TAXATION LAW REVIEW

From the Lectures of Atty. Manuel P. Quibod, CPA 1

4 Manresa | SY 2020-2021

Example: DIVIDENDS
INCOME TAXATION • Dividends were declared in Dec 1, 2020. P1/share
• Dividends were (actually) distributed in Jan 11, 2021
• When was the income earned/ realized/ received?
January 12, 2020 (0:00 – 35:03) | MarisseAnne Coquilla
For purposes of accounting and recognizing the
INCOME TAX PRINCIPLES income, the income taxpayer has the option to use
EITHER
§ Actual receipt recognition– Jan 11, 2021
CONCEPT OF INCOME § Constructive receipt recognition – December 01,
2020
All wealth which flows into the hands of the taxpayer other than
return of capital; it refers to all earnings derived from services c. The gain must not be excluded or exempted by law or treaty
rendered (use of labor), from the use of capital (business or from taxation
investment), or both, including gains derived from dealings on
property
ACCOUNTING FOR THE INCOME
INCOME, definition Ø Cash basis
§ income is recognized only upon actual or constructive
• Income pertains to the flow of wealth which goes into the receipt of cash payments or property but no deductions
hands of the taxpayer, other than return of capital. are allowed from the cash income unless actually
• Pertains to the amount of money or property received by a disbursed through an actual or constructive payment in
person within a specified time whether as payment for cash or property.
services, interest or profit § income is earned when cash is collected, and expense
• Anything that goes into the hands of the taxpayer other than is incurred when cash is disbursed.
capital will constitute income. Capital is not an income. Ø Accrual basis
• Income is also referred to as the earnings derived from § income is recognized in the period it is earned,
services rendered from: regardless of whether it has been received or not. In
§ the use of labor, or the same manner, expenses are accounted for in the
§ the use of capital, like engaging in business or period they are incurred and not in the period they are
investments, or paid
§ the use of both labor and capital. § Amounts of income accrue when the right to receive
• It also includes gains derived from dealings on property (real them becomes fixed, when there is a created
or personal). enforceable liability. Similarly, liabilities are accrued
when fixed and determinable in amount, without regard
REQUISITES FOR TAXABILITY to indeterminacy merely of time of payment
a. There must be gain or profit
• mere expectation of profit or increase in the value of Same basis in case of deduction. If the taxpayer uses the cash
property is not income. or accrual basis on accounting the income, it should be the same
basis in accounting deduction/expenses.
Example:
Acquisition Price: P100,000 APPROACHES IN THE TAXATION OF THE INCOME
Present Value (after 5 years): P150,000
Global system/Unitary Schedular system/
Is the increment of P50,000 a gain or profit? or Aggregated Segregated Approach
NO. Mere expectation of profit or increase in the value of Approach
property is not income all income are one and differentiation/distinction of
the same income
• For purposes that there will a gain or profit, there must No differentiation and Different treatments on different
be a transaction that will give rise to the income. distinction of the different kinds of income
categories of income
Example: the tax treatment views system employed where the
• Acquisition Price: P100,000 indifferently the tax base income tax treatment varies and
and generally treats in made to depend on the kind or
• Selling Price: P180,000 – transaction that gave rise
common all categories of category of taxable income of
to the income
taxable income the taxpayer
• Gain: P80,000
INCOME TAX SYSTEMS
b. The gain must be realized or received. 1. Global tax system – System employed where the tax
• Actual receipt – there is an actual payment and receipt of system views indifferently the tax base and generally treats
income in common all categories of taxable income of the individual.
2. Schedular tax system – System employed where the
• Constructive receipt – by legal fiction, there is a
income tax treatment varies and is made to depend on the
realization of income (income earned) even though the
kind or category of taxable income of the taxpayer
actual payment has not been received.
3. Semi-schedular or semi-global tax system – All
compensation income, business or professional income,

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 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA 2
4 Manresa | SY 2020-2021

capital gain, passive income, and other income not subject 1. Classification of Income
to final tax are added together to arrive at the gross income. a. Compensation Income – gains derived from labor
After deducting the allowable deductions and exemptions employment, services, (i.e. salaries, wages,
from the gross income, the taxable income is subjected to commissions, etc)
one set of graduated tax rate for individual or normal b. Professional/Business Income – derived from the
corporate income tax rate for corporation exercise of profession, business or utilization of capital
c. Passive Income – income in which the taxpayer merely
In our case: waits for the amount to come in, (i.e. dividends,
• Schedular – income taxation for individual income tax royalties, interest, prizes, winnings, etc.)
payers d. Capital Gains – derived from the sale of assets not
• Global- income taxation for corporations used in trade or business, (i.e sale of residential house
and lot, personal properties; cars, jewelries, shares of
SOURCES OF INCOME stocks)
• place where the income is earned (not the place of
payment); 2. Classification of Income Taxpayers
Ø If you are paid abroad but the services are rendered a. Individuals
in the PH • Citizens
Ø the source of income is the place where the income § Resident Citizens – taxable on all sources
is earned (PH) not on the place of payment (abroad) within and without
• it is governed by the rule on situs; § Nonresident citizens – taxable on sources
Ø to determine whether the income is taxable or not within PH
Ex. OFWs – not taxable on income earned
• this classification is important to determine whether the
abroad but taxable on income earned in the
income is taxable or not
PH. On Income earned abroad like foreign
currency bank deposits which earn interests
SITUS (where they send their money or
1. Citizenship remittances) – it is treated as a foreign
2. Residence source which is not taxable for purposes of
3. Source of income income taxation.
• Aliens – taxable on sources within PH
INCOME MAY BE EARNED FROM § Resident aliens – alien who stays
• Within the PH continuously for a period of 1 year
• Without or outside the PH § Non-resident aliens (NRA)
• Partly within and partly without o NRA engaged in trade or business
(stayed more than 180 days)
FORMS OF INCOME o NRA not engaged in trade or business
(stayed for less than 180 days)
• Received in the form of cash
• Property
• Service January 12, 2021 (35:04 – 1:10:08) | Jessalyn R. Puerin
• Combination of cash, property or service
Non-Resident Alien
DETERMINATION OF SOURCE ACCORDING TO THE
KIND OF INCOME The non-resident aliens are further classified as those:

KINDS OF INCOME SOURCE OF a. engaged in trade and business; and

INCOME/SITUS OF b. not engaged in trade or business.
TAXATION
Compensation/income from place of performance of
services service The non-resident alien is taxable only on Philippine source.
Rent location of the property
Royalties place of use of the The non-resident alien may either be engaged in trade or
intangibles/IPR business or not engaged in trade or business.
Gain on sale of real property Location of property
Gain on sale or personal Place of sale Question: How will you determine if the non-resident alien is
property engaged or not engaged in trade or business?
Sale of goods/merchandise Place of sale
Interest income Residence of the Answer: This is determined on the length of stay in the
debtor/borrower Philippines.
Dividends Residence/office of the
If an alien, for the first time, arrives in the Philippines, it is a non-
corporation
resident alien.
Mining Place where mine is located
Farming Place where farm is located
A. Non-Resident Alien Engaged in Trade or Business
(NRAETB)
CLASSES OF INCOME AND TAXPAYERS

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 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
If that alien, after arriving in the Philippines, stayed more than
180 days, it is a non-resident alien engaged in trade or business
from the date of arrival. So, the alien is a non-resident alien
engaged in trade or business if it stayed more than 180 days
within the income period (the alien made income).
B. Non-Resident Alien Not Engaged in Trade or
Business (NRANETB)
If the alien, after arriving in the Philippines, stayed for less
than180 days and made income, it is a non-resident alien not
engaged in trade or business.
Take Note: If the non-resident alien continued to stay more than
180 days up to one year, then that non-resident alien becomes
a resident alien. So, if the non-resident alien stayed continuously
for a period of one year and made income, then the non-
resident alien’s status will be changed to resident alien.
Nevertheless, the taxability of the aliens, whether resident or
nonresident, will still be on sources within the Philippines.
CORPORATION
There are two categories:
A. Domestic Corporation; and
B. Foreign Corporation
Domestic Corporation
Domestic Corporations are those created under Philippine
Laws. Domestic Corporations are taxable on all sources within
and without.
Foreign Corporation
Foreign Corporations, on the other hand, are those
created outside the Philippine Laws or those organized or
created under foreign laws. They are taxable only on
sources within the Philippines.
Like aliens, a foreign corporation can be
a. a resident foreign corporation or
b. a nonresident foreign corporation.
Resident Foreign Corporation, defined.
A foreign corporation is a resident foreign corporation, for
income tax purposes, if licensed to engage in trade or
business in the Philippines.
Non-resident Foreign Corporation, defined.
If a foreign corporation has no license to engaged in trade
or business in the Philippines, it is classified as a
nonresident foreign corporation.
Nevertheless, whether resident foreign corporation or
nonresident foreign corporation, they are taxable only
on sources within the Philippines.
In other words, in category of income taxpayers, there are
only two taxpayers which you have to remember that are
taxable on all sources within and without the Philippines:
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1. Resident Citizen
2. Domestic Corporation
The rest are taxable only in the Philippines.
PARTNERSHIP
Partnership is classified into:
1. Business Partnership; or
2. Professional Partnership
Business Partnership defined.
Business Partnership is organized by two or more
persons that group together to engage in trade or
business. A Business Partnership will be taxed as a
corporation.
If the Business Partnership is organized in the Philippines
Laws, it is like a domestic corporation that will be taxed
on all sources of income within and without the
Philippines.
Professional Partnership is different from the Business
Partnership.
Professional Partnership defined.
Professional Partnership is formed by two or more
persons for the sole purpose of exercising a common
profession. Take note of the tax requirement that it is for
common profession.
So, when a group of lawyers formed Professional
Partnership for the sole purpose of exercising a
profession which is lawyering, then that will become a
professional partnership.
Professional Partnership is tax under Section 26 of the
NIRC. Professional Partnership is not a taxable person,
but the professional partners are the taxable persons in
their separate and individual capacities.
Take note: Professional Partnership pertains only to the
exercise of common profession, and the professional
partnership is not a taxable person. The taxable persons
are the individual personal partners who will be taxed in
their separate and individual capacities depending on the
distribution or profit-sharing agreement agreed upon by
their co-partners.
If the partnership created by these professionals if
composed of two or more professions, while it is a
professional partnership, it will no longer a partnership
under Section 26 of the NIRC. It will now become a
business partnership. In that case, it will now be taxed as
a corporation. So, it must be only for common profession
to be classified as professional partnership.
Partnership is those no matter how created or organized.
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
Business Partnership need not be registered in the
Securities and Exchange Commission.
If two or more persons grouped together or combined and
exercise a business or engaged in business, it becomes
a taxable business partnership, taxed like a corporation.
The taxability of business partnership is no matter how
created or organized. So, even it is just a loose
partnership and you are now engaged in business, you
are now become a taxable person, taxed like a
corporation.
It includes joint stock companies, joint accounts,
associations or insurance companies, and joint
ventures/consortiums. They are taxable as corporations.
JOINT VENTURE/CONSORTIUM
Joint ventures or consortium projects such as undertaking
construction projects engaging in petroleum, coal,
geothermal and other energy projects are not taxable as
corporations but only as co-venturers or entities with
respect to their share with taxable income.
Meaning, the share from the joint venture and brought to
their principal corporation, then they will be taxed together
with their principal income of where they come from and
they will be taxed in that manner.
CO-OWNERSHIP
There are instances where a property is owned by two or
more persons, it gives rise to co-ownership in the
property. In the event of the transaction in the co-
ownership which will gives rise to an income, the co-
owners are taxed in their individual capacity.
Question: Let us say, a piece of real property is owned
by three persons and they sold it, who will be taxed?
Answer: The co-owners will be taxed in their individual
capacities. So, there is capital gains tax from the sale of
real property. Their sharing is 1/3 each as they will be
taxed in their individual capacities. While one time the
capital gain tax is paid, their contribution to their liability is
based on their individual capacity depending on their
share in the real property.
Question: Let us say that the co-owners decided that
after selling the real property, they did not distribute the
income, but rather used it as capital. And they bought
more properties. And they continue buying properties,
which they continue to be co-owned. What happens now
to that relationship?
Answer: Co-ownership now becomes a going concern, in
which case the co-owned properties they accumulate and
then engaged in buying and selling properties will now be
treated as engaged in business. Then that co-ownership
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will now be taxed like a corporation. So, they will become
business partnership. Being a business partnership now,
it becomes a going concern, then they will be taxed as
corporation.
Take note: When a taxpayer is taxed like a corporation,
the corporation is a taxpayer by itself. And when the
corporation will distribute profits or dividends for regular
corporation or the business partnership will distribute
profits to the co-venturer or co-owner partners in that
business partnership, then that be treated as a taxable
distribution of dividends.
So, that is the consequence of a business partnership or
a co-ownership or a corporation engaged in business.
And when the entity now distributes profits to the
members, that partnership or business partnership no
matter how created, or a co-ownership engaged in
business, that distribution of profits will be taxed- taxable
distribution ‘yon. They will be taxed like dividends.
ESTATE AND TRUSTS
In estates and trusts, these will be governed by the
provisions under Sections 60-66 of the NIRC.
Estate, defined.
Estate pertains to the property left behind by the
decedent. The estate is treated as separate taxable
person. In the settlement of the estate, there are
properties of the decedent which are earning income, so
the estate will be treated as a separate taxable person.
The estate will have to pay the tax. The estate will be
taxed like individuals.
Trust, defined.
Trust is one created by the grantor of the trust in favor or
for the benefit of a beneficiary of the trust. The trust
created is separate from the person of the grantor, the one
who created the trust.
The trust, being a separate entity from the person of a
grantor, is taxable as a separate person from the grantor.
The trust is taxed like individual.
If the trust earns income then the trust will have to pay the
tax, and not the grantor. The same with the estate, the
income earned by the estate that is subject to tax will be
paid by the estate and not by the heirs or beneficiary of
the estate. But from the owned income of the estate, being
the estate a separate taxable person. Behind the estate,
you have the family of the decedent, or the administrator
or executor.
You have the categories of our income taxpayers. You
have the individuals, the corporations, the partnerships,
estates and trusts.
Let us move on to the provisions under Section 32 of the
NIRC, what gross income is all about. Under Section 32,
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
it includes the inclusions or exclusions of what constitute
of the income.
INCOME TAXATION: GROSS INCOME
SEC. 32. Gross Income. -
(A) General Definition. - Except when otherwise provided in
this Title, gross income means all income derived from
whatever source, including (but not limited to) the following
items:
(1) Compensation for services in whatever form paid, including,
but not limited to fees, salaries, wages, commissions, and
similar items;
(2) Gross income derived from the conduct of trade or business
or the exercise of a profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner's distributive share from the net income of the
general professional partnership.
(B) Exclusions from Gross Income. - The following items
shall not be included in gross income and shall be exempt from
taxation under this Title:
(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
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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
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA 6
4 Manresa | SY 2020-2021

from foreign governments, and (iii) international or regional b. The conduct for trade or business or the exercise of
financial institutions established by foreign governments. profession
c. Dealings of property
(b) Income Derived by the Government or its Political d. Interests
Subdivisions. - Income derived from any public utility or from e. Rents
the exercise of any essential governmental function accruing to f. Royalties
the Government of the Philippines or to any political subdivision g. Dividends
thereof. h. Annuities
i. Prizes and Winnings
(c) Prizes and Awards. - Prizes and awards made primarily in j. Pensions
recognition of religious, charitable, scientific, educational, k. Partner’s distributed shares in the net income of
artistic, literary, or civic achievement but only if: general professional partnership

(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 Ninety thousand pesos
(P90,000) which shall cover: [4]
(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;
So, that is how income is described under the NIRC. You have
different sources of income. The enumeration here is unlimited.
These are just examples, including but not limited.
Taxable Income, defined.
Taxable income means the pertinent items of gross income
specified in this Code, less the deductions and/or personal and
additional exemptions (now, there are no personal and
additional exemptions-repealed), if any, authorized for such type
of income by this Code or other special laws.
Illustration under the NIRC:
GROSS INCOME xxx
LESS: DEDUCTIONS, if any (xxx)
TAXABLE INCOME xxx
Gross Income, defined.
Gross income is all income derived from whatever source
including but not limited to the following items. The law defines
these categories or types of income, but these sources are not
limited only to the following items.
INCLUSIONS OF GROSS INCOME

(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.
(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.
Gross income has been described as the income from
whatever source including the following:
a. The compensation for services
1. Compensation for services in whatever form paid,
including, but not limited to fees, salaries, wages,
commissions, and similar items;
So, this is compensation income pertaining for the
compensation for services rendered in whatever form paid,
therefore, taxable and constitute gross income.
The exceptions are the following:
1. When the compensation is for the convenience of the
employer; and
2. When it is required by the nature or necessary to the
trade or business or profession
The first exception is one where in the compensation will not
be taxed, then the payment of that compensation is for the
convenience of the employer or “for the convenience of the
employer rule”.
For example, you are the doctor and because of covid, the
doctor’s driver is with him 24 hours. So, the doctor should
provide the driver, for the convenience of the doctor, quarter,
meals, swabbing. So that the driver will observe high protocol.
All these expenses should be shouldered by the doctor. Will
these constitute an income in the hands of the driver? As a rule,
these will form part of the compensation income considered in

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 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
the form of allowances, and they are compensation for services
rendered. The equivalent cost of the housing facility, meal
allowance, quarters, other incentives and benefits, etc. for his
wealth and well-being, generally form part of the driver’s
compensation income. And as a rule, these are taxable are form
part of his regular income. But since these benefits and
allowances are for the convenience of the employer. Then,
these benefits and allowances are to be excluded from taxation
because these are for the convenience of the employer.
The second exception is when it is required by the nature or
necessary to the trade, or business, or profession.
For example, you have salesman assigned in the store and the
store owner sends his salesman or marketing people for the
promotion of his company and products. They go out, sell and
meet the quota required by the employer. So, the employer will
provide for their meals, gasoline allowances, representation,
travel, etc. Will these allowances form part of the compensation
income of the salesman? Yes. As a rule, these allowances will
form part of the salesman’s compensation income because they
are compensation for services rendered; allowances form part
of his salaries and wages, and therefore taxable. So, when the
allowances are necessary to the trade or business of the
employer, then these allowances will be excluded.
For purposes of the exclusion, there are requirements:
1. The salesman should provide an accounting; and
2. substantiate the manner within which these allowances
were spent.
So, if the employer gives the salesman a gasoline allowance, he
must present receipts afterwards. If the salesman is given
allowances to promote the business or the products, he must
provide proofs and substantiate how the manner in which the
allowances were spent.
If there is excess money out of the allowances given, the excess
must be returned to the employer. If these steps are followed,
then these allowances are excluded, but the salesman is
required to substantiate and return any excess of the amounts
given to the employer.
But now, if these allowances were given to the salesman, then
they are not required anymore to render an accounting and
substantiate them. If there is excess money, you do not need to
return them, then these allowances form part of the regular
income of the employee. These allowances and benefits will
form part of his taxable compensation income.
2. Gross income derived from the conduct of trade or
business or the exercise of a profession;
Aside from compensation, the other source of income we have
is gross income from the conduct of trade or business or
exercise pe profession.
3. Gains derived from dealings in property;
We have also from gains or profits from the sale of property,
whether real or personal like capital assets.
4. Interests;
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Then interest for the years of forbearance of money. The lender
will earn interest income.
5. Rents;
Rent for the consideration for the use of the property.
6. Royalties;
Royalties for the payment made for the use of the intellectual
property like tradename, trademark, etc.
7. Dividends;
Dividends for the distribution of profits by the corporation or
business partnership to the partners or stockholders of the
corporation.
8. Annuities;
Annuities are periodic payments from a fund given to those
investors built up the funds. They are paid through periodic
payments of interest which were earned from that fund by way
of annuities.
9. Prizes and Winnings;
As a rule, prizes and winnings are taxable. These will be
excluded when we go to the provision of exclusions provided by
the NIRC.
10. Pensions;
Pensions are also sources of income unless the law excludes
them because pensions also are payments for the services
rendered by the employees.
11. Partner’s distributive share from the income of
professional partnership;
EXCLUSIONS OF GROSS INCOME
Paragraph B of Section 32 of the NIRC are exclusions from
gross income. These are items which do not form part of gross
income and they are not therefore taxable income. On the other
hand, these are not considered income because these pertain
to the capital, that is why they are excluded. And we still go back
to the definition that income pertains to the flow of wealth which
goes to the hands of the taxpayer other than return of capital.
What are the exclusions?
1. Life Insurance
Life insurance is a contract of indemnity. In the event of the
happening of the insurable risk, the insured passed away, and
then the insurance company indemnified the heirs of the
insured, then the receipt of the proceeds of the insurance is not
income because the life insurance policy is a contract of
indemnity.
The proceeds received by the heirs who received by reason of
indemnity pertains to the return of capital. It is income. What is
insured is the life of the insurer. If the life is gone, it was
monetized by way of the coverage of the insurance. So, the
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
insurance paid the heirs left by the decedent. So, it is a return
or receipt of capital, and not income.
On the other hand, there are insurance policies that instead of
paying one time, the insurance company paid the heirs in
installment under an agreement to pay interest, under the NIRC
provision.
Take note: If the insurance company will pay them on monthly
basis for a period of one year, portion the heirs received
pertains to the capital, and the portion of the interest is one
that is called the income. So, these are proceeds of life
insurance paid to the heirs or beneficiaries upon death of the
insured whether in a single sum or otherwise.
But if the heirs were paid under an agreement to pay
interest, then the interest component is taxable income or
part of gross income. But not the portion pertaining to the
insurance coverage because that pertains to the return of
capital or to the indemnity.
Then, you have the amounts received by the insured as return
of premium. So, there are policies to contract an insurance that
during the life of the policy the insured will receive certain
amounts like a cash surrender value or from some other form or
other called it dividends.
Question: So, let us say on the 10th year you received some
form of dividend feature of the policy, is that income?
Answer: No, that is not income because the amount that you
pay in consideration of the policy is the insurance premium- you
pay for the premium. So, the amounts you received during the
life of the policy which they will be cash surrender value form of
payment, that is not income but represents return of premium. If
there is return of premium, then there is return of capital.
Therefore, they are excluded from gross income.
January 12, 2021 (1:10:09 – end) | Francis Roel Dulay
Part 3 of 3
EXCLUSIONS
2. Amount Received by Insured as Return of
Premium
(Return of Capital)
Section 32. Gross Income. –
(B) Exclusions from Gross Income. – The following
items shall not be included in gross income and shall
be exempt from taxation under this title:
(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.
So, there are policies when you contract an insurance that
during the life of the policy the insured will receive certain
amounts like a cash surrender value or some other forms (yung
iba tinatawag nilang dividends). Let’s say, on the 10th year may
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natanggap kang amount for some form of dividend feature of the
policy, is that income?
No, because the amount that you pay in consideration of the
policy is the insurance premium. So, the amounts that you
receive during the life of the policy which they call it cash
surrender value or other form or payment, that is not income.
That represents return of your premium. So, if they are return of
your premium, then they are therefore return of your capital. So
therefore, they are excluded from gross income.
3. Gifts, Bequests and Devises.
(Receipt of Capital)
(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.
What about gifts, bequests and devises that you receive from
the estate or from a donor? So, you are one of the beneficiaries
of that estate and you receive a bequest or a devise, or you are
a donee and you receive a gift or a donation in the form of
property or even cash, Is that income?
No, that is not income but receipt of capital. So, property or
amounts received by way of gift, bequest or a devise are not
income but receipt of capital. But in the event that these amounts
or property will earn income, like you receive a row of
apartments, pinaupa mo, then the rental income becomes
income. Or if you receive cash for P1M then dineposito mo sa
bangko, nag-earn ng interest, then the interest becomes
income. But the capital itself is not a receipt of income but a
receipt of capital.
4. Compensation for Injuries or Sickness.
(Indemnity)
(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.
Whether this is by way of insurance, or by in payment of an
accident by agreement, or by suit (an award, a judgment in your
favor) for the compensation of the injury, or sickness, or illness
that fall upon the taxpayer, it is not income. In other words, you
were paid damages. Amounts received by way of insurance or
as compensation for personal injuries or sickness plus amounts
of any damages receives by suit or agreement on account of
such injuries or sickness are not income and therefore, they are
excluded for the reason that they are forms on indemnity. So, if
you are indemnified for the injury or sickness, then that pertains
to the receipt or return of capital.
In the context of damages, except for loss of earning capacity or
loss of income (wherein these forms of indemnity or
compensation will be taxable), but for the rest of other damages,
actual, moral, etc., for as long as they are not loss of earning
capacity or loss of income, these damages are excluded. So, the
loss of income or loss of earning capacity are included because
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
they are income. The indemnity will constitute an income. The
rest of the other damages are excluded because they are
compensation for injuries or sickness or indemnity or as a return
of capital, so they are excluded.
5. Income Exempt under Treaty
(5) Income Exempt under Treaty. – Income of any kind, to
the extent required by any treaty obligation binding upon
the Government of the Philippines.
The Philippines may enter into a tax treaty with another country
to reduce the effects of multiple situs of taxation (the income is
being taxed twice or more by different jurisdiction). So, we enter
into a treaty on the basis of reciprocity with another country so
that the income of our Filipino citizen in that country will be
exempted for as long as the alien who is earning income in the
Philippines will also be given a similar exemption. So, the
income will be exempt under a tax treaty.
So, income of any kind, to the extent required by any treaty
obligation binding upon the Government of the Philippines. Like
yung RP-US Bases Agreement. Yung mga income ng mga US
soldiers in the Philippines, nandoon sa Clark dati or sa Subic,
they are paid by the US government and they are doing this in
the Philippines. So, that income should be taxable in the
Philippines but under RP-US Bases Agreement we exempt that
income.
6. Retirement Benefits, Pensions, Gratuities, Etc.
1. Retirements under the Labor Code, under a Private
Retirement Plan covered by the NIRC or the Employers
Retirement Plan
2. Separation Pay
3. Foreign Source Retirement/Pensions
4. USVA Benefits
5. SSS
6. GSIS & Retirement Gratuity
(a) Retirements under the Labor Code, under a
Private Retirement Plan covered by the NIRC or
the Employers Retirement Plan
Section 32. Gross Income. –
(B) Exclusions from Gross Income. – The following
items shall not be included in gross income and shall
be exempt from taxation under this title:
(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
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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.
In the case of retirement under the Labor Code, if an employee
retires under the provisions of the Labor Code, the retirement
benefits are excluded. You have the age and service
requirement provided under your Labor Code. If that is followed,
then the retirement benefits under the Labor Code, under RA
7641, will be excluded from tax.
Retirement under a private retirement plan or what we call a
reasonable private benefit plan. So, an employer sets up a
reasonable private benefit plan or its own private retirement or
pension plan. The employer follows the exclusion requirements
under the NIRC. What are the exclusion requirements under the
NIRC?
1. There is a reasonable retirement benefit plan
maintained by the employer and approved by the BIR.
2. The retiring employee has been in the service for at
least 10 years.
3. Age requirement: Not less than 50 years of age.
4. Availing the benefit of that requirement only once.
These requisites or requirements must be followed for purposes
of the exclusion. If the NIRC retirement requisites for purpose of
the exclusion are followed then that will be excluded. In other
words, if the retirement policy or plan of the employer is the
same as the NIRC, follow the NIRC. Lalo na yung age
requirement, yung length of service, approval of the retirement
plan, etc. Yung 4 requirements. Absent one requirement or
requisite, the retirement benefit is now taxable. Absent 1
requirement of the policy made by the employer of such
retirement following the requisites of the NIRC, absent 1, the
entire retirement benefit becomes taxable.
Can the employer set up a policy over and above the
requirements of the NIRC? In other words, the retirement policy
of the employer is that yung length of service niya is 20 years of
even less than, and then yung age requirement niya dapat 60.
In the event the employee retires, what should be the policy that
should be followed?
If the employer sets-up a higher standard or a different standard,
then that standard should be followed. Absent one compliance
of that standard, the retirement becomes taxable. Now, if the
employer sets up a higher standard than the NIRC, and the
employee retires, yung standard nila 60 years of age, nag retire
ng 55, sa NIRC not less than 50. Will the retirement be
excluded? No, because the employer sets-up a higher standard.
3 Things to remember in the case of retirement
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA 10
4 Manresa | SY 2020-2021

1. The retirement under the Labor Code. If the
requirements are followed, excluded. If the
requirements are not followed, taxable.
2. If it is a private retirement plan in accordance with the
provisions of the NIRC, follow that standard. Absent
one, the retirement becomes taxable.
3. A retirement plan using a standard higher than the
requirements of the NIRC. So, the employer sets up its
own higher standard. So, these higher standards
should be followed. Noncompliance of one standard
makes the retirement taxable.
For purposes of exclusion follow the standards of within which
you’re setting up the retirement plan. If yung retirement plan mo
is in accordance with labor code, sundin mo ang labor code.
Wag yung combination. Absent one requirement of the Labor
code, magiging taxable na yan. Or you set up the NIRC
standards, sundin mo. Or you set up your own employer
standards higher than the requirements of the NIRC, sundin mo
din yung standard na yan. Otherwise, failure to follow or comply
with any of the standards set up or failure to follow any of the
policy set up by the employer, then the retirement becomes
taxable. So those are the rules for the exclusion.
(b) Separation Pay
be taxable because it is involuntary or beyond the control of the
employee.
(c) Foreign Source Retirement and Pensions
(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.
Excluded din yan. Ito yung mga foreigners who are residing in
the Philippines then nagtatanggap sila ng kanilang mga
retirement or pensions from abroad. They are also excluded.
(d) The benefits under the United States Veterans
Administration excluded under the NIRC
(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.

(b) Any amount received by an official or employee or by his

heirs from the employer as a consequence of separation of
(e) SSS
such official or employee from the service of the employer (f) GSIS & Retirement Gratuity
because of death, sickness, or other physical disability, or
for any cause beyond the control of the said official or (e) Benefits received from or enjoyed under the Social Security
employee. System in accordance with the provisions of Republic Act
No. 8282.
Separation pay are the amounts received by the official or
employee or by his heirs from the employer as a consequence (f) Benefits received from the GSIS under Republic Act No.
of separation of such official or employee from the service of the 8291, including retirement gratuity received by government
employer because of death sickness or other physical disability officials and employees.
or for any cause beyond the control of the said official or
employee. The separation pay therefore is excluded if it is in SSS/GSIS and Retirement Gratuities, kasama dito yung ating
payment for the services of the employee due to death, accumulated leave credits received by the retiring official or
sickness, or other physical disability or for any cause beyond the employee. Yung kanyang mga unused leave credits, tapos yung
control of the employee. naipon and then ibibigay at the time of retirement, they form part
of the exclusions. They form part of the retirement gratuities and
So, if the separation pay was given for involuntary causes, then therefore they are excluded.
the separation pay is not taxable. If the separation pay is
voluntary, meaning nag resign tapos binigyan parin ng 7. Miscellaneous Items
separation pay, the separation pay, as a rule, is taxable. So, it
1. Income Derived by Foreign Government
should be one on account death, sickness, or other physical 2. Income Derived by the Government or its Political
disability, or any cause beyond the control of the employee, Subdivisions
meaning for any involuntary causes, then the separation pay
3. Prizes and Awards
becomes excluded. Otherwise, magiging taxable yan siya if it is 4. Prizes and Awards in sports Competition
voluntary. 5. 13th Month Pay and Other Benefits
6. GSIS, SSS, Medicare and Other Contributions
For example, the bank was merged with another bank so yung
7. Gains from the Sale of Bonds, Debentures or other
dating employees ng bangko, yung mga managers nila Certificate of Indebtedness
nagtender ng regisnation because the surviving bank that will 8. Gains from Redemption of Shares in Mutual Fund
now absorb the former bank will bring-in their own people. So,
nagtender ng resignation and they were paid separation pay.
Since they resigned and they are still paid separation pay, is the
(a) Income derived by foreign government
separation pay taxable?
Section 32. Gross Income. –
NO, they are no longer taxable. Even though they resigned,
since the cause of the resignation is involuntary, kasi wala silang (B) Exclusions from Gross Income. – The following
magawa, papalitan talaga sila whether they resign or not, then items shall not be included in gross income and shall
they will be paid separation pay, then the separation pay will not be exempt from taxation under this title:

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 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
(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.
So ito yung example nung ating observance of international
comity, that we do not tax another sovereign. So, income
derived by foreign governments in the Philippines are excluded
from tax because income derived by foreign governments of
which our statute and the NIRC provides for the exclusion.
(b) Income Derived by Government or its Political
Subdivisions
(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.
Ito yung example ng immunity of government of government
from tax. That the income derived by the government or its
political subdivisions exercising governmental or sovereign
functions are not taxable. If these are income derived by the
GOCCs exercising proprietary functions, the income is taxable
unless the law or the charter creating them grants the exemption
or the exclusion of the income. So, income derived by the
government or its political subdivisions, excluded yan kasi
sovereign yan or governmental functions. Pero kung GOCCs the
income is taxable unless the law or the charter grants the
exemptions.
(c) Prizes and Awards
(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.
As a rule, Prizes and Awards are taxable. They will be excluded
only:
1. When the prizes and awards are made primarily in
recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement.
That’s one requirement.
2. The recipient was selected without any action on his
part to enter the contest
3. The recipient is not required to render substantial future
services
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That will be the requisites for the exclusion. If one requisite is
missing, then the prizes and awards becomes taxable. Yan yung
requirements for the exclusion.
(d) Prizes and Awards in Sports Competition
(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.
Yung prizes and awards when you participate in the sports
competition like the recent SEA games. So may mga awards
and monetary benefits given to the winners who got gold, silver,
or bronze in that sports competition, then they will be excluded
provided:
1. All prizes and awards granted to athletes in local and
international sports competitions
2. The tournaments are held in the Philippines or abroad
and
3. Their participation is sanctioned or recognized by their
national sports associations.
The prizes and awards, including the monetary they receive will
be excluded from tax.
(e) 13th Month Pay and Other Benefits
(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 Ninety thousand pesos
(₱90,000) 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.
13th Month Pay and Other Benefits, up to P90,000 under the new
law, will be excluded from tax. So, they will not be added to your
taxable compensation income up to P90,000. So, if you receive
P120,000 13th month pay, yung P90,000 n’yan ang excluded
and excess and itatax. So 13th month pay includes all other
benefits like yung mid-year bonus, Christmas bonus, 14th month
pay or meron ba silang 15th month pay or Christmas gifts, these
will form part part under this item, 13th month pay and other
benefits. The Maximum of the exclusion is only up to P90,000.
So if you receive more, the excess will be the one taxable. The
First P90,000 will be excluded from tax.
(f) GSIS, SSS, Medicare and Other Contribution
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA 12
4 Manresa | SY 2020-2021

(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, citizen of the Philippines who is residing
SSS, Medicare and Pag-ibig contributions, and union dues outside of the Philippines including overseas
of individuals. contract workers referred to in Subsection (C)
of Section 23 hereof; and
The contributions from GSIS, SSS, Philhealth, Union Dues (c) On the taxable income defined in Section 31
including Pag-IBIG or the HDMF, these contributions are also of this Code, other than income subject to tax
excluded from tax. under Subsections (B), (C), and (D) of this
Section, derived for each taxable year from all
sources within the Philippines by an individual
(g) Gains from the Sale of Bonds, Debentures or
alien who is a resident of the Philippines.
other Certificate of Indebtedness.
(2) Rates of Tax on Taxable Income of Individuals.
(g) Gains from the Sale of Bonds, Debentures or other - The tax shall be computed in accordance with
Certificate of Indebtedness. - Gains realized from the and at the rates established in the following
same or exchange or retirement of bonds, debentures or schedule:
other certificate of indebtedness with a maturity of more
than five (5) years. (a) Tax Schedule Effective January 1, 2018 until
December 31, 2022:

Not over ₱250,000 0%

Gains from Sale of Bonds, Debentures, or other Certificate of
Over ₱250,000 but not over ₱400,000 20% of the
Indebtedness where the maturity is 5 years of more. When
excess over ₱250,000
bonds, debentures or other certificated of indebtedness are sold
Over ₱400,000 but not over ₱800,000 ₱30,000 + 25% of
wherein these bonds have a maturity of 5 years or more, the
the excess over ₱400,000
gains derived are excluded from tax. The requirement here is
Over ₱800,000 but not over ₱2,000,000 ₱130,000 + 30%
that Bonds, Debentures, or other Certificate of Indebtedness
of the excess over
have or has a maturity is 5 years of more for purposes of the
₱800,000
gain from the sale will be excluded from tax.
Over ₱2,000,000 but not over ₱5,000,000 ₱490,000 + 32%
of the excess over
₱2,000,000
(h) Gains from Redemption of Shares in Mutual Fund Over ₱8,000,000 ₱2,410,000 +
35% of the excess over
(h) Gains from Redemption of Shares in Mutual Fund. - ₱8,000,000
Gains realized by the investor upon redemption of shares of
stock in a mutual fund company as defined in Section 22 Tax Schedule Effective January 1, 2023 and onwards:
(BB) of this Code.
Not over ₱250,000 0%
Over ₱250,000 but not over ₱400,000 15% of the
Gains realized by the investor upon redemption of shares of
excess over ₱250,000
stocks in a mutual fund company, the gains will no longer be
Over ₱400,000 but not over ₱800,000 ₱22,500 + 20% of
taxable.
the excess over ₱400,000
IN THE SLIDES BUT NOT DISCUSSED Over ₱800,000 but not over ₱2,000,000 ₱102,500 + 25%
of the excess over
8. Taxation of Individuals: Sec. 24-25
₱800,000
See: Rev. Reg. 8-2018; 11-2018; 14-2018 Over ₱2,000,000 but not over ₱8,000,000 ₱402,500 + 30%
RMC No. 50-2018; 96-2018 of the excess over
₱2,000,000
Sec. 24. Income Tax Rates. – Over ₱8,000,000 ₱2,202,500 +
35% of the excess over
(A) Rates of Income Tax on Individual Citizen and ₱8,000,000
Individual, Resident Alien of the Philippines -
For married individuals, the husband and wife, subject
(1) An income tax is hereby imposed: to the provision of Section 51(D) hereof, shall compute
separately their individual income tax based on their
(a) On the taxable income defined in Section 31 respective total taxable income: Provided, That if any
of this Code, other than income subject to tax income cannot be definitely attributed to or identified as
under Subsections (B), (C), and (D) of this income exclusively earned or realized by either of the
Section, derived for each taxable year from all spouses, the same shall be divided equally between
sources within and without the Philippines by the spouses for the purpose of determining their
every individual citizen of the Philippines respective taxable income.
residing therein;
(b) On the taxable income defined in Section 31 Provided, that minimum wage earners as defined in
of this Code, other than income subject to tax Section 22(HH) of this Code shall be exempt from the
under Subsections (B), (C), and (D) of this payment of income tax on their taxable income:
Section, derived for each taxable year from all Provided, further, That the holiday pay, pay received by
sources within the Philippines by an individual

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 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
such minimum wage earners shall likewise be exempt
from income tax.
(b) Rate of Tax on Income of "Purely Self-
employed Individuals and/ or
Professionals Whose Gross Sales or
Gross Receipts and Other Non-operating
Income Does Not Exceed the Value-added
Tax (VAT) Threshold as Provided in
Section 109(BB).— Self-employed
individuals and/or professionals shall have the
option to avail of an eight percent (8%) tax on
gross sales or gross receipts and other non-
operating income in excess of Two hundred
fifty thousand pesos (₱250,000) in lieu of the
graduated income tax rates under Subsection
(A)(2)(a) of this Section and the percentage
tax under Section 116 of this Code.
(c) Rate of Tax for Mixed Income Earners. —
Taxpayers earning both compensation
income and income from business or practice
of profession shall be subject to the following
taxes:
(1) All Income from Compensation – The
rates prescribed under Subsection
(A)(2)(a) of this Section.
(2) All Income from Business or Practice
of Profession –
(a) If Total Gross Sales and/or Gross
Receipts and Other Non-operating
Income Do Not Exceed the VAT
Threshold as Provided in Section
109(BB) of this Code.— The rates
prescribed under Subsection (A)(2)(a)
of this Section on taxable income, or
eight percent (8%) income tax based
on gross sales or gross receipts and
other non-operating income in lieu of
the graduated income tax rates under
Subsection (A)(2)(a) of this Section
and the percentage tax under Section
116 of this Code.
(b) If Total Gross Sales and/or Gross
Receipts and Other Non-operating
Income Exceeds the VAT
Threshold as Provided in Section
109(BB) of this Code. — The rates
prescribed under Subsection (A)(2)(a)
of this Section.
(B) Rate of Tax on Certain Passive Income. —
(1) Interests, Royalties, Prizes, and Other
Winnings.— A final tax at the rate of twenty
percent (20%) is hereby imposed upon the amount
of interest from any currency bank deposit and
yield or any other monetary benefit from deposit
substitutes and from trust funds and. similar
arrangements; royalties, except on books, as well
as other literary works and musical compositions,
which shall be imposed a final tax of ten percent
(10%); prizes (except prizes amounting to Ten
thousand pesos (₱10,000) or less which shall be
subject to tax under Subsection (A) of Section 24;
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and other winnings (except winnings amounting to
Ten thousand pesos (₱10,000) or less from
Philippine Charity Sweepstakes and Lotto which
shall be exempt), derived from sources within the
Philippines: Provided, however, That interest
income received by an individual taxpayer (except
a nonresident individual) from a depository bank
under the expanded foreign currency deposit
system shall be subject to a final income tax at the
rate of fifteen percent (15%) of such interest
income: Provided, further, That interest income
from long-term deposit or investment in the form of
savings, common or individual trust funds, deposit
substitutes, investment management accounts
and other investments evidenced by certificates in
such form prescribed by the Bangko Sentral ng
Pilipinas (BSP) shall be exempt from the tax
imposed under this Subsection: Provided, finally,
That should the holder of the certificate pre-
terminate the deposit or investment before the fifth
(5th) year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by the
depository bank from the proceeds of the long-
term deposit or investment certificate based on the
remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20%
(2) Cash and/or Property Dividends. - A final tax at
the rate of ten percent (10%) shall be imposed
upon the cash and/or property dividends actually
or constructively received by an individual from a
domestic corporation or from a joint stock
company, insurance or mutual fund companies
and regional operating headquarters of
multinational companies, or on the share of an
individual in the distributable net income after tax
of a partnership (except a general professional
partnership) of which he is a partner, or on the
share of an individual in the net income after tax of
an association, a joint account, or a joint venture
or consortium taxable as a corporation of which he
is a member or co-venturer.
(C) Capital Gains from Sale of Shares of Stock not
Traded in the Stock Exchange. - The provisions of
Section 39(B) notwithstanding, a final tax at the rate of
fifteen percent (15%) is hereby imposed upon the net
capital gains realized during the taxable year from the
sale, barter, exchange or other disposition of shares of
stock in a domestic corporation, except shares sold, or
disposed of through the stock exchange.
(D) Capital Gains from Sale of Real Property. -
(1) In General. - The provisions of Section 39(B)
notwithstanding, a final tax of six percent (6%)
based on the gross selling price or current fair
market value as determined in accordance with
Section 6(E) of this Code, whichever is higher, is
hereby imposed upon capital gains presumed to
have been realized from the sale, exchange, or
other disposition of real property located in the
Philippines, classified as capital assets, including
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
pacto de retro sales and other forms of conditional
sales, by individuals, including estates and trusts:
Provided, That the tax liability, if any, on gains from
sales or other dispositions of real property to the
government or any of its political subdivisions or
agencies or to government-owned or controlled
corporations shall be determined either under
Section 24 (A) or under this Subsection, at the
option of the taxpayer.
(2) Exception. - The provisions of paragraph (1) of
this Subsection to the contrary notwithstanding,
capital gains presumed to have been realized from
the sale or disposition of their principal residence
by natural persons, the proceeds of which is fully
utilized in acquiring or constructing a new principal
residence within eighteen (18) calendar months
from the date of sale or disposition, shall be
exempt from the capital gains tax imposed under
this Subsection: Provided, That the historical cost
or adjusted basis of the real property sold or
disposed shall be carried over to the new principal
residence built or acquired: Provided, further, That
the Commissioner shall have been duly notified by
the taxpayer within thirty (30) days from the date
of sale or disposition through a prescribed return
of his intention to avail of the tax exemption herein
mentioned: Provided, still further, That the said tax
exemption can only be availed of once every ten
(10) years: Provided, finally, that if there is no full
utilization of the proceeds of sale or disposition,
the portion of the gain presumed to have been
realized from the sale or disposition shall be
subject to capital gains tax. For this purpose, the
gross selling price or fair market value at the time
of sale, whichever is higher, shall be multiplied by
a fraction which the unutilized amount bears to the
gross selling price in order to determine the
taxable portion and the tax prescribed under
paragraph (1) of this Subsection shall be imposed
thereon.
Sec. 25. Tax on Nonresident Alien Individual -
(A) Nonresident Alien Engaged in trade or Business
Within the Philippines. -
(1) In General. - A nonresident alien individual
engaged in trade or business in the Philippines
shall be subject to an income tax in the same
manner as an individual citizen and a resident
alien individual, on taxable income received from
all sources within the Philippines. A nonresident
alien individual who shall come to the Philippines
and stay therein for an aggregate period of more
than one hundred eighty (180) days during any
calendar year shall be deemed a 'nonresident
alien doing business in the Philippines'. Section 22
(G) of this Code notwithstanding.
(2) Cash and/or Property Dividends from a
Domestic Corporation or Joint Stock
Company, or Insurance or Mutual Fund
Company or Regional Operating Headquarter
or Multinational Company, or Share in the
Distributable Net Income of a Partnership
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(Except a General Professional Partnership),
Joint Account, Joint Venture Taxable as a
Corporation or Association., Interests,
Royalties, Prizes, and Other Winnings. - Cash
and/or property dividends from a domestic
corporation, or from a joint stock company, or from
an insurance or mutual fund company or from a
regional operating headquarter of multinational
company, or the share of a nonresident alien
individual in the distributable net income after tax
of a partnership (except a general professional
partnership) of which he is a partner, or the share
of a nonresident alien individual in the net income
after tax of an association, a joint account, or a
joint venture taxable as a corporation of which he
is a member or a co-venturer; interests; royalties
(in any form); and prizes (except prizes amounting
to Ten thousand pesos (P10,000) or less which
shall be subject to tax under Subsection (B)(1) of
Section 24) and other winnings (except Philippine
Charity Sweepstakes and Lotto winnings); shall be
subject to an income tax of twenty percent (20%)
on the total amount thereof: Provided, however,
that royalties on books as well as other literary
works, and royalties on musical compositions shall
be subject to a final tax of ten percent (10%) on the
total amount thereof: Provided, further, That
cinematographic films and similar works shall be
subject to the tax provided under Section 28 of this
Code: Provided, furthermore, That interest income
from long-term deposit or investment in the form of
savings, common or individual trust funds, deposit
substitutes, investment management accounts
and other investments evidenced by certificates in
such form prescribed by the Bangko Sentral ng
Pilipinas (BSP) shall be exempt from the tax
imposed under this Subsection: Provided, finally,
that should the holder of the certificate pre-
terminate the deposit or investment before the fifth
(5th) year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by the
depository bank from the proceeds of the long-
term deposit or investment certificate based on the
remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%.
(3) Capital Gains. - Capital gains realized from sale,
barter or exchange of shares of stock in domestic
corporations not traded through the local stock
exchange, and real properties shall be subject to
the tax prescribed under Subsections (C) and (D)
of Section 24.
(B) Nonresident Alien Individual Not Engaged in Trade
or Business Within the Philippines. - There shall be
levied, collected and paid for each taxable year upon
the entire income received from all sources within the
Philippines by every nonresident alien individual not
engaged in trade or business within the Philippines as
interest, cash and/or property dividends, rents,
salaries, wages, premiums, annuities, compensation,
remuneration, emoluments, or other fixed or
determinable annual or periodic or casual gains,
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
profits, and income, and capital gains, a tax equal to
twenty-five percent (25%) of such income. Capital
gains realized by a nonresident alien individual not
engaged in trade or business in the Philippines from
the sale of shares of stock in any domestic corporation
and real property shall be subject to the income tax
prescribed under Subsections (C) and (D) of Section
24.
(C) Alien Individual Employed by Regional or Area
Headquarters and Regional Operating
Headquarters of Multinational Companies. - There
shall be levied, collected and paid for each taxable
year upon the gross income received by every alien
individual employed by regional or area headquarters
and regional operating headquarters established in the
Philippines by multinational companies as salaries,
wages, annuities, compensation, remuneration and
other emoluments, such as honoraria and allowances,
from such regional or area headquarters and regional
operating headquarters, a tax equal to fifteen percent
(15%) of such gross income: Provided, however, That
the same tax treatment shall apply to Filipinos
employed and occupying the same position as those
of aliens employed by these multinational companies.
For purposes of this Chapter, the term ‘multinational
company’ means a foreign firm or entity engaged in
international trade with affiliates or subsidiaries or
branch offices in the Asia-Pacific Region and other
foreign markets.
(D) Alien Individual Employed by Offshore Banking
Units. - There shall be levied, collected and paid for
each taxable year upon the gross income received by
every alien individual employed by offshore banking
units established in the Philippines as salaries, wages,
annuities, compensation, remuneration and other
emoluments such as honoraria and allowances, from
such offshore banking units, a tax equal to fifteen
percent (15%) of such gross income: Provided,
however, That the same tax treatment shall apply to
Filipinos employed and occupying the same position
as those of aliens employed by these offshore banking
units.
(E) Alien Individual Employed by Petroleum Service
Contractor and Subcontractor. - An alien individual
who is a permanent resident of a foreign country but
who is employed and assigned in the Philippines by a
foreign service contractor or by a foreign service
subcontractor engaged in petroleum operations in the
Philippines shall be liable to a tax of fifteen percent
(15%) of the salaries, wages, annuities,
compensation, remuneration and other emoluments,
such as honoraria and allowances, received from such
contractor or subcontractor: Provided, however, That
the same tax treatment shall apply to a Filipino
employed and occupying the same position as an alien
employed by petroleum service contractor and
subcontractor.
Any income earned from all other sources within the
Philippines by the alien employees referred to under
Subsections (C), (D), and (E) hereof shall be subject
to the pertinent income tax, as the case may be,
imposed under this Code.
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(F) The preferential tax treatment provided in Subsections
(C), (D), and (E) of this Section shall not be applicable
to regional headquarters (RHQs), regional operating
headquarters (ROHQs), offshore banking units
(OBUs) or petroleum service contractors and
subcontractors registering with the Securities and
Exchange Commission (SEC) after January 1, 2018:
Provided, however, That existing RHQs/ROHQs,
OBUs or petroleum service contractors and
subcontractors presently availing of preferential tax
rates for qualified employees shall continue to be
entitled to avail of the preferential tax rate for present
and future qualified employees.
9. Taxation of Professional Partnerships: Sec. 26
Section 26. Tax Liability of Members of General
Professional Partnerships. - A general professional
partnership as such shall not be subject to the income tax
imposed under this Chapter. Persons engaging in business as
partners in a general professional partnership shall be liable for
income tax only in their separate and individual capacities.
For purposes of computing the distributive share of the
partners, the net income of the partnership shall be computed
in the same manner as a corporation.
Each partner shall report as gross income his distributive share,
actually or constructively received, in the net income of the
partnership.
10. Taxation of Corporations: Sec. 27-28
Sec. 27. Rates of Income Tax on Domestic Corporations -
(A) In General. - Except as otherwise provided in this
Code, an income tax of thirty-five percent (35%) is
hereby imposed upon the taxable income derived
during each taxable year from all sources within and
without the Philippines by every corporation, as
defined in Section 22(B) of this Code and taxable
under this Title as a corporation, organized in, or
existing under the laws of the Philippines: Provided,
That effective January 1, 1998, the rate of income tax
shall be thirty-four percent (34%); effective January 1,
1999, the rate shall be thirty-three percent (33%); and
effective January 1, 2000 and thereafter, the rate shall
be thirty-two percent (32%).
In the case of corporations adopting the fiscal-year
accounting period, the taxable income shall be
computed without regard to the specific date when
specific sales, purchases and other transactions occur.
Their income and expenses for the fiscal year shall be
deemed to have been earned and spent equally for
each month of the period.
The reduced corporate income tax rates shall be
applied on the amount computed by multiplying the
number of months covered by the new rates within the
fiscal year by the taxable income of the corporation for
the period, divided by twelve.
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
Provided, further, That the President, upon the
recommendation of the Secretary of Finance, may
effective January 1, 2000, allow corporations the option
to be taxed at fifteen percent (15%) of gross income as
defined herein, after the following conditions have been
satisfied:
(1) A tax effort ratio of twenty percent (20%) of Gross
National Product (GNP);
(2) A ratio of forty percent (40%) of income tax
collection to total tax revenues;
(3) A VAT tax effort of four percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated
Public Sector Financial Position (CPSFP) to GNP.
The option to be taxed based on gross income shall be
available only to firms whose ratio of cost of sales to
gross sales or receipts from all sources does not
exceed fifty-five percent (55%).
The election of the gross income tax option by the
corporation shall be irrevocable for three (3)
consecutive taxable years during which the corporation
is qualified under the scheme.
For purposes of this Section, the term 'gross income'
derived from business shall be equivalent to gross
sales less sales returns, discounts and allowances and
cost of goods sold. "Cost of goods sold' shall include all
business expenses directly incurred to produce the
merchandise to bring them to their present location and
use.
For a trading or merchandising concern, 'cost of goods'
sold shall include the invoice cost of the goods sold,
plus import duties, freight in transporting the goods to
the place where the goods are actually sold, including
insurance while the goods are in transit.
For a manufacturing concern, 'cost of goods
manufactured and sold' shall include all costs of
production of finished goods, such as raw materials
used, direct labor and manufacturing overhead, freight
cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service,
'gross income' means gross receipts less sales returns,
allowances and discounts.
(B) Proprietary Educational Institutions and
Hospitals. - Proprietary educational institutions and
hospitals which are nonprofit shall pay a tax of ten
percent (10%) on their taxable income except those
covered by Subsection (D) hereof: Provided, that if the
gross income from unrelated trade, business or other
activity exceeds fifty percent (50%) of the total gross
income derived by such educational institutions or
hospitals from all sources, the tax prescribed in
Subsection (A) hereof shall be imposed on the entire
taxable income. For purposes of this Subsection, the
term 'unrelated trade, business or other activity' means
any trade, business or other activity, the conduct of
which is not substantially related to the exercise or
performance by such educational institution or hospital
of its primary purpose or function. A 'Proprietary
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educational institution' is any private school
maintained and administered by private individuals or
groups with an issued permit to operate from the
Department of Education, Culture and Sports (DECS),
or the Commission on Higher Education (CHED), or
the Technical Education and Skills Development
Authority (TESDA), as the case may be, in accordance
with existing laws and regulations.
(C) Government-owned or -Controlled Corporations,
Agencies or Instrumentalities - The provisions of
existing special or general laws to the contrary
notwithstanding, all corporations, agencies, or
instrumentalities owned or controlled by the
Government, except the Government Service
Insurance System (GSIS), the Social Security System
(SSS), the Philippine Health Insurance Corporation
(PHIC), and the local water districts shall pay such rate
of tax upon their taxable income as are imposed by
this Section upon corporations or associations
engaged in similar business, industry, or activity.
(D) Rates of Tax on Certain Passive Incomes -
(1) Interest from Deposits and Yield or any other
Monetary Benefit from Deposit Substitutes and
from Trust Funds and Similar Arrangements,
and Royalties. - A final tax at the rate of twenty
percent (20%) is hereby imposed upon the amount
of interest on currency bank deposit and yield or
any other monetary benefit from deposit
substitutes and from trust funds and similar
arrangements received by domestic corporations,
and royalties, derived from sources within the
Philippines: Provided, however, That interest
income derived by a domestic corporation from a
depository bank under the expanded foreign
currency deposit system shall be subject to a final
income tax at the rate of fifteen percent (15%) of
such interest income.
(2) Capital Gains from the Sale of Shares of Stock
Not Traded in the Stock Exchange. - A final tax
at the rate of fifteen percent (15%) shall be
imposed on net capital gains realized during the
taxable year from the sale, exchange or other
disposition of shares of stock in a domestic
corporation except shares sold or disposed of
through the stock exchange.
(3) Tax on Income Derived under the Expanded
Foreign Currency Deposit System. – Income
derived by a depository bank under the expanded
foreign currency deposit system from foreign
currency transactions with non-residents, offshore
banking units in the Philippines, local commercial
banks, including branches of foreign banks that
may be authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business with foreign
currency deposit system units and other
depository banks under the expanded foreign
currency deposit system shall be exempt from all
taxes, except net income from such transactions
as may be specified by the Secretary of Finance,
upon recommendation by the Monetary Board to
be subject to the regular income tax payable by
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
banks: Provided, however, That interest income
from foreign currency loans granted by such
depository banks under said expanded system to
residents other than offshore banking units in the
Philippines or other depository banks under the
expanded system, shall be subject to a final tax at
the rate of ten percent (10%).
Any income of non-residents, whether individuals
or corporations, from transactions with depository
banks under the expanded system shall be
exempt from income tax.
(4) Intercorporate Dividends. – Dividends received
by a domestic corporation from another domestic
corporation shall not be subject to tax.
(5) Capital Gains Realized from the Sale,
Exchange or Disposition of Lands and/or
Buildings. – A final tax of six percent (6%) is
hereby imposed on the gain presumed to have
been realized on the sale, exchange or disposition
of lands and/or buildings which are not actually
used in the business of a corporation and are
treated as capital assets, based on the gross
selling price or fair market value as determined in
accordance with Section 6(E) of this Code,
whichever is higher, of such lands and/or
buildings.
(E) Minimum Corporate Income Tax on Domestic
Corporations. -
(1) Imposition of Tax. - A minimum corporate income
tax of two percent (2%0 of the gross income as of
the end of the taxable year, as defined herein, is
hereby imposed on a corporation taxable under
this Title, beginning on the fourth taxable year
immediately following the year in which such
corporation commenced its business operations,
when the minimum income tax is greater than the
tax computed under Subsection (A) of this Section
for the taxable year.
(2) Carry Froward of Excess Minimum Tax. - Any
excess of the minimum corporate income tax over
the normal income tax as computed under
Subsection (A) of this Section shall be carried
forward and credited against the normal income
tax for the three (3) immediately succeeding
taxable years.
(3) Relief from the Minimum Corporate Income
Tax Under Certain Conditions. - The Secretary
of Finance is hereby authorized to suspend the
imposition of the minimum corporate income tax
on any corporation which suffers losses on
account of prolonged labor dispute, or because of
force majeure, or because of legitimate business
reverses.
The Secretary of Finance is hereby authorized to
promulgate, upon recommendation of the
Commissioner, the necessary rules and regulation
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that shall define the terms and conditions under
which he may suspend the imposition of the
minimum corporate income tax in a meritorious
case.
(4) Gross Income Defined. - For purposes of
applying the minimum corporate income tax
provided under Subsection (E) hereof, the term
'gross income' shall mean gross sales less sales
returns, discounts and allowances and cost of
goods sold. "Cost of goods sold' shall include all
business expenses directly incurred to produce
the merchandise to bring them to their present
location and use.
For a trading or merchandising concern, 'cost of goods sold'
shall include the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where the
goods are actually sold including insurance while the goods are
in transit.
For a manufacturing concern, cost of 'goods manufactured and
sold' shall include all costs of production of finished goods, such
as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs
incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross
income' means gross receipts less sales returns, allowances,
discounts and cost of services. 'Cost of services' shall mean all
direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including (A)
salaries and employee benefits of personnel, consultants and
specialists directly rendering the service and (B) cost of facilities
directly utilized in providing the service such as depreciation or
rental of equipment used and cost of supplies: Provided,
however, That in the case of banks, 'cost of services' shall
include interest expense.
Sec. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this
Code, a corporation organized, authorized, or
existing under the laws of any foreign country,
engaged in trade or business within the
Philippines, shall be subject to an income tax
equivalent to thirty-five percent (35%) of the
taxable income derived in the preceding taxable
year from all sources within the Philippines:
provided, That effective January 1, 1998, the rate
of income tax shall be thirty-four percent (34%);
effective January 1, 1999, the rate shall be thirty-
three percent (33%), and effective January 1, 2000
and thereafter, the rate shall be thirty-two percent
(32%).
In the case of corporations adopting the fiscal-year
accounting period, the taxable income shall be
computed without regard to the specific date when
sales, purchases and other transactions occur.
Their income and expenses for the fiscal year shall
be deemed to have been earned and spent equally
for each month of the period.
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
The corporate income tax rate shall be applied on
the amount computed by multiplying the number of
months covered by the new rate within the fiscal
year by the taxable income of the corporation for
the period, divided by twelve
Provided, however, that a resident foreign
corporation shall be granted the option to be taxed
at fifteen percent (15%) on gross income under the
same conditions, as provided in Section 27 (A).
(2) Minimum Corporate Income Tax on Resident
Foreign Corporations. - A minimum corporate
income tax of two percent (2%) of gross income,
as prescribed under Section 27 (E) of this Code,
shall be imposed, under the same conditions, on a
resident foreign corporation taxable under
paragraph (1) of this Subsection.
(3) International Carrier. - An international carrier
doing business in the Philippines shall pay a tax of
two and one-half percent (2 1/2%) on its 'Gross
Philippine Billings' as defined hereunder:
(a) International Air Carrier. - 'Gross Philippine
Billings' refers to the amount of gross revenue
derived from carriage of persons, excess
baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue
and the place of payment of the ticket or
passage document: Provided, That tickets
revalidated, exchanged and/or indorsed to
another international airline form part of the
Gross Philippine Billings if the passenger
boards a plane in a port or point in the
Philippines: Provided, further, That for a flight
which originates from the Philippines, but
transshipment of passenger takes place at
any port outside the Philippines on another
airline, only the aliquot portion of the cost of
the ticket corresponding to the leg flown from
the Philippines to the point of transshipment
shall form part of Gross Philippine Billings.
(b) International Shipping. - 'Gross Philippine
Billings' means gross revenue whether for
passenger, cargo or mail originating from the
Philippines up to final destination, regardless
of the place of sale or payments of the
passage or freight documents.
Provided, That international carriers doing
business in the Philippines may avail of a
preferential rate or exemption from the tax
herein imposed on their gross revenue
derived from the carriage of persons and their
excess baggage on the basis of an applicable
tax treaty or international agreement to which
the Philippines is a signatory or on the basis
of reciprocity such that an international
carrier, whose home country grants income
tax exemption to Philippine carriers, shall
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likewise be exempt from the tax imposed
under this provision.
(4) Offshore Banking Units. - The provisions of any
law to the contrary notwithstanding, income
derived by offshore banking units authorized by
the Bangko Sentral ng Pilipinas (BSP) to transact
business with offshore banking units, including any
interest income derived from foreign currency
loans granted to residents, shall be subject to a
final income tax at the rate of ten percent (10%) of
such income.
Any income of nonresidents, whether individuals
or corporations, from transactions with said
offshore banking units shall be exempt from
income tax.
(5) Tax on Branch Profits Remittances. - Any profit
remitted by a branch to its head office shall be
subject to a tax of fifteen (15%) which shall be
based on the total profits applied or earmarked for
remittance without any deduction for the tax
component thereof (except those activities which
are registered with the Philippine Economic Zone
Authority). The tax shall be collected and paid in
the same manner as provided in Sections 57 and
58 of this Code: provided, that interests, dividends,
rents, royalties, including remuneration for
technical services, salaries, wages premiums,
annuities, emoluments or other fixed or
determinable annual, periodic or casual gains,
profits, income and capital gains received by a
foreign corporation during each taxable year from
all sources within the Philippines shall not be
treated as branch profits unless the same are
effectively connected with the conduct of its trade
or business in the Philippines.
(6) Regional or Area Headquarters and Regional
Operating Headquarters of Multinational
Companies. –
(a) Regional or area headquarters as defined in
Section 22(DD) shall not be subject to income
tax.
(b) Regional operating headquarters as defined
in Section 22(EE) shall pay a tax of ten
percent (10%) of their taxable income.
(7) Tax on Certain Incomes Received by a
Resident Foreign Corporation. -
(a) Interest from Deposits and Yield or any
other Monetary Benefit from Deposit
Substitutes, Trust Funds and Similar
Arrangements and Royalties. - Interest from
any currency bank deposit and yield or any
other monetary benefit from deposit
substitutes and from trust funds and similar
arrangements and royalties derived from
sources within the Philippines shall be subject
to a final income tax at the rate of twenty
percent (20%) of such interest: Provided,
however, That interest income derived by a
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
resident foreign corporation from a depository
bank under the expanded foreign currency
deposit system shall be subject to a final
income tax at the rate of seven and one-half
percent (7 1/2%) of such interest income.
(b) Income Derived under the Expanded
Foreign Currency Deposit System. -
Income derived by a depository bank under
the expanded foreign currency deposit
system from foreign currency transactions
with local commercial banks including
branches of foreign banks that may be
authorized by the Bangko Sentral ng Pilipinas
(BSP) to transact business with foreign
currency deposit system units, including
interest income from foreign currency loans
granted by such depository banks under said
expanded foreign currency deposit system to
residents, shall be subject to a final income
tax at the rate of ten percent (10%) of such
income.
Any income of nonresidents, whether
individuals or corporations, from transactions
with depository banks under the expanded
system shall be exempt from income tax.
(c) Capital Gains from Sale of Shares of Stock
Not Traded in the Stock Exchange. - A final
tax at the rates prescribed below is hereby
imposed upon the net capital gains realized
during the taxable year from the sale, barter,
exchange or other disposition of shares of
stock in a domestic corporation except shares
sold or disposed of through the stock
exchange:
Not over P100,000 5%
On any amount in excess of P100,000 10%
(d) Intercorporate Dividends. - Dividends
received by a resident foreign corporation
from a domestic corporation liable to tax under
this Code shall not be subject to tax under this
Title.
(B) Tax on Nonresident Foreign Corporation. -
(1) In General. - Except as otherwise provided in this
Code, a foreign corporation not engaged in trade
or business in the Philippines shall pay a tax equal
to thirty-five percent (35%) of the gross income
received during each taxable year from all sources
within the Philippines, such as interests, dividends,
rents, royalties, salaries, premiums (except
reinsurance premiums), annuities, emoluments or
other fixed or determinable annual, periodic or
casual gains, profits and income, and capital
gains, except capital gains subject to tax under
subparagraphs (C) and (d): Provided, That
effective 1, 1998, the rate of income tax shall be
thirty-four percent (34%); effective January 1,
1999, the rate shall be thirty-three percent (33%);
and, effective January 1, 2000 and thereafter, the
rate shall be thirty-two percent (32%).
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(2) Nonresident Cinematographic Film Owner,
Lessor or Distributor. - A cinematographic film
owner, lessor, or distributor shall pay a tax of
twenty-five percent (25%) of its gross income from
all sources within the Philippines.
(3) Nonresident Owner or Lessor of Vessels
Chartered by Philippine Nationals. - A
nonresident owner or lessor of vessels shall be
subject to a tax of four and one-half percent (4
1/2%) of gross rentals, lease or charter fees from
leases or charters to Filipino citizens or
corporations, as approved by the Maritime Industry
Authority.
(4) Nonresident Owner or Lessor of Aircraft,
Machineries and Other Equipment. - Rentals,
charters and other fees derived by a nonresident
lessor of aircraft, machineries and other equipment
shall be subject to a tax of seven and one-half
percent (7 1/2%) of gross rentals or fees.
(5) Tax on Certain Incomes Received by a
Nonresident Foreign Corporation. –
(a) Interest on Foreign Loans. - A final
withholding tax at the rate of twenty percent
(20%) is hereby imposed on the amount of
interest on foreign loans contracted on or after
August 1, 1986;
(b) Intercorporate Dividends. - A final
withholding tax at the rate of fifteen percent
(15%) is hereby imposed on the amount of
cash and/or property dividends received from
a domestic corporation, which shall be
collected and paid as provided in Section 57
(A) of this Code, subject to the condition that
the country in which the nonresident foreign
corporation is domiciled, shall allow a credit
against the tax due from the nonresident
foreign corporation taxes deemed to have
been paid in the Philippines equivalent to
twenty percent (20%) for 1997, nineteen
percent (19%) for 1998, eighteen percent
(18%) for 1999, and seventeen percent (17%)
thereafter, which represents the difference
between the regular income tax of thirty-five
percent (35%) in 1997, thirty-four percent
(34%) in 1998, and thirty-three percent (33%)
in 1999, and thirty-two percent (32%)
thereafter on corporations and the fifteen
percent (15%) tax on dividends as provided in
this subparagraph;
(c) Capital Gains from Sale of Shares of Stock
not Traded in the Stock Exchange. - A final
tax at the rates prescribed below is hereby
imposed upon the net capital gains realized
during the taxable year from the sale, barter,
exchange or other disposition of shares of
stock in a domestic corporation, except
shares sold, or disposed of through the stock
exchange:
Not over P100,000 5%
On any amount in excess of P100,000 10%
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
January 19, 2021 (0:00 – 36:21) | Hannah Keziah P. Dela Cerna
INDIVIDUAL TAXPAYERS
*Table (Summary) is on the next page (Figure 1).
Discussion:
Before TRAIN and under TRAIN, we have the same
classification for individuals.
Classification for Individuals:
1. Resident Citizen
2. Non-Resident Citizen
3. Resident Alien
4. Non-Resident Alien Engaged in Trade or Business
(NRAETB)
5. Non-Resident Alien Not Engaged in Trade or Business
(NRANETB)
1. CITIZENS
Citizens of the Philippines who can either be natural born or
naturalized in accordance with law. They can be classified into:
a. Resident Citizen
b. Non-Resident Citizen
Resident Citizen, defined.
A person is considered a resident citizen if he has been
permanently staying/residing in the Philippines. Even if he/she
went abroad, for as long as he stayed outside LESS THAN 183
days, the citizen will still be considered as resident citizen.
They are taxable on all income (all sources; within and
without) derived from sources within and without the
Philippines (Section 23, NIRC).
Non-Resident Citizen, defined.
One who stayed outside the country 183 days OR MORE (in
other words, AT LEAST 183 days) or one who has been
permanently staying abroad or one who has been performing a
contract in the case of overseas workers.
Section 22 (E) The term 'nonresident citizen' means;
(1) A citizen of the Philippines who establishes to the
satisfaction of the Commissioner the fact of his physical
presence abroad with a definite intention to reside therein.
(Passive Definition)
(2) A citizen of the Philippines who leaves the Philippines during
the taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis.
(3) A citizen of the Philippines who works and derives income
from abroad and whose employment thereat requires him to be
physically present abroad most of the time during the taxable
year.
(4) A citizen who has been previously considered as
nonresident citizen and who arrives in the Philippines at any
time during the taxable year to reside permanently in the
Philippines shall likewise be treated as a nonresident citizen for
the taxable year in which he arrives in the Philippines with
respect to his income derived from sources abroad until the date
of his arrival in the Philippines.
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20
(5) The taxpayer shall submit proof to the Commissioner to
show his intention of leaving the Philippines to reside
permanently abroad or to return to and reside in the Philippines
as the case may be for purpose of this Section.
Section 23. General Principles of Income Taxation in the
Philippines. - Except when otherwise provided in this Code:
(A) A citizen of the Philippines residing therein is taxable on
all income derived from sources within and without the
Philippines;
(B) A nonresident citizen is taxable only on income derived
from sources within the Philippines;
(C) An individual citizen of the Philippines who is working and
deriving income from abroad as an overseas contract worker
is taxable only on income derived from sources within the
Philippines: Provided, That a seaman who is a citizen of the
Philippines and who receives compensation for services
rendered abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be treated as an
overseas contract worker;
xxx
BIR Ruling No. 517-2011 (December 22, 2011)
“Employment Thereat”
Facts: The local employer is a domestic corporation that sends
its engineers to various countries for a maximum period of 214
days per calendar year. While working overseas, these
engineers remain on the Philippine payroll.
Held: The Bureau of Internal Revenue (BIR) held that a local
company’s employees assigned to render services abroad do
not qualify as “nonresident citizens” and will thus be treated as
resident citizens. Accordingly, compensation income from their
assignment abroad, where such engineers are present in the
foreign country most of the time during the taxable year (more
than 183 days), are subject to Philippine income tax and
consequently to creditable withholding tax on wages.
The BIR held that the engineers cannot qualify because the
phrase “employment thereat” [as used in paragraph (3) of
Section 22(E)] means that the individual must be employed in
such country. For this purpose, it cited the definition of an
“employee” under Section 2.78.3 of RR 2-98, that is, an
individual performing services under an employer-employee
relationship.
The BIR noted that the personnel are employed as full-time staff
in the local company and the foreign assignment is considered
part of their duties. As their salaries were paid by the local
company whether they were in the Philippines or on foreign
assignment, their temporary assignment does not make them
employees of the foreign companies for which they rendered
that service. The BIR further explained that as the employees of
the local company, though working abroad, they are still under
an employer-employee relationship with the Philippine entity and
not with the foreign entity, and so they do not qualify them as
non-residents under paragraph (3).
BIR Ruling 305-2016 (June 28, 2016)
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
Facts: An official of the DSWD was appointed for the post of
Deputy Secretary General for the ASEAN Secretariat. Based on
the MOA executed between the DSWD and the ASEAN
Secretariat, the official remained as an employee of DSWD
during her secondment in the ASEAN Secretariat based in
Indonesia. However, she was considered on leave without pay
in the DSWD during the said period. Her remunerations and
other benefits were shouldered by the ASEAN Secretariat.
Held: Secondment abroad does not necessarily make the
employee a non-resident citizen. In this case, the official’s
secondment was temporary; she continued to be employed with
DSWD and she has no intention to reside in Indonesia. Thus,
she is still considered a resident citizen during the period of her
secondment, in which case, she is taxable on all income derived
from within and without the Philippines, including her salaries
received from the secondment.
Revenue Regulation No. 1-2011
Overseas Contract Worker (OCW), defined.
OCW refer to Filipino citizens employed in foreign countries,
commonly referred to as OFWs, who are physically present in a
foreign country as a consequence of their employment thereat.
Their salaries and wages are paid by an employer abroad and
is not borne by any entity or person in the Philippines.
To be considered as an OCW or OFW, they must be duly
registered as such with the Philippine Overseas Employment
Administration (POEA) with a valid Overseas Employment
Certificate (OEC).
Seamen, defined.
Seafarers or seamen are Filipino citizens who receive
compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively in international
trade.
To be considered such, they must be duly registered as such
with the Philippine Overseas Employment Administration
(POEA) with a valid Overseas Employment Certificate (OEC)
with a valid Seafarers Identification Record Book (SIRB) or
Seaman's Book issued by the Maritime Industry Authority
(MARINA).
2. ALIENS
They are not citizens of the Philippines. They have not acquired
Philippine citizenship. They can be classified into:
a. Resident Alien
b. Non-Resident Alien
i. Non-Resident Alien Engaged in Trade or
Business (NRAEB)
ii. Non-Resident Alien Not Engaged in Trade or
Business (NRENEB)
Resident Alien, defined.
An alien who stayed in the country for MORE THAN 12 months
FROM THE DATE OF ARRIVAL. He/she was able to
complete/form one tax year.
A resident alien is an individual who is stateless or is a national
of another country and who lives in the Philippines with no
definite intention as to length of stay, but who is not a mere
transient or sojourner. An expatriate working in the Philippines
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on a contract for an indefinite period potentially falls into this
category (PricewaterhouseCoopers).
A resident alien is:
a) An alien actually present in the Philippines who is not
a mere transient or sojourner;
b) Lives in the Philippines and has no definite intention as
to his or her stay;
c) One who comes to the Philippines for a definite
purpose which for its nature than an extended stay may
be necessary for its accomplishment and to the end the
alien makes his home temporarily in the Philippines
(e.g. NGO workers).
Non-Resident Alien, defined.
The term 'nonresident alien' means an individual whose
residence is not within the Philippines and who is not a citizen
thereof [Section 22 (G), NIRC].
C. Non-Resident Alien Engaged in Trade or Business
(NRAETB)
(1) In General. - A nonresident alien individual engaged in trade
or business in the Philippines shall be subject to an income tax
in the same manner as an individual citizen and a resident alien
individual, on taxable income received from all sources within
the Philippines. A nonresident alien individual who shall come
to the Philippines and stay therein for an aggregate period of
more than one hundred eighty (180) days during any calendar
year shall be deemed a 'nonresident alien doing business in the
Philippines'. Section 22 (G) of this Code notwithstanding.
NRAETB refers to a non-resident alien who shall come to the
Philippines and stay for an aggregate period of more than one
hundred eighty (180) days during any calendar year.
i. They are engaged in trade or business within the
Philippines;
ii. They stay in the Philippines for a period more than 180
days.
D. Non-Resident Alien Not Engaged in Trade or
Business (NRANETB)
A NRANETB refers to a non-resident alien who shall
come to the Philippines and stay for an aggregate
period of 180 or less during any calendar year.
They are normally taxed on the basis of gross income
because these aliens are not staying for a long time in
the Philippines.
If he continues to stay [for] more than 180 days, but
less than 1 year, then [he or she is a] non-resident alien
engaged in trade or business.
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA 22
4 Manresa | SY 2020-2021

Table 1 | SUMMARY OF TAX BASE AND TAX RATES ON INDIVIDUAL TAXPAYERS [2018] as amended by RA 10963 [TRAIN]

CATEGORY OF INCOME RESIDENT NON-RESIDENT

CITIZEN
ALIEN CITIZEN NRAETB NRANETB
Permanently stayed in
Stayed within the Phil. for Stayed outside the Stayed in the Phil. Stayed in the Phil.
the Phil. or stayed
more than 12 months Phil. 183 days or more than 180 180 days or less
outside less than 183
from date of arrival more days
days
1. Compensation*, Business/Profession** All Sources Within Philippines Within Philippines Within Philippines Within Philippines
2. Prizes of P10,000 or less
Based on Taxable Income
Foreign sources income of resident citizens and all other Schedular Normal Tax Rate: NIRC Sec. 24 (A): 0%-35% GIW 25%
income not subject to a Preferential or Special rate [Minimum Wage Earners (MWE) – Exempted from income tax under RA 9504]
3. Interest, Royalties, winnings/Prizes [except Gross income within 20% Final Withholding Tax (FWT)
Prizes pf P10,000 & below-reg/normal rate]
4. Royalties- books, literary works, musical Gross income within 10% Final Withholding Tax (FWT)
compositions GROSS INCOME
5. Interest (long-term investment 5 years or more) EXEMPT WITHIN
-savings, common or individual trust funds, In case of pre-termination, remaining of maturity of: (GIW) 25%
deposit substitute, investment management 4 years to less than 5 years – 5% FWT
account in denomination of P10,000 or as 3 years to less than 4 years – 12% FWT
prescribed by the BSP Less than 3 years – 20% FWT
6. Cash/Property Dividends GIW 10% FWT GIW 20% FWT
7. Interest (Foreign Currency Deposit System) GIW 15% FWT EXEMPT

8. Capital Gains on Sale of Share (not traded-stock Net capital gains within: 15%
exchange)
9. Sales on Shares (traded in stock exchange) 6/10 (60%) of 1% of the Selling Price, [Business/Percentage Tax, Sec. 127, NIRC]

10. Capital Gains on Sale of Real Property Gross Selling Price or Current FMV, whichever is higher. 6% capital gains tax

Less than P10,000: EXEMPTED

11. Winning on Philippine Sweepstakes / Lotto More than P10,000: 20% FWT

15% on GIW on salaries, wages, compensation, remuneration and emoluments. [Preferential tax treatment no longer
12. Aliens Employed by Regional or Area HQ and applicable, subject now to graduated rates 0%-35%]
Regional
15% on GIW on salaries, wages, compensation, remuneration and emoluments. [Preferential tax treatment no longer
13. Aliens employed by Offshore Banking Units applicable, subject now to graduated rates 0%-35%]

14. Aliens employed by Petroleum Service 15% on GIW on salaries, wages, compensation, remuneration and emoluments. [Preferential tax treatment no longer
Contractor and Subcontractor applicable, subject now to graduated rates 0%-35%]

Banosan, Bayquen, Cabarlo, Coquilla, Dela Cerna, Dulay, Emuy, Manligoy, Paulma, Peroy, A., Pizarro, Publico, Puerin, Talon, Viola
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
Discussion of Table:
1. COMPENSATION, BUSINESS/PROFESSIONAL
INCOME AND PRIZES
If income pertains to compensation, or business, or professional
income, the tax is 0-35%. But when it comes to non-resident
alien not engaged, it will be taxed on gross at 25% of income.
If prices of 10,000 or less, it would be added to the regular
income of the taxpayer subject to tax at 0-35%.
Resident citizens are taxable on all sources, within and without.
And you would notice that all the other individuals, from aliens
to non-resident citizens, are taxable only on income within.
The foreign source income will be taxable only in so far as the
resident citizen, they will not be taxable to aliens as well as non-
resident citizens.
The foreign source income of resident citizen and all other
income not subject to a preferential rate, will be taxed on the
regular rate of 0-35%. In other words, as far as resident citizen,
their Philippine income will be subject either to 0-35% or to the
preferential rate, depending on the category of income. But the
income within, compensation, business, or profession,
automatic 0-35%. If they have other passive income in the
Philippines subject to preferential rate, do not tax them at 0-35%.
There will be a special rate for them in so far as the resident
citizen. But all other income like all foreign income of the resident
citizen will be added to the regular income taxed at 0-35% as
well as all other Philippine income not subject to a preferential
rate will be taxed also at 0-35%.
Related to compensation are the minimum wage earners
(MWE). The MWEs were already exempted from income tax
even before TRAIN. Under RA 9504, the MWEs are already
excluded or exempted from the income tax, including all the
other wages (overtime pay, etc. which forms part of the wages).
2. INTEREST, ROYALTIES, WINNINGS EXCEPT
PRIZES OF P10,000 & BELOW
On the third category of income, “Interest, Royalties, winnings
except Prizes pf P10,000 & below,” this will now be subject to a
gross income [tax], the gross income of which will be taxed at
20% as a final withholding tax (FWT). In the case of non-resident
alien not engaged, 25% on the gross income.
3. ROYALTIES ON BOOKS, LITERARY WORKS,
MUSICAL COMPOSITION
When the income pertains to royalties on books, literary works,
musical composition, the income will be taxed at 10% as a final
withholding tax.
Question: What if item 3, interests, winnings, prizes are foreign
sourced?
Answer: This will be taxed only on resident citizens. The aliens
and non-resident, non-taxable. If the resident will have a foreign
source interest, winning, prizes, it will not be subject to 20%
FWT. It will be added to his regular income subject to the regular
rate under TRAIN. Likewise, if the royalties are from a foreign
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source, the income earner is a resident citizen, you do not use
the 10% FWT. The rate will be 0-35%.
4. INTEREST ON LONG-TERM INVESTMENT WITH
A MATURITY OF 5 YEARS AND MORE
Item number 5, interest on long-term investment with a maturity
of 5 years and more, it will be exempted for these resident
citizens and the resident alien, non-resident citizen, non-resident
alien engaged in trade or business, but the interest income will
be taxed at 25% if earned by NRANETB.
If the long-term investment has been pre-terminated because
the income earner which for the interest to mature within 5 years
or more, the interest income is exempted from tax but not for the
NRANETB.
If these individuals supposedly exempted if they waited for the
investment to mature, 5 years or more, but cannot wait and so
they pre-terminated, the interest income will be taxable, subject
to the length of time it was pre-terminated. IF the pretermination
is less than 3 years, then the interest income will be taxed at
20% FWT. More than 3 years but less than 4, 12% FWT. More
than 4 years but less than 5 years, 5%. However, in the case of
the NRANETB, whether he will wait for maturity or he will pre-
terminate, it is taxable at gross at [the rate of] 25%. Take note of
the declining tax rates in the event of pre-termination
Question: If the interest income of long-term investments is
foreign-sourced and then the person waited 5 years or more for
maturity, will it be subject to exemption?
Answer: No because the exemption only pertains to Philippine-
sourced long-term investments. The long-term investments are
foreign-sourced, the interest will still be taxable. The rates will
be added to the regular income [and the rate will be] 0-35%.
5. DIVIDENDS
Cash and property dividends including distribution of profits. It
will be subject to a 10% FWT if resident citizen, resident alien,
or non-resident citizen. But if the income earner is a non-resident
alien engaged in trade or business, 20% FWT. If non-resident
alien not engaged, it will be 25%.
If the cash or property dividends are not Philippine-sourced, it
will be exempted to the aliens including the non-resident citizen
but if the income earner is a resident citizen, the foreign-sourced
cash or property dividends will be taxed, not at rates of 10 and
20% but 0-35%. In other words, the foreign source, cash or
property dividends, will be added to the regular income of the
resident citizen taxable at 0-35%.
You noticed that if this is a Philippine-sourced passive income
or an income subject of preferential rate, then that will be the tax
you will use. But if that passive income is foreign-sourced then
you add it up. In other words, the treatment is global. All foreign-
sourced income of the resident citizen will be added to his
regular income at 0-35%.
6. INTEREST (FOREIGN CURRENCY DEPOSIT
SYSTEM)
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
This is the foreign currency accounts of the income earner. If the
income earner is a resident citizen or resident alien, the interest
on foreign currency deposit is taxed at 50% FWT. But if resident
citizen, non-resident aliens, exempted.
Question: If the interest income from foreign currency deposits
is foreign sourced of these resident citizens (their account
abroad which earned interest, will it be subject to withholding
tac?
Answer: No, not subject to withholding tax. Add it to regular
income taxed at 0-35%.
7. CAPITAL GAINS ON THE SALE OF SHARES OF
STOCKS NOT TRADED AT THE STOCK
EXCHANGE
Taxed on the net capital gain.
To determine net capital gain, selling price less the cost is the
gain. That gain will be taxed at 15%. It is a uniform rate all across
the individuals, regardless of who the individual is or whatever
his/her status is.
Selling price – cost = net capital gain
8. CAPITAL GAINS ON THE SALE OF SHARES OF
STOCKS TRADED AT LOCAL STOCK
EXCHANGE
The rate is not in income taxation, it is under Section 127 of the
NIRC. That is a percentage/business tax, the rate being 60% of
1% or 6/10 of 1% of the selling price is the applicable tax rate.
Sec. 127. Tax on Sale, Barter or Exchange of Shares of
Stock Listed and Traded through the Local Stock
Exchange or through Initial Public Offering -
(A) Tax on Sale, Barter or Exchange of Shares of Stock Listed
and Traded through the Local Stock Exchange.— There shall
be levied, assessed and collected on every sale, barter,
exchange or other disposition of shares of stock listed and
traded through the local stock exchange other than the sale by
a dealer in securities, a tax at the rate of six-tenths of one
percent (6⁄10 of 1%) of the gross selling price or gross value in
money of the shares of stock sold, bartered, exchanged or
otherwise disposed which shall be paid by the seller or
transferor.
Question: In item 8, if the capital gains (CPG) of the shares of
stock are foreign sourced, not traded, will you apply the 15%?
Answer: No. It will be taxed only to the resident citizen, but the
rate is 0-35%. The gain will be added to the regular income.
9. SALE OF SHARES OF STOCK TRADED AT THE
STOCK EXCHANGE (FOREIGN SOURCED)
Do not apply the rate in Section 127 in the case of the resident
citizen. The foreign source gains in the sales of stock in the New
York stock exchange or Hongkong or British exchange, then the
gain will be added to the regular income taxed at 0-35%.
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Take note the 0-35%, that is the rate to all sources of income
not subject to any preferential rate including foreign sourced
income of the resident citizen.
10. CAPITAL GAINS ON THE SALE OF REAL
PROPERTY
Notice it is the same rate all across the individuals, the rate being
6% of the gross selling price or current fair market value (FMV),
whichever is higher.
Question: What if foreign sourced?
Answer: It will be taxable only as to the resident citizen and will
not be taxed as to the other individuals. The rate, however, is
not 6%, but the capital gains will be added to the regular income
of the resident citizen taxed at 0-35%.
Take note of the exemption from 6% when the individual will
acquire a new residence. He can apply for the exemption of the
coverage of the 6% capital gains tax if the previous residence
has been disposed to acquire or construct new residence then
the taxpayer could avail of the exemption from the 6% tax.
11. WINNINGS FROM THE PHILIPPINE CHARITY
SWEEPSTAKES OFFICE/LOTTO
Less than 10,000, exempted. More than 10,000, subject to the
20% FWT.
It does not mean that you win P1million, the 10,000 will be
excluded. No. The whole P1million will be taxed at 20%. The
application of the exemption of less than 10,000 is if it is the only
winning or prize you won. If the total price is 1million or even
500,000, it does not mean that the 10,000 will be exempted and
the excess will be the only one taxed. That is not the proper
application. The entire amount will be taxed at 20%.
Question: What if from foreign source, foreign sweepstakes, or
foreign lotto?
Answer: you do not apply this rate. The winnings will be added
to your regular income for resident citizens, at 0-35% tax.
12. ALIENS EMPLOYED BY:
(A) REGIONAL OR AREA HQ AND REGIONAL
OPERATING HQ OF MNCS,
(B) OFFSHORE BANKING UNITS AND
(C) PETROLEUM SERVICE CONTRACTOR AND
SUBCONTRACTOR
15% of gross income or wages, compensation, remuneration
and emoluments (no longer applicable). The preferential tax
treatment NO LONGER APPLIES.
Subject now to graduated rates of 0-35%. Take note because
this has been vetoed by the President. So, the aliens employed
by regional HQs, offshore banking units, and petroleum service
contractors, the 15% is NO LONGER the applicable rate. It is
now the graduated rates of 0-35%.
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA 25
4 Manresa | SY 2020-2021

The veto letter of the president questioned why the aliens have
preferential treatment while the Filipinos are taxed to 0-35%.
Thus, they are now subject to the rates of their Filipino
counterparts.
RA 9504 - MWEs
Under RA 9504, the MWE who are workers in the private sector,
and who are paid under our statutory minimum wage fixed by
the Regional Tripartite Wage and Productivity Board (RTWPB)
or to the employees in the public sector not receiving more than
the statutory minimum wage are exempted from tax.
(HH) The term ‘minimum wage earner’ shall refer to a worker in
the private sector paid the statutory minimum wage, or to an
employee in the public sector with compensation income of not
more than the statutory minimum wage in the non-agricultural
sector where he/she is assigned.
3. Taxpayer should not be a VAT-registered taxpayer.
Otherwise, the taxpayer is subjected to VAT regardless
of gross income.
4. Taxpayer indicates in his return at the start of the
taxable period that he will be availing of the gross sales
or gross receipts tax option.
Thus, individuals covered under Section 24(A)(2)(b) shall have
the option to avail of the following:
1. The graduated tax rates under Section 24(A)(2)(a) of
the Tax Code, as amended, OR
2. An eight percent (8%) tax on gross sales or gross
receipts and other non-operating income in excess of
P250,000 in lieu of the graduated tax rates under
Section 24(A) and the percentage tax under Section
116.

For this scenario, the purely self-employed or professional has

SEC. 2. Section 24 (A) of Republic Act No. 8424, as amended,
the option to choose. This table presents the difference between
otherwise known as the National Internal Revenue Code of
the two choices.
1997, is hereby further amended to read as follows:
CRITERIA Graduated Tax Rate 8% Tax
SEC. 24. Income Tax Rates. — Schedular Proportional
xxx Rate (Based on the tax (Based on a fixed
Provided, That minimum wage earners as defined in table) rate of 8%)
Section 22(HH) of this Code shall be exempt from the
payment of income tax on their taxable income: Allowed to claim the Only allowed to
Provided, further, That the holiday pay, overtime pay, deductions claim until
night shift differential pay and hazard pay received by P250,000 since
such minimum wage earners shall likewise be exempt (For income tax the 8% is based
from income tax. purposes, taxpayer on the gross
Deductions
can claim itemized sales or gross
Comment: The MWEs did not benefit from TRAIN because they deductions such as receipts IN
were already exempted before TRAIN. The holiday pay, business expenses or EXCESS of
overtime pay, the night shift differential, and hazard pay received optional standard P250,000.
by these MWEs are also covered by the exemption. Under the deduction)
TRAIN Law, MWEs are also exempted to the 13th month pay Liable separately
and other benefits up to P90,000. Any excess of the P90,000 apart from the
ceiling will be taxed under normal income tax rates (0-35%). schedular rates for
income tax purposes
January 19, 2021 (36:22 – 1:12:43) | Cavin Jhon M. Cabarlo Liable only for
Note: The taxpayer one tax rate.
TYPES OF INDIVIDUAL INCOME TAXPAYERS will pay two taxes
1. Compensation Income Earners The 8% tax rate
2. Self-employed [1] For his income is a substitute for
Percentage Tax
taxes based on the schedular tax
3. Professionals Liability schedular tax rates rates for income
4. Mixed Income Earners
tax purposes and
[2] Other percentage
other percentage
COMPENSATION INCOME EARNERS tax (Not VAT because
taxes.
the taxpayer is not
Compensation Income Earners are subject to tax under the
graduated rates from 0%-35% under Section 24(A)(2)(a). VAT-registered and
gross sales does not
exceed the VAT
PURELY SELF-EMPLOYED OR PROFESSIONALS threshold)
The following conditions must be met in order for the tax option
discussed subsequently to apply:
1. Taxpayer is purely self-employed individual and/or of a MIXED INCOME EARNERS
professional; Mixed income earners are those who are earning income from
2. Gross sales or gross receipts and other non-operating both compensation and from self-employment or practice of
income of the taxpayer does not exceed value-added profession. For mixed income earners, the income tax rates
tax threshold of P3,000,000. applicable are:

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 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA 26
4 Manresa | SY 2020-2021

1. The compensation income shall be subject to tax under [b] 8% Rate WITH
the graduated rates from 0% - 35% under Sec. P250,000 deduction
24(A)(2)(a) – This is the same rate applicable to
compensation income earners. [2] VAT-registered OR
gross sales or receipts
2. The income from business or practice of profession exceed P3 Million
shall be subjected to: (subject to VAT):
a. If gross sales/receipts and other non-
operating income does not exceed the VAT [a] Schedular rates
threshold of P3 Million shall have the option to of 0% - 35%
be taxed at:
i. 8% income tax on gross sales or AND
gross receipts and other non-
operating income in lieu of the [b] 12% VAT
graduated rates 0% - 35% under
Sec. 24(A)(2)(a) for income tax and [1] For Compensation Income: Schedular
the percentage tax under Sec. 116 rates of 0% - 35% (Based on the tax table)
of the NIRC; or
AND
- No deduction of P250,000
here since it is already [2] For Business Income or Practice of
consumed under the Profession
compensation income. If
you look at the tax table for [A] IF NOT SUBJECT TO VAT:
compensation income, the
taxpayer is exempt up to [a] Schedular rates of 0% - 35%
P250,000. Thus, the Mixed Income
deduction is applied in the Earner OR
compensation income and
not here anymore. [b] 8% Rate WITHOUT P250,000
deduction
ii. The graduated rates 0% - 35%
under Sec. 24(A) of the NIRC. [B] IF SUBJECT TO VAT:
b. If gross sales/gross receipts and other non-
operating income exceeds the VAT threshold [a] Schedular rates of 0% - 35%
of P3 Million shall subject to the graduated
rates 0% - 35% under Sec. 24(A)(2)(a) of the AND
NIRC. Further, the taxpayer is also subject to
VAT. [b] 12% VAT

TRANSCRIBER’S SUMMARY:
Compensation Business or Practice of
Taxpayer
Income Profession
Schedular rates
Compensation of 0% - 35% Not Applicable
Income Earner (Based on the
tax table)
[1] Not VAT-registered
AND gross sales or
receipts do not exceed
P3 Million (not subject
to VAT):
Purely Self-
Employed or Not Applicable [a] Schedular rates
Professionals of 0% - 35% AND
Other Percentage
Taxes (OPT)

OR

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 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA 27
4 Manresa | SY 2020-2021

Table 2 | TAXATION ON CORPORATE INCOME (2018) AS AMENDED BY RA 10963 [TRAIN]

NONRESIDENT FOREIGN
CRITERIA DOMESTIC CORPORATIONS RESIDENT FOREIGN CORPORATIONS
CORPORATIONS
SOURCES OF TAXABLE INCOME Within and without the Philippines Within the Philippines Within the Philippines
INCOME IN GENERAL TAXABLE INCOME TAXABLE INCOME TAXABLE INCOME
Normal Tax Rate Normal Tax Rate Normal Tax Rate

ALL OTHER INCOME NOT SUBJECT 30% effective 30% effective 30% effective
TO PREFERENTIAL/SPECIAL RATE January 1, 2009 January 1, 2009 January 1, 2009
AND INCOME WITHOUT OF DOMESTIC (with MCIT application) (with MCIT application)
CORPORATIONS
CAPITAL GAINS WITHIN

1. Capital gains on sale of shares

of stocks not traded at the Not Over P100K – 5% Not Over P100K – 5%
15%
stock exchange On any amount in excess of P100K – 10% On any amount in excess of P100K – 10%

Net capital gains:

2. Percentage tax on sale of

shares of stock traded in the
local stock exchange.
6/10 of 1%* 6/10 of 1%* 6/10 of 1%*
Based on selling price (Sec.
127 NIRC)

3. Capital gains on sale or

exchange or disposition of
6% of Selling Price or FMV, whichever is Same as domestic 30% final tax**
lands and/or buildings located higher 6% SP or FMV Effective Jan. 2009
in the Philippines

4. Net capital gains on sales or

exchange or disposition of
lands and/or buildings located Normal tax rate (30%) Not taxable Not taxable
outside the Philippines

5. International Carriers - GR: 2 ½% on Gross Philippine Billings -

Exception: Tax Treaty granting exemption
on the basis of reciprocity.
6. Offshore Banking Units (OBU) - Exempted -

7. Branch Profit Remittances - 15% of profits applied for remittance -

8. Regional Operating - 10% of taxable income -

Headquarters

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 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA 28
4 Manresa | SY 2020-2021

9. Regional or Area Headquarters - Exempted -

* 6/10 of 1% tan on sale of shares of stock traded in local stock exchange is a percentage tax not on income tax. Its payment will exempt the transaction from income tax.
** Sale on real property by nonresident foreign corporation is subject to a final tax of 30% based on gain by Jan. 2009 (RA 9337). Sale of real property outside by resident citizen and domestic corporation is
subject to normal rate based on gain.

Table 3 | PASSIVE INCOME WITHIN

NONRESIDENT FOREIGN
CRITERIA DOMESTIC CORPORATIONS RESIDENT FOREIGN CORPORATIONS
CORPORATIONS
Per Dean:
15%
1. Interest from depository bank Sec. 27 D(1);
15%
under the expanded foreign Sec. 28 A(7)(a) Tax Exempt
Sec. 27 D(1);
currency deposit system Sec. 27 D(3)
Sec. 28 A(7)(a)
Per Codal:
7.5%
Sec. 28 A(7)(a)
2. Royalties, Yield or monetary
substitutes from deposit
substitutes, trust funds and 20% 20% Normal Corporate Income Tax at 30%
similar arrangements.

3. Interest on currency bank deposit

20% 20% Normal Corporate Income Tax at 30%
4. Cash/Property Dividends 0% 0% 30%
(inter-corporate dividends) (inter-corporate dividends) 15% if entitled to a tax sparing credit

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 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
TAXATION ON CORPORATE INCOME
SOURCES OF TAXABLE INCOME FOR
CORPORATIONS
1. Domestic Corporations are taxable for all sources of
income within and without the Philippines just like
resident citizens.
2. Foreign Corporations, whether resident or
nonresident, are taxable for the income derived within
the Philippines just like alien individuals.
INCOME IN GENERAL
INCOME IN GENERAL
Rules:
1. All types of corporations are taxable on income derived
WITHIN the Philippines at 30% effective January 1,
2009.
2. Domestic and resident foreign corporations are taxed
on net income (with benefit of deductions) while
nonresident foreign corporations are taxed at gross (no
deductions).
3. Only domestic corporations are taxable for income
derived WITHOUT the Philippines at 30% effective
January 1, 2009 based on net income.
4. Domestic and resident foreign corporations have
Minimum Corporate Income Tax (MCIT) application
while nonresident foreign corporations have none.
5. Some corporations are subject to a preferential rate
such as those imposed on capital gains or special rate
of 10% tax rate imposed on non-profit educational
institutions and hospitals.
CAPITAL GAINS WITHIN THE PHILIPPINES
1. Capital gains on sale of shares of stocks NOT
TRADED at the stock exchange
a. Domestic corporations shall be subject to a
preferential tax rate of 15% based on net
capital gains.
b. Resident and Nonresident Foreign
Corporations shall be subject to the following
rates based on the capital gains:
i. Not Over P100K – 5%
ii. On any amount in excess of P100K – 10%
Problem: What is the tax rate for capital gains on sale
of shares of stocks not traded at the stock exchange
earned by a domestic corporation outside the
Philippines?
Answer: The capital gains of a domestic corporation
earned outside the Philippines shall be subject to the
30% tax rate. The preferential tax rate of 15% is only
applicable to gains WITHIN the Philippines. Other
types of corporations are not taxable for income
derived outside the Philippines.
2. Percentage tax on sale of shares of stock TRADED
in the local stock exchange
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All types of corporations, whether domestic or foreign,
shall be subject to a preferential tax rate of 6/10 of 1%
based on the selling price (Sec. 127 of NIRC).
For percentage tax on sale of shares of stock traded in
the stock exchange earned by a DOMESTIC
CORPORATION, the income shall be added to the
regular income taxed at 30%.
3. Capital gains on sale or exchange or disposition of
lands and/or buildings located in the Philippines
Domestic and resident foreign corporations are taxed
at 6% of the Selling Price or the Fair Market Value
whichever is higher.
Nonresident foreign corporations are taxed at 30% final
tax effective January 2009.
4. Net capital gains on sales or exchange or
disposition of lands and/or buildings located
OUTSIDE the Philippines
Only domestic corporations are taxed for income
outside the Philippines based on normal income tax.
Therefore, the capital gains on sale of lands and/or
buildings outside the Philippines by a domestic
corporation is taxed at 30% normal tax rate. Foreign
corporations, whether resident or nonresident, are not
taxable.
RESIDENT FOREIGN CORPORATIONS SUBJECT TO
PREFERENTIAL RATES
5. International Carriers
General Rule: Resident foreign corporations which are
international carriers will be taxed at 2 ½% based on
Gross Philippines Billings.
Exception: Resident foreign corporations is exempted
if the Philippines is a signatory to a treaty granting them
exemption on the basis of reciprocity.
Amendment by TRAIN:
International carriers doing business in the Philippines
may avail of a preferential rate or exemption from the
tax imposed on their gross revenue derived from the
carriage of persons and their excess baggage on the
basis of an applicable tax treaty or international
agreement to which the Philippines is a signatory or on
the basis of reciprocity such that an international
carrier, whose home country grants income tax
exemption to Philippine carriers, shall likewise be
exempt from the tax imposed [Sec. 28(A)(3) of NIRC
as amended by RA 10963].
6. Offshore Banking Units (OBU)
Offshore banking units are exempted from income tax.
7. Branch Profit Remittances
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA 30
4 Manresa | SY 2020-2021

b. Resident Foreign Corporation – Taxed at 20%

This applies to resident foreign corporations which c. Nonresident Foreign Corporation – Normal
have branch offices in the Philippines. Once they remit Corporate Income Tax at 30%
their branch profits to the head office located abroad,
the remittances will be subject to a tax of 15% based 4. Cash/Property Dividends
on the total profits applied or earmarked for remittance
without any deductions. a. Domestic Corporation – 0% as inter-corporate
dividends
8. Regional Operating Headquarters b. Resident Foreign Corporation – 0% as inter-
corporate dividends
Regional operating headquarters shall mean branch c. Nonresident Foreign Corporation – 30% or 15%
established in the Philippines by multinational if entitled to a tax sparing credit
companies which are engaged in operational activities
such as general administration and planning, Tax Sparing Credit - This tax-sparing credit
procurement of raw materials and components, provision allows the reduction of the 30% tax rate
corporate finance advisory services and the like [Sec. to 15%, if the country in which the nonresident
22(EE) of NIRC as amended by TRAIN]. foreign corporation is domiciled allows a credit
against the tax due from the nonresident foreign
Regional operating headquarters are taxable at 10% corporation taxes deemed to have been paid in the
based on their taxable income. Philippines equivalent to the difference between
the regular tax rate and the 15 percent tax on
9. Regional or Area Headquarters dividends.

Regional or area headquarters shall mean branch
established in the Philippines by multinational
companies and which headquarters do not earn or
derive income from the Philippines and which act as a
supervisory, communications and coordinating center
for their affiliates, subsidiaries, or branches in the Asia-
Pacific Region and other foreign markets [ Sec. 22(DD)
of NIRC as amended by TRAIN].
Regional or area headquarters shall not be subject to
income tax.
PASSIVE INCOME
PASSIVE INCOME WITHIN THE PHILIPPINES
1. Interest from depository bank under the expanded
foreign currency deposit system
a. Domestic Corporation - Taxed at 15% on the
income received
b. Resident Foreign Corporation – Taxed at 15%
(Per Dean’s Table) but 7.5% (Per Codal) on the
income received
c. Nonresident Foreign Corporation – Tax exempt
2. Royalties, Yield or monetary substitutes from
deposit substitutes, trust funds and similar
arrangements
Problem: What is the tax rate for the passive income earned by
a domestic corporation on sources outside the Philippines?
Answer: The passive income earned outside the Philippines
shall be added to the gross income subject to the 30% normal
corporate income tax rate.
GENERAL PROFESSIONAL
PARTNERSHIPS
Section 26. Tax Liability of Members of General
Professional Partnerships. – A general professional
partnership as such shall not be subject to the income tax
imposed under this Chapter. Persons engaging in business as
partners in a general professional partnership shall be liable for
income tax only in their separate and individual capacities.
For purposes of computing the distributive share of partners,
the net income of the partnership shall be computed in the same
manner as a corporation.
Each partner shall report as gross income his distributive share,
actually or constructively received, in the net income of the
partnership.
General Professional Partnership (GPP) are those formed for
the sole purpose of exercising a common profession and no part
of income of which is derived from engaging in any trade or
business.

a. Domestic Corporation - Taxed at 20% Rules:

1. The GPP is not a taxable entity. Thus, it is not subject
b. Resident Foreign Corporation – Taxed at 20%
c. Nonresident Foreign Corporation – Normal to income tax. However, it is required to file an Annual
Information Return which consists of the details of its
Corporate Income Tax at 30%
income and deductions for the year.
2. The professionals/partners shall be taxable on their
3. Interest on currency bank deposit
respective shares in the distributive net income of the
GPP.
a. Domestic Corporation - Taxed at 20%

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 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
MINIMUM CORPORATE INCOME TAX
Section 27 (E). Minimum Corporate Income Tax on
Domestic Corporations.
(1) Imposition of Tax. - A minimum corporate income tax of
two percent (2%) of the gross income as of the end of the
taxable year, as defined herein, is hereby imposed on a
corporation taxable under this Title, beginning on the fourth
taxable year immediately following the year in which such
corporation commenced its business operations, when the
minimum income tax is greater than the tax computed under
Subsection (A) of this Section for the taxable year.
RATIONALE
MCIT is imposed as a corrective measure to ensure minimum
contribution. Corporations use the previous tax system to evade
income tax by declaring net losses resulting to no tax liability.
However, the law recognizes the reality that newly-formed
corporations suffer losses on its first few years of formation.
Thus, the MCIT applies only beginning on the fourth year from
the commencement of its operations.
APPLICABILITY OF MCIT
1. MCIT applies only to:
a. Domestic Corporation and
b. Resident Foreign Corporation
2. It can be availed of beginning on the fourth (4th) taxable
year immediately following the year in which such
corporation commenced its business operations.
As to new corporations, MCIT will apply beginning the
4th taxable year in which the corporation commenced
its business.
3. The MCIT must be greater than the Normal Corporate
Income Tax.
RATES
Corporations subject of the MCIT shall observe the following:
1. Compute the taxable corporate income tax based on
a. Normal/Regular Corporate Income Tax
(NCIT) at 30% of the taxable income and
b. 2% of gross income for the MCIT
2. Pay the tax whichever is higher
3. The MCIT shall be applied in the corporate quarterly
returns as well as in the corporate annual consolidated
return.
RELIEFS FROM MCIT
During the pendency of the application of the MCIT, the taxpayer
may ask for the may ask for the suspension of the MCIT in case
of losses on account of prolonged labor dispute, force majeure,
or legitimate business reverses.
IMPROPERLY ACCUMULATED
EARNINGS TAX
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Section 29. Imposition of Improperly Accumulated
Earnings Tax
(A) In General. - In addition to other taxes imposed by this Title,
there is hereby imposed for each taxable year on the improperly
accumulated taxable income of each corporation described in
Subsection B hereof, an improperly accumulated earnings tax
equal to ten percent (10%) of the improperly accumulated
taxable income.
IMPROPERLY ACCUMULATED EARNINGS TAX
The Improperly Accumulated Earnings Tax (IAET) operates as
a sur tax or penalty tax imposed on corporations improperly
accumulating earnings beyond the reasonable needs of the
business. While corporations are allowed to accumulate
earnings, the accumulation becomes unreasonable when there
is no legitimate business need for it such as future expansion.
This penalty is imposed because when corporations improperly
accumulate its earnings, it means that there are no dividends
declared in favor of its stockholders. These dividends are
generally subject to a 10% final tax. Without the declaration of
dividends, the Government will lose an earning from the 10% tax
imposed on dividends. Thus, the IAET serves as a measure to
recover taxes that the Government could have earned through
dividends. That is the reason why IAET is 10% based on the
improperly accumulated taxable income which corresponds to
the 10% final tax on dividends it loses.
RATE OF IAET
The IAET is 10% based on the improperly accumulated taxable
income.
COVERAGE OF IAET
Section 29. Imposition of Improperly Accumulated
Earnings Tax
(B) Tax on Corporations Subject to Improperly
Accumulated Earnings
Tax. –
(1) In General. – The improperly accumulated earnings
tax imposed in the preceding Section shall apply to
every corporation formed or availed for the purpose of
avoiding the income tax with respect to its
shareholders or the shareholders of any other
corporation, by permitting earnings and profits to
accumulate instead of being divided or distributed.
(2) Exceptions. – The improperly accumulated earnings
tax as provided for under this Section shall not apply
to:
(a) Publicly-held corporations;
(b) Banks and other nonbank financial
intermediaries; and
(c) Insurance companies.
General Rule: IAET applies to every corporation
Exception:
1. Publicly-held corporations;
2. Banks and other nonbank financial intermediaries;
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
3. Insurance companies
4. Partnerships
5. Insurance companies
6. Non-taxable joint venture
7. Enterprises duly registered with PEZA
8. Foreign corporations
“REASONABLE NEEDS OF THE BUSINESS”
Reasonable needs of the business pertains to any reasonably
anticipated needs of the business such as business expansion,
acquisition of property or machineries, improvement of facilities,
funding working capital among others.
January 19, 2021 (1:12:44 – end) | Christine L. Paulma
In funding expansions working capital, you have the option
either –
a. to source it from the corporation from your own funds (retained
earnings); or
b. to borrow capital (by acquiring a loan or borrow money from
financial institutions or from the banks).
If your retained earnings have been improperly accumulated,
then you may be hit with that penalty; if you could not justify the
reasonableness of the accumulation.
DEFINITION OF IAET
Improperly accumulated earnings is permitting earnings and
profits to accumulate instead of being divided or distributed for
the purpose of avoiding income tax to the shareholders.
Kasi, yung distribution of dividends, meron yang corporate
income tax. Kung individual ang recipient niyan, 10%. If
corporation ang recipient, it's a zero inter-corporate dividends
tax. The burden of proof to determine the need of the
accumulation and the reasonable needs rests upon the
taxpayer.
CORPORATIONS EXEMPTED FROM TAX
Section 30. Exemptions from Tax on Corporations. – The
following organizations shall not be taxed under this Title in
respect to income received by them as such:
(A) Labor, agricultural or horticultural organization not
organized principally for profit;
(B) Mutual savings bank not having a capital stock represented
by shares, and cooperative bank without capital stock
organized and operated for mutual purposes and without profit;
(C) A beneficiary society, order or association, operating for the
exclusive benefit of the members such as a fraternal
organization operating under the lodge system, or mutual aid
association or a nonstock corporation organized by employees
providing for the payment of life, sickness, accident, or other
benefits exclusively to the members of such society, order, or
association, or nonstock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the
benefit of its members;
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(E) Nonstock corporation or association organized and
operated exclusively for religious, charitable, scientific, athletic,
or cultural purposes, or for the rehabilitation of veterans, no part
of its net income or asset shall belong to or inure to the benefit
of any member, organizer, officer or any specific person;
(F) Business league chamber of commerce, or board of trade,
not organized for profit and no part of the net income of which
inures to the benefit of any private stock-holder, or individual;
(G) Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire insurance company,
mutual ditch or irrigation company, mutual or cooperative
telephone company, or like organization of a purely local
character, the income of which consists solely of assessments,
dues, and fees collected from members for the sole purpose of
meeting its expenses; and
(K) Farmers', fruit growers', or like association organized and
operated as a sales agent for the purpose of marketing the
products of its members and turning back to them the proceeds
of sales, less the necessary selling expenses on the basis of
the quantity of produce finished by them;
Notwithstanding the provisions in the preceding paragraphs, the
income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or
from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax
imposed under this Code.
Please take note of the exception of the non-stock, non-profit
educational institutions because their exemption is not under
Section 30 of the NIRC but under the Constitution. All revenues
and assets of the non-stock, non-profit educational institutions
are exempted from tax – including yung nag import sila, from
customs duties.
Application of the exemption: they are exempted from the
income raised or generated from its corporate or primary
purpose.
CIR v. CA and YMCA
G.R. No. 124043, October 14, 1998
Facts: YMCA is a non-stock, non-profit institution, which
conducts various programs and activities that are beneficial to
the public, especially the young people, pursuant to its religious,
educational and charitable objectives.
In 1980, YMCA earned, among others, an income of
P676,829.80 from leasing out a portion of its premises to small
shop owners, like restaurants and canteen operators, and
P44,259.00 from parking fees collected from non-members. The
CIR issued an assessment to private respondent, in the total
amount of P415,615.01 including surcharge and interest, for
deficiency income tax, deficiency expanded withholding taxes
on rentals and professional fees and deficiency withholding tax
on wages. Private respondent formally protested the
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
assessment and, as a supplement to its basic protest, filed a
letter dated October 8, 1985. In reply, the CIR denied the claims
of YMCA.
Issue: Is the income derived from rentals of real property owned
by YMCA — established as "a welfare, educational and
charitable non-profit corporation" — subject to income tax under
the National Internal Revenue Code (NIRC) and the
Constitution?
Ruling: Yes.
Laws allowing tax exemption are construed strictissimi juris.
Hence, for the YMCA to be granted the exemption it claims
under the aforecited provision, it must prove with substantial
evidence that (1) it falls under the classification non-stock, non-
profit educational institution; and (2) the income it seeks to be
exempted from taxation is used actually, directly, and
exclusively for educational purposes. However, the Court notes
that not a scintilla of evidence was submitted by private
respondent to prove that it met the said requisites.
BELLOSILLO, dissenting:
In order to claim exemption from income tax, a corporation or
association must show that it is organized and operated
exclusively for religious, charitable, scientific, athletic, cultural or
educational purposes or for the rehabilitation of veterans, and
that no part of its income inures to the benefit of any private
stockholder or individual. The main evidence of the purpose of
a corporation should be its articles of incorporation and by-laws,
for such purpose is required by statute to be stated in the articles
of incorporation, and the by-laws outline the administrative
organization of the corporation which, in turn, is supposed to
insure or facilitate the accomplishment of said purpose.
Note: underlined part is what was discussed by Dean and
included in his slides.
TESTS APPLIED FOR EXEMPTION
1. Organizational Test
2. Operational Test
3. Inurement Test or the Principle of No Inurement
Under Section 30(E), these are non-stock, non-profit
corporations. Iba rin yun non-stock non-profit educational
institutions. For purposes of the exemption, these corporations
which apply for tax exemption ruling under Section 30(E) of the
NIRC, as amended, must meet the following tests:
Organizational Test – requires that the corporation or
association's constitutive documents exclusively limit its
purposes to one or more of those described in paragraph (E) of
Section 30 of the NIRC, as amended
Sa paragraph (E) are these non-stock corporations organized
for religious, charitable, scientific, athletic, cultural, or for the
rehabilitation of veterans, whhere no part of the income shall
belong or inure to the benefit of any member, organizer, officer,
or specific person. So that is the first test - that the corporation
is non-stock, non-profit on the basis of its documents like the
Articles of Incorporation.
Operational Test – mandates that the regular activities of the
corporation or association be exclusively devoted to the
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accomplishment of the purposes specified in paragraph (E) of
Section 30 of the NIRC, as amended. A corporation or
association fails to meet this test if a substantial part of its
operations may be considered 'activities conducted for profit'.
Inurement Test or the Principle of No Inurement – all the net
income or assets of the NSNP (non-stock, non-profit)
corporation or association must be devoted to its purpose/s and
no part of its net income or asset accrues to or benefits any
member or specific person. Any profit must be plowed back and
must be devoted or used altogether for the furtherance of the
purpose for which the corporation or association was organized.
In order to claim exemption from income tax, a corporation or
association must show that it is organized and operated
exclusively for religious, charitable, scientific, athletic, cultural or
educational purposes or for the rehabilitation of veterans, and
that no part of its income inures to the benefit of any private
stockholder or individual. So ito yung inurement test for the
exemption under Section 30 (E).
EXCEPTION TO THE EXEMPTION
When are the NSNP corporations taxable?
While you are exempted if you fall under the categories under
Section 30 (A-K), so you have a long list there of the exempted
corporations. However, you have the last paragraph of Section
30 –
"Notwithstanding the provisions in the preceding paragraphs,
the income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or
from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax
imposed under this Code."
Notwithstanding the provisions in the preceding paragraphs
(while yes, you are an exempted corporation under Section 30
by reason of the primary purpose you were created) but in the
event there is income of whatever kind and character of the
foregoing organizations from any of their properties, real or
personal (meaning nagbenta sila ng kanilang properties) or from
any of their activities conducted for profit (meaning yung
kanilang parking lot - they collect parking fees for those who will
be using their parking lots. Pero sa members nila free yung
parking; pero pag hindi ka member, sisingilin ka ng parking fee.)
So there is an activity conducted for profit. All this income will be
turned back and plowed back to the corporation (to the non-
stock, non-profit corporation). Will it be exempted? No. It will still
be subject to tax under the income tax provisions.
...regardless of the disposition made of such income (hindi mag
matter kung binalik mo sa iyong non-profit activities or non-profit
purpose, it will not matter). That income will be subject to the
corporate income tax. It will be subject to tax. Now, kung real
properties yan, mag a-apply yung capital gains tax. Kung hindi
yan subject to a preferential rate, then we apply the regular
corporate income tax.
Now take note, in the case again of the non-stock, non-profit
educational institutions, they are exempted on the basis of the
exemption under the Constitution, not on the basis of the NIRC.
So in other words, in the case of non-stock, non-profit
educational institutions, pag nagparenta sila ng kanilang
commercial spaces, the income there, if they are used for
educational purpose, it will be covered by the exemption. Unlike
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
the other non-stock, non-profit corporation na even if ginamit nila
sa kanilang exempted purpose, it will still be taxable. Yun yung
distinction.
FRINGE BENEFIT TAX
Section 33. Special Treatment of Fringe Benefit. –
(A) Imposition of Tax. – Effective January 1, 2018 and onwards,
a final tax of thirty-five percent (35%) is hereby imposed on the
grossed-up monetary value of fringe benefit furnished or
granted to the employee (except rank and file employees
defined herein) by the employer, whether an individual or a
corporation (unless the fringe benefit is required by the nature
of, or necessary to the trade, business or profession of the
employer, or when the fringe benefit is for the convenience or
advantage of the employer). The tax herein imposed is payable
by the employer which tax shall be paid in the same manner as
provided for under Section 57 (A) of this Code. The grossed-up
monetary value of the fringe benefit shall be determined by
dividing the actual monetary value of the fringe benefit by sixty-
five percent (65%) effective January 1, 1998; sixty-seven
percent (67%) effective January 1, 1999; and sixty-eight
percent (68%) effective January 1, 2000 and thereafter:
Provided, however, That fringe benefit furnished to employees
and taxable under Subsections (B), (C), (D) and (E) of Section
25 shall be taxed at the applicable rates imposed thereat:
Provided, further, That the grossed -up monetary value of the
fringe benefit shall be determined by dividing the actual
monetary value of the fringe benefit by the difference between
one hundred percent (100%) and the applicable rates of income
tax under Subsections (B), (C), (D), and (E) of Section 25. [4]
(B) Fringe Benefit Defined. - For purposes of this Section, the
term 'fringe benefit' means any good, service or other benefit
furnished or granted in cash or in kind by an employer to an
individual employee (except rank and file employees as defined
herein) such as, but not limited to, the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and
others;
(5) Interest on loan at less than market rate to the
extent of the difference between the market rate and
actual rate granted;
(6) Membership fees, dues and other expenses
borne by the employer for the employee in social
and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his
dependents; and
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(10) Life or health insurance and other non-life
insurance premiums or similar amounts in excess of
what the law allows.
(C) Fringe Benefits Not Taxable. - The following fringe benefits
are not taxable under this Section:
(1) Fringe benefits which are authorized and
exempted from tax under special laws;
(2) Contributions of the employer for the benefit of
the employee to retirement, insurance and
hospitalization benefit plans;
(3) Benefits given to the rank and file employees,
whether granted under a collective bargaining
agreement or not; and
(4) De minimis benefits as defined in the rules and
regulations to be promulgated by the Secretary of
Finance, upon recommendation of the
Commissioner.
The Secretary of Finance is hereby authorized to promulgate,
upon recommendation of the Commissioner, such rules and
regulations as are necessary to carry out efficiently and fairly
the provisions of this Section, taking into account the peculiar
nature and special need of the trade, business or profession of
the employer.
We discussed earlier the tax treatment of the fringe benefit tax
relative to the fringe benefits received by employees from
employers where it will not be taxed if it is for the convenience
of the employer or when it is necessary or useful to the business
of an employer.
DEFINITION OF FRINGE BENEFIT
Fringe benefit are any goods, service or other benefit furnished
or granted in cash or in kind by an employer to an individual
employee - whether the employer is corporate or individual.
TREATMENT OF FRINGE BENEFIT
In the treatment of the fringe benefit tax, if the recipients of the
fringe benefits are –
a. rank and file – fringe benefit is taxable and forms part of
compensation income
except: when the fringe benefit is for the convenience of the
employer or required by the nature of, or necessary to the trade,
business or profession (then, it is not taxable to the employee)
b. supervisory & managerial (executives, managers) – fringe
benefit is subject to the rules under Section 33 of the NIRC
So the fringe benefit tax will apply to the fringe benefits that will
be received by your supervisory and managerial employees.
Yung sa rank and file, it will be the rules on compensation
income that will apply.
In the case of supervisory & managerial, the fringe benefit forms
part of the compensation income but taxable to the employer.
The employer pays the tax.
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
In tax treatment of the fringe benefit of the rank and file, i-add up
lang siya dun sa kanyang regular income, subject to 0-35%. But
in the case of the supervisory and managerial, the fringe benefit,
while it forms part of the compensation income, the employer is
the one who pays the tax. But the tax is not based on the actual
monetary value but the grossed-up monetary value of the
benefit.
!"# = %&'(()* − ,- /'0)12&3 4256) '7 !" × &21) (35%)
>?1625 /'0)12&3 4256) '7 !"
%/4 =
65%
Illustration:
If the actual monetary value of the FB is 1 Million, that 1 Million
is not the taxable base. It will be divided by 65% to arrive at the
GMV. And when you have now, the GMV, that is now the tax
base of the 35%. And that will be the fringe benefit tax. The
employer pays the tax.
FRINGE BENEFIT NOT SUBJECT TO FBT
The fringe benefit which is not subject to the fringe benefit tax
(meaning both to rank and file or supervisory and managerial)
are those fringe benefits which are –
a. authorized and exempted under special laws;
b. contributions of the employer in the retirement,
insurance & hospitalization benefit plans;
c. benefits given to rank-and-file (under CBA or not);
d. de minimis benefits
DE MINIMIS BENEFITS
The de minimis benefits are what we call benefits in small
amounts. Whether these are received by managerial or rank-
and-file, exempted yan siya from income tax.
1. Monetized unused vacation leave credits of employees not
exceeding ten (10) days during the year; monetized value of
vacation & sick leave credits paid to government employees;
2. Medical cash allowance to dependents of employees not
exceeding P1,500 per semester or P250 per month;
3. Rice subsidy of P2,000 or one (1) sack of 50-kg rice per month
amounting to not more than P2,000;
4. Uniform and clothing allowance not exceeding P6,000 per
annum;
5. Actual yearly medical benefits not exceeding P10,000 per
annum;
6. Laundry allowance not exceeding P300 per month;
7. Employee achievement awards, e.g. for length of service or
safety achievement, which must be in the form of a tangible
personal property other than cash or gift certificate, with an
annual monetary value not exceeding P10,000 received by the
employee under an established written plan which does not
discriminate in favor or highly paid employees;
8. Gifts given during Christmas and major anniversary
celebrations not exceeding P5,000 per employee per annum;
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9. Benefits received by an employee by virtue of a collective
bargaining agreement (CBA) and productivity incentive
schemes provided that the total monetary value received from
both CBA and productivity incentive schemes combined does
not exceed P10,000 per employee per taxable year;
10. Daily meal allowance for overtime work not exceeding
twenty-five percent (25%) of the basic minimum wage.
DEDUCTIONS
In an income tax system which the State may create or evolve,
the State has the discretion in determining what would be its
income tax system - whether it will tax the income at gross
without the benefit of deductions or the option to avail of the
deductions. In our income tax system, we grant deductions. We
allow taxpayers to avail of the deductions especially those who
are engaged in business or practice of profession.
1. Deductions are matters of legislative grace. These
are amounts which are authorized to be charged
against gross income to arrive at the taxable income.
Principle: Taxpayer seeking deduction must point to a provision
of the law authorizing the deduction.
In other words, there is a strict construction relative to the
availment of deductions. Kapag mag avail ka ng deductions, you
must be able to point out that there is a law which authorizes you
to claim the deductions. He must be able to prove that he is
entitled to the deduction allowed.
2. Classifications
A. Those arising from business, trade or profession
B. Exemptions [Personal & Additional Exemptions - have been
repealed by RA 10963 (TRAIN)]
So, under TRAIN, wala na tayong exemptions which we call
personal and additional exemptions.
3. Deductions from Trade, Business, or Profession
a. Itemized Deductions: Sec. 34 (A) to (J);
b. Optional Standard Deduction (OSD): Sec 34 (L);
c. Special Deductions: Sec. 37; Sec. 34 (M) [Repealed by
RA 10963 (TRAIN)] & Sec. 61 (A)
Wala na tayong deduction under Section 34 (M) pero you have
still a deduction under Sec. 37, yung sa insurance. Sec. 61 yung
deduction of the distribution of income from the estates and
trusts.
4. Affected Taxpayers
Who are the affected taxpayers for purposes of the deduction,
meaning who are the taxpayers allowed to avail?
For deduction on trade, business, or profession, you have:
- Citizens
- Resident Aliens
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA 36
4 Manresa | SY 2020-2021

- Domestic Corporations receipts, as the case maybe. In the case of a corporation

- Resident Foreign Corporations subject to tax under Sections 27(A) and 28 (A)(1), it may elect
a standard deduction in an amount not exceeding forty percent
They may avail either the itemized deduction or the OSD. (40%) of its gross income as defined in Section 32 of this Code.
Unless the taxpayer signifies in his return his intention to elect
But, the Non-Resident Alien Engaged in Trade and Business the optional standard deduction, he shall be considered as
(NRAETB) is allowed only to avail the itemized deduction, no having availed himself of the deductions allowed in the
OSD. preceding Subsections. Such election when made in the return
shall be irrevocable for the taxable year for which the return is
Also, to remember: if the taxpayer has the option to avail of the
made: Provided, That an individual who is entitled to and
itemized or the OSD, the availment should be made at the
claimed for the optional standard deduction shall not be
earliest. In other words, the earliest filing of the return, especially required to submit with his tax return such financial statements
those taxpayers engaged in business and practice profession is
otherwise required under this Code: Provided, further, That a
done quarterly. So at the earliest is the quarterly return of the general professional partnership and the partners comprising
current year. Once the taxpayer avails of the itemized such partnership may avail of the optional standard deduction
deductions in the quarterly return, itemized na yan forever during only once, either by the general professional partnership or the
the tax year. So, if he starts with OSD during the tax year, OSD partners comprising the partnership: Provided, finally, That
na yan tuloy-tuloy for the entire tax year. Hindi pwede na during
except when the Commissioner otherwise permits, the said
the tax year, sa first quarter itemized siya then sa second quarter
individual shall keep such records pertaining to his gross sales
OSD siya, etc. Hindi pwede yun.
or gross receipts, or the said corporation shall keep such
records pertaining to his gross income as defined in Section 32
Once you avail the manner of deduction, whether itemized or of this Code during the taxable year, as may be required by the
OSD, if you are allowed at that option, that will be the method of rules and regulations promulgated by the Secretary of Finance,
deduction that you're going to use during the tax year, including upon, recommendation of the Commissioner.
your quarterly returns. It becomes irrevocable during the tax
year.
Notwithstanding the provision of the preceding Subsections,
The Secretary of Finance, upon recommendation of the
Commissioner, after a public hearing shall have been held for
5. Itemized Deductions this purpose, may prescribe by rules and regulations, limitations
or ceilings for any of the itemized deductions under Subsections
(A) to (J) of this Section: Provided, That for purposes of
Section 34. Deductions from Gross Income – determining such ceilings or limitations, the Secretary of
Finance shall consider the following factors: (1) adequacy of the
(A) Expenses prescribed limits on the actual expenditure requirements of
each particular industry; and (2)effects of inflation on
(B) Interest
expenditure levels: Provided, further, That no ceilings shall
(C) Taxes
further be imposed on items of expense already subject to
(D) Losses ceilings under present law.
(E) Bad Debts
(F) Depreciation
OSD = 40% of gross sales or gross receipts
(G) Depletion
If corporations (whether domestic or resident foreign), OSD =
(H) Charitable and Other Contributions 40% of gross income
(I) Research & Development
(J) Pension Trusts There seems to be a disparity here. The 40% sa individuals, on
gross sales or gross receipts. Pero sa corporations, on the basis
of gross income.
So ito yung mga itemized deductions. So if you avail an itemized
deduction outside of this 34 (A) to (J), that will be disallowed.
Section 34 (A) is so broad kasi generic yan siya; expenses - 7. Special Deductions
business expenses. For as long as the expense would be
business, the covered na yan siya. You can avail of the Sec. 37: Insurance companies
deduction. Sec. 61 (A): Income distributed to the beneficiaries of the estates
or trust as allowed deduction
6. Optional Standard Deduction
Section 37. Special Provisions Regarding Income and
Deductions of Insurance Companies, Whether Domestic or
Sec. 34 (L): Allowed to individuals, except non-resident aliens
Foreign. -

Section 34. Deductions from Gross Income – (A) Special Deduction Allowed to Insurance Companies. -
In the case of insurance companies, whether domestic or
(L) Optional Standard Deduction (OSD). – In lieu of the foreign doing business in the Philippines, the net additions, if
deductions allowed under the preceding Subsections, an any, required by law to be made within the year to reserve funds
individual subject to tax under Section 24, other than a and the sums other than dividends paid within the year on policy
nonresident alien, may elect a standard deduction in an amount and annuity contracts may be deducted from their gross
not exceeding forty percent (40%) of his gross sales or gross
Banosan, Bayquen, Cabarlo, Coquilla, Dela Cerna, Dulay, Emuy, Manligoy, Paulma, Peroy, A., Pizarro, Publico, Puerin, Talon, Viola
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
income: Provided, however, That the released reserve be
treated as income for the year of release.
(B) Mutual Insurance Companies. - In the case of mutual fire
and mutual employers' liability and mutual workmen's
compensation and mutual casualty insurance companies
requiring their members to make premium deposits to provide
for losses and expenses, said companies shall not return as
income any portion of the premium deposits returned to their
policyholders, but shall return as taxable income all income
received by them from all other sources plus such portion of the
premium deposits as are retained by the companies for
purposes other than the payment of losses and expenses and
reinsurance reserves.
(C) Mutual Marine Insurance Companies. - Mutual marine
insurance companies shall include in their return of gross
income, gross premiums collected and received by them less
amounts paid to policyholders on account of premiums
previously paid by them and interest paid upon those amounts
between the ascertainment and payment thereof.
(D) Assessment Insurance Companies. - Assessment
insurance companies, whether domestic or foreign, may deduct
from their gross income the actual deposit of sums with the
officers of the Government of the Philippines pursuant to law,
as additions to guarantee or reserve funds.
SEC. 61. Taxable Income. - The taxable income of the estate
or trust shall be computed in the same manner and on the same
basis as in the case of an individual, except that:
(A) There shall be allowed as a deduction in computing the
taxable income of the estate or trust the amount of the income
of the estate or trust for the taxable year which is to be
distributed currently by the fiduciary to the beneficiaries, and the
amount of the income collected by a guardian of an infant which
is to be held or distributed as the court may direct, but the
amount so allowed as a deduction shall be included in
computing the taxable income of the beneficiaries, whether
distributed to them or not. Any amount allowed as a deduction
under this Subsection shall not be allowed as a deduction under
Subsection (B) of this Section in the same or any succeeding
taxable year.
(B) In the case of income received by estates of deceased
persons during the period of administration or settlement of the
estate, and in the case of income which, in the discretion of the
fiduciary, may be either distributed to the beneficiary or
accumulated, there shall be allowed as an additional deduction
in computing the taxable income of the estate or trust the
amount of the income of the estate or trust for its taxable year,
which is properly paid or credited during such year to any
legatee, heir or beneficiary but the amount so allowed as a
deduction shall be included in computing the taxable income of
the legatee, heir or beneficiary.
(C) In the case of a trust administered in a foreign country, the
deductions mentioned in Subsections (A) and (B) of this Section
shall not be allowed: Provided, That the amount of any income
included in the return of said trust shall not be included in
computing the income of the beneficiaries.
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Sec. 35 (A) is already repealed. Ang nag take place niyan is the
first P250,000 of your taxable income. Kasi yan yung exempted.
So your first P250,000 will answer to whatever personal and
additional exemptions you used to have prior to TRAIN.
Under TRAIN, when your taxable income let's say is P1 Million,
less P250,000 - yung P750,000 na yan will now be subject to
the tax at 0-35%.
So yung first P250,000, ibabawas. Built-in na yun daan sa rates
under Section 24.
Question by Student: Clarification on tax of corporations
specifically the capital gains tax on stocks that are not traded.
Ang pagkakaalam kasi namin Dean is ang 15% is applicable
only to domestic corporations because the rate for resident and
non-resident foreign remain unchanged to 5-10%.
Dean: Ang appreciation ko diyan, that (15%) will apply to all.
Note: Binawi ito ni Dean na answer sa next meeting. Yung old
pa rin ang mag apply na 5-10%.
January 26, 2021 (0:00 - 34:02) | Lorenzo A. G. Pizarro
As for the clarification sought regarding the rates of taxes imposed
on foreign corporations – due to the issuances made by the BIR, all
foreign corporations, whether resident or non-resident, are still
covered by the old rate/s [if the capital gain is not over P100,000
(5%); any amount in excess of P100,000 (10%)] as they are not
covered by the amendment.
While this may be a mere oversight on the part of the Legislature,
the un-amended provision, nonetheless, continues to be with force
and effect.
With respect to the CGT on the sale of shares of stock not traded in
the stock exchange, the amendment pertained only to domestic
corporations, and all individuals (rate = 15%).
DEDUCTIONS
You have the itemized deductions. You have under Section 34,
from (A) to (J), the different items of deductions which we
categorize as the “itemized deductions.”
Trade, Business, or Professional Expenses
We start with Section 34 (A), which is the deduction for trade,
business, or professional expenses.
(1) Ordinary and Necessary Trade, Business or Professional
Expenses. –
(a) In General. – There shall be allowed as
deduction from gross income all the ordinary and
necessary expenses paid or incurred during the
taxable year in carrying on or which are directly
attributable to, the development, management,
operation and/ or conduct of the trade, business or
exercise of a profession . . .
So, this item of deduction under Section 34 (A) has a very broad
coverage of an expense that can be claimed by those taxpayers
engaged in trade, business, or exercise of profession.
. . including:
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
(i) A reasonable allowance for salaries,
wages, and other forms of compensation
for personal services actually rendered,
including the grossed- up monetary value
of fringe benefit furnished or granted by the
employer to the employee: Provided, That
the final tax imposed under Section 33
hereof has been paid;
(ii) A reasonable allowance for travel
expenses, here and abroad, while away
from home in the pursuit of trade, business
or profession;
(iii) A reasonable allowance for rentals and/ or
other payments which are required as a
condition for the continued use or
possession, for purposes of the trade,
business or profession, of property to
which the taxpayer has not taken or is not
taking title or in which he has no equity
other than that of a lessee, user or
possessor;
(iv) A reasonable allowance for entertainment,
amusement and recreation expenses
during the taxable year, that are directly
connected to the development,
management and operation of the trade,
business or profession of the taxpayer, or
that are directly related to or in furtherance
of the conduct of his or its trade, business
or exercise of a profession not to exceed
such ceilings as the Secretary National Tax
Research Center 61 of Finance may, by
rules and regulations prescribe, upon
recommendation of the Commissioner,
taking into account the needs as well as
the special circumstances, nature and
character of the industry, trade, business,
or profession of the taxpayer: Provided,
That any expense incurred for
entertainment, amusement or recreation
that is contrary to law, morals, public policy
or public order shall in no case be allowed
as a deduction.
(b) Substantiation Requirements. – No deduction from
gross income shall be allowed under Subsection (A)
hereof unless the taxpayer shall substantiate with
sufficient evidence, such as official receipts or other
adequate records: (i) the amount of the expense
being deducted, and (ii) the direct connection or
relation of the expense being deducted to the
development, management, operation and/or
conduct of the trade, business or profession of the
taxpayer.
(c) Bribes, Kickbacks and Other Similar Payments. –
No deduction from gross income shall be allowed
under Subsection (A) hereof for any payment made,
directly or indirectly, to an official or employee of the
national government, or to an official or employee of
any local government unit, or to an official or
employee of a governmentowned or-controlled
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corporation, or to an official or employee or
representative of a foreign government, or to a
private corporation, general professional
partnership, or a similar entity, if the payment
constitutes a bribe or kickback
So you have an enumeration which includes salaries wages . . .
including the grossed-up monetary value of fringe benefit (the
fringe benefit tax that is charged to that – that is also a deductible
expense). . . allowance for rentals, for entertainment,
amusement, recreation (provided that the entertainment,
amusement or recreational activity is not contrary to law, morals,
public policy or public order), etc. . .
Then you have a requirement of substantiation. So, when you
claim a deduction under Section 34 (A), you must comply with
the substantiation requirement – which means that the expense
must be supported with an evidence of the expense like official
receipts, invoices, or other adequate records.
Expenses that are related to bribes, kickbacks or other similar
payments are disallowed. No deductions shall be allowed if the
payment constitutes bribes or kickbacks.
Requisities for deducibility of a business expense:
1. It must be ordinary and necessary;
2. It must be paid or incurred during the taxable year;
3. It must be paid or incurred in carrying on, or is directly
attributable to the development, management,
operation and/or conduct of, the trade, business, or
exercise of profession;
4. It must be substantiated by sufficient evidence, like
receipts, invoices, or other adequate records;
5. It must not be contrary to law, morals, public policy, or
public order; and
6. The tax required to be withheld on the expense paid or
payable must be shown to have been remitted to the
BIR.
So like in salaries and wage, there must be a corresponding
withholding because the law requires their withholding –
otherwise, if there is no withholding, then the expense will be
disallowed.
So, what is crucial is the first requirement – that the expense
must be ordinary and necessary.
When we say “ordinary,” it means it is a normal or usual expense
of the taxpayer. And when we say “necessary,” it means it is
useful and reasonable to the business.
An example is rentals for the office space – that is ordinary and
necessary. Expenses for office supplies consumed for the tax
year – that is also ordinary and necessary. Salaries and wages
of your workers and employees – also ordinary and necessary.
The grossed up monetary value of fringe benefits, in case you
extend fringe benefits to your managerial and supervisory
employees – that is also within the context of what is ordinary
and necessary.
An expense is considered as necessary if it is reasonable and
essential to the development, management, operation, or
conduct of the business or profession of the taxpayer. The
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
expense if necessary if it is intended to increase profit, or
minimize losses appropriate and helpful to the business.
An expense is said to be ordinary when it is normal in relation to
the business of the taxpayer and the surrounding
circumstances, and it is usual and normal to the business.
For example – a purchase of a delivery truck, or a motorcycle
for the use, let us say, of the collector. A delivery vehicle for the
servicing and delivery of articles to your customers. This
expense is necessary, for it is useful and reasonable. BUT is the
expense ordinary? The expense is no longer ordinary. While it
is necessary, it is not ordinary, therefore you cannot claim a
deduction for that under Section 34 (A). However, there is
another way of claiming deduction for that expense – that is, by
way of depreciation. In other words, there may be deductions
which may not fall under 34 (A) because they fail to comply with
the requirements that they must be ordinary and necessary. An
expense may be necessary but not ordinary. So, you may claim
the deduction in some other form, like the motorcycle in the
previous example, by way of depreciation (that is the method of
deduction).
Another example – advertising expense. Let’s say the taxpayer
entered into a 5-year contract with an advertising firm for
P10,000,000 to promote the products of the business. Now, is
the advertising expense worth P10,000,000 for 5 years ordinary
and necessary? Can you claim it as an outright deduction? The
answer is no. While the expense is necessary as it useful to the
business, it is not ordinary – because the benefit of that expense
is not only for one tax year; it extends for a period of 5 taxable
years. Similar to depreciation. The benefit of that expense is not
only for one tax year; it extends to the extent of the life of the
vehicle that will be used in the business.
In the case of the advertising expense worth P10,000,000 for 5
years, how will you now claim the deduction? The deduction can
be claimed on the basis of pro-rating, or allocating the amount
every taxable year for the 5 years.
So, let’s say that this year they were able to spend P1,000,000
of the P10,000,000 contract, then that P1,000,000 will be
considered as an ordinary expense to be deducted from that
amount of P10,000,000. So, there is a requirement of allocating
– you have to attribute – of the P10,000,000 contract, how much
was allocated for that taxable year? So, if that is the allocation
for that taxable year, then that expense now becomes ordinary.
Because that is now normal and usual, and directly attributable
to that taxable year.
Then for next year, there’s another allocation.
OR you may pro-rate it. If you pro-rate it on equal amounts then
that would be P10,000,000 divided by 5 years – that would be
P2,000,000 a year. Every year, you claim a P2,000,000
deduction of advertising expense because it now qualifies under
Section 34 (A) as an ordinary and necessary expense. So, this
is an essential requirement for deductibility under Section 34 (A)
– the expense must be ordinary and necessary.
Please take note also that under Section 34 (A), this is very
broad item of deduction. This would practically cover all items of
deduction outside of 34 (B) to (J). If you could not identify the
expense with the other itemized deductions, chances are it
would fall under 34 (A). In other words, all other expenses could
fall under 34 (A) for so long as they comply with the requirement
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of being ordinary and necessary trade, business or professional
expenses.
(2) Expenses Allowable to Private Educational Institutions. –
In addition to the expenses allowable as deductions under
this Chapter, a private educational institution; referred to
under Section 27(B) of this Code, may at its option elect 62
National Tax Research Center either: (a) to deduct
expenditures otherwise considered as capital outlays of
depreciable assets incurred during the taxable year for the
expansion of school facilities, or (b) to deduct allowance for
depreciation thereof under Subsection (F) hereof.
Now, related to 34 (A) is a special treatment of deductions to
educational institutions. This pertains only to educational
institutions. So those which are not educational institutions could
not have this option. It could pertain only to private educational
institutions.
When a private educational institution would like to put up
buildings as classrooms, the educational institution has the
option to treat the yearly expense as an outright deduction under
34 (A). So, bumili ng bakal, semento, nagbayad ng wages ng
mga nagtrabaho sa building, nagbayad ng mga engineer, mga
contractors, purchase of other hardware materials during the
year while it is being built. Then that expense may be claimed
outright under 34 (A).
The other option is to defer the expense and accumulate all the
expenses until the building has been completed. Once the
building is completed you have now an accumulation of the
expenses that you have incurred by the educational institution
to put up and finish the building. Once you now have the total
amount of construction, then you could claim the deduction by
way of depreciation under 34 (F). In other words, if that is a
capital outlay or a capital expense of a private educational
institution, like construction of buildings, purchase of school
buses, and other capital expenditures which are what we call
depreciable acquisitions – meaning these articles acquired are
subject to depreciation. The school has the option to treat them
outright as an expense under 34 (A) OR may treat the item as
subject to depreciation under 34 (F) and claim a deduction by
way of depreciation. In our example, the school building – while
it is being constructed, during the year a deduction is claimed for
the expense incurred during that year until the building is
finished. Pag natapos na, the other option is after natapos, you
accumulate all the expenses and you have now the total cost of
the building and then you may claim the depreciation.
Another example is the purchase of school buses. So it bought
10 school buses to service the students. So the acquisition of
the school buses may be claimed as an outright deduction. Let’s
say they were able to acquire these for P15,000,000. That could
be claimed outright as a deduction under 34 (A). OR the other
option is to claim a deduction by way of depreciation under 34
(F).
So, remember that these options to claim it as an outright
deduction under 34 (A) or by way of depreciation under 34 (F)
apply only to private educational institutions. So take note of that
treatment of deduction.
Another thing – one of the principles behind the treatment of
deduction is the manner of recognizing a deduction – whether
on actual payment or accrual. In other words, like in the
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
recognition of income, income may be recognized on actual
receipt or constructive receipt. That is also the same manner you
should recognize the deduction. Either actual or constructive.
OR cash or accrual.
So if you recognize income on cash basis, then you should
recognize deductions on a cash basis – meaning, you recognize
the deduction when you actually pay the expense.
If you are the constructive or the accrual recognition taxpayer,
that treatment should be followed in recognizing income, as well
as in recognizing deductions. So if you recognize income on
accrual basis, then you should recognize deductions also on
accrual basis – meaning, the expense has been incurred even
though payment will take place later. Like if you purchase office
supplies para sa business, for the use of the office. Then utang.
So hindi mo binayaran this year. If you are an accrual taxpayer,
then that expense has to be recognized because it was incurred
during the tax year, even though babayaran mo pa yan later on
or next year. But this year, when it was incurred, you should
already recognize that as an expense and a deduction because
you are the accrual or constructive receipt taxpayer. So
remember that treatment of both the income and the deduction.
This is following the principle of consistency.
Interest
(B) Interest. –
(1) In General. – The amount of interest paid or incurred
within a taxable year on indebtedness in connection with the
taxpayer’s profession, trade or business shall be allowed as
deduction from gross income: Provided, however, That the
taxpayer’s otherwise allowable deduction for interest
expense shall be reduced by forty-two percent (42%) of the
interest income subjected to final tax: Provided, That effective
January 1, 2009, the percentage shall be thirty-three percent
(33%).
(2) Exceptions. – No deduction shall be allowed in respect of
interest under the succeeding subparagraphs:
(a) If within the taxable year an individual taxpayer
reporting income on the cash basis incurs an
indebtedness on which an interest is paid in
advance through discount or otherwise: Provided,
That such interest shall be allowed as a deduction
in the year the indebtedness is paid: Provided,
further, That if the indebtedness is payable in
periodic amortizations, the amount of interest which
corresponds to the amount of the principal
amortized or paid during the year shall be allowed
as deduction in such taxable year;
(b) If both the taxpayer and the person to whom the
payment has been made or is to be made are
persons specified under Section 36 (B); or
(c) If the indebtedness is incurred to finance petroleum
exploration.
(3) Optional Treatment of Interest Expense. – At the option of
the taxpayer, interest incurred to acquire property used in
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trade, business or exercise of a profession may be allowed
as a deduction or treated as a capital expenditure.
You have Interest. The amount of interest paid or incurred within
a taxable year on indebtedness in connection with the taxpayer’s
profession, trade or business shall be allowed as deduction from
gross income.
Then you have an exception – the tax arbitrage rule, wherein
not the entire interest expense could be claimed as a deduction.
Another exception – if you are a cash basis taxpayer and you
paid interest in advance. When you incur an indebtedness or a
loan, and then you paid interest in advance, you are not to
recognize the interest expense outright as a deduction.
Then, if both the taxpayer and the person to whom payment has
been made are persons specified under Section 36 (B) –
(B) Losses from Sales or Exchanges of Property. – In
computing net income, no deduction shall in any case be
allowed in respect of losses from sales or exchanges of
property directly or indirectly –
(1) Between members of a family. For purposes of this
paragraph, the family of an individual shall include
only his brothers and sisters (whether by the whole
or halfblood), spouse, ancestors, and lineal
descendants; or
(2) Except in the case of distributions in liquidation,
between an individual and a corporation more than
fifty percent (50%) in value of the outstanding stock
of which is owned, directly or indirectly, by or for
such individual; or
(3) Except in the case of distributions in liquidation,
between two corporations more than fifty percent
(50%) in value of the outstanding stock of which is
owned, directly or indirectly, by or for the same
individual if either one of such corporations, with
respect to the taxable year of the corporation
preceding the date of the sale of exchange was,
under the law applicable to such taxable year, a
personal holding company or a foreign personal
holding company; or
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of a trust and the fiduciary of
another trust if the same person is a grantor with
respect to each trust;
(6) Between a fiduciary of a trust and a beneficiary of
such trust.
. . . that is, interest expense between related taxpayers are not
deductible – like members of the same family; that between an
individual stockholder and a corporation where the individual
owns more than 50%; between related corporations where one
owns more than 50% of the other; between a grantor and a
fiduciary or trustee of a trust; between a fiduciary of a trust and
the fiduciary of another trust if the same person is a grantor with
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
respect to each trust; and between a fiduciary of a trust and a
beneficiary of such trust. So, these are what we call related
taxpayers. Any interest expense incurred arising from
indebtedness between these related taxpayers is not deductible.
Then you have indebtedness incurred to finance petroleum
exploration. Interest thereon is not deductible.
Then you have the optional treatment of the interest incurred to
acquire property – we will discuss this in a while.
So, what are the requisites for deductibility of interest?
1. The interest must be stipulated in writing;
2. The interest expense must be paid (if a cash-basis
taxpayer) or incurred (if a an accrual basis taxpayer)
during the taxable year;
3. The indebtedness must be related to the taxpayer’s
trade, business, or exercise of profession;
4. The interest payment arrangement must not be
between related taxpayers under Section 36 (B).
So, those are the requirements.
What are the exceptions?
First exception: we have the tax arbitrage rule. Now, this rule
applies only to a peculiar transaction. This will not apply to all
types of transaction. The tax arbitrage rule comes in when the
taxpayer would borrow money and the proceeds of that
indebtedness or loan is used for investments where interest
income is earned.
As a rule, the interest expense is deductible. However, since the
borrowing was used to acquire investments where interest
income is earned, the taxpayer, under the tax arbitrage rule, is
not allowed to claim 100% of the interest expense. The interest
expense is reduced by 33% of the interest income.
So, if the interest expense is P100,000 and the interest income
is P100,000, you are not allowed to recognize 100% of the
P100,000 interest expense. That will be reduced by 33% of the
interest income. So, here, only P67,000 worth of interest
expense is deductible.
Second exception: interest expense incurred by cash-basis
individual where the interest is paid in advance. Under this
transaction, the interest expense that will be allowed to be
claimed as a deduction is that portion of the interest expense
attributable to the tax year. In other words, it does not follow that
hindi ka pwedeng mag-claim ng deduction. Ang requirement
lang you could not claim the entire deduction. The law limits the
interest expense deduction that pertains to the portion
attributable to the tax year.
So, let’s say you borrowed money – P100,000 on January 1,
with an interest of 6% annually for 2 years. Meron kang 2-year
loan with the lender. So you, the borrower, will incur interest
expense. So, pina-prepaid sa iyo yung interest. So 100,000 x
6% is P6,000. So, on January 1, when you borrowed 100,000,
kinaltasan ka na ng (6% x 2, because 2 years yan siya) or 12%.
So, binawasan ka na ng P12,000 sa P100,000. Ang natanggap
mo lang is P88,000. Question: Is the taxpayer allowed to claim
the P12,000 interest expense as a deduction at the end of the
tax year? The answer is no. While he is allowed because he is
a cash-basis individual paying interest in advance, the interest
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that is allowed to be claimed by that cash-basis taxpayer is that
only that portion attributable to the tax year – so yung interest
for the 1-year period lang ang i-charge to be claimed as an
interest expense. So, for year 1, he will claim P6,000 interest
expense. Yung other P6,000 will be claimed on year 2 or the
next year.
Then letter (c) which we have mentioned – interest expense
between related taxpayers under Section 36 (B) is
disallowed. So kung magpautang ka, ang utang between related
taxpayers, even though you justify it that the money borrowed is
to be used in business, it will still be disallowed.
January 26, 2021 (34:03 – 1:08:05) | Ador Ray Peroy
RELATED TAXPAYERS
SEC. 36. Items not Deductible. -
(B) Losses from Sales or Exchanges of Property. - In
computing net income, no deductions shall in any case be
allowed in respect of losses from sales or exchanges of property
directly or indirectly -
(1) Between members of a family. For purposes of this
paragraph, the family of an individual shall include only his
brothers and sisters (whether by the whole or half-blood),
spouse, ancestors, and lineal descendants; or
(2) Except in the case of distributions in liquidation, between
an individual and corporation more than fifty percent (50%)
in value of the outstanding stock of which is owned, directly
or indirectly, by or for such individual; or
(3) Except in the case of distributions in liquidation, between
two corporations more than fifty percent (50%) in value of
the outstanding stock of which is owned, directly or
indirectly, by or for the same individual if either one of such
corporations, with respect to the taxable year of the
corporation preceding the date of the sale of exchange was
under the law applicable to such taxable year, a personal
holding company or a foreign personal holding company;
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the
fiduciary of another trust if the same person is a grantor
with respect to each trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust.
1. Those that are between members of a family. These are not
deductible.
2. Between an individual stockholder and the corporation where
the individual owns more than 50% of the corporation;
3. Between corporations where 1 corporation owns more than
50% of the other corporation;
4. Between the grantor and fiduciary or a trustee of a trust;
Between a fiduciary of a trust and a fiduciary of another trust
but the trusts are created by the same grantor; or
5. Between the fiduciary and the beneficiary of the trust.
Any interest expense between these are disallowed as deduction.
INTEREST EXPENSE ON INDEBTEDNESS
INCURRED TO FINANCE PETROLEUM
EXPLORATION
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
SEC. 34. Deductions from Gross Income.
(B) Interest. -
(2) Exceptions. - No deduction shall be allowed in respect of
interest under the succeeding subparagraphs:
(a) If within the taxable year an individual taxpayer
reporting income on the cash basis incurs an
indebtedness on which an interest is paid in advance
through discount or otherwise: Provided, That such
interest shall be allowed as a deduction in the year the
indebtedness is paid: Provided, further, That if the
indebtedness is payable in periodic amortizations, the
amount of interest which corresponds to the amount of
the principal amortized or paid during the year shall be
allowed as deduction in such taxable year;
(b) If both the taxpayer and the person to whom the
payment has been made or is to be made are persons
specified under Section 36 (B); or
(c) If the indebtedness is incurred to finance
petroleum exploration.
This is not allowed as deduction under Sec. 34(B)(2)(c). But the
interest expense, you will add that back to the exploration
expenditure. It does not mean that the interest expense on
indebtedness will be disallowed (period). It is only disallowed to be
claimed under Sec. 34(B).
You could still claim the deduction pero isama mo sya doon sa
exploration expense, wherein the method of deduction is by way of
depletion. Yung exploration and development expenses in
extracting industries, like petroleum, mines, etc.
The deductibility of the interest expense incurred for petroleum
exploration is not to be claimed under Sec. 34(B), it may be claimed
by way of depletion under a different itemized deduction.
OPTIONAL TREATMENT OF INTEREST EXPENSE OF
DEPRECIABLE PROPERTY
(B) Interest. -
(3) Optional Treatment of Interest Expense. - At the option of
the taxpayer, interest incurred to acquire property used in trade
business or exercise of a profession may be allowed as a
deduction or treated as a capital expenditure.
Another special treatment on interest expense is when the taxpayer
acquires depreciable properties, which are used in business,
through financing. Meaning, you borrowed money and then you
used that money to purchase assets, which are depreciable, and
these assets are to be used in business.
Example:
You borrowed money with interest:
1. because you want to construct a building for the business, you
are going to expand your factory.
2. because you are going to purchase new equipment and
machinery.
3. Purchase of vehicles for your sales representatives or
customer relations.
You incurred this interest expense since you borrowed money to
purchase depreciable assets to be used in business.
TREATMENT OF INTEREST INCURRED IN
ACQUISITION OF BUSINESS PROPERTY
Under Sec. 34(B)(3), the taxpayer has two options for the treatment
of interest incurred to acquire property to be used in business
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1. Interest expense and depreciation are claimed separately
The interest can be claimed as a separate deduction under Sec.
34(B), then the item that was purchased to be used in business,
which is a depreciable property, the deduction for depreciation can
be claimed for that item/property. The interest expense is treated as
a separate item, then the property that was acquired will be claimed
by way of depreciation
Illustration:
Property Cost P100,000 This is the basis for
deprecation expense
Interest Expense P12,000 Claimed as interest expense
2. Interest expense is added to the cost of the property
The interest plus cost of the property acquired to be used in
business, which are depreciable properties, will be treated as capital
expenditure. You add up the interest plus value of the
purchase/equipment (which are depreciable), then you claim
depreciation. Meaning, you interest is added to the total cost of the
equipment/property to be used in business, then claim a
depreciation on that item. The interest expense is added to the cost
of the property and claim a deduction for depreciation.
Illustration:
Property Cost P100,000 This is the basis for
depreciation expense
Add: Interest P12,000 Claimed as interest expense
Expense
Total Capital P112,000 This is the basis for
Expenditure depreciation expense; no
more interest expense.
C. TAXES
All taxes, national or local paid or incurred during the tax year, in
connection with the trade, business, or profession shall be allowed
as a deduction, except:
1. Income tax
2. Transfer Taxes
3. Foreign income tax, unless availed as a tax credit
4. Special assessment or special levy by the LGU
Note: Foreign income tax paid by resident citizen and domestic
corporation on foreign source income are availed as a tax credit in
the Philippine income tax and not as a tax deduction. [Sec. 34(C)(3)]
(C) Taxes. -
(3) Credit Against Tax for Taxes of Foreign Countries. - If
the taxpayer signifies in his return his desire to have the benefits
of this paragraph, the tax imposed by this Title shall be credited
with:
(a) Citizen and Domestic Corporation. - In the case of a
citizen of the Philippines and of a domestic corporation,
the amount of income taxes paid or incurred during the
taxable year to any foreign country; and
(b) Partnerships and Estates. - In the case of any such
individual who is a member of a general professional
partnership or a beneficiary of an estate or trust, his
proportionate share of such taxes of the general
professional partnership or the estate or trust paid or
incurred during the taxable year to a foreign country, if
his distributive share of the income of such partnership
or trust is reported for taxation under this Title.
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
An alien individual and a foreign corporation shall not be
allowed the credits against the tax for the taxes of foreign
countries allowed under this paragraph.
Those taxpayers like resident citizens and domestic corporations
who are taxable on all sources, the foreign source income will be
subject to a foreign income tax. The foreign income tax paid will be
claimed by tax credit, not as a tax deduction.
TAXES NOT ALLOWED AS DEDUCTIONS
1. Percentage tax
2. Excise
3. Local taxes
4. Fringe Benefit Taxes
5. VAT
TREATMENT OF TAX REFUNDS
(C) Taxes. -
(1) In General. - Taxes paid or incurred within the taxable year
in connection with the taxpayer's profession, trade or business,
shall be allowed as deduction, except:
(a) The income tax provided for under this Title;
(b) Income taxes imposed by authority of any foreign
country; but this deduction shall be allowed in the case
of a taxpayer who does not signify in his return his desire
to have to any extent the benefits of paragraph (3) of this
subsection (relating to credits for taxes of foreign
countries);
(c) Estate and donor's taxes; and
(d) Taxes assessed against local benefits of a kind tending
to increase the value of the property assessed.
Provided, That taxes allowed under this Subsection, when
refunded or credited, shall be included as part of gross income
in the year of receipt to the extent of the income tax benefit of
said deduction.
Sec. 34(C)(1)(a) in the deduction of taxes, is when you have tax
refund. In other words, you claim a deduction for the tax and later
on you found out that you have overpaid or erroneously paid, and
ask for a refund, and you were refunded. But you have already
claimed a deduction for that, kasi yung refund will come in later pa
man 'pag na refund ka na.
TAX BENEFIT RULE IN RELATION TO TAX
REFUNDS
The question now is, is the refund taxable income?
You have now the application of the Tax Benefit Rule:
a. Tax refund as part of the taxable income
In the case of tax refunds, in the application of the tax benefit rule,
taxes which were claimed as a deduction then later on refunded or
credit, shall be claimed as part of gross income in the year of receipt
to the extent of the income tax benefit of the said deduction.
Which means, therefore, that when you claim the taxes as a
deduction it reduced the taxable income of the taxpayer so he
benefitted because it reduced taxable income, ultimately the income
tax is also decreased. If later on there was a tax refund because the
taxes that were claimed as a deduction were erroneous or illegally
claimed or paid, then when you are able to have that refunded or
credited, income is recognized because you benefitted from the
deduction at the time the deduction was made.
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b. Tax refund not treated as taxable income
If there was no income tax benefit at the time the taxes were claimed
as a deduction, then at the time of recovery there is no need to claim
gross income or taxable income for that tax refund.
It is taxable only when there is an income tax benefit at the time of
the deduction. If there was no income tax benefit at the time of
deduction, then at the time of the refund or credit, the tax refund
need not be claimed as a taxable income.
Note: Bad debts recovery is another application of the tax benefit
rule. To be discussed later.
It normal that when a taxpayer engages in trade, business, or even
in the practice of profession, the taxpayer will incur loses. Loses
brought about by theft or embezzlement, fire, storm, or other
casualties, robbery, or flood. These are losses.
D. LOSSES
(D) Losses. -
(1) In General. - Losses actually sustained during the taxable
year and not compensated for by insurance or other forms of
indemnity shall be allowed as deductions:
(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or
profession, if the loss arises from fires, storms, shipwreck,
or other casualties, or from robbery, theft or embezzlement.
The Secretary of Finance, upon recommendation of the
Commissioner, is hereby authorized to promulgate rules
and regulations prescribing, among other things, the time
and manner by which the taxpayer shall submit a
declaration of loss sustained from casualty or from robbery,
theft or embezzlement during the taxable year: Provided,
however, That the time limit to be so prescribed in the rules
and regulations shall not be less than thirty (30) days nor
more than ninety (90) days from the date of discovery of the
casualty or robbery, theft or embezzlement giving rise to the
loss.
(c) No loss shall be allowed as a deduction under this
Subsection if at the time of the filing of the return, such loss
has been claimed as a deduction for estate tax purposes in
the estate tax return.
General Rule: Losses actually sustained during the taxable year
and not compensated for by insurance or other forms of indemnity
shall be allowed as a deduction.
Losses can be claimed as a deduction as long as there is no
indemnity or compensation by insurance or other forms of
indemnity, and the losses were sustained during the tax year.
REQUISITES FOR THE DEDUCTIBILITY OF LOSSES
1. The loss must be actual, not anticipated.
2. The loss must be sustained in a close and completed
transaction.
3. The loss must not be compensated for by insurance or other
forms of indemnity.
4. Loss must be liquidated and charged off during the tax year.
5. The loss must be incurred or related to the business, trade, or
profession of the taxpayer or of property used in business.
Discussion of the requisites
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
Requirement 1:
The loss must be actual, not anticipated.
There must be actual loss just an estimated or an anticipated loss.
Requirement 2:
The loss must be sustained in a close and completed transaction.
Example: June 2019, a portion of your building was destroyed by
fire. Then gi-claim sa insurance, after estimation, inspection,
investigation, they were only able to determine the losses for the
purposes of the compensation by insurance only on February 2020.
The estimated loss was worth P500k.
Question: When was the loss sustained? In what year will you
recognize the loss?
Answer: While the loss happened in 2019, the loss was determined
only in 2020. The loss is recognized in the year when they were
sustained in a closed and completed transaction. If the loss was
finally determined on February 2020, then that is the year when the
loss will be recognized. Not in 2019 when you had the fire.
Go back to the requisites, the loss must be actual, not anticipated.
The loss must be sustained in a close and completed transaction.
So, when the loss was finally determined in the following year (Feb.
2020), it is only in taxable year 2020 where you could claim the
deduction for losses under Sec. 34(D).
Requirement 3:
The loss must not be compensated for by insurance or other forms
of indemnity.
a. Total compensation
If the loss was totally covered by insurance. Say, P500k (from the
example above) loss was totally covered by insurance, then you
could not claim the deduction for losses.
b. Partial compensation
If there is only partial compensation, the unindemnified portion,
the portion of the loss not covered by the insurance, then that
portion can be claimed as a deduction for losses under Sec. 34(D)
Requirement 4:
Loss must be liquidated and charged off during the tax year.
This is related to requirement number 2 on a "sustained in a
completed transaction."
Requirement 5:
The loss must be incurred or related to the business, trade, or
profession of the taxpayer or of property used in business.
Like casualty losses.
Those are the requirements under Sec. 34(D)
D.3. NET OPERATING LOSS CARRY-OVER
(NOLCO)
Sec. 34(D)(3)
(D) Losses. -
(3) Net Operating Loss Carry-Over. - The net operating loss
of the business or enterprise for any taxable year immediately
preceding the current taxable year, which had not been
previously offset as deduction from gross income shall be
carried over as a deduction from gross income for the next three
(3) consecutive taxable years immediately following the year of
such loss: Provided, however, That any net loss incurred in a
taxable year during which the taxpayer was exempt from
income tax shall not be allowed as a deduction under this
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44
Subsection: Provided, further, That a net operating loss carry-
over shall be allowed only if there has been no substantial
change in the ownership of the business or enterprise in that -
(i) Not less than seventy-five percent (75%) in nominal value of
outstanding issued shares., if the business is in the name of
a corporation, is held by or on behalf of the same persons; or
(ii) Not less than seventy-five percent (75%) of the paid up
capital of the corporation, if the business is in the name of a
corporation, is held by or on behalf of the same persons.
For purposes of this subsection, the term 'net operating loss'
shall mean the excess of allowable deduction over gross
income of the business in a taxable year.
Provided, That for mines other than oil and gas wells, a net
operating loss without the benefit of incentives provided for
under Executive Order No. 226, as amended, otherwise known
as the Omnibus Investments Code of 1987, incurred in any of
the first ten (10) years of operation may be carried over as a
deduction from taxable income for the next five (5) years
immediately following the year of such loss. The entire amount
of the loss shall be carried over to the first of the five (5) taxable
years following the loss, and any portion of such loss which
exceeds the taxable income of such first year shall be deducted
in like manner form the taxable income of the next remaining
four (4) years.
LOSS DISTINGUISHED FROM NOLCO
Itong loss naman ito is the result of your operations. Yung loss nung
34(D)(1) pertains to properties used in business na nasunog,
nawala, etc. -- property or casualty losses.
NOLCO or net operating loss is a loss from the operations of the
business. At the end of the year from your gross income less
deduction, you end up negative. Mas marami kang expense or
deduction kaysa kinita mo, so you end up with an operating loss.
NOLCO; WHEN CLAIMED
When a taxpayer's business ends up with a net operating loss, the
taxpayer is allowed to claim a deduction -- a net operating loss
carry-over deductible against gross income within three (3)
consecutive tax years provided there is no substantial change
in the ownership of the business.
Because ordinarily, in the course of the operations that you had
been operating at a loss for the next 3 years, chances are dapat
magsarado ka na. Because it is no longer beneficial and worth it na
ipagpatuloy mo na if you continue to sustain losses for the last 3
years.
However, the law comes in if you want to continue pa with your
business despite for the last 3 years lugi na yung operation mo, the
law allows you to claim a net operating loss carry-over. Meaning,
yung losses mo na naipon, you're allowed to claim them as a
deduction against your gross income for the next 3 consecutive
years.
Hanggang 3 years lang. If after 3 years nandyan pa yung loss, tapos
na yon. Tapos na yon, hindi mo na maclaim. So, the loss this year
can be claimed for the next 3 years. Kung may loss ka naman uli sa
following year, yung loss na yon can be claimed uli for the next 3
years. That's the treatment of the NOLCO.
Illustration:
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA 45
4 Manresa | SY 2020-2021

Year 1 Year 2 Year 3 Year 4 Year 5

Year 1 Balance Balance Year 1 X General Rule: Securities are treated as capital assets. If they
NOLCO of Year 1 of Year 1 NOLCO become worthless they are treated as capital losses.
NOLCO NOLCO No longer
claimable Exception:
Year 2 Balance Balance Year 2 If the securities are in the hands of a tax trader/broker or a securities
NOLCO of Year 2 of Year 2 NOLCO trader/broker
NOLCO NOLCO No longer They are considered as ordinary losses and the losses will be
claimable treaded as bad debts, or losses under Sec. 34(D)(1) from business.

The essential requirement is that: there is no substantial change D.5. LOSSES FROM WASH SALES OF
in the ownership of the business.
STOCKS OR SECURITIES
D.4. CAPITAL LOSSES They are not deductible under Sec. 38.

Sec. 34(D)(4)
D.6. Wagering Losses
(4) Capital Losses. -
(a) Limitations. - Loss from sales or Exchanges of capital These are gambling losses.
assets shall be allowed only to the extent provided in
Section 39. They are not deductible against gross income. They are
(b) Securities Becoming Worthless. - If securities as defined deductible only when you have gambling gains or wagering
in Section 22 (T) become worthless during the taxable year gains.
and are capital assets, the loss resulting therefrom shall, for
purposes of this Title, be considered as a loss from the sale D.7. Abandonment Losses
or exchange, on the last day of such taxable year, of capital
assets. They are deductible from gross income since they arise from
exploration and development expenditures on the extractive
In the case of capital loss, remember, they are deductible. industries.

Example: You started operating the mines. From your estimates

CAPITAL LOSSES DISTINGUISHED FROM LOSSES you'll be able to extract the resources from the mines for the next 10
Capital losses is different from the losses under Sec. 34(D)(1). In years. But on the 5th year you discover that the mine has been
Sec. 34(D)(1), the loss are related to the to the business, trade or depleted, you have already extracted all the minerals and resources.
profession. Pero meron ka pang expenditures from your exploration and
development expenses which have not been recovered.
The capital losses here pertains to capital asset transactions. These
are properties of the taxpayer but they are not used in business. What will you do now of the unrecovered portion of your exploration
and development expenditures?
Losses under Sec. They will now be claimed as abandonment losses. Then they are
Capital Losses
34(D)(1) deductible from gross income since they arise from exploration
Related to business, trade or and development expenditures particularly those from the extractive
Capital asset transactions
profession industry.
Properties of taxpayer not Properties used in business,
used in business trade or profession That is where you can claim abandonment losses,
when:
Example: 1. you decided to abandon the extractive activity,
1. family home house and lot, this is a capital asset because it is not 2. and you still have unrecovered exploration and
used in business.
development expenses.
2. Collection of painting, jewelries, etc. When these were sold at a
loss, then you end up at a loss.

A. LIMITATION OF DEDUCTIBILITY E. BAD DEBTS

See: Sec. 34(D)(4)(a)
Capital losses are deductible when they are capital gains and not
deductible under gross income. Only the losses under Sec. 34(D)(1)
which are related to the trade, business, or profession which are
deductible against gross income. But losses arising from capital
asset transactions are not deductible against gross income, they are
deductible only when you have capital gains. Capital gains are gains
derived from the sale of capital assets. Losses are derived from
capital asset transactions under Sec. 39.
In capital asset transactions, you may end up with capital loss or a
capital gain.
B. SECURITIES BECOMING WORTHLESS
See: Sec. 34(D)(4)(b)
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Sec. 34(E)
(E) Bad Debts. -
(1) In General. - Debts due to the taxpayer actually ascertained
to be worthless and charged off within the taxable year
except those not connected with profession, trade or
business and those sustained in a transaction entered into
between parties mentioned under Section 36 (B) of this
Code: Provided, That recovery of bad debts previously
allowed as deduction in the preceding years shall be included
as part of the gross income in the year of recovery to the
extent of the income tax benefit of said deduction.
(2) Securities Becoming Worthless. - If securities, as defined
in Section 22 (T), are ascertained to be worthless and
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
charged off within the taxable year and are capital assets, the
loss resulting therefrom shall, in the case of a taxpayer other
than a bank or trust company incorporated under the laws of
the Philippines a substantial part of whose business is the
receipt of deposits, for the purpose of this Title, be
considered as a loss from the sale or exchange, on the last
day of such taxable year, of capital assets.
Bad debts originate from the receivables of the taxpayer.
Example: Kung magpautang ang taxpayer selling their merchandise
on credit, meron syang receivables from customers. Unfortunately,
these receivables remain unpaid despite the collection efforts, the
demand letters, pumunta na sa barangay hindi parin nagbayad, to
the point that the debtor can no longer be found in his last known
address. Nagtago na.
Q: What will the taxpayer do regarding the receivables?
That receivable now becomes worthless and could no longer be
collected. In that case, the taxpayer could claim a deduction by way
of bad debts under Sec. 34(E).
REQUISITES
1. There is a valid and subsisting debt or an unpaid debt
2. The obligation or the debt is connected with the trade,
business, or profession, and not between related
taxpayers
Kasi 'pag related taxpayers yung pautang, bad debts is not allowed
to be recognized by the taxpayer.
3. The debt is ascertained to be worthless and could no
longer be collected, and
4. The debt is charged off during the tax year.
BURDEN OF PROOF UPON THE TAXPAYER
In other words, in determining whether the debt has become
worthless and could no longer be collected, the burden is upon the
taxpayer to determine their worthlessness -- that they could no
longer be connected.
The taxpayer must be able to show that collection efforts were
made. Nagpadala ng collector, demand letters, nirefer sa abodago,
umabot sa barangay, after several attempts the debtor can no
longer be found, nag-abscond na. Then it is high-time that you
recognize that receivable as bad debts. You charge them off during
the tax year.
BAD DEBTS RECOVERY
What if after 10 years the debtor resurfaces and pays the
indebtedness, with interest pa.
TAX BENEFIT RULE ON BAD DEBTS RECOVERY
Q: What is the treatment of bad debts recovery? Will income be
recognized when you are able to recover the indebtedness after
claiming them as a deduction for bad debt?
We have now another application of the tax benefit rule on bad debts
recovery. Recall, the other one is the recovery of tax refunds.
Ito ngayon is the application of the tax benefit rule on bad debts
recovery. It will follow the same principle:
a. There is tax benefit -- Income is recognized
If a the time the deduction for bad debts was made, there was a tax
benefit in claiming the deduction wherein the taxpayer resulted in a
lesser or lower taxable income and paid a lesser tax because
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46
nagclaim sya ng bad debts as a deduction. If later on there was a
recovery of these bad debts, income shall be recognized in the year
of recovery because there was a tax benefit at the time of the
deduction.
b. No tax benefit -- Income is not recognized
If there was no tax benefit at the time the deduction was made on
the bad debts, then at the time of recovery there is no need to to
recognize income because there was no tax benefit at the time of
the deduction.
Recall: That rule similarly applies also on tax refunds.
TWO APPLICATION OF THE PRINCIPLE ON THE
TAX BENEFIT RULE
1. Tax refunds
2. Bad debts recovery
F. Depreciation
Sec. 34(F)
(F) Depreciation. -
(1) General Rule. - There shall be allowed as a depreciation
deduction a reasonable allowance for the exhaustion, wear
and tear (including reasonable allowance for
obsolescence) of property used in the trade or business. In
the case of property held by one person for life with
remainder to another person, the deduction shall be
computed as if the life tenant were the absolute owner of
the property and shall be allowed to the life tenant. In the
case of property held in trust, the allowable deduction shall
be apportioned between the income beneficiaries and the
trustees in accordance with the pertinent provisions of the
instrument creating the trust, or in the absence of such
provisions, on the basis of the trust income allowable to
each.
(2) Use of Certain Methods and Rates. - The term
'reasonable allowance' as used in the preceding
paragraph shall include, but not limited to, an allowance
computed in accordance with rules and regulations
prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, under any of the
following methods:
(a) The straight-line method;
(b) Declining-balance method, using a rate not exceeding
twice the rate which would have been used had the
annual allowance been computed under the method
described in Subsection (F) (1);
(c) The sum-of-the-years-digit method; and
(d) Any other method which may be prescribed by the
Secretary of Finance upon recommendation of the
Commissioner.
Depreciation is the deduction for the wear and tear of the property
used in business.
The family car of the taxpayer is depreciable, but you could not claim
depreciation as a deduction because it is not used in business.
Only those properties used in business, which are subject to wear
and tear or obsolescence or exhaustion can be claimed as a
deduction by way of depreciation.
Therefore, depreciation is a cost recovery method because at the
time you purchase (let's say) the delivery van, the motorcycle, or the
construction of the building. The expenses were necessary but not
ordinary under Sec. 34(A). The law allows you now to claim a
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA 47
4 Manresa | SY 2020-2021

deduction by way of depreciation because these are properties that

are subject to wear and tear. Annual Depreciation (Year 2) = 48,000 x 20% = 9,600
New Book Value (Year 2, ending) =
Example: Book Value (Year 1, ending) – Annual Depreciation (Year 2)
1. building, magiging subject na yan to wear and tear or exhaustion.
2. vehicle to be used in business New Book Value (Year 2, ending) = 48,000 – 9,600 = 38,400
3. motorcycle used by your collectors Accumulated Depreciation (Year 2, ending) =
they will be subject to exhaustion or wear and tear while they are Ann. Dep (Year 1) + Ann. Dep (Year 2)
being used.
Accumulated Depreciation (Year 2, ending) = 12,000 + 9,600 =
The method of recovering the cost, since you could not claim it 21,600
under Sec. 34(A), you could claim the deduction under Sec. 34(F)
by way of depreciation. The law allows the taxpayer to determine
3. Sum of the Years Digit (SYD)
which method of depreciation they will use. That discretion is given
You add, let's say 5 year ang kanyang useful life, you add the 5
by law to the taxpayer.
years, i.e. 1+2+3+4+5.
METHODS OF DETERMINING AND RECOGNIZING January 26, 2021 (1:08:06 – end) | Kemarie Manligoy
DEPRECIATION

1. Straight Line Method ITEMIZED DEDUCTIONS

It spreads the depreciation over the useful life of the property used
in business. The depreciation is determined by the cost of the
property less the scrap value (if any), over the estimated life.
SECTION 34(F). DEPRECIATION
Example:
The cost of the property, the delivery van P1 million, scrap value is You have the depreciation expense which is the rate multiplied
P50k, you have P950k. The estimated life is 10 years. Then P95k to the book value of the property.
per year depending on the estimated life the taxpayer would
determine on the property. Meaning the usefulness or the utility of The other method is the Sum of the Years Digit (SYD).
that property to be used in business.
Formula:
!"#$ − &'()* ,)-./
= 788.)- 9/*(/'1)$1"8 Remaining useful life
0#$12)$/3 415/ Annual Depreciation = Cost – scrap value x
Sum of the years
1,000,000 − 50,000
= 95,000/>/)(
10 >/)(#
For example:
2. Declining Balance Method
This method uses a rate, usually 1.5 or 2 times the straight line rate Five years ang estimated useful life, you add the five years.
to the declining book value of the property.
1
2
So, you determine the rate over the estimated life times 2 or 1.5 to + 3
determine the depreciation rate. So the depreciation expense will be 4
determined by the rate times the book value of the property. The 5
book value is the cost of the property minus the accumulated Total 15
depreciation. Meaning, the depreciation is determined on the
declining value of the property as it is being depreciated year in, year Let’s say the property has a useful life of 5 years. The sum of
out. the five years is 15:

You have the deprecation expense, the rate, times the book value
of the property.
Illustration: [Lifted from 2016 Review TSN]
Book Value = P60k
For year 1:
Annual Depreciation = Book Value x Depreciation Rate
Annual Depreciation (Year 1) = 60,000 x 20% = 12,000
New Book Value = Book Value – Annual Depreciation
New Book Value (Year 1, ending) = 60,000 – 12,000 = 48,000
For year 2:
Annual Depreciation (Year 2) =
Book Value (Year 1 ending) x Depreciation Rate
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• In its first year, 5/15 * cost of the property less the
scrap value equals your annual depreciation.
• In the 2nd year, it will be 4/15 and so on.
You would notice that in the declining balance and of the SYD,
Malaki yung deduction for deprecation in the 1st year. As you
move towards the life of the property, nagrereduce yung annual
depreciation. In declining method, there is a fixed rate, but the
book value decreases. For the 5th year, the depreciation is
already reduced unlike in a straight-line method, you have a
fixed annual depreciation towards the life of the property used in
the business. Going back, the taxpayer is given the leeway to
determine the method of depreciation to use. They may use
straight-line on some properties and use a declining method on
other properties of the business or use the SYD.
In other words, if the taxpayers used the straight-line method it
does not mean that it will uniformly use the straight-line method
on all of its depreciable properties used in the business. He is
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
not limited to use different methods of depreciation on the
various depreciable assets. It depends upon his discretion.
Unit of production or Working Hours method or any other
depreciation method which may be prescribed by the
Department of Finance upon the commendation of the
Commissioner of Internal Revenue.
SECTION 34(G). DEPLETION
Depletion is peculiar to those in the mining industry or the
wasting assets or extracting industry. This is a method of
claiming deduction for the invested capital of an extractive
industry like oil and gas wells and mine. It is a cost recovery
method for the exploration and development expenditures that
were incurred by an extractive industry.
When you are in an extractive industry, there are expenditures
incurred by the taxpayer prior to the commercial production of
the mines. Prior to the commercial production, they will inclur
exploration expenditures. He has to spend for ascertaining the
existence, location, extent and quality of any deposit of oil or
mineral before they begin with any development stage of the
mine or deposit. They extract, get sample and go to a chemical
lab to ascertain what minerals can be found. These are
exploration expenditures to ascertain the existence, location,
extent and quality of the deposit, oil or minerals.
Aside from exploration expenditures, he will also incur
development expenditures pertaining to the development stage
of the mine or other deposits. The development stage begins
from the time deposit of the ores or other minerals are shown to
exist of sufficient commercial quantity and quality and shall end
up on the commencement of the actual commercial extraction.
Prior to commercial extraction, these are the expenses that the
taxpayers incurs – exploration and development expenditures.
After incurring this, the taxpayer goes on the actual commercial
extraction. Let’s say, he incurred 1 billion for exploration and
development expenditures, at the time of the actual commercial
extractions, that 1 billion is not to be claimed an outright
deduction.
The method of claiming and recovering that exploration and
development expenditures is through the process of depletion.
He will recover these expenses relative to the length of time the
extraction will be made. Gagawan niya yan ng kanyang
depletion method. If 10 years siya mag eextract, 10 years din
siya marerecover yung exploration and development
expenditures. After 10 years there is depletion and full
extraction, then he is now able to recover 100% of the
exploration and development expenditures. Parang depreciation
din sya. A cost recovery method. The total expense cannot be
claimed outright at the time you start the commercial extraction.
You claim it towards the life of the mine or the period of time you
will be doing the actual commercial extraction.
Let’s say for example. Depletion therefore is the exhaustion of
natural resources such as mines, oil and gas wells due to
production. How do you determine depletion? The exploration
and development expenditures over the estimated units of
minerals to be extracted is your depletion rate per unit. So when
you have 1 billion of expenditures and you have 1 billion units of
estimated extraction, you have then 1 peso depletion per unit. If
during the 1st year of commercial extraction, you extracted 1
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48
million units. So 1 million units multiplied by 1 peso depletion
rate, then the annual depletion is 1 million peso.
Again, depletion is a cost recovery method to recover your
exploration and development expenditures.
Then you have Section 34 H, charitable and other contributions.
Now, from Section 34A to depletion, all these expenses or
deductions are related to the business, trade or profession.
Under Section 34H, this is a deduction which the law grants and
allows the taxpayers to be claimed which are not related to the
business. It is a recognition of taxpayer’s social responsibility of
sharing what he has earned and generated towards the life of
the business. It is part of his social responsibility to share some
of his resources to others by giving something to charity or to
other people.
SECTION 34(H). CHARITABLE and OTHER
CONTRIBUTIONS
Contributions or gifts made during the tax year or for the use of
the government or any of its agencies or political subdivisions
exclusively for public purposes, or to an accredited entities or
organizations operated for religious, charitable, cultural,
educational, scientific, youth and sports development, or for
rehabilitation of veterans, or to social welfare institutions or to
nongovernment organizations are deductible.
Contributions made under this regard are deductible under
Section 34H by way of charitable and other contributions. Under
34H, there are contributions which are deductible and there are
contributions which are subject to partial deductibility.
What contributions are deductible in full? The contributions
deductible in full are donations to government. When you give
to government, see to it that it is an area for priority development.
Go to the NEDA website to determine what areas are for priority
development. The NEDA website has a list of areas for priority
development. Kung magdonate ka dun, you will be given full
deductibility, unless it is not an area for priority development
even if it is a donation to the government, you will be entitled
only to a partial deductibility. Your contribution or donation will
not be given a 100% deduction.
Another deduction is donations to foreign institutions or
international organizations. This will be given full deductibility.
Then you also have donation to nongovernment organizations.
These are tax free done institutions accredited by Philippine
Council for NGO Certification. In other words, when you donate
or give something to nongovernment institutions, see to it that
it’s a tax-free institution accredited by PCNC so that it will be
given full deductibility. When you give to NGOs, it does not mean
that you are given full deductibility. It should be an accredited
NGO, one which is accredited by PCNC. PCNC is the clearing
house of BIR to accredit non-government organization as a tax-
free institution such that donations made to an accredited NGO
is given 100% deductibility and likewise exempted from the
donor’s tax.
Outside of this 100% deductibility, meaning it is not for an area
of priority development or is not an accredited NGO, it will only
a partial deductibility. The deductibility will be determined
depending on whether it is individual or a corporation.
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
If individual, it will be in an amount not in excess of 10% of
taxable income from trade, business, or profession without the
benefit of this deduction. Meaning, if you say you give 100K, the
10% of the taxable income without the benefit of deduction, is
only 5K. The deduction will only be 5K and not 100K.
The same with corporation, if the actual contribution made by
the corporation is 100K but the 5% of the taxable income will
account for only 15K, then whichever is lower or 15K will be
claimed as deduction. It is in an amount not in excess of 5% of
taxable income without the benefit of this deduction. The
contribution will only be given partial deductibility and not full
deductibility.
If property is given other than money like land, the valuation of
the contribution is the acquisition cost of the property and not
the fair market value of the property.
SECTION 34(I). RESEARCH and DEVELOPMENT
Prior to 34I, research and development was claimed under 34A
because these are what we call ordinary and necessary expense.
34I is a new deduction which came out in 1998 under the Tax
Reform law then. They introduced this new item of deduction called
Research and Development. There are two treatments of Research
and Development as a deduction. At the option of the taxpayer, R&D
may be claimed as ordinary and necessary expense under 34A. Any
expense related to R&D may be claimed outright under 34A. The
2nd option of treating the deduction is to defer th expenses. It will
be treated as deferred expenses. The deferred expenses shall be
allowed as deduction ratably distributed over a period not less than
60 months (5 years) beginning with the month in which the taxpayer
first realizes the benefits of the expenditures. Meaning, they go into
R&D to develop a certain product. It took them 5 years to develop
the product and be able to have it commercially. During the last 5
years, they were deffering the expenses. In the accumulation of
expenses, they were able to spend 4Million in R&D. On the 5th year,
they were now able to have the product and they will launch the
product commercially.
It took them 5 years to develop and have it available commercially.
During the past 5 years they were deferring. In the accumulation of
expenses, they were able to spend 5million for research and
development. On the 5th year, they were going to have the product
launched commercially. They have marketed the product. The 10
million expenses will distributed pro rata over 5 years. They will
claim as deduction 2m every year until they can recover. It’s not that
the 10 million will claimed as deduction immediately at the time they
launched the product. It will be spread out over 5 years
The taxpayer has the option of claiming it immediately under 34A or
defer it under 34I. If deferred and once you realize the benefit of the
expenditure, then when you launch the product that you worked into
R&D, then you claim the expense and spread it out for a number of
5 years.
The limitation here in the case of R&D, it cannot be treated as a
capital account or expenditure which will be subject to depreciation
or depletion. You should claim that as R&D expense whether by way
of ordinary and necessary expense under 34A or a deferred
expense ratably distributed for 5 years beginning on the month the
taxpayer realizes the benefit of the expenditure.
SECTION 34(I). PENSION TRUST
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Similar to R&D, this expenditure has been allowed before. Dun lang
siya sa 34A because the contributions to the pension fund or the
pension trust are ordinary and necessary expense. Therefore, they
can be claimed under 34A. However beginning 1998, there is now
a separate item for this expense which is called pension trust or
contribution to pension trust under 34J. This is not actually new
because taxpayers have been allowed to claim this as deduction
under 34A. The law recognizes it now as a separate deduction item
under 34J.
This is a deduction to provide payment of reasonable pensions to
the employees. In setting the pension trust or the retirement fund or
trust of the employees, there is an amount that will be put up to cover
the length of service of your current employees. You also have the
annual contribution.
Since you would start up the pension trust, there is a substantial
amount that would be put up by the taxpayer to cover the length of
service of your current employees. So if you have for example 100
employees and majority have been with you for the last 10 years,
then 30% of the last 4 years, 10% for the last 3 years etc., you need
a substantial amount to cover the length of service of your current
employees. This is the contribution to set up your pension trust.
As to the contribution to cover past services, the employer has to
put in 100 million to set up the fund. That 100 million is not to be
claimed as an outright deduction. The contribution to cover past
services will be ratably distributed and apportioned to equal parts for
a period of 10 years. The 100 million to set up the fund will not be
deducted as 100 million in the year it was set up. That 100 million
will be ratably distributed for 10 years. On the 1st year, you will only
claim 10 million or 1/10 of 100 million contribution. That 1/10 will
continue and go on until the 10th year. On the 10th year, fully
recovered mo na yung 100 million to set up the trust.
The contribution to set up the fund will not be allowed as deduction
outright. It will be equitably distributed for a period of 10 years. Only
1/10 of the contribution will be claimed as a deduction. On top of the
1/10 is the annual contribution for the current length of service for
the current year. During the 1st 10 years, the contribution will consist
of the 1/10 of the contribution to set up the trust and the annual
contribution. After 10 years or on the 11th year, only the annual
contribution will remain or continue as a deduction.
Those are the itemized deductions from 34A to 34J.Outside of these
itemized deductions, no other deductions are allowed. Only those
recognized under 34A to 34J.
OPTIONAL STANDARD DEDUCTION
The taxpayer aside from the itemized deduction may avail of what
we call as the Optional Standard Deduction or OSD.
Who are allowed to use OSD?
In lieu of the itemized deductions, the taxpayer except the non-
resident alien engaged in trade, business or profession, may elect
OSD as a method of deduction. Meaning, in the case of individuals,
only citizens and resident aliens engaged in trade, business or
profession may avail either the itemized or the OSD. If you are a
non-resident alien engaged in trade, business or profession, you are
not allowed OSD but only itemized deduction. In case of
corporations, the domestic and the resident foreign corporation may
avail of the OSD which as in the case of individuals, 40% of gross
sales or gross receipts and for corporations, 40% of gross income.
The non-resident alien engaged in trade or business is allowed only
the itemized. He is not allowed to use the OSD. The non=resident
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
alien engaged in trade, business or profession is taxed on gross.
The non-resident foreign corporation is taxed on gross.
Election to avail the OSD shall be made on the 1st quarter of the
income tax return because these taxpayers engaged in trade,
business or profession are subject to the quarterly payment of
income tax. When you avail of the OSD in the 1st quarterly tax
return, you will use OSD during the tax year. If you use itemized
deduction in the 1st quarterly tax return, you will use itemized
deduction for the entire year. No hybrid or combination at any time
during the tax year.
If you fail to avail of the OSD, you are deemed to have availed of the
itemized. Once the OSD is availed, it is deemed irrevocable for the
tax year. There is no hybrid or combination of the deduction method
during the tax year.
PARTNERSHIPS
The general profession partnership (GPP) and the partners may
avail of the OSD only once, either by the partnership itself or the
partners. If the GPP availed the itemized or the OSD in determining
its distributable net income, the partners can no longer claim further
deduction from their partner’s distributive share in the net income.
In other words, pag nagclaim ng deduction ang partnership in
determining the distributable net income that will be given to the
individual professional partners, then the professional partners can
no longer claim a deduction because the income they received has
already been subject of the deduction.
Partners in the GPP are also not allowed to avail of the 8% income
tax rate portion. The are subject to the regular graduated rates. They
could not avail of the 8% income tax rate.
If the partner has other income from trade, business or profession
and distinct or different from the share of the GPP, the other income
can avail either the itemized or the OSD.
February 2, 2021 (0:00 – 27:06) | Mariel Banosan
CAPITAL ASSETS v. ORDINARY ASSETS
Capital Assets, defined
Properties of a taxpayer which are not used in the trade or
business e.g., family car of a taxpayer.
Ordinary Assets, defined
Assets which are used in trade or business e.g., office
equipment, machineries, delivery vehicles and etc. These are
used in trade or business.
SEC. 39. Capital Gains and Losses. -
(A) Definitions. - As used in this Title –
(1) Capital Assets. – The term ‘capital assets’ means property
held by the taxpayer (whether or not connected with his trade
or business), but does not include stock in trade of the taxpayer
or other property of a kind which would properly be included in
the inventory of the taxpayer if on hand at the close of the
taxable year or property held by the taxpayer primarily for sale
to customers in the ordinary course of his trade or business, or
property used in the trade or business, of a character which is
subject to the allowance for depreciation provided in Subsection
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(F) of Section 34; or real property used in trade or business of
the taxpayer.
(2) Net Capital Gain. – The term ‘net capital gain’ means the
excess of the gains from sales or exchanges of capital assets
over the losses from such sales or exchanges.
(3) Net Capital Loss. – The term ‘net capital loss’ means the
excess of the losses from sales or exchanges of capital assets
over the gains from such sales or exchanges.
(B) Percentage Taken into Account – In the case of a
taxpayer, other than a corporation, only the following
percentages of the gain or loss recognized upon the sale or
exchange of a capital asset shall be taken into account in
computing net capital gain, net capital loss, and net income.
(1) One hundred percent (100%) if the capital asset has been
held for not more than twelve (12) months; and
(2) Fifty percent (50%) if the capital asset has been held for
more than twelve (12) months;
(C) Limitation on Capital losses. – Losses from sales or
exchange capital assets shall be allowed only to the extent of
the gains from such sales or exchanges. If a bank or trust
company incorporated under the laws of the Philippines, a
substantial part of whose business is the receipt of deposits,
sells any bond, debenture, note, or certificate or other evidence
of indebtedness issued by any corporation (including one
issued by a government or political subdivision thereof), with
interest coupons or in registered form, any loss resulting from
such sale shall not be subject to the foregoing limitation and
shall not be included in determining the applicability of such
limitation to other losses.
(D) Net Capital Loss Carry-Over. – If any taxpayer, other than
a corporation, sustains in any taxable year a net capital loss,
such loss (in an amount not in excess of the net income for such
year) shall be treated in the succeeding taxable year as a loss
from the sale or exchange of a capital asset held for not more
than twelve (12) months.
(E) Retirement of Bonds, Etc. - For purposes of this Title,
amounts received by the holder upon the retirement of bonds,
debentures, notes or certificates or other evidences of
indebtedness issued by any corporation (including those issued
by a government or political subdivision thereof) with interest
coupons or in registered form, shall be considered as amounts
received in exchange therefor.
(F) Gains or losses from Short Sales, Etc. - For purposes of
this Title -
(1) Gains or losses from short sales of property shall be
considered as gains or losses from sales or exchanges of
capital assets; and
(2) Gains or losses attributable to the failure to exercise
privileges or options to buy or sell property shall be considered
as capital gains or losses.
Capital assets are defined in Section 39 in the negative. In the
tax treatment relative to a capital asset transaction, we have
encountered them early on. There was 6% capital gains tax,
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA 51
4 Manresa | SY 2020-2021

15% tax on net capital gains for individuals and domestic
corporations, the 5% and 10% on the capital gains on sales of
stocks not traded in the case of foreign corporations, and the
6/10 of 1% on the sales of shares of stocks traded [Please refer
to and correlate this with Figure 1 – January 19 discussion]
Therefore, in so far as the capital assets transaction are
concerned, their tax treatment will depend on what type of
property is the subject of the transaction. If the property is a real
property and a capital asset, then it will be subject to the 6%
capital gains tax on the basis of the zonal value or the fair market
value of the BIR, or the selling price of the real property,
whichever is higher.
You also have 15% on the net capital gains on the sale of stocks
not traded at the stock exchange in the case of individuals and
domestic corporations. If it is a foreign corporation, it is 5% and
10% on the net capital gains on the sale of stocks not traded at
the stock exchange.
SALE OF SHARES OF STOCK NOT TRADED
(CAPITAL ASSETS)
Individuals and Domestic 15% net capital gains tax
Corporations
Foreign Corporations 5% and 10% net capital
gains tax
Then, you have the 6/10 of 1% on the gross value in money on
the sale, barter, or exchange of shares of stocks traded under
Section 127, which is a percentage tax.
Now, all other capital assets which are not real properties and
not shares of stocks, we will follow the tax treatment under
Section 39. Otherwise stated, in the case of real properties and
shares of stock, they already have their specific tax treatment.
Assuming, in the above examples, these are short period capital
assets, then the entire gain or loss is recognized, the 120,000
and 50,000 will be recognized.
Assuming, these are long period capital assets, then only 50%
of the gain/loss will be recognized. So, 60,000 and 25,000,
respectively will be recognized.
Note that this recognition (long period and short period) will
apply only to individuals, this will not apply to corporations. In
corporations, the entire gain or loss is recognized.
So, the next step is you consolidate the capital gains and the
capital losses during the year. Note that it is a rule that capital
losses are not deductible on your gross income. You can only
deduct your capital losses when you have capital gains. So, you
end up only with either a net capital gain or a net capital loss.
NET CAPITAL GAIN TREATMENT
If you end up with a net capital gain, what is now the tax
treatment? Since this net capital gain is neither shares of stocks
or real property, then this net capital gain is added to the regular
income of the individual which is subject to the 0-35% tax on
income of the individual. If it is a corporation, the net capital gain
is added to the revenue income subject to the 30% corporate
income tax.
Using the above example
If it is short period, and individual taxpayer:
Capital gains 120,000
Capital loss 50,000
Net Capital Gains 70,000

(This 70,000 will be added to the regular income subject to 0-

RECOGNITION OF HOLDING PERIOD 35% graduated rate)
What are the rules in Section 39? One is the recognition of the
gain or loss that will be determined for purposes whether there
is an income or a loss. Except for shares of stocks and real
If long period, and individual taxpayer:
properties, all other capital assets when they will now be sold,
Capital gains 60,000
will be subject to gain or loss recognition.
Capital loss 25,000
Capital gains 35,000
100% of the capital gain or the capital loss will be recognized if
the capital asset was held for 1 year or less before the sale.
(This 35,000 will be added to the regular income subject to 0-
While 50% of the capital gain or loss is recognized if the capital
35% graduated rate)
asset was held for more than 1 year before the sale. So, you
have a transaction involving a short period (1 year or less)
capital asset and long period (more than 1 year) capital asset. If an individual sold jewelry held for short period and long period,
and paintings held for a short and long period, using the same
RECOGNITION OF GAIN/LOSS IN CAPITAL ASSETS amount in the example:
(INDIVIDUALS ONLY)
Capital asset held for 1 year 100% of the gain/loss will be Capital gains 180,000
or less recognized Capital loss 75,000
Capital asset held for more 50% of the gain/loss will be Net Capital Gains 105,000
than 1 year recognized
(This 105,000 will be added to the regular income subject to 0-
35% graduated rate)
EXAMPLE:

Jewelry sold. Paintings sold If corporation:

Price in selling: 200,000 Price in selling: 300,000 Capital gains 120,000
Cost: 80,000 Cost: 350,000 Capital loss 50,000
Gain: 120,000 Loss: 50,000 Net Capital Gains 70,000

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 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
(This 70,000 will be added to the revenue income subject to 30%
tax on corporate income)
NET CAPITAL LOSS TREATMENT
This happens when there are more losses than gains during the
tax year, what will happen? The net capital loss by individual can
be used as a net capital loss carry over. It means that this loss
will be claimed (in the next tax year) as a fresh capital loss and
is chargeable against capital gains of the next year.
However, there is a treatment as to how much loss will be carried
over. You cannot carry over the entire net capital loss of the
previous year, there is a ceiling or a limit. The carry over should
be an amount not exceeding the net income in the year the net
capital loss was sustained.
However, if the one who sustained a net capital loss is a
corporation, there will be no carry over. It is a loss forever. A
corporation is not entitled to claim a net capital loss carry over.
SIMPLE EXAMPLE:
Net income: 100,000
Loss: 150,000
Carry over allowed: 100,000
ANOTHER EXAMPLE:
In 2018, the net income of the individual is 300,000. As to capital
assets transaction, he has a capital gain of 200,000, and
600,000 as capital loss. So, he has a net capital loss of 400,000
in the consolidation. How much can he carry over in 2019? Only
300,000 can be carried over as a fresh capital loss chargeable
in the year 2019.
SHORT SELLING
It is selling a property not yet owned by the taxpayer. This is
treated as gains or losses on sales of capital assets. Any gains
or losses on this will be treated as a capital transaction.
GAINS AND LOSSES FROM WASH SALES
Wash sale is a sale or other disposition of stocks or securities
where substantially identical or the same stocks or securities are
purchased or acquired within 30 days before the sale or 30 days
after the sale. It involves a simultaneous purchase and sale of
the same or identical shares of stock. Losses from wash sales
of stocks and securities under Section 38 are not deductible, but
the gains are taxable.
So, if you have a wash sale of stock or securities and it resulted
in losses, it cannot be deductible. If it resulted to gains, it is
taxable.
NO GAIN OR LOSS RECOGNITION – SECTION 40 (c)
Section 40. Determination of Amount and Recognition of
Gain or Loss. -
(C) Exchange of Property. -
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(1) General Rule. - Except as herein provided, upon the
sale or exchange or property, the entire amount of the gain
or loss, as the case may be, shall be recognized.
(2) Exception. - No gain or loss shall be recognized if in
pursuance of a plan of merger or consolidation -
(a) A corporation, which is a party to a merger or
consolidation, exchanges property solely for stock in a
corporation, which is a party to the merger or consolidation;
or
(b) A shareholder exchanges stock in a corporation, which
is a party to the merger or consolidation, solely for the stock
of another corporation also a party to the merger or
consolidation; or
(c) A security holder of a corporation, which is a party to the
merger or consolidation, exchanges his securities in such
corporation, solely for stock or securities in such
corporation, a party to the merger or consolidation.
No gain or loss shall also be recognized if property is
transferred to a corporation by a person in exchange for
stock or unit of participation in such a corporation of which
as a result of such exchange said person, alone or together
with others, not exceeding four (4) persons, gains control
of said corporation: Provided, That stocks issued for
services shall not be considered as issued in return for
property.
(3) Exchange Not Solely in Kind. -
(a) If, in connection with an exchange described in the
above exceptions, an individual, a shareholder, a security
holder or a corporation receives not only stock or securities
permitted to be received without the recognition of gain or
loss, but also money and/or property, the gain, if any, but
not the loss, shall be recognized but in an amount not in
excess of the sum of the money and fair market value of
such other property received: Provided, That as to the
shareholder, if the money and/or other property received
has the effect of a distribution of a taxable dividend, there
shall be taxed as dividend to the shareholder an amount of
the gain recognized not in excess of his proportionate
share of the undistributed earnings and profits of the
corporation; the remainder, if any, of the gain recognized
shall be treated as a capital gain.
(b) If, in connection with the exchange described in the
above exceptions, the transferor corporation receives not
only stock permitted to be received without the recognition
of gain or loss but also money and/or other property, then
(i) if the corporation receiving such money and/or other
property distributes it in pursuance of the plan of merger or
consolidation, no gain to the corporation shall be
recognized from the exchange, but (ii) if the corporation
receiving such other property and/or money does not
distribute it in pursuance of the plan of merger or
consolidation, the gain, if any, but not the loss to the
corporation shall be recognized but in an amount not in
excess of the sum of such money and the fair market value
of such other property so received, which is not distributed.
(4) Assumption of Liability. -
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
(a) If the taxpayer, in connection with the exchanges
described in the foregoing exceptions, receives stock or
securities which would be permitted to be received without
the recognition of the gain if it were the sole consideration,
and as part of the consideration, another party to the
exchange assumes a liability of the taxpayer, or acquires
from the taxpayer property, subject to a liability, then such
assumption or acquisition shall not be treated as money
and/or other property, and shall not prevent the exchange
from being within the exceptions.
(b) If the amount of the liabilities assumed plus the amount
of the liabilities to which the property is subject exceed the
total of the adjusted basis of the property transferred
pursuant to such exchange, then such excess shall be
considered as a gain from the sale or exchange of a capital
asset or of property which is not a capital asset, as the case
may be.
(5) Basis -
(a) The basis of the stock or securities received by the
transferor upon the exchange specified in the above
exception shall be the same as the basis of the property,
stock or securities exchanged, decreased by (1) the money
received, and (2) the fair market value of the other property
received, and increased by (a) the amount treated as
dividend of the shareholder and (b) the amount of any gain
that was recognized on the exchange: Provided, That the
property received as 'boot' shall have as basis its fair
market value: Provided, further, That if as part of the
consideration to the transferor, the transferee of property
assumes a liability of the transferor or acquires form the
latter property subject to a liability, such assumption or
acquisition (in the amount of the liability) shall, for purposes
of this paragraph, be treated as money received by the
transferor on the exchange: Provided, finally, That if the
transferor receives several kinds of stock or securities, the
Commissioner is hereby authorized to allocate the basis
among the several classes of stocks or securities.
(b) The basis of the property transferred in the hands of the
transferee shall be the same as it would be in the hands of
the transferor increased by the amount of the gain
recognized to the transferor on the transfer.
(6) Definitions. -
(a) The term “securities” means bonds and debentures but
not 'notes" of whatever class or duration.
(b) The term “merger” or “consolidation”, when used in this
Section, shall be understood to mean: (i) the ordinary
merger or consolidation, or (ii) the acquisition by one
corporation of all or substantially all the properties of
another corporation solely for stock: Provided, That for a
transaction to be regarded as a merger or consolidation
within the purview of this Section, it must be undertaken for
a bona fide business purpose and not solely for the
purpose of escaping the burden of taxation: Provided,
further, That in determining whether a bona fide business
purpose exists, each and every step of the transaction shall
be considered and the whole transaction or series of
transaction shall be treated as a single unit: Provided,
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finally, That in determining whether the property transferred
constitutes a substantial portion of the property of the
transferor, the term “property” shall be taken to include the
cash assets of the transferor.
(c) The term “control”, when used in this Section, shall
mean ownership of stocks in a corporation possessing at
least fifty-one percent (51%) of the total voting power of all
classes of stocks entitled to vote.
(1) (d) The Secretary of Finance, upon
recommendation of the Commissioner, is hereby
authorized to issue rules and regulations for the
purpose “substantially all” and for the proper
implementation of this Section.
When properties are exchanged on account of merger or
consolidation, no gain or loss is recognized. Or when property is
exchanged for shares of stocks, there is also no gain or loss
recognition. The reason is that there is no resulting income, only
an exchange or return of capital.
SEC. 41. Inventories. - Whenever in the judgment of the
Commissioner, the use of inventories is necessary in order to
determine clearly the income of any taxpayer, inventories shall
be taken by such taxpayer upon such basis as the Secretary of
Finance, upon recommendation of the Commissioner, may, by
rules and regulations, prescribe as conforming as nearly as may
be to the best accounting practice in the trade or business and
as most clearly reflecting the income.
If a taxpayer, after having complied with the terms and a
conditions prescribed by the Commissioner, uses a particular
method of valuing its inventory for any taxable year, then such
method shall be used in all subsequent taxable years unless:
(i) With the approval of the Commissioner, a change to a
different method is authorized; or
(1) (ii) The Commissioner finds that the nature of the
stock on hand (e.g., its scarcity, liquidity,
marketability and price movements) is such that
inventory gains should be considered realized for
tax purposes and, therefore, it is necessary to
modify the valuation method for purposes of
ascertaining the income, profits, or loss in a more
realistic manner: Provided, however, That the
Commissioner shall not exercise his authority to
require a change in inventory method more often
than once every three (3) years: Provided, further,
That any change in an inventory valuation method
must be subject to approval by the Secretary of
Finance.
Under Section 41, the use of the inventory is to determine the
use of the income of the taxpayer. What is the requirement here
on the taxpayers? It is to use a method of valuing its inventory
which shall be used in all subsequent taxable years. The
valuation method of your inventory is what is provided in Section
41. The taxpayer is required to use a method of valuation in
valuing his inventory. When they would like to change an
inventory method, they will need the approval of the BIR or the
Commissioner of Internal Revenue.
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA 54
4 Manresa | SY 2020-2021

February 2, 2021 (27:07 – 54:13) | Francris Talon
How to determine inventory method?
In determining unreported income by the use of the inventory
method, this is determined by the beginning inventory, meaning
the stock for sale during year at the end of the tax year. So, in
January there is beginning inventory. Then you add your
purchases during the year. So all these, your beginning
inventory in January 1 plus your purchases during the year will
constitute the inventory available for sale to your customers.
Then less the cost of goods sold. Form this inventory how much
were sold? The cost of goods sold. The remainder will be the
ending inventory which is the remaining unsold inventory or
materials at the end of the year. So in the next tax year beginning
inventory again depending on the ending inventory on the
previous tax year. That is where now the BIR would determine if
there is unreported income. On the basis on the inventory
method.
he would determine the income and expenses during the
calendar year.
So the accounting period of the tax year may either be calendar
year (from January to December or the fiscal year (which is any
period of 12 months which does not begin in January and does
not end on December).
Individuals are required only to use the calendar year as their
tax year or accounting period. So individuals are allowed only to
use the calendar year. The corporations may use either.
Section 46. Change of Accounting Period. – If a taxpayer,
other than an individual, changes his accounting period from
fiscal year to calendar year, from calendar year to fiscal year, or
from one fiscal year to another, the net income shall, with the
approval of the Commissioner, be computed on the basis of
such new accounting period, subject to the provisions of
Section 47.

Section 43. General Rule. – The taxable income shall be Section 47. Final or Adjustment Returns for a Period of
computed upon the basis of the taxpayer’s annual accounting Less than Twelve (12) Months. –
period (fiscal year or calendar year, as the case may be) in
accordance with the method of accounting regularly employed
(A) Returns for Short Period Resulting from Change of
in keeping the books of such taxpayer, but if no such method of
Accounting Period. – If a taxpayer, other than an individual, with
accounting has been so employed, or if the method employed
the approval of the Commissioner, changes the basis of
does not clearly reflect the income, the computation shall be
computing net income from fiscal year to calendar year, a
made in accordance with such method as in the opinion of the
separate final or adjustment return shall be made for the period
Commissioner clearly reflects the income. If the taxpayer’s
between the close of the last fiscal year for which return was
annual accounting period is other than a fiscal year, as defined
made and the following December 31. If the change is from
in Section 22(Q), or if the taxpayer has no annual accounting
calendar year to fiscal year, a separate final or adjustment
period, or does not keep books, or if the taxpayer is an
return shall be made for the period between the close of the last
individual, the taxable income shall be computed on the basis
calendar year for which return was made and the date
of the calendar year.
designated as the close of the fiscal year. If the change is from
one fiscal year to another fiscal year, a separate final or
Section 44. Period in which Items of Gross Income adjustment return shall be made for the period between the
Included. – The amount of all items of gross income shall be close of the former fiscal year and the date designated as the
included in the gross income for the taxable year in which close of the new fiscal year.
received by the taxpayer, unless, under methods of accounting
permitted under Section 43, any such amounts are to be
(B) Income Computed on Basis of Short Period. – Where a
properly accounted for as of a different period. In the case of
separate final or adjustment return is made under Subsection
the death of a taxpayer, there shall be included in computing
(A) on account of a change in the accounting period, and in all
taxable income for the taxable period in which falls the date of
other cases where a separate final or adjustment return is
his death, amounts accrued up to the date of his death if not
required or permitted by rules and regulations prescribed by the
otherwise properly includible in respect of such period or a prior
Secretary of Finance, upon recommendation of the
period.
Commissioner, to be made for a fractional part of a year, then
the income shall be computed on the basis of the period for
Section 45. Period for which Deductions and Credits which separate final or adjustment return is made.
Taken. – The deductions provided for in this Title shall be taken
for the taxable year in which ‘paid or accrued’ or ‘paid or
If a corporation will change its tax period, from calendar to fiscal,
incurred’, dependent upon the method of accounting the basis
they could not just do that at their own behest. However, they
of which the net income is computed, unless in order to clearly
need the approval and consent from the BIR. They should notify
reflect the income, the deductions should be taken as of a
the BOR that they will be changing its tax period or accounting
different period. In the case of the death of a taxpayer, there
period from calendar to fiscal year or vice versa.
shall be allowed as deductions for the taxable period in which
falls the date of his death, amounts accrued up to the date of
Now accounting methods. This goes both to individuals and
his death if not otherwise properly allowable in respect of such
corporations. The accounting method of income and deductions
period or a prior period.
is cash basis or accrual basis. So the cash basis is what we call
the actual receipt recognition of income or deductions. While the
The subsequent discussion will be administrative matters which accrual basis used the constructive method of recognizing
we have taken earlier. As requirements for tax payers to follow. income and deductions. The taxpayer may either use either.
So for example is the accounting period and accounting There is no combination or hybrid method.
methods. So for income tax purposes, the tax payer is required
to follow an accounting period for a tax year. So if the tax payer
uses the calendar year, then that should be the method where
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4 Manresa | SY 2020-2021
Changing the accounting method,. This will require an approval
from the BIR as regards the corporations. However this is not
required in the case of individuals. However, if he wants to shift,
it will be applicable in the next tax period. He cannot change in
the middle of the tax period.
So in the case of shifting your tax period, the corporation is
required to file a short period return. This short period return
covers the months which will not be covered by reason of
transition of the tax period. So in the course of transition there
are number of months that will not be covered. Thus they are
required to file a short period return.
Section 48. Accounting for Long-term Contracts. – Income
from long-term contracts shall be reported for tax purposes in
the manner as provided in this Section. As used herein, the term
‘long-term contracts’ means building, installation or
construction contracts covering a period in excess of one (1)
year. Persons whose gross income is derived in whole or in part
from such contracts shall report such income upon the basis of
percentage of completion. The return should be accompanied
by a return certificate of architects or engineers showing the
percentage of completion during the taxable year of the entire
work performed under contract. There should be deducted from
such gross income all expenditures made during the taxable
year on account of the contract, account being taken of the
material and supplies on hand at the beginning and end of the
taxable period for use in connection with the work under the
contract but not yet so applied. If upon completion of a contract,
it is found that the taxable net income arising thereunder has
not been clearly reflected for any year or years, the
Commissioner may permit or require an amended return.
When we account income and deductions, we account them
annually. If the taxpayer has a long term contract, he cannot
report his entire income if the long term contract will cover more
than one tax year. Let’s say he has a long term contract of 5
years to build a skyway. So that income that will be earned form
that long term contract will to be reported at once during the tax
year.
So there is a method under Section 48 to account for the income
on long term contracts. So long term contracts will cover the
building and the installation or construction contracts covering a
period of more than 1 year. The accounting method is the
percentage of completion. So if during the first year, 10%
competed then 10% of the income is recognize. On the following
year another 15% was completed. So 15% of the contract will
be reported as income. That is what we call as percentage of
completion method. So you report the income vis-à-vis the
completion that was made during the tax period.
Section 49. Installment Basis. –
(A) Sales of Dealers in Personal Property. – Under rules and
regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, a person who regularly
sells or otherwise disposes of personal property on the
installment plan may return as income therefrom in any taxable
year that proportion of the installment payments actually
received in that year, which the gross profit realized or to be
realized when payment is completed, bears to the total contract
price.
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(B) Sales of Realty and Casual Sales of Personality. – In the
case (1) of a casual sale or other casual disposition of personal
property (other than property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close
of the taxable year), for a price exceeding One thousand pesos
(PhP1,000), or (2) of a sale or other disposition of real property,
if in either case the initial payments do not exceed twenty-five
percent (25%) of the selling price, the income may, under the
rules and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner, be returned on the
basis and in the manner above prescribed in this Section. As
used in this Section, the term ‘initial payments’ means the
payments received in cash or property other than evidences of
indebtedness of the purchaser during the taxable period in
which the sale or other disposition is made.
(C) Sales of Real Property Considered as Capital Asset by
Individuals. – An individual who sells or disposes of real
property, considered as capital asset, and is otherwise qualified
to report the gain therefrom under Subsection (B) may pay the
capital gains tax in installments under rules and regulations to
be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
(D) Change from Accrual to Installment Basis. – If a taxpayer
entitled to the benefits of Subsection (A) elects for any taxable
year to report his taxable income on the installment basis, then
in computing his income for the year of change or any
subsequent year, amounts actually received during any such
year on account of sales or other dispositions of property made
in any prior year shall not be excluded.
Then installment basis of reporting income. So there are
taxpayers who sell merchandise for installments. Under Section
49, there is a method of reporting income based on installments.
Taxpayers may report their income on installments where they
are dealer in personal property, sales of real property or realty
or sales of personalty sold in installments. For example selling
of land in a subdivision payable in 10 years. Selling of a condo
payable in 20 or 25 years. So report the income on installment
basis.
Section 50. Allocation of Income and Deductions. – In the
case of two or more organizations, trades or businesses
(whether or not incorporated and whether or not organized in
the Philippines) owned or controlled directly or indirectly by the
same interests, the Commissioner is authorized to distribute,
apportion or allocate gross income or deductions between or
among such organization, trade or business, if he determines
that such distribution, apportionment or allocation is necessary
in order to prevent evasion of taxes or clearly to reflect the
income of any such organizations, trades or businesses.
Then allocation of income and deductions. This takes place
when the taxpayer has a very unique set-up. For example, The
corporation serves several entities and then the income comes
from several lines of business and there is only one mother
corporation. Then there are expenses which are shared by these
5 line so services.
For example the security guard services. They serve these 5
lines of services. Take note that these 5 lines of services have
different items of income which are reported back to the mother
corporations. So how are they going to allocated it? How will the
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4 Manresa | SY 2020-2021

income be matched with the deductions? That is now answered
by section 50. The law allows the taxpayer if he cannot identify
that these deductions is charged to line A or B of business then
make the proper allocation or prorating. Either allocate or
prorate.
(d) A minimum wage earner as defined in Section
22(HH) of this Code or an individual who is exempt from
income tax pursuant to the provisions of this Code and
other laws, general or special.16

So section 50 empowers the BIR to distribute, apportion or
allocate or pro-rate the gross income or deductions between or
among trade of business in order to prevent evasion or clearly
to reflect the income of the said trade or business, so the BIR
will make the corresponding allocation of the deduction and
income to reflect the true income of the said trade or business.
CHAPTER IX
RETURNS AND PAYMENT OF TAX
Section 51. Individual Return. –
(A) Requirements. –
(3) The foregoing notwithstanding, any individual not
required to file an income tax return may nevertheless be
required to file an information return pursuant to rules and
regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
(4) The income tax return shall be filed in duplicate by the
following persons:
(a) A resident citizen – on his income from all sources;
(b) A non-resident citizen – on his income derived from
sources within the Philippines;

(1) Except as provided in paragraph (2) of this Subsection,
the following individuals are required to file an income tax
return:
(a) Every Filipino citizen residing in the Philippines;
(b) Every Filipino citizen residing outside the Philippines,
on his income from sources within the Philippines;
(c) Every alien residing in the Philippines, on income
derived from sources within the Philippines; and
(d) Every non-resident alien engaged in trade or
business or in the exercise of profession in the
Philippines.
(2) The following individuals shall not be required to file an
income tax return;
(a) An individual whose taxable income does not exceed
Two hundred fifty thousand pesos (PhP250,000) under
Section 24(A)(2)(a): Provided, That a citizen of the
Philippines and any alien individual engaged in business
or practice of profession within the Philippines shall file
an income tax return, regardless of the amount of gross
income;
(c) A resident citizen – on his income derived from
sources within the Philippines; and
(d) A non-resident alien engaged in trade or business
in the Philippines – on his income derived from sources
within the Philippines.
(5) The income tax return (ITR) shall consist of a maximum of
four (4) pages in paper form or electronic form, and shall only
contain the following information:
(A) Personal Profile Information;
(B) Total gross sales, receipts or income from
compensation for services rendered, conduct of trade
or business or the exercise of a profession, except
income subject to final tax as provided under this Code;
(C) Allowable deductions under this Code;
(D) Taxable income as defined in Section 31 of this
Code; and
(E) Income tax due and payable.

(b) An individual with respect to pure compensation

(B) Where to File. – Except in cases where the Commissioner
income, as defined in Section 32(A)(1), derived from
otherwise permits, the return shall be filed with an authorized
sources within the Philippines, the income tax on which
agent bank, Revenue District Officer, Collection Agent or duly
has been correctly withheld under the provisions of
authorized Treasurer of the city or municipality in which such
Section 79 of this Code: Provided, That an individual
person has his legal residence or principal place of business in
deriving compensation concurrently from two or more
the Philippines, or if there be no legal residence or place of
employers at any time during the taxable year shall file
business in the Philippines, with the Office of the Commissioner.
an income tax return;15
(C) When to File. –
(c) An individual whose sole income has been subjected
to final withholding tax pursuant to Section 57(A) of this
Code; and

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4 Manresa | SY 2020-2021

(1) The return of any individual specified above shall be filed
on or before the fifteenth (15th) day of April of each year
covering income for the preceding taxable year.
(2) Individuals subject to tax on capital gains;
(a) From the sale or exchange of shares of stock not
traded thru a local stock exchange as prescribed
under Section 24(c) shall file a return within thirty (30)
days after each transaction and a final consolidated
return on or before April 15 of each year covering all
stock transactions of the preceding taxable year; and
(b) From the sale or disposition of real property under
Section 24(D) shall file a return within thirty (30) days
following each sale or other disposition.
Who are those not required?
a) (a) An individual whose taxable income does not
exceed Two hundred fifty thousand pesos
(PhP250,000) under Section 24(A)(2)(a): Provided,
That a citizen of the Philippines and any alien individual
engaged in business or practice of profession within
the Philippines shall file an income tax return,
regardless of the amount of gross income;
b) An individual with respect to pure compensation
income, as defined in Section 32(A)(1), derived from
sources within the Philippines, the income tax on which
has been correctly withheld under the provisions of
Section 79 of this Code: Provided, That an individual
deriving compensation concurrently from two or more
employers at any time during the taxable year shall file
an income tax return;

(D) Husband and Wife. – Married individuals, whether citizens,

The employer is required to make a correct
resident or non-resident aliens, who do not derive income
purely from compensation, shall file a return for the taxable year whtholding. So that at the end of the year, the
employer should adjust and compte the
to include the income of both spouses, but where it is
correct withholding tax of the employees. So
impracticable for the spouses to file one return, each spouse
if the income tax has been properly withheld
may file a separate return of income but the returns so filed shall
and adjusted, at the end of the tax year, then
be consolidated by the Bureau for purposes of verification for
the taxable year. the tax payer need not file another return
because the income that will declared in the
return is the same as what has been subject
(E) Return of Parent to Include Income of Children. – The of withholding. But if there are multiple
income of unmarried minors derived from property received employers, file the ITR.
from a living parent shall be included in the return of the parent,
except (1) when the donor’s tax has been paid on such property,
or (2) when the transfer of such property is exempt from donor’s c) An individual whose sole income has been subjected
tax. to final withholding tax pursuant to Section 57(A) of this
Code; and
d) A minimum wage earner as defined in Section 22(HH)
(F) Persons Under Disability. – If the taxpayer is unable to make
his own return, the return may be made by his duly authorized of this Code or an individual who is exempt from
agent or representative or by the guardian or other person income tax pursuant to the provisions of this Code and
charged with the care of his person or property, the principal other laws, general or special.16
and his representative or guardian assuming the responsibility
of making the return and incurring penalties provided for
Note: Succeeding discussion reiterates only what is written on
erroneous, false or fraudulent returns.
the provision. Please read the provision.

(G) Signature Presumed Correct. – The fact that an individual’s CRITERIA ITR TO FILE
name is signed to a filed return shall be prima facie evidence Quarterly (May 15, August
for all purposes that the return was actually signed by him. 15 and November 15)
Individuals engaged in trade
and business Annual (April 15 of the
Section 51–A. Substituted Filing of Income Tax Returns by following year)
Employees Receiving Purely Compensation Income. –
Individual taxpayers receiving purely compensation income, Follow fiscal or calendar
regardless of amount, from only one employer in the Philippines year.
for the calendar year, the income tax of which has been withheld
correctly by the said employer (tax due equals tax withheld) Quarterly returns will have
shall not be required to file an annual income tax return. The to be filed within 60 days
certificate of withholding filed by the respective employers, duly following the close of the
Corporations
stamped ‘received’ by the BIR, shall be tantamount to the taxable quarter.
substituted filing of income tax returns by said employees.
Annual return: 15th day of
Individuals are required to file income tax returns. So who are the 4th month following the
these individuals? We have citizens and resident aliens deriving end of the tax year.
compensation or engaged in trade or business or practice of
profession. So they are required to file ITRs.

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From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
Section 52. Corporation Returns. –
(A) Requirements. – Every corporation subject to the tax herein
imposed, except foreign corporations not engaged in trade or
business in the Philippines, shall render, in duplicate, a true and
accurate quarterly income tax return and final or adjustment
return in accordance with the provisions of Chapter XII of this
Title. The income tax return shall consist of a maximum of four
(4) pages in paper form or electronic form, be filed by the
president, vice-president or other principal officer, shall be
sworn to by such officer and by the treasurer or assistant
treasurer, and shall only contain the following information:
(1) Corporate profile and information;
(2) Gross sales, receipts or income from services
rendered, or conduct of trade or business, except income
subject to final tax as provided under this Code;
(3) Allowable deductions under this Code;
(4) Taxable income as defined in Section 31 of this Code;
and
(5) Income tax due and payable.
Provided, That the foregoing provisions shall not affect the
implementation of Republic Act No. 10708 or TIMTA.
(B) Taxable Year of Corporation. – A corporation may employ
either calendar year or fiscal year as a basis for filing its annual
income tax return: Provided, That the corporation shall not
change the accounting period employed without prior approval
from the Commissioner in accordance with the provisions of
Section 47 of this Code.
C) Return of Corporation Contemplating Dissolution or
Reorganization. – Every corporation shall, within thirty (30) days
after the adoption by the corporation of a resolution or plan for
its dissolution, or for the liquidation of the whole or any part of
its capital stock, including a corporation which has been notified
of possible involuntary dissolution by the Securities and
Exchange Commission; or for its reorganization, render a
correct return to the Commissioner, verified under oath, setting
forth the terms of such resolution or plan and such other
information as the Secretary of Finance, upon recommendation
of the Commissioner, shall, by rules and regulations, prescribe.
The dissolving or reorganizing corporation shall, prior to the
issuance by the Securities and Exchange Commission of the
Certificate of Dissolution or Reorganization, as may be defined
by rules and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner, secure a
certificate of tax clearance from the Bureau of Internal Revenue
which certificate shall be submitted to the Securities and
Exchange Commission.
(D) Return on Capital Gains Realized from Sale of Shares of
Stock not Traded in the Local Stock Exchange. – Every
corporation deriving capital gains from the sale or exchange of
shares of stock not traded thru a local stock exchange as
prescribed under Sections 24(C), 25(A)(3), 27(E)(2),
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28(A)(8)(c) and 28(B)(5)(c), shall file a return within thirty (30)
days after each transaction and a final consolidated return of all
transactions during the taxable year on or before the fifteenth
(15th) day of the fourth (4th) month following the close of the
taxable year.
For corporations: they follow the calendar or fiscal year. so
quarterly returns will have to be filed within 60 days following the
close of the taxable quarter. Annual return: 15th day of the 4th
month following the end of the tax year.
For corporations contemplating dissolution or reorganization,
they are required to file within 30 days from the adoption of the
resolution to dissolve or liquidate and to render a correct return
and secure a tax clearance. Thus it need not wait that they finish
the tax year.
Section 53. Extension of Time to File Returns. – The
Commissioner may, in meritorious cases, grant a reasonable
extension of time for filing returns of income (or final and
adjustment returns in case of corporations), subject to the
provisions of Section 56 of this Code.
Section 54. Returns of Receivers, Trustees in Bankruptcy
or Assignees. – In cases wherein receivers, trustees in
bankruptcy or assignees are operating the property or business
of a corporation, subject to the tax imposed by this Title, such
receivers, trustees or assignees shall make returns of net
income as and for such corporation, in the same manner and
form as such organization is herein before required to make
returns, and any tax due on the income as returned by
receivers, trustees or assignees shall be assessed and
collected in the same manner as if assessed directly against the
organizations of whose businesses or properties they have
custody or control.
Section 55. Returns of General Professional Partnerships.
– Every general professional partnership shall file, in duplicate,
a return of its income, except income exempt under Section 32
(B) of this Title, setting forth the items of gross income and of
deductions allowed by this Title, and the names, Taxpayer
Identification Numbers (TIN), addresses and shares of each of
the partners.
Section 56. Payment and Assessment of Income Tax for
Individuals and Corporations. –
(A) Payment of Tax. –
(1) In General. – The total amount of tax imposed by this
Title shall be paid by the person subject thereto at the
time the return is filed. In the case of tramp vessels, the
shipping agents and/or the husbanding agents, and in
their absence, the captains thereof are required to file the
return herein provided and pay the tax due thereon before
their departure. Upon failure of the said agents or
captains to file the return and pay the tax, the Bureau of
Customs is hereby authorized to hold the vessel and
prevent its departure until proof of payment of the tax is
presented or a sufficient bond is filed to answer for the tax
due.
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
(2) Installment of Payment. – When a tax due is in excess
of Two thousand pesos (PhP2,000), the taxpayer other
than a corporation, may elect to pay the tax in two (2)
equal installments, in which case, the first installment
shall be paid at the time the return is filed and the second
installment on or before October 15 following the close of
the calendar year, if any installment is not paid on or
before the date fixed for its payment, the whole amount
of the tax unpaid becomes due and payable together with
the delinquency penalties.
(3) Payment of Capital Gains Tax. – The total amount of
tax imposed and prescribed under Section 24(C), 24(D),
27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall be paid on the
date the return prescribed therefor is filed by the person
liable thereto: Provided, That if the seller submits proof of
his intention to avail himself of the benefit of exemption of
capital gains under existing special laws, no such
payments shall be required : Provided, further, That in
case of failure to qualify for exemption under such special
laws and implementing rules and regulations, the tax due
on the gains realized from the original transaction shall
immediately become due and payable, and subject to the
penalties prescribed under applicable provisions of this
Code: Provided, finally, That if the seller, having paid the
tax, submits such proof of intent within six (6) months
from the registration of the document transferring the real
property, he shall be entitled to a refund of such tax upon
verification of his compliance with the requirements for
such exemption.
In case the taxpayer elects and is qualified to report the gain
by installments under Section 49 of this Code, the tax due
from each installment payment shall be paid within (30)
days from the receipt of such payments.
No registration of any document transferring real property
shall be effected by the Register of Deeds unless the
Commissioner or his duly authorized representative has
certified that such transfer has been reported, and the tax
herein imposed, if any, has been paid.
(B) Assessment and Payment of Deficiency Tax. – After the
return is filed, the Commissioner shall examine it and assess
the correct amount of the tax. The tax or deficiency income tax
so discovered shall be paid upon notice and demand from the
Commissioner.
As used in this Chapter, in respect of a tax imposed by this Title,
the term ‘deficiency’ means:
(1) The amount by which the tax imposed by this Title
exceeds the amount shown as the tax by the taxpayer
upon his return; but the amount so shown on the return
shall be increased by the amounts previously assessed
(or collected without assessment) as a deficiency, and
decreased by the amount previously abated, credited,
returned or otherwise repaid in respect of such tax; or
(2) If no amount is shown as the tax by the taxpayer
upon his return, or if no return is made by the taxpayer,
then the amount by which the tax exceeds the amounts
previously assessed (or collected without assessment)
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as a deficiency; but such amounts previously assessed
or collected without assessment shall first be decreased
by the amounts previously abated, credited, returned or
otherwise repaid in respect of such tax.
Payment and assessment of the tax. Pay upon filing. Installment
payment are allowed in individuals but not in corporations. When
a tax due is in excess of Two thousand pesos (PhP2,000), the
taxpayer other than a corporation, may elect to pay the tax in
two (2) equal installments, in which case, the first installment
shall be paid at the time the return is filed and the second
installment on or before October 15 following the close of the
calendar year, if any installment is not paid on or before the date
fixed for its payment, the whole amount of the tax unpaid
becomes due and payable together with the delinquency
penalties.
Assessment and Payment of Deficiency Tax. – After the return
is filed, the Commissioner shall examine it and assess the
correct amount of the tax. The tax or deficiency income tax so
discovered shall be paid upon notice and demand from the
Commissioner. So that is the provision.
Section 57. Withholding of Tax at Source. –
(A) Withholding of Final Tax on Certain Incomes. – Subject to
rules and regulations the Secretary of Finance may promulgate,
upon the recommendation of the Commissioner, requiring the
filing of income tax return by certain income payees, the tax
imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C),
24(D)(1); 25(A) (2), 25(A)(3), 25(B), 25(C), 25(D), 25(E),
27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5),
28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2),
28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and
282 of this Code on specified items of income shall be withheld
by payor-corporation and/ or person and paid in the same
manner and subject to the same conditions as provided in
Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. – The Secretary of
Finance may, upon the recommendation of the Commissioner,
require the withholding of a tax on the items of income payable
to natural or juridical persons, residing in the Philippines, by
payor- corporation/persons as provided for by law, at the rate of
not less than one percent (1%) but not more than thirty-two
percent (32%) thereof, which shall be credited against the
income tax liability of the taxpayer for the taxable year:
Provided, That, beginning January 1, 2019, the rate of
withholding shall not be less than one percent (1%) but not more
than fifteen percent (15%) of the income payment.
(C) Tax-free Covenant Bonds. - In any case where bonds,
mortgages, deeds of trust or other similar obligations of
domestic or resident foreign corporations, contain a contract or
provisions by which the obligor agrees to pay any portion of the
tax imposed in this Title upon the obligee or to reimburse the
obligee for any portion of the tax or to pay the interest without
deduction for any tax which the obligor may be required or
permitted to pay thereon or to retain therefrom under any law of
the Philippines, or any state or country, the obligor shall deduct
and withhold a tax equal to thirty percent (30%) of the interest
or other payments upon those bonds, mortgages, deeds of trust
or other obligations, whether the interest or other payments are
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
payable annually or at shorter or longer periods, and whether
the bonds, securities or obligations had been or will be issued
or marketed, and the interest or other payment thereon paid,
within or without the Philippines, if the interest or other payment
is payable to a non-resident alien or to a citizen or resident of
the Philippines.
Section 58. Returns and Payment of Taxes Withheld at
Source. –
(A) Quarterly Returns and Payments of Taxes Withheld. –
Taxes deducted and withheld under Section 57 by withholding
agents shall be covered by a return and paid to, except in cases
where the Commissioner otherwise permits, an authorized
agent bank, Revenue District Officer, Collection Agent or duly
authorized Treasurer of the city or municipality where the
withholding agent has his legal residence or principal place of
business, or where the withholding agent is a corporation,
where the principal office is located.
The taxes deducted and withheld by the withholding agent shall
be held as a special fund in trust for the government until paid
to the collecting officers.
The return for final and creditable withholding taxes shall be
filed and the payment made not later than the last day of the
month following the close of the quarter during which
withholding was made.
(B) Statement of Income Payments Made and Taxes Withheld.
– Every withholding agent required to deduct and withhold taxes
under Section 57 shall furnish each recipient, in respect to his
or its receipts during the calendar quarter or year, a written
statement showing the income or other payments made by the
withholding agent during such quarter or year, and the amount
of the tax deducted and withheld therefrom, simultaneously
upon payment at the request of the payee, but not later than the
twentieth (20th) day following the close of the quarter in the
case of corporate payee, or not later than March 1 of the
following year in the case of individual payee for creditable
withholding taxes. For final withholding taxes, the statement
should be given to the payee on or before January 31 of the
succeeding year.
(C) Annual Information Return. – Every withholding agent
required to deduct and withhold taxes under Section 57 shall
submit to the Commissioner an annual information return
containing the list of payees and income payments, amount of
taxes withheld from each payee and such other pertinent
information as may be required by the Commissioner. In the
case of final withholding taxes, the return shall be filed on or
before January 31 of the succeeding year, and for creditable
withholding taxes, not later than March 1 of the year following
the year for which the annual report is being submitted. This
return, if made and filed in accordance with the rules and
regulations approved by the Secretary of Finance, upon
recommendation of the Commissioner, shall be sufficient
compliance with the requirements of Section 68 of this Title in
respect to the income payments.
The withholding of tax is the collection of the tax at the source of
the income. This is a feature introduced in our income tax
system. There is that principle of “pay as you go”. Like in the
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The Commissioner may, by rules and regulations, grant to any
withholding agent a reasonable extension of time to furnish and
submit the return required in this Subsection.
(D) Income of Recipient. – Income upon which any creditable
tax is required to be withheld at source under Section 57 shall
be included in the return of its recipient but the excess of the
amount of tax so withheld over the tax due on his return shall
be refunded to him subject to the provisions of Section 204; if
the income tax collected at source is less than the tax due on
his return, the difference shall be paid in accordance with the
provisions of Section 56.
All taxes withheld pursuant to the provisions of this Code and
its implementing rules and regulations are hereby considered
trust funds and shall be maintained in a separate account and
not commingled with any other funds of the withholding agent.
(E) Registration with Register of Deeds. – No registration of any
document transferring real property shall be effected by the
Register of Deeds unless the Commissioner or his duly
authorized representative has certified that such transfer has
been reported, and the capital gains or creditable withholding
tax, if any, has been paid: Provided, however, That the
information as may be required by rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation
of the Commissioner, shall be annotated by the Register of
Deeds in the Transfer Certificate of Title or Condominium
Certificate of Title: Provided, further, That in cases of transfer of
property to a corporation, pursuant to a merger, consolidation
or reorganization, and where the law allows deferred
recognition of income in accordance with Section 40, the
information as may be required by rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation
of the Commissioner, shall be annotated by the Register of
Deeds at the back of the Transfer Certificate of Title or
Condominium Certificate of Title of the real property involved:
Provided, finally, That any violation of this provision by the
Register of Deeds shall be subject to the penalties imposed
under Section 269 of this Code.
Section 59. Tax on Profits Collectible from Owner or Other
Persons. –
The tax imposed under this Title upon gains, profits, and income
not falling under the foregoing and not returned and paid by
virtue of the foregoing or as otherwise provided by law shall be
assessed by personal return under rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation
of the Commissioner. The intent and purpose of the Title is that
all gains, profits and income of a taxable class, as defined in
this Title, shall be charged and assessed with the
corresponding tax prescribed by this Title, and said tax shall be
paid by the owners of such gains, profits and income, or the
proper person having the receipt, custody, control or disposal
of the same. For purposes of this Title, ownership of such gains,
profits and income or liability to pay the tax shall be determined
as of the year for which a return is required to be rendered.
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
case of employees, when the employees receive their monthly
compensation, that is already the net of the withholding tax.
Also when you sell real property. You pay the capital gains tax.
The gain from that transaction is not anymore mingled in the
income of the taxpayer. The income is already collected at the
time of the transaction and you are requires to pay the capital
gain tax within 30 days from the sale of the real property. That
is also a system of withholding.
Forms and Kinds of Withholding Tax
1. Final withholding tax
Tax on interest income on bank deposits, the capital
gains tax, share of stocks not traded at the stocks
exchanges, other passive income (royalties, winnings,
etc.), prizes, awards. When your receive the amount it
is already the net, the balance. Already subjected to a
withholding.
2. Creditable withholding tax.
Withholding of an income where in the amount that has
been withheld, must be reported again it the return and
be claimed as a credit. For example, when lawyers bill
their clients, the clients paid their lawyers subject to the
withholding tax (ex: 5% or 10%). So the taxpayers
receives the payment net of the tax. So when the
taxpayer now files the annual return, that income he
billed to the customer or client will be reported. And the
withheld tax will be credited against the tax due. You
will pay only the balance after claiming the creditable
taxes.
3. Withholding tax on wages (compensation).
This is the withholding made by the employers.
4. Withholding through payment of the quarterly income
tax returns and taxes paid by the corporations.
Upon filing of the annual tax returns, the payment made
in the quarterly taxes may be credited. Thus, only the
balance will be paid (technically, the 4th quarter). Only
that there was advancement of payment.
5. Quarterly income tax return of individuals engaged in
business or practice of profession
February, 2021 (54:14 – end) | Emille Dane S. Viola
INCOME TAX OF ESTATES AND TRUST
In the classification of income tax payers, we have classified our
income tax payers as to individuals, corporations, partnerships,
then estate and trusts.
Estates and trusts are treated as separate taxable persons. The
estate is the property left behind by the decedent; while the trust
is created by the grantor in favor of a beneficiary of a trust.
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These estates and trust may have income earning properties.
The estate and trust will be treated for income tax purposes as
a separate taxable person from the decedent and from the
grantor, respectively.
Estates therefore, are taxable persons on the income earned or
realized pending the settlement of the estate. Same with the
property held in trust, they will be taxed like individuals. We will
follow the tax rates imposed on individuals from 0-35%.
Employee’s Trust
Take note of the income of employees trust, forming part of a
pension, stock bonus, or profit sharing plan for the benefit of
employees. This trust is not a taxable trust. When a trust fund is
created for the employees, set up by the employer, the income
earned by the trust (because this trust now will be treated as a
separate taxable person from the personality of the grantor
employer) the income of the trust ordinarily would be subject to
income tax, but if the trust created is a pension trust, stock
bonus, or profit sharing plan, or a retirement trust, then the
income of this trust is not taxable. It is exempted from tax.
Who are to pay the income tax
The beneficiaries of the estate are also separate and distinct
from the taxable estate.
In the payment of taxes, the trust through its fiduciary, or the
taxable estate through the executor or administrator pays the
tax. If there is no executor or administrator and the estate is
earning income, then the heirs prior to settlement will be the one
to pay the tax, of course such amount shall be taken from the
income of the estate. Anyone from among the heirs with the
consent of the common heirs who is the caretaker or
administrator may pay.
Multiple Trusts
When two or more trusts is created by the same grantor for the
same beneficiaries, there is a different tax treatment. Ordinarily,
when a trust is created, they are treated as a separate taxable
person, but in case of two or more trust by the same grantor for
the same beneficiary, these trusts would be consolidated.
The taxable income of the trusts will be consolidated and the
payment of the tax will be shared by the trusts in proportion to
their taxable income. However, if there are different
beneficiaries, there is no consolidation.
The taxable income is computed in the same manner and basis
as in the case of individuals, thus they are entitled to claim
deductions. The income distributed to the beneficiaries can be
claimed as a deduction against the taxable income. The
personal exemptions for estates and trusts are already repealed
under train.
EXCEPTIONS TO THE SEPARATE PERSONALITY
PRINCIPLE
Revocable Trust (Sec. 63)
SEC. 63. Revocable trusts. - Where at any time the power to
revest in the grantor title to any part of the corpus of the trust is
vested (1) in the grantor either alone or in conjunction with any
person not having a substantial adverse interest in the
disposition of such part of the corpus or the income therefrom,
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA
4 Manresa | SY 2020-2021
or (2) in any person not having a substantial adverse interest in
the disposition of such part of the corpus or the income
therefrom, the income of such part of the trust shall be included
in computing the taxable income of the grantor.
A revocable trust is a trust created by the grantor in favor of a
beneficiary , which the grantor is allowed to revoke at any time.
The income of the trust is added to the income of the grantor
and he pays the tax. While ordinarily the trust is to be treated as
a separate taxable person from the grantor, in the case of a
revocable trust which in its nature is revocable by the grantor at
anytime, there is no separate and distinct personality between
the trust and the grantor because the grantor has control over
the trust.
SEC. 64. Income for Benefit of Grantor.-
(A) Where any part of the income of a trust (1) is, or in the
discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the
income may be held or accumulated for future distribution to the
grantor, or (2) may, or in the discretion of the grantor or of any
person not having a substantial adverse interest in the
disposition of such part of the income, be distributed to the
grantor, or (3) is, or in the discretion of the grantor or of any
person not having a substantial adverse interest in the
disposition of such part of the income may be applied to the
payment of premiums upon policies of insurance on the life of
the grantor, such part of the income of the trust shall be included
in computing the taxable income of the grantor. `
(B) As used in this Section, the term 'in the discretion of the
grantor' means in the discretion of the grantor, either alone or
in conjunction with any person not having a substantial adverse
interest in the disposition of the part of the income in question.
The grantor creates a trust in which he himself is the beneficiary,
and in this case there is no more separate and distinct
personality. The income of the trust is added to the income of
the grantor and the grantor pays the tax because he is the
taxable person.
In the case of fiduciary returns of estates and trusts, the same
deadline with individuals.
OTHER TAX REQUIREMENTS
Publication of the list of tax payers, after the assessment has
been made and the returns (together with any corrections) shall
be filed with the office of the Commissioner and shall constitute
public records and can be open to inspection upon the order of
the President.
The CIR may cause the publication in any newspaper of the list
of tax payers who filed their ITRs.
The ITRs of specific persons can be subject to a request for an
exchange of information by a foreign tax authority, under an
international agreement on tax matters where the Philippines is
a signatory, shall be open to inspection upon the order of the
President. (01:04)
DISTRIBUTION OF DIVIDENDS OR ASSETS
BY CORPORATIONS
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Taxable distribution of dividends or assets by
corporations
When corporations distribute all its assets in dissolution and
liquidation, the gain or loss sustained by stockholder whether
individual or corporate is taxable income or deductable loss.
The distribution of stock dividends is not a distribution of taxable
income, therefore it is not subject to dividends tax. The
distribution of stock dividends is one where what is distributed
are not money or property of the corporation, but the
corporation’s own shares of stocks distributed as dividends to
the stockholder. The one accepted by the stockholder is not
anymore money, but shares or stocks. Such distribution is not
taxable because it is just a transfer of surplus to capital. What
the stockholders receive is not income, but capital.
However, if the stock dividends are cancelled or redeemed in
exchange for cash, (when stock dividends distributed are
recalled) this now becomes a taxable distribution of dividends.
At the time of the distribution of dividends, they are not taxable,
once this capital in the form of stock dividends or shares of
stocks are cancelled, redeemed or exchanged for cash, the
exchange becomes a taxable distribution of dividends.
APPLICATION OF FOREIGN INCOME TAX
CREDITS
Resident citizens and domestic corporations are taxable on all
sources of income within and without, and their foreign sourced
income has to be declared in the Philippines.
How will the resident citizen or domestic corporation avail of the
foreign income tax paid abroad? The foreign income tax paid will
be availed in his income tax return in the Philippines by way of
Tax Credit, meaning the foreign income tax paid is creditable in
the Philippines. There is a limit to the credit, it may happen that
the full amount paid in the tax abroad is not creditable, this is
determined by the following formula:
Example
X Corporation (domestic) sources of income:
Philippines – 900,000
Japan - 200,000
Foreign income tax paid in Japan- 80, 000
X Corp’s total taxable income in the Philippines will include
foreign source, thus its total taxable income is 1,100,000 with
the tax rate of 30%, thus he has 330,000 tax due.
Since the foreign income tax is creditable, is the 80,000 foreign
tax paid in Japan creditable?
In this case, the entire 80,000 is not creditable, it is only up to
60, 000.
The credit limitation tax is arrived at by determined by applying
the formula.
Thus,
200,000 (foreign source income)
1,100,000 (all sources) 330,000 (Ph tax due)
= 60, 000
 TAXATION LAW REVIEW
From the Lectures of Atty. Manuel P. Quibod, CPA 63
4 Manresa | SY 2020-2021

The proportion of the foreign income against the Philippine

income tax due is only up to 60,000. When corporations file their annual return, and there is a tax to
The allowed tax credit is whichever is lower between the be paid, the corporation has to pay the balance of the tax still
limitation and the actual foreign income tax paid. due. Let’s say the annual tax due is 1,000,000 and the tax credit
Thus, the Philippine income tax due (330,000) less than the is 900k, there is a balance of 100k. Under Sec 76, the
allowed tax credit (60, 000), we arrive at the tax payable which corporation has to pay the balance of the tax still due (100,000).
is 270,000. What if, the annual tax due is 1 million, the tax credit is 1.1
million, we now have an excess tax credit of 100k. The taxpayer
DECLARATION AND PAYMENTS OF corporation with respect to the tax credit has the option, either
to carry over the excess credits in the next taxable quarters in
INCOME TAX the succeeding taxable years OR apply for a tax refund or the
issuance of a tax credit certificate.
QUARTERLY AND ANNUAL RETURNS
Individuals engaged in trade or business If the option availed by the taxpayer corporation is to carry over
the 100k tax credit, as in the case above, to the next taxable
Quarterly quarter, such option shall be considered irrevocable and no
1st Quarter- May 15 of the current year application for refund shall ever be allowed. The carry over shall
2nd Quarter- August 15 continue to the subsequent taxable quarters of the succeeding
3rd Quarter- Nov 15 taxable years until all the excess credits have been purely
They follow only the calendar year as their calendar quarter. utilized or availed. Thus, availing of the carry over bars the tax
payer corporation from applying for any refund or issuance of a
Annual Return tax credit.
April 15 of the following year
If the taxpayer avails to apply for a refund or issuance of a tax
credit certificate, the irrevocability principle will not apply.
Corporations
In the case of a carry over, if during the tax year the entire tax
They are allowed to use either the fiscal year or the calendar credit carried over was availed or utilized, but at the end of the
year. tax year, a new excess credit arises, then a new option begins-
either the new tax credit will be carried over or the tax payer
Quarterly returns (1st, 2nd, and 3rd Quarters) would apply for a refund. In this case, the irrevocability principle
The ITR and the tax has to be paid within 60 days will no longer be applicable because a new option will come in—
from the close of the taxable quarter, whether they whether it will be carried over or applied for refund.
use the calendar year or the fiscal year.
Example
Annual ITR Tax year 2016
15th day of the 4th month following the end of the tax Income tax due- 900,000
year. Income tax credit- 800,000
Tax due or balance – 100,000 (which shall be paid by
PRINCIPLE OF IRREVOCABILITY OF CARRY OVER the tax payer)
SEC. 76. - Final Adjustment Return. - Every corporation liable
to tax under Section 27 shall file a final adjustment return Tax year 2017
covering the total taxable income for the preceding calendar or Income tax due- 600,000
fiscal year. If the sum of the quarterly tax payments made during Tax credits – 800,000
the said taxable year is not equal to the total tax due on the Excess credit – 200,000
entire taxable income of that year, the corporation shall either: Options:
1. Carry over the excess credits to the next taxable years
(A) Pay the balance of tax still due; or (2018 or 2019) until the 200,000 will be fully utilized;
OR
(B) Carry-over the excess credit; or 2. File for a refund or tax credit certificate

(C) Be credited or refunded with the excess amount paid, as the

case may be.

In case the corporation is entitled to a tax credit or refund of the

excess estimated quarterly income taxes paid, the excess
amount shown on its final adjustment return may be carried over
and credited against the estimated quarterly income tax
liabilities for the taxable quarters of the suceeding taxable
years. Once the option to carry-over and apply the excess
quarterly income tax against income tax due for the taxable
quarters of the succeeding taxable years has been made, such
option shall be considered irrevocable for that taxable period
and no application for cash refund or issuance of a tax credit
certificate shall be allowed therefor.

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