1 TAXATION 2 – Atty.
Justice Aurelio-Yap
January 11, 2019
CRITERIA IN IMPOSING PHILIPPINE
INCOME TAX
1. Citizenship or nationality principle – A
citizen of the Philippines is subject to
Philippine income tax
a. On his worldwide income, if he resides in
the Philippines;
b. Only on his Philippine source income, if
he qualifies as a non-resident citizen.
2. Residence or domicile principle – A resident
alien is liable to pay Philippine income tax
on his income from sources within the
Philippines but is exempt from tax on his
income from sources outside the
Philippines.
3. Source principle - An alien is subject to
Philippine income tax because he derives
income from sources within the Philippines.
A non-resident alien or non-resident foreign
corporation is liable to pay Philippine
income tax on income from sources within
the Philippines, despite the fact that he has
not set foot in the Philippines (Mamalateo,
2014).
For example if an alien earns income in the
Philippines, may he be liable for income tax?
YES, on the basis of the Source
Principle.
According to Section 23 on the General Principle
of Income Taxation in the Philippines,
General Principles of Income Taxation in the
Philippines. - Except when otherwise provided in this
Code:
(A) A citizen of the Philippines residing therein is
taxable on all income derived from sources within and
without the Philippines;
(B) A nonresident citizen is taxable only on income
derived from sources within the Philippines;
(C) An individual citizen of the Philippines who is
working and deriving income from abroad as an
overseas contract worker is taxable only on income
derived from sources within the Philippines: Provided,
That a seaman who is a citizen of the Philippines and
who receives compensation for services rendered
abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be
treated as an overseas contract worker;
(D) An alien individual, whether a resident or not of
the Philippines, is taxable only on income derived
from sources within the Philippines;
(E) A domestic corporation is taxable on all income
derived from sources within and without the
Philippines; and
(F) A foreign corporation, whether engaged or not in
trade or business in the Philippines, is taxable only on
income derived from sources within the Philippines.
For purposes of income taxation, INCOME is
any wealth which flows into the taxpayer other
than a mere return of capital (Casasola, 2013).
Example: You have a general merchandise
business, you bought soap worth 10, 000 pesos.
Karon pagbaligya nimo naa kay patong na 25%,
and so you sell it for 12, 500. So which part of
those is “income”?
When you receive the purchase price, the 10,
000 pesos deducted from that is not “income”
because it is a mere return of capital. Get the
25% you added before because that is the
“tubo.” The tubo is the income.
“Income from whatever source derived”
implies that all income not expressly exempted
from the class of taxable income under our laws
form part of the taxable income, irrespective of
the voluntary or involuntary action of the
taxpayer in producing the income. The source of
the income may be legal or illegal.
INCOME TAX is a tax on all yearly profits
arising from property, profession, trade or
business, or a tax on person’s income,
emoluments, profits and the like
It is generally regarded as an excise tax. It is not
levied upon persons, property, funds or profits
but on the privilege of receiving said income or
profit.
GENERAL PROCEDURES IN DETERMINING
INCOME TAX
1. FIRST, identify the tax paying party or
entity, if such party is a resident citizen,
non-resident citizen, resident alien, non-
resident alien, domestic corporation or
foreign corporation.
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2 TAXATION 2 – Atty. Justice Aurelio-Yap

Is he liable, or exempted?
Why? Because there are laws which exempt
persons or entities from paying taxes. So
determine if the taxpayer is exempted or not.
credit, meaning the taxes that have already been
paid in advance.
6. SIXTH, add the interests, penalties
and surcharges.

2. SECOND, determine the gross If there was delay in paying your taxes,
income. interests, penalties or surcharges shall be added
on your tax liability.
Gross income means all income derived from
whatever source (NIRC, Sec. 32). After adding all the interests, penalties and
surcharges, you will arrive at the TOTAL
Gross Sales/Receipts
AMOUNT PAYABLE.
- Less Sales Retruns/Sales
Allowance/Sales Discount
- Less Cost of Sales CLASSIFICATION OF INDIVIDUAL TAX
PAYERS
= GROSS INCOME
Kinds of Taxpayers:
What is the income earned by a tax payer. 1. Individuals
Remember that there are several kinds of a. Citizen
income, compensation income, business income, i. Resident Citizen (RC)
passive income, interest income. There are ii. Non- Resident Citizen (NRC)
different rules governing these kinds of income. b. Aliens
i. Resident Alien (RA)
3. THIRD, determine the exemptions or ii. Non- Resident Alien (NRA)
allowable deductions. (1) Engaged in Trade or Business (NRA-
ETB)
Identify the expenses and certain other items
(2) Not Engaged in Trade or Business
that can be deducted from the taxpayer’s
(NRA- NETB)
taxable income in order to determine the final
iii. Special Aliens
taxable income.
c. Special class of individual employees
So gross income, less the allowable deductions i. Minimum wage earner
and you arrive at the TAXABLE INCOME. 2. Corporations
a. Domestic
4. FOURTH, apply the applicable tax b. Foreign
rate. i. Resident foreign corporation (RFC)
ii. Non-resident foreign corporation (NRFC)
Remember that there are different tax rates. c. Joint venture and consortium
Because there are taxpayers who are subject to 3. Partnerships
the graduated schedular rates under Section 24 4. General Professional Partnerships
and there are those who are subject of a 5. Estates and Trust
different set of rates. 6. Co-ownerships

5. FIFTH, apply tax credits so that you

We have citizens who are classified into resident
can arrive at the TAX PAYABLE.
or non-resident.
Tax Credits are those taxes you paid in advance.
Then Aliens who are resident and non-resident.
Example: You are a purely compensation income
The Nonresident Alien are further classified as:
earner, every month withholding tax is deducted
from your salary. At the end of the year, all 1. Engaged in trade or Business Within the
income will be consolidated and your total tax Philippines;
for the whole year will be computed. From that, 2. Not Engaged in Trade or Business Within
the withholding taxes withheld previously from the Philippines;
you salary shall be deducted. That is a tax

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3. Alien Individual Employed by Regional or
Area Headquarters and Regional
Operating Headquarters of Multinational
Companies;
4. Alien Individual Employed by Offshore
Banking Units; and
5. Alien Individual Employed by Petroleum
Service Contractor and Subcontractor
(NIRC, Sec. 25).
Who is a CITIZEN?
Section 1. The following are citizens of the
Philippines:
[1] Those who are citizens of the Philippines at the
time of the adoption of this Constitution;
[2] Those whose fathers or mothers are citizens of
the Philippines;
[3] Those born before January 17, 1973, of Filipino
mothers, who elect Philippine citizenship upon
reaching the age of majority; and
[4] Those who are naturalized in accordance with law
(1987 Philippine Constitution, Art. 4 Sec. 1).
Who is a RESIDENT CITIZEN?
One who permanently resides in the Philippines.
Who is a NONRESIDENT CITIZEN?
The term "nonresident citizen" means:
(1) A citizen of the Philippines who establishes to the
satisfaction of the Commissioner the fact of his
physical presence abroad with a definite intention to
reside therein.
(2) A citizen of the Philippines who leaves the
Philippines during the taxable year to reside abroad,
either as an immigrant or for employment on a
permanent basis.
(3) A citizen of the Philippines who works and derives
income from abroad and whose employment thereat
requires him to be physically present abroad most of
the time during the taxable year. [IMPORTANT]
(4) A citizen who has been previously considered as
nonresident citizen and who arrives in the Philippines
at any time during the taxable year to reside
permanently in the Philippines shall likewise be
treated as a nonresident citizen for the taxable year in
which he arrives in the Philippines with respect to his
income derived from sources abroad until the date of
his arrival in the Philippines.
(5) The taxpayer shall submit proof to the
Commissioner to show his intention of leaving the
Philippines to reside permanently abroad or to return
to and reside in the Philippines as the case may be for
purpose of this Section. (NIRC, Sec. 22e)
The phrase “most of the time” under number 3
of paragraph E under Section 22 is interpreted to
mean presence abroad for at least 183 days
during the taxable year.
Who is a RESIDENT ALIEN?
The term "resident alien" means an individual
whose residence is within the Philippines and
who is not a citizen thereof (NIRC, Sec. 22f).
A RA is an alien actually present in the
Philippines who is not a mere transient or
sojourner.
But residence does not mean mere physical
presence. An alien is considered a resident or
non-resident depending on his intention with
regard to the length and nature of his stay.
We will have a drill on this, to
determine whether an individual is a
resident alien etc.
Who is a NONRESIDENT ALIEN ENGAGED IN
TRADE OR BUSINESS?
A NRAETB is an alien who is carrying on a
business in the Philippines which connotes more
than a single act or isolated transaction. It
involves some continuity of action.
The term “trade, business or profession" shall
not include performance of services by the
taxpayer as an employee, but includes the
performance of the functions of a public office.
The phrase “engaged in trade or business within
the Philippines” includes the performace of
personal services within the Philippines
(Casasola, 2013).
Generally, when we say NRAETB, he really has a
trade or business, not merely a single act or
isolated transaction. But an exception of that is
the presumption under Section 25 (A) 2nd
paragraph.
A nonresident alien individual who shall come to the
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4 TAXATION 2 – Atty. Justice Aurelio-Yap
Philippines and stay therein for an aggregate period
of more than one hundred eighty (180) days
during any calendar year shall be deemed a
'nonresident alien doing business in the Philippines'.
TIP: So if you encounter a problem which
involves a non-resident alien, but does not
mention anything about the kind of business or
transaction, look at the length of stay.
The TEST to determine whether a NRA can be
considered as engaged or not engaged in trade
or business within the Philippines is the length of
his stay in the Philippines during any calendar
year, regardless of the nature of his intention
why he wants to stay in the Philippines
(Casasola, 2013).
That a seaman who is a citizen of the Philippines and
who receives compensation for services rendered
abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be
treated as an OVERSEAS CONTRACT WORKER.
(NIRC, Sec. 23c)
Overseas contract worker or OFWs refer to
Filipino Citizens employed in foreign countries
that are physically present in a foreign country
as a consequence of their employment thereat.
Their salaries and wages ____ are not borne by
any entity or person in the Philippines. To be
considered as an OCW or OFW, they must be
registered as such in the POEA, with a valid
overseas employment certificate.
Seafarers or seamen are Filipino citizens who
receive compensation for their services rendered
abroad as a member of the complement of a
vessel engaged EXCLUSIVELY IN
INTERNATIONAL TRADE.
They must be registered as such with the POEA,
with a valid overseas employment certificate.
“Exclusively in international trade” - If you are a
seafarer, but your transactions are only
domestic, you cannot be considered as an OFW,
thus your salary as a seaman shall be subject to
Philippine income tax.
SOURCES OF INCOME
RULES ON THE TAX LIABILITY OF THE TAX
PAYERS (NIRC, Sec. 23)
(A) A citizen of the Philippines residing therein is
taxable on all income derived from sources
within and without the Philippines;
If you are a resident citizen and you have
properties from outside the Philippines and you
also earn income from outside the Philippines, all
those income shall be subject to income tax
because you are a resident citizen.
Let us again illustrate TAX CREDIT. So of course,
your income from abroad is also subject to tax if
that is taxable there. So the tax that you paid
there can be credited here in the Philippines
because you are a resident of the Philippines
taxed on all your income from sources within
and without the Philippines.
Kay tanan man gud nimo income, ginaadd na
tanan bisan as na gikan. Kanang income nimo sa
gawas ginataxan man pud na sa government
didto nila diba? So pwede pud na iapply ang tax
na gibayran nimo didto para ideduct sa imong
tax na kailangan bayran diri. That is an example
of a tax credit.
(B) A nonresident citizen is taxable only on income
derived from sources within the Philippines;
If you are a non-resident citizen, it follows na dili
ka kaclaim ug tax credit from your income from
outside the Philippines kay dili man to subject sa
tax dinhi.
If you are an OFW, your income from abroad will
not be taxed because you are a non-resident
citizen.
(C) An individual citizen of the Philippines who is
working and deriving income from abroad as an
overseas contract worker is taxable only on income
derived from sources within the Philippines: Provided,
That a seaman who is a citizen of the Philippines and
who receives compensation for services rendered
abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be
treated as an overseas contract worker;
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5 TAXATION 2 – Atty. Justice Aurelio-Yap
(D) An alien individual, whether a resident or not of
the Philippines, is taxable only on income derived
from sources within the Philippines;
(E) A domestic corporation is taxable on all income
derived from sources within and without the
Philippines; and
The term "domestic", when applied to a
corporation, means created or organized in the
Philippines or under its laws (NIRC, Sec. 22).
Mura ni siya’g resident citizen, taxable on all
sources.
(F) A foreign corporation, whether engaged or not in
trade or business in the Philippines, is taxable only on
income derived from sources within the Philippines.
The term "foreign", when applied to a
corporation, means a corporation which is not
domestic (NIRC, Sec. 22).
If the corporation is organized under Philippine
laws, then that is a domestic corporation.
COMPENSATION INCOME
NEW TAX SCHEDULE
(NIRC, Sec. 24 as amended)
COMPENSATION INCOME includes
remuneration for services rendered by
employee for his employer unless specifically
excluded under the NIRC.
Determine first whether there is an employer-
employee (ER-EE) relationship for it to fall under
the compensation income.
If there is no ER-EE relationship, you are
considered as an independent contractor.
If you are earning purely compensation income,
at the end of the year, you will consolidate all
your income from January to December in order
to obtain your total gross compensation income
and then apply the applicable tax rate.
Before, we have this “basic and additional
personal exemption.” 50, 000 is the basic and
25, 000/child not exceeding four children is the
additional exemption.
However, those exemptions were removed in
TRAIN Law, because the threshold has already
been increased to 250, 000.
Under the TRAIN Law, both the husband and the
wife can claim the 250, 000 exemption, unlike in
the old law where only the husband can claim
the additional exemption.
So this means that if you are earning a purely
compensation income, after getting you gross
compensation income, you immediately apply
the applicable tax rate based on the graduated
schedular rates found in the table.
HOW DO YOU APPLY THE TABLE?
(Basis of discussion is the old tax table)
OLD TAX SCHEDULE
If your income does not exceed 10, 000, your
all
tax rate is 5%.
an
Example: Taxable Income = 9, 000
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9, 000 x .05 = 450
Example: Taxable Income = 20, 000
500 for the first 10, 000 then add 10%
in excess of 10, 000
20, 000 – 10, 000 = 10, 000
10, 000 (difference) x .1 = 1, 000
1, 000 (product) + 500 = 1, 500
Example: Taxable Income = 1, 000, 000
First – Deduct 500, 000 (based on the
table)
1, 000, 000 - 500, 000 = 500, 000 (difference)
Second – Multiply difference by 32%
500, 000 x .32 = 160, 000 (product)
Third – Add product to 125, 000 (based
on table)
160, 000 + 125, 000 = 285, 000
BUSINESS INCOME arises from
employment or practice of profession.
Self-employment means you are engaged in
business.
Practice of profession means you are a lawyer,
engineer or architect and you practice your own
profession.
HOW IS BUSINESS INCOME TAXED?
In business income, there are allowable
deductions.
(Unlike in compensation income under the
TRAIN Law, there are no more basic or
additional exemptions, direcho na sa tax rate.)
Once you determine your business income, you
need to determine your allowable deductions.
So Business Income – Allowable Deductions =
Taxable Income
Once you get your Taxable Income, you then
apply your graduated schedular rates.
HOWEVER, there is a NEW PROVISION
under the TRAIN LAW
Rate of Tax on Income of Purely Self-employed
Individuals and/or Professionals Whose Gross Sales or
Cross Receipts and Other Non-operating Income Does
Not Exceed the Value-added Tax (VAT) Threshold as
Provided in Section 109(BB). - Self-employed
individuals and/or professionals shall have the option
to avail of an eight percent (8%) tax on gross sales or
gross receipts and other non-operating income in
excess of Two hundred fifty thousand pesos
(P250,000) in lieu of the graduated income tax rates
under Subsection (A)(2)(a) of this Section and the
percentage tax under Section 116 of this Code (NIRC,
Sec. 24A (2)b as amended)
Who are covered by this new provision?
Those individuals with Purely Compensation
Income and those who practice their profession
such as those with firms and the like are given
an option under this new provision.
2 OPTIONS
1. The FIRST OPTION is to still be
subject to the graduated tax schedule,
the table we discussed earlier.
self-
But you are still separately liable with the
percentage tax (3%) or VAT (12%).
So you separate liabilities.
Example: I practice my profession as a lawyer.
Under this first option, I am liable of 2 kinds of
taxes, income tax and percentage tax. The basis
of my income tax is the table.
The basis of my percentage tax is the 3%.
2. The SECOND OPTION is to choose to
be liable for 8% for BOTH income tax
and percentage tax.
But the following CONDITIONS must be
satisfied to avail of this Second Option:
a. That your gross sales/receipts for the
whole year must not exceed 3 million
VAT threshold;
b. That your gross income is based ONLY
on gross sales/receipts (NOT TAXABLE
INCOME) WITHOUT allowable
deductions. What you can only deduct is
250, 000 threshold.
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7 TAXATION 2 – Atty. Justice Aurelio-Yap
Example: Your gross income (sales/receipts) for
the entire year is 1 million. You chose the 2nd
Option, the 8%. How do you compute?
1 million – 250, 000 = 750, 000 x .08 =
BUT I still have to research if there
really is no allowable deduction.
Note: The option is irrevocable during the
taxable year. So when in the 1st quarter you
availed of the First option, you can no longer
change that option.
Rate of Tax for Mixed Income Earners. — Taxpayers
earning both compensation income and income from
business or practice of profession shall be subject to
the following taxes;
(1) All Income from Compensation – The rates
prescribed under Subsection (A)(2)(a) of this Section.
(2) AH Income from Business or Practice of
Profession -
(a) If Total Gross Sales and/or Gross Receipts and
Other Non-operating Income Do Not Exceed the VAT
Threshold as Provided in Section 109(BB) of this
Code. - The rates prescribed under Subsection
(A)(2)(a) of this Section on taxable income, or eight
percent (8%) income tax based on gross sales or
gross receipts and other non-operating income in lieu
of the graduated income tax rate s under Subsection
(A)(2)(a) of this Section and the percentage tax under
Section 116 of this Code.
(b) If Total Gross Sales and/or Gross Receipts and
Other Non-operating Income Exceeds the VAT
Threshold as Provided in Section 109(BB) of this
Code. — The rates prescribed under Subsection
(A)(2)(a) of this Section. (TRAIN, Sec. 24A (2)c)
There are individuals whose sources of income
are not only business, but also employed at the
same time. They are called mixed-income
earners.
Q: If percentage tax is a tax on business, and
income tax is privilege tax, if you are a lawyer,
why do you need to pay percentage tax and
income tax?
A: Because the practice of profession is
considered as a business income based on the
tax code.
All income from compensation shall be subject to
the graduated rates in the tax schedule.
Then your income from business or practice of
profession shall be subject to the 2 OPTIONS we
discussed earlier.
So since you earn two different kinds of income,
HOW ARE YOU TAXED?
Tax separately the compensation income and
the income from business or practice of
profession.
PASSIVE INCOME refers to income derived
from any activity in which the taxpayer has no
active participation or involvement.
Example: Interest earned by the money you
deposited in your bank account.
It is not directly related from your employment.
TEST in determining if an income is passive
or not is whether or not an income was earned
directly from an individual’s source of income.
Example 1: I am a purely compensation income
earner. I deposited a portion of my income to
my bank account which earned interest. Did the
interest I earned come directly from my
employment?
NO, because if I did not deposit anything, I
wouldn’t have earned any interest.
So my main source of income is employment. If
the income I earned did not directly come from
my employment, then it is a passive income.
Example 2: I am engaged in a general
merchandise business. I won the lottery. Were
my winnings directly earned from my main
source of income which is my general
merchandise business? If not, then that income
is passive income.
Example 3: Your main source of income is
practice of profession as a lawyer. Now you
bought stocks in San Miguel Corp, you become a
stockholder. My stocks will earn dividends. As a
lawyer, I earn through notarization or
appearance fees. I also earn dividends on my
stocks. Are those dividends earned directly from
my main source of income which is practice of
profession as a lawyer? No. So if you do not
earn a certain income directly from your main
source of income, then that is passive income.
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8 TAXATION 2 – Atty. Justice Aurelio-Yap
Q: What if you are really a lending institution
and you earn interest through lending, are those
interests passive income?
A: NO, because the interests earned through
your lending business are directly derived from
you main source income. Those interests are
business income.
Q: If you are a lawyer at the same time you lend
money with interests, but you are not a
registered lending institution?
A: The interest you earn from lending is
considered as business income since “income”
may come from whatever source.
Q: If you are a lawyer, but you are also a broker
and you invest in stocks, the dividends you earn
from your investment are not anymore
considered as passive income. Those are
business income.
RULE ON PASSIVE INCOME
“(B) Rate of Tax on Certain Passive Income-.
(1) Interests, Royalties, Prizes, and Other
Winnings. – A final tax at the rate of twenty
percent (20%) is hereby imposed upon the
amount of interest from any currency hank
deposit and yield or any other monetary
benefit from deposit substitutes and from trust
funds and similar arrangements; royalties,
except on books, as well as other literary
works and musical compositions, which shall
be imposed a final tax of ten percent (10%);
prizes (except prizes amounting to Ten
thousand pesos (P 10, 000) or less which shall
be subject to tax under Subsection (A) of
Section 24; and other winnings (except
winnings amounting to Ten thousand pesos
(P10, 000) or less from Philippine Charity
Sweepstakes and Lotto which shall be
exempt), derived from sources within the
Philippines; Provided, however. That interest
income received by an individual taxpayer
(except a nonresident individual) from a
depository bank under the expanded foreign
currency deposit system shall be subject to a
final income tax at the rate of fifteen percent
(15%) of such interest income: Provided,
further, That interest income from long-term
deposit or investment in the form of savings,
common or individual trust funds, deposit
substitutes, investment management accounts
and other investments evidenced by
certificates in such form prescribed by the
Bangko Sentral ng Pilipinas (BSP) shall be
exempt from the tax imposed under this
Subsection: Provided, finally, That should the
holder of the certificate pre-terminate the
deposit or investment before the fifth (5th)
year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by
the depository bank from the proceeds of the
long-term deposit or investment certificate
based on the remaining maturity thereof:
“x x x”
(2) Cash and/or Property Dividends. – A final tax
at the rate of ten percent (10%) shall be
imposed upon the cash and/or property
dividends actually or constructively received by
an individual from a domestic corporation or
from a joint stock company, insurance or
mutual fund companies and regional operating
headquarters of multinational companies, or on
the share of an individual in the distributable
net income after tax of a partnership (except a
general professional partnership) of which he is
a partner, or on the share of an individual in
the net income after tax of an association, a
joint account, or a joint venture or consortium
taxable as a corporation of which he is a
member or co-venturer. (NIRC, Sec. 24B as
amended)
Basta bank deposit, 20% jud na. But this foreign
currency deposit system, before, 7.5% now,
15%.
“Prizes (except prizes amounting to Ten
thousand pesos (P 10,000) or less which shall be
subject to tax under Subsection (A) of Section
24”
This means that, when the prize you
receive amounts to 10, 000 or less only that will
be subject to the graduated tax schedule table
for regular income. It will not be considered as a
passive income.
How about the rules on passive income?
This provision is an exception to the rule
that a passive income is not subject to the rules
on regular income. When your prize amounts
only to 10, 000 or less, even if it is only a
passive income (based on the test), it will still be
subject to the rates for regular income under
Section 24 (A).
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9 TAXATION 2 – Atty. Justice Aurelio-Yap
“Other winnings (except winnings amounting to
Ten thousand pesos (P10, 000) or less from
Philippine Charity Sweepstakes and Lotto”
This is another exception. Before, all
winnings from the lotto or PCSO are exempted.
Now, after the TRAIN Law, only 10, 000 or less
is exempted. So if you win millions, you only
deduct 10, 000, and then the remaining shall be
subject to passive income tax.
Q: How about prizes from The Voice, PGT or
PBB?
A: Subject to passive income.
REMEMBER: One important condition for the rule
on passive income to apply is that it should be
derived from within the Philippines.
Q: If you have a bank account abroad, the
interest earned by your deposits there, will that
be subject to passive income tax?
A: No, dapat derived within the Philippines lang.
But it may be subject to regular income tax if
you are a resident citizen. Why? because only
resident citizens are subject to income tax from
within and without the Philippines.
“That interest income from long-term deposit or
investment in the form of savings, common or
individual trust funds, deposit substitutes,
investment management accounts and other
investments evidenced by certificates in such
form prescribed by the Bangko Sentral ng
Pilipinas (BSP) shall be exempt from the tax
imposed under this Subsection”
If your long term investment is more
than 5 years, that is already exempted from
income tax.
If your deposit is for long-term, like time
deposits, the PRINCIPLE is, the longer the
term, the lesser the tax.
“(2) Cash and/or Property Dividends. – A final
tax at the rate of ten percent (10%) shall be
imposed upon the cash and/or property
dividends actually or constructively received by
an individual”
Take note, stock dividends are not
included as a passive income because stock
dividends are not considered income. Only your
capital increased, that your number of shares
increased, but the value is still the same. There
is no income, unlike cash and property
dividends.
“actually or constructively received”
Even if not actually received, if entered
in the books, those dividends are still subject to
passive income.
“share of an individual in the distributable net
income after tax of a partnership (except a
general professional partnership)”
General Professional Partnership as an
entity is exempt, not taxable. However, the
individual shares of the individual partners are
subject to tax.
January 14, 2019
(C) Capital Gains from Sale of Shares of Stock not
Traded in the Stock Exchange. - The provisions of
Section 39(B) notwithstanding, a final tax at the rate
of fifteen percent (15%) is hereby imposed upon the
net capital gains realized during the taxable year from
the sale, barter, exchange or other disposition of
shares of stock in a domestic corporation, except
shares sold, or disposed of through the stock
exchange. (NIRC, Sec. 24 C as amended)
Before the TRAIN Law, naka.bracket ang
computation, if the value is not over 100, 000,
5%, and if any amount in excess of 100, 000,
10%.
With the TRAIN Law, 15% nalang imposed upon
the net capital gains.
Under this provision, what is sold is the capital
asset, only an isolated transaction.
If you conduct business as a stock broker, you
are not subject to capital gains tax.
(D) Capital Gains from Sale of Real Property. - (1) In
General. - The provisions of Section 39(B)
notwithstanding, a final tax of six percent (6%) based
on the gross selling price or current fair market value
as determined in accordance with Section 6(E) of this
Code, whichever is higher, is hereby imposed upon
capital gains presumed to have been realized from the
sale, exchange, or other disposition of real property
located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of
conditional sales, by individuals, including estates and
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10 TAXATION 2 – Atty. Justice Aurelio-Yap
trusts: Provided, That the tax liability, if any, on gains
from sales or other dispositions of real property to the
government or any of its political subdivisions or
agencies or to government-owned or controlled
corporations shall be determined either under Section
24 (A) or under this Subsection, at the option of the
taxpayer. (NIRC, Sec. 24 D[1])
In the capital gains from sale of real property,
the first thing to remember is that the property
sold here is a capital asset.
Capital Assets means property held by the
taxpayer (whether or not connected with his
trade or business), but does not include stock in
trade of the taxpayer or other property of a kind
which would properly be included in the
inventory of the taxpayer if on hand at the close
of the taxable year, or property held by the
taxpayer primarily for sale to customers in the
ordinary course of his trade or business, or
property used in the trade or business, of a
character which is subject to the allowance for
depreciation provided in Subsection (F) of
Section 34; or real property used in trade or
business of the taxpayer. (NIRC, Sec. 39A [1])
When you say capital asset, kanang dili gud ka
engaged in selling. Meaning, it is not in the
ordinary course of business, and that you only
sold the property in one instance, an isolated
transaction.
Example: You have a house and lot, and you
want to sell it because you want to change your
residence.
That is an example of a sale of real property
subject to capital gains tax.
It is called “capital gains tax” because it is a sale
on a capital asset.
To obtain the capital gains tax, you choose from
among the values. You compare the different
values:
1. The gross selling price;
2. the market value (the assessed value of
the assessor’s office by the LGU); and
3. the zonal value provided by the BIR.
Remember: There are three market values which
you need to compare and whichever is higher
is the tax base used for computing the capital
gains tax.
From among the three values, you immediately
multiply the highest value to 6%.
HOWEVER, if the tax payer is engaged in selling
real properties, a real estate broker, then the
property sold shall not be subject to the capital
gains tax.
The income derived from that sale transaction is
considered business income, therefore is a part
of the gross income for purposes of computing
taxable income in computing income tax.
Q: Who pays the capital gains tax, the buyer or
seller?
A: In practice, it depends on the agreement of
the parties. Usually it is the buyer who pays, but
in essence it is supposed to be paid by the seller
because the seller is the one who obtains income
and therefore, “gains” from the transaction.
This RULE has an exception found in (2) of the
same provision.
(2) Exception - The provisions of paragraph (1) of this
Subsection to the contrary notwithstanding, capital
gains presumed to have been realized from the sale or
disposition of their principal residence by natural
persons, the proceeds of which is fully utilized in
acquiring or constructing a new principal residence
within eighteen (18) calendar months from the date of
sale or disposition, shall be exempt from the capital
gains tax imposed under this Subsection: Provided,
That the historical cost or adjusted basis of the real
property sold or disposed shall be carried over to the
new principal residence built or acquired: Provided,
further, That the Commissioner shall have been duly
notified by the taxpayer within thirty (30) days from
the date of sale or disposition through a prescribed
return of his intention to avail of the tax exemption
herein mentioned: Provided, still further, That the said
tax exemption can only be availed of once every ten
(10) years: Provided, finally, that if there is no full
utilization of the proceeds of sale or disposition, the
portion of the gain presumed to have been realized
from the sale or disposition shall be subject to capital
gains tax.
For this purpose, the gross selling price or fair market
value at the time of sale, whichever is higher, shall be
multiplied by a fraction which the unutilized amount
bears to the gross selling price in order to determine
the taxable portion and the tax prescribed under
paragraph (1) of this Subsection shall be imposed
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11 TAXATION 2 – Atty. Justice Aurelio-Yap

thereon. (NIRC, Sec. 24 D[2])
The exception from payment of capital gains tax
from sale of real property is if you sold your
principal residence for purposes of buying,
acquiring or constructing a new principal
residence.
To be exempt, the following are the conditions:
extent of the difference between the market rate and
actual rate granted;
(6) Membership fees, dues and other expenses borne
by the employer for the employee in social and
athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his
dependents; and
(10) Life or health insurance and other non-life
insurance premiums or similar amounts in excess of
what the law allows. (NIRC, Sec. 33B)

1. The property being sold must be the

principal residence of a natural person; Fringe Benefits to be taxable must be received
2. The proceeds from the sale of the said only by managerial employees. So if the fringe
principal residence must be fully utilized in benefit is received by a rank and file employee,
acquiring or constructing a new principal then that is not subject to fringe benefit tax.
residence within 18 calendar months from
the date of sale or disposition; REVIEW Classify the kinds of income:
3. The historical cost or adjusted basis of the
1. Compensation
real property sold or disposed shall be
2. Business
carried over to the new principal residence
3. Passive
built or acquired;
4. Capital Gains from Sale of Shares of
4. The owner/seller must duly notify the
Stock not Traded in the Stock Exchange
Commissioner within 30 days from the date
5. Capital Gains from Sale of Real Property
of sale or disposition through a prescribed
6. Fringe Benefits
return of his intention to avail of the tax
exemption; Income RC NRC RA
Nonresident Alien
5. The tax exemption can only be availed of ETB NETB
Final
once every 10 years; 1. Taxable Income Graduated Tax Rate under Sec.
Tax
(Regular) 24 (A) under TRAIN Law
6. If there is no full utilization of the proceeds, 25%
the portion of the gain presumed to have 2. Passive Income
(a) In general,
been realized from the sale shall be subject interest, royalties,
Final
to capital gains tax; 20% 20% Tax
prizes and other
25%
7. X x x x x winnings
Final
(b) Cash and/or
[please refer to Casasola pg. 96] 6%; 8%; 10% 20% Tax
Property Dividends
25%
3. CAPITAL GAINS
(a) Sale of SOS not
15% 25%
traded in SE
FRINGE BENEFITS is any good, service or (b) Sale of Real
6% 6%
other benefit furnished or granted by an Property
employer in cash or in kind, in addition to basic
salaries, to an individual employee, except rank
Taxable income comprises of all items of gross
and file employee
income minus allowable deductions. Gross
(B) Fringe Benefit defined. - For purposes of this income includes compensation and business
Section, the term "fringe benefit" means any good, income. Do not include Passive income.
service or other benefit furnished or granted in cash
or in kind by an employer to an individual employee Final tax means there are no allowable
(except rank and file employees as defined herein) deductions.
such as, but not limited to, the following:.
(1) Housing; 6%; 8%; 10% - This property dividend,
(2) Expense account;
currently it is 10%. However you still need to
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and remember the 6% and 8% because these were
others; the applicable rates for the previous years prior
(5) Interest on loan at less than market rate to the to the amendments. You need to apply these
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12 TAXATION 2 – Atty. Justice Aurelio-Yap

prior rates to transactions entered into during How much is the Capital Gains Tax from the
the years when they were applicable. sale?

TIP: REMEMBER the procedures in determining  Type of tax payer = Resident Citizen
income tax while referring to the table we made.  Type of Income = Capital gains tax
 Selling Price = 2.5 million (higher value)
1. FIRST, identify the tax-paying party or
 Fair market value = 2.3
entity and if it is liable, or exempted
Asa ang assessed value ug zonal value?
Remember the presumption that a nonresident
alien is doing business in the Philippines if he
TIP: Kung wala gani gipakita, ayaw
stays therein for an aggregate period of more
pud ninyo pangitaa. *sobs, kbye :P*
than one hundred eighty (180) days during any
calendar year.

2. SECOND, determine the gross income. ₱ 2.5M x 0.06 = ₱ 150, 000.00

3. THIRD, determine the exemptions or
allowable deductions. Determine the Q: Is the property exempted from capital gains
TAXABLE INCOME. tax because it is a residential house and lot?
4. FOURTH, apply the applicable tax rate.
A: No, because there was no mention in the
5. FIFTH, apply tax credits so that you can
problem that he acquired or constructed a new
arrive at the TAX PAYABLE.
principal residence. So do not assume.
6. SIXTH, add the interests, penalties and
surcharges.

January 18, 2019

So for the taxable income, if the transaction is TAXABLE INCOME is the basis of
prior to the TRAIN Law, apply the old table. computing tax due.

TRAIN Law became effective on January 2018. Taxable income depends upon the kind of tax
payer, if he is an individual earning purely
After identifying the tax-paying party (first row),
compensation income, or purely self-
determine the kind of income (regular income,
employment/business income earner, or mixed
passive income or capital gains) (first column).
income.
Then match.
Q: How do we compute the taxable income?
Under the passive income, determine first if it is
dividend. If not, then refer immediately to (a).

The usual problem that we might encounter is TAXABLE INCOME is comprised of, for:
the sale of real property. Make sure that what is
being sold is a capital asset. 1. Purely Compensation Income
Earner
Q: Kung daghan syag balay ma’am?
Gross Compensation Income – Non-
A: Still subject to capital gains tax as long as he taxable income/benefits = Taxable
is not engaged in the business of selling Income
properties. Look at the intention of the
transaction if he transacts on a regular basis or Gross Compensation Income is the income of the
not. employee for the whole year.

PRACTICE: Nicos a resident citizen sold his
residential house and lot in Tagum for 2.5
million. The cost of the house 3 years ago was
1.5 million while the fair market value at the
time of the sale is 2.3 million.
Non-taxable income/benefits are those not
taxed. These are benefits of small value
exempted from income tax. BUT there is a limit
on the value.
Example: Rice allowance, 13th month
pay, De Minimis, Bonuses
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13 TAXATION 2 – Atty. Justice Aurelio-Yap
NOTE: There are no more deductions of basic
and additional personal exemption under TRAIN
Law because the exemption was increased to
250, 000. So the basic and additional personal
exemption were already absorbed in the 250,
000.
RULE FOR HUSBAND AND WIFE
For married individuals, the husband and wife,
subject to the provision of Section 51 (D) hereof,
shall compute separately their individual income
tax based on their respective total taxable
income: Provided, that if any income cannot be
definitely attributed to or identified as income
exclusively earned or realized by either of the
spouses, the same shall be divided equally
between the spouses for the purpose of
determining their respective taxable income.
(NIRC, Sec. 24A [1])
RULE FOR MINIMUM WAGE EARNERS
Provided, That minimum wage earners as
defined in Section 22 (HH) of this Code shall be
exempt from the payment of income tax on their
taxable income: Provided, further, That the
holiday pay, overtime pay, night shift differential
pay and hazard pay received by such minimum
wage earners shall likewise be exempt from
income tax. (NIRC, as amended by R.A. 9504,
Sec. 24 [A] [2]).
Minimum wage earners shall be exempt from the
payment of income tax on their taxable income.
Holiday pay, overtime pay, night shift differential
pay and hazard pay received by such minimum
wage earners shall likewise be exempt from
income tax.
Example: Say the minimum wage is 370, and the
individual receives other
holiday/overtime/nightshift differential pay which
EXCEED 370, all of your income is still exempt,
by reason of you being a minimum wage earner.
Illustration: Mr. A is a minimum wage earner,
working for Mr. B. He has no other source of
income. For 2018, he earned a total
compensation income of 135, 000. He
contributed to SSS, PHIC, Pag-Ibig amounting to
5, 000. He received 13th month pay of 11, 000.
Compensation Income: 135, 000
Contribution: 5, 000
13th month pay: 11, 000
Q: How much is the taxable income?
A: Mr. A is not liable for income tax because his
net compensation income is exempted from
income tax because he is a minimum wage
earner.
So even if he earns overtime pay of 80, 000,
nightshift differential of 30, 000, hazard pay of
15, 000 and holiday pay of 15, 000, he is still
exempt.
Holiday pay, overtime pay, night shift differential
pay and hazard pay received by such minimum
wage earners shall likewise be exempt from
income tax.
NOTE: For minimum wage earners, even if the
total benefits (holiday pay, overtime pay, night
shift differential pay and hazard pay) exceeded
250, 000 threshold, they are still exempt from
income tax because they have a different legal
basis from the 250, 000 threshold.
This exemption is based on the codal provision,
the tax payer being a minimum wage earner.
AND, if the minimum wage earner receives
commissions from outside of his work, he may
still be exempt from income tax on such
commission because that may be absorbed by
the 250, 000 threshold.
2. Purely From Self-Employment Or
Practice Of Profession
2 OPTIONS
The FIRST OPTION is the graduated tax rates
and at the same time pay business tax.
You are allowed to deduct the allowable
deductions (business expenses) before applying
the graduated tax rates.
The SECOND OPTION is 8% for BOTH income
tax and business (percentage) tax.
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14 TAXATION 2 – Atty. Justice Aurelio-Yap
But the following CONDITIONS must be
satisfied to avail of this Second Option:
a. That your gross income for the whole
year must not exceed 3 million VAT
threshold;
If you exceed, 3 million, you cannot avail of the
Second Option, 8%.
b. That your gross income is based ONLY
on gross sales/receipts. Tax base must
be gross sales/receipts.
Gross Sales/Receipts
If you are engaged in selling goods and
merchandise, your “halin” is called GROSS
SALES.
If you are engaged in services or practice of
profession, your “halin” is called GROSS
RECEIPTS.
Remember that gross income has
allowable deductions and if you avail of
the First Option, you may deduct
allowable deductions from your gross
sales/receipts.
BUT if you avail of this 8% option, you
cannot deduct the allowable deductions
(business expenses), thus you go
directly to gross sales/receipts.
c. Income is earned purely from self-
employment (business) or practice of
profession. You cannot be a mixed
income earner for you to be able to
avail.
d. Tax payer must not be a VAT registered
tax payer and a partner of a GPP
e. Tax payer must signify with the BIR his
intention to avail of the 8% Option on
the First Quarter of the taxable year
(Jan-Mar)
Gross Sales/Receipts
If you are engaged in selling goods and
merchandise, your “halin” is called GROSS
SALES.
If you are engaged in services or practice of
profession, your “halin” is called GROSS
RECEIPTS.
A tax payer is considered as VAT
Registered if:
1. His gross income exceeded the 3M
threshold, thus he automatically has to
be registered as a VAT tax payer; or
2. He registered himself voluntarily as a
VAT tax payer even if his gross income
did not exceed 3M threshold.
Scenario: A tax payer avails of the 8% on the
first quarter, but at the end of the taxable year
realizes that his gross income exceeded 3million.
What happens?
He will go back to the First Option and use the
graduated tax rate table. But deduct the 8%
already paid from the total value computed
under the graduated rate.
TIP: If gamay ka’g income, ayaw pag 8%,
didto ka sa graduated tax rate. If mafeel
nimo na dako ka’g income, didto ka sa
8%.
Benefits in availing of the 8% Option:
1. You are not required to attach a
financial statement on your final income
tax return, but existing rules on
bookkeeping still applies.
Q: What are the advantages for individuals
voluntarily registering as VAT tax payer even if
their income does not exceed 3 million?
A: We have what we call “INPUT TAX” such that
when (for example) I, a VAT registered tax
payer, buy from another VAT registered entity
which imposes VAT on their products, the VAT I
paid them can be deducted from my VAT
liability. Because the rule there is, output VAT
minus input VAT.
Because, if you are not VAT registered, you are
liable with percentage tax, and in the percentage
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15 TAXATION 2 – Atty. Justice Aurelio-Yap

tax, direcho yan 3% from gross sales/receipts
without deductions.
But that is only advantageous if your gross
income is nearing 3 million. That becomes a
disadvantage if you have low income per month
or that you do not purchase goods from other
entities, such as practice of profession.
OPERATING EXPENSES katong water, electricity,
pamasahe, ug uban gastos nimo sa pagoperate
sa imong business]
Solution:
Total gross sales/receipts – cost of sales = Gross
Income

So if you always purchase goods, that is
advisable, but the strategy there is you should
purchase from another VAT registered entity.
When you opt for the 8%, that is irrevocable for
the entire taxable year. But you go back to the
graduated tax rate if your income exceeds 3
million.
Gross Income – Operating Expenses = Taxable
Income
1.1M – 600, 000 – 200, 000 = 300, 000
Taxable Income = 300, 000
*Refer to Graduated Tax Rate Table

Illustration: Ms. A owns a convenience store and

at the same time, has a bookkeeping business.
Her gross sales for her convenience store is 800,
000 for the year 2018. Her gross receipts for her
bookkeeping services is 300, 000. Her total gross
sales/receipts are 1.1M. Cost of Sales (capital) is
600, 000, and operating Expenses
(water/electricity/gastos sa business etc) is 200, 300, 000 – 250, 000 x 20% = 10, 000
000.
Tax Due = 10, 000
a. She already signified her intention to
But she is still liable for business tax because
avail of the 8% on the first quarter.
business tax is not included in this computation,
Solution: unlike in the 8%.

8% multiply to gross sales/receipts and other
non-operating income in excess of 250, 000 kay
mao man na ang exemption diba.
gross sales/receipts + non-operating income –
250, 000 = Taxable Income
The 250, 000 here is NOT an exemption, it is
the amount provided in the graduated tax table,
do not confuse this from the 250, 000 threshold
we have been discussing before.

Taxable Income = 850, 000 Example: Taxable Income is 500, 000

As mentioned, there are no more allowable

deductions (cost of sales and operating
expenses) when you opt for 8% because the
basis is only the gross sales/receipts. The only
amount to be deducted is the 250, 000 threshold
exemption.

850, 000 x 8% = Tax Due

500, 000 – 400, 000 x 25% + 30, 000 =
Tax Due = 68, 000
Tax Due: 55, 000
b. She failed to signify her intention to avail
of the 8%

[COST OF SALES imong capital Example: Taxable Income is 800, 000

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16 TAXATION 2 – Atty. Justice Aurelio-Yap
800, 000 – 400, 000 x 25% + 30, 000 =
Tax Due: 130, 000
January 25, 2019
Q: How do we get the taxable income and tax
due if the taxpayer is earning mixed income,
both compensation and business income?
(c) Rate of Tax for Mixed Income Earners. —
Taxpayers earning both compensation income and
income from business or practice of profession shall
be subject to the following taxes;
(1) All Income from Compensation – The rates
prescribed under Subsection (A)(2)(a) of this Section.
(2) AH Income from Business or Practice of Profession
– (business).
(a) If Total Gross Sales and/or Gross Receipts and
Other Non-operating Income Do Not Exceed the VAT
Threshold as Provided in Section 109(BB) of this
Code. - The rates prescribed under Subsection
(A)(2)(a) of this Section on taxable income, or eight
percent (8%) income tax based on gross sales or
gross receipts and other non-operating income in lieu
of the graduated income tax rate s under Subsection
(A)(2)(a) of this Section and the percentage tax under
Section 116 of this Code.
(b) If Total Gross Sales and/or Gross Receipts and
Other Non-operating Income Exceeds the VAT
Threshold as Provided in Section 109(BB) of this
Code. — The rates prescribed under Subsection
(A)(2)(a) of this Section. (TRAIN, Sec. 24A [c])
Separate the computation for both incomes.
For the compensation income, follow the
computation for the purely compensation income
earner.
For the business income, you have 2 options as
we discussed before.
1. Graduated Tax Rate or
2. 8%. But this 8% option is different from
the purely business income earner
computation we discussed before
because in this case, we will NO
LONGER DEDUCT 250, 000.
Remember before, when we compute the
taxable income for purely business income
earner, we deduct 250, 000 from the gross
income.
In this case if you are mixed income earner, we
do not deduct 250, 000 when computing the
business income because the 250, 000
exemption was already applied in computing for
the compensation income. Since we used the tax
table which already exempted the 250, 000.
Hindi pwede dumoble yung pagapply ng 250,
000 deduction because later after getting the tax
due of each income, we will add the two
incomes for us to arrive in total income tax
liability of a mixed income earner.
So that is the difference between a mixed
income earner from an individual earning purely
from self-employment and practice of profession
BUT note that the conditions required to be able
to avail the 8% option still applies.
Example: Mr. MKG is a financial comptroller of
ABC Company. His annual compensation is 1.5M
inclusive of 13th month and other benefits in the
amount of 120, 000. But net of the mandatory
contributions of SSS and Philhealth (already
deducted). Aside from employment income, he
owns a convenience store with gross sales of
2.4M, cost of sales of 1M and operating
expenses of 600, 000. He has a non-operating
income of 100, 000.
What is the taxable income and tax due if he
opted to be taxed at 8% (granting he availed of
the option in the 1st quarter of the taxable year)?
A: Mixed-income earner so compute separately.
a. COMPENSATION INCOME
Total income: 1.5M
Benefits already included in 1.5M: 120, 000
When we say compensation income, there are
benefits (13th month, de minimis). These
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17 TAXATION 2 – Atty. Justice Aurelio-Yap
benefits have a limit in their exemption, such
that the entire benefits may not be covered by
the exemption if it already exceeded 90, 000.
What is covered is only up to 90, 000.
What is covered by the exemption of the
benefits is only up to 90, 000. Any excess
shall be subject to tax.
The excess of 90, 000 from all benefits
shall be subject to tax.
120, 000 – 90, 000 = 30, 000 shall be subject to
tax
1.5M – 90, 000 = 1, 410, 000 Taxable
Compensation Income
 Taxable Compensation Income: 1, 410,
000
To compute for the tax due, use the graduated
tax rates.
1, 410, 000 – 800, 000 = 610, 000
610, 000 x 0.3 = 183, 000
183, 000 + 130, 000 = 313, 000 Total tax due
 Total tax due for compensation income:
313, 000
Draw the tax schedule on an index card
to be used in our exam.
b. BUSINESS INCOME
i. Opted for 8% (2 nd
Option)
TIP: Look at the gross sales first to see
if he did not exceed 3M and if he has
complied with all the other conditions.
Gross Sales: 2.4M (does not exceed 3M so
pwede magavail ng 8%)
Non-operating Income: 100, 000
2.4M + 100, 000 = 2.5M
 Taxable Business Income: 2.5M
We did not use the cost of sales and operating
expenses because the Rule is, if the tax payer
opted for the 8%, you just base on the gross
sales.
Remember, the 8% option for a mixed income
earner, (unlike in the purely business income
earner), we do not deduct 250, 000 exemption.
So multiply directly to the 8%.
2.5M x .08 = 200, 000
 Tax due on business income: 200, 000
How much is the TOTAL TAX DUE?
313, 000 + 200, 000 = 513, 000
TOTAL TAX DUE = 513, 000
ii. Opted for the graduated tax rates
1st – get the taxable income of the
compensation income
2nd – get the taxable income of the business
income
3rd – Add the taxable income of the two and
subject them to the graduated tax rate
 Taxable Compensation Income: 1, 410,
000 (same with the above computation)
But to get the taxable business income, unlike
the above computation, we have to compute the
expenses.
Gross Sales: 2.4M
Non-operating Income: 100, 000
Cost of Sales: 1M
Operating Expenses: 600, 000
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18 TAXATION 2 – Atty. Justice Aurelio-Yap
2.4M + 100, 000 = 2.5M
2.5M – 1M – 600, 000 = 900, 000
 Taxable Business Income: 900, 000
The difference of this First Option from the
Second Option above is that, in this case, we
deducted the cost of sales and operating
expenses.
Taxable Compensation Income + Taxable
Business Income = TOTAL TAX DUE
1, 410, 000 + 900, 000 = 2, 310, 000
Total Taxable Income = 2, 310, 000
How much is the TOTAL TAX DUE?
Use now the graduated rates
2, 310, 000 – 2, 000, 000 = 310, 000
310, 000 x 32% = 99, 200
99, 200 + 490, 000 = 589, 200
TOTAL TAX DUE = 589, 200
Butangi jud ug peso sign kay kwarta
jud baya ni. Ayaw kalimti.
In this graduated tax rates (First Option), in
addition to the income tax, the taxpayer is also
liable for percentage tax. Unlike in the 8%
(Second Option) the equivalent of which is BOTH
income and percentage tax.
INCOME TAX RATES ON NONRESIDENT
CITIZEN
RULE:
RC – within and without the Philippines
NRC, RA, NRAETB – within the Philippines
NRANETB – within the Philippines, but his
tax base is 25% of gross income without
allowable deduction (except capital
gains)
(C) Alien Individual Employed by Regional or Area
Headquarters and Regional Operating Headquarters of
Multinational Companies. — There shall be levied,
collected and paid for each taxable year upon the
gross income received by every alien individual
employed by regional or area headquarters and
regional operating headquarters established in the
Philippines by multinational companies as salaries,
wages, annuities, compensation, remuneration and
other emoluments, such as honoraria and allowances,
from such regional or area headquarters and regional
operating headquarters, a tax equal to fifteen percent
(15%) of such gross income: Provided, however, That
the same tax treatment shall apply to Filipinos
employed and occupying the same position as those
of aliens employed by these multinational companies.
For purposes of this Chapter, the term multinational
company means a foreign firm or entity engaged in
international trade with affiliates or subsidiaries or
branch offices in the Asia-Pacific Region and other
foreign markets. (NIRC, Sec. 24C as amended)
BEFORE, they are subject to preferential tax rate
of 15% in their compensation income, which
means they are not subject to the graduated
income tax rate.
But now, with the TRAIN Law, that 15%
preferential tax rate was removed.
But this does not affect those already enjoying
the preferential tax rate, you cannot
retroactively apply the law.
(C) Government-owned or Controlled-Corporations,
Agencies or Instrumentalities - The provisions of
existing special or general laws to the contrary
notwithstanding, all corporations, agencies, or
instrumentalities owned or controlled by the
Government, except the Government Service
Insurance System (GSIS), the Social Security System
(SSS), the Philippine Health Insurance Corporation
(PHIC) and the local water districts, shall pay such
rate of tax upon their taxable income as are imposed
by this Section upon corporations or associations
engaged in s similar business, industry, or activity.
(NIRC, Sec. 27C as amended)
General Rule: All GOCCs are subject to income
tax in the same way as corporations and
associations.
Exception (Remember this, mugawas ni sa
exam):
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19 TAXATION 2 – Atty. Justice Aurelio-Yap
1. GSIS
2. SSS
3. PHIC
4. Local Water Districts
EXCLUSIONS FROM GROSS INCOME
NOTE: Exclusions are different from deductions
When you say excluded from gross income, it
means exempted from paying gross income.
They have income, but dili sila apil.
When you say deductions, gastos to sya.
(B) Exclusions from Gross Income. - The following
items shall not be included in gross income and shall
be exempt from taxation under this title:
(1) Life Insurance - The proceeds of life insurance
policies paid to the heirs or beneficiaries upon the
death of the insured, whether in a single sum or
otherwise, but if such amounts are held by the insurer
under an agreement to pay interest thereon, the
interest payments shall be included in gross income.
The proceeds of life insurance are excluded from
gross income, but the interests thereon are
included in the computation.
(2) Amount Received by Insured as Return of
Premium - The amount received by the insured, as a
return of premiums paid by him under life insurance,
endowment, or annuity contracts, either during the
term or at the maturity of the term mentioned in the
contract or upon surrender of the contract.
When you do not like to continue your
insurance, the premium you paid will be
returned.
It is like a return of capital, hence not subject to
income tax.
(3) Gifts, Bequests, and Devises. - The value of
property acquired by gift, bequest, devise, or descent:
Provided, however, That income from such property,
as well as gift, bequest, devise or descent of income
from any property, in cases of transfers of divided
interest, shall be included in gross income.
Not subject to income tax because it is not
income, but it is subject to excise tax.
The gift, bequest and devise given, is not
subject to income tax. But if that property has
earned income, the earnings are included in
income tax.
(4) Compensation for Injuries or Sickness - amounts
received, through Accident or Health Insurance or
under Workmen's Compensation Acts, as
compensation for personal injuries or sickness, plus
the amounts of any damages received, whether by
suit or agreement, on account of such injuries or
sickness.
(5) Income Exempt under Treaty. - Income of any
kind, to the extent required by any treaty obligation
binding upon the Government of the Philippines.
(6) Retirement Benefits, Pensions, Gratuities, etc. -
(a) Retirement benefits received under Republic Act
No. 7641 and those received by officials and
employees of private firms, whether individual or
corporate, in accordance with a reasonable private
benefit plan maintained by the employer: Provided,
That the retiring official or employee has been in the
service of the same employer for at least ten (10)
years and is not less than fifty (50) years of age at the
time of his retirement: Provided, further, That the
benefits granted under this subparagraph shall be
availed of by an official or employee only once.
For purposes of this Subsection, the term 'reasonable
private benefit plan' means a pension, gratuity, stock
bonus or profit-sharing plan maintained by an
employer for the benefit of some or all of his officials
or employees, wherein contributions are made by
such employer for the officials or employees, or both,
for the purpose of distributing to such officials and
employees the earnings and principal of the fund thus
accumulated, and wherein its is provided in said plan
that at no time shall any part of the corpus or income
of the fund be used for, or be diverted to, any
purpose other than for the exclusive benefit of the
said officials and employees.
(b) Any amount received by an official or employee or
by his heirs from the employer as a consequence of
separation of such official or employee from the
service of the employer because of death sickness or
other physical disability or for any cause beyond the
control of the said official or employee.
(c) The provisions of any existing law to the contrary
notwithstanding, social security benefits, retirement
gratuities, pensions and other similar benefits received
by resident or nonresident citizens of the Philippines
or aliens who come to reside permanently in the
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20 TAXATION 2 – Atty. Justice Aurelio-Yap
Philippines from foreign government agencies and
other institutions, private or public.
(d) Payments of benefits due or to become due to any
person residing in the Philippines under the laws of
the United States administered by the United States
Veterans Administration.
(e) Benefits received from or enjoyed under the Social
Security System in accordance with the provisions of
Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act
No. 8291, including retirement gratuity received by
government officials and employees.
There are requisites provided by law before
retirement benefits can be excluded from gross
income.
MEMORIZE the requisites
(7) Miscellaneous Items. - (a) Income Derived by
Foreign Government - Income derived from
investments in the Philippines in loans, stocks, bonds
or other domestic securities, or from interest on
deposits in banks in the Philippines by (i) foreign
governments, (ii) financing institutions owned,
controlled, or enjoying refinancing from foreign
governments, and (iii) international or regional
financial institutions established by foreign
governments.
(b) Income Derived by the Government or its Political
Subdivisions. - Income derived from any public utility
or from the exercise of any essential governmental
function accruing to the Government of the Philippines
or to any political subdivision thereof.
(c) Prizes and Awards - Prizes and awards made
primarily in recognition of religious, charitable,
scientific, educational, artistic, literary, or civic
achievement but only if: (i) The recipient was selected
without any action on his part to enter the contest or
proceeding; and (ii) The recipient is not required to
render substantial future services as a condition to
receiving the prize or award.
(d) Prizes and Awards in Sports Competition. - All
prizes and awards granted to athletes in local and
international sports competitions and tournaments
whether held in the Philippines or abroad and
sanctioned by their national sports associations.
(e) 13th Month Pay and Other Benefits. - Gross
benefits received by officials and employees of public
and private entities: Provided, however, That the total
exclusion under this subparagraph shall not exceed
Ninety thousand pesos (P90,000) which shall cover:
(i) Benefits received by officials and employees of the
national and local government pursuant to Republic
Act No. 6686; (ii) Benefits received by employees
pursuant to Presidential Decree No. 851, as amended
by Memorandum Order No. 28, dated August 13,
1986; (iii) Benefits received by officials and employees
not covered by Presidential decree No. 851, as
amended by Memorandum Order No. 28, dated
August 13, 1986; and (iv) Other benefits such as
productivity incentives and Christmas bonus.
(f) GSIS, SSS, Medicare and Other Contributions. -
GSIS, SSS, Medicare and Pag-ibig contributions, and
union dues of individuals.
(g) Gains from the Sale of Bonds, Debentures or other
Certificate of Indebtedness. - Gains realized from the
same or exchange or retirement of bonds, debentures
or other certificate of indebtedness with a maturity of
more than five (5) years.
(h) Gains from Redemption of Shares in Mutual Fund.
- Gains realized by the investor upon redemption of
shares of stock in a mutual fund company as defined
in Section 22 (BB) of this Code. (NIRC, Sec. 32B as
amended)
“Prizes and Awards in Sports Competition. – x x
x”
Only those accredited sports competitions.
FRINGE BENEFITS is any good, service or
other benefit furnished or granted by an
employer in cash or in kind, in addition to basic
salaries, to an individual employee, except rank
and file employee.
(B) Fringe Benefit defined. - For purposes of this
Section, the term "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 as defined herein)
such as, but not limited to, the following:.
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and
others;
(5) Interest on loan at less than market rate to the
extent of the difference between the market rate and
actual rate granted;
(6) Membership fees, dues and other expenses borne
by the employer for the employee in social and
athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
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21 TAXATION 2 – Atty. Justice Aurelio-Yap
(9) Educational assistance to the employee or his
dependents; and
(10) Life or health insurance and other non-life
insurance premiums or similar amounts in excess of
what the law allows. (NIRC, Sec. 33B)
Fringe Benefits to be taxable must be received
only by managerial employees. So if the fringe
benefit is received by a rank and file employee,
then that is not subject to fringe benefit tax.
So if you are a rank and file employee (RF-EE),
and you receive fringe benefits, those are
exempted, PROVIDED, that the total amount of
the benefit is only within the exempted value of
de minimis.
“in cash or in kind”
If sakyanan, kuhaon lang ang fair market value
“Expenses for foreign travel”
If you were asked to liquidate your expenses,
and pay any excess expenditure from the
amount given, that is not fringe benefit. Look at
the intention of the problem.
(C) Fringe Benefits Not Taxable. - The following fringe
benefits are not taxable under this Section:
(1) fringe benefits which are authorized and exempted
from tax under special laws;
(2) Contributions of the employer for the benefit of
the employee to retirement, insurance and
hospitalization benefit plans;
(3) Benefits given to the rank and file employees,
whether granted under a collective bargaining
agreement or not; and
(4) De minimis benefits as defined in the rules and
regulations to be promulgated by the Secretary of
Finance, upon recommendation of the Commissioner.
The Secretary of Finance is hereby authorized to
promulgate, upon recommendation of the
Commissioner, such rules and regulations as are
necessary to carry out efficiently and fairly the
provisions of this Section, taking into account the
peculiar nature and special need of the trade,
business or profession of the employer. (NIRC, Sec.
33C)
“(2) Contributions of the employer for the
benefit of the employee to retirement, insurance
and hospitalization benefit plans”
If the contribution is for the benefit of the
employer, that is subject to fringe benefit tax.
Q: Who is liable for Fringe Benefit Tax?
A: Employer
February 1, 2019
FRINGE BENEFITS is any good, service or
other benefit furnished or granted by an
employer in cash or in kind, in addition to basic
salaries, to an individual employee, except rank
and file employee.
RANK AND FILE EMPLOYEES (RF Ee) shall
mean all employees who are holding neither
managerial nor supervisory position as defined
under existing provisions of the Labor Code of
the Philippines, as amended.
MANAGERIAL Ee are those who are given
powers or prerogatives to lay down and execute
management policies and/or to hire, transfer,
suspend, lay-off, recall, discharge, assign or
discipline employees.
SUPERVISORY Ee are those who effectively
recommend such managerial actions, if the
exercise of such authority is not merely routinary
or clerical in nature but requires the use of
independent judgment.
GROSSED-UP MONETARY VALUE (GMV) IS
THE whole amount of income realized by the Ee
which include the net amount of money or
monetary value of the property which he
received plus the amunt
This represents the whole amount of income
realized by the employee, which includes the net
amount of money or net monetary value of
property which has been received, plus the
amount of fringe benefit tax thereon otherwise
due from the employee but paid by the employer
for and in behalf of his employee.
GROSSED-UP MONETARY VALUE = Net amount
of fringe benefit + fringe benefit tax
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22 TAXATION 2 – Atty. Justice Aurelio-Yap
DE MINIMIS BENEFIT are facilities or
privileges furnished or offered by an employer to
his employees that are of relatively small value
and are offered or furnished by the employer
merely as a means of promoting the health,
goodwill, contentment and efficiency of his
employees.
Example: Medical allowance or leave
monetization.
Fringe benefit is imposed on the GMV of the
fringe benefit furnished, granted or paid by the
employer (ER) to managerial and supervisory Ee
(RF Ee are not covered), the ER may be an
individual or professional partnership or a
corporation.
The tax base is the GMV.
Q: How do we compute the GMV?
GUIDELINES IN GETTING THE GMV
If the fringe benefit is granted or furnished in:
1. Money, or is directly paid for by the
employer – the value is the amount
granted or paid;
2. Property other than money and ownership
is transferred to the employee – the value
of the fringe benefit shall be equal to the
fair market value of the property as
determined in accordance with the authority
of the Commissioner to prescribe real
property values (zonal valuation);
3. Property other than money BUT ownership
is NOT transferred to the employee – the
value of the fringe benefit is equal to the
depreciation value of the property.
PLEASE READ: pg. 265 of Casasola
1. Housing privilege
2. Expense account
These are expenses incurred by the Ee, but
which is paid or reimbursed by the Er.
Example: The Ee paid for his personal expenses
for his personal use, and subsequently, the Er
reimbursed the amount, but the Er did not ask
for a receipt. That is an expense account, a
fringe benefit.
If it is duly receipted for under the name of the
Er and the claim do not partake of a personal
expense, then that is not a fringe benefit.
3. Motor Vehicle
4. Household expenses
5. Interest on loan at less than market rate
6. Membership fees, dues and other
expenses borne by the employer for the
employee in social and athletic clubs or
other similar organizations
7. Expenses for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee
or his dependents; and
10. Life or health insurance and other non-
life insurance premiums or similar
amounts in excess of what the law
allows.
FRINGE BENEFITS NOT SUBJECT TO THE
FRINGE BENEFIT TAX
1. Fringe benefits which are authorized and
exempted from tax under the NIRC or
special laws (e.g. separation benefits which
are given to employees who are
involuntarily separated from work)
2. Contributions of the employer for the
benefit of the employee to retirement,
insurance and hospitalization benefit plans
3. Benefits given to the rank and file
employees, whether granted under a
collective bargaining agreement or not
There is a specific exemption regarding RF Ee so
do not anymore think whether the RF went
beyond the de minimis benefits because he has
his own separate exemption. If you are a RF Ee,
automatically, the fringe benefit is NOT
taxable because he has a separate exemption.
4. De minimis benefits, whether given to rank
and file employees or to supervisory or
managerial employees
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23 TAXATION 2 – Atty. Justice Aurelio-Yap
5. Fringe benefits granted to employee as
required by the nature of, or necessary to
the trade, business or profession of the
employer
De minimis benefits, nagagawas ni
sa bar.
[Table found in pg. 112 of Taxation 2017
Golden Notes for a clearer reference,
But updated amounts found in pg. 123 of
Dascil, RR No. 5-2011]
As discussed before all benefits including bonus,
productivity incentive, de minimis benefits etc.
will be collated, which must NOT EXCEED 92,
000 in order for it to be exempted.
If the sum of all benefits exceeds 92, 000, then
the excess shall be subject to the income tax.
Example: For the unused vacation leave, the rule
is, the exemption from tax is only up to 10 days.
However, if the unused vacation leave exceeds
10 days, refer back to the 92, 000. If the
monetary equivalent of the unused vacation
leaves, is still within the 92, 000, even if beyond
10 days, then it is still exempt.
But if the monetary equivalent of that already
exceeded 92, 000, then taxable.
CORPORATIONS
(B) The term "corporation" shall include partnerships,
no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion),
association, or insurance companies, but does not
include general professional partnerships and a joint
venture or consortium formed for the purpose of
undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium
agreement under a service contract with the
Government "General professional partnerships" are
partnerships formed by persons for the sole purpose
of exercising their common profession, no part of the
income of which is derived from engaging in any trade
or business. (NIRC, Sec. 22B)
Unregistered partnerships, if discovered to have
been engaged in trade and business, then they
are liable for income tax.
GENERAL PROFESSIONAL PARTNERSHIPS
are partnerships formed by persons for the sole
purpose of exercising their common profession.
The GPP as an entity is not subject to income
tax, but the individuals composing them are
liable for income tax imposed upon their
individual shares.
REASON why Joint venture formed for the
purpose of undertaking construction projects are
exempt is because in order to be able to
compete with big foreign contractors, it may be
necessary for them to enter into joint ventures
to pool their limited resources in undertaking big
construction projects. (PD 929)
REQUISITES TO FOR JOINT VENTURE TO
BE EXEMPTED FROM TAX
1. The joint venture was formed for the
purpose of undertaking a construction
project; and
2. Should involve joining/pooling of resources
by licensed local contracts; that is, licensed
as general contactor the Philippine
Contractors Accreditation Board (PCAB) of
the Department of Trade and Industry
(DTI);
3. The local contractors are engaged in
construction business; and
4. The joint venture itself must likewise be
duly licensed as such by the Philippines
Contractors Accreditation Board (PCAB) of
the Department of trade Industry (DTI).
If any of those requisites are absent, then the
joint venture is subject to income tax.
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24 TAXATION 2 – Atty. Justice Aurelio-Yap
DOMESTIC CORPORATIONS (DC) – a
corporation created or organized in the
Philippines or under its laws and is liable for its
income from sources within and without (NIRC,
Sec. 22 [C])
RESIDENT FOREIGN CORPORATION (RFC)
– a corporation which is not domestic and is
engaged in trade or business in the Philippines
and is liable for income from sources within the
Philippines
NON-RESIDENT FOREIGN CORPORATION
(NRFC) – a corporation which is not domestic
and not engaged in trade or business in the
Philippines and is liable for income from sources
within and without.
Q: How do we determine if a FC is engaged in
business or not?
A: DOING BUSINESS shall include
i. soliciting orders, service contracts,
opening offices, whether called "liaison"
offices or branches; appointing
representatives or distributors domiciled in
the Philippines or
ii. who in any calendar year stay in the
country for a period or periods totalling
one hundred eighty (180) days or
more. (RA 7042, Sec. 3)
RECALL: A NONRESIDENT ALIEN
INDIVIDUAL who shall come to the
Philippines and stay therein for an aggregate
period of more than one hundred eighty
(180) days during any calendar year shall
be deemed a nonresident alien doing
business in the Philippines (NIRC, Sec. 25A)
REMEMBER To be considered as a:
 FOREIGN CORPORATION doing business
in the Philippines – stays in the country
for at least 180 days.
 NONRESIDENT ALIEN INDIVIDUAL
doing business in the Philippines – stays
in the country for at least 181 days.
SEC. 27. Rates of Income tax on Domestic
Corporations. -
(A) In General. - Except as otherwise provided in this
Code, an income tax of thirty-five percent (35%) is
hereby imposed upon the taxable income derived
during each taxable year from all sources within and
without the Philippines by every corporation, as
defined in Section 22(B) of this Code and taxable
under this Title as a corporation, organized in, or
existing under the laws of the Philippines: Provided,
That effective January 1, 1998, the rate of income tax
shall be thirty-four percent (34%); effective January
1, 1999, the rate shall be thirty-three percent (33%);
and effective January 1, 2000 and thereafter, the rate
shall be thirty-two percent (32%).
In the case of corporations adopting the fiscal-year
accounting period, the taxable income shall be
computed without regard to the specific date when
specific sales, purchases and other transactions occur.
Their income and expenses for the fiscal year shall be
deemed to have been earned and spent equally for
each month of the period.
The reduced corporate income tax rates shall be
applied on the amount computed by multiplying the
number of months covered by the new rates within
the fiscal year by the taxable income of the
corporation for the period, divided by twelve
Provided, further, That the President, upon the
recommendation of the Secretary of Finance, may
effective January 1, 2000, allow corporations the
option to be taxed at fifteen percent (15%) of gross
income as defined herein, after the following
conditions have been satisfied:
(1) A 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 percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated
Public Sector Financial Position (CPSFP) to GNP.
The option to be taxed based on gross income shall
be available only to firms whose ratio of cost of sales
to gross sales or receipts from all sources does not
exceed fifty-five percent (55%).
The election of the gross income tax option by the
corporation shall be irrevocable for three (3)
consecutive taxable years during which the
corporation is qualified under the scheme.
For purposes of this Section, the term 'gross income'
derived from business shall be equivalent to gross
sales less sales returns, discounts and allowances and
cost of goods sold"Cost of goods sold" shall include all
business expenses directly incurred to produce the
merchandise to bring them to their present location
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25 TAXATION 2 – Atty. Justice Aurelio-Yap
and use.
For a trading or merchandising concern, "cost of
goods" sold shall 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 the goods are in transit.
For a manufacturing concern, "cost of goods
manufactured and sold" shall include all costs of
production of finished goods, such as raw materials
used, direct labor and manufacturing overhead,
freight cost, insurance premiums and other costs
incurred to bring the raw materials to the factory or
warehouse.
In the case of taxpayers engaged in the sale of
service, 'gross income' means gross receipts less sales
returns, allowances and discounts. (NIRC, Sec. 27)
For corporations, in computing for the taxable
income, what is involved is the gross income.
GROSS INCOME derived from business shall be
equivalent to gross sales or receipts, less sales
returns and allowances less sales discounts, less
cost of goods sold.
 Gross sales/receipts - HALIN
Sales – for goods
Receipts – for services
 Sales returns – mga GIULI, returned
defective goods
In the case of taxpayers engaged in the sale of
service, 'GROSS INCOME' means gross
receipts less sales returns, allowances and
discounts.
COST OF GOODS SOLD shall include all
business expenses directly incurred to produce
the merchandise to bring them to their present
location and use.
For trading or merchandising concern COST OF
GOODS SOLD shall 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 the goods are in transit.
For a manufacturing concern COST OF GOODS
MANUFACTURED AND SOLD shall include all
costs of production of finished goods, such as
raw materials used, direct labor and
manufacturing overhead, freight cost, insurance
premiums and other costs incurred to bring the
raw materials to the factory or warehouse.
TEST: Basta nakagasto ka ani nga butang para
mabuhat at product, apil na sa imong cost.
(B) Proprietary Educational Institutions and Hospitals.
- Proprietary educational institutions and hospitals
which are nonprofit shall pay a tax of ten percent
(10%) on their taxable income except those covered
by Subsection (D) hereof: Provided, that if the gross
income from unrelated trade, business or other
activity exceeds fifty percent (50%) of the total gross
income derived by such educational institutions or
hospitals from all sources, the tax prescribed in
Subsection (A) hereof shall be imposed on the entire
taxable income.
For purposes of this Subsection, the term 'unrelated
trade, business or other activity' means any trade,
business or other activity, the conduct of which is not
substantially related to the exercise or performance by
such educational institution or hospital of its primary
purpose or function.
A "Proprietary educational institution" is any private
school maintained and administered by private
individuals or groups with an issued permit to operate
from the Department of Education, Culture and Sports
(DECS), or the Commission on Higher Education
(CHED), or the Technical Education and Skills
Development Authority (TESDA), as the case may be,
in accordance with existing laws and regulations.
(NIRC, Sec. 27)
“tax of ten percent (10%) on their taxable
income”
Referred to as “PREFERENTIAL TAX RATE”
Proprietary Educational Institutions and Hospitals
are not tax-exempt but are rather taxed at a
preferential rate of 10% on their taxable income,
except on certain passive incomes which are
subject to final tax.
REQUISITES TO BE ABLE TO AVAIL OF
THIS PREFERENTIAL TAX RATE of 10%
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26 TAXATION 2 – Atty. Justice Aurelio-Yap

Predominance test final tax at the rate of fifteen percent (15%)

shall be imposed on net capital gains realized
If the gross income from unrelated
during the taxable year from the sale, exchange
trade/business/other activity exceeds 50% of the
or other disposition of shares of Stock in a
total gross income from all sources, the entire
domestic corporation except shares sold or
taxable income of the proprietary educational
disposed of through the stock exchange. (NIRC,
institution shall be subject to the regular
Sec. 27 D as amended)
corporate tax rate of 30%.

Almost the same with individual passive income

GENERAL RULE: The regular tax rate for
corporations is 30% Remember: The dividends of a domestic
corporation from another domestic corporation
EXCEPTION: The tax rate for Proprietary
are exempted from passive income tax, that is
Educational Institutions and Hospitals is 10%;
what you call INTERCORPORATE
PROVIDED the gross income from unrelated DIVIDENDS.
trade/business/other activity DOES NOT
exceed 50% of the total gross income from
all sources. February 8, 2019

Example: You are a school and you have a

commercial building in your school. But the
income from the lease of your commercial
building which is not related to your principal
purpose which is educational, exceeded 50% of
the total income of your school, then you cannot
avail of the preferential tax rate of 10%.

Look at the total income of your unrelated

activities, if less than 50%, then apply 10%
preferential tax rate.

(D) Rates of Tax on Certain Passive Incomes. -

(1) Interest from Deposits and Yield or any other
Monetary Benefit from Deposit Substitutes and
from Trust Funds and Similar Arrangements, and
Royalties - A final tax at the rate of twenty
percent (20%) is hereby imposed upon the
amount of interest on currency bank deposit and
yield or any other monetary benefit from deposit
substitutes and from trust funds and similar
arrangements received by domestic
corporations, and royalties, derived from sources
within the Philippines: Provided, however, That
interest income derived by a domestic
corporation from a depository bank under the
expanded foreign currency deposit system shall
be subject to a final income tax at the rate of
fifteen percent (15%) of such interest income.
(2) Capital Gains from the Sale of Shares of
Stock Not Traded in the Stock Exchange. - A
MINIMUM CORPORATE INCOME TAX
(MCIT)
Diba we have allowable deductions. So from
gross sales/receipts, we deduct sales returns and
allowances then we arrive at the GROSS
INCOME. And from Gross Income, we deduct
allowable deductions for us to arrive at the
TAXABLE INCOME which is the basis of the
income tax using the 30%.
So the role of MCIT (Minimum Corporate Income
Tax) is to prevent corporations from under
declaring sales and over declaring expenses for
them to have a low taxable income and tax due.
Since MCIT is based on gross income, we don’t
deduct the allowable deductions. So if direcho sa
gross income, dako ang tax, 2%.

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27 TAXATION 2 – Atty. Justice Aurelio-Yap
But MCIT only applies on the 4th taxable year of
business operations.
MCIT (2% of gross income) shall be compared
to your normal income tax (NCIT the 30% of
taxable income).
Whichever is higher between the two, will be the
taxable due for the taxable year.
Illustration:
A domestic corporation in its 4th year of
operations had a gross income of ₱300,000 and
net taxable income of ₱100,000. How much is
the income tax due for the year?
MCIT (₱300,000 x 2%) ₱ 6,000
NCIT (₱100,000 x 30%) ₱30,000
Income tax due – NCIT ₱30,000
(whichever is higher)
IMPROPERLY ACCUMULATED EARNINGS
TAX (IAET)
Improperly accumulated earnings are the
profits of a corporation that are accumulated,
instead of distributing them to its shareholders,
for the purpose of avoiding the income tax with
respect to its shareholders or the shareholders of
another corporation
Retained earnings mean the net income kada
tuig sa corporation na gitigom.
So the role of the IAET, there are corporation
Q: When do we say if a corporation has
improperly accumulated earnings?
A: If the value of the retained earnings of the
corporation has exceeded 100% of the paid-up
capital of the corporation.
(Paid-up capital is the 25% of the subscribed
capital stock already paid.)
Because the corporation should return declare
dividends to their stockholders. In order to
prevent improper accumulation of earnings, the
NIRC imposes IAET.
RATIONALE: If the corporation does not declare
and return dividends to the stockholders, then
no 10% passive income tax shall be computed
against the shareholder/tax payer. To prevent
this, the NIRC imposes IAET.
Exceptions - IAET not applicable to the
following: (NIRC, Sec. 29A 2)
1. Publicly-held corporations;
2. Banks and other nonbank financial
intermediaries; and
3. Insurance companies (NIRC, Sec. 29A 2)
(Grounds provided by the Corporation Code in
order to exempt a corporation from IAET even is
not included in the exceptions in the NIRC)
4. For expansion projects, (restricted retained
earnings)
5. Required by the loan agreement
6. To meet contingencies.
NON-STOCK, NON-PROFIT HOSPITAL
Proprietary Educational Institutions and Hospitals
are not tax-exempt but are rather taxed at a
preferential rate of 10% on their taxable income,
except on certain passive incomes which are
subject to final tax.
Predominance test
If the gross income from unrelated
trade/business/other activity exceeds 50% of the
total gross income from all sources, the entire
taxable income of the proprietary educational
institution shall be subject to the regular
corporate tax rate of 30%.
Illustration:
SGB University
 Gross Income (GI) for 2009 – 15M
 GI for unrelated (GIU) activities – 5M
 Total Deductions – 3M
GIU/TGI = 5/15 = 33.33% (less than 50%)
GI – Deductions = Taxable Income
15M – 3M = 12 M (Taxable Income)
12M x 10% (preferential tax rate) = 1.2M
Total Tax Due = 1.2 M
 Gross Income (GI) for 2009 – 15M
 GI for unrelated (GIU) activities – 9M
 Total Deductions – 3M
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28 TAXATION 2 – Atty. Justice Aurelio-Yap
GIU/TGI = 9/15 = 60% (more than 50%)
GI – Deductions = Taxable Income
15M – 3M = 12 M (Taxable Income)
12M x 30% (regular income tax rate) = 3.6M
Total Tax Due = 3.6M
GOVERNMENT-OWNED OR CONTROLLED-
CORPORATIONS, AGENCIES OR
INSTRUMENTALITIES
General Rule: All GOCCs are subject to income
tax in the same way as corporations and
associations.
Exception (Remember this, mugawas ni sa
exam):
1. GSIS
2. SSS
3. PHIC
4. Local Water Districts
TAXABLE PARTNERSHIPS
General Rule: Partnerships are considered as
corporations and taxed as such
Exception: GPP and joint venture or consortium
formed for the purpose of undertaking
construction projects or engaging in petroleum,
coal, geothermal and other energy operations
pursuant to an operating consortium agreement
under a service contract with the Government
EXEMPT CORPORATIONS
SEC. 30 Exemptions from Tax on Corporations - The
following organizations shall not be taxed under this
Title in respect to income received by them as such:
(A) Labor, agricultural or horticultural organization not
organized principally for profit;
(B) 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;
(C) A beneficiary society, order or association,
operating fort he exclusive benefit of the members
such as a fraternal organization operating under the
lodge system, or mutual aid association or a nonstock
corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits
exclusively to the members of such society, order, or
association, or nonstock corporation or their
dependents;
(D) Cemetery company owned and operated
exclusively for the benefit of its members;
(E) Nonstock corporation or association organized and
operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation
of veterans, no part of its net income or asset shall
belong to or inures to the benefit of any member,
organizer, officer or any specific person;
(F) Business league chamber of commerce, or board
of trade, not organized for profit and no part of the
net income of which inures to the benefit of any
private stock-holder, or individual;
(G) Civic league or organization not organized for
profit but operated exclusively for the promotion of
social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire insurance
company, mutual ditch or irrigation company, mutual
or cooperative telephone company, or like
organization of a purely local character, the income of
which consists solely of assessments, dues, and fees
collected from members for the sole purpose of
meeting its expenses; and
(K) Farmers', fruit growers', or like association
organized and operated as a sales agent for the
purpose of marketing the products of its members and
turning back to them the proceeds of sales, less the
necessary selling expenses on the basis of the
quantity of produce finished by them;
Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and
character of the foregoing organizations from any of
their properties, real or personal, or from any of their
activities conducted for profit regardless of the
disposition made of such income, shall be subject to
tax imposed under this Code. (NIRC, Sec. 30)
On exempt activities, 0%
On taxable activities, 30%
GPP
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29 TAXATION 2 – Atty. Justice Aurelio-Yap
GPP are exempt, but the individuals composing
them are subject to income tax on their
individual shares.
CORPORATIONS COVERED BY SPECIAL
LAWS
Subject to the rates specified under special laws
RESIDENT FOREIN CORPORATION
Gross Philippine Billings refers to the amount
of gross revenue derived from carriage of
persons, excess baggage, cargo and mail
originating from the Philippines in a continuous
and uninterrupted flight, irrespective of the place
of sale or issue and the place of payment of the
ticket or passage document: Provided, That
tickets revalidated, exchanged and/or indorsed
to another international airline form part of the
Gross Philippine Billings if the passenger boards
a plane in a port or point in the Philippines:
Provided, further, That for a flight which
originates from the Philippines, but
transshipment of passenger takes place at any
port outside the Philippines on another airline,
only the aliquot portion of the cost of the ticket
corresponding to the leg flown from the
Philippines to the point of transshipment shall
form part of Gross Philippine Billings. (NIRC, Sec.
28A [3])
Regional/Area Headquarters are exempted
because their purpose is only supervisory
without engaging in trade or business.
(B) Tax on Nonresident Foreign Corporation. - (1) In
General. - Except as otherwise provided in this Code,
a foreign corporation not engaged in trade or business
in the Philippines shall pay a tax equal to thirty-five
percent (35%) of the gross income received during
each taxable year from all sources within the
Philippines, such as interests, dividends, rents,
royalties, salaries, premiums (except reinsurance
premiums), annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits
and income, and capital gains, except capital gains
subject to tax under subparagraphs (C) and (d):
Provided, That effective 1, 1998, the rate of income
tax shall be thirty-four percent (34%); effective
January 1, 1999, the rate shall be thirty-three percent
(33%); and, effective January 1, 2000 and thereafter,
the rate shall be thirty-two percent (32%).
(2) Nonresident Cinematographic Film Owner, Lessor
or Distributor. - A cinematographic film owner, lessor,
or distributor shall pay a tax of twenty-five percent
(25%) of its gross income from all sources within the
Philippines.
(3) Nonresident Owner or Lessor of Vessels Chartered
by Philippine Nationals. - A nonresident owner or
lessor of vessels shall be subject to a tax of four and
one-half percent (4 1/2%) of gross rentals, lease or
charter fees from leases or charters to Filipino citizens
or corporations, as approved by the Maritime Industry
Authority.
(4) Nonresident Owner or Lessor of Aircraft,
Machineries and Other Equipment. - Rentals, charters
and other fees derived by a nonresident lessor of
aircraft, machineries and other equipment shall be
subject to a tax of seven and one-half percent (7
1/2%) of gross rentals or fees.
(5) Tax on Certain Incomes Received by a
Nonresident Foreign Corporation. - (a) Interest on
Foreign Loans. - A final withholding tax at the rate of
twenty percent (20%) is hereby imposed on the
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30 TAXATION 2 – Atty. Justice Aurelio-Yap
amount of interest on foreign loans contracted on or
after August 1, 1986; (b) Intercorporate Dividends - A
final withholding tax at the rate of fifteen percent
(15%) is hereby imposed on the amount of cash
and/or property dividends received from a domestic
corporation, which shall be collected and paid as
provided in Section 57 (A) of this Code, subject to the
condition that the country in which the nonresident
foreign corporation is domiciled, shall allow a credit
against the tax due from the nonresident foreign
corporation taxes deemed to have been paid in the
Philippines equivalent to twenty percent (20%) for
1997, nineteen percent (19%) for 1998, eighteen
percent (18%) for 1999, and seventeen percent
(17%) thereafter, which represents the difference
between the regular income tax of thirty-five percent
(35%) in 1997, thirty-four percent (34%) in 1998, and
thirty-three percent (33%) in 1999, and thirty-two
percent (32%) thereafter on corporations and the
fifteen percent (15%) tax on dividends as provided in
this subparagraph; (c) Capital Gains from Sale of
Shares of Stock not Traded in the Stock Exchange. - A
final tax at the rates prescribed below is hereby
imposed upon the net capital gains realized during the
taxable year from the sale, barter, exchange or other
disposition of shares of stock in a domestic
corporation, except shares sold, or disposed of
through the stock exchange:
Not over P100,000…………..5%
On any amount in excess of P100,000………… 10%
(NIRC, Sec. 28)
For NON-RESIDENT FOREIGN CORPORATIONS
just add all income including passive income,
subject to 30% tax rate. There is no distinction
whether the income is from the regular activity
or passive income, just add them all up times
30%. It is also not entitled to allowable
deductions.
He is called a gross income tax payer.
Memorize the rates.
February 25, 2018
RECITATIONS:
1. Net Operating Loss Carry Over
2. Give at least one type of donation that is
deductible in full
3. If a donation was made by an individual
tax payer, what is the rate used for
computing the rate of deductibility?
– 10%
4. What is the difference between an
itemized deduction and Optional
Standard Deduction with respect to the
substantiation requirement?
5. Who are not allowed to claim for
allowable deductions from gross
income?
– Those earning purely compensation
from Er-Ee relationship
6. Explain the concept of the Income Tax
Benefit Rule in relation to Bad Debts
7. What is the manner of computing the
Optional Standard deduction
DISCUSSION
Condition: If that deduction has a tax benefit on
the part of the tax payer in the previous year.
In the previous year, we said there are bad
debts.
Bad Debts are accounts receivable, for
example nagpautang ka ug goods and
you were not yet paid and you estimate
that you can no longer collect such debt
even you file a collection case, so you
make it part of bad debts, you write it
off from your books.
(E) Bad Debts. -
(1) In General. - Debts due to the taxpayer
actually ascertained to be worthless and
charged off within the taxable year except
those not connected with profession, trade or
business and those sustained in a transaction
entered into between parties mentioned
under Section 36 (B) of this Code: Provided,
That recovery of bad debts previously
allowed as deduction in the preceding years
shall be included as part of the gross income
in the year of recovery to the extent of the
income tax benefit of said deduction. (NIRC,
Sec. 34E)
What if your bad debts were recovered in the
succeeding year because your client paid the
debt? Once you recover such debt, the Tax Code
says that it shall be included in you gross income
for computing income tax.
BUT the condition is, you can only include it if in
the previous year that you declared that a bad
debt, you had an income tax benefit.
TRANSCRIPTION CEBF
31 TAXATION 2 – Atty. Justice Aurelio-Yap
Income Tax Benefit meaning, when you
write off your bad debts, you deduct
that from your income because that bad
debt is considered expense. Now when
you deducted that from the previous
year which resulted into a low income
tax, or you no longer have to pay
income tax because the amount of your
bad debts is big.
So when you benefited in declaring such bad
debt (no income tax or low income tax), then
you are required to declare it on the succeeding
year.
BUT that declaration is only to the extent of the
income tax benefit.
Example: Your gross income is 1M, and you
deducted 300, 000 as bad debts. So you have
700, 000 remaining gross income, that is your
income tax base. However, on the succeeding
year, you were able to collect the entire 300,
000, so you check the previous year. Did you
have an income tax benefit?
Meaning, was the tax I paid for the
previous year low, because of the bad debts? If
so, add the income tax benefit, (only to the
extent of the 300, 000) in your gross income to
the succeeding year.
Q: What if there is an interest imposed on the
debt which was subsequently recovered?
A: The interest will become part of your gross
income, because the interest income is different
from the bad debt you previously wrote off from
your books which you subsequently recovered.
GROSS INCOME – COMPENSATION
INCOME
In general, the term compensation means all
remuneration for services performed by an Ee
for his Er under an Ee-Er relationship, unless
specifically excluded by this code.
The name by which the remuneration for
services is designated is immaterial.
Regardless of the mode of payment or how
remuneration is referred, whether commission,
or allowance.
The timing or the basis in which remuneration is
paid is immaterial in determining whether the
remuneration constitutes compensation.
If an Ee receives compensation or wages on the
basis of piece-work, percentage of profits (E.g.
your salary will be 5% of the income), or paid
hourly, daily, weekly, monthly or annually,
immaterial.
They won’t matter as long as they are “sweldo,”
you still include them in compensation income.
The TEST is whether such income is received by
virtue of an employer-employee relationship.
What is PAYROLL PERIOD?
(B) Payroll Period. - The term 'payroll period' means a
period for which payment of wages is ordinarily made
to the employee by his employer, and the term
'miscellaneous payroll period' means a payroll period
other than, a daily, weekly, biweekly, semi-monthly,
monthly, quarterly, semi-annual, or annual period.
(NIRC, Sec.78B)
Payroll period is the period of services for
which a payment of compensation is ordinarily
made to an Ee by his Er.
It is immaterial that the compensation is not
always paid at regular intervals.
It is the coverage of your period of service.
Usually from the 1st to 15th day of the month.
EMPLOYEE
(C) Employee. - The term 'employee' refers to any
individual who is the recipient of wages and includes
an officer, employee or elected official of the
Government of the Philippines or any political
subdivision, agency or instrumentality thereof. The
term 'employee' also includes an officer of a
corporation. (NIRC, Sec.78C)
In general, an Er-Ee relationship exists when the
person for whom the services if performed has
the right to control and direct the individual who
performs his services, not only as to the result to
be accomplished, but also as to the means and
method of achieving the result.
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32 TAXATION 2 – Atty. Justice Aurelio-Yap
RECALL: 4 Elements of Er-Ee Relationship
1. Hiring and Selection;
2. Payment of Wages;
3. Power of Dismissal; and
4. Power of Control
If an individual is engaged in an independent
trade, business or profession, then he is not
considered as an employee for labor and tax
purposes.
EMPLOYER
(D) Employer. - The term 'employer' means the
person for whom an individual performs or performed
any service, of whatever nature, as the employee of
such person, except that:
(1) If the person for whom the individual performs or
performed any service does not have control of the
payment of the wages for such services, the term
'employer' (except for the purpose of Subsection(A)
means the person having control of the payment of
such wages; and
(2) In the case of a person paying wages on behalf of
a nonresident alien individual, foreign partnership or
foreign corporation not engaged in trade or business
within the Philippines, the term 'employer' (except for
the purpose of Subsection(A) means such person.
(NIRC, Sec.78D)
Statutory Minimum Wage refers to the rate
fixed by the Regional Tripartite Wage and
Productivity Board (RTWPB).
Minimum Wage Earner refers to worker in the
private sector paid the statutory minimum wage,
or to an employee in the public sector receiving
compensation income equivalent to Salary Grade
5 and below.
FORMS OF COMPENSATION
o Compensation paid in kind
E.g. stocks, bonds or other forms of property.
Remember the mode or manner of payment is
immaterial.
 BASIS in computing income tax – fair
market value of the property
Living quarters and meals – values are included
in your remuneration.
But if the living quarters or meals are furnished
to an Ee for the convenience of an Er – value
thereof is not part of remuneration for
computation of compensation income.
[IMPORTANT]
Facilities and privileges of a relatively
small value
De minimis benefits – the excess of the
limitations for de minimis benefit will form part
of the compensation income.
Tips and Gratuities
If tips and gratuities are paid directly to an Ee by
a customer of the Er, which are not accounted
for by the Ee to the Er, are considered taxable
income, but not subject to withholding tax.
Pensions, Retirement and Separation Pay
P, R and S pay constitute compensation subject
to withholding, EXCEPT those provided.
Generally, PRS are taxable. They constitute
compensation subject to income tax.
Taxation of Amount Received by Reason of
a valid dismissal
Section 32. Gross Income. -
XXX
(B) Exclusions from Gross Income. - The following
items shall not be included in gross income and shall
be exempt from taxation under this title:
XXX
(6) Retirement Benefits, Pensions, Gratuities, etc.-
Xxx
(b) Any amount received by an official or
employee or by his heirs from the employer as a
consequence of separation of such official or
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33 TAXATION 2 – Atty. Justice Aurelio-Yap
employee from the service of the employer
because of death sickness or other physical
disability or for any cause beyond the control of
the said official or employee. ((NIRC, Sec 32 B [6]
b).
Generally, PRS are taxable. They constitute
compensation subject to income tax.
However, Separation Pay may be exempted from
income tax.
Two Conditions in Order that Ee Benefits
may be granted tax exemptions:
1. The Ee separated from his service from
the Er:
a. Because of death, sickness or
other physical disability; or
b. For any cause beyond the
control of the official or
employee; and
2. Er pays benefits to the official or Ee or
his heirs as a consequence of such
separation (NIRC, Sec 32 B [6] b);
If for example you resigned from your
employment, so the separation was voluntary,
the separation pay paid to you is subject to
income tax, like a compensation income.
REMEMBER: Whether the separation was
voluntary (not exempted from income tax), or
involuntary (exempted).
Fixed or Variable Transportation,
Representation and other allowances
In general, fixed or variable transportation,
representation and other allowances which are
received by a public officer or Ee of a private
entity in addition to the regular compensation is
compensation subject to income tax.
Generally, they are considered compensation
subject to income tax.
BUT REMEMBER THE BASIC RULE: If those
allowances were incurred in pursuit of the trade,
business or profession, for the benefit of the Er,
and the Ee is required to liquidate/account the
expenses, then those will not be subject to
income tax.
TIP: If in the problem, fixed or variable
transportation/representation allowances
were given, BUT there was no mention
that the allowance was used for the
benefit of the Er, and that it was silent
about how it was used, APPLY the
General Rule (considered compensation
subject to income tax).
BUT if it was mentioned that the Ee is
required to liquidate and to account, and
that the allowance was used upon the
order of the Er, thus for the benefit of
the Er, then APPLY the Exception (not
included in the compensation). You
cannot enjoy because you are required
to liquidate.
Vacation and Sick Leave Allowances
Amounts of vacation allowances and sick leave
credits which are paid by the Er constitute
compensation, hence taxable.
Example: You went on a vacation leave, and you
were paid even if you did not work.
Did you enjoy? YES, so it’s considered
compensation, because you did not work and yet
you were given compensation.
RECALL: What is NOT taxable?
Those monetized unused vacation leave for
private employees not exceeding 10 days during
the year; and monetized value of vacation and
sick leave for government officials and
employees.
REMEMBER:
 Used vacation / sick leave = taxable
 Unused vacation / sick leave = not
taxable (look at the rule for de minimis
benefit)
TEST: Did you enjoy or not? :P
ALLOWABLE DEDUCTIONS
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34 TAXATION 2 – Atty. Justice Aurelio-Yap
34.19
2 Options of a Tax Payer
1. Itemized Deductions – those
enumerated in the Tax Code that can be
deducted
2. Optional Standard Deductions
Difference Between Itemized Deduction
and Optional Standard Deduction (OSD)
1. OSD has No substantiation requirement
No receipts or proof are necessary. They
are immediately deducted from your
gross income
2. Itemized Deductions are required to
substantiated, meaning receipts or proof
should be provided that those expenses
were incurred.
E.g. rental expenses should be proved
through receipts or any acknowledgment
receipt that payment for rent was
received.
But the receipt must be an official
receipt or sales invoice to be allowed as
proof for deduction.
MANNER OF COMPUTING OSD
1. Individual Tax Payer – 40% shall be
computed using the gross sales/receipts
0.4 x gross sales/receipts =
2. Corporation Tax Payer – 40% shall be
computed using the gross income
0.4 x gross income =
RECALL:
Gross sales/receipts less
o Cost of sales
o Cost of services
= GROSS INCOME
ITEMIZED DEDUCTIONS
1. Business Expenses
(A) Expenses. -
(1) Ordinary and Necessary Trade, Business or
Professional Expenses.-
(a) In General. - There shall be allowed as
deduction from gross income all the ordinary and
necessary expenses paid or incurred during the
taxable year in carrying on or which are directly
attributable to, the development, management,
operation and/or conduct of the trade, business or
exercise of a profession, including:
(i) A reasonable allowance for salaries, wages,
and other forms of compensation for personal
services actually rendered, including the
grossed-up monetary value of fringe benefit
furnished or granted by the employer to the
employee: Provided, That the final tax imposed
under Section 33 hereof has been paid;
(ii) A reasonable allowance for travel expenses,
here and abroad, while away from home in the
pursuit of trade, business or profession;
(iii) A reasonable allowance for rentals and/or
other payments which are required as a
condition for the continued use or possession,
for purposes of the trade, business or
profession, of property to which the taxpayer
has not taken or is not taking title or in which
he has no equity other than that of a lessee,
user or possessor;
(iv) A reasonable allowance for entertainment,
amusement and recreation expenses during
the taxable year, that are directly connected to
the development, management and operation
of the trade, business or profession of the
taxpayer, or that are directly related to or in
furtherance of the conduct of his or its trade,
business or exercise of a profession not to
exceed such ceilings as the Secretary of
Finance may, by rules and regulations
prescribe, upon recommendation of the
Commissioner, taking into account the needs
as well as the special circumstances, nature
and character of the industry, trade, business,
or profession of the taxpayer: Provided, That
any expense incurred for entertainment,
amusement or recreation that is contrary to
law, morals public policy or public order shall in
no case be allowed as a deduction.
(b) Substantiation Requirements. - No deduction
from gross income shall be allowed under
Subsection (A) hereof unless the taxpayer shall
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35 TAXATION 2 – Atty. Justice Aurelio-Yap

substantiate with sufficient evidence, such as Thus it cannot be an allowed expense.

official receipts or other adequate records: (i) the
amount of the expense being deducted, and (ii)
the direct connection or relation of the expense
being deducted to the development, management, 2 TREATMENTS OF AN EXPENSE
operation and/or conduct of the trade, business or
1. Capital Expenditure (CE)
profession of the taxpayer.
If treated as a “capital expense”, the expense
(c) Bribes, Kickbacks and Other Similar Payments.
- No deduction from gross income shall be allowed shall be considered an asset.
under Subsection (A) hereof for any payment
Example: You bought a vehicle. That vehicle
made, directly or indirectly, to an official or
shall form part of your property company. If a
employee of the national government, or to an
official or employee of any local government unit, property is owned by the company, and used by
or to an official or employee of a government- the company, that is called an “asset”.
owned or -controlled corporation, or to an official
Now, if the vehicle you bought was made as an
or employee or representative of a foreign
government, or to a private corporation, general asset of the company, that treatment is called
professional partnership, or a similar entity, if the “capital expenditure”. You made the vehicle a
payment constitutes a bribe or kickback. capital, so its value was made part of your
property as an asset.
(2) Expenses Allowable to Private Educational
Institutions. - In addition to the expenses allowable as BUT if that property is not treated as an asset,
deductions under this Chapter, a private educational but rather an “expense”, considered as “gastos”,
institution, referred to under Section 27 (B) of this that treatment is called “revenue expenditure”.
Code, may at its option elect either: (a) to deduct
expenditures otherwise considered as capital outlays
of depreciable assets incurred during the taxable year
for the expansion of school facilities or (b) to deduct 2. Revenue Expenditure (RE)
allowance for depreciation thereof under Subsection
(F) hereof. (NIRC, Sec. 34A)
DIFFERENCE BETWEEN CE and RE

The “reasonableness” of the amount being paid In the example, if the vehicle was treated as a
is a prime consideration for an expense to be capital expenditure, the total value of the car
allowed. shall not be deducted from your gross income.

We apply “depreciation”, you divide the value of

“Bribes, Kickbacks and Other Similar Payments
shall not be allowed as deductions from gross
income”
RECALL: Income derived from illegal
activities are included as part of the gross
income of a tax payer.
BUT if the illegality is on the payment, it shall
not be allowed to be deducted.
o Illegal income – included
o Illegal payment – not allowed
REASON: If the payment was illegal, was the
payment made considered a “need” of the
company in running its business? NO. Is it
directly attributable to the business? NO. Can it
be substantiated? NO.
the vehicle depende sa kinabuhi sa asset.
Generally, the life of a vehicle is only 5 years,
after 5 years, that vehicle has already fully
depreciated. That it cannot be made “pamuslan”
economically (I tried guys.).
Say the car, upon purchase, was made into an
asset. I recorded it as part of my property. The
expense equivalent to that is the “depreciation
expense”. Meaning, every year, since the value
depreciates, that depreciated value is what shall
be deducted from my gross income.
Example: This building erected by the school
was treated by it as a capital expenditure. The
school made it an asset (because if I treat this
as an expense, I will have no gross income since
this building is expensive). So this asset has a

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36 TAXATION 2 – Atty. Justice Aurelio-Yap

useful life of 30 years (based on the accounting very low net income. It will also result to a low
policy). dividend or benefits for the stockholders.

So if I treat it as a capital expenditure, its value,

say 30M, shall be divided into 30 years if
When a capital expenditure is capitalized, the
“Straight Line Method” is used.
company’s assets increase. On the other hand, if
30M / 30 years = 1M per year such an expense is considered revenue
expenditure, then it is deducted outright as an
So since every year, the value of the building expense in the year it was incurred from the
depreciates, the school shall have a depreciation
gross income.
expense of 1M. That 1M shall be deducted from
its gross income every year, for 30 years.

If I treat the property as CAPITAL EXAMPLES OF BUSINESS EXPENSES

EXPENDITURE, every year I only deduct 1M
per year for 30 years from my gross income; and
not the entire 30M for the year I purchased the
property.
Tagi-tagi ba if capital expenditure.
BUT if I treat it as REVENUE EXPENDITURE,
that entire value of 30M shall be considered as
expense and be deducted outright from my
gross income within that year only.
Usually, when the purchase is of a large amount,
such as a buildings or vehicles or improvements
(aircon), it will not be treated as RE so that they
will not be deducted outright from your gross
income. They will be treated as capital
expenditure, and what will be deducted from
your gross income is not the entire amount of
the asset, but its depreciation value.
What is usually treated as RE are office supplies.
Kanang dali lang maconsume, they can be
considered as expense outright. They need not
be treated as “assets”.
If you treat large purchases as revenue
expenditure, and deduct those large purchases
from your gross income outright, your gross
income will drop.
Q: What is the consequence if gross income will
drop?
A: A very low gross income will have an impact
on the company especially to its stakeholders
and customers. It will affect the company’s
reputation on why the company has a very low
net income. The investors might be discouraged
if the company’s financial statement shows a
WHICH ARE DEDUCTIBLE
1. Compensation payments – salaries and
wages, allowances, emoluments, fringe
benefits;
2. Travel expenses here and abroad, while
away from home in the pursuit of trade,
business or profession;
RECALL: If you are an Ee, and your were
given travel allowance which must be
liquidated and accounted, and it was used in
pursuit of the trade or business, that travel
allowance shall not be part of the Ee’s
compensation subject to income tax.
That travel allowance required to be accounted
for by the Er shall be claimed by him as a
deduction from his gross income. That’s why it
cannot be considered as a compensation income
of the Ee because that is considered an expense
of the Er for his benefit.
On the part of the Er, that travel allowance is an
allowable deduction. But on the part of the Ee,
that cannot be considered as income.
3. Rentals and/or other payments which
are required as a condition for the
continued use or possession, for
purposes of the trade, business or
profession, of property to which the
taxpayer has not taken or is not taking
title or in which he has no equity other
than that of a lessee, user or possessor;
Example: Your business doesn’t have your own
building, but only rents out spaces from
commercial buildings. Those rentals paid are

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37 TAXATION 2 – Atty. Justice Aurelio-Yap
allowed as deductions because they are in
pursuit of trade.
Q: The company owner rents his own house and
lot. Are the rentals paid for the house and lot
included as business expenses allowed to be
deducted?
A: NO, because that is not for the trade or
business.
4. Entertainment, amusement and
recreation expenses;
Same Rule as the others, the expenses must be
directly related to the operation or the conduct
of business, trade or profession and in
furtherance of the conduct of trade.
Example: Your Company has guests and you
entertain them, the expenses incurred for the
entertainment or for the accommodation of the
needs of those visitors can be claimed as
deductions.
“Provided that any expense incurred for
entertainment, amusement or recreation that is
contrary to law, morals public policy or public
order shall in no case be allowed as a deduction”
But say you brought your guests to nights clubs
or hubo-hubo places, they cannot be claimed as
allowable deductions because they are not
directly related to your business.
Also, by express provision of law, they cannot be
allowed as deduction.
REQUISITES FOR DEDUCTIBILITY OF
EXPENSES
a) Must be paid or incurred during the
taxable year;
b) Directly connected to the development
or management or operation of the
trade, business of profession of the
taxpayer;
c) Directly related to or in furtherance of
the conduct of his/her trade, business or
exercise of a profession;
Example: You are a sole proprietor and you
bought groceries for your business and for your
family’s consumption under only one receipt.
The groceries for your family are not allowed to
be deducted as expense of your business.
The feminine wash or other personal stuff you
bought cannot be deducted as expense for your
business, unless you justify that as necessary or
in furtherance of trade, business or profession.
d) Must not be contrary to law, morals
public policy or public order;
e) Must not be paid directly or indirectly, to
an official or employee of the national
government, or to an official or
employee of any local government unit,
or to an official or employee of a GOCC,
or to an official or employee or
representative of a foreign government,
or to a private corporation, general
professional partnership, or a similar
entity, if the payment constitutes a bribe
or kickback;
REASON: It cannot be substantiated and is
contrary to law.
f) Must be duly substantiated by adequate
proof by official receipts or invoices or
sales of accounts which should be in the
name of the tax payer claiming the
deduction
The official receipt should really be under the
name of the tax payer.
Example: You are a sole proprietor, but you used
office supplies bought by your sister the receipt
of which is in the name of your sister. You
cannot claim that as a deduction
1.05
March 25, 2019
Any obligation after this death cannot be
counted as liabilities
The liability was contracted in good faith for full
consideration in money or money’s worth.
So such claim must be proved.
Must be a debt valid in law and enforceable in
courts.
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38 TAXATION 2 – Atty. Justice Aurelio-Yap
The indebtedness must not be condoned and the
action of the decedent must not have
prescribed.
Requisites for the deductibility:
1. The value of the claims against part of
the gross estate
2. And it must be shown that they are
insolvent
3. And the value of the claim must have
been added in the gross estate
Unpaid mortgages and indebtedness
1. Where the value should be included in
the value of the gross estat
2. The value of the property mortgage
must be included in the gross estate.
3. Verified that such debt was contracted in
good faith by the decedent during his
lifetime.
4. Substantiated by proff that such debt
exists
5. Should have been included as part of
the gross estate
Requisites for the
1. Said taxes must have accrued as of the
time of death
2. Remain unpaid at the time of death
Estate taxes are no
Income received after death or
Taxes on the income of such property
Property taxes not accrued before his death
Property previously taxed.
Vanishing deduction
Pg 703 Revenue Regulation No. 12-2018
1. Property involved must have been
transferred by a prior decedent to a
present decent through donation
2. Presentpresent decedent must have
3. Property can be identified from the one
received by the donor to the present
decedent
a. Through technical description
4. The property must have formed part of
the gross estate of the decedent
5. Donors tax on the gift or the inheritance
must have been paid
6. Said property must be situated in the
Philippines and now forms part of the
gross estate of the decedent
7. Amount of the deduction is the full
amount and the amount decutible id
diminished years upon
8. VD must not ave been claimed by the
previous estate involving the same
property
9.
The earlier the death of the
Transfers for public use
Disposition is in the last will and testament
In favour of the government
Exclusively for public purpose
And value of the property is included in gross
estate
Losses
1. Losses must be incurred during the
settlement of thee estate
2. Arose from fires or other casualties
3. Not compensated for by insurance
4. Not have been claimed for
5. Incurred not later than
The mentioned deductions are call ordinary
deductions.
Special Deductions
1. Family home
Place where family actually resides
The family home is deemed family home.
Amounts received by heirs under RA 4967
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