Return on capital (Profit/ Gain in 3.

Receipt of money or property to

capital)(income tax) - increases net be held in trust for another person.
worth is income subject to income
tax.

Return of capital (Initial Capital) Requisites of a realized benefits:

(transfer tax) - maintains net worth. 1. There must be an exchange
Exempted from income tax: transaction.

1. Life 2. The transaction involves

another entity.
2. Health
3. It increases the net worth of
3. Human reputation the receipt.

Note: If same entity = exempted

Taxable recovery of lost profit - If different entity = taxable

through insurance, indemnity
contracts, or legal suits.

1. Proceeds of crop or livestock Bilateral transfers or exchange

insurance (onerous transaction) such as

2. Guarantee payments 1. Sales

3. Indemnity received from 2. Barter (trade)

patent infringement suit. Subject to income tax

Realized benefits Unilateral transfer (gratuitious

Realized means earned. transaction) such as

Benefits mean any form of 1. Succession - transfer of property

advantage derived by the tax payer. upon death

Note: Not benefits = not taxable 2. Donation

Subjected to transfer tax

Following are not benefits hence

not taxable: Complex transaction - partly
1. Receipt of loan gratuitious and party onerous.

2. Discovery of lost properties Referred to as ‘transfer for less

than full and adequate
consideration.’
 Example:
Fair value - 180,000
Selling price - 130,000
Cost - 100,000
Fair value - selling price =
subjected to transfer tax
Selling price - cost = subjected
to income tax
Benefits in the absence of
transfers - are not taxable
Example of unrealized gains or
holding gains:
Increase in value of:
1. Investment in equity or debt
securities
2. Real properties held (revaluation
increment)
3. Foreign currency held or
receivables
4. Decrease in value of foreign
currency denominated debt by virtue
of favorable fluctuation in exchange
rate
5. Birth of animal offspring, accruals
of fruits in an orchard or growth of
farm vegetable
6. Increase in value of land due to
the discovery of mineral reserves.
Note;
1. Gains from gambling and the
forgiveness of dept in consideration
of services or properties received
are realized gains from exchanges.
2. The forgiveness of dept out of
affection or mere generosity of the
creditor is a gratuitous transfer
subject to transfer tax
3. The loan received from a
bank constitutes a transfer but is not
a benefit.
Mode of receipts/realized
benefits
1. Actual receipt - actual physical
taking of the income in the form of
cash or property.
2. Constructive receipt - no actual
physical taking of the income but the
taxpayer is effectively benefited.
Not exempted by law, contract,
or treaty
Item of income are exempted by
law from taxation - not
taxable/exempted:
1. Income of qualified employee trust
fund
2. Revenues of non profit, non
stock educational institutions
3. SSS, GSIS, Pag-IBIG, or
PhilHealth benefits
4. Salaries and wages of
minimum wage earners and qualified
senior citizen
5. Regular income of barangay
micro business enterprises (BMBEs)
6. Income of foreign
governments and foreign
government-owned and controlled
corporations
7. Income of international
missions and organizations with
income tax immunity
Types of income taxpayers
Individuals
1. Citizen
Under the constitution, citizen
are:
1. Those who are citizens of the
Philippines at the time of adoption of
the constitution on February 2, 1987
2.Those whose father or mother
are citizens of the Philippines
3. Those born before January
17, 1973 of Filipino mothers who
elected Filipino citizenship upon
reaching the age of majority
4. Those who are naturalized in
accordance with the law
Resident citizen - within and
outside the Philippines.
Non - resident citizen - within the
Philippines.
1. Citizen of the Philippines who
establishes to the satisfaction of the
commisioner the fact of his physical
presence abroad with a definite
intention to reside thereof.
2. Citizen of the Philippines who
leaves the Philippines during the
taxable year to reside abroad.
3. A citizen of the Philippines
who works and derives income from
abroad and whose employment
threat requires him to be physically
present abroad most of the time
during the taxable year
4. A citizen who has been
previously considered as non
resident citizen and who arrives in
the Philippines at anytime during the
taxable year
Alien (both within the
Philippines)
Resident alien - residing in the
Philippines but is not a citizen.
1. An alien who lives in the
Philippines without definite intention
as to his stay,
2. One who come to the Philippines
for a definite purpose which in its
nature who require an extended stay
and to that end makes his home
temporarily in the Philippines. May
return to his domicile (permanent
home)abroad.
Non-resident alien - individual
who is not residing in the Philippines
and not a citizen.
1. Non resident aliens engaged in
business (NRA-ETB) - alien who
stayed in the Philippines more than
180 days during the year.
2. Non resident aliens not engaged
in business (NRA-NETB) - alien who
come to the Philippines for a definite
purpose which in its nature may be
promptly accomplished
- alien who stayed in the Philippines
not more than 180 days.
General rule for individuals
1. Intention - Intention of taxpayer
regarding the nature of his stay
within and outside the Philippines
Example:
Alien is normally a non-resident.
Alien who have come to the
Philippines with a tourist visa would
classified as Non-resident alien.
Citizen is normally a resident.
Citizen who would go abroad
under a tourist visa would consider
as Resident citizen.
An alien who would come to the
Philippines with immigration visa
would reclassify as Resident alien
upon arrival.
A citizen who would go abroad
with a 2 year working visa would
reclassify as Non-resident citizen
upon departure.
2. Length of stay
Example:
Citizens staying abroad for a
period of at least 183 day considered
as Non-resident.
Alien who stayed at the
Philippines for more than 1 year as
of the end of the taxable year
considered as resident.
Alien who stayed at the
Philippines for not more than 1 year
but more than 180 days are
considered as Non-resident aliens
engaged in business.
Aliens who stayed in the
Philippines for not more than 180
days are considered as Non-resident
aliens not engaged in business.
Taxable estates and trusts
Estates - refers to the
properties, rights, and obligations of
a deceased person not extinguished
by his death.
Trusts- is an arrangement
whereby a person transfers property
to another person, which will be held
under the management of a third
party.
Corporate income taxpayers
Domestic Corporation - within
and outside the Philippines.
Foreign Corporation - within the
Philippines.
Type of foreign corporations
Resident foreign corporation
(RFC) - a foreign corporation which
operates and conduct business in
the Philippines through a permanent
establishment
Non resident corporation
(NRFC) - a foreign corporation which
does not operate or conduct
business in the Philippines.
 Note:
A corporation that incorporates
in the Philippines is a domestic
corporation under the incorporation
text even if the same is controlled by
foreigners
A foreign corporation that
transact business with residents
through a resident branch is taxable
on such transactions as a resident
foreign corporation through its
branch however if it transacts
directly to residents outside its
branch it is taxable as a non resident
foreign corporation on the direct
transaction
An individual that establishes a
one person corporation (OPC) shall
be taxable as a corporate taxpayer
for the business transactions of the
OPC but he shall be subject to tax
as an individual for his personal
transaction
Special corporation
Special corporations are
domestic or foreign corporation
which are subject to special tax rules
or preferential tax rate.
GPP/ General professional
partnership - is not treated as a
corporation and is not taxable and it
is exempted to income tax.
-partners are taxable in their
individual capacity.
Business partnership - are
taxable and is formed for profit.
Joint venture - business
undertaking for a particular purpose.
It may be partnership or corporation.
Exempt joint ventured - under a
service contract with the
government.
Taxable joint ventures - all other
joint ventures are taxable as
corporation.
Co-corporation - limited to
property preservation or income
collection is not taxable and exempt
but the co-workers are taxable.
Situs of income - place of
taxation of income.
Income situs rules
Types of income/place of
taxation
1. Interest income/ debtor’s resident
2. Royalties/ where the intangible is
employed
3. Rent income/ location of the
property
4. Service income/place where the
service is rendered.
Notes:
Return on capital- total
consideration received from the
sales of service.
 Return on capital/return of
capital - total consideration received
from sales of goods at a gain.
Return of capital - total
consideration received from sales of
goods at a loss.
Exempted from income taxation
by virtue of legal exemption:
1. Minimum wage
2. Gain on sale of prohibited drugs
3. Unrealized gains
Some list of taxable
1. Winning from gambling
2. Income from swindling
3. Compensation income
4. Interest income
5. Amount received by the insured in
excess of insurance premiums paid
6. Gain on sale of goods and
services between relatives
7. Gain on sale of goods by a parent
corporation to a subsidiary
corporation
8. Cancellation of debt by the
creditor in exchange of service
rendered by the debtor
9. Matured interest from coupon
bonds
10. PCSO or lotto winnings
Some list of exempted from tax
1. Indemnity for moral damages
2. Harvested fruits from an orchard
3. Proceeds of life insurance
received by the heirs of the insured
4. Gain on sale of goods by the
home office to its branch
5. Appreciation in the value of land
6. Birth of animal offspring
7. Income of a registered barangay
micro-business enterprise
8. Cancellation of debt out of gratuity
of the creditor
9. Receipt of bank loan
10. Salaries of a minimum wage
earner
11. Benefits fro GSIS,SSS Pag-ibig
or PhilHealth
12. Discovery of hidden treasure
3 income taxation schemes
under NIRC:
1. Final income taxation
2. Capital gains taxation
3. Regular income taxation
Tax schemes are mutually
exclusive. An item of gross income
that is subject to tax in 1 scheme will
not be taxed by the other schemes.
Item of gross income can be
classified as follows:
 Gross income subject to
1. Final tax
2. Capital gains tax
3. Regular tax
Final tax - wherein full taxes are
withheld by the income payor at
source.
Final taxation - applicable only
on certain passive income listed by
law.
Passive income - earned with
very minimal or even without active
involvement of the taxpayer in the
earning process.
Example:
1. Interest income from banks
2. Dividends from domestic
corporation
3. royalties
Active or regular income -
transaction requiring a considerable
degree of effort or undertaking from
the taxpayer.
Example:
1. compensation income
2. Business income
3. Professional income
Capital gain tax - imposed on
the gain realized on the sale.
Capital assets - assets are not
used in business, trade or
profession.
Ordinary assets - assets used in
the business , trade or profession
such as inventory, supplies, or
property, plant and equipment.
Note: Not all capital gains are
subject to capital gains tax. Most of
them are subject to regular income
tax.
Accounting period - length of
time over which income is measured
and reported.
Regular accounting period - 12
months in length.
1. Calendar - starts from Jan 1 to
Dec 31
Calendar year shall be used
when:
-taxpayer’s annual accounting
period is other than a fiscal year
(longer than 12 months)
-Has no annual accounting
period (less than 12 months0
-does not keep books
-is an individual
2. Fiscal - starts from 12-month
period that ends on any day other
than Dec 31.
Short accounting period - less
than 12 months
Deadline of filing the income tax
return - 15TH day of 4th month.
Note: calendar year must file
their annual tax return not later than
April 15
 Fiscal year ending in June 30
must file its annual tax return not
later than Oct 15
Instances of short accounting
period
1. Newly commenced business -
covers the date of the start of the
business until the designated year-
end of the business
Ex:
Start of business operation is on
June 30, 2021 and opted to use the
calendar year
Income tax return will be June
30 to Dec 31. file must be return
before April 15.
2. Dissolution of business -
accounting period covers the start of
the current year to the date of
dissolution of the business
Example:
Fiscal year accounting period
ending every march 31. its ceased
business operation on Aug 15. file
income tax return covering April 1 to
Aug 15.
3. Change of accounting period
by corporate taxpayer - starts of the
previous accounting period up to the
designated year-end of the new
accounting. Required BIR approval.
Example:
Effective Feb,2021, corporation
change its calendar to fiscal year
ending June 30. File an adjustment
return from Jan 1 to June 30 on or
before Oct 15.
Effective Aug 2021, Company
change fiscal to calendar, June 30.
File an adjustment return from July I
to Dec 31 on or before April 15.
4. Death of the taxpayer -
covers the start of calendar year until
death of the taxpayer
Example: Jan 1 to Nov 2
5. Termination of the accounting
period of the taxpayer by the
Commissioner of Internal Revenue -
covers the start of current year until
the date of the termination of the
accounting period.
Example:
Under calendar year basis was
terminated by CIR on Aug 2.
Therefore, taxpayer must file n
income tax return covering Jan 1 to
Aug 2 Immediately.
Accrual basis (earned but not
yet received) - income is recognized
when earned regardless of when
received. Expense is recognized
when incurred regardless of when
paid.
Cash basis (Earned & received)
- Income is recognized when
received and expense id recognized
when paid.
Hybrid basis - any combination
of accrual basis, cash basis, and/or
other methods of accounting. It is
used when taxpayers have several
business.
Installment Method - gross
income is recognized and reported in
proportion to the collection from the
installment sales.
Installment method is available
to the following taxpayers:
1. Dealers of personal property on
the sale of properties they regularly
sell
2. Dealers of reap properties, only if
their initial payment does not exceed
25% of the selling price
3. Casual sales of non-dealers in
property, real or personal, when their
selling price exceeds P1,000 and
their initial payment does not exceed
25% of the selling price
Initial payment - total payment
by the buyer, in cash or property, in
the taxable year the sale was made.
Selling price - the entire amount
for which the buyer is obligated to
the seller.
Contract price - amount
receivable in cash or other property
from the buyer. It is usually the
selling price in the absence of an
agreement.
Deferred payment method -
variant of the accrual basis and is
used in reporting income when a
non-interest bearing note is received
as a consideration in a sale.
Percentage of completion
method - estimated gross income
from construction is reported based
on the percentage of completion of
the construction project.
Output method - is based on
engineering survey is prescribed by
the NIRC.
Leasehold improvement - are
tangible improvements made by the
lessee (tenant) to the property of the
lessor(landlord).
Improvement will benefit the
lessor so this benefits if referred to
as income from leasehold
improvement.
Outright method - Lessor may
report as income the fair market
value of such building &
improvements subject to the lease at
the time when such buildings or
improvements are completed.
Spread-out method - lessor may
spread over the life of the lease the
estimated depreciated value of such
buildings or improvements at the
termination of the lease and report
as income for each year of the lease
an aliquot part thereof.
Depreciation vale of the
leasehold improvement
Cost of improvement x excess
useful life over lease term / useful
life of the improvement.
Note: Outright method is
perceived as unjust and abusive,
and is an improper introduction of
legislation.
The depreciation value of the
improvement at the termination of
the lease should be the proper value
to be recognized as gross income
under the Outright method.
Farming income - is commonly
measured using the cash basis or
accrual basis.
1. Animal Husbandry
2. Short-term crops
Long-term crops depend on the
harvesting frequency:
1. Perennial crops - yield harvests
through years (using cash or accrual
basis)
2. One-time crops - Harvested once
after several years (using crop year
basis)
Crop year basis - farming
income is recognized as the
difference between the proceeds of
harvest and expenses of the
particular crop harvested. The
expenses of each crop are
accumulated and deducted upon the
harvest of the crop.
Crop year basis is an
accounting period and is not an
accounting period.
Tax Reporting
Types of returning to the
government
1. Income tax return - provides
details of the taxpayer’s income,
expense, tax due, tax credit and tax
still due the government.
2. Withholding tax returns - provide
reports of income payments
subjected to withholding tax by the
taxpayer
3. Information return - do not involve
in any payment or withholding of tax
but are essential to the government
in its tax mapping efforts and in its
evaluation of tax compliance.
Mode of filing income tax return
1. Manual filing system - Traditional
manual system of filing income tax
return.
Under the NIRC, Income tax
return shall be filed to the following,
in descending order to priority, within
the revenue district office where the
taxpayers is registered or required to
register:
1. An authorized agent bank (AAB)
2. Revenue collection officer
3. Duly authorized city or municipal
treasure
2. E-BIR form - Offline or online
version.
3. Electronic filing and payment
system (eFPS) - is a paperless tax
filing system developed and
maintained by the BIR
Penalties for late filing or
payment of tax
1. Surcharge
- 25% of the basic tax for failure
to file or pay deficiency tax on time
-50% for willing neglect to file
and pay taxes
2. Interest
Legal interest is 6% therefore
interest penalty is 12% per annum
Note: Under the new rules
established by RR21-2018, the
interest period shall be computed
based on actual days divided 365
days.
A month normally has 30 days
except the following:
31-days months - Jan, March,
May, July, Aug, Oct, Dec
28 or 29 day month - Feb
30 day month - April, June,
Sept, Nov
Extra info:
Accrual method - is the most
consistent with the lifeblood doctrine
Covers all capital gain is not
feature of final tax
Accounting methods -
accounting techniques or
conventions used to measure
income
Accounting period - distinct and
equal time periods over which
income is measured
Cash basis - income is
recognized when received rather
than when earned
Accrual basis - income is
recognized when earned regardless
of when received
Percentage of completion
method - mostly used by
construction worker/engineers
-Income is reported by
reference to the extent of project
completion
Spread-out method - Leasehold
income is recognized over the lease
term.
Crop year method - matches
cropping expenses with the income
upon harvest
Individual -calendar only (use of
accounting period)
Fiscal - only for corporation (use
of accounting period)
 The general rule in income taxation Taxable on income earned

INDIVIDUAL Within Without

TAXPAYERS

Resident citizen Included Included

Non-resident citizen Included

Resident alien Included

Non-resident alien Included

CORPORATE
TAXPAYERS

Domestic corporation Included Included

Resident foreign Included

corporation

Non-resident foreign Included

corporation

Non- resident person not engaged in business in the Philippines

Non- resident person not engaged in General final tax rate

business in the Philippines

Non-resident alien not engaged in 25%

trade or business

Non-resident foreign corporation 25%

Local currency deposit/ local currency bank deposit, deposit

substitutes, trust funds

On interest income Individual corporation

From banks

Short-term 20% 20%

deposit/certificate

Long-term Exempt RIT^1

deposit/certificate
From non-bank institute

Short-term RIT^2 RIT^2

deposit/certificate

Long-term RIT^2 RIT^2

deposit/certificate

Short-term (less than 5 years) & long-term (more than 5 years) deposit

Individual Corporation

Less than 3 years 20%

Less than 4 years 12%

More than 5 years Exempted

Note: Non-resident rate is 25% RIT stands for Refund of Income Tax

Summary of tax rules on interest on debt instruments

Deposit substitutes Receipt

Issued by bank: Individual Corporation

Short term 20% 20%

Long term Exempt RIT

Issued by non-bank:

Short term 20% 20%

Long term 20% RIT

Note: Resident Citizen - long-term (more than 5 years) exempted / Short-

term (less than 5) 20%

Non-resident citizen - Short-term 12%

Non-resident alien - Short-term 20%

NRA-NETB - Short-term 25%

NRA-ETB - Short-term 20%

 Resident alien - short term 5%

Pre-termination of long-term deposit or investment of individual

Holding period Pre-termination tax

Less than 3 years 20%

3 years to less than 4 years 12%

4 years to less than 5 years 5%

5 years or more 0%

Foreign currency deposit with foreign currency depository banks

Taxpayer Individual Corporation

Resident 15% 15%

Non-resident Exempt Exempt

Note: Resident taxpayer include resident citizens, resident alien,

domestic corporation and resident foreign corporation

Non-resident taxpayer include non-resident citizen, non-resident aliens

and non-resident foreign corporation

It should be emphasized that NRA-NETBs and NRFCs are also

exempted

There is no long-term or short-term classification of foreign currency

deposit

Note: if a bank account is jointly in the name of a non-resident and a

resident taxpayer, 50% shall be exempt while other 50% shall be subjected to
the 15% final tax.

Unincorporate (not registered)/ business partnership engaged in trade

business subjected to 10% final tax

Dividend Tax Rules

Source of dividends Individual Corporation

Domestic corporation 10% final tax Exempted

 Foreign corporation Regular tax Regular tax

Note: NRA-ETB subjected to 20% final tax on dividend

NRA- NETB subjected to 25% final tax on dividend

NRFC is subjected to 25% general final tax rate, however, the imposable
dividend tax shall be 15% when the tax sparing rule applies

Entities Taxable as corporations are subject to 10% final tax

1. Real estate investment trusts

2. Business partnerships

3. Taxable associations

4. Taxable joint ventures, joint accounts or consortia

5. Taxable co-ownership

Royalties within the Philippines

Source of passive Individual Corporation

royalties

Books, literary works, 10% final tax 20% final tax

and musical
composition

Other sources 20% final tax 20% final tax

Note: Under the regulation, 10% preferential royalty final tax on books and
literary works pertain to print literatures. Royalties on books sold e-copies or
CDs such as e-books are subjected to the 20% final tax.

Royalties o cinematographic films and similar works paid to NRA-ETbs, NRA-

NETBs or NRFCs is subject to a final tax of 25%

Taxable prize
Amount of taxable prize Individual Corporation

Prize exceeding P10K 20% final tax Regular tax

Prize not exceeding P10K Regular tax Regular tax

Tax free - the organizer will shoulder the tax

Winnings

Types of winnings Individual Corporation

PCSO winnings not Exempt Exempt

exceeding P10K

PCSO winnings 20% final tax 20% final tax

exceeding P10K

Other winnings, in 20% final tax Regular tax

general

Note:PCSO winnings of NRA-NETBs and NRFCs, regardless of amount, are

subject to 25% final tax.

The tax rules on PCSO winnings shall be applied on a per ticket basis.

Tax informer’s reward is 10% reward

- is subjected to 10% final tax

Tax- free corporate covenant bonds

Individual (apply to all Corporation

individuals regardless of
classification)

Tax on interest income 30% final tax Regular income tax

on tax-free corporate
covenant bonds

Exception to the general final tax on non-resident person not engaged in

trade or business in the Philippines.

NRA-NETB NRFC

General final tax rate 25% 25%

Exceptions:

1. Capital gain on sale 15% capital gain tax 15% capital gain tax
of domestic stocks
 directly to buyer

2. Rental on 25% of rentals 25% of rentals

cinematographic films
and similar works

3. Rentals of vessel 25% of rentals 4.5% of rentals

4. Rentals of aircraft, 25% of rentals 7.5% of rentals

machineries, and other
equipment

5. Interest income under Exempt Exempt

the foreign currency
deposit system

6. Interest on foreign N/A 20%

loss

7. Dividend income 25% 15% if tax sparing rule is

applicable

8. Tax on corporate 30% 30%

bonds

Additional info:

Interest formula

I=Prt

Resident citizen/ final tax on maturity of the deposit/ 20%

Non-resident alien not engaged in trade or business/ final tax on maturity of

the deposit/ 25%

Received means net tax