Common tax issues of PEZA-registered entities

December 2, 2019 | 9:50 pm

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Let’s Talk Tax

By Jasmine D. Abaygar

On weekends, I travel from my workplace to my province for a quick break

from my busy working life. Every time I travel to my home town, I always
notice the expanding industry of Philippine Economic Zone Authority (PEZA)
enterprises, with special economic zones and technoparks being established
in almost every city of my province, wherever I go. In fact, our province is
known for its numerous economic zones. This makes me realize the rise in
demand for PEZA-registered entities.

The PEZA Law or Republic Act No. 7916 — also known as the Special
Economic Zone Act of 1995 — was passed in February 1995. PEZA-
registered entities enjoy numerous fiscal and nonfiscal incentives under the
law as opportunities to build profits and minimize operational costs. However,
in effectively administering the incentives set forth by PEZA, the Bureau of
Internal Revenue (BIR), and other government agencies will always come into
the picture. PEZA-registered entities are required to strictly adhere to the rules
of PEZA, BIR, and other government agencies to completely enjoy their
incentives. While compliance with PEZA is the primary objective, its tax
compliance as a PEZA-registered entity should also be at the top of the to-do
list. Otherwise, tax consequences due to noncompliance will always be a
hurdle.

Consequently, what are the common tax issues PEZA-registered enterprises

deal with?

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Functional currency reporting. Many PEZA-registered entities are adopting

foreign currencies other than the peso in their books of account for tax
purposes. Under Revenue Regulations No. 06-2006, functional currency
income and expenses needs to be translated into pesos monthly using the
Philippine Dealing System (PDS) monthly average exchange rate (now the
Banker’s Association of the Philippines exchange rate). However, some
companies still use historical rates instead of monthly average exchange rates
in translating their foreign currency income and expenses. Is this allowed?
This was permitted in a BIR ruling, provided that the peso figures in the
income tax return are reconciled with the peso amounts reflected in the tax
returns other than income tax.

Hence, it is critical that the total figures in the income tax return for the year
are reconciled with the total of the equivalent peso figures as converted from
the functional currency figures in the maintained subsidiary ledgers to serve
as the source of the figures reflected in tax returns other than income tax (i.e.,
tax returns for value-added tax, percentage tax, withholding tax, documentary
stamp tax, etc.). For example, revenue reported under the VAT returns for the
year should, likewise, be used as the revenue reported in the income tax
return. Any difference due to currency translation is to be reported as
reconciliations at the end of the year in the annual or final adjustment of
income tax returns. For the sale of services, the foreign exchange rate may
differ when accruing for income tax purposes and when recording the
collection for VAT purposes.
Allocation basis. Some PEZA-registered entities, at any one time, are
covered by different tax regimes. They have income from unregistered
activities, which are subject to regular income tax. They may also have
registered activities that are enjoying income tax holidays (ITH) or are subject
to the five percent tax on gross income. Hence, they have to deal with the
basis for allocation between registered to unregistered activities, between
activities under ITH or the five percent regime, and from Cost of Sales to
Operating Expenses.

The question is, what should be the basis? BIR Ruling [DA-608-06] provides
that, if possible, segregation should be done through specific identification.
Otherwise, allocation based on relevant data may be used, if applicable.

While some enterprises have secured rulings with the BIR to validate their
basis of allocation, others plainly resort to their internal interpretations (e.g.,
sales related to registered and unregistered projects, floor areas and
personnel headcount). Take note, however, that allocation basis is crucial
during BIR assessments. It is the PEZA enterprises’ burden to prove that the
allocation basis is reasonable and acceptable. Hence, PEZA enterprises
should maintain documentation (e.g., memoranda, agreements, and BIR
rulings) that can justify the basis of allocation. These should be further
supported by billings/invoices issued to the company for them to be
acceptable from the BIR’s perspective.

Direct costs. The computation of gross income subject to the five percent tax
is still a major concern, even after more than 20 years of the PEZA Law. The
basis of the five percent tax is the enterprises’ gross income, which should be
Net Sales less Cost of Sales. RR No. 11-2005 has laid down the direct costs
to be included as allowable deductions to arrive at the gross income as the
basis of five percent gross income tax. The common question, though, is
should this be treated as exclusive or not?
In many instances, the BIR disallows certain direct costs that are not on the
list asserted under RR No. 11-2005. However, a Court of Tax Appeals (CTA)
decision issued in 2014 has ruled that the list under RR No. 11-2005 is not
meant to be all-inclusive, but merely enumerates the expenses that can be
considered direct costs. PEZA-registered enterprises may be allowed to
deduct expenses that are in the nature of direct costs, even though the same
is not included on the list. It was stated that the criteria for determining if the
item of cost or expense should be part of the direct cost are the direct relation
of such item in the rendition of the PEZA-registered services.

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Despite this CTA interpretation, the BIR still continues to disallow expenses
and to assess deficiency taxes based on the rules under RR No. 11-2005.

VAT zero-rating. For the sale of services to PEZA-registered entities to be

subject to VAT at zero percent, the BIR, in several rulings, takes the position
that it should be under these two circumstances: (1) services are rendered
within the ecozone, and (2) services are rendered in relation with the
registered activities of the PEZA-registered buyers.

A CTA ruling issued in 2017 rendered this invalid. The CTA ruled that sales of
services should be zero-rated when the following requisites are met:

1. Sale of service is performed in the Philippines;

2. Service is performed by a VAT-registered person; and

3. Service is rendered to persons or entities exempted under special laws or

international agreements to which the Philippines is a signatory.

The CTA considered unarguable the BIR’s position that a sale of services
should be rendered within the ecozone and should be directly connected to
the activities of PEZA-registered enterprises to qualify for VAT zero-rating.
Such a position is not only contrary to the plain wording of the law, but also to
established jurisprudence and even to BIR’s own revenue issuance.

The CTA decided that, as long as the PEZA-registered buyer is located and
operating within the ecozone, sellers from the Customs territory cannot pass
on any output VAT for any sale of goods or services destined for consumption
within the ecozone. Proving its tax situs and connection with the registered
activities will not be of importance.

Nevertheless, some BIR examiners still insist on a different interpretation

during tax audits.

Local government impositions. The five percent special gross income tax is

in lieu of all national internal revenue taxes and local government taxes,
except for real property taxes. However, it is still a question up to now if the
exception should be treated as encompassing all national and local taxes,
including regulatory fees and charges.

While PEZA entities’ exemption from payment of local business taxes is being
honored, many local government units impose local business taxes on
unregistered activities. Most PEZA entities are also being required to pay the
regulatory fees imposed by local government units (LGUs). While the
exemption states that this should be in lieu of all national and local taxes
under the PEZA law, certain local government units still specifically proceed
with their own LGU Memoranda of Agreement with PEZA.

Expiration of income tax holiday. PEZA-registered entities can be entitled

to an extension of the Income Tax Holiday up to eight years from the start of
commercial operations. However, the Income Tax Holiday extension requires
compliance with specific terms and conditions; thus, securing approval for the
extension can take time. Some PEZA enterprises whose ITH applications are
still pending with PEZA already use the ITH exemption as the basis of their
annual income tax. Will this be accepted? Ideally, they should already be
under the five percent gross income tax if the ITH has expired. The proof of
approval of the ITH extension is crucial before an enterprise can apply the
exemption in its annual income tax returns.

The above common issues are a few of what PEZA entities deal with. Indeed,
the growth of PEZA economic zones is no doubt instrumental to an economy:
making the country attractive to foreign investors, creating millions of job
opportunities, and improving export activities. From the PEZA-registered
entities’ perspective, however, tax compliance is not a walk in the park.

With the PEZA Board now in support of the Corporate Income Tax and
Incentive Rationalization Act or (CITIRA) Bill, PEZA-registered entities may be
faced with a new set of incentives and new rules if the bills are passed. Let us
hope for easier compliance with a clearer and more consistent interpretation
of the rationalized tax incentives.

In addition, the passage of Republic Act No. 11032 or the Ease of Doing
Business Act of 2018, which aims to make it easier to start and operate
businesses, should also support taxpayers’ concerns in dealing with tax
compliance: simplicity of rules, transparency, and promotion of efficiency.
Therefore, how do you deal with the dilemmas of complying with the BIR and
LGU regulations?

In the meantime, PEZA enterprises still bear the burden of proving that their
practices are reasonable and not contrary to what regulations provide.

Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that
aims to keep the public informed of various developments in taxation. This
article is not intended to be a substitute for competent professional advice.

 
 Jasmine D. Abaygar is a senior of Tax Advisory & Compliance division of P&A
Grant Thornton, the Philippine member firm of Grant Thornton International
Ltd.

pagrantthornton@ph.gt.com

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CTA: List of allowable deductions for

PEZA registered enterprises not
exclusive

TOP OF MIND - Mark Andrew M. Santiago (The Philippine Star 

) - July 8, 2014 - 12:00am

Republic Act 7916 (PEZA Law), otherwise known as the “The Special Economic Zone
Act of 1995” was enacted as a means of attracting investors in the Philippines. Among
its provisions is a tax incentive which grants to business establishments registered with
the Philippine Economic Zone Authority (PEZA), a five-percent preferential gross
income tax (GIT) rate imposed on gross income, in lieu of all national and local taxes.
Gross Income is defined in the Implementing Rules and Regulations of the PEZA Law
(PEZA Rules) as 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. In relation to this, the Implementing
Rules and Regulations of the PEZA Law (PEZA Rules) have provided a list of allowable
deductions for the purposes of computing gross income.

To clarify the list of direct costs included as allowable deductions under the
PEZA Rules, the Bureau of Internal Revenue (BIR) had issued Revenue
Regulations (RR) 11-05 which provides a list of direct costs which are as follows:

Direct salaries, wages or labor expense Service supervision salaries Direct

materials, supplies used

Depreciation of machineries and equipment used in the rendition of registered services;

portion of the building owned or constructed used exclusively in the rendition of
registered service

Rent and utility charges for buildings and capital equipment used in the rendition of
registered services

 Financing charges associated with fixed assets used in the registered service business
the amounts of which were not previously capitalized.

The BIR had opined in BIR Ruling No. 14-12 and subsequent rulings [BIR Ruling Nos.
92-13; 125-13; 194-13] that the enumeration contained in RR 11-05 is exclusive. Thus if
an expense does not fall under any of the list of direct costs under RR 11-05, it cannot
be claimed as a deduction by a PEZA enterprise.

This issue was again brought into the limelight in the recent Court of Tax Appeals case
of East Asia Utilities Corporation vs the Commissioner of Internal Revenue (CTA Case
No. 8179), promulgated May 21, 2014. In this case, the petitioner, East Asia Utilities
Corporation (EAUC), a PEZA registered enterprise, operates a megawatt power plant. It
had been assessed for deficiency taxes in the amount of P2,791,894.70 because of a
disallowance by the BIR of various expenses amounting to P34,467,835.76 for the
reason that these expenses do not fall under the list of direct costs expenses under RR
11-05.  EAUC contends however that the list of allowable deductions under RR 11-05 is
not exclusive.  The list serves only as a guide in determining what items may be
considered as direct costs or cost of sales.

The CTA ruled in favor of EAUC and declared that the list of direct costs under RR 11-
05 is indeed not exclusive. It agreed with EAUC that when RR 11-05 amended the
previous RR 02-05, the words “consists only” were deleted and the pertinent phrase
restated to “the following direct costs are included in the allowable deductions x x x .”

It held that the list under RR 11-05 was not meant to be all-inclusive but merely
enumerates the expenses that can be considered as direct costs and that PEZA-
registered enterprises may be allowed to deduct expenses which are in the nature of
direct costs even though the same are not included in the list. That the criteria in
determining whether or not the item of cost or expense should be part of the direct cost
is the direct relation of the expense in the rendition of the PEZA-registered services.  If
the item of cost or expense can be directly attributed in providing the PEZA-registered
services, then it should be treated as direct cost.  Since EAUC was able to present
evidence that their costs of services such as employee benefits, and technical training
of employees were directly related to their registered activity, the CTA ruled that these
should be allowed as deductions.

Both EAUC and the CIR had filed their separate motions for reconsideration to this
decision of the CTA.  It would therefore be interesting to see how this case would be
decided if and when it reaches the Supreme Court. The Court’s final decision would be
of great importance to PEZA registered enterprises that want to claim deductions, as
well as to investors who plan to set up business in the Philippines and register with
PEZA.

Mark Andrew M. Santiago is an Supervisor from the Tax Group of R.G. Manabat & Co.
(RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as
professional advice to a specific issue or entity.

The view and opinions expressed herein are those of the author and do not necessarily
represent the views and opinions of KPMG International or RGM&Co. For comments or
inquiries, please email ph-kpmgmla@kpmg.com or rgmanabat@kpmg.com.
For more information on KPMG in the Philippines, you may visit www.kpmg.com.ph.
New guidelines for tax exemption of non-
stock non-profits
Kent Lileo Tong Tax Senior Manager, PwC Philippines 07 Nov 2019
It is the activities of a non-stock, nonprofit corporation that entitle it to a tax exemption.

In a move to clarify the nature, character, and tax treatment of corporations under
Section 30 of the Tax Code, the Commissioner of Internal Revenue (CIR) issued
Revenue Memorandum Order (RMO) No. 38-2019 containing the new guidelines for the
processing and issuance of Certificates of Exemption (CTE).

The RMO is a reiteration of Revenue Memorandum Circular (RMC) No. 64-2016, which
provides parameters on which entities fall within the ambit of the so-called “Section 30
corporations,” i.e., tax-exempt corporations.

Section 30 corporations include (1) labor, agriculture or horticultural organizations not

organized principally for profit; (2) mutual savings banks not having capital stock
represented by shares, and cooperative banks without capital stock organized and
operated for mutual purposes and without profit; (3) beneficiary society orders or
associations, operating for the exclusive benefit of the members; (4) cemetery
company, owned and operated exclusively for the benefit of its members; (5) non-stock
corporations or associations operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of veterans; (6) business leagues,
chambers of commerce, boards of trade not organized for profit; (7) civic leagues or
those organized exclusively for the promotion of social welfare; (8) non-stock and
nonprofit educational institutions; (9) government educational institutions; (10) farmers’
or other mutual typhoon or fire insurance companies, mutual ditch or irrigation
companies, mutual or cooperative telephone companies, or like organizations of a
purely local character; (11) as well as farmers’, fruit growers’ associations operated as a
sales agent for the purpose of marketing the products of its members.

The RMO shall apply to all tax-exempt corporations listed above except for non-stock
and nonprofit educational institutions which are covered separately by RMC 44-2016.

Mere registration with the Securities and Exchange Commission (SEC) as a non-stock,
nonprofit corporation does not automatically entitle an entity to the tax exemption. It is a
corporation’s activities that determine the true nature of the organization and its
taxability or exemption from taxes.
Thus, to determine whether a corporation qualifies for income tax exemption under
Section 30 of the Tax Code, the BIR provided two determinative tests: (1) organizational
test; and (2) operational test.

The organizational test requires that the corporation’s constitutive documents (i.e., SEC
registration, Articles of Incorporation (AOI), and By-Laws) show that its primary
purpose(s) falls under Section 30 of the Tax Code. The operational test, on the other
hand, requires that the regular activities of the corporation be exclusively devoted to the
furtherance of such primary purpose.

Further, the earnings of a Section 30 corporation that chiefly come from donations,
grants, or contributions should not inure to the benefit of its trustees, organizers,
officers, members, or any specific person. As such, the RMO listed certain payments to
individuals that would be considered as inurement prohibitions.

However, realistically, Section 30 corporations need other sources of income to survive

and continue serving their purpose. Thus, in concurrence with the law, the RMO
recognizes that these corporations are allowed to engage in activities conducted for
profit without losing their tax exemption.
The RMO reiterated that the tax exemption granted to Section 30 corporations is not
absolute as it covers only the income received by corporations in furtherance of the
purpose for which they were established; hence, income of whatever kind and character
from any of their properties, real or personal, or from any of their activities conducted for
profit regardless of the disposition is subject to tax.
Thus, interest income from bank deposits, gains from investments, rental income from
real or personal properties shall be subject to income tax. Consequently, Section 30
corporations are required to file quarterly and annual income tax returns to report such
other income.

Furthermore, the exemption shall only be limited to income tax. It therefore excludes
withholding tax, value-added tax, or percentage tax. Thus, Section 30 corporations have
the responsibility to withhold taxes on the compensation income of their employees, and
on the payments to individuals or corporations subject to tax. Likewise, their purchases
of goods, properties, or services, and importations shall be subject to the 12% VAT. As
an indirect tax, it can be passed on to the purchaser.

Section 30 corporations who availing of the tax exemption are required to secure a
Certificate of Tax Exemption (CTE) or a tax exemption ruling. A CTE shall be valid for
three years from the date of its effectivity, unless sooner revoked or canceled. However,
it may be renewed or revalidated for another three years.
Nonetheless, to ease the process, the securing of CTEs has now been simplified under
the RMO. The request is filed with the Revenue District Office (RDO) where the
corporation is registered, and the CTE is subsequently issued by the Revenue Region.

However, the RMO remains silent on how the CTE requirements apply to new Section
30 corporations. Specifically, since two of the mandatory requirements are the Income
Tax Returns or Annual Information Returns and Financial Statements of the corporation
for the last three years, a new company will not be able to provide such documentary
requirements. In that case, would the AoI and By-Laws be sufficient documents for them
to secure a CTE and consequently, be qualified for tax exemption for the next three
years? At the end of the day, a Section 30 Corporation does not lose its character as
such, and its consequent exemption from taxation merely because it cannot submit
certain documentary requirements.

While the BIR merely seeks to ensure that only qualified taxpayers are rightfully availing
of the exemption, and safeguard against tax evasion and abuse of exemptions, it may
be worthwhile to consider that the tax exemption granted to corporations under Section
30 of the Tax Code is to compensate them for the services they render to benefit the
public. Thus, one would hope that more leniency and flexibility is afforded to them as
long as they comply substantially with the requirements of the law.
The views or opinions expressed in this article are solely those of the author and do not
necessarily represent those of Isla Lipana & Co. The content is for general information
purposes only and should not be used as a substitute for specific advice.

SECTION 32 (B) TAX CODE - EXCLUSIONS FROM GROSS INCOME

(exempt from taxation)(1) Life Insurance. - The proceeds of life insurance policies paid to the heirs
or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are
held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in
gross income.

(2) Amount Received by Insured as Return of Premium. - The amount received by the insured, as a return of
premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the
maturity of the term mentioned in the contract or upon surrender of the contract.

(3) Gifts, Bequests, and Devises. _ The value of property acquired by gift, bequest, devise, or descent:
Provided, however, That income from such property, as well as gift, bequest, devise or descent of income
from any property, in cases of transfers of divided interest, shall be included in gross income.

(4) Compensation for Injuries or Sickness. - amounts received, through Accident or Health Insurance or
under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts
of any damages received, whether by suit or agreement, on account of such injuries or sickness.
(5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation binding
upon the Government of the Philippines.

(6) Retirement Benefits, Pensions, Gratuities, etc.-

(a) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees
of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan
maintained by the employer: Provided, That the retiring official or employee has been in the service of the
same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his
retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an
official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan'
means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of
some or all of his officials or employees, wherein contributions are made by such employer for the officials
or employees, or both, for the purpose of distributing to such officials and employees the earnings and
principal of the fund thus accumulated, and wherein its is provided in said plan that at no time shall any part
of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive
benefit of the said officials and employees.

(b) Any amount received by an official or employee or by his heirs from the employer as a consequence of
separation of such official or employee from the service of the employer because of death sickness or other
physical disability or for any cause beyond the control of the said official or employee.

(c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement
gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines
or aliens who come to reside permanently in the Philippines from foreign government agencies and other
institutions, private or public.

(d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of
the United States administered by the United States Veterans Administration.

(e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of
Republic Act No. 8282.

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

(7)Miscellaneous Items. -

(a) Income Derived by Foreign Government. - Income derived from investments in the Philippines in loans,
stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i)
foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign
governments, and (iii) international or regional financial institutions established by foreign governments.
(b) Income Derived by the Government or its Political Subdivisions. - Income derived from any public utility
or from the exercise of any essential governmental function accruing to the Government of the Philippines or
to any political subdivision thereof.

(c) Prizes and Awards. - Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement but only if:

(i) The recipient was selected without any action on his part to enter the contest or proceeding; and
(ii) The recipient is not required to render substantial future services as a condition to receiving the prize or
award.

(d) Prizes and Awards in sports Competition. - All prizes and awards granted to athletes in local and
international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned
by their national sports associations.

(e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and
private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty
thousand pesos (P30,000) which shall cover:

(i) Benefits received by officials and employees of the national and local government pursuant to Republic
Act No. 6686;
(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum
Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of
Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of
Finance, upon recommendation of the Commissioner, after considering among others, the effect on the same
of the inflation rate at the end of the taxable year.

(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-ibig contributions, and
union dues of individuals.

(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from the
same or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of
more than five (5) years.

(h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by the investor upon redemption of
shares of stock in a mutual fund company as defined in Section 22 (BB) of this Code.
Tax Exemption in the
Philippines
Editorial Staff | Public Info
Taxes are the lifeblood of the government.  This is called the life-blood doctrine in
taxation.  Without taxes, the government cannot survive with its operation.  There will
be no infrastructure and projects that will help the community to work effectively. 
However, taxes can also burden the taxpayer if unregulated.

Thus, there are certain governing rules upon taxes to give justice and enabling those
who lesser income to survive in daily living.  There are tax exemptions that the
government are giving to the less privileged.  There are also exclusions allowed to be
deducted from the business gross income to come up with the net income enabling for
a lesser taxable income.

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Tax Exemption in the Philippines: These are some of the allowable exemptions,
exclusions or deductions under the law:

1. Minimum wage earners are exempted to pay taxes.  To qualify as a minimum

wage earner, it will depend on which City or Town you live in.  Your local
government unit follow a list of minimum wage earners according to categories
depending on your job.  So you can check with your respective local
government unit for the category.
2. In a recent jurisprudence by BIR, there is an increase from the old 30,000 to the
new 82,000 pesos exemption on 13th month pay, bonuses and other de minimis
benefits (small benefits) such as gifts and tokens for individual taxpayers. So,
this is an automatic exemption deducted from individual taxpayers.
3. For individuals, whether employed or in a business, an automatic 50,000 pesos
is deducted from the gross individual payment of taxes.
4. An additional 25,000 pesos for each dependent child for up to a maximum of
four children is given as a deduction to gross income. Dependent child means a
child who is below 21 years old, living with parents, and has no employment.
5. In business, allowable deductions from gross income are expenses incurred
directly related to business operations like salary/wages, gasoline, purchases,
administrative expenses, rent, utility bills and others.
6. Allowable deduction of 2,400 annual payment on health/hospitalization
insurance is allowable deduction to gross income.
7. Other allowable deductions for business are charitable and other contributions,
research and development, depreciation, depletion, bad debts, interest expense,
taxes, losses, and pension trust.
Finally, there are cases when you are confuse if a certain transaction is taxable or not. 
Here is a list of some transactions that you are not required to pay income tax:

 Given gifts out of generosity.

 Inheritance
 Prizes won by athletes representing the country.
 Advance payment for services not yet rendered.
 Income of OCW and Seamen from their employment abroad.
 Proceeds of swindling, embezzlement, theft or robbery.
 Separation pay of an employee where his severance from work is not his fault.
 Loan proceeds.
  Terminal leave pay of government employees.
 Life insurance proceeds received by beneficiaries.
 Donations
 Benefits and allowances such as longevity pay, subsistence allowance and
hazard pay granted to uniform policemen and jail guards.
 Lottery winnings and those from sweepstakes.
There is still a long list of deductible and items not subject to income tax under the
Philippine law.  To guide you with the decision if you need to pay tax or not, just
remember that money acquired from sources not considered as income are not subject
to income tax.

VAT exemptions under Philippine TRAIN

Tax Law
February 2, 2019 / BIR Taxation and TRAIN Law / By James Ryan Jonas

What are VATable and VAT-exempt items under the recently approved Tax Reform for
Acceleration and Inclusion or TRAIN Law implemented starting 2018?
To recap, the TRAIN tax reform program includes various provisions that touch on reducing
personal income taxes while increasing taxes on products such as sweetened beverages, oil,
petroleum, and fuel products, coal, stock transactions, cars and automobiles, among others.

Also included in the tax reform is the updating of VAT-able products and transactions. The list
of items that will or won’t be charged the 12% Value Added Tax (VAT) underwent several
revisions in Congress in the last few months, but the final version is shown below.
We begin with a list of products or transactions that currently enjoy VAT exemption and will
continue to be VAT-exempt under the new tax reform program.

* * * UPDATED resources on the approved TRAIN Tax Reform below:

 Everything about TRAIN Law and BIR Tax Implementing Guidelines
 What’s included in the approved Philippine TRAIN Tax Reform?
 New Personal Income Tax Rates and Income Tax Tables under TRAIN
 BIR Sample Computations: How to Compute Taxes under TRAIN
Products, service, or groups that will continue to be VAT-exempt
 Food and agricultural products
 Senior citizens
 Persons with Disability (PWD)
 Cooperatives
 Tourism
 Education
 Renewable energy
 Health
 Enterprises and BPOs located in Special Economic Zones
 Condominium association dues
 Rentals and leases below P15,000 per month
The following items, meanwhile, will now also enjoy the benefit of not paying VAT.

Groups, products, or transactions that will be VAT-exempt

 Businesses with annual gross sales of P3 million and below
 Government owned and controlled corporations (GOCCs), state universities and colleges (SUC),
and government agencies
 Medicines for diabetes, cholesterol, and hypertension (VAT exemption beginning 2019)
 Socialized housing, or houses priced at P450,000 and below, and low-cost housing, or those
priced at P3 million and below (VAT exemption retained from 2018 to 2020 only)
Exclusions And Exemptions Chart
TYPE OF ORGANIZATION CRITERIA FOR EXCLUSION OR EXEMPTION

Organizations of law enforcement personnel, Stated purpose in solicitations must not include any
firefighters, or other persons who protect benefit to any person outside the actual active
the public safety. membership of the organization.

Religious institutions and separate groups or

corporations which form integral parts of
1) Organization must be tax-exempt under the Internal
religious institutions.
Revenue Code; and
2) No part of the organization's net income can inure to
the direct benefit of any individual; and

3) The organization's conduct must be primarily

supported by government grants or contracts, funds
solicited from its own membership, congregation, or
previous donors, and fees charged for services
rendered.

Educational institutions and any auxiliary Curricula must be registered with, or approved by, the
associations, foundations, and support Department of Education, either directly or by
groups that are directly responsible to acceptance of accreditation by an accrediting body
educational institutions. recognized by the Department of Education.

Hospitals and hospital foundations. Organization must be regulated by the Department of

Health or the Department of Public Welfare.

Veterans' organizations chartered under All fundraising activities of the organization or

federal law, volunteer firemen, ambulance association must be carried on by volunteers, members,
associations, rescue squad associations, and or an auxiliary or affiliate thereof, who receive no
their auxiliaries or affiliates.  compensation, directly or indirectly, for the fundraising
activities.
Public, nonprofit library organizations.
Senior citizen centers and nursing homes.
Parent/teacher associations or
organizations.
Any corporation established by an act of
Congress of the United States.
Any charitable organization which receives
gross national contributions of $25,000 or
less annually.
Organization must receive financial aid from state and
municipal governments and file an annual fiscal report
with the State Library System.
Organization must be nonprofit and
charitable and must have been granted tax-exempt
status under the Internal Revenue Code and all
fundraising activities must be carried on by volunteers,
members, or officers, who receive no compensation,
directly or indirectly, for the fundraising activities.
Organization must be recognized in a notarized letter
from the school district in which it is located.
Corporation must be required by federal law to submit
annual reports of its activities to Congress containing
itemized accounts of all receipts and expenditures after
being fully audited by the Department of Defense.
Organization cannot compensate any person who
conducts solicitations.