Professional Documents
Culture Documents
1 Income Tax Reviewer
1 Income Tax Reviewer
1 Income Tax Reviewer
Constitutional Limitations
1. Provisions directly affecting taxation
2. Provisions indirectly affecting taxation
Section 2 – Powers and Duties of the BIR Commissioner’s exclusive and original jurisdiction
The 4 powers and duties of the BIR: to interpret the provisions of the Tax Code and to
1. Assessment and collection of all national issue revenue issuance
internal revenue taxes, fees, and charges The CIR shall have the exclusive and original
2. Enforcement of all forfeitures, penalties, jurisdicition to recommend to the Sec. of Finance the
and fines connected therewith promulgation of revenue regulations, issuance of BIR
3. Execution of judgments in all cases decided rulings and other revenue issuances:
in its favor by the Court of Tax Appeals
(CTA) and the ordinary courts Revenue regulation
4. Give effect to and administer the Formal interpretation of the Tax Code
supervisory and police powers conferred to These are issuances signed by the Secretary
it by the Code or other laws of Finance, upon recommendation of the
Commissioner of Internal Revenue, that specify,
The Bureau of Internal Revenue is under the prescribe or define rules and regulations for the
direct control and supervision of the Secretary of effective enforcement of the provisions of the
Finance National Internal Revenue Code (NIRC) and related
statutes.
Section 3. Chief Officials of the Bureau of Internal
Revenue. Revenue Memorandum Orders (RMOs)
1. Commissioner of Internal Revenue – chief These are issuances that provide directives
of the BIR, and or instructions; prescribe guidelines; and outline
2. 4 assistant chiefs to be known as Deputy processes, operations, activities, workflows,
Commissioners methods and procedures necessary in the
implementation of stated policies, goals, objectives,
However, in real life there are 6 deputy plans and programs of the Bureau in all areas of
commissioners with the following functions: operations, except auditing.
a. Operation
b. Legal Revenue Memorandum Rulings (RMRs)
c. Resource Management These are rulings, opinions and
d. Information interpretations of the Commissioner of Internal
e. Prosecution Revenue with respect to the provisions of the Tax
f. Special Concerns Code and other tax laws, as applied to a specific set
of facts, with or without established precedents, and
Commissioner of Internal Revenue – Cesar Dulay which the Commissioner may issue from time to
time for the purpose of providing taxpayers
Powers of the Commissioner guidance on the tax consequences in specific
situations. BIR Rulings, therefore, cannot contravene
Section 4. duly issued RMRs; otherwise, the Rulings are null
1st par: To interpret tax laws (Sec. 4, par. 1) and void ab initio.
The power to interpret the
provisions of the NIRC and other tax law Revenue Memorandum Circular (RMCs)
shall be under the exclusive and original These are issuances that publish pertinent
jurisdiction of the Commissioner, subject to and applicable portions, as well as amplifications, of
the review of the Sec. of Finance laws, rules, regulations and precedents issued by the
BIR and other agencies/offices.
2nd par: To decide
a. Disputed assessment, BIR Rulings
b. Refunds of internal revenue taxes, fees These are official position of the CIR to
or other charges, queries raised by taxpayers and other stakeholders
relative to clarification and interpretation of tax A. Examination of Returns and Determination
laws. of Tax Due
The lack of consent of taxpayer does not D. Authority to Terminate Taxable Period
imply that the data gathered is erroneous or false The Commissioner can terminate the
(CIR vs. Raul Gonzales) taxable period when:
1. Taxpayer is retiring from business
Section 6. Power of the commissioner to Make subject to tax
Assessments and Prescribe Additional 2. Taxpayer is intending to leave the
Requirements for Tax Administration and Philippines
Enforcement 3. Taxpayer is intending to remove
his property therefrom or to hide
or conceal his property, or
4. Taxpayer is performing any act 1. doubtful validity of his tax –
tending to obstruct the taxpayer can pay a minimum 40%
proceedings for the collection of of his tax
the tax for the past or current 2. financial incapacity to pay tax
quarter or year or to render the liability
same totally or partly ineffective
The Commissioner shall declared G. Authority to Accredit and Register Tax
the tax period of such taxpayer Agents
terminated at any time and shall send H. Authority of the Commissioner to
the taxpayer of notice of such decision, Prescribe Additional Procedural or
together with the request for Documentary Requirements
immediate payment of the tax for the
period. Section 7. Authority of the Commissioner to
Delegate Power
E. *Authority of the Commissioner to
Prescribe Real Property Values General Rule: The Commissioner may delegate the
The Commissioner is authorized to power vested in him under the NIRC to any or such
divide the Philippines into different zone or subordinate officials with the rank equivalent to a
areas and xxx determine the fair market division chief or higher
value of real properties located in each
zone or area. xxx Exception: The Commissioner cannot delegate the
following power:
For purposes of computing any 1. The power to recommend the promulgation
internal revenue tax, the value of the of rules and regulations by the Secretary of
property shall be, whichever is higher of: Finance
1. The fair market value as determined by 2. The power to issue rulings of first
the Commissioner; or impression or to reverse, revoke or modify
2. The fair market value as shown in the any existing ruling of the BIR
schedule of values of the Provincial and 3. The power to compromise or abate any tax
City Assessors liability
4. The power to assign or to reassign internal
F. Authority of the Commisisoner to Inquire revenue officers to establishment where
into Bank Deposit Accounts and Other articles subject to excise tax are produced
Related Information Held by Financial or kept
Institutions
Q. When can CIR inquired from bank Ruling of first impression – official ruling of CIR on a
deposits? query raised by a taxpayer
The Commissioner is authorized to
inquire into the bank deposits of and other
related information held by financial Section 13. Authority of a Revenue Officer
institutes of: Letter of Authority
1. A decedent to determine his gross The issuance of a letter of authority by the
estate; and Revenue Regional Director authorized a Revenue
2. Any taxpayer who has filed an Officer assigned to perform assessment functions to:
application for compromise of his 1. Examine taxpayers within the jurisdiction of
tax liability by reason of financial the district in order to collect correct
incapacity to pay his tax liability amount of tax, or
3. A specific taxpayer/s subject of a 2. To recommend the assessment of any
request for the supply of tax deficiency tax due in the same manner
information from a foreign
authority pursuant to an The assessment is void when the Revenue Officer
international convention or had no letter of authority
agreement on tax matters to which
the Philippines is a signatory or Section 21. Sources of Revenue
party of The following taxes, fees and charges are
deemed to be national internal revenue:
Q. When can taxpayers apply for the 1. Income tax;
compromise? 2. Estate and donor’s taxes;
3. Value-added tax;
4. Other percentage taxes;
5. Excise taxes;
6. Documentary stamp taxes; and
7. Such other taxes as are or hereafter may be
imposed and collected by the BIR
Title II
Tax on Income "Nonresident alien" means an individual
whose residence is not within the Philippines and
Chapter 1 Definitions who is not a citizen thereof. (G)
**Section 23. General Principles of Income Taxation Note: Simply put, one rate for all types of
in the Philippines. - Except when otherwise provided gross income.
in this Code:
A. A citizen of the Philippines residing therein 2. Schedular Tax System
is taxable on all income derived from Where there are different tax
sources within and without the Philippines; treatments of different types of income so
B. A nonresident citizen is taxable only on that a separate tax return is required to be
income derived from sources within the filed for each type of income and the tax is
Philippines; computed on a per return or per schedule
C. An individual citizen of the Philippines who basis.
is working and deriving income from abroad
as an overseas contract worker is taxable Note: Simply put, varying taxes are imposed
only on income derived from sources within on passive income.
the Philippines: Provided, That a seaman
who is a citizen of the Philippines and who 3. Semi-Schedular or Semi-Global Tax System
receives compensation for services All compensation income, business
rendered abroad as a member of the or professional income, capital gain and
complement of a vessel engaged exclusively passive income not subject to final tax, and
in international trade shall be treated as an other income are added together to arrive
overseas contract worker; at the gross income, and after deducting
D. An alien individual, whether a resident or the sum of allowable deductions, the
not of the Philippines, is taxable only on taxable income is subjected to one set of
income derived from sources within the graduated tax rates or normal corporate
Philippines; income tax. With respect to such income
E. A domestic corporation is taxable on all the computation is global.
income derived from sources within and For those other income not
without the Philippines; and mentioned above, they remain subject to
different sets of tax rates and covered by Chapter III
different returns. Tax on Individuals
Note: The Philippines follows a semi-schedular and ******Section 24. Income Tax Rates
semiglobal tax system.
A. Rates of Income Tax on Individual Citizens and
Test on Taxability of Income Individual Resident Aliens of the Philippines
1. Flow of Wealth Test
The determining factor for the Rates of Tax on Taxable Income of Individuals
imposition of income tax is whether any The graduated tax rates on taxable income
gain was derived from the transaction. of individuals are not part of the Bar exam according
to Atty. Rada. But remember the cut-off income
2. Realization Test subject to tax (see table below).
Unless the income is deemed
"realized," there is no taxable income.
NIRC TRAIN
Not over P10,000 Not over P250,000 has
3. Economic-Benefit Principle Test
subject to 5% rate 0% rate
Flow of wealth realized is taxable
only to the extent that the taxpayer is
Husband and Wife
economically benefited.
Husband and wife shall compute separately
their individual tax income based on their respective
Requisites for Income to be Taxable
total taxable income.
1. There must be a gain or profit.
2. The gain must be realized or received.
If any income of married individuals cannot
3. The gain must not be excluded by law or
be definitely attributed to or identified income
treaty from taxation.
exclusively by either spouses, the same shall be
Criteria in Imposing Philippine Income Tax divided equally between the spouses for the purpose
of determining their respective taxable income.
1. Citizenship or nationality principle
A citizen of the Philippines is
Minimum Wage Income Earner
subject to Philippine income tax
Minimum wage earners shall be exempt
a. on his worldwide income, if he resides
from payment of income tax on their taxable
in the Philippines
income.
b. only on his Philippine source income, if
he qualifies as a non-resident citizen
The following received by minimum wage earner are
where his foreign-source income shall
exempt from income tax:
be tax-exempt.
1. Holiday pay
2. Residence or domicile principle 2. Overtime pay
3. Night shift differential pay
An alien is subject to Philippine
4. Hazard pay
income tax because of his residence in the
Philippines. A resident alien is liable to pay
Rules regarding Minimum Wage Earner
Philippine income tax only from his income
1. A minimum wage earner who receives
from Philippine sources but is tax-exempt
taxable income in excess of the minimum
from foreign-source income
wage will be taxed on the excess, but the
minimum wage earner will not lose his/her
3. Source of income principle
status as such. Workers who receive the
An alien is subject to Philippine
statutory minimum wage as their basic pay
income tax because he derives income from
sources within the Philippines. Thus, a non- remain minimum wage earners.
resident alien or non-resident foreign
2. The receipt of other income during the year
corporation is liable to pay Philippine
does not disqualify them as minimum wage
income tax on income from sources within
earners. But the taxable income they
the Philippines
receive other than as MWEs may be
subjected to other appropriate taxes.
Hence, bonuses and other benefits
above the statutory limit (P82,000
– NIRC, P90,000 – TRAIN) are
taxable.
Categories of Individual Taxpayer
NIRC TRAIN
The NIRC only have one rule for an individual TRAIN classify the individual taxpayers into 3 different
taxpayer. It did not classify the taxpayer into categories:
different categories.
1. Individuals earning purely compensation income
The individual taxpayer is subjected to only 2. Purely Self employed individuals or engaged in
graduated rates. (Sec. 24 (A)(2)) business or profession
3. Mixed income earners – earning both
compensation income and income from business
or profession
Different tax base for graduated tax rates and 8% income tax rates
Tax option Tax Base
Graduated rates Taxable income
8% income tax rate Gross sales/receipts and other non-
operating income to be reduced by
P250,000
use the 8% income tax rates. He will also be subject
Gross receipts include all kinds of deposits. to other business taxes, if any.
However, returnable deposits or deposits held in
trust and record as Liability are excluded (RMC 50- Illustration: Taxpayer exceed the VAT threshold
2018) midyear
Gross sales/receipts from January to June:
The following are not allowed to avail the 8% tax P2,500,000
rate The taxpayer avail the 8% tax rate: P2,500,000 x
1. Purely compensation income earners (they 8% = P200,000
used graduated tax rates); Tax due: P200,000
2. VAT registered taxpayers, regardless of
their gross sales/receipts and other non- However, he has gross sales/receipts in July of
operating income; P5,000,000
He will be automatically subjected to
graduated tax rates and business tax (VAT)
3. Non-VAT registered taxpayers whose gross because his gross sales exceed the P3,000,000 VAT
sales/receipts and other non-operating threshold.
income exceeded the P3,000,000 VAT
threshold; (Atty. Rada did not continue the computation)
4. Taxpayer subject to other percentage taxes Let’s assume he has P1,000,000 allowable
(except those under Sec. 116); deduction
5. Partners of a general professional Taxable income = Gross Income –
partnership since their distributive share Deduction (remember TRAIN: no exemptions na)
from the GPP is already net of costs and Gross Income: P5,000,000
expenses; and Deduction: -P1,000,000
Illustration again: Difference of Taxing Self Employed Individual in NIRC and TRAIN
Note: Self employed individual in NIRC is taxed by: Graduated tax rate + VAT or Percentage Tax
C. Mixed Income Earners or those who earn (Do not fret too much just combined what you
income from both compensation and from self- learned in A and B. AJA!)
employment.
The treatment of mixed income The total income tax liability of
earner is just the combination of (A) the mixed income earner is the sum of the
Compensation earner and (B) Self employed liability for compensation income and
individual. liability for the income from business or
practice of profession.
Section 24(B) Rate of Tax on Certain Passive Incomes on Citizens and Resident Aliens
Tax Rate on Certain Passive Income on Certain Passive Income on FINAL TAX
Citizens and Resident Aliens NIRC TRAIN
1. Interest under the expanded foreign currency deposit system 7.5% 15%
(RR 10-98)
(Non-resident (Non-resident
Non-resident citizens – exempt aliens engaged in aliens engaged in
trade/business – trade/business –
exempt) exempt)
2. Interest on any current bank deposit, yield or other monetary
benefits from deposit substitute, trust fund and similar 20%
arrangements
3. Royalties generally 20%
4. Royalties from books, literary works and musical composition 10%
5. Prizes exceeding P10,000 20%
6. Prizes P10,000 or less Graduated
income tax rate
7. Winnings 20%
8. PCSO and Lotto winnings Exempt Exempt only
winnings
amounting to
P10,000 or less
9. Interest on long-term deposit or investment in banks (with Exempt
maturity of five years or more)
10. Pre-termination of long Less than 3 years 20%
term deposit 3 years to less than 4 years 12%
4 years to less than 5 years 5%
11. Dividend from a domestic corporation, or from a joint stock 10%
company, insurance or mutual fund company, and regional
operating headquarters of multinational company or share in (vs. 20% for non-
the distributive net income after tax of a partnership (except a resident aliens
general professional partnership), joint stock or joint venture or engaged in
consortium taxable as corporation trade/business)
But what about dividends from foreign corporation for resident citizens?
The income from foreign corporation enters into graduate income tax rate
(Sec. 24(a)). For resident aliens, they are not taxed since their income is
derived from abroad.
The income sources in Sec. 24(B) are derived within the Philippines.
2. For resident citizens – passive income that Note: sale and disposition of other capital assets
come from outside the Philippines are refer to Sec. 39
taxable. They are taxed from the income
sourced worldwide.
Section 24(C) Capital Gains from Sale of Shares of Stock Not Traded in Stock Exchange
Capital Gains from Sale of Stock Tax Rate
NIRC TRAIN
1. On sale of shares of stock of Capital gains not 5%
a domestic not traded over P100,000 of the net capital gains 15%
through a local stock of the net capital
exchange and held as capital Capital gains in 10% gains
assets excess of P100,000 of the net capital gains
Implications on shares of stock listed and traded in the stock exchange from those that are not
Kind of Shares of Stock Tax Base Implication of the tax base
Listed and Traded Gross selling price or The tax is imposed whether
gross value there was gain or not
Not traded Capital gains Subject to tax if there is only
gain
Who are liable for capital gains tax? Who are exempt from capital gains tax?
1. Individual taxpayer, whether citizen 1. Dealers in securities (in terms of CGT for
or alien shares of stock)
2. Corporate taxpayer, whether 2. Investors in shares of stock in a mutual fund
domestic or foreign company, as defined in Section 22(BB), and
3. Other taxpayers not falling under (1) Section 2(s) of RR 6-2008, in connection
and (2) such as estate, trust, trust with the gains realized by said investor
funds and pension funds, among upon redemption of said shares of stock in
others. (RR 6-2008) a mutual fund company and
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 (RR 6-2008)
The historical cost of the old principal If the ownership of the land and the
residence shall be carried over to the cost basis dwelling house belong to different persons, only the
of the new residence. dwelling house shall be treated as principal
residence.
NIRC TRAIN
Taxable income received from all sources within the Philippines Graduated tax rate on income tax [same as
Sec. 24 2(a)]
Tax Rate on Certain Passive Income on Nonresident Aliens Engaged in Final Tax
Trade, Business or Exercising a Profession NIRC
1. Interest under the expanded foreign currency deposit system (RR exempt
10-98)
2. Interest on any current bank deposit, yield or other monetary 20%
benefits from deposit substitute, trust fund and similar
arrangements
3. Royalties generally 20%
4. Royalties from books, literary works and musical composition 10%
5. Prizes exceeding P10,000 20%
Tax Rate on Certain Passive Income on Nonresident Aliens Engaged in Final Tax
Trade, Business or Exercising a Profession NIRC
6. Prizes P10,000 or less Graduated
income tax rate
7. Winnings 20%
8. PCSO and Lotto winnings exempt
9. Interest on long-term deposit or investment in banks (with exempt
maturity of five years or more)
10. Pre-termination of long term Less than 3 years 20%
deposit 3 years to less than 4 years 12%
4 years to less than 5 years 5%
11. Dividend from a domestic corporation, or from a joint stock 20%
company, insurance or mutual fund company, and regional
operating headquarters of multinational company or share in the
distributive net income after tax of a partnership (except a general
professional partnership), joint stock or joint venture or
consortium taxable as corporation
But what about dividends from foreign corporation for
non-resident citizens?
For non-resident aliens, they are not taxed since the
income is derived from abroad.
12. Gross income from cinematographic films and similar works 25%
Sec. 25 (A)(3) Capital Gains
In capital gains, TRAIN amended the tax on shares of stock not traded through stock exchange
Capital Gains from Sale of Stock (same with residents, and Tax Rate
non-resident aliens engaged in business) NIRC TRAIN
On sale of shares of stock of a Capital gains not 5%
domestic not traded through a local over P100,000 of the net capital gains 15%
stock exchange and held as capital of the net capital
assets Capital gains in 10% gains
excess of P100,000 of the net capital gains
Section 25 (B) Non-resident Alien Not Engaged in Trade or Doing Business in the Philippines
Non-resident aliens not engaged in business are taxed 25% on their entire income within the Philippines
Their capital gains – same as Sec. 24 (C) and (D) see above tables.
Tax Rate of Banks on Income Derived under the Expanded FCD System Final Tax
1. Income derived by a depository bank from foreign currency Exempt
transactions with non-residents, OBUs, local commercial banks,
foreign banks authorized by BSP
2. Interest income from foreign currency loans granted by a bank
under expanded foreign system to residents other than OBUs or 10%
other depository banks under the expanded system
Any income of non-residents, whether individuals or corporations, from transactions with depository
banks under the expanded system shall be exempt from income tax.
Read the payment of CGT on foreclosure of Period to start: Beginning on the fourth taxable year
mortgaged property immediately following the year in which the
corporation commenced its business operations
Sec. 27 (E) Minimum Corporate Income Tax on Business commenced from the
Domestic Corporation moment it is registered in the BIR
Tax Rate
International carrier doing business in the 2.5% of Gross Philippine
Philippines billings
Tax Rate
Air carrier with flight operations in the Philippines 2.5% of Gross Philippine
billings
Air carrier with flights originating from any point or port in the
Philippines irrespective of the place where passage document (unless subject to a
are sold or issued. different tax rate under a
tax treaty)
It is considered engaged in business as an international air carrier
in the Philippines
Income of non-residents, whether individual or corporations, from Exempt from income tax
transactions with OBUs
Net income from such transactions (transactions with OBUs) 30% regular corporate income tax
payable by banks
Interest income derived from foreign currency loans granted to residents Final withholding tax of 10%
(other than OBUs or local commercial banks, including local branches of
foreign banks that may be authorized by BSP to transact business with
OBUs)
Base for the BRPT unless the same are effectively connected with the
It is the total profits applied for remittance conduct of its trade or business in the Philippines.
or earmarked for remittance without any deduction
for the tax component (not the profit actually Meaning of “effectively connected with the conduct
remitted abroad) of its trade or business in the Philippines”
The Court ruled that only profits remitted
The following are not branch profits abroad by a branch office to its head office which are
1. Interests, effectively connected with its trade or business in
2. Dividends, the Philippines are subject to the 15% branch profit
3. Rents, remittance tax. To be effectively connected, it is not
4. Royalties, necessary that the income be derived from the
5. Payment for technical services, actual operation of taxpayer corporation’s trade or
6. Salaries and wages premiums business; it is sufficient that the income arises from
7. Annuities, emoluments or other fixed or the business activity in which the corporation is
determinable annual, periodic or casual engaged.
gains
8. Profits, income and capital gains received
by a foreign corporation
Section 28 (A)(6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational
Companies
Tax Rate
Regional or area headquarters Not subject to income tax
Regional operating headquarters 10% of their taxable income
Tax Rate of Banks on Income Derived under the Expanded FCD System Final Tax
(Sec. 28(A)(7b))
1. Income derived by a depository bank from foreign currency transactions Exempt
with non-residents, OBUs, local commercial banks, foreign banks
authorized by BSP
2. Interest income from foreign currency loans granted by a bank under
expanded foreign system to residents other than OBUs or other 10%
depository banks under the expanded system
Any income of non-residents, whether individuals or corporations, from transactions with depository
banks under the expanded system shall be exempt from income tax.
Sec. 28(A)(7c). Capital Gains from Sale of Shares of Stock Not Traded
Tax Rate
Non-resident foreign corporation 30% on the gross income derived from all
sources within the Philippines
Except
1. reinsurance premiums
2. capital gains from sales of shares
of stock not traded in stock
exchange
Nonresident foreign corporation which transacted Conditions for the 15% preferential tax rate on the
thru its branch office in the Philippines by investing intercorporate dividends
in the shares of stock of a domestic corporation The foreign corporation must show that the
subject to tax on intercorporate dividends country of origin grants a tax credit to the
nonresident foreign corporation, taxes deemed to
While the general rule is that a foreign have been paid in the Philippines equivalent to at
corporation is the same juridical entity as its least 15% against the tax due from the said
branches office in the Philippines, however, when nonresident foreign corporation.
the corporation transacts business in the Philippines
directly and independently of its branch, the
taxpayer would be the foreign corporation itself and The prerequisite must be strictly complied
subject to the dividends tax similarly imposed on the with because the 15% tax rate is a concession in the
nonresident foreign corporation under Sec. nature of a tax exemption vis-à-vis the normal rate
28(B)(5)(b). of 30% on corporation.
Attributable Rule – the dividends attributable to Tax Sparing Rule – which connotes that the
the Head Office of the nonresident foreign 15% represents the difference between the
corporation would not qualify as dividends regular income of 30% on corporation and
earned by its Philippine branch which is the 15% tax on dividends. It is the amount
considered as a resident foreign corporation of tax foregone by the Philippine
exempt from the intercorporate dividends tax government in favor of the nonresident
received from a domestic corporation. foreign corporation the purpose of which is
to encourage foreign investors to conduct
business in the country
Sec. 28(A)(7c). Capital Gains from Sale of Shares of Stock Not Traded
Special Corporations
Tax Rate Tax Base
Nonresident cinematographic film owner, lessor 25% Gross income from the
or distributor Philippines
Nonresident owner or lessor of vessels chartered 4.5% Gross rentals, lease or charter
by Philippine nationals fees from the Philippines
Nonresident owner or lessor of aircraft, 7.5% Gross rentals or fees from the
machineries, and other equipment Philippines
Proprietary educational institution and non-profit 10% Taxable income from all sources
hospital
Resident international carrier 2.5% Gross Philippine Billings
Regional operating headquarters of multinational 10% Philippine Taxable income
corporation
There is no MCIT for special corporations
Concept of IAET
Every corporation formed or availed for the Who are Covered by IAET
purpose of avoiding income tax with respect to its All domestic corporations which are
shareholders of any other corporations, by classified as closely held corporations
permitting earnings and profits to accumulate
instead of being divided or distributed shall be Closely held corporations – is one where at least
imposed a tax equal to 10% of the improperly 50% in value of the outstanding capital stock or at
accumulated taxable income. least 50% of the total combined voting power of all
classes of stock is owned directly or indirectly by not
IAET is imposed in the nature of penalty to more than 20 individuals (RR 2-2001)
the corporation for the improper accumulation of its
earnings, and as form of deterrent to the avoidance Determination if a corporation is a closely held
of tax upon shareholders who are supposed to pay corporation (Look at stock-ownership)
dividends tax on the earnings distributed to them by 1. If stock not owned by individual, it will be
the corporation. considered to be owned proportionately by
its shareholders
2. If it is a family and partnership ownership, The following are considered reasonable needs
an individual shall be considered to own the 1. Allowance for the increase of accumulated
stock for his family members or partners earning up to 100% of the paid-up capital;
3. If there is an option to acquire stocks, it 2. Earnings reserved for building, plant, or
shall be considered as being owned by the equipment acquisitions as approved by the
person with the option (BIR Ruling 25-02) Board of Directors (expansion,
improvement, and repairs);
Who are Not Covered by IAET 3. Earnings reserved for compliance with any
1. Publicly held corporations loan or obligation established under a
2. Banks and other financial institutions legitimate business agreement (debt
3. Insurance companies retirement);
4. Taxable partnerships 4. In case of subsidiaries of foreign
5. General professional partnerships corporations in the Philippines, all
6. Non-taxable joint ventures undistributed earning intended or reserved
7. Enterprises registered with the PEZA or with for investments in the Philippines; and
the BCDA or with other special economic 5. Earnings required by law to be retained. (RR
zones (RR 2-2001) 2-2001)
No inurements to trustees etc… to be exempt Non-stock, non-profit corporations who are exempt
In order for a non-stock and/or non-profit under Sec. 30 are still liable for the following taxes:
corporation/association/organization to be exempt 1. Income derived from any of their real
based on Sec. 30, its earnings or assets shall not properties (such as rental payment from
inure to the benefit of any of its trustees, organizers, their building premises)
officers, members or any specific person. 2. Any activity conducted for profit regardless
of disposition thereof
The following are Inurements: 3. Interest income from any bank deposits or
1. Payment of compensation, salaries, or yield on deposit substitutes (final tax of
honorarium to its organizers; 20%)
4. If it is foreign currency deposit, final tax of
2. Payment of exorbitant or unreasonable 7.5% (Dept. Order 149-95, 1995)
compensation to its employees; 5. They shall also be withholding agents for
their employee’s compensation income
3. Provisions of welfare aid and financial subject to withholdin tax (RMC 76-2003)
assistance to its members.
Sec. 30 (G) To be exempt from income tax civic
An organization is not exempt from league or organization
income tax if its principal activity is to 1. It must be organized for non-profit,
receive and manage funds associated 2. It must be exclusively operated for
with savings or investment programs, promotion of social welfare
including pension or retirement
programs. Note: Clubs which are organized and
Exception: This does not cover a operated exclusively for pleasure, recreation and
society, order, association or non-stock other non-profit purposes are subject to income tax
corporation under Sec. 30(C) providing (RMC 35-2012)
for the payment of life, sickness,
accident and other benefits exclusively Sec.30 (H) Exempt non-stock, non-profit
to its members or their dependents; educational institution (refer to Sec. 27(B))
Computation is based on Sec. 39 (b) or (c) of the Tax 3. Those that are in the nature of gifts
Code.
10. Pensions
When a corporation distributes all of its
assets in complete dissolution, there is no dividend Pension is a gratuity granted as a favor or
income to the shareholder receiving the liquidating reward or one paid under given conditions to a
dividend. There is, instead, a sale or exchange of person following retirement from service or to
property. Any gain realized or loss sustained by the surviving dependents.
stockholder, whether individual or corporate, is
taxable income or deductible loss, as the case may Note: Pensions and retirement benefits under RA
be (Sec. 265, RR 2-1940). 7641 are excluded from gross income.
Recovery of bad debts previously written off – Compensation for loss of income and exemplary
taxable damages which represent loss of capital – taxable
Recovery of bad debts previously charged
off is taxable to the extent of income tax benefit of Moral damages, reimbursement, for hospital bills,
the said deduction. return of capital/property – not taxable
They are items of income which are not 5. Income Exempt under Tax Treaty
included in the taxable income.
International Convention or Tax Treaty – shall only
Exclusions from Gross Deductions from Gross refer to the Double Taxation Convention (DTCs) or
Income Income Double Taxation Agreements (DTAs) negotiated
They are actually They are expenses between the Philippines and other Contracting
income received or and other allowable States or jurisdiction for the avoidance of double
earned by the taxpayer deductions as provided taxation and the prevention of fiscal evasion with
but is not taxable as for by the law which are respect to taxes on income.
income because of the incurred for engaging in
exemption provided by trade or business or 6. Retirement benefits, pensions or gratuities
law or by tax treaties exercise of profession.
A1. Retirement benefits under RA No. 7641
1. Proceeds of Life Insurance Paid to the Heirs In order to avail of the exemption of the
retirement benefits under RA 7641 from private
It is considered as a mere return of capital, employers without any retirement plans, the
thus it is excluded. following conditions must be met:
1. The retirement benefits must be received
Except if the proceeds are held by the insurer under under existing CBA or other agreements;
an agreement to pay interest thereon. Only the 2. This is given in the absence of retirement
interest payments are included in the gross income. plan or agreement proving for retirement
benefits
3. The retiring employee has served at least
2. Amount Received by Insured as Return of five (5) years in the said establishment;
Premium 4. That he is not less than 60 years of age but
not more than 65, which is declared as the
Only the actual value of such consideration compulsory retirement age; and
and the amount of the premiums and other sums 5. He shall be entitled to retirement pay
subsequently paid by the transferee are exempt equivalent to at least ½ month salary for
from taxation. every years, a fraction of at least 6 months
being considered as one whole year.
But if the amounts received exceed the
aggregate premiums or considerations paid then the A2. Retirement benefits received under a
excess shall be included in gross income. reasonable private benefit plan
In order to avail of the exemption, with
3. Value of property acquired by gift, bequest and respect to retirement benefits under a reasonable
devises private benefit plan, the following requirements
must be met:
1. The plan must be reasonable But any payment made by an employer to
2. The benefit plan must be approved by the an employee on account of dismissal, constitutes
BIR compensation regardless of whether the employer is
3. The retiring official or employee has been in legally bound by contract, statute, or otherwise, to
the service of the same employer for at make such payment. Hence it is not exempt from
least years gross income.
4. The retiring official or employee is not less
than 50 years of age at the time of his C. Benefits received from the US Veterans
retirement Administration
5. The benefits shall be availed of by an official D. Social security benefits, retirement gratuities,
or employee only once. pensions and similar benefits from foreign
government agencies
Reasonable private benefit plan E. SSS benefits
It means a pension, gratuity, stock bonus or F. GSIS benefits
profit-sharing plan maintained by an employer for
the benefit of some or all of his officials or 7. Miscellaneous Items
employees, wherein contributions are made by such
employer for the officials or employees, or both, for A. Income derived by foreign government
the purpose of distributing to such officials and Income earned by foreign governments in
employees the earnings and principal of the fund the Philippines from deposits/investments to be
thus accumulated, and wherein its is provided in said exempt, the income should be received by:
plan that at no time shall any part of the corpus or 1. foreign governments,
income of the fund be used for, or be diverted to, 2. financing institutions owned, controlled, or
any purpose other than for the exclusive benefit of enjoying refinancing from foreign
the said officials and employees governments, and
3. international or regional financial
B. Amount received by an official or employee from institutions established by foreign
the employer governments
Requisites in order that the separation pay may be B. Income derived by the government or its political
excluded from gross income subdivisions
1. The amount received by an official or Income derived by the government will be
employee or by his heirs from the employer exempt from tax:
should be due to: 1. The income should accrue to the
a. Death, government, and
b. Sickness, 2. It must be derived:
c. Physical disability, or a. From any public utility or
d. Any causes beyond the control of b. From the exercise of any essential
said employee or official governmental function.
2. The separation from the service of the
official or employee must not be asked for C. Prizes and awards in recognition of achievements
or initiated by him
3. The separation was not of his own making Amounts received as prizes and awards
4. Whether or not the separation is beyond made primarily in recognition of religious, charitable,
the control of the official or employee shall scientific, educational, artistic, literary, or civic
be determined on the basis of the prevailing achievement are not taxable and excluded from
facts and circumstances and shall be duly gross income if:
established by the employer by competent 1. The recipient was selected without any
evidence which should be attached to the action on his part to enter the contest or
monthly return for the period in which the proceeding; and
amount paid due to the involuntary 2. The recipient is not required to render
separation was made substantial future services as a condition to
5. Amounts received by reason of involuntary receiving the prize or award
separation remain exempt from income tax
even if the official or the employee at the D. Prizes and awards in sports competition
time of separation, had rendered less than
10 years of service and/or is below 50 years All prizes and awards granted to athletes in
of age local and international sports competitions and
tournaments, whether held in Philippines or abroad,
and sanctioned by their national sports association.
The national sports association referred to Any excess will be included in the gross
is the Philippine Sports Commission thru its income per income tax return as part of gross
Philippine Olympic Committee. compensation income.
E. 13th Month pay and other benefits The amount of the de minimis benefits
given to employees shall also be excluded from the
The gross benefits received by officials and gross income for income tax purposes.
employees of public and private entities in the form
of 13th month pay and other benefits are excluded
from the gross income for income tax purposes to
the extent of:
NIRC TRAIN
P82,000 P90,000
Fringe Benefits
It means any good, service or other benefit 10. Life or health insurance and other non-life
furnished or granted in cash or in kind by an insurance premiums or similar amounts in
employer to an individual employee (except rank excess of what the law allows.
and file employees) such as, but not limited to, the
following: Fringe Benefit Tax
1. Housing; It is a final income tax
2. Expense account; Imposed on the managerial/supervisory
3. Vehicle of any kind; employee
4. Household personnel, such as maid, driver Withheld by the employer who files the
and others; return and remits the tax within 25 days
5. Interest on loan at less than market rate to from close of each calendar year
the extent of the difference between the
market rate and actual rate granted; Fringe Benefits Not Taxable
6. Membership fees, dues and other expenses 1. Fringe benefits which are authorized and
borne by the employer for the employee in exempted from tax under special laws;
social and athletic clubs or other similar 2. Contributions of the employer for the
organizations; benefit of the employee to retirement,
7. Expenses for foreign travel; insurance and hospitalization benefit plans;
8. Holiday and vacation expenses; 3. Benefits given to the rank and file
9. Educational assistance to the employee or employees, whether granted under a
his dependents; and collective bargaining agreement or not; and
4. De minimis benefits 1. Monetized unused vacation leave credits of
5. Benefits granted to employees as required private employees not exceeding 10 days
by the nature of, or necessary to the trade, per year.
business or profession of the employer 2. Monetized value of vacation and sick leave
6. Benefits granted for the convenience of the credits paid to government officials and
employer employees (RR 5-2011)
3. Medical cash allowance to dependents of
Convenience of Employer Rule employees, not exceeding P1,500 per
The benefit shall not be subject to FBT employee per semester or P250/month (RR
when the: 11-2018)
1. Benefits granted to employees is required 4. Rice subsidy of P2,000 or 1 sack of 50kg rice
by the nature of, or necessary to the trade, per month amounting to not more than
business or profession of the employer P2,000 (RR 11-2018)
2. Benefits granted for the convenience of the 5. Uniform and clothing allowance not
employer exceeding P6,000/month (RR 11-2018)
6. Actual yearly medical benefits not
Benefits granted for the convenience of the exceeding P10,000/month
employer 7. Laundry allowance not exceeding
1. Housing privilege of military officers inside 300/month
or near the military camps; 8. Employee achievement awards for length of
2. A housing unit situated inside or at most 50 service or safety achievement in the form of
meters from the perimeter of the business tangible property (other than cash or gift
premises; certificate) with value not exceeding
3. Temporary housing of an employee for 3 P10,000
months or less; 9. Gifts given during Christmas and major
4. Expenses of the employee which are anniversaries not exceeding P5,000/year
reimbursed by the employer which are” 10. Daily meal allowance for overtime work,
a. Receipted under the name of the not exceeding 25% of the basic minimum
employer and wage
b. Not personal expenses of the 11. Benefits received by an employee by virtue
employee; of a collective bargaining agreement and
5. Business expenses which are paid for by the productivity incentive schemes provided
employer for the foreign travel of his the total annual monetary value from both
employees in connection with business CBA and productivity schemes combined do
meetings or conventions (RR 3-1998) not exceed P10,000 (RR 1-2015)
The benefits above are exempted from All other benefits given by employers which
FBT, however, it may still form part of the are not included in the enumeration shall not be
employee’s gross compensation income which is considered “de minimis” benefits, and hence, shall
subject to income tax (RR 3-1998) be subject to income tax and withholding tax on
compensation income (RR 5-2011)
Read Ingles p. 220-221
The amount of de minimis benefits within
De Minimis Benefits its ceiling is exempt from fringe benefit tax up to the
These are facilities and privileges of ceiling. Any excess over the ceiling of the de minimis
relatively small value furnished or offered by an benefits shall be part of the “other benefits” exempt
employer to his employee. up to (NIRC – P82,000; TRAIN – P90,000). Anything in
excess of P82,000 or P90,000 will be taxable.
These are not considered compensation
subject to income tax (and consequently withholding De minimis benefit
tax) if these are offered or furnished by the
employer as means of promoting:
Not w/in DMB ceiling w/in DMB ceiling
a. Health,
b. Goodwill,
Included in FBT FBT Exempt
c. Contentment, or
d. Efficiency of employees (RR 8-2000)
w/in P82k or P90k Not w/in P82k or P90k
The following are de minimis benefits (both
managerial, supervisory, and rank and file Not Taxable Taxable
employees). These are exempt from tax:
Any amount given by the employer as J. Pension Trust
benefits, whether de minimis or others, shall be
deductible as business expense (RR 10-2008). Deductions
These are the amounts allowed by law to
reduce the gross income to taxable income.
Chapter VII Taxpayers Allowed to Claim the Allowable
Allowable Deductions Deductions
These deductions are applicable only in
Sec. 34. Deductions from Gross Income computing the taxable income of the following
The following are allowed as deduction taxpayers derived from trade or business or practice
(except for taxpayers earning compensation from of profession:
personal services under an e-e relationship): 1. Individual resident and nonresident citizens
A. Expenses 2. Individual resident aliens
1. Ordinary and Necessary Trade, 3. Nonresident alien individual engaged in
Business or Professional Expenses trade or business within the Philippines
i. Salaries, wages and other forms 4. General professional partnerships and
of compensation partners thereof
ii. Travel expenses in pursuit of 5. Domestic corporations
trade, business, profession 6. Resident foreign corporations in general
iii. Rentals for purposes of trade,
business, profession Taxpayers NOT Allowed to Claim the Allowable
iv. Entertainment, amusement and Deductions
recreation expenses directly 1. Taxpayers earning compensation income
connected with trade, business arising from personal services rendered
or operation under an employer-employee relationship
2. Expenses Allowable to Private 2. Alien individuals employed by the RHQs or
Educational Institutions ROHQs of multinational companies
B. Interest – in connection with the taxpayer’s 3. Alien individuals employed by OBUs
trade, business or profession 4. Alien individuals employed by petroleum
C. Taxes – in connection with the taxpayer’s service contractors and subcontractors
trade, business or profession 5. International carriers
D. Losses – actually sustained during the 6. Offshore banking units
taxable year and not compensated by 7. Branches of foreign corporations on the
insurance or other indemnity profits remitted to their head offices
E. Bad debts 8. Regional or Area Headquarters (RHQs)
F. Depreciation 9. Regional Operating Headquarters (ROHQs)
G. Depletion of Oil and Gas Wells and Mines 10. Nonresident foreign corporation
H. Charitable and other Contributions
I. Research and Development
Capital Losses (refer to Sec. 39) Losses are not to be claimed in sales of stock or
Losses from sales or exchange of capital securities if:
assets. 1. Within a period of 30 days before the sale,
and 30 days after the sale (61 days in total)
Limitations on deductibility of capital losses 2. The taxpayer acquires or enters into an
Capital losses from sales or exchanges of option to purchase substantially the
capital assets are deductible only to the extent of same/identical stocks or securities
capital gains from such sales or exchange of capital
assets of both corporations and individuals. Losses are allowed only if the taxpayer is a
stockbroker and the sale was made in the regular
If the dealings of the taxpayer in capital course of business.
assets during the year result in a net capital loss,
such loss cannot be deducted from his ordinary Example: Jaime buy shares in Fraser Corp. He sells
income, inasmuch as capital losses are allowable the shares at a loss. Twenty days from the sale, he
only to the extent of capital gains. buys shares in Fraser Corp. again. The loss will not be
allowed as deduction
Securities considered as worthless
It refers to shares of stock when offered for Wagering Losses
sale or requested for share of redemption, no Wagering losses are allowed only to the
amount can be realized by the owner of the share. extent of gains from such transaction.
First step:
Gross income P300,000
Less: Allowable Deduction 100,000
Taxable Income 200,000
Second step:
Allowable deductible donation 20,000*
(10% of P200,000 taxable income)
Even if the actual donation is P50,000
Plus: P50,000 allowable deduction 100,000
Total allowable deduction 120,000
(Plus charitable donation)
Third step:
Gross Income P300,000
Less: Total allowable deduction P120,000
Taxable income P180,000
*The amount deductible, whichever is lower, is
1. actual contribution, or
2. statutory limit computed
Pension Trust
It is a trust established or maintained by the
employer to provide for the payment of reasonable
pensions to its employees
An individual/corporation can either elect: Requisites for Individuals who wants to avail OSD
1. Itemized deduction (Sec. 34 A-J), or 1. The corporation is a domestic or resident
2. Optional standard deduction (Sec. 34 L) foreign corporation;
2. The corporation signifies in his return filed
There is no need to substantiate with receipts for the first quarter his intention to elect
if the taxpayer availed of OSD. OSD as deductions, otherwise, it is
considered as having availed of the itemized
Who may avail of OSD deductions;
1. Citizen, resident or non-resident
2. Resident alien 3. The election to avail OSD is irrevocable for
3. Domestic corporation the year in which made; however, it can
4. Resident foreign corporation change to itemized deductions in
5. Partnerships, and succeeding years if he opts to;
6. Taxable estate and trust 4. The OSD allowed shall be a maximum of
40% gross income during the taxable year.
Non-resident aliens and non-resident
foreign corporation cannot claim OSD. Gross Income = (Gross Sales – Cost of
goods/services)
Requisites for Individuals who wants to avail OSD
1. The individual is a citizen or a resident alien; The following are not allowed to use OSD (must
2. The taxpayer’s income is not pure used itemized deduction)
compensation income;
3. The individual signifies in his return filed for A. For corporations
the first quarter his intention to elect OSD 1. Those exempt under Tax Codes such as tax
as deductions, otherwise, he is considered exempt corporations (Sec. 30) and GOOCs
as having availed of the itemized (Sec.27[C]), and other special laws with no
deductions; other taxable income;
4. The election to avail OSD is irrevocable for 2. Those with income subject to special or
the year in which made; however, he can preferential rates; and
change to itemized deductions in 3. Those with income subject to income tax
succeeding years if he opts to; under Sec. 27(A) and Sec. 28(A)(1) and also
5. The OSD allowed shall be a maximum of with income subject to special/preferential
40% gross sales or gross receipts during the tax rates
taxable year.
B. Individuals
If the individual uses the accrual basis of 1. Those exempt under Tax Codes and other
accounting for his income and deductions, the OSD special laws with no other taxable income;
shall be based on gross sales during the taxable year. 2. Those with income subject to special or
preferential rates; and
If the individual uses the cash basis, the OSD 3. Those with income subject to income tax
shall be based on gross receipts during the taxable under Sec. 24 and also with income subject
year. to special/preferential tax rates
Example:
Suppose a retailer of goods, whose accounting method is under the accrual basis, has a gross sales of
P1,000,000 with a cost of sales amounting to P800,000. The computation of the OSD
Individual Corporation
Gross sales P1,000,000 P1,000,000
Less: Cost of goods solds 800,000
Basis of OSD 1,000,000 200,000
x OSD rate (40%) 0.40 0.40
OSD amount P400,000 P80,000
If the taxpayers opts to use OSD in lieu of the itemized deduction allowed, the taxable net income is:
Individual Corporation
Gross sales P1,000,000 P1,000,000
Less: Cost of goods solds 800,000
Gross sales/Gross income 1,000,000 200,000
Less: OSD amount 400,000 80,000
Taxable income P600,000 P120,000
NIRC:
If the GPP availed of itemized deduction,
the partners are not allowed to claim the OSD from
their share in the net income because the OSD is a
proxy for all items of deductions allowed in arriving
at a taxable income. The partners can claim itemized
deductions which have yet to be claimed by GPP.
Summary
GPP avails itemized Partners can claim
deduction itemized deductions not
claimed by GPP
GPP avails of OSD Partners can no longer
claim any deductions
TRAIN:
A GPP and the partners comprising such
partnership may only use OSD once, either by the
GPP itself or the partners comprising the
partnership.
*TRAIN repealed personal exemption and premium payments on health and hospitalization insurance. (Sec. 24
increase the exempt income up to P250,000)
(RJRS note: Sec. 34 M and Sec. 35 will still be a part Sec. 35. Personal Exemptions
of the reviewer albeit the same is repealed by TRAIN.
Better safe than sorry!!!) Personal Exemption P50,000
Additional Exemption P25,000 for each
Sec. 34 M. Premium payments on health/hospital dependent not
insurance exceeding four
Premiums deductible does not exceed Person qualified to claim basic personal exemptions
P2,400 per family 1. The claimant must be a citizen, resident or
nonresident, or a resident alien
Gross income of family does not exceed 2. Non resident alien engaged in trade or
P2,500 business are entitled to basic personal
exemptions only by way of reciprocity but
Requisites for the deductibility not to additional exemptions
1. Hospitalization insurance must actually 3. The individual claiming basic personal
have been taken by the individual for exemption must be earning income for the
himself and/or for the members of his taxable year
family 4. The amount allowed for each individual
2. The individual availing either earns pure who earns income is P50,000, regardless of
compensation income or earning business whether the individual is single or married.
income or engaged in the practice of 5. In the case of married individuals, where
profession only one of spouse is deriving gross
3. The gross income of the family of the income, only such spouse shall be allowed
individual does not exceed P250,000 for the the personal exemption
taxable year
4. The amount of the premium deductible Persons qualified to claim additional exemptions
does not exceed P2,400 per family or P200 1. The claimant may be married or unmarried
per month during the taxable year as long as he has a qualified dependent
5. In case of married individuals, only the child
spouse claiming additional exemptions be 2. The claimant must be a citizen, whether
entitled to this deductions resident or non-resident citizen, or a
resident alien
3. In case of married individuals, the proper
claimant is the husband, except if there is
an express waiver by the husband in favor
of his wife
4. The wife automatically claims the additional
exemption in the following instances:
a. The husband has no income or Sec. 36. Items Not Deductible
unemployed
b. The husband is a nonresident General Rule: In computing the taxable income, no
citizen working abroad like OFW deduction shall in any case be allowed in respect to:
or seaman
c. In case of legal separation and she 1. Personal, living or family expenses;
has custody of the child. 2. Any amount paid out for new buildings or
for permanent improvements made to
Meaning of “dependent” in Additional Exemptions increase the value of any property or
A 'dependent' means estate;
1. a legitimate, illegitimate or legally adopted 3. Any amount spent in restoring property
or foster child of the taxpayer (major repairs) or in making good the
2. chiefly dependent for support upon and exhaustion thereof for which an allowance
living with the taxpayer is or has been made; or
3. S/He is not more than twenty-one (21) 4. Premiums paid on any life insurance policy
years of age, covering the life of any officer or employee
4. S/He is unmarried and not gainfully when the taxpayer is directly or indirectly a
employed or beneficiary under such policy.
5. Regardless of age, s/he is incapable of self- 5. No deductions when the transaction is
support because of mental or physical between related taxpayers:
defect. a. Losses from sales or exchanges of
property
Status-at-the-end-of-the-year Rule b. Interest expense
It provides that whatever is the individual c. Bad debts
taxpayer’s status at the end of the calendar year 6. Losses due to merger, consolidation, or
may be used for determining his basic personal and control securities where no gain or loss are
additional exemptions. recognized
7. Exchanges not solely in kind
If the taxpayer marries or should have 8. Illegal transactions
additional dependent(s) the taxpayer may claim the
corresponding additional exemption, as the case
may be, in full for such year.
Example: Roger, engaged in buying and selling goods, having an ordinary net income of P50,000, capital gains of
P30,000 and a capital loss of P20,000 from sales of capital assets held for more than 12 months, taxable net
income is:
Ordinary net income P50,000
Gain from sales of capital assets P30,000
50% of capital gains P15,000
Loss from sales of capital assets P20,000
50% of capital loss P10,000
Taxable net capital gains P5,000
Taxable net income P55,000
Example: Brianna, engaged in buying and selling goods, having an ordinary net income of P50,000, capital gains of
P10,000 and a capital loss of P30,000 from sales of capital assets held for more than 24 months, taxable net
income is
Ordinary net income P50,000
Gain from sales of capital assets P10,000
50% of capital gains P5,000
Loss from sales of capital assets P30,000
50% of capital loss P15,000
Net capital loss P10,000*
Taxable net income P50,000
*the net capital loss of P10,000 is not deductible in arriving at the taxable net income inasmuch
as capital losses are allowed only to the extent of capital gains
Exception to Limitations on Capital Loss net capital gain, net capital loss and net income
The limitation on capital loss does not apply (percentage into account):
to a bank or trust company incorporated under the a. 100% of the gain/loss, if the asset has
laws of the Philippines, a substantial part of whose been held for not more than 12 months
business is the receipt of deposits, sells any bond, b. 50% of the gain/loss, if the asset has
debenture, note, or certificate, or other evidence of been held for more than 12 months
indebtedness issued by any corporation (including
one issued by a government or political subdivision For corporations, capital gains and losses
thereof), with interest coupons or in registered form. are always considered at 100%
Net Capital Loss Carry Over 5. Losses from the sales or exchanges of capital
If any taxpayer, other than a corporation, assets shall be allowed only to the extent of the
sustains in any taxable year a net capital loss, such gains from such sales or exchanges (limitations
loss (in an amount not in excess of the net income on capital loss)
for such year) shall be treated in the succeeding
taxable year as a loss from the sale or exchange of a 6. (Net capital loss carry-over) If any taxpayer,
capital asset held for not more than twelve (12) other than a corporation, sustains in any taxable
months. (See example next page) year a net capital loss, such loss in an amount
not in excess of the net income (taxable income)
Net Capital Loss Carry Over (NCLCO) vs. Net shall be treated in the succeeding taxable year
Operating Loss Carry Over (NOLCO) as a loss from the sale or exchange of a capital
asset held for not more than twelve (12)
NCLCO NOLCO months.
Can be availed of only by Available to both
individual individuals and
corporation
Covers only a one year May be deducted from
period the gross income for the
next three (3)
consecutive taxable
years
A capital asset An ordinary asset
transaction transaction
Directly governed by the Directly governed by the
Tax Code only Tax Code and by the
Investment Incentive Act
The net capital loss of P5,000 sustained in 2010 and carried over in 2011 is
reduced to P2,250 for the reason that the net income from business and other sources
(not including capital gain), for the year is only P2,250.
The loss carried over is such loss not in excess of the taxable income.
Sec. 40 Determination of Amount and Recognition Loss – it is the excess of the basis for determining
of Loss loss over the amount realized
Sec. 40 B
Basis for Determining Gain or Loss from Sale or Disposition of Property
(RR 8-2001)
Mode of Acquisition Cost of Basis
1. Acquired by purchase The actual cost
2. By inheritance Fair market value
3. By gift The same as if it would be in the
hands of the donor or the last
preceding owner,
Example: Fraser sold a ruby worth P100M to Randall 3. In a m/c, a security holder of a corporation
Inc, in exchange for P110M cash, P20M worth of exchanges his securities in such
stocks and P5M property. How much is the gain for corporation, solely for stock or securities in
Fraser? What about the loss for Randall Inc? such corporation, a party to the merger or
consolidation.
Get the amount realized P135 M 4. If property is transferred to a corporation
first (cash +stock+property) by a person in exchange for stock or unit of
Deduct the basis P100M (worth of ruby) participation in such a corporation of which
Gain P35M (for Fraser), as a result of such exchange said person,
loss of P35M for Randall alone or together with others, not
exceeding four (4) persons, gains control of
Sec. 40. C. Tax Free-Exchanges said corporation but the stocks issued for
services shall not be considered as issued in
General rule: The sale or exchange or property, the return for property. (BAR)
entire amount of the gain or loss, as the case may
be, shall be recognized.
It is the place of activity creating the income 6. Sale of Personal Property. - gains; profits and
which is controlling, and not the place of business or income from the sale of personal property, as
residence of a corporation. determined in Subsection (E) of this Section.
Gross Income from Sources within the Philippines Gross Income from Sources without the Philippines
1. Interests other than those derived from
1. Interests. - including interests on bonds, notes sources within the Philippines;
or other interest-bearing obligation: 2. Dividends other than those derived from
a. The loan was used here in the sources within the Philippines;
Philippines 3. Compensation for labor or personal services
b. The debtor is in the Philippines performed without the Philippines;
4. Rentals or royalties from property located
2. Dividends without the Philippines or from any interest in
a. from a domestic corporation; and such property; and
b. from a foreign corporation, 5. Gains, profits and income from the sale of real
unless less than 50% of the gross property located without the Philippines.
income of the foreign corporation for the
three-year period ending with the close of Income From Sources Partly Within and Partly
its taxable year preceding the declaration of Without the Philippines.
such dividends (amount will be based on
the same ratio to dividends as the gross Gains, profits and income derived from the
income of the corporation for such period purchase of personal property within and its sale
derived from sources within the Philippines without the Philippines, or from the purchase of
bears to its gross income from all sources) personal property without and its sale within the
Philippines shall be treated as derived entirely form
3. Services. - Compensation for labor or personal sources within the country in which sold: Provided,
services performed in the Philippines; however, That gain from the sale of shares of stock
in a domestic corporation shall be treated as derived
4. Rentals and royalties. - from property located in entirely form sources within the Philippines
the Philippines or from any interest in such regardless of where the said shares are sold.(BAR)
property for:
a. the use of any copyright, patent, design
or model, plan, secret formula or
process, goodwill, trademark, trade
brand or other like property or right;
b. the use of any industrial, commercial or
scientific equipment;
c. the supply of scientific, technical,
industrial or commercial knowledge or
information;
d. the supply of services by a nonresident
in connection with the use of property
or rights belonging to, or the
installation or operation of any brand,
machinery or other apparatus
Chapter VIII received, and the expenses are allowed as
Accounting Periods and Methods of Accounting deduction from the gross income when actually
(RJ note – terms included were the ones Atty. Rada incurred, although not yet paid.
mentioned during class)
All-Events Test
Taxable year or taxable accounting period The accrual of income and expenses is
It means the calendar year or the fiscal year permitted when the following are met:
ending during such calendar year. 1. Fixing of a right to income or liability to pay
2. The availability of the reasonable accurate
Different Taxable Accounting Periods determination of such income or liability
General Rule: The accounting period of a taxpayer is Section 46. Change of Accounting Period.
a period of 12 months, such as: If a taxpayer, other than an individual,
changes his accounting period from fiscal year to
1. Calendar accounting period – a period of calendar year, from calendar year to fiscal year, or
12 months starting from Jan. and ending on from one fiscal year to another, the net income shall,
Dec. 21. (adopted by individual or with the approval of the Commissioner, be
corporation) computed on the basis of such new accounting
period, subject to the provisions of Section 47.
2. Fiscal accounting period – a period of 12
months ending on the last day of any month Sec. 47. Final or Adjustment Returns for a Period of
other than December. (only corporation) Less than 12 Months
Exception: But a taxpayer may have a taxable period When Short Period return required to be filed
of less than 12 months No return can be made for a period of more
than 12 months.
3. Short accounting period – an accounting
period wherein a return is made for a A separate return for a fractional part of a
fractional part of a year or which is a period year is required whenever there is a change, with the
of less than 12 months. approval of the Commissioner, on the basis of
computing taxable income from one taxable year to
This occurs: another taxable year.
a. When a taxpayer, with approval of
CIR, changes from fiscal to calendar The change is from:
year, vice versa or from one fiscal year a. Fiscal year to calendar year
to another fiscal year; or b. Calendar year to fiscal year
b. When taxpayer dies; or c. One fiscal year to another fiscal year
c. When a corporation is newly
organized or dissolved at any time Sec. 47. Accounting for Long-term Contracts
during the year after the beginning of
the calendar or fiscal year. Long-term Contracts – it means building, installation
or construction contracts covering a period in excess
Accounting Methods under the Tax Code of 1 year.
Income withheld:
a. excess of tax due – refunded
b. less than tax due – difference paid