Income Tax, In General

Kinds of Taxpayers
What is income tax?

Income tax is defined as a tax on all yearly profits arising from A. Individuals
property, professions, trades or offices, or as a tax on a persons 1. Citizens
income, emoluments, profits and the like. It is a direct tax on taxable a. Resident citizens
b. Non-resident citizens
actual or presumed income (gross or net) of a taxpayer received or
2. Aliens
realized during the taxable year. a. Resident aliens
b. Non-resident aliens
Income Tax Systems i. engaged in trade or business in the Philippines
ii. not engaged in trade or business in the Philippines
1. Global tax system all income received by a taxpayer are grouped c. Aliens entitled to preferential tax rates
together, without any distinction as to the type or nature of the 3. Estates and trusts
income, and after deducting therefrom the expenses and other
B. Corporations
allowable deductions, are subjected to tax at a fixed rate
1. Domestic corporations
2. Schedular system the various types or items of income are 2. Foreign corporations
classified accordingly and are accorded different tax treatments, in a. resident foreign corporations
accordance with schedules characterized by graduated tax rates. i. do not derive any income from the Philippines, thus
Since these types of income are treated separately, the allowable exempt from IT
deductions shall likewise vary for each type of income ii. engaged in trade or business here, subject to IT.
b. non-resident foreign corporations
Features of income tax law 3. Partnerships
a. Taxable partnership
b. Exempt partnership
1. Income tax is a direct tax i. general professional partnership
2. Income tax is a progressive tax tax base increases as tax rate ii. unincorporated joint venture or consortium engaged in
increases construction activity, or engaged in petroleum operations
3. Applies the nationality, residence and source principles with operating contract with the government
4. Semi-schedular or semi-global system of taxation iii. co-ownership

When is income taxable?

Citizens
Income, gain or profit is subject to income tax, when the
following requisites are present: Generally, a citizen has only one tax status during the year.
Exceptions (dual tax status):
a. There is income, gain or profit; a. A citizen who has previously been considered as a non-
b. The income, gain or profit is received, realized or accrued resident citizen and who arrives in the Philippines at any
during the taxable year; and time during the taxable year to reside permanently here,
c. The income, gain or profit is not exempt from income tax. shall be treated as a non-resident citizen until the date of
his arrival in the Philippines.
b. If the taxpayer dies during the year and his estate
continues to earn income for the rest of the year, before
his estate is settled.

1 all rights reserved. melvel C2005.


Resident citizens vs. Non-resident citizens
Distinction important because resident citizens are taxed on
worldwide income, while non-resident citizens are taxed on
income from the Philippines only.
Non-resident citizens
1. those who establish to the satisfaction of the Commissioner the
fact of his physical presence abroad with a definite intention to
reside therein
2. Those who leave the Philippines during the taxable year to reside
abroad, either as:
a. Immigrants
b. Employees of a foreign entity on a permanent basis
3. overseas contract workers (works and derives income from abroad
and his employment requires him to be physically present abroad
most of the time during the taxable year)
most of the time an aggregate of at least 183 days during
the calendar year
Resident alien
Aliens actually present in the Philippines NOT just a mere
sojourner or transient is a resident 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.
As long as alien lives in the Philippines with no definite
intention as to his stay, then alien is a resident
An alien who comes to the Philippines with a definite purpose,
but an extended stay is necessary to accomplish it such that
he makes his home temporarily in the Philippines, is
considered a resident.
But if purpose is definite, and the purpose may be promptly
accomplished, then the alien is only a transient.
Based on BIR ruling, if the alien exceeds three years here in
the Philippines, then he is considered a resident already.
Non-resident alien engaged in trade or business in the
Philippines
2 all rights reserved. melvel C2005.
If the aggregate period of his stay in the Philippines is more
than 180 days during any calendar year, he shall be
considered as engaged in trade or business in the Philippines.
Employees entitled to preferential tax rates
Alien individuals who are employed with the following entities
are entitled to 15% preferential tax rate of gross compensation
income:
1. regional or area headquarters/regional operating headquarters
of multinational companies in the Philippines
2. offshore banking units established in the Philippines
3. foreign service-contractor or sub-contractor engaged in
petroleum operations in the Philippines
Filipino employees occupying the same position as these aliens
are also entitled to the preferential rate. They have the option
to choose to be taxed under the graduated tax rates or the
preferential rate.
The preferential rates apply with respect to salaries, wages,
annuities etc. from such entities only
The only instance where compensation income is subject to
global tax system.
Estates and trusts
Taxed in the same manner as individuals, but entitled only to a
personal exemption of P20,000
Corporations
Shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts, associations,
insurance companies
Domestic corporations are those created or organized in the
Philippines, or under its laws. Nationality of the incorporators
has no bearing in ascertaining the tax status of the
corporation.
Resident foreign corporations
A. Do not derive any income here in the Philippines, hence
exempt from income tax
Examples: regional or area headquarters, representative
offices, regional warehouses of multinational companies
 To be a joint venture: 1) Each party contributes money,
B. Engaged in trade or business in the Philippines, subject to property, service etc. 2) profits are shared among the parties
income tax 3) there is joint proprietary interest and mutual control 4) for a
single business transaction
1. Preferential rate Not taxable as a corporation if:
1. it is an UNICORPORATED entity
Regional operating headquarters of 10% of NI 2. for the purpose of undertaking construction projects, or
multinational companies engaging in petroleum with an operating contract with the
Offshore banking units and FCDUs of 10% final tax government
Philippine branches of foreign banks An exempt joint venture may become a taxable partnership if
International air carriers/international 2.5% on gross
AFTER the construction period, the joint venture partners
shipping lines Phil. billings
engage in the business of leasing the units of the building.
Foreign service contractors and sub-
contractors engaged in petroleum operations
Registered enterprises under the PEZA and 5% Co-ownership
SBMA
There is a co-ownership whenever the ownership of an
2. Normal corporate income tax rate all other types of undivided thing or right belongs to different persons.
Philippine branches of foreign corporations Generally not considered as a separate taxable entity
May be converted into a taxable partnership if after the
Non-resident foreign corporations partition of the properties, the common properties are invested
and used as a common fund with intent to produce profits.
A foreign corporation not engaged in trade or business in the
Philippines, but deriving income from sources within the There must be clear intent to form a partnership. An isolated
Philippines. Non-resident is synonymous to not engaged in transaction cannot be interpreted as a partnership, because
trade or business in the Philippines. the mere sharing of gross returns does not by itself establish
the existence of a partnership.
Partnerships

Are generally taxable as a corporation

Exceptions: Gross Income
1. general professional partnership
2. unincorporated joint venture or consortium engaged in
construction, or petroleum operations under contract with What is income?
the government
Income is an amount of money coming to a person or
General Professional Partnerships corporation within a specified time, whether as payment for services,
interest or profit from investment. It is a flow of service rendered by
A general professional partnership is a partnership formed by capital.
persons for the SOLE purpose of exercising their COMMON profession,
no part of the income of which is derived from engaging any trade or What is gross income?
business.
Gross income means all income derived from whatever source,
Joint venture including (but not limited to) the following items:

3 all rights reserved. melvel C2005.

 1. Compensation for services in whatever form paid, including, uninterrupted flight, irrespective of the place of sale or issue
but not limited to fees, salaries, wages, commissions, and and the place of payment of the ticket or passage document.
similar items;
2. Gross income derived from the conduct of trade or business 4. Rents or royalties (location of the property) if the property
or the exercise of a profession; is located here in the Philippines, the income is treated as from
3. Gains derived from dealings in property; within the Philippines.
4. Interests;
5. Rents; 5. Sale of real property (location of the property) if the real
6. Royalties; property sold is within the Philippines, the gain is considered
7. Dividends; as income from the Philippines.
8. Annuities;
9. Prizes and winnings; 6. Sale of personal property if produced in the Philippines
10. Pensions; and and sold elsewhere, or vise versa, any gain will be treated as
11. Partners distributive share from the net income of the partly from sources within the Philippines and partly from
general professional partnership. outside the Philippines. If purchased in the Philippines and
resold elsewhere or vise versa, income is treated as derived
Source rules from sources within the country in which sold.

The following types of income are considered as income from

sources within the Philippines:
Types of Income
1. Interests (residence of debtor) if the obligor or debtor is a
resident of the Philippines, the interest income is treated as A. Compensation Income
income from within the Philippines. *fringe benefits
2. Dividends (residence of corporation) if the dividends are B. Trade or Business Income
*income from lease (rental income)
received from a domestic corporation or from a resident
C. Capital Gains
foreign corporation, it is treated as income from within the 1. from shares of stock
Philippines. But if less than 50% of the gross income of the 2. from real property in the Philippines
foreign corporation for the 3 years preceding the dividend is 3. other capital assets
from sources within the Philippines multiply dividends by the D. Passive Investment Income
percentage of income derived from Philippines to determine 1. Interest income
how much dividends are considered from sources within the 2. Dividend income
3. Royalty income
Philippines
E. Other Income
3. Services (place of performance of the service) if the service
1. Rental income
is performed in the Philippines, the income is treated as from 2. Prizes, awards and winnings
sources within the Philippines. 3. From illegal sources

Gross Philippine Billings (for international shipping

line) gross revenue for passenger, cargo or mail originating
from the Philippines up to final destination, regardless of the Compensation Income
place of sale or payment of the passage or flight documents.
All remuneration for services performed by an employee for his
(for international air carrier) gross revenue derived from employer under an EE-ER relationship.
carriage of personas, excess baggage, cargo and mail Does not include remuneration paid for:
originating from the Philippines in a continuous and

4 all rights reserved. melvel C2005.

 1. agricultural labor paid entirely in products of the farm
where the labor is performed
2. domestic service in a private home
3. casual labor not in the course of the employers trade or
business
4. services by a citizen or resident of the Philippines for a
foreign government or international organization
Fringe Benefits
A fringe benefit is any good, service or other benefit furnished
or granted in cash or in kind by an employer to an individual employee
such as, but not limited to, the following:
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; and
10. Life or health insurance and other non-life insurance premiums
or similar amounts in excess of what the law allows.
Fringe benefits tax is paid by the employer on the fringe
benefits received by supervisory and managerial employees.
Such fringe benefits do not form part of the compensation
income of the supervisory or managerial employees.
Fringe benefits of rank-and-file employees are treated as part
of compensation income subject to income tax.
Benefits for the convenience or benefit of the employer:
o If given to rank and file: will not be considered as
party of compensation income subject to tax
o If given to managerial or supervisory: will not be
subject to fringe benefits tax
FB tax is 32% of grossed up monetary value of fringe benefit.
But for non-resident aliens not engaged in business, tax is
25%. For aliens entitled to preferential tax rates, tax is 15%.
Trade or Business or Professional Income
5 all rights reserved. melvel C2005.
Gross income from business - For manufacturing or
merchandising business, gross income means the total sales, less cost
of goods sold, plus any income from investments and from incidental
or outside operations or sources.
Professional income refers to the fees received by a
professional from the practice of his profession, provided that there is
no EE-ER relationship between him and his clients.
Income from Lease
Rents received are considered as business income from which
the lessor may claim allowable deductions
Building erected by lessee considered income of the lessor if
there is an agreement that the building becomes property of
the lessor at the termination of the lease. Two options for
recording income:
1. report the entire market value of the building at the time it
is completed
2. spread over the life of the lease the estimated depreciated
value of the building at the termination of the lease, report
income for each year of the lease an aliquot part thereof
Capital Gains
Capital assets property held by a taxpayer (whether or not
connected with his trade or business) but does not include:
o Stock in trade of the tax payer
o Property of a kind which would properly be included in the
inventory of the tax payer if on hand at the close of the
taxable year
o Property held by the taxpayer primarily for sale to customers
in the ordinary course of his trade or business
o Property used in the trade of business, of a character which is
subject to the allowance for depreciation
o Real property used in trade or business of the taxpayer
1. Shares of stock of domestic corporation
a. If seller/transferor is dealer of securities treated as
ordinary assets and ordinary gain
sole instance where domestic shares are treated under
the global system
b. If seller/transferor is NOT a dealer of securities
 1) shares of stock listed and traded in local stock
exchange EXEMPT from income tax, but subject to
stock transaction tax of of 1% of gross selling price
2) shares of stock NOT listed and traded in local stock
exchange capital gains tax of 5% (first 100K) and
10% (exceeding 100K)
2. Real property (of individuals); land/building
corporations in the Philippines
1) If property is held for more than 12 months only
50% of gain subject to income tax
2) If property is held for 12 months or less 100% of
gain subject to income tax
b. For corporations corporate income tax rate of 32%
IMPT: Capital losses can be offset only against and to the
of extent of capital gains.

a. If seller/transferor is a real estate dealer treated as

ordinary assets and ordinary gain Interest Income
b. If seller/transferor is NOT a real estate dealer
1) If real property is used in taxpayers trade, business or 1. From Philippine currency deposits, yield and deposit
profession, or is used as fixed asset in his trade, substitutes (sources within the Phils)
business or profession, subject to depreciation
treated as ordinary assets and ordinary gain a. All types of individual taxpayers, except non-resident alien
2) If real property is NOT used in taxpayers trade, not engaged in business in the Phils final tax of 20%
business or profession, or is used as fixed asset in his b. Non-resident alien not engaged in business in the Phils
trade, business or profession, subject to depreciation final tax of 25%
capital gains tax of 6% based on FMV or gross selling c. Domestic corporations and resident foreign corporations
price, whichever is higher final tax of 20%
but if the selling entity is a foreign corporation, d. Non-resident foreign corporations corporate income tax
normal corporate income tax rate of 32% applies rate of 32%
NOTE: capital gain from the sale of a principal
residence of a natural person shall not be subject 2. From expanded foreign currency deposit system
to capital gains tax if the following conditions are
met: a. From banks within the Phils
o The proceeds from the sale of the residence is 1) Resident citizen, resident aliens, domestic
fully utilized within 18 months from the date of corporations, resident foreign corporations final tax
sale or disposition of 7.5%
o The Commissioner is notified of intention to 2) Non-resident citizens, non-resident aliens, non-
avail of the exemption within 30 days from the resident foreign corporations EXEMPT
date of sale or disposition b. From banks outside the Phils
o The exemption can be availed of only once 1) Resident citizens and domestic corporations
every ten years graduated income tax rates, and corporate income tax
o The historical cost or adjusted basis of the new rate of 32%, respectively
residence is carried over to the new residence 2) Non-resident citizens, aliens and foreign corporations
built EXEMPT

IMPT: Capital gains tax is paid by the SELLER. 3. From traditional loans granted by banks and other
creditors (sources within the Phils)
3. Other capital assets

a. For individuals subject to graduated income tax rates

6 all rights reserved. melvel C2005.

 a. All types of individual taxpayers, except non-resident
aliens not engaged in trade or business in the Phils
graduated income tax rates
b. Non-resident aliens not engaged in trade or business in the
Phils final tax of 25%
c. Domestic corporations and resident foreign corporations
corporate income tax rate of 32%
d. Non-resident foreign corporations final tax of 20%, for
FOREIGN LOANS
4. From long-term deposits or investments
a. All types of individual taxpayers, except non-resident
aliens not engaged in trade or business in the Phils
EXEMPT, unless pre-terminated before maturity
1) Remaining maturity (Holding period?) 4 years to less
than 5 years 5% final tax on entire income
2) Three years to less than four years 12% final tax on
entire income
3) Less than three years 20% final tax on entire income
b. Non-resident aliens not engaged in trade or business in the
Phils final tax of 25%
c. Corporations corporate income tax rate of 32%
Other types of exempt interest income:
o Interest income from a retirement plan or employee trust
fund
o Interest income of a non-stock non-profit educational
institution (provided it is shown that income is actually,
directly and exclusively used for educational purposes)
Dividend Income
Dividends are distributions made by a corporation to its
shareholders out of its earnings or profits payable to its shareholders,
whether in money or in other property.
Stock dividends - are dividends paid in the form of stock of the
corporation issuing it. Stock dividend represents the transfer of
surplus to capital account. Generally not taxable, except:
if the dividends gives the stockholder an interest
different from his former interest
if there is a subsequent cancellation or redemption of
stock dividends that is essentially equivalent to the
declaration of cash dividend
7 all rights reserved. melvel C2005.
1. From domestic corporations
a. Citizens and resident aliens final tax of 10%
b. Non-resident aliens engaged in trade or business in the
Phils final tax of 20%
c. Non-resident aliens not engaged in trade or business in the
Phils final tax of 25%
d. Domestic and resident foreign corporations EXEMPT
e. Non-resident foreign corporations 32%, however this
may be reduced to a final tax of 15%, on the condition
that the country where the corporation is domiciled allows
a tax sparing credit equivalent to 17%
Tax sparing credit credit granted by the residence country
for foreign taxes that for some reasons were not actually paid
to the source country but that would have been paid under the
countrys normal tax rules
Disguised dividends paid by a local domestic corporation
which is a subsidiary of a non-resident foreign corporation, to
the latter ostensibly for services rendered by the latter to the
former, but which payments are disproportionately larger than
the actual value of the services rendered. The amount over
and above the value of the services rendered shall be treated
as a dividend.
2. From foreign corporations
a. Resident citizens and domestic corporations graduated
income tax rates and corporate income tax rate of 32%,
respectively
b. All other taxpayers EXEMPT
Royalty Income
1. From sources within the Phils
a. All types of individual taxpayers, except non-resident alien
not engaged in business in the Phils
1) Books, other literary works and musical compositions
final tax of 10%
2) Other royalty income final tax of 20%
b. Domestic and resident foreign corporations final tax of
20%
 c. Non-resident aliens not engaged in trade or business in the
Phils final tax of 25% Exclusions from Gross Income
d. Non-resident foreign corporations corporate income tax
of 32%, unless a lower tax rate is allowed by an existing
tax treaty Exclusions refer to items that are not included in the determination of
gross income because:
2. From sources outside the Phils o they represent a return of capital or are not income, gain or
profit
a. Resident citizens and domestic corporations graduated o they are subject to another kind of internal revenue tax
income tax rates and corporate income tax rate of 32%, o they are income gain or profit that are expressly exempt from
respectively income tax under the law
b. All other taxpayers EXEMPT

Rental Income 1. Life Insurance. - The proceeds of life insurance policies paid
to the heirs or beneficiaries upon the death of the insured,
Corporations Individuals whether in a single sum or otherwise, but if such amounts are
Non-resident lessor of vessel 4.5% 25% held by the insurer under an agreement to pay interest
Non-resident lessor of aircraft, thereon, the interest payments shall be included in gross
machineries and equipment 7.5% 25% income.
Non-resident lessor of films 25% 25%
2. Amount Received by Insured as Return of Premium. -
Prizes, awards and winnings The amount received by the insured, as a return of premiums
paid by him under life insurance, endowment, or annuity
1. Prizes (exceeding 10,000) and other winnings (except contracts, either during the term or at the maturity of the term
sweepstakes and lotto) mentioned in the contract or upon surrender of the contract.

a. All types of individual taxpayers, except non-resident 3. Gifts, Bequests, and Devises. - The value of property
aliens not engaged in trade or business in the Phils final acquired by gift, bequest, devise, or descent: Provided,
tax of 20% however, That income from such property, as well as gift,
b. Non-resident aliens not engaged in business in the Phils bequest, devise or descent of income from any property, in
final tax of 25% cases of transfers of divided interest, shall be included in gross
c. Corporations corporate income tax rate of 32% income.

2. Prizes and awards made in recognition of literary, scientific,
artistic etc. achievement, provided recipient did not enter
contest on his own and he is not required to perform any
service as a condition to receiving the award EXCLUDED
from gross income
3. Prizes and awards granted to athletes in local and international
sports competitions and tournaments whether held in the
Philippines or abroad and sanctioned by their national sport
associations EXCLUDED from gross income
4. Compensation for Injuries or Sickness. - amounts
received, through Accident or Health Insurance or under
Workmens Compensation Acts, as compensation for personal
injuries or sickness, plus the amounts of any damages
received, whether by suit or agreement, on account of such
injuries or sickness.
5. Income Exempt under Treaty. - Income of any kind, to the
extent required by any treaty obligation binding upon the
Government of the Philippines.

6. Retirement Benefits, Pensions, Gratuities, etc.-

Retirement benefits received under Republic Act No. 7641 and
8 all rights reserved. melvel C2005.
 those received by officials and employees of private firms,
whether individual or corporate, in accordance with a
reasonable private benefit plan maintained by the employer:
Provided, That the retiring official or employee has been in the
service of the same employer for at least ten (10) years and is
not less than fifty (50) years of age at the time of his
retirement: Provided, further, That the benefits granted under
this subparagraph shall be availed of by an official or employee
only once. For purposes of this Subsection, the term
reasonable private benefit plan means a pension, gratuity,
stock bonus or profit-sharing plan maintained by an employer
for the benefit of some or all of his officials or employees,
wherein contributions are made by such employer for the
officials or employees, or both, for the purpose of distributing
to such officials and employees the earnings and principal of
the fund thus accumulated, and wherein its is provided in said
plan that at no time shall any part of the corpus or income of
the fund be used for, or be diverted to, any purpose other than
for the exclusive benefit of the said officials and employees.
Any amount received by an official or employee or by his heirs
from the employer as a consequence of separation of such
official or employee from the service of the employer because
of death sickness or other physical disability or for any cause
beyond the control of the said official or employee.
7. The provisions of any existing law to the contrary
notwithstanding, 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, private or public.
8. 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.
9. Benefits received from or enjoyed under the Social Security
System in accordance with the provisions of Republic Act No.
8282.
10. Benefits received from the GSIS under Republic Act No. 8291,
including retirement gratuity received by government officials
and employees.
9 all rights reserved. melvel C2005.
11. Income Derived by Foreign Government. - Income derived
from investments in the Philippines in loans, stocks, bonds or
other domestic securities, or from interest on deposits in banks
in the Philippines by (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.
12. Income Derived by the Government or its Political
Subdivisions. - Income derived from any public utility or from
the exercise of any essential governmental function accruing to
the Government of the Philippines or to any political
subdivision thereof.
13. Prizes and Awards. - Prizes and awards made primarily in
recognition of religious, charitable, scientific, educational,
artistic, literary, or civic achievement but only if:
The recipient was selected without any action on his
part to enter the contest or proceeding; and
The recipient is not required to render substantial
future services as a condition to receiving the prize
or award.
14. Prizes and Awards in Sports Competition. - All prizes and
awards granted to athletes in local and international sports
competitions and tournaments whether held in the Philippines
or abroad and sanctioned by their national sports associations.
15. 13th Month Pay and Other Benefits (productivity
incentive pay, Christmas bonus) - Gross benefits received
by officials and employees of public and private entities:
Provided, however, That the total exclusion under this
subparagraph shall not exceed Thirty thousand pesos
(P30,000). Provided, further, That the ceiling of Thirty
thousand pesos (P30,000) may be increased through rules and
regulations issued by the Secretary of Finance, upon
recommendation of the Commissioner, after considering
among others, the effect on the same of the inflation rate at
the end of the taxable year.
16. GSIS, SSS, Medicare and Other Contributions. - GSIS,
SSS, Medicare and Pag-ibig contributions, and union dues of
individuals.
17. Gains from the Sale of Bonds, Debentures or other
Certificate of Indebtedness. - Gains realized from the same
 or exchange or retirement of bonds, debentures or other
certificate of indebtedness with a maturity of more than five
(5) years.
18. Gains from Redemption of Shares in Mutual Fund. - Gains
realized by the investor upon redemption of shares of stock in
a mutual fund company
Exempt Corporations
GSIS, SSS, PHIC, PCSO and PAGCOR are exempt from income
tax. But all other government owned and controlled
corporations shall pay tax at the same rates imposed on
corporations engaged in a similar business (unless there is a
special law to the contrary)
Section 30 Corporations
The following corporations are not subject to income tax on
income received by them from undertakings which are essential to or
necessarily connected with the purposes for which they were
organized and operated BUT
They are subject to income tax on any income of whatever
kind and character 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.
1. Labor, agricultural or horticultural organization not organized
principally for profit;
2. Mutual savings bank not having a capital stock represented by
shares, and cooperative bank without capital stock organized
and operated for mutual purposes and without profit;
3. A beneficiary society, order or association, operating for the
exclusive benefit of the members such as a fraternal
organization operating under the lodge system, or mutual aid
association or a non-stock corporation organized by employees
providing for the payment of life, sickness, accident, or other
benefits exclusively to the members of such society, order, or
association, or non-stock corporation or their dependents;
4. Cemetery company owned and operated exclusively for the
benefit of its members
5. Non-stock corporation or association organized and operated
exclusively for religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of veterans, no part
of its net income or asset shall belong to or inures to the
10
benefit of any member, organizer, officer or any specific
person;
6. Business league chamber of commerce, or board of trade, not
organized for profit and no part of the net income of which
inures to the benefit of any private stockholder, or individual;
7. Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare;
8. A non-stock and non-profit educational institution;
9. Government educational institution;
10. Farmers or other mutual typhoon or fire insurance company,
mutual ditch or irrigation company, mutual or cooperative
telephone company, or like organization of a purely local
character, the income of which consists solely of assessments,
dues, and fees collected from members for the sole purpose of
meeting its expenses; and
11. Farmers, fruit growers, or like association organized and
operated as a sales agent for the purpose of marketing the
products of its members and turning back to them the
proceeds of sales, less the necessary selling expenses on the
basis of the quantity of produce finished by them.
Non-stock, non-profit private educational institutions
Under the Constitution, all revenues and assets of non-stock
non-profit educational institutions used actually, directly and
exclusively for educational purposes, are EXEMPT from tax and
duties
Income derived from dorms, canteens and bookstores are
exempt provided evidence is shown as to the actual, direct and
exclusive use for educational purposes.
all rights reserved. melvel C2005.
 f. loss from wash sale
5. Bad Debts
6. Depreciation
7. Charitable contributions
B. Premium payments on health and hospitalization insurance
C. Optional Standard Deduction
D. Special Deductions

Business expenses

To be deductible, the following conditions must concur:

Return of Capital and Deductions
1. it must be ordinary (normal in relation to the business) and
necessary (appropriate or helpful for development of the
business)
Class of taxpayer Allowable deductions from gross income
2. it must be paid or incurred during the taxable year
Individuals with gross o Premium payments on health and/or 3. it must be paid or incurred in carrying on or which are directly
compensation income from hospitalization insurance attributable to the development, management operation
ER-EE relationship o Personal exemptions and/or conduct of the trade, business or exercise of profession
4. it must be supported by adequate invoices or receipts
5. it is not contrary to law, public morals or public policy (thus,
o Itemized deductions or Optional Standard bribes are not deductible)
Individuals with gross Deduction 6. the tax required to be withheld on the expense paid or payable
income from business or o Premium payments on health and/or
is shown to have been remitted to the BIR
practice of profession hospitalization insurance
o Personal exemptions
Transportation expenses from house to office and vise versa
are not deductible because they are considered as personal,
Corporations o Itemized deductions living and family expenses not deductible from gross income

Interest expense

Interest is the amount paid by a debtor to his creditor for the

Types of Deductions use or forbearance of money.

A. Itemized Deduction To be deductible, the following conditions must concur:

1. Business expenses
*transportation expenses
2. Interest expense
1. There must be a valid and existing indebtedness;
3. Taxes 2. The indebtedness must be that of the taxpayer;
4. Losses 3. The interest must be legally due and stipulated in writing;
a. capital loss 4. The interest expense must have been paid or incurred during
b. casualty loss the taxable year;
c. net operating loss 5. The indebtedness must be connected with the taxpayers
d. wagering loss trade, business or exercise of profession;
e. shrinkage in value

11 all rights reserved. melvel C2005.

 6. The interest payment arrangement must not be between 2. losses from transactions entered into for profit, although not
related taxpayers connected with trade or business
7. The interest is not expressly disallowed by law to be deducted 3. casualty losses that arise from fire, storm, shipwreck, or other
from taxpayers gross income casualty, or from theft or robbery
8. Must be reduced by an amount equal to 38% of interest
income subjected to final tax (tax arbitrage) To be deductible, the following conditions must concur:

Optional Treatment of Interest Expense: At the option of the 1. the loss must be that of the taxpayer
taxpayer, interest incurred to acquire property used in trade business 2. the loss is actually sustained and charged off during the
or exercise of a profession may be allowed as a deduction or treated taxable year
as a capital expenditure. 3. the loss is evidenced by a closed and completed transaction
4. the loss is not claimed as a deduction for estate tax purposes
5. the loss is not compensated for by insurance or otherwise
6. for individuals, the loss must be connected with trade,
business or profession, or incurred in any transaction entered
Taxes into for profit, though not connected with trade, business or
profession
All taxes, national or local, paid or accrued during the taxable 7. for casualty losses, it must have been reported to the BIR
year in connection with the trade or business or profession of the within 45 days from date of occurrence of the loss
taxpayer are deductible from gross income, except:
Net operating loss
1. Philippine income tax
2. Foreign income tax, when taxpayer claims a tax credit Net operating loss is the excess of allowable deductions over
3. Estate and donors taxes gross income of the business in a taxable year.
4. Special assessments on real property
5. Electric energy consumption tax General Rule: The net operating loss of the business or
enterprise for any taxable year immediately preceding the current
To be deductible, the following conditions must concur: taxable year, which had not been previously offset as deduction
from gross income shall be carried over as a deduction from gross
1. payment must be for taxes income for the next three (3) consecutive taxable years
2. taxes are imposed by law upon the taxpayer immediately following the year of such loss
3. taxes must be paid or accrued during the taxable year in (Also, NOLCO will be allowed only if there is no substantial change
connection with the taxpayers trade or business in ownership of the enterprise in that not less than 75% of the
4. taxes are not specifically excluded by law from being deducted nominal value of the outstanding issued shares, or of the paid up
capital, is held by or on behalf of the same persons)
Value-added tax cannot be deducted from gross income
because taxpayer-seller passes it on to the buyer (double Exception: Any net loss incurred in a taxable year during which
benefit). The final consumer may deduct it, not as tax, but as the taxpayer was exempt from income tax shall not be allowed as
business expense. a deduction under NOLCO

Losses Wagering Loss shall be allowed only to the extent of gains from
such transactions
Classified into:
Shrinkage in value
1. losses from trade or business for profits

12 all rights reserved. melvel C2005.

 o If the stock of a corporation becomes worthless its cost or tear, and obsolescence of property used in the trade or business may
other basis may be deducted by the owner in the taxable year be deducted from gross income.
in which the stock became worthless, provided a satisfactory
showing of its worthlessness is made. To be deductible, the following conditions must concur:

o If the loss is merely on account of shrinkage in value through 1. the allowance must be reasonable
fluctuation of market or otherwise the loss allowable in such 2. it must be for property arising out of its use in the trade or
case is that actually suffered when the stock is disposed of. business, or out of its not being used temporarily during the
year
Loss from wash sale 3. it must be charged off during the taxable year from the books
of accounts of the taxpayer
In case of loss arising from sale of shares of stock or
securities, where it appears that, within a period beginning 30 days
before the date of sale or disposition, and ending 30 days after such
date, the taxpayer has acquired, or has entered into a contract or
option to acquire, substantially identical stock or securities, NO
DEDUCTION for the loss shall be allowed, unless the claim is made by Charitable contributions
a dealer in stock or securities, and with respect to a transaction made
in the ordinary course of business. Conditions for deductibility (general):

Bad debts 1. must be made within the taxable year

2. must be evidenced by adequate receipts or records
Debts actually ascertained to be worthless and charged off 3. must be based on the acquisition cost of the property donated
within the taxable year except those not connected with the trade,
profession or business and those sustained in a transaction between DEDUCTIBLE IN FULL
related taxpayers
1. Donations to the Government of the Philippines or to any of its
Tax benefit rule agencies or political subdivisions, including fully-owned
government corporations, exclusively to finance, to provide for, or
A taxpayer is obliged to declare as taxable income subsequent to be used in undertaking priority activities in:
recovery of bad debts in the year they were collected to the extent of
the tax benefit enjoyed by the taxpayer when the bad debts were o Education
written off and claimed as deduction from gross income. This also o Health
applies to taxes previously deducted from gross income but which o Youth and sports development
were subsequently refunded or credited by the government. o Human settlements
o Science
The taxpayer is required to report as taxable income the o Culture
subsequent tax refund or tax credit granted to the extent of the tax o Economic development
benefit the taxpayer enjoyed when such taxes were previously claimed
as deduction from gross income. according to a National Priority Plan determined NEDA.

Depreciation 2. Donations to Certain Foreign Institutions or International

Depreciation is the gradual dimunition in the useful value of
tangible property resulting from wear and tear and normal
obsolescence. A reasonable allowance for the exhaustion, wear and
13
Organization which are fully deductible in pursuance of or in
compliance with agreements, treaties, or commitments entered
into by the Government of the Philippines and the foreign
all rights reserved. melvel C2005.
 institutions or international organizations or in pursuance of special o Religious
laws; o Charitable
o Scientific
3. Donations to Accredited Non-government Organizations. - o Youth and sports development
The term "non-government organization" means a non profit o Cultural or educational purposes
domestic corporation, organized and operated exclusively for: o The rehabilitation of veterans
o Social welfare institutions
o Scientific
o Research 3. Non-government organizations, in accordance with rules and
o Educational regulations promulgated by the Secretary of finance, upon
o Character-building and youth and sports development recommendation of the Commissioner
o Health
o Social welfare For numbers (2) and (3) above, no part of the net income of which
o Cultural or charitable purposes inures to the benefit of any private stockholder or individual
o Or a combination of the above purposes
Limit: 10% of net income before charitable contributions in case
no part of the net income of which inures to the benefit of any of individuals, 5% of NI before CC in case of corporations
private individual.
Premium payments on health and hospitalization insurance
For non-government organizations, the ff. additional
requirements must be met: Deduction allowed up to P2,400 per annum, if the aggregate
a. not later than 15th day of the third month after the close of family income does not exceed P250,000. This may be claimed by the
the taxable year in which contributions are received, the spouse who claims additional personal exemptions for dependents.
org makes utilization directly for the active conduct of the
activities constituting the purpose for which it was Optional standard deduction
organized and operated
b. the level of administrative expenses of which shall, on an Deduction at 10% of gross income
annual basis, conform with rules and regulations to be For citizens and resident aliens only
prescribed by the Sec. of Finance, in no case to exceed No need to substantiate expenses
30% of total expenses
c. to assets, in the event of dissolution, would be distributed Personal exemptions
to another non-profit domestic corporation organized for
similar purpose/s, or to the state for a public purpose, or Class of taxpayer Personal exemption
distributed by a court in a manner that shall best Single individual or married individual judicially
accomplish the general purpose for which the dissolved org decreed as legally separated P20,000
was organized Legally married employee P32,000
Single head of family P25,000
For each dependent child, not exceeding four P8,000
DEDUCTIBLE, SUBJECT TO LIMITATION

1. The Government of the Philippines or any of its agencies or any
political subdivision thereof exclusively for public purposes, not in
accordance with the annual priority plan determined by NEDA
2. Accredited domestic corporation or associations organized and
operated exclusively for
Dependent: legitimate, illegitimate or legally adopted child chiefly
dependent upon and living with the taxpayer if such dependent is not
more than 21, unmarried and not gainfully employed (may be more
than 21 if incapable of self-support due to mental or physical defect)
Head of family: unmarried or legally separated person with one or
both parents, one or more brothers or sisters whether of whole or half

14 all rights reserved. melvel C2005.

blood or with one or more legitimate, recognized natural or legally
adopted children living with and dependent upon him for their chief
support, where such brothers and sisters or children are considered
dependents
May also refer to a benefactor of a qualified senior citizen (a
resident citizen at least 60 who has retired from work and has
an income of not more than P60,000 per annum)
Non-deductible expenses
In computing net income, no deduction shall in any case be allowed in
respect to
1. Personal, living or family expenses;
2. Any amount paid out for new buildings or for permanent
improvements, or betterments made to increase the value of any
property or estate; EXCEPT intangible drilling and development
costs incurred in petroleum operations
3. Any amount expended in restoring property or in making good the
exhaustion thereof for which an allowance is or has been made; or
4. Premiums paid on any life insurance policy covering the life of any
officer or employee, or of any person financially interested in any
trade or business carried on by the taxpayer, individual or
corporate, when the taxpayer is directly or indirectly a beneficiary
under such policy
5. Losses from sales or exchanges of property directly or indirectly
between related taxpayers.
a. Between members of a family. For purposes of this paragraph,
the family of an individual shall include only his brothers and
sisters (whether by the whole or half-blood), spouse,
ancestors, and lineal descendants; or
b. Except in the case of distributions in liquidation, 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
c. Except in the case of distributions in liquidation, 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 if either one of such corporations,
with respect to the taxable year of the corporation preceding
the date of the sale of exchange was under the law applicable
to such taxable year, a personal holding company or a foreign
personal holding company;
d. Between the grantor and a fiduciary of any trust; or
15
e. Between the fiduciary of a trust and the fiduciary of another
trust if the same person is a grantor with respect to each
trust; or
f. Between a fiduciary of a trust and beneficiary of such trust.
(dealings with related taxpayers not deductible in case of bad debts,
interest expense and loss from sale or exchange of property)
Filing of Tax Returns
Individuals
Who are required to file?
All individual taxpayers, except non-resident aliens not
engaged in business in the Philippines
Exceptions:
1. An individual whose gross income does not exceed his total
personal and additional exemptions for dependents
If the individual taxpayer is engaged in business or
practice of profession, he must still file an IT return,
regardless of amount of gross income
2. An individual with respect to pure compensation income,
derived from sources within the Philippines, the income tax on
which has been correctly withheld
If the individual derives income from 2 or more ERs
concurrently, he must still file an IT return
If the individual earns pure compensation income
exceeding P60,000, he must still file an IT return
3. An individual whose sole income has been subjected to final
withholding tax pursuant
4. An individual who is exempt from income tax pursuant to the
provisions of this Code and other laws, general or special.
**Any individual not required to file an income tax return may
nevertheless be required to file an information return
all rights reserved. melvel C2005.
Individuals earning purely business or professional income, or mixed
income must file quarterly IT return (within 15 days from end of
quarter) and an annual IT return (on or before April 15)

IMPT: Individuals shall always be taxed based on calendar year

Payment
1. Generally, at the time the return is filed
2. If tax exceeds P2,000, tax may be paid in 2 equal installments.
First installment at the time the return is filed, second
installment on or before July 15.

Corporations

Who are required to file?

All corporations, except foreign corporations not engaged in
trade or business here in the Philippines (non-resident foreign
corporations)
Corporations shall file a quarterly return (within 60 days from
end of quarter) and an annual return (on the 15th day of the
fourth month following the end of the fiscal year)

Capital gains tax returns

Shares of stock not listed and traded in the LSE file return within 30
days after each transaction, and a final consolidated return on or
before the 15th day of the fourth month following the close of the
taxable year

Real property held as capital asset in the Philippines file a return

within 30 days after sale or disposition

16 all rights reserved. melvel C2005.