Fundamentals of Income Taxation: Focus Notes On Taxation

FOCUS NOTES ON TAXATION
FUNDAMENTALS OF INCOME TAXATION

INCOME
All wealth which flows into the taxpayer other than a mere return of capital and includes gains
Why is income taxed?
Income is the best measure of a taxpayer’s ability to pay.
Basic Definitions:
Gross Income – refers to what is income for taxation purposes
Taxable Income – as the pertinent items of gross income that are subject to tax after allowable deductions
Tax Base – the value of a certain goods, or property for taxation purposes
Characteristics of Gross Income:
1. Return on capital and resulted increased networth at the moment of its generation
2. Realized benefit by the taxpayer (realization means actual or constructive receipt of in cash)
Example of constructive receipts of income:
1. credit to an account own by the taxpayer
2. declaration of a share of the profits of a general professional partnership
3. offsetting debt with right to received dividends
4. cancellation of debt in payment of service
Which do not constitute gross income?
1. Receipts representing returns of capital
Examples:
a. Proceeds of life insurance policy (upon death of the insured)
b. Proceeds received by the insured (still living) representing return of premium
2. Unrealized income
Examples:
a. Appreciation of value of properties
b. Unrealized gains on investments
3. Those exempted by the Constitution, statues or treaty or contract with taxpayers
Examples:
a. Receipt of non-profit institutions from their main activities
b. Contributions to GSIS, SSS, PhilHealth, Pag-Ibig and
c. Retirement and separation benefits under certain circumstances
d. Tax holiday for entities registered pursuant to the Omnibus Investment Code
e. Income of foreign government or corporations owned or controlled by them
Taxation of Gross Income under the NIRC:
A. Passive Income Tax
1. Capital gains tax – few final tax is imposed on certain gains on dealings on properties
Examples include final tax on:
a. Final tax on net gain on sale of domestic stocks directly to buyer (withheld at source)
b. Final tax on gains on sale of real property located in the Philippines classified as capital asset
2. Other withheld final tax – these are groups of passive income that are subject to withholding by the
income payor.
Examples include final tax on:
a. Interest on deposits with banks d. Winnings
b. Prizes e. Royalties
c. Dividends received from domestic corporation
Certified Tax Technician Review 1

B. Regular (Active) Income Tax – applies to all items of gross income that are generated by the taxpayer
in the ordinary course of business or to those items of passive income that are not covered by final taxes.
Regular income tax is either:
1. Progressive tax (0-32% schedular rates) – applicable to individual and taxable trusts and estates
2. Final tax (35%) – applicable to corporations
Examples active income:
1. Compensation income
2. Professional income
3. Business income
4. Those items of income that are excluded from capital gains tax
a. Gain on sale of properties located abroad
b. Gain on sale of properties located in the Philippines by non-residents
c. Gain on sale of other non-domestic stocks and non-real property capital assets
5. Those items of income that are excluded from other final taxes
a. Interest income on notes receivable (not deposit)
b. Prizes where the taxpayer has no intention or active effort to compete (Nobel Prize, cash awards to
“Most Outstanding Citizens of Baguio”)
c. Dividends from foreign corporations
6. Others
a. Certain tax benefits (example: items of deductions claimed in the past that are subsequently
recovered)
b. Obligations waived by the creditors in consideration of service
SITUS OF INCOME
A. Interest – debtor’s residence
B. Dividends
1. By a domestic corporation – within the Philippines
2. By a foreign corporation – apply the income dominance test
Basis:
World gross income for the three-year period ending the current taxable year preceding the
declaration of such dividends
a. If Philippine gross income is less than 50% of the basis, the whole dividend is considered earned
outside the Philippines
b. If Philippine gross income is at least 50% of this, the ratio of Philippine gross income over the
basis multiplied by the dividend received is considered earned within the Philippines.
C. Service – place of performance of the service
D. Rent – location of the property
E. Royalties – place where the intangible is used
F. Gain on sale
a. Real property – location of the property
b. Domestic shares of stock – always within the Philippines
c. Personal property – place of sale
G. Mining – location of mine
H. Farming - location of farm
I. Merchandising – place of sale
Place of Puchase Place of Sale Income is earned
a. Within within within
b. within abroad abroad
c. abroad within within
d. abroad abroad abroad

J. Manufacturing – place of production and place of sale (Sec. 42(E), NIRC):
Whether full or partial processing, for example:
Place of Production Place of Sale Income is earned
a. Within within within
b. within abroad within and abroad
c. abroad within within and abroad
d. abroad abroad abroad
Allocation methods:
1. With factory or production price – the value as transfer price of the factory to the selling segment is
deemed the selling price of the commodity transferred.*
2. Without factory or production price – the portion deemed earned within the Philippines is:
(Property value, Philippines/ Property value, world) * 50% of income P xxx
(Gross sales, Philippines/ Gross sales, world) * 50% of income xxx
Manufacturing income earned from the Philippines P xxx
TAX ACCOUNTING PERIODS

Gross income accumulates over a period of time. Income taxation would require adoption of an accounting
period wherein to measure the income. The NIRC provides that “taxable income shall be computed upon the
basis of the taxpayer’s annual accounting period in accordance with the methods of accounting regularly
employed in keeping the books of such taxpayer.”
There are two types of tax accounting periods:
1. Calendar year – the 12-month period ending December 31 and is applicable to:
a. Individuals
b. taxpayers who do not keep books d. taxpayers with accounting periods other than the fiscal year
c. taxpayers with no annual accounting period
2. Fiscal period – any 12 months period ending the last day of any month other than December 31st. This
is Not available to non-corporate taxpayers.
Normally, accounting period are uniformly 12 months, however, short accounting period may arise in the
following cases:
1. death of a taxpayer 3. dissolution of a business
2. newly organized business 4. changes in accounting period
TAX PAYMENTS
Tax shall be paid on the 15th day of the fourth month following the close of the taxpayer’s taxable year.
TAX ACCOUNTING METHODS
So as the reporting of items of gross income would be consistent, tax accounting methods should be applied
such as the following:
A. Principal Methods
1. Cash Basis Method – income is recorded in the year it is actually or constructively received; expenses
are generally reported in the year it is paid
2. Accrual Method – income is reported in the year it is earned and expenses are deducted in the year
incurred
3. Hybrid method – combination of both cash basis and accrual basis method
B. Deferred Payment Sales
1. Installment method – applicable in the following three cases only:
a. Sale of personal property by a dealer
b. Casual sale of personal property where:
a. selling price is over P1,000.00
b. initial payment do not exceed 25% of the selling price

c. property is of a kind which would be included in the taxpayer’s inventory if on hand at the
close of the taxable year
c. Sale of real property where the initial payment do not exceed 25% of the selling price
Initial Payment – refers to payments which the seller receives upon the execution of the
instruments of sale and those scheduled to be received in the year of sale or disposition. It simply
means “total first year payments” but do not include receipts of evidence of indebtedness of the
buyer such as notes.
2. Deferred payment basis – applicable when the buyer has issued evidence of obligation (notes). The notes
shall be valued at its market value at the date of receipt. The difference between the fair value and the
face value is reported as interest income in future taxable period. This is an alternative to delaying tax
payments when the installment method is not available.
C. Long-term Construction Contracts
1. Percentage of completion – this is applicable only to long-term construction contracts covering a period in
excess of one year (Architect or engineer’s certification is required)
2. Completed contract basis – gross income is recognized upon completion of construction contract
D. Farming income
Crop year basis – applicable only to farmers engaged in the production of crops which takes more than a
year from the time of planting to the process of gathering and disposal. Expenses paid or incurred are
deductible in the year the gross income from the sale of the crops is realized.
E. Leasehold improvement
1. Outright method – the value of the leasehold improvement attributable to the lessor is reported in
taxable income at the time of completion of the leasehold
2. Spread-out method – the value of the leasehold improvement attributable to the lessor is recognized in
taxable income over the lease term
Reminders on Tax Accounting Methods:
a. Absence of accounting method or use of one that do not clearly reflects the income
If the taxpayer has no accounting method or if the method employed does not clearly reflect the
income, the computation shall be made in accordance with such method as in the opinion of the
Commissioner clearly reflects the income.
b. Consolidation of gross income from two or more methods
If a taxpayer adopted the cash basis and accrual basis in accounting for income earned on separate
trade or business, he may opt to combine the two income determined from the respective methods
as a consolidated income for tax purposes.
c. Change of Tax Method
- Prior BIR approval is required
- If the taxpayer changes its accounting methods from accrual to installment method, he should
include in future periods the collection of receivables in future gross income.*
d. Expenditures benefiting future periods
Expenditures benefiting more than one taxable period is deferred and allocated to those periods
expected to be benefited by the expenditure.
e. Advanced receipt of items of gross income
Receipt of income in advance is taxable in the year of receipt.

GENERAL RULE IN INCOME TAXATION
Income Taxable in the Philippines
Type of Taxpayers Earned Philippines Earned Abroad
I. Individuals
A. Citizens
1. Resident  
2. Non-resident 
B. Aliens
1. Resident 
2. Non-resident
a. In business 
b. Not in business 
C. Estate and Trusts same rule with individuals
II. Corporations
A. Domestic  
B. Foreign 
1. Resident 
2. Non-resident 
TAX COMPLIANCE
The Philippines follows the “self-assessment method” wherein taxpayers determine their gross income,
prepare their income tax returns and pay the tax accordingly. The return filed is presumed correct unless
proven otherwise by the government. However, in cases of failure to file a return, the Commissioner of
Internal Revenue shall file a return from best available information and such return thus filed is presumed
correct. The taxpayer has the burden of proof in this case. The same rule applies when tax authorities has
reasons to believed that the tax return of the taxpayer is grossly misstated.
Income tax return is required for items of gross income that are subject to:
1. Regular Income Tax (quarterly and annual consolidated return)
2. Capital Gains Tax (per transaction and an annual consolidated return)
Who shall file income tax returns?
1. Every resident Filipino citizen
2. Every non-resident Filipino citizen on his income from sources within the Philippines
3. Every resident alien on income from sources within the Philippines; and
4. Every non-resident alien engaged in trade or business or in the exercise of profession in the
Philippines, on income from sources within the Philippines
Who are not required to file individual returns for income tax?
1. An individual whose gross income does not exceed his total personal and additional exemptions,
except those engaged in business or profession
2. An individual with respect to pure compensation income, derived from sources in the Philippines,
the income tax on which has been correctly withheld, except those with concurrent employment
3. An individual whose income has been subjected to final income tax
4. An individuals who is exempt from filing income tax returns in pursuant to other provisions of the
Tax Code and other laws.
Where to file income tax returns?
1. Authorized agent bank
2. Revenue District Officer
3. Collection Agent

4. Duly authorized Treasurer of the city or municipality in which the taxpayer has his legal residence or
principal place of business in the Philippines or
5. Office of the Commissioner if the taxpayer has no legal residence or place of business in the
Philippines
Payment of Income Tax
1. Outright
2. Installments (for individual taxpayers)
The Networth Method
The Networth Method serves as a test of the existence of income when not specifically disclosed.
Possible Gross Income = Personal Expenditures + Change in Networth*
*The change in Networth is computed as:
Asset, end - Liabilities, end = Net Worth, end
Less: Assets, beginning - Liabilities, beginning = Networth, beginning
Change in networth
The possible gross income is generally taxable, except when it:
1. is excluded by law, contract, treaty, public policy from taxation
2. result from additional investment
3. is not income for income tax purposes (i.e. does not meet the three characteristics of gross income)

FINAL INCOME TAXATION
An identified gross income will be subject to tax as follows:
Identified item of gross income
Exception Tests:
Final Withholding Tax Taxable Capital Gains Tax

(Certain passive income only) at either (Certain capital gains only)
Regular Income Tax

Individuals: Progressive Taxation (5-32%)
Corporations: Proportional Taxation (30%)
Catch-all for all item of gross income not subject to final tax and capital gains tax
Final tax and capital gains tax are the exceptions rule in the taxation of gross income. If an item of gross
income is subject to, or is exempted from, final tax or capital gains tax, it is no longer subject to regular tax.
FINAL WITHHOLDING TAX
Final withholding tax is imposed to certain passive income. Refer to H004.1 for the list. Under the final
withholding tax system, the taxpayer actually shoulders the tax but it is the income payor who withholds and
pays the tax. The amount of tax withheld is final. The taxpayer has no more responsibility to file an income
tax return for the passive income covered subject to final withholding tax.
Nature of Final Income Tax on Certain Passive Income:
1. The final taxes on the passive income are restrictive in application. They are applicable only on the items
of passive income that are expressly listed by the NIRC.
2. Final taxes are withheld at source by the income payor; hence, the income received by the taxpayer is net
of the final tax. The income taxpayer therefore need not file a return for the passive income.
3. Final taxes apply only on specified passive income by the law earned in the Philippines.
Final Withholding Tax vs. Creditable/Expanded Witholding Tax
Final Withholding Creditable
Similarities: Tax Withholding Tax
The income payor withhold a percentage of the income.
Serves to avoid cash flow problems to taxpayers by collecting at the moment cash is
available.
Differences:
Income tax withheld Full Only portion
Certain passive Certain passive
Coverage income income and regular
income
Who remits the tax Income payor Income payor and
the taxpayer
Necessity for a consolidated return None Required

CAPITAL GAINS TAXATION
The assets of the business are classified as:
1. Ordinary assets – includes:
a. stock in trade of the taxpayer, or other property of a kind which would properly be included in an
inventory of the taxpayer if on hand at the end of the taxable year
b. properties held by the taxpayer primarily for sale to customers in the ordinary course of trade or
business;
c. properties used in trade or business of a character which is subject to allowance for depreciation; and
d. real properties used in trade or business
Examples: inventories, property, plant and equipment
2. Capital assets – any other assets that does not fall under the definition of ordinary assets
Examples: investment properties, notes receivables and investment in equity or debt securities (for a
non-security dealer taxpayer)
Gains arising from sale of ordinary assets are called “ordinary gains.” Gains arising from sale of capital assets
are called “capital gains.” All ordinary gains are taxable under regular income taxation. Capital gains are
taxable either under final tax or under regular income tax.
CAPITAL GAINS SUBJECT TO FINAL TAX
A. Capital gains tax on sale, barter, exchange and other disposition of domestic shares of stock
directly to buyer
Requisites:
a. There is a net gain.
b. The capital asset sold is a domestic stock.
c. The sale is made directly to buyer.
Capital Gains Tax Rates:
First P100,000 of the net gain 5%
Excess of the net gain over P100,000 10%
Note to candidates: This rule on capital gains on sale of domestic stocks directly to buyer is uniform to
all income taxpayers (individuals or corporate) regardless of classification.
The rule do not applies to:
1. Gains on sale shares of stock is that is traded in the Philippine Stock Exchange (PSE)
 This is subject to a transaction tax (percentage tax) of ½ of 1% of selling price.
2. Gains under similar conditions by security brokers or dealers
When to file the Capital Gains Tax Returns?
1. Per transaction basis: Within 30 days after each transactions
2. Annual basis:
a. For individuals – On or before April 15 of the following year
b. For corporations – On or before the 15th day of the fourth month following the close of the
taxable year
When to pay the capital gains tax?
1. Lump sum – Upon date of filing the return with the Bureau (within 30 days from date of sale)
2. Installment – tax on installments is due within 30 days from receipts of each installments
Documentary Stamp Tax
 Par value stock: P0.75/P200 or fractional part of the par value of due bill, certificate of obligation
or stock
 No-par stock: 25% of the documentary stamp tax paid on the original issue of said stock. (The
documentary stock on original issue of non-par stock is based on actual consideration for the
issuance – Sec. 174 NIRC)

 Limit: Only one tax shall be collected on each sale or transfer of stock or securities from one person
to another regardless of whether or not a certificate of stock is issued or obligation is issued,
indorsed, or delivered in pursuance of such sale or transfer.
 Deadline: Documentary stamp tax return shall be filed within 10 days after the close of the month when
the taxable document was made, signed, issued, accepted or transferred, and the tax thereon shall be
paid at the same time the return is paid.
B. Sale, exchange or other disposition of real property in the Philippines classified as capital asset
Requisites:
a. The real property is located in the Philippines.
b. The property is classified as capital asset.
c. The taxpayer is an individual or a domestic corporation.
d. The taxpayer is other than a foreign corporation.
Tax Rate and Tax Basis: 6% x (the higher of Gross Selling Price or Fair Market Value)
The fair market value for purposes of the capital gains tax is whichever is higher of:
1. Zonal value as prescribed by the Commissioner of Internal Revenue
2. Assessed value as determined by the Provincial or City Assessor’s Office
Gross selling price – The amount of any money received plus the fair market value of any property
received. Interest on the selling price shall be treated separately as Other Income taxable under regular
income taxation.
Excess Mortgage Assumed
The excess of the mortgage assumed over the cost of the property is included both in initial payment and
selling since it is a constructive receipt of income; in other words, it represents “extra consideration”.
Note to Candidates: The basis of the tax is on the gross selling price or gross fair market value. This
treatment presumes the existence of gain and is applied regardless of the existence of actual gain.
SCOPE OF THE 6% CAPITAL GAINS TAX:
Individuals Corporation
Citizen Alien
Location of Non- NR- NR- Domestic Resident Non-
Real Property Resident Resident Resident ETB NETB resident
Philippines       Not Applicable
Abroad × × × × × × × ×
Note to Candidate: Regular income taxation, being the general rule, applies where the 6% final capital gains
tax do not apply. Under regular taxation, the actual net gain is subject to regular income tax.
How is the capital gains tax paid?
1. The tax is withheld at source – the seller and buyer files a joint capital gains tax return (one return per
sale or foreclosure sale).
2. Installment (one return for each installment payment receive)
The tax is withheld at source in installments when the taxpayer qualifies and opted to be taxed on
installments.
Alternative Taxation:
The actual net gain on the sale of real property may be included under progressive income taxation.
Requisites:
a. the seller is an individual
b. the buyer is the government, its political subdivisions or agencies or GOCCs

Tax Exemption:
The sale may be exempted from the payment of capital gains tax provided the following conditions are met:
1. The seller is an individual citizen or resident alien.
2. The real property sold is his principal residence.
Principal Residence – the place where an individual person resides comprising of the house and the lot to
where it erects; in case the interest on the land component is held by other persons, only the dwelling
house is considered principal residence.
The residential address indicated in the latest income tax return immediately before the date of sale is
conclusive presumed to be the true residence. The Barangay Captain Certification or Building
Administrator Certification in the case of condominium residences is no longer honored.
3. The full proceed of the sale is utilized in acquiring another residence.
4. A new residence must be acquired or constructed within 18 calendar months from the date of sale.
5. The BIR is duly notified by the taxpayer of his intention to avail of the tax exemption within 30 days
from the date of sale through a prescribed return.
6. The capital gains tax thereon is held in escrow in favor of the government.
7. The exemption can only be availed once every 10 years.
8. The historical cost or adjusted basis of the real property (principal residence) sold shall be carried over to
the new principal residence built or acquired
Should there be any portion of the proceeds of sale not utilized for the reconstruction of a new residence,
the same shall be taxable. The tax on the unutilized portion shall be determined as follows:
Gross selling price or Fair Unutilized portion
Market Value at the date of x x 6%
sale, whichever is higher Gross selling price
Tax Basis of New Principal Residence:

Tax Basis refers to the cost or adjusted cost of a property for tax purposes and hence the amount deductible
for tax purposes in determining gain or losses in disposal of the related property if the related transaction is
taxable under the progressive system of taxation. Generally, when a property is acquired by purchase, the cost
is the tax basis.
A tax basis reduction may result if the proceeds of the disposition of a principal residence is not fully utilized
in the acquisition or construction of a replacement. Likewise a tax basis increase results when additional
expenditures were incurred by the taxpayer in securing a replacement principal residence.
Less than full utilization of proceeds:
Utilized Selling
New cost basis = x Basis of the old principal
Gross Selling Price residence
More than full utilization of proceeds:
Basis of the old principal Additional expenditure in

New cost basis = residence + excess of the proceeds
Documentary Stamp Tax
 Amount:
 P15 – if selling price after allowance for encumbrances does not exceed P1,000
 P15 – for each P1,000 or fractional excess above P1,000 of such selling price
 Deadline: Documentary stamp tax return shall be filed and the tax thereon paid within 5 days after the
close of the month when the taxable document was made, signed, issued, accepted or transferred.

INDIVIDUAL INCOME TAXATION
Classification of Individual Income Taxpayers

A. Citizen
1. Resident – a citizen of the Philippines residing herein
2. Non-resident – a citizen of the Philippines residing abroad or who left the Philippines during the year
and have shown proof to the CIR of his extended stay abroad. In default of intention, the presence
of a citizen for at least 183 days qualifies him as non-resident citizen.
B. Alien
1. Resident – an alien who showed proof of his extended stay or who have stayed in the Philippines for
more than one year with indefinite purpose
2. In- business/engaged in trade or business in the Philippines – an alien who stayed in the Philippines
for more than 180 days is deemed doing business in the Philippines
3. Not engaged in trade or business – an alien who stayed in the Philippines for 180 days or less
a. Subject to 25% final income tax on all income regardless of type, bracket or category without
benefit of any deduction (allowable deductions or personal exemptions)
b. Special Aliens – non-resident not engaged in trade or business employed by:
a. regional or area headquarters (RAH) or regional operating headquarters of multinational
companies
b. offshore banking units
c. petroleum service contractors or sub-contractors
 They are taxable at final tax rate of 15% on gross income received
 Filipinos occupying the same position are also entitled to the same 15% final tax
scheme.
Progressive/Schedular Tax Rates for Non-Corporate Taxpayers:
Over But Not Over Basic Tax plus % of excess over
P 0.00 P 10,000.00 5% P 0.00
10,000.00 30,000.00 P500 plus 10% of excess over 10,000.00
30,000.00 70,000.00 P2,500 plus 15% of excess over 30,000.00
500,000.00 Infinite P125,000 plus 32% of excess over 500,000.00
Items of Income for Individual Taxpayers:
C. Capital Gain subject to Capital Gains Tax – applicable to all individuals, estates and trusts
1. Sale of domestic stocks directly to buyer
2. Sale of real property
D. Passive Income
1. Interest from deposits
2. Royalties
3. Winnings
4. Prizes
5. Dividends (cash or property)
6. Income from cinematographic films and similar works earned by non-resident aliens
 taxable at 25% final tax
 if earned by residents or citizens, this is taxable at progressive rates
7. Share in the net income of a taxable partnership
Business Partnership (taxable partnership)
 a partnership formed for profit and not for the exercise of a common profession

 treated as a corporation for tax purposes
 the share in the distributable income of a partnership is subject to a 10% final tax which is the
same as those imposed with dividends when the recipient is an individual or a non-resident
taxpayer
Share in the net income of General Professional Partnership (exempt partnership)
 GPP - one formed for the common exercise of a profession (all partners must be from the same
profession)
 GPP are not taxable as a separate entity but have reportorial responsibility with taxation
authority (i.e. filing of annual information return)
 its net income is deemed constructive income of the partners pro-rata to their ownership
interests
 share of partners from GPPs are subject to regular tax
Rules Compensation of partners from a partnership:
1. Business partnership – the compensation falls as taxable compensation of the receiving
partner; the same is a deductible compensation expense of the business partnership. It should be
noted that registration is not necessary before partnership are taxable as corporations.
2. General Professional Partnership – compensation is viewed as a distribution of income and
hence represents a business income of the recipient
Taxation of Co-ownership Income
General Rule: Co-ownership are exempt from taxation since it is usually limited to the preservation
of the property owned in common and the collection of the related income accruing therefrom. Co-
owners therefore are required to report to their separate income tax return their respective share in
the net income of the co-ownership
Exception Rule: when the income of the co-ownership is invested by the co-owners in business or
other income producing properties, the co-ownership is no longer limited to preservation by virtue
of the intention to engage in trade. The co-ownership is constitutes itself into a business partnership
and hence, taxable as a corporation.
E. Income subject to Progressive Taxation
A. Compensation Income – derived from employment and includes all income arising form employer-
employee relationship whether monetary or not
Inclusions:
1. salaries, wages, compensation, tips, commissions, emoluments and honoraria
2. bonuses
3. allowances (including straight allowances such as representation and transportation allowances
(RATA))
4. fringe benefits
5. retirement and separation benefits
6. fees, including director’s fees
7. pensions
8. other income of a similar nature
B. Business of Professional Income- derived from activities which a person is habitually engaged in
such as trading, rentals, fees in the ordinary course of business.
C. Other Income - these represent other items that meet the definition of income which are neither
subject to the final tax nor capital gains tax.

PERSONAL EXEMPTIONS
Items of Deductions from Individual Taxpayer’s Gross Income
A. Personal Exemptions
a. Single individuals or married individual judicially decreed as legally separated with no qualified
dependents P20,000 (RA 8424) NOW: P50,000 (RA 9504)
b. Head of the family- sec. 35 par. A NIRC defines it as an unmarried or legally separated man or
woman with one or both parents, or with one or more brothers or sisters, or with one or more
legitimate, recognized natural or legally adopted children living with and dependent upon him for
their chief support, where such brothers or sisters or children are not more than twenty-one (21)
years of age, unmarried and not gainfully employed or where such children, brothers, or sisters,
regardless of age are incapable of self-support because of mental or physical defect. P25,000 (RA
8424) NOW: P50,000 (RA9504 as single taxpayer)
Note: the definition of Head of the Family has been effectively scrapped by R.A. 9504 which became effective on July
8, 2008.
c. Married individual P32,000 (RA 8424) NOW: P50,000 (RA 9504)
 when one of the spouses is only deriving gross income, only such spouse is allowed personal
exemption
 Items of income not directly traceable to either spouse is allocated to both equally
B. Additional Personal Exemptions for dependents
Dependent – a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the
taxpayer if such dependent is not more than twenty-one (21) year of age, unmarried, and not gainfully
employed or if such dependent, regardless of age, is incapable or self-support because of mental or
physical defect.
 Additional exemption for each dependents not exceeding four: P8,000(RA 8424) NOW: P25,000
(RA 9504)
 In case of legally separated spouses, additional exemption is claimable only by the one having custody
of the child or children; provided, that the total amount of additional exemptions claimable by both
spouses shall not exceed 4 dependents.
Rules on Change of Status of an individual taxpayer during the year (partially superseded):
1. Marriage of a taxpayer or having additional dependent – the taxpayer may claim the
corresponding exemption as the case may be, in full (not prorated) for such year.
2. Death of a taxpayer – his estate may still claim the personal and additional exemptions for himself
and his dependent(s) as if he died at the close of such year.
3. Death of spouse or dependents, a dependent marries, a dependent becomes 21 year old or a
dependent becomes gainfully employed- these losses of entitlement shall take effect at the end of
the year.
Personal Exemptions Allowable to Nonresident Alien (sec. 35 (D) NIRC) – “a nonresident individual
engaged in trade or business or in the exercise of profession in the Philippines shall be entitled to personal
exemption in the amount equal to the exemptions allowed in the tax law in the country of which he is a
subject citizen, to citizens of the Philippines not residing in such country, not to exceed the amount fixed in
this Section (referring to section 35) as exemption for citizens or residents of the Philippines. Provided that
said nonresident alien should file a true and accurate return of the total income received by him from all
sources in the Philippines, as required by this Title.”
Note: Sec. 35 of the NIRC encompasses both personal exemptions, additional personal exemptions including rules of
change of status of taxpayers. It is clear from the provisions that both personal and additional exemptions are
claimable by non-resident engaged in trade or business. However, the existing interpretation of the BIR is
that NRA-ETBs are allowed only basic personal exemption only.

C. Premium on Health and Hospitalization Insurance
 the amount of premium not to exceed P 2,400 per family or P 200 a month paid during the taxable
year for health and hospitalization insurance paid by the taxpayer for himself, including his family,
shall be allowed as deduction from his gross income; provided that said family has a gross income of
not more than P 250,000 for the taxable year.
 In the case of married individuals, only the spouse claiming additional exemptions for dependents
shall be entitled to this deduction.
D. Business Expenses ( Please consult Deductions from Gross Income)
SPECIAL RULES WITH MARRIED TAXPAYERS
- each married person shall compute the amount of income tax separately but their income tax liability
shall be reported in one income tax return such that there will be only one income tax payable or income
tax refundable
- Joint income or income that cannot be clearly established as income of either spouse is allocated equally.
Substituted Filing of Income Tax Return
- The employer of the taxpayer withholds the tax due on the employees income; likewise the deductibility
of the related compensation expense for the employer is contingent on the withholding of the employee
income tax.
- in case of purely compensation income earners, there should be no need to file a separate income tax
return, unless there are other income to be declared or the withhold amount of tax is incorrect
- in case of concurrent employment, the taxpayer shall select a main and secondary employer; the main
employer shall compute tax liability with consideration for personal deductions while the secondary
employer shall compute and withhold tax thereon without consideration of the personal exemption of
the taxpayer; a consolidated return shall be filed by the employer at the end of the taxable period
Rules on Centavos
- centavos on the taxable income are concatenated (i.e.: dropped off)
- centavos on the income tax due are rounded to the nearest peso

CORPORATE INCOME TAX
Classification of Corporate Taxpayers:

A. Domestic Corporations- this are corporations that are incorporated under Philippine Laws and are
operating in the Philippines (includes business partnership)
1. Proprietary Educational Institutions and Non-Profit Hospitals
- If gross income from unrelated trade,
- If gross income from unrelated trade, business or other activities exceeds 50% of the total gross
income from all sources, the general corporate rate applies
- if the activities of these entities are primarily conducted on principal purpose (meaning unrelated
gross income do not exceed 50%), they are taxable at 10%
2. Others (Domestic corporations in general) – subject to the regular income tax of 30% on taxable income
B. Resident Foreign Corporations- this pertain to corporations that are incorporated under any laws
other than that of the Philippines but are operating in the Philippines
1. International carrier – taxable at 2 ½% of Gross Philippine Billings
2. Offshore banking units and Foreign Currency Deposit Units – taxable at 10% of gross taxable
income
3. Regional Area Headquarter and Regional Operating Headquarter of Multinational
Companies – taxable at 10% of taxable income
4. Others – subject to the regular income tax of 30% on taxable income
C. Non-resident or Foreign Corporations-refers to corporations that are not incorporated in the
Philippines and not operating in the Philippines except for some isolated or transactions
1. Non-resident Cinematographic Film Owner, Lessor or Distributor – film rentals and other
items of gross income shall be taxed at 25%
2. Non-resident Owner or Lessor of vessels, chartered by Philippine nationals – gross rentals and
other chartered fees shall be taxed at 4 ½%
3. Non-resident Owner or Lessor of aircraft, machineries, and other equipment – gross rentals
shall be taxed at 7 ½%
4. Others (Non-resident corporation in general) – taxable at 30% of gross income
D. Government Owned or Controlled Corporations
– These corporations shall be subject to the same corporate tax rate on their taxable income as are
imposed upon corporations or associations engaged in similar business, industry or activity
– Exception:
1. Government Service Insurance System (GSIS) 3. Philippine Health and Insurance
Corporation(PHIC)
2. Social Security System (SSS) 4. Philippine Charity Sweepstakes Office
(PCSO)
E. Exempt Corporations
1. Labor, agricultural or horticultural organizations not organized principally for profit
2. Mutual savings bank not having a capital stock represented by shares, and cooperative bank without
capital stock organized and operated for mutual purposes and without profit
3. A beneficiary society, order or association, operating for the exclusive benefit of the members such
as fraternal organizations operating under the lodge system, or a 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 or order, or association, or nonstick
corporation or their dependents.
4. A cemetery company owned and operated exclusively for the benefit of its members
5. Non-stock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its income
inure to the benefit of any member, organizer, officer or any specific person

6. Business league, chamber of commerce, or board of trade, not organized for profit and no part of
the net income or which inures to the benefit of any private stockholder or individual
7. Civic league or organizations not organized for profit but operated exclusively for social welfare
8. Non-stock and nonprofit educational institution
9. Government educational institution
10. Farmer’s or other mutual typhoon or fire insurance company, mutual ditch or irrigation company,
mutual cooperative telephone company, or like organizations of a purely local character, the income
of which consists solely of assessments, dues, and fees collected from members for the sole purpose
of meeting its expenses; and
11. Farmer’s, 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 the proceeds of sales, less the necessary
selling expenses on the basis of the quantity of produce finished by them.
Note: Income from whatever kind and character of the above organizations from any of their properties, real or
personal, or from activities conducted for profit regardless of the disposition made of such income, shall be subject
to income tax.
Key points to remember with exempt corporations:
- non-stock and non-profit organization
- no income inures to the benefit of any person or organization
- exemption applies only to income received from related to their main activities or purpose
NON-CORPORATE BUSINESSES UNDER THE LAW
The following entities are not corporations. Their income is taxable to their owners, venturers or
shareholders:
1. Co-ownership
2. General Professional Partnership
3. Joint venture for the purpose of undertaking construction projects under a service contact with the
Government
4. Joint venture for engaging in petroleum, coal, geothermal and other energy operation pursuant to an
operating or consortium agreement under a service contract with the Government.
ITEMS OF INCOME OF CORPORATIONS
A. Passive Income – Refer to H004 for details.
B. Capital Gains
1. Sale of shares of stock in a domestic corporation (traded or non-traded) – applicable to all
corporations.
2. Sale of real property located in the Philippines classified as capital assets – applicable to domestic
corporations only
C. Regular & Other Income – subject to proportional tax of 30% or special rates.
1. Business Income - these refer to those that are derived from the normal course of business of the
corporation. Examples: rental income, subscription fee, commission income, gross income from
sales.
2. Other Income- all other items which meets the definition of income but are not taxable under the
final taxation scheme. Example: recovery of bad debts, income from wagering gains and dividends
income from a foreign corporation

BASIS OF CORPORATE INCOME TAX
Domestic Resident Foreign
Gross Income xxx xxx xxx
Less: Itemized Deductions xxx xxx -0-
Taxable Income xxx xxx xxx
The following are the pertinent tax rates that apply for corporate taxpayers:
1. effective January 1, 2000 32%
2. effective November 1, 2005** 35%
3. effective January 1, 2009 30%
SPECIAL TAXATION RULES FOR REGULAR CORPORATIONS

A. MINIMUM CORPORATE INCOME TAX
 computed as 2% of gross income
 beginning on the fourth taxable year immediately following the year in which such corporation
commenced its business operation
 when the minimum corporate income tax is higher than the regular corporate income tax during the
period, the minimum corporate income tax shall be payable
 excess of minimum corporate income tax can be carried over and credited to the regular income tax
for the next three immediately succeeding taxable years
 applies only to domestic and resident corporations and excludes those entities enjoying preferential
rates
Exemption Rule to MCIT
The Secretary of Finance is authorized to suspend the imposition of minimum corporate income tax on
any corporation which suffers losses on account of:
a. prolonged labor disputes (over 6 months)
b. force majeure
c. legitimate business reverses
Gross Income for purposes of MCIT shall be:
a. for sale of goods – gross sales less sales returns, allowances, discounts and cost of goods sold
b. gross receipts less sales returns, allowances discounts and cost of services sold
Cost of services shall include all direct costs and expenses incurred to provide the services required by
the customers and clients and including salaries and employee benefits of personnel, consultants and
specialists directly rendering the services and cost of facilities used directly in providing the service such
as depreciation, rental of property and cost of supplies. For banks, cost of services includes interest
expense.
B. IMPROPERLY ACCUMULATED EARNINGS TAX
 10% of the improperly accumulated earnings to be determined by the Bureau of Internal Revenue.
 Effective January 1, 1998.
 This is assessed by the Bureau of Internal Revenue on its contention for improper accumulation of
profits and not applied for or computed by the corporation in its income tax return.
Presumption of evidence of improper accumulation of profits and hence avoidance of tax payables of
stockholders:
1. holding companies 3. closely-held corporations
2. investment companies 4. profit accumulation beyond the needs of business
Indicators of improper profit accumulations:
1. withdrawals of stockholders disguised as loans
2. expenditures by the corporation for the personal benefits of the stockholders

3. yearly substantial advances made to stockholders-officers
4. investments in unrelated business
5. radical change of business when large profit have been accumulated
Reasonable accumulation of profits:
1. additional working capital purposes
2. purchase of long-life assets reasonably required by the business(expansion, improvement and
repairs)
3. the acquisition of a related business or the purchase of the stock of a related business where a
subsidiary relationship is established
4. obligation in a contract to set aside funds in a sinking fund to settle a debt
5. anticipated losses or business reverses
Immediacy Test – profit must be applied not too long from the time of retention of profits. This rule
applies if the accumulation of profit is deemed for the reasonable needs of business.
Limit under the Corporation Code of the Philippines – a corporation can retain profits not exceeding
100% of its paid in capital. Accumulation of profits up to 100% of the paid up capital therefore is not an
improper accumulation of profit.
Taxable items of improperly accumulated profits:
1. after tax net income 4. Income exempt from final tax
2. income subject to final tax 5. NOLCO deducted in determining the relevant
income
IAET Exempt Corporations:
1. Insurance companies 3. Non-bank financial intermediaries
2. Publicly-held corporations 4. Banks
C. GROSS INCOME TAXATION

The president, upon recommendation of the Secretary of Finance, may effective January 1, 2000 allow
corporations the option to be taxed at 15% of gross income after the following conditions are satisfied:
1. tax effort ratio of twenty percent (20%) of gross national product(GNP)
2. a ratio of forty percent (40%) of income tax collection to total tax revenues
3. a VAT tax effort of four (4%) of GNP
4. a 0.9 percent (.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP
 this option shall be allowed only to firms whose ratio of gross income tax to gross sales or
receipts from all sources does not exceed 55%
 the election of gross income taxation shall be irrecoverable for the three consecutive taxable
years during which the corporation is qualified under the scheme
Meaning of Gross Income for Purposes Gross Income Taxation:
A. Sale of goods– Gross income = gross sales less sales returns, discounts and allowances and costs of
goods sold
Cost of goods sold – include all business expenses directly incurred to produce the merchandise or to
bring them to their present location and use.
1. merchandising concern – include the invoice cost of the goods sold, plus import duties, freight in
transporting the goods to the place where the goods are actually sold, including insurance while in
transit
2. manufacturing concern – include costs of production of finished goods, such as raw materials, labor
and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the
new materials to factory or warehouse.

B. Sale of service – Gross income = gross receipts less sales returns, allowances and discounts *
* As compared with MCIT gross income from service; this does not have direct cost of service.
Note: With respect to corporations adopting fiscal accounting period, the taxable income shall be
computed without regard to the specific date to which the relevant income is earned.
D. BRANCH PROFIT REMITTANCE TAX
Any profit remitted by the branch to its head office shall be subject to a final tax at 15% which shall be
based on the total profit (exclusive of investment income) applied or earmarked for remittances, without
any deduction for the tax component thereof, except those activities that are registered with the
Philippine Economic Zone Authority (PEZA)

REGULAR INCOME TAXATION: ITEMS OF GROSS INCOME
Regular Income Tax applies to all other items of gross income that are not subjected to final tax or capital
gains tax on certain passive income. Most of these items of gross income are derived in the regular conduct of
business, trade, profession or employment.
Nature of Regular Income Tax
1. It applies on net income (taxable income). “Taxable income means” the pertinent items of gross income
subject to regular tax less the deductions and/or personal and additional exemptions, if any, authorized
for such types of income under the NIRC or other special laws.
2. Reported quarterly with an annual consolidated return rather than on a per transaction basis.
Regular Income Tax has two forms:
1. Progressive Income Tax
This is applicable to individuals and estates and trusts.
Over But Not Over
P0.00 P 10,000.00 5%
10,000.00 30,000.00 P500 plus 10% of excess over P 10,000.00
500,000.00 Infinite P125,000 plus 32% of excess over 500,000.00
2. Corporate Income Tax
This is applicable to corporations and business partnership.
Corporate
Effectivity Tax Rate
Prior to 1998 35%
January 1, 1998 34%
January 1, 1999 33%
January 1, 2000 32%
November 1, 2005 35%
January 1, 2010 30%
Whereas the following entities may be covered by regular income tax rules, they are not taxable as a
separate entity but are treated as an extension of the personality of the individuals composing/owning
them:
1. General Professional Partnership
2. Co-ownership
3. Tax exempt estates and trusts
4. Exempt Joint Ventures or Consortium– those that are:
a. Formed for the purpose of undertaking construction projects,
b. Petroleum, coal, geothermal and other energy operations
- in pursuant to an operating consortium agreement under a service contract with the
government.
GROSS INCOME
Gross income includes gains, profits, and income derived from whatever sources, whether legal or illegal not
covered by either final taxation or capital gains taxation.

EXCLUSIONS FROM GROSS INCOME:
1. Proceed of a Life Insurance policy - received, whether in lump sum or otherwise, by the heirs or
beneficiary upon the death of the insured is tax exempt. However, if the proceed are retained by the
insurer under an agreement to pay interest, the interest is included in gross income.
2. Amount received by the insured as a return of premium under a life insurance, endowment, or
annuity contracts paid during the term or at the maturity of the term mentioned in the contract or upon
surrender of the contract.
3. Gifts, Bequests, and Devises or Descent – the value of property acquired by way of these are taxable
under Donor’s Taxation. However, incomes from such property, as well as, gift, bequest, devise, or descent of income
from any property, in case of transfer of a divided interest, are included in gross income.
4. Compensation for injuries and sickness – amounts received under Accident or Health Insurance or
under Workmen’s Compensation Acts, as compensation for personal injuries plus the amount of
damages received whether by suit or agreement on account of such injuries or sickness.
5. Income exempt under treaty – income of any kind to the extent required by any treaty obligation
binding upon the Government of the Philippines.
6. Retirement Benefits, Pensions, Gratuities, etc.
Retirement benefit under RA 7641
Requisites of exemption:
a. The employer maintains a reasonable private benefit plan.
b. The retiring official or employee has been in the services of the same employer for at least ten (10)
years.
c. The retiring employee is at least fifty (50) years of age at the time of retirement.
d. This is the first time availment of the exemption.
Reasonable private benefit plan
A reasonable private benefit plan is a pension, gratuity, stock bonus or profit-sharing plan maintained by the
employer for the benefit of its employees covered (plan members), wherein contributions are made by the
employer, employees or both, for the purpose of distributing the corpus (principal) or earnings thus accumulated to
plan members; provided that in no time shall any part of the corpus or income of the fund be used for,
or diverted to, any purpose other than the exclusive benefit of said plan members.
7. Separation or Termination
Requisite of exemption:
a. Due to sickness, death or other physical disability;
b. Any cause beyond the control of the employee or official (i.e.: redundancy and closure of business)
8. Retirement Gratuities, Social Security Benefits and Other similar benefits from foreign
government agencies and other institutions, private or public, by resident or non-resident citizens or
aliens who come to settle permanently in the Philippines
9. United States Veterans Administrations - administered benefits under the laws of the United States
received by any person residing in the Philippines
10. SSS benefits under RA 8282 received or enjoyed
11. GSIS benefits under RA 8291 and including retirement gratuity received by government officials and
employees
12. Investment Income in the Philippines in loans, stocks, bonds, or other domestic securities, or
form interest on deposits in banks in the Philippines by:
a. Foreign governments
b. Financing institutions owned, controlled, or enjoying refinancing from foreign government
c. International or regional financial institutions established by foreign governments
13. Income of the government and its political subdivisions from
a. any public utility or
b. exercise of essential government function

14. Prizes and Awards in recognition of religious, charitable, scientific, educational, artistic, literary,
or civic achievements but only if:
a. the recipient was selected without any action on his part to enter the contest or proceeding; and
b. the recipient is not required to render substantial future services as a condition to receiving the prize
or award
15. Prizes and Awards in Sports Competitions granted to athletes:
a. in local or international competitions and tournaments
b. whether held in the Philippines or abroad; and
c. sanctioned by their national sports associations
16. 13th Month Pay and Other Benefits (Examples: productivity incentives, Christmas bonus, etc.) – provided not to
exceed the P30,000 ceiling. Any amount in excess is included in gross income. This P30,000 ceiling is
adjustable by revenue regulation in keeping with the effects of inflation on the cost of living.
De minimis Benefits
1. Monetized unused vacation leave credits of private employees – not exceeding 10 days during the year
2. Monetized unused vacation and sick leave credits paid to government officials and employees
3. Medical cash allowance to dependents of employees – not exceeding P750 per employee per semester, or P125
per month
4. Rice subsidy – P1,500 or 1 sack of 50-kg rice per month amounting to not more than P1,500.
5. Uniform and clothing allowance – not exceeding P5,000 per annum (RR8-2012)
6. Actual Medical Assistance, e.g. medical allowance to cover medical and healthcare needs, annual
medical/executive check-up, maternity assistance, and routine consultations – not exceeding P10,000 per
annum
7. Laundry allowance – not exceeding P300 per month
8. Employee achievement award, e.g. for length of service or safety achievement, which must be in the form of
tangible property other than cash or gift certificates, 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.
9. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per
annum (i.e. Christmas gift and anniversary gifts)
10. Daily meal allowance for overtime work and night or graveyard shift not exceeding 25% of the basic minimum
wage on a per region basis (i.e. overtime meal)
Note to candidates:
The excess of these de minimis benefits over their maximum limits are included with the 13th month
or 14th month pay, bonuses, and other benefits. The totality of the benefits is compared with the
P30,000 limit.
17. Contributions for GSIS, SSS, Medicare, Pag-Ibig and Union Dues - these are deducted from the
relevant income to which they relate; for example, they are netted with the compensation income of
employees
18. Gains from Sale of bonds, debentures or other certificate of indebtedness with a maturity of more
than 5 years.
19. Gains realized from redemption of shares in mutual fund by the investor.
Note to candidates:
1. Exclusion is different with deductions. When an item of income is exempted under the above paragraph,
or under special laws, it is deducted from gross income if it was initially included therein. It is not shown
as a deduction from gross income rather it is “excluded” in gross income amounts.
2. Interest from government securities are already excluded from the list of exemptions

SOURCES OF GROSS INCOME:
A. Compensation for services in whatever form paid, including but not limited to fees, salaries, wages,
commissions, and similar items
 if received in promissory notes, the taxable portion at the time of receipt is the fair value of the note
(i.e.: its discounted value); The interest portion will be recognized as income over the related period
 Fringe benefits are not compensation. Please refer to your handouts on Fringe Benefits Taxation.
B. Trade, Business or Exercise of a Profession
C. Gains derived from dealings in property (Please read separate handout)
D. Interests – these refers to interest other than those subject to final taxes, except:
1. Interest income under the land reform earned by the landowner to which the tenant-purchaser pays
him
2. Imputed interest
E. Rents
Special considerations:
1. Obligations of the lessor that are assumed by the lessee is additional rental consideration.
2. Advance rentals:
a) If unrestricted, the entire amount is income at the time of receipt.
b) If it constitutes a loan – not rent income.
c) As security deposit to guarantee payment or rent – income only when the event or condition
which makes it the property of the lessor occurs (i.e.: when there is default)
d) If it is to be applied at the termination of the lease, it is income at the time of receipt
e) Improvements made by the lessee on the property – to be recognized as income by the lessor in
two ways:
 Outright method – the fair value of the property that will remain and be turn-over to the
lessor upon termination of the lease (the real book value of the property at termination, i.e.:
not the lessee’s book value) is recognized as income at the point of completion of the
improvement NOT the fair market value of the improvement upon completion. (Note:
Although the latter is the wordings of the law, apparently, the whole fair value is, by
common sense, not income.)
 Spread-out method – recognize the book value of the property at the termination of the
lease as income over the period of the related lease
F. Royalties
G. Dividends
Dividends are subject to regular income tax when it is declared by foreign corporations.
Dividends can either be:
 Cash dividend
 Property dividend – when taxable, taxable at the fair market value of the property received as
dividend. Note property dividend includes stock of another corporation declared by the distributing
corporation.
 Stock dividend – generally not taxable except when the declaration confers to the recipient a
different interest or right after the declaration. When taxable, the measure of taxable amount is the
fair market value of the stock dividend received.
 Liquidating dividends
This is considered an exchange or sale of property. Gain or loss is fully taxable or deductible.
Dividends received from resident corporations are subject to the Dominance Test.
H. Annuities
I. Prizes and winnings
J. Pensions; and
K. Partner’s distributable share from the net income of the general professional partnership

OTHER SOURCES OF GROSS INCOME:
A. Farming
Taxation of farming gross income requires classification of the following:
1. Livestock and farm products raised and sold – the selling price of the livestock or farm products is
considered gross income.
2. Livestock and farm purchased and sold – only the accounting gross income (sales less cost of sales) is
included in gross income
Taxation Rules:
1. Taxpayer may follow accrual or cash basis in accounting for inventories.
2. Expenses in raising the livestock and farm products are deductions from the computed gross
income.
3. The proceeds of crop insurance or livestock insurance constitute gross income because it
represents recovery of lost profits rather than lost capital.
B. Tax Benefits
When a taxpayer gains an advantage by an income tax deduction claimed in the past but were
subsequently recovered, the tax benefit should be included in income in the year recovered as item of
gross income.
Examples:
1. Bad debt recovery
General Rule: The recovery of bad debts previously written off constitute a receipt of taxable
income
2. Tax refund
General Rule: Refund of taxes that entered the determination of taxable income should be reverted
back to gross income.
Hence, refunds of the following taxes that will not enter the determination of taxable income will not
be included in gross income:
a. Philippine income tax, except the fringe benefit tax
b. Estate or donor’s tax
c. Special assessment
d. Income tax paid or incurred to a foreign country, if the taxpayer claimed a credit for such tax in
the year it was paid or incurred.
e. Stock transaction tax
Note: the above items are not deductible against gross income in any case hence they could not give
rise to a tax benefit to the taxpayer.
3. Unamortized cost of property abandoned and written off but was subsequently re-entered
into use
General Rule: The cost previously expensed should be reverted back into gross income in the year
extraction operation is resumed.
Exception to Recoveries of Losses and Expenses: Tax Benefit Rule
When the write-off or tax expense is did not cause a reduction in the income tax liability in the
period it is claimed, the recovery or refund is exempt because of absence of tax benefit.
C. Cancellation of indebtedness
a. in consideration of service – treated as compensation income
b. as an act of gratuity – not an income but a gift taxable under Donor’s Taxation
c. as capital transaction such as forfeiting the right to receive dividend in exchange of the debt – treated as dividends
and is subject to dividend taxation rules

D. Damage recovery
a. Compensatory Damages - this constitute return of capital and hence, not taxable. For example: moral
damages from personal action such as libel, slander; and breach of promise to marry.
b. Recovered Damages – this constitute taxable income since they are recoveries of lost profit. For
example: damages recovered from patent infringement suit
REGULAR INCOME TAXATION: DEDUCTIONS FROM GROSS INCOME

General characteristics of allowable deductions:
1. The deductions are legal, ordinary, actual and necessary expenses of business or profession.
2. The deductions pertains income which are subject to regular tax.
3. The deductions are not incurred with related parties to the taxpayer.
Related parties:
1. Members of a family
2. Except in cases of distribution in liquidation, and the direct or indirect controlling individual
3. Except in cases of distribution in liquidation, corporations under direct or indirect common control
by or for the same individual
4. Grantor and fiduciary of any trust
5. Fiduciaries of trusts with the same grantor
6. Fiduciary of a trust and beneficiary of such trust
Deductions from Gross Income:
A. Interest
Requisites:
1. there should be a valid indebtedness
2. there must be legal liability to pay interest
3. the indebtedness must have been incurred in connection with the taxpayer’s trade, profession or
business
4. for interest incurred abroad by taxpayers who are subject to income tax only on income earned
within the Philippines, the indebtedness must have been actually incurred to provide funds for use in
connection with the conduct or operation of trade or business in the Philippines
5. the deductible amount of interest shall be reduced by an amount equal to the following percentage of
the interest income:
Beginning January 1, 1998 41%
Beginning November 1, 2005 42%
Non-deductible interest:
1. Interest paid in advance through discount on indebtedness incurred by an individual taxpayer
reporting income under the cash basis. If the discounted liability is payable in installment, the amount
of interest which corresponds to the amount of the principal amortized or paid during the year shall
be allowed as deduction in such taxable year.
Note: If the borrower is a corporation, pre-deducted interest could be claimed as deduction in the
year of granting of the loan.
2. Interest payments with related parties
3. If the indebtedness is incurred to finance petroleum operations
Capitalization of interest
At the option of the taxpayer, interest incurred to acquire property used in trade, business or
profession may be allowed as a capital expenditure

Note: the capitalization of borrowing cost under PAS 23 is not followed for taxation purpose. The
interest expense up to repayment of the debt may be capitalized.
Special Cases:
1. Interest on preferred stock – these are dividends; hence, not deductible on interest
2. Interest on scrip dividends – since there is an evidence of indebtedness, these are deductible interest
B. Taxes
Generally, taxes paid or accrued within the taxable year in connection with the taxpayer’s trade or
business or exercise of a profession, are deductible from gross income. The deductible tax include
national and local taxes such as community tax, city taxes (mayor’s permit, real estate, professional tax;
etc.), however, the deductible tax component is the tax proper only. Interest on delinquent taxes are
deductible from gross income but as “interest expense” not taxes.
Note: no deduction is allowed for surcharges or penalties on delinquent taxes. Interest on tax
delinquency is deductible as interest expense.
Requisites:
1. must be paid or accrued within the taxable year
2. must be incurred in connection with the taxpayer’s trade, professional or business
Non-deductible Taxes:
1. Philippine income tax, except fringe benefit tax
2. Estate or donor’s tax
3. Special assessment
4. Income tax imposed by a foreign country if the taxpayer opted to claim them as deduction rather
than as tax credit
5. Stock transaction tax
6. Value-added tax on business
Tax Credit for Foreign Income Tax Paid
Can be claimed only by those taxable on world income such as resident citizen and domestic
corporations
Taxpayer has the option to claim the foreign income tax either as:
1. tax credit or
2. deduction from income
Limit of Tax Credit:
1. 1st Limitation: Per Country Evaluation - whichever is lower of the actual amount of foreign tax paid and
the amount which reflects the ratio which the gross income from the foreign country bears with the
total world taxable income to the Philippine income tax
For instance, the amount creditable or deductible for tax paid per foreign country is:
Country x taxable Income
x Philippine Income Tax
Total world taxable Income
2. 2nd Limitation: Total Foreign Country Evaluation: whichever is lower of the aggregate lower values of the
per-country evaluation and the amount which reflects the ratio of the taxable income from all foreign
countries bears with the total world taxable income to the Philippine tax.
Total foreign taxable income
x Philippine Income Tax
Total world taxable income

Rules on Income Taxes Paid:
Taxpayers who are taxable on:
World income Philippine income only
Foreign taxes paid* Deductible Qualified**
Foreign income tax paid Deductible/ Non-deductible/ Non-creditable
Creditable
Philippine taxes paid* Deductible Deductible
Philippine income tax paid Non-deductible Non-deductible
*other than the non-deductible taxes above
**deductible to the extent they are connected with income from sources in the Philippines only (Sec. 34 C (2), NIRC)
Refund of taxes: The refund of a deductible tax is taxable if it created a tax benefit in the year it is
deducted
C. Losses
1. Ordinary Loss
Requisites:
1. loss must be actually sustained during the taxable year
2. not compensated for by insurance or other forms of indemnity
3. it must be sustained in a close and completed transaction
4. the loss must be that of the taxpayer
5. the loss must be reported to the BIR within 45 days from the date of loss or discovery
6. not claimed as a deduction in the estate tax return for individual income tax payer only*
Note: * In estate taxation, losses incurred during the settlement of the estate such as theft of property or results of calamity
may be claimed as deduction in determining the net taxable estate.
Deductible losses:
1. loss incurred in trade, profession or business
2. loss due to fire, storm, shipwreck or other casualty of property connected with trade, profession or
business
3. loss due to theft, robbery, or embezzlement if the property is connected with trade, profession or
business
Measure of the loss:
1. Total Loss – book value of the property
2. Partial Loss – replacement cost of the damaged portion of the asset or the book value thereof at the
time of loss, whichever is lower.
Note: The asset must be written-off before a loss can be claimed as a deduction.
Abandonment Losses
1. Petroleum operation – all accumulated exploration and development expenditures pertaining to
partially or wholly abandoned of contract area shall be allowed as a deduction, provided notice of
abandonment shall be filed with the Commissioner of Internal Revenue
2. Producing wells – the unamortized costs thereof, as well as the undepreciated costs of equipment
directly used therein , shall be allowed as a deduction in the year such well, equipment or facility is
abandoned by the contractor
Note: if the abandoned well is re-entered and production is resumed, or if such equipment is restored
into use, the same cost claimed as deduction shall be reverted back into gross income subject to the
income tax benefit rule.

Special Cases:
1. If there is a pending proceeding in which the loss can be recovered, deduction for the loss is delayed
until recovery becomes impossible. Pending the resolution of the proceeding, the transaction is not
yet complete; hence, the loss is not yet actually sustained.
2. Loss of income – cannot be deducted unless the related income has already been included in gross
income (For example: worthless receivable is not deductible under cash basis of reporting income).
3. Losses on sale or exchanges of property with related parties – not deductible.
Net Operating Loss Carry Over (NOLCO)
Any excess of allowable deductions over gross income of a business in a taxable year immediately
preceding the current taxable year shall be carried over as a deduction from gross income for the next
consecutive taxable years immediately following the year of such loss provided there is no substantial
change in the ownership of the business. (This is discussed extensively in your Corporate Income Tax
Handouts.)
2. Capital Loss
Capital losses are deductible only to the extent of capital gains. But a net capital loss carry-over can be
deducted in the following year it arose for non-corporate taxpayers. (Please check handouts in Dealings
in Properties.)
D. Bad Debts
Requisites:
1. There must be valid and subsisting debt due to the taxpayer.
2. it must be connected with the taxpayer’s trade, profession or business
3. the debt is actually ascertained to be worthless
4. it must be charged-off within the taxable years
Recovery of bad debts
1. Taxpayers under cash basis – Taxable but subject to Income Tax Benefit Rule
2. Taxpayers under accrual basis – Always taxable
Non-deductible bad debts:
1. Those incurred under cash basis of reporting gross income
2. Those sustained in a transaction entered into by related parties
3. For taxpayers not taxable on world income, those that represents loss of foreign income.
The rules on bad debts may be applicable to debt securities becoming worthless for dealers in securities only
such as domestic banks and trusts companies whose major part of business are dealing with securities.
For other taxpayers where such security is a capital asset, the rules on capital loss apply and are deductible
subject to limit.
Special Cases with Bad Debts:
Receivables assigned without recourse – only the difference of amount paid and amount recovered is
allowed as deduction.
E. Depreciation
Requisites:
1. the property must be used in trade, profession or business
2. the property must have a limited useful life
3. the provision must be charged off during the taxable year
4. the provision must be reasonable
Special Option with depreciation:
1. For a proprietary or private educational institution only
2. May either choose to:
a. charged off as capital outlays of depreciable asset in the year of acquisition; or
b. deduct allowance for depreciation

Basis of Depreciation
The fair market value at the time of acquisition
1. The taxpayer and the Commissioner of Internal Revenue shall agree in writing about the useful life
and rate of depreciation. Such agreement shall be binding upon the taxpayer and the National
Government in the absence of circumstances not taken into consideration during the adoption of the
agreement.
2. Any change in the agreed rate and useful life shall operate prospectively.
3. In default of such agreement, the adoption of the taxpayer of useful life and depreciation rate for
depreciable assets without the objection of the Commissioner or his duly authorized representative
shall be considered binding.
Methods of Depreciation
1. Straight line
2. Declining balance
3. Sum of the years
4. Other methods which may be prescribed by the Secretary of Finance upon recommendation of the
Commissioner of Internal Revenue
Petroleum Operation:
- The taxpayer may choose either declining-balance method or straight line method at the option of
the contractor.
Useful life of depreciable asset:
1. used in or related to the production of petroleum – 10 years or shorter as may be permitted by
the Commissioner of Internal Revenue
2. not used in or not related to the production of petroleum – 5 years under straight line method
Mining Operations:
- For all properties used in mining operations, other than petroleum operation:
1. 10 year useful life or less – At normal rate of depreciation
2. More than 10 years useful life – depreciated over any number of years between 5 and the
expected life. Provided the taxpayer notifies the CIR at the beginning of the deprecation period
of the rate to be used.
F. Depletion (Cost Depletion) – available only for oil and gas wells and mines.
Exploration Expenditure – expenditures paid or incurred in ascertaining the existence, location and extent,
or quality of any deposit or ore or other minerals before the beginning of the development stage of the
mine or deposit.
Development Expenditure – paid or incurred during the development stage of the mine. The development
stage begins when ore or other minerals are shown to exist in commercial quality and quantity and end
upon commencement of actual commercial extraction.
Method to Use: Cost-Depletion Method
Depletion should be provided only up to the extent of capital investment in the mine only.
Capital investment in the mine
Unit depletion charge = Units expected recoverable
No. of units recoverable
Oil and Gas Wells or Mines: Treatment of units
No. of Intangible Exploration and Development Drilling
recoverable
Costs
Provided that production in commercial quantities has commenced, if intangible development drilling
cost are incurred for:
1. Non-producing wells and or mines – deductible in the year incurred
2. Producing wells and or mines – at the option of the taxpayer, deduction in full in the year paid or
incurred, or capitalized and amortized

Note: tangible development costs are capitalized and are subject to depreciation
If intangible exploration, drilling and development expenses are claimed as deductions, they should not
be added to the adjusted cost basis of the mining property for purposes of computing the cost depletion.
Irrevocable Alternative Deduction: Applicable to Mining Operation only
The taxpayer may, at his option, deduct exploration and development expenditures accumulated as cost
or adjusted basis for cost depletion as of date of prospecting, as well as exploration and development
expenditures paid or incurred during the taxable year.
Limit: the amount of deductible exploration and development cost shall not exceed 25% of taxable
income, without the benefit of any tax incentive under existing laws.
Once elected, the scheme shall be binding and irrevocable in succeeding taxable years.
Deductibility of Depreciation or Depletion on Mining Properties:
Taxpayers who are taxable on:
Depreciable or Depletable Asset World income Philippine income only
Located abroad Deductible Non-deductible
Located in the Philippines Deductible Deductible
G. Charitable and Other Contributions
Requisites:
1. the contribution or gift must be actually paid
2. the contribution of property must be measured based on acquisition cost
3. it must be given to an organization specified by law
4. net income of the specified institution must not inure to the benefit of any private stockholder or
individual
5. the person making the contribution must be engaged in trade, business or profession
Note: if the taxpayer is not engaged in trade, business or profession, the rules on Donor’s taxation
applies. Similar gifts are usually exempt under donor’s taxation provided that not more than 30% of the
donation is used for administrative purposes by such done non-profit entity.
Classification of contributions
A. Fully deductible contributions
1. Donation to the government or political subdivisions including fully owned government and
controlled corporations to be used exclusively in undertaking priority activities in:
1. Education 4. Human settlements
2. Health 5. Culture and sports
3. youth and sport development 6. Economic developments
Provided, donation to the government that are not in accordance with priority activities are subject to limit.
2. Donation to foreign institution or international organization in compliance with agreement or treaties.
3. Donations to accredited domestic non-government organizations. These includes organizations
exclusively for:
1. Scientific 6. Health
2. Research 7. Social welfare
3. Educational 8. Cultural
4. character building 9. Charitable
5. youth and sports development 10. Any combination of the listed purposes

Requisites:
1. the donation must be utilized by the donee institution not later than the 15th day of the third
month following the close of the taxable year
2. the administrative expense must not exceed 30% of the total expenses
3. Upon dissolution, assets must be distributed to another non-profit domestic corporation of to
the Government
- if these conditions are not complied with, the donation is subject to limit
B. Contributions subject to limit
1. Donations to the Government of the Philippines or political subdivisions exclusively for public
purposes (non-priority activities)
2. Donation to non-government organization or to domestic corporations organized exclusively for
the following purposes:
1. Religious 5. Cultural
2. Charitable 6. Educational
3. Scientific 7. Rehabilitation of veterans
4. Youth and sports development 8. Social welfare
Limit of deduction:
Based on the taxable income derived from business or profession prior to the deduction of
contributions (either fully deductible or subject to limit)
1. 10% for Individual
2. 5% for Corporations
Deductible Contribution subject to limit
The deductible contribution subject to limit shall be whichever is lower of the actual contribution with the limit
as set forth herein.
H. Contribution to Pension Trust
Current Service Cost – actually computed value of services rendered by a plan employee during the year
Past Service Cost – value of services rendered by employees in the past that partially satisfy vesting
conditions
Rules for Pension Expense:
1. Payments to the trust to cover pension liability accruing during the year (current service cost) are
fully deductible expense for the taxable year.
2. Payment to the trust in excess of the current period costs is attributed to past service cost up to the
balance of unfunded past service cost. Funding of past service cost is amortized over a period of 10
years starting from the year in which the contribution was made.
Actuarially, costs that accrue during the current year include the value of services rendered currently
(current service cost and interest cost).
Note: Deductions claimed for non-vesting employees should be reversed to gross income.
I. Research and Development Cost
Requisites:
1. It must be paid or incurred during the taxable year
2. it must be connected with the trade, profession or business of the taxpayer
3. it is not chargeable to capital accounts (capitalizable expenditure)
Amortization of Capitalizable Research and Development Costs that are not chargeable to a property of
a kind that is subject to depreciation or depletion:
1. the taxpayer should treat the expenditure as a deferred charge
2. amortized over a period of not less than 60 months starting from the month in which the taxpayer first
derived benefits from such deferred expense

Non-deductible research and development expenditures:
1. expenditure for the acquisition of improvement of a land ( in connection with research projects)
2. any expenditure for the improvement of property to be used in connection with research and
development of a kind which is subject to depreciation and depletion; and (these items are capitalized
then charged off to depreciation)
3. any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or
quality of any deposit of ore or other mineral, including oil and gas. (exploration costs are non-
deductible, only development costs)
J. Expenses, in general
Requisites:
1. it must be ordinary and necessary
2. it must be paid or incurred during the taxable year
3. it must be directly attributable to the development, operation, management and or conduct of the
trade, profession or business
4. it must be reasonable
5. the amount paid shall be allowed as deduction only if it is shown that the tax required to be deducted
and withheld therefrom has been paid to the BIR
6. it must be supported by official receipts or adequate records
A. Compensation
Requisites:
1. personal services must have been actually rendered
2. the compensation for such services must be reasonable, including the grossed-up monetary value
of fringe benefit furnished to the employee and the applicable final tax remitted to the BIR
B. Traveling Expenses
Requisites:
1. must be incurred while away from home
2. in pursuant of a trade, profession or business
C. Entertainment, Amusement or Recreation Expenses (EAR)
Requisites:
1. it must be directly related to the furtherance of the conduct of trade, profession or business
2. it must not be contrary to law, morals, good customs, public policy or public order
3. it must not have been paid directly or indirectly to an official or employee of the Government
(local or national, including government-owned and controlled corporations) or of a foreign
government, or to a private individual, corporation, General Professional Partnership or a similar
entity, if it constitute bribe, kickback or other similar payments
4. the official receipts, invoices, bills or statement of accounts should be in the name of the
taxpayer claiming the deduction
Limit of deductible amount for EAR:
A. Taxpayers deriving income from either sales of properties or sale of services:
Whichever is lower of the following and the actual EAR expense
1. Taxpayers engaged in sale of goods or properties – ½ of 1% ( or .5%) of net sales (i.e.: sales less sales
returns, allowances and discounts)
2. Taxpayers engaged in sale of services (profession, lessors) – 1% of net revenue (i.e.: gross revenue
less discounts)
B. Taxpayers deriving income from both sale of properties and services, the deductible amount shall be
whichever is lower between the two tests below:
1st Limit Test:
Note: The tentative deductible amounts are first determined using rule 1 and 2 above for each respective
class of business (service or sales).

The final deductible amounts shall be whichever is lower of the respective tentative deductible amount
and the respective amounts which the total sales or revenue bears to the total sales and revenue bears to
the actual entertainment, amusement or recreation expenses.
2nd Limit Test:
Net Sales Actual total EAR for
1.) x
Total Net Sales and Revenue sales and service
Net Revenue Actual total EAR for

2.) x
Total Net Sales and Revenue sales and service
OPTIONAL STANDARD DEDUCTIONS (OSD)

- This deduction equivalent to 40% of the gross income (corporations) or sales (individuals) may be opted
to in lieu of the itemized deductions as discussed above.
- Can be claimed only by individual taxpayers only, self-employed or engaged in a profession, except non-
resident aliens (whether engaged in business or not).
- The qualified individual taxpayer must signify in his annual income tax return his intention to elect the
optional standard deduction.
- Election of OSD shall be irrevocable for the taxable year for which the return was made.
- Cannot be chosen by to by the taxpayer simply because he cannot substantiate his items of deductions
already claimed. The choice must be made and indicated in the return.
- Also apply to other items of gross income received by the taxpayer even not actually engaged in business,
for example: share of the net income of a co-ownership if the individual has no business expenses.
Points to Remember with Optional Standard Deductions
OSD substitutes business deductible expenses of an individual taxpayer. It therefore substitutes NOLCO
which is a business deductible but not Premium on Health and Hospitalization Insurance, being an additional
personal exemption.
EXAMPLES OF NON-DEDUCTIBLE ITEMS FROM GROSS INCOME
A. personal, living, or family expenses
B. any amount paid out for new buildings or for permanent improvements, or betterments made to increase
the value of any property or estate (this rule don’t apply to intangible drilling and development costs
incurred in petroleum operations)
C. any amount expended in restoring property or in making good the exhaustion thereof for which an
allowance is or has been made; or
D. premiums paid on any life insurance policy covering the life of any officer or employee, or of any person
financially interested in any trade or business carried on by the taxpayer, individual or corporate, when
the taxpayer is directly or indirectly a beneficiary under such policy
E. losses from sales or exchanges of property directly or indirectly between related parties.

TAXATION ON FRINGE BENEFIT
FRINGE BENEFIT – means 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).
Classification:
A. Given to rank and file employees
Taxable Fringe Benefits to Rank and File Employees:
1. Meals furnished or subsidized by employer (except OT meal which is subject a de minimis benefit)
2. Rental value of quarters furnished an employee.
3. Premium on life insurance of an employee where the insured employee is directly or indirectly the
beneficiary – in essence a form of additional income for the employee.
4. Fixed or variable transportation, representation and other allowance given an employee. Advance or
reimbursement-type allowance is exempt.
5. Performance bonus, relay station allowance, and danger exposure allowance.
6. Personnel economic relief allowance (PERA) granted to government employees.
7. Salaries and allowances during leaves of absences (vacation and sick leave).
8. Fees received by an employee (including director’s fees) for the performance of a service for the
employer.
9. Dismissal payments (this is different with separation pay).
Exempt Fringe Benefits to Rank and File Employees:
1. Meals, living quarters, de minimis entertainment, medical services, courtesy discounts on purchases,
sack or rice, etc given for the convenience of the employer or for promoting the contentment,
health, efficiency or goodwill of the employee.
2. Reimbursement-type traveling, representation and other allowance. Excess advances retainable by
the employee is taxable
3. Retirement and separation benefits exempt under the law
B. Given to managerial or supervisory employees
Benefits subject to final tax:
1. Housing Benefits
Exception:
1. Housing benefits provided to military officials of the Armed Forces of the Philippines consisting
of officials of the Philippine Army, Philippine Navy and Philippine Air Force
2. Housing unit which is within or adjacent to the premises of a business or factory. Adjacent
means within 50 meters of the perimeter of the business premises of the employer.
3. Temporary housing for an employee who stays in a housing unit for three months or less.
2. Interest on loans at less than market rate or at 0% rate. The differential interest from 12% (as
fixed by regulation) shall be the taxable fringe benefit.
3. Membership fees, dues, and other expenses borne by the employer for the employee in social
and athletic clubs or other similar organizations – these are taxable employee benefits of the
employee in full.
4. Expense for foreign business travel
a. First class airplane ticket – 30% of the cost of ticket
b. Lodging cost in a hotel or similar establishment in excess of US$300 per day.
c. Traveling expense paid by the employer for the travel of the family members of the employee
In connection with this, there must be a documentary evidence to support that the foreign travel was for
business meetings or convention; otherwise the entire cost of the ticket including hotel accommodation
and other expenses incidental thereto shouldered by the employer shall be treated as taxable fringe
benefits.

1. business meetings – to be supported by official communication from business associates abroad
indicating the purpose of the meeting
2. business conventions – to be supported by invitations or communications from the host
organization or entity abroad
Reasonable foreign travel expenses are exempt under fringe benefit tax; hence, inland travel expenses such
as for food, beverages and local transportation; cost of economy and business class airplane ticket; and
those within the limits as set out in 4 a and b above.
5. Household personnel
If shouldered by the employer the following personal expenses shall be taxable fringe benefit:
a. Salaries of household help
b. Personal driver of the employee (if not for the convenience of the employer such as doctor on
call)
c. Similar expenses as payment for homeowners association duties, garbage dues, etc.
6. Expense account
General Rule: expenses of the employees that are paid for the employer are taxable fringe benefit:
a. expenses of a reimbursement type ( direct payment by the employer is not necessary since
subsequent reimbursement for the expense of the employee, makes him the indirect payer of the
expense)
b. personal expenses (groceries etc.) even if receipted in the name of the employer
Exception:
a. Regular fixed entertainment and representation allowance – this is treated as additional
compensation to the employee
b. Expenses connected with the trade of the employer and is duly receipted in the name of the
employer- these are expenses of the employer
7. Holiday and vacation expense
If incurred by the employees and shouldered by the employer, this constitute taxable fringe benefit.
8. Life and Health insurance and other non-life insurance premium or similar amounts in
excess of what the law allows
Exception:
a. contributions of the employer for the benefit of the employee pursuant to the provision of
existing laws, i.e.: SSS, GSIS, PhilHealth; etc
b. the cost of premium by the employer for the group insurance of its employees
9. Vehicle of any kind; and
The same rules in housing benefits apply herein.
Exception:
a. Aircraft or helicopter owned and maintained by the employer – are treated as for business
purpose only and hence, not subject to fringe benefit tax. (Note: it is very impractical to provide
managerial or supervisory personnel with aircraft or helicopter for personal use due to the cost
of maintaining them.)
b. Yatch, whether owned or leased by the employer is considered not for business purpose (by nature for
pleasure), and hence taxable fringe benefit. Note: Yatch for purposes of determining the
depreciation value is assumed to have a life of 20 years.

10. Educational assistance granted by employer to
1. the employee – generally, taxable as a fringe benefit
Exception:
a. the education or study involved is directly connected with the employer’s trade, business or
profession; and
b. there is written contract that the employee is under an obligation to remain in the employ of
the employer for a period of time mutually agreed upon
2. the dependents of employees – generally, taxable as a fringe benefit
Exception: When the assistance is granted through competitive scheme under a scholarship
program of the company
Benefits not subject to fringe benefit tax (Sec. 33 (C), NIRC):
1. Fringe benefits which are authorized and exempt form tax under special laws
2. Benefits given to rank and file employee, whether given on a Collective Bargaining Agreement or not
3. Benefits given as required by the nature of, or necessary to the trade, business or profession of the
employer
4. Benefits given for the convenience or advantage of the employer
5. Contributions of the employer for the benefit of the employee to retirement, insurance and
hospitalization benefit plans; and
6. De minimis benefits promulgated by the Bureau of Internal Revenue
Tax Rates for Fringe Benefits:

The final tax rates that apply to the gross-up monetary amount of the taxable fringe benefit with the
corresponding gross-up percentage are as follows:
If the employer paying the fringe benefit is a regular domestic or resident corporation:
Final Tax Gross-up rate
Effective January 1, 1998 34% 66%
If the taxpayer is subject to preferential rate:
1. Non-resident alien employed by regional area headquarters, offshore banking units of multinational
companies shall be taxed at 15% of the gross up amount of the benefits (i.e.: benefits / (100%-15%))
2. NRA-NETB is subject to 25% of the gross up value of the benefits (i.e.: benefits / (100%-25%))
Note to candidates:
The fringe benefit tax rates herein are complementary values of the final tax (regular corporate income) tax
and grossed-up value. It should be pointed out, however, that the same is not a statutory formula and thus
the rates will remain unaffected even if the corporate income tax change unless specifically provided for by an
amendatory law.
Valuation of Taxable Fringe Benefits:

1. If granted in money or is directly paid by the employer, the value is the amount of granted or paid for
2. If furnished by the taxpayer in property and ownership is transferred to the employee, the value of the
fringe benefit shall be the fair market value of the property transferred.
3. If furnished by the taxpayer in property without transfer of ownership, the value of the fringe benefit is equal
to the depreciation value of the property.
- For this purpose, personal property is assumed a depreciable life of 5 years (20%) while real
property shall have a presumptive life of 20 years (5%)
- Furthermore, since the supervisory or managerial employee cannot reasonably be expected to use the
property all the time, it is assumed that usage is 50% for business use and 50% for personal use.

Deductible Amount of Fringe Benefits:
General Rule: Deductible amount =taxable fringe benefits + fringe benefit tax
Exception Rule: Deductible amount = fringe benefit tax paid (If fringe benefit tax is based on the
depreciation value, zonal value or assessed value)
Filing of Return
The fringe benefit tax withheld by the employer shall be remitted to BIR within 10 days after the end of
each calendar quarter; however, for EFPS , 5 days later


Fundamentals of Income Taxation: Focus Notes On Taxation

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FOCUS NOTES ON TAXATION

FUNDAMENTALS OF INCOME TAXATION

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TAX ACCOUNTING PERIODS

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An identified gross income will be subject to tax as follows:

Identified item of gross income

Final Withholding Tax Taxable Capital Gains Tax

Regular Income Tax

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Tax Basis of New Principal Residence:

More than full utilization of proceeds:

Basis of the old principal Additional expenditure in

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Classification of Individual Income Taxpayers

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Classification of Corporate Taxpayers:

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SPECIAL TAXATION RULES FOR REGULAR CORPORATIONS

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C. GROSS INCOME TAXATION

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REGULAR INCOME TAXATION: DEDUCTIONS FROM GROSS INCOME

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Net Revenue Actual total EAR for

OPTIONAL STANDARD DEDUCTIONS (OSD)

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Tax Rates for Fringe Benefits:

Valuation of Taxable Fringe Benefits:

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