tax cases

neaded oy a Semor 1 office and assisted by 5 Associate
J/ohcec, To have a quorum, there should be 4 Justices in
er* banc, and 2 JuVicec in Sec cion of Division. Tax cases
paw in One Coo/t. must he resolved within 30 days.
S'/ Son 3 of KA. 0282, the amendment of certain sections

of KA, 3 12/, provides that the Court of Tax Appeals
1 CTAj, v/hich cbali be of the came level of the Court of
Appeal*, iCAj, ehalj possess all the inherent powers of a
Cou/t of Justice,
She CTA nov/ hae the exclusive appellate jurisdiction to

zeviev/ ajj tax caeca, r>, 7, /m There is no need to
2 Tax Administration 125
make appeal to the CA. The taxpayers remedy is to

directly appeal the CTA's decision to the Supreme Court.
The CTA may issue injunctions against administrative

collection by distraint and levy when collection could
jeopardize the interest of the government or the taxpayer
subject to the posting of the bond. (r.a. no. 1125)
The BJR or the Government cannot make an appeal to the

CTA. ia ct iny CfjUxfior of customs us. Court of Appeals, Oct 31, 1957)
h. Secure Injunction Order from CTA - The taxpayer may

secure injunction against administrative collection by
distraint or levy of when collection of taxes would
jeopardize his interest subject to the posting of bond. (R. a.
Ho. 1125)
c. Appeal from CTA to the Supreme Court (SC) - This should

be filed within 15 days from the receipt of the decision of
the CIA. (Supreme Court Circular No. 1-91, February 27, 1991)
2. Criminal Action
The taxpayer could file a complaint against erring BIR officials
and employees who commit any of the delinquencies specified
in the Tax Code, like extorting, conspiring to violate the
provisions of the Code, etc. (Sea 269, nirc)
3. Other Judicial Remedies

a. Action for Damages against Revenue Officers - An action
may be brought against any Internal Revenue Officer to
recover damages by reason of any act done in the
performance of official duty. (Sec. 227, nirc)
b. Action to Contest Forfeiture of Chattel - The owner desiring

to contest the validity of the forfeiture may, at any time
before sale or destruction of the property, bring an action
against the person seizing the property, and upon giving
proper bond, may enjoin the sale; or after the sale and
within 6 months, he may bring an action to recover the
net proceeds realized at the sale. (Sec. 231, nirc)
«;<? INCOWf- t a x a t i o n
Ch«|iicr 2 HI \ II W QUESTIONS
' \V T i: * t ^ ,uj mmist.1 ,»tUM I
r*umu*»-*t.o -.mil v lessenin' the functions of the govern me tit ngcncics
umlr* the IVpmUucut of Emmicc
Wh.\t ;5»v the powrrs of the DIE '
* St me and cxpUuu the powers of the HIE Commissioner?
5 What atr the five instances when the B1E Commissioner could
ten.ninate the tax period of the taxpayer?
o What are the two instances when the BIR Commissioner could
inquire into the bank deposits?
What are the two instances when the BIR Commissioner could abate
taxpayers tax liability?
S When should a self-employed be first registered with the BIR?
9. Distinguish a “commercial invoice” from a “receipt.”
10. State the rules regarding registration requirements for the
continuation of the business of a deceased person and the transfer of
business ownership.
11. Explain tax remedies.
12. Enumerate and explain the kinds of tax assessment.
13. State the five instances when the pre-assessment notice is not
required?
14. Discuss the Tax Assessment Procedure.
15. What are the requisites of a valid assessment?
16. What are the steps in contesting the validity of an assessment?
17. What are the tax collection remedies available to the government?
18. Distinguish distraint proceedings from levy of properties?
19. Enumerate the tax cases not subject to tax compromise.
20. Discuss how an informer’s reward is earned and given to the tax
informant.
21. Distinguish a civil action from a criminal action of pursuing tax case.
22. What are the basic rates of surcharges related to tax violations?
23. State the rules of installment payments of tax.
24. Distinguish deficiency interest from delinquency interest.
25. Give the prescriptive periods of tax collection.
26. What is the prescriptive period for the exercise of tax credit issued to
a taxpayer?
27. Discuss the judicial remedies available to the taxpayer.
Chapter 2 fax Administration 127
_____________ Score: _____________
problem 2 - 1 True or Fal»e

V//it* 'Imu it t)j»’ is correct, or False if the statement is
1)1' OM'-' l
J 1 ax administration involves legislation and collection of taxes.
2 TIr KFPS is a manual mode of filing tax returns and payment of

hums.
1. Among the executive officials of the government, only the CIR

has the power to interpret the provisions of NIRC and other tax
Jaws.
4. If the taxpayer has no accounting records or other documents,

tlie tax assessment is based on the best evidence obtainable.
5. 'fax assessment must be in writing containing the law and facts

as the basis of assessment.
6. The estate of the decedent person shall continue to use the TIN
of the decedent.
7. AH taxpayers should acquire one TIN and pay a registration fee of

P500.
8. The transfer of registration requires no additional fee to be paid

by the taxpayer.
9. Sales invoice or official receipts are not required to be issued if

the value of merchandise sold or service rendered is P25.00 but
not exceeding PI00.
10. A peddler should register his business and keep the certificate of
payment to be presented upon demand by any internal revenue
officer.
11. Tax assessment is. an action of actual tax collection.
12. The BIR can appeal to the CTA.
13. The BIR has the burden to prove that the taxpayer concerned
has received the tax assessment.
14. The final decision made by the CTA can be appealed to the
Supreme Court within 30 days.
UB \HCOm T A X M I O N
Problem 2 - 3 Ttu* or Put•*

Write Ttue it the statement is court'!, oi Kalae if the iirtlrinnii (*
incut itvt
I. *\ tax assessment must be it\ witting containing the (actual

findings and the law violated by the taxpayer,
2 A fraudulent return with vUVNi understatement of in< O h io

it port I'd is subject to a penalty of 2iVhi based on the basic tax
unpaid.
3. By forfeiture, the proceeds of the property sold are applied to

satisfy the tax liability and the excess thereof shall be returned
to the taxpayer,
4. By seizure, no part of proceeds goes to the taxpayer because the

property is confiscated in favor of the government.
5. A second cousin of an internal revenue officer is allowed to

receive an informer's reward.
6. Cases regarding collection of taxes already filed in the court are

not subject to compromise.
7. Delinquent tax accounts with duly approved schedule of

installment payments are not subject to compromise.
8. The BIR can access the- taxpayer’s record regarding sales or

purchases even without a Letter of Authority.
9. In a written protest to Commissioner) all relevant supporting

documents must be submitted to the Court of Tax Appeals
within 60 days from date of assessment; otherwise, the
assessment shall become final.
10. The power to assess the proper tax based on the best evidence
obtainable is applicable only when the relevant reports are not
available.
II. For tax violation committed, the BIR has the power to suspend
and temporarily close business establishment within 5 days
subject to the taxpayer’s compliance with the requirement as
indicated in the closure order.
12. The object of distraint may either be personal and/or real

properties of delinquent taxpayer.
ChJ»pt0f 2 Tnx AfJrnlnlfttmtlon 129
Score:
problem 2 3 True or FiiUc

VVtilr Tuir il !hr ftl/ilrmrnl if. ronoH, o. Imlsc jf (}„• Mt/i»erricrP is
I Cf imiiml lux violations Hir'd in eourlf: may be compromised.
Any internal revenue lax, which has been assessed within the
prescribed limitation period, tuny-he collected by distraint or
levy, or by a proceeding in court within five (5) years following
the assessment of tax.
3. The preHcriplivc period for collection of tax shall be made within

three (3) years from the time the final assessment, was released.
Oil l here and submit this page to your professor
4. The National Government is allowed to purchase property under

distraint if the amount of bid is substantially lower than the
actual cost of the said property.
5. After one year from the date of sale of real property under levy,
the delinquent taxpayer may redeem the property sold.
6. The levy may be repeated until the full amount due, including all
expenses, is collected.
7. Delinquent accounts may be compromised, however withholding

tax cases, in general, are not subject to compromise.
8. The transfer of business place during the year will require

registration and additional registration fee.
9. The estate must secure its own TIN, as a taxpayer separate from
its owner.
10. The required initial bond for manufacturers and importers of

articles subject to excise tax is P200,000.
11. The informer’s reward is subject to a 10% creditable withholding

tax.
12. Jeopardy assessment requires tax audit and shortens the

taxpayer’s period.
13. Once a taxpayer is served with a LA originating from National

Office, he should first verify or check with the BIR’S National
Office whether he is listed or not for National Office audit.
KssS^XKi -KVOlV Oi iSVd Stxjj
Name; Score:

1. Tax administration is a system involving enforcement of taxes

through the use of
a. tax legislation.
b. tax legislation and assessment,
e. tax imposition and collection,
d. tax assessment and collection.
A governmental officer considered as tax enforcer by having the

power to ascertain the validity of tax laws subject to the review of the
Courts of Justice.
a. Secretary of Justice
b. Secretary of Finance
c. BIR Commissioner
d. Chief Justice
3. Which of the following is not within the scope of authority of the BIR
Commissioner?
a. To exercise the levying function of taxation
b. To interpret tax laws
c. To assess and collect BIR taxes
d. To decide cases involving National Internal Revenue taxes
The following instances allow the BIR Commissioner to inquire or

examine the bank deposits of taxpayers, except
a. To determine the gross estate of a decedent.
b. When the taxpayer filed an application for compromise of his tax
liability
c. The taxpayer waives his right in writing the confidentiality of the
bank deposits.
d. When the taxpayer fails the lifestyle check test and shows
unexplained wealth.
5. The BIR is under the supervision of the

a. Department of Budget
b. Bureau of Customs
c. Department of Finance
d. Department of Trade and Industry
6 Which of the following is not an activity involving tax administration?

a. Execution of judgment decided by the court in favor of the BIR
b. Passage of tax laws and ordinances through the legislature
c Computation of tax due and payable
d. Taxpayer’s compliance to pay tax obligation

132 INCOME TAXATION

a. levying and collection of taxes are legislative furict-or.s.
b. Assessment and collection are administrative functacns-
c. Enacting of tax la ws and its interpretation are
fu net ions.
d. Levying and impositions are judicial functions.
8. Which of the following is correct?

legislative
a. Fixing of tax rates Yes
b. Valuat ion of object of tax Yes
c. Collection of taxes Yes
d. Assessment of tax liability No
a. Bureau of Internal Revenue

b. Bureau of Customs
c. Department of Finance
d. Court of Justice
10. Which of the following is not among the administrative powers of the
Bureau of Internal Revenue?
a. Compromise tax assessments
b. Distraint of personal property of delinquent taxpayer
c. Render court decision concerning tax dispute
d. Levy of real property of delinquent taxpayer
11. This tax assessment is being asked to be cancelled because there is a

question as to its validity or legality.
a. Jeopardy assessment
b. Disputed assessment
c. Illegal assessment
d. Deficiency assessment

a. If it is the first employment of the taxpayer, he must be
registered with the BIR before employment or within 10 days
from date of employment.
b. If the taxpayer is self-employed, he must register his business
within 10 days from commencement of his business.
c. If the taxpayer is both employed and doing business, he must
have only one TIN as employee and as sole proprietor.
d. TIN must be indicated in the return, documents or statement
filed with the BIR.
Mams: ___________ _____ __________ ____ ________ ______ Score:___________________
Problem 2 * 6 Multiple Choice

Encircle rhe letter that corresponds to the best answer.
J The threshold amount of annual gross sales/receipts requiring a

business to be registered under VAT system is
a. below PI ,919,500.
b. Ft,919,500.
c. above FI ,919,500,
d. F3,199/200.
2. Which of the following due dates does not fall on the 30th day after
the transaction?
a. Sale of real property classified as capital asset
b, Transfer of property through donation
ti Sale of shares of stocks classified as capital asset
d. Transfer of property through regular sales
3. This interest is imposed on the delay in the payment of taxes due as

provided in the FAN,
a. Deficiency interest
b. Delinquency interest
c. Imputed interest
d. Compounded interest
4. Determine the correct prescriptive periods of tax assessment and tax

collection.
Particulars Assessment period Collection period
a, Regular return 3 years 3 years
b. False return 5 years 10 years
c. Agreed period 3 years 5 years
d. No return 10 years 5 years
5. Which of the following amount of gross quarterly sales, earnings or

tcc eipts requires CPA certification?
a, P50.000
b, FI 00,000
c PI 50,000
d more than PI50,000
fi A fraudulent tax return or failure to file a tax return may be

assessed, or proceeding in court for the collection of such tax may be
filed without assessment at any time within
a, Two (2) year s after the discovery of the falsity, fraud or omission,
b, Three (3) years after the discovery of the falsity, fraud or
omission,
('• Five (5) years after the discovery of the falsity, fraud or omission,
d, Ten (ID) years after the discovery of the falsity, fraud or
omission,
m mcomr Tfi/j- rrM
7, V/hi'.h of the foôvhftg reo ure&oeut* )%> ?w rg&jav&x v~Ut? ^ *

tax return <xx,id be emeoded?
a . The tax re ,rn thooxj have been w>:hd/*w.'j £rs* yj? me caxp*^
before ame^dmer;* be rr^dt,
b. A *ax return should have bee;, £r*t brnraed *v *he ^
v.c.o should not ;>e whhdrawm
c. The amendment should be rr^ce wfc'2:. three '!p /ear* ?y~ tte
date of fling the return.
d. .No notice tor audit or investigation of vx#. bee:
served to the taxpayer,
b Statement 1', An mdivid/nh taxpayer earring pvre/ oocrpesa&atuor.

income is exerr.pt from PoOO registration fee. but rernhref to rente*
bis registration every year,
Statement 2; Ox;perative$ are exempt from armruai reg&âsatR lasts,
the BIR,
a. OnJy statement 3 is correct,
b. fioth statements are correct,
c. Only statement 2 is correct,
d. Both statements are not correct,
0, In which of the following cases could the BIP Cbszmêkeaer suspend

operations of a taxpayer?
a. Understatement of taxable '-ales or receipts by 30% or more cc
hi a taxable sales or receipts for the taxable quarter,
b. Failure to file a value added tax return and/or iadfcire to issue
receipts or invoices,
c, Failure to register with the Revenue District Office
d, AH of the above
10, Which of the following is not a general requirement of a tax return?

a. It must at least be in duplicate and in the form prescribed by the
BIR,
b. It must cover a taxable period of one year only except when
otherwise specifically authorised by law,
c. It must contain a declaration under oath and that it was made
under the penalties of perjury.
d. It must be signed and filed by the taxpayer only.

rvt
___ .
-------------- -------- ---_........_ ___________ __ Vyxr .... ...
Ztr&tem *-1 Cl****

2fle«* ^ ***** v, noe vs*? ^wtr
• T'-**B*^' * *****! ■** ■*'**■?*'*rs~s* *e V‘*?*n *

'fM fp'*T '"&CS. , rjJk ?*4*z\ v,
v Dt*tfra.rt..
c ->r*7
c /orifenvre.-
d bxxrproenê
Vhrn '/ the t * mt correct

iv% of caen arro *nt of oa^ due 5 cr eunpje rysgiex
'*xb% of oa*;n amour?. '/-----------
**''*------------------------------------------- oaj< cue"lor
' ' ^-------------------------------------------------' *'
a .oh per/ ax rer.ro or prea/urned cate
bib > of Uoe baen amount '/ ~ax 'f >, Ibr ''Z rtr.r -acth
-svrorg P.V'>
r/M of roe '^tx aroo .rt of tax due he b
’j&tSJZ &!*£ A- ^f£ZX
% ~JJl Osxparver fejK V. p^y the tax demanded per Ural gêeasmecs*
'he O 'r; t^T - — ^XX COa j exeTCSte ^y^*ry4yA ^rcebjea Vi*hix
</- be i* not correct? '
^ ij?rf of prc^rr/ the rr-grv 55 ^: of jv
ÂV%;r*t^p^tcrj&Ipr^r^^*ij!->gyer.
'- -ftwwJet '.? >r/ jSAjr've p ;rt ,-rf HacH^sJK^bs -so* 2ae
a*ce%eroer.t teoorret final and demandable.
t If the *ax aaeeeeed ic PIbb and bexy*, >77 or duatrarot mar roc
be of.
d The remedy of bkrraint of pertoral property nay be repeated tf
reoettary until the full amount due arc a£ exper.ês are
00 >sxM+
4 ^.'.//. of boe UZsnteJZ !* not trre •with regard to the ajhooehy of the
boro motioner to er^ter into a. tax oornprorrhee?
% The taxpayer nuit not have an exiehng tax: Haoibty.
' T'oere r/.oet oe an offer by the taxpayer or cormeneioner of an
arnoont to be paid by the taxpayer.
- A rea*or.ab> doubt aa to the vaitdtty of the claim agamat the
taxpayer exieu.
f The financial position of the taxpayer derncn«trate« a clear
r.abihvy to pay the aetee ted tax,
fi a
' ;,'h~ch of the fo!lo*//fng it not v4thin the ecope of authority of the BIR
bo/r, rr. :tex>ner?
51 ô exerciee the levying function of taxation
r' To interpret tax iawe
To aeeeee and collect BIR taxee

b To decide caeee Involving Ra tional Internal Revenue taxee
13o INCOME TAXATION
Which of ihe follow mg is within the scope of the authority of the B1R
Commissioner?
a. To inquire into bank deposit accounts
h. To terminate taxable period
o. To piescribe real property values
7, The following powers are classified as the primary powers of BIR

Commissioner, Which of these powers is the Commissioner’s
secondary power?
a. Power to interpret tax laws
b. Power to assess and collect the amount of tax
c. Power to make arrest and seizures
Cut here and submit this page to your professor.

d. Power to examine books of accounts
S, The passage of tax laws defines the country’s

a. Tax administration.
b. Tax policy.
c. Sound tax system.
d. Fiscal adequacy.
9. It refers to the monitoring of sales or receipts of a taxpayer by

Revenue Officers within the business establishment or premises.
a. Receipt surveillance
b. • Inventory taking
c. Evidence gathering
d. Open surveillance
10. In which of the following cases could the BIR Commissioner suspend
operations of a taxpayer?
a. Understatement of taxable sales or,receipts by 30% or more of
his taxable sales or receipts for the taxable quarter
b. Failure to file a value added tax return and/ or failure to issue
receipts or invoices
c. Failure to register with the Revenue District Office
d. All of the above
11. The BIR may issue TIN to the following, except

a. A taxpayer who changed his name.
b. Minors opening a bank account.
c. The estate of a dead person.
d. Self-employed individuals.
12. Which of the following persons is not required to ‘register with the
appropriate revenue office?
a. Individual employed in the Philippines
b. Resident foreign corporation
c. Domestic corporation selling products outside the Philippines
d. Filipino citizen working as overseas contract worker
Name: Score:

1. What is the expiration date of a letter of authority?

a. 30 days from its date of issue
b. 120 days from its date of issue
c. 3 years from its date of issue
d. 10 days from its date of issue
2. After the final assessment is made, the government should enforce

collection within
a. 2 years.
b. 3 years.
c. 5 years.
d. 10 years.
3. In installment tax payments, the unpaid balance of the tax is subject

to a surcharge of
a. 0%.
b. 10%.
c. 20%.
d. 25%.
4. Statement 1: It is within the general power of the Commissioner to

interpret tax law to be able to assess'the tax liability of the taxpayer.
Statement 2: The interpretation of the Tax code issued through BIR

rulings shall prevail over the decision of the Court because to
interpret tax laws is within the general powers of the Commissioner.
5. Statement 1: Each taxpayer is allowed to have only one TIN.
Statement 2: Upon death of the taxpayer, his estate, for estate tax
purposes shall use the same TIN he was using during his lifetime.
6. A formal letter from the BIR requiring the taxpayer to pay his tax
liability within a specific period.
a. Tax remedies
b. Tax assessment
m INCOME TAXATION
r Tbx collection
<i, iMutr of Authority
7 An assessment without completing tax audit which is intended to

facilitate the collection of taxes due to taxpayer’s noncooperation.
a, Jeopardy assessment
b, Deficiency assessment
c, Disputed assessment
d, Void assessment
H 'I he tax return not subjected to tax investigation can be amended

within
a Three (3) years from the date the tax return was filed,
b, Three (3) years from the date the error is discovered,
o, Three (3) years from the date the BIR granted the changing of the
fax return,
d, Kive (5) years from the date the tax return was filed.
U, A taxpayer's request to the BIR to consider as evidence the newly

discovered or additional evidence is called motion for
a, reconsideration,
b, cancellation,
c, withdrawal,
d, reinvestigation.
10, Which of the following Is not on administrative remedy available to

the government?
a, Assessment
h, Distraint
«, 'fax avoidance
d. Tax lien
11, Which of the following tux remedies is both beneficial to the

government and the taxpayer?
a. Tax lien
b. Compromise
c. Injunction
d. forfeiture
12, The following acta urc part of tax assessment except

a. Appraisal and valuation of tux object.
b. Determination of tux prescription.
e. Selection of tux object.
d. Computation of tux surcharges and interest.
Problem 2-9 Tax Assessment/Refund Procedures
Instruction: Determine the last day to exercise the rights of the

taxpayer.
Case A;
Date of tax return filed April 15, 2011
Date of material non-inclusion of income
Discovered June 20, 2012
Question; When is the last da}' to amend the tax return?
Case B:
Date of tax return filed April 15, 2011
Date of tax return amended October 20, 2012
Question: \fcTien is the deadline to assess tax return?
Case C:
Date of fraudulent tax return filed April 15, 2011
Date when tax fraud was discovered by BIR April 15, 2015
Question: When is the deadline to file a proceeding in court for tax

collection?
Case D:
Date of tax return was not filed April 15, 2011
Date when the omission was discovered by BIR April 15, 2012
Question: When is the deadline to assess tax return?
Case E:
Date of tax erroneous!}' paid April 15, 2011
Date of claim for refund was filed with BIR May 20, 2013
No decision on the claim of refund was made
Question: When is the last day to appeal to the CTA?
Case F:
Date of tax erroneously paid June 10, 2011
Date of claim for refund was filed with BIR March 3, 2013
Date of BIR decision of denial was received April 5, 2013
Question: When is the last day to appeal to the CTA?
Case G:
Date of tax erroneously paid June 10, 2011
Date of claim for refund was filed with BIR June 10, 2012
Date of refund check received July 15, 2012
Date when BIR decision to grant refund
was delivered AUGUST 1, 2012
14^ 'I \\MKN\
Oue>;.fcftV: Tt Aêv: Ph<vV XmA$ \V* CtYOAshAh XXhe ft m the Hftiftlftw

x .x- ro ?hv The êxenYtYtAU to fcxi#ft ft s
.\*?c xf tax ^nwiWs^^ paid June U\ QM \

Dfc<v Ai>lA:m ix; reftVftd XX<ft$ flXM Xxfth 1MN OUftC U\ AM '
IAjUO A tax oxviA omitlOA'iO Jut> v\\ am'
i\atf when BlF d<\Nisnxn xxas xXVAvaI Avgust 2 I x >0 \ V
Quest xmv Vi the tax credit xêilifxX&te was \um vftth^xxi xM tCYftUvhfttxl
when a the starnns date for the ^wenunent t\' tx'vetl ft t\x \\\?
general fund'
ruit^ xX! assessment W,XS ‘X\Y'A\X'i Jamnux A *AM t

tVrinoaT km re;nx,rsiY£*non was died xxfth M1K xhunuuv U\ AOU
Documents to support eerm.xr submitted Jamnuv AA, AOU
Ax decision on the* protest a* o: July u\ aou
Onesncr,: When i$ the last dav tc a;>:ya' t%x the CTA?
Case* A:
Assessment tvoeived January 5, A01 1
Pennon for moonsideration tiled with B1F February 1, AO U
Pension of Rls! denying the petition March a'a, :ou
A- request for moonaidoration tiled with B1R March AO, AO 1 \
Decision on A1- request denied April l A, AO 11
Qnesrion: When is the las: day to appeal to the CTA?
Case K:
Pate of appeal to the CTA April A1, AO 11
Date of achera-e deoiaicxn of the CTA June 1, AOU
!>ate the CTA adverse decision receix-ed June 10, AO 11
Question: When is the last day to appeal to the Supreme Court?
Case Lz
Date of appeal to the CTA June 10, 2011
Date of adverse decision of the CTA June 20, 2011
Date the CTA adverse decision received June 25, 2011
Question: When is the last day to appeal to the Supreme Court?
Case M:
Date the read property was levied January 5, 2011
Date the real property levied was sold March 1, 2011
Question: When is the last day to redeem the real property?

Problem 2*10 Business Registration

W i n c h of the following is correct regarding the amount of business
registration fee to the B1R?
Original Remwvyd Transfer
a. P500 P500 P500
b. PS 00 P500 None
O. P500 None P500
d. None P500 P500
Problem 2-11 Annual Registration

vo’hmac’s is a food chain corporation with a principal office in
Mandaluyong City, It has 2 factories located in Cavite and Cebu 12
w arehouses; and 45 branches throughout the Philippines
How much is the total annual registration fees of Jollimae’s?

a. P30,000 c. P29,000
b P29,500 d. P28.500
Problem 2-12 Filing and Payment

Alegre Trading is reporting its income on accrual basis of Accounting.
Under calendar year period of reporting, when should be the last day of
tiling and payment of its income tax for the year 200A?
a. April 15, 200A c. December 31, 200A
b. April 15, 200B d. January 15, 200B
Problem 2-13 Minimum Compromise

A criminal case was filed in court against Mr. Garcia for obtaining three
different Tax Identification Numbers (TIN) resulting to an estimated tax
fraud of P50 million.
If Mr. Garcia proposed for a compromise to the BIR Commissioner, how

much is the minimum compromise that is allowed to Garcia?
a. P20 million c. P5 million
b. P10 million d. P - 0 -
Problem 2-14 Minimum Compromise

F Co. declared bankruptcy with the following financial conditions:
Cash P 100,000
Noncash assets 1, 000,000
Bank loans payable 600,000
Trade creditors payable 800,000
Income tax payable 1,000,000
Accumulated losses 1,300,000
The noncash assets were liquidated for P600,000. F Co. was able to
negotiate comprise due to financial incapability'. Assuming that income
tax payable of F Co, has been due for 6 months, how much is the
minimum amount of compromise?
a. P550.000 c. P270.000
b. P400,000 d. P200,000
142 INCOME TAXATION
Problem 2-15 Property Purchased by the Government

The BIR decided to purchase a personal property under distraint in
behalf of the National Government, The information available in deciding
the price of the said personal property is as follows:
Market value of the property P300,000
Amount of tax liability 150,000
Bid price of the highest bidder 90,000
Surcharges 25,000
Interest 20,000
Advertising cost 5,000
How much is the price of the personal property if purchased by the BIR
in behalf of the National Government?
a. P350.000 c. P250.000
b, P300,000 d. P200,000
Problem 2-16 Importer’s Bonds

X Company is an importer of liquor products that need to pay an
importer’s bond on excise taxes. During the first year of importation, the
following information was taken from the record of X Company:
First 6-months bond P100,000
Actual total excise tax paid on the:
First 6 months 200,000
Last 6 months 250,000
1. How much is the required bonds on the last 6 months of the first
year?
a. P250,000 c. P400,000
b. P300,000 d. P450,000
2. How much is the net actual amount to be paid to the BIR to satisfy
the correct amount of required bonds for the second year assuming
that previous bonds paid will be cumulatively applied as tax credits?
a. PI 50,000 c. P450,000
b. P400,000 d. P600,000
Problem 2-17 Informer’s Reward

X, a first cousin of B (an RDO), provided an information to the BIR
leading, to a discovery of a tax fraud amounting to P9,000,000. How
much is the amount of net cash rewards that can be received by X from
the government?
a. PI ,000,000 c. P810,000
b. P 900,000 d. P - 0 -
Problem 2-18 Forfeiture

The government forfeited the chattel property of Mr. Balana due to
violation of tax laws. Mr. Balana’s total tax liability per assessment as of
April 15, 200A was P300,000 payable on June 1, 200A. The property was
sold for P500,000 through a public auction on September 1, 200A with
the following expenses incurred by the BIR:
Auction expenses P 35,000

Advertisement cost 10.000
Transfer tax 5,000
How much is the amount of excess from proceeds of sale to be remitted

to Mr. Balana as of September 1, 200A?
a. P - 0- c. P100,000
b. P 50,000 d. PI50,000
Problem 2-19 Forfeiture

On June 15, 200B, the government forfeited the chattel property of Mr.
Desuerte due to violation of tax laws. Mr. Deswerte’s unpaid tax liability
per assessment as of April 15, 200A was P500,000 plus 25% surcharge
and interest for one (1) year. The property was sold for P850,000 through
a public auction on October 15, 200A before deduction of P100,000
delinquency expenses.
How much is the imputed gain or (loss) of the government from the sale
of the property?
a. PI 25,000 c. P 2,500
b. P 75,000 d. (P 2,500)
Problem 2-20 Levy of Real Property

After proper proceedings, the real property of X was levied by the
government to satisfy his tax liability which has been delinquent for 5
years. The real property is a boarding house with an average income of
P60,000 per month. X received the total amount of assessment as
follows:
Basic income tax unpaid PI,000,000
Surcharge (PI,000,000 x 50%) 500,000
Interest (PI,000,000 x 20% x 5 years) 1.000.000
Total amount due per assessment, October 15, 200A P2.500.000
The property was sold for public auction for P4,000,000 on Januaiy 15,
200B. Cost of advertisement amounts to P20,000. It was stipulated in
the contract that the related capital gains tax and documentary stamp
tax shall be paid by X.
1. How much is the excess amount of the sale over the claim and cost
of sale that should be turned over to X?
a. P750,000 c. P450,000
b. P490,000 d. P430,000
2. If X decided to redeem the real property on October 15, 200B, how

much is the redemption price?
a. P7,700,000 c. P4,450,000
b. P4,600,000 d. P3,700,000
How much is the excess income of the real property over the interest
expense from the time of auction sale to the time of redemption?
NCOUfE ~4X*TON
i. C. P90.D00
i: ,;o: h Jinne. because the property
was sold to the higher bidder.
Z.~1ZC^SSBSSSTUSSV't. DSKUEIllt
* -rr-z—&"f*r-i ■zxnrpsrry was maced under a constructive distraint. The
zrzrzisrz v.*ai -mumslr' arrutret for P40D,D0D and at the time of
tiuamiture rfarpr- x accumulated depredation of P200,000. If
::e tuitorT?er sou. toe suit orooerrr for P25Q.0D0 without the consent of
ut* PC? 2:mimsBi:Tti£r. now ~-i-4 is the ~~"r.~r:m statutory fine that the
i. ;ci; ' psoo.ooo

pio: :o; i ppsd.ooo
PmiosacL 2>22 T.^*rx>d or Distraizu of Personal Property

Tot mr :f t 'r Poe. i oeiinoner: taxpayer. was subjected to a distraint
Pti urnîit uu m:mihr per assessment as of April 15, 200x was
P3X XC eraui-thing 2:4a surtriarge and interest for 9 months. The car
v -sa. sin: Ttr P5X ,XO dbrtrugb a public auction on July 15, 200x with
-re fXuivuu expenses incurred by the 3I?j
lor. rneuam stamp m: 1,500
1,000
rr*nt truer. 3. the amount to be refunded by the SIR to Mr- Poe as of July
v 2'X-X
*- P: b2.o0u u ?£ 1.500
" oT.OJb d. P32.500
-- 2-2i A-mveut 5»t£S Payable After Distraint

*.7, Mr- L&ZPU a delinquent taxpayer, was
: 7 *'* *' —* ‘-'Xac tax Eabihty per assessment as of April
vr*.^ ^7 ^ y^lfj j one year from the date of filing. The property
market on July 15, 200x with the following
by tee H?Pt
tax
PI,500
V - -em,^.'y stamp tax 1,125
' '' i’terne.v
1,000
Vv,
t>t ^ r a/nonv tn he paid by Mr. ligot to the BIR as of
T 2'Xob
 P-O/XXh Wha* v/ould be the total surcharge to be
% P^ c, P2,500
Xy' d, P~Q-
Problem 2-25 Interest on Unpaid Tax

If the basic tax is PI 0,000 and the surcharge is P2,500, how much is
interest charge if the 200A ITR is only filed on June 30, 200B?
a. P625.00 c. P416.67
b. P520.83 d. P - 0 -
Problem 2-26 Wrong RDO

A certain taxpayer has a basic tax due amounting to PI0,000 pertaining
to his 200A ITR but was filed only on June 30, 200B to wrong Revenue
District Office. How much would be the total amount due by the taxpayer
inclusive of surcharge and interest?
a. P12,500 c. P15,417
b. P15,000 d. P17.417
Problem 2-27 Additions to Tax with BIR Notification

The taxpayer did not file his income tax return for the calendar year
200A which was due for filing on April 15, 200B. He was notified by the
BIR about his failure to file the tax return, for which reason he filed his
tax return and paid the tax only after the said notice on June 30, 200C.
The tax due per return is PI00,000. How much would be the total
amount due, exclusive of compromise penalty?
a. P124,167 c. P154,167
b. P150,000 d. P174,167
Problem 2-28 Late Payment of Tax

The taxpayer’s income tax return for the calendar year 200A was due for
filing on April 15, 200B but the taxpayer voluntarily filed his return,
without assessment notice from the BIR only on June 30, 200B. The tax
due per return amounts to PI00,000. How much would be the total
amount due inclusive of penalties and interest, excluding compromise
penalty?
a. P125,000 c. P130,208
b. P129,167 d. P100,000
Problem 2-29 Understatement of Revenue

Due to economic crisis, the 4th year business operation of Mac
Corporation reported in its ITR the following data as of April 15, 200B:
Total sales P4,000,000

Less: Cost of sales 3,000.000
Gross income . PI,000,000
Less: Operating expenses allowed 950,000
Net income P 50.000
The required income tax due were paid during the year. On October 15,
200B, however, the BIR issued assessment that the sales of the
corporation are understated by 20%. How much is the total amount due
per BIR assessment as of October 15, 200B?
a. P472,000 c. P398,250
b. P405,000 d. P368,750
146 INCOME TAXATION
Problem 2-30 Nondeclaration of Income

As a BIR Examiner, you found the following material findings on the
income tax discrepancies of ABC Company for the taxable year 200A:
Taxable income per 200A ITR PI,000,000

200A income tax paid per return on April 15, 200B 300,000
Discrepancies per investigation during 200C:
Undeclared rental income 450,000
Nondeductible interest expenses 300,000
Nondeductible bad debt expense 200,000
Undocumented representation expenses 150,000
How much is the total amount due per assessment as of April 15, 200C?
a. P630,000 c. P478,500
b. P561,000 d. P330,000
Problem 2-31 Deficiency Tax Assessment

After failing to protest on time the BIR’s preliminary assessment notice,
Mr. Dayang received a tax assessment from the BIR as follows:
Unpaid income tax due - April 15, 200B P2,000,000
Surcharge and interest penalty:
Simple neglect (25%) P500,000
Interest for 1 year (P2,000,000 x 20%) 400,000 900.000
Total amount due - April 15, 200C P2.900.000
Per assessment notice the P2,900,000 should be paid within 30 days

from the date of receipt to avoid additional penalties. Mr. Dayang
received the assessment notice on April 30, 200C but made payment
only on August 30, 200C.
How much is the total amount to be paid to the BIR by Mr. Dayang
excluding compromise penalty?
a. P3,195,000 c. P3,450,000
b. P3,267,500 d. P3,625,000
Problem 2-32 Deficiency Tax Assessment

Tago Co. received FLD and FAN from the BIR to be paid on July 15, 200C
related to fraudulent 200A ITR filed on April 15, 200B containing the
following computations:
Income tax due per investigation P400,000

Less: Income tax paid per ITR 100,000
Deficiency income tax P300.000
Add: Surcharge - fraudulent return
(P300,000 x 50%) PI50,000
Interest from April 15, 200B to
July 15, 200C =15 months
(P300,000 x 20% x 15/12) 75,000 225j)gj
Total amount due per assessment, July 15, 200C P525tQial
Chapter 2 Taut Administration A 47
Assume that this assessment has become final and collectible because it
was not protested on time, but Tago Co. pays its tax. assessment only on
October 13, 2000. Tine total amount dvie as of October IS, 2000 wovxYtY.
be
a. P566,250. c. P525.000.
b. P34-0,000. d- P450.750.
Problem 2-33 Redemption or Real Property

Mr. Bay-art’s real property had been levied due to income tax
delinquency amounting to PI,000,000 for a period of 2 years VAetermirved
as fraud and habitual nonpayment) since December 31, 200 A.. On
December 31, 200C, the property was sold for public auction with a
selling price adequate to cover tire amount of public taxes, surcharge and
interest plus excess amount of PI58,333.
How much is the total amount to needed by hAr. Bay-an, if he decides to

redeem his real property on December 31,2000?
a. P2,300,000 c. Pi;900,000
b. P2,000,000 d. Pi,185,000
Problem. 2-34- Installment Tax. Payment

The income of a resident Filipino citizen amounts toP84-,OOQ, net of
P3,000 creditable withholding tax and his income tax due per YTR at
year-end amounts to- P8,000. If he opted for installment payment, the
minimum tax payable for the first and 2,Tid installments would be
First Second
installment installment
a. P3,000 P3,000
b. P2,500 P2,500
c. P4,000 P 1,000
d. P1,000 P4,000
Problem 2-35 Installment Tax Payment

Due to financial incapacity, XYZ Corporation requested B1R that it. toe
allowed to pay its income tax liability per TTR for calendar year 200K, In
the amount of PI,000,000, in four {41 equal monthly installments,
starting April 15, 200B. Its request bas been duly approved pursuant to
Sec. 23 of the Tax Code. XYZ complied with its monthly installment
payment.
1. The total amount due on April 15, 20QB and. lAay 15, 20013 would he
April 15, 200B Mav 15. 200B
a. PI,000,000 P762.500
b. PI,000,000 P750.000
c. P 750,000 P508.333
d. P 250,000 P262.500
m
The 3rd installment and 4th final installment would be

3rd installment 4* installment
a. P300.000 P350,000
b. P262.500 P258.333
IAS IS COME TAXATION
?2 53.333 P25^,166
b. ?2 30.00*0 P2 50.000
Problem 2 - 36 Tact Assessment Procedure

The PJZ/0 of B*s^j:o City issued a tax assessment to Mr. Lang due to
fraudulent income tax amcunting to P500r000, Mr. Lang Sled protest
with 60 bays and submitted proofs iO days thereafter.
Car. See SIR deny the protest of Mr. Lang? What would be the remedy
available to Mr. Lang?
Problem 2-37 Informer’s Reward f .

Mins Bervita Wan provided information to the government, wnich ifid
S, S
the capture and seizure of smuggled goods with fair market value
PI 3.000,060.
Required:
a. ..f "ne government sold the captured goods for PI5,000,000, how
m -oh wo uld he the cash reward of Mies Wan as tax Informer?
o i f hoe government destroyed the goods seized because these are
regarded as harmful to health, how much cash reward would Miss
Wan receive?
sumption v> letter 'a,” how much final income tax should be
wv ■e,o from the reward of Miss Wan?
Problem 2-32 Violations and Penalties

M ss He/ide bar, Tago is operating an unregistered trading business, and
me has not been issuing any official sales invoice. She was not issuing
any offc>ai sales invoice. When Miss San Tago was summoned to present
ner oooos of accounts to PIP, she ignored the summon.
Require dr
a. bounce/ate ail the Tax Code violations committed by Miss, San Tago.
If '//o noted for all these violations, how much is the total amount of
oenalbes?
Problem 2-36 f/rjdemtatement of Income Tax Return

Wn ApnJ -'/, 26ifg Orville Corporation filed its income tax retur
►a/aisle year 261A declaring a total receipts of P2,000,000 and total
ded ,cf»on of Pi///,///) The Income tax due declared amounts U)
*0 66,666 6'pon /Ling to B1P, the tax officer discovered that. Orv
recejpt*. are understated by 26% and the deduction is overstated
on Mok o oasis the correct amount of tax was pai/J on time, M
//;>s the amount ,,j *.
irt v;arge added to Orville’s income tax due
■ 6, 26 ,M>
Problem 2^ 40 losgJstr&tlon Fee th,,t maintains
6 ,, a
m>:,.v/uvs arm 66 branches h'rf 6 fts pnncip
in 'be f'hjlippmes. p‘/L«»yi«
1'* ao/$ ir, Vu'-zon Oriy
Required: Assuming that the taxable year is 200A, compute the

foilo^ving:
a. Total annual registration fee of Splash Corporation for 200A if
payment was made on January 31, 200B.
b. Total amount paid to the BIR if payment was made on July 30,
200B.
Problem 2-41 Chattel Property Forfeited

The government forfeited the chattel property of Mr. Balana due to
criminal violation of tax laws. Mr. Balana’s total tax liability per
assessment as of April 15, 200A was PI00,000 payable on June 1, 200A.
The property was sold for P200,000 through a public auction on
September 1, 200A with the following expenses incurred by the BIR:
Advertisement P 5,000
Transfer tax 20,000
How much is the amount of excess from proceeds of sale to be remitted

to Mr. Balana as of September 1, 200A?
Problem 2 - 4 2 Compromise
The following cases are available from the records of the BIR resulting
from compromise proposals of corporations:
Basic Tax Surcharge Interest
Delinquent accounts P 500,000 P 125,000 P 100,000
Pending cases under
administrative protest 900,000 450,000 180,000
Criminal violation not filed in courts 1,000,000 250,000 200,000
Withholding tax cases 2,000,000 500,000 400,000
Criminal violations filed in courts 5.000.000 2.500.000 1.000.000
Totals P9t40Q,QQQ P3.825.000 PI.880.000
Required: How much is the amount of compromise allowed using the

following reasons (independent assumptions):
Case 1: Financial incapability due to corporate insolvency.

Case 2: Financial incapability due to surplus deficit resulting to
impairment in original capital by at least 50%.
Case 3: Doubtful validity of assessment.
Problem 2 - 4 3 Comprehensive Tax Remedy

Miss Malou Lugui was assessed with tax liability of P250,000 exclusive of
penalty. The financial status of Miss Lugui when the demand for
payment was made is as follows:
Total properties:
Real property P200,000
Personal property 100,000
Total liabilities, exclusive of tax 150,000
1',0 INCOME TAXATION
ulf«d j
• If Miss Lugui offers lor t\ compromise payment of p 100,000 if ft her
tax liabilities on the ground of her financial incapability, 'uA
Commissioner accepted the offer, would it be in accordance with ?he
pre requisite for a compromise settlement?
I> Assuming that a distraint proceeding was obrrM out. instead, which
of ihr above properties would be issued with warrant of distraint?
f II oil the properties of Miss Lugui have a realizable value of P200///>

fitter payment of her P 150,000 liabilities and possible cost of the
proceedings, would It. be possible for the government to carry out the
distraint and levy proceeding simultaneously to effect the conversion
of Miss Lugul's assets Into cash?
d. If, after the properties of Miss Lugul were sold in public auction only
P200,000 was realized and used as payment of her tax liabilities,
would this extinguish the unpaid tax liabilities of Miss Lugui?
Chapter 3
CONCEPT OF INCOME
CONCEPT OF INCOME
One popular definition of income is the amount of wealth

accumulated plus savings and the value of the personal
Consumption. (Haig-Simons’ Definition)
The term Income” refers to all earnings derived from service

rendered (labor), from capital (business or investment), or both
including gain derived from sale or exchange of personal or real
property classified as either ordinary or capital asset. (Rev. Reg. No. 2,
Sec. 56)
There is no single criterion for determining income for tax

purposes, but it may be helpful to remember that the “rule-of-
thumb test” to determine income is the increase in net worth.
Tax Treatment of Increase in the Value of Property
A mere increase in the value of property is not income, but merely

unrealized increase in capital. (Voi. 1 Mertens, sec. 5.06,p. 13)
Unrealized increments in the value of property are not specified to

constitute income under the revenue law. (Fisher vs. Trinidad, 43 Phil. 973)
An increase in the book value of real property and other fixed

assets of a corporation as a result of their re-appraisal is not
income. (BIR Ruling No. 519, 1959)
Net increase of the value of livestock or increase of the inventory

do not constitute income (BIR Ruling No. 67-018, April 27, 1967)
Appreciation in the value of property is not even an accrual of
income to the taxpayer prior to the realization of such
appreciation through sale or conversion of the property. (Sec. 28, Rev.
Reg. No. 2)
152 INCOME TAXATION
The Net-Worth Method

When the taxpayer has no accounting records, the net-worth
method is commonly used in determining taxable income. The
basic formula to determine the taxable, income using the net
. worth method would be:
Net worth, ending P xxx

Less: Net worth, beginning xxx
Increase (decrease) in net worth P xxx
Add: Nondeductible items xxx
Total P xxx
Less: Nontaxable items P xxx
Personal exemptions (for individuals) xxx xxx
Net. taxable income ITxxx
The net worth is equal to total assets minus total liabilities.
Illustration
Mr. Carlos Padilla, a sole proprietor, reports the following during

the taxable year:
2Q0A 200B
Total assets P300,000 P800,000
Total liabilities 250,000 200,060
Additional investments 100,000
Personal withdrawals 100,000 230,000
Gain on proceeds of life insurance received 150,000
Unrealized loss - debt securities deducted 20,000
t
How much is the net taxable income of Mr. Padilla n 200B?
'Phe net taxable income of Mr. Padilla in 200B would be
20013 net worth (1*800,000 1*200,000) P600.000

Add: 20013 Personal withdrawals 230.000
'total P830.000
Less: 20013 Additional investments 100.000
Balance P730.000
Lens: 200A net worth (P300.000 1 *250,000) P 50,000
200A Personal withdrawals 100,000 150.000
hu t ease in net worth l>580,000
Add: Nondedvietihle item Unrealized loss 20.00Q
'total 1*600,000
Lens: Nonlaxahle item - Gain on life insurance PI 50,000
Basle personal exemption j>q^)oq 200.000
Net taxable income 1M00,00Q
Chapter 3 Concept of Income 153
Notes:
1. In general, the basic personal exemption of individual taxpayer is P50,000. If
the taxpayer has qualified dependent children, each shall be entitled to
P25,000 additional exemption. An individual taxpayer can claim four qualified
dependent children as maximum additional exemptions.
2. Additional investments are deducted because they increased the ending
capital yet they are not income-related (transaction with the owner).
3. Personal withdrawals are added back because they decreased the ending
capital but they might have been taken from the earnings during the year.
4. Gain on proceeds of life insurance is not taxable while unrealized losses are
not deductible.
Another illustration
Banawe Corporation reported the following during the taxable

year:
Increase in cash P 20,000

Decrease in accounts receivable 80,000
Increase in inventory 150,000
Decrease in accounts payable 60,000
Increase in notes payable 30,000
During the year, Banawe issued 1,000 shares at P100 to several

stockholders and paid dividend amounting to P80,000. How
much is Banawe’s income during the year?
The net taxable income of Banawe Corporation can be determined

as follows:
Effect on net assets
Increase Decrease
Increase in cash P 20,000
Decrease in accounts receivable P 80,000
Increase in inventory 150,000
Decrease in accounts payable 60,000
Increase in notes payable 30,000
Total P 230.000 P 110.000
Net increase in net assets (P230,000 - PI 10,000) P 120,000

Add: Dividend paid during the year 80,000
Total P 200,000
Less: Proceeds from sale of capital stock
(P100 x 1,000 shares) 100,000
Net taxable income - increase in net worth PJQCbQQQ
154 INCOME TAXATION
Rotes:
1 The following summary rules should be followed;
Situations
Increase in assets Increase
Decrease in liabilities Increase
Decrease in assets Decrease
Increase in liabilities Decrease
2. The calculation of the increase in net worth is a method used to determine
income in cases where the taxpayer does not have reliable accounting
records-
3. A corporation is not entitled to personal exemptions.
Return on Capital
Since income is commonly defined as all wealth which flows into

a taxpayer’s hand rather than a mere return of capital
(investment), it is, therefore, a return on capital (return on
investment).
A sale does not necessarily mean income. To be considered

income, the sale must exceed its related costs. Thus, an income
cannot be determined by just receiving cash as a result of sales or
collection of receivable (Rev. Reg*. 2, sec. 36). It is not merely a growth
or increment of value in an investment, but a gain, a profit in
excess of capital as a result of exchange transactions. fBbner v».
Macomber 252 US 189, 40 S. Ct. 189)
Illustration
If a PI,000,000, 90-day time deposit earns P9,000, the return of

capital is PI,000,000 and the return on capital is P9,000.
Distinctions between Income and Other Terms
Capital Distinguished from Income
Capital denotes the original investment or fund used in order to

generate earnings which is called income, “Capital is a wealth,
while income is the service of wealth. The fact is that property is
a tree, income is the fruit; labor is a tree, income is the fruit/
(Madrigal & Pat/emo vs. Refjerty & Conception, 38 Mill. 414)
For example, the amount of money put in time deposit is a

capital, while the interest earnings over a period of time is an
income.
Revenue Distinguished from Income

Revenue pertains to all funds accruing to the treasury of the
government derived from tax, donation, grants and any other
source, while income refers to the earnings of individual persons,
partnership, corporation or estate and trust whether or not
subject to tax.
Receipts Distinguished from Income
Generally, receipts are considered cash collected over a business

period. Receipts may include capital as well as its earnings, while
income refers to the amount after excluding capital invested, cost
of goods sold and other deductions allowed by law.
Nontaxable and Taxable Income

Income could be tax-exempt or taxable. Taxable income could
either be reportable in the annual tax return or could be collected
with final tax, whichever is applicable. Once the taxable income is
collected with final tax, it is no longer required to be reported in
the annual tax return (ITR).
Nontaxable Income. In order for an income to be classified as

nontaxable, it should be excluded by law or treaty from taxation.
Whenever this kind of income is received, it is not required to be
included in the determination of taxable income; neither shall it
be included as part of the gross income.
Examples of nontaxable income are winnings from sweepstakes

or lotto, and thirteenth month pay and other benefits not
exceeding eighty-two thousand pesos (P82,000.00) beginning
taxable year 2015, as amended by Republic Act No. 10653.
Taxable Income. The term “taxable income” means the pertinent

items of gross income specified in the Tax Code less the
deductions, if any, and/or personal and additional exemptions
authorized by such types of income by the Tax Code or other
special laws (Se . 3i, nirc%
c
Taxable income is synonymous to the term “net income.” Net

income means gross income less statutory deductions. [Rev. Reg. No.
2, Sec 36)
va mtjr/m f t / a
l .r ,*>, Ai’W s.t.fi,'eA ac- n;pir C4 >nc/#l*Ue ,:yy-

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‘Hi *'-f"V» >U< Of V//,iY,C r><&y;:CjC
Ch*^ct*fKhc*. of T*/£hfc lr»<r,rr,%
A 0 nVATft* tO VC M\/i%-hf~. h;.: /* foil (?to :-Z\p cha
l Thfrff' ffiVAt. be qrjtn Of groftt.
A valve in. received in the form of r/r :r* eour/^terd 3

result of rendition of nervine or earnings ;rj e/tccrvc df napita.
invested. fhi.m, a o&ncelUtirjn of a taxpayer"* indebtedness as
remuneration for eervice rendered ie an incorrie,
Th^: recovery of amount in venter! is not an income, hut the

exoese over the amount invented is an income. Mere
expectation for profit fa not income and. therefore, not
taxable.
Illustration
Mark acquired a car for P900,000 three years ago. He sold his
car for P500,000 when its accumulated depreciation
amounted to P540,000. How much is the amount of gain on
the sale of the car?
The gain on the sale of the car would be
Sales price P500.000

Less; Book value of the car
Cost WOO,000
Less; Accumulated depredation 540,000 360.000
Gain on sale of the car P140.0QQ
2, The gain must be realized or received.

The realization of gain may take the form of actual receipt of
cash or may occur as a constructive receipt of income.
A mere increase in the value of property is not income but

merely an unrealized increase in invested capital, fpemandez Hnos.
Int un. Comrru&zioner, 29 SCRA 552)
Concept of Inccmw 157
Ulustrmtiaa - Income Realised
In year 1. Mr. Maho Bute, a realtor* purchased property tor

PI.000.000 At the end ot'year 0, the property had a market
value ot PI,500,000. In year 3, Mr. Bute sold the property tor
PO.000.000 and paid 5°o of it as broker's commission.
The realised income of Mr. Bute would only be reported in

year 3. The comparative annual realised income is as follows:
___ y^Li .... Yejir 3 ....... Year d

Sales process P-0- P0 Pd.6oo.ooo
Cos: of land -0. .o (1.000.000)
Broker's commission |P.k(\\\CK>0 \ 5"\9 -0- .0- U100*000}
Realized income P-0- P-0 P 900,000
Note: The cost of land is a return of capital and the brokers commission is a
necessary expense in order to gain realized income. Hence, both should be
deducted from the sales proceeds to derive the actual realized income.
Illustration - Received Income
Mr. Maba Bait is a real property lessor. During 200A, he

collected P900,000 as rent for the years 200B to 200C.
Mr. Baits income for the year 200A is P900.000.
Income Constructively Received
An income is considered constructively received when it is

credited to the account of, or segregated in favor of a person.
The person may withdraw the said account credited in his
favor anytime without any substantial limitations or
conditions upon w'hich payment or enjoyment is to be made or
exercised. Examples of constructive receipt of income are:
a. Interest credited on savings bank deposit;
b. Matured interest coupons not yet collected by the
taxpayer;
c. Dividends applied by the corporation against the
indebtedness of a stockholder; (Sec. so, Rev. Reg. 2.)
d. Share in the profit of a partner in a general professional
partnership, although not yet distributed, is regarded as
constructively received; or
e. Intended payment deposited in court (consignation).
158 INCOME TAXATION
“AS IF” Theory of Constructive Income is designed to

prevent cash basis taxpayers to delay reporting of income. It
also presumes the existence of income on transactions
supposedly not subject to tax.
For example, real property (capital asset) sold at a loss is

subject to capital gains tax of 6% of the selling price or fair
market value, whichever is higher.
3. The law or treaty does not exclude the gain from taxation,
(Sec.32 (BJ, NIRC)
In general, all items of income, from whatever sources, are

taxable unless a law or treaty exempts them from taxation.
Accordingly, income derived from illegal activities is taxable, if
uncovered by the BIR.
Sources of Income
Sources and Taxability of Income
___ Income Taxpayers

Sources of Income: RC/ DC NRC/ Aliens/ FC
Earned:
Within Taxable Taxable
Without Taxable Nontaxable
Partly within and without Taxable Partly taxable
RC - Resident Citizens NRC - Nonresident Citizens

DC - Domestic Corporations FC - Foreign Corporations
Source is ascribed to the place wherein the income is earned. It is

governed by the situs of taxation. This classification of income is
necessary to determine whether such income is subject to tax or
not.
Income may be earned from (a) within the Philippines; (b) without
(outside) the Philippines; or (c) partly within and partly without
(outside) the Philippines.
Income from Sources Within the Philippines

Income within comprises earnings from within, the Philippine
territory, (Sec. 42a, nirc). Examples are:
a. Compensation for labor or service derived from Philippine

sources:
b. Interest on bonds, notes, deposits and the like earned in the
Philippines;
c. Dividends declared received from domestic corporations;
d. Rentals and royalties from property located within the
Philippines; and
e. Gains, profits and income from sale of real property as well as
j from personal property in the Philippines.
As a rule, if income is derived within the Philippines, such income

1 is taxable within.
Illustration
Mr. F, a nonresident Filipino citizen, reported P12,000,000 as

* total income in 200A as an international speaker. His speaking
! engagements were recorded as follows:
Months Days of speaking Country

m January 6 days Philippines
-U March 3 days Japan
June 4 days Taiwan
August 10 days USA
October 3 days China
December 4 days Philippines
I Total days 30 days
*
The amount of Mr. F’s income within the Philippines would be
Income within = x P12,000,000 = * P4.000.000
When the personal service or labor is performed partly within and

partly outside the Philippines and no accurate allocation can be
made the following formula may be used:
Income No. of days labor was Total

within = performed in the Philippines ’x compensation
Total No. of days labor was received
performed
!Sec. 42 (A)(3) & (C)(3),NIRC]
160 INCOME TAXATION
Income from Sources Outside the Philippines

Income Without refers to earnings coming from outside the
Philippines or income derived from foreign countries /Sec.42(C), nircj.
Examples are:
a. Compensation for labor or service rendered by overseas
contract workers;
b. Interest on bonds, notes, deposits and the like earned abroad;
c. Dividends received from nonresident foreign corporation;
d. Rentals and royalties from property located outside the
Philippines; and
e. Gains, profits and income from sale of real property as well as
from personal property located outside the Philippines.
In general, income earned outside the Philippines is taxable only

when the taxpayer is a resident Filipino Citizen or a Domestic
Corporation.
Conversely, earnings derived outside the Philippines by

nonresident Filipino Citizens and Foreign Corporations are not
subject to tax in the Philippines.
Income Partly Within and Partly Outside the Philippines

Income Partly Within and Partly Without are earnings from
sources partly within and partly without the Philippines includes
gains, profits and income derived from:
a. Transportation or other services rendered partly within and
partly outside, and
b. Dividend received from a domestic corporation and foreign
corporation. (Sec.42E, nirc)
In general, when an income is earned partly from within and

without, only income within is taxable in the Philippines, except if
the taxpayer is a resident citizen or domestic corporation. A
resident Filipino citizen or a domestic corporation whose income
is derived within and without is generally subject to tax. [Rev. Reg.
No. 2 - 98(A)( 10))
Illustration
In year 200D, Charice, a resident Filipino, received PI20,000
dividend income from McMac, a foreign corporation.
The 3-year gross income of McMac before dividend declaration is

shown as follows:
______ Within Without _______ Total
Year A P 3,000,000 P 7,000,000 P10,000,000
Year B 2,000,000 8,000,000 10,000,000
Year C 7,000,000 9.000.000 16.000.000
Total P12.000.000 P24.000.000 P36.000.000
The amount of income within and income without of Charice are
Income within = ElSLQfiPjPQP * PI 20 000 = P40.000

P36,000,000 • ’ "
Income without = B2±i90QiP0Q x P120.000 = P80.000

P36,000,000
Within is 33%; without 67%.

Note: If the three-year gross income within of a foreign corporation
before the declaration of dividend is less than fifty percent (50%), the
dividend declared should be prorated based on gross income from all
sources. (Sec. 42 (A)(2b), NJRC)
Classifications of Income
Income may be classified as follows:
1. Compensation Income - the gain derived from labor,

especially employment (earned from employeer-employee
relationship) such as salaries and commissions. These
earnings are subject to normal tax.
2. Profession or Business Income - the value derived from an

exercise of profession, business or utilization of capital
including profit or gain derived from sale or conversion of
assets.
Examples are net income from business and gain from the
sale of assets used in trade or business. These earnings are
subject to normal tax.
In case of revenue arising from sales, business income (gross

profit) is equal to sales reduced by sales returns, sales
allowances sales discount and cost of sales.
1*2 INCOME TAXATION
In the case of revenue arising from practice of profession or

receipts from rent and sendees, business income is equal to
gross receipts less returns, allowances and discount.
3. Passive Income - an income in which the taxpayer merely

warts for the amount to come in. Examples are royalty,
interest, prizes, and winnings Sec 2< b, smc). Generally, passive
income is subject to final tax.
4. Capital Gain - an income derived from sale of assets not used

in trade or business. Examples are sale of family home and
other sales of shares of stocks which are subject to final
taxes. Other sales of capital assets are subject to normal tax.
Mixed Income Earners. All income referred above could be

earned by a person at the same taxable year. Once subjected to
final taxes, the capital gains and passive incomes are no longer
required to be reported and taxed using the normal tax in the
Annual Income Tax Return. (Rev. p.egs. so. 7-2012>
An Income Tax Return flTRj is a formal statement of the taxpayer's

taxable income and deductions, reported in the BIR prescribed
form to be filed and paid using the normal or regular tax rates.
For the final quarter, the Annual Income Tax Return is prepared.
Ail tax exempt income and other items of income subject to final
tax shall not form part of the gross income to be reported in the
income tax return subject to normal tax.
Normal Tax vs. Final Tax

Normal tax, also called “regular, customary or ordinary tax,” is
imposed on compensation, professional/business income, and all
other incomes not subjected to final tax in the Philippines.
Normal taxes withheld on certain income payments are

creditable because they 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 an income tax return to report the
income and/or pay the difference between the tax withheld and
the tax due on the income.
Earnings outside the Philippines by resident Filipino citizens

(except OFW) and domestic corporations are subject to regular tax
in the Philippines.
The regular tax for individual taxpayers starts front b% to d'2%

and for corporate taxpayers the normal tax is d()%. r>v< >m. ,%
NIKC, a- arurruhrl h\j l\.A rffrrfirr JOOV)
Notes:
1. Proposed now normal tax rates?
• Individuals: 5% to 23% from 5% to 32%
• Corporations: NCI 1' - 25% fitm\ 30%: MC1T - 5% from 2%.
2. Philippines has the highest income tax in theenliie ASF,AN region:

Over 500,000 income: Philippines 32%; Thailand 10%; Singapore 2%;
Vietnam 20%; Malaysia 1 1%; Cambodia 20%; Urns 12%; Brunei 0%,
Pinal Tax is the term used to describe the lux on earnings tlint
have been subjected to complete withholding tax payment at
source. These earnings are no longer included in the
determination of taxable income subject to regular tax. Examples
of these earnings are interest income from the bank, royalty and
dividend income.
Final taxes withheld by the withholding agent constitute as a full

and final payment of the income tax due from the payee' on the
said income. The liability for payment of the tax rests primarily on
the payor as a withholding agent. Thus, in ease of his failure to
withhold the tax 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.
Note: DUdoaure of Passive Income Subject to Final Tax

(Revenue Memorandum Circular No. 9 2014 dated 1 1 February 2014)
The C1R has issued RMC No. 9 2014 dated I 1 February 20 M to amend RMC No.
57-2011 to make optional to individuals the disclosure of their passive income
subject to final tax [Supplemental Information) in BIR Korins No. 1700 and 1701
for calendar year 2013, due for filing on or be lore 15 April 2014. However, the
said information lias to be mandatorily disclosed by individual taxpayers for
calendar year 2014.
Illustration
The business data of Panay Company are as follows:

Sales Pl ,060,000 Other incomes:
Sales returns /allowances 60,000 Royalty income P 80,000
Cost of sales 600.000 Interest income 60,000
Expenses allowed 100.000 Gain on sale of land . 40,000
Required: Compute the reportable taxable income at the end of

the year using the following assumptions:
1U INCOME TAXATION
Assumption 1 - The other types of income have been subjected to-

final taxes and capital gains tax.
Assumption, 2 - It was discovered that the other incomes have not

been subjected to finaJ taxes and capital gains tax.
The comparative taxable income to be reported in the ITR would

be;
Assumption 1 Assumption 2
Saks PI,060,000 PI,060,000
L«ss: Sales returns/allowances 60.000 60.000
Net sales PI,000,000 PI,000,000
Less: Cost of sales 600.000 600.000
Gross income from business P 400.000 P 400.000
Add: Other income:
Royalty income 0- P 80,000
Interest income 0- 60,000
Gain on sale of land 0- 40.000
Total other income 0- P 180,000
Gross income P 400,000 P 580,000
Less: Operating expenses allowed 100.000 100.000
Income taxable at normal tax rate P 300.000 P 480.000
Note: Royalty income is generally subject to 20% final tax, except royalty on
literature which is subject to 10% final tax. The gain on sale of land is subject to
6% capital gains tax. As a rule, if an income has been subjected to final tax or
capital gains tax, it need not to be included anymore as part of the taxable income
reported in the ITR subject to normal tax.
Summary Application
NORMAL TAX vs. FINAL TAX
Subject to NORMAL TAX

Report in the year-end ITR
• Compensation income
• Business income
• Professional income
• Other passive income and capital
gains not subjected to final taxes
For supplemental disclosure

only, no need to be taxed again.
• Interest, dividend and royalty
income
• Sales of real property and shares
of stocks classified as capital
assets.
Forms and Valuation of Income

Income may be received either in the form of (a) cash, (b)
property, (c) service, or (d) a combination.of the three. (Rev. Reg. 2-98,
Sec. 2.78.1)
Cash as income pertains to money or money substitutes received

as compensation or earnings derived from labor, practice of
profession, and conduct of business. Examples of cash are bills
and coins which are in circulation and legal tender, bank drafts,
money orders, and treasury warrants.
Property as income denotes the right of ownership over a tangible

or intangible thing earned as a result of labor, business or
practice of profession. Examples of property are real estate,
stocks, bonds, etc.
Service is a form of income based on performance received in

payment for the work previously rendered by one person to
another.
In general, taxable income is valued as follows:

1. Cash received for income earned;
2. Fair value of property received as payment for income earned;
3. Fair value (at the date the income was earned) of the share of
stocks received as payment of income earned;
4. Fair value of the service received (in the absence of any
stipulated price) as payment of income earned;
5. Fair value of the promissoiy notes received as payment of

income is
a. Face value of the note, if interest bearing, and
b. Discounted value of the note, if non-interest bearing.
Illustrations:
Case 1: Sexy received P5,000 from Macho when the required
services were completed. The amount is net of PI,000 advances
taken by Sexy from Macho.
The service income of Sexy would consist of the following:

Cash collected in advance P 1,000
Cash collected upon completion of service 5,000
Total income earned by Sexy P 6.000
166 INCOME TAXATION
Case 2: S delivered to D his old TV sc\ m» piiymml of fh#- juHrr'e.

sendees to the former. S bought the TV set two (2) yrtua ago for
PI0,000. The old TV set could be traded in fit a value of P4,000
If a new TV set is acquired, the cash price is PI 2,000,
The income of D would be P4,000.
Case 3: Abogado will certify the transfer document of Akusado in

payment for the services of the latter. Normally, the professional
fee of Abogado for such nature of certification is P5,000, while
Akusado normally charges P4,000 for such services he rendered.
The service income of Abogado is P5,000.
Case 4: Mahal issued a P5,000 one-year, 12% interest-bearing

note to Masipag as payment of services.
The service income of Masipag is P5,000.
Case 5: Adam issued a P5,000 one-year, non-interest bearing

note to Eve. The prevailing interest in the market at that time is
12%. The service income of Eve is P4,465, computed as follows:
Face value of the note P 5,000

Multiplied by present value of annuity of PI.00 at 12% 0,893
Income of Eve P 4.465
Tax Accounting Periods to Report Income

Taxes are commonly required to be paid at regular intervals,
usually on an annual basis. The dates for paying taxes are fixed
by law to comply with the principle of administrative feasibility.
The law allows the following accounting period for tax purposes:
1. Calendar period. Almost all taxpayers elect to report income

covering a “calendar year,” which covers a period from
January 1 to December 31 of the taxable year.
2. Fiscal period. Some taxpayers may opt to report income on a

“fiscal year basis,” covering a period of 12 months which ends
on the last day of any calendar month other than December
31.
3. Short period. Income for a period less than 12 months is

required to be reported when the taxpayer dies or when the
taxpayer is under jeopardy assessment.
O r a cle r 3 Concept c/ 'r ca m e
A Variable Period- A taxpayer :s required m me and pay tax

wtr.m a period that varies depending or. “Joe nature c: income
earned. This period map be monthly. quarterly. semi-annually
or at specific time per sale or exchange transaction.. In other
words, variable period covers taxes paid on per transaction
basis.
Accounting Periods and Methods

The following roles shall be observed in accordance with Sections
AT to 47 of the NIRC:
1. Geriercd Ruler.
a- The taxable income shall be computed, upon the basis c:

the taxpayer's regular annual accounting period fiscal or
calendar year, as the case may be}.
b. If the method employed does not dearly reflect the income,
the computation of income is based on the method given
by the BIR Commissioner.
c. If the taxpayer has no annual accounting period., or does
not keep books, or if the taxpayer is an individual, use the
calendar year method.
d. In case of death of a taxpayer, the taxable income includes
income amounts accruing up to the date of his death.
2. Period for which Deductions and Credits Taken

a. The deductions provided for in this Title shall be taken for
the taxable year in which “paid or accrued* or “paid or
incurred,” dependent upon the method of accounting
upon the basis of which the net income is computed,
unless in order to clearly reflect the income, the
deductions should be taken as of a different period.
b. In case of death of a taxpayer, the deduction allowed
includes amounts accruing up to the date of his death.
3. Change of Accounting Period

a. A taxpayer, other than an individual, needs the approval
of the BIR Commissioner to change in accounting period
from fiscal year to calendar year (vice versa), subject to the
provisions of Section 47 of the Tax Code.
168 INCOME TAXATION
b. Returns for short period resulting from change of

accounting period
(l) If a taxpayer, other than individual, changes the basis
of computing net income from fiscal year to calendar
year, a separate final or adjustment tax return shall be
made for the period between the close of the last fiscal
year from which the tax return was made and the
following December 31.
(3) If the change is from calendar year to fiscal year, a
separate final or adjustment return shall be made for
the period between the close of the last calendar year
for which the tax return was made and the date
designated as the close of the fiscal year.
(3) If the change is from one fiscal year to another fiscal
year, a separate final or adjusted tax return shall be
made for the period between the close of the former
fiscal year and the date designated as the close of the
new' fiscal year.
o. Income computed on basis of short period

In all other eases where a separate final or adjusted tax
return is required or permitted by rules and regulations,
upon recommendation of the H1R Commissioner, to be
made for a fractional part of a year, then the income shall
be computed on the basis of the period for which separate
final adjustment return is made.
Methods of Reporting Income and Expenses
The timing when income' was earned is important. In the

Philippines, accountants may choose between the following
methods of accounting in reporting income and expenses, namely
(a) cash method, (b) accrual method, and (c) special methods.
Cash Method
C«s/i method generally reports income upon cash collection and
reports expenses upon payment. If earned from rendering of
services, income is to be reported in the year of collection whether
earned and or unearned, f/vwc,s«v. i o s i
Accrual Method
i§
Accrual method generally reports income when earned and reports
ifexpense when incurred. If earned from sale of goods, income is to
Ibe reported in the year of sale, irrespective of collection. (Mertens Law
pf Federal Income taxation, VoL 2 (1996), Cash and Accrual Methods, Chapter 12A,
H ■ faction 12A:51, p. 12A-77)
r
The accrual method utilizes the “All-events Test” which requires
r Jl) the fixing of a right to income or liability to pay; and (2) the
t availability of the reasonable accurate determination of such
|income or liability. (CIR vs. Isabela Cultural Corp., G.R. No. 172231, Feb. 12, 2007)
Îllustration
I;
\l% reported a total collection of PI,400,000 for year 200B with the
^following assumptions: »
• / Assumption 1 - The above collection represents payment of rent

Covering the period of December 1, 2008 to January 31, 200C.
•I
;* Assumption 2 - The above collection consists of the following sales
-of merchandise:
Cash sales for year 200B P 900,000

Collection of 200A sales on account 300.000
Advance collection of sales for 200C 200.000
Total collection
1 'In addition, the sales on account in 200B was PI,100,000. How

| much would be the 200B reportable income of X, using the above
assumptions?
The reportable revenue of X would be:

| Assumption 1 Assumption 2
I (Cash Basisl (Accrual Basis}
' As real estate lessor PI.400.000
■ As trader of merchandise P2.000.000
* Generally, trading and manufacturing businesses use accrual

\ method while servicing businesses use cash method.
If the service business opted to report on accrual basis, such

method can only be applied when it comes to reporting of expense.
170 mcove TAXATION
CASH /* ACCRUAL METHOO

A /JSSAifflSiQ
———
bum 0»'
yrsf *t<sxr <, ___ r~ojr**i v
*__ nt+rtfs/ .. 'er rnx~v0 "■
UL Cm***
V/vf'dfW
u.
kfSSu*\ ^ Tf*-J,r,g VMjhsjhSrq________________________ Es*" i*;
#:i,ase y
4. '*XJt*t**0*j
*-•- ..
r ^ j srf/jrftn f/x *4; xj.'t*#/ ‘*XX#t*Xl &^/*
l 7 r<jrf IXWfi
1 '5 ****•&
L
lev
L % <tfrf/%ftfxx rj yffjyii <*ssx *r*r
L._... U tats* <>x*
v ___
t, // *r. yr//,«V/ r'?'lZXX*Sjri*k
v - __ Vj 'XTrjV*
■>,"XS'JZX’SS
Special Methods
The taxpayer may use special method'* of reporting income when

the nature of its operation Is peculiar to the business industry.
The following are special methods in reporting income;
1, Installment
2. Deferred payment
3. Long-term construction contract classified into:

a. Completed contract method, and
b. Percentage of completion method.
4, Farming, categorized as follows:

a. Cash basis,
b. Accrual basis, and
c. Crop basis.
Installment Method
Installment basis is a method considered appropriate when
collections extends over relatively long periods of time and there
is a strong possibility* that full collection will not be made. As
customers make installment payments, the seller recognizes the
gross profit on sale in proportion to the cash collection. 49 <ai
V.75C S*v. : Re: Regs Xo
Simply stated, under installment method, the seller (taxpayer)

may report income over the several taxable years in which
collections are made based on the terms of payment.
Generally, the reportable income derived on installment sale is

the proportion of installment collection actually received during
the year in relation to the gross profit and contract price.
The formula to compute the reportable income would be:
Reportabie - Installment x Gross profit

income collection received Contract price
Installment Method’s Important Terms

Terms related to installment method of reporting income are
1. Selling Price is the amount realized on sale. It includes the

following:
Cash received P xxx

Fair market value of the property received Xxx
Installment obligations of the buyer (evidence
of indebtedness) Xxx
Mortgage assumed by the buyer Xxx
Selling price P xxx
Contract Price is the amount which the buyer agreed to pay

the seller. It includes the following:
Selling price P xsx

Add: Excess of mortgage over cost Xxx
Total " P rax
Less: Mongage assumed by the buyer __
Contract price P xggs
172 INCOME TAXATION
3. Initial Payments are payments received in cash or property

(other than evidence of indebtedness of the buyer) during the
taxable year in which the sale is made. It is computed as
follows:
Downpayment P xxx
Installments received in the year of sale Xxx
Total P xxx
Add: Excess of mortgage over cost xxs
Initial payments P-Xxx
Commissions and other selling expenses paid or incurred by

the seller are not to be deducted or taken into account in
determining the amount of “initial payments,” the “total
contract price,” or the “selling price.” tsec. its,Rev. Regs. xc. 2
4. Annual (Equal) Installment Payments after the year of sale

are the remaining balance collectible on a yearly basis from
the buyer. This is computed as follows:
Selling price P xxx

Less: Initial payments P xxx
Mortgage assumed by the buyer xxx Xxx
Balance P xxx
Divided by remaining years of payment Xxx
Annual installment payment after year of sale P xxx
The formula for the installment tax due would be
Installment _ Installment payment received x Total tax

tax due Contract price due
Illustration
Information related to the sale of real property (capital asset) on

installment is as follows:
Down payments in year 1:
Cash received by the seller PI00,000
Fair market value of property received by seller 300,000
Installments received:
Year 1: Amount received during the year of sale 100,000
Year 2: Notes receivable 500,000
Year 3: Notes receivable 500,000
Mortgage assumed by the buyer 500,000
Cost of property to the seller 400,000
Required: Compute for the amounts of the following:

1. Selling price,
2. Contract price,
3. Initial payment, and
4. Annual installment taxes due.
The required amounts are computed as follows:
1. Amount of selling price

Down payments:
Cash received by the seller P 100,000
Fair market value of property received by seller 300,000
Year 1: Amount received during the year of sale 100,000
Year 2: Notes receivable 500.000
Year 3: Notes receivable 500.000
Mortgage assumed by the buyer 500.000
Selling price P2.000.000
2. Amount of contract price

Selling price P2,000,000
Less: Mortgage assumed by the buyer 500.000
Balance PI,500,000
Add: Excess of mortgage over cost
(P500,000 - P400,000) 100.000
Contract price PI.600.000
3. Amount of initial payment

Down payments:
Cash received by the seller P100,000
Fair market value of property received by seller 300.000
Year 1: Amount received during the year of sale 100.000
Total P500,000
Add: Excess of mortgage over cost 100,000
Initial payments P600.000
4. Annual installment taxes due

Year 1: (P600,000/P1,600,000) x P120,000 P 45,000
Year 2: (P500,000/P1,600,000) x P120,000 37.500
Year 3: (P500,000/P1,600,000) x P120,000 37.500
Total capital gains tax (P2,000,000 x 6%) PI 20.000
174 INCOME TAXATION
When to Use Installment Method
The Tax Code provides that installment basis of reporting income

may be used in the following cases:
1. Installment Sale of Personal Property: (Sec. 49(A), N1RC)
a. Personal property is regularly sold on an installment basis

by a dealer,
b. Casual sale of personal property on installment basis
subject to the following conditions:
• the selling price exceeds PI,000;

• the initial payments do not exceed 25% of the selling
price; and
• the property sold is not an inventory.
As a rule in casual sale of personal property, if the initial

payment exceeds 25% of selling price, the transaction is
considered cash sales. (Sec. 49(B), NIRC)
In the sale of personal property classified as capital asset by a

taxpayer other than a corporation, the reportable income or
loss is 100% if the holding period is within one (1) year. If the
holding period is more than one year, the reportable income
or loss is only 50%.
Illustration
In 200A, Mora Less sold a car for P800,000 with an

acquisition cost of P600,000. The installment sales contract
has the following terms:
a. Payments in 200A: P400,000; and
b. Remaining balance: Equally beginning 200B.
Required: Compute the reportable income if Mora Less sells

the car on a:
a. Regular installment basis as a car dealer.
b. Casual basis.
Answers:
a. If Mora Less sold the car on a regular installment basis as
a car dealer, the reportable income would be.
200A P400.000 x (P200,000*/P800,000) PI 00,000

200B P200.000 x (P200,000/P800,000) 50,000
200C P200.000 x (P200,000/P800,000) 50.000
Total gross profit (P800.000 - P600,000)* P200.00Q
Note: Even if the initial payment exceeds 25% of the selling price, the
law allows installment reporting of income because the seller is a dealer
that sells on a regular installment basis.
b. If Mora Less sold the car on a casual basis, the reportable

income would be.
200A P800,000 x (P200,000*/P800,000) P200.Q0Q
Note: Since the sale is a casual sale and the ratio of initial payment over
the sales price exceeds 25%, the transaction is considered cash sales.
Hence, the reportable income in the year of sale would be the entire gross
profit.
2. Installment Sale of Real Property:

a. Sale of realty (inventory) where the initial payments do not
exceed 25% of the selling price. This sale is subject to
normal tax of 30% for corporate taxpayer (r.a. 9337) or 5% to
32% for individual taxpayer. (Sec. 24(A) , nirc)
b. Sale by individuals of real property considered as capital

asset, if initial payments do not exceed 25% of the selling
price. (Sec. 49(C], NIRC)
This sale is subject to a capital gains tax of 6% based on

the selling price or zonal value whichever is higher.
Illustration.
The information related to the sale of real property (capital asset)
is as follows*.
Acquisition cost P 800,000
Selling price 3,200,000
Zonal value 3,500,000
Down payment in the year of sale 500,000
Unpaid mortgage assumed bythe buyer 900,000
Balance is payable equally every year for two years
Under installment basis of reporting income,, the tax liability in

the year of sale is
o o'
,» •.,>' t*g-
’’
n
•&
/$
in
»>i
i. if
in
»iv
in
K
8
1\
S s $a
8
o
A
0
1 1
*N
in
on v*\
♦1 $§if a s
*<
a]
v i
if> <N
m K R i\<
n< A, o.
0,
d<?*ed L>ec^rf;b*rr 3!, 200B

(» T-n
*>
A,
,J5
£
;S*z*a? -j*^:,uv.
§S
iN
"N v>
*n
$
l'
‘s
*Xf
, v : >-
The prevailing discounted value of the note with the same nature
is 90%. Mia incurred P20,000 delivery expense in the sale of
furniture.
The income to be reported would be:

200A 200B
Cash P 300,000
Discounted value of the note (P800,000 x 90%) 720,000
Collection of the note P 800.000
Total revenue PI.020.000 P 800.000
Less: Cost of sale P 600,000
Delivery expense 20,000
Income on notes previously reported . P 720.000
Total deductions P 620.000 P 720.000
Income to be reported P 400.000 P 80.0QQ
Income from Long-Term Construction Contracts

Income from long-term construction contracts refers to the
earnings derived from construction of building, bridges,
installation and other construction usually covering a period of
more than one year.
When income is derived from long-term construction contracts, it

is generally reported on the basis of percentage of completion
made every year that will be evidenced by the certificates of
engineers or architects. (Secs.48 NIRC, Rev. Regs. No. 2)
The reportable income is calculated by deducting from the

contract price the actual cost of construction.
In recognizing realized revenue for long-term construction

contracts, accountants usually follow two methods - Completed
Contract Method, and Percentage of Completion Method.
As the term indicates, the completed contract method requires

recognition of revenue only when the contract is finally
completed. On the other hand, the percentage of completion
method requires recognition of income based on the progress of
work.
Illustration
Assume that the Goldfield Construction Corporation has a

contract starting January 200A to construct a P30,000,000
supermarket with a cost of P28,000,000.
178 INCOME TAXATION
Mow much is the amount of gross income to be reported using the

completed contract method, or percentage of completion method?
Completed Contract Method. If the construction project is

completed within one year, the 100% completed contract method
of reporting income is applicable.
The gross income for the year 200A is computed as:
Contract price P30,000,000

Less: Cost of construction 28.000.000
Gross income
If the construction project is to be completed for more than one

year, the percentage of completion method of reporting income is
to be used.
Percentage of Completion. Under this method, the gross income

to be recognized is computed as follows:
200A 200B 200C
Contract Price P30,000,000 P30,000,000 P30,000,000
Percentage of completion 35% 75% 100%
Value of contract feamed P10,500,000 P22,500,000 P30,000,000
Less: Costs incurred to date 10.000.000 21.500.000 28.000.000
Gross income to date P 500,000 P 1,000,000 P 2,000,000
Less: Prior years gross income 500.000 1.000.000
Annual realized revenue P 500.000 P 500.000 P 1.000.000
Observe that the total income reported under completed contract

method and percentage of completion method is the same. Only
that, in the percentage of completion method, the gross income is
reported gradually based on the accomplished percentage of
construction.
The percentage of completion is also used when the contract price

is definite and estimates of cost to complete or the stages of
completion can be determined with reasonable accuracy.
For taxation purposes, the percentage of completion method is

preferred over the completed contract method. It spreads the
burden of paying tax over the term of the contract.
Gross Income from Farming

Farming business embraces farm in the ordinary accepted sense,
and includes stock, dairy, poultry, fruit and truck farms, also
plantations, ranches, and all land used for farming operations.
All individuals, partnerships, or corporations that cultivate,

operate, or manage farms for gain or profit either as owners or
tenants are designated farmers. A person cultivating or operating
farm for recreation or pleasure the result of which is a continual
loss from year to year is not regarded as a farmer. /See. *5 , Rev. Regs.
.Vo. 2) '
Business engaged in farming could derive income from the

following sources:
1. Farm products raised,

2. Trading of farm products purchased, and
3. Other farm income.
Income from Products Raised. It refers to the income derived

by the farmer from products harvested or raised. These products
are generally valued at their selling price. The gross income from
products raised is computed as follows:
Harvest or product raised at selling price P xxx

Less: Unsold at end of the year, fat selling price) xxx
Gross income from products raised (harvested and sold) P xxx
Income from Trading of Farm Products Purchased. This

income is derived from the sale of livestock and products
purchased from other farmers.
Products sold P xxx

Less: Cost of sale xxx
Gain from sale P xxx
Other Farm Income. These may derive from sale of ordinary

farm assets and farm miscellaneous income, including capital
assets.
Ordinary farm assets may comprise of assets used in the farm,

such as equipment, implements and work animals.
Capital assets comprise of assets not used in the farm.

130 INCOME TAXATION
Miscellaneous income may consist of rent received from crop

shares, proceeds of insurance on growing crops, etc.
Methods of Computing Gross Income Derived from Farming
There are three methods in computing the gross income derived

from farming, namely:
1. Cash basis:
2. Accrual basis; and
3. Crop basis.
Cash Basis. The computation of gross income for this method

disregards the presence of inventory (meaning, inventory is not
yet income).
A farmer reporting on the basis of receipts and disbursements (in

which no inventory to determine profits is used) shall include in
his gross income for the taxable year the following:
a. The amount of cash or the value of merchandise or other

property received from the sale of livestock and products
which were raised during the taxable year or prior year;
b. The profits from the sale of any livestock or other items which
were purchased: and
c. Gross income from all other sources, rsec. 45, Rev. Regs. ivo. 2)
Notes:
1. The profits from the sale of livestock or other items that were purchased are
to be ascertained by deducting the cost from the sales price in the year in
which the sale occurs.
2. In the case of the sale of animals purchased as work animals or solely for
breeding or dairy' purposes and not for resale, the profit shall be the amount
of any excess of the sales price over the amount representing the difference
between the cost and the depreciation sustained. (Sec, 45, Rev, Reg, 2)
Accrual Basis. The computation of gross income for this method

considers the presence of inventory (meaning, inventory is part of
income for the yrear). The ending inventory is added as part of
gross income while the beginning inventory" is deducted to
compute the gross income.
Notes:
1. Farming gross income on accrual basis is ascertained by adding to the
inventory value of livestock and products on hand at the end ot the year the
amount received from the sale of livestock and products and miscellaneous
fjt ^,
V *,?* of ?^-;M, $,'4 ffc* y-f+ 4i,■?;«%/■ ft& ''r d

**?''*■' '•‘W? &Ofri *?,* v/*l sf ho* aonv* ''ft* »ftv*noX/ >**.** of '* f*t:^-
XV: -0-.4 on oar./: *-■ tv* .^0,'iuog of m* re*r ^4 -he //** ✓ / f/'s *Ari
y f*'**■■% X^-h^sed during 'fhe /o^r
, ... ., OC *4 feffij . ff*'\‘‘(/ 'S XJsAi/y'/i X, %?, \f-*-l*Trt'i‘*r"j ?’%.'f/lj " A' r <y
f** ***~J * * « n faA.sts*. Pom moorne at %<s? *&&>*? st- *bi. oe

'',,rr"'; ^ -n ‘r^ »*'**».v*rgr, fOec ^ V. /'*?,.. fvy
Mm me *r»e foho*?/fr>£ data

Sa.ev,
?a ay harvested and <*/>A HOO///>

daisy purchased ar,d sold 55 005
?*~m implement <vr>ld 5//;0
o( yaây purchased 45///1
Carrpr^ r//At r,i ferm implement :t 4,500
rajjy inventory end of year ^ ^ .'ielhn^, pnce 5,000
-"bier the cash and accrual methods h determined as
Cash Method. Acctj a! Method

'3- ^ ^ PI 00,000 PiOO/iCO
/• 5 _’ 7. ^ %r‘' '"•*•''•<?st end ofy%r 6,000
P^lay purchased and *,dd
- ^43,000) 5,000 / 5,000
*hp*^r'' *-ale of farm nr. Merner.t
>:'••K«X» ' 500 / 500
’ ^ fror'i fer.r. PIOS^^DO / P11JL50Q
iV /y
/
r * — —
| Difference = P6,000 ’nventcry, er.d:
1
'"*•'• hfference between cash and accrual method of income reporting of

’O;’ •'% busme** is the Increase or decrease in the inventory /Sec. 45, #eu
*"' ■ o ;-, rb/s case, the difference is ?6,000.
expenses m raising farm products are not treated as cost of the

solo, bur classified as farming ordinary' operating expenses
from fa."m;cg gross income.
.i,^r v^r»a; OasiS, inventories are carried at selling price. All crops and
v ^‘v - yrrA.xM are considered sold. If the total product produced has a
5 ^-co of K 00,000 of which during the year FU 00,000 were actually
* x,r 'a\r. i inen the er.d:ng inventory would be P6,000. Hence,
122 fttCOME TAXATION
Ar.r.â. cs.tfc. PlOG.QOt

Add. fr.^r.-cry. ^zxizr^ an ?T-oe ____
avaiishut a* price P206,QOCs
Le*w. fcvenrATy bes£r.r.:r-g 5: vtfhr.g price - 0.
Product prod .ced ar.d reported as sale P106.0y
4 Under the cash oaasar the h-aa on ssje of purchased livestock and farr:
product* fa net considered sn the cocspcsta.tion of gross income, while in the
accrual basis, such baa is an hern in :he cosn.pu'tataon of gross income.
Crop Basin. This method is employed by fanners whose crops

shall. be harvested, for rriore than a, year from the time of planting.
The pro-forma computation would be:
Gro?iS income of crop realized P xxx

Less: Entire cost of producing the crop xxx
Income P xxx
The entire cost of producing the crop is deductible only from

gross income in the year in which the crop v/as realized. (sec. *s, Rev.
Peg. No. 2}.
Illustration
In year 3, Ka Polinar, a farmer, planted Gemelina trees. In year 7,

he sold the trees when they were fully-grown. The costs of
producing the Gemelina woods were as follows:
Year:
3 P200,000
4 100,000
5 50.000
6 30.000
7 20.000
Total P400.00Q
If total sales of Gemelina woods amounted to P2,000,000, the

gross income using the crop method would be
Sales, year 7 P2,000,000

Cost of producing Gemelina woods:
Year 3 P200,000
Year 4 100,000
Year 5 50,000
Year 6 30.000
Year 7 20.000 400.000
Gross income, year 7 PI.600.000

j. Define “income.”
2. State the basic formula to determine taxable income using the net
worth method.
3. Define “net worth.”
4. Distinguish the following terms from income:
a. Capital,
b. Return of capital,
c. Revenue, and
d. Receipts.
5. When is an income not taxable?
6. What are the characteristics of a taxable income?
7. Explain “income constructively received.”
8. Discuss the sources of income and their taxability.
9. What are the classifications of income? Explain each.
10. Differentiate “normal tax” from “final tax.”
11. Identify the forms of income and their respective valuation.
12. Distinguish the four possible tax accounting periods.
13. Differentiate “cash” from “accrual” method of reporting income and
expenses.
14. What are the special methods of reporting income?
15. State the formula to compute (a) selling price, (b) contract price, and
(c) initial payments.
16.When should an “installment method” of reporting income allowed?
17. When should a “deferred payment method” of reporting income

allowed?
18. Differentiate “completed contract method” from “percentage of
completion method” of reporting income from long-term construction
contracts.
19.What are the sources of income from farming?
20. Differentiate the following methods of reporting income from farming:

a. Cash Basis,
b. Accrual Basis, and
c. Crop Basis.
184 INCOME TAXATION
Name: __ ____________ _____________ !__________ Score: ___________ _

Write True if the statement is correct or False if the statement i*
incorrect.
1. The networth method is commonly used in determining the

taxable income of taxpayers with complete accounting records.
2. Unrealized gain on trading securities reported in the profit-and-

i
loss statement is a taxable income.
3. Corporations comprising individual taxpayers are not allowed to

deduct personal exemptions.
4. The thirteenth month pay and other benefits amounting to

P82,000 and below are not subject to income tax.
Ciil linr mi«l nulmiH tltls pngr In ymu v""'*'***"

5. Declared dividends not yet received by the stockholders are
taxable income.
6. Incomes derived from unlawful activities are taxable income.
7. All Filipino citizens are subject to income tax on income derived

within and outside the Philippines.
8. A dividend is entirely earned within if a resident corporation

declaring dividend has three-year gross income within exceeding
50% before the declaration of dividend.
9. Normal taxes are usually subject to creditable withholding tax at

source.
10. The liability of paying the final income taxes withheld at source
rests primarily to the final tax withholding agent.
11. The Philippines has an average income tax rate in the entire
ASEAN region.
12. In general, all other passive income not subjected to final tax
should be taxed using the ordinary tax.
13. Sale of ordinaiy asset personal property by installment is

reportable as cash basis if the initial payment exceeds 25% of
the selling price.
problem 3-2 True or False

incorrect.
1. An increase in the value of property is income.
2. All increases in taxpayer’s net worth are taxable income.
3. The 13th month pay and other benefits amounting to P82.000 is

a nontaxable compensation income.
4. Net worth is the same as owner’s capital or shareholders’ equity.
5. A sale always includes return on capital.
6. Nontaxable incomes are generally excluded from reportable gross

income.
7. Most taxpayers elect to report income in a fiscal year basis.
8. In general, trading and manufacturing businesses use accrual

method while servicing businesses use cash method of reporting
income.
9. Cash method of reporting income can deduct prepaid expenses

in the year of payment.
10. A taxpayer engaged in installment sale of personal goods on a

regular basis is allowed to report income by installment only if
the initial basis exceeds 25% of the selling price.
11. An accrued interest income credited to the taxpayer is

considered constructively received.
12. The theoiy of income constructively received is designed to

prevent cash basis taxpayer to delay reporting income.
13. Income earned by a nonresident Filipino Citizen from all sources

is taxable in the Philippines.
14. If compensation is received in the form of notes or other

evidences of indebtedness, the basis of tax is the face value of
the instrument.
15. Premium paid by the employer on life insurance coverage of

employee wherein the beneficiaiy is the employer, the basis of
tax is the premium paid.
16. Under the accrual basis of reporting income, income is reported

in the year of collection.
186 INCOME TAXATION
Name: ____________________ _ Score:

incorrect.
1. Properties and labor are paralleled to trees while income are
fruits.
2. Passive income is subject to normal tax only if not subjected to
final tax.
3. The peso equivalent of a foreign currency as payment for
compensation is considered as the value of reportable income.
4. If the taxpayer is an individual, his taxable income shall be
computed on the basis of calendar year.
5. The income of a decedent person in the year of death, earned
from his properties before and after his death, are reportable
income of his estate.
6. Service business which is required to be reporting income using
cash basis can claim deduction of related expenses determined
using accrual basis.
7. In installment method, the excess of mortgage assumed over cost
of property sold is considered as part of the initial payment.
8. In installment sale, if the initial payment exceeds 25% of the
selling price, the transaction is considered cash sales.
9. The deferred payment method adopts the present value of
reporting income.
10. Foreign corporation which is doing less than 50% of its business
within and more than 50% of its business without is considered
as resident foreign corporation.
11. The income distribution of foreign corporation which is doing
less than 50% of its business within is considered as partly
earned within and partly earned outside the Philippines by the
recipient of such income distribution.
12. Either calendar or fiscal period consists of twelve (12) months
which starts from Januaiy to December of the taxable year.
13. The option for reporting farming income on cash or accrual basis
pertains only to those farm products that were raised or
produced in farming activities.
14. The main difference on the amount of income reported under
cash and accrual basis of reporting farming income is the change
in peso value of inventories.
15. Under the crop basis, the entire cost of producing the crop is
deductible only from gross income in the year in which the crop
was realized.
Name: __ __________ _________________________ Score: _____ _ _______
problem 3-4 Multiple Choice

1. Which of the following must not be included as part of income?

a. Personal consumption
b. Accumulated wealth
c. Additional investments
d. Savings
2. Which of the following does not describe income?

a. Increase in taxpayer's wealth
b. Return of taxpayer’s wealth
c. Realization or receipt of gain
d. Earnings constructively received
3. Total assets minus total liabilities is equal to

a. Net worth.
b. Owner’s capital.
c. Shareholders’ equity.
4. The principal amount of time deposit in the bank (point of view of

depositor) is a/an
a. Income.
b. Revenue.
c. Capital.
d. Receipt.
5. Statement 1: All wealth that flows into the taxpayer’s hand other
than mere return of capital is income.
Statement 2: All earnings are taxable with income tax.
6. Which of the following items is not included in the determination of

taxable income?
a. Realized gain
b. Realized loss
c. Gift
d. Income derived from the gift
7. Which of the following is not a criterion of a taxable income?

a. There must be gain.
b. The gain need not be actually received.
c. The gain must be included by the law as treaty from taxation.
d. The law as treaty from taxation must exclude the gain.
188 INCOME TAXATION
8. Which of the following is classified as income?

a. Damage recovery due to physical injuries
b. Return of capital
c. Excess of selling price over cost of assets sold
d. Gift received
9. Which of the following is not a characteristic of income?

a. Increase in taxpayers wealth
b. Return of taxpayers wealth
c. Realization or receipt of gain
d. Earnings constructively received
10. If a property is received in lieu of cash compensation, the basis of tax

is the
a. supposed amount of cash to be received.
b. agreed value of the property received.
c. fair market value of the property received.
d. salvage value of the property received.
11. If services are rendered for the cancellation of debt, the basis of tax
(point of view of debtor) is the
a. fair market value of the service rendered.
b. amount of obligation omitted.
c. fair market value of the debt cancelled.
d. supposed amount of cash to be received.
12. Which of the following businesses is/are normally reporting income

on accrual basis?
a. Real property lessor
b. Professional partnership
c. Trading business
d. Brokerage business
13. Which of the following is/are generally subject to final tax?

i. Compensation income
ii. Business income
iii. Passive income
iv. Capital gain
Choices:
a. i, ii, iii and iv
b. i and ii only
c. iii and iv only
d. iii only
C M p t e r 1 0Of*C«pt of
Mam*: V-Xyrcv

Snûroie th': leM/;/ fha* t / H A i u t s h * V:'-i* y/yj-
S Whirl, of »he following P; >P,'.'/* *'i /if; a! ,1 1 V * > f /.y

a. prf/f income
b. ; l!b month pay arid ofh'-r b'tu'dl*, ,r, < ^ p;/^ *>'/>
r Royal
d. Ordinary ypm<\
2. Statement J: In general, paWve ;n<»j,Vr v/hb;n the

Philippine jft oubje'l t/> firm) v/ffb holding piZ
Statement 2: All 7/jibbolding faxeft pn ^re t^xe?>.
a. Orly Mate merit J m eur/ect,
b. Only Maternent 2 r; correct,
r< Both statement e ore correct.
d. Both Maternent-;, ore not correct,
3. Under the accrual method, thin tcct require-; that the right to income
or liability be fixed and the amount of income or 11aoility be
determined with reasonable accuracy.
a. All-even to test
b. Question of fact test
o. Economic performance test
d. 'Iran cacti on test
4. Which of the following is not a compensation income?

a. Professional fee, net of creditable withholding tax
b. Separation pay due to closure of the employer's business
t. Separation pay due to early retirement
d. Terminal pay inclusive of P82,000 13,h month pay
5. Which accounting method is used when income or expenses are

recognized regardless of related collection or payment?
a. Cash method
b. Accrual method
c. Hybrid method
d. Installment method
6. Statement 1: In case of death, the taxpayer’s taxable income and

deductible expense should include only the amounts accruing to the
date of his death.
Statement 2: A taxpayer who changes the method of accounting
employed in keeping the books shall, before computing his income
upon such new method for purposes of taxation, secure the consent
of the BIR Commissioner.
190 INCOME TAXATION
d Both statements are not correct.
7. If a property is received in lieu of cash compensation, the basis of tax

is the
a. supposed amount of cash to be received.
b. agreed value of the property received.
c. fair market value of the property received.
d. salvage value of the property received.
8. The payor of passive income subject to final tax is required to

withhold the tax from the payment due the recipient. The
withholding of the tax has the effect of
a. a final settlement of the tax liability on the income.
b. a credit from the recipient's income tax liability.
c. consummating the transaction resulting in an income.
d. a deduction in the recipient's income tax return.
9. Which of the following accounting period is acceptable as basis for

reporting the annual taxable income of a taxpayer?
a. Fiscal year
b. Calendar year
c. That which the Commissioner prescribes under a particular
circumstance
d. All of the above
10. Which of the following'taxpayers is prohibited to use fiscal year as

basis for filing returns and computing income?
a. Individuals
b. General co-partnerships
c. Corporations
d. Associations
Name:____________________ _______________________ Score: _______________

1. This theory of constructive income presupposes the existence of

income on transactions supposedly not subject to tax.
a. As if theory
b. Actual gain theory
c. Actual receipt theory
d. Tax benefit theory
2. A tax period wherein a taxpayer is required to file and pay within

differing deadlines depending on the nature of income earned.
a. Calendar period
b. Fiscal period
c. Short period
d. Variable period
3. Which of the following is correct?

Reportable subject to
Final tax Tax Return
a. Compensation income No No
b. Business income Yes Yes
c. Passive income earned within Yes No
d. Capital gain on real estate (capital asset) Yes Yes
4. A method of reporting income that is used when collection can be

made over a relatively long periods of time with a strong possibility
that full collection will not be made.
a. Percentage of completion method
b. Installment method
c. Long-term construction contract method
d. Deferred payment method
5. Under which case is an installment method of reporting income on

installment sale allowed?
1. Movable property is regularly sold on an installment basis by a
dealer.
2. Sale of real property where the initial payments exceeds 25% of
the selling price.
Choices:
a. Only No. 1.
b. Only No. 2.
c. Both Nos. I and 2.
d. All choices are not allowed to report income by installment.
6. Which of the following sales is allowed to be reported under
installment reporting of income?
a. Regular installment sale of personal property
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Problem 3-7 Unrealized Gain

The statement of profit and loss of Pirut Corporation shows the following
data during the taxable year:
«
Operating income P3,000,000
Other income (loss):
Gain on life insurance - death of officer PI,000,000
Unrealized gain of trading securities 200,000
Interest income on notes receivable 150,000
Sale of scrap materials 50,000 1,400,000
Net income P4.400.0Q_Q
The correct amount of taxable income would be:

a. P4,400,000. c. P3,050,000.
b. P3,200,000. d. P3,000,000.
Problem 3-8 Increases in Wealth

Roy received increases in his wealth the following during the year:
Compensation for damages suffered due to accident P500,000

Annual salary 200,000
10% note for accounting service due after one year 150,000
Par value of 1,000 shares of stock as payment of
accounting services (fair market value per share, P120) 100,000
Increase in value of shares of stock 60,000
Increase in value of land 15,000
Gifts from friends . 5,000
Dividend income 2,000
How much is the taxable income of Roy?

a. P973,350 c. P467,000
b. P473,350 d. P458,350
Problem 3-9 Net Assets Approach

The records of Roco Trading for year 200A show the following:
January 1, 200A December 31. 200A
Assets P500,000 P300,000
Liabilities 150,000 50,000
During the year, the owner made a total withdrawal from the business
amounted to P240,000. How much is the net taxable income of Roco for
year 200A?
a. P240,000 c. P140,00
b. P190,000 d. P - 0 -
Problem 3 - 1 0 Net Assets Approach

The X Corporation reported the following changes during the year:
Increase in total assets PI,520,000
Decrease in total liabilities 330,000
Additional paid-in capital from stockholders 800,000
194 INCOME TAXATION
Ofvid•.*;d declared bu* not ye* paid 3©0/300

increase jrj retained earnmgs* dye to unrealized gain 50///;
How wuK;h i» the net taxable income of X Corporation for tbs year 2r/rf'
a PI ,350,000 c. P1/XXV000
b. PU 00,000 d. P 440,000
Problem 3 - 3 1 Increase in Wet Worth

T h e single
proprietorship retried the following changes during the yessr.
Increase in total assets P 25©///?
Decrease in total liabilities 160,0%
Additional investment to the business 5©/XX
Drawings during the year 20,00©
'ITie business income for the year is

a. P 00,000. a P4 30,000,
b. P330/)00. d, P450,000,
Problem 3 - 12 Return on Capital

On December 1, 200x, Mario started an Ice cream business with a
borrowed capital amounting to P2Q,000 at a monthly interest of 1%.
During the month, he spent P3,000 for the operating expense of the
kiosk, of which, *>2,000 for rent and the balance for purchase of ice
cream products for resale, Mario's total cash sales during the month
amounted to P30,000 with an inventory end of P7,50Q including a 60%
gross profit rate based on sale. At the end of the month, the Kiosk has
depreciated value of 1>2,900.
How much is the return on capital of Mario during December 200x?

a. J>21,600 c. PI 5,700
b, PI 5,900 d. PI 0,000
Problem 3 - 1 3 Return of Capital and Return on Capital

At the siart of the year, Noli's time deposit has a balance of P250,000. At
the end of the year, the account has a balance of P280,000. There are no
additional deposits and there are no drawings during the year.
How much is the return of capital and return on capital?

Ret urn of Capital Return on Capital
a, P2 50,000 P230/100
1). P280,000 P2 50,000
J >230,000 P 30,000
d P2 50,000 P 30,000
Problem 3 - 1 4 Income Realized

During 200x, dose bought a pared of land amounting to P500,000 (for
speculation). After several months, a school was constructed adjacent to
bis land whereby increasing the land's market value to P2,500,000. A
prospective buyer offered dose P2,000,000 plus 6% capital gains tax as
the purchase amount for the property. How much is the reportable gain
for 2O0x?
a. P - 0 - c. PI,500,000
b. PI,380,000 d. P2,000,000
Problem 3 -15 Income Constructively Received

Arom Corporation showed the following records related to its income:
Interest credited on peso-savings deposit, net of tax P 40,000
Matured interest on coupon bonds, not yet collected 80,000
Decrease in value of investments in bonds 50.000
Cancellation of indebtedness from SMC in which
Arom has equity investments 120,000
Increase in fair market value of SMC
equity investments 30.000
Profit share in joint venture not yet received 200,000
Payment of damages for unrealized profits deposited
in court by a competitor in favor of Arom Co. 60.000
Baaed on the items given, how much is the amount of realized income of
Arom Corporation?
a. P240,00Q c. P500,000
b. P450,000 d. P510,000
Problem 3 - 16 Income Realized

In year 1, X invested in real property the amount of PI,000,000. In year
2, the fair value of the real property is PI,500,000. In year 3, the
property was sold for PI,800,000 and incurred disposal cost of P50,000.
The amount of income for each year would be
Year 1 Year 2 Year 3
a. P 0 P500,000 P300,000
b. po P2 50,000 P250,000
c. P 0 P0 P750,000
d. P250,000 P250,000 P250,000
Problem 3 - 1 7 Taxable vs. Nontaxable Income

Orang’s income during the year are as follows: Salary P260,000
(including 13th month pay); Raffle winnings - P70,000 and Philippine
lotto winnings - P500,000.
How much is the taxable and nontaxable income of Orang?

Taxable Nontaxable
a. P310,000 P52Q,000
b. P240,000 P500,000
c. P300.000 P560,000
d. P240.000 P590,000
Problem 3 - 1 8 Sources of Income

Ogie is a resident Filipino Citizen. During the year, his earnings are as
follows:
196 INCOME TAXATION
Within Outside
Compensation P180,000 PI 20,000
Income from grocery store 50,000
Share in lotto winnings 100,000
The total income taxable in the Philippines would be

a. P230,000. c. P350,000.
b. P300,000. d. P450,000.
Problem 3 - 1 9 Sources of Income

From January to March of 20lx, Mr. C’s salary from employment in the
Philippines amounted to P250,000, net of P50,000 withholding tax. From
April to December 20lx his total income from employment in Japan
where he resided for the rest of the year, amounted to peso equivalent of
P630,000, net of foreign income tax of P70,0Q0. If Mr. C is a Filipino
citizen and an overseas contract worker (OCW), how much is his total
reportable income in the Philippines.
a. P250.000 c. P 880,000
b. P300,000. d. PI,000,000
Problem 3 - 20 Sources of Income

Peter Favorito is a resident German citizen. He received P600,000
dividend income from Sungad Corporation, a resident foreign
corporation. Data pertinent to the operation of Sungad Corporation is as
follows:
Philippines German _______ Total
Revenues P20,000,000 P10,000,000 P30,000,000
Operating expenses 14.000.000 4.000.000 18.000.000
Net income P 6.000.000 P 6.000.000 P12.000.000
The amount of Peter’s dividend income taxable within would be

a. P600,000. c. P300,000.
b. P400,000. d. P200,000.
Problem 3 - 2 1 Classification of Income

Records reveal the following earnings of Mr. Sabit, a resident Filipino
citizen, during a taxable year:
Salary as a university professor, net of P20,000 WTW P240.000
Income derived from audit services, net of 10%
creditable tax 135,000
Rent income, net of 5% CWT 114,000
Interest income, net of 20% final tax (Metrobank) 8,000
Dividend income, net of 10% final tax (Jollibee) 4,500
Gain from sale of personal car 3,000
Gain from sale of shares of stock - outside stock
exchange, net of 5% final tax 2,850
1. How much income is classified as compensation income?

a. P410,000 c. P260,000
b. P375.000 d. P240,000
2. How much is the total amount of income classified as income from

profession and business?
a. P273r000 ' c. P260,000
b. P270,000 d. P120,000
3. How much gross income is classified as passive income?

a. P21,000 c. PI 5,000
b. P15,350 d. PI 2,500
4. How much income is classified as capital gains?

a. PI 5,000 c. P10,500
b. PI2,500 d. P 6,000
Problem 3 - 2 2 Normal Tax vs. Final Tax

Kikay reports the following earnings:
Consultancy fee P240,000
Salary as a professor 300,000
Gain on sale of real property as capital asset (cost, P500,000) 400,000
Capital gain on sale of interest in a commercial partnership 100,000
Prizes in raffle ticket 10,000
Mow much is the gross amount of income reportable

amount subject to final taxes?
Subject to ITR Subject to Final Tax
a. P550,000 PI,000,000
b. P550,000 P 500,000
c. P540,000 P 510,000
d. P540,000 P 500,000
Problem 3 - 2 3 Normal Tax vs. Final Tax

Kiko reports the following earnings during the year:
Professional fee, net of 10% withholding tax P450,000
Salary, net of P60,000 withholding tax on wages 300,000
Capital gains - shares of stock, net of capital gains tax
of 5% on 1st PI00,000 gain, 10% on gain in excess
ofP100,000 149,000
Winnings, net of 20% passive income tax 40,000
Prizes 8,000
How much is the amounts of gross earnings subject to normal tax and
subject to final taxes?
Subject to
Normal tax Final tax
a. P868,000 P210,000
b. P868,000 P218,000
c. P860,000 P212,000
d. P810,000 P207,000
HMI INCOMI TAXATION
Problem 3 24 Cash Received i»» ('otnperiNMtion

( Hs, a public h( liool Icarhei, tarrived a monthly rfudi tuilhry (if f*l2,()()()
•f>i the fiint font months of flit* taxable year, Subsequently, he w/i*
piomoted mm m department head resulting lo on increase in hi* cash
mmIjuv •<> I * 1 f>,000 prr month, Hr Is entitled to Hi1*1 month pay which in
rfjunl to Ins gtoas basic pay during, Hie yeai (12 months).
Uir gioss compensation Inromr of Cris (luring tlir year including 13**
montli pny would hr
o. I* ISO, ()()(). c. |»| 68,000.
h. PI fS(,,()00. d, PI 82,000.
Problem 3 - 2 5 Property Received as Compensation

Atty. Pnsiclab received a second-hand car from his employer TA Law
Office for successfully defending a criminal case. The car has a cost of
P400.000 and its accumulated depreciation amounts to P300,000. The
prevailing market value of the car of the same model is P120,000, but the
new model is P500,000.
1 low much is the reportable gross income of Pasiclab?

a. P I 00,000 c. P400.000
b. PI 20,000 d. P500,000
Problem 3 - 2 6 Service Received in Lieu of Compensation

Danny Flora works as a caretaker with a monthly salary of P5,000 in the
house of Atty. Panfilo Salango. Atty. Salango successfully defended the
former against a vehicular accident case. The prevailing lawyer’s fee of
Atty. Salango is P6,000, which they agreed that such shall become Mr.
Flora’s salary for a month.
How much is the compensation income of Mr. Floro during month?

a. P6,000 c. PI,000
b. P5,000 d. P - 0 -
Problem 3 - 2 7 Notes Received in Lieu of Compensation

Mr. Teofilo Alcayde received a note with a face value of P30,000 as a
dissertation advising fee from Miss Nita Rica. The note is non-interest
bearing and is payable within one year. The prevailing market rate of the
same nature of note is 10%. The present value factor of 10% annuity of
PI is 0.909.
What is the amount of income to be reported by Mr. Alcayde upon receipt

of the note?
Compensation Interest
a. P30,000 P-0-
b. P27.270 P2,730
c. P27,270 P-0-
d. P27,000 P3,000
Problem 3 - 2 8 Notes Received in Lieu of Compensation

On June 30, 200A, Mr. Ely Felix received a two-year 12% interest-
bearing note amounting to P50,000 as a compensation.
As of December 31, 200A, what amount of income Mr. Felix shall report?
Compensation Interest
a. P50.000 P3,000
b. P50,000 P6,000
c. P47,000 P3,000
d. P47,000 P-0-
Problem 3 - 29 Accounting Periods

Ace Corporation reports its business income and, expenses using fiscal
year reporting ending September 30 of the financial year. Its total net
income from September 30, 201A to September 30, 20IB amounted to
P3,000,000 of which 60% comprised the first three quarters operating
period and 40% comprised the fourth quarter. It was determined that the
net income from January to September of 20IB has decreased by 20%
using the monthly average method of determining income but the fourth
quarter net income remains unchanged.
If Ace is an individual taxpayer, how much is his 201A reportable net

income before personal exemption?
a. P3,000,000 • c. P2,500,000
b. P2,700,000 d. PI,500,000
Problem 3 - 3 0 Accounting Periods

X regularly files ITR and pays income taxes on calendar basis. On August
31, 201 A, however, X applied to the BIR a change of accounting period
from calendar year to fiscal year ending to September beginning from the
current year and thereafter.
During 20.1 A, X shows the following income and expenses:

201A quarterly income and expenses
Noncumulative First Second Third Fourth
Rent income P250,000 P150,000 P400,000 P500,000
Operating expenses 100,000 50,000 150,000 200,000
Net income PI 50.000 P100.000 P250.000 P3QQ ,000
1. What is the effect (increase or decrease) to reportable net income if X

is an individual taxpayer?
a. P500,000 decrease c. PI50,000 increase
b. P300,000 decrease d. No effect
2. What is the increase (decrease) of reportable net income if X is a

corporate taxpayer?
a. P500,000 decrease c. PI50,000 increase
b. P300,000 decrease d. No effect
m INCOMt TAXATION
Problem 3 - 31 C**h v*. Accrual Method

V a smÎc proprietor engaged m service business, reported (hr following
business income and overuses;
Senior income 1*500,000
Collections during the vent 400,000
expenses actually incurred during (he vein 150,000
expenses paid during: the year 200,000
How much is the net income from business before personal exemption?
a. 1*350.000 c, P300.000
b. P340.000 d. 1*290.000
Problem 3 - 3 3 Cash vs. Accrual Method

In Maivh l, 201A. X Corporation reported the following business income
and expenses:
Sales PI,000,000
Cost of sales 600,000
Operating expenses 200,000
Cain from sale of old furniture 20,000
If 20° o of operating expenses of X prepaid expenses, how much is the
taxable income?
a. P260.000 c. P220.000
b. P240.000 d. P200,000
Problem 3 - 3 3 Sales Price, Contract Price and Initial Payments

The real property classified as capital asset with cost of P400.000 was
sold by installments in 4 years including the year of sale with the
following terms:
Down payments:
Cash (down payment) P 50,000
Fair market value of property received as
part of non-cash down payment 100,000
Mortgage assumed by the buyer 450.000
Installment payments:
First year (end of year of sale) 100.000
Second year 200,000
Third year 300.000
Fourth year 400.000
l. How much is the selling price of the installment sales?

a. P2.000.000 c, PI,600,000
b. PI,800,000 d. P 1,300,000
How much is the contract price?

a. P2.000,000 c. PI,600,000
b. PI,800.000 d. PI.200.000
How much is the initial payments?

p i =;n f>oo c.
< P250,000
P300.000
Problem 3 - 3 4 Selling Price vs. Contract Price

$ purchased P500.000 worth of real property and used the property as a
mortgage for a loan of P600,0000. payable in 10 equal annual
installments.
After the first annual installment payment, S sold the property to B for
P700.000, with 10% cash down payment, balance payable into 2 equal
installments starting January of next year. B assumed the remaining
balance of the mortgage.
How much is the contract price?

a. P700.000 c. P200,000
b. P540.000 d. PI 60,000
Problem 3 - 3 5 Installment Sales of Personal Property

.After 3 years. Mar sold a painting (capital asset) which he purchased in
200A at a cost of P3,000, on the following terms:
June 1. 200C downpayment PI,000
August 1, 200C installment due 1,000
October 1, 200C installment due 2,000
October 1, 200D installment due 4,000
October 1, 200E installment due 4,000
1. For year 200C, Marifel will report a gross income of

a. P9,000 c. P3,000
b. P4,500 d. PI,500
2. If Marifel is a dealer in paintings, for 200C he will report a gross

income of
a. PI,500 c. P4,500
b. P3,000 d. P9.000
Problem 3 - 3 6 Deferred Payment Method

On October 1, 200A, CF sold a car costing P500,000 payable as follows:
First year: Cash P300,000
Second year: 12% interest bearing note 200,000
Third year: 12% interest bearing note 500,000
How much is the total reportable income in year 200A?

a. P506,000 c. P300,000
b. P500.000 d. P 6.000
202 INCOME TAXATION
Problem 3 - 3 7 Income from Construction Contracts

Engr. Alcayde presented the following information regarding his road
construction project which is 50% completed at end of this year and was
30% completed at end of last year:
Contract price P50,000,000
Total estimated cost to complete 30.000. 000
Cost incurred previous year 10. 000. 000
Cost incurred this year 9,000,000
How much income is to be repor this year?

a. PI,000,000 c. P 6,000,000
b. P5,000,000 d. P10,000,000
Problem 3 - 3 8 Income from Construction Contracts

The contract price of the project is PI,000,000. Actual costs installed in
year 1 amounted to P90,000, and at that time the project is 20%
completed. How much should be reported as income under percent of
completion method for this year?
a. P550,000 c. P200,0C)0
b. P210,000 d. PI 10,000
Problem 3 - 39 Income from Construction Contracts

The total contract price of the project is PI,200,000. was
constructed as follows:
Year Cost for the vear Completion as of vear end
200A P432,000 60%
200B P184,250 85%
200C P103,750 100%
The income to be reported in year 200C under percent of completion

method would be
a. P480,000. c. P136,250.
b. P403,750. d. P 76,250.
Problem 3 - 4 0 Crop Basis

A citrus farm reported the following:
Year _____ Cost Harvest at Selling Price
1 P100,000 P - 0 -
2 P200.000 P - 0 -
3 P 50,000 P500,000
4 P 50,000 P400,000
How much should be the amount of reportable income in year 3?
a. PI 50,000 c. P450,000
b. P250,000 d. P500,000
: Problem 3 - 4 1 Crop Basis

A farmer started planting pulp trees in year 1 and harvested the trees 5
years later with total value of P2,000,000. The total direct costs related to
the harvest are as follows:
Year 1: P300,000 Year 3: P100,000 Year 5: P400.000
Year 2: P100,000 Year 4: P100,000
His income under crop basis of reporting is

Year 1 Year 2 Year 3 Year 4 Year 5
a. P 100,000 P300,000 P300.000 P300,000 P -0-
b. P 300,000 P100,000 P100,000 P100.000 P 400,000
c. P-0- P-0- P-0- P-0- P 1,000,000
d. PI,000,000 P-0- P-0- P-0- P -0-
Problem 3 - 4 2 Accrual Reporting of Income

A, a single proprietor engaged in service business, reported the following
business income and expenses:
Service revenue — accruing for current year PI,000,000

Collections during the year:
For service income - last year 300,000
For service income - current year 800,000
For service income - next year 100,000
Expenses actually incurred during the year 500,000
Expenses paid during the year 600,000
Required: Compute A’s net income from business before personal
exemption?
Problem 3 - 4 3 Accrual Reporting of Income

X Corporation reported the* following business income and expenses for
the taxable year 200A:
Cash sales P2,000,000

Sales on account 520,000
Advances from customers 400,000
Cost of sales 1,200,000
Operating expenses (30% prepayments) 600,000
Required: How much is X’s net income tor the taxable year 200AF
Problem 3 - 4 4 Farming Income

Assume the following data of a farmer Ibr two years:
Year l Year 2
Farm harvest 100 cavans 200 cava ns
Harvest sold 80 cavaiiH l O0 envans
Harvest unsold, year-end 20 eavans 30 cavans
Selling price 1’500/eavnu P500/envai\
Required: Compute the gross income using (a) cash and (b) accrual
methods.
204 INCOME TAXATION
Problem 3 - 45 Farming Income

Ka Pohr-ar. a farmer of Tacurong, reported the following revenues and
expenses in his farm for the year 200x:
Revenue from livestock and farm products raised P 50,000

Revenue from livestock and farm products purchased 150,000
Rem income, lease of one hectare farm 100,000
Farm equipment sold 25,000
Cost of livestock and farm products purchased 90,000
Unsold livestock and farm products raised:
Beginning 6,000
Ending 9,000
Carning value of farm equipment sold(heldfor 10 months) 25,000
Required: Compute for the gross income under the following situations:
1. Cash method
2. Accrual method
Problem 3 - 4 6 Farming Inpome

Erwin Serna, a farmer reported the following during the taxable year:
Beginning Inventory:
Livestock purchased P 50,000
Livestock produced 180,000
Ending Inventory:
Livestock purchased 100,000
Livestock produced 50,000
Cash purchases - livestock 175,000
Cash received:
Sale of livestock purchased 200,000
Sale of livestock produced 300,000
Rent of livestock for rent 50,000
Sale of livestock for rent (acquired at cost of PI 5,000
with accum, depreciation of P8,000 atdate of sale 10,000
Sale of machinery (acquired at cost of P50,000 with
accum. depreciation of P35,000 at date of sale) 20,000
Required: Compute the income from farming using (a) cash basis, and
(b) accrual basis.
Chapter 4
GROSS INCOME
GROSS INCOME DEFINED
Groî income mean* the pertinent :tem% of ;r,wr^ referred to m

Section 32(A) of the Tax Code. lx includes ah irs/jme frorr.
whatever source (uniefta exempt from tax by iav/y ;r.C udmg, but
not limited to. the following itemw
L Compensation for service?, in whatever form paid includir^r

fee^; salaries and wages, commissions, and similar items;
2. Gross income derived from the conduct of trade or business or
the exercise of a profession;
3. Gains from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and

11. Partners' distributive share from the net income of general
professional partnership. (Sec, 39, Rev, Regn. No. 2)
Accordingly, the definition of gross income includes a catch-all

clause (that is, "from whatever source") to supplement the
enumeration by including any non-enumerative items which can
properly be defined as "income."
Note: The term gross income whenever used without qualification is

comprehensive as defined above. It has different connotation from gross income in
the determination of the minimum income tax of corporations or gross income tax
of corporations. Gross income includes gross profit from ordinary business and
other income not subjected to passive income tax or final withholding tax.
206 INCOME TAXATION
GROSS COMPENSATION INCOME
Gross compensation income moans any remuneration for

rendering personal services (n«u. keg, 12 ho/. Generally, compensation
income is obtained from an employer-employee relationship
between payor and recipient, (km/, keg, 2 0H,:u>e..2,7H,i}
The basis upon which the remuneration is paid is immaterial in

determining whether the remuneration constitutes compensation,
Thus, it may be paid on I he basis 0/ piecework, or a percentage of
profits and may be paid hourly, daily, weekly monthly or annually,
(KfU, keg, No. J. OH, Sec, 2,78. l(Aj
There is no determination of compensation until the service is

rendered.
In general, every form of compensation income is taxable

regardless of bow it: is earned, by whom it is paid, the label by
which it is designated, the basis upon which it is determined, or
the form in which it is received. (Mtchie, krOemt rax Handbook, P. 1 1 2 /
Exception: The compensation income including overtime pay,

holiday pay, night shift differential pay, and hazard pay, earned
by Minimum- Wage Harriers (MWIS), who has no other returnable
income, are nontnxable and not. subject, to withholding tax on
wages. (R.A, ken. kegn, No, 10 200H)
When Does an Employer-Employee Relationship Exist?
Generally, an employer-employee relationship exists when the

person for whom services are rendered has the right to control
and direct the individual who performs the services, not only as to
the result in accomplishing the work but also as to the details
and means by which that result is accomplished. (Sve.5, rw. Reg. 6-82}
Remuneration for services constitutes compensation even if the

relationship of employes' and employee does not exist any longer
at the time when payment is rriudc between the person in whose
employ the services had been performed and the individual who
performed them, (ken, keg. No. 2 oh, sea. 2.78,1 (a/
Note#:
1. Compensation income. subject to lax in burnt on gross income less applicable
exemption!*. No business and personal expenses arc allowed as deductions
Irom gross compensation income.
Chapter 4 Gross Income 207
2. The rule on compensation income applies only to resident citizens, resident

aliens, nonresident citizens and nonresident aliens engaged in business in
the Philippines. It does not apply to nonresident aliens not engaged in
business. Neither does it apply to corporations, estate, and trusts because
compensation presupposes personal service.
Classification of Gross Compensation Income
The gross compensation income may be classified as follows:
1. Basic salary or wage
Salary refers to earnings received periodically for a regular

work other than manual labor, such as a monthly salary of an
employee.
Wages, on the other hand, are earnings received usually

according to specified intervals of work, as by the hour, day,
or week. An example is a carpenter’s daily wage.
Backwages are subject to income tax and the withholding tax

on wages. (BIR Ruling No. DA-073-2008, February 6, 2008)
2. Honoraria are payments given in recognition for services

performed for which established practice discourages charging
a fixed fee. The honorarium of a guest lecturer is an example.
3. Fixed or variable allowances
In general, fixed or variable transportation, representation,

COLA and other allowances that are received by a public
officer or employee or officer or employee of a private entity, in
addition to the regular compensation fixed for his position or
office, are compensation subject to withholding tax. (Rev. Reg. No.
2 -98, Sec. 2.78-1(A)(6)(a); Rev. Reg.6-82, Sec.2c)
Any amount paid specifically, either as advances or

reimbursements for traveling, representation and other bona
fide ordinary and necessary expenses incurred or reasonably
expected to be incurred by the employee in the performance of
his duties are not compensation subject to withholding tax, if
the following conditions are satisfied:
a. It is for ordinary and necessary traveling and

representation or entertainment expenses paid or incurred
s
WSM* t f i / f i f f / H
o r t o In c o m e arirJ m lY ih o M im t , t & jc , imp Puling &

/ > / (f'S /} '//f,) / / / ; yjl't't 4of ft) (»* *ffib*:r 1 'S/P/l)
Chapter 4 Gross income 209
4- Commission is usually a percentage of total sales or on

certain quota of sales volume attained as part of incentive,
such, as sales commission.
5 Fees are received by an employee for the services rendered to

the employer including a director's fee of the company, fees
paid to the public officials, such as clerks of court or sheriffs
for services rendered in the performance of their official duty
ever and above their regular salaries.
Legal fees paid by a union on behalf of its president constitute

compensation. (Micrie, Federal Tax Handbook, p. 113-114-/
Marriage fees, baptismal offerings, sums paid for conducting

masses for the dead, and other contributions received by a
clergyman, evangelist, or religious worker for sendees
rendered are considered compensation, tsec. *0 , Rev. Regs. :so. 2 t
c. Tips and gratuities
Tips or gratuities paid directly to an employee (by a customer

of the employer) which are not accounted for by the employee
to the employer are considered taxable income, but not
subject to withholding tax. {Rev. Reg. Vo. 2-98, Sec. 2.73.1-At
~ Hazard or emergency pay
This is an additional payment received due to workers’

exposure to danger or harm while working. This is normally
added to the basic salary together with the overtime pay and
right differential pay to arrive at gross salary.
hazard, overtime, night shift differential and holiday pay of a

nhrhmum wage earner (MWE) is nontaxable, as long as the
\F,VE has no other reportable income. (RA. 9504)
Retirement pay
h refers to a lump sum payment received by an employee wTio

.tas served a company for a considerable period of time and
-tas decided to withdraw from work into privacy. (&e^. Reg. &A2r
lec. 24
general, retirement pav is taxable except in the following

IN< <>M» I AXAMON
I) : ; m < t , ' i i ! i ihh« hm ip p<«yn
KVl it mint! |*iiV f l ‘ * dur to old fiyr provided thfiit f fa

rnllmviug mpiiriilrn mr niH,
m Thr rrlimnrnl profit mn ifs f t pprov^d by tb** hlk
Commlunionci;
I), II be* n f r u n o n n b U ' benefit plan, i * %
implrmrnlntion mind be f a i r f i n d equitable f o r the
benefit of all employe™ (r.g, f r o m president t o laborer);
e. The retiree should hove been employed for 10 year* fo
thr finicl company;
d. 'Phi' retiree should hove been 50 years old at the time
of retirement; mid
t\ It should have been availed of for the first time.
<). Separation pay
Separation pay is taxable if voluntarily availed of. It shall not

be taxable if involuntary. Examples of involuntary separation
are:
a. Death;
b. Sickness;
c. Disability;
d. Reorganization/merger of company; and
e. Company at the brink of bankruptcy.
When a company is at the brink of bankruptcy, the sequence

of satisfying the company’s indebtedness should be in this
order:
1) BIR
2) Employee
3) Creditors
As a rule, any amount received by an official or employee or

by his heirs from the employer due to death, sickness or other
physical disability or for any cause beyond the control of the
said official or employee (such as retrenchment, redundancy,
or cessation of business) are exempted from tax.
The phrase “/or any cause beyond the control of the said
official or employee” connotes involuntariness on the part of
the official or employee. The separation from the service of
4 GfV'WP ItH oino
*11
\'v v't.Vti''M.l m omplovor must not hr imkcd Im m imlinird by

hmv
Vmoumx itveivcd hv reason ol involuulmy Hcpmntlon remain

exempt (t\^t\t income tn\ even it the nflUitd or (hr employer, el
the nine of separation. bud tetidned lcwt» Hum len (ID) yemn
of service and or vs below TO yearn of age.
Any payment movie by on employer to nn employee on

account of dlimioMl constitutes compensation regardless of
whether the employer is legally bound bv ronlrnct, slid t i l e , or
otherwise. to moke such payment. (km, kw No. j *>h. sw-..
' *s \ a.:
0 Pension
This vs a stated allowance paid regularly to a person on las

retirement or to his dependents on his death, in consideration
ot* past services, meritorious work, age, loss, or injury.
Pension pay is taxable unless the law states otherwise, or

unless the B1R approves the pension plan of a private
company. (See retirement pay under gross compensation
income. s*v. eoa. m\\)
Note Gain from redemption of shams in mutual fund is exempt from income
tax S<x'-v'- B^h. \7KY'/
I. Vacation and sick leave
The following rules shall be observed in determining whether

money received for vacation and sick leave is taxable or not:
a. If paid or availed of as salary of an employee who is on

vacation or on sick leave notwithstanding his absence
from work, it constitutes taxable compensation income.
{Rev. Reg. 6S2?2d)
b. Monetized value of unutilized vacation leave credits of ten

(10) days or less which were paid to private employees
during the year are not subject to tax and to the
withholding tax. (Rev. Regs. No. 5-2011)
c. Monetized value of vacation and sick leave credits paid to

government officials and employees are not subject to
income tax and to the withholding tax. (Rev. Regs. No. 5 -201 1)
INvaHM 1AXAVION
Tfeirte+ntli nwmth *%*y Atui other henettin
-o'* \ \ v\v‘: o\hov benefits me not taxable if thr

■ -uum* s rSJhOOO 01 tc**. Any amount exceeding l\H,>,()()() |fi
WAbCe. v' «< AW W. VY*** V 5 -AO I.\
*7*,e ';>rv> u\v ,K A. \0PvvA nieivased tho 1 d<h month pay and
A A4TT beucths fxwm l\'0,000 to P8,h000.
a FV.tiê benefits And de minimis
7:u ?a\ Code defines fringe benefits as “any good, service, or

e: her Oer.cn: furnished or granted by an employer, in cash or
:r surd* :r. addition to basic salaries of an individual
empiryee ~ -s.v. At mkc
î>e :v.::v/:;.:sT benefits are privileges of relatively small value as

ever, by the employer to his employees. * Under Revenue
Regulations No. 5-2011 as amended, they are not considered
us romper: sation subject to income tax and consequently to
ru rich tiding tax.
7-US topic is thoroughly discussed in Chapter 6 of this book.
: - Overtime pay
This refers to premium payment received for working beyond

regular hours of work which is included in the computation of
gross salary of employee. Back pay and overtime pay
constitute compensation.
! o ProGt sharing
h is the proportionate share in the profits of the business

received by the employee in addition to his wages.
- 7, Awards for special services
- oe amount received as an award for special services of

err, proyee, or suggestions to employer resulting in the
prev*:; yon of theft or robbery. Awards for past services and
a.*: ,Tjz 'if(. :j)h0 compensations.
17. Beneficial payments
Beneficial payments such as where an employer pays the

income tax owed by an employee are additional compensation
income.
18. Other forms of compensation
Other forms received due to service rendered are

compensation paid in kind. It is to be noted that
compensation can be paid in kind but taxes are generally paid
in money. For example, an insurance premium paid by
employer for insurance coverage where the heirs of employee
are the beneficiaries is the employee’s income.
Illustration
Miss Pina Palad, single, reported the following income for the
taxable year 200A:
Salary for the year P384,000

13th month pay 33,000
Honorarium as a speaker 2,000
Commissions 5,000
Fees as a director 50,000
Availed vacation leave pay (included in the salary) 12,000
Cost of living allowances 9,000
Interest income from time deposit in the BPI 3,000
Royalty income from mining, net of final tax 70,000
Miss Palad retired at the age of forty-five as of December 31,

200A, receiving a retirement pay of PI,000,000. What is the gross
taxable compensation income of Miss Palad for 200A?
The gross taxable compensation income of Miss Palad for 200A

would be:
Salary for year 200A P 384,000

Honorarium as a speaker 2,000
Commissions 5,000
Fees as a director 50,000
Cost of living allowances 9,000
Retirement pay 1.000,000
Gross taxable compensation income PX4JLQJ2QQ
214 INCOME TAXATION
Notes:
J The retirement pay of Miss Palad is subject to tax even though her employer
complied with the retirement requirements because she retired at the age of
forty-five.
2. With regards to the vacation leave pay, the above situation reveals that the
vacation leave pay is availed of and included as salary; hence, it is taxable.
3. Cost of living allowance is taxable.

4. Interest and royalty incomes are subject to final withholding tax. They are
passive income, not compensation income; therefore, these are no longer
reportable in the annual tax return.
5. The nontaxable 13th month pay is now P82,000.
Shares of Stock Received as Compensation

Compensation paid to an employee of a corporation in its stock is
to be treated as if the corporation sold the stock at its market
value and paid the employee in cash. (Sec. 4i, Rev. Regs. No. 2)
Hence, if compensation is received in the form of shares of stock,

the fair m arket value of the shares of stock at the tim e the service
is rendered is the basis of tax.
Illustration
On March 31, 200B, Atty. Diosdado Doctolero, a corporate lawyer

of JC Corporation, received 200 JC shares of stocks with a fair
market value of P90 per share as of March 31, 200B. The shares
of stock were intended to pay the services rendered by Atty.
Doctolero on December 200A at which time the fair market value
was P75 per share. The par value per share is P50.
The compensation income of Atty. Doctolero is computed as

follows:
FMV per share when service was rendered P 75

Number of shares received 200
Gross compensation income P15.000
Chapter 4 Gross Incorns
Stock Option
A Mock option if* a privilege granted to some key employees of a
corporation or other entities to avail of the said corporation's
share of Mock In the future for a certain price,
Under f/MC No, 79 2014, Mock options con either he (a) equity-
settlement option, or (b) cash settlement option.
Equity-settlement option is a stock option granted hy a person,

natural or juridical, to a person or entity entitling said person or
entity to purchase shores of stocks of a corporation, v/hich may or
may not be the shares of stock of the grantor corporation,
Cash-settlement option entitles the holder to receive cash,

equivalent to the difference between the actual fair market value
ff'MV) of the share and the fixed nominal value of the shares of
stock set m the grant of the option, at a specific date or period.
The following are the salient provisions of RMC No, 79-20 J4;
J Grant of options:
a. If the stock option was panted due to employer-employee

relationship and no payment was received for such grant,
the grantor-employer cannot claim deduction:: for the
grant of the option,
b, if the option was granted for a price, the full consideration

shall be subject to capital gains tax.
Illustration
BN Corporation granted 1,000 stock options to its employees

at par value per share of 0100, At the time of the granting of
the option, the fair market value per share was 0180.
What are the tax treatments if the stock options were granted
H) Without payment received by SN Corporation?

(2) For a price at PI 20?
216 INCOME TAXATION
Answers:
(1) If the stock options were granted without payment, the

option is not subject to income tax, and at the same time
the stock option can no longer be deducted as salary
expense of the employer corporation.
(2) If the stock options were granted for an option price of

PI20 per share, the capital gains tax would be
Full consideration (PI20 x 1,000) P120.QQQ
Capital gains tax:

First P100,000 x 5% P5,000
Excess P20,000 x 10% 2.000 P7.QQ0
Notes:
a) RMC No. 79-2014 further provides that the issuance of the stock
option is subject to documentary stamp tax amounting to seventy-
five centavos (P0.75) on each Two Hundred pesos, or factional part
thereof, of the par value of the stock, or in the instance that the
stock has no par value, the amount equivalent to 25% of the DST
paid upon the original issue of the stock subject of the option.
b) The first P100,000 of capital gains is subject to 5% CGT rate; the

excess is subject to 10% CGT rate.
2. Sale or transfer of options:
a. The sale, barter, or exchange of stock option by the

grantee is treated as sale, barter, or exchange of shares of
stock not listed on the stock exchange, thus subject to
capital gains tax if transferred for a consideration.
b. If the option is sold or transferred without any

consideration, it shall be treated as a donation subject to
donor’s tax, basing on the FMV of the option at the time of
donation.
Illustration
Assume further that Edil Pat, one of the employees of SN

Corporation, received stock options of 100 shares with FMV of
PI80 per share. How much is the appropriate tax imposed if
the options were
(1) sold for P200 per share?
(2) transferred to his friend without any consideration?
Answers:
1) If the stock options were sold for P200 per share, the
capital gains tax would be PI,000, computed as follows:
Capital gains tax [(P200 x 100) x 5%] PI.000
(2j Jf the stock options were transferred to his friend without

any consideration, the donor’s tax would be
Donor’s tax [(P200 x 100) x 30%) P6.0Q0
Ifotet: The donor’s tax rate to a stranger (not relative to the 4th degree
consanguinity) is subject to a donor’s tax rate of 30%. If a gift is given to a 4th.
degree consanguinity relative, the applicable donor’s tax would be:
N e t G i f t T a x Plus O f the
O ver Not O ver Shall Be % Excess O ver
0 - PI 00,000 exem pt -0- 0-
P 100,000 200,000 -0 - 2% P100,000
200,000 500,000 P 2,000 4% 200,000
500,000 1,000,000 14,000 6% 500,000
1,000,000 3,000,000 44,000 8% 1,000,000
3,000,000 5,000,000 204,000 10% 3,000,000
5,000,000 10,000,000 404,000 12% 5,000,000
10,000,000 & above 1,004,000 15% 10,000,000
3. Exercise of options:
The difference between the book value/FMV of the shares,

whichever is higher, at the time of the exercise of the stock
option and the price fixed on the grant date shall be taxed
depending on the grantee, as follows:
• Rank-and-file employee: subject to income and

withholding tax on compensation;
• Supervisory or managerial position: subject to fringe

benefit tax;
• Supplier of goods or services: subject to the relevant

withholding tax at source and other taxes applicable;
• Person, natural or juridical, who is not an employee or

supplier: subject to donor’s tax.
218 INCOME TAXATION
Illustration
Assume that 1,000 stock options were granted to Miss Malou

Wang, the President of SN Corporation, for a stock option
price of PI00 per share. At the time when the stock options
were exercised, the fair market value per share was PI34.
The applicable tax on the exercise of stock options would be:
Excess of FMV over stock option price

[(PI34 - P100) x 1,000] P34,000
Divided by grossed-up monetary factor 68%
Grossed-up monetary value P50,000
Multiplied by fringe benefit tax rate 32%
Fringe benefit tax on the exercise of stock option P16.000
Note: The thorough discussions of Fringe benefit Tax are in Chapter 6 of this
book.
Cancellation of Debt
The cancellation and forgiveness of indebtedness may amount to
a payment of income, gift, or capital transaction, depending upon
the circumstances. (Sec. so, Rev. Regs. No. 2 .) The following rules shall
then be observed:
1. If a creditor merely desires to benefit a debtor and without any

consideration cancels the debt, the amount of the canceled
debt is a gift, not an income of debtor.
2. If a corporation to which a stockholder is indebted forgives the

debt, the transaction has the effect of the payment of a
dividend income to debtor.
3. If, however, a debtor performs services for a creditor, who in

consideration thereof cancels the debt, the debtor realizes
income for his services to the extent of the amount of debt
cancelled.
Illustration
Miss Mari Utang, a computer encoder, borrowed PI0,000 payable

within two months from Mr. Ulysses Chan, her employer. Miss
Utang was not able to settle her debts on the stipulated time of
payment. However, Mr. Chan cancelled her indebtedness in lieu

of her two months services.
The cancelled indebtedness of PI0,000 shall be considered

compensation income of Miss Mari Utang.
Insurance Premiums as Compensation

These are premiums paid by the employer on life insurance
coverage of the employee wherein the beneficiary is the
employee’s family. These constitute taxable income on the basis
of the amount of premium paid. (Sec. 40 , Rev. Reg. No. 2)
t
Illustration
Baguio Water Supply (BWS) paid the life insurance premium of

Mr. Vincent August amounting to P5,000 per year. The
beneficiary of the proceeds of insurance is Mrs. August.
Mr. August earned P5,000 compensation in relation to life

insurance premium paid in his behalf - a deductible expense of
BWS because the beneficiary is other than the employer.
However, if the beneficiary of the life insurance is the employer,

such payment of insurance premium shall neither be part of the
employee’s compensation income nor shall it become the
employer’s deductible expense. (Sec. 36[A](4), nirq
Taxability and Deductibility of Life Insurance Premium Paid

by the Employer
Beneficiary
Employee V Employer
I Taxable compensation of the employee?____ Yes ........| _ No
; Deductible operating expense of the employer? Yes l No
Income Tax Paid as Compensation

For income tax paid by the employer in favor of the employee, the
basis of tax is the amount of tax paid.
220 INCOME TAXATION
Illustration
Magnolia Corporation pays the income tax of Miss Cristine Leung,

being the Vice-President for Operations. Assuming that the
amount of Miss Leung’s salary is P300,000 and income tax paid
is P50,000, the gross income of Miss Leung is P350,000.
Convenience of the Employer’s Rule

This tax rule provides that allowances in kind furnished to the
employee for and as a necessary incident to the performance of
his duties are not taxable. Examples are food and lodging benefit
by a household maid, driver, etc.
Living Quarters
The following rules govern the living quarters and meals:
1. When livii^; quarters are furnished in addition to cash salary,

the rental* value of such quarters should be reported as
income. (See. 41, Rev. Regs. No. 2)
2. However, if living quarters or meals are furnished to an

employee for the convenience of the employer, the value
thereof need not be included as part of compensation income.
(Rev. Reg. No. 2 - 98, Sec. 7.78.1(A)(2)
Unless provided for the exclusive benefit of the employer, the

rental value of living quarters is compensation income to the
employee to the extent of his reasonable needs, and the excess
shall be considered as expenses of the corporation. (Arthur Henderson
vs. Collector of Internal Revenue, I SCRA 650)
Meals Subsidized by Employer

The value of any board and lodging furnished by an employer is
Ordinarily taxable to the employee. (Michie, Federal Tax Handbook, p. 121)
The exclusion for meals is allowed only when meals are furnished
or subsidized to an employee for the convenience of the employer,
and incidental to the requirement of his work or position. (Sec. 2(a),
Rev. Regs. No. 2)
Remuneration for Casual Labor
The following rules shall be observed regarding remuneration for

casual labor:
1. Remuneration for casual labor not in the course of an

employer’s trade or business is not considered compensation,
(Rev. Reg. No. 2 - 98, Sec. 2.78.1 (B)(4)
The term “casual labof includes labor which is occasional,

incidental or regular. The expression unot in the course of the
employer's trade or business” includes labor that does not
promote or advance the trade or business of the employer;
2. Any remuneration paid for casual labor (that is, labor which is
occasional, accidental or irregular, but which is rendered in
the course of the employer’s trade or business) is considered
compensation; and
3. Any remuneration paid for casual labor performed for a

corporation is considered as compensation.
Illustration
Miss Adalyn owns the Choco Company, a chocolate

manufacturihg business in Baguio City. She employs the
following persons during a taxable year for a short period of
time and pays their related remuneration.
Workers Services rendered Status Amount
A Repair service - home of Adalyn 5 day work PI,500
B Repair service - Choco Company 10 day work 4,000
C Accounting clerk Casual (3 months) 18,000
D Store helper Casual (2 months) 9,600
How much is the total remuneration considered as

compensation from casual service received?
The total remuneration considered as compensation for the

year is P31,600, computed as follows:
B Repair service - Choco Company 10 day work P 4,000

C Accounting clerk Casual (3 months) 18,000
D Store helper Casual (2 months) 9.600
Total compensation P31,600
Note: The payment for repair service in the home of Adalyn is not considered
compensation because it is not business-related, but a household-related
service.
222 INCOME TAXATION
GROSS INCOME FROM BUSINESS AND PROFESSION
Business Defined
Business means any commercial activity engaged in as a means
of livelihood or profit of an individual or group of individuals.
Examples are trading, merchandising, manufacturing and other
similar activities.
Profession Defined
For tax purposes, profession is primarily any endeavor or work
requiring specialized training in the field of learning, art, or
science engaged in as a means of livelihood or profit of an
individual or group of individuals. In general, a practice or
profession is a service business. Examples are Certified Public
Accountants, Lawyers, Medical Doctors, and the like.
Gross Income from Business

The gross income from business is classified into several groups,
namely:
1. Manufacturing;
2. Merchandising or Trading;
3. Servicing;
4. Farming; and
5. Long-term contract.
In case of manufacturing, merchandising or mining business,

Gross income shall mean gross sales less sales returns,
discounts and allowances, and cost of goods sold (Sec. 27 [au nirc),
plus other items of income not subjected to final tax, and other
incidental or outside operations or sources. (Sec. 43 , Rev. Regs. No. 2 )
In determining gross income, subtractions should not be made for

depreciation, depletion, selling expenses or losses or for items not
ordinarily used in computing the cost of goods sold, (ibid.)
In the case of taxpayers engaged in the sale of service, gross

income is based on gross receipts less returns, allowances,
discounts. (Sec.27 (a )nirc)
Gross Income 223
Copter 4
Illustration
Cabreros Store has just gone through its initial operation and
provided the following data to determine the gross income for the
current year:
Sales P240.000
Merchandise inventory, end 20,000
Sales returns and allowances 10,000
Purchases 150,000
Sales discounts 30,000
Gains from sale of scrap materials 5,000
The gross income of Cabrero’s Store would be
Sales, net of discounts, P30,000; retum/allowances, P10,000 P200.000

Less: Cost of goods sold (P150,000 - P20,000) 130.000
Gross profit from sales P 70,000
Add: Gains from sale of scrap materials 5.000
Gross income P 75,QQQ
The Cost of Sales

Cost of goods sold shall include all business expenses directly
incurred to produce the merchandise to bring them to their
present location and use, isec. 27(A), nircj. The cost of sale is
deducted from the net sales to calculate gross income from
business. Cost of sales of a business may be classified as follows:
L Cost of goods manufactured and sold of manufacturing

concern;
2. Cost of goods sold of trading or merchandising concern; and
3. Cost of service of servicing concern. (Sec. 27[A], nirc)
Cost of Goods Manufactured and Sold

For manufacturing business, “cost of goods manufactured and
sold” shall include all costs of finished goods that are sold such
as raw materials used, direct labor and manufacturing overhead,
freight cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse. (Sec. 27[aj, nirc)
224 INCOME TAXATION
Illustration
Assume the following data of Golden Fiy Manufacturing:

Sales P6.100.000 Purchase discounts P 40,000
Sales returns and allowances 100,000 Raw material’s insurance 50,000
Raw materials, beginning 200,000 Freight - in 80,000
Raw material purchases 3,600,000 Direct labor 500,000
Raw materials, ending 300.000 Manufacturing overhead 210,000
Golden Fry’s gross income is computed as follows:

Sales P6,100,000
Less: Sales returns and allowances 100.000
Net sales P6,000,000
Less: Cost of goods manufactured and sold:
Raw materials used:
Raw materials, beginning P 200,000
Raw material purchases 3,600,000
Raw material’s insurance 50.000
Freight - in 80.000
Purchase discounts ( 40,000)
Raw materials, ending ( 300.000) P3,590,000
Direct labor 500.000
Manufacturing overhead 210.000 4.300.000
Gross income P1.700.0QQ
Cost of Goods Sold of Trading or Merchandising Concern

Cost of goods sold of trading or merchandising business refers to
the invoice cost of the goods sold, plus import duties and freight
incurred in transporting the goods to the place where they are
actually sold, including insurance while the goods are in transit.
(Sec. 27 [A], NIRC)
Illustration
Assume the following data of Diamond Grocery:

Sales P6,100,000 Purchase returns ' PI 00,000
Sales returns/allowances 60,000 Purchase discounts 50,000
Sales discounts 40,000 Freight - in 80,000
Inventory, beginning 110,000 Inventory^, ending 300,000
Purchases 3,600,000 Insurance for goods in transit 60,000
Diamond Grocery’s gross income is computed as follows:

Sales P6,100,000
Less: Sales returns and allowances P 60,000
Sales discounts 40.000 100.000
Net sales P6,000,000
Less: Cost of goods sold:
Inventory, beginning P 110,000
Purchases P3,600,ooo
P3,600,000
InvVin* 225
— 80.000
K'i- jS\\{* ••' t>0.000
V ’X'v.-vs ( WO.OOO)
V Vi1, •*>C d'.SvW.-'Vs \ W.000)
*-X * ' - V'XO ^ L vOfUWl h.’90KlX>0 yK'HKIQ 00
* -.“cs^ ' xvc*’V' 1*2 ,(>00,000
w\\$: of S^rvfic^s (MCIT)

■*\v •mumvun corporate income tu\ purposes, ‘'gross income from
*c - cv business’* is gross receipts less returns, allowances,
decencies. and cost of services. The “cost of services” shall
. ",c: cue Che direct costs and expenses necessarily incurred to
c:v *.dc the services required by the customers and clients which
—chide “he tbllowuig. items:
a Sedarics;
: renexus cf personnel, consultants and specialists directly
rendering the service:
dost cf facilities directly utilized in providing the service such
as depreciation or rental of equipment used and cost of
supplies: and
d In the case ox banks, costs of services shall include interest
exrense. sec- vna
—'lustration
Ass—che following data of Reeky Reyes' Beauty Parlor:

:e P 940.000 Consultant’s fee PI00,000
40.000 Beauty supplies used 150.000
300.000 Salary of accountant 120,000
-ecri-uancc. cf beauty equipm ent 50.000 Interest expense 30,000
hern,- Reyes' Beauty Parlor's gross income is computed as

h-XTf'S;
r P 940,000
Se: counts 40.000
P 900,000
cr semce:
es c: beauticfans P 300,000
used 150.000
100.000
of beauty equipment 50.000 700.000
P2Q0.Q00
tz
= salary cf accountant is not a direct cost ot a beauty' parlor. Likewise,
expense is not a direct cost because the business is not a bank.
22(1 INCOMP TAXATION
, v Ve Revenue Mrmoiamltim ('iivulm No, I ,'00.I ClmilyiuK IO m iih tlint would

t'onrtlilnlt* U u >‘» m KVit'ipir* ami C'o n I m In drlrimining "G h o m m ln< nine" c, tl
Snvut'N lor the* I'uiptmr ol ('ompullnr, Ihr Minimum ('oiponiU* Income Tax
(MO V) l'ut:m <u\l In Sections ’/(K) ami ^8(A)(.!) ol I lie* Ntilionul Intrrnui
Revenue Code ol' l11 *)/
Telegraph and Cable Services
The gross income of telegraph and cable services of a foreign

iV/porofion shall include income' from services within the
Philippines only. Specifically, the income' may be derived from the
following:
l. Gross revenues derived from messages originating in the

Philippines, and
-2. Amount received by the company collected abroad on collect

messages originating in the Philippines and deducting from
such amounts paid or accrued for transmission of messages
beyond the company’s own circuit. (See. 164. kcu. Reg. No. 2)
Amounts received by the foreign company in the Philippines with

respect to collect messages originating outside the Philippines
shall not be included in the taxable gross income.
Illustration
Excel Communications, a resident foreign corporation, engages in

telegraph and cable services. Its revenues during the year were as
follows:
Revenue Within Without
Telegraph sendee P 5,000,000 60% 40%
Cable sendee 10,000,000 90% 10%
Total revenue El 5J3QO>OOQ
Excels total income subject to tax in the Philippines would be

PI2,000,000, computed as follows:
Telegraph within (P5,000,000 x 60%) P 3,000,000

Cable service (P10,000,000 x 90%) 9,000,000
Total income subject to Philippine income tax El^QOQiQSfi
Note: Only revenues earned within are subject to Philippine income tax.
Rental Income
Rental income refers to earnings derived from leasing reaJ estate
as well as personal property. Aside from the regular amount of
payment for using the property, rental income also includes all
other obligations assumed to be paid by the lessee to the third
party in behalf of the lessor (examples are interest, taxes, loans,
insurance premiums and others). fSee. 2.01, Rev. Reg. 19-86/
Rental income is generally determined by the gross receipts for

the year, (earned and unearned under accrual basis) because the
nature of business involved is service.
Illustration
Tiongsan Bazaar leases a portion of its commercial space to Mr.

Henry Lao with the agreement that Mr. Lao should be responsible
to pay the following:
a) Advanced rental of PI00,000;

b) Monthly rental of P25,000;
c) Annual insurance premium of P5,000;
d) Annual interest expense of P3,000; and
e) Real estate tax, P2,000.
The computation of income from the lease agreement between

Tiongsan and Mr. Lao should be governed by the following rules:
1. Prepaid Rental. If the advanced payment is a prepaid rented

received without restriction as to its use, the entire amount is
taxable in the year it is received whether the lessor uses cash
or accrual method of accounting.
The determination of the rental income of Tiongsan would be
Advanced rental received P100,000

Rent income (P25,000 x 12) 300,000
Annual insurance premium 5.000
Annual interest expense 3.000
Real estate tax 2.000
Annual rent income P410.000
Notes:
1. The lessor will report the computed amount as part of rental income. On
the other hand, the lessee will report it as part of his rental expense.
228 INCOME TAXATION
2. Since leasing is n service business, the rule is that advance payment

received by the lessor is presumed income unless the amount represent-,
a security deposit as discussed in 2 and 3 below. This is based on the tax
principle that if income is earned from rendering of services, income is to
be reported in the year when collected whether earned and/or unearned.
(NIRC, Sec. 108)
3. If the advance payment is a prepaid rental, such payment is taxable
income in full to the lessor in the year when received even though the
lessor is on the accrual method or the cash method of accounting. [(Hyde
Park Realty, Inc. vs. Commissioner, 211 F (2d.) 462; Pig whistle Co., 9
B.T.A. 668 and Main & Mekemy Building Co. vs. Commissioner, 113 F.
(2d.) 61)}
2. Security Deposit with Restriction. If the advanced payment

is a security deposit which restricts the lessor as to its use,
then such amount should be excluded in the determination of
rental income.
The annual rental income of Tiongsan would be:
Rent income (P25,000 x 12) P300,000

Annual insurance premium 5,000
Annual interest expense 3,000
Real estate tax 2,000
Annual rent income ^ P310.000
3. Security Deposit with an Acceleration Clause. If the

advanced payment is a loan deposit, or option money for the
property, or a security deposit for the faithful compliance of
the lessee of the lease contract, such advance payment is not
an income to the lessor. The income to the lessor inures when
the lessee violates the terms of the contract.
Based on the above illustration, assume that the contract of

lease between Tiongsan Bazaar and Mr. Lao contains an
acceleration clause stipulating that the lease contract be will
terminated for nonpayment of rental income in any month
during the year and that the security deposit shall be forfeited
in favor of the lessor.
Assume further that Mr. Lao was unable to pay the monthly
rental for the last quarter of the year, including all other
assumed obligations. The reportable rental income would be:
Rent income - first three quarters (P25,000 x 9) P225,000

Add: Security deposit forfeited 100,000
Rental income to be reported P325,000
If Mr. Lao did not violate the contract of lease, the answer
would be the same as in rule number 2.
Income from Leasehold Improvements

When the lessee erected or built permanent improvements on the
leased property which will become the property of the lessor upon
the expiration of the lease, the value of the improvements should
be reported as income of the. lessor using either outright method
or spread out method. (Sec. 49, Rev. Reg. No. 2)
Outright Method
Under this method, the income from leasehold improvement shall
be recognized when the improvement is completed at its fair
market value. (Sec. 49, Rev. Reg. No. 2)
Illustration
Baguio Improvement leases its lot to Mrs. Rose Fernandez for a

term of 3 years with an annual rental of P50,000. As of January
of year 1, Mrs. Fernandez completed the construction of an
improvement on the lot with a value of PI,500,000 with an
estimated life of 5 years.
The leasehold contract stipulates that the improvement will

belong to Baguio Improvements after the term of the lease.
By using outright method, Baguio Improvement should report its

income from rent in the year when the improvement was
completed as follows:
Value of building PI,500,000

Add: Annual rental per agreement \ 50,000
Total lease income to be reported RL5-5Q.QQQ
Note: If the contract of lease has been consummated, but the improvement has
not been completed, the annual income to be recognized from lease is P50,000.
Spread-Out Method
Under this method, the estimated book value of the leasehold
improvement at the end of the lease is spread over the term of the
230 INCOME TAXATION
tease aiui is reported us income for each year of the lease an

aliquot part thereof. <kvc k*v. 2 s™ tot
Accordingly, the annual income from leasehold improvement is

equal to:
Estimated book value of the leasehold improvement at the end of the lease contra^
Remaining term of the lease in years
Using the same illustration above, the computation of the annual

rent income of Baguio Improvements would be:
Cost of the building PI,500,000

Less: Accumulated depreciation at the end of the lease
(PI,500,000/5 years) 3 years 900,000
Book value of improvement at the end of the lease P 600,000
Divide by the term of the lease (in years) _________ 3
Annual income on leasehold improvement P 200,000
Add: Annual rental 50,000
Total lease income to be reported P 250.000
Comparison of Outright Method vs. Spread-Out Method

Outright Method Year 1 Year 2 Year 3 Total
Improvement income 1,500,000 -0- - 0 - 1,500,000
Depreciation expense ( 300,000) ( 300.000) ( 300,000) ( 900,000)
Net income from improvement I 300.000) ( 300.000) 600.000
Spread-Out Method
Net income from improvement
(1,500,000 - 900,000)/3 200.000
Termination of the Contract of Lease

Where there is an immovable improvement made by the lessee on
the lease property and the termination of the contract of lease is
made before the expiration of the lease term, the following rules
should regulate the circumstances:
1. If the improvement is destroyed before the expiration of the

lease, the lessor is entitled to deduct as a loss for the year,
when such destruction takes place, the amount previously
reported as income less any salvage value, to the extent that
such loss was not compensated for by insurance.
Illustration
Highland Co. leases its lot to Mr. So for 15 years with ail
annual rental of P50,000. Mr. So erected a building with fair
value of PI,200,000 with an estimated life of 20 years. The

building will belong to Highland Co. after the term of the
lease. Assume that Mr. So’s building was destroyed by fire on
the 10th year of the lease and its salvage value is P40,000.
Using the spread out method, the loss of Highland Co. will be
computed as follows:
(a) With insurance

Assume that the building is covered with insurance
amounting to PI00,000.
Book value at end of lease
(PI ,200,000) - (PI,200,000/20) x 15 years P300,000
Divided by term of lease , ________15
Annual income from leasehold improvement P 20,000
Multiplied by years until the fire ________10
Total reported income from improvement P200,000
Less: Salvage value P 40,000
Insurance collected 100.000 140.000
Loss on leasehold improvement due to fire P 60r000
(b) Without insurance

If the building was not covered by insurance the
computation of loss would be:
Total reported income from improvement P200,000
Less: Salvage value 40.000
Loss on leasehold improvement due to fire P160.0Q0
2. If for any reason other than a bona fide purchase from the
lessee by the lessor, the lease is terminated so that the lessor
comes into possession of the property prior to the final fixed
period of the lease contract, the lessor receives additional
income for the year if the value of improvement exceeds the
amount of income already reported.
No appreciation in value due to causes other than the

premature termination of lease shall be included.
Illustration
in the preceding illustration, assume that the lease was
terminated on the 10th year for failure of Mr. So to pay the
annual rental of P50,000 for that year. The computation of
additional income would be:
232 INCOME TAXATION
Value of I hr building PI,200,000

l ess Accumulated depreciation at termination
of lease (PI,200,000/20) x 10 years) 600,000
Hook value of the building on the 10th year P 600,000
Less: Reported income - leasehold improvement
(P20.000 x 10) 200.000
Additional income for the year P 40Q22QQ
GAINS FROM DEALINGS IN PROPERTY

This refers to the income derived from the sale, and/or exchange
of assets, which results in gain because of the excess of the
amount or value received by the taxpayer over the determined
value of the property he has disposed of.
The general rule is that the entire amount of the gain or loss
arising there from is a taxable gain or deductible loss.
This topic is discussed in Chapter 7 - Dealings in Property.
PASSIVE INCOME
Under Section 24(B) of the Tax Code, a final tax is imposed upon
gross passive income of citizen and resident aliens.
An income is considered passive if the taxpayer merely waits for it

to be realized. Examples of passive income are
1. Yield from deposit substitutes and trust fund;
2. Interest income;
3. Royalty income;
4. Dividend income; and
5. Prizes and winnings
A trust fund is any estate, especially stock, securities, or money

which is held in trust by a person in behalf of another person.
Both deposit substitute and trust fund yield earnings that are to
be treated as interest income.
Interest Income
Interest income is an earning derived from depositing or lending
of money, goods, or credits. Unless exempted by law, interest
income received by the taxpayer, whether or not usurious, is
subject to income tax.
For individuals, except nonresident aliens not engaged in trade

or business in the Philippines, interest income from long-term
deposit or investment (e.i., savings, common or individual trust
funds, deposit substitutes, investment management accounts and
other investments) shall be exempt from income tax, provided
that the following conditions must be met:
1. The deposit or investment must be evidenced by certificates
conforming to the Bangko Sentral ng Pilipinas (BSP)
prescribed form; and
2. The same must have a maturity period of not less than five
years and in denominations of PI 0,000 or other
denominations as may be approved by BSP issued by banks
(not by non-bank financial intermediaries or finance
companies). (Sec. 22(ff), nirc)
However, should the holder of the certificate pre-terminate the

deposit or investment before the fifth year, a tax shall be imposed
on the entire income and shall be deducted and withheld by the
depository bank from the proceeds of the long term deposit or
investment certificate based on the remaining maturity thereof, as
follows: (Sec. 24(B)(1), NIRC)
• Final tax of 5%............................ Four years to less than five years
• Final tax of 12%......................... Three years to less than four years
• Final tax of 20%.......................... Less than three years
Illustration
Mr. Wais invested PI,000,000 in a 12% long-term deposit

certificate (BSP prescribed form) with five-year maturity. Is the
interest income from investment subject to income tax?
234 INCOME TAXATION
Answer: It depends. The interest income from such investment is

subject to income tax (final tax) if preterminated before the five-
year maturity. However, the interest income therefrom shall be
exempted from tax if withdrawn upon maturity.
i
Classifications of Interest Income
Interest income may be classified into three categories, namely:
1. Exempt from income tax;

2. Subject to final withholding tax; and
3. Subject to normal tax.
Tax Exempt Interest Income

Interest earned is exempted from income tax if received from:
By members from a duly-registered cooperative; (Rev. Regi. No. 20-
2001)
2. BSP prescribed form of investments maturing more than five

years;
3. Expanded foreign currency deposit system by nonresident
citizens/aliens; and
4. A tenant who paid to a landowner on the price of land under a

tenant-purchaser agreement as part of CARP.
Illustration
Mr. Matipid put his retirement pay in the following investments:

Interest
Investments: per year Amounts
BSP deposit substitutes (more than 5 years) 12% P200,000
Baguio - Benguet Cooperative 24% 200,000
Time deposit - China Bank (not BSP prescribed form) 7% 100.000
Total investments P500.00Q
The interest income not subject to income tax during the year
would be
Interest income - BSP deposit substitutes (P200,000 x 12%) P 24,000
Interest income - Baguio-Benguet Cooperative (P200.000 x 24%) 48.000
Total interest income not subject to tax P 72.00Q
Accordingly, the only interest income subject to income tax (final

tax of 20%) is the income earned from time deposit. The net
interest earning of Mr. Matipid would be
Total interest income not subject to tax P 72,000

Add: Interest income - China Bank (PI 00,000 x 7%) P 7,000
Less: Final tax on interest (P7,000 x 20%) 1.400 5.600
Total net interest earnings E_7-7,6Q0.
Interest Income OFW with Co-depositor

Interest on expanded foreign currency deposit (EFCD) whereby
the OFW is a co-depositor in the Philippines is subject to 50% of
the 7.5% final tax. [Sec. 3 (A), Rev, Regs. No, 1-2011}
Illustration
Eddie Paylang is an OFW working in Dubai. He has an expanded

foreign currency joint account deposit with his wife, Nabati
Paylang.
Assume that the EFCD earned $1,000 as interest income, the

final withholding tax on interest income would be:
Final withholding tax on interest income - EFCD

(PI ,000 x 7.5% x 50%) $37.50
Interest Income Subject to Final Withholding Tax

Interest income on deposits made in banking institutions is a
passive income which is usually subjected to final withholding tax
of twenty percent.
Illustration
On April 30, 200x, Mr. Gabino Garoy placed his retirement pay
amounting to PI,000,000 in the PNB as time deposit. The interest
per annum is 18%.
The determination of Mr. Garoy’s 200x interest income would be
Gross Interest Income (PI,000,000 x 18% x 8/ 12) PI20,000

Less: Withholding tax on interest income (20%) 24,000
Interest Income, net of final withholding tax 2Q&+QQQ
236 INCOME TAXATION
Note: Once a passive income has been subjected to final tax, it should not be
included anymore in the computation of gross income subject to normal tax. The
depository- bank that withholds the tax is responsible to remit such tax withheld
to the BIR.
interest Income Subject to Normal Tax

(Lending is the Main Course of Business)
These are earnings derived from lending money, goods or credits

from one person to another without any withholding tax made.
As a rule, the interest earnings shall be subject to the regular tax

rate and reported in the Annual Income Tax Return if:
a. Earned in the normal conduct of business, or

b. Earned as an incident of installment payment of any business
transaction. (Rev. Regs. No. 17-2003)
Illustration
Baguio Lending Corporation lends PI,000,000 during the year.

The average interest per year is 18%.
The interest income of Baguio Lending Corporation would be:
Interest income (PI,000,000 x .18%) P 180.000
Assuming that the operational expenses of Baguio Lending were

P80,000, its income tax would be P32,000, computed as follows:
Interest income P180,000

Less: Operating expenses 80,000
Net taxable business income P100,000
Multiplied by corporate normal tax 30%
Income tax due P 30.000
Note: The normal tax of a corporation is 30% (R.A. 9337) based on taxable
income, while the normal tax of an individual taxpayer is tabular in nature
starting from 5% to 32% (graduated tax rates, Sec. 24(A)(2), NIRC).
237
Gross Income
ChaPter 4
r •
Cooperatives
Summary
Classification of Interest Income
Interest earnings received from:

•
BSP prescribed form
investments (more than 5 years)
Tax exempt
• Expanded foreign currency
deposit system earned by
nonresidents
• A tenant who paid interest to a
landowner on the price of land
under a tenant-purchaser
agreement, CARP
C (See chapter 4 for other examples)
c Interest earned from:

• Financial companies (20% FWT)
• Not BSP prescribed form
Subject to final
investments (5%, 12%, 20% FWT) ^ withholding tax
• Expanded foreign currency
deposit system earned by
residents (7.5% FWT)
If with co-depositor 50% of
7.5% FWT
Interest earned as:

• Principal business activity > Subject to
• Incidental interest earnings not normal tax
subjected to final withholding tax
Royalty Income
A royalty income is a payment or portion of proceeds paid to the

owner of a right, such as an oil right or a patent for the use of it,
or a portion of the proceeds from the work of an author or
composer.
Royalty income may be classified as follows:
1. In general, royalty income includes those which are derived

from natural resources or products such as coal, gas, oil,
copper, silver, gold, and other similar products. These kinds
of royalty income are subject to 20% final tax; and
238 INCOME TAXATION
2. Royalties on books, literary works and musical composition

are royalty income subject to 10% final tax.
Illustration
Mr. Good Godin received the following royalties:
On sale of Goods Hamburger (franchise) P200,000

On sale of books authored by Godin (copyright) 300,000
Total P500.000
The total tax due on royalties would be
Royalty tax - sale of Goods Hamburger (P200,000 x 20%) P40,000

Sale of books authored by Godin (P300,000 x 10%) 30,000
Total royalty tax due P70.00Q
Dividend Income
Dividend income is a form of earnings derived from the
distribution made by a corporation out of its earnings or profits
and payable to its stockholders, whether in money or in other
property.
Such earnings may be exempt from income tax, or subject to

either final tax or on the normal year-end tax of individuals or
corporations. (Rev. Reg. 2 Sec. 250; N1RC Sec.73; Sec. 28(B)(5)(b))
Tax Rules on Dividend Income

The following rules shall govern whether dividends are subject to
tax or not:
1. If received by a domestic or resident corporation from a

domestic corporation subject to tax, such dividend is tax-
exempt (nontaxable inter-corporate principle).
2. Pure stock dividends, dividends received from cooperative,

and pure liquidating dividends are tax-exempt.
3. Cash or property dividend is subject to final tax if received by

an individual or nonresident corporation from a domestic
corporation subject to income tax.
a. If received by a resident citizen, nonresident citizen and

resident alien, the final tax applicable is 10%.
Gross Income 239
Chapter 4
b. If received by a nonresident alien engaged in business in

the Philippines, the final tax is 20%.
c. If received by a nonresident alien not doing business
within, the final tax is 25%.
d. If received by a nonresident foreign corporation from a
domestic corporation, the final withholding tax is 15%. /As
amended by R.A. 9337 which took effect on November 1, 2005; Sec. 28 (B)(5)(b),
NJRC]
4. Other dividends excluded from rules 1, 2 and 3 are

included in the computation of the taxable income and
income tax at the end of the year.
Summary of Taxes on Dividends
Dividends are tax-exempt if:

1. Received from a Domestic Corporation by:
a. Another Domestic Corporation.
Tax exempt b. Resident Foreign Corporation.
2. Received from a Cooperative.
3. Pure stock dividend.
4. Pure liquidating dividend (return of capital).
Dividends are subject to final tax if received

from a Domestic Corporation by a:
1. Citizen or Resident Alien = 10% final tax.
Subject to 2. Nonresident Alien doing business in the
Final Tax Philippines = 20% final tax.
3. Nonresident Alien not doing business in
the Philippines = 25% final tax.
4. Nonresident Foreign Corporation ■ 15%
final withholding tax.
Dividends are subject to year-end normal tax of

individuals or corporations if such dividends
Subject to are:
Normal Tax 1. Not included as tax-exempt dividends.
2. Not subjected to final tax.
3. Distributive shares of partner in
professional partnership
240 INCOME TAXATION
Tax Sparing Rule
Tax Sparing Rule is an inter-corporate dividend received by a

nonresident foreign corporation from a domestic corporation is
subject to 15% Final Withholding Tax provided that foreign law
allows taxpayer clause; otherwise, it will be subject to the normal
domestic rate of 30%. (r. a. 9337)
The tax rate of 15% shall be applicable if the foreign country does
not impose any income tax on dividends received by the
nonresident foreign corporation from a domestic corporation. The
15% tax rate shall be effective starting January 1, 2009.
Forms and Valuations of Dividend Income

For income tax purposes, the form of dividend income shall
determine its applicable treatment. Dividends that are usually
received by a stockholder are as follows:
1. Cash dividend;
2. Property dividend;
3. Stock dividend;
4. Scrip dividend;
5. Indirect dividend; and
6. Liquidating dividend.
Cash Dividend
A cash dividend is the most common form of dividend. It is valued

and taxable to the extent of amount of money received by the
stockholder.
Illustration
Mr. Solibao received P60,000 cash dividend from Manna

Corporation, a domestic corporation.
The P60,000 received by Mr. Solibao is subject to a 10% final tax.
Property Dividend
A dividend payable in property of an issuing corporation is a
property dividend. The property dividend is usually valued and
Chapter 4 Grows* Income*
taxable to the extent ot the fu«* mm Kef im/nc of (he pn'peuu

"(Wire*! iit the time of doWumftou fxvv nnv a nvs* \\tt
KxAmplcs of property dividends iur:
;\. Merchandise inventory, supplies, etc,,

h. Shatcs of stock ot*another corporation, or
e, Treasury stock of issuing corporation if not|uitod al comI
different from its par value.
Illustration
Mr, Gallardo invested in the common stock of Ansoor Go, Ini

1.000 shares at a cost amounting to 050,000. Alter a year of
investment, he received from Ansoor 100 shares of stock ol Cebu
Pacific common shares with a unit cost of P10 per share,
The fair market value of Cebu Pacific at the time of declaration

was P8 per share and the fair market value of Auseor's share at
the time of distribution is P55 per share4, llovv much is the
property dividend income received by Mr. Gallardo?
The property dividend income of Mr. Gallardo would he:
Fair market value of Cebu Pacific per share PH

Number of Cebu Pacific shares received 100
Dividend income of Mr. Gallardo P800
Stock Dividend
As a general rule, pure stock dividends are nol subject to tax

because they simply involve a transfer of the retained earnings to
the paid-in capital account, except when the following
circumstances exist:
a. There is an option that some stockholders could take cash or

property dividends instead of stock dividends;
b. Some stockholders exercised the option to take cash or

property dividends; and
c. The exercise of option resulted in a change of the

stockholders' proportionate share in the outstanding shaft's of
the Corporation. ($cc.73([3)t N!RC; Rcv.Rctj.2, Svv/2521
H, INCOMf TAXATION
Taxable Stack Dividend - With change in the proportionate

share of the stockholders
Assume' that Aurora Co. with common stock outstanding declared

;t 20% percent stock dividend to its .stockholders with mi option to
choose properly div idend instead of stock.
Stockholder X opted to choose property dividend with a fair

market value of PI5,000 and other stockholders choose the
common stock dividend. The fair market value of the common
stock upon distribution was P500 per share*.
Stock Before* Dividend Stock Number After Dividend

Holders Shares Percent Dividends Shares Percent
X 200 20% 200 17.24%
Others 800 80% 160 960 62,762i
mm 100%
The stock dividends mentioned above shall be subject to tax since

it resulted in the change in the proportionate share of the
stockholders. The determination of the dividend income of
stockholder X and other stockholders would be:
Dividend income of stockholder X is PI5,000, the fair market

value of the property received.
Dividend income of other stockholders:

Fair market value of common stock per share p 500
Multiply by number of stock dividends (800 x 20%) 150
Dividend income P8Q.Q0Q
Not Taxable Stock Dividend - No change in the proportionate

share of the stockholders
Based on the preceding illustration, if all of the stockholders

opted to receive stock dividends then it will not result in a change
in the proportionate interest of the shareholders in the net assets
of the corporation, as shown below:
Stock Before Dividend Stock Number After Dividend

Holders Shares Percent Dividends Shares Percent
X 200 20% 40 240 20%
Others 800 80% 160 960 80%
1.000 100% 1.200 100%
The dividend exercise is purely stock, and, therefore, not taxable.

Redemption of Stock Dividend

Jf the corporation cancels or redeems stock issued as a dividend
at such time and in such manner as to make the distribution and
cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount
so distributed in redemption or cancellation of the stock is
considered taxable income to the extent that it represents a
distribution of earnings or profits. (Sec. 73(B), NIRC 1997; B1R Rulings, March
12, 1962)
Illustration
In 200A, Kantata Corporation issued 10,000 redeemable
preferred shares at a par value per share of P100. During 200B,
Kantata declared and issued a 10% preferred stock dividend.
In 200C, Kantata redeemed all the preferred shares at PI00 per

share. How much dividend is taxable in 20OB and 200C?
There is no taxable dividend in 200B because at that time the

dividend is presumed as pure stock dividend. However, the stock
dividend became taxable because it was redeemed at PI00 per
share in 200C.
The taxable dividend income in 200C would be:

Redemption price of preferred stock/ share P 100
Multiplied by number of stock dividends (10,000 x 10%) 1,QQQ
Taxable dividend P100.000
The appropriate simple journal entries would be:
200A Cash 1,000,000

Preferred stock 1,000,000
200B Retained earnings 100,000
Preferred stock 100,000
200C Preferred stock 1,100,000

Cash 1,100,000
The above journal entries can be compounded as follows:

Retained earnings 100,000
Cash 100,000
The compounded journal entry is in effect equal to the nature of

cash dividend.
244 INCOME TAXATION
Stock Dividends Different from Shares Previously Acquired
W hen stock dividends received ntr of a different class from shares

previously acquired, the sfocK- d iv id e n d s o r e n o t in c o m e , a n d
rhrr'l'T, n o t :e \ e l\ e . The original cost of the investment is
allocated between the original shares and the stoek dividends on
the basis of their respective market value at the date of receipt.
Illustration
Yirgtl Bitukon acquired l .000 common shares of CBA

Corporation for PI00.000. Subsequently, he received 20% stock
dividends in the form of preferred stoek. The market values of the
stocks are P60 for common stoek and PI00 for preferred stock.
The new cost of common stock and t he preferred stock dividends

are determined as follows:
Market Allocated
value Fraction _________ cost
Common stock (P6Q x 1.000 shares) POO.000 6/8 P 75,000
Preferred stock (PI00 x 200 shares) 20,000 2/8 25,000
Total E8QA1QQ E1QPJ2Q.Q
The stock dividend does not constitute income because the old
certificates plus the new certificates represent the same
proportionate interest in the net assets of the corporation as it
was prior to the declaration of stoek dividend.
However, if a stockholder maintains more than one class of

shares of stock in a particular corporation, and he subsequently
receives one class of shares as stock dividend, such dividend is
taxable.
Scrip Dividend
A scrip dividend is issued in the form of promissoiy note and is

taxable to the extent of its fair market value. It is taxable in the
year when the warrant was issued. (Sec.25J. Rev. Regs. No. 2}
Illustration
On April 1. 200B, Mrs, Elvira Sacayanan received scrip dividend

from Philex Mines amounting to P20.000 with an annual interest
of 12% payable within one year from date of the note.
The taxable dividend income received by Mrs. Sacayanan is

P20,000 which is to be declared in 200B, The P2,400 interest
(P20,000 x 12%) shall not be a part of dividend income declared
but a part of interest income earned in 200C.
Indirect Dividends
Indirect dividends are those other dividends representing
payments or rights received by the taxpayer, which are really
dividends. (Sec. SO, Rev. Regs. No. 2)
Illustration
Alvino Tanicala, a stockholder of Jollibee Corporation, is indebted

to Jollibee amounting to P30,000. At the end of the taxable year,
he received a notice that the corporation has cancelled his
indebtedness. According to the law, the transaction has an effect
of the payment of dividend.
Liquidating Dividend
Liquidating dividends are return of stockholders investment, it
arises from the distribution of assets by a corporation to its
stockholders upon corporate dissolution. [Sec.73(A), nircj
As a rule, the excess amount of liquidating dividends over cost of

shares surrendered is taxable. Such excess is a gain realized
which is taxable.
jf the stockholder sustains a loss, such loss is deduct ible.
Illustration
E&N Company a c q u ir e d 1 0 ,0 0 0 common shares from P h ilo x

C o r p o r a t io n at P10 per share. P h ile x d e c id e d to liq u id a t e so it
is s u e d a liq u id a t in g d iv id e n d o f P I 2 p e r s h a r e .
T h e t a x a b le g a in w o u ld be
A m o u n t r e c e iv e d a s liq u id a t in g d iv id e n d
(P I 2 x 1 0 ,0 0 0 s h a r e s ) P 120,000
Less; Cost of com m on shares surrendered
(P 1 0 x 1 0 ,0 0 0 s h a r e s ) I OOjOOO
C a p it a l g a in r e a liz e d u p o n liq u id a t io n v 20,066
246 INCOME TAXATION
Distribution of liquidating dividends is to be treated as a sale of

stock. The difference between the cost or other basis of the stock
and the amount received in liquidation of the stock is a capital
gain or a capital loss. The gain realized or loss sustained by the
stockholder is a taxable income or deductible loss, as the case
may be, /Sec. 73 (A), nirc; sec. 256, Rev. Reg. No. 2j. Consequently, the capital
gain on liquidating dividend is not subject to final tax.
Prizes and Winnings
A prize is a reward for a contest or a competition. In other words,

a prize represents remuneration for an effort reflecting one’s
superiority, like prize money of a boxing contest.
On the other hand, a winning is a reward for an event ■ that

depends on chance such as winnings from gambling, lottery or
raffle ticket.
In general, prizes are subject to final tax of 20% except if the

amount of the prize is ten thousand (PI0,000) or less which shall
be subjected to normal tax (Sec. 24(bj[ij and sec. 24 [aj, nirc). Winnings are
subject to final tax of 20% regardless of amount.
Prizes and winnings are generally taxable except when the law
provides for their exemption. (See Chapter 5 of this book for
prizes and winnings that are not subject to tax.)
Illustration
Regine Velasquez won the following prizes/winnings during the

year:
First prize - singing contest P 10,000
First prize - Philippine Charity Sweepstakes winning 1,000,000
Third prize - raffle ticket winnings 5,000
Which of the prizes is subject to normal tax, final tax and tax-
exempt?
The prize from the singing contest being earned in a contest and
within the threshold amount of PI0,000 and below is subject to
normal tax (Sec. 24 (A), nirc). The winning on raffle ticket being earned
by chance is subject to final tax of 20% even if the amount is less
than PI 0,000; and the winning from Philippine Charity
Sweepstakes is tax exempt. (See chapter 5 for further discussion.)
Chapter * Gross Income 247
PARTNERS* distributive profits from professional

PARTNERSHIP’S NET INCOME
The partners share in the distributive profit of a professional

oartnership represents his gross income, (sve a.\ niro
This topic is discussed in Chapter 13 of this book.
OTHER SOURCES OF INCOME
These earnings are categorized as “other sources of income'*

because they are generally incidental earnings or not common
source earnings. Usually, these incomes are, but not limited to,
she following:
1. Bad debt recovery:

.. Tax refund or credit:
o. Damages recovery:
4. Annuities: and
5. Income from whatever source.
Tax Benefit Rule
Tax benefit rule is a general principle in taxation which states that

if a taxpayer deducted an item on his income tax return and
enjoyed a tax benefit (reduced his income tax) thereby, and in a
subsequent year recovers all or part of that item, he will recognize
gross income in the year the deducted item is recovered. (Dobson v.
Cc-s^siemr. 320 U.S. 4S9) '
The rule has both an inclusionary and an exclusionary

component, i.e., the recovery is included in the taxpayer’s gross
income to the extent that the taxpayer obtained a tax benefit from
the prior year’s deduction, and the recovery is excluded to the
extent that the prior year’s deduction did not provide a tax
benefit.
Bad Debt Recovery
The following are the requisites for deductibility of bad debts:
T There must be a valid and existing debt arising from business

or trade of the taxpayer;
248 INCOME TAXATION
2. The debt must be actually ascertained to be worthless and

uncollectible during the taxable year; and
3. The debt must be charged off during the taxable year.
For taxation purposes, bad debts are considered the amounts of

receivable being ascertained worthless to be written off during the
taxable year.
When a written off receivable has been recovered in the

succeeding year, the recovered amount must be included in the
gross income during the taxable year of recovery. However, under
the doctrine of equitable benefit, the amount recovered is only
taxable to the extent of the tax benefit in the year the account
was written off. (Sec. 34 (E)(i), nircj
Illustration
Let us assume that in 200A Mario wrote off a worthless account

receivable-trade amounting to P50,000. If Mario has bad debts
recovery of P30,000 in 200B, such amount will be included as
part of his 200B taxable income from business.
On the other hand, if Mario did not write off the worthless
account receivable-trade in 200A, there will be no taxable bad
debts recovery to be recognized in year 200B because there was
no tax benefit in 200A.
Tax Refund or Credit
As a general rule, refunds from taxes paid are taxable except for
the following:
a. Estate or donor’s tax;

b. Philippine income tax;
c. Stock transaction tax; and
d. VAT, claimed as input tax.
Tax refund is subject to the tax benefit rule which states that the
refund of tax would only be subjected to tax if such tax was
previously deducted from gross income resulting in the reduction
of reported taxable income.
As a rule, if the tax paid is deductible, refund is taxable. If the tax

paid is not deductible, refund is not taxable.
Ch#pto' 4 Groan Income 243
jnx refund or credit shall bo included ?js part of gross income in

the year of receipt lo the extent of the income tax benefit of the
said deduction.
Illustration
Garcia Company, a domestic corporation, paid the following taxes

during the year. The data of business operation were as follows:
2Q0A 200B
Gross income P250.000 P400,000
Allowable deductions-business expenses (130,000) (250.0001
Income before taxes P120,000 PI 50,000
Taxes paid: Community tax deficiency (2,000)
Income tax deficiency ( 5,000)
Net income per GAAP PI 18,000 P145.000
Taxable income per ITR PI 18.000 P150.000
Supposing that the tax deficiencies (community tax, P2,000, and

income tax, P5,000) were refunded in year 200C, what would be
the reportable taxable income if the 200C data of business were
as follows:
Gross income P500,000

Allowable deductions - business expenses 300,000
The 200C reportable taxable income would be:
Gross income from operations P 500,000

Add: Tax refund - community tax 2 >000
Total . P 502,000
Allowable deductions - business expenses ('300,0001
Reportable taxable income - 200C P 202T000
Even if the two deficiency taxes were refunded in 200C, only

community tax is taxable because it was allowed as deduction
from gross income in 200A. The refund on income tax is not
taxable in 200C because it was not deductible in 200B.
Damages Recovery
Damages recovery is an amount received by an injured person as
payment for loss income or payment to compensate damage to
property, injury to person, or loss of life.
250 INCOME TAXATION
As a rule, recoveries of damage representing compensation for

lOSS Of profit
Or income are taxable. (BIR Ruling No. DA-489-200S dated
December 6. 2005j v
Recoveries that are to compensate for damages to property, injury

to person, or loss of life are not taxable. (Sec. 63, Regs. No. 2)
Illustration
Mario met a vehicular accident. He received P500,000 as payment

of his taxi cab that was destroyed during the accident and
PI00,000 for unearned income due to accident.
Only the PI00,000 is the reportable gross income. The P500,000

is nontaxable because the amount compensates the value of
property being damaged due to accident.
Note: Compensation for damages is fully discussed in chapter 5 of this book.
Annuities
Annuities are installment payments received for life insurance
sold by insurance companies. The annuity payments represent a
part that is taxable and not taxable. If the part of annuity
payment represents interest, then it is a taxable income. If the
annuity is a return of premium, it is not taxable.
Under the contract of life annuity, the debtor binds himself to pay
an annual pension or income during the life of one or- more
determinate persons in consideration of a capital consisting of
money or other property, whose ownership is transferred to him
at once with the burden of the income. (Art. 2021 , New civil code)
Illustration
Mr. Hintay received PI0,000 as annuity of life insurance from Phil

Am Life consisting of the following:
Return of premium P 909
Interest at 10% 91
Total annuity P 1.000
The income is the interest. Hence, the P909 return of premium is
nontaxable, while the P91 interest income is taxable.
Income from Whatever Sources Defined

Income from whatever sources derived” means inclusion of all
income not expressly exempted within the class of taxable income
under the laws irrespective of the voluntary or involuntary action
of the taxpayer in producing the gains, and whether derived from
legal or illegal sources.
Examples of income from legal source are:

a. Employee’s salary, bonus; and
b. Commissions/rebates of a medical representative.
Examples of income from illegal sources are:

a. Gambling; •
b. Kidnapping;
c. Extortion;
d. Smuggling; and
e. Embezzlement.
Illegally Obtained Income

As a rule, illegal income is taxable. Income obtained through
illegal means is included in the wrongdoer’s gross income even
though he is obligated to return it when discovered, (d.a. Kahn,p. 87)
The mere fact that a transaction is illegal does not exempt it from
income tax laws. Gains from such transactions as gambling,
extortion, swindling and the like are all taxable. (Mwhie,P. 282)
Income that is not realized is not taxable, even though its absence
is due to an illegal act. “Moral turpitude is not a .touchstone of
taxability.” (P. HsboughMilk Co., 26 T.C. 707)
The Courts have sustained the BIR’s determination of the illegal

gains from such records as bank deposits, or on the basis of
commissions paid out, and even from a formula determination
based upon the nationwide experience. The burden is on the
taxpayer to offer independent evidence to contradict such
determination. (Humprey vs. Commissioner, 162 F. (2d.) 853; Nellis vs. Commissioner,
232 F. (2d.) 89)
Embezzled Funds
Embezzled funds are income without consent (express or implied)
with an obligation to repay.
252 INCOME TAXATION
If the embezzler reaps the fruit of his crime without restriction as

to disposition, he is in receipt of income though it may be claimed
he is not entitled to the money and may be adjudged liable to
restore its equivalent. When reported as income, actual
repayment of embezzled fund will give rise to deduction. (James
US., 366 U S. 313)
Illustration
Mr. Bala Subas, a treasurer of Diamond Corporation, spent

P500,000 of Diamond's funds for his personal use. Subsequently,
the auditor of Diamond Corporation found out the embezzlement.
Is Mr. Bala Subas liable for income taxes pertaining to the
P500,000 Diamond funds?
Answer: Yes. Aside from the criminal liability to be imposed to

Subas, he is liable for income taxes on the P500.000 he
embezzled from Diamond Corporation. It is because illegal income
is taxable when discovered. However, no income tax will be
imposed if Subas paid the embezzled fund.
Income Received by Error

When income is received under a mistake of fact or law, the
income is included in the gross taxable income of the recipient
notwithstanding the fact that the recipient may be required to
return the income item to the payor when the error is discovered.

1. Define “gross income.”
2. Define “gross compensation income.”
3. When is an employer-employee relationship exist?
4. Enumerate and describe the classifications of gross compensation
income.
5. ’ State the rules when a retirement pay would not be subject to
income tax?
6. When is separation pay taxable?
7. State the rules regarding the tax liability and exemption of the
vacation and sick leave earned.
8. What is an employee stock option? Discuss the tax treatments in the
(a) granting of stock options, (b) transferring of stock options, and (c)
exercise of stock options.
253
Ch«pt°f 4 Gross Income
tf state ihr rules of Ihe lax Ircntmcnt for cancellation of indebtedness.

jo What is the tax treatment if the beneficiary of the insurance
premium paid is the employer?
j | bx|)iaiii the tax exemption under the principle of “convenience of the
employei Vi rule/'
),) state the mien for tax exemption of remuneration for casual labor.
) 1 KimiiMuate and explain the classification of gross income from
business,
I I S t a i r * the loi mula to compute the following: (a) cost of goods
maimlar-tuied and sold, (b) cost of goods sold, and (c) cost of service.
If» When should an advanced rental received be regarded as reportable
income?
lb What are the two methods of reporting income from leasehold
impiovemenlM on properties of the lessor? State their respective
lm inula
17 Wind me the rules for tax treatment of reported income from
leasehold impiovemeid in the event of a pre-termination of lease
rnnl i act ?
!M What Is a passive* Income?
l‘b Hovv much is Ihe final withholding tax on interest income derived
bom KK('l) by an <>KW with co-depositor residing within the
Philippines?
*0 Kmtmerule and explain the tax treatment for the classification of
miriest income,
M Kmimet ale the different forms of dividend that a domestic corp.
could declare, and wind are the corresponding tax liabilities of the
tecipients,
*V) Kxplnm the concept of "tax sparing rule."
What me the different forms of divideiubs and how are they valued for
tax purposes,
*b Ibstinguisti pi fires from winnings,
* ° When is a had debt recovery taxable?
't \'
iMuuneiate the tax refunds that are not taxable,
y * is
hxplaiti the "principle of tax benefit rule” in determining tax refunds
bad debts recovery as taxable income.
254 INCOME TAXATION
Name: __________________ ______________________ Score: ____________ _____

incorrect.
1. The 14th month pay is included in the P82,000 non taxable 13^
month pay and other benefits.
2. Cash-settlement option warrants the holder to purchase shares

of stock of the grantor corporation.
3. The grant of stock option for a price is subject to capital gains

tax of 5% to 10% based on the capital gains.
4. The transfer of stock option for gratuitous is subject to donor’s

tax based on the fair market value of option at the time of
transfer.
5. If the option is exercised by a managerial employee, the book

value of the option is subject to fringe benefit tax.
6. Gross income includes all income from whatever sources

whether legal or illegal source.
7. There is compensation income realized by an employee when his

employer cancelled the employee’s indebtedness in lieu of wages
payable to him.
8. When a minimum wage earner also derives income from self-

employment, his minimum wage earned becomes taxable.
9. Cost of living allowance is not part of taxable compensation

income because the amount is very minimal.
10. Any amount of separation pay received by an employee for any

cause beyond his control is tax-exempt.
11. Baptismal fees paid to religious officers are not subject to income
tax because of the separation of church and state.
12. Under the employee stock option plan, the difference between the
fair market value at grant of option and the option price is
compensation income oft he beneficiary.
13. The cancellation of a taxpayer’s indebtedness is an income

unless such cancellation is intended as a gilt.
H. If debt is cancelled due to services rendered by the debtor, the
basis of tax is the value of service rendered.
15. Transportation allowance pre-computed on a daily basis is not
subject to substantiation but subject to tax.
Chapt*r 4
Gross Incoma
-f] Boorcn
NaniaJ
problem 4 - 2 True or False

YVnte True it the statement is con cot or Raise it the statement Iw
J
incoirrct.
]. Inteiest income earned hy an ORW (Vom a ICROP with a co

depositor is subject to 7,h"o Until withholding tax,
2, There is no tax sparing rule applicable on brunch remittances

because tax sparing rule are applicable to subsidiaries and not
to branch.
3. 'rips are not taxable*
4, The excess of actual expenses over advances made shall

constitute taxable income of the concerned employee it such
amount is not reimbursed to the employee.
h. Remuneration for casual labor not in the course of an employer’s

trade or business is not considered compensation,
b. In the sale of service, gross income under SRC 27 of NIRO,

means gross receipts less Sales returns, allowances, discounts
and cost of services,
7. For MCi r computation, cost of services includes but not limited

to cost of facilities directly utilized in providing the set vice such
as depreciation or rental of equipment used and cost of supplies,
5. Rental income includes obligations assumed by the lessee in

behalf of the lessor.
4. A fee received by a religious worker for services rendered is a

taxable compensation.
10. If the advanced payment is received from a customer to deliver a

commodity, such receipts should he reported as income when
received by the vendor,
U. If the advanced rental is received its a security deposit, without

restriction, then such amount should be excluded in the
determination of rental income,
17. The amount of bud debts which resulted to reduction of taxable

income will become a taxable Income in the subsequent year
when such is eventually recovered.
*y***Ut„. 4 , ^ '* *****
7/ .* f *.# **a:*^*n • ;* ww nr rw. ,f r>^
-*"**;* / ' ' *
* ,y. ,r.>.:vn£ d.vh/Vv.d j* #v*r. by a corporai.cn a* #

' A r c , - . n >S''-'*'-• or d»**oh;;,on.
c/aw*.CCC* see ££reraUy faxacic.
7hr ,coorce f'orc practice of profession snou.n he da.-tsiffec *

OO/C per, VitlOO iOOOme <g
7 he monetary '■!>•*•* of a-/a.led vacation and sick k%v^ &

#a xao;e
>n genera., ...ega--7 oo*ar.ed income is raxahle.
bshmaied bad '‘ebt* expense, which eventually adjusted to zero,,

oenornes innorne in the year of adjustmen ^
7. Tne journal ontry -ndcr GAAR rule, debiting allowance and

crediting ^cco-1.nts * ecerv^s hie, is tne item of cad debts expense
that, u allowed as deduction under Tax Rule.
o. The tax oenefh * ulc provides reporting option to the taxpayer for
the recovery of bad debts previously written off.
0. All amounts received from a life insurance annuity are taxable.
10. Income obtained through illegal means is included in the

v/rongdoeria gross income even though he is obligated to return it
when discovered,
11. Income that is not realized is taxable.
12. Actual repayment of embezzled fund by the wrongdoer will give

rise to reduction of his gross income.
13. As a rule, income obtained illegally is not taxable if the

wrongdoer is obligated to return it when discovered.
14. Income received due to error on the part of payor is not to be

reported as part of the gross Income of the payee.
Ah* 4
......................... *****.................................
„,.*!*'* ^ ‘ "'"* '■’ t*1**
’it'-'* » ■■ M*!AM*:r4( id f/.*?*/$ /sf ;>,*,** * -r&t ,*i
i 1 r#* '■"****> of \sK.ty\otvO% f.rYS.tfS.;, a *s,r. 'psx#*/t #*> <&zk<e

bU>< K,
> i'ÔeoO ,* +/wt£,f if ffswrt :> / * 00%/tefir.

e/yporfitiOr* from a f\r,fu*&$]/. r/ssssfiYss
; t/u>rnhf(A hr* t u, a final ray t,4 Uf/Y,, erysyey/wrjgr.+sse

;•>a\(,s if>( t4i p\ ft///, f,f p*M,'V
4 All <\fi(f\fige.'\ re/y verier fire try taya hie.
•' Tax refuor}& fir* subject to tax if the relate/, tax y*eze a?s/*f*si a&
<\*-<\ i i of ion from previon* year's y/oss try/,roe.
f, f’n'/A* fi rer $m > bject to a fin fit tax of '/XfY reyarb,ers% of a::s: ,:s„.
7 'the* fi mount sto\er\ by the cashier h subject a ~azabjt trsssoyz o€

the cashier,
H. Monetized value of vacation and sick leave credits of p?r*aze

employees are not subject to tax,
0. The entire amrsunt of P30,000 fourteenth month pay ii

non taxable,
10. De minimis benefits are non taxable,
31. The proceeds of life insurance due to death of an insured person

shall be part of the gross income of the recipient,
12. Subsidized board and lodging furnished by an employer is not

taxable,
13. Dividends received by a cooperative from a domestic corporation

are tax-exempt.
14. When stock dividends received are of a different class from

shares previously acquired, the stock dividends are taxable
income.
15. As a rule, excess amount of liquidating dividends over cost of

shares surrendered is taxable.
3 6.
iot IWGOWE TAXAT>£>*
Score*:
I’fcttMt:
4 True or False ,. r
✓ i/r 7 r' * ■f * t T * £__ * r-rjT~ *” ',' r>7 I* 3-. SC *•> statercert *
Torn redemption - jTwâi fund :* exen.pt frorr.

► UtX.
2. Aj approved retirement pays are exempt from income tax.
3- 7; pc are taxable
4 Pr c--corn pa ted daily transportation allowance 3 taxable.
b The MWE1'- ba?;>c salary is. exempt from tax but his overtime pay is;
excess of his. basic daily wage is taxable.
6 If a corporation forgive?, the debt of its stockholder. the transaction ia

considered payment of income.
7 Grose income includes other income from other sources.
8 To compute for the gross income of banks, the interest expense h

treated as operating expense.
9 The advanced rent income received by a lessor is not reportable

because there is no actual realization of income.
10. Passive income earned outside the Philippines by a resident Filipino

citizen that has been subjected to foreign final tax shall not anymore
be taxed in the Philippines.
11. Interest income earned by the banks from Its borrowers is subject to
final tax of 20%.
Name: __________________________________________ Score: _______________

Select the letter that contains the best answer.
1. The amount of 13th month pay and other benefits was increased by
a. P82,000.
b. P52,000.
c. P30,000.
d. P - 0 - .
2. These benefits are relatively small value and they are not considered
compensation subject to income tax.
a. Fringe benefits
b. 13^ month pay and other benefits of P82,000
c. Minimum wage
d. De minimis
3. A stock option that entitles the holder to purchase shares of stock is

called
a. Equity-settlement option.
b. Cash-settlement option,
d. Stock-purchase option,
d. Debt-equity option.
4. Which of the following is taxable with income tax at its gross amount
when earned within the Philippines?
a. Professional fee
b. Compensation income
c. Business income
d. Royalty income
5. Statement 1: Remuneration for casual labor not in the course of an

employer’s trade or business is not considered as taxable
compensation income.
Statement 2: Additional benefits received by the employee for the
convenience of the employer are not taxable income of the employee.
6- Which of the following is a taxable compensation income?

a. Separation pay due to resignation
b. Retirement pay under BIR approved retirement plan
c. Separation pay due to disability
d. Terminal pay by fact of death
263 INCOME TAXATION
■y V*"h:ch c: the following is a taxable compensation income?

a Professional fee, net of creditable withholding tax
b Separation pay due to closure of the employer's business
c Terminal pay inclusive of PI 5,000 13th month pay
i. Separation pay due to early retirement
S. Statement 1: All vacation leave and sick leave with pay are taxable
Statement 2: AH unused vacation leave converted into cash are
taxable.
c. Both statements are correct,
b. Both, statements are incorrect.
9. Which of the following is considered as taxable compensation

income?
a. Free housing given to employee
b. Social Securin' System Benefits
c. Retirement pa\T under a duly BIR approved benefit plan
d. Retrenchment pay
10. Which of the following is not taxable?

a. P2.500 for 10 days sick leaves actually taken
b. PI ,250 for 5 days unused vacation leave converted into cash
c. PI ,000 for unused vacation leave received as part of separation
pay due to voluntary resignation
d. P500 availed vacation leave
11. Which of the following is a taxable compensation income?

a. Cost of living allowance
b. De minimis benefits
c. Retirement benefit under BIR approved retirement plan
d. Retrenchment pay
12. Which of the following dividends are subject to income tax?

a. Received by domestic corporation from another domestic
corporation
b. Received by a resident corporation from a domestic corporation
c. Received by domestic from nonresident foreign corporation
d. Received by nonresident foreign corporation from another
nonresident foreign corporation
ss.me: ____________ ___ _____________________________ Score: ________________
problem 4 — 6 Multiple Choice

g.- ec: the Setter that contains the best answer.
•. Which of the folks wing grant of options is subject to capital gains tax
based on the full consideration received?
a. Stock option granted for a price
b. Stock option with empkyer-empioyee relationship without
payment
c. Stock option transferred for free
d- Stock option transferred in exchange of shares of stock
- Which of the following grantee in the exercise of stock options is

subject to relevant withholding tax at source and other taxes
arrlicable?
a. Rank-in-file employee
b. Managerial employee
c. Supplier of goods or services
d. Any person other than enumerated above.
5. Transportation allowance is nontaxable if

i. Pre-computec cm a daih' basis,
d. Paid to employee while on dun.',
id. Received by employee under employer s benefit rule.
a. i only
b. : and ii
c. ii and iii
d. i. d and iii
Which of the following is not a compensation income?

a. Retirement pay
h. Professional fees
-Allowances
p. o
Wages
-A stock dividend received in 200x from a domestic corporation by a

nonresident individual not doing business in the Philippines is
a. Subject to 10% final tax.
b. Subject to 25% tax.
c. Subject to 20% tax.
c. Not subject to tax.
Wnich of the following will result to earning of income by the debtor?

a- Cancellation of existing payables without any financial
consideration
b. Cancellation of existing payables for services rendered to creditor
c. Cancellation of existing payable to offset the equivalent amount
of collectible
2§2 INCOME TAXATION
d. Carmellunan o; existing payable due to bankruptcy of the debtor
Wmch of ‘Joe faZazzng is income to the recipient?

a. Stock option
b Stock dividend
c. Pre-emptive stock right
d. Stock warrant
S.. *hich of the following is/ are not taxable benefits of employee?
i. Lodging served within the employer’s premises and accepted by
the employee as a condition of employment,
u. Living quarter furnished to the employee for the convenience of
the employer
hi living quarter furnished outside the employer's premises
Choices:
a. i only
b. i and h only
c. h and in only
d. i: only
? Statement 1: Remuneration for casual labor not in the normal course

o: business is not considered compensation.
Statement 2: Remuneration for casual labor performed for a
corporation is considered compensation.
TO Property dividend received by resident citizens from domestic

corporation is taxable at
a. fair value of tine property at date of declaration.
b. fair value of the property at date of settlement.
c. cost of the property at date of declaration.
d. cost of the property at date of settlement.
11. Cost of services may be defined as

a cost of services to protdde services,
o. cost of facilities directly utilized to provide services,
o. ail direct costs and direct expenses necessary to provide services,
d ail cost involved in providing services.
1 2 V/lucn of the following is subject to 10% final tax?

a. Interest income from savings account
o Royalty income from franchise
c Royalty income from patent
d. Royalty income from Kterary works
jejune: ............... ....... .... ......... ................ ... Score:_______________

j, The interest income on peso savings deposit of an OFW with a co-

depositor residing within is
n. tax-exempt.
b. 7.5% final withholding tax.
c. 3.5% final withholding tax.
d. 20% final withholding tax. <
2. The tax rate on inter-corporate dividend income received by a

a. 0%.
b. 10%.
c. 15%.
d. 30%.
3. Which of the following tax refunds, which were incurred in the

conduct of business is taxable income of recipient?
a. Donor’s tax
b. Philippine income tax
c. VAT
d. Documentary stamp tax
4. Statement 1: Income that is not realized is not taxable, but illegal

income is taxable.
Statement 2: Income received under a mistake of fact or law is to be
included as part of the gross taxable income.
5. All of the following are income within, except

a. dividends declared by domestic corporation.
b. salaries earned by Filipino overseas contract workers.
c. interest on bonds issued by domestic corporation.
d. income from business located in the Philippines.
6. What is the final tax rate applicable to interest income earned from a
regular savings deposit?
a. 5%
b. 10%
c. 20%
d. 25%
264 INCOME TAXATION
i Mrs. (Vmtnniip I’nmnp, is n mining operator. Her miurinl Um<l« *,tp

not covered hy any lease oonlrael. Thr lux Mix, Pamng bun |() phy
based on the actual mailtrl vnlvir ol thr gross output or minnM|
products extracted is
a, rxoisr tax,
b, royalties,
0. rental,
d, ad valorem tax,
v^. Which of the following is not taxable income?

a. Had debts previously deducted as item of expense and partially
recovered subsequently
b. Tax expense previously disallowed as deduction from taxable
income, fully refunded subsequently
c. Income from gambling
d. Income from usurious financing
c). The following are related items to the operation of a single

proprietorship business:
1. Purchases of goods for sale
ii. Freight in of goods purchased
iii. Salt'of goods
iv. Freight out of goods sold
v. Unsold goods at the end of the period
Which of the above items are elements of cost of sales?

a. i, ii, iii, iv and v
b, i, ii, iv and v only
e. i, it, and iv only
d. i, ii, and v only
10. Compensation income is earned when an employer-employee

relationship exists. Which of the following does not represent
compensation income?
a. Honorarium of the company lawyer as a speaker in company
sponsored seminar
b. Retainer’s fee of a bookkeeper.
c. Emergency pay
d. Sick leave with pay
11. Statement 1: Property dividends received by individual from domestic

corporation are subject to final withholding tax.
Statement 2: Cash dividend received by a resident corporation from
another foreign corporation not doing business in the Philippines is
subject to final withholding tax of 30%, if without reciprocity.
a. Both statements are correct.
c. Only statement 2 is correct.
problem 4-8 Gross Reportable Compensation

fhe employee reported a net take home pay of P180,000. The amount is
net of P30,000 withholding income tax and PI,000 SSS. The amount is
inclusive of P5,000, covering a 10-day vacation leave actually availed and
pi0,000 13th month pay. His gross reportable compensation income is
a. P200,000 c. P190,000
b. P195,000 d. P165,000
problem 4-9 Gross Taxable Compensation

Marilou Badol has earned the following income in 200A:
Salaiy as a professor, net of withholding tax of P50,000 P370,000
Professional fee as CPA, net of 10% CWT 270.000
Per diem as a board of director 200.000
Thirteenth month pay 35.000
First prize in essay writing contest ' 50.000
Sale of house and lot (capital asset) 500,000
What is the amount of gross taxable compensation income subject to

normal tax?
a. P420,000 c. P620,000
b. P425,000 d. P625,000
Problem 4 - 1 0 Compensation Income

The following items of income are reported by Cute, a CPA:
Salary as an accountant PI,500,000
13th month pay and other bonuses 150.000
Audit retainer’s fee 600.000
Capital gains from sale of car 250,000
The total compensation income from employment subject to tax would be

a. PI,750,000 c. PI,568,000
b. PI,650,000 d. PI,500,000

The following items of income are reported by Sexy:
Salaiy as guest relation officer PI20,000
Tips, (from various customers) 360,000
Monetized 10-day unused vacation leave 4,000
Cost of living allowance * 5,000
Achievement awards 20,000
How much is the gross taxable compensation income?

a. P490,000 c. P510,000
b- P495,000 d. P515,000

Jeffrey Miguel received the following during the taxable year 200A:
266 INCOME TAXATION
Salary from employment, net of P24.000 withholding tax PI 20,000

Overtime pay from employment 36.000
13th month pay 15.000
Remunerations from his contractual job:
One-year non-interest bearing notes
(dated December 30, 200B) 30,000
Payment of services rendered, net of P30,000 cancelled
indebtedness, 4,000
Interest income from bank, net of tax 330
The prevailing effective rate of non-interest bearing notes of the same

kind is 10% per year.
What is the reportable amount of taxable income before personal

exemption for annual ITR purposes?
a. P244,330 c. P241,270
b. P242.330 d. P190,270
Problem 4 - 1 3 Retirement Pay

Sue reported the following retirement:
First 30 years received at the age of 50 P500,000
Second employment for 10 years received at the age of 60 400,000
Third employment for 10 years received at the age of 70 300,000
How much is the nontaxable retirement pay of Sue?
a. P - 0 - c. P400,000
b. P300,000 d. P500,000
Problem 4 - 1 4 Separation Pay

Gorgeous reported the following separation pay:
First employment for 20 years at the age of 40 - resigned P300,000
Second employment for 10 years at the age of 50
- retrenchment 200,000
Third employment for 10 years at the age of 60 - retirement * 100,000
How much is the taxable separation pay?
a. P - 0- c. P500,000
b. P300,000 d. P600,000
Problem 4 - 1 5 Stock Compensation

Which of the following,is the gross compensation income for 1,000 stock
certificates received as payment of services rendered to employer? The
share of stock is selling at P10 per share in the stock exchange. This has
par value of P5 per share. The shares were acquired by the employer at
cost of P8 per share.
a. P8,000 c. P10,000
b. P5,000 d. P 3,000
Chapter 4 Gross income 267
problem 4 - 1 6 Transfer of Stock Option

Campo Santo received stock options of 500 SMC shares with fair market
value of PI00 per share. He subsequently donated the stock options to
his brother. How much is the tax on the transfer of stock option?
a. P 2,500 c. P15,000
b. P10.000 d. P - 0 -
Problem 4 - 1 7 Exercise of Stock Option

X. an officer of Y Corporation, was granted 1,000 shares stock option
with a par value of P20 for an option price of P23 per share. The option
was exercised when the market price was P30 per share.
1. The tax on the grant of stock option would be

a. PI,000. c. P 150.
b. PI,150. d. P - 0 -.
2. The tax on the exercise of stock option would be

a. P3,294. c. P 9,412.
b. P4,706. d. P14,l 18.
Problem 4 - 18 Cancellation of Debt

Bingcol works as the CEO of B Co. His compensation income is P50,000
per month. In January 31, 200B, he borrowed P300,000 from B Co. As a
result, his monthly compensation income is reduced by P25,000 starting
February, as pa3unent to his borrowing.
If on December 31, 200B, after payment of P25,000 salary net of loan

amortization, B Co. cancelled Bingcol’s indebtedness, how much is the
latter’s compensation income in December 200B?
a. P25,000 c. P 75,000
b. P50,000 d. P100,000
Problem 4 - 1 9 Other Forms of Compensation

During the year, Sico has the following benefits received from his
employer:
Rice subsidy of PI,000 per month * P12,000
Free housing as a requirement to perform his duty 24,000
Clothing allowance 1,000
Transportation allowance subject to liquidation 6,000
Insurance premium paid - the beneficiary is Sico’s wife 5,000
SSS employer’s share contribution 3,000
How much is the taxable benefits of Sico?

a. P - 0 - c. P21,000
b. P5,000 d. P45,000

The following transactions were reported by Mr. Guardia related to his
income during the taxable year from January to December 200A:
268 INCOME TAXATION
(1} He received a notice of cancellation of his indebtedness amounting to

PI0,000 from his employer. Contained in the notice is to offset such
amount from his basic monthly compensation of P30,000.
(2) 100 shares of stock as compensation for service rendered on October

31, 200A. The market value of the shares of stock at the time when
service was rendered was PI00 per share, but PI20 per share when
the shares were received on November 30, 200A.
(3) A stock option of 100 shares was granted to Mr. Guardia. The
market price per share was PI20 but the option price was P80 per
share at the time of stock option exercise. He subsequently sold the
50% of the shares at PI30 per share.
(4) His employer granted P4,000 annual insurance premium to Mr.

Guardia for an insurance policy of PI,000,000. It is stipulated that
50% of the proceeds of life insurance will be received by Mr.
Guardia’s heirs.
What is the amount of the gross taxable compensation income of Mr.

Guardia during the taxable year?
a. P376,000 . c. P378,000
b. P376,500 d. P386,000

The following cancellations of indebtedness were received by Mr. Swerte:
• He owes P30,000 from his friend Mr. Bolate who cancelled his entire
debts due to Mr. Swerte’s introduction of major clients in business
representing as his commission.
• He owes P20,000 from A Corporation in which he is also a

stockholder. The corporation cancelled his entire debt.
• He owes P38,000 from his employer who also cancelled his debt in
exchange for his two-month salary amounting to P40,000, with the
balance still to be paid by Mr. Swerte.
• He owes PI0,000 from his brother who also cancelled his debt out of
generosity because the amount was used for Mr. Swerte’s
hospitalization.
How much is the gross income of Mr. Swerte based on the above
transactions?
a. PI 00,000 c. P88,000
b. P 90,000 d. P68,000
Gross Income 269
Chapter 4
Problem 4 - 2 2 Remuneration for Casual Labor

Ana, « single proprietor, employs the following persons for n short period
(>i tune an<l pays their related remuneration
kcu; £mlecs imdxved. Status Arnoi i n t

w Cleaning of business equipment 1 day work P I ,000
\ Repair service of store 10 day work 3,000
Y Repair of home refrigerator 3 day work 1,500
V Ha by sitter Casual(1 2,500
month)
much is the total remuneration considered as reportable
compensation from casual service rendered?
h. 1M.000 e. P5,5oo
b. P4.000 d, P8,000
Problem 4 - 23 Coat of Goods Sold

During the taxable year, the total purchases of goods for'sale amounted
to P50Q.000, Transportation expenses are P5.000 for goods purchased
and 1* 10,000 for goods sold. During the year, total sales amounted to
P550.000. At the end of the year unsold goods amounted to P40,000. The
cost of goods sold for the period is
a. P505.000 e. P465.000
b. P4 75,000 d. P460.000
Problem 4 - 24 Cost of Sales

The following information is available to determine the cost of sale of X:
Purchases P 1,200,000
Purchase discounts 10,000
Purchase returns 40.000
Transportation in 5.000
Freight out 4.000
inventory, end 50.000
Inventory, beginning 20.000
How much is the cost of sale?

a. P 45.000 c. PI, 125,000
b. PI, 185,000 d, PI,135,000
Problem 4 - 2 5 Cost of Sales

The following pertain to the 2-year operations of a trading business:
Year 1
Inventory, end P 50,000 P 30,000
Purchases 850,000 400,000
Freight in 10,000 15.000
Purchase discount 20,000 25.000
The cost of sales for year l and year 2 are

Year 1 Year 2
a. P920.000 P890,000
270 INCOME TAXATION
b. P910,000 P790,000
c. P790.000 P910,000
d. P860.000 P790,000
Problem 4 - 2 6 Income from Manufacturing Business

A manufacturing business reported the following for its first year of
operation:
Purchases of raw materials P 540,000
Freight in 20,000
Raw materials, ending inventory 10,000
Direct labor 400.000
Factory overhead 200.000
Work-in-process, ending inventory 100,000
Finished goods, ending inventory 50.000
Sales 1,275,000
Freight out 12.000
Sales return 25,000
Its gross business income is

a. P238,000 c. P228,000
b. P250^000 d. P188,000
Problem 4 - 2 7 Gross Service Income

Before starting to render his service, X collected an advance payment of
P2,000 for the acceptance of the job contract. When the required service
from X was completed, X received P8,000 cash service fee after deducting
the P2,000. advance payment, plus an office machine with cash price
value of P3,000 and P2,500 cost to the seller.
The gross service income of X is

a. P15,000. c. PI 1,000.
b. PI 3,000. d. P10,500.
J
Problem 4 - 2 8 Gross Service Income

From the following data compute the reportable gross business income of
a servicing business for MCIT purposes:
Professional fee, accounting services P500,000
Salaries of accounting staff 150,000
Salaries of office assistant ^ 60,000
Accounting supplies 10,000
General supplies 5,000
The gross income for MCIT purposes would be

a. P500,000. c. P280.000.
b. P340,000. d. P275,000.
Problem 4 - 2 9 Gross Income of Banks

BPI, Inc., reported the following income during the year:
Interest income from clients P50,000,000
from money placements with other hanks

Yield 20,000,000
Realized gain on trading securities thru stock market 10,000,000
Administrative and sales salaries expense 8,000,000
Lending and investments funds salaries 3.000. 000
Interest expense paid to depositors 2.000. 000
Miscellaneous expense 1,000,000
How much is the gross income of BPI subject for regular tax purposes?
a. P65,000,000 c. P48,000,000
b. P55,000,000 d. P45,000,000
Problem 4 - 3 0 Gross Income of Banks

Metrobank, Inc. reported the following during the taxable year:
Interest income from clients P10,000,000
Gain on sale of capital assets 5.000. 000
Rent income 2.000. 000
Salaries of bank employees assigned on lending and
investments of funds 3.700.000
Salaries of Janitors and security guards 1,000,000
Depreciation of building 800,000
Depreciation of computers and teller machines used 600,000
Direct supplies used 200,000
Interest expense paid to depositors 1.500.000
How much is the gross income of Metrobank, Inc. for purposes of MCIT?
a. P17,000,000 c. P12,500,000
b. P12,700,000 d. PI 1,000,000
Problem 4 - 31 • Telegraph and Cable Service Income

How much of the following receipts of a foreign corporation would be
reported as gross income for Philippine Income Tax computation?
Service charges for messages:
Originating from outside the Philippines sent to the Philippines P 500,000
Originating in the Philippines 150,000
Collection abroad of collect messages originating in the Philippines 60,000
Collection in the Philippines of collect messages originating outside
the Philippines 10,000
a. PI 60,000 c. P560.000
b. P210,000 d. P520,000
Problem 4 - 3 2 Rental Income

How much of the following amounts received in 200B will be included in
Ibe tax return for the year 200B?
Kent for year 200A P 80,000
Kent for year 200B 480.000
fo*nt for year 200C 40,000
^'fundable deposit 120.000
” 1*720,000 e. 1*560,000
h- Pf,00,000 cl. P520,000
272 INCOME TAXATION
Problem 4 - 3 3 Rental Income

Or, Varcr: ', 25uA Cieudeue leases a portion of its commercial building
v. Mar/: vuM Me following terms:
Ad va r. cod d epos: ‘ P 40,000
Month A- rental 20,000
Annual :n.v;ranee premium to be paid by the lessee 6,000
Pvt'.xb’j HO mos.j of real estate ta* to be paid by lessee 3,000/yr
The lease contract also stipulates that a 5% of Mark’s net revenue will be
credited to Claudette as commission. Mark’s net revenue during the year
m P2//>9///>.
1. Cla udette’s 200A rent income would be

a. P 00,000. c. P247,500.
b. P240.000. d. P347,500.
2. Assume that the advanced deposit is restricted, the Claudette’s gross

rôrtable taxable income would be
a. P347,500. c. P207,500.
b. P307,500. d. PI 69,000.
Problem 4 - 3 4 Income from Leasehold Improvements

The lease dated January 1, 200B provided for construction of
improvements at the cost of the lessee, and the ownership will belong to
the lessor at the end of 5-year lease contract. The construction of
improvements which was completed at the end of the 3rd month of the
contract amounted to P240,500. The improvement has an economic life
of 5 years arid estimated scrap value of P560. The rent income on
improvements for year 1 under each method is
Outright Spread - Out
a. P240,500 PI 9,672
b. PI 47,620 P22,143
c. P239,940 PI 4,754
d. P240,500 PI 5,479
Problem 4 - 3 5 Income from Leasehold Improvement

The following information are available related to a 10-year lease contract
which commenced on June 30, 200B:
Cost of improvement put up by the lessee PI 80,000
Estimated useful life of the improvement 12 years
Date completed December 31, 200B
The reportable income from leasehold improvement for year 200B is

Outrieht Method Soread-out Method
a. PI 80,000 P 1,974
b. P180,000 P 3,750
c. PI 80,000 P-0-
d. PI 80,000 P 3,947
problem 4 - 3 6 Prc-Terminated Lease Contract

fhc following data are pertaining to a 5-vear lease contract which started
October 31. 200A:
Cost of improvement put up by the lessee P 300,000
Estimated useful of the improvement 6 years
pate completed March 31. 200B
7be income from leasehold improvement was reported by the lessor using
the spread-out method. Assuming that the lease contract was pre-
terrninatcd on December 31. 200D. how much would be the additional
ir.comc in 200D from the pre-termination of contract?
a PI 37.500 c. PI 20,000
7135.455 d. P 42.500
Problem 4 - 37 Interest Income

The lollowing are the income of a resident citizen for the period
Interest income from an investment in a 10-year bond P40.000
Interest income from 5-vear time deposit in Philippine bank 50.000
Interest income from expanded foreign currency deposit 60.000
His taxable interest income is
• PI 50.000. c. P 40,000.
: PIOO.OOO. d. P-0
Problem 4 - 3 8 Interest Income

\ is a beneficiary of PIOO.OOO payable in 3 equal payments at 12%
:erest per year. The PIOO.OOO is payable in the following annuity table:
Year Annual pav Interest Principal Balance
PI 00,000.00
P41.635 P12.000.00 P39.635.00 70,635.00
41.635 8,443.80 33,191.20 37,173.80
3 41.635 4.461.20 37,173.80 -0-
Total P24.905.Q0
ae interest income earned by the beneficiary in year 3 is

^ P41.635.00. c. P24,905.00.
- P37.173.S0. d. P 4,461.20.
ôblem 4 - 3 9 Interest Income

c - 30a . Kee Nola reported the following interest earnings:
latest income - lending business (Philippines) P500,000

inerts: income - expanded foreign currency deposit - BDO 200,000
P-tes: income - peso time deposit - BPI 100,000
"''4res: income - under CARP tenant-purchaser agreement 50,000
-Kee Nola is a resident Filipino Citizen, how much is his total

-.come taxes? (Use OSD w'hen applicable.)
= P70,000 c. PI 10,000
- PS5.000 d. PI 60,000
274 '"•cow e
2 If K«e Noia is a t^resiceuiFlmmn Ckmer - J& U.S jptaL

income tax'? Dse OSD when amskc;
a. P'70,GGC ?::.: xc
b, ?2i ?I5;dcc
Problem 4 - 4 0 Royalty Iacom«

ir*£ *Ou©wing are tne grns.1 roysuy sucnme tf a. resobem 3X
Royalty income as author IX

Royalty income from frar 2X31
Royally income iron gold nine 31C
The total final tax on royalty income is

a. P SOtCOG. “' i P13C.XC
b. PlOOrOOO. £ PI5G -TCC-
Problem 4 - 4 1 Royalty Income

X, a resident citizen received P51.50C trnn. hra mra ues. nen rr
of P3.50O for bock copynghts and P5.GGC ter adtsbe tri ttsse
transactions are correctly summarized as
Comment rar*nt
a. Gross income o: P17.5GC ?s:.co:
b. Income after tax of P31.5CC pzf* r»j“
c. Gross income of P35.0GG
d. Income after tax of P31.50C P2C.3CC
Problem 4 - 4 2 Royalty Income

Pacinan is a resident Filipino citizen, ar a. s*.
international singer. He -receives royal: L-e tte
Philippines as follows:
vctso*
Royalties non pain reliever invention ?ICO„CCC PXC.XC

Royalties from musical compositions 200 .OQC 3CC.1CC
Royalties from books 500.000 idmcc
1. What is the amount final tax on royalty income?

a. P 80,000 c. Pl-JO.GQC
b. P 90,000 d. P250,000
2. What is the amount of royalty income subject to norm

a. P - 0 - c. P50O,G0O
b. P 300,000 d. ?600,0(X)
Problem 4 - 4 3 Dividend Income

A domestic corporation received P500,000 cash dividend frc:
corporation the earnings of which are 70" c earned in the Phi
taxable dividend income of the domestic corporation is
a. P500.000. c. PI50,000.
b. P350,000. d. PI00,000.
Chapter *4 Gross Income 275
Problem <4- — 44 Property Dividend

A. a domestic cotponvtiott, invested P 1,000.000 \v\ 10.000 common
sharrs of stock of YA, mtotVter domestic covpovfttion. T\\c investment
lrpresents of the o\r tstnvi cling, shaves of \A. VYuvin^, the yevv v. YA
dechimd property ciiviclcvttis of .20,000 common shaves of mvestmenl 'm
common stock of O Corporation.
The p.u value of O's sltiwo is Y'* \ O pev shave. <W time of AccXatntion, the
tau marke't value of t Yro share was PIS per sixmo hut when A. veceived fixe
pm per tv dividend. tlxe fiviv market value was PUS,
How much \s the fi\>vi\V>Ve dividend income of rV?

a. P - O c, PtSO.OOO,
h. rM 0,000. A. P04.000,
Problem 4 — 45 Prises and Winnings

Mario received the following prizes mad. \vivuxi\\G,s. duviug the tvx>ux\x\e yeavt
First pri-zc in Talentadong Pvnoy PPO.OOO
place in bicycle race 3.000
chv. place in chess tournament \s.ooo
4C'. place in a raffle draw s.ooo
What is the total amount subject to normal tax?
a. PI 0.000 c. P31,000
b. Plo.OOO cl. P36.000
Problem 4 - 46 Prizes and Winnings

X received the following, prizes and winnings*.
First prize - raffle draw (cost of ticket, P1,000^ P SO.OOO
Philippine lotto winnings 1.000.000
Gambling winnings 300.000
Beauty contest winnings 100.000
How much is the taxable prizes and winnings?

a. P50.000 c, P349,000
b. P300.000 d. P449.000
Problem 4 - 4 7 Bad Debts Recovery

The following information is available from the records of Xc.
Year \ Year 3 Year 3
income (loss] before bad debts written off
excluding bad debts recovery Pi00,000 fP20,0001 P50,000
Bad debts written off 15,000 \0,000 5,000
Previous tear's write off, recover this year 30,000 3,000
ror year 3, the total taxable income would be

J- P-U.OOO. c. P4&,000.
b- P45,000. d, PS0.000.
27€ meowe rurjcno*
PtcMtest & — 4' 5n[-C ZtefiC. Rif CO I g.IJ!
~'ue ituevcng jad^cr paetmgfr are arsihhter
.bhânoe so’ Dae Debts

* ■ UktUuSTlt^: pi,5qc
;e*r . v’ rtf r XiD
December 31. balance 1.300
Vjtrjrmrts r.ecenmbie
?:'/:. :rg
-i
hear 2 tales P 502
or 5000, rr, :x.xc
bet memmrg mcmne of P500 ■vrs.s reported. In year 2. P6X of
or rras cnbectetL The income from bad deb
In year 2r A or.; mccme tax ammmcmg to P12.DOO g~vf a

vat of ptxo. year 3, P5AOD o: year I local tax ?2,ODO incrmf
«, a JCS-— sjrm oi *st return snould be reoor’ed as
c_ ?6,0QG.
d, P5.OD0,
Problem 4 - 5 0 Tax Refund

X Corpcratmn recebed the fcbcrairg refunds during the taxable vear.
licensing fee ? 30, OX1

Registration tees of delivery rrces i,O0C
Donors tax 50,30?

Real estate tax 5,00?
Community tax 3.00?
Special assessment 10,000

Corporate income tax 150.000
Foreign income tax previously claimed as tax credit 60.000
so,ooo
Foreign income tax previously claimed as deduction
Value-added tax 120.000
How much is the reportable gross income from tax refunds?

a, P42,000 c. PI 10,000.
b. P92,000 d, PI22,000.
C?Mpt*r 4 Gross Income 277
Problem 4 - 5 1 Tax Refund

During the year, the following tax refunds were received by the taxpayer:
Real property tax deducted as expense in the previous year PI0,000
Income tax paid in the previous year 5,000
Percentage on equity shares sold last year 2,000
Local taxes paid for the previous year 500
The income from tax refund to be reported should be

a. Pi 7,500. c. P10,500.
fc. PI2,500. d. P10.000.
Problem 4 — 52 Damage Recovery

Abner received the following amount in relation to damage recoveries:
Loss of property P500,000
Unfair competition .✓ 400,000
Physical injuries 300,000
Loss earnings 100,000
Moral damages for breach of contract 150,000
Exemplary damages for breach of contract 50,000
Hospital expenses 50,000
Interest on damages 10,000‘
The gross income subject to tax from damage recoveries would be

a. P760,000. c. P660,000.
b. P710,000. d. P510,000.
Problem 4 - 5 3 Damage Recovery

Maria engaged into a one-year contract of music recording with Manny in
which the Jatter received P500,000 ns talent fee. Manny, however, did not
honor the contract by not recording a single song during the one-year
contract period, Maria filed a case against Manny and recovered damages
as follows:
Recovery of talent fee 1-500,000

Liquidated damages for actual cost incurred 200,000
Actual damages for anticipated profits 500,000
Moral damages for breach of contract 100,000
Exemplary damages for breach ol conlracl 50,000
Interest on damages 10,000
haw much is tire amount lo he included as taxable gross iueomci

!1 PSIX),000 I WOO,000
*>■ 1700,000 <*■ I WOO,000
ôblom 4 - 5 4 Annuity
Mr. Notmnl received P20,000 as annuity of life insurance tmm Malayan
1'ile. The annuity received includes a 10% inteiest Int uiu y < u t . o\v
,n,|( b I n the amount of taxable annuity?
n 170,000 <*« 1* ! » K I W
l) I' 2,000 d. V 0
278 INCOME TAXATION
Problem 4 - 5 5 Annuity
\ received an annuity of P5.S80, inclusive ot 12% interest ns part of the
insurance plan entered into by X, What amount ot this annuity is taxable
against X?
a! Pc,880 o. P70h
b. P5.250 cl. P<>3(>
Problem 4 - 5 6 Illegally Obtained Income

Mr. X received a letter from Mr. V, his brother, to withdraw $1,000 from
the PNB. The teller of PNB, however, issued $10,000 to Mr. X in which
the latter took the entire money and spent the $0,000 immediately.
Assuming that the exchange rate is P50 per $ 1, how much is the
reportable income received bv error of Mr. X?
a. P 50.000 ‘ c. P500.000
b. P450.000 d. P - 0 -
Problem 4 - 5 7 Illegally Obtained Income

Golang received a salary of P5,000 per month as a conductor of
Philippine Lapid Bus Company. Aside from his salary, he also obtained
some money from the changes of bus clients which he intentionally
neglect to return with an estimated amount of P4.000 per month. If the
BLR assessed Golang using the net worth method, and net increase in
net asset is determined at PI 08,000, how much of the illegally obtained
income would be taxable?
a. P108.000 c. P48.000
b. P 60,000 d. P42.000
Problem 4 - 5 8 Gross Income (Servicing)

A-1 Barber Shop shows a total receipts of P425.000 from its hair cut and
massage services in 200B. The following expenses were incurred by the
barbershop in providing sendees:
(a) Commission given to the barbers was 65% of the total receipts.
(b) Rental expense of barbershop space, P3,000 per month.
(c) Depreciation of furniture and tools used in rendering service,
P5,000.
(d) Interest expense for buying furniture, P2,000; and ointment
used PI,750. ■
Required: For income tax computation, what is the correct amount of

the gross income of A-1 Barber Shop?

Atty. Orville Thomas is employed as a corporate-lawyer of FLP,
International. In 200B, he received the following from his employment:
Salary P300,000
One thousand corporate shares of stock for special service
rendered in October 200A:
Fair market value per share - 200A 10®
Fair market value per share - 200B 125
Cancellation of debt in lieu of service rendered 50,000
firovn Incorno
ch„iii»f * ■m
'' (Ilf' f oinpnny In Oir brji'di* im y) /<),()()<)

(»rrWi* ulimlng 4(),<)()()
peqtdrcdi f'ompuP lor lh«- Ktcm «ump'ncmjon m< am *- of Mr.
I honiMM for y f , m 2 0 0 ) \
problem 4 60 Tux Benefit

I ('orjroiniion <!*•» Imrd 2J)% f»toc.k dividend or propo/fy dividend ;d the
,)|)|i()n Of ti>r NfO< klioldrtrc
flu’ fnii mnrkri valuer* of ibe rdoeku (owned by L Corporation) were a.*
I'oIIown:
I leclnrntion dote Record dole Dk.jtr i but ion dote
M«rcbJjLJ29PjJ April 15, 200A Mav 15.2Q0A
Market value
I’'’1 P50 P&5 ppQ
The values ol the property dividend that, represents the investments in

Jade Corp. common stocks were os follows:
Fair market value per share
Cost/ Declaration date Record date Distribution
share March 15. 200A April 15, 2QQA May 15, 20QA
Market value .
per share P40 P6Q PZQ p73.
Stockholders C, D and E opted to receive property dividends instead of

stock dividend.
The stockholders together with their respective number of shares owned

in L Corporation after the exercise of option were as follows:
Stockholders A B C D E
Number of shares owned 1,000 1,000 1,000 1,000 1,000
Add: Stock div. received 200 200 0 0 0
Total no. of shares owned 1,200 lr200 lr00Q 1.000 1?Q0Q
Required: What is the amount of final dividend tax on the dividend?
Problem 4 - 6 1 Various Sales

The following data pertains to the transactions of Miss Liza Bety for year
200x:
Total net sales from his trading business P 500,000

Cost of sales 300.000
Sale of vacant lot used as open warehouse for his
trading business. This was acquired two years ago
at cost of PI50,000. 200.000
Sale of family home - acquired 12 years ago, P800,000 of
the proceeds was used to acquire his new residential
house and lot. She was granted tax exemption by the
BIR 1,000,000
280 INCOME TAXATION
Sale of his personal computed He bought this for his

personal use, 2 years ago with book value of P20,000. 10,000
Sale of personal car, acquired 3 years ago with book value
of P50,000 100,000
Required:
1. What is the 200x gross income of Bety subject to regular tax?
2. How much is the supposedly final tax taken from the proceeds of
Miss Bety’s transactions for the year?
Problem 4 - 6 2 Comprehensive Problem

Mrs. Rowena Gorospe reports the following items of income and expenses
as of December 31, 200B:
Cash salary, net of withholding tax, P25.000 and SSS, P3,000 P302,000
Dividend from San Magnolia Corporation 30,000
Cancellation of her debt from San Magnolia Corporation 50,000
Living quarters and meals allowances, within the
employer’s premises 40,000
Income tax paid by the employer 5,000
One year note receivable from the employer, net of discount
PI,000 (maturity June 30, 200B) 19,000
Gross income from business 400,000
Allowable expenses 250,000
Prepaid rent income * 50,000
Interest from insurance proceeds, net of withholding tax 18,000
Bad debt recovery (60% previously written-off) 38,000
Gambling winnings 20,000
Gambling losses 30,000
Income tax refund 8,000
Household expenses 200,000
Donation from relatives 150,000
Winnings 10,000
Stock dividends from Asia Brewery at fair market value 4,000
Required: Compute the taxable income subject to normal tabular tax

before personal exemptions.
EXCLUSION
FROM GROSS INCOME
exclusion from gross income
"!vx< luMion,” ns used in income Indention, refers to items or

receipts not included in the* determination of Mu* taxable income
bemuse the law or treaty provides that they are exempt from
income tax.
The law specifically excludes certain items from gross income.

Items excluded from gross income are generally nontaxable, They
are not included in the income tax return unless information
regarding them is specifically called for.
Nontaxable Compensation Income
This refers to the earnings that are compensation in nature but

which the law specifically excludes as part of the gross income for
taxation purpose's. /s.v. 32(H), nirc /
Specifically, these nontaxable compensation incomes are:
1. Compensation income including holiday pay, overtime pay,

night shift differential pay, and hazard pay earned by
minimum wage earner, who has no other reportable income
(Rcik Regs. No. 10 2008);
2. Compensation income and/or business income earned

outside the Philippines by a Filipino Overseas Contract
Worker, nonresident Filipino Citizen, resident alien and
foreign corporation (Sec, 23, NiRcr, '
13,h month pay, and other benefits not exceeding P82.000 per
year (R.A, 10053 as amended),
De minimis benefits within the prescribed ceiling;

282 INCOME TAXATION
5. Compeimafion received under employer's convenience benefit

rule;
6. Proceeds of life jrmumnee policies paid to the heirs upon the

death of the insured //>w i2(ii}(i)t wftcj;
7. Amounts received through accident or health insurance, or

under the Workmen's Compensation Act, as compensation for
personal injuries or sickness, plus the amounts of any
damages received, whether by suit or agreement, on account
of such injuries or sickness. (Hue. :n(U)('f), nh<q
8. Retirement benefits under KA 7641 and those received by

officials and employees of private firms, whether individual or
corporate, in accordance with a reasonable private plan
maintained by the employer. The following conditions must be
m e 1: (s^t. rj(i Nih>c)
a. The retiring official or employee has been in the service of

the same employer for at least 10 years;
b. , l ie/she is not less than 50 years of age at the time of
retirement; and
c. He/she has not availed of similar benefits in the past.
The law does not require that the employee’s service should be
uninterrupted within 10 years;
9. Any amount received by an official or employee or by his heirs

from the employer as a consequence of separation of such
official or employee from the service of the employer because
of death, sickness or other physical disability or for any cause
beyond the control of the said official or employee (Sec. 32(B)(6b),
NJFtC)’,
10. Social security benefits, retirement gratuities, pensions and

other similar benefits received by resident or nonresident
citizens of the Philippines or aliens who came to reside
permanently in the Philippines, from foreign government
agencies and other institutions, private or public;
11. Benefits received from or enjoyed under the Social Security

System (SSS), including maternity benefits as stipulated in
R.A. 8282;
12. Benefits received from the (ISIS, including the retirement

gratuity received by government officials and employees;
Chapter 5 Exclusion from Gross Income 283
13. GSIS, SSS, Medicare (Phil-health) and PAG-IBIG contributions

and union dues of individuals;
14. Salaries and stipends in dollars received by non-Filipino

citizens serving as staff of the International Rice Research
Institute and the Ford Foundation (ra 2707)\ and
15. Tax exemption of allowances paid to militaiy personnel. (Philippine

Daily Inquirer, March 23, 2001)
16. Casual employment like house helper/maid, not connected in

the conduct of business of employer
Nontaxable Other Receipts

These refer to the amounts or values received other than
compensations that are not taxable according to law, such as:
1. The amount received by the insured as a return of the

premiums paid by him under life insurance, endowment or
annuity contract either during the term or at the maturity of
the term mentioned in the contract or upon the surrender of
the contract.
2. The value of property by gift, bequest, devise or descent:

provided, however, that the income from such property, as
well as gift, bequest, devise or descent of income from any
property, in case of transfers of divided interest, shall be
included in the gross income.
3. Income of any kind to the extent required by any treaty

obligation binding upon the Government of the Philippines.
4. Payments of benefits due to any person residing in the

Philippines under laws of the United States administered by
the United States Veterans Administration (USVA).
5*. Income derived from investments in the Philippines in loans,

stocks, bonds or other domestic securities, or from interest on
deposits in banks in the Philippines by:
a. foreign governments;
b. financing institutions, owned, controlled or enjoying
refinancing from foreign governments; and
c. international or regional financial institutions established
by foreign governments.
^ Income derived from any public utility or from the exercise of
any essential governmental function accruing to the
284 INCOME TAXATION
Government of the Philippines or to any political subdivision

thereof.
7. Prizes and awards made primarily in recognition of religious,

charitable, scientific, educational, artistic, literary, or civic
achievement, but only if the recipient was (is)
a. selected without any action on his part to enter the
contest of proceeding, or
b. not required to render substantial future services as a
condition to receive such prize or award.
8. Prizes and awards granted to athletes in local and

international sports competitions and tournaments whether
held in the Philippines or abroad and sanctioned by their
national sports associations.
9. Gains realized from the sale or exchange or retirement of

bonds, debentures, or other certificate of indebtedness with a
maturity of more than 5 years.
10. Interest on long-term deposits or investments in banks (with

maturity of 5 years or more) received by individuals (except
nonresident aliens not engaged in business or practice of
profession in the Philippines.
11. Interest received by a nonresident individual or a nonresident

corporation from deposits with the depository banks under
the expanded foreign currency deposit system.
12. Interest on the price of land covered by CARP (Comprehensive

Agrarian Reform Program).
13. Gains realized by the investor upon redemption of shares of

stock of a mutual fund company.
14. Intercorporate dividend, or dividend received by domestic

corporation or resident foreign corporation from a domestic
corporation.
15. Philippines Charity Sweepstake winnings and Philippine Lotto

winnings.
16. Income earned by non-resident and by alien from sources

outside the Philippines.
Tax Exemption of Statutory Minimum Wage Earner (MWE)
Statutory Minimum Wage (SMW) shall refer to the rate fixed by the
Regional Tripartite Wage and Productivity Board (RTWPB) of
DOLE. The RTWPB of each region shall determine the wage rates
in the different regions based on established criteria and shall be
the basis of exemption from income tax. (Note: The summary of current
Regional Daily Minimum Wage Rates is found in the Appendix A of this book.)
Under R.A. 9504, the compensation income of MWEs who work in

the private sector or public sector and being paid the SMW
applicable to the place where he/she is assigned is exempt from
income and not subject to withholding tax. The tax exemption
includes holiday pay, overtime pay, night shift differential pay
and hazard pay earned by the MWEs.
However, an employee who receives additional compensation that

makes his basic salary above minimum wage is no longer exempt
from income tax, except for the following additional compensation
received during the year not exceeding P82,000:
• 13th month pay; and

• Other benefits such as Christmas bonus, productivity-
incentive bonus, loyalty award, gifts in cash or in kind, and
other benefits of similar nature. (r.a. io653; Rev. Regs. No. 3-2015)
MWEs receiving other income, such as income from the conduct

of trade, business, or practice of profession, except income
subject to final tax, in addition to compensation income are not
exempted from income tax on their entire income earned during
the taxable year. This rule, notwithstanding, the SMW, holiday
pay, overtime pay, night shift differential pay and hazard pay
shall still be subject to income tax and consequently to
withholding tax. (Rev. Regs. No. 10-2008)
Any reduction/diminution of wages for purposes of exemption

from income tax shall constitute misrepresentation. It shall result
to the automatic disallowance of expense. The offenders may be
criminally prosecuted under the existing laws.
Illustration 1 - Tax-exempt MWE

Mr. Joseph Tayo (single) is a minimum wage factory worker.
During the month, he received P10,000 salary, PI,000 hazard
pay, P5,000 overtime pay and P2,000 night shift differential.
2M INCOME TAXATION
How much is the nnimml of nontnxnblr income and taxable

income of Mr. Tnyo during the month (before personal
exemption)?
The n o n t n x n b l r a n d taxable income of Mr. Tayo during the month

would hr
Nontaxahle Taxable
Minimum wngc P 10,000
Overtime pay 5,000
Night shift different ini 2,000
lln/.nrd pny 1.000
p3
j»
jo
Nrt income before personal exemption El&QftQ
:
Note: Since Mr. Tnyo is « MWE and has no other income, all of his income earned
is nontnxnblr and consequently not subject to withholding tax. (R.A. 9504)
Illustration 2 - MWE with Taxable Additional Compensation
Josephine (single) is a MWE sales worker. During the month, she

received PI0,000 salary, P40,000 sales commission, P5,000
overtime pay, and P2,000 transportation allowance pre-computed
on a daily basis.
How much is the amount of nontaxahle and taxable income of

Josephine during the month (before personal exemption)?
Nontaxahle Taxable
Minimum wage P-0- P 10,000
Sales commission -0- 40,000
Overtime pay -0- 5,000
Transportation allowance 2.000
Compensation income before
personal exemption P 2.000 P45.0QQ
Note: Josephine shall no longer enjoy tax exemption because she received a sales
commission which is not covered by the tax-exempt additional compensation (Rev.
Regs. No. 10-2008; Rev. Regs. No. 3-2015). Transportation allowance pre-computed on a
daily basis is tax-exempt. {BIR Ruling No. DA (BCB-026) 778-2009 dated December 15,
2009)
13th Month Pay, Bonuses, and Other Benefits

On February 12, 2015, President Benigno S. Aquino signed into
law R.A. 10653 amending Sec. 32(7)(e) of NIRC of 1997.
The amendment increased the 13th month pay and other benefits
ceiling from P30,000 to P82,000 to be excluded from the
computation of gross income for income tax purposes. Thus, such
amounts P82,000 or less of 13th month pay and other benefits are
exempt from income tax beginning January 1, 2015.
Revenue Regulations No. 3-2015 dated March 16, 2015 clarified

that the threshold amount of P82,000 shall only apply to the
following:
(a) 13th-month pay equivalent to the mandatory one month

basic salary of officials and employees of the government,
(whether national or local), including government-owned or -
controlled corporations, and or private offices received after
the 12th-month pay; and
(b) Other benefits shall include Christmas bonus, productivity-

incentive bonus, loyalty award, gifts in cash or in kind and
other benefits of similar nature actually received by officials
and employees of both government and private offices.
Other than the above benefits, the P82,000 exemption shall not
apply to other compensation received by an employee under an
employer-employee relationship, such as basic salary and other
allowances. Likewise, this exclusion from gross income is not
applicable to self-employed individuals and income generated
from business.
The law also gives the President the authprity to adjust the
threshold amount every three years after the effectivity thereof
with the Consumer Price Index to be published by the NSO.
Illustration
Miss Malou Wang receives the following compensation income

during the year:
Annual basic salary P600,000
13th month pay ’ 50,000
Productivity incentive bonus 20,000
Total fixed allowances V 30,000
Clothing allowance - de minimis 15,000
The gross income of Miss Wang can be shown as follows:

Nontaxable Taxable
Basic salary P600,000
13th month pay . P50,000
Total fixed allowances 30,000
Clothing allowance - de minimis ceiling 5,000
Clothing allowance - excess of ceiling 7.000 3.000
Total £22*001}
288 INCOME TAXATION
Notes:
1. The nontaxable 13th month pay and other benefits are now subject to a ceiling
of P82,000. It does not include other allowances and 14th month pay.
2. The clothing allowance classified as de minimis is not taxable to the extent of
P5,000. Any excess amount can be used as nontaxable other benefits if the
13th month pay and other benefits do not yet reach the P82,000 ceiling. (Rev,
Regs. No. 10-2012; R.A. 10653; Rev. Regs. No. 3-2015)
DE MINIMIS
The term “de minimis” benefits are privileges of relatively small
value given by the employer to his employees. As a tool of social
welfare, these are provided for the health, goodwill, and
contentment of the employees.
These benefits are exempt from income tax and withholding tax
on compensation income as well as from fringe benefit tax. (Rev.
Regs. No. 2-98; 3-98)
As amended by Revenue Regulations No. 5-2011, the following

shall be considered “de minimis” benefits:
a. Monetized unused vacation leave credits of private employees

not exceeding TO days during the year;
b. Monetized value of vacation and sick leave credits paid to

government officials and employees;
c. Medical cash allowance to dependents of employees not

exceeding P750.00 per employee per semester or P125 per
month;
d. Rice subsidy of PI,500.00 or one (1) sack of 50-kg rice per

month amounting to not more than PI,500.00;
e. Actual medical assistance, e.g. medical allowance to cover

medical and healthcare needs, annual medical/executive
check-up, maternity assistance, and routine consultations,
not exceeding PI0,000 per annum;
f. Laundry allowance not exceeding P300 per month;
g. Employees achievement awards, e.g., for length of service or

safety achievement, which must be in the form of a tangible
personal property other than cash or gift certificate, with an
annual monetary value not exceeding PI0,000.00 received by
the employee under an established y/ritten plan which does
not discriminate in favor of highly paid employees;
r. Gifts given during Christmas and major anniversary

celebrations not exceeding P5.000 per employee per annum;
and
i. Daily meal allowance for overtime work and night/graveyard

shift not exceeding 25% of the basic minimum wage.
The Revenue Regulations on “de - minimis” benefits are further

amended with:
Uniforms and clothing allowance not exceeding P5,000 per

annum CRevt Regs. No. 8-2012, effective January 1, 2012);
Note: The uniforms and clothing allowances was previously limited to P4,000.
k. Productivity7 incentive schemes arising from collective

bargaining agreement (CBA) not exceeding PI0,000 per year
Ret . Regs. No. 1-2015. effective January 5. 2015);
Benefits granted to employees which are not in the list, although

of relatively of small value, cannot qualify as “de minimis”
benefits, and hence, shall be subject to income tax, and
consequently, to withholding tax on compensation income. (Rev.
Reg- Nrj. 5-2011, as amended)
Notes:
; All allowances regularly received, except for the de minimis within the ceiling
amount, are subject to income tax.
2 De minimis amendments under Revenue Regulations No. 5-2011:
a. Omission of the list of flowers, fruits, books and similar items for special
occasions as de minimis. With the amendment, these are now subject to
income tax and WTW.
h. Daily meal allowance is now taxable unless provided for overtime work
and night/graveyard shift.
c. The scope of de minimis is limited exclusively to those benefits which are
included in the enumeration. This is a departure from the previous
position taken by the BIR.
d. RR No. 5-2011 clarifies the tax treatment of benefits in excess of the de

minimis threshold as discussed in the rules on de minimis and other
benefits.
Rules on ‘De Minimis’ and ‘Other Benefits’

vVifh the increase of 13th month pay and other benefits to
KS2.000, the following rules shall be observed in determining the
taxability of the ‘de minimis’ under Section 32(b)(7)(e) of the Tax
Oxie: Oc. \. Rev. Regs. No. 10-2008 os confirmed by Rev. Regs. No. 5-2011)
r*u mOCME TAXATION
. The ‘he :de rninunis' benefits conforming to the

herein prescribed shall not be considered
determining "he PS2,000 ceiling of 13^ month pay and other
benefit^'' excluded from gross income under Section 32fb){7](ej
of *he 7ax Code.
2 The excess of ‘he de minimis" benefits over the amount of

prescribed ceilings can be included as part of the ‘other
benefits’ not subject to tax as long as the total amount of the
1 y'Tj TisjTi'h way and other benefits would be confined only to
P82,000 ceiling.
7 The excess of de minimis not absorbed by the P82,000 13th

month pay and other benefits is subject to income tax on
compensation. (Rev. peg* No *22011,
4 The MV/Es receiving ‘other benefits’ exceeding the P82,000

limit -shall be taxable on the excess benefits, as well as on his
salaries, wages and allowances, just like an employee
receiving compensation income beyond SMW. (Rev. Regs. No. 10-
200%)
IIIu*tration 1 - ‘De minimis* beyond ceiling and ‘other

benefits’ absorbing excess of ‘de minimis*
Mr. A received the following compensation and benefits during the

year:
Total basic salary during the year P300,000

1 :j/u month pay 25,000
Hicc subsidy (P2,000 per month) - de minimis 24,000
How much is the taxable and the nontaxable compensation?
The taxable and nontaxable compensation is determined as

follows:
Taxable Nontaxable
Total basic salary P300,000
Ur tninimm:
Rice subsidy (PI,500 x 12) P 18,000
Other benefits:
13°» month pay P25,000
Excess of rice subsidy 6.000 31.000
'totals P300.000 P 49.00(2
Not©: The excess of ‘de minimis' can be absorbed by the ‘other benefits’ until it
rrtu hrs the P82,000 ceiling. The amount in excess of P82,000 other benefits
< riling in taxable.
Illustration 2 - 'De minimis’ within ceiling and 'other

benefits’ beyond ceiling
Mr. B received the following compensation and benefits during
the year:
Total basic salary during the year P900,000
Clothing allowances - de minimis 20,000
How much is the taxable and the nontaxable compensation?

follows:
Taxable Nontaxable
De minimis:
Clothing allowances P 5,000
Other benefits: ,
13th month pay P75,000
Excess of clothing allowances 7.000 82,000
Taxable clothing allowances 8.000
Totals P908.000 P 87.000
Note: The excess amount of "other benefits’ ceiling cannot be absorbed by the "de
minimis.’ The amount in excess of P82,000 other benefits ceiling is taxable.
Illustration 3 - MWE receiving 'other benefits’ exceeding

P82,000
Mr. C, a minimum wage earner, received the following

compensation and benefits during the year:
total basic salary during the year P150,000

13th month pay 12„500
lice subsidy (P2,000 per month) - de minimis 24,000
tooductivity incentive bonus 77,500

follows:
Taxable Nontaxable
De minimis:
Rice subsidy (PI,500 x 12) P 18,000
Other benefits:
13th month pay P12,500
Excess of rice subsidy 6,000
Productivity incentive bonus 77.500 14.000 82.000
Totals P164.Q00 P100.000
292 INCOME TAXATION
Note: The basic salary of the MWE is now taxable because he received ‘other
benefits’ exceeding P82.000.
Tax Exempt Contributions

Mandatory GSIS, SSS, Philhealth, PAG-IBIG contributions and
union dues of individuals are considered as tax-exempt
contributions /sec. 32 (B), nirci.
GSIS Educational Plan Premium and GSIS Memorial Plan

premium shall be considered as part of employee's compensation
subject to withholding tax. (bir Ruling 002-99)
Voluntary contributions (excess amount of the mandatory

contribution) are subject to withholding tax, beginning July 1,
2011. (RMC No. 53-2011)
Illustration
The pay slip of Mr. Cawa Wana, a government employee, reported

the following items:
Gross compensation P 15,000
Less: Withholding tax P 1,000
Advances from cooperative 500
GSIS membership 300
GSIS educational plans 200 2.000
Net pay P 13.000
The compensation income excluded from gross income would be

P300 representing GSIS membership. The taxable compensation
income would be PI4,700.
Benefits under Employer’s Benefit Rule

A benefit is said to be for the convenience or advantage of the
employer when it is required by the nature of work, or necessary
to the trade, business, or profession of the employer. Benefit
under employer’s benefit rule is not subject to income tax.
Illustration
Mario Tsuper, a driver of a physician, receives P9,000 as basic

salary. In addition to his basic salary, he is provided free board
and lodging by his employer with an approximate value of P5,000
per month with an agreement that he can be called to work

anytime.
Tsuper's basic salary amounting to P9,000 is subject to tax, but

his additional benefits are not subject to tax.
Proceeds of Life Insurance

The proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured, whether in a single
sum or otherwise, are nontaxable for income tax purposes.
Accordingly, the proceeds of life insurance can be considered

nontaxable only at the death of the insured person.
This exclusion is applicable to group life insurance proceeds,

death benefit payments under the workmen’s compensation
insurance contract, and health or accident insurance contract
having the characteristics of life insurance proceeds payable by
reason of death.
The reason for excluding the proceeds of life insurance from gross
income is that the amount paid is due to the death of the insured
person. Hence, the proceeds of life insurance received by the
beneficiary merely represent a reimbursement for the loss (of life)
suffered.
The exclusion applies regardless of who the beneficiary is,

whether a family member, or other individual, corporation or
partnership, except the estate of the insured person which is
subject to estate tax if the assignment of beneficiary is revocable.
However, if the proceeds are held by the insurer under an

agreement to pay interest thereon, the interest payments shall be
included in the taxable income. (Rev. Rev.2, sec.22; sec.32Ba, mrc)
Illustration
Assume that Mr. Satur Nino insured himself for PI,000,000. After
paying P300,000 of insurance premium, Mr. Nino died. His
surviving wife designated as a revocable beneficiaiy received the
amount. Is the PI,000,000 life insurance proceeds taxable?
£raptef 5 Exclusion from Gross Income 295
The proceed?) of life insurance token by a corporation on the life of

bn executive employee to indemnify it against loss in case of his
death do not constitute taxable income. Accordingly, the premium
f-ypenw related thereto h> rud a. deductible expense of the
arnpbyer.
If the proceeds are paid to a transferee for a consideration, the

proceeds of life insurance are taxable to the extent of the amount
exceeding the return of capital.
Gifts, Bequests, and Dovlses

'fhe value of property acquired by gift , bequest, devise, or descent
fehall be excluded from gross Income, provided that income from
feudi property shall be Included in gross income (tha.Mtn, ninq.
Gilt refers to any property legally and validly transferred from one
person to another for free.
22*£ TAXATION
Becmeaa. rehm tc personal property transferred from one person

ZP' *STL
Seme u s real prêrty transferred tram one person to another

3* v
Tint :'u3;mg rules are applicable in deterniining the taxability of
3"- men ic n:snc tax
- hue Thue c: ±.5 property acquired through donation or legal

Eucmesc~cu is exempt from income taxation, but the income
hemed fmm such property is included for income tax
pmpimem ssn.m svmrmc;
t- hindrance received based on a separation agreement is not

mxahde interne for it represents support of family.
b. Arm or the principal paid under a marriage settlement is

m taxable income.
e. .Amount received by virtue of settlement of will litigation is not
L ~*** men payments are made to show goodwill without legal

denmndable obligation to give, then the payment is a gift and
UC’t it.' CteCt to income UjX. Scr.oC u. Corrurasstonjer of Lnxemal Revenue, 174
tCc 'Yi ZCA 5*
UltLEtration
brie received PI .000.000 as a gift from Mayor Tsong. Since there
is an increase in her wealth, she contemplates to include the
Pi .000,000 as part of her gross income subject to tax. Is Kris
corrects
So. Kris should not include the PI ,000,000 as part of her gross
income for income tax purposes. The PI,000,000 is a gift, and
therefore exempt from income tax. However, the PI,000,000 is
subject to donor s tax to be paid by Mayor Tsong.
Tot*' Dcrafted diûssior..'* about donor's taxes are presented in Transfer and
Xoxotson written by the same authors.
Compensation for Damages
As a rule, amounts received through Accident or Health

Insurance or under Workmen's Compensation Acts, as
compensation for personal injuries or sickness, plus the amounts
of any damages received whether by suit or agreement on account
of such injuries or sickness are excluded from gross income.
Sec 32B4.N2RC: Rev. Reg. 2, See 63)
Examples of nontaxable and taxable damages recoveries are
1. Nontaxable, if the compensation for damages is on account of
a. Personal (physical) injuries or sickness; /Sec. 32 (B)(4)(a), nircj

b. Any other damages recovered on account of personal
injuries or sickness; jsec. 32 (B)(4)(a), njrc]
c. Exemplary and moral damages for out-of-court
settlements including attorney’s fees; (Bank of America n.a. -
Manila Branch vs. Commissioner of Internal Revenue, CTA Case No. 6144, March 14,
2005)
d. Alienation of affection, or breach of promise to marry; and
e. Any amount received as a return of capital or
reimbursement of expenses.
2. Taxable, if the compensation for damages is a payment for
a. Actual damages for loss of anticipated profits;

b. Moral and exemplaiy damages awarded as a result of
breach of contract; (BIR Ruling No. DA-489-2005 dated December 6, 2005)
c. Interest for nontaxable damages above; and
d. Any damages as compensation for unrealized income.
Illustration
Mr. Sammy Haban, a supervisor in a Milling Company, was

accidentally bumped by Zigzag Taxi resulting to his severe
physical injuries.
The court decided that Zigzag would pay Haban the following
damages which Zigzag paid for a certain period of time:
Moral damages PI00,000
Exemplary damages 50,000
Damages for permanent loss of earning capacity 200,000
Actual liquidated damages 50,000
Compensation for unrealized earnings 30,000
Total P430.000
298 INCOME TAXATION
Note: Only the compensation of P30.000 for unrealized earnings is taxable. The
P400.000 is nontaxable because they represent damage recoveries related to
physical injuries.
Retirement Benefits, Pensions, Gratuities, Etc.

a. Retirement benefits with a reasonable private benefit plan
Retirement benefits received by officials and employees of
private firms, whether individual or corporate, in accordance
with a reasonable private benefit plan maintained by the
employer are not taxable subject to certain conditions as
discussed in Chapter 4.
b. Separation pay beyond the control of employee

Any amount received by an official or employee or by his heirs
from the employer as a consequence of separation of such
official or employee from the service of the employer due to
death, sickness or physical disability or for any cause beyond
the control of said official or employee is not taxable.
Involuntary separation and retirement pays are tax-exempt

because they are mere provisions for the person’s impending
state of unemployment. This topic has been discussed in
Chapter 4.
c. Social security retirement benefits

Social security benefits, retirement gratuities, pensions and
other similar benefits received by resident or nonresident
Filipino citizens or aliens who come to reside permanently in
the Philippines from foreign government agencies and other
institutions, private or public are nontaxable.
SSS monthly pension is excluded from gross income, /Sec. 32

(B)(6)(e), nircj. The monthly pension shall be suspended upon re
employment or resumption of self-employment of a retired
SSS member who is less than sixty-five (65) years old. [Sec. 12-
B(c), R.A. 1161; R.A. 8282, as amended]
SSS funeral benefit equivalent to twelve thousand pesos

(PI2,000) granted upon the death of an SSS member is
excluded from gross income. [Sec. 13-B, R.A. 1161;R.A. 8282, as amended]
Chapter 5 Exclusion from Gross Income 2ff
U Benefits received under U nited States Veteran A drvnis crayon.

Payments of benefits due to any person residing ;r. the
Philippines under the laws of the united States administered
by the LTSVA are not taxable. ;s*c. n av^dj. *tfc
e. Benefits received as provided by Social Security Act

Payments of benefits made under the Social Security Act
82s2}. as amended.
Maternity benefits advanced by the employer to the employee

are excluded from gross income, and are therefore exempt
from withholding tax, \sir Ruling 012-99Sec. :~a. r.a_. 5232.
SSS maternity leave benefit of equal to average daily salary

credit for 60days or 78 days in case of caesarian delivery. SSS
sickness benefits of 90% of daily salary credit.
f. Benefits received from GSIS

Benefits received from GSIS and retirement gratuity received
by government officials and employees are not taxable. (See.
32(Bj'6), NJRC; Sec. Bfl), Rev. Reg. 2-98)
Illustration
Upon retirement of Mr. Cruz, a government employee, he received
from GSIS his lump sum pension computed as 1.5.months for
eveiy year of service. He was employed in the government for 20
years and his last pay was PI0,000 a month.
The lump sum pension of Mr. Cruz is P300,000, computed as

follows:
Lump sum pension

fP10,00D x 20 years x 1.5 months) P 300,000
The entire amount of P300,000 is not taxable and, hence, not

included in the gross income of Mr. Cruz.
Tax-Exempt Government Income

The following earnings are not subject to tax:
a. Income derived by foreign government in the Philippines; and
b. Income derived by the government or its political subdivisions.
(Sec.32B7, NIRC)
3CC INCOME TAXATION
Illustration
Assuming :hu: :he Philippine Government earned the following

income during :he year:
Income from:
PAGCOR Operation P5.000.000
NAPOCOR Operation 3,000.000
Holders of Public Utility Franchise 2,000,000
Land and Transportation Office * ,000,000
Collection of National Taxes 10,000,000
i ne nontaxable earnings of the Philippine Government would be:
Holders of Public Utility Franchise P 2,000,000

Land and Transportation Office 1,000,000
Collection of National Taxes 10,000,000
Nontaxable earnings P13.000.00Q
Incomes derived from any public utility or from the exercise of

any essential governmental function accruing to the Government
of the Philippines or to any political subdivision are excluded from
gross income, /sec. 32 (B)(7)(b), nircj
With the enactment of R.A. No. 9337, the income of PAGCOR, a

government owned and controlled corporation, is now subject to
corporate income tax but exempt from VAT. (paccor vs. bir, et oi., g.r.
No. 172087 dated March 15, 2011)
Incomes derived by the Philippine Government from
nongovernmental function such as NAPOCOR and PNR are
Subject tO income tax. (Collector vs. Bisaya Land Transportation, 105 Phil. 1338)
Tax-Exempt Income of Foreign Governments
In relation to the observance of international comity, the Tax

Code excluded from gross income those earnings derived by
Foreign Government in the Philippines. (Sec. 32 (B)(7)(a), nircj
Illustration
China invested in the Philippines with earnings within as follows:

Interest income from bonds P5,000,000
Interest on time-deposits in Philippines banks 2,000,000
Dividend income received from SMC stocks 1,000,000
Gain on sale of domestic securities 800,000
Tha entire income within of Chinese Government, is exempt from

income tax.
Tax-Exempt Corporations
Section 30 of the NIRC enumerates various corporations or

associations that are exempt from income taxes. This topic is
discussed in Chapter 12 of this book.
Tax-Exempt Prizes and Awards

Prizes and award made primarily in recognition of religious,
charitable, scientific, educational artistic, literaiy, or civic
achievement are not taxable, provided that the recipient was/is
1. Selected without any action on his part to enter the contest or
proceeding, and
2. Not required to render substantial future services as a
condition to receive the prize or award.
Illustration
Mr. Raul Roco was chosen as one of the Ten Outstanding Young
Men in the Philippines (TOYM). For this, he received an award of
PI 00,000 without substantial future services as a condition to
win the prize.
The entire PI00,000 should be excluded from the gross income of
Mr. Roco.
Prizes and Awards in Sports Competition

All prizes and awards granted to athletes in local and
international sports competitions and tournaments, whether held
in the Philippines or abroad and sanctioned by their respective
national sports associations, shall not be included in gross
income and shall be tax-exempt. (Nirc, sec. 32(B)(7)(d))
Prizes and awards granted by association not accredited by

Philippine Olympic Sport Committee (POSC) are subject to income
tax and consequently to 20% withholding tax. (bir Ruling 026-2000)
Illustration
Eugene Torete won P500,000 as the champion of International

Chess Tournament held in Baguio sponsored by the Baguio
m INCOW IAXAHON
CI u ' sn Club (HCC). U W i i & d|ts< los< d I h:>t BCC i t ‘i<j* m i*'/
assivittfion per PObC's i<< oids.
The P5()(),()()() its taxable because tlx BCC it n*jt :*c'.M/hU;d by

iwo,
Gain from Sale of Certificate of Indebtedrum
Gains from (he sale of bonds, debentures or other certiheates of

indebtedness with maturity of more than five years and ga oe
from redemption of shares in mutual fund company as defined C
See.22 [B] of the Tax Code are exempt from tax.
B1R Commissioner Pardo ruled that the exemption will only be

extended to capital gains and not to interest income pertaining to
investment securities of more than 5 years.
Illustration
On January 1, 200x, Kay Langit invested in a 10-year 12% bond

for PI,000,000. On October of the same year, Langit sold the
bond for PI, 100,000 resulting to the gain on sale of P100,000. Is
the gain on sale exempt from tax?
Yes. The gain on sale of PI00,000 is exempt from tax because the
face of the bonds indicates a maturity of more than five years.
The holding period of the investor in this case is not the basis of
tax exemption, but the maturity period as indicated on the face of
the bonds.
Tax-Exempt Interest Income
Interest incomes derived by Philippine National Red Cross (PNRC)

from currency bank deposit and yield or any monetary benefit
from deposits substitutes and from trust funds and similar
arrangements are exempted from 20% final tax imposed under
Sec. 27D Of NIRC. (BIR Ruling 014-99)
PAG-IBIG Mortgage Certificates (PMCs) that are categorized under

the definition of long-term deposit/investment, the interest
income of which is exempt from income tax pursuant to Sec.
24B1 and Sec.25 (s).
Illustration
Kulas Madulas purchased 10 Pag ibig Mortgage Certificate at face
value of PI0,000 each, carrying interest of 12% per year. At the
end of the year, Madulas received an annual interest, of PI 2,000.
The PI 2,000 is not subject to final withholding tax of 20%.
Tax-Exempt Qualified Senior Citizen

The income of a qualified senior citizen is exempt from the
payment of income tax provided that he qualifies to be minimum
wage earner in accordance with R.A. No. 9504. (r.a. N . 9994, July 27,
o
2009)
Illustration
Abraham is a senior citizen, but still working as a janitor of Adam

Corporation. He earns a minimum wage with a monthly salary of
P6,000. He also has some bank savings deposit with PI,000
interest income per year.
The minimum wage of Abraham is exempt from income tax. The

PI,000 interest income derived from bank savings deposit is
subject to 20% final income tax.
Tax-Exempt Inventors and Inventions
Sec. 5 and 6 of R.A. 7459 (The Inventors and Inventions Act of

1991) provides tax exemption for 10-year period of the income
generated from commercial sale of the invention which starts
from the date of first commercial sale.
This income tax exemption, however, does not apply to the prizes
awarded to the individual inventor which is still subject to a final
tax of 20%. (BJR Ruling 069 - 2000)
Illustration
For the year, Alberto Imbento, a Filipino inventor, reported the

following receipts:
First year sales of invented products PI ,000,000

Prizes received from the Inventors' Society (contest) 100,000
Only the PI00,000 prizes received from the Inventors' Society is

subject to a final tax of 20%. The sales of invented products shall
be tax exempt for 10 years.
INCOME TAXATION
Barangay Micro Business Enterprise (BMBE)
are exempt from income taxation and exempt from the

coverage of minimum wage law. 9i78,Juiy22,2002)
“Barangay Micro Business Enterprise” refers to any business

entity or enterprise engaged in the production, processing or
roar; u facto ring of products or commodities, including agro-
proce';9ing, trading and services, whose total assets including
*booe arising from loans but exclusive of the land on which the
particular business entity's office, plant and equipment are
rdtuated, shall not be more than Three Million Pesos (P3,000,000).
A registered BMBE shall be issued a Certificate of Authority (CA)

a& proof of registration, which will be effective for a period of two
year'?;, renewable for another period of two (2) years, thereafter.
Ill u strati on
'/bav/borry Wine, Inc. reported its results of operations during the

f/M>f ty/o years as follows:
Year 1 Year 2
bnjee, PI,000,000 P3,000,000
Coerl of sales (400,000) (1,300,000)
Operating mepenscs _ (200,000) ( 300.0001
t-lri income 1U400.Q00
If blrnwber/y Wine, Inc, me! Ihe requirement and is registered as

BMBE, its nel incomes from year 1 to year 2 are not subject to
in* ome tax.
T;ix-JIxompt Educational Institution

The following' educational Ins!itnlions are exempt from income
tnx
| (ioveinmrnl nil n nf 101ml institutions; mul
0, Nonsloi |- < um I nonprofit educational institutions, /svv. jo, m k\y
ip-vemir 01 income not actually, directly or exclusively related to

rdiHotlnmd pm poses shall he subject to internal revenue taxes.
jWtf/tVfMtffOri Jitoo)
Illustration
Benguet State University (BSUj received tuition fees during a

school year amounting to PI 0,000,000.
The entire tuition fees received is not subject to income tax.
Tax-Exempt Cooperative Income

A cooperative is a duly registered association of persons, with
common bond of interest, who have voluntarily joined together to
achieve a lawful common social or economic end, making
equitable contributions to the capital required and accepting a
fair share of the risks and benefits of the undertaking in
accordance with universally accepted cooperative principles, at a.
As stated in Revenue Regulations 20-2001, duly registered

cooperatives dealing/transacting business with members only
shall be exempt from paying the following taxes for which they are
directly liable;
a. Income tax on income from operations;
b. Value Added Tax (output tax on sale);
c. 3% percentage tax;
d. Donor’s tax on donation to duly accredited charitable research
and educational institutions, and re-investment to socio
economic projects within the area of operation of the
cooperatives;
e. Excise tax; documentary stamp tax; and
f. Annual registration fee of P500.
Duly registered cooperative dealing/transacting business with

both members and non-members are exempted from all National
Interna] Revenue Taxes on their transactions to member.
Cooperatives with accumulated reserves and undivided net

savings of not more than P10,000,000 are also exempted from
nnorr.e tax for a period of 10 years from date of registration with
CUA; provided, that at least 25% of the net income of the
operative is returned to the members in the form of interest
c/or patronage refund.
306 INCOME TAXATION
Taxability of Cooperatives
As n rule, cooperatives are tax exempt except for the following:
a. 20% final income tax on interest from any currency bank
deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements
and royalties derived from sources within the Philippines;
b. 7.5% final income tax on interest income derived from a
depository bank under the expanded foreign currency deposit
system;
c. capital gains tax on sales or exchanges of real property
classified as capital assets or shares of stock;
d. documentary stamp taxes on transactions of cooperatives
dealing with non-members when the accumulated reserves
and undivided net savings of such cooperatives exceed
PI0,000,000; and
e. VAT billed on purchases of goods and services.
5 Exclusion from Gross Income 307
fhapter 5 - REVIEW QUESTIONS

, Explain the tax phrase “exclusion from gross income.”
- Enumerate the nontaxable compensation income.

; Enumerate the nontaxable other receipts.
4 Are ‘de minimis benefits” part of the the 13th month pay and other
benefits amounting P82,000.
5. Are proceeds of life insurance excluded from taxable income?
6. Are Life insurance premiums paid by employer on insurance policy of

employee taxable income of employee?
7. Are returns of insurance premium paid taxable income of recipient?
S. Why is gift not subject to income tax?
9. Enumerate at least five examples of nontaxable recoveries of

damages and five examples of taxable recoveries of damages.
10. Enumerate the nontaxable retirement benefits, pension and
gratuities.
11. .Are there incomes of Philippine Government which are subject to
tax?
12. State the rules when prizes and awards are tax-exempt.
13. When is prize and awards in sports competition not taxable?
14. .Are interest earned and gain realized from certificate of indebtedness
with maturity of more than 5 years, exempt from income tax?
Explain.
15. .Are all retirement benefit plans required to be approved by the BIR to
be exempt from tax?
16. When is an educational institution exempt from income tax?
17. State the rules when a senior citizen’s income is not subject to
income tax.
-8. .Are prizes to be awarded to individual inventor subject to tax? Why?
19. What is a Barangay Micro Business Enterprise?

20. Give examples of the taxable income of a cooperative.
308 INCOME TAXATION
Name: Score:
Problem 5 - 1 Determining the Taxability of an Item

Indicate whether the item is taxable or nontaxable with income tax.
1. Thirteenth month pay in excess of P82,000

2. 14th month pay of P32,000 to complete the 13th month pay and
other benefits already received amounting to P50,000.
3. Productivity incentive schemes arising from CBA, PI0,000
4. Monetized sick leave credits of private employees
5. Overtime pay of a minimum wage earner
6. Statutory minimum wage of MWE who has other reportable
income
7. Amount received in payment of moral damages due to physical
injuries
8. Interest income in bank deposit earned by the duly registered
cooperative
9. Separation pay due to voluntary resignation
10. Money received as donation
11. Money acquired through illegal means
12. Philippine lotto winnings
13. Separation pay received resulting from business merger
14. Income derived by Baguio City Government in leasing Burnham
Park '
15. Availed vacation leave with pay \
16. Exemplary damages due to breach of contract
17. Damages for unrealized profits \
18. Novel prize received due to civic achievement contributions
19. Prizes and awards in sports competition not sanctioned by
Philippine Olympic Sport Committee \
20. Income earned within the Philippines by t World Bank
Name: __________________ ___________________ Score: _____________
Problem 5-2 Determining the Taxability of ah Item

1. Productivity incentive bonus

2. Shelter within the employer’s home provided by the employer to
the maid
3. Novel prize received for achievement civic achievements.
4. Prizes and awards in sports competition, not sanctioned by their
respective national association accredited by POSC
5. World Bank’s income earned in the Philippines
6. Cost of living allowance
7. Union due contribution
8. Proceeds of from life insurance policy, revocable designation of
beneficiary
9. Pensions, in general
10. Income of PAGCOR
11. Proceeds from the sale of land (capital asset), P100,000: costs,
P120,000
12. Income of government from holders of public utility franchise
13. Interest income
14. Board of director’s fee
15. Mandatory retirement pay
16. Professional athlete’s salary
17. Winnings from Philippine Sweepstakes or Lotto
18. Income derived from smuggling
10. Interest received from life insurance’s annuity
20. Annual clothing allowance of P5,000.
310 INCOME TAXATION
Name: _______________________________________________ Score:_____________
Problem 5-3 Determining the Taxability of an Item

1. Group insurance benefits

2. Inter-corporate dividend received by nonresident foreign
corporation
3. Voluntary premium contribution to SSS
4. Daily meal allowance, in general
5. Cancellation of debt in lieu to services rendered
6. Hazard pay received by MWE
7. Gains from redemption of shares in mutual fund
8. Magsaysay awards
9. GSIS Retirement benefits
10. Cash surrender value received from insurance in excess of
premium paid
11. Proceeds from life insurance of a deceased employee received by
the employer
12. Dividend income derived in the Philippines by the Taiwan
Government.
13. Gains from the sale of bond with a maturity of four years
14. Gains from the sale of certificate of indebtedness with a maturin'
of six years
15. Cost of living allowance
16. Employees' Union due contribution
17. Maternity benefits
18. Tuition fees collected by nonprofit educational institution
19. Interest income from savings deposit earned by nontaxable
senior citizen
20. Interest income derived by Philippine National Red Cross
$ Exclusion from Gross Inconi* 311
fN***
.. Score:
**/«*• • ......... ....... .......... -...... ...... ...................-.........
5-4 True or False
rme it' the statement is correct, or False it the statement is
w'c-' *
^ The excess of de minimis benefits received may be added as part

of non-taxable U'^ month pay and other benefits if the latter
does not exceed F82,000.
_\ Shares of stock received due to professional sendee rendered are

taxable income.
A Amount received by virtue of settlement of will litigation is not

taxable income.
The proceeds of life insurance received by employer from

insurance policy cove urge taken and paid by such employer
constitute taxable income.
5. Amount received as a consideration for a service rendered shall
be excluded from gross income.
o. Bequest refers to real property transferred from one person to
another by will.
7. Income subject to treaty obligation binding upon the Government

of the Philippines is exempted from income taxation.
A Termination pay for anv cause beyond the control of an employee
is not subject to tax. except if the dismissal is with a cause.
9. Damages for loss of earning capacity ^\re non taxable.
10. Actual liquidated damages are taxable.
11. Physical, exemplary, and moral damages except damages for loss
of profit in property are not taxable.
12. Accumulated vacation and sick leave credits for government

employees converted into cash at the end of employment
contract is nontaxable.
13. Charity sweepstake winning outside the Philippines won by

resident citizen is exempt from Philippine income tax,
14. Dividend received by a domestic corporation from nonresident

foreign corporation is exempt from income tax.
15. If the MWE earns other income subject to final tax, his SMVV is
also becomes taxable.
16. Income derived by foreign government in the Philippines is

taxable.
312 INCOME TAXATION
Name; __________________________________ ________________ Score: ___________

Writ* True if the statement is correct, or False if the statement is
incorrect.
1. length of service awards in money form not exceeding PI0,000 is

a non taxable de minimis.
2. The income of a senior citizen is to be taxed like as MWE.
3. The income of OFWs outside the Philippines is exempt from
income tax.
4. Income of general professional partnership is taxable.
5. Income of co-ownership is taxable.
6. Income of commercial partnership is taxable.
7. Tax refund allowed as deduction from prior year's gross income
is taxable.
8. All prizes and awards are subject to income tax.
9. Inventor’s awards are subject to income tax.
10. Income derived by the political subdivision of the government is
not taxable.
11. Income derived from the property acquired by gift, devise, or
descent is excluded from gross income.
12. Capital gains from sale of certificates of indebtedness with
maturity of more than five years are subject to tax.
13. Income of Philippine Chamber of Commerce is exempt from tax.
14. Professional income earned outside the Philippines by resident
alien is taxable in the Philippines.
15. If the MWE earns other income subject to normal income tax, his
SMW becomes taxable.
16. Maternity benefits advanced by the employer to the employee are
excluded from gross income, hence exempt from withholding tax.
17. A business with capitalization of P3,000,000 excluding an asset
in the form of land worth PI,000,000 is not allowed to register as
BMBE.
Chapter n I Exclusion from Gro«« Inoom* 313
N« m*»: 3cor9!
Problem 5 6 Multiple Choice

;>rlr< I 11jr* Jrllri llml ronhiinM 11»<* h‘*nl nmtWrf,
l Whirl) of I hr following In hixnhlr',*

ir SMS M I If I < i; il .* i hrlirlll
I) Modal n<*< tn ily bendii irrrfvrd hy 11 bnljUhnymi horn employer
sbroad,
* , Sri in i i»l ion pay inejyrd hy it SO yrm ol<l employer dor fo ihr
I rl I ri!« hllirnl pi i)gra I1| ill I l|r* employer,
fl I Vi HOI mrj K< ouomle |\*r|Jr| Allowance
I hr following are r*< limloim horn giontt Income, except

II pint rrds ol lllr Itisurfl»If policies. ,
h. SUM letiirment benrliis,
• F.lhw, I )C< |t Klfll S noil c|f*vl«KM,
<1 wiorli opllon granted hy employer.
*'• *' m ihr IHr hifuiiiiiirr premium paid hy I he employe; lo he included

im gmnri Inoomr ol employer, ihe designated beneficiary should he
n, n liniilly iiiemhe/ ol Ihe insured,
h niiployri,
i lllr instneil prison,
d ii irllgions organization.
I 'I hr billowing me taxable reeovrrles Irorn damages except

ir Inlrienl hoin iionlnxnhlr damages,
h moiid damages awarded due lo libel.
• damages loi loss ol goods mid oilier 1 belongings,
d damages lot imienlized prolll.
i Ninlrmrnl I; Inn Inxollou purposes, Id" 1 month puy is a

rompnmnlIon Income.
Mlalemrnl 2; Id 1 " month ol less Ilian P30,()00 is taxable
compensation Income,
a, Only shdemeul I Iwrorrecl,
h ( hdy Mlnlemrnl 2 In coned, 1
i I lolh sbdeinrnls m e cot i*ech
d I ln| h Mlalemrnl w m e jurorrrcl.
Nlalemeiji I; Insurance premium paid hy the employer Tor the life

iuNuram e ol Ihe employee, where Ihe henellcimy Is Ihe employer is a
taxable com pen an I Ion innmir of Ihe employee.
Nhilemrnl 2; Upon deallt of Ihe Insured employee, Ihe proceeds of
Ihr lllr innumiM e me taxable against Ihe honoliciaiy.
a (Inly statement I iscoirecl,
h Only nlalrmeul 2 l» eorreel,
c Molh slnfemenls me cm ircl,
d Molh slatemeulM me iucoiieel
314 INCOME TAXATION
7. Both Ara and Rica are covered by a BJR approved employer's pension
plan. Ara retired from her employment at age 52 after serving the
same employer for 12 years. Rica retired at age 51 after serving the
same employer for 10 intermittent years of services.
a. Only the retirement pay of Ara is tax-exempt.
b. Only the retirement pay of Rica is tax-exempt.
c. Both the retirement pay of Ara and Rica are tax-exempt.
d. Both the retirement pay of Ara and Rica are taxable.
8. William Galam was retired by his employer corporation in 200A and

paid PI,000,000 as a retirement gratuity without any deduction for
withholding tax. The corporation became bankrupt in 200B.
Can the BIR subject the PI,000,000 retirement gratuity to income

tax?
First answer: Yes, if the retirement gratuity was paid based on a

reasonable pension plan where William Galam was 50 years old and
has served the corporation for 10 years.
Second answer: No, if William Galam was forced by the corporation

to retire.
a. Both answers are wrong.
b. Both answers are correct.
c. First answer is correct, the second answer is wrong.
d. First answer is wrong, second answer is correct.
9. A CDA-registered cooperative is not subject to which of the following

tax?
a. Output VAT
b. Final tax on interest income
c. Final tax on foreign currency income
d. Input VAT
10. Which of the following income earned/received in the Philippines by

a citizen is subject to income tax?
a. Winnings in Philippine Charity Sweepstake lottery
b. SSS or GSIS benefits
c. Gains from sale of 3-year bond
d. Value of property received as gift
5 Exclusion *rom Gross Income 315
S3.-*- _____________________________________________ Scor8: ----------- ------

ihe letter that contains the best answer.
The uniform and clothing allowance de niiiiiniis has increased by

a P5.GCC.
c. P-.GGC.
c. P1 .OCO.
d. P-0-
: The following shall be excluded from gross income, except

a, income derived from a gift.
b. allowance based from marriage separation agreement,
c- amount paid under marriage settlement.
o. Advances for travelling expenses computed on a daily basis and
are paid to an employee to perform his duty.
o. Which of the following is not exempt from income tax?

a. Interest from PERAA
h. Interest from PAG-IBIG Mortgage Certificate
c. Magsaysav award
d. Interest on debt instrument with maturity' of 10 years
XYZ Co. took two insurance policies on the life of its President, Mr.
A. In one policy, the beneficiary is the corporation to compensate it
for its expected loss in case of death of its president. The other policy
designates Mr. As wife as its irrevocable beneficiary.
Question 1 - -Are the insurance premiums paid by XYZ Co, in both

policies taxable income of the employee (president)?
Question 2 - Will the insurance proceeds be treated as income

subject to tax by the corporation and by the wife?
a. Yes to 1« and No to 2nd questions.

b. Yes to both questions.
c. No to 1st question and Yes to 2nd question.
d. No to both questions.
5. The following are exclusions from gross income, except

a. proceeds of life insurance policies.
b. retirement benefits from plan approved by BIR.
c. gifts, bequests and devises.
d. prizes and winnings.
6. The widow* of your best friend had been paid PI.000,000 on account
of the life insurance policy of the deceased husband. She asked you
whether she should declare the amount for income tax purposes or
for estate tax purposes.
316 INCOME TAXATION
Pirst adore: The proceeds of life insurance paid to the benefiaanr

-pen the death of the insured are exempt from income tax and seed
not he declared for income tax purposes.
Second advice: The proceeds of life insurance would have to re
declared for estate tax purposes if the designation of die benefkiary
was irrevocable, otherwise it need not be declared.
a. Beth advices are correct .
h I *"• advice is correct and 2=* advice is wrong.
c. Bern advices are wrong.
a. IK advice is wrong and 2s- advice is correct.
%*» mch o: the following income earned in the Philippines by a citizen

is subject to income tax?
5l. Tu innings in Philippine Charity Sweepstake lottery
m mieresi on government bonds stipulated as tax-exempt on the
bend issue
c. Gains mom sale of 3-year bond
d. Value of propern.- received as gift
y«“*
S. A BldBB is exempt horn income tax if its capitalization is
a. More than P3.000.000 including land.
lilt**
b- 1'ot exceeding P3.000.000 excluding land,
c. Not more than P5,000.000 including land,
HUtnnll
d- More than P5.000.000 excluding land.
9- The law exchides some items of income from taxation because
1#• n n < l
a~ the transformation of these incomes into economic gain are not
essentially the result of labor or efforts of taxpayer.
•ul hr
b. the law or treaty provides that they are not taxable.
c. some of these items are just return of capital.
d. Ad of the above.
10. Which of the following is/are requisites for nontaxable pension

benefit?
L The retiring employee has been in service of the same employer
for at least 5 uninterrupted \rears.
n. The retiring employee is not less than 50 years of age at the time
of retirement.
iii. The retiring employee must retire from employment for the
second time.
Choices:
a. i only
b. ii only
c. iii only
d. None
I $elect the letter that contains the best answer.
| 1 Which of the following is considered ns taxable income?

a. Separation pay due to sickness
b. Separation pay due to voluntary resignation
c. Separation pay due to death
d. Retirement pay of P3,000 per month
2. Which of the following is a taxable income?

a. Excess of de minimis benefits + 13th month pay, aggregated
amount is P30,000
b. Member’ SSS contribution
c. SSS sickness benefits
d. passive income earned by a resident citizen from sources outside
the Philippines
3. The following are taxable recoveries for injuries except

a. interest earned from nontaxable damages.
b. compensatory liquidated damages,
c. damages for loss of goods and other belongings.
d. damages for unrealized profit.
4. Which of the following cases of retirement benefit is excluded from

taxable income?
a. The retiree is 45 years of age and has been in the service for
more than 20 years.
b. The retiree is 50 years of age and has been in the service for
more than 10 year in the employ of several employees.
c. The retiree is 60 years of age in his 2n(1 retirement after working
for same employer for another 10 years.
d. The retiree is more than 50 years of age and has been in the
service of the same employer for 15 years.
5. The following are the requirements to exempt retirement pay due to

old age from taxation, except
a. Must SSS or GSIS retirement plan only.
b. Equitable retirement program approved by the BIR
Commissioner.
c. The retiree should have been employed for at least 10 years and
retiring at the age of at least 50 years old.
d. Retirement pay should have been availed of for the first time.
6- Eddie resigned from his employment and received P25,000

separation pay. Glory received P30,000 as her terminal pay due to
retrenchment legally enforced by her employer. Joseph received
P35,000 termination pay when he was dismissed due to gross
negligence.
a. Only the separation pay of Eddie is taxable.
318 INCOME TAXATION
b. Only the terminal pay of Glory is not taxable.

c. Only the termination pay of Joseph and Glory are not taxable.
d. Only the separation pay of Eddie and Joseph are not taxable.
7. Which of the following is taxable?

a. SSS and GSIS benefit
b. Social security benefit received by a baiikbayan from employer
abroad.
c. Separation pay received by a 50-year old employee due to the
retrenchment program of the employer.
d. Interest income on peso-time deposit.
8. Which of the following exclusion from gross income is not provided

by special laws?
a. Prizes and awards on religious and educational achievement.
b. Winnings from Philippine Lotto
c. Winnings from Philippine Charity Sweepstakes.
d. Interest and capital gains on land covered by Land Reform under
the purchaser tenant program.
9. The proceeds of insurance taken, by a corporation on the life of the

President to indemnify it against loss in case of his death is
a. part of taxable income of the corporation.
b. taxable income of the corporation.
c. partly exempt, partly taxable.
d. exempt from income tax.
10. Mr. Tso’s building with a book value of P2,000,000 was razed by fire.
The insurance company paid Tso PI,400,000 for damages. The
PI,400,000 proceeds is
a. taxable in full.
b. subject to final tax.
c. tax exempt.
d. Partly reportable income and partly income subject to final tax
11. Which of the following may be excluded from the gross income of a
taxpayer?
a. Income derived from bequests and devices.
b. Income from illegal gambling.
c. Laundiy service income of a minimum wage earner
d. Hazard pay of MWE senior citizen
problem 5-9 Minimum Wage Earner

The basic gross compensation income of a minimum wage earner
employee for the entire year amounted to POO,000, not including the
following compensation;
13th month pay P 7,500
15-day monetized unavailed vacation leave 3,750
Overtime pay 24,000
Holiday pay 2,250
Christmas bonus (dc-minimis) 5,000
How much is the total nontaxable income if he received P400 Interest

income, net of final tax, from his saving bank deposit?
a. PI 32,500 e PI 31,250
b. PI 72,500 d. PI 71,250
Problem 5 - 1 0 Minimum Wage Earner

Mr. Q, a minimum wage earner, reveals the following income and
expenses during the taxable year:
Gross compensation income P73,000

] 3th month pay 6,500
Overtime pay 10,000
Productivity incentive bonus ' 23,000
SSS contribution '3,000
Philbealth contribution 2,500
Cellphone repair revenue 200,000
How much is the amount excluded from gross income of Mr. Q?

a. All gross compensation income because Mr. Q is a minimum wage
earner.
b. P40,000
c. P82,500
rj. P04,500.
Problem 5 - 1 1 Nonresident Taxpayer

Menarn is a Filipino Citizen residing in Australia, She earned the
following during the taxable year: (In. Philippine Pesos)
Aunlridkt
Corn per j sa t ion i a com e P900.000
Interest income under KPCCS P 40,000
bividend income 60,000
It the interest income has a resident co-depositor, how much total

amount is subject to tax in the Philippines?
a. PI ,000,000 c. P80.000
b. p 100,000 d. POO,000
320 INCOME TA/ATKM
Problem 5 12 Oversea# Contract Worker

ji^n *»«#*, as an OKW with r «W’’^7 *a a dvm.e*r*. b*i-er *
Hong Kong amounting w P30.000, One vmo* c>Abe* -s, *>
Philippine* for be/ Wag-Wag bufcmess from v/r/x.:* v>e t&rr..i a m/r.^rn
income of PV>W* bbe b**s û-sa/; r' 4;;t ^-ppine* wtr>. *'
average monthly income of ;y/M
Aswmmg ihat she #»y*A it) Hynjf Kx/rg i'/r a per*/d -of 3 2 moctc* d , m*
f h<: taxable year, bow much ts be/ v;o‘>% :r,*/vr.c.e :■?. v«*
Philippine*?
a. P240,000 - P309///0
b P300.000 '>' P000///J
Problem 5 - 13 1 3<>’ Month Pay and Other Benefit*

pioc received the following compensation mvjme for the entire year:
Total compensation including 1 d4? month pay PC90///>
IvoyaJty award 30//%
De minimis:
Productivity incentive bonus 25//%
Pice subsidy (PI ,800 per month) 2%//%
Clothing allowance 6,9%
i low much is the total amount of nontaxable compensation^

a, P 118,000 c. PI 05,000
b, PJ 15,000 d. P 82,000
Problem 5 - 1 4 De mfnimiV and ‘other benefit*’

Mr. A received the following compensation and benefit# during the year:
Total basic salary ^ P24Q 000
J 3th month pay 20,000
Productivity incentive bonus 30 000
Pice subsidy (P2,000 per month) - de minimis 24,000
How much is the taxable and the non taxable compensation of Mr. A?
Taxable Non taxable
a. P240,000 P74,000
b, P240,000 P38,000
c. P240,000 P44,000
d. P246,000 P38,000
Problem 5 - 1 5 MWE with Other Income

Mr. B, a minimum wage earner, received the following compensation and
benefits during the year:
Overtime pay 20,000
Productivity incentive bonus
22,000
Hazard pay
2,000
Holiday pay 1,000
24,000
Rice subsidy (P2,000 per month) - de minimis
IfB has a rental income of P100.000 during the taxable year, how much
is his taxable compensation income?
a. P -0- c. P 125.000
b. PI 19,000 d, P225.000
Problem 5 - 1 6 MWE with Passive Income

Mr. D, a minimum wage earner, received the following compensation and
benefits during the year:
Total basic salary P96.000
Overtime pay 20,000
Rice subsidy (P2,000 per month) - de minimis 24,000
In addition, Mr. D earned the following other income:

Royalty income, net of 10% final tax P9,000
Interest income, net of 20% final tax 4,000
How much is the taxable income of Mr. C?

a. P - 0 - c. P15,000
b. PI 3,000 d. P21,000
Problem 5 - 1 7 Taxable Compensation

An employee received the following for the period:
Reimbursements of his medical expenses received from SSS PI,250
5 days sick-leave paid by SSS 750
Availed 10-day sick-leave pay included in by the employer
in the semi-monthly pay of the employee 1,500
Income tax refund 2,000
Meal subsidy for overtime pay in 10 days 1,500
If the daily minimum wage in the region is P300, how much is the
amount of taxable compensation?
a. P3,500 c. P2,000
b. P2,250 d. PI,500
Problem 5 - 1 8 Nontaxable Compensation

A MWE employee received a take home pay amounting to P212,000
inclusive of 13th month pay of P17,500. The P212,000 is net of P13,500
withholding tax and P2,000 SSS contribution. In addition, he earned a
P20,000 as other income subject to final tax.
How much is the total amount of his taxable income?

a. P - 0 - c. P212,000
b. P20,000 d. P228.000
Problem 5 - 1 9 Voluntary SSS Contribution

Jennifer, a taxpayer who is single, received a net pay of P265.000 for the
year. The amount is net of P50.000 withholding tax, P3,000 payment for
advances, and P4,000 SSS contribution of which 50% voluntary. This is
inclusive of P27,000 13th month pay, P8,000 productivity incentive
bonus and P5,000 Christmas bonus (de minimis).
322 INCOME TAXATION
How much is the gross taxable compensation income?

a. P280.000 c. P220,QG0
b. P200,000 d. P265,000
Problem 5 - 2 0 Tax-Exempt Contributions

Thomas pay-slip reported the following:
Net take home pay P13,QCC
Deductions made:
SSS contributions (mandatory PI00) 3C0
PAG-IBIG contributions (mandatory PI00) 300
Philhealth contributions (mandatory PI 00) 2G0
Union dues contributions too
Office party contributions i'Z
Charitable contribution 23
Withholding income tax 4QG
The taxable compensation income and tax-exempt contributions are
Compensaton Tax-exempt Contributions
PI 3,000 PI,000
P13,100 P 900
PI 3,500 P 500
PI 4,000 P 400
Problem 5 - 2 1 Employer’s Benefits

X was hired with a condition (due to the nature of his work) that he will
be a stay-in. At monthly salary of PI5,000 per month, he was also
provided with free lodging valued at P2,000 per month and free meals,
valued at P3,000 per month.
The taxable monthly compensation income of the employee is

a. P20,000. c. PI 7,000.
b. P18,000. d. PI 5,000.
Problem 5 - 2 2 Taxable Benefits

A managerial employee enjoys the following monthly benefits;
Rent of apartment P50,000
Insurance premium (employer is the beneficiary) 30,000
Reimbursement of personal expenses 20,000
Which of the above amounts are subject to income tax?
a. P100,000 c. P20,000
b. P 70,000 d. P - 0 -
Problem 5 - 2 3 Proceeds of Life Insurance

After two years from the death of her husband, Naty Paltos received the
proceeds of life insurance of her husband amounting to PI,254,400
including 12% compounded interest per year. How much is the taxable
amount?
a. P254,400 c. PI 20,000
b. PI 54,400 d. P - 0 -
Chapter 5 Exclusion from Gro»* fncom© 323
problem 5 - 2 4 Pror««di of Life Inauranoe

IVtuklr Co. insured Mr. Kodtigo Pitjitnwi, its I'reHldent lor I’bOO.OOO. Mr.
{\\j.una died ami l\vinkle Uo. received the piocerdN ol I hr inniimiHr idlrr
paving insurance pirmimn ol PbO.OOO. The leporlnblc taxable income
would bo
PMHLOOO e. I MOO,000
tv 1*450,000 <1. I‘ 0
Problem 5 - 2 5 Income from Life Insurance

Mrs, Vina Luchina was insured under an endowment policy with value of
1*500,000. Total premiums paid by ber during the term of premium
payments on the policy was 1*400,000 from which there won n return of
premiums of P40.00Q, At the maturity of the policy, Mrs. Luchina
received P500.000. The income of Mrs. Luchina under the policy is
a. P500.000. c. PI 0,000.
b. P 50,000. d. P - 0 - .
Problem 5 - 2 6 Cash Surrender Value

X paid a monthly insurance premium of PI0,000 for 3 full years. The
coverage is for P2,000,000. At the end of 3rd year, a cash surrender value
ofP270,000 was received by the insured.
How much is the amount of income to be reported?
a. P360,000 c. PI 0,000
b. P270,000 d. P - 0 -
Problem 5 - 2 7 Return of Capital

Danny took out a Jardin life insurance policy amounting to P2,000,000
with his wife as irrevocable beneficiary. Under the policy, Jardin will pay
the amount of P2,000,000 when Danny reaches the age of 50 years, or
his beneficiary wife in case he dies before the maturity of the policy. The
total premiums that would be paid upon maturity of the policy is
P500,000.
1. Assume Danny reached 50 years old and Jardin paid P2,000,000
upon the maturity of the life insurance. How much is the amount
excluded from the gross taxable income?
a. P2,000,000 c. P500,000
b. PI,500,000 d. P - 0 - ’
/
2. Assume Danny died at the age of 45, and the total premium paid
upon his death was P350,000. How much is the amount excluded
from the gross taxable income?
a. P2,000,000 c. PI,500,000
b. PI,650,000 d. P 350,000
Problem 5 - 2 8 Return of Capital

Darlin received the following proceeds of insurance:
Car insurance P300,000
Accident insurance 100,000
Life insurance as beneficiary 500,000
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Problem 5 - 32 Pension
Mr Wais, a 50 year old retired army, entered into a life annuity contract
with Malayan Insurance Co., with Mr. Wais investing PI,350,000. For his
investment, Mr. Wais will receive annual pension of P360,000 for 15
years. In case of death of Mr Wais during term of contract, his heir will
continue receiving his pension for remaining term of agreement.
How much of the Mr. Wais’s annual pension is excluded from taxable
income?
a. P360,000 c. P90,000
b. P 96,000 d. P24,000
Problem 5 - 33 Terming Pay

The following amounts were received by the heir of deceased employee
from his employer:
Terminal pay P 60,000
Proceeds of life insurance 500,000
SSS death benefit 10,000
Donations/aids from relatives 40,000
What amount of these receipts is taxable and nontaxable with income

tax?
Taxable Nontaxable
a. P610,000 P-0-
b. P500,000 PI 10,000
c. PI 10,000 P500,000
d. P-0- P610,000
Problem 5 - 3 4 Taxability of Termination Pay

Jalosjos was dismissed from his employment due to major infraction
committed and received P100,000 termination pay. Under the Tax Code
final pay received due to involuntary separation is not taxable. Which of
the following is true?
a. Jalosjos’ P 100,000 termination pay is taxable because he was
terminated due to cause within his control.
b. Jalosjos’ PI00,000 termination pay is not taxable because his
termination is not voluntary.
c. Jalosjos’ PI00,000 termination pay is not taxable because it is
against his will.
d. Jalosjos’ PI 00,000 termination pay is taxable because it is due to
cause which is beyond his control.
Problem 5 - 3 5 Income from Separation

During the year, a resident citizen received the following among others:
Last pay upon resignation from his 1 st employment P 100,000
Separation pay due to closure of his 2nd employer 70,000
Retirement pay received from SSS as member 150,000
How much is the reportable income from the data above?

a. P220,000 c. P150,000
b. P170,000 d. P100,000
326 INCOME TAXATION
Problem 5 - 3 6 SSS Benefits

Satur, who after paying 30 months of SSS premium amounting to P30Q
per month, died due to vehicular accident. Upon his death, his wife
received P36.000 SSS death benefits.
How much of the amount received is excluded from taxable income?

a. P 9,000 c. P36.000
b. P27,000 d. P90.000
Problem 5 - 37 SSS Benefits

Sarah, after working for 3 months and after regularly remitting her SSS
premium contribution, was hospitalized during the year as follows:
• 6 days due to threaten miscarriage.

• 10 days for giving caesarian birth.
If her average salary credit as basis for her SSS contribution was P30Q
per day, how much is the total exclusion from taxable income of the total
SSS benefits of Sarah for the year?
a. P25,020 “ c. P19,620
b. P24,750 d. P 4,620
Problem 5 - 3 8 Nontaxable Receipts

Eddie Gil received the following cash during a taxable year:
Actual damages for injuries suffered P 30,000
Separation pay due to sickness 100,000
SSS retirement benefits 500,000
Inheritance from his grandparents 100,000
How much amount of cash receipts is subject to income tax?

a. P - 0 - c. PI30,000
b. P100,000 d. P230,000
Problem 5 - 3 9 Senior Citizen’s Income

Lolo Rado is a 60-year old retired employee. For the year, he received the
following income:
Income from his various consultation fees PSO.OOO
Interest income from 5-year time deposit 10,000
Interest in credit cooperative where he is a member 5,000
Interest income from bank savings deposit 4.000
His income subject to income tax is

a. P69.000. c. P 4,000.
b. P14,000. d. P -0 - .
Problem 5 - 40 Gifts, Bequests and Devises

Pandoy received the following gifts during the year:
Christmas gifts from his employer P 5,000
Gifts from relatives on account of his birthday 100,000
Inheritance from his grandfather 500,000
Donations from his friends 30,000
How much is the total gifts subject to income tax?

a. P635,000 c. P 5,000
b. P 35,000 d. P - 0 -
Problem 5-41 Gifts, Bequests and Devises

On March 1, 200B, Mymi received a building property from her parents
as inheritance with fair market value of PI0,000,000. This property was
acquired for P8,000,000 five years ago by his parents. The monthly
rental income of the property is PI 00,000 with an average monthly
expense of P20,000.
t
Mymi’s income after expenses, subject to income tax for the year 200B is
a. PI 1,200,000. c. P960,000.
b. P10,960,000. d. P800,000.
Problem 5 - 4 2 Nontaxable Prizes and Awards

Precious Lara received cash amounting to PI,000,000 plus a house and
lot amounting to P3,000,000 for winning as Miss International.
How much is tax-exempt from the awards of Miss Lara?

a. P4,000,000. c. PI,000,000.
b. P3,000,000. d. P - 0 - .
Problem 5 - 4 3 Nontaxable Winnings and Prizes

Manny Pacman, a boxing champion received the following winnings
during the taxable year:
Lotto - Philippines P10,000,000
Boxing prize 25,000,000
Raffle - refrigerator 20,000
The nontaxable winnings/prizes would be
a. P10,000,000. c. P10,120,000.
b. P10,020,000. d. P35,120,000.
Problem 5 - 4 4 Nontaxable Winnings, Prizes and Awards

Onyok Velasco, a national athlete, received the following during the year:
Ramon Magsaysay award P 50,000
Athlete of the year award 100,000
Prize - Jolibee raffle 5,000
Prize for winning the silver Olympic medal 500.000
Cash award from Mr. Alfred Lim 250.000
Car from Nissan as a gift 1,000,000
Winnings- Philippine sweepstake 100.000
The total winnings/awards and prizes not subject to income tax is

a. P2,505,000. c. PI,905,000.
b. P2,000,000. d. PI,900,000.
328 INCOME TAXATION
Problem 5 - 4 5 Investments in Government Bonds

The* following earnings were realized from investment in 5-year
government bonds;
Interest income P 60,000
( tain from sale of bonds classified as capital asset 140,000
How much is the total taxable income?

n. 1*200,000 c. P 60,000
b. P 140,000 d. P - 0 -
Problem 5 - 4 6 Gain from Sale of Bonds

The following transactions of an individual taxpayer transpired during
the taxable year;
Investment in a 7-year, PI,000,000 face value bonds P990,000
Interest received from bond investment 120,000
Gain from sale of bonds on maturity date 110,000
How much is the taxable income?

n. PI 10,000 c. P220,000
b. PI 20,000 d. P230,000
Problem 5 - 4 7 Gain from Bond Redemption

A 6 year investment in bonds earned the following:
Interest income P120,000
Gain from redemption of bonds 180.000
Total P300.000
The taxable income on the above earnings would be

u. P - 0 * c. PI80,000
b. PI 20,000. d. P300,000.
Problem 5 - 4 8 Inventor’s Income

Alberto invented a device that helps paralyzed people walk. The
government approved its patent. During its first year of commercial
activities, the following items were reported in relation to the invention:
Income from sale of invented products P5,000,000

Cost of produced products 1,000,000
Sale of technology 2,000,000
Research and development costs 800,000
Inventor's Achievement Award 300,000
How much is the nontaxable income of Alberto as inventor?

a. P6,200,000 c. P4,000,000
b. P5,000,000 d. P 300,000
Problem 5 - 4 9 Cooperative Income

A CDA registered cooperative reported a total income of P500,000
inclusive of P10.000 interest in bank savings deposit. The taxable income
of this cooperative would be
Ctepier 5 Exclusion from Gross income 329
^ P510,000. c. P 10.000.
PSOG.OOG. d. P - 0- .
problem 5 - 5 0 Cooperative Income

B£guio-3engue: Cooperat e has the following income during the taxable
yean
Interest income from members P5,000,000
Income horn coop groceries 3,000,000
Interest income from foreign currency* deposit 2,000,000
Interest income from time deposit 1,000,000
Hew much is the income taxable income of Baguio-Benguet Cooperative?

a. ?I,0CX}T000 c. P3,000,000
b P2.000,000 d. P6,000,000
Problem 5 — 51 Income under Tax Treaty

Mr. X, a foreign Ambassador to the Philippines, received the following
items of income during his stay in the Philippines:
Salary for consular services PS00,000

Honoraria received in various speaking engagement
in the Philippines 200,000
Capital gains on investments made in the Philippines 300,000
If there is no tax-exempt treaty, how much is the total reportable income

for Philippine income tax?
s. P -0 - c. P 500,000
b. P300.000 d. PI,300,000
Problem 5 - 5 2 United States Veteran Benefits

Loio Vicente was one of the US military men of the Armed Forces of the
United States under the Commonwealth Army of the Philippines serving
from July 26, 1941 through June 30, 1946.
As a US Veteran, he receives the following monthly benefits from the

United States Veterans Administration:
Compensation $750
Pension 200
Clothing allowance 30
Health benefits 30
If the conversion rate per one US dollar is P50, how much is the amount
of excluded from gross income during the taxable calendar year?
s. P600,000 c. P50,000
o. PI 50,000 d. P - 0-
Problem 5 - 5 3 Income of Foreign Government

Toe Government of Japan invested in the Philippines with earnings
thm as follows:
Interest income from bonds PI0,000,000
mterest on time-deposits in Philippines banks 15,000,000
330 INCOME TAXATION
Dividend income received from SMC stocks 3,000,000

Gain on sale of domestic securities 2,000,000
How much of the Japan Government income within is excluded from

gross income?
a. P30,000,000 * c. P25,000,000
b. P28,000,000 d. P18,000,000
Problem 5 - 5 4 Retirement Benefits (Comprehensive)

Mr. Mario Matiyaga, 50 years old, rendered service as a security guard of
Anscor Corporation. He had a monthly salary of P5,000 before retirement
in October 31, 200x. During the same taxable year he received P500,000
retirement benefits in accordance with reasonable private benefit plan
maintained by Anscor Co.
Required: Compute for the amount to be included in the gross income of

Mr. Matiyaga for 200x based on the following independent assumptions:
1. He received the retirement benefit for the first time after serving for
10 years.
2. He received the retirement benefit for the second time.
3. He has served the company for 10 non-continuous years.
Problem 5 - 5 5 Exclusion from Gross Income (Comprehensive)

Mr. Jose Velarde received the following items for the taxable year 200x:
Winnings from charity horse race sweepstakes from PCSO P 500,000
Winnings from gambling, net of P700,000 loss from gambling 800,000
Interest on government debt securities 100,000
Damages awarded by the court for breach of contract
(of which 40% is damages for unrealized profits) l ,000,000
Gains from redemption of shares in mutual fund 300,000
Gain from sale of bonds with maturity of more than five years 60,000
Gift from friends 200,000
Required: Compute the total amount of exclusion from gross income.
Problem 5 - 5 6 Exclusion from Gross Income (Comprehensive)

Mr. Erasto Fuentes received the following:
Return of his life insurance premium paid for 25 years
with annual premium of PI5,000 P2,000,000
Proceeds of his mother’s life insurance, paid premium for
30 years with annual premium of P5,000 1,000,000
Cash gift from his missionary friend 50,000
House and lot inherited from his mother 3,000,000
Rent income from house and lot inherited 100,000
Required: Compute for the following:

1. Amount to be excluded from gross income.
2. Amount to be included as gross income.
rrvm Incwt* 331
wtiimn * - S~ ?*suftfe4£fear of Transfer Rseeived

■ •<s ‘ui-n.i ?x.~>:.a *u sorted as a nurse for Judg* Maximo Lu\a for thirty
ru -5, cfeiror 5 'vis Peer: sc crag for „i foug period of time* the judge
•n-.uded r ‘ » nsr wfo; arc testament an amount of P 1.500*000 us
t:c ter •cck ;;rtirs df dedfoafed service.
ûjMeaia. s ire nnursfor excluded from income taxation if received by

• d»* ’‘.ir.oiru 'Jp:c. rite death of Judge Laxu?
**-iiiieax 5 - Si lucerne Subject to Normal Tax

n-srikr ruipujcir:.. received the following items for the taxable year 200x:
-'Tr.'Sinai n list insurance of Ins decedent husband with premiums
:mc unciuinng a: ? ICC. 000 Mrs. Btiduhan is an irrevocable
rsntriicarp PI.500,000
Crmarxn four: iittnes and relatives 10,000
CnnnensurLuir for ocraui damages tor injuries suffered
ate* .nisiuinc 200,000
foment rcum 50.000
.jirtsnar art Punk Pepcsits 2,000
bzs for v’irrrr-g as Mrs. Beautiful of Tawi-Tawi 25.000
fold team aenedrs at Pis husband 20.000
lamxirsd- Compute for his income subject to tax.
hroauim. 5 — 39 Compensation and De Minimis

C. i resident FUrpinc citizen, shows his income and expenses during
i rajerdar vearr
ccr.'.per.sation income PI09,200

. *2:i rrjrjc.tr. pay 9,100
v/, prerrhurr. contribution 2,400
v' .tea.nr premium contribution 3,000
he .rrr.rris.
xxjt subsidy 24,000
Actual hcspitalizarion payments 15,000
Ck*h i r.g a liowance 5,000
'brv.porary housfng for 3 months 6,000
k*s- red; Compute the taxable compensation during the year assuming
'''>■* /, < „
1 - ' rr.ure wage earner,

* 'b minimum v/age earner.
'A'^vj^rri " - 60 Compensation and De Minimis

a ?» resident fjljptno citizen, shows his income and expenses during
* 0**rS‘*s year;
^^ V/';’ ACTiâtion income P128,000

;^y 10,600
' pterr,;-^, contribution 2,400
3,000
'f * premium contribution
332 JNCOME TAXATION
:------ r::S.
T;ire subsidy iS.GOC
b:scttahzatittn payments 20.000
Cxdung aTcwance 4,000
~:cd <ôwance ter overtime in 10 days 1,500
Temperary housing for 3' months 6,000
Pent income 60,000
uncrating expenses 40,000
Required: Compute the gross taxable compensation dining the year

.issummit that Mr. D is a
i Mmmntnn wase earner.
Not a minimum wage earner.
Problem 5 - 6 1 Cooperative
The foTinvrng. are the transactions of Baguio-Benguet Cooperative during
Total purchases foam VAT-registered business,

nclusrre of VAT PI,120.000
sa-es to members 1,500,000
Interest income, time deposit 60,000
Interest income. Loan to members 40,000
interest income,, foreign currency deposit
; converted to peso) 10,000
The exonerative s statement oi surplus reported the following:

P 1,500,000
Less: Purchases P 1,000,000
Input VAT 120.000 ' 1.120.000
Gross income P 3SO.OOO
.Add: Interest income:
Time deposit P 60,000
Loan to members 40.000
Foreign, currency deposit 10.000 110.000
Total surplus P490.QQQ
Required: Compute the cooperative income subject to

I. Final tax.
tax.
FRINGE BENEFITS TAX
fringe benefits defined
Section 33 (B) of the NIRC defines Fringe Benefits as “any good,

service, or other benefit furnished or granted by an employer, in
cash or in kind, in addition to basic salaries, to an individual
employee such as, but are not limited to, the following:
a. Housing;
b. Expense account;
c. Vehicle of any kind;
d. Household personnel, such as maid, driver and others;
e. Interest on loan at less than market rate to the extent of the
difference between the market rate and actual rate granted;
f. Membership fees, dues and other expenses borne by the
employer for the employee in social and athletic clubs or other
similar organizations;
g. Expenses for foreign travel;
h. Holiday and vacation expenses;
i. Educational assistance to the employee or his dependents;
and
j. Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law
allows.”
Rationale of Granting Fringe Benefits

The following reasons may justify the granting of fringe benefits:
L A fringe benefit given to employees is a form of incentive to

encourage employees' productivity and loyalty to employer; 2
2- During financial difficulties, the employer may decrease or
discontinue previously given fringe benefits, but cannot
reduce the wage or salary of a specified amount once it is
given to employees; and
Additional remunerations for overtime and separation pay do
not include fringe benefits.
334 INCOME TAXATION
Fringe Benefit Tax (FBT)

It is a monetary burden imposed by the sovereignty on any good,
service, or other benefit furnished or granted by an employer, in
cash or in kind, in addition to basic salaries, to an individual
employee other than a rank and file employee.
The employer (individual, professional partnership, or

corporation, whether taxable or not), or the government and its
instrumentalities are liable to remit the fringe benefit tax to the
BIR once fringe benefit is given to a managerial or supervisory
employee.
The fringe benefit tax is a final tax on the employee's income to be

withheld by the employer (Sec. 33(A); sec. 57(A), nirc). The withholding
and remittance of FBT shall be made on a quarterly basis.
Fringe Benefit Tax Base and Rate

The tax base of fringe benefits is based on the grossed-up
monetary value (GMV) of fringe benefits furnished, granted or
paid by the employer to the employees, except rank and file
employees.
The grossed-up monetary value of the fringe benefit shall be

determined by dividing the monetary value of the fringe benefits by
68% effective January 1, 2000.
The Grossed-up Monetary Value of the fringe benefits represents:
(a) The whole amount of income realized by the employee which

includes the net amount of money or net monetary value of
property that has been received; and
(b) The amount of fringe benefit tax due from the employee which
has been withheld and paid by the employer for and in behalf
of his employee.
The rates of the fringe benefit tax that shall be applied is 32%
effective January 1, 2000 and thereafter.
pHng# Benefits Tax 335
Classification of Fringe Benefits
,v purposes, fringe benefits may be classified as follows:
Fringe benefit to rank and file employees are taxable as

compensation income subject to normal tax rate, except
a. De minimis benefits, and
h Benefits provided for the convenience of the employer;
: Fringe benefit to managerial employees are taxable with final

fringe benefit tax of 32%, except
*. De minimis benefits, and
C. Benefits provided for the convenience of the employer;
3. A”enhances which are fixed in amounts and are regularly

receii-'ed by the employee as part of his monthly compensation
income shall not be treated as taxable fringe benefit but as
A 'Rank-and-File Employee * is an employee who is holding

neither managerial nor supervisoiy position.
A ‘Managerial Employee/ on the other hand, is vested with

refers or prerogatives to lay down and execute management
policies and/or to hire, transfer, suspend, lay-off, recall,
us charge. assign or discipline employees.
"Supervisory Employees* are those who, in the interest of the

-mployer. effectively recommend such managerial actions if the
-erase of such authority is not merely routinely or clerical in
^ture but requires the use of independent judgment.
Eltistration
/-■hug the taxable year, Erlinda Alcayde, an employee of San

"--sue! Corporation, received a total salary of PI80,000. In
on, she received cash fringe benefits amounting to PI36,000
Personal expenses during the year.
assuming that Erlinda Alcayde is a rank and file employee of

‘ue company, how much of her fringe benefits would be
-u.oject to fringe benefit tax?
336 INCOME TAXATION
The fringe benefits are not subject to fringe benefit tax

because a rank and file employee received them. The fringe
benefits received by Erlinda Alcayde shall be included as part
of her gross compensation income subject to tabular tax of
Sec. 24-|A) of the Tax Code.
h) Assume that Erlinda Alcayde is a manager of the company.

How much is the related final tax on her fringe benefits?
The related final tax on the fringe benefit would be:
Value received as fringe benefit PI 36,000

Divided by GMV rate _____ 68%
Gross up monetary value P200,000
Multiplied by FBT rate 32%
Fringe benefit tax P 64.000
Kote: The salary of Erlinda Alcayde is not a fringe benefit so it should be

included in the computation of gross compensation income subject to tabular
tax provided in Sec 24(A) of the Tax Code-
Summary Application
TAX ON FRINGE BENEFITS
i dX
Summary Application
FBT CONCEPT SUMMARY
FBT Concept Summary
Taxable amount is the grossed-up monetary value of the fringe

benefit granted/furnished.
The fringe benefit tax is 32% of the grossed-up monetary value

of benefit.
The grossed-up monetary value is the benefit expense of the

employer which is also the income of the employee.
The fringe benefit tax is the income tax on income earned by the
employee.
The liability of the employer is to withhold the corresponding

income tax from the fringe benefit earned by the employee.
The fringe benefit income lax is a final tax on gross taxable

income.
^lustration
ihr cash payment by tire employer representing reimbursement

tlie* personal expenses of a managerial employee is PI 70,000.
338 INCOME TAXATION
Required: Determine the amount of the following:
1. Taxable amount of fringe benefit income;

2. Fringe benefit tax; and
3. Deductible fringe benefit expense of the employer.
The taxable amount of fringe benefit income is P25O,Q00

Cash payment or monetary value of fringe benefit P 170,000

Divided by GMV factor 68%
Taxable amount of fringe benefit
The fringe benefit tax is P80,000, calculated as:
Taxable amount of fringe benefit P 250,000

The deductible fringe benefit expense of the employer is
Cash payment of personal expenses p 170,000

Fringe benefit tax 80,000
Deductible fringe benefit expense P 250.QQQ
Chapter 6 Fringe Benefits Tax 339
Journal Entries in the Books of the Employer
Case 1: The employer correctly withheld the corresponding tax.
GENERAL JOURNAL
Date Page Number 12
200x Descriptions Debit Credit
3/31 Fringe benefit expense 100 %

Cash (or other appropriate account) 68 %
Withholding tax payable 32%
Payment of fringe benefit to the
employee.
Withholding tax payable 32%

Cash 32%
Remittance to the BIR of FBT withheld
In this case, the deductible expense from business income of the

employer is 100%.
Case 2: The employer did not withhold the tax.
GENERAL JOURNAL
Date Page Number 12
200x Descriptions Debit Credit
3/31 Fringe benefit expense 100%

Cash (or other appropriate account) 100%
Payment to the employee.
In the above case, the employer is liable for tax evasion. If

discovered and assessed by the BIR, the payment of tax would be
recorded as follows:
____________________ GENERAL JOURNAL_____________________

Date Page Number 13
200x______ ______________ Descriptions_____ _ ___________ _________ Debit________Credit
_3/31 income tax expense___________ ___________________________ 32%________________

„_____Cash""........... .......... ............ Y _ YY____________________I_____ 32%
____________ Payment to the BIR of final income tax.____________________ ______________
The fringe benefit expense and the 32% income tax expense are
n°t deductible from the employer’s business income for tax
Purposes because the related withholding tax was not withheld
ûd paid until the tax evasion was discovered by the BIR.
340 INCOME TAXATION
importance of Fringe Benefit Tax
Fringe benefit tax is primarily intended to recover the lost revenue

of the government due to a previous malpractice of the employer
and the managerial employee.
The said malpractice occurs by declaring only partial of the total

negotiated salary to lower the tameable employee's compensation,
yet with the employer still deducting in full from business income
the total payments to the managerial employee.
This effect of the FB tax rule is illustrated below.
Assume the following comparative data of Enlighten Corporation:

Tax
Before Effectivity Recovered by
FBT Rule of FBT Rale Government
Business income before fringe benefit PI,000,000 PI,000,000
Imiah: Fringe benefit-managerial employee 68.000 100.000 P 32,000
Net taxable income P 932,000 P 900,000
Lessr Income tax (30%) 279.600 270.000 r 9.6001
Net income after tax P 652.400 P 630.000
Net tax recovered by the government
VALUATION OF FRINGE BENEFITS
The following are the general rules applicable in the valuation of

fringe benefits:
CONDITION ■ .... VALUATION fMonetaATvûet
Rule 1: If Fringe Benefit (FB) is • The value is the amount granted

granted in money, or is directly paid \ or paid for.
for by the employer
Rule 2: If the FB is granted or • The value of the FB shall be equal

furnished by the employer in to the FMV of the property as
property other than money and determined in accordance with
ownership is transferred to the SEC. 6 (E) of the Code (Authority
employee. of the Commissioner to
| Prescribed Real Property Values).
Rule 3: If the FB is granted or ! • The value of FB is equal to the

furnished by the employer in| depreciated value of the property.
property other than money but‘
ownership is not transferred to the
employee.
Housing Fringe Benefits
The housing fringe benefits shall use the following formula:
HOUSING PRIVILEGE FRINGE BENEFIT TAX BASE
1. Lease of residential MV® 50% x rental payments

property for residential use
of employees. Where:
MV= monetary value of the FB
2. Assignment of residential MV® [5% (FMV or ZV, whichever is ?

property for use of higher) x 50%] *
employees. i
Where:
ZV=Zonal Value = Value of the land
and improvement, as declared in the I
Real Property' Declaration Form.
FMV ® Fair Market Value as \

determined by the Commissioner of
Internal Revenue. j .j
3. Purchase of residential MV® 5% x AC x 50% |

property on installment
basis for the use of Where: j
employees AC « Acquisition Cost, exclusive of
interest
4. Purchase of residential MV* FMV or ZV. whichever is

property and ownership is higher
transferred in the name of
the employees.
Illustration 1 - Purchase and Transfer of Real Property
Pretty Corporation purchased a residential property and

transferred the same in the name of its Chairman of the Board as
a fringe benefit. The property has a fair market value of
P6,000,000 and a zonal value of P5,000,000.
The fringe benefit tax would be
Grossed-up monetary value (P6.000,000/68%) PS,823,529

Fringe benefit tax F2.$23,529
M2 INCOMP IAXA1ION
I'hr uuu nat <H\U\ foi ttic- (un.llf'i ami paynirtM of MU WouM |,r
Fi .ngr benefit expense M,82d,?»2f)

Residential ptopeity 0,000,000
Cash 2(M2:j,fm
Not#: The enure jitwsed up monetary value U the allowed amount to he dfdut.M
as benefit expense than <n>ss income.
Illustration 2 - Assignment of Real Proparty
Pretty Corporation assigned its own residential building as a

residential house of its Marketing Manager with fair market value
of P6,000,000 and zonal value of P5,000,000.
The fringe benefit tax is computed as follows
Monetary' value (P6,000,000 x 5%) x 50% PI50,000

The journal entry would be:
Fringe benefit expense 70,588

Cash/FBT payable 70,588
Note: Since the property was not transferred in the name of the employee, the
fringe benefit tax is to be shown as deduction from gross income. The monetary
value of fringe benefit shall be claimed as deduction in the form of depreciation
expense.
Cost (Book Value) Lesser than Fair Market Value
If the cost (or book value) of the assigned residential house

subject to depreciation allowance is lesser than its fair market
value, the excess amount should be amortized throughout the
remaining estimated useful life of the residential property.
Assume the following data related to the residential property

assigned to the Manager of Beauty Company:
Fair market value P6,000,000
Zonal value 5,000,000
Book value 4,200,000
Remaining estimated useful life of the building 10 years
papier 6 Fringe Benefit* Tax 343
<ne fringe benefit tax is computed as follows:
fair market value (higher amount) P6,000,000

Lev**. Cost/Book value of real property 4,200,000
Excess amount PI,800,000
Divided by remaining useful life in years _________ 10
Knnual amortization P 180,000
Grossed-up monetary value P 264,706
fringe benefit tax P _ 84,706
The journal entry the annual fringe benefit would be:
F r 1 n ye ben efi t ex pen se 264,706

Cash / i'\ pay a Vile 84,706
Income constructively realized 180,000
'Vse annual amortization of 1M 80,000 decreases taxable income

w\ the income const rucUvely received increases taxable income
v/iu* hie same amount. Accordingly, the only amount affecting the
ts/.sble income is the fringe benefit tax due of 1*84,706. The
Mter native journal entry would bet
triage benefit expense 84,706

Cs^h/f iff payable 84,706
HontaxaVdo Housing Fringe Benefit

h>1' tollov/ing bousing benefits are not subject to fi i inge benefit
1 M ousing privilege ot Uie Aim ed Purees of the Philippines (AKP)

otti<.tale i.e,, those of the Philippine Arm y (PA), Philippine
Uti /y (Ptfi oi Philippine Ai» Korea (PAK);
/ l\ b o u s i n g u n i t , w h i c h I s s i t u a t e d i n s i d e o r a d j a c e n t t o t h e
ptrmiscs oi a business or factory. A housing unit. is
CintiHi«i«jil (td\(i(cia to the p» entities of the. Inm iiK'MH it it is
io< atrd witbm tie* maximum of titty (tit)) meters away from the
\*e» mietet <,1 t \ te inminrHH premises; and
loiil*ouiiy housing for au employee who stays in a housing

eiu\ toi thie<- (ft) mimtlm oi less.
344 INCOME I AHA I ION
Motor Vehicle*
i'he Motor vehicle hinge hoiirlit* wluill use Hi»• lollowing *«»• mnU,
MOTOR YKU1CLB ITKIVILItUM mtWUlUlMKFiXJWA "ASJ5
1 l. Purchase of motor vehicle in MV - AC

! the name of the employe*' At' - Aequinll ion < ’omI
► . .....................
Cash us given to the MV-* ( 'mmI ) iceeived by
employee for the purchase (hr employer
ot vehicle; ownership in
placed in the name of the HouH't>cr, please note Ilia! If tljr
employee ('asli given by the employer to Hh
employee in subject lo WTW, il ahull
not be subject to IrHT, anymore.
3. Purchase of car on MV - AC/5

installment basis, the
ownership of which is Where:
placed in the name of the AC ■ Acquisition Cost, exclusive of
employee. interest.
1- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ■
4. Employer shoulders a MV“Amount shouldered by the

portion of the purchase employer
price, the ownership of
which is placed in the name
of the employee.
5. Employer ‘ owns and MV = (AC/5) x 50%

maintains a fleet of motor
vehicles for the use of the
business and the
employees.
6. Employer leases and MV= 50% x rental payment

maintains a fleet of motor
vehicles for the use of the
business and the
employees.
Illustration - Purchase of car on installment basis
Active Company purchased a car by installment to be given as

fringe benefit of its president. The car has a cash price of
PI,650,000, but since it was acquired by annual installment of
P400.000 within five years, the total amount to be paid for a five
year installment is P2,000,000. In addition, the company also
spent car registration fee amounting to P50,000.
The fringe benefit tax would be:

Cash price of the car PI,650,000
Add: Other acquisition cost - registration fee 50.000
Total acquisition costs PI,700,000
Divided by numerator 5
Monetary value P 340,000
Grossed-up monetary value P 500,000
Note: The interest expense for five years amounting to P350,000, (P2,000,000 -
Pi.650,000) should not be included as part of the acquisition cost for fringe
benefit tax purposes. The other related costs such as cost of registration, testing,
and other costs necessaiy for the vehicle to be placed and used is part of the
acquisition costs.
Aircraft and Yacht. The use of aircraft (including helicopters)

owned and maintained by the employer shall be treated as
business use and is not subject to the fringe benefit tax.
The use of yacht whether owned and maintained or leased by the

employer shall be treated as taxable fringe benefit. The value of
the fringe benefit shall be measured based on the depreciation of
a yacht at an estimated useful life of 20 years. [Sec. 2.33 (B), Rev. Regs.
.Vo. 3-98i
Illustration
Grown Corporation owns and maintains a yacht, a helicopter and

an airplane which are used by its 10 members of the board of
directors for pleasure and business purposes. Some data
available are as follows:
Acquisition cost Estimated life
Yacht P27,200,000 20years
Helicopter 6,800,000 10years
Airplane 13,600,000 10years
The amount of annual fringe benefits tax for each director would
be
'tvtfs* C* '.htj/jf, y&iJ '¥/./ '/S/s ///Ji'/'*)) P;/£00, //jf
II
:A
mm
s
!
JS
t» ^ e
>v c O' ' S?
V _v^3
& A
"3 x' "** ^
‘tfrcfrt'nlfilioti un // trfjn*',[jorUjti//n oll/zu/on/A'^ 1'no* ut% U/,*:4 in
Tomftporbjtion busmens trip l 2M ^ J
How much of Mr, Pc rczV, rohn bur noble expense v/ouUi be subj®^
to fringe benefits tux?
"4
The reimbursable expense of Mr. Perez subject to fringe benefits

tax would be:
Light and Power (P8,000 x 25%) P 2,000
Grocery 15,000
Clothing 5.000
Total P22.000
Note: The gasoline and seventy five percent of lights and power are expenditures
of the employer. Thus, they don't partake the nature of personal expense subject
to fringe benefit tax.
Total fringe benefits P22,000

Divide by grossed-up monetary value factor 68%
Grossed-up Monetary Value P32,353
Multiply by tax rate 32%
Fringe benefit tax due P10.353
Household Expenses
Expenses of the employee which are borne by the employer for
household personnel, such as salaries of household help,
personal driver of the employee, or other similar personal
expenses (like payment for homeowners association dues, garbage
dues, etc.) shall be treated as taxable fringe benefits.
Illustration
The Magnolia Corporation hired Miss Emerita Bulosan, a scientist

who discovered the trade secret of wonderball ice cream, and gave
her the following compensation and fringe benefits:
Salary P300,000 per month

Three personal security guards P3,000 each/month
Two maids P2,000 each/month
One Secretary in the office P8,000 per month
One personal driver P4,000 per month
Homeowner’s association due P 600 per year
The determination of annual fringe benefits and fringe benefit tax

due would involve the following computations:
Three personal security guards (P3,000 x3xl2) P108,000
Two maids (P2,000 x 2 x 12) 48.000
48.000
One personal driver (P4,000 x 12)
348 INCOME TAXATION
Homeowner's association due ___—600

Total fringe benefits in a year P204,600
Divide by grossed up monetary' factor —__68%
Grossed-up monetary value P300.882
Multiply by tax rate 32<yft
Fringe benefit tax due P 96r9fp
Interest on Loan at Less than Market Rate

The following rules axe applicable regarding the cost of money
whenever an employee borrowed money from his employer: '
1. If the employer lends money to his employee free of interest or
at a rate lower than 12% per year, such interest foregone by
the employer of the difference of the interest assumed by the
employee and the 12% rate shall be treated as taxable fringe
benefit.
2. The benchmark interest rate of 12% shall remain in effect
until revised by a subsequent regulation.
3. This regulation shall apply to installment payments or

loans with interest rate lower than 12% starting
Januaiy 1, 1998. (Rev. Regs. 3-98)
Illustration
In 200x, Mr. Peter Ang, the owner of Victoria Supermarket, lends

PI 00,000 to Martin Lavarias, the supermarket’s manager. It is
stipulated in their agreement that the amount should be paid in
one year with an annual interest of 5.2%.
The fringe benefit tax is computed as follows:
Interest at 12% (PI00,000 x 12%) PI2,000
Interest at 5.2% (PI 00,000 x 5.2%) 5,200
Difference P 6,800
Divide by grossed-up monetary factor .68%
Grossed-up monetary value PI0,000
Fringe benefit tax due P 3*200
Notes;
I Die 12% benchmark interest rate in based on BSP Circular No. 005, .series of
1082. 2
2. On June 21,2013, the BSP issued Circular No. 700, series of 2013, reducing
the above interest rate from 12% to b% net annum.
3 For fringe benefit tax purposes the 12% benchmark interest rate shall remain
in effect until revised by subsequent regulation. (Rev. Regs. No. 3-98)
Membership Fees, Dues and Other Expenses

Membership fees, dues and other expenses borne by the employer
for the employee in social and athletic clubs or other similar
organizations.
The entire expenditures shall be treated as taxable fringe benefits

of the employee.
Illustration
Mr. Jose-Alfred Herbolario was appointed as the Vice President

for Marketing of Baguio Gold Corporation. As his privilege, the.
corporation paid his Baguio Country Club membership fee
amounting to PI,700,000. How much is the amount of the fringe
benefit tax?
The fringe benefit tax would be:
Monetary value of membership fee PI,700,000

Divide by GMV factor _________68%
Grossed-up monetary value P2,500,000
Multiplied by fringe benefit tax rate ______ 32%
Expenses for Foreign Travel

Reasonable business expenses which are paid for by the employer
for the foreign travel of his employee for the purpose of attending
business meetings or conventions shall not be treated as taxable
fringe benefits.
In this instance, the following rules shall apply:
(a) Inland travel expenses such as those incurred for food,

beverages and local transportation are not subject to FBT.
For lodging cost in a hotel or similar establishment, any cost

incurred in excess of an average US$300.00 per day shall be
subject to FBT.
350 INCOME TAXATION
(b) Cost of economy and business class airplane ticket shall not
he subject to fringe benefit tax. However, 30% of the cost of the
first class airplane ticket shall be subject to fringe benefit tax.
The expenses should be supported by documents proving the

actual occurrences of the meetings or conventions.
In the absence of documentary evidence showing that the

employee’s travel abroad was in connection with business
meetings or conventions, the entire cost of the ticket, including
cost of hotel accommodations and other expenses incident thereto
shouldered by the employer, shall be treated as taxable fringe
benefits.
Traveling expenses, which are paid by the employer for the travel
of the family members of the employee, shall be treated as taxable
fringe benefits of the employee.
Illustration
Mr. Leonardo de la Cruz, the Vice President for Finance of

Cordillera Corporation incurred the following, expenses in
attending a three-day foreign business convention:
Plane tickets (USA travel):
First class $1,500
Economy 800
Hotel accommodation (USA) 8,000
Inland travel 1,500
Assume $1.00 * P40
Compute the fringe benefit tax assuming that:
a. The business convention was with documentary evidence.
b. The business convention was without documentary evidence.
Business Conventions With Documentary Evidence
The fringe benefit tax due is determined as follows:
First class plane ticket ($1,500 x P40 x 30%) P 18,000

Hotel accommodation [($8,000-$900*) x P40) 284.000
Divide by grossed-up monetary valuefactor 68%
Mulriply by tax rate _ _ _ _ _ 32%

Fringe benefits tax due P142.118
^Computation of $900, ($300 x 3 days).
Note: Since the above-mentioned expenses are business related and with
documentary evidence, plane ticket economy should not be treated as a taxable
fringe benefit. Also, inland travel expenses are not fringe benefits. Hotel
accommodation amounting to $300 or less per day is not subject to fringe benefit
tax.
Business conventions Without Documentary Evidence
The fringe benefit tax is computed as follows:
First class plane ticket ($r, 500 x P40 ) P 60,000

Economy class plane ticket ($800 x P40) 32,000
Hotel accommodation ($8,000 x P40) 320,000
Inland travel ($ 1,500 x P40) 60,000
Divide by grossed-up monetary value factor 68%
Grossed-up monetaiy value P694,118
Fringe benefits tax due P222.148
Note: In the absence of documentary evidence showing that the employee’s travel
abroad was in connection with business meetings or conventions, the entire cost
of the ticket, including cost of hotel accommodations and other expenses incident
thereto shouldered by the employer, shall be treated as taxable fringe benefits.
Holiday and Vacation Expenses

Holiday and vacation expenses of the employee borne by his
employer shall be treated as taxable fringe benefits.
Illustration
In 20Ox, San Miguel Corporation provided a four-day free

vacation in Boracay to all of its employees of which 80% are rank-
and-file. Total expenses incurred by the company for the said
vacation amounted to P2,000,000.
The determination of fringe benefits tax would entail the following

computations:
Fringe benefit for managerial employees

(P2,000,000 x 20%) P400,000
352 INCOME TAXATION
Divide by grossed-up monetary value factor —.68^0

Multiply by tax rate — 32%
Fringe benefit tax due E188.23S
Educational Assistance
The following rules shall be applied whenever an employer
provides educational assistance to the employee or his
dependents.
Taxable FB______________ Non-taxable FB________________ _____________

a) General rule a) Exception
Cost of the educational Scholarship grant to the employee by the
assistance to the employer, provided the following conditions
employee which are are met:
borne by the employer
• The education or study involved is directly
connected with the employer’s trade, business
or profession; and
• There is a written contract between them to

the effect that the employee is under
obligation to remain in the employ of the
employer for the period that they have
mutually agreed upon.
; In this case, the expenditure shall be treated

| as incurred for the convenience and
| furtherance of the employer’s trade or
business.
b) Cost of educational b) The assistance was provided through a

assistance extended by competitive scheme under the scholarship
an employer to the program of the company.
dependents of an
emolovee
Illustration
Mr. Jack Ammo is a regular faculty member of Northern

University. The school provides free tuition fees for the children
of its employees. Are the tuition fees subject to fringe benefit tax?
No. However, it is subject to withholding tax for compensation

income under Section 79 of NIRC. (bir Ruling 189-99)
Ch«pt*' 6 F O"'** Ut
\(\%vrm\Q*
7y *Jv rH+r* ♦'/ Uft or o^.V, aih other roîhe

muuin"j premium* <t; w„.&: ^/.vv .of* m ezct&s. r* what the law
allow*.
The cost <n of

heaJG. ,/,*war.celift ar.ri oCber nor>!:fe insurance
premiums by *hs burnt
tmpW/tr for hi* er/.pfcyee shah be
treated a* fA/ftWc binge .veftefit exrjrpr for the fofowbig;
1. Contribution of the employer for the benefit of the employee

pursuant to the provision* of existing Law *nxh an under the
SSS </</. /*v ^2.;, a* amended* or or der the GS1S ;e.c or
similar contributions arising from the prooierone of airy other
existing law; and
2. The cost of premiums borne by the employer for the group

insurance of his employees.
Illustration
ABC Company sherds the folloy/ing insurance premiums intended

for its president, Mr, Eulogio;
Particulars: _.. „.. ,-.„ gîyîarv Premium paid

Life insurance ^ Mr, Eulogio a his heirs ?10,20C
Car insurance I'b'- nulogxo 5,440
Health insurance Mr- Eulogio% family 4,080
SSS contribution Mr, Eulogio & his heirs 3r40C
Group insurance Mr, Eulogio os. nis heirs 1,700
Total insurance premiums paid P24.820
The fringe benefit tax on the insurance premiums paid by ABC

Company for the benefit of Mr. Eulogio is computed as follows:
Particulars: _ _ _ _ _ _ _ _ _ _ Beneficiary Premium paid

Life insurance Mr. Eulogio & his heirs PI 0,200
Car insurance Mr. Eulogio 5,440
Health insurance Mr. Eulogio's family 4.080
Total monetary value of FB P19.72Q
Fringe benefit tax (PI9,720/68%) x 32% EL2S2

354 INCOME TAXATION
Fringe Benefits Tax on Special Taxpayers
RECEPJERT OF
FR/JfOE BENEFITS TAX RATE TAX BASE
:|
1 j Nonresident alien individual (not engaged 5 25% FBT on the I Monetary Value
in trade or business in the Philippines! j GMV of the FB ! of the FB divided
1 by 75%.
2) a. Alien individual employed by regional ; 15% FBT on Monetary Value

or area headquarters of a multi the GMV of the of the FB divided
national company or by regional FB : by 85%
operating headquarters of a
multinational company;
b. Alien individual employed by an

: \
offshore banking unit of a foreign
bank established in the Philippines;
3) Alien individual employed by a foreign 15% FBT on Monetary Value

• service contractor or by a foreign : the GMV of the of the FB divided
service subcontractor engaged in : FB by 85%
petroleum operations in the
Philippines;
4) Any of t heir Filipino individual

employees who are employed and 15% FBT on Monetary Value
occupying the same position as those the GMV of the of the FB divided
occupied or head by the alien FB by 85%
employees.
\
5) Employees in special economic zones, 1 Subject to the Monetary value
including Clark Special Economic Zone normal rate of of the FB divided
and Subic Special Economic and Free ; FBT or the by 85% or 75%.
Trade Zone. special rates of
1 25% or 15% as
1 provided above
Illustration
Brad Pitt, a nonresident alien not engaged in trade or business in

the Philippines received P60,000 from Waterpure Philippines, Inc.
as fringe benefit. The amount of fringe benefit to be withheld and
paid would be
Grossed-up monetary value (P60,000/75%) P80,000

Multiplied by applicable FBT rate 25%
Fringe benefit tax P20.0QQ
Note*:
1. The fringe benefit received by a nonresident alien not engaged in trade or
business in the Philippines shall be subject to 25% fringe benefit tax rate.
2. The tax base is the grossed-up monetary value computed by dividing the
monetary value by 75%. (Rev. Regs. No. 3-98)
3. The formula is: FBT = (MV/75%) x 25%
FRINGE BENEFITS NOT SUBJECT TO FBT

The following fringe benefits are not subject to FBT:
(a) Fringe benefits which are authorized and exempted from
income tax under the Code or under any special law;
(b) Contributions of the employer for the benefit of the employee
for retirement, insurance and hospitalization benefit plans;
(c) Benefits given to the rank-and-file, whether granted under a
collective bargaining agreement or not;
(d) If the grant of fringe benefits to the employee is required by
the nature of, or necessary to the trade, business or
profession of the employer; or
(e) If the grant of the fringe benefit is for the convenience of the
employer. (Sec.33C, NIRC)
(f) De minimis benefits. (This topic is discussed in Chapter 5 of
this book.)
The exemption of any fringe benefit from the fringe benefit tax
shall not be interpreted to mean exemption from any other
income tax imposed under the Code except if the same is likewise
expressly exempted from any other existing law. Thus, if the
fringe benefit is exempted from the fringe benefit tax, the same
may, however, still form part of the employee’s gross
compensation income subject to income tax. Hence, it is likewise
subject to a withholding tax on compensation income payment.
(Rev. Reg. .No. 3-98)
356 INCOME TAXATION

1. Define “fringe benefits.’’
2. Give the reasons to justify the granting of fringe benefits to
employees.
3. Whose income tax is the fringe benefit tax?
4. What is the grossed-up monetary value of fringe benefit and what is
the tax rate of fringe benefit tax?
5. Illustrate the applicable income tax for the fringe benefit received by
(a) managerial employees and (b) rank-in-file employees.
6. Why is fringe benefit tax important?
7. State the three general rules in determining the monetary value of
fringe benefit.
8. Enumerate the different instances of housing privilege and explain
their respective fringe benefit tax base.
9. What are the instances when housing privilege is not taxable?
10. When will personal expenses incurred by an employee subject to
fringe benefit tax?
11. Enumerate the different instances of vehicular privilege and explain
their respective fringe benefit tax base.
12. Can household expenses be subject to FBT?
13. State the rules when interest on loan from employer be considered
fringe benefit.
14. How much is the monetary value of fringe benefit related to
membership fees in social and athletic clubs paid by the employer?
15. Explain the rules on expenses for foreign travel.
16. Are employee’s holiday and vacation expenses borne by employer
subject to FBT?
17. State the rules on educational assistance fringe benefit granted to (a)
employee and (b) dependents of employee.
18. Can life or health insurance be subject to FBT?
19. Enumerate and describe the instances, tax rate and tax base of
fringe benefits granted to special aliens.
20. What are the nontaxable fringe benefits?
’ r''*<0S *>|** ' r/
w
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**
7 ' v*
^ ^ '■ ' >Ar A * *•'*» "*s '/ K'* {reaper

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:;y ^ *r.d by v.e ^/ip.oyer .-r. *
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"‘'••*. «-..., ,v
^ /y/' ^"/..loh the aob «** SJih*tecsier/f;y
* v* ^ S£>, *he rented 'r;r.^ vsr.k.2. ^
,y"1*' ** ded ^fo*a f/am br
ve e/.pioyer* r/as* ■
"'/. V .e aax or, baccme ea/aeh by
*** ^ *h* 1 /.OC//.
:rfjj; tt!t.. 4 *y ^ hae e/ap'-cye* & to Tehhhhd the

-*x f/o.aa 'ge vmefh earned by the maphyee.
V T fr.
* granted fo money; ar drecriy paid irjc by ~he
y/*x -.^ f_^ ar.a/vant recer/ed bv the emhcvee is
— "''x^ryv^z.
^ ^ ''^<*ztva. st of the resider.tsa! house assigned hr the
^ v> oaa.aogc/fa; employee is greater thar. ha scat, the excess
h:t~*r*n\ ^ amortized over the remafomg. life of the asset.
^ yC" 'h!4ir;f5 ve/.efh* provided by employer to m&nagena!
smp;oyee are object to fringe 'venefr: tax.
> b *nge benefits are for//,a of fnne/itr/es to managerial employees.
i,’ brings benefits fnrbude on Iy salaries and service-*, or similar
ucnefi* gr/er, by eroployer to a r/.aoagenai employee.
V/aê aod/or salary abeady j^yen to the employees may be
ove/jt /aijy redooeb durmg /ijiaiiciai dtfficultie*.
A/lodbooai rerourieratfon for overtime and separation pay does
not inojude fringe benefited
J4. ynrjfp h*zriefit includes additional help granted by the employer
to the managerial employees in addition to the basic salary.
j 5, 7 he fringe benefit tax rate shall be the same with the normal
corporate tax rate for income taxes.
] 6, The additional benefits received by the rank-and-file employees
are not subject to final fringe benefit tax rate, but are to
reported in the annual income tax return.
558 INCOME TAXATION
Name: _______ ____ ________________________________ _ Score: ________

incorrect
1. .All fringe benefits given to managerial employees are subject to

final fringe benefit tax, except those which are granted for the
convenience of the employer.
2. A fringe benefit not subject to FBT is also not subject to
compensation income tax.
3. Fringe benefit tax is not applicable when the fringe benefit given
is required by the nature of or is necessaiy to the trade, business
or profession of the employer, or when the fringe benefit is for
the convenience of the employer.
4. The 10 days monetized value of leave credits paid to government
official and employees is not subject to FBT and withholding tax
on compensation.
5. A medical allowance of P750 per employee per month granted by
employer to the employee’s dependent is a nontaxable fringe
benefit.
6. Daily meal allowance not exceeding twenty-five percent of the
basic minimum wage is a “de minimis” benefit.
7. Monetized unused vacation leave credits of private employees not
exceeding ten (10) days during the year and the monetized value
of leave credits paid to government official and employees are
part of de minimis.
8. Salaries of household maid of managerial employee that is
reimbursed to the manager by his employer constitute a fringe
benefit that is subject to final tax.
9. Household expenses which are reimbursed to the manager by his

employer are taxable fringe benefits.
10. A travel as fringe benefit required by the company to its officer is
subject to fringe benefit tax.
11. Holiday and vacation expenses of the managerial employee borne
by his employer are taxable fringe benefits.
12. All scholarship grants to the employees are nontaxable fringe
benefits.
13. Contributions of the employer for the benefit of the employee for
retirement, insurance and hospitalization benefit plans are
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36S INCOME TAXATION
The renewing items are treated as taxable fringe benefit, except

a. expenses incurred by the employee paid by the employer,
b expenses incurred attributable to business of employer paid by
the employer.
c. personal expenses without receipt of the employee reimbursed by
the employer.
d- representation and transportation allowances which are variable
in amount and not part of compensation income.
8 Interest on loans granted by the employer to employee are taxable

fringe benefit when the interest rate is
a, lT-:.
b above 12%.
c. L8:: and above.
d. lower than 12%.
9. Statement 1: Nonpayment of FBT will result to disallowance of

deductible fringe benefit expense.
Statement 2: All compensation income of a managerial employee is
subject to FBT.
c. 3oth statements are correct.
10. Which of the following fringe benefits received by a managerial

employee is taxable with final income tax?
a. De minimis
b. Free housing
Educational scholarship related to trade
. Foreign travel on account of business convention
an
11. Which of the following is not true?”

a. Use of company owned aircraft by a managerial employee is not
b. Use of company owned yacht by a managerial employee is not
c. Accumulated vacation and sick leave credits to government
employees are nontaxable.
d. Educational assistance to the employee and his dependents are
generally taxable benefits.
12, Which of the following is a taxable fringe benefit?

a. Life insurance premium on the life of employee borne by the
employer
b. Employer's tax payment on behalf of the employee
c. 13* month pay and similar benefits in excess of P30,000
Name: ______________________________________ Score:

1. Which of the following benefits is subject to withholding tax on

wages?
De minimis Received bv rank- file Received bv supervisor
a. Yes Yes Yes
b. No Yes Yes
c, No Yes No
d. Yes No Yes
2. Statement 1: The fringe benefit tax is part of the compensation of the

managerial employee.
Statement 2: The fringe benefit tax is to be withheld and remitted by
the employer to the BIR.
a. Statement 1 is correct.
b. Statement 2 is incorrect.
3. What is the value of fringe benefit if a property is furnished by the

employer to be used by the employee without transfer of ownership?
Book value Fair market value Depreciated value
a. No No Yes
b. Yes Yes No
e. Yes No Yes
d. No Yes Yes
4. Which of the following business travel expenses is not subject to

fringe benefit lax?
n, hotel accommodation for $300 per clay,
b. cost of economy airplane ticket;,
e. inland travel expense.
r> Educational grant to tin* employee or his dependent by the employer
\h not subject to fringe benefit tax, except when

(i, (he study grant involved is connected with the trade.
1). there is a written contract that the employee will remain to work
for a period of time.
e. the assistance was through competitive scholarship program,
d. the study grant is not connected with the trade,
'■ Which of the following statements is true'?

a. Existing fringe benefit being provided to a managerial employee
could he reduced without violating the labor law.
b. The fringe* benefit increase's in direct proportion to overtime
i ende*re*d.
<'■ The fringe* benefit is strictly payable in cash,
362 INCOME TAXATION
d. The fringe benefit of managerial employee is exempted from

income tax.

a. Fringe benefit of a managerial employee is subject to final income
tax.
b. Fringe benefit tax is a creditable withholding tax.
c. Fringe benefit tax is an income tax.
d. Fringe benefit tax rate is 32%.

a. The grossed-up monetary value of fringe benefit is equal to 68%
of cash value of the benefit.
b. The taxable compensation of the employee with respect to the
benefit is equal to the grossed-up monetary value of the benefit.
c. The fringe benefit tax is the income tax expense of the employer.
d. The 32% final tax is applied to the monetary value of the benefit.
9. Which of the following items is a taxable fringe benefit?

a. PI5,000 actual medical benefits received during the taxable year.
b. Overtime meal allowance of P50. The basic minimum wage is
P400.
c. Cost of the educational assistance to the employee’s children on
account of competitive scholarship.
d. Cost of employees’ group insurance premium paid by the
employer.

Relatively small meal allowances paid to rank-and-file employee
intended to promote health and goodwill are
a. considered as de minimis fringe benefits.
b. not subject to fringe benefit tax.
c. not subject to income tax as compensation.
d. subject to income tax as compensation.
11. Which of the following is subject to income tax?

a. Fringe benefit required by the nature of or necessary to trade
business or profession of the employer
b. Those granted for the convenience of employer
c. De minimis benefits
d. Income tax paid by the employer in behalf of the employee.
12. Which of the following concepts denotes exemption from fringe

benefit tax?
a. Convenience of the employer rule
b. Necessity to the business or trade of employer rule
c. De minimis benefits
d. All of the above
/%*£«**' S' T*,\ 363
6 - S Effect of FBT
n 2
Ah* -•'•'? ^.\vur.:ir.: c: V Ccrup&r.y charged the PI 70,000 fringe
rmnfrs c. ns rsn^-m-me employee as miscellaneous expense to avoid
ire rented vicednj rax As a result, the company paid an income tax
L.T-' -nmne to roZC.CCC Hew much is the additional tax to be paid if the
i T c: zee
c. p 30,000
r ~ c- -:c d- PI31.000
6 “* Recofêred by the Government

“* ~_1 ‘ /_ ccumu m; X Corporation's payments of fringe benefits
* JZ.TTZT^^ ez“?*~irees ^ 300A were charged to miscellaneous
lt;CZ^r ZT'lfr'T:^ rc —-Z.1ZC. If the company's 200A net income after
_!/7 f_~ . --A. new much is the tax recovered by the government
c--sccv-r7 - the requirement of expense deductibility is
* I'll:0 c. P78.600
: ± pi7,400
Przc&em 6-7 Vafries of Fringe Benefits

'-nrt a manager c-f Johmcac. received the following fringe benefits
lasn manel ahcwan.ee P 34,000

h'cuc*e and h: - ownership of real property' is transferred
m Hr. -Zegrs. 7ir/, ?SÂ0O<h cost ~ 476,000
far - 7sr.trthem wan transferred to Mr. Alegre,
he car ran a 10-year estimated useful life, but
already 1 year he use a t da te of transfer 680,000
re mcnscary value of fringe benefits received during the year would
re
r A! 2rA///Z c. P 646,000.
c a: 111///, d. P 578,000.
h "he greered -up monetary value of the fringe benefits would be
a. A 810000. c. PI,750,000.
c A 000 00.0. d. PI,850,000.
Prvhlero 6-8 Value* of Fringe Benefit* and FBT

Ac ^rerv/er remitted t/> HiP P80/XX) pertaining to amount withheld
here re carr h-enefit granted to its managerial employee.
Hew much is the monetary value of fringe benefit paid to managerial
err p.cyeer
* AV/,///, e. Pi 70,000
c A210///, d. P 80,000
/J- Kv>/ m m.h >. the groeeed-up rnontfAry value of fringe benefit/
A AV/,///, c, PI 70,000
v. >210///, d, p 80,000
M *4 INCOMt" TAXAMON
!!a- munnc1 tA\ expc-nsc* deductible horn ih< businev', i n ' o r n r *4 ^

rmplovn Uu lhiN pal ticuhii paymeni
.1 PS0.000 < . \nr)t<>00
!' PM ,400. <1, V 0
Problem 6-9 Not Monetary Value Subject to FBT

Mi R ojas , a professor of Luzon University, w.is promoted to *>chof,j
canteen manager starting June 30, 200A with the following
compensation and fringe benefit.
As a Professor Ah a Managg
Monthly salary P30,000 >50,000
Monthly meal benefits 3,000 10,200
Educational assistance of children 10,000, 13,600
How much is the 200A net monetary value of fringe benefits subject to
FBT?
a. P 81,600 c. PI42,800
b. PI 41,600 d. P220,800
Problem 6 - 1 0 Deductible Fringe Benefit Expense

X Corporation paid PI36,000 cash fringe benefit for year 200A
representing 80% of the car incentive for its area manager. X remitted
the related final tax of the said cash fringe benefit. The amount to be
claimed as business deduction from business income is
a. PI 70,000. c. P136,000.
b. P200,000. d. P108,800.
Problem 6 - 1 1 Deductible Tax Expense

EGV partnership withheld PI9,200 from the fringe benefit granted to its
office manager. Pertaining to the amount of tax withheld, how much
would be the tax expense that the office manager could deduct from his
gross compensation income?
a. P - 0 - . c. P19,200.
b. P 6,144. d. P60,000.
Problem 6 - 1 2 Fringe Benefit Tax

Joseph Estrada, a company messenger, received the following fringe
benefits during the taxable period:
Motor vehicle purchased to deliver messages P51,000
Actual medical help for hernia operation 13,600
Food allowance per month 1,700
Uniform allowance 680
The fringe benefit tax of Joseph would be

a. P31,520. c. P24,000.
b. P30,400. ' d. P - 0 -.
problem 6 - 13 Housing Benefits

X Corporation purchased a residential property with a zonal value of
P5.000,000. The property has a fair market value of P6,000,000.
1
1. If the property was assigned for the use of X Co.'s president, how
much is the fringe benefit tax?
a. P70.588 c. P48,000
b. P58.824 d. P40,000
2 If the property was acquired for the use of X Co.’s manager for
P2,000,000 down payment and PI,000,000 on installment basis per
year in 4 years (with an effective interest rate of 12% per year), how
much is the fringe benefit tax?
a. P70.588 c. P58,824
b. P59,258 d. P35,294
Problem 6 - 1 4 Housing Benefits

In Problem 6-13 No. 2, If the company policy is to treat the fringe benefit
based on the actual payment yearly, how much is the total fringe benefit
expense in year 200A?
a. P36.764.71 c. P23,862.50
b. P35,091.91 d. P73,529.41
Problem 6 - 1 5 Housing Privilege

A Corporation assigned its residential building to be used by its CEO.
The building was purchased for P2,040,000 and has a zonal value of
Pi.972,000. How much is the monthly fringe benefit by the CEO?
a. PI 25,000 c. P 6,042
b. P 6,250 d. P 2,000
Problem 6 - 1 6 Housing Privilege

B Corporation rents a condominium in Baguio City to be used by its key
officers that supervise the Region 1 business operation. The monthly
rental expense for the said condominium is P34,000. Jean, the corporate
comptroller, is assigned in Baguio City for two months to investigate an
inventory fraud. She was assigned to stay in the said condominium
c -ring the period of investigation.
How much is the amount of fringe benefit tax on the stay of Jean in the
condominium?
cP-0- c. P10,880
b P 8,000 d. PI6,000
Problem 6 - 1 7 FB Monetary Value of Each Officer

Abbott Laboratories Co, owns a fleet of 50 cars of which 80% are used by
the sales department. The remaining cars are assigned to its 10 officers.
Bach car has a sales price of PI,000,000. Abbott purchased the 50 cars
v/nh 5% discount plus transportation, insurance and testing cost of
K00,000.
3efiS6 INCOME TAXATION
ri Jici: :s the monetary value of the fringe benefit of each officer?

=. - 45 :o: c. P950,000
i d. P960,ooo
Problem 6 -18 Motor Vehicle Benefits

A Cc. rmmhaaed a car for a cash price of PI,000,000. If the A Co.
umcriasec the car on installment, the monthly payment would be
P27-DD7 for 5 -rears.
1 L: the company derided to maintain the car for the personal use of its
president as needed. How much is the fringe benefit tax?
a ? -7.059 c. P 94,118
r ? 56,-71 d. PI 12,941
2 If the company decided to transfer the ownership of the car in the

name cf its president, how much is the fringe benefit tax?
a, P 47,059 c. P 94,118
b ? 56.471 d. PI 12,941
Problem 6 -19 Lease of Fleet of Vehicles

ZF Distributors, Inc. leases a fleet of vehicles from Transpo Co. It leases
20 trucks for its delivery operations, 14 cars for its sales force and 6 cars
for its executive officers for a lump sum fee of P6,000,000 per year. How
much is the annual monetary value of fringe benefit of each officer?
a. ?450,000 c. P150,000
b. P30O,OOO d. P 75,000
Problem 6 - 20 Yacht, Helicopter and Airplane Benefits

Java Group of Corporations owns and maintains a yacht, a helicopter
arc an airplane which are used by its five members of the board of
directors for pleasure and business purposes. Some data available are as
rouows:
Acquisition cost Estimated life
Yacht P17,000,000 30 years
Helicopter 5.440.000 25 years
Airplane 8.840.000 30 years
How much is the amount of annual fringe benefits tax for each director?
a. PI47,200 c. P 80,000
b, PI00,000 d. P - 0 -
Problem 6 - 2 1 Expense Account

M Corporation allows its Chief Operating Officer, Mr. Colon, to incur
expenses subject to reimbursement. Mr. Colon presented the following
itemized receipts:
Light and water of his residential house P5.440
Grocery items 6,800
Transportation - business trip 2,040
Meals as representation expense in the name 3,400
of employer
The reimbursable expense of Mr. Colon subject to fringe bene:":, tax

would amount to
a. P15,640. c. P 10,200.
b. PI 2,240. d. P 8,340.
Problem 6 - 2 2 Expense Account

Gerry, the chairman of the board, presented the following expense
accounts which were reimbursed to him by his employer, If Corporation:
Monthly representation allowance P30,60G
Grocery items 17,060
Pants and T-shirt 3,400
Gasoline of company car 6,800

a. P27,200. c, P20,40G.
b. P24,000. d. P 9,600.
Problem 6 - 2 3 Motor Vehicle Fringe Benefit

Miss Clarence Sito, the production supervisor of the Universal
Corporation was given a fringe benefit in the form of a car whereby the
company has shouldered 75% of the price. The price of the car is
P476,000.
How much is the fringe benefit expense?

a. P700,000 c. P476,000
b. P525,000 d. P357,000
Problem 6 - 2 4 Household Expense

In 200B, Miss Rowena Gorospe, a managerial employee, was reimbursed
by her employer for the total salary she paid to her house helper
amounting to PI6,320 for the year and P34,000 traveling expenses
incurred in connection with her duty as sales manager.
How much would be the fringe benefit tax for the year, to be withheld by
her employer?
a. P24,000 c. PI 6,000
b. P23,680 d, P 7,680
Problem 6 - 2 5 Household Expenses

A managerial employee received P57,800 cash from his employer . The
amount is to repay the manager of the amount paid as salary of the
household helper of the manager’s family.
How much is the fringe benefit tax?
a. P85.000 P27,200
b. P57.800 d. PI 8.496
368 INCOME TAXATION
Problem 6 - 2 6 Interest Benefits on Loan

Andoy. an employee of P Finance Co., borrowed money from the coispa-v
amounting to P88,400. The company's policy is to charge 3% per anrrur:
to its employees instead of its regular interest rate of 1.5% per month.
1. If Andoy is a rank-in-file employee, how7 much is the hinge benefe

tax on the interest benefits?
a. P6,240 c. PI,248
b. P3,744 d. P -0-
2. If Andoy is a managerial employee, how much is the fringe benef:
tax on the interest benefits?
a. P6,240 c. PI,248
b. P3,744 d. P - 0 -
Problem 6 - 2 7 Membership Fees

A Corporation paid the following membership fees of its comptroller:
Professional Tax Receipts (PTR) P 5,440
PICPA Lifetime membership 13,600
Goma Golf Club 68,000
Baguio Countiy Club 340,000
How much is the fringe benefit tax?
a. PI 60,000 ' c. PI 98,400
b. P192,000 d. P200,960
Problem 6 - 2 8 Expenses for Foreign Travel

Art, the VP for Marketing of U Co. was assigned to attend a business
meeting in Europe in behalf of the corp.. He incurred the following
expenses with supporting documentary evidences:
Plane ticket - ordinaiy (round trip) $2,040
Hotel, room charge for four days ^600
Inland travel 1,190
Personal expenses 280
Assume that $1 = P50 and all expenses are in the name of the employee
reimbursed by the company.
How much is the amount of fringe benefit expense of U- Corp?
a. P 50,000 c. PI50,000
b. P137,500 d. P237,500
Problem 6 - 2 9 Expenses for Foreign Travel

An employer sent a managerial employee to an international convention.
From Philippines to country of venue, business class plane ticket of
P40,800 was paid by the employer. From country of venue back to the
Philippines, P54,400 first class ticket was paid by the employer.
How much is the fringe benefit tax for the plane tickets paid?
a. P19,200 c. P 7,680
b. P25,600 d. P 6,400
-*actBT S Frtrge Benefits Tax 3©a
pôciesn. 6 - 3 0 Holiday and Vacation Expenses

* employee was given by his employer all paid up vacation
jrjper.ses arr.ourmng to P--GS.GOO plus salary of P3—.000 for the period of
prater cf vacaucn. How much is the hinge benefit expense of the
^:icvr'J
f >550 QCC c. P20S.000
; *500. CCC d. P192.00G
problem 6 — 31 Educational Assistance

-0-" passing. tne scholarship examination, J received P92.SOO as
ccatma. assistance from EGV Foundation wherein his father works
is ~~e for Gpcrauons.
-cw much ;s the fringe benefit tax?

-?•C• c. P44,800
—'^ d. P95.200
Problem 6 - 32 Educational Assistance

ror year 200A, Michelle Gallego, a dean of college, received from her
emp.c> er an educational benefit with cash value of P65,280. The
fringe benefit tax is
*- F65.230. c. PI 5,360.
c P3G.720. d. P - 0- .
1 Pertaining to same data in number 1, the operating expense allowed
is deduction from business income of the employer is
a P96,000. c. P30,720.
b. P65.2S0. d. P - 0 - .
Problem 6 - 3 3 Special Taxpayers

Tear. Salonga. a resident Filipino, is employed as a manager of a regional
operating headquarters of W aim art Multinational Corporation here in the
Fruppir.es. Her position is normally occupied only by expatriate. She
received PI 70.000 cash as fringe benefits. The fringe benefit tax would be
a. ?%0,G0G. c. ^37,500.
b P62.500. d. P30,000.
Problem 6 - 3 4 Special and Regular Taxpayers

7 c and Lapid are both working with Okinawa Corporation, located
.ra.be the Clark Special Economic Zone. Chan is a Chinese national who
”a/*d ir. the Philippines for one month to complete his special process
vvsy with Okinawa. He received a fringe benefit of P30,000. Lapid is a
r;«psno citizen and he is the plant supervisor of the company. He
r served P31.000 fringe benefit.
Hw much is the total fringe benefit tax to be withheld by Okinawa

a *ior ;?
a P3b, i 1 b c. P27,000
*, r>AfjOO d. P19,000
i
370 INCOME TAXATION
Problem 6 - 35
During hex firs: year as X-Factor, Philippines president, Melanie Amaro
received the following benefits;
5-year non-interest bearing loan to construct her house PI,000,000

Use of company's airplane (share in annual depreciation) 200,000
Annual premium on life insurance 100,000
The monet&rv value of Amaro’s fringe benefits subject to FBT amounts to

a- ? - 0 -* c. P207,000
b ?l 07.000 d. P407.000
Problem 6 - 3 6 Nontaxable Fringe Benefits

Mr. Sison, the president of S Corporation, gave the following benefits
during the taxable year to his employees;
SSS contributions P 680

Philhealth contributions 612
Regular meal allowances to the company driver 3,400
Free housing to the company janitors 5,780
insurance premium of the Vice President for Operation
(S Corporation is the beneficiaiy of the 50% proceeds) - . 4,080
How much is the total fringe benefit tax?

a. P - 0 - c. P 960
b. P 444 d. P5,280
Problem 6 - 3 7 Nontaxable and Taxable Fringe Benefits

Miss Mabukol, as the head of office, received the following fringe benefits
Car P214,000
Uniform and clothing allowance 6,800
Rice subsidy (PI,000 per month) 12,000
Employees achievement award (in kind) 10,000
Lfeundry allowance (P300 per month) 3,600
Medical allowance to dependents (P4.250 per semester) 8,500
Actual medical benefits 10,000
Required: Compute the following:

1. Nontaxable fringe benefits.
2. Fringe benefit tax.

Violeta, a branch manager of San Miguel Corporation since year 200A,
received a total annual salary of P360,000. She*also received a free
housing benefit with monthly rent of PI2,240 and fixed monthly meal
allowance of P2,000 considered as part of her compensation income.
inapter 6 Fringe Benefits Tax 371
Is 200B. her salary and fringe benefits has been increased by 10%.
pvnng the year, in addition to her previous fringe benefits the following
casr benefit were extended to her by the corporation:
a. Educational assistance for her dependents amounting to PI3,600.

Trus was availed through a rigorous competitive scheme.
t Employee achievement awards, P10,000.
c. Lions Club membership fee, P20,400.

" 200B taxable amount of fringe benefits subject to FBT.
2. 200B fringe benefit tax.
3 200B deductible amount of fringe benefits.
Problem 6 - 3 9 Valuation and FBT

'Joe following fringe benefits were received by a managerial employee
from his employer:
a Cash amounting to P68,000 to purchase a motor vehicle.
b. Car acquired on installment. Terms: P200,000 down payment and

PI 80,000 annual installment for 5 years. The effective interest rate is
3 8% per year.
c. House and lot costing P816,000 transferred in the name of the

employee. The property has a fair market value of 150% based on its
cost. 7he estimated useful fife of the property is 20 years.
<j. House and lot costing PI,020,000 with a fair market value of
PI ,000,000. The property was not transferred in the name of the
employee. The estimated useful life of the property is 25 years.
e Apartment rented by the company for P244,000 a year and granted

the same to be used by the employee for free.
f. Assignment of residential property for the use of employee. The

property has a fair market value of PI,360,000 but its zonal value is
PI,224,000.
Required; Compute for the following (independent situation):

1 Monetary value
2 f ringe benefit tax
Problem 6 - 4 0 Valuation of Fringe Benefits

!" 200x, May Tamboc is a branch manager of PCI Bank. The bank
^signed to her a condominium. If the condominium is leased to others it

hfiis it monthly rent income of P25.000.
372 INCOME TAXATION
Thr (ondominlum has I hr following values:

A < (|i li'iilio n ro rd P4,000,000
lo in in n r k rt v a lu e 5.000. 000
/.o n n l v a lu e 6.000. 000
In addition, flic bank purchased a cur in the name of May. The car was
acquired on installment with the following terms: P300,000 down
payment and 1*240,000 per year for 5 installment payments. The effective
inlrrest rate is 12% per year.
Required:
1. Compute the h inge benefit tax of each fringe benefit received.
2. Make the appropriate journal entries of each fringe benefit.

In 200A, Miss Chita de Vera, a branch manager of PCI Bank, was given
fringe benefits as follows:
• Assignment of a condominium owned by the bank. The prevailing

rent of the same class of condominium is P40,000 per month. The
fair market value of the condominium is P4,000,000 per BIR
valuation and the zonal valuation is P5,000,000.
• A brand new car purchased by the company is in the name of Miss

de Vera. The company purchased the car by annual installment of
P200,000 in four consecutive years after giving a downpayment of
P50,000 . The cash price is P500,000.
• A PI 0,000 cash representing transportation and representation

expenses as fixed amount and considered part of Miss de Vera's
1. Monetary value of fringe benefit on condominium.
2. Grossed-up monetary value of the condominium.
3. Fringe benefit tax on use of condominium per year.
4. Grossed-up monetary value of the car as fringe benefit.
5. Fringe benefit tax of the car.

6. Grossed up monetary value of cash fringe benefit.
7. Fringe benefit tax of the cash benefit.

Chapter 7
dealings in property
dealings in property
The term ^dealings in property'* refers to the disposal through sale

tr exchange of fa) ordinary assets, or (b) capital assets,
Ordinary Assets
Section 39 ;Aj of the XIRC specifically provides the classifications

a: ordinary assets as follows:
h Stock in trade intended for sale in the normal course of

business, such as:
a. Merchandise inventory (finished goods, in process and raw-

materials); or
b. Securities held or being sold by dealers in securities.
2. Real properties acquired by real estate dealers or developers

^ Zegz. 7-2003 ' OT
h Properties used in business subject to depreciation provided

in Section 34 (F) of NIRC; or
4 Heal properties used in trade or business including real

property held for rent, secacn 39 ,a* size
* Accordingly, ordinary assess are assets that are used ‘‘primarily’ ibr business,
the gain on sale of ordinary assets is subject to regular income ax.
Peai properties acquired by banks through foreclosure sales are considered

is their ordinary assets. However, banks shall no: be considered as
habitually engaged in the real estate business for purposes of determining the
applicable rate oi withholding tax imposed under Sec. 2.57J2 fJ) o: Revenue
.regulations No. 2-98, as amended.
(
374 INCOME TAXATION
Capital Assets
The law defines the term "capital assets” by exclusion. Section y/i
(A) of the NIRC provides that "capital assets” as property held ty
the taxpayer (whether or not connected with his trade cr
business) hut does not include ordinary assets as defined in
Section 39 A of the NIRC. (Sec. 2, Rev. Regs. No. 7-2003J
Therefore, capital assets are property of a taxpayer other than

ordinary assets.
" Examples of capital assets are (but not limited to) the following:
1. Stock and securities held by taxpayers other than dealers in

securities;
2. Interest in partnership and joint venture;
3. Goodwill;
4. Real and personal properties not used in trade or business

like residential house and lot, car, jewelries, etc.; and
5. Investment property.
Note: The sale of real properties and sale of securities are subject to final taxes.
The gain on sale of capital assets other than real properties and securities is
subject to regular income tax.
Change of Purpose
When a taxpayer purchases a property for one purpose and

subsequently change his purpose for holding the property, the
determining factor in classifying the asset held (whether ordinary
or capital asset) is the purpose at the time of sale.
Illustration
I Lino purchased a tract of land in Baguio City with an intention to

construct his residential house on it. He held the land for 5 years,
but because of the sudden increase in the market price of the
1 land, he subdivided it into lots and promoted its sale.
| If the land were sold before its conversion to sub-divided lots, the
transaction would be a capital asset. However, upon the
| subdivision of the land, the lots became inventory (use in
Chapter 7 in Pmp*rty 375
business). Therefore* Lino's original purpose would no kmgvr he

the basis of classifying the land. It would now tv classified ns
ordinary asset.
Noteatr
In the csisse of taxj\\\er not engaged in the teal estate Mis ness, eea!
pwpcrtVs. whether land. building, or other improvements. whtoh air u$*n* or
being used or haw been previously used in trade or business of the mqxyver
shall be *N>nsideoc\i as ordinary assets XV; A\ys. iVo ‘ AVU?
2. Properties classified as ordinary assets for being used m hnsiness bv a
taxpayer engaged in business other than real estate business aw
automatically v\va\rrted into capital assets utvn showing proof that the same
haw not been used in business for mow than two (2) \ems prior to the
consummation of the taxable transactions involving said properties, n’w; )
d. In the case of taxpayers who changed its wal estate business to a non *oaI
estate business, real properties held by these taxpayers shall remain to be
treated as ordinary assets. (Ibut)
4. In the case of taxpayers who originally registered to be engaged in the real
estate business but tailed to subsequently operate, all real properties
acquired by them shall continue to be treated as ordinary assets. (:bm '
Taxes on Ordinary and Capital Asset Transactions
Ordinary Assets. As a rule, the sale or exchange of ordinary

assets (real or personal) is subject to normal-''regular raw These
normal taxes are:
1. 5% to 32% of the net taxable income for individual taxpayers:
and
2. 30% of the net taxable income for corporate taxpayers.
Capital Assets. The capital assets transactions may be subject to

final taxes or normal tax depending on the classification of capital
assets.
1. Subject to final taxes:

a. Sale of real property (capital asset) is subject to capital
gains tax (CGT) of 6% based on the selling price or zonal
value, whichever is higher, and
b. Sale of securities such as equity and debt securities

' (capital assets) is subject to:
1) Capital gains tax (CGT) of 5% on the first PI 00,000
capital gain, and 10% on the excess of the first
n%
FI '/>//» *J*yA*- ?/*•'' -■ *''* *scu *7*

NOT Vadcdm *'* ?r/y >,: /yp ';:
kj Ot.L'rr yz;fAK >*%'/; h7 :'CFT, 'A A 'A Y'A /<:&/: vr *h*

vbiing, price if Cv tfryAjjÂA v^>rri£*> arc Na.d^-rr;
the ^fnok *?/&:&< •¥,&*
Vuhfcct ?// r*/jrru/ji toy.. Au a : Y.k, the r>et uapcTaJ qpfo& <z.
<A capita] a.w.rt& 'Ary? Lean r*-jb. yrh^szA:/ and v;;Yt:j
v*/rurjt.i^ arc v/r^cct V> normal tax.
Illustration
Auto Corporation ->oId hoe following aauctn during the t^xstble

year:
Ordinary Asset Capital Assets
_________ r^-"- Shares of s^xk
SaJeo price PI 0,000,0% P5,000,000 POOO.OOO
Cost of sales <7,000,000, <4,000,000, <300,000.
expenses <2.000.000i < 400,0001 flOO.OOOl
Net P .1,000,000 IP 200*000, R200.000
Assume that the shares of stock are traded-in the stock‘market.

The related appropriate taxes are as follows:
Ordinary Asset Capital Assets
__________Cars _______ Land Shares of stock
Taxable base PI,000,000 P5,000,000 P600,000
Multiplied by _______ 30% _________ 6% % of 1%
Income taxes P 300.000 P 600,000 P 3,000
Other National Taxes. In addition to the normal tax or final

taxes, other national taxes may be imposed on sale or exchange of
assets. Below is a summary of these national taxes. 2
Ordinary Asset Capital Asset
Real Securities Others Real Securities Others
Income tax Normal Normal Normal COT CGT/OPT Normal
DST Yes Yes No Yes Yes No
Business tax Yes Yes Yes No No No
Note*:
1. The saJe of real property is subject to documentary stamp tax (DST) of 1.5%
based on the selling price or zonal value whichever is higher.
2. The original issuance of shares of stock is subject to DST of PI.00 for every
P200. In general, the sale or transfer of shares of stock is subject to P0.75 for
every P200.
Chapter 7 Dealings in Property 377
3. In general, sales of ordinary assets are subject business tax. On real property
classified as ordinary asset, the business tax is 12% value-added tax. Sales of
shares of stock traded in the stock market are subject to % of 1% OPT. Sales
of other properties classified as ordinary assets are either subject to 12% VAT
or 3% OPT.
Bank and Trust Companies

Investments in stocks and securities owned by banks shall be
classified as “capital assets” because banks are not considered
dealers in securities. (Rev. Regs. No. 6-08)
Real and other properties (ROPA), including stocks and securities

acquired by banks for clients’ loan settlements shall be treated as
“ordinary assets.”
Illustration
Bank of Baguio reported the following income and expenses

Real and personal properties for banking business P50,000,000
Foreclosures for clients’ loan settlements:
Real properties (ROPA) 10,000,000
Personal properties (ROPA) 7.000. 000
Equity securities (ROPA) 5.000. 000
Debts securities (ROPA) 3.000. 000
Investments in bonds 2.000. 000
Trading securities 1,000,000
The ordinary assets and capital assets of Bank of Baguio are

classified as follows:
Real and personal properties for banking business P50,000,000
Foreclosures for clients’ loan settlements:
Real properties (ROPA) 10,000,000
Personal properties (ROPA) 7.000.000
Equity securities (ROPA) 5.000. 000
Debts securities (ROPA) 3.000. 000
Total ordinary assets P75.000.000
Investments in bonds P 2,000,000
Trading securities 1.000. 000
Total capital assets P 3.000.000
378 mCOmr TA/>T§ON
Measurement of Gain or Loss
The gain from the cale or o*h*zr of pr<spzr*.y thaC ^

the excev* of the amount realized therefrom over the ^
adjusted bacjc, Ike loss shsdl be the exceed of me bsssj* ^
adjusted basic for determining less over the amount rea&ed
'Ihe amount realised from the sale or other ^poomor of

property shall be the sum of money received plus the fair mar/ie.
value of the property (other than money) received..
Illustration
Marquez reported the following items in relation to the sale of has

car:
Amount received:
Cash P390,D cc
Land (at fair market value) 700,090
Acquisition cost of car 1,500,093
Estimated useful life of the car 5 years
Number of year’s car was used by Manquez 3 years
The gain floss) on sale is computed as follows:
Amount received or sales price:

Cash P 300,000
Land (at fair market value) 700.000
Total PI,000,000
Less: Adjusted basis or book value:
Acquisition cost PI,500,000
Less: Accum. depreciation
(PI,500,000/5) x 3 900.000 600,000
Gain on sale
Cost and Expenses of Assets Disposed
For income tax purposes, the cost and expenses of an asset shall
be treated as follows:
1. The acquisition cost and incidental expenses related to the
acquisition of asset are to be capitalized, and 2
2. The adjusted cost and the expenses related to the disposition
of asset are treated as reduction from the selling price.
Illustration
After using the delivery truck in business for 2 years, Mr. Beam
sold it for PI 50,000. The sale was subject to 5% agent
commission and 10% processing expenses based on selling price.
The truck 'was previously purchased for a list price of P90,000.

Other expenses related to the acquisition of the truck are P7,000
reconditioning cost and P3,000 testing cost. The truck has a 5-
year estimated useful life.
Toe adjusted cost and expenses related to the sale of the truck
would be
List price P 90,000
Add: Incidental costs:
Reconditioning cost P7,000
Testing cost 3.000 10.000
Total cost capitalized P100,000
Less: Cost of expired life
f(PJ 00,000/5) x 2) 40.000
Adjusted cost or book value P 60,000
Add: Sales expenses:
Processing expense (P150,000 x 10%) P15,000
Commission expense (PI50,000 x 5%) 7,500 22.500
Total adjusted cost and expenses R 82.500
The gain or loss from the sale would be
La) es pr i ce P150,000
l>:ss: Adjusted cost and expenses 82.500
Cain on sale P 67.500
Special Rules In Determining Acquisition Cost (Cost Basis)

Lection 40(B) of the NIRC provides the following special rules in
determining the basis (cost) of property given for purposes of
computing the gain or loss on sale or exchange of property:
I If the property was acquired by purchase on or after March 1,

}(j13, the basis is the acquisition cost. (Note: March 1, 1913
refers to the date of the first Income Tax Law in the
Philippines.)
1»<> INCOMr 1AXAHON
llttlftt l«t Lnt
M» 3 Tunidui Mddvn CMdmugrd a pmUuu at hr< laud raMln*

PI,000 :vq pt Match I, t‘)|j t(M a cow wdh a cost of VMK 000
thr Uit mmkrt values ot (lit kind and id the cow id the daft
<d exchange PlbO.OOO (md PJ8.000, reapmdlvrtv
i hr gain on exchange would hr
thdi market value of the cow P ,*8,000

1 r>n; Acquisition cost ol land EOQO
On in ou exchange
U (hr !>n>pi‘t(ti axis ncqmrn/ by inheritance, the basis is the

tab market value id thr date of acquisition (time ot
inheritance),
Illustration
Mr. Froilaud Limeauco sold Ids inherited land tor 1*100,000.

I'hr land has a fair marked value ot* PI50.000 whru inherited
and has a tail market value of 1 H >0.000 when sold.
The loss on sale would be
Sales price PI 00,000

Less: Pair market value when inherited 150.000
Loss on sale IE 50,009)
J. If the prvpcrty was acquired as gift, the basis is the same as it
would be in the hands of the donor, or the fair market value
at the time when the gift was made, whichever is lower.
Illustration
Mr, Gary Using received an antique painting as a gift from

Miss Rosana Races. Miss Races acquired the painting for
PI00,000 but its fair market value was P80.000 when it was
given to Mr. Using which he subsequently sold to Mr. Juan de
In Cruz for PI50.000.
The gain or loss on sale of diamond would be

Sales price PI 50,000
Less: Cost of sale 80,000
Gain on sale E XQ>QQQ
Note: The fair market value (P80,000) as a cost of sale because it is lower
than the value in the hands of the donor (P10 0 ,0 0 0 ) when the gift was made.
4. If the property was acquired for less than full and adequate
consideration, the basis is the amount paid by the transferee
for the property.
Illustration
Mr. Juan Jumao-as sold a portion of lot with a cost of

P500,000 to Miss Ellen Libatique for P200,000. Subsequently,
Miss Libatique sold the same to Mr. Joseph Tayo for
P290,000.
The gain or loss on sale would be
Sales price to Mr. Tayo P290,000

Less: Amount paid by the transferee 200,000
Gain (loss) on sale P_ 90^000:
Special Basis in Determining Gain or Loss

Summary Application
' z r j Gam Cac«t2i Gain l u z x s - .
-men, is tre asm derived, from the sale or exchange

arusern -nduding gg:H* from per5hrnian.ee of serneee and
*2L -
rei* "here is an ordinary asm if the hiiatrusa* income *
•rer than the dnamess operating, expenses.
re,r. tax x the «K*w 'if business «{«»« *f** ‘‘f*3

^’*-r - ',
.-.e iiiur./tss income <"£ the taxpayer derived from, tne «e or
of ordinary assets
•*• ooir. is. the excess of value recerred. over the d<**®*^
"'Oe; ''.-t.iv. toe esie or ezohsr.se of s os pits I asset. y' *
os-,-0 s oo?>iol fees refers to the excess of the determt. -" ;
ne -/alne received from the eale or exchange o «*- ^
i-i-'-sc/stier*
'/r ^mpe* shew* the following data during the taxable year:
hale* of inventory P15000,QGG
ha.e of personal oar 200,000
hoot of inventory eotd 600,000
Ooor of personal oar sold 150.000
:m*.re** operating exper.ee*
100.000
The ord,nary gain and capital gain is determined as follows:

0>rdlnarv asset Capital asset
Tale* of inventory fvaiue received) PI,000,000
va^ of personal oar {value received) P 200,000
Cost of.overt/,ry sold {value given) f 600,000)
G//tf of personal ear f/aive given) f 150,000?
h .tones* operating expense* f 100.000)
'Vd.nary gavn Ocee> Ljmsoa
Cap.fa. ga.r f>nee>
Not Capital Gain (Lo*s)

//at fjif/it/jil f/oin m the excess of fp4e gains over the losses on sales
or exchanges of capital aeeets during the taxable year.
//et CopU/jJ means the excess of the Josses over the gains on
sales or exchanges of capital assets during the taxable year, /see
x//,g .v/ec,
Illustration
Assume that Mr. Joe Taruc acquired and sold the following
capital assets during the taxable year:
Selling Price Cost of Asset
Jewelries P 500,000 P 400,000
Personal car 200,000 150.000
Interest in joint venture 300,000 320.000
Household furniture 70,000 100.000
The computation of net capital gain (loss) would be

Capital gains from sale of:
Jewelries (P500.000 - P400.000) P 100,000
Personal car (P200.000 - PI50,000) 50.000
Total capital gains P 150,000
Less: Capital losses from sale of:
Interest in joint venture (P300,000 - P320,000) P 20,000
Household furniture (P70,000 - PI00,000) 30.000 50.000
Net capital gain (loss) PJ 00,000
Note: Since the capital assets are not real property, they are not subject to a 6 %
final capital gains tax. Moreover, the total amount of gains and losses are 100%
reportable because the capital assets were held by Mr. Taruc for an average of 1
year. The net capital gain of PI00,000 is therefore reportable in the annual income
tax return.
Preferential Tax Treatment for Capital Gain (Loss)

For purposes of taxation, it is important to determine the correct
classification of an asset because of the preferential tax treatment
for the gains or losses from sales or exchanges of capital assets.
The tax rules for the gains or losses from sales or exchanges of
capital assets over ordinary assets are as follows:
1. Net capital gain is added to ordinary gain but net capital loss
is not deductible from ordinary gain.
2. Net ordinary loss is deductible from net capital gain.
3. Capital losses are deductible only to the extent of the capital

gain.
4. For the individual the reportable percentages of capital gain or

loss shall be:
a. 100% if the capital asset is held for one year or less than
one year (short- term holding period). (Sec.39B2, njrcj
234 NCCAfE
•*- S.3«3et *»2—» wfC

5cr I -!■ mu.£ ZCTJCC
3 --— ~-
Jk>£*S -> ~ xer fTCLCQl
l^T 5—cn*t ci NCLCG bees rcr exceed tb.e taxable ircnue
-e^-re rxenpucr .1 3* -'- - fear wren ~re carnal loss was
, _— ..
^ - -V*e — c !3—cWL-5 2~e2L. «S-S -ess
■ - W*C . -W<S5 .*-■■«-►*—*
ne sue cr excbarae tf a . * 1 ’ ~ &T ^.^.eiC j^jsz%.
— ‘-'fecJc rorcr. sec. js V^cd ~ Ml *2
EOsurtratbon
b^n bbe foilowrfng irccnes
200A 2003
F 7,000 F90.000
10,000
13,000
52.000
20.000
Tire taxane income of Mr. nstoque before personal exe: Ions for
eacr vtar is confuted as follows:
2Q0A
Ordinary taxable incone P 7,000
Capital assets transactions:
Short-term capital loss far 100%) (FI8,000}
Snort-tern capital gain fat 100%) 10.000
Ifet capital loss (P 8.QOQ*

Taxable income before personal exemptions P 7.000
Vote' Cbsene ms: me net capital loss is not deductible from the ordinary gain
: income)
2QOB
Ordinary taxable income P 90,000
Capital assets transactions:
Short-term capital gain (10O%) P52,000
Long-term capital loss fat 50% of P20,000) (10,000)
MCLCO P8,000; Limit ( 7..Q9Ql —35,QQQ
Taxable income before exemptions PI 25,000
rM prer f t***n m
' [-/ //>' > <10 / ij(/. .,;f,/*i <r»? ot r-np»?>»l |r.«»«* sbnuJd nnt ry.tfittl the **rr>o\iftt of the
Summary Application
HOLDING PERIOD of CAPITAL ASSET
Individual apply holding period

Taxpayer
Mtilm fastis* Re&ortabfe Gain or Lcss
HeId for 12 month* or tea* 100%
Hold for more than 12 month* 50%
Corporal* HOLDING PERIOD NOT APPLICABLE

Taxpayer Capital gain and lo*s are to be reported in full amount
regardless of the number of years the capital asset is held.
Capital Gains or Losses Sustained by a Corporation
When a capita] gain or capital loss is sustained by a corporation,

the following rules shall be observed:
1. There is no holding period; hence, there is no net capital loss

carry-over.
2. Capital gains and losses are recognized to the extent of their

full amount.
3. Capital losses are deductible only to the extent of capital

gains.
4. Net capital losses are not deductible from ordinary gain or

income but ordinary losses are deductible from net capital
gains.
Illustration
Sterling Corporation has the following data on its operations for

200A and 200B.
200A 200B
Income from operations PI 50,000 P200,000
Capital gain 40.000 60,000
Capital loss 50.000 40,000
386 INCOME TAXATION
Sterling Corporation’s taxable income would be

200A 200R
Ordinary income P150.000 P200.000
Net capital loss:
Capital gain P 40,000 P 60,000
Capital loss { 50*000)l 40.000)
Net capital gain (loss) (P10.000) P 20,000
Taxable income PI 50.000 P220.000
Note: For corporation, the net capital loss cannot be deducted from the ordinary
income and shall not be carried over as deduction from capital gain of the
subsequent year.
Tax Treatment of Ordinary and Capital Assets

The tax treatments of gain or loss from ordinary and capital
assets transactions are summarized as follows:
1. Gain or (loss) from ordinary asset transactions:
Selling Price Cost Gain (Loss) Tax Treatment

Business income subject to normal
P100 P60 P40
tax
100 (40) Ordinary loss allowed as deduction

60
from other business income and
capital gains
2. Gain or (loss) from capital asset transactions:
Selling Price Cost Gain (Loss) Tax Treatment

Capital gains to be reduced by
P100 P60 P40
capital loss incurred during the
taxable year
Capital loss allowed as deduction

60 100 (40)
from the capital âins only
CM.ipt#r 7 Dealings In Property 387
Summary Application
LOSSES OF INDIVIDUAL vs. CORPORATION
DISPOSITION OF REAL PROPERTY
Real property consists of immovable properties such as land,

building and other permanent structure attached to the soil.
The disposition of real property made by individuals, estates and

trusts, and domestic corporations shall be taxed according to
classification whether or not the property is used -in trade or
business.
Real Property NOT Used in Business

In general, the sale or exchange of real property not used in
business is a capital asset transaction and, therefore, subject to
capital gains tax of 6% based on the selling price or zonal value,
whichever is higher.
388 INCOME TAXATION
Illustration
Mr. Eric Feir acquired a portion of land costing PI,500,000. The

land was not used for business and subsequently, he sold the
land to Mr. Froilan Limcauco for PI,000,000. However, the zonal
value of the land is PI,200,000.
The computation of capital gains tax would be
Zonal value (higher than the selling price) PI,200,000

Multiply by the final tax ________6%
Capital gains tax
The payment of tax shall be on a per-transaction basis. The

computation of the tax disregards gain or loss on the sale of real
property. The 6% capital gains tax on the sale of real property is a
final tax and not a creditable tax.
Notes:
1. Land owned by religious order, if sold, is subject to a capital gains tax of 6 %.
2. The following are not subject to capital gains tax:

a. Land Reform
b. Exchange of real property for shares of stock (original issue), and
c. Error in selling of lot (pay documentary stamp).
3. If the property is not used in trade or business, only the selling price (not
zonal value) shall be used in determining the basis of tax when the property
is
a. foreclosed by banks, or
b. sold by a government corporation.
Disposition of Principal Residence
A principal residence is the family home of the individual

taxpayer. It refers to the dwelling house, including the land on
which it is situated, wherein an individual including his family
permanently resides, or whenever absent, wherein the said
individual intends to return. (Sec. 2.1, Rev. Reg. No. 14-2000)
It is the residential address of a natural person as certified by the

Barangay Chairman who has jurisdiction over the place, or the
Building Administrator (in lieu of said Punong Barangay) if the
residence is a condominium or the individual taxpayer’s address
as indicated in the latest income tax return.
As a general rule, the sale of principal residence is subject to a

capital gains tax on 6% based on the selling price or zonal value,
whichever is higher.
Exemption from Capital Gains Tax

If the proceeds from the disposition of principal residence are
fullyutilized in acquiring or constructing a new principal
residence within 18 months from the date of disposition (date of
notarization), the transaction is exempted from the capital gains
tax subject to the following conditions:
1. Historical cost or adjusted basis of property sold is carried
over to the new principal residence;
2. The Commissioner is notified within 30 days from the date of
disposition of the taxpayer’s intention to avail of the tax
exemption;
3. Tax exemption can only be availed of once every ten (10)
years;
4. Unutilized portion of the proceeds is subject to capital gains

tax of six percent based on the portion of the gross selling
price or zonal value, whichever is higher, to be computed
proportionately as expressed in this formula:
Taxable Unutilized selling Price „Grof sf l l i n 8 P"ce or

amount Gross selling price x ,Zonal value at the time
of sale, whichever is higher
5. The tax on the unutilized portion shall be paid within 30 days

after the expiration of the 18-month period.
Illustration
Assume that Mr. Condrad Valix sold his principal residential

house (costing P6,000,000) for PI0,000,000. If he has informed
the BIR Commisioner within 30 days of his intention to avail of
tax exemption and he utilized the entire PI0,000,000 to construct
a new principal residential house, the sale would be tax-exempt.
However, if he utilized only P8,000,000 in constructing his new

principal residential house, the balance of P2,000,000 shall be
subject to capital gains tax computed as follows:
Taxable amount
[(P2,000,000 / P10,000,000) x P10,000,000) P2,000,000
Multiply by final tax _______ 6%
Capital gains tax P 1 20.000
390 INCOME TAXATION
Notes:
1. Although the proceeds from the sale of residential house and lot are used to
purchase a new house and lot, as requisite for transfer of title, the seller is
still required to deposit in escrow the equivalent amount of 6 % capital gain
tax in an interest earning bank deposit.
Such deposit could be withdrawn upon presentation of a release order from

the concerned Revenue District Officer (RDO) after verification that the
proceeds from sale were actually utilized in the acquisition of the new
residence. (Rev. Reg. 14 - 2000)
2. If the individual taxpayer fails to submit documentary evidence within 30

days after 18 months from the date of sale (notarization date) to show that he
has fully utilized the proceeds of sale, exchange or disposition of his old
principal residence to acquire a new principal residence, he shall be treated
deficient in the payment of his capital gains tax. Accordingly, he shall be
assessed for the deficiency capital gains tax, plus the related surcharge of late
payment and 20% interest per annum. (Sec. 2(7), Rev. Reg. No. 14 - 2000)
Basis of the New Principal Residence

If the disposal of the old principal residence has been exempted
from income tax, the basis (cost) of the new principal residence
would depend on whether the sales proceeds of the old principal
residence have been fully utilized in acquiring the new principal
residence or not (Sec. 2(6), Rev. Reg. 14-2000). Hence, the following rules
are observed:
1. Sales proceeds fully utilized. If the sales proceeds have been

fully utilized, the cost of the new principal residence isvthe
same as the cost of the old residence sold, irrespective of the
actual amount of the sales proceeds.
In the preceding illustration, if Mr. Valix used the entire

amount in acquiring the. new principal residence, the cost
basis of the new house would be the cost of the old principal
residence, which is P6,000,000.
2. Sales proceeds partially applied. If the sales proceeds were

just partially applied, the basis of the new principal residence
would be:
Basis of the _ Partially utilized selling price x Basis of the old

new principal ~ Gross selling price principal residence
residence 'so^
Accordingly, the basis of the new principal residence of Mr.

Valix would be P4,800,000, computed as follows:
Basis of the old principal residence disposed P6,000,000

Multiplied by percentage of utilized selling price over

the gross selling price (P8,000,000/P10,000,000) _______ 80%
Basis of the new principal residence ’ P4.800.000
The basis of the new principal residence disregards the actual

acquisition cost because the entire sales proceeds were
partially utilized.
3. Acquisition costs exceed the entire sales proceeds. If the

acquisition costs exceed the entire sales proceeds, the basis
(cost) of the new principal residence would comprise the
following:
a. Cost or basis of the old principal residence sold, plus
b. Additional cost in acquiring the new principal residence.
Assume that instead of spending PI0,000,000, Mr. Valix

actually spent PI5,000,000 in constructing his new principal
residence.
The basis for the new principal residence is PI 1,000,000,

Basis of the old principal residence disposed P 6,000,000
Add: Additional construction cost incurred
Total cost of construction P15,000,000
Less: Entire sales proceeds utilized 10,000,000 5,000.000
Basis of the new principal residence P11.QQQ.0Q0
Sale or Exchange of Real Property Used In Business

The sale or exchange of real property used in trade or business is
not a capital asset transaction, but an ordinary asset transaction.
This transaction, therefore, is subject to normal tax. The following
rules shall be observed:
Rule 1 - If the real property sold or exchanged is classified as

inventory, the gross selling price or fair market value,
whichever is higher, shall be subjected to a creditable
withholding tax (Rev. Reg. No. 6-2001) as follows:
A. Where the seller/transferor is exempt from
creditable withholding tax in accordance with
the BIR Revenue Regulations Exempt
B. Upon the following values of the property, where

the seller/transferor is habitually engaged in the
real estate business:
392 INCOME TAXATION
1. With a selling price of P500,000 or less 1.5%

2. With a selling price of more than P500,000
but not more than P2,000,000 3.0%
3. With the selling price of more than
P2,000,000 5*0%
Gross selling price shall mean the consideration stated in the

sales document or the fair market value determined in
accordance with Section 6 (E) of NIRC, whichever is higher. In an
exchange, the fair market value of the property received in
exchange shall be considered as the consideration.
A seller/transferor of real property, classified as ordinary asset, is

subject to creditable withholding tax which shall be withheld by
the agent or buyer. Such tax withheld shall be remitted to the
BIR.
The; creditable withholding tax is not a final tax. Hence, it can be

deducted from the; year-end income tax due.
Illustration
Olive Corporation, a real estate developer, sold 10 houses and lots

during a taxable year. The cost per house and lot is PI,200.000.
The .selling price per house and lot is P2,000,000. The lair market
value, on the oilier hand, is only PI,800,000.
W h a t is th e /n c o m e la x s till d u e o n th e s a le o f th e p ro p e rty
a s s u m in g th a t its to ta l o p e r a l ing e x p e n s e s is P5.000.000?
T h e * c ie d ita b le w ith h o ld in g ta x is c o m p u te d a s fo llo w s :
S riliiig p ric e h ig h e r (P 2 ,0 0 0 ,()()() x 1 0 ) P20.000.01X)

M u ltip lie d b y < ird iln h le la x m b ' 40%
C ird jla h lr w ith h o ld in g la x
Not o i WliHlu’i llw mile ol i * *it I |)iopoily i cun It ml to nolo or to**, the1 conipiitMtiou
o f lu x m I i m II ho l> n « c < 1 on flic m o III i i h piiic oi 40011I vnlno whichever I* ttijth m
W h e n O liv o ('o ip o m lio n M o m Its a n n u a l in c o m e ta x re tu r n , th e

< o m p u tn lin n w o u ld h r:
:iairri (1*2,000,000 x 10) P20.000.000

le s s : <'om! o l s a le s (P I ,2 0 0 ,()()() x 1 0 ) 14000,000
( H o m m In ro in e P 8,000,000
Op^vadmg <“/(/ * •; .<
I/-A
,NM 'a /;*oie It ' /* • * y t ox xs
,nr/S by nor.1 2 .iA ' r / f ' s ' . 1 i j o ■<&/.
in'//m/ * A / Clo * ■ p VX OX
I/**- ‘ A'/' Odnyp WHi,}-^0 ■ eg 'Ur-/
Ktc'/m/ tax Cuc o.nd poyeyy.
pule > < ?f 1}>< r«0l property *old or exthtt.yt*' ^ «*

ordinary mM**t other th*u inventory <*■•/'&+ —^ t :"A
hiXjAo.uhy * oypyyC 2, Ujr :*>/*'< vA*
■//iU.h'jMitjf/ tax ;«> 0% of *>g/cs^ se. eg pr^ ~:&r<£i
Vttio*", V / ! i i f ,ucyc/ it*, h-igac'. fa/j'Akxtfr'a tv. • J\iv2',&0*,
lJJu*tjat iyr>
la 200A, Ansa* Corporation, a flour manu &.ctu r;r^ yyrporaiion,

sold ds wm chouse with a cost of ?f/X)///j for in
bagnio City. During the year, Arina'* sales and <y>$t of flour .v>lc
we re PS,000,000 2nd P3,000,000, respectively. jts operating
expen vs v/as P J ,000,000,
The <-tun potation of creditsble withholding tax would be
Sale p/ir** oft ho land PI,000,000

M uJ f i plied by or edito bJe tox rate ________ 6%
Creditable '//jtlihoJdin^ fox P 60.000
Note; Whether Ur- #«k of real prof^rty resulted to j'air; or Jos*, the oorapat&tkn
mx feli/iii l^r b/j>,od on th<i filing prtix or zonoJ value, v/hkhever 2* higher,
W)x i) Arina Corporation files its annual income tax return on

April 15, 2001 i, the computation would be
Sales P 5,000,000
Less: Cost of flour manufactured and sold 3.000. 000
tiioss income P 2,000,000
Add: Gain on sale of land (PI ,000,000 - P600,000) 400,000
Total gross income P 2,400,000
U*ss: Operating expenses 1.000. 000
Net taxable income P 1,400,000
Multiplie d by normal corporate income tax rate 30%
Income tax due P 420,000
Less: Creditable withholding tax (PI,000,000 x 6%) 60.000
Income* tax still due and payable P 360.000
394 INCOME TAXATION
Rule 3 - If the real property classified as capital asset is sold

to any government unit or any of its political subdivisions or
Agencies or to any government owned and controlled
corporation by an individual taxpayer (citizen or resident
alien), at the option of the individual taxpayer-seller the tax
would either be:
a. 6% final capital gains tax based on sales proceeds, or
b. normal tax rate (5% to 32%) based on the net taxable
income. If the taxpayer opted for the normal tax rate, then
the sale is to be withheld with 6% creditable withholding
tax. (Rev. Reg. No. 17-2003; Rev. Reg. No. 6-2001)
Illustration
A parcel of land classified as capital asset owned by Miss Malou

Wang was expropriated by the National Government to for a just
compensation of P5,000,000.
If Miss Wang previously acquired the land for P6,000,000, what

would be her best option to save tax payment?
Option 1:
Pay Final Tax. If Wang opted to pay the final capital tax on the
sale of land, the computation of the capital gains tax would be:
Proceeds on expropriation of land P5,000,000

Multiply by final tax rate _______ 6%
Final capital gains tax P 300.000
Option 2:
Pay Normal Tax. If Wang opted to pay the normal tax, the
computation would be
Proceeds on expropriation of land p 5,000,000
Less: Cost of sale 6.000.000
Loss on expropriation of land fPl .000.000)
Since the expropriation resulted to a loss if Miss Wang opted to

pay normal tax, she must choose option 2 to avoid paying
P300,000 capital gains tax.
Notes:
1. Expropriation is an act of the Sovereign State to take private property to be
used for public purpose through the exercise of eminent domain power.
2. The transfer of property through expropriation with just compensation is

basically a capital asset transaction because such sale or exchange of
property \% subject to capital gains tax of 6%. (Bias Gutierrez, and Maria Morales
v\. CTA, and CIR, G.R. Mos. L-9738 and L-9771, May 31, 1957)
3 If the real property is classified as capital asset and sold by an individual

taxpayer to the Philippine Government or any of its political subdivisions or
agencies or to government-owned and controlled corporations, the taxpayer-
AelJer has the option to be taxed with 6% capital gains tax based on selling
price, or 5% to 32% normal income tax based on the net taxable income. (Rev.
Reg*. No. J 7 2003)
•I from Wit h h o M i r t y f % /
ll>‘ wjUjJ. ' l i t i f y o f i NjX *#, pt#

I > i j < > i y . ^ j j j /,oi #>pp,y |/y ;:&(>, to
following
1 • Niii oi lo* /i] ?>nd /to in>Jrumenf.a#ties,

U I't'itionn joying r U o i f i //fcy/nen* nf \r>a:XKt tagg*
‘>U< 11 .'«•>,
a <Oi potlif JOII'; f o g j f . 7 / l f h t.h'J f ' O i J W r t g bV'A iJst)/, C<fc:
Ptogulnfory Board ( l i i J J H h ) , tnypy/ul in vyJ&li'/zG ?sr>\m:#
pipjcrt, pmvidod Uiht the filing prtoo per bouee and/or
lol doc?i not exceed;
• IN 80,000 In Metro Manila and other urbanize:
areas, and
• IN 50,000 • in other areas.
b. Corporations registered with the Board of Investments

(1301) and enjoying exemption form the income tax
provided by Republic Act No. 7916 and the Omnibus
Investment Code of 1987.
cv Corporations which are exempt from the income tax under
Sec. 30 of the NIRC, to wit:
• Government Service Insurance System (GSIS);
• Social Security System (SSS);
• Philippine Health Insurance Corporation (PHIC); and
• Philippine Charity Sweepstakes Office (PCSO).
However, the income payments of these corporations arising
from any activity that are conducted for profit or income
derived from real or personal property shall be subject to
withholding tax. (Rev. Reg. No. 2-98)
Installment Reporting of Sale of Real Property
Installment reporting of sale of real property has been discussed

in Chapter 3 of this book.
Ordinary Asset Real Property. In relation to withholding taxes

on installment sale of real property classified as ordinary asset,
the following rules shall be observed:
1. If the buyer is an individual not engaged in trade or

business, no withholding is required to be made on the
periodic installment payments.
The applicable tax shall be withheld only from the last

installment or installments immediately prior to such last
installment if the last installment is not sufficient to cover the
tax due until the tax is fully paid.
2. If the buyer is engaged in trade or business, whether a

corporation or otherwise, the tax shall be deducted and
withheld by the buyer from every installment based on the
ratio of actual collection of consideration against the agreed
consideration appearing in the Contract to Sell applied to the
gross selling price or fair market value of the property at the
time of the execution of the Contract to Sell, whichever is
higher.
Interest earned as an incident of installment payment, if any,
shall be subject to the ordinary income tax rate. (Rev. Regs. 17-2003)
Sale of Real Property Not Located In the Philippines

Income on sale of real property not located in the Philippines
regardless of classification sold by a resident citizen or domestic
corporation shall be subject to the normal income tax rate using
the schedular tax rates or 30%, respectively. (Sec. 24A, nirc r.a. 9337)
;
Note: In general, only Filipino citizens and corporations or partnerships with at

least 60% of the shares are owned by Filipinos are entitled to own or acquire land
in the Philippines. Foreign individuals and foreign corporations are not allowed to
acquire real property in the Philippines. (PD 715, May 28, 1975)
Illustration
During the year, X Manufacturing Corporation, a domestic
corporation, made the following sales:
a. Real property located in the Philippines:
• Investment property for speculation classified as capital
asset, acquisition cost of P500,000 sold for P3,000,000.
INCOME TAXATION
♦ Land and building used in business, acquisition cost of

P4,000,000 sold for PB,000,000.
b. Pco.l property located outside the Philippines with acquisition

cost of 1*2,000,000 sold for P5,000,000,
Thr corporation uses OSD when applicable.
The income taxes on the sale of real property would be
Capital gains tax (P3,000,000 x 6%) P 1.8CLQ00
Total sales (PB,000,000 + P5,000,000) PI 3,000,000

ls:m: Total costs of sales (P4,000,000 + P2,000,000) 6.000,000
Gros.s income P 7,000,000
Ixjss: OSD (P7,000,000 x 40%) 2.800.000
Multiplied by normal tax rate _________ 30%
Income tax due per 1TR P 1.260.000
STOCK TRANSACTIONS
These transactions refer to the sale of equity securities of other
corporations which are classified as either capital assets or
ordinary assets.
Stocks classified as capital assets are stocks and securities held

by a taxpayer other than dealers in securities. If sold, these
securities are subject to capital gains tax (final tax).
Dealers in securities include all persons who for their own

account are engaged in the sale of stocks, bonds, exchanges,
bullions, coined money, bank notes, promissory notes, or other
securities as licensed by the SEC. (Sec. 2, Rev. Regs. No. 14-8O)
For purposes of determining the applicable tax on stock

transactions, the following rules shall be observed:
1. Dealers in securities are not liable to the stock transaction

tax of V2 of 1% based on the selling price or fair market value,
whichever is higher. (Sec. 4 & 5, Rev. Regs. No. 6 - 2008, as amended)
The gains (loss) from sale of securities held by dealers in

securities are ordinary income (loss) subject to normal tax.
? O va h n a * U ) f*it*% *> *ij
i\iu*\ t*\Uni
Hukol ( oi {tortoiion> a 4*-mU:/ *A xa-/ V'V^, v>*£ £<&>.

Corporation's J0,000 equity fv/ Vy///y ^
of slocks hove a <>o$t of Vlf/)///) fctk
P I 0 , 0 0 0 brokerage fee. ^"■'% ?£
The lax applicable to the sate of «hvare* of ^

Sales price
Less; Cost of equity shares
Brokerage fee
Net income
Multiplied by normal corporate tex rate
Income tax due
2. Non-dealers in securities ere either KabJe *****
transaction tax of % of 1% based on the selling pnoe ^
market value, whichever is higher fsf traded-in the
market), or capital gains tax of 5% to 19% hasef on
gains (if not traded-in the stock market^ "
Assume the same information above except that
Corporation is not a dealer in securities.
If the equity securities were traded-in the stock marker
applicable tax would be
Sales price Pi SO.O^r
If not traded-in the stock market, the applicable tax woukf be

Sales price PlSD,0CO
Less: Cost of equity shares PI00,000
Brokerage fee 10.000 IIP rwi
Capital gains P 40^000
Multiplied by capital gains tax ____ 5^
Capital gains tax P Pqqq
Notes:
L Shares of stock traded-in stock exchange
A sale of shares of stocks (classified as capital asset) traded-in the feca! stock
exchange is subject to stock transaction tax {percentage taxj of 2/2 of 1%
400 INCOME TAXATION
based on the selling price or fair market value, whichever is higher

irrespective of gain or loss sustained by the taxpayer. (Sec. 127(A), NIRC)
The stock transaction tax exempts the sale from income tax. (R. A. 7715 95-94.
Sec. 127(D), NIRC)
2. Shares of stock NOT traded-in stock exchange and listed shares of companies
who are not compliant with the MPO requirement.
A capital gain from the sale of stock shall be subject to a final tax on a per
transaction basis. The return should be filed and paid within 30 days after
each sale and a final consolidated return of all transactions during the
taxable year on or before the 15th day of the 4th month following the close of
the taxable year.
The capital gains tax would be:
• 5% if the net capital gain is not over P 100,000; and

• 10% on any amount in excess of PI00,000. (Sec. 28, [BJfcJ, NIRC; Capital
Gains Tax Return 1707(21) ,
Holding period is not applicable on capital gains of stock transaction because
it has been subjected to final tax.
3. Cost and other allowable expenses are deductible from selling price if the
shares of stocks are not listed and traded-in the local stock exchange. (BIR
Form No. 1707 - Capital Gains Tax Return)
Summary Application
SALE OF SHARES OF STOCKS
Valuation of Shares of Stock Not Listed and Traded in the

Local Stock Exchanges
In determining the value of the shares of stock not listed in the

stock market, the Adjusted Net Asset method s?,.an be used
whereby all assets and liabilities are adjusted to fair market
values. f/?etA Regs No. 6-2013)
The formula to compute the adjusted net asset method would be:
Fair value of assets Pxxx

Less: Fair value of liabilities xxx
Adjusted net asset values Pxxx
The net of adjusted asset minus the liability values is the

indicated value of the equity. The fair market value usually
approximates the carrying value (often called “book value5’) of the
current and monetary assets.
When a company has real properties the appraised value of the

real property at the time of sale shall be the higher of -
1. The fair market value as determined by the Commissioner, or
2. The fair market value as shown in the schedule of valued fixed

by the Provincial and city Assessors, or
3. The fair market value as determined by Independent

Appraiser. '
Illustration
Ernesto sold on March 1, 201 A, 1,000 shares of stock of M

Corporation for PI,800,000.
M Corporation has 5,000 outstanding shares with total assets

and liabilities amounting to PI 0,000,000 and P6,000,000,
respectively. The fair value of all its assets and liabilities are also
the market value with the exception of its land with P2,000,000
book value per financial report.
Supposing that the market values of the real property of M

Corporation are as follows:
402 INCOME TAXATION
Market value per tax Independent

declaration Zonal valuation appraiser
P2.500.000 P5.000.000 P6.000.0Q0
The adjusted net asset of M Corporation would be:
Fair value of assets:

Fair value of assets PI0,000,000
Adjustment increase
real property (P6M - P2M) 4.000.000 PI 4,000,000
Less: Fair value of liabilities 6.000.000
Adjusted net asset values P 8,000,000
Divided by outstanding shares 5.000
Adjusted value per share of stock P 1.600
Unidentifiable Shares of Stocks

If the shares of stocks cannot be properly identified, the following
rules are applicable to compute the cost of the shares of stocks:
1. The cost to be assigned shall be on the basis of the ftrst-In,

first-Out (FIFOj method;
2. If the seller maintains the books of accounts where every
transaction of a particular stock is recorded, the moving
average is to be used; and
3. If stock dividends are received, an allocated cost of the

original cost shall be assigned to the said stock dividends.
Illustration 1 - Without stock dividends

Assume the following investment transactions in the books of
accounts of Sara Lee in the common shares of stock of PNB:
October 20, 200A Purchased 50 shares at PI20 per share
May 10, 200B Purchased 50 shares at PI40 per share
September 3, 200B Sold 75 shares directly to a buyer at PI 50 per share.
FIFO Method. If the FIFO method were used, the computation of

capital gain on sale of investment in stock would be
Selling price (PI50 x 75) PI 1,250

Less: Cost of shares sold:
October purchase (PI20 x 50 shares) P6,000
May purchase (PI40 x 25 shares) 3t500 9.50Q
Capital gain on sale of investment in stocks £iJ£2
£?**#** ? D**Mogtin Pwp^rty 403
Am«|9 Method. If the moving average method were

the computation of capital gain on sale of investment In
jUOv'K would he
Felhitg puce (PI50 x 75) PI 1,250
less. Cos: of shares sold (P I 50 x 75) 9,750
Capital gam on sale of investment in stock I’J.SftQ
Supporting computation:
-vesrmcn: m common stocks: MsL.af..^b.txgs Cost/sharc Amount
DcccNtr DO, D00A 50 P120 P 6,000
May U\ D005 140 7.000
TbraLs m P13.000
Fmde by mnr.bcr of shares 100
Vrw ocs: per share E__13-Q
Qhutration 2 - With stock dividends

Assume Farther that on November 1, 200B, PNB declared stock
dividends (one stock for every stock held) to its stockholders. On
December 1, 200B, Sarah Lee sold the 30 common shares at
FIDO per share.
.re capital gain is computed as follows:

Moving
FIFO Averaee
Selling price (PI00 x 30) P3,000 P3,000
less: Cos: of sales
FIFO (P70 x 30) 2,100
Moving average (P65 x 30) 1.950
Capital gain P 900 PI.050
Supporting computation:
Moving
FIFO Average
i oral remaining cost — FIFO (PI40 x 25) * P3,500
- Moving average (PI30 x 25) P3,250
Divided by number of shares
Remaining shares (100-75) 25
Stock dividends (25 x 1) 25 50 50
New cost per share P 70 P 65
Installment Sales of Shares of Stock

The determination of the amount of tax due on the installment
receivable in the installment sales transaction of shares of stock
shall be governed by the following rules:
1. If the initial payment does not exceed 25% of the selling price,
an installment payment of the capital gains tax is allowed.
404 INCOME TAXATION
2, If the sale is not a mortgage sale, the determination of tax du*

shall be based on the proportionate ratio of the installment
payment received over the total selling price or to the: total
contract price.
Illustration
Assume the following data of Mr. Patbon:
Cost of 5,000 shares sold P200,000

Terms of P250,000 selling price:
Down payment 50,000
Remaining balance ' equally
If Mr. Patbon chooses to pay the tax due by installment, the

computation of the installment tax due would be:
Selling price P250,000

Less: Cost of shares 200.000
Capital gain P 50.000
Capital gains tax due (P50,000 x 5%) P 2.500
The formula of tax payable on installment sale of shares of

stock is as follows:
Annual _ Installment Payment T ,

tax payable Contract price X ^ ue
The tax due annually would be

200A (P50,000/ P250,000) x P 2,500 P 500
200B (P100,000/ P250,000) x P 2,500 1,000
200C (P100,000/P250,000) xP 2,500 1,000
Total tax payments ^ P2.500
Note: In the absence of contract price, the selling price is used as the
contract price.
3. If the sale is a mortgage sale of stock or where the mortgage

on such shares is assumed by the purchaser, the installment
received refers to the following:
a. The initial payment received, including the excess of the

mortgage, if any, assumed by the purchaser over the basis
of the property sold; and
b. Succeeding installments received by the seller.

7DwMnqs in Pn>p*MV
I )i.yu|rr| by irm«lhlnjj ydfiiB <>l imym^nl l

Annual bmbilliHr'niM 1* I2f î)i)
406 INCOME TAXATION
Wash Sales
Wash sale is a sale or disposition of stock or securities where
substantially identical securities are acquired or purchased
within a 61-day period, beginning 30 days before the sale and
ending 30 days after the sale. (Sec. 38, nirc) '
“Substantially identical securities” indicates stocks or securities

of the same class or similar on their important features like bonds
where the only difference is the date of maturity.
Below are examples of transactions of securities not substantially

identical and therefore not subject to wash sales:
'Exchanges of:
1. Common stock to preferred stock (vice versa); \
2. Voting stock to non-voting stock (vice versa);
3. Stock of one corporation to stock of another corporation; and
4. Bonds of the same corporation that differ as to interest rates,
'interest payment dates, and dates of issuance and maturity,
or one is secured by a mortgage and the other is not.
Requisites of Wash Sale Loss

In order that the sale of securities is considered wash sale, the
following requisites must be met:
1. The sale of the stock or securities is at a loss.
2. Within 30 days before or after such sale, the seller acquired
by purchase or exchange substantially identical stock or
securities.
3. The seller is not a dealer in stock or securities.
Note: Even if the seller is a dealer in securities if the transaction was not made in
the ordinary course of the business of such dealer, there is still a wash sale. (Sec.
38(A), NIRC)
Treatment of Losses and Gains from Wash Sale

The following rules shall be observed related to the losses and
gains from wash sales:
-*€fa\r*gts r P’*ope*ty 407
role , losses from wash sale are not deductible

gskcs from wash sale are taxable .
t rujmbcr of secrnrties sold is more than the number of

~rroe^ purchased within the sixty-one day period, then:
h*t aObs shah be recognized on the acquisitions within the

surry-one day period which are matched with a number of
shares or securities disposed of; and
h capital loss shall be recognized on the number of shares

or securities disposed of which cannot be matched with
aec• hsrdoxis within the sixty-one day period.
h somber of securities sold is less than the number of

securities purchased within the sixty-one day period, then:
a. Toe stocks or securities disposed of will be matched with

equal number of shares of stock or securities acquired
k accordance with the order of acquisition beginning with
he earliest acquisition.
PnrmuLa:
C o deterrrdr.e the amount of nondeductible wash sale loss
Number of shares bought
H<j n d.ed uotible ^ (during the prohibited period! x Amount
Loss Number of shares sold of loss
t To determine the tax basis (cost) of reacquired shares
(>>-'A of acquisition p xxx

Add; WaoVt sale loss (nondeductible loss) xxx
'lax bah, or adjusted cost P xxx
IU u itr ation
Mr, X. had the following transactions in ABC Corporation’s

ordinary shares classified as capital asset:
f>Mr- Particular^ Amount
‘Mn. 1(),2 OOx Purchased 10,000 shares at P50 per share P500,000
tnr, 20, 2C)()x Purchased 4,000 share at P50 per share 200,000
l(),200x Purchased 3,000 shares at P48 per share 144,000
V>\,. ia,2C)Ox Sold 10,000 shares at P45 per share
(from January 10, 200x) 450,000
408 INCOME TAXATION
1. Deductible and nondeductible loss on February 14, 2O0x

sales.
2. New cost of January 20 and Feb. 10 purchases.

3. If on Feb. 25, Mr. X sold 4,000 shares at P60 per share, how
much is the capital gain (loss)?
Solution:
1. Sales P450,000
Less: Cost of sales 500.000
Capital loss P 50^000
Nondeductible loss (P50,000 x 7/10) - wash sales P 35.Q0Q

Deductible loss (P50,000 x 3/10) P 15,000
2. January 20 February 10
Original cost P200,000 PI 44,000
Add: Nondeductible loss
Jan. 20 (P35,000 x 4/7) 20,000
Feb. 10 (P35,000 x 3/7) _________, 15,000
New cost 3 P220.000 PI 59.000
3. Sales (P60 x 4,000) P240,000
Less: Cost of sale 220.000
Capital gain P 20.000
f >,>r,n,ujo //j> frr>f***rty .409
f4tn>rt fUtlrm
/hi' '/n*t < cdr fH tti/itlf*-} that ohf,i( a/ttm ftntUl *iithf*r ht*. c h t H n i i i r c i
,ti fid .///'/ / -/-//<' f > / / >/ f,/ ,t~, /// (i i u I (!,/ /i///t/ti' fa t ‘j< t'f (‘/‘i* J / >r lut ft vy o or
V//'// /o /*m/ <•' -*?4'//v///.
(to /yd/m t*t h»mnrh <$t, of mi t hft/rh mr rttpiUd na art f 11* unitet /on ?
/ & h n r i f i t * ! * * oMVo/jurj/i,*, /i h h f t t f h f t i t i i h t n l t d r w h e n t * t i p e e u l n t n r
o r l / w /*/ f v* t t t v w i d e / t / t r ( i n r h / m l ( * w t i m i d j i n t i l j m n e h t h e i r d e l i v e r y
/ ( > n / ( d m i t r d r w h e n //,n p m t i d / n r p r i o r n/ I h r p r o p e r t y i n l o w e r
i / t t m / h r i i i i i i n i i d //r /o f j e i v m f / / m u ( h r e i t f r t o m f t l i e f t p r o f i t - , f i a t
. o / i e u / d / h r p r i i r i t / / > t / t p m ( j ( - i t r ) y s j t t i p , f i r f t t ( i t t f i i t f o p m , /jswr. / o r , /v/AY?y
Ilium 1 in 1 h p ti
/If/w Mnt i Mtu, it npnet tin/at of linniniitl net t u it fen, ohtnineil

r/ //> huy /,()()() n/tntrn lot M r, Met f irt /utttlo,
// /hr /nit m nt hr/ vti/oe (d tinet p i/ ieh hrd(m ton 1*1 10 pet nhnto nncl
/dfnn M nt /»in cduwrtt m td t Irllvrt r(! /ho twine to Mi , I let t uu t fot how
(u tn 'h in //tr < v?/d / a / y n /// ( m n h o / i u n i o n ( d n e t t n i l l e n d
the rn/d/nt H oin on nho/l ntdon In /'/ O t ( H H h ( d w i f / t t i e d a n t n l l o w n :
Sr//it tfc / *t it r / m ri vr(f I'l'-UKooo

l cvp /V/ / 1 /novo /?/ ii'r td horn/ //left (/ ,(/(>(> x /'/ IO) 1 10,000
'n/dtn//JH/tt on nhtd t tut/np r nj,<j{)<j
( h r t i l l / ' t i u u k r l v i t / n r t , t ( h r t t r o u t i t i c t i fJ,orn t i p l o pri

t c , t h r u M(t*t4 Mtu w o u l d n u n l / d n n c t i p l l n l l o n n o n r i h o i t H t i l r a
mliof.' t < > tillin',
/nil r / rt rived ri: !<),o< )(>
irrhusr ///irr ol nrriiiil/rti (I’liUi s I,(HHt nhitten) I rJlÔOO

( W f i o n n I a > i I tudrrt I’ Li.U(H)
p ICxcrcim r Option to Huy of Holt Property, When n

'in ii/cd /1 (Umtthlriidlun lot un option pci im t to huy p
r/lv htd Hitch privUc/JC won not cscicini'd, the option
he connhlcictl on coptto! loon.
410 INCOME TAXATION
Illustration
Mr. Buyer gave P2,000 to Mr. Seller in consideration of the option

to buy the latter’s capital asset within 30 days. He failed to
exercise the privilege to buy the property within the prescribed
period and Mr. Seller forfeited the option money. The P2,000 shall
become a capital loss on the part of Mr. Buyer and capital gain on
the part of Mr. Seller.
Securities Becoming Worthless

The following are the rules to be observed on securities becoming
worthless for purposes of income taxation:
1. The securities are ascertained worthless and written off;
2. The taxpayer owning the securities being written off should

not be a bank or a trust company incorporated under
Philippine laws; and
3. The written off amount is a capital loss.
Illustration
Adalyn Company, a domestic corporation engaged in producing

chocolates, invested 10,000 ordinary shares amounting to
P200,000 in Philippine Airlines.
Due to bankruptcy, Philippine Airlines closed its operations, such
that the investment of Adalyn was ascertained worthless and
should be written off. The entire amount of investment (P200,000)
should be considered capital loss on shares becoming worthless.
Liquidating Dividends
When a corporation distributes all of its assets in full dissolution,

the gain realized or loss incurred by the stockholder, whether
individual or corporate, is taxable or deductible from capital gain
as the case may be.
Illustration
Mr. Condrad Mapalo invested in Benguet Corporation by buying
5,00.0 shares at P50 per share. If Mr. Mapalo received a total
amount of P300,000 from Benguet Corporation upon its complete
liquidation, then the determination of taxable gain would be:
“mp®* Deab-sgs Pn^perty 411
T::h amour.: received P300.000

yess. Cost o: shares surrendered tPSQ x 5.000 shares) 250.000
;f Mr. Mapalc received a total amount of P240.000 from Benguet

dcrporancn upon its complete liquidation, then the determination
Total amount received P240.000

less. Cost c: snares surrendered 5.000 x P50) 250.000
deductible loss P 1Q.0QQ
Corporation’s Own Shares of Stock

Corporation's own shares o: stock refer to the shares of stock to
zst issued by the corporation as approved in its .Articles of
Inotrporanon. Corporate stocks are classified into Preferred Stock
mb Cmrxn Stock.
Preferred stock is a class of the stock of a corporation, which is

accorded priority by the charter or by-laws with respect to
dividends and/or assets case in of liquidation over the remainder
of the stocks of the corporation which are called common stocks.
Common stock represents basic interest of ownership in a

corporation. Stockholders holding common shares are called
oommon stockholders. They assume greater risk but generally
exercise a greater control and may receive a greater reward in the
form of dividends and capital appreciation.
Kart*: Wr,en 2 corporation issued only one class of stock, the stock is
s a common stock.
Tax Treatment. As a rule, the original issue by a corporation of

its shares of stock at more or less than the par value or stated
value shall have no recognition of gain or loss. Hence, it is not
mbject to capital gains tax. (Sec. 55, Reg. No. 2j
However, the gain or loss incurred from dealings by a corporation

;;o its own capital stock transactions may give rise to either
taxable gain or taxable loss based on transactions involving:
a Heceipt of own share in exchange for property (acquisition of
treasury stock); or
o. Sale of treasury stock.
41J INM/MI' i a*anon
Own rilMro Hct< <tlv<$<f In I *< Jmnijw for Property

Wh« n n < <m poi niton m • < lv< d )lti * iwn ««hM U mi • onidd'i at Ion U,t
i ly ttul.j «m Ini pay 1 1 a til ol lnd» bb dn***ub if may g|y#h 1}
Additional aitsomma ulH obtained f»y a corporation bom

hluo * holito m i <r|h » f|»Mii addll jonii) pi )< i' and f lay fur not
t O l i r i j f l t I « • « ! [||< O H M ' , Itttti no, I, Nth j)
I Hunt Kit ton
Aariumr I hot Tiiph* A Company m < ^*iv<oI >{,000 sb/0 ''M of if*t
» ommon stock with a pm vm)im* of PbO pm share in rwhnttf/r for a
'«>ni|mlt'i with <i cost of P f 00,000, The lab market value of the
common slock at 11 u* thin' of ex« fanigr win* P00 pej sba/e,
I‘hc' compulation of the taxable gain on the transacti n t i would he
loiii iiini kt-l value of common stock (POO x 2,000) PI20,000

Less: C’o?it of properly given J00,009
Taxable cm pit fit polo P 20,000
Sal© of Treasury Stock

Treasury otoch in m corporation's own .stock that bun been issued
and them reacquired l)ot not cancelled. The sole of the corporation
of its treasury stock may give rise to a taxable gain if the treasury
stock is subsequently reissued for a consideration more than its
cost. A deductible loss may lx; incurred if the treasury stock is
subsequently reissued for a consideration less than its cost. (Sue.
AVf/. N o . 2 )
Illustration
Assume that Triple A Company reacquired 100 shares of its
common stock with a par value of P100 per share for PI5,000.
Fifty shares were subsequently reissued at PI 80 per share.
Assuming that the shares were traded outside the stock

exchange, the taxable gain on the reissuance of treasury stock is
Consideration received (PI80 x 50) P9,000
Less: Cost of treasury stock (PI 5,000 x 50/ 100) 7.500
Taxable capital gain PJU5AQ
t (YonHnif* Mi Property 413
i >*/»•*
l„ ,»f Corporate Bond*
j /.ir ’ * . ;1 1 • 1 1 m e <»f m eoijmnifion of its boride nf birr v/iltir doe<i not

,r ,( .r tn rj*in of loss. The go in or loss ifs recognized when the
ifioi? rooies its own bonds nf n f)rrmium or n discount.
j jfir f reoguifion nf gain nr loss, however, shall be based on the

,rmmm oi discount over the life of the bonds.
1(n<»fti/<’d P
Illustration
A Corporation issued a 5-ycar, 1,000 bonds with a face value of

PI,000 each for I 10%. The bonds have 12% interest per year.
The computation of gain or loss on bonds issuance would be
Cash proceeds (PI,000 x 1,000 x 110%) PI, 100,000

Loss: Face value of bonds 1,000.000
Bonds premium P 100,000
Divided by life of bonds in years ___________5
Recognized gain on year of issuance P 20.000
The gain or loss on bonds is to be recognized until the maturity of

the bonds unless they are retired prior to maturity. In this case,
the total remaining unamortized premium (discount) shall be
recognized as gain (loss) on bonds upon retirement.
Retirement of Bonds
The bonds may be retired before its maturity date. The gain or
loss on bond retirement shall be taxable gain or deductible loss.
Based on the illustration above, supposed that A Corporations 4

bonds were retired two years later at 105%. The gain or loss on
retirement would be
face value of bonds PI,000,000

Redemption price (PI,000,000 x 105%)
boss on retirement of bonds (P 50,000)
Bnamortized premium (P20,000 x 3 years) 60,000
Net gain on retirement of bonds p 10.0QQ
414 INCOME TAXATION
Interest in Partnership
The* gain or loss on salt1 of partners micros! (capital) in

partnership is a capital asset transaction.
Illustration
Mr. Labin Tudors capital in the partnership has a book value of

PI00,000. He sold 50% of his interest to Mr. Wato Sec for
P80,00Q,
Tador’s capital gain would be P30,000, computed as follows:
Proceeds from sale of interest P 80,000

Less: Book value of interest sold (P 100,000 x 50%) 50.000
Capital gain E -30,0QQ
Abandoning Property for a Foreclosure Sale
When a
taxpayer abandons property, the loss does not result
from a
sale or exchange. However, if a taxpayer abandons
property an for ordinary loss and sells it in a foreclosure
proceeding, the loss incurred in such sale is a capital loss.
Illustration
Due to consistent losses in operation, Patawa abandoned his

restaurant business and subsequently sold it for P500,000. The
net assets of the restaurant is P600,000.
In this case, there is a capital loss of P100,000 which is presumed

long-term in nature.
Disguised Sale
A disguised sale is a sale or exchange transaction between two
parties (usually related parties) with intent of partly sale and
partly gift.
Illustration
Joseph acquired a parcel of land for P700,000. After 2 years, he

sold his property with fair market value of P2,000,000 to his son,
Jinggoy, for PI,000,000.
In this case, there are two taxes that are supposedly to be paid.
The PI,000,000 difference between fair market value (P2,000,000)
and selling price (PI,000,000) - considered as a gift - which is
supposedly subject to donor's tax. The P300,000 difference
between the selling price (PI,000,000) and the cost of land
(P700,000) is subject to income tax.
In lieu of the two taxes, the payment of 6% capital gains tax

based on the fair market value of the land will simplify the
complex computation of donor’s tax and income tax. This is so
because the 6% capital gains tax is a final tax making the
payments of donor’s tax and income tax no longer required.
Corporate Reorganization
Merger - one or more corporations are absorbed by another
corporation which survives and continues the business.
Consolidation - two or more corporations join and form a new

corporation. The old corporations cease to exist.
Rules:
3. Nonrecognition of gain or loss if Exchange of Property is
SOLELY IN SHARES OF STOCK:
a. A corporation which is a party to a merger or
consolidation, exchanges property solely for stock in a
corporation which is a party to the merger or
consolidation; or
b. A shareholder exchanges stock in a corporation which is a

party to the merger or consolidation solely for the stock or
another corporation, also a party to the merger or
consolidation; or
c. A security holder of a corporation which is a party to the
merger or consolidation exchanges his securities in such
corporation solely for the stock or securities in another
corporation, also a party to the merger or consolidation; or
d. A person exchanges his property for stock or unit of
participation in a corporation of which as a result of such
exchange said person, alone or together with others, not
exceeding four persons, gains control of said corporation.
INCOM E TAXATION
Illustration
A Co. was merged with B Co. with the following data:

A Co, _ _ _ _ _ _ _ _ _ _ _ _ _
Total assets PJ 0,000,000 P20,000,000
Total liabilities P 6,000,000 P 2,000,000
Total shareholders'equity P 4,000,000 PI8,000,000
Number of outstanding shares 400,000 900,000

Par value per share P5 ^
Fair market value per share ^
The net assets of A Co. with fair value of P4,200,000 are

transferred to B Co. for a corresponding 150,000 B Co shares.

1. Nondeductible loss of A Co.
2. Cost or basis of A Co.'s share to B Co.
3. Nontaxable gain of B Co.
4. Assume that Mr. X, a shareholder of A Co. was asked to
surrender his 100,000 shares which he purchased for
P950,000, how much is X’s gain (loss) not recognized?
5. What is the cost or basis of Mr. X on his investment in
equity of B Co.?
Solution:
1. A Co.
FMV of B Co.'s share received (P25 x 150,000) P3,750,000
Less: Book value of the net asset of A Co. 4.000.000
Loss of A Co, - not recognized imojmi
2. A Co.'s cost or basis in 13 Co.'s equity

is the same as the book value of net asset it
transferred to acquire 13 Co.'s equity wjjmm
3. B Co.
Fair value of A Co.'s net asset received P4,200,000
Less: Par value of shares issued
(P20 x 150,000) „a*ooojLi.oo
Gain of B Co. - not recognized
4. X shareholder
FMV of B Co's shares received (I'd,750,000 x J/'t) po:r/,f)0 o
Less: Cost of investment imjM
Loss - not recognized tmjjmi
5. The cost or basis of X's investment in tbe

equity shares of B Co. is the same as the cost

of investment he transferred to B Co. P95QfQOO
4. Recognition of gain but not loss if:
(]) An individual, a shareholder, or a corporation received

cash or property. The gain to recognize should not exceed
the sum of money and the fair market value of the
property received.
(2) As to the shareholder, if the money and/or property

received have the effect of distribution of a taxable
dividend, there shall be taxed as dividend to the
shareholder an amount of the gain recognized limited to
his proportionate share of the undistributed earnings and
profits of the corporation.
(3) Basis of the stock or securities received would be:

Cost of the stock transferred P xxx
Less: Money received P xxx
FMV of property received xxx xxx
Balance P xxx
Add: Gain recognized on the exchange P xxx
Amount treated as dividend xxx xxx
Basis or cost of stock received P xxx
Illustration
As a result of a merger, Mr. I transferred his A Co. shares with

a basis of P200,000 in exchange for the following:
B Co. ordinary shares with FMV of P220,000
Land with FMV of 50,000
Cash 20,000
Required:
1. Determine the taxable gain on the exchange.
2. Determine the basis of the B Co. shares received on the
exchange.
3. What is the basis of the land received?
4. if the land were sold for P200,000, how much is the
capital gains tax?
418 IMCOMf TAXATION
If ffm mveMfri'*nf ir> y> ( ,t vhttrrs v/ftr^ vdd i<,f

<ompnfc the g/»in or low or> V>Jc '* ;
Solution:
I It ( o ordinary fthmeft with FMV of iO.'/h?//,
Lm>d with I*MV of
C<ifth
... '4jJ//s
Tof/.j
Cost of A Co,'s shores transfer rwl
Totol g/bri
'J fixable gain (in limit eh to the FMV

of land and cash)
2. Cost of A Co.'ft shores trarmferred P200///>

Less: Caah received P20/>00
FMV of land received 50,000 70///;
Balance PI 30,000
Add: Gain recognized in the exchange 70.000
Basis of B Co. shares received P2C6,C£C
3. Basis of land received - FMV of land
4. Capital gains tax of land
(P200,000 x 6%)
5. Sales price P22G,0G6
Less: Cost 200.000
Taxable gain P 20.000
Sale of Patents and Copyrights
A patent is an exclusive right granted by the government to an

inventor granting him the special right to control the production,
sale and use of his invention for a certain period of time.
A copyright is an exclusive right granted by the government to a

composer, artist or author intended to protect his intellectual
work granting him a special right to publish, sell and benefit from
his literary, musical and artistic work.
The gain or loss arising from the sale of patents and copyrights is
determined by computing the difference between the selling price
and costs (book value or adjusted basis of the intangibles), rsee 46
&. 136, Rev. Rega. No. 2)
Illustration
Q Corporation acquired a patent amounting to P200,000 with an

estimated useful life of 30 years. After 5 years, the corporation
sold the patent for P300,000. How much is the gain on sale of the
patent?
The gain on sale of the patent is PI50,000, computed as follows:

Sales price P300,000
Less: Book value of the patent:
Acquisition cost P200,000
Less: Accumulated amortization
[(P200,000/20) x 5 years) 50.000 150.000
Gain on sale of patent PI 50.000
Notes:
1. The patent is to be amortized over its useful life or legal life, whichever is
shorter. The legal life of patent is 20 years. (R.A. No. 8293 -"The Intellectual
Property Code of the Philippines, January 1, 1998)
2. The cost of acquired copyrights should be amortized over its useful life.
Sale of Goodwill
Goodwill is an intangible asset that is identified with the entire
business entity as a result of its good reputation and capacity to
earn above normal earnings in the industry.
The gain or loss from sale of purchased goodwill results only

when the business, or a part of it, to which the goodwill attaches,
is sold, in which case the gain or loss will be determined by
comparing the sales price with the cost or other basis of the
assets, including goodwill. (Sec. 47, Rev. Regs. No. 2)
Illustration
Mr. X purchased Jam Restaurants for P5,000,000 comprising of

the business’ net fair value assets of P4,000,000 plus goodwill of
Pi,000,000. The restaurant has two branches, A and B, with net
fair value assets of P2,500,000 and PI,500,000, respectively.
If Mr. X subsequently sold branch B for P2,500,000. How much is

the gain on sale?
Sales price P2,500,000
less: Cost of branch A (P5,000,000 x 15/40) 1,875,000
Gain on sale P 625r0QQ
420 INCOME TAXATION

1. Define “dealings in property.”
2. Distinguish ordinary from capital assets. Give examples for each.
3. What is the determining factor in classifying assets whether ordinary
or capital asset if there is a change of purpose?
4. Distinguish net capital gain from net capital loss.
5. For purposes of computing gain or loss on sale or exchange of
property, what are the special rules in determining the cost of
property disposed of?
6. State the tax rules on ordinary gain (loss) and capital gain (loss).
7. What are the rules in treating holding period and net capital loss
carry-over?
8. What is the tax treatment of gain (loss) on sale of debt securities
sustained by bank and trust companies?
9. State the tax rules of capital gain (loss) sustained by a corporation?
10. What tax is applicable if the investment in securities is sold by a (a)
dealer in securities and (b) other than a dealer in securities?
11. If shares of stock cannot be properly identified, what rules are to be
applied in determining the cost of the shares of stocks?
12. State the rules when shares of stock are sold by installment.
13. What are the conditions for the existence of wash sales loss?
14. What is the tax treatment for the gain or loss on (a) short sale, (b)
wash sales, (c) liquidating dividends, (d) interest in partnership, (e)
failure to exercise option to buy or sell property, and (f) abandoning
property for closure sale?
15. Can sale of principal residence be exempt from capital gains tax?
State the conditions.
16. State the rules in determining the new cost basis of the new principal
residence which acquisition are from the sales proceeds of an
individual taxpayer’s former principal residence.
17. In the determining the tax liability, what is the tax base and rate
applicable on the sale or exchange of real property which is
considered as capital asset?
18. State the rules on sale or exchange of real property used in business.
19. Enumerate the assets of the business which are considered as
ordinary assets.
20. If real property is located outside the Philippines, what is the
applicable tax base and rate if sold by a resident citizen or domestic
corporation?
21. Differentiate patent from goodwill. State the rules in computing their
respective gains or losses.
Name: ________ ________________________________ _ Score: _______________

Write True if the statement is correct, or False if the statement is
incorrect.
]. Vacant lots temporary used as parking lots or car wash lots are
capital assets.
2. Sale of real property classified as ordinary asset is subject to

regular income tax, VAT and DST.
3. When sold, capital assets, other than real property and shares of
stocks, are subject to capital gains tax.
4. A taxpayer who is not engaged in a real estate business can

classify its real property previously used in business as capital
asset upon showing proof that the same have not been used in
business for more than two years.
5. If the property was acquired as gift, the cost basis to compute

gain or loss is the fair market value at the time of donation.
6. There is no holding period for sale of shares of stock held by

dealers in securities for more than one year.
7. No NIRC tax is to be paid if the sale of shares of stock is traded

in the local stock exchange and it resulted to a capital loss.
8. All sales pertaining to real properties are subject to a capital

gains tax of 6%.
9. Real properties acquired by a real estate developer, intended to

be developed and sold are ordinary assets.
10. Real properties held and used in the conduct of business, but
are not intended for sale are capital assets.
1 1 The depreciable assets of realtor shall be treated as capital

assets.
12. Net capital loss carry over is not applicable for corporations.
13. The loss on sale of debt securities sustained by a bank is a

capital loss.
AM \W /M % IA /A .W M
Narrii*
ProfoUrrn 7 2 'l run f»r V*l*m

W ith ' 'h a t if \)if fa ',r
liKOnrrt,
1 luniks '-iff denJe/>, it) ai*
2. 'Hie purchased goodwill tfra.t«.•;fAA/s';#?<■+}'/ */*A A
‘i. It h tiW/tiyn advantageous to the 'axpayer to choo*.e the (fi%

tax than the normal tax if the re?si properly A ts*Ato the
>
government,
4. Salc» of real properties to SSS or GSIS are object to orerfftabie

withholding tax.
5. In installment reporting of income, the contract price k

determined by deducting from the selling price the amount of
cost or assumed mortgage, whichever is higher.
6. Ordinary assets include those which are held primarily for sale
to customers in the ordinary course of the business except
equipment used in business operations.
7. The net capital loss carry over of an individual taxpayer is

limited to the amount of taxable income in the year when the
loss was sustained.
8. The tax rules of ordinary loss and net capital loss for both,
individual taxpayer and corporations are the same.
9. Capital losses are deductible only to the extent of the capital

gain.
10. If the property is acquired through inheritance, the cost basis to

the recipient is the acquisition cost of the previous owner.
11. The gains from sale of securities held by dealers in securities are
ordinary income subject to normal tax.
12. Stocks that are traded in the local stock market are subject to a
stock transaction tax based on the sales price irrespective of gain
or loss sustained by the taxpayer.
13. If the real property used in business were sold to the

government, the tax would be 6% final tax or normal tax rate at
the option of the taxpayer.
7 Dealings in Property 423
Score:
--------- -----------------------------------------------------------------
emblem 7-3 Tree or False
r>,-P True if the statement is correct, or False if the statement is
^correct.
; The NCLCO of an individual taxpayer is deductible in the
subsequent year only from the capital gains of capital assets
held not for more than 12 months.
2 The capital gains tax on sale of real property is to be paid within
30 days from the date of sale.
3- A disguised sale is a sale or exchange transaction between two
related parties with intent of partly sale and partly gift.
4. The gain or loss on sale of partner’s interest (capital) in the
partnership is a capital asset transaction.
5. Dealers in securities are not liable to the stock transaction tax.
6. All sales of shares of stock of a non-dealer in securities are
subject to stock transaction tax of % of 1%.
7. The payment of stock transaction tax exempts the sale from final
income tax of 5% and 10%.
3. Sales of real properties foreclosed by bank from nonpaying loan
clients are subject to normal taxes.
r j. Dealers in securities are not liable to the stock transaction tax.
10. Additional assessments obtained by a corporation from its
shareholders are taxable income.
31. If the property sold is not subject to mortgage, the contract price
is usually the selling price.
12, Gains from wash sales are taxable and losses from wash sales
are deductible.
13. There is wash sale if within a 61-day period, a taxpayer sold its
1.000 X Company’s common stocks and subsequently purchased
1.000 X Company’s preferred stocks.
M. If a government owned corporation sells a real property, only the
selling price is the basis of the tax.
15. The NOLCO is applicable for three years from the year of
operating loss and can be deducted from ordinary income and
net capital gain.
16. The original issue by a corporation of its shares of stock above
par value is subject to capital gains tax.
AlA INCOME TAXATION
Naum: Scoro: ______
Problem 7 4 True or Fnlee

Wiitr Inin il I hr statement is correct, or false If the statement i*
bn nr i cm I.
I The interest income on Installment sole of rcol property is

subject to uortnol tux.
2. The option to he taxed at regular tax rate or 6% final tax is

grunted when the sole of real property classified as capital asset
is sold to the govern merit: by an Individual or corporate taxpayer,
f
0, The buyer of real property is only required to withheld tax on the
last Installment payment.
4. hand owned by religious order, if sold is not subject to tax.
5. A sale or exchange of interest in partnership is a capital asset

transaction.
b. A short sale is effected when a speculator sell securities which he
owns.
7. A deductible loss may be incurred if the treasury stock is
subsequently reissued for a consideration less than its cost.
H. Copyright is an exclusive right granted by the government to an

inventor.
b. The total payments received during the year of sale in cash or
properly including evidences of indebtedness comprises the
initial payment for sale of real property.
10. Liquidating dividends in general are not taxable if they only

represent ret urn of investment.
J 1. Issuance of a corporation of its bonds at a premium gives rise to

capital gain.
12. All sales of land are subject to a final tax of 6% based on the
selling f>ricc or lair market value, whichever is higher.
10, .Sole of iral property of national government is exempt from
creditable withholding lax.
Hanks and trust companies are generally dealers of securities.
10. When <i taxpayer provided a consideration for un option period to
buy a capital properly and such privilege was exercised, the
apt ion /Money shall be considered as capital gain or capital loss.
Dealing* In Property 425
QttfpW 7
Scort;
problem 7 5 Multiple Choice

gf)ed (he k-lter that contains the bent enewer,
j The following ere excluded ne capital eeectft under Section SO (A) of

8424, except:
a. account ft receivable.
b. Mocks intended for sole in the normal course of business,
r;. property ur.ed in trade or buftincftft subject to depreciation,
d. real property uced in trade or burdnemi
2. When a bank sold it a real properties considered as POPA, the sale

shall not be subject to capital gains tax. If the bank sold its shares of
stock considered as ROPA, it shall be subject to
a. capital gains tax,
b. regular income tax.
c. other percentage tax,
d. final income tax.
3. When a buyer provided a consideration for an option period to buy a

capital property but such privilege was not exercised, the option
money received by a seller shall be considered
a. Nontaxable because the option privilege was not exercised.
b. Capital loss of the seller
c. Taxable gain of the seller
d. Refundable. x
4. For income taxation purposes, which of the following is classified as

capital asset of a manufacturing business?
a. Work-in-process ending inventory
b. Investment in equity securities
c. Factory building
d. Office equipment
5. Which of the following is a capital asset?

a. Inventory for sale
b. Real property held for rent
c. Equipment used in business
d. Investment property
b Which of the following statements is not correct?

a. Ordinary loss is deductible from capital gain.
b. Capital loss is deductible from capital gain.
c. Dealers in securities are subject to stock transaction tax.
d. Net capital loss is deductible from the succeeding year's capital
gain of an individual taxpayer.
426 INCOME TAXATION
7. It refers to an exclusive right granted to authors and composers.

a. Patent
b. Franchise
c. Copyright
d. Goodwill
8. Which of the following may result to capital gain or loss?

i. Sale of investment in bonds
ii. Receipt of liquidating dividend
iii. Sale of interest in partnership
iv. Re-issuance of treasury stock
Choices:
b. i, ii, and iii only
c. i, and ii only
d. iv only
9. Statement 1: Loss from wash sale of securities is deductible from

capital gain.
Statement 2: Gains from wash sales are taxable gains.
10. If an individual taxpayer disposed of his principal residence for

PI,000,000 and acquired as a replacement a smaller residential
house and lot for P750,000, the sale is subject to 6% capital gain tax
on
a. 25% of the selling price.
b. 75% of the selling price.
c. 100% of the selling price.
d. 100% of the purchase price of the new residential house and lot.
11. The sale of real property classified as capital asset shall be taxed at
6% of
a. selling price, where the zonal value is 110% of selling price.
b. zonal value, where the selling price is 110% of zonal value.
c. selling price, where the zonal value is 80% of the selling price.
d. zonal value, where the zonal value is 80% of the selling price.
12. If the real property sold is classified as inventory with a selling price
of P3,000,000 and zonal value of P4,000,000, the creditable
withholding tax is
a. 6% of the selling price.
b. 6% of the zonal value.
c. 5% of the selling price.
d. 5% of the zonal value.
Chapter 7 *27
Harm-. V//t
k/obUm 7-6 MtjitjfrU Ch&U*

'»*'5 »n* I****' *W ^/r/x .-.*, v* U*f */,vv/*f
i shares ot *t/*.k fi,,i hfytfjj jft ffjsr l//.:ii %*//y *://■*&:%£, */* y^-b a*
h hA\o*Mn />/-.» z;#.^ VJ&jy/..
b P/m tf,ht/t \ vfthiP.
' ■ 'any mg b',ok v/tio*-..
d -/hi it-
7, Uiari, of if it* foUov/my it i,ot a thoit thk '/f J;ro;/*:fV/>

h >nir of property not o'fjji*'A by Speculator
b I 'I il\ o r* f o < o o :r ,^ option f/, jj j y
• , I ' i f l l u / f ' }/> i y t f f f p.,. O f / t i O f ) t o t e l l
(f i f t d i ^ t becoming ‘ / / O f t f t l e n t
■*■ A rt-ijj fttiiU: bue.mev; that thiftt t/, ter/W.ng b

f Itittliy if«i tet jj properbcfr at
11 oi (Unary attet,
b, • If pit 1)1 nv*,et,

* abandoned ntjt^g
d ter vice ()t$aet,
4 '1 hr following rules ah all be oh served when & capital gain or loss is
>aiefnined by a corporation, except,
Capital gainr; and losses arc recognised to the extent of its full
amount,
h. Capital Josses are deductible only to the extent of capital gains,
e, Net capital Josses are not deductible from ordinary gain or
income but ordinary Josses are deductible from capital gains,
d. Only 50% of gain or Joss is reportable if the asset sold was held
for more than 12 months.
i, Which of the following rules shall be observed on securities becoming

worthless for purposes of income taxation?
a. The securities are ascertained worthless and written off
b. The frrxpayer owning the securities written off should not be
bank or trust company
e. '/‘he written off amount is a capital loss,
d. A1J of the above.
Sales of stocks of a domestic corporation traded through a local

stock exchange ore subject to a
/i. percentage tax of one half of one percent.
b. final tax of five percent if the net capital gain is not over
PI 00,000.
c. final tax of ten percent on any amount in excess of PI 00,000.
d. percentage tax of one fourth of one percent.
428 INCOME TAXATION
7. If the stock cannot be properly identified, the following rules are

applicable in the determination of the cost of the shares of stocks,
except
a. The cost to be assigned shall be on the basis of the first-in, first-
out method.
b. The cost to be assigned shall be on the basis of the average
method if the seller maintains a record for every particular stock.
c. No cost shall be assigned to the stocks since the stocks cannot
be properly identified.
d. An allocated cost shall be assigned to stock dividends to get the
cost of each stock.
8. Which of the following sale results to a capital gain or loss reportable

in ITR?
a. Sale of land foreclosed by the bank
b. Sale of interest in a professional partnership
c. Sale of shares of stock not traded-in the stock market
d. Sale of debt securities traded-in the stock market
9. Sales of investment in stocks of a domestic corporation not traded

through local stock market are subject to a final tax of
a. 5%.
b. 10%.
c. 10% on the net gain not over PI00,000.
d. 5% on the net gain not over P100,000, and 10% on the excess of
the first PI00,000.
10. If the proceeds from the disposition of principal residence are fully
utilized in acquiring or constructing a new principal residence, the
capital gain is not subject to tax if the
a. Acquisition or construction of the new residence is within 18
months.
b. Commissioner is notified within 30 days from the date of
disposition of the taxpayer’s intention to avail of the tax
exemption.
c. Historical cost or adjusted basis of property sold is carried over
to the new principal residence.
11. The cost of the new principal residence may be the

a. Cost of the old residence sold.
b. Percentage of the cost of the old residence sold.
c. Cost of the old residence sold plus additional cost in acquiring
the new principal residence.
Problem 7-7 Ordinary Assets

Cacho Corporation is engaged in book printing services. Its assets are
presented as follows:
Raw materials (papers and inks) P 500,000

Books inventories of clients stocked in the warehouse 3,000,000
Office equipment and printing machines 5,000,000
Warehouse used for printing 1,000,000
Land where the warehouse is constructed 400,000
Properties held for investments 2,000,000
Investments in equity shares 100,000
How much is the amount of ordinary assets?

a. P6,900,000 c. P10,000,000
b. P9,900,000 d. PI 1,000,000
Problem 7-8 Ordinary Assets

The following real estate assets are taken from^the records of Buenas
Realty Corporation, a real estate dealer and developer:
Real property inventories P10,000,000
Land and building used in business 3,000,000
Vacation house of the executives 1,500,000
Acquired undeveloped properties 500.000
Abandoned properties 600.000
The amount of ordinary assets would be

a. P13,000,000. c. P15,100,000.
b. P14,500,000. d. P15,600,000.
Problem 7-9 Capital Assets

Mateo shows the following assets:
Residential house P2,000,000
Personal car 1,000,000
Interest in commercial partnership 500.000
Inventory of goods for sale 600.000
Investment in property 1,500,000
How much is the total amount of capital assets?

a. P5,600,000 c. P3,500,000
b. P5,000,000 d. P3,000,000
Problem 7 - 1 0 Capital of Assets

Care Enterprises presented the following assets:
Interest in partnership PI,000,000
Idle raw lands 100,000
Proceeds of expropriated real property 2,000,000
Supplies inventory 200,000
Land and building used in business 5,000,000
43$ INCOME TAXATION
• r.e amour:: of capital assets would be

a PI. 100.000. c. P3,100,000.
b PI,300,000. d. P-,900,000.
Problem 7-11 Change of Purpose

B. a trader, purchased one-hectare land intended for investment
purposes for P2.000.000- After 10 years, he decided to subdivide 90% of
the land for business purposes and the 10% is used to construct his
warehouse- Or.e thousand square meters of the subdivision are used as a
road...
1 - If per subdivided lot is sold for PI00,000 per 200 square meters, how
much is the ordinary gain from sale of land?
a. P4,500,000 ' c. P2,700,000
b. P-,000,000 d. P2,200,000
2. Based on the above transaction, how much is the remaining capital

asset of B?
a. P-0- c. P200,000
b. PI 00,000 d. P300,000
Problem 7 - 1 2 Applicable Tax

Max sold some of his properties to his son, Maximut, as follows:
Fair
Market Value Selling Price
House and lot (cost, PI,000,000) P2,000,000 P100,000
Car & accessories (book value, P500.000) 400,000 50,000
Which of the following is subject to normal tax?

House and lot Car and accessories
a. P2,000,000 P400,000
b. PI,000,000 P100,000
c. P 100,000 P 50,000
d. P- 0 - " P-0-
Problem 7 - 1 3 Gain (Loss) on Exchange

Mr. Basa exchanged his car with a cost of P250,000 and a book value of
PI 50,000 to a portion of land with a fair market value of PI90,000 and a
zonal value of PI 50,000. The gain (loss) from the exchange of property is
a. (P60,000). c. P 50,000.
b. P 40,000. d. P 90,000.
Problem 7 -14 Exchange of Dissimilar Property

A taxpayer exchange his personal property for dissimilar property with a
market value of P200,000. Which of the following is correct?
a. There is capital gain if the property given away has fair value equal
to P200,000 at date of exchange.
b. There is capital gain if the property given away has acquisition cost
that is higher than P200,000.
j There is capital loss if the property given away has fair value higher
than P200.000 when it was inherited,
i There is capital loss if the property given away has fair value of at
date it was received as donation that is lower than P200.000.
problem 7 -15 Exchange of Similar Property

Ttong Association and Kim Association agreed together to exchange their
respective parcel of land to serve the accessibility needs of each other.
The following information are given related to the acquisition and fair
market values of the land:
Acquisition cost Fair market value
Land of Tiong (500 sq. m.) P500.000 PI.500.000
Land of Kim (480 sq. m.) 480.000 1.600,000
If there were neither other property nor money involved in the exchange
transaction, how much is the amount of gain or loss to be recognized in
the books of Tiong?
a- P - 0 - c. P100.000
b. P 20,000 d. P120.000
Problem 7 - 1 6 Exchange Solely in Kind

Veniz Corporation has an authorized capital stock of PI0,000,000 with a
par value of PI00 per share. The subscriptions of the incorporators are
as follows:
No. of shares Unpaid
Incorporators subscribed Amount oaid Subscriptions
A 15,000 P150.000 PI,350,000
B 5,000 125,000 375.000
C 2,000 125,000 75.000
D 2,000 125,000 75,000
E 1.000 100.000 -0-
Total 25*0.00 P625.Q0Q P1.875.Q00
By way of a deed of assignment, Mr. A transferred to the corporation a

parcel of his land with a fair market value of P600.000 in order to fully
pay his unpaid subscriptions. Howr much is the taxable amount if the
land w?as acquired by A for only P50,000?
a. P-0- ' c. P450,000
b. P400,000 d. P600,000
Problem 7 - 1 7 Determination of Cost and Expenses

Mr. Alejandro Ciencia sold his capital asset for a sales price of P500,000.
The sale wras subject to 10% agent commission. The capital asset was
acquired by Mr. Ciencia for P200.000 excluding installation and
insurance cost of P20,000. The cost and expenses deductible from the
sale is
a. P200,000. c. P235,000.
b. P220,000. d. P270.000.
4o INCOME TAXATION
T- Special Rules
U c-* ■:'*** tUthcr of \Urnicl died. the latter inherited a farm land which
ji'trr : e ' ears he sold lor PHOOO.OOO. The values related to the farm
Ur.h a~e gi\<r as Allows:
Aequ issue*'; cost of his father P 500,000
Far market value at the time of his father's death, 1,200,000
Parr market value when sold by Manuel 1,800,000
Wha: ts die amount of the gain on sale of farm land?

a FH50G.GG0 " c. P700,000
b F SOO.OOO d. P600,000
Problem 7 - 19 Special Rules

A acquired a capital asset (personal property) for P50,000. He donated it
to X Corporation when the market value was P80,000. After 2 years from
date of donation. X Corporation sold the said capital asset for P150,000.
How much is the amount of reportable capital gain?

a- P 100.000 c. P50,000
b. ? 70.000 d. P35,000
Problem 7 - 2 0 Ordinary vs. Capital Gain/Loss

Mr. Flo sold his personal car for P700,000 which he previously acquired
two years ago for PI,000,000 with an estimated useful life of 5 years.
How much is the reportable capital gain (loss) on the sale-of the car?
a. (P300,000) c. PI 00,000
b. P 50,000 d. P200,000
Problem 7 - 2 1 Holding Period

A capital asset of an individual was acquired at a cost of PI00,000. .
Subsequently, this owner died and the capital asset is transferred to a
religious organization when the fair market value was PI20,000. The
latter sold the capital asset for P200,000 after holding it for 2 years.
The amount of reportable capital gain would be
a. P40,000. c. P 80,000.
b. P50.000. d. PI 00,000.
Problem 7 - 2 2 Taxable Income

The individual taxpayer reported the following;
Year 1 Year 2
Net income from business P200,000 P300.000
Capital gain for asset held more than one year 50,000 40.000
Capital loss for asset held less than one year 40,000 10.000
Tne taxpayer should report combined taxable income before personal
exemption of
- Year 1 __ Year 2
a. f'? 10,000 P330,000
b. P200,000 P.300,000
Chapter 7 Dealings In Property 433
c. P200,000 P310,000
d. PI 85,000 P315,000
Problem 7 - 23 Taxable Income (Individual vs. Corporation)

The following are the transactions of X business for the year:
Ordinary gain P50,000
Short-term capital gain 20,000
Long-term capital gain 30,000
Long-term capital loss 10,000
1. If X is an individual, how much is the combined taxable income

before personal exemption?
a. P95,000 c. P80,000
b. P90.000 d. P75,000
2. If X is corporation, how much is the combined taxable income?

a. P95,000 c. P80,000
b. P90,000 d. P75,000
Problem 7 - 24 Net Capital Loss Carry-Over

C reported the following incomes and losses for the years 1 and 2:
Year 1 Year 2
Ordinary taxable income P 60,000 P180,000
Short-term capital loss 400.000
Long-term capital gain 600.000
Long-term capital loss 100,000
Short-term capital gain 200,000
1. If C is an individual taxpayer, the year 2 combined taxable income

before personal exemption is
a. P330,000. c. P270,000.
b. P280,000. d. P170,000. 2
2. If C is a corporation, the year 2 combined taxable income is

a. P330,000. c. P270,000.
b. P280,000. d. P170,000.
Problem 7 - 2 5 Net Taxable Capital Gain

In addition to his business as construction materials dealer, Mr. Espiritu
had the following capital asset transactions in 200x:
Sold Acquired Selling
Date Selling Price Date Cost Expenses
Jewelry 8/15/0x P 80,000 5/lO/Ox P 10,000 P 1,000
M. Benz Car 5/16/0x 400,000 5/15/0Y 350,000 20,000
Refrigerator 9/5/0x 6,000 2/9/0x 5,000
Ford car 12/5/Ox 12,000 1/10/Ox 20,500
The net taxable capital gain of Mr. Espiritu in 200x is

a. P76,500. c. P27,000.
b. P42,000. d. P26,500.
434 INCOME TAXATION
Problem 7 - 2 6 Bank and Trust Companies

BPI family Bank and Trust Co. reports the following results (rf operation:
Interest revenue PI0,000,G0C

Operating expenses 6,060,060
Gain on sale of long-term bonds 1,000,COG
Loss on sale of trading debt securities 200,GOO
Loss on sale of long-term equity investment 50,000
If BPI is a dealer of debt and equity securities, how much is the net
capital gain of BPI Family Bank?
a. P - 0 - c. P 800,000
b. P750.000 d. PI,000,000
Problem 7 - 2 7 Stock Transactions

The capital gains from sale of investment in debt securities outside the
stock exchange is P207,500, net of final tax. How much is the final tax?
a. P12,500 c. PI 7,500
b. PI 7,432 d. P22,500
Problem 7 - 2 8 Stock Transactions

The following capital stock transactions on shares of stock were reported
by an individual taxpayer:
Cost Selling price
March P100,000 PI50,000
June 150.000 160,000
September 200.000 240,000
November 120,000 150tQ00
If tax returns were filed and paid on prescribed dates, how much capital
gain tax should be reported within 30 days from November sales?
a. PI,500 c. P6,500
b. P3,000 d. P8.000
Problem 7 - 2 9 Dealer in Securities

A Company sold 100,000 SMC equity shares for PI,000,000. The related
costs of the said securities are as follows:
Acquisition cost P900.000
Brokerage fee 40,000
1. If A Company is a dealer in securities and sold the securities through
the stock market, the income tax due would be
a. PI 8,000. c. P3,000.
b. P 5,000. d. P 500. 2
2. If A Company is not a dealer in securities and sold the securities

through the stock market, the stock transaction tax would be
a. PI 8,000. c. P3.000.
b. P 5,000. d. P 500.
j. if A Company is not a dealer in securities and sold the securities

directly to the buyer, the capital gains tax would be
a. PI 8,000. c. P3,000.
b. P 5,000. d. P 500.
problem 7 - 3 0 Dealer in Securities

In October 200A, Marisa acquired 1,000 shares, par P100 per share of
Baguio Oil Corporation for P90,000 with the following market values in
the last quarter of the year:
October November December
Market values 90% 105% 140%
Marisa would like to sell the shares of stock in December. A broker's fee
of 1% based on sales price will be paid in addition to the percentage tax if
the stock is sold in the stock exchange. To avoid the broker’s fee, Marisa
decided to sell the shares of stocks directly to the buyer at the same
sales price.
Would Marisa’s decision result to a better profit? At what amount?

a. Yes, P500 increase in profit.
b. Yes, P400 increase in profit.
c. No, P400 decrease in profit.
d. No, P200 decrease in profit.
Problem 7 - 3 1 Net Capital Gain

During the year, the following are the recorded stock transactions of X
Corporation of its own shares of stock:
(1) Total shares originally issued, 1,000 shares of P100 par value per
share, sold at PI20 per share.
i2' Total shares retrieved 250 shares at cost of P125 per share.
{3} From the total shares retrieved, 100 shares were sold outside stock
market at PI50 per share.
What would be the net capital gain before tax for the year?
a. P22.500 c. P20,000
b. P21,250 d. P 2,500
Problem 7 - 3 2 Wash Sales

Marjorie Corpuz is an investor in X Corporation. In 200A she has 1,000
share holdings acquired at PI20 per share or a total investment cost of
? 120,000 classified as capital asset.
2003 Transactions:
Oanuaxy Received stock dividends 2 shares for every 10 share holdings.
March Sold 500 shares of X Corporation for PI20 per share.
April Purchased 300 shares of X Corporation for PI50 per share.
May Sold 500 shares of X Corporation for P90 per share.
What would be the net capital gain in March?

436 INCOME TAXATION
P9.000 c. P20.000
PS.QOO d. P10.000
^«rar muc£ is me londeductible loss in Mav?

&- PS .000 c. P3.000
b- F5.000 d. P2,000
^ Supposing tha: all of the remaining shares w ere liquidated in

December 2003 at P130 per share. What would be the capital gain
si December 200B?
a. jP 3,0001 c. PI 7,000
b ?:s.0001 d. PI 8,000
Problem 7 - 3 3 Cost of the Remaining Shares

Nona's investments in equity shares of Sting Corporation show the
tp-flwicg transactions:
2SCA Particulars .Amount
Mar. 'o Purchased 800 ordinaiy shares P 80,960
Apr. 20 Purchased 1,500 ordinary shares 161,700
May 30 Received 10% stock dividend (the fair market
value of stock is P95 per share)
June i Sold 2,000 ordinaiy shares 240,000
Mot.& specifically identified that the April 20 batch of shares was first
s&Zd because it has higher cost compared to March 10.
1 - gain on sale of the investments in equity shares?

Hew much is the
a. P27,700 ' c. P46,100
b. P29,680 d. P48,760
2. Her// much is the cost of the remaining shares?

a. P30,360 c. P48,760
b, P32,340 d. P51,940
Problem 7 - 3 4 Corporation's Own Share of Stock

X Corporation issued 5,000 of its common shares with P20 par value per
share at P25 per share. Of the 5,000 common shares issued, 2,000
shares were reacquired for P21 per share and eventually reissued for P23
per share,
1 Ho v/ much is the capital gains on the original issuance?
a P25,000 c. P 4,000
b. PI 2,500 d. P-0-
2 Her// much is the capital gains on reissued shares?

a P25,000 c. P 4,000
b PI2,500 d. P-0-
Problem 7 - 35 Original Issuance and Retirement of Shares

i he foik/v/ing accounts are shown in the records of V Corporation:
£1?
us.-sra- -vr-utn •i.rr: cu'.ru5-.ccmt:r, *r. aar rlCG -2 ggg cgg

i - 3*.' * «-'■-<*- 5GG GGG
; .v>. ..i UV' *00 GGG
;^ru 1..0GC GGG
y.C Trta-yu*y thares at coir 120,000
• \e r *..tc .~er: 5GC ■■csycr^sJ idar^ wet?? oiigmsuy isêd at PL 30 per

'. :szrt' r -ncred ?30Q. tmûir* *hsr£:T were reissued at PI40' per
*.t.2 .-e„ arm tr..e rmuarmmg: a®* rruntdred 200 ); shares- were retired.
e-7w mtam is tu-: n-r: tascsh Pt gam cf the above data grid araixsaciioTis?
= h: 3 GGG ~ c.. PHS.GOG'
- ?22 3 qc ±. pie,am
Problem 7-3-6 Install meet Sal** of Scales of Stock

-t 2 %A.. Mr. Rey„ an owner cf shares of stock: in a farndy-ciased
ocrpcratum... sold cuuskdc stock exchange I_QO€ shares1 of stock with, a
otfi*. cf PI 20 per 3 hart for PI SO per share- under the fbhcwing terms:
PIA /IGG dcxr: payment and the balance rs cehectftle in three equal
«nnuaJ installments.
The capital gains tax due for year 2QGD wmiLd be

a. P96G- ~ c. F720.
t PS00. d. P360.
Problem 7 - 3 7 Liquidating Dividend

Cr October 31. 200C, X received PI 20,000 liquidating dividends from
Philex Mining Corporation for his 10,000 shares invested at P10 per
share which was acquired on January 31, 200 A.
1 How much is the reportable capital gains if X is a corporation?

a. P - 0 - c. P20,000
b. PI 0,000 <i. P30,000
2 How much is the reportable capital gains if X is an individual?

a. P - 0 - c. P20.000
b. PI 0,000 d. P30,000
Problem 7 - 3 8 Basis of New Residence and Capital Gains Tax

Manwong is a resident of Mankayan, Benguet. He sold his family home
for P4,000,000 which was previously acquired for P2,000,000. Manwong
complied with all the BIR requirements to avail of tax exemption and
spent P2,500,000 in acquiring new family home.
1. How much is the basis of the new family home?

a. P2,500,000 c. PI ,250,000
b. P2,000,000 d. P 500,000
438 INCOME TAXATION
2. How much v\ the capita) gain* tax to be paid by Mr. Manv/ong?

a. P 0 - c. PI50,000
b. P 90,000 d. P240,000
Problem 7 - 3 9 Basis of New Residence and Capital Gains Tax

Hunk sold his old residential house and lot for P5,000,000 and acquired
a new residential house and lot for P9,000,000, How much is the cost of
the new residence and capital gains tax on the said sale if the old house
and lot was previously acquired for P2,000,000 and no tax exemption
was allowed by the BIR?
Basis of New Residence Capital Gains Tax
a. P6,000,000 Tax exempt
b. P6,000,000 P300,000
c. P9,000,000 Tax exempt
d. P9,000,000 P300,000
Problem 7 - 4 0 Capital Gains Tax (Real Property)

On August 15, 201 A, Mr. Tandingan sold a 500 square meters residential
land for P300,000. The land was acquired in 199A for P200,000 and
classified as capital asset. On the date of sale, the fair market value as
shown in the real property declaration is P250,000 and the assessed
value amounts to P75,000. The zonal value is P700 per square meter.
The capital gain tax is
a. P 3,750. c. P17,500.
b. P12,500. d. P21,000.
Problem 7 - 4 1 Basis of New Residence

In 200A, Mr. Del Rosario acquired his principal residence for P6,000,000.
He sold it to Mr. De la Cruz for PI2,000,000 in 200D. Within 30 days,
he wrote the BIR for tax exemption because he intends to use the entire
sales proceeds to purchase a new principal residence.
How much is the basis of the new residence for taxation purposes if he
actually acquired it for PI5,000,000?
a. P6,000,000 c. P12,000,000
b. P9,000,000 d. PI 5,000,000
Problem 7 - 4 2 Real Estate Transactions

The following are the transactions of Ruby pertaining to sale of real
properties for the year 200x:
(a) Sale of vacant lot used as open warehouse for her trading business,
P500.000. This was acquired 2 years ago at P200,000.
(b) Sale of her residential lot for PI,000,000, the zonal value at date of
sale is PI ,200,000. This was purchased 3 years ago at P400,000. 1
1. What would be her final tax for these real estate transactions?
a. P60,000 c. P 72,000
b. P90,000 d. PI 02,000
Chapter 7 Dealings in Property 43S
2. What would foe the creditable withholding tax. for the real estate used
in business?
a. P60.000 c. PI 5,000
b. P30.000 d. P 7,500
Problem 7 — 43 Disposition of Real Property

In 200x, E Corporation sold a residential house and lot for sales price of
P2,500,000, excluding VAT. The said property has a cost of PI,500,000
and with fair market value of P2,000,000. The documentary stamp tax.
(DST) is paid by E Corporation.
1. If the property is a capital asset, how much is the total tax that
should be paid to the BIR?
a. PI 37,500 » c. P162,500
b. PI 50,000 d. PI 87,500
2. If the property is an ordinary asset, how much is the total tax that
should be paid to the BIR with the application of tax minimization
principle?
a. P492,500 c. P217,500
b. P367.500 d. P192,500
Problem 1 — 4-4- Creditable WithtioldLing Tam and Income Tam Due

Camella Homes, a realty corporation, sold the following real property
during a taxable year:
Sales price / unit
4 houses at a cost of P200,000 each P 500,000
2 houses at a cost of PI,200,000 each 3,000,000
The operating expenses incurred during the year is P2,800,000. How

much is the creditable withholding tax and income tax still due and
payable of Camella Homes?
Creditable withholding tax Income tax still due and payable
a. P240,000 P460,000
b. P330,000 P370,000
c. P400,000 P300,000
d. P330,000 P270,000
Problem 7 - 4 5 Creditable Withholding Tax and Income Tax T>ue

The San Fernando City Government sold 10 hectares of land to Goldrich
Realty Corporation (a member of HLURB) at a price of PI0,000,000.
1. How much is the creditable withholding tax to be withheld by

Goldrich?
a. P - 0 - c. P500,000
b. P600,000 d. P300,000
2. How much is the income tax still due and payable by San Fernando
Government?
440 INCOME TAXATION
a. P - 0 - c. P2,900,000
b. P600,000 d. P3,500,000
Problem 7 - 4 6 Corporate Own Bonds

N Corporation’s transactions related to its own 10-year bonds with par of
PI ,000,000 per certificate are as follows:
Years: Particular^: Amonm
1: Issuance par - 2 bonds certificates P2,000,OOq
2: Issuance at a premium for 118 1,180,000
6: After 6 years, retirement of 1 bond in (1) for 91 ( ( 910,000}
After 6 years, retirement of 1 bond in (1) for 110 (1,100,000)
After 5 years, bond issued in year 2 was retired for 105 (1,050,000}
The net gain or loss on bond retirements would be

a. P20,000. c. P40,000.
b. P30.000. d. P50,000.
Problem 7 - 4 7 Corporate Reorganization

E Co. was merged into V Co. with the following data:
E Co. V Co.
Total assets PI5,000,000 PI 8,000,000
Total liabilities 6,000,000 2,000,000
Total shareholders’ equity 9,000,000 16,000,000
Number of outstanding shares 300,000 500,000

Par value per share P10 P25
Fair market value per share P12 P30
The net assets of E Co. with fair value of P8 ,000,000 are transferred to V
Co. for a corresponding 250,000 V Co.’s shares.
1. The nondeductible loss of E Co amounts to

a. P2,500,000 c. P 500,000
b. PI,500,000 d. P - 0 -
2. The cost or basis of E Co.’s share to V Co. would be

a. PI 5,000,000. c. P8 ,000,000.
b. P 9,000,000. d. P3,000,000.
3. The taxable gain of V Co. would be

a. PI,750,000. c. P630,000
b. PI,120,000. d. P-0-
4. Assume that Mr. Cruz, a shareholder of E Co. was asked to

surrender his 20,000 shares which he purchased for P700,000, how
much is his gain (loss) not recognized?
a. P400,000. c. (P200,000).
b. P300,000. d. P - 0
5. Assume that Mr. Cruz subsequently sold 20% of his E Co.’s

investment, how much is the gain (loss) on sale?
a. (P20,000). c. P 20,000.
b. P - 0 d. P 40,000.
problem 7 - 4 8 Creditable Withholding Tax

Villar Corporation, a real estate developer and a member of HLURB, sells
socialized housing. In 200B, records show the following sales of houses:
a. 20 houses: selling price of PI 50,000 each, gross profit of 25%.
b. 30 houses: selling price of PI,000,000 each, gross profit of 30%.
c. 40 houses: selling price of P2,500,000 each, gross profit of 35%.
Required: Compute for the creditable withholding tax and income tax
still due and payable on the sales using OSD.
Problem 7 - 49 Ordinary Income, Capital Gains and Final Tax

The following data pertains to the transactions of Miss Larcy De Guzman
for year 200 B:
Total net sales from his trading business P 500,000
Sale of vacant lot used as open warehouse for her trading business.
This was acquired two years ago at cost of PI50,000. 200,000
Sale of residential house and lot - acquired 12 years ago, P800,000
of the proceeds was used to acquire her new residential house
and lot. All pertinent BIR requirements were complied with. 1,000,000
Sale of her personal computer. He bought this for her personal use,
2 years ago at cost of P20,000. 10,000
Sale of personal car, acquired 3 years ago at P50.000 . . 100,000
Questions:
1. What is the ordinary income/gain of Miss De Guzman for 200B?
2. How much is the supposedly final tax taken from the proceeds of
Miss De Guzman transactions for the year 200B?
Problem 7 - 5 0 FIFO vs Moving Average

Galam’s common stock investments in Philex Mines are as follows:
December 15, 200A Purchased 100 shares at P100 per share.

Fcbruaiy 24, 20013 Purchased 300 shares at PI20 per share.
August 20, 200B Received a 15% stock dividend.
December 15, 200B Sold 350 shares at P20.0 per share.
Required: Compute the tax due and payable for the 350 shares sold
assuming that the shares are not traded in stock exchange using (a)
FIFO Method and (b) Moving Average.
4~C INCOME TAXATION
Pn>b*e«* 7 ~ 51 Installment Sale of Share* of Stock

'CCA. \ .rgbv.a R oyvs sold outside' stork exchange 1,000 .shares of
swxx w*.:h a vw; os' PSO per aha re for PI 50 per share under the following
:*r.ms :\VkV 0 downpayment and the balance' shall be payable in three
ecy.a annual msralhnems.
Required: Compute the annual tax due of Miss Reyes for 200A, 200B,
2COC and COOD.
Problem 7 - 52 Various Capital Asset Transactions

Mrs Coanta's capital asset transactions for 200B were as follows:
a Gave P5.000 option money to buy a capital asset of Mr. Yew, of

w'racn she did. not exercise.
c Invested PI,000.000 in San Pedro Corporation’s bonds with an

interest of 30% which was retired after 9 months for 120.
c; Received P50.000 from Mr. Chu for 20,000 common shares with a
market value of P3.00 per share which she delivered immediately.
d Invested P20,000 for 100 common shares in Philippine Airlines
which was ascertained insolvent.
Required: Compute the net capital gain or net loss incurred by Mrs.
Dolinta.
Problem 7 - 5 3 Capital Gains Tax vs. Normal Tax

Or. December 31, 200B, Trinidad Wood Corporation sold its land with
erected warehouse to the Benguet Provincial Government at sales price of
P3,000,000. The land was previously acquired by Trinidad for
P2,000,000 and the warehouse has a remaining book value of P200,000
at the date of sale. Trinidad’s befoks of accounts shows the following data
related to its 200B operations:
Sales P6 ,000,000
Cost, of sales 2,000,000
Allowable deductible expenses 1,000,000
Question: Trinidad intends to pay the sale of the land at its final capital
gains tax of 6 % instead of opting to pay normal tax with a creditable
withholding tax of 6 %. Is Trinidad correct? Show your supporting
computation.
Problem 7 - 5 4 Tax Exemption

Loakan Corporation sold the residential building used as housing
privilege of its employees for PI0,000,000. The building was previously
constructed at PH, 000,000 with recorded accumulated depreciation of
P7,300,000. The corporation wrote the B 1R to avail of the tax exemption
privilege because it plans to use the entire sales proceeds to construct u
new residential building amounting to PI0,000,000.
Chap^r 7 Dealings In Property 443
Question; Can I>oaknn Corporation avail of fox exemption? Justify your

nmiwrr.
Problem 7 - 5 5 IfOLCO va. JfCLCO

Thf following ordinary and capital gains (losses) ore token from T:
Yân; Operating gain (loss)
1 (P 100,000) P 20,000
2 P50,000 10,000
3 P30,000 (P40,000)
4 P80,000 P50,000
Required:
1. What is the amount of taxable income for years 3 and 4 before
personal exemption if T is an individual taxpayer?
2. What is the amount of taxable income for years 3 and 4 if T is a
corporate taxpayer?

Mr. Avelino Cayat reported the following incomes and losses for the
calendar year 200B:
Income:
Professional fees PI 80,000
Interest on notes receivable (profession) 12,000
Winnings in a raffle 10,000
Dividend income 6,000
Capital gain (loss) on sale of capital assets:
Residential land 50,000
Personal car 10,000
Jewelry 30,000
Refrigerator (4,000)
Loss on sale of personal furniture tohis brother (6,000)
The following tabulations are the particulars on the capital assets sold in
200B:
Caoital Assets: Date Sold Date Purchased Selling Price Cost
Residential land 2-15-200B 12-20-200A P130,000 P80,000
Personal car 1-15-200B 11-25-200B 105,000 95,000
Jewelry 7-10-200B 5-12-199Y 80,000 50,000
Refrigerator 9-20-200B 7-15-199X 4,000 8,000
Furniture 9-30-200B 10-30-200B 10,000 16,000
Required: Compute the amount of net capital gains of Mr. Cayat that
shall be reported in his 200B income tax return.
Problem 7 - 5 7 Capital Asset Transactions

The following data are available from the records of S:
Year 4 Year 5 Year 6 Year 7 Year 8
Business income P300,000 P400,000 P500,000 P600,000 P700,000
Business expenses 340,000 380,000 450,000 570,000 650,000
Capital gain (loss)
444 INCOME I AX A MON
N!u-.< MU MM* { M U*00| lO.fMM* Ui.lHfU

UMuiinm ( IIMHMM HM>0(> (mo.noO) 10,000
K*quir*d: Compute the tunable im nine 11 M \n n/mi

5 Individual (ta\tA»Mr income Oritnn peisoiml r*f mpfjnn)
' vAn point ion.
Problem 7 - 5B Ordinary A**«d v». C a p i t a l Aaaat.

In '00 A, Philippines soli! o Land C m dsn (Invnitoiy) rosfinj,
0 5.000.000 tor I'I'.OOO.OOO I>v installment. The Icrms of payment wn
IVwn payment 40%

Additional during the year of pair S00,000
Cnpnid balance lC(|ia*lly in 5 ymr*
Required; Compute the following:

l- Reportable gross income in 200 A.
Reportable gross income in 20011.
3, Assuming that the Land Cruiser is classified as a capita] asset, how
much is the reportable gross income in 200A?
Problem 7 - 5 9 Various Transactions

Mrs. Dolintas capital asset transactions for 200B were as follows:
• Gave P10.000 option money to buy a capital asset of Mr. Yew which
she exercised.
• Invested P500,000 in San Pedro Corporation’s bonds with an interest

of 30% which was retired after 9 months for 120.
• Received P50.000 from Mr. Chu for 20,000 common shares with a
market value of P3.00 per share which she delivered immediately.
The cost per share was P2.25.
• Invested P50,000 for 100 common shares in Philippine Airlines

which was ascertained insolvent.
Required: Compute the amount of net capital gain.
Problem 7 - 6 0 Sale of Family Home

Mr. S sold his family home costing PI,200,000 for P3,000,000. He
applied for tax exemption. He spent P2,000,000 for the construction of
his new residential home.
1. If the tax exemption was granted how much is the capital gains tax?
2. Based on No. 1, how much is the basis of the new residential home?
3. If the tax exemption was not granted, how much is the capital gains
tax?
4. Based on No. 3, how much is the basis of the new residential home?
problem 7 - 6 1 Wash Sales

Mr. I had the following transactions in ABC Corporation’s ordinary
shares classified as capital asset:
Date Particulars Amount
Jan. 10, 200x Purchased 9,000 shares at P50 per share P450,000
Jan. 20, 200x Purchased 5,000 share at P50 per share 250.000
Feb. 10, 200x Purchased 4,000 shares at P45 per share 180.000
Feb. 14, 200x Sold 8,000 shares at P40 per share (FIFO) 320,000
1. Deductible loss on Feb. 14, 200x sales.
2. Nondeductible loss on Feb. 14, 200 x sales.
3. New cost of January 20 purchases
4. New cost of Feb. 10 purchases.
5. If on Feb. 25, Mr. 1 sold 4,000 shares at P60 per share, how much is
the capital gain (loss)?
Problem 7 - 62 Corporate Own Shares

M Corporation has 100,000 authorized ordinaiy shares at P10 par.
Transactions related to the shares were as follows:
Shares capital transactions during the period:
(1) Subscribed and paid by the incorporators,
50.000 shares at P10 par P500,000
(2) Total sales during the initial public offering
25.000 shares at P25 625,000
(3) Reacquired 5,000 shares at P20 cost per share 100,000
(4) Sold treasury 3,000 shares at P30 per share 90,000

(5) Payment received M Corporation’s 2,000 own
shares of stock with a FMV of P30 per share for
sales of merchandise inventory costing P50,000 60,000
(6 ) Additional assessment collected from the
outstanding shareholders 200,000
Required: Compute the net taxable gain.
Problem 7 - 63 Corporate Reorganization

a shareholder, owns 100,000 A Co. shares which cost him P9 per
share. As a result of a merger of A Co. to B Co., he received from B Co.
the following shares:
Number of Par value/ Fair market

446 INCOME TAXATION
shares share value/ share

Ordinary shares 25,000 P20 P30
Preference shares 5,000 30 50
Required:
1. Determine the gain or loss not to be recognized on the exchange.
2. Determine the basis of the ordinary and preference shares,

respectively.
3. Assume that the ordinary shares were sold for P25 per share and the
preference share for P60 per share, determine the net gain or loss.
4. If the shares were sold in the stock exchange, compute the

percentage tax.
5. If the shares were sold not in the stock exchange, determine the
capital gains tax.
6. Choosing the lower tax between 4 and 5, determine the tax

advantage.
Problem 7 - 6 3 Corporate Reorganization

As a result of a merger, Mr. X transferred his A Co. shares with a basis of
PI80,000 in exchange for the following:
B Co. ordinary shares with FMV of P200,000

Land with FMV of 100,000
Cash 50,000
Required:
1. Determine the taxable gain on the exchange.
2. Determine the basis of the B Co. shares received on the exchange.
3. What is the basis of the land received?
4. If the land were sold for P300,000, how much is the capital gains
tax?
5. If the investment in B Co. shares were sold for P250,000, compute

the gain or loss on sale.
Chapter 8
DEDUCTIONS
FROM GROSS INCOME
NATURE OF DEDUCTIONS
In general, deductions or allowable deductions a tv business

expenses and losses incurred which the law allows to reduce
gross business income to arrive at net income subject to tax. fS*v.
t>S, KYi’./NtV .Vo. '
Deductions are strictly construed against the taxpayer as

i\isf„-No<Jti. sv/c-v v'"a. They are not presumed but allowable only by
reason of specific provisions of law and not under any general
equitable or Constitutional concept. (A.vnWuV. ou*,-a<iWmnrr t \ »r y u m x 'K
i.'U'. as. l S., .VI P(.\i}S 0>
The taxpayer seeking a deduction must be able to prove that he is

entitled to the deduction which the law allows. (MmVi*. r s. aas c s.
,’isn. Adequate revords sliould be kept to support deductions.
,/Vnruv fhiii MsnU A;\ Course n CXCCpt when tllC UlW dispenses the
records, documents or receipts to support the deductions.
The purpose of deductions from gross income is to provide the

taxpayer a just and reasonable taxable amount as the basis of
income tax. It is because many taxpayers spend adequate
expenditures in order to obtain a legitimate income.
Mandatory Withholding of Taxes. MIR issued RR No, 12-20 Id

amending Sec. 2.85,5 of RR. No, 2-l>8 as amended, relative to the
requirements for deductibility of certain income payments.
The salient features of Revenue Regulations No, 12-20 Id are:
1. No deduction shall be allowed on income payments if it is

shown that the applicable withholding taxes required by the'
rules had not been withheld.
446 INCOME TAXATION
2 No deduction will <>1 io hr allowed if during t/*x a.'i^cHnment

deficiency withholding taxrn for alleged failure to withhold thr
taxpayer paid the withholding taxes*.
Not*: In effect Revenue RegulM iorrn No. 12 2013 rnoke^ it rn/indofory for
taxpayer* to Withhold on expense,'; required to be withheld for purponew of exp^rw
deduction for income tax purposes in the Philippines.
Revenue vs. Capital Expenditures

There are two major classifications of business expenditures: (a)
Revenue Expenditures, and Capital Expenditures.
Revenue expenditures are ordinaiy recurring expenditures that

provide benefits to the current accounting period. They are
usually called “period costs” because they are related to a
particular period of time of business operation.
They are charged to expense as incurred, and are deductible from

gross income if they satisfy the conditions as prescribed by the
Tax Code.
Examples of revenue expenditures are:

1. Salary expense;
2. Supplies expense;
3. Repairs and maintenance such as painting, lubricating,
cleaning expenditures; and
4. Other recurring expenditures that benefit only current
operation and do not improve or extend the life of the asset
used in business.
Capital expenditures are nonrecurring expenditures related to

the acquisition of depreciable assets to be used in the business,
but not for sale, having a useful life of several years. They provide
current and future benefits in business operations.
The cost incurred (or paid) for acquiring such assets is capitalized
and not immediately expensed. They are gradually expended from
period to period in the form of depreciation or amortization within
their estimated useful life.
Expenditures After Acquisition

Costs after the acquisition of plant assets shall be capitalized
when any of the following conditions are met:
S Deductions from Gross income 449
v-t-rctis** in useful life , There is an increase in the economic life

cf the asset if its new useful life exceeds its original life after
:::e expenditures. For instance, if the asset’s original useful
life is 5 years; it becomes 9 years after the expenditures.
2 Increase in capacity. There is an increase in the units
produced from the utilization of the asset after the
expenditures. For instance, if the normal production per
period is 10,000 units, it becomes 15,000 after the
expenditures.
5. Increase in efficiency. The asset provides better quality of
sendees or products after the expenditures.
i; neither of the conditions is met, the expenditures are intended

only to sustain the ordinary level and quality of services to be
provided by the plant assets. Thus, expenditures should be
designated as revenue expenditures and recorded as repairs
expense during the year of incurrence.
Summary Application
Deductibility of Expenditures
Deductibility from
As to Usage As to Period Benefited business income
Year 1 Year 2 Year 3 i
............... ..... ...... ..
Personal use .. - 0 -____ __ - 0 -
... ........ " -.... ...-...— •-v.... —.......
Business use: Capital expenditures allocated
as depreciation or amortization XXX ....XXX ...... xxx 77
------ -----------------
Revenue expenditures
........ ..... .............. -..............— -........ -..-....
Year 1 .............................. .......... ___ XXX ~
Year 2 ........................ .... ....... .... 1 ... 7
- - -.................... Year 3 __________„____ _____ ......... ....... xxx
Situs of Expenses
The place of business becomes the basis if business expenses are

deductible for Philippine income tax purposes.
Afi a rule, business expenses ore deductible only if they are

incurred in relation to the business income taxable in the
Philippine*^ (except when the taxpayer is a resident Filipino or a
domestic corporation). If a business expense could not be traced
whether incurred within or not, such expense shall be allocated
h;metj on the gross income within and without.
450 INCOME TAXATION
Illustration
Mr. Dacu Chan, a nonresident alien engaged in business in the

Philippines, presented the following incomes and expenses during
the taxable year:
Philippines Foreign
Gross income PI0,000,000 P30,000,000
Operating expenses t 1,000,000 5,000,000
In addition, Mr. Smith presented P600,000 mixed operating

expenses both used for Philippines and foreign operations.
The total amount of operating expenses for Philippine income tax

purposes would be
Operating expenses - Philippines PI,000,000

Add: Allocated share on mixed expenses
Philippines (P600,000 x 1/4) 150.000
Total amount of operating expenses - Philippines PI. 150.000
Note: The mixed expenses is allocated based on the gross income.
Summary Application
Situs of Deductible Expenses
Income Taxpayers
Situs of Expenses: RC/ DC NRC/Aliens/FC
Incurred:
Within Deductible | Deductible
Without Deductible Not Deductible
Partly within and without Deductible Partly Deductible
RC - Resident Citizens NRC - Nonresident Citizens

DC - Domestic Corporations FC - Foreign Corporations
ITEMS NOT DEDUCTIBLE FROM GROSS INCOME

As a general rule in computing net income, no deductions shall in
any case be allowed with respect to:
1. Personal, living or family expenses (Sec. 36(A), nirq.
2. Any amount paid out for new buildings or for permanent

improvements, or betterments made to increase the value of
any property or estate.
3. Any amount expended in restoring property for which an

allowance is or has been made.
^ /r.cx vacx* h ,^ fXrcX&r payrneasi cs*. z*>.mmzQ-
Paym ent *07 yfXfjt rjr^tfX:t:cn & ‘C j x & L ^ c ; O ifcnr,* as. OSteZT
. '■■*"'■ ; v>/. :;7/
7. Gonaucr.>. made tc employees. and others, which do net have
,r. to err the element of compensation or are in excess of
/earoname corn peunar ion for services, /.o». 7^ >v* <23
h Tr.e amount spent for political campaign, campaign funds and
Cora nor* to political parties or candidates are NOT
Oed >or; ole either as business or contrfoutfon expenses from
7/OOS income. v*. <3A 077.053* 60S. ApcC SG;
Tax Laws versus GAAP

For mxauon purposes, whenever there is a cordHct between Tax
bws and GAAP, the former prevails over the latter.
Comparative Presentation
GAAP
yyy. Less: Cm; of sales

>V.. Co<t? Vf P 3GCC Gross Pro£t
?; icovme Lew; Operating
U«*. AU<rwable itemized deductions
vefvr* personal ex«np*^>r.s p Net incom e before tax jdo c
Personal exemptions
Illustration
Mr. Maginoo reports the following sales and expenses during a
taxable year'.
P500,000 Estimated uncollectibles Po,000
200,000 Miscellaneous expense
Cost of fsaies
50.000 (without receipts) 2,000
balary expense
24.000 Depreciation expense 6,000
Pent expense
v
452 INCOME TAXATION
The comparative computation would be

Tax Code GAAP
Sales P500,000 Sales F* 500,000
Cost of sales ( 200.0001 Cost of sales
imoeo!
Business income P300.000 Gross profit mmo
Itemized allowable Operating expenses:
deductions:
Salary expense (P 50,000) Salary expense (P 50,000)
Rent expense ( 24,000) Rent expense ( 24,000)
Depreciation expense ( 6,000) Depreciation expense ( 6,000)
Estimated uncollectibles ( 5,000)
Miscellaneous expense f 2.0001
Total itemized deductions (P 80.000) Total operating expense fP 87.0001
cn to
to
-a
o o
o o
Taxable income Net income P213,000
OO
oo
Less: Personal exemption
Net taxable income P170.000 Net income before tax P213.000
Notes:
1. Observe that there are expenses that are allowed as deduction under GAAP
but disallowed under Tax Code. The gross profit under GAAP is the business
income under the Tax Code and operating expenses under GAAP are the
itemized deductions under the Tax Code.
2. Determination of the Net Taxable Income:
Employed Taxpayer. For individual taxpayer, the deductions of items

specified in Section 34 of NIRC are not allowed with respect to compensation
income arising from personal services rendered under an employer-employee
relationship.
Items allowed to reduce the compensation income of individual taxpayer are
• Allowance for personal exemptions (Sec. 35, NIRC), and

• Premium payments of health and/or hospitalization insurance (PPHHI)
■ not exceeding P2,400 in a year. [Sec. 34 (M), NIRC]
The PPHHI is deductible only if the total family income does not exceed
P250,000 in a year.
Employed and Self-employed. The deductions allowed by law under Section

34 of NIRC are allowed to reduce only the gross business income of an
individual taxpayer.
The format to compute the net taxable income of employed and at the same
time self-employed taxpayer is
Compensation income P XXX

Less: Personal Exemptions XXX
Compensation income after personal exemption P XXX
Add: Gross income from business P XXX
Less: Allowable itemized deductions XXX
Net business income XXX
Net taxable income Pxxx

DeductiOfTO from WK&-nh Afi
Câpte^ t
Cerporwticm. Xbe oers^x^t *..xm^ in- ^-v,. . , ,- ^ ^

alic^’eQ is, reduce gr**> xx^*nt o' vx os*po'*'xr,. Tbe** 4>^
showed of perss*r.a exeripticr- %-jic PPKK..' ?'x it *" ’ "
Tae fc~«- *® OT=n>w* -* **• »***« 4 WVXêgr - ~r-,~ *-

"Tax C»de w^d be '' "
• xwr
G'oss income
AlknaraMe ztexaized de^tictios* .*33?
r"r jr
Net texaiê income
Corporate taxpayers are not aJkwec! to deduc* v~h _^cck' e^x.'.povrx
Classifications of Deductions from Gross Income

Deductions from gross income are classified as follows:
2. Optional standard deduction 'OSDj;
2. Regular allowable itemized deduction; and
3, Special allowable itemized deductiom
bnless the taxpayer signifies in Ms return his mt i-UrJ*

r~ ~ £ * -r-' _
the OSD, he snail be considered as having availed mm.se u o: t x
he Tax Code provides that once a taxpayer el a cecum:

or izedj in his income tax return, such ale
iâroccZle /or the tuxcd/Ie year vi v^zcn the return is made.
-arteriy OSD or DedtK^T^ BiR re«: -Ui.4 C-----tCwîLl
s T%s with its isr^ncc « SR 0.M0, * c ?.e*'tc.
-ûm Oirtrhlar (K3*fQj lô- - b- -O-
new regulation rec times taxpayers to

Quarter incorr^ tax return their ejection, or imeutaon to elect
-ituer the OSD or itcouzeci deductions -
luce the election is made, the same type of ruction m _st i>e
xmlatently applied in ell the succeeding quarter }v returns and m

tee final income tax return for the t&x&ole year
Optional Standard Deduction (OSD)

Dmwable itemized deductions, the may oe
✓ *
'C?C Sec 3 r.f-
d from the gross income as follows: see. ?*
4*4 btC'jMt r/./A fiOH
it * n' tt*/,ph yt f j4.
j An Itiriivifiuiii ffthrr thftn /> nonresident r?i*en, the Gvvf/ i% 4f//,t

*ii tu% . + t-jti' * ot g/ncs itf oifA*.,
it lu, individual ofA'/i to o&t, f )' { A) f he is f>(, \r,<%?/*,( h Unwed v,

deduct f /^f ,4 fff 'JAt f/f ser'/iceft, /<>,W f j , MkO,f>'. \ y * „
t't'u*) tio it, '/t/(,nf
'!ht Tax {j ,7/ (f/ A, Of,04) is tpeeific f>& to the basis of 08f>
v/bioh states that for individuals, the basis of the 40% 05if,
nh/4J bn the ^)/ronn sales* or 'V/oss re/eijr/te* and not the “gross
meome,"
An md/vidual 7/bo opts to avail of this deduction need not

submit the Account Information form (AfFj/Mnanoiai
Statement e,
2. A corporation, the OSD in 40% of its gross income.
OSD Illustration - Individual vs. Corporation
Section f> of Revenue Regulations Ho, 16-2008 provider the

followingexamples in determining the basin of the 40% OSD for
individuals and corporations.
Assume the following data of a taxpayer;
Gross sales PI,000,000

Cost of goods sold 800,000
How much is the OSD if the taxpayer is a/an (l) individual, or (2)
a corporation?
The OSD of the taxpayer would be
If individual If Corporation
Gross sales PI,000,000 PI,000,000
Ivess: Cost of goods sold 800.000
Basis of OSD PI ,000,000 P 200,000
Multiplied by OSD rate 40% 40%
OSD amount P. 40M £_J&Q22
11 the taxpayer opts to use OSD in lieu of the itemized deduction

allowed under Section 34 of the Code as amended, his/its net
taxable income shall be as follows:
Chapter 8 Deductions from Gross Income 455
If Individual If Corporation
Gross saJes PI,000,000 PI,000,000
Less: Cost of goods sold 800.000
Sales/Gross income PI,000,000 P 200,000
Less: OSD amount 400.000 80.000
Net income P 600.000
Query: Are other items of gross income not subjected to final

taxes excluded from gross income for corporate OSD purposes?
Answer: No. Other items of income not subjected to final taxes

are included in the gross income in determining corporate OSD.
Consider the following provisions of Revenue Regulations No. 16 -
2008:
“Passive incomes which have been subjected to final tax at

source shall NOT form part of the gross income for purposes of
computing the forty percent (40%) optional standard deduction.”
(Sec. 4, Rev. Regs. No. 16-2008)
Jt could be inferred that only those that have been subjected to

final taxes are precluded to be part of gross income for corporate
OSD purposes. Accordingly, other items of income that were not
subjected to final taxes are NOT precluded as part of the gross
income in computing the 40% corporate OSD.
With the foregoing, the gross income basis of 40% corporate OSD
should include other taxable income not subjected to final tax.
Notes:
1 Section 2 of Revenue Regulations No. 16-2008 provides that the following
may be allowed to claim OSD in lieu of itemized deductions under Sections 34
(A) to (J) and (M), Section 37, other special law, if applicable):
Individuals:
a. Resident citizen
b. Nonresident citizen
c. Resident alien
d. Taxable estates and trusts
Corporations:
a. Domestic corporations
b. Resident foreign corporations
2. An individual who is entitled to and claimed for the OSD shall not be required
to submit with his tax return the supporting financial statements.
3. If an individual employs the accrual basis of accounting for his income and
deductions, the OSD shall be based on the gross sales during the taxable
year. If he, she employs cash basis, the OSD shall be based on his gross
receipts during the year.
“L It is the authors’ opinion that sales discounts, sales returns and sales
456 INCOME TAXATION
allowances are considered to derive the basis of sales in computing OSD, This
rule is supported by the tax principle that the lower amount of deduction will
be allowed for income tax purposes.
5. Components of Gross Income for purposes of Corporate OSD
“Gross income derived from business shall be equivalent to gross sales less
sales returns, discounts and allowances and cost of goods sold. Gross sales
shall include only sales contributory to income taxable under Sec. 27 (A) of
the Tax Code.”
“Cost of goods sold shall include all business expenses directly incurred to
produce the merchandise to bring them to their present location and use.”
(RR No. 16-2008)
6. If a taxpayer elects to offset his losses against his profit from capital asset
transactions, he may no longer claim the OSD under Sec. 34 (L) of NIRC
because this section provides that the OSD shall be in lieu of the itemized
allowed deductions under Sec. 34 which evidently include losses from sales or
exchanges of capital assets. (BIR Ruling, May 20, 1955)
Regular Allowable Itemized Deductions

Itemized deductions are allowed deductible ordinary and
necessary business expenses paid or incurred during the taxable
year. As a rule, these deductions require supporting documents
to justify the reduction from gross income. (Sec. 34 (A to m), nirc)
Notes:
1. Compensation income is not allowed to be reduced by OSD or itemized
deductions.
2. Each spouse may either use OSD or itemized deductions.
3. If any income of the husband and wife could not be definitely identified as
income exclusively earned or realized by either of the spouses, the same shall
be divided equally between the spouses for the purpose of determining their
respective taxable income.
4. In the case of an individual entitled to claim the OSD, “allowable deductions”
shall mean the aforesaid OSD plus deduction of premium payments on health
and/or hospitalization insurance, if applicable, as provided under Section
34(M) of the Tax Code.
Income Subject to Regular Allowable Itemized Deductions

The following items of income are granted with itemized
deductions: 12
1. Business/professional inpome derived within and outside the

Philippines by a resident citizen;
2. Business/professional income derived within the Philippines

by a nonresident citizen; a resident alien; and a nonresident
alien:
# tiMtiihtlMi* U*4ih 407
* uh-.tn> t"/t<Uih uit hit*1 tti'a \y tit ittl / o )wtjoertddp;

i ijt< • • i*11 ..a in) miik H m ^ m I v /m M m # and oun»jdr M m ' J'hdhd'id^*
j,v > M f I f»< M < »j) It I iit pOf H l|UO ,
:4 MhiiiMf m* ol lan/aafar/ 'dM'ebontfl iiwtHutfap find
M I < M j ' I I * I I I i tl «fc>| »M < vdildn IIm i'jdllpph'/e<* tumtd Ir/ h fortify)
i t-* j*ni nf inn
( om|M>Qithn» of MotJHlor Allowable Itemized Deductions

detHno H A 111 J al ||m filfO Ua following as the
loo of IlnaHo d dodiirljont*;
I Heneml | tuelitnee tnt

lideietd,
1 Ti^W,
I I'USSP&i
d lUHi • IH d e*
0 I vpi n( 'In! * *»*»*
7 I >('|»le| inii <i( oil mim I wit* wrlln and iiilnea;
ft Ohm liable Mini ol hoi (Nml i ibnllnn;
<J KosonM h mm (I development}
id ivtmion lined; and 1
1 I I’lniimm payment a on henllli nud/oi Inmpllnljzation

111,1111 nm r, (lhn Individual laxpnyei'M only)
GENERAL BUSINESS EXPENSES
riictic expenses are di reedy nilribi liable lo the development,

management, operation and/or eondiiet of I lit* (rude?, biiHinews or
excuse ul ii profession aw.HAhi, NiHt% These include a reasonable
allowance lor the following;
(a) Salaries wngevN, management expenses, commissions, and

labor:
(b) Supplies, and repairs and maintenance, and oilier Incidental
expenses*.
458 INCOME TAXATION
(c) Operating expenses of transportation equipment used in the

trade, profession or business;
(d) Rental for the use of business property;
(e) Advertising and other selling expenses;
(f) Travelling expenses while away from home solely in the
pursuit of trade, profession or business; and
(g) Insurance premiums against fire, storm, theft, accident, or
other similar losses in the trade or business.
Requisites for Deductibility of General Expenses

In order that a general expense will be allowed as deduction from
gross income, all of the following requirements should be met:
It must be:
1. Ordinary and necessary for the conduct of business or
exercise of profession;
2. Substantiated with official receipts or any other adequate
records (Sec.34Alb, NIRC);
3. Reasonable in amount (ibid., (a)(i), nirc);
4. Withheld with tax and paid to the BIR, if required such as

salary expense or income payments (Sec. 2, Rev. Regs. No. 12 -2013 );
5. Not contraiy to law, morals, public policy, or public order (ibid.,
(a)(iv), NIRC); and
6 . Incurred or paid and deducted within the taxable year.

(Sec.34Alb, NIRC)
A taxpayer has all the right to deduct all authorized expenses. It

thus follows that if he does not, within any year, deduct any of
his expenses, losses, interest, taxes, or other charges, he cannot
deduct them from the income of any succeeding year. (Sec. 76, Rev.
Regs. No. 2)
NOLCO and any item of incentive deduction allowable under any

special law are not part of the regular itemized deductions (Rev.
Reg. No. 14-2001, Sec. 3.2).
NOLCO is not part of regular itemized deduction because such

loss was not incurred during the taxable year. This topic is
discussed in the Chapter 9 of this book.
Meaning of Ordinary and Necessary

An expense is ordinary if it is reasonable and common to the
particular business of the taxpayer as distinguished from a.
capital expenditure, (Merten**, vm. 4 a .pp. 4 1 43)
As long as the expense is attributed to the development,

management, operation e n d / o r conduct of the trade, business or
exercise o f profession, such expense is ordinary.
An expense is necessary when it is useful or helpful to the

business; it need not be essential or indispensable to the
business as distinguished from ordinary expenditure (Mtchie's Federal
rax Handbook. P.309). For instance, a lawsuit affecting the safety of a
business may happen once in a lifetime. The counsel fees may be
so heavy that repetition is unlikely.
Meaning of Trade or Business

A business is an activity intended to make profit. Carrying on a
business connotes regularity in a transaction that might result in
profit. It is not necessary, however, that the activities in question
form the taxpayer’s principal trade or business. (Michie, p. 309 ; Flint vs.
Stone Tracy Co., 220 U.S. 107)
Salaries and Wages

Salaries, inclusive of wages and other forms of compensation for
personal services actually rendered, including the grossed-up
monetary value of fringe benefits furnished or granted by the
employer to the employee are ordinary expense.
As a general rule, salary expenses are allowed as deductions from

gross business income only if the corresponding withholding tax
has been deducted and remitted to the BIR. (Sec.34Aiai, nirc)
To be deductible, payments of salary must be reasonable in

amount. The excess over reasonable amount may be disallowed
as deduction from gross income or capitalized or treated as
distribution of capital, as the case may be.
Illustration
In year 200x, Y Co. incurred and paid the salary expenses of its
workers amounting to P300,000. The company, however, did not
withhold and remit income taxes on the said salary payments.
460 INCOMI TAXATION
In thi*4 emir, V ('o cniinol deduct ft/ilmy expense honi jt«* gro**
income loi yeni -*()()x,
Note*] Tin* lotlowmg compnmHliunH me mil Hiibjerl In withholding in( nine taxm
I. ('<>m primal iou ineomc including holiday pay, overt line p ay, night ^hlfl
dillcirntihl pay and ha/,md pay of a minimum wage earner employee (both of
pnvalr and public nedoi) In exempt Irom Income lax mid conxerjia-ntly
exempt Irom income lox withholding. (R.A, 'P >04; Rev. I)'eg». No, I0 200H)
*l)e miminiH’ brnelilM rrrrlvrd I»y employee (either managerial m rank arid
tile) mIioII not he Mubjrel lo Income bix mid coiiHer|nenlly exempt from
withholding lox on waged, (H .A. 0!>04; Rev. Regs. No. 10 2000)
d. Since the nhove compeiiHnlioiui me lox exempt o h exprermed by low, they ore
deductible exprnHes even il theje Ih no withholding tox mode.
Compensation for Injuries and Pensions

Compensation for injuries and pensions are deductible expenses.
ICvrn the amount of the; salary of an employee paid for a limited
period of time after his death to his widow or heirs, in recognition
for the services, rendered may be deductible. (Sec. 73, Rev. Regs. No. 2)
The salary paid to an employee during the period of partial

incapacity was held reasonable and, hence, deductible. (S.w.
Anderson Co. vs. Glenn, 43 F. Supp. 334)
Illustration
On March 1, 200x, Dexter, an electrical engineer of MPC, was

electrocuted while performing his duty resulting to his death. His
family received the following compensation after his death:
Continuous salaries after death

to assist Dexter’s family P 250,000
Death benefit 1,000,000
Terminal pay 1,500,000
Donation for coffin and other wake expenses 50,000
How much is the deductible expense of the MPC?
The deductible expenses of MPC would be
Continuous salaries after death to assist Dexter’s family P 250,000

Death benefit 1,000,000
Terminal pay 1,500,000
Deductible expense P2.750.0QQ
Note: The donation for coffin and other wake expenses is not business or
compensation related and, hence, not deductible. (Sec. 72, Rev. Regs. No. 2)
Materials and Supplies
Actual consumption method. In general, the costs of materials

or supplies are deductible as expense when consumed or used in
lhe business operation during the taxable period. Unused
supplies and supplies not used for business purposes are not
allowable deductions. .'Sec 67. Pec Reg?. JVs> 2;
Total purchases method. If the taxpayer carries incidental

materials or supplies on hand for which no record of
consumption is kept, or of which physical inventories are not
takers <beginning and ending inventories), it will be permissible for
me taxpayer to include in his expenses and deduct from gross
income the total cost of such supplies and materials as were
purchased during the year for which the return is made, provided
:ue net income is clearly reflected by this method. fjbuLj
Production cost method. If the materials or supplies are used

directly or indirectly in producing products to be sold, the related
cost shall form part of the cost of the product. Such cost shall be
deductible as cost of goods sold when the products produced are
sold.
Illustration
In 200x, Mardonio Manufacturing Company’s materials and

supplies show the following data:
Office Factory
Beginning inventory P 2,000 P 50,000
-»et purchases during the year 20,000 300,000
Ending inventory 3,000 30,000
Hew much is the deductible material and supplies expense from

gross income and the inventoriable cost of materials and supplies
product cost?
deductible expense and inventoriable cost is computed as

Office Factory
•‘^ginning inventory P 2,000 P 50,000
dec; Set purchases during the year 20.000 300,000
;'vai available for use P 22,000 P350,000
Ending inventory 3.000 30.000
supplies expense P19.OQQ
' emonable cost - part of cost of product produced £32 Q>0 QQ
462 INCOME TAXATION
Traveling Expenses
These are expenses incurred within and outside the country wh;*
away from home in the pursuit of trade, business or profession
NfRC}
Deductible traveling expenses include transportation expenses

and meals and lodging as long as they are incurred solely for
carrying on the trade, business or profession, ,u. 5;
Illustration
Acong reported the following traveling expenses;
Business seminars (registration fees, P5,000) P 20///>

Meals and lodging on business seminars 10,000
Visiting friends 5,000
The deductible traveling expense would be
Business seminars (registrations fees, P5,000) P 20,000

Meals and lodging on business seminars 10,000
Traveling expense P 30.000
Rent Expenses
These are expenses incurred for the continued use or possession

of property to which the taxpayer has not taken or is not taking
title to or in which he has no equity other than that of a lessee,
User Or possessor, (Sec.34A 1aiU, NIRC.)
Rentals paid for property used in business, whether the property

is real or personal, are deductible as ordinary and necessary
business expenses. (Menchie, p. 321 )
When is Rent Deductible?
As a rule, the rent expense is deductible when incurred in

relation to trade, business or profession and the corresponding
5% creditable withholding tax has been made. (Rev. Rega. No. 17 -2013 )
On the accrual basis, rent is deductible as expense when liability

is incurred during the period of use. While on cash basis, rent is
deductible when incurred and paid.
If the advance payment is a prepaid rental, such payment is

taxable income to the lessor in the year when received even

though the lessor is on the accrual basis or the cash method of
reporting income and expense.
However, an advance payment is not deductible expense of the

lessee until the period is used, although the lessor may be
required to report the amount when received, [Hyde Pork Realty, jnc. vs.
Commissionen 211 F. (2d) 462; fler. Reg, No. I9-S6. See. 2.01; [Pig Whistte Co., 9 B.T.A. 668
<5e ifekeniy Budding Co. vs. Commissioner, 113 F. (2d} 61}
Application Summary
RENTAL EXPENSES
Deductible?
Payments given by the lessee: Accrual ! Cash
Prepaid expense Prorate Prorate
incurred and paid Yes ; Yes
Incurred but not paid 1 YSi ~~] No
Illustration
On December 1, 200A, M Company rents a store building for

PI0,000 a month. The lease contract stipulates that an advance
payment for 10 months must be made before the lessee can
occupy the store building. M paid the PI00,000 as advance
payment on November 1, 200A. The related creditable withholding
tax has been withheld and remitted to the BIR.
How much is the total deductible rental expense for the year
200A, under accrual and cash methods reporting? The deductible
rental expense for the year 200A would be
Accrual Cash
Deductible rental expense (PI00,000/10) P10.000 PI0.000
Assuming that in year 200B, M was not able to pay the rental
expense from October to December, how much is the deductible
rental expense for the year 200 B using the accrual and cash
methods of reporting?
The deductible rental expense for the year 200 B would be

Accrual Cash
Application of advance payment (PI00,000 x 9/10) P 90,000 P 90,000
Add: Rent used but not paid (PI0,000 x 3 months) 30,000 : Q-
Total deductible rental expense Pi 20.Q0Q P 90r0QQ
4*4
L%a«4 bofd Impro /ement
7/M-h ;? ar; ;mprwr.c«:t vn Vie

ftf'*{*rfiy,fhc c/a*a cf v-ch irr> prv/err^rrr. be daêciaterf tr*!er
tb'* life of ;rr*prwem*r,o♦ o: the tern: cf *r.e 1%5« cxira'*.
whiclvrv** period /* ^horvrr. The compute depvect^ticn
i«‘. iyWn'H+A a*. deduction {torn ?/<&% mccame-
A W;uti paid */> v^virt a 'e^v: h> deductible or. a pro-rats. bass
over the o-rm of *r.e ieaee.
Illustration
0 Corporation signed a 10 year lease contract to occupy a vacant

lot for PI0,000 per yean As a part of the lease agreement, 0
constructed a warehouse building costing P200r000. The bthlding
has ari eatimated life of 12 years- At the end of the lease contract
the landlord will own the building.
The itemized deduction per year from the business income of

Queen Corporation would be
Rent expense PIG,0GC

Depreciation (200,000/10) 20.000
Total itemized deductions P30.00Q
Notes:
1. Taxes paid by a tenant to or for a landlord for busmess uropernr =rt
additional rent and constitute a deductible iteza to the tenant and taxab>
income to the landlord, the amount of the tax being deductible by the latrer.
2. When property is leased for both residence and business purposes, the rental
value of the residence portion is personal and not deductible. The portion of
the rent allocable to business is deductible.
Representation Expenses
These are entertainment, amusement and recreation (EARi

expenses incurred or paid during the year that are directly
connected to the development, management and operation of the
trade, business or profession of the taxpayer.
They are subject to ceilings as prescribed by the rules and

regulations provided by the Secretary of Finance, as follows:
a) y2% of net sales for taxpayers engaged in sale of

goods/properties, or
b) 1% of net revenue for taxpayers engaged in sale of services.

Chapter & Deductions frym Grots income xes
jjid uding exercise of profession &nd use or lease of proper: xes.

*>-> k *u ;
Requisites: 1 o be deductible, the entertainment/ recreation

expense must meet the following conditions:
1 it m ur not be con t: ary to lav/, moralo, public policy or public

order;
2 it must, be substantiated with sufficient evidence such as

receipts and or adequate records wfijiaw, imo;
.3. ft must be limited to the ceiling requirement (Rev. Peg. 10-2002);

and
4. Jhere must be some definite reasonable purpose connected

with one's busin ess (lAtnfMjn lrw<'\\rnenl Cz/tjj, vh . Commissioner of Internal
Kwmu', CTA OsstiNu. J.'jM, t&jfamber 20, 1007).
Mere giving of parties to entertain one's employees and personnel

does not. indicate a definite business purpose. (Rozas m. or a , 23 scra
770).
Illustration
Mr. Sucpa Teofiio, a manager of Maharlika Corporation with total

net sales of goods amounting to FI0,000,000 in 200x, incurred a
total entertainment and recreation expenses amounting to
F60,000 with adequate receipts, It was incurred to conduct a
special meeting with major customers at Supreme Hotel.
The representation expense allowed as a deduction of Maharlika

Corporation would oriJy be P50,000, determined as follows:
Actual entertainment and recreation expenses P 60r000
Total net sales fluring the year P10,000,000

Multiplied by limit percentage _ _ _ _ _ _ _ _ .005
Deductible representation expense P m 50^000
EAR Used Both for Trading and Servicing Business

It the taxpayer derives income from both sales of goods/properties
and services, I lie allowable ICnlertainmcnt., Amusement and
km eat ion (KAK) expense shall in all cases be determined based
on an apportionment formula, taking into consideration the
percentage of tlie net sales/net revenue to the total net sales/net
levcnur, but which in no case shall exceed the maximum
466 INCOME TAXATION
percentage ceiling provided in the Regulations. (Rev. Regs. No. 10-2002,

July 18,2002}
Illustration
Watchworld Is engaged in sale and repairs of all kinds of clocks

showed the following revenues and expenses:
Net sales P600,000
Net repairs revenue 200,000
Itemized deductions, including representation
expense of P8,000 ' 208,000
The deductible representation expense would be

Actual allocated EAR: Trading Servicing Lower amount
Trading (P8,000 x 6/8) P6,000
Servicing (P8,000 x 2/8) P2,000 P2,000
Statutory limit:
Trading (P600,000 x 0.005) 3,000 3,000
Servicing (P200,000 x 0.01) 2,000-
Representation expense allowed P5.000
Interest Expense
The cost of money incurred within a taxable year on indebtedness
in connection with the taxpayer’s profession, trade or business.
The following are requisites for interest expense to be allowed as

deduction from business and or professional income:
1. There must be an indebtedness stipulated in writing;
2. The indebtedness must be that of the taxpayer in connection

with the trade, business or profession;
3. The interest must have been paid or accrued during the

taxable year (Commissioner vs. Prieto, 1-13912, September30, I960)', and
4. The interest payment must not be in ‘favor of a relative. (Sec.

34B, N1RC; Rev. Reg. 13-2000)
Interest Expense Deductible Subject to Limit

If the taxpayer has interest income subjected to 20% final tax and
at the same time incurred an interest expense during the taxable
year, the interest expense shall be reduced by thirty-three percent
(33%) effective January 1, 2009, as amended by R.A. 9337.
Illustration
Assume that the taxpayer engaged in business incurring an

interest expense of P400,000. In the same year, the business also
earned P300,000 interest income from time deposit in the bank.
The deductible interest expense would be

Actual interest expense P400,000
Less: Tax differential on interest income
(P300,000 x 33%) 99.000
Deductible interest expense P301.000
Notes:
1. The tax differential rate on interest to reduce the actual interest expense is
now 33% whether the taxpayer is an individual or corporation as per
amendment made by R.A. 9337.
2. This limitation apparently intended to counter the tax arbitrage scheme
where a taxpayer obtains an interest-bearing loan and places the proceeds of
such loan in investments that yield interest income subject to preferential tax
rate of 20% final withholding tax.
Interest Expense Deductible in Full

Interest expense is deductible in full when:
a. The business has no interest income subjected to 20% final
tax; or
b. The interest expense is paid in favor of the government. (Rev.
Regs. No. 13-2000)
Interest on delinquent taxes is deductible because taxes are

considered legal debt when due. As a rule, interest paid to
the government shall not be reduced by tax differential
because the beneficiary of such interest is the government
itself. (Commissioner vs. Polanco, 18 SCRA 496)
Illustration
On April 15, 200B, Ramos was not able to pay income taxes
amounting to P20,000 for the taxable year 200A. He was charged
with twenty-five percent (25%) ordinary fines and penalties for
late payment of taxes plus twenty percent (20%) interest.
Assume that Ramos paid the taxes on April 15, 200C, the interest
deductible in full would be
Unpaid tax due P20,000
468 INCOME TAXATION
Multiply by interest expense rate 20%

Interest expense deductible in full P 4.000
Note: Taxes constitute indebtedness for purposes of income tax and the interest
paid for delinquency in the payment of tax is a deductible interest expense;
however, fines and penalties for late payment of taxes are not deductible.
(Commissioner VS Palanca, L-16626,10-29-66)
Nondeductible Interest Expense

The following payments for interest expense are not allowed as
deduction from business/professional income:
1. Interest payment on indebtedness not business related (nirc,

Sec. 34, (B)(2)(a & b)'y
t
2. Interest payment in favor of a relative (related debtor and

creditor);
3. Interest paid in advance;
4. Interest to purchase or carry tax - exempt transactions;
5. Interest paid on indebtedness to finance petroleum
explorations; and
6. Interest on unclaimed salary is not deductible from gross
income. (Kuenzle & Streiff, Inc., us. .Collector of Internal Revenue, 106 Phil. 355)
Related Debtor and Creditor

Debtor and creditor are related taxpayers when the following
conditions are met:
1. Interest on loan between members of the family, which

includes wife, brothers, sisters, ancestors and other lineal
descendants/ascendants. 2 3 4
2. Interest on loan between individual and corporation of which
such individual owned more than 50%.
3. Interest on loan between two corporations where the same
individual owns more than 50% in each corporation.
4. Interest on loan between fiduciaries of two trusts which are
both owned by the same grantor.
*rtjpt*r S Deductions from Gross Income 469
prepaid Interest by a Cash Basis Individual Taxpayer

7''.e following rules are to be observed on prepayments of interest:
*. 5V.' payment of principal indebtedness
It an individual taxpayer reporting income on cash basis

incurs indebtedness on which an interest is paid in.advance
through discount or otherwise, such interest shall be allowed
as deduction in the year that the principal indebtedness is fully
paicL
Illustration
On December 31, 200B, Mr. Acop whose business is using

cash basis of accounting acquired a bank loan of PI00,000 for
business purposes. The amount received as proceeds of the
loan was P90,000, net of interest.
How much is the interest expense allowed as deduction from

200B business income of Acop if the loan is to be paid in
200C?
Acop cannot deduct in 200B the prepaid interest paid for the
bank loan, but he is entitled to deduct the interest expense of
P10,000 from his 200C business income.
2. Proportionate to principal amortization
However, if the indebtedness is payable in periodic

amortization, the amount of the interest which corresponds to
the amount of the principal amortized or paid during the year
shall be allowed as deduction in such taxable year.
Illustration
On January 1, 200B, Gloria borrowed P900,000 from
Prudential Bank payable in equal periodic amortization within
three years starting December 31, 200B. The bank deducted
an interest expense in advance amounting to PI62,000.
The deductible interest expenses for 200B, 200C and 200D

are computed as follows:
Deductible
Year Amortization Principal Fraction interest expense
200B P300,000 P 900,000 9/18 ‘ P 81,000
200C 300,000 600,000 6/18 54,000
200D 300,000 300.000 3/18 27.000
Total P9mQQQ PI,80.0,00.0 PL62,0QQ
470 INCOME TAXATION
Interest to Finance Petroleum Exploration

Interest paid on indebtedness to finance petroleum exploration is
nondeductible because this is exempt from income tax. This is
appropriately capitalized as “deferred exploration cost.”
Illustration
Driller Inc. borrowed PI0,000,000 for its petroleum exploration
activity in Palawan. During the. year, PI,200,000 interest was
paid with supporting receipts.
Under this case, the PI,200,000 interest expenses is no longer

claimed as deduction because petroleum exploration is tax
exempt.
Optional Treatment of Interest Expense

At the option of the taxpayer, interest incurred to acquire
property used in trade or business or exercise of profession may
be allowed as either an outright deduction from business gross
income, or treated as a capital expenditure. (Sec.34B3, nirc)
Illustration
Mr. Marvin Gannaban incurred PI0,000 interest expense in 200B

for PI00,000 loan made for the acquisition of an equipment used
in the business.
The treatment of interest expense incurred in the preceding

illustration would be either:
1. Mr. Gannaban has the option of claiming the PI0,000 interest
expense as business income deduction for 200B under
accrual basis of accounting, or
2. He can opt to capitalize the PI0,000 interest as part of the

acquisition cost of the equipment and subsequently avail
himself of the deduction from business income in the form of
depreciation.
TAXES
In general, taxes are allowed as deduction when paid or incurred
within the taxable year in connection with the taxpayer’s
profession, trade or business. (Sec.34c, nirc)
In the case of a nonresident alien individual engaged in trade or

business in the Philippines and a resident foreign corporation* the
deductions for taxes shall be allowed only if and to the extent that
they are connected with income from sources within the
Philippines. fSec. SO. Ree Regs. So. 2)
At the option of the taxpayer* the income tax paid to any foreign
country is treated as an item of deduction or tax credit. (Svc.34
(0(1) <Sf (3)(a & b), NTRCj
Requisites for Deductibility of Taxes

The requisites for taxes to be deductible are as follows:
1. It must be paid or incurred within the taxable year;
2. It must be paid or incurred in connection with the taxpayer’s
profession, trade or business; and
3. The tax must be imposed directly upon the taxpayer.
Taxes Deductible from Gross Income

As a general rule, taxes are deductible, except for those to which
the law does not permit deduction. The following taxes, according
to Section 80 of the Revenue Rev. Regs. No. 2, are allowed as
deductions if incurred in the conduct of business:
1. Documentary stamp taxes;
2. Occupational taxes;
3. Privilege and license taxes;
4. Excise taxes;
5. Import duties;
6. Local business taxes;
7. Automobile registration fees;
8- Community tax;
Municipal tax; and
10. Income tax paid to foreign country if not claimed as tax credit.
(Sec. 32 (C)(1)(a), NIRCJ
Taxes Not Deductible from Gross Income

The law does not permit the deduction of income tax paid to or
47? INCOMf TAXATION
ii(t'iur*<l in favor of 11 >c* National C r jmeot oJ ihc Pbihpjvm'-

and in no one may th<* inxpaym avail of auch dedu cl ion. p». V
K’t i’ tit'tjt, No 1}
The following taxer* an* not allowed a.* deduction ljo;n

inc'omc:
1. Philippine income tax; r:>>. hi, u < v . i^ s , no . u )

2. Rstate and donor’* taxes; (See. hs , urv. n <^. No, 2)
3. Foreign income? tax, if claimed a* a tax credit;
*1. Percentage tax on stock transaction;
5. Value-added tax;
6. Taxes not related to business, trade, or profession; and
7. Other items related to tax such as:
a. Special assessment; (ibixi.)
b. Surcharges; and
c. Compromise penalty.
The amount of deductible taxes is limited to the basic tax and

shall not include the amount for any surcharge or penalty on
delinquent taxes . However, interest on delinquent taxes , although
not deductible as tax, can be deducted as interest expense at its
full amount. (Commissioner vs. Palanca, 18SCRA496)
Illustration
X Corporation paid in 200B the following taxes which were

incurred in connection with the business: Community tax, basic
amount of PI,000 and surcharge of P250 plus interest of P125,
Real property tax of P5,000 plus surcharge of PI,250 and interest
of P500. Income tax, PI00,000, plus surcharge of P25,000 and
interest of PI0,000.
The amount deductible of taxes and interest from business gross

income of the X Corporation for 200B would be
Basic community tax P 1,000
Real property tax 5.000
Total deductible taxes P6,000
Add: Interest expenses on:
Community tax P 125
Real property tax 500
Income tax 10,000 10.625
Total deductible taxes
and interest expenses Pi 6,625
•* ■» »
* X-^ X* V X*
oe ascertai V v-< .txO'O o ^
.^.'X V V
' hove beer V* ;ten
the ::xi» vear. .
cfc-ir tf\
s a C:asm Ascertained to be Worthless?

a***' -e
eh to be worthless when the
•*a.' tc •xa* 5s ^ x»x "b. "•* «»2fc .'•’■•'■^xa "V*' ’X^s.»—» *-x-»,«» ••** - x-*•
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\
b -H
->» .bb x*a ^ ~fx-j~- r*x.«a
, V.' ■*. V. X <. v »X * A. o '■« «. V. XX *C *01V4 Xl-*«htx ^.*X x^x-**xx\t Xx^CifcX
S-tCOS to 00—001.
>.«a ■o.b » r* x '
^yjf t*" - -n~ — 2V IV* il>« v. X v.
r- o ••x -
— —.w ** ■*. htv x x. x—^-».x »■'•»-<•*-«*' xx -« x. -*.^.-.»«X
-. -» ’•^.— ** «« ««_,. - , fc
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x***. , _r "*
x 'w•x~"•^ x.'xx**. x *bT*
- ' «..^*5^ , * h < ► ^nN*vafâ^ .'x.’vvx-a^ V.

- wiir.xUt r*xpca^ x*? ^4.\x.4
-OVX
.c
^ se oseertaineh worthless when

V -■ — .>— ■xa x-* rb ibO b -a b*> > -br
t*-s> ^ X.! ,» X d-»* A -*■ X ■ X X* X W« v-—. X ». ¥•
- sureo A h~V ,5
t
w— r
_ _ _ A."* “'•'
hive VA :o oobeo: from the
“—' «- .*%,«*» X ♦ss *~\

' ^x _ i^. «. * * t.
474 INCOME TAXATION
business;
3. The claim must not be between related parties enumerated in
Section 36(B) of the Tax Code;
4. The claim must actually be ascertained to be worthless and
uncollectible as of the end of the taxable year; and
5. The claim must be written off within the taxable year.
Nondeductible Bad Debts

The following are non-deductible bad debts:
1. Not connected with the profession, trade or business;

2. Arising from unpaid wages, salaries, rents and similar item of
taxable income which were not included as income for the
year in which the deduction as bad debts is sought to be
made, or in a previous year; and
3. Contract entered into between related taxpayers or members
of the family.
Valuation of Bad Debts

The following rules shall be applied in determining the value of
deductible bad debts:
1. Actual amount paid. An accounts receivable acquired by

purchase which becomes uncollectible can be deducted from
gross income at the actual amount paid and not at the face
i >aluc of t he receivable.
Illustration
Cash Tight Corporation sold its P250,000 accounts receivable

for PI00,000 to Collecting Corporation without recourse.
Assume that the latter cannot collect from the client of the
former despite etYorts made, the actual amount paid which is
PI00.000 is the allowed deductible bad debt expense of
Collecting Corporation.
However, if the purchase contract is with recourse. Collecting

Corporation cannot deduct the P 100,000 as bad debts
expense because it can still collect trom Cash Tight
Corporation, unless the latter becomes insolvent.
Chapter 8 Deductions from Gross income 475
2, Original amount. If receivables are acquired through sale of

goods or services, the original amount of reeeivablt' is
deductible , but the related interest thereof not reported as
I income, is not deductible .
Illustration
Balingit Furnitures sold its sala set: on installment for

PI00,000 with the following terms: 50% downpayment; the
remaining balance is payable in five (5) annual installment.
The cash price of the sala set sold is P70,000.
Assuming that the remaining balance becomes uncollectible'

and was written off, the amount of bad debts that can bo
deducted from gross income is P20,000, computed as follows:
Cash price of sala set P 70,000
Less: Down payment received (PI00,000 x 50%) 50.000
Deductible bad debts expense P 20,000
3. Proportionate amount. If receivable becomes uncollectible

due to debtor's bankruptcy, the allowed deduction is the
proportionate amount uncollectible over the total claims of
ordinary debtor's creditors.
Illustration
Ordana Company has P50,000 collectibles from Mr. Saki Teen

who died with the following assets and liabilities:
_ _ Assets Liabilities
Total E5QS-28S 900,000
Assume that the liabilities are composed of the following:
Unpaid income tax (National Government) P 100,000

Various creditors 800.000
Total liabilities E ?0Q,QQO
The total indebtedness that cannot be paid shall be computed

first as follows:
Total assets of Mr. Teen P 500,000
Less: Payment to preferred creditor - Government 100»0QQ
Assets available to ordinary creditors P 400,000
Less: Total liabilities to various creditors 800,000
Total indebtedness that cannot be paid ly AQQ^QOQ
476 INCOME TAXATION
The deductible bad debts expense of Ordana Company is

Collectibles of Mr. Teen P 50,000
Multiplied by percentage of uncollectibility
(P400,000/P800,000) 50%
Deductible bad debt expense of Mr. Teen P 25.000
Accounting for Worthless Accounts

The only acceptable method to record bad debts for tax purposes
is the direct or actual method. Bad debts computed using the
allowance method are not acceptable for taxation purposes.
Illustration
The following data are available from the records of Pasarado

Company:
Accounts receivable, beginning PI00,000
Sales on account 900,000
Total collection during the year 600,000
Through the company’s past experience, a 3% allowance of

uncollectible accounts based on sales on accounts is estimated.
During the year, one of the company’s customer became insolvent

and the related amount of collectibles amounting to P20,000 is
determined to be uncollectible.
The accounting for the writing off of worthless accounts would be
GENERAL JOURNAL
Page Number 10 Not
!' Data Descriptions Debit Credit deductible.
(Allowance
or
Bad debts expense 27,000
, 1'*) estimated
Allowance for bad debt expense 27,000 bad debts)
To record estim ated uncollecti~
blc accounts, (l«K )(),000 x 3% ).
Deductible.
j. l‘>) ■ Allow ance tor bad debts expense 20,000
(Actual
Accoim ts receivable 20,000^
accounts
To wrile off w orthless account. written off)
r
=
( iMptcJi n n»<tt« tiena fiiim (Anuta liinmiM Ml
llrtcf lM>f4 Of ( fifth lltlftlt* laxpayrM
\*mh Oi\|mv<M ge timidly i«*pmlH ln< ome ol j h i i m 11 )f' I

bit'Un* ^ M«U\ i(|rfi upon «n||rv|inn Cnnsm|MMil ly, mii» h InNpny'1
1 , mnmt «l« ihic( wmlldeaa amnimfh linni IiIm groan im<’ij)lu
|u »iHr.« m. oiut* m iepm Iml only whmi « nlleried
Ilhint id( ion
f King** Com t tn a »t*f 11 piopmty Icrtrim, Km ihr* yfin, llm total imil
, allcvt tom* wen' a;» lollowrc
IVvtom, ymu ‘n imi*:

Novmubei and Ilermnbm I’ d0,000
I'unrnt \eai *?1 irniN,
danumy to Novnul^r I*I 10,000
Tlir icîu income of PI 0,000 lor IVemubm of rurrenl your la

piovrn uncollectible,
In Hun case. Kings Court cannot claim the P10,000 uncoiled ible
rent os bad drill for (hr current yrnr because thr business in a
sn vicing business whirli rrports income on rash basis. As such,
this rc'iit for December is not reported as income, Consequently, it
could not be claimed as drdurtion.
Depreciation Expense
IVprrriotion, one' of the' allovvrd drdurlions imdrr the 'fax Code,
refers to llu' periodic' roduotion of tlu* value of a 'tangible
permanent asset due to passage* of time, wear and tear and
obsolescence, go /■>)ar-rw, //><• i«, cta , c .\ o.k. sp No. oo.i/s, April 20oi>.j.
Depreciation expense is allowed as a deduction from gross income

to enable taxpayers to recover the acquisition cost of the property
used in the practice of profession, business or trade, (Scc.34F, nikc)
For intangible assets such as patents, copyrights and franchise,

die annual allowance to reduce their useful value is called
"amortization."
Requisites for Deductibility of Depreciation

The following requirements must be met by a depreciation
e-vpense to be deductible:
h It must be reasonable.
478 INCOME TAXATION
2. It must be charged off during the year.

3. The asset must be used in profession, trade or business.
4. The asset must have a limited useful life.
5. The depreciable asset must be located in the Philippines if the
taxpayer is a nonresident alien or a foreign corporation.
/ Methods of Depreciation
The methods for computing depreciation expense shall include
but are not limited to the following:
1. Straight-line method;
2. Declining balance method;
3. Sum of the years digit method; and
4. Any other method which may be prescribed by the Secretary
of Finance upon the recommendation of the Commissioner.
Illustration
Cacal’s Merchandising purchased a delivery truck for the
transportation of the business merchandise from suppliers and to
customers. The purchase price of the truck is PI 10,000 with a
salvage value of PI0,000 and with an estimated life of 5 years.
How much is the depreciation expense using the straight-line

method?
Using the straight-line method, the annual depreciation expense

is computed as follows:
Acquisition cost of delivery truck pi 10,000

Less: Salvage value 10,000
Balance PI 00,000
Divide by estimated useful life (years) _______ 5
Annual deductible depreciation P 20.000
Note: If the problem is silent, use the straight-line method. The procedures of
other methods of depreciation are discussed in higher financial accounting
subjects.
Depreciation and Other Related Expenses of Vehicles

Revenue Regulations No. 12-2012 mandates that only one (11
vehicle for land transport is allowed for the use of an official or
employee and the value of the vehicle involved should not exceed
P2.4 million.
Once the value of the vehicle purchased breaches the P2,400,000

amount, the following consequences shall be imposed:
1. The taxpayer shall be totally barred from claiming any
depreciation expense and all maintenance expenses of such
vehicle; and
2. The input taxes on the purchase of non-depreciation vehicles

and all input taxes on maintenance expense incurred thereon
are likewise disallowed for taxation purposes.
No depreciation shall be allowed for yachts, helicopters, airplanes
and/or aircrafts, and land vehicles which exceed the above
threshold amount unless the taxpayer’s main line of business is
transport operations or lease of transportation equipment and the
vehicles purchased are used in said operations. (Sec. 3, Rev. Regs. No. 12-
2012)
The said regulation shall take effect starting October 17, 2012. It
does not cover land vehicle purchases prior to its effectivity. (rmc
No. 2-2013)
Illustration
E Company acquires cars to be used by its salespeople and its

officers. The company has the policy to depreciate motor vehicles
by 10% annually.
Before the year 2012, it has a total 10 units of Toyota Vios used
by its salespeople and one Land Cruiser Prado used by the
company president with the following acquisition costs:
05/30/2011 10 units Toyota Vios (sales people) P3,600,000

12/30/2011 1 unit Land Cruiser Prado (used by 4,800,000
president)
The company reported to the BIR the following new motor vehicle
acquisitions:
10/30/2012 2 units Mitsubishi Pajero P3,200,000
01/02/2013 5 units Toyota Vios 3,300,000
The two Mitsubishi Pajero cars (PI,600,000 each) are used by the
vice president for finance and the Toyota Vios cars (P660,000
each) are used by its five (5) senior sales people. The company
430 INCOME TAXATION
submitted to the BIR al necessary summer.: evidence to supotr

the claim of depreciation.
The depreciation expense of E Company for the taxable 20:3

would be:
From 2011:
10 units Toyota Vios P 3.600,000
1 unit land cruiser prado 4,800.003
From 2012: 1 Pajero car (P3,200,000/2) 1.600.0%
From 2013: 5 units Toyota Vios 3,300.001
Total costs of depreciable vehicles P13.300.000
Multiplied by depreciation rate _________
Depreciation expense 2013 P 1,330000
Depreciation of Properties Used in Petroleum Operations

The following rules shall be applied for depreciating properties
used in petroleum operations:
1, Initially placed properties. If properties directly related to

production of petroleum are initially placed in service in a
taxable year, the depreciation method may be either (a)
straight-line method, or (b) declining-balance method of
depreciation, at the option of the service contractor.
2, Churuye of depreciation method. If the service contractor

initially elects the declining-balance method, it may at
subsequent date, shift to the straight-line method.
3, Estimated useful life:
a, The useful life of properties used in or related to

production of petroleum shall be ten (10) years or such
shorter life as may be permitted by the BIR Commissioner.
b. Properties not used directly in the production of petroleum
shall he depreciated under the straight-line method on the
basis of an estimated useful life of five (5) years. (Sec. 34(F)(4),
Wl'C)
Chapter 8 Deduction# from Gross Income 481
Illustration
Assume the following depreciable assets of Linapacan Oil

Corporation:
Estimated useful life Acquisition cost
Oil drilling machine l 5 years P2,000,000
Computers (office) 6 years 300,000
Total costs P2,3p_0,Q0Q
The annual depreciation expense is determined as follows:

Drilling machine (P2,000,000/10) P200,000
Computers (P300,000/5) 60,000
Total annual depreciation PJ260,f)00
Note: Since the oil drilling machine is used directly in the production of oil, its
allowed maximum life for depreciation is 10 years. The computers are not used
directly in the production of oil; thus, its maximum life allowed is 5 years.
Depreciation of Properties Used in Mining Operations

An allowance for depreciation in respect to all properties used in
mining operations, other than petroleum operations, shall be
determined as follows:
1. At the normal rate of depreciation if the expected life is ten
(10) years or less; or
2. Depreciated over any number of years between five (5) years
and the expected life if the latter is more than ten (10) years,
and
3. The depreciation thereon allowed as deduction from taxable
income.
The contractor should notify the BIR Commissioner at the

beginning of the depreciation period as to which depreciation rate
will be used, ftsec. 34(F)(5), nirc )j
Depletion Expense
Depletion is the exhaustion of natural resources like mines, oil
and gas wells due to production (Castaneda. Commentaries and Jurisprudence
on nirc ). It is similar to depreciation allowance, the purpose of
which is to recover the invested capital in the property.
482 INCOME TAXATION
Illustration
Baguio Mining acquired a coal property with an estimated deposit

of 2,000,000 tons for P4,200,000. It is estimated that the
property has a salvage value of P200,000. If Baguio Mining was
able to produce 400,000 tons, the deductible depletion expense
during the year is P800,000, computed as follows:
Cost of coal property P4,200,000

Less: Salvage value 200,000
Depletion base P4,000,000
Divided by estimated tons to be extracted 2,000,000
Depletion per ton P 2
Multiplied by number of tons extracted
during the year 400,000
Depletion expense during the year * P 800.000
Note: If the property needs restoration so that it can be sold at its estimated
salvage value, any restoration cost incurred to restore the property should be
charged against the salvage value.
Exploration and Development Expenditures

“Exploration expenditures” means expenses paid/incurred before
the development stage of the mine intended to ascertain the
existence, location, extent, or quality of any deposit of ore or other
mineral.
“Development expenditures” means expenditures paid or incurred

during the development stage of the mine or other natural
deposits.
The development stage of the mines or other natural deposit shall

begin at the time when deposits or mineral ores are shown to
exist in sufficient commercial quantity and quality and shall end
upon commencement of actual commercial extraction.
Tax Treatment. Any intangible exploration, drilling and

development expenses allowed as deduction in computing taxable
income during the year shall not be taken into consideration in
computing the adjusted cost basis for the purpose of computing
allowable cost of depletion.
At the option of the taxpayer, exploration and development
expenditures paid or incurred during the taxable year may be
treated as:
Chapter 8 Deductions from Gross Income
(1) part of adjusted basis for depletion cost, or
(2) deduction to compute taxable income from raining operation!*
Should the taxpayer choose to use option two (2), the following
limitations shall be followed:
1 The total amount deductible for exploration and development

expenditures shall not exceed 25% of the net income fôm
mining operations computed without the benefit of any tax
incentives under existing lawrs.
2. The actual exploration and development expenditures minus

25% of the net income from mining shall be carried forward to
the succeeding years until fully deducted.
Note: "Net income from mining operations* shall mean gross inoame -from
operations less allowable deductions which are necessary or relaxed to Turning
operations. ‘'Allowable deductions* shall indude mining, milling and marketing
expenses, and depreciation of properties directly used in the mining :jpersrkm&.
/Sec 3«G}(2). MRC)
The election of the taxpayer to deduct the exploration and development

expenditures is irrevocable and shall be binding in succeeding taxable
years.
Illustration
Assume the following given data of Benguet Mining Corporation:
Ore reserved 50,000,000 tons

Ore produced-prior year —,000,000 tons
Ore produced-current year 5.000,000 tons
Costs for depletion:
Mine property P5,000,000
Exploration cost (original) 3.000. 000
Intangible development cost 2.000. 000 PI0,000,000
Tangible property 5,000,000
Value of production 25,000,000
Production cost and selling cost:
Mining costs, including depletion P10,000,000
Milling costs 8,000,000
Marketing costs 1,600,000
Depreciation 400,000 20,000,000
Actual exploration costs incurred during the year was
?3,000,000.
Required: Compute the two options of the tax treatment for the
P3,000,000 exploration costs.
484 INCOME TAXATION
1. Accounted as part of adjusted basis for depletion costs

Deplete hie costa before adjustments P10.000.QOO
Less: Depletion (P10,QOO,GO0/5OM tons) x 4 M tons SOO.QTjn
Balance P 9,200.000
Add: Current exploration cost 3.000. 0nr
Total P12,200,000
Divided by remaining ore reserves in tons ^6,000.000
New depletion cost/ton P 0.2652
Multiplied by ore produced current year in tons 5.000. 000
Depletion expense P 1,326.000
2. As deduction from income from mining:

Value of production P25,000,000
Less: Production and selling costs 20,000.000
Net income from operation P 5,000,000
Multiplied by limit percentage ________ 25%
Deductible exploration cost (currently incurred)
Actual current exploration P 3,000,000

Less: Reported deductible exploration cost this year 1,250,000
Chargeable to succeeding year
Capita! Expenses of a Private Educational Institution

The capital expenditures of a private educational institution may
be treated in the following options:
1. Deduct immediately as expenditures, or

2. Deduct as allowances for depreciation. (Sec. 34(A)(6)(2), nirq
Illustration
On Januaiy 2OOx, Pines City College, a private educational
institution, spent PI,200,000 to acquire school furniture and
fixtures with an average estimated life of 10 years. How much
deductible expense is allowed to Pines City in 200x?
Answer: If Pines City opted to report the cash outlay as outright

expense, the entire amount of PI,200,000 is deductible in year
200x.
If Pines City opted to report the cash outlay as depreciation

allowance, the deductible expense would only be PI20,000,
Chapter 8 Deductions from Gross income 485
Cost of school furniture and fixtures PI,200,000

Divided by estimated useful life _ _ _ _ _ _ _ _ 10
Deductible depreciation expense P_jm0_0.Q
Deductible Pension Trusts

A pension plan comprises a fund intended to provide retirement
benefits to the employees. It is usually set up after some years of
operations when the employer can already provide benefits to
employees.
An employer is allowed to deduct from business gross income

contributions or payments made to pension trust in accordance
with a ‘reasonable private benefit plan. (R.a . 4917& src 32(B)(6)(A ), nirq
There are two general types of pensions that may be adopted by

an employer.
1. Defined benefit plan . The employer handles and manages the

fund. The benefits that the retiree would receive are defined
and normally based on certain percentage of the salary of the
employees eligible to the benefit plan.
The amount of periodic contribution to be made by the

employer is dependent on the estimated liability based on the
designed benefits.
2. Defined contribution plan. The trust fund is handled by a third

party, normally an insurance company or bank as the
“administrator.” The liability of the employer is to contribute
the defined or contracted periodic contribution as per
agreement with the administrator..
The administrator will manage the fund and is liable to the

payment of retirement benefits of the employees under the
plan. The retirement benefit payable to the retiree would be
dependent on how the administrator managed the fund to
become profitable.
Requirements of Plan
For tax purposes, it is not important whether the benefit plan
defined benefit or defined contribution as long as the following
requirements of the BIR are met:
486 INCOME TAXATION
1. The plan mast be reasonable and actuarially sound .actuana:

valuation).
2. The plan must be approved by the BLR. To be approved by the

BIR, the plan must comply with requirements of Rev. Regs.
No. 1-68 and Rev. Regs. !'o. 1-83.
Section 34(j) of the Tax Code provides that the allowable

deduction as pension trust is equal to the provision for the
payment of reasonable pensions to employees (based on the
normal or actuarian valuation) or actual contribution to the plan
whichever is lower, and the excess of actual contribution over he
actuarian valuation is to be amortized over the period of 10 years.
The amounts of tax deduction should be based on actuarial

valuation for funding.
Illustration
A Co. maintains BIR-registered defined benefit retirement plan.

The company’s normal cost per actuarial valuation for funding is
P900,000 and P950,000 for years 200A and 200B, respectively.
The actual contributions of A Co. to the retirement plan were
PI, 100,000 and P800,000 for years 200A and 200B, respectively.
The 200A and 200b deductible retirement expense would be
200A 200B
Normal or actual contribution (lower) P900,000 P800,000
Add: 200A amortization of excess contribution
over normal cost (P200,000/10) 20.000 20.000
Retirement expense P920,Q00 P820.000
Notes:
1. The 200A excess contribution over normal cost is computed as follows:
200A 200B
Actual contribution PI, 100,000 P 800,000
Less: Normal cost 900.000 950.000
Excess of contribution over normal cost P 200.000 (PI 50.0001
2. If the retirement pension plan is not BIR-approved, the deduction will only
be allowed if there is an actual retirement payment There is no deduction
allowed for the retirement contribution.
Charitable and Other Contributions

A charitable contribution is a non-operating expense, but the law
allows some contributions or gifts given within the taxable year as
deductions from gross income (Sec. 34 [H], nirc).
The amount of any charitable contribution of property other than

money shall be based on the acquisition cost of said property.
Requisites for Deductibility of Contributions

The following are the requisites to allow contributions as
deductions from gross income:
1. The taxpayer making the charitable contribution must be

engaged in a profession, trade or business;
2. There must be an actual payment of contribution or gift;
3. The recipient must be an entity or institution specified by law;
and
4. The net income of the institution must not inure to the benefit
of any individual or private stockholder.
Contribution Deductible in Full

The law specified these contributions as deductible in full
amount. Examples of contributions deductible in full are:
1. Donations to the Government of the Philippines, or to any of
its agencies, or political subdivisions, including fully owned
government corporations exclusively to finance, to provide for,
or to be used in undertaking specific priority activities in
a. Education;
b. Health;
c. Youth and sports development;
d. Human settlements;
e. Science and culture; and
f. Economic development.
2. Donations to international organizations in compliance with
agreements, treaties, or commitments entered into by the
Government of the Philippines and the foreign institutions or
international organizations or in pursuance of special laws. 3
3. Donations to Accredited Non-Government Organizations
subject to the following requisites to be deducted in full:
a. Not more than 30% of which should be used for
administration purposes.
■4$$ INOOMl VAXA1 ION
t\ The contribution must hr ulill/rd no! Inin Mum i|)r-

fifteenth Mm of the third month nllri I he* ( lour nl
taxable year.
o. Upon dissolution, a court shall distribute the* nrmrln oft hr

said NGO to another nonprofit domestic eorpor/il ion, or to
the state, or to another similar organization.
If the abovementtoned requisites are not met, the donation filial!

be subject to limit.
Contributions Subject to Limit

These contributions are not deductible in full as specified by the
law or such deduction has not met the requisites to be deducted
in full.
The limitation of contribution shall depend on whether the donor

is individual or corporation subject to the following rules:
1. If the donor is an individual taxpayer, the limit is 10% of the
taxable income derived from business, trade or profession
(before the contribution) or the actual contribution, whichever
is lower.
2. If the donor is a corporation, the limit is 5% of the taxable
income derived from trade or business (before the
contribution) or the actual contribution, whichever is lower.
(Sec. 34H, NIRC)
To be deductible, these donations must be properly documented.
Illustration - Donor is an Individual Taxpayer
Prasas revealed the following data regarding his income and

expenses for the taxable year 200x:
Gross income from business P800,000
Business expenses allowed as deduction (except contributions) 600,000
Charitable contributions:
To the government:
- for specific priority activities in education 50,000
- for public purposes 60,000
To church 15,000
The total deductible charitable contributions of Prasas would be
Contributions deductible in full:

To government- priority education activities
Contributions subject to limit: P50,000
To government - public purposes P60.000
To the church 15.000
Total actual contributions P75.000
Limit [(P800,000-P600,000) x 10%] 20.000
Total deductible charitable contributions P70.0Q0
Illustration - Donor is a Corporation
Assume that the donor in the preceding illustration is a

corporation. The deductible charitable contributions would be
To government- priority education activities P50,000
Contributions subject to limit:
To government - public purposes P60,000
To the church 15,000
Total actual contributions
Limit [(P800,000-P600,000) x 5%]
Total deductible charitable contributions
Donations to Political Parties or Candidates

Contributions to political parties registered with COMELEC are
not deductible from gross income. Campaign expenditures and
contributions may not be claimed as deductions from income
since they are neither business-related expenses nor deductible
donations similar to those given to accredited non-government or
charitable organizations as provided in Section 34 (H) of the Tax
Code.
The amount spent for political campaign, campaign funds and

donations to political parties or candidates are NOT deductible
either as business or contribution expenses from gross income.
(Felix Montenegro, Inc. os. CIR, CTA Case 695, April 30, 1969)
Illustration
Tan Enterprises donated PI0,000,000 for the campaign funds of

Liberal Party. The donation is not deductible from gross income of
Tan Enterprises.
Notes:
1. Contributions given to candidates or political parties are not subject to
donor’s tax as long as said contributions are duly reported to the Commission
on Elections. (Omnibus Election Code; R.A. 7166)
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- Cry •XTirrrsi* rarrrrrtr ;rr rhiriliF.
«*,. r-arnru^p* ■..’Vrrf: ..irrrrrmz; rsi,
ue razcitia^j- ^Tps^hrucss. rre -^rcsaîrrz -fc? furbeu: . B&J, ?<&GS>
'2-'.a as fucrr :xusr je xeiueec. x: me 'zaHsciciitP?'? ucciitiir m:v
v,;. ;r~. - ,•
Research and Deve-Sepêr:

j 0000;
expenditures dtn: are\ratc or r tint raxabue y
I. Ordinary and necessary ~xp?r

business gross bccne in the ye^ rxrer :<^s are pah or
incurred.
' r*> V
suhec: to be me .-s’
■veurueu: e e c r e r_____
a—— - —*- -—e* - as
--------
. expenses will be
■ a period of no: les^s than 62 raerths
ith in which the :axrctver hrs: realises
idirures. xxc
Illustration
In 200B, CW, a domestic corporation, incurred to ml research and

development cost amounting to Pi,500.220 ui relation to year
200C computer problems. The research became a success. Or.
March 1. 200Cr the company sold Pi0,000,000.
Assuming that CW opted to charge the research and development

cost as an ordinary expense, what is the amount of deductible
research and development expense in 200A and 200R?
The research and development expenditures chargeable to

business gross income in 200B is PI ,500,000: in 2000, none.
If the company opted to treat the research and development

expenditures as deferred expenses the related amount of
deductible expenditures for 200A would be zero and for the year
200C would be P250,000, computed as follows:
Total research and development expenditures P1.500*000
Divide by number of months (12 months x 5 years) --------------
Monthly expenses P 25,000
Multiply by months beginning March 1 to Dec. 31, 200C _ _ _ _ _ _ _ _ _ _ B3
Deductible research and development expense - 200C
fre*" J'vss hv\v*%' 4$ 1
■ v*v# " ' ” ' •>•••.• *••• .*•• '•-' vw. -r $v**v"* jvv. r\y*\}$e c bankable
I ;•< -.w-v s ' - = ' ’ <■.*" %•• V-w^. h AVC becAV.s* :he :**- that the
I *v.v'<•••*« < • : .:* c«\&K.ekK\ rafctbX d-.s;nb\atod «wer n period
p ./ .,•• *♦«.# ■ • - * $\\~ 'ritb e.,c r.vr.:h :n which the taxpayer first
f j- *v< >* • ■: •■:'..-< /v •** ? \• v*N *.\pr'vl’ X "X 5
premium Payments for Health Hospitalization Insurance

{F PHH\)
H.v- urr.-.:' y*vrp u p j f v ? - health a'id/or hospitalization

•'•>~.ru%vv ;akvc; by on individual taxpayer for himself or for his
rlr-by arc aiiewcd as deduction at a.*; <r*tor?r*r jjof evoeerfm^
ff pcy.'inruig F-TcX? a ’"®r::k utdefaever Is lower during the
v v .1” provided ciiac their fondly total gross income does not
exceed PI!50.000 tor the calendar year. see. a«w, xsâ xm &egs. xo. u>-
•< •, ••
"he total foruiy gross income includes primary income and other
income from sources received by aii members of the nuclear
family, i.e. father. mother. unmarried children living together as
one household or single patent with children. A single person
living alone is considered as a nuclear family.
hie spouse claiming the additional exemptions for qualified

dependent children shall be the same spouse to claim the
deductions for premium payments.
Illustration 1 - Insurance premium is more than P2,400.
Mr. and Mrs. Scott Saboy. resident citizens with seven minor
children have gross compensation income of PI00,000 and
PS0.000. respectively.
Beginning June 1. 200A to December 200A, Mr. Saboy paid a

health insurance polic3r premium of P5,000. The deductible
PPHHI would be
Monthly threshold from PPHHI P 200

Multiplied by number of months (June to December) ______ 7
Deductible amount of PPHHI PI .400
Note: The total family income is only PI80,000, therefore the PPHHI is deductible
as regular deductible itemized deduction subject to a limit of P200 per month. The
spouse claiming the additional exemption has the right to claim the deductible
amount of PPHHI.
492 INCOME TAXATION
Illustration 2 - Family income is more than P2 50,000.

Mr. and Mrs. Bayan, resident citizens with two minor children,
have gross compensation income of P 170,000 and P200,000,
respectively. During the taxable year 200A, Mr. Bayan paid a
health insurance policy premium of P5,000.
There is no deductible amount of PPHHI because the total family

income exceeded the P250,000 threshold.
Total family income means the accumulated income of the

spouses within the taxable year. In this example, the total family
income is P370,000.
Special Allowable Itemized Deductions (SAID)

Over and above the deductible actual amount of ordinary and
necessary expenses (regular allowable itemized deduction), SAID
are additional incentives allowed to be deducted from gross
income, as provided under existing regular and special laws, rules
and issuances, such as but are not limited to the following:
1. Adopt-a-School Program under RA 8525;

2. Fifteen percent (15%) additional deduction of salaries/wages
paid to the senior citizens; (Sec. 12, Rev. Regs. No. 7-2010)
3. Senior Citizen Discount under R.A. 9257;
4. Discounts to Person with Disability under R.A. 9442;
5. Rooming-in and Breast-feeding Practices under R.A. 7600;
6. Free Legal Assistance under R.A. 9999;
7. Qualified Productivity Bonuses under R.A. 6971;
8. Income currently distributed to beneficiaries under estates
and trusts (Sec. 6i [a j , n ir c ), but such amount shall be taxable to
the latter;
9. Net Operating Loss Carry-Over (NOLCO); and
10. Special deduction allowed to insurance companies such as
a. Net additions to reserve funds within a year.
b. Premium deposits returned to their policyholders.
c. Actual deposit of sums with the officers of the Government
of the Philippines (Sec. 37 (A to u), nirc).
Adopt-a-School Program
Tax Incentives to Adopting Private Entities. The amount for
assistance, contribution, donation to public schools, made by
private entities, that were actually, directly and exclusively
incurred for the program in team up with the Department of
Education, Commission on Higher Education , or with TESDA
may be deducted from the gross income. (R. a. 8525, Rev, Reg. io-2rx>3}
The deductible amounts from gross income are as follows;

1. Actual
amount of assistance/donation or limit, whichever is
applicable under
the conditions and rules set forth in Section
34(H) of Tax the Code (This is part of regular itemized
deduction), plus
2. An additional amount equivalent to 50% of the actual

contribution/donation. (This tax incentive is part of the
special allowable itemized deduction.)
Furthermore, the assistance/donation of the adopting private

entity to the public school under the program is exempt from
donor’s tax pursuant to Section 101 (A)(2) and (Bj(l) of the Tax
Code.
Valuation of Assistance or Donation

The value of the assistance or donation by adopting private
entities to public schools is to be valued in the following manner:
h Cash assistance = Actual amount of cash donated.
2. Personal property = Acquisition cost or depreciated value
whichever is applicable.
3. Consumable goods = Acquisition cost by the donor, or the
actual cost thereof at the time of donation, whichever is lower.
4. Services = Service value as agreed upon per Memorandum of
Agreement (MOA) or the actual expenses incurred, whichever
is lower.
5. Real property = Fair market value at the time of donation or
the book value whichever is lower (recorded appraisal increase
shall be excluded).
liit
(II m h < t *| Jltfi
K , (liMUf'jfl/' / f-t (lOr Al ( t /1 r t , ify-Y, ,s )>//ifa ’to’Tf '*'%/■'■* fg.,

I>.{ hm7 .I he?./*',I fdî IY, r/& Urr/JX* 'S
, r Mt:iii(Hmi; bbdf \<> I? Mt, if, '('(** f/rf f ti> + yp A ( * f0 p. ^ K
fbim <>f b< ibe V,b<V%i * *
bf » M(>A, th^ vMuf< (>{ fh* W'/iff,*, rjf ’//%

amounts t(> f\:00,0M. He^cvcy; the f/sf;/;fznorA$. *./?„
in(vn? »ed f6» the one yftbr fH f t f t r+.U*tfiA ?/, +*>,(*;.■;.%
nmbunled U > l'25(),0(>(>,
Hu' gross income of X Corporhftou for *{>*

amounted to po.000,000 before operfitia% '£ y*,;//,*'//,
(value of assistance to the technical school, oot y*& /
Assumption 1 ~ Program is a priority project.

Assuming that the program is a prior .ty project '£ ^
government, the amount, of deductions that the coronation coc-h
claim against its gross income with respect to the seets^jcce
provided would be
Actual donation p 25C-9CC

Special deduction under RA 8525 (P250,000 x 56%| 125,0^
Amount of deduction with respect to assistance ? 375.
Note: X Corporation is also exempt from donor’s tax with respect to Lte fc&ssstsrjec
under the “Adopt-a-School Program.”
Assumption 2 - Program is NOT a priority project
Assuming that such program is not a priority project of ihe

government, the amount of deductions that can be deducted from
gross income would be
Deduction as donation,
limit (P9,000,000-P5,000,000) x 5% P 200,000
Special deduction under adopt-a-school program
(P250,000 x 50%) 125,000
Amount of deduction with respect to assistance P 325.000
Senior Citizens’ Salaries and Discounts

Private establishments employing Senior Citizens shall be entitled
to additional deduction from their gross income equivalent to
fifteen percent (15%) of the total amount paid as salaries and
chaptor 8 Deductions from Gross Income 495
wag<*s to Senior Citiz<*ns provided the following conditions <irc

in ft:
j. The employment shall have to continue for a period of at least
six (6) months; and
2. The annual taxable income of the Senior Citizen does not

exceed the poverty level. (Senior citizens are covered with the
minimum wage law.) 12, h<h>. r^js. no. 7-20W)
The discounts granted by the seller of qualified goods and

services exclusively for the use of senior citizens as provided by
R.A, 9257 are classified as special itemized deductions (New BJR
Form 1701). The statutory rates of senior citizen's discounts are
enumerated as follows*.
1. For goods and services, 20% discount;

2. For water and electricity consumption registered in the name
of senior citizen, 5% discount if the water and electricity
consumptions do not exceed thirty cubic meters and one
hundred kilowatt hours, respectively; and
3. For electricity, water and telephone consumption, 50%
discount if consumed by a Senior Citizen Center administered
by the Government or domestic NGOs.
Illustration
Senior Corporation employs senior citizens at minimum wage

showing the following reports during the year:
Gross sales P5,000,000
Salaries expense paid to senior citizens 500.000
Salaries expense paid to other workers 200.000
Senior citizens' discount 10,000
The special itemized deduction would be

Incentive to senior citizens’ salary (P500,000 x 15%) P75,000
Senior citizen discount 10.000
Total special itemized deduction P85.000
Notes:
1 The incentives and discounts granted to senior citizens can only be claimed if
the seller does not opt for the OSD during the quartcr/year. 2
2 Only the actual amount of discount granted or a sales discount not less than
the statutory rate, whichever is higher, based on the gross selling price can
be deducted from the gross income. (Sec. 12, Rev. Regs. No. 7-2010)
49€ INCOME TAXATION
Sales Discounts Granted to Person with Disability
Subject to the conditions provided by law, establishment

granting sales discounts to persons with disability may claim the
sales discounts as deduction from gross business income.
The special deduction would be the actual amount of sales

discount granted or a sales discount not exceeding 20% of the
gross selling price or gross receipt net of value added tax, if
applicable, for income tax purposes, jra. 9442; Sec. 4, Rev. Regs. No. 1-2009
Illustration
Gabriana Clinic, a VAT-registered entity, performed a prosthetic

surgery on the legs of Mongo Loyd, a person with disability. Tne
total cost of medical operation was P500,000. Being a disabled
person, Loyd received 20% discount from Gabriana.
How much is the special deduction allowed and the total amount
to be paid by Loyd?
The special itemized deduction allowed would be P100,000,

Cost of medical operation P500,000

Multiplied by 20%
Special itemized deduction PIOO.OQO
The total amount to be paid by Loyd would be P448,000,

Vatable amount (P500,000 x 80%) P400,000

Add: Value-added tax (P400,000 x 12%) 48,000
Total amount to be paid by Loyd P448.000
Note; A penon with disability -who is at the same a senior citizen can only claim
20% discount on a particular sales transaction.
on*-.
Rooming-in and Breast-Feeding Practices

The State adopts rooming-in as a national policy to encourage,
protect and support the practice of breastfeeding.
'1 he expenses incurred by a private health institution in

complying with the provisions of this Act, shall be deductible
expenses for income tax purpose up to twice the actual incurred
during the taxable period. (r.a. 76ooj
Z.’&z~r 3 Deductions from Gross tricorne 497
jUsstration
Cart Medical Center, a private hospital, conducted a free seminar
mb medical services regarding '‘Lactation Management” in every
'-irangay in Baguio City. The hospital incurred the following
expenses related to the seminar:
AC"err:sing and transportation P 200,000
Arne medicines 500.000
Arte materials 300.000
7:ml actual expenses PI -000.000
. se teta. itemized deductions allowed would be

A val actual expenses PI,000,000
ACC. Special itemized deduction - tax incentive 1.000.000
. '.m. itemized deductions allowed P2.000.000
-r&e Legal Assistance

A ia-vyer or professional partnerships rendering actual free legal
sendees, as defined by the Supreme Court, shall be entitled to an
viewable deduction from the gross income, the amount that
muid have been collected for the actual free legal services
rendered or up to ten percent (10%) of the gross income derived
:'um the actual performance of the legal profession, whichever is
7be actual free legal services herein contemplated shall be

emmmr/e of the minimum sixty (60)-hour mandatory legal aid
seneces rendered to indigent litigants as required under the Rule
Mandatory' Legal Aid Services for Practicing Lawyers, under
AA? Matter No. 2012. issued by the Supreme Court, (rjl 9999)
LLast ration
Mt/ Abo Gado, a practicing lawyer, rendered a 300 hours

.'mher.ng free legal assistance to indigent litigants. Atty. Gado’s
•e?a. fee per hour is P5,000. If his actual professional fee during
Me year amounted to PI0,000,000, how much is the special
-eduction allowed to be deducted from his gross professional
romr.eb
he allowable special itemized deduction for Atty. Gado’s free

assistance is PI,000,000, computed as follows:
498 INCOME TAXATION
Professional fee pet hour 5,WO

Multiplied by voluntary hours rendered
for free legal assistanee (300 00) -.249
Estimated professional fee given for free
Actual professional fee PI 0,000,000

Multiplied by statutory incentive rate _____ jm
Allowed special deduction, lower iLismm
Qualified Productivity Bonuses

A company that grants productivity bonuses to its rank-in-filc
employees pursuant to the Productivity Incentives Act of 1990
(Republic Act No. w i ) shall be entitled to a special deduction from its
gross income equivalent to 50% of the total productivity bonuses
over and above the deductible ordinary and necessary expenses.
In order for the bonuses to be deductible from gross income, the

following requirements must be met:
1. The payment of bonuses is, in fact, compensation.
2. The payment must be for personal services actually rendered.
3. The bonuses are reasonable when measured by the amount

and quality of the services performed by a particular
employee. (BIR Ruling No. DA-O-t 1-2005, January 28, 2005)
Illustration
Profit Company, together with its employee labor union, agreed to

have a productivity incentives program. During the year, the
following productivity incentive benefits were received by the
rank-in-file employees as compensa
Profit sharing P2,000,000

Manpower training 1,000,000
Special studies 1.000.000
Total qualified productivity bonuses
The special itemized deduction would be P2,000,000, computed

as follows:
Total qualified productivity bonuses P4,000,000

Multiplied by 50%
Special itemized deduction
Deduction* from Qron» Income* 499
('hnptcr 8 - R E V I E W QUESTIONS
; Explain (he nature of"deductions liom gums income,*'
; Pilfccentinle "revenue expenditures” from ‘Vfipllnl expend/lures,”

Our examples for each.
3 State the conditions in order tluil comIm nfler ncquiaition of

drpiroiublc assets shall he capitalized.
4 State the rule regarding situs of deductible expenses.
5, What arc the items of expense that are not deductible from gross
income?
C Give the basic format in the tax return to compute the net taxable
income of a self-employed or employed individual.
7. Identify the differences in application of Tax Law and GAAP as to

reportable revenue and deductible expenses.
S. Define "business expenses.”
9. Differentiate the allowable OSD for individual from that of the

corporation.
10. Enumerate the taxpayers that are allowed to deduct OSD.
11. Can a husband claim OSD while the wife claim itemized deductions
(vise versa) in their consolidated ITR? Justify your answer.
12. Define “itemized deductions.”
13. Enumerate the incomes that are granted with allowable itemized
deductions.
14. What is a “general business expenses”?
15. Give the requisites for the deductibility of general expenses.
16. Are all ordinary expenses necessary?
17. When is salary expense deductible?
18. Is compensation for injuries and pensions deductible from business

income of payor?
19. What are the tax treatments if materials and supplies are used
directly and indirectly in producing products?
500 INCOME TAXATION
20. State the rules on the deductibility of rent expenses are paid under
accrual and under cash method.
21. State the ceilings for deductible representation expenses.
22. Explain the tax arbitrage on interest expense subject to limit.
23. What are the two allowed options in the treatment of interest
expense incurred in relation to capital expenditures?
24. Enumerate the taxes that are deductible from gross reportable
income.
25. What are the requisites for bad debts expense to deductible from
gross business income?
26. What are the requisites of a deductible depreciation expense?
27. State the consequences if a vehicle is acquired exceeding P2,400,000

to be used by an employee.
28. State the rules for depreciating properties used in petroleum

operations.
29. State the rules for depreciating properties used in mining operations.
30. Explain the allowable tax treatments of exploration and development

expenditures.
31. What are the two alternative treatments of capital expenditures

incurred by private educational institution?
32. Distinguish “defined benefit plan” from “defined contribution plan."
33. What are the limits for the amount of charitable contributions that
could be deducted from gross business income?
34. Why are contributions to political parties nondeductible from gross

income?
35. Explain the tax incentives to adopting private entities according to

R.A. 8525.
36. Give the valuation equivalents of assistance or donation as stated in

R.A. 8525.
37. Give the allowed tax treatments for research and development cost.
38. Enumerate the special deductions from gross income. Discuss their
respective tax deductibility treatment.
s, from jr'oss k*oome 501
_____ _________________________________________ Score: ________________
'fcrj&ts- % - 1 Deductible or Koadedactibie

--e sasr: "*>rjrrmr owjcribk or oood-eductibk from business
r- ■ ^^'e-
:.- &e&&&z of vefeadc with an acquisition cost of
P2 vx, ox
2 O' âli&ed pr-v: bonuses
' r>fc*ary p^yr'er.4.* v> ?/7/Et without withholding income taxes
*' *>*&***# >n!«rwrt on unpaid income taxes
v Xyf^Pke; of knd
Personal, /r/ing or farm}? expenses
7 to political parties
^ iy/ssee on related party transactions „%
'> Kickback payment to the government official
10 Perfeon&J exemptions on corporations
11 Optional standard deduction from compensation income
12, NOLCO within three-year period
I f Tuition fee#, board and lodging incurred by a medical doctor

while attending a continuing professional education seminar
v 4. j>; rmriimm not subjected to withholding taxes
I 3, Fringe benefits granted to executives subjected to FBT
I b, Overtime pay paid to rank-and-file employee
17. Fringe benefits paid to an officer of the company
18. Death benefits granted to employees
19 Non taxable overtime pay of MWE
20. Distribution of profits to partners

502 INCOME TAXATION
Name: Score: _____
Problem 8-2 Deductible or Nondeductible

Classify the item whether deductible or nondeductible from business
gross income.
1. Road users’ tax paid by common carriers
2. Prepaid rent and interest
3. Cash dividends paid
4. Donations made to employee's’ birthday party
5. Amounts paid for pensions of retired employees
6. Salary of employee paid to ids widow for a limited period after his
death
7. ICntire amount expended for meals, lodging, and travel in

connection with own business
8. Net capital loss carry-over
9. Philippine income tax
JO. Income tax paid by a resident citizen to foreign country
11. Research and development costs of unsuccessful developed

products
12. Net operating loss carry over
13. Compromise penalty
14. Operating expenses incurred outside the Philippines by a

nonresident alien engaged in business in the Philippines
15. Donation for coffin and wake expenses
JO. Manager's fixed allowances
17. Cost of technical books used by a CPA in the practice o f his

profession
18, Allowance for doubtful accounts
19, Premium deposits returned to policy holders of life insurance
20. Withholding Income tax on employees' salaries

Name: ______ ___________ __ ____________________ Score: -----------------------
problem 8-3 True or False

incorrect.
1. As a rule, deduction means itemized deduction.
2. Deductions from gross income are not presumed.
3. Revenue expenditures are immediately expensed.
4. Business expenses are deductible only if these are incurred in
relation to business income taxable in the Philippines.
5. No business and personal expenses are allowed as deductions
from reportable gross income.
6. Optional standard deduction may be allowed as deduction from
the gross income of partnerships.
7. The optional standard deduction allowed to individual taxpayer
is 40% based on his gross income.
8. The depreciation expense is allowed to be deducted from gross
income of two vehicles acquired with an aggregate acquisition
costs of P2,400,000 to be used by one employee.
9. A common carrier business is not allowed to deduct depreciation

expense if the vehicle used in operation was acquired exceeding
P2,400,000.
10. All business expenses are allowable deductions from gross

business income.
11. Individual taxpayers may opt for itemized deductions or OSD
from his business income.
12. Individual taxpayers earning salaiy compensation income may
deduct optional standard deduction from their gross
13. NOLCO is among those that could be claimed as itemized
deduction.
14. A bonus paid to secure a lease is deductible on a pro-rata basis
over the term of the lease.
15. A representation expense is subject to limit of 1% of net sales of
goods.
1
504 INCOME TAXATION
Name: Score:

Write True if the statement is correct or False if the statement h
incorrect.
1. Donations to political parties or candidates are deductible from

the gross income of the taxpayer-donor.
2. Special deductions are incentives in addition to the actual

regular itemized deductions.
3. The entire amount of sales discounts based on gross selling price

* or gross receipts inclusive of VAT granted to person with
disability are deductible from gross income.
4. Sales discounts granted to senior citizens are deductible from

gross income if the taxpayer-seller used OSD.
5. A person with disability who is at the same a senior citizen can

only claim one 20% discount on a particular sales transaction.
6. Rooming-in and breast-feeding practices have an incentive

special deduction amounting to 100% of the actual expense
incurred.
7. The adopt-a-school program is allowed to deduct 150% special

deduction.
8. PPHHI is allowed to be deducted from gross income of any

taxpayer for as long as the amount does not exceed P2,400
during the taxable year. *
9. A corporation with interest expense and at the same time earned

interest income during the same taxable period will be subject to
a tax arbitrage of 38%.
10. Straight-line method of depreciation provides the best tax
savings over other allowable depreciation methods.
11. Adopting private entities of public schools through TESDA can
get 150% of the actual assistance made.
12. Corporations are allowed to deduct optional standard deduction.
13. Business and professional income derived within and outside the
Philippines by a nonresident Filipino Citizen are granted with
allowable deductions.
Name: ____________________ ______________ .________ Score:__________ ______

1. Which of the following is not allowed to be deducted from a VAT-

registered business income if the vehicle acquired exceeds
P2,400,000 and primarily used in business?
a. Depreciation expense
b. Maintenance expense
c. Input taxes related to the acquisition of the vehicle
d. Repairs expense
2. Statement 1: In preparing financial statements, GAAP should prevail

over the Tax Code.
Statement 2: In preparing Tax Returns, Tax Code should prevail over
GAAP.
3. Statement 1: Unless the taxpayer signified in his return that he is

electing the standard deduction, he is deemed to have availed of the
itemized allowable of deductions.
Statement 2: In case of consolidated income tax return of husband
and wife, each is allowed to choose from either optional or itemized
deductions.
4. Statement 1: Self-employed taxpayer is required to file his quarterly

income tax return.
Statement 2: The option to avail of optional standard or itemized
deduction could be opted for each quarter.
5. Statement 1: The taxpayer has the burden of justifying the allowance

of any deduction claimed.
Statement 2: Deductions are strictly construed against the taxpayer.
506 INCOME TAXATION
6. Statement 1: Revenue expenditures are period costs that are related

to a particular period of time of business operation.
Statement 2: Capital expenditures are non-recurring expenditures
related to acquisition of depreciable assets to be used in the
business.
7. Which of the following item is correct as to the deductibility of

expense from gross income?
Item Deductible Nondeductible
a. Compromise penalty No Yes
b. Advanced payment
of rent expenses Yes Yes
c. Interest on unclaimed salary No No
d. Accrued salary expense No Yes
8. Which of the following items is not included as entertainment,

amusement and recreation expenses of a business?
a. Depreciation or rental of entertainment facilities
b. Amusement and recreation expenses
c. Expenses incurred in accommodating company guests
d. Fixed representation allowances of key officers subjected to WTW
9. Which of the following taxes incurred in the conduct of business is

not allowed as deduction from business income?
a. Foreign income tax claimed as tax credit
b. Documentary stamp tax
c. Import duties
d. Local business taxes
10. Which of the following statement is not correct?

a. Personal expenses are not allowed as deductions from
compensation, profession, trade or business income.
b. Personal expenses are not allowed as deductions from

profession, trade or business income except compensation
income.
c. Personal exemption and additional exemption are allowed as
deduction from compensation income.
Name: ________ __________________________________ Score: ______________

1. Which of the following cannot be deducted as business expense?

a. Donations made to employees.
b. Entire amount expended for meals, lodging, and travel in
connection with own business.
c. Tuition fees, board and lodging incurred by a medical doctor
while attending a continuing professional education seminar.
d. Cost of technical books used by a CPA in the practice of his
profession.
2. Which of the following is not allowed as deductible in full from gross

income?
a. Interest expense paid by the bank.
b. Interest expense paid by the taxpayer in relation to the purchase
of merchandise on installment.
c. Interest expense paid to the relative of the taxpayer.
d. Interest expense with reported interest income.
3. Which of the following taxes incurred in the conduct of business is

allowed as deduction from business income?
a. Income tax
b. VAT
c. Community tax
d. Withholding on wages of employees
4. Which of the following expenses of the business would be allowed as

deduction from its business income?
a. Insurance premium on life insurance of employee where the
employer is the beneficiary
b. Donation made to employees
c. Losses incurred on transaction with related party
d. Regular repairs of business property
5. The following taxes are not allowed as deductions from reportable

gross income, except
a. value-added tax.
b. stock transaction tax.
c. capital gains tax.
d. documentary stamp tax.
6. Which of the following is classified as deductible loss?

a. Allowance for bad debts
b. Embezzlement '
c. Depreciation
d. All of the above
508 INCOME TAXATION
7. Which of the following income is allowed to be reduced with itemized

deductions?
a. Compensation income
b. Business income
c. Passive income
d. Capital gain
8. Statement 1: Compensation income is allowed to be reduced with

personal exemption.
Statement 2: All business income is allowed to be reduced with
business expenses, and with excess of personal exemption over
b. Only statements is correct.
9. Statement 1: An individual taxpayer could claim both the itemized

deduction and personal exemption in the same taxable year.
Statement 2: An individual single proprietor could claim both the
itemized deduction and optional standard deduction in the same
taxable year.
10. Which of the following is allowed with optional standard deductions?

a. Nonresident alien doing business in the Philippines
b. Resident citizen whose taxable income is his compensation
earned
c. Nonresident citizen claiming itemized deductions from his
business income outside the Philippines.
d. Resident alien with business income earned within and outside
the Philippines.
11. Statement 1: Insurance expense incurred in connection with the

conduct of business is allowable deduction.
Statement 2: Insurance premium incurred to cover the life of key
employee where the employer is the beneficiary could be allowed as
deduction.
Dwcliir .tlon* from Oro«* Inf-orrm
Nmn«-
I*f<>!»Srto ft 7 MialUpl* Cliotafi
t ( f | (hr |<'11 l 11 ir following In not n ir/jiiiniln for the dcduchEI-

tmill Ihuhoim?
it. It mutd hriiHtmrd in (diiiih lion with fho conduct o f b u n i n o n n ,
h I Iw Inxpnyri mnkiii).' <mill ibulion tritmf bo engaged i n buxine'*/
ot pmlenrhon,
» There mtml lie- neltml payment of ro/ih jbufion or gift.
il Thr recipient of Ihe coni ri I >t 11 inn in a n entity epeci/ied b y l a w .
? Statement 1: Thr optional standard deduction in allowed to all

mdividuni taxpnyei a cm ning business income,
Slnlrmcnl 2: 'The oplionnl standard deduction in 10% of gross
business income,
n. Only statement I is correct,
l). Only statement 2 is correct.
o. Both statements nre correct.,
(I. Both statements arc not correct.
3. Statement 1: Husband and wife may report their income and

expenses in the same or common lax return.
Statement 2: Husband may choose itemized deduction while the wife
may choose optional standard deduction or vice versa.
b. Only statement 2 is correct,
e. Both statements are correct.
A. Which of the following statement is correct?

a. Actual receivable written off in connection with the conduct of
business are allowed as deduction.
b. Estimated bad debts based on account receivable balance is
deductible.
c. Bad debts written off are deductible in the year when the
allowance based on estimate was made.
d. Bad debts arising from unpaid salaries that are actually written-
off are deductible in the year of write off.

a. Depreciation of assets used in business is allowed as deduction
from business income.
b. Depreciation as a recovery of capital invested should not be
beyond the acquisition cost.
c. Depreciation should be determined on the basis of re-appraised
value if revaluation is made.
d. Straight-line method, SYD, and declining balance methods of
depreciation are all allowed for claiming depreciation expense.
510 INCOME TAXATION

a. The employer making the contribution manages defined
contribution plan.
b. The actual payment of benefit to employee is the expense of the
employer under the defined contribution plan.
c. Under the defined benefit plan, the employer normally makes the
actual payment of benefit to employees.
d. Under the defined contribution plan, the amount of contribution
is equal to the actual payment of the benefits due to the retiring
employee.
7. Statement 1: Deductible business expenses must be ordinary and

necessary.
Statement 2: Expenses from previous period which were not
deducted from previous period’s income could be deducted from
income in the current period.
8. Which of the following expenses incurred in relation to the conduct

of business could be deducted in full, if the net sale is PI,000,000?
i. Salaries of employees, net of withholding tax
ii. P60,000 rent expense
iii. P50,000 traveling expense
iv. P10, 000 entertainment expenses
Choices:
b. i, ii, and iii only
c. i, and ii only
d. i only
9. Which of the following interest expense is deductible in full?

a. Interest on tax delinquency
b. Interest on personal loan
c. Interest expense which is 200% of the interest income for the
same year
d. Interest paid in advance
10. Which of the following is deductible as bad debts?

a. Bad debts which is estimated at 1% of net sale
b. Bad debts based on allowance of 1% of accounts receivable
c. Account receivable written off
d. Account receivable recovered
Chapter 8 Deductions from Grass Income 511
■i.
ri
': Name: Score:
problem 8 - 8 Multiple Choice

I. foliowing statements is correct?

W h ich o f the
a. Aii contributions of person engaged in business are deductible.
b. Aii deductible contributions are deductible at their actual
amount contributed.
c. Contributions to the government for priority program a r e
deductible only up to *10 % i f b e i n g claimed by single
proprie torship.
d. Contribution by a domestic corporation to the government for
general purposes is subject to limit of 5 % of income after
itemized deductions before contribution
2. Statement i: Gains arising from transactions between related

taxpayers are taxable.
Statement 2: Losses incurred from transactions between members of
I the family are not deductible from business income.
3. Statement 1: The amount of deductible taxes is limited to the basic

tax and s h a l l n o t include the amount for any surcharges or penalty.
Statement 2: Interest on delinquent taxes is deductible from gross
business income in full amount.
a. O n l y statement 1 is correct.
4. Which of the following will be an appropriate deductible expense for

the exhaustion of intangible asset of wasting asset corporation?
a. Depreciation expense
b. Amortization expense
c. Depletion expense
d. Exploration expense
5. Statement 1: Research and development cost may be reported as

deferred expense.
Statement 2: Research and development cost could be charged to
property subject to depreciation or depletion.
6. Statement 1: Under the defined contribution plan, the pension

#- ■ x ncrjte
iptcyer is -err -a* 30 v-^ 5*r sec. amount of pence;

^r.tr.huh/;c.
rr
Snsre -i- -r.ner f ztrrJifs. oiaru e pensxu expeiâe*
r.t
vue employer a ecu a. m -he pension for the T-rrer.'. year
*rv.oea p;us v.e «rxmxanon of pât year?' serenes.
Emy staternem I i romecr_
Or_y ttatemerh* 2 „a
Bor.'. ifater.rer.ta sue correct.
>
5x.rh are not correct
va-emerr * • True charirahLe contribution must be connected in the

conduct of business m be af-cwed so deductfcu.
Sterner, t 2: Tice chartab'e crmvrbuuon is showed as dechacdcn
*torr. business income but cot showed as dedtactao:
^mper.iaucr income
*- Only statement I ia. correct,
c Only scat/ er.t z a correct
Both va tenenta are correct
d Both smtener.Ui are cot correct.
•- *he contribution is subject to lire:’ the allowable amount a

dec rctior. should be limited"to
a- 5% of the business income after fu lized deduction but defer
contribution of individual taxpayer,
o, 10% of the business income after itemized deduction, and
con tribu tier, of ind hid uai taxpayer.
c. 5% of the business income after itemized deduction but before
contribution of corporate taxpayer,
d 10% of the business income after itemized deduction and
contribution of corporate taxpayer.
9 The amount allowed as deduction for assistance directly and

exclusively incurred for the program coordinated with DECS is
a. 50% of the actual value of the assistance,
h. 100% of the actual value of the assistance.
c. 150% of the actual value of the assistance.
d. 200% of the actual value of the assistance.
10. Statement 1: Premium payment on health and hospitalization

insurance is a special itemized deduction.
Statement 2: All charitable contributions to educational project of
the government can be deducted in full amount phis a special
itemized deduction of 50%.
d. Both statements axe not correct.
problem 8-9 Revenue vs. Capital Expenditures

D Trucking incurred the following additional expenditures in maintaining
its deliveiy trucks;
Cost of truck’s new differential P50,000

Cost of overhauling materials 30,000
Cost of paint in repainting truck body 10,000
Total labor costs incurred 10,000
The amounts to be immediately expensed and capitalized are

Expensed Capitalized
a. P90,000 P10,000
b. PI 1,250 P88,750
c. P10,000 P90,000
d. P 1,250 P98,750
Problem 8 - 1 0 Revenue vs. Capital Expenditures

ABC Store incurred additional expenditures of PI30,000 for its business
fixed assets as follows:
Installation of new air condition P60,000
Expansion of store 50,000
Damages paid due to workers’ injury 20,000
Repainting of store building 10,000
Cleaning of computers 9,000
Repair of furniture 1,000
The amounts to be immediately expensed and capitalized would be
Expensed Capitalized
a. P-0-. PI50,000.
b. P30,000. P120,000.
c. P40,000. PI 10,000.
d. P80,000. P 70,000.
Problem 8 - 1 1 Situs of Expenses

Mr. Smith, a nonresident alien, who is engaged in business in the
Philippines, presented the following incomes and expenses during the
taxable year:
Philippines Australia
Gross income PI,000,000 P4,000,000
Operating expenses 400,000 2,200,000
In addition, Mr. Smith presented P200,000 operating expenses which
cannot properly be identified whether or not incurred in the Philippines.
How much is the amount of allowable operating expenses for Philippine

income tax purposes?
a. P600,000 c. P450,000
b. P440,000 d. P400,000
514 INCOME! 1AXATION
Problem 8 - 1 2 Uviut Not Deductible

Mr. Fronda, an entrepreneur, submitted the following rxpeuae* during
the taxable year:
Personal expenses P --O.Ooo

Family- expenses I 50,000
Renovation of his house 200,000
Loss on sale of personal ear >10,000
Worker’s insurance premium (beneficiary, Mr. luotula) 5.000
Worker's salary 00,000
Bad debts on money lend to his brother 20,000
How much is the amount of total expenses deductible from Ids busiarsH
gross income?
a. P60.000 c. P80.000
b. Pb5,000 d. P85.000
Problem 8 - 1 3 Items Not Deductible

Mr. Wallang, a businessman, submitted the following business expenses
and losses during the taxable year:
Salary of employees PI 20,000

Police protection 20,000
Interest expense paid to his father 10,000
Gifts made to employees during birthday 5,000
Capital loss 4,000
How much is the amount of nondeductible expenses and losses from

gross income?
a. P14,000 c. P35,000
b. P29,000 d. P39,000
Problem 8 - 1 4 Deduction from Business Income

Mr. Bago incurred the following expenses and losses during the year:
Family expenses P 240,000
Cost of family home, life 25 years (40% used in business) 1,000,000
Life insurance expense of his maid, the beneficiary is Mr. Bago 10,000
Loss from sale of land to his brother 100,000
Loss of business equipment reported to the BIR 38,000
The deductible expenses and losses from Mr. Bago’s business income is
a. PI 64,000. c. P60,000.
b. PI 54,000. d. P54,000,
Problem 8 - 1 5 Deductible from Gross Income

Mr. Apo Linar, married, works as a supervisor of Golden Construction
receiving P240,000 as his annual gross compensation income. He
maintains a small consulting firm that earns PI20,000 a year. He
incurred the following expenses during the year:
Ch»pt*f ** Deduction* from Gross Income 515
I ' f t m U t m p u y m t n i t s i o f h i * life jneiur«n< r P25,000

D r \itn o f his house (J0% ts used »s offiee f o r his firm) 20,000
o f h i e house (J0% used as office f o r his linn) 100,000
I n i r t r - h t t * i / t - n * r paid to his broiler 10,000
Office supplies u8f*d 0,000
Donation fo 0a burial of his friend 5,000
1 loom On items above, how much Is 1b*4 total deduction from gross
1 ompt jifeiifkm income of Unar?
«■ t* 0 c, P20,000
h' îd.000 d, | >2 5,000
2 P r o m flit- items above, how much Is the total deduction from

p/<>ft astioual gross income of Linar?
h !' 0 o. 020,000
^ i'18,000 d, 1*25,000
Problem H - 16 Tax Laws vs. GAAP

Duong On- year, A Co. reported the following business expenses:
balm y expanse, net c>j withholding lax of 020,000 PI 80,000
grdboated uncollectible accounts 10,000
Compromise penalty expense 50,000
Dcp/rf jafion expense 30,000
Mis* ' ligneous expense 5,000
'M»e miscellaneous expense was incurred but not reported lust. year.
'Die deductible business expense from a company’s earnings would be
Taj* Laws _ OMP
a, 1*205,000 1* 205,000,
b, 1*280,000 1*200,000,
c, 1*250,000 1*200,000,
d 1*280,000 1*205,000.
Problem H - 17 OSD of Sales (Individuals)

Miss Dianne Torres showed the following income and expcn.ses during
the year:
Compensation income as a teacher 1*250,000
bales of wagwag business 300,000
Cost ol sales 80,000
Opejahng expenses (without documentations) 50,000
Mow much is thr deductible cost ol sale and operating expense if Dianne
opted to deduct OSD?
Cojtf Ol fJtUc OpCXillillg CAlKHJiC
M I* 0 1*120,000
1), 1* 80,000 1*120,000
t P 80,000 P 88,000
d, 1*130,000 1* 50,000
516 INCOME TAXATION
Problem 8 - 1 8 OSD of Gross Receipts (Individuals)

Mr. Lito Pusalang provides the following data:
Gross receipts from profession PI00,000
Rent income, net of withholding tax of 5% 475,000
Interest income from Metro Bank 40,000
Dividend income from San Miguel Corporation 10,000
Operating expenses without receipts 40,000
Compensation income 300,000
How much is the optional standard deduction?

a. P316,000 c. P230,000
b. P240,000 d. P220,000
Problem 8 - 1 9 OSD (Nonresident Alien)

Teno Lang, a nonresident Chinese national engaged in business in the
Philippines, reported the following Philippine income and expenses
during the year:
Sales PI,000,000
Gross income P 700,000
Less: Operating expenses 500,000
There are no official receipts and documents to support his operating

expenses. There is no reciprocity law in his country to provide tax
exemption to Filipino citizen. How much is the amount of allowable
deduction from the gross income of Teno Lang if he opted to deduct OSD
because he cannot substantiate with receipts his operating expenses?
a. P550,000 c. P330,000
b. P450,000 d. P - 0 -
Problem 8 - 2 0 OSD (Individual vs. Corporation)

T reported the following for the period:
Sales PI,000,000
Computee the OSD assuming that T is a (a) sole proprietor, or

(b) corporation.
Sole
Proprietor Corporation
a. P400,000 P280,000
b. P400,000 P580,000
c. P360,000 P200,000
d. P280,000 P280,000
518 INCOME TAXATION
Les.;. - ;r.~' zsl X z -zic an fringe bene5: payment*

PSSC.OCC 68V X 32 :: ' 320.000 680.000
Tmal zash payment for salaries and Cringe benefits P5.980 OOP
Vhe ?320,000 final kax on fringe benefits has been paid to the BIR.
The total amount of allowable salary' and fringe benefits expenses that
-uf be claimed bv Phoenix Corporation would be
a P7.Q0G,000. ” c. P5,980,000.
b- ?6TOOOfOOO. d. P5,300,000.
Problem 8 - 2 5 Deductible Bonus

«-• In 20GB, a domestic corporation, using the calendar period, had a net
income of P75.000 after deducting in full charitable contribution of
?5fCOQ which is subject to limitation but before deducting bonus given to
hey officials and before 30% basic income tax. Bonus is 15% of the
income before the bonus and after the basic income tax. What is the
amount of deductible bonus?
a- F7.067 c. P8,356
h. P7,752 d. P8,400
Problem 8 - 2 5 Compensation for Injuries and Pensions

vrrile working, A, one of X Construction Co.’s workers, died by falling
from the 10* floor of the building. The company helped the worker’s
family with the following:
Monthly salary P 5,000
Death benefits 50,000
Termma I pay 25,000
r ; nera 1 expense 1 o, 000
Continoo m compensation after the burial for three months 15,000
How much is the total deductible expense?
a. PI 05,000 c. P90,000
b p 95,000 d. P80,000
Problem 8 - 2 7 Materials and Supplies

O Do reported the following data regarding its materials and supplies:
Materials Supplies
Beginrdng inventory P100,000 P20,000
H;rchae«e 300,000 40,000
Increased Hiecreae.e) in inventory (20,000) 3,000
v...
How rniioh is the amount of inventoriablc cost and supplies expense?
f W/ml'M ia blc
a l'400,000 H63,000
o, HO go, 000 POO,000
HO20,000 P37,000
0, HO00,000 H40,000
f k (j^ d o e t io n t frwi Gr r t % % in r s s f r * 519
pfftfoimffl % yfl ‘TwraHnst #'Xp*en**i*

y Ki ■’iff^ the foJP/v/.og *r;t "/+i
0) H*f»' f,/ hotel hni% of it* oiU.er% who Were V:.'.2 * 4 V, V
*e/mnarn
fn C>*/*>o p bG///,
tn 'lh,y/*r> 200///,
(9,) 'rtfperfvn of Pa officers fro?ft home to ofi/J? ar,d
v<r/n#» P/,rf '>f their employment contract, PG8///> or. v/bfch
fax of P-*2/>00 wtt*. ffi.rfiitt/'/j. Transportation ezpenoez of rnc^venger5*
from offV e to several cJienfV pIo < a % (it 940///), i?,c\ J'd'/e of rnealA
arare mfmg tf> fOcG//;0.
f(w/ much i* the UfU d slJov/able exfiense that could ve claimed fry
A Corporation?
a 99//)/)</> o, PO 50,000
b. Pbi 8,000 d, P090,000
Problem 8 - 29 W«nt Expedite

On Ortober 9,1, 200H, /*, acquired a </>n\ro(Z of leave v/ith 7abora
p,udders regarding a space v/ith the stlpulatione that A should be
resporis/bJr in paying thr. UJUjv/iny/.
Monthly rent ^rj (j (j C j
Hhate tn annual nonlife insurance premium b 000
Jhare in annual real prfjperty fay. 1*500
'/hare in annual city services 24 000
If ufire 60% of the apace for business and the remaining 40"/, for
A
residence, how
much iv. the deductible rent, expense to be reported by A
lot the year eridiny her,ember 91,200h?
a, 92 4,450 c, P26,850
I k I *26,700 d, 944,750
Problem 8 - 3 0 Prepaid Rent

On June 90, 200H, G rentjh an apartment for P20,000 and subsequently
sublease 80% of the apartment to CPA reviewees for P25,Q00 a month
beginning July 91, 2001b G's records show the following rental
collections and payments during the year:
JofaJ payments P 80,000
Total collectionH 150,000
1. How much is the deductible rent expense for the year?

a. PI 40,000 c. P96,000
b. PI 20,000 d. P80,000
2. I low much is the reportable rent income for the year?

a. P 80,000 c. PI20,000
b. PI 00,000 d. PI 50,000
520 INCOME TAXATION
Problem 8 - 3 1 Lemichold Improvement

R signed mi 8 year lease contract to occupy a vacant lot for P'2,000 a
month. As a part of (he lease agreement, R constructed a restaurant
building costing PbOO.OOO completed at the start of the lease contract.
The building has an estimated life of 10 years. At the end of the lease
contract, the landlord will own the building.
The monthly deductible expense from the above contract would be

a. P2.000. c. P7,000.
b. P6.250. d. P8,250.
Problem 8 - 3 2 Leasehold Improvement

On August 1. 200A, T Foods signed a 10-year lease contract to occupy a
vacant lot for P5,000 a month. As a part of the lease agreement, T Foods
constructed a restaurant building costing P950,000. The building was
completed and immediately used on January 31, 200B. The building has
an estimated life of 15 years with a salvage value of P50,000. At the end
of the lease contract, the landlord will own the building.
The related deductible expense of T in 200B from the above contract

would be
a. P142,500. c. P151,667.
b. P150.000. d. P154,737.
Problem 8 - 3 3 Representation Expense

A business reported a total net revenue of P5,000,000. The actual
entertainment and representation expenses incurred in connection with
the conduct of business amounted to P30,000.
1. If the business is a trading business, the deductible amount of

representation and entertainment expenses is
a. P 5,000. c. P30,000.
b. P25,000. d. P50,000.
2. If the business is a service business, the deductible amount of

representation and entertainment expenses is
a. P 5,000. c. P30,000.
b. P25,000. d. P50,000.
Problem 8 - 3 4 Representation Expense

Compairs, a sole proprietor, is engaged in computer sales and computer
repairs, reported the following income and expenses during year:
Net sales P700,000
Net repairs revenue 300.000
Cost of sales 500.000
Cost of service 80,000
Salaries expense 90.000
Rent expense 60.000
Representation expense 10,000
Deductions ?-prt Gross Income 521
m ~ v.e bed„c*:ible representation expense?

*. ?'. c. P 7,500
• - 6. d. P10,000
Prooiem 3 * 35 Interest Expense

earned income, inclusive of P50.000 interest income and
re? tf mrerem expense of P40.000, amounting to PI,500,000.
"he deduct hie interest expense would be

*• P23.500. c. P16,800.
- P'9.DOC. d. P-0-.
free leal & - 36 Special Itemized Deductions

■'— Ved.ca. Cer.-.er reported the following expenses during the year:
7 • ta -v• >ed. r. g assiatance to the needy P200,000

:u>.ar- v.' *-vricers (20% senior citizens) 500,000
.. vee medical center reported health services revenue amounting

Ph'/hOCO from senior citizen, how much is the total special itemized
ded-^ctaic?
% P275 TOO c. P315,000

t P300 TOO d. P560,000
Problem 3 - 37 Deductible vs. Nondeductible Interest Expense

T-x... a taxpayer reporting m cash basis, showed the following interest
related to his business during the year:
paid :r. advance P20,000
' paid -o a brother 12,000
meres: pax! on delinquency taxes 8,000
rreres* or. borrowings to finance his family home 30,000
' -.*rev paid to finance petroleum exploration 100,000
7 Mr Tee has an interest income of PI0,000 earned from the bank, and
P2h r//j interest income from trade notes receivable, how much is the
deductible and nondeductible interest expense during the year?
Deductible bonded u cf i bie
% P28 000 PI 42,000
p b.ooo PI62,000
p 4.200 PI 65,800
po P 170,000
^'oblem 3 - 3 8 Hondeductible Interest and Itemized Deductions

>o Manpower Services, a domestic corporation, reports the following
' oo.", and ex peruses during a taxable year;
Dross receipts PI,000,000
r income, net of 20% final tax 40,000
b*u*r.e- 600,000
>-n* evper.se 200,000
'r^res* expense on unpaid salaries 60,000
522 INCOME TAXATION
Payment of bank loan balance, including interest

expense of P40,000. 400,000
If Gibo opted to use itemized deductions, how much is the amount of

nondeductible interest expense and total amount of itemized deductions
allowed to reduce business gross receipt?
Nondeductible Itemized
interest exnense deductions
a. P79,000 P821,000
b. P76.500 P823,500
c. P60,000 P840,000
d. P19,000 P281,000
Problem 8 - 3 9 Tax Arbitrage

Ajoy Co., a domestic corporation, has average annual.business income of
PI,000,000 and an annual average * allowed operating expenses of
P500,000. It has acquired a loan of PI,000,000 with interest expense of
10% per year, and invested the same in a time deposit that earns 12%
per year.
If there is no limitation on the deductibility of interest expense, how

much is the actual net tax savings of Ajoy?
a. P12,000. c. PI 1,000.
b. PI 1,880. d. P 6,000.
Problem 8 - 4 0 Tax Expenses

Care Corporation incurred the following taxes during the taxable year:
Documentary stamp taxes P 1,000
Income taxes paid in favor of key officers (as fringe benefit) 13,600
Income taxes paid in favor of rank-in-file employees (as fringe benefit) 22,400
Local taxes, including surcharge of P800 and interest of P200 6,000
Philippine income tax 100,000
Municipal tax 2,000
Community tax 1,500
Value-added tax 90,000
Compromise penalty on taxes 50,000
The amount of taxes deductible from gross income of Care Corporation

would be
a. P 9,500. c. P46,500.
b. P45.500. d. P51,900.
Problem 8 - 4 1 Tax Expenses

The following tax expenses related to business were paid by X Trading
Business taxes other than VAT P 20,000
Documentary stamp taxes 1,000
Automobile registration fees (business use) 3,000
Import duty taxes 50,000
Postage stamp taxes 500
Stock transaction tax 2,500

Income tax 600,000
Value-added tax 240,000
Donor’s tax 5,000
How much is the amount of taxes deductible from gross income?

a. P73.000 c. P74,500
b. P73,500 d. P76,000
Problem 8 - 4 2 Tax Credit Paid to Foreign Country

Balong is a resident citizen with earnings within and outside the
Philippines. His financial records during the taxable year show the
following:
Business income within and without P520,000
Business expenses within and without 200,000
The business expense includes PI0,000 representing income tax

payment made in foreign country.
If his personal exemption is P50,000, how much is the correct net

taxable income to avail better tax savings?
a. P320,000 c. P300,000
b. P310,000 d. P280,000
Problem 8 - 4 3 Bad debt Expense

Fran Corporation has PI00,000 collectibles from Oliva who became
insolvent with P60,000 assets and P200,000 liabilities of which 50% is
an income tax liability.
How much is the deductible bad debts of Fran Corporation?
a. P100,000 c. P30,000
b. P 40,000 d. P15,000
Problem 8 - 4 4 Bad debt Expense

Mr. So reports the following bad debts as deductions from his gross
income for the year 200B:
Bad debts expense from business P200,000
Bad debts expense from practice of profession 50,000
Uncollectible salary 20,000
Uncollectible money lend to brother for operation 10.000
Total bad debts claimed P280.000
Upon investigation, the following are gathered from the records of Mr. So:
1) Bad debts from business:
From insolvent customer with solvent guarantor PI00,000
From other customers without guarantor (60% are estimated
collectible and 40% are actually written off during the year) • 100.000
Total P200.000
2) 100% of bad debts from profession are actually written off during the
year.
3) Uncollectible salary was due to employer’s bankruptcy.
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Employing the provisions of Rev. Regs. No. 12-2012 regarding

depreciation, how much is the total overstated amount of financial
operating expenses over itemized deductions for the taxable year 2013?
a. PI 20,000 c. P360,000
b. P320,000 d. P400,000
problem 8 - 48 Depreciation Expense

Zamba Oil’s fixed assets that are used in petroleum operations are as
follows:
Estimated useful life Acquisition cost
Land Infinite P 500,000
Oil drilling machine 8 years 800,000
Oil extracting machine 20 years 900.000
Computers (office) 4 years 100.000
Delivery truck 10 years 200,000
If all depreciable assets have a salvage value of 10%, how much is the
annual depreciation?
a. P270,000 c. P235,000
b. P250,000 d. P229,500
Problem 8 - 49 Depletion Expense

Gold Ore acquired a mining property for P6,000,000 believed to have an
estimated gold ore deposit of 5,000,000 tons. It is estimated that the
property has a salvage value of PI,000,000 after P300,000 restoration
cost.
If Gold Ore was able to produce 800,000 tons of gold ore, how much is
the deductible depletion expense?
a. P752,000 c. P848,000
b. P800,000 d. P960,000
Problem 8 - 5 0 Exploration and Development Expenditures

Benguet Mining Co. reported the following data for 200x:
January 1, 2OOx depletable cost P 12,500,000

January 1, 200x probable reserves 5,000,000 units
Cost and Expenses:
Mining costs P2,000,000
Milling costs 3.000. 000
Marketing expenses 1.500.000
Depreciation expense 1.000. 000
Exploration costs 1,000,000
Intangible development costs 1.500.000
Other information during 200x:

(a) Additional probable reserves were determined to be 2,500,000 units.
(b) Actual production was 1,200,000 units.
(c) Selling price per unit is PI2.
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M MO 'h.OOO I Ml ,000,000
0 17/0,000 (! IV ,000,001/
j. If the retirement plan is BIR-registered, how much is the deductible

retirement expense for year 200C?
a. P300,000 c. P800,000
b. P530,000 d. P830.000
2. If the retirement plan is NOT BIR-registered, how much is the

deductible retirement expense for year 200C?
a. P300,000 c. P800,000
b. P530,000 d. P-0
Problem 8 - 53 Retirement Expense

X Co. maintains a BIR-registered defined benefit retirement plan. The
company’s normal cost for funding is P700,000 and P670,000 for year X
and year Y, respectively. The following are expenses related to the
retirement plan:
YearX Year Y
Benefit expense for accounting purposes P750,000 P900,000
Actual contribution 800,000 600,000
How much retirement expense is deductible for year Y?
a. P610,000 c. P680,000
b. P670,000 d. P900,000
Problem 8-54 Deductible Contribution Expense

What would be the allowable deduction for PI5,000 contribution made
by a domestic corporation to a religious organization from its P200,000
net income before contribution?
a. P 9,250 c. P10,750
b. P10,000 d. P15,000
Problem 8 - 5 5 Deductible Contribution Expense

What would be the allowable deduction for P5,000 contribution made by
a resident citizen to an accredited social welfare organization, from his
P60,000 net income after contribution?
a. P6,000 c. P5,000
b. P5,500 d. P6,500
Problem 8 - 5 6 Deductible Charitable Contribution

A domestic corporation made a P20,000 contribution to an accredited
social welfare institution. Its business income for 200A is P500,000. The
related business expenses inclusive of the P20,000 contribution is
PI50,000. The allowable deduction for charitable contribution would be
a. P17,500. c. P20,000.
b. P18,500. d. P24,000.
Problem 8 - 5 7 PPHHI
How much is the deductible amount of PPHHI if the amount paid is
P3,000 during the taxable year by a resident alien and his total family
income is P200,000.
528 INCOME TAXATION
The payment tor PPHH1 was made in the month of December of current
year, covering one year period starting December of current year of the
taxable year.
a. P 200 c. P3,000
b. P'2,400 d. P2,000
Problem 8 - 5 8 PPHH1
Mr. Tyrone Velasquez has a total salary of PI80,000 , and Mrs. Girlie
Velasquez has PI20,000 income for the year, both earned from
employment in the Philippines.
They paid PI 50 per month health insurance policy for the months of
June to December 200x. Mr. Velasquez as head of the family could claim
special allowable itemized deduction for these payments equal to
a. P 900. c. P2,400.
b. PI,800. - d. P - 0 - .
Problem 8 - 5 9 Tax Incentives to Adopting Private Entities

X signed a MOA with Department of Education for the supply of books to
Irisan National High School valued at PI,000,000 for free. During the
same year, X reported a business income of P31,500,000 and business
expenses of P22,500,000 before the amount of donation per MOA. \
The deductible donation of X is
a. P675,000, if X is a corporation and the donation is for the priority
program of the Government.
b. PI,350,000, if X is a single proprietor and the donation is for the
priority program of the Government.
c. PI,500,000, if X is a general co-partnership and the donation is for
the priority program of the Government.
d. P675,000, if X is a sole proprietorship and the donation is not part of
the priority program of the Government.
Problem 8 - 60 OSD and NOLCO

X Co. reported the following income and expenses for a calendar year:
Sales P5,000,000
Operating expenses during the year 1,000,000
NOLCO 500,000
Dividend income from domestic corporation 60,000
Interest income, net of final tax 40,000
Only 30% of the operating expenses can be substantiated with official

receipts. Included in the operating expenses is P50.000 interest expense.
Required:
1. Total deductible expenses using itemized deduction
2. Total deductible expenses using OSD
3* Net taxable income using the amount that provides tax advantage.
problem 8 - 6 1 Allowable Deductions

Mr Joker Aroyo. widower with three (3| qualified dependent children and
3. practicing accountant has the following receipts and expenditures for
the calendar year ended December 31. 200x:
Receipts:
Professional fees P500.000
Allowance as director of Corporation A 25,000
Interes: on time and savings deposits, net of 20% final tax 16,000
Commissions 5,000
Expenditures:
Salaries of Assistants P 96,000
Partial payment of Loan 20,000
Interest on the loan (The loan was used for the repair
of the residential house of Mr. Aroyo) 3,850
Traveling expenses 11,000
Light and water, Office 7,890
Light and w'ater, Residence 6,500
Stationeries and supplies 1,960
Office rent 60,000
Contributions exclusively for religious purposes 38,500
Required: Compute for the allowable

deductions from the business gross
income.
Problem 8 - 6 2 Total Allowable Deductions

Love Enterprises incurred the following
business expenses in the taxable year
200x:
a. Allowance per aging of accounts receivable at the beginning and
ending of the year are P20,000 and P30,000 respectively. The firm’s
provision for bad debts during the year is PI5,000.
b. Accumulated depreciation on machine at the beginning is PI00,000
but at the end of the year is PI 10,000. During the year, the firm sold
a machine with a cost of P300,000 and an accumulated depreciation
of P30,000 and purchase at the end of the year a new machine worth
P400,000 with a better capability.
c. Research and development cost of P500,000 treated as deferred
expense.
d. Contribution during the year are as follows:
To the government for priority program in sports P 50,000
To the government for public purposes „ 10,000
To the accredited NGO’s total administrative expenses is 35% 100,000
To the church of Baguio 60,000
Net income before contribution 2,500,000
530 INCOME TAXATION
Required: Compute the total allowable deductions of Love Enterprises

assuming that the firm is a
1. Sole proprietorship.
2. Corporation.
3. Partnership.
Problem 8 - 6 3 Retirement Expense

X Corporation maintains a BIR-registered benefit retirement plan. The
company’s normal cost per actuarial valuation for funding is PI,000,000
and PI,200,000 for years 200A and 200B, respectively.
The following are expenses related to the retirement plan:

200A 200B
Retirement benefit expense
(Recognized for accounting purposes) PI,100,000 PI,200,000
Actual contribution 1,250,000 900,000
X Co.’s financial net income for year

200A and 200B are P50,000,000 and
P60,000,000, respectively.
1. Deductible retirement expense for years 200A and 200B
2. Net income before income tax for years 200A and 200B
Problem 8 - 6 4 Financial to Tax Reporting

X, reported the following income and expenses during the calendar year:
Sales P10,000,000
Salaiy expenses 500,000
Retirement expenses (actual contribution)
(normal valuation is P250,000) - BIR Registered 300,000
Representation expense 200,000
Interest expense paid to the BIR 20,000
Interest expense paid to Metro Bank 100,000
Depreciation expense 40,000
Rent expense 250,000
Group insurance expense 50,000
Bad debts expense (of which only 20% actual write-off) 100,000
Income tax expense 120,000
Contribution to TESDA priority project 500,000
Contribution to local government 100,000
NOLCO 200,000
Required: Compute the allowable itemized deduction if X is a

1. Corporate taxpayer
2. Individual taxpayer
i 'h J i p t t H t f f h l d i l * f l i M l t t f t H ( i r < ) e t e > l t t < OIT1& W1
8 Ktiimu liil lo Tw* Ifwjioftbig

\ ...nuiiif > i tn.iiii;.; ( V I ) u p l a n d m i «td< t* of f* ',')<)(),<)()<) and * w* rA
at Pl’MkVOOt) \ l' Uu u i K i l (h« (allowing hutdorst* r/tpc-ns*'^ 'fining
(!w \ car 30()\
• Safin k‘n c'\pen sc a.s (allows:

YVnikrus last \c'ai’s salaries paid this year P '>0,000
Salat i<\s incurred anil paid thin yem 2'j 0/J00
Accmcd salaries not yet paid 00,000
Withholding (ax on salaries 20,000
Advances to employees 20,000
• Allowance per aging of accounts receivable ai ibe beginning and

ending of (ha year arc* 1*48,000 and 1*00,000 respectively, The firm's
allowance provision for bad debts during Ifieyrnr is PI 5,000,
• Accumulated depreciation on machine al (he beginning if> 1*100,000

but at the end of the year is PU)0,000. During the year, the firm sold
a machine with a cost of 1*300,000 and an accumulated depreciation
of P30.000 and purchase at the end of the year a new machine worth
P-400,000 with a better capability.
• Entertainment, amusement and recreation expenses:

Fixed representation allowance, net of P4,500 WTW P 50,000
Country club fees 100,000
Sporting events 50.000
Entertainment of company guests 30.000
• Contribution during the year are as follows:
To TESDA for priority educational program P200,000
To the church of Baguio 150,000
To the government for priority program in sports 60,000
To the accredited NGO (administrative expenses is
25% and all requirements of BIR are complied) 40,000

1. If VT is a sole proprietorship, how much is the amount of total
allowable deductions, excluding personal exemption?
2. If VT is a partnership, how much is the amount of total allowable
deductions?
Problem 8 - 66 Financial to Tax Reporting

X, reported a financial accounting income amounting P5,000,000 during
a calendar year. The cost of sale was P30,000,000. The operating
expenses that were deducted reveal the following:
a. Salaries expense: a
Salaries worked and paid P500,000
Advances to employees 100,000
Accrued salaries (senior citizen workers) 80.000
Total salaries expense P680.000
532 INCOME TAXAUOH
b. Bad debts expense:

Accounts written off determined to be 'IX XC
Estimated uncollectible accounts /'*'> 7X
Related party bad debts
Worthless accounts not yet written off 5C XC
Total bad debts expense
c. Actual retirement expenses deducted PI ,000,090, The retirement
plan is BIR-approved. Normal retirement per axttiarual ccmpuuamt:
is P800,000. ActuaJ retirement payments amounted to P52XXG-
d. Representation expense, P500,00Q„
e. Rent expense:
Advanced payment of which only 80% w as used
f. Taxes expense:
Municipal and licenses ? SOjOOC
Surcharges and penalties ÔJO€C
Quarterly income tax 23Q.ti*X>
Total taxes P3f*r»-30C
g. Life insurance expense:
Premium on employees group insurance P 5XQ0C
Premium on officer’s insurance (beneficiaiy-X Co.j 100.000
Total life insurance expense P 150.000
h. Interest expense:
Interest expense (bank borrowings) P2GG.OOG
Interest expense (late payment of tax) 20.000
Interest income (bank deposits) ( 50.000*
Interest income (trade notes receivable) f 10.000^
Net interest expense, deducted £160.000
i. Contribution expense:
Donations to TESDA priority project P500.000
Donations for Rooming-in and Breast-feeding 200.000
Donations to accredited NGO’s (35% for admin.) 100.000
Total contribution expense P800.000
1. Total allowable deductions if X is an/a
a. Individual taxpayer.
b. Corporate taxpayer.
2. Net income for income tax purposes if X is an/a
b. Corporate taxpayer.
Chapter 9
LOSSES
LOSSES
Losses represent reductions of resources due to unintended

destruction or deprivation of things.
In general, these losses shall be allowed as deductions from gross

income if related to business, actually sustained during the
taxable 3rear and not compensated for by insurance or other
forms of indemnity. [Sec. 34(D), nircj
Kinds of Losses
Losses may be classified into three major categories, namely:

1. Ordinary losses. These losses are usually incurred in
relation to trade, profession or business, property used in
business, and profit-seeking transaction incidental to
business. These are generally deductible from gross income.
2. Capitallosses. They are losses incurred in relation to capital

asset transactions. Capital assets are resources not used in'
business.
As a rule, capital losses are deductible only from
capital gains. (Capital losses are fully discussed in chapter 7).
Examples of capital losses are:

a. Losses from sale or exchanges of capital assets.
b. Losses from short: sales of property.
c. Losses arising from securities becoming worthless,
provided that the securities are not ordinary assets.
d. Losses due to failure to exercise privileges or option to buy
or sell property.
L Special kinds of losses. These are losses incurred not

related to ordinary business transactions or capital assets
t ran sact. ions.
534 INCOME TAXATION
Examples of these losses are:
a. Losses from sales or exchange of property between related

taxpayers
b. Wagering losses
c. Losses due to voluntary removal of property such as
building, machinery, etc.
d. Losses of useful value of capital assets due to some
change in business conditions.
e. Abandonment losses in petroleum operations
Requisites for Deductibility of Ordinary Losses

The following requisites should be met for ordinary losses to be
deductible from gross business income:
1. The loss must be actually sustained in a closed and
completed transaction;
2. The loss must be that of the taxpayer and incurred in trade,
profession or business;
3. The loss must not be compensated by insurance or other
forms of indemnity; and
4. If a loss results from casualty, robbery, theft or embezzlement,
the loss must be reported to the BIR from 30 days to 90 days
from the date of its discovery.
Notes:
1. Casualty losses with claim for reimbursement (with reasonable prospect of
recovery} shall not be deductible until it is ascertained with reasonable
certainty whether or not reimbursement will be received.
2. A loss claimed as deduction for estate tax purposes should not be claimed as
a deduction for income tax purposes. (Sec.34Dj, XIRCj
Losses Not Allowed by Law as Deductions
Some losses prohibited by law as deductions from gross income

are:
1. Loss on voluntary removal of building on land purchased with
a view to erect another building ?sec. 97, Rev. Regs so 2)\
2. Gambling losses not covered by gambling gains Sec. 3* { s t r c : ,
3. Capital loss not covered by capital gains (Sec. 34;d;:^j, mrc/;
Losses from exchanges of property in corporate readjustments
Sec. ±9,
Chapter 9 Losses 525
5. Losses from illegal transactions <:**. vc. h *v r ^,$. k0 2r.

6. Losses from exchanges of property where the property
received is not substantially different horn the property
disposed of (Sec 40, wi<cff
7. Losses not incurred in trade, profession or business or in any
transaction entered into for profit r>ec. 3c m, mucr, and
8. Losses from sales or exchanges of property between related
taxpayers fSec. 30 iuj, muc).
Classification of Deductible Losses

The following are deductible losses, assuming that the requisites
for deduction of losses are complied with:
1. Business losses such as Josses incurred in trade or
profession;
2. Casualty losses such as Josses due to storms, fires, shipwreck
or other casualties of property connected with profession,
trade or business;
3. Losses of business property due to theft, robbery or
embezzlement; and
4. Net operating loss carry-over (NOLCOJ.
Illustration
Swan Enterprises incurred the following losses for the year 200x:
a. Building razed by fire, costing P5,000,000; accumulated
depreciation P3,000,000, insurance payment received
PI,600,000, salvage value P250,000.
b. Loss of P50,000 due to cash shortage embezzled by the
cashier who absconded,
e. Loss on robbery of computers costing P70,000; accumulated
depreciation, P25,000, insurance recovered P25,000.
The deductible loss to be claimed by Swan Enterprises would be:

Cost P5,G00,000
Accumulated depreciation P3,000,000
I n h u r a nee recovery 1,600,000
Salvage value 250.000 4.850.000 PI 50,000
J-ojjtj on embezzlement ----- 50,000
535 INCOME TAXATION
■ cic: "dreer*- - •xmputers;

P 70.000
Less Uxum. depreoa&bec. P 25,000
Insurance recovery 25.000 50.000 20.000
P22Q,QQ0
* .re related compound journal entry to record the losses Suana

Enterprises would be
r
f GENERAL JOURNAL
i Cate Page Number 12
1 2SC5 Descriptions F Debft Credit
.1
JL_ Receivable from insurance
1 • PI..600.000 - P25.000) 1,625.000
Realizable value from salvage (cash, if sold) 250,000
_i Accum. depreciation - btrflrirnir 3.000,000
_L Accum depreciation - computers 25,000
l Pfre loss 150,000
[ Loss from embezzlement (or cash shortage) 50,000
j Loss from theft 20.000
J BufLdmg 5,000,000
| Cash 50.000
j. Computers 70.000
I* To record losses
1
Partial Loss
If the loss is partial, the deductible loss is the lower amount of the
replacement cost or the book value of the asset's damaged
portion. At the time of loss, such amount shall be reduced by the
amount of insurance recover}7.
Illustration 1
Lesley Inc. sustained fire loss on its machine in 200x. The

machine, however, is 40% partially damaged. Lesley spent
P90,000 for major repair. Prior to fire, documents reveal that the
machine had an acquisition cost of P300,000 and accumulated
depreciation of P60,000.
The deductible loss of Lesley would be

Replacement cost
Book value (P300,000 - P60,000) P240,000

Multiplied by percentage of damage _ _ _ _ _ 40%
Deductible loss - damaged book value, lower P 96.000
f C hapter 9 Lo«iw* 537
Nondeductible Loss/Exccss of Replacement Cost

The nondrdiu'iiblr Iobb on pnrfinl Jobs shall bo treated as
additional roat in determining the new cost basis subject to
depieci/iI ion.
Using Hie same data in tin' previous illustration (Lesley, Inc.); new
east basis subject to depredation would be:
Undamaged book value (P240,000 x 60%) PI44,000
Add: Replacement cost P90,000
Non-deductible loss (J>96k-f>90k) 6.000 96,000
New cost basis subject to depreciation P24Q,QpQ
Loss with Insurance Recovery

Any amount received as a loss recovery from insurance company
shall reduce the deductible loss.
When the insurance proceeds are greater than book value of

assets destroyed, then that will be a taxable gain.
Illustration
Based on the above previous illustration, assume that Lesley

received P50,000 as insurance recovery, the deductible loss would
only be P40,000, computed as follows:
Insurance recovery P 50,000

Less: Replacement cost, lower
(see above computation) 90,000
Deductible loss 1P40.000)
On the other hand, if Lesley received P50,000 as insurance

recovery and P50,000 as loss compensation from its employee
who is culpable for the fire incident, there would be no loss to be
reported but taxable gain. Thus,
Insurance recovery P 50,000 ,

Loss compensation received 50.000 'fily';
Total amount recovered
Replacement cost, lower
Taxable gain
538 INCOME TAXATION
NET OPERATING LOSS

“The term net operating loss shall mean the excess of allowable
deduction over gross income of the business in a taxable year.'’
I Sec 34D (3), NIRC)
For taxation purposes, the net operating loss comprises only of

operating expenses and losses that are allowed by the law as
deduction from gross income.
Estimated losses or expenses are not allowed for taxation

purposes.
Assume the following expenses of Coloma Enterprises:
Service revenue P 400,000

Gain from life insurance 300,000
Salary expenses, tax withheld and paid 240,000
Estimated warranty expense 50,000
Insurance expense of employee - beneficiary is employer 100,000
Rent expense 120,000
Depreciation expense 60,000
Bad debts (of which 30% written of!) 30,000
Comparing the operating expenses/losses between taxation and

accounting, the following computations are made:
Comoarative Deductions
Accounting Taxation
Salary expenses P 240,000 P 240,000
Estimated warranty expense 50,000
Insurance expense 100,000
Rent expense 120,000 120,000
Depreciation expense 60,000 60,000
Bad debts (for taxation is the written off) 30.000 9.000
Total deductions allowed P 600.000 P 429.000
Only P429,000 is the allowable deduction for taxation purposes.
Notes:
1. The related income tax on salary expenses must have been withheld and paid
to the BIR to be deductible.
2. The estimated warranty expense is not allowed as deduction for taxation
purposes. Expenses, to be deductible, must be actual and not estimate.
3. insurance expense paid for employees wherein the employer is the beneficiary
is not deductible for taxation purposes.
4. Only actual written off bad debts accounts is allowed as deduction for
taxation purposes.
Accordingly, the comparative computation of net income (loss)

would be
Comparative income floss)
Accounting Taxation
Service revenue P 400,000 P 400,000
Gain from life insurance 300.000
Total revenue P 700,000 P 400,000
Deductions allowed ( 600.000) 1429.000)
Net income (loss) PI 29.000)
Gain from life insurance is tax exempt; hence, it is not included

as part of the revenue for taxation purposes. For accounting
calculation, there is net income of PI00,000, but for taxation
there is a net loss of P29,000. Such net loss can be deducted as a
net operating loss carry over (for three years) in the succeeding
years.
NET OPERATING LOSS CARRY - OVER (NOLCO)

Net operating loss (NOLCO) shall mean the excess of allowable
deductions over business gross income in a taxable year. (Sec.34D(3),
N1RC)
NOLCO and any item of incentive deduction allowable under any

special law are not part of the itemized deductions. (Sec. 3.2, Rev. Reg.
No. 14-2001).
The NOLCO of the business shall be carried over as a special

deduction from gross income for the next three (3) consecutive
taxable years immediately following the year of such loss.
1
A taxpayer who claims the 40% OSD shall not simultaneously
claim deduction of the NOLCO. The three-year reglementary
period shall continue to run notwithstanding the fact that the
aforesaid taxpayer availed of the OSD during the said period. (Rev.
Reg. 14 2001, R.A. 9504)
Domestic and resident foreign corporation taxed during the

taxable year with MC1T cannot enjoy the benefit of NQLCO.
Nevertheless, the running of the three (3) year period for the
expiry of NOLCO is not interrupted by the fact that such
corporation is subject to MCIT. (Rev. Reg. 14-2001)
NOLCO shall be availed of on a “first-in, first-ouf basis (ibid., sec. 2.7).

It shall be allowed as deduction in computing the taxpayer’s
540 INCOME TAXATION
income taxes per quarter and annual final adjustment income tax
returns.
Illustration
John Ibuan, single, reported the following income and expenses:

2007 2008 2009 2010 2011
Salary as a professor PI 80,000 PI 90,000 P200,000. P210,000 P210,000
Gross business income 200,000 250,000 340,000 400,000 600.000
Business deductions 350,000 200,000 300,000 380,000 400,000
How much is the taxable income before personal exemption of Mr.

Ibuan for the taxable years 2007 to 2011?
Mr. Ibuan’s taxable income before personal exemption for the said
years would be:
2007 2008 2009 2010 2011
Gross business income P 200,000 P 250,000 P340.000 P400,000 P600,000
Business deductions f 350.000) (200.000) (300.000) (380.000) 400.000
Income (loss) from business (PI 50,000) P 50,000 P 40,000 P 20,000 P200,000
Less: Applicable NOLCO ( 50.000) ( 40.000) f 20.000)
Net business income (loss) (PI 50.000) P-0- P -0- P-0- P200,000
Salary as a professor P 180.000 P 190.000 P200.000 P210.000 210.000
Taxable income before
personal exemption P 180.000 P 190.000 P20Q.000 P210.000 P410.000
Notes:
1. NOLCO cannot be deducted against compensation income (employer-
employee relationship).
2. In the illustration above, the remaining P40,000 NOLCO cannot be deducted
from the business income of the year 2011 because the three-year
reglementary period has expired.
Taxpayers Entitled to Deduct NOLCO
The following taxpayers are permitted to deduct NOLCO from

their business gross income:
1. Individual taxpayers engaged in trade or business or in the

exercise of his profession.
2. Domestic and resident foreign corporations subject to normal

income tax.
3‘. Special Corporation subject to preferential tax rates such as
private educational institutions, hospitals, and regional
operating headquarters.
NOLCO incurred or sustained prior to January 1, 1998 shall not

qualify for purposes of NOLCO. (Rev. Reg. No. 14-2001, Sec. 4)
Persons Not Entitled to Deduct NOLCO
As a rule, any net loss incurred in a taxable year during which

the taxpayer was exempt from income tax shall not be allowed as
a deduction. iSec.34D3.NIRC)
Any person, natural or juridical, enjoying exemption from income

tax pursuant to the provisions of the Tax Code and any special
law shall not be entitled to deduct NOLCO from gross income.
Illustration
In 200A, XYZ, a general professional partnership, incurred a net

operating loss of P100,000. In 200B, XYZ engaged in trading
which converted the business to general commercial partnership.
In this case, the PI00,000 net operating loss in 200A is not

allowed as NOLCO in 200B because general professional
partnership was tax-exempt in 200A.
Entities Not Allowed of NOLCO
Specifically, the following shall not be entitled to claim deduction

of NOLCO:
1. Offshore Banking Unit (OBU) of a foreign banking corporation,

and Foreign Currency Deposit Unit (FCDU) of a domestic or
foreign banking corporation, duly authorized as such by the
Bangko Sentral ng Pilipinas.
2. An enterprise registered with the Board of Investments (BOI)
with respect to its BOLregistered activity enjoying the Income
Tax Holiday incentive. Its accumulated net operating losses
incurred or sustained during the period of such Income Tax
Holiday shall not qualify for purposes of the NOLCO.
T An enterprise registered with the Philippine Economic Zone
Authority (PEZA).
4 Enterprises registered under R. A. 7227 or “Bases Conversion
and Development Act of 1992.
' foreign corporations engaged in international shipping or air
carriage business in the Philippines. (N ku . /«w/ 2001, .sw 2,r>)
542 INCOME TAXATION
NOLCO for Business Combination

A business combination is a change in business ownership which
may be through:
Merger - absorption of a corporation by another corporation, the

latter retaining its own name and identity and acquiring the
assets, liabilities, franchises and powers of the former, and the
absorbed corporation ceasing to exist as a separate juridical
person.
Consolidation - extinguishment of two or more corporations

resulting to the creation of a new corporation taking over the
assets and assuming the liabilities of the said extinguished
corporations.
The following rules for NOLCO shall be applied whenever there is

a change in business ownership:
1. NOLCO shall be allowed only if there has been no substantial

change in the ownership of the enterprise.
There is no substantial change in business ownership if 75%

of the paid-up capital or nominal value of outstanding issued
shares are retained by the same persons.
Illustration
Mr. Gisado is a stockholder of 80,000 common shares of A

Corporation acquired at P10 per share and 75,000 common
shares of B Corporation acquired at P20 per share.
A Corporation is incurring loss and its board of directors

decided that it be absorbed by B Corporation in a merger. A
Corporation’s stockholders are to be issued with one common
share of B Corporation for every 2 shareholding of A
Corporation.
In this case, the loss of A Corporation is allowed as NOLCO for

B Corporation. The capital structure before and after merger
is as follows:
Before After
A B Merged as B
Corporation Corporation Corporation Percent
Gisado’s interest P 800,000 PI,500,000 P2,300,000 77%
Total outstanding PI,000,000 P2,000,000 P3,000,000 100%
Chapter 9 L o s s e s 543
2. NOLCO shall be allowed as a deduction from the gross income

of the same taxpayer who sustained and accumulated the not
operating losses regardless of the change in its ownership.
This rule shall also apply in the case of a merger where the
taxpayer is the surviving entity.
Illustration
Using the same data in No. 1, except that Mr. Gisado is a
stockholder of 50,000 common shares of A Corporation at par
value of P10, and 75,000 common shares of B Corporation at
par value of P20. Two (2) shares of A Corporation are issued
for one (1) share of B Corporation. The merger effected to the
survival of A Corporation.
In this case, although the ownership of Mr. Gisado is
changed, NOLCO is allowed to A Corporation because A is the
surviving entity.
3. Unless otherwise provided in Revenue Regulations, the
NOLCO of the taxpayer
shall not be transferred or assigned to
another person, whether directly or indirectly. (Rev. Reg. No. i4~
2001, Sec. 2.2-3)
Illustration
T and B Companies are merged as T Corporation absorbing B
which incurred successive losses in the prior years.
Except when there is no substantial change, B’s net operating

losses prior to the merger could not be claimed by T as
deduction from its gross income in the subsequent year.
NOLCO of Mines Other than Wells

For mines other than gas wells, a NOLCQ incurred in any of the
first 10 years of operation may.be carried over as a deduction
from taxable income for the next 5 years immediately following
the year of such loss.
Illustration
On December 31, 200A, Lepanto Gold Mines marked its 10
consecutive year of operation. It has an operating loss in year
200A amounting to P30,000,000.
544 INCOME TAXATION
If Lepanto continues operation with the following data, the

taxable income would be:
200B 2Q0C 200D 200E 200F 200G
(In millions of pesos)
Revenue P 20 P30 P24 P28 P35 P40
Cost of goods sold ( 5) ( 7) ( 6) ( 7) (10) (12)
Operating expenses f 131 (15) (15) (15) (16) (18)
Net income (loss) P2 P8 P 3** P6 P9 P10
NOLCO i_ 21 LSI L31 L21 -0-
Taxable income r_Q_r EIQ
Only P28,000,000 NOLCO was deducted because year 200G is not

covered by the five-year period for the deductibility of NOLCO. The
remaining P2,000,000 NOLCO cannot be deducted anymore as for the
succeeding periods after 200F.
NOLCO in the Tax Return and Unused NOLCO

NOLCO shall be separately shown in the taxpayer’s income tax
return (also shown in the Reconciliation Section of the Tax
Return).
The Unused NOLCO shall be presented in the Notes to the

Financial Statements showing in detail the taxable year in which
the net operating loss was sustained or incurred, and any
amount thereof claimed as NOLCO deduction within three (3)
consecutive years immediately following the year of such loss.
Failure to comply with this requirement will disqualify the

taxpayer from claiming the NOLCO.
SPECIAL RULES ON LOSSES
The Marcelo Steel Doctrine on Losses

Under the Marcelo Steel Doctrine on losses, a loss in one line of
business is not permitted as allowable deduction from gain in
another line of business, if one of the two lines is tax-exempt.
Illustration
The following report pertains to the business of Asian

Corporation, a resident foreign corporation:
Within Without
Business income PI,000,000 P 2,000,000
Operating expenses 700.000 2,200.000
Net income (loss) lEUmQQQl
Since Asian Corporation is a foreign corporation (taxable only for

income within), its taxable income in the Philippines would only
be P300.00Q because the P200.000 net loss incurred outside the
Philippines is not allowed as a deduction.
Losses between Related Taxpayers

As a rule, gains in transactions between related taxpayers are
taxable, but losses incurred from transactions between members
of the family are not deductible, jsec. 36 (B), nircj
The law intends to prevent tax evasion by taxpayers who take

advantage of the deduction for losses by means of purported or
simulated sales or exchanges to members of their families,
controlled or in trust.
The law presumes that the transactions between these persons

are devoid of free bargain between the buyer and the seller, as
one party might dictate on the terms and conditions of the sale or
exchange. Furthermore, losses due to related party transactions
might have been fabricated in order to evade payment of income
taxes.
Gambling Losses
As a rule, gambling losses can only be deducted from gambling
winnings. They are not allowed as deductions from business
income, compensation income or even from gains from sale of
capital assets. (Sec. 3-t(DH6), nirq
Illustration
Mr. Suga Lero provided the following data during a taxable year:
Compensation income P300,000
Business income 130,000
Gambling gains 20,000
Personal expenses 200,000
Business expenses 100.000
Gambling losses 80,000
The taxable income before personal exemptions of Mr. Lero is

Business income P 180.000
Less: Business expenses 100.000
p 80,000
Income from business
546 INCOME TAXATION
Add: Compensation income 300.000

Total income P 380,000
Gambling gains P 20,000
Less: Gambling losses 80,000 0
Taxable income before personal exemptions vjmjm
The P60,000 gambling losses are not deducted from income

derived from business and employment.
Note: The costs of the unsold sweepstakes tickets are not deductible loss because
sweepstakes winnings are exempt from tax. (BIR Ruling No. 62-0026; R. A. 1169)
Losses from Theft or Embezzlement

Losses from theft or embezzlement of business property not
compensated with insurance are deductible for the year in which
these were sustained.
Where the defalcation was committed and the taxpayer'had no

means of determining the actual date of the embezzlement, the
loss is deductible on the year of discovery.
When the loss is caused by embezzlement of funds by a known

person, the loss sustained is not deductible on the year of
commission or discovery, but in the year when the right of
recovery becomes worthless (Tcdisay - SUay Milling Co. Inc., us. Commissioner; CTA
Cases No. 1399 and 1406, December 29, 1965).
Illustration
Assume that Star Corporation employs a treasurer, Mr. Na Cao,

with a cash bond of P50,000. In 2009, Star lost P500,000 from
its treasury. How much loss would be deductible in 2009 if the
P500,000 was:
(a) stolen by a theft?

(b) embezzled by the Mr. Cao?
If the P500,000 was stolen by a theft (unknown) to the Star, the

entire P500,000 can be deducted as a loss in 2009.
On the other hand, if Mr. Cao was proven to have stolen the
P500,000, Star cannot immediately deduct a loss in 2009, unless
Mr. Cao abandoned his job.
Assume that Mr. Cao abandoned his job in 2010, and despite the
reasonable effort of the company and policemen to find him he
Chapter 9 Lo**e* 547
cannot be found anymore. In this case, Star can now deduct a

loss from embezzlement reduced by cash bond or insurance
recovery.
Receivable from the treasurer P 500,000
Less: Cash bond recovery 50.000
Deductible loss in 2010 P 450.000
Mortgage Losses
When h mortgage property is foreclosed and subsequently

purchased by the mortgagee, the difference between the purchase
price arid the unpaid indebtedness is not allowable as deduction
from bod debts. The loss arising from mortgage foreclose is
deferred until the property foreclosed has been disposed of.
Accordingly, the loss on mortgage is determined upon sale of the

property by the mortgagee,
Illustration
In 200A, Mr, ffullier, a creditor, lent P200,000 payable in 200B,

with a mortgage of property of his debtor Mr. Utangin. Mr.
Ufangin bnnmn insolvent in 200B and could not: pay the
P200.000. Mr, Hullier foreclosed the mortgaged property. It was
swarded to him ns a highest bidder for P 120,000 during a public
ms (ion in 2010, Mow much loss can Mr. Ilullicr deduct in 200B?
No loss is allowed as deduct ion in 200B. Mr. Hullier cannot

deduct n mortgage loss in 200B because the property is not yet
Raid to a third party.
If Mr, Hullier decided to keep the property for himself, it becomes

a purchase of property and the P8(),000 loss becomes part of the
rust nl the property acquired.
Bn (hr other hand, it Mr, I lullicr sold the property in 200C for
1*1 f.>0,000, the amount of deductible loss on the sale ot property
moitngc would hr PbO.OOC), computed as follows:
Receivable P200.000
l-rss: KVidi/ed amount from sale of property J59JSQQ
deductible loss in 200C Ljs&qqq
548 INCOME TAXATION
Losses due to Voluntary Removal of Property
The following rules should be observed when it comes to losses

incurred due to voluntary removal of property:
1. As incidents to renewal and replacements. Losses due to

voluntary removal of property such as building, machinery,
and other similar assets, incident to renewals and
replacements, will be deductible from gross income. (Sec. 97, Rev
Reg. No. 2)
Illustration
Solo Mona is engaged in water delivery business. He has a

second hand delivery truck which he purchased for P60,000.
He estimated the truck’s useful life to be five (5) years. After
three (3) years, however, due to inefficiency and constant
repairs, he sold the truck for P20,000 to replace it with a
better one.
The deductible loss due to replacement would be
Acquisition cost of the delivery truck P60,000

Less: Accumulated depreciation for three (3) years
(P60,000/5) x 3 years 36.000
Book value of the delivery truck P24,000
Less: Sales proceeds 20.000
Deductible loss due to replacement P 4.000
2. As cost to remove useless structure in the real property

acquired. When a taxpayer buys real estate upon which a
building is located which he proceeds to raze with a view to
erecting therpon another building, the cost of removing the
structure is not a deductible expense from gross income t
instead, such cost will be added as part of the cost of the
acquired land. (Sec. 97, Rev. Reg. No. 2)
Illustration
Wina Wala acquired house and lot for a P900,000 lump sum
price. The acquisition of the property is intended to make the
lot available for the construction of a factory building. Wala
incurred PI00,000 in demolishing the house to give way to
the construction of the factory building.
The PI00,000 cost of demolition is not allowed as deduction

from Wala’s business gross income. Such loss shall be

charged to the cost of the land. Accordingly, the cost of the
land would be PI,000,000.
Losses due to Shrinkage in Value of Stocks

Decline in value through market fluctuation of investments in
stocks of a corporation is not a deductible loss. To be deductible,
the loss must be actually suffered when the stock is disposed of.
(Sec. 99, Rev. Reg. No. 2)
Illustration
Lomi Liit invested in A Corporation’s common stocks for

PI 00,000. At balance sheet date, Liit’s investment had market
value of P75,000.
The P25,000 shrinkage in value of stocks is not a deductible loss,

unless the common stocks were actually sold for P75,000 in
which case, the loss is deductible only against any capital gains.
Losses of Useful Value

Generally, assets may lose their useful value due to:
1. Technological changes which make operation more expensive

and the assets impractical to use.
2. New legislation which makes the continued profitable use of
the property impossible.
Losses of value of assets are not deductible from gross income

except when the asset involves building and machineries are
permanently abandoned. Any loss to be deductible under this
exception must be charged off in the books and fully explained in
returns Of income. (Sec. 98, Rev. Reg. No. 2)
Illustration
Acer Company uses a computer with an acquisition cost of

P100,000. The estimated life of the computer is 5 years with a
salvage value of PI0,000. After a year, Acer updated the computer
to improve its performance spending a capital outlay of P20,000.
In the third year, Acer decided to permanently abandon the use of
such computer due to technological changes. How much is the
550 INCOME TAXATION
deductible loss?
The deductible loss would be

Acquisition cost of the machine PI 00,000
Cost of improvements —20,000
Total P120,000
Less: Accumulated depreciation
First year: (P100,000 - P10,000)/5 P18,000
Second and third years:
(PI8,000 x 2) 36.000
(P20,000/4) x 2 10.000 64.000
Book value P 56,000
Less: Salvage value 10.000
Deductible loss P 46.000
Abandonment of Petroleum Operation

If a contract area where petroleum operations are undertaken is
partially or wholly abandoned, the following rules shall be
observed:
1. All accumulated exploration and development expenditures
are allowed as deduction.
2. However, accumulated expenditures incurred in that area

prior to January 1, 1979 shall be allowed as deduction only
from any income derived from the same contract area.
3. In all cases, notices of abandonment shall be filed with the

BIR Commissioner.
If a producing well is subsequently abandoned, the following

rules shall be applied:
a. The unamortized cost thereof, including the undepreciated

costs of equipment directly used therein, shall be allowed
as a deduction in the year such well, equipment or facility
is abandoned.
b. If such abandoned well is reentered and production is

resumed, or if such equipment or facility is restored into
service, the said costs shall be included as part of gross
income in the year of resumption or restoration and shall
be amortized or depreciated, as the case may be. (Sec. 34(D)(7),
NIRC)
Illustration
In 200A, CaJpetshell Oil Corporation has a business income of

PI 0,000,000, but it decided to abandon an oil equipment with a
remaining book value of P300,000.
After three years (year 200D), Calpetshell decided to reuse the

said oil equipment. Its remaining useful life is 5 years. The
following additional data are available during the year:
Business income P10,000,000
Expenses, before depreciation of reused equipment 4,140,000
How much is the deductible loss in 200A, and how much is the
taxable income in 200D?
The deductible loss in 200A would be P300,000, the book value of

the abandoned oil equipment.
The taxable income in 200D would be P5,800,000, computed as

follows:
Business income P10,000,000
Add: Book value of the reused equipment 300.000
Total P10,300,000
Less: Operating expenses P4,140,000
Depreciation of reuse equipment
(P300,000/5) 60,000 4,200.000
Taxable income - 200D P 6.100.000
Losses from Farming

As a rule, losses incurred in the operation of farm as business
enterprise are deductible from gross income.
Section 100 of the Revenue Regulation No. 2 provides the

following guidelines:
Nondeductible Loss. No Deduction is allowed in the following

farm losses:
1. Shrinkage in weight or physical value due to deterioration of
farm products, except if such shrinkage is reflected in an
inventory in determining profits.
552 INCOME TAXATION
2. Total casualty losses of prospective crops. (Casualty

may be brought by storm, flood, or fire.)
3. Value of animals that perish from among those raised on the

farm, except when suph loss is reflected in inventory.
4. If gross income is ascertained by inventories, no deduction

can be made for livestock or products lost during the year,
whether purchased for resale, or produced on the farm, as
such losses will be reflected in the inventory by reducing the
amount of livestock or products on hand at the close of the
year.
Deductible Loss. The guidelines in order that farm losses may

be deductible are as follows:
1. If an individual owns and operates a farm in addition to being

engaged in another trade, business, or calling, and sustains a
loss from such operation of the farm, then the amount of loss
sustained may be deducted from gross income received from
all sources, provided the farm is not operated for recreation
purposes.
2. If livestock has been purchased for any purpose, and

afterwards dies from disease, exposure, or injury, or is killed
by order of the authorities, the actual purchase price of such
stock, less any depreciation allowable as a deduction in
computing net income, with respect to such perished
livestock, and also any insurance or indemnity recovered, may
be deductible.
3. The actual cost of other property (with proper adjustment for

depreciation), which is destroyed by order of the authorities,
may in like manner be claimed as a loss; but if
reimbursement is made in whole or in part on account of
stock killed or property destroyed, the amount received shall
be reported as income for the year in which reimbursement is
made.
4. The cost of any feed, pasturage, or care which has been

deducted as an expense of operation shall not be included as
part of the cost of the stock for the purpose of ascertaining the
amount of a deductible loss.

1. Define “losses.”
2. Differentiate ordinary losses, capital losses and special kinds of
losses.
3. What are the requisites for ordinary losses to be deductible?
4. What are the losses not allowed by law as deductions?
5. Enumerate the classifications of deductible losses,
6. State the rules for the deductibility of partial loss.
7. What is a “net operating loss”?
8. State the ruies for the deductibility of NOLGO.
9. Who are the taxpayers that are entitled to deduct NOLCO?
10. Enumerate the persons and entities not allowed to claim NOLCO as
deduction.
11. What are the tax rules for NOLCO of business combination?
12. What is the tax treatment for NOLCO of mines other than wells?
13. How is NOLCO shown in the financial reports?
14. What is the “Marcelo Steel Doctrine” on losses?
15. Are losses Incurred with related taxpayers allowed as deductible
expense from gross income?
16. Sta te the rules for tax treatment of gambling losses.
17. State the ruies for tax treatment of losses from Theft or
Embezzlement.
18. When is a mortgage loss deductible expense?
19. State the tax rules on losses due to voluntary removal of property.
20. What is the tax treatment for losses due to shrinkage in value of
stocks?
2 1. State the instances when assets may lose their useful value.
22. State the tax rules when petroleum operations are partially of wholly
abandoned.
23. State the instances when farm losses are not deductible.
24. What are the instances when farm losses are deductible?
S5* INCOME TAXATION
___________________________________________ Score:
Problem 9 - 2 T r u e o r False
True if the statement is correct or False if the statement is
; A loss claimed as deduction for estate tax purposes should not

be clamed as a deduction in the ITR of the estate for income tax
purposes.
2- Gambling losses can be deducted from gambling gains and
oapzzsu gains.
L bosses from business operation are ordinary losses.
- Loss incurred from the sale of business furniture is deductible
5. Loss from embezzlement of business fund is a loss deductible
6. Fire damage on the equipment is deductible from business
income unless covered by an insurance policy.
7. Typhoon damage on the residence of the owner of the business is
not allowed as deduction from business income.
8. Net operating loss of prior year could be claimed as deduction
from business income of current year.
9. Partial loss on business property, plant and equipment is
deductible loss from business income.
10. NOLCO could be deducted from next year’s business income of a
sole proprietorship which is opting for optional standard
deduction.
11. The NOLCO should be deducted from gross income to arrive at
base amount for the computation of MCIT.
12. Loss incurred from sale of partner’s interest in a partnership is a
capital loss.
13. Loss from sale of capital asset is deductible from business
income.
14. If there is a partial loss, the allowable deduction will be the book
value of the damaged asset at the time of loss.
15. Expenses not reported when incurred cannot be claimed as
NOLCO.
555
Zm&sr 5 1
9-2 Multiple Choice

^ ;«sr:sr hua: mx's the bês: answer.
': ::e z 2.rj.2~ lusc cr. business property is partial, the deductible loss
. - ^ -*•
a. replacement cost of the damaged property.
> scruaf cost of damaged on business property,
v book value of the damaged property/,
d. lower amor or, t between a and c.
2 Vh^h of the following is not correct regarding NOLCO?

a NOLCO is showed. as deduction from business income for the
ter. b succeeding years.
h. Domesun and resident foreign corporation subject to normal
income tax is aliov/ed with NOLCO
o Offshore banking unit of a foreign corporation is allowed with
NOLCO
d. Private education institution enjoying preferential tax rate is
allowed with NOLCO
Which of the following ix entitled, to claim NOLCO?

a rimpirsyee //Uh respect to his compensation income
b. Foreign international earner
0, Offshore banking unit
o beif erapioy^j individual
4 Which of the following is deductible from related gross income?

a. Worthless and v/ntten off trade receivables
b. Personal expenses
c. »et capital loss
d - Lst i n-; a ted loss,
' Which nf the follov/ing is not deductible from business income?

a. Casualty losses on properties connected in the conduct of trade
or business
b. O/ss of business property due to theft
' l/oss 0/1 cx< f»ange of capital assets
d. Net operating joss (:hm/ over
y^^^ statements in correct?

a jf. hn p0/n business income.
T n '/,fi°n rji,nnt r(,uUi ( h,hn NOLCO.
d * * ( ( > t ^ e i oj/iiined together with (he optional deduction.
f > / O i»; e/jual p, operating loss reported in the GAAP
sfatrmml of earnings in prior year,
•Vhu h of Hie following Is allowed as deduction from business
a Utha ( , t i thr sale of property not directly used in the business

556 INCOME TAXATION
b. Loss on inventory which is fully covered with insurance

c. Fire damage on fully depreciated business equipment
d. P50,000 fire loss on business building without insurance
8. Statement 1: Losses claimed as deduction from gross estate will

reduce the net taxable estate.
Statement 2: Losses already claimed as deduction from gross estate
would also reduce the taxable income of the estate.
9. Statement 1: When the loss is caused by embezzlement of funds by a

known person, the loss sustained is not deductible on the year of
commission or discovery,, but in the year when the right of recovery
becomes worthless.
Statement 2: The loss on mortgage is determined upon sale of the
property by the mortgagee.
10. Statement 1: Casualty losses of prospective crops are deductible loss.

Statement 2: Loss on purchased livestock is a deductible loss.
11. Statement 1: Domestic and resident foreign corporation taxed during

the taxable year with MCIT cannot claim NOLCO.
Statement 2: Decline in value through market fluctuation of
investments in stock of a corporation is not a deductible loss.
a. Only statement 1 is correct. '
12. Statement 1: A loss in one line of business is not permitted as

allowable deduction from gain in another line of business, if one of
the two lines is exempt from tax.
Statement 2: Losses from transactions between related party
taxpayers may be allowed as deduction as long as supported by
documentation.
a: Only statement 1 is correct.
Problem 9-3 Deductible Loss

X Trading incurred loss from fire on its equipment with a book value of
P80,000 when the fire happened. The fire consumed 60% of the
equipment. X needs P40.000 to rehabilitate the extent of damages. The
equipment was not covered by insurance or other compensation.
The equipment has accumulated depreciation of P70,000 at date of fire.

To acquire new equipment of the same type will cost PI30,000. If X
Trading will decide to rehabilitate the equipment, the deductible loss
would be
a. P80,000. c. P48,000.
b. P60.000. d. P40000.
Problem 9-4 Deductible Loss

On June 1, 200A, X Company bought an item for resale for P200.000.
On August 1, 200A, the item was stolen when it has a fair market value
of PI80,000. The incident was immediately reported to the BIR. The item
stolen was fully insured but a controversy regarding insurance liability
was raised by the insurance company. A court litigation was made and
the controversy was settled for PI20,000 in 200B.
How much is the deductible loss in 200A and 200B?

Deductible loss
200A 200B
a. P200.000 P~0-
b. PI 80,000 PI 80,000
c. P 20,000 P 60,000
d. P-0- P 80.000
Problem 9-5 Expenses and Losses

Mr. Bago incurred the following expenses and tosses during the year:
Cost of family home, life 25 years
(-40% used in business) PI.000,000
Family expenses '. 240,000
Loss from sale of land tohis brother 100.000
Loss of business equipment reported to the BIR
after hi) days 38,000
Life insurance expense of his maid
(beneficiary is Mr. Bago) 10,000
Accounts receivable of a customer determined
to be worthless and written off during the year 10,000
The deductible losses from Mr. Bogus business income is

a. PM.OOO. c, Pit),000,
h . P2 6,000. ti. PI 0,000.
Problem 9-6 Deduction from Business Income

Tin* following transactions transpired (lut ing the year:
_ _ _ _ _ iXJ&t
558 INCOME TAXATION
Inventory PI,400,000 P2,500,000

Temporary investments 500,000 450.000
Land (capital asset) 1,000,000 800.000
How much could be claimed as deduction from business income?
a. P - 0 - c. P250,000
b. P 50,000 d. P450,000
Problem 9-7 Deductible Loss on Fire

What would be the amount of loss that could be deducted from business
income for the property that was damaged by fire in 200x and has a
remaining useful life of 4 years at date of fire? The property was acquired
at PI00,000 and depreciated at 10% per year without scrap value.
a. P10,000 c. P40,000
b. P20,000 d. P60,000
Problem 9-8 Deductible Loss to Rehabilitate

X Trading incurred losses from fire on its equipment with a net book
value of P50,000 when the fire happened. It will need P60,000 to
rehabilitate the extent of damages on the equipment which was not
covered by any insurance policy.
The equipment has an accumulated depreciation of PI50,000 at date of
fire. To acquire new equipment of the same type will cost PI 10,000. The
allowable deductible loss is
a. P200,000. c. P60,000.
b. PI 10,000. d. P50,000.
Problem 9 -9 Partial Loss, New Cost Basis and Depreciation

X Enterprises reported a partial loss of its property. The property was
acquired 2 years ago for P600,000 and has an estimated useful life of 10
years with an estimated 10% salvage value.
Thirty percent (30%) of the property was partially damaged. The

replacement cost of the damaged portion was PI27,600. The replacement
of the damaged portion extended the life of the property by four years.
1. How much is the deductible loss?
a. P180,000 c. P127,600
b. P147,600 d. PI 13,400
2. How much is the new cost basis and the new annual depreciation
expense?
New annual
New cost basis denreciation expense
a. P309,960 P25,830
c. P344,400 , P35,000
b. P432,000 P36,000
d. P492,000 P36,900
Problem 9-10 Shrinkage in Value of Stocks

Kool Corporation is holding common stocks of Lang Corporation acquired
at cost of PI00,000. At December 31, 201 A, investment in Lang’s stocks
has a fair market value of P90,000. On January 30, 20IB after the
balance sheet date, the investment in stocks of Lang were sold outside
the stock market for PI20,000.
The deductible loss at balance sheet date and reportable gain on June 30
would be
Dec. 31,201A June 30, 201B
Deductible loss Non-reDortable gain
a. P-0- P-0-
b. P10,000 , P30,000
c. P-0- P20,000
d. P10,000 P20,000
Problem 9 - 1 1 NOLCO
The net operating loss reported in the GAAP income statement is
P50,000 after P200,000 operating expenses. Part of the operating
expense is a PI0,000 bad debts based on estimate. How much NOLCO
would be deductible from the succeeding years’ income?
a. P260,000 c. P50,000
b. P 60,000 d. P40,000
The previous year’s operating loss amounted to P50,000. How much
would be the NOLCO that could be deducted from current year’s income
of business opting for optional standard deduction?
a. P55,000 c. P5,000
b. P50,000 d. P - 0-
Problem 9 - 1 3 Marcelo Steel Doctrine

Mr. Chin, a resident alien engaged in trade or business in the
Philippines, reported the following during the taxable year:
Gross income - Philippines P2,000,000
Less: Operating expenses - Philippines 1.200.000
Net income - Philippines P 800,000
Gross income - China P3,000,000
Less: Operating expenses - China 3,500.000 I-5Q.QtQ.QQ]
Net income P 300,000
Less: Personal exemption - basic 50.000
Net taxable income - Philippines P 250.000
In addition, Mr. Chin sustained P100,000 loss on his sale of his personal
car during the taxable year. How much is the deductible loss from gross
income within?
a. P600,000 c, PI 00,000
b. P500,000 d. P - 0-
560 INCOME TAXATION
Problem 9 - 14 Related Party Losses

Car Rentals, a sole proprietor car for lease business owned by Mr. Kotse
Mo. reported the following results of operation during the taxable year:
Gross receipts P2,000,000

Less: Repairs and maintenance P400,000
Depreciation 300.000
Losses, including car loss 700.000
Salaries 200.000 1.600.000
\ou uncover that the losses account is legitimate except for an item
related to a car rented by the brother of Mr. Mo. The car was not
returned to him despite of his several demands to his brother. The car
was acquired at P500,000 with an estimated useful life of 5 years. The
depreciation of the car was regularly recorded as it was used by the
business for 4 years.
How much is the deductible loss if Mr. Mo believed that he could not
recover the car anymore from his brother and the car loss was recorded
at the book value of the car?
a. P700,000 c. P500,000
b. P600,000 d. P200,000
Problem 9 - 1 5 Petroleum Operation

In 200A, Riveroil Corp. abandoned the used of one of its producing well.
The following related data are shown:
Gross income P5,000,000
Abandoned and written-off machines 2,000,000
The abandoned machines have 10 years estimated useful life and have
been used in petroleum operations for 6 years using the unit of
production method. Total estimated units that can be produced by the
machines are 10,000,000 units. As of the beginning of 200A, the
accumulated depreciation per record is P800,000 and the actual units
produced is 100,000 units.
1. How much is the deductible loss in 200A?

a. P 800,000 c. PI,200,000
b. PI,180,000 d. P2,000,000
2. If in 200C, the producing well is resumed and the abandoned

machines are reentered, how much is the net taxable income
assuming that the net operating income is P8,820,000 before the
abandoned machines and the units of production are 500,000 units?
a. P8,720,000 c. P 9,900,000
b. P8,800,000 d. PI 0,000,000
CMP*®1 9 Lon*#* 561
problem 9 16 Partial Fir© Loaa

rhr Inistiirsti rquipmrnl which hns a cimying value of 1*25,000 was
p.uiuUlv damaged In' lue, The mMn/il coni of 1*30,000 wns incurred to put
h.u K the business equipment to its operaliug eondifion.
Required: Compute for the deductible loss from business income.
Problem 9 - 17 Total Fir© Loss

The business building with mi acquisition cost of PI ,200,000 and
estimated useful life of 20 years was totally damaged by fire at the end of
its I0lh year. 1*200.000 worth of damages was recovered from insurance.
Scrap recovered were' realized at P20,000.
Required: Compute for the deductible loss from business income.
Problem 9 - 1 8 Destruction of Old Building

The business incurred P I 20,000 to raze down an old existing building to
give way to the construction of its factory building. Scrap from the
demolished building were realized for P20,000.
Required: Compute for the deductible loss from business income related
to above construction.
The trading business reported a net loss of P50,000, net of P300,000
operating expense. The operating expenses included P20,000 estimated
bad debts and estimated warranty expense of PI0,000.
Required: Compute for the Net operating loss that could be carried over
for the next 3 succeeding years.
The following are the comparative income statements of Venus:
_ Year 1 Year 2
Gross profit P 500,000 P600,000
Estimated bad debts 20,000 10,000
Other operating expenses 580.000 490.000
income (loss) 1P.1QCLQQQ1 £100*00-0
Required: Compute the NOLCO that could be deducted from year 2
income.
Problem 9 - 2 1 Mortgage Property

In year 1, the business foreclosed the property of delinquent debtor with
fair value of PI ,000,000 to recover the notes receivable of PI ,500,000. In
year 2, the foreclosed property was sold for Pi,800,000.
Required: Determine the gain or loss in year 1 and year 2.

W? INCOME TAXATION
Problmm 9 22 Mortage Property

'if,r mortgage property with fntr value of kl,0 00,000 at date of grant of
Juan w/i«! foreclosed by the bank when the bn sin eft*.' over due Joan of
I'',()(),(>()<) v/a* not paid. The foreclosed property was offered for public
au/tlon and no bidder-offered any price, The fair value at date of auction
Is estimated at f» 400,000,
Required: Compute for the deductible lose from business income of the
bn nk.
Problem 9 - 2 3 Various Losses

Mr, Outlier Dunong, a farmer, reports the following:
Income from farming P300,000
Cockfighting v/inntrigs 50,000
Shrinkage of farm products produced 20,000
I/jss of potential farm products due to calamities 150,000
Cockfighting losses 100,000
Required: How much is the deductible loss from gross income?

Mr, Scott Saboy incurred the following losses in connection to his
co n s t ru c t i o n b u s i n e a s:
Compensatory liquidated damages P 50,000
Loss on actual damages 30,000
Lose on robbery (construction supplies) 50,000
Loss on pilferage of business supplies 10,000
Book value of partially damaged machine due to fire 200,000
Replacement cost of damaged portion of machine 150,000
Loss on sale of capital assets 25,000
Required: Compute the amount of deductible loss from gross income.
Problem 9 - 2 5 NOLCO and OSD (R.A. 9504)

X, r eported the following gross receipts, cash disbursements and NOLCO:
Cross receipts P2,000,000
Cost of service 500.000
Cash d 1«bursernents 400.000
NOLCO last. year 300.000
X opted to deduct OSD because the cash disbursements that represent

business expenses are not properly supported with documentation.

1. If X is an individual taxpayer, how much is the amount of allowable
deductions?
If X is a corporation, how much is the amount of allowable
deduction?
Problem 9 - 2 6 NOLCO, OSD and MCIT (R.A. 9504)

In the fourth year of Y Co,, the company reported the following:
Sales, 200D 2,000,000
NOLCO - 200A 200,000
Due to losses and since the company has been in existence for more than
3 years, the BIR required Y Co. to pay a minimum corporate tax of 2%
based on gross income.

1. Income tax due and payable in year 200D.
2. Total NOLCO in year 200E.

A Co. reported the following losses during the year:
Burglary loss - cash P50,000
Embezzlement loss - cashier 25.000
Pilferage loss - office supplies 5,000
Capital loss on sale of capital asset (long-term) 10.000
Decline in the market value of investments in stocks 30.000
Casualty losses 15.000
The burglary loss was reported to the police station within 90 days, but
such loss was not reported to the BIR. The cashier was traced culpable
for the embezzlement.
Required: Compute .for the following:

1. Deductible loss from gross income
2. Deductible loss from capital gains
Problem 9 - 2 8 Losses from Farming

The following losses were incurred by D Farms during the calendar year:
Shrinkage loss of farm products produce P140,000
Casualty losses of prospective products ' 40,000
Casualty losses of animals raised in the farm
(not part of inventory) 20,000
Death of livestock previously purchased 10,000
Cost of property expropriated by the government
The government paid only PI 0,000 as compensation 30,000
Required: Compute for the deductible farm loss.
504 INCOML TAXATION
Problem 9 29 Adjmitfiiefit of Loiiqi

X Co. roirdru'tf*d n building at a (o*t of P 10,000,000 with o/i estimated
u v f u l bP of 30 year*, Aff'*r five year?*, '#ubr*equcnt addition?* and
m)|uov^fri' nln whic h wcr»- properly capitalized amounted io P500,000
The: building was insured for PO,000,000 against fire at the Urn*: it was*
totally destroyed by firr of year 8,
The claim lor lire loan was nettled with the insurance company paying
P3,*300,000 wilh an agreement that any materials that may be salvaged
horn the- fire shall Ik* taken by the owner of the building. Proceeds from
aaje of salvaged materials amounted to 0300,000.
Required: Compute! the loss deductible by X Co,
Problem 9 - 30 Various Losses

Mr. Saboy incurred the following losses related to his construction
business:
I-oss on unrealized earnings P500,000
Casualty losses 250,000
Abandoned equipment due to technological problem 150,000
Accumulated depreciation of abandoned equipment 120,000
Compensatory liquidated damages 100,000
Embezzled funds by the cashier 70,000
Book value of partially damaged machine 50,000
Replacement cost of damaged portion of machine 40,000
Loss on sale of capital assets 30,000
The casualty losses was reported to the BIR within 45 days and
compensated by insurance amounting to P300,000.
Required: Compute the total amount of deductible losses.

Chapter 10
BASIC INCOME TAX

PATTERNS
INCOME TAX SYSTEM

The Philippines uses several types of income lax system.
Taxpayers with different types of income are required to a,dopt the
following types of tax system*.
3. Global income tax system;
2. Gross income tax system; and
3. Schedular tax system. (Lim, Tax Ixiw and -Jurisprudence, p. 11 Oj
Global Income Tax System

This income tax system is a combination of gross compensation
income and/or net income from business, trade or profession to
arrive at the total (global) income subject to tabular tax rates, isec.
24 (A)(c), NIRCI
In other words, global tax system employs the grouping of similar

incomes from all sources and subjecting them to a single tax rate
or progressive graduated (Recorded Speech rates. of Former BIR Commissioner
Rene Banez at Baguio Country Club, July 15, 2003)
Examples of globalized income are the following:
1. Compensation income;
2. Net income from business, trade or profession;
3. Passive income (not subjected to final tax); and
4. Capital gains (not subjected to capital gains tax).
Gross Income Tax System

Under this tax system, the taxpayer’s income tax is fixed or
computed based on the gross income. The usual allowable
deductions are completely disregarded in computing this income
tax.
566 INCOME TAXATION
Examples of income under gross income tax system are the

following income taxes:
1. Fringe benefit tax;
2. Passive income subject to final tax;
3. Capital gains tax on real property (capital asset); and
4. Minimum corporate income tax (MCIT).
Schedular Tax System

Since income taxes are either computed based on global tax
system or gross income tax system, their filing and payment
should be accompanied with separate BIR form as required per
category of income. '
Examples of income tax under schedular tax system are the

following:
1. Annual income tax return (for global income tax); and
2. Capital gains tax return (for sale of real property classified as
capital asset, and sale of shares of stocks not traded in the
stock market).
BASIC SUMMARY OF PHILIPPINE INCOME TAX

Groups and Sources of Income Taxpayer
In the Philippines, income taxpayers are classified as follows:
A. Individuals
1. Citizen
a. Resident Citizen (taxable within and outside)
b. Nonresident citizen (taxable within)
2. Alien
a. Resident alien (taxable within)
b. Nonresident alien, doing business in the Philippines
(taxable within)
c. Nonresident alien, not doing business in the
Philippines (taxable within)
B. Corporations and Partnerships
1. Domestic corporation (taxable within and outside)
2. Resident foreign corporation (taxable within)
3. Nonresident foreign corporation (taxable within)
C. Estates and Trusts (taxable as individual taxpayer)
Chapter 10 Basic Income Tax Patterns 567
Summary of Groups of Income

The groups of income may be summarized as follows:
Compensation Business Passive Capital

Income Income Income Gain
Salaries Income from Interest Sale of Capital

Wages Trading Income Assets
Holiday pay Income from | (Not an inventory/
Sick leave pay Merchandising Royalties | not used in
Vacation leave pay Income from business)
Per diem Manufacturing Dividends
Honorarium Professional income Sale of Real
Night shift Income from Prizes Property
differential Farming (capital asset)
Hazard pay Rent Income Winnings
Commission Income from ! Sale of shares of
Allowances Construction stock
Tips Contract 1 (sold outside stock
Bonus I exchange)
13th month pay
li
Retirement pay
Terminal pay
Pension 1 .
Deductions from Business Income

1. Itemized allowable deductions (business expenses) or
2. OSD - 40% of gross sales or gross receipts for individuals and
40% of gross income for corporations
Personal Exemptions
Based on R.A. 9504, the personal exemptions of individual
taxpayers are:
1. Basic exemption of P50,000 for each individual taxpayer
(whether single, married or head of family)
In case of married individual, only the spouse deriving gross *

income shall be allowed to avail personal exemption.
2. Additional of P25,000 for each dependent child, maximum of

4 children.
The additional exemption shall be claimed only by one of the
spouses in case of married individuals.
568 INCOME TAXATION
Collection Points of Income Tax

The collection point of income tax may be summarized as follows:
Collection |
Point Income Income Tax
AT SOURCE Compensation income j Creditable withholding tax

(Collected I
before the Passive income within:
income is < Sale of real property Final withholding tax
received by (capital asset)
earner) Sale of share of stocks
(sold outside stock exchange) j
Business income:
Trading/merchandising, Quarterly income tax
QUARTERLY Manufacturing, Servicing,
panning, Leasing and
Construction
Compensation income
Business income Annual income tax, reduced
ANNUALLY by creditable withholding tax
Gain on other capital assets
Passive income earned outside
Creditable withholding tax refers to the income tax withheld by the

employer before the earner receives the net proceed of his income.
The amount withheld represents an estimated portion of the total
income tax for the year. This tax is called “creditable” because it is
deductible from the total actual income tax due computed at the end
of the taxable year.
Final withholding tax is also an income tax withheld from the total
income before the earner receives the net proceeds of his income.
This tax is called “final” because it is not allowed as deduction from
the total actual income tax due at the end of the year.
Quarterly income tax is paid quarterly by those who are engaged in

business/self-employed. This income tax is also a creditable tax at
the end of the year.
Annual income taxes are normal taxes that are usually 30% for
corporations and 5 to 32% for individual taxpayers. These taxes are
paid at the end of the taxable year and usually reduced by the
creditable taxes.
1
Minimum corporate income tax (MCIT) is an income tax of 2%
based on the gross income of corporation that still incurs losses or
reports minimal income tax even after the 3rd year of business
operation. The MCIT is observed starting from the 4th year of the
business.
Chapter 10 Basic income Tax Patterns 569
Capital gain tax is generally an income tax on sale of real

property (BIR Form 1706) and shares of stocks classified as
capital assets (BIR Form 1707).
BASIC MATRIX OF INCOME TAXATION

BUSINESS PERSONAL TAX
TAXPAYER INCOME EXPENSES EXEMPTION RATE
INDIVIDUAL i!
Resident citizen Within and outside
1. Compensation 0 Yes Normal J
2. Business income j
+ Passive income outside j Yes i Excess over Normal I
+ Capital gain not subject 1 Compensa- 1
to final tax j I tion 1
3. Capital gains: !
Sale of real estate j
! Sale of shares of stock 0 0 | Final tax 1
4. Passive income (within)
Nonresident citizen
Resident Alien Within only
1. Compensation 0 Yes Normal |
2. Business income Yes 0 Normal 1
+ Capital gain not subject ! ; Excess over
to final tax Compensa
tion
3. Capital gains:
Sale of real estate
Sale of shares of stock 00 Final tax 1
4. Passive income (within)
Nonresident Alien ■
All income within Yes Reciprocity
Engaged in Business Normal f
Nonresident Alien
No Business All income within 0 0 Final tax 1
i
CORPORATIONS:
Domestic
Corporation Within and outside
1. Business income
+ Passive income outside
+ Capital gain not subject Yes j 0 Normal I
--- to final tax
jo
Business loss
o
MCIT [
j
1
2. Capital gains:
o
Sale of real estate Final tax K

Sale of shares of stock
3.Passive income -within 0 ! 0 Final tax |
Resident Foreign BI
Corporation Within only 1
1. Business income Yes j 0 Normal I
Business loss 0 f 0 MCIT j
2. Capital gain: .
Sale of Real Estate 0 j 0 j Final tax 1
Sale of shares of stock __ _ |
3. Passive income-within
Nonresident
Foreign Corp. All income within 0 10; Final tax f
570 INCOME TAXATION
Illustration - 1
The income statement of a taxpayer is as follows:
Within itside
Business income PI00,000 Pi 20,000
Business expenses 40,000 50,000
Passive Income 5,000 5,000
Capital gain 10,000
Capital loss 5,000
Required: Compute the taxable income and the applicable tax

assuming that the taxpayer is
1. A single individual:
a. Resident citizen
b. Alien
2. A corporation:
a. Domestic
b. Foreign
Comparative computation of taxable income and applicable tax:

Resident Domestic Foreign
Citizen Alien Corporation Corporation
Business income P220,000 PI00,000 P220.000 PI 00,000
Passive income outside 5,000 5,000
Business expenses . (90,000) (40,000) (90,000) (40,000)
Capital gain 10,000 10,000
Capital loss • f 5.0001 ( 5.0001
Net business income 140,000 60,000 140,000 60,000
Personal exemption (50.0001 (50.0001
Income subject to normal tax P 90.000 P 10.000 P140.000 60,000
Resident Domestic Foreign
Citizen Alien Corporation Corporation
Passive income within
subject to final tax P5.000 P5.000 P5.000
Illustration - 2
Assume the following data:
Within Without
Business income P3,000,000 P2,000,000
Business expenses 2,000,000 2,700,000
The pro-forma computation would be:

Resident
citizen Resident Resident Domestic
(head of Alien Foreign Gen,* Co. Estates A
familvi (married 1 Corporation Partnershio Trusts
Business income P5,000,000 P3,000,000 P3.000,000 P5.000.000 P5.000.000
Business expenses 14.700,0001 (2.000.0001 (2,000,0001 (4.700.0001 (4.700.0001
Net income P 300,000 PI,000,000 PI,000.000 P 300,000 P 300,000
Exemption (50.0001 _ 150.0001 (20.000)
Net taxable income P 250.000 E. 95Q.QQ0 PIOOOOOO P 300.000 P 2&O.OOQ
Applicable tax rate —Tabular Tabular 3QS» 2% MCIT __ Tabular
Chapter 10 Basic Incoma Tax Pattern* 571
Summary Application
COMPARISON OF INDIVIDUAL AND E5TATE/TRUST TAXPAYERS
TAXPAYERS INDIVIDUALS | ESTATE/TRUST
--------------- ------------------------- T
Compensation/ S* I
INCOME
Profeeei&n/ Business
________ 1____________
DEDUCTIONS Itemized deduction* or 40*/* OSD based on
gross safes or gross receipts
J
EXEMPTIONS
Distribution to
beneficiaries
J
Basic » P50,000 >
Additional * P25,000 P20.000 j
each child (max. of 4) _________________
1 1r
TAX RATE Tabular Tax (Tax on Individuals) 1
Passive income earned within is collected with final tax at source, and as such no longer required
to be induded in the annual tax return for normal tax purposes.
Summary Application
COMPARISON OF CORPORATION AND PARTNERSHIP TAXPAYERS
DEDUCTIONS Itepiized deductions or 40% OSD based on G.l.
EXEMPTIONS
sz
Normal Corporate Income Tax
I
--------------- ---------------
TAX RATE |-------------- ► (30%) or Tax Exempt

MCITV /2%l
VTIVI 1* /VI
Passive income earned within is collected with final tax at source, and as such no longer required
to be induded in the annual tax return for normal tax purposes.
572 INCOME TAXATION
Income Tax Return and Filing
A. Individual, employed, not doing business
if an individual is employed with only one employer during the

taxable year, the corresponding withholding tax every month
for the whole year will be accurately deducted.
Employer will furnish the employee with form 2316 which will
serve the same purpose as that of BIR Form 1700 (Tax Reram
for Employed, not doing business).
BIR Form 2316 is a sworn declaration of the employer of the

compensation payment to an employee (with or without tax
withheld) and the amount of creditable tax withheld.
B. Individual, employed, with several employers during the

year, not doing business
Under this case, the individual taxpayer is required to

accomplish form 1700 and attach to it the form 2316
furnished by his employers.
Illustration
For year 200A earnings, his employers furnished Mr. Jun

Fuentes with the following BIR Form 2316:
BIR F-2316 BIR F-2316
Nontaxable compensation: EmDlover A Emplover B
13* month pay P 3,500 P 16,000
SSS, PAG-IBIG, Union Dues 3,000 18,000
Taxable compensation:
Basic salary 30,000 135,000
Allowances 5,000 25,000
Commission 4,000 15,000
Hazard pay 1,000 -0-
Total income tax withheld as head of family 5,375 29,625
In addition, he earned a net income of P50,000 during the

year from his small sari-sari store.
Mr. Fuentes’ income tax return should be reported in BIR

Form 1700 which basically would indicate the following:
Gross taxable compensation income P240.000

Other taxable income 60.000
Total P300,000
Less: Personal exemption 50,000
'taxable income P250.000
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v.« cos*;, ^ ;cc/>r',e
574 INCOMl TAXATION
Avlxi Net taxable business income:

Business income PhOO.OOO
1 os Uenurevl deductions _maee
Vt.e taxable income V 50Q,QQQ
Income tax due V 125,000

. ess Tax credits;
\\ ithholdmg tax FIR Forms 2d lb P 50,000
Qua* tcrlv tax payments . 22,500 7^500
Income tax still due 1> .52,500
Note: BIR Komi 1701 is also applicable tor income taxes of Estates and
TYv.sts
D* Corporation and Partnerships
Juridical persons engaged in business are required to

accomplish B1R Form 1702Q for the First three quarters, and
form 1702 for annul tax return.
Illustration
/
MT Co., a domestic corporation, reported the following tax

payments for the first to the third quarters of the taxable year:
Quarters
First Second Third
Business income (cumulative) P2,000,000 P 4,600,000 P 7,500,000
Itemized allowable deductions 1.500.000 3.500.000 5.700.000
Taxable income P 500.000 P 1.100.000 P 1.800.000
Income tax P 175,000 P 352,000 P 630,000

Less: Payment previous quarters -0- 175.000 352.000
Income tax payments P 175.000 P_ 177.000
For the fourth quarter, the company reported the following:
Business income for the quarter P3,000,000

Itemized allowable deductions 2,500,000
Capital gains * 100,000
Passive income earned outside the Philippines 50,000
Income tax -withheld per BIR Form 2307
furnished by credit card company 20,000
Its BIR Form 1702 should show the following:
Gross income from operation P10,500,000

Add: Non-operating income (PI00,000 + P50,000) 150.000
Total gross income P10,650,000
Less: Itemized deductions 8.200,000
Ne; :axable income P 2,450,000

Multiplied by corporate normal tax rate _ _ _ _ _ _ 30%
Tax due P 735,000
Less: Tax credits:
31R Form 2307 P 20,000
BIR Form 1702Q (first to third quarters) 630,000 650.000
Income tax still due P 85.000
E. Onerous Transfer of Real Property Considered as Capital

Asset
Under this case, the tax is 6% based on the selling price or

zonal value, whichever is higher. Accordingly, the actual gain
or loss on the sale of real property classified as capital asset is
not considered in the calculation of the capital gains tax.
Illustration
Assume that an individual taxpayer sold its land held as
investment for P5,000,000, which was acquired for
P3,000,000 two (2) years ago. The zonal value at the date of
sale was P6,000,000.
The seller should report the sale in BIR Form 1706. The
report is basically computed as follows:
Tax base P6,000,000
Multiplied by tax rate ________ 6%
Capital gains tax P 360.000
Note: The tax base is the higher between the selling price and the zonal
value. The sale is assumed to result to a capital gain and subject to tax
regardless of the actual gain or loss.
F. Onerous Transfer of Shares of Stock not Traded through

Local Stock Market
The capital gains is subject to a 5% final tax if the amount is
within the PI00,000 threshold. The capital gains in excess of
the first PI00,000 is subject to a final tax of 10%.
Illustration
A taxpayer sold its 100,000 common shares of a domestic
corporation for PI5 per share. These were acquired at P10
per share 6 months ago. Each share has PI 2 par value. The
term is 20% down payment and the balance is payable in two
(2) equal monthly installments.
576 INCOME TAXATION
Under this case, the taxpayer should report the sale in the
BIR Form 1707.
If the taxpayer elects to pay his tax on installment, it is

basically reported as follows:
Capital gains (PI5 - PI0) x 100,000 shares • P500.000
Tax on first PI00,000 x 5% P 5,000
Tax on excess, P400,000 x 10% 40.000
Total capital gains tax P 45.000
First installment payment:
(P45,000 x 20%) P 9.000
Second installment payment:
00
ON O
oo
oo
i—*
Principal (P45,000 x 40%)
Interest (P36,000 x 20% x 1 /12) P 18.600
Third installment payment:
Principal (P45,000 x 40%) P18,000
Interest (P18,000 x 20% x 1/12) 300 P 18.300
Notes:
1. The return should be filed within 30 days from receipt of down payment
and 30 days following each installment payment. (BIR Form No. 1707)
2. The installment payments shall be subject to 20% interest per annum
based on the outstanding balance. (BIR Form No. 1707)

1. Differentiate the three income tax patterns.
2. Enumerate the sources and taxability of the income of the different
taxpayers.
3. Give at least 4 examples of compensation income, business income,
passive income and capital gain.
4. Differentiate the two kinds of deductions from business income.
5. How much is the personal exemption for an individual taxpayer who
is (a) married, (b) head of family, and (c) single. How much is the
maximum amount of additional exemptions? 6
6. Explain the nature of the following kinds of income taxes:
a. Creditable withholding tax
b. Final withholding tax
c. Quarterly income tax
d. Annual income tax
e. Minimum corporate income tax
f. Capital gain tax
t Mpt«»r 10 Basic Income* Tax Patterns 577
f^prtTp: Score:
problem lO - 1 True or False

Wnic True if the statement is correct or False if the statement is
nuoHret.
1 Passive income within by n resident citizen is allowed to be reduced

by personal exemption.
2 Reporting compensation and business income in one tax return

using the same tax rate is an example of global tax system.
3. Allowing personal exemption as reduction to taxable compensation

income is an example of global income tax system.
4. Resident aliens are taxable for their income earned within and
5. There is net capital gain if the ordinary gain exceeds ordinary loss.
6. Only resident citizen could ppt for 40% OSD.
7. A single individual, fully supporting his minor sister could claim

P75,000 total personal exemption.
8.. A married individual with 5 dependent children could claim only

PI00,000 total personal exemption.
9. A self-employed taxpayer is required to file his quarterly income tax

return.
10. A general professional partnership is taxed in the same manner as

corporation.
11. A passive income earned outside the Philippines by a nonresident

alien is subject to annual income tax in the Philippines.
12. Both creditable and final withholding taxes are withheld at source.
13. The excess of personal exemption over compensation income cannot

reduce the net operating income from business.
14. In general, passive income within is subject to final tax.
15. The annual income taxes are usually increased by creditable
withholding taxes.
16. The optional standard deduction can be deducted from the quarterly
income tax.
57$ INCOME TAXATION
Problem 1 0 - 2 Multiple Choice

Select the letter that contains the beat answer.
1. When different types of income are subjected to common vwt r.a*r

the tajK system is described as
a. global tax system.
b. gross income tax system.
c. schedular tax system.
d. final tax system.
2. Schedular tax system of income taxation means

a. all types of income are added together to arrive at gross income
b. separate graduated rates axe imposed on different j^ypes of
income.
c. capital gains are excluded in determining gross income.
d. Compensation income and business professional income shaE or
added together in arriving at gross income.
3. Which of the following taxpayers are taxed for income earned wjthrr.
and outside the Philippines?
i. Resident citizen *
ii. Resident alien
iii. Domestic corporation
iv. Resident foreign corporation
Choices:
b. i, ii and iv only
c. i and iv only •
d. i and iii only
4. Jn general, which of the following incomes is not allowed to ot

reduced with personal exemption?
b. Passive income
c. Professional income
d. Business income
5. The following incomes are not allowed to deduct business expenses.
except
a. Compensation income.
b. Capital gains.
c. Passive income.
d. Professional income. 6
6. Which of the following income is not subject to withholding tax at

source?
a. Tax informer's reward
b. Sale of real property classified as inventory'
c. Interest income of bank time-deposit
d. Gain on sale of personal property
7. Which of the following is required to be filed with quarterly income

tax return?
b. Passive income
c. Business income
d. Capital gain
8. An income tax that is used to reduced the income tax due at the end
of the year.
a. Creditable withholding income tax
b. Final withholding income tax
c. Annual income tax El
d. Capital gains tax
9. Statement 1: NOLCO can only be deducted from the operating

income in the annual ITR.
Statement 2: The individual taxpayer's personal exemption can only
be deducted from the operating income in the annual ITR.
10. Which of the following is a subject to a creditable withholding tax at

source?
a. Holiday pay
b. Royalties
c. Gain on sale of shares of stock
d. Sale of family home
11. Statement 1: An individual self-employed taxpayer is allowed to

deduct personal exemptions eveiy quarter he files his quarterly tax
return.
Statement 2: The income of estates or trusts is subject to an
absolute exemption of P20,000.
12. Which of the following income is subject to a monthly creditable

withholding tax?
a. Salaries
b. 13th month pay
c. Income from trading
d. Winnings
580 INCOME TAXATION
Problem 1 0 - 3 Resident Citizen’s Compensation

A resident citizen reported compensation income amounting to PI 67,500,
net of P22,500 withholding tax. The tax rates for individual are as
follows:
• P8,500 for P70,000 + 20% in excess of P70.000.

• P22,500 for P140,000 + 25% in excess of P140,000.
His net tax payable would be

a. P22,500. c. P 5,000.
b. PI 5,000. d. P-0
Problem 1 0 - 4 Minimum Wage Earner

Mr. A, a MWE, reported a gross compensation income of P90,000 and
business gross receipts of P200,000. How much is the net taxable
income if the taxpayer opted to elect the optional standard deduction?
a. P-0- c. PI 60,000
b. P70,000 d. P240,000
Problem 1 0 - 5 Quarterly Income and OSD

For the months of January, February, March and April, a head of family
reported a business gross receipts of P50,000, P60,000, P70,000 and
P80,000, respectively. Opting for standard deduction, his net taxable
income for the first quarter is
a. P209,000. c. P106.000.
b. P108,000. d. P 58,000.
Problem 1 0 - 6 Corporation’s Net Taxable Income

A domestic corporation reported a gross profit of PI,000,000. Its sales
amounted to P2,500,000. Its ending inventory is P500,000 more than the
beginning inventory. Its operating expenses amounted to P400,000. Its
net taxable income would be
a. PI,000,000. c. P2,600,000.
b. P3,000,000. d. P 600,000.
Problem 1 0 - 7 Income Tax on Final Adjusted Return

For the previous 3 quarters, the total income tax paid by a domestic
corporation amounted to P900,000. Its total business income for the
year amounted to P5,500,000 and expenses of P2,000,000. How much
would be its net tax payable per final adjusted return?
a. PI,120,000 c. P 220,000
b. P 900,000 d. P 150,000
Problem 1 0 - 8 Net Tax Payable (Refund)

A resident foreign corporation in its 5th year paid P500.000 income tax
for the first 3 quarters. Its net taxable income for the year after operating
expense of P23,500,000 is equal to PI,500,000.
What. would be its net tax payable (refund) at the end of the year?
2 P480,000 c. P - 0 -
b- P 20,000 d. (P20,000)
problem 1 0 - 9 Net Taxable Income of Resident Citizen

The following are the reported income and expenses of a resident citizen:
Within Outside
Compensation income P250,000 P-0-
Business income 500.000 600,000
Business expenses 200.000 300.000
Dividend income 50,000 100.000
Required: Compute for the net taxable income before personal

exemption that should be reported in the annual income tax return.
Problem 10 - 10 Net Taxable Income of Resident Alien

The following are the reported incorrje and expenses of a resident alien:
Within Outside
Compensation income P250,000 P- 0 -
Business income 500.000 600,000
Business expenses 200.000 300.000
Dividend income 50,000 100.000
Required: Compute for the net taxable income before personal
exemption that should be reported in the annual income tax return.
Problem 1 0 - 1 1 Net Taxable Income of Foreign Corporation

The following are the reported income and expenses of a foreign
corporation:
Within Outside
Business income P500,000 P600,000
Business expenses 200,000 300.000
Dividend income from foreign corporation 50,000 100.000
Required: Compute for the net taxable income that should be reported
in the annual income tax return.
Problem 1 0 - 1 2 Annual Income Tax

Saddam, a single individual taxpayer, received the following income
during the year:
Taxable monthly salary, net of
P4,000 creditable withholding tax P 16,000
Interest income, net of final withholding tax of P2,000 8,000
First three (3) quarters’ taxable business income after
allowable deductions, net of P90,000 income tax
for three (3) quarters’ income tax 300,000
The net taxable business income for the last quarter is PI 10,000.
5S2 INCOME TAXATION
Required: How much is Saddam's fetal income tax .normal tax ph:s final
taxes during the \Tar?
Problem 10 - 13 Quarterly Income Tax

Data of Highland Corporation. a domestic corporation, for the year COOx
are as follow's: .(Data are all noncumulatire)
Qu&rrers
First Second Third Pound
Sales ;n oncumulative • P500.000 P600.000 JÔCUODD 5^00.000
Operating expenses before
interest and contribution 120,000 150.000 100.000 160.00C
Interest expenses 10.000 laooo 15.000 15.000
Contribution tdeduedbie in full) 20.000 'KhOOO
Cther revenue:
Dividend income (domestic'. 40.000
Royalty income 60,000
Ren: income 30,000 30.000 30,000 30.000
Interest income 15.000 10.000 15.000 2CJX£
The gross profit is -0% based on sales,

Required: Compute the foQowing:
1 Quarterly income tax due and payable
2, Income tax stfil due and payable in the fourth quarter.
3, Total passive income tax
Problem 10 - 14 Income Tax Still Due

Mariposa Co.., a demesne cerpcranon, reported the following tax
osments for me first i.o the third quarters of the taxable year
(-cumulative amount):
Quarters
____peered Third
P2.500.000 B4.-000.000 ?5,500.000
iced a_iOw»b}e deductions 1.500.000 2.300.000 _3.000.000
'axable PI .5t£i>20 22300,000
? 320.000 ? -30.000 P SOO.OOO
less. Payment previous quar -c_ 320.CC0 4SO.0OO
Income tax payments ? ? !6P,sdp C-320.000
Tor the fourth quarter, the company reported the following:

Business mccne P7,500,000
Itemized allowable deductions 4,000,000
Capital gams ,no final withholding tax'! 200,000
Passive income earned outside the Phfiippines 100,000
Income ax withheld per 31R Perm 2307 ‘
famished by credit card company 40,000
Re-cimedr Determine the income tax still due anc parable ai year-end
I7R
Chapter 11
INCOME TAX
OF INDIVIDUALS
INDIVIDUAL TAXPAYERS
~cthin the temtcclal jurisdiction of a taxing authority. These

innviduai taxpayers are ciasshkd as dozens and oHens.
w ncer An. iY, Section 1 cf the Phihonne Constitution* a FtUptno

Ohzen is he who is; has:
a. Those who are citizens of the Philippines at the time of the

adoption cf the 2987 Philippine Constitution;
i. bcm {by birth) with father and/or mother as rlipino citizens;
c. bom before January 17, 1973 of Filipino mother who elects

Philippine citizenship upon reaching the age of majority; or
d. acquired Philippine citizenship after birth Inaruralizedj in

acoordanoe wadi the Philippine Laws.
An Alien is a foreign-bom person who is not qualified to acquire

Philippine citizenship by birth or after birth.
Classifications of Citizens
U
ittzens are classified into (a) Resident Citizen and (bj iVon-
esidenz Citizen.
1 Resident Citizen (RC) is a Filipino citizen who stayed

penrjjrendy in the Philippines or stayed outside the
Philippines for less than 183 days during the taxable year.
A citizen of the Philippines residing therein is taxable for all

income derived from sources within and without the Philippines.
584 INCOME TAXATION
2. Nonresident Citizen is a Filipino citizen who stayed outside the

Philippines for 183 days or more during the taxable year and
has established proof to the BIR Commissioner of his definite
intention to reside outside the Philippines on a permanent basis
as an immigrant or employee. (Sec. 2, Rev. Reg.9-99)
A nonresident citizen is taxable only on income derived from

sources within the Philippines. (Sec.23B, nirc)
A citizen of the Philippines who works and derives income from

abroad and whose employment requires him to be physically
present abroad most of the time (at least 183 days) during the
taxable year is to be classified as nonresident citizen, (bir Ruling No.
128-99)
An individual citizen of the Philippines who is working and

deriving income from abroad as overseas contract worker is
taxable only on income from sources within the Philippines.
A seaman who is a citizen of the Philippines and who receives,

compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively in international trade
shall be treated as an overseas contract worker. (Sec. 24 a ib;(Sec.23C,
NIRC; Rev. Reg. 5-2001)
A Filipino citizen who was previously a nonresident citizen and

who arrives and resides permanently in the Philippines at any
time during the taxable year shall likewise be treated as a
nonresident citizen for the same taxable year with respect to his
income derived from sources abroad until the date of his arrival to
the Philippines.
Illustration
During 200B, Mr. Dongdi Perio, a Filipino Citizen, worked and

earned P200,000 in Saudi Arabia. Before the end of year 200B, he
returned to the Philippines and earned P80,000 salary from his
employment here. '
How much would be his gross taxable income for year 200B as
basis for Philippine income tax computation under each of the
following independent assumptions?
Chapter 11 Income Tax of Individuals 585
Assumption 1: Mr. Perio went abroad on January 200B and

returned to the Philippines on March 200B.
For the taxable year 200B, Mr. Perio was out of the country for
less than 183 days. Hence, he is a resident citizen. Consequently,
his income earned from all sources is taxable in the Philippines.
For year 200B, his taxable income before exemption is P280,000.
Assumption 2: Mr. Perio was in Saudi Arabia since June 1, 200A

and returned to the Philippines on March 200B.
Although Mr. Perio is already a resident citizen in year 200B, with

respect to his income earned outside the Philippines he is still a
nonresident citizen; hence, not subject to Philippine income tax
(paqe 480, par. 5). His taxable income before exemption would only be
limited to his earnings within the Philippines, which is P80,000.
Assumption 3: Mr. Perio went to Saudi on March 1, 200B and

returned to the Philippines on December 5, 200B.
Mr. Perio was out of the country for more than 183 days. As of the
end of the year 200B, he is a nonresident citizen. Hence, he is
taxable only for income earned within. His taxable income before
exemption for the year 200B is P80,000.
Classifications of Aliens
As a rule, an alien individual, whether a resident or not of the
Philippines, is taxable only for income derived from sources within
the Philippines. (Scc.23D, nirc )
Aliens are classified as either a Resident Alien, or Nonresident

A lien.
1. Resident Aliens (RA) are persons who are not citizens of the
Philippines but are residing within the Philippines including
foreign individuals who have stayed in the Philippines for
more than one year from date of arrival. (Svc.22F, nirc)
2. Nonresident Aliens (NRA) are foreign individuals whose

residences are not within the Philippines. Sec. 22G of the
NIRC classifies Nonresident Aliens as follows:
a. Those engaged in trade or business within the Philippines
(NRA PTH)
586 INCOME TAXATION
Those who have stayed within the Philippines for more

than 180 days during the taxable year shall be deemed
nonresident aliens doing business in the Philippines. A
nonresident alien who is engaged in trade or business and
has business income in the Philippines also belongs in
this group. (Sec.25A(i), Nmq
b. Those not engaged in trade or business within the

Philippines (NRANETB)
They are nonresident foreign individuals who have stayed

within the Philippines for only 180 days or less, and have
no business income derived within the Philippines. (Sec.25B,
NIRC)
Notes regarding residency:
1. The intention with regard to the length and nature of stay of

an alien determines whether he is a resident or nonresident.
2. If one comes to the Philippines with a definite purpose that
can be promptly accomplished, he may be considered as
nonresident. When his transaction can be accomplished with
extended period making his temporary home in the
Philippines, he becomes a resident.
3. A foreigner who shall live in the Philippines with no definite
intention as to his stay is a resident.
4. A foreigner who has acquired residency in the Philippines
shall only become a nonresident when he actually departs
with the intention of abandoning his residency in the
Philippines.
Summary Application
CLASSIFICATION OF TAXPAYERS AND SITUS OF INCOME
Situs of Income
Taxpayers Within ; Outside
Citizens: I I
Resident citizen Taxable ! Taxable
Nonresident citizen Taxable Nontaxable
Aliens:
Resident alien, NRAETB and NRANETB Taxable Nontaxable
Special Taxpayers*:
Citizen Taxable Taxable
Aliens ! Taxable ! Nontaxable'
‘Subject to special tax rates for some income as provided by law, generally at 15%.
'ifrt'JMt Y*/f**/+f*
*y,«* i//i 'f '*ftfe the** %fvd,'r\d. A,,'\ Of fX
t f j , i f f * v**.+A y/t*h a tiff**:* {.sifWit f)t%. °.A'/ :*/;*, ca*ed or, dntzr
yjtf a vfif/itfi*-. mA.fi the fois/v leg cond-ibon:* are
t(A*
i Ihty tiff: ?-j*A (y-t'utyfitify managerial torAj or tech r. real

pcsdions with regional df tixte headquarters of multinational
ttn pom bom, pet .'olet.ro service contractors ar.d
c;*jb':on tractor^ or offshore oanidng units. >'Stt.25C*j>,m&c,t&tc. t
?/.'/, !'+» Pf 'i~ to,. 1 / />/>i(>fy and
'a d >he special taxpayer fe an alien* all of h:s gross

compensation income received is subject to 15% final tax.
3. ff the taxpayer is a Filipino citizen* he has the option to he

taxed at 15% final tax based on his gross compensation
income received or at a regular income tax rate (5% to 32%)
based on the net taxable compensation income if his gross
annual taxable compensation is at least P9T5,000.00 (whether
or not actually received}, /sec. a Regs. nc . 11-201011
Illustration
Mr, % a Filipino holding a managerial position in a Regional

Operating Headquarters of Multinational Company receives a
monthly salary and cost of living allowance in the amount of
P70,000 and P7,000, respectively for the entire year.
1. If Mr, E opted to be taxed at 15% final tax* the amount of final

tax on his gross compensation income would be
Annual salary (P70,000 x 12 months) PS40,a0C
Annual cost of living allowance
(P7,000 x 12 months) 8-hGOO
13th month pay (P840,000/12) ... 7QAQG
Gross annual compensation income P994.000
Multiplied by final tax of Lbfh
Final tax on gross income at 15% P I 49,, 100
2. If Mr. E opted to be taxed at regular tax rate, the amount of

normal income tax due would be
Gross annual compensation income
Less: Non taxable 13th month pay —jO.OOO
iWAMt tfi/tnf/ii
Irixn}/!#' ' n*\Oi*

u* t nr,h/tj t //■ ‘Tftjltiori
I/,'-. i'ft ^V//„
ron:)l * /t-rrif/U'/n
Nf t inxnblf itt'oin*
^ >VuY,
' I f > x o n Pf>00,000 Y j jf.

Tnx on t y,( or,'> (P374,000 x 32%)
Normal moor no Sox duo
I A cbmigr in oorep' rmboo by ».V;

lr»ft than the romp*:nwUon threshold cf y/70 ///j i'J' v'rt ?*=&: %'&*'
tb/'if tfoc ernpF/yee’;* fX/m^T^x/T, \rxjj::,t *Jt % + '&>'* *& ifcr
, tax rate. ('->r;c 502 - Normal/5cncd'>lar r-abJ V> Xr*
2. In any case, a Filipino special vxcper^t^tivc xo^vrn* ^
subject to ;j withholding tax of 3 5%,
Marginal Income Earners (MIEs)

These are individuals:
1. whose activities are principally for subsistence or livelihood

that do not realize gross sales or receipts exceeding PI DO.CCC
in any 12-month period;
2. not deriving compensation as employee; and
3. who are not licensed professionals, consultants, artists, sales

agents, brokers and others similarly situated, including al
others whose income have been subjected to withholding tax.
MIEs includes the following:

• agricultural growers/producers(farmers/fLshennen: sehng
directly to ultimate consumers;
• small sari-sari stores;
• small carinderias or “turo-turos”; and
• drivers/operators of a single unit tricycle.
MIE are subject to income taxes but exempt from payment of

business taxes (i.e. VAT or any Percentage Tax). xMC.va ?oc:-
PERSONAL EXEMPTIONS
Personal exemptions are the arbitrary7 amounts allowed by law as
a deduction from the gross compensation income and/or net
C h a p t e r 1 1 In c o m e Tax of Indivlduala 580
business income nnd/oi profermionnl income an the caw may he,

for personal, living, or family expenses.
These deductions, which include both the exempt ionn of the

individual taxpayer, his family and his dependents, are
considered to be the equivalent of*the minimum subsistence.
Personal exemptions are granted only to individual taxpayers who

have earnings not subjected to final taxes.
Kinds of Personal Exemptions

Personal exemptions may be classified into:
1. Basic personal exemption is a deductible allowance granted

by the law to reduce the taxable income of an individual
taxpayer. (Sec. 35(A), njrc).
The new R.A. 9504 provides that the basic personal exemption
for individual taxpayer amounts to P50,000 whether he/she is
married, head of family or single.
In the case of married individual, only the spouse deriving

income is allowed to deduct personal exemption.
Illustration
Mr. Tanada, a Filipino Citizen with income within, married to

Miss Smith, an American Citizen residing in USA, has
compensation income of PI50,000 in the Philippines. He
would like to know their personal exemptions.
The personal exemption of Mr. Tanada is P50,000.

Note: As a Filipino Citizen with income derived within, only Mr. Tanada is
allowed to have a basic personal exemption. His wife has no personal
exemption because she is not a Filipino Citizen and has no income derived
within the Philippines.
2. Additional exemption is a deductible allowance in addition to

the basic personal exemption allowed for qualified dependent
children of an individual taxpayer.
The new R.A. 9504 provides that the amount of additional

exemption for each qualified dependent child (not exceeding
four) is P25,000.
590 INCOME TAXATION
Illustration
For the taxable year 200A, Mr. Cruz, married and with six
qualified dependent children has a compensation income of
P200,000. Assuming that Mr. Cruz is a Filipino Citizen, how
much is his total personal exemption?
The total personal exemptions allowed to Mr. Cruz would be

Basic personal exemption P 50,000
Add: Additional exemptions
(P25,000 x 4 children) 1.00,000
Total personal exemptions P 150.000
Taxpayers Allowed for Personal Exemption
The following individual taxpayers with compensation or business

income in the Philippines are entitled to personal exemptions:
1. Citizens of the Philippines, whether resident or nonresident;

2. Resident aliens;
3. Estates and Trusts; and
4. Nonresident alien engaged in trade or business within
(NRAETB) in Certain Cases. (Sec.9, Rev. Regs. No. 2)
The following are the requisites before a nonresident alien

individual doing business in the Philippines may be granted
personal exemptions:
1. The country of which the nonresident alien is a subject or a

citizen has an income tax law;
2. Such income tax law of the foreign country allows personal
exemptions to a Filipino citizen deriving income therefrom but
not residing therein (principle of reciprocity) ;
3. The nonresident alien files an income tax return (ITR) in the
Philippines in due time; and
4. Such ITR is true and accurate, covering all income received
from sources within the Philippines. [Sec. 35(B),nircj
Chapter 11 Income Tax of Individuals tU 1
Taxpayers Not Allowed for Personal Exemption

The following taxpayers are not alJowed for personal exemption
1. Nonresident aliens engaged in trade or business in the

Philippines not enjoying reciprocity clause;
2. Nonresident aliens not engaged in trade or business in the
Philippines;
3. Corporations; and
4. Partnerships.
Principle of Reciprocity
Personal exemptions of nonresident alien engaged in trade or
business (NRAETB) in the Philippines shall be subject to
reciprocity. (Sec. 35D, Nine)
It means that NRAETB shall be allowed a personal exemption only

if the income tax law in his country grants allowance for personal
exemptions to the citizens and residents of the Philippines as
stipulated in the reciprocity tax treaty with the Philippine
Government. (Sec, 14, Rev, Regs, No. 2)
Under the principle of reciprocity, the allowance for personal

exemption for NRAETB is equal to the amount of exemptions
allowed in the income tax law in the country of which he is a
citizen not to exceed the amount fixed as personal exemption in
the Philippines. (Sec. 35 (D), nircj
The term "personal exemption” in the Philippines includes both

the basic personal exemption /Sec. 35 (aj, nircj and additional personal
exemption for qualified dependent children not exceeding four. /Set.
35 (B), NIRCJ
Accordingly, if the reciprocity tax treaty stipulates to allow only

basic personal exemption, the Philippines will only allow basic
personal exemption subject to limit.
However, if the tax treaty stipulates that both basic personal and
additional exemptions be allowed as exemptions, based on
reciprocity principle the Philippines will also grant both basic and
additional exemptions subject to limit.
592 INCOME TAXATION
illustration
Mr. Smith, single and a nonresident American doing business in
the Philippines, asks you to determine his personal exemption for
200A.
Assume that the American Government allows a Filipino Citizen a

personal exemption amounting to P20,000, and the Philippine
Government allows P50,000. How much is the allowable personal
exemption of Mr . Smith in the Philippines?
The allowable personal exemption of Mr. Smith is P20,000. The

lower amount between P50,000 and P20,000.
a. If the American Government allows a single resident Filipino

Citizen a personal exemption of P75,000, what is the personal
exemption of Mr. Smith?
The allowable personal exemption of Mr. Smith is P50,000.
b. If the American Government does not allow personal

exemptions to resident Filipino Citizens, what is the allowable
personal exemption of Mr. Smith?
None. The personal exemption of nonresident alien doing
business in the Philippines is subject to the rule of reciprocity.
If the foreign government does not allow personal exemptions
to resident Filipino Citizens doing business in their country,
the Philippine Government will not allow such exemption also.
c. If Mr. Smith is married with a qualified dependent child and

the law in his country provides the following personal
exemptions:
Basic for married individual PI 00,000

Additional exemption
for each ^qualified dependent child 20,000
How much is the amount of the personal exemption of Mr.

Smith?
The personal exemption of Mr. Smith is P70,000 determined

as follows:
{.riApfet 1 I l / » ( t r t i f of Inrlivkltmlfc fW s
f 4 OI rigli
!'r: .< »Ji d r <ri!ij>fi(.(iv:; I'llilippilit?'. Count f y Allowed
!•!■!< m:u nrrj (’SO,000 i’100,000 f •!>()'()()()
Ac Ichf ton/il 2S.000 20,000 mooo
1 ofii! personal exemptions izojm
f'of long iis there is reciprocity, R.A. 8424 allows oddifionnl

exemption to NRAKBT because the term "allowance for
personal exemption" includes both basic and additional
exemption. may ,
Requisites for Additional Exemptions
The following requirements should be met by the dependents of

the individual taxpayer to qualify as dependents and be allowed
with additional exemption:
The dependent must be:
1. a taxpayer’s child, whether legitimate, illegitimate or legally

adopted;
2. chiefly depending for support on the taxpayer;
3. living with the taxpayer;
4. not married; not gainfully employed, and not more than 21

years old. (Sec. 35(B), njrq
The law allows the continuous additional exemption even if the

dependent child is more than 21 years old, with the provision
stating “or if such dependent, regardless of age, is incapable of
self-support because of mental or physical defect.” /sec. 35(B), par.4, nirj
Meaning of Dependent
Dependent means a legitimate, illegitimate or legally adopted child

chiefly dependent upon and living with the taxpayer if such
dependent met the criteria provided under Sec. 35 (b) of NIRC.
A legitimate child is one who was conceived or bom of spouses

within wedlock. An illegitimate child is one conceived and born
Outside marriage. (Family Code of the Philippines)
594 INCOME TAXATION
A natural child is one conceived of parents who, at the time of

conception, without being married, were qualified to many (New
Civil Code of the Philippines).
Hence, an illegitimate child under the Family Code of the

Philippines is a natural child under the New Civil Code of the
Philippines. (Sec. 35 (B), nirq
Note: In view of the Family Code which makes no distinction between the
spurious and natural child, an illegitimate child can now be considered as a
qualified dependent and qualifies the claimant to the status of head of family.
(Rev. Reg. 2-98, Sec.2.79B(2)d).
Meaning of Living with the Taxpayer

The term “living with” may be construed that the taxpayer and his
dependents reside under one roof, or do not necessarily reside
under one roof with consideration on the character of the
separation.
The dependent has the status of living with the taxpayer in the
following circumstances:
a. The parents are absent from home due to business or work.
b. The dependent is away at school or on a visit.
c. Through force of circumstances, a parent is obliged to

maintain his dependent children with relatives or non
relatives.
Meaning of Gainfully Employed

The child is “gainfully employed” when he has earnings deriving
from employment, work or trade that will remove him from the
status of chief support from the taxpayer.
Meaning of Chief Support

Chief support refers to the principal or main support whether
money or in kind extended continuously to the dependent, such
that if withdrawn, the dependent will have a destitute life.
To be regarded as main support, the supply must be more than

one-half of the requirements for support to the dependent such
that if two legally separated man and woman contribute equal

support to their dependent child, neither of them may qualify as
head of family.
A man or woman who provides chief support to parents, brothers

or sisters may qualify as head of family, entitled to the basic
personal exemption of P50,000, but not entitled to additional
exemptions.
Illustration
Compute the personal exemption of Mr. Weygan, a Filipino, legally

separated with the following dependents:
a. Children: A, 30 years old and jobless; B, 19 years old student

but gainfully employed; C, 22 years old mentally retarded,
b. 55-year old father,
c. 12-year old illegitimate son, and
d. Supporting a senior citizen (60 years old).
The total personal exemption would be
Basic personal exemption P 50,000

Add: Additional exemptions:
Child - mentally retarded P25,000
Illegitimate child _25,Q00 50.000
Total personal exemptions PlQiLOQO
Rules in Claiming Additional Exemptions
An individual taxpayer claims additional exemption with the

following guidelines:
1. If only one spouse is deriving taxable income, only said spouse

may claim the additional exemption.
Illustration
For the taxable year 200A, Mr. Cruz, married to Mrs. Cruz, a
plain housewife, with 6 qualified dependent children, has a
compensation income of PI30,000. How much is the personal
exemption of the couple?
596 INCOME TAXATION
The total personal exemptions would be

Mr. Cruz Mrs. Cruz Total
Basic personal exemption P 50,000 P-0- P 50,000
Add: Additional exemptions:
(P25,000 x 4) 100.000 100.000
Total personal exemptions E15&QQQ P-0- PI 50.000
2. If both of the spouses earn income during the taxable year,

only one of the spouses can claim additional exemptions for
dependent qualified children. (Sec. 35B, nirq
To minimize tax, usually the spouse with higher earnings

claims the additional exemption.
When both spouses earn compensation income, the husband

shall be the proper claimant of the additional exemption.
However, the wife may claim the additional exemptions in the
following cases:
a. The husband explicitly waives his right in favor of his wife,

b. The husband has no income, or
c. The husband works abroad. (Sec. 79f, nirq
Illustration
For the taxable year 200A, Mr. Cruz and Mrs. Cruz, both
Filipinos with 6 dependent children, have compensation
income of P300,000 and business income of P200,000,
respectively. How much is the total personal exemption of the
couple?
The total personal exemptions would be

Mr. Cruz Mrs. Cruz Total
Basic personal exemption P 50,000 P50,000 P100,000
Add: Additional exemptions
(P25,000 x 4) 100.000 100.000
Total personal exemptions PI 50.000 P50.QQQ P200.000
Chapt#? 11 ircoma Tax of Individuais 597
y .7 .egahy h-epa rated from the spouse with a qualified dependent

sm.ty he -ay avail a basic personal exemption of P50,000,
and *he additional exemptions shall be allowed to the spouse
who has oustody of ‘he child or children.
ffiuatratiem
Mr Cruz and Mrs. Cruz, both Filipinos and legally separated,

worn one dependent child under the custody of Mrs. Cruz,
nave compensation income during the year amounting to
.:<*40,000 and business income of P250,000, respectively.
'!he pcrrônai exemptions of Mr. Cruz and Mrs. Cruz would be
Mr. Cruz Mrs. Cruz

Basis personal exemption P50,000 P50,000
Add: Add ."bona; exemption (P25,000 x 1) 25.000
7eta; personal exemption P50-000 P75.000
* An unmarried individual with a child out of wedlock who is a

recognized natural child can claim a personal exemption
amounting to PSD,ODD, plus additional exemption(s).
Illustration
Miss Poces, a single mother Filipino, with one qualified

dependent child who is acknowledged by his father, has
compensation income amounting to P280,000. If Miss Roces
chiefly support her child, how much is her personal
exemption?
1he personal exemption of Miss Roces would be
Basic personal exemption - head of the family P 50,000

Add: Additional exemption (P25,000 x 1) 25.000
Total personal exemption P 75.000
Note; A* a rule, personal exemptions are deducted first from compensation
incom e. Any excess of personal exemption over compensation income is
deductible from business net income.
598 INCOME TAXATION
CHANGE OF STATUS
The rules for change of status are summarized as follows:
CHANGE OF STATUS SUMMARY

(R.A. 9504)
Individual Taxoaver • Exem ption

Change of Status: This vear Next vear
1. Married P50,000 P50,000
2. Died P50,000
3. Widowed with 1 qualified dependent
child P75,000 P75,000
4. Widowed with qualified dependent not
his child P50,000 P50,000
5. Widowed without dependents P50,000 P50,000
6. Legally separated with 1 qualified
dependent child P75,000 P75,000
7. Legally separated with qualified
dependent not his child P50,000 P50,000
8. Legally separated without dependents P50,000 P50,000 .
9. Not legally separated P5Q,000 P50.000
DEPENDENT CHILDREN
(Maximum of Four)
Additional Exemption
Change of Status: This vear Next vear
1. Born P25,000 P25,000
2. Reaches 21 years old - normal child P25,000
3. Reaches 21 years old - abnormal
child and incapable to support
himself P25,000 P25,000
4. Marries P25,000
5. Gainfully employed P25,000
6. Dies P25.000
Dependents Other than Children

The Tax Code provides that additional exemption is to be granted
to qualified dependent children of an individual taxpayer.
Accordingly, a taxpayer with dependents other than his children
(example: sister, brother, parents, and senior citizen) is not
entitled to additional exemption. [Sec. 35 (B), nirc as amended by r.a. 9504 ]
If an individual taxpayer supports dependents other than his

children, he may retain the basic personal exemption of P50,000,
without additional exemption.
Chapter 11 Income Tax of Individuals \
Illustration
Miss Dina. Maligawan is single and chiefly supporting her parents

and four (4) brothers who pvialify to be dependents.
In this case, Miss Maligawan’s basic personal exemption is

P50,000. But she cannot claim additional exemptions lor tier
parents and four (4) qualified dependent brothers.
DEPENDENTS OTHER THAN CHILDREN

(Brother, sister, parents and/or senior citizen^
3asic Additional
1. Single, with dependent other than P50,000 - O-
children
2. Head of family, with dependent other P50,000
than children
3. Married, with dependent other than P50,000
children
Dependent Senior Citizen

A Senior Citizen shall mean any. resident of the Philippines who is
at least 60 years old, including one who is retired from either
government office or private enterprise, and has an income of not
more than P60.000 per year subject to review by NEOA. every 3
years. (Rev. Reg. 2-98(Bj2d)
The benefactor of a senior citizen shall be entitled only to the

basic personal exemption equivalent to P50,000 or as allowed
under the Tax Code for head of family. He shall HOT, however, ~be
entitled to claim the additional exemption of P25.QOO for
supporting a senior citizen. (Rev. Reg. No. 4-2006; Sec. 7, ra 7432; r.a. 9504)
The Baybay vs. CIR, CTA Case No. 5280 dated Dec. 20, 1996 is no
longer applicable because the most recent Tax Laws R.A. 8424 of
January 1, 1998 and R.A. 9504 of June 6, 2008 provides that
additional exemption is applicable to qualified dependent
children. When the law does not include it excludes.
Under “lex posteriori derogate priori” principle - the more recent

law governs. The old CTA decision is superseded by the two
Special Laws - R.A. 8424 & R.A. 9504 which are superior to CTA
decision. Furthermore, BIR reiterated in its Revenue Regulations
600 INCOME TAXATION
No. 4 - 2006, Sec. 7 last paragraph that “No personal exemption

is allowed for senior citizen.”
Illustration
Mr. Siegfred Erorita, single, is taking care and providing chief

support to Lolo Rado, a senior citizen.
The personal exemption of Mr. Erorita would only be P50,000. ts&L.

2, R.A. 9504)
' CLASSIFICATION OF TAXES ON INDIVIDUALS

Taxes on individual taxpayers are classified as;
1. Normal (Tabular) graduated tax;

2. Passive income tax; and
3. Capital gains tax.
Normal (Tabular) Tax

The tax rate to be used in computing income tax due of an
individual taxpayer is the normal graduated tax rate as provided in
the Section 24(A) of the NIRC.
Individual taxpayer’s taxable income subject to normal (tabular)

tax is income derived from compensation, business and
profession. It may also include capital gains and passive income
not subjected to final taxes.
The income tax on these earnings is generally computed based on

the following schedule:
NORMAL (SCHEDULAR) TAX RATE ON INDIVIDUAL TAXPAYER

(Sec. 24(A) of NIRC)
Not over PI0,000 5% 8
Over PI0,000 but not over P30,000 P500 + 10% of the excess over PI0,000 1
Over P30,000 but not over P70,0Q0 P2.500 + 15% of the excess over P30.000
Over P70.000 but not over PI40,000 P8.500 + 20% of the excess over P70.000
Over PI40,000 but not over P2S0.000 P22.500 + 25% of the excess over P 140,000
Over P250,000 but not over P500,000 P50,000 + 30% of excess over P250,000
Over P500.000 PI25,000 + 32% of the excess over P500,000

C h a p te r 1 1 Income Tax o f in d i v id u a l* $01
Taxable Incomo
Taxuhlt» ituoftu' means the prj iiruni jtrms of gross income, less
11»* deductions tuui/oi basic personal and additional exemptions
and special deductions, if any, authoiizcd for such of
income by the NJRC' or Other special lows (:><<
The amount ot taxable inconn' is the basis of Income tax rate to

arrive at income f ax due,
'Ib<‘ individual taxpayer's taxable income may be computed as

follows: ( I H R F o r m l / O O & I 70J )
Compensation income* \> ^xx

Less: Personal exemptions P XXX
1 lenlth/hospitalixadon insurance paid .....XXX XXX

Net taxable compensation P xxx
Business income P XXX
Less: Business expenses allowed ..... XXX
Net business income P XXX
Add: Capital gains, not subjected to tinsj tax P XXX
Passive income without
(for resident citizen) XXX _ XXX . xxx
Total taxable income Pzxx
Income Tax Due

The income (ax due of an individual taxpayer is based on his/her
net taxable income. The; income tax rate to be used is the normal
(tabular) income tax rate .as provided by Section 24(A) of the
NIRO.
The; lax due on the; respective income earned by husband and wife
should be computed separately. In case a family business income
could not be specifically identified whether earned by either of the
couple, such income shall be divided equally between the spouses
to determine their respective individual taxable income, ir.a 74<j7)
At the end of the taxable year, the 'husband and wife will
accomplish a single income tax return wherein their respective
taxes are to be combined.
The single 1TR to be accomplished is BJk Form 1700 if the income

is purely compensation. If the income is a combination of
compensation and business income, the single ITR to be
accomplished is BIR Form 1701.
SC2 INCOME TAXATION
Illustration
Assume the following income of Mr. Scott and Mrs. Ann Saboy:
Mr. Sabov Mrs. Sabov

Compensation income P300,000 PI80,000
Withholding taxes 34,000 24,500
Rent income of PI20,000 is derived from the couples’ conjugal

property. They have four (4) qualified dependent children.
The income tax of Mr. and Mrs. Saboy can be determined as

follows:
Mr. Sabov Mrs. Sabov
Compensation income P300,000 P180,000
Less: Personal exemptions:
Basic - married P 50,000 50,000 50,000
Additional exemption (P25,000 x 4) 100.000 100.000
Taxable compensation income P150,000 P130,000
Add: Rent income (P 120,000/2) 60,000 60,000
OSD (PI20,000 x 40%)/2 ( 24.000) f 24.000)
Total taxable income PI 86.000 P166.000
Income tax on PI40,000 P22,500 P22,500

Income tax on excess:
Mr. Saboy (PI86,000 - PI40,000) x 25% 11,500
Mrs. Saboy (P166,000 - P140.000) x 25% 6.500
Income tax due P34,000 P29,000
Less: Tax credit - withholding taxes 34.000 24.500
Income tax still due and payable P-0- P 4.500
Notes:
1. Since the husband and wife will file a single ITR, their respective income
taxes are to be combined subject to reduction of withholding taxes.
2. Each spouse with income is entitled to claim his/her personal exemption.

The husband is presumed head of family; hence, he would claim the
additional exemption, except when he waived his right to claim in favor of his
wife.
Passive Income
Passive income is an income earned from allowing other to use
one’s rights, or game of chance or investment, which the taxpayer
merely waits for the income to come in. The law subjects passive
income to final tax. Once subjected to a final tax, it is no longer
included in the taxable income subject to normal (tabular) tax.
Deductions and exemptions do not apply to items subject to final
tax.
— i ax of Individuals 603
Passive income is classified as follows:

a. Interest, prizes, royalties, etc.,
b. Cash or property dividends,
The applicable rates for passive income are shown in the

Summary of Tax Base and Tax Rate on Individual Taxpayers.
Capital Gains Tax

These taxes are imposed on sales or exchanges of properties not
used in business. Capital gains and their respective, taxes have
been discussed in Chapter 7 of this book.
Comprehensive Illustration
Mr. Guillermo Miraflores, married and a resident citizen, received

the following income in 200A:
Source of Income
Within Without
Interest income P 20,000 P100,000
Dividend income 50,000 80,000
Prizes 10,000 30,000
Lottery winnings 40,000 70,000
Royalty, books 60,000 50,000
Royalty-mining 180,000 90,000
Interest foreign currency deposits 100,000 85,000
Winnings, Philippine Lotto 1,000,000
Sale of land (capital assets), cost 50%; zonal 10% higher 500,000 600,000
Sales of shares not traded, cost 50% 250,000 200,000
Rent income 175,000 160,000
The applicable taxes of Mr. Miraflores would be
A. Final tax on passive income withheld at source by the income payor:
Final tax on interest income:

Interest income-within (P20,000 x 20%) p 4,000
Interest on Foreign Currency Deposit-within (Pi00,000 x 7.5%) 7.500
Pi 1*500
Final tax on dividend income (P50,000 x 10%) P .5*00.0
Final tax on royalties:

Royalty on books - within (P60,000 x 10%) P 6,000
Royalty on mining-within (PI 80,000 x 20%) 36.000
P42.000
Final tax on winnings: Lottery winnings-within (P4(),000 x 20%) P 8,000
Final tax on capital gains:
Sales of land within (zonal value is higher)
(P500,000 x 110% x 6%) P 33,000
Sales of shares of stock - within
(outside local stock exchange) P250,000
1
so* INCOM E TAXATION
Cr*s; o! snares <of stock F750.000 2> ..jagjoQp

Gam cr s£f of srxTS of stock P125*OO0
Pax on urs: PS00.000 x 5% P 5.000
Tax cc excess ,P125.000 - PIOO..OCO) x 20*/P ___ aÔ _ 7,500
E4&*§i&
3. lucerne subject to normal (tabular) tax;
Sources of Inccme
Within Withî-
x?:.: tree me PI 75.000 P 160.000
Pmses 10.000 50.000
Inters; 100.000
Dseadend 50.000
Lottery 70.000
loyalty. beck 50.000
Royalty. zoning 90.000
Interest, foreign currency deposit S5.00G
Gain on sa3e of land ,P600.0CK>-P500.000) 300.000
Gain on sale of stock, not traded
i?C'OO.OOi>-P100.0001 100,000
Totals PI,065.000
Add: Income within «?: “5,000 - PI0.0001 PIS5.000 155.000
Income before optional deduction PI.250,000
Less: Optional deduction ;P:.250.CX1^0 x 40% 1 500.000
Income beiore personal exemption P 750.000
Less: Persona! exemption - basic 50.000
Taxable income P 700.000
Tax on P5QO,QOO P 125.000

Tax on excess F~OQ.OOO-P50D.OOOl x 32% 64,000
Income tax due and payable P 1S9.000
SUMMARY OF TAX BASE AND TAX RATES ON INDIVIDUAL TAXPAYERS

’ iTTTTvr ‘ r s o v rrsTFTT:
J,
•FVVT Final W ithholding Tax

“GIW Gross Incom e W ithin
NONRESIDENT ALIENS’ (NRA) INCOME TAXES
The Nonresident Aliens’ income taxes shall be governed by the

following rules:
1. NRA Engaged in Business. If the NRA is engaged in business

(NRAEBT) in the Philippines, he shall be taxed in the same
manner as a Nonresident Citizen, except for the following
income derived within:
a. Dividends subject to 20% on gross amount, and

b. Cinematographic film owner at 25% on gross income.
Illustration
Shawar Mah, an Indian national engaged in money-lending
business in the Philippines, reports the following business
income and expenses during the year:
Philippines India
Business income P900,000 $600,000
Business expense 400.000 500,000
Dividend income 100.000 80,000
Assume that India does not provide personal exemptions to

foreigners. Shawar Mah’s income tax in the Philippines is
Normal (tabular) tax: Philippines

Business income P900,000
Business expense 400,000
Net taxable income P500.000
Income tax on P500,000 P125.000
Final tax on dividend income within P_ 20.000
(PI00,000 x 20%)
Note: Income earned outside the Philippines by a nonresident alien is not subject to tax
in the Philippines. Shawar Mah’s income within is not granted a personal exemption
because his income within is not subject to reciprocity.
NRA Not Engaged in Business. If the NRA is not engaged in

business (NRANEBT) in the Philippines, he shall be taxed at a
final tax of 25% based on his gross income within; except for
alien employed by (a) regional or area headquarter established
606 INCOME TAXATION
in the Philippines by multinational company, (b) offshore

banking units, (c) petroleum service contractor and
subcontractor. They are taxed at 15% of salaries within. (sec.
25(C)(D)(E), NIRCj
Illustration
Mr. George Bush, a nonresident alien not doing business in

the Philippines, earned the following income during the year:
Philippines U. S. A.
Net income from business $ 100,000
Prizes P100,000 30,000
Royalty income 200.000 60.000
Total P3.Q0iQ0Q $190,000
The Philippine income tax of Mr. Bush would be
Gross income - Philippines P300,000

Multiplied by applicable tax rate 25%
Philippine income tax due P 75.000
Summary and Treatment of Different Taxpayers’ Income

laxpayeg; Within Without Itemized Optional Pxemptipn la&iaig
A. Resident Citizen:
Compensation Income Yes Yes No No Yes Schcdular (Sec. 24A)
Income from Profession Yes Yes Yes or Yes Yes Schcdular (Sec. 24A)
Income from Business Yes i Yes Yes or Yes Yes Schedular (Sec. 24A)
Passive Income* Yes Yes* No No No Final Tax (Sec 24B.C.D)
•Tabular (See. 24A)
B. Nonresident Citizen &
Resident Alien
Compensation Income Yes No No No Yes Schcdular (See 24A)
Income from Profession Yes No Yes or Yes Yes Schcdular (Sec 24A)
Income from Business Yes No Yes or Yes Yes Schcdular (Sec 24A)
Passive Income Yes No No No No Final Tax (See 24B,C,D)
c. Nonresident Alien lingaged

in Trade in the Philippines
Compensation Income Yes No No No R Schcdular (See 24A)
Income from Profession Yes No Yes or No R Schcdular (Sec 24A)
Income from Business Yes No Yes or No R Schedular (See 24A)
Passive Income Yes No No No No Final Tux (See 24B.C.D)
O. Nonresident Alien not

hngugcd in Trade in the Yes No No No No 25% of gross income &
Philippines ’ apply See. 24 C Jit D
i Special t axpayers P.m pioyed

by:
u. Regional llcud Oltice Yes No No No No 15% of gross income
' of M ulu-nalionul Apply Sec. C & D.
Corporation assigned & 25% tor other income
in the Philippines
b. Ollshore Bunking
Unit
c. Petroleum Service
Contractor
>apttr 11 Income Tax of Individuals 607
i *• In.-orrir tax *ab> Cor compensation and trade income (normal tabular tax) j
* T3 U r nr- for pasw* income j
*C i ' »?e for 5-ale of share of stock outside the stock exchange
O t*' ’*'* for vile of real property
■V>, 1+ A to K, !tenured Deduction
Sr: l* - OSD V *0 >, based on Sales or Gross R eceipts (Rev. Regs. No. 16-2008)
SeeVV Personal Exetr.pr.on
=inject to Reciprocity _________ ______________ ____________________________
TAX CREDIT
The tax that was withheld by source shall be applied as a

reduction of the tax liability of the taxpayer in the taxable year or
quarter in which the income was earned or received.
Illustration- Tax credit within
In 200A, Mr. Restie Espanola, married and with four (4) qualified
dependent children, reports the following income and expenses
within:
Salary, net of WT P5,000; SSS premium P2,000 P205,000

Rent income of commercial space, net of WT 5% 95,000
Expenses, 40% connected with rent income 150,000
Royalty income on mining claim, net of WT 20% 160,000
Commission income, net of WT 10% 27,000
The computation of income tax payable of Mr. Espanola subject to

schedular tax would be
Gross salary (P205,000 + P5,000) P210,000

Rent income (P95,000/95%) P100,000
Less: Rent expenses (PI50,000 x 40%) 60.000 40,000
Commission (P27,000/90%) 30.000
Total net income before personal exemption P280,000

Basic (married) p 50,000
Additional (P25.000 x 4) 100.000 150.000
Taxable income Pi 50.000
608 INCOME TAXATION
Tax on P70.000 P 8,500

Tax on excess (P130,000-P70,000) x 20% 12,000
Tax due P20,500
Less: Tax credit:
Withholding tax on salary P5,000
Withholding tax on rent income
(PI00,000 x 5%) 5,000
Withholding tax on commission
(P30,000 x 10%) 3,000 13.000
Income tax still due and payable P 7,500
Note: Royalty income is subject to final tax; hence, it should not.to be included in
the computation of income subject to schedular tax. SSS premium is nontaxable.
Tax Credit for Taxes Paid to Foreign Country

Taxes paid by an individual to a foreign country shall be subject
to the following rules:
1. An alien individual shall not be allowed credits for the taxes

paid to foreign countries (Sec. 24,c (3 b), nircj. It is because he shall
be taxed on income derived within the Philippines only.
2. At the option of the taxpayer, the income tax paid by resident

citizen to any foreign country may be treated as an item of
deduction or tax credit (Sec. 34C(3), nirc).
3. The total amount of the credit shall not exceed the proportion
of the tax against which such credit is taken, which the
taxpayer’s income from sources without the Philippines
taxable under this Title bears to his entire taxable income for
the same taxable year [Sec. 24,c (4b), nircj.
Limit of Tax Credit Paid to Foreign Country

Per Sec. 34(4) of the NIRC, the rule applicable to tax credit paid to
foreign country will be the lower of actual tax paid or the amount
derived by computing the tax limit as follows:
Formula:
One Foreign Country
Tax _ Taxable income from foreign country x Philippine
Credit Taxable income from all sources* income tax
♦Note: The taxable income used to compute the limit on foreign tax credit is
before personal basic and additional exemptions.
\ncome Tax of \nd\v\dua\s 609
Mlote Yoxeign Countries
me formula is used as that of one foreign country except

ne allowable tax credit will be the lower of the following;
.ctual tax paid to foreign country;
Limit on tax credit computed using individual taxable income

from foreign country fas numerator); or
. Limit on tax credit computed using total taxable income from
foreign country fas numerator).
Y\tu»tx alloti
Assume that Mr. Romeo Vazquez, head of family and a resident

citizen of the Philippines, derived income from sources within and
outside the Philippines. The information regarding his taxable
;~~ome taxes paid for 200A are as follows:
>me Taxable income Income tax paid

P220,000 P 15,000
200,000 70,000
500,000 175,000
U20,000)
tax paid in tbe Philippines is only a partial payment

in tbe quarterly income tax.
ayer cbose a tax credit for tbe income taxes paid to
antries, tbe income tax still due and payable in the
s would bave been computed as follows:
rotation of Philippine income tax before tax credit

lUYe income from all sources:
Phiiippin es P220,000
Japan 200,000
USA. 500,000
Hongkong (120.0001
T
Taxable income t>efore exemption 1*800,000
Less; Personal exemption (Vieacl of family) 50.000
laoable income f*75Q,pQO
Tax on P500,000 PI 25,000
Tax. on excess 1P750,000-P500,000) x 32% 80.000
PViilvppine income tax \>efore lax credit JftZPS.OOQ
610 INCOME TAXATION
l.i. J>drrmirmfion of allowable tax credit foreign (lower)

M»«l* 1 A' tuftl In* fmi(1 f/irfit&i (P70,000 * PI75,000) emsae
rift,H 7 IrifliWdanJ InjmMf* Income- fwrjgn
(P700.000/ PAOO.OOO) x P'705,000 P 51,250
USA (P500.000/ P800,000) x P205.000 128 J 25 msuzs
Mm t* 3 If,to) Oixnhle iw-wnr foreign

|f»V 00,000 i P500,000 P120,000)/P800,000) x P205.000 (lower) P148.625
* !ictcrmination of Philippine income tax still due

Philippine income tax before tax credit P205,000
Less; Tax credits:
f oreign, Limit (lower) P148,625
Local quarterly income tax paid 15,000 163.625
Philippine income tax still due EAJU3Z5
Ni»t©i In (ompHllag fhr incomr Im x , m frnrtionnJ pert of a peso less than P0.50
shall he aifitrînled. If tlir fiaetlonnl pari is P0.S0 or more, It shall be rounded off
to PI .00, /AM, r,oo)
SALARY FROM EMPLOYMENT

II n mmried individual taxpayer is employed, his periodic net pay
Lorn salary is computed as follows: (All amounts assumed)
1 hmir salary per month PI 8,000.00
Overtime and holiday pay _&ee&22
(Loss loxablr income P 24.000.00
Less; 1 )edi id ions;
ALsences and Imdiness 1’1,200.00
888, employee's share 400.00
Phil ■ heall h 03.75
Pag il)lg 360.00
Union (lues 100.00
Wilhholditu/ lax ..&ZK&2<> 57>I>WI5
Nel lake home pay imoy^QS
Withholding Taxos on Salaries

Withliolclinf/ laxaa on salaries are income taxes that are
temporarily based on estimate, The exact amount of taxable
salary would only he determined at the end of the year when the
Inal pay for the year Is computed and paid.
It the only source of the taxpayer’s income is from his sole

employment, Ins Annual 1TK (HIK Form 1700) is no longer
Chaplal 11 ItMSOifid Teu of Individuals
011
l!r ‘ r "* ;,n Itllv* I'l'lill iMlO lr,„.||r,| |,y ,||r ,

csanigh as compliant r, 7 would fif
HMr.urtlh, the xvnfih.)li1ntK lux I'm riu I, ) M ,y j„ ,

r >lripi<|r/| un
tallows
Gross salary for the pay period timea number

oi paydays m flit* yeai
P xxx
less Personal exemption P XXX
Health insurance premium, il any XXX XXX
Estimated net taxable income P XXX
Times applicable tax rate
%
Estimated income tax for the year P xxx
Divided by number of pay period for the year XXX
Estimated withholding tax tor the payday ILXM
Illustration
Mr. Joel Awingnn is single and employed with a monthly salary of

P25.000. Suppose that there is no change in Ids salary during the
period, and no other deductions, except the withholding tax,
The computation of estimated withholding tax is as follows:

Estimated salary for the year (P25,000 x 12) P300,000
Net taxable income P25QQOQ
Since the annual income tax for P250,000 taxable income is
P50.000 and salaries are paid once in a month, then the
withholding tax for the payday is computed as;
Annual income tax P50,000.00

Divided by number of months in a year ............ JL2
Withholding tax for the month P 4 A66,67
SELF - EMPLOYED INDIVIDUALS

A self-employed individual is an individual taxpayer whose income
is derived solely from his own business, $
fg
f'j?
Illustration
Assume that a single individual taxpayer is a single proprietor of a

trading business, His proprietorship has business income for the
first quarter is PI20,000, The operating expense amounted to
P50,000. His first quarter income tax return would be:
612 INCOME TAXATION
Business income Pi 20,000

l,css: Business expenses ...50,W0
Nel estimated taxable income P 7Q.Q0Q
Tlir tux for the I’/0,000 tuxtiblc income per nornuit (tabular) Ulx
rule is PH,500.
Note: Im>i m self rm ployed taxpayer, his quarterly ITR not to be reduced bv
personal exemption. Tlir personal exemption is allowed only in his tmnun.1 income
tax iftutu* when nit hit* income is consolidated in one annual income tux return.
Income Tax on Professional or Talent Fees

In general, professionals are required to collect a 12% VAT based
on the gross receipts which shall he remitted to the B1R on the
Ô1*1 day of tlie succeeding month, (KA. wo
In addition, Revenue Regulation No. 30-2003 provides that

professional or talent fees for services rendered by an individual
shall be subjected to a creditable withholding of income tax on the
gross professional, promotional and talent fees or any other form
of remuneration for the services of the following individuals:
1. Practice of Profession. Trn percent (10%)

tvithholdituj tax for an annual income' of P720.000 and below
and 15% for income more than l*720,000, fxvc. do :*\w. Sfcc.
Ml
Illustration
On October 200A, Jose IVrnlta, a CPA and VAT registered

professional, obtained several accounting services as follows:
Do tc 1 Tofcssjqiud. m vive rendered ITv&ssivnud
December 1 Management advisory PI 00,000
System installation 200,000
Auditing
Total Po00,000
Add: VAT (PhOO.OOO x 12%) x2,W0
Total Po72,000
hesM; ('(editable withholding tax (PO00.000 \ 10%) OdJlW
Oioss ircripts inclusive of VA T 1 'sdAU&l
i„b*pt*f 11 Irif tttfm f
613
A**n/nr IMl fh* /,vrrhr;i'1 f '>sf >s F^!>OfOOO. The journal entry
v/ouj/1 Nr
OrMf Ml JOURNAL *
n»*» Png* Number 12
/h*t% ti* D#Mf Credit
] '/i < «*» b 612,000 . f-' ■
t'trslifnhft holding It*/ 00,000 I 11
i’Tf>fr+%U,rml ir.t t,rn* "600,000. ff
f n>*p“t '/AT 72,000_ j1
)>/i —-- ------.......
' 250,000
/ o«C) ~ 250,000” , ’{ 1'
i'// VAT
VA'f puyat»k
72,000
72,000
| '
ifi i
iti/trtnr Xu/ 65,000
( trtUtsihlr withholding fa* 60,000 fife If
U\( <>tnr tf*x ftnyhhlf 5,000 'la If
|I I;
i The creditable tax amounting to P60,000 m withheld by the client*.
2. 7'he VAT ift ) 2% of the professional fee received, or P72,000, (P600,000 x
1 2%),
3. 7‘he income tax still due and payable would be;
Total professional fee (net of value-added tax) P600,000
Ixrf.n; Operating expenses 250,000
Net income P350,000 u
lx:*?!; Personal exemption .-£ChQQQ |s
Net taxable income £300,000
■|
Income tax on P250,000 P 50,000
Tax on excess (P300,000 - P250,000) x 30% 15.000 If
Total income tax P 65,000
Ijzhh: Creditable withholding tax ~m.QQQ
Income tax still due and payable P 5,000
I
Professional athletes, entertainers, musical and movie r&&:'
directors.
a. Ten percent (10%) - if the annual income does not exceed

P720,000.
b. Fifteen percent (15%) - if the annual income exceeds

P720,000.
Talent fees are entitled for optional standard deduction of 40%

if no operating expenses are claimed as deductions.
614 INCOME TAXATION
Illustration
In 200A, Manny Pacquiao (married having four qualified

dependent children) acted in the movie “Mata sa Kamao,” with
a contract talent fee of P20,000,000 plus 12% VAT. He opted
to deduct OSD since no official receipt can substantiate his
operating expenses.
Assuming that Pacquiao is VAT-registered, compute for the

following:
1. Creditable withholding tax.

2. Cash received.
3. Income tax still due and payable.
The creditable withholding tax is computed as follows:
Talent fee per contract • P20,000,000

Multiplied by withholding tax rate _______ 15%
Creditable withholding tax P 3.000,000
Note: The withholding tax rate used is 15% because the total professional
income exceeds P720,000 in a year. (Rev. Reg. No. 30 - 2003)
The actual cash received would be PI9,400,000, determined

as follows:
Talent fee per contract P20,000,000

Add: VAT (P20,000,000 x 12%) 2.400.000
Total P22,400,000
Less: Creditable withholding tax 3.000.000
Actual cash received P19.400.000
The VAT of P2,400,000 shall be remitted to the BIR within 20

days of the succeeding month when the income was received.
Consequently, the net cash received by Pacquiao would be
P17,000,000, (P19,400,000 - P2,400,000).
At the end of the year, income tax still due and payable is
Talent fee per contract P20,000,000
Less: Optional standard deduction
(P20,000,000 x 40%) 8,000,000
Net taxable income PI2,000,000
Less: Personal exemptions
(P50,000) + (P25,000 x 4) 150,000
Taxable income PI 1.850.000
Income tax on P500,000 P 125,000

Income tax on excess
(PI 1,850,000 - P500,000) x 32% 3.632,000
Income tax due P 3,757,000
Less: Creditable withholding tax 3.000.000
Income tax still due and payable P 757.000
INDIVIDUAL INCOME TAX RETURN (ITR)

The following individual taxpayers are required to file income tax
return that should be filed in triplicate:
1. Resident Filipino Citizen on his income from all sources
a. Individuals deriving compensation income from 2 or more

employers, concurrently or successively at anytime during
the taxable year;
b. Employees deriving compensation income regardless of the

amount, whether from a single or several employers
during the calendar year, the income tax of which has not
been withheld correctly (i.e. tax due is not equal to the tax
withheld) resulting to collectible or refundable return;
c. Employees whose monthly gross compensation income

does not exceed statutory minimum wage and opted for
non-withholding of tax on said income;
d. Individuals deriving other non-business, non-professional

related income in addition to compensation income not
otherwise subject to a final tax;
e. Individuals receiving purely compensation income not

otherwise subject to a final tax; and
f. Individuals receiving purely compensation income from a

single employer, although the income of which has been
correctly withheld, but whose spouse is not entitled to
substituted filing.
Substituted Piling of ITR. Individual taxpayers receiving purely

compensation income, regardless of amount, from only one employer in
the Philippines for the calendar year whose income tax has been
withheld correctly by the said employer shall not be required to file BIR
Form 1700 if the tax due per computation equals tax withheld.
In lieu of BIR Form 1700, the Annual Information Return of Income Taxes
Withheld on Compensation and Final Withholding Taxes (BIR Form 1604-cf)
f.U WCOMI TAXATION
r.. * * - ov.» ■* *i>*« *!V# • t i ' p i ' ? auiv cm it it v«r<^v‘'#r by f;JK shaft y
' uni •' m* s ■ . » ! ; « < • ) f ir>«<)iy|r f<turr»c by 5»id employ*
, .*• • 4 *v. /<<;v * TOOyj
2 NY. in* Md< til Filipino CMlzcri on hi? income derived within th^
Philippov -s
3. krMdcm alien on Him hu orne derived within the Philippines
< t verv notof ulnu alien engaged in irode or busine?*ft or

prefer>mo»i m the Philippines, /,v< *>/m/a weey
Exempt Individual to File Income Tax Returns

The following individual taxpayer* are exempted from filing
income tax returns: r>v niAfrJh nmq
1 An individual who is not engaged in business or practice of

profession whose gross income does not exc eed his personal
and additional exemptions for dependents,
2. Minimum wage earners, via <w/m; r.h, no. to qooh/
3. If his gross income does not exceed his total personal and
additional exemptions for dependents, /;&«•. ;t%NMC)
4. If his pure compensation income derived from the Philippine!)

and the pertinent income tax has been correctly withheld, (fine,
79, nirci
5. Regardless of amount, the following individuals are not

required to file an income tax return:
a. An individual whose sole income lias been subjected to
final withholding true psw sya, nirc), such as interest, prizes,
winnings, royalties, dividends, share of individual person
in a business partnership,
b. Alien employees of regional or area headquarters of multi

national corporations with respect to income received from
such corporations;
c. Aliens employed by offshore banking units with respect to

income received by them from such units; and
d. Alien employees of service contractors and sub-contractors

engaged in petroleum exploration in the Philippines with
respect to income received by them as such.
ITR of Parent to Include Income of Children

Under Section 51(E) of the NIRC, the income of unmarried minors
derived from property received from a living parent shall be
included in the returns of the parent, except:
a. When the donor’s tax has been paid on such property, or
b. When the transfer of such property is exempt from donor’s

tax.
Financial Statements Attached to the ITR

The financial statements that are required to be attached with the
income tax returns upon filing are:
1. Statement of Net Worth anfi Operations. This statement is to be

attached with the income tax return of individual taxpayers if
the gross sales, receipts or output from business do not
exceed P50,000 in any one quarter.
2. Balance Sheet and Profit-and-Loss Statements. These

statements are to be attached with the income tax return of
individual taxpayers if the gross sales, earnings, receipts, or
output from business in any one quarter exceed P50,000 but
do not exceed PI 50,000.
3. Other Statements. The following statements are to be attached

with the income tax returns if the gross sales, earnings,
receipts or output from business in any one quarter exceed
PI 50,000.
a. Balance Sheet and Profit-and-Loss Statement certified by

an independent CPA.
b. Comparative Profit-and-Loss Statements for the current and

preceding taxable years.
e. Schedule oj income producing properties and corresponding

income therefrom. (Svc. 232 , mnci
618 INCOME TAXATION
Annual Declaration and Quarterly Payments of Income Tax
The following dates are to be observed by an individual taxpayer

in his declaration and quarterly payments of income taxes:
1. On or before April 15 of the following year for the taxable

income of the previous year.
2. April 15 of the same taxable year for the estimated income of

the current year. (Sec.74B, nirc)
3. Filing and payments of individual’s estimated income tax.
Ouarters Specific Dates

First April 15 of the current taxable year
Second August 15 of the current taxable year
Third November 15 of the current taxable year
Fourth April 15 of the following calendar year when final
adjusted income tax return is due for filing
(Sec. 74B; Sec. SIB, NIRC)
The individual taxpayer’s quarterly income tax has been

illustrated on chapter 10 of this book.
Installment Payment of Tax

Individual taxpayers are allowed installment payment of their
income taxes when the tax due exceeds P2,000. (Sec.56 A2 , nirc,j
The taxpayer other than a corporation may elect to pay the tax in
two (2) equal installments in which case the tax installment dates
are as follow's:
1. April 15 - 1st installment payment on the required date of

filing and payment.
2. July 15 - 2nd installment payment.
3. If any installment is not paid on or before the date fixed for its
payment, the whole amount of the tax unpaid becomes due
and payable together with the penalty on delinquency.

]. Distinguish the following:
a. Filipino citizen from alien
lx Resident citizen from nonresident alien
<. Resident alien from nonresident alien
2. Who are “special taxpayers?” State the tax rules applicable if the
special taxpayer is a/an (1) alien and (2) Filipino citizen.
J Who ate marginal earners? State their taxability.
4. State tlie categories and amounts of personal exemptions.
5. Who an* the taxpayers allowed with personal exemptions?
0. Fxplain the principle of reciprocity with respect to personal

exempt i o n of NRAISTI3 in the Philippines.
7, Who /ire the taxpayers not allowed for personal exemptions?
H, Who air the taxpayers entitled to additional personal exemptions?
State the rules in claiming additional personal exemptions for

rtpouries.
It), (live the meaning of the following:
a. Dependent
I), Living with the taxpayer
e. (Ininlully employed
I I What are the basic and additional personal exemptions if dependents
air other than the taxpayer's children?
12 State the mien on claimable additional personal exemption when the
depe ndent is a senior citizen.
I t How m e c h a n g e s in status during the taxable year treated in
c l a i m i n g additional personal exemption?
LI Wlmt m e (lie classifies! ions of income taxes of individual taxpayers?

I », What is a nmma! (tabular) income tax?
In (iive the haaic I'm mat of ITR in computing an individual taxpayers
t a x a b l e income.
17 What m e the types of deductions that may be deducted from

individual laxpavri’s income?
i s | sttrienttatr tax due from net tax payable as shown in the ITR.
62C VCOME TAXATION
19. Whs: ts a passive incc.tuc? Oivc at Was* ^ examples.
2C, Wha: &z* the incense taxes applicable if an alien is a nonresident

enc&eed in business or no: engaged in business in the Philippines?
21. What is a tax credit?
22 State the formula and rules of the deductibility of taxes paid by

resident dtben and domestic corporation to foreign country.
23, Who are required to file income tax return?
24. What are the typical deductions from gross pay to arrive at the
amount of net take home pay?
2 5. Define a *self-employedx individual.
26. What are the required taxes attached to professional or talent fees?
27. When would an ITR of parent include income of children?
28. What are the financial statements attached to the ITR?
29. State the due dates of quarterly and annual filing/payments of

income tax.
30. Is installment payment of income tax allowed?
31. Who are exempt to file income tax returns?

f Chapter 11 Income Tax of Individuals 621
f
j Name: _____________________________________ _ Score:
!
j Problem 1 1 - 1 True or False
I Write True if the statement is correct or False if the statement is
incorrect.
1. A nonresident citizen is taxable only for income within.

Therefore, his interest income from expanded foreign currency
deposit system transacted with an OBU is taxable in the
Philippines.
2. A foreigner who stays in the Philippines for more than 180 days
during the taxable year is deemed as doing business within and
his income within and outside the Philippines is taxable in the
Philippine.
3. Nonresident aliens engaged in business in the Philippines are

allowed with personal exemptions and additional exemptions
subject to reciprocity.
4. The allowances for personal exemptions of a single mother with a

dependent child out of wedlock are P50,000 and P25,000,
respectively.
5. Individual taxpayers are allowed to elect installment payment of

their income taxes when the tax due is P2,000.
6. At the option of a resident taxpayer, income taxes paid in foreign

countries can be claimed as deduction from gross income or tax
credit subject to limit.
7. A senior citizen's income is exempt from all income taxes.
8. An individual taxpayer is exempted from filing income tax return

if his sole income has been subjected to final withholding tax.
9. For self-employed taxpayers, their quarterly income tax returns

are to be reduced with corresponding personal exemption.
10. Income earned outside the Philippines by domestic helpers is

tax-exempt because they are considered nonresident citizens.
11. The personal exemption of a nonresident alien not engaged in

business in the Philippines is subject to reciprocity agreement.
12. A citizen who works abroad most of the time during the taxable
year is a nonresident citizen.
622 INCOME TAXATION
Name: Score:
Problem 1 1 - 2 True or False

Wire True if the statement is correct or False if the statement is
incorrect.
1. A dependent senior citizen is not entitled for additional

exemption of P25,000.
2. A Filipino citizen classified as special taxpayer is required to be

taxed based on his gross compensation income subject to a final
tax of 15%.
3. If the taxpayer dies during the taxable year, his estate may claim
the personal exemption as if he died at the close of such year.
4. The tax rate on special aliens is 15% of their gross compensation

income derived within the Philippines from special employment
by multinational corporation.
5. Professional or talent fees for services rendered by an individual

shall be subjected to a creditable withholding value-added tax.
6. When there is a tax treaty agreement, both the basic and

additional exemptions can be availed by a nonresident alien
engaged in trade or business in the Philippines but subject to
limit.
7. An alien residing and doing business in • the Philippines is

allowed to have a tax credit for income taxes paid in other
country.
8. If the professional fee of an entertainer exceeds P720,000 per

year, the creditable withholding tax should be 20%.
9. Gross income for computation of optional standard deduction

includes compensation and business income plus other taxable
income not subjected to final tax.
10. Interest income from foreign currency deposit of a nonresident
Filipino is subject to a final withholding tax of 7.5%.
11. The income of a professional entertainer can be reduced by

optional standard deduction.
12. All lotto and sweepstake winnings derived by a resident Filipino

citizen within and outside the Philippines are exempt from
Philippine income tax.
Name: ______________________________________ ______ Score:

1. An individual taxpayer, whose personal exemption allowed is the

lower amount provided between Philippine Tax Code and his
country’s Tax Code.
Citizenshio Residency Business income
a. Filipino Within No
b. Filipino Outside Yes
c. Alien Within No
d. Alien Outside Yes
2. For Philippine income tax computation, which of the following

individual is taxable also for income earned outside the Philippines?
a. Nonresident alien
b. Nonresident citizen
c. Resident alien
d. Resident citizen
3. A foreign individual who have stayed in the Philippines during the

taxable year for more than 180 days but less than one year is
considered a
a. nonresident alien doing business in the Philippines.
b. nonresident alien not doing business in the Philippines.
c. resident alien.
d. resident alien doing business in the Philippines.
4. Which of the following is not a marginal income earner?

a. Agricultural contract growers
b. Owners of small sari-sari store
c. Drivers of tricycle
d. sidewalk vendors
5. Which of the following individual is required to be taxable at 15% on

compensation income derived within the Philippines?
i. Compensation income amounting to more than P975,000 per
year of a citizen earned from employment with regional or area
headquarters of multi-national corporation
ii. Managerial and technical compensation income of alien earned
from employment with the petroleum service contractor
iii Compensation income of alien as a rank-in-file earned from
employment with an offshore banking unit
Choices:
a. i, ii and iii c. ii only
b. ii and iii only d. iii only
624 INCOME TAXATION
6. For taxation purposes, a Filipino citizen who stayed outside the

Philippines and worked abroad for 182 days during the taxable year
is classified as
a. nonresident citizen.
b. resident citizen.
c. overseas contract worker.
d. special taxpayer.
7. Which of the following is not required to file an income tax return?

a. Resident citizen with respect to his business income earned
outside the Philippines
b. An employee with only one employer and whose compensation
income is fully collected with creditable withholding tax
c. Nonresident citizen with respect to his compensation income
earned within the Philippines
d. Nonresident alien with respect to his business income earned
within the Philippines

a. A self-employed individual is required to file a quarterly income
tax return.
b. The income reported in quarterly tax return is cumulative during
the year.
c. Business expenses reduce the income reported in the quarterly
tax return.
d. The income reported in the quarterly tax return is reduced by
personal exemption.
9. A CPA certificate is required if the quarterly gross sales, gross

receipts or earnings of an individual taxpayer
a. exceeds P100,000.
b. exceeds PI50,000.
c. less than P200,000.
d. less than P500,000.
10. The following persons benefit from personal exemptions, except

a. Resident alien, not doing business in the Philippines.
b. Foreigner who stayed in the Philippines for more than 183 days
and earned business income within.
c. An alien with only business income earned within after a year of
stay in the Philippines.
d. Nonresident alien, with only compensation income earned in the
Philippines.
625
Seas
c%»ioe
* ^" *r W^*-^
* ^: ...
.<»' CC ',.
" ^ wirii both. DC* icusi exerciitxm and sednior^
:s ,< Ss.c
• -'d •'» d S 'axpaytr
-CS~a:ft Jj,'.C “f^StS
ds.mcftmhip
Ovrpcr^ :.,cr:
'/► •ûsg mdrvxdual dditiofiaJ

-axpayem are granted basic an
exers e me except
rses ces irixer,
tt citizen
•''am.'crsmp fuuy owned by rodent Filipino citizen,
les
bcr.residesr alien engaged fr> trade or business in the Philipi
s r*x treaty reciprocity.
i-'a "er.cer.t ! ,'f born husband and wife are earning income, only one
o; them no',Id claim for the additional personal exemption.
O'a tersest 2: The husband is the rightful claimant of additional
perv.nal exemption, unless he waives his rights in favor of his wife,
a Only statement 1 is correct,
b fioth statements are correct,
c Only statement 2 is correct,
d. ,:x/*h statements are incorrect,
Statement 1; A tax credit wifi reduce the taxable income,

bta tersest 2; A, tax credit will be available when there is foreign
income tax paid by resident Filipino for income earned without,
a. Only statement, i is correct,
o frets statements are correct.
c. Only statement 2 is correct,
d, fjoth statements are incorrect,
One of the following is not creditable against the total computed tax
per rr p
a Pinal withholding tax
b foreign income tax paid by resident citizen
c Ored/fable withholding tax on compensation
d. Income tax paid for the first three quarters for the business
income earned.
bfatrment l; An alien who shall reside in the Philippines with no

definite intention as to his stay is a resident of the Philippines.
626 INCOME TAXATION
Statement 2: A foreigner who has acquired residency in the

Philippines shall only become a nonresident alien when he actually
departs with the intention of abandoning his residency in the
Philippines.
7. Statement 1: Compensation income is reduced by personal expenses

to arrive at the taxable amount.
Statement 2: Business income is reduced by business expenses to
arrive at taxable amount.
8. Which of the following statements is true?

a. Resident citizen with income from foreign sources only is allowed
a basic personal exemption only.
b. Nonresident alien not engaged in business in the Philippines is
allowed basic personal exemption only.
c. Nonresident alien engaged in business in the Philippines is
allowed both basic and additional personal exemptions.
d. Nonresident citizen with income from the Philippines only is
allowed both basic and additional personal exemptions.
9. The personal exemption of a nonresident alien engaged in trade or

business in the Philippines is equal to that allowed by the
a. income tax law of his country to a citizen of the Philippines not
residing there.
b. income tax law of his country to a citizen of the Philippines not
residing there or the amount provided by the NIRC to a citizen or
resident, whichever is lower.
c. NIRC to a citizen or resident.
d. income tax law of his country allows to a citizen of the
Philippines not residing there or the amount provided by the
NIRC to a citizen or resident alien, whichever is higher.
10. A net taxable income of a nonresident alien sole proprietor of a

cinematographic film is subject to a
a. normal tax of individuals.
b. 10% special tax.
c. 25% final tax.
d. 32% normal corporate income tax.
Cfcdp**? 11 Income Tax of Individuals 627
Mans: Score:
problem 11 - 5 Multiple Choice

V cm *hc better that contains the best answer.
;. A Filipino special taxpayer is taxable on his gross compensation

income if his total earnings during the taxable year from
tr, vocational enterprises amounted to more than P975,000.
a. Yes, provided that the amount is to be reduced by personal
exemption.
o Yes, provided that the amount is said taxpayer has the option to
be taxed at special tax rate of 15% or normal tax.
c. Yes, for as long as the tax rate applicable is 15%.
d. No, because the special tax rate is applicable only to aliens
classified as special taxpayer.
2. Which of the following is the correct amount of additional personal

exemption?
a P8,000 for each qualified dependent child
b. P20,000 for each dependent sibling
c. P2 5,000 for senior citizen
d. P2 5,000 for each qualified dependent child
o. Which of the following is an amount of allowed personal exemption

for a nonresident alien not engaged in trade or business in the
Philippines?
a. P50,000 basic without additional exemption.
b. P50.000 basic plus additional exemption of P25,000 for each
qualified dependent child
( Amount subject to tax treaty reciprocity and limit
d. No personal exemption is allowed for NRANETB.
4 All of the following taxes are classified as income taxes, except

a. 20% royalty tax.
b. 10% dividend tax.
r. V/ of J% tax on the selling price of shares of stock traded-in the
local stock exchange,
d. b% capital gains tax on sale of land.
Which of the following amount of winnings/prizes is subject to final

tax of 20%?
a P10.000 winnings outside the Philippines
b. PI0.000 winnings earned within the Philippines
t. P 1,000.000 Philippines Sweepstakes winnings
d po.OOO first prize singing contest
628 INCOME TAXATION
6. Which of the following is not correct income tax rate?

a. 20% on P50,000 compensation income earned by senior citizen
b. 20% on dividend income earned within by nonresident alien
doing business within
c. 25% on gross income earned within by nonresident alien not
doing business in the Philippines
d. 7.5% on interest income earned within by a resident Filipino
citizen under the expanded foreign currency deposit system.
7. One of the following individual taxpayer could claim additional

personal exemption.
a. Single, supporting a 30-year old paralytic brother.
b. Widow, with a 25-year old son under his custody.
c. Legally separated with 21 -year old sibling as qualified dependent.
d. Legally separated with one qualified dependent child within his
custody.
8. All of the following dependents will entitle the taxpayer for additional
personal exemption except
a. 25-year old, but mentally retarded son.
b. 20-year old, unmarried daughter.
c. 18-year old, unemployed son.
d. 19-year old sister.
9. Which of the following is the correct creditable withholding tax on

professional income?
a. 15% on professional income of a practicing lawyer earning
P500,000 a year.
b. 15% on professional income of entertainer earning more than
P720,000 per year
c. 20% on professional income of entertainer earning P500,000 and
below per year
d. 20% on professional income of entertainer earning more than
P720,000 per year
10. If an individual person is allowed to pay his tax on installment

payment, the due date would be
a. April 15 for the 1st installment and July 15 for the 2nd
installment payment
b. May 15 for the 1st installment and July 15 for the 2nd
installment payment
c. April 15 for the 1st installment and August 15 for 2nd installment
payment
d. May 15 for the 1st installment and August 15 for the 2nd
installment
r/itfptei 11 lOrOtnti
rtobUiti t l *i VttfWHtol X,*.* tup* l*>n

.‘.j x/Liof* iiutiitoihi &l'f1 l>c'I) -• ; i •'* ,< tott'/W?' *■% C*.U
i<j ,\tJ f>J< y« e»i
( inilpt IlHUtlOl) JD< Otlir pvxlvuv

AJJoWfUK * giV^n b; wih «ud 4 mmo* {4W <//J) fs/j
rhlid/ t n
How much in ih< total amount ot p'/$o/;*J ex&mptsjn
Problem 1 1 * 7 Permonul Exemption

A J'iiipino tux pay tw supports t he following dependent® for tht^r dhaef
Hnun< iul iireds;
• Mentally retarded legitimate son (40 years old);

• l^*gi(inmtf* sou (25 years old);
• Legitimate daughter (20 years old) and her husband (21 years old)
• IIIegif im«t e da ugh ter (10 years old);
• Adopted child (0 years old);
• Wife without income;
• Senior citizen mother; and
• A brother (20 years old)
Mow much is the amount of his total personal exemptions allowed from
his P300.000 gross compensation income?
a. PI 75,000 c. PI 25,000
b. PI 50,000 d. P100,000
Problem 1 1 - 8 Personal and Additional Exemptions

The taxpayer is a widow who supports the following:
(a) Legitimate child by a former marriage, 12 years old;

(b) Recognized natural child with present common law husband, 6 years
old;
(c) Common law husband who is single; and
(d) Widowed mother (senior citizen) of her common law husband.
The amount of her personal and additional exemptions is

a. P50,000. c. P100,000.
b. P75.000. d. P125,000.
Problem 1 1 - 9 Personal Exemption (Reciprocity)

Mr. Ronald Baden, an American citizen and a resident of California,
U S A., has business income derived in the Philippines amounting to
P50Q,000 for the year. He is married and has 2 minor children.
mo INCOME TAXATION
ftk'-.v rr, .so*: i]j :>(“ .allowed ;is his personal exemption for the computation
■re r:i* tax :n the Philippines, if his country’s tax law is granting
:r:»i m-me ■•mount of personal exemptions to Filipino citizens, except for
irrib \i 'tet* exemption where his country’s tax law is allowing PI0,000 per
:j epe r. d e rat child?
P 3 00,'000 c. P50,000
? ~0,000 d. P-0-
Problem 1 1 - 1 0 Dependent Other than Children

Mana. married and without income, receives her allowance amounting to
P50.0C0 per month from her husband who is working in Brunei as
Accountant. She supports her two siblings and parents who are qualified
as dependent relatives.
How much is the total personal and additional exemptions of Maria?

a. P 3 25,000 c. P50,000
b. PI00,000 d. P - 0 -
Problem 1 1 - 1 1 Income Subject to Philippine Income Tax

Juan, single, is an OFW with a monthly income abroad amounting to
P20.000. He has a sari-sari store in the Philippines with an average
monthly income of PI0,000. If Juan returned in the Philippines from
March 1 of the taxable year and stayed to manage his sari-sari store,
hoy/ much of his income is subject to tax in the Philippines after
personal exemption?
a. P 70,000 c. PI 10,000
b. PI 00,000 d. P120,000
Problem 11 - 12 Special Taxpayer

Mr. Roman Dinero (single), a Spaniard who is a resident general
manager of Texas Instrument, Philippines - a multi-national company’s
regional operating headquarters established in the Philippines - received
a monthly salary of P250,000. What is the amount of Mr. Dinero’s
income tax payable during the year?
a. P 12,500 c. P450,000
b. P80,000 d. P487,500
Problem 1 1 - 1 3 Special Taxpayer

On July 1, 20lx, Mr, Bout, an Indian national came to work in the
Philippines as a resident general manager of Abbot Laboratories-a multi
national company’s regional operating headquarters. He received a
monthly salary of PI 50,000 plus 13th month pay. In addition, he received
a bonus of P50,000 and a car fringe benefit amounting to P850,000, net
of fringe benefit tax. What is the amount of Mr. Bout’s preferential
income tax on compensation for the year 20lx?
a, P297,000 c. PI 53,750
b. PI 65,000 d. P149,250
Chapter 1 1 Income Tax of tndhriduais 631
Problem 11 - 14 Special Taxpayer

Mr. E. a Filipsno holding a technical position in a Regional Operating
Headquarters of Multinational Company receives a monthly salary* and
cost of living allowance in the amount of P65.0OG and P5.000,
respectively, for the entire year. How much fs the income tax due of Mr.
E?
a. PI 31,250 c. P229 f OOQ
r P217.800 d. P245,0CX)
Problem 1 1 - 1 5 Net Taxable. Income

Eddie Pay! a eng. a Filipino Citizen who supports his senior citizen father,
reported the following earnings and expenses during the year:
Gross compensation income P200,000
Gross receipts derived from rent income 50,000
Personal living expenses 180,000
Premium payments on hospitalization insurance 5,000
How much is the net taxable income of Mr. Paylaeng by taking the best
option to minimize tax?
a. P 52,400 c. PI77,600
b. PI 75,000 d. P180,4OO
Problem 11 - 16 Taxpayer’s Income

X, single, reported the following income and expenses during the taxable
year:
Within Without
Professional income » 300,000 P200,000
Interest income 100,000 60,000
Dividend income 60,000 40,000
X opted to deduct OSD.
1. What is the amount of net income subject to tabular tax and final
tax in the Philippines if X is a resident Filipino Citizen?
Subject to
Tabular tax Final tax
a. P450,000 PI 54,000
b. P550,000 PI 60,000
c. P770,000 PI 80,000
d. P790,000 PI 60,000
2. What is the amount of net income subject

tax in the Philippines if X is a resident alien?
Subject to
Tabular tax Final tax
a. P370,000 PI 60,000
b. P410,000 P220.000
c. P520,000 PI 60,000
632 INCOME TAXATION
d. HvlO.OOO P260.000
Problem 1 1 - 1 7 Income of Husband and Wife

The net taxable income of husband and wife are PI40,000 and
P250.000. respectively. These incomes are net of withholding taxes
amounting to P20,000 and P45,000, respectively. Their respective
income tax still due and payable would be
Husband Wife
a. P22.500 P50,000
b. P20.000 P45,000
c. P20.000 P22,500
d. P 2.500 P 5,000
Problem 1 1 - 1 8 Total Income Tax Due (Resident Alien)

Mr. Erection, a married Indian national, stays in the Philippines with no
definite intention. He received P600,000 compensation income as
researcher of Blue Good Ocean, a domestic corporation. In addition, he
invested in the Philippines some of his savings earning dividend income
and interest income of P120,000 and $10,000, respectively.
If the interest income is a dollar deposit under the expanded foreign

currency deposit system, how much is the total income tax due of Mr.
Erection in the Philippines? (One dollar is P50.)
a. P 37,500 c. P146,760
b. P190,500 d. P196,260
Problem 1 1 - 1 9 Capital Gains Tax

Mr. Jose Matbagan, a citizen and resident of the Philippines had the
stock transactions during 200x:
(a) Capital gain of P280,000 on sale of shares of a domestic corporation.

The shares were not enlisted in the stock exchange.
(b) Capital gain of P300,000 on sale of land at a selling price of
P2,000,000. The land is located in Makati, Philippines.
The total capital gains tax paid during the year should be
a. P 19,400. c. P108,000.
b. P 22,000. d. P124,000.
Problem 1 1 - 2 0 Final Tax and Normal Tax

In 200A, Mr. Marvin Ebojo, a native of Pangasinan, received the following
during the year:
Proceeds from copyright royalty, net of tax P 11,250

Proceeds from mineral claim royalty, net of tax 12,000
Share from trading partnership, net of withholding tax 270,000
Assume that Mr. Ebojo is single, compute for the following:

w* * I income Tax of Individuals 633
Total final tax on Mr. Ebujo'a income.

a. P50,000 c. PS 1,250
b. P34,250 rf- P 4,250
2. Income tax 3tiJ3 due and payable per 1TR.

a. P50,00G c. P31.250
b. P34.250 d. P - 0 -
Problem 1 1 - 2 1 Professional Income

Professional income of a VAT-registered person is subject to output VAT
and required to be withheld with income tax. If the net proceeds for
services rendered is P92,000, net of 20% withholding tax based on the
service fee, the amounts of service fee, withholding tax and output VAT
would be
Service fee Withholding tax VAT
a. Pll 2,000 P20,000 PI 2,000
b. P100,000 P20,000 PI 2,000
c. P 97,391 P19.478 PI 1,687
d. P 92,000 PI 8,400 P22.080
Problem 11 - 22 Various Income

Mr. Crisanto Estrada, a practicing accountant and a widower with three
(3) qualified dependent children, has the following receipts and
expenditures for the calendar year ended December 31, 200A:
Receipts:
Professional fees P500,000
Allowance as director of Corporation A 25,000
Interest on time and savings deposits, net of 20% final tax 16,000
Commissions 5,000
Expenditures:
Salaries of assistants ^ 96,000
Partial payment of loan 20,000
Interest on the loan (The loan was used for the repair of the
residential house of Mr. Estrada) 3,850
Traveling expenses - business related 1i,000
Light and water - Office 7,890
Light and water - Residence 6,500
Stationeries and supplies used in the office 1,960
Office rent 60,000
Contributions exclusively for religious purposes 38,500
1. The allowable deductions from the business gross income is

a. P209,165. c. P212,165.
b. P210,725. d. P176,850.
2. The net income (for income tax purposes) after itemized deduction
but before personal and additional exemptions is
a. P317,835. o: P320,835.
b. P319,275. d. P334.650.
634 INCOME TAXATION
3. The income tax due in ITR is

a. P56,550. c. P38,350.
b. P50.000. d. £36,459.
Problem 1 1 - 2 3 Itemized vs. OSD(CPA EXAM)

Mr. George Estrada, Filipino resident, whose wife died during the taxable
year, has six qualified dependent children. He is a director of a business
firm from which he received per diem and allowances amounting to
P20,000 during the taxable year. The income tax withheld on this is
PI,000.
He also operates a barbershop which generated a gross receipts of

P400,000. The total itemized expenses of his business is PI50,000, but
he encounters difficulty in determining how much of these expenses can
be classified as direct costs and deductible expenses. He asks you to
prepare his income tax return.
Required: Compute the taxable income and income tax still due and
payable by Mr. Estrada using
1. Itemized deduction.
2. Optional standard deduction.
Problem 1 1 - 2 4 Determination of Correct Income (CPA EXAM)

Data from the records of Mr. Alex Valdez are:
Net worth, December 31, 200A P325,000

Nontaxable income for 200B 2,000
Nondeductible expenses for 200B (excluding donations
and contributions) 150,000
Fully deductible donations 20,000
Contributions subject to limitations 50,000
Net worth, December 31, 200B 375,000
Reported/declared net income subject to tax, 200B 24,200

1. The correct income subject to normal graduated tax if Mr. Valdez is a
widower, with four qualified dependent children.
2. The unreported taxable income for the year 200B of Mr. Valdez.
Problem 1 1 - 2 5 Taxable Income (With Capital Asset Transactions)

The following data are the operating results and capital assets (not real
estate, not corporate shares of stock) transactions of Mr. Jovito Galam, a
contractor, for the years 200A and 200B:
Chapter 11 Income Tax of Individual* 635
Gross receipts from contracts P 1 ,000,000

Less Mutrtmls and supplies used 17(H),00(1
Labor St&.WKJ 1,500,000
Net income p j hxm
Net capital loss* can s over to JOOH P 4 5,000
Gross receipts from contracts P2,550.000

Less. Materials and supplies used PI,200,000
Labor ...LmiiiiQ
Net income P t>00,000
Short-term capital gains 40,000
Long-term capital gains 30,000
Short-term capital loss 10,000
Required: If Mr. Galam is married and has three qualified dependent

children, how much is the taxable income for the year ended December
31, 200B?
Problem 1 1 - 2 6 Compensation and Business Income

A resident citizen, single with a qualified dependent child, has the
following income and expenses during the year:
Compensation income, net of WTW P30,000 P240,000

Personal expenses 60,000
Business expenses allowed 120,000
Premium on health/hospitalization insurance paid 3,000

1. Taxable income.
2. Income tax still due and payable per ITR.
Problem 1 1 - 2 7 Monthly and Quarterly Withholding Taxes

Miss Jennifer Bay-on, single, has the following data from January to
December 200A:
Monthly salary P 30,000
13th month pay and bonus 35,000
SSS contribution (one whole year) 3,000
Medicare/Philhealth contribution 2,000
Business income per quarter 200,000
Business expense per quarter 120,000
Capital asset transactions:
Proceeds from sale of personal car 300,000
Cost of the car sold 400,000
The car’s estimated useful life is 8 years, but used by
Miss Bay-on for 6 years

1. Monthly withholding taxes paid.
2. Quarterly business income tax paid.
t>36 INCOME TAXATION
Problem 1 1 - 2 8 Income Tax of Professional Income

Rosanna Roses, a resident Pilipina actress, earned PI,700,000 as an
entertainment fee during the taxable year, net of related 15% creditable
withholding tax. In addition, she earned the following from business:
Gross receipts Income tax paid

Philippines P 500,000 P40,000
Japan 1,000,000 300,000
Rosanna opted to use OSD.
Required: Assume that Roses is single with four qualified dependent

children, compute for the following:
1. Net taxable income.
2. Income tax due.
3. Tax credit.
Problem 11 - 29 Income Tax of .Husband and Wife

Mr. and Mrs. Bravo living with 8 qualified dependent children have the
following income and expenses during the taxable year:
Mr. Bravo Mrs. Bravo

Compensation, net of WTW P200,000 P25Q,000
Withholding tax on wages (WTW) 25,000 50,000
Personal expenses in going to work 80,000 100,000
Professional income, net of withholding tax 100,000
Premium on health/hospitalization insurance paid 2,400
The couple has a communal property with a rent income of P300,000

during the year. The couple use OSD.
Required: Compute for income tax still due and payable (ITR) of Mr. and
Mrs. Bravo.
Problem 11 - 30 Income Tax of Various Earnings

An individual taxpayer, married with 4 qualified dependent children,
reported the following:

13th month pay and bonuses 40,000
Business expenses allowed 300,000
Dividend income 1 50,000
Royalty income - literature 80,000
Capital gains - long-term 60,000
Withholding income taxes paid on:
Compensation 50,000
Quarterly business income 20,000
t
£
L^t>
638 INCOMt ?A/AJlOM
Hu lahjuiyn la iimirird with tux quabb^d d^nd'-rH *;hi':*h+:T,
acquired; Compute (or th^ following:

1 Total nontaxabR 13 ,J » month pay and o»h«*r benefit,
2 I'.Htimatad withholding Ui* bom January t/> November,

3. Total income tax still due and payable on December 33 , 290A.
Problem 11 - 33 Comprehensive Problem

A taxpayer named Ramsay Colorado, single, has the following 'mcorrt
and expenses during the taxable year 2QQA:
PhiliD nines 0, S. A.
Compensation income, net of WT 10% P3 60,000 $2,250
Interest income, net of WT 20% 50,000 1,290
Commission income, net of WT 5% 57,000 950
ix>tto Winnings 100,000
Dividend income, net of WT 10% 9,000 1,800
One US dollar is equivalent to P50. All income derived without come from
U.S.A. Assume that withholding taxes were applied to income derived
Required: Determine the income taxes due and payable of the taxpayer
assuming that he is a:
1. Resident citizen;
2. Nonresident citizen;
3. Resident alien;
4. Nonresident alien engaged in business in the Philippines; and
5. Nonresident alien not engaged in business in the Philippines.
Problem 1 1 - 3 4 Comprehensive Problem
Mr. X, a resident Filipino citizen, provided the following information

related to business operations:
20QA 200B
Net income from operation per GAAP PI .065.000 ElAi&m.
Cost and operating expenses per GAAP:

Cost of sales (60% of sales) P4,500,000 P6,000,000
Salaries expense 800,000 900,000
Representation expense 300,000 400,000
Interest expense 200,000 250,000
Bad debts expense (40% written off) 100,000 150,000
Charitable contributions 200,000 400,000
Quarterly income taxes paid 375,000 500,000
Other income:
Bad debts recovery from previous year 30.000
40,000 48.000
Interest income, net of 20% final tax
Chapter 11 income T$/pf uai*
Required; Compete the foaivvccg;

j. Mr. X $ n#rrtgxa.&t irgofr^ £>,.• 20>A
2 Mr X s ,-.-t Jflosw per ?" <' htfow p«v2».: twr.^
3. The 20CU income tax at:;; hue ace pavame of :/* y
problem 1 1 - 3 5 Comprehensive Problem

Thr lo.:v*:i.z cat* arc the v»k« cftfje ta^y.
Sales
Cost of sales P2 CCGyXG
Gain from sale of capital assets Cor.y-^rrr.
iy>cs from sale of capita; assets (short-term IGC.CCG
Gambling winnings IGLyGGC
Gambling Josses 3oxxx>
Compensation income, net of tax yhthhelh P20.000

230XXC
I3'r month pay, and other bonuses
3G.OGO
Proceeds from life insurance of his mother
300,000
Business expenses, including robbery loss ofP50/XXy;
contribution to DepEd s priority projects, P IOC, 000,
and interest expense, P30,000
500.000
Bad debts recovery
60,000
Income t ax refund 10,000
Lotto winnings, USA 300.000
PersonaJ expenses 100.000
Tuition fees of children 150,000
/merest income personal lending 20,000
Required: Compute the income tax still due and payable per ITR, if the
taxpayer is an individual Filipino resident, married and has 2 qualified
dependent children and 2 dependent senior citizen parents.
Problem 1 1 - 3 6 Comprehensive Problem

Negos Yante, a resident citizen, married, with 2 qualified dependent
children, reported the following income and expenses within and outside
the Philippines from January to December taxable year 201A:
Compensation income as a manager within: p52Q Q00
Gross basic compensation income 204000

Fringe benefits, net of final tax 120 000
Honorarium ^n’nnn
13th month pay 24’000
De minimis ~ rice subsidy (P2,000 per month) 10 000

De minimis - clothing
I
640 INCOME TA/ATTOh'
Deductions from com per. aa-ion.
SSS premium contributions -Of*

Pag-ibig premium contributions
Phil health premium contribution *fjx
Pag-ibig loan payment SDfjli;
Withholding taxes on wages (from January m Jiaêrnberi; i x.iix
Business income and expenses:
_____ WilrilwTO
Gross sales J,TO,TO
Coat of sales 600.03© mo>Moo
Interest income* net of 20% final taxes 240,(0©©
Dividend income, net of 10% final taxes 90.00©
Operating expenses:
Salaries 300.00© 4©©,TO
Depreciation 100,00© 3-0©,TO
Interest expense 200.000
Business taxes 240,000 3©0,TO
Rent expenses 500,000 400,00©
Traveling and communication 100,000 169,TO
Charitable contributions 250,000
Income taxes paid 60,595 590,00©
Required: Determine the correct amount of the following:
1. Total non taxable compensation income.

2. Taxable compensation income subject to normal tax.
3. Total itemized allowable deductions.
4. Total net taxable income per FTR.
5. Total income tax credits per fTR.
7. Final income taxes within.
Chapter 12
INCOME TAX OF
CORPORATIONS
COSCEPT OF CORPORATION
lr. i^xaueru a corporation includes joint stock companies, joint

atot-jr.ts, associations, insurance companies or partnerships no
matter ncv,' tuey were created or organized.
rcr income tax purposes, how ever, a corporation does not include
general professional partnerships and a joint venture or
consortium, formed to undertake construction projects or engage
m petroleum, coal, geothermal and other energy related operation,
pursuant to an operating or consortium agreement under a
service contract with the Government. is&c. 22©^, .mrc?
Classification of Corporate Taxpayers

Corporate Taxpayers are classified into (a) Domestic Corporation,
and (b; Foreign Corporation.
A domestic corporation is one organized and existing under

Philippine laws. In general, it includes government owned and
controlled corporations or instrumentalities engaged in a similar
business industry or activity. 27(C),m r c ; b ir Ruling 041-2000]
[Sec. 22(C);
A domestic corporation is taxable on all income from sources within

and outside the Philippines. /sec. 23(E),nirc]
Foreign Corporation is a corporation organized and existing

under the laws of foreign country irrespective of the nationality of
its Stockholders. (Sec. 22/DJ,NIRCJ
foreign Corporation is taxable only on income from sources within

the Philippines, (Sec. 23(F), n ir c j
foreign Corporation may either be a Resident Foreign

Corporation, or a Nonresident Foreign Corporation.
64? INCOME TAXATION
Rcmidtmt foreign corporation refers to a foreign corporation that

is engaged in business or trade in the Philippines. Generally, it
establishes a branch or an office for the purpose of doing
business or trade. fs, c 22(H), NiRCj
A nonresident foreign corporation does not engage in business

or trade in the Philippines (Sec. 221, nircj. Its earnings are derived
from fixed determinable income from sources within the
Philippines that are enumerated in the Tax Code as follows:
1. Interest, dividends, royalties;
2. Rents, salaries;
3. Premiums, except reinsurance premiums;
4. Annuities, emoluments or other fixed or determinable annual,

periodic or casual gains, profits and income; and
5. Capital gains, except capital gains from the sale of shares of

stock not traded in the stock exchange of a domestic
corporation. [Sec. 28 (B)(i), n ir cj
CORPORATIONS’ TAXABLE BASE AND INCOME TAX RATES
IfTAXES ON CORPORATE INCOME |

| j
CLASSIFICATIONS DOMESTIC
CORPORATIONS
RESIDENT
FOREIGN
CORPORATIONS
NON-RESIDENT
FOREIGN
CORPORATIONS
SOURCES OF Within and without Within Within

TAXABLE INCOME the Philippines the Philippines the Philippines
IN GENERAL
TAX BASE TAXABLE INCOME TAXABLE INCOME GROSS INCOME

Normal Tax Rate Normal Tax Rate Final Withholding
Tax Rate
TAX RATE 30% effective 30% effective 30% effective

(R.A. 9337) January 1, 2009 January 1, 2009 January 1,2009
OR OR
TAX BASE GROSS INCOME - GROSS INCOME NOT APPLICABLE

Minimum Corporate Minimum Corporate
Income Tax Income Tax
TAX RATE 2% 2% NOT APPLICABLE |
r
TAX-EXEMPT COPPOnATtOHS
vy iVH' .5 r-T b* ?>:rrr.p:ed
Ov—v-r.,-.. r-v—y-c
'' f‘'^' nor.prsXh Serrations.
■ y ' * ' ! * & . agrrm.ûraj Dsr cultural organizations.
* * '■■''s:~,hXi'jr i% yf farme;*, fruh growers. and the like whose

p, i,^ry lvn'hxt/n m to market tne product of their members.
" x V/jTt.-yjb w/;,**, vrt4h a purely local operation whose income is

O'-'fyeo on;j from acees^ments, dues, and fees collected mom
1rjr;r 'r^tooejt to meet operational expenses such as fire
;ctvro/;ce company, farmer s' or other mutual typhoon
;moocmhono* mutual ditch or irrigation company and mutual
o/ cooperative teleymone company.
0 U'/n Week Corporation or association organized and operated

exciuor/eiy for religious, charitable, scientific, athletic, or
ouJturaj purposes or for the rehabilitation of veterans;
provided that ,-jo individual person owns its assets or no
individual person receives benefit on its earnings.
7, Non otock/nonprofit mutual savings bank or non-stock/

nonprofit cooperative bank.
b. Nonprofit civic league or organization operating exclusively for

the promotion of social v/eJfare.
0 f .'emetery company ov/ned and operated exclusively for the

benefit of its members.
JO. Nonprofit business league, chamber of commerce, or board of

trade.
J J, Associations, orders, beneficiary societies operating for the

exclusive benefits of their members. (Sec.3o,NiRC)
Notes:
J-'MO No. 20 2013 lays down policies and guidelines in the issuance of Tax
hxc/nptjou Ruling?1 f,J qualified non-stock, non-profit corporations and
lihhoi liltion?> ("excnipf o/jiifics").
In t}iia RMO, ih<- Commissioner of Internal Revenue provided that “tax

exemption ruling* granted to exempt entities, prior to 30 June 2012 shall
644 INCOME TAXATION
be valid until 30 December 2013 and those issuances issued after 30 June
2012 shall continue to be valid for 3 years from date of issuance unless
sooner revoked or cancelled.* Prior to amendment, Section 10 reads as follows
‘SECTION 10. Renewal of Tax Exemption Rulings.—Tax Exemption Rulings may

be renewed upon filing of a subsequent Application for Tax
Exemption/Revalidation, under same requirements and procedures provided
herein. Otherwise, the exemption shall be deemed revoked upon the expiration of
the Tax Exemption Ruling. The new Tax Exemption Ruling shall be valid for
another period of three (3) years, unless sooner revoked or cancelled/
Under the .Amendment, the second sentence of Section 10 has been deleted and
revised to read as follows:
“Failure to renew the Tax Exemption Ruling shall be deemed revocation

thereof upon the expiration of the three (3)-year period.”
CORPORATIONS NOT MENTIONED BY LAW OR ANY TAX TREATY

AS TAX-EXEMPT ARE SUBJECT TO INCOME TAXES.
Taxability of PAGCOR
Philippine Gaming Corporation (PAGCOR) derives its incomes

from two sources: operations conducted under its franchise, and
operations of other necessary and related services.
The Supreme Court has ruled the following regarding the

taxability of the (PAGCOR):
1. PAGCOR's income from its gaining operations can only be

subjected to 5-percent franchise tax, and not to a corporate
income tax.
Presidential Decree 1869 exempts PAGCORs gaining

operations from any kind of taxes, except the 5-percent
franchise tax it is required to pay.
2. PAGCOR’s income from other related sendees can be

subjected to a corporate income tax.
Chapter 12 Income Tax of Corporations 645
income taxes of corporations
Corporations may be subjected to the following taxes:
1. Normal Corporate Income Tax (NCIT) - starting January 1,

2009 » 30% based on net taxable income; (R.a 9337)
2. Minimum Corporate Income Tax (MCIT) - 2% of gross income;
3. Optional Gross Income Tax (OGIT) - Optional effective January
1, 2000 if requirements are met;
4. Capital Gains Tax - on sale of real property or on sale of
shares of stock; and
5. Final Tax on passive income.
The Normal Corporate Income Tax
For taxation purposes, NCIT refers to the use of regular domestic

income tax rates on the corporate taxable income which is 30%
starting January 1, 2009. (r . a . 9337)
BIR Form 1702 lays out the general format for income tax
computation on business income.
Sales/ Revenues/ Receipts/ Fees from within and without P XXX

Less: Sales returns, allowances, and discounts (if any) P XXX
Cost of sales XXX XXX
Gross income from operation P XXX
Add: Non-operating and other income not subjected to
final tax or capital gains tax XXX
Gross income P XXX
Less: Allowable itemized business deductions or OSD XXX
Net taxable income P XXX
Multiply by normal corporate income tax rate 30%
Normal corporate income tax
To illustrate, the corporate income subject to normal tax for a

trading or manufacturing Domestic Corporation is as follows:
Gross sales, year 201A PI,050,000

Less: Sales returns, allowances and discounts 50.000
Net sales PI.000,000
Less: Cost of sales/ Goods manufactured and sold 400.000
Gross profit from operation P 600,000
Add: Non-operating and other income not subjected to
0
d
final/capital gains tax

0
0
0
Gross income p 700.000

Less: Allowable itemized business deductions 400.000
Net taxable income subject to normal corporate income tax p 300,000
Multiply by normal corporate income tax rate 30%
Normal corporate income tax P___9QjQQjQ
646 INCOME TAXATION
The corporate income subject to normal tax for a servicing

domestic corporation is illustrated, thus:
Gross receipts or revenues, year 201A P 810,000
Less: Sales returns, allowances and discounts (if any) 10.000
Net receipts p 800,000
Add: Other gross income not subjected to final tax/
capital gains tax 50.000
Gross income p 850.000
Less: Itemized deductions allowed 650.000
Taxable income subject to normal tax p 200,000
Multiply by normal tax rate for the year 30%
Normal corporate income tax p 60.000
Notes:
1. If the corporation above is a resident foreign corporation, the computation of
normal income taxes would be the same if all sources of income and expenses
were derived within the Philippines. Any income derived outside the country
is not subject to tax in the Philippines.
2. For Nonresident Foreign Corporation, the tax base would be the gross income
Minimum Corporate Income Tax (MCIT)

Pursuant to Section 27(E) and Sec. 28 (A2) of the NIRC, domestic
and resident foreign corporations shall be taxed with 2% based on
gross income (MCIT) when the said corporations:
1. Incurred a net loss or zero taxable income, or
2. Obtained a normal corporate income tax (NCIT) that is lesser

than minimum corporate income tax (MCIT); and
3. MCIT is imposed beginning on the 4th taxable year

immediately following the year in which such corporation
commenced its business operations.
Imposition of MCIT
The following implementing laws clarify the imposition or
suspension of MCIT:
1. The 4-Year MCIT Grace Period. The law allows a 4-year

period from the time the corporation was registered with the
BIR during which the minimum corporate income tax should
not be imposed. (Rev. Regs. No. 9-98; BIR Ruling 7-2001; Manila Banking Corp. us.
CIR, 499 SCRA 782)
Assume that X Corporation was registered with the BIR in 2011.

Based on the 4-year MCIT grace period rule, there should be no
imposition of MCIT from 2011 to 2014 regardless of the
rj » (A*f 1> ksssmt t*/ of *A?
/'-■vhM *A >U try m's/i. /he M'AV 0^/' Assr on / -"•

20 i’/ if / . f s : s f f s / t a f,s* SA4> '/? *%/%'*?■
ss-*ttti* , ot A* HUl si ,*■'/■*?; t'hspr; ,*% hiChf,
2 Hu*p*fi*lmt 4um to ImgtUmjuto bu*in*z* t*w*r%*% Z r,c

';/•/ f t - U i f / '// F i r sirs S’. tz it'i*'i,'*ty/sA V, su%yrsi "r,e >n,y/".y s/r,
'A S rs- it»it>\umm *s/ry*rats iisstiut *a/. a '/srysrwt:x%"
v>fW*. iovsc% on ;$*//i itA rA ;/yoior//fA A ',o; bl%p ,te, or
u*s as%*■ 'A lot's: rfstycrs, or oi sssy-.ma+c o ?*?*&%*&.
'>/ /Z(h Hie'.)
Format to Compute MCIT

f or MCl'l purpr*%n*. f the rs/mputetss. of yyc*/, .rxsxr.e rac Zssrr.
A; scored if, f c h a p t e r 4 f A *hi% book. Va'/Ave :rss/rr.ft that r:2s*
-son tsjbj's.Us} to a f in ai Ms/. 'Snail rsA be sr.d Avi an a part of
i f S Still*' (Pay. ./<*//>-; '/ '/H)
I'm bA\ J Form 1702, the format to rsss.pjse toe

corpora**; income tax would be;
hr 0* 1*, mss>ffie from operation ? XXX

AAA' f*on operating and other income not
sobjected to final/capital gains tax XXX
ToOjI gross income subject to MCff ? XXX,
Multiply by MC/T mx rate 2%
Minimurn f sjiporhte income'!ax iMClT) H-SS2
Carry Forward of Excess of fVfCIT

Ar,y excem of the minimum corporate Income tax (MCITj over the
normal tax shall he carried forv/ard and credited against the
normal tax immediately for three (3) succeeding taxable years, fsec,
'sn/s, sihc )
Hiuttration
Abuci Corporation has been operating since January l, 2011.
bat a pertinent, to its operations covering 2014 to 2016 are as
follow*:
_______ 2fiI4 ___________201 5 2fm
"■'/«« fcaj'-a P3,080,000 P4,100,000 PS ,200,000
;«>«» rrtiirnfi, rhtifs/unlft/t*}\trm%nrr.% 80,000 J 00,000 200,000
f '>«;* t,f f 1,500,000 2,000,000 2.500.000
i’U}(/ Crtp«-r>fcr«t 1,4 50,000 1,900,000 2.100.000
l h* determination of the appropriate income tax of Abuei

Corporation in shown as follows:
648 INCOME TAXATION
1. Computation of Normal Corporate Income Tax (NCIT):

2014 2015 2016
Orcr,i P3,080.000 P4,100,000 P5,200,000
Saiet. returns, discount./allowances 80.000 100.000 200.000
Net sales P3,000,000 P4,000,000 P5,000,000
Cost of Sales 1.500.000 2.000.000 2.500.000
Gross income PI,500,000 P2,000,000 P2,500,000
Operating Expenses 1.450.000 1,900,000 2,100.000
Net taxable income P 50,000 P 100,000 P 400,000
Multiply by Normal Corporate Tax 30% 30% 30%
Normal corporate income tax P 15.000 P 30.000 P 120.000
2. Computation of Minimum Corporate Income Tax (MCIT)

2015 2016
Gross income P2,000,000 P2,500,000
Multiplied by MCIT rate 2% 2%
Minimum corporate income tax P 40.000 P 50.000
Note: The minimum corporate income tax for 2014 is not applicable because
the company is still covered by the 4-year MCIT grace period rule.
3. Determination of income tax due and payable:

2014 2015« 2016
NCIT OR MCIT, whichever is higher P 15,000 P 40,000 PI20,000
Less: Excess of MCIT over NCIT .________ , ., 10.000*
Income tax due and payable P 15.000 P.40,000 PI 10.000
” The computation of excess of MCIT over NCIT is computed as follows:
2015 Minimum Corporate Income Tax (P2,000,000 x 2%) P40,000

2015 Normal Corporate Income Tax (P100,000 x 30%) 30,000
Excess of MCIT over NCIT PI0.000
Accounting Treatment of MCIT

Any amount of excess MCIT shall be recorded in the corporation’s
books as an asset as “Deferred charges, MCIT.” The excess of
MCIT over the normal tax due shall be carried forward and may
be credited against the latter within 3 years immediately
succeeding the taxable year(s) in which the MCIT has been paid.
Any amount of the excess MCIT that was not or cannot be

credited against normal income taxes due for the three-year
reglementary period shall lose its creditability.
Such amount shall be removed and deducted from “Deferred

charges, MCIT” account by a debit entry to ‘Retained Earnings”
account and a credit entry to “Deferred charges, MCIT” account
since this tax is not allowable as deduction from gross income, it
being an income tax. (Rev.Reg.9-98)
Illustration
Forever Corporation, a domestic corporation, has. been in

existence for 6 years. It reported the following results of its
operations for its 5th and 6th year:
5th Year 6th Year
Gross income P8,000,000 P4,600,000
Itemized expenses 7,800,000 4,250,000
Forever’s income tax and its related journal entries for each year
would be
5:h Year:
Normal tax (P8,000,000 - P7,800,000) x 30% P 60,000
MCIT (P8,000,000 x 2%) 160.000
Excess of MCIT over normal tax
! GENERAL JOURNAL
: j Date \ Page Number 5 !
i 5,h Year j Descriptions F \ Debit \ Credit j
; (a) ] Income tax expense { 60,000 i j
< ' Deferred charges | 100,000 j J
| ; Income tax payable j * j \ 160,000 j
;;E?Xf
6th Year:
Normal tax (P4,600,000 - P4,250,000) x 30% P 105.000 '
MCIT (P4,600,000 x 2%)
The excess of MCIT over normal tax on the 5th year can reduce
the normal tax, hence:
Normal tax PI 05,000
Less: Excess of MCIT over normal tax - 5th year 100.000
Income tax payable P 5.000
The journal entry would be
GENERAL JOURNAL
Date Page Number 6~J
6thYear Descriptions J F : Debit | Credit {
Income tax expense I I 105,000 |
Deferred charges | I 100,000 L
__ Income tax payable j| j 5,666 j
Expanded Withholding Tax as Deduction from MCIT

A taxpayer who is liable to MCIT and at the same time has an
expanded withholding tax (EWT) may deduct the EWT from MCIT
6-SO INCOME TAXATION
drjd if there is still an excess EWT, he may request for tax credit
or refund of tax withheld. (BiR RuJmg 001-99)
Illustration
A real estate lessor collected PI, 140,000 rent during the taxable
year, net of 5% expanded withholding tax. Total expenses
amounted to PI, 130,000. The net income tax payable (refundable)
for the period would be
Gross receipts (PI, 140,000/95%) PI,200,000
Multiplied by MCIT rate _______2%
Minimum corporate income tax p 24.000
Less; Expanded withholding tax 60.000
Income tax refundable JE=36.0001
NCIT VS MCIT
Summary Application
After 4-Year MCIT Grace Period:" r ncit T MCIT
Losses or break-even j Not Applicable ; Applicable
MCIT greater than NClt j Not applicable ! Applicable
NCIT greater than MCIT I Applicable* | Not Applicable
*When the tax to be paid is NCfT the "Deferred Charges, MCIT (excess of MCIT over NCIT) within
fhe past three years can be claimed as a tax credit against NCIT.
Quarterly Payment of MCIT or NCIT

Revenue Regulations No, 12-2007 also provides that the quarterly
income tax of domestic corporations (including resident foreign
corporations) shall be paid on quarterly payment.
If the computed quarterly MCIT is higher than the NCIT, the tax
due to be paid for such taxable quarter shall be MCIT (2% of
gross income of the said taxable quarter). Below are the rules to
be observed for MCIT.
For quarterly income tax return:
1, The taxes ALLOWED to be credited against the quarterly MCIT

due are:
a. Expanded withholding tax;
b. Quarterly corporate income tax payments under NCIT paid
in the previous taxable quarter; and
c. Quarterly MCIT paid in the previous taxable quarter.
2. In the payment of said quarterly MCIT due, excess MCIT from

the previous taxable year/s is NOT ALLOWED to be credited.
Income T zx erf C&rporzt&ns 651
7 nr che accu&j uvcome tax return.:

.. •: in the fma3 computation axr;u2 j inhere tax due the XCIT is
higner than MCj7: the iollofrtrig taxes are allied to- be
credited:
a. Quarterly MCJT paid on the current taxable quarters;
b. Quarterly NCJT paid on the current taxable quarters;
c. Excess of MCJT over NCJT in the previous years [subject to
prescriptive period of three years*
d. Expanded withholding taxes of the current year; and
t Excess wnn holding taxes in the previous year-
2 If not annual MCJT is greater than NOT, only the following

taxes are allowed to he credited against MCJT;
a. Quarterly MOT paid on the current taxable quarters;
b. Quarterly NOT paid on the current taxable quarters;
c. Expanded withholding taxes of the current year; and
c. Excess withholding taxes in the previous year-
bxcess MOT from the previous taxable year/s shall NOT be

allowed to be credited iherofrow as the same can only be applied
against Norma] Income Tax. iReverw* iiey>jji/jju/sn$ //v. 12-2007, yR,,:th*-A Oct ly
2007)
niiifetfatioii
The following income taxes records were revealed by Hildng-Hilo

Corporation:
Year 5 business operations: NOT ____ MCI!
Corporate income fax computed T3Q0,PQ0 PmOQQ
Excess withholding taxes in year 5 was P20,000,

Year 6 business operations: UGH ____ mot
l'-' quarter none urn uJative PI 00,000 PI 60,000
2id quarter - noncumulative 180,000 100.000
3rd quarter - noncumulative 150,000 190.000
4 j quarter - cumulative ending computation 000,000 250.000
The expanded withholding taxes in year 0 Is 050,000,
The year 6 income fax still due and payable of lilong llilo
Corporation would be;
P000,000
Year 6 income tax, end NOT, higher
Ix-ss: Previous income taxes paid;
] =’ qua/ter MOT, higher P 160,000
quarter NOT, higher 180,000
652 INCOME TAXATION
3*t: quarter - MCIT. higher 190. ODD

Excess of MCIT over NCIT - year 5
(F500.000 - P300,000) 200.000
Expanded withholding tax in year 6 50.000
Excess withholding tax in year 5 20.000 500,000
Income tax still due and payable - year 6 mmm
Optional Gross Income Tax (OGIT)

Section 27 A of the NIRC provides an optional gross income tax of
15% based on the gross income. The rules for the application of
this tax are as follows:
1. '‘...The President, upon the recommendation of the Secretary of

Finance, may, effective January 1, 2000, allow corporations the
option to be taxed at fifteen percent (15%) of gross income as defined
therein, after the following conditions have been satisfied:
a. A tax ratio of twenty percent (20%) of Gross National Product
(GNP);
b. A ratio of forty percent (40%) of income tax collection to total tax
revenues;
c. A VAT tax effort of four percent (4%) of GNP; and
d. A 0.9 percent (0.9%) ratio of the Consolidated Public Sector
Financial Position (CPSFP) to GNP.”
2. The option to be taxed based on gross income shall be available only

to firms whose ratio of cost of sales to gross sales or receipts from all
sources do not exceed fifty-five percent (55%).
3. The election of the gross income tax option by the corporation shall
be irrevocable for three (3) consecutive taxable years during which
the corporation is qualified under the scheme.
For purposes of gross income tax, gross income should be the

same as gross income for purposes of MCIT in cases of trading,
merchandising and manufacturing concern business. However,
for service enterprises, gross income means gross receipts less
sales returns, discounts, allowances and cost of sendees.
/Sec.27(E4), NIRC}
Illustration
Janette Corporation’s information regarding its 201A operation is
as follows:

pax or oorporaiions
U>* r O W f / n t o t j ' / F i r/f income taxes due and payable by Janette

< orporfitp//? wwkJ be
201A NCJT MCIT GIT

lift**- <zn fret 10,700,000 P3,700,000 P3,700,000
// «?«; * oqf f f w l r t t f
2/JOO.OOp 2.000.000 2.000.000
/ i i r f S t : i f f t t,inr PI ,700,000 PI,700,000 PI,700,000
|/cq Op' fating t yprn^f S 000.000
(i< 1 iiu onw P >500,000
Multiply by tny t o f t ' 30% 2% 15%
h i t t n n t tax P 255,000
fLiaiomo P- ■ ■3.1Q.QQ
<'/mi p/ilit f o v r i re, (1^,000,000/1^,700,000) 54%
Jhim (lr ( mpomtion may opt to pay gross income tax of P255,000
<m j;i*v oof innl f orponitr income fox of P240,000. The corporation
i!- not ' j i u d i f i r d l o r M e n (
niiMo; A<i of Hm wttfiiif/ nf Ihiq book, the gross income tax of 15% based on the
i m |m;iiiIf' worm in< otnr |imo not hern implemented in the Philippines.
Capital Gains Tax

The lux on (Mpitnl gnins of ? j corporation derived within the
Miillppnirr» ir; siimm/iriml as follows:
0OR P O R A T I O N S
KcHident Nonresident
i AIIIAI CAINS WITHIN poll) OB tic Foreign foreign
1. < ujMlnl gnlun on PMilr of slum's
o( film It no! Imdrd in fbr local

r:( »>( k cm lutngr, Nf’l capital 1
gain?*;
Nut ovn non.oou 5% 5% 5%
k r u n o l I’lOO.OOO 10% 10% 10%
' lVirentage tux on rmir of

rihoiri ot ntork haded In the Vi «r i%* % of 1%* ‘/a of 1%*
loud Mock exchange, Hascd
J on welling pi ire
! \ faptlal gaum on salr or (>% of Selling Same as 30% final

rvhnniT oi disposition of Price or FMV, domestic withholding
lands and o\ buildings whichever is corporation tax
1 located in the rhitippincs higher.
j A Nrt Papitnl gains on sales or

rwhange oi disposition of Not taxable
30% Not taxable
lands and / pi buildings
Us at rd outside tbr
Philippines.
- ........
654 INCOME TAXATION
lfot«s:
1. *1/2 of 1% tox on sale of shares of stock traded in local stock exchange h a
percentage tax, not an income tax,
2. Sale of real property sold outside by resident citizen and domestic

corporation is subject to normal tax rate based on gain, fRev, Reg. No. 7-
2003, Sec. (e & f)J.
3. The sale of real property by nonresident foreign corporation is subject to a

30% final withholding tax based on casual gains, (R.A. 9337)
4. In general, only Filipino citizens and corporations or partnerships with at

least 60% of the shares are owned by Filipinos are entitled to own or acquire
land in the Philippines.
5. Foreign individuals and foreign corporations are not allowed to acquire real
property in the Philippines as provided by anti-dummy law. (PD 715, May 28,
1975)
Exception:
a. Acquisition of real property by hereditary succession - Example, Barack
Obama (US Citizen) inherited a real property in the Philippines from his
relative, Mar Binay.
b. Acquisition of real property under the 1935 Constitution.

c. Purchase of not more than 40% of the units in a condominium project in
the Philippines.
d. Purchase by former natural bom Filipino citizens, subject to the

requirements of limitations prescribed by law. The acquisition shall not
exceed 1,000 square meters for urban land or 1 hectare for rural land to
bused sole for residential purpose of the transferee (Batas Pambansa,
Big. 185), or under 5,000 square meters for urban land or 3 hectares for
rural land for business or other purposes of the transferee. (Foreign
investment Code, R.A. 8179)
Illustration *
Diamond Corporation has the following capital asset transactions

for the year 201 A:
1. Sold 10,000 common shares of stock not traded in the local

stock exchange for PI,200,000. The cost per stock is P100.
2. Sold 20,000 preferred shares of preferred stock traded in the

local stock exchange for PI,800,000. The cost per stock is
P100.
3. Sold land located in the Philippines for P6,000,000. The cost

of land is P3,000,000 with a fair market value of P6,500,000.
4. Sold land located in Japan for P5,000,000. The cost of the

land is P4,000,000.
w.apier 12 Income Tax of Corporations 655
Required: Compute Diamond Corporation’s taxes payable on

sales of capital assets assuming the taxpayer is:
1 . Domestic corporation (DC)

2. Resident foreign corporation (RFC)
3. Nonresident foreign corporation (NRFC)
Solution:
Capital gains tax on: DC RFC NRFC
l. Sales of stock - not traded
Net capital gain of P200.000
Tax on Pi00,000 x 5% P 5,000 P 5,000 P 5,000
Tax on excess PI00,000 x 10% 10.000 10.000 10.000
H1M0Q PI 5.000 P15.000
2 . Sales of stock - traded
(PI,800,000 x V'i of 1%) P.9MQ P 9.000 P 9.000
3. Sales of land in the Philippines

(P6,500,000 x 6%) E39.0lQ.QQ P390.000
(P6,000,000-P3,000,000) x 30% P900.000
A. Sales of land in Japan

(P5,000,000-P4,000,000) x 30% P300.000 not taxable not, taxable
Passive Income Tax

The tax on passive income of the corporation is summarized as
follows:
C O R P O R A T I O N S
Domestic and Nonresident
PASSIVE INCOME WITHIN Resident Foreign Foreign
1. Interest from depository bank under
the expanded foreign currency deposit 7.5% Tax exempt
system. Sec. 27 D( 1); Sec. Sec. 27 D (3)
28 A 7(a)
2. Royalties, Yield or monetary Normal Corporate

20%
substitutes from deposits substitutes, Income Tax
trust funds and similar arrangements.
Normal Corporate
3. Interest on currency bank deposit 20%
Income Tax
Illustration
Golden Corporation has the following passive income for the year
201 A:
1. Interest from depository bank under expanded FCDS at

P120,000.
2. Royalties of P300,000.
3. Yield deposit substitutes and trust fund at PI80,000.
4. Interest on currency bank deposit at P50,000.

656 INCOME TAXATION
( ofnputf' the passive income taxes of Golden Corporation

iissujiinu- that the corporation is a
(a) Don it vs tii corporation,

(b) Resideni foreign corporation; and
(c) Nonresident foreign corporation.
Solution
Passive* incomer: DC/ RFC NRFC

1) Interest from depository bank under expanded
i'Cns, (Pi20,000 x 7.5%) P 9.000 Tax exempt
2) Royalties (P300.000 x 20%) PftLQQQ

(P300.000 x 30%) P9Q.00Q
3) Yield deposit substitutes and trust fund

(PI80,000 x 20%) P36.000
(PI 80,000 x 30%) P54.000
4) Interest on currency bank deposit

(P50.000 x 20%) PI 0.000
(P50,000 x 30%) P15.000
Other Passive Income of Domestic and Resident Foreign

Corporations
1. The income of domestic banks under the Expanded Foreign
Currency Deposit System is subject to a final tax of 10%.
a. Income derived by a depository bank from foreign currency

transactions, with local commercial banks including
branches of foreign banks, other depository banks and
residents.
b. Interest income from foreign currency loans granted to

residents.
2. Inter-corporate dividends
a. Received by a domestic corporation from another domestic

corporation = tax-exempt. (Sec.27(D)(4), n ir c )
b. Received by a resident foreign corporation from a

corporation liable to tax under Philippine Tax Code = tax-
exempt. (Sec.28(7)(d), NIRC)
Illustration
A Philippine Bank has been authorized to operate a Foreign
Currency Deposit Unit by the Bangko Sentral ng Pilipinas
has the following revenue and expenses:
I T*, <„
5*7
I )jVi<i« nd Hi' oim lf<mi

p •',,000,000 V' pv;
b iuK-rr^l ,Jy
uU(Jh/«J/-") to op- ,ot, a h b ' A J .'it
< , i,.< «>«!.■ on dyjlar loan*, *>,,,,, -t*idwd W/"' Wi't; I,
$:»,ooo '
Ini-i-'f-.t on Fhilippjn,; p--t.o Joan* Jror;; 'xcrowerv

1*3,000,000.
, l i n o o n U:> doli.-n Joans t.o nonresident bwrvww's at

$30,000.
(■ liil.-r- st on US dollar deposit in Hongkong at $10,000.

K- Opi i iting expenses of P2,000,000, Exchange rate: one US
dollar is P50.
The final taxes of Philippine Bank would be

Interest Interest
Dividend dollar deposit dollar loans
Income P3,000,000 $ 20,000 $ 5,000
Multiply by rate Tax exempt 10% 10%
Kina) taxes .0 - &...ZQQQ
Income subject to normal corporate income tax;
Interest on Philippine peso loans P3,000,000

Interest on US dollar loans ($30,000 x P50) 1,500,000
Interest on US dollar deposit ($10,000 x P50) , 500.QQ0
Less: Operating expenses * _2,000,000
Taxable income P3,000,000
Multiply by tax rate , _______30%
Income tax due P 900r000
Other Passive Income of Nonresident Foreign Corporation
1. Interest income on foreign loans contracted on or after August

1, 1986 is subject to 20% Final Withholding Tax.
2. Tax Sparing Rule is an inter-corporate dividend received by a

subject to 15% Final Withholding Tax provided that foreign
law allows taxpayer clause; otherwise, it will be subject to the
normal domestic rate of 30%. (R. a. 9337 )
658 INCOME TAXATION
Tho tax rafr, of 1 3% shall be applicable If the foreign country

dcec not impose any income tax on dividends received by the
nonresident foreign corporation from a domestic corporator.
The 15% tax rate shall be effective starting January 1, 2009.
Illustration
World Company, a nonresident foreign corporation, received

PI 00,000 worth of dividends for the taxable year 201A , Compute
the taxes on the dividends assuming that the a) foreign law allows
taxpayer clause, and b) foreign law does not allow taxpayer
clause.
The computation of taxes on dividends received by World

Company would be:
Assumption A Assumption B
Dividend P100,000 PXOO,OOG
Multiply by tax rate 15% 30%
Final withholding taxes P 30,000
Note**.
a. THE TAX SPARING RULE OF PROCTLE AND GAMBLE PHILIPPINES.
(SUBSIDIARIES ARE NOT SUBJECT TO BRANCH PROFIT REMITTANCE TAX
BUT SUBJECT TO DIVIDEND TAX OF 15% OR 30%)
b. Commissioner of Internal Revenue vs, Procter & Gamble Philippine
Manufacturing Corporation and the Court of Tax Appeals (G,R. No. 66836,
dated December 2, 1991 now Section 28 (B)(1) and (5)(b) of the Tax Code of
1997 - A subsidiary is not a branch because subsidiary are registered in the
Philippines, Remittances are considered dividends,
c. A subsidiary is a separate legal entity, whereas a branch is not a legal entity

and has the same legal identity as its parent company.
SPECIAL CORPORATIONS (Sec. 27(B), nirc >
SPECIAL DOME8TIC CORPORATIONS
CLASSIFICATIONS APPLICABLE TAX

1, Proprietary educational Institutions
(Except those whose gross Income from 10% of net taxable Income
unrelated source exceeds 50% of their total
gross Incomo)
2 Nonprofit hospitals 10% of net taxable income
3. Government owned and controlled Normal corporate income tax
corporations
4 Exempt government organizations Tax exempt
(GSISa SSS, PHIC, PCSO)
r<tUntiti
iU*hu>r*Ui UUvafu t thunilonnl hmtHution* atut Homplt&l*
Pmm Mu piivafr rthu nUntntl Infill i iliniih and htmftiUi}* whl' h nl

luuiptafh if mil |»mv n (a h nl 10% nn limit nrI thKtiltlr hi(*>mn,
M n w r x r i , < f ( h e l l h i i i d f i r r i u incnnir fmnt uniHnterf busInCFtfi

atiniMr.* rM rnl.i bO"-,» nl (hr Inlttl gnmn income hom nil *\ourccn,
(hr irgular la\ ra(r fm <lonirfi(i< coi (totnf Ion tthnll hr applied, //>'■.
‘ ;i N.V, '
I hr (mn ’’umrfafrd IniMnirMN arlivify" means any trade, business

m nthei activity. (he conduct of which in not substantially related
fi» (hr cvctcise or performance by such educational institution or
hospital or its primary purpose or function.
\ "proprietary educational institution” is any private school

maintained and administered by private individuals or groups
with an issued permit to operate from the DECS, or CHED, or
ITS PA.
Illustration 1
The following data were reported for 200A business activities of

W estern University (WU), a private educational institution:
Tuition fees P3,000,000

Miscellaneous fees 200,000
Rent income, net of 5% withholding tax 475,000
Cash dividend (domestic), tax-exempt 200,000
The income tax payable ofWU per ITR is determined as follows:
l. Computation of percentage of unrelated income:

Unrelated Related Total
Rent income (P47S,000/95%) P500,000 P 500,000
Cash dividend 200,000 200,000
Interest income (P80,000/80%) 100,000 100,000
Tuition fees P3,000,000 3,000,000
Miscellaneous fees 200.000 200.000
Total gross income - all sources P800.000 P3.200.000 P4.000.000
Percentage of unrelated income over total gross income

from ail sources (P800.000/P4,000,000) 20%
INCOME TAXATION
2. Computation of income tax payable per ITR;
Turxm foes P3,000,000

Rent income 500.000
MisceLaneous fees 200.000
Total gross income per iTR P3,700,000
Less Operating expenses 1.200.000
Net taxable income P2,500,000
Multiplied by special tax rate ‘ 10%
income tax due P 250,000
Less: Creditable withholding tax on rent
(P5Q0,000 - P475,000) 25.000
Income tax payable P 225.QQQ
Illustration 2
Suppose that in 200A, the composition of WU income is as
follows:
Tuition fees PI,200,000

Rent income, net of 5% withholding tax 950,000
Cash dividend (domestic), tax-exempt 500,000
interest income, net of 20% final tax 80,000
The income tax payable of WU per ITR is determined as follows:
Computation of percentage of unrelated income:
Unrelated Related Total

Rent income (P950,000/95%) PI,000,000 PI,000,000
Cash dividend 500,000 500,000
Interest income (P80,000/80%) 100,000 100,000
Tuition fees PI,200,000 1,200,000

Miscellaneous fees 200.000 200.000
Total gross income - all sources PI.600,000 PI.400.000 P3.000.000
Percentage of unrelated income over total gross income

from all sources (PI,600,000/P3,000,000) 53%
2. Computation of income tax payable per ITR:
Tuition fees PI,200,000

Rent income 1,000,000
Total gross income per ITR P2,400,000
Less: Operating expenses 1.200.000
».na|*C«r t J f»M Ortkc; t «j» e>f
.Sr ! laNntilr Hi. .n.r ,,,
t*V i f;o, tclr

t=.v «iur ,,
lr:»sS t fr <1 ilaltlr WitlihnHinfS |( )l|
fl 3 ttHKi 1)00 |*-Jr>0,00t)j 'Aj/J'Sj
ini'ctiru* tax |»ayahlf PvJO/jOO
Wole T{*« nm.muim i f u n i t K t a x m a y f>«" it thr.

f JiU. i J ir»U1 illlOil <jUuIit|r t. to lie* <«*'d IH)*Uf , lOttftui ' Otp'tfitit: ttV/Wl* *&/,.■ if
A n r i k m i l i s U f u t f f f c | > c t U i l ( u x i ) l 1 ()“/>,, t l ) r IttlNiiniiin • < it\)*)f ti\*" Iti'A/tfl*: *bz r)f/f
fcpplU'’«*hJr
SPECIAL RESIDENT FOREIGN CORPORATION
I .'h- uiLonif luxes imposed to s|)<*<:jul /VikI.'ij t ionul’/i c'lrpor;jtion

tire* .is follows;
SPECIAL RESIDENT FOREIGN CORPORATIONS
; c LASSiFica t Io ns ” Income Within
i international carrier 2 %% of the Philippine gross billing^
' 2 Offshore banking units 10% of gross income
3 Branch remittances 15% of remittances
4 Regional area headquarters Tax exempt
i 5 Regional operating headquarters 10% of taxable income
International Carrier
The applicable tax would be 2 Va % of the Gross Philippine Billings

(PGB) (Sec.28A3, NiRC), PGB means gross revenue realized from
carriage or persons, excess baggage, cargo and mail originating
from the Philippines under the following conditions:
• In a continuous and uninterrupted flight, and
• In case of transshipment, that portion of the cost of ticket

corresponding to the leg flown from the Philippines to the
point of transshipment. (Rvv.Reg.Svc.i63)
Illustration
DRAGON FLY has the following records of income for the period:
662 INCOME TAXATION
A. Continuous flight from Manila to Beijing = 1,000 tickets at

P3,000 per ticket.
B. Ticket Sold for flight from Manila to Hongkong: Transfer flight

from Hongkong to Beijing = 2,000 tickets at P3,000 per ticket.
C. Direct flight from Manila to Hongkong = 3,000 tickets at

P2,000 per ticket.
Computation of income tax:
Continuous flight from Manila to Beijing

(P3,000 x 1,000) P 3,000,000
Transfer flight from Manila to Hongkong
(P3,000 x d,000 x 2/3*) 4.000. 000
Direct flight from Manila to Hongkong
(P2,000 x 3,000) 6.000. 000
Gross revenue P13,000,000
Multiply by tax rate 2 V2%
Income tax P 325.000
♦Note: The 2/3 ratio of transfer flight from Manila to Hong Kong is computed by
getting the prices of ticket for direct flight over transfer flight, (P2,000/ P3,000).
Offshore Banking Units (OBU)
These resident foreign corporations are subject to a 10% final tax

on interest income derived from foreign currency loans granted to
residents. [See28 (A4), nircj
Exceptions:
1. Income derived by OBU authorized by BSP from foreign

currency transactions with nonresidents, other OBUs, local
commercial banks and foreign banks shall be exempt from all
taxes, except net income from such transactions as specified
by the Secretary of Finance. (r.a 9294)
2. Income of nonresident individuals and nonresident

corporations from transactions with offshore banking units is
exempted from Philippine income tax.
Illustration
Aseanbank, Inc., an offshore banking unit and a resident foreign

corporation, shows the following income and expenses during the
taxable year:
rusnrre :T Zcrzcrttcrs m
in burner- -•
^xr^fisoss
51.000.000
■" *’ I*s44£3 in.C lir^nrn b&hfS 1.500.000
y^dier'" V3r>x*r.rjcj3 ann 500.000
400.000
- »n ■ '.*r" *5^'- ^
ir.irtrt. ^ 'Zz^Z caa; of 10% would onlv be
-‘-^ricy transactions from resident
J* Thus. 550.000 or $500,000
i jt vx
?n,€hs Z
^, tay >c h incur.: rerrJixed by branch to

v‘>je
'■-Jr.
f uuv-'jt
v/.rr:r y" ~^t are registered with Philippine
*" ' Anrcrr;/.
- Pasture ^^
uvrr*err*n profits received not directly
‘~v* Vje ''sx-'- sJ. of he trade or business in the
^* 'v • -'**' Xfc/4, .’Uf*^
O. Ufctt r |4 i/>*8
..*1* ^ ^' ^*^V0 ^r'-'^''' ^ vr^noh of a foreign corporation

^
y>oa. *" /PA ê&ng crejccee in the Philippines, reported
*r,ee ^v*,ng c n.r.g uceg year.
' he ye.
P7,000,000
^ opera \ eg .ryypoe a Per 'a/
2.000,000
fay ey/empd d/vyrer.d income
p9>QQ0,0Qfi
*'/a. ry-* ,W//!fJb
;>y dfy/i^ -g yea' the branch earmarked for remittance to the

ry,d offy* ** «///>//* dividend and PS,000,000 of its net
v;y r&Ung mcofne after *ax
fhe vym am// to f/d remitted v/ouid be

P2,000,000
i^yide/./j ,/yy/me
K,000,000
fcdd : >«y opera f mg income after fax
branch profit remittance tax
( 75WW21 JL25Q&QQ
(Pb/X/C W<> x f v%) Lf^§0/QQQ
>/aj i.f to Jy rermfieri
>,y ^ *->. >*,. "' bu*,ne", * ,;Ubjr"
y i..l Ul/;
6&4 INCOME TAXATION
See. 28 (A) (4) of N1RC provides that the following income within
of a foreign corporation shall not be treated as branch profit for
tax purposes unless the same are effectively connected with the
conduct of the trade or business in the Philippines:
1. Interest, dividends, rents, royalties;

2. Remuneration for technical services;
3. Salaries, wages, premiums, annuities, emoluments;
4. Other fixed or determinable annual, periodic or casual gain,
profits, income and capital gains.
Regional Operating Headquarters
Regional operating headquarters are branches established in the

Philippines by multi-national companies, which are engaged in
any of the following services, are subject to 10% tax rate based on
their taxable income:
a. General administration and planning;
b. Business planning and coordination;
c. Sourcing and procurement of raw materials and components;
d. Corporate finance advisory services;
e. Marketing control and sales promotion;
f. Training and personnel management;
g. Logistic services;
h. Research and development services and product development;
i. Technical support and maintenance;
j. Data processing and communication; and
k. Business development. (Sec. 28 A6, nircj
Illustration
Ace, Inc., Philippines is engaged in research and development

services and product development related to computer and
aircraft parts. During the year, Ace reported the following income
and expenses:
Sales P10,000,000
Chapter 12 income Tax of Corporations 665

Dividend income, tax-exempt 800,000
The income tax of Ace Inc., Philippines would be
Sales PI 0,000,000
Less: Cost of sales 4,000,000
Gross income P 6,000,000
Less: Operating expenses 2,500,000
Multiplied by applicable tax rate __________ 10%
Note: Tax-exempt and income subjected to final taxes are not to be included as
part of the taxable income.
SPECIAL NONRESIDENT FOREIGN CORPORATIONS
The applicable tax rates for special nonresident foreign

corporations are as follows:
SPECIAL NONRESIDENT FOREIGN CORPORATIONS

CLASSIFICATIONS APPLICABLE TAX - Income Within
1. Cinematographic film owner,

Lessor/ Distributor 25% of gross income
(Sec. 28B.NIRC)
2. Lessor of machinery, 7 Vi% of gross income

equipment, aircraft and others
(Sec. 28C,N!RC)
3. Lessor of vessels chartered

4 1 A% of gross income
by Philippine Nationals
(Sec. 28D.NIRC)
Illustration
t
X, a special nonresident foreign corporation reveals its income
and expenses within the Philippines as follows:
Gross receipts P5,000,000

686 INCOME TAXATION
Compute the income taxes due if X is a:
(1) Cinematographic film distributor,

(2) Lessor of aircraft, or
(3) Lessor of vessels chartered by Philippine Nationals.
The income taxes due would be
(1) Cinemato (2) Lessor of (3) Lessor of

graphic film aircraft vessels
Gross receipts P5,000,000 P5,000,000 P5,000,000
Multiplied by
applicable tax rate 25% 7.5% 4.5%
Income taxes due PJ,a§S£-QS P 375.QQQ
INSURANCE COMPANIES
In the ease of insurance companies, whether domestic or foreign

doing business in the Philippines, the net additions, if any,
required by law to be made within the year to reserve funds and
t he sums other than dividends paid within the year on policy and
annuity contracts may be deducted from their gross income:
Provided, however, that the released reserve be treated as income
in the year of release. (Sec. 37(A), NIRC; Sec. 129, Rev. Regs. No. 2J
Illustration
Malayan Insurance Corporation shows the following accounts at

the end of the taxable year:
Gross premium collected P8,200,000

Reserve funds release 800,000
Net additions to reserve funds during the year 500,000
The net income of Malayan Corporation would be
Gross premium collected P8,200,000

Add: Reserve funds release 800,000
Less: Operating expenses P3,500,000
Net additions to reserve funds 500,000 4,000,000
Net taxable income P5,000,000
Multiplied by normal tax 30%
Income tax due PI,500*000
Chmptpt 12 tneom* Tax of Corporation* 067
r!<?AVvN>$IN6 COMPANIES
•>i -o' it'* ;vx' ixxx'twil in iH'tivr ptnmiil nl biifiliifris, if >t>

v.;,sOv' <c 30% iv'gulor corporate income Inx. ft myallies are
f.*om passive income. these me gcnemlly subject to 20%
- a : : a \ K';c \> ;>A ' i O l) tiafu'd <Vft>/vr / ", J00HJ
niwstrfttion
v\mooraTtom a franchisor of chain stores, grant ed franchise to a

-c-hnaoo. V* Coloration. The franchise fee is PI0,000,000. The
om^vocracing and training costs incurred was P2,000,000. Using
C^‘ r^3eh is the income tax due for this transaction?
Dir income tax due would be

xcyaliy fee P10,000,000
bess: Pre-operating and training cost 2.000,000
Cross income P 8,000,000
.ess: OSD (PS,000,000 x 40%) 3.200.000
Multiplied by normal tax rate _________30%
Income tax cue
Corporate Income Tax Returns

Section 52 (A) of the NIRC provides that every corporation subject
:c the rax 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 (BIR
Forrr. 1 702Qj and final or adjustment return (BIR Form 1702).
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.
Pules in filing and payment of corporate income tax:

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.
P 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.
7 7 IRC/
668 INCOME TAXATION
3. The final adjustment return shall be filed on or before the fifteenth

(15th) day of April, or on or before the fifteenth (15th) day of the fourth
month following the close of the fiscal year, as the case may be. <sec. 77
(B), NIRC)
ITR of Corporate Dissolution or Reorganization
Within 30 days after the adoption of a plan for dissolution or

reorganization, a corporation should render a correct ITR to the
BIR Commissioner.
Prior to the issuance of the Certificate of Dissolution or

Reorganization by the SEC, the dissolving or reorganizing
corporation shall secure a certificate of tax clearance from the BIR
which shall be submitted to the SEC. (Sec. 52(C),nircj
Taxable Year of Corporation
A corporation may employ either a calendar year or a 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, (sec 52 nirq
The quarterly corporate income tax is computed as follows:
Sales for the quarter p xxx.

Less: Cost of sales xxx
Gross income P xxx
Less: Deductible expenses xxx
Taxable income for the quarter p xxx
Add: taxable income from previous quarter xxx
Total taxable income to date p xxx
Multiply by corporate tax rate 3qq/0
Income tax due P xxx
Less: Income tax paid in previous quarterly return P xxx
Income tax withheld by various payor xxx xxx
Tax payable this quarter p xxx
The corporate quarterly income tax has been illustrated in

Chapter 10 of this book.
Annual Income Tax Return

The corporate annual income tax return contains the
accumulated report of sales, cost of sales and allowable
Chapter 12 Income Tax of Corporations* 669
deduction*; from the first quarter to the fourth quarter ( f u n n y , the

taxable year.
This annual income tax return is the adjusted income tax return
and is to be filed on or before April IS of the succeeding year.
Sales for the year P XXX

Less: Cost of sales XXX
Gross income P XXX
Less: Deductible expenses XXX
Taxable income for the year P XXX
Multiplied by normal tax rate or 30%
MCIT 2% of gross income 2%
Total annual income tax (applicable tax, the higher
of normal tax or MCIT) P XXX
Less: Income tax paid in the first 3 quarters P XXX

Income tax withheld by various payor XXX XXX
Tax payable this year P XXX
Note: 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 be
refunded with the excess amount.
Improperly Accumulated Earnings Tax

on Family or Closely-held Corporation
In general, accumulation of earnings would be improper if such

accumulation were not within the reasonable needs of the
business.
The term “reasonable needs of the business” are hereby construed

to mean the immediate needs of the business, including
reasonably anticipated needs.
In either case, the corporation should be able to prove an

immediate need for the accumulation of the earnings and profits,
or the direct correlation of anticipated needs to such
accumulation of profits. Otherwise, such accumulation would be
deemed to be not for the reasonable needs of the business, and
the penalty tax WOUld apply. (Sec. 29 A, NTRC., Rev. Reg. No. 2 - 2001)
The improperly accumulated earnings tax shall not apply to the

following corporations:
1. Publicly-held corporations;
2. Banks and other nonbank financial intermediaries; and
3. Insurance companies. (Sec. 29 (B)(2 ), nirq
/
670 INCOME TAXATION
Earnings for the Reasonable Needs of the Business
Revenue Regulations No. 2-2001 provides the following which

constitute accumulation of earnings for the reasonable needs of
business:
1. Allowance for the increase in the accumulation of earnings up

to 100% of the paid-up capital of the corporation as of balance
sheet date, inclusive of accumulations taken from other years;
2. Earnings reserved for definite corporate expansion projects or

programs requiring considerable capital expenditure as
approved by the Board of Directors or equivalent body;
3. Earnings reserved for building, plants, or equipment

acquisition as approved by the Board of Directors or
equivalent body;
4. Earnings reserved for compliance with any loan covenant or

pre-existing obligation established under a legitimate business
agreement;
5. Earnings required by law or applicable regulations to be

retained by the corporation or in respect of which there is
legal prohibition against its distribution; and
6. In the case of subsidiaries of foreign corporations in the

Philippines, all undistributed earnings intended or reserved
investments within the Philippines as can be proven by
corporate records and/or relevant documentary evidence.
Accumulated Profits Beyond Reasonable Needs
The following are prima facie instances of accumulation of profits

beyond the reasonable needs of a business and are indicative of
purpose to avoid income tax upon shareholders:
1. Investment of substantial earnings and profits of the

corporation in unrelated business or in stock or securities of
unrelated business;
2. Investment in bonds and other long-term securities; and
3. Accumulation of earnings in excess of 100% of paid-up

capital, not otherwise intended for the reasonable needs of the
business as defined.
Objective of Improperly Accumulated Earnings Tax (IAET)

The objective of imposing tax on the improperly accumulated
income is to force corporations to distribute dividends to
stockholders in order that related tax on dividends will be
collected.
A corporation that does not distribute dividends deprives the

government of income taxes from the stockholders' dividend
income.
If there is a determination that a corporation has accumulated

income beyond the reasonable needs of the business, the 10%
improperly accumulated earnings tax (IAET) shall be imposed.
(Sec.29D, NIRC)
Tax Base of Improperly Accumulated Earnings Tax (IAET)

For closely-held or family corporations found subject to the tax,
Revenue Regulations 2-2001 provides that the IAET for a
particular year is first determined by adding to the year’s taxable
income the following:
a) Income exempt from tax;

b) Income excluded from gross income;
c) Income subject to final tax; and
d) NOLCO deducted.
The sum of the above amounts shall be reduced by the sum of
a) income tax paid or payable for the taxable year;
b) dividends actually or constructively paid/issued from the

applicable year’s taxable income; and
c) Amount reserved for the reasonable needs of the business as
defined, emanating from the covered year’s taxable income.
Illustration
Amaro Corporation, a closely-held corporation, reported the

following during the taxable year:
672 INCOME TAXATION
Accumulated retained earnings P3,000,000

Paid-up share capital 2,000,000
Income tax due and payable 900,000
20% final tax on interest income 60,000
Divided income 200,000
Gain on life insurance 1,000,000
Dividend declared and paid 300,000
Reserved for plant expansion 200,000
Investment in bonds 2,000,000
The IAET of Amaro Corporation would be
Taxable income (P900,000/30%) P3,000,000

Add: Gain on life insurance PI,000,000
Interest income (P60,000/20%) 300,000
Dividend income 200.000 1.500.000
Total P4,500,000
Less: Income tax due and payable P 900,000
Dividend declared and paid 300.000
Reserved for plant expansion 200.000
Final tax on interest income 60.000 1.460.000
Improperly accumulated earnings P3,040,000
Multiplied by IAET rate 10%
Improperly accumulated earnings tax R 304.000
Accounting of IAET
The accounting for IAET entails the application of the following

formula to convert the GAAP Income to Taxable Income (in
thousands): ______________________________
Add j i
(Deduct) 1 Tax Rate. Amount and Accounts
GAAP income P100
Nondeductible expense 3
Net loss cany over (1)
Nontaxable income (2)
Base of income tax expense P100 30% = P30.00 income tax expense
Temporarily not deductible expense 5 Ii 3 0 % = 1.50 Deferred tax
Temporarily not taxable income (4) 30% = ( 1.201 Deferred tax liability
Base of income tax payable PI 01 30% = P30.30 Tax payable ' • \
The related journal entry would be

Income tax expense 30.00
Deferred tax 1.50
Deferred tax liability 1.20
Income tax payable 30.30
If BIR declared the above income as improperly accumulated,

then the computation of IAET following the statutory provision
would be:
Taxable income PI01.00

Add: Net-operating loss carry over (NOLCO) P 1.00
Nontaxable income 2.00
Temporarily not taxable income 4.00 7.00
Total P108.00
Less: Income tax payable 4.00
Basis of IAET PI 04.00
Multiplied by IAET rate 10%
IAET P 10.40
Period of Payment of Dividend

The dividends must be declared and paid or issued not later than
one year following the close of the taxable year; otherwise, the
IAET, if any, should be paid within 15 days thereafter.
Effect of 10% IAET

Once the profit has been subjected to IAET, the same shall no
longer be subjected to IAET in later years, even if not declared as
dividend.
$74 INCOME TAXATION

]. For laxa.uon purposes, what does a corporation comprise?
2. Distinguish a domestic corporation from a foreign corporation.
3. Enumerate the corporations that are exempt from taxation.
4. What are the different kinds of taxes that may be imposed on the
income of a corporation?
5. Differentiate normal corporate income tax (NCIT) from minimum
corporate income tax (MCIT). State the tax rules regarding the excess
of MOT over NOT.
6. Can the related expanded withholding tax be allowed as tax credit
from MCJT?
7. State the rules when gross income tax can be applied to corporate
income.
8. What are the different taxes applicable to capital gains earned by
corporate within the Philippines?
9. Enumerate the several passive incomes that could be earned within
and their respective applicable income tax rates.
10. State the instances of inter-corporate dividends and their respective
tax treatments.
11. Enumerate those which are included as special domestic
corporations and their respective preferential income tax rates.
12. State the applicable special income tax rates of special resident
foreign corporations which are exempt from normal corporate tax
rate.
13. Enumerate the special nonresident foreign corporations which are
exempt from normal corporate tax rate and their applicable income
tax rates,
14. What is the prescribed date for filing of the corporate income tax
returns?
15. What are the allowable tax credits from tax due in the annual ITR of
a domestic corporation?
16. State the instances when accumulation of earnings is beyond the
reasonable needs.
17. What are the items required to be added to income reported in ITR in
computing the tax base of IAET?
18. When should the payment of dividend be made in order that this will
not be considered as improper accumulation of earnings?
Name: _____________________ ___________ ________Score;______________

incorrect.
1. In general, the regular corporate income tax rate is 30%.
2. Substantial losses from a prolonged labor dispute may exempt

corporation from MCIT upon the recommendation of the BIR
Commissioner to the Secretary of Finance,
3. The MCIT is applicable to resident foreign corporation such as

“international carrier."
4. For purposes of determining MCIT on gross receipts, cost of

services is allowed to be deducted to arrive at the tax base.
5. Casual gains not directly connected in the conduct of business of

the branch are to be included as part of branch profit subject to
1 5% remittance tax.
6. The interest income from foreign currency loans granted by

Offshore Banking Units (OBU) to residents is subject to a passive
income tax of 20%.
7. The excess of MCIT over normal corporate tax can be carried

forward as tax credit against the normal tax for the three
immediately succeeding years.
8. The MCIT is applicable only to domestic corporation.
9. The excess of MCIT over normal tax that has not been credited
against normal tax within the reglamentary period shall be
removed from the book balance by charging it to the retained
earnings account.
10. The capital gains earned outside the Philippines by resident

foreign corporation are taxable based on the normal corporate
income tax.
11. A sale of real property located in the Philippines by a
nonresident foreign corporation is subject to a final tax of 6%
based on gain.
12. Both resident and nonresident foreign corporation’s interest
income from peso deposits is subject to a final tax of 20%.
13. Nonstock and nonprofit educational institutions are exempt from
income tax.
C?6 INCOME TAXATION
Har* ________________________________________ Score: __________ _

Vrue True z the siaieruen: is correct or False if the statement is
rt correct.
i - A otrporatioo does nor include general professional partnership

hut includes joint venture under a service contract with the
governr. er. *..
2. Domestic corporations refer to all kinds of corporation operating

within the Philippines,
r '»or,resident foreign corporations are taxed based on their net

taxable income within.
4, Domestic and foreign resident corporations are taxed on income

within and without.
5, Tne gross income derived within by the nonresident foreign

corporation is taxed in the Philippines with 30% normal tax.
6, If the payor of the dividend is a domestic company and the

recipient of the dividend is either a domestic company or
revident foreign corporation, such dividend is exempt from
income tax,
7, Domestic and resident foreign corporations are required to

withhold tax whether or not the payment to nonresident foreign
corporation is connected with the trade or business.
8, Dividend income is considered as among the unrelated business

activities in determining the amount of unrelated income of a
proprietary educational institution for purposes of availing the
10% preferential tax rate.
9, Passive incomes which have been subjected to a final tax shall

not form part of gross income for MCIT purposes.
JO, A duly registered cooperative is exempt from income tax but

subject to output VAT on their gross sales or gross receipts.
11. Improperly accumulated earnings shall not be imposed on

publicly-held corporations but can be imposed on insurance
companies.
12. In general, incomes of tax-exempt corporation which are not

directly related with respect to their registered activities shall be
subject to tax.
Chapiar 12 Income Tax of Corporations 677
Score:

Select the >?ter ‘hat contains the best answer.
1. Nonresident foreign corporations are subject to normal tax rate

hacec on
a. net taxable income within.
b. gross income within.
c net taxable income from all sources.
c. gross income outside.
2. Tice tax imposed on inter-corporate dividends received by a resident

foreign corporation from a domestic corporation a is
a. tax-exempt.
b. subject to 10% final tax.
c. subject to 15% final tax.
c . subject to 30% corporate tax.
3. Royalty income derived within the Philippines by a nonresident

foreign corporation shall be subject to
a. 20% final tax.
b. 7.5% final tax.
e. 30% normal corporate tax.
d. 2%> minimum corporate tax.
4. Which of the following is not classified as corporation?

a. Joint accounts
b. Associations
c. General professional partnerships
d. Insurance companies
5. A corporation whose income within and without the Philippines are

both taxable.
a. Domestic Corporation
b. Foreign Corporation
c. Resident Foreign Corporation
d. Nonresident Foreign Corporation
6. Which of the following corporation is taxable?

a. Cooperatives
b. Government educational institutions
c. Partnerships in general
d. Chamber of commerce
7. In paying corporate income tax, the excess of minimum corporate

income tax could be used as a deduction within three immediate
succeeding taxable years and such excess shall be credited against
a. normal corporate tax.
b. minimum corporate tax.
c. gross income tax.
* «■» *»
INCOME TAXATION
tax
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r. ^ #T £» --i
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corporate income is apom ie tax
iiabuity of a corporation except when the corporation

a. is in its third year.
is in its fourth vear.
c. incurred net loss or zero taxable income.
d. has normai income tax which is lesser *-a-n minimi:
tax.
11. Capita] gains of resident foreign corporation on sale or exchange cr

disposition of lands and/or buildings located in the Philippines.
a. 6% of selling price or fair market value whichever is higher
b. 6% of selling price or fair market value whichever is lower.
c. of 1 % of the selling price.
d. Subject to normal corporate income tax.
12. The following corporate income are subject to income tax, except
a. Cash dividends received from a domestic corporation by another
domestic corporation.
b. Royalty income received from a domestic corporation
c. Interest income on foreign loans.
d. Inter-corporate dividends received by a non-resident foreign
corporation from a domestic corporation.
13. The net taxable income of regional operating headquarters

established in the Philippines by multi-national companies engaged
in administrative services is
a. tax-exempt.
b. subject to 10% income tax.
d. subject to 30% corporate tax.
Name: ___________ _________ ______ ___________ Score: _____________

1. Which of the following corporation is subject to IAET?

a. Publicly-held corporations
b. Family-closed corporations
c. Banks and other nonbank financial intermediaries
d. Insurance companies
2. The tax imposed on inter-corporate dividends received by a

a. tax-exempt.
b. subject to 10% final tax.
d. subject to 30% corporate tax.
3. Which of the following items is not added to the taxable income per
ITR to compute the improperly accumulated taxable income?
a. NOLCO
b. Tax-exempt and exclusions from gross income
c. Dividends
d. Income subject to final tax
4. Statement 1: A domestic corporation subjected to normal corporate

income tax is exempt from Improperly Accumulated Earning Tax.
Statement 2: Both domestic and resident foreign corporations are
subject to improperly accumulated earning tax.
5. The royalty income in pursuit of business received by franchising

companies like Jollibee Corporation is subject to
a. 30% regular tax.
b. 20% final tax.
c. 15% final tax.
d. 10% creditable withholding tax.
6. Which of the following companies would report release reserved
funds as part of gross income in the year of release?
a. Franchising companies
b. Liquidating companies
c. Insurance companies
d. Cinematographic companies
7. For taxation purposes, the following are taxable corporation, except

a. National Power Corporation.
b. EGV & Company Auditing Firm.
680 INCOME TAXATION
c. ABC Trading Partnership.

d. PAGCOR.
8. Which of the following corporate tax is not yet implemented in the

Philippines?
a. Optional gross income tax
b. Capital gains tax
c. Passive income tax
d. Minimum corporate income tax
9. The business income of a domestic corporation may be subject to
any of the following except
a. minimum corporate income tax.
b. normal corporate tax.
c. optional gross income tax.
d. final withholding tax.
10. All of the following are subject to minimum corporate income tax
starting on the 4th year of its business operation, except
a. nonresident foreign corporation.
b. general commercial partnership.
c. resident foreign corporation.
d. domestic corporation.
11. The excess of minimum corporate income tax over the normal
income tax is deductible from normal income tax for the next
succeeding
a. 2 years.
b. 3 years.
c. 4 years.
d. 5 years.
12. Which of the following is an incorrect determination of income tax?
a. 25% on gross income within of a nonresident cinematographic
film
b. 30% income tax on the net taxable income of nonresident foreign
corporation
c. 10% income tax on proprietary education institution
d. 30% income tax on net business income of government owned
and controlled corporation
13. The following are correct income tax rate, except
a. 7.5% on gross income within earned by nonresident foreign
cinematographic film owner.
b. 2.5% on gross receipts within received by foreign international
carrier.
c. 4.5% on gross income within earned by nonresident lessor of
vessel chartered by Philippine nationals.
d. 7.5% on gross income within earned by nonresident foreign
lessor of aircraft.
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( f p n a bug * ■ y p * ti*,* >//)///j >66,606
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J Mo*// mu/jj is the 206/ int/ttr.v tax *XM d >£ and payable ff T 13.
res/dent \ t i \ \ p i n t * edi/en?
a. I*'', 00,000 c, f'ZAO///)
b. P300,000 ri, 50,666
2. How much is the 200/ in'Xjrn*: tax z t f H f i t j . t and payable If T is a

dor/i^slio corporalion?
h, P5 10,000 c, P576,000
b. HO J 6,000 d, P504,000
Problem X2 - 6 Domestic vs, Foreign Corporation

The Tacurong C o m p a n y has the following business income and expenses
in yen r 201 A:
From Philippines sources; Gross income Expenses
From husir/css P450,000 P290,000
Dividends from domestic corpomtiorir. 80,000
loom other countries;
Saudi, Arabia 180,000 80,000
Australia 75,000 25,000
.Japan 190,000 100,000
Total foreign income tax paid is P60,000 and Philippine quarterly income
tax paid is P42,000,
1. The income tax still due and payable if Tacurong is a domestic
corporation is
a. PI20,000. c, P 30,000.
b. P 72,000. d. P 18,000.
2. The income tax still due and payable if Tacurong is a resident foreign ,,v.,
corporation is
a. PI 20,000. c. P 30,000.
b. P 72,000. cl. P 18,000.
SK^f*
‘C
682 INCOME TAXATION
Problem 1 2 - 7 Income Tax Situs

The following income and expenses are shown by X Corporation:
Within Outside
Gross income P8,000,000 P4,000,000
Business expenses 5.000. 000 3,000,000
Sale of land and warehouse (cost P2M) 3.000. 000
1 - If X is a domestic corporation, how much is the taxable income and

income tax due in the Philippines per annual ITR?
Taxable income Income tax due
a. P3,000,000 P 900,000
b. P4,000,000 PI,200,000
c. P5,000,000 PI,500,000
d. P7,000,000 P2,100,000
If X is a resident foreign corporation, how much is

income and income tax due in the Philippines per annual
Taxable income Income tax due
a. P3,000,000 P 900,000
b. P4,000,000 PI,200,000
c. P5,000,000 PI,500,000
d. P7,000,000 P2,100,000

The ABC Corporation has the following gross receipts and expenses for
the calendar year 201 A:
Sources of income: Gross Receipts Expenses
Philippines P2,800,000,, PI,300,000
U.S.A 1,100,000 600,000
Saudi Arabia 400,000 500,000
If ABC Corporation is a nonresident foreign corporation, the Philippine
income tax due for 201A is
a. P175,000. c. P700,000.
b. P450,000. d. P840,000.

Unicor is a resident foreign corporation. For the fiscal year ending March
31, 20IB, reported the following:
Gross income derived from:

Philippines P15,000,000
U.S.A. 60,000,000
Mixed operating expenses 30,000,000
The Philippine income tax payable of Unicor for the fiscal year April 1,
201A to March 31, 201B is
a. P2,700,000. c. PI,750,000.
b. P2,250,000. d. PI,500,000.
Problem 1 2 - 1 0 Tax-Exempt Corporations

The Philippine Government maintains the following corporations with the
following gross income and expenses:
Gross income Expenses
University of the Philippines P50,000,000 P47,000.000
GSIS 60,000,000 55.000. 000
PAGCOR 30.000. 000 28.000. 000
NAPOCOR (40% Philippine Government) 10. 000. 000
4,000.000
How much is the income tax due that can be collected by the Philippine
Government?
a. P - 0 - c. PI,800,000
b. P600,000 d. P2,400,000
Problem 1 2 - 1 1 Tax-Exempt Corporations

The following domestic corporations reported the following net income
from operations:
Philippine Charity Sweepstakes PI0.000,000
National Power Corporation 8,000,000
UNLAD Cooperative 6,000,000
National Bookstore 5,000,000
Baguio Colleges Foundation 4,000,000
How much is the income tax due that can be collected by the Philippine
Government?
a. P - 0 - c. P3,900,000
b. P2,400,000 d. P5,100,000
Problem 1 2 - 1 2 Normal Corporate Income Tax

Chicken Corporation, a domestic corporation, shows the following data
for the taxable year 201 A:
Capital gains on sale of paintings 940.000
Dividend income (domestic) 200.000
Operating expenses including charitable contribution 500.000
Charitable contribution 100.000
The income tax due would be
a. P524.400. c. P256,500.
b. P522,000. d. P240,000.
Problem 12 - 13 NOLCO
The 4“» year financial statements of X Company, a resident foreign
corporation, show the following information:
Net operating loss 4th year P 100,000
Operating expenses 4.000,000
NOLCO 3“* year 200,000
684 INCOME TAXATION
How much is the income tax due of X Company?

a. P - 0 - c. P78,000
b. P74.000 d. P80,000
Problem 12 - 14 MCIT vs. NCIT

On its 4th year of operation, a domestic corporation reported an operating
loss of P200,000 after operating expenses of PI,000,000. On its 5th year,
its net income amounted to P320,000. Its 5th year net income tax
payable would be
a. P96,000. c. P60,000.
b. P80,000. d. P16,000.
Problem 12 - 15 MCIT vs. NCIT

A ten-year old domestic corporation reported in year 201A a net income
before tax, under GAAP amounting to P5,000,000. This amount is net of
operating expenses which includes PI50,000 allowance for bad debts
and P300,000 actual contribution to CHED priority projects.
1. What is the amount of income tax due?

a. PI,500,000 c. PI,553,250
b. PI,545,000 d. PI,590,000
2. How much would be the income tax due if the total amount of the
total operating expenses per GAAP is P80,000,000?
a. P-0- c. PI,700,000
b. PI',656,800 d. PI,812,125
Problem 12 - 16 Excess of MCIT

The outstanding balance of excess of MCIT over normal tax in prior
period is PI00,000. During the current taxable year, the corporation has
gross income of P8,000,000 and operating expenses of P7,850,000.
1. The income tax payable for the current year is

a. P160,000. c. P60,000.
b. P100,000. d. P52,500.
2. Assuming that the operating expense is P7,000,000 instead of

P7,850,000, the income tax payable for the current year is
a. P350,000. c. P200,000.
b. P250,000. d. P160,000.
Problem 1 2 - 1 7 Deferred Charges MCIT

In year 5, Arabohok Corporation provided the following data:
fin thousands of pesos)
Year 3 Year 4 Year 5
Gross profit - business PI,000,000 PI,200,000 PI,500,000
Business expenses (1,500.000) fl.000.000) fl.000.000)
Income (loss) (P 500.000) P 200.000 P 500.000
chapter \ 'J
6S5
j\ 6s I»I > i * M i a I I i (f
* r*>l55'f* ^'r ^ y";*r*, wha? ;* f-he amount of
<11 f f * M *1 ' >ui| uMt ( f l t*pp|j, for /<:>r 4?
nr0 c P ?o///r
li 1M voou 4 1W>t(t(j 0)
problem 12 If* r > c : r 1 Chi.r|{«,ii MCJT

l hr hnoi- - «»/ m< minis y Owipofty, a domestic corporation, show the
following juui t t t i i r t i t t y :
Debit Credit
11 U 0111 r l i t * r> p n p f r-
750,000
i )r|r‘l I t‘( 1 i !i)II(/r-) Mt H
50,000
In< oiiif l.ix p/iynhl^ 200,000
I I low ititH h r> the y/rmi income of X Company?

it PH),000,000 o, P2,500,000
I). I* 7,500,000 d, p 500,000
7 J low much in the net taxable income of X Company?

n. 1*833,338 e, P500,000
b. 0000,007 d, P200,000
Problem 12-19 Expanded Withholding Tax

R Corporation, a real estate lessor, collected rental income amounting to
PI,906,000, net of 5% expanded withholding tax. The total operating
expcMises of the business amounted to P2,350,000. The corporation has a
capital gain amounting to P500,000, not subjected to final capital gains
tax.
How much is the amount of income tax due and tax refund to be
reported in the ITR if the excess of MCIT over NCIT in the previous year
amounted to P40,000?
Income tax due Tax refund
a. • P52,500 P 87,500
b. P50,000 P100,000
c. P45,000 P 95,000
d. P-0- P 87,500
Problem 12 - 20 Sale of Real Property

A domestic realty corporation sold real property carried at cost of
PI,200,000 for PI,600,000 to Baguio City Government.
Which tax could give tax advantage to the corporation?

a. Normal tax gives P24,000 tax advantage.
b. Capital gains tax gives P24,000 tax advantage.
c. Normal tax gives P72,000 tax advantage.
d. No tax advantage can be achieved.
'VCOW.SE TAÂ^DC**
Problem 1 2 - 2 2 Tax ott Capital Axaeis

Star Corporation has the folkywcng causal axier. ^t^^c^xjza for 200A:
a. Sold 2 2,006 investm-enT m cxmmosi charts of &&dk not ira.ded is the

local stock exchange for PI,000,000. The .toss per stock. is P.210 per
share.
b. Sold 5,000 investment hi preferred stock traded m the local mock
exchange for PT ,800,000. The cost per r&ck Is P300-
c. Sold lane* located in -Japan for P3r®QQtOOO* The related cost and
expenses on sale of land ammmted So F2,500,000*
d. Sold land located in the Fhi&ppfces $x Ft ,000,000. The cost of land
is P000,000 with a fair market vahre of FI ,200,000*
Star Diamond Corporation's taxes pajahJe (gneome tax and percentage

tax) on .sales of capital assets aastimtng the taxpayer is a:
2. Domestic corporation fDQ.

a. PI 94,000 e, P264,000
b. P254,000 cL P269.0OG
2. Resident foreign corporation (RFC),

a. PI 04,000 c. P89.000
b, P 94,000 d. P79,0GQ
3. Nonresident foreign corporation f.VRFC).

a. PI 62,000 c, P94,000
b. P2 22,000 cL PB9,000
Problem 12 - £2 Final Passive Income Tax

San Miguel Corporation, a domestic corporation, has earned the
following passive income within the Philippines for the taxable year
201 A:
Interest from savings deposits P3,000,000
Royalty income 1,000,000
Interest from a depository bank under expanded foreign currency
deposit ($30,000 at P50 per US dollar), 1,500,000
Dividends from JoUibee, a domestic corporation 200,000
Dividends from Microsoft, a nonresident foreign corporation 800,000
What is the total amount of final taxes on passive income?

a. P800,000 c. P912,500
b. P880.000 d. P992,500
Problem 1 2 - 2 3 Passive Income Taxes

Silver Corporation has the following passive income within for the year
201 A:
Interest from depository bank under expanded FCDS $ 20,000
Royalty income from mining P300,000
Royalty income from franchising 100,000
Interest income peso-savings deposit 80,000
Conversion for one dollar is P50.
Compute the passive income taxes of Silver Corporation assuming that

the corporation is a:
1. Domestic Corporation,
a. P296,000 c. P96,000
b. PI 71,000 d. P86,000
2. Resident Foreign Corporation.

a. P296,000 c. P96,000
b. PI 71,000 d. P86,000
3. Nonresident Foreign Corporation.

a. P296.000 c. P168,000
b. PI 71,000 d. P144,000
Problem 12 - 24 Final and Normal Income Taxes

A Philippine Commercial Bank has been authorized to operate a Foreign
Currency Deposit Unit by the BSP and had the following revenue and
expenses;
(a) Dividend income from Magnolia, a domestic corporation at
PI,000,000.
(b) Interest income on US dollar loans from resident borrowers at
$3,000. ($1.00 = P50.00)
(c) Interest on Philippine peso loans from borrowers at P2,000,000.
(d) Operating expenses of P900,000.
1. What is the total amount of final income taxes of Philippine

Commercial Bank?
a. P - 0 - c. P 30,000
b. PI 5,000 d. PI 15,000
2. What is the total amount of normal corporate income tax of

Philippine Commercial Bank?
a. P 40,000 c. P375,000
b. P330,000 d. P385,000
Problem 1 2 - 2 5 Educational Institution

A proprietary educational institution reported on its 10th year an
educational related income of PI,000,000 and other business income of
PI,500,000. Its total operating expenses amount to P3,000,000. Its
income tax payable for the period is
a. P50.000. c. (PI 50,000).
b. P40,000. d. P - 0 - .
688 INCOME TAXATION
Problem 1 2 - 2 6 Educational Institution

The Baguio Central University, a private educational institution, provided
the following income and expenses for the year 200A and 200B:
Educational income: 200A 200B

Tuition and miscellaneous fees P4,000,000 P6,000,000"
Sales of canteen 700.000 1,600,000
Sales of bookstore 300.000 400,000
Non-educational income:
Rent income, net of CWT 4,940,000 5,225,000
Sale of scrap materials 60,000 20,000
Costs and expenses:

Cost of sales - canteen 400.000 800,000
Cost of books sold 240.000 320,000
Operating expenses ' 2,000,000 3,000,000
Purchase of library books 1,000,000 1,500,000

Cost of classroom construction 500,000
Purchase of school furniture 200,000
The operating expenses do not yet include the cost of capital

expenditures. The fixed assets are estimated to be useful for 10 years.
1. What would be the 200A income tax still due and payable per ITR of
University of Baguio using tax minimization principle as allowed by
the existing Tax Lawsand regulations?
a. P2,241,000 c. PI,836,000
b. PI,981,000 d. PI,576,000
2. What would be the 200B income tax still due and payable per ITR of
University of Baguio using tax minimization principle as allowed by
the existing Tax Lawsand regulations?
a. P395,000 c. P670,000
b. P548,000 d. P823,000
Problem 12 - 27 Government Educational Institution

A government owned and controlled educational institution reported an
educational related income of PI,000,000 and other business income of
PI,500,000. Its operating expenses amounted to P3,000,000. Its income
tax payable for the period is
a. P 50,000. c. (P160,000).
b. (P 50,000). d. P - 0 - .
Problem 1 2 - 2 8 Foreign International Carrier

A resident foreign international carrier has the following data for the
current year: Gross billings of P700,000 and expenses of P200,000 from
- 2 zf Ccr^cradcrs §83
Crons. mbr.gs of P5C0.00C and expenses of PiOC.OOO

me- >
s
- of income tax psvahLe in. the Ph lines v
?21 3 - . re
c. ? 30,000
O'. V, d. P 17.500
12 - 2^ Foreign International Carrier

' '•' >s a resident foreign international carrier. Its records of income
3 h .ezper.^-'e are as fouows:
'■ flight from Manila to Beijing = 2,000 tickets at ?5?000

froze-
o nozet acid for fight from Manila to Hongkong; 'Transfer Sight Srom
f tongkong jC
to *Berlin? - 4,000an
t.uuu uezets tickets
m.uc/jatper
P6,000 pei
ticket,
from Manila to Hongkong = 2,000 tickets at P3,000 per
nez/r*
> > ofa * opera ting expenses is p10,000,000.
//oaf >a fr»e amount of Fly Horsed income tax payable in the Philippines?
a, P700.000 c. P6,300,000
o P75/>/>00 d, P7,350,000
Problem 12 - 30 Special Nonresident Foreign Corporation

f oe following nonresident foreign corporations operate in the Philippines
y/j>n their respective income and expenses:
A. Dragon Film, cinematographic Sim distributor:

Within Outside
Grose rcedpta- P10,000,000 P200,000,000
Cost of film distributed 6,000,000 120,000,000
Operating expenses 3,000,000 50,000,000
B. American Aircraft, a lessor of airplanes to Philippine Airlines:

________Within Outside
Gross income P20,000,000 PI 00,000,000
Operating expenses 15,000,000 80,000,000
What is the amount of Philippine income taxes to be paid by Dragon Film

arid American Aircraft?
Dragon Film American Aircraft
a. P2,500,000 PI,500,000
b. PI,000,000 P 225,000
PI,000,000 PI,500,000
o
P 250,000 PI,250,000
a
690 INCOME TAXATION
Problem 12-31 Profit Branch Remittances

During year 200A, Abbott Laboratories, branch of a foreign company
doing business in the Philippines, reported the following income and
expense within as follows:

Less: Operating expenses 60.000.000
Less: Income tax (P40,000,000 x 30%) 12.000.000
Net income after tax P 28,000,000
Add: Dividend income from Pharma Co. (domestic) 7.000.000
Total net income P 35.000.000
In year 200B, Abbott earmarked for remittance to its head office in North
Carolina, USA some of its income as follows:
Operating net income after tax ' P24,000,000

Dividend income from Pharma Co. 7,000,000
Total branch profit remittance P31 ,QQQ.,flQQ
How much is the branch profit remittance tax and the total amount to be
remitted after tax?
Remittance
Remittance tax after tax
a. P3,600,000 P27,400,000
b. P4,650,000 P26,350,000
c. P3,100,000 P27,900,000
d. P2,400,000 P28,600,000
Problem 12-32 Cooperative

A multi-purpose cooperative, registered with CDA reported a business
income of P500,000, operating expenses of P300,000 and interest
income of P80,000, net of 20% final tax. Its income tax would be
a. P70,000. c. P16,000.
b. P20,000. d. P - 0 -.
Problem 12-33 Cooperative

Unlad Cooperative is registered with CDA and reported the following
business income and expenses:
Sale of land (classified as ordinary asset) to its members P 800,000

Sale of groceries to its members 900,000
Interest income from its members 600,000
Dividend income from Jolibee Corporation 60,000
Cost of land sold 700,000
Cost of groceries 500,000
Interest expenses on loan for expansion 100,000
Chaptsr 12 toccrrm Tax of Corporation*
691
What ;n ‘ho ftrnounf r>f income fex of Uniad Cooperative?

pi ;> 0' c. P 60,000
P48.06 0 d. PI 75,000
Problem 12-34 Quarterly Income Tax

A domestic corporation has the following data:
Excess rax credit# in 200A P 10,000
Per year 200H feu mu la five amount): 1* Qtr. 2 nd Qtr.

Pevenue, net of 1% withholding tax P495,000 P792,000
Deduction* 480,000 700,000
The corporation deducted ita first quarter 1% creditable tax from the first
quarter income tax due and the remaining was reduced by the excess tax
credits in 200A.
1 How much is the income tax still due and payable in the first quarter
200h?
a. p- 0 - c, P5,000
b. PI,000 d. P6,000
2. How much is the income tax still due and payable in the 2nd quarter
200H?
a. PI 8,000 c. P12,000
b, PI7,000 d. P 6,000
Problem 1 2 - 3 6 Quarterly Income Tax

A domestic servicing corporation has the following cumulative data:
For year 201 A; l9t Qtr. 2”d Qtr.

Gross receipts, net of 2% withholding tax P1,960,000 P2,940,000
Deductible business expenses 750,000 1,300,000
The corporation uses as tax credits its creditable tax eveiy quarter.
How much is the income tax still due and payable in the second quarter
if the corporation used OSD in the first quarter?
ft. PI 10,000 c. PI 60,000
b. PI 20,000 d. P180,000
Problem 12 - 36 Quarterly Income Tax

Masikap Corporation, a domestic corporation, has the following
information regarding its income and expenses for the taxable year 200A;
Q U A R T E R S
________ First Second _____________Third ____________ Fourth
Sales PI,000,000 PI,500,000 P2,200,000 P2,800,000
Cost of sales 600,000 900.000 1,320,000 1,680,000
Itemized deductions 320,000 480.000 704,000 896,000
692 INCOME TAXATION
Assume that the amounts are cumulative from first quarter to the fourth
quarter, the income tax credit and income tax still due and payable in
the fourth quarter w ould be
Income tax credit Income tax still due
a. P56.320 PI 5,360
b. P61,600 PI 6,800
c. P52.800 P 14,400
d. P61,600 (P39,200)
Problem 1 2 - 3 7 Tax on Interest Income

A domestic corporation reported the following income within before tax:
Business income PI,000,000
Business expenses 900,000
Interest income from peso savings bank 100,000
Interest income from expanded foreigncurrency deposit 100,000
Its total income tax is

a. P105.000. P 57,500.
b. P 70,000. P 55,000.
Problem 1 2 - 3 8 Passive Income Taxes

A nonresident foreign corporation reported the following income within
before tax:
Interest income from peso savings bank P 100,000
Interest income from expanded foreign currency deposit 100,000
Cash dividend from domestic corporation 100,000
Cash dividend from a resident foreign corporation
with 100% earnings in the Philippines 100,000

a. P90,000. c. P30,000.
b. P60,000. d. P-0-
Problem 1 2 - 3 9 Dividend Income Tax

A nonresident foreign corporation earned the following income before tax:
Cash dividend from domestic corporation p 100,000
Cash dividend from a resident foreign corporation,
40% earned within 100,000

a. P64,000. c. P30,000.
b. P40,000. d. P20,000.
Problem 1 2 - 4 0 Passive Income Tax

A resident foreign corporation reported an interest income of PI00,000;
royalty income of P200,000 and cash dividend of P500,000 all earned
Based on the earnings presented, how much is the total income tax
payable in the Philippines?
a. PI 60,000 c. P60,000
b. P100,000 d. P - 0 -
Problem 1 2 - 4 1 Amount subject to Surtax (IAET)

Y Corporation, a family-closed corporation, had the following selected
data for 201 A, the accumulated earnings for which year the BIR
considered to be improper:
Nontaxable gain on life insurance of Y Co.’s president P900,000
Income tax due 201A 780,000
Quarterly income tax paid 580,000
Dividend declared and paid during the year 440,000
Reserve for maturing bonds in 20 IB 300,000
Tax-exempt dividend income from resident corporation 200,000
NOLCO deducted 100,000
Capital gain on direct sale to buyer of shares of
another domestic corporation, net of final tax 95,000
Interest income on peso deposit, net of final tax 16,000
How much is the amount of improperly accumulated earnings tax

(IAET)?
a. P327,100 c. P240,000
b. P297,100 d. P239,100
Problem 12 - 42 IAET
A closely-held corporation, deemed committed unreasonably
accumulating its income, shows the following data:
Paid-up capital P10,000,000

Accumulated earnings - unrestricted 8,000,000
Accumulated earnings - restricted 2,000,000
Income tax per annual income tax return 300.000
Income tax for the first three quarters 240.000
Final tax on passive income at 20% 60,000
Capital gain tax at 5% on first PI00,000 and 10% on excess 40,000
What is the corresponding improperly accumulated earnings tax of the

said corporation?
a. P135,000 c. P108,000
b. P134,000 d. P - 0 -
Problem 1 2 - 4 3 Insurance Companies

Jardine Insurance Corporation shows the following accounts at the end
of the taxable year: ♦
Gross premium collected PI 0,000,000

Net additions to reserve funds during the year 500,000
INCOME TAXATION
694
Reserve funds, beginning 1 ,0r SJ,'SXj

Reserve funds, ending 'j 'jj /j 'S*
1. How much is the amount of reserve funds released during the year?
a. P600,000 c. P400,00Q
b. P500,000 d. P100,000
2. How much is the amount of the net income of Jardine for *.ar
purposes?
a. P6,000,000 c. P5,000,000
b. P5,500,000 d. P4,900,000
Problem 1 2 - 4 4 Franchise Fee*

Philippine Seven Corporation, a top 10,000 corporation, granted Triple
Three Corporation to operate 7-Eleven Stores for a franchise fee of
PI0,000,000, including pre-operating and training costs of P6,000,000-
1. How much is the net amount of franchise fees after deducting the
required creditable withholding tax?
a. PI 1,800,000 c. P10,000,000
b. P10,200,000 d. P 9,800,000
2. How much is,the income tax still due and payable of Philippine
Seven Corporation? (Observe tax minimization)
a. P420,000 c. P 720,000
b. P520,000 d. PI,000,000
Problem 1 2 - 4 5 Tax Credit

Intern Corporation, a domestic corporation, has the following data for
calendar year 201 A. The corporation signified its intention to claim tax
credits on income taxes paid to foreign countries.
Country Gross income Allowed deductions Income tax paid

Philippines PI,000,000 P800,000
United States 400.000 200,000 P80,000
Japan 300.000 200,000 30,000
Required: Compute the income tax still due in the Philippines.
Problem 1 2 - 4 6 Passive Income Tax

Abbott Corporation, a resident foreign corporation, has earned the
following passive income for the taxable year 200x:
Interest from savings deposits - Metrobank P3,000,000

Royalty income - Philippine Mining Company 1,000,000
Interest from a depository bank under expanded foreign currency
deposit ($30,000 at P50 per US dollar), - PCI Bank 1,500,000
Dividends from Jollibee, a domestic corporation 200,000
Dividends from Zerxes, a resident foreign corporation
(income within) 500,000
Dividends from Microsoft, a nonresident foreign corporation 800,000
■-'V* r 1/ trtcnm«* f u p *3rf Corporations 695
W*q*#fte«1 ffi/w mm h )t* tjjr firm) passive income tax for the year
l*^«»li!»n>i jjl 47 Income T u n of Educational Institution

^ tr fifihjwing infotmudon came from the records of the Cordillera
1 ''niyr i s,)fyt I tv , » private rrln' oifanvl institution, for the fiscal year
rudr <| Mrty 1 I, 2f>0x:
fie urn* M)«<v flanem/s fi^s P 362,600

'lb Minn fi^s 2343,100
IrM'orrK fo/m m^ts 60,000

f^f fie orrK, school canteen 36,200
Net income, hook stor^ 24,800
Dividends 15.000
Inters! income on time deposits 45.000
Expenses: Payroll end administrative salary 1,425,420
Other opening expense 762,330
bdr/csf on P750,000 hank loan 82,100
Drpre'efidlon, new six mom building 37,500
In ilie hffjt mouth of the fiscal year, the school secured a loan from a
hank in ihc amount o f f * 7 ( ) ( ) ( ) , T h e proceeds o f the loan were spent in
thr t’oiiîrncllofi o f n nrw six morn building.
Inquired: Compute the Income tox payable for 200x.
Problem 12 - 48 Surtax (IAET)

The retained nutiitiK s of Panday Corporation (a family-closed
coipoMirtion) of the star t of Ihc year has a credit balance of P2,500,000
which is equal to its paid in capital, Duruif/ Ihc year, the corporation
reported the following data but no dividend income was distributed:
Net Income after tax of 30% PI,050,000

Interest income, net of 20% final fax 120,000
Capital gain on shares of stock, net of Capital gains tax 230,000
Income fax /raid for the Unit 3 quarters 350,000
NOLt'O deducted horn taxable operating income 100,000
Required: Compute for the following;
1, Total income lor (JAAP reporting,
2. Total income tax paid for (he year, before IAET.
3, GAAP income after tax,
4. Total IA1CT.
Problem 1 2 - 4 9 Annual Income Tax (MCIT va. NCIT)
After 2 years of operation, a domestic corporation reported the following
income and expenses:
..... J"1 ymr 4"1 year .5f,,yejii; ....Ci'iLmu:
Sales PI ,000,000 1*2,500,000 1*4,000,000 1* 5,000,000
Cost ol sales 600,000 1,200,000 2.400.000 2.700.000
Operating expenses 300,000 1,300,000 1.400.000 1.500.000
Royalty income, net of tax 80,000 160,000 120,000 40,000
INCOME TAXATION
696
Interest income, net of tax 20,000 32,000 16,000 24,000

Dividend income (Domestic) 50,000 60,000 70,000 80,000
Rent income 200,000 300,000 100,000 50,000
Quarterly tax paid 10,000 20,000 30,000 40,000
Required; Compute for the following:

2. Final tax.
Problem 1 2 - 5 0 GAAP to Tax Code Reporting

The income statement of X Corporation prepared under GAAP rules is as
follows:
Sales P10,000,000
Less: Cost of Sales 6.000.000
Gross profit P 4,000,000
Less: Operating expenses:
Salaries PI,000,000
Depreciation 300,000
Supplies 200,000
Bad debts (percent of accounts receivable) 100,000
Interest expense 50.000 1,650.000
Operating income P 2,350,000
Add: Other revenues:
Interest income, net of tax P 32,000
Cash dividend (domestic) 68.000 100.000
Income before other expense P 2,450,000
Less: Losses on investment in securities 250.000
Net income before tax EJL200.000
Required: Determine the correct amount of the following:
1. Reportable gross income per ITR.

2. Net taxable income per ITR.
3. Final withholding tax paid.
4. Net income per GAAP after income tax.
Chapter 13
INCOME TAXES
OF PARTNERSHIPS, CO-
OWNERSHIPS, & J O I N T
VENTURES
PARTNERSHIP DEFINED
A partnership is defined as a contract whereby two or more
persons bind themselves to contribute money, property, or
industiy to a common fund to engage in profitable activities with
the intention of dividing the profits among themselves.
For purposes of taxation, partnership is classified into two major

categories: (1) General Professional Partnership (GPP), and (2)
General Co-Partnership (GCP)
General Professional Partnership
A GPP is one formed by two or several persons for the sole

purpose of exercising their common profession of which no part of
income is derived from engaging in any trade or business, /sec. 22
(B), NIRC]
Examples of professional partnerships are CPA Firms, Law Firms,

Medical Partnerships and others.
A GPP is exempt from income tax. It is, however, required to file a

tax return for its income for the purpose of furnishing information
as to the share in the gains.or profits that each partner shall
include in his individual tax return. (Sec. 26, nirc)
The Commissioner of Internal Revenue (“CIR”) has issued

Revenue Memorandum Circular (“RMC”) No. 60-2014 dated 24
July 2014 to clarify that the requirement of presenting a tax
exemption certificate or ruling in RMC No. 8-2014 does not apply
698 INCOME TAXATION
to GPPs. GPPs are not subject to income tax, and consequently, to

withholding tax.
The following guidelines may be followed for general professional

partnership:
1. The partners in a general professional partnership shall be

liable for income tax only in their separate and individual
capacities. (Sec. 26, n ir q
2. Each partner shall report his distributive share, actually or

constructively received in the net income of the partnership as
gross income (Sec. 26, n ir q . The share of a partner shall be
subject to 10% creditable withholding tax. (Sec. 2.57 - i[h], Rev. Regs.
2-98)
If the income payments to the partner for the current year

exceeds P720,000, the withholding tax is 15%. [Rev . Reg. No. 30-
2003, Sec. 2(H))
3. The partner is deemed to have elected the itemized deductions

unless he declares his distributive share undiminished by his
share of the itemized deductions.
A forty percent (40%) OSD is deductible from the distributive

share of the gross income if such gross income was not
previously reduced by the partnership’s itemized deduction, (p .
D. 1773; R.A. 9504)
4. For purposes of computing the distributive share of the

partners, the net income of the partnership shall be computed
in the same manner as that of a corporation. (Sec. 26, n ir q
Illustration
Atty. Liu is one of the partners of N&M Partnership. The

partnership is engaged in rendering professional services (the sole
source of income of the partnership) with a net income before tax
of P200,000. Atty. Liu has 60% shares on the profit or loss of the
partnership. The other income of Atty. Liu is a buy and sell
business with a gross income of P200,000 and related expenses of
P80.000.
Chapter 13 Partnerships, Co-ownerships and Joint Ventures 699
1. How much is the income tax of N&M?
2. How much is the net income tax payable of Atty. Liu if the
partnership withheld a 10% withholding income tax?
Answers:
1. N&M Partnership’s income is tax-exempt because it is engaged
in purely professional services.
2. Atty. Liu, being engaged in business, is liable for income tax
only in his separate and individual capacity and should not in
any way change the tax status of N&B partnership as a
general professional partnership.
The income tax due of Atty. Liu would be
Share from the gross income of professional partnership

(P200,000 x 60%) P120,000
Gross income from buy and sell business P200,000
Less: Allowable deductions 80.000 120.000
Income before personal exemption P240,000
Less: Personal exemption - basic 50.000
Taxable income PI 90. OOO
Tax on P140,000 P 22,500

Tax on excess (P50,000 x 25%) 12.500
Less: Tax withheld by the partnership (PI20,000 x 10%) 12.000
Income tax still due P 23.000
Notes:
1. The Tax Code (R.A. 8424) provides that the partner’s distributive share from
the net income of the general professional partnership be included as a part
of individual taxpayer’s gross income.
2. P.D. 1773 allows OSD if the reported income of the individual partner as
share from the general professional partnership is not previously reduced by
the partnership’s business expenses.
3. If the share received by an individual taxpayer from a professional
partnership is based on net income of the partnership (gross income minus
allowable itemized deductions), it shall no longer be allowed to deduct 40%
OSD; otherwise, there will be a double deduction. (Rev. Regs. No. 2-2010)
700 INCOME TAXATION
General Co - Partnership
A general co-partnership (compania-colecdva) is a partnership

wherein part or all of its income is derived from the conduct of
trade or business.
For taxation purposes, the general co-partnership is considered

as a corporation and therefore liable to corporate tax of 30% (r .a .
9337 ). A general commercial partnership is also subject to MCIT in
the same manner as a corporation.
In a commercial partnership, the partners are considered as

stockholders. The profits distributed to them by the partnership
are considered dividends and subject to a final tax of 10%. (Rev. Reg.
2-98; Sec. 2.57-1A)
Illustration
A and B are partners of AB’s Enterprises, sharing 60% and 40%
profit and loss, respectively. The partnerships net income before
tax during the year amounts to P2i000,000.
Required: Determine the following:
1. Income tax due of AB’s Enterprises, and

2. Final income taxes on the share of A and B partners.
I
Answers:
1. The income tax due of AB’s Enterprises would be
Net income P2,000,000

Multiplied by corporate normal tax rate _______,30%
2. The final income taxes on the share of A and B partners are

determined as follows:
Net income after tax (P2,000,000 - P600,000) PI.400.000
Partner A Partner B
Distribution of net income:
Partner A (PI,400,000 x 60%) P840,000
Partner B (PI,400,000 x 40%) P560,000
Multiplied by final tax rates 10% 10%
Final income taxes P 84.000 P 56.000
Chapter 13 Partnerships. Co-ownerships and Joint Ventures 701
General Professional Partnership

Engaged in Commercial Activity
To be nontaxable, a GPP should be for the sole purpose of
exercising the partners’ common profession. If the GPP is engaged
in trade or business other than the practice of the partners'
common profession it becomes taxable as a corporation. [Sec 22
MFC, Sec. 26. NIRCJ
Like a corporation, a taxable partnership is subject to regular

corporate income tax (30% based on the net taxable income) or
minimum corporate income tax (2% based on the gross income)
starting from the 4th year of its business operation. [Src. 27(E) and Av.
eS (A)(2). NIRCJ
Illustration
WE Partnership of William and Eduardo reported the following
earnings:
Professional fee PI 00,000

Professional expenses 60.000
Business income - trading 200,000
Business expenses - trading 120.000
Question: Will WE partnership be liable to income tax?
Answer: WE partnership is liable to pay income tax, because it

earned business income. It is a clear indication that the
partnership is engaged in activities other than professional
services. Hence, it is considered and treated as a corporation,
which is liable to corporate income tax of 30% or MCIT.
The income tax payable of WE Partnership would be
Revenues:
Professional fee P 100,000
Business income - trading 200,000 P 300,000
Expenses:
Professional P 60,000
Business - trading 120,000 180,000
Net taxable income P 120,000
Multiplied by corporate income tax rate 30%
Assume that the partners agreed to divide the net income equally,
the tax pertinent to the shares of William and Eduardo would be:
702 INCOME TAXATION
*
Net income before income taxes PI 20,000
Less: Income tax 36.000
Net income for distribution EJ3&Q2Q
William Eduardo
Profit distribution (P84,000/2) P42.000 P42,000
Multiplied by tax for dividends . 10% 10%
Final tax withheld by the partnership P 4J2QQ P.4.200
It must be observed that the taxable income of the co

partnership, less corporate income tax, shall be taxable to
partners, whether actually distributed or not. (Sec. 73(D), n ir q
Chapter 13 Partnerships, Co-ownership* and Joint Venture* 703
PARTNERSHIP’S ITEMIZED DEDUCTION vs. OSD

Re venue Regulations No. 2 20 10 provides the following rules
regarding deductions from the gross income of the partnership
and the partners:
l If the GPP availed of the itemized deduction in computing its

net income, the partners may still claim itemized deductions
from said share, provided, that, in claiming itemized
deductions, the partner is precluded from claiming the same
expenses already claimed by the GPP. (Sec. 2, Rev, Regs. No. 2-2010)
2. If the GPP availed of itemized deductions, the partners are not

allowed to claim the OSD from their share in the net income
because the OSD is a proxy for all the items of deductions
allowed in arriving at taxable income. (Sec. 2, Rev. Regs. No. 2-2010)
3. Since one-layer of income tax is imposed on the income of the

GPP and the individual partners where the law had placed the
statutory incidence of the tax in the hands of the latter, the
type of deduction chosen by the GPP must be the same type of
deduct ion that should be availed of by the partners. (Sec. 2, Rev.
Regs. No. 2-2010)
4. If the partner also derives other gross income from trade,

business or practice of profession apart and distinct from his
share in the net income of the GPP, the deduction that he can
claim from his other gross income would follow the same
deduction availed of from his partnership income. Provided,
however, that if the GPP opts for the OSD, the individual
partner mav still claim 40% of its gross income from trade,
business or practice of profession but not to include his share
from the net income of the GPP. (Sec. 2, Rev. Regs , No. 2-2010)
Note: Observe that Rev. Regs. No. 2-2010 provides that the basis of the 40% OSD
is the gross income of the individual partner derived from his trade, business or
practice of profession separate and distinct from his share in the net income of
the GPP.
This application of OSD for individual is not consistent with Rev. Regs. No. 16-
2008 which provides that for individual taxpayer, the basis of the 40% OSD shall
be the gross sales or gross receipts and not the gross income. If an individual
taxpayer opted to use OSD, he is no longer allowed to deduct cost of sales or cost
of service.
Illustration
ABC & Co., a general professional partnership (GPP), reveals the

following net income using optional standard deductions:
704 income: taxation
Uu'** receipts I>5,000,000

less v.Vst ot service [ ,500,000
Orcss tiuvmr l>5,500,000
less OSP <1\L300,000 \ -10%) 1.400,000
Net moorne P 2,100,000
Mr. B, a junior partner of ABC vSj. Co. with 30% shore in the profit
and loss, is also a sole' proprietor engaged in trading business
with the following information:
Sales P500,000
Less: Cost of sales 200.000
Less: Operating expenses 50.000
Net income P250.000
The amount of net taxable income of partner B would be
Gross income of Mr. B from distributed share

of the partnership (P2,100,000 x 30%) P630,000
Add: Gross income from trading business P300,000
Less: OSD (P300,000 x 40%) 120,000 180,000
Total net income * P810,000
Less: Basic personal exemption 50,000
Net taxable income of partner B P760.QQQ
PARTNER’S CONTRIBUTIONS
A partner’s contributions (cash, personal and/or real property) to
the partnership fund are not subject to income tax. (bir Ruling No. 162,
June II, 1987)
Illustration
A & B Partnership accepted C as one of the partners for a 30%

interest in the partnership. As a contribution to the partnership,
C gave the following assets:
Costs Market values
Cash P100,000 P100,000
Personal property 50,000 40,000
Real property 300,000 400,000
How much is the income tax on the transfer of C’s properties to

the partnership?
There is no income tax on the transfer of Cs properties to the

partnership, because the transaction is only a contribution of
capital to the partnership and not a sale or disposition of
property'.
SALE OF PARTNER’S CAPITAL

The sale of partner's interest (capital) in the partnership is a
capital asset transaction.
Illustration
X, a partner of XP Partnership for 5 years, sold his entire share

interest with a balance of P500,000 to Y for P800,000. Compute
tne related taxes if the partnership is a (1J general professional
partnership and a (2) commercial partnership.
i. If the partnership is a general professional partnership, the

income tax due of X would be
Sales proceeds P800,000

Less; Partner's capital sold 500.000
Capital gains P300,000
Multiplied by percent of holding period 50%
Reportable capital gains subject to normal tax PI 50,000
Less; Personal exemption 50.000
Net taxable income pjoo.ooo
Tax on P70,000 P 8,500

l ax on excess (P30,000 x 20%) 6,000
Note: The capital gain is subject to holding period because it is not subject to
Jj/jmJ to*. T1h‘ capital gain is classified as subject to normal tax because in the
professional partnership, the income of the partner is to be tax jn his
individual capacity,
2. if the* partnership is a commercial partnership, the capital

gains tax of X would be
Sales proceeds P800.000

Ixrsa: Partner's capital sold 500.000
Capital gains 'iaaojm
Final tux on;

First P 100.000 x 5% Pp5,000
5,000
706 INCOME TAXATION
Excess (P200,000 x 10%) 20.000

Capital gains tax P25.0Q0
Notes:
1. The capital gain is not subject to holding period because it is subject to
final tax.
2. Shares of stock shall include shares of stock of a corporation; warrants

and/or options to purchase shares of stock, as well as units of
participation in a partnership (except professional partnerships), joint
stock companies, joint accounts, joint ventures taxable as corporations,
associations, and recreation or amusement clubs (such as golf, polo or
similar clubs); and mutual fund certificates. [Sec. 22 (L), N1RC of 1997]
PARTNERSHIP WITH OTHER INCOME

SUBJECT TO FINAL TAX
Inasmuch as the general professional partnership is only a “pass
through” entity, the passive income that has been subjected to
final taxes shall not anymore be included in the taxable
distributive Share Of each Of the partners. (Rev. Regs. No. 2-2010, February
18, 2010) '
Since the commercial partnership is not a “pass-through” entity,

the net income for distribution that will be subject to final tax
should include all incomes subjected to normal tax and final
taxes.
Illustration
A and B formed a partnership with profit and loss sharing of 50%
and 50%, respectively.
The summary of the partnership’s income and expenses during

the year are as follows:
Net income from operation P1,100,000

Required:
1. Compute the .following if the partnership is a general
professional partnership:
a. Income tax due of the partnership, and

b. Income tax due of each partner assuming that their
respective creditable withholding tax has been withheld
and remitted to be BIR.
C h a p t e r 13 P a r t n e r s h ip a , Co-own«r*hip» and Joint Vantorea 707
2. Compute the following if the partnership is a commercial

partnership:
a. Income fox due of the partnership, and
b. Final tax of each partner.
Answers:
l. As general professional partnership;
a. The general professional partnership is exempt from income
I'M- Persons engaging in business as partners in a general
professional partnership shall be liable for income tax only in
their separate and individual capacities. Each partner shall
report as gross income his distributive share, actually or
constructively received, in the net income of the partnership.
7.6, NiRC)
b. Total partnership’s net income PI. 100.000
Partner X Partner Y
Partner X (PI, 100,000 x 50%) P550,000
Partner Y (PI ,100,000 x 50%) P550,000
Less: Personal exemptions 50.000 50,000
Net taxable income P500.000 P50.Q t QQQ
Tax on P500,000 P125,000 P125,000

Less: Creditable withholding taxes:
Partner X (P550,000 x 10%) 55,000
Partner Y (P550,000 x 10%) 55,000
Income tax still due and payable P 70.000 P 70.000
As commercial partnership:
a. Total partnership net income not subjected
to final taxes' PI,100,000
Multiplied by corporate normal tax rate 30%
b. Total partnership net income after tax

(PI, 100,000 - P330,000) P 770,000
Add: Interest income, net of final tax 30.000
Net income for distribution P 800.000
Partner X Partner Y
Parmer X (P800,000 x 50%) P400,000
Partner Y (P800,000 x 50%) P400,000
Multiplied by final tax rate
on dividend 10% 10%
Final taxes on share
of each partner P 40.000 P 40.0QQ
trn IWLOMF TA/ATIOM
PNorrr **mam of a nonresident alien partner
I h« |im *)Mir "1 <• oli^/7 engaged in trade or business.

(NKAK'I U) in hi' J'bUlppinrS i«* to be Nixed m the same manner as
mi mdividunl iiiizfti and u inm/hint a hen indr/idual on taxable
iiu onir irvr jv^fl bom *'<11 Noumea y/Ebin, Tibs includes his share
lioiti it f/rjjr f ftl prof'TVtlomil pa/f/iershlp, f>>e zSfAtft %.2}r ’rrpq
llltmt ration
Mi.‘is MHmiif* Amaro, a NRALTB (v/ith reciprocity), is a partner of

ICdvnl Pm tnciabip, Philippines, During the taxable year, her share
in the distributable net income of the partnership amounted to
P300,000.
If the partnership is a general professional partnership, the

income tax due of Miss Amaro would be
Share in the net income of partnership P300,0G0

Less: Personal exemption 5(7.000
Net taxable income P250.00Q
Tax on P250,000 P 50.000
If the partnership is a commercial partnership, the final

withholding tax of Miss Amaro would be
Share in the net income of partnership P300,000

Multiplied by final tax rate 20%
Net taxable income P 60.000
CO-OWNERSHIP
When more than one person acquired the right to own a piece of
property or mass of properties, a co-ownership exists. The
ownership acquisition by more than one person over a property or
properties may be due to succession of an estate or donation.
Co-ownership is generally tax-exempt because the activities of the

co-owners are usually intended to preserve the property and to
collect the income from the property.
The income derived by a co-owner from the property shall be

reported in his individual tax return regardless of whether such
income is actually or constructively received.
ti.mmtftotifsr.
Ki'^r t:.- ■ -f'iii'i of meir parent, A «r*d h, ooeh :rAiv:A'^^f

mh*nrvv-y; % P4.000.000 worth of o j;Ain% *hro<2%f. mrestate
%-XTX-Jt'*. \;Of>
•x.mmg r.he yenr. the hoil/Unfr has & grw irssxrje of F4O0/>00
was /li'nfif-A +sp^lly between A «r.d £j, Hw much is the
i noorr.e tax of the on mwnerihjp?
fnere i>. no income tax to be ampooee or, the co-ov/rerthip

Hcwever> the meome derived by each of the rx,-owner is subject to
income tax computed at, follow*;
Oross meorne r erxp /ec p2oo///> yx/j/f/)

OOf> (40%> f '*/),<//)) * AO,000;
Personal exemption singe f 00,000i ( OO.OOOi
bet taxable income p 70*000 hjmm
Uif <>cut fax on f V0,000 ih 44^00 ILJ&.522
Whon Co-ownorahip Is Subject to Income tax
The following circumstances would render a co-ownership subject

to a corporate income tax;
I. When fi oof>v/ncrship is formed or established voluntarily, or

upon agreement of the parties.
2 When the individual co-owner reinvested his share in the co~

ownership to produce another income-generating activity.
'i. Where the inherited property remained undivided for more

than ten years, and no attempt was ever made to divide the
same among the co-heirs, nor was the property under
administration proceedings nor held in trust, the property
stiould be considered as owned by an unregistered
partnership. (FUR Ruling August 1B, 1959)
Illustration
Based on the illustration above, assume that after 10 years, A

and B did not divide the property and they contributed money
and their respective earnings from the co-ownership for the
expansion of the business.
710 tHCOm?: TtXATm*
In r.hi* ca.ne, the ounmenn becsjrne*, * pz?'.:Jrr\:..y suhytct to

corporate income tax rate of 30% or MCT o f 2%
JOINT VENTURE
.Joint venture, in the P'rSJppiz.en, in a. b'JMrrenn activity tirjzt fg

organized or established on!/ for a temporary or sloort-penod of
time, ft is dissolved once its business objective is accomplished-
An example of a joint venture is the undertaking of a construction
project by which when the project is completed, the joint venture
is also terminated.
It is similar to a partnership in terms of the joint venture

partners’ commonality of interest, mutual right of control, and
mode by which profits or losses are shared.
Generally, joint venture is one of the options used by corporations

- domestic or foreign-based - which are not allowed to form
partnerships or become partners in a partnership to engage into a
particular business undertaking. It is because, under the
Philippine Law, only individual, natural persons are permitted to
form partnerships.
Income Tax of Joint Ventures

An unincorporated joint venture is taxed like a corporation. The
share of the joint venture partners will no longer be taxable to
them because they partake of dividends if paid to a domestic or
resident corporation. (Tax-exempt intercorporate dividends)
However, an unincorporated joint venture formed for the purpose

of undertaking a construction project or engaging in petroleum
operations pursuant to the consortium agreement with the
Philippine Government is not subject to the corporate income tax.
Only the joint venture partners will be taxed on their respective
shares in the income of the joint ventures.
Notes:
1. The allocation between the co-venturers of the project’s saleable area in
consideration of their respective contributions, as stipulated in the Joint
Venture Agreement is not a taxable event. It is not a taxable event because
the allocation is a mere return of capital that each party contributed. The
Partition Agreement is not subject to documentary stamp tax (DST).
f./p'/n f>,f subsequent disposition by the co-venturers of the areas allocated

■o tMm, the gain that may be realized from such sale will be subject to the
r‘ g- jar imorn' tax rates under Sec. 27, 27(A) or 27(E) of the Tax Code, as the
' «se may p*', and/or to the creditable withholding tax under Rev. Regs. No.
2 'd T>»* sb«li be subject to DST imposed under Section 196 of the Tax
Cod'- based on the gross selling price or fair market value of the property,
•'dikhever j<s higher. Moreover, the sale shall also be subject to VAT. (BIR
Ruling No. DA. 431 2005 doted October 20, 2005; BIR Ruling No. DA-397-2005 dated
Nopf^rnher 22, 2005)
V A joint venture for a construction project of the government is not subject to

income tax Consequently, gross payments to said joint venture are not
subject to withholding tax, The joint venture, being exempt from corporate
income fax, is not required to file quarterly and final or adjusted income tax
returns. (HID Rutiny No. DA-415 2005 dated October 4, 2005)
Hluntrution
X < o and Y Co., both domestic corporations, form o joint venture
fo construct. /, building with a contract price excluding VAT
amounting to 1*50,000,000, The joint venture incurred total
< outturnt ion costs amounting to P40,000,000 and use OSD. The
corporations agreed to share any income or losses equally.
Compute the related tuxes of the joint venture and the joint
venture partners assuming that the construction is not a
go vet /orient project.
II the const/net inn project is a private business contract, the net

im onje of the joint, venture is subject to income tax just like of a
r ot porn I ton. Thus,
Coni rad pt ire 1 >50,000,000

bens; (;onsl motion cost 40,000,000
(ooss income l> 10,000.000
I,era;: OCD (PI0,000,000 x 40%) itWKLOOO
Net incYtuir of joint venture 1* (>,000,000
Multiplier! by corporale normal lax rale . v *0%
Income lax due l!....J^&Q.Q+Q.LLQ
The reapedive aha/e of X Co. and Y Co. from the net income of
thr joint venture is exempt from income lax. (/Vo exempt inUvvorpomte
titiddenrh)
712 INCOME TAXATION

1. Define “partnership.”
2. Distinguish a “general professional partnership” from a “general co

partnership.”
3. Discuss the tax liabilities of a (a) general professional partnership

and (b) general co-partnership?
4. When would a registered general professional partnership be

subjected to a corporate income tax?
5. State the partnership rules of deducting OSD and itemized

deduction.
6. Is a partner’s contribution taxable? Why?
7. What is the tax treatment on sales of partner’s capital? When it

would be subject to normal tax and when subject to final tax?
8. Differentiate the tax treatment of partnership with other income

subject to final tax when the partnership is a (a) professional
partnership and (b) commercial partnership.
9. How should the share of a nonresident alien from a partnership

operating within the Philippines be subject to tax within?
10. What is a “co-ownership?”
11. When is co-ownership subject to income tax?
12. Discuss the tax treatment of income of joint venture.

Chapter 13 Partnerships, Co-ownerships and Joint Venture* 713
I Name: __ _ ______ _________ _______________ ____ Score:

I
l Problem 1 3 - 1 True or False
Wme True if the statement is correct or False if the statement is
incorrect.
1. The distributable share of a partner in a commercial partnership

is subject to final tax of 10%.
2. If the only source of income of the partner is his share in a

general commercial partnership, he is no longer required to file
the annual income tax return.
3. The share of partners in the general professional partnership is

taxable in the conventional manner of computing the normal
income tax of individual.
4. A partnership that derives income primarily from professional fee

and also engages in trading business as secondary source of
income is to be classified as general professional partnership.
5. Dividend income earned by general commercial partnership is no

longer taxable against the partner upon its distribution as share
of the partner.
6. All partnerships are taxed in the same manner as corporation.
7. A general professional partnership is not required to file its

annual income tax return.
8. The share of a partner in the general professional partnership is

subject to final withholding tax of 10% if the amount is below
P720,000.
9. The income of general commercial partnership is also subject to

MCIT or Normal Corporate Tax whichever is applicable.
3 0. If the amount to be distributed to a partner of a general

professional partnership is more than P720,000, it is to be
withheld with 1 5% creditable tax.
714 INCOME TAXATION
Name: ______________________________________________ Score: __________ ___

incorrect.
1. Partner’s contributions to the partnership are subject to a final tax of

10%.
2. The capital gains on sale of partner’s interest is a subject to a final

tax of 5% if the amount is PI00,000 and 10% in excess of the first
P100,000.
3. Generally, co-ownership income is not taxable.
4. The income of co-ownership that is distributed to the beneficiary is

subject to 10% withholding tax if less than P720,000 per year.
5. Co-ownership, which exists for more than 10 years, is subject to

income tax in the same manner as general commercial partnership.
6. The general professional partnerships and joint ventures are not

classified as a corporation.
7. In general, a joint venture is taxed like a corporation.
8. Partnership contemplates a general business with degree of

continuity, while the joint venture is formed for the execution of a
single transaction.
9. A corporation cannot enter into a partnership contract, but it can

engage in a joint venture.
10. The co-venturers in a tax-exempt joint venture are also exempt fr<?m
income tax.
11. The tax-exempt joint venture is not required to file an ITR.
12. The share of co-ventures in a taxable joint venture is subject to a

final tax of 10%.
ssr--
716 INCOME TAXATION
Statement 2: A genera] commercial partnership that is reporting an

operating lose on its 5,h year of operation is still liable to pay its
annual income tax for such year.
a, Only statement l is correct.
(- Both statements are correct.
Both statements are not correct.
^ statement l: The distributive share of general commercial

partnership is subject to final withholding tax of 10%.
Statement 2: The distributive share of a general professional
partnership is subject to creditable withholding tax of 10%.
fs Both statements are correct.
'I he general professional partnership is not subject to income tax,

hut is required to file a return in order to
a. provide information regarding the business activities of the
partnership.
b. provide information regarding the share of the partners in the
net income of the partnership to be included in their tax return.
c. comply with the requirements of the Securities and Exchange
Commission.
d. comply with the requirements of the taxing agency.
0. The net income received by a partner of a general co-partnership is

subject to
a. a corporate tax.
b. a final tax on dividends.
c. an individual normal tax.
d. a capital gains tax.
10. Statement 1: The creditable withholding tax on the partner’s share

from the income of a professional partnership is 15% if the partner’s
share exceeded P720,000 per year.
Statement 2: The amount received by the partner as his share in the
general commercial partnership is subject to a creditable withholdi
tax of 10%.
b. Only statement 2 is correct,
e. Both statements are correct,
ua.une :: ^'iirrnsjrsiinpsi CiVownarships find Joint V anturas 717
teemc Score:
pTofuem 2 - 4 Multiple Choice

:v . H: a,:.e~ 2mt contains the best answer.
Unc snort of partners from the P700.000 net income of a general

p*-on*ssjonn; partnership is subject to
a. ir.iii. :ax of 1 0%.
t crednanle withholding tax of 10%.
i cred liable withholding tax of 2 5%.
a. nix -exempt.
*'* genera, professional partnership engaged in the practice of

profession and trading of goods is subject to
‘ i . 0l i tax based on gross income,
r 23‘a tax based on net taxable income,
c 30% tax based on net taxable income,
c.. tax-exempt.
The gross receipts of a professional entertainer is subject to a 10%

or treatable withholding tax if his/her income during the year
c exceeds P720,000.
is P720..000 and below,
c. is PI,000.000 and above.
b None-of the above.
Which of the following co-ownership is not subject to tax as a

■ adoration ?
c Agreed co-ownership
Undivided property of co-ownership for more than 10 years with
an attempt to divide the property among the co-heirs,
c. Undivided property of co-ownership for more than 10 years
without an attempt to divide the property among the co-heirs,
c Co ownership v/ith investments of co-owners
Uoaurmem 1: A partner in a GPP is allowed to deduct OSD based on

trut gross income from his trade, business or practice of profession
which is separate and distinct from the GPP.
S'axemen' 2: If the GPP availed of the itemized deduction, the
partners are not aJIov/ed to claim the OSD from their share in the net
income.
Only statement 1 is correct.
U Only statement 2 is correct,
< . Both statements are correct,
b Both: statements are not correct.
718 INCOME TAXATION
b. Statement 1: The income of co-owned inheritance is tax exempt.

Statement 2: The share of the co-owner in the income of co-
ownership is also exempt from income tax.
7. Which of the following co-ownership is subject to income tax?

a. Income of voluntarily established co-ownership
b. Income of co-owned property acquired as inheritance
c. Income of co-owned property acquired as donation
d. Income of general professional partnership
8. Statement 1: A co-ownership that exists for more than 10 years is

exempt from income tax.
Statement 2: The share of co-owners from tax-exempt co-ownership
is taxable against the co-owners.
9. Statement 1: Income of co-ownership per agreement is taxable.

Statement 2: The share of a co-owner in the income of co-ownership
is also exempt from income tax.
10. Statement 1: The grantor is liable for the income of a revocable trust.
Statement 2: A revocable trusts exist when the grantor revokes his
power to change at any time any part of the terms of the trust.
!artrofsm'es. Co-ownerships and Joint Ventures 719
?:5^ks 1 3 - 5 GFP with Net Loss

; i. ri—ne- * gfr.eral professional partnership, showed the following
mm trading business - as sole proprietor P500,000

et of die partnership 200,000
iet taxable income of J?

c. P30O,OOO
d. P250,000
Problem 1 3 - 6 Co-Partnership with Net Loss

■'f a pa^r.er of a commercial partnership, showed the following income
* from trading business - as sole proprietor P500,000

h:n from, net loss of the partnership 200,000
Kov/ much is the net taxable income of M?

a. P700,000 c.c. P300,000
b P4 50,000 d.
d. P250,000
Problem 1 3 - 7 Co - Partnership
In 200x, Mitzi and Edgar reported a partnership net profit from trading
amounting to P400,000. Other items of income not included in the net
profit are interest income of P4,000, net of final withholding tax, and
dividend income from domestic corporation of P10,000. The income tax
on the distributive share of Mitzi who shares profit and loss equally with
Edgar in the earnings of the partnership is i
h. P 14,700, c. P14,076.
h. P) 4,300. . d. P13,600.
Problem 1 3 - 8 Co - Partnership
A and B formed a trading partnership sharing profit and loss at' 1:1.
During the taxable year, the gross profit of the partnership amounted to
P400,000 and business expenses incurred amounted to PI60,000; cost
of sale of P200,000.
1. The income tax of the partnership is

a. P135,000. c. P72,000.
b. P105,000. d. P15.000.
2, How much is the distributable share of partner A, net of final tax?

a. PI 83,000 c. P87,750
b. P102,000 d. P75,600
720 INCOME TAXATION
Problem 13-9 General Professional Partnership

J, married, with an unemployed wife and one qualified dependent child,
and R, single, are partners in J, R, & Co., a general professional
partnership. They are sharing profits and losses as follows: J - 70% and
R - 30%. For the calendar year ended 200x, the income and expenses of
the partnership and the income and expenses of the personal accounts
of the partners are as follows:
J. R. & Co. Personal J Personal R
Gross income P325,000 P85,000 P65,000
Expenses:
Allowable deductions 175,000 35.000 15.000
Charitable contributions 15,000 1,750 620
Drawings by J and R from the
partnership during the year (39,000) 24.000 15.000
1. The taxable net income of J, if he opted for itemized deduction is

a. P67,750. c. P 96,750.
b. P71,250. d. P146,250.
2. The taxable net income of R, if he opted for optional standard

deduction is
a. PI 12,500. c. P77,500.
b. P 97,500. d. P47,500.
Problem 13-10 General Professional Partnership

Black and White partnership reported for year 200x a net professional
income amounting to P400,000. Mr. Black is single and has
compensation income of P240,000. His other income, net of final
withholding taxes are interest income of P4,000 and dividend income of
P10,000.
The net taxable income per annual ITR of Black who shares profit and
loss equally with White in the earnings of the partnership is
a. P420,000. c. P390,000.
b. P404,000. d. P360,000.
Problem 13-11 GPP vs. GCP

X and Y formed a partnership with profit and loss sharing of 60% and
40%, respectively.
The summary of the partnership’s income and expenses during the year
are as follows:
Net income from operation PI,400,000

Gain on sale of capital assets, not subjected to final tax 200,000
1. If the partnership is a general professional partnership, how much is

the income tax due and payable per ITR of the partnership?
a. P-0-
b. P456,000
c. P480f000
d. P510,000
2. If the partnership is a general professional partnership, how much is

the income tax still due and payable of partners X and Y per ITR,
assuming that the creditable withholding tax has been withheld and
remitted to the BIR?
Partner X Partner Y
a. P256,200 P153,800
b. P128,200 P105,800
c. PI 12,200 P 89,800
d. P105,600 P 64,000
3. If the partnership is a commercial partnership, how much is the

income tax due and payable per ITR of the partnership?
a. P510,000
b. P480,000
c. P456,000
d. P-0-
4. If the partnership is a commercial partnership, how much is the final

taxes on the respective profit share of partner X and partner Y?
Partner X Partner Y
a. P105,600 P64,000
b. P102.000 P68,000
c. P 96,000 P67,200
d. P72.000 P48,000
Problem 13 - 12 Co-ownership
In 200x, Robert and Annie inherited a plantation from their Aunt,
Cherry. During the year, the property’s net earnings after itemized
expenses was P3,000,000 of which PI,000,000 each was received by
Robert and Annie.
1. How much is the income tax of the earnings from the plantation?
a. P320,000 c. P285,000
b. P960,000 d. P -0-
2. Assuming that Robert is single, how much is the net taxable income
in his share from the co-ownership?
a. PI,000,000 c. P 880,000
b. P 950,000 d. P - 0 -
722 INCOME TAXATION
Problem 13 13 Co-ownership
lit 1‘ht‘b Oniic Ann J juI;/i|;i ;hk I Mnrjorif’ vSifton received a plantation
I mm (Inn mini ICvrlyn Pm/if/fim The courtinfl continued to maintain the
plitnlnlion, In 201 A, I lie* net income of the plantation is P5,000,000 of
which 1*1,000,000 each wan received by Grace and Marjorie before
deducting the applicable withholding tax.
What is the amount of income tax due and payable of the co-
ownership?
a. PI,600,000 c. PI,250,000
b. PI,500,000 d. P - 0 -
2. What is the amount of the final income tax withheld from the share
of Marjorie Sison?
a. P200,000 c. P100,000
b. P150,000 d. P - 0-
3. What is the amount of the income tax due and payable of Grace Ann
Subala per ITR?
a. P200,000 c. P100,000
b. P150,000 d. P - 0 -
Problem 13 - 14 Joint Venture

A Co. and B Co. formed a joint venture for a construction project of the
government. The companies agreed that they share profit equally. The
joint venture received the total contract price of PI0,000,000. The cost of
the project amounted to P.6,000,000. Operating expenses related to the
joint venture amounted to PI,000,000. How much is the income tax due
of the joint venture?
a. PI,200,000 c. P 600,000
b. P 900,000 d. P - 0 -
Problem 1 3 - 1 5 Joint Venture

X and Y Companies formed an unregistered joint venture engaged in
setting up cable networks. Related data for their joint venture are as
follows:
Sales, including VAT P67,200,000

Costs, including VAT 44,800,000
If the joint venture would like to minimize its tax liability, how much its
income tax due?
a. P6,000,000 c. P3,600,000
b. P4,032,000 d. Tax-exempt
Problem 1 3 - 1 6 General Professional Partnership

AB and Company, a general professional partnership has the fo
data for 200x:
Chapter 13 Partnerships, CQ~owner*hip* and Joint Venture* 723
Ores* income PI,200,000

Deduction*:
Salary of A 240.000
Salary of £ 300.000
Other business expenses 300.000
Profit anc! loss distribution:

Partner A, 60%, single, providing full support to his mother,
partner B, 40%, legally separated with 2 qualified dependent children,
Required: Compute for the tax liability of;

;. '/'he partnership
2 Partner A
3 Partner B
Problem 13 - 17 Co - Partnership
M7/; a registered general co partnership, had the following data for 2Q0x:
Crocs income /rorr; merchandising P575,Q0Q
Dividends received from domestic corporation 40.000
Dc/Klend* received from nonresident foreign corporation 60.000
Ordinary and necessary business expenses 235,000
Data for the partners; ... ..........M W
ParB' tpalion 40% 00%
Btatiis Married Single
Required; Compute the income tax due of M and W,
Problem 13 - 18 Joint Venture

X f.o. and V Co., both domestic eo/potations, form a joint venture to
r/mcjfiij' i a building wilh a contract price Including 12% VAT amounting
in IB 12,000,000,
'/|,r total cost of con »b notion amounted Jo P72,800,000 Including 12%

VAT. Operating ^xpmjses ndafed Jo the joint venture amounted to
pj 3,000,000, The toipoilitlnrw ng/ced to share any income or losses
equally
Required; C ompute the /Hated taxes of the (a) joint venture and the (bj
joint vr-utuint* assuming lli/it tlie count turf Jon Is
I Not a government p/pjer I,
'A A govei onirnt jaojer (r
Problem 13 19 Joint Venture

A t o and H Co,, both domestic coiporaflone, form a Joint venture to
« oiihIiiu t a building with a ronliaH pjim including 12% VAT amounting
in PM‘V,00,0<)0
INCOME TAXATION
72*
Tr;f cds: of construction amounted to P56,000,000 including 12%

VAT. Operating expenses related to the joint venture amounted to
?: 0030000.
The ccrporancriS agreed to share any income or losses equally.
Required: Compute the related taxes of the (a) joint venture and the (b)
joint venture partners assuming that the construction is
1.. Xct a government project- '
2. A government project.
Problem 13 - 20 GCP vs. GPP

—■ Cao and A. Co are partners of ATIN Partnership, where they share any
profit or loss equally. Both partners are single with no other source of
mcorne. ATTN Partnership’s income and expenses are as follows:
Allowable deductions 100,000
Required:
; Compute for the income tax due, if the partnership is a (a) general
co-partnership, and (b) general professional partnership.
2. Compute the respective income tax liabilities of E. Cao and A. Co. if
the partnership is a (a) general co-partnership, and (b) general
professional partnership.
Problem 13-21 Comprehensive Problem

X & Y Trading Partnership provided the following information related to
business operations:
200A 200B
Net income (loss) from operation per GAAP (P385.0001 PI.478.000
Cost and operating expenses per GAAP:

Cost of sales (60% of sales) P3,000,000 P6,000,000
Salaries expense 800,000 900,000
Fire loss 1,200,000
Representation expense 300,000 400,000
Interest expense 200,000 250,000
Bad debts expense (40% written off) 50,000 150,000
Contribution expense 200,000 400,000
Quarterly income taxes paid 375,000 500,000
Other income:
Bad debts recovery — from previous year 30,000
Interest income, net of 20% final tax 40,000 48,000
Fire loss insurance recovery 700,000

1. Net taxable income of the partnership per 1TR for year 200A.
2. Net taxable income of the partnership per ITR for year 200B.
3. Income tax still due and payable of the partnership for year 200B.
Chapter 14
INCOME TAXES
OF ESTATES AND TRUSTS
ESTATES
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 (Art 775 , cum
Code). 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 earnings are subject to income tax.
Illustration
X died, leaving behind P500,000 investment in securities to his

wife and son. In his last will and testament, the investment is to
be held in trust for the wife and son.
The annual income of the trust is assigned to the wife as

beneficiary during her lifetime and the trust will be terminated
upon her death and the son, as beneficiary, will receive the
investment in securities.
If the expected annual income from the investment is P60,000,

the P500,000 is subject to transfer tax (estate tax) while the
P60,000 income (if realized) is subject to income tax.
Taxable Income and Tax Rates

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 (Sec.60, nirq. The items composing the
taxable income and tax of the income from estates/trusts are as
follows:
726 INCOME TAXATION
l Gross Income
The items of gross income of estates/trusts are the same
items as the items of gross income of individual taxpayers. fsw*.
JJA. MFC)
Deduction
Deductions from the gross income of estates/trusts are the
same as the items of deduction allowed to individual taxpayer.
f'Sccfcon ti'id Sec. 61. NlRCl
3. Special Deduction
In addition to the allowable deductions under Section 34 of
the Tax Code, estates are also allowed to deduct the amount of
income of the estates during the taxable year that is paid or
credited to the legatee, heir or beneficiary, subject to a
creditable withholding tax of fifteen percent (15%). (Sec. 2.57- i{N,
Rev. Regs. 2 - 9S; Sec. 61 .4. NIRC)
However, the amount so allowed as a deduction shall be a

part of the taxable income of the legatee, heir or beneficiary.
Any portion of the gross estate paid to the heir is not
deductible from the gross income of the estates.
In case of a trust administered in a foreign country, this

deduction shall not be allowed. Provided, that the amount of
any income included in the return of said trust shall not be
included in computing the income of the beneficiaries, /sec. oj
(C). NtRCj
4. Exemption Allowed to Estates and Trusts

The absolute exemption allowed to estates and trusts is
P20,000. (Latest BIR Form No. 1701, page 6)
For the income of estates, however, the following provision of

the law shall be considered: “If the taxpayer dies during the
taxable year, his estate may still claim the personal and
additional exemptions for himself and his dependent(s) as if
he died at the close of the year.” (Sec.3sc, nirc)
5. Taxable Income
The taxable income of estates/trusts shall be computed in the
same manner and on the same basis as in the case of
individual taxpayer. (Sec. 6i, xmc)
Chapter 14 Income Taxes of Estates and Trusts 727
6 Tax Rate
The tax rate applicable is the tax rate prescribed for individual
taxpayers. (Sec. 24a, nirq
Illustration
Mr. Mano Baliling, married, died on August 31, 201 A, leaving his
wife and his four (4) qualified dependent children.
He left his income generating exclusive real property amounting

to PI0,000,000 under an administrator. The results of operation
show the following:
Year 201A Year 20IB
Jan. to Aug. SeDt to Dec. Jan. to Dec.
Gross income PI,500,000 PI,000,000 P2,500,000
Itemized deductions 800.000 500.000 1.500.000
Net income P 700.000 P 500.000 PI.000.000
In 201A and 20IB, the administrator credited P340,000, net of

15% withholding tax, each year to Mrs. Maria Baliling. The
amounts represent the share of the beneficiary.
The net taxable income and income tax due of Mr. Baliling and
his estate would be
Year 201A Year 20IB
Jan. to Aug. Sent to Dec. Jan. to Dec.
Mr. Mano Mano’s Estate Mano’s Estate
Net income P700,000 P500,000 .PI,000,000
Amount for beneficiary
(P340,000/85%) (400.000) ( 400.000V
Net income before exemption P700,000 P100,000 P 600,000
Less: Applicable exemptions 150.000 20.000 20.000
Net taxable income P550.000 P 80.000 P 580.000
Tax on P70,000 P 8,500

Tax on P500,000 P125,000 P125,000
Tax on excess:
(PI0,000 x 20%) 2,000
(P50,000 x 32%) 16,000
(P80,000 x 32%) 25.600
Income tax due P141.00Q P10.500 PI 50.600
Notes:
1. In case of death, the taxable income includes incomes and expenses accruing
up to the date of his death. (Sec. 44, NIRC)
728 INCOME TAXATION
2. The net income of Mr. Mariano can claim allowance for personal exemptions
both basic and additional during year 201A. (See. 35 fC), NIRCJ
3. The income of the estate is only allowed to deduct an absolute exemption of
P20,000.
Assuming that Mrs. Maria Baliling, the beneficiary, has no other

income during the taxable years, her income tax would be
201A 201B
Gross income received from income of estate
(P340,000/85%) P400,000 P400,000
Less: Optional standard deduction (P400,000 x 40%) 160.000 160.000
Income before exemption P240,000 P240,000
201 A: P50,000 50,000
20IB: P50,000 + (P25,000 x 4)) 150.000
Taxable income P19Q.PQQ
Tax on P140,000/P70,Q00 P 22,500 P 8,500

Tax on excess:
201 A: (P50,000 x 25%) 12,500
201B: (P20,000x20%) 4.000
Income tax due P 35,000 P 12,500
Less: Creditable withholding tax (P400,000 x 15%) 60.000 60,000
Income tax refund IP 25.0001 IP 47.5001
Notes:
1. A beneficiary of the income of estate engaged in business has the status of
self-employed individual taxpayer.
2. Since the amount paid to the beneficiaiy has not been subjected to business
expenses, it can be reduced by 40% OSD. (BIR Form 1701; R.A. 9504)
Another Illustration
Miss Nata Yen, single, with a dependent mother, died in

November 1, 201 A. Her estate includes a business income of
PI50,000 earned during year 201 A. The business expenses for
year 201A amounted to P60,000. How much would be the net
income of the estate subject to income tax?
The net taxable income of Miss Nata Yen is computed as follows:
Gross business income PI 50,000

Less: Business expenses 60,000
Income before personal exemption > P 90,000
A year following the death of Nata Yen, her estate’s income and
expenses amounted to P400,000 and 130,000, respectively.
îtsasssa*
S
The estate has not been transferred to Nata Yen’s mother when
the income was earned. Her mother also earned business income
of P200,000 and incurred business expenses of PI 40,000 during
the same year.
How much would be the tax saving if the administrator of the

estate would distribute PI00,000 income of the estate to Nata
Yen’s mother?
The tax saving is determined as follows:

Case 1* Case 2* Case 3** Case 4**
Gross income P400,000 P200.000 P400,000 P200,0G0
Business deductions:
Itemized (130,000) (140,000) (130,000) (140,000)
Special - distributed income of estate (100,000) 100,000
OSD (PI00,000 x 40%) 1 40.000)
Net income before personal exemption P270,000 P 60,000 PI 70,000 PI 20,000
Absolute exemption 120.000) 150.000) 120.000) 150.000)
Net taxable income P250.000 P 10.000 PI 50.000 P .70,000
Income tax on P250,000: P 50,000

Income tax on PI 50,000:
1»< PI40.000 P 22,500
Excess (PI0,000 x 25%) 2,500
Income tax on PI0,000: P 500
Income tax on P70,000: P 8.500 .
Total income tax P 50.Q0Q £_ _, .500 P 25.000 P 18 son
*Case 1 - Income tax of the estate (no portion is .distributed to heir).

*Case 2 - Income tax of the heir (no portion is received from estate).
**Case 3 - Income tax of the estate (PI00,000 is distributed to heir).
**Case 4 - Income tax of the heir (PI00,000 is received from estate).
Summary
s
1. Income tax when there is no income distributed from the estate:
Income tax of the estate - Case 1 P50,000

Income tax of the heir - Case 2 _____ 500
Total income tax P50.500
2. Income tax when PI00,000 of estate’s income is distributed:
Income tax of the estate - Case 3 P25,000

Add: Income tax of the heir - Case 4 8.500
Total income tax P33.500
3. Tax savings:
Income tax when no income of estate is distributed (1) P50,400

Less: Income tax when PI00,000 of estate’s income
is distributed (2) 33.500
Tax savings PI 6.900
730 INCOME TAXATION
The tax saving is brought about by splitting the taxable income

between taxpayers thus lowering the taxable income to lower tax
rate and availing two personal exemptions.
TRUSTS
A trust is an obligation imposed or a right to administer over a
property given to a person for the 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 J wants his wife to have the income from his estate as
long as she lives. J may place his property in a trust, the income
of which would go to his wife for life; the trust would be dissolved
upon her death and the property distributed to the children. The
trust is 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 be paid.
Income accumulated in trust and/or to be distributed to

beneficiary is 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, it 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
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;
731
7 ' * '**' ’• v* < v4' v r*t' r. -êr.dy by the fiduciary to

’ **'■*•'■■* *f ** -' b ;'>*/ft' * '/&■.*.<**£ by a guardian of an
",£r'' •* ‘b vft vr sVibif^d as the court may direct;
7 ‘ t f M * ' > # 4 ; ' *>.•/ b-v .'*V/,\ of the fiduciary, /nay be either
>*?■*'* c *'/ <>..«. v ,v '/; accumulated, f&c.GOA,mc)
</ ''i h *b4 y r , * f y . k , ' / / / 4>,e may pay the tax on
do ^ '-- a'i' '"/;o 4/y#f*
tupord*MP*f> '/f Inwritf T«/
7 h* ' '//"p'O^d wp of 4p* ,|f-» Ui/ftUtr- in'.or tie of trust shall be In the
t-Mfti* ttibhn* / »b/M vt th*. net ffi/tibto Inw/ttie of an estate, The
pH )u**tup b* hj/'Td by usb/# fbe y/wlmtecl tubular
(noniml) it**- p f , hh )ud/yiddn| fn/paye/ based o// '>cc, 24 A of the
I up * O'b
fJJiitiintliftii On# 7ru*f
/via *by ' u n n d u a 'hunt nnnifynin^ A My, Ver Du//o as

l i n t u < tn Uhl A, l hr l/usl's itnomn, expenses a r i d income
d ) t I / i l a i l i n n p m «fc fo/lov/s;
|0 n t n l im ntn> 0120,000
P« I n f t d oiiowtihf^ m<prMses 10,000
) hh / k «: djtoOibnird !o M/SS I 1 t w i n h u t f i f t n ,
t in It i n * t V Ja/.y 40,000
I Im Hilled Iiii uiiir lp« is I o/opufed a« follows

• >i untt liii iiini 0120,000
I i tjtj I' i I m I i i I m, j m m SMS 010,000
A mimiimi ilinh ihulnf In h r t n r l h Huy 40,000 MbQOP
Im •Mill' hi Imm t : H * U 111 i t I n i i 0 70,000
I l ije» AI<S m I m I m d/M Mipliail mioo

Ni l OtH n | lid 11|« i in |d O^CLOOO
III*mild Inn MM P 10,1 IOO 0 2,500

l! ♦*» i citj |p ji > ( m in * | fVb,j
I Ml ill I Ml i M lid III *, »|| Id lL^&,5Wi
Mtn IMMIMM* dUMilMildil liu Mini 1 tillif*1 lip iutllndrd In the InxnMr ItH'ouu* ol the
It* i|<li Hi
732 INCOME TAXATION
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. (Sec.60C2, n ir c )
The consolidated taxable income is allowed only of one basic

personal exemption.
The proportionate amount of the tax computed based on the

consolidated income shall be assessed and collected from each
trustee. The said amount of tax should be proportionate to the
taxable income of the trust administered by the trustee to the
consolidated income of the several trusts.
Illustration
Mr. Mar Don created two irrevocable trusts: a trust (Trust A) on

his property located in Baguio for his only son, assigning Atty. Pis
as trustee, and another trust (Trust B) on his property located in
La Union, also for his son, but this time naming Atty. Lasap as
the trustee.
For year 201 A, the two trustees reported the following income and
expenses:
Gross Distributed to Quarterly
Income Expenses Beneficiary > Taxes Paid
Trust A P140,000 P30,000 P10,000 P10,000
Trust B 260.000 60.000 30,000 20.000
Total P40Q.0QQ P9Q.000 P4Q.0QQ P30.000
To compute for income tax still due of the two trusts would be
Trust A Trust B Total
Taxable income before exemption P 100.000 P 270,000
Less: Absolute exemption 20.000
Consolidated taxable income R25CUQQQ
Income tax due E_J5£LQQQ
Allocation of P50,000:
Trust A (P50.000 x 10/27) P18,5I9
Trust B (P50.000 x 17/27) P31,481 P50,000
Less: Income taxes already paid 20.000 30.000
10.000
Income tax still due PI 1,481 P20,Q00
P.8,519
Note: The fraction for allocation is based on the taxable income before
absolute exemption.
Another Illustration
Naia Eng. married and without a qualified dependent, earns an

annual income of P500.000 from his business before deducting
t h e operating expense averaging to P230,000 per year. Out of his
earnings, he is giving PI 00,000 as yearly allowance to his son.
li 50° of his business will be put in an irrevocable trust in favor

of his son who is married, how much would be his annual tax
savings?
The determination of annual tax savings would be
3. Income tax before creating a trust:

Less: Business expenses 230,000
Net taxable income P220.000
Tax on PI40,000 P22,500

Tax on excess (P80,000 x 25%) 20,000
Total income tax due P42.50Q
Note: Allowance provided to the son is not allowed as deduction.
2. Income tax after creating a trust

Income tax of
Grantor Trust Son
Gross income P250,000 P250,000
Business deductions:
Distributed portion (100,000) PI 00,000
OSD (PI00,000 x 40%) ( 40,000)
Itemized (P230,000/2) ( 115.000) ( 115.000)
Net income before exemption P135.000 P 35,000 P 60,000
Less: Exemption 50.000 20.000 50.000
Set taxable income P 85.000 E^±5J2QQ P_ 10,000
734 INCOME TAXATION
Grantor Trust Son

Income tax:
On PS5,000:
First P70,000 P 8,500
Excess (PI5,000 x 20%) 3,000 .
On P15,000:
First P10,000 P 500
Excess (P5,000 x 10%) 500
On P10,000 P 500
Total income tax P l.QQQ P 500
E^Lsas
The tax savings would be:

Total income tax without the trust P42,500
Less: Total income tax with the creation of trust:
Grantor PI 1,500
Trust 1,000
Son 500 13.000
Tax savings P29.,.5QQ
Trust as a Device to Lower Income Tax

Creating a trust could lower the income tax by splitting the
income between two taxpayers, and consequently lowering the
taxable income to lower tax bracket.
Illustration
X, married, receives an annual income from his two properties as

follows:
Total Property 1 Property 2
Rent income P 600,000 P350,000 P250,000
OSD (P600,000 x 40%) (240.000)
Personal exemption ( 50.000)
Taxable income P 310.000
Income tax due:

Tax on P250,000 P 50,000
Tax on excess (P60,000 x 30%) 18.000
P_ 68,000
If Property No. 2 would be held in trust for any of his

beneficiaries, the income tax effect would be:
Property 1 Trust
Rent income P350,000 P250,000
OSD (40%) (140,000) (100,000)
Income before personal exemption P210,000 PI 50,000
Exemptions f 50.0001 ( 20,000 )

Taxable income El60.000 E130.QQQ
Income tax of property 1:

Tax on P140,000 P22,500
Tax on excess (P20,000 x 25%) 5,000
Income tax of trust:
Tax on P70,000 P 8,500
Tax on excess (P60,000 x 20%) 12.000
Income tax P27.5QQ P20.500
If Property No. 2 is placed into trust, the total annual income tax
would only be P48,000, (P27,500 + P20,500). Accordingly, there
would be an annual savings of P20,000, computed as follows:
Total income tax if property 2 is placed in trust P 48,000

Total income tax without trust f 68,000)
Annual tax savings fP20,Q00)
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. (Sec. 63, n jr c )
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 outrightly the terms of the
trust. For the year, the trust earned a total income of P200,000.
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.
736 INCOME TAXATION

1. Distinguish “income of estates” from “income of trusts.”
2. State the rules of determining the taxable income of estates.
3. Discuss the rules of determining the taxable income of irrevocable

trusts from revocable trusts.
4. How much is the exemption allowed as deductible from the income of

estates or trusts?
5. What are the items composing the taxable income and tax rate of
income from estates and trusts?
6. What composes the taxable income of two or more trusts created by

the same person?
7. Is the establishment of trust a device to lower income tax? How?

C-'i^rU * ©f Estate* 3rd 737
*42"*"
Score:
r raise is tne statement is
2 m '.te cao^ of twc or' more trusts created by the same person for the
oame ben-eSciary, 1
tne taxable income of all trusts shall be
consolidated and ttne tax shall be commuted based on the
consolidated income.
A beneficiary of
employed individual taxpayer.
^ The computation of the net taxable income of the estate is the same
manner a* individual taxpayer, except that the personal exemption
is limited to P2Q,Q00.
5. The income of irrevocable trust is taxable in the same manner as the

income of the estate.
6. A trust ;s a right of property, real or personal, held by one party for

the benefit of another.
7. The creation of trusts may be either expressed or implied.
8. A trustee is the person who establishes a trust.
9. Each beneficiary must include in his return his distributive share of

the net income of the trust.
10. The tabular rates of tax prescribed under Section 24 (A) for
individuals shall be used in computing the income tax of trusts or
estates.
11. The amount of trust's income for distribution to beneficiary, allowed

as a deduction from trust's taxable income shall be included in
computing the taxable income of the beneficiaries whether
distributed to them or not.
12. Estate and trusts are treated as separate taxable entities.

738 INCOME TAXATION
Name: _______________________________________________ Score:

Write True if the statement is correct or False is the statement is
incorrect.
1. There is no need to file a tax return if the income of estates or

irrevocable trusts is P20,000 and below.
2. Trust device is usually used to transfer property from one generation

to another.
3. In general, the income of a trust for the taxable year which is to be

distributed to the beneficiaries is returnable and will be taxed to the
respective beneficiaries.
\
4. The income of the trust which is accumulated for future distribution

is taxed against the beneficiaries.
5. Income accumulated in trust for the benefit of unborn person is not

reportable income.
6. No taxable income is realized from the passage of property to the

executor or administrator on the death of the decedent.
7. An allowance paid to a widow or heir out of the corpus of the estate

is not deductible from gross income.
8. The special deduction from trust is allowed to reduce, the income of

trust if such trust is administered in foreign country.
9. In general, the income derived from employees’ pension trust is

subject to tax applicable to individual taxpayer.
10. The income of several irrevocable trusts shall be included in the

consolidated income of the trustor to avail of one personal
exemption.
C h a p t e r 14 Income Taxes of Estates and Trusts 739
Name;_______________________________________________ Score; __________ ____

1. The properties left by the decedent transferrable to the successors

are called
a. Trusts.
b. Estates.
c. Wills.
d. Investments.
2. The portion of income from irrevocable trust that would be

distributed during the year is taxable against the
a. grantor.
b. trustee.
c. beneficiary.
d. trust.
3. The beneficiary of the income of estate has the status of

a. Self-employed taxpayer.
b. Single taxpayer.
c. Receivership.
d. Taxpayer with dependents.
4. The absolute exemption applicable to the income of estate or trusts

amounts to
a. P75,0Q0.
b. P50,000.
c. P30,000.
d. P20,000.
5. The share of the beneficiary of the income of estates during the

taxable year is subject to a
a. Final withholding tax of 15%.
b. Creditable withholding tax of 15%.
c. Final withholding tax of 10%.
d. Creditable withholding tax of 10%,
6. The taxable income of the estates or trusts is to be computed in the

same manner as
b. Taxable partnership.
c. Corporation.
d. Joint venture.
740 INCOME TAXATION
7, St.ttt'mcnl 1: The income of* the undistributed estate is subject to

income tax.
Statement 7: The income of the estate is computed in the same
manner as a general commercial partnership.
a. Only statement l is correct.
tv Only statement 2 is correct.
o. Both statements are correct.
d. Both statements are not correct .
S. Statement l: The income of the estate distributed to the beneficiary

during the year is subject to final tax of 15%
Statement 2: The withholding tax on the income distributed to
beneficiary is creditable against the total tax liability of the
beneficiary.

a. An irrevocable trust is subject to income tax.
b. The taxable trust is taxed in the same manner as individual
taxpayer.
c. The taxable trust is allowed to claim P20,000 exemption.
d. The taxable trust is taxed at 30% of net taxable income.
10. Statement 1: Both revocable and irrevocable trusts are taxable for
their income earned.
Statement 2: The income of revocable trust is taxable against the
grantor.
11. Statement 1: The grantor is liable for the income of a revocable trust.
Statement 2: A revocable trusts exist when the grantor revokes his
power to change at any time any part of the terms of the trust.
Problem 1 4 - 4 Taxable Income of Estate

Mrs. Anna Ayugat died in year 200A and was survived by her husband
who is a businessman and two minor children. After her death, her
exclusive estate’s gross income for year 200A amounted P200,000. The
itemized allowable deductions amounted to P20,000. To determine the
estate’s minimum income tax due, the net taxable income for year 200A
is
a. PI80,000. c. PI 00,000.
b. PI30,000. d. P 70,000.
Problem 1 4 - 5
Mr. Mathai died in November 1, 200A. After his death, his estate has a
gross business receipts of P400,000 during the year 200A. He is survived
by his mother, who has annual rent income of P200,000.
1. How much would be the net income of the estate subject to income
tax in 200A?
a. P240,000 c. P200,000
b. P220,000 . d. P190,000
2. If in the year following the death of Mr. Mathai, his estate’s gross
business receipts amounted to P500,000, and his estate has not
been transferred to his mother. How much would be the tax saving if
the administrator of the estate would distribute PI 50,000 income of
the estate to Mathai’s mother?
a. P3,500 c. P4,500 .
b. P4,000 d. P5,000
Problem 1 4 - 6
Naty Goc died in December 31, 200x, leaving her exclusive estate to his
minor child. She earned a gross business income of P320,000 during
year 200x. The business expenses for year 200x amounted to P200,000.
Her husband has an average annual gross business receipts of
P400,000.
In 200y, a year following the death of Naty Goc, her estate’s income and
expense amounted to P500,000 and P300,000, respectively. The
administrator of Miss Goc’s estate opted to minimize her estate’s income
tax. He distributed PI50,000 to Goc’s child in 200y.
1. How much is the income tax due of Naty Goc in 200x?

a. P23.OO0 c. P 8,500
b. P17.900 d. P 4,750
How much is the tax savings in 200y?

a. P26,000 c. PI 5,500
b. P21,000 d. P 4,000
742 INCOME TAXATION
Problem 1 4 - 7
Mr ?um Anao died on March 1. 200x with Pi,000,000 income. He left
an exclusive gross estate amounting 10 P2G,000,000 under an
administrator comprising a business with the following 2G0x incomes
and expenses after his death:
200x _______ 2QQy

Gross income P 5,000,000 P 6,000,000
Operating expenses allowed (2.800,0001 fi.mflQQ)
Net income P 2.800.OOP
The administrator gave the following amounts to Mr, Pum Anao’s

beneficiaries:
200x 200v
Mrs. Wai Anao. wife P425,000 P510,000
Mr. Tag Anao, son (a minor) 255.000 255.000
Total amount paid, net of CWT P680.0QQ P765.000
The beneficiaries used OSD in the computation of their respective

taxable income.
1. The income tax due of Mr. Anao’s estate for years 200x and 200y
would be
200v 200x
a. P389,400 P549,000
b. P389,000 P557,000
c. P406,600 P566,600
d. P973,000 P600,200
2. The income tax due (refund) of Mrs. Anao for year 200y is higher
(lower) by what amount compared to 200x?
a. (P 3,000) c. (P18,000)
b. P 3,000 d. P 18,000
3. The income tax due (refund) of Mr. Tag Anao for year 200y would
amount to
a. P-0 c. (P24,500).
b. (P20,500). d. P45,000.
Problem 1 4 - 8
During the year, the amount of income of irrevocable trust that was
distributed to heir amounted to P85,000, net of creditable withholding
tax. The trust income after itemized deductions was P400,000.
The net taxable income of trust is

a. P400,000. c. P280,000.
b. P350,000. d. P250,000.
Chapter 14 income Taxes of Estates and Trusts 743
Problem 1 4 - 9
Don Pepot established two separate irrevocable trusts for the benefit of
his two children. The trusts are administered also by two respective
trustees. During the year, the data related to the income and expenses of
the trusts are as follows:
Separate irrevocable trusts Trust A Trust B

Separate beneficiaries Topep Potet
The same trustees Attv. Abobo Attv. Abobo
Net income after distribution to beneficiary P4,000,000 P4,800,000
Amount given to beneficiary 20% 20%
Income taxes paid 1,229,000 1,485,000
The related creditable withholding taxes were made on the amount given
to the beneficiaries. The trustees use OSD if needed to avail of tax
minimization.
1. How much is income tax still due and payable of Potet if he has rent
income of P285.000, rtet of withholding tax?
a. P 15,000 c. P 51,600
b. P 42,000 d. P246,600
2. How much is the total income tax due of the two separate irrevocable
trusts?
a. P2,675,600 c. P2,733,200
b. P2,714,000 d. P2,784,000
Problem 14 - 10 Trusts
The following data are available for the income and expenses of the
grantor, the trusts and the beneficiary for the year 200x:
Earner Income Expenses
Grantor PI,000,000 P400,000
Trust A 500.000 200,000
Trust B 200.000 100,000
Beneficiary 100,000 40,000
1. Under the assumption that the income earned from Trust A is
revocable and B is irrevocable, the net income of the grantor before
personal exemption is
a. P 600,000. c. PI,000,000.
b. P 900,000. d. PI, 100,000.
2. Based on the given data above, the net taxable income of all the
trusts after exemption is
a. P380,000. c. P100,000.
b. P200.000. d. P 80,000.
INCOME TAXATION
: A>5 -—* ~>»- uva: PÔ.ODO o! the income of trust B was

m-smmuted to me beneficiary. the net taxable income of beneficiary
ancr personal exemption is
a PIST.COQ. c. P60.000.
h ? 90r000- d. P40?000.
Problem 1 4 - 1 1
- -r Tan a Fuipino-Chinese created a revocable trust in favor of his
mamec youngest daughter amounting to PI0,000,000. During the year,
the trust earned a net income of P2,000,000 before 10% of its amount
given to his daughter beneficiary. (Observe the principle of tax
ntmimiza tion,
* - How much would be the net taxable income of the trust?

2L P - o - c. PI,150,000
b. P 950,000 d. PI,750,000
2. How much would be the income tax due of Mr. Tan?

a. P269,000 c. P541,000
b. P525,000 d. P589,000
3. How much would be the income tax still due and payable (refund) of
Mr. Tan's daughter?
a. P - 0 - c. (P 8,500)
b. P 8,500 d. (P21,500)
Problem 14 - 12 Income of Estate

Mr. Gerald Baguingan, died on Januaiy 4, 200x, leaving a conjugal
estate of P20,000,000 to his wife, Mitzi. The heirs are still in judicial
testamentary proceedings for the settlement of estate.
In 200x, the estate realized a gross income from business amounting to

P5,000,000 and the related business expenses is 40% of gross income.
The administrator distributed the following amount to the children
beneficiaries of Mr. Baguingan.
a) Mrs. Diana. Nievera, married with 4 qualified
dependent children, with a compensation income of
P250,000. P200,000
b) Alona, single, 18 years old 200,000
c) Mrs. Grace Micu, married and unemployed 200.000
Total income distributed to the beneficiaries P600.000
The related withholding taxes were made on the amount received by the
children beneficiaries.

1. Income tax due of Mr. Baguingan's estate for 200x.
2. Income tax still due and payable of Mrs. Diana Nievera for 200x.
3. Total withholding taxes on the amount received by the children

beneficiaries.
Problem 14 - 13 Tax Savings

Naty Poc died in November 1, 200x. Kalag, her husband, survived her.
Upon her death, her exclusive estate includes a business income of
P500,000 earned during year 200x. The business expenses for year 200x
amounted to P200,000. Naty’s estate was managed by an administrator.
A year following the death of Naty Poc, the estate’s income and expenses
amounted to P800,000 and 260,000, respectively.
The estate has not been transferred to Kalag when the income was
earned. Kalag also earned business income of P300,000 and incurred
business expenses of PI80,000 during the same year.
Required: How much would be the tax saving if the administrator of the
estate would distribute PI 50,000 income of the estate to Kalag?
Problem 1 4 - 1 4 Taxable Income of Trust and Beneficiary

In January 2, 200x, Mr. James Boting established a trust for the benefit
of his daughter Juniper Bbting, aged 12 years old. The properties
established as trust are as follows:
House and lot with an annual income of P80,000

Hollow block business with a monthly income of 10,000
Farm with an annual income of “ 50,000
It is determined that the business expense is 30% of the income derived

from trust. During the year, the income distributed to the beneficiary
amounted to P50,000.
Required: If the trust is irrevocable trust, compute for the following:

1. Income tax payable by the trust in 200x.
2. Income tax due from the beneficiaiy in 200x.
Problem 1 4 - 1 5 Irrevocable Two Trusts

Mark Llaguno, a trustor, created two irrevocable trusts for his son. The
reported earnings of each trust for year 200x are as follows:
a. Trust 1: Net income before exemption, after P10,000 distribution to

beneficiaiy during the year, P40,000.
b. Trust 2: PI,000,000 income before exemption, and distribution to

beneficiaiy amounting to P20,000.
Required: If the related withholding taxes were made during the year,
how much is the income tax still due of the two trusts?
746 INCOME TAXATION
Problem 1 4 - 1 6 Tax Planning

.M* *; >.ngic, with a dependent father, died in November 1, 200A.
His estate has a gross business receipts of P300,000 during the year
20OA.
Required:
] How much would be the net income of the estate subject to income
tax in year 200A?
2. If a year following the death of Mr. Nabiag, his estate's gross
business receipts amounted to P500,000, and his estate has not
been transferred to his father. Assume further that his father has a
gross business receipts of his own amounting to P200,000, How
much would be the tax saving if the administrator of the estate
would distribute PI 50,000 income of the estate to Nabiag’s father?
Problem 14 - 17 Tax Planning

Dokling earns an annual gross income of P400,000 from his business
before deducting the operating expense averaging to PI00,000 per year.
Out of his earnings, he is giving PI00,000 as yearly allowance to his son.
Required:
1. Using a better way to minimize income tax, what device could
Dokling use to lower his income tax.
2. If 50% of his business will be put in an irrevocable trust in favor of
his son who is married, how much would be his annual tax savings?
Problem 14 - 18 Tax Planning

Mr. A, married, receives an annual income from his two properties as
follows:
Total Pronertv 1 Property 2
Rent income P 800.000 P500.000 P300.000
Depreciation expense P 240.000 PI 50.000 P 90.000
Required:
1. Applying the tax minimization principle, how much is the income tax
due of Mr. A.
2. If Property No. 1 would be held in irrevocable trust for any of his
beneficiaries, how much is the amount of tax savings?
Chapter 15
WITHHOLDING TAXES
WITHHOLDING TAXES
Withholding of taxes is a systematic way of collecting taxes at

source, an indispensable method of collecting taxes to ensure
adequate revenue for the government.
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 his income tax return or a penalty
imposed on the 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 (payor) or employers the appropriate
income taxes due as they are earned before earnings are paid to
the payees or employees.
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 major categories:
1) Final Withholding Tax, and

2) Creditable Withholding Tax.
748 INCOME TAXATION
Final Withholding Tax
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.
(Sec. 79B, NIRC.)
The finality of the withholding tax is limited only to the payee or

the 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. (Sec. 2.57 (A) Rev. Reg. No. 2-98)
The final taxes withheld are reported in the following BIR Forms:
A. 1601-F for reporting the monthly remittance of final income

taxes withheld on the following income (Rev. Reg. 6 -200 ly.
RATE ON RATE ON
INDIVIDUAL CORPORATE
1 NATURE OF INCOME PAYEE PAYEE
i • Interest on foreign loans payable to
| Nonresident foreign corporation 1 20%
I • Interest and other income

payments on foreign currency
transactions payable to OBU’s and
FCDU’s 10%
• Cash or property dividend payment

by domestic corporation to citizen
and resident aliens 10%
; • Cash or property dividend payment

! by domestic corporation to
1 nonresident foreign corporation
without reciprocity rule 30%

with reciprocity rule 15% __
Ch-pteMs Withholding ixes
Tax
749
•’ ■>' o,' ^ jdi

‘/'•'Mti'-i-A,, ,, J -«i p-'jymcnl
,h'- d"ir,!i bus»"'^

i
20%
' ir< ... ,0f m<iividuaJ

' '* 'dmr/iercial
10%
i , t J * 'he
20%
**.# iter's
“ ‘Wines, domestic araj resident
/ JK,‘ except royalty
' books ar)d
ifiernntr,Kr;»phir: films 20% i 20%
(>n jtriyj'.k cxcecdmp, P 10,000 and

winning paid to individualn 20%
• Hrnnch remittance by all

corporn except
dons PEZA, SBMA
: 15%
and < A JA reyjotvred
i
• ( j f o e - . rental's, leone and charter
leer, paid to nonrc'iidcnt lessor of
4.5%
ioicip/l vchocIh
• Grout* t c n t j i l f i , 1 tin an a n d cha rf er

bfb paid to nonresident letmor of
foreign aircraft, machinery and 7.5%
r/fiiipnirni
f—~~..
• On pny/rK’ntfi to oil exploration 8% 8%
service emit ration,/sub
con doctors
• Payments to citizen or alien
employed hy Foreign Petroleum
Service f’ond actors/sub-
rond nctoi ri, Offshore Hanking
Units and Regional o r Area
S fraricjiuir ter k and Regional
Ope/nting I leadrji Jar ters of
Multinational Corn pa n left
o» r upynrg executive, managerial 15%
nod techrueal positions
i
750 INCOME TAXATION
• Payments to nonresident aliens not

doing business in the Philippines, j
except on sale of shares of stock j
j
and real property 25%
i • Payments to nonresident
individual/foreign corporate
cinematographic film
owners/lessors or distributors 25% 25%
• Other pa}ments to nonresident

foreign corporations 30%
• Royalties paid to nonresident .!

aliens doing business in the
Philippines on cinematographic
films and similar works 25%
j • Final tax on interest or other

payments upon tax-free covenant
bonds, mortgages, deeds of trust
or other obligations under Sec.
57C of NIRC. 30%
j • Royalties paid to citizens, resident

j and nonresident aliesn doing
business in the Philippines on
books, other literary works and
musical composition 10%
| • Tax informer’s cash reward 10% 10% j
B. BIR Form 1602 on interest paid on deposits and yield on

deposits substitutes, such as:
* RATE ON RATE ON
INDIVIDUAL CORPORATE
NATURE OF INTEREST INCOME PAYEE PAYEE
| • On peso savings deposits 20% 20%
1 • On peso time deposits , 20% 20%
• On deposit substitutes 20% 20%
| • On government securities 20% 20%
• On pre-terminated long-term
deposit:
Less than 3 years 20% 20%
3 years to less than 4 years 12% 20%
4 years to less than 5 years 5% 20%
• On foreign currency deposits 7.5% 7.5% J

rriAptof in wiiiih<>iuin<j !«*«*» /Sr 1
T BIR FORM 1603. O u a M r i l y K V m H i m n c - J 6 * i i i n j of Huai

iuiYunr it4\r.-> Withheld oil Fringe Bejuiifs Paid to JCmployccs
Other ihail Rank and File,
IU u 11 ration
let us assume* that Mr. Ricardo Puma, a resident KiJipino Citizen,

deposited PI00,000 in PNB on duly 31, 200x. Me also deposited a
dollar account under an expanded foreign currency deposit
system amounting to $50,000 on September 1, 200x, The
effective interest rate of the bank is 18%. is Mr. Pama required to
tile an income tax return on account of his interest income
derived from deposits?
According to the law, Mr. Pama is not required anymore to file

income tax return on account of his interest income. The
pertinent income tax therein has been deducted by PNB, which
assumes obligation to report and remit the same to the BIR, The
withholding tax to be reported and remitted by the bank in
relation to Mr. Pama’s deposits would be computed as follows:
Interest on bank deposit - Philippine Peso
(PI 00,000 x 18% x 5/12) P 7,500
Multiplied by tax rate 20%
Tax withheld by the bank P 1.500
Interest on expanded foreign currency deposit

($50,000 x 18% x 4/12) $3,000
Multiplied by tax rate _ 7,5%
Tax withheld by the bank & 225
Note: In case of failure to withhold or in case of under withholding, the deficiency

tax shall be collected from the payor/withholding agent. In other words, if the
bank did not deduct the final withholding tax, it shall be obliged to pay the final
tax on the said interest income.
The amount withheld by the payor is to be reported in BIR Form

1602 and to be filed and paid on or before the 10th of each month
following the payment of income.
Creditable Withholding Tax

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
752 INCOME TAXATION
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 on income payments covering the expanded

withholding tax from compensation income is creditable in
nature. (Sec.sm , )
n ir c
The creditable taxes withheld are reported in the following forms:
A. 1601 C Monthly Remittance Return of Income Taxes Withheld

on Compensation.
Illustration
Let us assume that Mr. Danilo Principe, single, earned P20,000

salaiy per month in 2009. His employer deducted withholding tax
for the year amounting to P34,500 which has been remitted to the
BIR. Is Mr. Principe required to file income tax return on or before
April 15, 2010? Will he still pay additional income tax?
Mr. Danilo Principe is still required to file his income tax return
as prescribed in the Section 51 of the NIRC. His income tax will
still be computed and he shall pay any difference of the computed
amount and the income tax withheld by his employer.
Mr. Principe’s income tax still due and payable would be:
Total compensation income for 2009 (P20,000 x 12) P 240,000

Less: Personal exemption-single 50.000
Tax on PI40,000 P 22,500

Tax on excess (PI90,000 - PI40,000) x 25% 12.500
Total income tax due P 35,000
Less: Income tax withheld from compensation- creditable 34.500
Income tax still due and payable P 500
If the employer of Mr. Principe withheld a tax of P36,000, the

latter would be entitled for a tax refund of PI,000, computed as
follows:
Total income tax due (see above computation) P35,000

Less: Income tax withheld from compensation 36.000
Income tax refund P 1.00Q
Chapter 15 Withholding Taxes 753
If thr employer of Mr. Principe did not withhold a tax, the former
is required by the law to pay the same to the BIR.
B. 1601 E, Monthly Remittance Return of Creditable Expanded

Income Taxes Withheld. The following income payments are
subject to expanded withholding tax system (Sec. 3, Rev. Reg. 6-2001):
Rev. Rett. No. 30 - 2003

Rate on | Rate on
Individual 1 Corporate '
Nature of Income Taxpayer Payee
CPAs, etc.
Professional entertainers,
professional athletes and movie,
stage, radio, television and musical
directors:
- annual income does not exceed 10%

P720.000
■ annual income exceeds P720,000 15%
Management and technical

consultants 10%
Bookkeeping agents and agencies 10%
Insurance agents and adjusters 10%
Fees of directors who are not

employees of the company 15%
Real property rentals 5% 5%
Cinematographic film rentals 5% 5%
Prime-contractors/sub-contractors 2% 2%
L
Income distribution to beneficiaries
of estates and trusts 15%
Brokers and agents 10% 10%
Income payments to partners of

general professional partnership
- P720,000 and below 1 10%
- exceeds P720,000 15%
Payments by credit card companies 0.5% 0.5%
Payments by government unit to

754 INCOME TAXATION
1% i%'
• s cypher ~ of cervices 2% 2% ;
• Jooorr,e payments by top 5,000
corporations to their local suppliers 1% | i 1% 1
• Additional payments to government
personnel from importers, shipping
and airline companies for overtime
tem ccs 15%
C. 1606 Withholding tax Remittance Return for onerous

transfer of real property other than capital assets.
tax
TRANSACTION rate
• Transaction of realtor duly registered and certified by
the Housing and Land Use Regulatory Board as
engaged in socialized housing projects. The selling price
of the house and Jot or only the lot does not exceed
R 1^0,000 in Metro Manila and other highly urbanized
areas or P3 50,000 in other areas or on the adjusted
amount of 'idling price for socialized housing as may be 0%
determined later by the BLURB.
• Not registered with the BLURB as engaged in socialized
housing project, the seller is habitually engaged in real
estate business, the 'idling price is not over P500,000. 1.5%
* Not registered v/itb the BLURB as engaged in socialized
bousing project, the seller is habitually engaged in real
estate bu?;ines?>, the selling price is over P500,000, not
over R2,000,000, 3%
• Not registered with the BLURB as engaged in socialized
housing project, the seller is habitually engaged in real
estate business, the selling price is over P2,000,000 5%
• Where the seller in not habitually engaged in the real

estate butiiness 6%
WITHHOLDING TAX ON COMPENSATION INCOME

A?j a general rule, all salaries earned by persons as government or
non-government employees are subject to withholding tax, except
the following items: 1
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 casual 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.
THE REVISED MONTHLY WITHHOLDING TAX TABLE

(Effective January 1, 2009)
1 2 3 4 5 6 7 8
0.00 0.00 1 41.67 208.33 708.33 1,875.00 4,1667.67 10,416.67
i M-mptiOD +0% i +5% !+10% +15% + 20% + 25% + 30% + 32%
f‘00©P) over over i over over over over over over
A. Table for employee* without qualified i dependent
J. /. 0.0 1 0 833 2,500 5,833 11,667 20,833 41,667

1 . V ML 50,0 'I 4,167 5,000 6.667 10,000 15,833 25,000 45,833
1
H. Table for kinglc/married employees with qualified dependent child/children
; i
I. M £J/S1 75.0 1 6,250 7,083 8,750 12,083 17,917 27,083 47,917
2. ML2/S2 100.0 I 8,333 9,617 10,833 14,167 20,000 > 29,167 50,000
3. MK3«3 125.0 ! I 10,417 11*250 12,917 16,250 22,083 31,250 52,083
4. ML4/S4 150,0 I 12,500 13,333 15,000 18^33 24,167 33333 54,167
Legend: Z-Zero exemption; S-SIngle; ME-Marrled Employee; 1; 2; 3; 4 - Number of qualified dependents

S/ME P50,000 each working employee;
Qualified dependent child = P25.000 each but not exceeding four (4) children
Illustration
Mr. Ren Marcaida, married having 4 qualified dependent children,

receives a monthly salary amounting to P20,000. The amount to
be withheld by his employer would be:
Total taxable compensation P20,000

Less; Compensation level - ME4 18,333
Excess P 1,667
Income tax on P18,333 p 708-33
Add: Income tax on excess (PI,667 x 20%) -----33^'~"

Monthly withholding tax
756 INCOME TAXATION
LIABILITY FOR TAX
Section 2.80 of the Revenue Regulations No. 10-2008 provides the

following persons liable for the payment of withholding tax on
compensation income:
1. Employer
a. In general, the employer shall be responsible for the

withholding and remittance of the correct amount of tax
required by deducting and withholding from the
compensation income of his employees. If the employer
fails to withhold and remit the correct amount of tax such
tax shall be collected from the employer together with the
penalties and additions to the tax otherwise applicable.
b. The employer who is required to collect, account for and

remit any tax imposed by the NIRC, as amended, who
willfully fails to collect such tax, or account for and remit
such tax or willfully assist in any manner to evade any
payment thereof, shall in addition to other penalties
provided for in the Code, as amended, be liable, upon
conviction, to a penalty equal to the amount of the tax not
collected nor accounted for or remitted.
c. Any employer/withholding agent who fails, or refuses to

refund excess withholding tax not later than January 25
of the succeeding year shall, in addition to any penalties
provided in Title X of the Code, as amended, be liable to a
penalty equal to the total amount of refund which was not
refunded to the employee resulting from any excess of the
amount withheld over the tax actually due on their return.
2. Employee
Where an employee fails or refuses to file the Application or

Certificate of Update of Exemption and or Employer’s and
Employee’s Information (BIR Form No. 2305) together with the
attachments or willfully supplies false or inaccurate
information thereunder after due written notice by the
employer, the tax otherwise to be withheld by the employer
shall be collected from him including penalties or additions to
the tax from the due date of remittance until the date of
payment.
On the other hand, where the employee, after due written

notice from the employer, willfully fails or refuses to file the
said Application or Certificate, whichever is applicable, or
willfully supplies false and inaccurate information, the excess
taxes withheld by the employer shall not be refunded to the
employee but shall be forfeited in favor of the government.
PERSONS REQUIRED TO DEDUCT AND WITHHOLD

The following persons who are hereby constituted as withholding
agents for purposes of the creditable taxes that are required to be
withheld on income payments:
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; and
3. All government offices including government-owned or

controlled corporations, as well as provincial, city and
municipal governments.
Note: BIR Form 2316 (Certificate of Compensation Payment and Tax Withheld)
shall be filed and paid under BIR Form 1601C, Monthly Remittance Return On
Income Taxes Withheld on Compensation.
This wall already serve the purpose of BIR Form 1700 (Income Tax Return of
Employee) if this is the only source of income of the taxpayer.
Registration of Withholding Agent

Every person who makes payment or expects to make payment of
compensation in an amount exceeding the statutory minimum
wage to any single employee shall register by filing in duplicate,
with the RDO of the City or Municipality where his legal residence
or place of business is located, an Application for Registration as
a withholding agent using the form prescribed by the BIR not
later than 10 days after becoming an employer. (Sec. 4, Rev. Reg. No. i-
2006; Rev. Regs. No. 10-2008)
758 INCOME TAXATION
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 becomes payable, whichever comes first. The term
“payable” refers to the date the obligation becomes due,
demandable or legally enforceable. (Sec. 2 .47 .4 , n ir c j
Exemption from Withholding

The creditable withholding tax shall not apply to income
payments made to the following:
1. Compensation income of individuals that do not exceed the

statutory minimum wage and amount of de minimis received
within the prescribed ceiling provided by law (Sec. 1 , Rev. Reg. No. 1 -
2006; Rev. Regs. No. 10-2008)
2. Compensation income of employees of the government of the

Philippines, or any of its political subdivisions, agencies or
instrumentalities, with salary grades 1 to 3. (Sec. i, Rev. Reg. No. 1 -
2006)
The aforementioned individuals whose compensation income

is not subject to withholding tax shall remain liable for
income taxes and shall continue to file their annual income
tax returns and nav the income taxes due thereon, if any, not ,
later than April 15 of the year immediately following the
taxable year.
3. The National Government and its instrumentalities, including

provincial, city or municipal governments;
4. 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 reed 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 one hundred eighty
thousand pesos PI80,000) in Metro Manila and other
highly urbanized areas and one hundred fifty thousand
pesos (PI50,000);
toapter * 5 Taxes 759
b. Corporations registered with the Board of Investments and

eir'cr.tr.g exemption from income tax provided by Republic
Act No. 7916 and the Omnibus Investment Code of 19S7.
c. Corporations which are exempt mom income tax under

Section IC of NIRC. to wit; the GSIS. SSS. PH1C. and
PCSO: However, the income payments arising from any
activity which is conducted for profit or income derived
from real or personal property shall be subject to a
withholding tax as ore scribed in these regulations,
2.57 5. XPQ
Where and When 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
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 directly with the RDO, 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... tsec. si, xjrq
For both large and non-large taxpayers, the 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 the months of December of each year, which shall be
filed on or before January 15 of the following year. (Retinue Regulations
So. 6 - 2001, as amended effective September 2001.)
Meaning of Large Taxpayer

A taxpayer who satisfies any of the following criteria is a large
taxpayer:
1. Business Tax - VAT or OPT paid or payable of at least one

hundred thousand pesos (PI00,000) for any quarter, of the
preceding taxable year;
2. Excise Tax - excise tax paid or payable of at least one million

pesos (PI,000,000) for the preceding taxable year;
760 INCOME TAXATION
3. Corporate Income Tax -annual income tax paid or payable of

at least one million pesos (PI,000,000) for the preceding
taxable year; and
4. Withholding Tax - withholding tax payment or remittance of at

least one million pesos (PI,000,000) for the preceding taxable
year.
5. Documentary Stamp Tax (DST) - aggregate annual

documentary stamp taxes of at least PI,000,000.
Withholding Tax Statement

Every payer required to deduct and withhold taxes under these
regulations shall furnish each payee, whether individual or
corporate, with a withholding tax statement, using the prescribed
form showing the income payments made and the amount of
taxes withheld there from, for every month of the quarter (except
Form 2316 for Compensation) within twenty (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,
however, the payor must furnish such statement to 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. (Sec.83A, nirq
Annual Information Return for Income Tax Withheld
The payor is required to file on or before January 31 of the

following year. The Annual Information Return of Income Tax
Withheld at Source (Form No. 1604 E) should show among others
the following information:
1. Name, address and taxpayer’s identification number (TIN);

and
2. Nature of income payments, gfoss 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 (Sec. 83B, nirq.

1. What is a “withholding tax?”
2. What are the two classifications of withholding tax at source?
3. Distinguish “Final Withholding Tax” from “Creditable Withholding

Tax.”
4. Enumerate the persons required to deduct and withhold creditable

withholding taxes on income payments.
5. When to register as withholding income tax agent?
6. Enumerate the income payments not subject to creditable

withholding tax.
7. Where and when to file creditable and final withholding taxes?
8. Give the criteria in order that a taxpayer will be qualified as large

taxpayer.
9. When to file the Annual Information Return of Income Tax Withheld

at Source?
762 INCOME TAXATION
Name: ____________________ ______________ _________ Score; __________ ___

incorrect.
1. A penalty shall be imposed on withholding tax agent for failure to

withhold the tax.
2. Taxes are withheld at source to facilitate tax collection.
3. Under the final withholding tax system, the income tax withheld is
the full and final income tax due from the payee.
4. Under the withholding tax system, the income tax payee is not
required to file an income tax return for the particular income on
which the final tax has been withheld.
5. Taxes withheld on income payments covering the expanded

withholding taxes and final withholding taxes are creditable in
nature.
6. The taxes withheld from compensation of employees of offshore

banking units should file income tax returns to the BIR.
7. All income earned by persons are subject to withholding tax.
8. Remuneration for casual labor not in the course of employer’s trade

or business is not subject to withholding tax. :
9. No withholding tax shall be required where the total compensation

income of an individual in a year does not exceed sixty thousand
pesos.
10. 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.
11. In general, any juridical person, whether or not engaged in business

or trade is required to withhold tax on income payments.
12. Government offices are not constituted as withholding tax agents.
13. The obligation of the payor to withhold tax arises at the time an
income is paid or payable.
14. The withholding of creditable withholding taxes shall not apply to

income payments made to national government and its
instrumentalities.
15. Business establishments whose withholding taxes amount to one

million pesos are considered large taxpayers.
C cszfit' ' 5 Wi&hoidiing T axes 763
Problem 15 - 2 Attotat to Receive, Ket of Withholding Tax

s sr. ^mmarnec pemcm ar,d s, partner in a central professional
corner* r..p for a 5C‘r. nterest The partnership earned P5O0.COQ
:r.ccrr.e ar.r iis.tr. ou tec to partners. How much should partner X receive.
re* r: «tmscrt tax'
a ?^5C XC c. P225.CXX)
F2SC.XC d. ?212.500
Problem 1 5 - 3 Amount to be Paid, ?fet of Withholding Tax

A r.trrecrcer.t foreign corporation is a holder o: 10,000 shares of X. a
ccrreottt corpora tier. X declared a ?1G per share cash dividend to
:tcc2no.oer« o: recorn. Hors* much should be paid to the nonresident
ror-egr. corporation, net o: "withholding tax?
i c P80,000
PSC.OOO d. P70,000
Problem 15 - 4 Amount to be Paid, Net of Withholding Tax

A f'hiuppm.e National chartered a foreign vessel of nonresident lessor for
PohO 'j OC How much should be paid to nonresident lessor, net of
v/;thhold:ng tax?
a. P* 50,000 c. P477,500
b P462,500 d. P500,000
Problem 1 5 - 5 Ifet Payment, Net of Withholding Tax

A tax informer earned PI,000,000 reward. How much should be paid to
the tax informer, net of withholding tax?
a. P950,0Q0 c. P850,000
b. P900,000 d. P800,000
Problem 1 5 - 6 Comprehensive Problem /

Thefollowing income are earned during the taxable year 200x:
1. Interest on bank deposits:
a. Peso deposits P 50,000
b. Dollar account (FCDS) $ 10,000
2. Prize PI00,000
3. Royalties on books P300,000
4. Capital gains - sale of real property
(acquisition cost, P800,000) P200,000
5. Property dividends P120,000
6. Compensation from offshore banking units P400,000
Required: Compute the final taxes if the income payee is a:

a, Resident Citizen or Resident Alien.
b. Nonresident Alien engaged in business.
e. Nonresident Alien not engaged in business,
d. Domestic Corporation (except Nos. 2 and 6).
v. Resident Foreign Corporation (except Nos. 2, 4 and 6).
1. Nonresident Foreign Corporation (except Nos. 2, 4 and 6).

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PREFACE

to the 7th Edition

This book is designed as a textbook in the course Income

The NIRC (R.A. 8424 as amended by R.A. 9337, R.A. 9504,

Materials included in this book are classroom tested, logically

At the end of each chapter, the authors prepared new various

To our colleagues in the academe who would like to adopt this

The teacher’s manual will be given only to the professor and

Chapter 1: General Principles and Concepts of Taxation 1

Certain Doctrines in Taxation 29

Chapter 2: Tax Administration 73

Power to Suspend Business Operations 81

Authority to Delegate Power 81

Chapter 3: Concept of Income 151

Chapter 4r Gro^s Inocvisve 205

’Dividend Income 238

Redemption of Stock Dividend 2-3

Chapter 5: Exclusion from Gross Income 251

Tax-Exempt Cooperative Income 305

Chapter 6: Fringe Benefit Tax 333

Chapter 7: Dealing* in Property 373

Disposition of Principal Residence 2SH

Chapter 8: Deductions from Gross Income 447

Meaning “I <bdiuni v and Neeessatv -|{»0

Research and Development 490

Chapter 9: Losses 533

Kinds of Losses 533 •

Chapter 10: Basic Income Tax Patterns 565

Gross Income Tax System 565

Chapter 11: Income Tax of Individuals 583

Withholding Taxes on Salaries 610

Chapter 12: Income Tax of Corporations 641

Taxable Year of Corporation (>(>8

Chapter 13: Income Taxes of Partnerships*

Chapter 14: Income Taxes of Estates and Trusts 725

Chapter 15: Withholding Taxes 747

hhholding Tax at Source 747

fjM y/;thhol'Uny/lf*x 748

Annnn A ?‘iUtnmni y of ^in it4nf lOyJonni Dally Minimum

hnn*t/t 11 Huml/t't ol Wotklny Dayt* in a Y«mi

Arifunr Clu-vltteh fV'|i*‘hul<« of DomiaomUti IVnally

INHERENT POWERS OF THE STATE

When a Sovereign State is bom, it exists with indispensable

The three inherent powers of the Sovereign State are summarized

Nature of Police Power

Police poujer refers to the inherent power of the sovereign state to

community. I: is exercised usually to guard against excesses or

This power is restricted by the ‘due process clause" of the

The police power of the State may be exercised through taxation

Examples of police power are preservation of natural resources,

Nature of Eminent Domain

ErrJnen: Domain refers to the power of the sovereign state to take

Consequently, the State may expropriate private property when it

Tne Constitution limits the exercise of the power by providing that

‘Just compensation’ means paving the owner the full monetary

1. A poiver by which an Independent State, through its law­

1 A rr-acsss or xr cf hupcsmg a charge by governmental

b> £ process.. h passes a legislative undertaking through the

3. -b msmts by which the Sovereign State through its law-making

Ji*zrLUZE.:n+ 5t?izr± Jzrrj* Z^S‘~

As = means, it is a way of collecting and apportioning the cost

Similarities among Taxation, Eminent Domain and Police

1 They are inherent in sovereignty (they can be exercised even

hnnt/t 11 Huml/t't ol Wotklny Dayt in a Y«mi

1. A poiver by which an Independent State, through its law

JizrLUZE.:n+ 5t?izr± Jzrrj Z^S‘~