TABLE OF CONTENTS

I. Basic Concepts in Income Taxation II. Persons Subject to Income Tax INDIVIDUALS III. Personal Exemptions IV. Taxation of Individuals V. Taxation of Fringe Benefits CORPORATIONS VI. Taxation of Corporations VII. Exempt Corporations VIII. Improperly Accumulated Earnings Tax PARTNERSHIPS IX. Taxation of Partnership INCOME X. Source of Income XI. Gross Income XII. Exclusions from Gross Income DEDUCTIONS XIII. Business Expense XIV. Interest and Taxes XV. Losses and Bad Debts XVI. Depreciation and Depletion XVII. Pension Trust and Charitable and Other Contributions XVIII. Research and Development and Premium Payments on Health and Hospitalization Insurance XIX. Treatment of Foreign Income Tax XX. Non-deductible Expenses XXI. Losses from Wash Sales CAPITAL GAINS AND LOSSES XXII. Ordinary Gains and Losses XXIII. Capital Gains and Losses XXIV. Installment Method 29 30

2 2 3 5 11 12 17 19 21 23 25 28

31 34 35 37 38 40 41 41 42 44

BASIC CONCEPTS IN INCOME TAXATION What is income tax? An income tax is levied on the income from property or an occupation. It is impo sed upon persons within the jurisdiction of the State to raise revenue for the s upport of the Government. Purpose The imposition of income tax is intended to: 1. raise revenue to defray the expenses of the government; 2. mitigate the evils arising from the inequalities of wealth by a progressive s cheme of taxation which places the burden on those best able to pay.

What is income? Income means all wealth which flows to the taxpayer other than a mere return of capital. It includes gain derived from the sale or other disposition of capital assets. Income v. Capital Capital is a fund, income is a flow. Capital is wealth, while income is the serv ice (fruit) of the wealth. Capital is a tree, income is the fruit. Amounts recei ved as a return of capital are not income. Increase of Property Value A mere increase in the value of property is not income, but merely unrealized in crease in capital. The increase in the value of property is also known as apprai sal surplus or revaluation increment. Classification 1. Income from 2. Income from 3. Income from of Income according to Source sources within the Philippines sources without the Philippines sources partly within and partly without the Philippines

PERSONS SUBJECT TO INCOME TAX Who is a taxpayer? Under Sec 22(N), a taxpayer is any person subject to tax imposed by this Title. A person is defined in Sec 22(A) as an individual, a trust, estate or corporatio n. Classification of Taxpayers Employee trustadministration Irrevocable Revocablesjudicial Ordinary trust (cuentas Trustsaccounts (RA) Not underPartnerships Under stock Estates Foreign administration Business Corporation General Alienfor NOT Partnerships Foreign Engaged Association Alien Engaged Joint ventureCitizen Partnerships Domestic Contract petroleum, Corporationstrust construction projects Overseas Citizen Corporation in or Non-residentcompaniesCorporation (NRFC) ResidentProfessional (DC)(OCW)Tradegeothermal or energy operations Individualstrust (RC)(NRC) coal,(GPP) or Sub-classificationWorkeren participacion) Business ((NRANETB) Primary Classification(BP) in(RFC)TradeBusiness ((NRAETB) judicial PERSONAL EXEMPTIONS Legal Basis Sec 35

Concept Personal exemptions are arbitrary amounts allowed by law to be deducted from inc ome to cover personal, living, or family expenses of the taxpayer. These deducti ons are allowed on the theory that the minimum requirements of subsistence of a taxpayer should be free from tax. Kinds 1. Basic Personal Exemptions (BPE) varies according to the status of taxpayer 2. Additional Exemptions (AE) depends on the number of qualified dependent child ren Amount of Basic Personal Exemptions Married P20,000 individual Single Taxpayer who are Basic Personal Exemption (BPE) Kind ofindividuals (includes widow/er) * judicially decreed as legally separated & P32,000 Each married individual P25,000 Head of P20,000 Family * with no qualified dependents * but note Sec 35(A) - In the case of married individuals where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption. Who is a Head of the Family? [Sec 35(A), NIRC] 1. An unmarried or legally separated man or woman with dependents who may be * one or both parents

* one or more brothers or sisters, or * one or more legitimate, illegitimate or legally adopted children 2. Such dependent must be living with and dependent upon him for chief support 3. Such brothers or sisters or children are * not more than 21 years old * unmarried and * not gainfully employed OR * regardless of age, are incapable of self-support because of mental or physical defect. Additional Exemptions (AE) for Dependents Who may claim? 1. Married individual 2. Head of family 3. Legally separated spouses In the case of married individuals, AE is claimed by only one spouse usually the husband, except in the following instances, where the wife claims the AE: 1. express waiver by the husband as embodied in the withholding exemption certif icate 2. husband has no income 3. husband works abroad In the case of legally separated spouses, AE can be claimed by the spouse with c ustody of the child. [Sec 35(B), NIRC] Amount of AE P8,000 per dependent child Limit of AE Should not exceed 4 dependent children Who is a dependent? [Sec 35(B), NIRC] 1. A legitimate, illegitimate or legally adopted child 2. chiefly dependent upon and living with the taxpayer 3. not more than 21 years old 4. unmarried and 5. not gainfully employed or 6. regardless of age, if incapable of self-support because of mental or physical defect Note: Only children may be considered dependent pendent for purposes of BPE. for purposes of AE. Compare with de

Certain Terms chief support principal or main support given regularly such that withdrawal wil l result in destitute life for dependent living with taxpayer living under one roof with taxpayer; includes situations wh ere taxpayer is away from home on business, or dependent is away at school Who are allowed BPE and AE? 1. Resident Citizen (RC) 2. Non-resident Citizen (NRC) inc. OFW 3. Resident Alien (RA) 4. Non-resident Alien engaged in trade or business (NRAETB) by virtue of recipro city Who are not allowed BPE and AE? 1. Non-resident Alien engaged in trade or business (NRAETB) if no reciprocity

2. Non-resident Alien not engaged in trade or business (NRANETB) Amount of BPE and AE allowed to NRAETB An amount equal to the exemptions allowed by NRA s country to Filipino citizens th ere but not to exceed the amount fixed by NIRC [Sec 35(D), NIRC] Change of Status [Sec 35(C), NIRC] 1. If taxpayer marries during taxable year, taxpayer may claim corresponding BPE in full for such year. 2. If taxpayer should have additional dependent(s) during taxable year, taxpayer may claim corresponding AE in full for such year. 3. If taxpayer dies during taxable year, his estate may still claim BPE and AE f or himself and his dependent(s) as if he died at the close of such year. 4. If during the taxable year a. spouse dies or b. any of the dependents dies or marries, turns 21 or becomes gainfully employed taxpayer may still claim same exemptions as if the spouse or any of the dependen ts died, or married, turned 21 or became gainfully employed at the close of such year. TAXATION OF INDIVIDUALS Individuals Subject to Tax 1. Resident Citizen (RC) 2. Non-resident Citizen (NRC) 3. Resident Alien (RA) 4. Non-resident Alien Engaged in Trade or Business (NRAETB) 5. Non-resident Alien Not Engaged in Trade or Business (NRANETB) Resident Citizen (RC) - a citizen of the Philippines who resides within the Phil ippines [Sec 23(A)] Non-resident Citizen (NRC) (1) A citizen of the Philippines who establishes the fact of his physical presen ce abroad with a definite intention to reside therein. (2) A citizen of the Philippines who leaves the Philippines during the taxable y ear to reside abroad, either as an immigrant or for employment on a permanent ba sis. (3) A citizen of the Philippines who works and derives income from abroad and wh ose employment thereat requires him to be physically present abroad most of the time during the taxable year. (more than 182 days in a taxable year) (4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permane ntly in the Philippines shall likewise be treated as a nonresident citizen for t he taxable year in which he arrives in the Philippines with respect to his incom e derived from sources abroad [Sec 22(E)] (5) Overseas Contract Worker (OCW) a) Filipino citizen who is working and deriving income from abroad b) seaman who is Filipino citizen and who receives compensation for services ren dered abroad as member of the complement of a vessel engaged exclusively in inte rnational trade Resident Alien (RA) an individual whose residence is within the Philippines and who is not a citizen thereof [Sec 22(F)] Non-resident Alien Engaged in Trade or Business (NRAETB) An individual whose residence is not within the Philippines and who is not a cit izen thereof. [Sec 22(F)]

A nonresident alien individual who shall come to the Philippines and stay therei n for an aggregate period of more than 180 days during any calendar year shall b e deemed a 'nonresident alien doing business in the Philippines.' [Sec 25(A)(1)] The term trade or business shall not include performance of services by the taxpay er as an employee. [Sec 22(CC)] Non-resident Alien Not Engaged in Trade or Business (NRANETB) A nonresident alien individual who shall come to the Philippines and stay therei n for an aggregate period of less than 180 days during any calendar year Tax Rates on Ordinary Income (Schedular Rates) * 32%* 125,000 30% 50,000 500,000 25% 22,500 250,000 20% 8,500 140,000 15% 2,500 70,000 10% 500 30,000 5% 10,000 of34% Plus over Tax less over ButExcessthan Incomebefore 1 January 1999, 33% after 1 January 1999, 32% starting 1 January 20 00 QUICK GLANCE 25% Rate Philippines Non-resident Citizen Schedular without Not Engaged Gross and TaxpayerEngaged Within of Rates Resident Alien (RA)the Phils Tax Base Citizen BPE and SourceIncome less Income in in Trade or Business (NRANETB) IndividualTaxable(RC)(NRC)AE Trade or Business (NRAETB) the Phils Alien Taxation of Passive Income of Individuals 1. Interest Income a. interest income from any currency bank deposit and yield or any other monetar y benefit from deposit substitutes and from trust funds and similar arrangements - 20% final tax b. interest income received by individuals from a depository bank under the expa nded foreign currency deposit system (EFCDS) - 7.5% final tax for residents, exe mpt if non-residents c. Interest income from long-term deposit or investment certificates (LTDIC) e.g ., savings, common or individual trust funds, deposit substitutes, investment ma nagement accounts and other investments, which have maturity of 5 years or more exempt Should LTDIC holder pre-terminate LTDIC before the 5th year, a final tax shall b e imposed on the entire income based on the remaining maturity: 4 years to less than 5 years - 5% 3 years to less than 4 years - 12% less than 3 years 20% 2. Dividends a. cash and/or property dividends actually or constructively received by an indi vidual from i. a domestic corporation ii. a joint stock company iii. insurance or mutual fund companies iv. regional operating headquarters of multinational companies b. share of an individual in the distributable net income after tax of a partner ship (except a general professional partnership) of which he is a partner c. share of an individual member or co-venturer in the net income after tax of i. an association ii. a joint account iii. a joint venture or consortium taxable as a corporation Rate ) 3. Capital Gains a. Sale of Shares of Stock not Traded in the Stock Exchange A final tax rate is imposed on Net Capital Gains (NCG) from the sale, barter, ex change or other disposition of shares of stock in a domestic corporation in acco rdance with following schedule: 10% for residents (RC, RA) and non-resident citizens (NRC), 20% for non-resident aliens engaged in trade or business (NRAETB

Not over P100,000 ........ 5% On any amount in excess of P100,000 10% NCG = Selling Price Cost of Acquisition

If shares of domestic corporation are traded through the local stock exchange, t he applicable tax rate is of 1% of the gross selling price (GSP) of the shares. [Sec 127(A)] Therefore, the transaction is taxable whether the sale was at a pro fit or at a loss. b. Sale of Real Property (Capital Gains Tax CGT) A final tax of 6% based on the gross selling price (GSP) or fair market value (F MV) whichever is higher, is imposed on the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, inclu ding pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts Capital Assets [Sec 39] - property held by the taxpayer (whether or not connecte d with his trade or business) but does not include: * stock in trade of the taxpayer or * other property which would properly be included in the inventory of the taxpay er or * property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business or * property used in the trade or business which is subject to the allowance for d epreciation or * real property used in trade or business of the taxpayer e.g., residential house, vacant lot Special Case. - No capital gains tax (CGT) if the following requirements are met: a. sale or disposition of their principal residence by natural persons b. proceeds of sale is fully utilized in acquiring or constructing a new princip al residence within 18 calendar months from the date of sale or disposition c. historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired d. Commissioner shall have been duly notified by the taxpayer within 30 days fro m the date of sale or disposition through a prescribed return of his intention t o avail of the tax exemption e. tax exemption can only be availed of once every 10 years If there is no full utilization of the proceeds of sale or disposition, the port ion of the gain presumed to have been realized from the sale or disposition shal l be subject to capital gains tax (CGT). Formula: ortion GSP GSP or FMV at the time of sale, whichever is higher, shall be multiplied by a fr action which the unutilized amount bears to the gross selling price in order to determine the taxable portion Table Summarizing Rates and Bases of Passive Income Taxation INTEREST 25% 5-32% Taxable within without from NRANETB Income NRAETB gross any currency RA NRC C of[24A] income [25A] bank deposit & yield or any other monetary benefit fr w Rithin om deposit substitutes and from trust funds and similar arrangements (PESO depos Cash/property exempt[25A] exempt[24B] PCSO Other within < withoutin NRANETB[27D3] NRAETB [24B] RA NRC C PRIZESWINNINGS 10% [25A] ROYALTIES general(lottery) 5-32% [24B] 7.5% WINNINGS exempt[24A] DIVIDENDS received INTEREST on DOLLAR PESO loans from musical 25% [24B]in books, deposits NA [25B]P10,000from Long Term deposit or investment certified by stock 20% [25A]fromgeneralliterary of individuals corp or from its)[24B]income(except PCSO) works anddomestic compositions joint BSP company, w Rithin (lottery) NA SHARE of 25% [25B] * received NIAT of association, joint account, or JV or 20% [25A]individual fund cos and NIAT 5-32% [24A]or mutualin from foreign corp partnership (except GPP) consortium t 10% [24B]partner in DISTRIBUTABLE ROHQ of MNCs insurance Unutilized amount x (higher of ) GSP or FMV = Taxable p

6% 5-32% 5/10% higher of GSP CAPITALas 25% [25B] 20% [25A] corporation NA [24B]NCG [25B] 10%of [24A] [25A] or of REAL PROPERTY axableofGAINS[24C] SaleFMV SHARES of Stock not Traded from [25B] [25A] [24D] Legend: NA NIAT GPP JV ROHQ MNCs NCG GSP FMV Not Applicable net income after tax general professional partnerships joint venture Regional operating headquarters Multinational corporations net capital gains gross selling price fair market value

Special Rates Alien Individual Employed by a. Regional or Area Headquarters (RAHQ) and Regional Operating Headquarters (RO HQ) of Multinational Companies (MNCs) b. Offshore Banking Units c. Petroleum Service Contractor and Subcontractor Tax Rate and Base - 15% of gross income * The same tax treatment shall apply to Filipinos employed and occupying the sam e position as those of aliens employed by these multinational companies [Sec 25( C), (D), (E)] Married Individuals The husband and wife shall compute separately their individual income tax based on their respective total taxable income: Provided, that if any income cannot be definitely attributed to or 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. [Sec 24(A)] Married individuals, whether citizens, resident or nonresident aliens, who do no t derive income purely from compensation, shall file a return for the taxable ye ar to include the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the Bureau for purposes of verifi cation for the taxable year. [Sec 51(D)] TAXATION OF FRINGE BENEFITS Legal Basis Sec 33, NIRC, Rev. Reg. No. 3-98

Fringe Benefit - any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee except rank and file employ ees (The fringe benefit covered by Sec 33 refers to those enjoyed by managerial and supervisory employees.) Managerial employee is one who is vested with the powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees. Supervisory employees are those who, in the interest of the employer, effectivel y recommend such managerial actions if the exercise of such authority is not mer ely routinary or clerical in nature but requires the use of independent judgment . All employees not falling within any of the above definitions are considered ran

k-and-file employees. Examples of fringe benefits 1. Housing 2. Expense account 3. Vehicle of any kind 4. Household personnel, such as maid, driver and others 5. Interest on loan at less than market rate to the extent of the difference bet ween the market rate and actual rate granted 6. Membership fees, dues and other expenses borne by the employer for the employ ee in social and athletic clubs or other similar organizations 7. Expenses for foreign travel 8. Holiday and vacation expenses 9. Educational assistance to the employee or his dependents Tax Rate and Tax Base 32% on the grossed-up monetary value (GMV)

GMV represents the whole amount of income realized by the employee. GMV is dete rmined by dividing the actual monetary value of the fringe benefit by 68% [100% - tax rate of 32%]. For example, the actual monetary value of the fringe benefi t is P1,000. The GMV is equal to P1,470.59 [P1,000 / 0.68]. Payor of Fringe Benefit Tax (FBT) the employer

Fringe Benefits which are not taxable 1. Fringe benefits which are authorized and exempted from tax under special laws 2. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans 3. Benefits given to the rank and file employees, whether granted under a collec tive bargaining agreement or not 4. If the grant of fringe benefits is for the convenience of the employer. (conv enience of the employer rule) 5. De minimis benefits those which are of relatively small value are offered by the employer as a means of promoting health, goodwill, and efficiency of employe es. Examples are uniforms, rice subsidy, employee achievement awards, etc. Special cases For fringe benefits received by non-resident alien not engaged in trade of busin ess (NRANETB), the tax rate is 25% of the grossed-up monetary value (GMV). The G MV is determined by dividing the actual monetary value of the fringe benefit by 75% [100% - 25%]. For fringe benefits received by alien individuals and Filipino citizens employed by regional or area headquarters, regional operating headquarters, offshore ban king units (OBUs), or foreign service contractor, the tax rate is 15% of the gro ssed-up monetary value (GMV). The GMV is determined by dividing the actual monet ary value of the fringe benefit by 85% [100% - 15%]. INCOME TAX ON CORPORATIONS Definition of a Corporation [Sec 22(B)] The term corporation includes: 1. partnerships, no matter how created or organized 2. joint-stock companies 3. joint accounts (cuentas en participacion) 4. association 5. insurance companies

It does not include: 1. general professional partnerships (partnerships formed by persons for the sol e purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business) 2. joint venture or consortium formed for the purpose of undertaking constructio n projects or engaging in petroleum, coal, geothermal and other energy operation s pursuant to an operating consortium agreement under a service contract with th e Government. Classification of Corporations 1. Domestic Corporation (DC) - when applied to a corporation, means created or o rganized in the Philippines or under its laws [Sec 22(C)] 2. Resident Foreign Corporation (RFC) - a foreign corporation engaged in trade o r business within the Philippines [Sec 22(H)] 3. Non-resident foreign coporation (NRFC) - a foreign corporation not engaged in trade or business within the Philippines [Sec 22(I)] QUICK GLANCE Gross the Non-resident Resident Phils. 32% income without Net RatesForeign Corp Phils. Withinincome (DC) thetax Domestic CorpForeign (RFC) Tax Baseof Taxable Income (FWT) SourcesandwithholdingCorp (NRFC) final Income TAXATION OF PASSIVE INCOME OF CORPORATIONS INTEREST 32% Taxable within without Income NRFCof gross any currency RFC [28A] C [27A]fromincome [28B1] bank deposit & yield or any other monetary benefit fr w Dithin om deposit substitutes and from trust funds and similar arrangements (PESO depos INTEREST 32% [28A7d] NA [27D]from 20% [28A7a] DOLLAR deposits of individuals certified corp its)[27A]income from LT deposit or investmentor NON-BANKby BSP [28B1] NA within without NRFC [28A7a] RFC [27D1] C [28A7a] 10% [28A7b] INTEREST exempt [27D3] from PESOdepositary banks from DOLLAR loans granted to residents 32% [27D3] 7.5%[27A]income derived byloans depositary BANK w Dithin of EFCDS EFCDS non-resid NO YES MCIT[28B1]* 32%/15%[27D] exempt <[28B5b]DIVIDENDS INTERCORPORATE[28B5c] 6% [28A7a] [28A7c] 5/10% higher gross CAPITALin general(lottery) Other-ofGAINSof(except of [27A] PRIZESWINNINGSfrom from REAL 20% [27D] on [27A](lottery)SHARES and ROYALTIES in books,incomefrom PROPERTY (land and NA [28A]NCG generalor FMVforeign corp Corporation buildings 32%of[28B1] receivedliterary Domestic musical Traded ents[27A]P10,000GSPSalePCSO) worksof Stock not compositions only) 2% of [28A7d] Legend: Not Applicable NA NIAT net income after tax JV joint venture NCG net capital gains GSP gross selling price FMV fair market value Capital Gains 1. Sale of Domestic Shares a. If the shares are not traded through the local stock exchange, a final tax is imposed on the net capital gains (NCG) in accordance with the following schedul e: Not over P100,000 ..... 5% Amount in excess of P100,000 .. 10% Net Capital Gains (NCG) = Gross Selling Price (GSP) Cost b. If the shares are traded through the local stock exchange, a final tax of of 1% is imposed based on the gross selling price (GSP). [Sec 127] Therefore, the transaction is taxable whether the sale was at a profit or at a loss. 2. Sale of Land and Buildings a. The sale, exchange or disposition of lands and/or buildings which are not act ually used in the business of a domestic corporation and are treated as capital assets is subject to a final tax of 6% based on the based on the gross selling p rice (GSP) or fair market value (FMV), whichever is higher. b. If the seller is a resident foreign corporation (RFC), the income or gain is included in the items of gross income and the net income of the resident foreign corporation is subject to 32% tax rate. c. If the seller is a non-resident foreign corporation (NRFC), the income or gai n is subjected to a final tax rate of 32%. Acquisition

Inter-corporate Dividends A dividend paid by a domestic corporation to another corporation. 1. In the case of a domestic corporation (DC) or a resident foreign corporation (RFC), the dividends received are not subject to tax. 2. In the case of a non-resident foreign corporation (NRFC), as a general rule, a final withholding tax at the rate of 32% is imposed on the dividends received from a domestic corporation. However, if the country in which the NRFC is domiciled allows a tax credit for t axes deemed paid in the Philippines, a final withholding tax at the rate of 15% is imposed on the dividends received from domestic corporation with the remainder of 17% [32%- 15%] being deemed paid. Interest Income of Domestic Banks under the Expanded Foreign Currency Deposit Sy stem (EFCDS) Transactions subject to 10% final tax: 1. Income derived by a depository bank from foreign currency transactions with l ocal commercial banks, including branches of foreign banks and other depository banks 2. Interest income from foreign currency loans granted by depository banks to re sidents Corporations Subject to Special Tax Rates 1. Domestic Corporations Proprietary Educational Institutions and Hospitals Tax Rate and Base 10% on net income within and without the Philippines. If gross income from unrelated trade or business or other activity exceeds 50% o f total gross income derived from all sources, the tax rate of 32% shall be impo sed on the entire taxable income. The term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exe rcise or performance by such educational institution or hospital of its primary purpose or function. A "Proprietary educational institution" is any private school maintained and adm inistered by private individuals or groups with an issued permit to operate from the DECS, CHED or TESDA. 2. Resident Foreign Corporations a. International Carriers doing business in the Philippines pine Billings (GPB) 2.5% on Gross Philip

In the case of International Air Carriers, GPB refers to the amount of: * gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irre spective of the place of sale or issue and the place of payment of the ticket or passage document * gross revenue from tickets revalidated, exchanged and/or indorsed to another i nternational airline if the passenger boards a plane in a port or point in the P hilippines * for flights which originate from the Philippines, but transshipment of passeng er takes place at any port outside the Philippines on another airline, the gross revenue consisting of only the aliquot portion of the cost of the ticket corre sponding to the leg flown from the Philippines to the point of transshipment In the case of International Shipping, GPB means gross revenue whether for passe nger, cargo or mail originating from the Philippines up to final destination, re gardless of the place of sale or payments of the passage or freight documents. b. Offshore Banking Units - final tax of 10%

c. Regional or Area Headquarters and Regional Operating Headquarters of Multinat ional Companies * Regional or area headquarters (RAHQ) not subject to income tax RAHQ is a branch established in the Philippines by multinational companies and w hich headquarters do not earn or derive income from the Philippines and which ac t as supervisory, communications and coordinating center for their affiliates, s ubsidiaries, or branches in the Asia-Pacific Region and other foreign markets. * Regional operating headquarters (ROHQ) final tax of 10% d. Tax on Branch Profits Remittances * Taxable transaction any profit remitted by a branch to its head office * Tax Rate and Base 15% based on the total profits applied or earmarked for remi ttance without any deduction for the tax component * Non-taxable activities those activities which are registered with the Philippi ne Economic Zone Authority * Income not treated as branch profits unless effectively connected with the con duct of trade or business in the Philippines: i. Interests, dividends, rents, royalties, including remuneration for technical services ii. salaries, wages premiums, annuities, emoluments iii. other fixed or determinable annual, periodic or casual gains, profits, inco me iv. capital gains 3. Non-resident Foreign Corporations (NRFC) a. Nonresident Cinematographic Film Owner, Lessor or Distributor 25% of gross in come from all sources within the Philippines b. Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals 4.5% of gross rentals, lease or charter fees from leases or charters to Filipino cit izens or corporations c. Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment 7.5% of gross rentals or fees d. Interest Income from Foreign Loans 20% final tax e. Income from transactions with depository banks under the expanded foreign cur rency deposit system (EFCDS) exempt Minimum Corporate Income Tax Rate (MCIT) Who are subject to MCIT? Domestic Corporations (DC) and Resident Foreign Corporations (RFC) Rate and Base 2% on gross income The MCIT is imposed if the amount resulting from the imposition of the 2% tax ra te is greater than the amount resulting from the imposition of the regular corpo rate tax rate of 32%. The term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. In the case of taxpayers engaged in the sal e of service, 'gross income' means gross receipts less sales returns, allowances , discounts and cost of services. When does the MCIT become applicable? beginning on the 4th taxable year from the time the corporation commenced its bu siness operations Carry-forward of excess minimum tax Any excess of the minimum corporate income tax (2%) over the normal income tax ( 32%) shall be carried forward and credited against the normal income tax for the 3 immediately succeeding taxable years.

EXEMPT CORPORATIONS Legal Basis [Sec 30]

The following organizations shall not be taxed in respect to income received by them as such: (A) Labor, agricultural or horticultural organization not organized principally for profit (B) Mutual savings bank not having a capital stock represented by shares, and co operative bank without capital stock organized and operated for mutual purposes and without profit (C) A beneficiary society, order or association, operating fort he exclusive ben efit of the members such as a fraternal organization operating under the lodge s ystem, or mutual aid association or a nonstock corporation organized by employee s providing for the payment of life, sickness, accident, or other benefits exclu sively to the members of such society, order, or association, or nonstock corpor ation or their dependents (D) Cemetery company owned and operated exclusively for the benefit of its membe rs (E) Nonstock corporation or association organized and operated exclusively for r eligious, charitable, scientific, athletic, or cultural purposes, or for the reh abilitation of veterans, no part of its net income or asset shall belong to or i nures to the benefit of any member, organizer, officer or any specific person (F) Business league chamber of commerce, or board of trade, not organized for pr ofit and no part of the net income of which inures to the benefit of any private stock-holder, or individual (G) Civic league or organization not organized for profit but operated exclusive ly for the promotion of social welfare (H) A nonstock and nonprofit educational institution (I) Government educational institution (J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organizatio n of a purely local character, the income of which consists solely of assessment s, dues, and fees collected from members for the sole purpose of meeting its exp enses and (K) Farmers', fruit growers', or like association organized and operated as a sa les agent for the purpose of marketing the products of its members and turning b ack to them the proceeds of sales, less the necessary selling expenses on the ba sis of the quantity of produce finished by them; Notwithstanding the provisions in the preceding paragraphs, the income of whatev er kind and character of the foregoing organizations from any of their propertie s, real or personal, or from any of their activities conducted for profit regard less of the disposition made of such income, shall be subject to tax. (YMCA v CI R) IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) Legal Basis [Sec 29]

Nature and Purpose of the Tax The improperly accumulated earnings tax applies to every corporation formed or a vailed for the purpose of avoiding the income tax with respect to its shareholde rs or the shareholders of any other corporation, by permitting earnings and prof its to accumulate instead of being divided or distributed. The tax is intended to discourage corporations from permitting its profits not n eeded by business to accumulate instead of being distributed to stockholders in the form of dividends.

Rate and Base

10% of the improperly accumulated taxable income

Corporations Not Subject to IAET 1. Publicly-held corporations 2. Banks and other non-bank financial intermediaries 3. Insurance companies Evidence of Purpose to Avoid Income Tax 1. Prima Facie Evidence The fact that any corporation is a mere holding company or investment company sh all be prima facie evidence of a purpose to avoid the tax upon its shareholders or members. 2. Evidence Determinative of Purpose The fact that the earnings or profits of a corporation are permitted to accumula te beyond the reasonable needs of the business shall be determinative of the pur pose to avoid the tax upon its shareholders or members unless the corporation, b y the clear preponderance of evidence, shall prove to the contrary. Improperly Accumulated Taxable Income Formula: Taxable Income + Income exempt from tax + Income excluded from gross income + Income subject to final tax + net operating loss carry-over - Dividends actually or constructively paid - Income tax paid for the taxable year Improperly Accumulated Taxable Income TAXATION OF PARTNERSHIP Definition of Partnership By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing t he profits among themselves. Two or more persons may also form a partnership for the exercise of a profession . [Art. 1767, Civil Code] Classification of Partnerships for Tax Purposes 1. Partnerships subject to tax (Business Partnerships) 2. Partnerships not subject to tax a. General Professional Partnerships (GPP) partnerships formed by persons for th e sole purpose of exercising their common profession, no part of the income of w hich is derived from engaging in any trade or business b. joint venture or consortium formed for the purpose of undertaking constructio n projects c. joint venture or consortium formed for the purpose of engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government.

General Professional Partnerships (GPP) Legal Basis Rules: [Sec 26]

1. A GPP as such shall not be subject to the income tax 2. Persons engaging in business as partners in a GPP shall be liable for income tax only in their separate and individual capacities. 3. For purposes of computing the distributive share of the partners, the net inc ome of GPP shall be computed in the same manner as a corporation. 4. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. 5. The income tax liability of a partner in a GPP is computed using the schedule r rates. Business Partnerships Business partnerships include all partnerships, no matter how created or organiz ed, except those mentioned above. [Sec 22(B)] The share of a partner in the distributable net income after tax of a business p artnership is subject to 10% final tax. [Sec24(B)(2)] Co-ownership There is co-ownership: 1. When two or more heirs inherit and undivided property from a decedent. 2. When a donor makes a gift of an undivided property in favor of two or more do nees. When Co-ownership not subject to tax When the co-ownership s activities are limited merely to the preservation of the c o-owned property. In such a case, the co-ownership, as such, is not subject to t ax. The co-owners are liable for income tax in their separate and individual cap acity. When Co-ownership is subject to tax When the income of the co-ownership is invested by the co-owners in business, th e co-owners have in effect constituted themselves into a partnership. In such a case, the co-ownership shall be subject to tax as a corporation. For tax purposes, the co-ownership of inherited properties is automatically conv erted into an unregistered partnership the moment the said common properties and /or the incomes derived therefrom are used as a common fund with intent to produ ce profits for the heirs in proportion to their respective shares in the inherit ance as determined in a project partition either duly executed in an extrajudici al settlement or approved by the court in the corresponding testate or intestate proceeding. The reason for this is simple. From the moment of such partition, t he heirs are entitled already to their respective definite shares of the estate and the incomes thereof, for each of them to manage and dispose of as exclusivel y his own without the intervention of the other heirs, and, accordingly he becom es liable individually for all taxes in connection therewith. If after such part ition, he allows his share to be held in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument were e xecuted for the purpose, for tax purposes, at least, an unregistered partnership is formed. [Ona v CIR, G.R. No. L-19342, 25 May 1972] SOURCE OF INCOME Legal Basis [Sec 42] Income according to Source from sources within the Philippines from sources without the Philippines from sources partly within and partly without the Philippines

Classification of 1. Income derived 2. Income derived 3. Income derived

Basic Principles 1. Resident Citizens (RC) and Domestic Corporations (DC) are taxable on income d erived from within and without the Philippines 2. Non-resident Citizens (NRC), Non-resident Aliens (NRA), Resident Foreign Corp orations (RFC) and Non-resident Foreign Corporations (NRFC) are taxable only on income derived from within the Philippines. A. Gross Income From Sources Within the Philippines The following items of gross income shall be treated as gross income from source s within the Philippines: 1. Interests derived from sources within the Philippines, and interests on bonds , notes or other interest-bearing obligation of residents 2. Dividends received: a. from a domestic corporation; and b. from a foreign corporation, unless less than 50% of its gross income for the previous 3-year period was derived from sources within the Philippines. The inco me which is considered as derived from within the Philippines is obtained by usi ng the following formula: Philippine Gross Income x Dividend = Income Within Worldwide Gross Income 3. Compensation for labor or personal services performed in the Philippines 4. Rentals and royalties from property located in the Philippines or from any in terest in such property 5. Gains, profits and income from the sale of real property located in the Phili ppines 6. Gains, profits and income from the sale of personal property Income Abroad from Within Philippines Without TreatmentSale Place of Purchase The gain from the sale of shares of stock in a domestic corporation shall be tre ated as derived entirely from sources within the Philippines regardless of where the said shares are sold. Allowable Deductions to Gross Income From Sources Within the Philippines 1. General Rule From the items of gross income above, the following are allowed as deductions: a. expenses, losses and other deductions properly allocated to items of gross in come b. ratable part of expenses, interests, losses and other deductions effectively connected with the business or trade conducted exclusively within the Philippine s which cannot definitely be allocated to some items of gross income Philippine Gross Income x Unallocated Expenses = Expenses to be Worldwide Gross Income Allocated to Inco me from With in 2. Exception No deductions for interest paid or incurred abroad shall be allowed from the ite m of gross income unless indebtedness was actually incurred to provide funds for use in connection with the conduct or operation of trade or business in the Phi lippines. B. Gross Income From Sources Without the Philippines The following items of gross income shall be treated as income from sources with out the Philippines: 1. Interests other than those derived from sources within the Philippines

2. Dividends other than those derived 3. Compensation for labor or personal 4. Rentals or royalties from property y interest in such property 5. Gains, profits and income from the Philippines

from sources within the Philippines services performed without the Philippines located without the Philippines or from an sale of real property located without the

Allowable Deductions to Gross Income From Sources Without the Philippines From the items of gross income specified above, the following are allowed as ded uctions: 1. expenses, losses, and other deductions properly apportioned to items of gross income 2. ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income Gross Income from Without the Phils. x Unallocated Expenses = Expenses to be Worldwide Gross Income Allocated to Income from Without

SUMMARY Dividends Always Gain Royalty of Location Use Rental of of Personal Shares Place Salethe the IncomeofSource ofDebtor Sold ResidencePerformance InterestIncomeWithin Test onIncometheProperty Property Item offrom ServicesIntangible Domestic Income a. From Domestic Corporation b. From Foreign more than Income Within ifCorporation50% of its gross income for the previous 3-year peri Within, od was derived from sources within the Philippines. Income within computed using this formula: Phil. Gross Income x Dividend = Income Within Worldwide Gross Income Income without, if less than 50% of its gross income for the previous 3-year per iod was derived from sources within the Philippines. GROSS INCOME Definition of Gross Income Gross Income means the total income of a taxpayer subject to tax. It means all income derived from whatever source. It does not include income which is exclud ed or exempted by law. Items of Gross Income 1. Compensation for services in whatever form paid, including, but not limited t o fees, salaries, wages, commissions, and similar items 2. Gross income derived from the conduct of trade or business or the exercise of a profession 3. Gains derived from dealings in property 4. Interests 5. Rents 6. Royalties 7. Dividends 8. Annuities 9. Prizes and winnings 10. Pensions 11. Partner's distributive share from the net income of the general professional partnership (GPP)

Compensation Income Compensation income is that income arising from an employer-employee relationshi p. It includes: 1. Salaries and wages 2. Commissions 3. Tips 4. Allowances 5. Bonuses 6. Fringe Benefits of rank and file employees Fringe Benefits of Rank and File employees Basic Rule: Convenience of the Employer Rule If meals, living quarters, and other facilities and privileges are furnished to an employee for the convenience of the employer, and incidental to the requireme nt of the employee s work or position, the value of that privilege need not be inc luded as compensation. Gains Derived From Dealings In Property Dealings in property such as sales or leases may result in gain or loss. The ga in from the transaction shall be taxable income. [Sec 32(A)]. The loss shall be deductible if incurred in the conduct of trade or business. [Sec 34(D)]. Basic Formula for Computing Gain or Loss: Selling Price XX Acquisition Cost XX X Gain (Loss) XX If Selling Price is greater than Acquisition Cost, there is a Gain. If Selling Price is less than Acquisition Cost, there is a Loss. Interest Income Interest income received by citizens, resident aliens, and non-resident aliens e ngaged in trade or business from long-term deposit or investment certificates (L TDIC), e.g. savings, common or individual trust funds, deposit substitutes, inve stment management accounts and other investments, shall be exempt from tax. Interest income from Government securities such as Treasury Bills is subject to tax. Rental Income Rental income of the lessor includes 1. the actual rent itself 2. prepaid or advance rent 3. Security deposit, only if applied as rent Dividends Kinds of Dividends 1. Cash Dividend 2. Stock Dividend As a general rule, Stock Dividends are not subject to tax. However, if a corporation cancels or redeems stock issued as a dividend in such a manner as to make the distribution and cancellation or redemption essentially equivalent to a distribution of a dividend, the amount distributed shall be cons idered taxable income. (Unscrupulous individuals may declare stock dividends, ca ncel or redeem them, and then distribute its cash equivalent, thus achieving two objectives finding shelter in the non-taxability of stock dividends and circumv enting the tax on cash dividends. With the rule, the loophole is plugged.) 3. Property Dividend eived measured at the fair market value (FMV) of the property rec

4. Scrip Dividend measured at the fair market value (FMV) of the promissory note received 5. Liquidating Dividend distribution of all the property of a corporation. It is strictly not dividend income, but rather a sale of shares of stock resulting in capital gain or loss. Partner's Distributive Share From Net Income Of General Professional Partnership (GPP) 1. A general professional partnership (GPP) as such shall not be subject to the income tax. 2. Persons engaging in business as partners in a general professional partnershi p (GPP) shall be liable for income tax only in their separate and individual cap acities. 3. For purposes of computing the distributive share of the partners, the net inc ome of the partnership shall be computed in the same manner as a corporation. 4. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. [Sec 26] Other Sources of Income 1. Recovery of Damages representing compensation for loss of profits or income ( exclude damages which compensate for injury to property or person) 2. Recovery of Bad Debt Previously Written Off (Tax Benefit Rule) If the deduction of the bad debt in a prior year resulted in an income tax benef it in favor of the taxpayer, the bad debt recovered is taxable income in the yea r of recovery. There is an income tax benefit when the deduction of the bad debt in the prior y ear resulted in lesser income and hence tax savings for the company. EXCLUSIONS FROM GROSS INCOME Legal Basis [Sec 32(B)]

The following are excluded from gross income: 1. Life Insurance The proceeds of life insurance policies paid to heirs or beneficiaries upon the death of the insured. (The reason is that insurance is a contract of indemnity a nd hence, the proceeds should be treated as indemnity and not as gain or income. ) 2. Amount Received by Insured as Return of Premium The amount received by the insured, as a return of premiums paid by him under li fe insurance. (The rationale is that this is a return of capital and not income. ) 3. Gifts, Bequests, and Devises The value of property acquired by gift, bequest, devise, or descent. (The reaso n is that these transactions are subject to transfer taxes estate or donor s taxes .) However, income from such property, as well as gift, bequest, devise or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income. 4. Compensation for Injuries or Sickness The amounts received as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of su ch injuries or sickness. 5. Income Exempt under Treaty Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. 6. Retirement Benefits, Pensions, Gratuities, etc.a. Retirement benefits received under RA 7641 and those received by employees of private firms in accordance with a reasonable private benefit plan maintained b

y the employer: Requisites: (1) The retiring employee has been in the service of the same employer for at le ast 10 years (2) The retiring employee is not less than 50 years of age at the time of his re tirement (3) The benefits shall be availed of by an employee only once. (4) That there be a reasonable private benefit plan as defined below. A 'reasonable private benefit plan' means * a pension, gratuity, stock bonus or profit-sharing plan maintained by an emplo yer for the benefit of some or all of his employees * wherein contributions are made by such employer for the employees * for the purpose of distributing to such employees the earnings and principal o f the fund thus accumulated and * wherein it is provided in the plan that at no time shall any part of the corpu s or income of the fund be used for, or be diverted to, any purpose other than f or the exclusive benefit of the said officials and employees. b. Any amount received by an employee or by his heirs from the employer as a con sequence of separation of such official or employee from the service of the empl oyer because of * death * sickness or * other physical disability or * for any cause beyond the control of the employee c. The social security benefits, retirement gratuities, pensions and other simil ar benefits received from foreign government agencies and other institutions d. Payments of benefits by the United States Veterans Administration e. Benefits received from or enjoyed under the SSS f. Benefits received from the GSIS 7. Miscellaneous Items a. Income Derived by Foreign Government Income derived from (1) investments in the Philippines in financial securities o r (2) from interest on deposits in banks in the Philippines by (i) foreign governments (ii) financing institutions owned, controlled, or enjoying refinancing from fore ign governments, and (iii) international or regional financial institutions established by foreign go vernments. b. Income Derived by the Government or its Political Subdivisions Income derived from any public utility or from the exercise of any essential gov ernmental function accruing to the Government of the Philippines or to any polit ical subdivision thereof. c. Prizes and Awards Prizes and awards made primarily in recognition of religious, charitable, scient ific, educational, artistic, literary, or civic achievement but only if: (i) recipient was selected without any action on his part to enter the contest o r proceeding and (ii) recipient is not required to render substantial future services as a condit ion to receiving the prize or award d. Prizes and Awards in Sports Competition

All prizes and awards granted to athletes (1) in local and international sports competitions (2) sanctioned by their national sports associations. e. 13th Month Pay and Other Benefits Gross benefits received by employees of public and private entities provided tha t the total exclusion shall not exceed P30,000 which shall cover: i. Benefits received by government employees under RA 6686 ii. Benefits received by employees pursuant to PD 851 (13th Month Pay Decree) iii. Benefits received by employees not covered by PD 851 and iv. Other benefits such as productivity incentives and Christmas bonus f. GSIS, SSS, Medicare and Other Contributions GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of individuals g. Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness Gains realized from the sale or exchange or retirement of bonds, debentures or o ther certificate of indebtedness with a maturity of more than 5 years. Note that what is exempt is the sale or exchange of the instruments. Note furth er that interest income from these instruments are likewise exempt if held by a resident citizen (RC), non-resident citizen (NRC), resident alien (RA), or a no n-resident alien engaged in trade or business (NRAETB). [Sec. 24(B)(1), 25(A)]. If held by a non-resident alien not engaged in trade or business (NRANETB) or a corporation, the interest income becomes taxable income. h. Gains from Redemption of Shares in Mutual Fund Gains realized by the investor upon redemption of shares of stock in a mutual fund company DEDUCTIONS FROM GROSS INCOME The term taxable income means the pertinent items of gross income specified in t his Code [ref: Sec 32], less the deductions [ref: Sec 34] and/or personal and ad ditional exemptions [ref: Sec 35], if any, authorized for such types of income b y this Code or other special laws. [Sec 31] Kinds of Deductions 1. Itemized Deductions 2. Optional Standard Deduction Who can avail of deductions? All taxpayers except for those earning compensation income arising from personal services rendered under an employer-employee relationship Rules: 1. Compensation income earners can avail themselves only of the deduction in Sec 34(M), i.e., premium payments on health and/or hospitalization insurance. 2. The following can claim itemized deductions: a. Corporations, whether domestic or foreign b. General Professional Partnerships c. Individuals engaged in trade, profession or business d. Estates and trusts engaged in trade or business 3. Only citizens (RC, NRC) and resident aliens (RA) can elect between itemized d eductions and optional standard deduction. Itemized Deductions (A) Expenses (B) Interest (C) Taxes (D) Losses

(E) Bad debts (F) Depreciation (G) Depletion (H) Charitable and Other Contributions (I) Research and Development (J) Pension Trust (M) Premium Payments on Health and Hospitalization Insurance of an Individual Ta xpayer Optional Standard Deduction (OSD) * The Optional Standard Deduction is in lieu of the itemized deductions. * The OSD is in an amount not exceeding 10% of gross income. * The taxpayer shall signify in his return his intention to elect the OSD; other wise he shall be considered as having availed himself of the itemized deductions . Note: Gross Income = Gross Sales or Receipts BUSINESS EXPENSE Legal Basis Sec 34(A) Cost of Sales or Services

In a nutshell, what is allowed as a deduction are ordinary and necessary trade, business or professional expenses. Requisites for Deductibility of Business Expense 1. It must be ordinary and necessary 2. It must be paid or incurred during the taxable year 3. It must be connected with the conduct of the trade, business or exercise of a profession 4. The tax required to be withheld must have been paid to the BIR. What are examples of ordinary and necessary expenses? 1. salaries, wages, and other forms of compensation for personal services actual ly rendered, including the grossed-up monetary value (GMV) of fringe benefit fur nished by the employer to the employee. 2. travel expenses, here and abroad, while away from home (meaning tax home or t he place of work) in the pursuit of trade, business or profession 3. rentals and/or other payments which are required as a condition for the conti nued use or possession of property 4. entertainment, amusement and recreation expenses The term "Representation Expenses" shall refer to expenses incurred by a taxpaye r in connection with the conduct of his trade, business or exercise of professio n, in entertaining, providing amusement and recreation to, or meeting with, a gu est or guests at a dining place, place of amusement, country club, theater, conc ert, play, sporting event, and similar events or places. Requisites for deductibility of entertainment, amusement and recreation expenses : a. It must be paid or incurred during the taxable year b. It must be directly related to the conduct of trade, business or exercise of a profession c. It must not be contrary to law, morals, good customs, public policy or public order d. It must not have been paid, directly or indirectly, to a government official or employee or to a private individual, or corporation, or general professional partnership (GPP), if it constitutes a bribe, kickback or other similar payment; e. It must be duly substantiated by adequate proof. The official receipts should

be in the name of the taxpayer claiming the deduction and f. The appropriate amount of withholding tax should have been withheld and paid to the BIR. Ceiling on entertainment, amusement and recreation expense The amount of actual entertainment, amusement and recreation expense paid or inc urred within the taxable year by the taxpayer, but in no case shall such deducti on exceed * 0.5% of net sales (i.e., gross sales less sales returns/allowances and sales d iscounts) for taxpayers engaged in sale of goods or properties or * 1.0% of net revenue (i.e., gross revenue less discounts) for taxpayers engaged in sale of services, including exercise of profession and use or lease of prope rties [Rev Reg. No. 10-2002] Bribes, Kickbacks and Other Similar Payments No deduction from gross income shall be allowed as business expense for any paym ent made, directly or indirectly, to a government official or employee or to a p rivate corporation, general professional partnership, or a similar entity, if th e payment constitutes a bribe or kickback. Expenses Allowable to Private Educational Institutions In addition to the expenses allowable as deductions, a private educational insti tution may at its option elect either: 1. to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities or 2. to deduct allowance for depreciation INTEREST AND TAXES Legal Basis Sec 34(B) and 34(C)

Interest The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed a s deduction from gross income. Requisites for Deductibility 1. There is an indebtedness. 2. The indebtedness is that of the taxpayer. 3. The indebtedness is connected with the taxpayer s trade, profession, or busines s. 4. The taxpayer is liable to pay interest on the indebtedness. 5. The indebtedness must have been paid or accrued during the taxable year. Reduction of Interest Expense as a Deductible Item The taxpayer's allowable deduction for interest expense shall be reduced by an a mount equal to 38% of the interest income subjected to final tax: Non-deductible Interest 1. Interest paid in advance by the taxpayer who reports income on cash basis (be cause such interest shall be allowed as a deduction in the year the indebtedness is paid.) 2. Interest paid by one person to a family member or a related taxpayer (subsidi ary, affiliate) Sec 36(B) 3. Interest on indebtedness incurred to finance petroleum exploration Note: Interest for late payment of income tax is deductible, but fines and penal ties for late payment are not deductible.

Optional Treatment of Interest Expense At the option of the taxpayer, interest incurred to acquire property used in tra de business or exercise of a profession may be either (1) allowed as a deduction or (2) treated as a capital expenditure (asset). Taxes General Rule: Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, shall be allowed as deduction. Exceptions: 1. income tax 2. foreign income taxes, if claimed as tax credit 3. estate and donor's taxes 4. special assessment taxes assessed against local benefits of a kind tending to increase the value of the property assessed 5. value added tax 6. fines and penalties due to late payment of tax 7. taxes which are final taxes Requisites for Deductibility 1. It must be paid or incurred within the taxable year. 2. It must be paid or incurred in connection with the taxpayer s trade, profession or business. 3. It must be imposed directly on the taxpayer. Examples of Deductible Taxes 1. Import duties 2. Business taxes 3. Occupation taxes 4. Privilege and license taxes 5. Excise taxes 6. Documentary stamp taxes 7. Automobile registration fees 8. Real property taxes Limitations on Deductions In the case of a nonresident alien individual engaged in trade or business (NRAE TB) and a resident foreign corporation (RFC), the deductions for taxes shall be allowed only if and to the extent that they are connected with income from sourc es within the Philippines. Phil net income ible foreign taxes Worldwide Net income LOSSES AND BAD DEBTS Legal Basis Sec 34(d) and 34(E) x Taxes paid to a foreign country = Deduct

Losses Losses actually sustained during the taxable year and not compensated for by ins urance or other forms of indemnity shall be allowed as deductions. Requisites for Deductibility 1. The loss must be actually sustained. 2. It must be sustained in a closed and completed transaction. 3. The property lost must be connected with the conduct of trade or business.

4. The loss must 5. The loss must 6. The loss must worn Declaration

be that of the taxpayer. not be compensated by insurance or other forms of indemnity. be reported to the BIR within 45 days from the date of loss. (S of Loss)

Examples of causes of loss: Business loss those incurred in trade or business such as obsolescence, worthles sness Casualty loss fires, storms, shipwreck, robbery, theft or embezzlement No loss shall be allowed as a deduction if at the time of the filing of the retu rn, such loss has been claimed as a deduction for estate tax purposes in the est ate tax return. (The purpose is to avoid the item from being deducted twice, to the detriment of the Government.) How (partial) loss is computed: Formula: Book Value of property lost Less: Salvage value of property lost Insurance recovery Loss XX XX XX (XX)

* If loss is total, the amount of book value is equivalent to the actual loss. Obsolescence and Worthlessness Obsolescence of property is deductible as a loss when the property has to be dis carded permanently because its usefulness is suddenly terminated. Worthlessness may be a ground for deductibility of the value of the property as a loss when it can be satisfactorily shown that the property had indeed become v alueless. If securities become worthless during the taxable year and are capita l assets, the loss resulting therefrom shall be considered as a loss from the sa le or exchange, on the last day of such taxable year, of capital assets. (See di scussion under heading Gains and Losses) Shrinkage in value of property is not a ground for deductibility as a loss. The re has to be an actual loss sustained in order for it to be deductible. Capital Losses (See discussion under heading Gains and Losses) Wagering Losses Losses from wagering transactions shall be allowed only to the extent of the gai ns from such transactions. (Therefore, if there are no wagering gains, wagering loss cannot be deducted.) Net Operating Loss Carry-Over (NOLCO) Net operating loss is the excess of allowable deductions over gross income. The net operating loss of the business of the immediately preceding taxable year shall be carried over as a deduction from gross income for the next 3 consecuti ve taxable years immediately following the year of such loss. Requisites for application of NOLCO: 1. any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction 2. a net operating loss carry-over (NOLCO) shall be allowed only if there has be en no substantial change in the ownership of the business. There is no substantial change when 1. not less than 75% in value of outstanding shares is held by or on behalf of t

he same persons; or 2. not less than 75% of the paid up capital is held by or on behalf of the same persons. Non-deductibility of certain losses In computing net income, no deductions shall be allowed in respect of losses fro m sales or exchanges of property directly or indirectly between members of a fam ily or related taxpayers (subsidiaries, affiliates). Bad Debts Rule: Debts due to the taxpayer actually ascertained to be worthless and charge d off within the taxable year are deductible from gross income. Exceptions: The following are not deductible as bad debts: 1. those debts not connected with profession, trade or business 2. those sustained in a transaction entered into between family members or relat ed taxpayers Requisites for Deductibility: 1. There must be a valid and subsisting debt. 2. The debt must be connected with profession, trade or business. 3. The debt must be actually ascertained to be worthless or uncollectible. (e.g. , bankrupt debtor) 4. The debt must be charged off within the taxable year. Recovery of Bad Debts Previously Deducted The recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the ex tent of the income tax benefit of said deduction. (Tax Benefit Rule) If the deduction of the bad debt in a prior year resulted in an income tax benef it in favor of the taxpayer, the bad debt recovered is taxable income in the yea r of recovery. There is an income tax benefit when the deduction of the bad debt in the prior y ear resulted in lesser income and hence tax savings for the company. DEPRECIATION AND DEPLETION Legal Basis Sec 34(F) and 34(G)

Depreciation Depreciation is the gradual diminution of the useful value of tangible property resulting from wear and tear and normal obsolescence. There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and te ar (including reasonable allowance for obsolescence) of property used in the tra de or business. The rationale for this is that property gradually approaches a p oint where its usefulness is exhausted. Requisites for Deductibility 1. The asset must be used in trade or business. 2. The asset must have a limited useful life. 3. The allowance must be reasonable. 4. The allowance must be charged off during the year. 5. The total allowances must not exceed the cost of the property. Methods and Rates of Depreciation 1. Straight-line method (SL) Formula: Cost Salvage Value Estimated Useful Life of the Property

2. Declining-balance method, using a rate not exceeding twice the rate for strai ght line method Under this method, the depreciation allowance per year varies. Depreciation is largest in the first year and continually decreases towards the end of the usefu l life of the property. Example: Double Declining Balance Method (DDB) Cost: P100,000.00 / Salvage Value: P5,000.00 Estimated Useful Life of the Property: 5 years Straight Line rate: 1/ estimated useful life or 1/5 or 20% Double Declining Rate: 20% x 2 = 40% The depreciation for 0 x 40%]. Note that d. The depreciation 100,000 P40,000) x the first year is P40,000.00, computed as follows: [P100,00 the salvage value is ignored in the declining balance metho for the second year is P24,000.00, computed as follows: [(P 40%].

3. Sum-of-the-years-digit method (SYD) Under this method, the annual depreciation is computed by applying a changing fr action to the cost of the property reduced by the salvage value. In the fractio n, the numerator is the number of remaining years of the estimated useful life o f the property and the denominator is the sum of the numbers representing the ye ars of the life of the property. Example: Cost of the Property: P105,000 Salvage Value: P 5,000 Estimated Useful Life: 5 years Depreciation Year 1 5 / Year 2 4 / Year 3 3 / Year 4 2 / Year 5 1 / Schedule 15 x (P105,000 15 x P100,000 15 x P100,000 15 x P100,000 15 x P100,000 P5,000)

The denominator 15 is the sum of the years digits of the useful life of the prop erty: 5 + 4 + 3 + 2 + 1. The numerator is the remaining years in the useful life of the property. Depreciation of Properties Used in Petroleum Operations An allowance for depreciation in respect of all properties directly related to p roduction of petroleum shall be allowed under the straight-line or declining-bal ance method of depreciation at the option of the service contractor. If the ser vice contractor initially elects the declining-balance method, it may shift to t he straight-line method. The useful life of such property shall not be more tha n 10 years. Properties not used directly in the production of petroleum shall b e depreciated under the straight-line method on the basis of an estimated useful life of 5 years. Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business (NRAE TB) or Resident Foreign Corporations (RFC) A reasonable allowance for the deterioration of property shall be permitted only when such property is located in the Philippines. Depletion of Oil and Gas Wells and Mines Depletion is the exhaustion of natural resources due to production. The rationa le for depletion allowance is the recovery of the capital invested in the proper ty.

In the case of oil and gas wells or mines, a reasonable allowance for depletion computed using the cost-depletion method shall be granted provided that when the allowance for depletion shall not exceed the capital invested. The cost deplet ion method is based on the cost of a mine deposit to the taxpayer. The purpose of cost depletion is to return to the taxpayer, free of tax, that portion of the cost of mining resources which taxpayer spent in earning his taxable income. Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien indiv idual (NRA) or Foreign Corporation (RFC, NRFC) In the case of a nonresident alien individual engaged in trade or business in th e Philippines or a resident foreign corporation, allowance for depletion of oil and gas wells or mines under paragraph (1) of this Subsection shall be authorize d only in respect to oil and gas wells or mines located within the Philippines. PENSION TRUST AND CHARITABLE AND OTHER CONTRIBUTIONS Legal Basis Sec 34(H) and 34(J)

Pension Trusts An employer may establish a pension trust to provide for the payment of reasonab le pension to his employees. Such employer who establishes a pension trust shall be allowed to deduct 1. Contributions to such trust during the taxable year to cover the pension liab ility accruing during the year 2. Payments into such trust during the taxable year in excess of such contributi ons Payments mentioned in #2 above shall be allowed as a deduction only if such amou nt 1. has not theretofore been allowed as a deduction AND 2. is apportioned equally over a period of 10 consecutive years beginning with t he year in which the payment is made. In summary, Contributions are deductible in full while Payments in excess of Con tributions are deductible annually for 10 years and in equal parts. Charitable and Other Contributions Contributions made within the taxable year are allowed as deductions from gross income. Requisites for Deductibility 1. The contribution must be actually paid. 2. It must be given to the entity specified by law. 3. The net income of the entity must not inure to the benefit of any private sto ckholder or individual. 4. The taxpayer making the contribution must be engaged in trade, business or pr ofession. Kinds of Contributions 1. Those deductible in full 2. Those subject to limit Contributions Subject to 1. Contributions made to ivisions exclusively for 2. Contributions made to ed exclusively for * religious Limit the Government or any of its agencies or political subd public purposes accredited domestic corporation or associations organiz

* charitable * scientific * youth and sports development * cultural * educational or * rehabilitation of veterans 3. Contributions to social welfare institutions 4. Contributions to non-government organizations Limit of Contribution Individual 10% of taxable income derived from trade or business, before deductin g contributions Corporation 5% of taxable income, before deducting contributions Contributions Deductible in Full 1. Donations to the Government, exclusively to finance priority activities in * education (e.g., UP, IBP) * health * youth and sports development * human settlements * science and culture (e.g., CCP, National Museum) and * economic development 2. Donations to Certain Foreign Institutions or International Organizations 3. Donations to Accredited Non-government Organizations (NGO) A "non-government organization" means a non profit domestic corporation: a. Organized and operated exclusively for scientific, research, educational, cha racter-building and youth and sports development, health, social welfare, cultur al or charitable purposes, no part of the net income of which inures to the bene fit of any private individual. b. Which makes utilization directly for the active conduct of the activities con stituting the purpose for which it is organized and operated. c. The level of annual administrative expense of which shall not exceed 30% of t he total expenses. d. The assets of which, in the event of dissolution, would be distributed to ano ther nonprofit domestic corporation organized for similar purpose, or to the Sta te for public purpose. * Note that when the requisites above are not met, the contribution becomes s ubject to limit. Valuation of Charitable Contribution in Kind The amount of any charitable contribution of property other than money (i.e., co ntributions in kind) shall be based on the acquisition cost of said property. Contributions Deductible by a General Professional Partnership (GPP) A GPP is not subject to income tax. In determining its net income, the GPP can deduct the contributions which are deductible in full. With respect to the cont ributions subject to limit, they may be claimed an deducted by the partners in p roportion to their respective interest. RESEARCH AND DEVELOPMENT AND PREMIUM PAYMENTS ON HEALTH AND HOSPITALIZATION INSU RANCE Legal Basis Sec 34(L) and 34(M)

Research and Development Research and Development (R&D) may be treated either as: 1. ordinary and necessary expenses or 2. deferred asset which is periodically subject to depreciation or amortization.

As an Ordinary and Necessary Expense Requisites for Deductibility 1. The R&D expenses must have been paid or incurred during the taxable year. 2. The R&D expenses must be connected with the conduct of the trade or business of the taxpayer. As a Deferred Asset subject to Depreciation or Amortization At the election of the taxpayer, the following R&D expenditures may be treated a s deferred assets: 1. Those paid or incurred by the taxpayer in connection with his trade, business or profession 2. Those not treated as expenses and 3. Those chargeable to capital account but not chargeable to depreciable propert y The deferred asset shall be allowed as deduction ratably distributed over a peri od of not less than 60 months. The taxpayer may elect this alternative not late r than April 15 of each taxable year. Limitations on Deduction The following are not allowed as R&D expenses: 1. Any expenditure for the acquisition or improvement of land or the improvement of depreciable property. 2. Any expenditure incurred in ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, including oil or gas. Premium Payments on Health and/or Hospitalization Insurance of an Individual Tax payer The amount of premiums not to exceed P2,400 per family or P200 a month paid duri ng the taxable year for health and/or hospitalization insurance taken by the tax payer for himself or his family, shall be allowed as a deduction from his gross income provided the gross family income for the taxable year is not more than P2 50,000. Requisites for Deductibility 1. The taxpayer must be an individual, whether a compensation earner or engaged in trade or business. 2. The premium payments is for health and/or hospitalization insurance of the ta xpayer or his family. 3. The taxpayer s gross family income is not more than P250,000. In the case of married taxpayers, only the spouse claiming the additional exempt ion for dependents shall be entitled to this deduction. TREATMENT OF FOREIGN INCOME TAX Legal Basis Sec 34(C)

A taxpayer has the option to claim foreign income tax either as: 1. Tax Credit 2. Deduction from Gross Income Deduction from Gross Income If the taxpayer elects to claim the foreign income tax as a deduction from gross income, the foreign income tax is included among the itemized deductions. Such deduction is not subject to any limitation. Tax Credit Once the foreign income tax is claimed as a tax credit, it cannot anymore be cla

imed as a deduction from gross income and vice versa. Tax Credit is amount of income tax paid or incurred to any foreign country allow ed to be subtracted from the Philippine income tax due from the taxpayer. It is a remedy against international double taxation. Who may claim Tax Credit Only those persons whose income from within and without the Philippines may clai m tax credit:1. Resident Citizens (RC) 2. Domestic Corporations (DC) 3. Members of General Professional Partnership (GPP) 4. Beneficiary of an estate or trust Who may not claim Tax Credit 1. Non-resident Citizens (NRC) 2. Resident Alien (RA) 3. Resident Foreign Corporation (RFC) 4. Non-resident Foreign Corporation (NRFC) Amount of Tax Credit The amount of tax credit allowed is equivalent to the tax paid or incurred to a foreign country during the taxable year but not to exceed the following limits: 1. The amount of tax credit shall not exceed the same proportion of the tax agai nst which such credit is taken, which the taxpayer's taxable income from sources within such country bears to his entire taxable income for the same taxable yea r; and 2. The total amount of the credit shall not exceed the same proportion of the ta x against which such credit is taken, which the taxpayer's taxable income from s ources without the Philippines taxable bears to his entire taxable income for th e same taxable year. In formula format, the limitations are as follows: 1. Taxable Income per Foreign Country x Philippine income tax Worldwide Taxable Income 2. Taxable Income for all Foreign Countries Worldwide Taxable Income = limit

x Philippine income tax = limit

If there is only one foreign country involved, the first formula is used. If th ere are two or more foreign countries are involved, both formulae are computed, in which case the lower of the two limits is used as the amount of tax credit.

NON-DEDUCTIBLE EXPENSES Legal Basis Sec 36

In General In computing net income, no deduction shall be allowed in respect to:1. Personal, living or family expenses because not related to conduct of trade o r business 2. Capital Expenditures amount paid for buildings or improvements made to increa se the value of property. 3. Major Repairs amount spent in restoring property for which depreciation allowa nce has been made 4. Premiums paid on any life insurance policy covering the life of any officer, employee, or person financially interested in the trade or business carried on b y the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy.

Case 1 Insured officer, employee, owner, stockholder, or other financially-interested p erson Beneficiary company The premium is a non-deductible expense. [Sec 36] Case 2 Insured officer, employee, owner, stockholder, or other financially-interested p erson Beneficiary officer, employee, owner, stockholder, or other financially-interest ed person The premium is a deductible expense. The premium is likewise a fringe benefit o n the part of the beneficiary. COMPUTATION OF INDIVIDUAL INCOME TAX 1. For Pure Compensation Income Earners Gross Compensation Income Less: Premium Payments for Health and Hospitalization Insurance Net Income Less: Personal and Additional Exemptions Taxable Income Multiplied by: Tax Rate (Schedular Rates) Income Tax Payable 2. For Business or Professional Income Earners Gross Compensation Income Less: Itemized Deductions or Optional Standard Deduction Net Income Less: Personal and Additional Exemptions Taxable Income Multiplied by: Tax Rate (Schedular Rates) Income Tax Payable LOSSES FROM WASH SALES Legal Basis Sec 38 -

Wash sale is a sale of stocks or securities at a loss, whereby the seller acquir ed by purchase or exchange substantially identical stocks or securities within t he 61-day period (within 30 days before or 30 days after) of such sale. Requisites of a Wash Sale 1. The sale of stocks or securities is at a loss. 2. Within 30 days before or after such sale, the seller acquired by purchase or exchange substantially identical stocks or securities. 3. The seller is not a dealer in stocks or securities. The 61-day Period. The acquisition of stocks or securities within the 30 day-pe riod before or after the date of sale is determinative of whether the sale is a wash sale. 30 days before Date of Sale 30 days after

--------------------------------------- x --------------------------------------Effects of Wash Sale Loss 1. The loss from a wash sale is not deductible. 2. If substantially identical shares are acquired within the 30-day period after the date of sale, the loss from wash sale is added to the cost of the shares ac quired. Hence, the loss from wash sale has the effect of increasing the cost of reacquired shares. ORDINARY GAINS AND LOSSES Legal Basis Sec 40

The sale of property may result in a gain or a loss. The law provides that the gain or loss be recognized. Computation of Gain or Loss 1. The gain from the sale or other disposition of property shall be the excess o f the amount realized therefrom over the basis. 2. The loss shall be the excess of the basis over the amount realized from such sale or other disposition. 3. The amount realized from the sale or other disposition of property shall be t he sum of money received plus the fair market value of the property (other than money) received. Amount Realized (Cash received + Fair Market Value [FMV] of property received) Less: Basis (usually the Cost of Acquisition of Property) Gain (or Loss, if basis is greater than amount realized) Basis for Determining Gain or Loss from Sale or Disposition of Property The basis of property shall be:1. The cost, if such property was acquired by purchase 2. The fair market value (FMV) as of the date of acquisition, if property was ac quired by inheritance 3. If the property was acquired by gift, the basis shall be the same as if it wo uld be in the hands of the donor 4. If the property was acquired for inadequate consideration, the basis is the a mount paid by the transferee for the property Exchange of Property General Rule: Upon the exchange or property, the entire amount of the gain or lo ss shall be recognized. Exception: No gain or loss shall be recognized if in pursuance of a plan of mer ger or consolidation, property is exchanged solely for shares of stock (asset-fo r-stock swap). Losses from Sales or Exchanges of Property In computing net income, no deductions shall be allowed in respect of losses fro m sales or exchanges of property directly or indirectly:1. Between members of a family, which shall include only his brothers and sister s (whole or half-blood), spouse, ancestors, and lineal descendants 2. Between an individual and a corporation more than 50% in value of the outstan ding stock of which is owned, directly or indirectly, by or for such individual (major stockholder) 3. Between two corporations more than 50% in value of the outstanding stock of w hich is owned, directly or indirectly, by or for the same individual (common maj or stockholder) 4. Between the grantor and a fiduciary of any trust

5. Between the fiduciary of a trust and the fiduciary of another trust if the sa me person is a grantor with respect to each trust (common grantor) 6. Between a fiduciary of a trust and beneficiary of such trust. CAPITAL GAINS AND LOSSES Legal Basis Sec 39

Definitions Capital Assets property held by the taxpayer (whether or not connected with his trade or business), but does not include: 1. stock in trade of the taxpayer 2. other property of a kind which would properly be included in the inventory of the taxpayer 3. property held primarily for sale to customers in the ordinary course of trade or business 4. property used in the trade or business, of a character which is subject to th e allowance for depreciation 5. real property used in trade or business of the taxpayer Examples are personal or non-business properties (family car), property held for investment, and other property not used in business (vacant lot). Ordinary Asset those not considered capital assets and includes: 1. stock in trade of the taxpayer 2. other property of a kind which would properly be included in the inventory of the taxpayer 3. property held primarily for sale to customers in the ordinary course of his t rade or business 4. property used in the trade or business, of a character which is subject to th e allowance for depreciation 5. real property used in trade or business of the taxpayer Net Capital Gain the excess of the gains from sales or exchanges of capital asse ts over the losses from such sales or exchanges Net Capital Loss means the excess of the losses from sales or exchanges of capit al assets over the gains from such sales or exchanges Holding Period The length of time the asset was held by the taxpayer

Percentage of Gain or Loss to be Taken Into Account Ordinary Asset Gains are taxable in full (100%) and losses are deductible in ful l (100%). Capital Asset It depends on whether the taxpayer is an individual or a corporati on. Individual 100% of the capital gain or loss, if holding period for the capital asset is not more than 12 months 50% of the capital gain or loss, if holding period for the capital asset is more than 12 months Corporation 100% of the capital gain or loss, regardless of the holding period Limitation on Capital Losses Losses from sales or exchanges of capital assets shall be allowed only to the ex tent of the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the Philippines, a sub

stantial part of whose business is the receipt of deposits or the sale of bond, debenture, note, certificate or other evidence of indebtedness, any loss resulti ng from such sale shall not be subject to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses . The reason is that the securities mentioned are ordinary assets of the bank o r trust company. Net Capital Loss Carry-over If an individual taxpayer sustains a net capital loss in a taxable year, such lo ss shall be treated in the succeeding taxable year as a loss from the sale or ex change of a capital asset held for not more than 12 months (50% deduction). Not e that corporations cannot carry-over net capital loss. Summary of Rules for Corporations 1. Corporations shall recognize 100% of the capital gain or loss, regardless of the holding period. 2. Corporations cannot carry-over net capital loss. 3. Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges. Gains or Losses From Short Sales 1. Gains or losses from short sales of property shall be considered as gains or losses from sales or exchanges of capital assets. (A short sale is the sale of shares of stock which are not yet owned by the seller. For example, the seller anticipates a drop in the price of SMC shares. Even though he doesn t own SMC sh ares, he sells them to the buyer. When the price of SMC shares go down, he buys them and delivers them to the buyer. In the process, he makes a neat profit. A short sale is usually done through the stock exchange, where the seller can tak e advantage of the lag in settlement of transactions.) 2. Gains or losses attributable to the failure to exercise privileges or options to buy or sell property shall be considered as capital gains or losses. INSTALLMENT METHOD Legal Basis Sec 49

Sales in Which Income May be Reported in Installments 1. Sales of Dealers in Personal Property A dealer or a person who regularly sells personal property on the installment pl an may report as income in any taxable year that proportion of the installment p ayments actually received in that year, which the gross profit realized bears to the total contract price. Formula: Total Gross Profit r Taxable Year Total Contract Price x Amount of Installment = Income fo

2. Casual Sales of Personality Persons who make a casual sale of personal property under the following conditio ns: a. selling price exceeds P1,000 b. initial payments do not exceed 25% of the selling price 3. Sale of Real Property The sale of real property where the initial payments do not exceed 25% of the se lling price. * The term "initial payments" means all the payments received during the taxable year. It does not refer to the first payment or downpayment only.

GLOSSARY OF TERMS IN SECTION 22 includes: corporation an individual, a trust, estate or corporation person 6. partnerships, no matter how created or organized 7. joint-stock companies 8. joint accounts (cuentas en participacion) 9. association 10. insurance companies does not include: 3. general professional partnerships (partnerships formed by persons for the sol e purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business) 4. joint venture or consortium formed for the purpose of undertaking constructio n projects or engaging in petroleum, coal, geothermal and other energy operation s pursuant to an operating consortium agreement under a service contract with th when applied domestic e Government.to a corporation, means created or organized in the Philippines or (1) citizen of non-resident citizen Philippines who establishes the fact of his physical whenA its foreign laws. corporation, means a corporation which is not domestic. presen underapplied to athe (NRC) ce abroad with a definite intention to reside therein. (2) A citizen of the Philippines who leaves the Philippines during the taxable y ear to reside abroad, either as an immigrant or for employment on a permanent ba sis. (3) A citizen of the Philippines who works and derives income from abroad and wh ose employment thereat requires him to be physically present abroad most of the time during the taxable year. (4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permane ntly in the Philippines shall likewise be treated as a nonresident citizen for t he taxable year in which he arrives in the Philippines with respect to his incom resident from (RA) e derivedalien sources abroad until the date of his arrival in the Philippines. an individual whose residence is within the Philippines and who is not a citizen non-resident alien (NRA) thereof. an individual whose residence is not within the Philippines and who is not a cit fiduciary trustee, not engaged a foreign corporationexecutor, administrator, receiver, conservator or any perso resident foreign corporation (RFC)in trade or business within the Philippines. izen thereof. guardian, shares of agent any personstock withholding any fiduciary capacity for any any tax n acting inrequired to deduct and withhold person. under Section 57. include shares of stock of a corporation, warrants and/or options to purchase sh ares of stock, as well as units of participation in a partnership (except genera l professional partnerships), joint stock companies, joint accounts, joint ventu res taxable as corporations, associations and recreation or amusement clubs (suc taxable any golf, taxpayeryear include holders of to tax clubs), as mutual above shareholdersubject shares imposed anddefined fund h asperson polo or similarof stockby this Title. certificates. the calendar year, or the fiscal year ending during such calendar year, upon the fiscal of which the net income is computed basis year an accounting period of twelve (12) months ending on the last day of any month o ther thanincurred and paid or accrued paid or December. construed according to the method of accounting upon the basis of which the net securities includes computed trade isthe performance of the functions of a public office incomeor business under this Title. shares of stock in a corporation and rights to subscribe for or to receive such shares. It also includes bonds, debentures, notes or certificates, or other evid ence or indebtedness, issued by any corporation, including those issued by a gov ernment or political subdivision thereof, with interest coupons or in registered dealer in securities form. a merchant of stocks or securities, whether an individual, partnership or corpor ation, with an established place of business, regularly engaged in the purchase of securities and the resale thereof to customers one who, as a merchant, buys securities and re-sells them to customers with a vi bank ew to the gains and profits that may be derived therefrom. every banking institution, as defined in General Banking Law. A bank may either be a commercial bank, a thrift bank, a development bank, a rural bank or special non-bank financial intermediary ized government bank.

a financial intermediary, as defined in General Banking Law, authorized by the B quasi-banking activities angko Sentral ng Pilipinas (BSP) to perform quasi-banking activities. borrowing funds from twenty (20) or more personal or corporate lenders at any on e time, through the issuance, endorsement, or acceptance of debt instruments of any kind other than deposits for the borrower's own account, or through the issu ance of certificates of assignment or similar instruments, with recourse, or of repurchase agreements for purposes of relending or purchasing receivables and ot her similar obligations: Provided, however, That commercial, industrial and othe r non-financial companies, which borrow funds through any of these means for the limited purpose of financing their own needs or the needs of their agents or de deposit substitutes alers, shall not be considered as performing quasi-banking functions. shall mean an alternative from of obtaining funds from the public (the term 'pub lic' means borrowing from twenty (20) or more individual or corporate lenders at any one time) other than deposits, through the issuance, endorsement, or accept ance of debt instruments for the borrowers own account, for the purpose of relen ding or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. These instruments may include, but need not be limited to bankers' acceptances, promissory notes, repurchase agreem ents, including reverse repurchase agreements entered into by and between the Ba ngko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of a ssignment or participation and similar instruments with recourse: Provided, howe ver, That debt instruments issued for interbank call loans with maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilit ies, including those between or among banks and quasi-banks, shall not be consid ordinary income ered as deposit substitute debt instruments. any gain from the sale or exchange of property which is not a capital asset or p roperty described in Section 39(A)(1). Any gain from the sale or exchange of pro perty which is treated or considered, under other provisions of this Title, as ' ordinary income' shall be treated as gain from the sale or exchange of property which is not a capital asset as defined in Section 39(A)(1). The term 'ordinary loss' includes any loss from the sale or exchange of property which is not a cap ital asset. Any loss from the sale or exchange of property which is treated or c onsidered, under other provisions of this Title, as 'ordinary loss' shall be tre all and file who are holding neither of property which is not capital as def rank as loss employees atedemployeesfrom the sale or exchangemanagerial nor supervisoryaposition asset. mutual fund company ined under existing provisions of the Labor Code of the Philippines, as amended. an open-end and close-end investment company as defined under the Investment Com trade, business or profession pany Act. a branch include performance (RAHQ) regional established in the Philippines by multinational as an employee. shall notor area headquarters of services by the taxpayercompanies and which hea dquarters do not earn or derive income from the Philippines and which act as sup ervisory, communications and coordinating center for their affiliates, subsidiar regional operating the Asia-Pacific Region and other foreign markets. ies, or branches inheadquarters (ROHQ) a branch established in the Philippines by multinational companies which are eng aged in any of the following services: 1. general administration and planning 2. business planning and coordination 3. sourcing and procurement of raw materials and components 4. corporate finance advisory services 5. marketing control and sales promotion 6. training and personnel management 7. logistic services 8. research and development services and product development 9. technical support and maintenance 10. data processing and communications long-term deposit or investment certificates (LTDIC) 11. business development. certificate of time deposit or investment in the form of savings, common or indi vidual trust funds, deposit substitutes, investment management accounts and othe r investments with a maturity period of not less than five (5) years, the form o f which shall be prescribed by the BSP and issued by banks only (not by nonbank financial intermediaries and finance companies) to individuals in denominations

of P10,000 and other denominations as may be prescribed by the BSP. Sources: Llamado and San Diego, Philippine Income Tax. De Leon, The Fundamentals of Taxation. Acknowledgements: Thank you to Ron Morgia, CPA and Ronald Galura of the UP Pan Xenia Fraternity, C ollege of Business Administration, for their valuable inputs. Prepared by Rudyard S. Arbolado 2004E UP Law 0917-4894205 ?? ?? ?? ?? INCOME TAX REVIEWER UP LSG BAR OPS 2003 1

Bar Operations 2003, Law Student Government, College of Law, University of the P hilippines All Rights Reserved, 2003.