Professional Documents
Culture Documents
Income Tax defined as a tax on all yearly profits arising from property, professions, trades or offices, or as
tax on a persons income, emoluments, profits and the like. Income tax is a tax on the net income or the entire
income realized in one taxable year. It is levied upon corporate or individual incomes in excess of specified
amounts, less certain deductions and/or specified exceptions in cases permitted by law.
Income all wealth which flows to the taxpayer other than a mere return of capital. It is a flow of services
rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in
relation to such fund through a period of time. It includes gain derived from the sale or other disposition of
capital assets.
It is an amount of money coming to a person/corporation within a specified time, whether as payment
for services, interest or profit from investment. Unless otherwise specified, it means cash or its
equivalent. Income can also be thought of as a flow of the fruits of one's labor. (Conwi v. Court of Tax
Appeals)
Income includes earnings, lawfully or unlawfully acquired, without consensual recognition, express or
implied, of an obligation to repay and without restriction as their disposition.
Who is a taxpayer?
Under Sec 22(N), a taxpayer is any person subject to [income] tax. Income taxpayers, with distinction based
on the amount of income subject to tax, or the applicable tax rates, or both, are classified as follows:
Primary
Sub-Classification(s)
Classification
Citizens of Residents of the Philippines
the
Not Residents of the Philippines
Philippines
Residents of the Philippines
Not Engaged in Trade or Business in the Philippines
Aliens Residents
Individuals of the Not Engaged in Trade or Business in the Philippines
Philippines
Individual Employed by Regional or Area Headquarters and Regional Operating
Special Headquarters of Multinational Companies
Classes of Individual Employed by Offshore Banking Units
Individuals Individual Employed by a foreign service contractor or by a foreign service
subcontractor engaged in petroleum operations in the Philippines
Estates and
Trusts
Corporations Domestic Corporations
Foreign Resident Corporations
Corporations Non-resident Corporations
Special Classes Proprietary educational institutions and non-profit hospitals
of Corporations Domestic Depositary Bank (Foreign Currency Deposit Units)
Resident international carriers
Offshore Banking Units
Resident Depositary Bank (Foreign Currency Deposit Units)
Regional or Area Headquarters and Regional Operating Headquarters of
Multinational Companies
Non-resident cinematographic film owners, lessors or distributors
NOTES:
The definition of a non-resident citizen should be cross-referred with Sec. 23 (c),
which provides that a citizen of the Philippines who is working and deriving income
from abroad as an OVERSEAS CONTRACT WORKER is taxable only on income from
sources within the Philippines.
NOTE FURTHER: A seaman who is a Filipino citizen and who receives
compensation for services rendered abroad as member of the complement of a
vessel engaged exclusively in international trade is treated as an overseas
contract worker.
Length of stay is indicative of intention. A citizen of the Philippines who shall have
stayed outside the Philippines for 183 days or more by the end of the year is a non-
resident citizen. His presence abroad, however, need not be continuous. [RR1-79|
2. Alien
RESIDENT - an individual whose residence is within the Philippines and who is not a
citizen thereof. An alien actually present in the Philippines who is not a mere transient or
sojourner is a resident of the Philippines for income tax purposes. A mere floating
intention indefinite as to time, to return to another country is not sufficient to constitute
him a transient. If he lives in the Philippines and has no definite intention as to his stay,
he is a resident. He is taxable for income derived within the Philippines based on
taxable (i.e., net) income
NON-RESIDENT - an individual whose residence is NOT in the Philippines and who is
not a citizen thereof.
Engaged in trade or business in the Philippines (NRAETB) - is taxable for
income derived within the Philippines based on taxable (i.e., net)
income
Not engaged in trade or business in the Philippines (NRANETB) - is taxable for
income derived within the Philippines based on gross income1
NOTES:
What makes an alien a resident or non-resident alien is his intention with regard to
the length and nature of his stay. Thus:
a. One who comes to the Philippines for a definite purpose which in its
very nature may be promptly accomplished is not a resident citizen.
b. One who comes to the Philippines for a definite purpose which in its
very nature would require an extended stay, and to that end, makes
his home temporarily in the Philippines, becomes a resident, though it
may be his intention at all times to return to his domicile abroad when
the purpose for which he came has been consummated or abandoned.
(Sec. 5, RR 2-
1
Notwithstanding the general classification of aliens into resident and non-resident for income tax purposes, note that there is
a special classification of aliens who are taxed differently. See subsection D.
Are all sales / dispositions of capital assets subject to capital gains tax?
NO! Only two kinds of things held as capital assets are subject to the capital gains tax,
as follows:
1. On sale, barter, exchange or other disposition of shares of stock of a
domestic corporation not listed and traded through a local stock
exchange, held as a capital asset:
On the net capital gain:
Not over P100,000 Final Tax of 5%
On any amount in excess of P100,000 Final Tax of 10%
Key definitions
Net capital gain selling price less cost
Selling price consideration on the sale OR fair market
value of the shares of stock at the time of the sale,
whichever is HIGHER
Cost original purchase price
i.e.,
Unutilized amount x (higher of ) GSP or FMV = Taxable portion
GSP
Dividends
o cash and/or property dividends2 actually or constructively received by an
individual from
a domestic corporation
a joint stock company
insurance or mutual fund companies
regional operating headquarters of multinational companies
o share of an individual in the distributable net income after tax of a partnership
(except a general professional partnership) of which he is a partner
o share of an individual member or co-venturer in the net income after tax of an
association, a joint account, or a joint venture or consortium taxable as a
corporation
Rate 10% for residents (RC, RA) and non-resident citizens (NRC),
20% for non-resident aliens engaged in trade or business (NRAETB)
Royalties
o From books, literary works, and musical compositions 10%
o Other royalties 20%
2
A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a
corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and
cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so
distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent that it represents a
distribution of earnings or profits. (Sec. 73B, NIRC) [In other words, stock dividends are generally not subject to tax as long as
there are no options in lieu of the shares of stock. On the other hand, a stock dividend constitutes income if it gives the
shareholder an interest different from that which his former stockholdings represented.]
3
Schedular tax rates apply to all classes of individuals, with the exception of non-resident aliens not engaged in trade or
business. Should NRANETB earn other income, such is subject to a 25% final tax.
4
Pro-forma computation of income subject to schedular tax rates:
Gross Compensation Income P xxx
Less: Personal Exemptions (xxx)
Health Insurance (if qualified) (xxx)
Net Compensation Income P xxx
Add: Net Business Income xxx
Net Professional Income xxx
Other Income (capital gains, rent, etc.) xxx
Net Income subject to schedular tax rates P xxx
where Net Business Income and Net Professional Income are computed as follows:
Gross Business / Professional Income P xxx
Less: Itemized Deductions [OR] Optional Standard Deduction (xxx)
Net Business / Professional Income P xxx
2. Special deduction for actual premium payments for health and/or hospitalization
insurance taken by an individual taxpayer provided that the following requisites are met:
a. The taxpayers family gross income does not exceed P250,000 in a taxable
year.
b. The amount deductible should only be limited to P2,400 per family or P200
per month.
In the case of married taxpayers, only the spouse claiming the additional
exemption for dependents shall be entitled to this deduction.
3. Personal Exemptions are arbitrary amounts allowed by law to be deducted from income
to cover personal, living, or family expenses of the taxpayer. These deductions are allowed
on the theory that the minimum requirements of subsistence of a taxpayer should be free
from tax.
4.
Kinds:
1. Basic Personal Exemptions (BPE) varies according to the status of
taxpayer
5
Remember that non-resident aliens not engaged in trade or business are taxed on gross income. They may not, therefore,
avail of these deductions.
6
Thus, the only deductions that may be claimed by individuals with compensation income only are personal exemptions and
premium payments on health and/or hospitalization insurance.
7
See Allowable Deductions from Gross Income for the detailed discussion on itemized deductions and the optional standard
deduction.
2. Such dependent must be living with AND dependent upon him for
chief support
Chief support principal or main support given regularly
such that withdrawal will result in destitute life for
dependent; includes situations where taxpayer is away
from home on business, or dependent is away at school
NOTE: Chief support means more than one-half of the
requirements for support. Hence, if two children contribute
equal amounts to the support of a parent, neither of them
qualify as head of the family.
3. Such brothers or sisters or children are
not more than 21 years old
unmarried and
not gainfully employed OR
regardless of age, are incapable of self-support because
of mental or physical defect.
D. Special Classification of Individuals and Corresponding Tax Treatment [Sec 25(C), (D), (E)]
1. Alien individuals employed by:
a. Regional or Area Headquarters (RAHQ) and Regional Operating Headquarters (ROHQ)
established in the Philippines by multinational companies
o Multinational company, defined a foreign firm or entity engaged in
international trade with affiliates or subsidiaries or branch offices in the Asia-
Pacific Region and other foreign markets
b. Offshore Banking Units established in the Philippines
2. Alien individuals who are permanent residents of a foreign country but who are employed and
assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor
engaged in petroleum operations in the Philippines
Tax Rate and Base - 15% of gross income received as salaries, wages, annuities,
compensation, remuneration and other emoluments, such as honoraria and allowances
o The same tax treatment shall apply to Filipinos employed and occupying the same
positions as those of aliens employed by these multinational companies, offshore
banking units and petroleum service contractors and subcontractors.
Note that the coverage of the special classification (and the corresponding tax rate) is limited to
income received as wages. Hence, any income earned from all other sources within the
Philippines by the alien employees shall be subject to the pertinent income tax (example: sale
of real property in the Philippines is subject to 6% capital gain tax, imposed on the gross selling
price or fair market value of the property at the time of the sale, whichever is higher).
GIW 25%
2. Prizes of P10,000 or less Based on Taxable (i.e, Net) Income
for NRANETB
11. Capital Gains on Sale of Shares (not Net Capital Gains within:
traded in a domestic stock exchange) Not Over P100,000 5% Final Tax
Amount in Excess of P100,000 10% Final Tax
12. Capital Gains on Sale of Real
Property in the Philippines Gross Selling Price or FMV, whichever is higher 6% Final Tax
13. Sale of Shares (traded in a domestic of 1% of the Selling Price (Stock Transaction Tax)
stock exchange) Note: Stock Transaction Tax is not an income tax, but a business
(percentage) tax
Legend: GIW Gross Income within the Philippines FMV Fair Market Value
A. Coverage of the term Corporation [Sec 22(B)] The term corporation includes partnerships, no
matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion),
associations, or insurance companies
It does NOT include:
1. general professional partnerships (partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the income of which is derived
from engaging in any trade or business)
2. joint venture or consortium formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium agreement under a service contract
with the Government.8
B. Classification of Corporations
General Types
1. Domestic Corporation (DC) - one created or organized in the Philippines or under its
laws [Sec 22(C)]
2. Foreign Corporation (FC) one that is not domestic [Sec 22(D)]
Resident Foreign Corporation (RFC) - a foreign corporation engaged in trade
or business within the Philippines [Sec 22(H)]9
Non-resident foreign coporation (NRFC) - a foreign corporation not
engaged in trade or business within the Philippines [Sec 22(I)]
Special Types
1. Proprietary educational institutions and non-profit hospitals
2. Domestic Depository Bank (Foreign Currency Deposit Units)
3. Offshore Banking Units
4. Resident Depository Bank (Foreign Currency Deposit Units)
5. Resident international carrier
6. Non-resident owner or lessor of vessel
7. Non-resident cinematographic film owner, lessor or distributor
8. Non-resident lessor of aircraft, machinery and other equipment
9. Regional/Area Headquarters & Regional Operating Headquarters of Multinational
companies
C. Scope of Taxation
QUICK GLANCE
Type of Corporation Sources of Taxable Income Allowed Business Deductions?
NOTE: A good example of a resident foreign corporation is the Philippine branch of a foreign
corporation duly licensed by the Securities and Exchange Commission. The Philippine branch is merely
an extension of the foreign head office (i.e., non-resident foreign corporation); hence it does not have
nor issue Philippine shares of stock. There is only one single entity to speak of. However, for income
tax purposes, only the income of the Philippine branch from sources within the Philippines is subject to
income tax, and the income of the Philippine branch as well as that of the foreign head office from
sources outside the Philippines are exempt from Philippine income tax.
- NOTE FURTHER: Marubeni Corporation v. Commissioner (177 SCRA 500) clarified the single
entity concept. As a GENERAL RULE, the head office of a foreign corporation is the same
juridical entity as its branch in the Philippines following the single entity concept. The
income from sources within the Philippines of the foreign head office shall thus be
taxable to the Philippine branch. BUT when the head office of a foreign corporation
independently and directly invested in a domestic corporation without the funds passing
8
In this case, the joint venture [as an entity] is not subject to income tax, but each member of the joint venture shall be taxable
on his/its share in the net income of the corporation. On the other hand, a joint venture constituted for purposes other than (2)
above is treated as a corporation and taxable as such.
9
The qualifier resident in the term resident foreign corporation should not be equated with the nationality of the
corporation. In determining nationality, the control test is often invoked and applied, which considers corporate nationality by
the nationality of its controlling shareholders or members. (Mamalateo, citing Winship v. Philippine Trust Co., 90 Phil 744) Thus,
for income tax purposes, a domestic corporation may be formed or organized by foreigners (as long as three of them are
residents of the Philippines as per the Corporation Code),provided that it is organized under the laws of the Philippines.
b. On the sale, exchange or disposition of lands and/or buildings which are not
actually used in the business of a corporation and are treated as capital assets On the
gross selling price, or the current fair market value at the time of the sale, whichever is
higher, a final tax of 6%
NOTE: Tax treatment is the same as that of individuals.
The capital gains tax is applied on the gross selling price, or the current fair
market value at the time of the sale, whichever is higher. Any gain or loss on
the sale is immaterial because there is a conclusive presumption by law
that the sale resulted in a gain.
10
Amended by Republic Act (RA) No. 9337 (dated May 24, 2005 which took effect on July 1, 2005) The 35% corporate income
tax shall be effective until December 31, 2008. Starting January 1, 2009, the tax rate shall be reduced to 30%. The Supreme
Court upheld the constitutionality of said RA in the ABAKADA vs. Ermita, G.R. 168056, dated September 1, 2005.
When is the MCIT computed? beginning on the fourth taxable year immediately
following the year in which such corporation commenced its business operations
What amount of income tax is paid by the corporation to the BIR? Whichever
is HIGHER between the normal tax and the minimum corporate income tax.
ILLUSTRATION: E Co., a domestic trading corporation, in its fourth year of
operations had a gross profit from sales of P300,000 and net taxable
income of P100,000. How much was the income tax paid by the corporation
for the year?
MCIT (P300,000 x 2%)
P6,000
Normal income tax (P100,000 x 35%)
P35,000
Income Tax to be paid for the year (whichever is higher)
P35,000
From Year 4
From
Year 5
From Year 7
GROSS INCOME TAX (GIT) The President, upon the recommendation of the
Secretary of Finance, may allow domestic corporations the option to be taxed at fifteen
percent (15%) of gross income, after the following conditions have been satisfied:
The election of the gross income tax option by the corporation shall be
irrevocable for three (3) consecutive taxable years during which the
corporation is qualified under the scheme.
Computation of GIT Gross Income Gross sales less sales returns, discounts
and allowances and cost of goods sold. Cost of goods sold shall include all
business expenses directly incurred to produce the merchandise to bring them
to their present location and use. [Sec. 27(A)]
B. Rationale If the earnings and profits were distributed, the shareholders would then
be liable to income tax; if the distribution were not made to them, they would incur no
tax in respect to the undistributed earnings and profits of the corporation. It is a tax in
the nature of a PENALTY to the corporation for the improper accumulation of its
earnings, and a DETERRENT to the avoidance of tax upon shareholders who are
supposed to pay dividends tax on the earnings distributed to them.
C. Exception The use of undistributed earnings and profits for the reasonable needs
of the business would not generally make the accumulated or undistributed earnings
subject to the tax. What is meant by reasonable needs of the business is
determined by the IMMEDIACY TEST.
Immediacy Test - It states that the reasonable needs of the business are the
1) immediate needs of the business; and
2) reasonably anticipated needs.
F. Exempt Corporations: The IAET shall not apply to the following corporations: (BIG-
PEN-T)
1. Banks and other non-bank financial intermediaries;
2. Insurance companies;
3. Publicly-held corporations;
4. Taxable partnerships;
5. General professional partnerships;
6. Non- taxable joint ventures; and
7. Enterprises that are registered:
a. with the Philippine Economic Zone Authority (PEZA) under R.A. 7916;
b. pursuant to the Bases Conversion and Development Act of 1992 under
R.A. 7227; and
c. under special economic zones declared by law which enjoy payment of
special tax rate on their registered operations or activities in lieu of
other taxes, national or local.
Words in regular letters are found in Sec. 29(B)(2) of the NIRC. Words in italics
are additions made by the revenue regulation to consolidate Sec. 29 with other
pertinent laws.
G. Computation
Years taxable income: P XX
Add: Income exempt from tax XX
Income excluded from gross income XX
Income subject to final tax XX
Amount of net operating loss carry-over(NOLCO)deducted XX
Total P XX
Less: Income tax paid/payable for the taxable year XX
Dividends actually or constructively paid/issued from
the applicable years taxable income XX
Amount reserved for the reasonable needs of the
business emanating from the covered years
taxable income XX
Improperly Accumulated Taxable Income P XX
Multiplied by IAET rate x 10%
Improperly Accumulated Earnings Tax (IAET) P XX
Words in regular letters are in the statutory formula. Words in italics are additions
made by the revenue regulation.
H. Limitation The profit that has been subjected to IAET shall no longer be subjected to
IAET in later years even if not declared as dividend. However, profits which have been
subjected to IAET, when declared as dividends, shall be subject to tax on dividends
except in those instances where the recipient is not subject thereto.
J. Period for Payment of Dividend/IAET The dividends must be declared and paid or
issued not later than one year following the close of the taxable year, otherwise,
the IAET, if any, should be paid within fifteen (15) days thereafter.
ONE LAST NOTE ON THE APPLICABILITY OF TAX RATES OF DOMESTIC CORPORATIONS: All
corporations, agencies, or instrumentalities owned or controlled by the GOVERNMENT are taxable
and shall pay such rate of tax upon their taxable income as are imposed on domestic
corporations engaged in a similar business, industry, or activity.
EXCEPTIONS (i.e, not taxable):
o Government Service Insurance System (GSIS),
o Social Security System (SSS),
o Philippine Health Insurance Corporation (PHIC),
o Philippine Charity Sweepstakes Office (PCSO) and
o the Philippine Amusement and Gaming Corporation (PAGCOR)11
Note: Exemption for PAGCOR was withdrawn by RA 9337
10. Capital Gains subject to Capital Gains Tax On sale, barter, exchange or other disposition
of shares of stock of a domestic corporation not listed and traded through a local
stock exchange, held as a capital asset:
On the net capital gain:
Not over P100,000 Final Tax of 5%
On any amount in excess of P100,000 Final Tax of 10%
NOTE:
Tax treatment is the same as that of individuals and domestic corporations.
12. Income subject to Normal Tax [OR] Minimum Corporate Income Tax (MCIT) [OR]
Gross Income Tax (GIT) The discussion with respect to this topic (income subject to
normal tax, MCIT, or GIT) under the subheading of domestic corporations is equally applicable
to resident foreign corporations, both as to concepts and computations, except that RFCs are
taxed only on income from sources within the Philippines.
NORMAL CORPORATE INCOME TAX RATE 35%12 of net taxable income from
sources within the Philippines
GROSS INCOME TAX (GIT) The President, upon the recommendation of the
Secretary of Finance, may allow resident foreign corporations the option to be taxed at
fifteen percent (15%) of gross income within the Philippines, under the same
conditions as domestic corporations. [Sec. 28(A)(1)]
12
Amended by RA No. 9337 (dated May 24, 2005, effective July 1, 2005)
NOTE:
Tax treatment is the same as that of individuals and domestic/resident foreign
corporations.
There is no corresponding provision for non-resident foreign corporations regarding
capital gain tax on the sale of real property held as a capital asset. Hence, the gross
income from the sale of real property realized by the non-resident foreign corporation
shall be subject to a 35% final tax imposed on gross income from sources within the
Philippines.
3. Final Tax on [Other] Gross Income from sources within the Philippines 35%of the
gross income14 received from all sources within the Philippines, such as interests, dividends,
rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or
other fixed or determinable annual, periodic or casual gains, profits and income, and capital
gains EXCEPT capital gains resulting from the sale of shares of stock of a domestic corporation
not listed and traded through a local stock exchange, held as a capital asset.
13
Amended by RA 9337 (dated May 24, 2005, effective July 1, 2005)
14
Amended by RA 9337 (dated May 24, 2005, effective July 1, 2005)
2. Offshore Banking Units authorized by the Bangko Sentral ng Pilipinas (BSP) [Sec.
28(A)(4) as amended by RA 9294 (2004)]
Coverage of the Rule ONLY income derived by offshore banking units from
foreign currency transactions with:
- nonresidents,
- other offshore banking units
- local commercial banks including branches of foreign banks that may
be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact
business with offshore banking units
Tax Rate: Exempt from all taxes, except net income from such
transactions as may be specified by the Secretary of Finance, upon
recommendation by the Monetary Board to be subject to the regular income
tax payable by banks
- EXCEPTION: Interest income derived from foreign currency loans
granted to residents other than offshore banking units or local
commercial banks, including local branches of foreign banks that may
QUICK GLANCE
Tax
Type of Corporation Tax Base
Rate
Domestic Corporations
Proprietary Educational Institutions and Hospitals (Non-profit) Taxable Income from all sources 10%
foregoing organizations from any of their properties, real or personal, or from any of their
activities conducted for profit regardless of the disposition made of such income, shall be
SUBJECT TO TAX.
Note:
RA 9178 Barangay Micro Business Enterprises (BMBEs) implemented by DO 17-04, April 20, 2004
BMBEs shall be exempt from income tax for income arising from the operations of the enterprise.
BMBE is any business entity or enterprise engaged in the production, processing or manufacturing
of products or commodities, including agro-processing trading and services, whose total assets
including those arising from loans but exclusive of land on which the particular business entitys
office, plant and equipment are situated, shall not be more that P3M.
I. Summary of Tax Bases, Tax Rates and Applicable Tax Regimes for Corporations
2. Interest from any currency bank deposit , etc. GIW - 20% Final Tax 35% of Gross Income
A. Definition of Fringe Benefit any good, service or other benefit furnished or granted in cash or in
kind by an employer to an individual employee except rank and file employees (The fringe benefit
covered by Sec 33 refers to those enjoyed by managerial and supervisory employees.)
Key definitions:
Managerial employee one who is vested with the powers or prerogatives to lay down
and execute management policies and/or to hire, transfer, suspend, lay-off, recall,
discharge, assign or discipline employees.
Supervisory employees those who, in the interest of the employer, effectively
recommend such managerial actions if the exercise of such authority is not merely
routinary or clerical in nature but requires the use of independent judgment.
All employees not falling within any of the above definitions are considered rank-and-file
employees.
Examples of fringe benefits:
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel, such as maid, driver and others
5. Interest on loan at less than market rate to the extent of the difference between the
market rate and actual rate granted
6. Membership fees, dues and other expenses borne by the employer for the employee in
social and athletic clubs or other similar organizations
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to the employee or his dependents
10. Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows
B. Tax Rate and Tax Base [Generally] 32% of the grossed-up monetary value (GMV)
GMV represents the whole amount of income realized by the employee.
How GMV is determined GMV is determined by dividing the actual monetary value of the
fringe benefit by 68% [100% - tax rate of 32%]. For example, the actual monetary value of
the fringe benefit is P1,000. The GMV is equal to P1,470.59 [P1,000 / 0.68]. The fringe benefit
tax, therefore, is P470.59 [P1470.59 x 32%].
Special Cases:
For fringe benefits received by non-resident alien not engaged in trade of business
(NRANETB), the tax rate is 25% of the grossed-up monetary value (GMV). The GMV is
determined by dividing the actual monetary value of the fringe benefit by 75% [100% -
25%].
For fringe benefits received by alien individuals and Filipino citizens employed by regional
or area headquarters, regional operating headquarters, offshore banking units (OBUs),
or foreign service contractor, the tax rate is 15% of the grossed-up monetary value
(GMV). The GMV is determined by dividing the actual monetary value of the fringe
benefit by 85% [100% - 15%].
What is the tax implication if the employer gives fringe benefits to rank-and-file
employees? Fringe benefits given to a rank-and-file employee are treated as part of his
compensation income subject to income tax and withholding tax on compensation income,
which must be withheld and deducted by his employer from the compensation income of his
employee.
C. Payor of Fringe Benefit Tax (FBT) the employer [but the law allows the employer to deduct such
tax as a business expense, in determining his taxable income]
D. Fringe Benefits which are not taxable [Sec. 33 of the NIRC, consolidated with Sec. 2.33(C) of RR
03-98] [RED CNC]
1. Fringe benefits which are authorized and EXEMPTED from tax under special laws
2. CONTRIBUTIONS of the employer for the benefit of the employee to retirement, insurance
and hospitalization benefit plans
3. Benefits given to the RANK AND FILE employees, whether granted under a collective
bargaining agreement or not
4. DE MINIMIS benefits
5. If the grant of fringe benefits to the employee is required by the nature of, or NECESSARY to
the trade, business, or profession of the employer
6. If the grant of fringe benefits is for the CONVENIENCE of the employer [Convenience of the
Employer Rule]
NOTES:
Tax implication of de minimis benefits: EXEMPTED from tax. However, should the
amount of the benefits given be in EXCESS of the ceilings prescribed, the following
rules apply:
- If given to managerial / supervisory employees The amount in
excess of the ceiling prescribed is taxable as a fringe benefit (i.e.,
there will be a 32% tax imposed on the grossed-up monetary value of
the residual amount).
ILLUSTRATION: X Company gave one of its supervisors a laundry
allowance of P200 per month. P150 of the P200 is considered de
minimis and not taxable. However, the residual P50 per month is
considered a fringe benefit and is taxable as such. The fringe
benefits tax for the year will thus be P282.35 [{(P50 per month x
12 months) / 68%} x 32%]
- If given to rank-and-file employees The amount in excess of the
ceiling prescribed is taxable as salary or compensation income.
BIR Ruling 023-02: Meal and food allowance, although not for overtime work, is
considered de minimis if it does not exceed 25% of the basic wage. The rules and
regulations on de minimis benefits do not allow aggregation of the amounts set for
each type of benefit.
BIR Ruling 034-02 (Aug 16, 2002): Representation and Transportation Allowance
(RATA) and Personnel Economic Relief Allowance (PERA) are not subject to Income
Tax and Withholding Tax. Additional Compensation Allowance (ACA) is part of other
benefits under Sec. 32(b)(7)(e) of the Tax Code of 1997 which are excluded from
gross compensation income provided the total amount of such benefits does not
exceed P30,000. It is also not subject to withholding tax pending its formal
integration into basic pay.
NOTES:
GPP is not a taxable entity The partnership is deemed to be no more than a mere
mechanism or a flow-through entity in the generation of income by, and the ultimate
mechanism distribution of such income to, respectively, each of the individual partners.
(Tan v. Commissioner [Oct. 3, 1994]) However, the partnership itself is required to file
income tax returns for the purpose of furnishing information as to the share in the gains
or profits which each partner shall include in his individual return. (RR 2- 1998)
The share of an individual partner in the net profit of a general professional partnership
is deemed to have been actually or constructively received by the partner in the
same taxable year in which such partnership net income was earned, and shall
be taxed to them in their individual capacities, whether actually distributed or
not, at the graduated income tax ranging from 5% to 32%. Thus, the principle of
constructive receipt of income or profit is being applied to undistributed profits of GPPs.
The payment [to the partners] of such tax-paid profits in another year should no longer
be liable to income tax. (Mamalateo)
ILLUSTRATIONS:
A and B, both lawyers, formed a general professional partnership in January
2002. In accordance with their agreement, they would equally divide the profit
and loss. During the year, the partnership had a net profit of P1,000,000 and
P800,000 was distributed to the partners. Under Section 26, each partner must
report an income of P500,000 (not just P400,000), representing his share in the
partnership profits, because the entire net income of the partnership is taxable
in the year earned and is deemed distributed to the partners in the same year.
- The taxable income and income tax due of Mr. I and Mr. J,
respectively, are as follows:
Partner Partner
I J
Gross Income
Share in IJ net income P200,000 P200,000
Own income 80,000 90,000
Total Gross Income P280,000 P290,000
Less: Personal Exemption
Basic Personal Exemption (20,000) (32,000)
Additional Exemption (maximum of 4 - (32,000)
children)
Taxable Income P260,000 P226,000
ILLUSTRATION:
A and B organized AB Trading, a partnership that will distribute motor oils in the Philippines.
The partners agreed to distribute profits equally. In 2002, the partnership had a net profit of
P1,000,000, A (married) had personal income of P200,000, and B (single) had personal income
of P400,000. The partnership did not actually distribute the net profit to A and B. Who were the
taxpayers and how much income tax did they pay?
- AB Trading is taxable as a corporation, as follows:
Taxable Income P1,000,000
- When Co-ownership is not subject to tax When the co-ownerships activities are
limited merely to the preservation of the co-owned property. In such a case, the co-
ownership, as such, is not subject to tax. The co-owners are liable for income tax in their
separate and individual capacities.
- When Co-ownership is subject to tax When the income of the co-ownership is
invested by the co-owners in business, the co-owners have in effect constituted
themselves into a partnership. In such a case, the co-ownership shall be subject to
tax as a corporation.
For tax purposes, the co-ownership of inherited properties is automatically
converted into an unregistered partnership the moment the said common properties
and/or the incomes derived therefrom are used as a common fund with intent to
produce profits for the heirs in proportion to their respective shares in the
inheritance as determined in a project partition either duly executed in an
extrajudicial settlement or approved by the court in the corresponding testate or
intestate proceeding. The reason for this is simple. From the moment of such
partition, the heirs are entitled already to their respective definite shares of the
estate and the incomes thereof, for each of them to manage and dispose of as
exclusively his own without the intervention of the other heirs, and, accordingly he
becomes liable individually for all taxes in connection therewith. If after such
partition, he allows his share to be held in common with his co-heirs under a single
management to be used with the intent of making profit thereby in proportion to his
share, there can be no doubt that, even if no document or instrument were
executed for the purpose, for tax purposes, at least, an unregistered partnership is
formed. [Ona v. CIR, G.R. No. L-19342, 25 May 1972]
A. Application of Income Tax The tax imposed upon individuals shall apply to the income of estates
or of any kind of property held in trust, including:
1. Income accumulated in trust for the benefit of unborn or unascertained person
or persons with contingent interests, and income accumulated or held for future
distribution under the terms of the will or trust;
2. Income which is to be distributed currently by the fiduciary to the beneficiaries,
and income collected by a guardian of an infant which is to be held or
distributed as the court may direct;
3. Income received by estates of deceased persons during the period of
administration or settlement of the estate; and
4. Income which, in the discretion of the fiduciary, may be either distributed to the
beneficiaries
or accumulated.
EXCEPTION The tax shall not apply to employee's trust which forms part of a pension,
stock bonus or profit-sharing plan of an employer for the benefit of some or all of his
employees
(1) if contributions are made to the trust by such employer, or employees, or both for the
purpose of distributing to such employees the earnings and principal of the fund accumulated
by the trust in accordance with such plan, and
(2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all
liabilities with respect to employees under the trust, for any part of the corpus or income to
B. Computation and Payment of the Tax The tax shall be computed upon the taxable income of the
estate or trust and shall be paid by the fiduciary. (GENERAL RULE)
EXCEPTIONS:
1. Revocable Trusts. - Where at any time the power to revest in the grantor title to
any part of the corpus of the trust is vested
1. in the grantor either alone or in conjunction with any person not having a
substantial adverse interest in the disposition of such part of the corpus or the
income therefrom, or
2. in any person not having a substantial adverse interest in the disposition of
such part of the corpus or the income therefrom,
the income of such part of the trust shall be included in computing the taxable income of
the grantor.
2. Income for Benefit of Grantor - Where any part of the income of a trust
i. is, or in the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income may be held or
accumulated for future distribution to the grantor, or
ii. may, or in the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income, be distributed to the
grantor, or
iii. is, or in the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income may be applied to
the payment of premiums upon policies of insurance on the life of the grantor,
such part of the income of the trust shall be included in computing the taxable income of
the grantor.
NOTE: 'In the discretion of the grantor' means in the discretion of the grantor,
either alone or in conjunction with any person not having a substantial adverse
interest in the disposition of the part of the income in question.
Consolidation of Income of Two or More Trusts - Where, in the case of two or more trusts, the creator
of the trust in each instance is the same person, and the beneficiary in each instance is the
same, the taxable income of all the trusts shall be consolidated and the tax computed on such
consolidated income, and such proportion of said tax shall be assessed and collected from each
trustee which the taxable income of the trust administered by him bears to the consolidated income of
the several trusts.
C. How Taxable Income of the Estate or Trust is Computed [Sec. 61] The taxable income of the
estate or trust shall be computed in the same manner and on the same basis as in the case of an
individual, EXCEPT that:
- (A) There shall be ALLOWED AS A DEDUCTION in computing the taxable income of the
estate or trust the amount of the income of the estate or trust for the taxable year which
is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the
income collected by a guardian of an infant which is to be held or distributed as the court
may direct, BUT the amount so allowed as a deduction shall be included in computing
the taxable income of the beneficiaries, whether distributed to them or not. Any amount
allowed as a deduction under this Subsection shall not be allowed as a deduction under
Subsection (B) of this Section in the same or any succeeding taxable year.
- (B) In the case of income received by estates of deceased persons during the period of
administration or settlement of the estate, and in the case of income which, in the
discretion of the fiduciary, may be either distributed to the beneficiary or accumulated,
there shall be allowed as an ADDITIONAL DEDUCTION the amount of the income of
the estate or trust for its taxable year, which is properly paid or credited during such
year to any legatee, heir or beneficiary but the amount so allowed as a deduction shall
be included in computing the taxable income of the legatee, heir or beneficiary.
- (C) In the case of a trust administered in a foreign country, the deductions mentioned in
Subsections (A) and (B) of this Section shall not be allowed: Provided, That the amount
of any income included in the return of said trust shall not be included in computing the
income of the beneficiaries.
D. Exemption Allowed to Estates and Trusts There shall be allowed an exemption of P20,000 from
the income of the estate or trust.
E. Fiduciary Returns Guardians, trustees, executors, administrators, receivers, conservators and all
persons or corporations, acting in any fiduciary capacity, shall:
F. Fiduciaries Indemnified Against Claims for Taxes Paid Trustees, executors, administrators and
other fiduciaries are INDEMNIFIED against the claims or demands of every beneficiary for all payments
of taxes which they shall be required to make, and they shall have CREDIT for the amount of such
payments against the beneficiary or principal in any accounting which they make as such trustees or other
fiduciaries.
B. Basic Principles
1. Resident Citizens (RC) and Domestic Corporations (DC) are taxable on income derived from
within and without the Philippines
2. Non-resident Citizens (NRC), Non-resident Aliens (NRA), Resident Foreign Corporations (RFC)
and Non-resident Foreign Corporations (NRFC) are taxable only on income derived from within
the Philippines.
6. GENERAL RULE: Gains, profits and income from the sale of personal property, subject to
the following rules:
Allowable Deductions from Gross Income From Sources Within the Philippines
1. GENERAL RULE: From the items of gross income above, the following are allowed as
deductions:
a. expenses, losses and other deductions properly allocated to items of gross income
b. ratable part of expenses, interests, losses and other deductions effectively
connected with the business or trade conducted exclusively within the Philippines
which cannot definitely be allocated to some items of gross income
Formula for (b):
E. Summary
QUICK GLANCE
15
Regardless of the residence of the payor, of the place in which the contract for service was made, or of the place of
payment.
A. Basic Principles
Gross Income means all income derived from whatever source16, including (but not limited to) the
following items: (TRIP CARD GPP)
1. Gross income derived from the conduct of TRADE or business or the exercise of a
profession
2. RENTS
3. INTERESTS
4. PRIZES and winnings
5. COMPENSATION for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items
6. ANNUITIES
7. ROYALTIES
8. DIVIDENDS
9. GAINS derived from dealings in property
10. PENSIONS
11. PARTNER'S distributive share from the net income of the general professional partnership
(GPP)
The term gross income whenever used without qualification, is comprehensive, as defined
above, and is different from the limited meaning of gross income for purposes of minimum
corporate income tax or the gross income tax of corporations.
Withholding Tax on Compensation Income The income recipient (i.e., employee) is the
person liable to pay the tax income, yet to improve the collection of compensation
income of employees, the State requires the employer to withhold the tax upon payment
of the compensation income.
16
It does not include income which is excluded or exempted by law.
If the asset involved is classified as ordinary, the entire amount of the gain from the
transaction shall be included in the computation of gross income [Sec 32(A)], and the
entire amount of the loss shall be deductible from gross income. [Sec 34(D)]. (See XI.
Allowable Deductions from Gross Income - Losses)
If the property sold is a capital asset (except shares of stock not listed nor traded in a
local stock exchange and real property subject to capital gains tax), the rules on capital
gains and losses apply in the determination of the amount to be included in gross
income. (See XIII Capital Gains and Losses)
Note: Amount realized from sale or other disposition of property = sum of money
received + fair market value of the property (other than money) received
In computing the gain or loss from the sale or other disposition of property, the
BASIS shall be as follows:
1. Property acquired by purchase its cost, i.e., the purchase price plus
expenses of acquisition.
2. Property which should be included in the inventory its latest inventory
value [RR-2 sec 136]
3. Property acquired by devise, bequest or inheritance its fair market price
or value as of the date of acquisition
4. Property acquired by gift or donation the same as if it would be in the
hands of the donor or at last preceding owner by whom it was not acquired
by gift, EXCEPT that if such basis is greater than the FMV of the property at
the time of the gift then, for the purpose of determining loss, the basis shall
be such FMV
5. Property (other than capital asset) acquired for less than an adequate
consideration in moneys worth a) the amount paid by the transferee for
the property; or b) the transferors adjusted basis at the time of the
transfer whichever is greater
6. Property acquired in a transaction where gain or loss not recognized The
basis shall be that as defined in 40 (C) (5)
Interest Income e.g., Interest income from government securities such as Treasury Bills
Rental Income
Actual rent itself included in gross income (taxable)
Payments by lessee of obligations of lessor to third persons considered as
additional rent income of the lessor, and therefore included in gross income (taxable).
Thus, if the lessee paid directly to the City Government a real estate tax of P2,000 on
the property of the lessor, the tax paid by the lessee would be considered to have been
cash that changed hands two times, as follows:
Lessee Lessor Government
(1)
Advance Rentals Receipt of advance rentals by the lessor may or may not constitute
taxable income to him depending on the true nature of the so-called advance rentals.
o If the advance rentals is in the nature of prepaid rent (for the lessee),
received by the lessor under a claim of right and without restriction as to
use, the entire amount is taxable income of the lessor in the year received.
o If the amount received is in the nature of a security deposit for the faithful
compliance by the lessee of the terms of the contract, there is no income to
the lessor unless the conditions which make the security deposit the
property of the lessor occur (i.e., the lessee violates the terms of the lease
agreement)
Dividends Any dividend which is not exempt from income tax, or which is not subject to final
tax, is taxable dividend included in the computation of the taxable income (gross income) in the
income tax return at the end of the year.
NOTE: Liquidating Dividend distribution of all the property of a corporation. It is strictly not
dividend income, but rather a sale of shares of stock resulting in capital gain or loss.
Annuities income derived from a capital amount paid to an insurance company. Annuities
are paid on the basis of an individual contract, which can be made by everybody.
Cancellation of debt The cancellation or forgiveness of indebtedness may have any of three
possible consequences:
1. It may amount to payment of income. If, for example, an individual performs services to
or for a creditor, who, in consideration thereof, cancels the debt, income in that amount
is realized by the debtor as compensation for personal services. The law will consider the
transaction as one where the creditor compensated the debtor for services rendered, and
the debtor paid his indebtedness out of the compensation he received.
2. It may amount to a gift. If a creditor wishes merely to benefit the debtor, and without
any consideration therefore, cancels the debt, the amount of the debt is a gift to the
debtor and need not be included in the latters report of income.
3. It may amount to a capital transaction. If a corporation to which a stockholder is
indebted forgives the debt, the transaction has the effect of a payment of dividend.
Prizes and Awards Contest prizes and awards received are generally taxable. Such payment
constitutes gain derived from labor. The EXCEPTIONS are as follows:
Prizes and awards received in recognition of religious, charitable, scientific, educational,
artistic, literary or civic achievements are EXCLUSIONS from gross income if:
a. The recipient was selected without any action on his part to enter a contest or
proceedings; and
b. The recipient is not required to render substantial future services as a condition to
receiving the prize or award.
Prizes and awards granted to athletes in local and international sports competitions and
tournaments held in the Philippines and abroad and sanctioned by their national
associations shall be EXEMPT from income tax.
Damage recovery
Compensatory damages, as constituting returns of capital, are not taxable. Thus,
amounts received as moral damages for personal actions (such as alienation of affection,
libel, slander or breach of promise to marry) are not taxable.
Recovered damages representing recoveries of lost profits are taxable, just as profits are
taxable in the regular course of business. Thus, damages recovered in patent
infringement suits are taxable.
ILLUSTRATION:
Case A Case B Case C
Year 1
Year 2
Recovery of Amounts Written Off P 2,000 P 2,000 P 6,000
Explanation:
In Case A, the entire amount recovered (P2,000) is included in the
computation of gross income in Year 2 because the taxpayer benefited by
the same extent. Prior to the write-off, the taxable income was
P300,000; after the write-off, the taxable income was reduced to
P298,000.
In Case B, none of the P2,000 recovered would be recognized as gross
income in Year 2. Note that even without the write-off, the taxpayer
would not have paid any income tax anyway. The taxable income
before the write-off was actually a net loss.
In Case C, only P5,000 of the P6,000 recovered would be recognized as
gross income in Year 2. It was only to this extent that the taxpayer
benefited from the write-off. The taxpayer did not benefit from the extra
P1,000 because at this point, the P1,000 was already a net loss.
Tax Refund As a general rule, a refund of a tax related to the business or the practice of
profession, is taxable income (e.g., refund of fringe benefit tax) in the year of receipt to the
extent of the income tax benefit of said deduction (i.e., the tax benefit rule applies).
However, the following tax refunds are not to be included in the computation of gross income:
(EXCEPTIONS)
1. Philippine income tax, except the fringe benefit tax
2. Income tax imposed by authority of any foreign country, if the taxpayer claimed a credit
for such tax in the year it was paid or incurred.
3. Estate and donors taxes
4. Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed (Special assessments)
5. Value Added Tax
6. Fines and penalties due to late payment of tax
7. Final taxes
8. Capital Gains Tax
The enumeration of tax refunds that are not taxable (income) is derived from an
enumeration of tax payments that are not deductible from gross income. If a tax is not
an allowable deduction from gross income when paid (no reduction of taxable income,
hence no tax benefit), the refund is not taxable.
b. What is excluded: Any amount received by an employee or by his heirs from the
employer as a consequence of separation of such official or employee from the
service of the employer because of
o death
o sickness or
o other physical disability or
o for any cause beyond the control of the employee (i.e., the separation of
the employee must be involuntary and not initiated by him)
c. What is excluded: The social security benefits, retirement gratuities, pensions and
other similar benefits received by resident or nonresident citizens of the Philippines or
aliens who come to reside permanently in the Philippines from foreign government
agencies and other institutions
d. What is excluded: Payments of benefits due or to become due to any person residing in
the Philippines under the laws of the United States administered by the United States
Veterans Administration
e. What is excluded: Benefits received from or enjoyed under the Social Security System
f. What is excluded: Benefits received from the GSIS, including retirement gratuity
received by government officials and employees
CASE LAW:
BIR Ruling 125-98: The phrase "shall not have availed of the privilege under
7. MISCELLANEOUS Items
a. Income Derived by Foreign Government
Income derived from (1) investments in the Philippines in domestic securities (loans,
stocks, bonds, etc.) or (2) from interest on deposits in banks in the Philippines by
i. foreign governments
ii. financing institutions owned, controlled, or enjoying refinancing from foreign
governments, and
iii. international or regional financial institutions established by foreign governments.
The term taxable income means the pertinent items of gross income specified in the National Internal
Revenue Code [Sec 32], less the deductions [Sec 34] and/or personal and additional exemptions [Sec
35], if appropriate, authorized for such types of income by the Code or other special laws. [Sec 31]
B. Kinds of Deductions
1. Itemized Deductions business (or professional) expenses which are ordinary and necessary
in the conduct of business (or in the exercise of profession)
2. Optional Standard Deduction (OSD) may be taken by an individual, in lieu of itemized
deductions
REQUISITES:
1. OSD is available only to citizens or resident aliens; thus non-resident aliens
are not entitled to claim the optional standard deduction
2. The standard deduction is optional; i.e., unless the taxpayer signifies in his
return his intention to elect this deduction, he is considered as having
availed of the itemized deductions;
3. Such election, when made by the qualified taxpayer, is irrevocable for the
year in which made; however, he can change to itemized deductions in
succeeding years;
NOTE HOWEVER: Since an individual in business or in the practice
of profession is required to file quarterly income tax returns, can
he choose the Optional Standard Deduction in his quarterly returns
and then choose the itemized deductions in his annual income tax
return, or vice versa? YES, the Optional Standard Deduction or
Itemized Deductions is against the gross income of the year.
Quarterly income tax returns are only interim computations on the
taxable income for the year.
4. The amount of standard deduction is limited to ten percent (10%) of the
taxpayers gross income. [However, OSD is not available against
compensation income arising out of an employer-employee relationship.]
NOTE: The Gross Income base of OSD is
In the case of an individual in a manufacturing or
merchandising concern: gross income (or profit) from
sales [i.e., sales less cost of sales], and incidental
income, if any
In the case of an individual whose income is from the sale
of services: gross income (or profit) from sale of services
[i.e., gross receipts less direct cost of services], and
incidental income, if any
5. Proof of actual expenses is not required, but the taxpayer should keep
records pertaining to his gross income.
C. Who can avail of deductions? In general, all taxpayers except for those earning
compensation income arising from personal services rendered under an employer-employee relationship
Rules:
1. Compensation income earners can avail themselves only of the deduction in Sec 34(M),
i.e., premium payments on health and/or hospitalization insurance (in addition to the
appropriate personal exemption).
2. The following can claim ITEMIZED deductions:
a. Corporations, whether domestic or (resident) foreign
b. General Professional Partnerships
c. Individuals engaged in trade, profession or business (citizen, resident alien,
non-resident alien doing business in the Philippines)
d. Estates and trusts engaged in trade or business
e. Proprietary educational institutions and hospitals (non-profit)
f. Government-owned or controlled corporations
3. Only individuals, EXCEPT non-resident aliens, can elect between itemized
deductions and OPTIONAL STANDARD DEDUCTION.
QUICK GLANCE
Bribes, Kickbacks and Other Similar Payments No deduction shall be allowed for any
payment made, directly or indirectly, to an official or employee of the national government,
or to an official or employee of any local government unit, or to an official or employee of a
government-owned or -controlled corporation, or to an official or employee or representative of
a foreign government, or to a private corporation, general professional partnership, or a similar
entity, if the payment constitutes a bribe or kickback.
Limitation on Deduction The taxpayer's allowable deduction for interest expense shall be
reduced by an amount equal to 42% of the interest income subjected to final tax.17
ILLUSTRATION:
On January 15, 2005, Company A, who has a deposit account with BCD Bank, obtained a
loan from XYZ Financing Corporation in connection with the operation of its business. For the
year 2005, the interest income it derived from the said deposit with BCD Bank amounted to P
180,000 on which a final tax of P36,000 had been withheld. Its interest expense on the loan
obtained from XYZ Financing Corporation during the same year amounted to P 150,000.
What is the deductible interest expense? the taxable income and the income tax due of
Company A shall be computed as follows:
17
Amended by RA 9337 (May 24, 2005)
Optional Treatment of Interest Expense At the option of the taxpayer, interest incurred
to acquire property used in trade, business or exercise of a profession may be either
(1) allowed as a DEDUCTION or (2) treated as a CAPITAL EXPENDITURE.
ILLUSTRATION:
Mr. A wanted to acquire a delivery van worth P1,000,000 for his business. To finance this, he
borrowed P1,000,000 from ABC Bank on January 1, 2005. The loan bears interest of 10%,
and both the interest and principal are payable on December 31, 2005. For income tax
purposes, how should Mr. A account for his interest expense in 2005?
ANSWER: Mr. A has two options. First, he may choose to treat the P100,000 (10% of
P1,000,000) interest expense as an outright deduction from his gross income in 2005 (which
deduction shall be subject to the limitation that it be reduced by an amount equal to 42% of
the taxpayers interest income subjected to final tax). Alternatively, he may choose to
capitalize the interest expense by incorporating its amount to the cost of the vehicle obtained
for his business. In this case, the vehicle will be recorded in his books at a cost of P1,100,000
(purchase price of P1,000,000 plus the interest expense of P100,000). The total cost of the
vehicle will then be gradually allowed as deduction from the gross income of the succeeding
taxable years as depreciation expense.
EXCEPTIONS:
Philippine income tax, except the fringe benefit tax
Income tax imposed by authority of any foreign country
EXCEPT when the taxpayer does NOT signify his desire to avail of the tax credit
for taxes of foreign countries, in which case the amount may be allowed as a
deduction subject to the limitations set forth by law. (Note that a taxpayer
qualified to take tax credits for foreign income taxes paid or incurred may
alternatively claim them as deductions from gross income.)
Estate and donors taxes
Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed (Special Assessments)
Value Added Tax
Special Treatment of Foreign Income Tax A taxpayer qualified to take tax credits for
foreign income taxes paid or incurred may alternatively claim them as deductions from gross
income.
What is tax credit? A credit for foreign income tax paid or incurred reduces the
Philippine income tax that should be paid. Tax credit is given to a taxpayer in order to
provide relief from too onerous a burden of taxation in case where the same income is
subject to foreign income tax and the Philippine income tax. In determining the tax
credit that may be allowed a taxpayer, the foreign income tax should be understood to
mean tax proper only, and no credit shall be taken for any amount paid or incurred to
the foreign country which represents interest, surcharge or penalty incident to
delinquency on the payment of the tax. In taking a tax credit:
What are the substantiation requirements? The tax credits shall be allowed only
if the taxpayer establishes to the satisfaction of the Commissioner the following:
1. The total amount of income derived from sources without the Philippines;
2. The amount of income derived from each country, the tax paid or incurred to
which is claimed as a credit under said paragraph, such amount to be
18
Amounts are subject to the limitations (per country and overall) set forth by law.
What amount may be taken as a tax credit? The amount of tax credit allowed is
equivalent to the tax paid or incurred to a foreign country during the taxable year but
not to exceed the following limits:
1. [Per Country Limit] The amount of tax credit shall not exceed the same
proportion of the tax against which such credit is taken, which the taxpayer's
taxable income from sources within such country bears to his entire taxable
income for the same taxable year; and
2. [Worldwide Limit] The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken, which the taxpayer's
taxable income from sources without the Philippines taxable bears to his entire
taxable income for the same taxable year.
i.e.,
1. Taxable Income per Foreign Country x Philippine income tax =
limit
Worldwide Taxable Income
NOTE: The second limitation applies where the taxpayer derives income
from more than one foreign country.
ILLUSTRATION:
D Co., a domestic corporation, had the following data for a year on taxable income and
income taxes paid:
Taxable Income, Country A P200,000
Taxable Income, Country B P100,000
Taxable Income, Philippines P700,000
Income Tax Paid Country A P 60,000
Income Tax Paid Country B P 38,000
What is the Philippine income tax still due, after credit for foreign income taxes? Should D
Co. choose to treat income taxes paid to foreign countries as deductions from gross income,
what is its Philippine income tax?
Answer:
Scenario A: Tax Credit option is chosen.
Step 1: Compute for total taxable income and Philippine income tax.
Taxable Income, Country A P200,000
Taxable Income, Country B 100,000
Taxable Income, Philippines 700,000
Total Taxable Income from sources
within and without the Philippines P1,000,000
Taxable income from foreign country x Phil. income tax = Tax credit
The result after applying the formula above is compared to the tax actually paid for
each foreign country. The lower of the two amounts for each foreign country will be
added to get the total tax credit allowed under Limitation A.
Amount Allowed
(Whichever is Lower)
Country A
Limitation A (200/1000 x 350,000) P 70,000 P 60,000
Actually paid to Country A 60,000
Taxable income from sources outside the Phils. x Phil. income tax = Tax
credit
Taxable income from all sources
The result after applying the formula above is compared to the tax actually paid in
total to foreign countries. The lower of the two amounts will be added to get the
total tax credit allowed under Limitation B.
Amount Allowed
(Whichever is Lower)
Overall Limit: 300/1000 x 350,000 P 105,000
Total foreign income taxes paid 98,000
Tax credit allowed under Limitation P 98,000
B
Step 4: Compare the respective tax credits allowed under Limitation A and Limitation B. The
lower of the two amounts is the final allowable tax credit. In this case, the amount computed
under Limitation A (P95,000) is lower, thus it becomes the final allowable tax credit.
Extent of Losses Allowable: The entire amount of the loss, as the case may be, shall be
recognized.
Other Types of Losses Recognized by the Tax Code (and Corresponding Treatment)
Shrinkage in Value of Stocks A person possessing stock of a corporation cannot deduct
from gross income any amount claimed as a loss merely on account of shrinkage in value
of such stock through fluctuation of the market or otherwise. The loss allowable in such
case is that actually suffered when the stock is disposed of. If stock of a corporation
becomes worthless, its cost or other basis determined in accordance with Revenue
Regulation 2-98 may be deducted by the owner in the taxable year in which the stock
became worthless, provided a satisfactory showing of its worthlessness be made, as in
the case of bad debts.
Wagering Losses Wagering losses are deductible only to the extent of wagering gains.
Therefore, if there are no wagering gains, wagering loss cannot be deducted. [Wagering
gains and losses gains and losses from transactions where the outcome depends upon
chance.]
Loss from Wash Sales of Stocks or Securities [Sec. 38] A loss from a wash sale of
stock or securities is [generally] not deductible from gross income. A wash sale is a sale
under the following circumstances:
1. There was a sale of stock or securities at a loss.
Acquisition occurred 30 days prior to the sale OR 30 days after the sale
EITHER:
INCOME TAX RULE: On the shares sold at a loss with covering acquisitions, NO
LOSS shall be recognized. On the shares sold at a loss with no covering acquisitions,
CAPITAL LOSS shall be recognized (See XIII. Capital Gains and Losses, for the
income tax treatment). The loss not recognized shall be adjusted into (i.e., added
to) the basis of the shares acquired within the sixty-one day period.
ILLUSTRATION:
S Co., not a dealer in securities, on December 27, 2000, sold for P90,000, 1,000
shares of common stock of ZZ Company, that it acquired on January 20, 2000 for
P110,000. On January 5, 2001, or nine days after the sale, it acquired 900 shares of
common stock of the same company for P90,000. On June 10, 2001, the latest
acquisition was sold for P120,000.
SUPPORTING SOLUTION:
a. Determine if the sale is a wash sale YES, there is a wash sale because nine
days after the December 27, 2000 sale (or within the sixty-one day period), S.
Co. (which is not a dealer in securities) acquired shares of stock which were the
same as those disposed of.
ILLUSTRATION:
Y Co. was merged into Z Co. Y Co. transferred its properties with a book value of
P2,000,000 to Z Co., for which it received shares of stock of Z Co. with a fair market
value of P1,800,000. Mr. AA was a stockholder of Y Co., and he was asked to surrender
his shares in Y Co. (which he acquired at a cost of P200,000) to the company (Y Co.),
and received in return for the shares surrendered, shares of stock of Z Co. with a fair
market value of P180,000. The merger had the following tax consequences:
To Y Co.:
Fair Market Value of shares of Z Co. received P1,800,000
Less: Book Value of properties transferred 2,000,000
Loss not recognized P 200,000
To Mr. AA:
Fair Market Value of Z Co. shares received P180,000
Less: Cost of Y Co. shares surrendered 200,000
Loss not recognized P 20,000
ILLUSTRATION:
BB Co. was merged into CC Co. Mr. DD is a stockholder of BB Co. Mr. DD was asked to
surrender his shares of stock of BB Co. (acquired by him for P100,000) to that
corporation, and in exchange, he received shares of stock of CC Co. with a fair market
value of P110,000, plus cash of P20,000. One month after the merger, Mr. DD sold his
CC Co. shares for P120,000.
SUPPORTING SOLUTION:
a. Computation of the gain of Mr. DD from the merger
FMV of the CC Co. shares received P110,000
Add: Cash received 20,000
Total Consideration received P130,000
Less: Cost of BB shares surrendered 100,000
Indicated Gain P 30,000
19
No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation -
(a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation,
which is a party to the merger or consolidation; [property for stock] or
(b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the
stock of another corporation also a party to the merger or consolidation; [stock for stock ] or
(c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in
such corporation, solely for stock or securities in such corporation, a party to the merger or consolidation. [securities
for securities]
ILLUSTRATION:
Mr. EE transferred property to FF Co., as a result of which transfer Mr. EE acquired
control of FF Co. The property transferred had a basis to Mr. EE of P500,000, and as
consideration, he received shares of stock of FF Co. with a fair market value of
P490,000. The consequence of the transaction was:
FMV of the shares of FF Co. received P490,000
Less: Basis of the property transferred 500,000
Loss not recognized P 10,000
Suppose the transfer resulted in a GAIN to the transferor, will the gain be recognized?
Gain will be recognized only if on the transfer, the taxpayer received cash or property in
addition to the shares received. The gain to recognize shall not exceed the sum of
money and fair market value of the property received.
ILLUSTRATION:
Mr. GG transferred property to HH Co., as a result of which transfer, Mr. GG acquired
control of the company. The property transferred had a basis to Mr. GG of P500,000, and
as consideration, he received shares of stock of HH Co. with a fair market value of
P550,000 plus cash of P40,000. One month after the transfer, Mr. GG sold the HH Co.
shares for P560,000.
SUPPORTING SOLUTION:
a. Computation of the gain on the transfer
FMV of the HH Co. shares received P550,000
Add: Cash received 40,000
Total Consideration received P590,000
Less: Basis of the property transferred 500,000
Indicated Gain P 90,000
20
Previous to the transfer there was no control, and it was the transfer that resulted in control.
Abandonment Losses
- In the event a contract area where petroleum operations are undertaken is
partially or wholly abandoned, ALL accumulated exploration and
development expenditures pertaining thereto shall be allowed as a
deduction:
o Provided, That accumulated expenditures incurred in that area prior
to January 1, 1979 shall be allowed as a deduction only from any
income derived from the same contract area.
o In all cases, notices of abandonment shall be filed with the
Commissioner.
- In case a producing well is subsequently abandoned, the unamortized costs
thereof, as well as the undepreciated costs of equipment directly used
therein, shall be allowed as a deduction in the year such well, equipment or
facility is abandoned by the contractor:
o Provided, That if such abandoned well is reentered and production is
resumed, or if such equipment or facility is restored into service, the
said costs shall be included as part of gross income in the year
of resumption or restoration and shall be amortized or depreciated,
as the case may be.
Net Operating Loss Carry-Over (NOLCO) [Sec. 34(D)] The net operating loss21 of the
business for any taxable year immediately preceding the current taxable year, which had
not been previously offset as deduction from gross income shall be carried over as a
deduction from gross income for the next three (3) consecutive taxable years22
immediately following the year of such loss.
- REQUISITES for application of NOLCO:
1. Any net loss incurred in a taxable year during which the taxpayer was
exempt from income tax shall not be allowed as a deduction
2. A net operating loss carry-over (NOLCO) shall be allowed only if there
has been no substantial change in the ownership of the business or
enterprise.
There is no substantial change when:
1. not less than 75% in nominal value of outstanding
issued shares, if the business is in the name of the
corporation, is held by or on behalf of the same
persons; or
2. not less than 75% of the paid up capital of the
corporation, if the business is in the name of the
corporation, is held by or on behalf of the same
persons.
21
Net operating loss is the excess of allowable deductions over gross income (as defined in Sec. 32(A) of the NIRC).
22
Exception to the Three-Year Rule For mines other than oil and gas wells, a net operating loss without the benefit of
incentives provided for under the Omnibus Investments Code of 1987, incurred in any of the first ten (10) years of operation
may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss.
The entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss, and any portion of
such loss which exceeds, the taxable income of such first year shall be deducted in like manner form the taxable income of the
next remaining four (4) years.
ILLUSTRATION OF NOLCO:
Less: NOLCO
From 2000
(100,000) (80,000)
From 2002 (50,000)
* - whichever is applicable
Explanation:
- The unused net operating loss of P220,000 (400,000 100,000 80,000) of
the year 2000 could not be carried over beyond 2003. The net operating loss of
2002 could be carried over to 2004, since it is within the three-year period.
- Q: As of yearend of 2004, what amount of NOLCO is available to the company
for offsetting against (potential) gross income of succeeding taxable years?
Answer: None. While there was an unused portion of the 2000 NOLCO, such
had already expired by yearend of 2003. The 2002 NOLCO (P50,000) was
completely used up in 2004. There is, therefore, no NOLCO available to the
company for year 2005 and thereafter.
Deduction Allowed: Debts due to the taxpayer actually ascertained to be worthless and charged
off within the taxable year
Good faith is not enough. There are two requisites before a taxpayer may
charge off and deduct a debt. He must ascertain the debt to be worthless in the
year for which the deduction is sought, and that in doing so, he acted in good
faith. However, good faith on the part of the taxpayer is not enough. He must
show also that he had reasonably investigated the relevant facts and had
drawn a reasonable inference from the information thus obtained by him.
Where a taxpayer has failed to attach to his tax returns a statement showing the
propriety of the deductions therein made for alleged bad debts, the account
written off will be disallowed. (Collector v. Goodrich International Rubber Co., 21
SCRA 1336)
- What does good faith require? Good faith does not require that
the taxpayer be an "incorrigible optimist" but on the other hand, he
may not be unduly pessimistic. Creditors do not have to wait until
some turn of the wheel of fortune may bring their debtors into
affluence. The taxpayer may strike a middle course between pessimism
and optimism and determine debts to be worthless in the exercise of
sound business judgment based upon as complete information
as is reasonably ascertainable. The taxpayer need not have perfect
discernment. (Sec. 2, RR 5-99 as amended by RR 25-02)
NOTE: The debts due a taxpayer may arise out of securities held. BUT in a case where
securities are ascertained to be worthless and charged off within the taxable year, and are
capital assets, the loss to the taxpayer (other than a bank or trust company incorporated under
the laws of the Philippines a substantial part of whose business is the receipt of deposits) will
not be treated as bad debts, but as capital loss on the last day of the taxable year
23
1. Between members of a family.
- The family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse,
ancestors, and lineal descendants.
2. Between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned,
directly or indirectly, by or for such individual; or
3. Between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or
indirectly, by or for the same individual;
4. Between the grantor and a fiduciary of any trust;
5. Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust;
6. Between a fiduciary of a trust and beneficiary of such trust.
Recovery of Bad Debts Previously Deducted (Tax Benefit Rule) The recovery of bad
debts previously allowed as deduction in the preceding year or years shall be included as part
of the taxpayer's gross income in the year of such recovery to the extent of the income tax
benefit of said deduction.
Example: If in the year the taxpayer claimed deduction of bad debts written-off, he
realized a reduction of the income tax due from him on account of the said deduction, his
subsequent recovery thereof from his debtor shall be treated as a receipt of realized
taxable income. Conversely, if the said taxpayer did not benefit from the deduction of
the said bad debt written-off because it did not result to any reduction of his income tax
in the year of such deduction (i.e. where the result of his business operation was a net
loss even without deduction of the bad debts written-off), then his subsequent recovery
thereof shall be treated as a mere recovery or a return of capital, hence, not treated as
receipt of realized taxable income.
Who may take depreciation: The person who sustains an economic loss from the decrease in
property value due to depreciation gets the deduction. Ordinarily, this is the person who owns
and has a capital investment in the property.
24
ILLUSTRATION: Mr. A purchased bonds of B Co. on March 10, 2000 for P100,000 and held them as capital assets. On
February 2, 2001, B Co. was declared by the Court as insolvent, and the bonds were totally worthless. Mr. A wrote off the
bonds from his books of accounts on February 4, 2001. There is no bad debt for Mr. A. He would be considered to have a
capital loss of P100,000 for the year 2001. The holding period of the bonds was from March 10, 2000 to December 31 2001, or
more than 12 months. The capital loss would be considered at 50%, or at P50,000. (See XIII. Capital Gains and Losses for the
detailed explanation on income tax treatment of capital asset transactions.)
When to deduct depreciation: The period of depreciation starts when the asset is placed in
service. It ends when the asset is disposed of, or its usefulness exhausted.
What is the appropriate useful life of the property? What rate of depreciation must be applied?
Generally, the estimated useful life is determined by the taxpayer himself.
HOWEVER, where the taxpayer and the Commissioner have entered into an agreement
in writing specifically dealing with the useful life and rate of depreciation of any property,
the rate so agreed upon shall be binding on both the taxpayer and the national
Government in the absence of facts and circumstances not taken into consideration
during the adoption of such agreement.
The responsibility of establishing the existence of such facts and circumstances
shall rest with the party initiating the modification.
General Rule: Any change in the agreed rate and useful life of the depreciable
property as specified in the agreement shall not be effective for taxable years
prior to the taxable year in which notice in writing by certified mail or registered
mail is served by the party initiating such change to the other party to the
agreement.
Exception: Where the taxpayer has adopted such useful life and depreciation rate
for any depreciable property and claimed the depreciation expenses as deduction
from his gross income, without any written objection on the part of the
Commissioner or his duly authorized representatives, the aforesaid useful life and
depreciation rate so adopted by the taxpayer for the depreciable asset.
Alternative Method:
Depreciation Rate= 1 _
Estimated Useful Life of the Property
ILLUSTRATION:
H Co. acquired a machine at a cost of P380,000. It had no scrap (or salvage) value,
and the useful life was estimated at 25 years. The depreciation expense per year is
P15,000, computed as follows:
Depreciation Expense = [(380,000 0) / 25] [OR]
= (1/25) x (380,000 0)
2. Declining-balance method, using a rate not exceeding twice the rate for straight line
method
Under this method, the depreciation allowance per year varies. Depreciation is largest in
the first year and continually decreases towards the end of the useful life of the property.
The depreciation rate under the straight-line method is first computed, and the result is
multiplied with the rate relative to the straight-line method rate. The product (the
declining balance rate) is then multiplied to the yearly declining balance of the property
(i.e., book value of the property at the start of the current year, which is equal to its
original cost minus its accumulated depreciation) to determine the deduction for
depreciation for the current year. However, in the last year of the assets estimated life,
Step 1: Compute for the depreciation rate under the straight-line method.
Straight Line Depreciation Rate = 1/Estimated Useful Life
= , or 25%
Step 3: Apply the Declining Balance Rate to the book value of the property
at the start of the current year.
Year 2002:
Book value of the property *** P400,000
Multiplied by: DBR 37.5%
Deduction for Depreciation P150,000
*** Since this is the year of the acquisition, the book value of the
property at the start of the year is equal to its original cost.
Year 2003:
Original Cost P400,000
Less: Accumulated Depreciation 150,000
Book Value of the Property, start P 250,000
of current year
Multiplied by: DBR 37.5%
Deduction for Depreciation P 93,750
Year 2004:
Original Cost P400,000
Less: Accumulated Depreciation
Year 2002 P150,000
Year 2003 P93,750 243,750
Book Value of the Property, start P 156,250
of current year
Multiplied by: DBR 37.5%
Deduction for Depreciation P
58,593.75
Year 2005:
Original Cost P400,000
Less: Accumulated Depreciation
Year 2002 P150,000
Year 2003 P93,750
Year 2004 P58,593.75
302,343.75
Book Value of the Property, start
of current year P 97,656.25
3. Sum-of-the-years-digit method
Under this method, the annual depreciation is computed by applying a changing fraction
to the depreciable cost of the property (original cost reduced by the salvage value). In
the fraction, the numerator is the number of remaining years of the estimated useful life
Step 1: Compute for the sum of the numbers representing the years of the
propertys life.
The property has an estimated useful life of 5 years. The sum, therefore, is 15 (5 +
4 + 3 + 2 + 1). This sum will be used as the denominator in the fraction.
Step 3: Compute for the yearly deduction for depreciation (Column D).
A B C D
(= A / (= B x C)
15)
Year Remaining Useful Life Resulting Depreciable Cost Deduction for
(Reckoning Point: Fraction Depreciation
Start of the Year)
2001 5 5/15 P105,000 P35,000
2002 4 4/15 P105,000 P28,000
2003 3 3/15 P105,000 P21,000
2004 2 2/15 P105,000 P14,000
2005 1 1/15 P105,000 P7,000
4. Any other method which may be prescribed by the Secretary of Finance upon
recommendation of the Commissioner
Special Rules:
Depreciation of Properties Used in Petroleum Operations
An allowance for depreciation in respect of all properties DIRECTLY related to
production of petroleum shall be allowed under the straight-line or declining-
balance method of depreciation at the option of the service contractor.
However, if the service contractor initially elects the declining-balance method,
it may shift to the straight-line method. The useful life of properties used in or
related to production of petroleum shall be ten (10) years or such shorter life as
may be permitted by the Commissioner.
Properties NOT USED DIRECTLY in the production of petroleum shall be
depreciated under the straight-line method on the basis of an estimated useful
life of 5 years.
Depreciation of Properties Used in Mining Operations An allowance for depreciation in
respect of all properties used in mining operations other than petroleum operations, shall
be computed as follows:
At the normal rate of depreciation if the expected life is ten (10) years or less;
or
Depreciated over any number of years between five (5) years and the expected
life if the latter is more than ten (10) years, and the depreciation thereon
allowed as deduction from taxable income: Provided, That the contractor
notifies the Commissioner at the beginning of the depreciation period which
depreciation rate allowed will be used.
Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business (NRAETB)
or Resident Foreign Corporations (RFC) - A reasonable allowance for the deterioration of
property arising out of its use or employment or its non-use in the business, trade or
profession shall be permitted only when such property is located in the Philippines.
Deduction Allowable: A reasonable allowance for depletion computed using the cost-depletion
method shall be granted provided that the allowance for depletion shall not exceed the capital
invested.
ILLUSTRATION:
Land containing natural resources was purchased for P100,900,000. It was estimated that
the land, after exploitation of its natural resources, will have a value of P900,000. It was
Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien individual Engaged
in Trade or Business or a Resident Foreign Corporation Allowance for depletion of oil and gas
wells or mines shall be authorized only in respect to oil and gas wells or mines located within
the Philippines.
Kinds of Contributions:
1. Contributions deductible in full
2. Contributions subject to the statutory limit
Utilization means:
i. Any amount in cash or in kind, including administrative expenses, paid or
utilized by an accredited NGO to accomplish one or more purposes for which it
was created or organized; or
ii. Any amount paid to acquire an asset used, or held for use, directly in carrying
out one or more purposes for which the accredited NGO was created or
organized; or
iii. Any amount set aside for a specific project which comes within one or more
purpose or purposes for which the accredited NGO was created, but only if at
the time such amount is set aside, the accredited NGO has established to the
satisfaction of the Commissioner of Internal Revenue that the amount will be
utilized for a specific project within a period not to exceed five (5) years, and
the project is the one which can be better accomplished by setting aside such
amount than by immediate payments of funds
iv. Any amount in cash or in kind invested in any activity related to the purpose for
which it was created or organized.
v. Any amount in cash or in kind invested in capital sustaining and generating
activities, such as but not limited to, endowment funds, trust funds, money
market placements, shares of stock and similar instruments
Provided, That, any income derived from those investments shall be
exclusively used in activities directly related to one or more purposes
for which the accredited NGO was created or organized. (Sec. 1, RR
13-1998)
ILLUSTRATION:
N Co. had a gross income from business of P1,000,000 and allowable deductions (except
deductions for contributions) of P400,000. It made during the year a contribution that is fully
deductible of P10,000 and contributions subject to limitation of P50,000. Compute for the total
deduction for contributions and the taxable income of the company.
ANSWER: The total deduction for contributions is P40,000, and the taxable income is P560,000.
SUPPORTING SOLUTION:
Tax Treatment: R&D expenditures which are paid or incurred by a taxpayer during the taxable
year in connection with his trade, business or profession may be treated EITHER as:
1. Ordinary and necessary expenses allowed as deduction during the taxable year when
paid or incurred (i.e., as an outright deduction for the full expenditure), or
2. Deferred asset (or deferred expense) which is periodically subject to amortization
At the election of the taxpayer, the following R&D expenditures may be treated
as deferred assets:
1. Those paid or incurred by the taxpayer in connection with his trade,
business or profession.
2. Those not treated as expenses.
3. Those chargeable to capital account but not chargeable to depreciable
property.
In computing taxable income, such deferred expenses shall be allowed as
deduction ratably distributed over a period of not less than sixty (60) months as
may be elected by the taxpayer (beginning with the month in which the
taxpayer first realizes benefits from such expenditures).
The taxpayer may elect this alternative not later than the time prescribed by
law for filing the return for such taxable year (April 15). The method so elected,
and the period selected by the taxpayer, shall be adhered to in computing
taxable income for the taxable year for which the election is made and for all
Limitations on Deduction: The above tax treatment of R&D expenses does NOT apply to:
1. Any expenditure for the acquisition or improvement of land or the improvement of
depreciable property, used in connection with research and development.
2. Any expenditure incurred in ascertaining the existence, location, extent, or quality of any
deposit of ore or other mineral, including oil or gas.
NOTE: Cost of acquisition or improvements of property subject to depreciation or
depletion used in research and development becomes part of the cost of the asset, and
deduction from it is by way of depreciation or depletion, as the case may be.
ILLUSTRATION:
Q Co., a manufacturer of food seasoning, is continuously conducting research and
development on its product lines. In early January 2004, it completed the extension and
improvement of its research and development building at a cost of P1,000,000. The
extension has an estimated useful life of 25 years. The company also incurred an aggregate
of P1,800,000 for other research and development costs. Determine the tax treatment of the
various expenditures.
ANSWER:
The P1,000,000 cost of expansion of the building cannot be deducted as research and
development costs in 2004. However, depreciation of P40,000 may be recognized
yearly for 25 years (P1,000,000 / 25 years).
The other costs of P1,800,000 may be either:
a. An outright deduction from gross income for P1,800,000 in 2004; [OR]
b. A deferred expense of P1,800,000, from which there shall be a monthly
deduction of P1,800,000 divided by 60 months (cannot be shorter, but
can be longer), or P30,000 per month, beginning with the first month
from which benefits were acquired from the expenditure. The
aggregate of monthly deductions for a given taxable year is then
deductible from that years gross income.
Background Concepts: The rules in the law on deduction for pension payments to employees
apply to a pension plan that is funded. An employer does not provide for pension for his
employees in his initial years of operations. A pension plan is usually set up after some years of
operations have gone by, when the employer is already financially capable of providing benefits
to his employees. Since the benefits from any pension plan consider the length of service of the
employee, the plan should consider the services of the employees who were already with the
employer even before the plan was set up. Such past services will require a lump sum payment
to the pension fund; this is called past-service cost. For each year after the pension plan
was set up, there should be payment to the fund for pension for the services rendered during
the year by the employees. This is called present service cost.
Present service cost deductible in full in the year transferred or paid into the trust;
covered by Sec. 34(A)(1) [Ordinary and Necessary Expenses]
Past-service cost amount so transferred is apportioned and deductible in equal parts
over a period of ten (10) consecutive years beginning with the year in which the transfer
or payment is made; covered by Sec. 34(J) [Pension Trusts]
ILLUSTRATION:
F Co. established a pension trust in 2001, transferring thereto a lump sum payment of
P500,000 to cover past services rendered by its employees. Additionally, the terms of the
Mutual Insurance Companies. - In the case of mutual fire and mutual employers' liability and
mutual workmen's compensation and mutual casualty insurance companies requiring their
members to make premium deposits to provide for losses and expenses, said companies shall
not return as income any portion of the premium deposits returned to their policyholders, but
shall return as taxable income all income received by them from all other sources plus such
portion of the premium deposits as are retained by the companies for purposes other than the
payment of losses and expenses and reinsurance reserves.
Mutual Marine Insurance Companies. - Mutual marine insurance companies shall include in their
return of gross income, gross premiums collected and received by them less amounts paid to
policyholders on account of premiums previously paid by them and interest paid upon those
amounts between the ascertainment and payment thereof.
P. Allocation of Income and Deductions [Sec. 50] - In the case of two or more organizations, trades
or businesses (whether or not incorporated and whether or not organized in the Philippines) owned
and controlled directly or indirectly by the same interests, the Commissioner is authorized to
distribute, apportion or allocate gross income or deductions between or among such organization,
trade or business, if he determines that such distribution, apportionment or allocation is necessary in
order: (a) to prevent evasion of taxes; or (b) to clearly reflect the income of any such organizations,
trades or businesses.
ILLUSTRATION:
CASE 1 CASE 2
Officer, employee, or person Officer, employee, or person
Insured financially interested in the financially interested in the
taxpayers trade or business taxpayers trade or business
Beneficiary of
Officer, employee, or person
Life
Company financially interested in the
Insurance
taxpayers trade or business
Policy
Premium a YES (Premium is likewise a
deductible NO (covered by Sec. 36) fringe benefit on the part of
expense? the beneficiary.)
25
A transaction in which a speculator sells securities which he does not own in anticipation of a decline in its price. The seller intends to
cover the sale by purchasing the securities when the price declines, in which case he will make a profit.
Net taxable capital gains = Gains of sales of capital assets, or 50% thereof
Losses from sales of capital assets, or 50% thereof
Net Capital Loss Carry-over: If an individual taxpayer sustains a net capital loss in a
taxable year, such loss (in an amount not in excess of the net income26 for such year) shall be
treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset
held for not more than 12 months (100% deduction).
ILLUSTRATIONS:
Mr. N, a citizen of the Philippines, married, had the following data for 2001 and 2002:
2001 2002
Net Income, Profession P 90,000 P 78,000
Interest Income from notes of clients 2,000 4,000
Capital Gain on assets:
Painting, held for 10 months 30,000
Jewelry, held for 2 years 40,000
Capital Loss on bonds, held for 3 years 70,000 -
Mr. Ns taxable income for 2001 was P60,000, and for 2002 was P65,000, computed as follows:
2001 2002
Net Income, Profession P 90,000 P 78,000
Interest Income 2,000 4,000
Ordinary Net Income P92,000 P82,000
Capital Gain (100%) P30,000
Capital Gain (50%) P20,000
Capital Loss (50%) (35,000)
Net Capital Loss (P 5,000)
Legend:
To determine the maximum that may be carried over to the next year: Taxable Income
26
Net Income should be understood as taxable income (Executive Order No. 37)
>
Net Capital Loss Carry-Over from the previous year
>
Mr. O, a citizen of the Philippines, single, had the following data for 2001 and 2002:
2001 2002
Net Income, Business P 80,000 P 90,000
Interest Income from notes of clients 4,000 2,000
Capital Gain on assets:
Shares of foreign corporations, 50,000
held for 3 years
Jewelry, held for 10 months 70,000
Capital Loss on bonds, held for 4 months 120,000 -
Mr. Os taxable income for 2001 was P64,000, and for 2002 was P78,000, computed as follows:
2001 2002
Net Income, Business P 80,000 P 90,000
Interest Income 4,000 2,000
Ordinary Net Income P84,000 P92,000
Capital Gain (50%) P25,000
Capital Gain (100%) P70,000
Capital Loss (100%) (120,000)
Net Capital Loss (P95,000)
Legend:
> To determine the maximum that may be carried over to the next year: Taxable Income
Net Capital Loss Carry-Over from the previous year
>
P Co., a domestic corporation, had the following results of operations for a taxable year:
The taxable income of the corporation for the year is computed as follows***:
*** For corporations, capital gains and losses are always considered at 100%, and there is no
net capital loss carry-over.
SUMMARY OF RULES
For Corporations:
3. Losses from sales or exchanges of capital assets shall be allowed only to the extent of the
gains from such sales or exchanges.
D. Taxable Income From Sources Without the Philippines. - Deduct from the gross income from
sources without the Philippines the expenses, losses, and other deductions properly apportioned or
allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be
allocated to some items or classes of gross income. The remainder, if any, shall be treated in full as
taxable income from sources without the Philippines.
E. Income From Sources Partly Within and Partly Without the Philippines.-
a. Allocated or apportioned to sources within or without the Philippines, under the rules and
regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner. Where items of gross income are separately allocated to sources within the
Philippines, there shall be deducted (for the purpose of computing the taxable income
therefrom) the expenses, losses and other deductions properly apportioned or allocated
b. thereto and a ratable part of other expenses, losses or other deductions which cannot
definitely be allocated to some items or classes of gross income. The remainder, if any, shall
be included in full as taxable income from sources within the Philippines. In the case of gross
income derived from sources partly within and partly without the Philippines, the taxable
income may first be computed by deducting the expenses, losses or other deductions
apportioned or allocated thereto and a ratable part of any expense, loss or other deduction
which cannot definitely be allocated to some items or classes of gross income; and the
portion of such taxable income attributable to sources within the Philippines may be
determined by processes or formulas of general apportionment prescribed by the Secretary
of Finance. Gains, profits and income from the sale of personal property produced (in whole
or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or
in part) by the taxpayer without and sold within the Philippines, shall be treated as derived
partly from sources within and partly from sources without the Philippines.
F. Gains, profits and income derived from the purchase of personal property within and its sale without
the Philippines, or from the purchase of personal property without and its sale within the Philippines
shall be treated as derived entirely form sources within the country in which sold: Provided, however,
That gain from the sale of shares of stock in a domestic corporation shall be treated as derived
entirely form sources within the Philippines regardless of where the said shares are sold.
a. The transfer by a nonresident alien or a foreign corporation to anyone of any share of stock
issued by a domestic corporation shall not be effected or made in its book unless:
the transferor has filed with the Commissioner a bond conditioned upon the future
payment by him of any income tax that may be due on the gains derived from
such transfer, or
the Commissioner has certified that the taxes, if any, imposed in this Title and due
on the gain realized from such sale or transfer have been paid. It shall be the duty
of the transferor and the corporation the shares of which are sold or transferred,
to advise the transferee of this requirement.
A. Sales of Dealers in Personal Property A person who regularly sell or otherwise disposes of
personal property on the installment plan may return as income therefrom in any taxable year that
proportion of the installment payments actually received that year, which gross profit realized or to be
realized when payment is complete of the total contract price.
FORMULA:
C. Sales of Real Property Considered as Capital Asset by Individuals An individual who sells or
disposes of real property considered as capital asset; and is otherwise qualified to report the gain
therefrom under Subsection (B) may pay the capital gains tax in installments.
SPECIAL RULES:
1. Husband and Wife Married individuals, whether citizens, resident or
nonresident aliens, who do not derive income purely from compensation, shall
file a return for the taxable year to include the income of both spouses, but
where it is impracticable for the spouses to file one return, each spouse may
3. Persons Under Disability If the taxpayer is unable to make his own return,
the return may be made by his duly authorized agent or representative or
by the guardian or other person charged with the care of his person or
property, the principal and his representative or guardian assuming the
responsibility of making the return and incurring penalties provided for
erroneous, false or fraudulent returns.
c. Where to file
Except in cases where the Commissioner otherwise permits, the return shall be filed:
If person has legal residence or place of business in the Philippines with an
authorized agent bank, Revenue District Officer, Collection Agent or duly
authorized Treasurer of the city or municipality in which such person has his
legal residence or principal place of business in the Philippines
If there be no legal residence or place of business in the Philippines with the
Office of the Commissioner.
d. When to file - The return of any individual specified above shall be filed on or
before the fifteenth (15th) day of April of each year covering income for the
preceding taxable year.
When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer other
than a corporation may elect to pay the tax in two (2) equal installments in which
case:
1. the first installment shall be paid at the time the return is filed and
2. the second installment, on or before July 15 following the close of the calendar
year
3. If any installment is not paid on or before the date fixed for its payment, the
whole amount of the tax unpaid becomes due and payable, together with the
delinquency penalties.
PAYMENT
The total amount of tax imposed and prescribed shall be paid on the date the return
prescribed is filed by the person liable
o That if the seller submits proof of his intention to avail himself of the benefit of
exemption of capital gains under existing special laws, no such payments shall
be required
o That in case of failure to qualify for exemption under such special laws and
implementing rules and regulations, the tax due on the gains realized from the
original transaction shall immediately become due and payable
Estimated tax means the amount which the individual declared as income tax in
his final adjusted and annual income tax return for the preceding taxable year minus
the sum of the credits allowed under this Title against the said tax. If, during the
current taxable year, the taxpayer reasonable expects to pay a bigger income tax,
he shall file an amended declaration during any interval of installment payment
dates.
The Certificate of Compensation Payment/Tax Withheld (BIR Form No. 2316) shall
contain a certification to the effect that the employers filing of BIR Form No. 1604-
CF shall be considered as a substituted filing of the employees income tax
return to the extent that the amount of compensation and tax withheld appearing
in BIR Form No. 1604-CF as filed with BIR is consistent with the corresponding
amounts indicated in BIR Form No. 2316. It shall be signed by both the employee
and employer attesting to the fact that the information stated therein has been
verified and is true and correct to the best of their knowledge. However, the
withholding agents/employers are required to retain copies of the duly signed BIR
Form No. 2316 for a period of three (3) years as required under the National
Internal Revenue Code.
The following checks are, however, not acceptable as check payments for internal
revenue taxes:
1. Accommodation checks checks issued or drawn by a party other than the
taxpayer making the payment;
2. Second endorsed checks checks issued to the taxpayer as payee who
indorses the same as payment for taxes;
3. Stale checks checks dated more than six (6) months prior to presentation to
the authorized agent bank;
4. Postdated checks checks dated a day or several days after the date of
presentation to the authorized agent bank;
5. Unsigned checks checks with no signature of the drawer;
6. Checks with alterations/erasures.
AABs accepting checks for the payment of BIR taxes and other charges must see to
it that the check covers one tax type for one return period only. Moreover, AABs
must strictly comply with the systems and procedures for the reception, processing,
clearing and accounting of the checks to be prescribed under a separate regulation.
Second indorsement of checks which are payable to the Bureau of Internal Revenue
or Commissioner of Internal Revenue is absolutely prohibited.
In case the corporation is entitled to a tax credit or refund of the excess estimated
quarterly income taxes paid, the excess amount shown on its final adjustment
return may be carried over and credited against the estimated quarterly income tax
liabilities for the taxable quarters of the succeeding taxable years. Once the option
to carry-over and apply the excess quarterly income tax against income tax due for
the taxable quarters of the succeeding taxable years has been made, such option
shall be considered irrevocable for that taxable period and no application for
cash refund or issuance of a tax credit certificate shall be allowed.
The final adjustment return shall be filed on or before the fifteenth (15th) day
of April, or on or before the fifteenth (15th) day of the fourth (4th) month following
the close of the fiscal year, as the case may be.
B. WITHHOLDING TAX
1. Final Withholding Tax at Source
Sec. 57. NIRC
Subject to rules and regulations the Secretary of Finance may promulgate, upon the
recommendation of the Commissioner, requiring the filing of income tax return by certain
income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C),
24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3),
27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2),
28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of the NIRC on
specified items of income shall be withheld by payor-corporation and/or person and paid in
the same manner and subject to the same conditions as provided in Section 58 of the NIRC.
Withholding of Creditable Tax at Source. - The Secretary of Finance may, upon the
recommendation of the Commissioner, require the withholding of a tax on the items of
income payable to natural or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less than one percent (1%) but
not more than thirty-two percent (32%) thereof, which shall be credited against the income
tax liability of the taxpayer for the taxable year.
Tax-free Covenant Bonds. In any case where bonds, mortgages, deeds of trust or other
similar obligations of domestic or resident foreign corporations, contain a contract or
provisions by which the obligor agrees to pay any portion of the tax imposed in this Title
upon the obligee or to reimburse the obligee for any portion of the tax or to pay the interest
without deduction for any tax which the obligor may be required or permitted to pay thereon
or to retain therefrom under any law of the Philippines, or any state or country, the obligor
shall deduct bonds, mortgages, deeds of trust or other obligations, whether the interest or
other payments are payable annually or at shorter or longer periods, and whether the bonds,
securities or obligations had been or will be issued or marketed, and the interest or other
payment thereon paid, within or without the Philippines, if the interest or other payment is
payable to a nonresident alien or to a citizen or resident of the Philippines.
The income recipient is still required to file an income tax return, to report the income and/or
pay the difference between the tax withheld and the tax due on the income.
RR 12-2001
The amounts subject to withholding tax under this paragraph shall include not only
fees, but also per diems, allowances and any other form of income payments not
If an individual recipient receives talent fees in addition to salaries from the same payor, the
said talent fees shall be considered as supplemental compensation and, thus, be subject to
the withholding tax on compensation."
The taxes deducted and withheld by the withholding agent shall be held as a special fund in
trust for the government until paid to the collecting officers.
The return for final withholding tax shall be filed and the payment made within twenty-five
(25) days from the close of each calendar quarter, while the return for creditable
withholding taxes shall be filed and the payment made not later than the last day of the
month following the close of the quarter during which withholding was made:
Provided, That the Commissioner, with the approval of the Secretary of Finance, may require
these withholding agents to pay or deposit the taxes deducted or withheld at more frequent
intervals when necessary to protect the interest of the government.
Statement of Income Payments Made and Taxes Withheld. - Every withholding agent
required to deduct and withhold taxes under Section 57 shall furnish each recipient, in
respect to his or its receipts during the calendar quarter or year, a written statement showing
the income or other payments made by the withholding agent during such quarter or year,
and the amount of the tax deducted and withheld therefrom, simultaneously upon payment
at the request of the payee, but not later than the twentieth (20th) day following the
close of the quarter in the case of corporate payee, or not later than March 1 of the
following year in the case of individual payee for creditable withholding taxes. For
final withholding taxes, the statement should be given to the payee on or before
January 31 of the succeeding year.
The Commissioner may, by rules and regulations, grant to any withholding agent a
reasonable extension of time to furnish and submit the return required in this Subsection.
Income of Recipient. - Income upon which any creditable tax is required to be withheld at
source under Section 57 shall be included in the return of its recipient but the excess of the
amount of tax so withheld over the tax due on his return shall be refunded to him subject to
the provisions of Section 204; if the income tax collected at source is less than the tax due
on his return, the difference shall be paid in accordance with the provisions of Section 56.
All taxes withheld pursuant to the provisions of this Code and its implementing rules and
regulations are hereby considered trust funds and shall be maintained in a separate account
and not commingled with any other funds of the withholding agent.
C. Withholding on Wages
Sec. 78. Definitions.
Wages - The term 'wages' means all remuneration (other than fees paid to a public official) for
services performed by an employee for his employer, including the cash value of all remuneration
paid in any medium other than cash, except that such term shall not include remuneration paid:
(1) For agricultural labor paid entirely in products of the farm where the labor is performed, or
(2) For domestic service in a private home, or
(3) For casual labor not in the course of the employer's trade or business, or
(4) For services by a citizen or resident of the Philippines for a foreign government or an
international organization.
If the remuneration paid by an employer to an employee for services performed during one-half (1/2)
or more of any payroll period of not more than thirty-one (31) consecutive days constitutes wages, all
the remuneration paid by such employer to such employee for such period shall be deemed to be
wages; but if the remuneration paid by an employer to an employee for services performed during
more than one -half (1/2) of any such payroll period does not constitute wages, then none of the
remuneration paid by such employer to such employee for such period shall be deemed to be wages.
Payroll Period - a period for which payment of wages is ordinarily made to the employee by his
employer, and the term "miscellaneous payroll period" means a payroll period other than, a daily,
weekly, biweekly, semi-monthly, monthly, quarterly, semi-annual, or annual period.
Employee - any individual who is the recipient of wages and includes an officer, employee or elected
official of the Government of the Philippines or any political subdivision, agency or instrumentality
thereof. The term "employee" also includes an officer of a corporation.
Employer - means the person for whom an individual performs or performed any service, of
whatever nature, as the employee of such person, except that:
Tax Paid by Recipient - If the employer, in violation of the provisions of this Chapter, fails to deduct
and withhold the tax as required under this Chapter, and thereafter the tax against which such tax
may be credited is paid, the tax so required to be deducted and withheld shall not be collected from
the employer; but this Subsection shall in no case relieve the employer from liability for any penalty
or addition to the tax otherwise applicable in respect of such failure to deduct and withhold.
Refunds or Credits -
(1) Employer. - When there has been an overpayment of tax under this Section, refund or credit
shall be made to the employer only to the extent that the amount of such overpayment was not
deducted and withheld hereunder by the employer.
(2) Employees. -The amount deducted and withheld under this Chapter during any calendar year
shall be allowed as a credit to the recipient of such income against the tax imposed under Section
24(A) of this Title. Refunds and credits in cases of excessive withholding shall be granted under
rules and regulations promulgated by the Secretary of Finance, upon recommendation of the
Commissioner.
Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or credited
within three (3) months from the fifteenth (15th) day of April. Refunds or credits made after such
time shall earn interest at the rate of six percent (6%) per annum, starting after the lapse of the
three-month period to the date the refund of credit is made.
Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized
representative without the necessity of counter-signature by the Chairman, Commission on Audit
or the latter's duly authorized representative as an exception to the requirement prescribed by
Section 49, Chapter 8, Subtitle B, Title 1 of Book V of Executive Order No. 292, otherwise known
as the Administrative Code of 1987.
Personal Exemptions -
In General. - Unless otherwise provided by this Chapter, the personal and additional exemptions
applicable under this Chapter shall be determined in accordance with the main provisions of this Title.
Exemption Certificate. -
(a) When to File. - On or before the date of commencement of employment with an employer, the
employee shall furnish the employer with a signed withholding exemption certificate relating to
the personal and additional exemptions to which he is entitled.
(b) Change of Status. - In case of change of status of an employee as a result of which he would be
entitled to a lesser or greater amount of exemption, the employee shall, within ten (10) days
from such change, file with the employer a new withholding exemption certificate reflecting the
change.
(c) Use of Certificates. - The certificates filed hereunder shall be used by the employer in the
determination of the amount of taxes to be withheld.
(d) Failure to Furnish Certificate. - Where an employee, in violation of this Chapter, either fails or
refuses to file a withholding exemption certificate, the employer shall withhold the taxes
prescribed under the schedule for zero exemption of the withholding tax table determined
pursuant to Subsection (A) hereof.
Withholding on Basis of Average Wages - The Commissioner may, under rules and regulations
promulgated by the Secretary of Finance, authorize employers to:
(1) estimate the wages which will be paid to an employee in any quarter of the calendar year;
(2) determine the amount to be deducted and withheld upon each payment of wages to such
employee during such quarter as if the appropriate average of the wages so estimated
constituted the actual wages paid; and
Husband and Wife - When a husband and wife each are recipients of wages, whether from the same
or from different employers, taxes to be withheld shall be determined on the following bases:
(1) The husband shall be deemed the head of the family and proper claimant of the additional
exemption in respect to any dependent children, unless he explicitly waives his right in favor of
his wife in the withholding exemption certificate.
(2) Taxes shall be withheld from the wages of the wife in accordance with the schedule for zero
exemption of the withholding tax table prescribed in Subsection (D)(2)(d) hereof.
Nonresident Aliens - Wages paid to nonresident alien individuals engaged in trade or business in
the Philippines shall be subject to the provisions of this Chapter.
Year-End Adjustment - On or before the end of the calendar year but prior to the payment of the
compensation for the last payroll period, the employer shall determine the tax due from each
employee on taxable compensation income for the entire taxable year in accordance with Section
24(A). The difference between the tax due from the employee for the entire year and the sum of
taxes withheld from January to November shall either be withheld from his salary in December of the
current calendar year or refunded to the employee not later than January 25 of the succeeding year.
Employee - Where an employee fails or refuses to file the withholding exemption certificate or
willfully supplies false or inaccurate information thereunder, the tax otherwise required to be withheld
by the employer shall be collected from him including penalties or additions to the tax from the due
date of remittance until the date of payment. On the other hand, excess taxes withheld made by the
employer due to:
(1) failure or refusal to file the withholding exemption certificate; or
(2) false and inaccurate information
shall not be refunded to the employee but shall be forfeited in favor of the Government.
The return shall be filed and the payment made within twenty-five (25) days from the close of each
calendar quarter: Provided, however, That the Commissioner may, with the approval of the Secretary
of Finance, require the employers to pay or deposit the taxes deducted and withheld at more frequent
intervals, in cases where such requirement is deemed necessary to protect the interest of the
Government.
The taxes deducted and withheld by employers shall be held in a special fund in trust for the
Government until the same are paid to the said collecting officers.