Tax 1 Notes 2019 20 Part 2 For Students

INCOME
TAXATION

ORGANIZATION AND FUNCTIONS OF THE BUREAU OF INTERNAL REVENUE

1. Power and duties of the Bureau of Internal Revenue

The bureau of the Internal Revenue is under the control and supervision of the Department of Finance
and its powers and duties include the assessment and collection of all national internal revenue taxes,
fees and charges; the enforcement of all forfeitures, penalties, and fines; and the execution of judgments
in all cases decided in its favor by the court of tax appeals and the ordinary courts.

2. Chief officials of the bureau of internal revenue

The bureau of internal revenue is headed by chief known as the commissioner, with 4 assistants known
as deputy commissioners.

3. Powers of the Commissioner

a. Power of the commissioner to interpret tax laws and to decide tax cases
b. Power of the commissioner to obtain information; and to summon and to take testimony of
persons (authority to administer oath)
c. Power of the commissioner to make assessments and prescribed additional requirements for tax
administration to and enforcement

4. Power of the commissioner to make assessments and prescribe additional requirements for tax
administration to and enforcement, includes:

a. Authority to terminate taxable period
The Commissioner may terminate the taxable period when it shall come to his knowledge that a
taxpayer is retiring from business subject to tax, or is intending to leave the Philippines, or to
remove his property therefrom, or to hide or conceal his property, or is performing any act
tending to obstruct the proceedings for the collection of the tax for the past or current year or to
render the same totally or partly ineffective unless such proceedings are begun immediately.
(Sec. 6 [D], NIRC of 1997)

b. Authority to inquire into bank deposit accounts
The Commissioner may inquire into bank deposit accounts of: (1) a decedent to determine his
gross estate; or (2) any taxpayer who has filed an application for compromise of his tax liability
by reason of financial incapacity to pay his tax liability; or (3) a taxpayer who authorizes him to
inquire into the bank deposits. (Sec. 7 [F], NIRC of 1997)

c. Authority to delegate power
The Commissioner may delegate the power vested in him under the Tax Code to any or such
subordinate officials with the rank equivalent to a division chief or higher, subject to such
limitation and restrictions as may be imposed under rules and regulations to be promulgated by
the Secretary of Finance, upon recommendation of the Commissioner. However, the following
powers of the Commissioner shall not be delegated:
1. The power to recommend the promulgation of rules and regulations by the Secretary
of Finance;
2. The power to issue rulings of first impression or to reverse, revoke or modify any
existing ruling of the BIR; (Secretary of Finance, et.al. vs. La Suerte Cigar and
Cigarette Factory, et.al., G.R. No. 166498, June 11, 2009)
3. The power to compromise or abate any tax liability. However, assessments issued by
the regional offices involving basic deficiency taxes of P500,000 or less, and minor
criminal violations, as may be determined by the Secretary of Finance, upon
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recommendation of the Commissioner, discovered by regional and district officials,
may be compromised by a regional board; and
4. The power to assign or reassign internal revenue officers to establishments where
article subject to excise tax are produced or kept. (Sec. 7, NIRC of 1997)

d. Authority to compromise the payment of any internal revenue tax
The authority of the Commissioner to compromise encompasses both civil and criminal liabilities
of the taxpayer. The civil compromise is allowed only in cases: (1) where a reasonable doubt as
to the validity of the claim against the taxpayer exists; or (2) when the financial position of the
taxpayer demonstrates a clear inability to pay the assessed tax. All criminal violations except
those involving fraud, can be compromised by the Commissioner but only prior to filing of the
Information with the Court. (Sec. 204 [A], NIRC of 1997)

e. Authority to abate or cancel a tax liability
The Commissioner may abate or cancel a tax liability when: (1) the tax or any portion thereof
appears to be unjustly or excessively assessed; or (2) the administration and collection costs
involved do not justify the collection of the amount due. (Sec. 204 [B], NIRC of 1997)

f. Authority to credit or refund taxes
The Commissioner may credit or refund taxes erroneously or illegally received or penalties
imposed without authority. No credit or refund of taxes or penalties shall be allowed unless the
taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years
after the payment of the tax or penalty. (Sec. 204 [C], NIRC of 1997; CIR vs. Mirant Pagbilao Corp.,
G.R. No. 146941, August 9, 2007)

g. Authority to prescribe real property values
The Commissioner is authorized to divide the Philippines into different values or areas and shall,
upon consultation with competent appraisers both from the private and public sectors,
determine the fair market value of real properties located in each zone or area. (Sec. 6 [E], NIRC
of 1997) While the law grants to the Commissioner of Internal Revenue the power to determine
zonal values, including the authority to delegate to the Assistant Commissioner of the
Assessment Service the authority to approve and sign the Technical Committee of Real Property
Valuation (TCRPV) resolutions involving requests for revaluation of established zonal values of
real properties, the same is for the purpose of computing internal revenue taxes. (Capitol Steel
Corp. vs. Phividec Industrial Authority, G.R. No. 169453, December 6, 2006)

5. Authority of internal revenue officers to make arrest and seizures (Sec. 15, NIRC of 1997)
The Commissioner, the Deputy Commissioners, the Revenue Regional Directors, the Revenue District
Officers and other internal revenue officers shall have authority to make arrests and seizures for the
violation of any penal law, rule or regulation administered by the Bureau of Internal Revenue. Any person
so arrested shall be forthwith brought before a court, there to be dealt with according to law.

6. Collection agents (internal revenue taxes)

a. The commissioner of customs and his subordinates with respect to the collection of national internal
revenue taxes on imported goods;
b. The head of the appropriate government office and his subordinates with respect to the collection of
energy tax:
c. Banks duly accredited by the commissioner with respect to receipt of payments of internal revenue
taxes.

7. Issuance and rulings of the bureau of internal revenue

Revenue regulations (RRs) (RMOs) are issuance that provide directives or instructions; prescribe
guidelines; and outline processes, operations, activities, workflows, methods and procedures necessary
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in the implementation of stated policies, goals, objectives, plans and programs of the bureau in all areas of
operations, except auditing.

Revenue memorandum rulings (RMRs) are rulings, opinions and interpretations of the commissioner
of internal revenue with respect to the provisions of the tax code and other tax laws, as applied to a
specific set of facts, with or without established precedents, and which the commissioner may issue from
time to time for the purpose of providing taxpayers guidance on the tax consequence in specific
situations. BIR rulings, therefore, cannot contravene duly issued RMRs; otherwise, the rulings are null
and void ab initio.

Revenue memorandum circular (RMCs) are issuance that publish pertinent and applicable issued by
the BIR and other agencies/offices.

Revenue Bulletins (RB) refer to periodic issuances, notice and official announcements of t6he
Commissioner of Internal Revenue that consolidate the Bureau of Internal Revenue’s position on certain
specific issues of law or administration in relation to the provisions of the Tax Code, relevant tax laws and
other issuances for the guidance of the public.

BIR Rulings are official position of the bureau to requires raised by taxpayers and other stakeholders
relative to clarification and interpretation of tax laws

Delegations of power
The commissioner may delegate the powers vested in him under the tax code to any or such subordinate
officials with the rank equivalent to a division chief or higher. The following powers of the commissioner
may not be delegated:
a. The power to recommend the promulgation of rules and regulations by the secretary of finance;
b. The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling
of the bureau;
c. The power to compromise or abate any tax liability: provided, however, that assessment issued
by the regional offices involving basic deficiency taxes of P500,000 or less, and minor criminal
violations, discovered by regional and district officials, may be compromised by a regional
evaluation board which shall be composed of the regional director as chairman, the assistant
regional director, the heads of the legal, assessment and collection divisions and the revenue
district officer having jurisdiction over the taxpayer, as members;
d. The power to assign or reassign internal revenue officers to establishments where articles
subject to excise tax are produced or kept.

MEANING OF INCOME

Income means all wealth which flows into the taxpayer other than a mere return of capital. Income is a gain
derived from:
a) The use or employment of labor or capital, or both labor and capital; and/or
b) From the sale or other disposition of assets or property (both ordinary and capital)

Income distinguished from Capital

Capital is a fund, income is a flow. Capital is wealth, while income is the service (or fruit) of wealth.
Capital is the tree, income the fruit. (Madrigal v. Rafferty, 38 Phil. 414)

Amounts received as a return of capital are not income.

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Classification of Income According to Source

For income tax purposes, the word “source” refers to the activity, or property, or labor that gave rise or produced
the income.

Based on source, income is classified as follows:
1. Income from source within the Philippines;
2. Income from sources without the Philippines; and
3. Income from sources partly within and partly without the Philippines

How to determine Income WITHIN and Income WITHOUT

Income Test Source of Income
Interest income Residence of the debtor
Income from services Place of performance
Rent Location of property
Royalty Place of use of intangible
Gain on sale of real property Location of property
Gain on sale of personal property purchased in one Place of sale
country and sold in another
Dividend
A. From Domestic Corp. Income within

B. From Foreign Corp. (1) Income within, if 50% or more of the gross income
of the foreign corporation for the preceding three (3)
years prior to the declaration of dividend or for such
part of such period as the corporation has been in
existence, was derived from sources within the
Philippines.

(Phil. Gross Income / Total Gross Income) x Dividend
= Income within

(2) Income without, if less than 50% of the gross
income of the foreign corporation for the preceding
three (3) years prior to the declaration of dividend or
for such part of such period as the corporation has
been as the corporation has been in existence, was
derived from sources within the Philippines.
Sale of domestic shares Income within
Sale of foreign shares Income without
Income from transportation and other services Partly within and partly without
rendered partly within and partly without the
Philippines
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SITUS OF INCOME
The situs of income is the place of taxation of the income or the country which has jurisdiction to impose the tax.
For income tax purposes, income may be taxed in one or more or all of the following places or countries –
1. The place where the taxpayer is a citizen;
2. The place where the taxpayer is a resident; and
3. The place where the income is earned or derived.

INCOME TAX SYSTEM OF THE PHILIPPINES
a) Global (Unitary) tax system
Global treatment is a system where the tax treatment views indifferently the tax base and generally treats in
common all categories of taxable income of the taxpayer. (TAN v. DEL ROSARIO, JR. 237 SCRA 324)

Some types of taxable income are compounded or grouped together without distinction, and after deducting
expenses and other allowable deductions therefrom, are then subjected to the same set of tax rate(s). (This is also
known as Net Income Tax System)

For qualified individuals, the total allowable deductions (as well as personal and additional exemptions) are
deducted from the gross income (i.e. sum of all items of taxable income, profit and gain) to arrive at the net
taxable income subject to the graduated income tax rates.

For corporations, the total allowable deductions are deducted from the gross income (i.e. sum of all items of
taxable income, profit and gain) to arrive at the net taxable income subject to the corporate income tax rate.

Net Income taxation, whereby certain deductions are allowed and subtracted from the aggregate of incomes not
subject to final tax, and the tax computed is based on the resulting net income therefrom.

b) Schedular tax system
Schedular approach is a system employed where the income tax treatment varies and made to depend on the kind
or category of taxable income of the taxpayer. (TAN v. DEL ROSARIO, JR. 237 SCRA 324)

Some types of taxable income like passive income and certain capital gains which are classified into different
categories, and are accorded different tax treatments. Each category of income has its own schedule of tax rates.
(This is also known as Gross Income Tax System)

Gross income taxation, whereby a final tax is imposed on the gross amount of specified types of income, such as
interest income, royalty, prizes, dividends, and capital gains

c) Semi-schedular or semi-global tax system
Where the tax system is either (a) global (e.g. taxpayer with compensation income not subject to final withholding
tax or business or professional income or mixed income – compensation and business or professional income) or
(b) schedular (e.g. taxpayer with compensation, capital gains, passive income, or other income subject to final
withholding tax) or (c) both global and schedular may be applied depending on the nature of the income realized
by the taxpayer during the year.

Distinguish “schedular treatment” from “global treatment” as used in income taxation?
Under the schedular tax system, the various types of income (i.e. compensation; business/professional income)
are classified accordingly and are accorded different tax treatments, in accordance with schedules characterized
by graduated tax rates. Since these types of income are treated separately, the allowable deductions shall likewise
vary for each type of income.

On the other hand, under the global tax system, all income received by the taxpayer are grouped together, without
any distinction as to type or nature of the income, and after deducting therefrom expenses and other allowable
deductions, are subjected to tax at a graduated or fixed rate (see TAN VS. DEL ROSARIO [OCTOBER 3, 1994]).
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Types of Taxable Income
“Returnable “ Income Passive Income subject to Final Capital Gains subject to Capital
(Income to be included in the Tax (“FT”) Gains Tax (“CGT”)
Income Tax Return of an Individual
taxpayer)
a) Compensation income from Earned without any active action Arise from the sale of 2 types of
being an employee on the part of the taxpayer. Ex. capital assets, namely:
b) Income from trade, business, or Dividends, interest income on bank a) Real property in the
practice or a profession deposits Philippines classified as capital
c) Gain from sale of ordinary asset; and
assets b) Shares of domestic
d) Net capital gain from sale of corporations (provided the
“other capital assets” and seller or taxpayer is not a
e) Other taxable income not dealer in securities)
subject to FT or CGT

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Income Tax Return (ITR) Final Tax Final Tax (CGT)

Steps on How to Compute the Tax of an Individual

Step 1: Type of Income Returnable Income Passive Income Capital Gains
Step 2: Type of Tax Generally, subject to Net Subject to Final Tax Subject to Capital Gains
Liability Income Taxation (FWT) Tax (CGT)

Step 3: Actual Gross Income xxx Passive income x Tax rate “Capital gains” x CGT rate
Computation Less: Deductions (xxx)
Net taxable Income xxx
THEN
Compute Tax (using table)

General Categories of Individual Taxpayers

Definition
1. Resident Under Sec. 1, Art IV of the 1987 Constitution, the following are citizens of the Philippines:
Citizen a. Those who are citizens at the time of the adoption of the 1987 Constitution; or
b. Those whose fathers and mothers are citizens; or
c. Those born before January 17, 1973 of Filipino mothers, and who elect Philippine
citizenship upon reaching majority age; or
d. Those who are naturalized in accordance with law.
AND
Whose residence is within the Philippines
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2. Non-resident a. A citizen of the Philippines who establishes to the satisfaction of the Commissioner the
citizen1 fact of his physical presence abroad with a definite intention to reside therein.
b. A citizen of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis.
c. A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time
during the taxable year.
d. A citizen who has been previously considered as nonresident citizen and who arrives in
the Philippines 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.
e. The taxpayer shall submit proof to the Commissioner to show his intention of leaving
the Philippines to reside permanently abroad or to return to and reside in the
Philippines as the case may be.

Per Revenue Regulation, a citizen of the Philippines who shall have stayed outside the
Philippines for 183 days or more by the end of the year is a nonresident citizen for
that year.

3. OCW a. Citizen working or deriving income from abroad. Must be registered with the POEA;
b. Seaman who is a citizen and works as a member of the complement of a vessel engaged
exclusively in international trade (Sec. 22 (F))

4. Resident Not a citizen but whose residence is within the Philippines.
Alien - Not a mere transient or sojourner as determined by his intention regarding the nature
and length of stay

5. Non-resident Not citizen, not a resident of the Philippines
alien
a) ETB2 - if stay in the Philippines is for more than 180 days during the year

b) NETB - if stay in the Philippines is for 180 days or less during the year (Sec. 25 (A)(1))

6. Special a) Non-resident alien cinematographic film owner, lessor, or distributor
Individual b) Subcontractor, whether citizen, resident alien, or NRAETB, of service contractors
taxpayers engaged in petroleum operations
c) Filipinos registered with the BOI availing of the Income Tax Holiday (“ITH)
d) PEZA-registered individuals availing of ITH incentive
e) PEZA-registered individuals availing of 5% gross income tax (GIT) incentive
f) Individual registered as Barangay Micro Business Enterprise (BMBE)

7. MWEs Worker, whether in the public or private sector, who is paid not more than the statutory
wage (Sec. 22 (HH))

1 A non-resident citizen who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall be treated as a
non-resident citizen for the taxable year in which he arrives in the Philippines with respect to his income from sources abroad until the date of his
arrival in the Philippines.
2 “Trade or business” includes functions of public office, performance of personal services, but does not include performance of service as an employee.
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I. “RETURNABLE” INCOME

Individual Source of Type of Returnable Tax Base Tax Rate
Taxpayer Taxable Income Income
1. Resident citizen Within and
Without the Compensation Taxable
Philippines Income Compensation Graduated Rates
2. Non-resident Income
Within the
citizen Philippines
Gross Income Less
3. OCWs/OFWs Within the Graduate Rates
Deductions
Philippines Income from
4. Resident Alien Within the Business, Trade, or OR
Philippines Practice of Gross
5. Non-resident Profession Sales/Receipts3
8%
alien ETB Within the Plus Non-operating
Philippines Income
[See Note (a), (b)]
6. Non-resident
Within the
alien NETB Gross Income 25%
Philippines
See Note (c)

Note:
OLD BIR INCOME TAX RATES (USED UNTIL 2017)
INCOME PER YEAR TAX RATE
P10,000 and below 5%
Above P10,000 to P30,000 P500 + 10% of the excess over P10,000
Above P30,000 to P70,000 P2,500 + 15% of the excess over P30,000
Above P500,000 P125,000 + 32% of the excess over P500,000

NEW BIR INCOME TAX RATES, FROM TRAIN TAX REFORM (2018-2022)
TAXABLE INCOME PER YEAR INCOME TAX RATE
Above P250,000 to P400,000 20% of the excess over P250,000
Above P800,000 to P2,000,000 P130,000 + 30% of the excess over P800,000
Above P2,000,000 to P8,000,000 P490,000 + 32% of the excess over P2,000,000
Above P8,000,000 P2,410,000 + 35% of the excess over P8,000,000
3“Gross sales”, for purposes of the 8% income tax, shall be the total sales, net of VAT, and the net of the following deductions: (1) sales returns and
allowances; and (2) discounts determined and granted at the time of sale.
“Gross receipts”, for purposes of the 8% income tax, refers to the total amount of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services, and deposits and advance
payments, actually or constructively received during the taxable period for the services performed or to be performed for another person, except for
returnable security deposits. In the case of a VAT taxpayer, this shall exclude the VAT. (RR 8-2018)
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NEW BIR INCOME TAX RATES, FROM TRAIN TAX REFORM (2023-ONWARDS)
TAXABLE INCOME PER YEAR INCOME TAX RATE
Above P250,000 to P400,000 15% of the excess over P250,000
Above P800,000 to P2,000,000 P102,500 + 25% of the excess over P800,000
Above P2,000,000 to P8,000,000 P402,500 + 30% of the excess over P2,000,000
Above P8,000,000 P2,202,500 + 35% of the excess over P5,000,000
(a) Purely self-employed individuals or mixed earners can avail of the 8% income tax rate if the gross
sales/receipts from their business/profession plus non-operating income does not exceed the VAT threshold
of P3,000,000.

The 8% tax is in lieu of (1) the graduated rates and (2) the OPT under Section 116 of the Tax Code.

However, this option is not available to the following individual taxpayers:
1. VAT-registered taxpayers;
2. Taxpayer subject to OPT other than the 3% OPT under Section 1164;
3. Partners of general professional partnerships (“GPPs”);
4. Individuals enjoying income tax exemption (e.g. those registered as BMBEs);
5. Taxpayers who fail to signify their intention to avail of the 8% income tax rate in the First (1st) Quarter
Income Tax Return, or in the First (1st) Quarter Percentage Tax Return, or in the initial quarterly return of
the taxable year upon the commencement of a new business or practice of profession (RR 8-2018).

(b) Net of P250,000 if individual taxpayer is a self-employed individual earning income purely from self-
employment or practice of profession. Mixed income earners are not allowed this P250,000 deduction.

(c) Starting January 1, 2018, the PERSONAL EXEMPTIONS (Basic and Additional) are not available in
computing the taxable net income of individuals, estates, and trusts.

(d) In the case of NRAs not engaged in trade or business (“NRANETBs”) –
1. The 25% tax on gross income is a final tax to be deducted and withheld by the payor of the income and
remitted to the BIR.
2. The payor of the income is constituted by law as a withholding agent.
3. The NRANETB does not have to file a Philippine income tax return because the tax on the income
received is considered paid, said tax having been deducted by the payor of the income.

7. Special Individual Taxpayers Type of Income Tax Base Tax Rates
a) Non-resident alien cinematographic film Income from film leasing and
Gross
owner, lessor, or distributor distribution within the 25%
Income
Philippines (including royalties)
b) Subcontractor, whether citizen, resident Income derived from contract
alien, or NRAETB, of service contractors with service contractor engaged Gross
8%
engaged in petroleum operations in petroleum operations in the Income
Philippines
c) Filipinos registered with the BOI availing Income from registered activities
Exempt
of the Income Tax Holiday (“ITH”)
d) PEZA-registered individuals availing of Income from registered activities
Exempt
ITH incentive
e) PEZA-registered individuals availing of 5% Income from registered activities Gross
5%
gross income tax (GIT) incentive Income
f) Individual registered as a BMBE Income arising purely from its
Exempt
operations as a BMBE
4Section 116 of the Tax Code provides for the imposition of a 3% percentage tax on the sales/receipts of persons engaged in VAT-taxable transactions,
who are not VAT-registered, and whose annual sales or receipts do not exceed the threshold of P3,000,000.
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g) MWEs Statutory Minimum Wage (SMW)
including holiday pay, overtime
Exempt
pay, night shift differential pay,
and hazard pay

Aliens employed by Regional or area Headquarters (RHQs) and Regional Operating Headquarters (ROHQs) of
multinational companies; Offshore Banking Units (OBUs); Petroleum Service Contractor and Subcontractor, by
direct veto of President Duterte, ALL employees of RHQs/ROHQs/OBUs, and Petroleum Service Contractors and
Subcontractors SHALL BE SUBJECT TO REGULAR INCOME TAX RATE under Section 24(A)(2)(a) of the Tax
Code, as amended, without prejudice to the application of preferential tax rates under existing international tax
treaties.

UNDER THE OLD LAW: Special rules for aliens (including Filipinos) employed by: regional or area headquarters
and regional operating headquarters of multinational companies; offshore banking units; petroleum service
contractor and subcontractor:
EMPLOYER TAX BASE RATE
a. Regional or area headquarters and regional
Operating headquarters of multinational gross 15%
Companies income

b. Offshore banking units gross 15%
income
c. (foreign service contractor or subcontractor)
Petroleum service contractor and gross
Subcontractor income 15%

Special Individual Taxpayers

1. BOI-Registered Filipinos Availing of Income Tax Holiday (“ITH”)

All registered individuals shall be granted the ITH incentive to the extent they are engaged in a preferred area of
investment as declared by the Board of Investments (BOI) under E.O. No. 226 (Omnibus Investments Code).

To qualify for BOI registration, an individual must be engaged or is proposing to engage:
1) in an area of activity listed in the Investment Priorities Plan ("IPP");
2) if not so listed, at least fifty percent (50%) of its production is for export if a Philippine national, or at
least seventy percent (70%) of its production is for export if a foreigner;
3) exporting part of its production under such terms and conditions and/or limited incentives as the BOI
may determine;
4) producing or manufacturing a product which is used as input to an export product;
5) export trading of export products bought by it from one or more export producers;
6) rendering service to domestic and foreign tourists if listed in the IPP;
7) in rendering technical, professional or other services as may be determined by the BOI which are paid for
in foreign currency; or
8) in exporting television or motion pictures and musical recordings made or produced in the Philippines,
either directly or through an export trader (Rule I, Sec. 1(i),IRR of E.O.No.226).

ITH – exemption from income taxes levied by the National Government.
Registered individuals may avail of the ITH to the extent they are engaged in a preferred area of investment
(either pioneer or non-pioneer)

Period of availment shall be as follows:
1. New registered pioneer firms – for 6 years from commercial operations.
2. New registered non-pioneer firms – for 4 years from commercial operations.
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3. Expanding firms – for 3 years from commercial operations of the expansion.

In exceptional cases, existing firms undertaking new activities distinct from existing operations may qualify as
new projects subject to the setting up of separate books of account. In such cases, only sales of such registered
products shall be entitled to the ITH exemption.

Export trader and service exporters shall be entitled to the ITH if they will export products and services which are
new exports for the Philippines, or will serve new export markets.

Additional Period of Availment

For new registered firms, the ITH incentive may be extended for an extra year for each of the following cases, but
in no case to exceed the total period of eight (8) years for pioneer registered enterprises.

(1) If the average cost of indigenous raw materials used m the manufacture of the registered product is at least
fifty percent (50%) of the total cost of raw materials for the preceding years prior to the extension unless the BOI
prescribes a higher percentage; or

(2) If the annual or average net foreign exchange savings or earnings (“NFEE") amount to at least US$500,000.00
during the first three (3) years of operations to be determined by the BOI at the end of such three-year period.

2. PEZA-registered enterprises in ECOZONEs

1) Income Tax Holiday (“ITH”) - Individuals registered as ECOZONE (a) Export Enterprises5 or (b) Free Trade
Enterprises6 may choose to avail of this incentive under E.O. No. 226.

Note: PEZA-registered entities enjoying ITH also enjoy the following incentives:
(a) exemption from duties and taxes on importation into the ECOZONE (Rule XV, Sec. 1, IRR of RA7916);
(b) exemption from payment of the RPT on machineries and equipment they acquire or use in their
production operations, during the first three (3) years of use of such machinery and equipment (Art. 78,
E.O. 226); and
(c) exemption from payment of local taxes, licenses, and fees, except the real estate tax (Art. 78, E.O.226).

2) Five (5%) Final Tax on Gross Income ("5% GIT") - 5% of the gross income7 earned by the business
enterprise within the ECOZONE shall be paid and remitted as follows:
(a) Three percent (3%) to the National Government;
(b) Two percent (2%) which shall be directly remitted by the business establishments to the treasurer's
office of the municipality or city where the enterprise is located (See. 24, R.A. No. 7916).

The 5% GIT shall be in lieu of all other taxes (national8 or local9), except for real property taxes on land owned
by an ECOZONE developer/operator.
5 Export enterprise - engages in manufacturing, assembling or processing activity, and resulting in the exportation of 100% of its production, unless a
lower percentage is prescribed by PEZA.
6 Free Trade enterprise - engages in the tax and duty-free importation of goods or merchandise within the restricted or free trade area of an ECOZONE
for immediate transhipment, or for storage, repacking, sorting, mixing, or manipulation, and subsequent exportation unless the PEZA allows the sale
of the same in the Customs Territory.
7 "Gross Income" refers to gross sales or gross revenues derived from business activity within the ECOZONE, net of sales discounts, sales returns and
allowances, and minus costs of sales or direct costs but before any deduction is made for administrative expenses or incidental losses during a given
taxable period (Rule I, Sec. 2 (nn), IRR of R.A. No. 7916).
8 National taxes shall mean all internal revenue taxes including: (1) Regular Income Tax; (2) VAT; (3) OPT; (4) DST; (5) Excise Tax; and (6)
Customs duties and import charges.
9Local taxes shall include: (1) Business taxes; (2) Real Property Tax, except on lands owned by an ECOZONE Developer or IT Park/Building
Developer; and (3) Other taxes, fees, and charges imposed by LGUs (BIR Ruling DA-326-07).
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The 5% GIT shall be available to
(a) Individuals registered as ECOZONE (1) Export Enterprises or (2) Free Trade Enterprises upon expiry of
the ITH if such individual chose to avail of the ITH at the start of its operations; and
(b) Other individuals registered as ECOZONE (1) Developers/Operators10, (2) Export Enterprises, (3) Free
Trade Enterprises, (4) Domestic Market Enterprises 11 , (5) Utilities Enterprises 12 , (6) Facilities
Enterprises13, or (7) Tourism Enterprises14.
Notes:
(a) The exemption from all other taxes under the ITH and 5% GIT regimes not include the following:

1) Withholding taxes at source (expanded withholding tax ("EWT") and Final Withholding Tax (“FWT")) on
income payments by PEZA-registered individuals;

2) Withholding tax on compensation income of employees of PEZA-registered individuals; and

3) Fringe Benefits Tax ("FBT") on fringe benefits given to managerial or supervisory employees of PEZA-
registered individuals.

These taxes are not the taxes of a PEZA-registered entity. Instead, these are taxes of a PEZA-registered entity’s
payees which are withheld and remitted by the PEZA-registered enterprise.

(b) On the other hand, the BIR has ruled that all income payments received from its customers related to its
registered activities, by a PEZA-registered enterprise, whether availing the ITH or 5% GIT incentive, are exempt
from the withholding tax, (BIR Ruling Nos. 422-14, October 23, 2014; DA-(C-020) 091-10, June 10, 201.0).

(c) Income derived by an individual registered with the PEZA from its registered activities shall be subject to
such treatment as may be specified in its terms of registration, i.e. (a) the ITH where such income shall be exempt
from the regular income tax; or the 5% preferential GIT, if the same has been approved.

However, the following shall be subject to the regular internal revenue taxes (i.e., regular individual income taxes,
final taxes on bank deposits, capital gains taxes, etc.):

(1) Income realized by registered individuals from activities which are not registered;
(2) Income of all other persons and entities which are not registered (i.e. income payments to entities m the
Customs Territory, to shareholders, and to non-registered creditors, etc.)
(3) Income of Service Enterprises or providers (e.g. those providing customs brokerage, transportation,
parcel, janitorial, restaurant, banking, insurance services, etc.) which are required by locator enterprises
but which need not be physically based inside the ECOZONE.

3. Individuals registered as Barangay Micro Business Enterprise (“BMBE”)

A Barangay Micro Business Enterprise or BMBE refers to any business entity or enterprise engaged in the
production, processing, or manufacturing of products or commodities, including agro-processing, trading, and
10Developer/Operator - develops, operates, and maintains an ECOZONE, and the required infrastructure facilities and utilities such as light and
power systems, water supply and distribution systems, sewerage and drainage systems, pollution control devices, communication facilities, paved road
network, administration building and other facilities as may be required by the PEZA.
11Domestic Market Enterprise - engages in manufacturing, assembling or processing activities resulting in the sale of its finished products (1) in the
Customs Territory, or (2) in the non-restricted or authorized areas within the ECOZO'NE in its entirety or (3) if exporting a portion of its
production, it continually fails to export at least 50% thereof for a period of 3 years without any justifiable reason.
Utilities Enterprise - engages in power generation and distribution, water production and distribution, and telecommunication services within the
12
ECOZONE.
13Facilities Enterprise - owner and/or operator of buildings, warehouses, and other structures and facilities leased out to PEZA-registered export
producers and other locators (in the ECOZONE).
14Tourism Enterprise - engages in the establishment and operation of tourist-oriented accommodations, restaurants operated as an integral part of a
tourism facility (e.g., hotels, resorts, recreational centers), or sports and recreational facilities within the ECOZONE.
12
services15, which activities are barangay-based16 and micro-business17 in nature, and whose total assets including
those arising from loans but exclusive of the land on which the particular business entity's office, plant and
equipment are situated, shall not be more than Three Million Pesos (P3,000,000.00).

Registration

The Office of the Treasurer of each city or municipality shall register the BMBEs and issue a Certificate of
Authority (CA) to enable the BMBE to avail of the benefits under R.A. No. 9178. Provided, that only one Certificate
of Authority shall be issued for each BMBE and only by the Office of the Treasurer of the city or municipality that
has jurisdiction over the principal place of business of the BMBE.

The LGUs shall issue the CA promptly and free of charge. However, to defray the administrative costs of
registering and monitoring the BMBEs, the LGU may charge a fee not exceeding One Thousand Pesos (P1,000.00)

Fiscal Incentives

Registered BMBEs can avail of the following incentives:
(1) Income tax exemption from income arising from the operations of the enterprise;

A duly registered BMBE shall be exempt from income tax on income arising purely from its operations as such
BMBE.

Provided, the income tax exemption shall not apply to (a) income subject to final taxes, (b) capital gains subject to
the capital gains tax, and (c) compensation income (d) income from practice of a profession received directly from
clients or from a general professional partnership; and (e) other income not effectively connected with the
operations of the BMBE.

The LGUs are encouraged either to reduce the amount of local taxes, fees and charges imposed or to exempt the
BMBEs from local taxes, fees and charges (Sec. 7, R.A. No. 9178).

(2) Exemption from the coverage of the Minimum Wage Law. BMBE employees will still receive the same
social security and health care benefits as other employees;

(3) Priority to a special credit window set up specifically for the financing requirements of BMBEs; and

15"Services" shall exclude those rendered by anyone, who is duly licensed by the government after having passed a government licensure examination,
in connection with the exercise of one's profession (e.g. lawyer, doctor, accountant, etc.) (See. 3(a): R.A. No. 9178).
It shall also exclude services rendered by juridical persons such as partnerships or corporations engaged in consultancy, advisory, and similar services
where the performance of such services are essentially carried out through licensed professionals (DOF D.0. 17-04).
16 A business enterprise shall, be considered "barangay-based" if:

i. the majority of its employees are residents of the municipality where its principal place of business is located; or
ii. its principal activity consists in the application/use of a particular skill peculiar to the locality or of raw materials predominantly sourced
from the area; or
iii. its business operations are confined within the territorial jurisdiction of the municipality or LGU in which its principal place of business is
located:
Provided, however, that the enterprise may establish warehouses, buying stations, sales outlets, and booking or administrative offices anywhere in the
Philippines, subject to pertinent rules and registration requirements of the concerned LGUs and other government agencies where such warehouses,
outlets, stations or offices are established.
17 It shall be considered "micro-business in nature and scope” if:

i. its principal activity is primarily for livelihood, or determined by the Small and Medium Enterprises Development (SMED) Council or DTI
as a priority area for development or government assistance;
ii. the enterprise is not branch, subsidiary, division or office of a large scale enterprise; and
iii. its policies and business modus operandi are not determined by a large scale enterprise or by persons who are not owners or employees of
the enterprise (i.e. franchises) (DOF D.O. No. 17-04).
13
(4) Technology transfer, production and management training, and marketing assistance programs for
BMBE beneficiaries.

4. Minimum Wage Earners (“MWEs”)
MWEs shall be exempt from the payment of income tax on their minimum wage. Holiday pay, overtime pay, night
shift differential pay, and hazard pay received by such minimum wage earner shall likewise be exempted from
income tax (Sec. 24 (A) (2))

The SMW shall refer to the rate fixed by the Regional Tripartite Wage and Productivity Board ("RTWPB"). The
RTWPB of each region shall determine the wage rates in the different regions based on established criteria and
shall be the basis of exemption from income tax for this purpose.

Note: An employee who has 2 or more employers each paying him an SMW, shall remain to be an MWE exempt
from income tax and withholding tax on the

SMW he receives from each employer.

The following Income Payments to MWEs are Taxable:
a) Additional compensation received from his employer, other than the SMW, holiday pay, overtime pay,
hazard pay, and night shift differential pay, such as (a) commissions, (b) honoraria, (c) fringe benefits, (d)
benefits in excess of the allowable statutory amount of “13th month pay and other benefits" of P90,000;
(e) taxable allowances, and (f) other taxable income.

b) Income from the conduct of trade, business, or practice of a profession (except income subject to final
tax), in addition to his compensation income.

Note: The income earned as an MWE is exempt from tax. The other income in (1) and (2) shall be subject to
income tax and to the withholding tax

II. PASSIVE INCOME SUBJECT TO FINAL WITHHOLDING TAX (FWT)

Some types of income, collectively referred to as passive income, like interest income, dividends income, etc. are
subject to final withholding taxes.

Notes:
1. To be subject to the final withholding tax ("FWT"), (a) the income must be taxable by the Philippine
government and (b) the payor must be under the jurisdiction of the BIR.
2. The payor of the income must withhold the tax. In the case of interest income on a bank deposit, the bank must
withhold the tax.
3. The income subject to final WT is not returnable. This means that the interest income in number (2) does not
have to be reported or included in the ITR of the taxpayer.

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TAXATION OF PASSIVE INCOME
(TRAIN LAW)

Passive Income Citizen and RA NRAETB NRANETB
a) Interest from any currency
(usually Peso) bank deposit 20% 20%
b) Yield or monetary benefit from

deposit substitutes, trust funds, 20% 20%
and similar arrangements
c) Royalties 20% 20%

Except royalties on books, literary 10% 10%
works, and musical compositions
d) Prizes of more than P10,000 20% 20%

Except prizes of P10,000 or less Included in ITR Included in ITR Generally, 25% of
e) Winnings 20% 20% gross income
received from all
Philippine Charity Sweepstakes Exempt if P10,000 or Exempt sources within the
and Lotto winnings less Philippines as
interest, dividends,
f) Interest from a depositary bank 15% Exempt rents, salaries,
under the expanded foreign (EXC: NRC – exempt) premiums,
currency deposit system annuities,
compensation, etc.
g) Interest income from long term Exempt Exempt
deposit or investment of 5 years or
more
h) Cash or property dividend 10% 20%
received from a domestic
corporation, or regional operating
headquarter of an MNC
i) Share of an individual partner in 10% 20%
the after-tax net income of a
business partnership, or an
organization, JV, or consortium
taxable as a corporation

Notes:
For Passive Income Until December 2017 (Old Law)
a) Interest from any currency bank deposit 20%
b) Royalties, in general 20%
c) Royalties on books literary works and musical compositions 10%
d) Prizes (except prizes amounting to P 10,000 or less) 20%
Prizes amounting to P10,000 or less shall be subject to rates under Sec. 24-
A (Tax table)
e) Other winnings (except Philippine Charity Sweepstakes and Lotto 20%
winnings)
f) Interest income received by an individual taxpayer (except a nonresident 7½%
individual) from a depository bank under the expanded foreign currency
deposit system
g) Interest income from long-term deposit or investment Exempt Cash and/or 10%
property dividends actually or constructively received by an individual
from a domestic corporation
15
1. Deposit substitutes – alternative form of obtaining funds form the public other than deposits. “Public” means
borrowing from 20 or more lenders at any one time. Ex. Banker acceptances, PNs, repurchase agreements,
government debt instruments and securities.

– if the debt instruments is not a deposit substitute, interest income shall not be subject to a final
withholding tax. Instead, the interest income shall be included in the taxpayer’s ITR, and the same shall
be subject to CWT.

2. Long-term deposit or investment certificate – Certificate of time deposit or investment certificates with a
maturity of at least 5 years issued by a bank, and not by a non-bank financial intermediary. The exemption only
covers interest income. Any gain from grading such certificates is not covered by the exemption.

- NRANETB shall not be exempt
- the LT deposit or investment certificate must be issued by a bank;
- may be in the form of savings, common, or individual trust funds, deposit substitutes, investment
management accounts
- investment must have a maturity of at least 5 years from the time it is held
- investment must be held for at least 5 years for the interest income to be exempt

Pre-termination of investment

If the deposit or investment is pre-terminated before the 5th year, the entire income shall be subject to final tax to
be withheld by the depositary bank from the proceeds of the long-term deposit or investment based on the
holding period of the taxpayer:

4 years to less than 5 years 5%
3 years to less than 4 years 12%
Less than 3 years 20%

Ex. A long-term investment instrument with a maturity of 30 years was bought by Mr. A from a bank. The
instrument was sold successively to other investors. The holding periods of the investors are as follows:

Holding Period FWT Rate
Mr. A (NRC) 3 years 12%
Mr. B (RA) 2 years 20%
Mr. C (NRA ETB) 5 years Exempt
Mr. F (NRA NETB) 5 years 25%

3. Interest on foreign currency bank deposits

Interest on foreign currency deposit is taxable if received by an individual taxpayer, except a non-resident
individual, who may be a non-resident citizen or a non-resident alien (Sec. 24 (B) (1), NIRC).

An OCW shall be exempt from the 15% final tax on interest income from a foreign currency bank deposit in the
Philippines. However, if the deposit account is jointly in the name of an OCW and another individual (spouse or
dependent), who is a Philippine resident, only 50% of the interest income shall be exempt, while the other 50%
shall be subject to the 15% FWT.

4. Interest income from savings and time deposits of members with their credit cooperatives – exempt
from the 20% FWT.

5. Sec. 25 (A)(2) of the Tax Code which provides for the taxation of passive income of NRAETBs has not been
amended nor repealed by R.A. No. 10963. Consequently, the PCSO and Lotto winnings of an NRAETB are still
exempt from income tax, regardless of the amount.
16
III. CAPITAL GAINS SUBJECT TO FINAL TAX (also known as “CAPITAL GAINS TAX”)

A. On the Sale of Domestic Shares of Stock

1. Shares of stock in a domestic corporation NOT TRADED in the stock exchange. (TRAIN LAW)

(a) Tax Base - Net Capital Gain which is the excess of the amount realized on the sale (selling price) over the basis
or adjusted basis of the shares.

Selling price - the total consideration of the sale consisting of the sum of money and/or the fair market
value of property received, if any.

Adjusted basis - the basis of the shares sold plus expenses of sale/disposition

(b) Tax rate on net capital gain: 15%

Under the Old Law, the tax is computed as follows:
Not over P100,000 5%
On any amount in excess of P100,000 10%

(c) Withholding agent - The payor of the income who, in this case, is the BUYER.

(d) Who are subject? All individual taxpayers, except the following:
(1) Dealers in securities. The gains from such sales by dealers shall be included as ordinary income in their
income tax returns;
(2) Investors in shares of stock in a mutual fund company.
(3) All other persons, whether natural or juridical, who are specifically exempt from national internal
revenue taxes under existing investment incentives and other special laws (Rev. Regs. No. 6-2008).
(4) The sale, barter, or exchange of stock options is treated as a sale, barter, or exchange of shares of stock
not listed on the stock exchange (RMC 79-2014).

2. Shares of stock LISTED AND TRADED through the local stock exchange (Sec. 127(A), NIRC).

(a) Rate and Base - Six-tenths of one percent (6/10 of 1%) of the gross selling price or gross value in money of the
shares of stock sold.

(b) Withholding agent - The tax must be deducted and withheld by the stockbroker who effected the sale at the
stock exchange.

(c) Who are subject? All individual taxpayers, except the following:
(1) Dealers in securities (Sec. 127 (A), NIRC);
(2) Investors in shares of stock in a mutual fund company;
(3) All other persons, whether natural or juridical, who are specifically exempt from national internal
revenue taxes under existing investment incentives and other special laws (Rev. Regs. No.6-2008).
(4) Sellers of shares of a publicly-listed company which is non-compliant with the mandatory minimum
public ownership ("MPO")18 - subject to the 15% capital gains tax.
(5) Sellers of shares of stock in the stock exchange where the transaction excludes the public by pre-
arranging the sale or pre-determining the buyers. Ex. Block sale - subject to the 15% capital gains tax.

(d) Kind of tax - Business tax

18MPO – the minimum percentage of outstanding shares held by the public or public float. It also refers to the portion of outstanding shares of the
company which are freely available and tradeable in the market. Currently the MPO is 20%.
17
Notes:

(1) Tax on traded shares - The tax on the sale of shares traded at the stock exchange is not an income tax, but a
percentage tax (stock transaction tax). However, the imposition of a percentage tax on the selling price of traded
shares has the effect of a final tax because any gain on the sale is not returnable.

(2) Effect of Non-Payment of Tax - The sale or exchange cannot be registered in the books of the corporation
unless the receipts of payment of the tax imposed is filed with and recorded by the stock transfer agent or
secretary of the corporation. Any stock transfer agent or secretary of the corporation or the stockbroker, who
caused the registration of transfer of ownership or title on any share of stock in violation of the aforementioned
requirement shall be punished in accordance with the provisions of the Tax Code (Sec. 11, Rev. Regs. No. 6-2008).

(3) Redemption of preferred shares. If redeemed by issuing corporation which Is not contemplating dissolution,
any capital gain or loss of the preferred shareholder from the redemption shall be subject to the regular income
tax.

B. On the Sale of Real Property Classified as Capital Assets

1. Transaction subject - Sale, transfer, 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.

2. Rate and Base of Tax - Six percent (6%) of the gross selling price or current fair market value of the property,
whichever is higher. The fair market value of the property is the higher of zonal value or assessor's value,

3. Final Tax - The tax to be withheld by the payor (buyer) is a final tax and the capital gain from the sale is not
returnable.

4. Who are Subject? All individual taxpayers.

5. Forced Sale to the State Under Eminent Domain - If the sale is made to the government or any of its political
subdivisions or agencies, or to government-owned or -controller corporations, the taxpayer may choose either
(a) to have the gain included in the ITR and taxed under the graduated rates or the 8% tax under Section 24(A), or
(b) to be subject to the capital gains tax under Section 24(D).

6. Exemption from the Capital Gains Tax:
(a) Sale of raw lands to be used for "socialized housing" projects, or sold under the Community Mortgage
Program (CMP). (R.A. 7279)
(b) Land transfers under the Comprehensive Agrarian Reform Law of 1988.
(c) Sale of principal residence, and subsequent acquisition or construction of another principal residence:
1) Sale by a natural person (individual) of his principal residence located in the Philippines;
2) The proceeds of the sale must be fully utilized in acquiring or constructing a new principal residence
within 18 calendar months from the date of sale;
3) 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;
4) The taxpayer must notify the Commissioner within 30 days from the date of sale or disposition, of his
intention to avail of the tax exemption;
5) The tax exemption can be availed of only, once every 10 years (Sec. 24(D)(2)).

Proceeds of sale not fully utilized - If the proceeds of the sale are not fully utilized in the purchase or
construction of a new residence in 6(c) above, the portion of the gain presumed to have been realized
on the sale shall be subject to capital gains tax. The following formula is used to arrive at the taxable
portion:

Unutilized Amount x (Higher of GSP or FMV) = Taxable
Gross Selling Price (“GSP”) Portion
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Final Tax on Informer's Reward
Informer - person (except a BIR employee, or other public employee, or his relative within the 6th degree of
consanguinity) who gives information that leads to the discovery of frauds or violations of tax laws, which
results m the recovery of taxes, or in the conviction of the tax evader, or in a compromise agreement with the BIR.
Reward = Ten percent (10%) of the revenues, surcharges, or fees recovered and/or fine, or penalty imposed and
collected, or the value of smuggled and confiscated goods, or One Million Pesos (P1,000,000) per case, whichever
is lower.

Tax = 10% of the reward

WITHHOLDING TAX ON INCOME PAYMENTS

Final Withholding Tax (“FWT”)
a) FTs on passive income
b) CGT on sale of domestic shares, and sale of real property classified as capital asset

Creditable Withholding Tax (“CWT”)
a) On compensation income
b) On certain income payments (EWT)

Creditable Withholding Tax System:
a) For the income payment to be subject to the CWT, the following must be complied with:
(1) The income payment must be taxable to the payee; and
(2) The BIR must have jurisdiction over the payor of the income (in most cases, this means that the income
must be sourced within the Philippines).

b) Not all income payments are subject to creditable WT. Only those payments specified or enumerated in the
law or internal revenue regulations are subject to the creditable withholding tax system.

c) The income subject to CWT shall be included in the ITR by the payee of the income. The amount to be
reported by the payee shall be gross of the CWT.

The tax withheld by the payor shall be allowed as a tax credit against the income tax liability of the payee in
the taxable year or quarter in which the income was earned or received.

d) Time of withholding. When an income payment is paid or payable or when it is accrued or recorded as an
expense or asset by the payor, whichever comes first.
e) If the CWT is withheld, the payor cannot use as a deduction in computing the net taxable income in the
ITR.

Types of CWTs
CWT on Compensation CWT on Other Income (Expanded WT)
Who Withholds: Who Withholds:

Employer - Files a Form 1601-C monthly and remits Customer or Client - Files a Form 1601 EQ quarterly
the WT to the BIR. At the end of the year, employer files and remits the WT to the BIR. At the end of the year,
a Form 1604 CF, which lists the total WTs on customer files a Form 1604-E which lists all the WTs
compensation from all its employees for the taxable withheld from all its vendors or suppliers, for the entire
year. taxable year.

- Shall also submit an Alphalist of Payees which is to be - Shall also submit an Alphalist of Payees which is to be
attached to the aforementioned forms. attached to the aforementioned forms.
19
Amount of CWT: Amount of CWT:

Depends on the compensation of the employee, and on Depends on the nature of the income payment and the
his income tax rate. CWT rate as provided by law.

Employee: Payee (Vendor or Supplier):

Will receive from his employer at the end of the year a Will receive a Form 2307 from the customer or client
Form 2316 stating his total gross taxable compensation showing the tax withheld from the income payment
income, non-taxable payments made by the employer, within 20 days from the close of the quarter, or upon
and the total taxes withheld by the employer. the request of the payee.

EXEMPTIONS (Before the TRAIN Law)

EXEMPTIONS

• Arbitrary annual amounts allowed by law to be deducted from gross income to cover the personal, living,
and family expenses of the taxpayer.

Starting January 1, 2018, the exemptions below are not available in computing the taxable net
income of individuals, estates, and trusts.

• Individuals Allowed Personal Exemptions: (1) residents citizens; (2) non-resident citizen; (3) OCWs;
(4) resident aliens; and (5) non-resident alien engaged in trade of business, or the exercise of profession
in the Philippines (“NRAETB”) on the basis of reciprocity.

Note: Personal exemption of NRAETB is the (a) exemption(s) allowed by the foreign country (of which
the alien is a citizen) to non-resident Filipinos, or (b) the exemptions allowed by the Philippines,
whichever is lower.

Processual Presumption – where the foreign law is not proven, the presumption is that the foreign
law is the same as the Philippine law.

• Individuals Not Allowed Personal Exemptions: (1) NRAETB, and there is no reciprocity; (2) non-
resident alien not engaged in trade or business in the Philippines (“NRANETB”)

Two Kinds of Personal Exemptions

Basic Additional
P50,000 P25,000
a) For single individual For each (a) qualified dependent child, whether
b) For head of the family legitimate of illegitimate, (b) a foster child; and a (c)
c) For each married individual qualified person with disability (PWD).
d) For married individual judicially decreed as
legally separated
Rules: Rules:
1) In case of married individuals where only one of 1) Limit = 4 additional exemptions
the spouses is deriving gross income, only such
spouse shall be allowed the personal exemption 2) In case of married individuals, the additional
(Sec. 35(A), NIRC) exemption may be claimed by only one spouse.

20
Husband, as a general rule, shall claim the
additional exemption(s).

EXC.: Wife may claim the additional exemptions in
the following cases:
a) Husband waives his right to claim additional
exemptions;
b) Husband has no income;
c) Husband is a non-resident citizen deriving
income from abroad;
d) Wife was awarded custody of her children in a
legal separation case.

3) In cases of legal separation, additional exemptions
may be claimed by the spouse who has custody of
the child or children. Provided, that the total
additional exemptions for both spouses shall not
exceed four (4).
Change of Status Rules
1) If during the taxable year, the taxpayer should have additional dependents, the taxpayer may claim the
corresponding additional exemption in full for such year;
2) If during the taxable year, any of the dependents dies, marries, becomes 21 years old, or becomes gainfully
employed, the taxpayer may still claim the full additional exemptions as if such dependent died, married
became 21 years old, or became gainfully employed at the close of the year;
3) If during the taxable year, the taxpayer dies, he is considered to have died at the close of the year. His estate
may claim his additional exemptions for the taxable year (year of death).

1) Qualified Dependent is a:
a) Legitimate, legally adopted, or illegitimate child
- chiefly dependent upon and living with taxpayer, if such dependent is –
(a) not more than 21 years of age;
(b) unmarried; and
(c) not gainfully employed; or
(d) if such dependent, regardless of age, is incapable of self-support because of mental or
physical defect (Sec. 35(B), NIRC)
OR
b) Foster child. Refers to a child placed under foster care. “Foster parent” refer to a person duly
licensed by the DSWD to provide foster care. (RA 10165; RMC 41-2013). A foster child can be treated
as qualified dependent for an additional exemption, provided:
(a) The period of foster care is at least a continuous period of one (1) taxable year; and
(b) Only (1) foster parent can treat the foster child as a dependent for particular taxable year.
As such, no other parent or foster parent can claim the said child as a dependent for that
period.
OR
c) Persons with disability (PWDs) are those suffering from restrictions in performing an activity in a
manner considered normal because of a mental, physical, or sensory impairment, and who are:
(a) within the 4th civil degree of consanguinity or affinity to the taxpayer, regardless of age or
marital status;
(b) living with the taxpayer;
(c) not gainfully employed, and chiefly dependent upon the taxpayer.

2) Two views on the qualification of Senior Citizens as additional exemptions.
i) CTA view. The Court of Tax Appeals has ruled in CTA Case No. 5280 that senior citizens (resident
citizens at least sixty (60) years of age) shall be treated as dependents for purposes of qualifying the
taxpayer as head of family and for additional exemptions in accordance with RA 7432.
21
ii) BIR view. The BIR, on the other hand, has taken the position that senior citizens do not qualify as
“dependents’ for purposes of additional exemption. However, the BIR has not been able to
successfully assail and overturn the above CTA decision.

“Chief support” – principal or main support. Must be regular and continuing support. Quantitatively, chief
support means > ½ of the requirements for support.

“Not gainfully employed” – dependent is not engaged or is not engaging in employment or work where the
compensation will remove him from the status of chiefly depending upon the taxpayer.

“Living with the taxpayer” – does not necessarily mean that the taxpayer and the dependent(s) live under one
roof. The character of the separation must be considered. If, without necessity, a sole dependent of a taxpayer
makes his home elsewhere, the taxpayer cannot be considered head of the family.

Exemption allowed to Estates
- If the taxpayer dies during the taxable year, his estate may still claim the personal and additional
exemptions for himself and his dependent(s) as if he died at the close of such year.
- After the year of death, there shall be allowed an exemption of only Twenty Thousand (P20,000)
Pesos from the income of the estate.

Exemption allowed to Trusts
- For the purpose of computing its taxable income, there shall be allowed an exemption of Twenty
Thousand (P20,000) Pesos from the income of the trust.

22
Salient Features of Republic Act R.A. 10963 [The Tax Reform for Acceleration
and Inclusion (TRAIN) Act]:

1) Lower personal income tax (PIT)
2) Simplified estate and donor’s tax
3) Simplified VAT
4) Increased excise tax for petroleum products
5) Increased excise tax for motor vehicles
6) New excise tax on sweetened beverages

INDIVIDUAL INCOME TAX: Adjustments on Personal Income Taxation
A. New Graduated Income Tax Rates

For Compensation Income Earners:

TAXABLE INCOME – means GROSS Compensation LESS non-taxable income/benefits, such as but not limited to
the 13th Month Pay and Other Benefits, de minimis benefits, and employee’s share in the SSS, GSIS, PHIC, Pag-ibig
contributions and union dues.

MINIMUM WAGE EARNERS (MWE) – Exempt based on statutory minimum wage rates. Holiday Pay, Overtime
Pay, Night Shift Differential Pay and Hazard Pay are likewise exempt.

Illustration: Mr. CSO, a minimum wage earner, works for G.O.D., Inc. He is not engaged in business nor has any
other source of income other than his employment. For 2018, Mr. CSO earned a total compensation income of
P135,000

(a) The taxpayer contributed to the SSS, Philhealth, and HDMF amounting to P5,000 and has received 13th
month pay of P11,000. His income tax liability will be computed as follows:

Total Compensation Income P 135,000
Less: Mandatory Contributions P 5,000
Non-taxable benefits 11,000 16,000
Taxable Income P 119,000

*Taxpayer is exempt since he is considered a minimum wag earner.

(b) The following year, Mr. CSO earned, aside from his basic wage, additional pay of P140,000 which consists
of the overtime pay – P80,000, night shift differential – P30,000, hazard pay – P15,000, and holiday pay –
P15,000. He has the same benefits and contributions as above.

Total Compensation Income P 135,000
Add: Overtime, night shift
differential, hazard, and
holiday pay 140,000
P 275,000
Less: Mandatory Contributions P 5,000
Non-taxable benefits 11,000 16,000
Net Taxable Income P 259,000
Tax Due EXEMPT

*Taxpayer is tax exempt as an MWE. The Statutory Minimum Wage as well as the holiday pay, overtime
pay, night shift differential pay and hazard pay received by such MWE are specifically exempted from
income tax under the law. (RR No. 8-2018)

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The new alternative tax scheme (8% tax) for self-employed and professionals.

A.1. Individual earning purely from self-employment/practice of profession.

1. With gross sales/receipts and other non-operating income NOT exceeding P3,000,000 (new VAT
EXEMPT threshold):

Taxpayer has the OPTION to avail of:
a. Graduated rates under Sec. 24 (A)(2)(a), OR
b. 8% tax on gross sales/receipts and other non-operating income in excess of P250,000, in lieu of
graduated income tax rates and percentage tax under Section 116, NIRC

A taxpayer subject to graduated income tax rates is also subject to applicable business tax, if any.

2. With gross sales/receipts and other non-operating income EXCEEDING P3,000,000 (new VAT
EXEMPT threshold):

No option for 8% tax. Computation based on graduated income tax rates. S/he is also subject to VAT.

A.2. Individual earning BOTH from compensation and from self-employment (business or practice of profession)

1. Compensation income subject to graduated income tax rates; AND

2. Business/Professional income subject to the following:

a. If gross sales/receipts and other non-operating income DO NOT exceed the VAT threshold, the
individual has the option to be taxed at:

i. Graduated income tax rates, OR
ii. 8% income tax rate on gross sales/receipts and other non-operating income in lieu of
graduated income tax rates and percentage tax under Section 116, NIRC.

b. If gross sales/receipts and other non-operating income EXCEED the VAT threshold, the
individual shall be subject to graduated income tax rates.

CORPORATE INCOME TAX: Adjustments on Corporate Income Taxation

PCSO now taxable. PCSO was removed from the list of tax-exempt GOCCs, agencies and instrumentalities
of the government. GSIS, SSS, PHIC and Local Water Districts remain to be tax exempt.

TRANSFER TAXES: Adjustments on Estate and Gift Taxation

1. The TRAIN Law restructures the estate tax to a low and single rate of 6% based on the NET value of the
estate; Other changes.
a) Removes the graduated rates from 5% to 20%
b) Increases the Standard Deduction from P1,000,000 to P5,000,000; Estates of Non-Resident Alien
not entitled to Standard Deduction in the amount of P500,000
c) Increases the Family Home threshold from P1,000,000 to P10,000,000
d) Removes the deduction of funeral expenses, settlement expenses
e) Filing of Notice of Death not a requirement anymore
f) Deadline of Filing of Estate Tax Return now One (1) year from death of decedent
g) Payment by installment within two (2) years, without civil penalty and interest
h) Bank deposit may not be withdrawn before payment of estate tax, subject to final withholding
tax of 6%
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2. The TRAIN law also simplifies the donor’s tax into a single rate of 6% of the net value of the gifts
regardless of the relationship of the donee to the donor.

a) Graduated rates from 2% to 15% for donations to relatives, and 30% for strangers, now
substituted by a uniform rate of 6%
b) An arm’s length transaction without donative intent is now a complete defense against liability
for donor’s tax in case of transfer for insufficient consideration.

VALUE ADDED TAX (VAT)/PERCENTAGE TAX: Revision on VAT and Percentage Tax
1. The TRAIN law withdrew several VAT exemptions, making the tax fairer and simpler. 54 our of 61
special laws with non-essential VAT exemptions had been withdrawn.

2. VAT zero-rating is limited to direct exporters who actually export goods outside of the country.

3. Enhanced VAT refund system will now provide fast and timely cash refunds (not tax credit certificates) to
exporters.

4. VAT threshold increased from P1,919,500 to P3,000,000.

5. VAT-exempt taxpayers (with gross sales/receipts not exceeding the threshold will have 3 options:
a) Graduated income tax rates with 40% Optional Standard Deduction (OSD) of 40% of gross
sales/receipts PLUS 3% percentage tax;
b) Graduated income tax rates with itemized deductions PLUS 3% percentage tax; or
c) Flat tax of 8% on gross sales/receipts in lieu of personal income tax and percentage tax.

TAX ON PASSIVE INCOME: Changes in the Tax Treatment of Some Passive Incomes
1. Interest income from depositary bank under the expanded foreign currency deposit system (EFCDS) –
15% (from 7.5%)

2. Winnings (except Philippine Charity Sweepstakes and Lotto winnings amounting to P10,000 or less) –
20% (total exemption for PSCO and lotto winnings under the old law)

3. Capital gains from sale of shares of stocks not traded in Stock Exchange – 15% (from 5% and 10% of net
capital gain)

Percentage tax on stock transaction in Stock Exchange – 6/10 of 1% (from ½ of 1%)

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HOW TO COMPUTE TAXES OF PROFESSIONALS AND SELF-EMPLOYED

Sample Computation: Illustration 1
Ms. Terry operates a convenience store while she offers bookkeeping services to her clients. In 2018, her gross
sales amounted to P800,000.00, in addition to her receipts from bookkeeping services of P300,000.00. She
already signified her intention to be taxed at 8% income tax rate in her 1st quarter return.

Her income tax liability for the year will be computed as follows:
Gross Sales - Convenience Store P800,000.00
Gross Receipts - Bookkeeping 300,000.00
Total Sales/Receipts P1,100,000.00
Less: Amount allowed as deduction 250,000.00
TAXABLE INCOME P850,000.00
TAX DUE (8% of P850,000.00) P68,000.00

CONCLUSIONS:
• The total of gross sales and gross receipts is below the VAT threshold of P3,000,000.00.
• Taxpayer’s source of income is purely from self-employment, thus she is entitled to the amount allowed as
deduction of P250,000.00 under Sec. 24(A)(2)(b) of the Tax Code, as amended.
• Income tax imposed herein is based on the total of gross sales and gross receipts.
• Income tax payment is in lieu of the graduated income tax rates under subsection (A) hereof and percentage
tax due, by express provision of law.

Ms. Terry above, failed to signify her intention to be taxed at 8% income tax rate on gross sales in her initial
Quarterly Income Tax Return, and she incurred cost of sales and operating expenses amounting to P600,000.00
and P200,000.00, respectively, or a total of P800,000.00, the income tax shall be computed as follows:
Gross Sales/Receipts P 1,100,000.00
Less: Cost of Sales 600,000.00
Gross Income P500,000.00
Less: Operating Expenses 200,000.00
TAXABLE INCOME P300,000.00
TAX DUE: On excess (P300,000 - P250,000) x 20%) P10,000.00

CONCLUSION: Aside from the income tax due above, Ms. Terry is likewise liable to pay business tax.

26

Mr. Yoso signified his intention to be taxed at 8% income tax rate on gross sales in his 1st Quarter Income Tax
Return. He has no other source of income, His total sales for the first three (3) quarters amounted to
P3,000,000.00 with 4th quarter sales of P3,500,000.00.

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
(8% Rate) (8% Rate) (8% Rate)
Total Sales P500,000.00 P500,000.00 P2,000,000.00 P3,500,000.00
Less: Cost of Sales 300,000.00 300,000.00 1,200,000.00 1,200,000.00
Gross Income P200,000.00 P200,000.00 P800,000.00 P2,300,000.00
Less: Operating Expenses 120,000.00 120,000.00 480,000.00 720,000.00
TAXABLE INCOME P80,000.00 P80,000.00 P320,000.00 P1,580,000.00

Computation of Tax Due:

Total Sales P6,500,000.00
Less: Cost of Sales 3,000,000.00
Gross Income P3,500,000.00
Less: Operating Expenses 1,440,000.00
TAXABLE INCOME P2,060,000.00

INCOME TAX DUE:
Tax Due under Graduated Rates P509,200.00
Less: 8% income tax previously paid (Q1 to Q3)* 220,000.00
ANNUAL INCOME TAX PAYABLE P289,200.00

* Computed as: (P3,000,000.00 – P250,000.00) x 8% = P220,000.00

CONCLUSIONS:
• The gross receipts exceeded the VAT threshold of P3,000,000.00. Taxpayer shall be liable to pay income tax
under graduated rates pursuant to Section 2(A)(2)(a) of the Tax Code, as amended.
• Taxpayer shall be allowed an income tax credit of quarterly payments initially made under the 8% income tax
option computed net of the allowable deduction of P250,000.00 granted for purely business income.
• Taxpayer is likewise liable for business tax(es), in addition to income tax. For this purpose, the taxpayer is
required to update his registration from non-VAT to VAT taxpayer. Percentage tax pursuant to Section 116 of
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the Tax Code, as amended, shall be imposed from the beginning of the year until taxpayer is liable to VAT.
VAT shall be imposed prospectively.
• Percentage tax due on the non-VAT portion of the sales/receipts shall be collected without penalty, if timely
paid on the due date immediately following the month/quarter when taxpayer ceases to be a non-VAT.


Ms. RSVP is a prominent independent contractor who offers architectural and engineering services. Since her
career flourished, her total gross receipts amounted to P4,250,000.00 for taxable year 2018. Her recorded cost of
service and operating expenses were P2,150,000.00 and P1,000,000.00, respectively.

Her income tax liability will be computed as follows:
Gross Receipts P4,250,000.00
Less: Cost of Service 2,150,000.00
Less: Operating Expenses 1,000,000.00

INCOME TAX DUE:
On P800,000.00 P130,000.00
On excess (P1,100,000.00 - P800,000.00) x 30%) 90,000.00
INCOME TAX DUE P220,000.00

CONCLUSION: The gross receipts exceeded the VAT threshold of P3,000,000.00; subject to graduated income tax
rates; liable for business tax – VAT, in addition to income tax.


In 2018, Mr. Swabe owns a nightclub and videoke bar, with gross sales/receipts of P2,500,000.00. His cost of sales
and operating expenses are P1,000,000.00 and P600,000.00, respectively, and with non-operating income of
P100,000.00.

His tax due for 2018 shall be computed as follows:
TAXABLE INCOME FROM BUSINESS:
Gross Receipts P2,500,000.00
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Net Income from Operation P900,000.00
Add: Non-operating Income 100,000.00

INCOME TAX DUE:
On P800,000.00 P130,000.00
On excess (P1,000,000.00 - P800,000.00) x 30%) 60,000.00
TOTAL INCOME TAX P190,000.00

CONCLUSIONS:
• The taxpayer has no option to avail of the 8% income tax rate on his income from business since his
business income is subject to Other Percentage Tax under Section 125 of the Tax Code, as amended.
• Aside from income tax, taxpayer is liable to pay the prescribed business tax, which in this case is
percentage tax of 18% on the gross receipts as prescribed under Sec. 125 of the Tax Code, as amended.

HOW TO COMPUTE TAXES FOR INDIVIDUALS EARNING INCOME BOTH FROM
COMPENSATION AND FROM SELF-EMPLOYMENT

The pertinent item on taxation of individuals with income streams both from compensation and from self-
employment is explained in Section D of the BIR’s Revenue Regulations No. 8-2018, specifically:

Section (D). Individuals Earning Income Both from Compensation and from Self-Employment (business or
practice of profession).

For mixed income earners, the income tax rates applicable are:
1. The compensation income shall be subject to the tax rates prescribed under Section 24(A)(2)(a) of the
Tax Code, as amended; AND
2. The income from business or practice of profession shall be subject to the following:
a. lf the gross sales/receipts and other non-operating income do not exceed the VAT threshold, the
individual has the option to be taxed at:
a.1. Graduated income tax rates prescribed under Section 24(A)(2)(a) of the Tax Code, as
amended; OR
a.2. Eight percent (8%) income tax rate based on gross sales/receipts and other non-operating
income in lieu of the graduated income tax rates and percentage tax under Section 116 of the
Tax Code, as amended.

b. If the gross sales/receipts and other non-operating income exceeds the VAT threshold, the individual
shall be subject to the graduated income tax rates prescribed under Section 24(A)(2)(a) of the Tax
Code, as amended.

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The provision under Section 24(A)(2)(b) of the Tax Code, as amended, which allows an option of 8%
income tax rate on gross sales/receipts and other non-operating income in excess of P250,000.00 is
available only to purely self-employed individuals and/or professionals.

The P250,000.00 mentioned is not applicable to mixed-income earners since it is already incorporated in
the first tier of the graduated income tax rates applicable to compensation income. Under the said
graduated rates, the excess of the P250,000.00 over the actual taxable compensation income is not
deductible against the taxable income from business/practice of profession under the 8% income tax rate
option.

The total tax due shall be the sum of:
(1) tax due from compensation, computed using the graduated income tax rates; and
(2) tax due from self-employment/practice of profession, resulting from the multiplication of the 8%
income tax rate with the total of the gross sales / receipts and other non-operating income.

Mixed income earner who opted to be taxed under the graduated income tax rates for income from
business/practice of profession, shall combine the taxable income from both compensation and
business/practice of profession in computing for the total taxable income and consequently, the income
tax due.

Sample BIR Computations: Taxes of Mixed Income Earners

Mr. Madz, a Financial comptroller of JAC Company, earned annual compensation in 2018 of P1,500,000.00,
inclusive of 13th month and other benefits in the amount of P120,000.00 but net of mandatory contributions to
SSS and Philhealth. Aside from employment income, he owns a convenience store, with gross sales of P2,400,000.
His cost of sales and operating expenses are P1,000,000.00 and P600,000.00, respectively, and with non-
operating income of P100,000.00.

Option 1: Eight Percent (8%) income tax rate on Gross Sales
His tax due for 2018 shall be computed as follows if he opted to be taxed at eight percent (8%) income tax rate on
his gross sales for his income from business:

(1) TAX DUE ON COMPENSATION INCOME:
Total compensation income P1,500,000.00
Less: Non-taxable 13th month pay and other benefits (max) 90,000.00
Taxable Compensation Income P1,410,000.00
Tax due on Compensation:
On P800,000.00 P130,000.00
On excess (P1,410,000 - P800,000) x 30% 183,000.00
Tax due on Compensation Income P313,000.00
(2) TAX DUE ON BUSINESS INCOME:
Gross Sales P2,400,000.00
30
Taxable Business Income P2,500,000.00
Multiplied by income tax rate 8%
Tax Due on Business Income P200,000.00

TOTAL INCOME TAX DUE (Compensation and Business) P513,000.00

Option 1 CONCLUSIONS:
• The option of 8% income tax rate is applicable only to taxpayer’s income from business, and the same is
in lieu of the income tax under the graduated income tax rates and the percentage tax under Section 116
of the Tax Code, as amended.

• The amount of P250,000.00 allowed as a deduction under the law for taxpayers earning solely from self-
employment/practice of profession, is not applicable for mixed-income earner under the 8% income tax
rate option.

• The P250,000.00 mentioned above is already incorporated in the first tier of the graduated income tax
rates applicable to compensation income.

Option 2: NOT Opting for 8% income tax on Gross Sales/Receipts and other non-operating income

His tax due for 2018 shall be computed as follows if he did not opt for the eight percent (8%) income tax based on
gross sales/receipts and other non-operating income:

Less: Non-taxable 13th month pay and other benefits-max 90,000.00
Add: Taxable Income from Business -
Net Income from Operation P800,000.00
Add: Non-operating Income 100,000.00 900,000.00
Total Taxable Income P2,310,000.00
31
Tax Due:
On P2,000,000.00 P490,000.00
On excess (P2,310,000 - 2,000,000) x 32% 99,200.00
Total Income Tax P589,200.00

Option 2 CONCLUSIONS:
• The taxable income from both compensation and business shall be combined for purposes of computing
the income tax due if the taxpayer chose to be subject under the graduated income tax rates.

• In addition to the income tax, Mr. Madz is likewise liable to pay percentage tax of P72,000.00, which is 3%
of P2,400,000.00.

Sample Illustration 1 Continued:
On February 7019, taxpayer tendered his resignation to concentrate on his business. His total compensation
income amounted to P150,000.00, inclusive of benefits of P20,000.00. His business operations for the taxable year
2019 remains the same. He opted for the eight percent (8%) income tax rate.

(1) TAX DUE ON COMPENSATION INCOME:
Total compensation income P150,000.00
Less: Non-taxable benefits 20,000.00
Taxable Compensation Income P130,000.00
Tax Due on Compensation:
On P130,000.00 (not over P250,000.00) P 0.00
Tax due on Compensation Income P 0.00
(2) TAX DUE ON BUSINESS INCOME:
Taxable Business Income P2,500,000.00
Multiplied by income tax rate 8%
Tax Due on Business Income P200,000.00

Total Income Tax Due (Compensation and Business) P200,000.00

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• The option of 8% income tax rate is applicable only to taxpayer’s income from business, and the same is
in lieu of the income tax under the graduated income tax rates and the percentage tax under Section 116
of the Tax Code, as amended.

• The amount of P250,000.00 which is allowed as deduction under the law for taxpayers earning solely
from self-employment/practice of profession, is not applicable for mixed-income earner under the 8%
income tax rate option.

• The P250,000.00 mentioned above is already incorporated in the first tier of the graduated income tax
rates applicable to compensation income. The excess of the P250,000.00 over the actual taxable
compensation income is not creditable against the taxable income from business/practice of profession
under the 80% income tax rate option.

Mr. Wayne, an officer of BATS International Corp., earned in 2018 an annual compensation of P1,200,000.00,
inclusive of the 13th month and other benefits in the amount of P120,000.00. Aside from employment income, he
owns a farm, with gross sales of P3,500,000. His cost of sales and operating expenses are P1,000,000.00 and
P600,000.00, respectively, and with non-operating income of P100.000.00.

His tax due for 2018 shall be computed as follows:
Less: Non-taxable 13th month pay and other benefits-max 90,000.00
Add: Taxable Income from Business -
Net Income from Operations P1,900,000.00
Add: Non-operating Income 100,000.00 2,000,000.00
Total Taxable Income P3,110,000.00

Tax Due:
On P2,000,000.00 P490,000.00
On excess (P3,110,000 - 2,000,000) x 32% 355,200.00
Total Income Tax P845,200.00

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CONCLUSION:

The taxpayer has no option to avail of the 8% income tax rate on his income from business since his gross sales
exceed the VAT threshold. However, he is still not subject to business tax since the nature of his business
transactions is VAT exempt.

Source: Bureau of Internal Revenue (BIR www.bir.gov.ph), Department of Finance (DOF www.dof.gov.ph) Philippines

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TAXATION FOR ESTATES AND TRUSTS

ESTATES

Estate Defined

Estate refers to the mass of all the property, rights, and obligations of a person which are not extinguished by his
death (Art. 776, Civil Code).

It includes not only the property and transmissible rights and obligations existing at the time of his death, but also
those which have accrued thereto since the opening of the succession (Art 78 h Civil Code).

Decedent Defined

Decedent is the general term applied to the person whose property is transmitted through succession whether or
not he left a will. If he left a will, he is also called the testator (Art. 775, Civil Code).

Heir Defined

An heir is a person called to the succession either by the provision of a will or by operation of law (Art. 782, Civil
Code).

Devisee Defined

A devisee is a person to whom a gift of real property is given by virtue of a will.

Legatee Defined

A legatee is a person to whom a gift of personal property is given by virtue of a will (Art, 782, Civil Code).

Classification of Estates

Estates, for purposes of the income tax, are classified into:
1. Estate under judicial administration (the settlement of which is the object of Judicial testamentary or
intestate proceedings), and

2. Estate not under judicial administration (the settlement of which is not the object of judicial testamentary
or intestate proceedings) (Secs. 209 and 210, Rev, Reg. No. 2).

To Whom Income of Estate Shall be Taxed

The income of an estate may be taxable to the estate or heirs and beneficiaries, as follows:

1. Generally the income of the estate shall be taxable to the fiduciary or trustee.

The fiduciary or trustee (executor or administrator) shall file a return for the estate and pay the income
tax due thereon.

2. Where the estate is not under judicial administration and there is no executor or administrator, the
income of the estate shall be taxable to the heirs and beneficiaries.
35

Each heir and beneficiary shall include in his return his distributives share of the net income of the estate.

Taxable Income of Estates

The taxable income of the estate shall be computed in the same manner and on the same basis as in the case of a
self-employed individual.

Gross Income of Estates

The items of gross income taxable to individuals (as defined in Section 32 (A) of the Tax Code) are also the same
items of gross income which are taxable to estates.

Excluded from Gross Income of an Estate:

The passage of property to the executor or administrator on the death of the decedent, even though the property
may have appreciated in value since the decedent acquired it

Included In Gross Income of an Estate

1. Income received by the estate of a deceased person during the period of or settlement of the estate.

The “period of administration or settlement of the estate” is the period required by the executor or
administrator to perform the ordinary duties pertaining to such as the collection of assets and payment
of debts and legacies.

Estates, during the period of administration have but one beneficiary and that beneficiary is the estate.

2. Where prior to the settlement, of the estate, the executor or administrator sells property of a decedent’s
estate for more than the appraised value placed upon it at the death of the decedent, the excess is income
taxable to the estate.

Notes:
1. In the event of delivery of property in kind to a legatee or distribute, no income is by the legatee or
distributee.

2. Where the property is sold after the settlement of the estate by the devisee, legatee, or heir at a price
greater than the appraised value placed upon it at the time he inherited the property from the decedent,
the devisee, legatee or heir is taxable individually on any profit derived.

Deduction of Estates

An estate can take up the same items of deduction authorized under Section 34 of the Tax Code and allowed an
individual taxpayer (Sec. 61, NIRC).

Special Deduction of Estates

Estates can also deduct, in addition to the deduction authorized under Section 34, the amount of income of the
estate for the taxable year which is property paid or credited during such year to any legatee, heir, or beneficiary.
36

Notes:
(a) The amount so allowed as a deduction shall be included in computing the taxable income of the legatee,
heir, or beneficiary (Sec. 61 (B) NIRC).

However, where no such distribution to the heirs is made during the taxable year that such income is
subjected to income tax payments by the estate, the subsequent distribution thereof is no longer taxable
on the part of the recipient heir.

(b) An allowance paid to an heir out of the corpus (i.e. property) of the estate is not deductible from gross
income (Sec. 211, Rev. Reg. 2).

Rates of Tax

The rates of tax under Section 24(A)(2) of the Tax Code, which are prescribed for individuals earning purely self-
employment or professional income, shall be used in the income tax of estates. As estate shall thus have the
following tax rates:

A. If the estate’s gross sales/receipts plus other non-operating income exceeds the VAT threshold of
P3,000,000 as provided in Section 109(BB) of the Tax Code, it shall be taxed on its net taxable income
using the graduated rates under Section 24(A)(2)(a) of the Tax Code.

B. If such estate’s gross sales/receipts plus other non-operating income does not exceed the VAT threshold
of P3,000,000, the estate’s executor/administrator shall have the option for the estate to be taxed at:

1. Eight percent (8%) of gross sales or gross receipts, plus other non-operating income in excess of Two
Hundred Fifty Thousand Pesos (P250,000);

Note: This 8% tax on gross sales/receipts plus other non-operating income shall be in lieu of (a) the
progressive income tax rates under Section 24(A)(2)(a) of the Tax Code, and (b) the 3% Other Percentage
Tax (“OPT”) under Section 116 of the Tax Code.

OR

2. The graduated (progressive) rates under Section 24(A)(2)(a) of the Tax Code.

Computation of Tax

Accounting Period - Calendar year
Tax Base - (a) Taxable net income or
(b) Gross sales/receipts + non-operating income, if 8% income tax rate
is availed
Rate of Tax - (a) Graduated rates or
(b) 8% Income tax rate (if qualified and elected)

TRUSTS

Trust defined

A trust is a right of property, real or personal, held by one party (trustee) for the benefit of another (beneficiary).

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A trust is an obligation imposed either expressly or by implication of law, whereby the trustee is bound to deal
with property over which he has control, for the benefit of certain persons of whom he may himself be one and
anyone of them may enforce the obligation.

Parties to a Trust

A person who establishes a trust is called the Trustor or Grantor. The one in whom confidence is reposed as
regards the property for the benefit of another person is known as the known as the Trustee (or Fiduciary), and
the person for whose benefit the trust has been created is referred to as the Beneficiary.

Fiduciary Defined

A fiduciary for income tax purposes is any person or corporation that holds in trust an estate of another person or
persons. In order that a fiduciary relationship may exist, it is necessary that a legal trust be created (Sec. 207, Rev.
Reg. No. 2).

Classification of Trusts

Trusts may be classified into the following categories.
(1) Ordinary trust;
(2) Revocable trust; and
(3) Employee’s trust.

Ordinary trust

In an ordinary trust, the income and corpus of the trust do not revert to the grantor. The trust income is
accumulated and held for distribution to the beneficiaries.

Revocable Trust

A revocable trust is a trust in which the power to revest in the grantor title to any part of the corpus of the trust is
vested in the grantor himself or any person not having any substantial adverse interest in the trust or in its
income.

The income of such part of the trust estate title to which may be revested in the grantor, or held of distributed for
the benefit of the grantor shall be included in computing the taxable income of the grantor (Sec. 63, NIRC;
Sec. 207, Rev. Reg. No. 2)

“Income For the Benefit of the Grantor”

A trust income is considered foe the benefit of the grantor where any part of the income of the trust –

(1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the
disposition of such part of the income may be held or accumulated for future distribution to the grantor, or

(2) may, or in the discretion of the grantor or of any person not having a substantial adverse interest in the
disposition of such part of the income, be distributed to the grantor; or

(3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the
disposition of such part of the income may be applied to the payment of premiums upon policies of insurance on
the life of the grantor
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Such part of the income of the trust for the benefit of the grantor shall be included in computing the taxable
income of the grantor (Sec. 64 (A), NIRC).

Employee’s Trust

Income tax shall not apply to employee’s trust which forms part of the pension, stock bonus, or profit-sharing
plan of an employer for the benefit of some or all of his employees (Sec. 60 (B), NIRC)

Requisites or Conditions For Exemption of Employee’s Trust

(1) The employee’s trust must form part of a pension, stock bonus, or profit-sharing plan of an employer for the
benefit of some or all of his employees;

(2) Contributions are made to the trust by such employer, or employees, or both;

(3) The contributions are made for the purpose of distributing to such employees the earnings and principal of
the fend accumulated toy the trust in accordance with such plan;

(4) Under the trust instrument, it impossible, at any time prior to the satisfaction of all liabilities with respect to
employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used
for, or diverted to, purposes other than for the exclusive benefit of his employees.

Any amount actually distributed to any employee or distribute shall be taxable to him in the year in which so
distributed to the extent that it exceeds the amount contributed by such employee or distributee (Sec. 60 (B),
NlRC).

TAXABILITY OF INCOME OF TRUST

The income of a trust may be taxable to the trustee, or to the beneficiaries, or to the grantor.

(A) Income of Trust Taxed to the Trustee

(1) The income of a trust which is to be accumulated or held for future distribution, whether consisting of
ordinary income or gain from the sale of assets included in the corpus of the trust, must be returned by
and will be taxed to the trustee (Sec. 207 Rev. Reg. No. 2)

(2) The income of a trust, whether created by will or deed, for accumulation of income, whether for an
unascertained person or persons with contingent interests or otherwise, shall be taxed to the trustee.

(3) The income of a trust, where under the terms of a will or deed, the trustee may, in his discretion,
distribute the income or accumulate it, the income is taxed to trustee, irrespective of the exercise of his
discretion.

(B) Income of Trust Taxed to Beneficiaries

The income of a trust for the taxable year which is to be distributed to the beneficiaries must be returned (i.e.
included in the ITR) by and will be taxed to the respective beneficiaries.

Note: Income distributed to beneficiaries of a trust is subject to a CWT of 15% to be withheld by the trust.

(C) Income of Trust Taxed Directly to the Grantor
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(1) In case of a revocable trust, income from such part of the trust estate title to which may be revoked by the
grantor or revested in the grantor.

The income should be included in the grantor’s return.

(2) In the case of a trust the income of which, in whole or in part, may be held or distributed for the benefit of
the grantor. That part of the income which may be held or distributed for the benefit of the grantor
should be included in the return of the grantor.

(3) Such part of the income of the trust which may be applied to the payment of premiums upon policies of
insurance on the life of the grantor. Such part of the income shall be included in computing the taxable
income of the grantor (Sec, 64 (A) NIRC).

Determination of the Tax

The tax shall be computed upon the taxable income of the trust and shall be paid by the fiduciary (Sec.60(C) (l)
NIRC).

Taxable Income of Trusts

The taxable income of the trust shall be computed in the same manner and on the same basis as in the case of an
individual (Sec. 61, MIRC).

Gross Income of Trusts

The items of gross income taxable to individuals are also the same items of gross income which are taxable to
trusts.

Deduction of Trusts

A trust can take up the same items of deduction authorized under Section 34 of the Tax Code and allowed an
individual taxpayer (Sec. 61, NIRC).

Special Deduction of Trusts

A trust can also deduct, in addition to the deductions authorized under Section 34, the following:

(1) The amount of the income of the trust for the taxable year which is to be distributed currently to the
beneficiaries; and
(2) The amount of income collected by a guardian of an infant which is to be held or distributed as the court
may direct (Sec. 61 (A), NIRC); or
(3) The amount of the income of the trust for the taxable year which is properly paid or credited to any
beneficiary. (Sec. 61 (B), NIRC).
Note: The amount so allowed as a deduction shall be included in computing the taxable income of the
beneficiaries, whether distributed to them or not

Rates of Tax
The rates of tax under Section 24(A)(2) of the Tax Code, which are prescribed for individuals earning purely self-
employment or professional income, shall be used in computing the income tax of trusts. A trust shall thus have
the following tax rates:
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(A) If the trust’s gross sales/receipts plus other non-operating income exceeds the VAT threshold of
P3,000,000 as provided in Section 109(BB) of the Tax Code, it shall be taxed on its net taxable income
using the graduated rates under Section 24(A)(2)(a) of the Tax Code.

(B) If such trust’s gross sales/receipts plus other non-operating income does not exceed the VAT threshold of
P3,000,000 the trustee shall have the option for the trust to be taxed at:

(1) Eight percent (8%) of gross sales or gross receipts, plus other non-operating income in excess of
Two Hundred Fifty Thousand Pesos (P250,000);

Note: This 8% tax on gross sales/receipts plus other non-operating income shall be in lieu of (a)
the progressive income tax rates under Section 24(A)(2)(a) of the Tax Code, and (b) the 3%
Other Percentage Tax (“OPT”) under Section 116 of the Tax Code.

OR

(2) The graduated (progressive) rates under Section 24(A)(2)(a) of the Tax Code.

Computation of Income Tax of Trusts

Accounting Period - Calendar year
Tax Base - (a) Taxable net income or
(b) Gross sales/receipts + non-operating income, if 8% income tax rate
is availed.
Rate of Tax - (a) Graduated rates or
(b) 8% Income tax rate (if qualified and elected)

Consolidation of Income of Two or More Trusts

Where two or more trusts are created by the same trustor or grantor, and in each instance the beneficiary is the
same person, the taxable income of all the trusts shall be consolidated, and the tax computed on such consolidated
income.

Such proportion of said tax shall be assessed and collected from each trustee which the taxable income of the
trust administered by him bears to the consolidated income of the several trusts (Sec. 60 (C) (2), NIRC).

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INCOME TAX ON PARTNERSHIPS

Purposes of the income tax, partnerships are classified into:
(a) partnership not subject to income tax; and
(b) Partnership subject to income tax.

A. Partnerships Not Subject to Income Tax

The following partnerships are not subject to income tax:

1. General professional partnership (“GPP”) – A partnership formed by persons for the sole purpose of
exercising their common profession, no part of the income of which is derived engaging in trade or
business (Sec. 22 (B), NIRC)

Note: Because of the exemption of GPPs from the income tax, income payments to them by their clients are
exempt from creditable withholding tax (RMC No. 3-2012)

2. A joint venture or consortium formed for the purpose of
(a) Undertaking construction projects; or

(b) Engaging in petroleum, coal, geothermal, and other energy operations pursuant to an operating or
consortium agreement under a service contract with the government. (Sec 22(B), NIRC)

Filing of Return

Exempt partnerships are required to file an “annual information return.” However, the purpose is to furnish
information (Form No. 1702 EX) as to the share each partner shall report and include in his personal income tax
return.

Tax Liability of Partners in Exempt Partnership

(a) Persons engaging in business as partners in a general professional partnership shall be liable for income
tax only in their separate and individual capacities.

(b) Each partner shall report as gross income his distributive share, actually, or constructively received, in
the net income of the partnership (Sec. 26, NIRC)

The share of a partner in the net profits of the partnership shall be taxable to the partner, whether
distributed or not.

But where the result of the partnership operation is a loss, the loss will be divided among the partners in
the same proportion as the net income, or as provided in the partnership agreement. Each individual
partner may then take up his share in the loss in his income tax return as a deductible loss.

(c) The share of a partner shall be subject to creditable withholding tax of 10% if the current year’s income
payments to the partner total P720 000 or below, or 15% if the same exceeds P720 000.

(d) For purposes of computing the distributive share of the partners, the net income of the partnership shall
be computed in the same manner as a corporation.

The distributable net income of the GPP may be determined by claiming either Itemized Deductions or
OSD:

(1) The Partners comprising the GPP can no longer claim further deductions from their distributive
shares in the net income of the GPP.
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(2) The partners of a GPP are also not allowed to avail of the 8% income tax rate option since their
distributive share from the GPP is already net of costs and expenses.

(3) If a partner also derives other income from trade, business, or practice of profession apart and
distinct from his share in the net income of the GPP, the deduction that can be claimed from this
other income would either be the Itemized Deductions or OSD.

Note: Co-venturers in a joint venture or consortium which is not subject to income tax have the same tax liability
as partners in an exempt partnership.

B. Partnerships Subject to Income Tax

All other partnerships, except those mentioned above (item A), no matter how created or organized, are
considered corporations subject to income tax (Sec. 22(B), NIRC).

Filing of Tax Return

Taxable partnerships, like ordinary corporations, are required to file quarterly income tax returns for the first,
second, third quarters, and an annual return based on their accounting periods.

Tax Liability of Partners in a Taxable Partnership

Partner Final Tax Rate Tax Base
Citizen or Resident Alien 10% Dividend or Share in the distributable after
tax net income of the partnership
NRAETB 20% Dividend or Share in the distributable after
NRANETB 20% Dividend or Share in the distributable after

Note: 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, is also subject to this final
tax.

Tax Liability of Corporate Co-Venturers in a Taxable Joint Venture (JV)

Co-Venturer Final Tax Rate Tax Base
DC Exempt Dividend of Share in the distributable after
tax net income of the JV
RFC Exempt Dividend of Share in the distributable after
NRFC 15% Dividend of Share in the distributable after

43
INCOME TAX ON CORPORATIONS

A corporation may be liable for at most seven (7) types of income taxes, namely:

Net Income Tax (on Ordinary Income)
Standard Income Tax Final Withholding Tax (on Passive Income)
Capital Gains Tax (on “Capital Gains”)
Minimum Corporate Income Tax (“MCIT”)
Penalty Income Tax
Improperly Accumulated Earnings Tax (“IAET”)
Gross Income Tax (“GIT”)
Special Income Tax
Branch Profits Remittance Tax (“BPRT”)

Definition

Under Section 22(B) of the NIRC, the term “corporation” shall include –

a) partnerships, no matter how created or organized;
b) joint stock companies
c) joint accounts (cuentas en participacion);
d) associations; or
e) insurance companies

However, the term does not include:

a) General professional partnerships (GPPs)

AND

b) joint venture or consortium formed for the purpose of (1) undertaking construction projects or (2) engaging in
energy operations pursuant to an operating or consortium agreement under a service contract with the
Government.

Classification of Corporations

(1) Domestic Corporations
(a) In general
(b) GOCCs EXC: SSS, GSIS, PHIC, LWDs
(c) Taxable partnerships
(d) Proprietary educational institutions/Non-profit hospitals
(e) FCDUs of domestic banks
(f) Service contractors/subcontractors engaged in petroleum operations
(g) Ecozone enterprises
(h) Exempt corporations

(2) Resident Foreign Corporations
(a) In general
(b) Resident international carriers
(c) OBUs
(d) ROHQs/RHQs of MNCs
(e) Service contractors/subcontractors engaged in petroleum operations
(f) Ecozone enterprises

(3) Non-resident Foreign Corporations
(a) In general
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(b) Non-resident owners/lessors of vessels chartered by Philippine nationals;
(c) Non-resident owners/lessors of aircraft, machineries, and other equipment;
(d) Non-resident cinematographic film owner, lessor or distributor

(4) Exempt Corporations

Types of Income Subject to Tax

(a) Ordinary Income/Net Income – refer to “Ordinary Income” table
(b) Passive Income – refer to “Passive Income” and Intercorporate Dividend” tables
(c) “Capital Gains”

ORDINARY INCOME

Source of Taxable
Corporate Taxpayer Income Tax Base Tax Rates
1. Domestic Within and Without the Net Income 30%
Philippines
2. RFC Within the Philippines Net Income 30%
only
3. NRFC Within the Philippines Gross Income enumerated Final withholding tax of
only by law 30%

PASSIVE INCOME

Passive Income DOMESTIC and RFC NRFC
Interest on currency bank deposit 20% 30%
Yield or any other monetary benefit
from:
(1) Deposit substitutes 20% 30%
(2) Trust funds, and similar 20% 30%
arrangements
Royalties 20% 30%
Interest from a depositary bank
7.5% (RFC)
under the expanded foreign Exempt
15% (DC)
currency deposit system

INTERCORPORATE DIVIDEND

Payor Recipient Tax
1. Domestic corporation Domestic corporation Not taxable
2. Domestic corporation RFC Not taxable
3. Domestic corporation NRFC 15% final WT

Capital Gains Tax on Capital Gains

1. Sale, exchange, or other disposition of domestic shares of stock:

(a) Not traded at the stock exchange:

By Domestic Corporation:
45
Net capital gain 15%

By Foreign Corporation:
Net gain over P100,000 5%
Amount in excess of P100,000 10%

(b) Shares listed and traded at the stock exchange:

6/10 of 1% based on the gross selling price.

Notes:
(1) Final tax on capital gains on the sale of shares of stock applies to all corporate taxpayers.
(2) The exceptions for individual taxpayers also apply for corporate taxpayers.

2. Sale of Real Property Classified as Capital Asset –

(a) Transaction subject – the sale, exchange, or other disposition of lands and buildings which are
not actually used in the business of the corporation and treated as “capital assets.”

(b) Tax rate and base –

(1) Seller domestic corporation – Final tax of 6% based on the gross selling price or FMV,
whichever is higher. The FMV is the higher between the Commissioner’s value and the
Assessor’s value (Sec. 27 (D)(5), NIRC).

(2) Seller RFC – Gain on sale is returnable, and subject to normal tax rate (30%).

(3) Seller NRFC – Final tax of 30% of the capital gain realized on the sale.

(c) Exemptions from CGT –
(1) Sale of raw lands to be sued for “socialized housing” projects, or sold under the
Community Mortgage Program under R.A. No. 7279 (Urban Development and Housing
Act of 1992).
(2) Land transfers under the Comprehensive Agrarian Reform Law of 1988.

DOMESTIC COMPANIES SUBJECT TO SPECIAL TAX RATES

(1) Proprietary educational institutions

Proprietary educational institutions are subject to a special tax rate of 10% of taxable net income
within and without the Philippines

Provided – the gross income from unrelated trade, business, or activity does not exceed 50% of the total
gross income derived from all sources. However, if it exceeds 50%, the normal tax rate will be applied on
the entire taxable income, i.e. 30%.

(2) Hospitals which are non-profit

Hospitals which are non-profit are also subject to a special tax rate of 10% of taxable net income
within and without the Philippines.

46
Provided – the gross income from unrelated trade, business, or activity does not exceed 50% of the total
gross income derived from all sources. However, if it exceeds 50%, the normal tax rate will be applied on
the entire taxable income, i.e. 30%.

(3) Final tax on income of a Foreign Currency Deposit Unit (“FCDU”) of a local bank under the Expanded
Foreign Currency Deposit System (“FCDS”)

a) Income from foreign currency loans granted to Philippine residents, (other than OBUs or other
depositary banks) – 10% final tax

b) Interest income from foreign currency interbank deposits – 10% final tax

c) Income from foreign currency transactions with non-residents, OBUs, local commercial
banks, and branches of foreign banks authorized to transact business under the FCDS –
Exempt

Note: “Income from foreign currency transactions” shall include interest income from lending
operations, including bank charges, commissions, service fees, and net foreign exchange transaction
gains.

(4) Service Contractors/Subcontractors Engaged in Petroleum Operations
- Liable to an eight percent (8%) final tax on gross income derived from such contract in petroleum
operations

Provided however, that any income received from all other sources within and without the
Philippines in the case of domestic contractors/subcontractors, shall be subject to the regular income
tax under the Tax Code.

(5) Ecozone Enterprises

All business enterprises registered with the Philippine Economic Zone Authority (“PEZA”), SBMA, or CDA
and operating within the Special Economic Zones (“ECOZONE”) availing the 5% GIT incentive taxed 5%
of gross income on registered activities. Three percent (3%) shall be paid to the National Government;
Two percent (2%) to the city or municipality where the enterprisers located.

Notes:

(a) The exemption from all other taxes under the Income Tax Holiday (ITH) and 5% GIT regimes
does not include the following:
1) Withholding taxes at source (expanded withholding tax (‘‘EWT”) and Final Withholding
Tax (“FWT”)) on income payments by PEZA-registered entities;
2) Withholding tax on compensation income of employees of PEZA-registered entities; and
3) Fringe Benefits Tax (“FBT”) on fringe benefits given to managerial or supervisory
employees of PEZA-registered entities.

These taxes are not the taxes of a PEZA-registered entity. Instead, these are taxes of a PEZA-
registered entity’s payees which are withheld and remitted by the PEZA-registered
enterprise.

(b) On the other hand, the BIR has ruled that all income payments received from its customers
related to its registered activities, by a PEZA-registered enterprise, whether availing the ITH or
5% GIT incentive, are exempt from the withholding tax.

47
(c) Income derived by an entity registered with the PEZA from its registered activities shall be
subject to such treatment as may be specified in its terms of registration, i.e. (a) the ITH where
such income shall be exempt from the regular income tax; or (b) the 5% preferential GIT, if the
same has been approved.

However, the following shall be subject to the regular internal revenue taxes (i.e., regular
corporate income taxes; final taxes on bank deposits, capital gains taxes, etc.):

1) Income realized by registered entities from activities which are not registered;
2) Income of entities/individuals which are not registered (i.e. income payments to
entities in the Customs Territory, to shareholders, and to non-registered creditors, etc.)
3) Income of Service Enterprises or providers (e.g. those providing customs brokerage,
transportation, parcel, janitorial, restaurant, banking, insurance services, etc.) which are
required by locator enterprises but which need not be physically based inside the
ECOZONE.

(6) Tourism Enterprises registered with the Tourism Infrastructure and Enterprise Zone Authority
(“TIEZA”)

As an alternative to the Income Tax Holiday (“ITH”) a new Registered Tourism Enterprise within a
Tourism Enterprise Zone may, in lieu of all national and local taxes, except real estate taxes and fees
as may be imposed by the TIEZA, pay a tax of five percent (5%) on its gross income earned from its
registered activities.

The 5% gross income tax shall be remitted as follows:
(a) One-third to be proportionally allocated among affected cities or municipalities based on the
area of the RTE
(b) One-third to the National Government; and
(c) One-third to the TIEZA.

(7) Microfinance NGO
A duly registered and accredited Microfinance NGO shall pay a two percent (2%) tax based on its gross
receipts from microfinance operations in lieu of all national taxes. However, the non-microfinance
activities of Microfinance NGOs shall be subject to all applicable regular taxes.

RESIDENT FOREIGN CORPORATIONS SUBJECT TO SPECIAL TAX RATES

(1) International carriers doing business in the Philippines shall pay a tax of two and one-half percent (2½
%) of Gross Philippine Billings (“GPB”)

GPB - 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;

Rules:
a) 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;

b) Provided, that for a flight or voyage which originates from the Philippines, but transshipment of
passenger takes place at any port outside the Philippines on another carrier, 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 the Gross Philippine Billings.
48

c) Where a passenger, his excess baggage, cargo, and/or mail originally commencing his flight or voyage
from a foreign port alights or is discharged in any Philippine port, and thereafter boards or is loaded
on another airplane/vessel owned by the same international carrier, the flight or voyage from the
Philippines to any foreign port shall be considered “originating from the Philippines” if the time
intervening between arrival to and departure from the Philippines exceeds forty-eight (48) hours.

(1) If the failure to depart within 48 hours is due to reasons beyond the control of the passenger such
as when the next available flight or voyage leaves beyond 48 hours, or such failure is due to force
majeure, the flight or voyage from the Philippines shall not be considered “originating from the
Philippines”;

(2) If the second aircraft/vessel belongs to a different international carrier, the flight/voyage from
the Philippines shall be considered originating from the Philippines regardless of the length of the
intervening period between arrival to and departure from the Philippines.

Preferential Rates

Under R.A, No, 10378, an international carrier or shipper is subject to the Gross Philippine Billings Tax of 2
½%, unless it is subject to a preferential rate or exemption on the agreement to which the Philippines is a
signatory or on the basis of reciprocity.

Note: However, such carriers may earn compensation or commission income from the sale of passage
documents to cover off-line19 flights/voyages of its principal office, or on-line20 flights/voyages of other
carriers. Such income shall not be subject to the 2 ½% GPB tax, but shall be subject to the regular rate of
income tax under Section 28(A)(1) of the Tax Code.

(2) Offshore Banking Units

An “offshore banking unit (“OBU”) shall mean a branch, subsidiary or affiliate of a foreign banking
corporation which is duly authorized by the BSP to transact offshore banking business in the Philippines.

a) Income from foreign currency loans granted to Philippine residents, (other than OBUs or other
depository banks) – 10% final tax

b) Interest income from foreign currency interbank deposits – 10% final tax

c) Income from foreign currency transactions with non-residents, OBUs, local commercial banks, and
branches of foreign banks authorized to transact business under the FCDS – Exempt

(3) Regional or Area Headquarters, and Regional Operating Headquarters of Multinationals

(a) Regional or area headquarters (“RHQ”) of multinationals shall not be subject to income tax.

(b) Regional operating headquarters (“ROHQ”) shall pay a tax of ten percent (10%) of their taxable
income (in the ITR).

Note: Any income derived from Philippine sources by a ROHQ when remitted to the parent company
shall be subject to the tax on branch profit remittances.

19 Off-line carriers refer to international carriers having no transportation operations to and from the Philippines.
20 On-line carriers refer to international carriers having or maintaining transportation operations to and from the Philippines.
49
(4) Service Contractors/Subcontractors Engaged in Petroleum Operations

- Liable to an eight percent (8%) final tax on gross income derived from such contract in petroleum
operations

Note: Any income received from all other sources within the Philippines in the case of foreign
subcontractors shall be subject to the regular income tax under the Tax Code.

(5) Ecozone Enterprises and TIEZA-registered enterprises

- Such enterprises availing the preferential GIT shall be taxed at 5% GIT shall be taxed at 5% of gross income
from registered activities in lieu of all taxes, national or local

NON-RESIDENT FOREIGN CORPORATIONS SUBJECT TO SPECIAL TAX RATES

In general, a non-resident foreign corporation is subject to a final withholding tax of 30% based on enumerated
gross income from all sources within the Philippines, except –

Rate and Base
(1) Non-resident cinematographic film owner, 25% of its gross income from all sources within the
lessor, or distributor Philippines

(2) Non-resident owner or lessor of vessels 4 ½ % of gross rentals or charter fees from leases or
chartered by Philippine nationals charters to Filipinos or corporations, as approved by
the Maritime Industry Authority

(3) Non-resident owner or lessor of aircraft, 7 ½% of gross rentals or fees
machineries, and other equipment

(4) Interest on foreign loans contracted on or after 20% of the amount of interest
August 1, 1986

(5) Income from transactions with depository Exempt
banks under the expanded Foreign Currency
Deposit System

Note: Royalty is subject to the rate of 30% as it is not one of the items of income subject to a special rate.

EXEMPT CORPORATIONS

The following organizations shall not be subject to income tax in respect to income received by them as such:

(A) Labor, agricultural, or horticultural organizations not organized principally for profit;

(B) Mutual savings bank not having a capital stock represented by shares; and cooperative banks without
capital stock organized and operated for mutual purposes and without profit;

(C) A beneficiary society, order, or association, operating for the exclusive benefit of the members such as a
fraternal organization operating under the lodge system, or a mutual aid association or a non-stock
corporation organized by employees providing for the payment of life, sickness, accident or other
50
benefits exclusively to the members of such society, order, or association, or non-stock corporation or
their dependents;

(D) Cemetery company owned and operated exclusively for the benefit of its members;

(E) Non-stock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans no part of its net income or
asset shall belong to or inure 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 stockholder or individual;

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social
welfare;

(H) A non-stock and non-profit educational institution;

(I) Government educational institutions;

(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 (Sec. 30, NIRC).

(L) Child-caring or child-placing institutions licensed and accredited by the Department of Social Welfare
and Development (“DSWD”) to implement the Foster Care Program under R.A. No. 10165, otherwise
known as the “Foster Care Act of 2012.”

(M) Duly registered cooperative on income from transactions with members and non-members as long as the
income is related to its main business or purpose. Provided, those with accumulated reserves and
undivided net savings exceeding P10 Million shall be exempt only on income from transactions with
members.

(N) Homeowners’ Associations (“HOAs”). Generally, fees, dues or contributions made to HOAs are taxable.
However, the same are exempt when the LGU having jurisdiction over the HOA certifies the lack of
resources for the HOA render its services.

(O) Non-stock Savings and Loan Associations (“S&Ls”). S&Ls accumulate savings of its members to be used
for long-term loans to members. These are exempt final taxes on interest income from deposits.

(P) Building and loan associations whose accounts are guaranteed by the Home Guaranty Corporation.

(Q) Other organizations exempt from income tax in accordance with special laws (exs. Philippine Red Cross;
PDIC; Sports Facilities under the control of the Philippine Snorts Commission; Veterans’ Federation of the
Philippines; National Commission for Culture and the Arts)

Income of Exempt Organizations Subject to Tax

The following income, of whatever kind and character, of the foregoing organizations shall be subject to income
tax:
1. From any of their properties, real or personal; or
51
2. From any of their activities conducted for profit.

The said income shall be taxable regardless of the disposition made of such income (Sec. 30, NIRC).

For-Profit Corporations Enjoying Exemption from Tax

1) BOI-registered enterprise21 enjoying ITH.

(1) New registered pioneer firms – 6 years from commercial operations.
(2) New registered non-pioneer firms – 4 years from commercial operations.
(3) Expanding firms – 3 years from commercial operations of the expansion.

In exceptional cases, existing firms undertaking new activities distinct from existing operations may
qualify as new projects subject to the setting up of separate books of account, in such cases, only sales
of such registered products shall be entitled to the ITH exemption.

Additional Period of Availment

Registered firms, the ITH incentive may be extended for an extra year for each of the following cases,
but in no case to exceed the total period of eight (8) years for pioneer registered enterprises.

(1) If the ratio of the total imported and domestic capital equipment to the number of workers for the
project does not exceed $25,000 to one worker; or
(2) If the average cost of indigenous raw materials used of the registered product is at least fifty percent
(50%) of the total cost ox raw materials for the preceding years prior to the extension unless the
BOI prescribes a higher percentage; or
(3) If the annual or average net foreign exchange savings or earnings (“NFEE”) amount to at least
US$500,000.00 during the first three (3) years of operations to be determined by the Board at the
end of such three-year period

2) PEZA-registered and TIEZA-registered enterprises availing of the ITH.

3) Enterprises registered as Barangay Micro Business Enterprise (“BMBE”)

A Barangay Micro Business Enterprise or BMBE refers to any domestic business entity or enterprise
engaged in the production, processing, or manufacturing of products or commodities, including agro-
processing, trading, and services, which activities are barangay-based and micro-business in nature, and
whose total assets including those arising from loans but exclusive of the land on which the particular
business entity’s office plant and equipment are situated, shall not be more than Three Million Pesos
(P3,000,000.00).

Registration

The Office of the Treasurer of each city or municipality shall register the BMBEs and issue a
Certificate of Authority (CA) to enable the BMBE to avail of the benefits under R.A. No 9178. Provided
21To qualify for BOI registration, the corporation, partnership, or association must be engaged or is proposing to engage:
1) in an area of activity listed in the Investment Priorities Plan (“IPP”);
2) if area of activity is not listed in the IPP, it is a domestic enterprise at least 60% owned by Filipinos with at least 50% of its production for export;
3) a domestic enterprise less than 60% is owned by Filipinos but exporting at least 70% of its production or exporting part of its production under
such terms and conditions and/or limited incentives as the Board may determine;
4) producing or manufacturing a product which is used as input to an export product;
5) export trading of export products bought by it from one or more export producers;
6) rendering service to domestic and foreign tourists if listed in the IPP;
7) in rendering technical, professional or other services as may be determined by the Board which are paid for in foreign currency; or
8) in exporting television and motion pictures and musical recordings made or produced in the Philippines, either directly or through an export trader.
(Rule I, Sec. 1(i), IRR of E.O. No. 226)
52
that only one Certificate of Authority shall be issued for each BMBE and only by the Office of the
Treasurer of the city or municipality that has jurisdiction over the principal Place of business of the
BMBE.

The LGUs shall issue the CA promptly and free of charge. However to defray the administrative costs of
registering and monitoring the BMBEs, the LGU may charge a fee not exceeding One Thousand Pesos
(P1,000.00)

Tax Exemption

Income tax exemption from income arising from the operations of the enterprise.

A duly registered BMBE shall be exempt from income tax on income arising purely from its operations as
such BMBE, Provided, the income tax exemption shall not apply to (a) income subject to final taxes, (b)
capital gains subject to the capital gains tax, and (c) compensation income (d) income from practice of a
profession received directly from clients; and (e) other income not effectively connected with the
operations of the BMBE.

The LGUs are encouraged either to reduce the amount of local taxes fees and charges imposed or to
exempt the BMBEs from local taxes, fees and charges (Sec, 7, R.A. No. 9178).

PENALTY TAXES IMPOSED ON CORPORATIONS

I. MINIMUM CORPORATE INCOME TAX (“MCIT”)

1. Who are subject?

(a) Domestic corporations, and
(b) Resident foreign corporations.

2. Rate and Base – Two percent (2%) of gross income. The taxpayer shall pay whichever is higher between
the MCIT and the regular corporate income tax (“RCIT”).

3. Effectivity – The fourth (4th) taxable year immediately following the year in which such corporation
commenced its business.

4. Carry forward of excess minimum tax – Any excess of the MCIT over the regular corporate income tax
(“RCIT”) in a particular year shall be carried forward and credited against the regular income tax for the
three (3) immediately succeeding taxable year.

5. Gross income (sale of goods) – The term “gross income” shall mean 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 and use.

6. Gross income (sale of services) – In the case of taxpayers engaged in the sale of services, “gross income”
means gross receipts less sales returns, allowances, discounts, and cost of services. “Cost of services” shall
mean all direct costs and expenses necessarily incurred to provide the services required by the customers
and clients, including –

53
(a) Salaries and employee benefits of personnel, consultants, and specialists directly rendering the
service, and
(b) Costs of facilities directly utilized in providing the service such as depreciation or rental of equipment
used and cost of supplies.

Provided, that in the case of banks, “cost of services” shall include interest expense. (Sec. 27 (E)(4), NIRC).

Note: According to the regulations, the term “gross income” will also include all items of gross income
enumerated under Section 32, whether or not derived from the taxpayer’s core business, except:

(a) Income exempt from income tax; and
(b) Income subject to final withholding tax (Rev. Reg. No. 12-2007)

7. Domestic Corporations Not Subject to MCIT

The minimum corporate income tax (“MCIT”) shall apply only to domestic corporations subject to the
regular corporate income tax (30%). Accordingly, the following shall not be subject to MCIT –

(a) Domestic corporations operating as proprietary non-profit educational institutions subject to tax at
ten percent (10%) on their taxable income;

(b) Domestic corporations engaged in hospital operations which are non-profit subject to tax at ten
percent (10%) on their taxable income;

(c) Domestic corporations engaged in business as depository banks under the expanded foreign currency
deposit system, otherwise known as Foreign Currency Deposit Units (“FCDUs”) on their –

(1) Income from foreign currency transactions with non-residents, offshore banking units in the
Philippines, local commercial banks, including branches of foreign banks, and other depository
banks, and

(2) Interest income from foreign currency loans granted to residents of the Philippines under the
expanded foreign currency deposit system, subject to final tax at ten percent (10%) of such
income.

(d) Firms that are taxed under special income tax regimes such as those PEZA- and TIEZA-registered
firms availing of the 5% GIT incentive.

(e) REITs – Real Estate Investment Trusts. The only corporation which is subject to the 30% RCIT but not
subject to the MCIT.

8. Resident Foreign Corporations Not Subject to MCIT

The minimum corporate income tax shall apply only to resident foreign corporations which are
subject to the regular income tax (30%). Accordingly, the MCIT shall not apply to the following:

(a) Resident foreign corporations engaged in business as “international carrier” subject to tax at 2.5%
of their “Gross Philippine Billings”;

(b) Resident foreign corporations engaged in business as Offshore Banking Units (“OBUs”) on their:

(1) Income from foreign currency transactions with non-residents, other offshore banking units,
local commercial banks, including branches of foreign banks, and

54
(2) Interest income from foreign currency loans granted to residents of the Philippines, subject to
final tax at ten percent (10%) of such income.

(c) Resident foreign corporations engaged in business as regional operating headquarters subject to tax
at ten percent (10%) of their taxable;

(d) Firms that are taxed under special income tax regimes such as those PEZA- and TIEZA-registered
firms availing of the 5% GIT incentive.

9. Relief From the Minimum Corporate Income Tax

The Secretary of Finance, upon the recommendation of the Commissioner, may suspend imposition of the
MCIT upon submission of .proof that the corporation sustained substantial losses on account of –

(a) A prolonged labor dispute;
(b) Because of “force majeure”;
(c) Because of legitimate business reverses.

Rules in Computation of MCIT

1) Excess MCIT, if any, for the year is computed annually, that is, in the 4th quarterly (annual) return.

2) The quarterly tax shall be the higher of the RCIT or the MCIT.

3) IF the quarterly tax due is the MCIT, the excess MCIT from previous taxable year(s) shall not be
allowed to be credited. However, (1) creditable withholding taxes, (2) quarterly income tax payments
paid in the previous quarter(s), and (3) excess tax credits of the prior year, are allowed as credits against
the quarterly MCIT due.

4) IF the quarterly tax due is the RCIT, the (1) excess MCIT from previous taxable year(s), (2) creditable
taxes withheld, (3) quarterly income tax payments paid in previous quarter(s), and (4) excess tax credits
of the prior year, are allowed as credits against the quarterly RCIT due.

Illustration: 2% of the gross income as of the end of the taxable year is hereby imposed upon any domestic
corporation beginning on the 4th taxable year immediately following the year in which such corporation
commenced its business operations. The MCIT shall be imposed whenever such corporation has zero or negative
taxable income or whenever the amount of MCIT is greater than the normal income tax computed due from such
corporation.

Any excess of the MCIT over the normal income tax as computed shall be carried forward on an annual basis and
credited against the normal income tax for the three (3) immediately succeeding taxable years.

A domestic corporation organized in 2006 provided the following information:
2014 2015 2016 2017 2018
Net Sales P 4,000,000 P 5,000,000 P 6,000,000 P 7,000,000 P 9,000,000
Cost of Sales 2,000,000 3,500,000 4,200,000 5,000,000 5,200,000
Business Expenses 1,900,000 1,550,000 1,820,000 2,100,000 2,300,000

Gross Income 2,000,000 1,500,000 1,800,000 2,000,000 3,800,000
MCIT (2% of GI) 40,000 30,000 36,000 40,000 76,000
Regular Tax (30% of Net 30,000 0 0 0 450,000
Income)
Excess of MCIT over 10,000 30,000 36,000 40,000 2015-(30,000)
Regular Tax 2016-(36,000)
2017-(40,000)
Tax Due 40,000 30,000 36,000 40,000 344,000
55
II. IMPROPERLY ACCUMULATED EARNINGS TAX

Concept of the Tax

In order to compel corporations to distribute or pay dividends to stockholders, the retention or accumulation of
earnings or profits beyond the reasonable needs of the business is made subject of tax.

The IAET is imposed upon corporations which are formed or availed of for the purpose of avoiding the income tax
by permitting earnings and profits to accumulate instead of being divided or distributed (Sec. 29 (B) (1), NIRC).

The IAET is an additional tax to the regular corporate income tax imposed on corporations under Title II of the
Tax Code (Sec. 29 (A), NIRC).

Corporations Subject to IAET
The tax is imposed on improperly accumulated taxable income earned starting January 1, 1998 by domestic
corporations (as defined under the Tax Code) which are classified as closely-held corporations (Sec. 4, Rev.
Regs. No. 2-2001)

Note: A branch of a foreign corporation is not liable for the IAET the same being a resident foreign corporation.
Closely-held Corporations Defined.

These are corporations where at least fifty percent (50%) in value of the outstanding capital stock or at least fifty
percent (50%) of the total combined voting power of all classes of stock entitled to vote is owned directly or
indirectly by or for not more than twenty (20) individuals (Sec. 4 Rev. Reg. No. 2-2001).

Corporations Not Subject to IAET

The IAET shall not apply to the following corporations:
(a) Banks and other non-bank financial intermediaries
(b) Insurance companies
(c) Publicly-held corporations;
(d) Taxable partnerships;
(e) General professional partnerships;
(f) Non-taxable joint ventures; and
(g) Enterprises duly registered with the TIEZA under RA, 9593, the PEZA under R.A. 7916, and enterprises
registered pursuant to the Bases Conversion and Development Act of 1992 under R.A. 7227, as well as
other enterprises duly registered under special economic zones declared by law which enjoy payment of
special tax rates on their registered operations or activities in lieu of other taxes, national or local (Sec.
4, Rev. Reg. 2-2001).

Circumstances Indicative of Purpose to Avoid the Tax
(1) Dealings between the corporation and its shareholders, such as withdrawals by the shareholders as personal
loans;
(2) Expenditure of funds by the corporation for the personal benefit of the shareholders;
(3) The investment by the corporation of undistributed earnings in assets having no reasonable connection with
the business (Sec. 19, Rev. Reg. No, 2);
(4) Advances in substantial sums made yearly to corporate officers who are at the same time the stockholders
(Basilan Estates vs. Commissioner, GRL-22492, September 5,1967);
(5) Investment of substantial earnings and profits of the corporation in an unrelated business or in the
stock or securities of an unrelated business;
(6) Investment in bonds and other long-term securities;
(7) Accumulation of earnings in excess of 100% of paid-up capital, not otherwise intended for the reasonable
needs of the business.

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Proper Accumulation of Profits
The following constitute accumulation of earnings for the reasonable needs of the business:
If retained for working capital needed by the business;
(a) Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of the
corporation as of the balance sheet date, inclusive of accumulations taken from other years;
(b) Earnings reserved for definite corporate expansion projects or programs requiring considerable capital
expenditure as approved by the Board of Directors or equivalent body;
(c) Earnings reserved for building, plants, or equipment acquisition as approved by the Board of Directors or
equivalent body;
(d) Earnings reserved for compliance with any loan covenant or pre-existing obligation established under a
legitimate business agreement;
(e) Earnings required by law or applicable regulations to be retained by the corporation or in respect of
which there is a legal prohibition against its distribution;
(f) In the case of subsidiaries, of foreign corporations in the Philippines, all undistributed earnings intended
or reserved for investments within the Philippines as can be proven by corporate records and/or
relevant documentary evidence (Sec. 3, Rev. Reg. No. 2-2001).

Tax Base or Basis of the Tax

The rate of the IAET is 10%. It is based upon the improperly accumulated taxable income for each taxable year.

Formula:

Current Year’s Taxable Income
Plus: 1) Income exempt from tax;
2) Income excluded from gross income;
3) Income subject to final tax;
4) Amount of NOLCO deducted.
Less: 1) Dividends actually or constructively paid from applicable year’s taxable income;
2) Income taxes paid or payable for the taxable year (both income tax in the ITR and final taxes); and
3) Amounts reserved for the reasonable needs of the business from the applicable year’s taxable income
Equals: IAET

Notes:
1) Once the profit has been subjected to IAET, the same shall no longer be subjected to IAET in later years
even if not declared as dividend.
2) Notwithstanding the imposition of IAET, profits which have been subjected to IAET, when finally
declared as dividends, shall nevertheless be subject to tax on dividends imposed under the Tax Code
except in those instances where the recipient is not subject thereto.

Period For Payment of Dividend/Payment of IAET

The dividends must be declared and paid or issued not later than one (1) year following the close of the taxable
year. Otherwise, the IAET, if any, should be paid within fifteen (15) days thereafter (Sec. 6, Rev. Reg. 2-2001).

SPECIAL INCOME TAXES

The Tax Code presently has two types of special income taxes, namely the branch profits remittance tax, and the
gross income tax.

I. BRANCH PROFITS REMITTANCE TAX (“BPRT”)

(a) Transaction subject – Any profit remitted by a branch of a foreign corporation to its head office (Sec. 28
(A) (5), NIRC).
57

This includes any income derived from Philippine sources by the Regional Operating Headquarters of a
multinational corporation when remitted to the parent company (R.A. No. 8756)

(b) Rate and Base – Fifteen percent (15%) of the total profits applied or earmarked for remittance (gross of
the BPRT), except those activities which are registered with the –

(1) Philippine Economic Zone Authority (“PIEZA”);
(2) Subic Bay Metropolitan Authority (“SBMA”);
(3) Clark Development Authority (“CDA”); and
(4) Tourism Infrastructure and Enterprise Zone Authority (“TIEZA”)

(c) Income not treated as branch profits – Income which are not connected with the trade or business in the
Philippines shall not be treated as “branch profits.”

Ex. Dividends from marketable securities.

(d) Tax treaties. The 15% rate may be reduced by international treaties to which the Philippines is a
signatory.

II. GROSS INCOME TAX (“GIT”)

Under Section 27(A) of the Tax Code, the President, upon recommendation of the Secretary of Finance, may allow
corporations the option to be taxed at fifteen percent (15%) of gross income as defined in the Tax Code
instead of the 30% net income tax.

(a) Corporations given the option – the option is available to domestic and resident foreign corporations
(Secs. 27 (A) and 28 (A) (1) NIRC).

(b) Requisite conditions – the option is available after the following conditions have been satisfied:

1) A tax ratio effort 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.

(c) Additional requisite – the option 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%)

(d) Period of irrevocability – 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.

(e) Rate and base – Fifteen percent (15%) of gross income where gross income shall be equivalent to gross
sales less sales returns, discounts, and allowances, and cost of goods sold.

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GAIN OR LOSS FROM SALE OR EXCHANGE OF PROPERTY

Sale or exchange of properties are classified into:

1. Sales resulting to Capital Gains (subject to “CGT”)

a) On the sale of domestic shares
b) On the sale of real property classified as capital assets

2. Tax-Free Exchanges – where No Gain nor Loss is Recognized

a) Tax-free exchanges pursuant to a corporate reorganization under Section 40(C)(2) of the Tax
Code (merger or consolidation)
b) Like-Kind Exchanges

3. Sales or Exchanges Where Gain, but Not Loss is Recognized

a) Exchanges not solely in kind pursuant to a corporate reorganization where boot is received
b) Transactions between related persons under Section 36(B) of the Tax Code
c) Illegal transactions

4. (a) Sale or Exchange of Ordinary Assets; and
(b) Sale or Exchange of Other Capital Assets (i.e. capital assets other than those whose sale is
subject to CGT)

– If the transaction is a sale, the gain or loss to be recognized is computed as follows:

Sale xxx
Less: Basis (xx)
Gain (Loss) xxx

– If the transaction is an exchange, the property received must be essentially different from the
property disposed of, otherwise no gain or loss is recognized. The gain or loss is computed as
follows:

FMV of the property received xxx
Less: Basis of property given (xx)
Gain (Loss) xxx

BASIS

a) If property was acquired by purchase, the basis of the property is the cost to the buyer

b) If the property was acquired by inheritance, the basis of the property is the FMV of the property at the
time of death of the decedent (step-up in basis)

c) If the property was acquired by gift, the basis of the property is the basis in the hands of the donor.
Except that if such basis is greater than the FMV of the property at the time of the gift, then the basis shall
be such FMV for the purpose of determining the loss.

d) If the property was acquired for less than an adequate consideration, the basis of the property is the
amount paid

e) If property was acquired in a previous tax-free exchange where gain or loss is not recognized under
Section 40(C)(2), the basis is the substituted basis
59
Adjusted Basis

- after a property is acquired, its basis can be increased by improvements that materially add to its value or
life, and is decreased by accumulated depreciation

Formula:

Basis of property xxx
Plus: Improvements xxx
Less: Accumulated Depreciation (xx)
Adjusted Basis xxx

Use of Basis
Basis is used to determine:
a) Gain or loss in transactions involving ordinary assets
b) Gain or loss involving capital assets which are not subject to the CGT
c) Gain or loss in the sale of domestic shares not traded in stock exchange
d) Gain or loss in forced sale of an individual taxpayer of real property to government in the
exercise of the latters’ power of eminent domain; and
e) Gain or loss in the sale of real property classified as capital asset of a RFC or NRFC

CLASSIFICATION OF PROPERTIES FOR TAX PURPOSES

Ordinary Assets Capital Assets
a) Stock included in inventory; Asset which is not an ordinary asset:
b) Property primarily held for sale; (1) Personal or non-business property, or
c) Property used in business which is (2) Asset held merely for investment, or
capitalized (3) Property not used in business
d) Real property used in the trade,
business, or profession of the
taxpayer

How taxed? How taxed?

Gain is 100% included in the ITR. Subject to FTs: Gain/Loss (“G/L”) is
recognized, but only Net
Loss is 100% deducted in the ITR if 1) Capital gains tax on sale of Capital Gain is included in the
taxpayer itemizes deductions domestic shares; ITR:
2) Capital gains tax on sale of
real property located in the 1) If taxpayer is an individual:
Philippines classified as
capital assets ST22 G/L = 100% recognized
LT23 G/L = 50% recognized

2) If taxpayer is a corporation:

100% recognized whether ST
or LT

Other Rules:
22 Short-term – holding period of taxpayer is not more than 1 year.

23 Long-term – holding period of taxpayer is more than 1 year.
60

3) Capital losses are allowed
only against capital gains

4) Any net capital loss (net
capital loss carry-over) of an
individual taxpayer can be
carried over to the next
succeeding year as a ST NCL,
but not to exceed the net
income for the year in which
the capital loss was incurred.

Corporations are not
allowed any net capital loss
carry-over.

Other Transactions Resulting in Capital Gains or Losses Where There is NO SALE

1) When stocks or bonds held as capital assets become worthless, capital loss is recognized.

2) When bonds (held as capital assets) are retired.

3) Gains or losses from failure to exercise options (option gains or losses)

4) When the assets of a corporation are distributed in complete liquidation thereof (liquidating dividend).
Capital gain or loss to the shareholder is recognized.

5) Redemption of preferred shares.

6) Liquidation of partnership. Capital gain or loss is recognized to the partners.

Formula:
Amount received for his partnership interest
Less: His investment in the partnership
Less: His share in the undistributed partnership income
Gain or loss to Partner (subject to holding period qualification)

7) Gains or losses from short sales

“Short selling” is selling something one does not own in the future at a particular price in the hope that
the property goes down in value. For tax purposes, a short sale is deemed consummated upon delivery of
the property to cover the short sale.

WASH SALES LOSS

Requisites
1) Sale of securities at a loss; and
2) Identical securities were purchased within a 61-day period, beginning 30 days before the sale, and ending
30 days after the sale.
3) The taxpayer is either (a) not a dealer in securities, or (b) if a dealer, the sale was not made in the
ordinary course of business.

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Notes:
a) “Purchase” includes entering into a contract or option to acquire identical securities.
b) IF taxpayer is a dealer in securities and the sale was made in the ordinary course of business, the loss on
the sale id deductible in the ITR.
c) IF taxpayer is not a dealer in securities or is a dealer but the sale was not made in the ordinary course of
business, the loss on the wash sale is a capital loss, but is not deductible against capital gains.

Formula for Non-Deductible Loss:

No. of Shares Acquired Within 61-day period x Loss = Non-deductible Loss
No. of Shares Sold

Formula for Tax Basis of Re-Acquired Shares:

Cost of Acquisition xxx
+ Wash Sale Loss (xx)
New Tax Basis/Cost xxx

TAX-FREE EXCHANGES OF PROPERTIES PURSUANT TO A MERGER OR CONSOLIDATION (CORPORATE
REORGANIZATION)

(1) If in pursuance of a plan of merger or consolidation:

(a) A corporation (transferor), which is a party to a merger or consolidation exchanges property
solely for stock24 in a corporation, which is a party to the merger or consolidation; or

(b) A shareholder (transferor), exchanges stock in a corporation, which is a party to the merger or
consolidation, solely for stock 25 of another corporation also a party to the merger or
consolidation; or
(c) A security holder (transferor), of a corporation, which is a party to the merger or consolidation,
exchanges his securities in such corporation, solely for stock or securities26 in another corporation,
a party to the merger or consolidation; or

OR

(2) A person (transferor), transfers his property to a corporation in exchange for stock27, or unit of
participation in such a corporation of which, as a result of such exchange said person, alone, or together
with others, not exceeding four (4) persons28, gains control of said corporation (Sec. 40 (C) (2), NIRC)

Tax Consequences:

(1) The transferor shall NOT recognize gain or loss (i.e., no CGT, no income tax, no CWT, no
donor’s tax, no VAT29); and
(2) The basis (cost) of the stock or securities received by the transferor shall be the same as the
basis of the stock, property, or securities transferred (substituted basis)

24 Whether voting or non-voting

27 Voting
28 The 4 other persons must also be transferors of property
29 However, if the properties transferred by the transferor is used in business or held for sale or for lease, the transfer shall be subject to VAT
(equivalent to 12% of the FMV of the property transferred)

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Example:

Marian bought 100 shares of X Corporation at P5 per share. Later X Corporation decided to merge with Y
Corporation. Pursuant to which Marian exchanged her 100 shares of X Corporation for 500 shares of Y
Corporation which had a FMV at that time of P7 per share.

(a) What is the gain of Marian?

Fair market value of Y shares received (P7 x 500 shares) P 3,500
Less: Basis in X shares transferred (P5 x 100 shares) (500)
Gain P 3,000

However, this gain will not be recognized and therefore is not taxable.

(b) What will the basis of the Y shares of Marian?

The basis of the Y shares will be the same basis in her X shares = P1/share x 500 shares = P500

(c) If Marian sells all the 500 Y shares to Ivy for P20,000, what will be the tax consequence to Marian?

Selling price of Y shares P20,000
Less: Basis (P1 x Y 500 shares) (500)
Gain P19,500

Since the Y shares are not traded in the stock exchange and are capital assets, the P19,500 gain shall be
subject to the 15% CGT.

HOWEVER, if the “Transferor” receives not only stock or securities, but also money or property, GAIN but
NOT LOSS shall be recognized.

Note: The money and/or property received is called “boot.”

Tax Consequences:

(1) Gain recognized ≤ Money + FMV of Property Received

EXC: No gain is recognized if the transferor is a corporation and the boot is distributed in accordance
with plan of merger or consolidation.

(2) Basis of the shares received by the transferor shall be computed as follows:

Formula:

Cost (basis) of the stock or property transferred P xxx
Less: (a) Money received P xxx
(b) FMV of property received xxx (xxx)
Balance P xxx
Add: (a) Gain recognized on the exchange P xxx
xxx Xxx
Basis (Cost) of the stock received P xxx

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INSTALLMENT METHOD

Installment Method Defined

The installment method is a special method of accounting whereby income on installment sales of property
during the year is allowed to be reported in installments in proportion to the installment payments actually
received which the gross profit bears to the total contract price (Sec. 49 (A) NTRC).

The 3 Cases Where Income May be Reported in Installments:

(a) Sale of personal property by a dealer – Dealers in personal property who regularly sell or otherwise
dispose of personal property on the installment plan (Sec. 49 (A), NIRC).

(b) Casual sale of personal property – Persons who make a casual sale or casual disposition of personal
property subject to the following conditions:

(1) The selling price exceeds P1,000;
(2) The initial payment must not exceed 25% of the selling price; and
(3) The property sold is not kind which would be includible in the inventory if on hand at the close of
the taxable year (Sec. 49 (B), NIRC)

(c) Sale of real property – Persons who sell or otherwise dispose of real property on installment plan are
also allowed to use the installment method to report the gain on the sale subject to one condition:

That the initial payment must not exceed 25% of the selling price (Sec. 49 (B) and (C), NIRC)

Important Installment Method Terms

(a) SELLING PRICE – The amount realized on the sale

Cash received P xxx
FMV of the property received xxx
Installment obligations of the buyer (evidence of indebtedness) xxx
Mortgage assumed by the buyer xxx
Selling price P xxx

(b) CONTRACT PRICE – The amount which the purchaser contracts to pay the seller. It includes:

Selling price P xxx
Less: Mortgage assumed by the buyer xxx
Balance xxx
Add: Excess of mortgage over cost xxx
Contract price P xxx

Note: Mortgage assumed by the buyer, if any, is part of the selling price, but is not part of the contract
price.

(c) INITIAL PAYMENTS – Payments received in cash or property (other than evidence of indebtedness of
the purchaser) during the taxable year in which the sale is made.

Down payment P xxx
Installments received in year of sale xxx
64
Total xxx
Add: Excess of mortgage over cost xxx
Initial payments P xxx

Notes:
1) “Initial payments” means at least one (1) other payment in addition to the initial payment. If
there is no payment during the first year, the income may not be returned on the installment
basis;
2) Commissions and other selling expenses paid or incurred by the vendor are not to be
deducted or taken into account in determining the amount of the “initial payments”, the
“total contract price,” or the “selling price” (Sec. 175, Rev. Reg. No. 2-1940)

Formula to Report Income under the Installment Method

Gross Profit x Installment = Income to be reported
Contract Price payments actually for the year
received

OR

Installment payment received x Gross Profit = Income to be reported
Contract Price for the year

Note: The installment method does not apply to deductions. Deductible items shall be deducted for the taxable
year in which the items are “paid or incurred” or “paid or accrued.”

Sale of Real Property (Capital Asset)

The sale of real property which is a capital asset is subject to final capital gains tax, whether the seller is an
individual, estate or trust, or a corporation.

Can the final tax be paid in installments?

Yes, the final tax can be paid in installments if the initial payments do not exceed 25% of the selling price.

Formula to compute the final tax in installments:

In year of sale: Initial Payment x Final Tax
Contract Price

In subsequent years: Installments Received x Final Tax
Contract Price

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Sale of Shares of Stock of a Domestic Company (Capital Asset)

When the shares are not traded through the stock exchange – the tax is based on the net capital gain realized:
(a) If sold by an individual – Subject to 15% final tax
(b) If sold by a corporation – subject to 15% final tax if sold by a domestic corporation; or 5% / 10% if sold
by a foreign corporation.
(c) If the shares are not traded through the stock exchange and are sold in installments, can the final tax be
paid in installments?

Yes, if the initial payment is not more than 25% of the selling price.

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FRINGE BENEFITS TAX (“FBT”)

Fringe Benefit Subject to the Fringe Benefits Tax (“FBT”)

The term “fringe benefit” means any good, service, or benefit other than the regular salary and allowances
received by an employee, and which may be furnished or granted in cash or in kind by an employer to an
individual employee.

Coverage
Fringe benefits subject to FBT are those benefits given or furnished to managerial or supervisory employees, and
not to the rank and file.

General Rules in the Valuation of Fringe Benefits

(a) If the fringe benefit is granted in money, or is directly paid for by the employer, then the value is the
amount granted or paid for.

(b) If the fringe benefit is granted or furnished by the employer in property and ownership is transferred to
the employee, then the value of the fringe benefit shall be equal to the fair market value (“FMV”) of the
property.

Note: The FMV of the property is the FMV determined by the BIR Commissioner or the FMV determined
by the Provincial or City Assessor, whichever is higher.

(c) If the fringe benefit is granted or furnished by the employer in property but the ownership is not
transferred to the employee (i.e., only the “usufruct” or the right to use the property is transferred), the
value of the fringe benefit is equal to the depreciation value of the property.

Rate of Tax and Tax Base

Tax rate = Final Tax of 35%

Tax base = Grossed up monetary value (“GUMV”) of the fringe benefit

GUMV = Monetary value of the fringe benefit ÷ 65%

Notes:
a) The final tax is imposed whether the employer is an individual, partnership, or corporation,
regardless of whether the employer is taxable or not, or the government or its instrumentalities.

b) The fringe benefit tax is a tax of the employee. It is a tax on the income or benefit received by
the employee. However, for convenience, the tax is imposed on the employer. The employer
is required by law to pay the tax for and in behalf of the employee.
Filing of Return and Payment of Tax

The fringe benefit tax is a final income tax on the employee to be “withheld” by the employer. The employer shall
file a Quarterly Remittance Return of Final Income Taxes Withheld on Fringe Benefits Paid to Employees Other
Than Rank and File (BIR Form No. 1603Q) and pay the tax “withheld” on or before the alst day of the month
following the close of the calendar quarter which “withholding” was made.

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With respect to employers enrolled with the Electronic Filing and Payment System (“eFPS”), the deadline for e-
filing BIR Form No. 1603Q and e-paying the tax due thereon shall be five (5) days later than the deadline for
manual filing.30

Note: No actual withholding of the tax can take place because the payments are generally made to
persons/entities (ex. Store, school, club, etc.) who are not the taxpayers subject to the fringe benefit tax.

Taxable FBs and Specific Valuation Guidelines

The guidelines for valuation of specific types of fringe benefits and the determination of the monetary value of the
fringe benefits are as follows:

(A) Housing Privilege

Case 1 – The employer leases (as lessee) residential property for the use of the employee.

Value of the benefit – Rental paid by the employer under the lease contract.

Monetary value of the benefit – 50% of the value of the benefit

Case 2 – The employer owns residential property which was assigned to an officer for his use as
residence.

Annual Value of the benefit – 5% of the FMV of the land and improvements as
determined by the BIR Commissioner or the Assessor,
whichever is higher.


Case 3 – The employer purchases residential property on the installment basis and allows the
employee to use the same as his residence.

Annual Value of the benefit – 5% of the acquisition cost exclusive of interest.


Case 4 – The employer purchases residential property and transfers ownership thereof in the name
of the employee.

Value of the benefit – Employer’s acquisition cost or FMV, whichever is
higher. The FMV is the higher between the BIR
Commissioner’s value and the Assessor’s value.
30Despite the provisions of the Tax Code mandating the quarterly payment of the FBT, the BIR has obligated withholding agents/employers to remit
the FBT monthly by filing BIR Form No. 0619F every tenth (10th) day of the following month when the withholding was made, regardless of the
amount withheld. For employers using the eFPS facility, the due date is on the fifteenth (15th) day of the following month. Employers with zero
remittance are still required to use and file the same form.
Employers shall thus pay the FBT monthly by filing BIR Form No. 0619F for the first 2 months of the quarter.
The quarterly FBT remittance return (BIR Form No. 1603Q) shall reflect therein the total fringe benefits paid/given during the quarter and the
resulting FBT due for the quarter. Whatever FBTs were previously paid in the first 2 months shall be available as tax credits against the FBT due for
the quarter. The resulting amount payable shall be the FBT payable for cue last month of the quarter.
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Monetary value – The entire value of the benefit

Case 5 – The employer purchases residential property and transfers ownership thereof to his
employee for the latter’s residential use at a price less than the employer’s acquisition
cost.

Value of the benefit – The difference between the FMV of the BIR
Commissioner or the FMV of the Assessor, whichever is
higher, and the cost to the employee.

Monetary value of the benefit – Entire value of the benefit

Case 6 – Housing Benefits Which Are Not Taxable – The following housing benefits provided by the
employer to its employees are not considered as taxable fringe benefits:

(a) Housing privilege of military officials of the Armed Forces of the Philippines consisting of
officials of the Philippine Army, Philippine Navy, and Philippine Air Force.

(b) A housing unit which is situated inside or adjacent to the premises of a business or factory. A
housing unit is considered adjacent to the premises of the business if it is located within the
maximum of fifty (50) meters from the perimeter of the business premises.

(c) Temporary housing for an employee who stays in a housing unit for three (3) months or less.

(B) Expense Accounts

(1) Expenses incurred by the employee which are paid by his employer. In this case, the employee
receives an entertainment or representation allowance which is subject to liquidation.
(2) Expenses paid for by the employee but reimbursed by his employer. In this case, the employee pays
for the expense and gets reimbursement from the employer.

Note: The above expenses shall not be taxable provided:
(a) The expenditures are duly receipted for and in the name of the employer, and
(b) The expenditures are connected with the trade or business of the taxpayer, that is, they are
not personal expenses attributable to the employee.

(3) Personal expenses of the employee (like purchases of groceries for the personal consumption of the
employee and his family) paid for or reimbursed by the employer to the employee shall be treated as
taxable fringe benefits of the employee whether or not the same are duly receipted for in the name of
the employer

Note: Representation and transportation allowances which are fixed in amounts and are regularly
received by the employees as part of their monthly compensation income shall not be treated as
taxable fringe benefits.

Such allowances are taxable as compensation income subject to regular tax rates.

(C) Motor Vehicle of Any Kind

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Case 1 – The employer purchases the motor vehicle in the name of the employee.

Value of the benefit – Acquisition cost


Case 2 – The employer provides the employee with cash for the purchase of a motor vehicle in the
name of the employee.

Value of the benefit – Amount of cash received by the employee


Case 3 – The employer shoulders a portion of the amount of the purchase price of the motor vehicle
in the name of the employee.

Value of the benefit – Amount of shouldered by the employer


Case 4 – The employer purchases the car on installment in the name of the employee.

Value of the benefit – Acquisition cost (exclusive of interest) divided by five
(5) years


Note: In Cases 1 to 4, the monetary value of the fringe benefit shall be the entire value of the benefit,
regardless of whether the motor vehicle is used by the employee partly for personal purposes and partly
for the benefit of the employer.

Case 5 – The employer owns and maintains a fleet of motor vehicles for the use of the business and
the employees.

Value of the benefit – Acquisition cost of all motor vehicles not normally used
for business purposes divided by 5 years


Case 6 – The employer leases and maintains a fleet of motor vehicles for the use of the business and
the employees.

Value of the benefit – Amount of rental payments for motor vehicles not
normally used for business purposes

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Case 7

(a) The use of aircraft or helicopters owned and maintained by the employer shall not be subject to the
fringe benefits tax. The use shall be treated as a business use.

(b) The use of a yacht, whether owned and maintained or leased by the employer shall be treated as a
taxable fringe benefit. The value of the benefit shall be measured based on the depreciation of the
yacht at an estimated useful life of 20 years.

(D) Household Expenses
The following personal expenses of the employee which are borne by the employer shall be treated as
taxable fringe benefits:

(1) Salaries of household help, personal driver of the employee, or other.
(2) Similar expenses like payment for homeowners’ association dues, garbage dues, etc.

(E) Interest on Loans at Less Than Market Rate
(1) If the employer lends money to his employee free of interest or at a rate lower than 12%, such
interest forgone by the employer (difference of the interest assumed by the employee and the rate of
12%) shall be treated as a taxable fringe benefit.
(2) The benchmark rate of 12% shall remain in effect until revised by a subsequent regulation.

(F) Social and Athletic Club Fees

Membership fees, dues, and other expenses borne by the employer for his employee, in social and athletic
clubs or other similar organization shall be treated as tangible fringe benefits of the employee in full.

(G) Expenses for Foreign Travel
Not subject to FBT – reasonable expenses of the Subject to FBT
employee paid by the employer of the purpose of
attending business meetings or foreign conventions:

(a) Inland travel expenses such as expenses for (a) 30% of the cost of first class airplane tickets;
food, beverage, and local transportation;

(b) The cost of lodging in a hotel or similar (b) Lodging cost in a hotel or similar establishment
establishment amounting to an average of in excess of US$300 per day;
US$300 or less per day;

(c) The cost of economy and business class (c) Travelling expenses paid by the employer for
airplane tickets; the travel of the family members of the
employee;

(d) 70% of the cost of first class airplane tickets. (d) When there is no documentary evidence
showing that the employee’s travel abroad was
in connection with business meetings or
conventions, the entire cost of the ticket,
including the cost of hotel accommodations and
other expenses incident thereto shouldered by
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the employer, shall be treated as taxable fringe
benefits.

(H) Holiday and Vacation Expenses

Holiday and vacation expenses of the employee borne by his employer shall be treated as taxable fringe
benefits.

(I) Educational Assistance

Subject to FBT Not Subject to FBT
Cost of education assistance to the employee which IF:
is borne by the employer (a) The education or study involved is directly
connected with the employer’s trade,
business, or profession; AND
(b) There is a written contract that the employee
is under obligation to remain in the employ of
the employer for a period of time mutually
agreed upon.

Cost of educational assistance extended by an When the assistance is provided through a
employer to the dependents of an employee competitive scheme under a scholarship program of
the company

(J) Cost of Insurance

Subject to FBT Not Subject to FBT
Cost of life or health insurance and other non-life (a) Contributions of the employer for the benefit of
insurance premiums borne by the employer for his the employee pursuant to the provisions of
employee existing laws, such as contributions to the
Social Security System, the Government Service
Insurance System, and similar contributions
under the provisions of any other existing law.

(b) The cost of premiums borne by the employer
for the group insurance of his employee.

(K) Stock Options
Stock options granted by an employer to its employee(s) involving the employer’s own shares or the shares
of another corporation are considered compensation. The amount of such compensation shall be the FMV
of the stock options at the time the services were rendered.

If the grantee exercises the option in the future, additional income may be recognized the grantee which
shall give rise to the following tax consequences31:

When the option is granted by an employer (involving its own shares of stock or shares of another
corporation) to its rank-and-file employee, and the latter actually exercises the option by paying the exercise
price, additional taxable compensation shall be recognized by the employee and shall be subjected to the
31It goes without saying that the exercise of the option will result to additional income only if the stock is worth more than the exercise price on the
date the option is exercised. Otherwise, the option will not even be exercised, and no additional income will be realized.
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creditable withholding tax on compensation. Such additional compensation shall be equivalent to the
difference of the higher of the book value or FMV of the underlying shares at the time of the exercise of the
option, and the exercise price.

However, if the employee exercising the option is a supervisory or managerial employee, such additional
compensation shall be treated as a fringe benefit subject to the final fringe benefit tax (“FBT”) under Section
33 of the Tax Code (RMC 79-2014).

Tax Accounting for FB Expense and FB Tax

(a) The “fringe benefit expense” and “fringe benefit tax” shall constitute allowable deductions from gross
income of the employer.

Ex. The fringe benefit expense of P35,000 and fringe benefit tax of P18,846 are deductible from gross
income of the employer, and shall be taken up in the employer’s books of accounts as follows:

Debit – Fringe benefit expense 35,000
Debit – Fringe benefit tax expense 18,846
Credit – Cash 53,846

(b) If the basis of the computation of the fringe benefits (“FB”) tax is the depreciation value of the property,
only the FB tax shall constitute a deductible expense of the employer.

Provided, however, if the zonal value or FMV of the said property is greater than its cost subject to
depreciation, the excess amount shall be allowed as a deduction from the employer’s gross income as a
fringe benefit expense

Other Fringe Benefits Not Subject to Fringe Benefits Tax (Sec 33 (A), (C), NIRC)

(A) Fringe benefits which are authorized and exempted from income tax under the Tax Code or under special
law;

(B) Contributions of the employer of the benefit of the employee to retirement, insurance, and hospitalization
benefit plans;

(C) Benefits given to the rank and file, whether granted under a collective bargaining agreement or not;

(D) If the grant of the fringe benefit is for the convenience or advantage of the employer.

(1) In the case of meals, they must be furnished on the business premises of the employer

(2) In the case of lodging, the lodging must be furnished on the business premises of the employer and
the employee must be required to accept such lodging as a condition of his employment in order for
the employee to properly perform the duties of his employment.

(E) “De minimis” Benefits

“De minimis” benefits which are exempt from the income tax on compensation as well as from the fringe
benefit tax shall be limited to 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, or efficiency of his employees, such as the following:

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(1) Monetized unused vacation leave credits of employees (in the private sector) not exceeding 10 days
during the year;

(2) Monetized value of vacation and sick leave credits paid to government officials and employees;

(3) Medical cash allowance to dependents of employees not exceeding P1,500 per semester or P250 per
month (or P3,000 per year);

(4) Rice subsidy of P2,000 or one (1) sack of 50 kg. of rice per month amounting to not more than P2,000
(or P24,000 per year);

(5) Uniform and clothing allowance not exceeding P6,000 per annum;

(6) Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual
medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10,000
per annum;

(7) Laundry allowance of P300 per month (or P3,600 per year);

(8) Employee achievement awards, e.g. for length of service, loyalty, safety achievement, etc. To be
exempt:

(a) The award must be in the form of tangible personal property other than cash or gift
certificates;

(b) The annual monetary value must not exceed P10,000; and

(c) The award must be given under an established written plan which does not discriminate in favor
of highly paid employees.

(9) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee
per annum;

(10) Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty-five percent
(25%) of the basic minimum wage on a per region basis;

(11) Benefits received by an employee by virtue of a collective bargaining agreement (“CBA”) and
productivity incentive schemes. Provided, the total annual monetary value received from both the
CBA and productivity incentive schemes combined, do not exceed Ten Thousand Pesos (P10,000) per
employee per taxable Year (Rev. Regs. No. 3-98, as amended by Rev. Regs. Nos. 5-2011 and 1-2015)

Notes:

a) The abovementioned eleven (11) items are not only exempt from the FBT but also from the withholding
tax on compensation income of managerial, supervisory and rank and file employees.

b) The amount of “de minimis” benefits conforming to the abovementioned prescribed ceilings shall not be
considered in determining the P90,000 ceiling of “13th month pay and other benefits” excluded from
gross income under Section 32 (B)(7)(e) of the Tax Code.

Provided that, the excess of the “de minimis” benefits over their respective ceilings shall be considered as
part of “13th month pay and other benefits” and the employee receiving it will be subject to tax only on
the excess over the P90,000 ceiling.

c) Minimum wage earners (“MWEs”) receiving “13th month pay and other benefits” exceeding the P90,000
limit shall be taxable on the excess benefits over P90,000.
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Taxation of Fringe Benefits of NRANETB

A non-resident alien not engaged in trade or business in the Philippines who receives a fringe benefits is subject
to the fringe benefit tax as follows:

Rate - twenty-five percent (25%)

Tax Base - the grossed-up monetary value of the fringe benefit computed by dividing the
monetary value of the fringe benefit by seventy-five percent (75%).

Valuation of FBs subject to FBT

FB Value of Benefit Monetary Value of
Benefit
(A) Housing Privilege
Case 1: ER lets EE use ER-leased property Rent paid by ER 50% of Value
Case 2: ER lets EE use ER-owned property 5% of FMV (higher of zonal 50% of Value
and assessor’s value)
Case 3: ER buys property in installment and lets the EE 5% of acquisition cost 50% of Value
use the same exclusive of interest
Case 4: Transfer to EE of ER’s property Higher of cost or FMV Value
Case 5: Transfer to EE of ER’s property at less than the Difference between the FMV Value
acquisition cost of ER and the cost of EE

(B) Expense Accounts
(1) Allowance subject to liquidation Amounts paid by ER Value
(2) Amounts reimbursed by ER Amounts reimbursed by ER Value

(C) Motor Vehicle
Case 1: ER buys vehicle in the name of EE Cost Value
Case 2: ER gives EE cash to buy vehicle Cash received Value
Case 3: ER shoulders portion of cost Amount shouldered by ER Value
Case 4: ER purchases vehicle on installment in the name 20% of acquisition cost Value
of EE (exclusive of interest)
Case 5: ER lets EE use ER-owned vehicle 20% of acquisition cost 50% of Value
Case 6: ER lets EE use ER-leased vehicle Rentals paid for vehicle 50% of Value
Case 7: ER lets EE use ER-owned yacht 5% of acquisition cost Value

(D) Household Expenses
(1) Salaries of household help, driver, etc. Amount of salaries paid Value
(2) Payment for other similar expenses like association Amount paid Value
dues, garbage dues, etc.

(E) Less than Marker Rate Interest on Loans Difference between 12% and Value
the interest charged

(F) Social and Athletic Club Fees Amounts paid by ER for EE Value

(G) Expenses for Foreign Travel
(1) No documentary evidence that the foreign travel Amounts shouldered by ER Value
was in connection with business meeting or
convention
(2) There is documentary evidence that the foreign
travel was in connection with business meeting or
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convention:

i. 30% of cost of first class ticket;
ii. Excess of lodging cost over $300/day Amounts paid by ER Value
iii. Travelling expenses for the travel of EE’s
family

(H) Holiday and Vacation Expenses Amounts borne by ER Value

(I) Educational Assistance
(1) Education of EE UNLESS education is connected Amount paid by ER Value
with the ER’s business and EE is obligated to
remain in the employ of the ER for a certain period
of time
(2) Education of EE’s dependents UNLESS assistance is Amount pay by ER Value
provided through a competitive scheme under a
scholarship program of the ER

(J) Cost of Insurance borne by ER for the EE UNLESS Premiums or contributions Value
the contribution is pursuant to existing law (ex. paid by ER
SSS, GSIS, PhilHealth), or if the ER

(K) Stock Options: Upon exercise of the stock option Higher of book value or FMV Value
of the shares less the exercise
price

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GROSS INCOME

EXCLUSIONS FROM GROSS INCOME

What are Exclusions?

Exclusions are income or receipts which are excluded from gross income, i.e. these are not included in the
determination of a taxpayer's gross income.

Hence, these incomes or receipts are hot subject to income tax. However, despite their non-inclusion from gross
income, such income items may be subject to taxes other than the income tax.

Exclusions Under the Tax Code

The following items shall not be included in gross income and shall be exempt from income tax:

A. Proceeds of Life Insurance Upon Death of the Insured

The proceeds of life insurance policies paid to the heirs or beneficiaries upon death of the insured shall be
exempt from income tax. The proceeds of life insurance are treated more as an indemnity for the life lost
instead of as gain, profit, or income.

Note: Interest payments made by the insurer constitutes income to the recipient.

B. 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.

Notes:
a) The excess of the proceeds received over the premiums paid is included in gross income
b) Participating dividends distributed to life insurance policy holders are actually a return of overpaid
premiums. They are therefore excluded from gross income of the insured.

C. Gifts, Bequests, and Devices

The value of property acquired by gift, bequest, devise or descent are exempt from income taxation.

Note: The income from the lease, sale, exchange, investment, or other disposition of such property shall be
subject to income tax.

D. Compensation for Injury or Sickness

a) Amounts received, through accident or health insurance, or under Workmen’s Compensation Acts, as
compensation for personal injuries or sickness; Plus

b) The amounts of any damages received, whether by suit or agreement, on account of such injuries or
sickness.

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c) Damages representing compensation for personal injuries arising from libel, defamation, slander, breach
of promise to marry, or alienation of affection.

- Includes moral damages. Moral damages include physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and
similar injury.

- Includes exemplary or corrective damages. These are imposed by way of example or
correction for the public good.

E. Income Exempt Under Treaties

Income of any kind, to the extent required by any treaty obligation or international agreement to be exempt
from taxation by the Republic of the Philippines.

F. Retirement Benefits, Pensions, Gratuities, Separation Pay Which Are Exempt From Income Tax

As a general rule, retirement benefits, pensions, separation pay are all taxable.

As exceptions, the following benefits and payments are EXEMPT from income tax:

a) Retirement benefits and/or pensions which are exempt from income tax:

Under RA No. 7641 (Retirement Pay Law). In the Under the Tax Code, retirement benefits and/or
absence of a retirement plan for employees, pension amounts received by officials and
employers are required to pay a retirement benefit employees of private firms, whether individual or
equal to at least ½ month salary for every year of corporate, shall be exempt from income tax when
service. the requisites for exemption in the Tax Code are
complied with.

Requisites for exemption: Requisites for exemption:
i. The employee has reached the age of 60 or i. There must be a reasonable private
more, but not beyond 65; and benefit plan maintained by the employer;
ii. The employee has served for at least 5 ii. The retiring official or employee has been
years in the same establishment. in the service of the same employer for at
least 10 years;
iii. The retiring official or employee is not
less than 50 years of age at the time of
his retirement;
iv. The benefits of exemption granted shall be
availed of by an official or employee only
once.

b) Separation pay due to a cause beyond the control of the employee

Any amount received by an official or employee, or his heirs, from the employer as a consequence of
separation of such official or employee from the service of the employer due to:

(1) Death;
(2) Sickness;
(3) Other physical disability; or
(4) For any cause beyond the control of the said official or employee.
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Note: Separation pay due to the above-mentioned causes are exempt from income tax regardless of the
age or length of service of the employee.

The exemption does not cover salaries, 13th month pay and other benefits in excess of P90,000, and
other payments which are properly taxable to the employee.

c) Social security benefits, retirement gratuities, pensions and other similar benefits received by
resident or non-resident citizens of the Philippines, or aliens who come to reside in the Philippines, from
foreign agencies and other institutions private or public.

d) Payment 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 Veteran Administration.

e) Benefits received from or enjoyed under the Social Security System (SSS) in accordance with the
provisions of Republic Act 8282.

f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by
government officials and employees.

g) Maternity benefits advanced by the employer to the employee are excluded from gross income, and are
therefore exempt from withholding tax.

G. Miscellaneous Items

a) Income derived by foreign governments, financing institutions owned or controlled by foreign
governments, and international or regional financial institutions established by foreign
governments from investments or deposits in the Philippines.

b) Income derived by the Philippine Government or its Political Subdivisions from the exercise of
any governmental function.

c) Prizes and awards primarily in recognition of religious, charitable, scientific, educational, artistic,
literary, or civic achievement but only if:
(1) The recipient was selected without any action on his part to enter the contest or proceeding; and
(2) The recipient is not required to render substantial future services as a condition to receiving the
prize or award.

d) Prizes and awards granted to athletes in local and international sports competitions and tournaments
whether in the Philippines or abroad and sanctioned by their national sports association.

e) 13th Month Pay and Other Benefits received by officials and employees of public and private entities as
“13th month pay and other benefits” which shall include:

(1) The 13th month pay, and other incentives such as productivity incentives and Christmas bonus; and
(2) The excess of the de minimis fringe benefits over their respective ceilings.

Provided, however, that the total exclusion shall not exceed Ninety Thousand (P90,000) Pesos
(P82,000 before the TRAIN law).

f) Compulsory or mandatory contributions of employees to GSIS, SSS, Medicare (PHIC), and PAG-
IBIG, and union dues of individuals.

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Note: Contributions in excess of the mandatory contributions are not deductible from gross income.
Moreover, GSIS Educational Plan, GSIS Optional Insurance, GSIS Unlimited Optional Insurance, and GSIS
Memorial Plan premiums shall not be deductible.

g) Gains from the sale, exchange or retirement of bonds, debentures, or other certificates of
indebtedness with a maturity of more that 5 years.

h) Gains from Redemption of Shares in Mutual Fund

i) Income of non-residents from transaction with Domestic Depository Banks and OBUs Under the
Expanded Foreign Currency Deposit System

j) Personal Equity and Retirement Account (“PERA”)

PERA refers to the voluntary retirement account of an individual (called a “Contributor”) established from
his own Qualified PERA Contributions and/or Qualified Employer Contributions, for the purpose of being
invested solely in qualified or eligible PERA investment products.

k) Representation and transportation allowances (“RATA”) granted under Section 34 of the General
Appropriation Act to certain officials and employees of the government from the rank of Department
Secretaries to Division Chiefs are not subject to income tax and to the withholding tax.

l) Personnel Economic Relief Allowance (“PERA”) granted to all employees of the National Government,
Local Government Units, including government owned or controlled corporations, is considered
remuneration/compensation for services performed by the employees in the performance of official
duties, hence, not taxable income.

m) Capital contributions to corporations/partnerships are not income of the corporation/partnership,
and hence not subject to income tax.

n) Project-related income from the development of socialized housing sites. The private sector (ex.
contractors) shall be exempt from payment of project-related income taxes (including CGT) on a per
project basis on income realized from the development of socialized housing sites.

Yield or income from any low-cost or socialized housing-related asset-backed security.

o) Income from the commercialization of technologies developed by local inventors or researchers
under R. A. No. 7459 during the first ten (10) years from the date of the first sale.

p) Proceeds which constitute a fund held in trust by the taxpayer, and which do not redound to the
benefit of the taxpayer.

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GROSS INCOME

Concept of Gross Income

Gross income means the total income of a taxpayer subject to tax. It includes the gains, profits, and income
DERIVED FROM WHATEVER SOURCE, whether legal or illegal.

It does not include income excluded by law, or which are exempt from income tax.

Gross Income Defined

Gross income means all income derived from whatever source, including, but not limited to the following
items:
(1) Compensation for services;
- Including pensions and retiring allowances (except those exempt by law)
(2) Gross income derived from the conduct of trade or business or the exercise of profession;
(3) Partner’s distributive share from the net income of a general professional partnership;
(4) Rents
(5) Annuities (excess over premium paid);
(6) Gains derived from dealings in property;
(7) Interest income;
(8) Royalties;
(9) Dividends;
(10) Prizes and winnings;

Note: The above enumeration is not exclusive. Gross income may also include other forms of income which
are not even mentioned in the list above. An example of this would be income from illegal sources.

Items of Gross Income

1. Compensation For Services

Compensation for services, of whatever kind and in whatever form paid, forms part of gross income. The
name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments
and honoraria, allowances, commissions (e g. transportation, representation, entertainment, and the like);
fees, including director’s fees, if the director is, at the same time, an employee of the employer/corporation;
taxable bonuses and fringe benefits, except those which are subject to the fringe benefits tax under Section 33
of the Tax Code; taxable pensions and retirement pay; and other income of a similar nature constitute
compensation income.

(A) Compensation Income which may be in the following forms:
a) Cash
b) Allowances
c) Property – the FMV of the thing taken in payment is the amount of compensation
d) Employer’s stock – the FMV of the shares at the time the services were rendered.
e) Promissory notes – the fair discounted value of the note as of the time of receipt. The employee
shall also record additional income upon the recovery of the discount.
f) Forgiveness of debt for services rendered to ta creditor
Note: Where the debtor is a stockholder of the corporation condoning the debt, the condonation of
the debt amounts to an indirect payment of dividend.
g) Income tax of the employee assumed or paid by the employer, in consideration of the latter’s
services.
h) Pensions and retiring allowances – except those exempt by law
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i) Stock options – the FMV of the stock option at the time the services were rendered by the
employee.

(B) Stock Options

1) The amount of compensation shall be the FMV of the stock options at the time the services were
rendered.

2) When the employee exercises the option by paying the exercise price (equity-settlement option), it
results in additional income. Such additional income shall equal the higher of the book value or FMV
of the shares, less the exercise price.
(a) If the employee is a rank-and-file employee, the additional income shall be recognized by
the employee as taxable compensation and shall be subject to the CWT on compensation.
(b) If the employee is a supervisory or managerial employee the additional income shall be
treated as a fringe benefit subject to the final FBT
3) When the grantor (the corporation) simply pays the difference between the FMV of the shares and
the exercise price (cash-settlement option), the same rules in (2) above apply.

(C) Fringe Benefits which may be in the form of (1) meals furnished or subsidized by the employer; (2)
living quarters; (3) life insurance premiums paid by the employer where the insured employee is the
beneficiary; (4) facilities or privileges provided by the employer; or allowances.

Fringe benefits are classified under the following categories, namely:

Those subject to the fringe benefits tax (“FBT”)

- Fringe benefits given to employees holding managerial or supervisory positions, and which
are listed in RR No. 3-98, as amended

Those included in gross income in the ITR

- Fringe benefits given to rank and file employees
- Fringe benefits given to employees holding managerial or supervisory employees and which
are not listed in RR No. 3-98, as amended

Those which are not taxable

- Fringe benefits given to employees for the convenience of the employee, or if incurred by the
employee in the pursuit of the trade, business, or profession of the employer and is
liquidated and accounted for by the employee.
- “De minimis” fringe benefits

(D) Salaries and Allowances During Leaves of Absence

(E) Separation Pay NOT Due to a Cause Beyond the Control of the Employee

General Rule: Separation pay is included in gross income of separated employee

Exception: If separation is caused by something not of the employee’s making. For example, if
separation is due to cessation of the business, or as a consequence of death, sickness, other
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physical disability, or for any cause beyond his control, the separation shall be exempt
from tax.

(F) Fees

Fees received by an employee for the performance of a service for the employer, including director’s
fees (including per diems and allowances), are regarded as compensation income.

Marriage fees, baptismal offerings, sums paid for saying masses for the dead, and other contributions
received by a clergyman, evangelist, or religious worker for services rendered are considered
compensation.

Exception: Authorized fees paid to public officials, such as notaries public, clerks of court, sheriffs, etc.,
for services rendered in the performance of their official duties, are not considered wages.

(G) Dismissal Payment

Any payment made by an employer to an employee on account of dismissal, that is, involuntary
separation from the service of the employer, constitutes wages, regardless of whether the employer is
legally bound by contract statute, or otherwise to make such payment

(H) Tips and Gratuities

Tips or gratuities paid directly to an employee (by a customer of the employer) which are not accounted
for by the employee to the employer are considered taxable income, but not subject to withholding
tax.

2. Gross Income From Business

1) In general, “gross income” means total sales less COGS, plus any income from investments and from any
incidental or outside operations or sources.

Formula:

Gross Sales P xxx
Less: Cost of good sold xx)
Gross profit from sales P xxx
Add: Other Income P xxx
(a) Income from investment P xxx
(b) Income from incidental or outside
operations or sources xxx xxx
Gross Income P xxx

2) Income from Long-Term Contracts

The term “long-term contracts” refers to construction, installation, or building contracts requiring a
period longer than one (1) year for completion.

Income therefrom is reported under the percentage of completion basis.

3) Gross Income From Farming
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The income tax regulations prescribe three (3) methods of reporting the gross income from farming,
namely:

(a) Cash basis, or receipts and disbursements basis. Under this method, no inventory is used to
determine profits.

Formula –

Cash from sales of livestock and other products raised in the farm
+ Value of property received from sales
+ Profits/Gains from the sale of livestock or other items purchased
+ Gross income from all other sources
TOTAL gross income

(b) Accrual basis. Under this method, inventory is used to determine profits
Formula –
Sales xxx
Ending Inventory xxx
Less beginning inventory (xx)
Less purchases (xx) (xx)
Gross Income xxx

(c) Crop basis. This method of reporting income may be used by a farmer engaged in producing
crops which take more than (1) year from the time of planting to the time of gathering and
disposing of the crop.

In such cases, the entire cost of producing the crop must be taken as a deduction in the year in
which the gross income from the crop is realized.

4) Gross Income From Petroleum Operations

Gross income from petroleum operations means its total entitlement of the gross proceeds from the
sale at market price, during the taxable year, of petroleum produced under the service contract, and
such other income incidental to and arising from any one or more of the petroleum operations of the
contractor.

Provided, the amount of Filipino participation incentive allowance received by a Philippine corporation
pursuant to an operating agreement under a petroleum service contract between a service contractor
and the Government under P.D. No. 87 shall not be included in the gross income of the Philippine
corporation.

3. Payments Made by a GPP to a Partner, and the Distributive Share of Partners in the Net Income of a GPP

4. Rent or Lease Income

Reporting of Income by a Lessor

Rent paid by the lessee for the use or lease of property is taxable income to the lessor.

Rent income may be in the following forms:
(1) Cash, at the stipulated price;

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(2) Obligations of the lessor to third persons paid or assumed by the lessee in consideration of the
contract of lease. An example is the real estate tax on the property leased assumed by the lessee.

(3) Advance payment which must be pre-paid rentals and not (a) a loan to the lessor, or (b) option
money for the property, or (c) security deposit for the faithful performance of the lessee’s
obligations

However, a security deposit that is applied to rentals is taxable income to the lessor.

Pre-paid rent must be reported in full in the year of receipt, regardless of the accounting
method used by the lessor.

(4) Leasehold improvement

The contract of lease may provide that the lessee may make permanent improvements on the lease
property and said improvements will belong to the lessor upon termination of the lease.

Income and Deduction from Leasehold Improvement

(a) Income of Lessor

The lessor, in such a case, may, at his option, report income under any of the following methods:

1) Outright method – lessor reports as income the FMV of the improvement in the year of
completion.

2) Spread-out method –

The lessor shall spread over the remaining term of the lease the estimated depreciated
(book) value of such buildings or improvements at the termination of the lease, and report
as income for each remaining term of the lease an aliquot part thereof

Formula:

Cost of leasehold improvements P xxx
Less: Depreciation for remaining term of lease (xx)
Book value, end of lease P xxx

Book value end of lease = Income per year P xxx
Remaining term of lease

(b) Deduction of Lessee (Depreciation expense)

The lessee may claim depreciation of the improvements over the remaining term of the lease or
the life of the improvements, whichever is shorter.

(c) Computation of Income from Leasehold Improvement Arising from the Pre-termination
of Lease Contract

The lessor receives additional income for the year in which the lease is so terminated to the
extent that the value of such building when he became entitled to such possession exceeds the
amount already reported as income on account of the erection of such building.

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Formula –
BV of Leasehold Improvement at termination of Lease P xxx
Less: Amounts of income previously recognized (xx)
Additional income in year of termination P xxx

(d) Loss of Lessor if Leasehold Improvement is Destroyed Before Termination of Lease

If the building or other leasehold improvement is destroyed before the expiration of the lease,
the lessor is entitled to deduct as a loss for the year when such destruction takes place the
amount previously reported as income because of the erection of the improvement, less any
salvage value, to the extent that such loss was not compensated by insurance.

5. Annuities and Life Insurance Policies

(a) Annuities – Annuities paid under an annuity contract in excess of the consideration paid are includible in
gross income

(b) Life Insurance Policies – Where insured outlives the term of the policy, amounts received by an insured
in excess of the premiums paid are included in gross income.

Note: Distributions on paid-up policies, which are made out of earnings of the insurance company
subject to tax, are in the nature of corporate dividends and should be taxed accordingly.

6. Gains Derived From Dealings in Property

Sale of 3 types of property which may give rise to taxable events:

Ordinary asset – 100% of the gain or loss shall be recognized in the ITR
Capital asset – subject to final taxes (capital gains tax)
Other capital asset – holding period of the asset shall be taken into consideration if the seller is an
individual, and only the net capital gain shall be included in the ITR.

(1) Sale of Tangible Assets
(2) Sale of Intangible Assets (ex. patents, copyrights, and goodwill)
(3) Corporate Sinking Fund
(4) Sale of Real Property

Gain from the sale of real properties classified as ordinary assets shall be included in gross income in the
ITR of the taxpayer.

Note: Real properties acquired by banks through foreclosure sales are considered as their ordinary
assets. However, banks shall not be considered as habitually engaged in the real estate business
for purposes of determining the applicable rate of creditable withholding tax imposed under
Sec. 2.57.2 of Rev. Reg. No. 2-98, as amended (Rev. Reg. No. 7-2003).

7. Interest Income

Interest income, as a rule is taxable income included in the ITR.

EXC. (1) Interest income from bank deposits or deposit substitutes in the Philippines subject to FT
(passive income);
(2) Interest income which are exempt from tax:
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i. Interest income from long-term deposit or investment in the form of savings, trust funds,
deposit substitutes, investment management accounts;
ii. Interest income earned from passive investments of foreign governments, financing
institutions owned by foreign governments, and international financial institutions
established by foreign governments.

Note: Interest income on Government securities is subject to final tax on passive income as such securities
are considered deposit substitutes.

8. Royalties

Royalties derived from sources within the Philippines are subject to a final tax of 20%, except royalties on
books, other literary works, and musical compositions which shall be subject to a final tax of 10%.

Royalties received by resident citizens and domestic corporations from sources without the Philippines
shall be included in the ITR.

9. Dividends

Dividends subject to FT: Cash or property dividends received by individuals and NRFCs from domestic
corporations.

Dividends included in gross income in the ITR:

1) Generally, cash and/or property dividends received by a resident citizen or domestic corporation
from a foreign corporation.

2) Liquidating Dividend

Liquidating dividends represent distribution of all the property or assets of a corporation in
complete liquidation or dissolution.

The difference between the cost or other basis of the stock and the amount received in liquidation of
the stock is a capital gain or a capital loss. Where property is distributed in liquidation, the amount
received is the fair market value of such property.

Liquidating dividend P xxx
Less: Cost of stock investment or other basis (xx)
Capital gain or (Capital loss) P xxx

If the shareholder is a corporation, the capital gain is taxable in full.

If the shareholder is an individual and the stocks were held for more than 12 moths, the capital gain
is taxable only to the extent of 50% thereof (Sec. 39 (B), NIRC)

Dividends not subject to income tax

1) Intercorporate dividends from a domestic corporation to another domestic corporation or a RFC.
2) Generally, stock dividends.

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10. Prizes and Winnings

Subject to FT: (a) Prizes over P10,000 and winnings32 derived within the Philippines.
(b) Prizes received by a NRANETB and by a NRFC within the Philippines.

Included in the ITR:
1) Prizes amounting to P10,000 or less received by a citizen, resident alien, or NRAETB
2) Prizes received by domestic corporations
3) Prized received by RFCs within the Philippines
4) Prizes and winnings received by resident citizens from sources without the Philippines

11. Income From Other Sources

(1) Recovery of damages representing compensation for loss of profits or income are includible
in gross income
Note: Recoveries that are to compensate for damage to property, injury to person, or loss of life are
not taxable.

Included in Gross Income Not Taxable
1) Damages for loss profits 1) Damages to compensate for damage or
2) Damages for lost income injury to the person or his property
2) Damages for lost capital
3) Moral damages
4) Exemplary damages
5) Punitive damages

(2) Recovery of Bad Debts Previously Deducted

The “Tax Benefit Rule” is the doctrine observed in the Philippines in bad debt recoveries.

Rules on Bad Debt Recovery:

(a) Taxable – if the deduction of the bad debt in prior year resulted in an income tax benefit to the
taxpayer, the bed debt recovered is taxable income in the year of recovery.

(b) Not Taxable – if the deduction of the bad debt did not result in an income tax benefit to the
taxpayer (i.e., where the result of the business operation was net loss even without the bad debt
deduction), the bad debt recovered is not taxable income but is treated as a mere recovery or
return or capital.

(c) Income From Bad Debt Recovery – the recovered amount of the previously deducted bad debt
which resulted in an income tax benefit.

(3) Refund of Deductible Tax

The tax benefit doctrine also applies with respect to refund or credit of taxes which were claimed
and deducted in a previous year.

Rules on Refund of Taxes Previously Deducted:

32Except PCSO and Lotto winnings of P10,000 or less of an individual citizen or resident alien, and PCSO and Lotto winnings of a NRAETB
regardless of amount, which is EXEMPT.
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(a) Taxable – if the tax paid is a deductible tax. The refund or credit thereof is taxable in the year of
receipt.

(b) Not Taxable – if the tax paid is not a deductible tax. The refund or credit thereof is not taxable.

(c) Income From Tax Refund – The refunded amount of the tax which was previously deducted and
which resulted to an income tax benefit.

Examples of deductible taxes are: percentage taxes (except VAT and stock transaction tax under
Sec. 127 the Tax Code), excise taxes, occupation or professional taxes, real property taxes.

Examples of non-deductible taxes are income tax, donor’s tax, estate tax, VAT, stock transaction tax
under Section 127 of the Tax Code)

(4) Tournament Prizes

Included in the ITR: Cash prizes won by local players/participants in tournaments are not passive
income inasmuch as participating in such tournaments is their profession and/or occupation.

Subject to FT: Cash prizes of foreign players/participants, shall be subject to a final tax of 25%.

Exempt from income tax: 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.

(5) Forgiveness of Indebtedness

Included in the ITR: When a creditor cancels the debt as part of a business transaction, or in
consideration of personal services of the debtor, the condoned debt is taxable income to the debtor.

Taxed as a dividend: But where the debtor is a stockholder of the corporation which condoned the
debt, the condonation is considered an indirect payment of dividend.

Subject to donor’s tax: If a creditor merely desires to benefit a debtor, and without any
consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the
debtor.

(6) Income from Illegal Sources

All unlawful gains are taxable and includible in the ITR. However, actual repayment of such illegal
gains will give rise to a deduction. (James vs. United States, 366 US 213)

(7) Unutilized/Excess Campaign Funds

Unutilized/excess campaign funds, that is, campaign contributions net of the candidate’s
campaign expenditures, shall be considered as subject to income tax. As such, the same must be
included in the candidate’s gross income as stated in his Income Tax Return (“ITR”) for the subject
taxable year.

Any candidate who fails to file with the COMELEC the appropriate Statement of Expenditures
required under the Omnibus Election Code, shall be automatically precluded from claiming such
89
expenditures as deductions from his campaign contributions. As such, the entire amount of his
campaign contributions shall be considered as directly subject to income tax.

(8) Early Withdrawals from a Personal Equity and Retirement Account (“PERA”) which do not
qualify for exclusion from taxable gross income

(9) Gain in the Sale or Retirement by a Corporation of Its Own Bonds

- Where the corporation is able to buy back its own bonds for less than the value of such
bonds as reflected in the corporation’s books.

(10) Stock options granted to a supplier of goods or services

DEDUCTIONS

DEDUCTIONS

- Amounts allowed to be subtracted from Gross Income to arrive at taxable income in the ITR.

- Taxpayers may choose NOT TO AVAIL of the deduction

- If deductions are claimed, the burden of proving the legality and correctness of the deductions rests upon
the taxpayer. The taxpayer has the obligation to substantiate with receipts and other evidences every
item of deduction when required.

Kinds of Deductions:

BEFORE TRAIN AFTER TRAIN
1) Personal Exemptions (Basic and Additional)
(for individuals, and estates in year of decedent’s
death)

2) Income distributed to heirs/beneficiaries (for Income distributed to heirs/beneficiaries (for
estates and trusts) estates and trusts)

3) P20,000 special exemption (for estates after year
of decedent’s death, and for trusts)

4) Health and/or Hospitalization Insurance
Premium (“H/H premium”) under Section 34
(M) of the Tax Code)

5) Itemized Deductions (“ID”) or Optional Itemized Deductions (“ID”) or Optional Standard
Standard Deduction (“OSD”) Deduction (“OSD”)

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Notes:

a) Individuals engaged in trade or business, or profession can select the ID of the OSD, if they are being
taxed under the graduated rates. If they are taxed under the 8% tax regime, no deductions shall be
available in computing their tax bases.

b) Individuals earning compensation income are not allowed any deduction from their compensation
income.

c) Estates and trust can claim the ID or the OSD, only if they are taxed under the graduated rates.

d) Domestic corporations, resident foreign corporations, and partnerships can claim ID or OSD.
Summary of Allowable Deductions (BEFORE TRAIN)

Deduction Individuals Estates Trusts Corp. Partnerships
EE Self-
Decedent Died
employed
w/in At least
taxable 1 year
year ago
1) ID or OSD ✔ ✔ ✔ ✔ ✔ ✔
2) H/H ✔ ✔
3) Income distributed to ✔ ✔ ✔
heirs/beneficiaries
4) Personal/Additional Exemptions ✔ ✔ ✔
5) P20,000 special exemption ✔ ✔

Summary of Allowable Deductions (AFTER TRAIN)

Deduction Individuals Estates Trusts Corps. Partnerships
EE Self-employed
taxed under
graduated rates
1) ID or OSD ✔ ✔ ✔ ✔ ✔
2) Income distributed to ✔ ✔
heirs/beneficiaries

OPTIONAL STANDARD DEDUCTION (OSD)

OSD is the deduction which can be taken in lieu of Itemized Deductions (both ordinary and special IDs)

Who may claim the OSD?

1) For Individuals: a) Citizens;
b) Resident aliens; Who compute their income tax under the
c) Estates and Trusts; graduated rates

Amount of OSD = 40% of [Gross sales, net of returns, allowances, and discounts (accrual basis) + Other
taxable income from operations not subject to FTs]
Or
40% of [Gross receipts, net of returns, allowances, and discounts (cash basis) + Other
taxable income from operations not subject to FTs]
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For individuals, OSD is in lieu of Cost of Goods Sold or Cost of Sales + the Itemized Deductions

2) Corporations: ONLY Domestic Corporations and Subject to 30% of net taxable income
Resident Foreign Corporations

Amount of OSD = 40% of [Gross Income (GI)33 + Other taxable income not subject to FTs]

For corporations, OSD is in lieu of the Itemized Deductions only.

Election of the OSD

- Made in the 1st Quarterly Return. Failure by taxpayer to indicate OSD election in the 1st Quarterly Return
means that taxpayer is claiming Itemized Deductions;

- When made, it is irrevocable for the entire year;

- Failure to file the 1st Quarterly Return is equivalent to availing Itemized Deductions for the year.

ITEMIZED DEDUCTIONS (IDs)

When a taxpayer claims IDs, the taxpayer is specifying the particular expenses to be deducted from gross income.

Who may claim IDs? a) Domestic corporations including partnerships and GOCCs
b) Resident foreign corporations
c) Individuals engaged in trade, business, profession
d) Estates and trusts

Items of IDs: Business expenses Depletion of oil and gas wells
Interest expenses Charitable and other contributions
Deductible taxes Research and development expenses
Losses Pension trust contributions
Bad Debts
Depreciation

I. ORDINARY ITEMIZED DEDUCTIONS (under the Tax Code)

A) BUSINESS EXPENSES

Requisites for deductibility:

1) Ordinary and necessary for the business;
2) Incurred or paid during the taxable year;
3) Connected with the trade, profession, or business of the taxpayer;
4) Reasonable expenses of the business;
33 GI = Gross Sales – Sales Returns – Sales Allowances – Discounts – Cost of Goods Sold
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5) Substantiated by official receipts/records;
6) The withholding tax required to be withheld has been withheld and remitted to the BIR.34

Notes: a) Bribes and kickbacks (to both local and foreign officials) are not allowed as deductions.
b) Deductible business expenses of non-resident citizens, resident aliens, NRAETBs, and RFCs
constitute expenses paid or incurred in carrying out its business in the Philippines.

(1) Compensation expenses (of employer) for personal services actually rendered;

(a) Includes salaries and other forms of compensation, including bonuses, and the Grossed-up
Monetary Value of fringe benefits subject to Final Tax.
(b) Includes management and labor expenses, commissions, and pension payments.
(c) Includes compensation for injuries paid by the employer less any insurance proceeds.
(d) Includes premiums of life insurance of the employee where the beneficiary is not the
employer, but the employee.
(e) Includes salaries paid after death of the employee, but does not include donations for
coffin and wake expenses

(2) Travelling Expenses;

- Includes transportation expenses, meals, and lodging

Additional requisites for deductibility:
- Must be incurred while away from home (“tax home”). Tax home refers to the place of
work, business, or employment.

(3) Entertainment, Amusement, and Recreational (EAR);

- Expenses in entertaining or meeting with guests, or clients (called representation
expenses)
- Includes depreciation or rental expenses relating to entertainment facilities.

Subject to the following ceilings:
1) For taxpayers engaged in the sale of goods and properties: ½ of 1% of net sales
2) For taxpayers engaged in the sale of services/leasing of properties: 1% of net
revenues.

(4) Materials and supplies actually consumed in business;

(5) Maintenance and repairs which do not add to the value of the property nor appreciably
prolong its life;

(6) Rental expense (of the lessee) of property used in business;

Notes:
(a) Advance or prepaid rentals are not allowed to be deducted in year of payment. Instead,
advance rentals shall be apportioned over the term of the lease.
(b) Taxes and other obligations of the lessor which are paid by the lessee, are allowed as
deductions.
34Under RR 6-2018, a deduction shall be allowed even if no withholding tax was made if the withholding tax + surcharges are paid at the time of the
audit/investigation or reconsideration/reinvestigation.
93
(c) Depreciation of leasehold improvement is available as deduction to the lessee.

(7) Advertising and other selling expenses;

(8) Operating expenses of transportation equipment used in the trade, profession, or business;

(9) Insurance premiums against fire, storm, theft, accident, or other similar losses in the trade
or business;

(10) Miscellaneous expenses;

a) Amortization of pre-operating expenses, which are treated as deferred expenses, for not
more than 60 months;
b) Costs of suits are allowed as deductions;
c) Judgments against the taxpayer less any amount compensated for by insurance or
otherwise;
d) Loss upon a corporation’s retirement of its own bonds.

(11) Special Expense Allowed to Private Educational Institutions under Sec. 27(B)

Capital outlays for expansion of school facilities can either be:
a) Expensed immediately; or
b) Capitalized and depreciated.

B) INTEREST EXPENSE

(1) Requisites

(a) Must be connected with the trade or business of the taxpayer;
Note: Interest on home mortgage is not allowed as deduction.
(b) There must be a liability to pay interest. The obligation to pay interest must be stipulated
in writing and must be legally due
(c) Must be paid or accrued within the taxable year
(d) Interest expense must be the obligation of the taxpayer
(e) Interest payment must not be between related taxpayers in Sec. 36 (B) of NIRC.

(2) Reduction of Allowable Deduction for Interest Expense By:

33% of interest income subject to Final Tax beginning January 2009

Exceptions: Where Interest Expense is Deductible in Full

a) If taxpayer has no interest income subject to Final Tax;
b) Interest on all unpaid business-related taxes (RR 13-2000);
c) Interest payments of an occupant of a socialized housing project incurred for the
construction or purchase of the house (R.A. No. 7279)

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(3) Optional Treatment of Interest Incurred to Acquire Property Used in Trade or Business

a) Immediately expensed; or
b) Capitalized as part of the cost of the property.

(4) Non-Deductible Interest (Sec. 34 (B)(2))

a) Interest paid in advance (thru discount) by a cash-basis taxpayer. The interest expense is
not allowed to be deducted in the year the cash-basis taxpayer takes out the loan.

The interest expense will be deducted only in the year the debt is paid.

b) Interest Paid Between Members of a Family or Related Taxpayers under Section 36(B)

1) Between the taxpayer and his brothers/sisters, spouse, ancestors, and lineal
descendants;
2) Between a corporation and an individual who owns, directly or indirectly, more
than 50% in value of the outstanding stock of such corporation (except in cases of
distribution in corporate liquidation);
3) Between 2 corporations where more than 50% in value of the outstanding capital
stock of each corporation is owned, directly or indirectly, by the same individual
(except in cases of distribution in corporate liquidation);
4) Between grantor and a fiduciary (trustee) of a trust;
5) Between the fiduciaries of 2 trusts having the same grantor;
6) Between the fiduciary and a beneficiary of a trust.

c) If debt is incurred to finance petroleum exploration

d) Interest expense attributable to income without the Philippines of an alien or foreign
corporation

e) Interest on preferred stock which is actually a dividend

f) Interest on debt incurred to purchase a tax-exempt security

g) Interest which is not stipulated in writing

C) DEDUCTIBLE TAXES
Requisites:
(1) Paid or incurred within the taxable year;
(2) Must be connected with the profession, trade, or business of the taxpayer; and
(3) Is directly imposed on the taxpayer.

Examples of deductible taxes: import duties; business taxes (like percentage taxes); local business
taxes; community tax; privilege and license taxes; excise taxes, Documentary Stamp Tax (DST);
automobile registration fees; real property tax; fringe benefit tax (FBT)

Examples of non-deductible taxes: income tax, foreign income tax if claimed as a tax credit; estate tax;
donor’s tax; special assessments; VAT; final taxes; stock transaction tax under Sec. 127; capital gains tax.

Notes:
(a) VAT is non-deductible except input VAT allocated to exempt sales (is deductible)
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(b) Fines and penalties imposed due to late payment of tax are not deductible. But interest imposed
due to the same is deductible
(c) Tax benefit rule applies to refund of deductible taxes

D) LOSSES

ORDINARY LOSSES

1) Casualty losses due to mishap, accident, fortuitous event, robbery, theft, embezzlement of
property used in the trade, profession, or business of the taxpayer.

Requisites:
(1) Must involve ordinary properties;
(2) Actually sustained;
(3) Not claimed as a deduction for estate tax purposes;
(4) Not compensated for by insurance or by other forms of indemnity;
(5) Must be reported to the BIR within 45 days from the date of loss.

If loss is total, the deductible amount is the book value of the asset less any amount of insurance
proceeds or compensation received.

If loss is partial, the deductible amount is the replacement cost or book value of the asset,
whichever is lower. If replacement cost is greater than the book value, the excess shall be
capitalized and depreciated over the remaining useful life of the property.

2) Business losses – losses incurred in the trade, profession, or business of the taxpayer.

(a) Losses from sale of ordinary assets
(b) Partner’s share in the losses of a GPP.

3) Net Operating Loss Cary-Over (“NOLCO”) – excess of allowable deductions (excludes NOLCO
and any item of incentive deduction under special laws that does not involve any cash outlay)
over gross income in a taxable year;

a) Can be availed of by individual taxpayers engaged in trade, business, or a profession,
estates and trust, domestic and resident foreign corporations subject to the normal income
tax, and special corporations subject to preferential tax rates (hospital corporations,
proprietary educational corporations, and regional operating headquarters of MNCs)

Taxpayers not entitled to NOLCO:

(1) OBUs and FCDUs of domestic or foreign banking corporations;
(2) PEZA, SBMA, CDA, etc. registered enterprises with respect to their registered
businesses;
(3) Foreign corporations engaged in international shipping or air carriage business in
the Philippines.

b) No NOLCO if net operating loss was incurred in a year during which taxpayer was
exempt from income tax.

Ex. Corporations enjoying income tax holiday incentives from the BOI or PEZA are not
entitled to NOLCOs.
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A loss in one line of business which is tax-exempt is not permitted as a deduction in
another line of business which is taxable.

Ex. Foreign corporations are allowed only losses sustained in business in the Philippines
or losses of property within the Philippines because foreign corporations are taxable
only on income within the Philippines.

c) Net operating loss can be carried over and deducted from gross income for the next 3
consecutive years.

d) NOLCO shall be allowed only if there has been no substantial change in the ownership of
the business.

“No substantial change” means ≥ 75% in value of the outstanding shares or ≥ 75% of the
paid-up capital of a corporation is held by or on behalf of the same persons (Sec. 34
(D)(3)).

Note: Applies to transfers of NOLs as a result of a merger, consolidation or business
combination. This means that the transferee is not entitled to the NOLCO unless
the transferor owns at least 75% of the outstanding shares or at least 75% of the
paid up capital of the transferee.

e) For mines, other than oil and gas wells, NOL incurred without the benefit of incentives
provided under the Omnibus Investment Code, in any of the first 10 years of operations,
can be carried over as deductions for the next 5 years following the year of loss.

The net operating loss of a Registered Tourism Enterprise (registered with the
Tourism Infrastructure and Enterprise Zone Authority but taxed under the regular
rates) for any taxable year may be carried over as a deduction from gross income for the
next six (6) consecutive taxable years immediately following the year of loss.

SPECIAL LOSSES

a) Loss of income which was previously reported under the accrual method.

b) Wagering losses – deductible only to the extent of gains or winnings.

Note: Cost of Lotto or Sweepstakes ticket will not be deductible from Lotto or Sweepstakes
winnings if such winnings are exempt from tax (not more than P10,000 if won by a
citizen or RA or regardless of the amount if won by a NRAETB)

c) Loss due to the voluntary removal of old buildings or old machinery

However, No deduction: Where a taxpayer buys land on which structures are erected, and then
such taxpayer proceeds to remove the structures. It is presumed that the price of the land
already includes the cost of such removal.

d) Loss of Useful Value – loss of usefulness of an asset or property used in business due to changes
in business conditions.

Amount of loss = BV – Accumulated Depreciation – Salvage Value

Loss must be charged off the books

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e) Securities, shares of stock (classified as ordinary assets) becoming worthless

- Becoming worthless means value is close to zero; mere shrinkage in value is not
deductible
- Amount of loss = cost or basis of the shares of stock

Note: if shares of stock are held as capital assets, and have become worthless during the
taxable year, such loss shall be treated as capital losses which can be deducted only
against “other capital gains” in the ITR.

f) Abandonment Losses in Petroleum Operations

- When petroleum operations are abandoned, all accumulated exploration and development
expenditures, as well as unamortized costs and undepreciated costs of equipment can be
deducted;

g) Losses from Sales of Shares of Stock Where the Seller is a Dealer in Securities

NON-DEDUCTIBLE LOSSES

a) Exchanges solely in kind pursuant to mergers/consolidations under Section 40(C)(2)
b) Losses from sales/exchanges between related taxpayers under Section 36 (B)
c) Losses from wash sales35 where the seller is NOT a dealer in securities

E) BAD DEBTS

Requisites: a) There must be a valid and subsisting debt owed the taxpayer;
b) The debt must be connected with the trade, business, or profession of the taxpayer;
c) The debt must be ascertained to be worthless or uncollectible;
d) The debt must be charged off within the taxable year.

Note: Recovery of bad debts previously allowed as a deduction is governed by the Tax Benefit Rule. The
recovery of a bad debt is included in gross income if its deduction in a previous year resulted in
an income tax benefit to the taxpayer (i.e., a decrease in tax)

Non-deductible Debts:

1) Bad debts not connected with the trade, business, or profession of the taxpayer.
2) Bad debts between related parties under Section 36 (B)
3) When mortgage is foreclosed and the collateral is bought by the mortgagee in foreclosure sale,
the difference between the amount of the loan and purchase price of the collateral is not
allowed as a bad debt deduction. Any loss deferred until the property is eventually sold by the
mortgagee.

F) DEPRECIATION/DEPLETION

- Gradual decrease in the useful value of an asset/property from wear or tear, or obsolescence
35Wash sale is a sale of a security if, within a period of 30 days before the date of sale and ending 30 days after such sale, the taxpayer purchased the
same identical shares.
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- Also includes amortization of intangible assets (patents, copyrights, etc.)
- Limited to the cost or amount invested in the asset/property
- Depletion (for oil and gas wells) refers to the exhaustion of natural resources

Requisites:
1) Asset must be used in trade, business, or profession of the taxpayer;
2) Asset has a limited useful life;
3) Allowance for depreciation must be reasonable;
4) Allowance for depreciation must be charged off during the year.

Methods of Depreciation Allowed under Section 34(F)(1)
1) Straight-line method
2) Declining-balance method
3) Sum of the years digits method
4) Units of production/hours of use method
5) Any reasonable method of measuring obsolescence approved by the Secretary of Finance

Depreciation of petroleum operations
Properties used directly in the production of petroleum shall be depreciated over 10 years or such
shorter life as may be permitted by the CIR.

Properties not directly used in the production of petroleum (such as cars, office equipment) shall be
depreciated over 5 years)

Favorable depreciation rate for mining operations
If the property used in mining has an expected life of more than 10 years, the cost can be depreciated
over any number of years between 5 years and the expected life of the asset.

If the property has an expected life of not more than 10 years, the cost shall be depreciated at the
normal rate of depreciation.

Irrevocable election to deduct exploration and development expenditures in mining operations

Provided, the total amount deductible for exploration and development expenditures shall not
exceed twenty-five percent (25%) of the net income from mining operations computed without the
benefit of any tax incentives under existing laws.

The actual exploration and development expenditures minus twenty-five percent (25%) of the net
income from mining shall be carried forward to the succeeding years until fully deducted.

Intangible exploration and drilling costs (for both mines and wells)

After the production in commercial quantities has commenced, certain intangible exploration and
development drilling costs:

(a) Shall be deductible in the year incurred if such expenditures are incurred for non-producing
wells and/or mines, or

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(b) Shall be deductible in full in the year paid or incurred or, at the election of the taxpayer, may be
capitalized and amortized if such expenditures incurred are for producing wells and/or mines in
the same contract area.

Depreciation/Depletion by NRAETB and RFCs
- Only if the property/mine/well is located within the Philippines.

No Depreciation for Certain Transportation Vehicles

No depreciation shall be allowed for (a) yachts, (b) helicopters, (c) airplanes and/or aircrafts, and (d)
land vehicles which have a value of more than P2.4 Million. However, this prohibition does not apply
if the taxpayer’s main line of business is transportation or the lease of transport equipment, and the
vehicles purchased are used in said operations.

Maintenance expenses of non-depreciable vehicles are NOT allowed as deductions.

G) PENSION TRUST CONTRIBUTIONS

- To provide for reasonable pensions to employees

Payment Deductibility
Present service cost contributions – paid to In FULL
cover current pension liabilities accruing during
the taxable year
Past service cost contributions – contributions in Prorated over 10 years beginning with the year in
excess of the present service cost contribution in a which the payment is made
taxable year

H) CHARITABLE CONTRIBUTIONS

Requisites:
1) Contributions or gifts are actually paid;
2) Given to entities specified by law;
3) Net income of the recipient does not inure to benefit of any stockholder or individual owner;
4) Taxpayer making the charitable contribution must be engaged in trade, business, or profession.

Valuation: The amount of any charitable contribution of property other than money shall be based on
the net book value of the said property as reflected in the financial statements of the donor.

NOT SUBJECT TO LIMIT – deductible in FULL

(1) Donations to the government or to GOCCs for PRIORITY ACTIVITIES in education, health, youth
and sports development, human settlements, science and culture, or economic development as
determined by the NEDA;

(2) Donations to foreign institutions and organizations pursuant to treaties or agreements entered
into by the Philippine government;

(3) Donations to entities pursuant to special law;
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Examples: State colleges and universities; CCP; National Commission for Culture and the Arts,
Integrated Bar of the Philippines, IRRI; Philippine Red Cross (RA 10072); Any child-caring or child-
placing institutions accredited by the DSWD (RA 10165).

(4) Donations to accredited NGOs

“NGOs” refers to a non-profit corporation:
(a) Organized and operated exclusively for scientific, research, educational, character-
building, youth and sports development, heath, social welfare, cultural, or charitable
purposes;
(b) No part of the net income of such NGO inures to the benefit of any private individual;
(c) Uses the donation not later than the 15th day of the 3rd month after the close of its taxable
year;
(d) It administrative expenses ≤ 30% of total expenses;
(e) Its assets, upon dissolution, shall be given or distributed to another NGO organized for a
similar purpose, or to the state for a public purpose.

SUBJECT TO LIMIT

(1) Donations to the government or GOCCs exclusively for public purpose, but not for PRIORITY
activities;

(2) Donations to accredited domestic corporations or associations organized and operated exclusively
for religious, charitable, scientific, youth and sports development, cultural, educational, or the
rehabilitation of veterans;

(3) Donations to social welfare institutions;

(4) Donations to non-governmental organizations (“NGOs”)

Limit of Contributions

Corporations: 5%
Individuals: 10%

Of taxable income derived from trade, profession, or business without the benefit of the
charitable deductions (both subject and not subject to the limit)

Note: Taxable income from trade, profession, or business does not include non-business income
(example, capital gains derived from assets not used in business)

I) RESEARCH AND DEVELOPMENT EXPENDITURES
- Must be connected with the trade, business, or profession of the taxpayer

Options of taxpayer:
1. Deduct as ordinary and necessary expenses. However, the taxpayer cannot use this option if the
expenditure is

a) For the acquisition of land or improvement of property which is subject to depreciation
or depletion; or
b) For the purpose of ascertaining the existence of location, extent, quality of a deposit ore
or other mineral, such as oil and gas.
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OR
2. Treat as deferred expenses and amortize over a period of ≥ 60 months beginning in the month
that benefits are first realized from the expenditure.

J) FOREIGN INCOME TAXES PAID TAKEN AS DEDUCTIONS BY RESIDENT CITIZENS OR DOMESTIC
CORPORATIONS

II. SPECIAL ITEMIZED DEDUCTIONS

K) SPECIAL DEDUCTIONS OF INSURANCE COMPANIES

1) The net additions, if any, required by law to be made within the year to reserve funds. Provided,
“released reserves” are treated as income in the year of release.
2) The sums paid within the year on policy and annuity contracts including matured endowments,
payments on installment policies and surrender values actually paid.

L) SPECIAL DEDUCTIONS OF REAL ESTATE INVESTMENT TRUSTS (“REITs”)

Dividends paid by a REIT shall be deductible.

Requirements:
1) The REIT must be a corporation whose shares are traded in the stock exchange.
2) The REIT must maintain a minimum public ownership of forty percent (40%) for its first two (2)
years, and sixty-seven percent (67% on or before the 3rd year and thereafter.
3) The REIT must distribute at least 90% of its distributable income.

M) DEDUCTIONS OF ESTABLISHMENTS GRANTING SALES DISCOUNTS TO PERSONS WITH DISABILITY
(PWDs36)

Such establishments shall be entitled to deduct the said sales discount from their gross income for
income tax purposes, subject to the following conditions

1) The total amount of the claimed tax deduction, net of VAT if applicable, shall be included in the
gross sales receipts;

2) The sales discounts shall be deducted from gross income after deducting the cost of goods sold
or the cost of services;

3) Only the actual amount of the sales discount granted or a sales discount not exceeding 20% of
the gross selling price or gross receipts can be deducted from gross income, net of VAT;

4) Only that portion of the gross sales exclusively used, consumed, or enjoyed by the persons with
disability shall be eligible for the deductible sales discount;

36 PWD must be a Filipino or dual citizen.

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5) PWDs shall be entitled to at least a twenty percent (20%) discount on payments for the following
sales of goods and services for their exclusive use and enjoyment or availment:
a) On the fees and charges relative to the utilization of all services in hotels and similar
lodging establishments, restaurants, and recreational centers;
b) On admission fees charged by theaters, cinema houses, concert halls, circuses,
carnivals, and other similar places of culture, leisure, and amusement;
c) On the purchase of medicines in all drugstores;
d) On medical and dental services including diagnostic and laboratory fees such as, but
not limited to x-rays, computerized tomography scans and blood tests, and professional
fees of attending doctors in all government and private hospitals and medical facilities
subject to guidelines to be issued by the DOH, in coordination with the PHIC;
e) On fares for domestic air and sea travel except promotional fares;
f) On actual fares for land transportation travel such as, but not limited to (1) public
utility buses or jeepneys (“PUBs/PUJs”), (2) taxis, (3) Asian utility vehicles (“AUVs”), (4)
shuttle services, (5) public railways including Light Rail Transit (“LRT”), Metro Rail
Transit (“MRT”), and Philippine National Railways (“PNR”), (6) Transportation Network
Vehicle Services (“TNVS”) such as Grab, Uber, and the like, and (7) such other similar
infrastructure that will be constructed, established, and operated by a public or private
entity;
g) On funeral and burial services for the death of the PWD.

Note: “No double discount” means that in the purchase of goods and services which are on
promotional discount, PWDs can avail of the establishment’s offered discount, or the
20% discount provided under R.A. No. 10754, whichever is higher or more favorable.

In cases where the PWD is also a senior citizen entitled to a 20% discount under a
valid Senior Citizen ID, the PWD shall use either his PWD ID card or his Senior Citizen
ID to avail of the 20% discount. Thus, a PWD who is also a senior citizen can only
claim one 20% discount on a particular sales transaction.

N) TAX INCENTIVES FOR EMPLOYERS OF DISABLED PERSONS
(1) Private entities that employ disabled persons either as regular employee, apprentice or learner
shall be entitled to an additional deduction from gross income equivalent to twenty-five
percent (25%) of the total amount paid as salaries and wages to disabled persons;

(2) Private entities that improve or modify their physical facilities in order to provide reasonable
accommodation for disabled persons shall be entitled to an additional deduction from their net
taxable income, equivalent to fifty percent (50%)of the direct costs of the improvements or
modifications.

Note: The above provision does not apply to improvements or modifications of facilities required
under B.P. Bilang 344, otherwise known as “An Act To Enhance The Mobility Of Disabled
Persons By Requiring Certain Buildings, Institutions, Establishments, and Public Utilities To
Install Facilities And Other Devices.” (R.A. No. 7277)

O) TAX INCENTIVES FOR ESTABLISHMENTS GRANTING SALES DISCOUNTS TO SENIOR CITIZENS

All establishments supplying any of the goods and services below (in Rev. Reg. No. 7-2010) may claim the
discounts granted to Senior Citizens as a tax deduction.

(a) The following sales to Senior Citizens shall be given the Senior Citizens’ discount of 20%:
(1) Medicines, medical supplies, and medical equipment;
(2) Professional fees of physicians and licensed professional health workers;
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(3) Medical and dental diagnostic and laboratory services;
(4) Actual fares for land transportation in public utility buses, jeepneys, taxis, asian utility
vehicles, LRT, MRT, PNR (except toll fees);
(5) Actual fees for domestic air transport and sea vessels;
(6) Services and other amenities in hotels and similar lodging establishments, restaurants, and
recreation centers;
(7) Admission to theaters, concert halls, circuses, carnivals, and similar places of culture,
leisure, and entertainment; and
(8) Funeral and burial services.

Public utilities supplying water and electricity to senior citizens shall grant a 5% discount on
their monthly bill.

Public utilities supplying water, electricity or telephone services to Senior Citizen Centers and
care or group homes run by the government or a non-profit corporation shall grant a 50%
discount.

(b) The total amount of the claimed tax deduction, net of VAT, if applicable, shall be included in the
establishment’s gross sales receipts for tax purposes. This means that, for the discount to be
allowed as a deduction, the amount of sales that must be reported for tax purposes by the
establishment is the undiscounted selling price.

(c) The income statement of the seller must reflect the discount not as a reduction of sales to arrive
at net sales, but as a deduction from its gross income (sales less cost of sales).

(d) Only that portion of the gross sales exclusively used, consumed, or enjoyed by the Senior
Citizen shall be eligible for the deductible sales discount.

The following sales are not subject to the Senior Citizen discount: bulk orders; set orders for
children; “pasalubong” food items; non-consumable items sold in restaurants; cigars and
cigarettes; delivery fees which are billed separately.

(e) The actual amount of the discount granted or the statutory rate based on the gross selling price
(the 20% discount, the 5% discount on water and electric consumption by Senior Citizens, or the
50% discount on electricity, water, and telephone consumption by a Senior Citizen Center) can
be deducted from gross income (Rev. Reg. No. 7-2010)

Note: Senior citizens like PWDs shall also follow the “No Double Discount Rule” in availing discounts.

P) ADDITIONAL DEDUCTIONS FROM GROSS INCOME OF PRIVATE ESTABLISHMENTS FOR
COMPENSATION PAID TO SENIOR CITIZENS

Private establishments employing Senior Citizens shall be entitled to an additional deduction from their
gross income equivalent to fifteen percent (15%) of the total amount paid as salaries and wages to Senior
Citizens subject to the following conditions:

1) The employment shall have to continue for a period of at least six (6 months;
2) The annual taxable income of the Senior Citizen does not exceed the poverty level as may be
determined by the National Economic and Development Authority (NEDA) thru the National
Statistical Coordinating Board (“NSCB”)

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Q) TAX INCENTIVES FOR ESTABLISHMENTS AND INSTITUTIONS WITH ROOMING-IN AND
BREASTFEEDING PRACTICES

Expenses incurred by a private health or non-health facility, establishment, or institution in:

(a) The provision of facilities for rooming-in and breastfeeding, including equipment, facilities, and
supplies for breastmilk collection, storage, and utilization; or
(b) The provision of lactation stations including the necessary equipment and facilities such as:
lavatory for hand-washing, unless there is an easily-accessible lavatory nearby; refrigeration or
appropriate cooling facilities for storing expressed breatmilk; electrical outlets for breast bumps;
a small table comfortable seats; and other items,

Shall be deductible expenses for income tax purposes up to twice (2x) the actual amount incurred.
Provided, such facilities, establishments, or institutions shall secure a “Working Mother-Baby-
Friendly Certificate” from the DOH to be filed with the BIR.

R) TAX INCENTIVES FOR LAWYERS or GPPs RENDERING FREE LEGAL SERVICES

A lawyer or professional partnership rendering actual free legal services shall be entitled to an allowable
deduction from gross income equivalent to the lower of (a) amount that could have been collected for the
actual free legal services, or (b) ten percent (10%) of the gross income derived from the provision of legal
services

(1) The actual free legal services mentioned above shall not include the minimum sixty (60)-hour
mandatory legal aid services rendered to indigent litigants as required under the Rule on
Mandatory Legal Aid Service for Practicing Lawyers, under Bar Matter No. 2012, issued by the
Supreme court; and
(2) The lawyer or professional partnership shall secure a certification from the Public Attorney’s
Office, the Department of Justice, or any accredited association of the Supreme court, indicating tha
the aforementioned agencies cannot provide the legal services to be provided by the private
counsel

S) TAX INCENTIVES FOR ESTABLISHMENTS PARTICIPATING IN THE DUAL TRAINING SYSTEM UNDER
REPUBLIC ACT NO. 7686 (“DUAL TRAINING SYSTEM ACT OF 1994”)

A participating agricultural, industrial, or business establishment shall be allowed to deduct from its
taxable income the amount of fifty percent (50%) of the system expenses paid to the accredited
educational institution for its trainees. Provided, that such expenses shall not exceed five percent
(5%) of the establishment’s direct labor expenses, but in no case shall it exceed Twenty Five Million
Pesos (P25,000,000) a year (R.A. No. 7686)

T) TAX INCENTIVES FOR ENTERPRISES ADOPTING PRODUCTIVITY INCENTIVES PROGRAMS UNDER
REPUBLIC ACT 6971 (“AN ACT TO ENCOURAGE PRODUCTIVITY AND MAINTAIN INDUSTRIAL
PEACE BY PROVIDING INCENTIVES TO BOTH LABOR AND CAPITAL”)

Tax Incentives In Adopting a Productivity Incentives Program

(a) A business enterprise which adopts a productivity incentives program, duly and mutually
agreed upon by the parties to its labor-management committee, shall be granted a special
deduction from gross income equivalent to fifty percent (50%) of the total productivity bonuses
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given to employees under the program over and above the total allowable ordinary and
necessary business deductions for said bonuses.
(b) Grants for manpower training and special studies given to rank-and-file employees pursuant to a
program prepared by the labor-management committee of the enterprise for the development of
skills identified as necessary by the appropriate government agencies shall entitle the business
enterprise to a special deduction from gross income equivalent to fifty percent (50%) of the total
grants over and above the allowable ordinary and necessary business deductions for said grants.

U) DONATION TO PUBLIC SCHOOLS

Under RA 8525 and Rev. Reg. 10-2003, the amount of assistance, contribution, or donation to public
schools (elementary secondary, or tertiary) made by private entities, that were actually, directly, and
exclusively incurred for the program in team up with the Department of Education, Commission on
Higher Education, or with TESDA, may be deducted from gross income.

If the program is a priority project, the actual amount of the donation, contribution, or assistance plus
fifty percent (50%) of said donation shall be available for deduction.

Note: If the program is not a priority project, the lower of five percent (5%) of the net income of the
corporation (10% if an individual) before charitable contributions, or the actual contribution, plus
fifty percent (50%) of said amount shall be available for deduction.

V) QUALIFIED EMPLOYER’S CONTRIBUTION TO EMPLOYEE’S PERSONAL EQUITY AND RETIREMENT
ACCOUNT (PERA)

An employer can claim as deduction the actual amount of its or his contribution that would complete the
maximum allowable PERA contribution of an employee.

The maximum allowable PERA contribution shall not exceed P200,000 per year for an Overseas Filipino,
or P100,000 per year for a non-Overseas Filipino.

For example, an Overseas Filipino employee made PERA contributions amounting to P110,000 for the
year. His employer decides to make a matching contribution of P110,000 for the same period. In such
case, the employer can only claim P90,000 as deduction.

W) TAX INCENTIVES GRANTED TO REGISTERED TOURISM ENTERPRISES (“RTEs”) IN TOURISM
ENTERPRISES ZONES (“TEZs”) UNDER THE REPUBLIC ACT NO. 9593 (“TOURISM ACT OF 2009”)

Tourism Enterprises registered with the Tourism Infrastructure and Enterprise Zone (“TIEZA”) and
which are within the Tourism Enterprise Zones (“TEZs”) shall be entitled to a tax deduction of up to fifty
percent (50%) of the cost of:

(a) Environmental protection activities in the surrounding areas of the enterprise or the TEZ as certified
by the Department of Environment and Natural Resources (“DENR”);
(b) Cultural heritage preservation activities in the surrounding areas of the enterprise or the TEZ,
conducted pursuant to K.A. No. 10066, as certified by the appropriate cultural agency and the Local
Culture and Arts Council in the local government unit, the RTE is located; and
(c) Sustainable livelihood programs for local communities in the surrounding areas of the enterprise or
the TEZ which may be chosen from the list of activities identified by the National Anti-Poverty
Commission (“NAPC”).
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X) TAX INCENTIVES GRANTED TO QUALIFIED TO JEWELRY ENTERPRISES (“QJEs”) UNDER R.A. NO.
8502 (“JEWELRY INDUSTRY DEVELOPMENT ACT OF 1998”)

A Qualified Jewelry Enterprise (“QJE”) is a natural or juridical entity, either a single proprietorship,
cooperative, partnership, or corporation, organized and existing under Philippine laws which is issued a
Board of Investments accreditation under R.A. No. 8502 and its Implementing Rules and Regulations.

A QJE providing training to its employees may avail of the additional deduction equivalent to fifty percent
(50%) of the expenses incurred in training schemes for the purpose of computing the net taxable income.

Y) TAX DEDUCTION FOR HOSPITALS OR MEDICAL CLINICS UNDER R.A. NO. 10932 (AN ACT
STRENGHTHENING THE ANTI-HOSPITAL DEPOSIT LAW)

RA No. 10932 amended Section 1 of BP No 702 otherwise known as “An Act Prohibiting The Demand of
Deposits or Advance Payments for the Confinement or Treatment of Patients in Hospitals and Medical
Clinics in Certain Cases”

Section 7 of B.P. No. 702 now provides that PhilHealth shall reimburse the cost of basic emergency care
and transportation services incurred by the hospital or medical clinic for the emergency services given to
poor and indigent patients.

Tax Deduction

Under Section 8 of the same amended law, expenses incurred by a hospital or medical clinic in providing
basic emergency care to poor and indigent patients which are not reimbursed by PhilHealth, shall be tax
deductible.

NON-DEDUCTIBLE ITEMS
1) Personal, living, and family expenses

2) Expenditures which are capitalized, except intangible drilling and development costs incurred in
petroleum operations which may be deducted in full

3) Premiums paid by an employer:
a) Covering life of an employee; and
b) The beneficiary is the employer.
Note: IF the employee is the beneficiary, the premiums paid by the employer are deductible, and are
fringe benefits to the employee.

4) Losses from sales/exchanges of property between related parties under Sec. 36 (B)
5) Interest expense between related parties under Sec. 36 (B)
6) Bed debts between related parties under Sec. 36 (B)
7) Fines and penalties due to late payments of tax

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FOREIGN INCOME TAX CREDITS

Amount of Tax Credit

The tax credit allowed is equivalent to the amount of income tax paid or incurred to any foreign country during
the taxable year but not to exceed the limitations prescribed by law.

Limitation on Tax Credit (Sec. 24. (C) (4), NIRC)

(A) 1st limitation

Taxable Income (per foreign country)
X Philippine Income Tax = Limit
Total Taxable Income

(B) 2nd limitation

Taxable Income (all foreign country)
X Philippine Income Tax = Limit
Total Taxable Income

Tax credit is the amount of income tax paid or incurred to the foreign country but not to exceed the limit. In
other words, tax credit is the income tax paid to the foreign country or the limit, WHICHEVER IS LOWER.

Rules in the Application of Limits Formula

(1) if there is one foreign country involved, use only the formula for the first limitation
(2) if there are two or more foreign countries involved, use both formulas
(3) in case both formulas are used, two tax credits will be computed. One based on the first limit, and the other
based on the second limit.

The final tax credit is whichever is the lower between the two amounts.

Example: The records of a domestic company show the following data:

Gross Business Foreign
Income Expenses Tax
Philippines P 350,000 P 150,000
U.S. 500,000 200,000 P 98,000
Canada 100,000 50,000 20,000
Japan 250,000 300,000 -

Required: Compute the tax due claiming the foreign taxes as tax credits.

Gross income, Philippines P 350,000
Less: Business expenses, Philippines (350,000) P 200,000

Gross income, U.S. P 500,000
Less: Business expenses, U.S. (200,000) 300,000

Gross income, Canada P 100,000
Less: Business expenses, U.S. (50,000) 50,000

108
Gross Income, Japan P 250,000
Less: Business expenses, Japan (300,000) (50,000)

Total Taxable Income P 500,000

Tax due (P500,000 x 30%) P 150,000

Less: Tax Credit (1st limit)
(a) Tax paid in U.S. P 98,000
Limit: (P300,000/P500,000) x P150,000 90,000
Tax Credit (lower) P 90,000

(b) Tax paid in Canada P 20,000
Limit: (P50,000/P500,000) x P150,000 15,000
Tax Credit (lower) 15,000

Total tax credit, 1st limit P 105,000

Tax Credit (2nd limit)
Total taxes paid in foreign countries P 118,000
Limit: (P300,000/P500,000) x P150,000 90,000
Tax Credit (2nd limit), lower) P 90,000

Tax Credit Allowed (lower) (90,000)

Tax Due After Tax Credit P 60,000

109

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INCOME

P10,000 and below 5%

Above P10,000 to P30,000 P500 + 10% of the excess over P10,000

Above P30,000 to P70,000 P2,500 + 15% of the excess over P30,000

Above P70,000 to P140,000 P8,500 + 20% of the excess over P70,000

Above P140,000 to P250,000 P22,500 + 25% of the excess over P140,000

Above P250,000 to P500,000 P50,000 + 30% of the excess over P250,000

Above P500,000 P125,000 + 32% of the excess over P500,000

P250,000 and below 0%

Above P250,000 to P400,000 20% of the excess over P250,000

Above P400,000 to P800,000 P30,000 + 25% of the excess over P400,000

Above P800,000 to P2,000,000 P130,000 + 30% of the excess over P800,000

Above P2,000,000 to P8,000,000 P490,000 + 32% of the excess over P2,000,000

Above P8,000,000 P2,410,000 + 35% of the excess over P8,000,000

Customs duties and import charges.

16 A business enterprise shall, be considered "barangay-based" if:

17 It shall be considered "micro-business in nature and scope” if:

b) Yield or monetary benefit from

Gross Receipts - Bookkeeping 300,000.00

Total Sales/Receipts P1,100,000.00

Less: Amount allowed as deduction 250,000.00

TAXABLE INCOME P850,000.00

TAX DUE (8% of P850,000.00) P68,000.00

Less: Cost of Sales 600,000.00

Gross Income P500,000.00

Less: Operating Expenses 200,000.00

TAXABLE INCOME P300,000.00

TAX DUE: On excess (P300,000 - P250,000) x 20%) P10,000.00

(8% Rate) (8% Rate) (8% Rate)

Total Sales P500,000.00 P500,000.00 P2,000,000.00 P3,500,000.00

Less: Cost of Sales 300,000.00 300,000.00 1,200,000.00 1,200,000.00

Gross Income P200,000.00 P200,000.00 P800,000.00 P2,300,000.00

Less: Operating Expenses 120,000.00 120,000.00 480,000.00 720,000.00

TAXABLE INCOME P80,000.00 P80,000.00 P320,000.00 P1,580,000.00

Less: Cost of Sales 3,000,000.00

Gross Income P3,500,000.00

Less: Operating Expenses 1,440,000.00

TAXABLE INCOME P2,060,000.00

Tax Due under Graduated Rates P509,200.00

Less: 8% income tax previously paid (Q1 to Q3)* 220,000.00

ANNUAL INCOME TAX PAYABLE P289,200.00

Less: Cost of Service 2,150,000.00

Gross Income P2,100,000.00

Less: Operating Expenses 1,000,000.00

TAXABLE INCOME P1,100,000.00

On excess (P1,100,000.00 - P800,000.00) x 30%) 90,000.00

INCOME TAX DUE P220,000.00

Gross Receipts P2,500,000.00

Less: Cost of Sales 1,000,000.00

Gross Income P1,500,000.00

Net Income from Operation P900,000.00

Add: Non-operating Income 100,000.00

TAXABLE INCOME P1,000,000.00

On excess (P1,000,000.00 - P800,000.00) x 30%) 60,000.00

TOTAL INCOME TAX P190,000.00

Total compensation income P1,500,000.00

Taxable Compensation Income P1,410,000.00

Tax due on Compensation:

On excess (P1,410,000 - P800,000) x 30% 183,000.00

Tax due on Compensation Income P313,000.00

(2) TAX DUE ON BUSINESS INCOME:

Gross Sales P2,400,000.00