CPA REVIEWER

IN TAXATION
INTRODUCTION TO INCOME TAXATION
GROSS INCOME
- Inflow of wealth to the taxpayer from whatever source, LEGAL OR ILLEGAL, that
INCREASES NET WORTH.
- Includes income from employment, business, practice of profession, and income from
properties.
ELEMENTS OF GROSS INCOME
1. Return ON capital that INCREASES NET WORTH;
2. A REALIZED benefit; and
3. Not exempted by law, contract or treaty.
RETURN ON CAPITAL
- Which that increases net worth subject to income taxation;
- Anything received AS A COMPENSATION FOR THEIR LOSS is deemed a return OF
capital
1. Life- Generally, received as a consequence of death, such as proceeds from life
insurance, is NON-TAXABLE.
Exemptions:
a. Any excess amount received over premiums paid
b. Gain realized from the sale or assignment of insurance policy
c. Interest income from the unpaid balance of the proceeds
d. Excess proceeds received over acquisition cost (When the insured outlived its
insurance policy.)
2. Health- Compensation received in consideration for the loss of health
3. Human reputation- Indemnity received as a compensation for its impairment.
- Recovery of LOST PROFITS is TAXABLE.
REALIZED BENEFIT
- “Benefit” Advantage received by the taxpayer. There is a benefit when there is an
increase in net worth.
- “Realized” means EARNED. There must be a degree of undertaking or a sacrifice from
the taxpayer.
Requisites for a realized benefit:
1. There must be an EXCHANGE transaction
2. Transaction involves ANOTHER PARTY
3. Increases net worth of the recipient.
- Increase in the wealth of the taxpayer in the form of appreciation or increase in value of
properties or decrease in value of his obligation IN THE ABSENCE OF SALE OR
BARTER is NOT taxable. These gains are unrealized.
- In rendering of services, the entire consideration received such as compensation income
or service income is an item of Gross Income.
NOT EXEMPT BY LAW OR TREATY
Other Notes:
TYPES OF INCOME TAXPAYERS
INDIVIDUAL INCOME TAXPAYERS:
1. Citizens
A. Residents(RC)- Those Filipinos residing in the Philippines
Those staying abroad then go back to the Phils. after 182 days or less of
absence
B. Non-Residents(NRC)- Those staying abroad for at least 183 days(1/2 of 1 year)
Immigrants- Exact day of departure
OFW and Seafarers- Automatically NRC from the day they depart the
Philippines and until their arrival.
2. Aliens
A. Residents(RA)-Aliens who stayed for MORE THAN ONE YEAR as of the end of the
taxable year
B. Non-Resident
1. Engage in Trade/Business(NRA-ETB)- Aliens who stayed an aggregate of 180
DAYS or MORE during the taxable year.
2. Not Engaged in Trade/Business(NRA-NETB)- Aliens who stayed for NOT
MORE THAN 180 DAYS During the year[FWT of 25% on Gross Income]
CORPORATE INCOME TAXPAYERS(Includes all juridical persons)
1. Domestic- Organized in accordance with Philippine laws
2. Foreign- Organized under foreign laws
A. Resident Foreign Corporation(RFC)- With permanent establishment in the Phils.
B. Non-resident Foreign Corporation(NRFC)- Do not operate or conduct business in the
Philippines.
 Partnership
General Professional Partnership(GPP)- EXEMPT from income tax but partners
are the ones taxable.
Business Partnership- A taxable corporation
 Joint Ventures- A taxable corporation
EXCEPT: JV for construction project of coal, geothermal, etc.
 Co-ownership- Non-taxable

Other Notes:
INCOME TAX SCHEMES
- Under NIRC, Final Income Tax, Capital Gains Tax and Regular Income Tax are
MUTUALLY EXCLUSIVE in coverage. Meaning, an item of gross income that is
subject to tax in one scheme will no longer be taxed to other schemes.
ITEMS OF GROSS INCOME
1. FINAL INCOME TAXATION- Taxes are withheld at source, the taxpayer receive
income net of tax.
2. CAPITAL GAINS TAXATION- This is imposed on certain capital assets
A. Net gain on sale or exchange or other disposition of domestic stocks that is not listed
and not traded, directly to a buyer- 15% CGT on the gain
B. Sale of real properties classified as capital assets- 6% of Zonal or Assessed value,
whichever is higher.
3. REGULAR INCOME TAXATION- This is the general rule in income taxation and
covers all other income such as:
A. Active income
B. Gains from dealings in properties
1. Dealings in ordinary assets
2. Dealings in capital assets not subject to Capital Gains Tax
C. Other income, active or passive, not subject to Final Tax.
ACCOUNTING PERIOD
1. Calendar year(Jan 1-Dec 31)- Available to BOTH corporate and individual taxpayers
DUE DATE: On or before April 15 of the following year.
2. Fiscal year- Any 12 month period that ends on any day other than Dec 31.
Available to corporate taxpayers only.
DUE DATE: On or before the 15th day of the fourth month following the close of
the fiscal year.
3. Instances of short accounting periods:
A. Newly commenced business
B. Dissolution of business- start of the current year to the date of dissolution
Dissolved corporations shall file their return 30 days from cessation of activities.
C. Change of accounting period of a corporate taxpayer- Covers the start of the previous
accounting period up to the designated year end of the new accounting period. BIR
APPROVAL IS REQUIRED.
D. Death of the taxpayer- Start of the calendar year until the death of the TP.
E. Termination of accounting period of the TP by the CIR- Start of the current year until
the date of termination of the accounting period.
ACCOUNTING METHODS
1. General Methods:
A. Accrual Basis
B. Cash Basis
Rules:
1. Advances are taxable upon receipt
2. Prepaid expenses are non-deductible
3. Special tax accounting must be followed

2. Installment method:
Available to the following taxpayers:
A. Dealers of PERSONAL properties (no initial payment threshold)
B. Dealers of REAL properties, only if their initial payment does not exceed 25% of the
selling price.
 C. Casual sale of non-dealers in property, real or personal, when their selling price
exceeds P1000.00 and initial payment does not exceed 25% of the selling price.

 Selling price= Entire amount that will be paid by the buyer to the seller including the
mortgage.
 Contract Price= Amount paid by the seller
Or= SP-(Mortgage assumed or basis, whichever is LOWER)
 Initial Payment= DP + Installments made during the taxable period + Excess
mortgage over the basis
D. Deferred Payment Method- Variation of accrual basis. Used when non-interest
bearing note is received as a consideration
E. Percentage of completion method- Applies only to construction contracts.
F. Income from leasehold improvement
Improvement made by the lessee on favor of the lessor if their useful life extends
beyond the lease term of the lessee.
Can be reported using:
A. Outright method- Lessor may report as income the fair value of such
improvements subject to the lease at the time when such improvement is
completed
B. Spread-out method- Lessor may spread over the life of the lease the estimated
depreciated value of such buildings or improvement at the termination of lease
=(Cost of Impvt)[(EUL-Lease Term)]
EUL of the impvt
G. Crop year basis- Farming income is recognized as the difference between the
proceeds of the harvest and expenses of the PARTICULAR crop harvested.
Expenses of each crop are accumulated and deducted upon the harvest of the crop.
INCOME TAX REPORTING
1. Self-assessment method:
Taxpayers declare their income and expense and personally determine their tax due
thereon.
Types of income tax related return filed to the government;
A. Income tax returns: CGT return, RIT Return
B. Withholding tax returns
C. Information returns
2. The withholding system
Types:
A. Final withholding tax
B. Creditable withholding tax
3. Information returns
Do not involve any payment or withholding of tax, only for tax mapping and evaluation
of tax compliance.
4. Where to file ITR?
In order of priority:

A. Authorized agent bank

B. Revenue collection officer
C. Duly authorized city or municipality treasurer.
Electronic Filing and Payment System(eFPS)
Taxpayer mandated to use eFPS:
A. Large TPs duly notified by BIR
B. Top 5,000 individual TPs duly authorized by the BIR
C. Top 20,000 individual TPs duly authorized by the BIR
5. Penalties for late filing and payment of taxes
FINAL INCOME TAX
FEATURES OF FINAL INCOME TAX
1. A final tax
2. Withholding at source
3. Territorial imposition- Only those passive income earned in the Phils.
4. Imposed on certain passive income and persons not engaged in trade/business.
PASSIVE INCOME
- Income earned with a very minimal involvement from the taxpayer and generally
irregular in timing and amount
- Not usually specifically monitored by the taxpayer
- NRA-NETB and NRFC have high risk of non-compliance, so instead of letting them file
a return, their income is being subjected to 25% and 30% final withholding tax
respectively based on their gross income.
PASSIVE INCOME SUBJECT TO FINAL TAX (other than NRA-NETB and NRFC)
1. INTEREST INCOME OR YIELD ON BANK DEPOSITS OR DEPOSIT
SUBSTITUTES

Individuals Corporations
Long term Exempt 20%
Short term 20% 20%
 If interest income given is that those EARNED, just multiply it by the tax rate
applicable
 If interest income given is that those the taxpayer already RECEIVED, gross up the
amount before multiplying it to the applicable tax rate.
 Pre-termination of long term deposits of INDIVIDUALS
For pre-terminated long term deposits before 5 years, previously exempt interest
income will be subject to final tax.

Holding period Final tax

Less than 3 years 20%
3-4 years 12%
4-5 years 5%
5 years or more 0
 Foreign currency deposits with foreign currency depositary banks

Individuals Corporations
Applicable for residents only 15% 7.5%
there is no long term or short term classification
Joint account on foreign currency deposits:
If bank account is jointly in the name of non-resident and resident taxpayer, 50% of
the interest shall be EXEMPT and 50% shall be subject to 15% final tax
 Interest income subject to REGULAR INCOME TAX(RIT) and not to FIT
Interest income on:
A. Lending activities
B. Investment in bonds
C. Promissory notes
D. Foreign sources
E. Penalty for legal delay
2. DOMESTIC DIVIDENDS IN GENERAL(Cash, property and script)
Domestic dividends not subject to final tax
A. Stock dividends are generally not subject to final tax EXCEPT FOR:
1. Subsequent cancellation or redemption of the stocks issued
 2. If it leads to substantial alteration in the ownership in the corporation
2.1. Shares in lieu of cash; and
2.2. Corporation declares optional stock or cash dividends
Both at the fair value of the stocks received.

RC NRC NRA-ETB NRA-NETB DC/RFC NRFC

DC 10% 10% 20% 25% E 30/15%
For. Corp. RIT RIT

EXEMPT dividends
1. Inter-corporate dividend
Inter-corporate dividend received by a DC or RFC from a DC or RFC are
exempt from final tax. This is to eliminate double taxation. Dividends
declared are only subject to final tax when it finally falls to an individual
shareholder.
This exemption extends to business partnerships, not to GPP, since they
are considered corporations.
2. Dividends from cooperatives
Dividends representing interest on capital or patronage refunds are
EXEMPT.
B. Dividend income from Real Estate Investment Trusts (REIT)
REITs are publicly listed corporations established owning income-generating real
estate assets. Recipient of REIT dividends that are exempt from final tax:
NRA, DC, RFC, NRFC, OFW investors only until August 12, 2018.
3. SHARE IN THE NET INCOME OF BUSINESS PARTNERSHIP, TAXABLE
ASSOCIATIONS, JOINT VENTURE, JOINT ACCOUNTS OR CO-OWNERSHIP
(10% FINAL TAX)
 10% Final tax at the point of determination of income, not at the point of actual
distribution.
 Share in the business partnership net income:
If provision for salaries, interests and bonuses are EXPENSED, they are subject to
RIT, not to final tax. In this case, only the share in the RESIDUAL INCOME is
subject to 10% final tax.
 IAET is subject to 10% IAET
4. ROYALTIES
Passive royalty income received from sources within the Philippines

Individuals Corporations
Books, literary, musical (printed 10% 20%
literatures only)
Other sources 20% 20%
 Royalties on books sold on E-copies are subject to 20% FIT
 For ACTIVE royalties, it is subject to RIT
 Royalties, active or passive, earned from sources ABROAD are subject to RIT
5. PRIZES
Exempt prizes:
A. Prizes received by a recipient without any effort in his part to join any contest
B. Recipient is not required to render future services as a condition to receive the award.
Taxable prizes:

Individuals Corporations
Prizes exceeding P10,000 20% RIT
Prizes not exceeding P10,000 RIT RIT
6. WINNINGS
 Generally, all winnings are subject to 20% final tax on winnings except for PCSO/Lotto
winnings not exceeding P10,000. PCSO/Lotto winnings exceeding P10,000 is subject to
20% FIT for its whole amount.
7. TAX INFORMER’S REWARD
10% Final tax on the amount of cash reward at:
A. 10% of the revenues, fees and surcharge recovered or
B. P1,000,000, whichever is LOWER.
8. INTEREST INCOME ON TAX FREE CORPORATE COVENANT BONDS (30%)
 30% FWT on individuals
 RIT on corporations

CAPITAL GAINS TAX

CLASSIFICATION OF TAXPAYER’S PROPERTIES:
1. Ordinary assets- assets used in business
2. Capital assets- any assets other than ordinary assets
TYPES OF GAINS ON DEALINGS ON PROPERTIES
1. Ordinary gains from sale of ordinary assets- subject to RIT
2. Capital gains from sale of capital assets:
RIT as a general rule
Capital gains tax(CGT) on sale of certain capital assets.
CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX:
1. Capital gains on sale of domestic stocks, not listed and not traded, sold directly to a buyer
made thru a casual sale.
2. Capital gains on sale of REAL properties not used in business
SCOPE OF CAPITAL GAINS TAX:

Rate
Gain on sale or exchange of DOMESTIC stocks directly to buyer 15%
Sale or exchange of REAL properties in the Phils. (FV or SP whichever is HIGHER) 6%
Gains from other capital assets RIT
 Treasury share premium from stocks acquired by corporation from its stockholders is
an additional capital and is not an income, therefore not subject to CGT.
 Exchange of stocks for services is not a gain, therefore not subject to CGT.
 Redemption of shares in a mutual fund are EXEMPTED by NIRC in income tax.
 Value of stocks becoming worthless is considered a capital loss subject to the rules of
Regular income tax.
 Redemption of shares by issuing corporation, any gain or loss is subject to RIT.
Gain or loss realized by the investor in the voluntary buy back of shares by the
issuing corporation is subject to CGT.
 Gratuitous transfer of tax is subject to transfer tax.
MODES OF DISPOSING DOMESTIC STOCKS
1. Through PSE
Sale or exchange of domestic stocks thru PSE is subject to Stock Transaction Tax of 6/10
of 1% based on the selling price of the stocks sold.
2. Directly to buyer
Gains on sale of domestic stocks, not listed and not traded, sold directly to a buyer made
thru a casual sale is subject to 15% CGT.
TAX BASIS OF STOCKS
1. Cost of acquisition components: consideration transferred, obligations assumed and
directly attributable costs.
 2. On costing procedures: May be specific ID, moving average or FIFO(order of
priority)
3. Acquisition by gratuitous title:
Donation: lower of
Cost on the hand of the last preceding owner who did not acquire the property by
gift; or
Fair value at the date of donation.
Inheritance: Fair value at the date of the death of the donor
CGT ON STOCKS COMPLIANCE:
1. Transactional CGT:
Required to be reported after each sale thru CGT Return form 1707
Deadline: within 30 days after each sale
2. Annualized CGT:
Based on annual net capital gains thru CGT Return form 1707
Deadline: 15th day of the fourth month following the close of the taxable year.
INSTALLMENT PAYMENT OF THE 15% CGT

 When domestic stocks are sold in installments, CGT may also be paid on installments
if (A.) SP exceeds P1,000, and (B.) Initial payment does not exceed 25% of the SP.
Installment CGT payment= (periodic collection/SP-MAP)(Net CGT due)
SPECIAL RULES ON CAPITAL GAIN OR LOSS MEASUREMENT
1. Wash sales- deemed to occur when within 30 days before and 30 days after the sale(61
day period), the taxpayer acquired or entered into a contract or option to acquire
SUBSTANTIALLY IDENTICAL securities
 Capital losses on wash sales by NON DEALERS are not deductible against
capital gains.
 61 day rule includes stocks and bonds.
 Substantially identical means stock or bonds with the same class and the same
features.
 RATIONALE OF WASH SALES- Intended to prevent taxpayers from feigning
temporary losses which could enable them to manipulate their reportable taxable
net gain. Hence, the prohibition against the claim of wash sale is not an absolute
rule but a form of deferral of loss.
 Wash sale is not applicable to dealers in securities.
2. Tax free exchanges(Corporate readjustment)
1. Merger or consolidation- Gains or losses for share-for-share swaps pursuant to a plan
merger or consolidation will not be recognized for taxation purposes.
PERSONS NOT LIABLE FOR 15% CGT:
1. Dealers in securities
2. Investors in shares of stocks of a mutual fund company in connection with gains realized
upon redemption of stock with a mutual company
3. All other persons, natural or juridical, who are specifically exempt
SALE OR EXCHANGE OF REAL PROPERTY CLASSIFIED AS CAPITAL ASSETS
LOCATED IN THE PHILIPPINES

 6% of the selling price or fair value, whichever is HIGHER

The fair value of property is Zonal or FV per Assessment level, whichever is
HIGHER.
Other Notes: