Tax1 LLB404 2012-2013 Prefinals Notes

INDIVIDUAL INCOME TAXATION
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Black transcript
A.
B.
General Principles, Section 23

1. A resident citizen is taxable on all income derived from sources
within and without the Philippines.
2. A non-resident citizen is taxable on all income derived from sources
within the Philippines.
3. An overseas contract worker is taxable only on income from
sources within the Philippines.
A seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively in the international
trade shall be treated as an overseas contract worker
4. A resident alien individual is taxable only on income derived from
sources within the Philippines
Individual Taxpayers
1. Resident citizen
An individual whose residence is within the Philippines and who is
a citizen thereof
a. May be a pure compensation income earner under an employeremployee relationship
b. May solely be engaged in trade/business/profession
c. May
both
be
an
employee
and
engaged
in
trade/business/profession
2. Non-resident citizen, Section 22(E)
a. A citizen of the Philippines who establishes to the satisfaction
of the Commissioner of the fact of his physical presence abroad
with a definite intention to reside therein.
b. A citizen of the Philippines who leaves the Philippines during
the taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis.
c. A citizen of the Philippines who works and derives income from
abroad and whose employment thereat requires him to be
physically present abroad most of the time during the taxable
year.
d. A citizen who has been previously considered as non-resident
citizen and who arrives in the Philippines at any time during
the taxable year to reside permanently in the Phils.
3. Resident alien
An individual whose residence is within the Philippines and who is
not a citizen thereof.
When does an alien become a resident of the Philippines?
Section 4 of Revenue Regulations No. 2: An alien actually present
in the Philippines who is not a mere transient or sojourner is a
resident of the Philippines for income tax purposes. Whether he is
a transient or not is determined by his intentions with regard to the
length and nature of his stay. A mere floating intention indefinite
as to time, to return to another country is not sufficient to
constitute him a transient. If he lives in the Philippines and has no
4.
5.
6.
C.
definite intention as to his stay, he is a resident. One who comes

to the Philippines for a definite purpose, which in its nature may be
promptly accomplished, is a transient. But if his purpose is of such
nature that an extended stay may be necessary for its
accomplishment, and to that end the alien makes his home
temporarily in the Philippines, he becomes a resident, though it
may be his intention at all times to return to his domicile abroad
when the purpose for which he came has been consummated or
abandoned.
Non-resident alien engaged in trade or business
An individual whose residence is not within the Philippines and
who is not a citizen thereof.
He shall be deemed a non-resident alien engaged in trade or
business if the aggregate period of his stay in the Philippines is
more than 180 days during any calendar year.
Non-resident alien not engaged in trade or business
An individual whose residence is not within the Philippines and
who is not a citizen thereof.
He shall be deemed a non-resident alien not engaged in trade or
business if the aggregate period of his stay in the Philippines does
not exceed 180 days during any calendar year.
Special employees
An individual employed by a Regional Area Headquarter of
multinational corporation, Regional Operating Headquarter of
multinational corporation, Offshore Banking Unit or Petroleum
Service Contractor
Resident Citizens, Non-Resident Citizens and Resident Aliens

1. Rule on taxability of income
a. Resident citizens
5% - 32% tax on net income from sources within and sources
without
b. Non-resident citizens
5% - 32% tax on net income from sources within
c. Resident aliens
2. What constitute gross income?
a. Compensation income
i.
Requisites for taxability
ii. Doctrine of cash equivalent
iii. Inclusions
(1) Monetary Compensation
(a) Regular salary/wage
(b) Separation pay/retirement benefits, not otherwise
exempt
(c) Bonuses, 13th month pay and other benefits, not
otherwise exempt
(d) Directors fees
(2) Non-monetary compensation
(a) Fringe benefits subject to tax
(i) Definition: Any good, service or other benefit
furnished or granted in cash or in kind by an
employer to an individual employee(except
rank and file employee)
TAX PREFINALS JEN, JASPER, REUVILLE, JADE, JARED, JAN, NEIL, RYAN, KRISTEL, RIZA, FRANK, PATRICIO, ANTHONY, KIM, BARBARA, KZ | 1
b.
c.
d.
(ii) Special treatment of fringe benefits: Subject to

32% final tax on the grossed-up monetary
value of the fringe benefits
(iii) Kinds of taxable fringe benefits
Housing
Expense account
Vehicle of any kind
Household personnel
Interest on loan at less than market

rate(extent of the difference)
Membership fees, dues and other expenses

borne by the employer in social and athletic
clubs or other similar organizations
Expenses for foreign travel
Holiday and vacation expenses
Education assistance to the employee or his

dependents
Life or health insurance and other non-life

insurance premiums or similar amounts in
excess of what the law allows
(b) Property
(c) Promissory note
(d) Stocks
(e) Cancellation of indebtedness, in favor of services
rendered
(f) Premiums paid by the employer on the life
insurance policy of the employer
iv. Exclusions
(1) 13th month pay and other benefits and payments
(2) Fringe benefits not subject to tax
(a) Benefits granted to rank and file employees
(b) Contributions of the employer for the benefit of the
employee
to
retirement,
insurance
and
hospitalization benefit plans
(c) Fringe benefits which are authorized or exempted
under special laws
(d) Employers convenience rule, as required by the
nature of the trade, business or profession of the
employer
(e) De minimis benefits, benefits relatively of small
amount, limited to facilities or privileges furnished
or offered by employer to his employees merely as
a
means
of
promoting
health,
goodwill,
contentment or efficiency of the employees
Gross income from trade, business or profession
Rental income
i.
Lease of personal property
ii. Lease of real property
iii. Tax treatment of
(1) Leasehold improvements by lessee
(2) VAT added to rental/paid by the lessee
(3) Advance rental/long term lease
Income from dealings in property
Types of properties:
i.
Ordinary assets
e.
f.
g.
h.
i.
j.
ii. Capital assets, Section 39

Capital gains derived from the sale of real property classified as
capital assets, 6%
Exceptions:
i.
Sale of principal residence, requisites
ii. Sale to the government or any of its political subdivisions,
agencies or GOCCs, options
Capital gains derived from the sale of shares of stock in any
domestic corporation
i.
Listed and traded through the local stock exchange, of
1%
ii. Not listed/not traded through the local stock exchange, 5%
and 10%
Passive investment income, and its special rates
i.
Interest income, 20% or 7.5%
ii. Royalty income, 20% or 10%
iii. Prizes and winnings, 20% or exempt
iv. Dividend income
(1) Cash dividend, 10%
(2) Stock dividend, exempt
(3) Property dividend, 10%
(4) Liquidating dividend, 5% - 32%
v. Share of a partner in the net income after tax of a taxable
partnership, joint account, joint venture or concessions,
10%
Annuities, proceeds from life insurance or other types of
insurance
Pensions, retirement benefit, or separation pay
Income from any source whatever
I can put any type of income, which income is taxable and which
income is not taxable.
i.
Forgiveness of indebtedness
If it is given because there is service rendered, then it is
subject to income tax. If it is gratuitously given, then it is
subject to donors tax.
ii. Recovery of accounts previously written off
If you have a receivable from the customer, and that
customer has been judicially declared as bankrupt, what will
happen to your receivable? It will be written off the books
now. It is no longer a collectible, worthless. Because of
that fact, you are allowed by law to deduct whatever
collectible as an expense. Now if you deduct it to the
expense, what will be the result? You diminish or lower your
income tax liability to the government. That is the first event
that took place.
When we talk about recovery, it means subsequent collection.
If that amount which you have considered already as
worthless and uncollectible, and you have deducted it as an
expense which lowered your income tax liability, such will be
collected in the future, for example the said person judicially
declared as bankrupt won the lotto and is now willing to pay
you, will that payment be taxable? Yes, to the extent it has
benefitted the tax payer. What is the said extent that
benefitted the tax payer? To the extent that it reduced the
income tax liability of the tax payer.
MAM TIUs 1st Illustration
Sales, Cost or Capital. From your sales, you deduct any

cost you have spent = gross income. And you are allowed
as a business to deduct expenses. And youre allowed to
deduct collectibles that are already worthless and net
taxable income. This is where you apply your 5 to 32%
rate. This will result to your tax due
If in 2005, you have sales of 10,000 and you have capital

of 5,000 so your gross income is 5,000. Your ordinary
and normal expenses is actually 3,000. But during this
year, your customer who owes you 2,000 was judicially
declared bankrupt. So you claimed this as your ordinary
and normal expense, this is not something you claim
every year. How much is your net taxable income? 5,000
plus the said deductions (in short, subtract them), so you
have zero.
Did the government benefit?
No.
In 2012, same amount. No improvement in the

business same type of expense. You have a net
taxable income of 2,000. Your debtor suddenly
presented himself and gave you the 2,000 as
payment. Will it be a taxable income in 2012? YES.
The reason why it is taxable in 2012 is that you were
benefitted in 2005, resulting to zero taxes. The
recovery of previously written off debts is taxable
only to he extent that it has benefitted the tax payer.
Assets
Costs/Ret. Capital
Gross Income
-Expenses:
Ordinary
Bad Debts
Net taxable income
x 5% 32%
Tax Due
2005
10,000
5,000
5,000
2012
10,000
5,000
5,000
3,000
2,000
-0x 5% 32%
-0-
3,000
2,000
2,000
4,000
MAM TIUs Edited Illustration (when it will not benefit the tax
payer)
Lets go back to 2005. If your ordinary expense is 5,000

and you have 2,000 as bad debts, it still results to zero
tax. In 2012 you recovered, will it be taxable? No. even if
you have not deducted the bad debts, you will still have
zero tax.
Assets
Costs/Ret. Capital
Gross Income
-Expenses:
2005
10,000
5,000
5,000
2012
10,000
5,000
5,000
Ordinary
5,000
4,000
Bad Debts
-0-0Net taxable income
-01,000
x 5% 32%
x 5% 32%
2,000
Tax Due
-03,000
MAM TIUs Illustration of Partial
Lets go back again to 2005, you have ordinary expenses

of 10,000. If you had no bad debts to deduct, you have
to pay 1,000 (taxable. But since you have 2,000 to
deduct, you pay zero. If you recover the 2,000 in 2012,
will it be taxable as a recovery? Yes. To the extent of
1,000 only (extent that you benefitted)
Assets
Costs/Ret. Capital
Gross Income
-Expenses:
Ordinary
Bad Debts
Net taxable income
x 5% 32%
2005
10,000
5,000
5,000
2012
10,000
5,000
5,000
3,000
3,000
2,000
-0-01,000
x 5% 1,000
32%
Tax Due
-02,000
Why would a recovery of account previously written off
be subject to defect? subject to income tax?
Because he benefitted and it was deducted in the

previous year.
If the writing off of accounts receivable benefitted the

taxpayer on the year of write off, it will be taxable if
subsequently recovered but the amount subject to tax
will only be the extend of how much the taxpayer was
benefitted.
If he was benefitted in full for the amount, then full

amount will be subject to income tax BUT if it benefitted
because the taxpayer has zero income liability despite
the absence of that written off account then any
subsequent recovery will not be taxable and the third
representation we have was if it partially benefitted, if
the taxpayer wherein half of it or portion of it lower the
tax liability then to that extent it will be subjected to tax
from the time it is recovered.
iii. Receipt of tax refunds or credit
How about tax refunds? What happens when you are
refunded by the government of taxes youve previously
paid?
It means that you have paid more than what is required

to pay.
And when you are refunded you are restituted with
money of the tax credit certificate.
Will that be receipt of money of the tax credit

certificate during that year received be subject to
income tax?
Yes.
Why would it be taxable if its only a return of the payment
you have excessively paid or wrongfully paid? Lets say your
liable for the government with 1 million, you paid 2 million.
Then you realized that you overpaid two years later you were
refunded of the one million overpayment. Will that receipt of
1 million be subjected to income tax?
This would still require the application of the tax benefit

rule to the extent that the taxpayer has been previously
benefitted by the payment of tax, subsequent recovery
will be taxable.
After gross income, a taxpayer who is engaged in trade
business or professional whether individual or corporate is
allowed and says which expenses includes in the tax
expenses. So if you have expenses of three million and you
paid real property tax of two million that brings down you
taxable income to 0. If you realized later on that the tax
estate or real property tax has been excessive and it should
only be 1 million you refund to the and the subsequent refund
of one million will be subjected whether a refund will be
taxable in the year of receipt the answer will be based on tax
benefit rule
Has for payment of the tax in the previous years
deducted from gross income and benefitted the
taxpayer. In this case, has the taxpayer been
benefitted?
Yes
So therefore the 1 million is fully taxable because the two

million composed of 1 million real property tax and 1
million overpayment actually reduced to zero. But if the
expenses was already at 4 million and he deducted taxes
of million wherein 1 million is correct and the other one
million is excessive payment subsequent recovery of this
one will not be taxable because 1 million payment here
did not have the company position whether it was
correctly one million to zero or two-million to zero.
And if it was only 3.5 million and 2 million was deducted

in taxes.
Will the subsequent refund of the 1 million by the
government be taxable?
I believe only to the extent of 5,000.
Why because without the deduction of taxes you would

have taxable income of 1.5 million minus the 1 million
correct taxes still taxable income of 500,000 but because
you have overpaid 1 million of taxes and half of that
overpayment helped the company in reducing the income
to zero level only have benefitted the company therefore
If what you have overpaid are income taxes, will the
subsequent refund of the overpaid income taxes be
taxable?
You have to determine what type of tax has been

overpaid. If the type of tax is not a deductible expense
such as income tax (you cannot deduct income tax in

computing income tax) (other non-deductible taxes:
donors tax, estate tax, VAT), subsequent refunds can
never be subject to tax because it has never been
deducted from your gross income.
Refunds of deductible taxes such as real property tax,
community tax, will have to be examined under the tax
benefit rule (taxable if it has benefitted the taxpayer in the
taxable year it has been paid) in order to determine whether
such refunds are taxable.
iv. Income from any source whatever
D.
Non-Resident Aliens
Two classes:
1. Non Resident Alien Not Engaged in Trade or Business and
Must not have stayed in the Philippines for more than 180 days
(continuous or aggregate), regardless of activity undertaken. (180
or less)
2. Non Resident Aliens Engaged in Trade or Business.
Must have stayed in the Philippines continuously or for an

aggregate period of more than 180 days, regardless of activity
undertaken. (181 and above)
Example: Mr. X, a tourist, has stayed in the Philippines for 7 months
without earning any income except that he won a raffle prize in SM. He
will be treated as a NRA Engaged in Trade or Business, even if he did
nothing, because he has stayed in the Philippines for more than 180
days. The determining factor is the number of days stayed, not the
activity undertaken by the alien.
The winnings in the raffle draw will then be subjected to the

withholding tax on prizes and winnings at 20% because SM is
within the Jurisdiction of the Philippines and can be compelled to
withhold.
IF he stayed only for 180 days, then FWT on his winnings will be
25% (because Mr X is a NRA Not Engaged in Trade or Business).
Its up to SM to determine the status of Mr X.
1. Engaged in trade or business
a. Rule on taxability of income
Taxed at 5%-32% of his NET income within the Philippines (NET
income because he is allowed certain deductions).
NRAs Engaged in Trade or Business are required to file their
Income Tax Returns at the end of the year, because they need to
collate deductions from their gross income.
b. What constitutes gross income?
See previous discussion under C
Subject to the same tax rates as a citizen and a resident alien,
except for:
i.
Cash dividends, 20%
ii. Property dividends, 20%
iii. Share of a partner in the net income after tax of a taxable
partnership, joint account, joint venture or concessions,
20%
What constitutes gross income?
i.
Cash dividends, 20%
ii. Prperty dividends, 20%
iii. Partners share, 20%

NRAs Engaged in Trade or Business have generally the same tax
rates we previously discussed for Citizens and Resident Aliens,
except for DIVIDENDS.
Non Resident and Resident Citizens are taxed at 10% final
withholding tax for cash or property dividends that they receive
and 10% on the partners distributed share in a taxable
partnership. The same dividends received by a NRA Engaged in
Trade or Business, however, will be subjected to a higher rate of
20% (whether cash, property, or partners share. Stock dividends,
however, remain to be not taxable)
Not engaged in trade or business
a. Rule on taxability of income
25% tax on gross income from sources within
NRAs Not Engaged in Trade or Business are taxed at 25% of gross
income from sources within the Philippines. Gross = not allowed
deductions
If a non-resident alien not engaged in trade or business was able
to sell personal belongings, clothes, jewelry. Let us say, a nonresident alien who has stayed in the Philippines for less than 180
days, he some pieces of jewelry for his own use but decided to sell
it for a higher price.
Will the entire selling price be subject to the 25% percent
tax rate?
No, what is subject to 25% income tax is the gross incomeselling price minus capital/cost.
In our previous discussions, we said that an individual, from a
resident citizen to a non-resident alien engaged in trade or
business is taxed at 5-32% on their net income which means
gross income less expenses. In the case of NRA-NETB, they are
taxed at their gross income without the benefits of expense
deductions. Gross income does not equate to selling price unless
of course, what he (NRA-NETB) is engaged in the rendering of
service because in rendering of service, you do not have tangible
cost to deduct from your gross income. Gross income simply
means that the individual is not allowed to deduct expenses. So in
our example, if you sold the jewelry for 2M (which you bought for
1M), the gross income is 1M. If you belong to the classification of
individuals who are taxed at their net income, then you will be
allowed to make deductions such as the commission you gave to
the person who looked for a buyer, etc.
Would a NRA-NETB be required to file an ITR at the end of
the year?
No. The nature of the 25% tax is a final tax. So, anyone who
pays an NRA-NETB is obligated to automatically withhold 25%
and remit it to the government. So whatever an NRA-NETB
receives is net of the 25%, it is only 75% having subjected to
tax with finality. Hence, the individual is not required to file
an ITR at the end of the year.
The reason why he is subjected to final tax is because he is not
actually within our taxing jurisdiction, he is a transient.
b. All items of gross income
Subject to 25% final tax, except for (which shall be the same
as citizens & resident aliens):
i.
Gain on sale of shares of stock in any domestic corporation
ii.
2.
E.
Gain on sale of real property classified as capital asset

located in the Philippines
What if the NRA-NETB earns income through royalties and
dividends, what is the taxability of such income?
Section 25 (b) NIRC
Nonresident Alien Individual Not Engaged in Trade

or Business Within the Philippines.- There shall be
levied, collected and paid for each taxable year upon the
entire income received from all sources within the
Philippines by every non-resident alien individual bot
engaged in trade or business within the Philippines as
interest, cash and/or property dividends, rents salaries,
wages,
premiums,
annuities,
compensation,
remuneration,
emoluments,
or
other
fixed
or
determinable annual or periodic or casual gains, profits,
and income, and capital gains, a tax equal to 25% of
such income. Capital gains realized by a non-resident
alien individual not engaged in trade or business in the
Philippines from the sale of shares of stock on an
domestic corporation and real property shall be subject to
the income tax prescribed under subsection (c) and (d) of
Section 24.
So except:
i.
Gain on sale of shares of stock in any domestic
corporation (5% on first 100K, 10% on succeeding, STT)
ii. Gain on sale of real property classified as capital asset
located in the Philippines (6% of Gross Selling Price)
Now you may ask if a non-resident alien may own real properties
in the Philippines. Yes. They can own condominium units as well
as own parcels of land by right of succession.
Special Employees
Who are special employees?
Special employees are those employees employed in special

corporations and special corporations are the following:
(1) Regional Area Headquarters (RAHQ) of multinational corporations,
defined in Sec. 22
(2) Regional Operating Headquarters (ROHQ) of Multinational
Corporations, defined in Sec. 22
(3) Offshore banking units
(4) Petroleum service contractors
1. Nationality and position
Are special employees alien employees or Filipino employees?
The general rule is only alien employees occupying managerial

and technical positions can be special employees. Only in cases
where no alien individual can fill up that requirement would a
Filipino individual be allowed to become a special employee
subject to the preferential, special tax rate of only 15%.
So, would you agree with me if I say that all employees of a
Regional Area Headquarter of a Multinational Corporations is
subject to 15% tax on their compensation income?
No, only managerial and highly technical positions and these

positions should belong to the top management.
Who are qualified (in relation to Filipinos)?
(Revenue Memorandum Circular No. 41 2009)
2.
3.
Filipinos employed by ROHQs or RHQs in a managerial or technical

position shall have the option to be taxed at either 15% of their
gross income or at the regular income tax rate on taxable
compensation income.
Taxability of income
15% preferential tax
Filipinos exercising the option to be taxed at 15% preferential rate for
occupying the same managerial or technical position as that of an alien
employed in an ROHQ or RHQ must meet all the following
requirements:
a. Position and Function Test- The employee must occupy a
managerial or technical position and must actually be
exercising such managerial or technical functions pertaining to
said position;
b. Compensation Threshold Test- the employee must have
received, or is due to receive under a contract of employment a
gross annual taxable compensation of at least 975,000.00.
c. Exclusivity Test-The Filipino managerial or technical employee
must be exclusively working for the RHQ or ROHQ as a regular
employee and not just a consultant or contractual personnel.
Exclusivity means having just one employer at a time.
The Filipinos is not required to be both managerial AND highly
technical. It can be managerial OR highly technical. That person must
occupy top management still so technical support, not a special
employee.
Insofar as the Filipino special employees are concerned, there rates
actually is not exclusive 15%, they have the option to be taxed at
15%. So the default really is Filipino employees employed by these
headquarters are subject to 5-32% and under the circular they will
have their option to be taxed similarly as alien employees at 15% if
they have satisfied the three test:
1.) Position and function test if they occupy managerial or highly
technical position, not only by designation but rather, the actual
function itself.
2.) Exclusivity test he must be employed by that headquarter or
any of the four special corporations as an employee not as a
consultant, and not concurrently be an employee of another
company. Otherwise the Filipino will be taxed at 5-32%.
3.) Compensation threshold test that only Filipino employees that
will have an annual compensation income of at least 975,000php
(exclusive of retirement pay, separation pay etc.) will enjoy the
15% (much better than the 5-32%, because 975k is already
subject to 32%, 15% is lower)
-but if anytime during the year you fall below 975,000 php, from
that point forward you will be subjected to the 5-32%.
This only applies to Filipino special employees. Alien employees

always 15%
Source of income
Salaries, honorarium, wages, emoluments, remunerations and
other similar income
So the tax rate of alien employees, Filipino employees would be
15% on what type of income?
Iincome from employment which are salaries, wages,

honorariums, per diems, which are related to such employment.
F.
All other income outside that employment will no longer enjoy the
15%.
Individual Taxpayers Exempt from Income Tax

1. Minimum wage income earners
There is no one statutory minimum wage for the entire Philippines, it
depends per region. Ex. Cebu city and Cebu province have different
statutory minimum wage.
If you have an employee in your company here in Cebu who is
receiving 305php per day and he subsequently assigned to
another branch of your company in some parts of the province
where the minimum wage is only 295php which is 10 peso
lesser than the statutory minimum wage here in Cebu city, will
he be subject to tax? Will you be obligated to withhold tax
from the employee?
YES. Where an employee is assigned to an area where he is

receiving a salary of more than the statutory minimum wage in
that area where he is assigned he will already be subject to tax,
the employer is already required to withhold tax. because
statutory minimum wage is determined in the area where he is
currently employed or assigned, in that case even if there is no
change, no increase in his income still, the area determines
whether he is earning the minimum wage or not.
But the income prior to the assignment or transfer is still exempt
because that time he was still considered a minimum wage income
earner.
If the other way around happens, the employee is earning 305php
here in Cebu city and later assigned to Manila where the minimum
wage is more than 305, there is no question that the employee is
exempt from income tax. But there is a labor issue that you would
have to increase the wage of the employee to comply with the
minimum wage in Manila.
If you give your employee 306 pesos a day (Cebu City Satutory
minimum wage 305php) is he subject to income tax?
YES, even if it is a mere peso difference. Because he is already

beyond the minimum wage.
Other incomes by the minimum wage earner received from you as
their employer, will it be exempt still? YES, any overtime pay, holiday
pay, night shift differential, hazard pay, or those what we call premium
payments are exempt from tax and is still part of their minimum wage.
Thankfully there has already been a revision, because prior to RA 9504
any overtime pay received by the minimum wage earner already
withdraws him from the category of minimum wage, which is unfair.
Other incomes such as commissions and bonuses beyond the 30,000
exempt bonus will already revoke the minimum wage income earner
from the category.
If you are a minimum wage income earner earning 305 pesos
per day, no other source of income from your employer but you
exercise your profession separately. So you have a professional
income plus your minimum wage from your employer, will you
now be subject to tax?
This is what you have to remember, the law provides under sec.
24 that resident citizens, non-resident citizens, and resident aliens
are taxed in their income on all their taxable income apart from
passive incomes, and capital gains from 5-32% except if it falls
a.
b.
c.
under the minimum wage. Now in that case although he is earning

minimum wage income, he is earning additional income. He will
have to declare his minimum wage income as part of his
professional income at the end of the year (collate as the 5-32%
tax relates to all income earned). But because insofar as the
employer is concerned, he is only giving out minimum wage, the
employer cannot withhold, the employee remains exempt from tax
insofar as his relationship with his employer is concerned because
the employer cannot withhold tax on an income beyond its
control. The professional income is no longer within the control of
the employer. But on the part of the employee he have too
combine his income at the end of the year including that received
from the minimum wage of employment which will result in
increasing or elevating the tax bracket prescribed by law.
Another example, Employee earns 305 from employer A, and another
305 pesos from employer B.
Should he be withheld of taxes from his employers or by

any of his employers?
No, he remains exempt, as he is still receiving the minimum

wage as far as the employer is concerned. Because the
employer has no control over the other income earned by the
employee from another employer.
Is he liable for income tax?
No, the total of his income is more than the statutory

minimum wage
The employer is bound with his contract with the employee. It is

now with the employee to combine his 2 incomes from the 2
different jobs at the end of the year and pay the taxes upon filing
for income tax.
Remember:
The exemption from tax by a minimum wage earner applies only

to income earned from employment. Income derived from the
exercise of trade, business or profession regardless if below the
minimum wage is still subject to tax unless that income (from
trade, business or profession) will never exceed your personal and
additional exemption.
TP is not required to report his income if aside from his minimum wage
income, what he earns is a passive income taxed with finality
Example:
If an EE earns minimum wage + 1M as interest income from

an inheritance:
ER cannot withhold income tax since his wage from employment is still
minimum wage. And EE is not required to file an ITR at the end of the
year since his other income (interest) is a passive income taxed with
finality or subject to FWT (this does not form part of the gross income
subject to 5-32%)
BUT if an EE earns minimum wage + 1m as an interest income

from 5/6:
The interest income here is not a passive income. Interest income

to be passive must be from financial institutions. In this case
which is already lending
Statutory minimum wage, defined
Minimum wage earner, defined
Income also subject to tax exemption:
i.
Holiday pay
2.
3.
G.
ii. Overtime pay

iii. Night shift differential pay
iv. Hazard pay
Senior citizens
Who are senior citizens?
Those aged 60 years old and above. But not all senior citizens are
exempt from tax, must meet the qualification.
a. Qualifications
earning MINIMUM wage from EMPLOYMENT (the applicable
minimum wage in the area) OR
earning not more than 60K income annually (from whatever
source)
SO that if Senior citizen earns 70k annually as minimum wage
from employment with XYZ corporation, he is still exempt from
income tax since it is still belongs in the minimum wage category.
Minimum wage depends on the rate applicable on the area.
b. Exemption
exempted also to the:
VAT, 20% discount on other purchases , 5% electric and

water bills
Exemptions granted under international agreements
There are plenty of exemptions granted under tax treaties. Example is
when an individual comes to the country as a trainee so long as does
not earn income for more than this amount of dollars, etc exempt from
income tax. (No detailed discussion)
Kinds of Deductions
1. Basic personal exemption
each individual allowed basic personal exemption of 50k; in case of
married individuals where only one of the spouses is deriving gross
income, only such spouse shall be allowed personal exemption
a. Php50,000 for every individual, except non-resident aliens not
engaged in trade/business
regardless of civil status, married or not
b. Php50,000 for non-resident aliens engaged in trade/business
subject to rule of reciprocity
reciprocity means that the foreign country where the NRA etb
is a citizen grants exemptions to Filipinos not residing there but
doing trade or business therein. The amount granted should not
exceed the amount of personal exemptions allowed under our
laws
c. Change of Status
i.
Death of taxpayer during the taxable year
Kind of
RC
NRC
RA
NRAetb
NRAnetb
Exemption
Personal
Yes
Yes
Yes
Based on
No
Exemption
reciprocity:
(50k)
allowed if
country of
domicile of alien
allows the same
personal
exemption to
Filipinos not
resident on that
met so that the tax payer may be allowed to claim the additional
exemption of P25,000.
Living with the tax payer, temporary absence is allowed, some are
you are not living with your parents, chiefly dependent for
support, that is why if Mr. X and Mrs. B has two children, one
supports the other, this one supports the other child, even if all
the requisites are met, no one, not one of them can claim the
deduction because, Mr. X is supporting a child living with the
mother and the mother is supporting a child living with the father.
Not all the requisites are met, not allowed to claim, but that is
only for discussion purposes in real life it is not necessary to tell.
Then can you claim additional exemption for taking of a
senior citizen? If you are a benefactor of a living citizen,
meaning you are the one with whom the senior citizen is
living, chiefly dependent on you for support, of course not
the 21 years of age, 60 years of age, at least no gainful
employment, can you deduct P25,000?
No. For P25,000 to apply, it only applies to a qualified

dependent. A qualified dependent under RA 9504 refers only
to legitimate, illegitmate or legally adopted child. So even if
you are taking care of a senior citizen, it is no longer
beneficial for tax purposes, before it was because it is
changing your status from single to head of the family,
increasing your personal exemption. But with the personal
exemption fixed at P50,000, regardless of one's status, and
additional exemption refers only to children.
Now, who by default should claim the additional
exemption?
Student: The husband
Why do you think it's the husband?
Probably because (?)the wife(?)it is more beneficial to

deduct such exemption from the higher income earner.
So additional exemption can be deducted by the husband
unless?
Assuming they are both earning income, unless the husband

waives his right to claim even so he has to file necessary
documents, inform his employer, the employer of his wife and
more importantly the BIR.
If your wife has given on december 31, 2011, in filing your tax return
for 2011, can you claim additional exemption in full?
country
*If US allows
exemption of 2k
USD(84PHP) to
Filipinos
In the Phils
that alien from
the US only
allowed up to
50K
*If US allows
exemption to
Filipinos 1K
USD (42K PHP)
In the Phils
that alien only
allowed 42K PHP
Additional
Exemption
(25K PHP for
every
qualified
dependent
not exceeding
4
dependents)
2.
Yes
Yes
Yes
WE allow
personal
exemption of
50K or w/c ever
is lower granted
by the other
state
No
No
Reciprocity Rule
apply only to the
PERSONAL
exemption.
Since
not
expected
dependents are
in the Philippines
Additional exemption
a. Php25,000 for qualified dependents of individuals, except nonresident aliens
b. Maximum allowed, four(4) qualified dependents
c. Who is a qualified dependent? The legitimate, illegitimate or
legally adopted child/ren.
So to illustrate, if Mr. X has an Illegitame son that lives with the
mother, he is fully supporting the child, not more than 21 years of
age, not married and not gainfully employed, can Mr. X claim the
additional exemption?
Dependent means legitimate, illegitmate or legally adopted child,
living with the tax payer, chiefly dependent upon him for support,
not more than 21 years of age or even beyond so long as he is
incapable of self-support because of mental or physical defect, not
married and not gainfully employed, all of these requistes must be
d.
e.
Yes. (Student answer in audible)

Qualifications of a dependent
Change of Status
i.
Additional dependent during the taxable year
If your wife has given on december 31, 2011, in filing
your tax return for 2011, can you claim additional
exemption in full?
Yes. (Student answer in audible)

You know the concept of giving additional exemption of
P25,000 for each child is for that amount not taxable is to in
answer for the needs of having such chid, but your child was
born on the last day of the taxable year, can you still claim
the exemption on 2011 or can you begin only to claim
such exemption that next year?

Attorney's comment: Jibberishly inaudible.
Death of dependent during the taxable year
If Mr. X losses his child on January 1, 2012, can he still
claim additional exemption for 2012?
Yes because, according to the law on change of status, it

is provided that it is should interpreted in favor of the
taxpayer, any change in the status, if it is the death of
the taxpayer, or any other change, even if it is in the
beginning of the year is considered during the entire
year, he is allowed for that exemption. If a child is born
even on the last day of the year it's as if for the entire
year, he has that exemption. If a child gets married
during the year, he will still be considered, for one last
time, as an exemption, so long as he is no yet over 21
years of age.
iii. Gainful employment of the dependent during the taxable
year
So any change in the status, gainful employment, birthday
(21), death, birth, marriage of the dependent, any change of
status will always be interpreted in favor of the taxpayer
claiming the exemption. Anyway it will not be any loss to the
government because there is always a limit in time. Diba sa
dependent is only up to 21 years of age even if can claim it
during the year, it will still end on 21.
iv. Dependent became 21 years of age during the taxable year
A child more than 21 years of age, can the parents still
claim for additional exemption?
So even if more than 21 years of age, if he is

incapacitated, mentally of physically, you will still be
considered as a dependent. But if he is married, more
than 21 years of age, having gainful employement, he is
no longer a dependent.
Premiums on health and hospitalization insurance
What are other exemptions granted to individuals?
Student: inaudible
Let me ask you, would an individual taxpayer, resident
citizen, be allowed to claim personal exemption regardless
of the type of income that he earned? Otherwise stated,
can a resident citizen claim personal exemption in all cases,
without regard whether he is earning purely compensation
income, income from business, or a mix of both?
Yes. The personal and additional exemptions, including

premiums on health insurance, is available to all individuals,
regardless of the type of income the individual is earning.
What is limited only is the claiming of itemized deductions and
optional standard deductions, which is only available to
taxpayers who are engaged in trade, business or professional
because itemized business connotes business expenses.
If you are an individual engaged in the exercise of
professional even if you are not an employee, you may
claim only personal or additional or premiums on health
and hospitalization insurance or itemized or optional
standard deduction.
But if you are purely an employee without any business
trade or profession, you may only claim personal exemption,
ii.
f.
g.
h.
additional exemption if you have a child and premiums and

hospitalization insurance. Just don't forget that itemized and
optional will only apply if there is trade, business or profession.
Not only that, the premiums on and hospitalization insurance.
What are the requirements for an individual to claim
business expense or deduction?
1. Premium payments made more than P2,400 per annum or
more than P200 per month can only be deducted under the
amount of P2,400.
2. The salary of the family must not be more than P250,000 a
year. If you are single, that is the salary combined by the
father and mother and the taxpayer. If you are married, the
salary combined that of the husband and the wife. Very
difficult to claim if your income is more than P250,0000.
3. The spouse claiming the deduction is the one who will claim
the exemption on premiums on health and hospitalization
insurance.
Limitations:
i.
Must not be more than Php2,4000 a year (i.e., Php200 a
month)
ii. The family must have an income of not more than
Php250,000 a year
iii. The claimant must be the spouse claiming the additional
exemption
Itemized business expenses
i.
The ordinary, necessary and reasonable expenses incurred
in relation to trade, business or profession, as enumerated
in Section 34 of the Tax Code
ii. Default claim of expenses
To be discussed extensively in Corporate Income Taxation
Optional standard deductions
i.
A standard deduction available to individuals and
corporations, except non-residents, in an amount not
exceeding forty percent (40%) of the gross income, in lieu
of the itemized business expenses.
ii. When elected, irrevocable for the taxable year
iii. When elected by the general professional partnership, the
individual partners shall use optional standard deduction in
its individual income tax returns
What is the difference between itemized deductions and
optional standard?
The difference between itemized(?) is when you deduct each

and every expenses whether related to trade, business or
profession. It is supported by official receipts and invoices. It
is the default type of expense without any invitation that you
would wish the optional standard deduction, automatically it
is expected that you itemize your expenses. Any amount to
all types of taxpayers who are taxed on their net income. For
the 5 individuals that we have mentioned until NRA-ETB are
taxed at 5%-32% net income, they are allowed to claim the
itemized expenses.
What may be Optional Standard deduction may be in lieu of the
Itemized deducitons if you cannot support your expenses with
official receipts, invoices, and other records. It is an arbitrary
amount 40% with any question as to what type of expenses these
H.
I.
are - 40% of your gross income. Once chosen in the first quarter
remains irrevocable during the entire year. Who are allowed to
claim optional standard deductions? Both individuals and
corporations except the non-residents. For the 5 individuals we
have stated there, though we said 4 can claim itemized deductions
but for optional only 3 can claim except non-resident alien. So
the 2 last items under non-resident engaged in trade and not
engaged in trade are not allowed to claim optional standard
deductions.
Entitlement to Deductions
1. Pure compensation income earner under an employer-employee
relationship
a. Basic personal exemption
b. Additional exemption/s
c. Premiums on health and hospitalization insurance
2. Solely engaged in trade/business/profession
d. Business expenses
i.
Itemized deductions
ii. Optional standard deductions
3. Mixed income earner
d. Business expenses
i.
Itemized deductions
ii. Optional standard deductions
Estates and Trusts
Estate is a mass of properties left by the deceased person
Trust is right to property whether real/personal held by one person-trustee
for the benefit of another person-beneficiary
ESTATE
TRUST
Grantor/trustor
Administrator/Executor
INCOME
INCOME
Estate
TRUST
Estate Tax
- Transfer tax
INCOME
heirs
Fiduciary/trustee
Jan. 1
2012
INCOME
... Apartment units subject to rent, etc. Any income that it

generates will be subject to income tax treated just like an
individual tax payer. So estate taxation is different because
Dec. 31
2013
Will Mr. X, as an individual, have to claim the
basic personal exemption?
Yes, P50,000 as an individual. Will be allowed
to claim the additional exemption for each
qualified dependent that he has - qualified
dependent only refers to a legitimate,
Sept. 15
beneficiary
estate taxation under the Tax Code is a tax on the estate left
by the decedent. It is not a tax on the income.
Why do you think estate taxation would not apply to
the entire estate just the income that it generates?
It's because estate tax which is a transfer tax because of
the privilege of receiving property upon death is only a tax
on the gross value of the estate at the time of death. So it
does not consider any income or properties generated by
that estate after death. So there is a reckoning point - at
the time of death estate taxes will be computed or the
value is the value at the time of death. So any increases or
decreases will not affect estate taxation. That is why if it
earns income, it will be subjected to income tax.
What is the tax rate on estate income taxes and trust
income taxes?
Because they are treated similarly individual taxpayers, it

will be the same 5%-32% tax rate based on the NET
INCOME.
It is subject to deductions.
They are
deductions allowed including exemptions.
ESTATE INCOME TAXATION
What type of settlement will be subject to estate

income taxation?
It's when the estate is under administration and

judicial settlement. If the estate is under
extrajudicial settlement, no estate income tax is due
rather any income earned by the estate will be
taxable in the hands of the estate or it may be an
taxable unregistered partnership.
Let us assume that this were (?). (ILLUSTRATION) If Mr.

X dies today which is Sept. 15. In 2012, there will be 2
taxpayers. There will be Mr. X during his lifetime, any
income, he will have to file separately, of course, not
himself but his executor or administrator would file an
Income Tax Return for his income during his lifetime. And
after his death, another Income Tax Return will be filed
by the estate of Mr. X. And this will continue Dec. 31,
2013, another estate income tax return will be filed until
the estate is judicially settled, distributed to the heirs.
So in 2012, there are 2 taxpayers subject to the same
tax rate of 5%-32% based on the amount of income
generated.
5%-32%
BPE=50K
5%-32%
BPE=20K
Estate
Mr. X File -ITR AE=25K (4)
Estate ITR
AE=0
ADE
IT
ADE
Dec. 31
illegitimate or legally adopted child excluding

brothers
and
sisters,
excluding
parents,
excluding senior citizens.
So, he can claim
assuming he has qualified dependents not
exceeding 4.
How about the estate? In filing the estate tax
return, will it be allowed to take a personal
exemption? Yes or No.
Yes
Of how much will you be allowed to claim a
basic personal exemption?
P20,000.
Additional
exemption
for
each
qualified
dependent?
An estate does not have a child.
The reason why it is P20,000 basic personal
exemption is because when the Tax Code of 1997,
R.A. 8424 was enacted, Sec. 62 provide for the
exemption available to estates and trusts which is
P20,000, included into the exemption granted to
single individuals. When R.A. 9504 was enacted in
2005, if you notice the heading, it amended certain
sections without including Sec. 62 of the Tax Code.
And the P50,000 exemption refers to only individual
taxpayers. Estate is treated as an individual taxpayer
but not an individual. So in cases of exemption, we
construe strictly against the taxpayer. So without
any law amending particularly Sec. 62 of R.A. 8424,
then you can say that it should only be P20,000
personal exemption.
Admittedly, it cannot be
allowed any additional exemption to a child.
ESTATE
Administrator/Executor
Income
ESTATE
2012
Income
2013
100M
5 heirs
100M
100M
Distributed 10 M to
each heir
50M
Assuming no
expenses
->
50M
20K
20K
Yes taxable
estate
Entirely deductible,
cannot deduct
distribution from
2012 income
*if distributed to
heirs 2012 income
in 2013, not
taxable, subject
already to tax
So what would comprise the income or gross

income of an estate?
We said the income of an estate should be during the

year. Let us assume that for the remainder of 2012
when Mr. X died, his estate earned an income of
P100M from rent or rent income.
How much would be the taxable income less the
expenses?
It is just like a business when you are renting

personal properties less the basic personal
exemption of P20,000. But if there are distributions
to the heirs during the year, say for example, there
are 5 heirs and the income of P100M, 50 or half of it
was distributed to the 5 heirs, P10M each, will the
P100M be taxable, let us say there are no expenses
to make the example simple. No expenses. You
only deduct the basic personal exemption.
Will the entire gross income be taxable or would
only be the P50M less the basic personal exemption
during the year?
You have read through the outline until the end, it

provides there deductions are allowed to the extent
of any distributions of the income made during the
year. But it does not mean that the income will
escape income taxation. The income that has been
distributed to the heirs will be taxable in the hands
of the heirs. So what will be taxable to the estate is
only that which is left, the P50M less the P20,000

basic personal exemption and the P50,000
distributed during the same year will be taxable
separately in each to every year, not less the
personal exemption that they can claim - the
additional exemption.
The income that has been distributed to the heirs will

be taxable. What is only taxable to the estate is that
what is left, 50M less 20k basic personal exemption.
If the 50M will be distributed during the same year,
will be taxable separately 10M each to every heir, of
course less the personal exemption that they can
claim.
So what if no distribution is made?
The entire gross income less expenses will be

taxable in the hands of the estate. If in the following
year, 2013, that will be distributed in the hands of
the heirs.
Will it be taxable in the hands of the heirs?
In 2012, no distribution was made, assuming no
expenses but we can claim 20k personal
exemption. Will the entire 100m be taxable less the
20k?
Yes, taxable and the taxpayer is the estate. If in

2013, the estate earned another 100m and no
expenses but deduct 20k. Distribution were made
coming from the 2012 income, 50m was distributed.
Is the distribution 50m deductible to income earned
in 2013? No, because it did not reduce the income in
2013 and it is a different set of income.
Will the distribution of 50m coming from the 2012
income be taxable in the hands of the heirs?
(Distributed in 2013)
No, because it has already been subjected to tax in

2012. It's taxable in the hands of heirs if the
distribution is from the current income. Diba the
entire 100m was already tax. You have to look at it
on a yearly basis.
What is prohibited, no distribution of the estate will be
made until and unless the estate taxes will be paid. If the
estate will not be paid of estate taxes, this will not be
distributed to the heirs. What we are talking right now is
the distribution of the income.
One the judicial settlement is terminated at one point,
then we no longer have an estate to look into. We have
to look into whether the heirs have partitioned the
income. If there is no partition made, there is a coownership made. As a general rule, co-ownership is not
taxable if the purpose is only for the common enjoyment
or preservation of the property, but once there is
substantial investments and improvements, then it will
be a partnership and taxable as a corporation.
What if it was not judicially settled?
If a parcel of land left, not judicially settled and

earning income but distributed to the heirs
every time. The distribution will be taxable in

the hands of the heirs. We are not looking it as
an estate left nor an unregistered partnership.
The distributed income will be subject to 5-32%.
We will not have any estate income tax return.
At the time of death, there will only be one
income tax return and that will only be of the
decedent for his income during his lifetime.
1.
2.
TRUST
Only receive it at the time of emancipation or age of

majority. It's not really that popular here in the
Philippines.
Trust when earns income is generally taxable similar to

an income generated by an estate, except for that which
is provided in number 2 of the outline. When the trust is
formed in favor of the employees which is really a
pension, stock, bonus or profit sharing plan for the
benefit of some or all of the employees. It shall be
exempt from tax.
Application
Income tax shall apply to the income of estates or of any kind of
property held in trust.
a. Income accumulated in trust for the benefit of unborn or
unascertained person/s with contingent interests and income
accumulated or held for future distribution under the terms of
the will or trust
b. Income which is to be distributed currently by the fiduciary to
the beneficiaries, and income collected by a guardian or an
infant which is to be held or distributed as the court may direct.
c. Income received by estates of deceased persons during the
period of administration or settlement of the estate
d. Income which, in the discretion of the fiduciary, may be either
distributed to the beneficiaries or accumulated
Exception
Employees trust which forms part of a pension, stock, bonus or
profit-sharing plan of an employer for the benefit of some or all of
his employees shall be exempt from income tax:
a. If contributions are made to the trust by such employer, or
employees, or both, for the purpose of distributing to such
employees the earnings and the principal of the fund
accumulated by the trust in accordance with such plan; and
b. If under the trust instrument, it is impossible, at any time prior
to the satisfaction of all liabilities with respect to employees
under the trust, for any part of the corpus or income to be used
for or diverted to purposes other than for the exclusive benefits
of the employees.
That includes retirement funds if it is really addressed in favor of
whom - the employees. So when the corporation creates a trust in
favor of its employees for retirement or pension for the future, there is
one juridical person who will hold the trust in favor of the employees,
it may be a bank, that what we call trust-passing or it may be an
insurance company and that trust is entirely a separate juridical entity
from the corporation. So any outflow of money from the corporation
to that trust will only be considered as a permanent outflow. It will
3.
not redound to the benefit of the company. For the trust income to be
exempt, there are 2 requirements:
1. The contribution are made either to the employer or employees or
both and its purpose of distributing such earning to the employee
and
2. It is not to be diverted for purposes of other than for the exclusive
benefit of the employees
If the requirements are not met, then the income from such trust
even if for the employees will be taxable.
But if the company creates a retirement fund that is not managed by a
trust, then, it is not a separate entity. It still forms part of the assets
of the company. Any income will be taxable.
However, any amount actually distributed to any employee or
distributee shall be taxable to him in the year in which so
distributed to the extent that it exceeds the amount contributed by
such employee or distribute.
So there are 3 parties: the grantor-trustor, the trustee and the
beneficiary.
We are talking of the income that is taxable in the hands of whom the trustor, trustee or beneficiary?
If the trust that has been created is a revocable, meaning

revocable in favor of the grantor anytime, then it is taxable in the
hands of the grantor. It will not be considered as a separate trust
because it is revocable. What we are considering here, (?) is the
type that is a irrevocable trust, taxable in the hands of the
trustee-fiduciary. But when there are distributions of the trust
income for the beneficiary during the year, it will be treated
similarly as the distributions we have discussed early on. So if
part, talking of a irrevocable trust, if part of the income is
distributed to the beneficiaries during the year, if such income was
earned during the year, it will be allowed as a deduction only the
net that has been left or the remaining amount that has been left
with the trust is taxable and what was distributed is taxable in the
hands of the beneficiary. If it is not distributed, the entire income
is taxable in the hands of the trustee. If it is subsequent year, the
distributions coming from the income of a subsequent year, it will
no longer be taxable in the hands of the beneficiary because it has
already been taxed in the hands of the trustee.
Determination of tax
a. Consolidation of income of two or more trusts
There 2 (?) created by the same grantor in favor of the same
beneficiary. Usually what happens is that the trustee will file a
separate ITR but for tax purposes, since the grantor is the same
and the beneficiary is the same, it will be consolidated for
purposes of disallowing the excess of additional exemption paid.
There will only be one basic personal exemption allowed. Such as
a trust, you may also pay the P20,000 personal exemption. The
income of trust will be computed at the consolidated.
b.
c.
i.
The amount of the income of the estate or trust for the

taxable year which is to be distributed currently by the
fiduciary to the beneficiaries
ii. The amount of the income collected by a guardian of an
infant which is to be held or distributed as the court may
direct.
iii. The amount of the income of the estate or trust for its
taxable year, which is properly paid or credited during such
year to the legatee, heir or beneficiary.
The amount so allowed as a deduction shall be included in
computing the taxable income of the heirs, beneficiaries or
legatees, whether distributed or not.
Taxable income
i.
Income tax shall be based on the taxable income of the
estate and trust
ii. Personal exemption shall be allowed
Additional deductions allowed
CORPORATE INCOME TAXATION

A.
B.
General Principles, Section 23

1. A domestic corporation is taxable on all income derived from
sources within and without the Philippines
Domestic corp taxable on sources of income within and without
2. A foreign corporation whether engaged or not in trade or business
in the Philippines, is taxable only on income derived from sources
within the Philippines
Foreign corp whether doing business in the Philippines or not taxable
on sources of income within
Definition of Terms
1. Corporation includes partnership no matter how created or
organized, joint account companies, insurance companies and
other associations, except:
a. General professional partnership
A partnership to exercise a common profession. So when you form
a partnership to practice law, you cannot invite other professionals
such as engineers or doctors to join your partnership. If you do
so, it will not be called a general professional partnership and
therefore, it will be taxable as a partnership already.
Although general professional partnerships are exempt from
corporate taxation, they are required to file an income tax return
and have their financial statements certified by an independent
auditor for the purpose of monitoring whether the individual
partners of such partnership are declaring their income properly.
The income of the partnership will be the expected income of the
individual partners. So if there is a declaration of P100M income
and there are two partners, then each partner have to declare the
P50M as part of their gross income subject to the 5-32% tax rate.
b. Joint venture for the purpose of undertaking construction
projects
Does it have to be with the government?
No. Joint ventures undertaking construction projects may be

with any private persons, juridical or natural
When there is a joint venture between two corporations to
undertake a construction project, will the income from the
activities of that joint venture be taxable at all?
It would depend on how they would divide the income from

the joint venture and any income that is received by each
party will be taxable to that party alone or separately.
When there are two corporations who wish to develop the entire
south reclamation project or the entire mountain of this area or
any development subdivisions, and they decide to distribute the
income 50-50, then that 50 will be taxable to one joint venturer
and the other 50 to the other joint venturer.
NOTE: Joint ventures not for construction projects are always
taxable as a corporation.
But of course, if the joint venture is already taxable as a
corporation because it is not for construction projects, that income
that is taxable to the joint venture will no longer form part to the
separate income of the two corporations.
c. Joint consortium for the purpose of engaging in petroleum,
geothermal and other energy operations pursuant to a
consortium agreement with the government
And the joint consortium for the petroleum, coal, and other
energy operations, it has strictly to be a contract with the
government otherwise if it is a private undertaking, then both
parties under the joint consortium is taxable as a corporation.
Partnership an association of 2 or more persons where they may
contribute money, property or industry to a common fund with the
intention of dividing the profits among themselves.
Tests that will determine whether a partnership exists or not:
a. There must be a contribution to a common fund
b. There must be an intention to divide the profits among
themselves
There are 2 types of partnership
1) taxable
2) non-taxable
If 2 or more person creates a partnership without registering or the
non-compliance of the requirement will not benefit any association or
partnership they are subjected to the 30% corporate taxation
Professional partnership partnerships formed by persons for the
sole purpose of exercising their common profession, no part of the
income of which is derived from engaging in any trade or business.
Co-ownership one formed and organized not for profit but for the
common enjoyment of the property or for the preservation of the
property.
Lease of properties under common management
Where there is a series of transaction whose purpose is not limited
to the conservation of the common fund or even acquired
properties, a taxable partnership is formed.
The character of
habituality peculiar to business transactions engaged in for the
purpose of gain is present. (Evangelista vs. Collector, 102 Phil 140)
GR: not taxable if the co-onwed property is for the common
enjoyment.
XPN: if the property co-ownership so long as it is not to generate
profit.
Donor giving as a gift an undivided property to several donees without
the latter diving the property
Deceased that would give an estate to several heirs
Note: NCC provision that co-ownership only last for 10/20 yrs.
Joint Venture created when 2 corporations, while registered and
operating separately, are place under 1 sole management which
operated the business affairs of said companies as though they
constituted a single entity thereby obtaining substantial economy
and profits in the operation.
Joint Account created when 2 persons form or create a common
fund and such persons engage in a business for profit. This may
result in a taxable unregistered association or partnership.
Joint Stock Companies the midway between a corporation and a
partnership, a hybrid personality, somewhat a corporation
because this is managed by a Board of Directors and such persons
may transfer their share/s without the consent of others, and
somewhat a partnership because it is an association, and persons
or members of the same contribute fund, money to a common fund.
2.
3.
4.
5.
6.
7.
C.
Corporate Taxpayers
1. Domestic Corporations
A corporation formed or organized under Philippine laws.
Situation: If a corporation composed of all American stockholder and

registered as a corporation in the Philippines it is considered as a DC,
but not a Philippine corporation (a because is not composed of all
Filipino).
If ABC Corporation is owned 100% by an American Citizen, registered
or organized in the Philippines, it is considered a Domestic Corporation
and is taxable for income within and without.
ABC Corporation, however, cannot be considered a Philippine
Corporation.
Domestic Corporation: Organized under Philippine Laws, without
regard to the owners
Philippine Corporation: 60% (or more) owned by Filipino Citizens
(Grandfather rule), without regard to where it is organized.
General Rule: GOCCs will be treated as a Domestic Corporation and
will be taxed as such.
Resident Foreign Corporations
A corporation formed, organized, authorized or existing under the
laws of any foreign country, and engaged in trade or business
within the Philippines.
Engaged in trade or business implies continuity of commercial
transactions or dealings continuity of business or continuity of
intention to conduct continuous business.
Corporation organized in any foreign country but is engaged in trade
or business in the Philippines. Engaged in trade or business means
continuity of commercial dealings and transactions for the purpose of
engaging in a profitable activity.
Examples: When it has a permanent physical establishment in the
Philippines, or when it appoints an agent domiciled in the Philippines,
or even when the agent is not domiciled in the Philippines but has
stayed in the country for more than 180 days or more. (Can now be
considered as engaged in trade or business in the Philippines)
The only requirement for residency (as a strict rule), is registration
and licensing with the SEC. It can either be considered as a Foreign
Corporation Philippine Branch, or it can be a Regional Area
Headquarters (RAHQ) of a multination Corporation. It does not mean,
however, that those unregistered Foreign Corporations will be free
from taxation.
Non-Resident Foreign Corporations
A corporation formed, organized, authorized or existing under the
laws of any foreign country.
A Corporation organized under the laws of any foreign corporation, not
habitually engaged in trade or business in the Philippines but may
enter into isolated transactions.
Example: Extending a loan payable in monthly intervals for 2 years.
The loan was a single isolated transaction, and even though payments
will be made over a period of time, it cannot be considered as having
regularly engaged in trade or business in the Philippines.
2.
3.
D.
Domestic Corporations
1. Rule on taxability of income
a. General Rule:
30% regular corporate income tax on net
income from sources within and sources without
GR: Taxable at 30% on their NET income coming from sources
within and without. NET income, because they are allowed certain
deductions.
Domestic Corporations have the option to be taxed at 15% on

their GROSS income. Lower rate, but no deductions allowed.
Formula:
Gross sales-return of capital= gross income
Gross income- itemized expenses or optional standard

deduction= net income
Gross Sales
Less: Cost on Return of Capital
15%
Gross Income
Less: Itemized Expenses/OSD
30%
Net Income
-0-
So the general rule is that corporations are going to be taxed

based on their net income. If the corporation is reporting 0
income, naturally, that corporation will not opt to be taxed 15 per
cent income tax on gross (optional Gross Income Tax). Why would
you volunteer paying 15 per cent on your gross income? But the
tax code provides an alternative rate and it is not an option. Even
if the corporation reports 0 income or its regular 30% income tax
is lower than that amount then the alternative tax will have to be
paid and that alternative rate is called Minimum Corporate Income
Tax (MCIT).
Exception:
i.
2% minimum corporate income tax (MCIT)
Revenue Regulations No. 09-98, as amended by 12-07
MCIT= 2% x gross income as of the end of the taxable year
What are the conditions for corporate income tax to
apply?
1. Whenever corporation incurs a net loss or negative
taxable income
2. Whenever the amount of 2% minimum corporate income
tax is greater than the 30% normal income tax due from
such corporation
Gross Sales
Less: Cost on Return of Capital
Gross Income
2% MCIT
1. Net Loss
Less: Itemized Expenses/OSD
2. 30% NCIT < 2% MCIT
Net Income
30% NCIT
15%
30%
Will the MCIT apply to corporations who are exempt as yet

because they are granted tax holidays? Will proprietary
educational institutions with a tax rate of 10 percent be
included in the MCIT?
With regards to corporations granted tax holidays,

because they are not subject to the normal income tax of
30%, then there will be no 2% MCIT to speak of. So this
boils down to the conclusion that corporations who are
not subject to the 30% normal income tax shall not be
liable to the 2%MCIT.
Now about the school.
The school has gross income from educational activities of
50M. Its gross income from non-educational activities is 60M
for a total of 110M. It is subject to what rate?
It will be subject to the NCIT of 30% because the gross

income from non-educational activities is more than
50%. So as we said, proprietary educational institutions
are subject to 10% tax so long as income from noneducational activities does not exceed more than 50% of
its total gross income. In this case, since it is already
taxed NCIT, then it will now be subject to the 2%MCIT.
GI
Educ
50M
GI
Non-Educ
60M
110M
*Subj. to 30%, GI Non

Educ exceeds 50% of GI
Would all corporations incorporated in 2012 be subject to the

2%MCIT?
When: beginning on the 4th taxable year immediately

following the taxable year in which such corporation
commenced its business operations.
CY
Sept. 15, 2012
2012
1
2013
No MCIT
2
2014
No MCIT
3
2015
No MCIT
4
2016
MCIT
2017
In his first year registration is 2012, beginning the year

following its registration so we count the 4 years starting from
2013 as the law says MCIT shall be imposed beginning the 4th
taxable year immediately following the year when the
corporation commenced its business operation.
MCIT vs. NCIT (normal corporate income tax)
First 4 years, no MCIT. So even if the corporation would

be reporting for losses during the first 4 years the 30%
NCIT tax will apply even if the 30% tax is lower than the
2% MCIT.
Is date of BIR registration the same as starting commercial
operation?
When the law provides that it is beginning the 4th taxable

year immediately following the year when such coverage
commences business operations in order to make it
easier the BIR considers the reckoning point as the year
when it has registered with the BIR, it is not the actual
year of commercial operations.
SEC
Nov. 15, 2011
BIR
Dec. 1, 2011
SCO
Jan. 2, 2012
(Start of commercial
operations)
The year when the corporation was registered was 2011, the
4th taxable year following the year of operations would be
2015. So this is when MCIT will be compared as against the
30% NCIT to see if whether or not the corporation would be
taxed with MCIT or NCIT.
(1) Imposition of MCIT
(a) Gross income, defined
MCIT is 2% based on the gross income, what do you
mean by gross income?
Gross sales less cost of goods sold or the return of

capital further reduced by the discounts given, the
returns made by your customers or the allowances
that you have provided, and that would be the basis
of your MCIT of 2%.
What about the income that have already been subjected
to final withholding tax? Should it form part of your gross
income?
No, because final withholding tax has already been

subjected to tax with finality and does not form part
of the gross income subject to the 5-32% tax.
(b) Cost of goods sold, defined
What do cost of goods sold means?
Business expenses directly incurred to produce

the merchandise if you are engaged in the
manufacturing and all other expenses that are
incurred to bring the merchandise to the selling
location which includes the freight cost,
insurance and other packaging cost.
(c) Cost of goods manufactured and sold, defined
(d) Cost of services, defined
And cost of services would be?
Would include the services of employees but not

all employees, only employees directly rendering
the service such as if it is a banking institution,
the salaries of the tellers, guards.
How about interest expense?
It is our interest income as deposited, it is a

direct cost from the bank, and also includes the
cost of facilities that are directly used in
providing service.
(2) Carry forward of excess MCIT
Any excess of the MCIT over the regular tax shall be
carried forward and credited against the regular tax for
the 3 immediately succeeding taxable years
Sale
Less: Cost
Gross income
Less: Expenses
Net income
NCIT (30% of Net income)
MCIT (2% of Gross income)
Pay to the government
ACTUAL payment to govt
Excess MCIT (MCIT NCIT)
Carry forward to Next Year
5th year
10M
5M
5M
4.8M
200K
60K
100K
100K
100K
40K
40K
6th year
10M
5M
5M
4.7M
300K
90K
100K
100K
100K
10K
50K
7th year
10M
5M
5M
4.8M
200K
60K
100K
100K
100K
40K
90K
8th year
10M
5M
5M
4.6M
400K
120K
100K
120K
30K
0
0
Your actual tax liability is only 30% (referring to the

NCIT). The MCIT is there to help the government in its
tax collection. The reason why MCIT has been imposed
beginning 1998 is to get those companies who are always
reporting at a loss or a very low income to pay taxes.
In the case of year 5, the lower tax of 60,000 is your true
tax liability. But because MCIT as compared is higher,
then you have to pay the higher tax.
What happens to the difference between the MCIT and

the NCIT?
Any payment that is in excess of your normal income

tax of 30% is considered as an advance tax payment
to the government.
It will be treated as an asset of the corporation and

offset-able in the future.
It can be carried over for the next 3 succeeding

consecutive years after the year you paid MCIT in
excess of NCIT.
It can be credited and offset against the NCIT.
It cannot be offset against a Minimum Income Tax

Corporate liability (MCIT)
Year 5:
Pay the government = 100,000. (MCIT; it being

higher than the NCIT)
Excess/advance payment = MCIT NCIT= 100,000

60,000 = 40,000. (difference between MCIT and
NCIT)
Carry forward the excess = 40,000
Carry forward the 40,000 to the next 3 years which

is year 6, 7, and 8.
Year 6:
Pay the government = 100,000 (MCIT)
Excess during the year = 10,000
Carry forward to the next year = 50,000. Derived

from 40,000 from last year + 10,000 from this year.
50,000 offset-able against any normal income tax
liability in year 7.
Reason why you are not able to offset 40,000

against the 100,000 tax liability: excess MCIT can
only be offset against the Normal Income Tax liability
(NCIT).
Year 7:
Pay the government = 100,000 (MCIT)
Excess is 40,000
Carry-forward to the next year = 90,000; valid until

the 8th year. This is the last year wherein you can
consider the unused 40,000 as part of the asset.
If the 40,000 cannot be utilized in year 8, then it will

not form part of the carry-forward of year 9. Why?
The 40,000 from year 5 can only be credited to the
succeeding 3 years. Year 6, year7, and year 8. If
not used in year 8: 0 na ang 40,000.
Year 8:
You had good operations. Instead of an expense of

4.8M, you only have 4.6M in expenses. 400,000 in
net income.
NCIT is 120,000; as against 100,000 MCIT.
The higher amount is the NCIT. So you pay the

NCIT.
Actual payment to the government? 30,000. Instead

of paying 120,000 NCIT, you are only required to
pay 30,000. The 120,000 less the 90,000 from the
excesses for the last 3 years.
Do you still have any excess during the year? Do

you still carry any excess MCIT to the succeeding
year? No more. Because you fully consumed the
90,000.
In effect:
Your total payment for the 4 years is 330,000

(100+100+100+30).
Your NCIT liability is a total of 60+90+60+120 =

330,000. This is your tax liability, but you paid it
differently.
You paid for the first 3 years in advance because the

MCIT was higher, but eventually it catches up during
the year when crediting is still allowed. Its simply
an advance tax payment.
BUT if something is forfeited, f its 4.8M of net taxable
income of year 8. Still MCIT is higher then you have to
pay the MCIT. How much can be recovered in year 9?
You cannot anymore carry forward the 40k in year 5 to
year 9 then you can only carry forward the 10k of year 6
and the 40k of year 7 and the 10k if year 8. Which is the
total of 60k. If in year 9 your net income is 400k that will
normally form a tax liability of 120k which is higher than
the MCIT for that year which is 100k. How much will you
pay in year 9? 120k (the carry forward)60k.Then there
is no more carry forward because of the deduction and
because there is no excess.
It would appear that your total payment for the 5 years is
460k while your liability is 400k. You should have only
paid 420k if MCIT was not provided by law. The
difference is that you pay the excess of 40k if you
allowed the 40k in the 5th year to be forfeited. Loss
comes only when you forfeit an MCIT during the year or
allow it to expire. .
(3) Relief from the MCIT
The Secretary of Finance may suspend the imposition
of the MCIT on any corporation which suffers losses on
account of [i] prolonged labor dispute; [ii] force
majeure; and [iii] legitimate business reverses
Assuming that your business is already on its 5 th
year operation and already covered by MCIT, in
what instances can you ask for the suspension of
payment of the MCIT?
Ask for relief from the Secretary of Finance on the

bases that the corporation is suffering from losses
due to:
1. Force majeure, or
2. Prolonged labor dispute (strike for more than 6
months)
3. Legitimate business reverses
(4) Applicability of the MCIT where a corporation is
governed both under the regular tax system and a
special income tax system
(5) Corporations exempt from the MCIT
What corporations are not covered by MCIT?
1.
Domestic proprietary educational institution - But if

there unrelated businesses exceed 50% - they
become subject to MCIT
2. ROHQ/RAHQ
3. International Air Carrier/Shipping Carrier
4. Non-Resident Foreign Corporation MCIT not
applicable to them
5. Those enjoying incentives they are covered by the
income tax holiday (ITH) during their first 6 years of
operation 5%
Example:
Heres ABC Corporation under Subic Bay Dev.

Authority. Its registration is only for manufacture of
TIMEX watches. And this is covered by the first 4
years under ITH or income tax holiday and the
subsequent years or forever would be 5% gross
income tax.
If it ventures into the manufacture of cellphones, not

covered by its registration. There will no ITH, there
will be no 5%, and instead there will be 10%. IF this
is current financial, 70% of its income is subject to
5%, 30% of its income subject to 30%. You can
impose the 2% MCIT on the income that is not
registered because it is not covered by the special
rate, instead it is covered by the 30%, then it has to
be compared with the 2% MCIT.
ABC
Manufacture of Timex Watches
Manufacture of Cellphones
Gross Sale
Less:
Gross
Income
Less:
Net
Income
4
ITH
X
5 ->
5%
X
Income
30%
70%
30%
*not covered
by special rate
b.
5th yr
X 2% = 100,000 MCIT
X 30%= 60,000 NCIT
How much will you pay to the government? MCIT or

NCIT?
100,000 MCIT because the MCIT

is greater
Computing MCIT (2%) and NCIT (30%) without
using calculator:
For 2%, get the 1% x 2. For 30%, you get the

10% x 3.
In getting 1% just move two zeros backwards; if

10%, one movement backwards.
Illustration:
If you will know 1% of 5,000,000 then you will know

its 2%.
Since its 1%, move two zeros backwards, so it

becomes 50,000. 2% is 50,000 x 2 = 100,000.
If 30%, get the 10%, which is one movement

backwards, then times 3.
Whats the 10% of 200,000? 20,000. So the

30% is 20,000 x 3 = 60,000.
ii. Special rate for special domestic corporations
(1) Proprietary educational institutions, 10% or 30%
(2) Non-profit hospital, 10% or 30%
Proprietary Educational institutions complete definition
SEC. 27 ( B) TAX CODE
Non profit hospital in order for it to enjoy the 10 %
preferential rate it has to be a NON PROFIT HOSPITAL. If it is
operating as a profit hospital, meaning it is registered as such
then it will be taxable as a corporation at 30 %. The basis is
the Gross income.
If the gross income of educational or hospital activity would
be more than half of the total gross income (50%) of the
total gross income then it will enjoy the 10% for the total
income earned. If it were the other way around, if non related
income were more than half of the gross income then 30%
would apply to the entire income.
What if it was 50% income from educational or hospital
activity and 50% from non related activities? Which would
apply?
10 % should apply because in order for the 30% to apply

the unrelated income should exceed the 50% gross
income
For a non-profit hospital and a proprietary educational
institution to lose the preferential rate the non-related income
should exceed 50% of the total gross income. If its 50% then
the 10% tax rate is still maintained.
Optional: 15% gross income tax
i.
When conditions are satisfied
A tax effort ration of 20% of the Gross National

Product (GNP)
A ratio of 40% of income tax collection to total tax

revenues
A VAT tax effort ration of 4% of the GNP
A 0.9% ration of the Consolidated Public Sector

Financial Position to GNP
ii. Where ration of cost of sales to gross sales/receipts from
all source do not exceed 55%
iii. Option is irrevocable for the 3 consecutive years
When will the 15% optional tax rate be allowed? When the ff.
conditions are satisfied:
(1) A tax effort ratio of 20% of the Gross National Product (GNP)
(2) A ratio of 40% of income tax collection to total tax revenues
(3) A VAT tax effort ration of 4% of the GNP
(4) A 0.9% ration of the Consolidated Public Sector Financial
Position to GNP
If the abovementioned conditions are present and its beyond the
control of the taxpayer because its an effort ratio, as performed
by the government such as 40% income tax collection vis--vis a
total tax revenues at least 40% must come from income taxation
c.
and all others present, then probably the 15% gross income tax
maybe allowed corporations that are domestic and resident
foreign corporations. A further requirement is necessary, which is
that the ratio of cost of sales to gross sales/receipts from all
sources does not exceed 55%. The condition is that the cost of
sales should not exceed 55% of the total gross sales. The reason
why such ratio is necessary is that if no limit is provided then the
gross income maybe presented at a very low amount. If this is
90% of gross sales, then the amount that will be presented, the
gross margin, is only 10% of the gross rate which will result to a
very low tax collection by the government. So if gross sales is
55%, the gross margin will be 45%. This is the lowest gross
margin that will be subjected to the 15% gross income tax in
order to avoid abuse in recognizing figures as part of cost of sales.
Once, chosen it becomes irrevocable for 3 consecutive years, on
the assumption that during those years the corporation is qualified
under the gross income tax scheme, meaning your cost of sales
would not exceed 55% of your gross sales. If you exceed such
rate, you go back to the 30% net income taxation.
Exempt corporations
i.
General professional partnerships
ii. Government educational institutions
iii. Non-stock, non-profit educational institutions
iv. Joint venture, for purpose of undertaking construction
projects
v. Joint consortium, for purpose of engaging in petroleum,
geothermal and other energy operations pursuant to a
consortium agreement under service contract with the
govt
vi. Regional area headquarters
vii. Labor, agricultural or horticultural organization not
organized principally for profit
viii. Mutual savings bank not having capital stock represented
by shares and cooperative bank without capital stock
organized and operated for mutual purposes and without
profit
ix. A beneficiary society, order or association, operating for
the exclusive benefits of the members
x. Non-stock corporation or association organized and
operated exclusively for religious, charitable, scientific,
athletic or cultural purposes, or for the rehabilitation of
veterans, no part of its income or asset shall belong to or
inure to the benefit of any member, organizer, officer or
any specific person
xi. Business league, chamber of commerce, or board of trade,
not organized for profit, and no part of the net income of
which inures to the benefit of any private stockholder or
individual
xii. Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare
xiii. Farmers associations or like associations, organized and
operated as a sales agent, for the purpose of marketing the
products of its members, and turning back to them the
proceeds of sales, less the necessary selling expenses on
the basis of the quantity of produce finished by them
xiv. Farmers cooperative or other mutual typhoon or fire

insurance, mutual ditch or irrigation company, or like
organization of a purely local character, the income of
which consists solely of assessments, dues and fees
collected from members for the sole purpose of meetings
its expenses
xv. Government-owned and controlled corporations
(1) Government Service Insurance System
(2) Social Security System
(3) Philippine Health Insurance Corporation
(4) Philippine Charity Sweepstakes Office
(5) Local Water Districts (RA No. 10026)
NOTE on Exempt Entities under Section 30 of the Tax Code:
Income of whatever kind and character from any of their
properties, real or personal, or from any activities
conducted for profit, regardless of the disposition made of
such income, shall be taxable.
We can divide the list into exempt entities under the Constitution,
under Section 30 of the Tax Code, under Section 22 of the Tax
Code defining what corporations are. First, the Constitution
provides that non-stock non-profit educational institutions are
exempt from income tax. Second, the definition of corporations
excludes General professional partnerships, joint ventures
undertaking construction programs, and joint consortiums with
the government for geothermal, petroleum, coal and other energy
operations. While Regional Area Headquarters, since it does not
derive any income as defined in the tax code, it is not subject to
income tax. And the very long list in section 30 on exempt
corporations.
Section 30: List of Corporations exempt from tax which we can
summarize as associations or entities which are not ordinary
principally for profit, no income inures to the benefit of any private
individual, or otherwise they are exclusively for the benefit of
members only.
For government owned and controlled corporations, we said
earlier that they are just like any other domestic corporations
subject to the 30% tax rate except for, under the tax code, there
are 4 GOCCs which are exempt from tax which are:
1. GSIS
2. SSS
3. PhilHealth
4. PCSO
Note: Another GOCC exempt Local Water Districts (exempt by
RA 10026) and they are also exempt from other local government
taxes
While other GOCCs may be exempt from income tax, not thru the
tax code but because of their respective charters providing for
their exemptions.
Now there is that last provision in Section 30 which provides for
the exception to the exception: Income of whatever kind and
character from any of their properties, real or personal, or from
any activities conducted for profit, regardless of the disposition
made of such income, shall be taxable.
What activities are subject to income tax?
Proprietary activities
So of the list in section 30 of the tax code, these listed entities are
NOT exempt from income tax if they derive income of whatever
kind and character from any of their properties, real or personal,
or from any activities that are conducted for profit. So there are 3:
1. Activity conducted for profit taxable, because their
exemption rest solely on the fact that they are not supposed
to be engaged principally for profit, OR income does not inure
to the benefit of any private individual OR they cater
exclusively to members alone; so that if they engaged in
activities conducted for profit, they will already be subject to
income tax such as the farmers association conducting
reality shows Ang Dakilang Magsasaka and ticket sales
P1000 per entry
2. Any income either from the use of personal or real property
regardless of any profit made so that if the use of real or
personal property is made and it generates income to any of
these entities in section 30, it is taxable regardless of whether
it was intended to be profitable or not because the word for
profit only defines the word activities for profit but NOT the
use of real or personal property. So if the USC allows rent of a
space in the campus to a commercial entity, whether it is for
a very minimal amount (not comparable to regular rates of
such), it is still taxable because it is income derived from the
use of real property. BUT let us take note that this comes in
conflict with the constitution insofar as NON-stock NON-profit
educational institutions are concerned; because in the tax
code, it provides that it becomes taxable regardless of how
the income was disposed of. So even if the ticket sales from
the reality show was used to finance fertilizers to the different
farmers for the purposes of the association itself, it is still
taxable because the law provides regardless of how the
income is disposed of it will be taxable. But remember that
the constitution provides that if it is a non-stock non-profit
educational institution, the revenues and assets will be
exempt from taxation so long as it is actually, directly, and
exclusively used for educational purposes. Insofar as nonstock and non-profit educational institutions are concerned,
there is conflict, but for all other entities, it will be
implemented as provided by the tax code. Currently it is not
considered unconstitutional so now it will depend on the
examiner on how to treat income of schools.
What constitutes income?
What constitutes Gross Income of a corporation?
a. Income derived from trade, business, or profession going thru
the list, these are basically the same types of income
derived/earned by any tax payer; it may be coming from trade,
business, or profession but not from employment because you
cannot employ a juridical person as an employee.
b. Rental income
c. Income from dealings in property
d. Others
a. Gross income from trade or business
b. Rental income
Differentiate an operating lease or an ordinary lease from a
financial lease. So imagine a corporation having a real property. It
2.
c.
d.
entered into an operating lease contract with a tenor. What is the

concept of an operating lease and how would the corporation
record the proceeds from the lease activity.
i.
Operating lease a contract under which the asset is not
wholly amortized during the primary period of the lease,
and where the lessor does not rely solely on the rentals
during the primary period for his profits, but looks for the
recovery of the balance of his costs and for the rest of his
profits from the sale or the re-lease of the returned assets
at the end of the primary lease period.
Operating Lease ordinary lease or renting out of the
property without transfer of ownership; so when a corporation
receives proceeds from the operating lease, it will record it as
rental income. Its just like any ordinary lease whether long
or short term lease and the owner (in this case the
corporation) does not expect full amortization or recovery
from rental payments of the value of the property the lease
would be minimum recovery for the temporary use of the
property
ii. Financial lease also called the full payout lease, a
contract involving payment over an obligatory period (also
called the primary or basic period) of specified rental
amounts for the use of a lessors property, sufficient in
total to amortize the capital outlay of the lessor and to
provide for the lessors borrowing costs and profits.
Obligatory period is primary non-cancellable period of the
lease which in no case shall be less than 730 days. Lessee
exercises choice over the asset.
Financial Lease similar to purchasing a property on
installment basis; On the part of the lessee not considered
as expense but rather an advance of regular payment of the
value of the property; But on the part of the corporation
where it expects that the lessee will become the owner of the
property at the end of the lease term it is actually recorded
as an installments paid and not a rental income.
Financial lease on the part of the lessee using the property,
is a purchase of a property he will not consider it as an
expense but rather as an advance or regular payments of the
value of the property.
What about on the part of the corporation entering into a
financial lease where in they expect the lessee becomes the
owner of the property on the end of the lease term is actually
already an instalment sale. Recording it as an instalment sale
and not as an ordinary rental income
Being a financial lease the obligatory period is usually not less
than 730 days or 2years or more. The concept here is the
entire contract will result in the full recovery not only the
value of the property but plus interest rate and any profit that
you wish to make.
Rental income only refers to operating lease while a financial
lease is not a rental income
Royalty income (the type not subject to final withholding tax)
Interest income (the type not subject to final withholding tax)
A corporation can earn royalty income or interest income in the
active or passive sense.
Active income= regular income that he earns, not the type that is
subject to withholding tax. It will be subject to the regular rate of
30%
E.g a credit lending company. The income he earns from lending
money to borrowers is subject not to the 20% but to the 30% .
not necessarily a banking institution.
A corporation lending money to its affiliates with interest. Subject
to 30% and not 20%, not that type that is subject to withholding
tax.
Gains derived from dealings in property
Gains derived in the dealings of property, we have to differentiate
an ordinary asset from a capital asset.
Capital gains derived from the sale of real property classified as
capital assets, 6% on GSP/FMV, whichever is higher
Capital gains from the sale of real property classified as a capital
asset. Corporation capital gains tax rate 6% of the gross selling
price or fair market value whichever is higher in selling capital
asset located within the Philippines just like individual tax.
e.
f.
g.
h.

i.
Listed and traded through the local stock exchange, of
1%
and 10%
How about the sales of share of stock in the corporation? It
depends if it listed and traded in the stock exchange, tax rate is
of 1% of the Gross selling price. If not listed and not traded tax
rate 5% or 10%
Passive investment income derived from sources within
(subject to final withholding tax)
Same rate with individual tax payers in the sale of capital assets,
shares of stock and the passive income of interest income, 20% or
7.5% or exempt. Royalty income is 20%. Only difference will lie in
dividend income.
i.
ii. Royalty income, 20%
iii. Dividend income from a domestic corporation
Classification Tax rates
RC
10%
RA
10%
NRC
10%
NRA ETB 20%
NRA NETB 25%

If a domestic corporation recieving cash dividend or property
dividend from a domestic corporation. It is exempt as of yet..
it is taxable until it reaches the individual stockholder. If it is
owned further by a corporate stockholder, then further
dividend is still exempt until it eventually reaches an
individual stock holder.
The concept is to avoid double
taxation referring to the same income tax earner.
If stock dividend is concerned. Still exempt because it is
simply a transfer of the surplus to the capital account unless
in two situation as exception to the rule that it changes the
i.
j.
E.
interest of the stockholders a redeemable and cancellable

stock dividend
Liquidating dividend, corporate 30% tax rate.
Disguise dividend is not given out as a dividend declaration. It
is when the the corporations pays off its stock holder in the
guise of valid expenses. But this is really an expensive and
excessive payment to the stockholders it takes the form of
dividend payments. Once it is recognized really as a dividend
to avoid taxation it will be treated as any cash dividend. The
corporation can disguise it dividend by giving out cars to its
stockholders. Avoiding the 10% tax. If unjustified then
subject to the dividend tax. If given to a non-stockholder e.g.
an employee. Then not subject to dividend tax because the
employee is not a tax holder.
(1) Cash dividend, exempt
(3) Property dividend, exempt
(4) Liquidating dividend, 30%
Annuities, proceeds from life insurance or other types of
insurance
Resident Foreign Corporations

The reason why we cannot tax the income of resident foreign corporation
are not taxable on income outside the Philippines is because imposing a tax
on income outside the Philippines would actually violate the principle of
territoriality. We cannot extend any (?) or protection to the activities
outside the country. So RFC are taxed 30% on net income but only on
sources within the Philippines.
Similarly, if you remember our discussion on domestic corporations,
domestic corporations have the option to be taxed at 15% gross income
tax.
Would RFC have the same option?
The answer is YES and according to the gross income taxation so long
as the conditions of the GNP and the tax effort ratios are met and that
the cost of sales of these RFC do not exceed 55% of the gross sales or
receipts, then gross income tax can be availed of. It becomes
irrevocable in the year of choice and the next 2 years, so it is
irrevocable for 3 consecutive years on the condition that during those
3 years, the corporation is qualified as such. But since we are dealing
with RFC, take note that the gross income we are talking about subject
to the 15% gross income tax are only those gross income that has
been earned in the Philippines. The gross income excludes income
that is exempt from tax or income that has already been subjected to
final withholding tax.
Let's go back to the 30% normal corporate income tax. If a corporation is
subject to 30% normal or corporate income tax, we said that it comes with
it the imposition of 2% minimum corporate income tax. In fact, payment
shall be equivalent to that which is higher between the 30% NCIT and the
2% MCIT. We have discussed this extensively with domestic corporations.
In so far as RFC, since they are doing business in the Philippines, they will
be treated similarly. Any income that they earn subject to 30% income tax
from sources within the Philippines will also be computed of the 2%
minimum corporate income tax. Again, gross income refers to the income
within the Philippines only for a RFC.
1.
Rule on taxability of income

a. General Rule: 30% regular corporate income tax on net income
from sources within
Exception:
i.
2% minimum corporate income tax (MCIT), refer to
previous discussions
ii. Special rates for special resident foreign corporations
Just like domestic corporations having special domestic
corporations, they are special RFC. First of in your outline are
the International Air Carriers and #2 - International Shipping
Carrier. Being international, we presume that these are
engaged in international trade or operations.
Airports,
aircrafts, vessels or ships for shipping carriers. And since the
discussion is under RFC, naturally, we cannot help but think
that these are RFC. Do not ever think that International Air
Carriers subject to 2.5% tax on Gross Philippine Billings are
domestic corporations. They are not. They are not as well
imputed NRFC, otherwise, if they are, then that will be
subject to 30% tax on net income for domestic corporations
or 30% on gross income as a NRFC.
(1) International air carrier, 2.5% on gross Philippine
billings
It's a foreign airline corporation doing business in the
Philippines. A foreign corporation doing business in the
Philippines, that has somehow been granted landing
rights in any port in the Philippines to perform
international
air
transportation
services
or
air
transportation or flight operations anywhere in the world.
So once a foreign corporation does business in the
Philippines with landing rights, it can either opt to really
have operations or flights coming from or originating
from port in the Philippines, from foreign airports or from
a foreign seaports or that we will call an international air
carrier with online/online air carrier.
It becomes online when there is a flight/ vessel
originating from Philippine port. It becomes offline when
its flight operations does not originate in the Philippines.
RULE ON TAXABILITY OF INCOME
Now, what is its taxability?
International Air Carriers as a RFC doing

business in the Philippines are taxed only at 2
1/2% on the Gross Philippine Billings. Of course,
the tax treaty would provide a lower and a
preferential rate. But the availment of a tax
treaty provision such as RP-US Tax Treaty
providing for 1 1/2% tax on Gross Philippine
Billings will have to apply for a ruling with the
National Office of the BIR. Without any ruling
application, a taxpayer can only use the 2 1/2%
rate. It says there 2 1/2% of Gross Philippine
Billings.
Gross Philippine Billings
includes the total amount of gross revenues derived

from the passive of not only persons, including
excess baggages, cargoes and/or mails originating
from the Philippines in a continuous and

uninterrupted flight irrespective of the place of sale
or issue and irrespective of place of payment of such
passage document.
would be the total amount of gross revenue earned

by an international air carrier for the passage of
persons, excess baggage, cargo and/or mail
originating from the Philippines from a continuous
and uninterrupted flight irrespective of the place of
sale or issue of the passage document and
irrespective of where such passage document will be
paid.
-Now the issue of where it is sold, issued, and paid

becomes important only if the person, baggage,
cargo or mail does not originate from the Philippines
and not in a continuous and uninterrupted flight. So,
if an International Air Carrier does not have any
online operations or does not have flight originating
from the Philippines, will there income be subject to
the 2 1/2% tax? The answer is NO.
If an international air carrier does not have any online
operations or does not have any flight originating in the
Philippines, will their income be subject to 2.5% tax? NO
And if it is registered as a business doing in the
Philippines, it will be subject to 30% net income tax.
Not all international air carriers are guaranteed the 2.5%
tax on gross Philippine billings. Only when all the
conditions are satisfied.
What are the three conditions?

1. Flight would originate from the Philippines
2. Continuous and uninterrupted flight
3. Irrespective of the place of sale or issue and the
place of payment of the ticket or passage
document
So what if the flight is interrupted or there is a stop
over? What will happen to the gross revenues? Will the
entire gross revenue on the ticket declared still as part
of Philippine billings or not?
No! The total revenue will be declared as part of

Philippine billings is only the portion related to the flight
from the Philippines until the stop-over or transshipment
in the foreign airport. Afterwards, the related income or
gross revenue will be subject to a different tax rate. No
longer the 2.5% because it is not anymore a gross
Philippine billing.
When will there be an interruption or transshipment?
Does it mean to say when the flight is from Philippines
to Florida, there is no direct flight, if the foreign airline
company will have a stopover in Hong Kong or in
Korea, does it mean to say that we only consider the
gross revenue from the flight in the Philippines and
stopover in Hong Kong or Korea as part of gross
Philippine billings?
It depends.
If the interruption will result in the transfer of another

aircraft belonging into another airline company, that
becomes an interruption, then only aliquot portion from
the Philippines to the transshipment or stop over will only
be considered as part of Philippine billings.
But if it is a simple stop over not exceeding 48 hours

within the same airline and same company, that will still
be considered as uninterrupted and continuous flight.
Another item that will form part of the gross Philippine billing
is the gross revenue from tickets that has been revalidated,
exchanged and endorsed to another international airline
company. It was sold by the first company and sell by the
passenger airline to another company. It will still form part of
gross Philippine billings.
But for international air carrier, if you look into your
tax code. Are the gross Philippine billings for
international air carrier the same as gross Philippine
billings for international shipping?
No!
What is missing? What phrase is missing?
In international carrier, gross Philippine billings mean

gross revenue whether for passenger, cargo or mail
originating from the Philippines up to final destination,
regardless of the place of sale or payments of the
passage or freight documents.
What is missing? The phrase "continuous and

uninterrupted flight".
So in case of the international shipping the cost of ticket

will have to be included as part of the gross Philippine
billings subject to 2.5%.
It appears that gross Philippine billings for international air
carrier has stricter interpretation while in international
shipping it's more general in the sense that the entire ticket
cost, so long as it originated in the Philippines, will form part
of the gross Philippine billings.
If the foreign corporation opens a branch in the Philippines or
appoints an agent in the Philippines for the sale of tickets and
the flights bought from these tickets will not originate in the
Philippines, will it be subject to tax in the Philippines? Yes, at
30%! The correct term will be is that it's not the gross
revenue that will be subject to Philippine income tax in that
case but rather the net income. Why? Because we are talking
about the regular rate of 30% which is imposable on resident
foreign corporations based on their taxable net income after
all expenses have been deducted.
So even of the 2.5% tax on gross Philippine billings is lower in
rate, take note that the amount computed is directed against
the entire payment, to the entire ticket cost. No deductions
allowed. Not even the fuel for the aircraft.
Question! Maning: Transfer to another same company but
different airline mam!
Atty: As long as it is the same airline company and does
not exceed 48 hours.
(Sorry cannot here the 2nd question.)
2.
(2) International shipping, 2.5% on gross Philippine

billings
(3) Offshore banking units
Another special resident foreign corporation is
offshore banking units. What are offshore banking
units?
Offshore banking units are branches, subsidiaries or

affiliates of foreign banking corporations duly
authorized by the Bangko Sentral ng Pilipinas to
perform banking operations in the Philippines.
What is the taxability of an OBU?
It depends.
Taxability of Offshore Banking Units (OBUs) - As

RFC also, OBUs are only taxable on income derived
within.
if the income is derived by the OBUs from

interests on loans of residents (citizens or
aliens), individual residents, taxable at 10%.
if they give up the interest, its an interest

expense.
If the income is derived from non-residents,

whether individuals, aliens, corporations, OBUs,
tax exempt.
EXCEPTION to the rule if the income is

derived from a Phil. commercial bank or a local
commercial bank, it is still exempt.( because it is
already subjected to withholding tax by depository
bank)
Income of OBUs on interests of deposits from nonresident depositors under an expanded foreign currency
deposit system unit Withholding Tax exempt
(a) Income derived from foreign currency transactions
with nonresidents, OBUs and local commercial
banks, exempt
(b) Income derived from foreign currency loans
granted to residents, 10%
(c) Income of non-residents from OBUs, exempt
(4) Regional operating headquarters of multinational
companies, 10%
any profits, the taxable income of which, will be subject
to the special rate of 10%.(plus 12% VAT)
the foreigner or Filipino employees are given the
preferential rate of 15% so long as theyre occupying a
position of managerial or technical.
b. Optional: 15% gross income tax, refer to previous discussions
a RFC that comes here in the Philippines to register and do business
are taxable in the same way as a DC. The income that they will declare
is subject to income tax of 30%.
a. Gross income from trade or business
b. Rental income
ex. From personal property.
c. Royalty income (the type not subject to final withholding tax)
Subject to the ordinary rate of 30%.
d. Interest income (the type not subject to final withholding tax)
Those that are not a passive income that are NOT given out by
banking institutions subject to the ordinary rate of 30%
Ex. Interest income from the loans extended to another
corporation
Loans extended to EEs forms part of the gross income subject to
30% rate.
Gains derived from dealings in property
Whether real or personal will be subjected ENTIRELY to the rate
of 30%
The reason: sec. 28 of the tax code, doest mention any reference
to the 6% capital gains tax. Therefore any sale of a real property
classified as a capital asset will ALWAYS be subject to the 30%
net income tax in the hand of a RFC.
i.
Listed and trade through the local stock exchange, of
1%
and 10%
Same rule as the other
e.
f.
g.
Passive investment income derived from sources within

(subject to final withholding tax)
i.
ii. Royalty income, 20%
same), refer to sec. 24 and 25
(Encourage to memorize)
iii. Dividend income from a domestic corporation
If a DC declares dividends in favor of a RFC then the cash
dividends is not taxable until and unless it reaches the
individual stockholder.
Same holds true for property dividends.
Ex. AbC corp a DC declares dividends of 10m for the ff. tax
payers the rate shall be as follows:
6. RA -10%
5. NRC -10%
7. NRA-ETB 20%
ABC
Corp -DC
8. NRA-NETB 25%
1. DC - exempt
4. RC -10%
3. NRFC -30% or 15%

2. RFC - exempt
3.
declare dividends to their stockholders and it so happens that

their stockholders are individuals then only at that time will
the tax rates apply.
This is allowed to happen and it is not taxed in the first
instance is because, aside from the fact that we avoid double
taxation, these corporations are still within our controlboth
are registered in the Philippines, both are tasked as withhold
agents. If they declare themselves dividends to stockholders,
the Philippines will still have jurisdiction over them. So the
Government is assured that these two corporations both
domestic and resident foreign corporation will be withholding
the tax from the dividends declared to their own stockholders.
Property dividends will fall under the same rules.
Stock Dividends, however as we have discussed, are not
income to the stockholders because these are mere entries to
the books of the corporationa transfer from the surplus to
the capital amount. These are inchoate income which has
cannot be translated into realized or actual income. The
exceptions to this rule are: when the stock dividends issued
are cancellable and redeemable and stock dividends which
distort the proportional interest before the declaration.
Liquidating Dividends
DIAGRAM
Company ABC is partly owned by a resident foreign
corporation
ABC dissolved the corporation.
If the resident foreign corporation receives

liquidating dividends beyond its cost of investment,
the gain (liquidating gain), will be subject to tax at a
rate of 30%.
Annuities, proceeds from life insurance, and income from
whatever sources, you can relate that with previous discussions
(1) Cash dividend, exempt
(3) Property dividend, exempt
(4) Liquidating dividend, 30%
h. Annuities, proceeds from life insurance or other types of
insurance
i.
Annuities, proceeds from life insurance, and income from
whatever sources, you can relate that with previous discussions
Branch profits remittances, 15% on the total profits applied or
earmarked for remittance without deduction for the tax
components thereof.
ING Bank, Manila Branch vs. CIR, CTA Case No. 6017, March 11,
2002
Of the three types of corporationsDomestic, RFC, and NRFCyou will
only see this topic under RFC. Domestic Corporations and NRFCs do
not have branch profit remittances.
Div. P10M each
The reason why it is not as yet subjected to final withholding

tax at this stage of declaration and issuance or payment of
dividends is because eventually when these corporations
(Parent) NRFC
(Head Office)
15% Dividends
Branch Profit
Remmittance
15%
Interest
DC
Subsidiary
PEZA
4 years ITH
RFC
Phi. Branch
5% tax on gross
If a NRFC wishes to do business in the Philippines, it has two options:
In cases of profit distribution, if these operations in the PH

generates profit and it wishes to return the profit to its head
office, you call that branch profit remittances. It is no longer
dividends because it is not governed by shares of stocks but
rather it is simply remitting the profits generated to its head
office.
Whenever a resident foreign corporation remits profit to its head
office, it will be subject to the rate of 15%.
Will a Cebu branch remitting its profits to the Manila head office be
subject to the 15% BPRT?
No. So BPRT will only be applicable to resident foreign

corporations when it remits to its main office.
Would all Philippine Branches registered as resident foreign
corporations be subject to the 15%BPRT on all its remittances to head
office?
No, the exception is in cases of corporations registered in PEZA,

they will not be covered by the BPRT.
So if you are a corporation registered under the PEZA, a tax avoidance
scheme would be to register your business not as a subsidiary but a
Philippine Branch of a non-resident foreign corporation so that all the
profits that you will remit will not be subject to the final withholding
tax of 15%. If you register yourself as a subsidiary, you will be taxed
at 15% on dividends.
So if the corporation registered with PEZA is given 4 years income tax
holiday, and afterwards 5% tax on gross income, will the exemption
from BPRT apply during the income tax holiday? Or will it only apply if
the corporation is already enjoying the 5% special tax rate?
What does the tax code provide?
Usually corporations which seek registration under the PEZA are

granted tax holidays for the first 4 or 6 years of its operations and
thereafter will be subjected to the 5%tax rate at its option or it
may be taxed at 30% on its net income. But usually PEZA
corporations would avail of the 5% tax on its gross income instead
of the higher 30% tax rate on its net income. Now the exception
from the PBRT applies to corporations registered with PEZA
regardless of whether it is still on its income tax holiday years or
when it is taxed 5% income tax. So it would not matter if the
F.
corporation is exempt or 5%, the exception to that rule is the

PEZA company is engaged in activities that are not registered with
the PEZA which can happen, you call it unregistered business
activities. Any income from the unregistered business activities
that is remitted to its head office will already be subjected to the
15% BPRT. So what is covered by the exemption are only those
profits remitted abroad which arose from activities that were
registered with the PEZA.
So for example, when a head office sends 100M dollars for
construction of manufacturing plant. Of the 100M, only 90 M was
utilized. 10 M was sent back by the branch to its head office. Will it be
subject to BPRT assuming it is not a PEZA company?
No, because it is not a profit in the first place. It was only a capital
infusion made by the head office and any return will not in any
way will be subject to BPRT.
Another example.
If the head office and the branch had an arrangement that the
head office would send some personnel to help the branch
operation and the branch would shoulder the cost of lodging,
transportation, and other expenses of these personnel coming to
the Philippines and the arrangement was that the branch will send
out money to the head office for these expenses subject to
liquidation later on by the head office will that be subject to
branch profit remittance tax?
The concept is not remittance of profit, the arrangement

really was that its an advance given by the branch for the
expenses of the head office personnel. So since its actually an
expense and subject to liquidation later on, it is not a branch
profit remittance thus not subject to the 15% bprt
What is the basis of the 15% BPRT?
It is the total profit applied or earmarked for remittance without

any deduction to the tax component thereof, so if 100M is
earmarked for remittance to the head office then the tax to be
paid to the government would be 15M.
Note: Head office and the branch exist under one and the same entity,
therefore, if the non-resident foreign corporation through the branch
made an investment in the Philippines it becomes an investment of the
branch. But if the non-resident foreign corporation directly makes an
investment in a corporation without going through the branch, then for
tax purposes that is a separate investment.
With regards to the profit, how do we arrive at the profit? do
we have a computation?
No, a Philippine branch is just the same as a domestic corporation,

at the end of the year of its operation it will have a separate books
of accounts. For Philippine tax purposes we only consider the
income of the branch not that of the foreign corporation. If it has
net income or accumulated income of 500M pesos and all the
100M is earmarked for remittance, the rest will remain with the
branch for future working capital, then only that 100M wil be
subject to tax multiplied by 15%. You wont consider the net
income, only the earmarked amount.
Non-Resident Foreign Corporations

are corporations organized under the laws of a foreign country and is not
doing business in the Philippines. Although at some point in time they may
1.
2.
be earning on isolated cases that is why even if they are not registered as
doing business in the Philippines we consider the taxability beforehand. So
any income earned by a non-resident foreign corporation on isolated
transactions in the Philippines will also be subject to the same tax rate of
30% but on the basis of its GROSS INCOME without the benefit of expense
deductions even if these expenses are related to the income which has
been earned. So its the same as the taxability of a non-resident alien not
engaged in trade or business. And it is already a final tax. so any payer of
a non resident foreign corporation has no obligation to withhold the tax
with finality.
If the non-resident foreign corporation parent company enters into a
technical service agreement with its subsidiary domestic corporation to
transfer the manufacturing process know-how etc. the non-resident foreign
corporation will be earning royalty payment from the Philippines, even if
the contract provides that it will be paid on a monthly basis, 5% of the
gross sales generated by the domestic corporation does not make the
foreign corporation as doing business in the Philippines because there is
only one transaction entered into. Now being a non-resident foreign
corporation any royalty payment made by the domestic corporation will be
subject to the final withholding tax of 30% unless the tax treaty provides
a lower rate.
Rule on taxability of income
General Rule: 30% regular corporate income tax on the gross
income from sources within
Exception: Special rates for special non-resident foreign
corporations
a. Non-resident cinematographic film owner, lessor or distributor,
25%% on gross rental or fees
b. Non-resident owner or lessor of vessels chartered to Filipino
nationals/corporations, 4.5% on gross rentals, lease or charter
fees
c. Non-resident owner or lessor of aircraft, machinery and
equipment, 7.5% on gross rental or fees
a. Gross income which may include interests, dividends, rents,
royalties, salaries, premiums (except reinsurance premiums),
annuities, emoluments or other fixed or determinate annual,
periodic or causal gains, profits and income, and capital gains
(except capital gains from the sale of shares of stock not
traded in the stock exchange)
GR: Gross income may include: (subject to 30% on gross
income)
a. Interest,
b. Dividends,
c. Rents,
d. Royalties,
e. Salaries,
f.
Premiums (except insurance premiums),
g. Annuities
h. Emoluments or other fixed or determinate annual, periodic or
casual gains, profits and income, and
i.
Capital gains (except capital gains from the sale of shares of
stock not traded in the stock exchange)
Practically, ALL income of NRFC derived WITHIN the Philippines

are subject to the rate of 30% final tax on gross income. Even the
capital gains on the real property classified as capital asset.
Exceptions: Certain other income where the rates are applied
differently:
Certain other income
i.
(1) Listed and trade through the local stock exchange, of
1%
(2) Not listed/not traded through the local stock exchange,
5% and 10%
This is the only type of tax that remains consistent all
throughout different types of taxpayers.
ii. Interest on foreign loans, 20%
Interest on foreign loans obtained in 1985 onwards will NOT
be subject to 30% tax rate, but only to 20% rate (this is the
tax code rate)
Note: Tax treaty provides 10% rate
iii. Intercorporate dividends, 15% under the Tax Sparing
Credit Rule
Condition: That the country in which the nonresident
foreign corporation is domiciled, shall allow a credit against
the tax due from the nonresident foreign corporation taxes
deemed to have been paid in the Philippines
GR: 30% final tax
EXC: 15% under Tax Sparing Credit Rule
Condition: That the country in which the NRFC is domiciled,
shall allow a credit against the tax due from the NRFC taxes
deemed to have been pain in the Philippines.
Unless, Tax treaty provides a lower rate, lets say 10%. But if
you dont want to invoke the tax treaty where the country to
which you are declaring dividends, or the corporation is
domiciled in a country where we have no existing tax treaty,
we can only use the tax code provision (rate)
So when can a NRFC avail the lower rate of 15%?
The condition states that the country in which the NRFC

is domiciled, shall allow a credit against the tax due from
the NRFC taxes deemed to have been paid in the
Philippines.
So it is always considered, whether or not there is actual
payment, there is a tax credit deemed to have been paid of
15%.
Why 15%? The difference between the 30% regular tax rate
and 15% intercorporate dividend rate = 15%, is the taxes
deemed to have been paid in the PH by the NRFC.
Actually, we usually apply 15%, unless the tax treaty
provides for a lower rate.
b.
NRFC
ABC
NRFC DEF
60% Owner
Dividend, 15%
RFC
ABC Branch
or non-resident
DC is taxable on
income
earned
within and without
40% Owner
Dividend, 15%
DC
Dividend, EXEMPT
XYZ
Dividends declared by XYZ (DC) to DEF&ABC (NRFC), subject

to 15% intercorporate tax?
Yes
What about dividend declared by XYZ (DC) to ABC Philippine
Branch (RFC), subject to tax?
No. when RFC receives dividend from DC, it exempt from

tax.
How about the dividends declared by a DC to ABCPhilippine branch? Is that subject to tax?
We said that when a RFC receives dividends from a DC, it

is exempt from tax.
How about the dividends declared by a DC to a head
office of the Philippine branch? Subject to tax or not?
Yes, 15%.
Can the NRFC, ABC Corp, invoke the single entity
concept that being one and the same with the branch in
the Philippines (RFC), therefore any dividend payment
made to it by a domestic corporation is also exempt
from tax?
NO. As Ive said before, in situations wherein its an

investment made by the head office independently of the
branch, then that is the investment alone of the head
office.
So in this case since they have separate investments,

30% by the branch (RFC) and 30% by the NRFC, one is
still a payment to a NRFC subject to tax, and the other is
a payment to a RFC exempt from tax.
They will be in this case treated as 2 separate investors.

Reason why the dividends going out to a NRFC is not
exempt from tax:
We do not have control over these corporations, if and

when finally or ultimately they declare their income to
their other stockholders, they are not considered as
withholding agents of the Philippine tax authority. So at
this point pa lang, we have to withhold na the tax from
the cash or property or strict (?) dividends.
RFC
EXEMPT
Dividends coming from EXEMPT = not taxable

sources within: 30%
RFC
taxable
on income
Coming from sources earned within.
without: EXEMPT
NRFC
30% or
15%
Dividends coming from

sources within: 30%
Coming from sources
without: EXEMPT
NRFC taxable on
income
earned
within
RECAP: SUMMARY OF TAXABILITY OF CASH OR PROPERTY DIVIDENDS

RECEIVED BY INDIVIDUAL TAXPAYERS
Received by From
a:
DC
DC
EXEMPT
From a FC
Comments
10%
Within or without: 5- Not 10% because FC cannot

32%
withhold; no jurisdiction to
withhold; has to be declared
as part of gross income by
RC.
NRC
10%
Within:
5-32%
Without: exempt
RA
10%
Within:
5-32%
Without: exempt
NRAetb
20%
Within:
5-32%
Without: exempt
NRAnetb
25%
Within:
Without: exempt
Comments
30%; whether resident We dont even talk of where
RC
Received
FROM
a Received FROM a FC
DC
Did we not say that RFC and

NRFC are taxable on income
within to the extent that we
can identify such dividends
from sources within.
* The passive type of dividends granted exemption are only dividends received
from a DC.
SUMMARY OF TAXABILITY OF CASH OR PROPERTY DIVIDENDS RECEIVED

BY A CORPORATION
Dividends
Received
BY:
the foreign corporation is

operating:
whether
its
operation is more than 50%
in the Philippines, it wouldnt
matter; because a DC is
taxable on income within and
without.
G.
25%
NRA-etb taxable at the rate of 20% coming from a domestic

corporation, if coming from a foreign corporation taxable 532% on income coming within and without exempt.
NRA-netb taxable at a rate of 25% if within and if without
then exempt
Partnerships
1.
2.
H.
TAXABLE PARTNERSHIPS AND NON TAXABLE PARTNERSHIPS
There are generally 2 types of partnerships :

1. A partnership that is taxable
2. A partnership that is exempt from tax
General Professional partnerships are not subject to income tax but
the individual partners are based on the withdrawals they have made or
the net distributed share of partners
Taxable partnerships such as those engaged in trade or business, it will
be taxable as a corporation as long as all documentary requirements have
been complied with.
Business Partnerships
Similarly taxed as a taxable corporation.
General Professional Partnerships
Exempt from income taxation. However, for purposes of computing
the distributive share of partners, the net income of the
partnership shall be computed in the same manner as a
corporation.
Each partner shall report as gross income his
distributive share, actually or constructively received, in the net
income of the partnership.
Kinds of Deductions
Our discussion on the kinds of deductions would not be strictly limited to
corporate income taxation. Way back in our outline on income taxation in
general, we identified already that as part of the deductible items of an
individual taxpayer is the itemized deductions and the optional standard
deduction so long as in some form or another the individual taxpayer is
earning income from trade, business or profession. So we are assuming
that from this point forward that the taxpayer is engaged in trade, business
or a profession. The kinds of deductions for business purposes would be
the itemized deductions and the standard optional deductions.
May a corporation claim personal deductions or additional
exemptions?
NO.
Can a resident citizen, non-resident citizen and resident alien claim
itemized deduction or optional standard deduction if they are
purely employed without any other sources of income?
NO
How about a non resident alien engaged in trade and business? Can
they claim itemize deduction or OSD?
NRA-etb They are allowed itemized deduction because they are taxed
on net income but because they are non- resident then they cannot
claim optional standard deduction.
How about a non resident alien not engaged in trade or business?
Both itemized and OSD are not available to them because they are
taxed at gross same with non resident foreign corporation.
The principle to be observed in claiming for itemized expenses or
deductions is that
1. There must be a law allowing such deductions
2. That the taxpayer has proved that he is qualified to claim such
deductions
3. If such extent is required to be withheld of tax, it must be withheld of
tax
4. It must be strictly construed against the taxpayer.
1.
The catch all phrase here in deductions is expense which refer to ordinary
and necessary expenses of the business which would depend on the
business the taxpayer is engaged in.
Itemized business expenses
a. Expenses
i.
Business expenses vs. capital expenses
A private educational institution may, at its option, elect
either:
(1) To deduct expenditures otherwise considered as capital
outlays of depreciable assets incurred during the table
year for the expansion of school facilities; or
(2) To deduct allowance for depreciation thereof
SPECIAL RULES:
We said that deductions must refer only to ordinary

expenses based on a day to day expenses.
Would capital expenses or capital expenditures be allowed as an
outright deduction? No. But the non-deductible items that we have
learned is if there is a purchase of a capital asset it will not be
allowed as a deductible expense instead it will only be depreciated
over its usual life.
If a corporation makes a major capital expenditure which is used to
extend or prolong the life of the asset, such capital expenditure or
extra ordinary expense will not be expensed out right but instead it
will be capitalized and deducted over the usual life of the asset.
With regards to PRIVATE EDUCATIONAL INSTITUTIONS
A private educational institution at its option may elect to

deduct expenditures which are considered as capital outlays in
the taxable year when it was purchased or to deduct the
allowance of depreciation over its usual life.
It would not make any difference for tax purposes if the school
is a non stock non profit or a stock corporation because it is
exempt from income tax, whether the entire amount is
deducted in the year of purchase or all throughout the
estimated time of the property or capital (di ko ka dakop sa
unsa g ingon, murag asset ang g ingon).
What must be observed in deducting these instances?
Take note that the expense must be paid or incurred inorder

to generate the income. If the expense had been incurred to
pay for a number of years then it will not be deductible in the
year of incurrence or payment but also spread out over life in
which it seeks to benefit the income earner.
ii. Common requisites for deductibility:
(1) The expenses must be ordinary and necessary
When is it an expense ordinary? It is an ordinary expense
when it is normal or usual to the taxpayers business in
the surrounding circumstances. It is necessary when it is
appropriate and helpful in the development of the
taxpayers business and are intended to minimize the
losses or to increase the profits.
So if the expense is not necessary or ordinary in the
business then that expense becomes extraordinary
expense, not deductible for tax purposes.
Although, it
may be shown as part of the expenses but in computing
the income tax liability it will not reduce your net taxable
income.
(2) It must be paid or incurred during the taxable year

So actually it depends on what method of accounting the
taxpayer is following. There are different methods. It can
be the cash basis accounting, the accrual method, or the
mixed type. Usually we follow the accrual method of
accounting that whenever income already earned or
realized regardless whether it is received it is already
taxable income and the expense whenever it has already
been incurred regardless if it when it is paid it becomes
deductible expense. It means to say that if the all-events
test has already been satisfied, in order for the right to
the income and the obligation to pay is already there
then we recognize the expense of the income already. So
income earned, expense incurred. If the taxpayer is
under the cash basis of accounting, expense becomes
deductible only when it is paid. But in accrual method of
accounting, when it is incurred, or when the obligation is
already due and demandable.
Exception: net operating loss carry-over
The exception there is the net operating loss carry over.
The concept of NOLCO is whenever a corporation suffers
net loss, instead of a net income, so the financials would
reflect that the expenses are higher than the gross
income, it would result to a negative, which we call as a
net operating loss. The tax code allows this to be carried
over and deducted against the gross income of the
taxpayer for the following year. This is an exception to
the rule that the expense must be paid or incurred during
the year. This is because when a net operating loss is
carried over to the succeeding year and deducted against
the gross income we are now talking about an expense
which is attributable to the credit income. That is a
deduction resulting from the past and the income
generated has no relation to the loss of the prior year.
(3) It must be paid or incurred in connection with the
trade, business or profession of the taxpayer
Any personal expense of the stockholder, employer, or
officers of a corporation can in no way be deducted from
expense. So if there are purchases, grocery, personal
motor vehicles it cannot be claimed as a deduction if it
cannot be connected to the trade, business or profession
of a taxpayer.
(4) It must be reasonable in amount
What is reasonable would depend not only on the amount
of the expense but has to be taken into consideration
with the size, the nature of operation of the business, the
current economic conditions, etc.
(5) It must be substantiated by sufficient evidence such as
official receipts and other official records
In order for an expense under itemized deductions to be
allowed as a deduction to reduce the gross income it
must be support by either official receipt, sales invoice,
or any other adequate records. If the expense you are
trying to claim is a transportation expense of an
employee riding a jeepney, you cannot get an official

receipt. So instead of official receipts, you can support
that with adequate records such as a trip ticket filled out
by the employee claiming for reimbursement. If the
company secures the services of a home-based person,
that person will not be able to issue official receipt or
invoice for service rendered. It will only be an
acknowledgment receipt. For purposes of claiming such
services an acknowledgment receipt will not suffice. It
has to be supported additionally by the contract entered
into for the subcontracting service. When you give out
salaries, do employees give out official receipts to
employers? No. So the substitute would be the payroll,
payslips, annual/monthly reporting by the employer to
the Bureau for taxes withheld. So that if expense is
claimed without any supporting document it will not be
allowed as a deduction. Except that which qualifies under
the common rule, that if there is a showing that an
expense is actually incurred but the taxpayer corporation
cannot show adequate document then it is up to the BIR
to determine the proximate amount that can be allowed
as deduction to the taxpayer so long as there is an
excuse for non-procurement of official receipts, invoices
and documents and it can be proven that the expense
was really incurred. Example, if you purchase from a
fisherman, the individual ones, you cannot expect them
to issue you an official receipt but the alternative is to
sign an acknowledgment receipt or if you can deposit it
to his bank account, then the deposit slip.
Can the BIR say that it is not justifiable?
It will be justifiable if you are in the business of

making canned sardines. Naturally, your cost will be
the purchase of raw materials from individual
fishermen who dont usually issue official receipts.
The only proof that they can show to the BIR are
those mentioned above plus delivery receipts plus
proof that it has been weighed over by some public
weighing company. In this case, by the Cohan Rule it
will be allowed.
It is now up to the BIR to determine as to what extent
the only will be allowed, not the entire amount.
In the production of his plays Cohan was obliged to be free-handed in entertaining
actors, employees, and, as he naively adds dramatic critics. He had also to travel
much, at times with his attorney. These expenses amounted to substantial sums,
but he kept no account and probably could not have done so. At the trial before
the Board he estimated that he had spent eleven thousand dollars in this fashion
during the first six months of 1921, twenty-two thousand dollars, between July
first, 1921 and June thirtieth, 1922, and as much for his following fiscal year, fiftyfive thousand dollars in all. The Board refused to allow him any part of this, on the
ground that it was impossible to tell how much he had in fact spent, in the absence
of any items or details. The question is how far this refusal is justified, in view of
the finding that he had spent much and that the sums were allowable expenses.
Absolute certainty in such matters is usually impossible and is not necessary; the
Board should make as close an approximation as it can, bearing heavily if it
chooses upon the taxpayer whose inexactitude is of his own making. But to allow
nothing at all appears to us inconsistent with saying that something was spent.
True, we do not know how many trips Cohan made, nor how large his
entertainments were; yet there was obviously some basis for computation, if
necessary by drawing upon the Boards personal estimates of the minimum of such
expenses. The amount may be trivial and unsatisfactory, but there was basis for
some allowance, and it was wrong to refuse any, even though it were the
travelling expenses of a single trip. It is not fatal that the result will inevitably be
speculative; many important decisions must be such. We think that the Board was
in error as to this and must reconsider the evidence.
Cohan vs. Commissioner, 39 F. 2d 540 (2d Cir. 1930).
(6) It must not be against law, morals, public policy or
public order
What would be the type of expenses which would
be contrary to law, morals, public policy, or public
order?
a. Payments to government officials
Example you are being assessed P10M in taxes and
you are able to negotiate that only P5M will be paid
but the counter negotiation was that only P2M in
official receipts will be issued, will you be able to
claim the difference of P3M as an expense? You may
reflect it as miscellaneous expense but it will not be
allowed as a deduction in computing your tax
liabilities. But it has to be recorded somehow
because it was an outflow of cash in the corporation
(for private purposes) BUT for TAX purposes, it
cannot be allowed as an expense deduction.
Now payments that are contrary to law, morals, etc.

are not deductible BUT any income derived from
illegal activities are taxable. But take note that it is
allowed that illegal expenses can be allowed as a
deduction only to the extent of illegal gains. Now
these illegal expenses can be deducted if you have
illegal income. But that would be self-incriminating
you wouldnt declare your activities to be illegal
therefore you cannot altogether claim these as an
expenses
Note: Any amount paid or payable which is otherwise
deductible form, or taken into account in computing
gross income or for which depreciation or amortization
may be allowed, shall be allowed as a deduction only if
it is shown that the tax required to be deducted and
withheld therefrom has been paid to the BIR.
Any amount paid or payable which is otherwise
deductible from the gross income may be allowed as a
deduction only if the requirement of tax withholding has
been complied with. In other words, if an expense is
required to be withheld of tax by the payer, then such
withholding shall be made and remitted to the
government otherwise the entire expense will not be
allowed as a deduction.
Example: [This is one way for the BIR to collect taxes in
advance the method of withholding. But this is not the
type that is subject to final withholding tax; this is the

creditable withholding tax.] The regulations provide that
rental payments by the lessees to the lessor shall be
subject to 5% withholding tax. So that if there is a
domestic corporation A leasing from another domestic
corporation B worth P1.5M monthly. So if the lessee pays
P1.5M every month and there is that requirement that it
has to be withheld the 5% withholding tax, then the
lessee will only be paying the lessor P1,425,000 every
month. This would constitute as a tax payment and the
lessor corporation would receive P1,425,000 (instead of
the P1.5M). The P75,000 withheld by the lessee will be
given to the government constituting as an advance
payment of the lessor because this is a tax on the income
of the lessor. If it is not withheld, meaning to say the
lessee paid entirely the P1.5M, this amount will not be
allowed as expense in the books of the lessee
corporation. The lessee cannot deduct the P1.5M and
sadly for the entire year, all the rental payments will not
be deductible. BUT the lessor corporation has to declare
as well P1.5M as the monthly income and any
computation of the tax due will be offsetted against what
has been advanced to the government. So the
creditable withholding is simply a scheme by the
government to collect in advance from the tax payers
slowly towards the end of the year.
Going back to expense requirements, if an expense is
required to be withheld of tax, it has to be withheld
otherwise the expense will not be allowed as a deduction.
iii. Salaries, wages, bonuses and other forms of compensation
for personal services actually rendered, including the
grossed-up monetary value of the fringe benefits subjected
to fringe benefits tax which should have been paid
So what are the different types of expenses mentioned in
Section 34-A?
a. Salaries, wages, understandably, every corporation
employing personnel will have to spend for the salaries
and wages, even bonuses of these individuals under an
ER-EE relationship. BUT for salaries and wages to be
deductible, it must be reasonable in amount especially
bonuses it must be given in good faith. So that if an EE
is able to close a transaction worth P100M, is it
reasonable to give him P50M in bonuses? No, the
corporation would get the bulk of it, not the EE. So in
order for bonuses to be deductible from the income of
the corporate tax payer, it has to be given in good faith
and it has to be reasonable in amount and justifiable
according to the circumstances, the locality of where the
corporation is operating, and the general economic
conditions.
b. Cost of materials and supplies insofar as it is actually
incurred by the corporation is deductible
c. Advertising and Promotional expenses
iv. Cost of materials and supplies
v. Advertising and promotional expenses
Three types of advertising

1. Advertising is an act of making know the product or
something. For the purpose of stimulating the sales of its
product is deductible in the year of its occurrence.
2. For the purpose of stimulating the future sales for its new
product. Sort of an investment. Deductibe not in the year
of the occurrence but spread out in the life of its future
benefit.
3. Advertisement to promote the sales of the shares of
stock in the year of incorporation is not deductible.
Because it is for the purpose of advertising in the
investment of the corporation and not for the purpose of
increasing sales, or its product in the corporation.
Advertisement for the sales of bond deductible only in
banking institutions.
vi. Rentals and/or other payments for use or possession of

property
Rentals, the rental payment under operating lease then
deductible as expense but the financial lease which is an
installment not recorded as expense but recorded as purchase
of an asset.
vii. Expenses under lease agreements
viii. Travelling/transportation expenses
Those incurred while away from home in the pursuit of
trade and business Reasonable and necessary and
supported by adequate records. Transpo expense from
the head office to the branch, vice versa, office to the
client is deductible. But the expense of the employee
from home to the branch or office is a personal expense
and not deductible.
ix. Repairs and maintenance
In 2 forms.
1. Minor ordinary expense to answer for the ordinary wear
and tear of the asset. It is fully deductible in the year it is
incurred
2. Extra-ordinary or major repair deductible after it has
been capitalized. Its deductibility will be the depreciation
of the asset it has prolonged. Becomes an extra-ordinary
repair when the life of the asset is prolonged.
x. Expenses for professionals
Consultancy fees, professional fees deductible.
xi. Entertainment, amusement and recreation expenses
Conditions and requisites under Revenue Regulations No.
10-02
Entertainment, amusement or recreation expenses providing
recreation to your clients so long as it does not violate laws,
morals, public policy or public order. Then deductible to some
extent, must be related to the business or trade. Must be a
reasonable amount.
1. 1st requirement, must be related to its business or trade,
higher expenses in banks and other commercial
establishments compared to manufacturing sardines.
2nd must be a reasonable amount If the business is

engaged in rendering service business, maximum ear
should not exceed 1% of the net sales
Engaged in the sale of goods maximum ear expense

should not exceed % of 1% its net sales.
If mixed, apportionment. 1% service related

activities. of 1% engaged in the production of
goods.
3. 3rd not contrary to law, public policy, morals.
No constitute bribes and kickbacks. Must be

substantiated with receipts.
xii. Litigation expenses
Litigation expenses if the issue is related to its trade or
business.
xiii. Political campaign expenses
Political campaign expenses, not related to trade or business
or operations. Not deductible unless you want make a
donation.
xiv. Training expenses
Interests
i.
Arbitrage rule: The amount of interest paid or incurred
within a taxable year on indebtedness in connection with
the taxpayers profession, trade or business shall be
allowed as deduction, reduced by an amount equal to 33%
of the interest income earned by him which has been
subjected to final tax.
ii. Additional requisites for deductibility
(1) There must be an obligation which is valid and
subsisting
(2) There must be an agreement in writing to pay interest
(3) The amount shall observe the limitation under the
arbitrage rule
(4) It must not be between related taxpayers
iii. Non-deductible interest expense
(1) Interest expense on preferred stock, its exception
(2) When there is no agreement in writing to pay interest
(3) Interest expense on loan entered into between related
taxpayers
(4) Interest paid or calculated for cost-keeping purposes
(5) Interest expense beyond the arbitrage rule limitation
(6) Interest expense on unclaimed salaries of employees
(7) Theoretical interest
iv. Special rules
(1) Interest paid in advance
(2) Interest periodically amortized
(3) Interest expense incurred to acquire property for use in
trade/business/profession
Optional treatment of interest expense:
(a) Deduction; or
(b) Capital expenditure
Taxes
i.
All taxes, national or local, paid or incurred within the
taxable year in connection with the taxpayers trade,
business or profession are deductible from gross income,
except:
2.
c.
d.
e.
f.
(1) Income tax Philippine and Foreign Income taxes

(2) Estate and donors taxes
(3) Value-added taxes
(4) Special assessment on real properties
(5) Electric energy consumption tax (BP No. 36)
ii. Requisites for deductibility
(1) It must be paid or incurred during the taxable year;
and
(2) It must be paid or incurred in connection with the
trade, business or profession of the taxpayer.
iii. Treatments of surcharges/interests/fines for delinquency
tax payments
iv. Taxes subsequently credited or refunded
v. Tax credit vis--vis deduction
vi. Limitations on Tax Credit
(1) Per Country Limitation
(2) Global Limitation
vii. Who may claim tax credits for foreign taxes paid?
viii. Proof of Tax Credits
(1) The total amount of income from sources without the
Philippines;
(2) The amount of income derived from each country, the
tax paid or incurred to which is claimed as a credit; and
(3) All other information necessary for the verification and
computation of such credits.
Losses
i.
Classification of losses
(1) Ordinary losses
(2) Capital losses
(1) Losses must be incurred in relation to the trade,
business or profession of the taxpayer
(2) Losses must actually be sustained and charged off
within the taxable year, and not mere anticipated
losses
(3) Must be evidenced by a closed and completed
transaction
(4) Must not be compensation by insurance or other forms
of indemnity
(5) The loss is not claimed as a deduction for estate tax
purposes
(6) If it is a casualty loss, the taxpayer has filed a sworn
declaration of loss within 45 days after the date of
discovery
of
the
casualty,
robbery,
theft
or
embezzlement.
iii. Special rules
(1) Capital losses
(2) Wagering losses
(3) Net operation loss carry-over (NOLCO)
(4) Net capital loss carry-over (NCLCO)
Bad Debts
i.
Debts due to the taxpayer which are ascertained to be
worthless and charged off within the taxable year
(1) There must be valid and subsisting indebtedness
g.
h.
i.
(2) The debt must be ascertained to be worthless

(3) The debt must be charged off and uncollectible within
the taxable year
(4) It must be uncollectible in the near future
iii. Bad debts charged off and subsequently collected
Depreciation
i.
The gradual diminution of the useful value of the property
used in trade, business or profession of the taxpayer,
arising from wear and tear or natural obsolescence.
(1) There must be depreciable properties
(2) The property must be used in trade, business or
profession of the taxpayer
(3) The allowance for depreciation must be reasonable
(4) This must be charged off during the taxable year
(5) A statement on the allowance must be attached to the
return
(6) The method
in
computing the
allowance for
depreciation must be in accordance with the method
prescribed by the Secretary of Finance
iii. Methods of computing depreciation allowance
(1) Straight-line method
(2) Declining balance method
(3) Sum-of-years digit method
Depletion
i.
The exhaustion of natural resources like mines and oil and
gas wells as a result of production or severance from such
mines or wells.
Same as that of depreciation, except that the

properties involved are natural resources
iii. Determination of the amount of depletion cost, factors
(1) The basis of the property
(2) The estimated total recoverable units in the property
(3) The number of units recovered during the taxable year
Charitable and other contributions
i.
Kinds of charitable contributions
(1) Ordinary deductible, subject to the following
limitations:
(a) Must not exceed 10% of the taxable income, in the
case of an individual
(b) Must not exceed 5% of the taxable income, in the
case of a corporation
(2) Special deductible in full
(a) To the Government or to any of its agencies or
political subdivisions, including GOCCs, exclusively
to finance, to provide for, or to be used in
undertaking
priority
projects
(i.e.,
sports
development, science and invention, health and
human settlement, educational and economic
development)
(b) Foreign government or institution and international
civic organizations
a. Accredited NGOs (NGO means non-profit
domestic corporation which are formed and
2.
I.
organized for any of the following

purposes: research, health, education,
charitable, cultural, character building,
sports development and social welfare)
(1) The contribution must actually be paid or made to the
Philippine government or to any of the domestic
corporations or associations specified by the Tax Code
(2) No part of the net income of the beneficiary must inure
to the benefit of any private person
(3) It must be made within the taxable year
(4) For ordinary contributions, it must observe the
limitations
(5) It must be evidenced by adequate records or receipts
j. Contributions to pension trusts
i.
Distribution of contributions:
(1) Current year the contribution is considered as
ordinary and necessary expenses fully deductible.
(2) Past years if it refers to services rendered for the past
10 years, the contribution is deductible but apportioned
over the next 10 years (i.e., 1/10 deductible every
year)
(1) There must be a pension or retirement plan established
by the employer
(2) The pension must be reasonable and actuarially sound
(3) Contribution must be given by the employer to that
pension plan
(4) The amount contributed must no longer be subject to
the control or disposition of the employer
(5) The payment has not yet been allowed as deduction
(6) This must be for the benefit of the employees
(7) The deduction is apportioned in equal parts over a
period of 10 consecutive years
Optional standard deductions
a. A standard deduction available to domestic corporations and
resident foreign corporations in an amount not exceeding forty
(40%) of the gross income, in lieu of the itemized business
expenses
b. When elected, irrevocable for the taxable year in which the
return is made
preponderance of evidence, shall prove that it is not to avoid the

tax on shareholders or members)
2.
3.
4.
Coverage
b. For corporations using the calendar year basis the
accumulated earnings tax shall apply on improperly
accumulated income after the close of calendar year 1997
c. For corporations adopting the fiscal year accounting period
the accumulated earnings tax shall apply on improperly
accumulated income after the close of fiscal year 1998
Improperly accumulated taxable income is taxable income adjusted
by:
a. Income exempt from tax
b. Income excluded from gross income
c. Income subject to final tax
d. Amount of net operating loss carry-over deducted and reduced
by the sum of:
i.
Dividends actually or constructively paid; and
ii. Income tax paid for the taxable year
Exceptions to improperly accumulated earnings tax
a. Publicly held corporations
b. Banks and other non-bank financial intermediaries
c. Insurance companies
d. Taxable partnerships
e. General professional partnerships
f. Nontaxable joint ventures
g. PEZA-registered enterprises enjoying the special tax in lieu of
national and local taxes
Improperly Accumulated Earnings of Corporations, Section 29 of the

Tax Code & RR No. 02-01
1. A 10% tax based on the improperly accumulated taxable income of
a corporation formed or availed for the purpose of avoiding the
income tax with respect to shareholders or the shareholders of any
other corporation, by permitting earnings and profits to accumulate
instead of being distributed. Evidence of purpose to avoid income
tax
Prima facie evidence: The fact that any corporation is a mere
holding company or investment company
Evidence determinative of purpose: The fact that the earnings or
profits of a corporation are permitted to accumulate beyond the
reasonable needs of the business (unless the corporation, by clear

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INDIVIDUAL INCOME TAXATION

General Principles, Section 23

definite intention as to his stay, he is a resident. One who comes

Resident Citizens, Non-Resident Citizens and Resident Aliens

(ii) Special treatment of fringe benefits: Subject to

Vehicle of any kind

Interest on loan at less than market

Membership fees, dues and other expenses

Expenses for foreign travel

Holiday and vacation expenses

Education assistance to the employee or his

Life or health insurance and other non-life

ii. Capital assets, Section 39

MAM TIUs 1st Illustration

Sales, Cost or Capital. From your sales, you deduct any

If in 2005, you have sales of 10,000 and you have capital

Did the government benefit?

In 2012, same amount. No improvement in the

Lets go back to 2005. If your ordinary expense is 5,000

Lets go back again to 2005, you have ordinary expenses

Because he benefitted and it was deducted in the

If the writing off of accounts receivable benefitted the

If he was benefitted in full for the amount, then full

It means that you have paid more than what is required

Will that be receipt of money of the tax credit

This would still require the application of the tax benefit

So therefore the 1 million is fully taxable because the two

And if it was only 3.5 million and 2 million was deducted

I believe only to the extent of 5,000.

Why because without the deduction of taxes you would

You have to determine what type of tax has been

such as income tax (you cannot deduct income tax in

Must have stayed in the Philippines continuously or for an

The winnings in the raffle draw will then be subjected to the

iii. Partners share, 20%

Gain on sale of real property classified as capital asset

Section 25 (b) NIRC

Nonresident Alien Individual Not Engaged in Trade

Special employees are those employees employed in special

The general rule is only alien employees occupying managerial

No, only managerial and highly technical positions and these

(Revenue Memorandum Circular No. 41 2009)

Filipinos employed by ROHQs or RHQs in a managerial or technical

This only applies to Filipino special employees. Alien employees

Iincome from employment which are salaries, wages,

Individual Taxpayers Exempt from Income Tax

YES. Where an employee is assigned to an area where he is

YES, even if it is a mere peso difference. Because he is already

under the minimum wage. Now in that case although he is earning

Should he be withheld of taxes from his employers or by

No, he remains exempt, as he is still receiving the minimum

Is he liable for income tax?

No, the total of his income is more than the statutory

The employer is bound with his contract with the employee. It is

The exemption from tax by a minimum wage earner applies only

If an EE earns minimum wage + 1M as interest income from

BUT if an EE earns minimum wage + 1m as an interest income

The interest income here is not a passive income. Interest income

ii. Overtime pay

VAT, 20% discount on other purchases , 5% electric and

No. For P25,000 to apply, it only applies to a qualified

Student: The husband

Why do you think it's the husband?

Probably because (?)the wife(?)it is more beneficial to