INCOME

AND WITHHOLDING
TAXES
A"y. Vic C. Mamalateo
July 13-17, 2015
ATENEO COLLEGE OF LAW, Maka5

TITLE II: INCOME TAX

Chap I DeniBons
Chap II General principles
Chap III Tax on individuals
Chap IV Tax on corpora5ons
Chap V ComputaBon of taxable income
Chap VI ComputaBon of gross income
Chap VII Allowable deducBons
Chap VIII AccounBng periods and methods of accounBng
Chap IX Returns and payment of tax
Chap X Estates and trusts
Chap XI Other income tax requirements
Chap XII Quarterly corporate income tax
Chap XIII Withholding tax on wages

BASIC TAX PRINCIPLES

General principles arising from lifeblood theory:
TaxaBon is the rule; exempBon, the excepBon.
ExempBon from taxaBon may refer to the transacBon or to the
person.
ExempBons are construed strictly against the taxpayer. In case of
doubt, you tax income or disallow deducBons and tax credits.
Taxes are imposed by law (e.g., NIRC), while nancial accounBng are
based on generally accepted accounBng principles or standards adopted
by BOA/SEC. In case of conict between (a) tax accoun5ng rules
(provided in the Tax Code) and (b) nancial accoun5ng rules (in PFRS/
PAS), the former shall prevail in determining the tax liabili5es of a
person.
Only one (1) type of income tax under Title II, NIRC on the taxable
income of a person shall be imposed!
Business transac5ons are classied either as (a) sale of goods or
proper5es, or (b) sale of service! Principal document in support of sale is
sales invoice, for sale of goods, or ocial receipts, for sale of service.

OVERVIEW
1. Cash/Property Received
Is it a (a) return of capital (or capital), or (b) income,
gain or prot?
2(A). Capital or Return of Capital
Is it acquired (1) gratuitously or (2) for a valuable
consideraBon?
Gratuitous Transfer: Transferor may be subject to estate
tax (Chapter I, Title III) or donors tax (Chapter II, Title III)
For Valuable Considera5on: Transferor-seller may be
subject to income tax (Title II). Buyer is not subject to
income tax, although the parBes may agree that the income
tax of the seller be assumed by the buyer thereof.

OVERVIEW
2(B). If income, gain or prot
1. Exempt from income tax:
ConsBtuBon, tax treaty, NIRC, or special law
Exclusion from gross income [Sec. 32(B), NIRC]
Sec. 30, NIRC: Exempt corporaBons and associaBons
Sec. 22, NIRC: GPP or JV (construcBon or energy-
related projects)

2. If taxable, what income tax system applies?

Schedular tax system (subject to FWT)
Global tax system (subject to CWT or no WT)
Mixed schedular and global tax systems

OVERVIEW
3. Who is the taxpayer?

Individual (or estate or trust)

CiBzen or alien

CorporaBon (including partnership or joint venture)

DomesBc or foreign

4. Where is the source of income?

Within the Philippines
Without the Philippines

5. Methods of repor5ng income

Cash, accrual, installment plan, percentage of

compleBon, and crop year

OVERVIEW
6. Nature of income?
CompensaBon income
Business or professional income
Capital gain
Passive investment income
Other income

7. Type of asset and gain?

Capital asset
Ordinary asset

INCOME TAX
IMPORTANT PROVISIONS:

Secs. 23 (General principles), 24-28 (individual &

corporaBon), 32 (gross income & exclusions), 39-40
(capital gain/loss and determinaBon of gain), 42
(source rules), and 60-63 (tax on estates and trusts),
NIRC
Secs. 22(b) [corporaBon & other deniBons], 30
(exempt corporaBon or associaBon), 31 (taxable
income), 34-36 (deducBons & non-deducBble items),
44-45 (accounBng periods), and 48-49 (methods of
accounBng), and 50 (allocaBon of income of related
parBes), NIRC

INCOME TAX
INCOME TAX

Tax on all yearly prots arising from property, professions, trades or

oces, or as a tax on a persons income, emoluments, prots and the like
(Fisher v. Trinidad).
Income tax is a tax on (a) actual or presumed income, gain or prot
(gross or net) of a seller of property or service, (b) received, accrued or
realized during the taxable year, and (c ) there is no law that exempts (i)
such income, gain or prot, or (ii) the person who derives such income,
from income tax.

WITHHOLDING TAX

It is not an internal revenue tax but a mode of collecBng income tax in

advance on income of the recipient of income thru the payor of income.
[NOTE: Sec. 21, NIRC enumerates various internal revenue taxes.]
The duty to le and pay income tax is dierent from the duty to withhold
and remit income tax. Exemp5on from income tax does not exempt said
taxpayer from the duty to withhold income tax on the recipient of
income! However, NO INCOME TAX, NO WITHHOLDING TAX!
There are 2 types of withholding taxes, namely: (1) nal withholding tax;
and (2) creditable withholding tax, including expanded withholding tax.

REQUISITE #1 INCOME TAX

THERE IS INCOME, GAIN OR PROFIT OF SELLER

Person subject to income tax is the seller or transferor of property or

service; buyer is not subject to income tax, except as a withholding
agent of government, or where income tax on the seller is assumed by
the buyer;
Income, gain or prot should be actual, unless presumed by law;

6% CGT is due on sale of real property, classied as a capital asset, located

in the Philippines, and the seller is NOT a foreign corporaBon, and is
computed on the gross selling price or fair market value, whichever is
higher. Law makes a conclusive presump5on here; hence, even if seller
incurs a loss, he is sBll liable to pay the 6% CGT.
If seller is a foreign corporaBon, ordinary rules shall apply.

Income, gain or prot could be gross income or net income; gross

selling price may consist of (a) return of capital and (b) income, gain or
prot; return of capital is not subject to income tax.
Income, gain or prot may be in cash or its equivalent (value of
property or service).

REQUISITE #2 INCOME TAX

RECEIVED, ACCRUED OR REALIZED/RECOGNIZED DURING THE YEAR

Receipt of income could be actual or construcBve (i.e., credited to the account

of or set aside for a taxpayer, which may be drawn by him at any Bme and not
subject to any condiBon or limitaBon, although not actually reduced to
possession);
20% FWT on interest income on bank deposits of commercial banks with
other banks is construc5vely received; hence, subject to percentage tax.
Accrued income means income is earned but not received during the year;
Receipt of liability by a person using the accrual method is not subject to
income tax.
Income is realized means there is a separaBon from capital of something of
exchangeable value; it generally arises from sale or other disposiBon of
property, especially when there is a closed and completed transacBon. To be
taxable, the sale need not be consummated!
Income is recognized means the enBre income is not subject to income tax;
the law imposes tax only on the recognized porBon of the income (e.g., long-
term other capital gain).
Method of accoun5ng income (cash, accrual or other method) adopted by
income payee determines the period of reporBng such income.

REQUISITE #3 INCOME TAX

THERE IS NO LAW THAT EXEMPTS THE INCOME OR THE PERSON THAT
RECEIVES SUCH INCOME

The law may exempt the income, gain or prot

Intra-corporate dividend

The law may exempt the person that receives the income,
gain or prot
Interest income on long-term bank deposits of individuals

The law granBng tax exempBon could be the ConsBtuBon,

tax treaty or statute
ExecuBve Order cannot extend the tax exempBon to persons not
expressly granted under the law.

ExempBon may be full or parBal (e.g., preferenBal tax

rate); permanent or for a limited period (e.g., ITH); for all
taxes (direct and indirect) or for specied tax only.

FEATURES OF INCOME TAX

It is a direct tax.
It is a progressive tax, since the tax base increases as
the tax rate increases. It is founded on the ability to
pay of taxpayer.
Phil adopted the most comprehensive system in
imposing income tax (based on ciBzenship,
residence, or source of income).
Phil follows the semi-global or semi-schedular
income tax system (i.e., global, schedular, or mixed
global and schedular tax system).
It is of American origin. Decisions of U.S. tax
authoriBes have peculiar and persuasive eects for
the Philippines.

CRITERIA IN IMPOSING INCOME TAX

Ci5zenship principle
For Filipino ciBzens and domesBc corporaBons,
who are enBtled to Philippine government
protecBon wherever they are situated.

Residence principle
For alien individuals and foreign corporaBons

Source principle
For alien individuals and foreign corporaBons

INCOME TAX SYSTEMS

GLOBAL TAX SYSTEM

CompensaBon income not subject to FWT

Business and/or professional income
Capital gains not subject to FWT
Passive investment income not subject to FWT
Other income not subject to FWT

SCHEDULAR TAX SYSTEM

CompensaBon income subject to FWT

Capital gains subject to FWT
Passive investment income subject to FWT
Other income subject to FWT

SEMI-GLOBAL OR SEMI-SCHEDULAR TAX SYSTEM

The Philippines adopted the semi-global or semi-schedular tax system.
Either the global or schedular system, or both systems, may apply on
income of a taxpayer, depending on the nature of such income.

PURELY GLOBAL TAX SYSTEM

1. The taxable income (regardless of nature) is not subject to FWT; it may
be subject to CWT or no WT applies. In other words, if income, gain or
prot is subject to income tax and no FWT tax applies thereon, use
GLOBAL TAX SYSTEM in compuBng income tax.
2. All taxable incomes above are declared in tax return for the year.
COST OF SALES (represenBng return of capital) or cost of services is
DEDUCTED FROM GROSS SALES to arrive at GROSS INCOME.
3. All allowable deducBons (except on compensaBon income) and
personal/addiBonal exempBons, if individual is qualied, are deducted
therefrom to arrive at NET TAXABLE INCOME.
4. Tax rates depend on WHO is the taxpayer -- graduated rates (5%-32%)
for individuals, and xed rate (30%) for corporaBons, unless the law
imposes a dierent tax rate.
5. CWT taxes withheld by the buyer (thru 1706 return led with BIR) and
usually evidenced by BIR Form 2307 (CerBcate of Tax Withheld) are
creditable against the income tax due for the period of the seller.

PURELY SCHEDULAR TAX SYSTEM

1. Income of seller is subject to income tax under Title II, NIRC;
2. Income is listed in Sec 57(A), NIRC among those subject to FWT, to be
withheld by the Phil resident-payor of income and remijed to BIR within
the prescribed period.
You apply the schedular tax system only when the taxable income, gain or
prot is subject to FWT.

3. FWT return (1601F, 1602, or 1603) is led by payor of income-buyer of

goods or service. However, capital gains tax return for sale of real
property subject to 6% CGT (1606) is to be led by the seller/transferor,
not by the buyer.
4. Payee-recipient of income may be resident or non-resident person. He
does not report or declare such income subjected to FWT in his tax return
(1701 or 1702), although current regulaBons require that such income be
reected in the supplemental informaBon in the tax returns to be led.
RA 1405 (Bank Secrecy Law) prohibits the disclosure or inquiry into the bank
deposits by the government.

SEMI-GLOBAL OR SEMI-SCHEDULAR
TAX SYSTEM
1. Incomes are subject to income tax, but one or more
types of income is subject under the global tax system
(e.g., compensaBon income and business/professional
income), while other types of incomes are subject
under the schedular tax system (e.g., interest income
on bank deposits and dividend income).
2. It does not apply to mixed incomes of taxpayer,
where both of the incomes are subject to the (a)
purely global tax system (e.g., compensaBon income
and professional/business income), or (b) purely
schedular tax system (e.g., interest income on bank
deposits and dividend income from domesBc
corporaBon).

FORMULA
GLOBAL SYSTEM (CWT/No
WT)
Gross sales/revenue
Less: Cost of sales/service
Gross income
Less: DeducBons
PAE (for individual)
Net taxable income
MulBplied by applicable
rate (graduated or at)
Income tax due
Less: Creditable WT
Balance

SCHEDULAR SYSTEM (FWT)

Type #1. Gross selling price
or fair market value,
whichever is higher Bmes
applicable tax rate = Tax
due (real property)
Type #2. Gross selling price
less cost or adjusted basis =
Capital gain Bmes
applicable tax rate = Tax
due (shares of domesBc
corp)
Type #3. Gross income
Bmes applicable rate = Tax
due (passive inv income;
income paid to resident or
non-resident person)

FINAL WITHHOLDING TAX

Income payment is listed in Sec 57(A), NIRC, as subject to FWT.
FWT withheld by the payor of income (e.g., 20% FWT on interest income
on bank deposits) represents FULL payment of income tax due on such
income of the recipient.
Income payee (or recipient of income) does not report income subjected
to FWT in his income tax return, although income is reected in his
audited nancial statements for the year. However, he is not allowed to
claim any tax credit on income subjected to FWT.
Withholding agent (payor of income) les the withholding tax return,
which includes the FWT deducted from the income of payee, and pays the
tax to the BIR. There is no CerBcate of Tax Withheld issued to income
payee.
No CerBcate of Tax Withheld (BIR Form 2307) is asached to the income
tax return of recipient of income because he does not claim any tax credit
in his tax return.

FWT: SEC 57(A), NIRC

Income tax is imposed or prescribed by:

Sec. 24(B)(1) Interests, royalBes, prizes & other winnings

Sec. 24(B)(2) Cash and/or property dividends
Sec. 24(C) CGs from sale of shares not traded in PSE
Sec. 24(D)(1) CGs from sale of real property located in the Phil
Sec. 25(A)(2) Cash and/or property dividends from DC; interests, royalBes,
prizes and other winnings
Sec. 25(A)(3) CGs from sale of shares not traded in PSE and real property
Sec. 25(B) NRA not engaged in trade or business in the Phil
Sec. 25(C) Alien employed by RHQ and ROHQ
Sec. 25(D) Alien employed by OBU
Sec. 25(E) Alien employed by petroleum service contractor and sub-
contractor

FWT is required to be withheld and remijed by buyer-payor of income,

except in the case of CGG on real property which if paid by the seller-
payee of income.

CREDITABLE WITHHOLDING TAX

Income payment is (a) compensa5on income subject to WT on
Wages under Chapter XIII (WT on wages), or (b1) one listed in the
regula5on, in the case of ordinary withholding agent, or (b2) even
though unlisted, in the case of Top 20,000 CorporaBon or Top
5,000 Individual, that is subject to expanded withholding tax (EWT)
under Sec 57(B) [EWT], NIRC; hence, if income or person is exempt
from income tax, NO WT is required.
Taxable income is reported in the tax return of taxpayer, together
with other incomes subject to income tax under the global tax
system.
Income tax is generally computed on the net taxable income of
taxpayer.
EWT is creditable against the income tax due, provided that it is
evidenced by BIR Form 2307 (Cert of Creditable WT), or other
relevant legal documents (e.g., JV/check).

NO WITHHOLDING TAX APPLICABLE

Income is subject to income tax under the global tax
system, but no withholding tax (whether CWT or FWT)
applies thereon.
Income is reported by the taxpayer (recipient of
income) in his/its tax return, together with other
incomes subject to income tax under the global tax
system.
EnBre income tax due per return is paid at the Bme of
ling of tax return, except in the case of self-employed
individuals with more than P2,000 income tax due for
the year, provided that at least 50% thereof is paid
upon ling on or before April 15 (Sec. 56, NIRC).

TYPES OF INCOME TAX

1. Graduated income tax on individuals (Secs 24-25);
2. Regular corporate income tax on corporaBons (RCIT) [Sec 27(A)-28(A)];
3. Minimum corporate income tax on corporaBons (MCIT) [Sec 27(E)-Sec(E2)];
4. Special income tax on certain corporaBons (e.g., private educaBonal
insBtuBons [Sec 27(B)]; foreign currency deposit units [Sec 27(D3)];
internaBonal carriers [Sec 28(A3)]; OBU (Sec 28(D4)]; ROHQ (Sec 28(D6); FCDU
(Sec 27(D3) &28(D7b)];
5. Capital gains tax on sale or exchange of unlisted shares of stock of a
domesBc corporaBon classied as a capital asset;
6. Capital gains tax on sale or exchange of real property located in the
Philippines classied as a capital asset;
7. Final withholding tax on certain passive investment incomes (e.g., interest,
dividend, and royalty);
8. Final withholding tax on income payments made to non-residents
(individual or corporaBon);
9. Fringe benet tax (FBT) [Sec 33];
10. Branch prot remisance tax (BPRT) [Sec 28(D5)]; and
11. Tax on improperly accumulated earnings (IAET) [Sec 29, NIRC].

KINDS OF TAXPAYERS
INDIVIDUAL, including estate and trust
CITIZEN (RC)

Resident (RC) Taxable on worldwide income

Non-resident immigrant, permanent worker, OFW (seamen)

ALIEN

Resident
Non-resident

Engaged in trade or business (more than 180 days in the Phil)

Not engaged in trade or business (180 days or less stay in Phil)

CORPORATION (DC), including partnership

DOMESTIC (DC) Taxable on worldwide income

FOREIGN
Resident (e.g., Phil branch of foreign corporaBon)
Non-resident

TEST FOR TAX PURPOSES: Law of incorporaBon, NOT ownership

RULE: All taxpayers are taxed only on income from sources within the
Phil, except RC and DC.

INCOME TAX ON INDIVIDUAL

COMPENSATION INCOME
Gross compensaBon income
Less: Personal (P50T) and
addi5onal exemp5ons (P25T)
Tax base
MulBplied by graduated rates of
income tax (5%-32%)
Ordinary income tax
Less: Creditable withholding tax
(CWT)
Balance due for payment upon
ling of return

BUSINESS/PROFESSIONAL INCOME
Gross sales/professional fees
Less: Cost of sales/service
Gross income
Less: Deduc5ons
Personal and addiBonal
exempBons
Net taxable income
MulBplied by grad tax rates
Income tax due
Less: CWT
Balance due (if amount of income
tax due is over P2,000, he may pay
in 2 equal installments on April 15
and July 15) [Sec 56(A2), NIRC]

RA 9504, June 17, 2008

1. COMPENSATION INCOME EARNER

Statutory Minimum Wage (SMW) rate xed by the Regional

TriparBte Wage and ProducBvity Board, as dened by BLES of
DOLE (Sec. 22(GG), NIRC)
Minimum Wage Earner (MWE) worker in the private sector
paid the statutory minimum wage, or to an employee in the
government sector with compensaBon income of not more than
the statutory minimum wage in the non-agricultural sector
where he/she is assigned (Sec. 22 (HH), NIRC)
Minimum wage earners shall be exempt from the payment of
income tax on their taxable income: Provided, further, That the
holiday pay, overBme pay, night shix dierenBal pay and hazard
pay received by such MWE shall likewise be exempt from
income tax (Sec. 24(A)(2), NIRC)

RR 10-2008, July 8, 2008

An employee who receives/earns addiBonal compensaBon such as
commissions, honoraria, fringe benets, benets in excess of the
allowable statutory amount of P30,000 (increased to P82,000
beginning 2015 under RA 10653), taxable allowances and other
taxable income other than the SMW, holiday pay, overBme pay,
hazard pay and night shix dierenBal pay, shall not enjoy the privilege
of being a MWE and, therefore, his/her enBre earnings are not exempt
from income tax and, consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of
trade, business or pracBce of profession, except income subject to
nal tax, in addiBon to compensaBon income, are not exempted from
income tax on their enBre income earned during the year.
This rule notwithstanding, the SMW, holiday pay, overBme pay, night
shix dierenBal pay, and hazard pay shall sBll be exempt from
withholding tax.

RMC 91-2010, Dec 2, 2010

If in Dec 2010, the MWE was promoted, her salary

for the month of December will be subject to
income tax if it exceeds her personal and
addiBonal exempBons (Q10).
If an MWE with a salary of P382/day assigned in
NCR was re-assigned in Laguna with the same
salary in May 2010, his salary in Laguna will be
subject to withholding tax because his daily wage
is above the prevailing minimum wage in Laguna
region (Q14-15).

RESIDENT CITIZENS EMPLOYED BY

ADB & INTL ORGANIZATIONS
A. ADB IN THE PHIL
Sec 45(b), Art XII of the Agreement between ADB and
RP: Only ocers and sta of ADB who are not Phil
naBonals shall be exempt from Phil income tax
(because exempBon is subject to the power of the
Govt to tax its na5onals.

B. FOREIGN EMBASSIES IN THE PHIL

Resident ciBzens are taxed on worldwide income.

C. OTHER INTL ORGANIZATIONS IN THE PHIL

Resident ciBzens are taxed on worldwide income.

TAXES ON LABOR DISPUTE AWARDS

RMC 39-2012, Aug 3, 2012
Backwages, allowances and benets awarded in a labor
dispute consBtute remuneraBon for services that would
have been performed by the employee in the year when
actually received, or during the period of his dismissal from
the service which was subsequently ruled to be illegal.
The employee should report as income and pay the
corresponding income taxes by allocaBng or spreading his
backwages, allowances and benets thru the years from his
separaBon up to the nal decision of the court awarding
the backwages.
The backwages, allowances and benets are subject to
withholding tax on wages.

TAXES ON LABOR DISPUTE AWARDS

However, when the judgment awarded in a labor dispute is
enforced thru garnishment of debts or having in possession
or control of such credits (e.g., banks or other nancial
insBtuBons) would normally release and pay the enBre
garnished amount to the employee. As a result, employers
who are mandated to withhold taxes on wages cannot
withhold the appropriate tax due thereon.
In order to ensure the collecBon of the appropriate
withholding tax on wages, garnishees of a judgment award
in a labor dispute are consBtuted as withholding agents
with the duty to withhold tax on wages equivalent to ve
percent (5%) of the porBon of the judgment award,
represenBng the taxable backwages, allowances and
benets.

DE MINIMIS BENEFITS
RR 10-2008, July 8, 2008

FaciliBes and privileges of relaBvely small value.

Ordinarily, faciliBes and privileges (such as
entertainment, medical services, or so-called
courtesy discounts on purchases), otherwise known
as de minimis benets, furnished or oered by an
employer to his employees, are not considered as
compensaBon subject to income tax and
consequently, to withholding tax, if such faciliBes or
privileges are of relaBvely small value and are oered
or furnished by the employer merely as means of
promoBng the health, goodwill, contentment, or
eciency of his employees.

DE MINIMIS BENEFITS
RR 5-2011, Mar 16, 2011
MoneBzed unused vacaBon leave credits of private employees not
exceeding 10 days
MoneBzed value of vacaBon and sick leave credits paid to
government employees
Medical cash allowance to dependents of employees, not
exceeding P750 per employee per semester or P125 per month
Rice subsidy of P1,500 or one sack of 50 kg rice per month
amounBng to not more than P1,500
Uniform and clothing allowance not exceeding P4,000 per annum
Actual medicine assistance (e.g., medical allowance to cover
medical and healthcare needs, annual medical/execuBve check-up,
maternity assistance, and rouBne consultaBons, not exceeding
P10,000 per annum

DE MINIMIS BENEFITS
Laundry allowance not exceeding P300 per month
Employees achievement awards (e.g., for length of service or safety
achievement, which must be in the form of tangible personal property
other than cash or gix cerBcate, with an annual monetary value not
exceeding P10,000 received by employee under an established wrisen
plan which does not discriminate in favor of highly paid employees
Gixs given during Xmas and major anniversary celebraBons not exceeding
P5,000 per employee per annum
Daily meal allowance for overBme work and night/graveyard shix not
exceeding 25% of basic minimum wage on a per region basis
Benets received by an employee under a CBA or produc5vity incen5ve
scheme, provided it does not exceed P10,000 for the year (RR 1-2015)
All other benets not included above shall not be considered as de
minimis benets; hence, subject to income tax and withholding tax.

FILIPINO CITIZENS
A. RESIDENT CITIZENS
2. Self-employed (i.e., he is engaged in trade or
business in the Philippines or he exercises his
profession)
Allow deducBons from gross income (itemized or OSD) on
taxable income not subject to FWT
Use purely global tax system; i.e., compute income tax
based on net taxable income (gross sales less cost of sales
less deducBons and personal and addiBonal exempBons)
Bmes graduated rates = IT due
Taxable income from sources within and without the
Philippines are subject to income tax.

NON-RESIDENT CITIZEN
A. IMMIGRANT
Qualies as non-resident ciBzen from the date of
departure from the Philippines.

B. PERMANENT EMPLOYEE
Qualies as non-resident ciBzen from the date of
departure from the Philippines.

C. OVERSEAS CONTRACT WORKER

Qualies as non-resident ciBzen, if his aggregate
period of stay outside the Philippines during the year
exceed 183 days.

DOMESTIC CORPORATION
1. Taxable incomes of DC on worldwide net income,
not subject to FWT, are taxed at 30%, unless a lower
rate is imposed under the law (i.e., educaBonal
insBtuBon or hospital)
2. Income of branches within the Philippines as well as
those outside the Philippines must be reported in the
tax return of the head oce in the Philippines
3. Some DCs are granted ITH (e.g., BOI law or PEZA
law) for limited period or granted preferenBal tax rate
for unlimited period, in lieu of all naBonal and local
taxes (e.g., PEZA law, BCDA law), permanent
exempBon under certain condiBons (e.g., CDA law).

1997 TAX CODE PROVISION

SEC. 27: INCOME TAX ON DOMESTIC CORPS
(A) In general Income tax of 30% on taxable income (i.e.,
gross income less allowable deducBons) derived during
each year from all sources within and without the Phil by
every corporaBon.
(B) Proprietary EducaSonal InsStuSons and Hospitals.
Proprietary educaBonal insBtuBons and hospitals which are
non-prot shall pay a tax of 10% on their taxable income,
except those covered by Subsec D hereof: Provided, That if
the gross income from unrelated trade, business or other
acBvity exceeds 50% of the total gross income derived by
such educaBonal insBtuBons or hospital from all sources,
the 30% tax shall be imposed on the enBre taxable income.

1997 TAX CODE PROVISION

Unrelated trade, business or other ac5vity means
any trade, business or other acBvity, the conduct of
which is not substanBally related to the exercise or
performance by such educaBonal insBtuBon or
hospital of its primary purpose or funcBon.
Proprietary educa5onal ins5tu5on is any private
school maintained and administered by private
individuals or groups with an issued permit to operate
from the DECS, or CHED, or the TESDA, as the case may
be, in accordance with exisBng laws and regulaBons.

1997 TAX CODE PROVISION

SEC. 30: EXEMPTION FROM TAX ON CORPS
(E) Non-stock corporaBon or associaBon orga-
nized and operated exclusively for religious,
charitable, scienBc, athleBc, or cultural
purposes, or for the rehabilitaBon of veterans, no
part of its net income or asset shall belong to or
inure to the benet of any member, organizer,
ocer or any specic person;
(H) A non-stock and non-prot educaBonal
insBtuBon;
(I) Government educaBonal insBtuBon

1997 TAX CODE PROVISION

Notwithstanding the provisions in the preced-
ing paragraphs, the income of whatever kind
and character of the foregoing organizaBons
from any of their properBes, real or personal,
or from any of their acBviBes conducted for
prot, regardless of the disposiSon made of
such income, shall be subject to tax imposed
under this Code.

Jesus Sacred Heart College v. Collector

The fact that a college is administered to assure
that it will not incur a decit should not subject it
to income tax. Every responsible organizaBon
must be so run as to, at least insure its existence,
by operaBng within the limits of its own
resources, specially its regular income. It should
strive, whenever possible, to have a surplus.
In other words, the making of a prot does not
destroy the tax exempBon of charitable,
benevolent or educaBonal insBtuBons.

CONSTITUTIONAL PROVISION
ART XIV: EDUCATION
Sec 1. The State shall protect and promote the right of
all ciBzens to quality educaBon at all levels and shall
take appropriate steps to make such educaBon
accessible to all.
Sec. 4(3). All revenues and assets of non-stock, non-
prot educaBonal insBtuBons used actually, directly,
and exclusively for educaBonal purposes shall be
exempt from taxes and duBes. Upon the dissoluBon or
cessaBon of the corporate existence of such
insBtuBons, their assets shall be disposed of in the
manner provided by law.

CONSTITUTIONAL PROVISION
Actually is opposed to seemingly, pretendedly,
or feignedly, as actually engaged in farming means
truly in fact;
Directly means in a direct way without anything
intervening; not by secondary, but by direct
means;
Exclusively means apart from all others; without
admission of others to parBcipaBon; in a manner
to exclude (NPC v. CBAA, G.R. 171470, Jan 30, 2009).

CONSTITUTIONAL PROVISION
Proprietary educaBonal insBtuBons, including
those cooperaBvely owned, may likewise be
enBtled to such exempBons subject to the
limitaBons provided by law, including restricBons
on dividends and provisions for reinvestment.
Sec. 4(4). Subject to condiBons prescribed by law,
all grants, endowments, donaBons, or contribu-
Bons used actually, directly, and exclusively for
educaBonal purposes shall be exempt from tax.

CONSTITUTIONAL PROVISION

ART. VI: LEGISLATIVE DEPARTMENT

Sec. 28(3). Charitable insBtuBons, churches and parsonages or convents
appurtenant thereto, mosques, non-prot cemeteries, and all lands, buildings, and
improvements, actually, directly, and exclusively used for religious, charitable, or
educaBonal purposes shall be exempt from taxaBon.
What is exempted from real property tax is not the insBtuBon itself but the
lands, building and improvements of these insBtuBons. It is the use of
property, not ownership that is the test of exempBon (Abra Valley College Inc
v. Aquino, G.R. 39086, June 15, 1988).
If real property is used for one or more commercial purposes, it is not
exclusively used for the exempted purposes but is subject to taxaBon. It is not
the use of the income from property that determines whether such property
is used for tax-exempt purposes (Lung Center of the Phil v. QC, GR 144104,
June 29, 2000).
Sec. 234, LGC. ExempSons from real property. Charitable insBtuBons, churches,
parsonages or convents appurtenant thereto, mosques, nonprot or religious
cemeteries and all lands, buildings, and improvements actually, directly and
exclusively used for religious, charitable or educaBonal purposes.

RMO 20-2013, July 22, 2013

APPLICATIONS FOR TAX EXEMPTION AND REVALIDATION

CorporaBons and associaBons under Sec 30, NIRC, including those that
have been issued tax exempBon rulings/cerBcates prior to June 30,
2012, shall le their applicaBons with the RDO where they are
registered.

GENERAL DOCUMENTARY REQUIREMENTS

Original copy of applicaBon leser, ciBng parBcular paragraph of Sec

30, NIRC as basis;
CerBed true copy of latest ArBcles of IncorporaBon and By-laws
issued by SEC;
Original copy of cerBcaBon under oath by an ocer of the
corporaBon or associaBon as to (i) previous amendments in arBcles
and by-laws; (ii) manner of acBviBes; and (iii) sources and disposiBon
of income. If there is no amendment, this fact shall be stated therein.
CerBed true copy of BIR CerBcate of RegistraBon;

RMO 20-2013, July 22, 2013

Original copy of cerBcate under oath by the Treasurer of the
corp/asso as to amount of income, compensaBon, salaries or
any emoluments paid by the corporaBon or associaBon to its
trustees, ocers and other execuBve ocers. A corporaBon
sole need not submit this cerBcaBon.
Original copy of the cerBcate issued by the RDO where the
corp/asso is registered that the corp/asso is not the subject of
any pending invesBgaBon, on-going audit, pending tax
assessment, administraBve protest, claim for refund or issuance
of TCC, collecBon proceedings, or a judicial appeal; or if there be
any, the original copy of the cerBcate issued by the RDO on the
status thereof;
CerBed true copies of the ITRs or annual informaBon returns
and nancial statements of the corp/asso for the last 3 years;

RMO 20-2013, July 22, 2013

Original copy of statement under oath by an
execuBve ocer of the corp/asso as to its modus
operandi which shall include (i) a full descripBon
of the past, present and proposed acBviBes of the
corp/asso; (ii) narraBve descripBon of anBcipated
receipts and contemplated expenditures; and (iii)
detailed descripBon of all revenues which it seeks
to be exempted from income tax.
All other revenues not included in the statement/
applicaBon shall be subject to income tax.

RMO 20-2013, July 22, 2013

ADDL REQUIREMENTS FOR EDUC INST

CerBed true copy of government recogniBon/permit/accreditaBon to

operate issued by CHED, DepEd, or TESDA;
If govt recogniBon/permit/accreditaBon to operate was issued more
than 5 years prior to the applicaBon, an original copy of a current
CerBcate of OperaBon/Good Standing, or other equivalent
document, issued by appropriate govt agency shall be submised as
proof of the non-stock, non-prot educ inst is currently operaBng as
such; and
Original copy of Cert of UBlizaBon of annual revenues and assets by
the Treasurer or his equivalent, which shall provide (i) amount in cash
or in kind paid or uBlized to accomplish one or more purposes for
which the educ inst was created or organized; amount paid to acquire
an asset or invested in acBvity related to educ purposes; amount set
aside for a specic purpose, which must be supported by a Board
ResoluBon.

ST PAUL COLLEGE-MAKATI vs CIR

St Paul College-MakaB challenged the consBtuBonality of RMO before the
MakaB RTC and requested for the issuance of injuncBon. It anchored its
peBBon on the provisions of the ConsBtuBon.
According to the court, the RMO violates the ConsBtuBon. The said
exempBon is in recogniBon of the fact that in the educaBonal system, the
public and private insBtuBons have complementary roles. The court
observed that prior to the issuance of the RMO, non-stock, non-prot
educaBonal insBtuBons did not need to secure a TER in order to enjoy tax
exempBon. With the RMO, however, such insBtuBons who fail to secure
the TER will be deemed non-compliant subject to tax and penalBes. Thus,
the RMO eecBvely divests them of their tax-exempt status under the
ConsBtuBon. The court declared that the RMO is unconsBtuBonal as it
imposes a prerequisite to the enjoyment by non-stock, non-prot
educaBonal insBtuBons of the privilege granted by the ConsBtuBon, which
the Congress cannot diminish by mere legislaBon. The Commissioner is all
the more powerless to do the same, considering that she only possesses
quasi-legislaBve funcBons.

EXEMPT GOCCs
EXEMPT GOCC (Sec 27, NIRC):
SSS
GSIS
PHILHEALTH
PCSO
Local Water Districts (RA 10026); RMC 28-2010,
March 22, 2010

PAGCOR was deleted from Sec 27 in R.A.

9337 (Nov 1, 2005)

PARTNERSHIPS
EXEMPT
General professional partnership (GPP)
Joint venture undertaking construcBon acBvity or energy-related
acBviBes with operaBng contract with the government
TAXABLE
Partnerships, no maser how created or organized
RULES:
If taxable, partnership is taxed like a corporaBon.
If taxable partnership derives net income during the year, the enBre
net income is deemed received by the partners in the year it was
earned by the partnership.
If GPP adopts itemized deducBons during the year, partners must use
itemized deducBons during the same year.

RESIDENT FOREIGN CORPS

TAXABLE: RCIT & BPRT

Ordinary branch of a foreign corporaBon in the Phil: 30% x net income from
sources within the Phil
PEZA- & SBMA-registered branch of foreign corporaBon is exempt from
15% BPRT
Regional operaBng headquarters (ROHQ): 10% x net income from sources
within the Phil
Oshore banking unit (OBU) and foreign currency deposit unit (FCDU) [ING
Bank Manila v. CIR]: 10% x gross interest income on forex loan to residents
Foreign internaBonal carriers by air or water: 2.5% x GPB
Foreign contractor or sub-contractor engaged in petroleum operaBons in the
Phil: 8% x gross income from sources within the Phil

EXEMPT: Not engaged in trade or business in the Phil

RepresentaBve oce
Regional headquarters (RHQ)

REV REGS NO. 10-2012, June 1, 2012

JOINT VENTURE, NOT TAXABLE AS CORPORATION

JV or consorBum is formed for the purpose of undertaking

construcBon projects;
It involves joining or pooling of resources by licensed local
contractors; i.e., licensed as a general contractor by the Phil
Contractors AccreditaBon Board (PCAB) of the DTI;
Local contractors are engaged in construcBon business; and
JV itself is likewise licensed as such by PCAB.

If any requirement above is absent, JV or consorBum is a

taxable corporaBon.
Tax-exempt JV shall not include those who are mere
suppliers of goods, services or capital to a construcBon
project.

JOINT VENTURE
Lease of proper5es under common management

Three sisters borrowed money from their father and bought twenty-four (24) pieces of real
property that they leased to various tenants for over xeen years and derived rentals
therefrom. They appointed their brother to manage their properBes and to collect and
receive rents.
The court ruled that a taxable partnership was formed. There were series of transacBons
where peBBoners purchased twenty-four lots, showing that the purpose was not limited to
the conservaBon of the common fund or even the properBes acquired by them. The
character of habituality peculiar to business transacBons engaged in for the purpose of gain
was present. The properBes were leased out to tenants for several years. Moreover, the
term corporaBon includes organizaBons that are not necessarily partnerships in the
technical sense of the term as well as partnerships, no maser how created or organized.
This qualifying expression clearly indicates that a joint venture need not be undertaken in
any of the standard forms, or in conformity with the usual requirements of the law on
partnerships, in order that one could be deemed consBtuted for purposes of the tax on
corporaBons (Evangelista vs. Collector, 102 Phil. 140).
When a father and son purchased a lot and building, entrusted the administraBon of the
building to an administrator and divided equally the net income, there is a taxable
partnership (Reyes vs. Commissioner, 24 SCRA 198).

JOINT VENTURE
Insurance pool or clearing house

An insurance pool or clearing house, composed of 41 non-life insurance

corporaBons, whose role was limited to its principal funcBon of allocaBng
and distribuBng the risks arising from the original insurance among the
signatories to the treaty or the members of the pool on their ability to
absorb the risks ceded as well as the performance of incidental funcBons,
such as records, maintenance, collecBon and custody of funds, and which
did not insure or assure any risk in its own name, was treated as a
partnership or associaBon subject to tax as a corporaBon.
ArBcle 1767 of the Civil Code recognizes the creaBon of a contract of
partnership when two or more persons bind themselves to contribute,
money, property, or industry to a common fund, with the intenBon of
dividing the prots among themselves. Its requisites are mutual
contribuBon to a common stock, and a joint interest in the prots (AFISCO
Insurance Corp et al. vs. Commissioner, G.R. No. 112675, Jan. 25, 1999).

JOINT VENTURE

Agreement to manage and operate mine denominated as Power of Ajorney

Philex Mining CorporaBon entered into an agreement denominated as Power of

Asorney with Baguio Gold Mining CorporaBon to manage and operate the lasers
mining claim. In managing the project, Philex made advances of cash and
property. The mine suered conBnuing losses resuling in Philexs withdrawal as
manager and cessaBon of mine operaBons.
A Compromise with DaBon in Payment was executed by the parBes, where
Baguio Gold admised its liabiliBes to Philex and agreed to pay the same.
Philex wrote o in the books the remaining outstanding indebtedness of Baguio
Gold by charging a porBon of the amount to allowances and reserves that were set
up in 1981 and a porBon to the 1982 operaBons. The amount allocated to 1982
was deducted from the 1982 gross income as loss on seslement of receivables.
The BIR disallowed the deducBon for bad debt and assessed Philex deciency
taxes because the advances are Philexs investment in a partnership with Baguio
Gold for the exploitaBon and development of the mine.

JOINT VENTURE
The totality of the circumstances and the sBpulaBons in the parBes
agreement indubitably lead to the conclusion that a partnership was
formed between the parBes.
First, it does not appear that Baguio Gold was uncondiBonally obligated to
return the advances made by Philex under the agreement.
Second, the Tax Court correctly observed that it was unlikely for a business
corporaBon to lend hundreds of millions to another corporaBon with
neither security nor collateral or a specic deed evidencing the terms and
condiBons of such loans. The parBes also did not provide for a specic
maturity date for the advances to become due and demandable, and the
manner of payment was unclear.
Third, the strongest indicaBon that Philex was a partner is the fact that it
would receive 50% of the net prots as compensaBon under the
agreement (Philex Mining Corporaaon vs. Commissioner, G.R. No. 148187, Apr. 16, 2008).

SOURCES OF INCOME

Interest Interest from sources within Phil and interest on bonds and obligaBons
of residents, corporate or otherwise
Dividend From domesBc corporaBon and from foreign corporaBon, unless less
than 50% of gross income of foreign corporaBon for 3 years prior to declaraBon of
dividends was derived from sources within the Phil, in which case, apply only raBo
of Phil-source income to gross income from all sources
Services Place where services are performed, except in case of internaBonal air
carrier and shipping lines which are taxed at 2.5% on their Gross Phil Billings.
Revenues from outbound trips (originaBng from the Phil) are considered as
income from sources within the Philippines, while revenues from inbound trips are
treated as income from sources outside the Philippines.
Rentals and royal5es LocaBon or use of property or property right in Phil
Sale of real property Located in the Philippines
Sale of personal property Located in the Philippines
Gain from sale of shares of stocks of a domes5c corpora5on is ALWAYS treated as
income from sources within the Philippines.
Other intangible property Mobilia sequuntur personam (e.g., gain from sale of
shares of stocks of a foreign corporaBon)

MINIMUM CORP INCOME TAX

SALE OF GOODS
Gross Sales
Less: Cost of Sales:
Beg. Inventory
+ Purchases
Total available for sale
- Ending inventory
Cost of Sales

Gross income
Times 2%
MCIT

SALE OF SERVICES
Gross Revenue
Less: Cost of Service
consisBng of all direct
costs and expenses

Gross income
Times 2%
MCIT

INCOME
INCOME means cash or its equivalent coming to a person within a

specied period, whether as payment for services, interest or prot from

investment. It covers gain derived from capital, from labor, or from both
combined, including gain from sale or conversion of capital assets.
Return of capital is exempt from income tax. Capital, labor, or property is
the tree; income is the fruit. Capital is the fund, income is the ow of
fund.
Subsidy of foreign corporaBon to Phil representaBve oce is not income.
Reimbursement of advances made is not income, but receipts/invoices must
be issued by provider of goods or services in the name of the principal.

To be taxable, there must be income, gain or prot; gain is received,

accrued or realized during the year; and such income or the person who
derives such income is not exempt from income tax under the
Cons5tu5on, treaty or law.

Mere increase in the value of property does not consBtute taxable income. It
is not yet realized during the year.
Transfer of appreciated property to the employee for services rendered is
taxable income.
MCIT on domesBc corporaBons is consBtuBonal, as it is a tax on gross income.

TEST IN DETERMINING INCOME

Realiza5on test

There must be separaBon from capital of something of

exchangeable value (e.g., sale of asset)

Claim of right doctrine

CIR v. Javier, 199 SCRA 824 (bank erroneously paid $1 M,

instead of $1,000)

Economic benet test

Stock opBon given to the employee

Income from whatever source

All income not expressly exempted from income,

irrespecBve of voluntary or involuntary acBon of taxpayer
in producing income

NATURE OF INCOME
COMPENSATION INCOME

Existence of employer-employee relaBonship

No deducBon from gross compensaBon income allowed

BUSINESS AND/OR PROFESSIONAL INCOME

NO employer-employee relaBonship

CAPITAL GAIN

Real property in the Phil and shares of stock of domesBc corporaBon

Other sources of capital gain

PASSIVE INVESTMENT INCOME

Interest, dividend, and royalty income

OTHER INCOME

Prizes and winnings

All other income, gain or prot not covered by the above classes

COMPENSATION INCOME
CompensaBon income falling within the meaning of statutory
minimum wage(SMW) under R.A. 9504, eecBve July 6, 2008, as
implemented by Revenue RegulaBons No. 10-2008 dated July 8,
2008, shall be exempt from income tax and withholding tax.
Holiday pay, overBme pay, night shix dierenBal pay, and hazard
pay earned by Minimum Wage Earner (MWE) shall likewise be
covered by the above exempBon, provided that an employee who
receives/earns addiBonal compensaBon such as commissions,
honoraria, fringe benets, benets in excess of the allowable
statutory amount of P30,000, taxable allowances and other taxable
income other than the SMW, holiday pay, overBme pay, hazard pay
and night shix dierenBal pay shall not enjoy the privilege of being
a MWE and, therefore, his/her enBre earnings are not exempt from
income tax and withholding tax.

RMC 58-2014, July 22, 2014

RMC 58-2014 publishes the full text of Supreme Court

ResoluBon dated June 25, 2014 on the withholding of tax

from the special allowance for the judiciary as well as the
withholding of corresponding taxes on the following:
Monthly SAJ of incumbent jusBces, judges and judiciary
ocials with the equivalent rank of a CA jusBce or RTC
judge;
Monthly special allowance in an amount equivalent to the
SAJ being received by judiciary ocials not included in
item #1; and
AddiBonal allowances from the surplus of the SAJ Fund
that may be authorized to be given to judiciary ocials
and employees who are not direct beneciaries under RA
9227.

COMMISSION INCOME
Commissions paid for markeBng services rendered abroad for a Philippine
company is considered foreign-source income. The source of the income
is the property, acBvity or service that produced the income. Place where
services are rendered determine taxaBon.
The fact that recipient of commission income is President and majority
stockholder of the Philippine company does not alter the source of
income. There are only two ways by which the President and other
members of the Board can be granted compensaBon apart from
reasonable per diems: (1) when there is a provision in the by-laws xing
their compensaBon; and (2) when the stockholders agree to give it to
them. If none of these condiBons are present, commission income cannot
be automaBcally asributed to peBBoners posiBon in the company
(Juliane Baier-Nickel vs. CIR, GR No. 156305, Feb. 17, 2003)
Documents faxed to Philippine company bearing instrucBons as to sizes,
designs and fabrics to be used in nished products and sample sales
orders relayed to clients abroad are not enough to show services were
performed abroad. Said documents must show that instrucBons or orders
ripened into concluded or collected sales in Germany (CIR v. Baier-Nickel,
GR No. 153793, Aug 29, 2006).

ONSHORE AND OFFSHORE INCOME

ConstrucBon and installaBon works were subcontracted and
done in the Philippines by a Phil corporaBon; hence, income is
from sources within the Philippines.
However, some pieces of equipment and supplies for NDC
project and ammonia storage tanks and refrigeraBon units
were completely designed and engineered in Japan. All
services for the design, fabricaBon, engineering and
manufacture of materials and equipment under Japanese Yen
porBon were made and completed in Japan; hence, exempt
from Phil income tax.
Service income from turn-key contract on a project in the Phil
is divisible (CIR v. Marubeni Corp, GR No. 137377, Dec 18, 2001).

NATURE OF ASSET
ORDINARY ASSET

CAPITAL ASSET (Sec 38A)

Inventory if on hand at end of

taxable year
Stock in trade held primarily for
sale or for lease in the course of
trade or business
Asset used in trade or business,
subject to depreciaBon
Real property used in trade or
business
All other assets, whether or not
used in trade or business, other
than the above assets

ORDINARY v. CAPITAL ASSETS

Who is seller of asset?
Person is habitually engaged in real estate business
PresumpBon or proof when habitually engaged in real
estate business
6-transacBon rule
Person is not habitually engaged in real estate business
Nature of asset sold?
If it forms part of stock primarily for sale or it is being used
in trade or business, ordinary asset
Otherwise, capital asset

ORDINARY v. CAPITAL ASSETS

Type of capital asset sold?
If CA is used as principal residence of seller who is a ciBzen or alien
who resident or non-resident but engaged in trade in the Phil, sale is
exempt from 6% CGT, provided other condiBons are present.
Otherwise, sale is taxable.
Tax base, tax rate, and gain or loss from sale
CA located in the Phil 6% CGT; CA located abroad Global tax
system. Basis is FMV or GSP, whichever is higher. Seller pays the 6%
CGT, but buyer does not withhold the FWT.
In OA, tax base is net income and rate of tax depends on whether
seller is individual or corporaBon; it is subject to EWT provisions.

ORDINARY v. CAPITAL ASSETS

Cost or adjusted basis upon subsequent sale
This is not material, if asset sold is capital asset, because
tax base is GSP/FMV, whichever is higher.
This is important, if asset sold is ordinary asset, because
tax base is net income.
Donors tax on sale for insucient considera5on
If CA, no donors tax due.
If OA, there is donors tax due per Sec 100, NIRC.
Filing of tax return
If CA, within 30 days from date of sale
If OA, within 45/60 days from close of quarter

COST OR ADJUSTED BASIS

COMPUTATION OF GAIN OR LOSS

Amount realized less basis or adjusted basis = gain or loss

Amount realized is the sum of money received plus the fair
market value of property (other than money) received

BASIS OF PROPERTY

Cost, if acquired by purchase

FMV at date of acquisiBon, if property was acquired by
inheritance
Basis shall be the same as if it would be in the hands of the
donor or last preceding owner by whom it was not acquired by
gix, if property was acquired by donaBon
Basis is the amount paid by the transferee for the property, if
acquired for less than adequate consideraBon (Sec. 40, NIRC).

EXCHANGE OF PROPERTY
GENERAL RULE

The enBre gain or loss shall be recognized.

EXCEPTIONS:

No gain or loss shall be recognized at the Bme of

the transacBon on tax-free exchanges of property
under Sec 40(2), NIRC:
a. Merger or consolidaBon
b. Exchange of property for shares of stocks, as a
result of which, he together with four others gains
control of the corporaBon

GROSS PHIL BILLINGS

INTERNATIONAL AIR CARRIER

On outbound trip: Flight from Phil to foreign desBnaBon, income

is treated as from Philippine sources; hence, subject to 2.5% on
GPB.
ConBnuous and uninterrupted ight
If transhipment of passenger in another country on another foreign
airline takes place: GPB tax applies only on aliquot porBon of
revenue on Philippine leg (Phil to foreign country)

On inbound trip: Flight from foreign country to the Phil, income is

treated as from foreign sources; hence, exempt from Phil income
tax

INTERNATIONAL SHIPPING LINE

From Phil to nal foreign desBnaBon: enBre income is taxable,

even if transhipment of cargoes took place in another country
From foreign country to Phil: exempt

RMC 40-2013, May 2, 2013

RA 10378 (grants income tax exempBons to internaBonal
carriers based on reciprocity) passed into law on March 7,
2013, published in Manila BulleBn and Phil Star on March
13, 2013, and took eect on March 29, 2013.
InternaBonal carrier doing business in the Phil shall pay
2.5% on its GPB, provided that internaBonal carriers may
avail of preferenBal rate or exempBon from tax imposed on
gross revenue derived from the carriage of persons and
their excess baggage on the basis of applicable tax treaty or
internaBonal agreement to which the Phil is a signatory or
on the basis of reciprocity such that the intl carrier, whose
home country grants income tax exempBon to Phil carriers,
shall likewise be exempt from income tax.

CAPITAL GAINS
3 TYPES OF CAPITAL GAINS
Capital gain from sale of real property located in the Phil
Capital gain from sale of shares of stocks of a domesBc
corporaBon
Other types of capital gains

Sale of real property located in the Phil

Seller is not engaged in real estate business
The law presumes that the seller realizes a prot from sale of
capital asset; hence, despite the loss from sale, seller has to pay
the 6% CGT.

SALE OF REAL PROPERTY

The tax base is gross selling price or fair market value, whichever is
higher
Apply the 6% capital gains tax, if the seller is a resident ciBzen, an
alien individual (resident or non-resident), or a domesBc
corporaBon.
If the seller is a foreign corporaBon (resident or non-resident), the
asset in the Phil is a capital asset, but the gain from sale is subject
to the global tax system of taxaBon.
If the real property is located abroad, the gain from sale is exempt
from Phil income tax, unless the seller is a resident ciBzen or a
domesBc corporaBon.
If the seller is a resident ciBzen and capital asset is the principal
residence of the seller, the sale may be exempt from the 6% CGT,
provided that the condiBons provided for in the law are complied
with by the seller.

SALE OF REAL PROPERTY

Seller is a person engaged in real estate business
Real property is an ordinary asset; hence, any gain (selling
price less cost or adjusted basis) from sale is taxed under
the global tax system.
The transacBon is subject to the expanded withholding
tax, such tax to be withheld by the buyer of the property
and remised to BIR. The withholding tax is creditable
against the income tax of the seller.
The 6% capital gains tax on the transacBon is not
applicable thereon.

SALE OF SHARES OF DOMESTIC

CORPORATION
Seller is a dealer in securi5es
Dealer in securiBes is a person regularly engaged in the buy and sale of
securiBes for his own account. He sells property and looks at prots
from sale of shares or securiBes. A stockbroker is a middleman
between the seller and buyer of stocks or securiBes. He is a seller of
services and his income is commission.
Shares are ordinary assets of seller; selling price less cost or adjusted
basis equals gain; gain from sale is subject to global tax system of
income taxaBon.
TransacBon involving listed shares traded in local stock exchange is
covered by Sec 127(A), NIRC (stock transacBon tax), but exempt from
income tax.

SHARES OF DOMESTIC CORPORATION

Seller is an investor who is not a dealer in securi5es
If shares are listed and traded in a local stock exchange,
apply of 1% stock transacBon tax on gross selling price
or gross value in money. Sale is exempt from income tax.
If shares are listed but not traded in a local stock exchange
(or over-the-counter), or the shares are unlisted, the net
capital gain (selling price less cost or adjusted basis), if any,
is subject to the capital gains tax computed as follows:
5% on rst P100,000 net capital gain; and
10% on any amount in excess of P100,000

SHARES OF DOMESTIC CORPORATION

CGT return is led within 30 days from date of sale. Every
sale must be covered by a separate CGT return and the tax
paid upon ling of the return.
All transacBons during the year are consolidated and the
annual return shall be led not later than April 15 of the
following year, but only one P100,000 is subject to 5% and
the balance of net capital gain for the year is subject to
10%.
Net capital gain = Total capital gains from sales of shares
of domesBc corporaBon during the year less total capital
losses during the same year.

RR 6-2013, Apr 11, 2013

SEC 7 of RR 6-2008 is amended as follows:

Sec. 7 covers sale or exchange of shares (of domesBc

corporaBon) not traded thru a local stock exchange
FMV Fair market value of shares of stock sold shall be the
value at the Bme of sale. In determining value of the shares,
the Adjusted Net Asset Method shall be used, whereby all
assets and liabiliBes are adjusted to fair market values. The net
of adjusted asset minus the liability values is the indicated value
of the equity. For purposes of this secBon, the appraised value
of real property at the Bme of sale shall be the higher of (1)
FMV as determined by CIR; or (2) FMV as shown in the schedule
of values xed by Provincial/City Assessor; or (3) FMV as
determined by independent Appraiser.
RR shall take eect immediately.

OTHER CAPITAL ASSETS

INDIVIDUAL
If capital asset is long-term (holding period is over
12 months), only 50% of gain is subject to income
tax, using the global tax system.
If gain is short-term, 100% of gain is subject to
income tax under the global tax system.

CORPORATION
Regardless of holding period, the enBre gain or
loss is taxable or deducBble.

INTEREST INCOME
TYPES OF INTEREST INCOME

Subject to FWT: Interest income on bank deposits, deposit

subsBtutes, trust and other similar arrangements
20% FWT peso deposit with bank
7.5% FWT foreign currency deposit with OBU/FCDU

NOT subject to FWT but subject to global tax system: All other
interest income or nancing income not covered above
Exempt income:

Long-term deposit or investment (5 years or more) by individuals in the

form of trust funds, deposit subsBtutes, IMA and other investments
prescribed by BSP

Taxable income:

PreferenBal tax rate Pre-terminaBon of long-term deposit by individual :

20%, 1- less than 3 yrs; 12%: 3 yrs-less than 4 yrs; 5%: 4 yrs-less than 5
yrs); and interest on foreign loan (20%)
Regular tax rate All other cases; subject to 20% CWT.

TAX ON OBU/FCDU
Final tax on interest income from loans to resident
borrower is a direct liability of FCDU
Failure of local borrower to withhold and remit the
nal withholding tax does not exempt OBU/FCDU on
onshore interest income (ING Bank v CIR, 2005).
The withholding agent-borrower may also be
assessed deciency withholding tax as penalty for
failure to withhold (RCBC v. CIR, CTA Case 2004).

DIVIDEND INCOME
REQUISITES FOR DIVIDEND DECLARATION

Presence of posiBve retained earnings

No prohibiBon to declare dividend in loan agreement
DeclaraBon of dividend by Board of Directors

TYPES OF DIVIDENDS
Taxable

Cash dividend
Property dividend

Exempt

Stock dividend (except when there is change in proporBonate interest among

stockholders, or there is subsequent cancellaBon or redempBon of shares
declared as stock dividend, which is essenBally equivalent to cash dividend)

NOTE: LiquidaBng dividend represents distribuBon of corporate assets to

stockholders. Gain from surrender of shares are treated as ordinary income.

DIVIDEND INCOME
Intra-corporate dividend: Exempt from tax
CorporaBon paying dividend: DomesBc corporaBon
Recipient of dividend: Another domesBc corporaBon or resident
foreign corporaBon

Dividend paid to non-resident foreign corpora5on

CorporaBon paying dividend: DomesBc corporaBon
Recipient of dividend
Foreign head oce makes direct investment in Phil company: 15% FWT
on gross dividend income
Phil branch of foreign corporaBon makes investment in Phil company:
Exempt from income tax

Tax-sparing provision
If country of residence of the foreign corporaBon does not impose income
tax on dividend paid by a domesBc corporaBon, impose 15% FWT only

DIVIDEND INCOME

While there is transfer of the shares of stock/securiBes to the Borrower pursuant

to the SecuriBes Borrowing and Lending (SBL) Agreement, the Lender retains
certain rights accruing to the shares of stock/securiBes lent, such as the right to
receive cash, stock dividends or interest which the Borrower is obliged to
manufacture or reimburse to the Lender during the borrowing period. These cash,
stock dividends or interest which the Borrower is required to manufacture or
reimburse to the Lender are otherwise referred to as "Manufactured Dividends or
Benets". The Lender may likewise retain voBng rights over the loaned shares of
stock/securiBes while in the possession of the Borrower, if mutually agreed upon
by the parBes.
Receipt of the Manufactured Dividends or Benets shall not be a taxable income
of the Lender since it just represents dividends/other benets that the lender
would have received had the share not been loaned pursuant to SBL agreement.
However, the payment of such amount by the Borrower shall not be a tax
deducBble expense. On the other hand, the receipt of cash dividend from the
issuing company by the Borrower or Buyer shall be subject to the provisions of
exisBng laws (e.g., nal withholding tax of 10% on gross dividend paid to a ciBzen).

OTHER INCOME
Income from any source whatever
The words income from any source whatever discloses a legislaBve
policy to include all income not expressly exempted from the class of
taxable income under our laws (Madrigal vs. Raerty, supra; Commissioner vs.
BOAC). The words income from any source whatever is broad enough to
cover gains contemplated here. These words disclose a legislaBve policy
to include all income not expressly exempted within the class of taxable
income under our laws, irrespecBve of the voluntary or involuntary acBon
of the taxpayer in producing the gains (Guaerrez vs. Collector, CTA Case 65, Aug.
31, 1955).

Any economic benet to the employee whatever may have been the
mode by which it is eected is taxable. Thus, in stock opBons, the
dierence between the fair market value of the shares at the Bme the
opBon is exercised and the opBon price consBtutes addiBonal
compensaBon income to the employee (Commissioner vs. Smith, 324 U.S. 177).

EXCLUSIONS

Life insurance proceeds

Amount received by insured as return of premium
Gixs, bequests and devises
CompensaBon for injuries or sickness
Income exempt under treaty
ReBrement benets, pensions, gratuiBes

R.A. 7641 (5 yrs & 60 yrs) and R.A. 4917 (10 yrs & 50 yrs)

Interest income of employee trust fund or accredited reBrement plan is exempt

from FWT (CIR v. GCL Rearement Plan, 207 SCRA 487)

Amount received as a consequence of separaBon because of death, sickness

or other physical disability or for any cause beyond the control of employee

Miscellaneous items

Income of foreign government

Income of government or its poliBcal subdivisions from any public uBlity or
exercise of governmental funcBon

EXCLUSIONS
Miscellaneous items
Prizes and awards
In recogniBon of religious, charitable, arBsBc, literary
achievement, etc. (He did not enter contest and is not required to
render substanBal future services)
Granted to athletes in local and internaBonal sports compeBBons,
sancBoned by their naBonal sports associaBons

13th month pay and other benets (up to P30,000)

Gains from sale of long-term (5 years and 1 day) bonds,
debentures and other cerBcates of indebtedness
Gains from redempBon of shares in mutual fund

INCOME OF RETIREMENT FUND

COA alleged that DBP is actual owner of the trust fund and its income because:
DBP made the contribuBon to the Fund
Trustees of the Fund are merely administrators
DBP employees only have an inchoate right to the Fund

DBP responded that the Trustees received and collected income and prot from
the Fund and they maintained separate books for that purpose. The principal and
income will not revert to DBP, even if trust is subsequently modied or
terminated.

SC ruled that the beneciaries of the Fund are the DBP ocials and employees
who will reBre. It is not always necessary that the beneciaries should be named
or even be in existence at the Bme the trust is created in his favor, provided they
are suciently certain or idenBable.
The Salary Loan Program did not terminate the trust to the Funds trustee. That
the DBP Board of Directors conrms the approval of the SLP by the Funds trustees
does not make the fund property of DBP (DBP v. COA, 2004).


RMC 39-2014, May 12, 2014

RMC 39-2014 claries the tax treatment of payouts by

employee pension plans
Sec 60(A), NIRC subjects income of any kind of property
held in trust to income tax.
Sec 60(B), NIRC exempts from income tax an employees
trust which forms part of a pension, stock bonus or prot-
sharing plan of an employer for the benet of some or all
of the employees. However, any amount actually
distributed to employee to the extent it exceeds the
amount contributed by such employee shall be subject to
income tax.
Payments of reBrement benets under Sec 32(B)(6)(a),
NIRC are exempt from income tax.


RMC 39-2014, May 12, 2014

Non-contributory pension plan

If employees who do not contribute to the provident fund

receive dividends from en employee pension fund, the
same is subject to income tax.
If employee resigns from an employer, and he receives
benets from the provident fund maintained by it that
does not qualify as tax-exempt, the enBre amount
received by him is subject to income tax.

Contributory pension plan

Dividend distributed to employees is subject to income tax

in the year so distributed.
Benets received by a resigning employee is exempt only
to the extent of his contribuBon to the pension fund.

DE MINIMIS BENEFITS
EXEMPT DE MINIMIS BENEFITS, REGARDLESS OF RECIPIENT (RANK AND
FILE, OR MANAGERIAL OR SUPERVISORY)
a. MoneBzed unused vacaBon leave credits of private employees not
exceeding ten (10) days during the year and the moneBzed value of leave
credits paid to government ocials and employees;
b. Medical cash allowance to dependents of employees not exceeding
P750.00 per employee per semester or P125 per month;
c. Rice subsidy of P1,500.00 or one (1) sack of 50-kg rice per month
amounBng to not more than P1,500.00;
d. Uniforms and clothing allowance not exceeding P4,000.00 per
annum;
e. Actual yearly medical benets not exceeding P10,000.00 per
annum;
f. Laundry allowance not exceeding P300.00 per month;

DE MINIMIS BENEFITS

g. Employees achievement awards (e.g., for length of service or safety

achievement, which must be in the form of a tangible personal property other
than cash or gix cerBcate, with an annual monetary value not exceeding
P10,000.00 received by the employee under an established wrisen plan which
does not discriminate in favor of highly paid employees;
h. Gixs given during Christmas and major anniversary celebraBons not
exceeding P5,000.00 per employee per annum;
i. Flowers, fruits, books, or similar items given to employees under special
circumstances (e.g., on account of illness, marriage, birth of a baby, etc.); and
j. Daily meal allowance for overBme work not exceeding twenty-ve
percent (25%) of the basic minimum wage.
The amount of de minimis benets conforming to the ceiling herein
prescribed shall not be considered in determining the P30,000.00 ceiling of
other benets provided under Sec. 32(b)(7)(e) of the Tax Code. However, if
the employer pays more than the ceiling prescribed by these regulaBons, the
excess shall be taxable to the employee receiving the benets only if such
excess is beyond the P30,000.00 ceiling. Any amount given by the employer as
benets to its employees, whether classied as de minimis benets or fringe
benets, shall consBtute as deducBble expense upon such employer.

INCOME FROM PROPERTY OF EXEMPT

ASSOCIATION

The phrase any of their acSviSes conducted for prot does not qualify the word
properSes.-- The phrase any of their acBviBes conducted for prot does not qualify
the word properBes. This makes income from the property of the organizaBon taxable,
regardless of how that income is used whether for prot or for loxy non-prot purposes.
Thus, the income derived from rentals of real property owned by the Young Mens ChrisBan
AssociaBon of the Philippines, Inc. (YMCA), established as a welfare, educaBon and
charitable non-prot corporaBon, is subject to income tax. The rental income cannot be
exempted on the solitary but unconvincing ground that said income is not collected for prot
but is merely incidental to its operaBon. The law does not make a disBncBon. Where the
law does not disBnguish, neither should we disBnguish. Because taxes are the lifeblood of
the naBon, the Court has always applied the doctrine of strict interpretaBon in construing tax
exempBons. YMCA is exempt from the payment of property taxes only but not income taxes
because it is not an educaBonal insBtuBon devoBng its income solely for educaBonal
purposes. The term educaBonal insBtuBon has acquired a well-known technical meaning.
Under the EducaBon Act of 1982, such term refers to schools. The school system is
synonymous with formal educaBon which refers to the hierarchically structured and
chronologically graded learnings organized and provided by the formal school system and for
which cerBcaBon is required in order for the learner to progress through the grades or
move to higher levels (Commissioner vs. Court of Appeals and YMCA of the Phils., G.R. No.
124043, Oct. 14, 1998).

INCOME FROM ACTIVITY FOR PROFIT OF NON-

STOCK HOSPITAL
To be exempt from income tax, Sec 30(e), NIRC requires that a charitable
insBtuBon be organized and operated exclusively for charitable
purposes. Due to huge amount received from paying paBents, hospital is
not operated exclusively for charitable purposes.
The last paragraph of Sec 30, NIRC provides that if a tax-exempt
charitable insBtuBon conducts any acBvity for prot, regardless of the
disposiBon made of such income, such acBvity is not tax exempt (even as
its not-for-prot acBviBes remain exempt from income tax). Such taxable
net income is taxed at 10% pursuant to Sec. 27(B), NIRC.
However, in view of the BIR ruling in 1990 staBng that St Lukes Hospital is
exempt from income tax, no surcharge and interest shall be imposed on
the deciency tax (CIR v. St Lukes Med Center, Sept 2012).


RMC 51-2014, June 11, 2014

RMC 51-2014 claries the inurement prohibi5on

under Sec 30, NIRC

Sec 30 enumerates the non-stock, non-prot corporaBons

or associaBons exempt from income tax on income
received by them as such.
Non-stock means no part of its income is distributable as
dividends to its members, trustees, or ocers and that any
prot obtained as an incident to its operaBons shall,
whenever necessary or proper, be used for the
furtherance of the purpose(s) for which the corporaBon
was organized.
Non-prot means that no income or asset accrues to or
benets any member or specic person, with all the net
income or asset devoted to the insBtuBons purposes and
all its acBviBes conducted not for prot.


RMC 51-2014, June 11, 2014

To qualify as a tax-exempt enBty, its earnings or assets
shall not inure to the benet of any of its trustees,
organizers, ocers, members or specic person. The
following are considered inurements of such nature:

Payment of compensaBon, salaries or honorarium to its trustees

or organizers;
Payment of exorbitant or unreasonable compensaBon to its
employees;
Provision of welfare aid and nancial assistance to its members.
An organizaBon is not exempt if its principal acBvity is to receive
and manage funds associated with savings or investment
programs, including pension or reBrement programs. This does
not cover a society, order, associaBon or non-stock corporaBon
under Sec 30, NIRC providing for payment of life, sickness,
accident and other benets exclusively for its members or their
dependents.


RMC 51-2014, June 11, 2014

DonaBon to any person or enBty (except donaBons made to
other enBBes formed for the purpose(s) similar to its own);
Purchase of goods or services for amounts in excess of FMV
of such goods or services from an enBty in which one or
more of its trustees, ocers or duciaries has an interest;
and
When upon dissoluBon and saBsfacBon of all liabiliBes, its
remaining assets are distributed to its trustees, organizers,
ocers or members. Its assets must be dedicated to its
exempt purpose(s). Its consBtuBve document must
expressly provide that in the event of dissoluBon, its assets
shall be distributed to one or more enBBes formed for the
purposes similar to its own or to the Phil government for
public purpose.


CIR v. Insular Life Assurance Co. Ltd,
G.R. 197192, June 4, 2014
The 1997 Tax Code does n ot require registraBon with
the CDA. No tax provision requires a mutual life
insurance company to register with that agency in
order to enjoy exempBon from both the percentage
tax and DST.
Although RMC 48-91 requires the submission of the
Cert of RegistraBon with the CDA before issuance of
the tax exempBon cerBcate, that provision cannot
prevail over the clear absence of an equivalent
requirement under the Tax Code.
The provisions of the CooperaBve Code of the Phil do
not apply to mutual life insurance companies.

CIR v. Insular Life Assurance Co. Ltd,
G.R. 197192, June 4, 2014
Graaa argumena that registraBon
is mandatory, it cannot

deprive respondent of its tax exempBon privilege merely

because it failed to register.

The Insurance Code does not require registraBon of mutual
life insurance companies with the CDA.
While administraBve agencies like the BIR may issue
regulaBons to implement statutes, they are without
authority to limit the scope of the statutes to less than
what it provides, or to extend or expand the statute
beyond its terms, or in any other way modify explicit
provisions of the law. Indeed, a judicial body or an
administraBve agency for that maser cannot amend an Act
of Congress. In case of discrepancy between the basic law
and an interpretaBve or administraBve ruling the basic law
prevails.

DEDUCTIONS
KINDS OF DEDUCTIONS

Itemized DeducBons
OpBonal Standard DeducBons
Special DeducBons

ITEMIZED DEDUCTIONS

Business expenses, incl. research and development

Interests
Taxes
Losses
Bad debts
DepreciaBon
DepleBon
Charitable contribuBons
ContribuBons to pension trust
Health or hospitalizaBon premium

DEDUCTIONS
BUSINESS EXPENSES

1. The expense must be ordinary and necessary;

2. Paid or incurred during the taxable year;
3. In carrying on or which are directly asributable to the develop-
ment, management, operaBon and/or conduct of the trade,
business or exercise of profession;
4. Supported by adequate invoices or receipts;
5. Not contrary to law, public policy or morals. OperaBng expenses
of an illegal or quesBonable business are deducBble, but
expenses of an inherently illegal nature, such as bribery and
protecBon payments, are not.
6. The tax required to be withheld on the amount paid or payable is
shown to have been paid to the BIR.

DEDUCTIONS
An expense is ordinary when it connotes a payment, which is normal in
relaBon to the business of the taxpayer and the surrounding
circumstances.
An expense is necessary where the expenditure is appropriate or helpful
in the development of taxpayers business or that the same is proper for
the purpose of realizing a prot or minimizing a loss.
P9.4 M paid in 1985 for adverBsing a product was staggering incurred to
create or maintain some form of goodwill for the taxpayers trade or
business or for the industry or profession of which the taxpayer is a
member.
Goodwill generally denotes the benet arising from connecBon and
reputaBon, and eorts to establish reputaBon are akin to acquisiBon of
capital assets. Therefore, expenses related thereto are not business
expenses but capital expenditures (CIR vs. General Foods Phi., GR No. 143672, Apr.

24, 2003).

DEDUCTIONS
TEST OF REASONABLENESS OF BONUS
There is no xed test for determining the reasonableness of a given
bonus as compensa5on. This depends upon many factors, one of them
being the amount and quality of the services performed with relaBon to
the business.
Other tests suggested are payment must be made in good faith, the
character of the taxpayers business, the volume and amount of its net
earnings, its locality, the type and extent of the services rendered, the
salary policy of the corporaBon, the size of the parBcular business, the
employees qualicaBons and contribuBons to the business venture, and
general economic condiBons.
However, in determining whether the parBcular salary or compensaBon
payment is reasonable, the situaBon must be considered as a whole.
Ordinarily, no single factor is decisive (C.M. Hoskins & Co., Inc. vs. Commissioner, L-24059,
Nov. 28, 1969; Pacic Banking Corp. vs. Commissioner, CTA Case 1667, Oct 29, 1970).

Bonuses that are out-and-out gixs, are graBtude and are not deducBble.

DEDUCTIONS
Legal and accountants fees for prior years were not billed in
corresponding years (1984-1985). It was paid by taxpayer in succeeding
year (1986) when it was billed by the lawyer and accountant. Taxpayers
uses accrual method of accounBng.
Accrual of income and expense is permised when the all events test has
been met. This test requires (1) xing a right to income or liability to pay,
and (2) the availability of reasonably accurate determinaBon of such
income or liability. It does not, however, demand that the amount of
income or liability be known absolutely; it only requires that a taxpayer
has at its disposal the informaBon necessary to compute the amount with
reasonable accuracy, which implies something less than an exact or
completely accurate amount.
Moreover, deducBon takes the nature of tax exempBon; it must be
construed strictly against the taxpayer (Commissioner vs. Isabela Cultural Corporaaon,
G.R. No. 172231, Feb. 12, 2007).

DEDUCTIONS
Entertainment, amusement and recreaBon expenses are subject to
limitaBon
% of net sales for sellers of goods
1% of net sales for sellers of services
Club dues for membership in social or athleBc clubs to promote business
of corporaBon paid by the corporaBon are deducBble from gross income.
However, they will be treated as fringe benets subject to FBT on the part
of the employer. FBT paid by employer is deducBble as business expense
of the corporaBon.
Rental expenses include leasehold acquired for business purposes and
cost of improvements introduced by lessee to be allocated over the term
of the lease. Realty taxes paid by lessee for business property is part of
rental expenses.

DEDUCTIONS
Directors Fees
If not ocer or employee of corporaBon, report it as other income
subject to 10% EWT.
If director is also an ocer of the corporaBon, apply CWT on
compensaBon income upon the directors fees, together with salaries.
Commission Income
If there is no employer-employee relaBonship between broker and
payor of income, treat it as business income subject to 10/15% EWT.
If there is employer-employee relaBonship, commission income is
treated as part of CWT on compensaBon income.

RR 12-2013, July 12, 2013

Sec. 2.58.5, RR 2-98, as amended by RR 12-2013:
Any income payment which is otherwise deducBble
under the Tax Code shall be allowed as a deducBon
from the payors gross income only if it is shown that
the income tax required to be withheld has been paid
to the Bureau in acc with Secs. 57 and 58 of the Code.
No deducBon will also be allowed notwithstanding
payments of withholding tax at the Bme of the audit
invesBgaBon or reinvesBgaBon/reconsideraBon in
cases where no withholding of tax was made in acc
with Secs 57 and 58 of the Code.

RMC 63-2013, Sept 26, 2013

RR 12-2013 (No WT, no deducBon from gross
income) shall apply to audit invesBgaBon for
the taxable year 2013.

DEDUCTIONS

INTEREST EXPENSE

1. There must be a valid and exisBng indebtedness;

2. The indebtedness (uncondiBonal obligaBon to pay) must be that of the taxpayer;
3. The interest must be legally due and sBpulated in wriBng;
4. The interest expense must be paid or incurred during the taxable year;
5. The indebtedness must be connected with the taxpayer's trade, business or
exercise of profession;
6. The interest payment arrangement must not be between related taxpayers as
mandated in SecBon 34(B)(2)(b), in relaBon to SecBon 36(B), of the Tax Code;
7. The interest is not expressly disallowed by law to be deducted from the taxpayers
gross income (e.g., interest on indebtedness to nance petroleum operaBons);
and
8. The amount of interest deducted from gross income does not exceed the limit set
forth in the law. In other words, the taxpayers otherwise allowable deducBon for
interest expense shall be reduced by forty-two percent (42%) of the interest
income subjected to nal tax beginning November 1, 2005 under R.A. 9337, and
that eecBve January 1, 2009, the percentage shall be thirty-three percent (33%)
[Sec. 34(B)(1), NIRC].

DEDUCTIONS
Deciency or delinquency interest
Deciency or delinquency interest on unpaid taxes is not
deducBble as tax, but taxpayer is allowed to deduct the
same as interest.

Interest expense on capital expenditures

At the opBon of the taxpayer, interest expense on capital
expenditure incurred to acquire property used in trade,
business or exercise of profession may be deducted in full
in the year incurred, or may be treated as capital
expenditure subject to amorBzaBon. However, taxpayer
cannot claim interest expense both as deducBon and part
of cost of asset.

DEDUCTIONS
TAXES

1. Payments must be for taxes;

2. Taxes are imposed by law upon the taxpayer;
3. Taxes must be paid or accrued during the
taxable year in connecBon with the
taxpayers trade, business or profession; and
4. Taxes are not specically excluded by law from
being deducted from the taxpayers gross income.

DEDUCTIONS
The word taxes means taxes proper and no deducBon
should be allowed for amounts represenBng interest,
surcharge or penalBes. Interest on taxes is not deducBble as
taxes, but as an item of interest.
Fines and penalBes for violaBons of law are not deducBble as
taxes.
Only the person upon whom taxes are imposed may claim
them as deducBon, except: (1) Taxes upon an individual upon
his interest as shareholder of corporaBon which are paid by
corporaBon without reimbursement; and (2) Corporate bonds
or other obligaBons containing a tax-free covenant clause, the
corporaBon paying the tax or any part of it for someone else
(Sec. 80, RR 2).

DEDUCTIONS
DEDUCTIBLE TAXES

All taxes, naBonal and local, paid or accrued during the year in
connecBon with trade, business or exercise of profession is deducBble.
Examples: professional tax, documentary stamp tax, other percentage
tax, excise tax, real property tax, etc.

NON-DEDUCTIBLE TAXES
1. Philippine income tax

2. Foreign income tax

3. Estate and donors taxes
4. Special assessments on real property
5. Electric energy consumpBon tax under B.P. 36.
6. VAT
Foreign income tax paid may be credited against the Phil income tax due,
subject to limitaBon (e.g., Federal income tax of M Pacquiao).

DEDUCTIONS
LOSSES (Rev. Regs. No. 12-77 and Rev. Regs. No. 10-79)

1. The loss must be that of the taxpayer;

2. The loss is actually sustained and charged o within the taxable
year;
3. The loss is evidenced by a closed and completed transacBon (xed by
idenBable events or when insurance recovery was denitely established);
4. The loss is not claimed as a deducBon for estate tax purposes;
5. The loss is not compensated for by insurance or otherwise;
6. In the case of an individual, the loss must be connected with his
trade, business or profession, or incurred in any transacBon
entered into for prot though not connected with his trade,
business or profession; and
7. In the case of casualty loss, it has been reported to the BIR
within forty-ve days from date of occurrence of the loss.

DEDUCTIONS
Bad Debt Theory
Loss from thex or embezzlement occurring in the year and discovered
in another year is deducBble in the year in which sustained. However,
where the taxpayer had no means of determining the actual date of
embezzlement, a loss was sustained in the year of discovery.
The rule is now modied by the bad debt theory, which holds that
since embezzlement creates a debtor-creditor relaBonship, a loss is
deducBble as bad debt in the year the right of recovery becomes
worthless.

NOLCO
Net operaBng loss of one year may be carried over and deducted from
gross income for the next succeeding 3 years, provided that no
substanBal change in the ownership of the business or enterprise (not
less than 75%) takes place.

DEDUCTIONS
BAD DEBTS

1. There must be an exisBng indebtedness due to the taxpayer

which must be valid and legally demandable;
2. The same must be connected with the taxpayer's trade, business
or pracBce of profession;
3. The same must not be sustained in a transacBon entered into
between related parBes enumerated under Sec. 36(B) of the Tax
Code of 1997;
4. The same must be actually charged o the books of accounts of
the taxpayer as of the end of the taxable year; and
5. The same must be actually ascertained to be worthless and
uncollecBble as of the end of the taxable year.

DEDUCTIONS
In the case of banks, the BSP thru the Monetary Board shall
ascertain the worthlessness and uncollecBbility of the bad
debts and approve in wriBng the wriBng o of bad debts from
the books, without prejudice to the CIRs determi-naBon of
the worthless and uncollecBbility of debts.
In no case shall a receivable from an insurance or surety
company be wrisen o from taxpayers books and claimed as
bad debt deducBon, unless such company has been declared
closed due to insolvency or for any similar reason by the
Insurance Commission.

DEDUCTIONS
TAX BENEFIT RULE
The taxpayer is obliged to declare as taxable income any
subsequent recovery of bad debts in the year they were
collected to the extent of the tax benet enjoyed by the
taxpayer when the bad debts were wrisen o and claimed
as deducBon from gross income.
It also applies to taxes previously deducted from gross
income but which were subsequently refunded or credited
by the BIR. He has to report income to the extent of the
tax benet derived in the year of deducBon.

DEDUCTIONS
DEPRECIATION
1. The allowance for depreciaBon must be reasonable;
2. It must be for property arising out of its use in the trade or
business, or out of its not being used temporarily during the year;
3. It must be charged o during the taxable year from the taxpayers
books of accounts;
4. DepreciaBon shall be computed on the basis of historical cost or
adjusted basis. While nancial accounBng allows computaBon based
on appraised value, recovery of investment for tax purposes shall be
limited to historical cost.

DepreciaBon for the year = Cost less salvage value divided by the
esBmated useful life (number of years) of the asset
Book value of the asset = Cost or adjusted basis less accumulated
depreciaBon.

DEDUCTIONS
CHARITABLE CONTRIBUTIONS
1. The charitable contribuBon must actually be paid or made to the
Philippine government or any poliBcal subdivision thereof exclusively for
public purposes, or any of the accredited domesBc corporaBon or
associaBon specied in the Tax Code;
2. It must be made within the taxable year;
3. It must not exceed 10% (individual) or 5% (corporaBon) of the
taxpayers taxable income before charitable contribuBons (whether
deducBble in full or subject to limitaBon);
4. It must be evidenced by adequate receipts or records; and
5. The amount of charitable contribuBon of property other than money
shall be based on the acquisiBon cost of said property (Sec. 34(H), NIRC).
The limitaBon is imposed to prevent abuse of donaBng painBngs and
other valuable properBes and claiming excessive deducBons therefrom.

DEDUCTIONS
D. Op5onal Standard Deduc5on
Privilege is available only to ciBzens or resident aliens as well
corporaBons subject to the regular corporate income tax;
thus, non-resident aliens and non-resident foreign
corporaBons are not enBtled to claim the opBonal standard
deducBon.
Standard deducBon is opBonal; i.e., unless taxpayer signies
in his/its return his/its intenBon to elect this deducBon, he/it
is considered as having availed of the itemized deducBons;
Such elecBon when made by the qualied taxpayer is
irrevocable for the year in which made; however, he can
change to itemized deducBons in succeeding year(s);

DEDUCTIONS

Amount of standard deducBon is limited to 40% of taxpayers gross

sales or receipts (in the case of an individual) or gross income (in the
case of a corporaBon). If the individual is on the accrual basis of
accounBng for his income and deducBons, OSD shall be based on the
gross sales during the year. If he employs the cash basis of accounBng,
OSD shall be based on his gross receipts during the year. It should be
noted that cost of sales or cost of services shall not be allowed to be
deducted from gross sales or receipts.
A general professional partnership (GPP) may claim either the itemized
deducBons or in lieu thereof, the OSD allowed to corporaBons in
claiming the deducBons in an amount not exceeding 40% of its gross
income. The net income determined by either the itemized deducBon
or OSD from the GPPs gross income is the distributable net income
from which the share of each share is to be ascertained.
Proof of actual expenses is not required; hence, he is not also required
to keep books of accounts and records with respect to his deducBons
during the year.

DEDUCTIONS
NON-DEDUCTIBLE ITEMS

1. Personal, living or family expenses;

2. Any amount paid out for new buildings or for permanent improvements, or
beserments made to increase the value of any property or estate. This SubsecBon
shall not apply to intangible drilling and development costs incurred in petroleum
operaBons, which are deducBble under SubsecBon (G)(1) of SecBon 34 of this
Code.
3. Any amount expended in restoring property or in making good the exhausBon
thereof for which an allowance is or has been made; or
4. Premiums paid on any life insurance policy covering the life of any ocer or
employee, or of any person nancially interested in any trade or business carried
on by the taxpayer, individual or corporate, when the taxpayer is directly or
indirectly a beneciary under such policy
5. Losses from sales or exchanges of property between related parBes

PERSONAL EXEMPTIONS
RA 8424: Jan 1, 1998
Single and estate or trust
P20,000
Head of family P25,000
Married P32,000
For each child, not to
exceed 4 P8,000

RA 9504: July 6, 2009

Individual, whether single,
HOF, or married P50,000
For each child, not to
exceed 4 P25,000
Law exempts income of
minimum wage earners and
increases OSD from 10% to
40% of gross sales or
receipts, for individuals, and
of gross income, for
corporaBons.

PERSONAL EXEMPTIONS
Status-at-the-end-of-the-year rule
Status-at-the-end-of-the-year rule which means that whatever is the
status of the taxpayer at the end of the calendar year shall be used for
purposes of determining his personal and addiBonal exempBons generally
applies.
A change of status of the taxpayer during the taxable year generally
benets, but does not prejudice, him. Thus, if a child is born at any Bme
during the calendar year, even on the last day of the year, the taxpayer is
enBtled to claim his child as a dependent enBtling him to deduct
addiBonal exempBon of P8,000/P25,000 for that year. On the other hand,
if one of his qualied dependent children dies during the year, the law
considers that the child died on the last day of the year; hence, he is
enBtled to claim the full amount of addiBonal exempBon of P8,000/
P25,000 for the deceased child for the year.
If he marries at the end of the year, he shall be enBtled to personal
exempBon of P50,000. It does not maser under present law whether the
individual is single, head of family or married at the end of the year.

BRANCH PROFIT REMITTANCE TAX

Branch prot of the Phil. branch used as addiBonal capital
investment of the foreign head oce in the Philippine branch,
pursuant to the requirements of the Bangko Sentral ng
Pilipinas, is considered as prot construcBvely remised
abroad.
Branch prot remisance tax (BPRT) applies not only when the
prot is actually remised but also when such prot is
construcBvely remised to the head oce abroad (ING Bank, Manila
Branch vs. CIR, CTA Case No. 6017, Mar. 11, 2002)

BPRT does not apply on prots remised by an enterprise

registered with PEZA or SBMA and other freeport zones.
Tax base of BPRT is the amount of prot earmarked for
remisance to its head oce abroad.

ACCOUNTING METHODS
Cash method
Accrual method

All events test; amounts received in advance are not treated as

revenue of the period in which received but as revenue of future
periods in which earned (Manila Mandarin Hotels vs. CIR, CTA Case No. 5046, Mar
24, 1997).

Installment sales

Sale on the installment plan

IniBal payments do not exceed 25% of GSP

Deferred payment sale, not on the installment plan

IniBal payments exceed 25% of GSP

Percentage of comple5on (for long-term construcBon

project)
Crop year method

FILING OF TAX RETURN

SUBSTITUTED FILING OF ITR: No individual income tax return
for the year will be led by the employee concerned, and the
employer is the one that les the return for him

Applies only to individuals

With only one (1) employer
Who correctly withholds the income tax on compensaBon income paid
to the employee and remits the same to the BIR

SubsBtuted ling of return does not apply when the

condiBons above are not met, such as when the individual has
(a) two or more employers, (b) mixed incomes, correct WT
was not deducted from compensaBon income, etc.
BIR Form 2316 is led by employer with BIR not later than Feb
28 of the following year; original copy thereof is given to
employee concerned on Jan 30 of following year.

FILING OF TAX RETURN

Individual deriving mixed income, or purely business/
professional income, or other income must le his quarterly
income tax returns (BIR Form 1700 Q) not later than April 15
for the rst quarter, and within 45 days from close of second
and third quarters, and annual income tax return (BIR Form
1700 ) as follows:

Period

Q1 Return
Q2 Return
Q3 Return
Annual Return

Due Date for Filing Return

April 15 of same year

August 14 of same year
November 14 of same year
April 15 of the following year

FILING OF TAX RETURN

A domesBc corporaBon and resident foreign corporaBon shall le
quarterly corporate income tax return (BIR Form 1702 Q) within 60 days
from the close of the quarter, and annual corporate income tax return
(BIR Form 1702) as follows:

Q1 Return

Q2 Return

Q3 Return

Annual Return

ComputaBon of the quarterly and annual tax returns of individuals (except those
receiving purely compensaBon income) and corporaBons shall be made on the
cumulaSve basis; i.e., gross income and deducBons are consolidated and the
income tax liability is computed on the consolidated net income, and the income
taxes paid for the preceding quarter(s) are credited against the consolidated
income tax due.

May 30 of same year

August 29 of same year

November 29 of same year
April 15 of the following year (if on calendar
year), or 15th day of the fourth month following
the close of the scal year (if on scal year).

WITHHOLDING TAX
An income payment is subject to the expanded withholding
tax, if the following condiBons concur:
a. An expense is paid or payable by the taxpayer, which is
income to the recipient thereof subject to income tax;
b. The income is one of the income payments listed in the
regulaBons that is subject to withholding tax, unless the
corporaBon is designated as Top 20,000 CorporaBon or Top
5,000 Individual; and
c. The income recipient and the payor-withholding agent are
residents of the Philippines.

WITHHOLDING TAX

EXEMPT FROM EWT

1. NaBonal government and its instrumentaliBes, including provincial, city or

municipal governments and barangays, except government-owned or
controlled corporaBons;
2. Persons enjoying exempBon from payment of income taxes pursuant to the
provisions of any law, general or special, such as but not limited to the
following:
a. Sales of real property by a corporaBon which is registered with and cerBed
by HLURB or HUDCC as engaged in socialized housing project where the selling
price of the house and lot or only the lot does not exceed P180,000 in Metro
Manila and other highly urbanized areas and P150,000 in other areas;
b. CorporaBons registered with the BOI, PEZA, and SBMA, enjoying exempBon
from income tax under E.O. 226, R.A. 7916, and R.A. 7227;
c. CorporaBons which are exempt from income tax under SecBon 30 of the Tax
Code, such as GSIS, SSS, PHIC, and PCSO;
d. General professional partnerships; and
e. Joint ventures or consorBum formed for the purpose of undertaking
construcBon projects or engaging in petroleum, coal, geothermal and other
energy operaBons
f. InternaBonal carriers (by air or water) subject to 2.5% Gross Phil Billings

WITHHOLDING TAX

1. Professional fees for services rendered by individuals, incl. real estate service
pracBBoners; and
professional entertainers and athletes, and directors:
If gross income for current year exceeds P720,000
- 15%
If gross income for current year does not P720,000
- 10%
2. If recipient of professional fees, talent fees, etc. is
a juridical person:
If gross income for current year exceeds P720,000
- 15%
If gross income for current year does not P720,000
- 10%
3. Rental income
Real properBes




- 5%
Personal properBes of P10,000 per payment; P10,000
shall not apply when accumulated rental to same
lessor exceeds or is reasonably expected to exceed
P10,000 within a year



- 5%
Poles, satellites and transmission faciliBes

- 5%
Billboards




- 5%

WITHHOLDING TAX

4. Gross payments to resident individuals and corporate cine-

matographic lm owners, lessors, or distributors
5. Gross payments to contractors


6. Income distribuBon to beneciaries


7. Income payments to certain brokers and agents

8. Income payments to partners of general professional
partnerships:




If gross income for current year exceeds P720,000
If otherwise




9. Professional fees paid to medical pracBBoners

If gross income for current year exceeds P720,000
If otherwise




10. Gross addiBonal payments to government personnel from
importers, shipping and airline companies, or their
agents





11. One-half of gross amounts paid by any credit card
company in the Philippines

- 5%
- 2%
- 15%
- 10%

- 15%
- 10%

- 15%
- 10%
- 15%
- 1%

WITHHOLDING TAX

12. Income payments made by any Top 20,000 Corp or Top

5,000 Individual:


Supplier of goods



Supplier of services



13. Income payments made by government to its local/resident
supplier of goods and services other than those covered
by other rates of withholding taxes
Supplier of goods



Supplier of services



14. Commissions of independent and exclusive distributors,
and markeBng agents of companies


15. Tolling fees paid to reneries



16. Payments made by pre-need companies to funeral parlor
17. Payments made to embalmers


18. Income payments made to suppliers of agricultural products
19. Income payments on purchases of minerals, mineral pro-
ducts and quarry resources



20. MERALCO refund to customers
With acBve contracts



With terminated contracts

- 1%
- 2%

- 1%
- 2%
- 10%
- 5%
- 1%
- 1%
- 1%
- 10%
- 25%
- 32%

REFUND

Requisites of claim for refund are:

Claim was led within 2 years under Sec. 230, NIRC;

Income upon which taxes were withheld were included in the return of
the recipient; and
Fact of withholding is established by a copy of statement (BIR Form
1743.1) duly issued by payor (withholding agent) to payee, showing
amount paid and amount of tax withheld (RR 6-85).
CTA found above requisites were saBsed. Findings of facts of CTA are enBtled
to great weight and will not be disturbed on appeal, unless it is shown that the
lower court commised gross error in the appreciaBon of facts.
Failure of respondent to indicate its opBon in its annual ITR to avail itself of
either tax refund or tax credit is not fatal to its claim for refund.
Sec. 76, NIRC oers two opBons: refund or tax credit. The opBons are
alternaBve and the choice of one precludes the other. However, in Philam
Asset Mgt v. CIR, this Court ruled that failure to indicate a choice will not
bar a valid request for refund, should this opBon be chosen by the
taxpayer later on. The requirement is only for the purpose of easing tax
administraBon, parBcularly the self-assessment and collecBon aspects.

REFUND
Tax refunds or credits are not founded principally on
legislaBve grace but on the legal principle which underlies all
quasi-contracts, abhorring a persons unjust enrichment at
the expense of another. The dynamic of erroneous payment
of tax ts to a tee the prototypic quasi-contract, which covers
not only mistake in fact but also mistake in law.
The government is not exempt from the applicaBon of soluao
indebia. Indeed, the taxpayer expects fair dealing from the
government, and the laser has the duty to refund without
any unreasonable delay what it has erroneously collected (CIR v.
Fortune Tobacco Corp, GR 167274, July 21, 2008).

REV REGS NO. 1-2014, Dec 17, 2013

The submission of the prescribed alphalist where the income
payments and taxes withheld are lumped into one single amount
shall not be allowed. The submission thereof, including any
alphalist that does not conform with the prescribed format,
thereby resulBng to the unsuccessful uploading into the BIR
system, shall be deemed as not received and shall not qualify as a
deducBble expense for income tax purposes.
The manual submission of alpha lists containing less than 10
employees/payees by withholding agents under BIR Form 1604CF
and 1604E shall be immediately disconBnued beginning Jan 31,
2014 and March 1, 2014, respecBvely, and every year thereaxer.
This regulaBon shall take eect 15 days axer publicaBon in leading
newspaper of general circulaBon.


REV REGS NO. 4-2014, March 20, 2014

RR 4-2014, Mar 20, 2014 -- Prescribes the policies and guidelines in the
monitoring of service fees of professionals

Self-employed professionals shall register and pay the ARF with the RDO/LTDO
having jurisdicBon. In addiBon, they shall submit an adavit indicaBng the
rates, manner of billings and the factors they consider in determining their
service fees upon registraBon and every year thereaxer on or before Jan 31.
Self-employed professionals are obligated to register their books of accounts
and ocial appointment books of their pracBce of profession before using the
same. The OAB shall contain only the names of client and date/Bme of
meeBng. They shall likewise register their invoices and receipts (VAT or NV)
before using them.
In cases when no professional fees are charged by professionals, a BIR receipt,
duly acknowledged by the client, shall be issued showing a discount of 100%
as substanBaBon of the pro-bono service.

RMC 32-2014, May 5, 2014 Extends the period to submit the required
adavit and ocial appointment books under RR 4-2014 from April 6,
2014 to May 6, 2014, to give ample Bme for all parBes.

RMC 8-2014, Feb 6, 2014

RMC 8-2014 requires the presenta5on of Tax Exemp5on
Cer5cate or Ruling by exempt individuals and en55es

Secs 57-59 and 78-83, NIRC require certain items of income to

be subject to withholding taxes. However, certain persons are
exempt from income tax and consequently, withholding taxes.
Withholding agents shall require all taxpayers claiming such
exempBon to provide a copy of a valid, current and subsisBng
tax exempBon cerBcate (TEC) or ruling before payment of the
related income. Such TEC or ruling must explicitly recognize the
grant of tax exempBon as well as the corresponding exempBon
from imposiBon of withholding tax.
Failure of taxpayer to present such TEC or ruling shall subject
him to the payment of appropriate WT due on the transacBon,
and failure of withholding agent to withhold shall cause the
imposiBon of penalBes.

 END OF PRESENTATION

Agy. Vic C. Mamalateo

Mobile: 0918-9037436
Email: vicmamalateo@yahoo.com
vic.mamalateo@vcmlaw.com.ph