INCOME TAXATION

TAX ON INDIVIDUALS

RATES:

I. GRADUATED RATES
II. Final Withholding tax on passive income subject to final tax
III. Capital gains tax on capital assets subject to CGT

I. GRADUATED RATES
A. Compensation income
B. Business and professional income
C. Not subject to final tax

- NRA-NETB is not subject to graduated rates - ALL INCOME FROM SOURCES WITHIN PH SHALL BE
SUBJECT TO 25% WITHHOLDING TAX AND NO DEDUCTIONS ALLOWED.

II. FINAL TAX

- Withheld by the payor and is remitted to BIR

PASSIVE INCOME SUBJECT TO FINAL TAX

1. Dividends from domestic corporation or from joint stock company, insurance, or mutual fund
companies.
2. Royalties
3. Interest income
4. Prizes and winnings from sources within the PH derived by RC, NRC, RA, NRA-ETB provided
that the amount EXCEEDS 10K and if NRA-NETB - regardless of amount.
5. Partner’s share from the net income tax of business partnership.

- A stock dividend representing the transfer of surplus to capital account shall not be taxable
(CAPITAL)
- During liquidation, the transfer of properties by dissolving corporation to its stockholders by
way of liquidating dividend is not a sale. It is not subject to income tax, DST or creditable
withholding tax.

INTEREST INCOME
1. From any current bank deposit yield or any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements derived from sources within PH.

DEPOSIT SUBSTITUTE - Must be from the PUBLIC - from 20 or more individual or corporate lenders at
one time.
- 19 lender rule - In order for a borrowing to qualify as deposit substitute, the borrowing must be
made from 20 or more individual or corporate lenders. Mere floatation of debt instrument is
not considered as public if there is only 19 or less than 19.
- When through any of the foregoing transactions, funds are simultaneously obtained from 20 or
more lenders, there is deemed to be a public borrowing.

- IF NOT DEPOSIT SUBSTITUTE - Subject to Creditable withholding tax of 20%

2. Depositary bank under the expanded foreign currency deposit

- If the bank is jointly in the name of a NRC (OCW) or a filipino seaman and his or her spouse or
dependent, 50% of the interest income from such bank deposit shall be exempt while 50%
shall be subject to withholding tax.

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PRIZES AND WINNINGS
1. FC, NRC, RA, NRA-ETB - 20%
2. NRA-NETB - 25%

- Prizes amounting to 10K or less although exempt from final tax are to be included in the gross
income.
- Prizes and winnings from sources without the PH are included in the gross income of RC only.

MINIMUM WAGE EARNER - Exempt from income tax and withholding tax.
- An employee who receives or earns additional compensation such as commissions, honoraria,
fringe benefits in excess of allowable by law and earning allowances other than SMW, Holiday
pay, OT, Hazard pay, Night shift, shall not enjoy the privilege of MWE and are taxable for their
entire earnings.

INDIVIDUALS WHETHER FILIPINO OR ALIEN EMPLOYED BY

1. Regional or area headquarters and regional operating headquarters of multinational
companies in PH
2. Offshore banking units
3. Foreign service contractors or subcontractors engaged in petroleum business in PH

OPTION TO
1. 15% final income tax
1. Multinational and offshore - Filipino must be holding a managerial or technical position
and must be exclusively working and not as a mere consultant.
2. Graduated rates

TAX ON CORPORATIONS

I. NORMAL CORPORATE INCOME TAX

A. DC and RFC
B. 30% of taxable income

II. MINIMUM CORPORATE INCOME TAX

A. DC and RFC
B. 2% of Gross income
- Commences on the FOURTH TAXABLE YEAR immediately following the year it commences
business.
- Applied if NCIT is zero, negative or MCIT is higher than NCIT
- Does not apply if Corporation is not subject to NCIT
- If partly covered by NCIT and partly by special tax, only applied to what is covered by NCIT

CARRY FORWARD OF EXCESS MCIT

- Excess of MCIT over NCIT may be credited against NCIT in the next three years or else
forfeited.
- IT CAN ONLY BE CREDITED TO NCIT. NOT TO ANOTHER MCIT.
- It can only credit the amount of the NCIT.
- If after three years, deemed forfeited.

REQUIREMENTS FOR SUSPENSION OF IMPOSITION OF MCIT

1. Authority of Sec of finance
2. Losses due to prolonged dispute, force majeure, legitimate business reverses

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MCIT IS NOT APPLICABLE
1. Those subject to preferential rate
2. Domestic depositary bank
3. Resident foreign international carrier
4. Resident foreign offshore banking units
5. Peza law
6. Real estate investment in trust

GROSS INCOME TAX - Granted by the president

- 15% Optional rate

CAPITAL GAINS TAX

- DC, RFC, NRFC

TAX SPARRING RULE - The ordinary 30% tax rate applicable to dividend remittances to non
resident corporate stockholder of PH corporation goes down to 15% if the country of domicile
allows such foreign corporation a tax credit for taxes deemed paid in the PH
- 15%
- Domicile of NRFC shall allow tax credit
- Such country does not impose tax on dividends

IMPROPERLY ACCUMULATED EARNINGS TAX

- DC and Closely held corporations
- 10%
- Imposed on the improperly accumulated taxable income earned starting Jan 1, 1998
- IAET - Profits of a corporation that are permitted to accumulate instead of being distributed to
its SH for the purpose of avoiding income tax with respect to its SH
- Dividends must be declared and paid or issued not later than 1 year following the close of
taxable year or else it shall be subject to IAET.
- No IAET in partnership - Constructively received

BRANCH PROFIT REMITTANCE TAX (BPRT)

- RFC
- 15% of total profit applied or earmarked for remittance without any deduction for the tax
component
- Applied whether the remittance is done actually or constructively
- Those that are effectively connected with the conduct of business within the Philippines shall
be subject to be subject to BPRT
- If not connected with the conduct of business - 30% NCIT

TAX ON NON RESIDENT CORPORATION

- 30%

SPECIAL DOMESTIC CORPORATIONS

1. Proprietary Non Profit Educational institution
REQUISITES:
1. Stock and non profit institution
2. Private educational institution or hospital
3. Gross income from unrelated trade, business, activity does not exceed 50%
4. Permit to operate from TESDA, CHED, DEPEd

2. Depositary Banks (Foreign currency deposit)

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 1. Non resident
2. Offshore banking units
3. Local commercial banks including branches of foreign banks that may be authorized by
the BSP

3. GOCC
- PAGCOR is deleted to the list of exempt GOCC
- Income derived from public utility or from the exercise of government function accruing to the
government shall be exempt from income tax.

SPECIAL RESIDENT FOREIGN CORPORATIONS

1. International carriers doing business in PH with landing rights in PH
- Only when originated from the PH in a continuous and interrupted flight regardless of where
the passage documents were sold.
- GROSS PH BILLINGS
- ONLINE FLIGHTS -Between ports or points in Territorial jurisdiction of the PH
- Offline - no landing rights - NOT LIABLE TO TAX IB GROSS PHILIPPINE BILLINGS
- But a foreign airline company selling ticket in PH shall be considered as RFC engaged in trade
in business in the country

2. Offshore Banking Units

- Gross income from those foreign currency transactions with local commercial banks and
branches of foreign banks
- Final tax of 10%

3. Resident Depository bank (same rules)

4. Regional or Area Headquarters of Multinational companies (RHQ)

- Act as an administrative branch of a multinational company which does not derive income
here in the PH
- Exempt from tax

5. Regional operating Headquarters of Multinational companies

- 10%
- Allowed to derive income here in the PH

SPECIAL NON RESIDENT FOREIGN CORPORATIONS

1. Non resident Cinematographic film owners, lessors and distributors
- 25% of gross income from sources within the PH

TAX EXEMPT CORPORATIONS

1. Business league, Chamber of commerce or board of trade not organized for profit and no
part of the net income inures to the benefit of any private SH
2. Labor agricultural or horticultural organization not organized principally for profit
3. Civic league or organization not organized for profit
4. Gov Educational institution
5. Cemetery of company for its members
6. Beneficiary society order or association for exclusive benefit of members
7. Non stock non profit educational institutions - It does not cover withholding taxes
DETERMINING FACTOR IS ADE: USE

8. Non stock corporations or associations organized and operated exclusively for religious,
charitable, scientific, athletic, cultural purposes or for the rehabilitation of veterans, no part of
its net income shall inure to the benefit of any member.

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- Religious activities income from the conduct of strictly religious activities are not subject to tax

REQUISITES
1. EXCLUSIVELY for such purpose.
2. All the net income/assets must be devoted for its purpose and no part accrues to any person
3. Not be a branch of foreign non stock non profit organization

IF CHARITABLE INSTITUTION ENGAGES IN ACTIVITIES FOR PROFIT: It does not lose its tax exempt
status. Such profit shall only be subject to tax.

COMMON LIMITATION: EXCEPT TO EDUCATIONAL INSTITUTION

- Income of whatever kind and character from any of their properties, real or personal or from
any of their activities conducted for profit regardless of the disposition made of such income
shall be subject to tax.

EXAMPLE
1. Corporate dividends
2. Rentals
3. Interests
4. Income from agricultural lands
5. Profits from sale of property

GROSS INCOME
- All income, gain, or profit subject to income tax

TAXABLE INCOME - GROSS - Deductions and or personal and additional exemptions

ALSO INCLUDED IN GROSS INCOME

1. Treasure found
2. Amount received by mistake
3. Cancellation of the taxpayer’s indebtedness on amount of service rendered
4. Payment of usurious interest
5. Illegal gains
6. Embezzled funds are subject to income tax
7. Tax refunds and bad debts recovered to the extent of the income benefit derived from
deduction
8. Subsidy
9. Unutilized or excess of campaign funds which is the excess of the contributions

- Cash deposits or advances received by the taxpayers other than GPP form part of GI

ITEMS OF GROSS INCOME

1. COMPENSATION - There must be EER. If other than EER it shall be recorded as income from
trade or business.
- It includes
1. Wages
2. Separation pay when cause is NOT BEYOND THE CONTROL of the employee - Voluntary
separation program
3. Retirement Benefits provided it FAILS TO COMPLY with the requirements
1. Reasonable Plan
2. Approved by BIR
3. Must have been in service of the same employer for at least 10 years AND must be at
least 50 years old at the time of the retirement
4. Not availed of this privilege (only availed once)

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 4. Monetary benefits
5. Fringe benefits of Rank and file

2. Annuity except return of premium

3. Rents from business or not

- Prepaid or advance rental is taxable income to the lessor in the year received if so received
under a claim of right and without restriction to its use.
- Security deposit applied to the rental of rent is included in GI at the time it is applied
- Security deposit to ensure compliance with the contract is not included in GI until the lessee
violates the contract.

4. Dividends not subject to Final tax (those which are from Foreign corporations not 50%)

5. Interest not subject to Final tax

- by means of principal business activity
- Not deposit substitute or issued by banks

6. Gross income from Profession, trade or business

7. Gains in dealings in property

8. Royalties

9. Prizes and winnings not subject to Final tax

1. Derived from sources within the PH which do not exceed 10K
2. Sources outside PH regardless of amount
3. Prizes and winnings of corporations whether domestic or foreign

10. Pension except when given by SSS or GSIS

11. Partner’s distributive share in GPP

EXCLUSIONS (LAG-CRIM)
- All kinds of taxpayers, individuals, citizens or aliens, estates, trusts and corporate may avail

1. Proceeds of Life insurance

- Must be paid to the heirs or beneficiaries by reason of DEATH (Indispensable req)
- Included to GI if transferred for a valuable consideration
- If made to compensate partner, Corporation or partnership - INCLUDED.

2. RETURN OF INSURANCE PREMIUM

- Under life insurance, endowment or annuity

3. GIFT, BEQUEST, DEVISE OR DESCENT

4. COMPENSATION FOR INJURIES OR SICKNESS

- Punitive or exemplary damages are included in gross income because they are not
substitute for the damage caused.

5. RETIREMENT BENEFITS, PENSIONS AND GRATUITIES

1. RA 4917: Must comply with the following requirements
1. Reasonable Plan
2. Approved by BIR

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 3. Must have been in service of the same employer for at least 10 years AND must
be at least 50 years old at the time of the retirement
4. Not availed of this privilege (only availed once)

2. Retirement Benefit Under RA 7641

- Not approved by BIR but may still be excluded if complied with:
1. Made under CBA
2. If not made in CBA, Made in accordance with law:
A. At least 5 years of service
B. Not less than 60 but not more than 65

3. VACATION LEAVE AND SICK LEAVE

- Compulsory retirement: EXEMPT
- Optional Retirement: SL - Taxable; VL - Up to 10 days exempt.

4. SEPARATION PAY if for any cause BEYOND THE CONTROL.

5. GSIS, SSS

6. EXEMPT UNDER TREATY - Treaty governs over Local tax code

7. MISCELLANEOUS ITEMS
1. 13th Month pay to the extent of 90K
2. Passive income by Foreign Governments

3. Prizes and awards

1. Received in recognition of Charitable, Artistic, Religious, Civic, Educational, Literary,
Scientific achievement (CARCELS)
2. Selected without action on his part
3. Not required to render future service

4. Prizes and awards granted to athletes in sports competitions locally or abroad and
sanctioned by their NATIONAL SPORTS ASSOCIATION (Duly accredited by Philippine
olympic committee)

5. Mandatory contributions to SSS/GSIS

FRINGE BENEFITS
- Any good, service or other benefit furnished or granted by an employer in addition to basic
salaries to an individual employee.

FRINGE BENEFIT TAX - Only to Managerial and Supervisory employee

- GROSSED-UP MONETARY VALUE - 32%
- Imposed on the employee and not on the employer. But the employer pays it for it is withheld.
- Such Fringe benefits may be given to Rank and File but they are not subject to FBT
because such amount will be part of their gross income.

EXEMPT FROM INCOME TAX:

1. Fringe benefits exempted by law
2. Contributions of the employer for the benefit of the employee to retirement, insurance, and
hospitalization benefit plans (PERA - PERSONAL EQUITY AND RETIREMENT ACCOUNT)
3. De minimis Benefits
4. Fringe benefit is required by the nature of the business
5. Grant is for the convenience of the employer

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NON TAXABLE FRINGE BENEFITS
1. Housing privileges of Military Officials of the Aft consisting of officials of the PH Army, Navy
and Air force
2. Temporary House for an employee who stays in the housing unit for three months or less
3. Housing unit which is situated inside OR Adjacent to the business premises which is 50meters
from the perimeter

TAXABLE FRINGE BENEFITS

1. Housing except those stated above
2. Expense account paid by the employer or reimbursed by employer
3. Vehicle of any kind
- Use of aircraft including helicopters owned and maintained by the employer shall not
be subject to FBT
- Use of Yacht whether owned, leased shall be treated as Taxable FBT

4. Household expenses
5. Interest on loan at less than market rate to the extent of difference between market rate and
actual rate granted
6. Membership fees, dues borne by employer for social, athletic clubs or other organizations
7. Holiday and vacation expenses
8. Expenses for foreign travel except if for business meeting
9. Educational assistance to the employee and dependent
- Except when it is directly connected with business and asked to retain employment
10. Insurance premium

DE MINIMIS BENEFITS
- Facilities and privileges furnished or offered by an employer to his employees as a means of
promoting CHEG (contentment, Heath, Efficiency and Good will)
EXCLUSIVE ENUMERATION
1. Rice subsidy of PHP1500
2. Uniform and clothing allowance not exceeding 5K per annum
3. Monetized Unused vacation leave credits of PRIVATE EMPLOYEES not exceeding 10 days
during a year
4. Monetized value of Vacation and sick leave credits of GOVERNMENT OFFICIALS and
employees (No limit)
5. Medical cash allowance to dependents of employees not exceeding PHP 750 per employee
per semester or PHP125 per month
6. Actual yearly medical benefits not exceeding 10K per annum
7. Gift given during Christmas and major anniversary not exceeding 5K per annum
8. Benefits received by employee by virtue of CBA and productivity schemes not exceeding
10K
9. Daily meal allowance for OT and Night/Graveshift not exceeding 25% of the basic minimum
wage
10. Laundry allowance not exceeding 300 per month
11. Employees’ Achievement awards in a form of tangible personal property other than cash or
gift with annual monetary value not exceeding 10K

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 DEDUCTIONS from Gross Income

There are 2 options:

a. Itemized Deductions

b.Optional Standard Deduction of 40%

Itemized Deductions
1.Ordinary and Necessary Expenses in TBP
2.Interest
3.Taxes
4.Losses
5.Bad Debts
6.Depreciation
7.Depletion
8.Charitable and Other Contributions
9.Research and Development
10.Pension Trusts

Note: Itemized Deductions do not apply to taxpayers earning compensation income from ER-EE
Relationship

Ordinary and Necessary Expenses

REQUISITES
1. Paid or incurred during the taxable year
2. Substantiated
3. Paid in connection with trade or business or exercise of profession or attributable to the
development and management of business
4. Ordinary and necessary
5. Subject to withholding taxes, properly withheld and remitted on time.
6. Not contrary to law.

-‘Ordinary’ is normal in relation to the business

-‘Necessary’ is appropriate and helpful in the business

COHAN RULE - If there is showing that the expenses has been incurred but the exact amount
cannot be ascertained due to absence of evidence, it is the duty of the BIR to make an
estimate deduction that may be allowed.

- Amount must not be a capital expenditure to create goodwill for the product or business.

CAPITAL EXPENSE - Payment which creates or enhances what is essentially separate and distinct
asset or made to increase the value of the taxpayer’s property.
- Not deductible as ordinary and necessary expenses.

- Any amount paid of payable shall be allowed deduction only if it is shown that the tax
required to be deducted and withheld therefrom has been paid to the BIR.
- Any payments as kickback directly or indirectly is not deductible.

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What are included?
a.Salaries, Wages, and other forms of compensation including Fringe Benefits (provided tax
has been paid)
b.Travel Expenses in pursuit of TB and incurred WHILE AWAY FROM HOME.
c.Rentals
d.Entertainment, amusement, recreation expenses connected to TBP which shall not exceed:
a.Engaged in sale of goods or properties - .50% of net sales
b.Engaged in sale of services - 1% of net revenues
c.Engaged in both - Apportionment

REPRESENTATION EXPENSES - In connection with TBP in entertaining, providing amusement and

recreation or meeting with guests at a dining place or other similar events.

ENTERTAINMENT FACILITIES - Yacht, Vacation home, condo, any similar property used primarily for
the entertainment of guests.

GUESTS - Direct business relations. But shall not include officers, employees, SH, Directors.

Bonuses?
-Bonuses to employees are deductible as long as not exceed reasonable compensation
-Bonuses to corporate officers are not deductible in the absence of showing what role said
officers performed
-Bonuses must be reasonable
-CM Hoskins vs. Commissioner: There is no fixed Test of Reasonableness, it depends on may
factors
oBonus is compensation
oFor personal services actually rendered
oReasonable

Expenses of Private Educational Institutions

-They have special deductibles
-2 options:
-Deduct expenditures considered as capital outlays of depreciable assets
-Capitalize the expenditure and claim deduction by way of depreciation

Representation, Entertainment, Amusement expenses incurred in:

-Entertaining guest, providing amusement or recreation or meeting with guests
-Dining, country club, theater, concerts plays, sports.
-If taxpayer is a registered member of country club?
-GR: Fringe benefit subject to FBT
-EXC: Prove that it is representation expense
-But there is a ceiling for REA expense
-If engaged in sale of goods/property = .5% of net sales
-If engaged in sale of service, profession or lease of property = 1% of net revenue

Substantiation Requirement
a.Sufficient Evidence of the amount
b.Direct connection/relation to TBP
c.For depreciation, show that the tax required has been paid to the BIR

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Note:
-Taxpayer must deduct this expense during the taxable year
-If he failed to do so, he cannot deduct it for next year
-Litigation expense is not deductible
-Other business expense allowed by special laws as deduction:
-PWD/SC discounts
-RA 9999
-RA 8502
-RA 10028
-RA 8525

- Minor and ordinary repair is deductible

- Advertising expenses:
- Stimulate current sale: deductible
- Stimulate Future sale - Non deductible
- Promote sales of shares of stock of favorable image: Non deductible

Interest

Requisites:
a.Existing indebtedness
b.Interest expense has been paid/incurred
c.Indebtedness of taxpayer
d.Connected with TBP
e.Paid or incurred during taxable year
f.Interest stipulated in writing
g.Legally due and demandable
h.Not treated as capex

Interest NOT deductible:

a.Interest paid in advance (Discounted)
b.Interest in debt between related taxpayers (Section 36B)
c.Incurred to finance petroleum operations

TAX ARBITRAGE - Situation where a taxpayer profits from the differences on how income or gains
are taxed. Proceeds of a taxpayer’s loan obtained in connection with operations is deposited
and invested.
- REDUCED BY 33%
- Interest on unpaid business related taxes are fully deductible

RELATED taxpayers
a.Between members of a family, including his brothers and sisters, spouse, ancestors, and
lineal descendants; (Except in the case of distributions in liquidation)
b.Between an individual and corporation more than 50%in value of the OCS is owned by or
for such individual (Except in the case of distributions in liquidation)
c.Between 2 corporations more than 50% in value of the OCS is owned by or for the same
individual ;
d.Between the grantor and a fiduciary of any trust;
e.Between the fiduciary of a trust and the fiduciary of another trust if the same person is a
grantor with respect to each trust;

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 f.Between a fiduciary and beneficiary of same trust

- At the option of the taxpayer, interest incurred to acquire property used in trade in business
may be allowed as interest expense or capex. MUTUALLY EXCLUSIVE.

Taxes as Indebtedness
-Collector vs. Vda. De Prieto: Indebtedness is an unconditional and legally enforceable
obligation for the payment of money
-Palanca vs. CIR: Where statutes impose a personal liability for a tax, the tax becomes a
debt. Thus, interests on taxes should be considered as interest on indebtedness under
Section 34(b)
-BUT Taxes only ha, not penalties, fines and surcharges

NOTE:
-If there is Interest INCOME from Bank Deposits, reduce interest expense with interest income
-Deduct 33% of Interest Income from the Interest Expense claimed

Taxes

-Taxes paid/accrued during the taxable year in connection with the taxpayer’s TBP
-ALL taxes are deductible EXCEPT:
-Income Tax
-Estate Tax
-Donor’s Tax
-Special Assessments
-Foreign Income Tax
-Stock Transaction tax
-VAT
-BUT Taxes only, not fines, penalties and surcharges

Tax Credits
-Only RC, DC, RA under principle or reciprocity may avail this
-Because they are the only taxpayers taxed on income from sources worldwide
-Not Aliens without reciprocity and FC

Limitations on Deductions
-Allowed only to the extent of income from sources within the Philippines

Gutierrez vs. Collector: Capital Expenditures are NOT deductible as Business Expense BUT must be
integrated into the cost of Capital Assets

Losses

Requisites:
a.Must be actually sustained during the taxable year, charged off
b. For individuals: Incurred in TBP or in any transaction incurred for profit
c.For CASUALTY LOSSES, declaration with BIR within 45 days from discovery

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 d.Not compensated by insurance
e.Not from sham sale
f.Declaration of Loss is filed within 45 days from time of loss for casualty losses

Losses must be claimed in the year it was actually sustained

However, take note also that it must be a closed and completed transaction

- Both Ordinary and Casualty losses are deductible but there is an additional requirement for
deductibility in casualty losses.

- Capital losses arising from sale or exchange of capital assets may be deductible only to the
extent of capital gains

Net Operating Loss Carry Over (NOLCO)

-Excess of the allowable deduction over Gross Income of the business in the taxable year
-The NOL of the business which has not been previously offset as deduction shall be carried
over as deduction for the next 3 consecutive years immediately following the loss
-For Mines, 5 years
-But not: Oil and Gas
-BUT: Only if there has been no substantial change in ownership of the business
-Not less than 75% of OCS is held by the same persons
-Not less than 75% of the paid-up capital is held by the same persons
-Note: If the taxpayer is EXEMPT form income tax, No NOLCO

REQUISITES:
1. Incurred during the period that taxpayer is not exempt from income.
2. No substantial change in ownership

Merger and Consolidation

-GR: If NOLCO arises from Merger or Consolidation, transferee is not entitled to claim
deduction
-EXC:
-Shareholders of Transferor gains control of at least 75% of OCS of Transferee
-Shareholders of Transferor gains control of 75% or more interest in the business of the
transferee/assignee

- IN TAX FREE MERGER, NOLCO of the absorbed corporation is not one of the assets of the latter
that can be transferred and absorbed by the surviving corporation as this privilege can be
availed merely by the ABSORBED CORPORATION.

- Taxpayer who claims the 40% OSD shall not simultaneously claim deduction of the NOLCO.

Other types of Losses

A Capital Losses
B Losses from Wash Sales
-61 Day Period
-GR: Taxpayer cannot claim as deduction, losses sustained from disposition of shares/
securities IF he acquired or entered into an Option to Purchase substantially identical shares
30 days before and 30 days after the disposition

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 -EXC: If disposition is made in the ordinary course of business
-Dealer, Stockbrokers

CWagering Loss
-Allowed only to the extent of the gains from such transaction

DAbandonment Losses
-When petroleum operation is partially and wholly abandoned all accumulated exploration
and development expenses shall be allowed as deduction

RR 2-1998 – Writing off of Inventories

-Before writing off inventories, taxpayer must first get BIR Certification
-BIR must witness the destruction of inventory

Note:
-Loss is deductible only in the taxable year it actually happens or is sustained
-However, if it is compensable by insurance, deduction for the loss is postponed to a
subsequent year, in which it appeared that no compensation at all can be had (Close and
Completed Transaction)
-Plaridel Surety Insurance vs. CIR: Taxpayer must exhaust his remedies first to recover or
reduce his loss

- Loss of predecessor partnership is not deductible by successor corporation.

-
Bad Debts
-Amounts borrowed from taxpayer which have become worthless or uncollectible

Requisites:
1Existing Indebtedness, valid and legally demandable
1Connected with TBP
1Actually ascertained to be worthless, uncollectible
1In case of Banks, BSP must declare (RR 5-99)
1In case of Insurance companies, Insurance Commission must declare (RR 5-99)
1Charged off within the taxable year
1Not between related parties

- A debt is worthless after taking of reasonable steps to collect the debt and that there is no
likelihood of recovery at any time in the future.

Tax Benefit Rule

-If the bad debts are subsequently recovered, it shall be included as part of gross income in
the year of recovery
-BUT only to the extent of income tax benefit of said deduction

NOTE:
-GR: Voluntary cancellation of Debt is NOT deductible
-EXC: If Debt was worthless
-To prove worthlessness, taxpayer must prove that he exerted diligent efforts to collect
-Collector vs. Goodrich International Rubber Co: Good faith is not enough. Taxpayer must
show that he had reasonably investigated the relevant facts and had drawn a reasonable

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 inference from the information thus obtained by him. He must attach statement showing
propriety of deductions
-Fernandez Hermanos, Inc. vs. CIR: Bad debts are deductible in full or not at all. There are NO
partial deductions

Depreciation
-Gradual Diminution in the useful value of tangible and intangible property from wear and
tear

Requisites:
a.Reasonable
b.Depreciation is of property arising out of its use in TBP
c.Charged off during the taxable year
d.Statement of Allowance must be attached to the ITR

Methods of Depreciation
1Straight Line Method
1Cost of fixed asset is reduced uniformly over the useful life of the asset
1Declining Balance Method
1Amount of Depreciation that is charged during the beginning declines over time
1Sum of the Years Digit Method
1In this method, most of the depreciation is recognized in the first few years

- Patents, copyrights, franchise are subject to depreciation.

- Automobiles and transportation equipment used solely by the taxpayer for pleasure are not
subject.

Special Rules on Depreciation

Private Educational Institutions
-2 Options:
-Deduct expenditures considered as capital outlays of depreciable assets
-Capitalize the expenditure and claim deduction by way of depreciation

Petroleum Operations
-Depreciate 10 years if property is used DIRECTLY
-Depreciate 5 years if property is used INDIRECTLY in production of petroleum

Mining Operations
-If expected life is 10 years or less, normal rate of depreciation
-If expected life more than 10 years, notify the CIR
For NRA Engaged in TB or RFC
-Reasonable rate is allowed on properties located HERE in the Philippines

Note:
-Basilan Estate Inc vs. Commissioner: The law does not allow/authorize claim for
depreciation beyond acquisition cost
-RR 12-2012 limits claim of depreciation of vehicles
-Such as 1 employee 1 vehicle only
-Value must not exceed P2.4M

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 -No depreciation for yachts, helicopters, airplanes UNLESS taxpayer’s line of business
is transport operations or lease of transportation equipment and the vehicles
purchased are used in said operations

Depletion

-Oil and Gas wells or mines are allowed a reasonable allowance for depletion or
amortization computed using the cost-depletion method
-“Cost Depletion Method”
-When allowance for depletion equals the capital invested, no further allowance shall be
granted
-If NRA or RFC, allowance for depletion is limited to oil wells and mines in the Philippines

Charitable Contributions
-Must be paid within the taxable year

REQUISITES:
1. Given to organizations specified by law
2. Actually paid
3. Made within the taxable year
4. Substantiated

Partially Deductible Donations

1Contributions to the government, agency or political subdivision exclusively for public
purposes
1To accredited Domestic Corporation or Associations exclusively for Religious, Charitable,
Scientific, Youth and sports, Educational, Rehabilitation of Veterans, Cultural, Social welfare
1Non-accredited NGO
1Amount to be deducted is lowest of:
oContribution
oIndividual: 10% of taxpayer’s income from TBP before contribution
oCorporation: 5%

Fully Deductible - NOT SUBJECT TO 5% OR 10%

i.Donations to the government exclusively to finance priority activities in Educational, Health,
Youth and sports, Human Settlements, Economic development, Culture, Science according
to a NEDA National Priority Plan
ii.To foreign institutions based on government agreements, treaties, or commitments
iii.To accredited NGOs
iv.Special Laws

Non- Government Organization - IF FAILED TO COMPLY WITH THE REQUISITES, SUBJECT TO 5% 10%
-Non-profit domestic corporation
-Exclusively for their purpose (S R E YSD . . .)
-No part of net income inures to the benefit of any private individual
-Administrative expense NOT exceed 30% of total expenses
-Utilize contributions not later than 15th day of the 3rd month after close of taxable year

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Special Laws
-To UP
-National Book Trust Fund
-Foster Child Agencies
-IBP
-DONATIONS OF PRIZES AND AWARDS TO ATHLETES
1. Local and international tournaments and competitions
2. Sanctioned by their respective national sports associations

Note:
-If donation is over 50K, notify RDO within 30 days
-There must be Certificate of Donation/ Official Receipt from Donee
-Roxas vs. CTA: Contributions to Christmas Funds of city police are not deductible because
not for public purposes

Research and Development

Requisites:
i.Incurred during the taxable year
ii.In connection with TB

But: Taxpayer can either

i.Deduct or
ii.Amortize the deductions

This deduction is NOT applicable:

i.For the acquisition or improvement of land or property in connection with RD
ii.To Expenses for the purpose of ascertaining existence of deposits of minerals and oils

Pension Trusts

Employer may deduct pension trust established for Employee’s benefit if:
i.Amount is reasonable
ii.Funded by employer
iii.Not have been previously allowed for deduction
iv.Apportioned in equal parts over a period of 10 consecutive years

Optional Standard Deduction

Who may avail?

1.RC
2.NRC
3.RA
4.DC
5.RFC

Note:
-NRA and Non-Resident FC cannot avail OSD

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 - Fixed percentage deduction without regard to actual expenditure in lieu of itemized
deductions. No need to substantiate with receipts

Rate?
For Individuals (RC, NRC, RA)
-40% of Gross Sales or Gross Receipts

For corporations (DC, RFC)

-40% of Gross Income

PRESUMPTION OF ITEMIZED DEDUCTION - Unless signifies intention to elect OSD

- Election is irrevocable for year return is made.
- OSD may be availed by GPP. But the partners shall not be allowed any deductions from such
share since OSD which GPP claimed is in lieu of itemized deductions.
- GPP could never avail of OSD against their share in the net income regardless of deductions
availed by the GPP. The only time that they may avail of OSD is if they also earn other business
or professional income.

SPECIAL DEDUCTIONS
1. Establishments granting sales discount to or employing Senior citizens
- Only portion of gross sales exclusively used, consumed, or enjoyed by the senior citizen
- Same as Tax deduction based on the cost of goods or s
- Only the actual amount granted may be deducted.
- Seller must nor claim OSD during the same taxable year.

COMPENSATION TO SCIT - Additional deduction of 15% of the amount paid.

- Employment of more than 6 months.

PERSONAL EXEMPTIONS

-P50,000 for each individual taxpayer

-If married, only the spouse deriving gross income shall be allowed the personal exemption
-Resident Citizens, Resident Aliens, Non-Resident Aliens Engaged in TB

ADDITIONAL EXEMPTIONS

-P25,000 for each dependent

-Up to 4 dependents only
-If separated, only the spouse with custody may claim
-Resident Citizens, Resident Aliens, not NRA

“Dependent”
-Legitimate, Illegitimate or Adopted
-Not more than 21 years old
oRegardless of age if with Mental or Physical defect
oUnmarried
oNot gainfully employed

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Non-Resident Aliens Engaged in TB
-Entitled to Personal Exemption
-Amount equal to exemptions allowed in the country of NRA to Filipinos therein
-But up to P50,000 only

STATUS AT THE END OF THE YEAR RULE

- Whatever the status of the taxpayer at the end of the calendar year shall be used for the
purposes of personal and additional exemptions.
If Taxpayer –
-Marries
-Additional dependents
-Taxpayer may claim the additional exemption in full for such year

If Taxpayer –
-Dies
-Estate may claim the personal and additional exemptions
Note: If dependent dies, marries, becomes 21, or gainfully employed, Taxpayer may still
claim the same exemptions

SENIOR CITIZEN - A benefactor of SCIT shall be entitled to claim the basic personal exemption of
50K

Estate and Trusts

-Allowable exemption of P20,000 from the income of the estate or trust

Items Not Deductible

-No deduction for any payment made to an official or employee of the National
Government, LGU, GOCC, Foreign Corporation, Private Corporation or GPP if it constitutes as
a bribe or kickback
-Section 36:
-Personal, Living or Family Expenses
-Amount paid for new buildings or permanent improvements to increase the value
of property
-Amount expended in restoring property or in making good the exhaustion thereof
for which an allowance is or has been made
-Premiums paid on any life insurance policy covering the life of any officer or
employee, financially interested in any TB, when the taxpayer is a beneficiary under
such policy
-Political Campaign expenses cannot be deducted UNLESS it is registered with
COMELEC.

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 RULES ON CAPITAL GAINS AND LOSSES
It shall apply only if the transaction on capital asset is EITHER sale or exchange.

Ordinary Gains/ Income

-Any gain from the sale or exchange of property which is not a capital asset

Ordinary Loss
-Any loss from the sale or exchange of property which is not a capital asset

Net Capital Gain

-The excess of the gains over the losses from sales or exchanges of capital assets

Net Capital Loss

-The excess of the losses over the gains from sales or exchanges of capital assets

Loss Limitation Limitation on Capital Losses

-Losses from sales or exchanges of capital assets shall be allowed only to the extent of the
gains from such sales or exchanges

Net Capital Loss Carry-over

-If a taxpayer sustains a net capital loss, such loss shall be treated in the succeeding taxable
year as a loss from the sale or exchange of a capital asset held for not more than 12 months

-Holding Period: For individual taxpayer, the following percentages of the gain or loss shall be
taken into account:
o100% of the gain/loss if the asset has been held for not more than 12 months
o50% of the gain/loss if the asset has been held for more than 12 months
oBUT: This does not apply to a Corporation because capital gains or losses are always
considered at 100%
oNo Holding Period for Corporations
oNo Net Capital Loss carry over for corporations

Real Property: Ordinary Assets vs. Capital Assets

What is a Capital Asset?

-All property held by the taxpayer which is not an Ordinary Asset
-These are Ordinary Assets: (SOUR) (EXCLUSIVE)
-Stock in trade of the taxpayer
-Other property which would be properly included in the inventory of the taxpayer if
on hand
-Property held primarily for sale to customers in the ordinary course of his trade or
business
- Personal Property used in TB of a character which is subject to allowance for
depreciation
-Real property used in trade or business

-GR: Once an ordinary asset, always an ordinary asset

-Except: Taxpayer is engaged in business other than Real estate - Automatically Converted
to Capital Asset upon showing that it has not been used in business for more than 2 years

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 -Ordinary assets are subject to the Gross income. And Ordinary losses are deductible to
Gross income.

Note: It depends if the Real Property is used in Real Estate Business

-If Real Estate Dealer, Developer, Lessor, Habitually engaged in the real estate business: All
properties used – Ordinary Asset
-If NOT engaged in the Real Estate Business, but real property is used in the trade or business
of the taxpayer, still ordinary assets

IF NOT used
-A real property not used in trade or business as evidenced by a Certification from the Brgy
Chairman shall be treated as capital asset

Recognition of Gains and Losses

-The gain from the disposition of property shall be the excess of the amount realized over the
basis or adjusted basis for determining gain
-Loss shall be the excess of the basis or adjusted basis for determining loss over the amount
realized
-The amount realized from the sale or other disposition of property shall be the sum of money
received plus the fair market value of the property (other than money) received;

TREATED AS ORDINARY ASSET IF:

1. Failure to operate a real estate business
2. Changing business from real estate to non real
3. Abandoned and idle properties

3 General Types of Capital Assets

a.Shares of Stock of Domestic Corporation
b.Real Property in the Philippines
c.Other Capital Assets

1. Shares of Stock of Domestic Corporation

Is it shares of Domestic Corporation?

First: Deal or No Deal?

If Seller/Transferor: DEALER
-Shares are treated as ordinary assets
-Thus, the gains = Ordinary Gains
-Ordinary Gains are subject to Graduated Income Tax Rates
-5% - 32% if individual
-30% corporate income tax

If Seller/Transferor: NOT A DEALER

Check if shares are Listed/Unlisted/Traded

If shares: Listed and Traded in local stock exchange

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 -Exempt from Income tax
-BUT: Subject to Stock Transaction Tax
-½ of 1% Stock Transaction Tax based on the Gross Selling Price or Gross Value in
money of the shares
-Whether there is gain or not
-If cash sale: Total consideration
-If partly: Cash + FMV of property received
-If Exchange: FMV of property

If shares: NOT Listed or Listed but NOT Traded in local stock xc

-Subject to final Capital Gains Tax
-5% of P100,000
-10% of excess of P100,000
-Imposed only when there is gain

2.Real Property located in the Philippines: 6% GROSS SELLING PRICE

Always check if located in the Philippines
Because if not, subject to graduated income tax
Check if Principal Residential House

First: Deal or No Deal?

Real Estate Dealer is one who is engaged in the business of buying, developing, selling,
exchanging real properties

If seller/transferor is a REAL ESTATE DEALER

-Real properties are treated as ordinary assets
-Thus, the gains = Ordinary Gains
-Ordinary Gains are subject to Graduated Income Tax Rates
-5% - 32% If R, C, NRA engaged in TB
-25% if NRA not engaged in TB
-30% Corporate Income Tax

If seller/transferor is NOT A DEALER

But the real property is:
-Used in TBP or
-Treated as fixed asset used in his TBP, subject to depreciation
-STILL treated as ordinary asset like above

But if the real property is:

-NOT used in TBP
-NOT treated as fixed asset used in TBP
-Treated as capital asset
-Subject to 6% Capital Gains Tax
-Based on Gross Selling Price, Zonal Value or FMV (highest)
-The law presumes that the seller makes a gain and such gain is subject to 6% final tax
-Even if in reality he incurred an actual loss, he still has to pay the tax

IN CGT - Gain or loss is immaterial because there is a CONCLUSIVE PRESUMPTION OF GAIN.

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EXCEPTIONS TO CGT:
1. Principal Residence Exempt from Capital Gains Tax
a.Fully utilize the proceeds to acquire a new principal residence within 18 months
b.Historical cost shall be carried over to the new principal residence
c.Notify the Commissioner within 30 days, of his intention to avail the exemption
d.Open an escrow account and deposit the 6% CGT
e.Avail only once every 10 years

NOTE:
-Yung owner ng residential house bibili ng bagong residential house
-Only Filipinos or Residents may avail. NRA cannot (of course wala syang principal residence
dito eh)

2. IF the buyer is the government, political subdivision or GOCC and the seller is an
individual, choice to subject it to CGT or Income Tax Rate

3. IF subject to right of redemption, the CGT is based on the bid price of the highest
bidder
-If mortgagor exercises right of redemption within 1 year, no CGT because no capital gains
realized
-If no redemption was made, capital gains based on the highest bid price

Other Capital Assets NOT SUBJECT TO CGT

-It involves sale or exchange or one considered as equivalent to sale or exchange of
property classified as capital asset EXCEPT:
1. Unlisted shares of stock of domestic
2. Real property held in PH

-All other capital assets are subject to graduated income tax rates if individual
-Or corporate income tax of 30%

Special Rules on Capital Gains or Losses

Holding Period
-If capital asset has been held for 12 months or less
-Percentage of gain or loss: 100%
-If capital asset has been held for more than 12 months
-Percentage of gain or loss: 50%
-NOTE: This applies only to individuals, not corporations

Loss Limitation Rule

-Capital losses are allowed only to the extent of capital gains
-Net capital loss is not deductible (meaning mas Malaki yung net losses sa net gains)

Net Capital Loss Carry Over Rule (NELCO)

-If INDIVIDUAL taxpayer sustained a net capital loss in a taxable year, such loss in an amount
not in excess of the net taxable income shall be treated in the succeeding taxable year as a
loss from sale of capital asset held for not more than 12 months
-Note: Net taxable year must not be in excess of the net taxable income
-Thus, the net capital loss this year shall be carried over for next year (100% deduction)

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 -NOTE: This applies only to individuals, not corporations

In answering:

Is this a Capital Asset?

If shares
Domestic Corporation?
Dealer or no dealer?
Listed or unlisted?
If RP
Located in the Philippines?
Dealer or no dealer?

Principal Residence?

Which is highest of GSP, ZV, FMV?

GAIN OR LOSS IN EXCHANGE OF PROPERTY


GR: Entire amount of G/L shall be recognized
EXCEPTIONS
1. Gain recognized but loss not recognized from transactions between related parties
2. Exchanges solely in kind/Tax Free exchanges

TAX FREE EXCHANGES

- Not subject to Income tax, CGT, DST or VAT

1. No gain or loss is recognized where in pursuance of a plan of merger or consolidation:

1. A corporation which is a party to a merger or consolidation, exchanges or property solely
for a stock in a corporation, which is a party to the merger or consolidation
2. A shareholder exchanges stock in a corporation which is a party to the merger or
consolidation solely for stock of another corporation a party to the M/C
3. A security holder of a corporation which is a party to MC, exchanges his securities in such
corporation solely for stock or securities in such corporation

2. Property is transferred to a corporation by a person in exchange for stock or unit of

participation in a corporation which as a result of such alone or together, not exceeding 4, gains
control of said corporation. Provided that stock issued for services shall not be considered as
issued in return for property.

UPSTREAM MERGER - Merger between a parent company and its subsidiaries where the parent
will not be ISSUING ANY SHARES to the subsidiaries in exchange for the assets to be transferred as
a result of the merger - NOT TAX FREE EXCHANGE.
- In the nature of a donation.

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 Estates and Trusts

Estate is created by operation of law

Trust is a legal arrangement whereby the trustor of property transfers ownership to the trustee to
hold and control the property

- Estate is taxable to the income received during the period of administration or settlement of
estate
- Trust is taxable when:
1. Income accumulated in trust for the benefit of unborn
2. Income to be distributed currently by the fiduciary

- Income of employees’ trusts is exempt

- Estate and trust os subject to personal exemption limited to 20K

REVOCABLE TRUST - Power to revert in the grantor title to any part of the corpus is vested:
1. Grantor either alone or in conjunction with any person not having a substantial adverse
interest
2. Any person not having substantial interest
- Trustor is not the trust itself and is subject to the payment of income tax.

IRREVOCABLE TRUST - Trust itself is liable for payment of income tax

Cases:
-Ona vs. CIR: The moment the heirs used the properties and income thereof as common
fund in several transactions with intention to divide profits, they formed an unregistered
partnership
-Evangelista vs. Collector: Character of Habituality to the business transactions for purposes
of gain
-Pascual vs. CIR: Isolated transactions and not habitual are not taxable as Unreg Partnership

Accounting Methods

Calendar year - Jan 1 - December 31

METHODS:
1. Cash method - Income reported in the year payments are received while expenses are
deducted the year paid.
2. Accrual method - Income is reported in the year it is earned while expenses is deducted in
the year it is incurred regardless of receipt of disbursement of cash.

Tax return and payment

WHO ARE REQUIRED TO FILE INCOME TAX RETURN
1. Individual: RC, NRC, RA, NRA-ETB

EXCEPTIONS:
1. Gross income dies not exceed total personal and additional exemption
EXCEPT: Engaged in business or practice of profession in PH

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2. Pure compensation income derived from sources within the PH correctly withheld.
EXCEPT: Deriving compensation from two or more employer

3. Individual whose sole income has been subjected to final withholding tax
4. Exempt from tax

SPECIAL RULES

1. HUSBAND AND WIFE - File one return if they are married and do not derive purely
compensation income.
2. UNMARRIED MINOR - Included in the return of parents except: Donors tax has been paid on
such property or transfer is exempt.

SUBSTITUTED FILING
REQUISITES
1. Purely compensation income regardless of amount
2. One employer only
3. Amount of tax due from employee is equal to amount withheld

NOT QUALIFIED TO SF:

1. 2 or more employers
2. Not withheld correctly
3. Monthly gross compensation does not exceed 5K or minimum wage
4. Individuals deriving from non business or non profession related

WITHHOLDING TAXES
Withholding agents - Person having control over the payment and who at the same time claims
the expenses.

WITHHOLDING OF TAX SHALL NOT APPLY TO INCOME PAYMENT TO:

1. National Government, Instrum, GOCC
2. Exempted
3. Exempt organizations

_____________________________________________________________________________________________
Sorry for all the typographical errors. Good luck and God bless you! Kindly pass
this or pay it foward! In God's perfect timing I know you will be the person you
aspire to be.
- Edward Arriba

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