Taxation Income Taxation

BAR 2021
TAXATION LAW
INCOME TAXATION
Handout No. 002-A and B
INCOME TAXATION
A. Income Tax
1. Definition, nature, and general principles
a. Income tax systems
Q: What are the income tax systems in the Philippines:

A: The following are the recognized tax systems:
(1) Global tax system - a tax system which views indifferently the tax base and
generally treats in common all categories of taxable income of the individual.
It taxes all categories of income except certain passive incomes and capital
gains;
(2) Schedular Tax System - a tax system where the income tax treatment varies
and is made to depend on the kind or category of taxable income of the
taxpayer. It itemizes the different income and provides for varied percentages
of taxes, to be applied thereto;
(3) Semi-schedular or Semi-global Tax System
a. Global, in the sense that:
i. All compensation income, business or professional income, capital
gain, and passive income not subject to final withholding income tax,
and other income not subject to final tax are added together to arrive at
the gross income.
ii. After deducting the total allowable deductions from business or
professional income, capital gain and passive income and other
income not subject to capital gains tax and final tax, in the case of
corporations, as well as personal and additional exemptions, in the
case of individual taxpayers; and
iii. The taxable income (i.e., gross income less allowable deductions and
exemptions) is subjected to one set of graduated tax rates or regular
corporate income tax rate.
b. Schedular, in the sense that, passive investment income subject to final tax
and capital gains from the sale or transfer of shares of stocks of a domestic
corporation and sale or transfer of real properties remain subject to
different sets of tax rates covered by different tax returns.
b. Features of the Philippine Income Tax Law
Q: What are the salient features of the Philippine Income Tax Law?
A: The salient features are the following:
i. Direct Tax – The tax burden is borne by the income recipient upon whom
the tax is imposed.
ii. Progressive – The tax rate increases as the tax base increases. It is
founded on the ability to pay principle and is consistent with Sec. 28, Art.
VI, 1987 Constitution.
iii. Comprehensive – The Philippines has adopted the most comprehensive
system of imposing income tax by adopting the citizenship principle, the
residence principle, and the source principle. Any of the three principles
is enough to justify the imposition of income tax on the income of a
resident citizen and a domestic corporation that are taxed on a worldwide
income.
TAXATION LAW Income Taxation [1]

iv. Semi-Schedular or Semi-Global Tax System – The Philippines follows
the semi- schedular or semi-global system of income taxation, although
certain passive investment incomes and capital gains from sale of capital
assets (namely: (a) shares of stock of domestic corporations, and (b) real
property) are subject to final taxes at preferential tax rates
[MAMALATEO].
c. Criteria in imposing Philippine income tax
Q: What are the criteria in imposing Philippine income tax?

A: The principles being used as criteria are the following:
(1) Citizenship Principle – where a citizen taxpayer is subject to income tax

on his worldwide income (from sources within and without the
Philippines) if he resides in the Philippines, or only on his income from
sources within the Philippines if he qualifies as a non-resident citizen.
(2) Residence Principle – where an alien is subject to Philippine income tax
because of his residence in the Philippines but only on his income from
sources within the Philippines; and
(3) Source Principle – where an alien is subject to Philippine income tax
because he derives income from sources within the Philippines. Thus, a
non-resident alien is subject to income tax on his income derived from
sources within the Philippines. (MAMALETEO)
Q: Who are citizens of the Philippines?
A: The following are citizens of the Philippines:

(1) Those who are citizens of the Philippines at the time of the adoption of the
1987 Constitution;
(2) Those whose fathers or mothers are citizens of the Philippines;
(3) Those born before January 17, 1973 (effectivity of 1973 Constitution), of
Filipino mothers who elect Philippine citizenship upon reaching the age of
majority; and
(4) Those who are naturalized in accordance with law.
Q: Who is a resident citizen?

A: A citizen of the Philippines who stays in the Philippines withpit the intention of
transferring his physical presence abroad, whether to stay permanently or
temporarily as an overseas contract worker.
Q: What is meant by residence for taxation purpose?

A: Residence refers to the place where one habitually resides and to which,
when he is absent, he has the intention of returning.
Q: Who is a resident alien?

A: A resident alien is an individual whose residence is within the Philippines and
who is not a citizen thereof.

Q: Who may be considered as a resident alien?
A: An alien may be considered a resident of the Philippines for income tax

purposes if:
a. He is not a mere transient or sojourner

b. He has no definite intention as to his stay in the Philippines; or
c. His purpose is of such a nature that an extended stay may be necessary
for its accomplishment and to that end, the alien makes his home
temporarily in the Philippines.
Q: When is residency lost?
A: An alien who has acquired residence in the Philippines retains his status as a
resident alien until he abandons the same and actually departs from the
Philippines. Mere intention to change his residence is not enough.
Q: When is an alien subject to Philippine income tax?
A: An alien is subject to Philippine income tax because he derives income from

sources within the Philippines. Thus, a non-resident alien or non-resident
foreign corporation is liable to pay Philippine income tax on income from
sources within the Philippines, such as dividend, interest, rent, or royalty,
despite the fact that he has not set foot in the Philippines. [MAMALATEO]
d. Types of Philippine income taxes
Q: Enumerate the types of income tax.

A: There are several types of income tax under the NIRC, namely:
[MAMALATEO]
i. Graduated income tax and fixed tax on gross sales or receipts for
individuals;
ii. Normal corporate income tax on corporations;
iii. Minimum corporate income tax on corporations;
iv. Special income tax on certain corporations;
v. Capital gains tax on sale or exchange of unlisted shares of stock of a
domestic corporation classified as capital assets;
vi. Capital gains tax on sale or exchange of real property located in the
Philippines classified as a capital asset;
vii. Final withholding tax on certain passive investment income paid to
residents;
viii. Final withholding tax on income payments made to non-residents;
ix. Fringe benefits tax on fringe benefits of supervisory or managerial
employees;
x. Branch profit remittance tax; and
xi. Tax on improperly accumulated earnings of corporations

e. Kinds of taxpayers
Q: Enumerate the different kinds of taxpayers.

A: The different kinds of taxpayers are the following:
(1) Individual Taxpayers
(2) Corporations
(3) Partnerships
(4) General Professional Partnerships
(5) Estates and Trusts
(6) Co-ownership
Q: What are the qualifications of individual taxpayers?

A:
Primary Sub-
Nature
Classification Classifications
Individuals Citizens of the Resident citizens
Philippines
Non-resident Citizens
Aliens Residents
Non-residents Engaged in
Trade of
Business in the
Philippines
Not Engaged in
Trade or
Business in the
Philippines
Special Classes of Minimum Wage Earner
Individuals
Corporations Domestic Corporations
Foreign Corporations Resident
Corporations
Non-resident
Corporations
Partnerships General Partnership
General Professional Partnership
f. Taxable period
Q: What are the different taxable periods under the NIRC?
A: The taxable periods are the following:

1. Calendar period – an accounting period which starts from January 1 to
December 31. Taxable income shall be computed on the basis of the
calendar year if the:
a. Taxpayer‘s accounting period is other than fiscal year;
b. Taxpayer has no annual accounting period;
c. Taxpayer does not keep books; or
d. Taxpayer is an individual (NIRC, Sec. 43)
2. Fiscal period – an accounting period of 12 months ending on the last day

of any month other than December (NIRC Sec. 22, Par. (Q)), which is
allowed only for corporations; and
3. Short period – an accounting period where income is computed on the

basis of a period less than 12 months when the:
a. Taxpayer, other than an individual and the approval of the
Commissioner, changes his accounting period from fiscal year to
calendar year, or from calendar year to fiscal year, or from one fiscal
year to another. (NIRC, Sec 47)
b. Taxpayer dies (applicable to both the decedent‘s final personal income
tax and estate tax return) (NIRC, Sec. 90 Par. A);
c. Corporation is newly organized;
d. Corporation is dissolved; and
e. Tax period is terminated by the Commissioner by authority of law
(NIRC, Sec. 6, Par. D)
Q: What is a taxable year?

A: "Taxable year" means the calendar year, or the fiscal year ending during
such calendar year, upon the basis of which the net income is computed.
Taxable year includes, in the case of return made for a fractional part of a
year under the provisions of Title II (Tax on Income), the period for which
such return is made [Sec. 22 (P), NIRC].
Q: How is a taxable income computed?

A: Taxable income shall be computed based on the taxpayer‘s annual
accounting period, which may be fiscal year or calendar year
Exception: Taxable income shall be computed based on the basis of calendar

year only:
a. If the taxpayer's annual accounting period is other than a fiscal year;
b. If the taxpayer has no annual accounting period;
c. If the taxpayer does not keep books of accounts; or
d. If the taxpayer is an individual [Sec. 43, NIRC].
Q: May individual taxpayers use the fiscal period?

A: No. In no instance shall individual taxpayers be authorized to establish a
fiscal year as basis for filing their returns and computing their income.
Q: May a corporation change its accounting period?

A: Yes. A taxpayer, other than an individual with the approval of the
Commissioner, may change the basis of computing its net income from fiscal
year to calendar year, from calendar year to fiscal year of from one fiscal year
to another fiscal year. (NIRC, Sec. 47)

2. Concept of income
a. Definition
Q: What is income?
A: Income means all wealth which flows to the taxpayer other than a mere return
of capital. Income is a gain derived from labor or capital, or both labor and
capital; and includes the gain derived from the sale or exchange of capital
assets. [DE LEON]
Q: Define income tax.

A: Income tax is a tax on all yearly profits arising from property, professions,
trade or offices, or as a tax on a person‘s income, emoluments, profits, and
the like (Fisher vs. Trinidad, G.R. No. L-17518, October 30, 1922.
Q: What is the difference between income and capital?

A: The essential difference between capital and income is that capital is a fund;
income is a flow. A fund of property existing at an instant of time is called
capital. A flow of services rendered by that capital by the payment of money
from it or any other benefit rendered by a fund of capital in relation to such
fund through a period of time is called income." [Madrigal v. Rafferty, G.R.
No. 12287 (1918)]
Income Capital
Denotes a flow of wealth during a Fund or property existing at one distinct
definite period of time. point in time.
Service of wealth Wealth itself

Subject to tax Return of capital is not subject to tax
Fruit Tree
Q: What are the different classification of income? Explain each.

A: The following are the classification of income:
1. Compensation Income
Means all remuneration for services performed by an employee for his employer
under an employer-employee relationship, unless explicitly excluded by the Tax
Code of special law. [MAMALATEO]
2. Profession or Business Income
The value derived from an exercise of profession, business or utilization of capital
including profit and gain derived from sale or conversion of assets. Examples are
net income from business and gain from the sale of assets used in trade or
business.
3. Passive Income
An income in which the taxpayer merely waits for the amount to come in. Examples
are royalty, interest, prizes, and winnings.
4. Capital Gain
An income derived from sale of assets not used in trade or business. Examples are
sale of family home and other capital assets.

b. When income is taxable
Q: When is income taxable?
A: Income is taxable when the following requisites are present:
1. There is income, gain, or profit
2. The gain or profit must be realized or received, actually or constructively.
Q: What comes in mind when you hear General Principles of Income

Taxation?
A: Except when otherwise provided in the NIRC:
1. A RESIDENT CITIZEN is taxable on all income derived from sources
within and without the Philippines;
2. A NON-RESIDENT CITIZEN is taxable only on income derived from
sources within the Philippines;
3. An individual citizen who is working and deriving income from abroad as
an overseas contract worker is taxable only on income from sources
within the Philippines;
4. An alien, (resident alien or non-resident alien), is taxable only on income
within the Philippines;
5. A domestic corporation is taxable on all income derived within and without
the Philippines;
6. A foreign corporation, (engaged or not in trade or business in the
Philippines), is taxable only on income derived
Q: Kindly state the Types of Philippine Income Tax.

A: There are several types of income tax under the NIRC, namely:
1. Graduated income tax and fixed tax on gross sales or receipts for
individuals;
2. Normal corporate income tax on corporations;
3. Minimum corporate income tax on corporations;
4. Special income tax on certain corporations;
5. Capital gains tax on sale or exchange of unlisted shares of stock of a
domestic corporation classified as capital assets;
6. Capital gains tax on sale or exchange of real property located in the
Philippines classified as a capital asset;
7. Final withholding tax on certain passive investment income paid to
residents;
8. Final withholding tax on income payments made to non-residents;
9. Fringe benefits tax on fringe benefits of supervisory or managerial
employees;
10. Branch profit remittance tax; and
11. Tax on improperly accumulated earnings of corporations
Q: What are the Kinds of Taxpayers?

A:
1) Individuals
 Citizens
a. Resident citizens
b. Non-resident citizens
 PH citizen who establishes to the satisfaction of the CIR the fact of
his physical presence abroad with a definite intention to reside
therein.
 PH citizen who leaves the Philippines during the taxable year to
reside abroad, either as an immigrant or for employment on a
permanent basis.

 PH citizen 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. To be considered physically
present abroad most of the time during the taxable year, a contract
worker must have been outside the PH for not less than 183 days
during such taxable year.
 PH citizen previously considered as a non-resident citizen and who
arrives during the taxable year to reside permanently in the PH –
Treated as NRC with respect to his income derived from sources
abroad until his arrival in the PH
2. Aliens
a. Resident aliens
 An alien actually present in the Philippines who is not a mere
transient or sojourner is a resident for income tax purposes.
 No/Indefinite Intention = RESIDENT: If he lives in the
Philippines and has no definite intention as to his stay, he is a
resident. A mere floating intention indefinite as to time, to
return to another country is not sufficient to constitute him a
transient.
 Definite Intention = TRANSIENT: One who comes to the
Philippines for a definite purpose, which in its nature may be
promptly accomplished, is a transient.
 Exception: Definite Intention but such cannot be promptly
accomplished; If his purpose is of such nature that an extended stay
may be necessary for its not accomplishment, and thus the alien
makes his home temporarily in the Philippines, then he becomes a
resident.
b. Non-resident aliens
i. Engaged in trade or business in the Philippines
 If the aggregate period of his stay in the Philippines is more
than 180 days during any calendar year.
ii. Not engaged in trade or business in the Philippines


If the aggregate period of his stay in the Philippines
does not exceed 180 days.
3. Estates and trusts
 Income tax imposed on individuals shall apply to income of estates
or of any kind of property held in trust.
 Exceptions: (1) Employee‘s trust (2) Revocable trusts (3) Income for
Benefit of Grantor
 Taxable income of the estate or trust is computed in the same
manner as an individual, subject to certain special rules .
 Estate – refers to all the property, rights and obligations of a person
which are not extinguished by his death and those which have
accrued thereto since the opening of the succession.
 Trust – an arrangement created by will or an agreement under
which legal title to property is passed to another for conservation or
investment with the income therefrom and ultimately the corpus
(principal) to be distributed in accordance with the directions of the
creator as expressed in the governing instrument.
a. Revocable trust
b. Irrevocable trust

2) Corporations
 Includes all types of corporations, partnerships (no matter how created or
organized), joint stock companies, joint accounts, associations, or
insurance companies, whether or not registered.
 Excludes general professional partnerships (GPP); joint ventures or
consortiums formed for the purpose of (1) undertaking construction
projects or (2) engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium agreement under a
service contract with the government.
1. Domestic corporations
 A corporation created and organized in the Philippines or under its
laws.
2. Foreign corporations
 A corporation which is not
domestic.
a.Resident foreign corporation
 Foreign corporation engaged in trade or business within the
Philippines.
b.Non-resident foreign corporation
 Foreign corporation not engaged in trade or business within
the Philippines.
3. Partnerships
a.Taxable partnership
b.Exempt partnership
i. General professional partnership
 A partnership formed by persons for the sole purpose of
exercising their common profession, no part of the income
of which is derived from engaging in any trade or business.
The partners themselves, not the partnership, shall be
liable for income tax in their separate and individual
capacities. Each partner shall report as gross income his
distributive share, actually or constructively received, in the
net.
ii. Joint venture or consortium undertaking construction activity or
engaged in petroleum operations with operating contract with
the government.
 Essential factors of a joint venture or consortium:
 Each party must make a contribution, not
necessarily of capital but by way of services, skill,
knowledge, material or money;
 Profits must be shared among the parties;
 There must be a joint proprietary interest and right of
mutual control over the subject matter of the
enterprise;
 There is a single business transaction.
 A joint venture or consortium is treated as a
corporation, except those formed for the purpose of:
 Undertaking construction projects, or
 Engaging in petroleum, coal, geothermal and
other energy operations pursuant to an
operating consortium agreement under a
service contract with the Government.

Non-Taxable Partnership Taxable Partnership
Distributive share
Taxable whether actually distributed to the partners or not
Included in GI. Forms part of the gross Subject to final tax.
income subject to graduated tax rates. Treated as dividends and subject to
Subject to CWT. The share is subject final tax of:
to a creditable withholding tax of: a. 10% for RC, NRC, RA
a. 15% if >720, 000 or b. 20% for NRA-ETB
b. 10% if does not exceed 720, 000 c. 25% for NRA-NETB
Share in net loss
Deductible expense in personal ITR Not deductible because share is
subject to final tax
How the partnership is
taxed
Non-taxable as such but still required Deemed and treated as corporations
to file ITR for purpose of ascertaining subject to the corporate income tax
the partner‘s taxable shares rate.
Q: What is a taxable year?

A: "Taxable year" means the calendar year, or the fiscal year ending during such
calendar year, upon the basis of which the net income is computed. Taxable
year includes, in the case of return made for a fractional part of a year under
the provisions of Title II (Tax on Income), the period for which such return is
made.
Calendar Year – An accounting period of 12 months ending on the last day of

December. Fiscal Year – An accounting period of 12 months ending on the
last day of any month other than December.
Short Period – An accounting period which starts after the first month of the
tax year or ends before the last month of the tax year (less than 12 months).
Instances whereby short accounting period arises:

 When a corporation is newly organized.
 When a corporation is dissolved.
 When a corporation changes its accounting period.
 When the taxpayer dies.
General rule: Taxable income shall be computed based on the taxpayer‘s

annual accounting period, which may be fiscal year or calendar year
Exception: Taxable income shall be computed based on the basis of calendar

year only:
a. If the taxpayer's annual accounting period is other than a fiscal year;
b. If the taxpayer has no annual accounting period;
c. If the taxpayer does not keep books of accounts; or
d. If the taxpayer is an individual.

Q: How will you define Concept of Income?
A: Income means all wealth which flows to the taxpayer other than a mere
return of capital. Income is a gain derived from labor or capital, or both labor
and capital; and includes the gain derived from the sale or exchange of
capital assets.
Income includes earnings, lawfully or unlawfully acquired, without
consensual recognition, express or implied, of an obligation to repay and
without restriction as their disposition. Income may be received in the form
of cash, property, service, or a combination of the three.
Q: When is Income Taxable?
A: The requisites are:
(1) There is income, gain or profit;
(2) Received or realized during the taxable year;
(3) Not exempt from income tax.
Q: When does Realization of Income exists?

A: Income is realized when there is a gain or profit derived from a closed and
completed transaction. The realization of gain may take the form of actual
receipt of cash or may occur as a constructive receipt of income. Mere
increase in the value of property without actual realization, either through
sale or other disposition, is not taxable.
Q: How is Income Recognized?
A: Income realized pertains to the accrual basis of accounting. Recognition of
income in the books is when it is realized and expenses are recognized
when incurred. It is the right to receive and not the actual receipt that
determines the inclusion of the amount in gross income.
Q: What are the Tests in Determining Whether Income is Earned for Tax
Purposes?
A:
1) Realization Test
No taxable income until there is a separation from capital of something of

exchangeable value, thereby supplying the realization or transmutation
which would result in the receipt of income. Thus, stock dividends are not
income subject to income tax on the part of the stockholder when he merely
holds more shares representing the same equity interest in the corporation
that declared stock dividends. Income is recognized when both of the
following conditions are met: (a) the earning is complete or virtually
complete; and (b) an exchange has taken place.
2) Claim of Right Doctrine also known as Doctrine of Ownership,
command, or control
In the claim-of-right doctrine, if a taxpayer receives money or other property

and treats it as its own under the claim of right that the payments are made
absolutely and not contingently, such amounts are included in the taxpayer's
income, even though the right to the income has not been perfected at that
time. It does not matter that the taxpayer's title to the property is in dispute
and that the property may later be recovered from the taxpayer.

3) Economic Benefit Test, Doctrine of Proprietary Interest
Any economic benefit to the employee that increases his net worth, whatever
may have been the mode by which it is effected, is taxable. Thus, in stock
options, the difference between the fair market value of the shares at the time
the option is exercised and the option price constitutes additional
compensation income to the employee at the time of exercise (not upon the
grant or vesting of the right). Anything that benefits a person materially or
economically in whatever way is taxable. However, note that a mere increase
in the value of property without actual realization is not taxable.
4) Severance Test
Under the severance test of income, in order that income may exist, it is
necessary that there be a separation from capital of something of
exchangeable value. The income requires a realization of gain. Hence, the
increase in value of an asset is not income as it has not yet been exchanged
or transferred for something else. Once the asset is exchanged, then a
severance of the gain from its original value takes place, resulting into taxable
income.
Q: What are the Principal Methods of Accounting?

A:
1. Cash method – income, profits and gains earned are not included in gross
income until received, and expenses are not deducted until paid.
2. Accrual method – income, profits and gains are included in gross income
when earned, whether received or not, and expenses are allowed as
deductions when incurred, although not yet paid. It is the right to receive
and not the actual receipt that determines the inclusion of the amount in
gross income.
3. Hybrid method – income and expenses are reported by employing the
combination of cash and accrual method.
Q: What are the Special Methods of Accounting?
A:
(1) Installment Basis – Taxpayer reports as income only a part of the gross
profit to be realized from the sale on the instalment plan equivalent to that
proportion of the instalments received every year which the gross profit
realized or to be realized when payment is completed bears to the contract
price.
(2) Deferred Payment Sales
a. Applicable when the initial payments exceed 25% of the selling price
b. The income to be reported during the year of sale is the difference
between the selling or contract price and the cost of the property,
even though the entire purchase price has not been actually received
in the year of sale.
c. The obligations of the purchaser received by the vendor are
considered as equivalent of cash.
(3) Percentage of completion – Income from long-term contracts is reported
for tax purposes on the basis of percentage of completion. ―Long-term
contracts‖ means building, installation or construction contracts covering a
period in excess of 1 year. Gross income already earned though not yet
received, based on estimates of architects or engineers duly certified by
them, is reported in a taxable year; and all deductions relating to such
gross income for the taxable year, even if not yet paid are taken into
account.

Note: Completed contract method is no longer allowed since January 1,
1998 as per RA 8424. Cost of the contract is accumulated during the years
of construction and deducted from the income of the contract in the year it
is completed.
Situs of Income Taxation.
Q: What are included in the income from sources within the Philippines?
A:
1) Interests derived from sources within the Philippines
2) Dividends from domestic and foreign corporations, if more than 50% of
its gross income for the three-year period ending with the close of the
taxable year prior to the declaration of dividends was derived from
sources within the Philippines
3) Compensation for services performed within the Philippines
4) Rentals and royalties from properties located in the Philippines or any
interest in such property including rentals or royalties for the use of or for
the privilege of using within the Philippines intellectual property rights
such as trademarks, copyrights, patents, etc.
5) Gains on sale of real property located in the Philippines
6) Gains on sale of personal property other than shares of stock within the
Philippines
7) Gains on sale of shares
Income Situs
Interest Residence of the debtor
Dividends Residence of the corporation
declaring the dividends
Services Place of performance
Rentals Location of the property
Royalties Place of use or exercise
Sale of Real Property Location of realty

Sale of Personal Property  Tangible
 Manufactured w/in and sold
w/o: Partly w/in and partly w/o
the PH
 Manufactured w/o and sold
w/in: Partly w/in and partly w/o
the PH
 Purchased w/in but sold w/o:
Place of Sale
 Purchased w/o but sold w/in:
Place of sale
 Intangible
 General rule: Place of Sale
 Exception: Shares of stock of
domestic corporations: Place of
incorporation
Q: What are included in the income from sources without the Philippines?
A:
(1) Interest and dividends derived from sources other than those within the
Philippines
(2) Compensation for services performed outside the Philippines
(3) Rentals and royalties from properties located outside the Philippines or any
interest in such property including rentals or royalties for the use of or for
the privilege of using outside the Philippines intellectual property rights
such as trademarks, copyrights, patents, etc.
Q: What are included in the income derived partly within and partly
without the Philippines?
A: Gains, profits, or incomes other than those enumerated above shall
be allocated or apportioned to sources within or without the
Philippines.
3. Gross Income
a. Definition
Q: What is the general definition of Gross income?

A: Except when otherwise provided in this Title, gross income means all
income derived from whatever sources, including the following items:
(CGGIR-R-DAPPP)
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.
Q: What is Gross Income for purposes of computing the normal corporate

income tax means?
A: It means income, gain, or profit subject to tax. It includes compensation for
personal and professional services, business income, profits, and income
derived from any source whatever, whether legal or illegal, unless exempt
from tax under the Constitution, tax treaty, or statute.
Q: On, the other hand, what is Gross Income for purposes of computing
the minimum corporate income tax means?
A: The term ―gross income‖ shall mean gross sales less 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.
Q: What is the expanded definition of Gross income under Revenue

Regulations No. 9-98?
A: The expanded definition of the term ―gross income‖ includes other or
miscellaneous income of the corporation such as gain from nonrecurring sale
of equipment. (Revenue Regulations No. 9-98)
b. Distinguish: gross income from net income, and taxable income
Q: What is the meaning of Net Income?
A: Net income means gross income less statutory deductions and exemptions.
(Section 36 of Revenue Regulations No. 2)
Q: What is the meaning of the term “Taxable Income?

A: The term ―taxable income‖ means the pertinent items of gross income
specified in this Code, less the deductions, if any, authorized for such types
of income by this Code or other special laws. (Section 31 of R.A. No. 8424,
as amended by R.A. No. 10963)

c. Sources of income subject to tax
i. Compensation income
Q: What is the term “Compensation income” means?

A: In general, the term ―compensation‖ means all remuneration for services
performed by an employee for his employer under an employer-employee
relationship. (Sec. 2.78.1, Revenue Regulations No. 2-98), unless
specifically excluded by the Tax Code.
Q: What are the various types of taxable compensation income?

A: There are various types of taxable compensation income, such as salaries,
wages, bonus, remuneration, honorarium, benefits, and allowances
(including representation and transportation allowance (RATA), personal
emergency relief allowance (PERA), longevity pay, subsistence allowance,
hazard pay, annuities, and pensions, etc.
Q: Is Additional compensation allowance (ACA) given to government

employees pursuant to E.O. 219 subject to withholding tax?
A: No, Additional compensation allowance (ACA) shall not be subject to
withholding tax pending its formal integration into the basic pay. While its
nature shall continue to be that of compensation, it shall be treated as part
of the ―other benefits‖ which are excluded from compensation income,
provided that the total amount does not exceed P90,000. (BIR Ruling No.
034-2002, August 16, 2002)
ii. Fringe Benefits
Q: How does Tax Code define Fringe Benefits?

A: The term ―Fringe benefits‖ is defined as 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 other;
(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
(10) Life or Health insurance and other non-life insurance premiums or
similar amounts in excess of what the law allows.

Q: Enumerate the Fringe Benefits which are not taxable.
A: The following fringe benefits are not taxable under Section 33(C) of NIRC:
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.
Q: Define De minimis benefits?
A: These are certain fringe benefits denominated as ―de minimis benefits‖ that
are exempt from income tax and withholding tax, even if received by rank-
and-file employees and supervisory or managerial employees.
Case: Henderson vs. Collector, 1 SCRA 548
Q: Sps. Arthur Henderson and Marie Henderson filed their annual income
tax with the BIR. Arthur is president of American International
Underwriters for the Philippines, Inc., which is a domestic corporation
engaged in the business of general non-life insurance, and represents a
group of American insurance companies engaged in the business of
general non-life insurance.
The BIR demanded payment for alleged deficiency taxes. In their
computation, the BIR included as part of taxable income: 1) Arthur’s
allowances for rental, residential expenses, subsistence, water,
electricity and telephone expenses 2) entrance fee to the Marikina Gun
and Country Club which was paid by his employer for his account and 3)
travelling allowance of his wife
Whether or not the rental allowances and travel allowances furnished
and given by the employer-corporation are part of taxable income?
A: NO. Such claims are substantially supported by evidence. These claims are
therefore NOT part of taxable income. No part of the allowances in question
redounded to their personal benefit, nor were such amounts retained by them.
These bills were paid directly by the employer-corporation to the creditors. The
rental expenses and subsistence allowances are to be considered not subject
to income tax. Arthur‘s high executive position and social standing, demanded
and compelled the couple to live in a more spacious and expensive quarters.
Such ‗subsistence allowance‘ was a SEPARATE account from the account for
salaries and wages of employees. The company did not charge rentals as
deductible from the salaries of the employees. These expenses are
COMPANY EXPENSES, not income by employees which are subject to tax.

iii. Professional Income
Q: Where does Professional Income is derived?

A: It is from the fees received by a professional from the practice of his
profession, provided that here is no employer-employee relationship
between him and his clients. It includes the fees derived from engaging in
an endeavor requiring special training as professional as means of
livelihood, which includes, but is not limited to, the fees of CPAs, doctors,
lawyers, engineers, and the like [Revenue Regulations No. 2-98].
Q: Is it important to determine the existence or absence of the employer-

employee relationship?
A: Yes, the existence or absence of the employer-employee relationship
determines whether the income shall be treated as compensation income or
professional fee. This fact is material for purposes of taxation because there
is no deduction allowed against compensation income, whereas allowable
deductions may be made from professional income.
Example:
Thus, a lawyer may practice his profession as a legal officer of a private

corporation, but for income tax purposes, the compensation income he
receives is subject to the graduated income tax rates without deductions,
except for his personal and additional exemptions, because of the existence
of employer-employee relationship.
iv. Income from business
Q: What is the meaning of Gross income from business?

A: In the case of manufacturing, merchandising, or mining business, ―gross
income‖ means the total sales, less the cost of goods sold, plus any income
from investments and from incidental or outside operations or sources. In
determining the gross income, subtractions should not be made for
depreciation, depletion, selling expenses or losses, or for items not ordinarily
used in computing the cost of goods sold (Section 43 of Revenue Regulations
No. 2).
In the case of sellers of services, their gross income is computed by
deducting all direct costs and expenses as prescribed in Revenue
Memorandum Circular Nos. 4-2003 and 30-2008, April 1, 2008.
Q: Is there a specific criterion as to what constitutes as “doing” or

“engaging in” or “transacting” business?
A: No, there is no specific criterion as to what constitutes doing, or engaging in
or transacting business. Each case must be adjudged in the light of its
peculiar environmental circumstances. The term implies a continuity of
commercial dealings and arrangements, and contemplates, to that extend,
the performance of acts or works or the exercises of some of the functions
normally incident to, and in progressive prosecution of, commercial gain or for
the purpose and object of the business organization. (CIR vs. British
Overseas Airways Corporation, 149 SCRA 395 (1987).

Case: CIR vs. British Overseas Airways Corporation, 149 SCRA 395 (1987)
Q: BOAC is a British Government-owned corporation organized and
existing under the laws of the United Kingdom. It is engaged in the
international airline Business. it did not carry passengers or cargo to or
from the Philippines although during the period covered by the
assessments, it maintained a general sales agent in the Philippines.
Warmer Barnes and Company, Ltd., and later Qantas Airways which was
responsible for selling BOAC tickets covering passengers and cargoes.
It is admitted that BOAC had no landing rights for traffic purposes in the
Philippines, and was not granted a Certificate of Public Convenience,
except for a nine-month period, partly in 1961 and partly in 1962, when it
was granted a temporary landing permit.
Petitioner assessed BOAC for deficiency income taxes covering the
years of 1959 to 1963. BOAC paid the assessment under protest.
The Tax Court held that the proceeds of sales of BOAC passage tickets
in the Philippines do not constitute BOAC income from Philippine
sources since no service of carriage of passengers or freight was
performed by BOAC within the Philippines, and therefore said income is
not subject to Philippine income tax.
BOAC’s service of transportation is performed outside the Philippines
the income derived is from sources without the Philippines, and
therefore not taxable under our income tax laws.
Whether the revenue derived by BOAC from sales of tickets in the
Philippines for air transportation while having no landing rights here
constitute income of BOAC from Philippine sources, and accordingly
taxable?
A: Yes, Sales of tickets in the Philippines is taxable. The source of an income is
the property, activity or service that produced the income. For the source of
income to be considered as coming from the Philippines, it is sufficient that the
income is derived from activity within the Philippines. The absence of flight
operations to and from the Philippines is not determinative of the source of
income or the site of income taxation.
The definition of gross income under section 32 of tax code is broad and
comprehensive to include proceeds from sales of transport documents.
There is no specific criterion as to what constitutes doing, or engaging in or
transacting business. Each case must be adjudged in the light of its peculiar
environmental circumstances. The term implies a continuity of commercial
dealings and arrangements, and contemplates, to that extend, the
performance of acts or works or the exercises of some of the functions
normally incident to, and in progressive prosecution of, commercial gain or for
the purpose and object of the business organization.
v. Income from Dealings in Property
Q: What does Income from Dealings in Property include?
A: Dealings in property such as sales or exchanges may result in gain or loss.

The kind of property involved, whether the property is a capital asset or an
ordinary asset, determines the tax implication and income tax treatment.

(a) Distinguish Ordinary Asset and Capital Asset
Q: Define Ordinary Assets.

A: For tax purposes, there are three general types of Ordinary assets. These
are:
a. shares of stock of a domestic corporation;
b. real property of individual or land or building of corporations; and
c. other types of assets, including shares of stock of a foreign corporation.
Q: Define Capital Assets.
A: The term ―capital assets‖ means property held by the taxpayer (whether or
not connected with his trade or business), but does not include stocks 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 (F) of Section 34; or real property used in trade or business of the
taxpayer. (Section 39 (A)(1) of NIRC).
Q: What are the Distinctions between Capital Assets and Ordinary Assets?
A: As to Definition
Capital assets are generally properties that are not used in trade or business
of the taxpayer. On the other hand, ordinary assets are properties used in
trade or business or primarily held for sale by the taxpayer.
As to Tax imposed and its rate
The sale of capital assets (land and/ or building) is subject to capital gains
tax at the rate of six percent based on the gross selling price or fair market
value at the time of sale, whichever is higher and the corresponding
documentary stamp tax (DST). Conversely, sale of ordinary assets is
subject to the creditable withholding tax at a rate ranging from 1.5 percent-
6 percent and consequently to ordinary income tax, corresponding DST and
likewise to the 12 percent VAT.
As to Gains
If the asset involved is classified as ordinary, the entire amount of the gain
from the transaction shall be included in the computation of gross income
[Sec 32(A) of NIRC], and the entire amount of the loss shall be deductible
from gross income. [Sec 34(D) of NIRC]. Conversely, If the asset involved is
a capital asset, the rules on capital gains and losses apply in the
determination of the amount to be included in gross income.

(b) Types of Gains
Q: What are the types of Gains?
A: The following are the types of Gains:

(1) Presumed Gain
(2) Actual Gain
(3) Long-term Capital Gain
(4) Short-term Capital Gain

(5) Net Capital Gain; and
(6) Net Capital Loss
Q: When is there a Presumed Gain?

A: In the sale of real property located in the Philippines, classified as capital
asset, the tax base is the gross selling price or fair market value, whichever is
higher. The law presumes that the seller makes a gain from such sale.
Q: When is there an Actual Gain?

A: The tax base in the sale of real property classified as an ordinary asset is the
actual gain.
Q: When will the Long-term Capital Gain operate?

A: If the Capital asset is held for more than twelve (12) months before it is sold.
Only 50% of the gain is recognized.
Q: When will the Short-term Capital Gain operate?

A: If the Capital Asset is held for twelve (12) months or less, 100% of the gain is
subject to tax.
Q: What is the Net Capital Gain?

A: The term ―net capital gain‖ means the excess of the gains from sales or
exchanges of capital assets over the losses from such sale or exchange.
(Section 39(A) of NIRC)
Q: What is Net Capital Loss?

A: 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.
(Section 39(A) of NIRC)
(c) Special rules pertaining to income or loss from dealings in property
classified as capital asset (loss limitation rule, loss carry-over rule, holding
period rule)

Q: What is the loss limitation rule?
A: Losses from sales or exchanges of capital assets shall be allowed only to the
extend of the gains form 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 the government or political subdivision thereof), with
interest coupons or in registered form, any loss resulting from such sale shall
not be subject to foregoing limitation and shall not be included in determining
the applicability of such limitation to other losses. (Section 39(C) of NIRC)
Q: Discuss the loss carry-over rule.
A: 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. (Section 39(D) of NIRC)
Q: How is the Holding period rule apply?

A: The holding period of an asset is generally the time the taxpayer has
retained ownership of the asset. Holding periods are usually measured in
months and a fractional month. The beginning of the holding period is
generally the day after property is acquired and the number of months that
the property is held is determined by the specific day of the month,
regardless of how many days are in the month.
A: Holding period of the property classified as other capital asset is material for
individual taxpayers only. Thus, only 50% of long-term capital gains are
recognized as subject to income tax, if derived by an individual taxpayer,
while 100% of the capital gains are subject to tax if derived by an individual
taxpayer from short-term capital asset transactions. A capital gain is treated
as follows:
a. long-term if the asset sold or exchanged is held for more than 12 months; or
b. short-term if the asset sold or exchanged is for 12 months or less.
In case of corporate taxpayers, the holding period is not material and the
capital gain or capital loss is recognized in full.
(d) Tax free exchanges
Q: What is the rule on Tax Free Exchanges?

A: General rule, except as herein provided, upon the sale or exchange of
property, the entire amount if the gain or loss, as the case may be, shall be
recognized. Except, no gain or loss shall be recognized if in pursuance of a
plan or 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 another corporation, a party to the merger or consolidation.
Q: What do Initial Acquisition of Control mean?

A: It means that 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
corporations: Provided, that stocks issued for services shall not be
considered as issued in return for property. (Sec. 40(C) of NIRC
vi. Passive investment income
Q: What are the sources of passive income subject to final tax?
A: The following are the sources of passive income subject to final tax
(a) Interest income;

Q: What is interest?
A: It is the amount of compensation paid for the use of money of forbearance

from such use.
(b)Dividend Income;
Q: What is dividends?
A: It is any distribution made by a corporation to its shareholders out of its

earnings or profits and payable to its shareholders, whether in money on in
other property.
(c)Royalty Income;
Q: What is royalty?
A: The compensation for the use of a patented invention.
(d)Rental Income.
Q: What is rental income?
A: It is a fixed sum, either in cash or in property equivalent, to be paid at a
definite period for the use or enjoyment of a thing or right.

vii. Annuities and proceeds from life insurance or other types of insurance
Q: What are annuities and proceeds from life insurance or other types of
insurance?
A: It refers to periodic installment payments of income or pension by insurance
companies during the life of a person or for a guaranteed fixed period of
time, whichever is longer, in consideration of capital paid by him. It is paid
annually, monthly, or periodically, computed upon the amount paid yearly,
but necessarily for life. The annuity payments represent a part that is
taxable and not taxable. If part of annuity payment represents interest, then
it is a taxable income. If the annuity is a return of premium, it is not taxable.
viii. Prizes and awards
TN: A prize is a reward for a contest or a competition. Such payment

constitutes gain derived from labor.
Q: What are the items excluded from prizes and rewards subject to final
tax?
A: Prizes and awards made primarily in recognition of religious, charitable,

scientific, educational, artistic, literary, or civic achievements are exclusions
from gross income if: 1) the recipient was selected without any action on his
part to enter a contest or proceedings; and 2) the recipient is not required to
render substantial future services as a condition to receiving the prize or
award.
Prizes and awards granted to athletes in local and international sports
competitions and tournaments held in the Philippines and abroad and
sanctioned by their national associations shall be exempt from income tax.
ix. Pension, retirement benefit, or separation pay
TN: A stated allowance paid regularly to a person on his retirement or to his

dependents on his death, in consideration of past services, meritorious work,
age, loss or injury.
x. Income from any source
(a) Condonation of indebtedness

TN: The cancellation of indebtedness may have any of three possible
consequences:
(1) It may amount to payment of income. If, for example, an individual
performs services to or for a creditor, who, in consideration thereof, cancels the debt,
income in that amount is realized by the debtor as compensation for personal
services.
(2) It may amount to a gift. If a creditor wishes merely to benefit the debtor,
and without any consideration therefore, cancels the debt, the amount of the debt is
a gift to the debtor and need not be included in the latter‘s report of income.

(3) It may amount to a capital transaction. If a corporation to which a
stockholder is indebted forgives the debt, the transaction has the effect of a payment
of dividend.
(b) Recovery of accounts previously written off
TN: Bad debts claimed as a deduction in the preceding year(s) but

subsequently recovered shall be included as part of the taxpayer‘s gross
income in the year of such recovery to the extent of the income tax benefit of
said deduction. There is an income tax benefit when the deduction of the bad
debt in the prior year resulted in lesser income and hence tax savings for the
company.
(c) Receipt of tax refunds or credit
Q: Are tax refunds or credits taxable?

A: As a general rule, a refund of a tax related to the business or the practice of
profession, is taxable income (e.g., refund of fringe benefit tax) in the year of
receipt to the extent of the income tax benefit of said deduction.
However, the following tax refunds are not to be included in the computation of
gross income:
(1) Philippine income tax, except the fringe benefit tax
(2) Income tax imposed by authority of any foreign country, if the taxpayer
claimed a credit for such tax in the year it was paid or incurred.
(3) Estate and donor‘s taxes
(4) Taxes assessed against local benefits of a kind tending to increase the
value of the property assessed (Special assessments)
(5) Value Added Tax
(6) Fines and penalties due to late payment of tax
(7) Final taxes
(8) Capital Gains Tax
(d) Exclusions
i. Rationale
Q: What is the rationale of the items that are not included in the
determination of gross income?
A: They are excluded because they represent return of capital or are not
income, gain or profit; they are subject to another kind of internal revenue
tax; and they are income, gain or profit expressly exempt from income tax
under the Constitution, tax treaty, Tax Code, or a general or special law.

ii. Taxpayers who may avail
Q: Who are the taxpayers who may avail the exclusions?
A: All kinds of taxpayers – individuals, estates, trusts, and corporations,

whether residents or non-residents may avail of the exclusions.
iii. Distinguish: exclusions, deductions, and tax credits
A: Exclusions from gross income refer to flow of wealth to the taxpayer which
are not treated as part of gross income for purposes of computing the
taxpayer‘s taxable income, due to the following reasons: (1) it is exempted
by the Constitution or a statute; or (2) it does not come within the definition of
income. It pertains to the computation of gross income
Deductions, on the other hand, are the amounts which the law allows to be
subtracted from gross income in order to arrive at net income. It pertains to
the computation of net income
Tax Credit refers to amounts subtracted from the computed tax in order to
arrive at taxes payable.
b. Concept of return To Capital
Q: What is return to capital?

A: Return of capital occurs when an investor receives a portion of their original
iv. Exclusions under the Constitution
Income derived by the government or its political subdivisions is exempt from

gross income, if the source of the income is from any public utility or from the
exercise of any essential governmental function.
Also, all assets and revenues of a non-stock, non-profit private educational
institution used directly, actually and exclusively for private educational
purposes shall be exempt from taxation.
4. Deductions
a. General Rule
Q: What is the general rule in tax deductions?
A: The general rule is that ordinary and necessary expense to the conduct of
trade, business, or the practice of a profession is deductible.

Q: What are allowable Deductions?
A: Allowable Deductions are the amounts which you can deduct from the gross
income in order to arrive at the taxable income of the taxpayer.
Pure Compensation Earner 1. Premium payments on health and/or
hospitalization insurance (PHHI)
2. No itemized deduction
Those engaged in business or practice 1. OSD or itemized deductions

of profession 2. PHHI
Corporations OSD or itemized deductions
investment that is not considered income or capital gains from the investment.
c. Distinguish: itemized deduction and optional standard deduction
Q: What is the limit of on deductible amount under the itemized deduction?
A: there is no limitation on deductible amount under the itemized deductions,

except that it is reasonable.
Q: What is the limit of the deductible amount under the optional standard
deduction?
A: The limit under the optional standard deduction is forty (40%) percent of the
gross income.
Q: Differentiate itemized deduction and the optional standard deduction.

A: itemized deductions are those expenses that can be subtracted from
adjusted gross income (AGI) to reduce your taxable income and therefore
reduce the amount of taxes you owe.
Whereas, optional standard deduction is the deduction of a maximum
amount of forty (40%) percent of the gross income.
Itemized deductions needs to be quantifiable whereas the optional standard
deduction does not need to be quantifiable.
Itemized deductions are available to everyone whereas, optional standard
deductions are not available to non-resident aliens and married individuals
who are filing their respective tax returns separately.
d. Requirements for deductible item
Q: What are the requirements of a deductible item?
A: The requirements for deductability are the following:
(1) Ordinary and necessary;

(2) Paid or incurred during the taxable year;
(3) Paid or incurred 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;
(4) Substantiated by adequate proof;

(5) Legitimately paid;
(6) If subject to withholding tax, the tax required to be withheld on the
expense paid or payable is shown to have been properly withheld and
remitted to the BIR; and
(7) Amount must be reasonable.
c. Items not deductible
Q: What items are not deductible?
A: The following are the items that are not deductible:

(1) Personal, living, or family expenses;
(2) Any amount paid out for new buildings or for permanent improvements or
betterments made to increase the value of any property or estate;
(3) Any amount expended in restoring property or in making good the
exhaustion thereof for which an allowance is or has been made;
(4) Premiums paid on any life insurance policy covering the life of any officer,
employee, or any person financially interested in the trade or business
carried on by the taxpayer, individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such policy;
(5) Interest expense and bad debts between related parties;
(6) Losses from sales or exchanges of property between related taxpayers;
(7) Non-deductible interest;
(8) Non-deductible taxes;
(9) Non-deductible losses; and
(10) Losses on wash sales;
a. Proprietary educational institutions and hospitals;
b. Government owned and controlled corporations; and
c. others
5. Income tax on individuals
Summary Table for Taxation of Individuals
(all individual taxpayers, including nonresident aliens)
Classification Taxable Income Tax Rates

Resident Citizen Income from sources within
and
0%-35%
outside the
Philippines
Non-Resident Citizen Income from sources within
the Philippines
0%-35%

Resident Alien Income from sources within
the Philippines
0%-35%
Non-resident Income from sources within

the Philippines
Alien Engaged 0%-35%
in Trade or
Business (NAETB)
Non-resident Alien Not Income from sources within
the Philippines
Engaged in Trade or 25%
Business (NANETB)
a. Resident citizens, non-resident citizens, and resident aliens
i. Coverage
1. Resident Citizens
Q: From what source of income is a Filipino resident citizen taxable by the

Philippine government?
A: A citizen of the Philippines residing therein is taxable on income from all sources
(both within and outside Philippines).
Q: Patrick is a successful businessman in the United States and he is a sole

proprietor of a supermarket which has a gross sales of $10 million and an
annual income of $3 million. He went to the Philippines on a visit and, in a
party, he saw Atty. Agaton who boasts of being a tax expert. Patrick asks
Atty. Agaton: if he (Patrick) decides to reacquire his Philippine citizenship
under RA 9225, establish residence in this country, and open a
supermarket in Makati City, will the BIR tax him on the income he earns
from his U.S. business? If you were Atty. Agaton, what advice will you give
Patrick? (Bar Question, 2016)
A: I will advice Patrick that once he re-acquires his Philippine citizenship and
establishes his residence in this country, his income tax classification would then
be a ‗resident citizen.‘ A resident citizen is taxable on all his income, whether
derived within or without the Philippines; accordingly, the income he earns from
his business abroad will now be subject to the Philippine income tax (Sec. 23,
NIRC).

Q: Mr. A, a citizen and resident of the Philippines, is a professional boxer. In a
professional boxing match held in 2013, he won prize money in United
States (US) dollars equivalent to P300,000,000. Is the prize money paid to
and received by Mr. A in the US taxable in the Philippines? Why? (Bar
Question, 2015)
A: Yes. Under the Tax Code, the income within and without of a resident citizen is
taxable. Since Mr. A is a resident Filipino citizen, his income worldwide is taxable
in the Philippines (Sec. 23 [A], NIRC).
Q: Federico, a Filipino citizen, migrated to the United States some six years
ago and got a permanent resident status or green card. Should he pay his
Philippine income taxes on the gains derived from the sale in the New York
Stock Exchange of shares of stock in PLDT, a Philippine corporation
whose shares are listed thereat? (Bar Question, 2011)
A: Yes. The gains from the sale of shares of stock in a domestic corporation shall
be treated as derived entirely from sources within the Philippines, regardless of
where the said shares are sold (Sec. 42 [E], NIRC). By this provision of law, the
gain, if any, from the sale of shares of stocks of a domestic corporation by any
person shall always be treated for income tax purposes as income from sources
within the Philipines.
2. Non-resident Citizens
Q: What are the types of non-resident citizens?

A: There are 3 types of non-resident citizens, namely:
(1) Immigrants;
(2) Employees of a foreign entity on a permanent basis; and
(3) Overseas contract workers
Q: From what source of income is a non-resident citizen taxable by the

Philippine government?
A: A non-resident citizen is taxable only on income derived from sources within the
Philippines.
Other considerations:
Q: Does an individual citizen of the Philippines who is working and deriving

income from abroad as an overseas contract worker need to pay taxes to
the Philippine government?
A: Yes. A Filipino citizen working and deriving abroad as an Overseas Contract
Worker (OCW) is taxable only on income from sources within the Philippines (i.e.
sideline income in the Philippines).

Q: What do you mean by Overseas Contract Worker (OCW)?
A: Overseas Contract Worker (OCW) refers to Filipino citizens who are physically
present in a foreign country as a consequence of their employment.
Their salaries and wages are paid by an employer abroad and is not borne by an
entity or person in the Philippines. [Sec. 2, RR 1-11]
Q: Are the Overseas Contract Worker (OCW’s) income arising from sources
outside the Philippines exempt from income tax.
A: Yes. An OCW‘s income arising from sources outside the Philippines is exempt
from income tax.
Q: Mr. C, a resident citizen, bought ready-to-wear goods from Ms. B, a non-

resident citizen. If the goods were produced from Ms. B’s factory in the
Philippines, is Miss B’s income from sale to Ms. C taxable in the
Philippines? Explain. (Bar Question, 2015)
A: Yes, the income of Ms. B from the sale of ready-to-wear goods to Ms. C is
taxable. A non- resident citizen is taxable only on income derived from sources
within the Philippines (Sec. 23 [B], NIRC). In line with the source rule of income
taxation, since the goods are produced and sold within the Philippines, Ms. B‘s
Philippine-sourced income is taxable in the Philippines.
Take a pause: The problem does not indicate where the sale took place. The
suggested answer assumes that the sale took place in the Philippines.
3. Resident Aliens
Q: Are resident aliens’ income taxable by the Philippine government?
A: Yes. A resident alien is taxable only on income from sources within the
Philippines.
Q: Mr. C, a resident citizen, bought ready-to-wear goods from Ms. B, a non-

resident citizen. If Ms. B is an alien individual and the goods were produced
in her factory in China, is Miss B’s income from the sale of goods to Ms. C
taxable in the Philippines? Explain. (Bar Question, 2015)
A: Yes, but only to proportionate part of the income. Gains, profits, and income from
the sale of personal property produced by the taxpayer without and sold within
the Philippines, shall be treated as derived partly from sources within and partly
from sources without the Philippines (Sec. [E], NIRC).
Hold-up: The problem does not indicate where the sale took place. The
suggested answer assumes that the sale took place in the Philippines.

ii. Taxation on compensation income
Q: What is compensation?
A: In general, the term ―compensation‖ means all remuneration for services
performed by an employee for his employer under an employer-employee,
unless specifically excluded by the Tax Code.
Q: What is compensation income?

A: The term ―compensation income‖ means all remuneration for services performed
by an individual employee for his employer, including the cash value of all
remuneration paid in any medium other than cash.
Income arising from an employer-employee relationship.

(a) Inclusions
1. Monetary compensation
Q: What do you mean by Monetary compensation?

A: If compensation is paid in cash, the full amount received is the measure of the
income subject to tax.
2. Regular salary/wage
Q: What is salary?
A: Salary refers to earnings received periodically for a regular work other than
manual labor, such as monthly salary of an employee.
Q: What do wages cover/include?

A: Wages cover all remuneration for services performed by an employee for his
employer, including the cash value of all non-cash remuneration. [Sec. 78(A),
NIRC]
Separation pay/retirement benefit not exempt

Retirement pay – is a lump sum payment received by an employee who has served a
company for a considerable period of time and has decided to withdraw from work into
privacy. [Sec. 2(b), RR No. 6-82]
Retirement pay
Q: What is the General rule on retirement pay?
A: The the general rule is that Retirement pay is taxable.

Q: What are the Exceptions?
A:
i. SSS or GSIS retirement pays [Sec. 32(B)(6), NIRC]
ii. Retirement benefit under R.A. 7641 provided the following requirements are met:
iii. Retirement program is approved by the Commissioner;
iv. Retirement benefit is pursuant to a reasonable private benefit plan.
v. Retiree employed for 10 years by the employer;
vi. Retiree should have been 50 years old or above at the time of retirement; and
vii. Retirement benefit availed only once [Sec. 32 (B)(6)(a), NIRC].
Separation pay
Q: What is the General rule on separation pay?
A: The general rule is that Separation pay is taxable if voluntarily availed of.
Exception: if due to causes such as death, sickness, disability, reorganization
or bankruptcy of the company or for any other cause beyond the control of the
said employee.
3. Bonuses, 13th month pay, and other benefits not exempt

Tips and Gratuities – those paid directly to the employee (usually by employer‘s
customer) which are not accounted for by the employee to the employer. (taxable
income but not subject to withholding tax) [Sec. 2.78.1, RR No. 2-98]
13th month pay – taxable only for the part which exceeds P90,000 [Sec. 32(7)(e),
NIRC]
Overtime Pay – premium payment received for working beyond regular hours of
work which is included in the computation of gross salary of employee.
4. Directors’ fees, allowances and bonuses
Q: State the General rule on Directors’ fees, allowances and bonuses.

A:
General Rule: taxable as compensation income when the recipient director

has an employee- employer relationship with the corporation which pays the
same.
Exception: not taxable as compensation income when recipient director’s duties

is confined to attendance and participation only in the meetings of the Board of
Directors, but taxable as income arising from exercise of profession [R.M.C 34-
08].

5. Non-monetary compensation
Q: What is the measurement of non-monetary compensation for tax

purposes?
A: The measure of income subject to tax is the equivalent value in money.
(b) Exclusions
1. Fringe benefit subject to tax
Q: How are fringe benefits of rank-and-file employees treated?

A: The fringe benefits of rank-and-file employees treated as part of his
compensation income subject to income tax and withholding tax on
compensation income, which must be withheld and deducted by his employer
from the compensatio income of the employee.
If the recipient of the fringe benefits is a rank and file employee, and the said
fringe benefit is not tax-exempt, then the value of such fringe benefit shall be
considered as part of taxable compensation income. [DOMONDON]
Where the recipient of the fringe benefit is not a rank and file employee, and the
said benefit is not tax-exempt, then the value of such fringe benefit shall not be
included in the taxable compensation income. It is instead levied upon the
employer. [DOMONDON]
Convenience of the employer Rule
Q: What does Convenience of the employer Rule mean?

A: If meals, living quarters, and other facilities and privileges are furnished to an
employee for the convenience of the employer, and incidental to the requirement
of the employee‘s work or position, the value of that privilege need not be
included as compensation [Henderson v. Collector (1961)]
2. De minimis benefits
Q: What are de minimis benefits?
A: These are certain fringe benefits denominated as ―de minimis benefits‖ that are
exempt from income tax and withholding tax, even if received by rank-and-file
employees and supervisory or managerial employees.
Facilities or privileges of relatively small value furnished by an employer to his
employees and are as a means of promoting the health, goodwill, contentment,
or efficiency of his employees [RR No. 11-18].
These are exempt from both fringe benefit tax and compensation income tax
[Sec. 33 (C)(4), NIRC].

3. 13th month pay and other benefits and payments specifically excluded from
taxable compensation income
Gross benefits received by employees up to P90,000 (amounts in excess are

considered compensation income)
Q: What are included in other Benefits?

A:
a) Benefits received by government employees under RA 6686;
b) Benefits received by employees pursuant to PD 851 (13th Month Pay Decree);
c)Benefits received by employees not covered by PD 851 as amended by

Memorandum Order No. 28; and,
d) Other benefits such as productivity incentives and Christmas bonus.
iii. Taxation of business income/income from practice of profession
Q: Are all income obtained from doing business or exercising of profession

be included in the computation of gross income?
A: Yes. All income obtained from doing business or exercising of profession shall
be included in the computation of gross income.
Individuals earning purely business or professional income
Q: What are the options given to Individuals earning purely business or

professional income?
A: Individuals earning income purely from self-employment and/or practice of
profession, whose gross sales/receipts and other nonoperating income does
not exceed the VAT threshold as provided under Sec. 109 (BB) of the Tax
Code, as amended, shall have the option to avail of:
(a)Schedular
The graduated rates under Sec. 24 (A)(2)(a) of the Tax Code, as amended;
OR
(b)8% option
An eight percent (8%) tax on gross sales or receipts and other non-operating
income in excess of two hundred fifty thousand pesos (P250,000.00) in lieu
of the graduated income tax rates under Sec. 24 (A) and the percentage tax
under Sec. 116 of the NIRC.

Individuals earning mixed income
Q: What about for Individuals earning mixed income?

A:
For mixed income earners, the income tax rates applicable are:
a. The compensation income shall be subject to the tax rates prescribed under
Section 24 (A)(2)(a); AND
b. The income from business or practice of profession shall be subject to the
following:
c. If the gross sales/receipts and other nonoperating income do not exceed the
VAT threshold, the individual has the option to be taxed at:
d. The aforementioned graduated taxable income rates; OR
e. The aforementioned optional 8% gross income tax.
f. If the gross sales/receipts and other nonoperating income exceeds the VAT
threshold, the individual shall be subject to the graduated income tax rates.
In other words:
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 compensation income shall be subject
to graduated income tax rates prescribed under Subsection (A)(2)(a) of this
Section.
AND
(2) All Income from Business or Practice of Profession. If total gross sales
and/or gross receipts and other non-operating income
a. Do not exceed the VAT Threshold as Provided in Section 109(BB) of this
Code.
i. Graduated tax rates under Subsection (A)(2)(a) of this Section on
taxable income [for both compensation and profession], OR
ii. 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. Exceed the VAT Threshold as Provided in Section 109(BB) of this Code.
The rates prescribed under Subsection (A)(2)(a) of this Section.
iv. Taxation of partners in a general professional partnership
Q: Is general professional partnership (GPP) a taxable entity for income tax

purposes?
A: No. A general professional partnership (GPP) is not subject to income tax
imposed pursuant to Sec. 26 of the Tax Code, as amended. However, the
partners shall be liable to pay income tax on their separate and individual
capacities for their respective distributive share in the net income of the GPP.
Each partner shall report as gross income his distributive share in the net
income of the GPP, actually or constructively received.

In computing the distributive share of the partners, the net income of the GPP
shall be computed in the same manner as a corporation. [Sec. 26, NIRC]
If the partnership sustains a net operating loss, the partners shall be entitled to
deduct their respective shares in the net operating loss from their individual
gross income.
Q: A, B, and C, all lawyers, formed a partnership called ABC Law Firm so that
they can practice their profession as lawyers. For the year 2012, ABC Law
Firm received earnings and paid expenses, among which are as follows:
Earnings:
(1) Professional/legal fees from various clients
(2)Cash prize received from a religious society in recognition of the

exemplary service of ABC Law Firm
(3)Gains derived from sale of excess computers
and laptops Payments:
(4) Salaries of office staff

(5) Rentals for office space
(6) Representation expenses incurred in meetings with clients
(Bar Question, 2014)
(A) What are the items in the above mentioned earnings which should be
included in the computation of ABC Law Firm’s gross income? Explain.
(B) What are the items in the above-mentioned payments which may be
considered as deductions from the gross income of ABC Law Firm?
Explain.
(C)If ABC Law Firm earns net income in 2012, what, if any, is the tax
consequence on the part of ABC Law Firm insofar as the payment of
income tax is concerned? What, if any, is the tax consequence on the part
of A, B, and C as individual partners, insofar as the payment of income tax
is concerned?
A:
A) The three items of earnings should be included in the computation of ABC
Law Firm‘s gross income. The professional/legal fees from various clients is
included as part of gross income being in the nature of compensation for
services (Sec 32[A][1], NIRC). The cash prize from a reigious society in
recognition of its exemplary services is also included there being no law
providing for its exclusion. Tjis is not a prize in recognition of any of the
achievements enumerated under the law, hence, should form part of gross
income (Sec. 32 [B][7][c], NIRC).
B) The law firm being formed as a general professional partnership is entitled to

the same deductions as allowed to corporations (Sec. 26, NIRC). Hence, the
three items of deductions mentioned in the problem are all deductible, they,
being in the nature of ordinary and necessary expenses incurred in the
practice of profession (Sec. 34 [A], NIRC.

C) The net income having been earned by the law firm which is formed and
qualifies as a general professional partnership, is not subject to income tax
because the earner is devoid of any income tax personality. Each partner
shall report as gross income his distributive share, actually or constructively
received, in the net income of the partnership. The partnership is merely
treated for income tax purposes as a pass- through entity so that its net
income is not taxable at the level of the partnership but said net income
should be attributed to the partners, whether or not distributed to them, and
they are liable to pay the income tax based on their respective taxable income
as individual taxpayers (Sec. 26, NIRC).
v. Taxation of passive income

Passive Income Subject to Final Tax
Q: What does Final tax mean?
A: ―Final tax‖ means tax withheld from source, and the amount received by the
income earner, is net of the tax already. The income having been tax-paid
already, it need not be included in the gross income in the yearly
submission of ITR.
Interest income
Q: What are the rates applied on interest income?

A:
a. On any currency bank deposit, yield or any other monetary benefit from
deposit substitutes, trust funds and similar arrangements - 20% final tax
b. Under the expanded foreign currency deposit system (EFCDS) - 15%
final tax for residents, exempt if non-residents.
Treatment of income from long-term deposits
Q: What is the treatment of income from long-term deposits?
A: On long-term deposit or investment certificates (LTDIC) in banks (e.g., savings,

common or individual trust funds, deposit substitutes, investment management
accounts and other investments, which have maturity of 5 years or more) –
exempt.
Should LTDIC holder pre-terminate LTDIC before the 5th year, a final tax shall
be imposed on the entire income based on the remaining maturity:
4 years to less than 5 years 5%
3 years to less than 4 years 12%
less than 3 years 20%

Any income of nonresidents, whether individuals or corporations, from
transactions with depository banks under the expanded system shall be exempt
from income tax.
For interest from foreign currency loans granted by FCDUs to residents other
than Offshore Banking Units (OBUs) or other depository banks under the
expanded system – tax rate is 10% if payors are RESIDENTS, whether
individuals or corporations.
Dividends from domestic corporation

cash and/or property dividends actually or constructively received by an individual from:
-a domestic corporation
-a joint stock company
-an insurance or mutual fund companies
-a regional operating headquarters of multinational companies
-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
-share of an individual member or coventurer in the net income after tax of an -
association, a joint account, or a joint venture or consortium taxable as a corporation.
Rate:
a. 10% for residents (RC, RA) and nonresident citizens (NRC);
b. 20% for non-resident aliens engaged in trade or business (NRAETB)
However, if a corporation cancels or redeems stock issued as a dividend at such

time and in such manner as to make the distribution and cancellation or redemption,
in whole or in part, essentially equivalent to the distribution of a taxable dividend, the
amount so distributed in redemption or cancellation of the stock shall be considered
as taxable income to the extent that it represents a distribution of earnings or profits.
[Sec. 73 (B), NIRC]
In other words, stock dividends are generally not subject to tax as long as there are
no options in lieu of the shares of stock.
On the other hand, a stock dividend constitutes income if it gives the shareholder an
interest different from that which his former stockholdings represented.
Prizes and other winnings
Q: What are the rates applied in prizes and winnings?

A: Prizes and other winnings - 20%, except
a. Prizes amounting to P10,000 or less, which shall be subjected to the

graduated rates under Subsection A of Section 24; and
b. Philippine Charity sweepstakes / lotto winnings which does not exceed
P10,000 - exempt ;
c. Prizes excluded from gross income.

Q: Differentiate prize from winnings.
A: A prize is the result of an effort made (e.g., prize in a beauty contest), while
winnings are the result of a transaction where the outcome depends upon
chance (e.g., betting).
vi. Taxation of Capital Gains
(a) Income from sale of shares of stock of a Philippine corporation
Shares traded and listed in the stock exchange – CGT-exempt, but subject to
business tax.
The transaction is exempt from income tax regardless of the nature of

business of the seller or transferor. However, it is subject to a business tax of
six-tenths of one percent (0.6%) of the gross selling price [Sec. 127 (A),
NIRC].
Shares not listed and traded in the stock exchange – subject to final tax
On sale, barter, exchange or other disposition of shares of stock of a

domestic corporation not listed and traded through a local stock exchange,
held as a capital asset
On the net capital gain: Final Tax of 15%

Net capital gain: selling price less cost
Selling price: consideration on the sale OR fair market value of the shares of stock at
the time of the sale, whichever is higher
Cost: original purchase price
Income from the sale of real property situated in the Philippines
Q: What properties are covered?

A: Property located in the Philippines classified as capital assets.
Q: What transactions are covered?
A: Sales, exchanges, or other disposition of real property (classified as capital
assets), including pacto de retro sales and other forms of conditional sales of the
following: citizens, resident aliens, NRAETB, NRANETB, domestic corporations.
Q: What is the Tax rate?
A:
General rule: 6% of —whichever is higher of:
GSP, or FMV in accordance with Sec. 6 (E).
Exceptions:
a. In case of sales made to the government, any of its political subdivisions or

agencies, or to GOCCs, it can be taxed either:
b. Under Sec. 24 (D)(1) – 6% CGT, or
c. Under Sec. 24 (A), at the option of the taxpayer.
d. In case of the sale of or disposition of their principal residence by natural

persons.

Tax rate on capital gains
On sale of shares of stock of a 15% of net capital gains (NCG)
domestic corporation NOT traded
through a LSE and held as capital
asset
On sale of real property in the PH No provision for capital gains for sale
of realty. Hence, subject to RCIT.
Q: What are the requirements to avail of the exceptions?

A: The following are the requirements:
a. Sale or disposition by a natural person of his principal residence,
b. The proceeds of which is fully utilized in acquiring/constructing a new
principal residence,
c. Such acquisition/construction taking place within 18 calendar months from
the date of sale or disposition,
d. The taxpayer notifies the Commissioner within 30 days from the
sale/disposition through a prescribed return of his intention to avail of the
exemption,
e. The tax exemption can only be availed of once every 10 years.
Q: What is the Tax treatment on sale of principal residence?

A: Sale of principal residence is exempt from capital gains tax (CGT). 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
CGT.
How taxable portion and tax determined:
[HIGHER of Gross selling price or FMV @ sale]
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.
Computation for the basis of new principal residence:
Historical cost of old principal residence XXX
Add: Additional cost to acquire new principal residence* XXX
Adjusted cost basis of the new principal residence XXX
*Additional cost to acquire new principal residence:
Cost to acquire new principal residence XXX
Less: Gross selling price of old principal residence (XXX)
Additional cost to acquire new principal residence XXX

(b) Income from sale of real property situated in the Philippines
(c) Income from sale, exchange, and other disposition of other capital assets.
Q: What are the Tax rates of Other properties which shall be subject to
income tax?
A:
a. At the graduated income tax rates, if the seller is an individual
b. Long-term capital gains: only 50% is recognized.
c. Short-term capital asset transactions: 100% subject to tax [Sec. 39(B), NIRC].
Q: How to determination whether short- or long-term capital gains?

A: Short-term if held for 12 months or less; otherwise, it is a long-term capital
gain. At 30% corporate income tax, if the seller is a corporation.
Rule: Capital gain/loss is recognized in full.
Q: What are capital assets?

A:
Capital assets shall refer to all real properties held by a taxpayer, whether or
not connected with his trade or business, and which are not included among
the real properties considered as ordinary assets under Section 39(A)(1).
Q: What are ordinary assets?
A: Ordinary assets shall refer to all real properties specifically excluded from the
definition of capital assets under Section 39(A)(1), NIRC, namely:
a. Stock in trade of a taxpayer or other real 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
b. Real property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business; or
c. Real property used in trade or business (i.e., buildings and/or improvements)
of a character which is subject to the allowance for depreciation provided for
under Sec. 34(F) of the Code; or
d. Real property used in trade or business of the taxpayer
b. Non-Resident Aliens Engaged in Trade or Business
Q: State briefly the rule on income tax on individuals of those who are Non-
Resident Aliens Engaged in Trade or Business.
A: Non-Resident Aliens Engaged in Trade or Business are subject to income tax in
the same manner as an individual citizen and a resident alien individual on
taxable income from all sources within the Philippines.

Q: Is there any exceptions? If Yes, enumerate the exceptions.
A: Yes. The following shall be subject to an income tax of 20% on the total amount
thereof:
a. Cash and/or property dividends from:
b. A domestic corporation;
c. A joint stock company;
d. An insurance or mutual fund company;
e. A regional operating headquarters of multinational company;
f. 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;
g. 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 coventurer;
h. Interests
i. Royalties (in any form); and
j. Prizes (except prizes amounting to Ten thousand pesos (P10,000) or less
which shall be subject to graduated tax) and other winnings (except
PCSO/lotto winnings which shall not exceed P10,000)
Q: Explain the rules regarding the Royalties.

A: The following Royalties shall be subject to a final tax of ten percent (10%) on
the total amount thereof:
a. On books as well as other literary works; and
b. On musical compositions
c. Cinematographic films and similar works shall be subject to twenty-five
percent (25%) of the gross income
d. 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.
Q: What will happen if the holder of the certificate pre-terminate the deposit?
A: 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:
a. Four (4) years to less than five (5) years - 5%;
b. Three (3) years to less than four (4) years - 12%; and
c. Less than three (3) years - 20%.

Q: How about the rules regarding Capital gains? Explain Briefly.
A: 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 similar tax prescribed on citizens and resident
aliens. Sale, barter or exchange of Shares of stock in domestic corporation not
traded – 15% of net capital gains Sale, barter or exchange of real properties –
6% of gross selling price or current FMV whichever is higher.
Q: Patrick is a successful businessman in the United States and he is a sole

proprietor of a supermarket which has a gross sale of $10 million and an
annual income of $3 million. He went to the Philippines on a visit and, in a
party, he saw Atty. Agaton who boasts of being a tax expert. Patrick asks
Atty. Agaton: if he (Patrick) decides to reacquire his Philippine citizenship
under RA 9225, establish residence in this country, and open a
supermarket in Makati City, will the BIR tax him on the income he earns
from his U.S. business? If you were Atty. Agaton, what advice will you give
Patrick? (Bar Question, 2016)
A: I will advise Patrick that if he reacquires his Philippine citizenship and establish
residence in the Philippines, he shall be considered as a resident citizen subject
to tax on incomes derived from sources within or without the Philippines. [NIRC
of 1997, Sec. 23 (A)] Consequently, the BIR could now tax him on his income
derived from sources without the Philippines which is the income he earns from
his U.S. business (Domondon).
c. Non-Resident Aliens Not Engaged in Trade or Business [Sec. 25 (B), NIRC]
Q: State the rule on income tax on individuals of those who are Non-Resident
Aliens Not Engaged in Trade or Business.
A: There shall be levied, collected, and paid for each taxable year upon the entire
income received from all sources within the PH by every NRANETB within the
PH 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, profits, and income, and capital
gains, a tax equivalent to 25% of such income.
Q: X is a non-resident alien not engaged in trade or business. He earned

gross income in the amount of ₱1.5 million from his one-night concert in
the Philippines. How much will he pay for his income tax?
A: X must pay ₱375,000 as income tax (₱1,500,000 x 25%). Since X is a non-
resident alien not engaged in trade or business, his gross income within the
Philippines is subject to 25% final tax and is not allowed any deductions.

d. Aliens Employed by Regional Headquarters, Regional Operating Headquarters,
Offshore Banking Units, and Petroleum Service Contractors
Q: Is the preferential tax treatment still applicable to employees of regional

headquarters (RHQs), regional operating headquarters (ROHQs), offshore
banking units (OBUs) or petroleum service contractors and
subcontractors?
A: The preferential tax treatment of 15% shall no longer be applicable to
employees of regional headquarters (RHQs), regional operating headquarters
(ROHQs), offshore banking units (OBUs) or petroleum service contractors and
subcontractors. They are now subject to regular income tax rates [Sec. 25 (F)].
[Take Note of item A of veto message of the President on TRAIN Law]
e. Individual Taxpayers exempt from income tax are.

Q: Who are the Individual Taxpayers exempt from income tax?
A: Individual Taxpayers exempt from income tax are:
a. Senior Citizens (with qualifications)
b. Minimum wage earners
c. Exemptions granted under international agreements
Q: Provide the requirements of the individuals and entities claiming

exemption from imposition of taxes on income.
A: All individuals and entities claiming exemption from imposition of taxes on
income and, consequently, from withholding taxes are required to provide a
copy of a valid, current and subsisting tax exemption certificate or ruling, as per
existing administrative issuances and any issuance that may be issued from
time to time, before payment of the related income.
Q: Is it necessary that the tax exemption certificate explicitly recognize the
grant of tax exemption? What is the effect in case of failure on the part of
the taxpayer to present the said tax exemption certificate?
A: The tax exemption certificate or ruling must explicitly recognize the grant of tax
exemption, as well as the corresponding exemption from imposition of
withholding tax. Failure on the part of the taxpayer to present the said tax
exemption certificate or ruling as herein required shall subject him to the
payment of appropriate withholding taxes due on the transaction. [RMC No. 8-
14]
Q: What are the requirements in order for senior citizen to avail tax
exemption?
A:
1. He must be qualified as such by the CIR or RDO of the place of his residence;
2. He must file a Sworn Statement on or before January 31 of every year that
his annual taxable income for the previous year does not exceed the poverty
level as determined by the National Economic and Development Authority
(NEDA) thru the National Statistical Coordinating Board (NSCB);
3. If qualified, his name shall be recorded by the RDO in the Master List of Tax-
Exempt Senior Citizens for that particular year, which the RDO is mandatorily
required to keep.

i. Minimum Wage Earners
Q: Minimum Wage Earners shall be exempt from payment of income tax on

their taxable income, what are the limitations of such exemption?
A: If he receives ―other benefits‖ in excess of the allowable statutory amount of
P90,000, then he shall be taxable on the exceeds benefits as well as his
salaries, wages, and allowances, just like an employee receiving compensation
income beyond the statutory minimum wage. The treatment of bonuses and
other benefits that [a minimum wage earner] receives from the employer in
excess of the [₱90,000] ceiling cannot but be the same as the prevailing
treatment prior to R.A. 9504 - anything in excess of ₱30,000 is taxable; no more,
no less. The treatment of this excess cannot operate to disenfranchise the MWE
from enjoying the exemption explicitly granted by R.A. 9504. [Soriano v.
Secretary of Finance, G.R. No. 184450 (2017)]
Q: What are the other rules?

A: The minimum wage shall be exempt from the payment of income tax on their
taxable income: Provided, further, That the holiday pay, overtime pay, night
shift differential pay and hazard pay received by such minimum wage earners
shall likewise be exempt from income tax. Compensation income including
overtime pay, holiday pay and hazard pay, earned by minimum wage earners
who have no other returnable income are NOT taxable and not subject to
withholding tax on wages [RA 9504].
ii. Exemptions Granted Under International Agreements
Q: Explain Briefly the Exemptions Granted Under International Agreements.
A: Taxation of compensation income of Philippine nationals and alien individuals

employed by foreign governments/embassies/diplomatic missions and
international organizations situated in the Philippines.
The Government of the Philippines is a signatory of certain international

agreements and a party to different tax treaties which specifically provide for
the exemption of certain persons or entities from taxes imposed by the
Philippines. (See RMC No, 31-2013, April 12, 2013 –)
Q: Give examples of these tax exemptions are those accorded to diplomats

or ambassadors of other countries here in the Philippines.
A: Examples of these tax exemptions are those accorded to diplomats or
ambassadors of other countries here in the Philippines. The World Health
Organization is also tax exempt upon an international agreement [CIR v.
Gotamco, G.R. No. L-31092 (1987)]

6. Income Tax On Corporation
a. Domestic Corporations
Q: What do you mean by Domestic Corporation?

A: A corporation created and organized in the Philippines or under its laws. The
same is taxable on all income derived from sources within and without the
Philippines. Section 22( c ), NIRC
Q: How do you determine the residence of corporations?
A: For the purpose of determining the tax status or residence of a corporation, the
Philippines adopted the "law of incorporation test" under which a corporation is
considered as a domestic corporation, if it is organized or created in accordance
with or under the laws of the Philippines, or as a foreign corporation, if it is
organized or created in accordance with or under the laws of a foreign country.
Q: Under the Tax Code, what are the inclusions and exclusions in the
definition of Corporation?
A: The Tax Code defines ―corporation‖ in a broad sense which includes all types of
corporation, partnership, joint stock companies, joint accounts, associations or
insurance companies, whether or not registered with the Securities and
Exchange Commission.
However, it does not include the following: a) general professional partnerships,
b) joint venture or consortium formed for the purpose of undertaking construction
projects, or c) joint venture or consortium engaging in petroleum, coal,
geothermal and other energy operations pursuant to an operating agreement
under a service contract with the government.
Q: What are the taxes imposed on Domestic Corporation?
A: The law dictates that the outline of taxes under the Domestic Corporation are the
following:
1. Normal corporate income tax (NCIT) - 30% of taxable income from all
sources within and without the Philippines
2. Minimum corporate income tax (MCIT) - 2% of gross income, if MCIT applies
3. Gross income tax (Optional corporate income tax) - 15% of gross income,
if qualified
4. Improperly Accumulated Earnings Tax - 10% of improperly accumulated
earnings
5. Final tax on passive income

Q: How about the taxes that are imposed on a Resident Foreign Corporation?
A: The Tax Code states that the taxes imposed on a Resident Foreign
Corporation are the following:
1. NCIT – 30% of taxable income from sources within the Philippines Section 28
[A], NIRC
2. MCIT – 2% of gross income, if MCIT applies
3. GIT (Optional corporate income Tax) - 15% of gross income, if qualified
4. Final tax on passive income
5. Interest from deposits and yields and royalties
6. Capital gains from sale of shares not traded in the stock exchange
7. Income derived under the Expanded Foreign Currency Deposit System
8. Inter-corporate dividends
9. Branch profit remittance tax
i. Taxation in General
(a) Normal/Regular Corporate Income Tax (RCIT)
Q: Define Normal/Regular Corporate Income Tax.

A: An income tax of thirty percent (30%) shall be imposed upon the taxable
income derived during the taxable year from all sources within and without the
Philippines for Domestic Corporation while from all sources within the
Philippines for Resident Foreign Corporation.
Illustration: (as to how to compute for the Normal/Regular Corporate Income Tax
Gross sales XX
Less: Sales returns / allowances / discount (XX)
Cost of goods sold / cost of services (XX)
Gross income XX
Less: Allowable deductions (XX)
Taxable income XX
Multiplied by tax rate 30%
Normal corporate income tax due XX

(b) Minimum Corporate Income Tax (MCIT)
Q: What is the concept or rationale of the Minimum Corporate Income Tax?

A: Under the law, Minimum Corporate Income Tax (MCIT) is a new concept under
the Philippine taxation system. It was a result of the perceived inadequacy of the
self- assessment system in capturing the true income of corporations.
Q: How did the lawmakers intend MCIT to be?
A: Under the existing jurisprudence, Congress intended to put a stop to the practice
of corporations which, while having large turnovers, report minimal or negative
net income resulting in minimal or zero income taxes year in and year out,
through underdeclaration of income or over-deduction of expenses otherwise
called tax shelters. The MCIT serves to put a cap on such tax shelters. Further,
As a tax on gross income, it prevents tax evasion and minimizes tax avoidance
schemes achieved through sophisticated and artful manipulations of deductions
and other stratagems. Since the tax base was broader, the tax rate was lowered
(Chamber of Real Estate and Builders’ Association, Inc. v. Hon. Executive
Secretary, G.R. No. 160756, March 9, 2010)
Q: What is the purpose of MCIT?
A: The imposition of the MCIT is designed to forestall the prevailing practice of

corporations of over claiming deductions in order to reduce their income tax
payments.
Take Note: The MCIT is equal to 2% of the gross income of the corporation at the
end of the taxable quarter, except income exempt from income tax and income
subject to final withholding tax. Being a minimum income tax, a corporation should
pay the MCIT whenever its normal corporate income tax (NCIT) is lower than the
MCIT, or when the firm reports a net loss in its tax return. Conversely, the NCIT
is paid when it is higher than the MCIT. Therefore, the taxable due for
the taxable year will be NCIT (30% of taxable income)or MCIT (2% of gross
income), whichever is HIGHER
Q: When will MCIT be imposed?
A: The Tax Code provides that it is Imposed beginning the fourth taxable year
from the taxable year the corporation commenced its business operations. For
purposes of MCIT, the taxable year in which business operations commenced
shall be the year when the corporation registers with the BIR (not in which the
corporation started commercial operations)
Attention: Recognizing the birth pangs of businesses and the reality of the
need to recoup initial major capital expenditures, MCIT commences only on the
4th taxable year.

Q: Discuss the coverage of MCIT.
A: The MCIT covers domestic and resident foreign corporations which are subject
to the regular income tax. Corporations subject to a special corporate tax
system do not fall within the coverage of the MCIT. These special corporations
include Proprietary educational institutions, nonprofit hospitals, OBUs, FCDUs,
ROHQs, firms registered in PEZA/BCDA/other ecozones, International Carriers .
For corporations whose operations or activities are partly covered by regular
income tax and special income tax system, MCIT shall apply on operations
covered by the regular corporate income tax system
Q: Are there other items of gross income that are included in the computation
of MCIT?
A: Yes, there are other items of gross income which are included in the
computation of MCIT. The law dictates that If apart from deriving income from
core business activities there are other items of gross income realized or earned
by the taxpayer which are subject to the normal corporate income tax, they must
be included as part of gross income for computing MCIT. Section 27 (E), NIRC;
RR 12-07
Further, it means that the term ―gross income‖ will also include all items of gross
income enumerated under Section 32 (A), except: a) income exempt from
income tax, and b) income subjected to FWT.
Q: What is the imposition of MCIT?

A: The MCIT shall be imposed on the following, namely:
Q: What is the gross income for purposes of computing MCIT?
A: The law provides that:
(1) As to sale of goods – it shall mean gross sales less sales returns,
discounts and allowances and cost of goods sold.
(2) As to sale of services – it shall mean gross receipts less sales returns,
allowances, discounts and cost of services.
Q: When is MCIT reported and paid?
A: The MCIT shall be paid in the same manner prescribed for the payment of the
normal corporate income tax which is on a quarterly and on a yearly basis.
The taxpayer shall pay the MCIT whenever it is greater than the regular or
normal corporate income tax. The MCIT shall likewise apply to the quarterly
corporate income tax but the final comparison between the NCIT payable by
the corporation and the MCIT shall be made at the end of the taxable year. The
payable or excess payment in the Annual Income Tax Return shall be
computed taking into consideration corporate income tax payment made at the
time of filing of quarterly corporate income tax return, whether this be MCIT or
normal income tax (R.R. 12-2007)

Q: Can MCIT be allowed as a deduction from gross income?
A: No, MCIT is not allowed as a deduction from gross income, since MCIT is an
estimate of the normal income tax, it cannot be claimed as a deduction.
Q: Distinguish Regular Corporate Income Tax and Minimum Corporate

Income Tax.
A: The distinctions between regular corporate income tax and the minimum
corporate income tax are the following:
1. As to taxpayer: Regular corporate income tax applies to all corporate
taxpayers while minimum corporate income tax applies to domestic
corporations and resident foreign corporations.
2. As to tax rate: Regular corporate income tax is 30% while minimum
corporate income tax is 2%.
3. As to tax base: Regular corporate income tax is based on the net taxable
income while minimum corporate income tax is based on gross income.
4. As to period of applicability: Regular corporate income tax is applicable
once the corporation commenced its business operation, while minimum
corporate income tax is applicable beginning on the 4th taxable year following
the commencement of business operations.
5. As to imposition: The minimum corporate income tax is imposed whenever
it is greater than the regular corporate income tax o the corporation (Sec. 27
[A] and [E], NIRC; RR No. 998)
Q: What do you mean by Carry Forward of excess minimum tax?

A: The law provides that any excess of the minimum corporate income tax over the
normal income tax shall be carried forward on an annual basis. The excess can
be credited against the normal income tax in the next three (3) succeeding
taxable years only [Sec. 27(E)(2), NIRC]. In the year to which it was carried
forward, the normal tax should be higher than the MCIT. Any excess not credited
in the next three years shall be forfeited. Carry forward (annually or quarterly) is
possible only if MCIT is greater than NCIT. Further, the maximum amount that
can be credited is only up to the amount of the NCIT, there can be no negative
NCIT.
Q: How do you compute the MCIT quarterly?
A: The computation and the payment of MCIT shall likewise apply at the time of
filing the quarterly corporate income tax. In the computation of the tax due for the
taxable quarter, if the quarterly MCIT is higher than the quarterly normal income
tax, the tax due to be paid for such taxable quarter at the time of filing the
quarterly corporate income tax return shall be the MCIT. Items allowed to be
credited against quarterly MCIT due: (a) CWT, (b) Quarterly income tax
payments under the normal income tax; and © MCIT paid in the previous taxable
quarter(s). Excess MCIT from the previous taxable year/s shall not be allowed to
be credited against the quarterly MCIT tax due.

Q: If annually, how do you compute the MCIT?
A: In the computation of annual income tax due, if the normal income tax due is
higher than the computed annual MCIT, the following shall be allowed to be
credited against the annual income tax:
a. quarterly MCIT payments,
b. quarterly normal income tax payments,
c. excess MCIT in the prior year/s (subject to the prescriptive period allowed
for its creditability),
d. CWTs in the current year,
e. excess CWTs in the prior year.
If in the computation of annual income tax due, the computed annual MCIT due
is higher than the annual normal income tax due, the following may be credited
against the annual income tax: (a) quarterly MCIT payments of current taxable
quarter, (b) quarterly normal income tax payments in current year, (c) CWTs in
the current year, (d) excess CWTs in the prior year.
Excess MCIT from the previous taxable year/s shall not be allowed to be
credited against the annual MCIT due as the same can only be applied against
normal income tax.
Q: When can the imposition of MCIT be suspended?

A: Since certain businesses may be incurring genuine repeated losses, the law
authorizes the Secretary of Finance, upon recommendation of the BIR, to
suspend the imposition of MCIT if a corporation suffers losses due to any of
the following:
1. Prolonged Labor Dispute – losses arising from a strike staged by the
employees which lasted for more than 6 months within a taxable period and
which has caused the temporary shutdown of business operations;
2. Force Majeure – a cause due to an irresistible force as by ‗Act of God‘ like
lightning, earthquake, storm, flood and the like, and shall also include
armed conflicts like war or insurgency;
3. Legitimate Business Reverses – include substantial losses due to fire, theft
or embezzlement or for other economic reason, as determined by the
Secretary of Finance (Sec. 27 [E][3], NIRC; RR. No. 9- 98, Sec. 2.27 [E]
[4][b,c,d]).
Q: As to the manner of Filing and Payment of the MCIT, how is it done?

A: The MCIT shall be paid in the same manner prescribed for the payment of the
normal corporate income tax which is on a quarterly and on a yearly basis.
(c) Taxation of Passive Income
Q: What is the nature of Taxation of Passive Income?

A: The Tax Code provides that it is an interest from deposits and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar
arrangements and royalties
a. 20% final tax on:
b. interest on any currency bank deposit,

c. yield or any other monetary benefit from deposit substitutes, trust
funds and similar arrangements, and
d. Royalties
e. same for Domestic Corporations and Resident Foreign Corporations
f. Collected as Final Withholding Tax (Section 57, NIRC)
Q: The Passive Income can be classified as what?
A: Under the law, passive income may either be:
a. Subject to schedular rates; or

b. Subject to final tax
(d) Taxation of Capital Gains
Q: What is the nature of the taxation of Capital Gains?

A: Under the law, Capital gain from sale of shares of stock not traded in the stock
exchange. Final tax on net capital gains realized by a domestic corporation
during the taxable year from the sale, barter, exchange or other disposition of
shares of stock in a domestic corporation not listed and traded through a local
stock exchange: 15% of net capital gains (Section 27 (D)(2), NIRC)
Q: What are the capital gains realized from the sale, exchange, or
disposition of lands and/or buildings?
A: The following are the capital gains realized from sales, exchange, or
disposition of lands and/or buildings, namely:
a. 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
b. On the gross selling price, or the current fair market value at the
time of the sale, whichever is higher, a final tax of 6%;
c. If it is a Resident Foreign Corporation., it is subject to the regular

corporate income tax rate of 30%
d. The capital gains tax is applied on the gross selling price, or the current fair
market value at the time of the sale, whichever is higher. Any gain or loss
on the sale is immaterial because there is a conclusive presumption by law
that the sale resulted in a gain.
e. Applicable to domestic corporations only.
f. Tax treatment is similar to that of individuals.

(e) Improperly Accumulated Earnings Tax
Q: Discuss the rule on Improperly accumulated earnings tax.

A: It is a tax in the nature of a penalty to the corporation for the improper
accumulation of its earnings, and a deterrent to the avoidance of tax upon
shareholders who are supposed to pay dividends tax on the earnings distributed
to them.
In addition to other income taxes, there is imposed for each taxable year a tax
equal to 10% of the improperly accumulated taxable income. Further, Applies 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. (Section 29, NIRC, as implemented by RR 2-2001)
Q: What is the effect of imposition of Improperly accumulated earnings tax?

A: Once the profit has been subjected to IAET, the same shall no longer be
subjected to IAET in later years even if not declared as dividend. Profits which
have been subjected to IAET, when finally declared as dividends, shall
nevertheless be subject to tax on dividends. In applying the above rules,
dividends shall be deemed to have been paid out of the most recently
accumulated profits.
Word of the day: LIFO: Last in, First Out
Q: What do you mean by Immediacy test?

A: The term "reasonable needs of the business" means (1) the immediate needs of
the business, including (2) reasonably anticipated needs.
The corporation should be able to prove (1) an immediate need for the
accumulation of the earnings and profits, or (2) the direct correlation of
anticipated needs to such accumulation of profits.
Q: Under Revenue Regulation 2-2001, what is the nature of Accumulation of

Earnings?
A: Accumulation of earnings up to 100% of paid up capital; Definite corporate
expansion projects requiring considerable capital expenditure (approved by
Board of Directors or equivalent body);
Building, Plant or Equipment Acquisition (approved by Board of Directors or
equivalent body)
a. compliance with any Loan Covenant or pre-existing obligation (established
under a legitimate business agreement);
b. required by Law or applicable regulations to be retained;
c. in case of subsidiaries of foreign corporations in the Philippines, undistributed
earnings reserved for Investments within the Philippines

Q: What are the inclusions and exclusions of Income Accumulated Income
Tax?
A: The law dictates that Income Accumulated Income Tax applies to domestic
corporations classified as closely- held corporations; however, the same does
not apply to the following:
a. Banks and other non-bank financial intermediaries;
b. Insurance companies;
c. Publicly-held corporations;
d. Taxable partnerships;
e. General professional partnerships;
f. Non- taxable joint ventures; and
g. Enterprises registered with PEZA (RA 7916), BCDA (RA 7227), and other
special economic zones declared by law which enjoy a special tax rate in
lieu of other taxes.
Q: What are those closely-held corporations?
A: Under the law, closely-held corporations are those:

a. at least 50% in value of the outstanding capital stock; or
b. at least 50% of the total combined voting power of all classes of stock
entitled to vote
c. is owned directly or indirectly by or for not more than 20 individuals.
Domestic corporations not falling under the aforesaid definition are,
therefore, publicly- held corporations. N.B. the same definition and rules as
in Tax on IPO in Section 127 (B); not the same as close corporation under
the Revised Corporation Code.
Further, as provided, The ownership of a domestic corporation for purposes of

determining whether it is a closely held corporation or a publicly held
corporation is ultimately traced to the individual shareholders of the parent
company. Where at least 50% of the outstanding capital stock or at least 50%
of the total combined voting power of all classes of stock entitled to vote in a
corporation is owned directly or indirectly by at least 21 or more individuals, the
corporation is considered as a publicly-held corporation, thus, exempt from
IAET. (BIR Ruling 025-02)
Q: How to determine the purposes in order to avoid income tax?

A: Being a holding or investment company is prima facie evidence of purpose to
avoid dividend tax. Holding or investment company – corporation having
practically no activities except holding property, and collecting the income
therefrom or investing the same;
Accumulation in excess of reasonable needs is determinative of the purpose to
avoid dividend tax. Prima facie instances of this include: (i) investment of
substantial earnings and profits in unrelated business or in stock or securities
of unrelated business; (ii) investment in bonds and other long-term securities;
(iii) accumulation of earnings in excess of 100% of paid-up capital. The
controlling intention of the taxpayer is that which is manifested at the time of
accumulation, not subsequently declared intentions which are merely the
product of afterthought. A speculative and indefinite purpose will not suffice.
Definiteness of plan/s coupled with action/s taken towards its consummation
are essential.

ii. Proprietary educational institutions and non-profit hospitals
Q: What is the tax base of a special domestic corporation, particularly the

proprietary educational institutions and non-profit Hospitals?
A: The Tax Code provides that the tax rate or base of proprietary educational
institutions and non-profit hospitals are 10% tax on taxable income, except on
income subject to capital gains tax and passive income subject to final tax within
and without the Philippines. (Section 27 (B), NIRC).
Bear in mind: If gross income from unrelated trade or business or other activity
exceeds 50% of total gross income derived from all sources, the tax rate of 30%
shall be imposed on the entire taxable income.
Unrelated trade, business or other activity – 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.
Proprietary educational institution – any private school maintained and
administered by private individuals or groups with an issued permit to operate
from DepEd, CHED or TESDA [Section 27 (B), NIRC].
Q: Is the Proprietary Educational Institutions and Non-Profit Hospital tax-

exempt?
A: They are not tax-exempt but are rather taxed at a preferential rate of 10% on
their taxable incomes which are subject to final tax.
Q: What is the effect of non removal of the income tax exemption of

proprietary non-profit hospitals?
A: Under Section 27 (B), NIRC, it does not remove the income tax exemption of
proprietary non-profit hospitals as charitable institutions under Section 30 ( E )
and ( G). Further, the effect of the introduction of Section 27 (B) is to subject the
taxable income of two specific institutions, namely, proprietary non-profit
educational institutions and proprietary non-profit hospitals, among institutions
covered by Section 30, to the 10% preferential rate under Section 27(B) instead
of the ordinary 30% corporate rate under the last paragraph of Section 30 in
relation to Section 27(A)(1).
Q: In order to qualify hospitals, what are the requirements?

A: The law states that in order to qualify, they must be (1) proprietary, and (2) non-
profit. Further, proprietary means private, following the definition of a ―proprietary
educational institution‖ as ―any private school maintained and administered by
private individuals or groups‖ with a government permit. ―Non-profit‖ means no
net income or asset accrues to or benefits any member or specific person, with
all the net income or asset devoted to the institution‘s purposes and all its
activities conducted not for profit (CIR v. St. Luke’s Medical Center, Inc., G.R.
No. 195909, 195960, September 26, 2012).

Q: Explain Predominance Test.
A: Under the law, it occurs when the gross income from unrelated
trade/business/other activity exceeds 50% of the total gross income from all
sources, the entire taxable income of the proprietary educational institution
shall be subject to the regular corporate tax rate of 30%.
Q: When does the trade/business/activity of a proprietary educational

institution be considered as unrelated?
A: The trade, business or other activity of a proprietary educational institution is
unrelated when the conduct of which is not substantially related to the exercise
or performance by such educational institution of its primary purpose or
function.
income from unrelated unrelated trade, Net income or asset shall
trade, business or other business or belong to or inure to the
activity exceeds 50% other activity benefit of any member,
of total gross income does not exceed organizer, officer or any
from all sources. 50% of total specific person.
Hospitals and gross income
educational institutions from all sources.
claiming to be
proprietary non-profit
but do not meet the
definition thereof.
Note: Related activities include auxiliary activities such as school-owned

canteen, cafeteria, dormitory, and bookstore within the school premises (BIR
Ruling 237-87, December 16, 1987)
Q: Distinguish the tax treatment between a proprietary educational institution

and a non-stock non-profit educational institution.
A: Proprietary educational institutions which are non-profit shall pay a tax of 10%
on their taxable income, except on certain passive incomes which are subject to
final tax: Provided, that if the gross income from unrelated trade, business or
other activity exceeds 50% of the total gross income derived from all sources,
the entire taxable income of the proprietary educational institution shall be
subject to the regular corporate tax rate of 30% (Section 27[B], NIRC).
A non-stock non-profit educational institution is exempt from tax on its revenues
and assets actually, directly and exclusively used for educational purposes
(Section 30, NIRC)
Q: What is the coverage of Non-Profit Hospital?
A: A nonstock-nonprofit hospital that is operated for charitable and social welfare

purposes is exempt from income tax under Section 30 (E) and (G) of the NIRC.
However, as provided in St. Luke's Medical Center, Inc. Vs CIR (2011), the
nonstock-nonprofit hospital must satisfy the following requisites in order
to be entitled to the exemption from income tax:
1. It is a non-stock corporation;
2. It is operated exclusively for charitable purposes; and
3. 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.

Illustration: Tax on Proprietary Non-Profit Educational Institutions and Non-
Profit Hospitals
30% 10% EXEMPT

Private, non-profit Private, non-profit Organized and operated
hospitals and hospitals and exclusively for charitable
edu educational institutions purposes and no part of its
cational whose gross income
institutions whose from
gross
iii. Government-owned or controlled corporations, agencies, instrumentalities
Q: What is the rule on Government-owned or Controlled Corporations,

Agencies Instrumentalities?
A: Under Section 27 ( C ), NIRC, generally, they are taxable as any other
corporation engaged in similar business, industry or activity, however, there are
some exceptions, namely:
1. Government Service Insurance System (GSIS),
2. Social Security System (SSS),
3. Philippine Health Insurance Corporation (PHIC), and d) Local Water Districts
(LWDs)
Worthy to Note: PAGCOR is no longer exempt from corporate income tax as it
has been effectively omitted from the list of GOCCs that are exempt from the
payment of the income tax. PAGCOR‘s income from gaming operations is
subject only to 5% franchise tax under PD No. 1869, while its income from other
related services is subject to corporate income tax pursuant to PD No. 1869 in
relation to RA No. 9337. SC clarified that RA No. 9337 did not repeal the tax
privilege granted to PAGCOR under PD No. 1869, with respect to its income
from gaming operations. What RA No. 9337 withdrew was PAGCOR's
exemption from corporate income tax on its income derived from other related
services, previously granted under Section 27(C) of RA No. 8424.(PAGCOR v.
BIR, G.R. No. 215427, December 10, 2014)
Q: Are they exempt from tax?
A: As a general rule, the government agencies or instrumentalities are exempt from
tax. However, When it chooses to tax itself. Nothing can prevent Congress from
decreeing that even instrumentalities or agencies of the government performing
governmental functions may be subject to tax. Where it is done precisely to fulfill
a constitutional mandate and national policy, no one can doubt its wisdom.
[Mactan Cebu Airport v Marcos (1996)]
iv. Foreign currency deposit units

Q: What is the coverage on Foreign Currency Deposit Units?
A: Income derived by a depository bank under the expanded foreign currency
deposit system from: Foreign currency transactions with nonresidents, offshore
banking units in the Philippines, local commercial banks, including branches of
foreign banks authorized by the BSP to transact business with foreign currency
depository system units and other depository banks under the EFCDS – exempt
from income tax. Except net income from transactions specified by the Secretary
of Finance upon recommendation by the Monetary Board – subject to regular
income tax payable by banks.

Q: What is the tax base of Foreign Currency Deposit Units?
A: Under the expanded foreign currency deposit system, 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.
b. Resident Foreign Corporations
Q: How about Resident Foreign Corporation, what does it mean?

A: The Tax Code defines Resident Foreign Corporation as a corporation organized
under the laws of a foreign country, which is engaged in trade or business in the
Philippines. It is taxable only on income derived from sources within the
Philippines. Section 28 (A)(1), NIRC
To illustrate, a Philippine branch of a foreign corporation duly licensed by the
Securities and Exchange Corporation is considered a resident foreign
corporation. Thus, only the income of the Philippines branch from sources within
the Philippines is subject tot Philippine income tax.
Simple Words: The general rule is that RFC shall be liable for a 30% income tax
on their income from within the Philippines, except for resident foreign
corporations that are international carriers which shall be taxed at 2 ½% on
their Gross Philippine Billings. Section 28 [A][3], NIRC
Q: What are the types of Resident Foreign Corporations?

A: There are two (2) general types of resident foreign corporations: (1) those
exempt from income tax because they are not engaged in trade or business in
the Philippines; and (2) those that are subject to income tax at (a) 10%
preferential tax rate, or (b) 30% regular corporate income tax rate or 2%
minimum corporate income tax rate, whichever is higher. Further, falling under
the first category are the regional or area headquarters pursuant to E.O. No. 226,
as amended by R.A. No. 8756, representative offices, and regional warehouses
of multinational corporations in the Philippines. (Section 22(H), NIRC)
Q: What are the resident foreign corporations that are exempt from
Philippine Income Tax?
A: The following are exempt from Philippine Income Tax, namely:
a. Regional or area headquarters (RHQ) shall mean a branch established in the
Philippines by multinational companies and which headquarters do not earn
or derive income from the Philippines and which act as supervisory,
communications and coordinating center for their affiliates, subsidiaries, or
branches in the Asia-Pacific Region and other foreign markets.
b. Representative office is a branch in the Philippines of a foreign multinational

corporation whose activities are limited to information dissemination, product
promotion, and the performance of quality control of goods for export to its
head office or affiliates.

Q: Are they subject to preferential tax rates, if so, what are these?
A: The following are subject to preferential tax rates, namely:

a. International carriers by air or water. - 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."37 Philippine tax treaties generally reduce the rate
to 1.5%.
b. 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) from foreign currency transactions with
local commercial banks, including branches of foreign banks that may be
authorized by the 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.
c. Regional operating headquarters (ROHQ) shall pay a tax often percent (10%)
of their net taxable income from sources within the Philippines.
d. Foreign currency deposit unit in the Philippines of a foreign bank. - 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) from foreign currency transactions with local
commercial banks, including branches of foreign banks that may be
authorized by the 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.
i. Taxation - in general
(a) Regular Corporate Income Tax (RCIT)
Q: What is the rule on RCIT when it comes to Resident Foreign Corporation?

A: Unless otherwise provided for in the Tax Code, the rates of normal corporate
income tax on net taxable income from worldwide sources of a domestic
corporation, or from sources within the Philippines of a resident foreign
corporation during the calendar year.
Q: What is the tax rate/base of a resident foreign corporation?

A: The law requires that the normal/regular corporate income tax rate is 30% of
taxable income.
(b) Minimum Corporate Income Tax (MCIT)
Q: Does minimum corporate income tax applies to resident foreign

corporation?
A: Yes, it also applies to resident foreign corporation, aside from domestic

corporation. Further, if it has zero or negative taxable income, or whenever the
MCIT is greater than the normal income tax due.

Q: When does MCIT be imposed on resident foreign corporations?
A: it is imposed beginning the fourth taxable year from the taxable year the
corporation commenced its business operations. For purposes of MCIT, the
taxable year in which business operations commenced shall be the year when
the corporation registers with the BIR.
Q: What is the tax rate/base of MCIT on resident foreign corporation?
A: Under the law, the tax rate is 2% of gross income. Further, The MCIT covers
domestic and resident foreign corporations which are subject to the regular
income tax. Corporations subject to a special corporate tax system do not fall
within the coverage of the MCIT.
(c) Branch Profit Remittance Tax (BPRT)
Q: When does BPRT applies?
A: It applies to non-resident foreign corporations, imposed on profits remitted by the

Philippines branch to the head office. Further, it is collected as final withholding
tax. Section 57, NIRC
Q: How is it transacted?
A: Under the law, the taxable transaction is any profit remitted by a branch to its
head office.
Q: What is the tax rate/base of BPRT?
A: It is stated that 15% final tax based on the total profits applied or earmarked for
remittance without any deduction for the tax component (except those activities
registered with PEZA).
Q: What are not treated as branch profits?
A: The following are not treated as branch profits unless effectively connected with
the conduct of trade or business in the Philippines:
a. Interests, dividends, rents, royalties (including remuneration
for technical services),
b. salaries, wages,
c. premiums, annuities, emoluments, or
d. other fixed or determinable annual, periodic or casual gains, profits,
income and capital gains received during each taxable year from all
sources within the Philippines
(d) Taxation of passive income
Q: Enumerate the Taxation of passive income

A: Certain passive income from domestic sources is subject to final tax rather
than ordinary income tax

(e) Taxation of Capital gains
Q: What are Taxation of capital gains?

A: Effective January 1, 2018 to present (Republic Act No. 10963 or TRAIN Law),
the following are the rates for capital gains:
a. For For Real Properties-Six percent (6%
b. For Shares of Stocks Not Traded in the Stock Exchange:
Not Over P100,000 - 5%
In any amount in excess of P100,000 - 10 %
ii. Resident foreign corporations subject to preferential tax rates

(a) International carriers
Q: Are corporations subject to income tax on the sale of real property

classified as capital assets?
A: Yes, Resident foreign corporations shall report any gain on the sale of real
property classified as capital assets on their income tax return subject to the
corporate income tax rate.
Q: How do International Carriers being taxed?

A: They are taxed on the basis of their Gross Philippine Billings which is
equivalent to 2 1/2%.
Case: South African Airways vs CIR
Q: Petitioner South African Airways is a foreign corporation organized and

existing under and by virtue of the laws of the Republic of South Africa. Its
principal office is located at Airways Park, Jones Road, Johannesburg
International Airport, South Africa. In the Philippines, it is an internal air
carrier having no landing rights in the country. Petitioner has a general
sales agent in the Philippines, Aerotel Limited Corporation (Aerotel).
Aerotel sells passage documents for compensation or commission for
petitioner’s off-line flights for the carriage of passengers and cargo
between ports or points outside the territorial jurisdiction of the
Philippines. Petitioner is not registered with the Securities and Exchange
Commission as a corporation, branch office, or partnership. It is not
licensed to do business in the Philippines. It paid a corporate tax in the
rate of 32% of its gross billings. However, it subsequently claim for refund
contending that its income should be taxed at the rate of 2 1/2% of its
gross billings. Should South African Airways be taxed at 32% of the gross
billings?
A: Yes. In the instant case, the general rule is that resident foreign corporations
shall be liable for a 32% income tax on their income from within the Philippines,
except for resident foreign corporations that are international carriers that derive
income ―from carriage of persons, excess baggage, cargo and mail originating

from the Philippines‖ which shall be taxed at 2 1/2% of their Gross Philippine
Billings. Petitioner, being an international carrier with no flights originating from
the Philippines, does not fall under the exception. As such, petitioner must fall
under the general rule. This principle is embodied in the Latin maxim, exception
firmat regulam in casibus non exceptis, which means, a thing not being
excepted must be regarded as coming within the purview of the general rule.
To reiterate, the correct interpretation of the above provisions is that, if an
international air carrier maintains flights to and from the Philippines, it shall be
taxed at the rate of 2 1/2% of its Gross Philippine Billings, while international air
carriers that do not have flights to and from the Philippines but nonetheless earn
income from other activities in the country will be taxed at the rate of 32% of
such income.
(b) Foreign currency deposit units and offshore banking units
Q: What does Taxation on Offshore Banking Units pertain?

A: 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.
(Section 28, A (4) NIRC)
(c) Regional or area headquarters and regionals operating headquarters
Q: Taxation on Regional or Area Headquarters and Regional Operating

Headquarters of Multinational Companies:
A:
(a)Regional or area headquarters as defined in Section 22(DD) of the NIRC shall
not be subject to income tax.
(b)Regional operating headquarters as defined in Section 22(EE) of the NIRC shall
pay a tax of ten percent (10%) of their taxable income.(Section 28, A (6) NIRC)
Income CIT rate (%)

Income of international carriers on their gross Philippine billings 2.5
Interest income from foreign currency loans granted to residents 10
other than offshore business units (OBUs) or local commercial
banks
Income of OBUs and foreign currency deposit units (FCDUs) of Exempt
depository banks from foreign currency transactions with non-
residents, other OBUs or FCDUs, and local commercial banks
(including branches of foreign banks) authorised by the Bangko
Sentral ng Pilipinas (BSP; central bank) to transact business
with OBUs and FCDUs

Regional operating headquarters (ROHQs) earning income from 10
the Philippines
Regional or area headquarters of multinational corporations Exempt
that do not earn or derive income from the Philippines, and that
act as supervisory, communications, and coordinating centres
for their affiliates, subsidiaries, or branches in the Asia-Pacific
region and other foreign markets
Recap of Definition:
Section 22 (DD) of the NIRC- The term "regional or area headquarters" shall mean a
branch established in the Philippines by multinational companies and which
headquarters do not earn or derive income from the Philippines and which act as
supervisory, communications and coordinating center for their affiliates, subsidiaries,
or branches in the Asia-Pacific Region and other foreign markets.
Section 22 (EE) of the NIRC -The term "regional operating headquarters" shall mean
a branch established in the Philippines by multinational companies which are
engaged in any of the following services: general administration and planning;
business planning and coordination; sourcing and procurement of raw materials and
components; corporate finance advisory services; marketing control and sales
promotion; training and personnel management; logistic services; research and
development services and product development; technical support and
maintenance; data processing and communications; and business development.
c. Non-resident foreign corporation (NRFC)

i. Taxation of NRFC in general
Q: Define Non-resident foreign corporation (NFRC).

A: NRFC is organized under and by virtue of the laws of a foreign county that is not
engaged in trade or business in the Philippines.
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) of the NIRC : 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%) (Section 28 B (1),
NIRC)
ii. NRFCs subject to preferential tax rates
Q: NRCF subject to preferential tax rates.
A:
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; ((Section 28 (5 a), NIRC)

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; (Section 28 (5 b), NIRC)
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% (Section 28 (5 c), NIRC)
Q: Are corporations subject to income tax on the sale of real property

classified as capital assets?
A: NRFC are subject to the corporate income tax (final withholding tax) on the
capital gain from the sale of real property classified as capital assets.
d. Corporations exempt from income tax
Q: Enumerate the organizations that are exempt from Corporate Income Tax.
A:
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 fort he 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;
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
inures 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. (Section 28, NIRC)
Case: (CIR v CA & YMCA)
Q: In 1980, YMCA earned an income of 676,829.80 from leasing out a portion

of its premises to small shop owners, like restaurants and canteen
operators and 44,259 from parking fees collected from non-members. On
July 2, 1984, the CIR issued an assessment to YMCA for deficiency taxes
which included the income from lease of YMCA’s real property. YMCA
formally protested the assessment but the CIR denied the claims of YMCA.
On appeal, the CTA ruled in favor of YMCA and excluded income from
lease to small shop owners and parking fees. However, the CA reversed the
CTA but affirmed the CTA upon motion for reconsideration. Is the rental
income of YMCA taxable?
A: Yes. The exemption claimed by YMCA is expressly disallowed by the very
wording of the NIRC which mandates that the income of exempt organizations
(such as the YMCA) from any of their properties, real or personal, be subject to
the tax imposed by the same Code. While the income received by the
organizations enumerated in NIRC is, as a rule, exempted from the payment of
tax in respect to income received by them as such, the exemption does not apply
to income derived 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.

e. Tax on other business entities: general partnerships, general professional
partnerships, co- ownerships, joint ventures, and consortia
Q: Discuss the tax on other business entities.

A:
1.GENERAL PROFESSIONAL PARTNERSHIPS
Income payments made to General Professional Partnership in consideration for
its professional services are not subject to income tax and consequently to
withholding tax.
It is the individual partners who shall be subject to income tax and consequently
to withholding tax, in their separate and individual capacities. Each partner shall
report as gross income his distributive share, actually or constructively received,
in the net income of the partnership.
2.CO-OWNERSHIPS
As a rule, co-ownership is tax exempt. It becomes taxable if it is converted into
an unregistered partnership. Converted into partnership if the properties and
income are used as common fund with intention to produce profits. If after
partition, the shares of the heirs are held under a single management for profit
making, unregistered partnership is formed. (Ona,et al vs. Commissioner)
3.JOINT VENTURES FORMED FOR PROFITS
Joint Emergency Operation (no legal personality) operates the business affairs
of the two companies as though they constitute a single entity thereby obtaining
substantial economy and profit in operation-taxable ( Collectior vs. Batangas)
4.JOINT STOCK COMPANIES
Generally classified as partnership possessing some of the characteristics of a
corporation. They appear to be like corporations to the extent that they have
capital stock but when capital is divided or made transferable even without the
consent of the co-partner, they partake of the nature of partnership. (Brocki vs.
American Express Company)
7. Filing of returns and payments

a. Individual return
Q: Who are the requirement to file income tax returns?

A:
(1) Resident citizens receiving income within and without the Philippines;
(2) Non-resident citizens receiving income from sources within the Philippines;
and
(3) Aliens whether resident or not, receiving income from sources within the
Philippines;

Q: Who are individuals exempted from filing income tax returns?
A: We should observe the following:
I. Not required to file income tax returns

(1) Individuals whose business do not exceed one hundred thousand (Php
100,000.00) pesos in annual gross sales or receipts;
(2) Individuals who are not deriving income from an employer; and
(3) Individuals whose activities should principally for subsistence or
livelihood (i.e. farmers, small sari-sari store owners, small carinderias,
etc);
(4) Minimum wage earners;
(5) Income earners whose gross income for the year doesn‘t exceed their
total personal and additional exemptions;
(6) Individuals who receive income up to sixty thousand (Php 60,000.00)
pesos from a sole employer with the income tax withheld correctly;
(7) Those whose income has been subjected to final withholding tax; and
(8) Those who are qualified for substituted filing and meet the following
requirements:
a. Employed by a sole employer within the taxable year;
b. The individuals earns purely compensation income from said
employer;
c. The individuals income tax due is equivalent to the tax withheld by
the employer;
d. Their spouse must comply with the said conditions;
e. The employer files the annual information return; and
f. The employer issues BIR Form 2316 to all employees.
II. Exempt from filing income tax returns:
(1) Non-resident Filipinos who:
a. Have established with the BIR that they prefer to live outside the
Philippines;
b. Moves out of the country and lives abroad either as an immigrant or
for permanent employment;
c. Works and receives income abroad; and
d. A Filipino citizen who was previously considered a non-resident
citizen.
(1) Overseas Filipino Worker who earn income solely from sources outside of
the Philippines;
(2) Filipino overseas working as a seaman, granted that their vessel is
engaged only in international trade.
Q: Who are qualified to avail of substituted filing?

A: The only ones qualified for substituted filing are those who receive purely
compensation income, regardless of amount who only has one employer within
the calendar year whose income tax has been withheld correctly by the
employer.
Q: Who are not qualified to avail of substituted filing?
A: The following are not qualified to avail of substituted filing:

1. Individuals deriving compensation from two or more employers concurrently
or successively at any time during the taxable year;

2. Employees deriving compensation income, regardless of amount, whether
from a single or several employers during the calendar year, the income tax of
which has not been withheld correctly resulting to collectible or refundable
amount;
3. Individuals deriving other non-business, non-professional-related income in
addition to compensation income not otherwise subject to a final tax;
4. Individuals receiving purely compensation income from a single employer,
although the income tax of which has been correctly withheld, but whose
spouse falls under 1, 2, and 3; and
5. Non-resident aliens engaged in trade or business in the Philippines deriving
purely compensation income, or compensation income and other non-
business, non- professional-related income.
Q: When and where to file your income tax return?
A: Should be filed on or before the 15th of April to the Regional District Office of the
residence of the individual taxpayer.
b. Corporations returns
Q: How often should Corporations file their income tax?
A: Corporations should file their income tax returns quarterly.
Q: When should corporations file their income tax?
A: The corporate quarterly income tax declaration shall be filed within sixty (60)
days from the close of each quarter of the first three quarters of the taxable
year.
The final adjustment return shall be filed on or before the 15 th day of the 4th
month following the close of the taxable year.
Q: When and where to file?
A: Should be filed on or before the 15th of April to the Regional District Office of
the principal office of the Corporation.
Q: Where should a corporation contemplating dissolution or reorganization

file their income tax?
A: Every corporation 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 a
possible involuntary dissolution by the Securites and Exchange Corporation, 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, prescribed.

Q: How to file returns on capital gains tax realized from sale of stock and real
estate?
A: The return should be filed within thirty (30) days from the sale with any
authorized bank or the regional district office where the seller required to
transfer the said property.
8. WITHHOLDING TAX
a. Concept
Q: What is withholding tax?
A: is when a business withholds a portion of a payment for services or goods to a

supplier and remits that portion to the government on behalf of its supplier.
b. Final Withholding Tax
Q: What is a final withholding tax?
A: is a kind of withholding tax which is prescribed on certain income payments and

is not creditable against the income tax due of the payee on other income
subject to regular rates of tax for the taxable year. Income Tax withheld
constitutes the full and final payment of the Income Tax due from the payee on
the particular income subjected to final withholding tax.
Q: What transactions are subject to final withholding tax?
A: The following are transactions subject to final withholding tax:
I. Income payments to a Resident Citizen, Non Resident Citizen, and

Resident Alien:
1. Interest on any peso bank deposit;
2. Royalties;
3. Prizes;
4. Winnings;
5. Interest income on foreign currency deposit;
6. Interest income from long term deposit;
7. Cash and/or property dividends; and
8. Capital gains assumed to have been realized from sale, exchange,
or other disposition of real property.
II. Income payments from Non Resident Aliens Engaged in Trade and
Business
1. On certain passive income;
2. Cash and/or property dividends;
3. Share in the distributable net income of partnership;
4. Interest on any bank deposits;
5. Royalties;
6. Prizes;
7. Winnings;
8. Interest in long term deposits; and
9. Capital gains presumed to have been realized from the sale,
exchange, or other disposition of real property.

III. Income derived from all sources within the Philippines by a Non
Resident Aliens Not Engaged in Trade or Business
1. On gross amount of income derived from all sources within the
Philippines; and
2. On capital gains presumed to have been realized from the sale,
exchange, or disposition of real property located in the Philippines.
IV. Income derived by alien individual employed by a special corporations
V. Fringe benefits granted to the employee;
VI. Informers reward;
VII. Cash or property dividends paid by a Real Estate Investment Trust
c. Creditable withholding tax
Q: What are types of withholding tax?
A: The following are withholding taxes:
(1) Withholding tax on compensation;

(2) Expanded withholding tax;
(3) Final withholding tax;
(4) Withholding tax on government money payments percentage package; and
(5) Withholding tax on government money payments value added taxes.
Q: What is withholding tax on compensation?
A: It is the tax withheld from income payments to individuals arising from an

employer-employee relationship.
Q: What is expanded withholding tax?
A: It is a kind of withholding tax which is prescribed on certain income payments

and is creditable against the income tax due of the payee for the taxable
quarter/year in which the particular income was earned.
Q: What is withholding tax on government money payments on percentage

taxes?
A: It is the tax withheld by National Government Agencies (NGAs) and
instrumentalities, including government-owned and controlled corporations
(GOCCs) and local government units (LGUs), before making any payments to
non-VAT registered taxpayers/suppliers/payees.

Q: What is the withholding tax on government money payments on value
added taxes?
A: It is the tax withheld by National Government Agencies (NGAs) and
instrumentalities, including government-owned and controlled corporations
(GOCCs) and local government units (LGUs), before making any payments to
VAT registered taxpayers/suppliers/payees on account of their purchases of
goods and services.
Q: What is creditable withholding tax?
A: It is an advance income tax of the payee.
Q: How is it an advance income tax?
A: It is an advance income tax because prior to the payee paying his taxes due,
part of it has already been remitted by the payor to the BIR.
d. Fringe Benefit Tax
Q: What is Fringe Benefit Tax?
A: It is a form of tax that companies paid in lieu of benefits they offered their
employees in addition to the compensation paid to them.
e. Duties of a Withholding Agent
Q: What is a withholding agent?
A: A withholding agent is any person or entity who is in control of the payment

subject to withholding tax and therefore is required to deduct and remit taxes
withheld to the government.
Q: What are the duties of a withholding agent?

A: The duties of a withholding agent are the following:
(1) To withhold 1% of the value of payments for purchases of goods and

2% for purchase of services from local suppliers; and
(2) To withhold tax from non-resident aliens engaged in trade or business
in the Philippines.
~o0o~

Taxation Income Taxation

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BAR 2021

Q: What are the income tax systems in the Philippines:

b. Features of the Philippine Income Tax Law

TAXATION LAW Income Taxation [1]

c. Criteria in imposing Philippine income tax

Q: What are the criteria in imposing Philippine income tax?

(1) Citizenship Principle – where a citizen taxpayer is subject to income tax

Q: Who are citizens of the Philippines?

A: The following are citizens of the Philippines:

Q: Who is a resident citizen?

Q: What is meant by residence for taxation purpose?

Q: Who is a resident alien?

TAXATION LAW Income Taxation [2]

A: An alien may be considered a resident of the Philippines for income tax

a. He is not a mere transient or sojourner

Q: When is residency lost?

Q: When is an alien subject to Philippine income tax?

A: An alien is subject to Philippine income tax because he derives income from

d. Types of Philippine income taxes

Q: Enumerate the types of income tax.

TAXATION LAW Income Taxation [3]

Q: Enumerate the different kinds of taxpayers.

Q: What are the qualifications of individual taxpayers?

Q: What are the different taxable periods under the NIRC?

A: The taxable periods are the following:

TAXATION LAW Income Taxation [4]

2. Fiscal period – an accounting period of 12 months ending on the last day

3. Short period – an accounting period where income is computed on the

Q: What is a taxable year?

Q: How is a taxable income computed?

Exception: Taxable income shall be computed based on the basis of calendar

Q: May individual taxpayers use the fiscal period?

Q: May a corporation change its accounting period?

TAXATION LAW Income Taxation [5]

Q: Define income tax.

Q: What is the difference between income and capital?

Service of wealth Wealth itself

Q: What are the different classification of income? Explain each.

TAXATION LAW Income Taxation [6]

Q: What comes in mind when you hear General Principles of Income

Q: Kindly state the Types of Philippine Income Tax.

Q: What are the Kinds of Taxpayers?

TAXATION LAW Income Taxation [7]

ii. Not engaged in trade or business in the Philippines

TAXATION LAW Income Taxation [8]

TAXATION LAW Income Taxation [9]

Q: What is a taxable year?

Calendar Year – An accounting period of 12 months ending on the last day of

Instances whereby short accounting period arises:

General rule: Taxable income shall be computed based on the taxpayer‘s

Exception: Taxable income shall be computed based on the basis of calendar

TAXATION LAW Income Taxation [10]

Q: When does Realization of Income exists?

No taxable income until there is a separation from capital of something of

In the claim-of-right doctrine, if a taxpayer receives money or other property

TAXATION LAW Income Taxation [11]

Q: What are the Principal Methods of Accounting?

Q: What are the Special Methods of Accounting?

TAXATION LAW Income Taxation [12]

Situs of Income Taxation.

7) Gains on sale of shares

TAXATION LAW Income Taxation [13]

Q: What is the general definition of Gross income?