PreFi Taxation

Taxation on Individuals
TAXABLE INDIVIDUALS
A. Resident Citizen
- the following are citizens of the Philippines (Art 4 Sec 1):
‣ those who are citizens of the Philippines at the time of the adoption of the 1987 Constitution
‣ those whose fathers or mothers are citizens of the Philippines
‣ those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority
‣ those who are naturalized in accordance with the law
- you are considered a resident of the PH if most of the time for the calendar year, you are residing here in the PH
B. Non-resident Citizen
(a) A citizen of the Philippines who established to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite
intention to reside therein
- to the satisfaction of the Commissioner: you have to inform the BIR that you are no longer residing in the PH, otherwise, your income will be
taxable
(b) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a
permanent basis
(c) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present
abroad most of the time during the taxable year
- most of the time: a particular citizen stays abroad for 183 days or more (continuous or aggregate) during a calendar year
(d) A citizen who has been previously considered as a non-resident citizen and who arrives in the Philippines at any time during the year to reside
permanently in the Philippines will likewise be treated as a non-resident citizen during the taxable year in which he arrives in the Philippines,
with respect to his income derived from sources abroad until the date of his arrival in the Philippines
- this is called the hybrid personality of a taxpayer
(e) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return
to and reside in the Philippines as the case may be for the purpose of this Section.
Note: A Filipino employed as Philippine Embassy/Consulate service personnel of the Philippine Embassy/Consulate is not treated as a non-resident
citizen, hence his income is taxable.
C. Resident Alien
- non-citizens who reside in the Philippines
- the test used to know if resident alien or not is not the length of time he stays here but the fact of whether he is a mere transient or has a definite
purpose/intention of staying here in the Philippines
- If he lives in the Philippines with no definite purpose, resident alien.
- One who comes to the Philippines for a definite purpose, which in its nature may be promptly accomplished, is a transient. But if his purpose is of such
nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the Philippines, he
becomes a resident.
- Example: kind of visa applied for
D. Non-resident alien
1. NRA-ETB
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- refers to a non-resident alien who shall come to the Philippines and stay for an aggregate period of more than 180 days during any calendar
year
- engaged in trade or business includes the performance of personal services within the Philippines
2. NRA-NETB
- refers to a non-resident alien who shall come to the Philippines and stay for an aggregate period of 180 days or less during any calendar year
- his income is taxed at 25% final tax based on gross or entire income within the Philippines
E. Special Employees
Employed by Special Corporations (15% tax on the gross income in the Philippines)
i. Regional Area Headquarters (RAHQ) of multinational corporations, defined in Sec 22
ii. Regional Operating Headquarters of Multinational Corporations, defined in Sec 22
iii. Offshore banking units (OBU)
iv. Petroleum service contractors (and subcontractor)
Atty A: Under the TRAIN Law, RAHQ, ROHQ, OBU, and PSCs which are registered with SEC from January 1, 2018 and thereafter shall no longer be
entitled to the preferential rate of 15%, provided that employees of said entities which are registered prior to January 1, 2018 continues to be entitled
to such rate —- this provision was vetoed by the President.
Note: All employees of RHQs, ROHQs, OBUs, and Petroleum Service Contractors and Subcontractors shall be subject to regular income tax under
Section 24(A)(2)(a) of the Tax Code, as amended, without prejudice to the application of preferential tax rates under existing international tax treaties,
if warranted. (BIR RR No. 8-2018)
F. Estates and Trusts

- under the TRAIN Law, basic personal exemption which can previously be availed by the Estate and Trust is repealed, effective January 1, 2018
- taxed at a flat rate of 6%
INCOME TAX RATES

Revised Personal Income Tax Rates - Graduated Schedules
Annual Income Tax 2018 to 2022 2023 onwards
P0 - 250,000 0% 0%
Over P250,000-400,000 20% + excess of over P250,000 15% + excess of over P250,000
Over P400,000-800,000 P30,000 + 25% of the excess over P400,000 P22,500 + 20% of the excess over
P400,000
Over P800,000-P2,000,000 P130,000 + 30% of the excess over P800,000 P102,500 + 25% of the excess over
P800,000
Over P2,000,000-8,000,000 P490,000 + 32% of the excess over P2,000,000 P402,500 + 30% of the excess over
P2,000,000
Over P8,000,000 P2,410,000 + 35% of the excess over P2,202,500 + 35% of the excess over
P8,000,000 P8,000,000
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For self-employed individual
If gross sales/receipts The applicable tax
Below the VAT threshold of P3,000,000 Taxpayer’s option (mutually exclusive):

1) Graduated Income Tax Rates (GITR) 
Tax Base: Net Taxable Income 
OR
2)8% income tax on gross sales or receipts in excess of
P250,000 (in lieu of the graduated tax rates and
percentage tax) 
Tax Base: Gross Sales or Gross Receipts
Exceeding the VAT threshold Graduated Income Tax Rates

Tax Base: Net Taxable Income
INCLUSIONS (GROSS INCOME FOR INDIVIDUALS)

A. Compensation Income
(a) Definition — In general, means all renumeration for services performed by an employee for his employer under an employer-
employee relationship, unless specifically excluded by the Code.
1. Cash or in money — amount of money received

2. Compensation in Kind:
• Stock Options
• Properties (Doctrine of Cash Equivalent) — FMV
• Promissory Notes
Not Discounted: Face Value
Discounted:
1. Year of Receipt — Discounted Value
2. Maturity Date — difference between face value and FMV
• Cancellation or forgiveness of indebtedness — amount of debt cancelled
✓ If no consideration — taxable as donation
✓ If creditor is a corporation and debtor is the stockholder — taxable as indirect divided
Jurisprudence:
First Lepanto Taisho Insurance Corporation vs CIR, GR No. 197117, April 10, 2013
“A director is considered an employee under Section 5 of Revenue Regulation No. 12-86, to wit: an individual, performing services for a
corporation, whether as an officer and director or merely as a director whose duties are confined to attendance at and participation in the
meetings of the Board of Directors, is an employee.”
Facts: Petitioner is a non-lire insurance corporation and considered as a "Large Taxpayer under Revenue Regulations No. 6-85, as
amended by Revenue Regulations No. 12-94 effective 1994." After submitting its corporate income tax return for taxable year ending
December 31, 1997, petitioner received a Letter of Authority from respondent Commissioner of Internal Revenue (CIR) to allow it to
examine their books of account and other accounting records for 1997 and other unverified prior years. CIR issued internal revenue
tax assessments for deficiency income, withholding, expanded withholding, final withholding, value-added, and documentary stamp
taxes for taxable year 1997. The petitioner protested such assessment, which it partially withdrew in view of the tax amnesty program it
had availed. The CTA ordered the petitioner to pay P 1,994,390.86 as deficiency withholding tax on compensation, expanded
withholding tax, and final tax. The petitioner appealed to the CTA En Banc which affirmed the decision of the CTA Division.
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The CTA rejected the contention of the petitioner that it is not liable to pay withholding tax on compensation to some of its directors
since they were not employees and they had already been subjected to expanded withholding tax. As to the petitioner’s transportation,
subsistence and lodging, and representation allowance, the CTA En Banc ruled that the petitioner failed to prove that those were actual
expenses. As to deficiency expanded withholding taxes on compensation, petitioner failed to substantiate that the commissions
earned came from reinsurance activities and should not be subject to withholding tax. As to deficiency final withholding taxes,
petitioner failed to present proof of remittance to establish that it had remitted the final tax on dividends paid as well as the payments
for services rendered by a Malaysian company. As to the imposition of delinquency interest, records reveal that petitioner failed to pay
the deficiency taxes within thirty (30) days from receipt of the demand letter, thus, delinquency interest accrued from such non-
payment.
Issue: WON petitioner is liable for: (a) deficiency withholding taxes on compensation on director’s bonuses; (b) deficiency expanded
withholding taxes on transportation, subsistence and lodging, and representation expense; commission expense; direct loss expense;
occupancy cost; and service/contractor and purchases; (c ) deficiency final withholding taxes on payment of dividends and
computerization expenses to foreign entities; and (d) delinquency interest under Section 249 (c) (3) of the NIRC
Held: Yes. Petitioner is liable for the said deficiencies
Deficiency withholding taxes on compensation on directors’ bonuses

For taxation purposes, a director is considered an employee under Section 5 of Revenue Regulation No. 12-86, to wit:
“An individual, performing services for a corporation, whether as an officer and director or merely as a director whose duties are
confined to attendance at and participation in the meetings of the Board of Directors, is an employee.”
The non-inclusion of the names of some of petitioner’s directors in the company’s Alpha List does not ipso facto create a presumption
that they are not employees of the corporation, because the imposition of withholding tax on compensation hinges upon the nature of
work performed by such individuals in the company. Moreover, contrary to petitioner’s attestations, Revenue Regulation No. 2-98,
specifically, Section 2.57.2. A (9) thereof, cannot be applied to this case as the latter is a later regulation while the accounting books
examined were for taxable year 1997.
Deficiency expanded withholding taxes on transportation, subsistence and lodging, and representation expense; commission expense;
direct loss expense; occupancy cost; and service/contractor and purchases
As to the deficiency withholding tax assessment on transportation, subsistence and lodging, and representation expense, commission
expense, direct loss expense, occupancy cost, service/contractor and purchases, the petitioner was not able to sufficiently establish that
the transportation expenses reflected in their books were reimbursement from actual transportation expenses incurred by its
employees in connection with their duties as the only document presented was a Schedule of Transportation Expenses without
pertinent supporting documents. Without said documents, such as but not limited to, receipts, transportation-related vouchers and/or
invoices, there is no way of ascertaining whether the amounts reflected in the schedule of expenses were disbursed for transportation.
With regard to commission expense, no additional documentary evidence, like the reinsurance agreements contracts, was presented
to support petitioner’s allegation that the expenditure originated from reinsurance activities that gave rise to reinsurance
commissions, not subject to withholding tax. As to occupancy costs, records reveal that petitioner failed to compute the correct total
occupancy cost that should be subjected to withholding tax, hence, petitioner is liable for the deficiency.
As to service/contractors and purchases, petitioner contends that both parties already stipulated that it correctly withheld the taxes due.
Stipulations cannot defeat the right of the State to collect the correct taxes due on an individual or juridical person because taxes are
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the lifeblood of our nation so its collection should be actively pursued without unnecessary impediment. Deficiency final withholding
taxes on payment of dividends and computerization expenses to foreign entities
Deficiency final withholding taxes on payment of dividends and computerization expenses to foreign entities
As to the deficiency final withholding tax assessments for payments of dividends and computerization expenses incurred by petitioner
to foreign entities, particularly Matsui Marine & Fire Insurance Co. Ltd. (Matsui), the Court agrees with CIR that petitioner failed to
present evidence to show the supposed remittance to Matsui.
Delinquency interest under Section 249 (c) (3) of the NIRC

The Court likewise holds the imposition of delinquency interest under Section 249 (c) (3) of the 1997 NIRC to be proper, because
failure to pay the deficiency tax assessed within the time prescribed for its payment justifies the imposition of interest at the rate of
twenty percent (20%) per annum, which interest shall be assessed and collected from the date prescribed for its payment until full
payment is made.
It is worthy to note that tax revenue statutes are not generally intended to be liberally construed. Moreover, the CTA being a highly
specialized court .particularly created for the purpose of reviewing tax and customs cases, it is settled that its findings and conclusions
are accorded great respect and are generally upheld by this Court, unless there is a clear showing of a reversible error or an
improvident exercise of authority. Absent such errors, the challenged decision should be maintained.
(b) Kinds
a. Regular Compensation — includes basic salary, fixed allowances for representation, transportation and others paid to an employee
b. Supplemental Compensation — includes payments to an employee in addition to the regular compensation such as but not limited
to the following:
➡ Overtime Pay
➡ Fees, including director’s fees
➡ Commission
➡ Profit Sharing
➡ Monetized Vacation and Sick Leave
➡ Fringe Benefits received by rank and file employees
➡ Hazard Pay
➡ Taxable 13th month pay and other benefits
➡ Other remuneration received from an employee-employer relationship
(a) Doctrine of Cash Equivalent — any economic benefit to the employee whatever may have been the mode by which it is effected is
compensation income.
(b) Mode of Compensation Income/Payment
Pay the balance as you file the tax return, computed as follows:
Income Tax Due P xx
Less: Withholding Tax (xx)
Net Income Tax Due P xx
Substituted Filing of Income Tax Return

- the manner by which declaration of income of individuals receiving purely compensation income the taxes of which have been
withheld by the employers
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- instead of filing ITR, the employer’s annual information return duly stamped received by the BIR may be considered as the
“substitute” ITR of the employee.
Q: Who can avail substituted filing?
A: Employee who satisfies all of the following:

✓ Receiving purely compensation income regardless of amount
✓ Working for only one ER in the PH for the calendar year
✓ Tax have been withheld correctly by the ER (tax due equals tax withheld)
✓ The EE’s spouse also complies with all three conditions above
✓ The ER files the annual information return (BIR Form 1604-CF)
✓ The ER issues BIR Form 2316 to each EE
Q: What if two employers?
A: Substituted filing is allowed but at the end of the year, you must file a consolidated ITR personally.
(e) Fringe Benefits
(a) Definition — any good, service, or other benefit furnished or granted in cash or in kind by an employer to an individual employee
(except rank and file employees as defined therein)
(b) Fringe Benefit Tax: 35% of the Grossed-Up Monetary Value (GUMV) of the benefit
Grossed Up Monetary Value for:
• Special Employees
Three tests:
1.Position and Function Test — occupying managerial or technical positions
2.Compensation threshold test — compensation must not exceed P820,000 (?)
3.Exclusivity test — you must be employed only by such company
Two options:
0-35% or 15% of the gross income. if you avail 15%, automatically, FBT is also 15%
• NRA-NETB — 25% tax
(c) Nature of FBT: Final tax should be shouldered by the employer, as a rule.
(d) Kinds of Fringe Benefits (HEVHIMEHEL) (the list is not exclusive)
i. Housing
ANNUAL VALUE OF
CASE MONETARY VALUE OF BENEFIT
THE BENEFIT
Employer leases residential property for use of the 50% x monthly rental paid by the
-
employee employer
Employer owns residential property which was 5% of FMV or zonal 50% x monthly value of the
assigned to an officer for his use as residence value of land and benefit
improvements,
whichever is higher Monthly Value = Annual Value/
12
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ANNUAL VALUE OF
CASE MONETARY VALUE OF BENEFIT
THE BENEFIT
Employer purchases residential property on 5% of acquisition 50% x monthly value of the

installment basis and allows the employee to use cost excluding benefit
the same as his residence interest
Purchases residential property and transfers the Acquisition cost or FMV

-
ownership to the employee whichever is higher
Purchases residential property and transfers FMV of CIR and FMV of Assessor
ownership thereof to his employee for the latter’s (zonal value), whichever is
-
residential use at a price less than the employer’s higher minus the cost to the
acquisition cost employee
Exceptions:
1. Housing privilege of officials of AFP, Philippine Navy, and Philippine Air Force
2. A housing unit which is situated inside or within the maximum of 50 meters from the perimeter of the business premises
or factory
Exception: Employee is still exempted of the housing privilege of up to 100 meters if employer’s factory is hazardous.
3. Temporary housing for an EE who stays in a housing unit for three months or less
ii. Expense Account
The following are treated as taxable fringe benefits:

a. Expenses incurred by the employee but paid by his employer
b. Expenses paid by the employee but reimbursed by his employer. However, if the above expenditures are duly
receipted for and in the name of the employer and these do not partake the nature of a personal expense
attributable to the employee, the same shall not be subject to fringe benefit tax; and
c. Personal expenses of the employee paid for or reimbursed by the employer to the employee whether or not
the same are duly receipted for in the name of the employer
Representation and transportation allowances which are fixed in amounts and are regularly received by the employees as part of
their monthly compensation income shall be considered as taxable compensation income subject to WHT on wages.
iii. Vehicle of any kind
- if there is transfer of ownership to the employee, 100% of the value is subject to fringe benefit tax
- if there is no transfer of ownership, 50% of the value only is subject to FBT
\Guidelines in valuation of Motor Vehicles:

CASE TRANSACTION MONETARY VALUE OF BENEFIT
1 Purchases the motor vehicle in the name of the employee Acquisition Cost
2 Provides the employee with cash for the purchase of a Amount of cash received by the
motor vehicle in the name of the employee employee
3 Shoulders a portion of the amount of the purchase price of Amount shouldered by the
a motor vehicle in the name of the employee employee
4 Purchase the car on installment in the name of the Acquisition cost (exclusive of interest)
employee divided by 5 years
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CASE TRANSACTION MONETARY VALUE OF BENEFIT
5 Owns and maintains a fleet of motor vehicles for the use of Acquisition cost of all motor vehicles
the business and the employees not normally used in business divided
by 5 years x 50%
6 Leases and maintains a fleet of motor vehicles for the use Amount of rental payment for motor
of the business and the employees vehicles not normally used in
business x 50%
7 The use of yacht whether owned and maintained or Depreciation of yacht at an

leased by the employer estimated useful life of 20 years
Remember: If there is transfer of ownership (as in Cases 1-4), monetary value of the benefit is 100%. Otherwise, 50% as in the
cases 5 and 6.
iv. Household personnel
- Expenses of the employee which are borne by the employer for household personnel, such as salaries of household help,
personal driver of the employee, or other similar personal expenses (like payment for homeowners association dues,
garbage dues, etc) shall be treated as taxable fringe benefits
- Household personnel should not be under the payroll of the employer because he will be treated as an employee of the
employer and not the company
v. Interest on loan at less than market rate
• If the employer lends money to his employee free of interest or at a rate lower than 12%, such interest foregone by
the employer of the difference of the interest assumed by the employee and the 12% rate shall be treated as taxable
fringe benefit.
- Monetary Value = difference between 12% interest and the interest imposed
Example: EE loaned at 7% interest. The difference of 5% will be treated as taxable fringe benefit
• The benchmark interest rate of 12% shall remain in effect until revised by a subsequent regulation
• This regulation shall apply to installment payments or loans with interest rate lower than 12% starting January 1, 1998
vi. Membership fees, dues, and other expenses borne by the employer in social and athletic clubs or similar
organizations
- Monetary value = the cost of membership

- If it is necessary for his/her position, then it is considered for the benefit of the employer or pursuant to the nature of the
business of the employer, thus, not subject to FBT
vii. Expenses for foreign travel
• Inland travel expenses except lodging cost in a hotel amounting to an average of US$300 or less per day, shall not be
subject to FBT. The expenses should be supported by documents proving the actual occurrences of the meetings or
conventions
• Cost of economy and business class airplane ticket shall not be subject to FBT. However, 30% of the cost of the first
class airplane ticket shall be subject to FBT.
• In the absence of documentary evidence showing that the employee’s travel abroad was in connection with business
meeting or conventions, the entire cost of the ticket, including cost of hotel accommodations and other expenses
incident thereto shouldered by the employer, shall be treated as taxable fringe benefits.
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• Business meetings shall be evidenced by official communications from business associates abroad indicating the
purposes of meetings.
• Business conventions shall be evidenced by official invitations/communications from the host organization or entity
abroad. OW, the entire cost thereof shouldered by the ER shall be treated as taxable fringe benefits of the EE.
• Traveling expenses, which are paid by the ER for the travel of the family members of the EE, shall be treated as taxable
fringe benefits of the EE.
Determine how much is considered as Fringe Benefit Answer: Php 90,000 + USD 100
Local Transportation USD 100 Inland travel expenses of US$300 or less per day shall not
Food and Drinks USD 300 be subject to FBT; excess thereof will be subject to FBT.
Lodging USD 1,500 Lodging is not subject to FBT pursuant to RR 03-98. 30% of
First class airplane ticket PHP 300,000 the first class airplane ticket shall be subject to FBT therefore,
only P90,000 (P300,000 x 30%) is subject to FBT.
viii.Holiday and vacation expenses
ix. Educational assistance to the EE or his dependents; and
Taxable Fringe Benefits

• Cost of the educational assistance to the EE or his dependents which are borne by the ER
Non-taxable Fringe Benefits

• The education or study involved is directly connected with the ER’s trade, business or profession; and
• There is a written contract between them to the effect that the employee is under obligation to remain in the employ of
the ER for the period that they have mutually agreed upon or the assistance to the EE’s dependent was provided
through a competitive scheme under the scholarship program of the company
x. Life or health insurance and other non-life insurance premiums or similar accounts in excess of the law allows
The following shall not be treated as taxable fringe benefits:

1. Contribution under SSS Law
2. Contribution under GSIS Law
3. Similar contributions under existing laws
4. Premium for group insurance or employees
Remember:
➡ If the beneficiary is the heir, it is considered as income of the employee.
➡ If the employee is managerial or supervisory, it is subject to FBT. But if the beneficiary is the company, it is not considered as fringe
benefit since the employee is never benefited from it.

(e) Exemptions from Fringe Benefit Tax
i. De Minimis Benefits — facilities and privileges of relatively small value and are offered or furnished by the ER to his EE merely
as means of promoting their health, goodwill, contentment or efficiency
The following shall be considered “De Minimis” benefits not subject to income tax, hence, not subject to withholding tax on
compensation income of both managerial and rank and file EE:
a. Monetized unused vacation leave credits of private EEs not exceeding 10 days during the year (sick leave not
included for private companies)
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b. Monetized value of vacation and sick leave credits paid to government officials and EEs
c. Medical cash allowance to dependents of EEs, not exceeding the P750.00 per EE per semester or P125.00 per
annum
d. Rice subsidy of P1,500 or one sack of 50kg rice per month amounting to not more than P1,500
e. Uniform and clothing allowance not exceeding P5,000 per annum
f. Actual medical assistance not exceeding P10,000 per annum
g. Laundry allowance not exceeding P300.00 per month
h. Employees achievement awards which must be in form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established
written plan which does not discriminate in favor of highly paid employees
i. Gifts given during Christmas and major anniversary celebration not exceeding P5,000.00 per employee per annum
j. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the basic minimum wage on
a per region basis and
k. Benefits received by an employee by virtue of a CBA and productivity incentive schemes provided that the total annual
monetary value received from both CBA and productivity incentive schemes do not exceed P10,000 per employee per
taxable year
Note: Amount in excess of the de minimis threshold shall form part of the P90,000 “13th month and other benefits“ threshold.
ii. Contributions of the employer for the benefit of the EE to retirement, insurance and hospitalization benefits plan are not
subject to FBT
iii.Employer’s Convenience Rule — not subject to FBT so long as it is necessary for the operations of the company
iv.Fringe Benefit which are authorized or exempted from tax under special laws
Example: Separation benefits which are given to EEs who are involuntarily separated from work
B. Business or Professional Income
- may relate to sale of goods, properties, or services. It may come from the conduct of trade or business, or the exercise of a profession, or
gain derived from dealings in property
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1.Income derived by self-employed from trade or business
• Business in any activity that entails the time, attention and effort of an individual or group of individuals for livelihood or profit
• “Engage” connotes more than a single act or a single transaction; it involves some continuity of action
2.Professional Income — refers to the fees received by a professional from the practice of his profession, provided that there is no employer-
employee relationship between him and his clients
3.Gross income of farmers include:

If a farmer reports on the basis of receipts and disbursements:
1.the amount of cash or the value of merchandise or other property received from the sale of livestock and produce which were
raised during the taxable year or prior years
2.the profits from the sale of any livestock or other items which were purchased
3.gross income from all other sources
If a farmer reports on the accrual basis:

• his gross profits are ascertained by adding to the inventory value of livestock and products on hand at the end of the year the
amount received from the sale of livestock products, and miscellaneous receipts for hire of teams, machinery, and the like, during
the year, and deducting from the sum of inventory value of livestock and products on hand at the beginning of the year and the
cost of the livestock and products purchased during the year.
Inventory, end xx
Amount received from sale of products xx
Miscellaneous receipts for hire
of machinery, etc xx
Less: Inventory, beg (xx)
Gross Income on accrual xx
C. Passive Income
- the income earned without the active participation of the person who earned the income. It is subject to Passive Income tax, which is a final
withholding tax.
- the withholding agent is the payor or the one who paid
- payor must be in the taxing jurisdiction of the Philippines, ow he cannot withhold the tax on passive income
Note: Passive income from sources outside the Philippines will be included as gross income subject to graduated income tax rate (GITR).
RC, RA
TYPE OF PASSIVE INCOME NRA-ETB NRA-NETB
NRC
1.Interest from currency deposits, trust funds, and deposit substitutes 20% 20% 25%
2.Royalties (on books, literary, and musical composition) 10% 10% 25%
— In general 20% 20% 25%
3.Prizes (P10,000 or less) GITR GITR 25%
— in excess or P10,000 20% 20% 25%
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RC, RA
TYPE OF PASSIVE INCOME NRA-ETB NRA-NETB
NRC
4.PCSO and lotto winnings (P10,000 or less) Exempt Exempt Exempt
— in excess if P10,000 20% 20% 25%
5.Interest Income of Foreign Currency Deposits 15% 20% 25%
6.Cash and Property Dividends 25%
— to individuals from DC 10% 20% 25%
— to DC from another DC 0% 25%
7.On capital gains presumed to have been realized from sale, exchange or
6% 6% 6%
other disposition of RP (capital asset)
8.On capital gains for shares of stock not traded in stock exchange 15% 15% 15%
9.Interest income from long-term deposit or investment in the form of savings,

common or individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates
Exempt Exempt 25%
Upon termination before the fifth year, there should be imposed on the entire
income from the proceeds of the long-term deposit based on the remaining
maturity thereof:
Holding Period
5% 5% 25%
—4 years to less than 5 years
— 3 years to less than 4 years 12% 12% 25%
— less than 3 years 20% 20% 25%
Note:
• If it is an active royalty, such as a business is engaged in extending franchises (ie Jollibee, McDonald’s), royalties earned will be included
in the gross income subject to GITR. This is because they are active in earning royalties and this becomes a regular source of income.
i. Taxation at Source
(a) Final Withholding Tax

- is a kind of withholding tax which is prescribed on certain income payments and is not creditable against the income tax dues of
the payee on other income subject to regular rates of tax for the taxable year.
- Income Tax withheld constitutes the full and final payment of the Income Tax due from the payee on the particular income subjected
to final withholding tax
(b) Creditable Withholding Tax

➡ Withholding Tax on Compensation — the tax withheld from income payments to individuals arising from an employer-
employee relationship
➡ Expanded Withholding Tax — a kind of withholding tax which is prescribed on certain income payments and is creditable against
the income tax due of the payee for the taxable quarter/year in which the particular income was earned
➡ Withholding Tax on Government Money Payments (GMP) — Percentage Taxes — the tax withheld by NGAs and instrumentalities,
including GOCCS, and LGUs before making any payments to non-VAT registered taxpayers/suppliers/payees
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➡ Withholding Tax on GMP — Value Added Taxes — the tax withheld by NGAs and instrumentalities, including GOCCS, and LGUs
before making any payments to VAT registered taxpayers/suppliers/payees on account of their purchases of goods and services
Jurisprudence:
ING Bank N.V vs CIR, GR No. 167679 July 22, 2015
“The obligation of the payor/employer to deduct and withhold the related withholding tax arises at the time the income was paid or
accrued or recorded as an expense in the payor's/employer's books, whichever comes first.”
Facts: ING Bank accrued bonuses in the taxable years 1996 and 1997, although no withholding taxes were withheld in the year of
accrual. The taxpayer was then assessed for deficiency withholding taxes in the year of accrual. ING Bank maintained that the liability
of the employer to withhold the tax does not arise until such bonus is actually distributed, citing Section 72 of the 1977 NIRC which
states that every employer making payment of wages shall deduct and withhold upon such wages. Since the supposed bonuses were
not distributed to the officers and employees in 1996 and 1997 but were distributed in the succeeding year when the amounts of
bonuses were finally determined, taxpayer asserts that its duty to withhold tax during those years did not arise.
Issue: WON ING Bank is liable for withholding taxes on bonuses accruing to its officers and employees during the taxable years 1996
and 1997.
Held: Yes, ING Bank is liable for the withholding tax on the bonuses since it claimed the same as expense in the year they were
accrued.
An expense, whether the same is paid or payable, "shall be allowed as a deduction only if it is shown that the tax required to be
deducted and withheld therefrom [was] paid to the Bureau of Internal Revenue[.]
Under the National Internal Revenue Code, every form of compensation for personal services is subject to income tax and,
consequently, to withholding tax. The term "compensation" means all remunerations paid for services performed by an employee for
his or her employer, whether paid in cash or in kind, unless specifically excluded under Sections 32(B) and 78(A) of the 1997 National
Internal Revenue Code. The name designated to the remuneration for services is immaterial. Thus, "salaries, wages, emoluments and
honoraria, bonuses, allowances (such as transportation, representation, entertainment, and the like), [taxable] fringe benefits [,]
pensions and retirement pay, and other income of a similar nature constitute compensation income” that is taxable. Hence, petitioner
ING Bank is liable for the withholding tax on the bonuses since it claimed the same as expenses in the year they were accrued.
Furthermore, petitioner’s contention that the bonus accruals in 1996 and 1997 were not yet subject to withholding tax because these
bonuses were actually distributed only in the succeeding years of their accrual when the amounts were finally determined is
untenable. The tax on compensation income is withheld at source under the creditable withholding tax system wherein the
tax withheld is intended to equal or at least approximate the tax due of the payee on the said income. It was designed to
enable (a) the individual taxpayer to meet his or her income tax liability on compensation earned; and (b) the government to collect
at source the appropriate taxes on compensation. Taxes withheld are creditable in nature. Thus, the employee 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. For
over withholding, the employee is refunded. Therefore, absolute or exact accuracy in the determination of the amount of the
compensation income is not a prerequisite for the employer's withholding obligation to arise.
It is true that the law and implementing regulations require the employer to deduct and pay the income tax on compensation paid to
its employees, either actually or constructively.
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If the taxpayer is on cash basis, the expense is deductible in the year it was paid, regardless of the year it was incurred. If he is on the
accrual method, he can deduct the expense upon accrual thereof. An item that is reasonably ascertained as to amount and
acknowledged to be due has "accrued"; actual payment is not essential to constitute “expense."
Stated otherwise, an expense is accrued and deducted for tax purposes when (1) the obligation to pay is already fixed; (2)
the amount can be determined with reasonable accuracy; and, (3) it is already knowable or the taxpayer can reasonably be
expected to have known at the closing of its books for the taxable year.
Section 29(j) of the 1977 National Internal Revenue Code (Section 34(K) of the 1997 National Internal Revenue Code) expressly
requires, as a condition for deductibility of an expense, that the tax required to be withheld on the amount paid or payable is shown
to have been remitted to the Bureau of Internal Revenue by the taxpayer constituted as a withholding agent of the government.
The provision of Section 72 of the 1977 National Internal Revenue Code (Section 79 of the 1997 National Internal Revenue
Code) regarding withholding on wages must be read and construed in harmony with Section 29(j) of the 1977 National Internal
Revenue Code (Section 34(K) of the 1997 National Internal Revenue Code) on deductions from gross income. This is in accordance
with the rule on statutory construction that an interpretation is to be sought which gives effect to the whole of the statute, such that
every part is made effective, harmonious, and sensible, if possible, and not defeated nor rendered insignificant, meaningless, and
nugatory. If we go by the theory of petitioner ING Bank, then the condition imposed by Section 29(j) would have been rendered
nugatory, or we would in effect have created an exception to this mandatory requirement when there was none in the law.
Reading together the two provisions, we hold that the obligation of the payor/employer to deduct and withhold the related
withholding tax arises at the time the income was paid or accrued or recorded as an expense in the payor's/employer's books,
whichever comes first.
Petitioner ING Bank accrued or recorded the bonuses as deductible expense in its books. Therefore, its obligation to withhold the
related withholding tax due from the deductions for accrued bonuses arose at the time of accrual and not at the time of actual
payment.
ii. Transactions Subject to Final Withholding
a) Income payments to a Citizen or to a Resident Alien Individual

- Interest on any peso bank deposit
- Royalties
- Prizes [except amounting to P10,000 or less which is subject to GITR]
- Winnings (except winnings not exceeding P10,000 from PCSO which are exempted)
- Interest Income on foreign currency deposit
- Interest income from long-term deposit
- Cash and/or property dividends
- Capital Gains presumed to have been realized from the sale, exchange or other disposition of real property
b) Income payments to a NRA-ETB

- On certain passive income
- Cash and/or property dividend
- Share in the distributable net income of a partnership
- Interest on any bank deposits
- Royalties
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- Prizes [except amounting to P10,000 or less which is subject to GITR]
- Winnings (except winnings not exceeding P10,000 from PCSO which are exempted)
- Interest on Long Term Deposits (except those with the term of five years or more)
- Capital Gains presumed to have been realized from the sale, exchange or other disposition of real property
c) Income derived from All Sources Within the Philippines by a NRA-NETB Individual
- On gross amount of income derived from all sources within the Philippines
- On capital gains presumed to have been realized from the sale, exchange, or disposition of real property located in the Philippines
d) Income derived by Alien Individual Employed by Special Corporations
e) Fringe Benefits Granted to the Employee (except rank and file)
f) Informers’ Reward
➡ This will only be given to you if the BIR is actually able to recover revenues, surcharges, fees and/or when there is actually
conviction of a guilty party. The BIR was able to impose any fine or penalty and were able to seize smuggled goods.
➡ It will only be equivalent to 1m or 10% of the revenues recovered, whichever is lower.
➡ The maximum amount that you are able to get under the tax informer’s reward is 900k because the 10%will be withheld.
g) Cash or property dividends paid by a Real Estate Investment Trust (REIT) pursuant to Section 13 of RR 13-2011
Jurisprudence:
BDO, et al vs Republic of the Philippines, et al. GR No. 198756 January 13, 2015
"The application of the withholdings system to interest on bank deposits or yield from deposit substitutes is essentially to maximize and
expedite the collection of income taxes by requiring its payment at the source. Hence, when there are 20 or more lenders/investors in a
transaction for a specific bond issue, the seller is required to withhold the 20% final income tax on the imputed interest income from the
bonds.”
Facts: This case involves P35 billion worth of 10-year zero-coupon treasury bonds issued by the Bureau of Treasury (BTr) denominated as the Poverty
Eradication and Alleviation Certificates or the PEACe Bonds. These PEACe Bonds would initially be purchased by a special purpose vehicle on behalf of
Caucus of Development NGO Networks (CODE-NGO), repackaged and sold at a premium to investors. The net proceeds from the sale will be used to
endow a permanent fund to finance meritorious activities and projects of accredited non-government organizations (NGOs) throughout the country. In
relation to this, CODE-NGO wrote a letter to the Bureau of Internal Revenue (BIR) to inquire as to whether the PEACe Bonds will be subject to
withholding tax of 20%. The BIR issued several rulings beginning with BIR Ruling No.020-2001 (issued on May 31, 2001) and was subsequently
reiterated its points in BIR Ruling No. 035-200119 dated August 16, 2001 and BIR Ruling No. DA-175-0120. The rulings basically say that in
determining whether financial assets such as a debt instrument are deposit substitute, the “20 or more individual or corporate lenders rule” should
apply. Likewise, the “at any one time” stated in the rules should be construed as “at the time of the original issuance.”
With this, BTr made a public offering of the PEACe Bonds to the Government Securities Eligible Dealers (GSED) whereby RCBC won as the highest bidder
for approximately 10.17 billion, resulting in a discount of approximately 24.83 billion. RCBC Capital Capital entered into an underwriting agreement
with CODE-NGO, whereby RCBC Capital was appointed as the Issue Manager and Lead Underwriter for the offering of the PEACe Bonds.
In October 7, 2011, BIR issued BIR RULING NO. 370-2011 in response to the query of the Secretary of Finance as to the proper tax treatment of the
discounts and interest derived from Government Bonds. It cited three other rulings issued in 2004 and 2005. The above ruling states that the all
treasury bonds (including PEACe Bonds), regardless of the number of purchasers/lenders at the time of origination/issuance are considered deposit
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substitutes. In the case of zero-coupon bonds, the discount (i.e. difference between face value and purchase price/discounted value of the bond) is
treated as interest income of the purchaser/holder.
Issue: WON PEACe Bonds are "deposit substitutes" and thus subject to 20% final withholding tax under the 1997 National Internal Revenue Code.
Held: The decision provided the definition of deposit substitute 1997 National Internal Revenue Code which placed the 20-lender rule. In particular,
Section 22 (Y) states that a debt instrument shall mean “…an alternative form of obtaining funds from the public (the term 'public' means borrowing
from twenty (20) or more individual or corporate lenders at any one time) other than deposits, through the issuance, endorsement, or acceptance of
debt instruments for the borrower’s own account….” The determination as to whether a deposit substitute will be imposed with 20% final withholding
tax rests on the number of lenders.
The PEACe Bonds, according to the SC, requires further information for proper determination of whether these bonds are within the purview of deposit
substitutes. The Court noted that it may seem that the lender is only CODE-NGO through RCBC. However, the underwriting agreement reveals that the
entire P35 billion worth of zero-coupon bonds were sourced directly from the undisclosed number of investors. These are the same investors to whom
RCBC Capital distributed the PEACe Bonds all at the time of the origination or issuance. Hence, until there is information as to whether the PEACe Bonds
are found within the coverage of deposit substitutes, the proper procedure for the BIR is to collect the unpaid final withholding tax directly from RCBC
Capital/ CODE-NGO, or any lender if such be the case.
The court also noted that according to the NIRC, Section 24, interest income received by individuals from long term deposits or investments with a
holding period of not less than five years is exempt from final tax.
In construing the phrase “at any one time” provided for in the definition of “public”, the Supreme Court made an analysis of how financial market works.
According to the Court, in the financial market whether this refers to capital markets securities or money market securities, transactions happen in two
venues: the Primary and the Secondary Market. The primary market transactions happen between issuers and investors where issuance of new securities
is facilitated. The secondary market is where the trading occurs among investors. This goes to show that for one security, there are different and separate
transactions happening depending on the flow of the transaction. In the exact words of the Supreme Court, “an agglomeration of financial transactions
in securities performed by market participants that works to transfer the funds from the surplus units (or investors/lenders) to those who need them
(deficit units or borrowers)….”
When there are 20 or more lenders/investors in a transaction for a specific bond issue, the seller is required to withhold the 20% final income tax on the
imputed interest income from the bonds. The Supreme Court cited Sections 24(B) (1), 27(D)(1), and 28(A)(7) of the 1997 National Internal Revenue
Code. These provisions state the imposition of a final tax rate of 20% upon the amount of interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes. On the other hand, for instruments not considered as deposit substitutes, these will be subjected to regular
income tax. The prevailing provision is Section 32(A). Hence, should the deposit substitute involves less than 20 lenders in a transaction, the income is
considered as “income derived from whatever source”.
The income is a “gain from sale” and should not be confused with “interest” provided for in Sections 24, 27 and 28. The Supreme Court noted that the
“gain” referred to in Section 32 (A) pertains to that realized from the trading of bonds at maturity rate (difference between selling price in the secondary
market and that upon purchase) or the gain realized by the last holder of the bonds when redeemed at maturity (the difference between proceeds from
retirement of bonds and the price upon acquisition of the last holder). In the case of discounted instruments, like the zero-coupon bonds, the trading
gain shall be the excess of the selling price over the book value or accreted value (original issue price plus accumulated discount from the time of
purchase up to the time of sale) of the instruments.
The Supreme Court finds that the BIR Rulings issued in 2001 and the assailed BIR Rulings are defective taking into consideration the above discussions
on deposit substitutes and its tax treatment. As for the BIR Rulings issued in 2001, the SC finds that the interpretation of the phrase “at any one time”, is
“…to mean at the point of origination alone is unduly restrictive….” On the other hand, the 2011 BIR Ruling which relied on the 2004 and 2005 BIR
Rulings is void for creating a distinction between government bonds and those issued by private corporations, when there is none in the law. Further, it
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completely disregarding the 20-lender rule under the NIRC since it says, ““all treasury bonds . . . regardless of the number of purchasers/lenders at the
time of origination/issuance are considered deposit substitutes…”
D.. Capital Gains

i. Sale of Shares of Stocks not listed and traded OR listed but not traded in local stock exchange
Dealer in Securities
- refers to a merchant of stocks or securities, whether an individual, partnership or corporation, with an established place of business,
regularly engaged in the purchase of securities and the resale thereof to customers; that is one, who as merchant buys securities and
re-sells them to customers with a view to the gains and profits that may be derived therefrom
- any person who buys and sells securities for his/her own account in the ordinary course of business
Capital Gains Tax (CGT) — 15% of the net capital gains

Q: How to determine the FMV?
1. If listed but not traded in the local stock exchange:
a. FMV is based on the closing rate on the day when the shares are sold
b. When no sale is made on the day, the closing rate nearest to the day of sale or exchange
2. If not listed and not traded:
a. The net capital gains is computed by deducting the cost from the selling price, book value, or fair market value
whichever is higher.
✓ Selling Price — the consideration by the parties
✓ Book Value — based on the Audited Financial Statements
✓ FMV is based on Adjusted Net Asset Method, whichever is higher between:
๏ FMV as determined by CIR (zonal value)
๏ FMV as shown in the schedule of values by provincial or city assessor (Assessor’s office; tax declaration)
๏ Appraiser’s certificate
Note: If the stock is listed and traded, it is subject to stock transaction tax of 6/10 of 1% of the gross selling price or gross value in money
of the shares of stock sold.
ii. Sale of Real Property

a. Located in the Philippines
CGT — 6% based on SP or FMV whichever is higher
If RP is sold during involuntary sales, the taxes thereof shall be counted from the date the right of the buyer to redeem the property
has expired. In such case, the tax shall be based in whichever is higher between the bid prize, FMV, or zonal.
b. Located outside the Philippines

Graduated income tax — resident citizen
Normal corporate income tax — domestic corporation
c. Not subject to CGT:

1. All real properties acquired by the real estate dealer shall be considered as ordinary assets.
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2. All real properties acquired by real estate developer, whether developed or undeveloped as of the time of acquisition, and all real
properties which are held by the real estate developer primarily for sale of for lease to customers in the ordinary course of his
trade or business, whether in the form of land, building, or other improvements, shall be considered as ordinary assets.
3. All real properties of the real estate lessor, whether land, building and/or improvements, which are for lease/rent, or otherwise
for use or being used in the trade or business shall likewise be considered as ordinary assets.
4. All real properties acquired in the course of trade or business by a taxpayer habitually engaged in the sale of real property shall
be considered as ordinary assets
Note: Registration with the HLURB or HUDCC as a real estate dealer or developer shall be sufficient for a taxpayer to be considered as
habitually engaged in the sale of real estate. If the taxpayer is not registered with the HLURV or HUDCC as a real estate dealer or
developer, he may nevertheless be deemed engaged in the real estate business through the establishment of substantial evidence such
as consummation during the preceding year of at least 6 taxable real estate sales transactions regardless of amount.
Rules on Transactions involving Real Properties:

a. A property purchased for future use in the business, even though his purpose is later thwarted by circumstances beyond the
taxpayer’s control, does not lose it character as an ordinary asset. Nor does a mere discontinuance of the active use of the
property change its character previously established as a business property.
b. In case of taxpayer not engaged in the real estate business, real properties, whether land, building or other improvements,
which are used or have been previously used in the trade or business of the taxpayer shall be considered as an ordinary asset.
c. In the case of taxpayers who changed its real estate business to a non-real estate business, real properties held by these
taxpayers shall remain to be treated as ordinary assets.
d. In the case of taxpayers who originally registered to be engaged in the real estate business but failed to subsequently operate,
all real properties acquired by them shall continue to be treated as ordinary assets.
e. Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business, or formerly being
used in the trade or business of a taxpayer engaged or not engaged in the real estate business, which were later on abandoned
and became idle, shall continue to be treated as ordinary assets. Provided however, that properties classified as ordinary assets
for being used in business by a taxpayer engaged in business other than real estate business are automatically converted into
capital assets upon showing proof that the same have not been used in business for more than two years prior to the
consummation of the taxable transactions involving said properties.
f. Real properties classified as capital or ordinary asset in the hands of seller/transferor may change their character in the hands of
the buyer/transferee shall be determined in accordance with the following rules:
a. Real property transferred through succession or donation to the heir or donee who is not engaged in the real
estate business with respect to the real property inherited or donated, and who does not subsequently use such
property in trade or business, shall be considered as capital asset in the hands of the heir or donee.
b. Real property received as dividend by the stockholders who are not engaged in the real estate business and who
do not subsequently use such property in trade or business, shall be considered as a capital asset in the hands of the
recipients even if the corporation which declared the real property dividends is engaged in real estate business.
c. The real property received in an exchange shall be treated as ordinary asset in the hands of the case of a tax-free
exchange by taxpayer not engaged in real estate business to a taxpayer who is engaged in real estate business, or
to a taxpayer who, even if not engaged in real estate business, will use in business the property received in exchange.
d. In the case of involuntary transfers of real properties, including expropriations or foreclosure sale, the involuntariness of
such sale shall have no effect on the classification of such real property in the hands of the involuntary seller, either as
capital asset or ordinary asset as the case may be.
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iii. Sale of Other Capital Assets
Subject to the graduated income tax rate (individuals) or normal corporate tax rate (corporation), i.e. motor vehicle not used in business,
short term commercial papers not considered deposit substitutes.
Holding period of other capital asset is material for “individual” taxpayers ONLY
Rule:
• 50% capital gain is taxable if held for more than 12 months — long-term capital gain;
• 100% capital gain is taxable if held for 12 months or less
• Capital losses can be offset only against and to the extent of capital gains.
iv. Conditionally Exempt from payment of CGT

• The proceeds of the sale of principal residence have been fully utilized in acquiring or constructing new principal residence within 18
months from the date of sale or disposition;

• The historical cost or adjusted basis of the real property sold or disposed will be carried over to the new principal residence built or
acquired;
• The Commissioner has been duly notified, through a prescribed return, within thirty days from the date of sale or disposition of the
person’s intention to avail of the tax exemption;

• Exemption was availed only once every 10 years; and
• There is no full utilization of the proceeds of sale or disposition. The portion of the gain presumed to have been realized from the sale or
disposition will be subject to CGT.

• In case of sale/transfer of principal residence, the Buyer/Transferee shall withhold from the seller and shall deduct from the agreed
selling price/consideration the 6% CGT which shall be deposited in cash or manager’s check in interest-bearing account with an
Authorized Agent Bank under an Escrow Agreement between the concerned Revenue District Officer, the Seller and the Transferee, and
the AAB to the effect that the amount so deposited, including its interest yield, shall only be released to such Transferor upon
certification by the said RDO that the proceeds of the sale or disposition thereof has, in fact, been utilized in the acquisition or
construction of the Seller/Transferor/s new principal residence within 18 months from the date of the said sale or disposition. The date or
sale or disposition of a property refers to the date of notarization of the document evidencing the transfer of said property.
v. Exempt entities from CGT

• Dealer in securities, regularly engaged in the buying and selling of securities
• An entity exempt from the payment of income tax under existing investment incentives and other special laws
• An individual or non-individual exchanging real property solely for shares of stocks resulting in corporate control
• A government entity or GOCC selling real property
• If the disposition of the real property is gratuitous in nature
• Where the disposition is pursuant to the CARP Law
• The proceeds of the sale of the principal residence have been fully utilized in acquiring or constructing new principal residence within
18 calendar months from the date of sale or disposition; (refer to requirements above)
vi. Certificate Authorizing Registration (CAR) is a certification issued by the Commissioner or his duly authorized representative attesting
that the transfer and conveyance of land, building/improvements or shares of stock arising from the sale, barter or exchange have been
reported and taxes due inclusive of the documentary stamp tax, have been fully paid.
E. Other Income
A. Rent Income other than royalties — the payor shall withhold 5% of the rental payment
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B. Interest income other than interest income on bank deposit
C. Dividend income — determine if the dividends are sourced from domestic or foreign corporation
If dividends are received from a foreign corporation in the Philippines during the last 3 preceding years, the ff shall apply:
• If the income derived from the Philippines is more than 85%, it is treated as a domestic corporation. Thus, it will be subject
to passive income tax.

• If the income derived from the Philippines is less than 50%, it is considered as a foreign corporation. Thus, it will not be
subject to passive income tax.

• If the income derived from the Philippines is more than 50%, it will be subject to tax partly within. You need to take into
consideration the ratio. Thus, if its income derived from the Philippines is only 60%, then only 60% of the dividends will be
subjected to passive income tax.
D. Income from other sources and this include:
(a) Bad debts recovered
- bad debts can only be considered as income when it is recovered
- apply the tax benefit rule which means that the bad debts recovered will only be considered as an income if the taxpayer
has been previously benefitted from the bad debts.
Example 1:
Year 2014 Income P50,000
Less: Bad Debts (P10,000)
Taxable Income P40,000
Year 2015 The entire amount of P10,000 was recovered.
✓ Since taxpayer’s taxable income is lowered by P10,000, he/she was benefitted from the bad debts. In the year 2015, the
bad debts recovered will be considered as taxable, applying the tax benefit rule.
Example 2:
Taxable Income 0
✓ The bad debts recovered will still be considered as taxable because the taxpayer benefitted from the bad debts
Example 3:
Taxable Income 0
Year 2015 The amount of P50,000 was recovered.
✓ The bad debts recovered in 2015 will still be considered as taxable because the taxpayer benefitted from the bad debts
but only to the extent of P50,000.
Example 4:
Year 2014 Income ( P5,000)
Taxable Income 0
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✓ The bad debts recovered in 2015 will not be considered as taxable because the taxpayer was not benefitted from the
bad debts expense in 2014. His income in 2014 is already negative and deducting the bad debts expense had no effect
in his taxable income. Therefore, bad debts recovered is not considered as taxable.
(b) Illegal gains derived from gambling

(c) Tax Refunds
- It means that you have paid more than what is required to pay and when you are refunded you are restituted with money of
the tax credit certificate.
- You have to determine what type of tax has been overpaid. If the type of tax is not a deductible expense such as income tax
(you cannot deduct income tax in computing income tax) (other non-deductible taxes: donor’s tax, estate tax, VAT),
subsequent refunds can never be subject to tax because it has never been deducted from your gross income.
- Refunds of deductible taxes such as real property tax, community tax, will have to be examined under the tax benefit rule
(taxable if it has benefitted the taxpayer in the taxable year it has been paid) in order to determine whether such refunds
are taxable.
(d) Compensation for private property expropriated by the government for public use
(e) Damages — excluding damages received from physical injuries (check Exclusions)
(f) Cancellation of indebtedness
Rules:
A. If the reason for cancellation is due to the services rendered by the debtor, it is subject to income tax.
B. If the reason for cancellation is due to the generosity or liberality of the creditor, it is NOT subject to income tax but
subject to donor's tax.
C. When the corporation extended a debt to one of its stockholders and eventually condone the debt, it is subject to
DIVIDEND INCOME tax of 10% or 20% or 25% as the case may be.
D. When the stock holder extended a debt to its corporation and eventually condoned the debt, it is considered as part of
investment that shall not be subject to tax since it is a capital.
INCOME TAX COMPUTATION
For Pure Compensation Income Earner

Compensation Income (net of mandatory deductions) P xx
Multiply by Tax Rate (0-35%) xx
Income Tax Due xx 
Less: Tax Withheld (per BIR form 2316) xx
Income Tax Due and Payable P xx
For self-employed individuals
Gross Income P xx
Less: Allowable Deductions (Itemized or OSD) (xx)
Net Taxable Income P xx
Multiply by Tax Rate (0-35%) xx
Income Tax Due xx
Less: Withholding Taxes (BIR Form 2304), Tax Credits xx
Income Tax Payable P xx
OR
8% of the Gross Sales/Receipts and other operating income in excess of P250,000 in lieu of the GITR and percentage tax.
(RR 08-2018)
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Note: The option to be taxed at 8% income tax rate is not available to a VAT-Registered taxpayer (remember P3M VAT threshold),
regardless of the amount of gross sales/receipts, and to a taxpayer who is subject to Other Percentage Taxes. Likewise, partners of a GPP
by virtue of their distributive share from GPP which is already net of cost and expenses cannot avail of the 8% income tax rate option. (RR
08-2018)
TAX ON NRA-NETB
Upon the entire income received from all sources within the Philippines by this taxpayer such as interest, cash and/or property dividends,
rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or
causal gains, profits, and income, and capital gains — 25% (RR 08-2018)
EXCLUSIONS (LAGCRIM)
Disclaimer: Review nlng sa midterms coverage ani please kay mutaas na ug ayo
1. Life Insurance
- reason for exclusion: deemed as indemnity for the loss of life
- the condition here is that the insured should have died. If the condition here is that the insured should have died. If the insured did not
die, then not the entire proceeds is excluded, only up to the amount of the premium paid is exempted if the insured outlives the
insurance
Subject to tax if:
A. Insurer and insured agreed that the amount of proceeds shall be withheld by the insurer with the obligation to pay interest in the
same, the interest will be subject to tax
B. There is transfer of the insurance policy
2. Amount Received by Insured as Return of Premium
- Reason for exclusion: represents a mere return of capital
3. Gifts, Bequests, and Devises
- it is exempted because it is already subject to donor’s, transfer or estate tax.
Exception to the rule: the income or fruit of such money given by donation, bequests or devise
Bequest — gifts personal property by virtue of a will and the recipient is called legatee
Devise — real property
4. Compensation for Injuries and Sickness
- Reason for exclusion — indemnification for the injuries or damages suffered
- the sources are:
• the compensation maybe paid by virtue of a suit;
• it may be paid by virtue of a health insurance, accident insurance or worker’s compensation act
5. Income Exempt under Treaty

- Reason for exclusion: treaty has the obligatory force of a contract
- Exception: as may be provided in the treaty
6. Retirement Benefits, Pensions, Gratuities, etc
(a)Retirement benefits under RA 7641 or a reasonable private benefit plan
(b)Separation pay — amount received by an official or an employee or by his heirs from the employer due to separation from service
because of death, sickness, or other physical disability or for any cause beyond the control of the official or employee
(c) Social security benefits, retirement gratuities, pensions and other similar benefits received by resident or non-resident citizens or
resident aliens from foreign institutions, whether public or private
(d)US veterans benefit
(e)SSS
(f) GSIS
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Recipient: Private employees or official of private firm
Requisites:
1. The private employee or official must be at least 50 years of age at the time of his retirement;
2. He must have rendered at least 10 years of service to the employer at the time of retirement
3. There must be reasonable private benefit plan
4. Reasonable private benefit plan may be in the nature of pension plan, profit sharing plan, stock bonus plan, or gratuity
5. The reasonable private plan must be approved by BIR
6. The employer must give contribution and no amount shall inure to the benefit of a particular employee or official. This must be
established for the common benefit of the employees or officials
7. This can be availed of once. The subsequent retirement benefits received from another private employer is no longer exempt but
subject to tax (If the second employer is a government entity or institution — exempt)
7. Miscellaneous Items
DEDUCTIONS
Disclaimer: Review nlng sa midterms coverage ani please kay mutaas na ug ayo
A. Itemized Deductions (ExInTaLoBaChaRePenDepDep)
(a) Expenses
(b) Interest
(c) Taxes
(d) Losses
(e) Bad Debts
(f) Charitable Contributions
(g) Research and Development
(h) Pensions
(i) Depreciation
(j) Depletion
B. Optional Standard Deductions — 40% of the gross sales or receipts; not applicable to non-resident alien.
INDIVIDUALS NOT REQUIRED TO FILE INCOME TAX RETURN

1. An individual who is a minimum wage earner.
2. An individual whose taxable income does not exceed P250,000. Provided that a citizen of the Philippines and any alien individual
engaged in business or practice of profession within the Philippines shall file an income tax return regardless of the amount of the
gross income
3. An individual whose income has been subjected to final withholding tax (alien employee as well as Filipino employee occupying the
same position as that of the alien employee of regional headquarters and regional operating headquarters of multinational companies,
petroleum service contractors and sub-contractors and off-shore banking units, NRA-NETB)
4. Those who are qualified under “substituted filing”
PROCEDURE FOR FILING OF ITR

➡ For “with payment” ITRs (BIR Form Nos. 1700/1701/1701Q/1702/1702Q/1704)
File the return in triplicate (2 copies for the BIR and once copy for the taxpayer) with the AAB of the place where taxpayer is registered or
required to be registered. In places where there are no AABs, the return will be filed directly with the Revenue Collection Officer 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, or if there is none, filing of the return will be at the Office of the Commissioner.
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➡ For “no payment ITRs — refundable, break-even, exempt and not operation/transaction, including returns to be paid on 2nd installment
and returns paid through a Tax Debit Memo (TDM)
File the return with the concerned RDO where the taxpayer is registered. However, “no payment” returns filed late shall be accepted by the
RDO but instead shall be filed with an AAB or Collection Officer/Deputized Municipal Treasurer (in places where there are no AABs), for
payment of necessary penalties.
Corporate Income Taxation

INTRODUCTION AND DEFINITION OF TERMS
Corporations — shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en
participacion), association, or insurance companies, except:
A. general professional partnerships;

B. a joint venture formed for the purpose of undertaking construction projects;
C. joint consortium engaging in petroleum, coal, geothermal, and other energy operations pursuant to an operating consortium
agreement under a service contract with the government.
Joint Venture — created when 2 corporations, while registered and operating separately, are placed under one sole management which
operated the business affairs of said companies as though they constituted a single entity thereby obtaining substantial economy and profits
in the operation.
➡ if no formal registration — then taxed individually; forms part of each corporation’s income tax.
➡ if there is a formal registration and therefore there is an entity — then that entity will be the one who will pay the corporate income tax
since it has a separate personality
Joint Account — created when 2 persons form or create a common fund and such persons engages in a business for profit. This may result in a
taxable unregistered association or partnership.
Joint Stock Companies — the midway between a corporation and a partnership, a “hybrid personality”, somewhat a corporation because this
is managed by a Board of Directors and such persons may transfer their share/s without the consent of others, and somewhat a partnership
because it is an association, and persons or members of the same contribute fund, money to a common fund.
➡ Taxed like a corporation insofar as business income is concerned
Emergency Operation — this may be formed by two corporations with separate personalities. If they form that emergency operation (it is
really a special activity) to engage in joint venture, corporation 1 may be taxed only from the income derived from such business. The income
derived from such emergency operations should also be included in that taxable income subject to corporate income tax. In the same way that
corporation 2 has a separate and distinct personality; if it’s a part of that emergency operation, the income derived from such special activity
should also be included in the income of that corporation 2, subject to corporate income tax, even if it is not registered with the SEC.
TAXABLE CORPORATIONS
Incorporation rule — in order to determine whether or not it is a domestic or a foreign corporation, you have to determine the place
where the corporation was created or organized
1. Domestic Corporation “DC”

i. Created or organized in the Philippines or under its law [Sec 22(c)]
ii. Classification:
i. Domestic Corporations in general, including taxable partnerships (other than GPPs);
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ii. Proprietary educational institutions and hospitals;
➡ these type of DCs are given a preferential rate subject to conditions
iii. GOCCs, agencies, or instrumentalities

iii. Taxed on Net Income derived from sources within and without the Philippines
2. Resident Foreign Corporation “RFC”

i. A corporation formed, organized, authorized, or existing under the laws of any foreign country and engaged in trade or business
within the Philippines
ii. Taxed on net income derived from sources within the Philippines
iii. “Engaged in business” implies continuity of commercial transactions or dealings
iv. “Continuity of business” — there must be continuity of intention to conduct continuous business.
Manifestations that the foreign corporation is a resident foreign corporation:
1. if the FC gets a license to do business here in the country through:
a) establish a Regional Operating Headquarters (ROHQ)
b) establish a Representative Office
c) establish a branch in the Philippines
2. if there is “continuity of business transaction” — there is permanent establishment in the Philippines i.e. warehouse , or the
foreign corporation sends employee to the Philippines for more than 180 days or more than 6 months, engages regular
consultancy in the Philippines
Atty A: If a foreign corporation is registered as Resident Foreign Corporations, they are required to register in the BIR and must file its own
ITR on a quarterly basis.
➡ If you are the payor, your manner of withholding is creditable, rather than final.
Jurisprudence:
Howden vs CIR, GR No. L-1392, April 14, 1965
“An activity may consist of a single act; while business implies continuity of transactions. An income may be earned by a corporation in the
Philippines although such corporation conducts all its businesses abroad.”
Facts: In 1950 the Commonwealth Insurance Co., a domestic corporation, entered into reinsurance contracts with 32 British insurance
companies not engaged in trade or business in the Philippines, whereby the former agreed to cede to them a portion of the premiums on
insurances on fire, marine and other risks it has underwritten in the Philippines. Alexander Howden & Co., Ltd., also a British corporation
not engaged in business in this country, represented the aforesaid British insurance companies. The reinsurance contracts were prepared
and signed by the foreign reinsurers in England and sent to Manila where Commonwealth Insurance Co. signed them.
Note: Reinsurance is like getting insurance for insurance companies (since high risk and insurance companies) and therefore,
Commonwealth is the ceding company (insurance co.) and Howden & Co is the reinsurer.
Within the two-year period provided for by law, Alexander Howden & Co., Ltd. filed with the Bureau of Internal Revenue a claim for refund
representing the income tax covering the reinsurance premiums received by Howden & Co. from Commonwealth Insurance Co. A ruling of
the CIR stated that it exempted from withholding tax reinsurance premiums received from domestic insurance companies by foreign
insurance companies not authorized to do business in the Philippines. Subsequently, Alexander Howden & Co., Ltd. instituted an action in
the Court of First Instance of Manila for the recovery of the aforesaid amount claimed. Pursuant to Section 22 of Republic Act 1125 the
case was certified to the Court of Tax Appeals. On November 24, 1961 the Tax Court denied the claim.
Issue: WON the reinsurance premiums in question came from sources within the Philippines.
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Ruling: Yes, the reinsurance premiums came from sources within the Philippines and therefore taxable.
The source of an income is the property, activity or service that produced the income. The reinsurance premiums remitted to appellants by
virtue of the reinsurance contracts, accordingly, had for their source the undertaking to indemnify Commonwealth Insurance Co. against
liability. Said undertaking is the activity that produced the reinsurance premiums, and the same took place in the Philippines. In the first
place, the reinsured, the liabilities insured and the risks originally underwritten by Commonwealth Insurance Co., upon which the
reinsurance premiums and indemnity were based, were all situated in the Philippines. Secondly, contrary to appellants' view, the
reinsurance contracts were perfected in the Philippines, for Commonwealth Insurance Co. signed them last in Manila.
Appellants should not confuse activity that creates income with business in the course of which an income is realized. An activity may
consist of a single act; while business implies continuity of transactions. An income may be earned by a corporation in the Philippines
although such corporation conducts all its businesses abroad. Precisely, Section 24 of the Tax Code does not require a foreign corporation
to be engaged in business in the Philippines in order for its income from sources within the Philippines to be taxable. It subjects foreign
corporations not doing business in the Philippines to tax for income from sources within the Philippines. If by source of income is meant
the business of the taxpayer, foreign corporations not engaged in business in the Philippines would be exempt from taxation on their
income from sources within the Philippines.
Furthermore, as used in our income tax law, "income" refers to the flow of wealth. Such flow, in the instant case, proceeded from the
Philippines. Such income enjoyed the protection of the Philippine Government. As wealth flowing from within the taxing jurisdiction of
the Philippines and in consideration for protection accorded it by the Philippines, said income should properly share the burden of
maintaining the government.
WHEREFORE, the judgment appealed from is hereby affirmed with costs against appellants.
3. Non-Resident Foreign Corporation “NRFC”

i. A corporation formed, organized, authorized, or existing under the laws of any foreign country.
➡ Its business here in the Philippines is intermittent and not continuous, or an isolated or one-time transaction.
ii. Taxed on gross income from sources derived within the Philippines
➡ Taxes are to be withheld by the payor located in the Philippines
➡ No deductions allowed since taxed on its gross income
Atty A: In NRFC, it is taxed at 30% of its gross income within the Philippines. You do not expect them to file their own ITR and therefore, the
manner of withholding the tax is final.
General Rule: Gross income (more on passive income) may include 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 — taxed at 30%
➡ Example: If NRFC sells real properties located in the Philippines, it will be taxed at 30% corporate income tax, rather than the 6%
capital gains which is applicable only to DC and RFC.
Exception: Capital gains from the sale of share of stocks not traded in the stock exchange — taxed at 15%
➡ Example: ABC Corporation (NRFC) is located in the US. XYZ Corporation (DC) is located in the Philippines. If ABC Corporation
purchases 99% of XYZ Corp’s stocks (ABC Corp now the parent company, XYZ becomes the subsidiary company), ABC Corp’s tax
exposure is 15%.
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PARTERNSHIPS AND CO-OWNERSHIPS
Co-Ownership
General Rule: A co-ownership is tax exempt because it is formed and organized not for profit but for common enjoyment or
preservation of a property.
Exceptions:
1. When the income of the co-ownership is invested by the co-owners in other income-producing activities, or
➡ example: if there is an inherited property and the heirs subdivided the lots and sold for profit
2. When there is no attempt to divide the inherited property for more than ten years and the said property was not under any
administration proceedings nor held in trust, an unregistered partnership is deemed to exist.
Partnership
Two types of partnership under the Tax Code:
1. General Professional Partnerships — The income of this type of partnership is not subject to corporate income tax because it is the
partners themselves who are liable to pay tax for the shares they received. This partnership is formed by persons for:
i. The sole purpose of exercising a common profession; and
ii. No part of the income of which is derived from engaging in any trade or business. [Sec 22(B)]
Atty A: Although not subject to corporate income tax, GPP will still compute its net income like a corporation and file an ITR. This is to
ascertain how much is the share of each partners. This is also to countercheck if the partners are correctly declaring the shares that
they received in the GPP regardless of whether or not the share have been distributed.
2. Taxable or Business Partnership — The income tax of this type of partnership is computed and taxed like that of a corporation
(taxed at 30%). This kind of partnership, like a regular corporation, is also required to file a quarterly corporate income tax return.
General Co-Partnerships — partnerships which are by law assimilated to be within the context of, and so legally contemplated as,
corporations. The partnership itself is subject to corporate taxation. The individual partners are considered stockholders and therefore,
profits distributed to them by the partnership are taxable as dividends, subject to final tax of 10% for RC, NRC, and RA, 20% for NRA-
ETB and 25% for NRA NETB.
Liability of Parters:
➡ Share of a partner in General Professional Partnership
i. Each partner shall report as gross income (business income) his distributed share actually or constructively received in the net
income of the partnership. The same share shall be subject to creditable withholding tax of 8% (effective 2018; before 10%).
They are liable in their separate and individual capacity. Share of a partner in the loss of a GPP may be taken by the individual
partner in his return of income
➡ 8% CWT is based on the distribution of the net income of the GPP
➡ Contrary to loose partnership or self-employed professionals, the payor must withhold 8% tax. Example: If you engaged the
services of Atty A as a lawyer in a loose partnership, you have to pay net of 8% tax. If 10,000 is your bill, you only have to pay
9,200 and remit the 800 to the BIR.
ii. Each partner in a GPP shall, report as gross income his distributed share in the net income of GPP, based on his agreed ratio.
iii. Payments made to partners of a GPP for services rendered shall be considered as ordinary business income subject to Sec 24A.
➡ Share of a partner in Taxable or Business Partnership or General Co-Partnership
i. Share of partner in the net income of a taxable or business partnership shall be subject to a final tax of 10% .
ii. Share of a partner in the loss of a taxable or business partnership maybe taken by the individual partner in his return of income.
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iii. Payments made to a partner of a business or taxable partnership for services rendered shall be considered as compensation
income subject to Sec 24A.
Jurisprudence:
Evangelista et al vs CIR, GR No. L-9996, October 15, 1957
“For purposes of the tax on corporations, our National Internal Revenue Code, includes these partnerships — with the exception only of
duly registered general copartnerships — within the purview of the term "corporation." It is, therefore, clear to our mind that petitioners
herein constitute a partnership, insofar as said Code is concerned and are subject to the income tax for corporations.”
Facts: Petitioners borrowed sum of money from their father and together with their own personal funds they used said money to buy
several real properties. They then appointed their brother (Simeon) as manager of the said real properties with powers and authority
to sell, lease or rent out said properties to third persons. They realized rental income from the said properties for the period
1945-1949.
On September 24, 1954 respondent Collector of Internal Revenue demanded the payment of income tax on corporations, real estate
dealer's fixed tax and corporation residence tax for the years 1945-1949. The letter of demand and corresponding assessments were
delivered to petitioners on December 3, 1954, whereupon they instituted the present case in the Court of Tax Appeals, with a prayer
that "the decision of the respondent contained in his letter of demand dated September 24, 1954" be reversed, and that they be
absolved from the payment of the taxes in question. CTA denied their petition and subsequent MR and New Trials were denied.
Hence this petition.
Issue: WON petitioners are subject to income tax on corporations, residence tax for corporations, and the real estate dealers fixed tax.
Ruling: Yes, they are subject to income tax on corporations, residence tax for corporations, and the real estate dealers fixed tax.
The essential elements of a partnership are two, namely: (a) an agreement to contribute money, property or industry to a common
fund; and (b) intent to divide the profits among the contracting parties. The first element is undoubtedly present in the case at bar,
for, admittedly, petitioners have agreed to, and did, contribute money and property to a common fund. Upon consideration of all the
facts and circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions for
monetary gain and then divide the same among themselves, because of the following observations, among others: (1) Said common
fund was not something they found already in existence. It was not property inherited by them pro indiviso. They created it
purposely. What is more they jointly borrowed a substantial portion thereof in order to establish said common fund; (2) They invested
the same, not merely in one transaction, but in a series of transactions; (3) The aforesaid lots were not devoted to residential
purposes, or to other personal uses, of petitioners herein.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the collective effect of
these circumstances is such as to leave no room for doubt on the existence of said intent in petitioners herein.
For purposes of the tax on corporations, our National Internal Revenue Code, includes these partnerships — with the exception only of
duly registered general copartnerships — within the purview of the term "corporation." It is, therefore, clear to our mind that
petitioners herein constitute a partnership, insofar as said Code is concerned and are subject to the income tax for corporations.
As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465 provides in part:
Entities liable to residence tax.-Every corporation, no matter how created or organized, whether domestic or resident foreign,
engaged in or doing business in the Philippines xxx
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The term 'corporation' as used in this Act includes joint-stock company, partnership, joint account (cuentas en participacion),
association or insurance company, no matter how created or organized. (emphasis supplied.)
It is apparent that the terms "corporation" and "partnership" are used in both statutes with substantially the same meaning.
Consequently, petitioners are subject, also, to the residence tax for corporations.
Lastly, the records show that petitioners have habitually engaged in leasing the properties above mentioned for a period of over
twelve years, and that the yearly gross rentals of said properties from June 1945 to 1948 ranged from P9,599 to P17,453. Thus, they
are subject to the tax provided in section 193 (q) of our National Internal Revenue Code, for "real estate dealers”.
Obillos et al vs CIR, GR No. L-68118, October 29, 1985
“Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a partnership, whether or not
the persons sharing them have a joint or common right or interest in any property from which the returns are derived". There must be
an unmistakable intention to form a partnership or joint venture.”
Facts: On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of 1,124 and 963 square
meters located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four children, the petitioners, to enable
them to build their residences. The company sold the two lots to petitioners for P178,708.12 on March 13. Presumably, the Torrens
titles issued to them would show that they were co-owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City Securities Corporation
and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D). They derived from the sale a total profit of P134,341.88 or
P33,584 for each of them. They treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of Internal Revenue required
the four petitioners to pay corporate income tax on the total profit of P134,336 in addition to individual income tax on their shares
thereof He assessed P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated
interest, or a total of P71,074.56. He also considered the share of the profits of each petitioner in the sum of P33,584 as a " taxable in
full (not a mere capital gain of which ½ is taxable) and required them to pay deficiency income taxes aggregating P56,707.20
including the 50% fraud surcharge and the accumulated interest.
Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76 on their profit of
P134,336, in addition to the tax on capital gains already paid by them.
Issue: WON the petitioners formed an unregistered partnership or joint venture within the meaning of Secs 24(a) and 84(b) of the
Tax Code and therefore liable for corporate tax.
Ruling: No. We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of the Civil Code
simply because they allegedly contributed P178,708.12 to buy the two lots, resold the same and divided the profit among
themselves.
To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation and confirm the
dictum that the power to tax involves the power to destroy. That eventuality should be obviated.
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Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on
the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The
division of the profit was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state.
It had to be terminated sooner or later.
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a partnership, whether or not
the persons sharing them have a joint or common right or interest in any property from which the returns are derived". There must be
an unmistakable intention to form a partnership or joint venture.
The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit. Thus, in Longa vs. Aranas, CTA
Case No. 653, July 31, 1963:
Co-owership distinguished from partnership.—We find that the case at bar is fundamentally similar to the De Leon case. Thus, like
the De Leon heirs, the Longa heirs inherited the 'hacienda' in question pro-indiviso from their deceased parents; they did not
contribute or invest additional ' capital to increase or expand the inherited properties; they merely continued dedicating the
property to the use to which it had been put by their forebears; they individually reported in their tax returns their corresponding
shares in the income and expenses of the 'hacienda', and they continued for many years the status of co-ownership in order, as
conceded by respondent, 'to preserve its (the 'hacienda') value and to continue the existing contractual relations with the Central
Azucarera de Bais for milling purposes.
INCOME TAX EXEMPT ENTITIES

Note: Even if these entities are tax exempt, they are still required to file an ITR unless there is a certification from BIR exempting you to file an
ITR.
1. General Professional Partnerships;
2. Joint Venture for the purpose of undertaking construction projects;

Requisites: [Revenue Regulation 10-2012]
a. The joint venture or consortium is formed for the purpose of undertaking construction activity;
b. It involves jointing or pooling of resources by licensed local contractors, i.e. licensed as general contractor by the PCAB of the
DTI;
c. The local contractors are engaged in construction business;
d. The joint venture is licensed by PCAB
3. Joint consortium engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium, agreement
under a service contract with the Government [OW, the consortium is liable to corporate income tax]
NB. For “2” and “3” to be exempt from corporate income tax, it must be:
a. Unincorporated formed by two or more persons (individuals, partnerships, or corporations; and
b. Purpose: to undertake construction project or engaged in petroleum and other energy operations with operating contract with
the government.
4. Labor, agricultural or horticultural organization not organized principally for profit;
5. Mutual savings bank not having a capital stock represent by shares, and cooperative bank without capital stock organized and
operated for mutual purposes and without profit;
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6. A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating
under the lodge system [one which must operate under a parent and subsidiary associations] 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;
7. Cemetery company owned and operated exclusively for the benefit of its members [must be a non-profit cemetery];
➡ “non-profit” — no part of its income inures to the benefit of any of its director, member, or private entity.
8. Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans, no part of its income or asset shall belong to or inures to the benefit any member,
organizer, officer, or any specific person;
9. 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 stock-holder, or individual;
Requisites:
a. Must be established for common business interest;
b. No part of income shall inure to the benefit of a particular individual
10.Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;
11.A non-stock and non-profit educational institution;
12.Government education institution;
13.Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone
company, or like 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 of the sole purpose of meeting its expenses; and
14.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;
REMEMBER: Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the 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 imposed under this Code.
➡ except: non-stock and non-profit educational institutions because their exemption is from the Constitution itself and it only provides
for only one condition (income must be ADE used for such purposes)
General Rule: All corporations, agencies, or instrumentalities owned or controlled by the government shall pay such rate of tax upon their
taxable income as are imposed upon corporations or associations engaged in a similar business, industry, or activity.
Exceptions:
1. Government Service Insurance System (GSIS);

2. Social Security System (SSS);
3. Philippine Health Insurance Companies (PHIC);
4. Philippine Charity Sweepstakes Office (PCSO);
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5. NAPOCOR (special law exemption);
6. Local Water Districts (RMC 28-2010, R.A. 10026);
7. Cooperatives (RA 6983) with conditions;
8. Foundations created for scientific advancement (RA 2067)
TYPES/CLASSIFICATIONS OF INCOME
A. Inclusions to Gross Income: All income derived from whatever source, including but not limited to the following (CG2IR2DAP3):
1. Compensation for services rendered;
2. Gross Income from profession, trade or business;
3. Gains from dealings in property;
4. Interests;
i. interest on bank deposit/deposit substitutes/trust fund and similar arrangements
ii.interest from lending/interest income from bonds
iii.interest income on foreign bonds/government bonds
iv.interest on treasury bills
v. interest earned from deposits maintained under the FCDU system
vi.interest income of pawnshop operators
5. Rents;
Items considered as rent income:
A. Agreed amount per month or per year.
B. Obligations of lessor to third parties which the lessee undertakes to pay as further consideration of the lease, such as:
i. Real estate taxes on leased premises paid by the lessee to the government
ii. Insurance premiums paid by lessee on policy covering leased property.
iii. Dividends paid by lessee to stockholders of lessor-corporation, in lieu of rent.
iv. Interest paid by lessee to holder of bonds issued by lessor-corporation, instead of rent.
Kinds:
A.Operating Lease — a contract under which the asset is not wholly amortized during the primary period of the lease, and where
the lessor does not rely solely on the rentals during the primary period for his profits but looks for the recovery of the balance of
his costs and for the rest of his profits from the sale or the release of the returned assets at the end of the primary lease period.
B.Finance Lease — also called “full pay-out lease”, a contract involving payment over an obligatory period (also called the
primary or basic period) of specified rental amounts for the use of a lessor’s property, sufficient in total or to amortize the capital
outlay of the lessor and to provide the lessor’s borrowing costs and profits. Obligatory period is primary non-cancellable period
of the lease which in no case shall be less than 730 days. Lessee exercises choice over the asset.
6. Royalties;
- the entity must be involved in granting franchises or royalties (active royalty)
- if it is a one time transaction, it will be recorded as passive income and not part of the gross income
7. Dividends;
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Concept — a corporate profit set aside, declared and ordered by the directors of a corporation to be paid to stockholders on demand or
at a fixed time. Under the tax code, it means any distribution made by a corporation to its stockholders, whether in money, property,
out of its earnings and profits accrued since March 1, 1913.
Kinds
A. Stock Dividends
➡ General Rule: A stock divided representing a transfer of surplus to capital account shall not be subject to tax
➡ Exceptions:
✓ If subsequently cancelled and redeemed by the corporation;
✓ If it leads to substantial alteration in the proportion of ownership in a corporation
Example 1:
STOCKHO STOCK
LDER DIVIDEND
A P100 20% P10 P110 20%
B P100 20% P10 P110 20%
C P100 20% P10 P110 20%
D P100 20% P10 P110 20%
E P100 20% P10 P110 20%
TOTAL P500 P50
In this example, the stock dividends are not taxable because there is no substantial alteration in the proportion of
ownership in a corporation. Even if they received the stock dividend, their interest in the corporation did not change.
So long as all the stockholders receive a uniform number of share of stocks or dividends, it will not be subject to tax.
Example 2:
STOCKHO STOCK
LDER DIVIDEND
A P100 20% P100 P200 31.25%
B P100 20% P10 P110 17.18%
C P100 20% P10 P110 17.18%
D P100 20% P10 P110 17.18%
E P100 20% P10 P110 17.18%
TOTAL P500 P140 P640
In this example, there is a dilution. A is going to be taxed, depending on whether A is an individual or a corporation. As
for the other stockholders, they are not subject to tax.
B. Property Dividends
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➡ Dividends paid in securities or other properties, in which the earnings of a corporation have been invested, are income to
recipients in the amount equal to the full market value of such property when receivable by individual stockholders.
➡ A dividend paid in stock of another corporation is not a stock dividend, even though the stock distributed was acquired
through the transfer by the corporation declaring the dividends of property to the corporation, the stock of which is
distributed as a dividend.
C. Liquidating Dividends
➡ Where a corporation distributes all its assets in complete liquidation or dissolution, the gain realized or loss sustained by the
stockholder, whether individual or corporation, is a taxable income or deductible loss as the case may be.
➡ If the shareholders received liquidating dividend which is equal or less than their contribution, it will not be subject to the
GITR because this will be considered as a return of capital.

➡ If the shareholders received liquidating divided which is more than their contribution, the difference between the
liquidating dividend and the acquisition cost will be considered as taxable income subject to GITR. This is because it is
considered as return on capital.
refer to spectra notes page 76 for examples
Note: This only applies to liquidating dividends. If it is cash or property dividends, subject to tax on passive income.
D. Disguised Dividends
➡ These are payments which are equivalent to dividend distribution. In case of excessive payments by corporations, if such
payments correspond or bear a close relationship to shareholdings, and are found to be a distribution of earning or profits,
the excessive payments will be treated as dividends.
8. Annuities;
- refers to income in fixed interval over a period of time.
9. Prizes and winnings;
10.Pensions;
11.Partner’s share in the net income of the GPP
E. Exclusions to Gross Income
DEDUCTIONS
A. Fundamental Principles in Deductions (Double Nexus Rule)
1. The taxpayer must prove that there is a law authorizing deductions.
2. The taxpayer must prove that he is entitled to deductions.
3. There must be proper withholding
Example:
In cases of rents, the amount you should withhold is 5%. You rent a specific stall in eMall. You pay a rent of P10,000 per month.
Will you automatically remit the entire P10,000 to eMall?
➡ No, Under the law, you should withhold at least 5%, or P500. On your part, you can recognize deduction for rent expense.
But before you can deduct rent expense, you must be able to prove that you have withheld such amount. No withholding =
no deduction.
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4. Provisions pertaining to deductions must be strictly construed against the taxpayer.
B. Entitlement to Deductions
1. Domestic Corporations (includes private educational institutions, non-profit hospitals, GOCCs) — entitled to deductions, tax base is
taxable income
2. Resident Foreign Corporations — entitled to deductions, tax base is taxable income
3. Non-resident Foreign Corporations — not entitled to deductions, tax base is gross income
C. Allowable Deductions
1. Itemized Deductions (ExInTaLoBaChaRePenPreDepDep)
i. Expenses
ii.Interest
iii.Taxes
iv.Losses
v. Bad Debts
vi.Charitable Contributions
vii.Research and Development costs
viii.Pension contributions
ix.Premiums paid on hospitalization and insurance
x. Depreciation and amortization
xi.Depletion of oil, gas, wells, and mines
2. Optional Standard Deductions (OSD) — a standard deduction available to corporation (DC and RFC only), except non-resident
corporation, in an amount not exceeding 40% of the gross income in lieu of itemized deductions.
Unless the taxpayer signifies in his return his intention to elect the OSD, he shall be considered as having availed himself of the
itemized deductions.
Such election (either itemized or OSD) when made in the ITR shall be irrevocable for the taxable year in which the ITR is made.
Note: If a corporation chose OSD during the first quarter, it cannot anymore change it to itemized deductions in the succeeding
quarters because that choice is irrevocable for the whole tax period. It can only change its choice of the method of deductions on the
next taxable year.
D. Additional Requirements for Deductibility of Certain Payments
Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which
depreciation or amortization may be allowed, shall be allowed as a deduction only if it is shown that the tax required to be deducted and
withheld therefrom has been paid to the BIR (Section 34K). refer to RR6-2018 for update.
Itemized Deduction
Disclaimer: wala pani nahuman dri nga part but you can read if you please :)
1. EXPENSES
Business Expense vs. Capital Expense
Business Expense — refer to all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are
directly attributable to the development, management, operation, and/or conduct of the trade, business or the exercise of a profession.
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Capital Expense — are expenditures for the extraordinary repairs which are capitalized and subject to depreciation. These are expenses
which tend to increase the value or prolong the life of the taxpayer’s property.
Ordinary Expense vs. Necessary Expense

Ordinary Expenses — refers to the expenses which are normal, usual or common to the business, trade or profession of the taxpayer. An
expense is ordinary when it is commonly incurred in the trade or business of the taxpayer as distinguished from capital expenditures. The
payments, however, need not be normal or habitual in the sense that the taxpayer will have to make them often. The payment maybe unique
or non-recurring to the particular taxpayer effected.
Necessary Expenses — one which is useful and appropriate in the conduct of the taxpayer’s trade or profession.
Extra-ordinary Expenses — these are amortized or depreciated.
A. Common Requisites for Deductibility of Ordinary and Necessary Expenses

iv. The Expenses must be ordinary and necessary;
v. It must be paid or incurred during the taxable year;
Exception: net operating loss carry-over
vi. It must be paid or incurred in connection with the trade, business or profession of the taxpayer;
vii.It must be reasonable in amount;
viii.It must be substantiated evidence such as official receipts and other official records; and
1. Official receipts
2. Adequate records
3. Amount of Expense being deducted
4. Date and Place where such expense is paid or incurred
5. Nature of expense — direct connection or relation of the expense being deducted to the development, management, operation
and/or conduct of the trade, business or profession of the taxpayer
ix. It must not be against law, morals, public policy, or public order
B. Kinds of Ordinary and Necessary Expenses (CARTERS)

i. Compensation for services rendered
ii. Advertising and Promotional expenses
iii. Rent expenses
iv. Traveling Expenses
v. Repairs and maintenance expenses
vi. Supplies and materials
Compensation for Services Rendered

Special Requisites for Deductibility of these expenses:
i. This must be reasonable, meaning, this must not be ostensible; and
ii. This are, in fact, payments for personal services actually rendered
Special Requisites for Deductibility of Bonuses to Employees:

i. The bonuses are made in good faith;
ii. They are given for personal services actually rendered; and
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iii. They do not exceed a reasonable compensation for the services rendered, when added to the stipulated salaries, measured by the
amount and quality of services performed in relation to the taxpayer’s business.
iv. Bonuses must be given in good faith and in determining whether the bonuses will form part of the compensation for services
rendered, you have to consider the (1) nature of the business, (2) the financial capacity of the taxpayer, and (3) the extent of the
services rendered.
v. General Economic Condition
Deductible expenses under compensation for personal services

i. Salaries, wages, commissions, professional fess, vacation-leave pay, retirement pay and other compensation.
ii. Bonuses are deductible expenses if pain in good-faith as additional compensation for services rendered.
iii. Pensions and compensation for injuries, if not compensated for by insurance or otherwise.
iv. Grossed up monetary value of fringe benefit provided for, as long as the final tax imposed has been paid.
Advertising and Promotional Expenses

- it must be reasonable.
Classifications:
i. Advertising to stimulate the current sale of merchandise or use of services
ii. Advertising to stimulate future sales of merchandise or use of services (General Foods Inc. vs CIR)
iii. Advertising to promote the sale of share of stocks or create favorable image.
Rental Expenses
Requisites:
i. The rental payment is required as a condition for continued use or possession;
ii. The purpose is for trade, business or profession; meaning the property is used in trade or business.
iii. The taxpayer must not be the owner of the property or he has no equitable title over the property. The taxpayer must not be taking title
to the property.
iv. This is subject to 5% withholding tax.
Travelling Expenses
Special Requisites for Deductibility of Travelling Expenses:
i. The expenses must not be reasonable and necessary;
ii. They must be incurred or paid “while away from home”; and “home” does not refer to your residence but to the station assignment or
post/principal place of business regardless of where the family residence is maintained ie business trips. This includes transportation,
meals and lodging. (RR 2-40)
iii. They must be paid or incurred in the conduct of trade or business.
Entertainment, Amusement and Recreation Expenses

Special Requisites for Deductibility of EAR Expenses:
i. Reasonable in amount;
ii. Incurred during the taxable period;
iii. Directly connected to the development, management, and operation of the trade, business, or profession of the taxpayer, or that are
directly related to or in furtherance of the conduct of his or its trade, business, or profession.
iv. Not to exceed such ceiling as the Sec of Finance may, by rules and regulations, prescribe (Refer to RR 10-2002); and
Limitation:
• Those engaged in sale of goods/ properties
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• Those engaged in sale of service
• Mixed — apportionment formula
Excess to the limitation is not deductible

v. Any expense incurred for entertainment, amusement, or recreation which is contrary to law, morals, public policy, or public order shall
in no case be allowed as a deduction.
Repairs and Maintenance Expenses

Expenses for repairs are deductible if such repairs are incidental or ordinary, that is, made to keep the property used in the trade or business
of the taxpayer in an ordinarily efficient operating condition. Repairs in the nature of replacement to the extent that they arrest deterioration
and prolong the life of the property are capital expenditures and should be debited against the corresponding allowance for depreciation.
Note: If the cost of the repair increased the life of an asset for a period of more than one (1) year, that amount is considered as extra-
ordinary repair. Otherwise, it is considered ordinary repair.
Supplies and Materials

This must be consumed during the taxable year.
Litigation Expenses
Litigation expenses defrayed by a taxpayer to collect apartment rentals and to eject delinquent tenants are ordinary and necessary expenses
in pursuing his business. However, litigation expenses that are incurred in the defense or protection of title are capital in nature and not
deductible.
Cost of defending a business in a civil suit (ie damages on patent infringement, injuries, etc) irrespective of judgment is deductible but it
must have been adjudicated and paid already.
Option to Private Educational Institution

In addition to the allowable deductions, a private educational institution — may, at its options, elect either:
i. Deduct expenditures otherwise considered as capital outlay of depreciable assets incurred during the taxable year for the expansion of
school facilities (“Outright Method); or
ii. To deduct allowance for depreciation thereof (“Spread-out Method”)
2. INTEREST
The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer’s profession, trade or business
shall be allowed as deduction from gross income.
a) Arbitrage Rule
The taxpayer’s allowable deduction for interest expense shall be reduced by an amount equal to 33% (effective January 1, 2009) of the
interest income earned by him which has been subjected to final tax.
b) Requisites for Deductibility

(1) There must be an indebtedness;
(2) There should be an interest expense paid or incurred upon such indebtedness;
(3) The indebtedness must that of the taxpayer
(4) The indebtedness must be connected with the taxpayer’s trade, business or exercise of profession;
(5) The interest expense must have been paid or incurred during the taxable year;
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(6) The interest must have been stipulated in writing;
(7) The interest must be legally due;
(8) The interest arrangement must not be between related taxpayers;
(9) The interest must not be incurred to finance petroleum operations; and
(10)In case of interest incurred to acquire property used in trade, business or exercise of profession, the same, was not treated as a capital
expenditure
c) 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 allowed as
eduction or treated as a capital expenditure.
d) Surcharges and Fines on Tax Payment — not deductible

Note: Interest on delinquency and deficiency taxes may be allowed as deduction
e) Theoretical Interest
An interest which is computed or calculated not paid or incurred, for the purposes of determining the opportunity cost of investing in a
business. This does not arise from legally demandable interest-bearing obligation. This is not a deductible interest.
f) Interest Expenses which are non-deductible

i. Interest expense on preferred stock
GR: Interest on preferred stock is not deductible because there is no obligation to speak. It is in effect an interest on dividend income.
Reason: The payment is dependent upon the profits of the corporation. It will only be paid if the corporation earns profits. But if it is not
dependent upon corporate profits or hearings, it is deductible. If it is payable on a particular date of maturity without regard to the
corporate profits, it is deductible.
ii. When there is no agreement in writing to pay interest

iii. Interest expense on loan entered into between related taxpayers
Related Taxpayers (Section 36[B] NIRC):

A. Members of the same family which includes spouses, brothers and sisters, descendants and ascendants
B. Between two corporations owned or controlled by one individual. He must have a controlling interest over these two corporations
or if one corporation is considered as personal holding company of another corporation.
C. Between a corporation and an individual; that individual owns or controls more than 50% of the outstanding capital stock of such
corporation
D. Between parties to a trust;
‣ grant or fiduciary
‣ fiduciary of one trust and fiduciary of another trust but there is only one grantor
‣ beneficiary and fiduciary
iv. Interest paid or calculated for cost keeping purposes
v. Interest paid in advance through discount or otherwise by an individual taxpayer reporting income on the cash basis. Such interest shall
be allowed as a deduction in the year the indebtedness is paid.
vi. Interest on obligation to finance petroleum exploration
vii.Interest on unclaimed salaries of the employees
viii.33% of the interest income subject to final tax
3. TAXES
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GR: All taxes, national or local, paid or incurred within the taxable year in connection with the taxpayer’s trade, business or profession are
deductible from gross income (Recap on Tax Benefit Rule)
XCP:
i. Special Assessment and taxes assessed against local benefits of a kind that tends to increase the value of the property
ii. Income Tax — includes foreign income tax
iii. Taxes which are not connected with trade, business or profession of the taxpayer
iv. Estate Tax, Donor’s Tax
v. Value Added Tax
vi. Final Taxes, being in the nature of income tax
vii.Excess electric consumption tax
viii.Foreign income tax, war profits and excess profits tax, if the taxpayer makes use of tax credit
ix. Taxes paid for commodities not connected with the taxpayer’s business
a) Requisites for deductibility of taxes

i. This must be paid or incurred during the taxable year; and
ii. This must be taxes paid or incurred in connection with the trade, business or profession of the taxpayer
b) Tax Deductions vs Tax Credits

Taxes, as deductions, include those taxes which are paid or incurred in connection with the trade, business or profession of the taxpayer.
However, the source of a tax credit is foreign income tax paid, war profit tax, excess profit tax paid to the country.
Taxes as deductions may be claimed as deductions from gross income in computing the net income while tax credit is a deduction from
Philippine income tax.
The foreign income tax paid to the foreign country is not always the amount that may be claimed as tax credit because under the limitation
provided in the Tax Code, it must not be more than the ratio of foreign income to the total income multiplied by the Philippine income tax.
c) Who may claim tax credits for taxes of foreign countries

i. Citizens
ii. Domestic Corporations
iii. Members of GPPs
iv. Beneficiaries of estates and trusts
Limitations on deductions for NRA-ETB and RFC:

In the case of NRA-ETB in the Philippines and RFC, deductions for taxes shall be allowed only if and to the extend that they are connected
with income from sources with the Philippines.
d) Limitations on credit
The amount of credit taken shall be subject to the following limitations:
i. Per Country Limitation — the amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same
proportion of the tax against which such credit is taken, which the taxpayers taxable income from sources within such country bears to
his entire taxable income for the same taxable year; and
Net Income (per foreign country) x Philippine Income Tax

Total Net Income
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ii. Global Limitation — 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 (outside) the Philippines under this Title bears to his entire taxable income
for the same taxable year.
Net Income all foreign countries x Philippine Income Tax

Total Net Income
e) Proof of credits (Tax Credits)

The credits shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following:
i. The total amount of income from sources without the Philippines;
ii. The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit; and
iii. All other information necessary for the verification and computation of such credits
f) Tax subsequently refunded or credited

Taxes previously allowed as deductions, when refunded or credited, shall be included as part of gross income in the year of receipt to the
extent of the income tax benefit of said deduction.
4. LOSSES
a) Classification of Losses
i. Ordinary Losses — losses sustained in the course of trade, business or profession of the taxpayer.
Net Operating Loss — the excess of allowable deduction over gross income of the business in a taxable year.
Net Operating Loss Carry Over (NOLCO) — shall be carried over as a deduction from the gross income for the next 3 consecutive taxable
years immediately following the year of loss. Such loss shall be allowed as a deduction if it had not been previously offset as deduction
from gross income. However, any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be
allowed as a deduction. 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:

a. Not less than 75% in nominal value of outstanding issued shares, if the business is in the name of a corporation, is held by or on
behalf of the same persons; or
b. Not less than 75% of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of
the same persons
ii. Capital Losses — governed by rules on loss from the sale or exchange of capital assets. Losses from sales or exchanges of capital assets
shall be allowed only to the extend of the gains from such sales or exchanges.
Net Capital Loss — the excess of capital loss over capital gains
Net Capital Loss Carry Over (NCLCO) — not available to corporate taxpayers.
Capital Losses include the following:

1. Loss arising from failure to exercise privilege to sell or buy property
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2. Securities becoming worthless
3. Abandonment losses in the case of natural resources
4. Loss from wash sale or stock securities
Wash Sale — occurs where it appears that within a good period beginning 30 days before the date of the sale or disposition of
shares of stock or securities and ending 30 days after such date, the taxpayer has acquired or has entered into a contract or option
to so acquire, substantially identical stock or securities. No deduction for loss shall be allowed for wash sales unless the claim is
made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of the business of such
dealer.
iii. Wagering or Gambling Losses — the amount that is deductible must not exceed the gains.
iv. Casualty Losses — include losses from fire, storm, shipwreck, other casualty losses, robbery, embezzlement and theft.
v. Abandonment Losses — in the event a contract area where petroleum are undertaken is partially or wholly abandoned, all accumulated
exploration and development expenditures pertaining thereto shall be allowed as a deduction.
vi. Special Losses — e.g. loss arising from voluntary removal of buildings as an incident to renewal or replacement
b.) Common Requisites for Deductibility of Losses

1. The loss must be incurred in the trade, business or profession of the taxpayer;
2. Losses must be actually sustained and charged off within the taxable year, and not mere anticipated losses;
3. Must be evidenced by a closed and completed transaction;
4. Must not be compensated by insurance or other forms of indemnity;
5. If it is partly compensated, only the amount not compensated by insurance is deductible.
6. If it is casualty loss, the taxpayer has filed a sworn declaration of loss within 45 days after the date of discovery of the casualty, robbery,
theft or embezzlement.
5. BAD DEBTS
These debts due to the taxpayer which are usually ascertained to be worthless and charged off within the taxable year.
a) Requisite for deductibility of Bad Debts

i. Must be valid and subsisting indebtedness;
ii. Must be ascertained to be worthless;
iii. Must be charged off and uncollectible within the taxable year;
iv. Must be uncollectible in the near future; and
v. Must arise from trade, business or profession of the taxpayer.
b) Steps to Prove the Worthlessness

i. There must be statement of account sent to the debtor;
ii. A collection letter;
iii. If he failed to pay, refer the case to a lawyer;
iv. If the lawyer may send a demand letter to the debtor; and
v. If the debtor still fails to pay the same, file an action in court for collection.
c) Bad Debts Charged off Subsequently Collected

If the recovery of bad debts, resulted in a tax benefit to the taxpayer, that is taxable. If it did not result in any tax benefit to the taxpayer,
that is not taxable (Tax Benefit Rule)
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PreFi Taxation

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PreFi Taxation

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Taxation on Individuals

‣ those who are naturalized in accordance with the law

F. Estates and Trusts

INCOME TAX RATES

Below the VAT threshold of P3,000,000 Taxpayer’s option (mutually exclusive):

Exceeding the VAT threshold Graduated Income Tax Rates

INCLUSIONS (GROSS INCOME FOR INDIVIDUALS)

1. Cash or in money — amount of money received

• Properties (Doctrine of Cash Equivalent) — FMV

Not Discounted: Face Value

✓ If no consideration — taxable as donation

✓ If creditor is a corporation and debtor is the stockholder — taxable as indirect divided

Held: Yes. Petitioner is liable for the said deficiencies

Deficiency withholding taxes on compensation on directors’ bonuses

Delinquency interest under Section 249 (c) (3) of the NIRC

➡ Fees, including director’s fees

➡ Monetized Vacation and Sick Leave

➡ Fringe Benefits received by rank and file employees

➡ Taxable 13th month pay and other benefits

➡ Other remuneration received from an employee-employer relationship

(b) Mode of Compensation Income/Payment

Substituted Filing of Income Tax Return

Q: Who can avail substituted filing?

A: Employee who satisfies all of the following:

✓ Working for only one ER in the PH for the calendar year

✓ The ER files the annual information return (BIR Form 1604-CF)

✓ The ER issues BIR Form 2316 to each EE

Q: What if two employers?

(e) Fringe Benefits

• NRA-NETB — 25% tax

(d) Kinds of Fringe Benefits (HEVHIMEHEL) (the list is not exclusive)

Employer purchases residential property on 5% of acquisition 50% x monthly value of the

Purchases residential property and transfers the Acquisition cost or FMV

ii. Expense Account

The following are treated as taxable fringe benefits:

iii. Vehicle of any kind

\Guidelines in valuation of Motor Vehicles:

7 The use of yacht whether owned and maintained or Depreciation of yacht at an

iv. Household personnel

v. Interest on loan at less than market rate

- Monetary value = the cost of membership

vii. Expenses for foreign travel

class airplane ticket shall be subject to FBT.

viii.Holiday and vacation expenses

ix. Educational assistance to the EE or his dependents; and

Taxable Fringe Benefits

Non-taxable Fringe Benefits

The following shall not be treated as taxable fringe benefits:

benefit since the employee is never benefited from it.

B. Business or Professional Income

3.Gross income of farmers include:

If a farmer reports on the accrual basis:

— In general 20% 20% 25%

3.Prizes (P10,000 or less) GITR GITR 25%

— in excess or P10,000 20% 20% 25%

4.PCSO and lotto winnings (P10,000 or less) Exempt Exempt Exempt

— in excess if P10,000 20% 20% 25%

5.Interest Income of Foreign Currency Deposits 15% 20% 25%

6.Cash and Property Dividends 25%

— to individuals from DC 10% 20% 25%

— to DC from another DC 0% 25%

9.Interest income from long-term deposit or investment in the form of savings,

— 3 years to less than 4 years 12% 12% 25%

— less than 3 years 20% 20% 25%