CTRL F Banggawan-Income Taxation (2021)

aol olga ae
Comprehensive
Pelee acs
Simplified
att aia Ae) cole
Self-taught
ge
' With Update Packa
k
mel ert(lar) Bae
INCOME
TAXATION
Laws Principles and Applications
m@ An Integrated Principle-based
Approach
A guide to understanding and

mastering income tax
principles and application
For Accountancy, Finance,

Business Including
Law Students
es , ij es
a pl ae itera
REX B. BANGGAWAN, CPA, MBA

INCOME TAXATION
LAWS, PRINCIPLES AND
APPLICATIONS
Well Organized
Comprehensive
Ilustrative
Simplified
CREATE Law Updated
Self-taught
Designed for OBE
An Integrated Principle-based Approach
A Guide to Understanding and Mastering Income Tax Principles and

Applications
For
Accountancy students
CPA Board Exam candidates
Finance & Business students
Law students
’ Taxpayers
and
Tax practitioners
By
REX B. BANGGAWAN, CPA, MBA
Scanned with CamScanner

INCOME TAXATION
2021 EDITION
OVERVIEW OF CONTENTS
Introductory concepts to taxation
The concept of tax, tax laws and tax administration
The concept of gross income under taxation
Taxation schemes, accounting period, methods and income reporting
Final income taxes
Capital gains taxes
Overview of the regular income tax
Exclusions and exempt income
Income subject to regular income tax
Compensation income
Fringe benefits and the fringe benefits tax
Dealings in properties subject to regular tax
Allowable deductions from gross income
Specific regular tax rules applicable individuals
Specific regular tax rules applicable to corporations

THE CONCEPT MAP OF INCOME TAXATION
Introductory concepts
(Chapters 1-2)
GROSS INCOME
(Chapter 3)
Final Income Capital Gains Regular Income

! |_
Taxation Taxation Taxation
reeeeeen siete Wa SIE seatesemtaehaataas 1h pron
n aR Sn onaccna
» Chapter5 4 ' Chapter6 84 ! Chapter 6-15B :
Me euennn anne nne ‘ Bon enennnassaune ' we we www we ee wee ee eee
; Gains on
' '
1 dealings in
Fringe benefits properties ' Chapter 12
neue uuunne oo T T wr rwnencccncnnt
; ’ ' !
+ Chapter 11 | !
Lew enewcenecnns {
‘
'-->| Gross income P XXX

pet cone w ee neennen Less:
| Chapter 13-13C &----|---- Deductions from
eee gross income XXX
Taxable income P_XXX
/
Individual Taxpayers Corporate Income Taxpayers
(Progressive Income Tax) (Corporate Income Tax)
oS imi oleate, pwemmice wats atti,
' Chapter 14 5 | Chapter 15A-15B
Special individual tax rules: Special corporate tax rules:

Taxable estates Gross income tax
Taxable trusts MCIT
Branch profit remittance tax

TABLE OF CONTENTS
PARTI
INTRODUCTORY CONCEPTS
CHAPTER 1 Introduction to Taxation 1-34

Definition of taxation 1
Theories of cost allocation 2-3
The Lifeblood Doctrine 3
The inherent powers of the State 4
The scope of taxation 6
Inherent limitations 7
Constitutional limitations 8
Stages of taxation 13
Situs of taxation 13
Other fundamental doctrines in taxation 14
Double taxation 17
Escape from taxation 19
Tax amnesty and tax condonation 20
Exercise Drills 21-34
CHAPTER 2 Taxes, Tax Laws, and Tax Administration 35-62

Taxation laws and tax exemption laws 35
Sources of laws and administrative issuances 36
Nature of Philippine tax laws 37
Elements of tax 38
Classification of taxes 38
Tax distinguished with similar items 40
Tax system 41
Tax collection system 42
Principles of a sound tax system 43
Tax administration at
Powers of the BIR and the CIR 44-45
Other agencies with tax related functions +9
Taxpayer classification for purposes of tax administration 50
PART I
INCOME RECOGNITION, MEASUREMENT AND REPORTING, AND
TAXPAYER CLASSIFICATIONS
CHAPTER 3 Introduction to Income Taxation 63-99

The concept of income 63
Elements of gross income 63
Capital items deemed with infinite value 64
Recovery of loss capital vs. recovery of loss profits 65
The concept of realized benefit 66
Complex transactions 67

_
Mode of realization of benefits 69

Types of income taxpayers 70
Individual income taxpayers 71
Classification rule for individual taxpayers 72
Te
Taxable estates and trusts 74

Corporate taxpayers 74
The general rules in income taxation 77
Situs of income 78
CHAPTER 4 Tax Schemes, Periods, and Methods and Reporting 100-135

Income taxation schemes 100
Classification of gross income 101
Accounting period 102
Short accounting period 103
Accounting methods 105
Tax reporting 118
Types of tax returns 118
Mode of filing income tax returns 118
Taxpayers mandated to use the eFPS 119
Groupings of eFPS taxpayers 119
Payment of taxes 121
Penalties for filing of returns and late payment of taxes 121-124
PART II
SPECIAL INCOME TAXATION
CHAPTER 5 Final Income Taxation 136-171
Features of final income taxation 136
The final withholding system 136
Taxpayers subject to final income tax 137
Items of passive income subject to final tax 137
Final tax to individuals and corporations 138
Final tax on interest from banks 138
Final tax on dividends 146
Final tax on royalties 15]
Final tax on prizes 152
Final tax on winnings 153
Final tax on informer’s reward 154
Final tax on “tax free” covenant bonds 155
Exceptions to the final taxation of certain taxpayers 155
The tax sparing rule 156
Other applications of the final income tax 157
Final withholding tax return 158
Entities exempt from final tax 159

CHAPTER 6 Capital Gains Taxation 172-227
Classification of taxpayer's properties 2
Analysis of taxpayer’s properties 173
Asset classification rules 174
Types of gains on dealings in properties 176
lt Cia
Scope of the capital gains taxation 176
Capital gains on the sale of stocks directly to buyer 176
Meaning of domestic stocks 176
Meaning of “other disposition” 177
Tax on sale of stocks through the PSE 178
Tax basis of stocks 180
eee
Costing procedures for stocks 180
Capital gains tax rates for domestic stocks 183
Transactional compliance 184
EE
Annualized capital gains tax 184
Installment payment of the two-tiered capital gains tax 187
Special rules on wash sales and tax-free exchanges 189
Tax free exchanges of property 193
Corporate reorganization 193
Initial acquisition of control 197
Capital gains tax on the sale of real property 201
a
Nature and scope of the 6% capital gains tax 203
Exceptions to the 6% capital gains tax 204
Installment payment of the 6% capital gains tax 207
Documentary stamp tax on the sale of capital assets 209
PART IV
REGULAR INCOME TAXATION
CHAPTER 7 Introduction to Regular Income Taxation 228-258

The regular income tax model and its characteristics 228
Determination of taxable income of individual taxpayers 230
The classification and globalization rule 231-232
Determination of taxable income of corporations 233
Income tax reporting format for individual taxpayers 236
Sales, revenue, receipts or fees 237
Non-operating income 237
Income tax reporting format for corporate taxpayers 239
Types of regular income tax 240
Scope of the progressive income tax of individuals 240
Computation of progressive income tax for individuals 240
Determination of the corporate income tax 242
Income tax forms 243
Required attachments in the annual income tax returns 244
Determination of tax due during transition of tax rates 245
Quarterly filing of income tax returns 247
‘Scanned with CamSeanner

UNIT 1 —- GENERAL RULES ON GROSS INCOMIE
CHAPTER 8 Regular Income Taxation ~ Exclusions in Gross Income 259-288

List of exclusions from gross income 259
Proceeds of life insurance and return of premium 260
Gifts, bequests, and devises or descent 261
Compensation for injuries and sickness 262
Income exempt under treaty 263
Retirement benefits and termination benefits 263-265
Miscellaneous exempt benefits 266
Investment income of the government & foreign government 267
Prizes and awards 267
Mandatory contributions to SSS, GSIS, PhilHealth and HDMF — 267
Contribution to Personal Equity Retirement Account (PERA) — 268
Gain on sale of bonds with more than 5 year maturity 269
Gains on redemption of shares in mutual funds 269
Income from sale of gold to the BSP 270
Other exempt income under the NIRC and special laws 272
Barangay Micro-business Enterprises (BMBEs) 212
Covid-19 benefits 272
Qualification of exemption on exempt entities 276
CHAPTER 9 Regular Income Taxation - Inclusions in Gross Income 289-331

List of inclusions in gross income subject to regular tax 289
Interest income 291
Rent and royalty income 292
Dividends 293
Conditional exemption of foreign-source dividends 294
Annuities 296
Prizes and winnings 297
Partner’s distributive share in GPP net income 298
General criteria for inclusion in gross income 299
Other sources of gross income subject to regular tax 299
Tax benefit on recoveries of past deductions 300
Refund of non-deductible taxes 303
Special considerations in reporting gross income 304
The effect of accounting methods and situs 304
The effect of VAT 307
The effect of creditable withholding tax 308
The power of the CIR to redistribute income and expense 309
The transfer pricing regulation 310

UNIT 2 —- SPECIAL RULES ON GROSS INCOME
CHAPTER 10 Compensation income 332-378

Eimployer-employee relationship 332
Elements of an employer employee relationship 333
Types of employees as to function and taxability 333
The tax model on compensation income 334
Non-taxable compensation income 334
De minimis benefits 335
Exempt benefits under treaty 338
Necessity or convenience of the employer rule 340
Components of taxable compensation income 341
Regular compensation 342
Non-compensation items 342
Supplemental compensation 344
13" month pay and other benefits 347
Illustrations: Compensation income 352
Taxability of minimum wage earners 356
Rules of change in minimum wage status 359
The withholding tax on compensation 360
Benefits not subject to withholding tax on compensation 363
Deadline of the withholding tax on compensation 363
Treatment of the withholding tax on compensation 364
CHAPTER 11 Fringe Benefits Taxation 379-409

Tax treatments of fringe benefits 379
Scope of the fringe benefit tax 380
Exempt fringe benefits to the fringe benefits tax 382
The fringe benefits tax and its characteristics 383
Procedural computations of the fringe benefits tax 384
Rules on valuation of fringe benefits 385
Special guidelines on monetary value determination 386
Fringe benefits tax rates 394
Grossed-up rates 394
Computation of the fringe benefits tax 395
Accounting entries 396
CHAPTER 12 Dealings in Properties 410-449

Dealings in properties subject to regular income tax 410
Determination and treatment of gain or loss 410
The holding period rule 412
Presentation of gains or losses in the income tax return 413
The effect of situs rules on dealings in properties 415
Net capital loss carry-over 416
Special rules in tax basis determination 418
Tax free exchanges 421
Merger or consolidation 422

Initial acquisition of control 422
Exchanges not plainly for stocks 423
Wash sales 430
Transactions considered exchanges 434
UNIT 3 - DEDUCTIONS ON GROSS INCOME
CHAPTER 13 Principles of Deductions 450-493

Business expense vs. personal expense 450
Allocation of common expenses 451
Business expense vs. capital expenditures 451
Rules on deducting capital expenditures 453
Depreciation methods 453
Special considerations with deductions 457
Asset related acquisition costs 459
The effects of accounting methods on deductions 462
The effect of VAT on deductions 463
The general principles of deductions 463
The LOAN Principle 464
The Matching Rule 466
The Related Party Rule 467
The Withholding Rule and rules of withholding 469
Summary of expanded withholding tax rates 470
Penalties for late withholding and remittances 472
Periods in which deductions or credits are taken 473
Non-deductible expenses 473
Tax reporting classification of deductions 473
Modes of claiming deductions 474
CHAPTER 13-A Regular Allowable Itemized Deductions 494-536

List of itemized deductions 494
Interest expense 494
Taxes 500
Foreign income tax credit 501
Losses 504
Bad debts 507
Depreciation expense 509
Amortization expense on intangible assets 51)
Depletion expense 511
Charitable contributions 515
Contributions to pension 519
Research and Development and general expenses 521
Entertainment and amusement expenses 522

CHAPTER 13-B Special Allowable Itemized Deductions and 637-572
Net Operating Loss Carry-over 537
List of special deductions 538
Special expenses under the NIRC and special laws 544
Deduction incentives under special laws 556
Net Operating Loss Carry-over 557
NOL vs. NOLCO 559
Requisites for the deductibility of NOLCO 561
Rules in carry-over of NOLCO 63
NOLCO for individual taxpayers i
NOLCO and merger and consolidation
CHAPTER 13-C Optional Standard Deduction SS

The Optional Standard Deduction (OSD)
Taxpayers mandatorily required to use itemized deductions 573
OSD percentages and bases 574
Rules on determination of OSD for individuals 576
Other taxable income from operations 576
Non-operating income 577
OSD for corporate taxpayers 580
Cost of services 583
OSD for general professional partnership including partners 585
UNIT 4— SPECIFIC REGULAR TAX RULES PER TAXPAYER CLASS
Sub-Unit 1
Special Regular Tax Rules for Individual taxpayers
CHAPTER 14 Individual Income Taxation 599-637
Income tax tables for individual taxpayers 599
Taxpayers subject to percentage tax 600
Pure compensation income earners 600
Conditions for substituted filing system 601
Pure business and or professional income earner 604
Mixed income earner 606
The 8% optional income tax 607
Interim transition to the Value Added Tax 613
Taxable estates and trusts 616
Consolidation of two or more trusts 618
Employee trust fund 619
Return of married taxpayers 620
Individuals with PERA accounts 621
Where to file Income Tax Returns 622
Installment payment of regular income tax 623
Amendment of income tax return 625

Sub-Unit 2
Special Regular Tax Rules for Corporate taxpayers
CHAPTER 15-A Corporate Income Taxation - Special Corporations 638-682

General classification and tax rules for corporations 638
J Domestic MSME corporations 639
a Sub-classification of corporate taxpayers 641
j Exempt corporations 642
P The classification rule 642
Requisites of exemption of non-profit corporations 644
Exception to the classification rule 645
Taxation of cooperatives 648
Allocation of common expenses of exempt corporations 650
Reporting requirements for exempt corporations 651
Special domestic corporations 651
The Pre-dominance test 651
Taxation of FCDUs, EFCDUs 653
Special resident foreign corporations 658
Tax on OBUs 659
Taxation of RHQs and ROHQs of multinational companies 660
Tax on international carriers 660
BO] or PEZA-repistered enterprises 666
Tax on special non-resident foreign corporations 666
CHAPTER 15-B Corporate Income Taxation - Regular Corporations 683-721

The regular corporate income tax 683
The minimum corporate income tax 683
Timing of MCIT imposition 684
The MCIT concept of “Gross income” 685
MCIT basic application 688
MCIT Integrative application 689
Excess MCIT carry-over rules 691
Corporate tax transition schedule 694
Quarterly MCIT 699
Relief from the imposition of the MCIT 700
The branch profit remittance tax 701
Appendices
Appendix 1 = Table summary for final income tax rates

Appendix 2. Withholding tax tables on compensation
Appendix 3 — Income tax table for individual taxpayers
Appendix4 List of compromise penalties relevant to income tax

ete
papter | Introduction to Ta
xation
CpéirER 1
INTRODUCTION To TAXATION
Chapter Overview and Objectives

eanwceeccence
eaeeecereras TOT Re ee
we eeeeenn <==
cain -
Seems een
This chapter discusses the fundamental principles ---
able to
of the following: comprehend and demonstrate master) ;
Concept of taxation and its necessity for every
Lifebloo government
d doctrine and its implication to taxation
POnNanrwnrp
Theories of government cost allocation

Inherent power of the State
Scope of the taxation power
Limitations of the taxation power
Stages of taxation
Concept of situs in taxation
. Fundamental principles surrounding taxation
10. Various escapes from taxation
11. Concept of tax amnesty and condonation
WHAT IS TAXATION?
Taxation may be defined as a State power, a legislative process, and a mode of
government cost distribution. _
1. Asa state power
Taxation is an inherent power of the State to enforce a proportional
contribution from its subjects for public purpose.
2. Asa process
Taxation is a process of levying taxes by the legislature of the State to enforce
proportional contributions from its subjects for public purpose.
3. Asa mode of cost distribution
Taxation is a mode by which the State allocates its costs or burden to its
subjects who are benefited by its spending.
The Theory of Taxation

Every government provides a vast array of public services including defense,
public order and safety, health, education, and social protection among others.
Mer ee

phe OF keel
Chapter1 - Introduction to Taxation
A system of government is indispensable to every society. Without it, the Peop|

will not relish the benefits ofa civilized and orderly society. However, a :
government cannot exist without a system of funding. The government’s NeCe¢e
for funding is the theory of taxation.
The Basis of Taxation

The government provides benefits to the people in the form of public Services.
the people provide the funds that finance the government. This mutualit,
support between the people and the government is referred to as the bagi
taxation.
This mutuality is illustrated as follows:
Public services
| v
Government People
4 Taxes
Receipt of benefits is conclusively presumed

Every citizen and resident of the State directly or indirectly benefits from
public services rendered by the government. These benefits can be in the form
daily free usage of public infrastructures, access to public health or educatio
services, the protection and security of person and property, or simply|
comfort of living in a civilized and peaceful society which is maintained by!
government.
While most public services are received indirectly, their realization by ew

citizen and resident is undeniable. In taxation, the receipt of these benefits by!
people is conclusively presumed. Thus, taxpayers cannot avoid payment of té
under the defense of absence of benefit received. The direct receipt or act
availment of government services is not a precondition to taxation.
THEORIES OF COST ALLOCATION

Taxation is a mode of allocating government costs or burden to the people
distributing the costs or burden, the government regards the following ge"
considerations in the exercise of its taxation power:
1. Benefit received theory
2. Ability to pay theory

Chapter 1 - Introduction to Taxation
Benefit received theory

The benefit received theory presupposes that the more benefit one receiv
es from
the government, the more taxes he should pay.
Ability to pay theory

The ability to pay theory presupposes that taxation should also consider the
taxpayer's ability to pay, Taxpayers should be required to contribute
based on
their relative capacity to sacrifice for the support of the government.
» In short, those who have more should be taxed more even if they benefit less from
the government. Those who have Jess shall contribute less even if they receive
more of the benefits from the government,
Aspects of the Ability to Pay Theory

1. Verticalequity (Gis 4) aye
Vertical equity proposes that the extent of one’s ability to pay is directly
proportional to the level of his tax base.
For example, A has P200,000 income while B has P400,000. In taxing income, the
government should tax B more than A because B has greater income; hence, a greater
capacity to contribute.
2. Horizontal equity | {\t7 (out) )

\
Horizontal equity requires consideration of the particular circumstance of the

taxpayer.
For example, Businessmen A and B both have P300,000 income. A incurred P200.000
in business expenses while B incurred only P50,000 business expenses. The
government should tax B more than A because he has lesser expenses and thus greater
capacity to contribute taxes.
Vertical equity is a gross concept while horizontal equity is a net concept.
The Lifeblood Doctrine .

Taxes are essential and indispensable to the continued subsistence of the
government. Without taxes, the government would be paralyzed for lack of motive
power to activate or operate it. (CIR vs. Algue)
Taxes are the lifeblood of the government, and. their prompt and certain
availability are an imperious need. Upon taxation depends the government's
ability to serve the people for whose benefit taxes are collected. (Vera vs
Fernandez)

55 Le
a
on
Chapter 1 - Introduction to Taxati
Implication of the lifeblood doctrine in taxation:

Tax is imposed even in the absence of a Constitutional grant.
Pe
Claims for tax exemption are construed against taxpayers.

oe
The government reserves the right to choose the objects of taxation.

&
The courts are not allowed to interfere with the collection of taxes
In income taxation: .
a. Income received in advance is taxable upon receipt.
b. Deduction for capital expenditures and prepayments is not alloweg «.
effectively defers the collection of income tax. >
c. A lower amount of deduction is preferred when a claimable expen-,
subject to limit. oe
d. A higher tax base is preferred when the tax object has multiple tax base-
INHERENT POWERS OF THE STATE

A government has its basic needs and rights which co-exist with its creation. It}
rights to sustenance, protection, and properties. The government sustains itself
the power of taxation, secures itself and the well-being of its people by pot
power, and secures its own properties to carry out its public services by :
power of eminent domain.
These rights, dubbed as “powers” are natural, inseparable, and inherent to ev:
government. No government can sustain or eliectively operate without th:
powers. Therefore, the exercise of these powers by the government is presum
understood and acknowledged by the people from the very moment they estab:
their government. These powers are naturally exercisable by the governm:
even in the absence of an express grant of power in the Constitution.
The Inherent Powers of the State
1. Taxation power is the power of the State to enforce proportional contribu

from its subjects to sustain itself.
2. Police power is the general power of the State to enact laws to protect!
well-being of the people.
3. Eminent domain is the power of the State to take private property for put
use after paying just compensation.

Comparison of the three powers of the

State
| Point of Eminent
Difference Taxation Police Power Domain
Exercising Government Government Government and
Authority private utilities
Purpose For the supportof | To protect the For public use
the government general welfare of
the people
Persons Community or Community or Owner of the
affected class of class of property
individuals individuals
Amount of Unlimited Limited No amount
Imposition (Tax is based on (Imposition is imposed.
government limited to cover
(The government
needs.) cost of regulation.)
pays just
compensation.)
Importance Most important Most superior Important
Relationship Inferior to the Superior to the Superior to the
with the “Non-impairment | “Non-impairment | “Non-impairment
Constitution Clause” of the Clause” of the Clause” of the
Constitution Constitution Constitution
Limitation Constitutional Public interest Public purpose
and inherent and due process and just
limitations compensation
Similarities of the three powers of the State

1. They are all necessary attributes of sovereignty.
2. They are all inherent to the State.
3. They are all legislative in nature.
4. They are all ways in which the State interferes with private rights and
properties.
5. They all exist independently of the Constitution and are exercisable by the
government even without a Constitutional grant. However, the Constitution
may impose conditions or limits for their exercise.
6. They all presuppose an equivalent form of compensation received by the
persons affected by the exercise of the power.
7. The exercise of these powers by the local government units may be limited by
the national legislature.

ation
Chapter1 - Introduction to Tax
SCOPE OF THE TAXATION POWER

The scope of taxation is widely regarded as comprehensive, plenary, unlimit,
and supreme.
However, despite the seemingly unlimited nature of taxation, it is not absolute,

unlimited. Taxation has its own inherent limitations and limitations imposed }
the Constitution.
THE LIMITATIONS OF THE TAXATION POWER

A. Inherent limitations
1 Territoriality of taxation
2 International comity
3 Public purpose
4 Exemption of the government
5 Non-delegation of the taxing power
Co nstitutional Limitations
1. Due process of law
2 Equal protection of the law
3 Uniformity rule in taxation
4 Progressive system of taxation
5 Non-imprisonment for non-payment of debt or poll tax
6 Non-impairment of obligation and contract
7 Free worship rule
8 Exemption of religious or charitable entities, non-profit cemeterie
churches and mosque from property taxes
Non-appropriation of public funds or property for the benefit of ar
church, sect or system of religion
10. Exemption from taxes of the revenues and assets of non-profit, non-sto
educational institutions
11. Concurrence of a majority of all members of Congress for the passage of
law granting tax exemption
12. Non-diversification of tax collections
13. Non-delegation of the power of taxation
14. Non-impairment of the jurisdiction of the Supreme Court to review t
cases
15. The requirement that appropriations, revenue, or tariff bills shi
originate exclusively in the House of Representatives
16. The delegation of taxing power to local government units

Chapter1 - Introduction to Taxati
on
INHERENT LIMITATION OF TAXA TION
Territoriality of taxation
Public services are normally provided within the boundaries of the State. Thus,
the government can only demand tax obligations upon its subjects or
residents
within its territorial jurisdiction. There is no basis in taxing
foreign subjects
abroad since they do not derive benefits from our government. Furthermore,
extraterritorial taxation will amount to encroachment
of foreign sovereignty.
Two-fold obligations of taxpayers:
1. Filing of returns and payment of taxes
2. Withholding of taxes on expenses and its remittance to the government
These obligations can only be demanded and enforced by the

Philippine
government upon its citizens and residents. It cannot enforce these upon
subjects
outside its territorial jurisdiction as this would result in encroachment
of foreign
sovereignty. ”
Exception to the territoriality principle
1. In income taxation, resident citizens and domestic corporations are taxable on
_income derived both within and outside the Philippines.
2. In transfer taxation, residents or citizens such as resident citizens, non-
resident citizens and resident aliens are taxable on transfers of properties
located within or outside the Philippines.
International comity
In the United Nations Convention, countries of the world agreed to one
fundamental concept of co-equal sovereignty wherein all nations are deemed
equal with one another regardless of race, religion, culture, economic condition or
military power.
No country is powerful than the other. It is by this principle that each country
observes international comity or mutual courtesy or reciprocity between them.
Hence, =—
1. Governments do not tax the income and properties of other governments.
2. Governments give primacy to their treaty obligations over their own domestic
tax laws.
Embassies or consular offices of foreign governments in the Philippines including

international organizations and their non-Filipino staff are not subject to income
taxes_or property taxes. Under the National Internal Revenue Code (NIRC), the

; . . 7 and control!
income of foreign government and foreign government-owned 7
corporations are not subject to income tax.
it is bound to honor the
When a state enters into treaties with oth er . states,
h the treaty partners even if the
agreements as a matter of mutual courtesy wit
Same conflicts with its local tax laws.
Public purpose ; -erci

Tax is ‘added for the common good. Taxation must be exercised absolutely fo; ,
interest.
public purpose. It cannot be exercised to further any private
Exemption of the government

can exercise the power upon
The taxation power is broad. The government
does not tax itselfa;
anything including itself. However, the government normally
e additional costs.
this will not raise additional funds but will only imput
the NIRC, government properties and income from essential publi

Under
functions are not subject to taxation. However, the income of the governmen
from its properties and activities conducted for profit, including income fron
government-owned and controlled corporations is subject to tax.
Non-delegation of the taxing power

The legislative taxing power is vested exclusively in Congress and is non
delegable, pursuant to the doctrine of separation of the branches of thi
government to ensure a system of checks and balances.
The power of lawmaking, including taxation, is delegated by the people to thi

legislature. So as not to spoil the purpose of delegation, it is held that what ha:
been delegated cannot be further delegated.
Exceptions to the rule of non-delegation

1. Under the Constitution, local government units are allowed to exercise th
power to tax to enable them to exercise their fiscal autonomy.
2. Under the Tariff and Customs Code, the President is empowered to fix th
amount of tariffs to be flexible to trade conditions.
-
3. Other cases that require expedient and effective admin
istration an
implementation of assessment and collection
of taxes.
CONSTITUTIONAL LIMITATIONS OF
TAXA TION
Observance of due process of law
No one should be deprived of his life, liber
, , Or pro cess 0
law. Tax laws should neither be harsh nor Opes yesnout the pre

Aspects of Due Process

1. Substantive due process
Tax must be imposed only for public purpose, collected only under authority ofa
valid law and only by the taxing power having jurisdiction. An assessment without
a legal basis violates the requirement of due process.
2. Procedural due process
There should be no arbitrariness in assessment and collection of taxes, and the
government shall observe the taxpayer’s right to notice and hearing. The law
established procedures which must be adhered to in making assessments and in
enforcing collections.
Under the NIRC, assessments shall be made within three years from the due date
of filing of the return or from the date of actual filing, whichever is later. Collection
shall be made within five years from the date of assessment. The failure of the
government to observe these rules violates the requirement of due process.
Equal protection of the law

No person shall be denied the equal protection of the law. Taxpayers should be
treated equally both in terms of rights conferred and obligations imposed.
This rule applies where taxpayers circumstances and

are under the same
conditions. This requirement would mean Congress cannot exempt sellers of
“halot” while subjecting sellers of “penoy” to tax since they are essentially the
same goods.
Uniformity rule in taxation

dissimilar
The rule of taxation shall be uniform and equitable. Taxpayers under
circumstances should not be taxed the same. Taxpayers should be classified
the tax classification to be adopted
andes,
according to commonality in attribut
ntly, but
should be based on substantial distinction. Each class is taxed differe
uniformity is
taxpayers falling under the same class are taxed the same. Hence,
relative equality.
Progressive system of taxation

Congress shall evolve a progressive system of taxaticion. Under the progressive
system, tax rates increase as the tax base increases. The Constitution favors
ten
with the
progressive tax as it is consis er's ability to pay. Moreover, the
taxpayt
by taxing
progressive system aids in an equitable distribution of wealth to society
the rich more than the poor.

Non-imprisonment for non-payment of debt or poll tax

As a policy, no one shall be imprisoned because of his poverty, and no one shall te
imprisoned for mere inability to pay debt.
However, this Constitutional guarantee applies only when the debt is acquired by
the debtor in good faith. Debt acquired in bad faith constitutes estafa, a crimin
offense punishable by imprisonment.
Is non-payment of tax equivalent to non-payment of debt?

Tax arises from law and is a demand of sovereignty. It is distinguished from debt
Which arises from private contracts. Non-payment of tax compromises public
interest while the non-payment of debt compromises private interest. The nop.
payment of tax is similar to a crime. The Constitutional guarantee on non.
imprisonment for non-payment of debt does not extend to non-payment of tay
except poll tax.
Poll, personal, community or residency tax

Poll tax has two components:
a. Basic community tax
b. Additional community tax
The constitutional guarantee of non-imprisonment for non-payment of poll tax

applies only to the basic community tax. Non-payment of the additional
community tax is an act of tax evasion punishable by imprisonment.
Non-impairment of obligation and contract

The State should set an example of good faith among its constituents. It should not
set aside its obligations from contracts by the exercise of its taxation power. Tax
exemptions granted under contract should be honored and should not
be
cancelled by a unilateral government action.
Free worship rule

The Philippine government adopts free exercise of religion and does
not subject
its exercise to taxation. Consequently, the properties and revenu
es of religious
institutions such as tithes or offerings are not subject to tax.
This exemption,
however, does not extend to income from properties or activities of religious
institutions that are proprietary or commercial in
nature.
Exemption of religious, charitable or education al entities, non-profit
cemeteries, churches and mosques, lands, buildings, and improvements
from property taxes
10

et senteas, haste inat i naten di eeeee
The Constitutional exemption from

property tax applies for properties actually,
directly, and exclusively (i.e. pri marily) used for charitable, religious, and
educational purposes.
In observing this Constitutional limitation, the Philippines follows the doctrine of

use wherein only Properties actually devoted for religious, charitable, or
educational activities are exempt from real property tax.
Under the doctrine of ownership, the properties of religious, charitable, or

educational entities whether or not used in their primary operations are exempt
from real property tax. This, however, is not applied in the Philippines.
Non-appropriation of public funds or property for the benefit of any church,
sect, or system of religion
This constitutional limitation is intended to highlight the separation of religion
and the State. To support freedom of religion, the government should not favor
any particular system of religion by appropriating public funds or property in
support thereof.
It should be noted, however, that compensation to priests, imams, or religious
ministers working with the military, penal institutions, orphanages, or
leprosarium is not considered religious appropriation.
Exemption from taxes of the revenues and assets of non-profit, non-stock

educational institutions including grants, endowments, donations, or
contributions for educational purposes
The Constitution recognizes the necessity of education in state building by
granting tax exemption on revenues and assets of non-profit educational
institutions. This exemption, however, applies only on revenues and assets that
are actually, directly, and exclusively devoted for educational purposes.
Consistent with this constitutional recognition of education as a necessity, the
NIRC. also exempts_ gove
educational rnme
institutions nt e
from_incom tax and
subjects private educational institutions to a minimal income tax. -
Concurrence of a majority of all members of Congress for the passage of a
law granting tax exemption
Tax exemption law counters against the lifeblood doctrine as it deprives the
government of revenues. Hence, the grant of tax exemption must proceed only
upon a valid basis. As a safety net, the Constitution requires the vote_of the
majority of all members of Congress in the grant of tax exemption.
of an exemption law, an absolute majority or the majority of all
In the approval
members of Congress, not a relative majority or quorum majority, is required.
However, in the withdrawal of tax exemption, only a relative majority is required.
—_ 11 |

Non-diversification of tax collections ie ‘should .
Tax collections should be used only for public purpose. should never bg
diversified or used for private purpose.
Non-delegation of the power of taxation

The principle of checks and balances in a republican state requires that taxation
power as part of lawmaking be vested exclusively in Congress.
However, delegation may be made on matters involving the expedient ang

effective administration and implementation of assessment and collection of taxes,
Also, certain aspects of the taxing process that are non-legislative in character are
delegated.
Hence, implementing administrative agencies such as the Department of Finance

and the Bureau of Internal Revenue (BIR) issues revenue regulations, rulings,
orders, or circulars to interpret and clarify the application of the law. But even so,
their functions are merely intended to interpret or clarify the proper application
of the law. They are not allowed to introduce new legislations within their quasi-
legislative authority. _
Non-impairment of the jurisdiction of the Supreme Court to review tax cases

Notwithstanding the existence of the Court of Tax Appeals, which is a special
court, all cases involving taxes can be raised to and be finally decided by the
Supreme Court of the Philippines.
Appropriations, revenue, or tariff bills shall originate exclusively in the

House of Representatives, but the Senate may propose or concur with
amendments.
Laws that add income to the national treasury and those that
allows spending
therein must originate from the House of Representatives while Senate may
concur with amendments. The origination of a bill by Congress
necessarily mean
does not
that the House bill must become the final law. It was held
constitutional by the Supreme Court when Senate changed the entire house
version of a tax bill.
Each local government unit shall exercise the

power to create its own
sources of revenue and shall havea
just share in the national taxes
This is a constitutional recognition of the loca | autonomy
of local governments and
an express delegation of the taxing power.
12

STAGES OF THE EXERCISE OF TAXATION POWER

1. Levy or imposition
2. Assessment and collection
) Levy or imposition
- This process involves the enactment of a tax law by Congress and is called impact
of taxation. It is also referred to as the legislative act in taxati
on.
Congress is composed of two bodies:
1. The House of Representatives, and
2. The Senate
As mandated by the Constitution, tax bills must originate from the House of
Representatives. Each may, however, have their own versions of a proposed law
which is approved by both bodies, but tax bills cannot originate exclusively from
the Senate.
Matters of legislative discretion in the exercise of taxation

Determining the object of taxation
PONE
Setting the tax rate or amount to be collected

Determining the purpose for the levy which must be public use
Kind of tax to be imposed
Apportionment of the tax between the national and local government
NOM
Situs of taxation
Method of collection
Assessment and Collection

—~
~
~
The tax law is implemented by the administrative branch. of the government.

Implementation involves assessment or the determination of the tax liabilities of
taxpayers and collection. This stage is referred to as incidence
of taxation_or the
administrative act of taxation.
SITUS OF TAXATION
Situs is the place of taxation. It is the tax jurisdiction that has the power to levy
-taxes.upon the tax object. Situs rules serve as frames of reference in gauging
whether the tax object is within or outside the tax jurisdiction of the taxing
authority. 7
Examples of Situs Rules:
1. Business tax situs: Businesses are subject to tax in the place where the business
is conducted.
Illustration
A taxpayer is involved in car dealership abroad and restaurant operation in the
Philippines.
13

| Chapter1 - Introduction to Taxation
The restaurant business will be subject to business tax in the Philippines since the
business is conducted herein, but the car dealing business is exempt because the
business is conducted abroad.
2. Income tax situs on services: Service fees are subject to tax where they arp
rendered.
Illustration ; as a
A foreign corporation leases a residential space to a non-resident Filipino citizen
abroad.
The rent income will be exempt from Philippine taxation as the leasing service js
rendered abroad.
3. Income tax situs on sale of goods: The gain on sale is subject to tax in the
place of sale.
Illustration
While in China, a non-resident OFW citizen agreed with a Chinese friend to sell his
diamond necklace to the latter. They stipulated that the delivery of the item and
the payment will be made a week later in the Philippines. The sale was
consummated as agreed.
The contract of sale is consensual and is perfected by the meeting of the minds of
the contracting parties. The perfection of the contract of sale is in China. The situs
of taxation is China. The gain on the sale of the necklace will be taxable abroad and
exempt in the Philippines.
4. Property tax situs: Properties are taxable in their location.

Illustration
An overseas Filipino worker has a residential lot in the Philippines.
He will still pay real property tax despite his absence in the Philippines because
his property is located herein.
5. Personal tax situs: Persons are taxable in their place of residence.

Illustration
Ahmed Lofti is a Sudanese studying medicine in the Philippines.
Ahmed will pay personal tax in the Philippines even if he is an alien because
he is
residing in the Philippines.
OTHER FUNDAMENTAL DOCTRINES IN TAXATION

1. Marshall Doctrine - “The power to tax involves the power to destroy.” Taxation
power can be used as an instrument of police power. It can
be used to
discourage or prohibit undesirable activities or occu pation. As such, taxation
power carries with it the power to destroy.
14

However, the taxation power does not include the power to destroy if it Is
used solely for the purpose of raising revenue. (Roxas vs. CTA)
2. Holme's Doctrine - “Taxation power is not the power to destroy while the
court sits. Taxation power may be used to build or encourage beneficial
activities or industries by the grant of tax incentives.
While the Marshall Doctrine and the Holme’s Doctrine appear to contradict
each other, both are actually employed in practice. A good manifestation of the
Marshall Doctrine is the imposition of excessive tax on cigarettes while
applications of the Holme’s Doctrine include the creation of Ecozones with tax
holidays and provision of incentives, such as the Omnibus Investment Code
(E.0. 226) and the Barangay Micro-Business Enterprise (BMBE) Law.
3. Prospectivity of tax laws

Tax laws are generally prospective in operation. An ex post facto law or a law
that retroacts is prohibited by the Constitution.
Exceptionally, income tax laws may operate retrospectively if so intended by
Congress under certain justifiable conditions. For example, Congress can levy
tax on income earned during periods of foreign occupation even after the war.
4. Non-compensation or set-off
Taxes are not subject to automatic set-off or compensation. The taxpayer
cannot delay payment of tax to wait for the resolution of a lawsuit involving
“his pending claim against the government. Tax is not a debt; hence, it is not_
subject to set-off. This rule is important to allow the government sufficient
period to evaluate the validity of the claim. (See Philex Mining Corporation vs.
CIR, G.R. 125704)
Exceptions:
a. Where the taxpayer's claim has already become due and demandable such
as when the government already recognized the same and an
appropriation for refund was made
Cases of obvious overpayment of taxes
c. Local taxes
5. Non-assignment of taxes
Tax obligations cannot be assigned or transferred to another entity by
contract. Contracts executed by the taxpayer to such effect shall not prejudice
the right of the government to collect.
15

6. Imprescriptibility in taxation
Prescription is the lapsing of a right due to the passage of time. When One
sleep on his right over an unreasonable period of time, he is presumed to be
waiving his right. The government's right to collect taxes does not Prescrib,
unless the law itself provides for such prescription.
Under the NIRC, tax prescribes if not collected within 5 years from the date of
its assessment. In the absence of an assessment, tax prescribes if not collecteq
by judicial action within 3 years from the date the return is required to b,
filed. However, taxes due from taxpayers who did not file a return or those
who filed fraudulent returns do not prescribe.
Doctrine of estoppel
Under the doctrine of estoppel, any misrepresentation made by one party
toward another who relied therein in good faith will be held true and binding
against that person who made the misrepresentation.
The government_is not_subject to.estoppel. The error of any government
employee does not bind the government. It is held that the neglect or omission
of government officials entrusted with the collection of taxes should not be
allowed to bring harm or detriment to the interest of the people. Also,
erroneous applications of the law by public officers do not-block_the
subsequent correct application of the same. ~
Judicial Non-interference
Generally, courts are not allowed to issue injunction against the government's
pursuit to collect tax as this would unnecessarily defer tax collection. This rule
is anchored on the Lifeblood Doctrine.
Strict Construction of Tax Laws

When the law clearly provides for taxation, taxationis the general rule-unless.
there is a clear exemption. Hence the maxim, “Taxation is the rule, exemption is
the exception.” : a
When the language of the law is clear and categorical, there is no room for
interpretation. There is only room for application. However, when taxation
laws are vague, the doctrine of strict legal construction is observe
d.
Vague tax laws

Vague tax laws are construed against the government and in favor of
the
taxpayers. A vague tax law means no tax law. Obligation arising from law
is
not presumed. The Constitutional requirement of due process requires laws
to
be sufficiently clear and expressed in their provisions.
16

Vague exemption laws

Vague tax exemption laws are construed against the taxpayer and in favor of
the government. A vague tax exemption law means no exemption law. The
claim for exemption is construed strictly against the taxpayer in accordance
with the lifeblood doctrine.
The right of taxation is inherent to the State. It is a prerogative essential to the

perpetuity of the government. He who claims exemption from the common
burden must justify his claim by the clearest grant of organic or statute law.
be, et al. vs. Smart Communications, Inc, GR. No. 167260, February 27,
When exemption is claimed, it must be shown indubitably to exist. At the

outset, every presumption is against it. A well-founded doubt is fatal to the
claim; it is only when the terms of the concession are too explicit to admit
fairly of any other construction that the proposition can be supported. (Ibid)
Tax exemption cannot arise from vague inference. Tax exemption must be
clear and unequivocal. A taxpayer claiming a tax exemption must point to a
specific provision of law conferring on the taxpayer, in clear and plain terms,
exemption from a common burden. Any doubt whether a tax exemption exists
is resolved against the taxpayer. (see Digital Telecommunications, Inc. vs. City
Government of Batangas, et al)
DOUBLE TAXATION
Double taxation occurs when the same taxpayer_is taxed twice by the same tax
jurisdiction for the same thing.
Elements of double taxation

1. Primary element: Same object
2. Secondary elements:
a. Same type of tax
b. Same purpose of tax
c. Same taxing jurisdiction
d. Same tax period
Types of Double Taxation

1. Direct double taxation
This occurs when all the element of double taxation exists for both
impositions.
17

J
/
Examples: .
a. An income tax of 10% on monthly sales and a 2% income tax on the annual
| sales (total of monthly sales)
b. A 5% tax on bank reserve deficiency and another 1% penalty per day as 3
consequence of such reserve deficiency
Indirect double taxation
This occurs when at least one of the secondary elements of double taxation js
not common for both impositions.
Examples:
a. The national government levies business tax on the sales or gross receipts of
business while the local government levies business tax upon the same sales
or receipts.
income
b. The national government collects income tax from a taxpayer on his
while the local government collects community tax upon the same income.
c. The Philippine government taxes foreign income of domestic corporations
and resident citizens while a foreign government also taxes the same income
(international double taxation).
Nothing in our law expressly prohibits double taxation. In fact, indirect double
taxation is prevalent in practice. However, direct double taxati on
is discouraged
because it is oppressive and burden to some
taxpayers. It is also believed to
counter the rule of equal protection and uniformity
in the Constitution.
How can double taxation be minimized?
The impact of double taxation can be minimized by any one or a combination of

the following:
a. Provision of tax_exemption - only one tax law is allowed to apply to the tax
object while the other tax law exempts the same tax object
Allowing foreign tax credit - both tax laws of the domestic country and a
foreign country tax the tax object, but the tax payments made in the foreign
tax law are deductible against the tax due of the domestic tax law
Allowing reciprocal tax treatment — provisions in tax laws imposing a reduced
tax rates or even exemption if the country of the foreign taxpayer also gives
the same treatment to Filipino non-residents therein
Entering into treaties or bilateral agreements - countries may stipulate for a
lower tax rates for their residents if they engage in transactions that are
taxable by both of them
18

Chapter1 - Introduction to Tax
ation
ESCAPES FROM TAXATION

Escapes from faxation are the means available to the taxpayer to limit or even
avoid the impact of taxation.
Categories of Escapes from Taxation

A. Those that result to loss of government revenue
1. Tax evasion, also known as tax dodging, refers to any act or trick that
tends to illegally reduce or avoid the payment of tax.
Examples:
a. This can be achieved by gross understatement of income, non-
declaration of income, overstatement of expenses or tax credit.
b. Misrepresenting the nature or amount of transaction to take
advantage of lower taxes.
2. Tax avoidance, also known as tax minimization, refers to any act or trick
that reduces or totally escapes taxes by any legally permissible means.
Examples:
a. Selection and execution of transaction that would expose taxpayer to
lower taxes.
b. Maximizing tax options, tax carry-overs or tax credits
c Careful tax Planning
3. Tax exemption, also known as tax holiday, refers to the immunity,

privilege or freedom from being subject.to.a tax which others are subject
to. Tax exemptions may be granted by the Constitution, law, or contract.
All forms of tax exemptions can be revoked by Congress_except those

granted by the Constitution and those granted under contracts.
B. Those that do not result to loss of government revenue

1. Shifting - This is the process of transferring tax burden_to_other
taxpayers.
Forms of shifting
a. Forward shifting -This is the shifting of tax which follows the normal
flow of distribution (i.e. from manufacturer to wholesalers, retailers to
consumers). Forward shifting is common with essential commodities
and services such as food and fuel.
19

b. Backward shifting - This is the reverse of forward shifting. Backwar,

shifting is common with non-essential commodities where buyer.
have considerable market power and commodities with numeroy,
substitute products.
c. Onward shifting - This refers to any tax shifting in the distributio,
channel that exhibits forward shifting or backward shifting.
Shifting is common with business taxes where taxes imposed on busines;
revenue can be shifted or passed-on to customers.
2. Capitalization - This pertains to the adjustment of the value of an asses

caused by changes in tax rates.
For instance, the value ofa mining property will correspondingly decrease
when mining output is subjected to higher taxes. This is a form of
backward shifting of tax.
3. Transformation - This pertains to the elimination of wastes or losses by

the taxpayer to form savings to compensate for the tax imposition or
increase in taxes.
Tax Amnesty
Amnesty is a general_pardon granted by the government for erring taxpayers to
"give them a chance to reform.and enable them to havea fresh start to be part.of a
society with a clean slate. It is an absolute forgiveness or waiver by the
government on its right to collect and is retrospective in application.
Tax Condonation
Tax condonation is forgiveness of the tax obligation of a certain taxpayer under
certain justifiable grounds. This is also referred to as tax remission.
Because they deprive the government of revenues, tax exemption, tax refund, tax
amnesty, and tax condonation are construed against the taxpayer and in favor 0!
the government.
Tax Amnesty vs. Tax Condonation

Amnesty covers both civil and criminal liabilities, but condonation covers only
civil liabilities of the taxpayer.
Amnesty ‘operates retrospectively by forgiving past violations. Condonatio®

applies prospectively to any unpaid balance of the tax: hence, the portion already
paid by the taxpayer will not be refunded.
Amnesty is also conditional upon the taxpayer paying the government a portion o!
the tax whereas condonation requires no payment.
20

CHAPTER 1: SELF-TEST EXERCISES
Discussion Questions
Define taxation.
Distinguish the theory and the basis of taxation.
P WNP
CONAN
What are the theories of government cost allocation? Explain each.

Differentiate vertical and horizontal equity.
Discuss the Lifeblood Doctrine.
Enumerate and explain the inherent powers of the State.
Distinguish the three powers of the State and enumerate their similarities.
Describe the scope of the power of taxation.
Distinguish substantive due process from procedural due process.
0. Distinguish the concept of equality from the concept of uniformity in taxation.
ree
1. Distinguish non-payment of debt versus non-payment of tax in terms of

consequences.
12. What institutions are exempt from real property tax in the Constitution?
13. Which of the constitutional limitations are also classified as inherent limitations?
14. Explain the stages of the exercise of taxation power.
15. Explain the concept of situs.
16. Distinguish the Marshall Doctrine from the Holme’s Doctrine.
17. Discuss the doctrine of strict construction of tax laws.
18. Explain double taxation, its elements, and its types.
19. What are the categories of escapes from taxation? Enumerate and explain each
means of escape under each category.
20. Distinguish tax amnesty from tax condonation.
Exercise Drills
In the space provided for, indicate whether the statement relates to a Constitutional
limitation (C) or inherent limitation (I). If it is not a limitation to the taxing power,
indicate (N).
1. Non-assignment of taxes c
2. Territoriality of taxation I
3. Taxes must be for public use T
4, Exemption of the property of religious institutions from (
income tax
5. | Exemption of the revenues and assets of non-profit, non- C
stock educational institutions
6. Non-delegation of the taxing power 1
7. Non-appropriation for religious purpose C
8. The requirement of absolute majority in the passage of a (
tax exemption law.
9. Non-imprisonment for non-payment of tax or debt f
21

s-
be
| 10. Taxpayers under the same circumstance should
ga | tions.
treated equal both in terms of privileges and obli
tional,
11. | Exemption from property taxes of religious, educa
and charitable entities. [_—_<—____—
are not object s of
12. | Government income and properties
taxation.
its
13. | Each local government shall have the power to create
own sources of revenue. -
v
14. | Imprescriptibility in taxation C
contracts.
15. | Non-impairment of obligation and
16. | Guarantee of proportional system of taxation.
17. | International courtesy
of the Supreme Court
18. | Non-impairment of the jurisdiction
to review tax cases.
el.
19. | The government is not subject to estopp IV
tax.
20. | Imprisonment for non-payment of poll
True or False 1
one could be compelled to pay
* 1, There should be direct receipt of benefit before
taxes.
dities to protect the
>. 2, Eminent domain involves confiscation of prohibited commo
well-being of the people.
ce of the taxpayer.
+ 3. Horizontal equity requires consideration of the circumstan
* 4. Taxes are the lifeblood of the government.
e.
~ 5. Taxation isa mode of apportionment of government costs to the peopl
- 6. The exercise of taxation power requires Constitutional grant.
- 7. Taxation is inherent in sovereignty.
EF 8. Police power is the most superior power of the government. Its exercise needs
to be sanctioned by the Constitution.
T 9. Allinherent powers presuppose an equivalent form of compensation.
+ 10. The reciprocal duty of support between the government and the people
underscores the basis of taxation.
True or False 2
. 1. The scope of taxation is regarded as comprehensive, plenary, unlimited, and
supreme.
2. The Constitutional exemption of religious, charitable, and non-profit cemeteries
churches, and mosques refers to income tax and real property tax
_ 3. Taxpayers under the same circumstance should be taxed differently.
4, Taxation is subject to inherent and Constitutional limitations.
5. International comity connotes courtesy between nations.
6. Collection of taxes in the absence of a law is violative of the Constitution!
requirement for due process.
F 7. Noone shall be imprisoned for non-payment of tax.
22

oa ———
g. The lifeblood doctrine requires the government to override its obligations and
contracts when necessary.
¢ 9, 2/3 ofall members of Congress is required to pass a tax exemption law.
10. The government should tax itself.
Multiple Choice - Theory: Part 1

1. That courts cannot issue injunction against the government's effort to collect taxes
is justified by
(a) the lifeblood doctrine. c. the ability to pay theory.
b. imprescriptibility of taxes. d. the doctrine of estoppel.
2. The point at which tax is levied is also called

(a,) Impact of taxation c. Incidence of taxation
b. Situs of taxation d. Assessment
3. Which of the following inappropriately describes the nature of taxation?

a. Inherent in sovereignty
b. Essentially a legislative function
c. Subject to inherent and constitutional limitation
(d) Generally for public purpose
4. Which is correct?
a. Tax condonation is a general pardon granted by the government.
b. The BIR has five deputy commissioners.
c. The government can still collect tax in disregard ofa constitutional limitation
because taxes are the lifeblood of the government.
(d) The President of the Philippines can change tariff or imposts without
necessity of calling Congress to pass a law for that purpose.
5. A.The power to tax includes the power to exempt.

B. The power to license includes the power to tax.
Which is true?
(a) Aonly c.Aand B
b. Bonly d. Neither A nor B
6. International double taxation can be mitigated by any of the following except

a. Providing allowance for tax credit
b. Provision of reciprocity provisions in tax laws
c. Provision of tax exemptions
(a) Entering into treaties to form regional trade blockage against the rest of the
world
7. Which is not an object of taxation?

a. Persons c. Transactions
b. Business d) Public properties
23

8. The power to enforce proportional contribution from the people for the SUPPon
of the government is
(a.) Taxation c. Eminent domain
b. Police power d. Exploitation
9. This theory underscores that taxes are indispensable to the existence of the state
a. Doctrine of equitable recoupment
b} The Lifeblood Doctrine
c. The benefit received theory
d. The Holmes Doctrine
on i is the ex emption.
n is the rule, exceptiion
10. A. Taxatioioni
B. Vague taxation laws are interpreted liberally in favor of the government.
Which is false?
a. Aonly c.)Both A and B
b. Bonly . NeitherA nor B
11. Statement 1: The benefit received theory presupposes that some taxpayers within
the territorial jurisdiction of the Philippines will be exempted from paying tax so
long as they do not receive benefits from the government.
Statement 2: The ability to pay theory suggests that some taxpayers may be
y exempted from tax provided they do not have the ability to pay the same.
¥f Which statement is true?
| a. Only statement 1 c. Both statements 1 and 2
Only statement 2 d. Neither statement 1 nor 2
12. Select the incorrect statement.
a. The power to tax includes the power to exemp
t.
b. Exemption is construed against the taxpa
yer and in favor of the government.
c. Tax statutes are construed against
the government in case of doubt.
Taxes should be collected only for publi
c improvements.
13. Which is not a public purpose?
a. Public education c. Transportation
b. National defense (None of these
14. Which does not properly
describe the scope of taxati
a. Compre hensive on?
(c)Discretionary
b. Supreme
d. Unlimited
15. All of these are second
ary purposes of taxation
a. To reduce social inequalit except
y
b, To protect local indust
ries
(©) Toraise revenue for the
support of the government
d. To encourage growth of local industries
24

16. What is the theory of taxation?

a. Reciprocal duties of support and protection
® Necessity
C. Constitutionality
d. Public purpose
17. A. Taxes should not operate retrospectively.

B. Tax is generally for public purpose.
Which is true?
A only c.AandB
b. B only d. Neither A nor B
18. Which provision of the Constitution is double taxation believed to violate?

a. Equal protection guarantee
b. Progressive scheme of taxation
Cc. Uniformity rule
@ Either A or C
19. Which limitation of taxation is the concept of “situs of taxation” based?

@Territoriality c. International comity
b. Public purpose d. Exemption of the government
20. Which tax exemption is irrevocable?

a. Tax exemption based on contract
b. Tax exemption based on the Constitution
C. Tax exemption based on law
Both A and B
21. Which statement is incorrect?

a. Every person must contribute his share in government costs.
b. The existence of a government is expected to improve the lives of the people.
C. The government provides protection and other benefits while the people
provide support.
Only those who are able to pay tax can enjoy the privileges and protection of
the government.
22. Which is the most incorrect statement regarding taxes?
a. Taxes are necessary for the continued existence of the government.
b. The obligation to pay tax does not rest upon the privilege enjoyed by or the
protection afforded to the citizen of the government, but upon the necessity of
money for the support of the State.
© There should be personal benefit enjoyed from the government before one is
required to pay tax.
d Taxes should be collected without unnecessary delay, but its collection should
not be tainted with arbitrariness.
25

courts have no Power,

23. Statement 1: In the selection of the objects of taxation, the
inquire into the wisdom, objectivity, motive, expediency, or necessity ofa tax lay,
Taxes may be levig
Statement 2: An imposition can be both a tax and a regulation.
~
to provide means for reh abilitation and stabilization of threatened industry,
Which is correct?
a. Statement 1 only (Both statements
b. Statement 2 only d. Neither statement
24. Which of the following acts in taxation is administrative by nature?

a. Determination of the amount tobe imposed
b. Fixing the allocation of the amount to be collected between the locg
government and the national government
(c) Levy or distraint of taxpayers’ property for tax delinquency
d. Determining the purpose of the tax to impose
25. This refers to the privilege or immunity from a tax burden which others ay
subject to:
a. Exclusion c.)Tax holiday
b. Deduction . Reciprocity
26. Which is nota legislative act?

a. Determination of the subject of the tax
b. Setting the amount of the tax
(c.) Assessment of the tax
d. Determining the purpose of the tax
27. Which of the following statements does not support the principle that tax is not
subject to compensation or set-off?
a. The government and the taxpayer are not creditors and debtors of each other.
b. Tax is not in the nature of contract but it grows out of a duty whereit
taxpayers are bound to obey even without the personal consent of the
taxpayer.
c. Taxes arise from law, not from contracts.
@ Both tax and debt partake the nature of an obligation.
28. Statement 1: Taxation is the rule; exemption is
the exception.
Statement 2: Taxation may be used to implement the police power of
the state.
a. Tis true (c)l and Il are true
b. Il is true d.l and Il are not true
29. Which of the fe at
delegated? e following powers of the Commissioner of Internal Revenue cannot bé
a me examination of tax return and
the determination of tax due thereon
‘ o refund or credit tax liabilitie
s in certain cases
26

c. The power to compromise or abate any tax liability involving basic deficiency
tax of P500,000 and minor criminal violations
@ The power to reverse a ruling of the Bureau of Internal Revenue
30. When exemption from a tax imposition is silent or not clearly stated, which is
true?
a. Taxation applies since exemptions are construed against the government.
b. Exemption still applies since this is an instance of exemption by omission.
(c) Taxation applies since exemptions are construed against the taxpayer.
d, Exemption applies since obligation arising from law cannot be presumed and
hence construed against the government.
31, What is the basis of taxation?

Reciprocal duties of support and protection
b. Constitutionality
c. Public purpose
d. Necessity
32. When the provisions of tax laws are silent as to the taxability of an item, which is
true? '
a. Taxation applies since taxation is the rule, exemption is the exception.
(6) Exemption applies since vague tax laws are construed against the
government.
c. Taxation applies due to the Lifeblood doctrine.
d. Exemption applies since obligation arising from law is presumed; ignorance
of the law is not an excuse.
33. Which is not legally tenable in refusing to pay tax?

Absence of benefit from the government
b. Lack of jurisdiction of the taxing authority
c. Prescription of the tax authority’s right to collect
d. All ofthese
34. What is the primary purpose of taxation?

a. To enforce contribution from its subjects for public purpose
(by To raise revenue
c. To achieve economic and social stability
d. To regulate the conduct of business or profession

1. That all taxable articles or properties of the same class shall be taxed at the same
rate underscores
a. Equalityintaxation | (©)Uniformity in taxation.
b. Equity of taxation d. None of these
27

Chapter1 - Introduction
to Taxation
2. The Constitutional exemption of religious or

charitable institutions refers op
(a) Real property tax c. Property tax and income tax vt
b. Income tax d. Business tax
3. An educational institution operated by a religious organization was bei,
required by a local government to pay real property tax. Is
the assessment Valigy
a. Yes, with respect to all properties held by such educational institution,
(b) Yes, with respect to properties not actually devoted to educational Purpose,
c. No, with respect to any properties held by such educational institution,
d. No, with respect to properties not actually devoted to educational PUrposes
4. Which is not a Constitutional limitation?
No tax law shall be passed without the concurrence of a majority of ,
members of Congress.
b. Non-appropriation for religious purpose
c. No law impairing government obligations on contracts shall be passed,
d. Non-impairment of religious freedom
5. Which of the following is not an inherent limitation of the power to tax?

a. Tax should be levied for public purpose.
b. Taxation is limited to its territorial jurisdiction.
©) Tax laws shall be uniform and equitable.
d. Exemption of government agencies and instrumentalities.
6. The following are inherent limitations to the power of taxation

except one. Choos
the exception.
a. Territoriality of taxes
b. Legislative in character
c. For public purpose
d) Non-appropriation for religious purpose
7. The following are limitations of taxation:

A. Territoriality of taxation
B. Exemption of the government
C. Taxation is for public purpose.
D. Non-impairment of contracts
E. Non-delegation of the power to tax
Which of these are classified as both

constitutional and inherent limitations?
a. AandB oe andE
b. BandC d.DandE
8. The provisions in the Constitution r
egarding taxation are
a. Grants of the power to tax
28

(b) Limitations to the power to tax

c. Grants and limitations to the power to tax
d. Limitations against double taxation
9, The agreement among nations to lessen tax burden of their respective subjects is
called
a. Reciprocity c. Territoriality
(b) International comity d. Tax minimization
10. The Constitutional exemption of non-stock, non-profit educational institutions

refers to.
a. Real property tax (c)Property tax and income tax
b. Income tax d. Business tax
11. Which of the following is violative of the principle of non-delegation?

a. Requiring that legislative enactment must exclusively pertain to Congress
b. Authorizing the President to fix the amount of impost on imported and
exported commodities
C. Authorizing certain private corporation to collect taxes
(d) Allowing the Secretary of Finance and the BIR to issue regulation or rulings
which go beyond the scope of a tax law
12. Which of the following violates Constitutional provisions?

a. Payment of salaries to priests or religious ministers employed by the Armed
Forces of the Philippines
b. Imposing tax on properties of religious institutions which are not directly and
exclusively used for religious purposes
(2 Imposition of license for the sale of religious literature
d. Authorizing the President of the Philippines to fix the rates of tariffs or
imposts
13. In order to phase-out a huge deficit, the President of the Philippines passed a law
offering all taxpayers with previous tax delinquency to pay a minimum tax in
exchange for relief from tax assessment in the period of delinquency. Is this a valid
exercise of taxation power?
a. Yes, because the measure adopted is grounded upon necessity.
b. Yes, because the President is merely exercising his presidential discretion.
(C) No, because the power of taxation is non-delegated.
d. No, because only the Department of Finance can issue such ruling.
14, Concerned with increasing unemployment rates in the country, the President of
the Philippines encouraged the Philippine Senate to pass a law granting special
tax privileges to foreign investors who will establish businesses in the country.
The Senate accordingly drafted the bill and passed to Congress for approval.
29

Is this valid exercise of taxation power?

a. Yes, It is the discretion of the President to adopt any measures he deemg
country. .
necessary to alleviate poor conditions in the
interest should be given optimun,
b. Yes. Any means beneficial to the public
priority.
c. Yes. The President’s proposalwill have to be finally approved and passed by
would not be violated,
the legislature. The rule on non-delegation of taxation
Representatives.
@ No. Tax bills shall originate from the House of
Ram is the only prac tici ng lung transp lant specialist in Baguio City. The City
15. nce subjecting the practice of lung
ment of Baguio passed a local or dina
Govern othe
spla nt to 2% tax base d on rece ipts. R am objected claiming that
tran
of the country are no t subjected to tax.
transplant specialists in other regions
Is Ram’s contention valid?
d be uniform and equitably enforced.
a. Yes, because the rule of taxation shoul
oners who would later
b. Yes, because Ram is the only one subject. Other practiti
practice would not be covered by the ordinance.
specialist who would
(c) No, because the ordinance would cover all transplant
violated.
practice in Baguio City. The uniformity rule would not be
hamper economic
d. No, because subjecting the new industry to taxation would
growth.
Congress
16. With the country under incessant shortage of sugar, the Philippine
enacted a law providing tax exemptions and incentives to cane farmers without at
the same time granting tax exemptions to rice farmers who produce the staple
food of the Philippines. Is the new law valid?
@) Yes, since there is a valid classification of the taxpayers who would be
exempted from tax.
b. Yes, since sugar is more important than rice.
c. No, since the grant of exemption is construed in favor of taxpayers.
d. No, because there is no uniformity in the grant of tax exemption.
17. Congress passed a law subjecting government-own i

-owned and controlled corporations
. P
(GOCCs) to income tax. Is the law valid?
& vee because e coeesnanee agencies and instrumentalities are subject to tax.
es, because CCs are not government agenci ncies jaly lly
~ Lae 6 and¥are €ssenti’
commercial in nature.
c. No, because government agencies are ex empt. Thisi would iolation 0!
, ; clause in the constitution. pose a viola?
the equality
d. No, because GOCCs are constitutionally exempted from paying taxes
18. The en Congress enacted a law requiring foreign banks to withhold tax®
earned by Filipino residents in their country and i he
Philippine government. | y to remit the same to !
30

Is this a valid exercise of taxation power?

a. Yes, because foreign banks are within the territorial jurisdiction of the
Philippines.
b. Yes, the Philippines can enforce tax requirements to subjects of foreign
sovereignty even if they are outside the country.
(c) No,as this leads to encroachment of foreign sovereignty.
d. No, this is prohibited by the Constitution.
19. Which of the following normally pays real property tax?

a. Bantay Bata, a non-profit charitable institution
b. Jesus Crusade movement, a religious institution
c. University of Pangasinan, a private proprietary educational institution
(d) AM Property Holdings, a registered property development company
20. Tax exemption bills are approved by

(a@ Majority of all members of Congress
b. Solely by the President of the Republic
c. 2/3 ofall members of Congress
d. Majority of the representatives constituting a quorum
21. Which of the following is not a constitutional limitation of the power to tax?
a. Non-impairment of obligation or contracts
b. Due process and equal protection of the law
c. Non-appropriation for religious purposes
(d) Non-delegation of police power
22. The Japanese government invested P100,000,000 in a Philippine local bank and
earned P10,000,000 interest. Which is correct?
The income is exempt on grounds of territoriality.
The income is exempt due to international comity.
nop
The income is subject to tax on the basis of sovereignty.

The income is subject to tax because the income is earned within the
Philippines.

1. Select the correct statement.
a. The benefit received theory explains that the government is obliged to serve
the people since it is benefiting from the tax collection from its subjects.
b. The lifeblood theory underscores that taxation is the most superior power of
the State.
() The police power of the State is superior to the non-impairment clause of the
Constitution.
d. The power of taxation is superior to the non-impairment clause of the
Constitution.
31

rights and privileges ung,

” 2. When a legislative body taxes persons and property, iance Wi
the same taxable category at the same rate, this is referred to as compl
the constitutional limitation of:
a, Equity c. Due process
(b.) Uniformity d. Equal protection clause
3. Which is nota legislative act?
(a.) Assessment of the tax c. Determination of the subject of the tax
tax
b. Setting the amount of the tax d. Determining the purpose of the
wing respect, except:
4. The inherent powers of the State are similar in the follo
197
a. They are inherent to the existence of the State.
ss Constitutional grant.
b. They are exercisable without the need for an expre
(¢) Allare not exercised by private entities.
d. They are exercised primarily by the legislature.
e power?
5. Which is mandatorily observed in implementing polic
(a) Public interest c. Public use
b. Just compensation d. All of these
6. Which is considered in the exercise of eminent domain?

a. Public use (©)Both a and b
b. Just compensation d. Neither anor b
7. The general power to enact laws to protect the well-being of the people is called
(a) Police power c. Taxation
b. Eminent domain d. All of these -
8. Which of the following entities will least likely exercise the power of eminer:
domain?
a. Electric cooperatives c. Telecommunication business
b. Water cooperatives d,)Transportation operators
9. In exercising taxation, the government need not consider

a. Inherent limitations c. Due process of law
(b) Just compensation d. Constitutional limitations
10. Licensing of business or profession is an exercise of
a» Police power c. Eminent domain
b. Taxation d. All of these

a. Eminent domain refers to the power to take public property for private u*
after paying just compensation.
b. Police power being the most superior power of the State is not subject to a!
limitation.
32

(c) Taxation power shall be exercised by Congress even without an express

Constitutional grant.
d. Taxes may be collected even in the absence of a law since obligation arising
from law is always presumed.
12. Which is principally limited by the requirement of due process?

a. Eminent domain c. Taxation
AL) Police
(b.) Poli power d. All of these
13. Statement 1: Congress can exercise the power of taxation even without
Constitutional delegation of the power to tax.
Statement 2: Only the legislature can exercise the power of taxation, eminent
domain, and police power.
Which statement is correct?
a. Statement 1 c)Statements 1 and 2
b. Statement 2 d. Neither statement 1 nor 2
14. Which of the following powers is inherent or co-existent with the creation of the
government?
a. Police power c. Taxation
b. Eminent domain (d) All of these
15. Which power of the State affects the least number of people?
a. Police power c. Taxation
(b) Eminent domain d. Taxation and police power
16. Which of the following is not exercised by the government?

a. Taxation c. Eminent domain
b. Police power (d)Exploitation

(a) Since there is compensation, eminent domain raises money for the
government.
b. Once a government is established, taxation is exercisable.
c. The most important of the power is taxation.
d. Police power is more superior than the non-impairment clause of the
Constitution.
18. The following statements reflect the differences among the inherent powers
except:
a. The property taken under eminent domain and taxation are preserved but
that of police power is destroyed.
(b) Eminent domain and police power do not require Constitutional grant, but
taxation, being a formidable power, requires constitutional grant.
33

\ Chapter 1 - Introduction to Taxation
™ ~~
be exe rcised by privateé entities.

~™
c. “Only eminent domain can are ways in which 4,

d. Taxation, police power, and eminent domain
government interferes with private right and property.
o destroy if the law is valid.

19. Statement 1: The Taxation power can be used t
Statement 2: A tax law which destroys ein business, or enterprises for ty,
ta x law.
purpose of raising revenue is an invalid
Which is incorrect?
Statement 1 C. Both statements
a.
Statement 2 d) Neither statement
b.
Ci
ne Constitution are grants of th
a. The provisions on taxation in the Ph ilippi
power to tax.
b) The power to tax includes the power to destroy.
is calle
c. When taxation is used as a too ] for general and economic welfare, this
fiscal purpose.
rnment.
The sumptuary purpose of taxation is to raise funds for the gove
tax?
21. Which of the following is not an inherent limitation of the power to
a. Tax should be levied for public purpose.
b. Taxation is limited to its territorial jurisdiction.
(c.) Tax laws shall be uniform and equitable.
d. Government agencies and instrumentalities are exempt from tax.
a. The power to tax includes the power to exempt.
b. Exemption is construed against the taxpayer and in favor of the government.
c. Tax statutes are construed against the government in case of doubt.
(d) Taxes should be collected only for public improvement.
23. Which of the following is not a constitutional limitation of the power to tax?
a. Non-impairment of obligation or contracts
b. Due process and equal protection of the law
c. Non-appropriation for religious purposes
‘d) Non-delegation of the taxing power
24. Which of the powers of the State is the most superior? Which is regarded as the
most important?
a. Taxation; Eminent domain
(b) Police power; Taxation
c. Eminent domain; Police power
d. All the powers are equally superior and impo
rtant
34

Chapter 2 ~ taxes, Tax Laws and Tax Administration
CHAP? 2
TAXES, TAX LAWS, AND TAX ADMINISTRATION

This Chapter discusses tax laws, taxes, and their distinction from similar items,
and the administration of the tax system.
After this chapter, readers are expected to comprehend and demonstrate

knowledge on the following:
The type of taxation laws
Distinction among tax laws, revenue regulations, and rulings
ONAARwWNe
Tax, its elements, and classifications

Distinction of tax from similar items
Tax system and its types
The principles of a sound tax system
How tax is administered
The powers of the Bureau of Internal Revenue (BIR) and the Commissioner of
Internal Revenue (CIR) and the non-delegated powers of the CIR
9. The criteria for selection of large taxpayers
TAXATION LAW -
Taxation law refers to any law that arises from the exercise of the taxation power
of the State. :
Types of taxation laws

1. Tax laws - These are laws that provide for the assessment and collection of
taxes.
Examples:
a. The National Internal Revenue Code (NIRC)
b. The Tariff and Customs Code
c. The Local Tax Code
d. The Real Property Tax Code
2. Tax exemption laws - These are laws that grant certain immunity from
taxation.
Examples:
a. The Minimum Wage Law
b. The Omnibus Investment Code of 1987 (E.0. 226)
c. Barangay Micro-Business Enterprise (BMBE) Law
d. Cooperative Development Act
35

Chapter 2 - Taxes, Tax Laws and Tax Administration
Sources of Taxation Laws

Constitution
CONAUPWN Ee
Statutes and Presidential Decrees
Judicial Decisions or case laws
Executive Orders and Batas Pambansa
Administrative Issuances
Local Ordinances
Tax Treaties and Conventions with foreign countries
Revenue Regulations
Types of Administrative Issuances

Revenue regulations
WNP
Revenue memorandum orders

Revenue memorandum rulings
Revenue memorandum circulars
Revenue bulletins
AW
BIR rulings
Revenue Regulations are issuances signed by the Secretary of Finance upg

recommendation of the Commissioner_of Internal Revenue (CIR) that specif
prescribe, or define rules and regulations for the effective enforcement of th;
provisions of the National Internal Revenue Code (NIRC) and related statutes.
Revenue regulations are formal pronouncements intended to clarify or explain theta
law and carry into effect its general provisions by providing details of administratic
~~
and procedure. Revenue regulation has the force_and_ effect _of_a. law, but is_ne
intended to expand or limit the application of the law; otherwise, it is void.
Revenue Memorandum Orders (RMOs) are issuances that provide directives ¢
instructions; prescribe guidelines; and outline processes, operations, activitie
workflows, methods, and procedures necessary in the implementation of staté
policies, goals, objectives, plans, and programs of the Bureau in all areas of operatio:
except auditing. ;
Revenue Memorandum Rulings (RMRs) are rulings, opinions
and interpretations oft
.CIR with respect to the provisions of the Tax Code and other tax laws as applied
specific set of facts, with or without established precedents, and which the CIR ™
issue from time to time for the purpose of providing taxpayers guidance on the®
consequences in specific situations. BIR Rulings, therefore, cannot contravene du!
issued RMRs; otherwise, the Rulings are null and void ab initio.
Revenue Memorandum Circulars (RMCs) are issuances that publish_pertinent =.
applicable portions as well as amplifications of laws, rules, regulations, and pr ecedeh
issued by the BIR and other agencies/offices.
36

5/R Rulings are official positions of the Bureau to queries raised by taxpayers and
other stakeholders relative to clarification and interpretation of tax laws.
‘Rulingsare merely advisory or a sort of information service to the taxpayer such that
none 2 of them is binding except to the addressee and may be reversed by the BIR at
er nyuume.
Types of rulings
Value Added Tax (VAT) rulings
NP
International Tax Affairs Division (ITAD) rulings

BIR rulings
Oo
Delegated Authority (DA) rulings

bs
Generally Accepted Accounting Principles (GAAP) vs. Tax Laws

Generally accepted accounting principles or GAAP are not laws, but are mere
conventions of financial reporting. They are benchmarks for the fair and relevant
-aluation and recognition of income, expense, assets, liabilities, and equity of a
reporting entity for general purpose financial reporting. GAAP accounting reports
are intended to meet the common needs of a vast number of users in the general
ne
public.
Tax laws including rules, regulations, and rulings prescribethe criteria for tax
reporting, a special form of financial reporting which is intended to meet specific
needs of tax authorities.
1e
Taxpayers normally follow GAAP in recording transactions in their books.

However, in the preparation and filing of tax returns, taxpayers are mandated to
follow the tax law in cases of conflict with GAAP.
NATURE OF PHILIPPINE TAX LAWS

Philippine tax laws are civil and not political in nature. They are effective even
during periods of enemy occupation. They are laws of the occupied territory and
not by the occupying enemy. Tax payments made during occupations of foreign
enemies are valid.
Our internal revenue laws are not penal in nature because they do not define
crime. Their penalty provisions are merely intended to_ secure taxpayers’
compliance.
37

ration
Chapter 2 - Taxes, Tax Laws and Tax Administ
me an enforced proportional contribution levied by the lawmaking body OF the

State to raise revenue for public purpose.
lid Tax CS
L tee So ie levied by the taxing power having jurisdiction over the object of
taxation. .
ations.
Tax must not violate Constitutional and inherent limit
DUR WN
Tax must be uniform and equitable.

Tax must be for public purpose.
Tax must be proportional in character.
Tax is generally payable in money.
Classification of Taxes
A, As to purpose
1. Fiscal or revenue tax - a tax imposed for general purpose
2. Regulatory - a tax imposed to regulate business, conduct, acts g
transactions . —
3. Sumptuary - a tax levied to achieve some social or economic objectives
B. As to subject matter
1. Personal, poll or capitation - a tax on persons who are residents of;
particular territory
2. Property tax - a tax on properties, real or personal
3. Excise or privilege tax - a tax imposed upon the performance
of an act
enjoyment of a privilege or engagement in an occupation
C. As to incidence
1. Direct tax - When both the impact and
incidence of taxation rest upon the
same taxpayer, the tax is said to
be direct. The tax is collected fro
person who is intended to pay the m the
same. The Statutory taxpayer is
economic taxpayer. the
D. As to amount
1. Specific tax - a tax of .
per kilo, liter or meter, etc.
° .
posed ona per unit basis such e 7 a

2. Ad valorem ~ a tax of a fixed proportion imposed upon the value of the tax
object
E. As torate
1. Proportional tax — This is a flat or fixed rate tax. The use of proportional
tax emphasizes equality as it subjects all taxpayers with the same rate
without regard to their ability to pay.
Progressive or graduated tax - This is a tax which imposes increasing rates
as the tax base increase. The use of progressive tax rates results in
equitable taxation because it gets more tax to those who are more capable.
It aids in lessening the gap between the rich and the poor.
Regressive tax - This tax imposes decreasing tax rates as the tax base
increase. This is the total reverse of progressive tax. Regressive tax is
regarded as anti-poor. It directly violates the Constitutional guarantee of
progressive taxation.
Mixed tax - This tax manifest tax rates which is a combination of any of the
above types of tax.
F, As to imposing authority
1. National tax — tax imposed by the national government
Examples:
a. Income tax - tax on annual income, gains or profits
b. Estate tax - tax on gratuitous transfer of properties by a decedent
upon death
c. Donor’s tax - tax on gratuitous transfer of properties by a living donor
d. Value Added Tax - consumption tax collected by VAT business
taxpayers
e. Other percentage tax - consumption tax collected by non-VAT
business taxpayers
f. Excise tax - tax on sin products and non-essential commodities such
as alcohol, cigarettes and metallic minerals. This should be
differentiated with the privilege tax which is also called excise tax.
g. Documentary stamp tax - a tax on documents, instruments, loan
agreements, and papers evidencing the acceptance, assignment, sale
or transfer of an obligation, right or property incident thereto.
Local tax - tax imposed by the municipal or local government
Examples:
a. Real property tax
b. Professional tax
c. Business taxes, fees, and charges
39

ration
d. y
Communittax ST a
e. Taxon banks and other financial institu
DISTINCTION OF TAXES WITH SIMILAR ITEMS

Tax vs. Revenue
ernment for public purpose. Reyer),
Tax refers to the amount imposed by the gov
refers to all income collections of the gove rnmentme which includes taxes, tariy
licenses, toll, penalties and others. [he amount impo: sed is tax but the AMOyy,
collected is revenue.
Tax vs. License fee st wee bea.

Tax has a broader subject than license. ‘Tax emanates from taxation power and j,
imposed upon any object such as persons, properties, or privileges to raj
ies j j 4q7 3S “ale
revenue.
License fee emanates from police power and is imposed to regulate the exercise gy
a privilege such as the commencement ofa business or a profession.
Taxes are imposed after the commencement of a business or profession where,

license fee is imposed before engagement in those activities. In other wordsytay i
a post-activity imposition whereas license is a pre-activity imposition.
Tax vs. Toll

Tax is a levy of government; hence, it is a demand of sovereignt
y. Toll is a charg
for the use of other's property; hence, it is a demand of
ownership.
The amount of tax depends upon the needs
of the government, but the amount¢
toll is dependent upon the value of the prop
erty leased.
Both the government and private enti
ties im pose toll, but private entities cann
impose taxes.
Tax vs. Debt
Pago) but tax is generall

y payable in money.
40

Tax vs. Special Assessment

Tax is an amount imposed upon persons, properties, or privileges. Special
assessment is levied by the government on lands adjacent to a_ public
improvement. It is imposed on land only and is intended to compensate the
government for a part of the cost of the improvement.
The basis of special assessment is the benefit in terms of the appreciation in land
value caused by the public improvement. On the other hand, tax is levied without
expectation of a direct proximate benefit.
Unlike taxes, special assessment attaches to the land. It will not become a personal
obligation of the land owner. Therefore, the non-payment of special assessment
will not result to imprisonment of the owner (unlike in non-payment of taxes).
Tax vs. Tariff
Tax is broader than tariff. Tax is an amount imposed upon persons, privilege,
transactions, or properties. Tariff is the amount imposed on imported or exported
commodities.
Tax vs. Penalty

Tax is an amount imposed for the support of the government. Penalty is an
amount imposed to discourage an act. Penalty may be imposed by both the
government and private individuals. It may arise both from law or contract
whereas tax arises from law.
TAX SYSTEM
The tax system refers to the methods or schemes of imposing, assessing, and
collecting taxes. It includes all the tax laws and regulations, the means of their
enforcement, and the government offices, bureaus and withholding agents which
are part of the machineries of the government in tax collection. The Philippine tax
system is divided into two: the national tax system and the local tax system.
Types of Tax Systems According to Imposition
1. Progressive - employed in the taxation of income of individuals, and certain
local business taxes
2. Proportional - employed in taxation of corporate income and business
3. Regressive - not employed in the Philippines
Types of Tax System According to Impact

1, Progressive system”
A progressive tax system is one that emphasizes direct taxes. A direct tax
cannot be shifted. Hence, it encourages economic efficiency as it leaves no
other resort to taxpayers than to be efficient. This type of tax system impacts
more upon the rich.
41

2. Regressive system
system isi tooneconsumers;
A Se edt taxBiisinesses ;
tha t emphasizes indirect taxes. Indirect tax
hence, the impact of taxation res
‘on the bottom end of the society. In effect, a regressive tax system is ant,
poor.
It is widely believed that despite the Constitutional guarantee ofa Progressiy,

taxation, the Philippines has a dominantly regressive tax system due to the
prevalence of business taxes.
TAX COLLECTION SYSTEMS

A. Withholding system on income tax - Under this collection system, the Payor
of the income withholds or deducts the tax on the income before releasing the
same to the payee and remits the same to the government. The following ar.
the withholding taxes collected under this system:
1. Creditable withholding tax
a. Withholding tax on compensation - an estimated tax required by the
government to be withheld (i.e. deducted) by employers against the
compensation income to their employees
b. Expanded withholding tax - an estimated tax required by
the
government to be deducted on certain income payment
s made by
taxpayers engaged in business
The creditable withholding tax is intended to
support the self-assessment
method to lessen the burden of lump sum
tax payment of taxpayer and
also provides for a possible third-party chec
k for the BIR of non-compliant
taxpayers.
Final withholding tax - a system of
tax collection wherein payors are
required to deduct the full tax
on certain income payments
:
The final withholding tax is int
ended for the collection of
Income with high risk of non taxes from
-compliance,
Similarities of final tax
and creditable withhold
a. In both cases, the ing tax
income payor withhold
the same to the governme sa fracti on of the income and remit
nt,
b. By collecting at the mo
42

ia ee
Differences between FWT and CWT

——<———<—
Final Withholding Creditable Withholding Tax

Tax
Full Only a portion
Income tax withheld
Coverage of Certain passive income Certain passive and active
income
withholding
Income payor Income payor for the CWT and
Who remits the actual the taxpayer for the balance
| fax__ Not required Required
Necessity of income tax
return for taxpayer
system on business tax - when the national government

B. Withholding
controlled
agencies and instrumentalities including government-owned and
ers, the
corporations (GOCCs) purchase goods or services from private suppli
percentage
law requires withholding of the relevant business tax (i.e. VAT or
on by
tax). Business taxation is discussed under Business and Transfer Taxati
the same author.
, the taxpayer
C. Voluntary compliance system - Under this collection system
returns
himself determines his income, reports the same through income tax
is also referred to as the
and pays the tax to the government. This system
“Self-assessment method.”
The tax due determined under this system will be reduced by:
a, Withholding tax on compensation withheld by employers
es
b. Expanded withholding taxes withheld by suppliers of goods or servic
or
The taxpayer shall pay to the government any tax balance after such credit
claim refund or tax credit for excessive tax withheld.
D. Assessment or enforcement system - Under this collection system, the

government identifies non-compliant taxpayers, assesses their tax dues
including penalties, demands for taxpayer’s voluntary compliance or enforces
collections by coercive means such as a summary proceeding or judicial
proceedings when necessary.
PRINCIPLES OF A SOUND TAX SYSTEM

According to Adam Smith, governments should adhere to the following principles
or canons to evolve a sound tax system:
1. Fiscal adequacy
2. Theoretical justice
3. Administrative feasibility
43

m
Fiscal adequacy
° S MUSt be s let
Fiscal adequacy requires that the sources of government funds ; " ve Suff ice,
to cover government costs. The government must not incur @ ond _ budy.
deficit paralyzes the government's ability to deliver the essen P © Services t
the people. Hence, taxes should increase in response to Increase In Zovernm,,,
spending.
- 4
a 1s a3 ae f
: ca
Theoretical justic
der the taxpayer,
Theoretical justice or equity suggests that taxation should consi
ability to pay. It also suggests that the exercise of taxation should not },
oppressive, unjust, or confiscatory.
Administrative feasibility a |
Administrative feasibility suggests that tax laws should be capable of efficient ay,
should make »
effective administration to encourage compliance. Government
ap;
easy for the taxpayer to comply by avoiding administrative bottlenecks
.
reducing compliance costs.

—h —
Toga) bey sh,
a
tL,<2
|
Upon
'er-
f lmwy
4 ,
“*
The following are applications of thhe principle of administrative feasibility:

1. E-filing and e-payment of taxes
2. Substituted filing system for employees
3. Final withholding tax on non-resident aliens or corporations
4. Accreditation of authorized agent banks for the filing and payment of taxes
TAX ADMINISTRATION
Tax administration refers to the management of the tax system. Ta
administration of the national tax system in the Philippines is entrusted to th:
Bureau of Internal Revenue which is under the supervision and administration ¢
the Department of Finance.
Chief Officials of the Bureau of Internal Revenue
1. 1Commissioner —
2. 4 Deputy Commissioners, each to be designated to
the following:
a. Operations group
b. Legal Enforcement group
c. Information Systems Group
d. Resource Management Group
POWERS OF THE BUREAU OF IN TERNAL REVENUE
1. Assessment and collection of tax
es
2. Enforcement of all forfeitures,
pen
decided in its favor by the courts alties and fines, and judgments in all cas*
44

Giving effect to, and administering the supervisory and police powers
3,
conferred to it by the NIRC and other laws
4, Assignment of internal revenue officers and other employees to other duties
of forms, receipts, certificates, stamps, etc. to
5. Provision and distribution
proper officials
6. Issuance of receipts and clearances
to
7. Submission of annual report, pertinent information to Congress and reports
the Congressional Oversight Committee in matters of taxation
POWERS OF THE COMMISSIONER OF INTERNAL REVENUE

the Secretary of
1. To interpret the provisions of the NIRC, subject to review by
Finance
2. To decide tax cases, subject to the exclusive appellate jurisdiction of the Court
of Tax Appeals, such as:
a. Disputed assessments
b. Refunds of internal revenue taxes, fees, or other charges
c. Penalties imposed
d. Other NIRC and special law matters administered by the BIR
information and to summon, examine, and take testimony of
3. To obtain
persons to effect tax collection
Purpose: For the CIR to ascertain:
none has
a. The correctness of any tax return or in making a return when
been made by the taxpayer
in correcting
b. The tax liability of any person for any internal revenue tax or
any such liability
c. Tax compliance of the taxpayer
Authorized acts:
to such inquiry
a. To examine any book, paper, record or other data relevant
any person other than
b. To obtain on a regular basis any information from
ct to audit
the person whose internal revenue tax liability is subje
to file a return, his
c. To summon the person liable for tax or required
dy of his books of
employees, or any person having possession and custo
books, papers, records
accounts and accounting records to produce such
or other data and to give testimony
as may be
d. To take testimony of the person concerne d, under oath,
relevant or material to the inquiry
of any revenue
e. To cause revenue officers and employees to make canvass
district
45

‘ax Adm inistration
Chapter 2 - Taxes, Tax Laws and Tax
4, To make an_ assess! nent iand prescribe additional requirement for ta

:
administration sanforcement
and enforcem
srmine tax due thereon
To examine tax returns and determine tax dt
ae al.
The CIR or hisis duly4 authorized representatives may authorize the aa

and the assessment of the correct fame’ natin
of any taxpay ta
axpayer ¢ a any law requiring the prior authorization
a ee .
y &
IZ ofa
mime
ao
agency instru ality: Failure to file a return shall not prevent
evey onor iastromentality the Ch
from authorizing the examination,
1 Nn 1
4 e e JY aos i - t e C
7
his I epl esentatives.
statements ‘ati
or declarations s hall not bebe withdrawn but may be
modified changed and amended by the taxpayer within 3 years rom the date
of filing except when a notice for audit or investigation has been actually
served upon the taxpayer.
When a return shall not be forthcoming within the prescribed deadline or

when there is a reason to believe that the return is false, incomplete
or
erroneous, the CIR shall assess the proper tax on the basis
of best evidence
available.
In case a person fails to file a required return

or other documents at the time
prescribed by law or willfully files a false
or fraudulent return or other
documents, the CIR shall make or amend
the return from his own knowledge
and from such information obtained
from testimony. The return shall
presumed prima facie correct
and sufficient for all legal pur be
poses.
6. To conduct inventory taki
ng or Surveillance
a.
The taxpayer failed to and receipts fora taxpayer
iss ue when:
b. The CIR believes receipts; or
that the books or
correctly reflect the other records of
declaration in the the taxpayer do no
return,
of gsumptve gross sa
information sess un les or receipt shall be derived from the
der similar circumst performan¢
ances adjusted for
other releval!
a. tax period whe

Retiring from
Intendin
business n the taxpayer js:
8 to leave the
C Intendin Philippines
8 to remove, hi de, or Conce
a l his prope
rty
46

SS Ta Se SN
| iin

ration
d. Intending to perform any act tending to obstruct the proceedings for the
collection of the tax or render the same
ineffective
The termination of the taxable period shall be communicated through a notice
to the taxpayer together with a request for immediate payment. Taxes shall be
due and payable immediately.
To prescribe real property values
The CIR is authorized to divide the Philippines into zones and prescribe real
property values after consultation with competent appraisers. The values thus
prescribed are referred to as zonal value.
Zonal values are subject to automatic adjustment once every 3 years through
rules and regulations issued by the Secretary of Finance based on the current
Philippine valuation standards. However, no adjustment in zonal valuation
shall be valid unless published in a newspaper of general circulation in the
province, city or municipality concerned, or in the absence thereof, shall be
posted in the provincial capitol, city or municipal hall and in 2 other
conspicuous public places therein. Furthermore, the basis of any valuation,
including the records of consultations done, shall be public records open to
the inquiry of any taxpayer.
For purposes of internal revenue taxes, fair value of real property shall mean
whichever is higher of:
a. Zonal value prescribed by the Commissioner
b. Fair market value as shown in the schedule of market values of the
Provincial and City Assessor’s Office
The NIRC previously used the assessed value which is merely a fraction of the
fair market value. Assessed value is the basis of the real property tax in local
taxation. The value to use now is the full fair value of the property.
10. To compromise tax liabilities of taxpayers
11. To inquire into bank deposits, only under the following instances:
a. Determination of the gross estate of a decedent
b. To substantiate the taxpayer’s claim of financial incapacity to pay tax in an
application for-tax compromise
In cases of financial incapacity, inquiry can proceed only if the taxpayer
waives his privilege under the Bank Deposit Secrecy Act.
12, To accredit and register tax agents
47

on
xe s, Ta x La ws and Tax Administrati
Chapter 2 - Ta
CIR of f applicatio
app n for accreditation is appealable to th,
The denial by the cre tary of Finance to act on th.
e nce. The failure of the Se
Department of Financ
ys is deeme dan approval.
appeal within 60 da
venue taxes
credit internal re
13. To refund or
ain cases
ab at e or ca nc el tax liabilities in cert
14. To
irements
15. To prescri be additional pro
cedures or documentary requ
nt tg,
16. To delegate h is powers to
any subordinate officer with a rank equivale
division chief of an office
CIR
Non-delegated power of the
oner shall not be delegated:
The following powers of the Commissi
The power to recommend the promulgation of rules and regulations to th
1.
Secretary of Finance.
rse, revoke or modify
The power to issue rulings of first impression or to reve
any existing rulings of the Bureau.
3. The power to compromise or abate any tax liability
Exceptionally, the Regional Evaluation Boards may compromise tax liabilities
under the following:
a. Assessments are issued by the regional offices involving basic deficieng
tax of P500,000 or less, and
b. Minor criminal violations discovered by regional and district officials
Composition of the Regional Evaluation Board

a. Regional Director as chairman
b. Assistant Regional Director
c. Heads of the Legal, Assessment and Collection Division
d. Revenue District Officer having jurisdiction over the taxpayer
4. The power to assign and reassign internal revenue officers to establishments

where articles subject to excise tax are produced
or kept.
Rules in assignments of revenue officers
to other duties
1. Reverie officers assigned to an establishmen
t where excisable articles al
ept shall in no case stay there for more than
2 years
2. Rev i
. enue officer S assigned to perform assessment and collection function shé!
not remain in the same assignment for more than 3 years
48

Chapter 2 - Taxes, Tax Laws and Tax Admi
nistration
3. Assignment of internal revenue officers and employees of the Bureau to

special duties shall not exceed 1 year.
Agents and Deputies for Collection of National Internal Revenue Taxes

The following are constituted agents for the collection of internal revenue taxes:
1. The Commissioner of Customs and his subordinates with respect to collection
of national internal revenue taxes on imported goods.
2. The head of appropriate government offices and his subordinates with respect
to the collection of energy tax.
3, Banks duly accredited by the Commissioner with respect to receipts of
payments of internal revenue taxes authorized to be made thru banks. These
are referred to as authorized government depositary banks (AGDB).
OTHER AGENCIES TASKED WITH TAX COLLECTIONS OR TAX INCENTIVES

RELATED FUNCTIONS
Bureau of Customs
Board of Investments
wh
Philippine Economic Zone Authority

Local Government Tax Collecting Unit
fe
Fiscal Incentives Review Board
Bureau of Customs (BOC)

Aside from its regulatory functions, the Bureau of Customs is tasked to administer
collection of tariffs on imported articles and collection of the Value Added Tax on
importation. Together with the BIR, the BOC is under the supervision of the
Department of Finance.
The Bureau of Customs is headed by the Customs Commissioner and is assisted by

five Deputy Commissioners and 14 District Collectors.
Board of Investments (BOI)

The BOI is tasked to lead the promotion of investments in the Philippines by
assisting Filipinos and foreign investors to venture and prosper in desirable areas
of economic activities. It supervises the grant of tax incentives under the Omnibus
Investment Code. The BOI is an attached agency of the Department of Trade and
Industry (DTI).
The BOI is composed of five full-time governors, excluding the DTI secretary as its
chairman. The President of the Philippines shall appoint a vice chairman of the
board who shall act as the BOI’s managing head.
49

P Bee eet OE Baers
al elR Fe TA Baantnt Sse BO ne
%
and Tax Administration
Chapter 2 - Taxes, Tax Laws
5
Philippine Economic Zone Authority (P manufactyy,
oErA is created to promote investments In export-oriented
The
of functions, supervise t
industries in the Philippines and, among other myriads
rant of both fiscal and non-fiscal incentives. me .
: ae en fr,
PEZA registered enterprises enjoy tax holidays for PEZAatais also ached Ben
taxes. The
import and export taxes including local
of the DTI.
and is assisted by three depy,
The PEZA is headed by a director general
directors.
|
g Units
Local Government Tax Collectin
also imposed and collect Varioy
Provinces, municipalities, cities and barangays
alize their fiscal autonomy.
local taxes, fees and charges to ration
of BOI-registered or PEZA-registered enterprise

The special tax treatments
nts will be discussed unde
including the local taxes imposed by local governme
Local & Preferential Taxation by the same author.
Fiscal Incentive Review Board (FIRB)

ives}
FIRB has oversight function on the administration and grant of tax incent
the Investment Promotion Agencies and other government agencies administerir
tax incentives. It approves or disapproves grant of tax incentives to priva
entities and tax subsidies to government-owned and controlled corporation
government instrumentalities, government commissaries, state universities at.
colleges.
TAXPAYER CLASSIFICATION FOR PURPOSES OF TAX ADMINISTRATION

For purposes of effective and efficient tax administration, taxpayers are classifi
into:
1. Large taxpayers - under the supervision of the Large Taxpayer Service (L?
of the BIR National Office.
2. Non-large taxpayers - under the supervision of the respective Revel!
District Offices (RDOs) where the business trade or ‘
ci
isie situated
, pr
e or profession of the taxpaj f
Criteria for Large Taxpayers:

A. As to payment
1. Value Added Tax - At least P200,
2. Excise Tax - At least P1,000,000 000 per quarter for the preceding yea!
tax paid for the preceding year
50

Chapter 2 - Taxes, Tax Laws and Tax
Administration
3. Income Tax - At least P1,000,000 annual income tax paid for the preceding
year
4, Withholding Tax - At least P1,000,000 annual withholding tax payments or
remittances from all types of withholding taxes
5. Percentage tax - At least P200,000 percentage tax paid or payable per
quarter for the preceding year
6. Documentary stamp tax - At least P1,000,000 aggregate amount per year
B. As to financial conditions and results of operations

1. Gross receipts or sales - P1,000,000,000 total annual gross Sales or receipts
2. Net worth - P300,000,000 total net worth at the close of each calendar or
fiscal year
3. Gross purchases - P800,000,000 total annual purchases for the preceding
year
4. Top corporate taxpayer listed and published by the Securities and Exchange
Commission
Automatic classification of taxpayers as large taxpayers

The following taxpayers shall be automatically classified as large taxpayers upon
notice in writing by the CIR:
1, All branches of taxpayers under the Large Taxpayer's Service
2. Subsidiaries, affiliates, and entities of-conglomerates or group of companies of a
large taxpayer
3. Surviving company in case of merger or consolidation of a large taxpayer
4. A corporation that absorbs the operation or business in case of spin-off of any
large taxpayer
Corporation with an authorized capitalization of at least P300,000,000 registered
with the SEC
Multinational enterprises with an authorized capitalization or assigned capital of
at least P300,000,000
Publicly listed corporations
Universal, commercial, and foreign banks (the regular business unit and foreign
currency deposit unit shall be considered one taxpayer for purposes of classifying
them as large taxpayer)
9. Corporate taxpayers with at least P100,000,000 authorized capital in banking,
insurance, telecommunication, utilities, petroleum, tobacco, and alcohol industries
10. Corporate taxpayers engaged in the production of metallic minerals
51

{EEE
nistration
Chapter 2 - Taxes, Tax Laws and Tax Admi
Distinguish tax law from tax exemption law.
P
Enumerate the sources of tax laws.

Discuss the nature of Philippine tax law.
PWN
and rulings.
Distinguish tax laws, revenue regulations,
Define tax and identify its elements.
What are the classifications of taxes? Enumerate and provide examples for eg
Au
classification.
debt, special assessment, tariff, a,
7. Compare tax with revenue, license, toll,
penalty.
8. What isa tax system? What are its types?
Explain each.
9. Enumerate the principles of a sound tax system.
10. Enumerate the powers of the BIR.
11. Enumerate the non-delegated powers of the CIR.
Exercise Drill No. 1

Identify the type of tax that is described by the following: Tiny!
pe Meyrtoge
1. A consumption tax collected by non-VAT businesses Tor.
2. Tax 91: gratuitous transfer of property by a living Donors To
donoy
3. Tax that decreases in rates as the amount or value of yi buy Bt oe
the tax object increases
egresSNe ‘Oo
4
4. Tax collected upon persons who are not the statutory 1 § and
taxpayers lahat Tox
5 Tax ti:it is imposed based on the value of the tax object AG: t oran RY
Cl
\ wy
6. Tax io." general purpose —~ oN
Sue popes TAX
7. Tax ini posed by the national government a bo + AS
Kodional Tor
8 A tax on sin products or non-essential commodities
gin JExase Tox
9 Imposed on the gratuitous transfer of property upon
death Estate Tax
10. Tax on residents ofa country “ > aos i. 3 hrte
dercna! Ou CE IA
11. Tax that remains at flat rate re ardless
of th
floporrtur! fo
the tax object ° = Warne of
12. Tax which is collected on a per unit basis
13. Tax is collected upon the statutory taxpay SPOR Fo.
er “y . ty
14, Tax imposed to regulate businesses rect

V Aes lox
or professions ty d
re 1 ula
:
,
Po
OXare / ih velogt Jax
TE
52

Chapter 2 - Taxes, Tax Laws and Tax Administrati
on

Identify which item is described by the following:
1. Itrefers to all income collections of the government.
/2.__Itis an imposition for the support of the government.
3, Itisimposed upon land adjacent to public improvements. 5 Brewer
| 4. Itisimposed on imported and exported commodities. uh ts

It is a charge imposed prior to the commencement of |
on
business or exercise ofa profession. bispre

It is a post-activity rather than a pre-activity imposition.
|e|a|a]
It is subject to compensation or set-off.

It is a charge for the use of others’ property.
9. _Itis an imposition intended to discourage an act.
|10. Itarises from contracts rather than from law. ped
* Exercise Drill No. 3

Indicate the criteria for the selection of large taxpayer for each of the following:
As to payment Criteria
1. Value Added Tax
2. Excise Tax
3. Income Tax
4. Withholding Tax
5. Percentage Tax
6. Documentary Stamp Tax
As to conditions and operations
1. Gross receipts or sales
2. Net worth
3. Gross purchases
1. Which is not a source of tax law?
@ CHED regulations c. Judicial decisions
b. BIR Rulings d. Constitution
2. When tax is collected upon someone who is effectively reimbursed by another, the
tax is regarded as
a. direct. c. personal.
6) indirect. d. illegal.
3. All are ad valorem taxes, except one. Select the exception.
Poll tax c. Real property tax.
b. Estate tax d. Capital gains tax on real property capital asset
4. Taxation power can be used to destroy

a. asarevenue measure. (c\as an implement of police power.
b. even if the tax is invalid. d. when the State is in dire need of funds.
53

5. Which is nota characteristic of tax?

a. Itis an enforced contribution.
b. It is generally payable in money.
c.) Itis subject to assignment. .
y of the State having jurisdiction
d. Itis levied by the law-making bod
6. Taxas to source is classified as

a. Fiscal or regulatory (©) National or local tax
b. Direct or indirect tax d. Specific or ad valorem tax
7. Which of the following is a local tax?

Value added tax c. Documentary stamp tax
a.
d. Other percentage taxes
<b) Real property tax
as
8. Tax as to purpose is classified
Fiscal or regulatory c, National or local tax
Direct or indirect tax d. Specific or ad valorem tax
b.
d as
9. Taxas to incidence is classifie
Fiscal or regulatory c. National or local tax
a.
ct tax
Direct or indire d. Specific or ad valorem tax
(by
10. Which is not a nature of tax?
bution
a. Enforced proportional contri authority
orial juris diction of the taxing
b. Enforced within the territ
c. Levied by the lawmaking body
@ Generally payable in kind
erred to as
Tax es that can not be shifted by the statutory taxpayer are ref
11. taxes.
(a) direct taxes. c. business
b. indirect taxes. d. personal taxes.
do not include
12. Tax classifications as to object
a. Poll tax Regulatory tax
b. Property tax d. Excise tax
13. Which is a local tax?

a. Donor’s tax c. Documentary stamp tax
(by Professional tax d. Excise tax
include
14. As to subject matter, taxes do not
a. Property tax c. Poll tax
(by Regulatory tax d. Excise tax
of an act, the enjoyment of aprivil

15. A tax that is imposed upon the performance
as
or the engagement ina profession is known
(Cjexcise tax.
a. income tax.
b. license. d. transfer tax.
54

chapter 2 - Taxes, Tax Laws and Tax Administration
tax?
16. Which is a national
qa. Real property tax c. Income tax
b. Community tax d. Professional tax
17. Which of the following distinguishes license from tax?

a. Unlimited in imposition c. Does not renders business illegal
b. Imposed for revenue d.Pre-activity in application
18. Which is correct?

a. Taxes may be subject to compensation.
b. Toll, being a demand of ownership, is exercised only by private entities.
c. Dacion en pago and cession in payment are applicable to taxation.
) Special assessment applies only when public improvement is made.
19: Tax as to determination of amount is classified as

Fiscal or regulatory c. National or local tax
oD
Direct or indirect tax d. Specific or ad valorem tax
20. Tax must not violate Constitutional and inherent limitation.

Tax must be uniform and equitable.
AMDOD>
Tax must be for public purpose.

Tax must be levied by the lawmaking body.
Tax must be proportionate in character.
Tax is generally payable in money.
Which of the above is/are not an essential characteristic ofa valid tax?
a. Allofthe above c. None, except F
b. All except F @) None of the above
21. Tax as to rates excludes
(a) Specific tax c. Mixed tax
b. Progressive tax d. Proportional tax
22. To limit the production of an environmentally harmful commodity, Congress
passed a law subjecting the sales of an environmentally unfriendly commodity to
a P10/kilo tax but a 5% tax is imposed on sales exceeding P100,000.
Which is incorrect?
a. The taxis a combination of an ad valorem tax and specific tax.
b. This is an example of a regulatory tax.
c This is a national tax.
(d}_ This is a local tax.
23. Which is not an excise tax?
a. Income tax c. Estate tax
@) Community tax d. Occupation tax
55

on
Chapter 2 - Taxes, Tax Laws and Tax Administrati
24. Which is an indirect tax?

(a) Value added tax c. Income tax
b. Donor’s tax d. Real property tax
25. Which is not an ad valorem tax?
a. Real property tax c. Income tax
\b.) Excise tax on cigar d. Donor’s tax
26. A tax that is imposed based on per unit or per head basis is known as
a. Proportional tax c. Ad valorem tax
(b) Specific tax d. Progressive tax
27. Mr. dela Cruz has a tax obligation to the government amounting to P80,000, Since
he is leaving the country, he entered into a contract with Mr. Garcia wherein Mr.p
shall pay the P80,000 tax in his behalf. On due date, Mr. Garcia failed to pay ty,
tax. The BIR sent a letter of demand to Mr. dela Cruz which he refused to pay.
Which of the following statements is correct?
a. The government cannot enforce collection charges against Mr. dela Cruz since
he has validly transferred his obligations to Mr. Garcia under the contract.
b. The government can no longer run after Mr. dela Cruz because he is already
outside the Philippine territory.
c. The government should wait until Mr. B becomes solvent again.
ds The government should force Mr. A to pay because taxes are non-assignable,
28. Philippine tax laws are, by nature,
a. political. c. political and civil.
(b) civil. _ d. penal and civil.
29. Motor vehicles tax is an example of
a. Property tax c. Income tax
(b) Privilege tax d. Indirect tax
30. Which of the following statements is correct?
a. The Marshall Doctrine is not used in practic
e since
b. An ex post facto tax law violates the constitution, it is unconstitutional |
(C) |
A tax bill personally drafted by the president Shall b
approval by congress. €come a law after, |
d. It is in the public interest that errors of Public offici
vant
government to limit cial .
government abuse. S should bind the
31. Who issues revenue regulations?

a} Department ofFinance c, Commissioner of Inte rnal Reve
b. Congress n
d. Commissioner of Cus toms =
56

32. Tax rulings are issued by the

a. Secretary of Finance c. Court of Tax Appeals
b. Supreme Court d) Commissioner of Internal Revenue
33. Which of the following is limited in application?

a. Tax laws c. Tax treaties
b. Revenue Regulations d, BIR Ruling
34, Which is not a source of tax law?

a. Judicial decisions c) Opinions of tax experts
b. Revenue regulations d. Tax treaties and ordinances
35, Which is not an element of tax?

a. Itmustbe for public purpose.
b. It must not violate Constitutional or inherent limitation.
€) Itmust be progressive by nature.
d. Itmust be uniform and equitable.
36. Tax as to purpose does not include

a. Revenue c. Regulatory
b. Sumptuary <d, Poll
of taxation are merged into the statutory

37. When the impact’ and incidence
taxpayer, the tax is known as
a. Personal tax c. Indirect tax
6) Direct tax d. National tax
38. Which of the following levy is fiscal or revenue by nature?
(@) Tax law geared to phase outa deficit balance of the government.
b. Tax law intended to prohibit gambling in the Philippines.
c. Tax law intended to protect local industries.
d. Tax law supporting the development ofa particular industry.
39. Tax as to object includes

a. Personal tax c. Excise tax
b. Property tax (d) All of these
40. Which is not an indirect tax?
a. Duties c. Excise tax
b. Impost (d) Personal tax
41. A tax that cannot be avoided is
(.) Direct tax c. Specific tax
b. Indirect tax d. Personal tax
42. Statement 1: Taxes are voluntary contributions to the government.

Statement 2: Taxes are mandatory contributions to the government.
57

- Taxes, Tax C Law
Laws and Tax Administration
Chapter 2
Which is correct?
a. Only statement 1 is correct.
b: Only statement 2 is correct.
c. Both statements are correct.
d. Neither statement is correct.
43. Which is an indirect tax?

(a) Other percentage tax c. Donor’s tax
b. Income tax d. Estate tax
44. Income tax is not a/an
a. Ad valorem tax
c, Revenue tax
b. Direct tax
(d.)Property tax
45. A transfer tax is not
a/an
(a.) Regressive tax
c. National tax
Ad valorem tax
d. Excise tax
Multiple Choice - Theo
ry: Part 2
1. Which is intended to
regulate conduct?
Penalty c. Police power
UD. License
d. Toll
2. Which is notan excise
tax?
a. Income tax (©)Personal tax
b. Business tax
d. Transfer tax
3. Which of the following do not rel
ate to tax?
a. Does not render business
illegal when not paid
b. Ari ses from law rather than fro
m contracts
Cc.) Intended to cover cost of reg
ulations
. Intended for public purpose
4. A levy from a property which derives some

improvement is
(@) Special assessment c. Taxation
b. Eminent domain d. Toll
5. A. Government revenue may
come from tax, license, to
B. Penalty may arise either from ll and Pe
law or contra cts. nalties.
Which is false?
a. Aonly c.AandB
b. Bonly (d)Neither A nor B
58

6. What distinguishes tax from license?

a. Taxisaregulatory measure.
b. Tax isa demand of ownership.
c. Taxarises from contract.
@) Taxis a post-activity imposition.
7, Which of the following distinguishes license from tax?
qa. Itis imposed under taxation power.
b. Itisacharge for other's property.
(c) Non-compliance to it will render businesses illegal.
d. Itis generally payable in money.
8. The amount imposed is based on the value of the property

a. Eminent domain Toll
b. License d. Special assessment
9. Toll exhibits all of the following characteristics, except one. Which is the
exception?
a. Demand of ownership
b. Compensation for the use of another's property
c. Maybe imposed by private individuals
@ Levied for the support of the government
10. Which of the following is incorrect?

a. The collected tax is referred to as revenue.
(6) Tax is the sole source of government revenue,
ion.
c. License is imposed before commencement of a business or profess
d. Debt can be subject to compensation or set-off.
11. What distinguishes debt from tax?

>) Arises from contract c. Non-payment will lead to imprisonment
Never drawsinterest d. Generally payable in money
12. Debt as compared to tax

a. Itisa demand of ownership.
b. Itis not assignable.
©) It will not cause imprisonment when not paid.
d. Itis generally payable in money.
a. Tax may be unlimited in amount.
b. Non-payment of license renders the business illegal.
c. Special assessment is not a liability of the person owning the property.
real right attaching
@ Special assessment can be imposed on building and other
or pertaining to land.
59

eo
2]
:
stration
3 - Taxes, Tax Laws and Tax Admini
|
\
Chapter
yr
not include
14. Tax as to subject matter does
) 4. Real property tax Cc. Excise tax
b. Personal tax (d} Regulatory tax

1. Which is not an application ofa principle ofa sound tax system?
a. Taxes should adjust based on government needs.
b. Taxation should be progressive.
c. Taxation should encourage convenient compliance.
(d) None of these
2. The Commissioner of Internal Revenue is not authorized to

a. interpret the provisions of the National Internal Revenue Code
b) promulgate Revenue Regulations.
c. terminate an accounting period.
d. prescribe presumptive gross receipts.
Which is not a power of the Commissioner of Internal Revenue?

a. To change tax periods of taxpayers
b. To refund internal revenue taxes
© To prescribe assessed value of real properties
d. To inquire into bank deposits only under certain cases
The principles of a sound tax system exclude

‘a, Economic efficiency c. Theoretical justice
b. Fiscal adequacy d. Administrative feasibility
Which of the following best describes the effect of tax condonation?
(a} It only covers the unpaid balance of a tax liability.
b. It is conditional on the taxpayer paying some portion of the unpaid tax.
c. It generally applies to all taxpayers.
d. All ofthese
By which principle ofa sound tax system is the elasticity in tax rates is justified?
a. Theoretical justice c. Administrative feasibility
(Bb) Fiscal adequacy d. All of these
Violation of this principle will make a tax law invalid

a. Fiscal adequacy c. Administrative feasibility
(B:) Theoretical justice d. Economic consistency
Which of the following is not an application of the lifeblood doctri
ne?
a. The government has the right to select the object of taxation "
b. Taxation is the rule; exemption is the exception,
c. Claim for exemption is strictly construed against the taxpa
(a) None of these yer.
60

9, Which is true with tax amnesty?

a. Itis unconditional.
b) It covers both criminal and civil liability of the taxpayer.
c, Itapplies for past and future non-compliance.
d. All of these
10. Which one of the following is the BIR not empowered to do?
a. Assess national taxes
b. Collect income, business and transfer taxes
(C.) Assess and collect local taxes
d. Enforce forfeitures, penalties and fines
11. Which principle demands that ax should be just, reasonable, and fair?
(a) Theoretical justice c. Administrative feasibility
b. Fiscal adequacy d. Economic consistency
12, Which among the following powers of the Commissioner of Internal Revenue can
be delegated?
@ The power to conduct inventory surveillance
. The power to recommend promulgation of revenue regulations.
c. The power to issue rulings of first impression.
d. The power to reverse a ruling, amend or modify an existing ruling.
13. The Commissioner of Internal Revenue is not empowered to

a. Make or amend a tax return for and in behalf of the taxpayer.
of persons
b. Obtain information and to summon, examine, and take testimony
to effect tax collections.
c. Compromise tax liabilities of taxpayers.
@> Grant amnesty for erring taxpayers.
14. Which of the following may tax exemption come from?

a. Contract c. Law
b. Constitution (a) All of these
15. Exemption based upon which of the following is repealable?

a. Contract (c)Law
b. Constitution d. None of these
16. Select the incorrect statement regarding tax amnesty and condonation.
tax assessed.
a. In tax amnesty, violators are required to pay a portion of the
d, the taxpayer
b. When the remaining unpaid portion of the tax is condone
;
cannot ask for refund for the balance already paid.
.
c. Tax amnesty operates as a general pardon and is rarely available
tax; hence, the
d. Tax condonation operates on the whole balance of the assessed
taxpayer can ask for refund for the paid portion of the tax.
61

inistration
Chapter 2 - Taxes, Tax Laws and Tax Adm
the Commissioner of Internal Revenue?

vV' a?
. .
17. Which of the following is a power of

a. Assessment and collection of taxes
and fines
b. Enforcement of all forfeitures, penalties,
(c)) Interpretation of the provisions of the NIRC ry and police powe.,
d. Giving to and administering the superviso
effect
conferred by the NIRC and other laws
18. The Commissioner of Internal Revenue can

delegate the power to
@) refund or credit internal revenue tax. a
the Secretary of Finance. 7
b. recommend rules and regulations to articles,
establishments of excisable
c. assign and re-assign revenue officer to
d. compromise or abate tax liability.
19. The BIR is under the supervision of

a. the Bureau of Customs. (c)the Department of Finance.
b. the President. ‘d. Congress.
20. As to tax payments measures, which of the following threshold for the
qualification as large taxpayer is incorrect?
a. Annual income tax payments of P1M
i) (6) Annual value added tax payments of P1M
A c. Quarterly percentage tax payments of P200,000
* d. Annual documentary stamp tax of P1M
21. Who is nota large taxpayer?

a. Mining companies c. Banks with P120M authorized capital
b. Listed companies (d)None of these
22. In terms of financial measures, which of the following threshold

for qualification
as large taxpayers is incorrect?
a. Gross receipts exceeding P1B
b. Net worth exceeding P300M
c. Gross purchases exceeding P800M
(d@) Gross sales exceeding P1.5B
62

¥ Iction to Income
Cha! Tay
CHAPTER 5
INTRODUCTION TO INCOME TAXATION
TT
Chapter Overview and Objectives esse SST S

eee er nanan naananaeeaaswaaamaaaasaassenneenens
O On Renee enw eeen nn nnanan
- dene ceee nent een en ene ARERR ANA
types of taxpayers.
After this chapter, readers are expected to comprehend and demonstrate
knowledge on the following:
1. The concept of gross income
2. The types of income taxpayers
3, The general rules in income taxation
4. The income tax situs rules
THE CONCEPT OF INCOME

Why is income subject to tax?
Income is regarded as the best measure of taxpayers’ ability to pay tax. It is an
excellent object of taxation in the allocation of government costs.
What is income for taxation purposes?

The tax concept of income is simply referred to as “gross income” under the NIRC.
A taxable item of income is referred to as an “item of gross income” or “inclusion in
gross income”.
Gross income simply means taxable income in layman's term. Under the NIRC
however, the term “taxable income” refers to certain items of gross income less
deductions and personal exemptions allowable by law. Technically, gross income
is broader to pertain to any income that can be subjected to income tax.
Gross income\is broadly defined as any inflow of wealth to the taxpayer from
whatever source, lega l that increases net worth. It includes income from
or illegal,
employment, trade, business or exercise of profession, income from properties,
and other sources such as dealings in properties and other regular or casual
transactions.
ELEMENTS OF GROSS INCOME

1. Itisareturn on capital that increases net worth.
2. Itis arealized benefit.
3. It is not exempted by law, contract, or treaty.
63
Mere,

Chapter 3 - Introduction to Income Tax
RETURN ON CAPITAL
on wealth 9,
Capital means any wealth or property. Gross income is a return
property that increases the taxpayer’s net worth.
Illustration
ABC purchased goods for P300 and sold them for P500. The P500 consideration can bh.
analyzed as follows:
Selling price (total consideration received) P 500 Total return’ jekot

Cost (value of inventory forgone) ___300 Return of capital 7
Mark-up (gross income) P__200 Return on capital “Y°
The return on capital that increases
net worth is income subject to income tax,
Return of capital merely maintains net worth; hence, it is not taxable. An
improvement in net worth indicates an ability to pay tax.
Capital items deemed with infinite value
There are capital items that have infinite value and are incapable of pecuniary
valuation. Anything received as compensation for their loss is deemed a return of
capital. ee TT aes
Examples:
1. Life
2. Health
3. Human reputation
Life ,
The value of life is immeasur
byable
money. Under Sec. 32 of the NIRC, the
proceeds of life insurance policies paid to the heirs or beneficiaries upon death of
the insured, whether in a single sum or otherwise, are exempt from income
tax.
The proceeds ofa life insurance contract collected by an employer as
a beneficiary
from the life insurance of an officer or any person directly interested with
his
trade are likewise exempt. These proceeds are viewe
d as advanced recovery of
future loss. ~ ie
VS However, the following are taxable

taxable return
return onon capit
ca al from insurance policies:
a. Any excess amount received over premiums paid by the insu
red upon
surrender or maturity of the policy (i.e. the insured outlives
the policy.)
b. Gain realized by the insured from the assignment or sale of his
insurance
policy
x c. Interest income from the unpaid balance of the proceeds of the policy
d. Any excess of the proceeds received over the acquisition costs and premi
um
payments by an assignee ofa life insurance policy
64

Health
Any compensation received in consideration for the loss of health such as
compensation for personal injuries or tortuous acts is deemed a return
of capital.
Human Reputation
The value of one’s reputation cannot be t measured financially. Any indemnity
return of capital exempt
received as compensation for its impairmen is deemed a setlaetin hie iron
from income tax.
Examples include moral damages received from:
a, Oral defamation or slander
b, Alienation of affection
c. Breach of promise to marry
Recovery of lost capital vs. Recovery of lost profits

in net worth while the loss of profits does
of capital results in decrease
The loss
not decrease net worth. The recovery of lost capital merely maintains net worth
e
the recovery
whil of
of lost profits increases net worth. Therefore, the recovery
returnson capital.
is a it
lost prof
ry
veprofi
of lost
Taxable reco ts _,
The recovery of lost profits through insurance, indemnity contracts, or legal suits
constitutes a taxable return on capital.
+ The following are taxable recoveries of lost profits:

a. Proceeds of crop or livestock insurance
b. Guarantee payments
c. Indemnity received from patent infringement suit
~ Illustration 1
Mang Reyes insured his strawberry crop in a P200,000 crop insurance coverage
against calamities. The crop was eventually destroyed by an unusual frost. Mang Reyes
was paid the P200,000 insurance proceeds.
The P200,000 proceeds which is a reimbursement for the lost value of the future harvest,
is an item of gross income. The yalue of the lost crops is, in effect, realized not through
actual harvest but through the insurance contract.
Illustration 2
Mr. Ramos purchased a franchise. The franchisor guaranteed an annual franchise
income of P100,000 to Mr. Ramos. In the first year of operation, Mr. Ramos’outlet only
earned P60,000. The franchisor paid the P40,000 difference to Mr. Ramos.
65

1: Chapter 3 - Introduction to Income Tax
The P40,000 guarantee payment is not a gratuity but a recovery of lost profit
for Mr
Ramos; hence, subject to income tax. Mr. Ramos shall report P100,000
. as franchis,
hise
income.
Illustration 3
Davao Crocodile Inc. experienced an unusual decline in its income after a competito,
copied its patented invention. Davao Crocodile sued the competitor
for paten,
infringement and was awarded an indemnity of P3,000,000.
The P3,000,000 indemnity is a compensation for the income not realize

d by Davap
Crocodile due to the patent infringement. The same is an item of gross income.
The recovery of lost income or profits is not intended to compensate for the loss of
capital. It is as good as realization of income; hence, it is an item of gross income.
REALIZED BENEFIT
What is meant by realized benefit?
The “benefit” concept
The term “benefit” means any form of advantage derived by the taxpayer. There is
benefit when there is an increa in se
the net worth of the taxpa Anyer.
increase in
net worth occurs when one receives income, donation or inheritance.
- The following are not benefits, hence, not taxable:
“A
a. Receipt of a loan - properties increase but obligations also increase resulting

H
in an offsetting effect in net worth.

b. Discovery of lost properties - under the law, the finder has an obligation
to
return the same to the owner.
c. Receipt of money or property to be held.in trust for, or
to be remitted to,
another person.
If the taxpayer is entitled to keep for his account portion of a receipt, only that
portion is a benefit. a
Illustration
1. An employee was granted P20,000 transportation
advance. He liquidated P18,000
transportation expenses and was allowed by his employer to keep the P2,000.
Only the P2,000 retained by the employee is considered income
since this was the
extent he was benefited. (RR2-98)
2. A security agency receives P120,000 from clients, P100,000 of
which is for the
salaries of security guards. Under RMC 39-2007, only the P20,000
attributable t
the agency is considered income of the agency since it is the extent it is benefi
ted
The P100,000 pertaining to salaries of security guards is recognized by
the agen
as.a liability upon receipt.
66

The “realized” concept

The term realized means earned. It requires that there is a degree of undertaking
or sacrifice from the taxpayer to be entitled of
the benefit.
Requisites ofa realized benefit:
1, There must be an exchange transaction.
2. The transaction involves another entity.
3. Itincreases the net worth of the recipient.
Types of Transfers
x 1, Bilateral transfers or exchanges, such as: '41/) (<0) /sosmee Los)
a. Sale
b. Barter
These are referred to as “onerous transactions”.
+2. Unilateral transfers, such as: (12. ¢«*) Cophied dy fanceer 40k /
\
a. Succession- transfer of property upon death

b. Donation
These are also referred to as “gratuitous transactions”.
Under current usage, unilateral transfers are simply referred to as “transfers”

while bilateral transfers are called “exchanges.” Benefits derived from onerous
transactions are “earned _or realized”; hence, they are subject to income tax.
Benefits derived from gratuitous transactions are not realized because of the
absence of an earning process. Benefits derived from g gratuitous transactions are
subjectto transfer tax, not income tax.
3. Complex transactions
Complex transactions are partly gratuitous and partly onerous. These are
commonly referred to as “transfers for less than full and adequate consideration”.
The gratuitous portion of the transaction is subject to transfer tax while the
benefit from the onerous portion is subject to income tax.
Illustration
A taxpayer sold his car which was previously purchased for P100,000 and with a
current fair value of P180,000 for only P130,000.
gine transaction will be analyzed as follows:

Fair value P 180,000
} P50,000 - Subject to transfer tax
Selling price 130,000
} P30,000 - Subject to income tax
Cost 100,000
67 \

fe ‘
The excess of fair value over selling price is apratuily or pill whereas the excess Of the
selling price over the cost is an item of gross income,
What is meant by another entity?

Every person, natural or juridical, is an entity. Natural persons are living Persone
while juridical persons are those created by law such as partnerships and
corporations, An entity may be a ‘taxable entity or an{exempt entity, A taxable
item of gross income arises from transactions which involve another natural g,
juridical entity,
Gains or income derived between relatives, corporations, and between a partne;
and the partnership are taxable since it is made between separate entities
Likewise, the income between affiliated companies such as between a holding o;
parent company and its subsidiaries and between sister companies are taxable
because each corporation is a separate entity. This applies regardless of the
underlying economic relationship. |
However, the sales of a home office to its branch office are not taxable because
they pertain to one and the same taxable entity. Furthermore, the income between
businesses ofa proprietor should not be taxed since proprietorship businesses are
taxable upon the same owner. Note that a proprietorship business is nota
juridical entity.
, Benefits in the absence of transfers
“The increase in wealth of the taxpayer in the form of appreciation or increase
in
iat
the value of his properties or decrease in the value of his obligations in the
absence of a sale or barter transaction is not taxable.
These are referred to as unrealized gains or holding
gains because they have not
yet materialized in an exchange transaction.
J Examples of unrealized gains or holding gains:
a. Increase in value of investments in equity
or debt securities
b. Increase in value of real properties held
(revaluation increment)
c. Increase in value of foreign currencies held
or receivable
d. Decrease in value of foreign currency deno
minated debt by virtue of favorabl?
fluctuatio
n in exchange rates
e. Birth of animal offspring, accruals of fruits in
an orchard or growth of fart
vegetables
f. Increase in value of land due to the discovery
of mineral reserves
‘/ Rendering of services
The rendering of services for a consideration is an exchange but
does not cause!
loss of capital. Hence, thé Oren
entire consideration received from rendering of servic”

— repenen
an eee
such as.compensation income or service fees is

an item of gross income.
68

Tax
Chapter 3 - Introduction to Income
[lustration
Mr. Mendoza lists the following possible items of gross income:
Compensation income y P 200,000
Winnings from gambling~ 100,000
Increase in value ofinvestments 50,000
Appreciation in the value of land owned ™ 300,000
Debt of Saladin cancelled by creditors in
consideration for services he rendered to them “ 150,000
Debt of Saladin cancelled by his creditor out of affection »“ 250,000
Loan received froma bank * 400,000
The items of gross income are:

Compensation income \ P 200,000
Winnings from gambling 100,000
Debt of Mendoza forgiven in consideration
for service rendered to his creditors 150,000
Note:
1. Gains from gambling and the forgiveness of debt in consideration of services or properties
received are realized gains from exchanges.
2. The forgiveness of debt 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.
Basis of Exemption of Unrealized Income

Normally, taxpayers will have the ability to pay tax when their income
materializes in an exchange transaction since tax is generally payable in money.
This does not mean, however, that only income realized in cash is subject to tax.
Income realized in non-cash properties are, in effect, received in cash but the
taxpayer used the same to acquire the non-cash property. Income received in non-
cash considerations is taxable at the fair value_of
the property received. Moreover,
exempting income realized in non-cash considerations would open a wide avenue
for tax evasion since taxpayers can easily divert their income in the form of non-
cash consideration.
Mode of Receipt/Realization Benefits
\ Taxable items of income may be realized by the taxpayer in two ways:

1. Actual receipt
Actual receipt involves actual physical
taking of the income in the form of cash
or property.
2. Constructive receipt
Constructive receipt involves no actual physical taking of the income but the
taxpayer is effectively benefited.
69

Examples:
a. Offset of debt of the taxpayer in consideration for the sale of goods 9,
service
b. Deposit of the income to the taxpayer’s checking account
c. Matured detachable interest coupons on coupon bonds not yet encasheq
by the taxpayer
d. Increase in the capital ofa partner from the profit of the partnership
; Inflow of wealth without increase in net worth

L¥ The inflow of wealth to a person that does not increase his net worth is no
income due to the total absence of benefit.
Examples:
a. Receipt of property in trust
b. Borrowing of money under an obligation to return
In law, the proceeds of embezzlement or swindling where money is taken without

an original intention to return are considered as income because of thei increase | in
networthof the swindler.
NOT EXEMPTED BY LAW, CONTRACT, OR TREATY

An item of gross income is not exempted by the Constitution, law, contracts or
treaties from taxation.
~“ The following items of income are exempted by law from taxation; hence, they are
not considered items of gross income: kee
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
Items of gross income that are exempted from taxation are discussed extensively
under Exclusions in Gross Income in Chapter 8.
TYPES OF INCOME TAXPAYERS

A. Individuals
1. Citizen
Po a. Resident citizen
:J<- b. Non-resident citizen
70

\Chapter 3 - Introduction to Income Tax
Alien
a. Resident alien
. b. Non-resident alien
aD a. engaged in trade or business
erp b. not engaged in trade or business
3. Taxable estates and trusts
B. Corporations —
ol 1, Domestic corporation
FC, 2. \ Foreign corporation
ae a. Resident foreign corporation
pert aty b. Non-resident foreign § corpopration
INDIVIDUAL INCOME TAXPAYERS

Citizens § - fi Pay dino Lor
7
Under the Constitution, citizens are:

a. Those who are citizens of the Philippines at the time of adoption of the
Constitution on February 2, 1987
Those whose fathers or mothers are citizens of the Philippines
c. Those born before January 17, 1973 of Filipino mothers who elected Filipino
citizenship upon reaching the age of majority
d. Those who are naturalized in accordance with the law
Classification of citizens:
A. Resident citizen - A Filipino citizen residing in the Philippines
B. Non-resident citizen includes:
1. A citizen of the Philippines who establishes to the satisfaction of the
Commissioner the fact of his physical presence abroad with a definite
intention to reside therein;
A citizen of the Philippines who leaves the Philippines during the taxable
year to reside abroad, either as an 1 immigrant or for an employment on a
) permanent1t basis;
3. citizen
A of the Philippines who works and derives income from abroad
and whose employment thereat requires him to be physically present
abroad most of the time during the taxable year;
citizen
A who has been previously | considered as non-resident citizen and
who arrives in the Philippines at anytime during the taxable year to reside
permanently in the Philippines shall likewise be treated as a non-resident
citizen for the taxable year in which he arrives in the Philippines with
respect to his income derived from sources abroad until the date of his
arrival in the Philippines
71

y» Filipinos working in Philippine embassies or Philippine consulate offices are no,

considered non-resident citizens.
Alien
A. Resident alien - an individual who is residing
in the Philippines but is not,
citizen thereof, such as:
AL
y+
1. An alien who lives in the Philippines without definite intention as to hig |
stay; or
2. One who comes to the Philippines for a definite purpose which in its
nature would require an extended stay and to that end makes his home
temporarily in the Philippines, although it may be his intention at all times
to returnto his domicile abroad;
An alien who has acquired residence in the Philippines retains his status as
such until he abandons the same or actually departs from the Philippines.
Non-resident alien - an individual who is not residing in the Philippines and

who is not a citizen thereof
1. Non-resident aliens engaged in business (NRA-ETB)- aliens who stayed
edays during
than 180
in the Philippines for an aggregate period of mor
the year
Non-resident aliens not engaged in business (NRA-NETB) - include:
a. Aliens who come to the Philippines for a definite purpose which in its
nature may bepromptly accomplished; mai
b. Aliens who shall come to the Philippines and stay therein for an
_ aggregate period of not more than 180 days during the year
THE GENERAL CLASSIFICATION RULE FOR INDIVIDUALS

1. Intention pou nmuray pooh
The intention of the taxpayer regarding the nature of his stay within or
outside the Philippines shall determine his appropriate residency
classification. The taxpayer shall submit
to the CIR of the BIR documentary
proofs such as visas, work contracts and other documents indicating such
intention.
Documents purporting short term stay such as touristvisa shall not result it
the reclassification of the taxpayer’s normal residency. Documents purporting
a Jong-term stay such as immigration \ visa or working 1 visa for an extended
period would result. in the automatic reclassification of the taxpayers
residency.
72

Cnapter 3 - Introduction to Income Tax
Examples:
who come to the Philippines with a
. Analien is normally non-resident. An alien
tourist visa would still be classified as non-resident alien.
abroad under a tourist
bp. A citizen Is normally resident. A citizen who would go
visa would still be considered a resident citizen.
visa would be
. An alien who come to the Philippines with an immigration
reclassified as a resident alien upon his arrival.
b sas -year working visa wou Id be
“ y qd, A citizen who would go abroad with a two
reclassified as a non-resident citizen upon his departure.
2 Length of stay
ch d o c u m e n ta
prrooyf, the le ng th of tstay of the taxpayer is
In defaulted: of su e e
consider idered
4 4 Citizens staying abroad for a period of at least 183 days are cons
non-resident.
1 year as of the end of
sb. Aliens who stayed in the Philippines for more than
(fF the taxable year are considered resident.
not more than 1 year but
xc. Aliens who are staying in the Philippines for
s engaged in business.
more than 180 days are deemed non-resident alien
not more than 180 days are
4d. Aliens who stayed in the Philippines for
or business.
considered non-resident aliens not engaged in trade
Illustration 1
contracted by a Philippine television
Daniel Mario Aresmendi, a Mexican actor, was
arrived in the country on February 29,
company to do a project in the Philippines. He
upon completion of the project.
2021 and returned to Mexico three weeks later
an NRA-NETB in 2021. His stay is for a
Daniel Mario Aresmendi shall be classified as
accomplished immediately.
definite purpose which in its nature will be
Illustration 2
in the country on November 4, 2021 Mr.
Mamoud Jibril, a Libyan national, arrived
any working visa or work permit.
Jibril stayed in the Philippines since then without
NETB because he stayed in the
For the year 2021, Mr. Jibril would be considered an NRA- is still within the
Philippines for less than 180 days as of December 31, 2021. If he
as a resident alien for 2022.
Philippines until December 31, 2022, he will qualify
Illustration 3
his stay, Juan Miguel, a Filipino
Without any definite intention as to the nature of
March 15, 2020 to April 1,
citizen, left the Philippines and stayed abroad from
2021before returning to the Philippines.
183
citizen because he is absent for more than
For the year 2020, Juan is a non-resident for
en for the year 2021 because he is absent
days but he will be classified as resident citiz
less than 183 days in 2021.
73

Taxable Estates and Trusts

1. Estate |
Estate refers to the properties, rights, and obligations of a deceased pers,
not extinguished by his death. a
Estates under judicial settlement are treated as individual taxpayers, The |
estate is taxable on the income of the properties left by the decedent.
Estate, |
under extrajudicial settlement are exempt entities. The income of the |
properties of the estate under extrajudicial settlement is taxable to the heirs,
|
2. Trust
|
A trust is an arrangement whereby one person (grantor or trustor) transfers
(i.e. donates) property to another person (beneficiary), which will
be hejg
under the Management ofa third party (trustee or fiduciary).
A trust that is irrevocably designated by the grantor is treated in taxation as if

it is an individual taxpayer. The income of the property held in trust is taxable
to the trust. Trusts that are designated as revocable by the grantor are not
taxable entities and are not cons as id
individer edrs. The income of |
ual taxpaye
properties held under revocable trusts is taxable to the grantor Not to the |
trust.
|
j
When the trust agreement is silent as to revocabi
lity of the trust, the trust is |
presumed to be revocable ~~ .
——
CORPORATE INCOME TAXPAYERS

|
The term ‘corporation’ shall include
one person corporations (OPCs},
partnerships, no matter how created
or organized, joint-stock companies,
accounts, association, or insurance. _com joint
panies, except genera i
partnerships and a joint ventur
e or consortium forined—for-the
undertaking construction purpose of |
pro}
Hence, the term corporation includes

Pr
such as charitable institutions, coopofit-oriented and non-profit institutions,
eratives, government
instrumentalities, associations, league S, Civ agencies and |
ic or religious and other org
anizations.
Domestic Corporation
A domestic corporation |
is a corporation that is
Philippine laws. It includes one-person
corporations (OPC
by resident citizens in the Philippines. =
74

chapter 3 - Introduction to Income Tax
Foreign Corporation
A foreign corporation is one organized under a foreign law.
Types of foreign corporations:

operates and
1. Resident foreign corporation (RFC) - a foreign corporation which .
establishment (i.e.
conducts business in the Philippines through a permanent
a branch).
(NRFC) - a foreign corporation which does
2, Non-resident foreign corporation
not operate or conduct business in the Philippines
Note:
in the Philippines is a domestic corporation under the
1, A corporation that incorporates
Incorporation Test even if the same is controlled by foreigners.
branch is
2, A foreign corporation that transacts business with residents through a resident
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 transactions.
3, 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 transactions.
Special Corporations
Special corporations are domestic or foreign corporations which are subject to
special
————
tax rules or preferential tax rates.
OTHER CORPORATE TAXPAYERS

1. One-person corporation
A one-person corporation is a corporation with a single stockholder who may
_be anatural person, trust or an estate.
Banks and quasi-banks, preneed, trust, insurance, public and publicly-listed

companies, and non-chartered GOCCs may not incorporate as One-person
corporations. A natural person who is licensed to exercise a profession may
not organize as a One Person Corporation for the purpose of exercising such
profession except as otherwise provided under special laws.
Partnership
A partnership is a business organization owned by two or more persons who
contribute their industry or resources to a common fund for the purpose of
dividing the profits from the venture.
Types of partnership
a) General professional partnership (GPP) \ -» (yowle Ce bone
75

a
A GPP is a partnership formed by persons for the sole_purpose
exercising a common profession, no part of the income of which is derive, |
from engaging in any trade or business. 7
A GPP is not treated as a corporation and is not a taxable entity, It ig

exempt from income tax, but the partners are taxable in their_individya |
capacity with respect to their share in the income of the partnership. |
|
b) Business partnership
A business partnership is one formed for_profit. It is taxable as 3
corporation. |
Examples: ‘ |
a. A partnership between Atty. Mendoza, a lawyer, and Mark Santos, a,

accountant, to practice in taxation advisory services would be a busines;
partnership since the two partners are not. in the same profession.
A partnership between accountants Khim and Vhinson to venture into 2
beauty parlor would be a business partnership since the venture is not in |
practice of a common profession.
A partnership between accountants Juan and Miguel to venture into audi
services would be a general professional partnership.
d. Dentists Wency and Andy partnered to operate a dental clinic. During slack|
season, they are converting their clinic into a beauty saloon. Their partnership
’
is a business partnership since it is earning income from business.
3. Joint venture a“
A joint venture is a business undertaking for a particular| purpose. It may be

organized as a partnership
or a corporation.
=
Types of joint ventures:

a. Exempt joint ventures
Exempt joint ventures are 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.
Similar to a GPP, this type of joint venture is not treated as a corporatio

and is tax-exempt on its regular income, but their venturers are taxable
their share in the net income of the joint venture. |
b. Taxable joint ventures
All other joint ventures are taxable as corporations.
76

i
4. Co-ownership
of a property formed for the purpose of
A co-ownership is joint ownership
preserving the same and/or dividing its income.
ncome collectio
A co-ownership that is limited to property preservation or incom n
e on their
is not a taxable entity and is.exempt but the co-owners_are taxabl
share on the income of the co-owned property.
ned property
However, a co-ownership that reinvests the income of the co-owconsidered an
will be
to other income-producing properties or ventures
unregistered partnership taxable as a corporation.
THE GENERAL RULES IN INCOME TAXATION
Within ‘Without
Individual taxpayers Y
v
Resident citizen
Y
Non-resident citizen
v
Resident alien
vv
Non-resident alien
Corporate taxpayers
SN
Domestic corporation
SM
Resident foreign corporation

Non-resident foreign corporation
Lp Note:
resident citizens and domestic
1. Consistent with the territoriality rule, all taxpayers, except
within the Philippines.
corporations, are taxable only on income earned
e the Philippines._
2. The NIRC uses the term “without the Philippines” to mean outsid
The Residency and Citizenship Rule

such as resident
Taxpayers who are residents and citizens of the Philippines
s within
citizen and domestic corporations are taxable on all income from source
_country_of
and without the Philippines. A corporation is a citizen_of_the
n Philippines.
of the
incorporation. Thus, a domestic corporation is a1citize
Basis of the extraterritorial taxation

from the
Resident citizens and domestic corporations derive most of the benefits
of
Philippine government compared to all other classes of taxpayers by virtue
their proximity to the Philippine government.
77

Under our laws, resident citizens and domestic eae tclteeeeren '
privileges over aliens. Also, between resident and non-resi ie reside |
citizens have full access of the public services of our create renee a Y ar,
in the country. The taxation of foreign income of a cea domes
corporations properly reflects this difference in benefits ith the
Benefit Received Theory.
The extra-territorial tax treatment.of resident citizens and domestic Corporation
is also intended as a safety net to the potential loss of tax revenw’s rought by
situs relocation or the practice of executing or structuring transactions such thas
income will be realized abroad to avoid Philippine income taxes.
The issue of international double taxation 7 3

The rule on extraterritorial taxation on resident citizens and domest,
= corporations exposes these taxpayers to double taxation. However, the NIRC
allows a tax credit for taxes paid in foreign countries. In fact, resident citizens ang
domestic corporations pay minimal taxes in the Philippines on their foreign
income because of the tax credit.
SITUS OF INCOME
The situs of income is the place of taxation of inco
me. It is the jurisdiction that has
the authority to impo
tax upon
se the income.
Situs of income vs. source of income
Situs of income should be differ
entiated from the source of inc
pertains to theactivity or property ome. The latter
that prodthe uc inc
es ome.
Situs is important in determ
ining whether or not an
Philippines. Situs is partic income is taxable in the
ularly important to taxpay
within. However, it is also ers taxable Only on inc
important ome
purposes of the computation of to taxpayers taxable on glo
the foreign taxcredit, bal income for
INCOME SITUS RULES

;
<< Types of income
. Place of taxation (si
1. Interest income tus)
Debtor's residence
2. Royalties Where the intangible is empl
3. Rentincome oyed
Location of the property
4. Service income Place where the Se
rvice js rendered
78

[IJustration
A taxpayer had the following income:
Interest income from deposits in a foreign bank * P 300,000

Interest from domestic bonds 50,000
Royalties from books published in the Philippines - 100,000
Rent income from properties abroad (the lease
contracts were executed in the Philippines) _» 150,000
Professional fees for servicesrenderedinthe .
Philippines to non-resident clients (paid in US Dollars) | 400,000
Applying the situs rules, the following are the situs of the aforementioned income:
Within Without World total

Interest on foreign deposits P - P 300,000 P 300,000
Interest from domestic bonds 50,000 50,000
Royalties from books in the Philippines 100,000 100,000
Rent income on foreign properties - 150,000 150,000
Professional fees 400,000 400,000
Total P__550,000 P__450,000 P_ 1,000,000
Resident citizen or domestic corporation-taxpayers would be taxable on the world

income while other taxpayers would be taxable only on the income from within
the Philippines.
OTHER INCOME SITUS RULES
A. Gain on sale of properties
1. Personal property
Y Domestic securities - presumed earned within the Philippines
Y Other personal properties - earned in the place where the property is
sold .
2. Real property - earned where the property is located
Illustration
A taxpayer had the following income:
Gain on sale of domestic stocks P 200,000 ~

Gain on sale of foreign bonds : 100,000 ~
Gain on sale of a commercial lot in Baguio City 500,000 ~
Gain on sale of car in Ontario, Canada 200,000 ~
Gain on sale of machineries in Mexico, Pampanga 250,000 -
Interest income on foreign bonds 50,000
Dividends on domestic stocks 150,000 -
79

Bun
The following table summarizes the situs of the foregoing income:

Within Without
“Gain on sale of domestic stocks P 200,000 sm nn 60
Gain on sale of foreign bonds 00 ,
Gain on sale of commercial lot 500,0 ee
Gain on sale of car in Canada 00 ,
Gain on the sale of machineries 250,0 50.000
Interest on foreign bonds an ,
Dividends on domestic stocks .
Total P_1,100,000 P_
350,000
B. Dividend income from:
> 1. Domestic corporation - presumed earned within
!
2. Foreign corporation - »*\.~,—_-
a) Resident foreign corporation - depends on the pre-dominance test
The pre-dominance test
If the ratio of the Philippine gross income over the world gross
income of
the resident foreign corporation in the three-year p eriod
pre ced ing the
year of dividend declaration is: la
“a
JAA
s wD '
Ts oe
Y At_least_50%, the portion of the dividend

corres ponding to th.
Philippine gross income ratio is earned within
Y Less than 50%, the entire dividend
s received is earned abroad
b) Non-resident foreign corporation
- earned abroad
¢ Illustration
We In 2021, Sarah received a
P400,000 dividend income
Corporation had the follow fr om ABC Corporation. ABC
ing gross income in 2018
through 2020:
_ 2018 2019 2020
Philippines Pp 100,000 p 200,000 p 300,000
Abroad —_— 200,000 p 600,000
100,000 ——
Total Se
100,000 “400,000
P—-E_30
_30, 0000
00,0 0
If ABC Corporation is a:
sn: 1. Domestic corporation
or Tt
- t he entire P400,0
o
2&2. 00 is earned with
Non-resident foreign co in
i\
rporation
the P400,000
Gross Income Ratio =
P600,000/P1,000,
00
0 = 60%
Earned witi hin the Phili
Ppines (60% x P400,000
Earned without the Philippines )
Total dividends (40% x P400,000)
80

Supposing that the ratio is 49%, the entire P400,000 will be deemed earned
outside the Philippines.
c. Merchandising income ~ earned where the property

is sold
[IJustration
6
ce of gross income Amount

Goods purchased and sold within ~. P 200,000
Goods purchased within and sold abroad ~ 100,000
Goods purchased abroad and sold within 150,000
Goods purchased and sold abroad 350,000
The income earned within and without shall be:

Within Without
Purchased and sold within P 200,000
Purchased within and sold abroad P 100,000
Purchased abroad and sold within 150,000
Purchased abroad and sold abroad 350,000
Total . P__350,000 P 450,000
D. Manufacturing income - earned where the goods are manufactured and sold
Operations Remark
Production | Distribution
Within Within Total income from production and distribution
is earned within the Philippines
Without . Without Total income from production and distribution
is earned without the Philippines
Within Without Production income is earned within,
Distribution income is earned without
Without Within Distribution income is earned within,
Production income is earned without
_Illustration 1
Island, Inc. manufactures goods and sells them through its branch. Island bills its
branch at established market prices. Island reported the following gross income:
Home office _Branch ___Total__

Sales P 4,000,000 P 2,000,000 P 6,000,000
Cost of goods sold 2,400,000 1,200,000 3,600,000
Grossincome P_1600,000 P800,000 P_2,400,000
81

i Chapter 3 - Introduction to Income Tax
the situs of the gross income of Island under each of the

The following shows
following scenario:
Scenario _Home office Branch Within Without
No. 1 Philippines Philippines P 2,400,000 P 0
No. 2 Abroad Abroad 0 2,400,000
No.3 Philippines Abroad 1,600,000 00,000
No.4 Abroad _— Philippines 800,000 1,600,000
Note:
1. Both production and distribution are conducted by the same taxable ent ey ee ae .
2. The branch is not a separate taxable entity, but an integral part of Island, Inc.; hence, it,
income is taxable to Island Inc.
» Illustration2 « pact dass pt

Assuming production is conducted by a parent corporation and the distribution js
" conducted by its subsidiary corporation:
Parent
__ Total__
_Subsidiary. __
Sales P 4,000,000 P 2,000,000 P 6,000,000
} Cost of goods sold 2,400,000 1,200,000 3,600,000
be Gross income P_1,600,000 P__800,000 P_2,400,000
The gross income recognized by each corporation is taxable to each corporation
- because each corporation is a separate taxpayer. The situs of taxation shall be the
place
a
of sale without regard to the seller or the supplier.
The following are the situs of income for the parent corporation:
Scenario ___ Parent _Subsidiary__ Within Without
No.1 Philippines Philippines P 1,600,000 P -
No. 2 Abroad Abroad - 1,600,000
No.3 _ Philippines Abroad 1,600,000 -
No. 4 Abroad Philippines - 1,600,000
The following are the situs of income for the subsidiary corporation:
Scenario Parent Subsidiary Within Without
No. 1 Philippines Philippines P 800,000 P P
No. 2 Abroad Abroad: - 800,000
No.3 Philippines Abroad - 800,000
No. 4 Abroad Philippines . 800,000
Note toreaders: Vv (/
Readers are advised to master the situs rules as this have a significant effect
on your comprehension of advanced tax rules to be introduced in succeeding
chapters.
82

pter 3 - Introduction to Income Tax
Cha

—_—_
ons
Discussion Questi
Enumerate the characteristics of gross income.
What are capital items considered with infinite value? Enumerate.
FWD
When is income considered realized?

Distinguish exchange from transfer.
What is a complex transaction? How is it taxed?
What is a holding gain? Why is it exempt from taxation?
eo DNA
Compare actual receipt with constructive receipt.

Enumerate and explain the classifications of individual taxpayers.
What constitute a taxable estate and trust?
. Enumerate and explain the classifications of corporate taxpayers.
O&O
RR
. Discuss the taxability of each class of taxpayers.

KF
. Explain situs. Differentiate situs from source of income.

Re
nN
. What is the situs of the following income?

wo
—
Interest income
Service income
ange
Royalty income
Rental income
Gain on sale of movable property
Gain on sale of immovable property
"seme
Dividend income from domestic corporation

Dividend income from resident foreign corporation
Merchandising income
Exercise Drill No. 1: Return of capital and Return on capital

Indicate the amount representing return of capital or return on capital:
Return OF Return ON
____| Consideration For the loss of Capital Capital
L_1. P 1,000,000 Health F lsd ye Poo
| 2. | P 500,000 P 400,000 car P 2 ewe FIGR, Cle
3. P 300,000 | P 350,000 building | * -' «scp D
4. |_P 600,000 Income C P @spiwvu
9. P 1,200,000 Life r 1,00, UY j> 0
83

Exercise Drill No. 2: Income tax and transfer tax

Check the box where each of the following items is taxable:
Transaction Income tax Transfer tax

Barter of properties /
U1) |PN |r
Sale of goods
Rendering of services
Donation of properties
Transfer of properties from a
decedent to the heirs upon death
Transfer for less than full and
adequate consideration
Exercise Drill No. 3: The tax concept of income

Check the appropriate box whether the following are exempt or taxable:
Item Taxable Exem pt |
Winnings from gambling
|] OO YE
Income from swindling

Indemnity for moral damages
Harvested fruits from an orchard
| OT]
Compensation income
Interest income
Amount received by the insured in excess of
MI]
insurance premiums paid

Proceeds of life insurance received by the heirs
of the insured
Gain on sale of goods by the home office to its
branch
10. Gain on sale of goods and services between
relatives
11. Gain on sale of goods by a parent corporation to
a subsidiary corporation
12, Appreciation in the value of land
13. Birth of animal offspring
14. Income of a registered Barangay Micro-Business
Enterprise
15. Cancellation of debt out of gratuity of the
creditor
16. Cancellation of debt by the creditor in exchange
of services rendered by the debtor
17, Matured interest from coupon bonds ~
18. Receipt of bank loan
84
Scanned with C samScanner

Chapter 3 - Introduction to Income Tay
19. Sal
r 20._ PCSO or lotto winnings
Exercise Drill No. 4: Income taxpayer classification

Indicate the appropriate classification for each of the following taxpayers:
DC - Domestic corporation RC - Resident citizen
RFC - Resident foreign corporation NRC - Non-resident citizen
NRFC - Non-resident foreign corporation RA - Resident alien
NRA-ETB - Non-resident alien engaged
in trade or business
NRA-NETB - Non-resident alien not engaged in
trade or business
NT - Nota taxpayer
Person or Entity Classification

1. | A fat Mexican tourist Np -Drrie
|2. | Ahardworking overseas Filipino worker NRC
|3. | An expatriate employee PC
|4. | A Filipino who is privately employed in the
bo
Philippines ~~
5. | An unemployed Filipino residing in the Philippines KC
6. | A Chinese businessman who has his domicile in the <9
Philippines
for 6 months NRA - TTB
7. | A Japanese who married a beautiful Filipina and has RA
been residing in the Philippines for 2 years ,
8. | A 24 year Korean college student studying in the p I
Philippines .
9. | A corporation incorporated under Philippine law DC
10. | A foreign corporation doing business in the
Philippines RFC
11. | Trust designated by the donor as irrevocable b
12. | Trust designated by the donor as revocable NT
13. | A business partnership Dc
14, | A joint venture organized under a foreign law and is re EC
not operating in the Philippines
15. | An estate of a Filipino citizen judicially administered
|_| in Japan (VRC
16. | An estate ofa Filipino citizen extra-judicially Nt
|__| administered in the Philippines
17. | A taxable joint venture organized in the Philippines De
18. | A non-profit corporation organized in the pc
——] Philippines
85

i ill No. 5: General Income Tax Ru le ~ ‘aia

eee he bok that properly corresponds to the taxability of the following xPayerg,
Philippine
po Faxpayer income income |
1. | Non-resident citizen rire
2. | Resident alien
3. | Non-resident alien engaged in trade or ’
business >
4. | Resident foreign corporation
5. | Resident citizen < ~
6. | Non-resident alien not engaged in “
business
7. | Non-resident foreign corporation
8. | Domestic corporation Z
9. | Taxable trusts established by a Filipino YL
citizen in the Philippines -
10. | Taxable estate of a non-resident citizen i
judicially administered abroad
Exercise Drill No. 6: Location and situs of income nae

Compute how much is earned within and earned outside the
Philippines from each of
\ the following independent cases:
y/ [- Income description
J
Within Without
1. | Rim Gonzales earned P1 00,000
interest
| income; 40% of these were from non-
6D woo 49,000
resident debtors.
2. | A finance company earned
P1,000,000
royalties from a franchise; 40
% of these ifDOYO
were derived abroad. Alyy yw
3. | Ray Gatchiearned P100,0
mai? ro
00 rent from
OFWs from his apartment in
the US. H
also earned P40,000 rent fro :
m his ° ° a WO
Philippine condominium unit. \N dV
4. | Chester, a resident citizen, works
home >| 77 —----—+~§ —____
online and submits his output to clients.
He collected P100,000 service ld 9
fee from Ad, on
foreign clients and P20,000 from
at
resident clients. 0,0
pe
5. | Mark rendered audit Ser
vices to client in
Afghanistan for P500,000.
The services D
were paid in Afghanistan. An) /UY
| -
|
86

_————J
Income description
a Within Without
6. July has a store in a tourist park in
Baguio City, Philippines. He earned a
total of P40,000 gain from selling
souvenir items. 40% were from foreign
tourists.
Don Flores sold at a gain of P2,000,000 to
a client abroad a commercial building
located in Quezon City, Philippines.
John sold his stocks in a domestic
corporation to a foreign investor ata
gain of P50,000.
Villanueva received P20,000 dividends
from a domestic corporation and
¢ Wyo
P30,000 dividend income from a non- LO!
resident foreign corporation.
10. Andrew Johnson received P40,00
dividends from a resident foreign LN) xia
corporation; 60% of its historical income

is from the Philippines.
an. Abreeza, Inc. manufactures in the
Philippines and sells to unaffiliated y (MN
export clients. A total of P100,000 gross

income was earned during the period.
12. Marawi manufactures abroad and sells to
its Philippines branch at market prices.
Production cost abroad were P200,000.
Billings to branch totaled P300,000 while (SB jvY
branch sales totaled P450,000.
13. James Fernandez received P100,000
dividends from a resident foreign Lu OU
corporation which realized 40% of its
income in the Philippines.
14. Kevin received P20,000 dividend from a
non-resident foreign corporation.
RP,
15, Macahambus plant manufactures tables
0
and sells to resident clients. A total of
P400,000 gross income was realized
during the period.
87
‘Scan ned with CamScanner

Tax
Chapter 3 - Introduction to Income

involve a return on capital?
1. When paid for, which of the following items may
(a) House and lot c. Dignity
b. Life d. Health
Which is not a requisite of gross income?

a. Return on capital (¢)Exempted by law
b. Realized benefit d. Not exempted by law
Which is taxable item of income?

a. Increase in numbers of a herd of animals
b. Compensation for personal injuries
c. Moral damages
d.) Interest on moral damages
Which is not subject to income tax?
a) Donation c. Sales of goods
Sale of service d. Barter of goods
The total consideration received from the sale of service constitute

‘a, Return on capital c. Either a or b
b. Return of capital d. Both a and b
The total consideration received from the sale of goods at a gain represents
a. Return on capital c. Either a or b
b. Return of capital @. Both a and b
The total consideration received from the sale of goods at a loss represents
a. Return on capital c. Either a orb
b>) Return of capital d. Both aand b
Why is income subject to taxation?

a. Income is the most prevalent source of a taxpayer's wealth.
‘b.) Income is the best measure of taxpayers’ ability
c. Rich people tend to have more income than the to pay tax.
poor.
d. Any of these.
9. Income tax may be imposed for the following purposes, except

_a, To provide large amounts of revenues
b.) To limit corruption
c. To offset regressive sales and consumption taxes
d. To mitigate the evils arising from the inequalities in the distribution of incom
and wealth
88

10. Which is not an item of gross income because of the absence of an undertaking
from the taxpayer?
a. Proceeds ofa life insurance policy
Forgiveness of indebtedness as an act of gratuity
c. Revaluation surplus on properties
d. Service fees
11, Which is subject to income tax?

a. Proceeds of life insurance policy received by the family of the insured
(6, Excess of proceeds over the premiums paid received by the taxpayer
C. Life insurance proceeds received by the corporation from the insurance of a
deceased officer
d. None of these
12. Which of the following is exempted from income taxation because of the absence
of ability to pay?
a. Damages received from patent infringement suit
(b} Unrealized income from investments
c. Gain on sale of goods
d. Inheritance
13. Which of the following constitutes taxable income?

a. Return of premium on life insurance received by the insured
b. Moral damages received from slander
(©) Proceeds of crop insurance
d. Compensation for personal injury
14. Which is specifically exempted from income taxation by virtue of legal exemption?
(a) Minimum wage
b. Gain on sale of prohibited drugs
c. Unrealized gain
d. All ofthese
15. Which of the following is not a constructive receipt of income?
a. Forgiveness of indebtedness in consideration of service
b. Matured detachable interest coupons
c. Deposit of income to taxpayer’s bank accounts
Cash salary of an employee
16. Transfers for insufficient consideration are subject to
a Income tax c. Either a orb
b. Transfer tax (4)Both aorb
89
Pa

~ Multiple Choice - Theory: Part 2

1. Which of the following is not an income taxpayer classification?
a. Resident citizen c. Resident foreign corporation
b. Non-resident alien ‘d)General professional partnership
2. Aresident alien naturalized in accordance with Philippine laws isa
a) Resident citizen
b. Resident alien
c. Non-resident alien engaged in trade or business
d. Non-resident alien not engaged in trade or business
3. Whois nota resident alien?
a. An alien who stayed in the Philippines for more than two years.
<b) An alien who married and stayed in the Philippines for one year.
c. An alien who stayed in the Philippines for more than one year.
d. An alien who established his intention before the CIR to stay in the
Philippines for an extended period of time.
4. Which taxpayer is not a natural person?

a. Resident citizen
b.) Taxable estate
c. Non-resident alien engaged in trade or business
S. A Filipino who has been abroad for more than 183 days
is classified as a
a. Resident alien
b.
Non-resident alien
c)Non-resident citizen
d.Non-resident citizen not engaged in trade
or business
6. An alien who stayed less than one year in
the Philippines is classified as a nor:
resident alien not engaged in trade or
business if he stayed herein for less than
a) 180 days c. 183 days
1 year d. 2 years
7. An American who showed proof to th € sati
sfaction of the Commissioner
Internal Revenue of his intention to sta 6
y in the Philippines as an immigrant
classified asa
a. Resident citizen c. NRA- ETB
(Bb) Resident alien d. NRA - NETB
8. A Japanese who is staying in the Philippines
for 183 daysisa
a. Resident alien
b. Non-resident alien
‘c.) Non-resident alien engaged in trade or busin
SS ess
90

dq. Non-resident alien not engaged in trade or business
is a
A Canadian who is staying in the Philippines for more than one year
4.) Resident alien
p. Non-resident alien
or business
c. Non-resident alien engaged in trade
d. Non-resident alien not engaged
10. Acorporation incorporated according to Philippines laws is a
a) Domestic corporation _c. Non-resident corporation
b. Residentcorporation — d. De jure corporation
11. A foreign corporation which is not authorized to conduct business in the

Philippines is a
a. Domesticcorporation c.\Non-resident corporation
b. Resident corporation d. De jure corporation
12. Which is taxable on world income?

a. Resident corporation (c. Resident citizen
b. Non-resident citizen d. Resident alien
13. A foreign corporation which operates a branch in the Philippines is a

a. Domesticcorporation — c. Non-resident corporation
ib) Resident corporation _ d. De jure corporation
14. A partnership which dominantly operates business abroad is a
® Domestic corporation — c. Non-resident corporation
. Resident corporation __d. De jure corporation
15. Which is required to pay income tax?
a. Revocable trusts
b, Estates under extrajudicial settlement
c. Co-ownership
(@) Business partnership
16. Which is not an income taxpayer?
a. Non-resident foreign corporation
b. Non-resident alien not engaged in trade or business
(C) Joint venture engaged in energy operation pursuant to a service contract with
the government
d. Irrevocable trusts
17. Which of the following taxpayers is taxable only on income earned from the
Philippines?
Resident corporation c. Resident citizen
b. of these
Domestic corporation _ d. All
91
: - te, er ees

: eal . ned from sources withjhin th

18. All of the following are taxable only on income
ilippines, except eee
c. Non-resident corporation |
Resident alien‘
a. es . cornoration
b. Non-resident citizen d) Domestic corporatlo

1. The place of taxation is tore
a. Situs rule c. Territoriality
h
(b. Si
Situs d. Gross income
2. ‘esi
Genesis, a non-resident citizen, lent money to Shino, a hearse Chi
The ne The
indebtedness was collateralized by a property located in Japan. erest |
income is earned in
a. the Philippines. c. Japan. a.
b) China. d. Japan, China and the Philippines.
3. Which is an incorrect statement regarding situs of income?
a) Service income is earned in the domicile of the taxpayer.
b. Interest income is earned in the residence of the debtor.
c. Royalty is earned where the intangible is employed.
d. Rentis earned in the location of the property.
4.Which statement is correct regarding situs of income?
a. The gain on the sale of real property is earned in the location
of the property.
b. The gain on sale of any property is earned in the place
of sale.
c. Merchandising income is earned in the residence
of the proprietor.
d. Manufacturing income is earned in the place
of sale
S. Gains on the sale of goods manufa
ctured and sold by the taxpayer
Philippines is subject to tax within the
a. wherever sold. c. without the Philippines only.
b. if sold abroad only. (within the Philippines only.
6. Jan, a resident alien, bou
ght a car manufactured in
the sameata gain to Carla, the P hilippines and exported
a non-resident citizen.
a. The gain is subject to tax Which j
in the
b. The gain is subject to tax in th
e Philippines since
Philippines. the buyer is a citize
n of the
c. The gain is both subject
to tax in the Phili pp
-, Commodity involved is manu ines and abroad
since the
d)
factured in: the ; Phi lipp
The gain is taxable in the Philipp ines.
ines since it is sold
in the Philippines.
92

vq, Juan, a resident alien, and Pedro, a non-resident alien, executed a contract of sale
in Japan whereby Pedro shall purchase the lot owned by Juan in the Philippines.
juan gains P1,000,000 in the exchange.
Which is true?
a. The gain is exempt since the gain is derived outside the Philippines.
bp. The gain is not subject to Philippine tax since Juan is a resident alien.
c. The gain is subject to Philippine tax because Juan is a resident alien.
> The gain is subject to Philippine tax because the property is in the Philippines.
O
Multiple Choice - Problems
problem 3-1
" Rica paid P20,000 annual premium ona life insurance contract which would pay her
p1,000,000 in case of her death. After paying for 4 years, Rica assigned the policy to
Carlos for P120,000. Compute the return on capital.
‘¢. P40,000 ma~ 7D
q. P120,000
b. P80,000 d.P0
Problem 3-2
Sophia purchased a P1,500,000 life insurance policy for P100,000. During the year,
Sophia died and her heirs collected the entire proceeds. How much of the proceeds is
_ exempt from income tax?
a) P1,500,000 c. P100,000
b. P1,400,000 d.P0
Problem 3-3
Sean negotiated a P1,000,000 non-interest bearing promissory note to Candy. Candy
paid Sean P950,000. On due date, Sean paid Candy P1,000,000. Which is true?
a. Sean earned P50,000 return on capital
b, Candy earned P50,000 return on capital
c. Candy received P50,000 donation
d. Candy received P1,000,000 return of capital
Problem 3-4
Andrew received a total sum of P42,000 from his employer consisting of the following:
* P5,000 reimbursements for employer's expenses paid by Andrew
P15,000 payment of Andrew’s computer set purchased by the employer
* P22,000 monthly salary
Andrew's computer set cost him P12,000. Compute the total return on capital which
can be subjected to income tax.
a. P42,000 ‘c)P25,000 r
P37,000 “d. P22,000 Iv i iy ~ 12
93

Problem 3-5
Lake Sebu Company insured the life of its president for P2,000,000. A tot
al Of
P500,000 in premiums was paid before the president died. The company collecte
thy |
total proceeds.
Compute the return on capital.
a P 0 c. P500,000
b. P1,500,000 d. P 2,000,000
Problem 3-6
Melvin purchased the P1,000,000 life insurance policy of Ben for P120,000. Dan Paid
the P20,000 annual premiums on the policy for 4 years after which Ben died.
Compute the total return on capital for Melvin. (4

a. P1,000,000 c. P800,000
b. P880,000 d.P0
Problem 3-7
Carlos paid P20,000 annual premium for a P1,000,000 life insurance policy. After7
years, Carlos surrendered the policy and was paid by the insurance company
P200,000 which represents the cash surrender value of the policy.
Compute the return on capital.
a. P1,000,000 ‘c. P60,000 -
b. P860,000 d.P.0 :
Problem 3-8
Onyoc insured his newly constructed building costing P1,000,000.
Within a few days,
the building was totally destroyed by a fire. The insurance
company reimbursed
Onyoc P1,500,000, which represents the fair value of the
building.
Which statement is false?
a. P1,000,000 of the proceeds is a return of capital.
b. P500,000 of the proceeds is a return on capital.
c. P1,500,000 is a return of capital.
d. OnlyAandB
Problem 3-9
Teodoro is worried that his entire potato plantation which
to yield is expected
P400,000 income will be totally devastated by bad weather
conditions. He obtained4
P300,000 crop insurance cover for P30,000. Just before harvest, a rare frost totally
destroyed Teodoro’s plantation. The insurance company paid
={ > MAC)
the policy proceeds.
Compute the total recovery of loss profits to be recognized by Teodoro
as income.
a P 0 ‘c. P 300,000
b. P 100,000 d. P 370,000
94

problem 3-10
y arks which he considered to
Carl sued an unscrupulous person for derogator rem
have besmirched his reputation. The court awarded him an indemnity of P1,000,000
inclusive © f P200,000 reimbursement for Attorney’s fees and P100,000 exemplary
damages: Compute Carl's total return on capital.
, P1,000,000 c. P700,000
b. pg00,000 d)P0
problem 3-11 7
nted. He sued a
Nathan sells hot chili-flavored pancakes using a secret formula he pate
competing pancake house for alleged patent infringement and claimed a total
indemnity of P1,200,000:
P1,000,000 for loss of profits from loss of sales
P200,000 as Attorney’s fee reimbursement
If Nathan wins the case and is awarded the total indemnity, compute his total return of
capital.
a. P1,000,000 c. PO
b. P800,000 d. P 200,000
Problem 3-12
Johnson was one of the passengers of a van that fell offa ravine. Henson sued the bus
company and was awarded an indemnity of P800,000 for the following:
e 500,000 for the impairment of his health resulting to the amputation of his legs
e 200,000 for his loss of salaries during his hospitalization
e P100,000 for his Attorney’s fees
Compute Johnson’s return on capital.
a. P800,000 c..P200,000
b. P300,000 d. PO
Problem 3-13
Clyde received the following items during the year:
¢ P200,000 donation from a girlfriend
¢ P100,000 service fee from professional services
—
¢ P300,000 inheritance from his deceased father

* P100,000 income from illegal gambling +a
e
P50,000 gain on sale ofhis personalcar —
e
P250,000 profits from his bar restaurant
Compute the total income subject to income tax.
a P1,050,000 c. P550,000
b. P750,000 d.P500,000
95

Problem 3-14
Pines Corporation has a branch in Manila and a 70%-owned subsidiary, Choco Hill
Inc. in Davao. The following data shows Pines Corporation’s sales transactions durin, |
the year: . |
e Pines Corporation billed the Manila branch P1,500,000 for re Shippey
to the latter at a mark-up of 50% above acquisition cost. The branch store the
merchandise and did not operate during the year.
e Sold merchandise to unrelated parties at a gain of P800,000
Sold merchandise to Darrel Asuncion, Pines Corporation’s controlling stockholde,
at a gain of P100,000
e Sold various merchandise to Choco Hills, Inc. at a gain of P200,000
Compute the total income of Pines Corporation subject to income tax.

a. P1,700,000 (¢)P1,100,000
b. P1,200,000 d. P900,000
Problem 3-15
Jonathan is a supervisory employee of Koronadal Corporation. He had the following
items of gross income during the year:
e Jonathan was paid P800,000 salaries.
e Jonathan’s P100,000 personal loan was paid by Koronadal Corporation as reward
for his excellent performance.
Y e
Jonathan’s P50,000 advances to the company was paid by
executive officer as a gift.
Jonathan is entitled to excess representation and
Koronadal’ chie‘
transport ation allowances,

Jonathan received P200,000 total allowance out
of which P120,000 was disbursed
by him.
Compute Jonathan’s total income subject
to income tax.
(a) P980,000 c. P880,000
b. P900,000 d. P800,000
Problem 3-16
Sold his personal car which was pu

half of the car’s P500,000 current
fair value,
Sales of merchandise was P800,000
a
Jen’s house and lot which he acquired for

P1,500,000 in 2010
fair valu
e of P2,500,000. now have a cut rent
96

Chapter 3 - Introduction to Income Tay
Compute Jen’s total income subject to income

tax.
_ P1,800,000 c. P200,000
b, P1,550,000 d.P250,000
problem 3-17
A condominium home owner S association collects dues from unit holders and remits
the same to service providers on their behalf. Such dues include electricity, water,
security, and maintenance. The association charges unit holders an additional 2% of
their utility bills as service charge,
During the year, the association processed utility bills for unit holders totaling
p5,000,000.
How much taxable income is realized by the association?

a. P5,000,000 ( ¢)P100,000
b. P4,900,000 d.P 0
Problem 3-18
Kenjy used to bet in PCSO lotto. On June 3, 2014, he won the P20,000,000 jackpot prize
from the 6/45 lotto. One P20-ticket out of 10 bets took the prize. How much is Kenjy’s
total income subject to tax?
a. P20,000,000 c. P19,999,900
b. P19,999,990 d.P0
Problem 3-19
An American citizen has been staying in the Philippines since August 15, 2021. What
would be his taxpayer classification for the year 2021 and 2022, respectively?
a. Non-resident alien engaged in trade or business; resident alien
b. Non-resident alien not engaged in trade or business; resident citizen
c, Non-resident alien engaged in trade or business; resident citizen
(a) Non-resident alien not engaged in trade or business; resident alien
Problem 3-20
A citizen who left the Philippines on March 1, 2021 would be classified as
a. Non-resident for the year 2021.
(b, Resident citizen for the year 2021..
c. Non-resident for the year 2022..
d. Resident citizen for the year 2022.
Problem 3-21
An alien received P200,000 compensation income in the Philippines and P300,000
rental income from abroad. How much will be subject to Philippine income tax?
a. None c. P300,000
(b) P200,000 d. P500,000
97

|
-22 . |
i agit Geldent citizen is an international financier who earned ren 000 intere,
income from resident debtors and P300,000 from foreign debtors. How much |
subject to Philippine income tax? . |
a. None c. P400,000 |
b. P300,000 d: P700,000
Problem 3-23
Sarah has the following items of income:
Philippines Abroad
Business income P 200,000 P ee
Professional fees OD 50,
Compensation income 400, *
Rent income 300,000 200,000
Interest income eS _40,000-
1. Assuming Sarah is a resident citizen, compute the total income subject to
Philippine income tax.
a. P1,390,000 c. P1,030,000
b. P1,180,000 d. P1,420,000
2. Assuming Sarah is a resident alien, compute the total income subject to Philippine
income tax.
a. P1,420,000 c.P1,030,000
Ly 3.
b. P1,180,000 d. P390,000
Assuming Sarah is a resident cor poration, compute the total
income subject to
a. P1,420,000 c. P1,180,000
b. P1,030,000 d. P390,000
4. Assuming Sarah is a domestic corporation, compute
the total income subject to
a. P390,000 c. P1,180,000
b. P1,030,000 dP1,420,000
Case Problems
Case Problem 1
Jayson has the following income in 2021:
e P10,000 interest income from a non-resident
Japanese friend
P40,000 interest income from Philippine resid
ents
e P500,000 rent income from a commerc ial complex
located in the USA which is
leased to resident Filipinos
P200,000 rent income from a boarding
house in Baguio City, Philippines
98

Se~ ee
1 sit
p200,000 professional fees rendered to Chinese clients in Hong Kong

p300,000 salary from a resident employer
s
p100,000 gain from sale of merchandise imported and sold to Filipino resident
purchased locally and. sold during her
p50,000 gain on sale of merchandise
business travel in Hong Kong
p400,000 gain on sale of the boarding house located in Baguio City to a non-
resident buyer
Required:
Compute the total income earned from sources
1. Within the Philippines L040, py?
2. Outside the Philippines Iu v~
Case Problem 2
s
Darlene earns franchise fees from her Hot Burger franchise. He also deals in variou
properties. Johnny realized the following gains in 2021:
e 500,000 royalty fees from local Hot Burger outlets
e 200,000 royalty fees from foreign Hot Burger outlets
e 100,000 gain from sales of equipment to foreign franchisees
e P200,000 gain from sales of equipment to local franchisees
* P50,000 gains from sale of investment in domestic stocks to foreign investors
¢ 40,000 gains from sale of investments in foreign stocks to Filipino investors
Required:
Compute the total income earned from sources
a. Within the Philippines J yo 7v ve
b. Without the Philippines 3YO; UV
Case Problem 3 °
TNC Company manufactures wooden furniture for the local and export market. It has
a distribution outlet abroad which handles foreign sales. It bills all customers,
including the foreign outlet, 70% above manufacturing costs. The foreign outlet bills
its customers 100% above TNC Company's billing price. TNC Company reports
P3,400,000 in total sales, exclusive of sales to the foreign outlet. The foreign outlet
reports P2,720,000 total sales to customers.
Compute the manufacturing income respectively earned within and earned without
oe ulippines.
a. 960,000; P1,360,000 c. P840,000; P1,920,000
b. P1,400,000; P1,360,000 d. P840,000; P1,360,000
azo X 1wwfwe = 1 Ue
2) rela
~ + * — Jr => f7w@w
24% VO 14
. yuoo
“ Gin 70 /\ JV —
(SWr yor 99
Ka Sto D
| "yo —
[ Ae

Chapter 4 — Income Tax Schemes, Accounting Periods, Methods, and Reporting
CHAPTER 4
INCOME TAX SCHEMES, ACCOUNTING PERIODS,
ACCOUNTING METHODS, AND REPORTING
This chapter provides an overview of the income tax schemes under the NIRC, |
After this chapter, readers are expected to gain familiarization and demonstrat,
mastery of the following: |
a. Types of taxation schemes and their scope

b. Concept of accounting period and its types
c. Concept of accounting methods and their accounting procedures
d. Types of tax returns, their deadline and place of filing
INCOME TAXATION SCHEMES

There are three income taxation schemes under the NIRC:
a. Final income taxation
b. Capital gains taxation
c. Regular income taxation
An item of gross income is taxable in any of these tax schemes.
Item of gross income
Taxable to any one of
| | |
Final Income Capital Gains Regular Income
Taxation Taxation Taxation
Mutually exclusive coverage

The tax schemes are mutually exclusive. An item of
gross income that is subject"
tax in one scheme will not be taxed by the othe
r_schemes. Similarly, items °
income that are exempted in one scheme are not ta
xable by the other schemes.
100

Chap’ Tax Schemes, Accounting Periods, Methods, and Reporting
CLAS 'F ITEMS OF GROSS INCOME

as
Because of the different tax schemes, items of gross income can be classified
follows:
1, Gross income subject to final tax -
2. Gross income subject to capital gains tax “
3, Gross income subject to regular tax /
Readers are advised to master the coverage of both final income tax and capital
gains (aX. A thorough understanding of these exceptional tax treatments is very
essential to your mastery of Income Taxation.
FINAL INCOME TAXATION

Final income taxation is characterized by final taxes wherein full taxes are
withheld by the income payor at source. The recipient income taxpayer receives
law to remit the tax to
by ed
the incomenet of taxes. The payor is the one requir
the government. Consequently, the recipient income taxpayer does not need to file
income tax returns because the withheld tax constitutes the full tax due and are
therefore deemed final payments. This system of taxation is referred to as the final
withholding tax system.
Final taxation is applicable only on certain passive income listed by the law. Not
all items of passive income are subject to final tax.
Passive income Vs. active income
Passive incomes are earned with very minimal or even without active involvement
of the taxpayer in the earning process.
Examples of passive income:

1. Interest income from banks
2. Dividends from domestic corporations
3. Royalties
degree
Active or regular income arises from transactions requiring a considerable
of effort or undertaking from the taxpayer. It is the direct opposite of passive
income,
Examples of active income:
1. Compensation income
2. Business income
3. Professional income
Final income taxation will be discussed in detail in Chapter 5.

101

Chapter 4 — Income Tax Schemes, Accounting Periods, Methods, and Reporting,
CAPITAL GAINS TAXATION

Capital gains tax is imposed on the gain realized on the sale, exchange and oy,
dispositions of certain capital assets.
Capital assets are assets not_used in business, trade or profession. Capital aren.
are the opposites of ordinary assets. Ordinary assets are assets used In busing.
trade or profession such as inventory, supplies or property, plant and equipmen
Also, not all capital gains are subject to capital gains tax. Most of them are subj,
to regular income tax.
The NIRC identifies capital gains tax as a final tax but they are hybrid forms ¢
final taxes since it also employs self-assessment method. The taxpayer still fije
capital gains tax returns to report the gain and pay the tax to the governmen:
Capital gains taxation applies only to two types of capital assets: domestic stock,
and real property.
Capital gains taxation will be discussed in detail in Chapter 6.
REGULAR INCOME TAXATION

The regular income tax is the general rule in income taxation and covers all othe:
income such as:
1. Active income
2. Other income
v
a. Gains from dealings in properties, not subject to capital gains tax

b. Other passive income not subject to final tax
Items of gross income from these sources are valued or measured using 2
accounting method, accumulated over an accounting period, and reported to th:
government through an income tax return. Regular income taxation makes use¢
the self-assessment method.
ACCOUNTING PERIOD
Accounting period is the length of time over which income is me asured ane
reported.
Types of Accounting Periods

1. Regular accounting period - 12 months in length
a. Calendar
b. Fiscal
2. Short accounting period - less than 12 months
102

a”
Calendar year
The calendar accounting period starts from January 1 and ends December 31. This
accounting period is available to both corporate taxpayers and individual
taxpayers.
Under the NIRC, the calendar year shall be used when the:
1. taxpayer's annual accounting period is other than a fiscal year (i.e. longer than
12 months in length)
2, taxpayer has no annual accounting period (i.e. less than 12 months in length)
3. taxpayer does not keep books
4, taxpayer is an individual
Fiscal year
A fiscal accounting period is any 12-month period that ends on any day other than
December 31. The fiscal accounting period is available only to corporate income
taxpayers and is not allowed to individual income taxpayers.
Deadline of Filing the Income Tax Return

Under the NIRC, the return is due for filing on the fifteenth day of the fourth
month following the close of the taxable year of thetaxpayer. The regular tax due
is payable upon filing of the income tax return.
Illustration: Due date of the annual income return
1. Taxpayers under the calendar year must file their annual income tax return for
the current period not later than April 15 of the following year.
2. A corporate taxpayer with fiscal year ending June 30, 2021 must file its annual
income tax return not later than October15, 2021. yatta
INSTANCES OF SHORT ACCOUNTING PERIOD

1. Newly commenced business - The accounting period covers the date of the
start of the business until the designated year-end of the business.
Illustration
Palawan Inc. started business operation on June 30, 2021 and opted to use the
calendar year accounting period.
Palawan should file its first income tax return covering June 30 to December 31,
2021 for the year 2021.The return must be filed on or before April 15, 2022.
2. Dissolution of business - The accounting period covers the start of the
current year to the date ofdissolution of the business.
Illustration
Tawi-tawi Inc. is on the fiscal year accounting period ending every March 31. It
ceased business operation on August 15, 2021.
103
VP
Chapter 4 — Income Tax Schemes, Accounting Periods, Methods,
and Reporting
Tawi-tawi should file its last income tax return covering April 1
to August 15, 202)
Under the old NIRC, dissolving corporations shall file their return
within 39 days
from the cessation of activities or 30 days from the approv
al of merger by the
Securities and Exchange Commission in the case
of merger. (BPI vs. Cip C
144653, August 28, 2011). Hence, the return shall be filed on or before
Septembe,
15, 2021.
For individuals, the return shall be due on or before

April 15, 2022. There
requirement for early filing under the NIRC, is no
Change of accounting period by corporate taxpayers - The accounting

period covers the start of the previous accounting period up to the designated
year-end of the new accounting period. Note that BIR approval is required jp
changing an accounting period. It is not automatic.
Illustration 1
Effective February, ;
2021, Sulu Corporation changed its calendar accounting
period to a fiscal year ending every June 30.
Sulu Corporation shall file an adjustment return covering the income

from January 1
to June 30, 2021 on or before October 15, 2021.
Illustration 2
Effective August 2021, Zamboanga Company chan
ged its fiscal year accounting |
period ending every June 30 to the calendar year.
—
|
Zamboanga Company should file an adjustme
nt return covering July 1 to December |’
31, 2021 on or before April 15, 2022.
4. Death of the taxpayer - The accounting period covers the start of the
calendar year until the death of the
taxpayer,
Illustration
Mr. Regonald died on November 2, 2021.
The heirs of Mr. Regonald or his esta
te administra tors or executors shal
income tax return covering his income l file his last .
from Janua ry 1 to November 2, 2021. There is
No requirement for early filing in case of
death of taxpayers, Hence, the incom
return shall be filed on or before the usual deadli e tax
ne, April 15, 2022.
It must be noted that cut-off of income

because properties such as income
must be made at date point of death
accruing before deat
h are part of the estate of
the decedent in Estate Taxation while
those income accruing after death are
part thereof. Hence, it is mandatory not
for the accounting period of the tax
terminated exactly at the date of death. payer to be
104

chapter 4 — Income Tax Schemes, Accounting Periods, Methods, and Reporting
S, Termination of the accounting period of the taxpayer by the Commissioner

of Internal Revenue - The accounting period covers the start of the current
year until the date of the termination of the accounting period.
IJlustration
The accounting period of a taxpayer under the calendar year basis was terminated
by the CIR on August 2, 2021.
The taxpayer must file an income tax return covering January 1 to August 2, 2021.
The income tax return and the tax shall be due and payable immediately.
ACCOUNTING METHODS
Accounting methods are accounting techniques used to measure income.
Types of Accounting Methods

1. The general methods
a. Accrual basis
b. Cash basis
Installment and deferred payment method
YE oo bh
Percentage of completion method

Outright and spread-out method
Crop year basis
General Methods for income from sale of goods or service

1. Accrual basis
Under the accrual basis of accounting, income is recognized when earned
regardless of when received. Expense is recognized when incurred regardless
of when paid.
Income is said to have accrued when the right to receive is established or
when an enforceable right to secure payment is created against the
counterparty.
Cash basis
Under the cash basis of accounting, income is recognized when received and
expense is recognized when paid.
Tax and accounting concepts of accrual basis and cash basis distinguished
The financial accounting concept of accrual basis and cash basis are similar to
their tax counterparts, except only for the following tax rules:
1, Advanced income is taxable upon receipt.
Income received in advance is taxable upon receipt in pursuant to the
Lifeblood Doctrine and the Ability to Pay Theory. The subsequent taxation of
105
FP We ee. Po rm ern ne

advanced income in the period earned will expose the government to risk of
non-collection. This rule is applicable on the sale of services not on goods.
2. Prepaid expense is non-deductible. 2 him
Prepaid expenses are advanced payment for expenses of future taxable
periods. These are not deductible against gross income
in the year paid. They
are deducted against income in the future period they expire or are used in
the business, trade or profession of the taxpayer.
Normally, the expensing of prepayments does not properly reflect the income
of the taxpayer. It also contradicts the Lifeblood Doctrine as it effectively
defers the recognition of income.
3. Special tax accounting requirement must be followed.

There are cases where the tax law itself provides for a specific accounting
treatment of an income or expense. The specified method must be observed
even if it departs from the basis regularly employed by the taxpayer jp‘
keeping his books.
The tax accrual basis income is determined as follows:
Cash income
P XXX,XXX
Accrued (uncollected) income
XXX,XXX
Advanced income
—__XXX,XXX
Gross income
P__Xxx,xxx
The tax accrual basis expense is determined
as follows:
x
Cash expenses
Accrued (unpaid) expense Ps XXX,xxx
Amortization of prepayments and XXX,XXX
depreciation of capital expenditures
Deductions XXX.XXX
Pp XXX.XXX
————————————
The tax cash basis income is det

ermined as follows:
Cash income
Advanced income
.
P XXx,xxx
Gross income XXX,XXX £ ye
P—N
2 _Xx
XXx,.
XXxxx
X
The tax cash basis expense is determ
ined as follows:
Cash expenses
Amortization of prepayments and Pe XxX,xxx
deprec: iation of capital expenditures
Deductions XXXAL,XXAAN
xx
P xxx.xxx
106

jllustration ir
A taxpayer providing services reported the following in 2021 and 2022:
2021 2022
Collections from services rendered P 500,000 P- 800,000
Accrued income from services rendered 500,000 400,000
Collection from accrued income of 2021 - 470,000
Collection for services not yet rendered 300,000 200,000
Payment of expenses of current period 400,000 600,000
Accrued expenses 100,000 150,000
Payment of accrued expenses of 2021 - 100,000
Payment for expenses of the following year 200,000 300,000
Tax Accrual Basis
2021 2022
Cash income P 500,000 P 800,000
Accrued income 500,000 400,000
Collection for future services - advances 300,000 200,000
Total gross income P 1,300,000 P 1,400,000
Less: Deductions
Cash expenses P 400,000 P 600,000
Accrued expense 100,000 150,000
Amortization of 2021 prepaid expense - 200,000
Total deductions P 0,000 P 950,000
Net income P__ 800,000 P 450,000
Points to consider in converting GAAP Accrual Basis to Tax Accrual Basis
1. In accounting accrual basis, income is recognized when earned even if not yet received.
Advanced income is inherently not included in net income. For purposes of taxation,
advanced income is taxable. Hence, it must be added to accrual basis gross income.
2. In accounting, expense is recognized when accrued even if not yet paid. Prepaid expenses
are inherently not deducted. Hence, no adjustment for prepayments is necessary under
accrual basis.
Tax Cash Basis
2021 2022
Collection from services rendered P 500,000 P*1,270,000
Collection for future services - advances _300,000 _200,000
Total gross income P__800,000 P1,470,000
Less: Deductions
Payments of expenses P 400,000 P **700,000
Amortization of 2021 prepayments ________- 200,000
Total deductions P__400,000 P 900,000
Net income p__ 400,000 P 570,000
Note: P800,000 + P470,000 = P1,270,000*; P600,000 + P100,000 = P700,000**
107

Points to consider in converting GAAP cash basis to Tax cash basis staneeienats
1. Under the accounting cash basis, income is recognized when SE rote IS earney
Advanced income is inherently recognized as income. Hence, no adjustn s Cessary én 3
income. _. . .
2. Under accounting cash basis, expense is deducted when paid including Prepatd CXPenses
Hence, the deducted prepaid expenses must be reversed for purposes of taxation,
Sellers of goods . follows:

The gross income of taxpayers selling goods is determined as follows:
Sales P XXX,XXX
Less: Cost of goods sold XXX.XXX |
Gross income P XXX,XXX
The cost of sales is computed using the inventory method:
Beginning inventory P = XXX,XXX

Add: Purchases XXX,XXX
Total goods available for sale P = -XXX,XXX |
Less: Ending inventory XXX,XXX
Cost of goods sold P___XXX, XxX
The expensing of the purchase cost of goods does not properly and fairly reflect the
income of the taxpayer particularly when there are significant fluctuations in |
inventory levels between accounting periods. This could expose the taxpayer to risk of |
BIR assessment. The use of the accrual method is suggested but of course subject to |
practical and cost considerations. }
Hybrid basis
The hybrid basis is any combination of accrual basis, cash basis,
and/or other
methods of accounting. It is used when the taxpayer has several busine
sses which
employ different accounting methods.
Illustration
Mr. Roxas has two proprietorship businesses: a servic
e business which uses cash basis
and a trading business which uses accrual basis.
The gross income as determined by cash basis in the service busine

ss and the gross |
income as determined by the accrual basis in the trading business
are simply combined.
There is no requirement to measure the income of different
businesses under a single
accou nting method.
Sale of goods with extended payment terms

The sale of goods with extended payment terms may be
|
reported using the accrual |
basis, installment method, or deferred payment method.
108

installment method
Under the 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 real properties, only if their initial payment does not exceed 25% of
the selling price
3, Casual sale 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
Initial payment means total payments by the buyer, in cash or property, in the
taxable year the sale was made. The term “initial payment” is broader than
downpayment. It also includes the installment payments in the year of sale.
Selling price
Selling price means the entire amount for which the buyer is obligated to the
seller. It is computed as follows:
Cash received and/or receivable P = XXX,XXX

Fair market value of property received or receivable XXX,XXX
Mortgage or any indebtedness assumed by the buyer XXX,.XXX
Selling price P___ Xxx. Xxx
Contract price
The contract price is the amount receivable in cash or other property from the
buyer. It is usually the selling price in the absence of an agreement whereby the
debtor assumes indebtedness on the property.
Comprehensive Illustration
Malaybay Company, a car dealer, sold a machine with a tax basis of P1,200,000 on
installment on January 3, 2021 Malaybay received a P200,000 cash downpayment and
a P1,800,000 promissory note for the balance payable in six installments of P300,000
every July 3 and January 3 thereafter.
The selling price and gross profit on the sale is computed as follows:
Cash downpayment P 200,000
Notes receivables __1,800,000
Selling price P 2,000,000
Less: Tax basis of machine sold (__1.200,000)
Gross profit P__800,000
109

s, and Reporting
s, Accounting Periods, Method
Chapter 4 — Income Tax Scheme
Accrual basis
0,000 gross profit shall be reported a, er
Under the accrual basis, the entire P80 , ” Bg i
income in 2021, the year of sale.
Installment basis
od because it is a dealer o¢ a
Malaybay cannot readily use the installment meth . a . §
rather than a dealer of machineries. The sale of properties hie the Seller is |
dealer is referred to as a “casual sale.” Hence, the ratio of initial payment sha be
~ |
tested first.
The initial payment of Malaybay can be computed as follows:

Cash downpayment (January 3, 2021) P 200,000
First installment (July 3, 2021) ___300,000
Initial payment P__500,000
Ratio of initial payment (P500,000/P2,000,000) _25%
Malaybay can use the installment method. The contract price or the amount due shaj
be determined next. Since there is no mortgage assumed by the buyer, the selling price
is the contract price.
The gross profit will be reported in gross income throughout the installment period by .
the formula: (Collection/Contract price) x Gross profit
Malaybay shall recognize the following gross income:
At the date of sale: (P200K/P2M x P800,000) P___ 80,000

Upon every installment: (P300K/P2M x P800,000) P__120,000
If Malaybay is a dealer in machinery, it can avail of the installment method even if the
ratio of its initial payment over selling price exceeds 25% so long as the selling price
on the installment sale exceeds P1,000. )
With indebtedness assumed by the buyer

The application of the installment method will slightly vary when the buyer
assumes indebtedness on the property sold. '
In this case, the selling price is no longer the contract price. The contract price is
the residual amount after deducting the mortgage from the selling pric P
e. Thus,
Selling price P XXX »XXX
Less: Mortgage assumed by buyer XXX.XXx
Contract price P me e
i
110

_
Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting
JIJustration
On January 3, .2021, Tagaytay, Inc,, a real epr operty dealer, sold a lot costing P1,400,000
for P2,000,000 The lot was encumber d by a P1,000,000 mortgage which was
ment. The balance is due
assumed by the buyer. The buyer paid P200,000 downpay
over four installments of P200,000 every July 3 and January 3 thereafter.
The gross profit can be computed as follows:

Less: Tax basis of lot sold 1,400,000
Gross profit P_ _ 600,000
Note that dealers of real properties are subject to limitation on the use of installment
method. The ratio of initial payment shall be determined first.
January 3, 2021 cash downpayment P 200,000

July 3, 2021 installment 200,000
Initial payment P___400,000
Ratio of initial payment (P400,000/P2,000,000) 20%
Tagaytay is qualified to use the installment method. The contract price should be
determined next.
Less: Mortgage assumed by buyer 1,000,000
Contract price P_1,000,000
Alternatively, the contract price can be computed directly as follows:

Cash downpayment P 200,000
Collectible balance (P200,000 x 4 installments) 800,000
Contract price P_1,000.000
Tagaytay shall recognize the following gross income:

At the date of sale: (P200K/P1M x P600,000) P__120,000
Upon every installment: (P200K/P1M x P600,000) P__120,000
Indebtedness assumed exceeds tax basis of property sold

When the indebtedness assumed by the buyer exceeds the tax basis of the
property sold, the excess is an indirect receipt realized by the seller. This is an
indirect downpayment which must be added as part of the contract price and the
initial payment. Note also that under this condition, all collection from the contract
including the excess mortgage is a collection of income.
111

tinecg
2porrtin
Repo
Sch eme s, Acc oun | g
tin Period s, Methods,S and ] R
Chapter4 - Inc ome Tax |
ed as follows:
The contract price shall be comput
P XXX,XXX
Selling price __XXXXXX
Less: Mortgage assumed by buyer P XXX,XXX
Cash collectible ; —
. ive receipt —__ AA
Add: Excess indebtedness - constructive P P__XXXXXXAA
Contract price
|
The initial payment shall be computed as follows:
P XXX,XXX
sone
Downpayment
a
Installment in the year of sale
ortgage over tax basis
Excess of mortgag é SaxXXXX
_—__XX e :
Initial payment
Illustration th a tam bas

On July 1, 2021, a taxpayer made a casual sale of property with a lax basis of
which
P1,300,000 for P2,000,000. The property was subject to a P1,500,000 mortgage
was agreed to be assumed by the buyer. The buyer paid a P100,000 down payment
with the balance due in two installments of P200,000 on December 31, 2021 and July
1, 2022.
The gross profit on the sale is determined as follows:

Less: Tax basis of property sold 1,300,000
Gross profit P___700,000
!
The initial payment shall be determined first:
Downpayment P 100,000
December 31, 2021 installment
200,000
Excess mortgage (P1,500,000 - P1,300,000)
Initial payment 200,000
P 500,000 |
Ratio of initial payment (P500K/P2,000,000)
25%
The contract price shall be computed as:
!
Selling price
Less: Mortgage assumed by buyer P 2,000,000 |
Cash collectible 1 S00.
Pp oon Dod
Excess mortgage (P1,500,000 - P1,300,000
Contract price on) ET |
£00,000

canlubang shall recognize the following gross income:

At the date of saleCU (P200K down + P100K excess) P 300,000
upon receipt of first installment - 12/31/2021 200,000
Upon receipt of second installment — 7/1/2022
200,000
Total gross profit on the contract P__700,000
Deferred payment method

The deferred payment method js a variant of the accrual basis and is used in
reporting income when a non-interest bearing note is received as consideration in
asale.
Under the deferred payment method, the gross income is computed based on the
present value (discounted value) of a note receivable from the contract. The
discount interest on the note is amortized (i.e., spread) as interest income over the
installment term.
Illustration
On December 31, 2021, a taxpayer sold an office building costing P1,400,000 for
P2,000,000. The buyer made P1,000,000 downpayment and the balance, evidenced by
a note, is due in 2 annual installments of P500,000 every December 31 starting
December 31, 2022.
Note that the installment method cannot be allowed since the ratio of initial payment
is already 50% (P1,000,000/P2,000,000).
Assume the note is non-interest bearing but can be discounted at a local bank for
P900,000. Under the deferred payment method, the reportable gross income for each
year shall be:
2021 2022 2023
Cash downpayment P 1,000,000
Present value of the note 900,000
Less: Tax basis of the property __ 1,400,000
Gross income P__500,000
Interest income (P 1,000,000 - P900,000) P__50,000 P__50,000

Note:
1. The difference between the face value and the present value of the note, known as discount,
will not be recognized in gross income at the date of sale but will be deferred and
recognized as interest income.
The discount is amortized as interest income upon every collection on the balance of the
note as follows: P500,000 installment/P1,000,000 total note balance x P100,000 discount
In the case of interest-bearing notes, the use of the deferred payment method will
far the same result as the accrual basis of accounting.
113

Peri ods, Methods , and Repo rt;ing
Port
Sch eme s, Acc oun tin g
Chapter 4 - Income Tax
ion Contracts
Method for Constructio
The Percentage of Completion
: ed comp
the traeimatof on m . toy
inco
grossleti
Under the percentage of completion method, th
the percel
construction is reported based on e|
||
| |
construction project.
|
estim ating pro ject completion in practice, } ut
There are sever al meth ods of
by the NIRC. the
output method based on engineering survey is
prescribed
Illustration
Oro Construct ion mea any é acc ept ed a P5,000,000 fixed.py,
In 2021, Cagayan De truction activities. e
the de ails of its cons
construction contract. The following shows
2021 _ 2022 i
Pp3000,000 P 1,200,0
100%
00
Construction expenses P sae
Engineer's estimate of completion
The reportable gross income on construction will simply be computed as follows; '
2021 2022
Contract price P 5,000,000 P 5,000,000
Multiply by: % of completion 70% 100%
Construction revenue P 3,500,000 P 5,000,000
Less: Construction revenue in prior year - 3,500,000
Construction revenue this year P 3,500,000 P 1,500,000
Less: Expense during the year 3,000,000 1,200,000
Construction gross income P__500,000 P300,000
Income from Leasehold Improvement

Leasehold improvements are tangible improvements made by the
lessee to the
property of the lessor. Improvements will benefit the lessor
when their useful lif
extends beyond the lease term. This benefit is referred to
as income from leaseholii
improvement.
Under Revenue Regulations No. 2, the inco

me from leasehold improvement can?
reported using either of the following
met hod at the option of the taxpayer
1. Outright method :
ir market value of such buildings

improvements subject to the ¢
lease at the time when suc
improvements are completed. h buildings
2. Spread-out method
|

chapter 4 — Income Tax Schemes, Accounting Periods,
Methods, and Reporting
The depreciated value of
the leasehold improvemen
t is computed as:
Cost of improvement x Excess useful
life over lease term
Useful life of the improvement
[Ilustration
On January 1, 2021, Ivan lea
sed a ya cant lot to Greg under a 20-year lease contrac
Greg immediately constructed a t.
buil ding on the lot at a total cost of P4,500,000. The
building has useful life of 30
years,
Outright method
Under the plain wordings of Section 49 of Revenue Regulations
No. 2, Ivan shall
recognize the entire P4,500,000 fair value of the improvemen
t as gross income upon
completion of the improvement in 2021. This is not income in its totality, but this is
the amount referred to by the regulation,
Spread-out method
The depreciated value of the property at the termination of the
lease is the value of the
years of usage of the lessor. This can be computed by splitting the value of the
improvement as follows:
Years of
User usage Allocation Cost
Lessee 20 20/30 x P4,500,000 P 3,000,000
Lessor _10 10/30 x P4,500,000 1,500,000
Total _30 P_4,500,000
The P1,500,000 depreciated value of the improvement at the termin
ation of the lease
isan income from leasehold improvement by the lessor.
Under the spread-out method, Anderson shall spread the P1,500

,000 income over 20
periods or recognize an annual income of P75,000 from the leaseh
old improvement
from Year 2021 through Year 2040.
Note to Readers
It should be pointed out that this rule exists only in the regulation
and is absent in
the NIRC. Some taxpayers are questioning its validity pointing out
lack of legal
basis. However, it is fairly proper to consider the depreciated
value of the
improvement that remains to the lessor upon termination of the
lease as incom e
because it is an actual benefit to the lessor. These are, in effect,
additional rental
Consideration in kind.
However, the treatment specified by the outright metho
d is perceived as unjust
and abusive, and is an improper introduction of legislation.
115

i g
orttin
Periods, Methods, an d Reppor
Tax Sch eme s, Acc oun i
tin g
Chapter 4 — Income
ea onsho Uld be
ht lease
inati n Ot the
depre ciate d value of the impro vemen t at the terminatio
The
na
gross income unde
the proper value to be recognized as
methore uld cat
ee not have been
eS
is supported by the fact that the spread-out
This view
nner
oe,
an option if the outright method intended to tax the e ortable gross incgme:
improvement considering the huge disproportion 1n the rep
under the two options.
eeome “case ornare
The outright method as mandated by the regulation yO ee
ae fonsto tach vent
lessees pay the lessor rentals in the form of leaseho
sporteaticletia s
leasehold improvements made by lessees are treated as re is up N
In such cases, the fair value of the leasehold improvements
unquestionably income to the lessor for taxation purposes.
Agricultural or Farming Income .

Farming income is commonly measured using the cash basis or accrual basis, such
as in the following:
a. Animal husbandry
b. Short-term crops
Illustration .
Northern Barn had the following details of its agricultural activity during the year:
Total sales of fattened pigs, P1,000,000 on credit P 12,000,000

Increase in fair value of pig herd compared last year 2,700,000
NG
Total costs of farm feeds and supplies bought 7,000,000

Total costs of farm feeds and supplies used 6,800,000
Administrative and selling expenses 1,200,000
Northern Barn shall compute its net income using either
method as follows:
Accrual method Cash basis
Sales
P 12,000,000 P 11,000,000
Direct farm costs
6,800,000 6,800,000
Gross profit from operations
P 5,200,000 P 5,200,000
Less: administrative and selling expenses
1,200,000 00. 0
Net income
P_5.000,000 P4, yon
000,000
The accounting for long-term cro ps depend
s on the harvesting freque
a. Perennial crops ~ those that yi eld harves ncy:
ts through years
b. One-time crops - those that ar e harves
ted once after several
years
The initial farm development costs of

rer
chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting
harvest. The harvests are accounted for using cash basis or accrual basis. One-time
crops are accounted for using the crop year basis.
crop year basis

Under the 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.
[llustration
John de la Cruz, a farmer, plants a certain crop that takes more than a year to harvest.
Juan had the following data on his farming operations:
2021 2022 2023

Proceeds of harvest P - P 750,000 P1,000,000
1st cropping expenses 400,000 200,000 .
24 cropping expenses - 500,000 300,000
The reportable farming income using crop year method would be:
2021 2022 2023

Proceeds of harvest - P 750,000 P1,000,000
Less: Cropping expenses
Incurred last year 400,000 500,000
Incurred this year ___ 200,000 300,000
Farming gross income P_150,000 P200,000
Crop year basis is an accounting method and is not an accounting period.
Use of different accounting methods

Taxpayers with more than one type of business using different accounting
methods can consolidate the income reported using the different methods. There
is no need to restate the income to a common accounting method. However, the
methods applied to each business should be applied consistently from period to
period.
Change in Accounting Period

The change in accounting period requires prior BIR notice. The following
documentations are required:
1. A letter of request addressed to the RDO having jurisdiction over the place of
business of the taxpayer showing:
a. The original and the proposed new accounting period
b. The reason for desiring to change the accounting period
2. Certified true copy of the SEC approved amended by-laws showing change in
accounting period
117

3. Sworn statement of “non-forum shopping” stating that such request has not
been previously acted upon by the BIR National Office
4, Duly filed up BIR Form 1905
5. A sworn undertaking by an officer of the taxpayer to file a separate final o,
adjustment return for the period between the close of the original accountip
period and the date designated as the close of the new accounting period
The request for approval of the change in accounting period shall be filed at any
time not less than 60 days prior to the beginning of the new accounting perigg
The certification approving the adoption of a new accounting period must b,
released within 30 days from the date of receipt of the complete documentary
requirements.
TAX REPORTING
Types of Returns to the Government
1. Income tax returns - provide 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-withholding agent.
3. Information returns
Information Returns
Certain taxpayers are also required to file information returns. Information
returns do not involve any payment or withholding of tax but are essential to the
government in its tax mapping efforts and in its evaluation of tax compliance.
u
The non-filing of income tax returns, withholding tax returns, or information

returns is subject to penalties, fines, and or imprisonment.
MODE OF FILING INCOME TAX RETURNS

1. Manual Filing System
The traditional manual system of filing income tax return is by paper documents
where taxpayers fill up BIR forms to report income, expenses, or any declaratio"
required to be filed with the BIR.
Under the NIRC, the income tax return shall be filed to the following, ™
descending order of priority, within the revenue district office where the taxpay®’
is registered or required to register:
1. An authorized agent bank (AAB)
2. Revenue Collection Officer
3. Duly authorized city or municipal treasurer, if there is no BIR office in th
locality
118

alll
chapte
~ ster 4
‘
~ Income Tax Schemes, Account nea
Periods,~ KAatsh asic
Methods, an nr
uING
9 e-BIR Forms
the BIR introduced the e-BIR Forms with an offline or online version. Taxpayers
fill up their income tax returns in electronic spreadsheets without the need of
writing on papers returns, The system ensures completeness of data on the return
and is capable of online submission. If there are no penalties that require BIR
assessments, taxpayers would have to print a hard copy of the filled tax returns
and proceed directly to the bank for payment.
3, Electronic Filing and Payment System (eFPS)

The eFPS is a paperless tax filing system developed and maintained by the BIR.
Taxpayers file tax returns including attachments in electronic format and pay the
tax through the Internet.
Taxpayers mandated to use the eFPS

1. Large taxpayers duly notified by the BIR
2. Top 20,000 private corporations duly notified by the BIR
3. Top 5,000 individual taxpayers duly notified by the BIR
4, Taxpayers who wish to enter into contracts with government offices
5. Corporations with paid-up capital of P10,000,000
6. PEZA-registered entities and those located within Special Economic Zones
7. Government offices, in so far as remittance of withheld VAT and business tax
are concerned
8. Taxpayers included in the Taxpayer Account Management Program (TAMP)
9. Accredited importers, including prospective importers required to secure the
Importers Clearance Certificate (ICC) and Custom brokers Clearance
Certificate (BCC)
In case of unavailability of the eFPS during maintenance or instances of technical
errors, eFPS enrolled taxpayers may file manually.
Grouping of Taxpayers under EFPS

1. GroupA
a. Banking institutions
b. Insurance and pension funding
c. Non-bank financial intermediation
d. Activities auxiliary to financial intermediation
e. Construction
f. Water transport
8. Hotels and restaurants
h. Land transport
2. Group B
a. Manufacture and repair of furniture
b. Manufacture of basic metals
; Manufacture of chemicals, and chemical products
Manufacture of coke, refined petroleum, and fuel products
119

Chapter 4 = Income Tax Schemes, Accoun
ting Periods, Methods, and Reporting
“ - NE ZC
and apparatus
machinery, and
electrical machinery,
Manufacture of ‘electrical apy
f Manufacture of fabricated metal pregae
es
Manufacture of foods, products, and be ve rg et
+
h. Manufacture of machineries, and equipmen 1 instruments
ij, Manufacture of medical, precision, and opticé smi-trailers
j. Manufacture of motor vehicles, trailers and sem vnachinerieS
k, Manufacture of office, accounting, and Se eaicks
. Manufacture of other non-metallic mineral pro .
m. Manufacture of other transport equipment
hn. Manufacture of other wearing apparel
o. Manufacture of papers, and paper products ipment, and apparatus
p. Manufacture of radio, TV, and communication equip ,
q. Manufacture of rubber and plastic products
r. Manufacture of textiles
s. Manufacture of tobacco products
t. Manufacture of wood and wood products
ue Manufacturing N.E.C.
v. Metallic ore mining
w. Non-metallic mining and quarrying
3. Group C
a. Retail sale
b. Wholesale trade and commission trade
c. Sale, maintenance, repair of motor vehicle, and sale of automotive fuel
d. Collection, purification, and distribution of water
e. Computer and related activities
f. Real estate activities
4. Group D
a. Airtransport
b. Electricity, gas, steam, and hot water supply
c. Postal and telecommunications
d. Publishing, printing, and reproduction
of recorded media
e. Recreational, cultural, and sporting
activities
f. Recycling
& Renting out of goods and equipment
h. Supporting and auxiliary transport activiti
es
5. GroupE
a. Activities of membership organiza
tions Inc,
b. Health and social work
c. Private educational services
d. Public administration and
defense compulsory social
e. Public educational services security
f. Research and development
8. Agriculture, hunting, and forestry
h. Farming of animals
i. Fishing
j. Other service activities
k, Miscellaneous busi ness activities
Unclassified activities
120

p AYMENT OF INCOME TAXES

The general rule is “pay as you file”. The capital gains tax and regular income tax
t of income tax is
theaintaxcond
paid onas cert
and wed files his return. Installment paymen
er ns.
payitio
allo
Taxpayers under the eFPS system shall e-pay their tax online through internet
panking service. The account of the taxpayer will be auto-debited for the amount
of taxes to be paid.
pASIC COMPARISON OF FILING AND PAYMENT SYSTEMS

Manual e-BIR Forms eFPS
Data entry Manual Electronic Electronic
Filing/Submission Manual Electronic Electronic
Tax payment Manual Manual Electronic
PENALTIES FOR LATE FILING OR PAYMENT OF TAX

The late filing and payment of taxes is subject to the following additional charges:
1. Surcharge -
a. 25% of the basic tax for failure to file or pay deficiency tax on time
b. 50% for willful neglect to file and pay taxes
The non-filing is considered ‘willful neglect’ if the BIR discovered the non-filing
first. This is the case when the taxpayer received a notice from the BIR to file
return prior to his actual filing. If the taxpayer filed a return before the receipt of
such notice, the same is considered simple neglect subject to the 25% surcharge.
Interest - Double of the legal interest rate for loans or forbearance of any
money in the absence of any express stipulation
Since the legal interest is currently set at 6%, the interest penalty is therefore
12% per annum effective January 1, 2018. Note that NIRC imposed an
interest penalty of 20% per annum until December 31, 2017.
Under the new rules established by RR21-2018, the interest period shall be
computed based on actual days divided 365 days. The additional day in
February during a leap year will be counted. The yearly-monthly-daily
counting method established in prior regulations is already abandoned.
A month normally has 30 days except the following:

31-day months January, March, May, July, August, October, December
28 or 29-day month | February
121

orting
- In co me Ta x Sch eme s, Acc ounting Periods, Methods, and Rep
Chapter 4
ar
is that 31-day and 8 Oneay months
The best way to put this in mind
ce Is res a ; ugust. Also Du
alternating from January to July, but the sequen ona leap year.
in mind that February is a28-day month, except
identify a leap year? ree

iS a leg
Mavi by 4 with a whole number quotient without a ee
years. Leap years hayp
year. Years 2016, 2020, 2024, 2028 and so on are leap
of days in a leap year is 366 no,
29 days in February hence the actual number
ves around the sun jp
the usual 365. This is due to the fact that our planet revol
ar
365 % days. Hence, there is an extra one complete day in every four calend
years.
Under the illustrative guidelines in RR2 1-2018, the new day counting system
for the interest penalty will be implemented for tax assessments effective
January 1, 2018. This means it will be applied even if the tax assessment
pertains to 2017 and prior years.
Illustration 1: Basic procedure

The tax return of the taxpayer was due on April 15, 2021 but was filed on August
3, 2021. The tax due per return of the taxpayer amounts to P100,000.
The number of days would be counted as follows:
Period Days
April (30 - 15) 15
May 31
w
June 30
July 31
August 3
Total days 110
The interest penalty shall be computed as P 100,000 x 12% x1 10/365 =

P3,616.44.
Illustration 2: Interest in a leap year
A taxpayer-withholding agent failed to file his withh Idi wed t
remit the P50,000 withholding tax ther eon on Apri o’ding tax return and failed d
the return on July 16, 2020. pril 30, 2019. The taxpayer file
The number of days would be counted as follows:
Period
April 30, 2019 to April 30, 2020 366
May 2020 31
June 2020
30
July 2020
16
Total days
443
122

Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting
The interest penalty shall be computed as P 50,000 x 12% x 443/365 = P7,282.19.
IJustration 3: Interest in transition years

An individual taxpayer has a tax due of P40,000 for taxable year 2016 due on April
15, 2017. The taxpayer settled his tax on February 10,
2018.
The interest in 2017 shall be computed using the old 20% interest penalty rate
while the interest in 2018 shall be computed using the 12% interest penalty rate.
April 16, 2017 to December 31, 207 is 260 days. January 1, 2018 to February 10,
2018 is 41 days. Hence, the interest shall be computed as follows:
2017 interest (P40,000 x 20% x 260/365) P 5,698.63

2018 interest (P40,000 x 12% x 41/365) 539.18
Interest penalty P__ 6,237.81
3, Compromise penalty -
Compromise penalty is an amount paid in lieu of criminal prosecution over a
tax violation.
The schedules of compromise penalty related to income taxes are included in
Appendix 4 for your reference.
INTEGRATIVE ILLUSTRATION
An individual taxpayer filed his 2020 income tax return with a computed tax due of
P100,000 on July 15, 2021. A total of P20,000 creditable withholding taxes was
deducted by various income payors from his gross income.
The total amount to be paid by the taxpayer including penalties shall be:
Tax due
P 100,000
Less: Tax credits (creditable withholding taxes)
—___ 20,000
Net tax due
Plus: Penalties P 20,000
Surcharge (P80,000 x 25%)
Interest (P80,000 x 12% x 91/365) 20,000
Compromise penalty* 2,393
Total tax due — 15,000
P__117,393
Note:
1 The deadline of the 2020 income tax return is April 15, 2021. April 15, 2021 to July 15,
2021 isa 91-day period.
2, Interest is computed from the net amount of tax due before the 25% surcha
rge. Imposition
4 Of interest upon the surcharge is illegal.
© Compromise penalty is taken from the table of compromise penalties for failure to file
and or Pay internal revenue tax at the time or times required by law, as follows:
123

| - ade Kh 6 a 2
Chapter 4 = Income Tax schemes, Accounting Periods, Methods, ind Reporting
yf the amount of tax unpald

Exceeds | But not exceed Compromise ts
PY 20,000 P 50,000 P 10,000

50,000 100,000 15,000
100,000 | 800,000, 20,000
You may check the schedule of compromise penalty for late payment of incom,
tax in Appendix 4 for your reference.
ION RETURN
PENALTIES FOR NON-FILING OR LATE FILING OF INFORMAT
list, or keep any
For each failure to file a separate information return, statement or
record, or supply any information required by the Code or by the Commissioner
therefor, unless it is shown that such failure is due to
on the date prescribe
off P1,000 fo,
reasonable cause not to willful neglect, shall be subject to a penalty
each such failure, Provided that the amount imposed for all such failure duringa
calendar year shall not exceed P25,000.
124


=——_
piscussion Questions
What are the three income taxation schemes? Briefly discuss the scope of each.
Pe
Discuss the nature of final income taxation.

WH
What are ordinary assets? Compare them with capital assets.

What capital gains are subject to capital gains taxation?
VS
What are the special features of regular income taxation?

Enumerate the instances wherein short accounting period will arise.
What are the tax accounting methods in reporting income? Briefly explain each.
SNA
What are the two types of income tax return?
True or False 1
1. An ordinary asset is defined to include all other assets other than capital assets.
2. Both active income and passive income do not require direct participation of the
taxpayer in earning the income.
There are three types of gross income for taxation purposes.
The three tax schemes are mutually inclusive in coverage.
SP OnNansw
Regular income tax generally covers active income and capital gains.
Final tax generally covers passive income.
Capital gains arise from the sale, exchange, and other disposition of any assets.
There are only two types of assets for purposes of taxation.
The technique used to measure income is referred to as an accounting method.
The length of time over which income is reported is referred to as an accounting
period.
10. Regular accounting periods are calendar and fiscal.
11. Individuals file their income tax returns on or before April 15 of the following
calendar year.
12. All taxpayers can change their accounting period when there is a change in the
nature of their business, but the BIR must be notified in all cases.
13. The first accounting period of a starting business will more likely be less than 12
months.
14. The accounting period of a deceased taxpayer shall be terminated on December
31 in the year of death.
15. Accrual basis and cash basis are the most common accounting methods used in
practice,
True or False 2
1. The withheld taxes on the income payments mad
e by the taxpayers are tax credit
against their income tax due.
Advanced income is an item of gross income for accrual basis taxpayers.
Generally, prepayments are non-deductible in the current accounting period.
. 125

Periods, Methods, and Reporting
Chapter 4- Income Tax Schemes, Accounting
or are cons sumed
are dedu ctib le but in the future perijod they exp! ire
Prepayments game taxpaye:.
‘n the business or trade of the taxpayer. businesses of the Payer j.
eren t met hod s for diff eren t
The use of diff
ermitted by law. ; r of sale.
and installments in the yea
Initial saytnent includes downpayment
ng ae
Contract price is synonymous with selli
SOND
me thod. orted b
The crop year method isi an accounting
i
gross income Is rep ased on
Under the percentage of completion method,
ary .
the cash collections from the contract price.
ion of the lease constitutes
The depreciated value of the property upon terminat
income to the lessee.
income tax scheme.
11. There are three types of income tax retur n for each
12. All taxpayers, small or large, are enco uraged to file their income tax
return
through the EFPS system of the BIR.
13. Large taxpayers are under the supervision of the BIR Large Taxpayer Service.
14. Non-filing and/or non-payment of tax is subject to penalties such as surcharges,
interest, compromise, and imprisonment. ; .
15. The interest on unpaid taxes is computed on the basic tax only excluding the
surcharge.
16. Only large taxpayers shall file under eFPS.
17. Both manual filing and filing though e-BIR forms makes use of manual payment.
18. eFPS is fully electronic tax compliance.
19. e-BIR forms makes use of electronic data entry and filing.
20. eFPS filers may file manually when there is a BIR system downtime.
Multiple Choice - Theory: General concepts

1. Which of the following accounting methods is most consistent with the lifeblood
doctrine?
a. Crop year method c, Installment method
b. Cash basis d. Accrual method
2. Which is nota scheme in taxing income?
a. Ordinary gain taxation _c. Capital gains taxation
b. Regular income taxation d. Final income taxa
tion
3. Which is a correct statement reg
arding income taxes?
a. An item of income subjected
to final tax can still be subj
b. An item of income exempted from
C. An item of income subjected to ca

pital gains tax may be su
income tax. bject to regu!"
d. An item of income exempted
fro m tax is likewise exempt
tax and regular income tax. from capital gains
126

#4
”
which is nota feature of final tax?

Covers certain passive income
Covers all capital gains
é Withholding at source
d. None of these
5, Which of the following properties when classified as capital asset is subject to

capital gains tax?
a, Domestic stocks sold directly to buyer
bp. Real property
c. Bothaorb
d. None of these
6. Capital asset means

a. real properties used in business.
b. personal properties used in business.
c. real properties not used in business.
d. any property, real or personal, not used in business.
7. Which is not an item of passive income?
a. Royalties _ c. Deposit interest income
b. Prizes d. Professional income
8. These are accounting techniques or conventions used to measure income

a. Accounting methods c. Accrual basis
b. Accounting periods d. Cash basis
9. These are distinct and equal time periods over which income is measured
a. Accounting methods c. Crop year basis
b. Accounting periods d. Cash basis
10. Income is recognized when received rather than when earned
a. Cash basis c. Accrual basis
b. Installment basis d. Deferred payment basis
11. Income is recognized when earned regardless of when received

a. Cash basis c. Installment method
b. Accrual basis d. Percentage of completion
12. Which statement is correct?
a. Dealers of real properties can use the installment method without limitation.
b. Dealers of personal properties can use the installment method without
limitation.
C Non-dealers of properties can use the installment method if initial payment
exceeds 25% of the selling price.
127
|
ee ae eee ee on
BON et

initial Paymen,
d. Dealers of properties can use the installment method only if
does not exceed 25% of the selling price.
13. Initial payment means

a. Downpayment.
b. Total collection within the year the installment sal e was adi
made.
within the year the
Cc. Installment payments, exclusive of downpayment,
installment sale was made.
d. Total collections within one year from the date the installment sale was made
14, Income is reported by reference to the extent of project completion in
a. Deferred payment method
b. Installment method
c. Percentage of completion method
d. Completed contract method
15. Leasehold income is recognized over the lease term in

a. Outright method c. Spread-out method
b. Cash basis d. Percentage of completion method
16. Statement 1: The excess of mortgage assumed by the buyer over the basis of the
properties sold is the amount of the gain on the sale. ,
Statement 2: Any collection from an installment contract where the mortgage
exceeds the tax basis of the properties received constitutes collection of income.
/ Which statement is true?
a. Statement 1 only c. Both statements are true.
b. Statement 2 only d. Neither statement is true.
17. Which is correct regarding the crop year method?

a. Crop year method is an accounting period.
b. Crop year method recognizes farming income when the next planti
ng season
commenced.
c. Crop year method matches cropping expenses with the income
upon harvest.
d. Crop year method recognizes cropping expenses when
incurred and harves!
income when realized.
18. Which is not a special feature of regular inco
me taxation?
a. Use of accounting methods _c. Annual payment of income tax
b. Use of accounting periods _d. Final withholding tax at source
19. Which is an incorrect statement regardin
g the use of accounting
a. Individuals can either choose the calendar year or fiscal peri od?
year accountiné
period.
b. The regular accounting period for
any taxpayer is 12 months,
128

Chapter 4- Income Tax Schemes, Acc
ounting Periods, Methods, and Reporting
c, Individual taxpayers are not al
lowed to report income using
period. fiscal accounting
d.
Corporations may opt to use eit
her calendar or fiscal accounting period.
20. Under which of the followin g will short accounti
ng period not arise?
a. Chan of acco ge p unting
eriod bya corporate
taxpayer
b. Change of accounting p eriod by an indivi
dual taxpayer
c. Death of a taxpayer
d, Dissolution and liquidation of a business
Multiple Choice - Problem 4-1; Accounting perio

d
1. A corporation reporting
on a fiscal year ending every
2021inco March 31 shall file its
me tax return not later than
a. April 15,2021. c. July 15, 2021.
b. June 15, 2021. d. April 15, 2022.
2. An individual income taxpayer shall file
his or her income tax return on or before
the
a. 15" day of the fourth month of the same calendar year.
b, 15 day of the fourth month of the following calendar year.
c, 15" day of the fourth month of the same fiscal year.
d, 15t* day of the fourth month of the following fiscal year,
3. Anderson died on March 31, 2021. Which
is a correct statement?
a. Anderson's 2021 income tax return shall cover January 1,
2020 to December
31, 2021.
b. Anderson's 2021 income tax return shall cover January 1, 2021
to December
31, 2021.
c. Anderson’s 2021 income tax return shall cover January 1, 2021
to March 31,
2021.
d. Anderson’s 2021 income tax return shall cover April 1, 2021 to Decem
ber 31,
2021.
4. Mrs, Julian started business on July 15, 2021. What should
be the coverage of her
2021 income tax return?
a, January 1 to July 15, 2021
July 15, 2021 to December 31,2021
¢ July 16, 2021 to July 15, 2021
January 1 to December 31, 2021
Metersbonwe Corporation started business on April 5, 2021
and opted to report
incom e tax on a fiscal year ending every October 31. Metersbonwe’s first incom
e
tax return shall cover
April 6, 2021 to October 31, 2021
April 5, 2021 to October 31, 2021
129

Reporting
4 - Inc ome Tax Sch eme s, Accounting Periods, Methods, and
Chapter
31, 2021
c. April 5, 2021 to December
d. April 5, 2021 to April 5, 2022
year
e OntioAu
. ora n’s ogn1,
15 202
gustsect15,fni it st meop
iectae
rep orts on a Ca len
a dar se
i um Corporation
Mait i
Ma
business due to persistent losses.
shall cover
1
a. January 1 to December 31,202
b. January 1 to August 15, 2021
1
Cc. August 15, 2020 to August 15, 202
d. August 15 to December 31, 2021
every April 30 t,
ctive May chang ed its fiscal year ending
15, 2022, Tabuk, Inc. od
rn shall be filed covering the peri
the cdlotdar yan An adjustment retu
a. May 1to December 31, 2022.
b. January 15 to December 31, 2022.
c. January 1 to April 30, 2022.
d. April 30 to December 31, 2022.
its calendar year to a fiscal year
1, 2021, Caraga, Inc. changed
Effective March
shall be fi led covering the period
ending every June 30. An adjustment return
a. March 1 to June 30, 2021.
b. January 1 to June 30, 2021,
c. January 1 to March 1, 2021.
d. January 1 to December 31, 2021.
During 2021, Ozamis Corporation changed its accounting period to the calendar
year. The adjustment return shall be filed on or before.
a. April 15,2021. c. April 15, 2022.
b. July 15, 2021. d. July 15, 2022.
10. Effective July 2, 2022, Parang Company changed its fiscal year ending every March
31 to another fiscal year ending every August 31. An adjustment return shall be
filed covering the period
a. April 1to July 2,2022. c. April 1 to August 31, 2022.
b. April 1to July 1,2022. d.July 3 to August 31, 2022.
Multiple Choice - Problems 4-2: Tax schemes and accounting methods

1, Berlin Corp. reported the following data for 2021:
e Total net sales made to customers were P2,000,000 in cash
° Goods purchased for sale totaled P1,200,000 in cash. Beginnin and endif|
inventory of goods for sale, respectively, were P200,000 and P300 000
e 1-year advanced rent of P30,000 to apply for 2022 was received from ,
sublease contract.
e P40,000 total interest income from customers promissory note earne?
P30,000 of this was collected.
130

Chapter 4 -— Income Tax Schemes, Accounting Periods, Methods, and Reporting
e Unrealized foreign exchange gains from foreign currency receivables totaled
Using cash basis, compute the total income subject to income tax.
q. P990,000 c. P750,000
b. P960,000 d. P690,000
2, Using accrual basis, compute the total income subject to income tax.
q, P1,060,000 c. P960,000
b. P1,000,000 d. P970,000
3, Pagadian, Inc. reported the following during the year:

e 400,000 proceeds of life insurance of an officer where Pagadian is the
beneficiary (P600,000 still uncollected.)
e P800,000 interest income, exclusive of P200,000 uncollected and accrued
interest
e P300,000 increase in value of investment in stocks
Compute the gross income under cash basis.

a. P800,000 c. P1,200,000
b. P1,000,000 d. P1,400,000
4, Compute the gross income under accrual basis.
a. P800,000 c. P1,200,000
b. P1,000,000 d. P1,400,000
5. Dapitan, Inc. has the following receipts during 2021:
From service billings to clients P 400,000

Advances from clients 100,000
Total cash collection ~ P_500,000
The P100,000 advances refer to services which will be rendered next year. Total
uncollected billing increased from P100,000 on December 31, 2020 to P150,00
0
on December 31, 2021.
Compute the gross income using cash basis.

a P400,000 c. P500,000
b. P450,000 d. P550,000
6. Compute the gross income using accrual basis.
a P400,000 c. P500,000
b. P450,000 d. P550,000
131
TT yee ee

v
|
rting |
Chapter 4 - Income Tax Sche
mes, Accounting Periods, Methods, and Repo
imstaument, The.
7
/. In 2021, Malita Inc. sold its parking lot for P2,400,000 payable on
lot was previously acquired for P1,500,000. The buyer has an a sPancing Unpaig
balance of P1,800,000 as of December 31, 2021, Malita's year’©h™
hod.
in 2021 using the installment met
Compute Malita’s gross income
a. P900,000 c, P225,000
b. P675,000 d. P112,500
Exquisite Corpora tion sold its old warehouse with carr

ying amount (tax basis) o
P600,000 for P1,000,000. A downpaym ent
of 15% was collected on July 1, 202;
eived as of December 31
Additional P150,000 llment payments were rec
insta
2021.
the year 2021.
Compute the gross profit to be reported for
a. P60,000 c. P400,000
b. P120,000 d. P450,000
He reported the following in
Carl Gabriel is a dealer of household appliances.
2021and 2022:
2021 2022
Installment sales P 500,000 P 800,000
Cost of installment sales 250,000 440,000
Collections 300,000 600,000
Carl Gabriel's 2022 collection is inclusive of P100,000 accounts from 2021.
Using the installment method, compute Carl Gabriel’s gross income subject to
income tax in 2022.
a. P360,000 c. P250,000
b. P320,000 d. P275,000
10, Using the accrual basis of accounting, compute Lancelot’s gross income subject!
income tax in 2022.
a. P360,000 c. P275,000
b. P320,000 d. P250,000
11. Merville is a dealer in real properties. Merville requires 20% downpayment, and
the balance is payable over 36 monthly installments starti
tarting on the last day of ti
month following the month of sale. Merville sold ies | 02
with terms as follows: Properties In 2021 and 7
¢ House and Lot No. 1 was sold for P1,350,000 on November 11, 2021
¢ House and Lot No. 2 was sold for P1,800,000 on July
5,2022 | .
Both properties were sold at a gross profit rate of 40% based on the selling pri*®
132

chapter 4 Income Tax Schemes, Accounting Periods, Methods, and Reporting
Compute Merville’s gross income subject to income tax in 2021 and 2022,
respectively.
_ P120,000; P368,000 c. P540,000; P720,000
b. P120,000; P864,000 d. P540,000; P864,000
12. In 2022, Mr. Francis, a dealer of car, disposed a brand new sports utility vehicle
(SUV) which costs P800,000 for P1,200,000, under the following terms:
July 1, 2022 - as down payment P 100,000
Monthly installment thereafter 50,000
Mr. Francis will choose whichever favorable permissible income reporting
method for him.
How much gross income is to be reported in 2022?

a. P 400,000 c. P116,667
b. P 250,000 d. P108,219
13. In the immediately preceding problem, assuming Mr. Francis is not a dealer of car,
how much gross income is to be reported in 2022?
How much gross income is to be reported in 2022?
a. P 400,000 c. P116,667
b. P 250,000 d. P108,219
14. Luccio Karl accepted a P1,000,000 construction contract in early 2021. As of

December 31, Luccio Karl incurred total construction costs of P600,000 and
estimates additional P200,000 to bring the project to completion. Per independent
appraisal, the building is at its 80% stage of completion. Compute Luccio Karl's
2021 construction income using the percentage of completion method.
a. P40,000 c. P160,000
b. P200,000 d. P400,000
15, Talomo, Inc. constructs residential properties for clients and reports income by
the percentage of completion method. In 2021, Talomo, Inc. started a P2,000,000
construction contract. Details of his 2021 and 2022 construction follow:
___2021
_ 2022
Annual construction costs P 200,000 P 800,000
Estimated cost to finish 800,000 250,000
Extent of completion 20% 80%
Compute the construction income in 2021 and 2022.
a. P200,000; P560,000 c. P400,000; P400,000
P200,000; P400,000 d. P400,000; P560,000
133

Periods, Methods, and Repoport
rtining
Inco me Tax Sche mes, Acco unti ng
i
Chapter4 -a _
th Per t
cment,
agreemen OlivQj; e
lease contract with
i
16. Oliver entered into a 40-year for ion
the cerminat oe rsrs
a builildi
ding on Bernas lot an oper, spon
pe
. will construct UpO” ©” feted
ip of the building will transfer to Bernas
building is completed. Qliya,
eae eae will not commence until the
00 on January 1, 2022, 7, e
completed the buildini g at a total cost of P40,000,0 |
buildi exp ted to be used over 50 years.
ilding ng isis expec
ovement to be reported in 292)
Compute Bernas income from the leasehold impr
using the spread-out method.
a. P 200,000 c. P8,000,000
b. P4,000,000 d. P32,000,000
building was completeg

17. In the immediately preceding problem, assume that te
on July 1, 2022, what is the income using outright method,
a. P 4,000,000 c. P32,000,000
b. P 8,000,000 d. P40,000,000
18. Len leases an office space from Rafi, Inc. in a non-renewable 10-year lease
contract. Just after the second year of the lease, Tomas renovated the premises
and made improvements at a cost of P1,200,000. These improvements are
expected to last for 12 years. Compute Rafi’s annual income from the leasehold
improvement using the spread-out method.
a. P50,000 c. P30,000
b. P37,500 d. P20,000
/ 19, Jamie started raising swine for sale by purchasing 5 gilts and a boar at a total
purchase price of P50,000 on January 2020. As of December 31, 2022, Hassan’
herd grew to 15 guilts, 2 boars and 20 piglets. The total herd has a fair value
of
P196,000 when sold as is. During the year, Hassan earned P180,00
0 from selling
piglets. How much should Hassan report as farming income
in 2022?
a. P326,000 c. P 146,000
b. P180,000 d. P 130,000
20. Peter, a farmer, uses the crop-yea
r method in reporting his income
term crops. The following data are rele from long:
vant to his farming operations in 2021
e — Sales of crops harvested, P900,000 :
e Expenses on harvested crops, P400,000
e Expenses on maturing crops, P200,0
00
e Expenses on newly planted crops,
P100,000
¢ Sales of tree branches for fire
wood, P5 0,000
Peter uses the crop year method in reporti ; |
. porting
Income subject to tax. & crop crop in income. Compute Peter’s’s t told
a. P240,000 c. P540,000
b. P340,000
d. P550,000
134

chapter 4—Income Tax Schemes, Accounting Periods, Methods, and Report
ing
Multiple Choice - Problem 4-3;
Tax compliance
1. A taxpayer filed his income tax return in October 28, 2022. The deadlin
e for the
return was April 15, 2022. If he has P40,000 net tax due, compute the penalties in
the form of interest.
a. P2,578 c. P 2,867
b. P 2,611 d. P 4,296
What is the total surcharge penalty?
a PO c. P 10,000
b. P 8,000 d. P 20,000
A taxpayer received a notice from the BIR to file his 2020 income tax return not
later than January 15, 2022. The tax due per his return is P100,000. What
is the
total surcharge penalty?
a PO c. P 25,000
b. P 20,000 d. P 50,000
What is his total interest penalty?
a. P6,500 c.P 9,041
b. P 7,900 d. P15,068
Compute the compromise penalty
a. P 10,000 c. P 20,000
b. P 15,000 d. P 30,000
Mani Pokyaw failed to pay file his income tax return for the
year 2021 which
should have been filed on or before April 15, 2022. The BIR sent
him a notice to
file his return and pay his tax on or before July 18, 2022. Mani
Pakyaw filed a
return showing a basic tax due of P1,000,000. Compute the total interes
t penalty.
a. P 30,904 c.P 38,555
b. P37,644 d. P 39,863
Mr. Pokyaw must pay a surcharge of
a PO c. P 500,000
b. P 250,000 d. P 1,000,000
Maco Corporation failed to file its income tax return for the fiscal year ending
August 31, 2021. On June 6, 2022, it filed an income tax return with a basic tax still
due and payable for the fiscal year amounting to P500,000. Compute the interest
penalty to be imposed by the BIR.
a P28603 c. P 45,873
b. P28,438 d. P 46,207
Compute the total tax assessment to be paid, excluding compromise penalty.
a P 653,603 c. P 689,275
P 653,438 d. P 660,873
135

Chapter 5 - Final Income Taxation
CHAPTER 5
FINAL INCOME TAXATION

meena,
ase aeenee eee ee eee See seme mee
eeeeeee es eee ee ee seeessee eoanesasaeenaee
-
This Chapter discusses the features of final income taxation, the items of Bross
income, and the class of taxpayers subject to final income tax.
Final tax is one of the exceptions to the scope of the regular income tax, An
excellent understanding of the items of passive income and those taxpayer,
subject to final tax including their final tax rates is extremely crucial to yoy,
mastery of income taxation.
After finishing this Chapter, readers are expected to demonstrate:

a. Understanding and appreciation of the features and scope of final tax |
b. Mastery of those certain passive income subject to final tax and their
corresponding final tax rates
c. Mastery of the general final tax rates on certain non-residents and their
exceptions
d. Knowledge of the other applications of the final income tax scheme
FEATURES OF FINAL INCOME TAXATION

1. Final tax
2. Tax withholding at source
3. Territorial imposition
4. Imposed on certain passi ve income and persons not engaged in business in
WV
the Philippines NES ZANLEC'S — dn ont bre . eripah Opie6

y mW Sy~ pert late
WIAls Jhe ¥ Luc . LIE f 14 byl
}
The Final Withholding System

The final withholding system imposes upon the person making income payments
the responsibility to withhold the tax. The tax which will be deducteat
d source i
final. The taxpayer receives the income net of tax and there would be no need fo
him to file an income tax return to report the same. :
The final withholding system is inherently territorial. It applies only to certail

passive income earned from sources within the Philippines. Note that taxation §|
territorial and we cannot impose tax obligation (filing or withholding) agains!
non-resident subjects of foreign sovereignty. Hence, all items of income earne!
from sources abroad, passive or active, are subject to tax under the general scope
of the regular income tax.
136

68 eyEeESSeeEe
capt” 5 ame Taxation
patio’ ale of in ' ‘income Taxation

The final witnnolaing tax is built upon taxpayer and government convenience. It
; elieves_the taxpayer of the obligation to file an income tax return. This is very
convenient for taxpayers who are limited by distance, time and cost to comply. For
the government, the final withholding system is the most convenient and effective
system in collecting taxes on income where there is high risk of non-compl
iance or
tax evasion.
Under the NIRC, final income tax is imposed on certain passive income and upon
non-resident persons not engaged in business in the Philippines.
Passive income
Items of passive income are earned with very minimal involvement from the
taxpayer and are generally irregular in timing and amount. Unlike items of active
income, they are not usually specifically monitored by taxpayers. When not
recorded by the taxpayer, their existence can be difficult to predict while their
actual amount may be difficult to determine. Thus, the final withholding at source
is the most favored scheme in taxing items of passive income.
Non-resident persons not engaged in business in the Philippines

Non-resident persons not engaged in trade or business in the Philippines, such as
non-resident aliens not engaged in trade or business (NRA-NETBs) and non-resident
foreign corporations (NRFCs), have high risk of non-compliance. These taxpayers
do not have offices or fixed places of business in the Philippines making tax
and distance in the Philippines.
compliance very unlikely due to their absence
Also, the Philippine government cannot impose upon them the obligation to file
return due to territorial consideration.
Thus, the law subjects them to final income tax wherein Philippine residents
paying them income, passive or active, are obligated to withhold the following
finaltax: 7
General final
Non-resident person not engaged in trade or business tax rate
Non-resident alien not engaged in trade or business 25%
‘Non-resident foreign corporation 25%
PASSIVE INCOME SUBJECT TO FINAL TAX

1. Interest or yield from bank deposits or deposit substitutes
Domestic dividends, in general
Dividend income from a Real Estate Investment Trust
137

See
> Share in the net income of a business partnership, taxable associations, joing
ventures, joint accounts, or co-ownership
Royalties, in general
waonauw
Prizes exceeding P10,000_

Winnings
Informer’s tax reward
Interest income on tax-free corporate covenant bonds
FINAL TAX ON INDIVIDUALS AND CORPORATIONS

Unless otherwise indicated, the final tax rates to be discussed in the folloWi
ng |
sections apply to all taxpayers (individuals and corporations) other than:
a. Non-resident alien not engaged in trade or business (NRA-NETB), and
|
b. Non-resident foreign corporation (NRFC).
INTEREST INCOME OR YIELD

Interest income or yield from local currency bank deposits, deposit
substitutes,
trust funds and similar arrangements are subject to final tax as
follows:
Local currency deposits
Recipient
On interest income
Individuals Corporations
From banks
-_ _ Short-term deposits/certificates
20% 20%
~_ Long-term deposits/certificates
Exempt |..~ RIT1
|From non-bank institutions
-_ Short-term deposits/certificates
| RIT2 RIT2
~_ Long-term deposits/certificates
RIT2 RIT2
Note:
1. Per Section 3 of RR 14-2012 and
reiterated under RMC
2. The final tax on deposits applies 7 - 2015
only to those made with
3. NRA-NETBs and NRFCs are subj banks.
ect to the 25% genera l final tax on their interest
income.
Short term deposits are those mad
e for a pe
perio
riodd of less than five years, Long-term
deposits or investment certific
ates refer to certificate of time
in the form of savings, common deposit or
or individual trust funds, deposit investment
investment management accounts,
and other inves tments wi
substitutes
tha n five years, the form of wh th a mat urity of not less
ich shall be prescribed by the
only (not by non-bank financial BSP and eatin by banks
intermediaries or fj
i
138

”
chapter 5 - Final Income Taxation
slustration 1 — .
various time deposits:
A taxpayer earned the following interest income from
g-month time deposit P 8,000

2-year time deposit 12,000
40.000
5-year time deposit
P 60,000
Total interest income
ion.
Required: Compute the final tax if the taxpayer is an individual and if a corporat
Solution:
Individual taxpayers
6-month time deposit P 8,000 x 20% P 1,600
2-year time deposit 12,000 x 20% 2,400
5-year time deposit 40,000 x0% 0
P 4.000
Final withholding tax
(P8K+P12K) x20% P 4,000
Corporate taxpayers
The exemption of individuals on interest income on long-term deposits is anchored on the fact
that long-term deposits are usually channeled to the financing of long-term projects such as
infrastructures, property developments, and other construction projects which are deemed
essential to the development of the country. Note that corporations are not exempt but are
subject to regular tax on interest income on long-term deposit or investment certificates.
Illustration 2 Patto¢ fax So fe received

A resident taxpayer received a P16,000 interest income from a bank. Determine the
final tax withheld at source.
Solution:
Gross interest income (P16,000/80%) P 20,000 « 0,000
Multiply by: final tax rates 20% - 1/002
Final tax withheld p___ 4,000 {1000
Illustration 3
Banko Negro incurs the following interest in its savings and time deposit accounts
from the following depositors:
Depositors Amount
Resident individuals P 600,000
Resident and domestic corporations 800,000
Non-resident aliens not engaged in business 200,000
on-resident corporations -_ 100,000
Total accrued interest expense P_1,700,000
139
oeMe

sd
xs
Required: Compute the total final income tax to be withheld by Banko Negro.
Solution:
Depositors Amount Rate. _ Final Tax
Resident individuals P 600,000 x20% P 120,000
Resident/domestic corporations 800,000 x 20% 160,000
NRA-NETB 200,000 x 25% 50,000
NRFCs 100,000 x25% ____ 25,000
Total accrued interest expense P_1,700,000 P__355,000
Savings or time deposits with cooperatives are not subject to final tax
The final tax is limited to banks and shall not be applied with time and Savings
account deposit maintained by members with cooperatives and by primary
cooperatives with their federations. (Dumaguete Cathedral Credit Cooperative ys
CIR, G.R. 182722)
feat qt Deposit substitutes
Deposit substitute means an alternative
form of obtaining funds from the public
other than deposits through the issuance, endorsement, or acceptance of debt
instruments for the borrowers own account, for the purpose of relending or
purchasing of receivables and other obligations, or financing their own needs or
any one time.
The 19-lender rule 7

The mere flotation ofa debt instrument is not considered to be a public borrowing and
is not deemed a deposit substitute if there are only 19 or less individual or corporate
lenders at any one time. -
The 19-lender rule does not apply to government securities
Government debt instruments and securities including Treasury bonds, Treasury bills,
and Treasury notes shall be considered as deposit substitute irrespective of the
number of lender at origination if such debt instruments and securities are to be
traded or exchanged in the secondary market.
Debt instrument issued for interbank call loans with maturity of not more than 5 days
to cover deficiency in reserves against deposit liabilities, including those between 0!
among banks and quasi-banks, shall not be considered
as deposit substitutes.
Classification of debt instruments
|. | _ Number of borrowers at origination
| Issuer of debt instrument _ | 19 or less 20 or more.
| Corporate issuer | Private borrowing | Deposit substitute
| Government including BSP | Deposit substitute Deposit substitute
140

Note: . .
origination means Issuance,
2, Interest on deposit substitute (i.e. public borrowing) is subject to final tax. Interest on private
porrowing is subject to regular income tax.
Any person holding any interest, whether legal or beneficial, on a debt instrument or
holding thereof either by assignment or participation, with or without recourse, shall
be considered as lender and thus be counted in applying the 19-lender rule.
Thus, debt instruments may not be initially considered deposit substitute for failing
the 19-lender rule but may subsequently qualify as such when the number of lender
increase to at least 20 when any of the original lenders assigned, securitized or
participated out the debt instrument.
Timing of withholding of final tax

1. Zero coupon instruments or securities - upon origination
2. Interest-bearing instruments or securities - upon payment of interest
Summary of tax rules on interest on debt instruments

Deposit substitutes Recipient |
|Issued by banks: Individuals Corporations
- Short term 20% 20%
- Longterm Exempt RIT
Issued by non-banks
- Short term 20% 20%
- Long-term 20%" RIT
*Per Section 3 of RR14-2012, exemption on long-term certificates or investments is limited to those
issued by banks only Os
Illustration 1
John earns interest income from the following investment placements in various debt
instruments:
| Instrument Remarks Term

|___DI1 BSP treasury notes S years
| DI2 BSP treasury bills 1 year
DI3 Itogon Bank deposit certificates 5 years
Ayala corporate bonds issued to the public 10 years
DI4
3 years .
DIS _| Securitized SB corporate bonds (100 lender)
2 years ¢
DI6 Promissory note negotiated by ABC Bank
8 years
DI7 KT Bank bonds participated out.to 30 lenders
The interest income from the foregoing instruments shall be taxable as follows:
141

}
_1fJohn isafan ~~ |
DINo. | Debt instrument classification Individual Corporation |
D11__| Long-term deposit substitute (BSP) Exempt RIT |
DI2__| Short-term deposit substitute (BSP) 20% FIT —20% FIT
DI3_| Long-term bank deposit emp RIT |
Di4 __| Long-term deposit substitute by a non-bank 20% RIT |
DI5__| Short-term deposit substitute by a non-bank 20% FIT 20% FTP |
DI6__| Private borrowing by a bank RIT 1 RIT
DI7__| Long-term deposit substitute by a bank Exempt Rit
Note: The final tax_exemption on interest incom
e derived from long-term certificates or debt
instruments refers only tothose issued by banks and applies only to_individual taxpayers,
Illustration 2
ABC Company wants to take advantage of the decreasing interest rates. It disposed of |
its investment in various short-term deposit substitutes. It gained total of P300,009
|
from the disposal inclusive of P180,000 interest income.
Only the P180,000 interest income shall be subject to 20%

final tax. The P120,000 (ie
P300,000 - P180,000) trading gain on the debt instruments
shall be subject to regular |
income tax. Also, forex gains on trading foreign currency
denominated instruments, if |
any, shall likewise besubject to regular tax.
|
Trust funds or investment Management |
accounts
Ww
st department of RCBC Bank t

through a trust agreement. The RCBC Bank tr ‘ e
© manage his money
money in 5-year corporate bonds. ust department iny ested Mr.
Ac ebo’s

jllustration 2
Assume Te dein trust department invested Mr. Acebo’s money in a 10-

year time deposit under its own name without mentioning that it was in trust for him.
The investor in this case to the 10-year time deposit is the bank which is a corporate
taxpayer subject to regular tax. Mr. Acebo would not qualify for exemption to the 20%
not made “in trust for the name of specific and
final since the
tay individu
qualified al”.investment was
Illustration 3
Assume instead that RCBC trust department invested the money under the name of
Mr. Acebo’s in a 10-year long-term deposit.
Mr. Acebo's interest income derived from the trust agreement shall be exempt from
income tax provided both he will hold such deposit or investment in a continuous and
uninterrupted period for at least 5 years. The trust must also hold the underlying
instrument (10-year deposit) for at least 5 years,
Pre-termination of long-term deposits or investment of individuals

If the deposit or investment placement of individual taxpayers is pre-terminated
before 5 years, any previously untaxed or exempted interest income will be
subjected to the following final taxes upon pre-termination:
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%
Illustration - long-term deposits

On January 1, 2020, Patricia invested P1,000,000 in Baguio Bank’s 5-year time deposit.
The deposit pays 10% interest annually. Alice pre-terminated the deposit on July 1,
2023.
The final tax on pre-termination will be computed as follows:

2020 interest income (P1,000,000 x 10%) P 100,000
2021 interest income (P1,000,000 x 10%) 100,000
2022 interest income (P1,000,000 x 10%) 100,000
2023 accrued interest income
(P1,000,000 x 10% x6 months/12 months) __ 50,000
Total interest income P 350,000
Final tax rate applicable to less than 4-year pre-termination 12%
Final tax
p___42,000 <
143

deposity,
net proce eds of the dep osi t and acc rue d interest to be released to the
¢ The
upon pre-termination shall be:
P 1,000,000
Principal balance 50,000
Accrued interest for 2023
(_ 42,000)
Final tax to be withheld
Net proceeds to be released to the depositor
P_1,008,000
Pre-termination, transfer or negoti ation of invest

ment certificates
For purposes of applying the pre- termination rates for
individual taxpayers op
long-term investment certificates, the remai ning maturity
of the instrument must
still satisfy the 5-year requirement.
Illustration 1
A debt instrument with a maturity of 10 years was held by Mr. X (a resident Citizen) |
for 6 years then transferred it to Mr. Y (another resident citizen) who in turn held it ©
for 4 years until the instrument matured.
The final tax due on the interest income of each holder shall be as follows:
Holder | Classification | Remaining maturity | Holding period Final tax

Mr. X RC 10 years - long-term 6 years Exempt
Mr. Y RC 4 years - short-term 4 years 20% FWT
Note: Mr. Y's remaining maturity upon acquisition of the instrument is already less than5 years so he
is now subject to 20% final tax. (See Q&A Nos. 2 and 3 of RMC 81-2012 dated December 10, 2012)
Illustration 2
A debt instrument with a maturity of 10 years was held by Mr. X (a non-resident
citizen) for 3 years and transferred it to Mr. Y (a resident alien). Mr. Y held
it for two |
|
years before subsequently transferring it to Mr. Z (a resident citizen) who

held it until |
maturity or 5 years.
The final tax due on the interest income of each

holder shall be as follows:
Holder | Classification | Remaining maturity |
Holding period Final tax
Mr. X NRC 10 years - long-term 3 years 12% FWT
Mr. Y NRA 7 years — long-term 2 years 20% FWT
Mr. Z RC © years - long-term 5 years Exempt
Illustration 3
An instrument with a maturity of 10 years held
by Mr. X (a NRA-N ETB) for 3 yea
transferred it to Mr. Y (a NRA-ETB ). Mr. Y hel rs and
d it for 2 years before subseq
transferring it to Mr. Z (a resident ali en), who uently
pre-terminated it after 4 years.
144

The final tax due on the interest income of each holder shall be as follows:
Classification | Remaining maturity Holding period Final tax
Mr. X NRA-NETB | 10 years — long-term | 3 years 25% FWT
Mr. Y NRA-ETB 7 years ~ long-term 2 years 20% FWT
Mr. Z RA 5 years - long-term 4 years 5%
Note: NRA-NETB are not
s subject to the reduced pre-termination tax rate on long-term deposits
investment certificates. or
EC/
Foreign currency deposit with foreign currency depositary banks
The interest income from foreign currency deposits under the
foreign currency
deposit system or expanded foreign currency deposit system by residents is
subject to a final tax of 15%,
Taxpayer Individuals Corporations

Residents 15% 15%
Non-residents Exempt Exempt
Note: Pc RA Dec- R Fes
1. Resident taxpayers include resident citizens, resident aliens, domestic corpor
ations and r esident
foreign corporations. REC yey, ; rma
fds (Of
2. Non-residents taxpayers include non-resident citizens, non-resident aliens and non-resident
foreign corporations.
3. It should be emphasized that NRA-NETBs and NRFCs are also exempt.
4. There is no long-termor short-term classification of foreign currency deposits.
The reduced final tax rates on interest income on foreign currency deposit and the
exemption of non-resident depositors are intended to encourage- the deposit of
foreign currencies in our banks which will be used in the financing of our
international trades. Our Philippine peso is not a globally accepted currency. Our
foreign trade will be limited without adequate foreign currency reserves in our
banking sector.
* Joint accounts on forex deposits

If the bank account is jointly in the
name of a non-resident and a resident
taxpayer, 50% of the interest shall be exempt while the other 50% shall be subject
to the 15% final tax.
Illustration
Mr, Seeman is an Overseas Filipino Worker. He deposits all his savings in a savings
account under the foreign currency deposit unit (FCDU) of a domestic bank. During
the month, the savings deposit account earned $1,000 interest equivalent to P4 1,500.
hor dposit , but Inkresl
145

TT
Scenario 1: Mr. Seeman deposited his savings through the account of his resident Wife,
The final tax shall be computed as follows:

Interest income P 41, 500.00
ico
Final tax rate 15%
Final tax P__6,225.00
Scenario 2: Mr. Seeman deposited his savings through a joint account with hig
resident wife.
The final tax shall be computed as follows:
Interest income P eau .00
Portion taxable
ea a0 - exert
Taxable interest income P 20, ‘ 5%
Multiply by: final tax rate ———-
Final tax P__ 3,112.50
Scenario 3: Mr. Seeman deposited his savings account through his own account.
In this case, the interest income shall be exempt from final tax.
pon-F
CU den}
Interest income subject to regular tax

Interest income from the following sources is subject to regular
income tax, not to
final tax:
-1. Lending activities, whether or not in the cours
e of business
ié 2. Investments in corporate bonds
yy 3. Promissory notes
4. Foreign sources, whether bank or non-ba
nk
~5. Penalty for legal delay or default
DIVIDENDS
Types of dividends:
1. Cash dividends - paid in cas
h
2. Property dividends - paid
j n non- cash properties including
of another corporation Stocks or securities
3. Scrip dividends - those .
paid in notes or evid
corporation en ce _of indebtedness
of the
4. _.ck_.vi
Sto dide
vind
desnds- paid in
the stocks of the corporat
Liquidating dividends - di ion
wn
stribution of corporate net

asset
146

js a Tule, dividends are income sy

bject to tax. However,
income for taxation purposes: the following are not
1. Stock dividends
Stock dividends representing
transfer of s urplus to
be subject to tax. Stock capital account shall not
dividends are in the
value (i.e. capital gain) form of increase in corporate
which should b € properly
through disposal or sale taxable when realized
of the Stocks inve stme
nt.
. poration
property dividend and nota as dividends is a taxable
stock dividend.
Liquidating dividends
income tax. Any loss is deductible apital gain, subject to regular

only to the extent of Capital gain,
Taxability of Stock Dividends
Normally, stock dividends are exempt
from income tax. Exceptionally, stock
dividends are subject to tax at the fair value of
following conditions: the stocks received under the
a. Subsequent cancellation and redemption

If a corporation cancels or redeems stoc
k 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, equivale
nt to the distribution of a taxable
dividend, the amount so distributed shal
l be taxable to the extent it represents
a distribu tion of earnings or profit.
For instance, a corporation declared stock dividend
s and immediately called the
stock dividends for redemption and cancellation.
This act is equivalent to
declaration of cash dividends.
Ifit leads to substantial alteration in ownership in the corpo
ration
Substantial alteration in ownership in a corporation may
occur when stock
divid ends are given in lieu of cash dividends or when
the corporation declared
an optional stock or cash dividend.
Stock dividend vs. St
ock split
Stock dividend is a capital of
izaeatrn
ioinngs while stock split results in: redu ion i
“par value of stock and an increase in the number of shares of sharehction in
Ss ————— olders.
uming a 2-for-1 hold: g one P50-pa
split, a shareholder holdin
0 P
r value stock will be given
cond ¢5-par value stocks, While stock dividend may be taxable under
ct ad
Onditio hie, certain

"S, stock split will never besubject
to income tax.
147

Dividend Tax Rules

Recipient ofdividends
Individuals Corporations _
Source of dividends
Domestic corporation 10% final tax! Exempt®
Regular tax Regular tax? _|
Foreign corporation
Note:
not to the usual 10%; but an NRa.
1. A NRA-ETB is subject to a 20% final tax on dividend, a
NETB is subject to a 25% final tax.

———_ 71.
final tax rate. However, the

2. A NRFC is not exempt but is subject to the 25% gencral
rule applies. This will be
imposable dividend tax shall be_15% when the tax sparing
discussed later. . _
for reinvestment to be discussed in detail in Chapter 9
3. With conditional exemption
Illustrative 1
is due to corporate
Mati Company declared a total of P2,00 0,000 dividends. P800,000
shareholders.
shareholders while P1,200,000 is due to individual
The final tax to be withheld by Mati Company shall be:
Amount Rate Amount

Shareholders
Individual shareholders P 1,200,000 x10% P 120,000
Corporate shareholders 800,000 x 0% 0
Final tax P__120,000
Illustrative 2
Bayog Company declared a total of P1,000,000 dividends in March 2021. An analysis
of the recipient shareholders is as follows:
Shareholders _Amount_
Resident aliens and citizens P 500,000 —
NRAs engaged in trade or business 100,000 °
NRAs not engaged in trade/business 50,000 .
Non-resident corporations 100,000 .:
Total dividends P__750,000
The total final tax to be withheld by Bayog Company shall be:
Shareholders _Dividends_ _Rate_ _ Final Tax

Resident aliens and citizens P 500,000 x10% P 50,000
NRAs engaged in trade or business 100,000 x 20% 20,000
NRAs-NETBs 50,000 x 25% 12,500
NRFCs 100,000 x 25% 25,000
Total P__750,000 P__107,500
148
at
p resumptive source of dividend distribution

Any distribution made to the shareholders or members of a corporation shall be
‘jeemed to have been made from the most recently accumulated profits or surplus,
and shall constitute a part of the annual income of the distributee for the year in
which received. (Sec. 73(C), NIRC)
exempt Dividends
1. Inter-corporate dividends from domestic corporations - exempt from final tax
_ Dividends from cooperatives - exempt from final tax
3, Qualified foreign-sourced dividends - exempt from regular tax
Inter-corporate dividends from domestic corporations

Inter-corporate dividends received by a domestic corporation and resident
foreign corporation from a domestic corporation are exempted under the NIRC to
minimize double taxation.
Illustration
B, Inc. owns 100% of A Corp. During the year, A Corp. declared P100,000 dividends to
B, Inc. B, Inc., in turn, declared the same dividends to its shareholders. The following
table illustrates the double taxation:
A Corp. B, Inc.
Dividends declared P 100,000 90,000
Less: 10% dividends tax 10,000 | 9,000
Net dividends P 90,000 P__ 81,000
This is a form of direct duplicate taxation. To eliminate the impact of double taxation,
inter-corporate dividends such as those declared by A Corp. to B, Inc. is exempted
from final tax. When the dividend finally falls to an individual shareholder, the 10%
final tax applies.
This exemption extends to dividends received by business partnerships from

domestic corporations since business partnerships are considered corporations
under the NIRC. However, the exemption does not extend to dividends received by
general professional partnership, exempt joint ventures and exempt co-ownership
because they are not considered corporations under the NIRC.
On the other hand, the exemption of inter-corporate dividends does not apply to
the share of a corporation from the net income of a business partnership due to
absence of express legal exemption. Exemption is restricted to dividend
declaration only.
149
=.

d
Dividends from cooperatives

Under RA 9520, the distribution of dividends by an exempt cooperative to ;
members either representing intere st l or as patronage refunds shall Not
on capita
be subject to tax.
Inter-corporate dividends from foreign corporations

Dividends received by corporations from foreign corporations are generalj
subject to regular income tax. However, domestic corporate recipients of such
dividends may be exempted under certain conditions which will be discussed jn
detail in Chapter 9.
ENTITIES TAXABLE AS CORPORATIONS ARE SUBJECT TO 10% FINAL TAX

The 10% final withholding tax also applies to dividends or share in the net income
of entities considered corporations under the NIRC and special laws, such as:
ji. Real Estate Investment Trusts
_2. Business partnerships
3, Taxable associations
4. Taxable joint ventures, joint accounts or consortia
_5. Taxable co-ownerships
Real Estate Investment Trust or REIT

A REIT is a publicly listed corporation established principally for the purpose of
owning income-generating real estate assets.
The following recipients of REIT dividends are exempt from the final tax:
a. Non-resident alien individuals or non-resident foreign corporations entitled
to claim preferential tax rate pursuant to applicable tax treaty.
b. Domestic corporations or resident foreign corporations
c. Overseas Filipino investors - exempt from REIT divide
nd tax until August 12,
2018 (7 years from the effectivity of RR13-2011 which took effect on
August
12, 2011)
Business partnership, taxable associations, joint venture, joint accounts oF

co-ownerships
Under Sec. 73 of the NIRC, the net income of these entities is deemed
constructively received by the partners, members or venturers, respectively, in
the same year the net income is reported. Hence, the 10% final tax applies at the
point of determin
of atio
the income,
n not at the point of actual distribution, —
150

ee
hare in business partnership net income

ne “share in net income” includes the share in the residual profit and provisions
for salary, interest and bonus to a partner. However, if the provisions for salaries,
interests, and bonuses are expensed as such in the book of the partnership, they
are subject to regular tax to the receiving partner, not to final tax. In this
case, only
the share in the residual income after such provisions is subject to final tax.
[llustration oilegs
The partnership profit distribution of partners Andy and Mar based on their agreed
profit distribution scheme is as follows:
Andy Mar
Salaries to industrial partner P 40,000 P 0
Interest to capitalist partner - 12,000
Bonus to industrial partner 25,000 -
Residual profit sharing 8,000 24,000
Profit sharing P___73,000 P 36,000
Assuming the salaries, interest and bonus are not expense in the book, the 10% final
tax shall be:
Profit sharing P 73,000 P 36,000
Multiply by: Final tax rate 10% 10%
Final tax P 7,300 P 3,600
Note: A partner, member or venture who is an NRA-ETB, NRA-NETB or NRFC shall be subject
respectively to 20%, 25% and 25% final tax rate.
ROYALTIES
Passive royalty income received from sources within the Philippines is subject to
the following final tax rates:
Recipient
_ | Source of passive royalties Individuals Corporations
Lt] Books, literary works, and musical compositions | 10% final tax 20% final tax
Other sources 20% final tax” | 20% final tax*
Note: p) Wd
1. Under the regulations, the 10% preferential royalty final tax on books and literary works
pertain to printed literatures. Royalties on books sold on e-copies or CDs such as e-books
, are subject to the 20% final tax. SoAtcoy’ )
‘ Royalties on cinematographic films and similar works paid to NRA-ETBs, NRA-NETBs or
NRFCs is subtojec
a finalt
tax of 25%.”
Passi .
assive vs. Active .
royalties
Syalties of a passive nature such as royalties of claim owners or land owners of
one Properties, royalties of inventors from companies that manufacture and
°l their invention, and royalty from licensing agreements that transfers the use
151

Gee Accrye
of trademark or technology are subject to 20% ial tan
, it is an activ
from an undertaking where the taxpayer has active Involve
income subject to the regular income tax.
¥ Illustration
These programs wer,
E-Soft Inc. develops application programs for establishments.
So nee and requireg
individually tailored to meet specific requirements of the
for problem s. The develope,
upgrades, occasional troubleshooting, and adjustments
receives 1% of the sales of the establishment as royalty. |
sel}, |
E-Soft also developed a utility program and assigned it to an e-marketer which
of |
the utility program through the Internet. E-Soft receives 30% royalty on each COpy
the program sold. |
The royalties from application programs are active income subject to regular income
royalty from the utility programs is passive income subject to final
tax. The
withholding tax, but if the e-marketer is not a resident in the Philippines, the passive |
income from abroad shall be subject to regular tax.
|
Royalties, active or passive, earned from sources abroad are subject to regular |
income tax.
PRIZES
The taxatio n
of prizes varies. Prizes may be exempt from income tax or subject to
either final tax or regular income tax.
Exempt prizes
bey 1. Prizes received by a recipient without any effort on his part to joina contest.
Examples include prizes from such awards as Nobel Prize, Most Outstanding
Citizen, Most Benevolent Citizen of the Year, and similar awards.
2. Prizes from sports competitions that are sanctioned by their respective
national sport organizations
Requisite of exemption
1. The recipient was selected without any action on his part to enter the contest:
2. The recipient is not required to render substantial future services aS 2
condition to receiving the price or reward.
Taxable prizes
For individual income taxpayers, taxable prizes are subject to either final tax
regular tax dependin on the amount
g of the prize. There may be events °
competitions where corporations earn prizes. However, there is no final
t
imposition on corporate prizes under the NIRC. Hence, the same must be subje“ |
152

Amount of taxable prize

Individuals
Recipient
uc} Prizes exceeding P10,000 20% finalt ___
Corporations
_.<| Prizes not exceeding P10,000 - tax
c Regu lar tax=
pular weeu ar tax
Regular tax
Recall also that final taxation does not apply to forei i,
prizes from foreign sourc ply elgn passive income; hence
WINNINGS
For individual income taxpayers, winni ngs received
from sources within the
Philippines are generally subject to 20% final tax, except
winnings
from Philippine
Charity Sweepstakes Office (PCSO) game S amounting
to P10,000 or less.
Similar to prizes, there is no final tax imposed on corporate

winnings under the
NIRC. Winnings that are not subjected to final tax by the payor should be reported
as part of the regular income. Also, winnings from foreign sources are
subject to
regular income tax.
fCge /[toHo 7
Recipient
Types of winnings v Individuals Corporations
PCSO winnings not exceeding P10,000 Exempt Exempt
PCSO winnings exceeding P10,000 20% final tax 20% final tax
Other winnings, in general - rargles pote 20% final tax
Regular tax
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.
Illustration 1
Apolinario won P10,000 first place in the singing contest sponsored by Syd Company
during their company anniversary celebration.
Since results of singing contest is based on effort rather than chance, the P10,000
payment is a prize which is not subject to 20% final tax since it is below the P10,000
threshold. Apolinario shall report the prize in his regular income tax return. If the
amount exceeded P10,000, Syd Company shall withhold 20% final tax.
Illustration 2 ae
Roy's raffle ticket was selected as the second winning ticket in the raffle draw of ZFT
Mall for P10,000 dubbed as “2nd Prize”.
Since raffle draw results is not based on effort but on chance, the P10,000 payment is a
winning which is subject to 20% final tax. The same shall be withheld by ZFT Mall. Note
that the P10,000 threshold applies only on prizes, not on winnings.
153

Illustration 3 detajj, ;
three bets to the PCSO lotto draws. Al l tickets won. The
Mr. Dante Paya made
the winnings were:
- EZ2-P 4,000
- 6/42 -P10,000 (3-digit winning numbers)
- 6/45 - P20,000,000 Grand prize (sole winner)
exceed P10,000 in amoung
The 6/42 and EZ2 winnings are exempt sinc e they did not
amount of the winnings.
PCSO shall withhold 20% final tax on the entire P20M
|
TAX INFORMER’S REWARD
A cash reward may be given to any person instrument:al in the ddiscovsei ery of |
violations of the National Internal Revenue Code or_discovery and seizure of
‘smuggled goods, The tax informer’s reward is subject to 1
0% final tax.
Requisites of Tax Informer’s Reward:

1. Definite sworn information which is not yet in the possession of the BIR
2. The information furnished lead to the discovery of fraud upon internal
revenue laws or provisions thereof.
3, Enforcement results in recovery of revenues, surcharges, and fees and/or |
conviction of the guilty party or imposition of any fine or penalty.
4. The informer must not be a:
a. BIR official or employee
b. Other public official or employee
c. relative within the 6th degree of consanguinity of those officials or
employee in a. and b. |
Amount of Cash Reward - whichever is the lower of the following per case:
1. 10% of revenues, surcharges, or fees recovered and or fine or penalty
imposed and collected or
2. P1,000,000 jini
The amount of cash reward is subject to 10% final withholding tax which shall b¢ |
withheld by the government. |
Illustration
Ms. Kirsten provided information to the BIR leading to the recovery of P12 000,000
unpaid taxes. The cash reward shall be computed as follows:
10% cash reward (P12,000,000 x10%) P1,200,000
Cash reward limit P1,000,000
Cash reward (whichever is lower) P1,0,000,
Less: 10% final withholding tax
ico'008
Net amount to be released to the tax informer P900,000 + |-::,
154

sAX-FREE CORPORATE COVENANT BONDS

interest Income of non-resident aliens, citizens or residents of the Philippines on
ponds, mortgages, deeds of trust, or other similar obligations of domestic or
resident foreign corporations with tax-free or t ax-reduction provision where the
abligor shoulders in whole or in part an y tax on the interest shall be
subject to a
nal withholding tax of 30%,
Bond investor
Individuals Corporations
Tax on interest Income on tax-free | 30% final tax Regular income
corporate covenant bonds tax
Note: . oo
1, The final tax applies to all individuals, regardless of classification.
2, There is no similar final tax provision for corporate recipients of “tax-free” interest; hence,
the regular income tax shall apply.
EXCEPTIONS TO THE GENERAL FINAL TAX ON NON-RESIDENT PERSONS NOT

ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES
NRA-NETB NRFC
General Final Tax Rate 25% 25%
Exceptions:
1. Capital gain on sale of domestic 15% Capital 15% Capital
stocks directly to buyer gains tax gains tax
2. Rentals on cinematographic films
and similar works 25% of rentals 25% of rentals
3, Rentals of vessels 25% of rentals 4.5% of rentals
4. Rentals of aircrafts, machineries,
and other equipments 25% of rentals 7.5% of rentals
5. Interest income under the foreign
____ currency deposit system Exempt Exempt
Interest
6. on foreign loans N/A 20%
15% if tax
7. Dividend income 25% sparing rule is
applicable
8. Taxon corporate bonds 30% 30%
Capital gains tax

‘arule, NRA-ETBs and NRFCs do not file income tax returns. Exceptionally, NRA-
NETBs and NRFCs are required to file income tax returns to report their gain from
®alings in domestic stocks directly to buyers. Ownership of the stocks shall not
* transferred to the assignee without the required return and tax clearance
155

come Taxation
Chapter 5 - Final In
from the BI R that the tax on y
CAR)
er ti fi ca te Au th or iz in g Regis tration or e
(C
transfer has been paid.
Illustration: NRA-NETB
s
a Humabon Company (RHC)
Wa ng Lu, an NR A- NE TB , was hired b y Rah s him royalty
a)
In 2021, Mr. RHC ’s fac tor y. RH C pay
install his invention 1n
domestic manufacturer, to eed to design RHC’s websit
e which he |
Lu also agr
and the installation fees. Mr. Mr. Lu s visit, he purchased shares of Ru
y
ted abr oad . Dur ing
designed and comple
ly to a buyer.
and subsequently sold them direct
P 300,000
Royalties from inven tion 1,000,000
Installation fees 500,000
Website development fees 40,000
to a buyer
Gain on sale of domestic stocks directly
RHC shall withhold the following final taxes:
Royalties from invention

P 300,000
Professional fees 1,000,000
Total gross income P1,300,000
Multiply by: final tax on NRA-NETB 25%
Total final withholding tax P__325,000
Note:
1. The final tax applies on gross income, whether active or passive. The same rule and final tax |
rate apply with NRFC taxpayers.
2. The website development fee is not subject to final tax since the same is earned abroad.
Note that the service is rendered abroad, not in the Philippines.
3. Mr. Lu shall file a capital gains tax return for the gain on the sale
of domestic stocks.
The Tax Sparing Rule

~NRECs shall be subject to a15%
general final tax if the country offinal tax on dividendC inc insitead of the—"25% |
ome aga
domi of ci le
the NRF credits edits against the tax due
of such NRFC taxes presumed to have been
Philippines equivalent to 10% of the
dividends
156

] tax to be imposed by the Philippi , , : mestic corporation. The

fina
corporation shal all be withheld by the domestic
l be 15%, not 25%, if
. tax upon the P1,
its income ; P 000,00 at least 10%, the dividend tax
t % general final tax rate. If the
: ce its tax on the divi z 0,
Philippines shall impose the 25% final tax, © Aividend by at least 10%, the
1, Fringe benefits of mz
Income payments of residents
9.
3, Income payments to oil exploration service contractors or sub-contra

ctors
FRINGE BENEFITS TAX
Fringe benefits include all remunerations under an employer-employee
relationship that do not form part of compensation income. The fringe benefitsof
managerial and supervisory employees are Subject to a
final fringe benefits tax.
This will be discussed in detail in Chapter 11.
INTEREST AND OTHER INCOME PAYMENTS TO DEPOSITARY BANKS

UNDER
THE EXPANDED FOREIGN CURRENCY DEPOSIT SYSTEM
Residents, other than depositary banks under the expan
ded foreign currency
deposit system, shall withhold 10% final tax on income payments
such as interest
income on loans from expanded foreign currency deposit units
(FCDUs). The final
taxation of FCDUs and EFCDUs will be discussed in Chapter 15-A.
INCOME PAYMENTS TO SUB-CONTRACTORS OF PETROLEUM SERVICE

CONTRACTORS
Under PD 1354, every subcontractor, whether domestic or foreign, enteri
ng into
a contract with a service contractor engaged in petroleum Operations
in the
Philippines shall be liable to a final income tax equivalent to eight percent (8%) of
its gross income derived from such contract, such tax to be in lieu of any and all
taxes, whether national or local.
Provided, however, that any income received from all other sources within and
Without the Philippines in the case of domestic subcontractors and within
the
Philippines in the case of foreign subcontractors shall be subject to the regular
come tax under the NIRC.
157

The term "gross income" means all income earned

or received 2 result of the
contract entered into by the subcontractor with a service contractor engageq i
petroleum operations in the Philippines under Presidential Decree No. 87,
Note that the 8% final tax applies only to subcontractors, whether individuals op
corporations, resident or non-resident. Petroleum service contractors are subjeg to
the regular income tax.
Persons or entities contracted by a petroleum service aren to cally Supply
goods and materials that are required by and in, or that are in eren : Necessary
or incidental to, its exploration and development of petroleum minera
resources
and are entitled to the preferential 8% final tax on their
gross income derived.
from such contracts. (BIR Ruling No. 024-2001, June 13, 2001)
Note on Special Aliens
Under the old law, employees of offshore banking unit.
s, regional operating or
regional administrative headquarters of multinational compan
ies, referred to as
speci
al aliens, are previously subject to 15% final tax on gross compensation |
income. The special alien classification is now
abolished by virtue of a presidential
veto to the TRAIN law. As such, these empl
oyees are now subject to regular
income tax if they are residents and 25%
final tax if they are non-residents, ~
FINAL WITHOLDING TAX RETURN
The final withholding tax return (BIR
Form 0619-F), Monthly Remittanc
of Final Income Taxes Withheld, e Return
shall be filed in triplicate by eve
NE
agen or payo
t r who is either an individual or corporat ry withholding
of the quarter. ion for the firs t two months
———err
Deadline and place for mont
hly manual filing
The return shall be filed and
filed the tax shall be paid
or before the 10th day of the
month following the month
in which withholding was
a. The authorized agent ban made with
k of the revenue district office : a
over the withholding agent’ having jurisdiction
s place of business
b. ces where there are no authorize
d agent banks, to the rev
officer enue collection
c. The authorized city or municipality tr
.
where the withh olding agent’s p lace easure r withi istrict
of business js lo n the revenue dis
cated
Monthly deadline for eF
PS filing
In accordance with th
e schedu
filing of returns is as follows: le set forth in RR No . 26- . e&
©2002, the deadline for
| GroupA - Fifteen (1
5) da ys following the
end
Gro up B - Fourte
en (14) days following the of the month
end of the month
158

—_
7 —
group © - Thirteen (13) days following the end of the month

croup D- Twelve (12) days following the end of the mont
h
croup E ~ Eleven (11) days following the end of the month
note: Please check the groupings of taxpayers under eFPS in Chapter 4.
quarterly filing
tance
The withholding agent shall file (BIR Form 1601-FQ), Quarterly Remit
return of Final Income Taxes Withheld, on or before the last day of the month
after each quarter.
penalties for Late Filing or Remittance of Final Income Taxes Withheld
The same penalties for late payment of income taxes as discussed in Chapter 4
apply for non-withholding or non-remittance of final taxes.
ENTITIES EXEMPT FROM FINAL INCOME TAX

1. Foreign governments and foreign government-owned and controlled
corporations
2. International missions or organizations with tax immunity
3, General professional partnership
4, Qualified employee trust fund
The first two categories are exempt on grounds of international comity. General
professional partnerships and qualified employee trust funds are expressly
exempt from any income tax imposed under the NIRC.
These entities are exempt not only

to final tax but also to capital gains tax and
regular income tax.
Acomprehensive summary of final tax rates is presented in Appendix 1.
159

Discussion Questions . —_
on:
1. Whatare the features of final income taxati
2. Explain withholding at source. i rrespondj
3, Enumerate the passive income subject to final tax and their co ponding tax
all
eae are the two types of taxpa
c yers W ho are subject to final tax rates, 9 n
4. What
applicable tg
income from within the Philippines? What are the general tax rates
each? .
.
5. Enumerate the requisites of the tax informe! r’s reward.
final withholding taxes,
6. Discuss the procedures and deadline in rem! tting the
' ” True or False 1

4¢ Individuals and corporations are tax-exempt on interest income on long-term |
deposits. . ‘
Ty 2. Generally, interest income from non-bank sources Is subject to regular income tax,
3. Foreign income is subjected to final tax if the taxpayer is taxable on global income, |
~4, Items of passive income from abroad are subject to final tax.
‘~ 5. Interest income on government securities are subject to final tax.
6: Allitems of passive income are generally subject to final tax.
) 7. Final tax is collected at source; hence, there is no need to file an income tax return.
8; Corporations are tax-exempt on inter-corporate dividends from any corporation.
7 9. Dividends from resident corporations are subject to regular tax.
X
10. Dividends from Real Estate Investment Trusts are exempt from final tax.
11. Stock dividends are always exempt from final tax.
12. Corporations are subject to final tax on prizes.
13. The share in the net income of a business partnership is subject to a creditable
withholding tax, not to final tax.
14. General professional
partnerships are subject to final tax but not to regular tax.
T 15. All non-residents
are exempt from final tax on foreign currency deposits.
16. Royalties, active or passive, are subject to regular
income tax.
17. The tax sparing rule is applicable to
resident and non-resident foreigt
corporations.
_ True or False 2
_t. The final withholding tax return shal I
be filed by the withholding agent on 0
. before the 15t day of the month
the final taxes were withheld
2° A government employee may
claim the tax informer’s reward
3; The final tax on winnings applies
to corporations. )
4. Individuals, except corporations,
are sub ject to final tax on
winnings abroad.
‘; Winnings which are not more than P10
,000 in amount are subject to the reg |
income tax. u!
160

ter 5 - Final Income Taxation
chap
pcsO winnings are exempt from all]
types of income tax.
special aliens do not fi € a regular inco
me tax return on their compensation
IX
income. ;
+
the final tax on interest on tax-free corporate

covenant bonds
resident individual or corporate taxpayers,
od
NRA-NETB and NRFC are subject to oe a

¥ final ta x Only to passive income from sources
in the Philippines.
NRA-NETB and NRFCs are not required
f 10. to fi le the regular income tax return.
4 11. Residents shall withhold 10% final tax upon interest on foreign currency loans of
FCDU banks under the expanded foreign currency depos
it system.
1 12. A qualified employee trust fund is not subject to final tax.
13. The income of FCDU banks from fellow depositary banks under the expan
ded
foreign currency deposit system is subject to 10% final tax.
7 14. Petroleum service subcontractors are subject to 8% final tax on their income from
petroleum service contractors.
71s . Foreign governments and foreign government-owned and controlled corporations
are exempt from final tax.
Multiple Choices - Theory 1

1, The final tax rates on pre-termination of long-term deposits are not relevant to
(a) any corporations. c. resident aliens.
b. resident citizens. d. non-resident citizens.
2. Which is correct with regard to the final income taxation?

(a.) Taxpayers need not file an income tax return.
It covers all items of passive income from whatever sources.
c. It applies to all items of gross income of any non-resident earned from
sources within the Philippines.
d. Itapplies to passive income earned abroad.
3, Which statement is correct regarding final income tax?

a. Items of income subjected to final tax can still be subjected to regular tax.
(b,) Final tax applies only on certain passive income earned within the
Philippines.
¢. Items of income exempt under final tax are subject to regular tax.
d. Final income tax applies to all passive income from Philippines sources.
4. Interest income from which of the following sources is subject to final income tax?
a. Lending c. Investment in corporate bonds
Mortgage loans (d,)Money market placements
The final tax does not apply to interest on (select the best answer)
~ Long-term deposit c. Deposit substitute
Trust funds (d)Promissory notes
161

te r 5 - Fi na l In co me Taxation
Ch ap not applicable
fro m lon r™t is
posi
- g-term de=po
‘nt ere é st
i on fina ] tax on = ation Or individuals Q
6. The exemption c. Re si n corp
als
a. Citizens individu d. All of the |
| b.. Co rp or at io ns
tax:
is not su bj ec t to any income
Which interest inc om
e
discount notes
7,
a. Interest income from bank
in co me fr om bo nd s issued bya
b. Interest
c. Imputed interest tute
posit substi
d. Interest income from de
ject t | to 15% ;final tax on interest from foreip,
8. Which of the following i 5 subjec ks?
currency deposits made with Philippine ban
a. Non-resident corporation
business
b. Non-resident alien engaged in trade or
or business
c. Non-resident alien not engage din trade
d. Resident alien
on all income from sources within th,
9, The following are subject to final tax
Philippines. Which is the exception?
a. Non-resident foreign corporation
trade or business
b. Non-resident alien not engaged in
business
c. Non-resident alien engaged in trade or
d. None of these.
10. The interest income from long-term peso deposits made with foreign banks is
a, subject to 20% final tax. c. subject to regular tax.
b. exemptfromanytax. d. None of these.
11. What is the final tax on interest income on 6-year deposit pre-terminated less
than 2 years before maturity?
a. 20% c.5%
b. 12% d.0%
12. Which of the following recipients is exempt from final tax on dividends?
a. Resident citizen c. Resident corporation
b. Non-resident alien d. Resident alien
13. A agen declaration in 2019 is subject to a final tax of
a. 6%, c.10%.
b. 8%. d. 20%.
14, Dividends declared by a resident
corporation is
a. exempt from any tax - ¢.Cc. subj Subject to regular in
b. subject to 10% final tax. d. subject
to 20% final tax. us
162

a
er
re
pter 5 - Final Income Taxation

cha
Between the date of declaration and the date of record, BCD, Inc. sold an
investment representing stock of ABC, Inc., a domestic corporation. Which
stat ement is correct?
@ ABC, Inc. shall withhold 10% dividend tax if the buyer of the sale is an
individual.
b. ABC, Inc. shall withhold 10% dividend tax if the buyer of the sale is a
corporation.
ABC, Inc. shall withhold 10% dividend tax if the seller of the sale is an
individual.
ABC, Inc. shall withhold 10% dividend tax if the seller of the sale is a
corporation.
2
Multiple Choices - Theory
1. Prizes from sources abroad is subject to final tax
a. if the amount of prizes exceeds P10,000.
b. if the amount of prizes does not exceed P10,000.
c if it is given to the taxpayer without effort.
/ ‘a
LY
under no circumstance.
Which is covered by final tax?

a. Interest income from foreign banks
(b Share in the net income of a joint venture
Cc. P10,000 taxable prizes from the Philippines
d. Share in the net income of a general professional partnership
Which is not subject to 20% final tax?

a, Interest income from trust funds
(b. Royalties from musical compositions
C. P11,000 worth of prizes
d. Winnings
Which is not subject to 10% final tax?
a. Royalties from literary works
b. Dividends from a domestic corporation
Cc. Share in the net income of a business partnership
d) Royalties from a business trademark
Which of the following is taxable?
on
a. Prize on sports competitions sanctioned by the national sports organization

cb, Prize from dance competition abroad
C, Nobel prize
d. Any prize received without effort
Which winning is taxable to a final tax?
an
a. Winnings exceeding P10,000 c. Winnings from PCSO lotto

Winnings not exceeding P10,000/d™All of these
163

—————E OO S,-S—<“<‘i*;*é‘FYT
i. The following are subject to final tax, except one. Which is the exception?
‘a.’ Jueteng winnings c. PCSO winnings not exceeding Pigx
b. Lotto winnings exceeding P10K d. All of these
8. Which of the following is exempt from final tax?

a. Interest income earned by a bank from deposits in another bank
b. Royalties from books ae
c qe Interest income earned by a bank from lending activities
All of these
9. Dividend income from domestic corporations is subject to final tax effective

a. 2000 c..1998
b. 1999 d. 1997
10. Prizes arising from sources within the Philippines may be

a. subject to final tax.
b. subject to regular tax.
C. exempt from tax.
dd exempt or subject to final tax or regular tax.
11. Any royalties earned abroad by a non-resident corporation is

(a.
ee ) not subject to Philippine income tax.
b. always subject to final tax.
Cc, subject to either final tax or regular tax.
d. always subject to regular tax.
12. The winnings of a resident alien from abroad is
a. subject to regular tax.
b. subject to final tax.
7 c
(dp
(7
subject to either final or regular tax.
not subject to Philippine income tax.
13. Royalty income ofa domestic corporat
ion from abroad is
a.) subject to regular tax.
subject to final tax.
o(
subject to either final tax or regular tax.

a9
not subject to Philippine income tax.
14. Wi nnings from PCSO are generall

y
a.) exempt from any tax.
b. subject to regular tax,
C. subject to 20% final tax
d. subject to both final and regular tax.
164

\
\\
\ 5 - Final Income Taxa
chapte tion
\
45. The final tax rates on passive j Income are generally sim
taxpayers, except one. Select the exception. lowin
: Ee ge nett .
a, ‘Domestic ieee
c. Non-resident citizen
b. Resi ident alien ‘d)
d.\Non-resident corporation
16. The tax informer’s reward may be granted to
a. Officials of the BIR
b. Public officials or employees
c. Close relatives of public government employees
a) Relatives of government employees beyond the 6th degree of consanguinity
17. Which is not subject to final tax?
a. Compensation to non-resident aliens not-engaged
b. Fringe benefits of Supervisory and managerial employees
c. Income of non-resident foreign corporations
@ Fringe benefits of rank and file employees
18. Which of the following is exempt from final tax?

a. Winnings in competitions sponsored by a local trading compan
y
b. Prizes in a body building competition
C.) Dividends from a foreign corporation
Winnings from a casino
Multiple Choice - Problems 1

1, Certain debt instruments were issued at the following scenario:
Instrument Lenders at origination
i Treasury notes 14
Il. Investment certificate 20
ll. Certificate of deposit 30
IV, Investment certificate 18
The interest income from which of the foregoing is subject to final tax?
a I, II, land IV c. I] and IV
b. I, land IV d. IV only
a Winnie, a resident citizen, deposited P2,000,000 in the 180-day time deposit of

Banco de Oro. The deposit pays 8% interest. Compute the final tax on maturity of
the deposit,
a. P6,000 c. P20,000
P8,000 a.P 16,000
3 Assume that Winnie is a non-resident alien not engaged in trade or business;
Compute the final tax on maturity of the deposit.
a. P6,000 @P20,000
P8000 d. P16,000
165

4. Renz received P42,000 interest from short-term deposits. Compute the final tay
withheld on the interest.
a.’ P10,500 c. P5,000
b. P9,000 d. P4,500
On January 1, 2021, Mr. Albuera invested P2,000,000 in the six-year time deposi
of Sulu Unibank which pays 10% annual interest. Compute the final tax to be
withheld by Sulu Unibank on December 31, 2021.
@) PO c. P200,000
b. P100,000 d. P250,000
Assume Mr. Albuera pre-terminated the time deposit on July 1, 2025; compute th,
final tax to be withheld on pre-termination.
a. P5,000 ¢¢’P45,000
b. P12,000 d. P108,000
Boy, a resident citizen, received the following interest income:

¢ 80,000 from short-term Peso time deposit
e 16,000 from a five-year bonds issued by a commercial bank
¢ P24,000 from 5/6 lending to market vendors
How much final tax must have been withheld from Boy’s interest income?
a. PO X€.P20,000
b> P16,000 d. P24,000
Jack Corporation, a domestic corporation, depo

sited P1,000,000 in the five-year
time deposit of Banco Pilipino which pays 10%
annual interest. Compute Jack
Corporation’s net interest income in the
first year of the deposit.
a. P100,000 (c)P80,000 Jovy k~ 20,
b. P90,000 d. P70,000 SO, EU?
Assume Jack Corporation is a non-resident corp
oration; compute the final tax on
interest income.
a. PO c: P25,000
b. P20,000 d. P30,000
10.
pre-termination.
a PO
¢c. P17,500
b. P10,000 id? P42,000
166

\
Nepapter 5 - Final Income Taxation
\ able every quarter. How m struments pay

ater of the issue? pay 10% 6 annual interest
uch final tax should UniBank withhold
in the first
a PO c. P6,250
(Cb) P5,000 d. P20,000
12. Charles, a resident citizen, de
depositary bank which pays 12% annual int
withheld in the first year? Interest. How much final tax shall be
(a. PO c. P120,000
b. P45,000 d. P150,000
13. Rodrigo, a non-resident citizen, deposited his
$2,000,000 Savings in a two-year
time deposit in Blue Bank, a depositary bank under the expanded foreig
deposit system. The depo n currency
sit pays 8% annual interest. Compute the
withheld in dollars in the first year, final tax to be
(a2 $0 c. $64,000
b. $24,000 d. $80,000
14. Gabriel is a non-resident citizen working abroad.
He invested his $1,000,000
personal savings in a FCDU bank under a joint accou
nt with his resident wife. The
bank pays 8% annual interest. Compute the final tax to be
withheld in one year.
a $0 c. $ 12,000
(b. $6,000 d. $ 16,000
15. Yvonne, a non-resident alien not engaged in trade or business, made
a $5,000,000
deposit to an FCDU Bank. The deposit pays 8% annual interest. Compute Yvonne
’s
final tax in the first year.
‘a $0 c. $ 160,000
b. $60,000 d. $ 200,000
16. David, a resident alien, deposited $1,000,000 in a depositary bank under the
expanded foreign currency deposit system. The five-year savings deposit pays
10% annual interest. Assuming a P45:$1 exchange rate, how much final tax on
interest would be withheld in the first year?
a PQ c. P 40,000
b. P 15,000 /d) P 675,000

‘Mr, Siegmond, a resident citizen, received P100,000 dividend income from Vodka,
Inc, a domestic corporation. How much final tax must have been withheld by
Vodka, Inc.?
a PQ c. P20,000
& Piai41 d. P25,000
167

Kenneth Inc., a domestic corporation, was credited een vuithhe On it |

; |
* depositary account in an FCDU Bank. How much final tax w
a $0 (€,$ 6,937.50
b. $7,500 d. $ 23,125.00
3. |
Assuming Kenneth Inc. is a resident foreign corporatioi n, how much h fifinal tax Was
withheld?
a. $23,125.00 c. $ 7,500 |
by) $6,937.50 d. $0
4. 7Tuazon ivi
Corporation declared P1,000,000 dividends i
ieaat 21.
i 409
Comp, ,;
its
outstanding shares is held by its only corporate investor, , the |
amount of dividends tax to be withheld on declaration. |
a. PO Cc.P 60,000 |
b. P 40,000 d. P100,000
5. Mr. Nice, a resident alien, owns 40% of the shares of Coco Corporation, a resident
corporation. Coco declared P200,000 dividends in 2021. How much fj nal tax |
should be withheld from Mr. Nice’s’ dividend income? i
a. P40,000 c. P8,000
b. P20,000 (dP 0
6. Jericho, Inc. owns 20% of the stocks of Kidapawan Corporation. Jericho and
Kidapawan are both domestic corporations. Kidapawan declared P120,000
dividends in 2021.
How much dividend income after any appl

icable tax will Jericho receive?
J Ca P24, 000 c. P19,000
b. P20,000 d. P18,000
partnership on Gina’s profit

sharing.
a PO c. P10,000
b.) P8,000
d. P20,000
8. Jose Man ons 20%
of the capital and pro
partnership. The partners fits of a general prof
hip reported PS00,000 essional
tax will be withheld from profitsj
Jose Mari? final
a P100,000 P te ow
c. P10,000 mice
b. P50,000
d. PO
joint venture, engaged in the

trading
P200,000 profits for 2021, Bor
of ho : .
tome appliances. Wise Ventures report? d
apte .5 - Final Income Taxation
w much final tax will

PO be Withheld by Wise
©: P20,000 Ventures?
p. \P10,000
d. P40,000
10.
boanga Corporation, a resi
mnilipine ion
, i
laws. ZambVe ntures (SPV), an Re
n e
i |
oanga ow ns 30% int ted jo in t sa ure formed under
p3,000,000 profit Philippine
and declared P1,0
be withheld from th 00,000 in divi
e dividend distribu
ti
a. P100,000 c. P90,000
b. P30,000 d. PO
11.
How much final tax will Peter Wow

withhold?
a. P200,000 c. P140,000
b. P 60,000 ap 0
12, Mr. Badugan published his book abroad for

the international market. During the
first quarter, he earned a gross royalty of P1,0
00,000. How much final tax will be
withheld by the foreign publisher?
a. P250,000 c. P100,000
—b. P200,000 (d?P0
13. Midsayap Inc. is the only corporate shareholde
r of Midsayap Inc. owning 60% of
its outstanding voting shares. During the year, Midsayap Inc.
declared a
P1,000,000 dividend. Compute the final income tax to be withheld by Surigao.
a P100,000 cc. P40,000
b. P60,000 d.P0
14, Mr. Taiwan won an
P800,000 prize in a national dancing competition. The
organizer of the event declared that the P800,000 grand prize was “tax free.”
How
much final tax must be remitted by the organizer to the BIR?
@ 'P 200,000 c. P88,889
P 160,000 d.P0
15 - Mr, Crocodile Park owns a mining prope
rty in Prosperidad. He allowed a mining
it on that he willi be paidi 10% % roy:
‘ompany to operate under a conditi royalty on the
Bold production The mining company produced P8,000,000 worth of gold during
the year, How much net royalties will be paid to Mr. Crocodile?
* P800,000 c. P720,000
© 640,000 d. P160,000
169
~~ ee


1. Tiong Go Department Store conducted a sales promotion where Custom
purchases exceeding P1,000 in one transaction shall be entitled to a ticket for 4
chance to win P500,000 raffle prize. Mr. Shing won the prize.
How much shall Tiong Go withhold from the grand prize?

a. P200,000 c. P 50,000
b. P100,000 d.P0
2. Mr. Sheriff Aguak earned the following prizes from two different competitions:
Date Event Gross Prize

anuary 4, 2017 Singing competition P 12,000
:Februarya 14, 2017 Painting
7 competition 10,100
Compute the total final tax that should have been withheld from the above prizes,
a. P5,500 c. P3,000
b. P4,420 d. P2,400
Mr. Remington Orayt participated in two different events on January 4, 2021:
Date Organizer Competition Gross Prize

January 4,2021 Ang Mahiwagang Boses Singing P 10,000
January 4,2021 Sexy Body Foundation Dancing 11,000
Compute the total final tax that should have been withheld from the above prizes.
a. PO
&
c. P3,000
b. P4,420 d. P2,200
Mr. Conrad won the P50,000,000 6/49 Superlotto Jackpot of the Philippine
Charity Sweepstakes Office. How much final tax will be withheld?
a. P500,000 c. P100,000
b. P 200,000 d. P 10,000,00
Ms. Matti won a gold medal and P50,000 cash prize for chess competition in the
Palarong Pambansa. How much final tax should be withheld from the prize?
a. P 20,000 c. P5,000
b. P 10,000 ‘d, PO
Tabong, a resident citizen, won $1,000,000 from the US lottery. The lottery
winning is
a. exempt from tax c. subject to 10% final tax
b. subject to 20% final tax “d,‘subject to regular tax
170

xt
al Income Taxation
C papter > ~ 7
dang submitted a sw ;
Mr. r ™Caran of Cutiei Corporation. orn
This statement
Jeg re § arding g the the al eg tax evasion
alleged
taxes. HOW much net tax informer’s oie rdtheshalBIR 0 recover P20,000 000 unpaid
p
1,800,000 c.P1,000,000
l be paid to Mr. Carandang?
P aie.
p, P1,600,000 d. P900,000
A concerned government employee furn
ished the BIR a statement detailing the
improper tax practice s ofa corporate taxpayer. The information was
instrumental
to the collection of P500,000 tax. How much informer’s tax reward after tax shall
be released to the informant?
(a) PO c. P45,000
‘bp. P40,000 d. P50,000
An individual taxpayer invested P1,000,000 in the “tax-
free” corporate bonds of
RBC Corpo ration. The bond pays 8.75% interest annually net of
much final tax must RBC Corporation withhold from any taxes. How
the annual interest payment
to Roy?
a, P36,000 (& P37,500
b. P16,800 d.P.0
10. A taxpayer wants to manually file his Monthly Remittance Return
of Final Income
Tax Withheld for the month of February 2021. What is the deadline for
the return?
a. February 14, 2021 c. March 10, 2021
b. February 28, 2021 d. April 15, 2021
11. In reviewing its tax compliance, Rang-ay Banco noted that

it failed to remit the
P90,000 final taxes it withheld for the month of February
2021. Compute the total
amount of taxes due including the penalties if Rang-ay Banco
settles the obligation
on March 20, 2021.
a P 102,827 c. P 127,796
b. P112,796 id’P 128,000
12, Bangko Illustrado failed to withhold the final tax on the P1,200,000 interest
expense which was credited to various accounts of individual depositors in the
month of April 2022. It wants to settle the unpaid final withholding tax on June 10,
2022. Compute the surcharge and interest penalty due.
@) P 64,000 c. P 62,400
b. P 62,446 d. P 62,367
171

ation
Chapter 6 - Capital Gains Tax
CHAPTER 6
CAPITAL GAINS TAXATION
“es.
This chapter discusses the items of gross income subject to the capital Bains
|
and the tax rules of the two types of capital tax under the NIRC.
After this chapter, readers are expected to be able to:
1. Identify and distinguish ordinary assets and capital assets
2. Recite the asset classification rules
3. Memorize the two types of capital gains subject to capital gains tax and thei|
corresponding tax rates and tax bases
4. Master the procedural computations of the 15%capital gains tax and the 6%
capital gains tax
S. Master the rules on wash sales and tax-free exchanges
6. Master the exceptions to the 6% capital gains tax
7. Memorize the documentary stamp tax imposed on the sale of stocks and req.
properties =
CLASSIFICATION OF TAXPAYER’S PROPERTIES

1. Ordinary assets - assets used in business, such as:
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
b. Real property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business
c. Real property used in trade or business of a character which is subject
the allowance for depreciation
d. Real property used in trade or business of the taxpayer
Business is habitual engagement in a commercial activity involving the regular s#®
of goods or services fora profit. Non-profit entities are not businesses.
Basically, ordinary assets are:
a. Assets held for sale - such as inventory j
b. Assets held for use - such as supplies and items of property plant
equipment like buildings, property improvements, and equipment
2. Capital assets - any asset other than ordinary assets |

172

Chapter 6 - Capital Gains Taxation
Basically, capital assets are:

1. Personal ( non-business) asssets
2. Business assets of any taxpayers wae taxpayers
a. Financial
inivestrivenisassets ~ Such as cash, ae
receivables, prepaid expenses and
b. Intangible assets -
franchise rights such as patent, copyrights, leasehold rights;
ANALYSIS OF PROPERTIES HELD BY

TAXPAYERS
INDIVIDUAL TAXPAYERS
¥
Vv y
Personal asset Business asset
(All are capital assets) T
t y
Ordinary assets Capital assets
CORPORATE TAXPAYERS
t
y y
Ordinary assets Capital assets
Asset classification is relative .

The classifi cation of assets or properti es as ordinary asset or capital asset does not
the nature of the pro per ty but upo n the nature of the taxpayer's
depend upon
ness.
business and its usage by the busi
Example: is a capital asset
stock is an 0 rdi nar y asset to a dealer in securities but
1. Adomestic
to a non-security dealer. ed place of
is a mer cha nt of stocks or securities with a register |
A “dealer in securities” se of securities and their re-s
ale to customers.
rly eng age d in the pur cha
business, regula
engaged in the rea
unu sed lot is an ordinary asset to a taxpayer sor but is a capital
2. A vacant and
ty dealer, realty dev
eloper, or les
bus ine ss suc h as real
estate
e real estate business.
asset to those not engaged int
173

Ls
Taxation
Chapter 6 - Capital Gains
re ve nu e regu la ti ons class ify real and other properties q, ui
engapeg Mir
Interestingly, the en if banks are not actually
by ba nk s as ordinary assets ev factinethat
ition of th ef bus ROPA are norms
(R OP A) .'t ss. However, Ro 4
arent recogn
realty business. This is an appin their normal course oI PA
ene held by Z ban kss areall capi tal asse ts. seUnd ertiesRR6.hel209¢ Q
aie efo wena

ene
an d cu ri d i,
mean stocks
capital assets’
“stocks ks ¢ classified as curities.
taxpayers ot her than dealers in se
ification Rules
Asset Classifica :
ture use in business 1S an ordinary asset eye,
A. eign thi
forer futhwarted by circumstances beyond the taxpaye rs
e s leaurchasedis lat
control.
s not change its characte,
B. Discontinuance of the active use of the property doe
property.
previously established as a business
y d, in trade of the
C. Real properties used, being used, or have been previousl use
taxpayer shall be considered ordinary assets.
business
ined
us by a
D. Properties classified as ordinary assets for being
taxpayer not engaged in the real estate business are automatically converted
to capital assets upon showing of proof that the same have not been used in
business for more than 2 years prior to the consummation of the taxable
transaction involving such property.
E. A depreciable asset is an ordinary asset even if it is fully depreciated, or there
is a failure to take depreciation during the period of ownership.
F. Real properties used by an exempt corporation in its exempt operations art
considered capital assets. Exempt corporations are not business.
G. The classification of property transferred by sale, barter or exchangé
inheritance, donation, or declaration of property dividends shall depend ®
whether or not the acquirer uses it in business.
H. For real properties subject of involuntary transfer such as expropriation and
foreclosure sale, the involuntariness of such sale shall have no effect on
classification of such real property.
I. cham the business from real estate to non-real estate business shall not
sitication of ordinary assets previously held.
developes , Fede tex lessor estatetaxpayers

real and real estate
includes engaged
businesshabitually dealer, rea!
in real estate busines
Taxpayers habitually
HLURB or HUDCC as dealer or develo . sta
ose with at least 6 taxable real ©
sales transactions i per or th
n the preceding year.

chapter 6 - Capital Gains
Taxation
jlustration 1 - Property
lfonso has a buildin
Mr ic allowance for decrecis . In juh used as an office and is subject to
egic shift office
ot Inistrative in his bus
in aniness ‘2 uly 1, 2021, Mr. Alfonso i ented z
Perations
resulting to the Téloottion oF “ts
° . otner city and the resultant abandonment of his office.
é ’ -€. More than . ;
building shall be reclassified as omital as ee ciscontinuance
; of use), the old office
not been use for more than two years Set upon showing of proof that the same has
Case 2: Mr. Alfonso is engaged in r. eal estate busine
ss
The old offi shal continue to be an ordina as.
the propertycefrom l act . use.
ive ty ‘di ng of
set despitepite t. the abandonment or idli
Illustration 2 - Property acquired

In June 1, 2021, Mr. Alfonso purchased a building to be used as a branch sales office.
The building remained idle as of December 31, 2024 due to an ongoing civil
war.
Case 1: Mr. Alfonso is a not engaged in real estate business
The property shall remain to be an ordinary asset. The two-year rule applies only to
properties which are classified as ordinary asset for being used in business. A
property purchased for future use in business, even though this is later thwarted by
circumstances beyond the taxpayer's control, does not lose its character as an ordinary
asset.
Case 2: Mr. Alfonso is engaged in real estate business
The property shall remain to be considered as an ordinary asset. Properties acquired by
taxpayers engaged in real estate business shall remain to be ordinary asset even if
discontinued from active use and even if they change the nature of their real estate
business.
Illustration 3 - Disposal of property .
Juan, a realty dealer, donated one of his house and lot inventory to his son as dowry
for his upcoming marriage. His son shall use the same as his family residence. He also
a
donated another house and lot as initial capital of his daughter who will commence
_ Tealty leasing business.
tal asset to the son because he will not use it in
phe house The
andhouse
lot shalll
and belot considered
donated to cl”
the daughter shall be considered ordinary asset to
business.
the daughter because she will use it in business.
ill
Bann ation 4 . Exempt non -business operation
5 Building A-1 which -
it uses for its non-profit
tay Tanda Foundation owns — ing A-2, which it leased out to various
Sommercial lessees.

in non-taxable operations,
: Byj at
Building A-1 is a capita l asset since | t is emp loy ed
aimetcial , entities 4 |
2 is an ordinary asset since it is employed in taxable op Se
Ctivity
taxable to income tax when they engage in 4 Pr ofit-oriente
ERTIES
TYPES OF GAINS ON DEALINGS IN Psa ROP
le, exchange an d other
: disposition ing, Inp
1. Ordi in - arises from the a assets .
of
and other conditional sales
other disposition inc, iy ”
Sacto des ir sale s
- aris es fro m the hange, and
sale , exc
2. Capital gain conditional sales of capital ass
ets
pacto de ret ro sales an d other
gs in Properties
Taxation of Gains on Dealin
Type of gain Applicable taxation scheme
Ordinary gains | Regular income tax
Capital gains General Rule : Regular income tax
Exception rule: Capital gains tax
TAX
CAPITAL GAINS SUBJECT TO CAPITAL GAINS
al gains tax:
There are only two types of capital gains subject to capit
1. Capital gains on the sale of domestic stocks sold directly to buyer
2. Capital gains on the sale of real properties not used in business
SCOPE OF CAPITAL GAINS TAXATION

Gains on dealings in capital assets Tax Rates
Y Gain on the sale, exchange, and other disposition | 15% capital gains
of domestic stocks directly to buyer tax
Vv Sale, exchange, and other disposition of real | 6% capital gains
property in the Philippines . tax
¥_ Gains from other capital assets : Regular income tax
The tax treatment of gains on dealings i
“ t e a l c o a t gs in other properties other than those sub?"jet
to capital gains tax will be discussed in detail in Chapter 12.
CAPITAL GAIN ON THE SALE. E EXCHANG AND OTHER DISPOSITIO no

DOMESTIC STOCKS DIRECTLY 10, BUYE D E
Domestic Stocks
Domestic : stocks are evid ence of own _o est ;
eae
.
. or
;
right s to owne rshi p in 4 dom
corporation regardless of its features
j. Preferred stocks (participati
Participa .
2. Common stocks pative, cumulative, etc.)
3. Stock rights
172

4, Stock options
5, Stock warrants
6. Unit of participation in any association, recreation, or amusement club (golf,
polo or similar clubs)
The capital gains tax covers not only sales of domestic stocks for cash but
also
exchange of domestic stocks in kind and other dispositions such as:
1. Fore closure of property in Settlement of debt
2. Pacto de retro sales ~ sale with buy back agreem
ent
3. Conditional sales - sales which will be perfected upon completion of certain
specified conditions
4. Voluntary buy back of shares by the issuing corporation - redemption
of
shares which may be re-issued and not intended for cancellation
The term other disposition does not include:
Issuance of stocks by a corporation
Exchange of stocks for services
PWD
Redemption of shares in a mutual fund

Worthlessness of stocks
Redemption of stocks for cancellation by the issuing corporation
DW
Gratuitous transfer of stocks

Issue of stocks including treasury stocks
The issue of stocks to stockholders by a corporation is a financing transaction rather
than a sale transaction. The excess of fair value received over the par value of shares
issued is an additional capital to the corporation.
Stocks acquired by the corporation from its shareholders, treasury shares, cannot be
considered assets or investments in accounting sense. The excess of the consideration
received in the re-issuance of treasury stocks called treasury share premium is an
additional capital and is not income.
Under US tax rules, treasury shares can be considered as investments if the
' Corporation trades on its shares as it would in the shares of other corporations. As
such, the treasury share premium is viewed as a capital gain.
Under the NIRC and RR6-2008, however, there is no express provision taxing treasury
share premium. Hence, treasury share premium should not be subjected to capital
Bains tax, ©
Exchange of stocks for services
The rhage or sl of stocks for services cannot be considered as exchange for
Property. No gain or loss can be imputed as it involves payment of expense in kind.
Rede wo" eempiion
Gain in ofa mutual
shares infund
a mutual fund are exempted by the NIRC from
income taxation. 7

Worthlessness of stocks
ess is considered a capital loss subject to th
The value of stocks becoming worthl r12. “Ue,
d in Chapte
of regular income tax. This will be discusse
ion
Redemption of stocks by the issuing corporat
Under RR6-2008, any gain or loss on the mandatory redemption of tstock s by
stock cancel lation shall be subjec to the t
issuing corporation for the purpose of
, LD es
of regular income tax to be discussed under Dealings in Properties in Chapte
theestor on redemption of redeem
should be noted, therefore, that the gain byinv
fe
preferred shares shall be subject to regular income tax.
Note, however, that this does not include the voluntary buy-back of the shares by the
issuing corporation to be held in treasury which may later on be re-issued. The Bain g
of shares by the issuin
loss realized by the investor on voluntary buy-back
corporation is taxable under capital gains taxation. 3
Gratuitous transfer of stocks

The gratuitous transfer of stocks either by way of donation inter-vivos or donation
mortis causa is subject to transfer tax, not to income tax.
If stocks are transferred for insufficient consideration or at significant discount ty|

their fair value, the difference between fair value and selling price is a donatio,
subject to donor’s tax.
MODES OF DISPOSING DOMESTIC STOCKS

Shares of stocks may be sold, exchanged or disposed:
1. Through the Philippine Stock Exchange (PSE) or
2. Directly to buyer
TAX ON SALE OF DOMESTIC STOCKS THROUGH THE PSE

The sale of domestic stocks classified as capital assets through the PSE is not
subject to capital gains tax. It is subject to a stock transaction tax of 60% of 1%4
the selling price effective January 1, 2018. The old law imposed a rate of 50% 0
1% on the selling price.
Illustration 1: Non-dealer in stocks .

Mr. San Juan, not a dealer in stocks, sold the following stock investments through
Philippine Stock Exchange:
4/5/2020 AC P 4,000,000 P 3,700,000 P 300,000

roioO 2020 SMB _3.000,000 __3,200,000 (___200,000)
178
Re
Pe ra ese
See
ner ee
Hae Pere
"S EIS
reWO

The stock transaction tax shall be computed as follows:

Total selling prices of stocks through the PSE _— P-_- 7,000,000
Multiply by: Transaction tax rate 0.6%
P 42.000
Transaction tax
ee
Note:
1. The on
stock
the transaction tax applies on the selli
sale transaction, iste
elling price regardless of the existence of fa a gaingai or
loss
2. The P58,000 net capital gains, computed as P100,000 less P42,000 tax, is exempt from
capital gains tax or to regular income tax.
[Illustration 2: Dealer in stocks

ae the same data in the previous illustration except that Mr. San Juan is a dealer
in stocks.
Mr. San Juan shall not be subject to the stock transaction tax since stocks are ordinary
assets to a security dealer. The P300,000 ordinary gain and the P100,000 ordinary losses
are subject to the rules of regular income tax.
CAPITAL GAINS TAX ON SALE, EXCHANGE, AND OTHER DISPOSITIONS OF

DOMESTIC STOCK DIRECTLY TO BUYER
Nature of the CGT:

1. Universal tax
capital assets
It applies to all taxpayers disposing stocks classified as
gain on sale of
regardless of classification of the taxpayer. By situs, the
the sale is executed
domestic stocks is within. The tax applies even if the
outside the Philippines.
2. Annual tax
c stocks directly to
It is imposed on the annual net gain on the sale of domesti
buyer.
The net gain is determined as follows:

ose PKK XKX
Selling price
. Less: .
Po XKKXKK
n Basis of stocks disposed Fo
i?! XXKXKK
Selling expenses
2X —EEKEKK
Documentary stamp tax on the sale
pcahathe whe Po xxK x
Net capital gain (loss)
if paid by the seller.
The documentary stamp tax is deducted
m4 /179

—=
Taxation
]] mean:
Selling price sha total consideration
: received per deed of sale
In case of cash sale, the in property, the “
tot al con sid era tio n is pai d partly in money and partly
: if
ty received
rt
money and fair value of proper

“
ed
r value of the property receiv
e Incase of exchanges, the fai
Illustration : .
Mr. Real sold his stocks recei ving
in exchange a building with a tax basis of P29, Oty,
P1 00,000, and P400,000 cash,
but with a fair value of P2,500,000, goods worth
The selling price shall be computed as follows:

P 2,500,000
Fair value of building received
Fair value of goods received 100,000
400,000
Cash
Total P_ 3,000,000
What is the tax basis of stocks?

e If acquired by purchase, tax basis is the cost of the property which will }
determined by the following methods in descending order of priority:
Y Specific identification, if the shares can be specifically identified.
“ Moving average method, if books of accounts are maintained by the seller
where transaction of every particular stock is recorded.
Y First-in, first-out method, if the stocks cannot be specifically identified.
e If acquired by devise, bequest, or inheritance, the tax basis is the fair value z
the time of death of the decedent.
e If acquired by gift - the tax basis is the lower of the fair market value at the
time of gift and the basis in the hands of the donor or the last preceding owner
by whom it was not acquired by gift.
e If acquired for inadequate consideration, the tax basis is the amount paid bj
the transferee for the property.
e If acquired under tax-free exchanges, the tax basis is the substituted basis g
the stocks.
Illustration 1: Cost of acquisition
Mrs. Excellence purchased 1,000 shares of Bacolod Corporation for P100,000 and pa:
the broker’s commission of P1,000. The stocks were subject to a chattel mortgage*
=e
P10,000 which Mrs. Excellence assumed.

The cost or basis of the acquired Bacolod stocks shall be:
sash paid P 100,000
OM eens wie on the property purchased 10,000
ect acquisition costs - broker's commissio
1,000
Total cost (Tax basis) " Fau.000
180 7

chapter 6 - Capital Gains Taxation
ustration 2: Costing procedure

s
mr. Online had the following purchases and sal
es of shares of the stocks of El Dorado
Corporation:
Date —Iransaction _Shares Price __Cost

january1 “Purchase 10,000 P1000 P 100,000
March 1 Purchase 5,000 11.03 55,150
March 23° Purchase 20,000 12.00 240,000
April 4 Sale 25,000 15.00
The cost of the shares sold shall be determined as follows:
1, Assuming Mr. Online identified that the shares sold were those bought on March 1
and March 23, the applicable method is specific identification method.
Under specific identification, the actual cost of the shares sold and the remaining
stocks shall be:
March 1 purchase 5,000 shares P 55,150
March 23 purchase 20,000 shares 240,000
Cost of 25,000 shares sold P_295.150
Cost of remaining 10,000 stocks P_100.000
The gain shall be computed as:

Selling price (25,000 shares x P15/share) P 375,000
Less: Cost of shares sold —295,150
Gain P__79,850
2. Assuming Mr. Online cannot identify the shares actually sold but retains detailed
records of purchase and sale in the stocks of El Dorado, the applicable method is
' the moving average method.
Under the moving average method, the cost of the shares sold and the remaining
Shares shall be computed as follows:
Date _Transaction __Shares_ Unitcost ___Cost

January 1 Purchase 10,000 P 10.00 P 100,000
Purchase 5,000 11.03 55,150
March 1. 240,000
M 20,000 _ 12.00
Purchase 35,000 P 11.29 P 395,150
men 23
Less; Cost of shares sold ___25,000 P_11.29 (P_ 282,250)
29 P__112,900
Quantity and cost of ending shares___10,000 P11
Note: , , |
1. Average unit cost =P395,150/35,000 = P11.29
181

Chapter 6 - Capital Gain s Taxation
ng age
e movi aver method, the average unit cost of the stocks {s dete
2. Under th ngven
bat | re x P11.29.
can be computed as 10,000
| 2B The castof ending shares
3. Assuming Mr. Online Eoinidentify the stocks sold and does not »,
nly ares of El Dorado, the applicab}e mah
transaction
— reears -out method. The cost of the shares sold shall be Pres,
is the First in, first hares bought: Meq
coming from the cost of the first 25,000 share
Unitcost ___Cost
—— Purchase 10,000 P 10.00 P 100,009
starchy purchase * 5,000 11.03 55,159
: be March 23 | Purchase __ 20,000
35,000 __12.00 ___240.009
p 395,150
Less: Costof shares sold: |

shore January era ' 10,000 P 10.00 P 100,000
7 March 1 purchase 5,000 11.03 55,150
March 23 (25K-10K-5K shares first sold) ___10,000 12.00 ____ 120,009
25,000 (P_275.150)
Quantity and cost of ending shares ___10.000 12.00 P__120,000
Note:
1. The 10,000 and 5,000 shares from January 1 and March 1 respectively are deema
first sold. The other 10,000 shares sold are deemed coming from the last purchase o,
March 23.
2. The cost of the 10,000 shares in the last purchase is computed as 10,000/20,000,
P240,000 = P120,000.
Mlustration 3: Acquisition by gratuitous title

In March 2021, Mrs. REO received by way of donation shares of stocks of Tal
‘. Corporation from her father, Don Bosco. Don Bosco also acquired the same sharesby
donation in June 2007 from his mother, Dofia Karena, who bought the shares for
P400,000 in April 2004. The shares had a fair value of P700,000 in June 2007 and
P2,500,000 in March 2021.
Assuming the shares were acquired by Mrs. REO from her father by way of:
1. Donation
Assuming the shares were donated by Don Bosco to Mrs. REO in March
2021 - tH
basis of the shares to Mrs. REO shall be whichever
is lower of:
* 400,000, the basis in the hand of the last prec
eding owner (Dojia Karet
who did not acqu
ire the property by gift, and
* 2,500,000, the fair value at the date of dona
tion, hence, P400,000.
2. Inheritance
Assumi ing the shares were inherited: by Mrs. REO when Don Bosco died4 iinn Mar Marl
2013, the basis of the shares t Mrs. Li at
date of death of Don Bosco, o Mrs. Lipa shall be P2,500,000, the fair value
~ 182

3, purchase for an inadequate consideratio

n
Assuming the shares were bought by Mrs. REO from Don Bosco for only
p1,200,000
orice pal d ,forthe basis of the shar €s to Mrs. REO shall be
them, P1,200,000, the actual
The computation of ar
adjusted basis on t ax-free exchanges will be discussed under
tax-free exchanges in this chapter.
stocks sold for inadequate consideration
The excess of the fair value of the stocks over the selling price is a gift subject to
donor's tax if so intended by the seller as a donation.
[ustration
Aseller sold his investment in domestic stocks directly to a friend for P500,000. The
shares have a tax basis of P300,000 excluding P10,000 expenses on the date of sale.
Case 1: Assume that the shares are readily marketable with many willing buyer at
its fair value of P650,000 but the seller opted to sell the same to his friend.
Fair val ue P 650,000 P150,000 gratuity subject to transfer

tax
Selling price 500,000
} P200,000 gain subject to capital gains tax
Less: Costandexpenses 300,000
The rules on the determination of fair value of stocks for purposes of donor's tax will
be discussed in the book, Business and Transfer Taxation, by the same author.
Case 2: Assume that the shares have a fair value of P650,000 but the seller is
under immediate need of cash forcing him to sell at a big discount.
In this case, the P200,000 gain will still be subject to capital gains tax but the P150,000
discount shall not be considered donation subject to donor's tax since there is no
donative intent in this case.
THE CAPITAL GAINS TAX RATE

The TRAIN law and CREATE law simplified the rate to a 15% flat rate.
Illustration
A taxpayer disposed his investments in domestic stocks costing P100,000 directly to a
buyer for P240,000. It paid on the sale P2,000 and P500, respectively, for broker’s
Commission and documentary stamp tax expense. The stocks have a fair value of
P300,000 at the date of sale.
The capital gains tax shall be computed as follows:
183

s Taxation
Chapter 6 - Capital Gain
P 240,00 0 |
Selling price ;
Less: Cost and expenses TD
P
Purchase cost ’
Commission expense ___ 500 5
expense
Documentary stamp tax
P 137,500
gain
apitlal on
co 15%
Multiply by applicable rate: P__20.625
Capital gains tax due
val ue ) 0 selling price
and P 240,00 jg,
ce of the P 300 ,00 0 fair
the basis of income tax js
The P60,000 diff eren
donation subject to dono r's tax. It must be noted that
realized gain.
Tax compliance
1. Transactional capital gains tax
Stocks are registrable securities which requires BIR tax clearance priorty
ondition to ty
their transfer of ownership. Filing of tax returns is a pre-c
eac,
clearance. The capital gains or losses are required to be reported after
gains tax return, BIR
sale, exchange, and other dispositions through the capital
Form 1707.
2. Annual capital gains tax

on the
The 15% capital gains tax is an annual tax. The CGT is recomputed
(BIR Form
annual net gains and reported through a final consolidated return
of
1707A) on or before the 15th day of the fourth month following the close
the taxable year of the taxpayer.
No loss scenario
Due of the flat 15% tax, there will be no capital gains tax payable in the find
consolidated return if all transactions during the year resulted to a gain. Filing
BIR Form 1707A may not even be necessary.
Illustration
Assume the taxpayer had the following disposition of several equity securities direct
to a buyer for the fiscal year ending June 30, 2021:
Selling Cost & Capital

Date _ Equity Securities. __Price__ _expenses. _gain{loss)_
1/12 Preferredstock P 200,000 P 100,000 P 100,000
3/18 Common stocks 100,000 90,000 10,000
5/14 Stock rights 160,000 70,000 90,000
Transactional compliance:
The following CGT shall be paid within 30 days of each sales transaction:
184

Capit
‘ al
Date — Equity Securitise: es Sain(loss) _CGT rate
Transactition
1/12 Preferredstock CGT
P 100,909 x 15% P
3/18 Commonstocks 19,999 + ze9”
15,000
5/14 Stock rights 90,000 x 15%
1,500
13,500
Total P__ 30000
alc i :
Annual net gain P 200,000
Multiply by: CGT tax rate 15%
Annual capital gains tax due P 30,000
Less: transactional capital gains tax paid 30,000¢+—
Capital gains tax payable P 0
With loss scenario
If there are losing transactions, it is best to offset losses first with subsequent
gains. Residual tax payable must be settled. No tax payment should be made
until
the same turns into a net gain. This intra-period loss carry-over procedure is
necessary to avoid overpaying the government every time there is a gain and
seeking refunds at the end of the year for losses incurred which could cause
unnecessary workload for both the taxpayer and the BIR.
Mlustration 1
Assume an individual taxpayer had the following transactions during the year:
Selling Cost & Capital

Date Equity Securities. __ Price expenses. _gain(loss)
1/12 Preferredstock P 210,000 P 100,000 P 110,000
3/18 Common stocks 80,000 90,000 ( 10,000)
8/14 Stock rights 160,000 70,000 90,000
11/17 Stock options 80,000 100,000 (____20,000)
Total P__170,000
Transactional compliance:
For every sales transaction, the taxpayer shall file BIR Form 1707:
Date | Deadline Capital gains tax
1/12 2/12 | The capital gains tax would simply be P110,000 x 15% =
P16,500.
3/18 | 4/17 | There would be no capital gains tax payable. The taxpayer will
simply file BIR Form 1707 indicating therein the P10,000 loss,
Interim refund could not be allowed since the 15% CGT is an
annual tax. The net gain/loss is inconclusive until year-end.
The P10,000 loss should be carried over in the next
L ; | transaction.
185

on
Chapter 6 - Capital Gains Taxati —
9/13 | The taxable gain sh all be (P90,000 ~ P10,000) or P80,000,5~ :

8/14 0 x 15 % = P12,000.
taxpayer shall pay P80,00
The re wo ul d be no cap ita l gai ns tax payable. The taxpayer wi
11/17 | 12/17 | —_|
simply file BIR Form 1707.
Annual compliance: A to claim refund for the tax overpa

yment;
The taxpayer shall file BIR Form 1707
P 1 70,000
Annual net capital gain specu
Multiply by: CGT tax rate
Annual capital gains tax due
Less: Total transactional CGT paid (P16.5K + P12K) __ 28,500
Capital gains tax payable (overpayment) (P___3.000 )
of capital loss
The tax code does not allow Inter-period carry-over or the carry-over
to succeeding taxable year. The taxpayer could not roll-over the P20,000 capital loss to
transactions of the following taxable year.
Illustration 2
Assume the taxpayer had the following series of capital gains and losses on sale of
domestic stocks directly to buyers during the year:
Gains (Losses)
Transaction 1 P 200,000
Transaction 2 ( 240,000)
Transaction 3 ___ 60,000
Yearly total P_20,000
Transaction1 | The taxpayer shall file Form 1707 and pay P 200,000 x 15% or P30,000
capital gains tax,
Transaction 2 The taxpayer shall pay zero tax,
Transaction 3 The taxpayer shall pay zero tax since P60,000 - P240,000 is still a net loss
Annual compliance:
The taxpayer shall file BIR Form 17074 to claim refund for the tax overpayment:
Annual net capital gain
Multiply by: CGT tax rate en
rae capital gains tax due P 3,000
ess: Total transactional CGT paid 30,000
Capital gains tax payable (overpayment)
(P__27,000 )
Illustration 3
Assume instead that the taxpa yer had
the following serie i and los é
on sale of domestic stocks directly to buyers during the
ode capital gains
186

Transaction ; ( 240,000)
Transaction —300,000
Yearly to tal P60.000
i Hance;
Transaction : me taxpayer shall pay zero tax.
Transaction te taxpayer shall ay P60,000 x 15% or P9,000 capital gains tax.
ual compliance:
BIR Form 1707A may no longer be needed in this case since all capital gains tax has
been paid for the year and there is no possible claim for refund.
INSTALLMENT PAYMENT OF THE CAPITAL GAINS TAX

When domestic stock is sold in installments, the capital gains tax may also be paid
in installments if the:
a. Selling price exceeds P1,000; and
b. Initial payment does not exceed 25% of the selling price.
Illustrative Case: Basic
On November 1, 2021, Mr. Batanes made a sale of domestic stocks costing P700,000
directly to a buyer for P1,000,000. The buyer agreed to pay in P100,000 monthly
installments starting November 30.
The capital gains tax shall be:
Less: Cost of shares sold __700,000
Net capital gain P 300,000
Multiply by: —__15%
Net capital gains tax due P__45,000
Mustration 1: No mortgage on the shares sold

Initial payment:
First installment (November 30) P 100,000
Second installment (December 31) —__100,000
Total initial payment P200,000
Ratio of initial payment (P200,000/P1,000,000) 20%
The taxpayer is qualified to pay capital gains tax by installment.
Under the installment method, the tax will be paid based on the pattern of collection of
the contract price. The contract price is the total sum of money collectible from the
Contract. It is normally the selling price in the absence of any indebtedness on the
Shares sold.
187

Taxation
aeZ
allment .
nt me th o d, the capital gains tax payable every inst hal,
Under the ins tal lme
lec tio n / Co ntr act pri ce x Cap ital gains tax
computed as: Col
rd
compute .
gain s tax pay abl e for eve ry installment shall be P 4,500
The capital
eSPR
0.
P100,000/P1,000,000 x P45,00
payment ratio, but the Contr
d to measure the ininitial
Note that the sell ing price is use
ese ob se iS
Qc
tax in installment.
bis
ini ng the cap ita l gai ns
price is used in determ
cost
ocks but not in excess of .
rtgag on st ly mortgaged for P600,000 which
Mlustration 2: With mortgage the h,
ious
sea
Assume the stocks were prev mon thly ins tal lme nts of Piq9 tn
P400 ,000 balance is paya ble in
assumed. The
starting November 30, 2021.
P300,000 and P4500)
The gain and the capital gains tax shall be the same as
on the sale shall be:
respectively. The contract price or tota ] sum collectible
P 1,000,000
Selling price
600,000
Less: Mortgage assumed
Contract price p__400,000
The capital gains tax payable every installment shall be P 11,250 computed a
P100,000/P400,000 x P 45,000.
Illustration 3: With excess mortgage over cost

the buyer
Assume instead that the stock was subject to P750,000 mortgage which
assumed. The P250,000 balance is payable in monthly installments of P50,000 starting
November 30, 2021.
The gain and the capital gains tax shall be the same as P300,000 and P45,000
respectively. The excess of mortgage over the basis of the stocks is an indirect dows
payment, a form of constructive receipt.
The contract price shall be computed as follows:
Less: Mortgage assumed 750,000
Cash collectible P 250,000
Constructive receipt (P750K mortgage - P700K basis) 50,000
Contract price P___300,000
The initial payment shall be computed as follows:
Indirect downpayment (constructive receipt) P 50,000
First installment (November 30) 50,000
Second installment (December 31) 50,000
Total initial payment P___150,000
ManiATS Leek
' 188

patio of initial payment (P150,000/P1,000,000) 15%

The taxpayer is qualified to Pay Capi
tal gains tax in installments.
the capital gains tax shall be as follows:
For the sale : P50,000 P300,00
For every installment: Peoogns /P300,0000xP45,000 P___7,500
x P45,000 P__7,500
SPECIAL TAX RULES IN CAPITAL GAIN OR
1. Wash sales of stocks LOSS MEASUREMENT
2. Tax-free exchanges
WASH SALES RULE

Wash sale of securities is deemed to occur when within 30 days before and 30 days
after the losing sale of securities (also referred to as the 61-day period), the
taxpayer acquired or entered into a contract or option to acquire the same or
substantially identical securities. Capital losses on wash sales by non-dealers
in
securities are not deductible against capital gains because they are effectively
unrealized. The taxpayer did totally let go of the shares. The immediate
reacquisition of the shares makes the loss a theoretical or a feigned loss.
Day of t Wee ee ee ee ee eee eee >

30 days losing sale
Securities for purposes of the 61-day rule include stocks and bonds. The wash sales
rule has significance on the recognition of reportable capital losses on domestic stocks
sold directly to buyer.
of the
For the purpose of this rule, substantially identical means that stocks or bonds
substantially identical to a
same class with the same features. A common stock is not
non-participating preferred stocks are not
Preferred stock. Participating an d
Substantially identical.
Ill . citi ntical shares before a losing sale

Inc., a
oe newing transactions in the shares of Talisay,
Pattie.
Omestic corporation:
Price —Cost_
—Date ___Transaction_- ae p 4.00 P 40,000
January 5 Purchase +0 41,000
Purchase 10,000
March 1 10,000
March 18 Sale*
189

on
ap te r 6 - Ca pi tal Gains Taxati
Ch ns.
d In co st in g se curity transactio
the FIFO metho
Mr. Donald uses the fy
sh ar es sol d In March 18 came from
the FI FO me th od, the 10,000 or loss on March 18, 2021 shall st
Under capital gai n e
sh ar es bo ug ht on January 5. The
10,0 00
computed as follows: ,000
p 38
Selling price ) ___ 40,000
(from January purchase
Less: Cost of shares sold p__2,000
Capital loss
l loss on the sale shall not
rule, the P2,00 0 capitaital :
gains in 2021 since the share,
Pursuant to the wash sales ion of the annual net cap
deductible in the computat
hin the 61-day period.
sold were fully replaced wit
eme nt or full cov er- up whe n the quantity of the shares acquired in
There is a full rep lac case, the |
peri od is at leas t equa l to the quantity of the shares sold. In this
the 61-day the
shall be defe rred and adde d to the tax basis of the replacement shares because
loss
his original position putting him in
loss is a fake loss since the taxpayer bought back shares).
owning 10,000
the same position as before (i.e. still
ired on March 1, 2021 shall be:
The adjusted basis of the replacement shares acqu
P 41,000
Purchase price
2,000
Add: Deferred loss on March 18 wash sales
P__ 43,000
Basis of replacement shares
What if the replacement shares are less than the shares sold?
Assume that the shares bought on March 1, 2021 were only 8,000 shares for P32,800.
Only the portion covered with replacement shares shall be disallowed. The portial
without replacement cover is a deductible realized |} ital be |
oss, Thus, the capital Joss = |
split as follows:
|
Deferred Joss (8,000 shares/10,000 shares x P2,000
Deductible loss (2,000 shares/10,000 shares x P20) P 0D
Capital loss
The adjustedpresbasis of the re placement shares acquired on M arch 1, 2021 shall b

‘rchase e:
Add: Deferred loss on March 1 8 wash P 32,800 ,

Basis of 8,000 replacement shares oa 34.4(
asaan
190

what if by specific identification

the same shares sold at a loss on the 10,000 shares bought on March 1, 2021 were
h n March 18, 2021?
Note aly rera : aurea. the sale of shares at a loss, but the same shares were
effe efore or after the sale by a covering acquisition.
In this case, the P2,000 Capital loss i S nota wash sales loss since there is no acquisition
of replacement shares within the 61-day period. Hence, the capital loss is deductible
against capital gains.
Iilustration 2: Acquisition of identical shares after a losing sale
In 2021, Mrs. Rachelle had the following transactions in the stocks of Sta. Rita
Corporation, a domestic corporation:
Date Transaction Shares Price Cost
January 4 Purchase 10,000 P20.00 P 200,000
February 28 Sale 10,000 18.00 180,000
March 4 Purchase 12,000 16.00 192,000
The capital gains or capital loss shall be computed as follows:
Selling price P 180,000
Less: Cost of shares sold 200,000
Capital loss (P___20,000)
Since there is a full replacement cover (i.e. 12,000 shares) within the 61-day period
(ie. March 4, 2021), the capital loss shall be deferred and included as part of the cost
of the replacement shares.
The basis of the replacement shares purchased on March 4 shall be:

Purchase price P 192,000
Add: Deferred loss on wash sales —_ 20,000
Basis of 12,000 replacement shares _ P__212,000
the shares sold?

What if replacement shares are less than
,000. In this
Assume instead that only 7,000 shares were bought on March 4 for P110
ows:
case, the capital loss shall be split as foll
Deferred loss (7,000/10,000 x P20,000) P14, 4,000
Deductible loss (3,000/10,000 x P20,000) —___ 6,000
Tal loss shares acquired on March 4,4, 2020: :
March
The adjusted basis of the replacement
10,000
Purchase price P19,
Add: Deferred loss on wash sales ——14.000
asis of 7,000 replacement shares
191

on
Chapter 6 - Capital Gains Taxati
of ide nti beta and after a losing sap

cal shares s before
ati on 3; Ac qu isit ion a Corporat
. INustr
lowing transactions In the shares of Nag
In 2021, Mr. Windell had the fol On,
a domestic corporation:
Transaction _Shares— Price/share __Valu__e
__Date 15,000 P 20.00 P 300,000
January4 _, Purchase 105,000
5,000 21.00
February 15 Purchase 216.000
12,000 18.00
February 28 Sale*
3,000 16.00 48,000
March 4 Purchase 98,000
Purchase 7,000 14,00
April 1
‘The shares sold on February 28 were the share s bought on January 4, 2021. 7),,
selling price - P20/share Cost)
capital loss is P24,000 computed as (P18/share
12,000 shares sold.
a total of 8,000 replacemen
There were 12,000 shares sold at a loss while there were Febr uary 15 (i.e., before the
shares in the61-day period: 5,000 shares acquired on
after the sale).
sale) and 3,000 shares acquired on March 4 (i.e.,
shall be split as follows:
Since this is a partial replacement, the capital loss
) P 16,000
Deferred loss (8,000 shares/12,000 shares x P24K
) 8,000
Deductible loss (4,000 shares/12,000 shares x P24K
Capital loss P__24,000
February 15, 2021 shall be:

' The adjusted basis of the replacement shares acquired on
10,000
Add: Deferred loss (5,000 shares/8,000 shares x P16K)
P 1 15,000
Basis of the 5,000 replacement shares on February15
4, 2021 shall be:
The adjusted basis of the replacement shares acquired on March
Add: Deferred loss (3,000 shares/8,000 shares x P16K) 6,000
Basis of 3,000 replacement shares on March 4 P__54,000
Illustration 4: No replacement shares in the 61-day period

On January 18, 2021, Mr. Real bought 10,000 shares of Gen. Luna Corporation for
P100,000. On February 6, 2021, he sold the same shares for P95,000. On March2
2021, he bought 5,000 shares for P55,000.
Note that the March 28 acquisition is beyond the 61-day period. Since there #§ :
acquisition of replacement shares within the 61-day period, the P5,000 is not wi
sales loss but a deductible realized loss against capital gain from the sale of dom 1
eeunon to a buyer. The basis of the shares bought on March 28, 2021 she |
» 192

transaction.
The wash s ales rule ule isi not applicable

:
to dealers in securities as it is a normal way
of business for them to buy and sell stocks an 4 i i
josses within short duration of time. of hve eae eee
TAX FREE EXCHANGES
A. Corporate reorganization
B, Initial acquisition of control
CORPORATE REORGANIZATION
No gain or loss shall be recognized on a corporation or on its stocks or securities if
such corporation Is a party to a reorganization and exchanges property in
pursuance of a plan of reorganization solely for stocks or securities in another
corporation that is a party to the reorganization.
Reorganization is defined as:

1. A corporation, which is a party to a merger or consolidation, exchanges property
solely for stocks in a corporation, which is a party to the merger or consolidation;
or
2. The acquisition by one corporation, in exchange solely for all or a part of its voting
stocks, or in exchange solely for all or part of the voting stocks of a corporation
which is in control of the acquiring corporation, of stocks of another corporation if,
immediately after the acquisition, the acquiring corporation has control of such
other corporation whether or not such acquiring corporation had control
immediately before the acquisition. ,
3. The acquisition by one corporation, in exchange solely for all or a part of its voting
stocks, or in exchange solely for all or part of the voting stocks of a corporation
which is in control of the acquiring corporation, of substantially all of the
properties of another corporation.
4. A recapitalization or an arrangement whereby the stocks and bonds of a
corporation are readjusted as to amounts, income, or priority or an agreement of
all stockholders and creditors to change and increase or decrease the capitalization
.
or debts of the corporation or both; or
rate business with the same
5. A reincorporation or the formation of the same corpo
asset or the same stockholders survivin g under a new charte
r. |
193

ins Taxation
Chapter 6 - Capital Ga
b
ion” me ans the acquisition
pr op er ti es of anoth er corporat ion . pn
“substant ial ly all the
of the ass ets , in cl ud in g cash, of another corporat
80% g. (Bir Gene
_. corporation of a t least and no t merely momentary holdin
pe rm an en ce
has the element of
Tq]
195 7)
Circular No. V-253, July 16, n by te
r the exch an ge i s sol ely for stock, the assumptio
In determining whethe be disregarded.
liability of the o thers shall
acquiring corporation of a
Merger or consolidation acq uires all or substantially all of the |

urs whe n 0 ne cor por ati on
A merger occ or More
tie s of ano the r cor por ati on. A consolidation occurs when two
proper “securities” include
form one corporation. The term
corporations merged to on,
e notes of whatever class or durati
bonds or debentures but does not includ
pursuant to a plan of merger »
The gains 0 r losses on share-for-share swaps Ina share-sway
ion purposes.
consolidation will not be recognized for taxat
of the acquire] _
pursuant to a plan of merger or consolidation, the shareholders |
The shares of th}
corporation will be integrated in the acquiring corporation.
shares of the
acquired corporations will be called in for replacement with the
‘ acquiring corporation.
ds
of th
In effect, the transaction merely involves a replacement of shares of stocks
ote wheth
integratedas
shareholders of the absorbed corporation with them being simply
shareholders of the acquiring corporation.
0s A
Illustration
atta sina ow. tn

shares in exchange for
Mr. Fernando was required to surrender his Zambales Inc.
merger of Zambales
Baler shares with total fair value of P1,200,000 pursuant to the
ased by Mr. Fernando
Inc. and Bataan Inc. The Zambales shares were previously purch
for P1,000,000.
Fair value of Baler shares received (selling price) P 1,200,000
Less: Cost of Zambales shares exchanged 1,000,000
Indicated gain P__200,000
The P200,000 indicated gain is not taxable as the exchange involves stocks for stocks
basi
Similarly, an indicated loss shall not likewise be recognized. The P1,000,000 tax
ted basis of the Balt
of the Zambales shares given shall be carried over as the substitu
shares received.
Share swap resulting in a control

The acquisition of control in another corporation achieved by acquisition of major"
of its voting shares or by the acquisition of substantially all of its assets is tax freé
2188
the acquiring corporation exchanged therewith:

Bt
a. its own shares, or

mst
b. shares of its controlling parent corporation

MBidiacMoa
Saree at
194
a’
betes

chapter 6 - Capital Gains Taxati
on
justration 1-share swap for contr

patents
subsico is 60% owned by its
nvesco: Subsico also bought ang held Ompany Parenco and 40% by an investor,
uired 30 a S investment shares of Parenco and Invesco.
ubsequently, Subsico acq 30% Share ownership in Affico and 60% share
svmers hip in Newsubsico,
Invesco Parenco
Subsico
{ +60%
Bi +30%
Newsubsico
Affico
The following illustrates the tax treatment of the foregoing share swaps on Subsico’s
investment acquisitions under the following scenario:
Subsico own shares Exempt

60% control in NewSubsico Investment in Parenco shares Exempt
Investment in Invesco shares Exempt) —_
Subsico own shares Exempt?
30% shares of Affico Investment in Parenco shares Taxable?
Investment in Invesco shares Taxable
Note:
1. The exchange of shares resulting in the acquisition of corporate contro] is exempt.
2. Though apparently silent in the law, Subsico’s own shares are not its assets. This is equity
issuance rather than a property disposition; hence, no gain should be recognized for income
tax purposes.
3. Since no corporate control was acquired, this is an ordinary exchange of property subject to
income tax (i.e. capital gains tax).
Illustration 2 - share swap for control ;

Assume that after the acquisition of initial 60% NewSubsico and 30% Affico, Subsico
made a second share swap for another 10% NewSubsico and 25% Affico. Subsico now
have 70% controlling interest in Newsubsico and 55% controlling interest in Affico.
The following table’
table’ i illustrates the tax trea tment of the foregoing share swaps on
nder the following scenario:
Subsico’s additional investment acquisitions u
avs 195
Ch ade ned sas 2 e ins 9 AES wed Eg ag SUT ieee nc) ea carer tite coh! Petre a nee Ce 1X, :
Vab reise d oe A eed DS Ra ed ASR EA Pe a EM

| |
tion
Chapter 6 - Capital Gains Taxa
ome tax a
Bren
sg
Shareacaul oS — Subsico own shares

.
[_ Exempt
Investment in Parenco shares
(Increase ofcontrolling Exempt
interest) Investment in Invesco shares .
Exempt
Subsico own shares
+25% shares of Affico Exempt) ™~
resulting in 55% controlling Investment in Parenco shares
Bxempe
interest Investment in Invesco shares
Note:
control pursuant to th,
1. Note that no gain will be recognized when there is a pre-existing
second type of corporate reorganization. _
2. No gain shall be recognized in step up acquisitio ns resulting in acquisition of corpora,
control.
Illustration 3 - swap for assets .

ion 1, except that instead of shar
Assuming further the same data in illustrat
bsico and the net assets
ownership, Subsico acquired the warehouse building of Newsu
of Affico by acquiring all its assets and assuming its liabilities by exchanging shares:
Income
tax status
Warehouse building of Subsico own shares Exempt
Newsubsico Investment in Parenco shares Taxable
Investment in Invesco shares _
Taxable
Subsico own shares Exempt
Net assets of Affico Investment in Parenco shares Exempt_
Investment in Invesco shares Taxable
Note:
1. Only the acquisition of substantially all assets of another corporation is tax-free whet
parent share or own shares are given in exchange. The mere acquisition of an item of asset#
_ subject to tax.
wiriné
2. In determining whether the exchange is solely for stocks, the assumption by the a¢4
corporation ofa liability of the others shall be disregarded.
Illustration 4 - recapitalization
Teupeta Company sustained continuous gargantuan losses forcing it to enter int
capital restructuring agreement which reduces its par value of stocks from p100 r
share to P10 per share in order to wipe out P24,000,000 of accumulated losses >
ihe Toon reduction in share capital and the resultant elimination of the accumu
eficit shall not be recognized as gain in the book of Tsupeta Company. i
ee
196
Bie

chapter 6 - Capital Gains Taxati
on
il gstration 5- recapitalizatio
n
Rome > meet short-term ent ntinuo
" erm penatne losses which cast
long-t s doubt about its
res ew as ones aguvert P40,000,000 debts
to sn by the Isouanee
creditors. The stocks have a fair Value
ofPIt ee stresmucharing “
No gain or loss shall be recognized
for the conversion of debt to equity.
[llustration 6 - reincorporation
by the Sat reece Aner Yeats of dormancy due to failure to commence operation, the
governm ' € Its franchise, Yehey Corporation decided to dissolve its charter
and incorporate as Apollo Global Corporation. Yehey’s P100M assets and P10M
liabilities are transferred into Apollo Global Corporation. Apollo Global issued P100M
par value shares in exchange.
No gain shall be recognized on the reincorporation of Yehey Corporation into a new
charter.
INITIAL ACQUISITION OF CONTROL

No gain or loss shall also be recognized if property is transferred to a corporation
by a person in exchange for the stocks or units of participation in such a
corporation of which as a result of such exchange, said person, alone or together
with others not exceeding four, gains control of said corporation.
“Control” shall mean ownership of stocks in a corporation which amount to at

least 51% of the total voting power of all classes of stocks entitled to vote.
This rule may be relevant only to the capital gains tax or the recognition of capital
gains when stocks are exchanged in the acquisition of corporate control.
Illustration . . .
Mr. Gapan exchanged his shares in Cabanatuan Corporation costing P2,000,000 in
exchange for the shares of Maharlika Corporation with a fair value of P1,800,000. The
transfer resulted in Mr. Gapan acquiring 51% ownership (corporate control) in
Maharlika Corporation.
. . : 1,800,000
Total consideration received or selling
price J 2,000
Less: Cost of Cabanatuan stocks exchanged 200,000
Indicated loss
be recognized. Any indicated gain shall not also
The P200,000 indicated loss shall not ition 0 f corporate control by not more
than
ized. The law views initial acquis
© recogn generating transaction.
Persons as an investing transaction rather tha n an income
197

r
Taxation
t
of the Maharlika shares received shall be P2,000,000, the same a,they
The tax basis
hanged.
basis of the Gapan shares exc
|
Exchange not solely for stocks cks but with th
are exchanged not solely for sto
Intax-free exchanges, if stocks But nat loss |
n suc h as cas h and oth er properties, the gains, ¢|
consideratio er properties received.
cash and oth
recognized up to the extent of !
-on 1: Cash and property received exceed indicated gain

Illustration1: Cash and property of merger between Zambales Inc. and Bataan
Assume that pursuant to the plan P1000 09
Fer nan do was req uir ed to sur ren der his Zambales Inc. shares costing
Mr. 0,000 plus P100,009 os
in exchange for Bataan shares with total fair value of P90
and P200,000 worth of goods.
Total consideration received or selling price

P 1,200,000
(P900,000 + P100,000 + P200,000)
Less: Cost of stocks exchanged __1,000,000
Indicated gain P__.200,000
realization of gains,
The amount of cash and other properties received is considered
and other propertie
the extent of the indicated gain. The excess amount of cash
received is a return of capital. Hence,
Realized return on capital
(to the extent of the indicated gain) P 200,000
Return of capital (in excess of the indicated gain) 100,000
Total cash and other properties received P__300,000
The P200,000 gain shall be reported as a capital gain. The substituted basis of th
Bataan shares received in the exchange shall be:
Basis of the Zambales shares exchanged P 1,000,000
Add: Basis of other properties exchanged 0
Less: Return of capital 100,000
Basis of the Bataan shares received P__900,000
Regulatory Formula on Tax Substituted Basis

The regulations prescribe the following formula in computing the tax basis
properties arising from the tax-free exchanges:
Tax basisi of old shares exchanged P XXX

Add: Gain recognized on the transfer uae
mice as oF other properties received ——_ XXK.XXX
. Tax basis of new shares received P___ xxx.xxx
198
—___ Scanned with CamScanner

an
qre substituted basis of the Bataa

foregoing regulatory formula as follows received may be computed following the
Tax basis of Zambales shares exch
ange
Add: Gain recognized on the
transfer °
Less: Cash or other Properti ° ei
es recejy
Tax basis of the Bataan 300,000
“ °
shares received
P900,000
Illustration 2: Indicated gain exceeds casha nd
other properties received
Assume od pursuant to the plan of merger between Zambales Inc. and Bataan Inc.,
Mr. Fernando was required to surrender his Zambales, Inc. shares costing P1,000,000
in exchange for Bataan shares with total fair value of P1,050,000
plus P150,000 cash.
Total consideration received or selling price
(P1,050,000+P150,000) P 1,200,000
Less: Cost of stocks exchanged __
1,000,000
Indicated gain P__200.000
The indicated gain is recognized to the extent of the cash and/or other properties
received. The indicated gain is considered as follows:
Realized gain (up to the value of cash
and other properties received) P 150,000
Unrealized return on capital (in excess of the
the value of cash and other properties received) —_ 50,000
Total indicated gain FP200,000
The substituted tax basis of the Bataan shares received shall be:
Basis of the Zambales shares exchanged P 1,000,000

Add: Basis of other properties exchanged 0
Less: Return of capital —_____0
Basis of the Bataan shares received P_1,000,000
Alternatively,
Tax basis of Zambales shares exchanged — P 1,000,000
Add: Gain recognized on the transfer _ 150,000
Less: Cash or other properties received ——150,000
Tax basis of the Bataan shares received £1.000,000
Minimum public float requirement of publicly listed corporations

ist €d corporatiions are required to maintain a minimum public
ly han
nS atoriExc ge (PSE) regulations.
i
°Wnership under Philippine Sto
199

ins Taxation
ownership is the higher of:
of The minimum publ ic ou ts tanding shares and
-
F
1. The 10%0 fi ss ue d an d rities and BXchap
bli c ow ne rs hi p required by the Secu Re
2. The minimum pu ne St oc k Ex ch an ge . |
ip pi
Commission or the Phil tj,
mu m pu bl ic ow ne rs hi p shall result in the de-lis
mini e of liste
Non-compliance to the
n in the PSE . Un der RR16-2012, the sal
the stocks of the corp or at io
ni mu m pu bl ic ow ne rs hi p requirement wiy q
their mi
stocks which fall below
gai ns tax an d not to the 6/10 of 1% stock trans tig
subject to the 15% capital
tax.
s
dealer
Illustration 1: Sale by a security ofSelling
s domestic stocks for P1,200,000, net
Benjamin, a security dealer, sold variou of P800,000.
uired at a cost
expenses. These stocks were acq
to a security
s tax is nil be cau se dom est ic stocks are ordinary assets
The capital gain
ular income tax.
dealer. The P400,000 net gain is an ordinary ga in subject to reg
Illustration 2: Sale of domestic bonds

s directly to a buyer at a net gain of,
Nonoy, not a security dealer, sold domestic bond |
s.
bond
P200,000. Nonoy is not a dealer of domestic
of domestic bonds is a capital gain
The capital gains tax is nil. The gain on the sale
is a debt instrument rather than an |
subject to regular income tax. Note that the bond '
equity instrument like stocks.
Illustration 3: Exchange of stocks for other securities

g P300,000 fo
Debbie Wong, an NRA-NETB, exchanged her domestic stocks costin
bonds with a fair value of P400,000.
The P100,000 capital gain is subject to capital gains tax since it Is not a share-for-shar
swap pursuant to a plan of merger or consolidation. The same rule applies for share fe
share swap not pursuant to a plan of merger or consolidation. Non-resident persons!
engaged in business in the Philippines such as NRA-NETBs and NRFCs are subject 0%
capital gains tax and are required to file the capital gains tax return.
Illustration 4: Issuance of stocks

Iba Inc., a domestic corporation, issued 10,0 i in exchate
for a vacant lot owned by KIT, Inc. The vacant i a ee shares f ps0 oct
Compute the capital gains tax. ae a fair values |
of stocks. These stocks © a
samba hike involves issue by Iba Inc. of its own shares
investment in the shares of another corporation. The share prem aa
200
d
\
{
;

p300,0
a 00,
ie [P500 ,000 t - to(10,0
not subjec 00l x patna
cptva P10 s part of iba’s, corporate capital, not an incom
i e.
[lustration 5: Sale of stocks ex-dividend

Ms. Pearl pou 10,000 shares of Zuma, a domestic corporation, at P10/shares. On
February 1 pia Zuma declared a dividend of P2 /share with record date of March
20, 2021 and payment date of April 20, 2021. On April 2, 2021, Ms. Pearl sold all the
shares for P15 per share directly to a buyer. The selling expenses were P 5,000.
The shareholders’ right to dividend accrues at the date of declaration. The stocks may
pass through different hands anytime. However, those who are registered as
shareholders of the corporation at record date shall receive the dividends.
Between the date of record and the date of payment, stocks are said to be selling ex-
dividend. The seller receives the dividends. The price of the stocks on those dates
includes only the selling price of the stocks.
Thus, the capital gain shall be normally computed as follows:
Total selling price (P15 x 10,000) P 150,000

Less: Cost of stocks and expenses (P10 x10,000 + P5,000) ___105,000
Capital gains P___45.000
10% final
In this case, the dividends to be received by Ms. Pearl shall be subject to the
tax to be withheld by Zuma Corporation.
Persons not liable to the 15% capital gains tax

1. Dealers in securities . .
2. Investors in shares of stocks in a mutual fund company in connection with
gains realized upon redemption of stocks in the mutual company exempt
3. All other persons, whether natural or juridical, who are specifically
investment incentives and other
from national revenue taxes under existing
special laws, such as:
foreign government-owned and controlled
a. Foreign governmen ts and
corporations
b. Qualified employee trust funds
OF REAL PROPERTY CLASSIFIED
SALE, EXCHANGE, AND OTHER DISPOSITION NES | .
ASThe CAPI TAL IN THE PHILIPPI
ASSET LOCATED disp
sal h and other osition of real property capital assets in the
g price or the fair value, whichever
Philippines is subject to a tax of 6% of the sellin
IS higher.
201

Taxation
r is higher of the:
r the NIR C, the fai r value of real property is whicheve of Int
Un de
value prescribed by the Commissioner
Zonal value, which is the ent of interna] reve
s for purpose s of enforcem
a.
Revenue for real propertie Tye
laws, and Pro vin
the schedule of market values of the
b. Fair market value, as shown in Clay
and City Assess ors .
fair Mate
y lan d has zon al val ue but bot h land and improvements have
Normally, onl |
's Office.
value in the Provincial or Assessor
For lands, the capital gains tax is 6%

of whichever is the highest of the sey, |
ure sales), zonal value, or Provincial or City
price (bid price in the case of foreclos
Assessor's fair value.
Note that independent apprais al valuation,
the fair value commonly useq j,
of the capital gains tax.
financial reporting, is not used in the computation
Illustration 1 - Land only
was previous '
Terry sold a vacant agricultural land for P5,000,000. The land
,000 and zong
purchased by Terry at P4,000,000 and had an appraisal value of P8,000
Provincia
value of P7,000,000. The property had a fair value of P6,000,000 in
0,000.
Assessor's Office and an assessed value of P2,40
or's fair value (P6M)
The highest of the selling price (P5M), zonal value (P7M) and Assess
be computed
is the P7,000,000 zonal value. Hence, the capital gains tax would
P7,000,000 x 6%; hence, P420,000.
|
Illustration 2 - Land and improvement
the lot whenit |
Anjo sold his residential house and lot for P5,000,000. Anjo purchased
cost of P2,500,000.
was worth P1,000,000 and constructed on it the house at a total
The following fair value details were available for the property:
BIR Valuation Assessor's valuation
Zonalvalue . Fairvalue Assessed value
Lot P 4,000,000 P 3,500,000 P 800,000
House n/a 2,000,000 1,200,000
Selling price P.5.000.000
Land P 4,000,000 P 3,500,000 P 4,000,000

House (improvement) — - 0 2,000,000
Total fair value (HIGHER) P_6,000,000
Multiply by: CGT rate ____ 64
Capital gains tax p__360,000
202

yjustration 3
areal property dealer sold a condo
Theunit has a fair value of P1,800,0 00unitat costi ng P1,2
the date
00,000 to a client for P1,500,000.
of sale.
, a : .
the capital gains tax is nil. The condo unit is an ordinary asset to a realty dealer, lessor
or developer. The actual gain of P300
subject to regular income tax. Ff P300,000 (P 1,500,000 - P1,200,000) Is an ordinary gain
BIR Tax Clearance

No registration of any document transferring real property shall be effected by the
Register of Deeds unless the Commissioner or his duly authorized representative
has certified that such transfer has been reported, and the capital gains or
creditable withholding tax, if any, has been paid. (Sec. 58(E), NIRC)
The certificate for purposes of this legal requirement is referred to as the
“Certificate Authorizing Registration (CAR)”.
NATURE OF THE 6% CAPITAL GAINS TAX

a. Presumption of capital gains
The 6% capital gains tax applies even if the sale transaction resulted to a loss.
or
Gain is always presumed to exist. The basis of taxation is the selling price
fair value whichever is higher, not the actual gain.
b. Non-consideration to the involuntariness of the sale
or is forced by
The capital gains tax applies even if the sale is involuntary sale,
such as in the case of expropriation sale, foreclosure
circumstances
of forced disposition. It also
dispositions by judicial order, and other forms
de retro sales
applies to conditional sales and pacto
c. Final tax : ;
be withhe ld by the buyer agains t the selling price of
The capital gains tax shall
to the government.
the seller and remit the same
CAPITAL GAINS TAX
SCOPE AND APPLICABILI TY OF THE 6%
; Taxpayers
a in the | individu als Corporations
All individual s Domestic corpo ration only
Withi >
ithin the Philippines «st applicable Not applicable
: idual taxpayers butl gains tax on

‘cable to all indivimpos it applies only
The 6% capita l gains tax 1Sappli ca RC ‘iat not e final capita
to domestic corporations. Th ti
in cases where foreign corporations gai
realize lize gains
E
capital gain shall be
of ee oerty classified as capital assets, the
tonne
Subject to the regular income tax.
203

of real property loc ated abroad fs not subi ‘. oa eh Bains tay, |
cd sale
The abroa UE to tery, ty Ml |
hi
Ow of the capital tax cannot be imposed
snalderation Hence thé actual gains realized ee eee Maree and ‘
of properties abroad are su bject to the re si come ta Kj
.ee eekions oe on global income such as resident citizens and qq -
corporations. For all other taxpayers, the capital gain realized abroad is eXemp,
EXCEPTIONS TO THE 6% CAPITAL GAINS TAX
1, Alternative taxation rule
- 2, Exemption rules
“a, Exemption under the NIRC
b. Exemption under special laws
ALTERNATIVE TAXATION
An individual seller of real property capital assets has the option to be taxed »
either:
a. 6% capital gains tax or
_«b. The regular income tax
It should be noted that this is permissible only when:
1. The seller is an individual taxpayer, and
2. The buyer is the government, its instrumentalities or agencies including
government-owned and controlled corporations
Illustration
Gretchen sold to the government a vacant lot for P800,000. The lot was purchased for
P200,000 in 1980 and had an Assessor’s fair value of P400,000 and zonal value
P500,000 at the date of sale.
|
Gretchen may opt to be subject to tax at 6% of P800,000 or report the
P600,00 |
(P800,000-P200,000) actual capital gain in her annual
regular income tax return.
Basis of Alternative Taxation .
The alternative taxation is intended to
ease the burden of governmel!
expropriation where taxpayers may incur losses
on the forced expropriation sit
and are still required to pay tax.
Illustration
An individual taxpayer bought a house and |
After several years, the government a ot near a highway at a cost of P2,000" 0,008
property for the expansion of the highway.ked its power of eminent domainin toto buy
the taxpayer would be forced to rincur

value of P1,800,000 for purpo the expropriay?, |
P200,000 loss (PLEM-P ON) orn still pa the i
204
|

ins tax..This w,
capital ga would be to ,
regular income tax option, the taxpayer essive to the taxpayer. With the alternative
p200,000 capital loss without being imposedspohe oon tte benefit of deduction of the
6% capital gai
ns tax.
EXEMPTION TO THE
6% CAPITAL GAINS TA
the sale, exchange X UNDER THE N
and other disposition
acquisition of a new princjCipa . of a principal resiwy dence for the re-
gain s tax, Pal
l i
resi denc e Oy
by Iin divid
the 6% capital ual taxpa yers is exempt from
principal residence
Principal residence means the h 7 .
taxpayer. If the taxpayer ha Ouse and lot which is the primary domicile of the
S multiple residences, his princi i
deemed that one shown in his latest tax declaration } Hs principal residence, 1s
Requisite of exemption:
1 The seller must be a citizen or resident alien.
2. The sale involves the principal residence of the seller-taxpayer.
3. The proceeds of the sale is utilized in acquiring a new principal residence.
4. The BIR is duly notified by the taxpayer of his intention to avail of the tax
exemption within 30 days of the sale through a prescribed return (BIR Form
1706) and “Sworn Declaration of Intent.”
5. The reacquisition of the new residence must be within 18 months from the
date of sale.
The capital gain is held in escrow in favor of the government.
nS
The exemption can only be availed of once in every 10 years.

8. The historical cost or adjusted basis of the principal residence sold shall be
carried over to the new principal residence built or acquired.
It must be emphasized that the sale of principal residence must precede the
acquisition of the new principal residence to be exempt. (BIR Ruling No. 038-2015)
Iustration 1
Gamboa sold her principal residence with a fair market value of P6,000,000 for
P5,000,000, Gamboa purchased the residence for P3,000,000 several years ago. The
imposable capital gains tax is 6% of P6,000,000 or P360,000.
Gamboa should indicate her . intention to apply fori exemption in the capital gains tax
rety bmit a Sworn Declaration of Intent, She will be required to
account in favor of the government.
deposit the o3n0,000 capital gains tax in an escrow
_—
Full utilization of proceeds is' exemp t pal residence oo within
for P5,200,000 18
‘:
Assuming Gamboa ‘
acquires a = ewviaprinci
escrow will be released to her.
Months, the P360,000 capital gain
205

Gains Taxation
Chapter 6 - Capital
the ta,
ne w pr in ci pa l re si de nce within 18 months,
acquire a Nay
“If Gamboa in does © lA be ta ken by the government.

not wil
gains tax escrow
ation
new residence shall be the bas; b,
Basis of new r esidence with fu Ht utiltz
tax
ds is fully utilized, the basis 0 f th e th, 4
cost incurred by the taxpayer in acquiring
new reg; denie
the old residence plus additionalis the excess of the purchase price of the
cost
residence. The additional
the old residence.
over the selling price of |
w residence shall be:
Thus, the tax basis of the ne |
P 3,000,000
~ Basis of old residence (P5.2M - PSM) ___ 200,000
Add: Additional out-of-pocket costs p_3,200,000
Basis of new residence
erty capital assets because the actual g;i,
Tax basis has no relevance for real prop ver, when the real propery,
elevant to capital gains taxation. Howe
on the sale is irr when they ar.
l ass ets su bs eq ue nt ly qua lif ies as ordinary assets such as
capita ary fg;
later employed in business, the tax basis of the property becomes necess
the new property needs to b:
gain or loss measurement. That’s why the basis of
monitored.
pt
Partial utilization of proceeds is partially exem
00 proceeds in acquiring her
Assume Gamboa uses only P4,500,000 out of the P5,000,0 ct to ta:
eeds shall be subje
new residence. The portion representing the unused proc
ued interest shall be
The capital gains tax held in escrow account including any accr
allocated as follows:
To Helen P 324,000 (P4.5M/P5M x P360,000)
To the government ___ 36,000 (P0.5M/P5M x P360,000)
Total amount in escrow P_360,000
Note: Any interest which might have accrued on the escrow fund shall be released
the taxpayer. The government is entitled to the amount of the unpaid tax only.
Tax basis of the new residence with less than full utilization
If the proceeds is not fully utilized, the tax basis of th : educed
accordingly by prorating the old basis as follows: Bnew:résidence’ shall bes
Tax basis of old residence x utilized proceeds / total proceeds ;
The tax basis of the new principal resi |
0, shall be computed as p3,000,00"
. P4,500,000/P5,000,000 = P 2.70
Illustration 2
Fakundo sold his residential Io , for p2,000,008
. "|
purchaased with a fair value of P1,000,000
new residence for P1,5 00,000 within 18 mont
hs. 1
206
~—_—

rakundo will be required to pay P42

vrnot he utilized the proceeds . 0,000 (P2,000,000 x 6%) capital gains tax whether
ac
or isages a sale of a principal residesce f @ new residence. Note that the exemption rule
ce for the acquisition of a new principal residence.
poeat in his mansion residence, Moonday left his

or P17,000,000 as his principal residence. Within 3
months, Moonday was able to sell his mansi
on for P40,000,000.
The sale of the mansion will be
. " subject to 6% capital gains tax. For purposes of the
exemption, the sale of the old residence must precede the purchase of the new residence.
CAPITAL GAINS TAX EXEMPTION UNDER SPECIAL LAWS

1. Sale of land pursuant to the Comprehensive Agrarian Reform Program
2. Sale of socialized housing units by the National Housing Authority
Sale of land under the Comprehensive Agrarian Reform Program

The sale of agricultural lands by land owners pursuant to the Comprehensive
Agrarian Reform Program of the government shall be exempt from capital gains
tax. Similarly, interest income on the selling price that may have been agreed by
the land owner and the tenant-buyer shall be exempt from income tax.
Sale of socialized housing units by the National Housing Authority

The sale of socialized housing units for the underprivileged and homeless citizens
by the National Housing Authority (NHA) pursuant to the Urban Development and
Housing Act of 1992 is exempt from the capital gains tax.
This exemption is limited to socialized housing units only. The BIR ruled that the
sale of the NHA of commercial lots which is not part of the socialized housing
project for the poor and homeless is subject to capital gains tax or regular tax and
documentary stamp tax.
comply
To qualify for exemption, the socialized housing units of the NHA must
price ceilings set by the NIRC and other special laws.
withSia
PAYMENT OF THE 6% CAPITALd GAI

NS TAX IN INSTALLMENT
in in stallment
pai if, under the payment terms, the
The capital gains tax may be payment”
t doe s not exc eed 25% of the selling price. The “initial
initial paym en
ns in the taxable y ear the sale is
made.
refers to the collectio
Illustration
On Dean 1: previa
Wi . ortgage | for P4,000,000 an unused lot with a cost and
ater gas sold
vale mont
fair ,000 onp00,00
er hly 0 and
ents
P5,000,000
star ting Pece
respectivel
, mver 31, y. .The buyer agreed to pay
2021
P500 inst allm

P 300,000
: Capital gains tax = P5,000,000 x 6%
P 500,000
*. Initial payment (December installment)
Ratio of initial payment = P500,000/P4,000,000 12.50%
the capital gains tay 7
The installment sale qualifies under the ratio ceiling; hence,
be Paya
_ paid in installment. The capital gains tax payable every installment shall
oy
computed as P500,000/P4,000,000 x P300,000.
Illustration 2; With mortgage not in excess of cost
ged for P1,000,000 Which
Assume that the lot in the previous illustration is mortga
buyer assumed and the buyer agreed to pay the P3,000,000 balance in P3000
monthly installments starting December 31, 2021.
Capital gains tax = P5,000,000 x 6% P 300,000
Initial payment (December installment) P 300,000
Ratio of initial payment (P300,000/P4,000,000) 7.5%
Selling price . P 4,000,000
Less: Mortgage assumed by buyer 1,000,000
Contract price P_3.000,000
The capital gains tax payable every installment shall be P30,000 computed«
P300,000/P3,000,000 x P300,000 capital gains tax.
Illustration 3: With mortgage in excess of cost
Assume further that the lot is mortgaged for P2,500,000 which the buyer assumed aml
the buyer agreed to pay the P1,500,000 balance in P300,000 monthly installmens
starting December 31, 2021.
It should be recalled that the excess of the mortgage over the tax basis of the prope!)
is an indirect downpayment which must be included in the initial payment an
contract price. Capital gains tax is P5,000,000 x 6% or P 300,000.
. Selling price P 4,000,000
Less: Mortgage assumed 50 , 0
Cash collectible P : Sab 00
Add: Constructive downpayment - excess mortgage
—
(P2.5M mortgage - P2.0M cost
500,000
Contract price
P_2 00 n00
The initial payment shall be computed
as:
Constructive downpayment (excess
m rt;
December 31 installment orseage) P aorst
Initial payment | P__800,000
208 P

ratio of initial payment = P800,000 /P4,00

0,000 , 20%
‘
0
The inst2allm entallm

inst plan
ent qualifj €s under the rati1o0 ceilceili
ing; hence, the capital gains tax
can
Under the installment method, the capital

gains tax payable shall be:
for the sale * P500,000/P2,000,000 x 300,00
0 p__75.0
.
For every installment : P300,000/P2,000, , ,
000 x P300,000 Doan o0o

?
0
Illustration 4:he Initia

initi l payment exceeds 25% o of selling price
Assume that the initial payment on the sale of Ms. Batangas exceeds 25% of the selling
price.
The sale would be taxed as if it were a cash sale. The capital gains
tax shall be paid in
lump sum upon filing of the capital gains tax return. This applies withou
t regard to
whether or not any mortgage on the property exceeds the cost of the property dispose
d.
Deadline for payment of the capital gains tax
The 6% capital gains tax will be filed through BIR Form 1706 and is due within 30
days from the date of sale or exchange. For foreclosure sales, it is due within 30
days from the expiration of the applicable statutory redemption period. When the
tax on the sale is qualified for installment payment, it is due 30 days upon receipt
of every installment.
Statutory redemption period on foreclosure sale

Foreclosed properties are subject to a right of redemption by individual mortgagor
within one year counted not from the date of sale but from the time of registration of
the sale in the Office of the Registry of Deeds. (Santos vs. Register of Deeds ofManila)
For juridical persons, redemption must be made before the registration of the
certificate of foreclosure sale with the applicable Register of Deeds or within 3
months from foreclosure, whichever is earlier.
DOCUMENTARY STAMP TAX ON THE SALE OF CAPITAL ASSETS

Documentary stamp tax on the sale, exchange, and other dispositions of
domestic stocks directly to a buyer
The sale of domestic stocks is subject to a documentary stamp tax of P1.50 for
every P200 of the par value of the stocks sold. (RA 10963)
‘ taxpayer sold domestic stocks with to tal

par value of P800,000 for P1,200,000. The
P1,000,000.
d were acquired for
“tocks have a fair value of P1,250,000 an
The documen tary stamp tax shall be P 6,000 computed as P1.5 0/P200 x P800,000.
209

‘Chapter 6 - Capital Gains Taxation
Documentary Stamp Tax on the Sale of Real Properties

The sale of real property capital assets is subject to a documentary stamp b
X oy
the gross selling price or fair market value whichever is higher.
The documentary stamp tax is P15 for every P1,000 and fractional parts of t,,
basis thereof. However, if the government is a party to the sale, the basis Shall
the consideration paid.
Illustration
A taxpayer disposed a real property capital asset acquired for P2,000,000 10 year, aap |
for P4,000,000. The property has a zonal value of P5,000,000 and declareg fea |
property value per real property tax declaration of P3,000,000.
The documentary stamp tax shall be computed from the fair value since it is higher tha
the selling price. Hence, the documentary stamp tax shall be P75,000 computed o
P15/P1,000 x P5,000,000.
PENALTIES FOR LATE/NON-FILING OR NON-PAYMENT OF CAPITAL GAINS TAX |

The late filing and payment of capital gains tax at the time or times required by
law is subject to the same penalties discussed in Chapter 4.
ENTITIES EXEMPT FROM CAPITAL GAINS TAX

The same lists of entities exempt from final tax in Chapter 5 are likewise exempt
from capital gains tax.
COMPARISON OF THE 6% CGT AND 15% CGT
6% CGT 15% CGT ___—

Tax object | Gainonreal property | _ Gain onsale of stocks
[Basisofthetax | __-Presumedgain Actual gain
Nature of the tax ___Finaltax | Self-assessed taX
Frequency of Per transaction Transactional and annual !® |
|payment ES |
210

2 wmiieereee the om “ssets and capital assets? Discuss.

; What are the trangene of Capital assets subject to capital gains tax.
, What transactions 1ons Considered as “other disposition” of domestic stocks?
4, Discuss the rules are not considered as
“other dispositions”?
. donation, for ani ae, tax basis of stocks acquired by purchase, inheritance,
; cuenereh we na €quate consideration, and under a tax-free exchange.
: emis th e methods In costing stocks in order of priority.
6. D1 s Me compliance requirements of the two-tiered capital gains tax.
7. Explain the concept of a wash sale.
8. Enumerate and discuss the tax-free exchanges.
9. What are the criteria of alternative taxation to the 6% capital gains
tax?
10, Enumerate the exemption requirements to the 6% capital gains tax.
11. Discuss the nature of the 6% capital gains tax.
12. Compare the taxpayers covered by the 15% capital gains tax and the 6% capital
gains tax.
True or False 1
1, Capital assets will not become ordinary assets when used in business.
2. A vacant and unused lot is an ordinary asset to a real estate dealer.
3. For taxpayers not engaged in business, assets shall cease to be ordinary assets
when they are discontinued from active use for more than two years.
Real and other properties acquired are ordinary assets to banks even if they are
not engaged in the realty business.
An ordinary asset automatically becomes a capital asset when it is withdrawn
from active use.
The sale of real property capital assets will never be subject to regular income tax.
Donated assets become ordinary assets even if the donee do not employ the same
in business. ; _.
An ordinary asset continues to be an ordinary asset even if idled for more than
two years if the taxpayer is engaged in realty business.
The real properties used by exempt corporations in their exempt operations are
capital assets. . :
10, Dealers in realties are subject to the regular tax on their sale of real properties.
11, Capital gains from assets other than domestic stocks and real properties are
subject to regular income tax. are subject to
12, Dealers in securities are not su bject to the stock transaction tax but
h the
tax on ga ins realized upon the sale of stocks throug
the regular income
Philippine Stock Exchange. If, polo, and similar clubs are considered domestic
13,
Unit of participations in g°
Stocks.
211

l Gains Taxation
Chapter 6 - Capita
n the re-issuance of treasury stocks is subject to Pity
14. The excess premium 0
l gains tax,
for pr op er ty is subject to capita
er is subject to capital gains tax, |
es of sto ck
15. ne veeuance of i shar ect ly to a buy
at brahim is a gain | op, th
f foreign stocks dir
16. can not ap
gai ns tax
17. THe Se pal capital of stocks airec .
_and other disposition h the PSE shall apply it they
18. i menection tax on the sale of stocks throug
loss on the transaction. . :
19. The 6% capital gains tax shall not apply unless there is a gain on the sale of,
roperty. . ,
subject to the 6% capital gains tay
20. Pi calc of real properties located abroad is
True or False 2
is allowed if the ratio of downpaymen,
1. Installment payment of capital gains tax
ed 25%.
over the selling price of the sale does not exce
the annual regula, '
2. The annual capital gains tax return is simultaneously due with
income tax return.
3. The basis of properties received by way of inheritance is the basis in the hands of
the last owner who did not acquire the same by donation.
When specific identification is impossible, the cost of the stocks sold is
determined by the weighted average method. |
The basis of the stocks received in tax-free exchanges is the basis of the shares|
given.
The transactional capital gains tax return is required to be filed within 30 days
from the date of sale.
The gain on the sale of stocks for stocks pursuant to a plan of merger and
consolidation is exempt if it resulted in the transferor acquiring corporate contrtl
over the absorbed corporation.
The selling price is used to determine the propriety of using the installment
method but the contract price is used to determine the capital gains tax payableia
installment.
The excess of mortgage over the basis assumed by the buyer constitutes *
indirect receipt which is part of the initial payment and the selling price
10. Wash sales occur when there is a repurchase of identi ee at 30 days
before and 30 days ys aft Pp se of identical securities within
after the date of disposal of securities at a loss.
11, rg eens more than 50% ownership in
the voting power of a corporation:
12. eiins tax is stocks isi subjec
j t to stock transaction tax and not to 4?! |
i
13. Gain and loss in a share-for- of

share swap pursuant to a plan of meré.
consolidation shall be recognize
received, d up to the extent of the cash and other proP®
14, The
iinetsale by the Nati
ational Housing Authority of commercial lots is subject t? capi? 0 |
' 212

jfrrothe
perass
ty ess
is or'
the s zon
faial
r val
valueve js low er than the sellin
15. i g price, then the fair value of the
Title to a proper
ty shall not be re
16. Commis
sioner or his representat; gistered by the Registry of Deeds unless the
ves has certified that the tax on the transfer has
Domestic corporations
17. are exem i i
and other disposition of rea] proper
The sale of land tign. re
18. pursuant to the A grarian Reform Program
is exempt from capital
gains tax.
19. Foreign corporations are required to pay capital gains tax on the sale of dom
stocks and on the sale of real property capita ass
estic
l ets.
20. The alternative taxation on an expropriation sale is not applicable to corporate
taxpayers.

1. Which is subject to the 15% capital gains tax?
a. Sale of domestic stocks directly to a buyer within or outside the Philippines
b. Sale of domestic bonds directly to a buyer within the Philippines
c. Sale of domestic stocks through the Philippine Stock Exchange
d. All ofthe above
Which is an ordinary asset?
a. Personal car c. Principal residence of the taxpayer
b. Delivery truck d. Wedding ring of the taxpayer
Which is not an ordinary asset?

a. Personal laptop ofthe taxpayer c. Real property held for sale
b. Machineries and equipment d. Leasehold improvements
Which is a capital asset to a realty developer?

a. Construction equipment c. Vacant lot held for future development
b. Domestic stocks d. Head office building of the developer
Which j .
ich is an ordina ry asset? c. Personal cellphone
a. Home appliances :
d. Office supplies
b. Personal car
ts, ifnot used in business, is subject to regular tax?
mr P oni = c. Domestic stock option
Denieetie stock rights d. Taxpayer's personal car
. ity dealer? re
Which is a capital asset for a security « Real property held for speculation
. Demeae: ra d. Office equipment
mestic
213

Gains Taxation
Chapter 6 - Capital
le of dom estic stocks dj ety
to cap ita l gai ns tax on the sale
8. Who is not subject
c. Dealer of securities
buy er? d. Realty dealer
b.a. Dealerproperty developer
Real
?
g, wh en sol d, is not subject to capital gains tax
Which of the follow in
c. House and lot
a. Boarding house
. 9.
d.Aand B
b. Warehouse
6% capital gains tax?
10. Which is not subject to the
a. Donation of property
ty
b. Foreclosure of a mortgaged proper or of the government |
tion of one’s property in fav
c. Expropria
ent consideration
d. Sale of property for an insuffici
11. Statement 1: Capital gains may arise from sale, exchange, and other disposition y
.
movable properties used in busi ness .
r dispositio,
Statement 2: Ordinary gains may arise from sale, exchange, and othe
of real properties not used in business.
Which is true?
a. Statement 1 is correct. c. Both statements are false.
b. Statement 2 is correct. d. Both statements are correct.
d |
12. Statement 1: The gain on sale of domestic stocks directly to a buyer is presume
2: The gain on sale of real properties is presumed. |
Statement
}
Which of the following correct?

a. Both statements are true. c. Only statement 1 is true. |
b. Both statements are false. d. Only statement 2 is true.
13. Which of the following properties when sold may be subject to capital gains tax!
a. Domestic stock c. Patent
b. Foreign stocks d. Office buildings
14. Statement 1: Only depreciable assets of business qualifies as ordinary asses:
. _ niet?
Statement 2: Land used in business i
S a capipitatal
l asset since it is not subj
tionn.
deprecia‘atio
_ Which of the following correct?
a. Statement 1 is false.
b. Statement 2 is false. c. Both statements are false.
d. A, Band C
j tif
15. Statement 1: Ordina disp
. Ty gains may arise fr
om sale, exchange, and other
- nee
of real properties used inbusiness

Ot Pr
214

Chapter 6 - Capital Gains Ta
xation
Statement 2: Capital pain m

real properties not used in busi
ay arise
Neg from sale, exchange, and other dispositions of
Which ts false?
il. statement , is correct,
c. Both statements are false.
b, oti nt 2 is correct, d. Both statements are correct.
1. Which of the following s ales of domestic
a. Sale of domestic sto cks stocks is subject to capital gains tax?
through the PSE
. Issue of domestic st ocks
to subscribers
c. Sale of domestic st ocks direct
ly toa buyer
d. Exchange of stock S for stocks ina
corporate merger
Which of the following properties,
when sold, may be covered by regular income
tax?
a. Share options c. Share warrants
b. Preferred stocks
d. Promissory notes
Which of the following assets may be subject to capital gains tax upon disposa
l?
a. Parking lot c, Farm lot
b. Dormitory d. Office supplies
The sale of an office building will be subject to
a. 60% of 1% percentage tax. c. 15% capital gains tax.
b. 6% capital gains tax. d. regular tax.
The term “other disposition” covers

a. Foreclosure sales c. Expropriation by the government
b. Auction sale d. Any of these
The sale of listed shares will never be subjected to .
a. 6% capital gains tax c. 15% capital gains tax
b. 60% of 1% percentage tax d. Any of these
The sale of non-listed shares may be subjected to .
a. 6% capital gains tax only. c. 15% capital gains tax only.
b. 60% of 1% percentage tax only. d. Any of these
Which of totge when
ee ad lowin soldntmay c.beDeve
exem pted from the 6% capital gains tax
.
governme lope d resi dential properties for sale

i ?
b. Residential lot d. Principal residence

gain before the 15%
Statement 1: The sale or exchange must result to an actual
capital gains tax is imposed.
215

6 - Ca pi ta l Ga in s Taxation
Chapter
re su lt to an ac tu al gain before the
or exchange must
Statement 2: The sale ame ce
capital gains tax Is Imposed. c, Only statement 1 is correc
t
a. Both statements are correct d. Only statement 2 Is correct
b. Both statements are incorrect.
ex ce ed s the tr an sa ct ional capital pajp, te
10. When the annualiz
ed capital gains tax
the excess is a c. Tax refundable
a, Taxcredit d.AorB
b. Tax payable
by rea l es ta te de al er s are ordinary assets,
es acquired
11. 15 statement: Properti l es ta te de al er s continue to be classi
fied as
es of rea
gnd statement: Properti ge the na tu re of their business.
th ey ch an
ordinary assets even if c. Ne it he r statement is correct
ec t
3, First statement is corr d. Both st atements are correct
rrect
b. Second statement is co
more than tw;
businesses discontinue use of assets for
12. 15t statement: When realty capital assets.
sified as
years, the same shall be reclas more than two
sinesses discontinue use of assets for
‘and statement: When realty bu capital assets.
sified as
years, the same shall be reclas c. Neither statement is cor
rect
a. First statement is correct rect
t d. Both statements are cor
b. Second statement is correc
ent?
13. Which is an incorrect statem ition of capital stock presumes th
a. The capital gains tax on the dispos .
ction.
existence of gain on the sales transa
of real pro per ty cap ita l ass et shall withhold the tax at source ant
b. The buyer
remit the same to the government.
C as a form of final tax.
c. Capital gains tax is identified under the NIR
ition of real property presumes i
d. The capital gains tax on the dispos
existence of gain on the sales transaction.
14. Which of these shall pay the two-tiered capital gains tax?
a. Areal property developer c. A merchandiser or trader of goods
b. Adealer in stocks d.AorB
i?
15. be subject a
to oftheth 6%follo"
which would otherwise
income tax if all
wan
F adiionwes eee be subject to regular
sale of real properties
‘an?
is the ex ception?
one. Whichtaxpayer
, except
an individual
a. the seller must be
b th
e sale involves the principal residence of the taxpayer
s . .
r the buyer is the government

the taxpayer opted to be subjected to regular tax

6 - Capital Gains Taxa
chapter tion
which of these pay th
e 6% ca
46. Security dealer pital gains tax?
c. Real Property d
b. Real property dealer d. None of thestye de velope
r
17. qhe sale of a principal residence i
following conditions are met,excégt from the capital gains tax if all of the
a. The proceeds is fully y utilized
utilizea ; : . .
pb, The reacquisition must be by acquiring a new principal residence.
tee purchase
he reacquisitio .
“ oe ’ n must have been made within 18 months from the date of
d. The capital gains tax must
be deposited in escrow

1. ment paymen capital gains tax is appli
t of only
The install
a. 15% capital gains tax pplicable to the
b. 6% capital gains tax only
c. BothAandB
d. Neither AnorB
The transactional 15% capital gains tax is to be paid

a. Within 30 days from the date of sale or exchange.
b. Within 30 days from the end of month of sale.
c. On the 15" day of the fourth month following the close of the quarter when
the sale was made.
d. Onthe 15t day of the fourth month following the taxpayer's year-end.
The annual 15% capital gains tax return is due

a. within 30 days from the end of the month of sale.
within 30 days from the date of sale or exchange. .
b.
taxpayer's year-
c. onor before the 15‘ day of the fourth month following the
end. .
d. on or before the 15t day of the fourth month following the close of the
quarter when the sale was made
Capital gains tax that is not payable on installment basis is due

sale or exchange.
a within 30 days from the date ofof month
b. with; he end of sale.
of the
C, on or before en "s® day of the fourth month following the close
taxpayer's year-
d, aor bemethe 1 * day orihe fourth month following the
end,
217

xation
Chapter 6 - Capital Gains Ta
ents of the 6% capita i l gaini s tax is due
t.
5.
ys fr om the da te of each installment paymen
: rwienin 2 0 da e of each ins a lment payment.
insttal
30 days fro m the dat
ithn ment.
15 ave fro m the dat e of each installment pay
® within payment.
Wit hin 20 day s fro m the date of each installment
d.
tal ent of cap ita l gains tax is applicable to
ins
dua
am l taxtepay
ar ers onl y ; c. Dealers in properties only
a.
me Ind ivi
d.A orB
b. Corporate taxpayers only
ject to capital gains tax?
Which of these capital gains is sub
a. Gainon the sale of stock rights
sional partnership
b. Gain on sale of interest in aprofes linked to comma
ncial instruments
c. Gain on the sale of derivative fina
prices
d. Gain on sale of bonds
exemption from the a
Paulo indicated in his return his intent to avail of the
he be exempted?
capital gains tax. Under what condition will
basis of the property solq
a. Whenthe proceeds of the sale exceeds the cost
the ng
b. When the proceeds of the sale exceeds the acquisition price of
residence
c. When the cost basis of the property sold exceeds its selling price
d. When the acquisition price of the new property exceeds the proceeds of th
old property sold
Partial taxation under the 6% capital gains tax will result when
a. The proceeds from the sale of the old property exceeds both its cost and te
acquisition price of the new property.
b. The proceeds of the sale exceeds its zonal value and Assessor’s fair value.
c. , The proceeds of the old property exceeds the acquisition price of the ner
property regardless of the tax basis, zonal value, and Assessor's fair valued
the old property. ,
d. The zonal value is greater than the sales proceeds of the old property.
10. The transactional capital gains tax on domestic stocks is

a. nota final tax. -
b. included in the income tax return.
c.. creditable to the regular income tax.
d. creditable to the annual capital gains tax due.
“IL, The 15% capital gaitaxndoe s s not apply to
a. Resident citizen dealers of stocks
b. Non-resident citizen dealers of cars
c. Resident alien dealers of computer parts
d. Domestic corporations dealing in real properties
‘218
e
x

2, The documentary stamp tax 9

based on n the sale of domestic stocks directly to a buyer
is
q. Selling price ;
p. Par value c oe !
The documentary stam
a a, Selling price P tax on the sale of real property is based on
b. Fair value ¢. Cost
d. A or B, whichever is higher
14. The 6% capital gains tax does not apply to
a.
b.
Domestic
Resident
corporations :
c. Non- resident iti
aliens citizens
d. Foreign corporations
15. Who shall file the capital gains tax return
for the sale, exchange, and other
disposition of real property?
a. Seller c. Transfer agent
b. Buyer d. The registry of deeds
Multiple Choices - Problems: Part 1
1, Poe sold domestic shares directly to buyer. The following relates to the sale:
Fair market value of shares P 400,000
Selling price . 300,000
Cost 150,000
Compute the capital gains tax.
a. P7,500 c. P 15,000
b. P9,925 d. P 22,500
2. Mr. Dondi sold domestic stocks directly to a buyer at a mark-up on cost of
P200,000. He paid P5,000 broker’s commission and P8, 000 documentary stamp
tax on the sale. Compute the capital gains tax.
a. P 28,050 c. P 14,200
b. P 14,500 d. P 13,700
3. Mr. Abdul, a non-resident alien, sold domestic stocks ulrecty toa buyer at a net
gain of P 70,000. Compute the capital gains tax.
a P10,500 c. P 4,000
b. P6,000 d. P 3,500
4. Mr. Panay Cabig, a non- -resident citizen, sold domestic stock rights directly to a
buyer at a net gain of P 320,000. a the aon gains tax.
» 219

ation
Mr. Bigos sold share s of a resident

foreign corporation directly to a buye
5. 0,000 and were sold at a net Selling pric
shares were purchased for P10
500 y
P210,000. Compute the capital gains tax.
c.P 5,
a. P15,000
b. P 11,000 d.P 0
domestic shares foy , bee
Bayawan Inc. exchanged its investments representing
of land owned by Eagle, Inc.
Fair market value of shares P 400,000
Fair market value of land 500,000
Par value of shares 300,000
Cost of shares 350,000

a. P22,163 c.P 11,000 |
b. P15,000 . d. P 9,988
Digong Inc. exchanged its share investment from Bee Inc., as payment of fs
P350,000 long outstanding loan from the latter. Digong acquired the shares f,,
P300,000. Ignoring documentary stamp tax, compute the capital gains tax on th;
transaction.
a PO c. P5,000
b. P7,500 d. P2,500
On January 5, 2021, Teresita, a stock dealer, disposed the following shares direct
to a buyer:
Shares Selling price Cost
Stock rights P200,000 P170,000
Common stocks — 100,000 110,000
Ignoring the documentary stamp tax, the capital gains tax payable
on the saleis
a PO c. P1,500
b. P1,000 d. P3,000
Kidapawan, Inc., a domestic service ctions
company, has the i
the sale of another domestic corporation: following transa |
urchase 20,000
Sa P 40,000
. 30,000
e . 63,000
40,000 92.000
a umiang the first-in
Ass “i , first-out method,
compute the capital gains
tax on the o
b. P40
rp
d.P 4,650 !
“; 220

a.
», P400 c. PSO
11. Argao Company,
year involving the a stocks
trading com
of Xu pany, made the following transactions during the
rpas, a domestic corporation:
Date Transaction
6/18/2021 Purchase states ——sNetrice
9/30/2021 Sale 8,000 "38
10/3/2021 Purchase 15,000
12/7/2021, Sale 10,000
oe
32
Argao uses the FIFO method in costing the
Xurpas stocks,
Compute the deductible loss on the September 30 sale.
a. P20,000 c. P12,800
b. P16,000 d.P0
12. Compute the taxable gain on the December 7 sale.
a. P64,118 c. P51,467
b. P60,000 d. P44,000
13. Mr. Gary has the following transactions during the year on the common stocks of
Philippine Pines, a domestic non-listed company:
Date Transaction _ Gain{Loss)

5/8/2021 Sale P120,000
8/5/2021 Sale ( 10,000)
9/8/2021 Sale 250,000
Compute the annual capital gains tax due for 2020.

a. P54,000 cP 22,000
b. P29,000 d. P 3,000
a
14, Mr. Cabilao shows the following transactions in the shares of Aklan Corporation,
closely held corporation: i
Quantity Price aia?

Date Transaction 10,000 P mye
2/8/2021 Buy 90,000
Sell 10,000
4/5/2021 20,000
9/1/2021 ° . ~~ Buy
acquired 000. 1,2020?
What is the tax basis of the shares
b raat aes ou + d,P220,000

- 221

ation
n, purchased 100,000 shares of PhilHotg

15. Mrs. San Marcelino, a resident citize 8a
domestic listed company. The sha
res were acquired at P200,000. She dispo,. deh.
009,
Exchange at a fair value of P250,0
shares through the Philippine Stoc k
a PO c. P 7,500
b. P 2,500 d. P 10,000
P400,000 ,
stocks at a total consideration of
16. Mr. Candelaria disposed various realized totale |
egate gains
paid thereon stock transactions tax of P2,000. Aggr ed
the capital gains tax?
P98,000 after the stock transaction tax. What is
a PO c. P 9,800
b. P4,900 d. P 14,700
Multiple Choice - Problems: Part 2

ly to a buyer, Th,
1. Bogo sold 1,500 shares of stocks of Bantayan Corporation direct
s for P90 ea¢,
share’s par value per shares was P85. Isidro purchased the share
On the date of sale, the shares had a selling price of P120 per share. What is the
capital gains tax on the sale?
a. P2,625 c. P 6,607
b. P2,250 d. P11,375
2. A certain taxpayer shows the following over-the-counter transactions in the

shares of a domestic corporation:
2/8/2021 Purchase 10,000 P 112,000

4/5/2021 Sale 10,000 100,000
5/1/2021 Purchase 8,000 80,000
6/7/2021 Sale 5,000 60,000
Compute the capital gain on June 7, 2021 that is subject to capital gains tax.
a. P4,000 c. P10,000
b. P5,000 d. P12,000
3. Aninvestor sold domestic stocks directly to a buyer on October 1, 2021 under te |

following terms:
Selling price | P 500,000
Cost a
Downpayment ~ . ~ s0%
Installments in 2019 | 50,000
Compute the total capital gains tax in 2021.
a P 45,000 rit c. P 9,000
b. P 25,000 “ d.P 6,250
- 222

papter 6 - Capital Gains Taxation
pampanga, Inc. realized the following gains

or :
gain on sale of domestic stocks rales seene yaxtonts aeeurtaes:
par value of domestic stocks sold P 300,000
Gain on the sale of interest in a partn . 200,000
Gain on the sale of stocks of fore stanlp 200,000
eign Corporations 15
0,000
compute the capital gains tax,
P 45,000 c.P 35,000
‘
b. P 44,775 LP ae,
Compute the documentary stamp tax in th
a. P1,500 ©. P562.50 € preceding problem.
b, P1125 d.P750
domestic shares wherein 20,000 shares were disposed at a loss of
wereof subsequently
P40,000 sale
Awash covered up within the 30-d iod b hase of
shares for P12/share, ay period by a purchase o
15,000
The deductible capital loss against capital gain on the wash sale is
a PO c. P 10,000
b. P13,333 d. P 20,000
What is the cost of the 15,000 shares acquired in the preceding problem?
a. P150,000 c. P190,000
b. P180,000 d. P210,000
Mr. Homonhon purchased domestic stocks which were priced at 150% above
their par values. After two years, he sold the stocks when their fair value doubled.
expenses on
He paid P7,500.00 documentary stamp and P10,000 in commission
the sale.
Compute the selling price of the stocks. ype

a P3,000,000 c. P 1,500,000
dP 1,000,000 6. i
b. P 2,500,000
Compute the capital gains tax. c. P 153,725 .
eva na e
a. P 143,625 e 7 | |
b. P152,750 d. P 222,375
the| sale of
gains tax retu: rn involving mp
10, 02 ‘Limon fil e d the
.
capi
Th
tal
e net gain was Pn Co ute the
Fe br ua ry 20, 20 21
domente Sates oh mpromise pent i _
co
g penalties extePt
total amount due includin
c.P 11,72 ae
a. P 26,880 d.P 12,254
P 26,871
‘223

ins Taxation
oblems: Part 3 ntial house 7
Multiple Choice ~ pr 500-square meter reside
1. On August 15, 2021
, Ms. Mo ne
wa
s
s
sol
ac
d
qu
a
ir e ‘in 200 6 at P2, 000 ,00 0. The Assogy Or's
use re P1,500,009
for P3,000,000. The ho lot, respectively, .we
and
values of the house er. and
fair market
e zon al va lu e of the lot was pS5,000 per square met
P1,000,000. Th
?
What is the capital gains tax
c. P150,000
a. P180,000
d. P240,000
b. P120,000
builgi,
a bui ldi ng to be use d as a future plant site. The
A taxpayer purchased sig nificant decline in customer'
s demang jy
for 3 yea rs due to a j,
remained unused eve ntu all y disposed the property. What
The tax pay er
product of the taxpayer.
ty?
the classification of the proper BIR
ry ass et c. Eit her A or B at the discretion of the
a. Ordina intent of the buyer
b. Capital asset d. Either A or B depending on the
the property was
ng the sam e data in the preceding number except that
Ass umi it became
used as a sales outlet after which
not disposed of but the same was ty?
t is the classification of the proper
vacant for more than two years. Wha
taxpayer
Ordinary asset, regardless of the
er
Capital asset, regardless of the taxpay
ao op
age in real estate business

Ordinary asset, if taxpayer is not eng
aged in real estate business
Capital asset, if the taxpayer is not eng
value
00,000. The lot has an Assessor's fair
Anderson disposes a vacant lot for P3,0
00, and an appraisal value of P3,500,000,
of P2,800,000, a zonal value of P3,200,0
What is the capital gains tax?
a. PO c. P 192,000
b. P 180,000 d. P 210,000
lot for P2,000,000. The lot has a zondl

Puerto Princesa Company sold its parking al gains tax°
capit
value of P2,500,000 and appraisal value of P1,800,000. The
the sale of the lot is
a PO c. P 120,000
d. P 150,000 |
b. P108,000
immediat®l
Mr. Antonio disposed his principal residence for P2,000,000 and Anton
~ acquired.a new one for P1,800,000. The old residence cost Mr..
~’ P1,000,000 and had a fait market value of P2,500,000 on the date of sale.
Compute the capital gains tax to be deposited in escrow.
a reo c.P120,000 '
. 000 d. P150,000
224

ation
g, What would be the tax b

a. P1,800,000 nsis “ Pon ie new residence?
b. P1,000,000 d. p 800.000
8. HOON Capital gains a will be released to the taxpayer?

. , c. Pl
b. P135,000 d. peaoe,
9, Manny, a resident Filipino citizen, s
old his principal residence (house and lot) at
its original purchase price of p4 :
value at that time. 1,000,000. The property had a P13,000,000 fair
If the ae of the sale were not invested in the new principal residence but,
instead, new funds of P15,000,000 were used to construct it, the capital gains tax
is
a. PO c. P750,000
b. P660,000 d. P780,000
Numbers 10 through 12 are based on the following information:

Mr. Manaloto sold his residential land in Manila with fair market value of P12,000,000
for P10,000,000.
10. If Mr. Manaloto utilized all of the P10,000,000 in buying a house and lot to be used
as his new principal residence, the final tax due from him is
a. P720,000 c. P120,000
b. P600,000 d. PO
11. If Mr. Manaloto utilized only P7,000,000 from the proceeds of the sale in acquiring
a new residence, the final tax due from him is
a. P720,000 c. P180,000
b. P216,000 d.P 0
12. The documentary stamp tax due on the sale is

a. P179,895 c. P149,985
b. P180,000 d. P150,000

1. Id a residential lot on June 1, 2021 for P2,000,000. The property had
value of P1,000,000.
. sastvainedh P2,500,000 and an Assessor's market
Dotan was compelledto pay the capital gains upon the
to be P20,000.
Ss.
On july of1, the

request buyer. Th e compromise penalty was determined
2022,
‘
225

l Gains Taxation
Chapter 6 - Capita
te the total tax due.

c. P. 217,500
Pl 50,000 d. P 225,500
b. P 205,549
stamp tax on the sale of
paid P9,000 documentary
a r
el
2. REO Basic Company the cap ita l gai
.
ns tax on the sale.
cap ita l ass et. Co mp ute
roperty
00 0 c. P 36,000
. 9,
d. P 42,000
b. P 16,000
at The land had
: a fair Value ¢;
3. Mr. Datu sold a residential land for p4,000,000. What is the total incon,
P3,500,000 and an Assessor's fair value of P2,000,000.
due?
tax and documentary stamp tax
a. PO c. P400,000
b. P 300,000 d. P450,000
nt in Carmen Corporation for the shares

4. Mr. Quirino exchanged his stock investme
en,
of stock of Dingalan Corporation. The stocks acquired by Mr. Quirino repres
60% of the stocks of Dingalan Corporation.
P 3,000,000
Basis of the stocks given
5,000,000
Fair market value of stocks given
Fair market value of stocks received 4,500,000
What is the capital gains tax?

a. PO c. P145,000
b. P45,000 d. P225,000
5. In the immediately preceding problem, what is the basis of the stocks received by
Mr. Quirino?
a PO c. P4,500,000
b. P3,000,000 d. P5,000,000
6. Mr. Rhad exchanged his DEF shares for the shares of EFG pursuant to a plan of
merger. Mr. Rhad bought his shares for P1,000,000. The shares had a fair value 0!
P1,500,000 on the date of exchange. Mr. Rhad received EFG shares with 4 fat
value of P1,300,000 plus cash of P200,000.
ew Compute the capital gains tax.
a PO = —' c. P 30,000
b. P15,000 — d. P 45,000
“7, whet i the basis of the shares received by Mr. Rhad?
~ ¢, P1,200,00
b. P1,000,000 d. P1,300 00
226

a. PO c. P1,2, 00,000
p. 1,000,000 d.P1,300,000 .
ed hi
Jong
Comp ey eal heintend shares pursuant to a plan of consolidation where A
eachange? with B Company. The follow;
owing relates to the
pasis of A Company shares given

fair value of A Company shares given P 1,200,000
Fair value of B Company shares received ortes
Fair value of other properties received 250,000
a PO c. P 20,000
b. P 10,000 d. P 22,500
10. What is the tax basis of the B Company received by Jong

a PO c. P1,200,000
b. P1,100,000 d. P1,350,000
11, What is the basis of the “boot” or the other properties received by Jong?
a PO c. P250,000
b. P150,000 d. P400,000
12. What is the basis of the A Company shares received by B Company?

a PO c. P1,200,000
b. P1,100,000 d. P1,350,000
aTeee ey j
©. 927

Tax
r 7 - in tr od uc ti on to Regular Income
Chap te
CHAPTER 7 IN C O ME TAX _
R E G U L A R
INTRODUCTION TO
Chapter Overview and Objectives: cenmnn mene eneneemenennmnnnnnn enna tan tan ee
ome tax intended to acquain

n overview of the re gular inc
i
tax str uct ure s of the regular income tax. It aj,
readderCas wi ie nate and
rea tax oie Subsequen;
po rt in g an d in co me
discusses regular tax re incoom .
pects of the regular Inc
chapters deal with specific as
knowledge on th,
cha pte r, rea der s are exp ect ed to demonstrate
After this
following: del
and its tax mo
The scope of regular income
he features of the regular income tax
PWNP
gross Income
The concept of inclusion and exclusions from
tax
The types of gross income subject to regular
ion
The concept of deduction and personal exempt .
exemptions
The concept of deductions compared to personal
NAM
of gross income from employment and business and the

Measurement
treatment of other income .
8. The concept of operating income or revenue and the difference in tax
presentation of individuals and corporate taxpayers
9. The procedural computation of taxable income of corporations and different
individual taxpayers
10. The computation of the regular tax for individuals and corporations
11. The deadline of the regular tax returns
12. Applicability of the quarterly filing and its deadlines
CHARACTERISTICS OF THE REGULAR INCOME TAX

1. General in coverage
2. Anet income tax
3. An annual tax
4, Creditable withholding tax
5. Progressive or proportional tax
General coverage
The regular income tax applies to all items
subject to final tax, capital gains tax, and speciaof taxable inco me except those t hat até
l tax regimes,
Net income taxation
The regular tax is an imposition on resid
i ual profits or gai
expenses and personal exemptions allowabl tions fo"
e by law —_
228

chapter 7 - Introduction to Regular Income Tax
nnual income tax

rhe regular income tax applies on yearly profits or gains. The gross income
and
expenses of the eit datas measured using the accounting methods adopted by the
taxpayer and are reported
the taxpayer.
to the government over the accounting period selected by
creditable withholding taxes

slost items of regular income are
subject to creditable withholdi
creditable withholding taxes are advanced tax ng tax (CWT). These
es that must be deducted against regular
tax due in computing the tax still due to the
government.
progressive or proportional tax

The NIRC imposes a progressive tax on the taxable income of individuals while it
imposes a flat or proportional tax of 25% upon the taxable income of corporations.
THE REGULAR INCOME TAX MODEL

Gross income - inclusions P= XXx,xxx
Less: Allowable deductions XXX,XXX
Taxable Income P__xxx,xxx
Gross income consists of the major topics:

1, Exclusions of gross income - list of income exempt to regular income tax
2. Inclusions in gross income - list of income subject to regular income tax
3, Special topics - covers income that are either exclusion or inclusion depending
on certain circumstances, such as:
a. Fringe benefits
b. Dealings in properties
GROSS INCOME
Gross income constitutes all items of income that are neither excluded in gross
income nor subjected to final tax or capital gains tax. The items of gross income
subject to the regular income tax will be extensively discussed in Chapter 9.
Exclusions from Gross Income
These pertain to items of income that are excluded; hence, exempt fro
m regular
income tax. These will be discussed in detail in Chapter 8.
Excluded income vs, exempt income
Excluded income is also exempt income. Excluded income are
those listed by the
NIRC as exempt income from regular tax. The term exempt income includes all
me €xempt from income tax whether final tax, capital gains tax or regular
in ome tax. Exclusions from gross income are listed in the NIRC. Exemption from
C
¢
ome may be provided by the NIRC or special laws.
229

Regular Income Tax
Chapter 7 - Introduction to
—
LLOWABLE DEDUCTIONS conduc, P
ons, are arin
Mloaable deductions, or simply “deducti
monly as busines. |
business or exercise of profession. They are com
expenses.
uctions as follows:
The book sub-divided the vast topic of ded
1. Principles of Deductions - Chapter 13
ions - Chapter 13-A :
2. Regular Allowable Itemized Deductions C
Itemized Deductions & Net Operating Loss Carry-over
3. Special Allowable
Chapter 13-B ;
4. The Standard Optional Deductions (OSD) - Chapter 13-C
For individual taxpayers, there is a need to note the difference between busines,
expenses and personal expenses. Personal expenses or Se aaa an individua
t of his
spends that are not connected to furtherance, maintenance or developmen
against gross Income.
trade, business or profession are non-deductible
Individuals that are not engaged in business cannot claim deductions from gros.
income. Consequently, individuals are classified as follows:
1. Pure compensation income earner |
2. Pure business or professional income earner
3. Mixed income earner - an individual earning both compensation and business
or professional income
Note on Personal Exemption

Previously, the law provides for personal exemption of income of individual
taxpayers. The amount of personal exemption depends on the number of
dependents who are supported by the taxpayer. Personal exemption is in lieu of
the personal, living, and family expenses of an individual taxpayer. Personal
exemption is repealed effective January 1, 2018.
In an effort to simplify the tax system, the TRAIN law simply exempts P250,000
annual income of the individual income taxpayer from regular income tax. This
exemption is embedded in the income tax table for individual
taxpayers. As such,
there is no need to separately deduct personal exemption.
DETERMINATION OF TAXABLE INCOME
Taxable Income of Individual ncome Taxpavers

The taxable income of individual taxpayers 1sj ; ‘fication
and Globalization rule. fit computed using the Classifica
230

classification isRule
firstclassified into:
a. Compensation income
bp. Business or professional income
compensation income vs. Business income

Compensation income arises from an employer-employee relationship. This
relationship 1s characterized by a power to retrench giving the purchaser of the
service a terminate the arrangement when he is losing in business. Business income
arises from selling of goods or rendering of services for a profit. In service
arrangements where the purchaser of the service has no power to retrench, the
income realized thereon is a business income,
Treatment of other income

Income that are neither compensation income nor business income such as those
passive income are simply classified as “other taxable income” and are added to
gross income from business and profession.
Allowable deductions
Business expenses are deducted against gross income from business or
profession. No deduction is allowed against compensation income since personal
expenses of individuals for cost of living are deemed to be included in the
P250,000 blanket exemption in the income tax table.
Other income which is neither compensation nor business or professional income

is simply added to total gross income from business or profession as “Non-
operating income.” If the taxpayer has no business or professional income, the
same shall be added to taxable compensation income as “other income.”
Taxable income of pure compensation income earner

The taxable compensation income of employees is computed as follows:
Gross compensation income P = XXX,XXX

Less: Non-taxable compensation XXX,XXX
Taxable compensation income P___xxx,xxx
Non-taxable compensation includes legally mandated salary deductions and items

of compensation income that are exempted by law, contracts, or treaty from
income taxation. The detailed tax rules on compensation income will be discussed
In Chapter 10,
231

Ta x
ap te r 7 - In tr od uc ti on to Regular Income
Ch
essifejo na l in
: io
onss come earner
re bus in profo
i ess or P opt nals is computed as follow,
Taxable income of pu
of businessmen
The taxable net income
: P=‘ XXX,
pean XXX
s Inc ome fro m bus ine ss /pr ofession
Gros Bigo santtos
Add: Non-operating income seeneaee
Total Gross income
Si inet sot
Less: Allowable deductions
Taxable net income
earner
Globalization rule for mixed eer both sources is simply globalizeg Or
income of mixed income earner nt
loss when deductions opie come
t
totaled A negative net income or net

t
be offset aga Oca enti

from business or profession shall not ee or ee ane ae
of
income because deductions are expenses e jg pens
Income thereto,
properly deductible only against gross
income.
deductible against taxable compensation
Illustration: Individual income taxpayer

Case 1 Case 2 Case 3 Case 4
Compensation income P 300,000 P 300,000 | P 300,000
Non-taxable compensation 30,000 30,000 30,000
Gross business income P 400,000 400,000 200,000
Deductions 250,000 250,000 250,000
Other income 20,000 20,000 20,000 20,000
ee
Taxable income shall be determined in each of the above case as follows:
Case 1: A compensation earner with other income

Gross compensation income P 300,000
Less: Non-taxable compensation 30,000
Taxable compensation income P 270,000
Add: Other gross income 20,000
eee
Taxable income
P290,000
Case 2: A business income earner with
other income
Gross business income
ee
Add: Other gross income P 400,000

Total gross income —__ 20,000
Less: Allowable deductions P 420,000
Net income 250,000
—_
232

tor 7 - Introduction to Regular Income Ta
ax
chapt*
case 3: A mixed income earner with other income

Gross compensation income | P 300,000
oss! Non-taxable compensation ___ 30,000
P 270,000
taxable compensation income
P 270,000
qaxable compensation income
cross business Income P 400,000

£0,000
ather gross income
Total gross income P 420,000
250,000
Less: Deductions
Taxable netincome _ 179,000
Taxable Income P__ 440,000
or profession
case 4: Mixed income earner - with net loss on business
P 300,000
Gross compensation income
Less: Non-taxable compensation 30,000
P 270,000
Taxable compensation income
Gross business income 200,000

P
Add: Other gross income 20,000
Less: Deductions 250,000
Net loss (P___30,000)
Taxable income P_270,000
income of the succeeding three

Note: A net loss may be carried over as a deduction against net
This will be discussed under
years. This is referred to as net operating loss carry-over or NOLCO.
deductions in Chapter 13-B.
Determination of Taxable I
The taxable income of corporations is computed in the same manner as pure
business or professional income earner.
Accounting Method and Accounting Period

taxpayer's annual
The taxable income shall be computed upon the basis of the rlyregula
accounting period in accordance with the method of accounting
if no such method of
employed in keeping the books of such taxpayer; however,
accounting has been so employed, or if the method employed does not clearly
dance with such
reflect the income, the computation shall be made in accor
income.
method that in the opinion of the Commissioner, clearly reflects the
233

Tax
7 - In tr od uc ti| on to Regularar InIncocon me
Chapter
In short, Shall com pute taxable Income usin

~~‘ Taxpayers using —rax cash basis on a calendar year
calendar rear year
“GAAP cash basis on a Tax cash basis ona fiscal
fiscal year
~~ GAAP cashbasis on a! endar ear
yeal
Tax accr ual basis on a cal
calendar al basis on a fiscal year
> accrual basis on a Tax accru
fiscal ye ar
GAAP accrual basis ona
wre rp
CS
—3
~ AAD
ines s or Profession
rm in at io n of Gr os s In come from B us
Dete
Business selling good he sale of goods is computed as:

business on t
The gross income from
P XXX,XXX
Sales
sales)
____ XXX, XXX
Less: Cost of goods sold (cost of P___XXX,XXX
Gross income
Cost of sales . ..
o,
Cost of sales pertains to the acquisition cost of the goods sold for merchandising
g.
of manufacturin
the manufacturing cost of the goods sold in the case
it
Cost of sale of a trading business
The cost of goods sold may be determined by the specific identification using
perpetual inventory system with the aid of point-of-sale (POS) machines or by the
periodic inventory system using the following formula:
Beginning inventory P XXX,XXX

Purchases, net of returns and allowances XXX,XXX
Freight-in XX,XXX
Total goods available > for for sale
goods avai P XXX,XXX
Less: Ending inventory
——__XXX, XXX
Cost of goods sold P XXX,XXX
Under the perpetual system, the cost of
Unde goods sold is
codes °! ule goods sold or by stock determined through bar
cards indicating the costs of the
naer the periodic system, the cost goods sold.
of goods sold is established by
inventories. The cost of missing i counting the
g§ items at eve : . :
For purposes of costing, the frei 1), Porting date is considered solt
all units purchased, ght costs of the goods purchased are allocated to
Cost of sales of a manufa
cturing business
The cost of goods sold ofam

~~ _ ERR eas =— usb a Mae ene SY
chapte’ 7 - Introduction to Regular Income Tax
, data during the year:

stration had the following
weaxpayet
gross sales P 4,000,000

100,000
cales discounts 200,000
cales return
peginning inventory 600,000
purchases 2,500,000
150,000
purchase returns and allowances
200,000
preight-in
ending inventory 800,000
The cost of sales shall be computed as follows:

peginning inventory P 600,000
2,350,000
Net purchases (P2.5M - P150K)
___ 200,000
Freight-in P 3,150,000
Total goods available for sale
____ 800,000
Less: Ending inventory
P_2,350,000
Cost of sales
The business gross income shall be computed as follows:
P 3,700,000
Sales (P4M - P100K- P200K)
2,350,000
Less: Cost of sales
Gross income P_ 1,350,000
Business selling service

of a profession is measured as
The gross income from sale of services or exercise
follows:
P = XXX,XXX
Revenues or gross receipts
XXX.XXX
Less: Cost of services
P___ XXX, XXX
Gross income
revenues while those using the cash
Service providers using the accrual basis shall report their
basis shall report their gross receipts or collections.
Cost of services
of
Cost of services pertains to all direct cost of rendering the services such as cost
labor, materials, and overhead costs. The cost of services should be distinguished
from the indirect costs such as general administration and marketing expenses of
the business. These two are separately presented under the deduction category
“Regular allowable itemized deductions.”
Illustration
the year:
A practicing auditor had the following income and expenses during
235

ome Tax
Chapter 7 - Introduction to Regular Inc
P 4,500,
capobne
Billing for services rendered and out-of-pocket costs
Salaries of audit staff 200,000
Salaries of administrative employees _ 12,000
Transportation expenses to and from clients 250,000
Supplies used in various engagements 120,000
Supplies and general utilities 80,000
Depreciation of office equipment 50,000
Depreciation of laptops issued to audit staff 20,000
Insurance expense on office properties 400,000
Rent expenses allocable to workspaces 50,000
Rent expenses allocable to administrative offices 100,000
Bad debt expense on non-paying clients
gross reveny.
The cost of services shall include only those directly incurred or related
from the rendition of services such as:
Salaries of audit staff P 1,400,000

12.000
Transportation expenses to and from clients 400,000
Rental expense on staff workspaces 560000
Supplies used in various engagements 30 50
Depreciation of laptops —_ 50,0
Total cost of services P_ 2,112,000
The gross income shall be computed as follows:
Revenue P 4,500,000
Less: Cost of services 2,112,000
Gross income P_
2,388,000
INCOME TAX REPORTING FORMAT
Reporting Format for Individuals Engaged in Business or Profes

sion
Net Sales/Revenues/Receipts/Fees
P XXxX,XXx
Add: Other taxable income from operation not subject to final
tax XXX.XXX
Total sales/revenues/receipts/fees
P XXX,XXX
Less: Cost of sales or services
___ XXX, XXX
Gross Income from business/profession
Add: Non-operating income PY ee ex
Total Gross income XXX.XXX
Less: Allowable deductions P XXX,XXX
Net income XXX.XXX
P__ xxx.xxx
236

Sl
“oF
otet 7 - Introduction to Regular Income Tax

cha
revenues, receipts, and fees distinguished
(total
gis a general term which pertains to the gross inflow of benefits
pertains to
ro) arising from the primary operations of the business. Sales
from the sale of
re v enue from ; the sale of goods while “fees” pertains to revenue
rice Receipts pertains to cash collection from the sale of goods or services.
s
me
are commonly used to denote the inco
e terms sales or fees or simply revenue to denote the
of taxpayers using the accrual basis while the term receipts is used
basis.
income of taxpayers using the cash
revenue VS: BFOSS income
co nc ep t per tai ning to the tot al ret urn in a transaction which
revenue is a gross on capital. Gross income is a net
includes the return of capital and the return me is net of
concept pertaining to the return on capital in a transaction. Gross Inco
of services.
the cost of sales or cost
ions
other taxable income from operat ts from
fro m ope ration s inc ludes revenues or receip
Othe r tax able income operations aside from the primary operations.
incident al or secondary
Examples:
m bookstore,
1. Aschool has tuition fees as primary revenue, but its income fro its
canteen or student dormitories constitutes other operating revenues.
as its
2. A manufacturing firm has its gross income from sale of finished goods
operati ng
primary revenue, but its income from scrap sales constitutes other
revenues.
may have
3, A private hospital has patient service fees as its primary revenue, but
room rental and sale of medicines at its other operating revenues.
fees
4, A dormitory has boarding fees as its primary revenue, but may have laundry
and canteen income as other operating revenues.
5. Aretail store has its sales of merchandise as its primary revenue, but may earn
consignment commission income as other operating revenues.
6. A bus transport company has the receipts from passengers and baggage as
primary revenue, but may earn income from bus stop restaurants and washrooms
as other operating revenues.
Non-operating income
Non-operating income includes all other items of gross income such as:
1. Gains from dealings in properties
Being net of costs, these are gross income items rather than revenue. They are
income.”
not part of “Sale/Revenues/Receipts/Fees” but of “Non-operating
individual taxpayers
Dealings in properties pertain to the sale, exchange and other disposition of
Properties by the taxpayer. The rules on gains in dealing in properties not
237

ome Tax
Chapter 7 - Introduction to Regular Inc
under
be discussed in Chapter 12 os
covered by the capital gains t ax will
income taxation.
ional partn
2.
.
Income distribution from a general re Pp ership,j taxay,
one burt
trust or estate, or from an exempt joint ventur
Income distributions from these entities are not rev oe tae Of gr.
income, hence, included as part of the non-operating inc 0 individual, -
ive income su
from isolated or one-time transactions Ch >.
* Tare includes active income
ged in carpentry busines, * Any
casual carpentry income of a person not enga oe
off with the casual income. The ne
A,
expense on casual transactions is se t

or income is a non-operating income.
4. Passive income not subject j to final tax d with the business
;
ive inco me not conn ecte of the taxpaye.
This includes pass an; |
as interest on advances to employees
and is not subjected to final tax such
e, these do no:
dividends from foreign corporations. Similar to casual incom
, classified as non-operatin;
arise from the regular business operations, hence
income.
Illustration adn.
An individual taxpayer who is using the accrual basis in his manufacturing busines;
reported the following results of operations in the preceding year:
Sales, net of returns, and discounts P 4,000,000

Cost of sales 1,800,000
Dividend income, net of final tax 36,000

Business expenses 1,600,000
Gain on sale of old equipment 100,000
Sale of scrap metals 200,000
Interest income on employee advances 45,000
Gain on sale of domestic stocks directly to a buyer 10,000
The business income of the individual will be presented in the income tax return
follows:
Net Sales/Revenues/Receipts/Fees P 4,000,000

Add: Other taxable income from operations - Scrap sales
200,000
Total Sales/Revenues/Receipts/Fees P 4,200,000
Less: Cost of sales or services 300.
1,800,000
Gross Income from Business/Profession P 2.400.000
Add: Non-operating income —
Gain on sale of equipment P 100,000
Interest income on employee advances
d )
Total Gross Income oo P 2 ae att
238 |

| Gross Income
rota neauet P 2,545,000
Less: allowable eductions (Business expenses) 1,600,000
Net incom P__ 945,000
ote: Income items su
bject to final tax like the dividends and capital gains on the stocks
are excluded in the co mputation of the gross income subject to regular income tax.
peporting Format for Corporate Taxpayers
Net Sales /Revenues/Receipts/Fees P xxx.xxx
Less: Cost of sales or services xml
Gross income from operations P Xxx,xxx
Add: Other taxable income not subject to final tax XXX,XXX
Total gross Income P XXx,Xxx
Less: Allowable deductions XXX,XXX
Net income P XXX,XXX
Note: For corporate taxpayers, revenues or receipts from secondary or incidental

operations will be included under the classification “Sales/Revenues/Receipts/Fees.”
Other taxable income not subject to final tax
This category includes other items of gross income whether or not arising from the
operations of the corporation such as gains from dealings in properties, income
distribution from an exempt joint venture, and other passive income not subject to
final tax.
Illustration
Assuming the same data in the previous illustration except that the taxpayer is a
corporation, the business income shall be reported as follows:
Net Sales/Revenues/Receipts/Fees (P4M + P0.2M) P 4,200,000

Less: Cost of sales 1,800,000
Gross income from operations P 2,400,000
Add: Other taxable income not subject to final tax
Gain on sale of equipment P 100,000
Interest income on employee advances 45,000 145,000
Total gross income P 2,545,000
Less: Allowable deductions (Business expenses) 1,600,000
Net income P__945,000
The difference in presentation between individuals and corporations is

necessitated by the Optional Standard Deduction (OSD). The basis of the OSD for
individual taxpayers is the total revenues or receipts from operations while the
basis of the OSD for corporations is total gross income subject to regular income
'ax whether or not they arise from the regular business operations.
239

e Tax
ti on to R e gular Incom
troduc
Chapter 7 - In
nal p ractice
b u s iin e s s andesspro OFfesseio
x e rcise of a profes
sion
‘ n g fo r b u s i n
ess or profeg.,
epin® gage d in
Separate bookke f r o m b u s i n
Individual taxp
ayer s
their transa
ctionsis ITO , Ong
pa ra te re co rd of
e in di vi du al taxpayer must
maintain a se ions of th Ot he
e pe rsona | transact profess! onal prac
tice.
transactio ns . Th
t he bu si ne ss or
xe d wi th th e transactions of
mi rsonal expense oy
of expen ses. The pe
an t in th e ta x tr eatm en t
s e a e of the business .t 8
This is im po rt the gr os
ca nn ot be de ducted against in dl vi dw e ta xp ay er is in liey a
taxpayer w for
ex emption fixed by la taxpayer.
|
allowable personal and co st of li vi ng expenses O th
e
mily,
the actual personal, fa
INCOME TAX
TYPES OF REGULAR
1. Individual income tax
2. Corporate income tax
;
INDIVIDUAL INCOME TAX iv e inc ome tax IS determined
by reference,
tax or pro g re ss
The individual income
rates.
3 tax table of progressive tax
Individual Taxpayers (Year 2018 - Year 2022)
The Income T ax Table for —_
)|
Income Tax Rate
Taxable Income per Year 0% |
P 250,000 and below |
Above P250,000 to P400,000 20% of the excess over P250,000
P30,000 + 25% of the excess over P400,000
Above P400,000 to P800,000
P 130,000 + 30% of the excess over P800,000
Above P800,000 to P2,000,000
Above P2,000,000 to P8,000,000 P 490,000 + 32% of the excess over P2,000,000
Above P8,000,000 P2,410,000 + 35% of the excess over P8,000,000 |
Note: Examinees are not required to memorize this tax table for Board Exam purposes.
Scope of the progressive tax

The progressive tax covers all individuals including taxable estates and trusts
except NRA - NETB which is subject to 25% final tax on gross income.
Illustration 1: Income Tax Computation

A resid va: ;
sident citizen with has a compensation income of P1,250,000 within i
Philippines and P150,000 from abroad.
The income tax due shall be computed as follows:
240

a 1 = EEE
OOO
naptet 7 - Introduction to Regular Income Tax

C
ple compen nsation income P 1,400,000 Tax Dus

TaN Lower limit of the income bracket
Les “where the taxable income qualifies __ 800,000 P 130,000
recess . P 600,000 180,000
| qultiply by: bracket marginal rate 30%
I rotal income tax due P___310,000

|
Above P400,000 to P800,000 P30,000 + 25% of the excess over P400,000

lL _[- Above P800,000 to P2,000,000 P 130,000 + 30% of the excess over P800,000
Above P2,000,000 to P8,000,000 | P 490,000 + 32% of the excess over P2,000,000
Note: Recall that a resident citizen is taxable on global income (ie. P1,250,000 + P150,000).
llustration 2: Income Tax Computation

A resident alien has a net business net income of P2,200,000 in the Philippines and
p1,250,000 from abroad.
The income tax due shall be computed as follows:

Tax Due
Taxable compensation income P 2,200,000
Less: Lower limit of the income bracket
> where the taxable income qualifies 2,000,000 P 490,000
i Excess P 200,000
' Multiply by: bracket marginal rate 32% 64,000
'Total income tax due P__554,000
ewww
Above P800,000 to P2,000,000 P 130,000 + 30% of the excess over P800,000

r-Above P2,000,000 to P8,000,000 P 490,000 + 32% of the excess over P2,000,000
Above P8,000,000 P 2,410,000 + 35% of the excess over P8,000,000
Note: Recall that a resident alien is taxable only on Philippine income.
The Optional 8% Income Tax

The TRAIN law introduced an optional income tax for self-employed and/or
professionals (SEP) wherein they can opt to be taxed at 8% of sales or receipt and
other non-operating income.
The 8% income tax shall be in lieu of the:

a. Progressive income tax, computed under individual tax table; and
b. 3% percentage business tax on sales or receipts
241

come Tax
te r 7 - Int rod uc ti on to Regular In
Chap
bu nd le d tax which enab - les one-time con, ,
m ofa Date
The 8% income t ax
is a for
re qu ir e se pa ra te filing and payments
h would otherwise * Veta.
for two taxes whic y d iscussed in
Chapter 14.
be ex te ns iv el
of thistax system wi ll
TAX regular corporate ;

CORPORATE INCOME C om mo nl y referred to as the ne 0
me tax , at a rate of 25% on tay
The corporate inco or fla t tax
lly a proportional able
tax (RCIT), is a genera
income for domestic
or foreign corporation.
come is impo sed on dom
pro por tio nal tax on taxable in mt
Howeve r, a low er 20 %
r ise s (M SM Es ) with not more than
ed ent erp
micro-, small-, and medium-siz e tha n PS mi llion taxable income
1p
and not mor
million assets, excluding land,
on othe r than those:

The RCIT applies to any corporati and FCDy
non-resi dent foreign corporation
a. Subject to final tax such as
final tax
interest income not subjected to
ferential (i.e. lower) tax rates ,
b. Special corporations or those subject to pre
special regimes
c. Exempt corporations
Illustration
Philippines and P800,000 from
A corporation has a net income of P1,200,000 in the
abroad.
shall bz
Assuming the corporation is a large domestic corporation, the income tax due
computed as follows:
Taxable income (world) P 2,000,000

Multiply by: Tax rate 25%
Income tax due P__500,000
ion i
estic MSME, the income tax due shall be compute!
Assuming t.
as g
follows: the cor por ati on is a dom
Taxable income (world) P 2,000,000

Multiply by: Tax rate
Income tax due Parone
a. Sher
Note:
1,
2. If the taxable in come Is more than PS milli

.
;
25% taxtax isi applicable t |
is a million,
MSME the
ora ee without regard © |
wheth er the domestic corporation |
orporation.
242

Ge
a7;
~
Regular Income Tax
cnapter 7 - Introduction to
.4g the corporation is a resid .
the income tax due shall
ent foreign corporation,
beps puted as follows:
a y Tax a
gaxable income (Philippines)
"P__32005,0%00
P 1,200,000
income tx CU
: . .
N ote:
gesident foreign corporation is taxable on Philippine income
there is: no distinction betw een ] large corporation
i or MSME i i
. corporation. The 25% proportional tax simply applies.
when If comes to foreign
ne Minimum Corporate Income Tax (MCIT)

corporate taxpayers are normally subject to a minimum tax, computed as 2% of
total gross income subject to regular tax. This minimum tax is temporarily
reduced to 1% this pandemic from July 1, 2020 to June 30, 2023. Even if
corporations are losing in business, they are subject to the minimum tax. Details of
the MCIT will be discussed in Chapter 15-B.
special Corporations
es but not 0%, such as
Special corporations are those enjoying lower tax rat
A-registered enterprises.
private schools, non-profit hospitals and PEZA or TIEZ ly apter 15-A.
The taxation of these corporations will be discussed thorough in Ch
Exempt Corporations
Exempt corporations are those enjoying 0% tax rate with no tax dues such as
government agencies, non-profit organizations with no taxable income,
g
cooperatives, and those registered with the Board of Investments (BOI) enjoyin
income tax holiday or ITH.
INCOME TAX RETURNS
Individual Income Tax Returns

Tax Return Form Individual taxpayers
Form 1700 Purely employed taxpayer
Form 1701A Purely in business or profession, using itemized, OSD or
Pp opting to the 8% optional income tax
Form 1701 Mixed income earners, Estates and Trusts
Corporate income taxpayers
lar income tax
Form 1702-RT Corporations subject only to the 25% regu
combination of tax rates
—Form 1702-MX _| Corporations subject to special ora
no tax due
Form 1702-EX Corporations that is exempt with
243

Tax
od uc ti on to Regular Income
Chapter 7 - In tr
i o n s ar e r e q oes tathxaeiblr e resuin.lt,
uired to ha
at exempt co r p o r a t
ey do not ve
It should be noted th R For m 1702-EX even if th n their income tax return
t hrough BI ions i
operations
da te d to it em iz ed their deduct nitoring compliance Of ey, en.
e ma n R 1n mo ”
They ar
y in te nd ed to assist the BI ga ti on s and to provide fo
r
bt
rule is appare nt l
wi th ho ld in g tax obli a
with th ei r rties.
corpo ration me ea rn ed by thir d pa
identify in co
mecha nism to corporate jn,
t to the regular Oma
i
ns with gross
Exempt corporatio For
ll file BIR
tax or special rate s ha
e i ncome tax
return
1 sth day of the fourth
mont,
Deadline of filing th for fi li ng 0” th e
return i s due come tax due sh
all be paj
The annual income tax of the taxpay er. Th e in Pa id upo,
the ta xa bl e ye ar
following
filing.
rns
ru le s in th e income ta x retu come ty
e lat est version of the in is 49 9;
Rounding n ta vo s in th os
If the amount of centav more, it ,
enteri ng ce
The requirement for be en el im in a te d.
) ha s avos or
return (June 2013 version
pe d do wn . If the a mount is 50 cent
drop
less, the centavos are
peso.
rounded up to the next
i n the income tax return as P10),
an am ou nt for P1 00 .49 shall be entered
Hence,
ll be rounded to P101.
An amount of P100.5 0 sha
Annual Income Tax Return

Required Attachment in the output
ate of Ind epe nde nt CPA - if annual sales, earnings, receipts or
1. Certific
exceed P3,000,000)
tiple activities per tax regime
2. Supplemental form for taxpayers with mul
tements (FS) showing:
3. Account information form and financial sta
a. Sales/receipts/fees
b. Cost of sales/services
c. Non-operating and other taxable income
d. Itemized deductions (if taxpayer did not avail of OSD)
e, Taxes and licenses
f. Other information prescribed to be disclosed in the FS
opts of management responsibility (SMR)
ertificate of income payments not subjected to Withholding Tax (BIR Form
mn
2304) |
Certificate of creditable withheld at source (B
Duly approved Tax debit memo, if sapileble Se
Proot of prior year’s excess credits, if applicable
roof of foreign tax credits, if applicable
244

eG
naptel 7 - Introduction to Regular Income Tax
C
10. For amended return, proof
of tax payment and the return previously filed
tax treaty relief/Entitlement issued by the concerned Investment
' promotion ofAgency
"certificate
(IPA)
jARTERLY FILING OF INCOME TAX RETURN

corporations and individuals engaged in business and those engaged in the
ractice of a profession are required to file three quarterly returns aside from the
gnnual consolidated income tax return.
individual taxpayers engaged in business or practice of profession shall file their

quarterly income tax returns using BIR Form 1701Q. Corporations shall file their
quarterly income tax returns using BIR Form 1702Q.
taxpayers make estimated quarterly tax payments. These quarterly tax payments
are claimed as tax credit (deductions) to the annual consolidated income tax due
of the taxpayer.
DETERMINATION OF TAX DUE UNDER INTERIM CHANGE IN CORPORATE TAX

RATE
Under Section 27 of the NIRC, as amended, the taxable income of corporations
adopting the fiscal-year accounting period shall be computed without regard to
the specific date when specific sales, purchases and other transactions occur.
Their income and expenses for the fiscal year shall be deemed to have been
earned and spent equally for each month of the period. This is the pro-rata
method.
The NIRC did not specify a method for corporations reporting on a calendar year
accounting period. In practice, however, the BIR has been consistent in using the
pro-rata method in implementing corporate tax rate transitions for any corporate
taxpayer without regard as to whether they reporting under a calendar or a fiscal
accounting period. This is observable in RMC16-2006 in implementing the tax rate
transitions under RA9337 and in RR5-2021 in implementing the tax rate
transition under RA11534 or the CREATE law.
Illustration 1: Fiscal year basis
Trans Corp. earned a total of P18,000,000 for the fiscal year starting November 1,
2019 ending October 31, 2020. The CREATE law changed the regular corporate tax
rate from 30% to 25% effective July 1, 2020.
The income tax due shall be computed for the fiscal year as follows:
Fiscal year taxable income P 18,000,000

vided by: months in a year 12
onthly taxable income P_1,500,000
245

to Regular Income Tax
Chapter 7 - Introduction
9
Taxable income covered by old 30% rate
No. of; months. (Novembe r 1toJune 30)
taxable income
4 ag
5 en ann,
000
Multiply by: monthly taxable in P12,000,
Total ___-30% P 3,600,000
Multiply by: Old tax rate 4
the new 25% rate
Taxable income covered by a
No. of months (July 1 to October 31) P_1,500,000
Multiply by: monthly taxable income P 6,000,000
Total 25% 1,500,000
by: .
Multiply
omet
Total income tax due
New tax rate
P_5,100,000
Alternatively,
rate
Taxable income covered by old 30%
Fiscal year taxable income P 18,000,000
rai B/12
Multiply by: Nov: ember - June months/12
P12,000,000
Total
_30% +=P 3,600,000
Multiply by: Old tax rate
rate
Taxable income covered by the new 25%
Fiscal year taxable income P18,000,000
4/12
Multiply by: July - October months/12
P 6,00 0,00 0
Total
Multiply by: New rate 25% 1,500,000
Total income tax due P_5,.100,000
Illustration 2: Calendar year basis

Assuming Trans Corp. earned a total of P10,000,000 for the calendar year 2020. The
CREATE law changed the regular corporate tax rate from 30% to 25% effective July1
2020.
The income tax shall be computed for calendar year 2020 as follows:
Taxable income covered by old 30% rate

Calendar year taxable income P 10,000,000
Multiply by: January - June months/12 «6/12
udiiely by: : Old tax x raterat : eee ee

Taxable income covered by the new 25% rate
.
° P2000
3 d
Calendar year taxable income P10,000,000

Muluply by: July- December months/12 6/12
hea P 5,000,000
ultiply by: New rate 25% 50,000
Total income tax due So 000
246 —

cnapter
7 - Introduction to Regular Income Tax
gline of Quarterly Income Tax Returns

ea
arterly Income Taxpayers
Tax Returns Individuals Corporations
1s" quarter ITR May 15, same year 60 days end of 1st Qtr
pnd Quarter” ITR August 15, same year 60 days end of 2"4 Qtr
rd quarter ITR November 15, same year 60 days end of 3" Qtr
yarterly income tax returns of individuals enga ged in business or profession are
ine 45 days from the end of the first three quar ter whereas the quart
erly income
tax returns of corporate taxpayers are due 60 da ys from the end of the quarter.
frequency of Reporting Per Taxpayer Type
Taxpayer Frequency of Tax Reporting

Individuals
[Pure compensation income earner Annual
’purely engaged in business or profession Quarterly & Annual
Mixed income earner Quarterly & Annual
_ Corporations Quarterly & Annual
The substituted filing system for employees

Pure compensation income earners may be relieved from the obligation to file
their annual income tax return if they have no taxable income from other
sources
other from their lone employer. The employee may avail of the substituted
filing
system wherein the employer shall withhold the income tax of the employ
ee’s
compensation.
f the employer correctly withheld the tax due of the employee throug
h the
withholding tax on compensation, the employee need not file his Form 1700
anymore since there would be no residual tax due or tax refundable.
The Form
1700 is required if the employee has other taxable income or
has more than one
’mployer, either concurrent or successive, during the year.
247

ular Income Tax
Chapter 7 - introduction to Reg
—
Discussion Questions siettally-Gnacsive tien

esp Me any
1. Discuss the scope of the regular income tax
capital gains. tax.
2. Enumerate the characteristics of the regular income
Whatare exclusion in gross income:
. . 9?
3.
:
‘cti i s from p ersonal exemption.

ngiish allowable deduction
ingu
'
4. Dist loy men
; of the gross ooo e fro m empployme nt anq the
5. Demonstrate the computation
profession.
gross income from business or exercise of a
6. Howis cost of goods sold determined?
7. Whatare included in cost of services:
loyee ap dy
8. What composes the compensation income of a rank and file emp
7 .
managerial and supervisory employee?
9. How does the tax presentation of the composition of gross income in the tay
return differ between individuals and corporate taxpayers? .
10. Distinguish “other taxable income from operations’ from non-operating income.
11. Distinguish revenue from sales, fees, and receipt.
12. Discuss how the taxable income of the following is determined:
a. Corporate taxpayer
b. Purely compensation earner
c. Purely business or professional income earner
d. Mixed income earner
13. Discuss the treatment of net loss from business or exercise of profession.
14. What are the deadlines of the quarterly regular income
tax for individuals and
corporations?
True or False 1
1. The P250,0: 00 income tax exemption for
indivi iduals isi designe in lieu li of
their personal and business expenses.
There are two types of regular Bne d to be int e
income tax: Proportional inc
N
a porations and progressive ome tax fot

income tax for individuals
! -NETBs and NRFCs are
also subject to regular inc
NOB w
All taxpayers are Subject ome tax

to final tax.
Taxable income is syno
nymous to net income
90
against their compen

sation income
Items of gross in
; come subject
8TOss income subject to regular to final tax and ¢ a
income tax ; tax are excluded! in
pital gains
248

Introduction to Regular Income
Tax
crapter
compensation i . .
Non-taxab®le | P are Items of compensation that are excluded against
gro ss Inc '
rue or False 2
The tax due of corporations is determined by multiplying their gross income by

25%.
The taxable compensation income is computed as gross compensation less the
non-taxable compensation income.
The deadline of filing the corporate quarterly income tax return is the same with
the deadline of the quarterly income tax return of individuals.
Business expenses can be deducted against all types of gross income subject to
regular tax.
No deduction shall be allowed against taxable income.
Only corporations may incur deductions against gross income.
The gross income from business is measured as sales or gross receipts less cost of
sales or cost of services.
The tax due of individuals is determined by means of a schedules of tax rates.
The deadline of the annual income tax return of corporations using the calendar
year is similar to the deadline fixed for individual taxpayers.
10. Every individual taxpayer is exempt from income tax on compensation up to
P250,000 annually but the same exemption does not apply to business income.

L. Which is not generally subject to regular income tax?
a. Compensation income c. Professional income
b. Business income d. Passive income
The general rule in income taxation is

a. final income taxation. c. regular income taxation.
b. capital gains taxation. d. fringe benefit taxation.
Active income is subject to

a. regular tax. c. final tax.
b. capital gains tax. d. any of these
Question 3 and 4 are based on the following:
A. Regular tax B. Final tax C. Capital gains tax
Which of the foregoing are passive incomes subject to?
a. Aonly c. Both A and B
b. Bonly d. Either A or B
Which of the foregoing are capital gains subject to?
a. Aonly c. Either A or C
b. Conly d. Both A and C
249

q

ject to regular tax is called
6. The net amount of regular income sub
a. able income.
tax c. net income.
b. compensation income. d. gross income.
ns against gross income? by th

Wh at are al lo wa bl e de du ct io
7. sonal expenses
Cc. Per Dy the taxpayer
a. Business expenses
b. Family support d. Expenses of employment
8. Deductions are allowed to

a. employed taxpayers. c. corporate taxpayers only.
ss,
d. taxpayers engaged in busine
b. individual taxpayers only.
9. Personal expenses are

a. Non-deductible by employed taxpayers.
b. Non-deductible by any taxpayer.
ers.
c. Deductible by employed taxpay
payers.
d. Deductible by any individual tax
ular income tax?
10. Which is nota feature of the reg .
c. Annual tax .
a. Netincome tax
d. Creditable withholding tax
b. Final withholding tax
lding tax?
11. Which is true with the final withho
nsolidated return.
a. The taxpayer still needs to file an annual co
b. It applies to all items of gross income.
c. Itconstitutes a partial payment of income tax.
d. Itapplies to certain passive income.
g
12. Which is not true with the creditable withholdin tax?
a. Advances to the annual tax due
b. No need to pay further taxes.
c. Need to file annual income tax return
d. Applicable to items of regular income
13. Progressive income tax is applicable to

a. - corporate taxpayers: c. compensation earners only.
b. individual taxpayers. d. individuals in business only.
14. Proportional regular income tax is applicable to
a. corporations only. c. individuals engaged in business.
b. compensation earners only. d. both individuals and corporations.
wahl
15. whiei h ot the following individual taxpayers is not subject to tax on taxab?
* . ee
non-resident citizen c. NRA-NETB

. Resident alien d. Non-resident alien engaged in business
250

4
mae
chaptel 7 - Introduction to Regular Income Tax
‘ followi
_ Which oF the ng corporate taxpayers is not subject to tax on taxable
jncomes .
a. c. Non-resident forei &n corporation
b. Business partnership d. Resident foreign corporation
_ Which is a source of income
subject to regular income tax
17 ?
a. Employment c. Trade or business or exercise of a profession
b. Casual sales transactions d. All of these
18. Which interest income will not be included in the incom

e tax return?
a, Interest income from bank deposits
b. Interest income from lending
c, Interest income from notes
d. Interest income from employees
19, Which is not subject to final tax?

a. Prizes amounting to P11,000
b. Interest income from bank deposits
c. Winnings from the Philippines
d. Share in the net income of general professional partnership
20. Which of the following is a passive income but is nevertheless subject to regular
tax by virtue of exclusion under final income taxation?
a. Prizes amounting to P10,000 c. Merchandising income
b. Service income d. Dividends from domestic corporations

1. Which is an incorrect statement?
a. Business expenses are deductible by individuals and corporations.
b. Purely employed taxpayers are not allowed deductions from gross income.
c. Personal exemptions are deductible by individuals, estates and trusts.
d. Deductions are considered in the determination of net income.
2, The following may be relevant in the determination of taxable income:

A. Gross income subject to regular tax
B. Gross income subject to final tax
C. Deductions from gross income
D. Exclusion in gross income
Which is not considered in the determination of taxable income?
a AandB c.AandC
Cand D d. B and D only
251

ncome Tax
to Reguiat | jus ?
oduction in gross income
Chapter 7 - intr
jon
ng ex“abject tO regular income tax,
in’
emen egardi ; me
me 5S - an of gross jncome.
a in gro
clt udsted deduct
3,
s
Whicich i a
COIT
determin vare presented as
They ar e in c . Ons,
a, s income bu
‘They are jgnoreated in gro”
: They are presen
They are subject C0 final '@™ ‘oct to final fringe b
d.
ployees enefit tay
f em pl oyees mayC. DeRamaenee file em
pe sees
4. Which of these ty p!o d.Aan
a. Ma na ge ri al em ,
ees
b. Supervisory employ me :ing inco
id er ed an op er at in g py a retail store
5. ns
Which is not co commission income -
"4. Consignment e
derin & of serv< icto employees
Fee s fr om t he re n
b.
C.
d. Sale of scrap
agi ?
ating income: core
6. Whichisa non-oper c. Gate receipts of
ce building mas
a. Gain onsale of offi store d. Gate receipts
0 cine
a retail
b. Sale of goods by
li ke ly to b e considered an operating income ¢:1a
ng will leas t
7. Which of the fol lowi
security dealer? e from domestic corporation
©: Dividend i ncom
a. Gain onsale ofstocks from bonds
d. Interest income
b. Gain on sale of bonds
j;
tin cti on be tw ee n ope rating and no n-operating income is not required
8. The dis
the income tax return of
a. Self-employed individuals in business
b. Mixed income earners
c. Self-employed professionals
d. Purely employed individuals
i
9. The reporting classification of gross income into operating and non-operating
unnecessary for
a. Corporatetaxpayers c.BothAandB
b. Individual taxpayers d. Neither A nor B
10. Which is not part of compensation income?

a asic pay of rank and file employees
p. pringe benefits ofmanagerial and supervisory
emplo
Fa pay of managerial or supervisory em l
oe
. Fringe benefits of rank and file employee proves
S
11. Who cannot claim deductions?
a Employed taxpayers .
- Self-employed taxpayers
in busine SS
252

er” introduction to Regular Income Tax
cnaP
s elf-employed professional taxpayers
i pand C
ho are required to file quarterly declaration of income?
2. "individuals engaged in business
: corporations and individuals engaged in business
corporations
1 All individuals and corporations
Mr. Peralta wishes to file his 2021 income tax return. To avoid penalty, he must
" gle his return on or before
, April 15,2021. c. August 15, 2022.
p, April 15, 2022. d. November 15, 2022.
14, An individual taxpayer must file his income tax return for the third quarter of
2021 on or before
a. April 15, 2022. c. November 15, 2022.
bp, August 15,2021. d. November 15, 2021.
15, Talisay Corporation is filing its income tax return for the quarter ending February
28, 2021. The return must be filed on or before
a. April 15,2022 c. April 29, 2021
b. August 15, 2021 d. March 29, 2021
16. Which of these taxpayers is required to file an income tax return?

a. Anemployee covered by the substituted filing system.
b. A taxpayer deriving purely passive income subject to final tax.
c. Aliens classified as NRA-NETBs.
d. A resident citizen who derives his entire income from sources outside the
Philippines.
17. The taxable income of corporate taxpayers is the
a. netincome from business.
b. net income from business less personal exemption.
c. taxable compensation income.
d. taxable compensation income plus net income from business.
18. The taxable income ofa pure compensation income earner is the
a. net income from business less personal exemption.
b. taxable compensation income plus net income from business.
taxable compensation income.
d. net income from business.
"9. The taxable income of a mixed income earner is the
a. net income from business less personal exemption.
net income from business.
253

heh eA
Regular Income Tax

Chapter 7 - Introduction to
C. taxable compensation income. jus net income com business:

Pp
d. taxable compensation income
is the
inc ome ofa pur e prof ess onal income earner
20. The taxabl e
net income from business.
.
taxable compensation income. from business.
Roop
e com pen sat ion inc ome plus ne income |

tax abl | ex emption.
less per son a
net income from profession
ic j i spect to t
ner othe r aaa determ| ina, y|
of the ;
follo wing ae i n d v alia aye
' ae
21. Which income of individual taxpay earners is simply included in tag,
* the
a. taxa income of pure compensation |
_
compensation income. Of ng
income earner is included as part
b. The other income ofa professional i come.
i
isi
C. |
net income.
operatinging i ome and isisi include din
inc income.
d in the computation of taxable
d The other income is simply ignore
me are subject to higher tax rates,

22. Statement 1: Individuals with higher inco
Statemen2:t Corporations with higher income are subject to higher tax rates
Which is correct regarding the regular income tax?
a. Statement 1 only c. Both statements 1 and 2
b. Statement 2 only d. Neither statement 1 nor 2
23. Which is incorrect in the determination of the taxable income of individu:

taxpayers?
a. Under the TRAIN law, there is no instance where the compensation income:’
taxpayers could become zero.
b. Anet operating loss is deductible against taxable compensation income. |
c. The taxable compensation income is added to the net income from business. |
d. Personal exemption is no longer deductible against compensation income. |
|
i
24. Statement 1: Corporations with the same net income may not have the samet!
due.
Statement
2: Individuals with the same net income may not have the same tax!
Which statement is incorrect regarding the regular inco
me tax?
a. Statement 1 c. Both statements 1 and 2
b. Statement 2 d. None
25. A purely engaged in business individual taxpayer using

itemized shall usé
a. BIR Form 1701A c. BIR Form 1700
b. BIR Form 1701 d. BIR Form 1702
254

»
7- introduction to Regular Income Tax
cnapte
a Form 1701 is not intended for
| gstate Cc. Pure professional income earner under OSD
‘ trust d. Mixed income earner
aR Form 1700 is intended for

a7 a
Trust c. Pure compensation income earner
p, Estate d. Pure business or professional income earner
08. A corporation subject to different tax rates shall use

_ Form 1702-RT c. Form 1702-MX
bp, Form 1702-EX d. Form 1701A
29. A non-profit corporation with a taxable income shall use

a, Form 1702-RT c. Form 1702-MX
bp, Form 1702-EX d. Form 1701A
30, A school which is subject to a preferential or special tax rate shall use
3. Form 1702-RT c. Form 1702-MX
b. Form 1702-EX d. Form 1701A
31, Acorporation that is subject only to a 25% or 20% income tax rate shall use
a. Form 1702-RT c. Form 1702-MX
b. Form 1702-EX d. Form 1701A

1, In 2015, Ms. Maya earned P450,000 compensation income but incurred P120,000
net loss in her business. What is her taxable income assuming she incurred
personal expenses of P100,000?
a. P 450,000 c. P 330,000
b. P550,000 d. P 570,000
Mrs. Sipalay had a gross taxable compensation income of P400,000. She also
earned an additional P2,000 by investing her money in time deposits plus P3,000
interest income from lending money to a friend. Compute her taxable income.
a. P303,000 c. P300,000
b. P302,000 d. P403,000
Ms. Santander had a business net income of P300,000. She also earned P5,000
commission from selling cellular cards and P12,000 dividends from a domestic
corporation. Compute her taxable income.
a. P300,000 c. P305,000
b. P312,000 d. P317,000
255

wrt— v

9 00
s receipts of P800,000 and paid P39
al gro s . in
Mr. Cabilao earned tot o ear ned
4, tice. Durin g the same year, he als
prac er. Heo
expenses in his accounting of domesti c stocks directly to a buy
the sa le
of P60,000 net gain from
n of P140,00 0. What is the taxable income ot}
net gai Mr
disposed a vacant lot at a
Cabilao?
c. P 500,000
a. P 400,000
d. P 600,000
b. P 460,000
ensation i ncome of P200,000
. , exclusive of pap 009 09 ||
Mr. Jagna earned a gros s com p
5. s busini ess income of P500,000 4
non-taxable compensat ion inco me, and gros 000 and Pan of P10,
e arned book royalties
of P200,000. He also
expenses y notes. Mr. Jagna has personal expens
_ |
interest income from clients’ promissor s taxable compensation income?
& |
the year. What is Mr. Jagna |
of P170,000 during
c. P 200,0 00
a. P 30,000
d. P 220,000
b. P 180,000
business?
6. Whatis Mr. Jagna’s net income from |
a. P 300,000 c. P 310,000
b. P 308,000 d. P 518,000
7, What is Mr. Jagna’s the taxable income?

a. P508,000 c. P558,000
d. P468,000 |
b. P450,000
8. Mr. Bangal earned a compensation income of P120,000 and net income from |
business of P300,000. He also earned P8,000 prizes from a dancing competition |
y and P45,000 royalties from his musical composition. Mr. Bangal has P150,000
personal expenses. Compute the taxable income. _—
a. P 473,000 c. P 428,000
b. P 465,000
.
d. P 420,000 |
|
9. Mr. Jordan, with a P75,000 personal exemption, had the following data in 2021: |
Philippines. _ Abroad
Gross income from sales P 4,000,000 P 6,000,000 |
Interest income on deposits 4 0,00
Less: Deductions 2,000 008 3 600.000
netCompeo
ute the
n taxable income cP
if 2 ote i a resid
; ent| citizen. |
b. P 4,520,000 d. P 2,000 000
10. In the immediately precedin
Is a non-resident citizen.
6 problem, compute the taxable income if Mr. Jord"
a P4,520,00
; 0 cP?
b. P 4,480,000 dP son bon
256

ptet 7 - Introduction to Regular Inc
ome Tax
che
tiple Choices - Problems 2
u .
Mr. Santos derived the following income in 2021:

pusiness income
compensation income : sooo
interest income from 5/6 lending to clients 100,000
interest income from bank deposits 20,000
Royalty income 100,000
capital gain on sale of personal car 20,000
capital gain on the sale of stocks directly to a buyer 40,000
ordinary gain on sale of old office furniture
10,000
pividend income 50,000
Compute the total passive income subject to final tax.

3. 170,000 c. P270,000
b. P1,370,000 d. P1,470,000
- Compute the total income subject to regular tax.

g, 1,730,000 c. P1,470,000
b. P630,000 d. P530,000
_ Compute the capital gain subject to capital gains tax.

a. P70,000 c. P60,000
b. P40,000 d.P 0
Panay, Inc., a large corporation, had the following income in 2021:
Philippines Abroad
Rent income P10,000,000 P12,000,000
Dividend - domestic 50,000 -
Royalties 80,000 200,000
Business expenses 8,700,000 9,800,000
Compute the taxable income if Panay, Inc. was a domestic corporation.

a. P3,500,000 c. P1,380,000
b. P3,700,000 d. P1,300,000
Compute the income tax due in the immediately preceding problem.
a P1,149,000 c. P1,110,000
b. P925,000 d. P381,000
Compute the taxable income assuming Panay Corporation was a resident foreign
Corporation.
a P3,700,000 c. P1,380,000
b. P3,500,000 d. P1,300,000
257

in tr od uc ti on to Re gular Income Tax
Chapter 7 -
lem,
co me ta x du e in th e im mediately preceding prob
7, Compute the in
c. P1,149,000
qa. P325,000
d. P381,000
b. P1,110,000
sident foreign co,
nay, Inc. was 4 non-re
8. Compute the total tax if Pa le to Cavite.
Doras
"ati
aring is not applicab
Assume that the tax sp
c. P 3,000,000
a. P 3,015,000
b. P 3,039,000 d. P 2,532,500
258

soot 8 - Regular Income Tax: Exclusion from Gross Income
AgGULAR INCOME TAX;

pxcLUSIONS FROM GROSS INCOME
qhis chapter Se one items of income that are excluded from gross income,
hence not sub) ome tax under the NIRC. It also includes discussions of
3ther exempt income under special laws, treaties, or contracts.
after this chapter, readers must be able to demonstrate:

1, Mastery of the list of exclusions from gross income
2, Comprehension of exclusion conditions or limitations of certain items of
income
3, Knowledge of the list of entities exempt under the NIRC and special laws
=
EXCLUSIONS FROM GROSS INCOME

income tax.
Exclusions from gross income are income which will not be subject to
or
They are not included in gross income subject to regular tax, capital gains tax,
final tax.
be included in gross
Under Sec. 32(B) of the NIRC, the following items shall not
income and shall be exempt from taxation:
A. Proceeds of life insurance policy
Amount received by the insured as a return of premium
Gift, bequest, devise, or descent
QOmmoow
Compensation for injuries or sickness

Income exempt under treaty
Retirement benefits, pensions, gratuities, etc.
Miscellaneous items
t or foreign government-
1. Income in the Philippines of foreign governmen
owned and controlled corporations
subdivisions
2. Income of the government and its political scientific,
religious, charitable,
Prizes and awards in recognition of
educational, artistic, literary, OF civic achievements
Prizes and awards in athletic sports competitions
Contributions to GSIS, SSS, PhilHealth, Pag-IBIG, and union dues
t Acc t (PERA)
oun
Contributions to Personal Equity Retiremen
PERA investment income and PERA distributions
259

Gross INCOME
ion fro
m
Ta x: Ex
.
cl us i
gular Income
Chapter 8 - Re
note xceeding
P90,000
r be ne fi ts
nd othe or certificates of inde
btednes.
8. 13th month pay 4 be nt ur es,
O f bonds, de With
2 Gains from sale
t han 5 years
maturity of more of sh ar es In mutu al
fund
demp ti on 7076 or th cPeony
10. Gains from re e sa le of go Jd pursual at to RA
d f ro m th
11, In‘ come derive
Act of 1991
Small-Scale Mining
OSS INCOME
EXCLUSION FROM GR
In su ra nc e pol icy - The p roceeds uofr e d
life insu
, w h e t h er ejn Polig.
ranc
A. Proceeds ofa Lif e
the death o f th
e ins |
or ben efi cia rie s upo n aSinc!,
de r
aid to the heirs nt s ar e he ld by th e in su re r un
Pp however, if such am ou nf
sum or otherwise;
the interest p ayme nts shall be inclyg
agreement to pay inte rest th er eo n, ith infinite value. Henge ed in|
as a capita l it em w!
ross income. Life is regar ded
©, the
return of capita l.
proceeds of life insurance is a
insured as a re turn of
paid by pre mium - The amoy,,
B. Amount received by the ms
him under life
received by the insured as a ret
urn of premiu the term or at the matur insurance
her during ity of y.
endowment, or annuity contracts, eit
tioned in the contract or upon surren
der of the contract.
term men
um on any insurang.!
The amount received by the insured as a return of premi
e.
contract is a return of capital; hence, it is excluded from gross incom
Illustration 1: Life insurance contracts |
|
Alberto is insured in a P1,000,000 life insurance policy with annual premiur |
payments of P20,000 for 10 years. If Alberto outlives the policy after the 10" year, hz
will be paid a P500,000 maturity value.
Scenario 1
Alberto died on the 8" year of coverage and his heirs collected the P1,000,00)
proceeds. The entire insurance proceeds of P1,000,000 is not taxable.
|
Scenario 2
4
U pon the death of Alberto, the insu rance company negotiated for an extension of te
payment of the proceeds wherein the insuran ce
company shall pay P1,050,000 ont?
extended payment. The P1,000,000 proceeds will not be taxed upon collection, but the
P50,000 excess represen ting interest is
a taxab le item of gross income.
Scenario 3
Al
berto outliv, ed the policy
,
and collected the maturity val
ue of P500,000
The total proceeds shall be analyz
ed as:
Total proceeds
Return of premium
(P20,000 x 10 years) P 500,000
Return on capital (i tem of gross income) 200,000
P__300,000
260

chapter 8 - Regular Income Tax: Exclusion from Gross Income
4
icy to Glino who paid him P130,000.
scenario
After 6 years of payment, Albert assigned the pol died.
for two more years after which Albert
Glino continued the premium payments
Glino collected the P1,000,000 insurance proceeds.
00 resulted into
cy by Albert to Glino for P130,0
he assignment or sale of the poli rn on capital.
0 taxable retu
120,000 (P20,000x 6) return of premiums and P10,00
l
nce pro cee ds by Gli no res ult ed in P170,000 return of capita
rhe receipt of the insura 0,000 taxable return on capita
P83
l. There is loss of life in
[P13 0,000 + (P20,000 x 2)] and . Hence,
io but it doe s not per tai n to the purchaser of the life insurance policy
this sce nar the heirs.
the excess must be taxable to
company officers
[Illustration 2: Life insurance of er-
,000 with the employ
Albert is insured by his employer corporation for P1,000 the corporation collected
sequently died, and
corporation as the beneficiary. Albert sub
ds.
the P1,000,000 life insurance procee
nce arrangement are
It is interesting to note that the entire proceeds under this insura
.
held within the purview of the NIRC exemption; hence, it is not taxable
Property insurance contracts

ss of the tax basis of the
The proceeds of property insurance contracts in exce
property lost or destroyed is a taxable return on capital.
Illustration: Property insurance
the entire P2,000,000 fair value
Aztraneca Company secured a fire insurance covering
destroyed by fire when the
of its office building. The building was completely
0,000. Aztraneca recovered the
depreciated cost (tax basis) of the building was P1,80
P2,000,000 insurance proceeds.
The total proceeds shall be analyzed as follows:

P 2,000,000
Total proceeds
1,800,000
Less: Basis of property destroyed (return of capital)
P___200,000
Return on capital (item of gross income)
the property destroyed unlike in life
Note that proceeds are considered as returns of
are expense items.
insurance. The premiums payments herein
The value of property acquired by
C. Gifts, Bequests, and Devises or Descent -
however, that income from such
gift, bequest, devise, or descent: Provided,
ent of income from any property,
property as well as gift, bequest, devise, or desc income.
be included in gross
in cases of transfers of divided interest, shall
Illustration
1, 2021. On that date, the
Juan received a restaurant business as a gift on April g P50,000 cash income
udin
restaurant had total properties amounting to P400,000 incl
261

Income
Chapter 8 - Regular Income Tax: Exclusion from Gross
earned since January 1, 2021. The restaurant posted an additional P150,09,

income from April 1 to December 31, 2021. Ca,Ssh
The transfer of business properties worth P400,000 to Juan is a gratuity . fee

. the P50,000 donated
transfer tax, not income tax. However, The income
P1S0. O00shal] p, ee inelyg”
«.**ty,
in gross income, but in the income tax return of the donor. 1000 ineg dey
donated property after the perfection : ion
of the donation isis includ ed as item of OF
ar
income in the tax return of Juan, the donee. ;
Gift distinguished from exchange +

The transferor’shoe intention
: ‘
or motive must be evalua ted in determir 1iNg Whe .
;
transfer is a gift or an exchange. Gifts are characterized by pure liberality r ;
disinterested generosity and are given without any consideration. An exchange alivay,
involves a consideration.
Employment Gratuities tonchi

Gratuities given under an employer-employee relationship are normally treateg in
exchange for services rendered by employees. Hence, they are subject to income '
The transfer of properties by the employer to managerial or supervisory Employees i
generally subject to fringe benefit tax. Christmas or major anniversary gifts granted by
the employer to employees are de minimis benefit subject to income tax.
D. Compensation for injuries and sickness - amounts received through

accident or health insurance or under Workmen's Compensation Acts as
compensation for personal injuries or sickness, plus the amounts of any damages
received, whether by suit or agreement, on account of such injuries or sickness.
Illustration 1
Mr. Vivid was hit by a jeepney. He paid P100,000 for hospitalization expenses.
He sued
the jeepney driver and was awarded by the court a total indemnity of
P340,000
divided as follows: P200,000 indemnity for his pain, anguish and sufferings,
P40,000
for his lost salaries, and P100,000 as reimbursement for his hospital bills.
The P200,000 indemnity and the P100,000 reimbursement for
hospitalization expenses
are non-taxable returns of capital. Note that health is q capital item
with infinite value.
However, the 40,000 reimbursement for lost salary is a recovery
of lost profit; hence, an
item of gross income.
Illustration 2
Mr. Galang’s brand new car which he bought for P1,200,000 was
totally wrecked iné
car collision. Mr, Galang escaped unharmed. He was
paid P1,300,000 for the accident.
The P100,000 excess indemnity is an item of gross income. Note
that the law pertains ¢
personal physical injury rather than injury to
rights or property.
262

i a
Income exempt under treaty

items that are excluded by international agreement to which the
income
philippine government is a signatory are excluded from income tax. It must be
1n
recalled that treaty agreements override provisions of our revenue tax laws
case 0! conflict under the exemption doctrine of international comity.
F. Retirement Benefits, Pensions, Gratuities and others benefits
1, Retirement benefit under RA. 7641 and those received by officials and
ce with a reasonable private benefit plan
employees of private firms in accordan
maintained by the employer.
Requisites of exemption: (Mnemonic: 1-10-50-RPBP)

a, This is the first time availment of retirement benefit exemption.
b. The retiring official or employee has been in the services of the same
employer for at least ten (10) years.
c. The retiring employee is at least fifty (50) years of age at the time of
retirement.
d. The employer maintains a reasonable private benefit plan.
A reasonable private benefit plan means a pension, gratuity, stock bonus or profit-
sharing plan maintained by an employer for the benefit of some or all of his officials or
employees, wherein contributions are made by such employer for the officials or
employees, or both, for the purpose of distributing to such officials and employees the
earnings and principal of the fund thus accumulated, and wherein it is provided in said
plan that at no time shall any part of the corpus or income of the fund be used for, or
be diverted to, any purpose other than for the exclusive benefit of the said officials and
employees.
To be exempt, the retirement benefit plan must be a “trusteed” plan where the fund is
held under the management of a trustee free from both employer and employee
control.
The 10-year service period requirement pertains to cumulative years of employment

with the same employer. It does not need to be continuous years of employment. A
requirement for continuous employment would be prejudicial to working women.
Illustration 1
Mrs. Estrella was employed in 2000 when she was 25 years old. In 2021, she availed of
the early retirement program of her employer.
Mrs. Estrella satisfied the 10-year cumulative employment requirement but she is only 45
years old (i.e. 25 + {2021-2000}) at the time of her retirement. The retirement benefit is
taxable, It is an inclusion in gross income as compensation income.
263

income
Tax: Ex clusion from Gross
Chapter 8 - Regular Income
7
I]ustration 2 worked therejy for 5
t Mrs . Est rel la joi ne d ano ther em ployer and
Assume tha
s afte r whi ch she reti re d fr om her employment. Thy
year
empl
Mrs. Estr ella is 50 year s old by the n, she is only 7 years under the 0 ¢
Although t is also taxable as compensation, Fhe,
:|
n ret ire men t bene fit
second employer. The seco d l Ne,
since she failed the resi denc y requ irem ent.
Illustration 3 first an
Assume instead that Mrs. Estrella was 3
0 years old when she joined her
ired at 50. She immediately ; Oe
ret
and worked therein for 20 years after W hich she s oe
another employer and retired after 10 ye ars
of service when she was 60 year
employer is exempt since Estrella jg
The first retirement benefit from the first )
The second retire Year,

old and has rendered at least 10 years of service (i.e., 20 years). ens|
from the second employ er is taxabl e even if she met the reside ncy gp F
benefit
once in q lifet | ye
Qn:
requirements since retirement benefit exemp tion can be availed of only Mme
ees inthe |
2. Retirement benefit under RA. 7641 received by officials and employ
absence ofa retirement plan
Requisites of exemption:
a. The retiring employee is at least 60 years of age
b. He must have served the employer for at least 5 years |
Note that these exemption criteria apply also in cases where the retirement plan; |
not approved by the BIR.
|
3. Separation or Termination
Requisite of exemption:
1, The separation or termination must be due to job-threatening sickness
deaths, or other physical disability; and
2. The same must be due to any cause beyond the control of the employee or |
official such as: |
a. Redundancy
b. Retrenchment
c. Closure of employer's business
d. Employee lay-off
e. Downsizing of employer's business
f. Sickness or death of the employee |
The phrase beyond the control of the employee” connotes involuntariness 00 |

part of the employee. In other words, the Separation must
not be of his
making.
264

——
ste Ew
chapter g - Regular Income Tax: Exclusion from Gross Income
appointment to
pandonment of office such as the registration and subsequent
the
As other office is considered as a voluntary separation and does not fall within or
marie of the phrase “for any cause beyond the control of such official
Ru ling 054-2001)
Ppleyee” (BIR
The exemption of termination or separation benefits does notextend to:
upon termination
packwages or illegal deductions repaid by the employer |
(BIR Ruling 003-2004)
leave credits
Terminal leave pay or the commutation of accumulated unused
(BIR Ruling No. 199-2011)
To avail of the tax exemption, the employee or his heirs shall request for a ruling
and other
or certificate of exemption (CTE) from the BIR. The request for a CTE
required documents shall be filed at the RDO where the employer is registered.
Illustration 1
Carina is an employee of Goldfish Company which closed its business during the year.
Czarina’s last paycheck shows the following details:
Unpaid salary in the last two months P 30,000
Current month salary 15,000
Separation pay 100,000
Total pay P_145,000
The current month salary and the P30,000 backwages are subject to income tax. The
P100,000 separation pay is an exclusion from gross income; hence, not taxable.
Illustration 2
Clarence’s employer was downsizing its business operations. Clarence was identified
among others to be laid off. To avoid implications of inefficiencies on his part, Clarence
filed a resignation letter to the company and received a separation pay of P120,000.
The separation pay is taxable as compensation income since the underlying reason of the
severance of the employment (i.e. resignation) is within the control of the employee. If
Clarence got terminated without resigning, the separation pay would be exempt.
Illustration 3
Eman was diagnosed to have a sexually transmitted disease (STD). Due to this, his
employer decided to terminate his services but granted him P1,000,000 separation
pay.
The P1,000,000 separation pay is taxable as STD does not normally render the employee
incapable of working.
265

come
x: Ex cl us io n from Gross In
r Incom e Ta
Chapter 8 - Regula
at ui ti es , an d Other simitg, »
ent Gr
esm and other in
Retire c stitutions,wh privat © or pyChap |
e
4, Social‘al . Security ty Benefifittss, 6 or aliens i ty
nt agencl © come
from foreign governme non-resident citizens
nt or
received by reside Ry,Ne |
ilippines.
permanently in the Ph
IIlustration os of t Cor p or
Heat ioisn in the USA. John ret, e
yed by Micr Om
John was an OFW em plo
; any |
paid a $2,000 monthly
Phi lip pin es.
returned to permanently
settle in the
$80 0 mo n thl y benefit from the y sin,
fund and another
from Microsoft’s pension
security benefit. . Note that these be
cu ri ty ben efits are exempt re
Under situs rule, the
the so ci al se
Both the pension an d a non -re sid ent .
the taxpayer was This holds true eyep
, Tei |
were earned abroad when in the Phi lip pin es.
no t taxable
income of non-residents is me as a res ide nt of the Philippines.
IF the
the in co
taxpayer subsequen tly receives
p
Administrationé (USVA) - administered ben
United States Veterans residing jn i
5.
United States recel ved by any person
under the laws of the
Philippines.
Illustration fy
Mr. Drei is a retired US serviceman from the eiv Iraqui war. He married a beautifrop,
ing a $1, 000 mon thl y bene fit
es. He is rec
Filipina and settled in the Philippin
the USVA.
The USVA benefit is excluded in gr oss income.
The same rule applies to USVA benefits for
ican flag in World WarI
beneficiaries of Filipino veterans who fought under the Amer
6. Social Security Systems(SSS) benefits under RA 8282
7, GSIS benefits under RA 8291 including retirement gratuity received by
government officials and employees
G. Miscellaneous items
1. Income derived on investments in the Philippines in loans, stocks, bonds,
or from interest on deposits in banks in the
or other domestic securities,
Philippines by:
a. Foreign governments
b. Financing institutions owned, controlled, or enjoying refinancing from foreigt
government
C. International or regional financial institutions established by foreigt
governments
These are exempt under the exemption doctrine of international comity.
266

Chapter 8 - Regular Income Tax: Exclusion from Gross Income
2, Income derived by the government and its political subdivisions from:

a, Any public utility or
b, Exercise of essential government function
Government agencies and instrumentalities

rule with government agencies and instrumentalities is exemption
The general
because of their public service nature. However, taxation applies when they engage
in income-producing activities which are proprietary or commercial in nature.
This exemption does not extend to government-owned and controlled
corporations (GOCCs). GOCCs are generally taxable as regular corporations
because their operations are proprietary in nature.
3, Prizes and Awards made primarily in recognition of religious, charitable,

scientific, educational, artistic, literary, or civic achievements but only if:
a. The recipient was selected without any action on his part to enter the contest
or proceeding; and
b. The recipient is not required to render substantial future services as a
condition to receiving the prize or award.
Prizes of this kind partake the nature of a unilateral transfer and hence, exempt
from income tax. These transfers are also exempt by law from transfer tax. If the
recipient exerted effort for the grant of the prize such as joining a contest or is
required to render service for its grant, the prize would be construed as received
in an exchange; hence, taxable as income.
Examples of exempt prizes:

a. Nobel Prize award
b. Gawad ng Sining Award
c. CNN Hero of the Year
d. Most Outstanding Citizen
4. Prizes and Awards in Sports Competitions granted to athletes:

a. In local or international competitions and tournaments;
b. Whether held in the Philippines or abroad; and
c. Sanctioned by their national sports associations.
5. Contributions for GSIS, SSS, PhilHealth, Pag-Ibig and Union dues of

individuals
These pertain to the employee share in the premium contributions to GSIS, SSS,
PhilHealth, Pag-Ibig and union dues. The portion of the salary thus contributed is
exempt from income tax.
267
ese

Exclu sion In me
from Gross Inco
- Regul ar Incom e Tax:
Chapter 8
ly s toto the
i ribuontion mang oy
Pagth
.
the ex Sor
clusi on eyperta ins
cont
Under RMC No. 21-20 1 1, et oY,
hly contr ibuti ons. Vo labitidntars texshie
ompulsor y mont ote the 6 f
mand ator y mont hly co S ocipMe
SSS in excess of the t
the Home Deve lopm ent Mu tp an

Ibig is now calle d
Ilustration ion income of P400,000 in 2021, His Hig emp

has a gross compensation !n dues
p3,000 HDMF, P2,000 union
Bee ps.000 SSS, P4,000 PhilHealth,
P80,000 creditable withholding tax.
uted as follows.
Thus, the gross income su bject to regular tax shall be comp>
abo ban
,
income or See 000
Less: Excluded compensation
Contributions to SSS P 2500
Contributions to PhilHealth 000
ibuti DMF ,
Condes eH 2,000 14,000
Gross taxable compensa tion income P_386,000
Note: The creditable withholding tax is not an exclusion in gross income but a tax Credit whi.
is deductible against the income tax due of the taxpayer. — |
The employer’s share in SSS, GSIS, PhilHealth, and HDMF contributions is ne
exclusion from gross income but an item of deduction against gross income,
6. Contributions to Personal Equity Retirement Account (PERA)

PERA is a contributor’s voluntary retirement account established from qualifie
contributions of the contributor and or his employer for the sole purpos
e of bein:
invested in qualified PERA investment products. :
Each OFW is allowed to contribute up to P200,000 per
year to a PERA accour:
Non-OFWs are allowed P100,000 contributions per
year. Husband and wife cz
each contribute up to the maximum allowable
contribution.
Contributions to PERA accounts are exclusions in
additional exclusion and is separate with the exclusion gross income. This is 2
for contributions to $SS«"
GSIS . Moreover, PERA contributors are
allowed to claim 5% of the
contributions as tax credit ir PER
against any internal rev
enue taxes.
7. PERA investment inco
me and PERA distribu
tions

Se
v
rer 8 - Regular Income Tax: Exclusion from Gross Income
chaP
kewise exclusions in gross income of the contributor or his heirs OF
e€ li ciaries aS the case may be.
penefi
13! Month Pay and Other Benefits received by officials and employees of
plic or private entities not exceeding P90,000
t
43th month pay and other benefits will be discussed in detail in Chapter 10.
g, Gains from sale of bonds, debentures, or other certificate of indebtedness

with a maturity of more than 5 years
this exemption is grounded upon the same assumption that long-term
indebtedness is diverted to the financing of long-term projects which is viewed as
peneficial to the development of the country.
The term “gain” however, does not include “interest.” (Nippon Life Insurance
Company of the Philippines vs. CIR, CTA Case No. 6142)
Illustration
nt for
On September 1, 2021, an individual taxpayer sold a 6-year term bond investme
P1,100,000. These bonds bear 12% interest payable every December 31 and were
previously acquired at P1,000,000 face value on January 1, 2021.
The gain on sale will be computed as follows:

Less: Cost of bonds sold 1,000,000
Interest accrued (P1M x 12% x 8 mos./12 mos.) 80,000
Gain on sale P___20,000
The gain from the sale of the long-term bonds is exempt because the bonds have a
maturity period of more than 5 years. However, the accrued interest income is an item of
gross income subject to regular income tax.
10. Gains realized from redemption of shares in a mutual fund company by

the investor
The term mutual fund company shall mean an open-end and close-end investment
company as defined under the Investment Company Act.
Mutual funds pool the money invested by different investors and invest the money to
earn investment income which shall add up to the net assets of the fund. A
participating investor must purchase participation shares from the fund at their
Net
Asset Value (NAV). Upon redemption of his participation shares, the investor gains or
oe by his proportionate share in the increase or decrease in the Net Asset Value
of
the fund,
269

tion V De,
bo ug ht 10,000 shareé s from Silver NA V pe r sh are was P180,
aA aeoa
taxpay er whent he
e, Th e ta xp ay er re deemed his shares
‘har js eXclyg
P1 80 -
o e P1 2 0) x1 0,000], on redemption
mpute d as [(
The P600,000 gain, co
ed
ex em pt fr om ta xa tion.
hence,
from gross income; taxation. Most
of *
gatte dou ble
itiga
d to mitoti
is appar a adenre desubject final tax at source. The subse Ue,
The exemption
items of income of mutua at redemption should no longer be Subject
distribution of these to the in
vestors to Prom, 0
t he exemption may have been intended
income tax. On the other hand, regarded as key Participant, i
the growth of mutual funds w
hich are widely
s.
ia ] market
providing liquidity in most financ
fro m the sal e of gol d pu rsuant to RA7076 or the People’
11. Income der ive d
Small-Scale Mining Act of 1991
ch is part of the international reserves
Gold is a highly precious commodity whi
y. Min ing is an imp ort ant sec tor of the Philippine economy Providing
every cou ntr
employment and livelihood to many mining communities. Mining 1S originally
but a gro win g sig nif ica nt por tio n of the mining
dominated by big companies
Ms).
output is now being contributed by small-scale miners (SS
Previously, most of the gold productions of these SSMs were sold to the black
market because of misinformed taxation policies of the government on gold. With
the dominantly untaxed black market, the government got no gold and no ta
Congress finally granted the long suggested exemption on small scale minino
output through RA11256. Under this new setup, the government gets no tax but
gets the gold.
Flowof gold production sales and income tax exemption rules:
I Exempt
eemered
R .
“Exempt” Resi.stered Gold traders—X
emPt_ v
BSP
(buyers)
7
axable —p» Black market
4
[ Taxable
Registered oles if
individual mines aes 2 Filipino citizens who have organized th Ives as an
to engage
(MGB) wider
ground tt the€ exmall duly licensed by the Mines and Geosciences Bure
extraction of
|
minerals Or ore-beari
e terms ofa small-scale mining contract earing material. s -om
from the
act. |
270

chapter 8 - Regular Income Tax:
Exclusion from Gross Income
Accredited traders refer persons and/or

entities en gaged in the business of buying and
selling gold that have complied with the BSP's gold trader accreditation procedures.
For our purpose, black ma
rket refers to any gold hoarders, traders or buyers other
than the BSP and accredited gold traders.
small-Scale Mining Contract refers to the co- production, joint ventur

th e, or mineral
production sharing agreement between 1€ government and a small-
scale mining
contractor for the small-scale utiliz ation ofa plot of mineral inside
a Small-Scale
Mining Area or Minahang Bayan.
To avail of income exemption on the sale o f gold, SSMs and

gold traders must be
registered with the BSP. SSMs will h ave to fulfill various stringent mining
standards of the Mines and Geoscienc e Bureau (MGB)
and the Department of
Environment and Natural Resources ( DENR) aside
from securing local permits
and clearances.
Only registered SSMs and registered gold traders

are exempt. Unregistered SSMs
and gold traders including mining companies are
taxable asa rule.
Illustration 1
Aladdin, registered small scale miner, produced
1 00 grams of gold. He sold 50 grams
to a jeweler for P240,000 and another 50 grams
for P230,000 to a registered gold
trader.
The P240,000 is subject to income tax. It must be inclu
ded in gross income. The P230,000
is an exclusion in gross income.
Illustration 2
Eugene is an unregistered gold trader. He speculates
on the price of gold by collecting
gold nuggets and disk from small-scale miners and
sells the same to Allan, a registered
gold trader. During the year, Eugene made earned P800,
000 gross profit from the sale
of gold.
The P800,000 gross profit is an inclusion in gross incom

e. Eugene will not be exempted
even if he sells directly to the BSP because he is an unreg
istered trader. He cannot be
given an indir ect exemption by selling to a registered gold trader.
Illustration 3
Lloyd is a metal scrapper recovering gold from electronic
scraps of integrated circuit
Components of phones or computers. During the year, he
made P2,000,000 gross
profit selling recovered gold to Jimber, a registered gold
trader.
The P2,000,000 gross profit is subject to income tax. It must
be included in gross income.
The income tax exemption specifically applies only to sales of gold
scale mining. produced by small.
271

Chapter 8 - Regular Income Tax: Exclusion from Gross Income
Illustration 4
with a mineral production sharing *
Abra Mining is a mining c ompany
(MPSA) with the governmen t. During the year, it earned a total of °300,000,099
profit selling gold to a registered gold trader.
Even if mining companies sell directly to the BSP, they will not be exempted, My
they cannot cloak under the exemption of registered SSMs and registered gold trade.
‘ny : b
selling their gold production to them. The P300,000,000 gross profit taxable
inclusion in gross income. Op
Illustration 5 ; .
Highland Miners Mining Cooperative (HMMC) Is a eee Or Banner:
established and operated by small-scale miners with a mining area Tegistereg
Minahang Bayan. During the year, HMMC earned a total of P900,000,000 sey), a5
B gol.
to the BSP.
The P900,000,000 income from the sale of gold to the BSP is exempt from taxation, Iti
an exclusion in gross income. Note that a cooperative of small-scale miners js likey.
exempt from tax.
OTHER EXEMPT INCOME UNDER THE NIRC AND SPECIAL LAWS

Minimum wage and certain benefits of Minimum wage earners
PE
COVID-19 benefits under Bayanihan to Heal as One Act

PWN
Limited retirement benefit exemption under RA 11494

Income of Barangay Micro-Business Enterprises Act (RA 9178)
Income of cooperatives (RA 9520)
Income of non-stock, non-profit entities
SANA
Income of qualified employee trust funds

Business or professional income of sel
f-employed and or professionals whp
opted to the 8% income tax
|
Minimum Wage Earners
‘ minimum wage earner is an ind
ividual recipient of a minimum
5 € Regional Tripartite Pro wage as fixed by
ductivity Wage and Produc
€partment of Labor and Employ tiv ity Board of the
ment. A minimum wage ear
income tax on the minimum wage incl ner is exempt from
udin j i ; ight
differential pay, and hazard pay. °
shi?
6 holiday PO overtime pay, night si
COVID-19 Benefits
provides
a. COVID-for the fol ing exempt special b
19 SpeciallowRis k Allowanen enefiti s for health workers:
b. Actual hazard duty pay
c. Compensation to
health workers who co
ntracted COVID-19
in the line of duty |
272
eS ee

chapter 8 - Regular Income Tax: Exclusion
from Gross Income
coviD-19 Special Risk Allowance is an allow

ance paid to both private and public health
worke rs direc
they are
tly catering to or in contact w ith COVID-19 patients for every month that
serving during the state of nation al emergency due
to COVID-19 as declared
py the President.
actual Hazard DutyaaPay is a compe nsation given to temporary Human Resource for
Health (HRH) serving in the front lin e during the state of emergency due to COVID-19.
Compensation to health workers who contracted COVID-19 in the line of
duty
private and public health workers who have contracted COVID-19 in the line of duty
shall be given:
a. P1,000,000 in case of death; or
b. P100,000 in case of severe or critical sickness
c. P15,000 in case of mild or moderate sickness
Limited retirement benefit exemption during pandemic

Under RA11494, retirement benefits received by officials and employees of
private firms, whether individual or corporate, from June 5, 2020 to December
31,2020, shall be exempt from income tax provided that the amount received
is in
accordance with a retirement plan duly registered with the BIR and that the
retiring employee must not be re-employed in the same firm and its related
parties within the succeeding 12 months from retirement.
Barangay Micro-Business Enterprise (BMBE)

A BMBE is a business entity or enterprise engaged in the production, processing or
manufacturing of products or commodities, including agro-processing, trading
and services, whose total assets including those arising from loans but exclusive of
the land on which the business entity's office, plant, and equipment are situated,
do not exceed P3,000,000.
The tem service excludes those rendered by licensed professionals and
partnership and corporations engaged in consultancy, advisory and similar
services which are essentially carried out through licensed professionals.
A BMBE shall include any individual owning such business entity or enterprise,
partnership, cooperative, corporation, association, or other entity incorporated
and/organized and existing under Philippine laws and registered with the office of
the treasurer of a city or municipality,
To qualify as a BMBE, an enterprise must not be a branch ora subsidiary of a large
scale enterprise and its policies, and modus operandi must not be determined bya
large scale enterprise such as in the case of franchises.
273

ion fro m Gro
ss Income
co me Ta x: Ex cl us
Chapter 8 - Reg ular In
must
; d Pp privile ges BMBE, an applicant eas, Sey,
O fa from
BMBE t he Office of the Tr
To avail of the benefits and
to operate as a Ire gg
certificate of authority isd ict ion . th
ni ci pa li ty tha t has jur
cit y or mu
from Operations
Tax Exemption on Income
law, the income of BMBE fro
s affo rded by the oss income subject t, i
the,
Aside from other incentive
exc luded from the gr oa
operation is exempt, hence, | Information Return
urn in lieu of the incy “Bul,
BM BE s file an An nu a are Subject ty
income tax. pa ssive, and capital gains
non -op era tin g,
return. However, their Oth.
e typ e of in co me tax .
appropriat
. . .
Illustration ofa lot with a b0Ok vyaye
Willie has a b akery with total assets of p4,000,000 inclusive
of P1,200,000.
P 300,000
Gross income from sales of bread 12,000
retail store clients
Interest on promissory notes of 36,000
Royalties on sale of recipe books 10,000
Dividend income from domestic stocks
Note that Willie’s total asset is P2,800,000, ific excluding the lot. Hence, Willie’s busin,s
a BMB E. If Will ie obt ain ed a cert ate of authority to operate as qBite
qualifie s as
from income tax:
the following items of operating income are exempt
Gross income from sales of bread
P 300,000
Other operating income:
Interest income from client promissory notes 12,000
Total exempt income P__312,000
Assuming Willie’s bakery is not registered as a BMBE, the P312,000 total operation
income will be subject to the regular income tax.
Either way, the royalty income and dividend income are exclusions in the gros
income subject to regular tax, but are inclusions in the gross income subject to find
tax.
Another illustration
Zeus Santos has an accounting and auditing firm with total assets of P2,500,000. #
derived a total operating income of P1,000,000 in 2021
The entire P1,000,000 is taxable siin

qualified to be mi a BMBE.
ce Mr. Santos is a professional service provide™
274

We 7 i)
beee=
v
str g - Regular Income Tax: Exclusion from Gross
Income
cha
acation of BMBE Tax Exemptions
y
a ‘ncome tax exemption of a BMBE may be revoked for any of the following
sons: of place of business
j. yalue of assets exceeds P3,000,000
2. yoluntary surrender of the Certificate of Authority
3. peath of the registered individual owner; violation or non-compliance with
4. the provisions of RA 9178
Merger oF consolidation with an entity which is not eligible to be a BMBE
; Sale oF transfer of the BMBE ifa sole proprietorship without prejudice to the
"transferee applying for registration
submission of fake or falsified documents
8. Retirement from business, or cessation/suspension of operations for one year
9, Making false or omitting required declarations or statements
cooperatives .
cooperatives that transact business purely with members are exempt from all
taxes and fees. Cooperatives that transact business with non-members are
likewise exempt from all taxes and fees if their accumulated reserve and
undivided savings do not exceed P10M. Otherwise, the amount of surplus
allocated for interest on capitals is subject to regular tax.
However, the income of any cooperative from non-related sources is fully taxable
to regular tax.
Non-Stock and Non-profit Entities

Non-stock entities that are not organized for profit are exempt from income tax on
their income from operations. However, their income from unrelated sources is
taxable.
Qualified Employees’ Trust Fund

An employees’ trust fund which forms part of a pension, stock bonus or profit
sharing plan of an employer for the benefit of some or all his employees is exempt
from any income tax under the NIRC.
Conditions for exemptions of employee trust funds

4 Contributions are made to the trust by such employer, or employees, or both
for the purpose of distributing to such employees the earnings and principal
of the fund accumulated by the trust in accordance with such plan.
b. The asset of the fund shall not be diverted for other purposes other than the
exclusive benefit of the employees
.
275

from Gross Income
Chapter 8 - Regular Income Tax: Exclusion
red in law rou

QUALIFICATION OF EXEMPTION OF XE ve ot auton
incentive or exemption is highly 4! ting law S OF co sti
r any exis
mn with exemptions or tax incentives unde
their entitlement by f filin
est <ablish g required documents with the st
must Authority. Cooperatives need to 8 ‘Ip.
BMBEs need to secure a Certificate O establisheg Cu
t te
Once exemption is
Certificate of Tax Exemption/Ruling (CT E). * On}
operates prospectively. y
LS WHO OPTED TO BE TAXED i:

INCOME OF SELF-EMPLOYED OR PROFESSIONA
8% INCOME TAX .
The income of self-employed and or professionals who opted jaye They tO the gy,
to regular hen
income tax shall be excluded in gross income subject 1e BY incom,
tax is in lieu of the 3% percentage tax and the progressive income tax. :
INCOME SUBJECT TO FINAL TAX OR CAPITAL GAINS TAX |

Items of income that are subject to final income tax or capital Sains tax are no,
items of gross income subject to regular income tax. Also, income items that are
exempted in the coverage of final tax or capital gains tax are not taxable to the
regular income tax.
EXCLUSIONS VS. DEDUCTIONS

Exclusions from gross income are not included in the amount of reportable gross
income in the income tax return. The amount of deductions is initially includeq in
the amount of gross income but is separately presented as deduction against gross
income in the income tax return.
Note to readers
Exclusion in gross income represents one of the exceptions to the general scope
of the regular income tax. Readers are advised to master or, at least
familiarize themselves with the list and their respective exclusion criteria
before proceeding to the next chapters of the book. This is important in
assisting readers in mastering the regular income tax.
276

'
APTER 8: SELF-TEST EXERCISES

o—
;, Enumerate the exclusions from gross income.
9, What capital items are considered with infinite value?
3, Enumerate the exclusion conditions of retirement benefits.
4, Discuss the exclusion condition of termination benefits,
5, Discuss the rules on taxation of prizes.
s, Enumerate the exclusions from gross compensation income in the determination
of gross taxable compensation income.
7, Who isa minimum wage earner?
g, Enumerate the benefits of minimum wage earners exempt from income tax.
9, What isa BMBE?
10. What are the exemption conditions of an employee trust fund?
True or False 1
1, An employee must have rendered more than 10 years of service before claiming
exemption for his termination benefits.
2. The proceeds of life insurance received by the heirs of the insured upon his death
is excluded in gross income.
3. The amount received in excess of the premium paid in an insurance contract
constitutes an item of gross income.
4, Donated income is included in the gross income of the donee.
5. Compensation for injuries and sickness constitutes profit; hence, an inclusion in
gross income.
6. It is sufficient that the employee rendered more than 10 years of service for his
retirement benefit to be exempt.
7. Anemployee can secure retirement benefit exemption only once in a lifetime.
8. Itisa must that the employer maintains a reasonable pension benefit plan for the
retirement benefit to be exempt.
9. The income of the Philippine government from essential public functions is
exempt from any income tax.
10. Prizes paid to corporations are an inclusion in gross income subject to final tax.
11. Only the mandatory portion of GSIS, SSS, PhilHealth, and union dues can be
excluded in gross compensation income.
12. Social security benefits, retirement gratuities, and other benefits from foreign
governments are excluded in gross income.
13. Social security benefits, retirement gratuities, and other benefits from foreign
private entities are included in gross income.
14. The gain from redemption of shares in mutual fund is an exclusion in gross
income subject to regular tax because it is an inclusion in gross income subject to
; capital gains tax.
5. 13% month pay and other benefits are taxable only up to P 90,000.
277

Gross Income
8 - Reg ula r In co me Tax: Exclusion from
Chapte r
True or False 2
1. Cooperatives that transact business only with members will, in no case, },, s Ub,
; . to th WO :
to income tax. . ross income € extent t
hey Cee
2. GSIS and SSS benefits are included in g
: 0.
P90,00 it at the recipie n shall rend
ipient
er specjfie fury, : .
Prizes awarded upon the ne. th
. oss income subject to regular incon
ak
services is an item of gross In 1

Prizeizes from contests
f government-owned § controlled corporations is an iter, : X,
are included in and
: e r
Bs
we
The income of go
income. my personnel are excl Uded ;jp Prt.
Benefits of veterans of war or retired US army P
share to SSS, PhilHealth and Pag-Ibig contributions are .

The employer's
exclusion in gross income.
luded in the amount of gross inco tiely
Compared to exclusion, deduction is In
e e Cc
.
the amount of taxable incom J 4

both exclusion and deductions are not reflected in ve
The interest income from any bond or debentu res, short-t erm or long-term , ;
Sz
item of gross income.
the:
10. Cooperatives, regardless of their classification, are taxable on income from
unrelated activities.
11. The gain on the sale of long-term bonds with a maturity of five years j,
exclusion in gross income. :
12. Anon-stock, non-profit entity is subject to tax on income from unrelated Activities
13. A general professional partnership can be registered as a BMBE.
14, Items of income subject to final tax or capital gains tax are exclusions in gros
income subject to regular income tax.
15. A BMBE must have a net asset not exceeding P3,000,000 to be exempt.
Mu Itiple Choice - Theory 1

1. Proportional income tax does not apply to a
a. Domestic corporation
b. Resident foreign corporation
c. Business partnership
d. General professional partnership
2. Statement 1: Items of passive income
tax.
fro m abroad are subject to regular inc
Statement 2: Items of Passive income
from the Philippines are generally subjec®
final income tax.
Which statement is generally

correct?
a. Statement 1
c. Both statements
b. Statement 2 d. Neither statemen
t
278

.g - Reg ular Income Tax: Exclusj
papte!
On from GrossS | INc
chs ome
wich is true with
the regular in
thi
\W cert> ainos item : come tax?
s of income ar "es
i
j
a tax is payable at re e Subjec t to . final with
gular intervals. holdi
b. Income tax return molding tax,
s are not require
d.
(dl.|, Allof these
ch is not a feature of regular
whi ‘ally applies to all ite income tax?
ItI aer
genereab
allyle wit ' tax ms 9! f 8TOss inc
aj hholding i on
Subjectt to final tax.
le Not subjec
Gross income tax
4, Accounting period
statement 1: Capital gains are general]

y . subject to Capita
Statement 2: Items of passive l gains t ax.
ws
incom e in the Phil

ippines are generally subject to
regular income tax.
3, Statement 1 is true. c. Both Statements
pb. Statement 2 is true. 1 and 2 are true.
d. Neither statemen
t 1 nor 2 is true.
Deductions from gross income are
a. Personal expenses c. Either A or B
b. Business expenses d. Neither A nor B
Which of the following statement best distin gui
shes deductions from exclusions
—
from gross income?

a. Deductions can be claimed b y citizens while P25
0,000 income exemption
cannot be claimed by aliens.
b. Deductions are outflows from gross income
s while exclusions are not
outflows from gross income,
c, Both deductions and exclusions are deducted
from gross income.
d, All of these.
Progressive income tax does not apply

toa
a Non-resident alien. c. non-resident citizen.
b. resident alien. d. resident citizen.
Which is not included under the term “corporation”? _

4 Business partnership cc. Non-profit charitable institution
Co-ownership d. Joint venture
10
The highest marginal tax rate for individual income taxpayers is
a 25% c. 35%
b. 30% d. 32%
279

Eyclu‘sion from Gr oss Income
-
r Income Tax: Exc
Chapter 8 - Regula
‘ ular inc" ome tax?
i t subject to reg porration
i orate taxpayer Is NOS” ident
‘ forelgign corrpo
reign corporation d.C- Res
Business partnership
siden tfo
-rees
Lh a.ee Nonomr
ion
b. Domestic corporat
lar tax?
ta xp ay er is no t subject to regu
income
12. Which individual ge d in tr ade or business
—
eng a business
Resident alien not
a.
cit ize n no t en ga ged in trade or
b. Non-resident in trade or busi
ness
sident ali en en gage d
c. Non-re
not en ga ge d in tr ade or business
d. Non-resident alien ?
t
fro m Fe .
7
le ci a
ect to exc lus ion s
with resp
13. Which is correct q y educteg,
lud ed as part of gross income but are
added to the taxable income
a. The y are inc
ome but are
They are not inclu ded in gross inc .
putation of taxable income
b.
not cons i der ed in the com
They are
c.
ductions.
They are synonymous witl 1 de
d.
ss income:
?
pect to deductions from gro

e
.
14, Which is correct with res fessions

erating items of business or pro
a. They pertain to expenses of gen
gross income.
n of taxable income.é
b. They are excluded from the determinatio
generation of any income.
c. They include all expenses incurred in the
ption.
d. They include P250,000 annual income exem
15. Which constitute a taxable item of gross income?

a. Compensation for personal injuries
b. Gain from sale of shares in mutual funds
c. Gain from sale of government bonds
d. Income exempt under treaty
Multiple Choice - Theory 2

1. Which of the following is subject to tax?
a. Proceeds of crop insurance
b. Proceeds of livestock insurance
c. Indemnity under patent infringement suit
d. Allofthese
2. The proceeds of an insura nce policy i received

: -ati
by y the corporation ‘ary ol
as beneficiary
a's
the life insurance of its officer is
2 , , .
a : aie c. an inheritance.
. ataxable income. d. exempt from income tax.
3. B
Mr. sble bench an a
intevoc in a life Insurance with his daughter, Ybon, 4 the
"y: N)on was paid the entire proceeds when Mr. Buguey “°°
280

The proceeds constitute

a. ataxable inheritance.
pb. ataxable gift.
c, ataxable income.
d. an exclusion from gross income.
4, A policy holder who outlived the policy and received a cash surrender value in
excess of premiums paid is exempt upon
a. the amount representing a return of premiums.
b. the entire amount received.
c. the excess of the amount received over the premiums paid.
d. None of these
5. The assignment of an insurance policy at an amount in excess of the premiums

paid on the policy is subject to
a. donor's tax. c. estate tax.
b. income tax. d. any of these
6. Awidow who collected the life insurance proceeds of her decease husband is
exempt to the entire amount of the proceeds.
taxable to the excess of the proceeds over the premiums paid by the husband.
ao oe
taxable to the excess of the proceeds over the premiums paid by the widow.
exempt with respect to the portion of the proceeds representing returns of
premium.
7. The policyholder of a life insurance contract outlived his insurance policy. He was
paid P300,000 upon maturity of the policy. He paid P250,000 total premium. What
is the inclusion in gross income?
a. P300,000 . c. P50,000
b. P250,000 d.P 0
8. Which is not a requisite of exemption of a retirement benefit plan?

a. 10 years of employment
b. The employer maintains a reasonable pension benefit plan.
c. Theretiree must bea senior citizen.
d. First time availment of retirement exemption
9. Termination benefits are exempt from income tax provided that the reason for
termination is
a. beyond the employee's control. c. within the employee’s control.
b. within theemployer’s control. d. beyond the employer's control.
10. Which is not an item of exclusion from gross income?

a. SSS benefits
b. Income of the government and its political subdivisions
C. Income of government-owned and controlled corporations
281

me
la r In co me Tax : Ex cl usion from Gross Inco
Chapter 8 - Regu
rnments
d. Income of foreign gove
ing gov ern men t-o wne d and controlled corporations jg Sub «
11. . Which of the fol low
to income tax?
a. Social Security System
ation
b. National Development Corpor
c. Local water district
poration
d. Philippine Health Insurance Cor
pay?
und for exemption of termination
12. Which is not an acceptable gro
a. Mass employee lay-off
b. Closure of employer’s business
c. Grave misconduct and neglect of duty
d. Retrenchment of employer's business
for taxation purposes?
13. Which is not an item of gross income
a. Unrealized income c. Income earned between related partie,
Advanced income d. All of these
b.
14. Which is subject to income tax?

a. Gain on sale of 6-year bonds.
b. Gain on sale of shares in mutual fund.
c. Interest income on long-term bonds with a maturity period exceeding fiye
years.
d. Interest income on long-term deposits by individual taxpayers.
15. Which of the following is not an exclusion from gross income?

a. Income of government properties
b. Income taxes collected by the Bureau of Internal Revenue
c. Dividend income payable to a foreign government
d. Social Security benefits
Multiple Choice - Problem: Part 1

1. Mr. Anthony was hurt in a bus accident. He received a total indemnity of P800,000
from the insurer of the bus. Mr. Anthony paid P250,000 in hospital bills due to the
accident. Compute the total amount to be excluded in gross income
a. PO c. P550,000 |
b. P250,000 d. P800,000
Mr. Philip collected the P1,00

,000,
0,000 insura nce proceeds of Mr. Gerald which he
bought from the latter for P400,000. Before the death of Mr. Gerald, Mr. Philip
paid total premiums of P200,000. Determi
income
; 000. mine respecti ‘clusion in gross
and the inclusion in gross income. pecuvely the exclusion in &
a. P1,000,000; PO c. P400,000; P600,000
b. PO; P1,000,000 d. P600,000; P400,000
282

er
r, Zero surrendered his

life ins
of pg00,000 after contributing P7000 00 y and
in received
a cas} 1 surrender value
respectively me oe exclusion in gross
ps00,000;
income and the a lien Determine
c. P100,000 : P700,000 'nclusion in gross income.
», PO; P800,000 d. P700,000. P100,000
" insurance
Mr. Johnkaiser
policy. died.
Mr. Johnkaiser
His heirs Collected t he P2 000,00
; 0 proceeds of his life
' respectively Prethevioexc
premiums. Determine usllus paid in a gros
y ion totasl income i" hei
in gros s income. in
: and the inclusion
a, P2,000,000; PO C. P2,000,000: PO
b, P500,000; P1,500,000 d. PO; P2,000,000
| Mr. Frankin stronait
pee P5,000,000 fire in
which was destroyed by surance proceeds of his
fire. The building had building
occurrence of the a tax bas i
the fire. Dete; rmine respec tively the total exc
and the inclusion in gross income. otal lus
exclus ionion inin gre
groes
ss inc
heen ome
a. P5,000,000; PO c. P4,500,000; P500,000
b. PO; P5,000,000 d. P500,000; P4,500,000
. Mr. Adrian insured his crops for a P1 :00
0,000 insurance cover against cala
He paid and expensed P100,000 ins urance mities.
premium. How much will be includ
in gross income? ed
a. P900,000 c. P100,000
b. P1,000,000 d.P0
. Ms. Ace received a condominium including its
accrued income as inheritance from
her deceased grandfather on April 1, 2021. The
following data relates to the
property:
Fair value of property P 125,000,000

Rent income earned before death of decedent 4,000,000
Rent income earned after death of decedent 6,000,000
Interest on deposits of rentals to the banks
(40% accruing after death) 100,000
How much of the above income will be included in the gross income of Mr. Ace
and in the gross income of the decedent?
a. P6,040,000; P4,060,000 c. P4,060,000; P6,040,000
P6,000,000; P4,000,000 d. P4,000,000; P6,000,000
* At the age of 54, Mrs. Rio was awarded a retirement gratuity of 2,000,000 for
€r 30 years of service in the Sirawai Company. The employer's Reet
Plan was with an employee participation feature where Mrs. Rio contributed a
283

|
ncome
c l u s i o n fr om Gross I
Ex
ncome Tax: Mrs. Rio also received P500¢
Chapter 8 - Regu lar I
d. 5
004.
eggs compute theta excinggy
: 0,000 in the fun “1 in gro ss income.
from the . cP !
a. P1,700,000 d, P2,500,000
b. P1,300,000 he government after 30 years of service at 4
: m tne e
9. Mrs. Moses retired fro cement pay © f P1,800,000 plus P400,009 Gsig So,
He received a total ret in gross 1income? Snes,
How much will be excluded nF p2,200,000
—
b. P400,000 d, P1,800,000
of pj
collected a total sum
n Commission
from 00,0
- 06,
10. The Professional Regu sr fees. It also collected ni P5,000,000
whose intone’
, ional license
from rreant properties What is the total exclusion In g me? tals
govern .
PO «. P100,000,000
b. P5,000,000 4. P105,000,000
a r:
11. Mr. Alvarez had the following income during the yea
including P25,000 13 month pay P 325,000
;
Less: Tardiness or absences (__10,000)
‘ani income
Net compensation P 315,000
12.600
SSS deductions ,
PhilHealth deductions 9,000
Pag-Ibig deductions 10,000
Union dues 5,000
Withholding tax 40,000
Net pay P_
239,000
Compute the total exclusions from gross income.
a. P36,000 c. P66,000
b. P61,000 d. P71,000
12. Mr. Yap received the following
during the year:
Donated properties
Income of donated Proper P 200,000
ty before donation
Income of donated Proper 50,000
ty after donation
Inherited properties 30,000
100,000
How much is taxable to
Mr. Yap?
a. P380,000 |
b. P80,000 c. P30
d. 50,005
284

mr. Gallardo has the following data during the year:

13.
Basic salary P 1,200,000
income tax withheld 50,000
13'" month pay 100,000
SSS 2,000
Phi]Health 1,800
Pag-Ibig 1,700
Union dues 500
Capital build up contribution in a social fund 2,000
Compute the total exemptions and exclusions from gross income:

qa. P 106,000 c. P 96,000
b. P 100,000 d. P 88,000
insured
14. Mang Custodio collected P2,000,000 from the fire insurance company that
his building which had a tax basis of P1,800,000 when the fire occurred. During
the same period, he also collected P300,000 crop insurance proceeds pertaining to
his crops destroyed by frost. The total item of gross income is
a. P2,300,000. c. P300,000.
b. P200,000. d. P500,000.

1. Mr. Ali discovered teleport technology where people can be transported over
thousand miles in seconds. Due to this, he was awarded by the scientific
community the most coveted Nobel Prize award in 2020. The total award was
$150,000,000.
What is the most correct statement regarding the taxation of the award?
a. The award is an inclusion in gross income subject to regular income tax since
final taxes do not apply abroad.
b. The award is an inclusion in gross income subject to final tax since it is more
than P10,000.
c. The award is an exclusion in gross income subject to regular tax since it is an
inclusion in items of gross income subject to final tax.
d. The award is an exclusion in gross income.
Wary of his deteriorating health conditions, Mr. Sidney, resigned from his job at
age 40 after working as a supervisor for 12 years. He was paid P2,000,000 as
separation pay. Is the P2,000,000 separation pay subject to income tax?
a. No, because the reason for Mr. Sidney's termination was beyond his control.
b. Yes, because Mr. Sidney resigned.
than 10 years.
c. No, because Mr. Sidney worked for the company for more
d. Yes, because Mr. Sidney is not yet 50 years old.
285

f rom Gross Income
Tax: Ex cl us io n
e g u l a r Incom e oy
Chapter 8
- R
s =d by his empl013an, .
ter minate
d w a u a r y 2 0
ni Edwar ny In Febr
5.
1, Mr. .KevHie joined the compa . Kevin Edward's ret; _

Yer at
On De cember 20 ne esight mpany: Is mr

ing €&Y omP the en
60 due to his kfaeil
d as t reasurer of
the c
ce then wo r .
his control
sin ; 2
fro m inc ome tax: bey o n d
pay exemp t war
¢ than 10 years.
jnation was
Yes, because his termemployed for’ s
i
a 7
he was vor citizen.
No, because
b. 50Y ears old.
he !si over y a sen
C. Yes, because e m p l oyee is alread
e th e
d. No, becaus She joined the compa
; - 25 years of servi ce. e?
accounting clerk , to VP Finance, She
her job afte! ae Pe ns in ,
Vas
4, Ms. Paula retired from s pr om o O er a voceetis

3 an d wa from the cm p
to ta l re tirement pay ee te i e eds, Ms, Pay),
tne 89,000,0 00 BIR. Out 0! m employmen
gistered with the
re reiren
lan which was duly This was Ms. Paula's first
,000.
contributed p600 from g! -oss inco
me?
much is ex cl ud ed
How c. P2,000,000
a. P6 6000 ,0 00
1,400,000 d. P 0
b. an d was retired after js
he r co mp an y
Assuming M s. Paul
a transferred to anot 00,000 out of its non-cont
ributory
5, d em pl oy er pa id P1 ,5
a. The pension fund was also duly
secon
years of ser vice. The
ment pay to Ms. Paul
re
pension fund as reti
registered with the BIR. x?
exe mpt from income ta
Is the second retirement pay d from employment.
No, bec aus e this is the sec on d time Ms. Paula retire
lready a senior citizen.
a.
b. Yes, because Ms. Paulaisa pay

bec aus e this is the first time Ms. Paula qualifies for retirement
c. Yes,
exemption.
one em ployer until retirement to
d. No, because an employee must work under
qualify for retirement exemption.
P500,000 in a local chess competition that was sanctioned by a

6. Mr. Eman won
ntly applying for accre ditation from the national
a ana on that is curre
000 prize considered an item of gross income?
ciation. Is the P500,
- hia all prizes are subject to income tax
ecause the chess competition is not an international competition
; 0, “as . "
c i
‘ No, oe the sport competition is a local competition
. , because the organizer is not an accredited sports organization
7. i
Th e following in 2021
relates to the compensation income of Ms Jilliane in
. :
Compensation
Contributions to SSS, PhilHe alth, and HDMP: P 2,400,000
—
- Mandatory contributions MP:
- Voluntary contributions 125,000
150,000
286

chapter 8 - Regular In
come Tax: Exclusion
from Gross Income
contribution to PERA
Creditable withholding taxes ioe neg
Employer's share in SSS, PhilHealth and

HDMF 105,000
What is the total exclusion in
8ross income?
a. P225,000 c. P395,000
b. P230,000
d. P465,000
In 2020, Ms. Rose invested P8,000,000 in the
10-year bonds of Compostela Mining
Corporation. She disposed the investment in 2016 for a total consider
P8,500,000 inclusive of the P400,000 ation of
accrued interest. What are respectively
inclusion in gross inco the
me and the exclusion in gross income?
a. P500,000; PO c. P400,000; P100,000
b. P100,000; P400,000 d. PO; P500,000
Ms. Mary invested in the mutu

al fund and Savings deposit of BCBC
acquired a 100,000 participation shares when Bank. She
the net asset value per unit of the
fund was P98.00. She pulled out her investment when the net asset
was P101.00. Ms. Mary also had P100,000 value per unit
accrued interest in her savings deposit.
Which statement is incorrect?

a. The P300,000 gain is an exclusion in gross inco
me.
b. The P100,000 interest income is an exclusion in gross income subje
ct to
regular tax.
c. The P100,000 interest income is an inclusion in gross
income subject to final
tax.
d. The P300,000 is an inclusion in gross income subject to regula
r tax, but the
P100,000 is an exclusion in gross income subject to final tax.
10. The following income relates to a proprietorship registered as a

BMBE:
Gross income from sales P 400,000
Dividend income - domestic 9,000
Interest on deposits 6,800
Compute the total exclusion in gross income subject to regular tax.
a. P400,000 c. P15,800
b. P415,800 d.P 0
11. In the immediately preceding problem, compute the total inclusions in gross
income subject to final tax.
a PO c. P6,800
b. P15,800 d. P9,000
287

5
yr a
|
! io n fro m Gross Income
. Excl us
lar Income 1ax: |
Chapter 8 - Regu \
i erative, had th |
coop e following ne
4 multi-purpose cred it
12. Gamitan sa Bayan, 400,000 hy
Cy. |
in 2015:
P ,
vities
Income from relate d acti 20,000
ac tivities:
Income from unrelated
stocks 18,000
- Dividends from
osits
- Income from time dep 60,000
- Rent income
gro ss in co me sub jec t to regular ta, ;
m
Comput e the total exclusion fro
|
PO c, P438,000 |
b. P38,000 d. P400,000
preceding problem, compute the total inclusion in Br
13. In the immediately
income subject to regular tax.
a. P60,000 c. P460,000
b. P 98,000 d. P38,000
202}.
14. Anon-stock, non-profit charitable entity received the following during
P 1,400,000
Contributions from the public
Income from the sale of merchandise
500,000
Gain on the sale of properties 300,000
What is the total exclusion from gross income subject to regular tax?
a. P2,200,000 c. P1,400,000
b. P1,900,000 d. P1,300,000
15. Mr. Lozada purchased a life annuity for P100,000 which will pay him P10,000:|
year. The life expectancy of Mr. Lozada is 12 years. Which of the following can
Lozada exclude from his gross income?
a. P10,000 c. P 120,000
b. P 20,000 d. P 100,000
288

chapter 9 - Regular Income Tax: inclusion in Gross Income
CHAPTER 9
REGULAR INCOME TAx:
[INCLUSION IN GROSS INCOME
chapter Overview and Objectives
This chapter discusses inclusion in gross income subject to the regular income tax.
After this chapter, readers are expected to demonstrate:
1. Mastery of the NIRC list of items of gross income subject to regular tax and
their measurement rules
2s Knowledge of the boundary between income subject to final tax or capital
gains tax and those subject to regular income tax
Knowledge of the link between items of exempt income and income subject to
regular income tax
Comprehension of the effect of accounting methods and situs rules on the
reportable amount of gross income
Knowledge of the treatment of creditable withholding tax
SOnNav
Understanding the treatment of income from pass-through entities

Mastery of the rules on recoveries of past deductions
Appreciation of the essence and purposes of transfer pricing regulation
ITEMS OF GROSS INCOME

The term items of gross income or inclusions in gross income is a broad category
pertaining to all items of income subject to taxation, namely:
1. Gross income subject to final tax
2. Gross income subject to capital gains tax
3, Gross income subject to regular tax
Items of gross income subject to final tax and items of gross income subject to
capital gains tax are respectively discussed in Chapter 5 and Chapter 6. This
chapter focuses on the items of gross income subject to regular tax.
ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX

Gross income includes, but is not limited to, the following items:
Compensation for services in whatever form paid
Pr
Gross income from the conduct of trade, business, or exercise of a profession

fFWwWN
Gains derived from dealings in properties

Interest
Rents
nu
Royalties
289

Ta x: In cl us i on in Gross Income
r Inco me
“Chapter 9 - Regula
7. Dividends
g. Annuities
9, Prizes and winnings
et income of general profe.,,
Ssiong
10. Pensions ‘ from the n
11, Partner's distributive share
partnership
ces ‘+n whatever
in a t form pataid , .
Compen sat ion for ser vi nsation income” technically Pertaing :
compe x.
r current tax rules, the term r tax. The fri nge ben ef.
f emp loy ee ben efitsemptha are subject to regula
t ees ere d compensation jncom
wee
the typ es of emp loy are not con sid
of managerial or supervisory g
but are subject to final tax. te)

xi ty of thi s sec tio n, co mpensation income is Separa
To minimize the comple
discussed in Chapter 10.
fro m the con duc t of trad e, bus iness or exercise ofa Profession,
Gross income
inc lud es inc ome fro m any tra de or business, legal or illegal, and whethe,
This
.
registered or unregistered.
ermined as follows:
Gross income from business or profession 1s det
Sales/Revenues/Receipts/Fees P = XXX,XXX
Less: Cost of sales or services ____ XXX XXX
Gross income from operations P___XXx, Xxx
The following business income shall not be included in gross income subject to
regular income tax:
1. Business income exempt from income tax such as:
a. Gross income from a Barangay Micro-Business Enterprise (BMBE) under RA 9178
b. Gross income from enterprises enjoying tax holiday incentives under the CREATE
law which have not yet graduated to their income tax holiday incentives
2. Business income subject to special tax such as:
a. Philippine Economic Zone Authority (PEZA)-registered enterprises subject to 5%
gross income tax
b, Tourism Infrastructure and Enterprise Zone Authority (TIEZA)-registered
enterprises subject to 5% gross income tax
c. Income of self-employed and or individuals (SE/P) who opted to be taxed under
the 8% income tax
3. Business income subject to final tax when not subjected to
final tax by the payor
a. Subcontractors of petroleum service contractors subject
to 8% final tax
b. Business income of foreign currency deposit units (FCDUs) and
expanded
FCDUs
(eFCDUs) from Philippine residents subject to 10% final tax
woten : aL Busines income shall report their gross income subject ©
column “Regular” in the computati sme i nua
Income Tax Return. . Gross incom j
e subject to specialpuvanon
rate a n of tax per regime
m in the . ese
_
i
respectively under the columns “Total Special” and “Total Exempt aaa hed
290

‘ chapter 9 - Regular Income Tax: Inclusion in Gross Income
Gains from Dealings in properties

the gains or losses in dealing in ordinary assets are subject to regular income tax.
pealings 1n capital assets other than domestic stocks and real properties are also
subject to regular income tax.
ordinary gains are included as items of gross income. Ordinary losses are items of
deductions against gross income. The net capital gain from other capital assets
after deducting capital losses is also included as an item of gross income. A net
capital loss is not an item of deduction against gross income.
To avoid complicating this section, the tax rules on measurement and recognition
of gains from dealings in properties are discussed in detail in Chapter 12.
Interest income
This particularly refers to interest income other than passive interest income
subject to final tax. A taxable interest income must have been actually paid out of
an agreement to pay interest. It cannot be imputed. (CIR vs. Filinvest Development
Corporation, GR 163653 and 167689)
Examples of interest income subject to regular income tax:

1. Interest income from lending activities to individuals and corporations by banks,
finance companies, and other lenders
2. Interest income from corporate bonds and promissory notes
3. Interest income from bank deposits abroad
Exempt interest income

The following are exempt from regular income taxation:
1. Interest income earned by landowners in disposing their lands to their
tenants pursuant to the Comprehensive Agrarian Reform Law
2. Imputed interest income
Imputed interest income (the opportunity cost of money) does not constitute
an actual income; hence, it is exempt from income tax.
The power of the Commissioner to allocate income and deduction does not
include the power to impute “theoretical interest.” (Ibid)
Illustration
Sapphire Bank has the following income in 2021:
Interest income from loans P 3,000,000

Interest income from deposits with other banks 400,000
Interest income from notes rediscounting 100,000
Interest income from Treasury notes 50,000
291

Income
In co me Ta x; In clusio n in Gross
Chapter 9 - Re gular
‘scounting are ite
oss it
nid treasury ni otofes Grare in n
come from
Only the interest inin .
lo
Th
an
e
s inan
te
drestOeon pgots
co me tax Mo
subject to regular
gross income su bject to fi
nal income tax.
; ; e
incom
Rents
op er ti es of an y kind. It iS a passive © hy
Rent income arises from
lea sin g pr regular incom
C; hence, It !s subject to
un der the NIR
is not subject to final tax Rta,
nsiderations on rent
I the lessee are additiona) re Nt,
Spe pligations of the lessor that are assumed by
income to the lessor.
2. Advance rentals are
a. Item of gross inco me upon
receipt if:
i. Unrestricted or
Re st ri ct ed to be appl ie d in fu tu re ye ars or upon the termination Of the
ii.
lease
b. Notanitem of gross income if:
i. It constitutes
a loan
ii. It is a security deposit to guarantee payment or rent subject4
0
contingency which may or may not happen.
Leasehold improvements made by the lessee on the leased prope
recognized by the lessor as income using the spread-out method or oak
method discussed in Chapter 4.
Illustration
Under the Escalante Corporation’s
ion’ standard lease contract, leases shall run for anon
three months rental n advance plusplus oveone gee 25,000. The lessee shal
retermi 4 .
two bémonths of the lease Shall | month security deposit. The rent for the as
will réeuinéd {fh shall be taken from the advance while the security deposi
ere are no damages sustained by the property
term.
during the ka
deposit is not an income.
Royalties
Ne ae eB EON Tete a ta Twn
a
chapter 9 - Regular Income Tax: Inclusion in Gross Inco

me
ilustration 1 a
ic- nolo i
ae ributor ofmsa coe mpsputecer
is a diutster prlyogram oredand to eaearnchs
Ro om iy cto Comp progra ar if ic al tail
roye and regular continui ers.
nance ltsey rvpa
ices e provided. . During the year,
clien ; ng te00
in,0
ma00 ro ya ym enarts
ed a total of P5
client-users remitt
; 4
enti re P50 0,0 00 is subj ect to regular inc ome tax sinc e the roya lty is an acti ve inco me
3 “ obotic-Technology Designed
The
{Illustration 2
Mang Donald has the following royalties:
Royalties from mining properties in the Philippines P 550,000

books published in the Philippines 200,000
Royalties from 300.000
Royalties from books published abroad 40 00 00
Royalties from franchise exercised abroad
the Philippines are subject to
The royalties from mining properties and from books in
000 are items of gross
final tax. The royalties from sources abroad aggregating P700, olding tax does not
withh
income subject to regular income tax. Remember that the final
apply to foreign income.
Dividends
ations. It should be recalled
These pertain to dividends declared by foreign corpor
are generally subject to 10%
that dividends declared by domestic corporations
and exempt if the recipient is a
final tax if the recipient is an individual taxpayer
domestic or a resident foreign corporation.
foreign corporations are generally items
Cash, property, and script dividends from
tax.
of gross income subject to regular income
Stock dividend tax, but when

idends are exempt from income
It should be recalled that stock div stock
lar ati on con fer s to the rec ipi ent a different interest or right after the
the dec redeemed such
dec lar ati on or whe n sto cks dividends are subsequently
div ide nd
fair market value of the stock
dividend, the
that it amounts to payment of cash
dividends received is taxable.
.
Liquidating dividends liquidating dividends are considere
d an
ng div ide nd is not inc ome . The
Liquidati ject to the rules
est ment of the investor and are sub
amount in exchange for the inv
12.
of dealings in properties in Chapter
293

|
n in Gross Income
Income Tax: Inclus!
iO
—
.
Chapter 9 - Regular
Jippine
Philippine i
income , the porti on .
r is taxable only on d following the pre-dominance tess
If recipient Ce thin shall be determine a |
dividend earned wit
discussed in Chapter 3.
. ividends from
fromt the Following
Illustration ic corporation, received cash dividends
Lubao Company, a domestic P 400,000
Domestic corporations _ 200,000
30 0,000
Resident foreign corporations
ji
is px tes
Dp or a tio n
Cc orp
y ed by a domestici
The P400,000 inter-corporate divide tem of gross income subject
nds decla
| to regular
: income tay
otant
from final tax. Therefore, it isn
n Corporation
al div ide nds fro m the resident and non-resident foreig
The P500,000 tot t to regular income tax and shall be reported 3,
are items of regular income subj ec
follows: |
Scenario 1: Assuming Lubao is a domestic corporation, the P500,000 total divideng,
from foreign corporations shall be included in gross income because domestic
corporations are taxable on world income.
Scenario 2: Assuming Lubao is a resident foreign corporation, only a portion of the
P200,000 dividends from the resident foreign corporation determined as earned |
within by the Pre-dominance test shall be included in gross income. The situs of |
dividends from the non-resident foreign corporation is abroad. |
Conditional exemption on intercorporate dividend from NRFCs
Dividend received by domestic corporations from non-resident foreign
corporations is generally subject to regular tax. However,
they are exempt if the
following conditions are fulfilled:
1. The domestic corporate recipient directly owns
at least 20% in value of the |
outstandingshares of the NRFC.
2. The Shareholdings in the NRFC |
a Working capital
requirements
b. Capital expenditures
c
d Dividend payments
mvestment In: domestic
nfrastructure Subsidiaries
projects
294

chapter g - Regular Income Tax: Inclusion in Gross Income
er pR5-2021, foreign-sourced dividends that are not utilized within the following
taxable year shall be considered taxable income in the year received subject to
‘ yrcharges, interest and penalties, as applicable.
.
jllustration 1
A domestic corporation received the following income distribution from the following
investments which was all acquired 3 years ago:
Income distribution source Amount receive
pividends from foreign subsidiary P 400,000
pividends from foreign associate 200,000
Dividends from 10% foreign investee 300,000
Dividends from 30% domestic investee 100,000
Share from foreign partnership 150,000
Profit remittance from foreign branch 250,000
Assuming all of the income distributions were used domestically, the following shall
be the inclusions in gross income subject to regular tax:
Dividends from 10% foreign investee P 300,000

Profit share from foreign partnership 150,000
Total inclusion in gross income P_450,000
Subsidiary corporations are more than 50% owned while associates are at least 20%
owned by the investing company. Since all requisites are fulfilled, dividends from these
NRFCs are exempt from regular tax. The dividend from domestic investees is exempt
under final income tax.
The foreign branch profit remittance is not subject to tax since the branch income are
already taxed as part of the regular income of the combined domestic home office and
the foreign branch. The profit share from foreign partnership is not exempt since the
CREATE exemption is limited to “dividends”.
Illustration 2
Since 2016, Mabaca Company, a domestic corporation, owns 30% of NRFC Abacus and
10% of NRFC Stalingrad. Both NRFC investees are operating in Russia. NRFC Abacus
also owns 70% of NRFC Stalingrad. In 2021, NRFC Abacus and NRFC Stalingrad
declared and paid P5,000,000 and P2,000,000 dividends respectively to Mabaca
Company. The dividends were all used in Philippine business operations.
The P5M dividends from the 10% interest in NRFC Abacus shall be exempt from regular
tax. The P2M dividends from the 10% interest in NRFC Stalingrad shall be subject to
regular tax. Direct rather than indirect equity interest is considered for purposes of the
20% ownership requirement.
295

Te 2
see
=
a
nvested in the est
Abacus dividends were rei were used in paying trade Obligation” in
d divid ends
Russia while the P2M Stalingra iS .
Ih
the Philippines.
supposes ap in Wo
The P5M dividends shall be subjected ; tax since the law pre
to regular
remittance of foreign-source dividends and its acta wae Leeubienel. ations here i |
the Philippines. The P2M Stalingrad dividends s ai he 20% direct own "egular to,
failing ership tes
despite actual reinvestment in the Philippines for
Illustration 4 eons .
RLT Corporation received dividends from the iin mvesments N foreio, |
20% interest for more years:
associates which it held at least
Remarks —— |
Foreign investments | Dividends
Investment in A Corp P1M | Received June 30, 2021 but remained unused |
until January 1, 2023.
Investments in B Corp P2M | Received in May 1, 2021. P1.5M was used =~
pay dividends in September 1, 2022. The Psy |
balance was used for working capital in 2023 |
7
Investments in C Corp P3M | Received in July 1, 2022. P2M Was used |
4 purchase equipment in 2023. The
remained unused on January 1, 2024,
balance||
||
The P1M unused dividends from A Corp shall be declared as taxable income for 2021 |
subject to surcharges, interest and penalty since it was not utilized in 2022.
P1.5M of the dividends from B Corp is exempt. P.5M dividends shall be declared as |
taxable income in 2021 subject to surcharges, interest and penalty since it was not used
in 2022.
P2M dividends from C Corp is exempt. The P1M unutilized balance in 2023 shall be
considered taxable income in 2022 subject to surcharges, interest
and penalty. |
;
Annuities
|
The excess of annuity payments received by the recipient over
premium paid is |
taxable incom e in the year of receipt.
|
Illustration
Andrew purchased an annuity contract f
annually until he dies, y or P100,000 which. shall pay him. P10,0 00
296

chapte’ g - Regular Income Tax: Inclusion in
Gross Income
ne receipt of oan 10 annual annuity payments is a return of capital. Any further

receipt from year ££ onwards is an item of gross income subject to regular income tax.
prizes and winnings
prizes and winnings that are exempted from final tax are not items of gross
income subject to regular income tax,
exempt prizes and winnings:
1, Prizes received without effort to join a contest
9, Prizes in athletic competitions sanctioned by their respective national sports
association
3, Winnings from PCSO games, not exceeding P10,000 in amount
Summary rules of prizes and winnings for individual taxpayers:

._ Earned from sources
Within — _Abroad
Prizes:
P10,000 and below Regular tax Regular tax
More than P10,000 Final tax Regular tax
PCSO winnings, exceeding P10,000 Final tax N/A
PCSO winnings, not exceeding P10,000 Exempt N/A
Winnings from other sources Final tax Regular tax
The final taxation of prizes and winnings for corporations is not contemplated in
the NIRC. Hence, the taxable prizes and winnings of corporations are subject to
regular income tax.
Illustration
The City of Baguio held its Panagbenga flower festival. During the festivities, Mr.
Sebastien, the proprietor of Mr. Not So Fit Gym, won the P500,000 second prize in the
flower float competition. John Hay Corporation won the P600,000 first prize.
The City of Baguio shall withhold 20% final tax on the winnings of Mr. Sebastien. The
prize of John Hay Corporation shall not be subjected to a 20% final tax but to creditable
withholding tax. John Hay shall include the prize in its gross income subject to regular
income tax.
Pensions
These pertain to pensions and retirement benefits that fail to meet the exclusion
_ criteria and hence subject to regular tax.
297

—e—_
Inco
me
e Tax: Inclusion in Gross

. .
Chap ter 9 - Regular Incom

net income of the
share from the
Partner’s distributable Beng. i
professional partnershi p partnerships are Not sup
era l professional
It should be recalled that gen ins| tax or: regular income tax) because
' Jee,
(i.e ., fin al tax, cap ita l gains
income tax partners
nehe ne @ are the ones subj!
ugh entities.
merely viewed as pass-thro the net } f the general Prof lect
on their share in
regular tax Stig,
Oh
partnership.
of the general professional Partnersh
For this purpose, the net in come
include items of income whic h are exempted from final tax or capita] Bains x ‘ty
the general professional partnership.
Illustration Partnership |
and Sieg frie d prac tice thei r pr ofession in a general professional
Set hi
the following:
share profits 60:40. Their firm repo rted
Gross receipts P Popo ooo

Less: Professional expenses
P 800,000
Net income from operations
20,000
Interest from bank deposits
Distributive net income P__ 820,000
The share of the partners in the net income of the partnership shall be computed as.
Total distribution to Set (60% x P820,000) P 492,000

Total distribution to Siegfried (40% x P820,000) 328,000
Distributive net income P__ 820,000
The partners shall include their respective shares in their gross income subjectt
regular income tax.
Note that this rule applies to other pass-through entities such as:
1. Exempt joint ventures
2. Exempt co-ownership
Business partnership and taxable joint venture or co-owner
ship
These entities are subject to corporate income tax. The distributive share 0!
partner, venturer, or co-owner from the net income of these entiti
es, if organiz?
within the Philippines, is subject to 10% final withh
olding tax —
However, if these entities are organized or constitute
d abroad, the share ff"
their profit is subject to regular income tax for taxpayers taxable on
global incom
the final In ||
i j i i |
298

chapter 9 - Regular Income Tax: Inclusion in Gross Income
GENERAL CRITERIA FOR ITEMS OF GROSS INCOME

jrems of gross income subject to regular income tax are not limited to the
aforementioned NIRC list. Under the NIRC, the regular income tax has a catch-all
provision for all income derived from whatever sources that are:
4, not subject to final tax, capital gains tax, and special tax regime, and
2, not excluded or exempted by law, treaty, or contract from taxation.
OTHER SOURCES OF GROSS INCOME SUBJECT TO REGULAR INCOME TAX

1. Income distributions from taxable estates or trusts
2. Share from the net income of other pass-through entities:
a. Exempt joint venture
b. Exempt co-ownership
Farming income
Recovery of past deductions
DAP
Reimbursement of expenses
Cancellation of indebtedness for a consideration
Income Distribution from taxable estates or trusts

Any income distribution received by an heir or beneficiary from a taxable estate
or trust shall be included in his gross income subject to regular tax, provided that
such income must not have been subjected to final tax or capital gains tax.
Illustration: Estates
Roman is one of several heirs to the business estate of his father which is under
judicial settlement. The administrator distributed the following income for the
support of Roman:
Domestic dividends P 22,500
Business income 70,000
Roman shall include in his gross income subject to regular income tax the P70,000
distribution from business income. The estate shall present the same amount as a
deduction against its gross income. The P22,500 dividend shall not be reported by
Roman since this was already subjected to final tax at source.
Illustration: Trusts
Horace received the following income distributions in his capacity as beneficiary to an
irrevocable trust designated by his grandmother:
Net capital gains on sale of domestic stocks P 9,500

Rental income 12,000
Horace shall report only the P12,000 rental income in his gross income subject to regular
income tax. The net gain on the sale of stocks is subject to capital gains tax to the trust.
299

wn in Gross Inco me
e Tax: Incl n
us io
Chapter 9 - Regular Inc om
rsh;ipg
and co-ownersh
joi
of exemoa:pt joinf tS ve nt ur es
Share from the net income of 4
hare in the binet income f Che
The same tax treatm ent on recognition 0
rom the era)
net income of exe, mpt ii
: the share f
tne rsh ip app lies to
professional par
ventures and co-ownerships.
Farming income
ed as:
Farming operations can be classifi .
ise and sell operation ducts is inclu
. ihe Crocs a the sales of livestock or farm ene In entsOs,
ebibes 4 as Pres
ome tax. Ani mal rais ing
income subject to regular :inc e.
as items of deductions against gross Incom
se) {s en included , ss
2. Purchase and sell operat jon (sales less cost of purcha
The gross profit from the sale |
.
income.
‘ual or ca sh basis in accounting; for inven
tories of
Taxpayers may follow accrua ear basis discussed in Chapter 4 May
be
livestock or farm products. The crop y
.
used for recognizing income for long-term crops
rance constitute ,
It should be recalled that the proceeds of crop or livestock insu
s.
taxable item of gross income because they are recovery of lost profit
RECOVERIES OF PAST DEDUCTIONS

When past year deductions from gross income are subsequently recovered by the
taxpayer or when accrued expense previously deducted are subsequently paid at
an amount less than the deduction claimed, they should be analyzed whether or |
not they resulted in tax benefit to the taxpayer.
Examples of recoveries of past deductions:

1. Recovery of previously claimed bad debt expense
2. Refund of local tax expense
3. Refund of foreign tax previously claimed as deduction
4. Recommissioning of abandoned petroleum service
contracts or mining tenements
5. Release of reserve funds of insurance companie
s
6. Interest expense which were subseque
ntly condoned by the lender
Past deductions that created tax benefit to the taxpayer must be reverted back to
gross income in the year of recovery so that the
government will recover the tax
lost from the deduction.
Tax benefit
There are two ways a taxpay
er may benefit from a ded
a. Directly, through reduction of uction:
taxable income in the year deduct
ion is made
300
chapter g - Regular Income Tax: Inclusion in Gross
Income
of
indirectly, through reduction of future taxable i income through carry -over
net operat ing loss
Note:
1. Unde Sa arene mess of deductions over gross income in a taxable year is carried over
as a de loss san st the net income of the next three years of operation. This is called net
operating ry-over or NOLCO. Because of this, almost all prior year deductions have tax
penefit; hence, their recovery is taxable.
here because of its relevant to
2. NOLCO will be discussed in Chapter 13-B. It is partially discussed
the topic at hand.
illustration 1: With Net income in the year of deduction

A taxpayer incurred P60,000 bad debt expense in 2019 out of which P35,000 was
recovered in 2021:
2019 2020 2021
Net income before bad debt expense P 100,000 P 80,000 P 120,000
(Bad debt expense) /Recoveries (_ 60,000) - 35,000
P_40,000 P80.000 P 2777
Net income after bad debt expense
The entire P60,000 deduction in 2019 is a tax benefit to the taxpayer. Hence, the P35,000
recovery from this deduction is a tax benefit which must be reverted back to gross
income in 2021. The taxable net income in 2021 shall be P155,000.
Illustration 2: With operating loss & NOLCO carry-over before recovery

A taxpayer incurred a P90,000 bad debt expense in 2019 out of which P60,000 was
recovered in 2021.
2019 2020 2021
Net income before bad debt expense P 70,000 P 100,000 P 120,000
(Bad debt expense) /Recoveries (___90,000) - 60,000
Net income after bad debt expense (P__20,000) P 100,000 227?
Less: NOLCO application (_ _ 20,000)
Netincome P_80,000
The entire P90,000 deduction is a tax benefit. The taxpayer benefited by the P70,000
reduction in 2019 taxable income plus the P20,000 carry-over of NOLCO. The P60,000
recovery from the deduction in 2021 is a tax benefit subject to tax. The reportable net
income in 2021 shall be P180,000.
Illustration 3: With expired NOLCO before recovery

to pay the
Suppose a taxpayer deducted a P500 interest expense in 2017 but failed
same due to financial difficulty. The lender condoned the interest in 2021.
_2017_ _ 2018 2019 2020 2021
Income before interest P 100 (P 130) P 80 (P 160) (P 70)
Less: Interest expense (__500) = - 500
Net income (NOLCO) (P_400) (P_130) P 80 (P_160) P__22?
NOLCO application L____— (P___ 80) P22?
Net income PO
301

ncome
cl us io n in Gross I
Tax: In
gular Income
Chapter 9 - Re co me and the 2019
Pgg
t a x in net; ea,
a v e d th e 2 0 1 7 P10 0 pre- o o o o u t tax Boe in
é xpense s educted Oy ene a
The in terest
t e t h a t N O LCO can be d i e 0 Ph e
from taxati
on. No
ing NOLCO ex
pire p180. Hence, only P
e P320 remain‘ning th e taxpayer
3
€ pe )
fi
, te
it e d co me .
ion only bene be ne oss in
ecteded duct the 2021 gr
tineteerest be reve rted b ack to
re co ve ry in 2021 shall
) of recovery
in the year h P4sa,9
ra ti on 4: Wi t h oper a t i n g lo ss
ex pe ns e in 2020 out of whic 00 tp
II lu st bad debt
d a P90,000 ag
A taxpayer incurre __2021
vered in 2021. 2020
reco (P 15,000)
P 70,000
b ad debts/reco
very
(90,000) ___45,009
(p_20.000) P___2
co me / (lo ss) be fo re
Net in
ecover y
(Bad debt expense) /R
debt expense
Net income after bad tax abley
ex pi re d be fo re the beginning of the
O whi ch has not tax benefit. Thus, the
entire pgg Cr jp
An increase in NOLC tr ea te da s
which the recovery takes
p lace sh al l be
co vere d out of it is a
tax benefityy!
P4 5, 00 0 re
e, the
payer. Henc Ich
a tax benefit to the tax
gross inc ome in 2021.
must be reverted back to
The 2021 net inco me shall

be computed as follows:
(P 15,000)
Net loss before recovery 45,000
___
Add: Recovery 30,000
P
Net income
20,000
Less: NOLCO application - 2021
P 10,000
Taxable net income
. , net
2022.
2020 2021 2022

Net income before bad deb t expense P =P 120,000
( 0.000) P 100,000
(Bad debt expense) /Recoveries ! 60,000
Net income after bad deb t expense (P__20,000 ) P 100,000 227?
T he tax benefit
determined tisinrof th
thee P90,000
orf bad a expense to the corporation in this case shall be
Re-compute th € net Income j

i b adjujusti Pane a
. ofof deduction
ion asi as!
the subseque nt deduction r¢ ~in the year
tog is known. The donipute ded
to what was previously reported o determine the income that is Geli ktfrom5 vexati
saved taxa!"
302
Pe ereticeterere

c
assuming the future recovery is known, the 2020 net income should have been:
ASS
Net income before bad debt expense P 70,000

Less: Bad debt expense if recovery is known (P 90,000 - P60,000) 30,000
Net income if recovery known P_ 40,000
The tax benefit is the income that escaped taxation in 2020 computed as:
Net income if subsequent recovery is known P 40,000

Less: Net income as reported in 2020 (recovery is unknown)
—___0
Tax benefit of the bad debt expense
P_40,000
P40,000 out of the P60,000 recovery in 2022 constitutes tax benefits which must be
included in the 2022 gross income. The 2022 net income shall be P160,000.
Illustration 6: Taxpayer is exempt in the year of deduction

Kalinga Corporation is an exempt BMBE taxpayer in 2020 but became a taxable
regular income taxpayer in 2021. It deducted P120,000 bad debt
expense in 2020. In
2021, it recovered P40,000 out of the bad debts.
2020 2021
Net income before bad debt expense P 70,000 P 100,000
(Bad debt expense) /Recovery (__120,000) 40,000
Net income after bad debt expense (P_50,000) P_ 222
Deductions have no tax benefit to a taxpayer who is exempt
from tax. Future recoveries
from deductions made in the year of exemption are non-taxable.
The P40,000 recovery is
not income. The 2021 net income shall be P100,000.
Refund of non-deductible expenses

Expenses or payments which are non-deductible against
gross income in the
computation of taxable net income will never create tax benefi
t to the taxpayer. As
such, their recovery should not be included in gross income.
Hence, the refund of the following non-deductible items is not

taxable:
1. Philippine income tax
2. Estate or donor’s tax
3. Income tax paid or incurred to a foreign country if the
taxpayer claimed a
credit for such tax in the year it was paid or incurred,
4. Stock transaction tax in disposing stocks through the
Philippine Stock
Exchange
5. Special assessment
303

ula r Inc ome Tax: ion i in Gro ss Income
Inclusion
Cha pte r 9 - Reg
NTS OF EXPENSES ,
Coen ef the taxpayer that are reimbursed or paid by the Customer OF g,
ey |
vanstitute additional income to the taxpayer.
Bsanipies: hip costs of the lessor such as rea] Dro

1. When the lessee osc the erty, the payment constitutes income to the lesso, ty ||
and insurance on the property, é |
When a client reimburses the out-of-pocket exp enses o fa Profession |
practitioner, the reimbursements are Income
i to the prac titioner.
°
NCELLATION OF INDEBTEDNESS . .
the cancellation of indebtedness may amount to gratuity or payment OF income
The cancellation of debt:

a. In consideration of service or goods - treated as income
b. : - treate
Asan act of gratuity . ift; not as income
d as gift; not =i |
|
c. As capital transaction such as forfeiting the right to receive dividends in
exchange of the debt - treated as dividend income
SPECIAL CONSIDERATIONS IN REPORTING OF GROSS INCOME

Accounting methods
PWN Rp
Situs rules
|
Effect of value added tax
Creditable withholding tax
Power of the CIR to redistribute income
and expenses
ACCOUNTING METHOD
The accounting method adopte
d by the taxpayer has a
reportable amount of gross direct effect on the
income subject to regular
income tax.
f income included as items

PhilipPpinpi of gross
e ne j income exce
pt resii dent ciititi
tha t all ta xp ay er s are taxable only ©"
taxable on global in zens and domest
ic
come. co rporations which 7
304
BERRA

f
ror taxpayers taxable only on Philippine income, only their items of gross income
subject to regular tax from sources within the Philippines are included in gross
jncome.
ror taxpayers taxable on global income, their items of gross income subject to
regular tax from sources within and without the Philippines are included in gross
income.
integrative Illustration 1
Kj Lending, a finance corporation, lends to various clients:
Interest income from loans to Philippine residents P 400,000
Interest income from loans to non-resident clients 500,000
Interest income from bank deposits in the Philippines 20,000
Interest income from bank deposits abroad 10,000
Required:
Determine the total amount of gross income subject to final tax and the reportable
amount of gross income subject to regular income tax assuming the taxpayer is a:
1. Non-resident foreign corporation
2. Resident foreign corporation
3. Domestic corporation
Solution:
An analysis of the situs of the above income is shown below:
Within Without
Loan interest income P 400,000 P 500,000
Bank interest income 20,000 10,000
Total P420,000 P_510,000
The following are the amounts subject to final tax and the amounts to be reported in
gross income subject to regular income tax:
Subject to
Finaltax_ Regular tax
1. Non-resident foreign corporation P 420,000 P 0
2. Resident foreign corporation 20,000 400,000
3. Domestic corporation 20,000 910,000
Note:
1. Non-resident foreign corporations are subject to final income tax on gross
income within.
Philippine residents shall withhold 30% final tax on their gross income.
2. The interest income from banks in the Philippines is an item of gross income
subject to 20% final
tax. The gross income subject to regular income tax of resident foreign corporat
ions includes
only those earned from sources within.
3. Income from sources abroad, passive or active, are subject to regular income tax
for taxpayers
subject to tax on global income. The gross income of domestic corporations
includes items of
gross income subject to regular tax from sources within and outside the Philippin
es. Thus,
P400K + P500K + P10K.
305

a’
me Ta x: In cl us io n in Gross Income
r Inco
Chapter 9 - Regula
|
hen
on 2 during the year:
tegrative Illustrati the following details of income
had
certain taxpayer
500,
P 40 0008
0.00
ilippine clients
Service fees from Ph s
80.00
ign clie nt ane
Service fees from fore stocks directly to a buyer
stic 30/000
Gain on sale of dome
vi de nd s fr om do me stic corporations
Di
nk deposits abroad
Interest income on ba
. tax, fina] tay
Required: | nc om e su bj
a ec t to regular income and
of gross
Determine the amount IS:
ng that the taxpayer
capital gains tax assumi
(NRA-NETB)
4. an individual in trade or business
RA-ETB), a resident sh
not eng age d
a. Non-resident alien t rade or business (N et
engaged in
b. Non-resident alien zen (NRC)
nt citi
(RA) ora non-reside
c. Resident citizen (RC)
2. acorporation
corporation
3. Non-resident foreign
ation
b. Resident foreign corpor
c. Domestic corporation
Solution:
income is as follows:
An analysis of the situs of the foregoing
Within Without
P 400,000 P 500,000
Service fees
Gain on sale of domestic stocks 150,000
Domestic dividends 5,000
Interest income from foreign bank : 30,000
P_555,000 P_530,000
Total
The following : are the amounts to be included in gross income

i subject to final income
tax (FIT), capital gains tax (CGT), and regular income tax (RIT):
Taxpayers FIT
Individuals 7
; NAEP R P 405,000 P 150,000 P -
2 we -ETB, RA, or NRC 5,000 150,000 400,000
5,000 150,000 930,000
306

craptet g - Regular Income Tax: Inclusion in Gross Income
Taxpayers FIT CGT RIT

rporations
CoP REC P 405,000 P 150,000 P -
¢, RFC - 150,000 400,000
5. DC - 150,000 930,000
ote: .
; NRFCs and NRA-NETBs are subject to final tax on Philippine income.
2, The 5%-10% capital gains tax is the most universal rule in taxation that applies to all
taxpayers regardless of classification.
3. Inter-corporate dividends are exempt from final tax, except when the recipient is a non-
resident foreign corporation.
EFFECTS OF VALUE ADDED TAX ON REPORTABLE GROSS INCOME

remember that business taxpayers are required to either register as:
a. VAT taxpayers - if their sales or receipts exceeds P3,000,000 in the last
consecutive 12-month period
b, Non-VAT taxpayers - if their sales or gross receipts is below the VAT threshold
or are specifically designated by the law to pay percentage taxes
Every VAT taxpayer is mandatorily required to charge 12% output tax on their
sales or receipt. The regulations presume that the amount charged to customers is
inclusive of the 12% VAT. The output VAT will be paid to the government net of
the VAT paid by the taxpayer (input VAT) on his purchases. As such, the amount of
reportable gross income shall not include the output VAT.
Illustration 1: VAT taxpayers
AVAT-registered taxpayer charged P78,400 to a client for rental.
The VAT-taxpayer shall split the billing as follows:
Rental income (P78,400/112%) P =70,000

Plus: Output VAT (P78,400 x 12/112) 8,400
Invoice price Pp__78,400
Only the rental income is subject to income tax. The output VAT shall be recorded as a
liability. The collection of the rental is recorded in accounting as follows:
Cash P78,400
Rent income 70,000
Output VAT 8,400
Illustration 2: Non-VAT taxpayers

Anon-VAT taxpayer charged P78,400 to a client for rental.
Non-VAT taxpayers are not subject to VAT. The entire amount they charge for their sales
of goods or services is gross income subject to income tax.
307

come
cl us io
i o n n | Gross IN
In
Tax: In
9 - R e g u l ar Income
Chapter
H O L D ING TAX c o m e e ne against the
W I T H by i n
CRED
E
i n g ta xe s ( C W T) deducte d
c o m e . Th es e should bg Bros,,
ewwi thhold
creditable no t
ross in
exclusions in g me. CWTs are tax Cred
its th, de
y e r ar e
of the tax pa gross } tar
income
repo e amount
of
d u e of th e taxpayer. e
back to the me tax
ag ai ns t C
o n
he annual inco
deductible
ing:
; rep orted the follow
[Jlustration corporation,
, a no n-VAT domestic
Guimaras Inc. P 475,000
T 360,000
5% or p2 5, 00 0 CWT
Rent income, net of 40,000
of 10% or p40,000 cw
Professional fees, net 10,000
20% final tax
Interest income, net of j ration
,
500,000
Dividends from a
domes tic corporam
Business expenses
stil] due
d the 1e income tax d ue and
gross j come
in an
Re teir
Dequ in:
rmed e the tota | reportable
come tax.
under the regular in
be:
tot al re po rt ab le gr oss income shall
The P 500,000
P25K)]
/95% or (P475K + 400,000
Rent income (P475K + P40K)]
Professional fees [P360K/90% or (P360K p_900,000
P.
Total gross income dend income are subject .to fin
al tax. They should not be
ere st in co me and the di vi
Note: The int ular income tax
ss income subject to reg
included in the item of gro
d as:
l due shall be determine
The income tax due and stil
P 900,000
Total gross income __ 500,000
expenses)
Less: Allowable deductions (business P 400,000
Taxable net income
30%
Multiply: Corporate tax rate
P 12
Income tax due
0/000
Less: Creditable withholding tax
oe ional I f fees eng

-
Income tax still due ts Se a0
we
Note:
1. The e CWT. s are actually advances to the annual income tax due of corporations and
. . wit
individ :
e pro cedures are apP lied
(i.e. creditable) thereto. Sam
eir eincome tax due s are determine
aavtdule reent hetthetri : j S.
2. The fina] taxes should not be credited against the annual eae vex dadue. rire
creattable withholding tax and VAT

ainttaxpa
Pe vers shall revert back to gross income toamounts of withholding
customers 0 ie ing
tax but
m the amount of VAT charged r clients.
308

a
yustration 1
yAT taxpayer collected a total of P55,000 cash for services rendered, net of P1,0
vithheld tax by the client evidenced by a BIR Form 2307.
\
the VAT taxpayer shall compute his service income subject to regular tax as follows:
P 55,000
Cash received
1.000
plus: Withholding tax (BIR Form 2307) 0
00000
56,
P 56
invoice price (inclusive of VAT)
6.000
Less: Output VAT (P56,000 x 12/112) 5( 00
P_50,0
service fees (Gross income)
[Ilustration 2
AVAT taxpayer collected P85,600 rental from a lessee who withheld 5% creditable
withholding tax.
The VAT taxpayer shall compute his rent income subject to regular tax as follows:
Cash received (inclusive of 12% but net of 5% CWT) P 85,600
Divide by: (100% + 12% - 5%) 107%
Rent income (Gross income) P__ 80,000
The VAT and withholding tax are as follows:
Rent income P 80,000

Plus: Output VAT (P80,000 x 12%) 9,600
Less: Withholding tax (P80,000 x 5%) 4,000
Cash payments to the lessor P__85,600
POWER OF THE CIR TO REDISTRIBUTE INCOME AND DEDUCTIONS

In the case of two or more organizations, trades or businesses (whether or not
incorporated and whether or not organized in the Philippines) owned or
controlled directly or indirectly by the same interests, the Commissioner is
authorized to distribute, apportion or allocate gross income or deductions
between or among such organization, trade or business, if he determined that
such distribution, apportionment or allocation is necessary in order to prevent
evasion of taxes or clearly to reflect the income of any such organization, trade or
business. (Sec. 50, NIRC)
The Problem of Unfair Pricing between Associated Enterprises

There is a risk that the pricing of the transfer of goods and services between
associated enterprises will be controlled in such a way to further the interests of
the associated enterprises as a whole in disregard of their social responsibility on
taxes.
309

ef
a)
: Inclusion in Gross Income
Chapter 9 - Regular Income Tax
Examples: a ‘act to 30% corporate tax in the p,.

1. A domestic corpo ration which is n subject to
a tax haven © Philip.
country . where no incom
that operate s i Pig
idiary
has a subsidiary Pp n transfers goods to its foreign Subsidi ,
. tay ’
imposed. The domestic corporation |
cost SO ae income will so vi
transfer pricing based on production e recom
entire g
recognized in the Philippines while the
abroad where no tax is imposed. am
oa Nc a Se count . |
2. A foreign corporation subject to 10%
branch in the Philippines which is subject to the 30% corp come ta en
a pric ing met hod that wil]i allow Wve
The foreign corporation transfers g00 ds at mn
|
minimal profit for the Philippine branch to minimize exposure to highe, incon
tax. |
3. Mr. Wais has a business enjoying a tax holiday under ‘. Investment Promotig
law. Mr. Wais also has a business that is subject to regutar Income tax, My, Wai
to his exem
orders his taxable business to sell goods and supplies at ost
business thereby shifting the profits to the exempt business to save from income
tax.
The transfer pricing guideline .

Those enumerated scenarios are just a few of the problems in taxation brought
about by unfair pricing practices. To limit these unfair practices and to Properly
reflect the income of associated enterprises, the BIR and the Department of
Finance promulgated Revenue Regulations No. 2 series of 2013 (RR2-2013) on
transfer pricing.
What are associated enterprises?

Under RR2-2013, two or more enterprises are associated if one participates
directly or indirectly in the management, control, or capital of the other; or if the
same persons participate directly or indirectly in the management, control, or
capital of the enterprises. Associated enterprises are also called “related parties
Examples of associated enterprises:
1. Parent corporation and its subsidiary corporation
2. Sister companies or businesses owned by the same parent corporation
3. All corporations controlled under the same holding company
4. Businesses owned by the same person
The arm’s length principle

Under RR2-2013, transfer pricing between associated enterprises shall
be made
under comparable conditions and circumstances as those entered into betwee!
independent parties where market forces drive the terms and conditions of thé
transaction rather than being controlled solely by reason of special relationship
between the associated enterprises.
310

me
rer 9- Regular Income Tax: Inclusion in Gross Inco
chap .
rmined by free mane
t Seth e
forces,
er words, an uncontrolled pricing method dete
is preferred. The failure to comply may oe roper
in on jled arm’s length pricingng, adju
© oa transfer
also ayer prici stment where the BIR re-computes the P
, a
- ae of the associated enterprises.
jnc
applied to:
he arm's length principle shall be n associated enterprises
I * cross-border transactions betwee
d enterprises
2. Domestic transactions between associate
the taxpayer may enter nto oon
When operations are conducted cross-border,
pre-agree
pricing agreement’ with the BIR where a pricing rate 1s
«advanced
apply for a period of time.
a safety net (or
Although this is not a mandatory requirement, this may serve andas adjus
n tment an
er to avoid the risk of transfer pricing examinatio
the taxpay
the inconvenience it may possibly cause.
|
Transfer pricing methods
ociated enterprises do not reflect arm Ss
When the pricing methods between ass
lled transactions to their arm’s length
length pricing, the BIR will adjust the contro ering the
e of the following method consid
values using the most appropriat
circumstance of the taxp ayer :
The transaction is valued in
1. Comparable uncontrolled price (CUP) method -
ed transaction under
reference to the amount charged in a comparable uncontroll
comparable circumstances.
It
This method works best for standard tangible goods sold in an open market.
does not apply to products containing unique characteristics such as those
patented products or those containing trade secrets.
2. Resale price method (RPM) - The transaction is valued based on the functions
performed by the reselling party to the product. This is used when products
purchased from a related party are resold to an independent party.
3. Cost plus method (CPM) - The transaction is measured by valuing the function
performed by the supplier of the property or services.
4. Profit split method (PSM) - The profit or loss on the transaction is split based on
the division of profits (or losses) that independent enterprises would have
expected to realize from engaging in the transaction or transactions.
a. Residual profit split approach - Profit is first allocated to provide a basic return
appropriate for the type of transaction the participant is engaged in.
The residual profit after such allocation is further allocated among the parties
based on an analysis of how the residual would have been divided between
independent parties.
311

co me Tax ion n in| Gross Income
: Inclusio
Chapt er 9 - Re gu la r In
. : combined profits f
ccaciated enterprises in a sic
b. Contribution profi’ split apron
be ae Single
transact ions are divided lative contribution to the profit or the
t relatiy .Stag
based upon the parties’ re icipa
cti ons per for med by eac h of the associated enterprises Patt
of the fun °
in the con tro lle d tra nsa cti ons .
; method (TNM M) - This is similar to the cogt hs
5. j l net maarg
Transactiona rg in the sense that it uses the margin t approan angi
é arable uncontrolled
the resale price methods in TaNsactigy
ed in comp
reference to the operating profit earn
of the subject taxpayer th
When no comparatives can be derived within the industry
BIR may consider:
a. Extension of the trans fer pricing methods
using comparatives deriyeg fon
another industry segment
icing methods or other methods
b. Use acombination of the transfer pr
ing agreement .
Illustration 1: With an advanced pric
lly bills its foreign branch at i
The Crosby Manufacturing Corporation usua
the BIR which
however, it entered into an advanced pricing agreement (APA) with
% of cost.
fixed its cross-border pricing to its foreign branch at 150
Crosby compiled the following costs and sales during the year:
Philippines Branch
Sales through the branch (intra-company sales):

Sales P 7,000,000 P12,000,000
Less: cost of sales 7,000,000 7,000,000
Gross income P 0 P_5,000,000
Sales to unassociated domestic enterprises:

Sales P
3,000,000
Less: cost of sales 1,200,000
Gross income P_1,800,000
Total gross income P_5,300,000
Applying the APA, the gross income earned from within and outside the Philipp!"
shall be computed as:
Within Outside Total
Sales through the branch (1 intra-compan
y sales):
Sales *P10,500,000
0, Pp 12,000,000 p
“ess cost of sales 7,000,000 _10500 000 fy oon noo
ro ss income P_
3,500,000 Pp 1,500,000 Pp 5,000,000
312

Sas
er9 - Regular Income Tax: Inclusion in Gross Income

chapt
Within Outside Total
ales tO unassociated domestic enterprises:

sles P 3,000,000 P 0 P 3,000,000
ress cost of sales 1,200,000 0 1,200,000
cross income P_ 1,800,000 P 0 P_1,800,000
total gross income P_5,300,000 P_1,500,000 P6,800,000
ote: .
" The total income on the P12,000,000 sales is split between the Philippine gross income and
foreign gross income using the APA rate. The Philippine sales shall be measured as:
P7,000,000 cost of goods transferred and sold x 150% = P10,500,000. The amount
determined as Philippines sales shall be the deemed cost of sales of the foreign branch.*
9, The transfer pricing rule does not apply to transactions with unrelated parties.
Scenario 1: Crosby is a domestic corporation

Crosby shall report P6,800,000 gross income since Crosby is taxable on global income.
Note that the transfer pricing rule is only important in the measurement of the proper
income from foreign sources for purposes of the computation of the foreign tax credit.
Scenario 2: Crosby is a domestic corporation, and the foreign operation is not a

branch but a foreign subsidiary incorporated abroad
Crosby shall report P5,300,000 gross income. The income of the foreign subsidiary is
not taxable in the Philippines as it is a non-resident foreign corporation. Note the
importance of the transfer pricing rule in measuring the fair and proper amount of the
reportable gross income from within. The profits on the sales of Crosby to the foreign
affiliates could have escaped taxation without this rule.
The same procedures in this scenario will be applied if Crosby is a resident foreign
corporation.
Illustration 2: Without an advanced pricing agreement

Hot Corporation, a foreign corporation, sells cosmetics products in the Philippines
through its branch. The Philippine branch filed an income tax return reflecting the
following gross income:
Sales P 4,000,000
Less: Cost of goods sold 3,500,000
Gross income P__ 500,000
313
~~.

me Ta x: In cl us ion n iin Gross In come
io
In co
Chapter 9 - Regular ch. a m
. anof
Hichbr
rporPeatpiopnorIsgHbiOllning SIits
. ed that Hot Corp rg 20%
determin
Scenario 1: The BIR competitors of Ho
her
of cost. Meanwhile, ot Lee t distributors at an ave,ilQp
Philippine independen {ge
product lines are billing their a
of 150% of cost. income ta,
on for purposes of Philippine
Hot Corporat!of
The gross income of the ng voods sold as follows:
the cost
be restated by re-measuri
_ of x Cost P 3,500,000
000
H x
Cost of sales at 200% billing rate (i.e. 200 0% Cost) 21,750,
625,00 0
Cost to the selling party (P3,500,000/20 )
P1,750,000)
Cost at arm’ length price (150% x
ows:
of Ho t Co rp or at io n shall be restated as foll
Thus, the gross income
P 4,000,000
eae
1
th cost) Sine 000 2,625,000
Less: Cost of goods sold (arm's leng
Gross income
tal tax plus
assessment by the BIR for the incremen
Note: Hot Corporation will be given an ement.
may be due from this restat
penalties that
2: Hot Cor por ati on bills its bra nch at established market prices
Scenario
length pricing, no transfer
Since the transfer price of Hot Corporation reflects arm’s
pricing adjustment shall be made.
Selection of Transfer Pricing Method

risks of transfer pricing adjustments, taxpayers may also
To minimize the
consider using the transfer pricing methods used by the BIR in pricing their
transactions with associated enterprises. The taxpayer must support the propriety
of the method adopted through proper documentation.
PERIOD IN WHICH ITEMS OF GROSS INCOME ARE INCLUDED

The amount of all items of gross income shall be included in the gross income for
year in which received by the taxpayer, unless, under methods of
the taxable
accounting permitted, any such amounts are to be properly accounted for as of a
different period.
314

=_»
s
piscussion Question
1. Enumerate the NIRC list of items of gross inco
me.
2. What are the broad categories of gross income?
3. Discuss in detail the taxation of interest income. Which is subject to final tax?
Which is subject to regular income tax?
Discuss the treatment of gains from dealin gs in properties. Which gains are
subject to capital gains tax? Which gains are subject
to regular income tax?
Discuss the taxation of dividends.
OonnmM
Discuss the taxation of royalties.

Discuss the taxation of prizes and winnings.
Compare actual distribution and the share in the
net income of the partnership.
Which one is included in the gross income
of the partner?
9. Discuss the taxability of recoveries of past
deductions.
10. Enumerate examples of pass-through entities, Are they
taxable to final tax, capital
gains tax, or regular income tax?
11. Enumerate and discuss the transfer pricing meth
ods.
True or False 1
1. Imputed interest income is an item of gross
income subject to regular income tax.
2. Items of gross income subject to regular
income tax and Capital gains tax are
reportable to the government,
3. Rentis a passive income, but is not subje
ct to final tax.
4. The interest income from bonds issued
by banks is subject to final tax,
5. Gains from dealings in Capital assets are
generally subject to the regular income
tax.
6. The gross income from operations enjo
ying a tax holiday are included in gross
income subject to regular tax, but are pres
ented as deductions in the income tax
return.
7. The share in a business partnership
is subject to final tax, but the share in
general professional partnership is subject to a
regular income tax.
8. Gains from dealings in ordinary assets are
subject to regular income tax.
9. Items of passive royalty income are subje
ct to final income tax while items of
active royalty income are subject to regular inco
me tax.
10. Compensation income is an inclusion in gross
income subject to regular tax except
compensation income of special aliens.
11. The reportable gross income from business or
the exercise ofa profession is net of
the cost of goods sold or cost of services,
12. Items of income which are included in gross income subject to final tax are
excluded in gross income subject to regular income tax.
13. Advanced rentals are income in the year
received.
315
‘
ee
_ a"
me
Inclusion in Gross Inco
Chapter 9 - Regular Income Tax:
on the property if assumed by th, '
14. Real property tax and insurance SSe
constitute income to the lessor. pt 5
in gross income; hence, they are exem
15.Corporate winnings are exclusions Tom
inc ome tax.
ect to income tax.
16. Stock dividends are never subj
17. Pensions or retirement benefits are inclusio
ns in gross Income subject tor
income tax if the employee isterminated due to any cause within his contro}
sanctioned by the Philippine governmen,
18. Prizes in athletic competitions gross incon’
in gros s inc ome subj ect to final tax, but are inclusions in
exclusions
subject to regular income tax. '
Income subject to final tax but
19. Corporate prizes are exclusions in gross ; Te
regular income tax.
inclusions in gross income subject to
e tax.
20. Stock splits are never subject to incom
True or False 2 .
ery of deduc tion from an exemp t year is subje ct to tax.
1. The recov
ership is subject to
2. The distributable net income of a general professional partn
creditable withholding tax.
3. Exempt joint ventures and co-ownerships are treated as pass-through entities ang
are subject to income tax.
sion in gross
4. The distribution by the GPP of items of passive income is an inclu
income of the partner subject to regular income tax.
5. General professional partnerships are exempt from tax and hence, exempt from
withholding.
6. The share from the net income of a joint venture organized abroad is subject to
10% final withholding tax.
7. Income distribution from taxable estates and trusts is an inclusion in gross income
subject to regular tax by the heir or beneficiary.
8. The recovery of past deduction must be reverted back to gross income of
taxpayers using the accrual basis.
9. The recovery of bad debts need not be reverted back to gross income of taxpayers
using the cash basis.
10. General professional partnerships are not exempt from regular tax but are subject
to final tax and capital gains tax.
11. An indebtedness cancelled by the creditor out of mercy is an income to the debt’.
12. When there is a net loss in the period the deduction is taken, the subsequent
recovery of the deduction will not have any tax benefit.
13. The refund or recovery of non-deductible taxes shall not be reverted back to gf*
income.
14, The loss of the partnership can be claimed by the partners as deduction in the"
Income tax returns.
15. The accounting period of the taxpayer has a direct impact upon the amount°
gross income to be reported.
316

a g -- Reg
Regular Income Tax: Inclyuea,
USION :in Gross Income
ower Of the CIR to redistrip
16. tT a income between
affiliate enterprises,€ and expense j
pense includes the power to
iM ais of taxation has an im
he situs
it. qh gitable withholding taxes
°
‘8 cre ne
. amount of reportable gross
ne outp. ut VAT must be incl
0
:
uded as Part
{ te requirement to revert back of gross inco
to Bross income th me ofV AT taxpa
: yers .
20. lies only to VAT taxpayers, € amount of withheld taxes
lly,
Generally, all
§ items : of income of NRA-NETB and
" -aclusions in gross inc ome subject to final tax, ; fr
NRECs ilippi
the taxpayer must enter into an oe ait pines ere
adva nced pricing
12. cross-border transfer pric agreement with the BIR for its
ing with associated enterprises
3 Transfer pricing petween associated
enterprises must be made at arm’s leng
the transfer prici ng regulations app]
PPly onlyl to cross-border transf
th
24. services between associated : and
enterprises,
15 Corporations
=ap Of Boo n
under the direct and indirec t control of the
controlling same
individual or corporation are associated enter prises.
26. Under the accrual basis of accounting, items of gross inc
ome are reported in the
period they are received.
77, Basically, transfer pricing adjustment is needed w hen
the income reported for
Philippine taxation is understated.

|. Which item of gross income is not subject to regular tax?
a, Interest income from foreign bank deposits
b. Capital gain on the sale of bonds with more than 5 years maturity
c. Gain on sale of domestic stocks by a security dealer
d. Capital gain on sale of patent
2. Which is not subject to income tax?

a. Gain from sale of shares in mutual funds by the investor
b. Prizes in recognition of civic, religious, and artistic achievements
C. PCSO lotto winnings, not exceeding P10,000
d. All of these
3, Which is an item of gross income subject to regular tax?
@ Gain on sale of lot by a realty dealer
Interest income from bank deposits
a
Passive royalty income

Capital gain on the sale of domestic stocks
t Which is not an
a item of gross income subject to final tax?
Dividends from a domestic corporation
Prizes in excess of P10,000 by an individual
317

“ee
ol r
in Gross Income
!a%- Inclusion
Tax:
Chapter 9 - Regular Income nership
ral professional part
c. Share in the income ofa gene
d. Winnings ats is subject t© final tax?
Which of these employee pen file employees
5. ad managerial employees
a. Fringe benefits to rank an
b. Regular pay of supervisory @ and managerial employees
c. Fringe benefits to supervisory loyees
emp art
d. Regular pay of rank and file tax except one, 5
. subject to regu ar
6. All of these are items of gross income suv) Elect the
exception. osits
a. Compensation income
b. Interest income from long-term bank dep
c. Ordinary gain on sale of properties
d. Interest on notes receivables
‘ ?
is an inco me exem pt from income tax: hi
7, Which
partnership
a. Income ofa general professional
b. Foreign dividends «i
c. Taxes collected by the government
d. Income of government-owned and
income tax, except
8. All of these are subject to regular
a. Professional fees
b. Wages and commissions
_
c. Business income
nes
d. Capital gain from the sale of real property located in the Philippi
9. Which is exempt from regular tax?
a. Income from construction
b. Income of qualified pension plans
c. Income from merchandising or trading
d. Income from financing or leasing
10. Whi is Noon fee of compensation income subject to regular tax?

Director's fees
a.
Bonuses and fixed allowances
b.
Portion of salary contributed to SSS
C.
Portion of salary used to pay salary loans
d.
;
11. Which is included in the gross income subject to regular tax of a resident alien?
a Gross income from the sale of goods
abroad
b. Interest income from promissory notes of resj .
. relatives abroad resident clients
c Interest income from
Gain from the sale of domestic stocks directly to a buyer
318

Wy Bin
"E
se g- Regular Income
Tax: Inclusion in Gros
s Income
ch of the following deductions fr
{2 + nich
ort of gross
0 incom
.
e subjec
‘
t to regularom tax?
gross compe
pensation
;
incom
.
e ises included as
pag-Ibig Contributions c. PhilHealth Contributions
: contributions to union d. dues Withholding
tax
which interest income
is not subject to regular
tax?
; Interest incom
. e from notes . c. Interest from tradin
b Interest income from lending
accoun i
rgins
d. All of these 6 tmarg
pividends subject to regular tax includes
14
,, Foreign dividends c. Both aandb
p, Domestic dividends d. Neither a nor b
15. statement 1: All prizes earned abroad are subject to regular tax.
statement
2: All prizes in the Philippines are subject to final tax.
Which statement is generally correct?
a, Statement 1 c. Both statements 1 and 2
b. Statement 2 d. Neither statement is true.
16. Which is an item of gross income subject to regular tax?

a. Lottery winnings from abroad
b. Imputed interest income
c. Advanced rent representing security deposit for contingency which may or
may not happen ;
d. Leasehold improvements with useful life not extending beyond the lease term
17, Which of the following is not subject to regular tax of a domestic corporation or
resident citizen?
a. Deposit interest income from abroad
b. Prize not exceeding P10,000 from the Philippines
¢. Income from abroad exempt under treaty
d. Royalties from abroad
18 : Which is subject to regular tax to a non-resident foreign corporation
or non-
resident alien not engaged in trade or business?
4. Business income from the Philippines
Capital gain from the sale of stocks directly to a buyer in the Philippines
C, Dividends from domestic corporations
None of these
19,
Which is subject to regular tax to a resident foreign corporation?
’. Service fees abroad it
Gain from sale of real property capital assets in the Philippines
Dividends from a domestic corporation
Gain from dealings in properties abroad
319

7h.
;
o. m
Ta x: In cl us io n !n Gross Inco
gula r In co me
Chapter 9 - Re
mer .
e pr oc ee ds of li fe in su ra nce received c. by pa Sea .
20. Th
4. partly exempt and partly taxable,
;
a. pt om income tax.
exem fr
b. subject to final tax.
ry: Part 2 to progressive tax?

Multiple Choice - Theo is no t su bje ct
er
bh individual taxpay c. Resident
alien
ete citizen
: WORAETB d. Resident
b. : Special aliens
in gross income?
of th e fo ll ow in g wil l not be re ported
2. Which
a. Receipt of inheritance ofa foreign partnership
income
b. Share in the net
sources
c. Royalties from foreign
from a taxable estate
d. Income distribution
type of gross income?
3. Whichis nota reportable
a. Passive royalties
corporation
b. Dividends from a foreign
c. Rentincome the PSE
Cap ita l gai ns fro m the sale of domest ic stocks through
d.
r tax?
ch of the fol low ing is inc lud ed in gross income subject to regula
4, Whi
ole um service contractors
a. Sub-contract income from petr
securities
b. Interest income from government
co-ownership
c. Share in the net income of a taxable
d. Farming income
5. All income earned abroad that would otherwise be subject to final taxes if earned
within the Philippines shall be subject to progressive tax ofa
a. domestic corporation. c. resident alien.
b. resident citizen. d. all taxpayers.
6. All items of passive income earned abroad are subject to regular tax to
a. aresident citizen only.
b. adomestic corporation only.
c. aresident citizens and domestic corporations
d. all taxpayers. '
7. Which corporate taxpayer is not subject to regular tax?

:
a. Domestic corporation c. Busi ness partnership:
. d. Non-resident foreign corporation
b. Resident corporation
8. Individual taxpayers shall report their income on
a. a fiscal year. ; eons ; Bscal or calendar year.
b. acalendar year.
: r
320

corporations are al
lowed to report th
eir income on
9. * a fiscal year. c. either a fiscal
p, acalendar year. d. a crop year. Year or calendar year.
nich is subject to progressive tax to an indiv
10. : proceeds of life insurance Policy idual taxpayer?
Gift .
6 Amounts received by the insured in exce
ss of premiums paid
4, Compensation for personal injuries
44, Which of these is subject to Philippine regular
‘4 Rentincome on properties loca income tax to a foreigner?
ted abroad
b. Dividend income from a dom
estic corporation
c, Interest income on a deposit abroad
q. Interest income from domestic bon
ds
12. If not covered by the substituted filin
& System, employed individual taxpayers
shall report their regul ar income
3, monthly. c. quarterly,
b. annually. d. quarterly and annually.
13, Corporations and individuals engaged in business or in the exercise of a
profession are required to report their regular income
a. monthly. c. annually.
b. quarterly. d. quarterly and annually.
14. Which is incorrect concerning transactions between associated enterprises?
a, Transactions between related parties should not be controlled.
b. Pricing should be determined by free market forces,
c. Pricing should be motivated by the need to save from total income tax.
d. Non-arms’ length pricing between related parties may be restated by the BIR
to reflect the arms’ length value of transactions.
15. Which is not an associated enterprise to the controlling individual of a holding
company?
a. An associate ofa subsidiary in the group
b. The parent company
¢ Adirect subsidiary company
A subsidiary of a subsidiary in the group
Bong, a professional practitioner, a
received the following from his
clients:
*dvances for future services to be rendered P 30,000
Ollections for past services rendered
70,000
“mbursements for client expenses
a8 eng
“imbursement for out-of-pocket expenses 10,00
321

“4
|
. . . ncome
in Bong’s
How muc h will be included ay
2
Cc. P110,000
a 150,000
d. P100,000
b. P140,000
income in 202].
em pl oy ee , re ce ived . the follow ing
2. Mr. Darlow,a supervisory
ome, befor e contribut
ions
Gross compensation inc P1 24 ,0 00 P ou nee
and HDMF totaling
to SSS, philHealth, 006 000
Fringe benefits a
shares ina mutual fund
Gain from redemption of
Commission income 400,000
PSE
Gain on sale of stocks through the
reported b y Mr. Darlow in gross income,
Determine the total income to be
a. P1,526,000 c. P1,026,000
b. P1,426,000 d. P 826,000
during the year:

Aldrin, employed, derived the following income
Gross salaries P 400,000
13 month pay and other benefits 40,000
SSS, PhilHealth, and Pag-Ibig contributions 20,000
Deductions for loans repayments 50,000
Deductions for withholding tax 60,000
Compute the compensation income to be reported in the annual income tx

return.
a. P440,000 c. P380,000
b. P330,000 d. P390,000
Mark resigned
during the year i 2021 after 12 years of service.
: She had the following incom:
Salary, net of P80,000 withholding tax, P20,

000 SSS
P18,000 Philhealth and P40 th
Separation pay Pia it peonth pay P 480,000
1,000,000
Tytheey
i
Compute the gross income sub . .
a. P1,480,000 © PS6D 000 Cresta) tax,
P1,560,000 d. P480,000
:
n the Sales
fA :
Sales
Cost of sales P3,500,000

ca
TOSS profit 2,000,000
P 1,500,000
322
— ee

Commission income on consignment 200,000

Interest income from customers 20,000
Interest income, net of final tax 10,000
pividend income 50,000
Total Income P 1,780,000
Less: Admin & Selling Expenses 1,000,000
Net income P780,000
Compute the total gross income subject to regular tax.
qa. P1,720,000 c. P1,780,000
b. P1,770,000 d. P 840,000
6. Cordova, Inc.,a domestic corporation, reported the following income in 2014:
Philippines
= Abroad
Service fees P 400,000 P 300,000
Interest income - bank 40,000 70,000
Royalties — franchise 80,000 30,000
Compute the total gross income subject to regular income tax.

a. P920,000 c. P800,000
b. P860,000 d. P700,000
7. If Cordova Inc. is a resident foreign corporation, compute the gross income subject
to regular tax.
a. P520,000 c. P400,000
b. P480,000 d. P440,000
8. Lenj leases a building to a client. During the year, he received the following
remittance from the lessee:
Rental, net of 5% creditable withholding tax P 1,900,000

Real property tax of the leased building 50,000
Reimbursement for utilities used
by the lessee paid by Lenj 200,000
How much will be included in gross income subject to regular tax?

a. P2,050,000 c. P2,000,000
b. P2,250,000 d. P1,950,000
9. The Big Bird Security Agency (BBSA) received P3,000,000 from its clients.
P2,400,000 of this was designated for salaries of guards assigned to various client
establishments.
How much will be included in the gross income of BBSA?

a. P600,000 c. P3,000,000
b. P2,400,000 d.P 0
323

Gross Income
gu la r In co me Tax: Inclusion in
Chapter 9 - Re ||
! 0,
0 was0
It 0 disc,
ter .
la0
an agricu ltural l ot for P1,0 increa sed to P4,000,99,,
V
<"*
iv er s, Inc . urchased its fair value 00, Tris
10. Dr
ld depo si ts . Th u is
that the lot ha : d go taxable.
increase in fai
r value is
lly exem pt
and partially
tax . C. pa rt ia
come
exempt from in
a.
tax. d. Any of these
b. subject to income the following
beef meat. In 2021, it reported
Company produces .
11. Northern Cattle 600,000
P 300,000
Sales of live cattle 300,000
Sale of young feeders ,
value of cattle inventory
Increase in
tax.
subject to regular
Compute the income c. P900,000
a. P1,100,000 d. P600,000
b. P800,000
in 2021:
Don Juan Ponce has the following income
12.
P 400,000
Sales from vegetables 200,000
Sales fro m fru its 35,000
for P30,000 in 2021)
Sales of carabao (acquired
s on the sale of
Interest income from tenant
the Agrarian
agricultural land pursuant to 12,000
Reform Program
ssive tax is
The gross income subj ect to progre
a. P647,000 c. P600,000 |
b. P617,000 d. P605,000
which will pay him P100,000a
13. Mr. Roding purc hased a life annuity for P1,000,000
year. What will Mr. Roding include in his gros s inco
me on the 11" year of the
policy?
a. P1,000,000 c. P200,000
b. P100,000 d. P1,200,000
14. Jerry purchased the life insurance policy of Paulo for P50,000. He continued the
policy by paying P20,000 premium after which Paulo died. Jerry collected the
P500,000 proceeds of the policy.
How much will Jerry exclude from his gross income?

a. P500,000 c. P70,000 ;
b. P430,000 d.P 0
15. Mr. Vhi , wee. tah Le ying
r. Vhinson insured his life with his children as beneficiaries. He died after P*
P200,0 00 premiums.
j His children
i collected the P1,000,000 life insural®
proceeds.
324

How much will be excluded from Mr. Vhinson’s gross income?

a. 800,000 c. P200,000
bp. P1,000,000 d.P0
16. Pedro’s crop was destroyed by incessant rains. He received P2 00,000 from an
insurer that insured his crop, The proceeds of the insurance is an
a. item of gross income subject to regular tax.
pb. item of gross income subject to final tax.
c, exclusion from gross income.
d. exempt income.
17. In 2021, Northern Crest Corporation (NCC) reported a P40,000 recovery from bad
debts that was claimed as deduction against gross income in 2017. In 2017, the
write-off increased the operating loss of NCC to P50,000. NCC was very profitable
from 2018 to the present. How much of the P40,000 recovery is subject to tax?
a. P60,000 c. P40,000
b. P10,000 d.P 0
18. West Oil abandoned an oil facility in 2021 and expensed the P300,000
unrecovered investment in the facility as abandonment loss. The 2021 taxable
income before provision for the loss was P100,000. West posted continuous losses
until 2024. With increasing prices of crude oil in 2025, West re-commissioned the
facility for use. How much will be included in its gross income in 2025?
a. P300,000 c. P100,000
b. P200,000 d.P0
19. Sarah Baby International graduated from its income tax holiday incentive and is
effectively subject to tax beginning 2020. In 2021, it collected a P4M from a P6M
receivable which was written off as bad debt expense in 2018. Before the write-
off, Sarah International had P1M profit. Sarah posted profits in 2019 and 2020 in
excess of its operating loss in 2018.
Compute the amount of recovery subject to regular income tax.

a. P6,000,000 c. P4,000,000
b. P 1,000,000 d.P0
20. In 2021, an accrual basis taxpayer received a cash refund for an income tax
assessment which he paid in 2017 consisting of the following:
Basic tax P 40,000
Surcharge 10,000
Interest 4,000
Total taxes paid p__54,000
How much must be reverted back to gross income in 2021?
a. PO c. P10,000
b. P4,000 d. P44,000
325

come
Tax: Inclusi on in Gross In
Chapter 9 - Regular Income
benefit if the ring
_— b .
:
p rob lem , co mp ut e the tax
ing
21, In the immediately preced
tax.
of local tax instead of income
iy
c. P10,000
a. P44,000
d.P0
b. 4,000
local tax expense Which
taxpayer reco vered
a P20,000 eae
22. An accrual basis
. ax expense was paig ;
Was
| government in 2021. The loca
refunded by the loca’ a P5,000 net operating loss. How much shalt
when the taxpayer sustained be
reverted to income?
a. PO c. P20,000
b. P5,000 d. P15,000
23. A taxpayer under the cash b asis wrot

e-off P50,000 receivables in 2021, , 20
vered. 6
P30,000 of the receivables was reco
s income in 2026 assuming that
Determine the amount to b e included in gros
000 in 2021.
taxpayer incurred a net operating loss of P40,
a. PO c. P30,000
b. P10,000 d. P40,000

1. An alien employee in an RHQ had the following in 2021:
Gross compensation income P 1,500,000
Contributions to SSS, PhilHealth, and HDMF 150,000
Creditable withholding tax 202,500
What is the total amount to include in gross income subject to regular income tay?
a PO c. P1,350,000
b. P1,147,500 d. P1,500,000
Mr. Cordillera owns 20% interest in a joint venture engaged in construction
Be — me joint venture reported profits of P500,000, inclusive of
e2o0n i
rom time i
deposits. Compute the total income to be reported in gros
income of Mr. Cordillera?
Po 00
a P4,0
b.
c. P96,000
d. P100,000
3. Mr. Buaya, with 14 dependent children, had the following data

for his incometat |
return in 2021:
Sales
Te 00
Cost of sales
a
Ay taxable compensation
ee
ministrative and selling expen
Personal expenses _ Tae,000
OO
326

chapter 9 - Regular Income Tay: INClusion IN Grogs
Inco me
what is the net income?
,, P170,000
CP 100,009
5, P290,000 d.P 20,000
ompute the taxable
compensation income
_ (P150,000) .
C.P 90,009
p. (P30,000) d.P 120,009
Compute the taxable inco
me,
5: ~ P10,000
c.P 140,009
b. P100,000 d. P 260,000
«. Vhinson and Khim practice
. professional thej
partnership.
T]
Gross receipts
Less: Cost Cos of services
2 P 4,000,000
Soon
Gross income from operations Poder
Add: Other non-operating income ,
Gain on sale of equipment
P 100,000
Interest on time deposits
40,000 140,000
Total gross income
*
P 2,340,000
1,200,000
Net profits
P_1,140,000
What is the reportable income in the
tax return of Vhinson?
a. P1,170,000 c. P550,000
b. P500,000 d. P570,000
7. In the immediately preceding problem,
determine the amount of income to be
reported by Khim assuming that their partners
hip is a beauty parlor.
a PQ c. P550,000
b. P570,000 d. P500,000
In the immediately preceding problem, what is the amount to
income assum
include in gross
ing the employee is a Filipino rank and file employee?
a PQ c. P 1,500,000
b. P 1,147,500 d. P 1,350,000
% A Corporation had the following gains from dealings in properties
:
Sale of delivery truck P 150,000
Sale of domestic stocks
50,000
Sale of 3-year corporate bonds
12,500
Sale of 6-year corporate bonds
7,500
327

SOLO —
Income
gu la r In co me Tax : Inclusioion n i in Gross
Chapter 9 - Re
be included in gross income?

° ; ?
ain to
What is the total amount of g
c. P 170,000
a. P 150,000
d, P 212,500
b. P 162,500
perties:
pil ation of the g ain on the sale of real pro
10. Shown below is a com
pines. __ Abroad__
Real properties classified as p lip
Phi 300,000 P 800,000
Ordinary assets 400,000 200,000
Capital assets
. id j oss income subj
nn
What is the amount of income to be includedic' incorgrporation: ect to "EB ulas
the tax pay er Is a do me st
income tax assuming
a. P 1,300,000 c. P 1,700,000
b. P 1,100,000 d. P 300,000
ar income tay ifthe
11, What is the gain to be included in gross income subject to regul
taxpayer is a resident foreign corporation?
a. P 300,000 c. P 700,000
b. P 400,000 d. P 1,100,000
12. What is the gain to be included in gross income if the taxpayer is a resident alje,
a. P 700,000 c. P 300,000
b. P 400,000 d. P 1,100,000
13. A taxpayer collected the following passive income during the year:
Passive income Philippines Abroad

Interest income from banks P 300,000 P 800,000
Royalties from books 200,000 100,000
Rent of properties 400,000 200,000
hts
What is the am ount to be reported ini gross income
i ifj the taxpayer is a resides:
a. P 900,000 c. P 1,500,000
b. P 1,100,000 d. P 2,000,000
14. In the immediately —
; preceding: probl
gross inco™
is the reportable
are the taxpayer isa resident allen? what
h P9000 cP. 600,000
| mee d. P 400,000 {
15. In 2021, , the

the taxpayer receivi ed the
following prizes and
winnings: .
.
rizes gs
Winnings
I ( aad
P 10,000 P 400,000
| 400,000 100,000
328

chapter
g - Regular Income Tax: Inclusion in Gross Income
what is the reportable item of gross income if the taxpayer respectively is 4

resident citizen and a non-resident citizen?
~ p500,000;
P0 c.P0; P500,000
b. P 510,000; P 10,000 d. P 910,000; P 410,000
What is the reportable item of gross income if the taxpayer is a domestic

16.
corporation and a resident foreign corporation, respectively?
a. P500,000; P 0 c. P 910,0 P 00;
410,000
b. P510,000; P 10,000 d. P 500,000; P 10,000
He made a total sales of

17. Mang Sipalay registered his business as a BMBE.
p500,000 and incurred cost of sales of P400,000. He also earned P10,000 interest
income from time deposits. What is the total reportable gross income?
a. PO c. P 100,000
b. P 10,000 d. P 110,000
18. Boracay Company is registered as a TIEZA locator subject to 5% gross income tax.
During the year, it made a total P400,000 gross receipts from various tourist
assistance services. It also incurred P210,000 in direct services.
What is the amount to be included in gross income subject to regular income tax?
a PO c.P 210,000
b. P 190,000 d. P 400,000
19. Mr. Siayan is a 5-6 lender. During the year, he granted loans totaling P2,000,000
and collected P400,000 in interest. He also earned P8,000 in temporary
investments in domestic bonds plus additional P6,000 from bank deposit
substitutes. Direct cost of lending was P100,000.
What is the total amount to be reported in gross income subject to regular tax?
a PO c. P 414,000
b. P 300,000 d. P 308,000
20. Mr. Cartilla received the following royalties from the following sources:
Mining claims P 150,000
Novel, “Alicia in Wonderland” 250,000
Basic Accounting textbook 80,000
Musical composition “Dayang-dayang” 40,000
What is the total amount to be reported in gross income?

a PO c. P400,000
b. P150,000 d. P520,000
329
LS

= -
fics
- a Sees
me
NN
n
n
|
R egu a
Chapter 9 -
Par 3
ce - Problems: . Part VAT and net of 10% or |
inclus ubject to regular tax. Teditiy,
multiple che" eceived p45,900 ince es
1, AVAT tap compute the gross
cP 45,536 | ¢
withholding (2% ,
. P e300 d. P.51,000
b. P42 ‘nesses and partnersh;
puss parnerships He |
has several interests in various |
p 120,000
during they
* Mrs ed the following income 000
: oration
a domestic corp
~vidends from ion 80,
forelgn oa oe nlp 200,000
yr dends from a resident
fa business pa | partnership 100,000
come O
Share in net in ojona
th e net i n c o me of a professl
Share in
0n
,0e 0di
0rt gross income?
to ta l in
in co
co me to be | rePpo
whe :i the
d. P180,000
b. 380,000 r fa th er fo r her support. ; During the
fr om he
P200,0 00 a Ttes
3. , rece
Ms. Peay oo rece iveda total
ived a P150,000 total distribution from the trust Irrevocably
ived PP120,000 income
ceived
rece
year,gnated by her grandfather in her favor. She also lement,
desi
rn the est ate of her gr an dm other undergoing judicial sett
distribution po
come?
at is the tot al am ou nt to be included in her gross in
Wh
P200,000 c, P350,000
a.
b. P270,000 d. P470,000
Compute the
4. Anon-VAT taxpayer collected P45,000 net of P5,000 withholding tax.
gross income subject to regular tax.
a. P5,000 c. P 45,000
b. P 40,000 d. P 50,000
5. A VAT taxpayer collected P66,600, inclusive of P7,200 VAT and net of P600
withholding tax. Compute the gross income subject regular income tax
a. P59,400 c. P 66,000 |
b. P 67,200 d. P 60,000
6. A non-VAT taxpayer collected P79 200, % wi

amount subject to regular income tax? i
eta "
a. P 71,351 c. P 80,000
b. P 71,429 d.P 79,200
7. A non-VAT. tax
j ‘
; P8000
000 interest. payer
j ings received a of op fi fina |
20%
withholdi ing tax, Compute the amount subject to repuilar
a. PO me tax.
b. P6400
, d.
8000
P10,000
|
330

seat
9° Regular Income Tax: Inclusion in Gross Income

cna?
te
ene receivted P18,000 dividend, net of

the amoun 10% final
A TOES
8, wit pnolding ta*- c.P 17,857 subject to regular j
gular income tax.
a 17,647 d. P 20,000
resident foreign perverts taxpayer entered into an advanced pricing

a reement (AP) wien 7 e BIR with respect to the pricing of its export sales to a
foreign country. 4 mark-up ratio of 50% of the cost is set in the APA. During the
ear, the corporation manufactured goods costing P12,000,000 and exported 80%
ofthe production to its foreign affiliate at a price of P12,000,000.
nat is the amount of gross income subject to Philippine tax?

- 2,000,000 c. P 2,400,000
b. P 4,800,000 d. P 6,000,000
10. Ms. Nene Bing registered a manufacturing business as a BMBE exempt from tax.
she also owns another taxable business which is engaged in the trading of goods.
Ms. Neneng Bing ordered her BMBE business to sell its production to her trading
business at ultimate sales prices.
You were tasked by your audit supervisor to conduct a transfer pricing evaluation
of Ms. Bing’s businesses. Based on your study, you determined that the retail
profit rate (on sales) of trading businesses with similar operations involving
similar goods is 40%. During the year, the trading business made a total purchases
of P400,000 from the BMBE and sold 75% of these for P500,000.
What is the gross income of the trading business to be subjected to regular income
tax following the arms’ length principle?
a PO c. P 200,000
b. P 100,000 d. P 120,000
331

i's aba epee ws
me
o m p ensation Inco
C
Chapter 40 -
ue
10
CHAPTER INCO
ION
COMPENSAT
|
nte t
na |
eaenre ta
e e e e e nceenr
Chapter Ove
rview and O
bjectiv e s
r e d as c o m p e n s a tion ‘ma
conside * t
llts ats ©
a x a b l
T
nncusses the emy e e be ne
vnieeenrteris
p l oy It a
S e su bject oagular ingy®
es: and
pes ofen emthpleoyceompensation A
on
l e s t h e t y
ra e gap betw
e it tax.
a in ates th su bj ec t to fringe bene
benefits
x and the fringe
taa to d emonstrate
:
xpected loy er- e mployee relationship
are XP
thes concept of anof em
After this chapter,: reader ploy
employees and the tax treatment
of the |
Understanding of th 2
1.
th e cl assifications
j
Knowle d g e of benefits speci |

2.
sa ti on in co me and fringe € xe mp te d un der the NIRC and |
compen of em pl oy ee benefits |
e li st
Mastery of th .
3.
an d th e de mi ni mi s li st
e m p l o y e e be nefits under treay
laws ption of
ow le dg e of th e condition for exem .
4. Kn . rule and th,
agreements nvenience”
or international “e mp lo ye r co
the concept of
5. Understanding of ” ru le . -
rner
“necessity of the em
pl oy er
em pt io n o f a m inimum wage ea
ex
the conditions of xable compensation
6. Understanding of r it em s of gr os s ta
sification rules fo
7, Knowledge of the clas
income
it io n 0 € “13th month pay and other benefits” for rank and
Mastery of the co mp os
8.
ee s and ma na ge ri al or su pervisory employees
file employ gular tax and fringe benefits
benefits subject to re
9, Comprehension of the fringe
subject to fringe benefits tax
|
EMPLOYER-EMPLOYEE RELATIONSHIP
al performs any service0 f
Employer - refers to any person for whom an individu
whatever nature as employee of such person.
An employer is the pers on who has control over the payment of the employee |
|
rem uneration.
i However, ifi such person isi a non-resident not engaged in tr ade of
ppines, the
business in the Philippi i I
remuneration in their behalf. employer 1s deemed Se ew ee
who is a recipient of wages and includes

a
Empl
off r ee
iceoy
re
¢ ssi-itv es cr la Agata
° the Go ve rn me nt of the Philippines any
) on in
political subdivisions sone
an officer ofa corporation. strumentality thereof. The term also inc! e |
332

Income
na pt er 10 - Compensation
C
oy er an d em pl oy ee re la tionship under case law:
glements of empl of employees - There is a screening process for
Selection and engagement
I, employees to hire.
payment of
Payment of wages - The employer usually fixes and controls the
wages:
ate employees
3, Power of dismissal - Employer has power to retrench or termin
when incurring heavy losses or other reasonable basis.
4, Power of control - The employer has power to control the employee on the
means and methods by which the work is accomplished.
An arrangement which do not manifest all the elements is not an employer-

employee relationship but an independent contract for the provision of services.
The following are not considered employees:

{, Consultants
2. Directors without management function
3. Talents and artists on TV shows or radio broadcasts (Sonza vs. ABS-CBN
Broadcasting Corporation, G.R. No. 138051)
The income or fees of these individuals are not compensation income but are
business or professional income.
TYPES OF EMPLOYEES AS TO FUNCTION

1. Managerial employees - Those who are given powers or prerogatives to lay
down and execute managerial policies and/or to hire, transfer, suspend, lay-
off, recall, discharge, assign or discipline employees.
2. Supervisory employees - Those who effectively recommend such managerial
actions if the exercise of such authority is not merely routinary or clerical in
nature but requires the use of independent judgment.
3. Rank and file employees - Those who hold neither managerial nor supervisory
functions.
TYPES OF EMPLOYEES AS TO TAXABILITY

1. Minimum wage earners - Employees who are recipients of minimum wage.
They are exempt from income tax on their compensation.
2. Regular employees - Employees who are subject to the regular progressive
income tax.
It must be noted that the “special alien” classification was removed into law by virtue
of a presidential veto to the TRAIN law. The special alien under the old law must be
treated as regular employees.
333

So a
—_<
tion Income
Chapter 10 - Compensa
er
Minimum Wage Earn to a wor ker in the private sector
who is
wage earner re fer s
A minimum ee in the public sector
with compensati, Paid
employ ge (i.e. ’those with Salary grad ing.
minimum wage or to an im um wa
utory ™ jn
of not more than the stat he or she is aSSI§ ned.
e ly. |
ct or wh er e
in the non-agricultural se
nimum
The statutory minimu wage refers to
g Department
rate fixed ofby Labor
the Regioandnal Employer,
,Tripartite, hy
en 8
d Productivity Board of the
P5,000/month 3 P60,000/year, whichever is higher
Or
MPENSATION INCOME
THE TAX MODEL ON CO
P sot aitX
XXX,XX
Gross compensation income — a
on
Less: Non-taxable compensati |
P_XXx,XXxxX
GROSS COM PENSATION INCOME ludes all remunerations receiyeg ag |

Gross compensation income generally inc et)
an employer-employee relationship.
|
NON-TAXABLE COMPENSATION
A. Mandatory deductions .
These includes employees’ mandatory contribution to GSIS, SSS, PhilHeale,
HDMF, and union dues
B. Exempt benefits |
1. Benefits excluded and/or exempted under the NIRC and special laws _|
2. Benefits exempt under treaty or international agreements
3. Benefits necessary to the trade, business, or conduct of profession of the|
employer
4. Benefits for the convenience or advantage of the employer
EXEMPT BENEFITS UNDER THE NIRC, AS AMENDE
D, AND SPECIAL LAWS
1. Remunerations received as incidents of emp
loyment
a. Exempt retirement benefits under RA 7641 includin
g exempt retiremet!
gratuities to government officials
and employees
b. Exempt termination benefits
“ counts from the United States
Veterans Administration
: security, retirement gratuitie s,
pensions, and simi
eeu
lar benefitsf rom|| |
wo
=
oO
=
3
>
a
©
Oo
Qu
WY
—
3
~
oa
=
3
oD
cD
a
ea
—
=
om
oad
—;
—~/
>
QO
oO
OO
°o
“I
—
Qu
Qu
pe)
pe)
~n
oO
=
=
©

"a5
10- Compensation Income
naP ter p. Actual Hazard
Duty Pay
Compensation paid to prj
contracted COVID-19 ;
; minimis benefits
}. 43° month pay and other benefits not exce
ed
3. ce rtain. benefits _ ing P90,000
of minimum Wage earners
jnimis benefits
; minimis benefits are; facilities or
a sdwill, contentment, or efficiency of hi

0 , of promoting the health,
) atty fringe benefits exempt from income tax .
ss originally conceived, other petty fringe benefits which fall within
ifde minimis even if not part of the de mi nimis list are the purview
ninimis and are also exempt from income t nor mal ly treated as de
ax,
However, the BIR and the Department of Fina nce changed the
rule under RR5-
2011, as last amended by RR 11-2018 wherein the term “de minimis
benefits” was
restricted to mean only the following:
|, Monetized unused vacation leave credits of
private employees not
exceeding 10 days during the year
2, Monetized unused vaca
andtion
sick leave credits paid to government
officials and employees
3, Medical cash allowance to dependents of employees not exceeding P1,500
per employee per semester, or P250 per month
4, Rice subsidy not exceeding P2,000 or 1 sack of 50-kg rice per month
amounting to not more than P2,000
5. Uniform and clothing allowance not exceeding P6,000 per annum (RR11-
2018)
Actual Medical Assistance, e.g., medical allowance to cover medical and
healthcare needs, annual medical/executive check-up, maternity assistance,
and routine consultations not exceeding P10,000 per annum
Laundry allowance not exceeding P300 per month
Employee achievement award, e.g. for length of service or safety
achievement, which must be in the form of tangible property other than cash
or gift certificates, with an annual monetary value not exceeding P10,000
received by the employee under an established written plan which does not
discriminate in favor of highly paid employees.
335
ARR AR te een

sation Income
Chap ter 10 - Compen d major nu anniversary celebrati
on,
r an m (i.e., Christ ma s gift Dag
i ng Christma s an
9, Gifts given dur ee Pe
exceeding P5,00 0
per employ nq
ve rs ar y gif ts) f
anni t or graveyard shi
ertime ¥ vork ande nigh
.
al lo wa nc e fo r ov on a per region basis ict
i meal
10. Daily n i m um wag
% of the b as ic m i
exceeding 25 &
overtime meal) ee by virtue of a collective barp,.

11. Benefits received by an employivity incen tive schemes provided that t
‘ agreement (CBA and productivity im @
m both CBA and
l
total ann u ‘I ary
chat val ue rec eiv ed fro th Pro duc tiy ;
ployee per taxahy.
p er employe
incentive schemes combined do not exceed P10,000 |
year.
-oductivi Seety 2
inc . s 5 amo
entive unting . to P10 000 rey
ork
CBA benefits and pro is a taxable othe
entire amount
Mor nate If the amount exceeds P10,000, the
benefits.”
Taxable de minimis benefits . wy

1. Excess de minimis over their regulatory limits included ;
2. Other benefits of relatively small value that are not included in the list of de
minimis benefits
Treatment of taxable de minimis benefits

a. For rank and file employees - taxable de minimis is treated as other
compensation income under the category “13 month pay and other benefits”
b. For managerial and supervisory employees -the taxable de minimis jg
treated as fringe benefit subject to final fringe benefit tax
DETERMINATION OF EXCESS DE MINIMI

S BENEFITS
Illustration 1: De minimis limits
Alexanderia, a private employee
who is paid a P600 daily rate
benefits during the year 2021: , receives the followin:
|
Monetized unused vacation leave
credits 9 days
Monetized unused sick le
ave credits
Medical assistance 9days
Rice subsidy (P2,500 7,000
per month)
Clothing allowance 30,000
Laundry allowance 9,
S000
336

rer 10 - Compensation Income
chap
golution: Actual Limit Excess
otiged unused VL P 5,400 P 6000 P 0
Monet d unused SL 5,400 0 5,400
Mone assistance 7,000 10,000
ver subsidy 0
viothing allowance 30,000 24,000 6,000
9,000 6,000 3,000
jaundry allowance J 6,000 3,600 2,400
taxable de minimis as “other benefits” P__16,800
Note: Private employees
1, The actual value of the monetized unused VL was computed as P600 x 9
while the limit was
~ p600 x 10.
2, The 10-day rule applies only to vacation leaves. Monetization of sick leaves of
employees is taxable. (BIR Ruling No. 227-2013, June private
20, 2013).
3, The rice subsidy and laundry allowance were likewise annualized
by multiplying their
monthly limit by 12. The de minimis benefits within the limits
are exempt from income tax.
Illustration 2
Hazelyn, a government rank and file employee, received the following
benefits:
oo
Monetized unused vacation leave credits (10 days) P 6,000

Monetized unused sick leave credits (15 days)
9,000
Uniform allowance 5,000
Laundry allowance 4,800
Required: Determine the amount to be included in other benefit
s.
Solution:
Actual Limit Excess

Monetized unused VL P 6,000 exempt P 0
Monetized unused SL 9,000 exempt 0
Uniform allowance 5,000 6,000 0
Laundry allowance 4,800 3,600 _1,200
Taxable de minimis as “other benefits”
P1200
Note: It is clear under RR5-2011 that the vacation leave and sick
leave of government employees
are not subject to the 10-day limit rule.
Illustration 3
Professor Estoque was one of the Hall of Fame awardees of Youbee University. He was
granted P25,000 cash as loyalty award for his 30 years of service. He was also given
P10,000 Christmas gift and an additional P10,000 gift during the institution’s
Founding Day Anniversary. Besides, he was also given free lunch meals with a total
value of P15,000 during the same year.
Required: Compute the total taxable de-minimis benefits as other benefits.
337

ensation Income
Chapter 10 - Comp
__Actual__ __Limit — __Excess _
Solution:
0 P 25,0
50 P 5 000 ve og
. P
Loyalty or service award
15,000 0 15.000
Christmas and anniversary gift ae
.
Meals nefits
nimis as other be
Total taxable de mi
Note: s only if itis gi ven in kind.

lim it on loy alt y or service aw ards applie nsidered de minimis. Other meal bene
1. The
for ove rti me or gra veyard shi fts are con
Only meals
. ehis
2.
de minimis.
are no longer cons! idered
ions, if the em
ployee is a managerial or supe,
Note that in all thr ee ill ust rat
imI s sha ll be co ns idered as othe; Ison,
excess de min fring.
employee, the entire
efits tax.
benefits subject to fringe ben a .
Peers ET TS ETE os
—
TIeA
DRT: rss eg
SSSR
SAIS LP
AILS TAS
Note to readers: wo
t reating excess de-mi nimIs benefits as part of 13:
Many follow the practice of managerj,
and oth er ben efi ts reg ard less of whe ther the employee is a
month pay use of the
erv iso ry or rank and fi le. Thi s tre atment is based on the erroneous
sup
compensation income” in section?
phrase “income tax as well as withholding tax on
uently clarified and corrected by then
of RR5-2011. This inadvertence was subseq
under RMC20-2011. It must be
Commissioner Henares as “fringe benefits tax”
inimi s benefits of managerial or
clarified therefore that the excess de-m
fits tax and is not part of 13%
supervisory employees is subject to final fringe bene
month pay and other benefits.
TS PP Ee
rae
Commutation of accumulated leave credits

The terminal leave pay or the commutation of unused leave credits due to
involuntary separation from employment of the employee is now treated as de
minimis benefits subject to the 10-day leave credit limit and is no longer exempt
as part of exempt termination benefits.
13th month pay and other benefits not in excess ofP 90,000
The composition of the “13th month pay and other benefits” will be discussed late
under taxable benefits.
BENEFITS EXEMPT UNDER TREATY OR INTERNATIONAL AGREEMENTS

Em
ee non Filipino nationals and/or non-permanent residens of the
_Eilin} .
te eae : om foreign governments, embassies or diplomatic missions: *

nal organizations in the Philippines are exempt from income ta:
338

rer 10 - Compensation Income
haP . ,
mption from withholding tax does not mean income tax exemption
Exe ion government embassies, diplomatic missions and_ international
nizations are immune from income tax including the obligation to withhold
0 nme tax by virtue of international comity as embodied in several international
im eements to which the Philippines is a signatory.
ag
However, this exemption from the obligation to withhold tax does not mean
‘ncome taX exemption of their Filipino employees. In fact, most of the
‘aternational agreements to which the Philippines is a signatory limit exemption
only to non-Filipino nationals and/or non-residents of the Philippines.
filipino employees of foreign governments, international missions, and
organizations are taxable as a rule except only to employees of the following
organizations:
United Nations (UN)
Specialized Agencies of the United Nations
wD
Australian Agency for International Development (AUSAID)

OID
Food and Agriculture Organization (FAO)

World Health Organization (WHO)
United Nations Development Programme (UNDP)
International Organization for Migration (IOM)
International Seabed Authority (ISA)
These organizations have exemption provisions that extend even to their Filipino
employees. Other aid agencies or international organizations may have tax free
provisions in their articles of agreement for Filipino employees.
Confirmation of Tax Exemptions

The exemption of Filipino employees is not automatic. Filipinos claiming
exemptions under the terms of international agreements or under provisions of
special laws granting privileges to international organizations shall file an
application for confirmation of tax exemption with the BIR’s International Tax
Affairs Division (ITAD). The confirmation shall serve as proof of exemption.
Without the confirmation certificate, the employee is taxable.
Employees of Philippine embassies or consulate offices

It should be recalled that employees working in Philippine embassies or
Philippine consulate offices are not considered non-resident citizens and are
therefore subject to Philippine income tax.
339

Income
Compensation
Chapter 10 -
___
yofrules
Su mmarry coreignem bassy: | Philippine embassy| |
oor | or consulate office ae
missions, or aorgamizator——~ i
[NAa/A
|
s
In the Philippi
nes
axable
——
_
N
Filipino citizens Exempt
i! i
-axable
TExe
|
—
Z
2 - ee |
Exempt___
J
mpt
ilipino citizens
Exempt ___—— contract
|
or special law.
under
th er e is an ex emption grant
e if
* Taxpayer must prov TO, THE TRADE |
}
OF, OR cep |
|
BY THE NATURE 3
BENEFITS REQUIRED OF THE EMP
L
SSION
T OF PROFE
OR CONDUC bje |
BUSINESS
by the em pl oy er to the employees to by enathei , |
Benefits or allowa
nc es furnished ute the ir du ti es as required
ely an d effectively exec necessity of the
them to appropriat in co me tax. This is referred
to as
e ex em p t fr om
employment ar
employer rule.”
nses |
Examples:
or ta ti on , re pr es ent ation, or entertainment expe
, transp
1. Necess ary traveling ance with specific
ac co unting or liquidation in accord
that are sub jec t to an |
requirements of substantiation of ex pense. |
rnment personnel
Allowances which essentiall y
constitute reimb ursement to gove
2.
ed in tl 1e performance of their offi
cial duties, such as: |
for expenses they incurr officers and |
Allowance (RATA) of public
a. Representation and Transpor tation
tion Act
employees under the General Appropria
A) (RR10-2008)
Personnel Economic Relief Allowance (PER
3. Reasonabl e amounts of reimbursements or adva
nces to employees for travelling
basis and which are paid to
and representation which are pre-computed on ad aily
any employee while on assignment or duty.
ases of the
These amounts given to the employee are not income but are expel
the
trade, business or profession of the employer that are incurred or paid t hrough
benefits since they are mere advances 0
vaenthments'o are not employes
from th
th suppose d to be direct cash outflows
employer; ,. hence, e, these are not considered as compensation income.
BENEFITS FOR THE CONVENIENCE OR ADVANTAGE OF THE EMPLOYER

Benefits or allowances which are intended for the furtherance of the interes"t
; ise Exell |
the employer’ smo oth ope rat ion s are lik ew
from income eine ess or to ensure its
. nce the employer rule.
This is referred to as the “convenie of
340

ca
Ge pter 40 - Compensation Income
cha
amples: : .
Exar ork-related mobile phone allowance and transportation allowance particularly
1. to employees of
call centers which are operated on a 24-hour basis where
employees are required to be available always for assignment and consultation
(BIR Ruling DA-233-07)
2 Outstation allowance for employees who will be out from office site at least 8
hours to visit lotto franchise holders for repairs and/or inspection of equipment
jeased by the employer (BIR Ruling No. 013-02)
3, Grant of housing privilege to employees working at distan
t or remote facilities
even if the dwelling is distanced from the facility in compliance to
labor safety
standards (BIR Ruling No. 055-99)
4, Car incentives to employed on-call medical doctors
5, Scholarship grants to employees under contract to remain a in service for
specified period upon completion of the study
6. Housing privilege of military officials of the AFP locat
ed inside or near the military
camps
These types of employer spending are regarded
as business expenses and are not
consi dered as employee
reward because they are not intended for the
personal consumption or disposal of the employee free
s but as implements of the
employer's business to ensure the employer's convenie
nce.
However, if the expense is unreasonably excessive
making it depart from the
nature of a reasonable business expense such as
when it is deliberately granted to
include a benefit for the employee, the portion of
the expense representing
provision or privilege to the employee is cons
idered a taxable fringe benefit. These
types of expense are regarded as “hybrid expen
ses” because they are partially
business expense and partially employee benefits.
COMPOSITION OF TAXABLE COMPENSATION INCO
ME
1. Regular compensation - This pertains to the
fixed remunerations received
by the employee every payroll period.
2. Supplemental compensation - This pertains to
other performance-based
pays to employees with or without regard to the payro
ll period.
An adjunct category to the supplemental compensa
tion, 13th month pay and
other benefit, is necessary to contain incentive
pays and all other taxable
employee benefits not classifiable as regular or suppleme
ntal compensation. 13th
month pay and other benefits not exceeding P90,000 is an exclu
income. The excess above P90,000 is added to
sion from gross
supplemental compensation.
Illustration
An employee received P400,000 regular compensation, P120,000 supplemental
compensation, and P100,000 13th month pay and other benefits.
341

n Income
ompensatio
Chapter 10 - C ed as follow
s: :
b e c o m p u t
sh al l
ensation income
The taxable comp 000 - P90,00)]
co
on — Pg
Regular compensati 12 0, 00 0 + (P 10 09 ,
930,009
ensation [P
Supplemental comp
on income
Taxable compensati .
SA TI nONin IN
cl CO
ud esME
fi xe d re mu ne rations due to be received "
REGULA R OMPEN C to
an
The regular comp
ensa
iod such as:
employee every P er ing allow
1, Basic salary t-of-living all owance, fixed hous ane
= as CoSt-O% i
2. Fixed allowances such and other allowance s paid to an EMplo *
tion,
transporta Vee
representation,
every payroll period
Fixed allowances gu la rl y re ce iv ed as part of the bas
re
ed in amounts and are part of reg Ic
Allowances which are fix la ri es or wa ge s
weekly or daily sa nces are actually used
monthly, bi-weekly, por ti on of th e al lo wa n
s applies even ifa
compensation. Thi
the employer's business.
lity of allowances: 9,
Exception rule on the taxabi nces for travelling, representation
a. ry and necessary allowa
Ordina the employe;
t ex pe ns e of em pl oy ee s in curred in the pursuit of
entertainmen
trade, business or profession.
or liquidation.
b. The expense is subject to accounting
loyer.
c. Any excess advances are returned to the emp
Hence, variable and liquidated allowances are not subject to tax. However
amounts of allowances that are retained by the employee for himself shall be
considered compensation.
Paid vacation and sick leave allowances

The paid absences of an employee applied against his vacation or sick leave
credits which are normally received as part of the r egular salary isi part of te
regular compensation.
Non-compensation items
1. Fees
Retai ner fees of consultants, talents, and directors who have no managemett
function in th e business
i are professi
ess income"
- 7 ional income, not compensation
the recipient.
2. , iness
Commissi ions to non-employ ees such as independent sales agents are pusines
.; the sales agent.
Income to
342

iptel 10 - Compensation Income
ch rips and gratuities -
"rips and gratuities paid directly to an employee by customers of the employe

| which are not accounted for by the employee to the employer are not
considered as compensation income, but are to be reported as “other income
in the income tax return of the employee.
d
yaluation of compensation paid in kin
compensation in kind is taxable at the fair value of the consideration received. If
received in shares, the fair value of the shares at the date services were provided
is used.
iIJustration 1
the following pertains to an employee in 2021:
cost-of-living allowance 36,000
Fixed monthly transportation allowance (P2Kx 12) 24,000
Deduction for withholding tax on compensation 10,000
Deduction for employee share in SSS, PHIC, and HDMF 32,000
The taxable compensation income shall be computed as follows:

Cost-of-living allowance 36,000
Fixed monthly transportation allowance 24,000
Regular compensation income P 460,000
Less: Non-taxable compensation
Mandatory deduction 32,000
Taxable compensation income P__428,000
Illustration 2
An employee who was terminated in 2021 due to business closure of the employer
received the following:
Unpaid 2021 salaries P 200,000
Unpaid 2020 salaries 20,000
Reimbursement for transportation expenses 10,000
Termination pay 100,000
The taxable compensation income shall be computed as follows:

Gross compensation income (P200K + P20K+ P100K) P 320,000
Less: Non-taxable compensation
Non-taxable benefits 100,000
Taxable compensation income P__220,000
Note:
1. Reimbursement for transportation expense is not an income to the employee.
343

Income
Chapter 10 - Compensation nsation income, but is also deduct .
pay is inc lud e din gro ss compens: e
9 The termination termine ition is beyond the employee’. Nop,
taxable compensation because the re «ason of Co
tray
.
SUPPLEMENTARY COMPENSATION
compensation includes Performance.
Supplementary or additional ensati on . . a Seq
rat ion s to an emp loy ee in ad di ti on to the regular comp
remune Ith OF
without regard to the payroll period.
||
ation under current tax rules:
The following are the additional compens
!|
1. Overtime pay
|
2. Hazard pay
|
3. Night shift differential pay
4. Holiday pay |
5. Commissions
is an emp loyee)
6. Fees, including director’s fees (if director
7. Emoluments and honoraria
8. Taxable retirement and separation pay
9. Value of living quarters or meals
10. Gains on exercise of stock options
11. Profit sharing and taxable bonuses
Overtime, holiday, hazard, and night differential pay
These constitute additional compensation, except when derived by a minimum Wage
earner.
Commissions, emoluments and honoraria

Commissions are incentives intended to stimulate sales. These may be given as a profit |
sharing or performance bonus. Emoluments pertain to any pay in general while |
honoraria are additional payments for attending to special tasks or assignments.
Living quarters or meals
If an employee receives free living quarters or meals in addition to salary for
services
common ane value ‘e ane employee of such living quarters or meals is
included in
compensation inca ne sowever, when
the same was furnished to an employee
couvenienc e of th for the
ployer or out of necessity of the employer's business, the value
pensation income, but a business expens
e.
Stock option plans
To motivat
earn additional eae sl give stock options to employees allowing them"
option will have value. het een of the stock price of the company. T*
va exceeds the
exercise price fixed at the grant date. ue of the stock of the employer
Types of options
1. Equity-settled options .
d exeremp
employer at a piedetsrmined.c ciseloypric
to dpuronchathse shares of stocks ° 7
eese fixe
e grant date
344

Chapter 10 - Compensation Income
2. Cash-settled options ~ entitles the employee to receive in cash the excess of the fair
value of stocks over the exercise price without actually delivering stocks
Upon the exercise of the option, the excess of the book value or fair value of the stocks,
whichever is higher, less the exercise price set at grant date is treated as follows:
a. Additional compensation income - if the employee is a rank and file
b. Fringe benefits — if the employee is a managerial or a supervisory employee
This rule is applied regardless of the type of the option. (RMC 79-2014)
Illustration - equity-settled option

Mr. Anthony, a rank and file employee, received a stock option from his employer,
ABC, Inc., entitling him to buy 10,000 of ABC’s share at a strike price of P100. In April
2021, Mr. Anthony exercised the option when ABC shares was selling P150/share. The
shares had a book value of P145/share in the latest published financial statements of
ABC, Inc. After two years, he sold the shares for P180/share.
Fair value of stocks (P150 x 10,000 shares) P 1,500,000
Less: Exercise price of option (P100 x 10,000) 1,000,000
Compensation income (discount) P__ 500,000
Note:
1. The P150/share fair value is used since it is higher than the P145/share book value.
2. For listed shares, the fair value of the stock is based on the simple average of high and low
on the exercise date. For non-listed shares, the book value per share is simply used in the
absence of an over-the-counter (OTC) market price available.
The compensation income shall be reported by Anthony in his 2021 income tax return.
w
4. If Mr. Anthony is a supervisory or managerial employee, the P500,000 shall not be treated as
a compensation but as a fringe benefit subject to a gross-up fringe benefits tax.
Treatment of the subsequent sale of the shares

If the employer corporation is a:
1. Domestic corporation, and the sale of the stocks is made:
a. through the PSE, the sale is subject to the stock transaction tax of 60% of 1%
of the gross selling price. The tax would be computed as:
Selling price (P180 x 10,000) P 1,800,000
Multiply by: stock transaction tax rate 60% x1%
Stock transaction tax P__10,800
The tax will be withheld by the broker who effected the sale. The gain from
the sale of the stocks would not be subject to income tax.
b. directly to buyer, the net gain on the sale is subject to the 15% capital gains
tax. The tax shall be computed as follows:
Less: Tax basis of shares sold 1,500,000
Capital gains P = 300,000
345

Capital gains P 300,000
Multiply by: CGT tax rate 1%
Capital gains tax P 45,000
2. Foreign corporation, the net: gain on the sale is a capital gain subje Ct tg the
regular income tax. The gain subject to regular tax shall be compute as f; lo ls,

Less: Tax basis of shares sold ___ 1,500,000
Capital gains P = 300,000
Multiply by: Holding period rate (>1 year) 50%
Capital gain subject to regular tax P__150,000
The rules on dealings in other capital assets will be discussed in Chapter 12.
Illustration - cash-settled option

Mr. Anthony, a supervisor, received a cash-settled stock option from his employe:
ABC, Inc., entitling him to receive the increase in the company’s oe
exercise date over the strike price of P100/share covering 10,000 ABC shares 0
March 23, 2021, Mr. Anthony exercised the option. ABC shares traded P156/shar
high, P146/share low and closed P150/share at the Philippine Stock Exchange. Tr
volume weighted average traded price was P148/share. ABC shares had a book valy:
of P153/share in the latest published financial statements.
Based on the ABC, Inc.'s option plan, Mr. Anthony shall receive cash instead of stocks
amounting to:

Cash (Fringe benefit subject to final tax) P__500,000
What if the option is an equity-settled option?

If the option would have been an equity-settled option, Mr. Anthony shall receiveté
following number of ABC shares pursuant to the terms option plan:

Increase in value of stocks covered by the option P 500,000
Divide by: Exercise day closing price 150
Number of shares ___ 3,333.33
Under the regulations, the fair value of listed stocks is the simple average of hi he
low, computed as (P156 + P146)/2= P151/share. Pursuant to RMC 79 -20 3s
minge benefits would be valued based on the P153/share higher book vali
ollows:
346

ES OS Se aS eee ee
rer 10 - Compensation
iv
Income
\
per of shares
Nun ly DY:
yultiPy inge benefit subj
goats (Fring ect to final tax 9333.33
o subsequent EESTI; 153
T here would be nosale of the Stocks Would be
income tax on the : Su
T reali Zed gabject t 0 the stock transaction
in. tax,
orofit sharing or
taxable bonus
profit sharing is
a reward for
~ompensation fo churning the b
r controlling al Usiness to Post
l the factors th a profit. It is a
and sales, producti at j Nfluence profi
vity, and administ tsuch as marketing
njoyed by individual rative fact Ors. It
employees such as is a reward wh
ich can be
all employees collectively, Salesm €n, divi
sj on heads, key Off
icers, or
Bonuses are supplemental or additi
onal compens at
solely to productivity under the Produc ion, However, if th
tivity incentive ey are linked
pursuant to RA 6971, they should b plan of the employer
€ considered as de
minimis benefits.
Productivity incentive bonus
The Productivity Incentiv
e Act of 1990 (RA 6971
to set-up productivity incent ) encourages private em
ive programs, ployers
considered as part of “other benefi » productivity incentive bonus is

ts” under “13 month pay and oth
Under the revision of RA 10653, pro er benefits”.
ductivity incentive is now a de min
benefit. imis
Productivity incentive distinguished from

profit mane pons of production
Productivity incentive is anchored on improvements s 7.
inherent diffieuley ot
and is usually enjoyed collectively by employees due ° ad Oren
Tacing Productivity to individual performance. It : ft sharing is payable aoe
ence,it is payable even if the business poses a loss. Pro
“hen the business post a profit.
‘STH MONTH PAY AND OTHER BENEFITS
Bth Month Pay and Other Benefits” includes:
, 13th Month pay
' Other benefits
.
Christmas bonus of private employee S
gifts of private employees
Cash gifts other than eee 5 anniviversary
(RR2-98, as amended by RR5-2 we
re RT NE

Income
Chapter 10 - Compensation
allowance (ACA) of governme
c. Additional compensation nm Personne |
(RR8-2000)
etc.
14% month pay, 15" month pay,
d.
e employees
Other fringe benefits of rank and fil
e.
meade |
13th month pay a Christmas
4. of government employees consists of
The 13th month pay Ly init onus
equivalent to one-month salary plus a P5,000 cash gift. (RA6686 as ame NdeqHs
by RA 8441)
to one-month Salary
b. The 13th month pay of private employees is equivalent
(PD 851) |
Christmas bonus and Christmas gift
month pay. In private
The Christmas bonus of government employees is their 13th
month pay,a
companies, the term “Christmas bonus” may pertain to the 13th
separate incentive pay, or to a profit sharing.
Christmas bonus of private employees which is a non-performance-based

incentive pay is part of other benefits. Christmas bonus in the nature of profit
sharing should be treated as additional compensation income, not as “other
benefits.” The nature of the Christmas bonus of private employees shall determine |
its tax classification.
The Christmas gift of government employees is specifically designated as part of
“13th month pay and other benefit” under Sec. 32(B)(7)(e)(i) of the NIRC. RRS- |
2011 includes Christmas gift in the list of de minimis benefits. But since revenue
regulations cannot amend the law they implement, RR5-2011 should be
interpreted to apply only to Christmas gifts of private employees.
Hence,
Government Private
employees employees
| Christmas bonus 13th month pay 13th month pay
and other benefits | and other benefits
Christmas gift 13th month pay De minimis
and other benefits
Bonus vs. Gift
Bonus is performance-based and is non-discretionary to the e
mployer while a gift is 4
gratuity
and is discretionary upon the employer.
Other fringe benefits

Other fringe benefits include all other taxable fringe benefits not specifically |
included in compensation income as regular, supplementary or 13th mont ‘a
and other benefits under current tax rules such as:
348

eee EE lllt———— EE ll “Ee p<: / ES ay: nett taitnnnes ade a FS EEE
7 ae
ae rm camel se edb tO TOT = Be aan wee OO
poe OE A

1. Employee personal expenses shouldered by the employer
2, Taxable de minimis benefits such as:
a. Excess de minimis
b. Benefits not included in the de minimis list
Employee personal expenses

Employee personal expenses such as, but not limited to, rental of residence,
grocery, association or club membership dues, travel or vacation expense or
tuition fees, when assumed or paid by the employer, constitute fringe benefits to
the employee. This fact holds true even if the expense is receipted in the name of
the employer.
Taxable de minimis benefits

All other benefits of relatively small value which are not included in the list of de
minimis benefits shall not be considered as de minimis but as ordinary fringe
benefits. Corollary to this rule, excess de minimis benefits should be considered as
taxable ordinary fringe benefits.
Tax Treatment of Other Fringe Benefits

a. For rank and file employees - treated as compensation income as part of
“other benefits” under “13 month pay and other benefits”
b. For managerial or supervisory employee - treated as fringe benefit subject to
fringe benefit tax
It must be emphasized that the “other fringe benefits” of managerial or supervisory

employees are excluded from their “13th month pay and other benefits.”
Illustration 1
The employer pays for the tuition fee of the employee in addition to his regular
compensation.
The tuition fee paid is a fringe benefit which will be treated as follows:
and
1. Asa compensation income as part of “other benefits” under “13% month pay
other benefits” if the employee is a rank and file employee
ial or
2. Asa fringe benefit subject to fringe benefit tax if the employee is a manager
supervisory employee
was
3. As an exempt fringe benefit, regardless of the type of employee, if the same
such as when the
given by the employer for his convenience or business necessity
of the
employee is required to study to acquire expertise for the future use
employer’s business
Illustration 2 .
in
An employee receives a monthly rice allowance of P3,000 a month which is P1,000
excess of the P2,000 a month de minimis limit for rice allowance.
349

Chanter
Whee ae
10 - Compensation
‘
Income
The P1,000 monthly excess constitutes a taxable de minimis benefit taxabla
compensation as part of “other benefits” for a rank and file employee, It js a fin
Wisiipeeate
benefit subject to final fringe benefit tax for a managerial or supervisory employen Re
. eet . Mts
TAX TREATMENT OF 13TH MONTH PAY AND OTHER BENEFITS

RR2-98 provides that 13th month pay and other benefits are exem t from
withholding on compensation provided they do not exceed P90,000. It follows
therefore, that the excess above P90,000 is subject to the withholding tay on
compensation.
RR3-98, the revenue regulation implementing the fringe benefit tax, also Provides
that it does not cover benefits forming part of compensation income subject to the
withholding tax on compensation.
Hence, the excess of “13th month pay and other benefits” over P90,000 should be
treated as compensation income subject to regular income tax.
Illustration 1
A government rank and file employee received the following benefits aside from the
basic pay in 2021:
Christmas bonus P 70,000
Cash gift ‘5,000
Additional compensation allowance 36,000
Personnel Economic Relief Allowance (P2,000/month) 24,000
Monetized value of vacation leave and sick leave (18 days) 9,000
Uniform and clothing allowance 7,000
Required: Determine the taxable “13th month pay and other
benefits.”
Solution:
Christmas bonus (13th month pay of gov't employees)
P 70,000
Cash gift
5,000
Additional compensation allowance
36,000
Excess uniform and clothing allowance (P7,000 ~ P6,00
0) 1,000
Total 13th month pay and other benefits
P 112,000
Less: Exclusion Threshold
90,000
Taxable 13th month pay and other benefits
P__22,000
Note on government employees:
1. Personnel Economic Relief Allowance is not subject to incom
e tax and withholding
(Under RR8-2000, as affirmed by RR10-2008)
.
2. The P5,000 Christmas gift of government employees is desig f
nated by the NIRC to be part
“13th month pay and other benefits”; hence, itis
nota de minimis benefit.
3. Under RR5-2011, the monetization of vacation leave
and sick leave credits of gover™ ent
Officials is
an exempt de minimis benefit without regard
to the number of days.
350

tion Income
Chapter 40 - Compensa |
Ilustration 2 g in a remote tower station of Snail Internet
A private rank and file emp loy ee wor kin
ng 2021:
Company received the following benefit duri
P 72,000
13th month pay 15,000
Performance bonus 30,000
Christmas gift 6,000
)
Danger exposure allowance (hazard pay 38,000
Housing privilege 8,000
Uniform and clothing allowance 6,000
Laundry allowance
of the employees’ living quarters
The housing privilege pertains to the annual value
te.
furnished by the employer to employees for staying on-si
benefits.
Required: Compute the excess 13th month pay and other
Solution:
De Other
minimis _Limit _ Benefits
P 30,000 P 5,000 P 25,000
Christmas gift
8,000 6,000 2,000
Uniform and clothing allowance
6,000 3,600 2,400
Laundry allowance
P 29,400
Excess de minimis benefits (other fringe benefits)
72,000
13th month pay
P 101,400
Total 13th month pay and other benefits
90,000
Less: Exclusion threshold
P__11,400
Taxable 13th month pay and other benefits
Note: Private employees
compensation.
1. Performance bonus is a supplemental or additional
12 = P3,600.
2. The laundry allowance limit is computed as P300 x
yees under RRS-2011.
3. Christmas gift is a de minimis benefit for private emplo
of the employer rule.
4. The housing privilege is exempt under the convenience
“other fringe
5. The “13th month pay and other benefits” of rank and file employees includes
benefits.”
IHlustration 3
in 2021:
A managerial employee received the following benefits
13th month pay P 95,000
Rental expense on condominium unit 18,000
12,000
Salary of personal body guard
Profit sharing 12,000
Rice allowance 32,400
Clothing allowance 7,000
11,000
Night shift differential pay
351

anele
ij i
|
. wes Income
‘.
10 - Compensation r bene
Chapter h mo nth pay and othe
t
rend: De spine the
«1
th taxable fit. su
3t
, Rts’
Required: D« ern pject to fringe benefit tax
CwTes i
ne
~ 2
th e tr in ge be
compensation, and
Solution: De
minimis Limit _Benefit,
p 32,400 P 24,000 Pett
Rice allowance 7,000 6,000 1,000
Clothing allowance
Excess de minimis
Other fringe benefits:
Rent of residence paid by employer
:
Salary of personal body guard
benefit tax
‘Total tringe benefit subject to fringe
Profit sharing P 12,000

Total supplemental compensation P__23,000
Total 13 month pay and other benefits P 95,000

Less: Exclusion threshold —_ 20,000
Taxable 13th month pay and other benefits P5000
INTEGRATIVE ILLUSTRATIONS: COMPENSATION INCOME
Integrative Illustration 1
A government rank and file employee had the following summary of his compens
and benefits in 2021:
Gross compensation income P 1,044,000

Less: Employee payroll deductions
Employee contribution to GSIS, PHIC; HDMF P 80,000
Employee deduction for withholding tax 144,000
64,000
Net regular payroll
P 900,000
Representation and Transportation Allowance
18,000
Personnel Economic Relief Allowance
24,000
Christmas bonus
87,000
Uniform allowance
12,000
Christmas gift
5,000
Honoraria
Total compensation ___ 15,000
p_1,061,000
The taxable compens ation j
nome shall be computed as follows:
352

Pe ee ee ll ee
pte 10 - Compensation Income

C
De
Non-
grand su ion:
Other Taxable
datory deductions
Man lar com 3
: Benefits. —Benefits _
pensat
°~ P80,000)
(P1,04
u ion 4.00
Mplemental compensation P 964,000
yonoraria
RATA 18,000 15,000

pERA 24,000
tal a
ah thpay and other benefits: P 0P 979,000
christmas bonus Pg
Christmas gift ons
gxcess De minimis: 000
Uniform allowance P_12 000
Total F_12,000 P 4g.009 p 98,000
exclusion threshold (up to P90,000) 90,000 « - :
Total P138,000 P
Total non-taxable compensation P_218,000
g.000
Taxable excess 13th month pay and other benefi
ts. __- 8.000> 8,000
P__987,000
Note:
1, The taxable regular compensation inco
me is computed as (P1,044,000
2. The excess of the P90,000 threshold - P80,000).
over the actual 13th month pay and othe
non-deductible to other items of com pens r benefits is
ation income. (RR3-2015)
Presentation in the Income Tax Return of
the employee:
Gross compensation income (i.e., P1,061,000 + P1 44,00
0) P 1,205,000
Less: Non-taxable compensation income
Mandatory deductions P 80,000
Exempt benefits —__138,000 _218,000
Integrative Iustration 2
Aprivate employee derived the following remunerations and benefits in 2021:
Basic Compensation, net of P32,000 SSS, PHIC, PhilHealth,
; HDMF, union dues, and P35,000 withhold . 00
Yertime pay ing tax P oot
“cation expenses of the employee 24.000
paid by employer
7 living allowance (COLA) 12,000
R comPuted daily transportation allowance 16,000
31,200
i3 bsid (12 cavans worth P2,600 each)
monthy pay 50,000
18,000
teed unused leave credit (10 VL and 8 SL)
toate allowance 2.000
“Ompensation
income
P_214200
353

ae 7 w
AAG
Soar
eer
Compe
srcation
sale
Ince! ne wee
Bross taxable
taxable c comppensation
ion ;
incon,
he
sand (nh
Wee 1 - ©
uw eatlo
ero ‘
| cal
The .
he ws:
as follo
l
ul
be comp
shall
Non . Othert Taxable

'
tora rank and
Fort
ti le cnmployee: De
. raxable
"f
_Benefits_ __Benefits _
minimis —
nsadien
pega.
Mandatory and supprementary.ceMiBereS"
deductions (re 00
vw
000 ~ P32,000)
9 QQq P 568,000
uae
Regula comp
t co enssation ~
mpel (FOUe —“
21,000
Supplementary compe nsation
Overtime pay 12,000

CO LA ance Pp 16,000 P 0P 601,000
Daily transportation allowance
‘Total
her bene: 50,000
13thumenth pav-and ot
-
—
13th month pay | rp
Other benefits: 24,
ployet
Vacation expense paid by em
Excess de minimis benefits: 7,200
P 31,200 24,000
Rice subsidy -
10,000 10,000
Monetized VL
8,000 8,000
Monetized SL
Uniform allowance 9,000 6,000 3,000
Total P_58,200 P 56,000 P 92,200 P 601,000
Exclusion threshold 90,000 - 90,000
Total P_146,000 P= 2,200
Total non-taxable compensation P_178,000
Taxable 13th month pay and other benefits -_ 2,200 > 2.200
Taxable compensation income P__ 603,200
Note:
1. The PS68,000 basic compensation may also be computed as P533,000+P35,000. Note that
the withholding tax is not an exclusion from gross
income.
2. The limit of the monetize4 d unus.ed VL 4
is cor nh ‘
pay is computed
as P18,000 x 8/18 = P8000. rllgtlas
= , 00. The
‘
t Beotva aacato ans
3. compen
The vac; ,
ue shouldered by the employer is a fringe benefit forming patt of
é ncome of a rank and file employee under
“other benefits.”
Presentation in the
Income Tax Re tur
n of the employee:
Gross compensation in
come*
Less: Non-taxable co P 781,200
mpensation income
Mandatory deductio
y 1s
Exempt benefits
Taxable compensa ° p00
tion income
e gach
*P714,200 neett pay
+ (P32,000 + P3
5,000) Payroll
deduction s
354

- 10
Compensation Income
aple , x Due
pn come Tax AX l jue Ue of the employee
come ployee would be computed as follows:
rhe!
,
yraxable income P 603,200

ress: b ower limit of applicable bracket 400,000 P 30,000
: v Ii ‘x “ess P 203,200
|
25%, 50 800
| sultiply by: incremental tax rate
30.800
Ponaaes
1 income Lax due
' e ent =
But Not Over ____ Basic Tax Plus % Ol excess over
: ~ Over
F556 9,000.00 400,000.00 0 “2096 Sen Gno an
' 400.000.00
1} 400,000.00 800,000.00 30,000 359
2,000,000.00 130,000 309 B00, woe ;
400,000.00
Note: &
check the complete Individual Income Tax Table in Chapter 7 or in the Appendix.
cora managerial or supervis

De Non- Other ‘Taxable
finimis _Taxable_ _Benefits _Benefits
and supplementary
Regul ar compensation:
Mandatory deductions 32,000
Regular compensation P 568,000
Supplemental compensation
Overtime pay 21,000
COLA 12,000
Daily transportation allowance 16,000 nine
Total P 601,000
13th month pay and other benefits:
13th month pay P 50,000
txclusion threshold (up to P90,000) 50,000& - 50,000
Total P 66,000 P 0
Excess 13th month pay & other benefit o> ti
Taxable compensation income P.601,000
Other fring » De S!
Vacation expense paid by employer P 24,000
*xcess de minimis benefits .
en subsidy Pp 31,200 24,000 P 7,200
onetized unused VL 10,000 10,000 ,
Monetized SL 8,000 0 8,000
lo ‘form allowance 9,000 6,000 S000
ote P__58,200 P106,000 P 18,200
~ NOn-taxable compensation P_138,000 ro 18.200
°s de minimis benefits : _
tal ting Ben 00
6¢ benefits subject to final tax
355

as follows:
The pross compensation income is computed
P 781,200
‘otal remunerations and benefits
42,200
Less: Fringe benefit subject to final tax
Gross compensation income P_739,000
Presentation in the Income Tax Return of the employee:

Exempt benefits 106,000 138,000
Taxable compensation income P_601,000
Income Tax Due

The income tax due of the employee would be computed as follows:
Tax
Taxable income P 601,000
- Less: Lower limit of applicable bracket _400,000 P 30,000
Excess P 201,000
' — Multiply by: incremental tax rate _25% __50,250
: Income tax due P__ 80,250
'
Over But Not Over Basic Tax Plus % Of excess over

250,000.00 400,000.00 0 20% 250,000.00
'--= 400,000.00 800,000.00 30,000 25% 400,000.00
800,000.00 2,000,000.00 130,000 30% 800,000.00
The fringe benefits tax on managerial or supervisory employees

The fringe benefits of managerial or supervisory employees is subject to a grossed-up
final tax at the rate of 35%, computed as follows:
Taxable fringe benefits P 42,200
Divide by: Gross-up by rate 65%
Grossed-up monetary value P 64,923
Multiply by: Tax rate 35%
Fringe benefits tax P__- 22,723
The fringe benefits tax is a final tax which be paid by the employer to the governme
nt
It is presumed withheld out of the fringe benefits
of the managerial or supervisory
employee. The detailed rules on fringebenefit taxation will be discussed in
following chapter.
understandin g. It is merely shown here f or you to obtainin p preliminary
TAXABILITY OF MINIMUM WAGE EAR

NERS (MWE)
Minimum wage earners are exempt from
income tax on the following:
1. Basic minimum wage
2. Other benefits (HHON)
a. Holiday pay
356

b, Hazard pay
c, Overtime pay
d. Night shift differential pay
These shall be presented

as exempt benefits un der non-taxable compe
nsation
income, Since exempt from income tax, the exempt benefits of MWEs
shall not be
subject to withholding tax.
Illustration
Ms. Guevarra,
following a minimum
benefits during the wage
year: earner employed by CSO Company, derived the
Basic minimum wage

P 124,000
13" month pay
11,000
Overtime pay
80,000
30,000
Hazard pay
15,000
Holiday pay
15,000
Total
P 275,000
Less: SSS, PhilHealth, HDMF contributions
5,000
Net total
P__270,000
The taxable compensation income should be computed as
follows:

Exempt benefits —___270,000 __
275,000
Taxable compensation income pd
Receipt of other taxable income by MWEs

MWEs are still exempt from income tax on the foregoing exempt benefits even if
they are earning other taxable items of compensation or other income from
concurrent employers, trade, business or practice of a profession.
MWEs are subject to tax only to the extent of income other than the
aforementioned exempt benefits. (RR11-2018) Hence, additional compensation
such as commissions, honoraria, fringe benefits, benefits in excess of the allowable
amount of P90,000, taxable allowances and other taxable income given by the
same employers to MWESs are subject to withholding tax. Despite this, it must be
noted that MWEs will actually pay income tax only if their total taxable income
exceeds P250,000 for the year.
357

e og
tion Incom ompensauon income
Chapter 10 - Compens@ lec s.e a sale. s de al fo The
e employee, Wa. s able to cloion
Illustration 1: With othinier taxab pensat duringt he
minimum eceived the following com
Mary Dela Fuente, @ year. Ye ar:
the She
employer during
: p 160,800
asic minimum wage, net of 14,000
deductions
Pa 78,000 mandatory 4,000
43th month pay
70,000
Holiday pay 15,000
Overtime pay 10,000
Night shift differential pay 12,000
Hazard pay 370,000
Profit sharing bonus 355'800
5
Commission income ae
Total
co mp en sa ti on in co me sh ou ld be computed as follows:
The taxable
P 663,800
P 655,800 + P 8,000)
Gross compensation income (i.e.
on income
Less: Non-taxable compensati P 8,000
Mandatory deductions 281,800
273,800
Exempt benefits ©
P__382,000
Exempt benefits consist of the following:

Basic minimum wage P 160,800
13 month pay 14,000
Holiday pay 4,000
Overtime pay 70,000
Night shift differential pay 15,000
Hazard pay 1 0,000
Total exempt benefits P._—-273,800
Mary's tax due shall be computed as:
Taxable compensation income Pp —Tax Due—

Less: Lower limit of the income bracket ane
cxce re the taxable income qualifies 250.000 P 0
Multiply by: P 132,000
Total tax due 20% 26,400
p__ 26,400
illustration 2: With
business inc
Jun,4 minimum wage empl sual! ot
oye do .
P2909 00 ‘nhs Part-time business after work. He rece of Por pst
minimum wage of
mandatory deductio
ns He also0 inclu sive of P11,000 13th month pay but net i eat
P300,000 from his
receive
side-lin
€ business, da performance bonus of P20,000
358

vaptel 40 - Compensation Income
i
(na\ taxable incom
e shall be computed as follow
ine s:
.
compensation income (i.e, P 299
Gnss vontaxable compensation income +P5K4 P20K) P 315,000
* Mandatory deductions p
, 5,000
Exempt benefits
——~£30,000 295,000
able compensation income
P 20,000
" income from business ____ 300,000
raxable income
P__320,000
ques of change in status as a Minimum Wage Earner during a year
|, When an employee becomes a minimum wage earner during the year, he shall
be subject to Income tax only on compensation earned before becoming a
minimum wage earner.
IIlustration 1
Anthony had a basic pay of P400/day when the minimum wage was P382/day. He
is also receiving overtime pay and the year-end 13th month pay. On July 1, 2021,
the Regional Wages and Productivity Board increased the minimum wage by
P22/day to P404/day. Anthony’s employer increased his salary to the minimum
P404/day.
Anthony shall be taxed on his income from January 1 to June 30 because he is not yet
a minimum wage earner. The employer shall regularly deduct the withholding tax
on compensation from his salary but shall stop withholding by June 30. Anthony's
compensation starting July 1 including overtime pay and year-end 13th month pay
shall be tax exempt.
If the exact amount of income taxes had been withheld by the employer for the
January 1 to June 30 compensation, Anthony need not file an income tax return.
Otherwise, Anthony shall file an adjustment return reflecting his compensation from
January 1 to June 30 and shall pay the tax still due or claim for refund in case of
excess withholding.
This rule may also apply in cases of:
lary at the minimum wage
a. Transfer to an employer paying sa/ary nimum wage
her mi
Transfer of employment to a region wit h hig
eee due
| When an employee ceases to inc be a minimum wage earner
ome for the rest of the y
to increase in salary, only the
lusty j ;
ation 2 an d was g given a salary
hdrea is a minimum wage earner. She was prom
Taise above the minimum wage starting August © .
1 to July 31 because she is a
mdrea shail be exempt from income eax fron tn andrea shall be subject to tax. The
™inimum wage earner. Effective August 1, 202%
359

ae —
ensation Income
Chapter 10 - Comp sation fray, j
st ar t de du ct in g the withholding tax on compen |
employer shal l Nro,,
reg’
me date.
salaries effective the sa
for the period Augus
HOA
wi th he ld the in co me as
If the employer properly
rem ortee ty
December 31, Andrea need not file an income lax ren. Itherri wise, Shd e Shsha
al
lj ilp "
l pay
ui on fo r {n e sa me pe od an
ng her compensa :
adjustment return reflecti
tender
ing.
hold
ll du e or cl ai m fo r re fu nd in case of excess with
tax sti
Prete et
This rule applies in cases of:
ve the minimum wape
q. Transfer to an employer paying salary abo
b. Transfer of employment to a region with lower statutory minimum WageIe.
by
3. When an employee ceases to be a minimum wage earner during the year
)
disqualification (i.e. earning taxable income
Note that if the taxable income of the employee does not exceed P250,000 for the
year, there will be no income tax due for the period under the tax table.
Treatment of Cost-of-living Allowance of MWEs

Under RMC23-2011, COLA which forms part of the new wage rates prescribed to
be the statutory minimum wage should be treated as part of the minimum wage
and shall not be treated as a separate or other benefit.
THE WITHHOLDING TAX ON COMPENSATION

The withholding tax on compensation is a method of collecting the income tax at
source upon receipt of the income. It applies to all employed individuals whether
citizens or aliens. The employer is constituted as the withholding agent.
Reproduced herein is the withholding tax table for semi-monthly compensation:

ee
REVISED WITHHOLDING TAX TABLE |
| Compensation Range|| ss
DAILY
° oF and |) P = : P p1096- |{ p2,192-P ||
P2,191 5,478
p5,a79-P || P22,918e
21,917 above _
ow , , _ JLLe
0.00 P 82.19 P 356.16 P 1,342.47 P 6,602.7
Prescribed
Withholding Tax 0.00 +20% over || +25% over P || +30% over P || +32%overP || +35% “
P685 1,096 2,192 5 , 479Le 21,918 __
wesw
| a se P 7,692 -P P 15,385-P
ds ——
L__—_———
P 38,462-P || P 153,846 nt |
Compensation Range P 4,808 and |] P 4,808 - P
below 7,691 15,384 38,461 153,845 a
abo =5
0.00 P 576.92 P 2,500.0
500. P 9,423.08 ’
p 46,246"
Withholding Tax 0.00 + hae P || + 25% over P || + 30% over P + 32% over + 35% ie |
:
——
7,692 15, , 38 385
J? es
153,
a Ps
38,462 |
ee
SEMI-MON
om Pensation Range P 10,417 and P10,417-P || P16,667-P |[ p33,333- |l p383,333-P || ? 33333

3 ||
16,666 33,332
; P83,332 ;
333,332 || abo
360
10 - Compensation Income
e
REVISED WITHHOLDING
TAX TABLE
0.00 —_ —
P1,250 | P 5,416.67 P 20,416.67 P 100,416.67
0.00 +20% over + 25% over P + 30% over P + 32% over P + 35% over P
P10,417_ || «16,667 33,333 83,333 333,333
Ee ee ee
P 20,833 and|| P 20,833-P || p33,333-p P 66,667-P || P166,667-P || P 666,667 and
below 33,332 66,666 166,666 666,666 above
0.00 P 2,500.00 || P 10,833.33 P 40,833.33 P 200,833.33
0.00 + 20% over P || + 25% over P || + 30% over P || +32% over P + 35% over P
20,833 33,333 66,667 166,667 666,667
procedural computation of the withholding tax on compensation

, Determine the total monetary and non-monetary compensation of the
employee for the payroll period: monthly, semi-monthly, weekly or daily.
segregate non-taxable benefits, mandatory contributions and supplemental
compensation.
2, Determine the bracket that applies to the regular compensation of the
employee for the applicable payroll period. Determine the basic tax for the
bracket.
3, Add supplemental compensation to the excess of the regular compensation.
Subject the total to the incremental tax rate for the bracket.
4. Total the basic tax and the incremental basic tax.
Illustration 1: Weekly payroll period

Olongapo Company pays Employee Marudo weekly. Marudo has a weekly salary of
P10,000, before P500 mandatory contributions for SSS, PhilHealth, HDMF and Union
dues and P1,000 non-taxable benefits.
Marudo’s taxable compensation shall be computed as:
Gross compensation P 10,000

Less: Mandatory contributions P 500
Non-taxable benefits 1,000 1,500
Taxable income p___8,500
Marudo’s P8,500 weekly taxable income qualifies under Column 3 under the
weekly
Fok Period. ABC Company shall compute the withholding tax on compensation as
Ows:
; Tax
gular compensation income P 8,500
“Ss: Base amount at Column No. 3 - weekly —___1.692 P
Xcess 576.92
P 808
Tot ae by: Incremental tax rate 29% 202.00
* withholding tax on compensation P___778,92
361

pe
|
tion Income
Chapter 10 - Compensa
| to Marudo shal} be:
The amou nt of compensation income that will be released
| eet ; an P 10,000.00
Gross compensation |
Less: Mandatory contr! 1,000 5 t.o0
Non-taxable benefits 50
Taxable income 8.92
Less: Withholding tax on compensation
Net payroll due to Marudo
tration 2
ABC Company employs Mr. Penoy with a basic monthly salary of P70,000 Which i
half
aid‘ semi-monthly every 15‘ and 30" th day day of the month. For the second half of the
sionth Penoy earned total overtime pay of P12,000. Total monthly contribution, for
SSS, PhilHealth, HDMF and union dues were P2,400.
Penoy’s semi-monthly regular compensation is P33,800, computed as (P70,000.
P2,400)/2. This qualifies under Column 4 under the semi-monthly payroll period, ABC
Company shall compute the withholding tax on compensation as follows:
Regular compensation income P 33,800

Less: Base amount at Column No.4-semi-monthly _33,333 P 5.41667
Excess P 467
Add: Supplemental compensation 12,000
Total P 12,467
Multiply by: Incremental tax rate 30% 3,740.10
Total withholding tax on compensation P9,156.77
The amount of semi-monthly pay that will be released to Penoy shall be:
Regular compensation P 35,000.00

Supplemental compensation __
12,000.00
Total compensation P 47,000.00
Less: Mandatory deduction P 1,200.00
Non-taxable benefits 0.00 1,200.00
Taxable income P 45,800.00
Less: Withholding tax on compensation 9,156.77
Net payroll due to Penoy
P_ 36,643.23
The procedures discussed herein are also applicable for daily
or monthly paytal
periods but of course using their respective withholding
tax table.
Year-end Tax Adjustment
aan be noted that the total amount withheld on every payroll date may not
‘0 b : y oe the annual tax due. Due to this, the income of the employee n¢ 5
reckoned at the end of the year and adjustment
is made as necessary: A"
362

, A RT eA
A
TZ
ot 10 - Compensation Income
capt vawith holdin
g shall be deducteg
nde aiding shall be refunded On the final
to the
yithh
i employee,
7s NOT SUBJECT TO wity
ae AS AMEN DED: HOLDING TAX oN COMPENSATION UNDER
pier”
1. pemunerations
. received
. as incidents of employment
emuneration paid for agricultural | ae
where the labor is performed ucts of the
abor and paid entirely in prod
b far
remuneration for domestic services
3,
Not art. WV of RA 10361 on e et
om workers or “kasambahay” prescribed under
ti
rs Act or Batas Kasambahay of

ec. , .
1: ranges from P1,500 to ai P2,500 a month - Worke

2013 too low compared to the tax exempt
minimum wage for commercial, industrial,
or agricultural works
°
4, Remuneration for casual labor not in the course of an employer’s trade or
business - treated as other income
s. Compensation for services by a citizen or resident of the Philippines for a
foreign government or an international organization
Under RMC 31-2013, this is not compensation income subject to withholding, but
it is still taxable compensation income; hence, it must be reported by the
employee.
Damages paid by the employer to employees
wan aD
Proceeds of life insurance

Amounts received by an insured employee as a return of premium
. Compensation for injuries or sickness
10, Income exempt under treaty
11. 13th month pay and other benefits not exceeding a total of P90,000
12. GSIS, SSS, PhilHealth, and other contributions
13. Compensation income including overtime pay, holiday pay, night shift
differential pay, and hazard pay of Minimum Wage Earners
14. Compensation income of employees in the public sector if the same does not
exceed those of minimum wage earners in the non-agricultural sector
These listed benefits are not considered compensation income; hence, they are
exempt from the withholding tax on compensation.
NG TAX ON
DEADLINE OF FILING AND REMITTANCE OF THE WITHHOLDI
COMPENSATION
shall file the BIR Form 160 1-C (Monthly Remittance Return of Income
Emplo yers owing month
) on oF before the 10" day of the foll
4xes Withheld on Compensation be
hold ing was made exce pt for tax es withheld for December which shall
the with year.
succeeding
lled/paid on or before January 15 of the
363

ft
come
In rne:
ap te r 10 - C o m pensation
1 6 0 4 - C( F ( A nnualI nfor
Ch BIR Fo r m holding Ta eh
al so r ehqeulidiredon to Cofimlepensation and Final With oy ;
Employer 5 ar e es Wi t h
y e a r in w h i c h the come.
of Income Ta
x
following ca J
endar en Sto
31 of th e s w e r e m a d e .
before Januar
y yment
n t s a nd p a s sive income pa
jncome payme
a copy of BIR Form
em ployee-taxp ayer
o y e r s sh al l fu rn is h ea ch
co me Tax Withheld) on oy fate
Em p l
e n s ation Payme nt or in fore
te of C o m p
(Certifica ar.
January 31 of
the succeeding ye
-compliance d in Chapter 4 fo,
Penalties for Non pe na lt ie s di sc us se
bject to the same Non.
Employers are su em en ts .
holding tax requir
compliance of with
Wi th ho ld in g T ax on Compensation incom
Treatment of th e
0 f in co me th at are subject to regular oy .
If the employee has ot
he r it em s
pr of es si on , in co me from other empl ment
business or tax return to include
such : Or
such as income from ol id at ed in co me
casual income, he mu
st file a cons
wi th ho ld in g tax on competisai ems
Th e
tire taxable year.
of income for the en olidated income tax return.
mus
due in the cons
credited against the total tax
urn
Substituted filing of tax ret the
employer files the income tax return of the
Under the substituted filing system, the ld by the employer,
of tax is corre ctly withhe
employee. If the amount
an annual income tax return.
employee no longer needs to file
364

i wv
&
wet 40 - Compensation
Income
oat
rha
qER 10: SELF-TEST EXERCIsEs
——
cussion Questions 7
pise umerate and explain the elements o
what are the classifications of compensation

income? Discuss each.
gnumerate the gene ral classes of non-taxable benefits
gnumerate the list of de minimis benefits and their respective
thresholds.
Explain the “necessity of the employer” rule and the “conv
enience of the employer”
rule.
Distinguish regular compensation from supplemental compensation. Enume
rate
So
—
the benefits considered as supplemental compensation.

11. How are stock options taxed under current tax rules?
12. Enumerate and explain the components of “13t month pay and other benefits.”
13. Discuss the difference in tax treatment of the “other fringe benefits” of rank and
file employees and managerial or supervisory employees.
14. Discuss the tax treatment of “13th month pay and other benefit.”
True or False 1
Benefits for the advantage of the employee are exempt from income tax.
Arank and file employee recommends managerial actions.
Aconsultant is not an employee.
A manager has the power to lay down and executes policies.
Aregular employee is subject to the regular income tax.
Filipinos employed by international missions are generally exempt.
Filipinos working in Philippine embassies are exempt from taxation.
A minimum wage earner is exempt from income tax.
Compensation income includes regular compensation, supplemental
compensation and 13th month pay and other benefits in excess of P90,000.
- Compensation income includes all remunerations received under an employer-
—
o
employee relationship, including all fringe benefits of managerial or supervisory

employees.
IL. Remunerations received as incidents of employment are exempt.
12. The employee's share in SSS, GSIS, PhilHealth, and HDMF are excluded from
Compensation income.
13. The exempt vacation leave credit is 10 days for government employees.
is — exempt de minimis benefits include all pn e fring oo rite
16 7 excess de minimis are considered “other inco Beit nde = _
* The sick leave credit of private employees up to 10 days Is exemp suns
- The overtime pay of minimum wage earners is exempt from tax.
365

eel ‘“
tion Income
Chapter 10 - Comp ensa
False 2 -
or nos em ployed in Philipp ine embassies are generally
True Filipi
exempt.
ilipt fixed amou nts regul ar]ly rece .
gular
1. mp en sa ti on s are fixe
Supplementa 1 co ved by t
2. payroll period. he
employee every manage rial, supervisory, or rank and
file emp)
employee can be a
A regular
i
tion includes
Inc variable performance-based remune
w
Regular compensa
th or without regar dtot
he payroll periog, tin
th e em pl oy ee wi
received by
idered employees.
All directors are not cons .
and file em pl oy ee s do routinary or clerical jobs. r empl
Ra nk
Nan
h business in come IS considered a regula

A minimum wage earner wit Vee
subject to inc ome tax.
ner,
age ria l emp loy e eis leas t likely to be a minimum wage ear
A man
The statutory minimum wag e
is P60,000 annually or the amount fixed5
9 ©
tivity Board whichever is lower. Y the

Regional Tripartite Wage and Produc
pensation threshold test, and exclusivity tes
10, The position and function tes t, com
are required for alien employees.
loyee.
11. A managerial employee can be a special emp
t “other benefits” while that
12. The Christmas gift of private employees forms par of
efit.
of government employees is considered de minimis ben
s
13. The fringe benefits of managerial or supervisory employee are gen
erally subject
to fringe benefit tax.
14. Resident Filipinos employed by foreign embassies, missions, or international
organizations are generally taxable.
15. Non-resident Filipinos employed by foreign embassies, missions, or international
organizations are generally exempt.
16, Half of the benefits given for the convenience or necessity of the employer are
taxable.
17. Fixed allowances are supplemental compensation income.
18. For managerial employees, the excess of de minimis benefits over their limits are
included as “other benefits”.
19, The excess of the 13th month pay and other benefits over P90,000 is considered
compensation income.
20. The substituted filing system appli
pplies to employees Itiple
i of
successive employments. ney we ee
- 21, An employer controls the m eans and
accomplished, method s by which
i the work isis to be
22, An employee who became a minimum

ini wage ig exempt
ge earner, during, the year Is 58
23. non
inimum earnersyear,
the entire
tax forwage who are di isquali i i during the yea" shall
employees. qualified for exemption
24, “inimum as regular
oe wage earners wh tne
increase during the year re teatiena Me ae threshold 9
: e only starting from the months of increas®.vit
25. A fringe benefit It isj usually in the nat : ‘
the nature of performance-based ag of an incentive. Compensation income!
366

1
Exercise Drill No.
In the bl ank provided for, indicate whether the Specified benefit
item of: or remuneration is an
', RC-regular compensation
. $C -supplemental compensation ~ FB ~ fringe benefits
- OB- 13% month pay &
. DM- de minimis benefits other benefits
B - exempt or non-taxabl
e benefits
; Rank &file Manager or
Benefit or remuneration employee Supervisor
1. | Uniform allowance
.2, | Commissions
3. | Rice allowance
4, | Productivity incentive
5._| Christmas bonus ~government
6. | Fixed monthly RATA - gov
ernment
7. | Medical benefits
8. | Additional compensation
allowance -
government
9._| 13th month pay
10. | Christmas gift - private
11. | Anniversary gift
12. | Shuttle allowance to a distant facility
13. | Excess de minimis benefits
14. | Basic salary
15. | Profit sharing
16.| Other employee personal expenses
paid by employer
17. | Emoluments and honoraria
18. | Stock bonus
19. | Educational assistance to employee
under employment bond
20. | Used sick leave credit
21.| Monetized unused sick leave - private
22. | Monetized unused vacation leave -
private
23. | Monetized unused sick leave - —
|_| government
24, | Monetized unused vacation leave ~
government
tami
25. | Excess over P90,000 of 13th month
| pay and other benefits
367

ee
=
/
ensation Income
Chapter 10 - Comp
|
||
; . .
rcise Drill No. 2 Salary of p
the empl oyee is a private employee with a basic
gsum ing that
of P250 per day, indi cate the annyay 0 de; a
in a region with a minimudem miwage nimis benefits in the spac es provided fo, limit
the an nu al ex ce ss
compute
Limit _ Excess
[——T De minimis benefits
ertime days
1. | P100/meal for 158 ov
during the year TT
e of 15-day
2. | P6,000 monetized valu
vacation leave credits md
owance to
3. | P1,000 monthly medical all
dependents of employees
day
4. | P6,000 monetized value of 15-
sick leave credits oes
P12,000 medical benefits
P2,000 quarterly uniform allowance
WO OINI aio
P500 monthly laundry allowance

P10,000 achievement award in cash
P3,000 Anniversary gift and P5,000
Christmas gift
10. | P3,000 monthly rice allowance

A 50-year-old employee retired during the year after 30 years of continuous service
and received the following remunerations:
Basic salary P 350,000
Employee share to SSS, PHIC, HDMF and union dues 24,000
Overtime pay 16,000
Retirement pay
Benefits from SSS 400.000
Pro-rated 13th month pay 21,000
Required: Compute the gross taxable compensation income.

An employee received the following benefits:
13th month pay
Profit sharing F60,008
De minimis benefits: 12,000
De minimis benefits within their ir] limi
Excess de minimis benefits o 80,000
Other de minimis benefits 30,000
Other fringe benefits 10,000
Total incentives —__25,000
368

i
%
¥
f
ter 40 - Compensation Income

chaP
ired «“
pea “13th month Pay and other benefits” assuming the employee is. a:
te the taxable
com ank and file employee
1. Managerial or supervisory employee
2.
lar compensation =
supplementary compensation P 1,068,000
340,000
other fringe benefits

13,000
required: Compute the taxable amount
in each of the following taxation sche
mes:
Progressive Fringe
Employee type
1, Rankand file employee tax benefit tax
2, Managerial or supervisory employ

ee

The following relates to the compensation income
employee: of a minimum wage earner
Compensation and overtime pay (January

to April) P 48,000
Compensation and overtime pay (May
to December) 97,000
13th month pay and other benefits in December
15,000
Required:
Compute the gross taxable compensat
ion income assuming the employee
became a:
[1 Minimum wage earner starting May 1
2. Regular employee by promotion starting May
1
Multiple Choice - Theory: Part
1
1. Which is usually an
employee?
A director who is at the same time the Chief Execu
92
tive Officer
A director regularly receiving a retainer’s fee
anon
Consultant
Ahired TV program talent
2 Which is not an element of an employer-employee

relationship?
“Selection process c. Power of control
Power to dismiss d. Payment of fixed wages
369

tion Income
Cha ter 10 - Compensa as to function?
e e classifi cation
‘Whichisnotan employ
3, pl oy ee c. Special employee
a. Manageri al em
ployee 4. > upervi
sory employee
b. Rankand file em
ty?
pl oy ee cl as si fi ca tion as to taxabili
Whichis notan em oyee
4,
oyee c. Managerial empl
a. Regular empl earner
d. Minimum wage
b. Special employee
wage is
The statutory minimum
5. ional Tripartite Wage and Productivity Board
a. The amount fixed by the Reg par tit e Wag e and Productivity Board Whic
h
Reg ion al Tri
b. The rate fixed by the ally
not ex ce ed P5 ,0 00 a month or P60,000 annu the rate fi
must nt h or P60,000 annually or
ee n P5 ,0 00 a mo ed by
c. The higher betw ty Bo ar d
ge and Productivi
the Regional Tripartite Wa ally unl ess it . exceeds the rate fixed by th ¢
d. P5,000 a month or P60,000 annu
and Productivity Board
Regional Tripartite Wage
Which is not included in the gros

s taxable compensation income of an employeg?
6.
a. Fixed monthly allowances
b. Performance based bonuses
In excess of P90,000
c. 13th month pay and other benefits not
ss of P90,000
d. 13th month pay and other benefits in exce
ee benefits?
7. Which is not an exclusion criterion on employ
a. Necessity of the employee rule
b. Convenience of employer rule
c. Exemption by special law
d. Exemption by treaties or international agreements
8. For purposes of the fringe benefit tax, fringe benefits pertain to

a. other fringe benefits not included as compensation income of any employees.
b. other fringe benefits not specifically included as compensation income of
managerial or supervisory employees.
c. all fringe benefits of managerial or supervisory employees.
d. all fringe benefits of rank and file employees.
9. Which is a correct statement?

a. The |compensation income of managegeri
ri al or supervisi ory employees isi subject
to fringe benefit tax. Fs icine tise
b. The taxable fringe benefits of rank and file employee are subject
i i [reing
to fring
benefit tax.
c. The taxable fringe benefits of managerial and supervi employee até
regular
to nsati i omee tax.
ton inc : pervisory . empioy
d he ect
Tsubj compe on incom of rank and file employees is subject to regular tax
370

47
0 - Compensation Inco
me
chapter |
ple Choice - Theory: Part 2
ulti
i] of these are exempt benefits of g minimum
j. wa &€ earner exc
_hazard pay. C. Vacation pay, ept
p, holiday pay. d. overtime pay,
which is not a su
pplemental comp
De minimis bene ensation income
fits ?
c. Allowances
p, Honoraria d. Bonuses
fringe benefits includes
a, Basiiccs salaries
i ment and Separatio
c. Retire
p.
n pay
Fees d. De minimis benefits
De minimis benefits are generally
a, exempt from tax. c. taxable in excess of P90,000.
b. fully taxable. d. subject to fringe benefit tax.
Which do not form part of other benefits of rank and file employees?
a, Excess of de minimis over their legal limits
b. Salaries and wages
c. Productivity incentive
d. Employee educational assistance
The term “de minimis benefits” does not include

a. Christmas bonus c. Rice subsidy
b. Christmas gift d. Monetized unused vacation leave
Select the most accurate statement.

a. De minimis benefits are totally exempt from income tax.
b. De minimis benefits in excess of P90,000 are subject to income tax.
c. The excess of “other benefits” over P90,000 constitutes compensation income.
d. The benefits of rank and file employees are not subject to fringe benefit tax.
Which is taxable as compensation?

a. SSS benefits c. Termination benefits from resignation
b. Retirement benefits d. Retirement gratuities from foreign institutions
Which of the following is subject to income tax?
a. Minimum wage
b. De minimis benefits
C GSIS benefits
Voluntary contribution to SSS, PHIC and HDMF
10, Which is correct when a minimum wage earner derives other income outside his
€mployment? i
4. He is subject to withholding tax and income tax. me tax
He is neither subject to withholding tax nov set ‘a income tax.
He is exempt from withholding tax, but subjec
371
Ee Re ee ee

INCOME ;
me (as
‘on
10 - Compensation
ta x, bu t ex em pt fr om c o
lalng
Card. e Heiis subject; vo wienno n P1,000 a month.
re than
wa nc e 1S ta xable whe given mo 00
d. given more than P2,0
11 . Ri ce al lo
a. palein cash sh
b. paid in no-cé>"
.
: e when given assignment.
c. for night shift employees.
er all
12 Bo rslow
oh
d. as incentive to
. fo sh. inca
.
s bene fit?
h is an ex em pt de minimi
13. Whic ave
9- da y mo ne tize d sick le ave
a. d vacation le
ay mo ne ti ze valued at P1,
000
b. 15-d lf sac ka m o n t h
Rice subsidy of ha
nce of P6,500
Uniform allowa
‘
limit?
rrect de minimis per year
14, Which is a co sh al lo wance of P5,000
di ca l ca
3. Actual me r year
wance of P3,600 pe
b. Laundry allo per year
ent award of P5,000
c. Employee achievem
Christmas gift of P 10
,000
d.
income as “othe
de mi ni mi s is co ns idered compensation
es s employees,
15. Statement 1: Exc and managerial or supervisory
an d file emp loy ees
benefits” for rank t
t subjec t to the fringe benefitax
minim is is a fringe benefi
Statement 2: Excess de orrect.
1is cor rec t. ©. Both statements are inc
a. Statem ent
b. Statement 2 iscorrect. d. Both statements are correct.
16. Which is considered compensation? daily transportation allowance

a. Reasonable amounts of pre-computed
b. Cost-of-living allowance
Outstation allowance for employees wor kin
g at distant facilities
c.
rt on duty anytime
d. Car incentives to medical doctors required to repo
compensation income?
17. Which of the following remuneration is an item of
a. Retainer fees of an outside director
b. Customer tips
c. Commissions to a minimum wage earner
d. Referral fee to a customer
18. Night cifferential pay is exempt from taxation when received by a

and fileemployee. c. minimum wage earner.
b.
own special
pecial employee. d, managerial or supervisory employee.
?
. ich i ‘ for a private employ**
a. 13th, ant to the P90,000 exemption threshold
b. Cash gift py c. Profit sharing bonus
d. Productivity incentive
372

tet 10 - Compensation Income
chaP p90,
ha
000 exemption threshold j
00. The S applicable to
regular employees. c. Managerial or s
a. upervisoi ry employees.
b. rank and file employees, d. all employees
, eee,
he excess of “13th month pay and other benefi
| ts” is
subject to regular tax. c. subject to fringe be
‘ nefit tax.
subject to final tax. d. exempt from income tax.
, which is subject to
the withholding tax on
3, Salary co
of domestic “Kasambaha
»,
ys” mpensanons
Compensation for injuries an
d sickness
¢, Salaries of resident Filipinos workin g in embassies, international missions
and organizations
qd, Salary of minimum wage arners
receiving fixed allowances
23, Statement 1: A minimum wage earner who | oses the benefit of exemption by
transferring to a region with a lower minimum wage is taxable on all income
during the year.
Statement 2: A minimum wage earner who qualifies as such during the year is
exempt from tax on all income earned during the year.
Which is correct?
a. Both statements are correct.
b. Both statements are incorrect.
c. Only statement 1 is correct.
d. Only statement 2 is correct.

1. Johnny received a salary of 73,000 during the year consisting of: P60,000 basic
salary, P8,000 overtime pay and P5,000 13th month pay. Compute Johnny’s
taxable income using contemporary tax regulations.
a PO c. P 68,000
b. P 60,000 d. P 73,000
Mr. Juanito had the following income in 2021:
Compensation income, net of P77,000 SSS,

PhilHealth, HDMF and union dues P 300,000
Supplemental compensation income 30,000
13" month pay and other benefits 25,000
What is the taxable compensation income?
% P402,000 c. P375,000
P330,000 d. P380,000
373

ensation Income
Chapter 10 - Comp
the employee:
The fol low ing rel ate s to an annual payroll of
3.
- os 00
P44,0 P 1,068,000
e000
Gross compensation income, before
, PHIC and HDMF
contributions to SSS aon
on
Additional compensati ,000
her benefits
13th month pay and ot
tion income.
ute the taxable compensa
c. P 1,069,000
a.a P1,113,000
d. P 1,068,000
b. P1,112,000
h pay of P29 000
me nt em pl oyee, receives a full 13th mont
4, Colyong, a govern year for
. He was deducted P18,000 during the
benefits
exclusive of P14,00 0 other Colyong’s taxable
contributions. Compute
premium for his SSS, PHIC, and HDMF
a. P222,000 c. P240,000
b. P226,000 d. P254,000
g compensation during the year:

5. Anemployee received the followin
P 143,000
Gross compensation (P11,000 x 13 months)
Overtime pay 12,000
Less:
SSS, PHIC, HDMF and union dues P 5,200
Withholding tax 10,000 15,200
Net pay P_139,800
Compute the taxable compensation income.

a. P149,800 c. P132,000
b. P138,800 d. P126,800
6. A private employee retired at 60 in the middle of the year and was paid the
following remunerations:
Retirement benefits P 2,000,000
Terminal leave pay (150 accumulated days) 120,000
Compensation, net of P16,000
SSS, PHIC and HDMF premium contributions 128,000
Mid-year bonus 8,000
Pro-rated 13th month pay 12,000
a. P 2,170,000 c.P 170,000
b. P 238,000 d. P 136,000
7. Amanagerial employee received the following remunerations:

Gross salaries, net of SSS, PHIC, and HDMF P1,090,000
SSS maternity benefits 30,000
374

ape
profit sharing bonus
240,000
13th month pay
95,000
Determine the taxable compensation Income,
a P 1,365,000
C. P 1,335,000
pb. P 1,350,000
d. P 1,330,000
8, A supervisory employee had the following remunera

tions during the year:
Salaries, before P24,000 SSs, PhilHealth
HDMF, and union dues
P 258,000
Profit sharing
Fringe benefits 20,000
65,000
13 month pay and other benefits
21,000
a P 343,000 c. P 254,000
b. P 278,000 d. P 204,000
An employee had the following details
of compensation income in 2021:
Regular compensation income
P 780,000
Overtime pay
43,000
13th month pay
65,000
De minimis benefits:
Medical assistance to employee
22,000
Total of other de minimis benefits
32,000
Compute the taxable compensation income if the
employee is a rank and file.
a P842,000 c. P 823,000
b. P 836,000 d. P 780,000
10. Compute the taxable compensation income if the em ployee is a managerial
supervisory employee. or
a P842,000 c. P 823,000
b. P 836,000 d. P 780,000

1. A managerial employee received the following benefits during the year:
Compensation income, net of mandatory contribution P 1,080,000
Housing allowance in addition to regular pay
(P30,000 x 12; actual rent is P25,000/month) 360,000
a P 1,445,000 c. P 1,145,000
b. P 1,175,000 d. P 1,085,000
375
tt I SI TE re ey Si YR ee

mpensation Income
Chapter 10 - Co
ceived t he following remunerations aside

from the basic pay.
Anemployee re 00
2,
an sp or ta ti on al lowance P 24,0
tion and tr aoa
Fixed representa y
tial pa
Night shift differen 000
Hazard pay 34'000
:
Honoraria
Profit sharing 18,000
13th month pay ployee
mp en sa ti on if th e em ployee is a regular em :
ntal co
Compute the suppleme c. P 56,0 00
a. P 68,000 d. P 32,000
b. P 44,000 ge
mp en sa ti on if th e em ployee is a minimum Wa
ntal co
3. Compute the suppleme
earner.
c. P 56,000
a. P 68,000
d. P 32,000
b. P 44,000
i pient of a st ock option
which vested during the
is a rec
4. A supervisory employee of the option and its subsequent
pertains to the exercl ise
year. The following data
sale by the employee:
P 45,000
date
Value of stocks at vesting 30,000
Exercise price of option 50,000
Selling price of stocks
ompensation.
Compute the supplemental c
c. P 15,000
a. P 50,000
b. P 20,000 d.P0
income of a private rank and file
pensation
5. The following relate to the com
employee during the year:
P 540,000 ,
Annual compensation income
45,000
13th month pay
45,000
14th month pay
26,000
Total of monthly rice allowances during the year
12,000
Commission from employer
8,000
Christmas gift
SSS, PhilHealth and HDMF contributions
21,000
Compute the exempt de minimis benefits.

a. P18,000 c. P 29,000
b. P 24,000 d. P 50,000
376

pter 10 - Compensation Income
cha
6 compute the total non-taxable compensation income. .
a PO c.P 111,000
bp. P.90,000 d. P 140,000
Compute the supplemental compensation.
~2
*
a ?P 25,000 cP 17,000
b. P 22,000 d. P 10,000
a. P586,000 c. P 557,000
b. P572,000 d. P 536,000
A government employee received the following benefits in 2019
Gross salaries
P 1,044,000
RATA 12,000
PERA
24,000
Additional compensation (ADCOM) 24,000
Christmas bonus 87,000
Laundry allowance (P400/ month) 4,800
Contributions to GSIS, PhilHealth and HDMF 62,000
Determine the taxable compensation income.
a. P1,071,200 c. P 1,044,000
b. P 1,068,000 d. P 1,009,200
10, A private employee had the following remuneration in 2019:

Gross salaries, net of P11,000 mandatory contribution P. 314,000
Fixed RATA 12,000
Cost-of-living allowance 24,000
Laundry allowance (P500/month) 8,000
Answer the following questions:
a. P314,000 c. P 338,000
b. P326,000 d. P 350,000
11. What is the total exempt de minimis benefit?

a. P 13,000 c. P 6,000
b. P8,600 d. P 5,000
12. What is the total exempt benefit?
a. P36,000 c. P 52,000
b P 47,600 d. P 90,000
377

"ee e
eae SEY
vw
come
pt er 10 - C o mpensation In gu la r employee at the star
Cha wage, b e c a m e a re 0 the
are ci pient of minim um iv ed a ra is e in pa y:
13. Jane,
of 2021 whe n
she rece Qtr _
third quarter Qtr_r
3 th
_4d
tr 2nd Qtr. —
P 33,000P 33
,000
p 24,000P 24,000 6,000
come 3,000
Compensation in 4,000 - 5,000
Overtime pay - 9,500
13th month pay
1,200 1,200
Less: 1,000 1,000
SSS, PHIC, and HDMF : 1,000 2,000
Creditable WH tax ,800 P45,300
Net pay p__27,000 p_28,000 p_33
.
e the ta xa bl e co mp ensation income in 2021
Comput
c. P- 75,000
a. P52,100
d. P 127,600
b. P72,600
oyee became a minimu
m wage earner when the minimum w age
14. A regular empl
last quarter of 2021:
was increased effective the
Be ond Qtr. _3rdQtr_ _4th Qtr_
24,000 P 24,000 P 00 P 24,750
24,0
Coat income P
4,000 5,000 3
vertime pay e Oks
13th month pay 083
Less: 1,000
j 00
1,0 ; 00
1,0
PHit, C, HDMF
SSS, PHI
1,100 1200
1,100
P25,900 P26,900 P_24,900 Poass13
Creditable WH tax 1,100
Net pay
1.
compe the taxable compensation income in 202
2 p 0 c. P 81,000
d. P 110,650
tp soasieg<”
. ,650
Bye
ekg
a5
378

—
worn"
my -”
. chapter discusses fringe benefits of managerial and supervisory employees
‘1 t to final fringe benefit tax and the procedural computations of the fringe
| penefit tax.
this chapter, readers are expected to demonstrate:
Afte
\ understanding of the nature of fringe benefits
1 Appreciation of the convenience of the employer rule and hybrid expense
3, Ability to distinguish exempt benefit, partially exempt, and fully taxable fringe
benefits
Understanding of the scope of the final fringe benefit tax
Knowledge of the characteristics of fringe benefits tax
Understanding of the procedures of fringe benefit tax computation
Comprehension of the general rules on monetary value
Comprehension on monetary value rules as applied to actual scenarios
Mastery of the procedures for the computation of the fringe benefit tax
0, Knowledge of the list of exempt fringe benefits
FRINGE BENEFITS
Under labor laws, fringe benefits pertain to all other benefits or incentives of
employees other than the basic pay. The basic pay is the fixed regular salary or
wages of employees every payroll period.
Under the NIRC, the term “fringe benefit” was defined to pertain to goods, services
or other benefits furnished by the employer to the employees.
Tax treatments of fringe benefits

Under current tax rules, however, items of fringe benefits in the strict sense are
treated differently depending on their nature:
For example:
4 Fringe benefits that are fixed every payroll period are considered regular
compensation.
wance
For example: Fixed transportation allo
Fringe benefits that are variable and performance-based are considered

Supplemental compensation.
pay
For example: commission, profit sharing and overtime
379

eee
oe
—
&
nefit Tax
Chapter 11 — Fringe Be
fo rm of in ce nt iv es are considered 13* monty,
c. Fringe benefits in the ang
other benefits.
he d for the em pl oy er ’s convenience or n écessy
d. Fringe benefits furnis Y arg
Other fringe benefits
d in the pr ev io us chapter, other fringe benefits not inclygama
As ment io ne
en s ation inco me and which are not exempteq
classifiable as items of co mp nder
s:
the law are treated as follow ud ed as “o ther benefits” under “13t Month
em pl oy ee s - in cl
1. For rank and file
pay and other benefits”
ees - excluded in compensation
9. For managerial and supervisory employben efit tax
income and are subjected to final fringe
SCOPE OF THE FRINGE BENEFIT TAX o;

frin ge ben efi t tax cov ers onl y the taxable fringe benefits of managerial
The
supervisory employees.
that taxable fringe benefits
For purposes of the fringe benefit tax, RR3-98 clarifies
income. Hence, an excellent
exclude those items considered as compensation
me is extremely important in
understanding of the items of compensation inco
me and the fringe benefits
highlighting the bounds between compensation inco
subject to fringe benefit tax.
SUBJECT TO FINAL TAX
GENERAL CATEGORIES OF FRINGE BENEFITS
1. Management perquisite benefits
2. Employee personal expenses shouldered by the employer
3. Taxable de minimis benefits
a. Excess de minimis over their limits
b. Benefits not included in the de minimis list
Management perquisite benefits

incentives
Perquisite benefits, also called “management perks’ are highly privileged
rformance
given only to a special group of employees. These benefits are non-pe
based and are given as incentives to management employees. Perquisite benefits
are not considered as compensation income, but as fringe benefits subject to
fringe benefit tax.
In practice, the boundary between fringe benefits subject to final tax and
compensation income subject to regular tax sometimes overlaps. Based on past
rulings, however, the BIR seemed to maintain the view that performance-bas¢
benefits are compensation income while benefits in the nature of incentive
perks are fringe benefits.
380

otet 4- Fringe Benefit Tax
C ha :
a safety net It Is therefore best recommended for taxpayers to secure BIR
“ings on the proper treatment of income in their compensation plans to avoid
sqconvenience
employee personal expenses
nen an expense takes the nature of an employee personal expense OF
xpenditure and is paid or assumed by the employer in default of a proximate
pusiness necessity, it is deemed a fringe benefit in its entirety even if the expense
is receipted in the name of the employer.
illustration
Mr. Lakewood, a managerial expatriate employee, was granted by his employer a
p30,000 monthly housing allowance in addition to his regular salary. The actual
monthly rent of Mr. Lakewood’s residence is P25,000.
The P25,000 personal expense assumed by the employer constitutes a taxable fringe
penefit subject to fringe benefit tax. The monthly fixed P5,000 excess is a taxable
additional compensation. (BIR Ruling No. 512-2011)
Hybrid expenses
When the employer incurs expenses which is purported partly for business and
partly for employee's incentive, only 50% of the expense representing the
employee incentive is subject to the fringe benefit tax.
The following are hybrid expenses under RR3-1998:
1. Housing benefits in the form of rental accommodation
When an employer leases a residential unit for the use of the employee and the
business, the rental expense is deemed half business expense and half fringe
benefit to the employee.
2. Allowing an employee free use of business property
When the employer allows its employee to use business properties, the rental
value or depreciation value of the business property over the period of usage is
deemed half business expense and half fringe benefit to the employee.
lllustration 1
The University of Caceres pays for the P50,000 monthly rental of the residential unit
ofits President.
The amount of taxable fringe benefits shall be P25,000 computed as 50% x P50,000.
381

ok ee eis ran bee a ee
~
ge Benefit Tax
Chapter 11 - Frin
products all over th e Philippi
Illustration 2 co ns um er be
nu fa ct ur er and distributo r of
s em pl oy ee s. Th e company requires nes
A ma e © fit _ Oe
cars and other ve
hicles for the us
hl y re nt al de du ct ib le through their payroy hile gs
40% of the mont
to share at least expense.
the 60% as rent n
company books y re nt al is taxable as fringe be
nt hl t Sine
opi ne d th at on ly 10% of} the mo terpart. (BIR Ruling No. 009- 20 ) 00
The BIR coun
40% of their 5 0 9%
employees shou idered
Exempt fringe benefits ar e ex em pt from the fringe benefit tax:

be ne fi ts
The following fringe d exempted from tax under speci
in ge be ne fi ts wh ic h are authorized an Cia}
1. Fr
laws
n to SSS, PhilHealth, HDMF or group insur,
tri but io
Examples: Employer's con
Nee,
set by law
r the mandatory amounts
except excess ove busines, :
by the nat ure of, or necessary to the trade, r
2. Benefits required
profession of the employer
yer
ience or advant age of the emplo
3. Benefit given for the conven
for the benefi t of the employee to retirement
4. Contributions of the employer
efit plans
insurance and hospitalization ben
r not granted under
Benefit given to rank and file employees whethe or °
collective bargaining agreement
oyees are exempt from fringe
The taxable fringe benefits of rank and file empl
of compensation income
benefit tax, but are subject to regular income tax as part
6. De minimis benefits within their legal limits
“Necessity or convenience of the employer’ rule
If an expense is necessitated by the nature of the trade, business, or profession of
ae or is furnished principally for the employer’s convenience or
Sree isi is sy incidental aa expense. The personal advantage of the
incidental tothe expense. These fring lew
as taxable fringe benefits under the NIRC. pe Benefits argnot wien
Exams of exempt benefits under this rule:
. Scholarship program for an employee to study and acquire competence for future
use of the business
: Car sreentves medical doctors so they will be available for duty anytime
"Mobile ohne la eRmne ovees working at distant facilities
sig liege hanhitos porate secretaries who are required to handle off
5. Sleeping quarters to field engineers and staffs working on remote facilities
382

‘é
’
Fringe Benefit Tax

chapter 1 ~
Helicopters assigned to fishing employees for locating schools of fish offshore or
7 to mining engineers for mineral exploration purposes
7 personal aircraft to a chief executive officer managing business affiliates and
"subsidiaries spread across different countries
9, Car incentive to a travelling company salesman
g, Sleeping quarters near the camp furnished to military person
nel so they will be
available for duty at any time of insurgency
10, Housing units for an employee and his family near the employer’s place of
business to ensure the employee's availability anytime when the employer needs
him
THE FRINGE BENEFIT TAX

The fringe benefit tax is a final tax imposed on the fringe benefit furnished, granted
or paid by the employer to the employee, except rank and file employees, whether
such employer is an individual, a professional partnership or a corporation,
regardless of whether the corporation is taxable or not, or the government and its
instrumentalities.
For the purposes of the fringe benefit tax, fringe benefit means any good, service,
or other benefits furnished or granted in cash or in kind by the employer to
individual employees (except rank and file employees) such as, but not limited to,
the following:
1. Housing benefits
2. Expense account
3. Vehicles of any kind
4, Household personnel, such as maid, driver or others
5. Interest, for the difference between the market rate (12%) and the actual
interest granted
Membership fees, dues and other expenses borne by the employer for the
aN
employee in social and athletic clubs or other similar organizations

Expense for foreign travel
mOON
Holiday and vacation expenses

Educational assistance to the employee or his dependents
0. Life or health and other non-life insurance premiums or similar accounts
in excess of what the law allows
CHARACTERISTICS OF THE FRINGE BENEFIT TAX
1. Final tax
The fringe benefit tax is a final tax which is withheld by the employer at
source. Thus, the employee need not report the fringe benefits in his income
tax return.
383

Chapter 11 — Fringe Benefit Tax
supervisory employee,
2. Tax upon the fringe benefits of managerial or
The fringe benefit tax is not a tax to the employer. It is a tax upon the fr;
benefit realized by the managerial or supervisory employee. It is a tax to ge
employee; hence, it applies regardless of the identity of the em low’
Therefore, it applies even if the employer Is a sole proprietor, partne.."
ershipp,
h government.
corporation whether taxable or exempt, or the
3. Paid by the employer
As a final tax, the tax is presumed withheld at source and remitted by the
employer to the government.
4. Grossed-up tax
b
The monetary value or the amount of fringe benefit realized or taken home
withhelq at
the employee is effectively net of the final tax which is to be
Hence, the monetary value is first grossed-up by the complement
source.
percentage of the applicable fringe benefit tax rate before the fringe benefit
tax rate is applied.
5. Due quarterly
The fringe benefit tax is due for remittance quarterly based on the accounting
period (fiscal or calendar) selected by the employer. The monetary value of
each taxable fringe benefit is determined and reported quarterly through BIR
Form 1603Q.
The quarterly fringe benefit tax is due on or before the last day of the month
following the quarter in which withholding was made.
PROCEDURES IN COMPUTING THE FRINGE BENEFIT TAX

1. Determine the monetary value.
Monetary value refers to the taxable amount of benefits taken home or realized by
the managerial or supervisory employee. The monetary value is presumed net of
the final tax.
2. Determine the gross-up rate and fringe benefit tax rate applicable for the
taxpayer.
The gross up rate is the complement of the fringe benefit tax rate. If the fringe benefit
tax rate is 35%, the gross-up rate is (100% less 35%) or 65%. If the fringe benefit tax
rate is 25%, the gross-up rate is 75%,
3. Determine the grossed-up monetary value by dividing the monetary value by
the gross-up rate. |
4. Determine the fringe benefit tax by multiplying the fringe benefit tax rate t
the grossed-up monetary value.
384
er

; a
i
er 11- Fringe Benefit Tax
cnapt
ES ON VALUATION OF FRINGE BENEFITS
v enefits paid in cash
1 when benefit is given in cash or paid for in cash, the monetary value is the
amount paid for in cash.
te: The only exception here is when the employer pays for th t of the residence of the
mo ployee. Monetary value is 50% of the rental payee ead wae
genefits paid in kind
2.
when benefit is given in kind, the monetary value is the fair value of the thing
given unless its book value is higher. Book value is the cost less any provision
for depreciation for depreciable properties.
simply stated, the monetary value is the fair value or the book value of the
thing given, whichever is higher.
When ownership over the property is transferred to the employee, the
monetary value is the entire fair value of the property even if the property is
partially used in the business of the employer.
3, Benefits that are furnished
When the benefit is given in the form of free use of the employer's property,
the monetary value is 50% of the rental value of the property. If the property
has no available rental value, the depreciation value is used.
For purposes of the depreciation value, the presumptive useful lives of the
property are:
a. 20 years for real properties.
Hence, the depreciation value is computed as 1/20 or 5% of the value of
the property.
b. 5S years for movable properties.
Hence, the depreciation value is computed as 1/5 or 20% of the value of
the property.
Since the fringe benefit tax is paid quarterly, the valuation and reporting of
monetary value is also done quarterly. In case of use of employer properties, the
reporting of monetary value ceases from the month the free use is discontinued.
lllustration: Determination of depreciation value
A Partnership transferred the use of a property with a fair value of P2,000,000 to its
Supervisor,
T he annual depreciation value shall be: ; —
: Ifthe property is an immovable such as a residential unit, the annual depreciation
Value shall be P100,000 computed as P2,000,000 x 5%.
385

d
chapter 11 ~ Fringe Be. net Le
e ;
motor vehicles, th
as a car OF other thy
e ch da s P2 ,0 00,0.00 x 20%,
su
is movabl 00,000 co mp ut e
If th e pr op er y ue shall be p4 fi t ta x, th
y
e quarterly monetar vali 7"
, .
2. va l th e fr in ge be ne
deprec aeiatireporting for
on
by 4,
uar di ng th e an nual value
by divi ION
hetermined
VALUE DE TERMINAT
Y
I D E L I N E S ON MONETAR .
SPECIAL G U _
the said
Benefits of hi s e mployee and
ousing for the us e
‘e as es a re si dential propertyemployee.
Tan ayer ua l residence
of the
is th e us
property
fit
ta ry va lu e = 50% of the bene
Mone
us e an d lo t fo r the use of his
l ho
llustration
sh ip bu si ne ss leases 4 residentia
Asole proprietor r P20,000 /mon th.
ss ma na ge r fo
busine
lue shall be: P 60,000
The monetary va hs) =
y va lu e = (P 20,000 x 3 mont p__30,000
Quarte rl % =
ry valu e = P 60,000 x 50 his
Quarterly moneta
d as si gn s th e same for the use of
an
Employer 0 wns a re
sidential property
e; th e an nu al va lu e of the benefit is 5% of
2.
ual place 0 f reside
nc provement.
employee as his us
e zo na | or as se ss ed value of the land and im
whichever is higher of th
fit
= 5 0% of the an nu al value of the bene
Monetary value
Illustration
un used re alty investmen
t costing P3,500,000
of its
00,000 to be used by its
ow ed one
Chamberly, Inc. all assessed valu e of P3,0
,000 and
with zonal value of P4, 000
vice president.
termined as follows:
The moneta ry value shall be de
,000 x 5% P 200,000
Annual depreciation value = P4,000 P 50,000
Quarterly value = P200,000/4 quarters
P__25,000
Quarterly monetary value = P50,000 x 50%
on installment basis and allows
3. ey employer purchases a residential property
of residence; the annual value is
is employee to use the same as his usual place
5% or 1/20 of the acquisition cost, exclusive of interest.
Monetary value = 50% of the annual value of the benefit
Thisis isi the same with No. 2 except that the basis is the purchase price of the properly:
Illustration
C ;
toe ae corpomaen purchased a residential property for the use of i ts manager:
perty is payable over 11 annual installments of P200,00 0 including
386
et TT

iM Fringe Benefit Tax
té
chaP ests but have a cash price of P2,000,000. For accounting purposes, Cotabato
inter ration opted to capitalize the interest and recorded the P2,200,000 contract
a as acquisition cost of the property,
ri
on monetary value shall be determined as follo
ws:
nual depreciation value = P2,000,000 x 5% P 100,000
AM eer! value = P100,000/4 quarters P 25,000
quarterly monetary value = P25,000 x 50% P_ 12,500
note: The purchase price is the cost net
of interest.
purchase by the employer of residential and transfer of ownership in the

* ame of the employee, the value of t heproperty
benefit is whichever is higher of the
acquisition cost or zonal value
monetary value = 100% of the value of the benef
it
lustration
4 non-profit corporation bought a residential dwelling for P5,000,000 and
transferred ownership to its president. The property has P3,000,000 zonal value.
since there is transfer of ownership, the monetary value is the entire P5,000,000,
the higher of book value (i.e. cost in this case) and zonal value.
5, Purchase by employer of property and transfer of title to employee for less than
adequate consideration, the value is [(fair market value or zonal value, whiche
ver
ishigher) less consideration paid by employee
Monetary value = 100% of the value of the benefit
Illustration
Denzy, a professional practitioner, transferred his residential
property in the
name of his managerial employee for P2,000,000. The property has
fair value per
tax declaration of P3,400,000 and P5,000,000 zonal value.
Since there is a transfer of ownership (i.e. title), the monetary value
is P3,000,000,
computed as P5,000,000 zonal value less the P2,000,000 consideration paid.
Exempt housing privileges:
| Military officials of the Armed Forces of the Philippines (AFP), Phi
lippine Air
Force (PAF), Philippine Army, and Philippine Navy on their qua
within or accessibl rters which are
e from the military camp so they can be readil
y available on call]
to meet the exigencies of their military service.
Housing unit situated or adjacent to the premises of a business or factory (within
amaximum of 50 meters) from the perimeter of the business premises.
The 50-meter rule may be relaxed
when upon the basis of health or safety
'equirements such as in the case of chemical manu
facturing, the housing needs to
Clocated at a farther location.
387
aS
ies.
eae

—__ ° °°
r _
nefit Tax
Chapter 11 - Fringe Be less (i
g for an em pl oy ee in a ho using unit for 3 months or &,
3. Temporary housin
r)
not exceeding one quarte
;
yp,
Expense Account
em pl oy ee bu t wh ic h are paid by his employer or inc
Expenses incurred by an by the employer are taxa
by
reim bursed or advanced
but e
and paid by employee is the am ount paid by the employ
er.
ne ta ry va lu e
fringe benefits. The mo
employer expense ang the
Properly docu mented in the name of the employer
rec eipted for and
When the expense is to tp
ke of the nature of a personal expense attributable
expenditure does not parta because it is a business expen se. .
able fringe benefit
employee, it is not a tax
ption of
of th e em pl oy ee suc h as groceries for the personal consum
Personal expenses er, are taxable
and /or his fam ily , if pai d or reimbursed by the employ
the employee employer.
ben efi ts whe the r or no tre ceipted int he name of the
fringe
ion income and are
reg ula r RAT A are tre ate d as part of regular compensat
Fixed and
taxes, no t to fringe benefit tax.
subject to creditable withholding
Illustration liquidated by its
expenses which were
Denver Corporation paid for the following
managerial employee:
P 15,000
Water and electricity bill at manager’s home 18,000
Meals and groceries at manager's home
2,000
Bill on business telephone
1,000
Bill on personal phone
12,000
Transportation from office to and from clients
Transportation from office to and from manager's home 10,000
Foods and beverages for visiting business clients 8,000
The monetary value of fringe benefits shall be computed as follows:
Water and electricity bill at director’s home P 15,000

Meals and groceries at director’s home 18,000
Bill on personal phone 1,000
Transportation from office to and from home 10,0 00
Total monetary value P_ 44.000
Note: Business telephone bills, office to client transportation, and food and beverages for client
visitors are business expenses, not fringe benefits to the manager
Motor Vehicles of Any Kind

1, ee by employer of motor vehicle in the name of the employee regar dless of
: ether the same is used partially in the business of the employer
onetary value = 100% of the cost of the motor vehicle
388
——-: ee

OEE
a f
ny
/
/
{
At Fringe Benefit Tax

capt
Note that the monetary value shall be re ported in the quarter of purchase.
cash penefit to employee for the purch
ase of a vehicle, even if the vehicle is partly
. .
in the busine
of the
ss employer
used in t ploy
pnclary value = 100% of the cash benefit, except when the amount is subjected
l0 withholding tax on compensation
car benefits that are paid in cash and are sy bjected to withholding tax on
compensation are subject to regular tax, not to
penefit tax, the monetary value shall he reporte
fringe benefit tax. If subject to fringe
d in the quarter of payment.
purchase of car on installment b asis by the employer with ownership placed in
the name of the employee
ee even if the car j S used partly for the employer's business,
the benefit is the acquisition cost divi
Monetary value = (1/5) or 20% of the acquisition cost
{IJustration
An employer purchased a car for P1,000,000 payable in four installments plus
10% interest on the outstanding unpaid balance of the car.
The entire acquisition cost shall be recognized as monetary value since
there is
transfer of ownership but the regulation requires amortization over
5 years. Hence,
the employer shall recognize P1,000, 000/5 or P200,000 monetary value
annually for
five years. For every quarter, the employer shall report P200,000/4 or P50,000
monetary value until the cost is fully reported over 5 years.
. Employer shoulders a portion and is placed in the name
of the employee, even if
partially used in business
Monetary value = the portion shouldered by the employer
Illustration
An employer assisted its managerial employee in purch
asing a brand-new car for
P4,000,000; 60% of the value is deductible against future salaries of the
managerial employee.
The monetary value shall be P1,600,000 computed as P4,000,000 x 40%
representing the portion shouldered by the employer. This
will be reported in the
quarter the employer's share is paid.
' Meet of motor vehicles owned for the use of the business and the employees, the
Value of benefit is the cost of all motor vehicles not used for sales,
freight, delivery
Service, and other non-personal uses divided by 5 years
Monetary value = 50% of the value of benefit
It should be noted that the cost of motor vehicles
not used in business js
‘Mortized over 5 years. There being no transfer
of title, 50% of the benefit is
"ecopnizable as monetary value. The quarterly recog
nition of monetary value
“Sntinues until the free usage
is terminated.
389
ae

Benefit Tax
Chapter 11 ~ Fringe 4)
of the in he re nt di ff ic ulty of tracing the realiz
cause jon™ or
it must be noted that be icular employee considering the collective en en
a part or possibly jn
the fringe benefits to (m an ag er ial, supervisory,
to the final fringe bell
em pl oy ee s
of the benefit by the si mp ly su bj ec te d it
regulations
rank and file.alike), the efit
tax.
for the use of the bu siness and the employ &€, the
sed
6. Fleet of motor vehicles lea tor vehicles not normal] Y Useg
ts is the rental payments for mo
value of the benefi al use
fre igh t, del ive ry, ser vic e, and other non-person
for sales, t
Monetary value = 50%
of the value of the benefi
rs are de em ed sol ely for bus iness use; hence, they a, e
7. Aircrafts including helicopte
t tax.
not subject to fringe benefi eg
ow ne d and m ain tai ned or leased by the employer are presum
Yachts whether
8.
ss use , hen ce, tax a ble as fri nge benefits. If owned or maintained, th
not for busine 20 years. ume
ben efi t is me as ur ed as the depreciation value over
value of the
Illustration
00 yacht for the use of its executives,
Assume a corporation acquired a P10,000,0
ermined as:
The monetary value shal | be det
,000,000/20 P 500,000
Annual depreciation value = P10 P_125,000
00/4
Quarterly monetary value = P500,0
of the fact that it is fixed and cannot be
A yacht is conside red immovable by virtue
presumptive useful life for real
removed from water. Hence, the 20-year
e rental payment is the monetary
properties is used. If this is leased, the entir
the regulation.
value. Note that the 50% rule is not applied by
d to the name of the executive,
Supposing the yacht is purchased and transferre
the monetary value shall be the entire P10,000,000.
Note on aircrafts and yachts

bitive or impractical
The high cost of ownership of aircrafts makes it inherently prohi
the regulations as solely for
to be for personal use. Thus, aircrafts are deemed by
y on
business use; hence, they are exempt from fringe benefit tax. Yachts, though price
being for
the other hand, generally lack any sensible business purpose aside from
fringe benefit tax in full.
personal pleasure; hence, its depreciation value is subject to
the entertainment of guests or prospective

Exceptionally, if the yacht is used solely for
clients, it is not subject to the fringe benefit tax. In this case, the depreciation of the
yacht qualifies as “entertainment, amusement, and recreation expense”.
390
acer

9 a
haptet 11 Fringe Benefit Tax

C
pusehold Expenses
gmployee expenses borne by the employer for household personnel, salaries of
nousehold help, personal driver of the employee, and other personal expenses
ch as homeowners association dues, garbage dues, electricity, and water are
vaxable fringe benefits. The monetary value is the amount paid.
justration
yenesy Corporation granted the following benefits to a
managerial employee:
salary of household personnel P12,000/month
salary of personal driver
10,000/month
Home owner's association dues 4,000/year
The quarterly monetary value of the benefit shall be dete

rmined as follows:
Salary of household personnel P 12,000 x3 P 36,000
Salary of personal driver P 10,000 x3 30,000
Home owner’s association dues* P 4,000/4 1,000
Note: A year is composed of 4 quarters. P67,000
Interest on Loan at Less than Market Rate

The interest forgone by the employer represen
ting the difference between 12%
and the actual interest charged is a taxable fring
e benefit.
Illustration
Europa Cooperative lent its chief executive officer
P 1,000,000 at a minimal 3% annual
interest rate. The monetary value shall be computed
as follows:
Annual monetary value = (12% - 3%) x P1,000,000
P 90,000
Quarterly monetary values = P 90,000 /4
P__22,500
Membership fees, dues, and other expenses born
e by the employer for his
employees in social and athletic clubs or othe
r Similar organizations
constitute taxable fringe benefits. The monetary value is the amou
nt paid.
Expenses for Foreign Travel
Reasonable business expenses for foreign travel for attendin
g business meetings
and conventions are exempt, such as the following:
1. Inland travel expenses such as food, beverage, and local transpor
tation costs
2, Lodging costs in hotel or similar establishment amounting to an aver
age of
$300/day or less.
Economy and business class airplane tickets
we
70% of the cost of first-class ticket
391

|
t Tax
Chapter 11 - Fringe Benefi botisider
of fi rs t- cl as s tic ket in foreign travels is
the co st
Note that 30% of reign travels de,
o tha t t he fo regoing rules apply only on fo i co
- minimis. No te als
onable and hence deduct
ra lly considered as reas
of domestic travel is gene |
‘as ; t
ir em en
Substantiation requ re su pp or ted by documentations 7
ly if the ex pe ns es we
The above rules app . inn: : Vv
the actual occurrences of the meeting OF convention; otherwise, they shally?

oP ¢
. ubjec t to ssfring
ve usine mmcoti ngs itmusttax.be supported by an official communication from }
e benef
pose of the meeting.
associates abroad indicating the pur
invitation or communication
Business conventions must be supported by an official
from the host organization or entity abroad.
d the employer are
Expenses for the family members of the employee shouldere by
taxable fringe benefits in full.
Illustration
Zubiri, Inc. allowed its VP Finance, Mr. Gonzales, to attend a convention abroad with
the privilege to bring his wife. The expenses of the foreign travel were:
Mr. Gonzales _Mrs. Gonzales Total

First class plane ticket P 70,000 P 70,000 P 140,000
Lodging cost* - 91,000 91,000 182,000
Foods & inland transportation 50,000 50,000 100,000
P__211,000 P211,000 P422,000
*The applicable exchange rate is P52:$1; P52 x $350 x 5 days each to Mr. and Mrs. Gonzales
The monetary value shall be determined as follows:
Items Remarks Amount

First class plane ticket:
Mr. Gonzales P70,000 x 30% P 21,000
Mrs. Gonzales P70,000 x 100% 70,000
Lodging costs:
eae ($350-$300) x P52x5 13,000
. Gonzales Fully taxabl
Foods and local transportation Tate aaa
Mrs guzales Exempt de minimis
.
0
Ful F 0
Total monetary value wa Peale P a : 0
Holiday and Vacation Ex
penses
Holid
employer. : The nn value is are
onetaryexpenses the amount fringeor benefits
taxable paid if shouldered
shouldered
by "*
by the employe!
392

yo
napter 1 Fringe Benefit Tax
C
gucational Assistance to the Employee or his Dependents
jucational assistance to the employe e is generally taxable except when it is
Preurred furtherance of the employer's business, such as:
for the convenience or
1, the education or study is directly connected with the employer's trade,
* jusiness or profession; and
9, there is a written contract (i.e., employee bond) that the employee is under
obligation to remain at the employ of the employer for a period of time they
mutually agreed upon.
educational assistance granted to dependents of the employee is generally taxable

except when the assistance was provided through a competitive scheme under a
scholarship program of the company.
Illustration
Dianne Marketing, a distributor of cosmetics products, provides educational
assistance to the following employees under an employment bond:
Amount per
Position Field of study —semester_
VP for Management Doctor in Business
Administration P 50,000
VP for Marketing Master in Marketing
Management 35,000
Operations manager BS Cosmetology 25,000
Accounting supervisor BS Criminology 24,000
Accounting staff BS Accountancy 20,000
Only the tuition fee of the accounting supervisor is subject to fringe benefit tax and
shall be reported in the quarters it is paid. Even if covered by an employee bond, his
field of study is neither related to the nature of his job nor to the employer's business.
The fringe benefit of all the other employees will neither be subject to the fringe
benefit tax nor the regular income tax under the “convenience of the employer” rule.
Life or health insurance and other non-life insurance premiums or similar

amounts in excess of what the law allows
These are taxable fringe benefits except the following insurance or premium
contributions allowed or required by law:
1. Contributions of the employer for the benefit of the employee pursuant to the
provisions of existing law such as contributions to SSS, GSIS, PhilHealth, and
HDMF
2. Cost of premium for group insurance of employees
393

a —_—_
Benefit Tax
Chapter 11 - Fringe
Iilustration
Queensdale Company made the following insurance premium payments during a
_ e0 the Chief Executive| Officer (CEO)

P30, 00 premium for the life insurancey © off the : With
be ne fi ci ar policy
any as the ating Oe
the Company Chief Oper
rance of
enim for the life insu
ques
ith his wi he beneficiary
pr em iu m of the per son al car of the company manager
OO nce
i urance of emp loyees
or e group
. ea ob sreminium n fshar in SS,ins PhilHealth, and Pag-Ibig dues of employees
for the company building
L P10,000 fire insurance premium
;
The quarterly monetary value of fringe benefits shall be computed as follows
Life insurance premium of COO where his wife

is the beneficiary P re ony
15,
Car insurance of company manager
Quarterly monetary value P___35,000
Te the insurance premium on the life of the CEO where the company itself is the beneficiary is
not a fringe benefit to the executive employee but a business expense.
2. Group insurance premiums and those required by special laws are not taxable.
3. The premium for fire insurance on company building is a business expense.
FRINGE BENEFIT TAX RATES
The fringe benefit tax rates are as follows:
pe Employees
be ; | Year Residents or citizens* Non-resident aliens
1998 34%
1999 33% 25%
2000 to 2017 32% °
2018 and thereafter 35%
’ . we
Includes reside nt citizens, non-resident
citizens, and resident ali
ens
GROSSED-UP MONETA
RY VALUE
The basis of the fri
n
benefit. Th
394

Ww
,
aptel 41 - Fringe Benefit Tax

cnaP
pe
Employees
Residents3 an citizens*
it Non-resident aliens
67%
7000 to 2 ee
ee
S8%
9
7018 and thereafter 65% “

ilu stra tion
assume an emp loyer grants fri ringe benefits with
resident citizen managerial employee. monetary value of P58,500 to a
The grossed-up monetary value is computed as P58,500/65% = P_90,000. If the

employee is a non-resident alien, the grossed-up monetary value shall be computed as
958,500/75% = P.78,000.
ILLUSTRATIONS: FRINGE BENEFIT TAX COMPUTATIONS

llustration 1: Resident citizen
in the last quarter of 2021, Alexander, a Filipino supervisory employee, was given
P13,000 worth of groceries for personal use.
Monetary value P 13,000

Divide by: Gross-up rate 65%
Grossed-up monetary value P = 20,000
Multiply by: Fringe benefit tax rate 35%
Fringe benefit tax P 7,000
Alternatively, the fringe benefit tax can be directly computed as P13,000 x 35%/65%.
Illustration 2: Resident alien

An offshore banking unit (OBU) reimbursed the following personal expenses of its
non-resident managerial employee during a calendar quarter:
Golf club membership dues - 100% in the
name of the employer
: 54000
Groceries - 50% in the name of the employer ,
Home owners’ association dues
539.00
39,0000
Total
% = P 21,000.
The fringe benefits tax shall be computed as: P39,000 x 35%/65
in full even if they are receipted in full or in
Note: Personal expenses are taxable fringe benefits
Part in the name of the employer.
395

ree
Chapter 11 - Fringe Benefit 19%

00 car ang design |
am pany purchased a P3,000,0
. ; n
Illustration 2: Non-resi ates.

: iive. cut di,
21, CybersP Pp 300.000
se of its non-residey alien exe
fc : Ja a
P__75,000 ||
Moarnetetarlryy vamolunee ta(ryF3va,lu0e 0(P0307.Y,000/
Qu |
'
= P 25,009,
oA —
as P7 5, 00 0 x 25 %/ 75 % 0
be co mp ut ed
The fringe benefits tax shall ee tans |
continues to be payable for as long as the employ th
Note: The fringe benefit tax business use.
and/or
property for personal use
UNTING ENTRIES lows:

folnd
l | be classified as te
Acc
Ne oun
co tin g ent rie s sha
in cash or in kin
1. Taxable benefits paid for
e payment of cash or transfer of pro Perty
2. Taxable benefits whi° ch do ° not involve ki d
cash or in kin
3, Exempt benefits paid for in
ent of cash or transfer of Property
4, Exempt benefits which do not involve paym
. oe
Benefits paid for in cash or in kind
Taxpayers shall record fringe benefits paid for in cash or in kind in their books a.
follows:
Fringe benefit expense (monetary value) XXX
Fringe benefit tax expense XXX
Cash/Tax basis of property given XXX
Fringe benefit tax payable XXX
Illustration 1: Rental accommodation

Moon Corporation paid P91,000 for the rental of a housing unit for the use of its
president.
Fringe benefit expense P 91,000
Fringe benefit tax expense 24,5 00
Cash P
Fringe benefit tax payable
ee
Fringe benefit tax = (P91,000 x 50%
) x 35%/65%
value of P1,300,000,
ge penefit expense P12

ringe benefit tax expense (p} 200,000
3M
pripersy
Investm benefit *35%/65%) 700,000
Fringe ent tax payable | P movngeee
700,0
396

Ww
ter 11
— Fringe Benefit Tay
chaP
pen ers shall record fri nefite wi or properties
nge be
te
t t pooks as follows: © ut outflow of cash or propermesm
Fringe benefit expens
e ( monetary value)
Fringe benefit tax Payable Xxx
.Th . t
calendar quarter would have been P260,000, € rental value of the unit for the pas
Fringe benefit tax expense
P 7
Fringe benefit tax payable
Fringe benefit tax = (P260,000 x 50%) x 359/660 2200 P 70,000
Note that the employer is not all
owed to claim fringe benefit exp
expense needs to be an actual ense. A deductible
outflow or depletion of resour
employer can claim depreciation exp ces. Anyway, the
ense if the property is an ordinary
of capital asset where no depreciation asset. In case
is allowable, fringe benefit tax rules
inappropriately allow the claim of ded shall not
uction. The rules of deductions will
in Chapter 13. be explained
llustration 2: Interest free loans

Kalamansig, an oil exploration company,
granted a P1,000,000 interest-free loan
non-resident managerial employee. toa
The following entry shall be made ever

y quarter after the loan issue:
Fringe benefit tax expense
P 10,000
Fringe benefits tax payable
Fringe benefit tax P 10,000
= (P1,000,000 x 12% /4) x 25%/75%
Note also that the interest ex pense is not recognized as a fring

because it is not an expense inv olving actual payme e benefit expense
nt or transfer of properties.
Exempt benefits paid for in cash or in kind
The taxpayer shall record exempt fringe benefits paid in cash
or in kind as follows:
Fringe benefit expense (monetary value) XXX
Cash/Property given XXX
Illustration: Exempt fringe benefits . .
n employer paid P120,000 for the tuition fee of his supervisor who is taking an
*“vancement course in furtherance of the employer's business.
Fringe benefit expense P 120,000
Cash P 120,000
397
My
‘ in,

x
Fringe Ben efit Ta nsfer of cash or property
Chapte
why f 1 -
in vo lv ed tr a
o not
which d
Exemp t benefits of P property residential property nearby its proc
t fre e use OF
: Exemp e a ocesses" np
Iilustra tion it s p l a n t m anage rto us ri ng of th e production Pr
Banga is al
low ing
r' s cl os e mo nito e Th
@
ge
sure the mana 0 a mo nth.
jant to en
th e p r o p e r ty IS p40,00
rental value of
No entry is required: 1 . -
MMC) furnished its managerial emp]
:
Illustration :
Integrated keting
arketing Coopera
Pp tive (T : worth P1,300,000 400,
s of their choice
Tagum Miners M purc ha se ca l the employee,
Ha40%neof
H M M C wi ll sa la ri es of
car plan wherei n nst future
pri ce wi ll be deductible agai
the purchase
its sales manager.
purchased a car for 0,000
P 52
3M x 40%)
Advances to officers (P1. 3M x 60%) 780,000
Fringe benefit expense (P1. ) 420, 000
in ge be ne fi ts ta x ex pe nse (780Kx 35% /65% P1,300,000
Fr
Cash 420,000
ble
Fringe benefits tax paya
able even if provided by
an exempt employer (i.e. cooperative, non
Note: The fringe benefit is tax d upon the employee not upon the employer
it or gov ern men t age ncy ) because the tax is impose
prof
Integrated Illustration 2 of its

Jose Abad Santos Corporation transferred ownership over one
Residences
residential property inventori es to its vice
presidents a consideration of P450,000
The property was acquired for 2,000,000 but has a fair value of P2,400,000 at date of
transfer.
’
The| fringe benefits expense shall be measured at the actual cost of the pro i
ty the employer but the fringe benefit tax shall be measured at the ence velne
e benefit (P2,400,000 fair value - P450,000 received) ~~
Hence,
Cash P 450, 000
(P2M
Fringe benefits expense - P45 OK) 1,550,000
.
Fringe benefits tax expense
1,050,000
Inventory re pba
Fringe benefits tax payable
(P2,400,000 - P450,000) x 35%/65% ,050,000
TaxT
ene ne xen
deductiblee
xpense of th
expense including the fri
ing the fringe ben e is @
of his taxable in © employer against his gr ue saa 4
a ti ‘computation
. come. It must b € noted that ded ;
th w o n a d : a bene fit exp en
exists only when eb
fit Is paid in cash giv
nge
or in ki faa friense is measure
the actu al cost or tax pene
asis of considera tio n en as ae exp
inge benefits.
398

- Fringe Benefit Tay
chaP ter 11
gaPTER 11: SELF-TES
ee T EXERCIsEs
cussion Questions
i enumer
ate the components of taxable
w~
piscuss the general cate Compensation

gorie, of fringe benefits, income.
piscuss the of empl yen ments of fri
t types
0 Oyee ben .
vs the 50% rule on hve mene
to the fringe benefit tax?
What are the two €xce
ptions to the 50% ru
le?
Enumerat
Enumeratee th e fringe benefits exempt from
and di scuss the characteristics ofthth
e efringegee b enefits tax,
Enumerate the procedures in ¢
Omputing the fri ringe benefit tax.
Discuss the general rules on Mone tary vane nge benefit tax.
eS
taal
Zz
c. e.
o o
cr
> oD
5
ca©
g 3©
5 oO
ga Sset
cr
aa a
9 cc
seb)
cr
® x
@
PP
>
oO
fo
~y
cr
A
a
QO
w
=
@
om
o
on
5
om
cr
Oe
>o
>
$
w
—
cr
2
ped)
—
ao
®
o
ins
oO
S
oo
3
f
5
=
K
0
Oo
a
or
°
3
>
j, The fringe benefit tax is a
managerial employees.
2. Rank and file employees ma y be
subject to
3, Fringe benefits are always subject to fri fringe benefi t tax.
nge benefit tax.
4, The personal expenses of employ
ees shouldered by the employer
benefits. are fringe
fringe benefit.
7, The taxable fringe benefit subject
to the frin ge benefit tax is the exc
minimis benefits over P90,000. ess of the de
8 Half of the benefits that are necessa ry
to the trade of the employer’s bus
Subject to fringe benefit tax. iness are
9, Benefits in the form of properties
transferred to the name of the employee are
subject to fringe benefit tax in full.
10. Benefits provided by the employer for his conv
enience are exempt from fringe
benefit tax,
rue or False 2
' The annual depreciation value of a movable property is 20% of the value of the
Property, |
The a depreciation value of a real property is presumed to be 10% of the
Value of the property.
* The monetary value of benefits given in cash is the cash paid.
399

ae A
~
ioe
-inge Benefit Tax 100% of the valu € of the Pope

ter 11 - Fringe given in kind is
tary value of benefits
cha ' of free usaggee of Property iss a
4, Thveen.monetarr” alue of fringe benefits In the fo
rm
gi . NY,
erty:
The monetary ve ve jation value of the prop emp Loven
oyee expense py nature that are paid e byfaithe
5,
ofthe rental oF o*rd yampl
|
e r valye, Fthe
Employee benel/ part i transferred, the monetary valu is th
over
pro > 5 Lie
When title
f
. and lottaryas theue usual e resid ence

pr op er ty given. » qg h o u s e m o n e v a l of th be ne fit is 50of0 th |
lease 5
mploye r e, the ho ‘
When the e ell
jal employe
or
supervisory 4 t tax ifthe.
enta l pa ym en ts .
T s is*; exempt from fringe benorefibus iness fe |
ss is ta nc e to the lat ed to the tra de
tional y 15
9, TO
e e bo nd an d the study e |
e m p l o y |
an
ed d not subject,
for business use ana
taxpayer. are co ns id er ta 0 |
ra ft in cl ud in g helicopters ar id at le ss lata ciyat all be th
10, Ai rc 1 ‘S
fringe benefit ta
x. ‘ ‘ 1
lue of benefit from lo 1]
11. The monet
ar y va a t e¢ a r ee . at
and the ac tu al r ss of amount
difference betwe
en 12%
bl e fr in ge be ne it regardle
s on foreign travel isa taxa inge benefit.
|
12. Lodging cost in foreign trav el is a t a x a b l e fr
employer |
13. 30% of first-
class tickets
th e e m p l o y e e shouldered by the |
family member ofs |
14, The expenses of benefit in full. nsidereda
constitute taxabl
e fringe
name of the employer is co
receipted in the |
ee expense
15. An employ
ployer.
business expense of the em

1. The fringe benefit tax by nature isa
ry employees.
a. taxon passive income of managerial or superviso
b. final tax.
c. tax to the employer of managerial or supervisory employees.
d. tax to all employee on their fringe benefits.
2. Which is not part of de minimis benefits?

2 rothing allowance c. Monetized unused vacation leave credits
. Actual medical benefits13% d. month pay
3. The de minimis benefits not exceeding their thresholds are
a exempt from income tax. c. subject to regular tax
. subject to fringe benefit tax. d. deductions from gross income
4, , t the answ er whicj h more a
Selec
fringe benefit of a supervisory
smplovee
2 subject to fringe benefit tax eee “ "
Pi
- subject to regular incom
c. the total of 13th month ¢ tax as compensation income.
pay and other benefits not exceeding P90,000.
400

vo
chapter 11 - Fringe Benefit Tax

d, the total of 13" month pay and other bene
fits exceeding P90,000.
who is subject to the fringe benefit
An
tax?
employer of rank and file emp
loyees
2
b. Managerial or supervisory employees

c, Anemployer of managerial
or supervisory employees
d, Rank and file employees
Which of these items is sub

Compensation inco ject to fringe benefit tax?
me of rank and file em
Fringe benefits of rank ployees
ff
and file employees

aa
Which is a correct statement

?
a. The fringe benefit tax
is a tax upon the ex pense
b. The personal expenses of the employer,
of any employees paid by
fringe benefits tax, the employer are subject to
c. The personal expenses
of rank and file employ
subjec t to fringe benefit tax, ees paid by the employer
are
d. The personal €xpenses of
managerial or Supervisory
the employer are subjec employee shouldered by
t to fringe benefit tax.
Asarule, hybrid expens
es are presumed
a. 50% fringe benefit.
c. 50% de minimis benefits,
b. 100% fringe benefit.
d. 100% legitimate busine
ss expense,
& phrases is not an exem
fringe benefit tax? ption criterion for purp
oses of the
a. Convenience of the emp
loyer
b. Necessary for the busine
ss of the employer
c. In furtherance of employee
goodwill
d. For the furtherance of the
employer’s business
10, What percentage of the
depreciation v alue is considere
usage of employer’s real proper d fringe benefit in the fre
ties? e
a 5%
c.50%
b. 20% d. 100%
11, When fringe benefit is in the
form of free use
of the fair value of the property is considered of real properties, what percentage
fringe benefit?
a 5% c.50%
b. 20% d. 100%
401

nefit Tax
g Be
Chapter 11 _ Fringe of free use of personal prop,
consi
fit is intionthe valufore m of is
the property is considered frin
s,
When fringe bene
12.
9% - beneg
percentage of the depreci@
d. 100% |
b 50% erty to the employee. What Per
ti tl e over PrOP the fringe benefit tax?
ansferred we Ntage of
13. An employer tr idered for Patoses of
cons
the benefit is 4 <0
qa. 100%
b. 20%
benefits involvin g the fre,
the annual value of
ing Use of
used?
or cont percentage of the value of property is
14, For purpost
movabe proper ties, c. 20%
F 50% d. 100%
e annua | value of
benefits involving the free ,
c o m p u t i
i n g ngt th
5. For purposes of
t Se of the v alue of property is used? “rot
ties, wha
rvmmovable proper c. 50%
d. 100%
0,
ok
Theory 2
Multiple Choice - benefit tay?
of which of the following items is exempt from fringe
1. The free usage c. Helicopter
a. Yacht
d. Residential unit
b b. Car
of the fringe benefit tax?

2. Which is nota characteristic
a. A final tax c. Payable by the employer
ee value of benefits
Ani nco me tax d. Imposed upon the monetary
F b.
fringe benefit tax?
Which is correct with respect to the
a. Itis due monthly and quarterly.
ome of employee.
b. Itisa tax upon the compensation inc
c. Itisatax upon the fringe benefit of any employee.
tax returns to report the fringe benefit.
d. Employees do not need to file income
or supervisory employee's
4, The actual value of benefits realized by the managerial
referred to as the
a, monetary value. c. grossed-up monetary value.
b. fair value. d. annual depreciation value.
5. Which is not an exempt housing benefit?

ss
a. Housing within 50 meters from the perimeter of the emp loyer’s pusine
b. Housing benefit for four months
c. Military sleeping quarters
d. Temporary housing
402

of 11- Fringe Benefit Tax
cnaP
t
ch is not subject to fringe benefit tax?

6. Whine onal expenses receipted in the name
a. over of the employee paid by the
Sr yee personal expense receipted in
the name of the employer paid‘
b. the employer by
Expenses of employees considered j n furtherance of the employer's oe
i personal expense receipted in the name of the employee reimbursed
‘employer by the
What percenta ge of the fair value of the yacht is considered in measuring

t value?
depreciation
©. 20%
, 5% 4.50%
b, 10%
g Which is subject to fringe benefits tax?
"a, Premiums of employee group insurance
b, Expenses of business travels
c. Housing for an employee to ensure
his immediate availability
d. Housing for the family members of an emp
loyee
9, To which of the following is the tax
benefit rate is not applied?
a. The monetary value of the fringe benefit
b. The amount deductible by the employ
er from gross income
c. The gross-up monetary value of the
fringe benefit
d, Both accounts of the fringe benefit and
the fringe benefit tax
10. Which fringe benefit is subject to frin
ge benefit tax?
a. If given for the convenience or adva
ntage of the employee
b. Benefits given to rank and file employ
ees
¢. Those required by the nature of or necessary to
profession of the employer the trade, business or
d. Contributions of the employer to retireme
nt, insurance an d hospitalizat
benefit plans for the benefit of the employee ion
Multiple Choice - Problem: Part 1

! Catarman Corporation designated two condominium
units for the use of its
Supervisory employees with fair value and
terms of residence as follows:
Agreed Residence time Property value
Unit No, 1 1 year P 4,000,000
Unit No, 2 3 months 3,000,000
Compute the quarterly monetary values
for the above.
P 4,000,000 c. P100,000
175,000 d. P25,000
403

se e__—,-,-,—lmUmUlUlmtttO~”
Chapter 11 — Fringe Benefit Tax

its:
2. A supervisory employee has the following benef
13th month pay and other benefits P 40,000
De minimis within their limits 35,000
Excess de minimis benefits 10,000
Other fringe benefits 40,000
Compute the amount of fringe benefits subject to the fringe benefit tax rate,
a. P 85,000 c. P 50,000
b. P 76,923 d. P 73,259
An employer pays the P10,000 monthly residential rental of his Manageria)

employee. Compute the quarterly monetary value. a
a. P15,000 c. P30,000
b. P10,000 d. P40,000
ABC Company designated a residential property for the use of its Managerja]
employee. The lot has zonal value of P3,500,000 and P2,000,000 value per tax
declaration. The assessed value on the improvement on the lot was P1,500,009,
The lot was purchased at a cost of P2,000,000. Compute the monetary value to be
reported in the quarterly fringe benefit tax return.
a. P250,000 c. P 62,500
b. P125,000 d. P31,250
Kalibo Company purchased a residential unit for P3,000,000 and transferred
ownership to its supervisory employee. The property has a zonal value of
P3,500,000. Compute the monetary value.
a. P3,000,000 c. P1,750,000
b. P3,500,000 d. P 175,000
Celebes, Inc. owns a residential property it acquired for P2,000,000. It transferred

ownership thereto to its managerial employee for P1,200,000 when its fair value
was P3,000,000. What is the monetary value of the benefit?
a. P 3,000,000 c. P 1,800,000
b. P 2,000,000 d. P 800,000
Tapas Corporation granted ownership of several housing units to the following

employees on its foundation day:
Name Position Property value

Mr. Magdiwang Accounting manager P 3,000,000
Mrs. Calatrava Marketing supervisor 2,000,000
Mr. Romblon Machine operator 1,500,000
Mrs. Sta. Fe Electrical staff 1,000,000
404
Cosa
ve FT ere =OIL
aa
SS ae
@ 9S Xe orld 2 ES “0 r ———

fit Tax
chapter 11- Fringe Bene
6 ompute the total monetary Y y Value of
?7,500,000 all frin ge benefits,
c.P 187.500
», P5,000,000 d.P 125,000
ary valu © of housing

i benefits that are subject to the
b. fringe benefits tax.
Pp 6,500,000
b. " p 162,500
, «. P’5,000,000
d.P 125,000
lo facility 10 kilometers away from town. To

Prthin the compound of the f iployees, it decided to construct housing units
rentals of employees, who did not’ ir n : o “greed their .

to pay halffamili of the househe@
,
unit. The following data relates to the ihiatter otaranke eee
Rank and file
Company officers
Value of housing unit P 1,000,000 eT
Rental payments 500,000 800,000
orput750
Com the 0 monetary value of7. P-5
e ,00 benefi 008subjec
00,ts ject t to to frifringe penebt tax.
b. P1,500,000 d. P4,650,000
10, As part of its employee benefits plan, Malaybay Realty Corporation acquired a
piece of residential lot worth P2,000,000 for its Director of Finance and
constructed upon it a house at a cost of P4,000,000. Ownership of the house and
lot was turned over to the director upon completion of the construction. 40% of
the value of the house and lot will be deducted from the director’s salary over a
period of five years. ‘
What is the monetary value of the fringe benefit?

a. P 6,000,000 c. P 3,600,000
b. P2,400,000 d. P1,600,000

car for the use of its managerial
1. InJuly 2021, Tipo-Tipo purchased a P1,200,000 respectively for the
the monetary value to be reported
employee. Compute
2021.
calendar quarters ending September and December
120,000; P 120,000
a P1,200,000;P 120,000 c.P
b. P240,000;P 120,000 d.P 30,000; P 30,000
following expense liquidation of its managerial

2 Mandaue reimbursed the
employee:
Pp 20,000
Purchase of office supplies 15,000
Personal meals and groceries
405

ge Benefit Tax
Chapter 11 - Frin ) 8,000 |
jon (1/2 for business 12,000
oe
Gasoli neelecfor tra
ic it nspwaorter, and telephone bills
y, |
Office tr
ta ry fringe benelits.
value ofc. P:19,000
Compute 00 mone
a. P 55, d. P 23,000 |
b. P35,000 ge
fringe b benefit tay fy
problem, what iis the {
preceding
In the immediately
is a resident citizen:
3.
managerial employee c. P 8,941 ;
a, P 25,882
d. P 10,23
b. P16,471
00 and registered it in the
: e ot ,.
nam
a car wor th P80 0,0
boughtemployee. It was agreed that the same will be used partially fo, the
4, Seater
business of Lebak. |
Compute the monetary value.
a. P 400,000 c. P. 80,000
b. P800,000 d.P 0
e benefit tax assuming the
5 Inthe immediately preceding problem, what is the fring |
employee is a non-resident alien?
a. P376,471 c. P 188,235
|
b. P 266,667 d. P 133,333
6. Nabunturan Company grants its managerial employees the privilege to select a car |
of their choice with value not exceeding P1,000,000 a unit or be given P1,000,000
cash benefit to acquire their own cars. It also grants supervisory employees car
benefits if they actually purchase their cars.
Car benefits given to a manager, net of
withholding tax on compensation P 900,000
Value of cars purchased for two other managers 2,000,000
Cash payments to various car suppliers for
supervisory employees 1,600,000
Compute the monetary value,
a. P 4,500,000 c. P 2,000,000
b. P 3,600,000 d. P 1,600,000
Compute the fringe benefit tax if the em

ployee is a resident citizen.
a. P 564,706; P 56,471 c. P 16,154; P 16,154
b. P 112,941; P 56,471 d.P 56,471; P 56, 471
Upi Carbon Plant acquired
engineer,a plant supervisor, a P1,00 0,000-motor vehicle for the use of iits
ts fe field
assigned to a very remote facility from town.
406

ret 17 Fringe Benefit Tax
ap
ch vompute the monetary value of benefits
subject to tax.
p1,000,000 c.P 100,000
} P.200,000 d. PO
pexter acquired a car for P1,200,000 and transferred ownership to its supervisory
9. employee for P400,000. The car shall be used partly in the employer's business.
compute the monetary value.
. P80,000 c. P 800,000
», 240,000 d. 1,200,000
u}tiple Choice - Problems: Part 3
Tekla paid the P27,200 monthly rental of the residence of its managerial
"employee from January to May of 2021. Compute the fringe benefit tax for the first
quarter and second quarter of 2021.
~ p6,400; P 6,400 c. P 19,200; P 12,800
b. P12,800; P 8,533 d. P 21,969; P 14,646
1, Dog Company made the following payments in the first quarter of 2021:
Fringe benefits:
To the supermarket in payment for groceries of the company’s manager and
family - P16,000
To a university in payment for the tuition fee of the manager — P24,750
Salary of the manager, net of P50,000 withholding tax - P350,000
Determine the fringe benefit tax due.

a P19,412 c. P 21,942
b. P19,176 d. P 184,118
3, Ormoc International acquired the following for the use of its executive officers:
Bell 206 helicopter P 23,000,000

Elling E3 Executive (Seagoing motor yacht) 16,400,000
Compute the monetary value.

a. P39,400,000 c. P 820,000
b. P 16,400,000 d. P 410,000
4, Mindanao Manpower Corporation paid the following fringe
benefits during the
calendar quarter to its managerial employee:
Salaries of household help P 10,000/month

Salaries of personal security guard P 15,000/month
Personal driver P 15,000/month
Annual home owner's association dues P 4,000
Garbage dues P 100/week
407

pe ance
Chapte r11- Fringe

Benefit Tax
|
value.
terly monetary
ee c. P 121,200
Com 20 0 44,100 d. P
125,5,200
b.a P12
d or furnished the following in behalf of a SUpery; s ory
Tolosa Company pai ded March 20 21:
e mployee for the quar ter en P 10,000
bership dues in golf course 2021
,0 00 in te re st fr ee loan due December
One-year P2 00 12,000 |
red by Tolosa
Free vacation sponso
ue.
Compute the monetary val
a. P 46,000 c. P 22,000
b. P32,000 d, P 28,000
Company pr |
, Naval Highlands
6. During the | ast calendar quarter of 2021 Branted a
Filipino supervisory employee t he foll
owing benefits:
P 120,000 |
Salaries
Performance bonus 20,000
Excess de minimis 12,000
Cash price of car given to supervisory employee 300,000
Compute the fringe benefit tax.

a. P 168,000 c. P 146,824
b. P 151,529 d. P 141,176
On August 1, 2021, San Fernando designated the use of its residential unit for its |
managerial employee. The residential unit was acquired for P4,500,000 and hasa__
fair value of P4,000,000.
Compute the fringe benefit tax for the e th thi

a. P100,000;P 100,000 cp (3095-0 13325 Tareers of 202
b. P52,941;P 52,941 d. P 10,096; P 15,144
8. B enavidez
i Company granted the following fringe
benefits in 2021:
, fi h 1
S S 1 g J
April
cas2 - granted the use of
with fair value of P3,000,000 residential unit to the vice president for finance
August 4 - transf err
P4,000,000 and assesment ship of a residential dwelling with zonal value of
sed' value of P3,000,000 to the company yp president %

Doe EEE LE
ysY2-08wltes os ig _
ter 11
_ Fringe Benefit Tax
creP
ute the quarterly fringe benefit :

‘ ed by Benavidez
tax to b e remitt Company in
in the second quarter ,
‘ frst quarter and
. p 139,138; One c. P54,400; P70,588
* p121,600; P 8,823 d. P32,000; P35,294
5
at is the fringe benefit tax respectively in the thi quart ers:
7a. P1,891,176; P8,823 é P2,163,949, ponds and fourth
® p1,882,353; P84,329 —d, P1,882,353; Po
0. pusayong ee maintains a fleet of motor vehicles for business use and
employee use. The ollowing relates to the calendar quarter just ended:
cost of three motor vehicles used exclusively for
sales, freights and delivery service P 4500,000
cost of a motor vehicle for employees’ business vhs
use and employee use 500,000
Rental payments for additional motor vehicle for 30,000
employees’ personal use
Compute the total quarterly monetary value of the fringe benefit.
a, P 4,530,000 c. P 42,500
b. P530,000 d. P 80,000
{1 Digos Company owns a residential lot which was purchased for P800,000, eight
years ago. The lot was sold to a supervisory employee for only P500,000 when it
was worth P1,200,000.
Compute the fringe benefit expense.

a. P300,000 c. P 700,000
b. P 400,000 d.P 0
12. Compute the fringe benefits tax.

a P141,176 c. P 329,412
b. P188,235 d. P 376,923
409

ings in Properties
Chapter 12 - Deal
}
CHAPTER 12
A L I N G S IN P R OPERTIES
DE |
|
‘
and Objectives
Chapter Overview
gain Tete,
th e m e a s u r e m e nt and recognition of
ses tax rules on ne :
This chapter discus ti es no t su bj ec t to capital gains
alings in proper
losses arising from de
’ ut ;
come tax.
subject to the regular in
expected to be able to:
After this chapter, readers are to reg ula r tax from those subject to capitala
gai ns sub jec t
1. tinguish capita ]
Dis
gains tax
and the rules on tax basis
2. Understand what constitutes selling price
assets and oth er
3. Understand the tax treatment of gain or loss on ordinary
capital assets
gain or loss and
4. Master the rules on the measurement of the net capital the |
rules on net capital loss carry over
iti of gain o
5. Comprehendid theth rules on tax-free exchan ges on recognition ° cfoss and
in
; the determination of basis of stocks received
i | j
_ Master the rules on wash sales as the y relate to capital to the
P osses subject
rules of regular income tax
7. Be able to interrelate the rules of regular
Seer g ini come tax to the rules of capital |
8. Familiarize themselves with the list of transactions considered as exchanges
DEALINGS IN PROPERTIES
Deali
orop ho j
vt ctories j
tnvolv e the sale, exchanges, and other disposition of
ordinary assets are seveks ie aie or capital assets. It should be recalled that
supplies, and prope 7 sed in the business of the taxpayer such as inventories
perty, plant and equipment. Capital assets are assets other than
ordinary assets.
Dealings in ordi
assets, other thanna 7 nen are subject to regular income tax. Dealings in capital
income tax. stocks and real properties, are also subject to regular
Dealings in ordi
rdinary assets in an ordi . i ;
may result oraina ain
Dealings in capi
apital . .
pital assets may likewise result in a capital oan Or csaptial tos “
D
s
velling price
ess: Tax basis or adj
Gain or loss adjusted basis of the asset disposed , wo
P xxx
410

aotet 12 - Dealings in Properties
ris selling price?
wr" price includes the amoun .
erty which shall include:
The sum of money received and
: air value Of non-cash properties received
nat is tax basis?
ic refers to the co .
ed of an asset. The
aS oun
an asset is the value forgone ¢emacqu iret j or depreciat a cost
it. Generally, it is the purchase price
om ne fair value of consid; era tion paid airin e acquirj
advanced rules on tax basis are discussed later in thie hapten operty disposed
of
Tax Treatment of Ordinary Gains and Losses
ordinary nes ave itemecr items of Bross income subject to regular income tax.
ordinary losse ems of deductions from gross income in the determination of
net income from business or profession. Ordina an .
ry gain is taxable in full. Ordinary
ioss is deductible in full.
The gain or loss on sale by dealers of properties is an ordinary gain or loss.

Exceptionally, bonds, debentures, notes, or other certificates of indebtedness
issued by any corporation or by the government are considered ordinary assets by
the NIRC if owned by banks or trust companies. The gain or loss on these debt
instruments by banks or trust companies are deemed ordinary gains or loss.
Also under the regulations, the real and other properties acquired (ROPA) by
banks, although they are not involved in the realty business, are considered
ordinary assets. Hence, gain or loss on sale of banks of their ROPA is an ordinary
gain or ordinary loss.
Tax Treatment of Capital Gains and Losses |

Under the NIRC, capital losses are deductible only up to the extent of capital gains
from dealings in capital assets other than domestic stocks and real properties.
Hence, capital gains and capital losses are offset. A net capital gain is an item of
gross income subject to regular income tax. A net capital loss is not an item of
deduction against gross income. The law views net capital losses as unnecessary
expenses since capital assets are not used in the business or trade of the taxpayer.
Determinati : in or net capital loss

ation of net capital gain 0 loss on capital assets, other
The determination of net capital gains or net capital
whether the taxpayer is
than domestic stocks and real properties, depends upon
aN "individual
indivi or a corporation.
411

te
ap te r 12 - De al ings in Properties
Ch
For Individual taxpayers: .
Iding period rule xpayer for a period of:
ld by an in di vi du al ta
oie capital asset is he l
tha n one yea r (sh ort -te rm hol ding period) - 100% of the capita
1. not more Sain
or loss is recognized iod) - 50% of the capita] Bain
than on e ye ar (l ong-term holding per
2. more Or
loss is recognized
rCo taxpayers:
of the holding period, 100% of the capital gain or capi,
Regardless of the length
ding period rule does not apply to corporations,
loss is recognized. The hol
er
Illustration: Individual taxpay
s as follows in 2021:
Mr. Manila sold various propertie
_Datesold _ Gain (loss)
Items sold Date acquired
8/14/2019 2/14/2021 P 100,000
Car 20,000
6/1/2020 12/5/2021
Office supplies 80,000
Laptop 4/5/2020 4/5/2021
7/21/2020 8/24/2021 ( 160,000)
Home appliances 30,000)
12/28/2020 11/26/2021 (
Books
2/14/2020 12/3/2021 250,000
Vacant lot
ws:
The net capital gain or loss shall be computed as follo
Items sold Holding period Gain (Loss) % Gain (loss)

Car long-term P 100,000 50% P 50,000
Laptop short-term 80,000 100% 80,000
Home appliances long-term ( 160,000) 50% ( 80,000)
Books short-term ( 30,000) 100% (___30,000)
Net capital gains P__20,000
Note:
1. The sale of the vacant lot is excluded since it is subject to the 6% capital gains tax.
2. The gain on the sale of the office supplies is excluded in the net capital gain computation
since it is an ordinary gain separately reportable as an item of gross income.
Illustration: Corporation
pataraza Corporation, a domestic shipbuilding company, assigned its receivable to the
pani without recourse at a loss of P200,000. During the year, it disposed an 0
put ding at a gain of P800,000 and its investment in foreign securities at a gain 0
350,000. All assets were held for more than one year.
412

We
OS
chapter 42 - Dealings in Properties

genet capital gain or loss shall be computed as:
P 350,000
sale of foreign securities (P350,000 x 100%)
assignment of receivables [(P200,000) x 100%] (200,000)
net capital gain ‘P.150,000
Note: . ‘ .
amounts without
Capital gains and capital loss of corporations are recognized at their full
regard to the holding period.
2.
The gain on the sale of the building is not included as it is an ordinary gain.
ion
integrative Hlustrat
and
Mr. Pantukan, a self-employed resident citizen, reported P800,000 gross receipts
P240,000. He also had the
p300,000 cost of services before business expenses of
following dealings in properties during the year:
Dealings inproperties _._-_ Holding period Gain(Loss)
Ordinary assets P 20,000

Equipment 8 months
18 months ( 25,000)
Old machines
t
Foreign bonds 4 months P 100,000
Domestic bonds 15 months (150,000)
Domestic stocks 8 months 80,000
Foreign stocks 18 months 40,000
The net capital gains shall be computed as follows:

Foreign bonds - P100,000 x 100% P 100,000
Domestic bonds - (P150,000) x 50% ( 75,000)
Foreign stocks - P40,000 x 50% __20,000
Net capital gain P___45,000
tax.
Note: The gain on sale of domestic stocks is subject to the 15% capital gains
Presentation in the Income Tax Return

:
The reportable gains and losses shall be presented in the income tax return as follows
P 800,000
Add: Other taxable income from operation
Total sales/revenues/receipts/fees P 800,000
Less: Cost of sales or services 300,000
Gross income from operations P 500,000
Add: Non-operating taxable income
Ordinary gain on equipment P 20,000
45,000 65,000
Net capital gain
P__565,000
Total gross income
413

|
.
Properties 565,000 |
ter 12 - Dealings in
Chapapte | P | |
|
Total gross income ory ee |
ns
Less: Allowable deductio ,
Business expenses |
ines 25,0005288.00
Ordinary loss on old mach P__ 30 0,000
000
P__ 300,
| come
Taxable net in
or losses ar e recognized at their full
amounts. The holding pei
Note: The ordinary gains othe; thar’ Tule
measuremen t of gains or losses from capital assets : |
is applicable only to the
and real properties.
Locks |
rporation
ng Pantukan is a co kan ||
Assumi1ing Corporation shall be computed as follows:
of Pantu
The net capital gain
P 100,000
Foreign bonds - P100,000 x 100%
( 150,000)
Domestic bonds - (P150,000) x 100%
___ 40,000
Foreign stocks - P40,000 x 100%
Net capital loss (P__10,000)
The: reportable gains and losses shall be presented in the income tax return of
Pantukan Corporation as follows:
Sales/Revenues/Receipts/Fees P 800,000
Less: Cost of sales or services 300,000
Ordinary gain on equipment P_20,000 20,000
Less: Allowable deductions .
Business expenses P 240,000
Ordinary loss on old machine 25,000 265,000
Taxable net income P__255,.000
Rationale of the holding period rule

Capital gains normally build up over time. However, the annual capit
al gains build
up Is not taxed because they are unrealized gains. In acco
rdance with the ability to
pay theory, these gains are taxable only when reali
ealized |
through ,
disposa l by sale or exchange. ” se chorsseveredeirpmiithe:capis
chee aie subject to progressive tax where higher income is subject

the capital gains ower income to lower tax. The one-time or lump sum taxation of
compared to the total eae ee on disposal results to higher income tax
taxedlosses
and annually. ent As a egislative
, ae compromise,
assuming the annual build-up of capital gains is
only 50% of long-term capital gains
upon disposal are recognized for taxation
purposes.
414

en Bn
ater 42 - Dealings in Properties

cha
orate taxpayers are subject to a proportional or flat tax rate regardless of the
e "al of income. The one-time taxation of the gain on disposal and the annual
ation of the capital gain as it builds up over time will yield the same amount of
taxpayers.
i Thus, the holding period rule is held not to apply to corporate
gffects of Situs on Dealings in Properties
ifthe taxpayer is taxable on world income such as in the case of resident citizens
and domestic corporations, the rules of dealings in properties apply to all
roperties regardless of location. However, if the taxpayer is taxable only on
philippine income, the rules of dealings in properties apply only to properties
jocated in the Philippines.
Illustration 1
john Hampton, a Filipino citizen, reported the following gains and (losses) from
dealings in properties:
Ordinary assets:
Delivery truck in the Philippines P 120,000
Obsolete inventories in the Philippines ( 40,000)
Commercial building abroad 300,000
Used equipment abroad ( 80,000)
Capital assets:
Domestic bonds, held for 14 months P 100,000
Non-resident foreign corporation stocks held for 8 months ( 30,000)
The situs of the ordinary gain or loss shall be:

Ordinary gains Within Without World
Delivery truck P 120,000 - P. 120,000
Commercial building - P 300,000 _300,000
Total P__120,000 P 300,000 P420,000
Ordinary losses Within Without World

Obsolete inventories (P 40,000) - (P 40,000)
Used equipment - (P___ 80,000) ( 80,000)
otal
(P____40,000) (P__80,000) (P__120,000)
Considering situs rules, the net capital gain or loss from capital assets, other
than
oMmestic stocks and real property, are as follows:
Net
capital gains or loss Within _Without. _World
Domestic bonds-50% P 50,000 - P 50,000
"reign stocks - 100% - (P__ 30,000) ( 30,000)
* capital gains or loss p__50,000 (P__30,000) P 20,000
415

ee
in Properties
Chapter 12 - Dealings
as follows:
ab le res ult s of de al in gs in properties are
The report
Ordinary i
Ordinary Cap
Nett Capital
Loss > = f re
Gain
Lfjohn PamHampton is a:
Pp 420,000 (P 120,000) ,000
Resident citizen 120,000 (P 40,000) P 50,000
Non-resident citizen
. t he global net capital gain or loss shall be considered if John Hampton is taxable gy World
’ : uch as when John Hampton Isi a resi ident citizen. . | |
, a dhe Philippine net capital gain or loss shall be considered if John Hampton is taxable
. only in the Philippines such as when John Hampton is a nonresident
citizen, resident alien
the Phil ippi nes.
or non-resident alien engaged in business in
lustration 2 ; .
poe the same information in the previous illustration except that John Hampton is
a corporation.
The analysis of the ordinary gains or losses shall be the same in the previoys
illustration. The net capital gain or loss from dealings in capital assets, other than
domestic stocks and real property, shall be:
Net capital gains or loss _Within _Without _World_
Domestic bonds - 100% P 100,000 - P- 100,000
Foreign stocks - 100% - (P 30,000) ( 30,000)
Net capital gains or loss P__100,000 (P__ 30,000) P 70,000
The reportable results of dealings in properties are as follows:

Ordinary Ordinary Net Capital
If ohn Hampton is a: Gain Loss Gain (Loss)
Domestic corporation P 420,000 (P 120,000) P 70,000
Resident corporation P 120,000 (P 40,000) P 100,000
Net Capital Loss Carry over

Individual taxpayers are allowed to carry-over net capital loss as a deduction
against net capital gain of the following year subject to the followi
ng limits:
1. Limit 1 - The amount of net inc
ome in the year the net capital loss was
sustained, and
2. Limit 2 - The available net capital gain
in the following year
In other words, the amou
nt of the net capital loss carry-over shall be whichever is
the lowest of the actual n et
capital loss, Limit 1, and Limi
hd t 2.
Note that the net capital loss carry-
over is strictly for one year only
and 's
applicable only to individual tax payers. Corporate tax ‘are not allow ed
under the NIRC to Carry Over net capital loss.
P a al e
416

raphe! 42 - Dealings in Properties
juustration i reported the following

;
Mr josephin owing in 2020 ang 2021;
income before dealings in Properties
2020 _ —2021
_
lings jn ordinary assets:
al l £20.90 P 300,000
ordinary i ace!
i
P 40,000 P 30,000
vealings in capital assets: ( 80,000) ( 50,000)
capital ae
P 20,000 P 80,000
ap! :
a capital gains or (loss) —_ 60,000
P._4,00 —___30,000
0,000
0) (
£40 P__50,0.000)
000
the net income before dealings in Capital
assets should be determined first. Thus,
FEV 2020 2021
Net income before dealings in properties
ordinary gains P 70,000 P 300,000
40,000 30,000
ordinary losses
Net income before dealings in capital ass (__80,000) (___50,000)
ets P30,000 P280,000
The net capital gain in 2021 shall be computed as follows:
2020 2021
Net capital gain (loss) (P 40,000) P 50,000
Carry-over: Lowest of P30K, P40K and P50K 30,000 —> ( 30,000)
Net capital gain
P__20,000
The net income for each year shall be computed as:
2020 2021
Net income before dealings in capital assets P 30,000 P 280,000
Add: net capital gain 0 —__20,000
Net income P__ 30,000 P__300,000
Note:
1. It must be emphasized that the net income before dealings in capital assets must be
determined first.
2. The unused P10,000 net capital loss in 2020 can no longer be used in: the future peri: ods
since carry-over is allowed only for one year.
Illustration 2
An individual taxpayer had the following net capital gains or losses:
2020 2021_
Netincome before dealings in capital assets P 80,000 P 150,000
Dealings in capita
l assets:
80,000
‘ital losses (__60,000) — (_80.000)
t capital gain (loss)
(P_40.000) OO
417

——_—_-
gs in Properties
Chapter 12 - Dealin follows:
ta l ga in sh all be computed for 2020 as
The net capi
P 30,000
(P 40,000)
,000)
Net capital gain (l
oss)
P30K 30,000—> (___ 30
P40K, P80K and
Carry-over: Lowest of pO
Net capital gain
ch period shall be:
The net income for ea
__ 2020 _ —2021
P 80,000 P 150,000
in capital assets Pet ig
Net income before dealings 0 1
Add: net capital gain P_150,000
p__80,000
Net income
carry-over taxpayer incurs q net

e
Needless to say, there is no capital loss when the
los s in the per io d the net capital loss was sustained and when the
operating
t capital loss.
following year results to a ne
it: Net in come at incurrence of capit
al loss
Rationale of the first lim income befo
exceed the net
The amount of capital loss carry-over shall not
was sustained. This rule is
dealings in capital assets in the year the net capital loss
ed full deductibility of capital
anchored on the tax benefit rule. If the law allow
only up to the amount of the net income
loss, the taxpayer would be benefi ted capital
. The excess of the
which the capital loss will erase and save from taxation
fit.
loss above this amount will not have a tax bene
than what
To be fair, the carry over shall not result in allowing the taxpayer more
he could have claimed assuming full deductibility of capi l loss isi allowed by th
capita
hment to the
law. In other words, the carry-over should not result in undue enric
taxpayer.
mationa’ of the second limit: Net capital gain in the following year
e amount of capital loss carry-over shall not exceed the net capital gain in the
following yea r. Allowing capital loss carry-over in excess of the net capital gain in
the following year will create anothe r net capital
i loss in the followi r which
will breach the one-year carry-over rule under the NIRC. ee
SPECIAL RULES IN THE DETERMINATION OF TAX BASIS

A. For assets acquired by purchase, the tax basis is the:
1. Acquisition cost for:
e capital assets
° non-depreciable ordinary assets such as land
any y as asset purchased for an inadequate
i consideration or those acquired at
less than their fair value at the date of acquisition
418

tet 12 - Dealings in Properties
a peprec
}
iated cost for dep
reciable ordina
}
!
i
i
}. quisition costs inc Ty assets
lude the Purchase
“ost such as commissions paid jn
acquiri Price, tax assumed, and acquisition-related
ng the asset,
jlustration: Gain or
‘oss measurement
pascual potting stahdeee on depreciable assets
its old factory for P5,000,000. The
factory on a P3 iooton acquired
lot where the
ten years ago at P1,500,000.
Pascual
to 90.00puild
Ct 0 ating
the date
has ofa sale
caityin & ‘vake
valueenstr
netuetioofn accu
van mulated
gactorydepr
build
eciaing,
tion Theof
iati
The tax basis of the factor

y shall be:
Lot
Building P 1,500,000
1,200,000
Tax basis P_2,700,000
Note: The tax basis of the land is the cost. The
depreciated cost or book value, tax basis of depreciable properties is their
Hence, the gain or loss shall be:
Selling price — P 5,000,000

Less: Tax basis of factory 2,700,000
Gain on sale P_ 2,300,000
Illustration: Other capital assets
Mr. Montano purchased a car he believes would be useful for
P800,000. Before the third year, he sold ten years for
the car for P900,000.
Note that the tax basis of capital assets is
their acquisition cost. Capital assets are
not depreciated for purposes of taxation. The
gain on the sale shall be P100,000,
computed as P900 ,000 less P800,000 tax basis.
B. Other assets received by exchange, fair value of asset

received
( For assets received by way of gratuitous title:
1, Donation - whichever is lower
of:
a.) the tax basis on the hand of the
donor or the last preceding owner by
whom it was not acquired by donation or
b.) fair market value at the date of gift (Sec. 40 (B)(3), NIRC)
If the basis is greater than the market value of the prope
rty at the time of
donation, then for purposes of determining the loss, the basis shall be such mark
Value, et
lnheritance ~ fair value of the property on the date of death
of the decedent
419

——— ee
in Properties
Chapter 12 - Dealings
. tion .
Illustration 1: Dona ion from his brother
who bought
Mr. Moawad received a Volkswagen car . as donat Cc value of P1,0 00,009 1
has aaafairhae
ar Cet
of P100,000. The
the same in 1990 at a cost 500,000.
a current fair value
the date of donation but has
. i ire thtthe property by donation acqy;
quired
eae ave at Pl ding owner
0 0,000. who did not acquire
Hence, the basis of the car in the hands of Mr. Moawad shal]
s P100,000.
be that same basis, thu
.
ration 2: Inheritance
school bus from his deceased grandfather who
7 waist inherited a used
depreciateg
urchased the property for P1,000,000 three years ago. The bus has a fair value of
ather, but has a
basis of P800,000 in the business of his grandf
his grandfather.
P900,000 in the estate tax return of
value on
The basis of the property in the hands of Mr. Asisi shall be P900,000, the fair
the date of death of the decedent.
|
Illustration 3: Donation after inheritance
of
Assuming further that Mr. Asisi donated the bus to a school, what is the basis
the bus to the school?
The basis of the bus shall be the basis in the hands of the last preceding owner
who did not acquire the property by donation. Mr. Asisi acquired the property by
inheritance at a basis of P900,000. Hence, the same amount shall be the basis of
the bus in the hand of the school.
D. For shares received by way of tax-free exchanges

a. For pure share-for-share swap, the tax basis of the shares exchanged or
given is the tax basis of the shares received
‘ by b. For share-swap with non-cash consideration, the tax basis shall be the
al
i
substituted basis computed as follows:
Transferor
Tax basis of shares exchanged Pp XXX
Add: Gain recognized | XXX
Amounts treated as dividends of the shareholder XXX
Less: Cash and fair value of other properties received ____XXX
Tax basis of new shares received by the transferor P___=XXx
Properties received as ‘boot’ shall have the same basis as their fair market value.
Boot refers to the money received and other property received in excess of the
stocks or securities received by the transferor on a tax-free exchange.
420

cnapre
pransferee
-iginal basis in the hands of the transferor | P
dd: Gain recognized to the transferor
XXX
XXX
Tax pasis of the shares received by the transferee
P_____ Xxx
rules on tax basis of stocks received pursuant to a plan of merger or

gains taxation are also relevant to regular income tax
“re the
olidation
determina tion capital
under
of the substituted basis of:
0 ;
stocks, domestic or foreign, received by dealers in securities pursuant to a
plan of merger or consolidation
p, Foreign stocks received by non-dealers in securities pursuant to a plan of
"merger or consolidation
TAX FREE EXCHANGES

1, Corporate reorganization
2, Initial acquisition of control
The same principles and rules on tax-free exchanges as discussed in Chapter 6

applies when foreign stocks or bonds which are subject to regular tax are
involved. The adjusted tax basis of properties received shall be discussed in the
following illustrations.
llustration 1: Corporate party to a merger or consolidation

Pursuant to a plan of merger, ABC Company exchanges a vast track of land with a fair
value of P12,000,000 and tax basis of P1 0,000,000 for the stocks of DEF Company
with
afair value of P12,500,000 and par value of P1 1,000,000.
For ABC Company
Fair value of DEF shares received P12,500,000
Less: Tax basis of the land exchanged 10,000,000
Indicated gain
P 2,500,000
No gain or loss shall be recognized for the property-for-stock transaction
pursuant to a
plan of merger or consolidation. The law does not view this
as an income-generating
exchange but an investing transaction. The basis of
the DEF shares received shall be the
basis of the land transferred; hence, P10,000,000.
Assuming ABC Company exchanged its own shares for
the shares of DEF Company, no
ain or loss shall likewise be recognized. The tax basis of the DEF shares recei
the tax basis of the ABC shares exchanged. ved shall be
For DEF Company

Fait value of the land received
> Tax basis of the stocks exchanged (par) P12,000,000
Xcess ~ Share premium
11,000,000
P 1,000,000
421

Chapter 12 - Dealings in Properties
Similarly, DEF Company shall not be subject to tax as this is a capital trans {Ction
involving the issue of its shares to an investor. The P1,000,000 excess of fair value
Of the
properties received over the par value of shares, commonly referred to as “Sh
premium” in accounting, is not income but is part of capital. No income can be impute
because the issuance of capital stock is a financing transaction similar to the issuan ; a
a promissory note to obtain cash loan. of
Illustration 2: Shareholder of a party to a merger or consolidation

Mr. Downy is a shareholder in ABC Company which is merging with DEF Company, 4,
Downy was required to surrender his ABC shares with tax basis of P100,000 ang fair
value of P120,000 in exchange for DEF shares with a fair value of P140,000.
Fair value of DEF shares received P 140,000
Less: Tax basis of stocks exchanged © 100,000
Indicated gain p___40,000
The P40,000 indicated gain in the share-for-share swap pursuant to a plan of merger or
consolidation shall not be recognized. A loss is likewise not recognized. The tax basis of
the DEF shares received shall be the same as the tax basis of the ABC shares exchanged;
hence, P100,000.
Illustration 3: Security holder of a party to a merger or consolidation

Mrs. Wacky is a holder of bonds of ABC Company which is merging with DEF
Company. Pursuant to the plan of merger, Mrs. Wacky was required to exchange her
bond investments costing P400,000 for the shares of DEF Company worth P500,000.
DEF shares received P 500,000

Less: Tax basis of bonds exchanged 400,000
Indicated gain P__ 100,000
No gain or loss on the security-for-stock exchange transaction pursuant to a plan of

merger or consolidation shall be recognized. The law also does not consider the receipt
of stock as realization. The tax basis of the shares received shall be the tax basis of the
bonds exchanged; hence, P400,000.
INITIAL ACQUISITION OF CORPORATE CONTROL

No gain or loss shall be recognized if property is transferred to a corporation by a
person in exchange for the stocks or unit of participation in such a corporation of
which as a result of such exchange said person, alone or together with others, not
exceeding four (4) persons, gains control of said corporation. Provided that stocks
issued for services shall not be considered as issued in return for property.
Illustration 1 .
Mr. Ali exchanged his land and building with tax basis of P18,000,000 for the stocks of
ABC Company with total par value of P15,000,000. Consequently, Mr. Ali obtained
51% ownership in ABC Company.
422

12- Dealings in Properties
ter . .
crap or loss shall be recognized in the exchange as it resulted in corporate control.
No wr incement of investment which resulted in corporate
control either solely or with up
romhetfour generating
other persons is viewed by the law as an investing transaction rather than an
exchange transaction,
come’
ion 2
'
gastro Mark, Luke, John, and Peter exchanged their commercial lands (all ordinary
for the stocks of a corporation where they obtained total shareholdings of
asset, mnabas also rendered consultancy services to said corporation and was
ne 410% shareholdings.
gt
2 yrsuant to the rule, any gain or loss of Matthew, Mark, Luke, John, and Peter on the
sfer shall not be recognized. The basis of their shareholdings shall
be the same basis
tel lands they exchanged for the stocks,
0
assuming the group was able to obtain only 45% ownership in the corporation,
their
respective gains or loss which shall be measured as the difference between the fair value
of stocks they respectively received and the tax basis of the lands they respectively
exchanged shall be recognized as ordinary gain or loss. The basis
of the stocks they
received shall be fair value of the stocks. Note that if the lands are capital assets,
the
same shall be subject to the 6% capital gains tax. Still, no gain will be recogn
ized under
regular income tax.
In either case, Barnabas shall report the fair value of the stocks he
received as
professional income. The rule covers only exchange of property for stocks where control
isobtained by one up to five persons.
\
Taxable Exchanges
1. Share-for-share swap transactions or property-for-share transaction that are
not in pursuant to a plan of merger or consolidation
are taxable. Losses are
recognized subject to the applicable tax rules.
Transfer of properties to a corporation alone or with
four others which did not
result in the acquisition of corporate control
Transfer of properties to a controlled corporation after
the initial acquisition
of contr ol is taxable. Losses are non-deductible since the transferee is a
related party to the transferor. Related party rules will be
Chapter 13, discussed in
EXCHANGES NOT PLAINLY FOR STOCKS

me “xemption rule to stockholders on share-fo
r-share swap and to security
one's on security-for-share swap both
pursuant to a plan of merger or
"Solidation proceeds from the theory
S areholder that there is no realization. The
or security holder is still part of the same corporate
entity, and the
423

<
s
Chapter 12 - Dealings in Propertie
nt of stocks or securities by stocks. Heng
transaction merely involves a replaceme
‘
5;
+
.
there is no realization of income
considerations other than stocks in the
However, if the transferor received
to the extent of cash and/o,
exchange, gains but not losses shall be recognized
properties received.
rties received
Illustration 1: Indicated gain exceeds cash and other prope
| |
Aurum Company jg
Ms. Casa is a holder of Aurum Company shares costing P100,000. King
1
with King Corporation. She received P105,000 worth of

;
being consolidated x
41
Company shares.
shares and P15,000 cash in exchange for her Aurum
5
2
5
P 105,000
King shares received
15,000
Cash received |
P 120,000
Total consideration received or selling price |
100,000
__
Less: Tax basis of stocks exchanged
p__ 20,000
|
Indicated gain
The indicated gain is considered realized to the extent of cash received. Any excess }
indicated gain is an unrealized gain. Thus,
(to the extent of cash received) P 15,000
Unrealized gain (in excess of cash received) 5,000
Indicated gain p____20,000
P15,000 of the indicated gain shall be recognized. A loss shall not be recognized.
Gain classification and taxability

The gain shall be classified and subject to tax as follows:
; If Ms. Casa is a:
Aurum Corporation is a: Dealer in stocks Non-dealer in stocks
Ordinary gain subject | Capital gain subject to the
Domestic corporation to regular income tax 15% capital gains tax
Ordinary gain subject Capital gain subject to
Foreign corporation to regular income tax | holding period rule under
regular income tax
The taxation of the income shall consider situs rules. In the case of foreign stocks, the
gain shall be taxable only if the taxpayer is taxable on global income.
Tax basis of the King shares

The tax basis of the King shares received shall be computed using the regulatory
formula as follows:
424

yr
ey?
;
of 12- Dealings in Properties

68 scion an
crap is of shares x
anged
qx orgainin t recognize _ 19/008
dends to shareholder
Age amounts treated as divi
sh and fair value of other properties received 15,000
|| Yeyess:nasis of new shares re received
i by the transferor P__100,000
7 natively, this can be directly computed as:

Alt
asis of Aurum shares exchanged P 10
g: other basis of properties exchanged 0)
pasis Return
ress: of capital
of te King shares received P__100,000 >
other implications of the exchange
involves its
um Com pan y will not be subj ect to tax as the exchange transaction
_ Aur
shareholders and King Corporation. is a financing transaction.
9, King Corporation shall not be subject to tax since this
income, but is part of its capital.
The premium on the share issue is not an
the assignee
Tax basis of Aurum shares to
a shall be the substituted
res acq uir ed by King from Ms. Cas
sha s:
using the regulatory formula as follow
the
The basis of ed Aur um
basis comput
P 100,000
Original basis in the hands of the transferor
15,000
Add: Gain recognized to the transferor
P__115,000
Tax basis of Aurum shares acquired
Alternative formula:
Lower of fair value of shares or property exchanged
P = XXX,XXX
and the basis of the transferor
XXX,XXX
Add: Cash or other properties exchanged
P___ XxX, XXX
Basis of shares received
an
The “lowe r of fair value exch ange d and transferor basis” rule is intended to prevent
Note: cost
could create a tax loophole when additional
improper appreciation of tax basis which cost on his part.
out actual
deduction is allowed to the transferee with
Thus,
Lower of P100,000 basis to the transferor and P 100,000
d
P105,000 fair value of shares exchange
anged ____15,000
Add: Cash and other properties exch p__115.000
Tax basis of Aurum shares acquired
n
and other propert ies re ceived exceeds indicated gai
Illustrat ion 2: Cash ged her Aurum shares costing
ation, Ms. Cas 4 exc han
Pursuant to a plan of consolid
King shares with fair value of P85,000 plus P20,000 cash. Aurum
100,000 for the nd the record date of the
Company declared a 10% cash dividend before the merger a
425

dividends. Consequently, Ms. Casa is due to receive P10,000 dividends on the shares
exchanged,
Note that the dividends are effectively acquired by King Corporation because the
share swap is made between the date of declaration and the date of record. King
Corporation will be registered at the date of record as shareholder and will receive the |
dividends on the Aurum shares transferred by Ms. Casa at the date of payment. |
King shares received P 95,000

Cash received ___20,000
Total consideration or selling price P 115,000
Less:
Basis of stocks exchanged P 100,000
Basis of dividends exchanged ___ 10,000 _110,000
Indicated gain p___5,000
The value of any cash or properties received shall be considered realization of gain to
the extent of the indicated gain. Any excess is a return of capital. Thus,

(to the extent of the indicated gain) P 5,000
Unrealized gain (excess cash received) __ 15,000
Cash received P___20,000
The P5,000 gain shall be recognized. A loss shall not be recognized. The P10,000
dividends on the stocks sold dividend-on shall be reported by Ms. Casa in gross
income subject to the regular income. Note discussion in Chapter 6.
Tax basis of King shares

The tax basis of the King shares received by Ms. Casa shall be computed using the
statutory formula:
Basis of Aurum shares exchanged P 100,000

Add: Amount treated as dividends" 10,000
Gain recognized 5,000
Less: Cash and other properties received 20,000
Basis of King shares received P__95,000
Note:
1, The basis of other properties exchanged by the transferor aside from stocks such as an
accrued dividend is actually additional cost of the shares to be received; hence, treated as
additional basis.”
2. We used P10,000 dividends in the computation rather than 90% x P10,000 because the
dividends will eventually be registered in the name of King corporation at the date of
record; hence, not subject to the 10% final tax.
- 426
nee

- D e a l i n g s in Properties
chapter 42
if the exchange of the Aurum shares occurred between the date of record and the date of
ayment of the dividends, Ms. Casa will receive the dividends. Hence, the same shall not be
included in the computation of the above basis.
formula:
tern ative .
ni pasis of the shares received can be alternatively computed as:
gasis of Aurum shares exchanged P 100,000
Add: Amount treated as dividends 10,000
i 1 5 000
Less: Return of capital
Basis of King shares received P_ _ 95,000

Tax basis of Aurum shares
The basis of the Aurum shares acquired by King from Ms. Casa shall be the substituted
basis computed using the regulatory formula as follows:
Original basis in the hands of the transferor P 100,000

Add: Gain recognized to the transferor —__5.000
Tax basis of Aurum shares acquired P__105,000
Alternative formula:
Lower of P100,000 basis to the transferor and

P85,000 fair value of shares exchanged P = 85,000
Add: Cash and other properties exchanged 20,000
Tax basis of Aurum shares acquired P_ _ 105,000
Illustration 3
Visayan Corporation, not a security dealer, is a shareholder of ABC Corporation, a
foreign corporation, which will be consolidated with QRZ Corporation, a domestic
corporation. Visayan Corporation acquired its ABC shares for P200,000.
Assume that pursuant to the plan of consolidation between ABC and QRZ, Visayan
Corporation exchanged its ABC shares for:
Case 1: P80,000 cash, P50,000 worth of merchandise, and P120,000 worth of QRZ
shares
Case 2; P90,000 cash, P50,000 worth of merchandise, and P210,000 worth of QRZ
shares
The indicated gain and reportable gain shall be computed as follows:

Case 1 Case 2
Cash P 80,000 P 90,000
Merchandise 50,000 50,000
Shares ___120,000 210,000
Total consideration or selling price P 250,000 P 350,000
Less: Tax basis of shares exchanged ——200,000 _200,000
Indicated gain P50.000 P__ 150,000
427

es
gs in Properti 000
p__50,000 P_140,
r 12 - De al in
Chapte
Taxable capita
l gain’
to the ho ld in g pe ri od rule as Visayan j,
is not subject (P80,099 :
ta xa bl e ca pi tal gain re ce iv ed in Ca se 1 is P130,000
Note: The that the cash
and property
se 2.
+ P50,000) in Ca
at io n. No te
corpor 00 (P 90,000
40 ,0
p50,000) and P1
ed as:
c ei ve d shall be comput
__Case2_
the sh ar es re
The tax basis of
p 200,000 P 200,000
exchanged 50,000 140,000
Tax basis of shares oD
Add: Gain recogniz
ed
ed ___ 130,000
receiv
Less: Other properties p__120,000 P__200,0
received
Tax basis of QRZ shares
Tax basis to the assi

gnee
Case] __Case2__
p 200,000 P 200,000
or or transferor 140,000
Tax basis of the assign 50,000
to the transferor
Add: Gain recognized p__250,000 p__340,000
Basis to the assignee
Alternative formula: Case 1 Case 2
hanged
Lower of fair value of shares exc p 120,000 P 200,000
or basis to the transferor 130,000 140,000
hanged
Add: Cash and other property exc
p___250,000 p__340,000
Basis to the assignee
on tax basis of st ocks

Effect of split and stock dividends
ld be sprea d over the total shares held
The tax basis of stocks previously held shou
ion.
following a share split or stock dividend declarat
Illustration
Corporation. A total of 1,000
Mr. Benguet invested P100,000 in the stocks of Ilocandia
Ilo Ilocandiai declared a 25% stock
shares were acquired at a cost of P100/share. _
i Mr. Benguet sold the 1,000
dividend. Just before the receipt of the stock dividend,
shares for P90,000.
The new per share tax basis shall be com uted t iluti
the stock dividend declaration as follows: P telject dhe cast alldua: Qrowest’?
Adjusted basis = [P100,000/(100,000 + 25% x 100,000)] = P 80/share

The gain on disposal shall be computed as follows:
Selling price Pr. 9
ress
Less: Tax basis of shares sold (1,000 shares x P80) 80,000
5 000
P10,000
428
eee

naptel 42 - Dealings in Properties
+, js a domestic c i .
gain s tag - IFi thie r: the isgain Benguet shall be subject
realized by Mr.ion,
yioce ande
15% siplt
caP al Hocandia a fore ign corp orat the gain is subject to
wa ;
foUr ular income tax. Either to regular tax if Mr.
y, the gain shall be subject
theengu : is a dealer in stocks,
gain on sale of indebtedness with maturity of more than 5 years
under S&C: 32(8)(7)g) of the NIRC, gains realized from the sale, exchange or
retirement of bonds, debentures, or other certificate ofindebtedness with a
ars is exempt from income tax. Hence, any ca ital
rpatusity-of more than_— five years other 1 e cate of
“gain or ordinary gain in dealings in bonds, debentures, or
years shall not be subject to
indebtedness with a maturity of more than five
jncome tax.
properties sold for less than adequate consideration
a gift
The excess of the fair market value over the selling price shall be deemed
tax basis
subject to transfer tax. The difference between the selling price and the
of the property shall be accounted for as gain or loss.
Capital Gains and Losses of a General Professional Partnership

of partnership shall be determined similar to
Under the NIRC, the net income
apply
corporations. Hence, the rules on dealings on capital assets by corporations
to partnership including a general professional partnership.
by the buyer
sale of properties with excess mortgage assumed
buyer exceeds the tax basis of
if the amount of the indebtedness assumed by the
received including the excess of
the property disposed of, any consideration
constitutes gain.
mortgage over the basis of the property sold
Illustration
a tax basis of P2,000,000 which was
Bohol Corporation sold its old o ffice building with med the mortgage and paid
bu yer assu
encumbered by a P2,500,000 mortgage. The
Bohol P200,000.
The gain can be computed as follows:

P 200,000
Cash received
Add: Excess of mortgage over cost (P2.5M - P2M) 500,000
P_700,000
Ordinary gain
in the usual way as follows:
Alternatively, the gain can also be computed
mortgage assumed by buyer E a ; fo “0
ne ireceived by seller 2,700,000

000,000
eee consideration or selling price
“ss: Cost of office building p_700,000
'dinary gain
429

WASH SALES
The wash sales rules discussed under Capital Gains Taxation in Chapter 6 als,
apply to the regular income tax particularly to sale by non-dealers of securities of.
a. Foreign shares
b. Debt securities, foreign or domestic
Readers may wish to review the rules on wash sales in Chapter 6. This section
focuses on advanced application and integration.
It should be recalled that wash sales occur when, within 30 days before and 39
days after the date of disposal of securities at a loss, known as the “61-day period”,
the taxpayer acquired or entered into a contract or option to acquire substantially
identical securities.
“Substantially identical securities” means securities with the same features. Preferred
stocks and common stocks are not substantially identical. A participating preferred
stock and a non-participating preferred stock are not substantially identical. Bonds
with different lengths of maturities or with different interest rates are also not
substantially identical.
The gains from a wash sales transaction are taxable, but the losses are not
deductible. The wash sales rule is not applicable to dealers in securities.
Illustration 1: Foreign stocks

A taxpayer had the following transactions in the shares of Nitros Company, a foreign
corporation, on the following dates:
___Date____ Transactions. Quantity. Price _Amount. _Gain/(loss)_

2020
January 4 Purchase 10,000 P 20 P 200,000 -
January 26 Sale 10,000 24 240,000 P 40,000
May 17 Purchase 12,000 17. 204,000 -
June 18 Purchase 3,000 17 51,000 -
July 15 Sale 5,000 15 75,000 ( 10,000)
2021
October 1 Sale 10,000 22 P 220,000 P 50,000
Required: Determine the reportable gains per year assuming that the taxpayer is
subject to tax on global income and is:
1. an individual non-dealer in securities
2. an individual dealer in securities
3. acorporate non-dealer in securities
4. acorporate dealer in securities
430

rapter 12 - Dealings in
Properties
spayer is an individual, not
a dea ler
the wast sales . N00 me “oldinaleg r inj stocks
period rule apply. The P10,000 loss
;
9 for ane Since the replar em
ent st by a purchase of 3, in July 15,
hes the loss shall be spires fo 000 shares within the
llows Within the 61-day period
is less than the
5
3,000/5,000 x P10,000
realized loss (2,000/5,000 x P10,000)
1055 ° toch
the basis of the shares purcha 00P10,0
sed on June 18 shall be adj
usted as follows: :
purchase cost
Add: Deferred loss on wash sale
r eb
Adjusted basis
P__57,000
The October 1, 2021 gain shall be adjusted for the deferred loss adjusted to the basis
ofthe stocks bought on June 18:
October 1, 2021 gain
,; . P 50,000
Less: Increase in basis of shares sold 6,000
Gain to recognize on October 1, 2021 P_ 44,000
The reportable net capital gain or loss for each year shall
2020 2021
Capital gain P 40,000 P 44,000
Less: Capital loss 4,000 0
Net capital gain P__ 36,000 P44000
2020 2021
Net capital gain P 36,000 P 44,000
Holding period percentage 100% ____50%
Net capital gain P36,000 P_
22,000
Note: Note that the 2020 capital gain and capital loss are short-term while the
2021 capital gain
is long-term.
Taxpayer is an individual dealing in stocks

Both the wash sales rule and the holding period rule do not apply. The gains and the
loss
Shall be recognized and reported as ordinary gains or loss in their entirety as follows:
2020 2021
Ordinary gain P 40,000 P. 50,000
Ordinary loss (10,000) :
431
a

ings in Properties
Chapte r12 - Deal .
.
in stoc
ks .
co rp or at io n, no ta de al er d ru le ap pl ie s. The same analysis Orit
Taxp ay er is a riod r u
t not the ho pold abgle pene
rtin t capital gain or loss for each year shai} Hs e
The wash sales rulele bu e. The re
mad
wash sales shall be
computed as follows: 2021
2020
p 40,000 P 44,000
Capital gain 5D a aan
Less: Capital loss Tote 509%
Net capital gain
ge
Holding period percenta p_36,000 P_44,000
Net capital gain
sto
in din
the g hol
Taxpay er is a corpP oration dealin g cksperiod rule do not apply. The reportable
period Fu
Both the wash sales rule and . Thus,
or loss shal l be the sam e as with individual taxpayers
ordinary gains
2020 2021
40,000 P 50,000
is a od
aot
pP
Ordinary gain 10,000) -
(
ee
Ordinary loss
TER
in the Philippines?
ee
What if the taxpayer is taxable only

Philippine income tax as the situs
--
None of the gains or losses shall be recognized for

=
on gain on sale of foreign stocks is abroad.
Illustration 2: Domestic bonds and stocks

of ABC Corp, a closely
Mr. Cebu had the following transaction in the bonds and stocks
held domestic corporation, in 2021:
Date Securities Transaction Quantity Unit price __Total_

January 4 ClassAbonds purchase 200 P 1,000 P 200,000
March 16 ClassBbonds __ purchase 100 1,500 150,000
April 5 Common stocks _ purchase 1,000 100 100,000
August 12 Class A bonds sale 200 1,020 204,000
September 1 Common stocks sale 1,000 120 120,000
September5 ClassAbonds purchase 300 1,005 301,500
December1 Class B bonds sale 100 1,490 149,000
December9 ClassAbonds _ purchase 100 1,480 148,000
The Class A and Class B bonds were both with five-year maturity period but Class A bonds bears
10% interest while Class B bears 12% interest.
Dealings in domestic stocks:

Selling price, (P120x 1,000 shares) | P 120,000
Less: Cost of stocks sold, (P100 x 1,000 shares) 100.000
Capital gain on September 1, 2021 P_ 20,000
432
ee OT

¥
42 - Dealings in Properties
on gindomesichnd
gpssA“ag bonds (P1,020 x 200 bonds)

price, (PL, P 204,000
seine st ofA bonds sold, (P1,000 x 200 bonds)
Lita
200,000
gain on August 12,2021
ta P___4,000
000
onas:
ning price (P1,490 x 100 bonds) P 149,000
5e ofcommon stocks sold (P1,500x 100 bonds) 150,000
otal loss on December 1, 2021 (P 1,000)
yer is:
equiredserDete rmine he reportable gain or loss assuming the taxpa
in securities
Adeal
7 Nota dealer in securities
solution:
The loss on the December 1 sale of Class B bonds is fully deductible since there is no
replacement acquisition within the 61-day period. The acquisition of Class A bonds on
pecember 9 could not be considered replacement acquisition for the Class B bonds
sold on December 1 because they are not substantially identical securities. Hence, the
wash sales rule does not apply.
The taxpayer is a dealer in securities

The taxpayer shall include the following ordinary gains as items of gross income
subject to tax:
Gain on sale of domestic stocks P 20,000

Gain on sale of Class A bonds 4.000
Total ordinary gain P__24,000
Itmust be noted that dealers in securities are not subject to the capital gains tax on the
sales of domestic stocks directly to buyers. The P1,000 loss is an ordinary loss, an item
of deduction against gross income.
This will be reported through BIR Form 1701

for individual taxpayers and BIR Form
1702-RT for corporate taxpa
yers.
The taxpayer is not a dealer in securities

The P20,000 gain from the sale of domestic stocks shall be included in gross income
Subject to the 15% capital gains tax. The capital gain shall be reported through the
“pital gains tax return (BIR Form 1707) within 30 days from the date of sale.
te <apital gains and capital losses from the other capital assets shall be offset. The
7 Capital gains of P3,000 (i.e., P4,000 - P1,000) shall be included in gross income
102pre regular income tax and shall be reported under BIR Form 1701 or BIR Form
433
v

a
What if both bonds have maturity of six years?

Ordinary gains or capital gains realized from the sale of bonds with more than 5.
maturity shall not be subject to income tax.
TRANSACTIONS CONSIDERED EXCHANGES a

The following are therefore subject to the rules of dealings in properties:
1. Retirement of bonds, debentures, notes, or certificates and other
evidence of indebtedness |
The amount received by the holder upon retirement of the Indebtedneg, is
deemed received in exchange thereof.
Short sale of properties 7
Short sale is a sale by a speculator of securities borrowed in anticipation of a
decline in security value. When the security price falls, the speculator 8ains by
buying at the lower price and replacing the borrowed securities he sold,
Failure to exercise a privilege or option to buy or sell property that js a
capital asset
Loss for failure to exercise an option is not an expense, but a capital Joss
deductible against capital gain. However, the gain or loss realized by security
dealers from trading stock options is an ordinary gain or loss.
Security becoming worthless
This occurs when the issuer of a debt or equity security becomes bankrupt
TESS
such that none is recoverable by the investor. Decline in market value is not
considered worthlessness.
As a rule, loss on securities becoming worthless is a capital loss. However, for
banks, trust companies and dealers in securities, the same is an ordinary loss
deductible as “bad debts expense.”
Receipt of liquidating dividends
Liquidating dividends is viewed as consideration in exchange for the
investment of the investor-shareholder. The difference between the proceeds
of the liquidating dividends and the cost of the investment is a capital gain or
loss which is subject to the rules of regular income tax and not to the 15%
capital gains tax. (Sec. 8 of RR6-2008)
The amount received in liquidation of a partnership is also deemed in
exchange of the partner’s interest on the partnership.
It should be noted that for a business partnership, the resultant capital gain 0"
loss from such liquidation is subject to capital gains tax. The capital gain O°
loss from the liquidation of a general professional partnership is subject to
regular income tax.
434

ized by the investor from the
buy-back of
» Shall be subject to regular income
3, Voluntary buy-back tax.
. of shares to be held in
to the investor, but treasury is considered exchange
not to the Corporate issue
T of the ashares. °
Gains or losses on voluntary share buy-back b
is not for the purpose of cancellation shall be y the issuing corporation which
Subject to the capital gains tax in
cases of domestic stocks but to regular incom
€ tax in cases of foreign stocks.
435

Chapter 12 ~ Dealings in Properties
1, Compare ordinary assets with capital assets.
Discuss the rules of taxation of gains and losses on ordinary assets and other
capital assets,
3, What is selling price?
4. Enumerate and discuss the rules on tax basis.
How do the rules on individual taxpayers and corporate taxpayers differ as to the
r
measurement of the net capital gain or loss? Explain.

0.
6. Discuss the basis of the 50% rule on other capital assets held long-term by
individuals.
7. Explain the limits on the carry-over of capital loss.
8, At what particular securities are the rules of wash sales relevant to regular
income tax?
income tax.
9. Discuss the rules on tax-free exchanges relevant to regular
10. Discuss how gain is recognized in tax-free exchanges and how basis is determined
for the transferor and the transferee.
11, Enumerate the transactions considered exchanges.
True or False 1
1. Tax basis means cost or depreciated cost of the property.
2. The loss on the sale of stocks by a trust company is an ordinary loss.
3. The capital gain from the sale of domestic bonds and foreign stocks are subject to
regular income tax.
Capital loss is deductible to the extent of capital gains.
The sale of foreclosed land by a bank is subject to regular income tax.
SNAnA
Ordinary loss and capital loss are items of deduction from gross income.
The loss on the sale of bonds by banks is an ordinary loss.
An ordinary gain is an item of gross income while a net capital gain is an exclusion
from gross income.
The holding period rule is relevant to individuals and corporate taxpayers.
so
10. The gain is said to be short-term if the sale of the asset is made in less than one
year from its acquisition.
11. 50% of the capital gain or loss is considered if the asset is held by individuals for
one year or more.
12. Ordinary gains or losses are subject to the holding period rule if the taxpayer is an
individual taxpayer.
13. The gain or loss on the sale of any stocks is subject to capital gains tax.
14. Ordinary loss is deductible to the extent of ordinary gains.
15. Anet ordinary loss is deductible from gross income while a net capital loss is non-
deductible.
436

ter 12 - Dealings in Propertie
s
chaP
qhe indicated gain in

a ta
yalue of cash or properti x-free exchange shall be reco gnized not to exceed the
es rece
The amount of net capital los ived other than stocks.
ear it was sustained. s carry-over must not exce
ed the net income in the
if ass
date ets
of doare ac ired by way of donation, their bas
nationqu
. is shall be the fair value on the
The net capital loss can
be Carried over to a pe
riod of three years fr
is sustained. om the time it
The basis of properties rece
ived as boot in a tax-
upon receipt. free exchange is th
eir fair value
Gains but not losses are reco ni
zed in tax-free ex
When no other property is i Nvolve changes.
d in a share “Swap
or consolidation, there is no gain to pursuant to a plan of merger
recognize.
10. Corporations are allowed t O Carry- Over net capita
l loss for a period of one
year
11.
12, No gain can be recognized on a pure

share-swap transaction which
pursuant to a plan of merger or con is not
solidation.
13. Stock splits and stock dividends ca use
a dilution in the cost per unit
which must be considered in subseq uent of stocks
gain or loss measurement.
14. Capital gains within the 61-day p erio
d are recognized, but losses are
when there are acquisitions of identica deferred
l securities in the same period
15, When properties are sold for less
than an adequate and full considera
measured as the difference between tion, gain is
fair value and the tax basis of the pro
disposed. perty
Multiple Choices: Theory

- Part 1
1, Which is correct regarding
gains from capital assets?
a. Always subject to regular tax
Always subject to capital gains tax |
C, Subject to both regular tax and capital gains tax
Subject to either regular tax or capital gains tax
2.
Which Capital asset is subject to the rules of capital gains
tax?
a. Sale of office building
Sale of office equipmen
C
t
Sale of domestic common shares directly to a buyer
Donation of domestic stock
437

Properties
Chapter 12 - Dealin gs in gain?
tr ue re ga rd in g ta xation of ordinary
3. Which is re gardless of the ta
xpayer.
re gu la r ta x
a. Itis subject to gular tax.
ta xp ay er s ar e 2 lways subject to re
b. Individual gains ta X.
l
c. Itis subject to capita tax.
s ta xa bl e un de r ei ther regu lar tax or capital gains
d. Iti
e of ordinary assets is
The gain arising from the sal
income c. Extraordinary gain
a. Ordinary
d. Ordinary gain
b. Regular income
capital assets is
The gain arising from dealing s in gain
a. Capital income c. Capital
b. Extraordinary gain d. Regular income
ry ts sub: ject to regular income tay
Statement 1: The gain on sale © f ordina asse is s tay
tal assets 1s subject to capital gain
Statement 2: The gain on sale o f capi
a. Statement 1 c. Both statements
b. Statement 2 d. Neither statement
ings in properties?
Which is not correct regarding rules in deal
nt of capital gains.
a. Ordinary loss is deductible only up to the exte
b Ordinary gains are taxable in full.
c. Ordinary losses are deductible in full.
gains.
d. Capital loss is deductible only up to the extent of capital
Which statement is incorrect?

a. Capital loss is deductible from capital gain.
b. Capital loss can be deducted from ordinary gain.
c. Ordinary loss is deductible from ordinary gain.
d. Ordinary loss is deductible from capital gain.
of 2"
Which is an incorrect statement regarding the taxability or deductibility
or losses in dealings in properties?
a. Ordinary gain is taxable in full.
b. Ordinary loss is deductible in full.
c. Net capital gain is taxable in full.
d. Net capital loss is deductible in full.
10. Statement 1: Ordinary gains and losses are offset.

Statement2: Capital gains and losses are offset.
a. Statement 1 c. Both statements
b. Statement 2 d. None of these
438
y

che pter 12 - Dealings in Properties
j, Whichich of0 the following js Not incl

:
uded in
1 Ordinary gains c. Net capit al been Putation of taxable income?
p, Ordinary loss
- Net capital gains
2 Which statement is true?
‘a The taxability of ordinar
taxpayer. Y Bain depends upon the holding period of the
Which statement is true?

a. Statement 1 is true. c. Both statements are tru
b. Statement 2 is true. d. Nei €.
ther Statement is true.
14, Statement 1: The net gain in dealin g ordinary asse
t is subject to regular tax.
Statement 2: Net gain in dealin g Capital asset is an item of gros
s income subject to
capital gains tax.
Which statement is true?
a. Statement 1 is true. c. Both statements are true.
b. Statement 2 is true. d. Neither statement is true.
15. The short-term holding period is
a. 12months or less. c. up to 24 months,
b. less than 12 months. d. 24 months or less.
16. Which statement is true regarding the holding period rule?

a. Applicable only to corporate taxpayers
b. Applicable only to taxpayers engaged in business
¢. Applicable only to individual taxpayers
d. Applicable to any taxpayer
17. The holding period rule applies to | .

a. Domestic corporations c. General professional partnerships
b. Taxable trusts d. Resident foreign corporations
18. To which of the following taxpayer does the holding period assumption not apply?
a Resident citizen c. Business partnership
Resident alien d. Non-resident citizen
e
; period ignor ;
follo wing taxpa yer's is the holdi ng ed?
'9. For which of the
4. Taxable estates
c. renee se |
Taxable trusts
d. All of the
439

s
Chapter 12 - Dealings in Propertie
means
20. Ashort-term holding period
a. 12 months or less. c. more than 12 months.
b. less than 12 months. d. at least 12 months.
ns
21. Along-term holding period mea
4. morethani2months. c. 12 months or less.
b. less than 12 months. d. at least 12 months.
gain or loss is consider, d

22. For individual taxpayers, what percentage of the capital
for capital assets held for 12 months?
a. 50% c.25%
b. 100% d.0%
23. Which of the following properly depicts the percentage of gains considered jp
dealings in properties?
Short term Long-term
a. _ Individual 50% 50%
b. Corporation 100% 100%
c. Individual 50% 100%
d. Corporation 100% 50%
24, What percentage of long-term capital gain shall be included in the computation of
the net capital gain or loss of a corporate taxpayer?
a. 0% c. 100%
b. 50% d. 200%
25. In the computation of the net capital gain or loss, what percentage of long-term
capital losses is taken into consideration by an individual taxpayer?
a. 0% c. 100%
b. 200% d.50%
26. Which is incorrect in the determination of the net capital gain or loss for
individuals?
a. 100% of short-term capital gain
b. 100% of short-term capital loss
c. 100% of short-term ordinary gain
d. 50% of long-term capital gain
27. Which is incorrect regarding net capital loss carry over?

a. Applicable to corporate taxpayers
b. Applicable only for a period of one year
c. Applicable only to individual taxpayers engaged in business
d. Applicable only to individual taxpayers not in business
28. Which is incorrect regarding the application of the net capital loss carry over?
a. There is no net capital loss carry over allowable if the succeeding year results
to a net capital loss.
440
eee eb
cceeding year. P t to the extent of available
.
net capital gain in the
su
d. ital
ne succeeding loss carry-over . ; a
year y can be applied against available ordinary
tne ’ gain in
hat is. the tax
ax basis of Pro
prop erti i
per ties received .
9, W Fair valueon the date of donation by wa ?
" Acquisition cost of the las “way of gif
t donor who did n t
i
> Whichever is lower of A and B ot acquire the property by gif, t
d. Whichever is higher of Aand B
30, What is the tax basis of properties rec eived

as inheritance?
a. Tax basis in the hands of the dece de
nt
b. Fair value of the property on the date
of succession
c, Whichever is lower ofA and B
d. Whichever is higher of Aand B
Multiple Choices: Theory - Part 2

1, All ofthe following are ordinary assets to a real prop
erty developer except
a, Raw and undeveloped land intended
to be sold as is
b. Mortgage receivables on properties sold
c. Land currently under development
d. Raw land held for future development
2, Which is an ordinary asset?

a. Gold inventory c. Investment in stocks
b. Notes receivable d. Accounts receivable
3. Which is an ordinary asset?
a. Home computer c. Family residence
b. Office supplies d. Personal clothing
Which is a capital asset?
a. Inventory ofsecurities c. Investment in foreign currencies
Parking lot d. Office building
». Which is a capital asset?
*. Home supplies c. Domestic bonds of a security dealer
Farm supplies d. Residential lot held for sale
All of the following are capital assets to a merchandising business
except
Store supplies
€ceivables from customers
€rsonal car of the trader
441

ties
Chapter 12 - Dealings in Proper
payer
d. Personal residence of the tax
disposeq is subj
4 Which of the following capital assets when sold, exchanged, or Jey |
to the rules of regular income tax?
c. Stock rights and
, warrants
a. Domestic stocks
b. Domestic bonds d. Real properties not used in business
gains tax?
8. Which capital asset is subject to capital
a. Domestic stocks held for sale
b. Domestic bonds held as investment
c. Domestic stocks held as investments
d. Domestic bonds held for sale
9. Which capital asset is not subject to regular tax?

a. Real property held for sale by a dealer
b. Foreign stocks
dealer
c. Real property held as investment by a non-realty
d. Domestic stock held by a security dealer
10. Which statement is generally true?

A. Apurely employed taxpayer does not have ordinary assets.
B. Aself-employed taxpayer does not have capital assets.
a. StatementA c. Both statements A and B
b. Statement B d. Neither statements A nor B
11. Which of the following capital asset is the holding period rule applicable?
a. Real properties not used in business
b. Home furniture
c. Domestic stocks sold directly to a buyer
d. All of these
12. Which of the following is considered as capital assets?

a. Fully depreciated properties
b. Land previously employed in business
c. Back-up and stand-by equipment
d. Assets not used in business for the last two years
13. Mr. Godod acquired a lot as a future plant site. For lack of financing, the lot is
currently vacant. For taxation purposes, the lot should be classified as a/an
a. ordinary asset. c. real property.
b. capital asset. d. personal property.
14. Purificacion Asuncion, a book publisher, received a lot as donation from a friend
who is not engaged in the realty business. She reserves the lot to housé his
publication business.
442

ter 12 - Dealings in Prop
erties
a
cae pat is the apprropr
op iate Clas
classificat;
sification of the lot for tax
Ordinary asset
t ?
b. Capital asset c. Depr ecia
Inventorbley Property te
Bantay Kagubatan,
4 non-profit and non-sto a
‘
devoted for its tax-exempt operation ck or 8 anization , has an offic
g, ordinary asset.
e
b. ital asset Pital asset at the discretion

C. capl . of the BIR examiner
d. either ordinary or capital
asset at the discretion of Ba
16.
ntay Kagubatan.
Whic h of the following
constitute Salon
a. An asset acquired on Nov &-term holding peri
emb er 30, 2020 and od?
28, 2021 was disposed of on
November
mber 28, 2020 was and

29, 2020 disposed of on Novemb
er
17. Which of the following stat €ments

is incorrect re gardin
dealings in properties in the j ncom g the presentation of
e tax return ?
a. Ordinary gains are prese nted
as items of gross income
b. Ordinary losses are pres ented as ,
items of deduction.
c. Net capital gains are pre sent
ed as items of gross income
d. Net capital losses are pr esente .
d as items of deduction.
Multiple Choices: Problems -
Part 1
1. An individual taxpayer had the
followin g dealings in properties:
Capital gain
P 150,000
Ordinary gain
200,000
Capital loss
120,000
Ordinary loss
150,000
Compute the total amount of gain to be included in gross income
Progressive tax. subject to
a P 230,000 c. P 80,000
P 350,000 d.P0
2,
A taxpayer had the following dealings in proper
ties:
Capital gain P 100,000
rdinary gain
200,000
Capital loss 120,000
Ordinary loss 150,000
443

ties
Chapter 12 - Dealings in Proper
ss income?
How much shall be included in gro
a. PO c. P 200,000
b. P50,000 d. P 300,000
which Will be
3. In the immediately preceding problem, what is the total net gain
ultimately included in net income?
a PO c. P 50,000
b. P 30,000 d. P 150,000
al assets:
4. Mr. Herman had the following dealings in capit
Short-term capital gain P 200,000
Long-term capital gain 100,000
Short-term capital loss 100,000
Long-term capital loss 150,000
Compute the reportable net capital gain.

a. P50,000 c. P 40,000
b. P 75,000 d. P 25,000
5. IfHerman isa corporate taxpayer, compute the reportable net capital gain.
a. P 75,000 c. P 40,000
b. P 25,000 d. P 50,000
6. A taxpayer had a P300,000 net income before the following dealings in properties:
Ordinary gain P 80,000
Capital gain 60,000
Capital loss 70,000
If the taxpayer is an individual, compute the taxable net income?
eS a. P300,000 c. P 290,000
a b. P 280,000 d. P 260,000
7. Assuming the taxpayer is a corporation, compute the taxable income.

a. P300,000 c. P 280,000
b. P290,000 d. P 260,000
8. In the immediately preceding problem, what is the net capital loss carry over for
an individual and a corporation respectively?
a. P 10,000; P10,000 c. P 5,000; PO
b. P5,000; P5,000 d. P 10,000; PO
9. After three years, an individual taxpayer disposed of a capital asset, other than
domestic stock or real property, with the following data:
Fair value P 2,000,000

Selling price 1,500,000
Cost 1,200,000
444

ter 12 - Dealings in Properties
cha p
what is the capital gain subject to
regular tax?
p 800,000 c.P 150,000
5 P300,000 d.P0
A taxpayer had the following dealings in
10. properties:
short-term capital gain P 200,000
Long-term capital gain
100,000
short-term ordinary gain 50,000
Long-term ordinary gain 150,000
Short-term capital loss 100,000
Long-term capital loss 150,000
Short-term ordinary loss 200,000
Long-term ordinary loss 120,000
Assuming that the taxpayer is an individual, compute respectively
the total items
of gross income and the total items of deductions from gross
income.
a. P200,000;P 260,000 cc. P 500,000; P 320,000
b. P350,000;P 260,000 d.P 275,000; P 320,000
11. Assuming that the taxpayer is a corporation, compute respectively the total items
of gross income and the total items of deductions from gross
income in regular
income tax.
a. P500,000;P570,000 ~—_c. P. 250,000; P 570,000
b, P500,000;P 320,000 d.P 250,000; P 320,000
12. Two years after acquisition, a domestic corporation disposed

of a real property
capital asset for P3,000,000 at a P300,000 discount from its fair
value. The
property was acquired for P2,000,000 when its fair value was P2,100,000.
Compute the capital gains subject to regular tax.

a P 3,000,000 c. P 1,000,000
b. P 1,300,000 d.P0
13, After three years of use, Mr. Kidapawan dispose
d of his malfunctioning factory
€quipment for P1,000,000. The equipment was acquired for P1,500,000 and has a
carrying value of P800,000 on the date of sale.
Compute the gain or (loss) to be included in the determination of regular income.
a P 200,000 c. P 100,000
(P 500,000) d.P 0
14,
Pedro, a realtor, was able to dispose his 2-hectare land inventory to a buyer after
ree years. The lot has a fair value of P5,000,000 and was sold at a discount of
500,000. The lot was purchased at P3,000,000.
445

operties
Chapter 12 - Dealin gs in Pr
come.
recognized in regular in
Compute the gain to be
c. P 2,500,000
a. P 1,500,000
P 2,000,000 d.P 0
b.
g dealings in capital assets:
15. Midsayap Corporation reports the followin
2020 2021
Net income P 10,000 P 80,000
30,000 50,000
Capital gains
45,000 20,000
Capital loss
Compute the net capital gains in 2021.
a. P30,000 c. P 15,0000
b. P 20,000 d. PO
properties:
16. Ms. Maui had the following dealings in
2020 2021
Net income P 20,000 P 80,000
Capital gains 35,000 60,000
Capital loss 60,000 25,000
Compute the net capital gains in 2021.
a. P60,000 c. P10,000
b. P 35,000 d. P15,000
?
nen
Multiple Choices: Problems -Part 2

Mec
1. Mr. Mayamaya, a dealer of household appliances, made the following dispositions

of properties during 2021:
aReee
Date of
$
Properties acquisition Date ofsale — Gain (Loss)

Leasehold right 12/2/2018 2/27/2021 P 50,000
Taxi franchise 7/10/2016 3/14/2021 100,000
Electric oven 6/15/2021 7/15/2021 80,000
Residence 1/14/2020 § 7/3/2021 800,000
Compute the net capital gains subject to regular tax.
a. P955,000 c. P 155,000
b. P875,000 d. P 75,000
2. The following data summarize the dealings in capital assets of an individual

taxpayer.
2020 2021
Net income P 90,000 P120,000
Short term capital gains 35,000 60,000
Long term capital gains 40,000 25,000
Short term capital loss 60,000 50,000
Long term capital loss 80,000 20,000
446

4
ret 12° Dealings in Properties

che p
mpute the ne t capital gain (loss) ) inj 2021.
Com(P 32,500) c. P 12,500
; p 25,000 d.P0
i the 20 21 net capita
pital l gain gain P42
iiff the
th : .
W hat7 is32,50 0) 80 taxpayer is ac orporation? ?
», P25,000 d.P 15,000
the following data may be relevant in establishing the net income of Mr. Masinloc:
2019 2020 2021

Net income (loss) before dealings P 20,000 (P 70,000) P 120,000
Capital gain 30,000 15,000 34,000
Capital loss 52,000 18,000 -
What is the net capital gain or loss in 2021?
a P11,000 c. P 34,000
b. P 31,000 d. P 9,000
Mr. Batangas, not a dealer in properties, made the following dispositions during
the year.
Proper Holding peri Gain (loss)
Land 5 years P 200,000
Car lyear and 8 months 30,000
Laptop 8 months (8,000)
Compute the net gain to be included in gross income subject to regular tax.
a. P7,000 as net capital gain
b. P222,000 as net capital gain
c. P207,000 as net capital gain
d. P200,000 as ordinary gain and P7,000 as ordinary gain
Mr. San Morales, a realty dealer, had the following dealings in properties in 2021:
Date of
Properties acquisition Date ofsale Gain (Loss)
House and lot 2/25/2016 2/27/2021 P 400,000
Commercial lot 8/12/2017 = 3/14/2021 (100,000)
Personal car 7/18/2021 9/12/2021 80,000
Personal i-Phone 1/14/2020 7/3/2021 (40,000)
Compute the ordinary gain and the net capital gain subject to regular income tax.
a. P480,000; PO c. P400,000; P40,000
b. P400,000; P60,000 d. P300,000; P60,000
What is the amount of ordinary loss?
a PO c. P 100,000
P 40,000 d. P 140,000
447

i 12 - Dealings in Properties
oe -yoération invested in the stocks of DEF 2 fore;
1, Davao Corpor
On July 1 202 are. On21.0
g. On July fy
corporation, by acquiring
, 10,000 shares at p12/sh
1, ry 15, 20 |] er 29 » 20255,84
Decnemb
y ty, - On January 2 2024
DEF declared a 20% stock dividend payable Oe '
are.
Davao Corporation sold 10,000 shares for P13/sh
be included in regular income.
Compute the net capital gain to
a. P5,000 c. P 10,000
b, P 15,000 d. P 30,000
on for the stocks of Queen dom
9. Darrel exchanged his stocks in Queen Corporati
Corporation suant to a plan of merger between Queen and Queendom, Darre|
pur
ue was P105,000. The Shares of
acquired his stocks for P100,000 when its fair val
P120,000, and P110,000, respectively gp
Queen and Queendom have fair values of
the date of exchange.
What is the tax basis of the Queendom shares received and the gain to be
recognized in the exchange?
a. P120,000; P20,000 c. P105,000; P 0
b. P 110,000; P20,000 d. P100,000; P 0
10, Moana exchanged his MEG shares costing P80,000 and with fair value of P100,000
for SM shares with fair value of P120,000. MEG and SM are not parties to a merger
or consolidation.
Compute the tax basis of the SM shares and the gain to be recognized in the
exchange.
a. P 80,000; P 0 c. P 100,000; P 40,000
b. P 100,000; PO d. P 120,000; P40,000
11. Krystal exchanged her PAL shares costing P 90,000 for P20,000 cash plus AirPhil
shares with fair value of P100,000 pursuant to a plan of merger between PAL and
AirPhil.
Compute the tax basis of the AirPhil shares and the gain to be recognized.
a. P 100,000; P 0 c. P 90,000; P 20,000
b. P 100,000; P 20,000 d. P 90,000; P 30,000
12, Pursuant to a plan of consolidation, Darlow exchanged his shares costing

P400,000 for the shares of the new corporation with fair value of P360,000 plus
P90,000 cash.
Compute the tax basis of the new shares and the gain to be recognized in the
exchange.
a. P 360,000; P 50,000 c. P 360,000; PO
b. P 400,000; P 90,000 d. P 350,000; P 50,000
448

mber 8, 2021, Mr. Tomas disposed of his
The transaction resulted to

=
p20,000 capital gain subject to regular income tax,

sf
p11,000 capital gain subject to capital gains tax,

p20,000 capital gain subject to capital gains tax.
ao
p11,000 capital gain subject to regular income tax.

¢
44, Matutina had the following dealings during the year:

Capital gain Short Term Long Term
Sale of domestic stocks directly to a buyer P 40,000 P 50,000
Sale of domestic bonds directly to a buyer 40,000 20,000
Ordinary gains
Sale of equipment 20,000 10,000
Capital loss
Sale of foreign stocks 10,000 10,000
Sale of domestic stocks directly to a buyer 10,000 -
Ordinary loss
Sale of old machine f 40,000
Matutina has a business income totaling P500,000 including P18,00
0 dividend
income from a domestic corporation. Compute the total income of Matutina
subject to regular tax.
a. P497,000 c. P522,000
b. P517,000 d. P507,000
15. In the immediately preceding problem, compute Matutina’s net capital gains tax
due on the sale of domestic stocks directly to a buyer.
a P3,000 c. P5,000
b. P4,000 d. P8,000
16. Pursuant to a plan of consolidation, Mr. Dolphy exchange his share with tax basis
of P1,000,000 for the share of another corporation with fair value of P800,
000
plus P100,000 cash. Compute the capital loss to be recognized.
a PQ c. P100,000
b. P50,000 d. P200,000
17, In the immediately preceding problem, compute the tax basis
of the properties
'eceived by Mr,
Dolphy.
‘ P 800,000 c. P1,000,000
* P1,100,000 d. P 900,000
449

es of Deductions
Chapter 13 - Principl
CHAPTER 13
UCTIONS
PRINCIPLES OF DED —

ept of business expens,
This chapter provides qa detailed discussion on the conc ,
ff er en t ac co un ti ng pr oc ed ur es us ed to account for expenses, It ajc
and the di of deductions from gross
income.
ses the general principles
discus
:
rea der s are exp ect ed to demonstrate mastery of the
After this chapter, al expense
Distinction business expense from a person
of
iture
Concept of an expense and a capital expend
&wWN
enditures
Accounting rules of deduction of capital exp
l considerations
Mastery of the different depreciation methods and the specia
on deductions
non-taxable operations
Allocation of common expenses between taxable and
General principles of deductions
OND
Tax reporting of deductions

me
Modes of claiming deductions from gross inco
DEDUCTICNS FROM GROSS INCOME

Deductions from gross income pertain to business expenses incurred by a
taxpayer engaged in business or engaged in the practice of profession.
What is a business?
Business means habitual engagement in a commercial activity involving the
regular sale of goods and services to customers or clients. In taxation, the term
business is generally used to include the exercise ofa profession. Self-employment
is a business but employment is not a business.
Business Expense vs. Personal Expense

Business expenses are costs of doing trade, business or practice of profession such
as employee salaries, office utilities, supplies and rent, taxes, losses, bad debts,
depreciation on business properties, research and development and the like.

Personal expenses include the living and family expenses of individual taxpayers
such . family food, personal recreation and transportation, medication, home
rentals and utilities, tuition fees of dependents, and other similar expenses.
450
a“

napter 43 - Principles of Deductions
cha
separation of the business expenses and the personal expenses of
an
Tn yidval income taxpayer is important because only business expenses
are
i e juctible. The P250,000 annual income exemption in the tax table for individuals
. deemed in lieu of all personal expenses of individual taxpayers. Hence,
personal
oxpenses are non-deductible.
Allocation of common expenses
expenses that are intended for both the business and for personal use of the
taxpayer are allocated between the two. Only those that pertain to the business
are deductible.
[llustration 1
A taxpayer borrowed money from a bank and used 60%
of the proceeds to finance the
construction of his house and the remaining 40% as working capital for his
business.
He later paid P10,000 in interest.
Only 60% of the interest expense ( P6,000) shall be considered perso
nal expense while the
P4,000 is considered business expense.
Illustration 2
A taxpayer engaged in trading business is
renting a two-storey warehouse for P40,
a month . He used the lower floor to store merchandise 000
and the upper floor as his
residence.
In this case, half of the rent pertaining to the lower
floor is a business expense while the
other half of the rent is a personal expense.
Business Expense vs. Business Capital Expe

nditure
Business expenses benefit only the current
accounting period. These are costs of
generating income or gains for the current
period. Hence, these are deductible
against gross income in the current period.
Examples of expenses:
1. Salaries and wages expense
Utilities expense such as electricity, telephone,
internet, gas, and water
wr
Selling expenses such as delivery and commission

expense
Rent
ulm
Local taxes and permits
Capital expenditures are expenses that benefit futur €

accounting periods. These
are initially recorded as assets upon acquisition then
later deducted against fut
gross income when used in the trade, business or pr ure
ofe
ssion of the taxpayer. The
advanced deduction of capita
l expenditures is not w arranted as it contradic
Lifeblood Doctrine. ts the
Examples of capital expenditures:

Items of property, plant, and equipment
2. Inventory
Investments
451

rss
tions
r 13 - pr in ci ples of Deduc
Chapte cog,
cluding
4, prepayments as se ts su ch as pa tent or franchise, in of
of intan gible
5. Acquisition in co urt
1]
e s a m e
defending th business good
wil
to p r o m o t e tr an sf ers ownership
Expenses e le as e th at
6. l lease or financ
7 Rentals on capita
ai n to al l ty pe s of pr op erties used or reserved
and é quipment pert
Property, plant, of the taxpayer,
such as:
for use in the
business
nd ed to be us ed in the business
ent ly or in te
1. Land used curr
ties s
2. Depreciable proper su ch as fe nc es , benches and road
Land improvements
evator
Building as in st al led escalator or el
moana
ts su ch
Building im provemen
pment
Machineries and equi
Furniture and fixtures
ents
Leasehold improvem
th os e th at de cr ea se in value through normal
p ertain to e of time.
Depreciable properties so le scence b y the passag
ge Or th ro ug h ob
wear and tear by usa and
nd i se in te nd ed for sal e. It may also include tools
Inventory includes mercha
er in his business.
supplies used by the taxpay
iation in
ass ets pur c has ed wh ic h are intended to earn from apprec
Investments are interest.
ome suc h as dividends and
F value or for accrual of inc
Examples of investments:
value
_a. Lands held for appreciation in
another corporation
j ,
b. Stocks, bonds, and other securities of
Acquisition of intangible properties constitutes

as patents and franchises
The acquisition of intangible assets such
over the period they are
capital expenditure that must be amortized (deducted)
expected to be used.
Expenses to promote business goodwill

yer's
open incurred to create or maintain some form of goodwill for the tax pa
or eae io are mousy or profession of which the taxpayer is a
tra
used ss.
ll inis busine lly sto todenote
generaEffort i
establish
from to conn “ti enodwi
termreputa
© and tion
areg akin
arisin
benefittion
reputa ac ection
ep peranon ave eee of capital assets and, therefore, expenses related
Development ( S expenses but capital expenditures. (Atlas Mining a?
pment Corp. vs. Commis of si on
Internal er
Reven ue)
452

tal payments on finance lease
n . that tr
rentals on a finance lease “ capital lease
that transfers ownership at the end of
> lease term, commonly known
tm sidered expense. The ren as “rent-to-own” arrangements are
tals constit not
c0 initial ] a ute acquisition cost of the leased property
shat should be initially capitalized. The Capitalize
shroughout the useful life of
d cost shall be depreciated
the property. For all other finance
cAAP, the rental payments can be con leases under the
sidered as expenses for tax purpos
es.
gules on Deducting Capital Expenditures
j, Non-depreciable asset
The cost of assets that do not depreciate b
' y usage or by passage of time such
as land is deducted
against the selling pric e when sold.
9, Depreciable properties
The “depreciable cost” or the acquisition
allocated as deduction over the useful lifecost, net of expected salvage value, is
th € property. The useful life of the
property is the length of time it is expected to be serviceable
applicable, whichever is lower. or its legal life, if
Note that the law requires maximum usa ge life on

certain items of properties
such as vessels or aircrafts after which
they must be de-commissioned from
use.
Useful Life and Depreciation Rate

Under Sec. 34(F)(3) of the NIRC, the taxpayer
and the CIR may enter into a
written agreement on the estimated useful life and
rate of depreciation of any
property. Such agreement shall be binding on both the taxpayer and the
Government in the absence of facts and circumstances not taken into
consideration during the adoption of the agreement.
Any change in the agreed rate and useful life shall be applied prospectively
Starting on the taxable period when notice by certified mail
or registered mail
IS rendered by the initiating party to the other party.
Depreciation methods
wy
© taxpayer may choose from the following methods:

Straight line method
DM
Sum-of-the-years-digit method
Oo
Declining balance method (150% or 200%)

oO
.
Other methods which may be prescribed by the Secretary of Finance upon
"ecommendation of the Commissioner of Internal Revenue
453

fee
ctions
Chapter 13 - Principles of Dedu |
Straight lin e me th od
useful life, The
The depreciable cost is simply spread equally over the Mua
depreciation expense is computed as:
life in years
(Acquisition cost - salvage value) / useful
Alternatively, the straight line depreciation rate may be compute as
fraction of one over the useful life in years. The depreciation rate is Multiply
to the depreciable cost of the property to arrive at the depreciation expense
Illustration ~— .
On January 1, 2021, a taxpayer acquired a P6,000,000 building with P1,000,09)
salvage value at the end of its 5-year expected useful life.
The annual straight line rate is 1/5 or 20%. The annual depreciation expense Shall
be P1,000,000, computed as P5,000,000 x 20% or P5,000,000/5.
Sum-of-the -years-digit method . ?

The depreciation charge is computed as a fraction of the remaining usefy| life
over the total of the annual remaining useful life of the asset.
IHustration oe
A taxpayer bought a machine for P120,000. The machine is expected to be sold
P20,000 net of selling expense after its 4-year estimated useful life. The
depreciable cost is P100,000, computed as (P120,000 - P20,000).
The divisor is first determined as the sum of the annual remaining useful life.
Hence, 4+3+2+1=10.
For simplicity, this arithmetic series is computed using the following formula:
nx (n + 1)/2, where “n” is the useful life of the asset.
an
Hence, 4 x (4+1)/2 equals 10.

The depreciation expense for each period is computed based on the depreciable
amount as follows:
Depreciation Book value at
expense year-end
First year:
4/10 x P100,000 P 40,000 P 80,000
Second year:
3/10 x P100,000 P 30,000 P 50,000
Third year:
2/10 x P100,000 P 20,000 P 30,000
Fourth year:
1/10 x P100,000 P 10,000 P 20,000
The “book value” or carrying value is the acquisition cost less periodic depreciation. Book
value is referred to as adjusted tax basis in taxation.
The same shall equal the ae
value at the end of the useful life of the machine.
454
ras

. me
13 - Principles of Deductions
ining balance me thod .
ee ining rate not exceeding
double of the stra
ight line rate is applied to the
hook value of the property. For every period, depreciation expense is
computed by multiplying the depreciation rate to the declining book value of
the property: The salvage value is initially ignored in computing depreciation
expense, but is considered in the terminal year of the property.
The 150% declining balance and the d ouble declining balance are more
common in practice. Under the 150% declining
rate and double declining rate,
the depreciation rate is determined by multiplying the
straight line rate by
450% and 200% respectively,
{Illustration
in January 2, 2017, a taxpayer
purchased an equipment
estimated to last 5 years with P50,000 Salvage value. for P500,000 which is
The taxpayer uses the
double declining balance method of deprec iation.
The depreciation rate is computed b y multiplying the straight line
rate 1/5, by
200%; hence, 40%. The periodic de preciation expense and adjusted tax basis is
[ Depreciation Year-end
expense adjusted tax basis
2017:
40% x P500,000 P 200,000 P 300,000
2018:
40% x P300,000 P 120,000 P_ 180,000
2019:
40% x P180,000 P_ 72,000 P 108,000
2020:
40% x P108,000 P_ 43,200 P 64,800
2021:
| (P64,800 - P50,000) P 14,800 P 50,000
Note: The provision for depreciation expense in the terminal year shall
not result in a tax
basis less than the residual value, Hence, the depreciation expense is merely
an adjustment
of the remaining book value to the salvage value.
Disposal of properties before full depreciation

If the Property is disposed of before it gets fully depreciated, its book value is
educted against the selling price. The difference is either
a gain or a loss. If
the Property is destroyed, its book value is recognized as an ordinary loss.
Intangible assets
Mortizable intangible assets or those that lose their value over time
should
© expensed over their legal life or expected usage life whichever is lower.
455

_—_— SSP SB
of Deductions
Chapter 13 - Principles
ts tha t do not los e thei r value such as franchise of public utility
Intangible as se
ortized.
vehicles shall not be am
4. Inventory
ry and sup pli es, the ir cos ts are deducted when sold or useq
For goods inve nto
business using the in
ventory method or the specific identification
in the e.
a Point- of-Sale (POS) machin
method with the aid of
if . uy
ion : The Inv ent ory me thod
Illustrat its inventory:
Yor k Cor por ati on had the following data pertaining to
New
P2,500,000
Gross purchases 50,000
In-transit freight and insurance 100,000
Purchase returns and discounts
the year were P250,000 and
and ending inventories during
The beginning
P340,000 respectively.
ed as follows:
The cost of goods sold shall be comput
P 250,000
Beginning inventory
Add: Net purchases
Gross purchases P2,500,000
5 Add: Freight-in and insurance 50,000
h Less: Purchase returns and discounts 100,000 _ 2,450,000
} Total goods available for sale P 2,700,000
Less: Ending inventory 340,000
Cost of goods sold/cost of sales P.2,360,000
Cost of goods sold shall include the purchase price or cost to produce the
merchandise and all expenses directly incurred in taking them to their present
location and use.
The same computational procedure is employed with supplies and tools, but the
resultant figure is referred to as “supplies expense.”
The inventory method is applicable to taxpayers using either cash basis or accrual
basis. Note that the expensing of purchase cost of inventory or supplies normally
does not properly reflect the income of the taxpayer unless the fluctuation in
inventory levels is immaterial. This may expose the taxpayer to risk of income re-
computation and assessment by the CIR.

The cost of goods sold is ded ucted outright
i from gro j easurement
of the gross income from operations. Bross Saree aan
456

crapter 13 - Principles of Deductions
; prepaid expenses
prepayments are dedu
cted in the future pe
riod
used in the business or professj as they expire or as they are
prepayments, if material in a
income; hence, it is not allowed.
[llustration
Ina buil
2018dbig
, Zefr
to a,com
Inc.
menpaid
ce P30
20190,0 00ougash a aot
thr three- a eae rental for the lease of
paid the lessor a lease bonus of P30.000. the lease contract, Zefra also
> prepaid rentals. These should be amo

P110,000 annual rent expense from 2019 to rtized as
2021.
jmmaterial capital expenditures

The acquisition of items of Property, plant and equip
ment, inventories or
prepayments of expenses which are relatively
immaterial in amount may be
deducted outright as expense upon acquisition as this will not
materially distort
net income. Moreover, the inventory method may likewise be imprac
tical to use
for such items.
SPECIAL CONSIDERATIONS WITH DEDUCTIONS

Property repairs and improvements
Property acquisition-related costs
PrwWwn
Securities issue costs

Manufacturing expenses
Effects of accounting methods
nw
Effects of value added tax
PROPERTY REPAIRS AND IMPROVEMENTS

Repairs that si gnificantly increase the value or prolong the useful life of properties
are capital expenditures. These are capitalized to the adjusted tax basis of the
Property and are included in the subsequent annual provision for depreciation.
Repairs that merely restore the value or functionality of the property without
Causing increase in fair value or useful life of the property shall be deducted as
outright expense.
If the fair value of the property increases due to repairs, improvements or
additions, the actual cost of the repairs, improvements or additions should be
“apitalized not to exceed the appreciation in fair value.
lf the fair value of the property is not determinable, the excess of the actual repair
COSt over the tax basis of the property is presumed a capitalizable increase in fair
Value,
457

j
Chapter 13 - Principles of Deductions
Improvements and additions to properties normally increase the value OF Uses
life of properties; hence, these are capitalized and depreciated. Ul
Illustration ;
The building of B Corp with a carrying value of P1,000,000 was partially qjj apid
through long usage. A repair of P500,000 was made on the property. ated |
Case 1: No increase in property value or useful life |

The P500,000 repair is deductible as repair expense. The tax basis of the p Toperty
remains at P1,000,000.
Case 2: Property fair value increased to P1,800,000 after the repair

The entire P500,000 repair is capitalizable since it is less than the P800,000 appreciation
in fair value. The adjusted tax basis of the property for purposes of future provision of
depreciation expense shall be P1,500,000.
Case 3: Property fair value increased to P1,400,000 after the repair |

The P500,000 repair cost shall be capitalized only to the extent of the P400,000 increase
in fair value. The excess P100,000 repair cost is expensed. The adjusted basis of the
property for future depreciation shall be P1,400,000.
Case 4: P1,200,000 repair cost was made to restore the property; fair value after
repair is unknown
P1,000,000 is deductible as repairs expense while the excess P200,000 is a capitalizable
improvement. The adjusted tax basis of the property shall be P1,200,000.
The same principles apply in case of repairs of properties due to partial destruction
by fire, storm and other calamities except that the deductible repair cost is presented
as a “loss.”
Case 5: No increase in fair value but with increase in useful life
The P500,000 will be capitalized. The adjusted basis for future depreciation shall be
P1,500,000.
Replacements of old or destroyed properties

The tax basis of the old property is deductible as a loss, but the cost of the
replacement property is capitalized subject to future provisions for depreciation.
Illustration
The office building of Andrix Corporation with a carrying value of P4,000,000 was
totally destroyed by an earthquake. The same was replaced with a new building ata
total cost of P8,000,000.
The P4,000,000 is deductible as loss while the 8,000,000 is capitalized as the tax basis of
the new building subject to future provision for depreciation.
458

3- P inciples of Deductior iS
ch apt er 1 rincl
tof demolishing old buildings

con Jand was acquired with an old building in it but was not intended to be used
che puyer, the entire amount paid is assigned only to the land.
e costs of demolishing the old building, net of any salvage scrap, are treated as
iditional cost of acquisition of the land.
a
ne cost of razing or removing an old building to give way for the erection of
another in its place is not a deductible expense, but capitalized as part of the cost
of the replacement building. (Priscilla Estate vs. CTA)
jlustration . ,
petermined to be insufficient for business use, the two-storey building of Benguet
Corporation was decided to be replaced by a nine-storey building. The two-storey
pbuilding with a P1,500,000 carrying value was razed at a cost of P600,000. A nine-
storey building was constructed in its place for P12,000,000.
The P1,500,000 carrying value of the old building shall be deducted as a loss. The cost of
the nine-storey building shall be P12,600,000, inclusive of the demolition cost of the old
building.
ASSET ACQUISITION-RELATED COSTS

All costs directly related to the acquisition of an item of property, plant and
equipment such as in-transit insurance, title guarantee insurance, freight, finder’s
fee or commissions, import duties, and other taxes (excluding VAT for a VAT
taxpayer) are capitalized as part of the cost of the property subject to
depreciation.
Expenses incurred which are directly related to the acquisition of goods such as
transportation, broker’s commissions, and insurance in-transit including those
incurred in bringing the goods for sale such as consignment freight-out are
capitalized to the cost of the goods and are expensed through cost of goods sold
when sold.
Cost of financing asset acquisition (i.e., interest expense) may, at the option of the
taxpayer, be expensed outright or capitalized and depreciated.
SECURITY ISSUE COSTS

Expenses of issuing equity or debt securities (i.e., stock or bonds) such as cost of
"egistering shares of stock to the Securities and Exchange Commission (SEC), cost
of Printing bond or stock certificates, or brokers’ commission on selling stocks
or
ands, are not deductible expense against gross income. They are deducted
Sainst the Proceeds of such securities.
459
Re
ions
Chapter 13 - Principles of Deduct
MANUFACTURING EXPENSES
as cost 0 f raw materials and supplies use
Plant or factory expenses such d, labo,
oth er ove rhe ad like pla nt utilities, maintenance and security, supp lies a :
and t of the goods being Processeg »
t of the cos
depreciation are capitalized as par nd
when sold.
are expensed through cost of sales
g firm is computed as follows:
The cost of goods sold ofa manufacturin
P XXX,XXX
Raw materials, beginning
—_AXKKKX
Add: Net purchases
P XXX,XXX
Raw materials available for use
—ABAKKK
Less: Raw materials, ending
P XXX,XXX
Raw materials used XXX, XXX
Direct labor (direct workers’ salaries)
——XXX,XXX
Factory overhead (all other plant costs) XXX,XXX
P
Total manufacturing costs
——XXXXXX
Add: Cost of work in-process, beginning
P XXX,XXX
Total cost of goods placed into process
__XXX,XXX
Less: Costs of work in-process, ending
P XXX,XXX
Cost of goods manufactured (finished)
___XXX,XXX
Add: Cost of finished goods, beginning
P XXX,XXX
Total cost of goods available for sale
XXX,XXX
Less: Cost of finished goods, end
Cost of goods sold P_XXX.XXX
Illustration
A manufacturing firm had the following data in March:
March 1 March 31
Finished goods (undelivered work orders) P 150,000 P 1 10,000
Work-in-process (unfinished work orders) 380,000 250,000
Raw materials 30,000 45,000
The following costs and expenses were incurred in March:
Total raw materials purchases 140,000

Factory supplies used 30,000
Factory salaries and wages 600,000
Factory utilities expenses (gas, water, and electricity) 70,000
Machinery repair and maintenance 20,000
Plant depreciation 100,000
Office utilities 80,000
Office building depreciation 50,000
Administrative salaries 120,000
Sales salaries 50,000
Commission expenses 20,000

rer 137 principles of Deductions
ses
anufacturing costs - administrative and selling expen
N
on™ nufacturing expenses commonly classified as administrative expenses and
,
n- nses
:
IN fina
i
ncia l acco unting
expeon the accounting method adopted
Nor,line ne should be expensed as incurred or paid
by the taxpayer: ~
depe®
penses:
A jministrative ex
_tion P 80 00000
50 ,0
office utilities ia 70,000
ce puilding deprec
ries ais Seto00n0
minister le sala ministrative expenses
otal deductib ad
selling expenses: P 500,0 00

sales salaries 5 00
es
commission expens 5a oD
ll ing expenses
Total deductible se
s
Manufacturing cost outright but are capitalized to
expensed
Manufacturing expenses should not be
of goods sold.
inventory then expensed through cost
Cost of goods sold:

P 30,000
Raw materials, beginning 140,000
Raw materials purchased ____ 45,000
Less: raw materials, ending P 125,000
Raw materials used
Conversion costs:
P 600,000
Factory labor
30,000
Factory supplies
Factory utilities expense 70,000
Machinery repair & maintenance 20,000
Plant depreciation expense __100,000 __ 820,000
Total manufacturing costs P 945,000
Add: In-process work, beginning __380,000
P 1,325,000
Total manufacturing costs placed to process
Less: In-process work, ending __250,000
Cost of goods finished, this period P 1,075,000
mid Finished goods, beginning 150,000
lee goods available for sale P corti
Cn Inished goods, ending 110,000
P1.115,000
Ost of goods sold
fi rm s, th e co st of go od s sold of manufacturing firms is deducted

Siar to trading re po rt ab le gr o ss income from operations.
g th e
Salnst sales in determinin
461

IONS
EFFECT OF ACCOUNTING METHODS ON DEDUCT
The methods adopted by the taxpayer in accounting for expense have a Signifi
that under the Cash
bearing on the deductible expense. It must be recalled nt
Sls
expenses are deductible when paid regardless of when they accrue while in
less of wh er
the accrual basis, expenses are deductible when they accrue regard
they are paid. However, prepayments and capital expenditures cannot .
e
deducted outright.
Under the cash basis, deductions include the following:

Cash expenses (paid) P = XXX,XXx
Amortization of prepayments XXX,XXX
Depreciation of properties —__ XXX, XXX
Cash basis deductions
Under the accrual basis, deductions include the following:

Accrued expenses (paid or unpaid) P = XXX,XXX
Amortization of prepayments XXX,XXX
Depreciation of properties __XXX,XXX
Accrual basis deductions P__XXX,XXx
Illustration
Xhelsy Corporation had the following items of expense and expenditures in 2021:
Purchase of equipment (paid in cash) P 200,000
Freight on purchase of equipment (paid in cash) 20,000
2021 salaries expenses paid this period (cash expense) 50,000
Supplies bought in 2020, half was used in 2021 16,000
Depreciation expense on property 24,000
2021 expenses, not paid this period (accrued expense) 12,000
2022 expenses, paid this period (prepaid expense) 18,000
Required: Determine the total deductions under:
1. Cash basis of accounting
2. Accrual basis of accounting
Solution:
Cash Basis Deductions
Salaries expense (cash expense) P 50,000
Supplies expense (P16,000 x 1/2) 8,000
Depreciation expense 24.000
Total deductible expenses P__82,000
Note:
1. Accrued expenses are not deductible under cash basis.
2. Capital expenditures and prepaid expenses cannot be deducted in the current period but in
the future period they relate to.
462
eee oe
ter 13 - Principles of Deductions
ha
ual pasis Deductions
C
: expense (cash expense)
galaries
lies expense P 50,000
on
pretation expense 24,000

Acer ue . __12,000
total deductible expenses
N ° te:Note that the

accrued expenses are also deductible,
"pre paym
. irated ents freight and
costs,capit
andal the
expen
pr diture items such as the cost of equipment, the acquisition
r ? epai
d expense are exclud
ed.
gFFECT OF VALUE ADDED TAX ON DEDUCTIONS

when purchases of goods or services are made from VAT suppliers,
taxpayers will
pay the VAT passed-on by the supplier. To the seller's
perspective, this is called
output VAT. But to the buyer, this is called input VAT,
treatment of Input VAT

a. For VAT taxpayer, the input VAT is claimable as tax credit a gainst output VAT;
hence, it is not claimable as deduction.
b. For non-VAT taxpayer, the input VAT is part of costs of the purchase or
expense of the taxpayer; hence, it is claimable as deduction,
GENERAL PRINCIPLES OF DEDUCTIONS FROM GROSS INCOME

1, Expenses must be legitimate, ordinary, actual and necessary (LOAN)
2. The Matching Principle
Only business expenses which contribute to, or are incurred in connection
with the generation of income, gain, or profits subject to regular income tax
are deductible.
3. The Related Party Rule
In case of transactions between related parties, gains are taxable but losses
are not deductible. Also, pursuant to the transfer pricing rule, non-arms’
length expenses incurred between associated enterprises may be restated to
their arm’s length fair values to reflect the correct income of each of the
associated enterprises.
4. The Withholding Rule
No deduction
;
is allowed unless the withholding tax required by the law or
regulations to be withheld on the income payment (i.e., expense) is withheld
and remitted by the taxpayer to the government.
463

ee

THE “LOAN” PRINCIPLE
inary, actual and necessary,
A deductible business expense is Jegitimate, ord
nse:
Characteristics of a legitimate business expe
period.
1, It is incurred in and for the current taxable
2. Itis nota capital expenditure.
3. It pertains to the business or profession of the taxpayer.
4. Itis not contrary to law, public policy or morals.
Examples: Bribes, kickbacks to government officials, payment to police officers for |
protection (Calanoc vs. CIR), and revolutionary taxes to rebels are held non- |
deductible illegal payments.
5, Itis adequately substantiated with receipts or other documents.

Illustration
A taxpayer compiled the following payments:
Salaries of employees P 400,000
Maintenance repair of office building 100,000
Renovation cost of an old building 200,000
Purchase of new equipment 150,000
Bribes to government officials to win business deals 200,000
Dividend distributions to shareholders 400,000
Only salaries and maintenance are deductible, The renovation cost and purchase of equipment are
capital expenditures claimable through depreciation. Bribe is a non-deductible illegal payment.
The dividend is not an expense, but a distribution of corporate profit.
What is an ordinary and necessary expense?

An expense is necessary if reasonable and essential to the development,
management, operation, or conduct of the trade, business or exercise of profession
of the taxpayer. It is "ordinary" when it is normal in relation to the business of the
taxpayer and the surrounding circumstances. (Atlas vs. CIR) An expense is also
said to be ordinary if it is normally incurred by other taxpayers under the same
line of business.
A deductible expense must be both ordinary and nece . An ordinary business

expense may still be disallowed by the BIR if unnecessary or unnecessarily
extravagant or unreasonable taking into consideration the context of the expense
and the nature of the taxpayer’s business.
An extraordinary expense is presumed incurred outside the business of the

taxpayer; hence, it is non-deductible. However, extraordinary expense may be
allowed if its connection and necessity to the business can be demonstrated by the
taxpayer.
464

raote! 13 - Principles of
Deductions
¢ tors i0
assessing reasonab
; leness
fixed test or clea
r. tani.
qhere . in CIR vs. Ge
nera] Foods (prnte
ex
pe pejunsdg™ es don the interplay of
tia n “e
J, Inc, it watermining i; ponableness
Many factors susch heas,
ld that reasonableness of wian
ll
folltyp
owine :and size of business but not limited to, th
e
1. yolume and amount of its innetwhearnings
ich the tax
Payer is engaged
.
b nature of the expenditure itself

: intention of the taxpayer
5
_ general economic conditions
the burden of proof of estab}
i Shing the Vali
di
ty and reasonab
rests upon the taxpayer and n ot upon lene Ss of an expens
the taxi ng authority e
.
What is meant by actual expe
nse?
An expense is actual
if jt js Paid or resu
the taxpayer. In case of a lted to an incurren
loss, it must be sustai ce of an obligation
ne d or to
closed and completed transactio re alized by the taxpa
n, er in a
y pay
Meaning of “closed and com pleted tr
ansaction”
A transaction is said to be close
d an
emanates from its occurrence.
In
indemnification or reimbursement fro
Examples of non
-ded uctible expense under this rule:
L Decrease in value of properties
or investments such as:
, €crease in value of securities such as stocks
or bonds
crease in value of foreign currencies or fore
ign currency-denominated
receivables
“crease in value of machineries, equipment
and building brought by
Obsolescence and impairment
465

Deductions
Chapter 13 - Principles of |
h as: —
i ted fut ure los ses suc
suc
_ Estima es
or uncollectible receivabl
; a. Estimated loss on bad debts judgment
med by a final
b, Estimated loss on lawsuit not yet confir
c. Estimated warranty expense
3. Loss on properties covered by insurance or indemnity contracts
are mer ely tem por ary and may reverse until they become actualy
These loss es
insurer.
sustained upon final settlement by the
|
THE MATCHING PRINCIPLE
that only business exPenses that
It is a well-established rule in income taxation
are incurred for the generation of items of gross income subject to regular tax are
deductible. This is a pervasive criterion that is consistently observed by the NIRC,
as the “Matching
revenue regulations, and BIR rulings. Let us refer to this rule
Principle.” .
Business expenses incurred to generate items of gross income that are either
exempt or excluded from taxation, subject to final tax or capital gains tax or to a
special tax regime, must not be matched or deducted against gross income subject
to regular tax.
Examples of non-deductible expenses under this rule:
1. Expenses on exempt income
a. Expenses incurred to finance the acquisition ofa tax-exempt security
b. Premiums paid for the life insurance of an officer where the taxpayer-
business itself is the beneficiary
The proceeds from such insurance arrangement is tax-exempt; hence, the premium
expense is not deductible. However, if the beneficiary is other than the employer, the
same shall be deductible as fringe benefit expense.
c. Expense on FCDU or EFCDU from foreign currency operation
Foreign currency deposit units (FCDUs) and EFCDUs are exempt from regular income
tax on their income from foreign currency transactions in the Philippines. Hence, FCDU
and EFCDU expenses from exempt operations cannot be deducted against their items
of gross income subject to regular income tax.
d. Expenses of non-profit organizations, government agencies, and cooperatives
from their exempt operations cannot be deducted from their gross income
2. Expenses on income subject to a special tax regime —

a. Expenses of new enterprises registered with the Tourism Infrastructure and
Enterprise Zone Authority (TIEZA)
Under RA 9593, newly registered enterprises of the TIEZA are subject to a 5% & ross
Income tax in lieu of all other national and local taxes, license fees imposts 7
assessments except real estate taxes and such fees as may be imposed by the TIEZA:
466

ote 13 - Principles of
Deductions
cha
p. enses
Expens of enterprises
Authortity re Bis
tered wit. h the PhiPhil
lipinn;
pine Economicic Zone
nein 30 O58 Ine emtetDrises in
subjec 8 specia
ncome tax on their registl economic zones (ECOZONES) are
national or local, exc ered operations
ept rea] Property tax
es on land in lieu of all taxes,
The expenses of these
businesses in Co
the 5% gross income nnection with their
tax are non “deduc Operations subject to
regular income tax, tible agai nst their gross income
subject to
"a, Non-resident alien, not eng ject to final income

aged j nN trade or tax such as:
b. Non-resident foreign corp busine ss
oratio ns
These taxpayers are not
subject to regular inco
deductions of whatever nature. me tax; hence, they ca
nnot claim
b. Selling expenses of real

c. p ed as capital assets
Expenses of petroleum
service subcontractors in
to petroleum service operat supplying goods and ser
ors vices
Pursuant to PD 1354, the
gross in
i come derived b
service contractors is sub y subcontractors with pet
ject to 8% final tax in roleum
local. lie u of any and all taxes,
national or
5. Foreign business ex penses
of taxpayers taxable onl
such as: y on Philippine income
,
a Resident aliens and non
-resident aliens engaged
Philippines in trade or business in the
b. Resident foreign corporations
The foreign income of these taxpay
ers is not included in t heir gro
taxation purposes, Hence, their fore ss income for Philippine
ign expenses shall no t be deduct
are incurred in connection with their Philippine bus ible, unless the sam e
iness,
Loss of income not yet recognized
in gross income
a. Write-off of receivable under the
cash basis of accounting
Destruction of unharvested farm fruit
s or vegetables
c. Death of animal of
fspring
THE RELATED PARTY RULE

Gains realiz ed between related parties are taxable, but losses
*ductible, are non-
The ry le is intended as a control measure due to the fact
transac ions can be easily tailored that related party
in a way to evade taxes. This rule
"elevant in the is particularly
claim of losses, bad debts, and interest expe
nses.
467
A, »
: ee.

ductions
Chapter 13 - Principles of De
Who are related parties?

1. Members of a family
2. Except in cases of distri
bution in liquidation, the direct or indirect contro}; Ing
individual of a corporation er direct
ept in cas es of dis tri bution in liquidation, corporations und Or
3. Exc sam e ind ivi dua l
or for the
indirect common control by
st
4. Grantor and fiduciary of any tru
same grantor
s. Fiduciaries of trusts with the
eficiary of such trust
6. Fiduciary ofa trust and the ben
(whether half-blood or full-bloog )
Members of a family includes brothers and sisters
endants.
spouse, lineal ascendants and desc
#4 of the voting stocks of a corporation.
Control means ownership of more than
Illustration 1: Corporations
and 30% of Basilan Company. Misamis
Mr. Lanao owns 60% of Misamis Corporation postela owns
owns 70% of Compostela Compan y and 80% of Surigao Company. Com
y also owns 40% of Davao Company.
55% of Cotabato, Inc. Surigao Compan
me ee Fe tm a
ee ee ee ee
ee
Compostela
55%
el ee
Basilan
Note:
between any of these taxpayers,
1. The related parties are indicated in bold font. Transactions ate controlling individual, are
the ultim
either inter-company or involving Mr. Lanao,
transactions between related parties.
are neither related between themselves
2. There being absence of control, Basilan and Davao
nor to the group of affiliated corporations. on their
may realize actual los
ses
3. In liquidation, all shareholders, related or unrelated, are deductible.
from a related party
investments. Hence, liquidation losses incurred
Ilustration 2: Trusts J
r management of different trustees. Trust
Mr. Sarangani designated three trusts unde
2 and Trust 3 are in favor of Cami as
is in favor of Agus as beneficiary while Trust
t No. 3.
beneficiary. The trusts are irrevocably designated except Trus
468
nner tt]

Notre fiduciaries of all the trus
ts are related to Mr. Sarangani.
The fiduciaries of Trust 2 and Trust 3 are related because the trusts they manage are for
2. the same beneficiary.
3, Agus js related to the fiduciary of Trust 1, but not to, the fiduciaries of Trust 2 and Trust 3.
4 cami is related to the fiduciaries of Trust 2 and Trust 3, but is not related to the fiduciary of
‘Trust 1.
s, Agus, Cami, and Mr. Sarangani are not necessarily related to each other unless they qualify
"as such as members of a family.
qransfer Pricing Regulation

Transactions between associated enterprises must be made at arm’s length.
pursuant to RR2-2013, the BIR may restate the price of a non-arm’s length
expense between associated or related enterprises to their arm’s length fair value
comparable to those entered into by independent enterprises. The amount
determined as arm’s length value shall be the deductible amount for purposes of
income tax.
THE WITHHOLDING RULE

| Payors of income are required to withhold income taxes on their payments. The
| failure to comply with this requirement shall result in the disallowance of the
_ expense as deduction. The rule is “no withholding, no deduction.”
Types of Withholding Taxes:

|__—s Types Expense type BIR Form Deadline
a Withholding tax Compensation 1601-C On or before the
on compensation expense 10% day of the
Certain passive month following the
b. Final withholdin income and fringe 0619-F month in which
tax benefits withholding was
Other income made. For EFPS
“ Expanded payments which are filers, their
withholding tax | subject to regulartax | 0619-E respective group
to the recipient deadlines apply.
469

Deductions
Chapter 13 - Principles of
mpensa tion and final withholding taxes are
idelines
The guideli on wi thholding tax on co
respectively. You may re
fer to RR11-2018 from the BIR
se d in Ch ap te r 1 0 and 5,
discus
ails of withholding taxes.
website for the specific det
holding tax rates:

Summary of Expanded with
ds, in general - 1%
A. Payments to suppliers of goo
vices, in general - 2%, except:
B. Payments to suppliers of ser
and toll fees to refineries - 5%
1. Rentals of properties or films
2. Professional services to:
agents, entertainers - 5% or 10%
1. individual professionals, brokers,
2. corporations - 10% or 15%
ips - 0%
3. general professional partnersh
3. Embalmers by funeral companies - 1%
importers, shipping
4. Additional payments to government personnel from ices - 15%
and airline com panies or their agents for overtime serv
C. Income distribution by
s - 15%
1, Estates and trusts to heirs or beneficiarie
ners - 10%
2. General professional partnerships to part
% of 1%
D. Payments made by credit card companies -
al fees, professionals must submi t a
For purposes of the withhol ding tax on profession
P3,000,000 in a year. The
sworn declaration that his gross receipts do not exceed
5% instead of the 10%. If
same shall be the basis for the withholding agent to deduct
this sworn declaration, he
the professional is a VAT taxpayer or if he fails to submit
shall be deducted the 10% withholding tax.
er must submit a
For corporate payees of professional services, the corporate taxpay
00 in a year. The
sworn declaration that their gross incomes do not exceed P720,0
d of the 15%. If
same shall be the basis for the withholding agent to deduct 10% instea
agent shall
the corporation failed to submit such sworn declaration, the withholding
deduct the 15% withholding tax.
The withholding agent-payor must release to the recipient or payee of the income
payments copies of evidence of the withholding:
a. BIR Form 2306 (Certificate of final tax withheld at source)
b. BIR Form 2307 (Certificate of creditable tax withheld at source)
For income not subject to withholding tax, the withholding agent-payor shall
release to the recipient of income exempt a copy of BIR Form 2304 (Certificate of
income payment not subject to withholding tax).
Illustration 1: Expanded withholding tax - non-VAT supplier

expense to a nom
In January 2021, Mrs. Arias is due to pay P40,000 monthly rental
VAT lessor.
470

ctions
napter 13 - Principles of Dedu
¢
Arias shall withhold P2,000 co
iS
of ofan (5% x P40,000) from the
lesso
r and furnish him a co rent, pay P38,000
oe and remit the P2,000 wit hheld ¢ Form 2307, Mrs. Arias shall file BIR Form
061 7 ment depositary bank, ax to the government through an
go" authorized
GRC shall deduct 10% withholdin 9 tax on

the gross ;
gross income of Mr. Galante.
withholding tax and VAT of the pay ment shall be comp The
uted as follows:
Gross amount due
Less: Output VA T (P896,000 x 12/112) P 896,000
Commission income 96.000
Multiply by: Withholding rate P 800,000
10%
Withholding tax
P__80,000
GRC shall claim the P800,000 as commission S expens
VAT. The input VAT is a tax credit e and record the P96,000 as
and input
is not an expense,
The cash payments to Mr. Galante shall be:

Commission income
P 800,000
Plus: VAT
Less: Withholding tax 96,000
Net cash due to Mr. Galante 80,000
P___816,000
Inaccounting, this is recorded in the boo
ks as:
Commission expense P 800,000
Input VAT 96,000
Cash
P 816,000
Withholding tax payable 80,000
IFGRC is a non- VAT taxpayer, it can claim the
deductible expense. commission and the VAT or P896,000 as
GRC shall furnish Mr. Galante a copy of BIR Form 2307.

Since this is the third month of
© quarter, GRC shall include the commission expense on its 1 601-EQ (Quarterly
emittance Return of Creditable Withholding
Taxes), and remit the P80,0000
"thholding tax to the BIR.
llustratio n 2: Fini al witi hholdi j tax
ng
nepio202Gal
Po car 1, emoDel,l DelPubl lis
Pubhin
incurred dedP200,000 royalty expenses to author Atty.
lisghing shall uct P20,000 (10% final tax) on the royalty
471

uctions
Chapter 13 - Principles of Ded ,
pay her P18 0,0 00, and fur nis h her a copy of the BIR Form
payments to Galemo, Dell Publishing shall include the
~ 306
he thi rd mon th of the qua rte r, |
Since this is t ta, toe
ts in i ts BIR For m 160 1-F Q and remit the P20,000 withheld )
paymen e
government.
BIR Form - Q
1601-F its deductio n for rp
to support its
Dell Publisish hing shall keep the
m 2306 furnished her as her tay . 2
expense but Galemo cannot use the BIR For
because the royalty is not part of his gross income subject
Timing of withholding
t and withhold tax from the
Per RR12-2001, the oblig ation of the payor to deduc
ence of any of the following, whichever
income payment arises upon the occurr
comes first:
a. Payment
payable
b. when the income payment becomes due or
or asse tin the books
c. recording of the income payment as expense
To avoid penalty, the withholding agent must remit the withheld tax befor
e the
deadline.
Late payment of withholding taxes
will stil]
Under the new rule established by RR6-2018, the BIR held that expenses
be deductible even if the withholding tax, surcharge including interest of such late
withholding is paid at the time of audit investigation or reinvestigation. This isa
reversal of the previous rule that no deduction is allowed even if the withholding
tax and penalties is subsequent paid.
For income payments exempt from withholding tax such as salary payments to
minimum wage earners, the taxpayer must comply with certain documentary
requirements of the BIR.
PENALTIES FOR NON-WITHHOLDING OR LATE REMITTANCE OF
WITHHOLDING TAX
Non-withholding or late remittance of withholding tax is subject to the same
penalties for late filing or late payments of tax discussed under Chapter 4.
Integrated Illustration
On March 15, 2021, the taxpayer paid P475,000 net rental to a lessor but failed to
remit the P25,000 withholding tax to the government. The taxpayer filed BIR Form
0619-E on June 28, 2021.
The total amount to be paid by the taxpayer on June 28, 2021 shall be:
Withholding tax due P 25,000
Plus: Penalties
Surcharge (P25,000 x 25%) 6,250
Interest (P25,000 x 12% x 79/365) 649
Compromise* 10,000
Total tax due P 41,899
472
a dl
eB principles of Deductions
“na?
L
got, eadline or the withholding tax was April
10, 2021 (i.c,, 10% day following the month
I. afiahholdin
2021g)-to June 28, 2021
is 79 days,
, Apa spromise penalty is taken from
the t able of compromi . i
3 | nhold or remit withheld tax at the time ort failure to
S o y bane Ch ee,*
“wit imes required by law, as follows:
=
ae
notnt
Ifthe amou withheld or remitted
Exceeds But not exceed
,
|_Compromise is
. >: ]
p 15,000 P 20,000 P 5,000

20,000 50,000 10,000
50,000 500,000 15,000
peRIOD FOR WHICH DEDUCTIONS AND CREDITS ARE TAK

EN
sie deductions shall be taken for the taxable year paid or accrued depending
upon the method of accounting employed by the taxpayer, unless in order to
dearly reflect the income, the deductions should be taken as of a different period.
\ON-DEDUCTIBLE EXPENSES
The NIRC lists the following non-deductible expenses:
1, Personal, living, or family expenses
2, Amount paid out for new buildings or for permanent, or betterments made
to
increase the value of any property or estate
2 Any amount expended in restoring property or in making good the exhaustion
thereof
Premiums paid on any life insurance policy covering the life of any officer or
employee, or any person financially interested in any trade or business
carried on by the taxpayer, individually or corporate, when the taxpayer is
directly or indirectly a beneficiary under such policy
TAX REPORTING CLASSIFICATION OF DEDUCTIONS

1. Cost of sales or cost of services
2. Regular allowable itemized deductions
3. Special allowable itemized deductions
4 Net Operating Loss Carry Over (NOLCO)
Cost of sales or cost of services is deducted outright against sales, revenues,

'eceipts or fees of individual taxpayers in the measurement of gross income from
eration S.
"ular allowable itemized deductions pertain to all neces

sary and ordinary
D “Nses paid or incurred during the taxable year
sts in Carrying on the development, management, including directly attributable
thet r
operation and/or conduct of
ade, business or exercise of profession.
. .
473
»
ee
of Deductions
Chapter 13 - Principles
i
{
are directly related to the rendering of |

noted that expenses that
excluded from the regular allowabj,
It must be
or in the acqu isit ion of good s are
services ” or “cost of services” as the |
uded in “cost of sales |
itemized deductions and are incl
case may be.
ion of |
whic are not dir
Expenses hich ectly related to the acquisition of goods or provis
r allowable itemized deductions.
i These include |
services are included in regula
g expenses.
administrative expenses and sellin
are discussed in Chapter 13-A.
Regular allowable itemized deductions
item ized deductions are additional deductions as provided

Special allowable
ions can be categorized
under the NIRC or speci al laws. Special allowable deduct
into two types:
1. Actual compliance expense
2. Deduction incentives
Compliance expenses are actual payments or transfers of funds. Deduction

incentives are not actual expenses, but are merely allowed by law to encourage
taxpayers to support government programs.
Net Operating Loss Carry-Over (NOLCO) pertains to the excess of expense

deduction over gross income during a taxable year which is allowed by the law to
be deducted against the net income of the following three years.
Technically, NOLCO is not an expense. It is a special deduction incentive allowed ||

by law. Technically, deduction incentives are deductible only in the year they are ||
availed of but NOLCO is exceptionally allowed to be carried over three years.
Special allowable itemized deductions and NOLCO will be discussed in detail in

Chapter 13-B.
MODE OF CLAIMING DEDUCTIONS FROM GROSS INCOME

1. Itemized deductions
2. Optional standard deductions
Itemized Deductions
ne the itemized deductions, taxpayers list every item of business expense they
claim as deductions. Deductions are strictly construed against the taxpayer.
474

3- principles of Deductions
cn tesp of has to point to
the provision of the law
qhe rata his claim by supporting authorizing the deduction,
the deduction ' i h official receipts, payment
gids cancelled checks or other adequate
youcl with any withholding tax re cords
rd and documentations, and
requireme nts on 5 expenses, Deductions claimed
cot 0 comply with any applicable
deduct 'on Ceilings set by law.
| nal standard Deductions
nus
opt j0 tional standard; deduction is in Jieu
of the itemized deductions, regular or
qhe OP’ auding NOLCO. The deduction
’ ocial, incluane ic
deduction is merely presumed as a fixed percentage
gross| income for . corporations
. and pr
Ne ross sales or gross recei indivi
ne rules of OSD will be discussed in detail in Chapter 13-C Boelpts fom aniaivicuets,
475

ee ™ ——
eee
of Deduct ions
Ch apter 13 - Principles
EXERCISES ——
CHAPTER 13: SELF-TEST
i jon Questions expense.

efinaalsh a business expense from a personal
Be
from a capital expenditure.
2. Distinguish an expense expensed.
how depreciable and non-depreciable assets are *
3, Discuss inventories and supplies.
inventory method for
4, Explain the methods used in practice. Distinguish
how,
5. Enumerate the common depreciation
puted unde r each method.
depreciation is com
are expensed.
Discuss how intangi ble assets d.
ust rat e the co mp ut at io n o f the cost of goods manufactured and sol
Ill
et-r elated acquisition costs are accounted for.
Discuss how repairs and ass
h basis expense differ?
How do accrual expense and cas ns.
um er at e and dis cus s the fou r general principles of deductio
En
“necessary” differ?
How do the terms “ordinary” and
ual?
When do we say an expense is act
d transaction” mean?
What does “close and complete
. Explain the matching rule.
e.
_ Who are related parties? Enumerat
i in tax reporting?
. What are the classifications of deduct ons
two modes of deductions.
. How are deductions claimed? Discuss t he

or a personal expense by
Identify whether the following is a business expense
checking the appropriate box corresponding to the item:
Business | Personal
expense expense
Medical expense of the proprietor (business owner)
Tuition fees of an employee to acquire expertise for
future use of the business
Transportation expense from office to client
establishments
Cost of entertaining family members of the proprietor
Cost of entertaining clients receipted under the name of
the taxpayer's spouse
Interest expense to finance the construction of the
office building
Loss on destruction of taxpayer's residence
so SIN
Office utilities expense

Repairs that restore the value of destroyed business
properties
10. Tuition fee of the taxpayer’s dependents
476

Business | Personal
expense expense
of office staff
{2 “ala
S eation expense: of fami:ly members
of the proprietor
13. Travel expense to attend seminar
i costs of renewal of the taxpayer's
1 ’
professional license
ercise Drill No. 2 .

on july 2 2021, a taxpayer paid for a P200,000
business expenditure.
equired:
rmpute the deduction from 2021 through 2023 assu
ming the expenditure was for:
_
2021 2022 2023
1 land which was sold in 2023
7 Equipment with 4-year

estimated useful life
3, Inventory which was sold in
2022
‘4.
Salaries of administrative and
sales personnel in 2022
‘5, Rental of a facility for the
years 2021 and 2022

A taxpayer engaged in trading two types of precious merchandise had the
fo llowing
summaries of inventories:
Zircon Ruby Total

January 1 inventory P 200,000 P 320,000 P 520,000
Purchases:
1,000 units P 800,000 - P 800,000
4,000 units - P1,200,000 P1,200,000
January 31 inventory 400 units 800 units
Required:
Compute the cost of goods sold.
Exercise Drill
No. 4
"July 1, 2021, a taxpayer purchased equipment for P2,000,000 with an estimated
“Tap value of P200,000 after its four-year estimated useful life.
477

Vv
{,
{

t
4
i
Required:
of the Property ag ;
Compute the depreciation expense and the adjusted tax basis OF
December 31 of 2021 throu 2026.

2 Da
SLM SYD 150%DB
Tax basis Tax basis Ti
Tax basis
OX bas:
2021
2022
2023
2024
2025
2026
Exercise Drill No. 5 . .

For each of the following, indicate CE if the item is a capital expenditure. If it js an.
expense, indicate DE if deductible expense and NDE if non-deductible expense,
Loss on destruction of uninsured personal car of the taxpayer
EP
Employee performance bonus for the current year

PWN
Acquisition cost of equipment

Decline in market value of investment securities
Advanced rent for the next two years
Interest expense in acquiring tax-exempt securities
CANA
Expenses to create business goodwill

Loss on decline in the value of securities
Fire loss on uninsured building
10. Factory salaries, utilities and rent expense
. Entertainment expenses for government officials
12. Revaluation loss on decline in value of building and equipment
13. Loss on sale of properties to an unaffiliated company
14, Decline in value of foreign currency denominated receivables
15. Facilitation fees to government agencies
16. Freight costs of selling goods
17. Freight and insurance cost of buying goods or equipment
18. Raw materials used in production
19. Cost of goods manufactured
20. Accrued salaries expense of an accrual basis taxpayer
21. Cost of goods finished and sold
22. Expired portion of business property insurance
23. Interest expense on borrowings from family members
24, Accrued but unpaid rent expense of a cash basis taxpayer
25. Value of unharvested fruits destroyed by a storm
26. Receivables proven to be uncollectible under the cash basis
27. Insurance expense on the life of the company president where the beneficiary is
the spouse of the president
28. Expenses on business operation which are exempt from regular income tax oF
subject to a special tax regimes
29. Bad debt expense with non-paying family members
30. Dividend to preferred or common stocks
478

rer 13-7 Principles of Deductions
cnaP
josses 0” properties not used in business

may be deducted but only to the exte
nt
of capit
the costal ofgain s. stments
inve and land are deductible against their proceeds
in the year
ale.
ve entire cost of depreciable pro
perties is deductible against their procee
che year of sale. ds in
prepanced
adva id expe nses are deductible upon payment consistent with the rule that
inco mes are taxab le upon receipt.
Capital expenditures are dedu
ctible against future income.
personal expenses are deductible from
gross income.
Expenses intended for the business
and the personal use of the taxpayer must be
allocated between the two, Only the portion
pertaining to the business is
deductible.
The expense of defending a patent is
a business expense deductible in the
current
period.
9. The depreciation of the property revaluation gain is deductible.
10. Supplies and inventories are expensed using the inventory method.
True or False 2
1. Repairs that increase property fair value are capitalized.
2. So long as the expense relates to the generation of an income subject
to any
income tax, the same is deductible again st gross income subject to regular
tax.
The amount of expense between affi liated companies may be adjusted by the BIR
to reflect their arm’s length value.
The failure to deduct creditable withholding tax on income paymen
ts will render
the expense non-deductible.
Immaterial expenditures must always be capitalized.
Repairs that increase property useful life are capitalized.
An unpaid expense may be deducted under the accrual basis of accounting.
The government should not enrich itself at the expense of the taxpayers.
Losses
between related parties are deductible in the same way gains between related
parties are taxable.
9, Taxpayers opting to use the optional standard deduction must also maintain
records of their expenses.
10. Deduction incentives are deductible beca
use they are actual expense.
Multiple Choice ~- Theory
: Part 1
' Arepair expense is deduct .
ible in the period paid or
a. merely maintain the value of the property. inc urr ed unl ess it
b, IMcreases the value of the property.
‘i Constitutes a major repair.
Constitutes a minor
expense.
479

4 Semen
2. Losses on capital assets are
a. deductible against gross income to the extent not compensated by in sur
nsated by in surance, ance
b. deductible against capital gain to the extent compe
c. not deductible against gross income whether or not compensated f
insurance. Or
d. not deductible against capital gains unless not compensated by insurance
Which is a deductible expense?
a. Marketing and advertising expense
b. Insurance on factory building
c. Salaries of security guards in the factory
d. Cost of registering stocks |
The transactions involving an insured property is said to be closed and complete

when
a. final settlement by the insurer is made.
b. the report of the insurance adjuster indicates a loss.
c. final settlement confirms an unrecoverable cost.
d. no proceedings in court is expected to be made by the insured.
Which is a deductible expense?

a. Acquisition cost of a business franchise
b. Repayment of debt
c. Cost of registering a business
d. Cost of issuing securities
Which is a deductible business expense?

a. Interest on personal borrowings
b. Rental of taxpayer’s domicile
c. Selling commission to agents
d. Wages of kasambahays
Losses on property are not deductible unless

a. sustained with a related party.
b. sustained in an actual or completed transaction.
c. temporary in nature.
d. covered by insurance or indemnity contracts.
Losses on insured properties are not deductible

a. to the extent not compensated by insurance.
b. to the extent compensated by insurance.
c, asarule, except when allowed by the BIR examiner.
d. in all circumstances.
Which statement is the most accurate?

a. Prepaid expense is deductible in the period paid by taxpayers using cash
basis.
480

" ea OTT
ter 13 ~ Principles of Deductions
a :
chaP prepaid expense is deductible in
the future Period it
the basis of accounting employed relate without regard
by the ta xp ay er to
Ac crued expenses are ,
deductible by cash
d. Depreciation expense can basis taxpayers
be claimed only by accrual
basis taxpayers.
Cas a aera basis taxpayers differ
40. s in the treatment of
b. Current period cash expense
c, Current period accrued expense
d. Depreciation expense
{1 Which may not be related?

a. The controlling individual and the controlled
b.
corporation.
The controlling individual and a subsidia
ry of a controlled corporation.
c. The grantor and fiduciary ofa trust
d. The grantor and the beneficiary of a trust
12. Which of the following is an extraordinar y non-deductible expense against regular

gross income of a merchandiser?
a. Loss on sale of obsolete merchandise
b. Store supplies and utilities
c. Local business permit
d. Loss on sale of investment in stocks
13, Which is a deductible expense against business gross income?

a. Commission expense on sale of investment in stocks
b. Salaries of marketing personnel of a manufacturing business
c. Quarterly estimated income tax
d. Final tax on interest income on bank savings deposit
14. Which is nota general principle of deduction?

a. The matching principle c. The withholding rule
b. Therelated partyrule d. The transfer pricing rule
15. Which is an actual deductible expense?
a. Provision for an estimated bad debt expense . .
b. Loss arising from liability on a contested lawsuit confirmed by a final
judgment
‘. Increase in value of foreign currency-denominated debt
4. Death of animal offspring
16,
Which is deductible against gross income?
‘ Imputed interest expense : ;
b, Advances to the rofit sharing of a partner In a general professional
Partnership
debts
qd ‘ Local taxes of business
Repayment
481
—
Berries
we Pieces
|
|

NN

le?
17. Which of the following is deductib
a. Rent of office space
payer
b. Tuition fees of the siblings of the tax
er
c. Selling expense of domestic stocks directly to a buy
d. Estimated losses on lawsuit
income?
18. Which is non-deductible against gross
3. Loss on sale of stocks through the PSE
b. Write-off of bad debts
c. Loss on destruction of office building by an earthquake
d. Amortization of patent or franchise used in business
19. Which is an incorrect statement?

n against
a. The straight line method provides for an equal periodic deductio
gross income.
The sum-of-the-years digit method provides for an increasing deduction
b.
against gross income.
n a
c. The double declining balance method provides for a declining deductio at
rate twice the deduction of the straight line method.
t ider the
d. Both straight line method and sum-of-the-years-digi method cons
residual value of the property.
20. Which of the following ordinary assets cannot be depreciated?
a. Office equipment c. Building and its improvements
b. Machineries d. Land
21. Statement 1: Only taxpayers under the accrual basis shall use the inventory
method in deducting inventories.
Statement 2: Only taxpayers under the accrual basis can claim deduction for
depreciation and losses.
a. Statement1iscorrect. c. Both statements are correct.
b. Statement 2iscorrect. d. Neither statement is correct.
22. Statement 1: The cost of goods sold is directly deducted upon sales in the
measurement of the gross income from the sales of goods.
Statement 2: The cost of services is directly deducted from gross receipts in the
measurement of the gross income from the sales of services.
a. Statementiiscorrect. c. Both statements are correct.
b. Statement 2iscorrect. d. Neither statement is correct.
23. Which is not a capital expenditure?

a. Payments to create a good image of the business of the taxpayer
b. Prepaid expenses
c. Accrued expenses
d. Advances to contractors
482

a
13- principles of Deductions

r
cnapl of
state ent 1: Repairs that do not extend the useful life or increase the fair value
24 m § hould be capitalized.
asset
rement 2: The costs of issuing securities of the taxpayer are deductions against
a
statement 1iscorrect. c. Both statements are correct.
b Statement 2Ziscorrect. d. Neither statement is correct.
statement 1; Improvements to properties are usually capitalized.

cratement2: Directly attributable cost of acquisition of properties are added to the
ots of the properties acquired.
4, Statement liscorrect. c. Both statements are correct.
b. Statement Ziscorrect. d. Neither statement is correct.
t 2
Multiple Choice - Theory: Par
1, Which isa deductible expense?
Regular repair of office equipment
&
pb. Refurbishing of an old building to prepare it for use

c, Addition ofa wing to an existing building
d, Overhaul of machineries to extend their useful life
2, Which of the following cannot claim deductions from gross income despite actual
engagement in business?
a. Resident citizen
b. Resident alien
c. Non-resident citizen
d, Non-resident alien not engaged in trade or business
Which of the following taxpayers cannot claim deductions from gross income?
a. General professional partnership
b. Domestic corporation
¢. Resident foreign corporation
d. Non-resident foreign corporation
Which of the following can be claimed as deduction?

a. Transportation allowance of employees of the taxpayer
Transportation allowance of the taxpayer's dependents
C, Losses from destruction of the taxpayer's residence
Depreciation of the residence of the taxpayer
*. Wh ich expense is deductible despite the fact that it is not an actual expense?
ompliance expense on regulatory requirements
mw
» eduction incentives for compliance to regulatory requirements

d Uncollectible debts ascertained to be worthless
* None of these
483
Bf ¥ ~.

of Deductions
Chapter 13 - Principles income?
a ch ar ac te ri st ic of deductions from gross
6. Whichisnot
ness expense
a. Legitimate busi
iture
b. Capital expend ense
necessa ry business exp
c. Ordinary and ense
d. d necessary business exp
Actual an
s income?
the fo ll ow in g ta xp ay er s can clai m deduction against gros
Which of earning p urely compensation in
come
A resident citizen taxpayer
oration
Non-resident foreign corp
P
ged in trade or busi ness

Non-resident alien not enga me
of passive and business inco
Resident citizen earning a mix
eo
?
on of deduction from gross income
g, Which is nota separate classificati
over
a. Net operating loss carry
ed deductions
b. Regular allowable itemiz
ed deductions
c. Special allowable itemiz
d. Net capital loss carry over
regarding deductions?
9, Which st atement is incorrect ption,is construed against the
exem
a. The claim of deduction, similar to
taxpayer.
ion always results in reported taxable
b. The use of optional standard deduct
income.
to the BIR to prove.
c. The unreasonableness of deduction is up unreasonable
an indication of an
d. The incurrence of an operating loss is
expense.
gross income except
10. The following cannot claim deduction from
a. Aself-employed individual taxpayer
b. Acorporation earning purely passive income
c. Anindividual earning purely passive income
tion and passive income
d. An individual taxpayer earning purely compensa
11. Which is not deductible against gross income?

securities
Interest expense incurred to purchase tax-exempt
op
Net capital loss

Personal expenses |!
ao
All of these
12. Which is a deductible business expense?

a. Loss on decline in value of securities 2i
b. Estimated losses on expropriation
c. Fire loss onan insured property
d. Loss on theft of company assets
13. Which of the following constitutes a deductible business expense?

the taxpayer's
a. Purchase of office equipment invoiced under the trade name of
business
484

. 13 - Principles of Deductio
cha pte
ns
Tuition fees of depend
ents Of the ta
Interest expense on Xpayer
a business loa n
i Representation expe
nses booked i n
the name of the taxpayer's wi
fe
din business? for deduction for an individual
engage in income taxpayer
Salaries of household ma
Gasoline expenses id
of the taxpayer's
é Office Internet expens Personal car
e
Which of the following

15. can be deducte
d by an individual ta
business? xpayer not engaged
a. Transportation expenses in
c. Internet expense
b. Communication expenses
d. None of these
16. aime
d by a resident fore
a, Depreciation expense on ign corporation?
p roperties loca
b. Income tax paid ina fo ted abroad
reign coun
c. Income tax paid in the Ph
d.
ilippines
Interest expense on foreign borrowings
business used to finance its Philippine
17. Which can be treated as a
capital expenditure de
expense? ductible through depr
eciation
a. Interest expense incu
rred to purchase office
b. Losses sustained in equipment
anu ninsured office bu
c. Acquisition of land il ding
d. Acquisition of person
al computers
18. Which of the followin
g items can be deducted
a. Write-off of ba in full in the year Sustained
d debts by a taxpayer ?
Loss on market dec under the cash basis
line in the value of gold inv
. Loss on the des entories
truction of the taxpayer's person
Uninsured fire los al car
s sustained by the business of
the taxpayer
19, Deductions
can be claim ed against
a. talent fees.
c. fringe benefits.
fixed allowances
. d. salaries.
20, Whic
h is deductible
in full by a taxpayer engaged in the merc
Value of inventori es taken home by hand ising business?
the business owner
°Ss On unrecoverable debts from a non-paying
family member
~ Imputed interest on the capital investment of the
owner
Value of inventories destroyed by rodents
485
4
ast e
an
=a

ity dealer?
21. Which is not a deductible loss by a secur
a. Wash sales loss
rity
b. Loss on the sale of bonds with more than five years matu
PSE
c. Losson the sale of stocks through the through the Philippine Deas
bonds
d. Loss on the sale of short-term Ngs
Exchange
22. Determine the deductible loss.

a. Loss incurred in exchanging property to obtain control of a corporation
b. Loss incurred in exchanging properties with a corporation after obtain; ng
control over said corporation
c. Calamity loss on uninsured property
d. Bad debts from a sister company
23. Which of the following is non-deductible by the fact that it violates the Matching
Principle?
a. Expense of a tax-exempt operation
b. Payment for police protection
c. Payment of revolutionary taxes
d. Expenses not receipted in the name of the taxpayer
24. Which is incorrect with regard to expenses incurred between associated

enterprises?
a. The pricing of the transaction must not be controlled.
b. The pricing method to be adopted shall be based on free market factors or
those made between two independent parties.
c. In case of a controlled transaction, the deductible expense to the paying
enterprise shall be the arm’s length value of the transaction.
d. No deduction shall be allowed on expenses incurred between associated
enterprises.
25. Which is not a business expense?

a. Fringe benefit tax expense
b. De minimis benefits granted to employees
c. Salaries of personal driver of the company president which was subjected to
fringe benefit tax
d. Depreciation value of properties designated for the use of company managers
and supervisors which are subjected to fringe benefits tax

1. A taxpayer paid P45,000 property insurance having a 12-month coverage starting
March 1, 2018. Compute the deductible insurance expense in 2018.
a. PO c. P37,500
b. P7,500 d. P45,000
interest
2. On September 30, 2021, a taxpayer borrowed P1,000,000 at 10% annual
to finance his acquisition of a luxury car.
486

OO es
113 - Principles of Deductio

chaP te pute th ns
e deductible
Co interest €xpe
nse in 2021
75,000 f. PS0,000
d.P75,000 ,
‘ond of the first calendar quarter, it had

e lies p 40,00
supp purchased were P250,0 , 80,
00 during the 000 w
Period
0 mppuute
te th
OeO supp lies €xpe
n©.tsoe
Pb2e8©0,q0de
08ducted during & the thefif rst
b. p250,00
quarter
0
.
A non-resident alien not e

‘ pyo0,000 and personal exp "gaged in business incurr
ed
0. How much business expenses of
€nses of P20,00
gross income? is deductible from
his
a. PO C.P 100,000
b. P 20,000 d.P 120,000
A taxpayer paid the following Sal
aries durin g th
e year:
Salaries of administrative em Ploy
ees
Salaries of sales and market P 80,000
Salaries of factory productio "8 Employees 70,000
n work ers
120,000
Compute the deductible salari
e S expense.
a. P270,000 c.P150,000
b. P200,000 d.P120,000
b, P 40,000 d. P80,000
- Astorm resulted in the loss
of the following livestock:
Value of two heifers (purchased
at P15,000 each) P 40,000
Value of a bull (purchased for P18
,000) soak
Value of twelve calves worth P6,
000 each —_72,000
Total value of lost livestock
P 136,000
Determine the deductible loss for taxati
on purposes.
a PQ c. P64,000
b. P4g. og d. P120,000
' Mr. Gan a professional practitioner, incurred the fol j
lowing expenses during
ing the
a
Salaries of household maids P 50,, 000
Salaries of office staff 30,000
487
i
Office supplies 8,000
Depreciation of personal car 15,000
Depreciation of office equipment 20,000
Compute the total deductible expenses.

a, P50,000 c. P100,000
b. P 70,000 d. P135,000
The following relate to the building of a taxpayer:

Fair market value P 6,000,000
Purchase price 5,000,000
Carrying amount 4,500,000
Remaining useful life 9 years
Depreciation method straight line
What is the deductible amount of depreciation expense?
a. P666,667 c. P500,000
b. P555,555 d.P0
10. The personal car of the taxpayer had the following data:
Fair market value P 6,000,000
Purchase price 5,000,000
Estimated useful life 10 years
What is the deductible annual depreciation expense?

a. PO c. P500,000
b. P250,000 d. P600,000
11, The following relate to the inventory of tools held by the taxpayer:
Inventory of tools, January 1, 2021 P 120,000
Purchases of tools 300,000
Inventory of tools, December 31, 2021 140,000
What is the amount of deductible tools expense?
a PO c. P280,000
b. P120,000 d. P300,000
12. A taxpayer paid the following disbursements and expenses for the current year:
Tuition fees of children P 50,000
Donation to friends 20,000
Purchase of office equipment at start of the year
(equipment expected to last for five years) 100,000
Office rent (for three years including the current year) 90,000
Office supplies (1/2 used) 20,000
488

137 principles of Deductions
; te |
chap apute the total deductible expense from the above items:
corp 0 c. P50,000
p 20,000 d. P60,000
germuda Inc. insured two of its key employees paying the following premiums
13. annually:
mr. croco, the president P 40,000

mr. Genero, the vice president for operations 34,000
his
the beneficiary. In Mr. Genero’s policy,
In Mr. Croco’s policy, Bermuda, Inc. is
wife is the beneficiary of the policy.
expense.
compute the total deductible . P50,000
a. p34,000 d. P74,000
b. p40,000
14, Cabanatuan City Corporation is a resident foreign corporation established in

China but is operating in the Philippines. During the year, it paid for P300,000 for
salaries of Philippine employees and P1,200,000 for Chinese employees.
Compute the deductible compensation expense.
qa, PO c. P1,200,000
b. P300,000 d. P1,500,000
15. Using the same choices in Number 14, compute the deduction assuming that
Dragon City is a domestic corporation.
16. Using the same choices in Number 14, compute the deduction assuming that
Dragon City is a non-resident foreign corporation.

1. The accountant of TRIBOA Corporation provides for an allowance against
unrecoverable accounts equivalent to 3% of TRIBOA’s total receivables. The
allowance for bad debts had a balance of P45,000 and P50,000 at the start and end
of the year, respectively, while P30,000 of previous accounts were actually found
to be worthless and were written-off. What is the deduction against gross income
for purposes of taxation?
a. PO c. P30,000
b. P25,000 d. P50,000
2, Boracay Company had the following summaries of expenses:

Expenses without supporting documentation P 200,000
Expenses with supporting documentations
Income payments subject to creditable withholding tax:
with withheld CWT 600,000
. 400,000
without withheld CWT
withholding tax 200,000
Payments not subject to creditable
489
uh,
Ya Pe

Determine the amount of deductions.

a. P800,000 c. P1,200,000
b. P1,000,000 d. P1,400,000
Palawan Corporation bought equipment costing P500,000. The equipment was

expected to have P50,000 residual value at the end of its 5-year expected life.
Palawan Corporation failed to withhold the creditable withholding tax on the
equipment.
Compute the depreciation expense in the first year.

a. PO c. P90,000
b. P45,000 d. P180,000
Tri-Peak Semiconductor is an exporter of transistors to the United States. On

December 15, 2021, it made a single shipment worth $1,000,000 payable January
21, 2022. The value of the sales in peso equivalent was as follows:
December 15, 2021 P42,000,000
December 31, 2021 41,800,000
January 21, 2022 (Converted value to peso) 41,700,000
ee
Compute the deductible foreign currency loss.

a. P200,000 in 2021 c. P300,000 in 2021
b. P300,000 in 2021 d. P200,000 in 2021
The taxpayer incurred the following in 2021:

Loss on sale of equipment to a subsidiary company P 400,000
Loss on sale of equipment to a sister company 100,000
Loss on liquidation of an affiliate company 200,000
What is the deductible amount of loss to a related party?
a PO c. P300,000
b. P200,000 d. P600,000
The following relate to a transaction between associated enterprises which was

subjected to transfer pricing restatement by the BIR.
Amount of expense claimed P 800,000

Arm’s length value in a comparable transaction 500,000
What is the deductible amount of expense?

a. P800,000 c. P300,000
b. P500,000 d.P0
In the immediately preceding problem, what is the required adjustment to taxable

net income?
a. P300,000 increase c. P500,000 increase
b. P300,000 decrease d. P800,000 decrease
490

ee
ye
3% Principles of Deductions
crapte! 1
. raxpayel ne a eters losses during the year:
* cetimated bad debt expense P 300,000

Eite-off of uncollectible accounts 150,000
rrying value of property destroyed by fire
he property is covered by insurance.) 1,200,000
ynrealized loss on foreign currency receivables 12,000
assuming the taxpayer is under the accrual basis, compute the total deduction.
a, PO c. P162,000
b. P 150,000 d. P1,315,000
9, In the immediately preceding problem, compute the deduction assuming the
"taxpayer is under the cash basis.
g, PO c. P162,000
b. P150,000 d. P1,315,000
40. Cavite Innovations Company incurred and paid the following expenses in 2021:
salaries (1/8 unpaid) P 400,000
prepaid rent (2021 to 2023) 150,000
Depreciation expense 80,000
Purchase of supplies 60,000

Supplies used 25,000
Compute the total deductions under the cash basis for the year 2021.
a. P690,000 c. P555,000
b. P655,000 d. P505,000
11. Compute the total deductions under the accrual basis for the year 2022.
a. P655,000 c. P555,000
b. P605,000 d. P505,000
12. An equipment was purchased on January 1, 2020 for P4,000,000. The equipment
has an estimated residual value of P400,000 at the end of its five-year useful life.
Compute the depreciation expense assuming the use of the straight line method:
a. P720,000 c. P1,440,000
b. P 1,200,000 d. P1,600,000
13, Under the sum-of-the-years digit method, compute the 2020 depreciation expense
in the first year.
a P720,000 c. P1,333,333
b. P 1,200,000 d. P1,440,000
14, Using a 150% declining balance method, compute the 2020 depreciation expense.
a P 720,000 c. P1,440,000
b. P 1,200,000 d. P1,600,000
491

2020 depreciation expense.
15. Using 200% declining balance method, compute the
a. P720,000 c. P1,440,000
pb. P 1,200,000 d. P1,600,000
Multiple Choice ~ Problems: Part 3

5% creditable withholding tax on rental payments to
1. The taxpayer withheld
various VAT-registered lessors. The total taxes withheld were P 5,600. What is the
deductible amount of rental expense?
a PO c.P 100,000
b. P56,000 d.P 112,000
office
2. Acertain taxpayer paid the following bill from a VAT-registered supplier of
the period:
supplies. The office supplies were all used in operation during
Plus: Output VAT 48,000
Less: Withholding tax (1%) 4,000
Net cash due P_444,000
What is the deductible supplies expense assuming the taxpayer is a VAT-taxpayer?

a. P396,000 c. P 444,000
b. P 400,000 d. P 448,000
3. What is the deductible supplies expense assuming the taxpayer is a non-VAT-

taxpayer?
a. P 396,000 c. P 444,000
b. P 400,000 d. P 448,000
4. On January 2, 2021, a non-VAT taxpayer purchased an equipment with estimated

useful life of 5 years
Plus: Output VAT 18,000
Less: Withholding tax (1%) 1,500
Net amount due P_166,500
What is the claimable depreciation expense for the year?
a. PO c. P 33,300
b. P 30,000 d. P 33,600
5. Until the time of the examination of its book, the taxpayer failed to withhold 10%
withholding tax amounting to P10,000 from the payments of professional fees to a
consultant who is a VAT taxpayer. What is the deductible amount for professional
services paid?
a. PO c. P100,000
b. P 89,286 d. P112,000
492

er 13 - Principles of Deductions
chap
6. In the immediately preceding problem, what is the amount of surcharge due from
P0 c. P 2,000
» P1874 d. P 2,500
the following case is applicable for Nos. 7 through 10:
Nueva Ecija Company received a bill for P27,440 from a non-VAT service provider.
The payment for the service is subject to 2% creditable withholding tax.
What is the deductible expense if Nueva Ecija is anon-VAT taxpayer?
a. PO c.P 27,440
b. P26,891 d. P 28,000
if Nueva Ecija is a non-VAT taxpayer, what respectively is the withholding tax and
the amount of cash to be paid by Nueva Ecija to the service provider?
a. P0;P 27,440 c. P 560; P27,440
b. P548.80;P 26,891.20 d.P537.82; P26,353.18
If Nueva Ecija is a VAT taxpayer, what is the deductible expense?

a PO c. P 27,440
b. P26,891 d. P 28,000
10. If Nueva Ecija is a VAT taxpayer, what respectively is the withholding tax and the
amount of cash to be paid by Nueva Ecija to the service provider?
a P0;P 27,440 c. P 560; P27,440
b. P548.80;P 26,891.20 d.P 537.82; P26,353.18
493

Deductions
Chapter 13-A - Regular Allowable Itemized
CHAPTER 13-A
NS
REGULAR ALLOWABLE ITEMIZED DEDUCTIO
This chapter discusses the rules of regular itemized allowable deductions under
the NIRC.
After this chapter, readers are expected to demonstrate:

1, Comprehension of the application of the principles of deductions on each item
of deduction
2. Mastery of the deduction conditions, rules, and computational procedures of
each item of deduction from gross income
3, Mastery of the procedures in computing foreign tax credits
ITEMIZED DEDUCTIONS FROM GROSS INCOME

Interest expense
Taxes
PHONaAn awe
Losses
Bad debts
Depreciation
Depletion
Charitable and other contributions
Contributions to pension and trusts
Research and development costs
10. Other ordinary and necessary trade, business, or professional expenses
If not directly connected with the selling of goods or rendering of services, these
items of expenses are classified as “Regular allowable itemized deductions.”
INTEREST EXPENSE
Requisites on the deductibility of interest (RR13-2000):
1. There must be a valid indebtedness.
2. The indebtedness must be that of the taxpayer.
3. The indebtedness must be connected with the taxpayer’s trade, business or
exercise of profession.
Interest expense must have been paid or incurred during the taxable year.
oP
Interest must have been stipulated in writing.

Interest must be legally due.
SND
Interest payments must not be between related taxpayers.

Interest must not be incurred to finance petroleum operations.
494

C napter 13-A - Regular Allowable Itemized Deductions
n case of interest incurr
e d in the a
9. jness or profession, the Same is not treatnct of Property,
: Ices .
bus" interest j
ghe used in trade,
.
is not €xpressly disallowed
treated as a capital expenditure.
10: come of the taxpayer, by
y | law to be deducted
7 from gross
guctible amoun
t of interest
deductible amou expense
rhe following pe n t of intere
rcentage of thst €xpense is the
e n erest 8TOss interest expense reduced
j
rctiv
effe y ity 1.2009 Subject to final tax:
Percentage
january 1, 2021
this percentage is re
20%
ferred to as the ar
bitrage limit or the
arbitrage cap.
Mux
n st on in
decuporrsi
edtsinan'doo
ino,
terest expense of P1
00 000 and earned P10,
000 in
i terest
The deductible interest expense Shall be computed
as:
Gross interest expense
i
Less: The arbitrage im
limit (P10,000 x 20%) P 100,000
vane
Deductible interest expense —__2,000
Rationale of the arbitrage limit
of higher regular tax savings created from interest expense

final tax on deposit interest income. deduction and a lower
Illustration: The Interest Arbitr
ate Scheme
A corporate taxpayer which
is subject to 25% regular cor
P1,000,000 from a bank which porate income tax borrowed
charges 6% interest and invest
a6% time deposit in the same ban ed the same proceeds to
k,
The following table summarizes the
effect of the interest arbitrage wit
hin a year:
Bank loan
Interest expense P 1,000,000
60,000
Bank deposits
Interest income 1,000,000
60,000
Without an interest expe
nse deduction limit, the
financial effect of this sc
analyzed as follow heme can be
s:
net interest income P 60,000 x (100%-20%
ayment
final tax) P aroun
of interest expense to the bank
a Savings on interest expens ,
e (P60,000 x 25%)
ancial tax Savings from the 15 ; 2
arbitrage
F 3.000
495
2
7 te
ae
<>

ctions
Chapter 13-A - Regular Allowable Itemized Dedu
it transactions
This will motivate taxpayers to enter into unnecessary loan-and-depos
tax.
to save from total income
Limit
Determination of the Arbitrage cally
uction cap was set which was mathemati
To eliminate the arbitrage savings, a ded
computed as:
est income)
(Corporate income tax rate - final tax on inter
Corporate income tax rate
Effect of the Arbitrage Limit

t (25-20)/25 or 20%.
Under current corporate income tax rate, the arbitrage limi is
as follows:
The deductible interest expense with the arbitrage limit can be computed
P 60,000
Gross interest expense 12.000
Less: 20% x P60,000 interest income
P 48,000
Deductible interest expense 25%
Multiply by: regular corporate tax rate
Tax savings from allowable interest expense Pp__12,000
Look at the net savings of the arbitrage with the arbitrage limit:
Net interest income [P60,000 x (100%-20%)] P 48,000

Payment of interest expense to the bank ( 60,000)
Tax savings from allowable interest expense 12,000
Overall net tax savings P 0
The arbitrage limit is an indirect application of the matching rule. The same result
would have been achieved if the law simply provided that only interest expense
connected with gross income subject to regular tax is deductible.
Illustration 2
A large enterprise taxpayer had the following interest expense and interest income in
2021:
Interest expense on bank loan P 100,000
Interest income from time deposit, net of final tax 10,000
Interest income from promissory notes, net of CWT 40,000
The deductible interest expense shall be computed as follows:
Gross interest expense P 100,000

Less: The arbitrage limit [(P10,000/80%) x 20%] ___ 2,500
Deductible interest expense P__97,500
496

u
It rect.to final t ax because no i ‘
sub} to final tax. The net interest tree Savings will arise on interest income not
subjofectthe fina
mt fi l tax (i.e.< 100% 0- - 209 20%) oo m must be grossed-up first by the percentage
before computing the arbitrage
sMES qualified to 20% corporate tax
tis noteworthy ofen thes that there is no arbitrage for qualified MSMEs subject
19 20% corp ‘ine arbitrage limit would be computed as (20-20)/20 = 0%.
such, qualified MSMEs can deduct the f : .
ull amount of interest expense without
‘eduction of arbitrage limit.
q distinction, neither should we. The 33% arbitrage limit will apply to individuals
before the effectivity of the CREATE. The 20% arbitrage limit will apply thereafter.
Moreover, in applying the limit, the law did not provide for any qualification of the
arbitrage limit based on intent. Therefore, it is construed to apply regardless of
whether or not there is an intentional arbitrage. Interestingly, however, the revenue
regulations currently exempt thrift banks from the coverage of the arbitrage limit.
Arbitrage limit under CREATE transition

The change in corporate tax rate caused by the CREATE directly impacts the
arbitrage limit. Corporations are previously subject to 30% corporate tax. This
will transition to 25% to corporations in general and 20% to qualified MSMEs
starting July 1, 2020.
Ifthe change in corporate tax is_| The arbitrage limit must change
from to from to
30% 25% 33% 20%
| 30% 20% 33% 0%
RR5-2021 prescribes a pro-rata treatment in determining the arbitrage limit.
Illustration 1
A domestic corporation which is reporting on a calendar year qualifies as a large
enterprise subject to 25% corporate tax under CREATE.
January 1, 2020 June 30, 2020 20% Decempey 31 2020
L_ 33%
(6 months) (6 months)
497

ns
Chapter 13-A - Regular Allowable Itemized Deductio
x 6/12 + 20% x 6/12 ~

it’s arbitrage limit for year 2020 shall be computed as 33%
26.50%,
Mlustration 2
starting April 1 ending
A domestic corporation which is reporting on a fiscal year
every March 31 qualifies as a large enterprise subject to 25% corporate tax under
CREATE.
June 30, 2020 March 31,2021

April 1, 2020 20%
\ 33% —»
as 33% x
it’s arbitrage for the fiscal year ending March 31, 2021 shall be computed
3/12 + 20% x 9/12 = 24.25%.
Illustration 3
as a MSME
A domestic corporation which is reporting on a calendar year qualifies
subject to 20% corporate tax under CREATE.
anuary 1.1, 202
January 2020 33% June : 30, 2020 0% ) oe 31,20 20
It's arbitrage limit for year 2020 shall be computed as 33% x 6/12 + 0% x 6/12 =
16.50%.
Illustration 4
A domestic corporation which is reporting on a fiscal year starting February 1 ending
every January 31 qualifies as a MSME subject to 20% corporate tax under CREATE.
Pel, 2, 2020
?02 33% pune. s0, 2020 0% January“y32, 2020
202
It’s arbitrage for the fiscal year ending March 31, 2021 shall be computed as 33% X
5/12 + 0%x 7/12 = 13.75%.
Table of transitional arbitrage limit

you will come
By using the statutory formula and rounding at two decimal points,
d the
up with the regulatory arbitrage limit. Nevertheless, the regulations provide
following table for the arbitrage limit for transition years 2020-2021:
498

chapter 13-A - Regular Allowable Itemized p
Eductions
ae a TI Riper ee
Annual Account
ing Periog transit; Corporations
from 300 ns
stsar ee
ise transitioning
ndgn
vear ending 7/31
8/3d1/apn —
/2529
a p |
2m 30%
s use | O2a
to 254, from 30% to 20%
si
i ee ending 1 o t e 7.50%
eee [
ae
ti year endian oe 24.75%
ear ending 1 seeest2020 |f h
58% 00%
Aisalyear ending 2/28/9e
-—_L ast
| 19.35%
Fiscal yea r ending 2/28/2027 24.33, — > 163..57509
%
Fal eaending 4/30/an3
——} — 2225 — 8.
HW 25%
eegae
Fiscal year ending 6/30/2024
.
| 1.08%
—£0.20 .00%} —2:25%
00% | HU 0.00D
Deductibility of di %
scount or pre
Discount or pre-dedu
cted int
erest is a Prepayment
upon release of the loa . Hence, it is not
n but upon Payment deductible
If the loan is due on of the same or as it accrue
Installments, the intere s as expense,
be deductible. st pe rtaining to each inst
allment shall
Optional treatment of
interest expense
Intere
st incurred in financin
g the acquisition of
may, at the option of the
tax
1, an outright deductio
n fi rom gross income or
2. a capital expenditur
e claimable through depr
eciation
Other deductible intere
st expense
1. Interest from tax delinquency
(CIR vs. Vda. De Prieto)
Interest from Scrip dividends
Examples of non-deductible
interest
1. Interest on personal
loans
2. Interest incurred with
a related party
3. Discount or pre-deducted interest applicable to future Peri
4 taxpayers ods for individual
Interest expense incurred to finance petroleum
3. Interest
operations
on redeemable preferred sha
res
6. Imputed interest
499
os on

vine ana Ratle
Chapter 13-A - Regular Allowable Itemized Deductions
TAXES
Taxes paid or incurred within the taxable year in connection with the taxpayer's
trade, business, or exercise of profession shall be allowed as deduction except:
1. Philippine income taxes except fringe benefit tax
a. Final income tax
b. Capital gains tax
c. Regular income tax
2. Foreign income tax, if claimed as tax credit
3, Estate tax and donor's tax
4. Special assessment
Rationale of non-deductibility
Income taxes are not costs of earning income but are impositions on net income
accruing only after income is earned; hence, they are non-deductible. Foreign
income tax is not a cost of earning income. However, it is allowed to be claimed as
4 deduction under the NIRC if not claimed as tax credit. Special assessment is nota
tax expense, but is capitalized to the cost of the land.
Other non-deductible taxes

1. Business taxes, in particular the Value added tax (VAT)
2. Surcharges or penalties on delinquent taxes
or
Business tax includes VAT, percentage tax, and excise tax. Businesses pay VAT
percentage tax on their sales or receipts. Manufacturers of excisable articles such
as sin products and non-essential commodities pay the excise tax.
to
In principle, business taxes are consumption taxes required by the government
be
be collected from consumers through the businesses. Hence, they should
is well
recognized by businesses as liability upon making the sales. This principle
However, this is
applied under the VAT; hence, VAT is not a deductible expense.
not the case with percentage tax.
tax
Contrary to the principle, current regulatory developments treated percentage
treatment yields
as a deductible expense. This might be due to the fact that this
the government higher tax collections.
tax on their selling price.
Businesses subject to excise tax normally include the
Hence, excise taxes are deductible as tax expenses.
purchases; hence, deductible
For the buyer, business taxes form part of the cost of
not as tax expense.
through cost of sales or other expense categories but
500

chaptel 13-A - Regula
r Allowable Itemizeg
Deq
Uctions
samples of deductible taxes:
E percentage tax
Excise tax
occupational tax
License tax
Fringe benefit tax
Local taxes except special as
Community tax S€ssment
Municipal tax
0. Foreign income tax if not Clai
med as tax credit
Only basic tax is deductible
was held deductible by

tax expense,
Unused input VAT
Historically, unused inp me
of the two-year prescr ut VAT On Zero-rated sales of Servici es af
iptive period is irati
elven
However, the BIR reversed the

r
ule in BIR Ruling 123-2013 by y disallowi
deduction for lack of legal basis. (See also RMC 57-201 3) ng ng th the
disallowi
FOREIGN INCOME TAX
Income taxes paid in a forei &n countr
y can either be claimed as:
1. Deduction
2. Tax credit
Iilustration 1: One foreign countr
y
A domestic corporation reported the followin
g result of operations:
Taxable income from the
Philippines
Taxable income from P 1,800,000
Japan
Quarterly estimated income tax m200;000
paidin the Philippines 200,000
Inc
ome tax paid in Japan
Deduction Approach “ee
The
taxable income and income tax lia ; ply be co
bility will sim mputed as follows:
Taxable income from
the Philippines
Taxable income from eryen
Japan
Total taxable inco P3,000,000
me
at
501

tl
Chapter 13-A - Regular Allowable Iternized Deductions
Total taxable income P 3,000,000

Less: Foreign income tax expense 300,000
‘Taxable Income - world P 2,700,000
Multiply by: Corporate tax rate 30%
Corporate income tax due P 810,000
Less: Philippine quarterly estimated tax payments 200,000
Income tax payable P_610,000
Note: Under the deduction approach, the foreign taxes paid are deducted but will not be
claimed as tax credit.
Tax Credit Approach

Taxable income from the Philippines P 1,800,000
1,200,000
‘Taxable income from Japan
P 3,000,000
Taxable income - world
30%
Multiply by: Corporate tax rate
P 900,000
Corporate world income tax due
Less: Tax credit
Philippine income tax credit P 200,000
Foreign tax credit* 300,000 500,000
Income tax payable P_400,000
Note: Under the tax credit approach, the foreign taxes paid are not deducted against gross
income but are credited against the income tax due on world taxable income.
Determination of Foreign Tax credit: One foreign country*

The foreign tax credit shall be the lower of the actual foreign income tax paid and the
following limit:
Foreign taxable income .
g x Philippine income tax due
World taxable income
Hence,
Actual foreign income tax paid P__ 300,000
Limit: (1,200,000/3,000,000 x P900,000) P__ 360,000
Foreign tax credit - LOWER P__300,000

Illustration 2: More than one foreign country
its Philippine and foreign
A domestic corporation had the following data on
operations:
P 1,800,000
Taxable income in the Philippines
1,200,000
Taxable income from Japan
1,000,000
Taxable income from Taiwan
300,000
Quarterly income tax paid in the Philippines
400,000
Income tax paid in Japan 200,000
Income tax paid in Taiwan
502

v
cropte’ 13-A - Regular Allowable Itemized Deductions
i h
credit Approach
73 ple in the Philippines P 1,800,000
aa able income from Japan
1,200,000
sable income from Taiwan 1,000,000
poxable income - World Income
P 4,000,000
ultiply by:
corporate income tax due 30%
P 1,200,000
Less: Tax credit
philippine income tax credit P 300,000
Foreign tax credit* 560,000 860,000
Income tax still due P__ 340,000
Determination of Foreign tax credit: With multiple foreign countries*

The final foreign tax credit shall be the lower of the total of the tax credit allowable per
country and the world income tax credit limit computed as follows:
Total foreign taxable income

Xx Philippine income tax due
World taxable income
Per country tax credit:
Japan:
Actual amount paid P 400,000
Country limit: (P1.2M/4M x P1.2M) 360,000
Lower amount P__360,000
Taiwan:
Actual amount paid P 200,000
Country limit: (P1.0M/4M x P1.2M) —__ 300,000
Lower amount P_200,000
Japan allowable tax credit P 360,000
Taiwan allowable tax credit 200,000
Total tax credit allowable per country P 560,000
World tax credit limit:
[(1.2M+1.0M)/4.0M x P1.2M tax due] 660,000
Foreign income tax credit (LOWER) P_560,000
©)
Note to readers:
faders are advised to master the tax credit computational procedures
herein
Ecause they also apply to estate tax and donor’s tax.
503

Who can claim tax credit or deduction for foreign taxes paid?
Consistent with the matching rule, only taxpayers taxable on world income such
as domestic corporations and resident citizens can claim deduction or tax credit
for foreign income taxes paid.
Tax treatment of refunds or credit of taxes

The refund or credit of deductible taxes must be reverted back to gross income to
the extent of their tax benefit. Incidentally, the refund of non-deductible taxes is
LOSSES
Losses actually sustained during the taxable year and not compensated by
insurance or other indemnity shall be allowed as deductions.
Requisites for the deduction of losses

1. It must be incurred in trade, profession, or business of the taxpayer. (The loss
must be a business loss, not a personal loss.)
2. It must pertain to property connected with the trade, business or profession, if
the loss arises from fires, storms, shipwrecks, or other casualties, or from
robbery, theft, or embezzlement. (The loss must be an ordinary loss. )
3. The loss must not be compensated by insurance or indemnity contract. (The
loss must be actually sustained, not temporary.)
4. A declaration of loss must have been filed by the taxpayer within 45 days from
the date of discovery of the casualty or robbery, theft or embezzlement giving
rise to the loss.
5. The loss must not have been claimed as a deduction for estate tax purposes in
the estate tax return. (Double deduction is not allowed.)
Types of losses
1. Ordinary loss
2. Capital loss
Losses from ordinary assets are deemed normal to the taxpayer's trade, business
or profession; hence, these are deductible in full. Losses on capital assets are
deemed by law unnecessary expenses; hence, these are deductible only up to the
extent of capital gains.
Illustration
A taxpayer engaged in farming incurred the following losses:
Loss on destruction of residence by a storm P 1,200,000
Loss on sale of old farm equipment 50,000
Loss on assignment of receivables to a bank 40,000
Purchase cost of a bull lost during a storm 30,000
Value of animal offspring killed by Black Leg disease 20,000
504
Tar rn
ET er —

op 13-A- Regular Allowable Itemized Deductions
chart
owing are deductible losses:
e fo
sale of old farm equipment
;
h 10 on st ofa bull Jost during P 50,000
nase cos a storm
t val geductible 30,000
loss
P___ 80,000
note! ne loss On destruction of residence is a pers

onal loss.
, 1. ge loss on assignment of receivable is a capital loss deductible
only up to the extent of
; capital gain consistent with the tax benefit rule, The loss of income not yet recognized in
ross income is non-deductible.
The value of dead animal offspring is a loss of income rather than a loss of capital. Hence, it
Ye
amples of deductible ordinary losses

A Loss on disposal or destruction of any ordinary asset
b Loss due to voluntary removal of building incident to renewal or replacement
<, Permanent or irreversible loss in value of assets due to changes in business
conditions, only to the extent actually realized
4. Abandonment loss
rules on restoration or replacement of destroyed properties

1. Total destruction of properties
If the restoration involves total replacement of the previous property, the tax
basis of the old property shall be claimed as a loss while the entire
replacement cost is capitalized as cost of the replacement property subject to
allowance for depreciation.
2, Partial destruction of properties
If the restoration involves partial replacement of the previous property, the
restoration cost shall be expensed up to the extent of the tax basis of the
property immediately before the casualty. Any excess is capitalized subject to
allowance for depreciation.
Illustration: Total and partial destruction
‘n uninsured building had a book value of P1,000,000 when a fire broke out.
later
It was
restored at a total cost of P1,200,000.
Total loss
‘Ssuming that the building was totally destroyed, the P1,000,000 tax basis is
*duct ible as fire loss while the P1,200,000 replacement cost is capitalized as cost
of
“new building.
Pattial loss
sheng that the building was partially destroyed,
the restoration cost of P1,000,000
all be €xpensed as fire loss while the excess P200,000 restoration cost shall
Capital; be
Malized as part of the cost of the building.
505
| ae ee Se -
Loss of value of assets

The loss of value of assets, as a rule, is not deductible due to their temporary and
reversible nature. However, impairment losses that became actually sustained can
be deducted.
Illustration 1
Fast Corporation maintains a fleet of high speed passenger jets. These jets had been
eight years in service and have an aggregate book value of P200,000,000. Due to the
increasing incidence of aircraft accident, Congress passed a law shortening the service
life of high-speed passenger jets to five years. This resulted in mandatory retirement
of the jets. The jets have current fair value totaling P90,000,000.
In this case, the P110,000,000 impairment loss is deductible, but only upon disposal of
the passenger jets when it becomes actually sustained.
Illustration 2
DC Company uses a certain preservative in its food products. DC Company had
P600,000 of the preservative in stocks. Congress passed a law prohibiting the use of
the substance and required their submission to authorities for immediate destruction.
wee
The P600,000 total impairment in value will be deductible upon confiscation or

submission of the preservatives to authorities.
Loss on Insured Property

The excess of the tax basis of the property over the insurance reimbursement is a
deductible loss in the year of insurance settlement.
Abandonment losses
In the event a contract area where petroleum operations are undertaken is
abandoned, the accumulated exploration and development expenditures
pertaining thereto, including the adjusted tax basis of equipment directly used in
the abandoned contract area, shall be allowed as a deduction. Notice of
abandonment must be filed with the Commissioner of Internal Revenue.
When the abandoned well is reentered and production is resumed or if such

equipment or facility is restored into service, the amount of abandonment loss
previously claimed shall be reversed and included in gross income in the year of
resumption or restoration and shall also be amortized or depreciated as the case
may be.
Losses from wagering transactions or passive activities

Losses from wagering transactions such as gambling and other passive activities
shall be allowed only up to the extent of the gains from the same transaction.
506

otet 43-A - Regular Allowable Itemized Deductions
cha
ation of the matching rule
rs taxable on global income can deduct losses on properties wherever
qaxpay© put taxpayers taxable only on Philippine income can only deduct losses
wy yated
gituate® © s situated in the Philippines.
on properve
EBTS
ally ascertained to be
” jebts refer to debts due to the taxpayer which were actu
yorthless and were charged off within the taxable year.
V 7
requisites of claim for deduction of bad debt:

1, The debt must have been ascertained to be worthless.
2, It must be charged off within the taxable year.
2 It must be connected with the taxpayer’s profession, trade or business (i.e.,
‘ uncollectible personal credits are non-deductible).
4, The taxpayer must be under the accrual basis of accounting.
s, Itmust not be incurred from a related party.
The accounting bad debt expense called “estimated bad debt expense” is not
deductible in taxation because it is a mere estimate rather than an actual loss. The
deductible bad debt expense pertains to the write-off of uncollectible receivables
after having been actually ascertained to be worthless.
In CIR vs. Goodrich, the Supreme Court held that it was essential that the taxpayer
did in fact ascertain the debt to be worthless in the year in which the deduction
was sought and in doing so, he acted in good faith.
Note that the requirement that the taxpayer must be under the accrual basis is
inserted by regulations. There is no comparable provision in the NIRC. This rule
should not be taken in general. It should be applied only to bad debts representing
loss of income and not to bad debts representing loss of capital. Bad debts
representing loss of capital can be deducted by both accrual basis and cash basis
taxpayers.
Illustration
Mr. Alibaba, a lending investor, loaned a corporation P1,000,000. After three taxable
period, the corporation became bankrupt. The entire principal and accrued interest of
P240,000 became totally worthless.
If Mr. Alibaba is under the accrual basis, he can deduct the P1,240,000 consisting of
P1,000,000 loss of capital plus P240,000 loss of income as bad debt expense. If Mr.
Alibaba is under the cash basis, he can, nevertheless, deduct the P1,000,000 as bad debt
expense but not the P240,000 receivable.
507

Application of the matching principle

In case of receivables representing loss of income only write-off of receivables
which have been previously recognized in gross income can be claimed as bad
debt expense. Since accrued income is not reported in gross income under the
cash basis of accounting, cash basis taxpayers cannot claim bad debt expense,
Securities becoming worthless

For domestic banks and trust companies a substantial part of whose business js
the receipts of deposits, securities becoming worthless are bad debt expense and
not capital loss. However, the term securities specifically covers only bonds,
debentures, notes, certificates, or other evidence of indebtedness with interest
coupons or in registered form.
Illustration
La Paz Mindanao Corporation, an accrual basis taxpayer, estimates additional
probable uncollectible accounts of P700,000 aside from the following accounts which
were ascertained to be worthless and were written off during the year:
Receivable from sale of goods to a bankrupt client P 200,000

Investment in a subsidiary liquidated at a loss 1,500,000
Receivable from sale of services to the subsidiary 100,000
Advances to the president set off against his salaries 500,000
The following write-offs are deductible as bad debt expenses:
Receivable from a bankrupt client P 200,000

Receivable from a liquidated subsidiary 100,000
Bad debt expense P__300,000
Note:
1. The receivable arising from the sales of goods or services shall be deductible as bad debt
expense by taxpayers under the accrual basis. The estimated uncollectible accounts are not
actual expense; hence, they are non-deductible.
2. The loss from the sale or exchanges of property such as bad debts sustained in liquidation
by a related party is deductible under the NIRC.
3. The advances to the president recouped against his salaries should be treated as
compensation expense, not bad debt expense.
4. The capital investment ofa parent corporation in the stocks of a subsidiary corporation is a
capital asset. Hence, the loss on the investment is a capital loss deductible only against
capital gains, not a bad debt expense. (China Banking Corporation vs. CTA, G.R. 125508) This
rule also applies in the case of advances in the nature of capital investments rather than
loans. (Philex Mining Corporation vs. CIR, G.R. 148187)
508
. SIS SNe ws

naptel 13-A - Regular Allowable Itemized Deductions
C
jes of capital losses not deductible as bad debts
px q debts from personal receivables
1.
2. securities becoming worthless of taxpayers other than domestic banks -
trust companies a substantial part of whose is the receipts of
business
deposits ol, ‘
3. Loss on capital investments in partnerships, joint ventures, or corporations
|
5yubsequent recovery of bad debts
a deduction in
under the NIRC, the recovery of bad debts previously allowed as
the preceding years shall be included as part of the gross income in the year of
See discussion
recovery to the extent of the income tax benefit of said deduction.
in Chapter 9-
s
subsequent change in accounting method
pad debt expense sustained by the taxpayer under the cash basis of accounting
should not be deducted even if the taxpayer subsequently changed its accounting
method to the accrual basis of accounting. What cannot be done directly cannot be
done indirectly.
DEPRECIATION
There shall be allowed as a depreciation deduction a reasonable allowance for the
exhaustion and wear and tear (including reasonable allowance for obsolescence)
of property used in the trade or business.
Depreciation refers to the gradual exhaustion in the value of tangible business

properties brought by ordinary wear and tear through usage or obsolescence by
the passage of time. It is a provision for the periodic return of the invested capital
on the property throughout its useful life.
Depreciation methods
1. Straight-line method
Declining-balance method
fe wN
Sum-of-the-year-digit method
Any other method which may be prescribed by the Secretary of Finance upon
recommendation of the CIR
These methods were discussed in the preceding chapter.
Special Rules on Depreciation

Life tenancy toa property
-
Properties held in trust

Revaluation on properties
Rules on depreciation of passenger vehicles
509
id

laa
te mem
Life tenancy to a property

In the case of property held by one person for life with remainder to another
person, the deduction shall be computed as if the life tenant was the absolute
owner of the property and shall be allowed to the life tenant.
Properties held in trust

In the case of property held in trust, the allowable deduction shall be apportioned
between the income beneficiaries and the trustees in accordance with the
pertinent provisions of the instrument creating the trust, or in the absence of such
provisions, on the basis of the trust income allowable to each.
Illustration
Don Pedro set up an irrevocable trust by transferring a commercial building in favor of
his daughters, Ana and Karena. Don Pedro designated 10% of the rent income of the
building to be given to Ana for her studies while 20% shall be given to Karena for her
family support. The building earned P2,000,000 rentals and reported P400,000
depreciation expense in 2020.
The gross income and the depreciation expense shall be split among the trust and the
beneficiaries based on the provision of the trust as follows: 10% to Ana, 20% to
Karena and 70% to the trust.
Hence,
Ana Karena Trust Total
Gross income P 200,000 P 400,000 P1,400,000 P2,000,000
Depreciation expense 40,000 80,000 280,000 400,000
Note: This provision applies only to a taxable trust.
Depreciation on revalued property

The depreciation of an asset must be premised on its acquisition cost and not on
its reappraised value. (Basilan Estates, Inc. vs. CIR) Taxpayers using the
revaluation model in accounting for items of property, plant, and equipment
under Philippine Accounting Standards (PAS) 16 are not allowed to deduct the
depreciation of the revaluation surplus on the value of property as this is not an
actual cost.
Similarly, impairment losses on items of property, plant, and equipment

recognized under PAS 36 are not deductible. These are deductible when sustained
through disposal or retirement of the asset.
510

ee —ee ee ee
rs —
o
oter 43-A - Regular Allowable Itemized Deductions

cha
son Deductibility of Depreciation on Passenger Vehicles
Ru 6 bstantiation of the purchase with sufficient evidence such as official
: receipts and other documents bearing the total purchase price including
specific motor vehicle identification numbers of the vehicles
substantiation of the direct connection or relation of the vehicle to the
development, operation, and/or conduct of the trade, business, or profession
of the taxpayer
3, Only one vehicle for land transport is allowed for an official and employee,
and the value of which shall not exceed P2,400,0
00.
4, No depreciation shall be allowed for yachts, helicopters, airplanes or aircrafts,
"and land vehicles which exceeded the threshold unless the main line of
business is transport operation or lease of transportation equipment and the
yehicles purchased are used in said operations
Effective October 17, 2012, vehicles not confirming with these rules are referred
eciable assets shall
to as non-depreciable vehicles for taxation purposes. Non-depr
be considered capital assets.
AMORTIZATION OF INTANGIBLE ASSETS

The same concepts discussed herein are also applicable to the exhaustion of
intangible assets with definite useful life such as patents, royalties, and franchises.
The depreciation of intangible assets is referred to as “amortization expense.”
However, intangible assets that do not lose their value throughout time should not
be amortized.
Optional Expensing of Capital Expenditure

Under the NIRC, private educational institutions are granted the option to treat
capital expenditure as an outright expense or as a deduction through allowance
for depreciation.
DEPLETION
Depletion expense is a provision for the periodic return of capital investments in
wasting assets such as minerals, gas, and oil.
Stages of wasting asset activities:
Exploration period Development period Commercial production
Exploration Stage involves ascertaining the existence, location, extent or quality of any
“posit or mineral. The development stage commences when deposits of ore or minerals
oh shown to exist in sufficient commercial quantity. Commercial production is the Stage of
Ctual extraction, processing and sale.
511

Common rules for both mining and oil operations

Taxpayers engaged in wasting assets shall classify their expenditures into:
1. Costs of acquisition or improvement of tangible properties.
2. Intangible exploration, drilling, and development costs.
Treatment of tangible development costs

Tangible development costs include the acquisition or improvement of tangible
property which are of a character subject to the allowance for depreciation. This
may include construction of mine-plant roads, buildings, processing plants and
installation of heavy equipment on-site.
Tangible exploration and development drilling costs are capitalized and deducted
through allowance for depreciation subject to the following rules:
1. Petroleum operations
Properties directly used in petroleum operations
The NIRC prescribes either the straight-line method or declining-balance method
at the option of the taxpayer for properties directly related to the production of
petroleum. A shift from the straight-line method to declining balance method is
allowed. The useful life shall be 10 years or such shorter life as may be permitted
by the CIR.
Properties not used directly in petroleum operations
The NIRC prescribed the straight-line method on the basis of an estimated useful
life of5 years.
2. Mining Operations
If the expected life of the property used in mining is 10 years or less, the taxpayer
can use the normal rate of depreciation. If the expected life is more than 10 years,
the property can be depreciated over any number of years between 5 years and
10 years. (Sec. 34(E)(5), NIRC)
Intangible exploration and development costs
Intangible costs in petroleum operations include any incidental and necessary costs
of drilling wells or preparing wells for petroleum production and which have no
salvage value.
Intangible costs in mining operations include the costs of diamond drilling,
tunneling, and other improvements of a nature that is not subject to allowance for
depreciation.
Tax treatment of intangible exploration and development costs

A. Before commercial production - capitalized as cost of the wasting asset
512

a
er 1A- Regular Allowable Itemized Deductions

chaP
after commencement of commercial production, if incurred with:
B. ‘ Non-producing wells or mines, deducted in the period paid or incurred
J producing wells or mines, at the option of the taxpayer, either:
4. Capitalized and amortized using the cost-depletion method or
p. Deducted in the year paid or incurred
pation: The Cost-Depletion Method
to bring its
drill Corporation incurred a total development cost of P120,000,000
of its
‘iol well to commercial produc tion in 2021. The following were the results
2022 :
traction activities until
exe
——2021_
__ __ 2022
garrels extracted per year 4,000,000 9,000,000
estimated barrels remaining 56,000,000 36,000,000
qreatment of exploration and development costs
The exploration and development costs incurred before commercial production are
capitalized as cost of the wasting asset. These will be deducted as depletion expense
using the cost-depletion formula:
. Units extracted
Tax basis of wasting assets x
Total Estimated Units*
*The total estimated units = units extracted for the year + estimated remaining units
The annual depletion expense of the wasting asset and its adjusted tax basis shall be
Depletion Dec. 31
Year Computation Expense Tax Basis
P 120,000,000
2021 4M/(4M+56M)xP120M _ P. 8,000,000 112,000,000
2022. (9M/(9M+36M) x P112M 22,400,000 89,600,000
Note:
1. The year-end tax basis is computed as last year’s tax basis less the annual depletion
expense.
2. The P89,600,000 shall be the basis for computation of the 2023 depletion expense.
The Expense Option on Non-producing Mines

After commercial production has commenced, exploration and development
drilling expenses incurred on non-producing mines may be deducted outright, but
the deductible amount shall not exceed 25% of the net income from mining
°perations without the benefit of any tax incentives under existing laws. The
513
y

unclaimed balance of the expense shall be carried forward to the succeedi

until fully deducted. Sang Years
Illustration: The Expense Limit on Post-Commercial Production Exploration

ang
Development Drilling Costs
Diwalwal Mining Company started commercial production in 2015. From 2019
through 2021, it reported the following income and expenses:
” . 2019 2020 2021

Mining gross Income P18,000,000 P17,000,000 P19,000,000
Other deductible expenses 12,000,000 12,500,000 12,400,000
Exploration and drilling costs
on non-producing mines 2,100,000 800,000 600,000
Diwalwal Mining Company opted to deduct the exploration and development drilling
(EDD) cost as outright expense.
The annual deductible exploration and development drilling (EDD) expenses shall be
subject to the following limits:
2019 2020 2021

Mining gross income P18,000,000 P17,000,000 P19,000,000
Other deductible expenses 12,000,000 _12,500,000 _12,400,000
Net income before EDD expense P 6,000,000 P 4,500,000 P 6,600,000
Multiply by: Limit % 25% 25% 25%
Deduction limit P_1,500,000 P_1125.000 P1,650,000
The deductible exploration and development drilling expenses shall be the lower of
the accumulated exploration and development drilling expenses and the limit. Thus,
2019 2020 2021

EDD Carry-over, beginning P 0 P 600,000 P 275,000
Actual EDD, this year 2,100,000 800,000 600,000
Total accumulated EDD expense P 2,100,000 P 1,400,000 P 875,000
Less: Deductible EDD expense -_1,500,000 _1,125,000 875,000
EDD Carry-over, ending P__600,000 P275,000 P__.__§0
Note: The annual deductible EDD expense is determined as the lower of accumulated EDD for
the year and the EDD expense limit. In 2019 and 2020, the EDD limit is lower, but in 2021, the
actual accumulated EDD is lower.
Note also that the option to deduct intangible exploration and development
drilling costs is irrevocable and binding in succeeding taxable years. This rule is
applied on a per contract area basis.
514

otet 43-A - Regular Allowable Itemized Deductions
cha
mit applies only to mining operations. No comparable rule exists for
7 jjeum operators. Hence, petroleum exploration and development drilling
ns on non-producing wells after commercial production can be claimed
c
outright
jication of the matching rule
ravers subject to tax on world income can deduct depreciation and depletion
expense on properties wherever situated. Those taxable only on Philippine
acome are only allowed to claim depreciation and depletion on properties located
CHARITABLE AND OTHER CONTRIBUTIONS

contributions or gifts made to the government or non-government organizations
(NGOs) may be deducted against gross income.
requisites of claim for deduction on contributions:
4, The donee institution must be a domestic institution.
2, No income of the donee institution must inure to the benefit of any private
stockholder or individual.
3. The contribution must be valued at the tax basis of the property donated.
4, The taxpayer must be engaged in trade or business.
5. The donee must issue a Certificate of Donation (BIR Form 2322) which
includes a donor’s statement of values.
6. If the amount of donation is at least P50,000 the donor shall file a Notice of
Donation to the RDO where he is registered within 30 days upon receipt of the
Certificate of Donation.
Donations that fail any of the requisites are non-deductible. Those that meet the
requisites are either:
a. Fully deductible —
b. Partially deductible (deductible subject to limit)
Classification of contributions
A. Fully deductible contributions (Mnemonics: PTA)
1. Donations to the government or political subdivisions including fully owned

government and controlled corporations to be used exclusively in undertaking
Priority activities as determined by the National Economic Development
Authority (NEDA) in:
a Education d. Human settlements
Health e. Culture and sports
C. Youth and sports development f. Economic developments
515
Ta -

-P
2. Donation to foreign institution or international organization in pursuance of

or in compliance with agreements, treaties or special laws
Note that this is an exception to the rule that the donee institution must be a domestic
organization.
Donations to accredited domestic non-government organizations.
Pursuant to EO 671, the NGO must be an accredited donee institution with

certifications issued by the following designated accrediting entities:
a. Department of Social Welfare and Development - for charitable and or
social welfare organizations, foundations and associations
b. Department of Science and Technology - for research and other scientific
activities
c. Philippine Sports Commission - for sports development
d. National Council for Culture and Arts - for cultural activities
e. Commission on Higher Education - for educational activities
The accreditation by the Philippine Council for NGO Certification, Inc. (PCNC)
is no longer regarded for this purpose.
The accredited donee institution shall issue to the donor a certificate of

donation in such form prescribed by the BIR. For donations exceeding
P1,000,000 in value, the donor is required to notify the Revenue District
Officer (RDO) with jurisdiction to his place of business within 30 days from
the receipt of the certificate of donation.
Requisites for full deductibility of contributions to accredited NGOs

1. The NGO must be organized and operated exclusively for the above purposes,
and no income inures to the benefit of any private individuals.
2. The non-profit organization makes utilization of the contribution not later
than the 15‘ day of the third month after the close of its taxable period.
The administrative expenses of the NGO do not exceed 30% of its total
expenses.
Members of the Board of Trustees must not receive remunerations.
nb
In the event of liquidation, the asset of the NGO will be distributed to another
nonprofit domestic corporation organized for similar purpose.
The amount of contribution of property other than money must be valued at
acquisition cost.
Contributions subject to limit

Donations to the Government of the Philippines or political subdivisions
exclusively for public purposes not in accordance with priority activities
516
Se ae

ter 13-A - Regular Allowable !temized Deductions
cnaP
nation to non-accredited non-government organizations or to domestic
‘rporations organized exclusively for the following purposes:
Religious e. Cultural
Charitable f. Educational
’ scientific g. Rehabilitation of veterans
4 Youth and sports development h. Social welfare
mit of deduction for contributions:
Li
sed on the taxable income derived from trade, business or profession (i.e., net
ome) before the deduction of any contributions
l
10% for individuals
2 50 for corporations
jlustration to . .
Mr. Joshua, a practicing accountant, had the following income and donations during
the year:
Professional fees P 1,100,000

Donations to government priority activities 100,000
Donations pursuant to treaties 30,000
Donations to accredited charitable institutions 50,000
Donations to the government for public purpose 80,000
Donations to non-accredited charitable institutions 60,000
Donations to a foreign charitable institution 40,000
Donations to street beggars 50,000
Other deductible business expenses 600,000
The deductible contribution expense shall be computed as follows:
Fully deductible contributions:

To government priority activities P 100,000
To accredited charitable institutions 50,000
To treaty-covered entities 30,000 P_ 180,000
Partially deductible contributions:
To government non-priority activities P 80,000
non-accredited charitable institutions _60,000
Total contributions subject to limit P_140,000
Deduction limit P__50,000
pductible contributions with limit (LOWER)
otal deductible contribution expense —__50,000
P__230,000
517

The deduction limit for partially deductible contributions is computed as follows;

P 1,100,000
Professional fees
Less: Other deductions before contribution expense 600,000
P 500,000
Net income before contributions
Multiply by: Individual limit percentage 10% -
P___50,000
Deduction limit
Note:
1. The donation to a foreign institution is not deductible unless in accordance with treaties.
2. The donation to beggars is not made to a domestic organization; hence, it is not deductible.
3. Contributions to non-qualified donee institutions are not deductible against gross income
and are subject to donor’s tax.
Illustration 2
Mr. John Paul both employed and self-employed, reported the following during the
year:
P 400,000
900,000
Gross income from business
100,000
Fully deductible contributions
40,000
Contributions deductible with limit
20,000
Non-deductible contributions
300,000
Other deductible business expenses
The contribution deduction limit shall be computed out of business net income before
contribution as follows:
Gross income from business P 900,000

Less: Other deductible business expense 300,000
Net income before contribution P 600,000
Multiply by: Individual limit percentage 10%
Deduction limit P___ 60,000
The deductible contribution shall be computed as follows:
Fully deductible contributions P 100,000

Partially deductible contributions P___ 40,000
Limit on partially deductible contributions P___60,000
Deductible contributions with limit (LOWER) ___ 40,000
Total deductible contributions expense P__140,000
Illustration 3
Batangas Corporation reported the following during a year:
Gross income from business P 900,000
Fully deductible contributions 100,000
Deductible contributions with limit 40,000
518

chapte! 13-A - Regular Allowable Itemized Deductions
eductible contributions
Mee d eductible expenses 20,000
ot 300,000
te geduction limit is computed as follows:
come from business

(105 her deductible expense P 900,000
awe ome before contribution —__ 300,000
“ipl by: Corporate limit percentage P 600,000
My tio limit —___5%
ie deductible contribution shall be computed as: P __30.000
i deductible contributions
partially deductible contributions P 100,000
jimit on partially deductible contributions
P__ 30,000
peductible contributions with limit (LOWER)
Total deductible contributions expense —___30,000
P__130,000
CONTRIBUTIONS TO PENSION TRUSTS
Types of Employee Pension Plans:
1, Defined contribution plan
9. Defined benefit plan
Under defined contribution plan, the employer is merely obligated to make certain
amounts of contribution to the pension fund on a regular basis. The employer
does not guarantee the amount of benefits to the employees. The amount of
benefits to be received by the employees shall be dependent upon the investment
performance of the pension fund. Because the employer’s liability to the plan is
defined in terms of contributions, actuarial computation is not necessary.
Ina defined contribution plan, the deductible expense of the employer is simply
the amount of contributions (i.e., funding) made by the employer to the fund.
Incase of participating contribution plans where employees also contribute in the

fund as part of their future benefits, the portion paid by employees is not
deductible by the employer.
Under the defined benefits plan, the employer guarantees the amount of benefits to
the employees, The amount of funding which the employer makes to the fund shall
© dependent upon the investment performance of the fund. This means less
funding if the fund
performs and more if it underperforms. Actuarial
“Mputations would be necessary to determine the employer's contributions to
“sure that the promised benefits to covered employees will be met in due time.
519

l l o w a b l e it em ized Deductions
- Regular A |
Chapter 43-A on or funding is either or both,
ployer’s contributi
|
, the . em 5
d benefit plan
vicaestCO
d i ‘
n a o g of current serS e
4, Fu n
nder th, | |
n s e of th e e m p loyer accrus:ing u
pension exp e reye .
ployees during the year
the
-o cost refers to rende red by em
seervic
Currenoft th e © for sé rvicres uing In prior year
g
pension plan m p l o y e r a c c r
term of the e
ef er s to th e p e nsion expense en t of th e pension fund ang
!
e co st r
fore the es ta bl is hm
Past servic ents in the |
nde red by employees be prior years arisin
g from improvem :
for services re ns e ac cr ui ng in
ion expe
additional pens .
benefit offering of the plan ss of cu rrent service Cost jg |
n ex ce
butions to the pe
nsion fund i any |
In practice, contri pa st se rv ic e cost without accounting for
fu nding of
simply presumed as
prepaid component.
e
ty of pension expens
Requisites of deducti bili bl is he d a pe nsion or re tirement fund to
provide |
ve es ta
1. The employer mus t ha
ym en t of rea son a ble pe ns ions to employees.
for pa
mp ti on s us ed by th e fu nd must be soun d and reasonable.
2. The actuarial assu
fu nd mu st be ac tu al ly funded by the employer. ntrol or '
ent from and not subject to the co
3. Th e
pend
4, The fund assets must be inde |
disposal of the employer.
deductible in full.
|
cur ren t ser vic e cos t is
5. Contribution for
rtized over a period of 10 years. |
for pas t ser vic e cost is amo
6. Contribution
sion expense
Rules in computing the deductible pen
first attributed to current service cost.
1. The contribution to the fund is
of current service cost.
Contributions is deductible up to the extent
unded past service cost. Any excess
2. The excess funding is attributed to any unf
sumed funding past service cost |
funding over the current service cost is pre
the actual vesting period of
and is amortized over 10 years regardless of
covered employees.
Illustration 1: Defined contribution plan

on during the year to its
In 2021, Liliwliwa Company contributed P100,000 contributi
made a P50,000
sponsored defined contribution employee trust fund. Employees also
participation in the fund.
The deductible pension expense in 2020 shall be P100,000.
Illustration 2: Defined benefits plan

Existing
establi shed a pension plan for its employees in 2021.
aenplovees te oration vesting asperiod of six years. Data from a t together
averagefunding
maeMindoro’save annual is follows: ”
with
520

chaptel 13-A - Regular Allowa
ble Itemized Deductions
21 2
urrent service cost : P gou0nd
con tributions to the fund 800,000
P 310,000
500,000
ghe 2021 deductible pension expense
shall be:
pension contribution P 800,000
ding of current service cos
300,000 P 300,000
aes - funding of past service cost
ott
pivide by: Amortization period
P 500,00010 —_—
BT Sen enn
peductible pension expense
F_ IOV UUU
Note:
p50,000 annual amortization will end by

2030.
2. The entire P500,000 excess is
attribut ed as funding of pri
or service cost.
The 2022 deductible pension expense shall be:
Pension contribution P 500,000

Funding of current service cost 310,000 P 310,000
Excess - funding of past service cost P 190,000
Divide by: Amortization period 10 19,000
Amortization from 2021 funding of prior service
cost__50,000
Deductible pension expense P__ 379,000
Note: The P19,000 annual amortizations will
end by 2031.
RESEARCH AND DEVELOPMENT (R&D) COSTS

Research activities are geared towards discover
y of new knowledge. Development
activities are geared towards determining
application of research knowledge
which could provide income and benefits for the
business.
Tax Treatment of R&D Costs
1. Research and development costs related to ca pital
accounts such as property
used in busin ess are capitalized as part of the cost of the
property and
deducted through depreciation expense.
2. Research and development costs not related to capita
l accounts are treated as
follows at the option of the taxpay
a: Out er:
right expense or
b. Deferred expense amortized over
a period not less than 60 months
beginning from the month the taxpayer realize benefits from the R&D
€xpenditures
521

|
EXPENSES, IN GENERAL
Other legal, ordinary, actual, and necessary expenses of business can be claimeg
by the taxpayers as long as these are substantiated with official receipts or Othe r
pertinent records. }
Examples of other deductible expenses: |

1 Salaries and allowances
2 Fringe benefits *3e
3 SSS, GSIS, PhilHealth, HDMF, and other contributions
4. Commissions
5. Outside services
6. Advertising
7. Rental
8. Insurance
9. Royalties
10. Repairs and maintenance
11. Entertainment, amusement, and recreation expenses
12. Transportation and travel
13. Fuel and oil
14. Communication, light, and water
15. Supplies
16. Miscellaneous expenses
Entertainment, Amusement, and Recreation (EAR) Expense

EAR expense includes representation expense and/or depreciation or rental
expense relating to entertainment facilities.
Representation expense shall refer to expenses incurred by a taxpayer in
connection with the conduct of his trade, business, or exercise of profession in
entertaining, providing amusement and recreation to, or meeting with, a guest or
guests at a dining place, place of amusement, country club, theater, concert, play,
sporting event or other similar places.
Representation expense excludes fixed allowances considered as_ regular

compensation of employees which are subject to the creditable withholding tax.
Entertainment facilities refer to a yacht, vacation home or condominium, and any

similar item of real property used by the taxpayer primarily for the entertainment,
amusement, or recreation of guests or employees.
A yacht shall be considered an entertainment facility if its use is in fact not

restricted to specified officers or employee position in such manner as to make the
same a fringe benefit subject to fringe benefit tax.
522

ater 43-A - Regular Allowable Itemized Deductions
cha
ui sites of deductibility of EAR Expense
pe
It must be paid or incurred during the taxable year.
jt must be directly connected to the development, management, and operation
2: of the trade, business, or profession
of the taxpayer or directly related to or in
gurtherance of the conduct of his or its trade, business, or exercise of a
profession.
3, It must not be contrary to law, morals, good customs, public policy, or public
order.
4, It must not have been paid, directly or indirectly, to an official or employee of

the government or government-owned and controlled corporation or of a
foreign government, private individual, corporation, general professional
partnership or similar entity if it constitutes a bribe, kickback, or other similar
payments.
s, Itmust have been duly substantiated with adequate proof. The official receipt,
invoices, bills or statements of accounts should be in the name of the taxpayer
claiming the deductions.
6. The appropriate amount of withholding tax should have been withheld
therefrom and paid to the BIR.
Ceiling on Deduction
¢ For taxpayers engaged in the sales of goods or properties - 0.5% of net sales
¢ For taxpayers engaged in the sales of services - 1% of net revenues
“Net sales” is computed as gross sales less sales returns, allowances and sales
discounts. “Net revenue” is gross revenue less discounts.
For taxpayers engaged in the sales of both goods or properties and services,
the allowable EAR shall in all cases be determined based on following
apportionment formula:
Net sales/Net revenue x Actual EAR

Total net sales and net revenue
In no case shall the deductible EAR exceed the maximum percentage ceiling
for the sales of goods and sales of services.
Illustration 1
'. Aragon, a seller of goods, had net sales of P200,000 and expenses for
*ntertainment, amusement and recreation of P1,400 in 2020.
The deductible EAR shall be the lowe

r of P1,400 and P1,000, computed as (0.5% x
P200,000); hence,
P1,000.
523

hal ‘
02
cenpemecnmnienctlt
ions
bl e i t e m i zed Deduct
Regular Allowa
Chapt er 13-A -
p
revenue of P300 ,000. He incurreg 2,50)
IHustration 2 e with a net year.
ro n is a se rv i ce pr ov id r
t io n ex pe ns es during the
Mr. Es pe
ent an d
recrea
t, a musem gs ct |
in entertainmen computed
and P3,000,
th e lower of P2,500 4 x |
EAR shall be
The deductible |
P2,500.
P300,000); hence,
incurr
|
ti on 3 s an d sa le s of services. She
Illu st ra les of go od 20 .
Be ro ni a is en gage d in both sa an d re cr ea ti on expenses in 20 + dhe
Mr s. amusemen t,
total of P9,000 entertainmen t, t revenues.
t sa le s an d pP700,000 in ne
in ne
reported P300,000
follows:
du ct ib le EA R s ha ll be computed as
The de Deductible
Ceiling** _Amount_
_Allocation® 1,500 P 1,500
P 2,700 P
p 300,000 UU0Y
“400
7, 6,300
Sales of goods 300 P_
700,000
Sales of services
= P6,300
Note:
,7 00 ; P7 00 K/P1,000K x P9,000
*P300K/P1,000K x P 9,00 P700,000 x 1% = P7,000
0 = P2
1,500;
**P300,000 x 5%=P
524

chapter 13-A - Regular Allowa
ble Itemized Deductions
cH APTER 13-A: SELF-TES
T EXERCISES
—
Di scussion Questions
What are the re
quisites of a de
Explain the arbitr ductible intere
age Scheme and ho st?
Discuss the deductibil w to deterr
ity of di
treatment of interest.
Discuss the deductibilit of taxe
y s an
Discuss the computatio of foreig d enumerate the non-deductible
Enum n n tax credit. taxes.
erate the requisites 0 7
f deductible lo
sses.
companies.
. Discuss the requisites
on d eductibility of
deductible and Partiall Contributions, En
u merate those fully?!
y deductible contribu
11. What is the limit
miattation on deductib tion s,
Fag
taxpayers and individual ility 0 f contribution
taxpayers? ex pe nse for corporate
12, Discuss the rules on pensio 3
n expense,
13. Discuss the rules on resear
c h and developm
ent expenses.
True or False 1
1.
subject to final tax during nt if there is no ‘interest
the period, income. a)
2. Interest incurred in the financ
ing of petroleum o perations
taxpayer be capitalized or may at the option ofthe
exp ensed. ©
Income tax is not an expens
e,
The arbitrage limit applies onl
y when there is an intentional
The arbitrage limit applies to all arbitrage.
taxpayers including individuals.
Interest expenses incurred with
related parties are deductible.
Interest on a prescribed debt is ded
uctible.
A deductible interest must not be
incurred between related parties.
The allowa ble deduction for deductible taxes inc poe RE
interest. lud es the bas ic tax, sur cha rge and
Foreign taxes can be claimed as a deductio
11, n or tax credit.
Foreign corporations and aliens can clai
taxes, m deduction or tax credit for foreign
12, Capital loss is d educ
tible to the extent of ordinary gain while ordi oe
deductible in ful nary loss is|
l
13, |, Osses must be
reported to the BIR within 45 day ’s from the
‘asualty, robbery, theft, or embezzlement occurrence of the oF
14. p ©Preciation on reva givi ng rise to the loss.
luation surplus of properties can be dedu
cted as part of
“preciat
ion expense.
525

15. The claim of the same loss in the income tax return of the estate and in the estate
tax return is not allowed.
True or False 2
1. If the fair value of the property is not determinable, restoration costs are
expensed to the extent of the basis of the original property. The excess over the
pasis is treated as an increase in fair value and is capitalized.
The loss in value of assets is deductible only when sustained and realized.
wn
Bad debt expenses representing loss of capital can be deducted by cash basis
taxpayers.
Bad debt expenses between related parties can be deducted as long as these are
adequately supported with documentary evidence.
The loss of capital investment in a business can be claimed as bad debt expense.
nn
The subsequent recovery of bad debt expense must be reverted back to gross
income to the extent of the tax benefit of the deduction in the year the deduction is
made.
The loss on insured property cannot be deducted.
In total destruction of properties, restoration costs are treated as new acquisition
of properties.
Losses on wagering transactions are deductible in full.
With the exception of domestic corporations and resident citizens, expenses
incurred abroad cannot be deducted unless incurred in connection with the
Philippine business.
11. Contributions are valued at the fair value of the property donated.
12. The recovery of bad debts by cash basis taxpayers must always be reverted back
to gross income.
13. The recovery of bad debts by accrual basis taxpayers may be reverted back to
gross income.
14, Capital assets can be depreciated for tax purposes.
15. The depreciation expense on properties held under life tenancy is computed as if
the life tenant were the absolute owner of the property.
True or False 3
1. The depreciation on properties held in trust is apportioned between the income
beneficiaries and the trustees in accordance with the provision of the instrument
creating the trust or on the basis of the income allowable to each.
Petroleum operations are not subject to the limit on the deduction of intangible
exploration and development costs after the commencement of commercial
production.
Contribution expenses are deductible if the donee is a domestic institution.
Donations to foreign institutions covered by treaty exemptions are fully
&
deductible. .
Contribution expenses are measured at the fair value of the property donated.
nu
Private educational institutions are allowed to deduct capital expenditures.

526
=

chapter 13-A - Regular Allowable Itemized Deductions
' Ing assets are capitalized and depreciated.

Intangible exploration and development costs incurred
production cial before commer
in a wasting asset Operation are capitali
zed as cost of the wasting
asset.
11. After commencement of commercial production,
development costs incurred on non-prod
intangible exploration and
ucing wells or mines are deductible
the period paid or incurred, in
12. After commencement of commercial producti
development costs incurred on on, intangible exploration and
producing wells or mines are
and amortized using the cost-d always capitalized
epletion method.
13. The threshold on partially deductible contributions
of corporate taxpayers is 10%
of the net income before the contribution
.
14. The funding of past service cost is amortize
d over 10 years or the actual vesting
period whichever is longer.
15. The overfunding of defined benefit plans is trea
ted as funding of past service cost
and is amortized over 10 years,
16. The employee counterpart in a contri buto
ry pension plan is deductible by the
employer.
17. Research and development costs related
to land must be capitalized.
18. Research and development costs not
related to capital accounts are either
deducted outright or deferred and amor
tized over a period of not less than 60
months.
19, The EAR expense on the sale of good
s is subject to a limit of 0.5% of gross sales.
20. The EAR expense on the sale of serv
ices is subject to a limit of 1% of net revenue.
21. Purely employed individuals can clai
m deductions for donations made.
Multiple Choice: Theory 1
1, Which is nota requisite ofa deduc
tible loss?
It must be sustained by the taxpayer in the current year.
It must be reported to the BIR within 45 days from the
aooO
occurrence of the loss.

It must be compensated by insurance or indemnity contracts.
It must pertain to a property connected to the trade, busin
ess or profession of
the taxpayer,
2. Which of the following cannot be deducted against gross

income of non-VAT
taxpa yers?
a. Foreign income tax c. Philippine income tax
Value added tax d. Percentage tax
527
a
s
Deduction
itemized
gular Allowab le
Chapter 13-A - Re
me:en? to managerial employee
ret gross incogiv
a eb
3, Which is not de esac 0
Depreciation v alu
e
a. fil
rank and
b. Fringe benefits to €
of min jmum wage
c. Co mp en sa ti on
or su pe rv is ory employees
gerial
d. Salaries of mana ?
pense againsi t gross income
ible tax ex
4, Which is deduct
p tax
a. Documentary stam
b. Donor’s tax
Estate tax
c.
n in co me ta x cl aimed as tax credit
d. Foreig
of net income from business t
measurement
5. Which is deductible in the
profession?
ion
a. Mandatory payroll deduct
er's brother
b. Tuition fees of the taxpay m family members
Interest expense on borrowings fro
c.
pe rs on al sec uri ty gu ar d ofa managerial employee
d. Salaries of
ion?
the fol low ing can trea t cap ita l expenditures as outright deduct
6. Which of
a. Public schools or universities
ies
b. Non-profit schools or universit
ons
c. Private educational instituti
d. Allofthese
7, Which is a correct statement?

mpt from income tax.
a. Gains between related parties are exe
ctible.
b. Losses between related parties are dedu
c. Gains between related parties are taxable.
d. All ofthe above
8. Who are not related parties for purposes of the NIRC?

a. Fiduciary of trusts with the same grantor
b. The trustee and the beneficiary ofa trust
c. Corporations under common control
d. Apartner and the partnership
9, Which is a deductible tax expense?

a. Surcharges and penalties
b. Stock transaction tax
c. Real property tax on business properties
d. Special assessment
10. Which of the following can be deducted by a VAT taxpayer?

‘" Philippine income tax _c. Value Added Tax |
. Donor’s tax d. Interest on tax delinquency
528

¥
\L. who cannot claim foreign income tax credit?

3, Resident citizens c. Resident aliens
b Domestic corporations d. None of these
aimed as
Fo re ig n in come tax can be cl
12.
Deduction from gross Tax credit against the income
income tax due
a: Yes Yes
b. No Yes
c. Yes No
d. No No
13. Estimated quarterly income tax can be claimed as

income tax due
a. Yes Yes
b. No Yes
C. Yes No
d. No No
14. Fringe benefit tax can be claimed as

income tax due
a. Yes Yes
b. No Yes
C, Yes No
d. No No
15, Which of these expenses is not part of the deductible expenses of the
taxpa yer?
Expanded withholding taxes on certain expenses
aoop
Withholding tax on employee salaries

Documentary stamp tax on the sale of stocks directly to a buyer
Real property tax on business properties
Multiple Choice: Theo

ry 2
1, A taxpayer incurred research and development expenditures which
are related to
4 Capital account subject to depreciation. The taxpayer should
a. claim outright deduction for the research and development expenses.
b. treat the R&D expenses as a deferred expenses and amortize them over 60
months.
treat the R&D expenses as capital expenditures and depreciate them over the
useful life of the related asset.
529

ed Deductions
Chapter 13-A - Regular Allowable Itemiz
as deferred charges and
d. claim them as outright deductions or treat them
amortize them over 10 years.
Wagering losses are deductible

a. in full.
b. to the extent of capital gains.
c. upto the extent of gains on wagering transactions
d. are treated as deferred charge subject to amortization over 60 months.
Securities becoming worthless is considered as an ordinary loss to

a. Banks c. Security dealers
b. Trusts d. All of these
Bad debts expenses include

a. uncollectible debts due to the taxpayer.
b. securities becoming worthless.
c. Bothaandb
d. Neitheranorb
Which of these is a partially deductible contribution?

a. Donation to the government for public purpose
b. Donation to priority activities of the government
c. Donation to foreign institutions with treaty exemption
d. Donation to accredited charitable institutions
Research and development cost that are not chargeable to capital account can be
claimed as
a. Deductible expense
b. Deferred expense subject to amortization
c. Bothaandb
d. Eitheraorb
A taxpayer paid for research and development expenses that are not chargeable to
capital account. The taxpayer wished to amortize the same over its expected
period of benefits.
If the R&D is expected to benefit the taxpayer for 6 years, what is the correct
amortization period for the R&D expenses?
a. 72months c.30 months
b. 60 months d. 36 months
Which can claim full deduction for the loss of securities becoming worthless?
a. Security dealers c. Both aandc
b. Non-security dealers d. Neither anor c
530

* Bag ee
72
c
e
which of the following items of entertainment, amusement and recreation

expenses can be claimed as a deduction?
Entertainment expenses paid to officials of the government
b. Entertainment expenses not receipted in the name of the taxpayer.
c, Entertainment expenses in excess of the limits of the
law
d. Entertainment expenses for potential and existing clients
10. Balanga Inc. owns 51% of the voting power of Quezon, Inc. Which is a correct
statement regarding gains and losses between these two entities?
a, Losses sustained by Balanga, Inc. on transactions with Quezon, Inc. are
claimable as deductions.
b. Losses sustained by Quezon, Inc. on transactions with Balanga, Inc. are
claimable as deductions,
c. Gains realized by either party from each other are exempt from income tax
due to the underlying economic substance of their relationship.
d. Gains between Balanga and Quezon are subject to income tax.
Multiple-Choice: Problems 1
1. The following relates to a taxpayer:
Interest expense P 400,000
Interest income - time deposit 100,000
Compute the deductible interest expense.
a. P380,000 c. P333,000
b. P367,000 d. P300,000
2. The following relates to a taxpayer:

Interest expense P 400,000
Interest income - promissory notes 100,000
Compute the deductible interest expense
a. P400,000 c. P333,000
b. P367,000 d. P300,000
3. The taxpayer has the following losses:

Net Operating Loss Carry Over - last year P 200,000
Net capital loss - current 80,000
Net capital loss - last year 70,000
Taxable income before losses 400,000
Compute the total deductible losses in the current year.
a P400,000 c. P250,000
P330,000 d. P200,000
531

ns
Chapter 13-A - Regular Allowable Itemized Deductio
net of P60,000 total

4, Gawan Merchandising paid P400,000 to employees,
amount of expense by
withholding tax on compensation. What is the deductible
_ the employer?
a PO c. P400,000
b. P 60,000 d. P460,000
5, Ataxpayer under the cash basis had the following expenditures:

Acquisition of office equipment at the
middle of the year (S year useful life) P 200,000
40,000
Payment of employee salaries
60,000
Payment for office utilities expenses
How much is claimable as deductible business expense for the year?

a. P300,000 c. P120,000
ab. . P140,000 d.P 60,000
6. The following relates to a taxpayer's warehouse:

-Cost <-> . P 2,000,000
Accumulated depreciation 600,000
Residual value 200,000
Current fair market value 2,500,000
Remaining useful life 12 years
Compute the deductible depreciation expense.

a. P208,333 c. P191,667
b. -P200,000 d. P100,000
7. An individual income taxpayer reported the following:

Capital loss - current year P 50,000
Capital gain - current year 200,000
the current year.
Compute the total capital loss deductible against capital gain in
a. P320,000 c. P120,000
~b. P200,000 . d. P50,000
taxpayer in the immediately preceding problem is a

Suppose the income
l gain.
corporation, compute the deductible capital loss against capita
_ a .P320,000 c. P120,000
.b. P200,000 d. P50,000
532

cnaptel 13-A - Regular Al
lowable itemized Deduct
ions
9, The following data relate to
an individual taxpayer:
Capital loss - Current yea
r
Capital gain - current year P 80,000
Net capital loss — last year 150,000
Net income - last year 90.000
80,000
What is the net capital loss
carry-over for the current
a. PO
c.
period?
P80,000
pb. P70,000 d. P90,000
10. The following relate to a Corp
orate taxpayer:
Capital loss - current year
Capital gain - current yea P 60,000
r
Net capital loss 140,000
Net income 40,000
75,000
What is the net capital loss
carry-over?
a PO
c.P75,000
b. P40,000 d. P80,000
11. An individual income
taxpayer reported the fol]
owing:
Capital loss - current year
Capital gain - current year P 50,000
70,000
Compute the deductible capita
l loss against capital gain in
a. P180,000 the current year.
c. P60,000
b. P120,000
d. P50,000
12. An individual taxpayer sho
wed the following:
2021 2022
Gross income
P 300,000 P 400,000
Deductible business expenses
( 360,000) ( 300,000)
Net capital gain or (loss)
( 50,000) 70,000
Compute the 2021 net income
.
a P170,000
c.P 110,000
P 120,000 d. P 60,000
13. Assume in the immediately preced
ing problem that the t axpayer
What would be the taxable in is a corporation.
come in 202?
a P170,000 c.P 110,000
P 120,000 d. P 60,000
533
e: a
14, Acorporate income taxpayer reported the following gross income and deductions;
Gross income Deductions
2017 P 300,000 P 450,000

2018 400,000 470,000
2019 450,000 400,000
2020 500,000 420,000
2021 500,000 400,000
Compute the taxable income in 2021.

a. P100,000 c. P 30,000
b. P80,000 d.P 0
0 and a tax
15. Antonio, a resident citizen, reported a world taxable income of P500,00
due on world income of P125,000. P150,000 of the taxable income was earned in
Japan out of which he paid P45,000 in income tax.
Compute Andrew’s foreign tax credit.
a. P50,000 c. P37,500
b. P45,000 d.P 0
Multiple Choice: Problems 2

1. Waling Waling, Inc. maintained a defined contribution pension plan. The plan is
contributory where employees contribute 20% of the pension contributions.
During the year, Waling Waling contributed P1,000,000 inclusive of employee
contribution which was pre-deducted through their salaries.
Compute the pension expense.
a. P1,000,000 c. P200,000
b. P800,000 d. Some other amount
2. Mr. Vhinson made contributions to the following in 2021:

Street beggars P 50,000
Barrio fiestas 60,000
Various cancer patients 40,000
Takusa, an accredited non-profit organization 100,000
Compute the deductible contribution expense.

a. PO c. P140,000
b. P100,000 d. P160,000
3. ABC Company declared a property dividend with book value of P1,000,000, and
fair value of P1,200,000. The total dividends withheld on the dividends were
P60,000. Compute the total deductible expense.
a. PO c. P1,000,000
b. P60,000 d. P1,060,000
534

x a er
r
’
vaptet 43-A - Regular Allowable

Itemized Deductions
6
4, Naga Compaly
ed by the family one of fringe
paid ofP35,000 benefits tax for the purchase of merchandis¢«
its company of.
usxpense against
. ;
gross income?
ficers. How much is the deductible
. PO c. P 53,846
p, P18,846 d. P109,375
Makati Corporation has operations in Malaysia
5. and Singapore with the following
taxable income and taxes paid during
the year:
Philippines Malaysia Singapore
Taxable income P 800,000 P 900,000
Income tax paid P 700,000
180,000 288,000 175,000
Makati Corporation wishes
to claim the foreign income tax paid as tax credit.
Compute the foreign inco
3. P480,000 me tax credit.
b. P463,000 c. P4 45,000
d. P430,000
6. Balanga, Inc. contributed P500,000 for its pension fund inclusi
ve of P200,00C
funding of current service cost. How much is the deductible pension
expense?
a. P200,000 c. P300,000
b. P230,000 d. P500,000
7, Entertain Corporation set up a plan in 2021. The follow

ing relate to the fund:
2021 2022
Funding of current service cost P 400,000 400,000
Funding of past service cost 300,000 200,000
Compute the deductible pension expense in 2021.
a. P340,000 c. P430,000
b. P 400,000 d. P700,000
8. In the immediately preceding problem, compute the pens
ion expense in 2022.
a. P420,000 c. P450,000
b. P430,000 d. P600,000
Zambales Inc. made the following contributions during 2021;

Contributions to the government in non-
Priority activities P 60,000
Contributions to foreign charitable institutions
40,000
Contribution to accredited non-profit
Institution 30,000
Ontributions to foreign organizations
with
treaty exemption 100,000
Zambales Inc. has net income before contribution expense
of P1,000,000.
535

Compute the deductible contribution expense.

a. P230,000 c. P180,000
b. P190,000 d. P130,000
Mr. Peterson reported the following income and expenses in 2021:

Compensation income P 400,000
Gross income from business 500,000
Fully deductible contributions 50,000
Deductible contributions with limit 75,000
Other allowable deductions 200,000
Mandatory deduction and exempt income 75,000
10. Compute the deductible contribution expense.

a. P125,000 c. P70,000
b. P80,000 d. P65,000
11. What is the taxable compensation income?

a. P400,000 c.P0
b. P325,000 d. (P75,000)
12. What is the net income?

a. P300,000 c P220,000
b. P235,000 d. P175,000
13. What is the taxable income?

a. P700,000 c. P545,000
b. P575,000 d. P500,000
14. A taxpayer with net sales of P2,000,000 and cost of sales of P1,800,000 incurred
P15,000 entertainment, amusement and recreation expenses (EAR). Compute the
allowable deduction for EAR expenses.
a. P20,000 c. P10,000
b. P15,000 d.P 0
15. A taxpayer with gross receipts of P2,000,000 and direct cost of services of
P1,800,000 incurred P15,000 entertainment, amusement and _ recreation
expenses. Compute the allowable deduction for EAR expense.
a. P20,000 c. P10,000
b. P15,000 d.P0
16. A taxpayer reported sales of P3,000,000 and gross receipts of P2,000,000 in 2021.
It incurred entertainment, amusement, and recreations expenses of P35,000.
Compute the deductible EAR expense.
a. P35,000 c. P29,000
b. P30,000 d. P25,000
536

~
a
craptet 43-8 - Special Allowable Itemized Deductions and NOLCO

BAPTER 13-B
! pEciAL ALLOWABLE ITEMIZED DEDUCTIONS & NET
* pERATING LOSS CARRY-OVER (NOLCO)
a
ween eee eee ewcece lds

TELE E LTTE
iebebeteilelebeleteteleletttit
- -- eoweernnenn ne
-* -
over.
After this chapter, readers are expected to demonstrate mastery of the following:
1. Special deductions allowed under the NIRC and special laws
" Requisites and deduction rules of the allowable special expenses
3, Additional deduction incentives granted by special laws
4, Measurement and carry-over rules of Net Operating Loss Carry-Over (NOLCO)
=——
SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS

Special deductions are other items of deductions which may or may not partake
the nature of an expense, but are allowed by the NIRC or by special laws as
deductions. Special deductions include deduction incentives to taxpayers in
assisting and in complying with certain legal requirements.
Special Allowable Deductions

A. Special expenses under the NIRC and special laws
1. Income distribution from a taxable estate or trust
2. Transfer to reserve fund and payments to policies and annuity contracts
of insurance companies
3. Dividend distribution ofa Real Estate Investment Trust (REIT) under RA
9856
4. Transfer to reserves funds of taxable cooperatives
5. Discounts to senior citizens under RA 9257
6. Discounts to persons with disability under RA 9442
7. Additional expenses on apprenticeship agreement
B. Deduction incentives under the NIRC and special laws

1. Additional compensation expense for senior citizen employees under RA
9257
2, Additional compensation expense for persons with disability under RA
7277, as amended by RA 9442
3. Cost of facilities improvements for persons with disability in accordance
with RA 7277, as amended by RA 9442
537

Chapter 13-B - Special Allowable Itemized Deductions and NOLCO
4. Additional training expense under RA 8502 - Jewelry Industry
Development Act of 1998
5. Additional labor training expense under the RA 11534 - CREATE law
6. Additional contribution expense under the Adopt-a-School program under
RA 8525
7. Additional deductions for compliance to rooming-in and breast-feeding
practices under RA 7600, as amended by RA 10028
8. Additional free legal assistance expense under RA 9999
9, Additional productivity incentive bonus expense under RA 6971
SPECIAL EXPENSES UNDER THE NIRC OR SPECIAL LAWS
INCOME DISTRIBUTION MADE BY TAXABLE ESTATES OR TRUSTS

Income distribution made by the administrator of a taxable estate in favor of the
heirs or by a trustee of a taxable trust in favor of the beneficiary of the trust is a
special deduction against the gross income of the estate or trust. The income
distribution shall be included by the recipient heir or beneficiary in his gross
income.
Illustration —
Don Mariano transferred a commercial lot and a P1M stock investment in irrevocable
trust in favor of his son, Ritchie. The trust earned the following income in 2021:
Rent income on the lot P 1,200,000

Less: Leasing expenses ____ 200,000
Rental net income P 1,000,000
Dividend income, net of final tax 36,000
Trustnetincome . P_1,036,000
In accordance with the trust indenture, the trustee distributed half of the gross rentals
and the entire dividends to Ritchie.
Special deduction
The special deduction is P600,000, the half of the gross rentals given to Ritchie. The
distribution of the P36,000 dividend to Ritchie shall not be deductible as this is not
included in the gross income of the trust for purposes of the regular income tax.
The net income of the trust shall be computed as follows:
Gross rent income P 1,200,000

Less:
Regular allowable deductions P 200,000
Special allowable deductions
Income distribution to beneficiary _600,000 ____800,000
Net income P___400,000
538

naptet 43-B - Special Allowable Itemized
Dedy
RANSFER TO RESERV, E FUND AND Payortions and NOLCO .
NETRA
Ci CTS OF INSURANCE ComPanigs NTS TO POLICIES AND ANNUITY
ce companies are required to maintain
iri
risks expiring ithi
within one year. Fo Premium, less returns and cancellations
‘or Marine Cargo
°
for e amount of : : g risks
ISKS, the
@ reserve
rese is
yivalent to th Premium on insurance during the last two months of
he calendar year.
; n dividends, paid within the year on policy

and annuity contracts may be deducted from the gross income of insurance
Illustration
The following relates to the performance of an insurance company:
2020 2021 2022
Premium revenue P 2,100,000 P 3,000,000 P2,500,00
Premiums ceded 0
420,000 600,000 500,000
Claims expense 200,000 800,000 1,000,000
Commission expense 100,000 300,000 250,000
Administrative expenses 300,000 350,000 340,000
Required legal reserves 672,000 960,000 800,000
Required: Determine the special deductio
ns and the net income assuming that the
required transfers to the reserve funds were made
in the same year.
Solution:
The net amount which will be paid to or released from the re
as follows: serve fund is computed
2020 2021 2022

Required reserves P 672,000 P 960,000 P800,000
“SS: prior year-reserve 0 672,000
mount payable (receivable) _960,000
P__ 672,000 P__288,000 (P160,000)
To simplify our illustration, let us assume that the contributi
Paid in the Same year they ons to the reserve were
were determined.
539

The net income of the insurance company shall be computed as follows:
2020 2021 2020

Premium revenue P 2,100,000 P 3,000,000 P2,500,000
Less: premiums ceded 420,000 600,000 500,000
Net premiums P 1,680,000 P 2,400,000 P2,000,000
Release from reserve - __*160,000
Gross income P 1,680, 000 P 2,400,000 P2,160,000
Less:
Regular allowable deductions
Claims expense P 200,000 P_ 800,000 P1,000,000
Commission expense 100,000 300,000 250,000
Administrative expense 300,000 ___ 350,000 ___ 340,000
Total P 600,000 P 1,450,000 P1,590,000
Special allowable deduction
Payment to reserve 672,000 288,000
Total deductions P_1,.272,000 P_1,738,000 P1.590,000
Net income P__ 408,000 P662,000 P_570.000
Note: The release of reserve from the reserve fund is included in gross income.
DIVIDEND DISTRIBUTION OF A REAL ESTATE INVESTMENT TRUST (REIT)

A REIT is a publicly listed corporation established principally for the purpose of
owning income-generating real estate assets. A REIT is legally mandated to
distribute 90% of its distributable income as dividends to shareholders.
Under RA 9856, the dividend distributions of REITs are treated as special

deductions against gross income.
For purposes of computing the taxable net income of REITs, dividends distributed
by them from their distributable income after the close of a taxable year and on or
before the last day of the fifth month following the close of the taxable year shall
be considered as paid on the last day of such taxable year.
TRANSFER TO RESERVE FUND OF COOPERATIVES

Under RA 9520, cooperatives are required to maintain reserves for their
protection and stability. Cooperatives are exempt from income tax, but are subject
to tax on their income from unrelated activities. The amount transferred by the
cooperative to the reserve fund out of the net surplus from unrelated activities is
an item of deduction in the computation of the taxable net income of the
cooperative.
540

chapte! 13-B - Special Allowable Itemized Deductions and NOLCO
tration ; .
jand Coop summarized the
followi
N dactivities
te : ng income and expenses from its exempt
and taxable unrelated activities:
rele
Related Unrelated
—Activities _ Activities Total
gales P 2,000,000 P 1,000,000 P 3,000,000
cost of sales 200.000 00,000 _ 1,800,000
Gross income P 800,000 P 400,000 P 1,200,000
ope rating expenses 00,000 50,000 650,000
—___650,000
Net income P__300,000 P__ 250,000 P__550,000
in compliance with the Cooperative Devel opment Act, Lowland Coop approp
riates
10% of profit to the reserve fund, plus addi tional 40% to other required and
optional
funds.
The amount of special deduction and the taxable net income of the cooperative shall
be computed as:
Gross sales from unrelated activities P 1,000,000

Cost of sales 600,000
Gross income from unrelated activities P 400,000
Less: Regular itemized deductions 150,000
Net income before statutory reserves P 250,000
Less: Special itemized deduction
Appropriation to reserve fund (P250K x 10%) 25,000
Taxable net income P_225,000
Note: Only the appropriation for the reserve fund is deductible as

a s pecial expense. The 40%
appropriations for other cooperative funds are not deductible.
THE EXPANDED SENIOR CITIZEN'S ACT OF 2003 (RA 9257)

Senior Citizen or Elderly
Senior citizen or elderly refers to any resident Filipino citizen aged
60 years old
and above,
Under RA 9257, a senior citizen or elderly is entitled to 20% discou

nt in certain
€stablishments such as hotels and similar lodging establishmen
ts, restaurants,
recreational centers, and other places of culture, leisure
and amusements,
Ospitals, drugstores, and services such as medical, dental,
domestic air, sea and
and transport, and funeral or burial service providers.
The discounts granted to senior citizens by covered establishm

Providers are allowed as special deductions again ents and service
st gross income.
541

Conditions for deductibility of sales discounts to senior citizens
4. Only that portion of the gross sales exclusively used, consumed, or enjoyed by the
senior citizen shall be eligible for the deductible sales discount.
2. The gross selling price and the sales discount must be separately indicated in the
official receipt or sales invoice issued by the establishment for the sale of goods or
services to the senior citizen.
3. Only the actual amount of the discount granted or sales discount not exceeding
20% of the gross selling price can be deducted from gross income, net of VAT, if
applicable.
4. The discount can only be allowed as deduction from gross income for the same
taxable year that the discount is granted.
5. The business establishment giving sales discount to qualified senior citizens is
required to keep a separate and accurate record of sales which shall include the
name, TIN, ID, gross sales/receipts, discounts granted, date of transaction, and
invoice number for every sale transaction to senior citizens.
Illustration 1
Medhub Drugstore Inc. recorded a P1,200,000 total deductible expense and the
following sales:
Customers
Regular Senior citizens
Gross sales P 5,000,000 P 1,200,000
Cost of sales 3,000,000 800,000
Medhub adopts a policy of giving senior citizens a 25% discount. Consequently, it

granted P300,000 total senior citizens’ discounts during the period.
The taxable net income of Medhub shall be computed as:
Gross sales (P5M + P1.2M) P 6,200,000

Cost of sales (P3M + P0.8M) 3,800,000
Less:
Regular itemized deductions P 1,200,000
Special itemized deductions
Senior citizens’ discount
(P1.2M x 20%) 240,000 1,440,000
Taxable net income P__960,000
Note:
1. The gross sales to senior citizens must be reported gross of the senior citizens’ discount
while the discount is presented as a separate expense.
2. The claimable senior citizen discount shall not exceed 20% of the gross sales from senior
citizens. Hence, the deductible amount is P240,000 not P300,000.
542

y Restaurant Corporation
Provides
Tas
.
—Regael
P
S a—_n_
4,000,000
receipts ‘ces P —— Total
ost of serviceCc 500,000 p 4,500,000
ther deductible expenses 2,800,000
100.000
qghe
gestauspe cia
t l shaded
ran ll uct
be ion fored senior citizens’ discount
comput as: and the net income of Tasty
cross receipts [P4M + (P500K/80%)
Less .
: Cost of services P 4,625,000
:
Gross income
ess: P 1,825,000
Y Regular itemized deduction
s P 1,100,000
Senior citizens’ discount
(P500K/80%) x 20%
125,000 1,225,000
Taxable net income
P__ 600,000
Note
1. Receipts pertain to cash colle
Hence, the receipts from senior i ntly net of an
citi
2. The discounts must not be de duc
ted out of net receipts.
DISCOUNTS TO DISABLED PE
RSONS (RA 7277)
Disability pertains to physical

or mental impairment that substa
or more Psychological, phy
siological, or anatom ntially limits one
activities of such indivi ical functions of an ind
duals. ividual or
Discount to Persons with dis

ability do
Similar to senior citizens, person
s with disability are entitled to a :
from certain establis 20 % discount
hments such as hotels and similar lodgin
restaurants, g establi shments,
Sports and recreation cen
“musement, drugstores on the purchase oftermed
s, Places of ane
ici ne, med
leisure and
'N Private facilities, and
ica l and de nta l services
domestic air, sea, and land transport.
The discounts
to persons with disability shall be allowed
as a special deduction
&r the same te rms and conditions as those for senior citizens.
543
;nud
ore
F

DEDUCTION INCENTIVES UNDER SPECIAL LAWS
ADDITIONAL CLAIMABLE COMPENSATION EXPENSE FOR SENIOR CITIZEN

EMPLOYEES
Under RA 9257, private establishments employing senior citizens
shall be entitled
Se:
“ag
to additional deduction from gross income equivalent to 15% of the total amount
BL:
paid as salaries and wages to senior citizens.

~~
Conditions for deductibility of additional compensation:

1. Employment shall have to continue for at least 6 months
2, The annual taxable income of the senior citizen does not exceed the poverty
level as determined by the NEDA
The poverty line or poverty threshold pertains to the amount of income sufficient
to meet basic food and non-food needs such as clothing, housing, transportation,
and health among others. The senior citizen shall submit to his employer a sworn
certification that his annual taxable income does not exceed the poverty level.
Illustration
Assume a taxpayer employs both regular and senior citizen employees and paid the
following compensation during the year:
Regular employees P 200,000

Senior citizen employees with salary grades
above poverty level 50,000
Senior citizen employees with salary grades
below poverty level ___ 40,000
Total compensation expense P290,000
The total deductible compensation expense shall be:
Regular employees P 200,000

Senior citizen employees ___90,000
Regular salaries expense P290,000
Additional compensation expense
under RA 9257 (P40,000 x 15%) P__ 6,000
The 15% additional deduction is definitely not an actual expense, but is allowed by
law merely as an incentive for employers who consider senior citizens for
employment. The regular salaries will be presented as part of regular allowable
itemized deductions. The 15% additional deduction shall be presented as special
allowable itemized deduction.
Senior citizens who are above the poverty level may avail of incentives under the
Minimum Wage law if they qualify as minimum wage earners.
544

or
ote! 43-B - Special Allowable Itemized Deductions and NOLCO
TIONAL CLAIMABLE COMPENSATION EXPENSE FOR PERSONS WITH
cha
MsABLITY
or
dis abl ed per son s wh o meet the required skills
iva’é entities that employ app ren tic es or learners, shall
be
regular emp loy ees ,
ent
salifeations either “as
ey-five percadd al ount pai
(25%) of the tot mam their
ent ona grod ss as inc ari,es equ
salome gets to
andivawalen to
ated to an iti l deduction, fro
sons.
qisabled per
requisites for deductibility:

The entity present proof as certified by the Department of Labor and
. Employment that disabled persons are under their employ.
p. The disabled employee is accredited with the Department of Labor and
Employment and the Department of Health as to his disability, skills, and
qualifications.
The actual salaries shall be presented as part of regular expense while the 25%
additional salaries expense shall be presented as special itemized allowable
deductions.
COST OF FACILITIES IMPROVEMENT FOR DISABLED PERSONS

Under RA 7277, private entities that improve or modify their physical facilities in
order to provide reasonable accommodation for disabled persons shall also be
entitled to an additional deduction from their income equivalent to fifty percent
(50%) of the direct costs of the improvements or modifications.
ADDITIONAL TRAINING EXPENSE UNDER THE JEWELRY INDUSTRY

DEVELOPMENT ACT OF 1998
Under RA 8502 and its implementing rules and regulations, a qualified jewelry
enterprise duly registered and accredited with the Board of Investments (BOT) is
entitled to an additional deduction from taxable income of 50% of the expenses
incurred in training schemes approved by Technical Education and_ Skills
Development Authority (TESDA). The same shall be deductible during the year the
€xpenses were incurred.
Conditions for deductibility:

1, A qualified jewelry enterprise must submit to
the BIR a certified true copy of
its Certificate of Accreditation iss
ued by the BOI.
2. The training scheme must be approved and certified by TESDA.
SPDITIONAL LABOR TRAINING EXPENSE UNDER THE CREA

TE LAW
acer RA 11534, 50% of the value of labor training expen
ses incurred for skills
velopment of enterprise-based trainees enrolled in public senior high schools,
545

public higher education institutions, or public technical and vocational institutions
shall be claimed as additional deduction against gross income.
Conditions of deductibility:
1, Apprenticeship agreement between the enterprise (taxpayer) and the trainees
pursuant to the Labor Code of the Philippines
9, Certification from Dep-Ed, TESDA, or CHED secured by the enterprise
3, The amount of deductions shall not exceed 10% of direct labor wage.
Illustration
Texas Instrument (TI) established an apprenticeship program in training private and
public school senior high students. The program was duly accredited by TESDA,
During the year, TI incurred a total of P1,800,000 apprentice training expense on top
of the following payroll expenses:
Factory personnel payroll P 8,000,000

Support departments personnel payroll 500,000
Administrative personnel payroll 1,500,000
Total P.10,000,000
The additional deduction shall be computed as follows:
Apprenticeship training expense P 1,800,000

Multiply by: Incentive percentage 50%
Possible deduction P__900,000
Deduction limit (P8M direct labor x 10%) P__ 800,000
The deductible amount shall be the lower P800,000. The same shall be classified under
special allowable deduction. The P1,800,000 training expense shall be claimable under
regular allowable deduction.
ADOPT-A-SCHOOL ACT OF 1998 (RA 8525)

Under the Adopt-a-School Program, private entities are allowed to assist a public
school in particular aspects of their educational program within an agreed period
of time.
The adopting private entity which may be an individual in business or practice of
profession, a partnership, or a corporation shall team up with the DepED, CHED,
or TESDA toward providing much needed assistance and services to public
schools.
The assistance may be an aid, contribution or donation in cash or in kind but not
limited to infrastructure, physical facilities, real estate property, training and skills
development, learning support, reading materials, computer and _ science
laboratories, health and nutrition packages, and assistive learning devices for
students with special needs.
546
eet
$$

oapter 13-B - Spec
ial Allowable Item
ized De ductions
alification of particip and NOLCO
qu g0 yernment sc
at in g schools
hool in al] levels m
a | be given to school ay Participate in the prog ram. Priorities
-emali
5 ynici
s located ; n the poorest
ti es, nd oth
palit i
provinces, ] low income
and other local &0vernment units
nortages: insufficient budget, experiencing severe classroom
S or havi ing numero
us poor but high performing
yalifications of Adop
ting Private Entity
jt must have a credible
track record,
It must have been in exis
tence for at least one year
- It must not have been
;
Tax deduction incentive

Contributions to the government in
oT i 10 priority activities are deductible in full while
those made in non-priority activities are deductible subject to limit.
.
Aside from the usual regular deductible contribu
tion expense, an adopting entity
shall be allowed an addi tional deduction
i ‘ . from gross income equivalent to 50% of
the contribution of the adopting entity for the “Adopt-A-School Program.”
Conditions for deductibility:
a. The deduction shall be availed of in the taxa
ble year in which the expense is
paid or incurred.
b. The expense is substantiated with suffici ent
evidence such as official receipts,
delivery receipts and other ade quate records
which shall set forth the
following:
a. The amount of expenses being claimed as dedu
ctions
b. Direct connection or relation of the expenses
to the adopting private
entity’s participation in the Adopt-a-School Program
c. Proof or acknowledgement of receipt of the
contributed or donated
property by the recipient public school
The application together with the approved MOA endo
rsed by the National
Secretariat shall be filed with the RDO having jurisdicti
on over the place of
business of the adopting private entity, copy furnished the RDO having
jurisdiction over the property, if the contribution is in the form of
real
property.
Procedures for availment

1. Memorandum of Agreement
An adopting private entity shall enter into a Memorandum of Agreement
(MOA) with the head of the public school. The MOA shall specify the details of
the adoption which must be for a minimum of 2 years pre-terminab
le only
when the adopting private entity is dissolved prior to the end of such period
or when terminated for failure to possess the qualification as such.
547

2. Supporting evidence
The adopting entity must maintain sufficient evidence of the amount of
assistance incurred, establish the connection of the expense to the adopting
entity's participation in the program, and maintain proof of acknowledgement
of receipt by the public school recipient of the donation.
3, Apply for Certificate of Tax Incentive and Tax Exemption
s The adopting entity shall apply for a Certificate of Tax Incentive or Tax
Exemption and submit the following documents to the Secretariat:
ah
a. Duly authorized or approved MOA

b. Duly notarized deed of donation
c. Official receipts and other documents showing the actual value of the
contribution or donation
d. Certificate of Title and Tax Declaration, if the donation is in the form of
property
e. Other adequate records showing direct connection or correlation of the
expense being claimed as deduction to the adopting entity’s participation
in the program
Illustration
In 2021, Robotics Inc. entered into a memorandum of agreement with two schools to
adopt them as part of its corporate social responsibility:
Name Nature Assistance granted

Balakbak High School A public secondary school
P 1,500,000
Divine World College A non-profit accredited
donee institution P 1,000,000
Adopt-A-School program was designated by the NEDA as a priority program in the

2021 National Prior
Robotics Inc. shall claim the following contributions expense as part of regular
itemized allowable deductions:
Contribution to accredited donee NGO P 1,000,000
Contribution expense under RA 8525 1,500,000
Regular deductible contribution expense P_2,.500,000
Robotics Inc. shall likewise claim the following additional contribution expense as
special itemized allowable deductions:
Contribution expense under RA 8525 P 1,500,000
Multiply by: _ 50%
Special additional contribution expense P___750,000
Note: Only donations to public schools are allowed the additional deduction.
548
en ae nt ee ee ete SO

‘ai 43-B - Special Allowable ite
mized Deductions and NOLCO
Oe det of deductions (RR10-20
03)
ash assistance, contributions or donations shall be based
1. ¥ amo on the actual
unt appearing in the official receipt iss
ued by the donee.
As sistance other than money
personal property - acquisition cost of assistance
or contribution
b. Consumable goods - acquisition cost or value at date of donation
whichever is lower
c. services - the value of services render ed by the donor and the service
provider and the public school as fixed in the MOA
or the actual expense
incurred by the donor, whichever is lower
d, Real property - fair value (higher of zonal value or assessed value) at the
time of contribution or the depreciated cost of the property whichever is
lower
lustration 1
In 2021, Danao Realty Corporation participated in the “Adopt-a-School Program” by
contributing its services to a public school in La Trinidad, Benguet. The agreed value
fixed in the MOA for the construction of the public school building was P1,000,000.
However, Danao Realty was able to complete the same at a total cost of P800,000.
The “Adopt-a-School Program” jis a priority program in 2021. Danao Realty
Corporation shall be allowed to deduct the following:
Regular itemized contribution expense P_

800.000
Special itemized contribution expense (P800K x 50%) P400,000
Note: The lower of the actual cost of services and the agreed value shall be considered.
Assume that the “Adopt-a-School Program” is no longer a priority program in 2021,

and Danao Realty has P9,000,000 net income before the contribution. Danao Realty
shall be allowed to deduct the following:
Contribution expense subject to limit P 800,000
Contribution limit: 5% x P9,000,000 450,0
—__— 00
Regular itemized contribution expense P__450,000
Special itemized contribution expense (P800Kx50%) P400,000
Note:
1. For corporations, contributions to the government in non-priority activities are subject to a
limit of 5% of the net income before the contribution.
2. The basis of the additional incentive is the actual donation as valued under RR10-2003, not
the amount of the regular allowable itemized contribution expense.
lustration 2
bey Bus Line contributed a lot and a bus to its adopted public school. The lot shall
“4 Used by the public school for building expansion and the bus as a school bus. The
4opt-a-School Program’ is a national priority program during the year.
549

the bus:
The following relates to the value of the lot and
P 5,000,000
Appraisal value of lot
3,600,000
Zonal value of the lot
2,500,000
Assessed value of the lot
3,000,000
Acquisition cost of the lot 2 400,000
isition cost of the bus
Acquisiti tenn,
1,500,000
Depreciated cost of the bus
>
2,000,000
Depreciated appraised cost of bus
ane,
»
nat
The contribution expense deductible as part of regular itemized allowable deductions

shall be computed as follows:
Contribution
Expense
Zonal value P 3,600,000
Assessed value 2,500,000
Fair value of the lot (higher) P 3,600,000
Cost of the lot (LOWER) P_3,000,000 P 3,000,000
Depreciated cost of bus 1,500,000
Regular itemized contribution expense P_
4,500,000
The term “acquisition cost” is understood to refer to “depreciated cost” if the movable
property donated is a depreciable ordinary asset. A portion of the cost is already charged
against gross income of prior years through depreciation expense so we could not expense
it again through contribution expense.
The contribution expense deductible as part of special itemized allowable deduction

shall be computed as follows:
Total value of donation P 4,500,000

Multiply by: 50%
Special additional contribution expense P_ 2,250,000
EXPANDED BREASTFEEDING PROMOTION ACT OF 2009 (RA 10028)

The purpose of RA10028 is to encourage, protect, and support the practice of
breast-feeding which is believed to provide distinct benefits to the mother and the
infant aside from saving the country’s valuable foreign exchange that may
otherwise be used for milk importation.
Requirements to all Establishments
Lactation station
All health and non-health facilities, establishments, and institutions whether
operating for profit or non-profit which employ in any workplace nursing
employees are required to establish a lactation station. Exemptions may be
granted when the establishment of a lactation station is not necessary due to the
circumstance of the workplace taking into consideration among others the
550

chapter 3-8 - Special Allowable Itemized Deductions and NOLCO
rage number of
number of snp physical size of establishments, and the ave
wome
‘ substantiation shall be made by the employer to support the application for
mption. Private sectors may secure exemption from the Department of Labor
and Employment (DOLE). Public sectors may apply for exemption from the
chairperson of the Civil Service Commission. The certificate of exemption is valid
for two (2) years.
pactation period
Nursing employees shall be granted break intervals of not less than 40 minutes for
every 8-hour working period in addition to the regular time-off for meals to
preastfeed or express milk. This interval shall include the time it takes the
employee to get to and from the workplace and the lactation station. The required
additional breaks are compensable hours.
Access to Breastfeeding Information

shall be made aware of the
Employers shall ensure that staff and employees
Implementing Regulations.
Breastfeeding Act and its
Requirements to Health Institutions
Rooming-in policy
The law requires newborn infants and the mother to be roomed-in immediately
after birth for a certain length of time. In case the mother and baby are separated
and direct breastfeeding is not possible, there should be facilities for milk
expression and milk storage.
Milk Storage Facility
All health institutions adopting rooming-in and breastfeeding shall provide milk
storage facilities. A milk storage facility is a private, clean, sanitary, and well-
ventilated area or space for the purpose of collecting and storing milk among
mothers separated from their babies due to medical reasons. This is different from
a milk bank and a lactation station. There must be dedicated and trained
personnel who supervise and assist the mothers who will use the facility, and the
facility should fully comply with Executive Order 51.
Milk banks
Milk banks can be used as temporary solutions when the mother and baby are
Separated. It may also be a source of breast milk for infants that are victims during
an emergency and/or disaster.
Medical centers and regional hospitals among others a re encouraged to set-up
milk banks which should be operated on a non-profit t b basis, but a minimal
Processing fee may be charged to cover for the screening, processing, and
‘dministrative
costs.
551

Sie Ty OS eS

Inability to pay the fees shall not be a reason for non-availment of the milk for
a
patient in need. These milk banks must have their own permanent, dedicated staff
or personnel who are trained in human milk banking and lactation management.
a
Tax deduction incentives

The expenses incurred by a private health institution in complying with the
rooming-in and breast-feeding practices shall be deductible expenses for income
tax purposes up to twice the actual amount incurred.
Conditions for deductibility
1. The deduction shall apply for the taxable period when the expenses were
incurred.
2. All health or non-health facilities, establishments and institutions shall comply
with the IRR of RA 10028 within 6 months after its approval.
3. The facility, establishment or institution shall secure a “Working Mother-Baby-
Friendly Certificate” from the Department of Health to be filed with the BIR.
Illustration 1
Henson Electronic employs primarily women. Henson installed a lactation station for
its nursing employees at the following costs:
Remodeling of a space for the lactation station P 80,000

Tables and comfortable chairs 40,000
Refrigerator 12,000
Manual and electric breast pumps 10,000
Supplies (sterile milk containers, soap, etc.) 8,000
Total P_150,000
The P150,000 cost of compliance shall be claimed as part of regular itemized deductions,
An additional expense for the same amount shall be claimed under special itemized
allowable deductions.
Illustration 2
Baguio Medical Center (BMC), a private hospital, previously set up a milk storage
facility and a milk bank. The total annual costs of the two facilities were:
Storage Milk
Facility Bank Total
Supplies P 100,000 P 120,000 P 220,000
Staff salaries 210,000 90,000 300,000
Maintenance 50,000 70,000 _120,000
Total P__ 360,000 P 280,000 P640,000
Less: Fees collected from patients ___ 190,000
Excess expense P__90,000
The milk bank was operated as an integral part of the hospital, but is operated as non-
profit. BMC charges minor fees and subsidizes the facility excess expense.
552

nop 43-B - Special Allowable Itemized Deductions and NOLCO
following expense as part of regular itemized allowable
c may claim the
auctions P 360
erating costs of storage facility
Toes Mil bank expense subsidized by BMC ert
as special itemized
aMC hall also claim an additional deduction for the same amount
silo wable deductions.
silustration 3 Hospital, a state hospital, set up a milk storage

facility at a total costs
qTabu k prov inci al
of P1,120,000.
deduction.
required: Determine the allowable special
Answer: a Hospital cannot claim deductions since it is non-taxable.

Nil. Tabuk Provincial
will receive
However, government facilities, establishments, and_ institutions
savings they may derive as a result of
additional appropriation equivalent to the
complying with RA 10028.
costs due to absenteeism, increased
These savings may come from reduced
reduced cost of procurement, sterilization,
productivity, reduced illness of babies, and
nalia.
and management of infant formula parapher
FREE LEGAL ASSISTANCE (RA 9999)

g pro-bono legal services are given
Lawyers or professional partnerships providin
deduction incentives for their free legal services.
Requirement for availment
actual free legal services shall
Lawyers or professional partnerships rendering Office (PAO), the Department of
secure a certification from the Public Attorney’s
Supreme Court indicating that the
Justice (DOJ), or association accredited by the
services defined by the Supreme
said legal services to be provided are within the
services to be provided by the
Court and that the agencies cannot provide the legal
legal counsel.
by the Supreme Court shall
The association and/or organization duly accredited actually provided by the
for t he number of hours
n
he the necessary certificatio
wyer or partnership.
Tax Deducti
ction In centive
ti hip shall be entitled to an allowable
‘onal partpartners
€ practicin g lawyer or professional the amount that could have been
conection from gross income equivalent to
perf orma nce of the actua l free services rendered or up to
Sllected for the actua l l performance of the legal profession
o Of gross income derived from the actua
553

For the purpose of this incentive, the free legal services must be exclusive of the
60-hour mandatory free legal assistance rendered to indigent clients as
mandatorily required under the Rule on Mandatory Legal Aid Services for
Practicing Lawyers.
~ =~ AIllustration 1
general professional partnership of lawyers had the following data
during the year:
as Gross receipts P 4,000,000
4 Interest on client notes 200,000
Interest on deposits 36,000
Value of pro-bono services, exclusive of indigent clients 240,000
Direct cost of services 1,700,000
Administrative costs 1,200,000
The special deduction for free legal services shall be determined as follows:
Gross receipts P 4,000,000
Multiply by: 10%
Deduction limit P. 230,000
Actual free services provided P__ 240,000
Special “free legal service expense” (LOWER) P__ 230,000
Note: The interest income on notes is an item of gross income subject to regular income tax, but
is excluded as it is not derived from the actual performance of the legal profession.
The net income of the general professional partnership shall be computed as follows:
Gross receipts P 4,000,000
_ Other gross income 200,000
Less:
Free legal services expense 230,000 1,430,000
Net income P_1,070,000
Illustration 2
Atty. Sabado rendered the following services during the year:
Gross receipts from legal fees P 5,000,000
Value of 60-hour assistance to indigent clients 200,000
Value of other pro-bono services 450,000
Other deductible expense 1,500,000
554
ED pines rete

ie
13-B - Special Allowable Itemized Deductions and NOLCO

ft e
On a pado shall be entitled to an additional deduction computed as follows:
P 450.000
” | value of pro-bono services
ctua Tee ie
sit of incentive: P 5,000,000

crossreceipts 1.800.000
pirect cost of services
109
Multiply by: limit rate
peduction limit P_ 320,000
P 320,000
special free legal services expense (LOWER)
the net income of Atty. Sabado shall be computed as follows:

P 5,000,000
cross receipts from legal fees
Less: Direct cost of services 1.800.000
Gross income P 3,200,000
Less:
Regular itemized allowable deductions P1,500,000
Special itemized allowable deduction
Free legal services expense 320,000 __ 1,820,000
Net income P_
1,380,000
ADDITIONAL PRODUCTIVITY INCENTIVE BONUS EXPENSE

Under the Productivity Incentive Act of 1990 (RA 6971), a business enterprise
which adopts a productivity incentive program is entitled to a special additional
deduction equivalent to 50% of the total productivity bonuses given to
employees under the program.
In addition, business enterprises providing manpower training and special studies

to rank-and-file employees as accredited by the Technical Education and Skills
Development Authority are also entitled to 50% additional deduction of the total
grant for local trainings and special studies.
However, the deduction incentive will not be allowed on bonuses accruin g during
the penden cy of a strike or lockout arising from any violation of the productivity
Ncentive p
rogram.
lustration
0 d
pro j erove
productivity, Cogon Company negotiated
:
with
°
its factory
employees a
on Activity incentive program wherein the employ
ees shall receive a productivity
ides quivalent to 40% of production cost savings which shall be
measured by an
Pendent expert.
555

studies though an “employee
Cogon Company also required employees to undergo
with the TESDA. All employees who finished their
advancement study program”
special studies were required to remain at the employer's business for a period not
less than one year.
The following were determined during the year:
Total distributable productivity bonus P 1,000,000

Cost of special studies
Supervisory employees P 300,000
Rank and file employees 1,700,000 _ 2,000,000
Total P3,000,000
Aside from deducting the above employee benefit expenses, the employer shall be
entitled to the following special deduction incentives:
Additional productivity bonus expense (P1M x 50%) P 500,000

Additional expense on employee studies (P1.7M x 50%) 850,000
Total productivity incentive expense P.1,350,000
Note:
1. The incentive on special studies covers rank and file employees only.
2. The costs of the special studies will not be subject to regular tax or fringe benefit tax as they
are granted for the convenience of the employer.
Note to readers
The deduction incentives discussed in the foregoing section are some of the more
common incentives to taxpayers. There are other deduction incentives granted by
special laws to various taxpayers across different industries. The list shown in this
chapter is merely intended as illustrative to show the practical application of
deduction incentives in income taxation.
NET OPERATING LOSS CARRY-OVER

over the
Net operating loss (NOL) pertains to the excess of allowable deductions
gross income from business or exercise of a profession during a taxable year.
of net operating
Net operating loss carry-over (NOLCO) pertains to the amount
t available net
loss that is allowed by the law to be carried over as deduction agains
income in the following three years.
NOL vs. NOLCO

with a NOLCO. A
It must be noted that a net operating loss is technically different
hence, no NOLCO.
net operating loss ma y occur, but may not be carried over;
However, a NOLCO cannot exist wit hout a prior year net operat
ing loss.
556

13-B - Special Allowable Item;
emized Deduct;
apter
rationale of NOLCO Uctions and NOLCO
The 7) is intended t
NOM co ,
's intended’ to allow ; the taxpayer to reco ma his losses before taxation go
of lost capital. result in taxation of recoveries
Year 1 Ye
ar2 Year 3
aos a P 400,000) | (P300,000 (P20, 000) P7000
who can claim NOLCO?

All taxpayers subject to tax on taxable income whether at the regular income tax
or at preferential tax rate can deduct NOLCO. Taxpayers who are exempt, enjoying
a tax holiday, subject to tax on gross income, or those subject to final income tax,
cannot deduct NOLCO.
How to compute NOLCOQ?
NOLCO is computed as follows:
Gross income subject to regular tax P xxx,Xxx
Less:
Total deductions excluding NOLCO from prior years
and deduction incentives under special laws (__xxx,. xxx)
Net operating loss carry-over (NOLCO) (P_Xxx.Xxx)
Deduction incentives are not actual operating expenses. They are not actual costs.
Hence, they must be excluded in the amount of net operating loss carry over.
That is why deduction incentives are legally allowed only as deduction in the
period they are availed of. The carry-over of deduction incentives is not legally
be
warranted. Prior year NOLCO, which is also a deduction incentive, cannot
the
deducted in the measurement of the current year NOLCO to avoid breaching
three-year carry over rule.
of taxable net income or NOLCO:
To emphasize the rules in the measurement
allowable itemized deductions are
lar
l. Cost of sales or cost of services and regu
fully deducti ible against gros income.
s Inco
Special ince ntiv e dedu ctio ns are deductible only to the extent of net income
efore special incentive deductions ext ent of net income after special
ly to the
NOLCo prior years are deductible on
Incentive deductions but before NOLCO
557

Deductions and NOLCO
Chapter 13-B - Special Allowable Itemized
is a taxable net income
A positive bottom line from the forgoing procedure
whereas a negative bottom line is NOLCO.
Illustration
Nexus Corporation reported a net loss during the year:
P1,500,000
Gross income
Less:
Regular itemized deductions P1,200,000
Special deductions under the NIRC 700,000
Deduction incentives under special laws 300,000 _2,200,000
Net loss | (P_Z00,000)
Based on the foregoing, the NOLCO shall be recomputed as follows:

P1,500,000
Gross income
Less:
Special deductions under the NIRC 700,000 _1,900,000
Net Operating Loss Carry-Over (P_400,000)
Treatment of NOLCO
Net operating loss carry-over (NOLCO) is treated as a separate item of deduction
in the next three (3) consecutive taxable years to the extent of the available net
income before NOLCO deduction in those periods.
To aid taxpayers during the pandemic, the CREATE law allowed NOLCO incurred
during taxable years 2020 and 2021 to be carried over a period of five (5) years. —
For taxpayers on a fiscal year basis, NOLCO for fiscal year ending on or before June ©
30, 2021 and June 30, 2022 will be carried over 5 years. Note that NOLCO incurred
after this two-year period will revert back to the original 3-year carry-over period.
Illustration
A corporate taxpayer reported the following net income and loss from business:
2020 2021 2022 2023
Gross income P 400,000 P 500,000 P 720,000 P 900,000
Less: Deductions 600,000 __ 450,000 _ 610,000 __ 650,000
Netincome(NOLCO) (P200,000) P50,000 P110,000 P_250,000
Required: Compute the taxable net income from 2021 to 2023.
The 2021 net income is P50,000 but the taxable net income is zero. The NOLCO
application and the 2020 NOLCO balance as of December 31, 2021 are as follows:
558

-B - Special Allowable Itemized Deductions and
NOLCO
2020 2021 2022 2023
ome (NOLCO) (P200,000) P50,000 P 110,000 P 250,000
net I deduction —50,000>(_50,000)
Nort palance (P150,000) Pg
922 net income is P110,000 but the taxable net income is likewise zero. The
mc0 application and the 2020 NOLCO balance as of December 31, 2022 are as
N
followS: 2020 2021. == 2022,—Ss—_—sa2023
rincome (NOLCO) ~—(P 150,000) P - P110,000 P 250,000
MLO deduction 110,000 ------ > (110,000)
youco balance (2_40,000) Po
2023 net income is P250,000 but the taxable net income is be P210,000,
a aputed as follows:
2020 2021 _2022 2023
Net income (NOLCO) (P 40,000) P - Pp - P250,000
NOLCO deduction —__40,000 -----.-.-.-.4.0. +> (40.000)
P ~ Adjusted netincome P210,000
Note:
1, Any unused NOLCO after the three-year prescriptive period will expire and will not be
creditable in future periods. Loss recoupment is legally allowed only over three years.
2. For NOLCO sustained during pandemic, apply the same rules but with a longer 5-year carry-
over period.
Requisites for the deductibility of NOLCO:

1. The taxpayer must not be exempt from income tax during the taxable year
when the NOLCO was incurred.
2, There has been no substantial change in the ownership of the business or
enterprise.
A change of at least 75% of either the paid up capital or nominal value of the
outstanding shares of a corporation is deemed a substantial change in business
ownership.
Illustration: NOLCO from exempt years

In 2021, Mr. Tan started a “Hot Siopao” manufacturing plant with less than P3M
capitalization and was registered as a Barangay Micro Business Enter
prise (BMBE). At
the start of 2022, Mr. Tan’s certificate of authority to operate
as BMBE was revoked
when he upscaled his business operations.
Mr. Tan’s business gross income and business expense were as follows:
__ 2021 = =__ 2022 ~) __ 2023

TOs business income P 400,000 P 700,000 P 1,500,000
Nee Business expenses 650,000 800,000 1,000,000
*tincome (NOLCO) (P_250,000) (P100.000) P__500,000
559

Required: Compute the taxable net income in 2023.
Solution:
2021 2022 2023
Net income (NOLCO) (P 250,000) (P 100,000) P 500,000
2021 NOLCO application 100,000 >(__100,000)
Net Income Pp - P-400,000
Note:
1, ‘The P250,000 net operating loss occurred in a year when the taxpayer was tax exempt. This
operating loss cannot be carried over as NOLCO,
2. The P100,000 net operating loss occurred in a year when the taxpayer was taxable. This
operating loss can be carried over as NOLCO. Hence, this is carried over as deduction in 2023.
Rationale of the Disallowance of Carry-Over of Net Operating Loss

Deductions are of no benefit to the taxpayer in an exempt year. Hence, the net
operating loss (i.e., excess deduction) from an exempt year should not be given
value by carry-over as this would cause undue enrichment to the taxpayer.
Illustration 1: Substantial change in ownership
Mr. See owns 80% of Trinoma Corp. In 2020, Mr. See disposed of his 80% interest to
Mr. Yuchen. The net income and (loss) of Trinoma Corporation since 2018 were:
2018 2019 2020
Net income (NOLCO) (P 250,000) P 150,000 P 500,000
Required: Compute the 2019 and 2020 taxable net income of Trinoma Corp.
Solution:
2018 2019 2020
Net income (NOLCO) (P 250,000) P 150,000 P 500,000
2018 NOLCO application 150,000 -»( 150,000)
( 100,000) ------- > ( 0)
Taxable net income P.O )=—sP._ 500,000
Note: NOLCO carry-over is allowed in 2019 since there is no substantial change in ownership
but not allowed in 2020 since there is change in at least 75% in the ownership of the business.
Illustration 2: Substantial change in ownership

Mr. Tan started a business in 2018. Disheartened by heavy losses, he sold the business
to Mr. Song at the start of 2019. The net income or (loss) of the business were:
_ 2018 2019 2020
Required: Compute the taxable net income of the business in 2020.
Solution:
2018 2019 2020
2019 NOLCO Application ! 00,000--> 300,000
Me ee > ( 0)
Taxable net income P.200,000

gpter 13-B - Special Allowable Itemizeg Deductions and NOLCO
ie qhe 201 g NOL cannot be carri led :
over since there is a substantial change
in ownership in
_qale of the Rule on Substantial Chango;

fone $ an incent; nge in Ownershi
Rico isefore
gran they b become
“ate ful ae taxpayers to enable th em to recoup their
hei
fully subj
income tax. Without this incentive,
i . ° .
se tax would become a tax on capital

ect to i
ye to the foregoing rules, it must be emphasized again that the occurrence

of a
net operating loss in prior years does not automatically mean that there is a
noLco.
gules in Carry-Over of NOLCO
1, NOLCO is claimable in a first-in first-out (FIFO) fashion.
2, NOLCO can be claimed only up to the extent of the business net income
in the
next three years. Prior year NOLCO cannot be deducted against a subsequent
year net operating loss.
3, Any NOLCO which remains unused at the end of the three-year prescriptive
period will expire.
{llustration 1
Acorporate taxpayer reported the following from 2016 through 2020:
2016 _ 2017 2018 _ 2019 _ 2020
Gross income P 400 P 320P 480P 400P 500
Less: Deductions 500 450 450 340 340
Netincome (NOLCO) (P_100) (P_130) P___30 P___60 P__160
In 2017
The taxable net income is nil. No deduction can be made against a subsequent net
operating loss since this will roll over the NOLCO through integration in the net
operating loss of the following year. This will effectively breach the three-year
prescriptive period rule.
In 2018
The taxable net income is nil. The 2016 NOLCO application and the remaining NOLCO
Prior year balances as of December 31, 2018 are:
2016 _ _2017_ _2018
Net income (NOLCO) (P 100) (P 130)P 30
oe NOLCO application 30 --- > (__30)
*tincome(NOLCO balance) (P_-Z0) (2130) P___0
Note: Deduction for NOLCO can be made only up to the extent of available net income in the
Teefollowing years.
561

In 2019
The taxable net income is nil. The 2016 NOLCO application and the ending NOLCO
_ prior year balances as of December 31, 2019 are:
2016 _2017 _2018 _2019_
Net income (NOLCO) (P 70) (P 130) P 0 P 60
2016 NOLCO application 60 ownw en wenn +> (_ _ 60)
Net income (NOLCO balance) (P10) (P_130) P__ OPO
Note: The P10 excess 2016 NOLCO balance already expired because this is the third year. The
same can no longer be used as an item of deduction in future years.
In 2020
The taxable income is P30.
—2017_ _ 2018 _2019_ _ 2020
Net income (NOLCO) (P 130) P OP OP 160
130 tte > (__ 130)
2017 NOLCO application
Net income (NOLCO) P OP 0 P 0 P__30
ay Illustration 2
y A domestic corporation reported the following results of operations from years 2015
through 2020:
2015 2016 2017 2018 2019 2020
Gross income P 410 P 300 P 500 P 400 P 600 P = 900
Less: Deductions __500 500 450 340 450 500
NI/(NOLCO) (P__90) (P_200) P 50 P 60 P1150 P___400
The taxable net income of the corporation from years 2015 throughout 2020 shall be
2015 2016 2017 2018 2019 2020
NI/(NOLCO) (P 90) (P 200)P 50 P 60 P 150 P 400
50-=--- >(__50)
NOLCO balance (P 40) (P 200) -
40 tee
B RS sme > (___40)
(P 200) P 20
__ 20 ----> 20)
NOLCO balance (P 180)
150 wna nee we > (150)
P 30 Expired ---------- > ( 0)
Net income P -P -P - P -P - P__400
NOLCO FOR INDIVIDUAL TAXPAYERS

NOLCO refers to an operating loss from business or exercise of a profession. For
individuals who are mixed income earners, NOLCO is measured by separating
compensation income from business or professional income following the income
classification and globalization rule.
562
er et se rere. —— ae sae ne atone tr

-B - Special Allowable Item;
.
cnapter 13 emized Deductions and NOLCO
t jystgivi
raondua | taxpay
Pp er compil
P ed th e followini g inco
me and expenses:
an in 2017 _
—2017 2018 —2019_
a? ensationincome P 20,000 Pp 229 000 P g 0,000 P ___-2020
75,
mysiness BOSS meome con aen 400,000 500,000 500 0
peauctions 900 420,000 420,000 340000
goquired: Determine the annual taxable inco
me.
olution:
5 —2017__ 2018| —2019
2020
qaxable compensation — P_20,00
P 220,000
0 P_ 80.000 P_ 75.000
3 ysiness TOSS income =P 470,000 P 400,000 P 500,000 P 500
jess: . Deduc tions ,000
en pany
500, aeu0,000
000 (420 00) __420,000 _340,000
net income (NOLCO) (P30,000 (P20,000) P 80,000 P 160,000
(50,000)
P30,000 P160,000
taxable Income P_20,000 P220,000 P110,000 P235,000
Note:
1, Asarule, the taxable compensation income and the net income are simply combined in
computing the taxable income of individual taxpayers,
2, Anet operating loss from business or exercise of profession is not deductible from taxable
compensation income, but is carried over as NOLCO.
Special Rule on NOLCO for Mining Companies

The net operating loss sustained by mining companies without the benefit of
incentives under the Omnibus Investment Code of 1987 in any of their first 10
years of operation is allowed to be carried over a period of 5 years following the
year the net operating loss was sustained. Note that this 5-year carry-over period
will continue to remain as is even after the pandemic.
NOLCO and Net Capital Loss Carry Over

NOLCO is deductible against available net income in the next three years of
operation. Net capital loss carry-over is deductible only up to the extent of the net
capital gain in the immediately following year.
Net Capital Loss Carry-Over cannot be claimed simultaneously with NOLCO. In

accordance with the income tax benefit rule, no capital loss carry-over is allowed
When the year’s operation resulted in a net operating loss (i.e., Limit 1 is zero).
Merger and Consolidation a

€'ger occurs when one business is merged with another business. Consolidation
curs when several businesses merge to form a new larger business. The
‘quired business is referred to as the “assignor or transferor” and the
563

LCO ,
13- B - Spe cia l All owa ble Itemized Deductions and NO
Chapte r led Ss
ans fer ee ”" or “as sig nee .” In accounting, the assignor is cal
purchaser as the “tr .” Sa
c haser is called the “acquirer
the “acquiree” while the pur
idation
NOLCO and Merger or Consol
NOLCO of the Acquirer merger : .
acquirer which it incurred before the
Under RR14-2001, the NOLCO of the er merger or consolidation so , ‘
tion continues to be deductible even aft
or consolida LF
its ownership.
long as there is no substantial change in
ret
NOLCO of the Acquiree

NOLCO is transferrable to a surviving © ,
Historically, the BIR consistent ly ruled that /or
corporation since it is view ed as part of the rights, privileges, properties, and
the surviving corporation upon -
interests that will be transferred to and vested in
merger or consolidation.
O is not one of the
However, under BIR Ruling 214-2012, the BIR ruled that NOLC
assets of the absorbed corporation that can be transferred and absorbed by the '
d
surviving corporation, noting that it is privilege or deduction that can be availe
only by the absorbed corporation.
SS
is
Under Sec. 34(D)(3) of the NIRC, NOLCO is not allowed as deduction when there
4 substantial change in the ownership of the business. It is clear that the privilege :
for NOLCO deduction is reserved by the law only to the group of owners when the
loss was incurred while denying it to the new group of owners who subseque ey i
acquired substantial interest in the business. NOLCO is not a transferrable right
privilege, or interest.
564

spaptel 13-B - Specia
l Allowable itemiz
ed p
Eductions and
cH
a
cussion Questions
pist piststin
ingguish an actual. expense f rom a deduct
ion ; .
j gnumer
2. gnumerate
ate the Spec ial exp ens es all owe
the deduction Incentives allowedd by theby Nin
spec e ae ; laws.
nd special
; pemo nstrate how NOLCO jg measured Y Special laws,
5. What are the con ditions for th “ae
explain the rules in the car F -OVe
the dedu
r ofctip j]
N OL. of NOLCQ?
; js NOLCO transferrable? Expl
ain,
e or False
te pividends are non-deductible
with disability provements in

are alloweq an their facilities to ac
additional 50% commodate persons
value of such improvement, de du ction incentive based
on the
are mandatorily allowe

establishments. d a discount of 20%
from all
Senior citizens are ma
ndatorily allowed a dis
establishments. count of 25% from cer
tain
10. The employer of senior
citizens can claim additiona
50% of the compensation l deductions equivalent
paid to senior citizens who to
poverty line. have income below the
11,
12. Attorneys are enti

tled to the value of their pro-bono
deduction from gross income services to indigent clients as
.
A3, The allowable ince
ntives to lawyers for pro-bono services
shall not exceed 10% of
the gross income from the actual performance of the
WE mplo legal profession,
yers are entitled to an additional deduction of 50%
incentive bonus paid to their of the productivity
employees.
15. Th © amount of NOLC
O shall not include the amount of deduction incen
allowed by la tives
w.
565

ized Deductions and NOLCO
Chapt er 13-B - Special Allowable Item
the
a larger business. Even after the merger,
16. A small business was merged to by the larger business.
NOLCO of the small business is deductible
17. NOLCO is valid for 3 years.
net op erating loss.
18. NOLCO always exist when there is a
e d over together with NOLCO.
19. Net capital loss carry over cannot be carri re the
sus tained a net operating loss befo
20. An acquirer in a business combination
carry-over its net operating loss
business combination. The acquirer is allowe d to
in prior years.
Exercise Drills
ion incentive, indicate the percentage of
For each of the following special deduct
applicabl e:
incentive and the limit, if
Deduction Incentive
incentive limit
ee”
Expense/Expenditure
Salaries paid to senior citizen
\ a Wy iya
1.
Sereee
employees
ae
2. Salaries paid to persons with

wk
disability
3. Training expense under the
Jewelry Industry Development Act
4. Cost of facility improvement for
employees with disability
5. Contribution under the “Adopt-a-
School Program”
6. Cost of compliance with the
“Rooming-in and _ Breastfeeding
Practices Act”
7. Free legal expense
8. Productivity incentive bonus and
employee training program

as of December
1. The required reserve for an insurance company was P3,200,000
ible amount
31, 2013 and P3,500,000 as of December 31, 2021. What is the deduct
of transfer to the reserve fund?
a. PO c. P3,200,000
b. P300,000 d. P3,500,000
revenue of
A fitness gym catering to senior citizens recorded a total gross
excess of the
P345,000 from senior citizens. The gym provides 24% discount in
legal requirements. What is the deductible amount of senior citizen’s discount?
a. PO c. P82,800
b. P 69,000 d. P90,789
566

tel 43-B - Special Allowable Itemizeg
cha p ja Inc. employs t ae Deductions and NOLCO
Germ riving he ih ahh Senior citize
3 gre rec évatd 'M Wage whichns isaS repy]
were employees. Two of them
minimum wages Pald to these senj within the poverty level. Total
itizen e
was paid P780,000 compensation du ahah
compute the deductible additional com

q, PO C. P1000 expense,
p. 27,300 d.P144,309
Mang Pandoy, substituted for an emplo

Mang Pandoy received at
ear. Comput
compensation expense. Pute the total deductible additional
a PO c. P25,800
b. P21,600 d. P43,000
Mr. Bernard irrevocably designated in trus t his investment portfolio

consisting of
domestic stocks and bonds. The divide nd income from the stocks shall be
distributed to the beneficiary while t he interest on the bonds shall be
accumulated. During the year, the po rtfolio earned P200,000 interest
and
P135,000 dividends, net of final tax.
What is the total deduction allowable to the trust for the income distribution?
a PO c. P135,000
b. P15,000 d. P150,000
A grantor irrevocably designated in trust a real property in favor of a beneficiary.

Under the trust indenture, 20% of the trust net income shall be distributed to the
beneficiary. The trustee shall be paid 5% of the gross income as management fee.
During the year, the trust collected P810,000 rent income, net of 10% creditable
withholding taxes. The trust recorded P350,000 in expenses.
Compute the deductible amount of income distribution to the beneficiary.
a PO c. P110,000
b. P101,000 d. P180,000
Areal estate investment trust (REIT) earned P4,100,000 from property rentals.
Total business expenses were P2,100,000. Assuming the REIT declared the
mandatorily required dividend distribution, what is the amount of deductible
ividend against gross income?
a PO c. P1,890,000
6. P1,800,000 d, P3,690,000
567

ns and NOLCO
Chapter 13-B - Special Allowable Itemized Deductio
8. A cooperative transacting business only with its members is on its third year of
with the new
operation. It reserves 50% of its operating income in compliance
income of
CDA regulation. During the year, it reported a total operating
P3,000,000 inclusive of P2,400,000 income from related activities. Compute the
deductible amount of transfers to reserve against gross income.
a. PO c. P240,000
b. P60,000 d, P300,000
g
An establishment granting senior citizens 25% discounts recorded the followin
sales during the period:
Customers
Regular Senior citizen
Gross sales P 8,000,000 P 800,000
Cost of sales 5,000,000 400,000
What is the deductible senior citizens’ discount?

a. PO c. P200,000
‘ b. P160,000 d. P266,667
of the 20%
10. A restaurant granted 25% discounts to senior citizens in excess
mandatory requirement. During the year, the restaurant reported receipts of
P93,750 from senior citizen customers.
Compute the deduction for senior citizens’ discount.

a. PO c. P23,437.50
b. P7,250 d, P25,000
11. An employer embarked on a socio-economic program named “A World

Empowered by Persons with Disability.” Under the ambitious program, the
employer established a business which is fully manned by persons with disability.
The employer incurred P300,000 in workplace improvements specifically
designed for its disabled employees. The business venture turned very profitable
due to overwhelming public sympathy. During the year, the employer paid
P2,100,000 in compensation expense. Compute the additional deductible
compensation expense.
a. PO c. P315,000
b. P210,000 d. P525,000
12. In the immediately preceding problem, what is the deductible additional expense
for the improvements made for the employees with disability?
a. PO c. P75,000
b. P45,000 d. P150,000
13. In 2021, Frank Abon, a practicing lawyer, adopted a public elementary school and
contributed P500,000 for the acquisition of computer equipment and software.
Abon had an operating income of P900,000 before this contribution expense.
568

: ial ;
Allowable Itemized
chapter Being thea“Adopt-a-School Pr Deductions
ne and NOLCO
assum vent in 2016 °gram" is an _!Nvestment
in priority program of the
yernment In . » compute Bernard’
“come respectively. d's additional contribution a and net
inc? 250,000; P150,000 —¢. P125, og.
* p250,000;P 650,000 a, P125,000; P275,000
P775 ,000
compute 3
the preceding problem,
14. vt income, respectively, if the "Adore headditio nal contribution expense and
svernment en “School program” is no longer a
program in 2016?
. p 0; P810, c. P250,0000; P650,00
b. PO; p400,000 d. P250,000; P560,000
penguet Jewelery is a qualified jewelry ent prise registered with the Board of
45. invest
ments.In order to modernize its jewel ry making business, it instituted an
in-house training program and hired externa | experts to train its employees. The
program was duly approved by TESDA. The program cost P300,000 during the
year.
What is the deductible amount of additional traini ?
a, P30,000 c. P75,000 eee
bp. P45,000 d. P150,000
Oe: employs purely women. It installed a lactatio n station at a
46. Girl row een
Mother- Babv-Fr iendly Certificate”
total cost 0 , and secured a “Working y-Friendly Certificate
from the Depart ment of Health.
Compute the additional deduction under the Rooming-in and Breastfeeding

Practices Act.
a PO c. P350,000
b. P175,000 d. P700,000
000.
17. Agovernment provincial hospital established a milk bank at a cost of P1,000,
Determine the additional deduction incentive it is allowed under the Rooming-in
and Breastfeeding Practices Act.
a PO c. P500,0000
b. P250,000 d. P1,000,000
onal deduction
18. In the immediately preceding problem, what would be the additi
assuming the hospital is a proprietary medical center?
a PO c. P1,000,000
b. P500,000 d. P2,000,000
the remote provinces of Min danao. During
19. Atty. Abdul is a practicing lawy er in of the 60-
for pro-bono services inclusive
the year, he provided 180 actual hours t These services would have
t clients.
ces to indigen
hour mandatory legal aid servi payin g clients. Atty. Abdulhas a
been bille d P1,0 00 per hour if rend ered to
0 f P20,000 interest on his
P1,400,000 gross income during the year exclusive
Savings deposit.
569

ee E —
ns and NOLCO
Chapter 13-B - Special Allowable Itemized Deductio
es.
Compute the special deduction for the free legal servic
a. P60,000 c. P140,000
b. P120,000 d. P142,000
ng income of
20. Curaratnit, Bolalatsing & Associates, a law firm, earned an operati
P8,000,000, net of P6,000,000 administrative expenses and P12,000,000 direct
cost of services. During the year, it represented selected clients under its free legal}
assistance program. The value of these services would have been P1,500,000. It
also represented indigent clients for free, the value of which would have been
P400,000. Compute the special deduction for free legal services.
a. P1,200,000 c. P1,500,000
b. P1,400,000 d. P1,900,000
21. An employer paid a total of P800,000 productivity incentive bonus to its

production workers. What is the additional productivity incentive bonus expense?
a PO c. P200,000 .
b. P80,000 d. P400,000
22. An employer provides manpower training and special studies to its rank and file
employees at a total cost of P200,000. The in-house program was accredited by
TESDA. What is the deductible additional productivity incentive bonus expense?
a. PO c. P100,000
b. P20,000 d. P200,000

i. In 2016, Warren Buffet purchased the net assets of Berkshire Hathaway, a losing
business which posted a cumulative P10,000,000 loss in the past three years.
Buffet’s charismatic leadership led the business to turn P4,000,000 profits in
2016. What is the allowable NOLCO deduction for 2016?
a PO c. P5,000,000
b. P4,000,000 d. P10,000,000
A taxpayer had the following results of operations:
2019 2020
Gross income P 1,200,000 P 2,500,000
Itemized deductions 1,400,000 1,000,000
Deduction incentives 200,000 300,000
What is the net income in 2020?
a. P800,000 c. P1,100,000
b. P1,000,000 d. P1,200,000
S. An enterprise registered with the BOI had a consistent profitable operation. Just
before graduating from its BOI tax holiday incentives in 2019, it sustained a
P1,800,000 operating loss due to an employee strike in 2019. The settlement of
the deadlock in 2020 enable the enterprise to post a P2,400,000 operating
income.
570

of 43-B - Special Allowable Itemized Ded
ca ;
l~
ris the allowable NOLco “CUCtions ana» NOLCO

Ons and
wee Geduction in 20202 --
* 900,000
p-
-P1,800,009
P2,400,0009
es
sal 5; Cost of sales P 3,000,000
cross income —1.200,000
jess: Deductions P 1,800,000
pegular itemized deduction P12
poh
Deduction incentives 800,000
Net operating loss 00.006 ett.
- tis0 the amount of NOL ro ma be oon ‘

Over in the next three years?
2.
p. 200,000 d. P600,000
An individual taxpayer rep
orted the following in 2021:
yu
Gro
a ss income P 1,500,000
Administrative expenses P 800,000
Selling expenses 650,000 450.000
Operating income P 50,000
Less: Personal expenses 150,000
Excess of personal expenses over income P__100,000
What is the NOLCO to be carried over in the next three years?
a PO c. P100,000
b. P50,000 d. P150,000
In 2021, a taxpayer finally posted a P1,000,000 operating profit after four years of
continuous losses. The results of operations in prior years were:
2016 (P 800,000)
2017 ( 400,000)
2018 ( 200,000)
2019 ( 100,000)
Compute the deductible NOLCO in 2021.
a PO c. P1,000,000
b. P700,000 d. P1,500,000
l results of operations:
A taxpayer has the following historica
2016 (P 600,000)
2017 ( 700,000)
571

2018 400,000
2019 ( 200,000)
2020 100,000
What is the total outstanding NOLCO at the end of 2020 which can be carried ove,
in future years?
a PO c. P600,000
b. P200,000 d. P800,000
8, A taxpayer reported the following items of gross income and deductions in 2020:
Rent income P 400,000
Service fees 200,000
Interest income from bank deposits 50,000
Deductible expenses 800,000
Non-deductible expenses 100,000
Compute the NOLCO to be carried over in the next three years.
a. P300,000 c. P200,000
b. P250,000 d. P150,000
The carry-over of NOLCO is allowed when

a. the net operating loss is sustained from an exempt year.
b. there is a change for at least 75% of the paid-up capital or nominal value of
the outstanding shares of a corporation.
c. the business is acquired by another taxpayer.
d. there is a change in the controlling shareholder representing 51% ownership.
10. Which is incorrect with regard to the net operating loss carry-over (NOLCO)?
a. NOLCO can be claimed together with Optional Standard Deductions.
b. NOLCO cannot be claimed if the net operating loss arises in a year where the
taxpayer is exempt from income tax.
c. NOLCO can be carried over to a period of three years.
d. NOLCO cannot be claimed by non-resident foreign corporation.
11. The following pertains to the salaries paid by the taxpayer during the year:
Salaries to regular employees P 400,000
Salaries to senior citizens (above poverty line) 30,000
Salaries to senior citizens (below poverty line) 50,000
Salaries to persons with disability 200,000
Compute the total deductible salaries expense under regular allowable itemized
deductions and the total special deduction.
a. P680,000; P 0 c. P 742,500; PO
b. P680,000; P57,500 d. P 680,000; P62,500
572

chapter 43-C - Optional Standard Deduction
APTER 13-C
opTIONAL STANDARD DEDUCTION
ee eases eae
lhebeteheheheteletetetetet LT ttt
EE a EEE EO
EE OO Oe Oe
LLL ES
EEE mm
after this chapter, readers are expected to demonstrate:

1. Understanding of the nature of the optional standard deduction (OSD)
2. Knowledge of the taxpayers who can claim the OSD
3, comprehension of the concept of operating income or revenue and a non-
operating income for individual taxpayers
4, Mastery of the computation of the OSD for individual taxpayers and corporate
taxpayers
s, Comprehension of the rules of OSD for general professional partnerships and
the partners
=
OPTIONAL STANDARD DEDUCTION (OSD)

The OSD is in lieu of the itemized deductions including NOLCO allowable under
the NIRC and special laws. Under the OSD, the allowable deduction of the taxpayer
is simply presumed as a percentage of gross sales or receipt for individuals and
gross income for corporations. There is no need to support every item of expense.
The OSD, however, does not relieve the taxpayer of the responsibility to deduct
withholding tax on certain income payments as required by the NIRC.
Who can claim OSD?

OSD is a proxy for itemized deductions. As a rule, all taxpayers who are subject to
tax on taxable net income can claim deductions except the following:
a. Non-resident alien engaged in trade or business (NRA-ETB)
b. Taxpayers mandated to use itemized deductions
Mandatory itemized deductions (RR2-2014)
1. Corporations mandated to use the itemized deductions:
a. Exempt GOCCs and non-stock, non-profit corporations with no taxable income
b. Those with income subject to special/preferential tax rates
income subject to regular corporate income tax and
c. Those with
special/preferential tax
2. Individual taxpayers mandate d to use the itemized ‘deductions:
a. Exempt individuals under the NIRC and speci al laws with no other taxable
income
rates
b. Those with income subject to special /preferential tax
573

Chapter 13-C - Optional Standard Deduction
c. Those with income subject to regular income tax and special/preferentia|
income tax
Both the NIRC and its amendatory law, RA 9504, excluded non-resident aliens
from the option to claim OSD. Sec. 3 of RA 9504 restricted the option to claim OSD
only to corporations subject to the regular corporate income tax. Hence, special
corporations subject to preferential rate on taxable income are deemed
excluded. Similarly, individuals enjoying preferential taxes under special tax
incentive laws are not allowed to use OSD.
The option to claim OSD must be signified in the income tax return, otherwise,
itemized deduction is presumed. The option to elect OSD or itemized deduction
must be made in the first quarter return. Such election when made shall be
irrevocable in the taxable year for which the return is made. Shifting between OSD
and itemized during the taxable quarters of the taxable year is not allowed.
Taxpayers who opted to claim OSD are not required to submit their financial
statements with their income tax return. Individual taxpayers opting to deduct
OSD shall keep records pertaining to their gross sales or gross receipts.
Corporations opting to deduct OSD shall keep such records pertaining to their
gross income during the taxable year.
PERCENTAGE OF OPTIONAL STANDARD DEDUCTIONS

1. Individuals taxpayers - 40% of total sales/revenues/receipts/fees
a. Those selling goods under the accrual basis - 40% of gross sales
b. Those selling services under the cash basis - 40% of gross receipts
c. Those selling services under the accrual basis - 40% of revenue
2. Corporate taxpayers - 40% of gross income
Hlustration
The income statement of a retailer of goods under the accrual basis of accounting is
shown below:
Sales, net of returns, allowances, and discounts P 1,000,000

Less: Cost of sales 600,000
Gross income P 400,000
Less: Operating expenses
Administrative expenses P 100,000
Selling expenses 120,000 220,000
574

qne OSD of the taxpayer shall be comp
uted as follows:
Gross sales, net of discount, —A/ndividual _ -Corporation_

returns, and allowances P
1,000,000 p ponond
cost of sales or services
Gross Incom - ____ 600,000
tyes OSD rate ° P 1,000,0000 P 400,000
Optional Standard Deductions 40% 40%
P____400
P ,016000
,000
The net income of the taxpayer und
er the OSD shall also be determine
d as follows:
Gross sales, net of discount,

returns, and allowances P 1,000,000 P 1,000,000
Cost of sales or services
- 600,000
Gross sales/gross income P = 1,000,000 P 400,000
Less: Optional standard deductions 400,000 160,000
Net income P 600,000 P__240,000
The Individual OSD

Since the OSD of individuals is based on gross receipts or gross sales, it is deemed
to
replace all items of deductions against gross receipts or gross sales in computing
net
income. Individuals using OSD shall use BIR Form 1701A in filing their annual return.
The Corporate OSD

Since the corporate OSD is based on gross income, it is deemed to replace all items of
deductions from gross income in computing net income.
Table of comparison on OSD:

Individual OSD | Corporate OSD
replaces replaces
Cost of sales/cost of services? YES NO
Regular allowable itemized deductions? YES YES
Special allowable itemized deductions? YES YES
Net operating loss carry-over (NOLCO)? | YES YES
Hence, corporations can claim cost of sales or cost of services while individual taxpayers
cannot claim cost of sales or cost of services under the OSD.
Corporations opting to use OSD shall BIR Form 1702-RT for their annual income tax
return.
575

RULES ON DETERMINATION OF OSD FOR INDIVIDUAL TAXPAYERS
Gross Sales
As clarified by RR16-2008, gross sales include only sales contributory to income
subject to regular tax. Since sales returns, allowances and discounts are not
contributory to income, they must be deducted from the total recorded sales
(accounting gross sales). In short, the tax concept of “gross sales” is the accounting
concept of “net sales.”
Gross Receipts
“Gross receipts” means amounts actually or constructively received during the
taxable year. For sellers of services employing the accrual basis of accounting, the
term “gross receipts” shall mean amounts earned as gross revenue during the
taxable year.
For individual taxpayers using other methods of accounting, the gross sales or
gross receipts shall be determined in accordance with said acceptable method of
accounting.
The optional standard deduction for individual taxpayers is specifically computed

as:
Sales/Revenues/Receipts/Fees P = XXX,XXX
Less: Sales returns, allowances and discounts XX,XXX
Net sales/revenues/receipts/fees P — XXX,XXX
Multiply by: OSD percentage 40%
Optional standard deduction P___Xxx,XXX
Other taxable income from operations not subject to final tax

Revenues or receipts arising from incidental or secondary activities of the
business or profession are added as part of sales/revenues/receipts/fees.
Illustration: The Department Store Industry

Department stores usually do not own the goods they are selling. They are owned by
the consignors, called principals. Principals deliver requested goods at list price, i.e.,
P1,000, but with a suggested selling price, i.e, P900, and offers the store 8% discount.
Let us assume that the department store sold the goods for P1,050. The store will pay
the principal only P828, computed as (100%-8%) x P900. The department store earns
the P222 or (P1,050 - P828) as commission income.
To be part of the product lines displayed in the store, principals pay a “listing fee.”
After listing, principals pay rentals called “display allowance” for ordinary display
spaces. If principals want to maximize display and sales potential, they rent gondolas
at higher charges.
576

when the store sponsors a program such as

ponanZa,”
“Back to School Promo”
“Pamasko or
the store discounts the Selling prices of certa
in product lines that are
relevant to the program, but passes the disc
patti cipating spon ount to affected principals. Non-
sors may be fined for not joining
the promo,
R equired: Determine the operating inc
ome and non-operating income,
Solution:
primary income Other operating income Non-operating income
|Comm
Commissi
issi€ onincome | Display allowance Fines
Gondola rental
TT
Listing fee
Other examples:
Establish ment Primary income Other operating income
Retail stores * Sales of goods ¢ Consignment commission
- - e Display rack rental
|Manufacturing business | e Sales of goods ° Sale of scrap
Installment dealers ¢ Sales of goods e Interest income
Accounting firm e Professional fees | e Income from seminars
e Interest from client notes
e Reimbursement for out-
of-pocket expenses
Non-operating income
1. Gains from dealings in properties
2. Distribution from a general professional partnership, exempt co-ownership
and taxable estates or trusts
3. Casual active income
4. Passive income or those not connected to the primary or secondary activities
of the business such as:
a. interest income on advances to employees
b. investment income subject to regular tax
Illustration 1: Basic
Mr. Lagawe, a manufacturer of goods under the accrual basis, opted to claim optional
standard deduction. Aside from manufacturing, Mr. Lagawe also leases a portion of his
building to other businesses. The following relate to his income:
Gross recorded sales P 4,000,000
Sales returns, allowances, and discounts 200,000
Interest income from bond investment 15,000
Interest income from customers’ notes 100,000
Gain on sale of equipment 20,000
Dividend from domestic a corporation 18,000
577

The Optional Standard Deductions shall be computed as follows:
Gross sales P 4,000,000

Other operating revenues or receipts:
Interest from customers’ notes ____100,000
Sales/revenues/receipts/fees P 4,400,000
Less: sales returns, allowances and discounts ___200,000
Net sales/revenues/receipts/fees P 4,200,000
Multiply by OSD rate _— «40%
Optional Standard Deductions P_1,680,000
The net income of Mr. Lagawe shall be presented in the income tax return as follows:
Sales/Revenues/Receipts/Fees P 4,400,000
Less: sales returns, allowances and discounts 200,000
Total sales/revenues/receipts/fees P 4,200,000
Less: Cost of sales or services le
Gross Income from Business/Profession P 4,200,000
Add: Non-operating income
Interest income - bond investment P 15,000
Gain on sale of equipment 20,000 35,000
Less: Optional Standard Deduction 1,680,000
__
Note: The dividend income from domestic corporations is subject to final tax.
Illustration 2: Comprehensive
The following relates to Mr. Agra Rhaman, an audit practitioner and accredited CPE
service provider:
Compensation income, net of mandatory deductions P__300,000
Billings for services rendered during the year:
Audit P 4,500,000
Continuing professional education (CPE) seminars 200,000
Total P_4,700,000
Collections during the year from:
Past year audit fee billings P 500,000
Current year audit fee billings 3,500,000
CPE seminars 150,000
Interest on bank deposits 34,000
Sale of used equipment (book value is P100,000) 150,000
Total P_4,334,000
Required: Compute the OSD and present the taxable net income assuming the
practitioner is under the:
1. Accrual basis of accounting
2. Cash basis of accounting
578

~
solution:
fessional fees (revenue) —

ro . Other taxable income from operations 200,000
Fees from seminars
P 4,700,000
ues OSD
net revenby: rate
109%
M ultiply Pp 1 880.000
optional Standard Deductions
and presented in the income tax return aS

The taxable net income shall be computed
follows:
ensation i e P__ 300,000
P 4,700,000
Net Sales/Revenues/ Receipts/Fees mk
Less: Cost of services P 4,700,000
ion
Gross Income from Business/Profess
income
Add: Other non-operating taxable 50,000
00)
Gain on sale of equipment (P150,000-P100,0 P 4,750,000
Total gross income 1,880,000
Less: Optional standard deductions 2,870,000
Net income P_3.170,000
Taxable income
Note:
deposits is subject to final tax.
1. Theinterest from bank
pment is a non-operating income.
2. Thegainon sale of used equi pensation income and the net inco
me.
The taxable income is the sum of taxabl e com
3,
Cash Basis of Accounting

00, 000 + P3,500,000) P 4,000,000
m pro fes sio nal fee s (P5
Receipts fro tax
er tax abl e inc ome fro m ope rations not subject to final
Add: Oth 150,000
fro m spo nso red sem ina rs
Receip ts P 4,150,000
Net gross receipts _____ 40%
Multiply by OSD rate P_1,660,000
Optional Standard Deductions
put ed and pre sen ted in the tax return as follows:
l be com
The taxable net income shal
p__300,00
Net Sales /Revenues/Receipts/Fees —_—_—_—_——
Less: Cost of services P 4,150,000
Gross Income from Business/Profes sion
gain 50,00
Add: Other non-operating taxable income ~ P 4,200,000
gross income
Total Opt ‘ ons
1,6 60,000
5 2.540,000
Less; ion sta ndard dedu cti
al sta
Taxable income
579

RULES ON DETERMINATION OF OSD FOR CORPORATE TAXPAYERS
Gross Income
Under the NIRC, gross income was restrictively defined as:
a. Gross Sales less sales return, discounts and allowances and cost of sales; or
b. Gross receipts, less sales returns, discounts and allowances and cost of
services
However, under the amendments introduced by RA 9504, gross income for

purposes of the corporate OSD pertains to all gross income subject to the
regular income tax. There is no distinction between gross income from
operations and gross income from non-operating sources. Thus, the corporate
OSD is computed as follows:
Net Sales/Revenues/Receipts/Fees P = XXX,XXX
Less: Cost of sales or services XXX,XXX
Gross income from operations P _XXX,XXX
Add: Other taxable income, not subject to final tax XXX.XXX
Total gross income P XXX,XXX
Multiply by: OSD percentage 40%
Optional standard deduction P___xxx,.xxx
Corporate sellers of goods

Illustration
Samar Corporation, a taxpayer under the accrual basis of accounting, opted to deduct
OSD. The following relates to its results of operations:
Gross sales, net of returns, allowances, and discounts P 3,850,000
Gain on sale of building 500,000
Dividend from domestic corporation 50,000
Beginning inventory P 300,000

Net purchases 3,000,000
Ending inventory 800,000
Recorded administrative and selling expenses P 760,000
The cost of goods sold shall be determined as follows:

Add: Net purchases 3,000,000
Total goods available for sale P 3,300,000
Less: Ending inventory 800,000
Cost of sales P_2,500,000
The OSD shall be computed as follows:
Gross sales, net of returns, allowances and discounts P 3,850,000
580

cpapte r 18°C ~ OPtON
operat
Standard Deduct
Al ions lon
ass income from
Gr jother taxable income not sy
bject to final tax P 1,350,000
Gain on sale of building
income
701d BOS ncn rat 500.00
multiply by: 6 P 1,850,000
40%
0 ptional standard deduction
-corporate
Note: . Inter-C
dividend is exempt under final i r=
: ncome tax,
he taxable net income of the corporation shal

income tax return as follows: all be computed and presented in the
Net Sales /Revenues/Receipts/Fees

P 3,850,000
tess: Cost of sales 7 000
cross income from operations , 000
Add: ‘ Other taxable income
j not subject
j to fin , 0
al tax P Lose ey
Total gross income
’ oun
Less: Optional standard deductions 0,000
taxable net income
corporate Sellers of Services
Illustration
Kahleens Realty Corporation, a lessor of commercial spaces, opted to claim optional
standard deduction. The following data relates to the current year:
Gross receipts from rental of commercial spaces P 3,600,000
Other receipts
Interest on lessees’ notes P 100,000
Fees from ads on building 30,000
____16,000 146,000
Interest income on time deposits
Accrued but uncollected income
P 400,000
Rent
Interest on lessees’ notes __20,000 420,000
40,000
Gain on cash sale of fully depreciated equipment
Cost of services:
Cost of services paid, including :
ti on an d su pp li es ex pe nse P 1,200, 000
deprec ia P 1,500,0 00
cost of services 300,000
Accrued or unpaid minng
i come assumi g the
pr es en t the ta xa bl e net in
the OSD and
Required: Determine
taxpayer is using:
, Accrual basis of accounting
: Cash basis of accounting
581
Solution:
' L Basis of A inp:
Rent revenue (P3,600,000 cash + P400,000 accrued) P 4,000,000

Add: Other revenue from operations
Interest on lessees’ notes (P100K+20K) P 120,000
Fees from ads on building 30,000 150,000
Total revenues P 4,150,000
Less: Cost of services (P1,200,000 + P300,000 accrued) 1,500,000
Gain on sale of equipment ____ 40,000
Multiply by: OSD rate 40%
Optional standard deduction P_1,076,000
The taxable net income shall be presented in the income tax return as follows:
Add: Other taxable income not subject to final tax 40,000
Less: Optional standard deduction 76,000
Taxable net income P_1,614,000
Cash is of i
Gross receipts from rentals (exclude accrued items) P 3,600,000
Add: Other receipts from operations
Interest on lessees’ notes P 100,000
Fees from ads on building 30,000 130,000
Total gross receipts P 3,730,000
Less: Cost of services (exclude accrued items) 1,200,000
Multiply by: OSD rate 40%
Optional standard deduction P_1,028,000
Note: Under the cash basis, the gross receipts exclude accrued income. Similarly, the cost of
services also excludes accrued direct expenses.
582

B-C- Optional Standard Deduction
té .
cr abl e net income shall be presented in the income tax return as follows:
qh et es revenues/Receip, ts/Fees P 3,730,000
a
’
Neyess"
“ostcome
of sae
from operatatiions
Gro ther taxable income not subject to final tax
P 2,530,000
40,000
pat gross income : P 2,570,000
gota optional standard deductions 1,028,000
rable net income P 1,542,000
at constitute cost of services?
of services includes all direct costs and expenses necessary to provide the
oi ice required by the customer such as:
salaries and employee benefits of personnel, consultants, and specialists
a sjirectly rendering the service
cost of facilities directly utilized in providing the service such as depreciation
"or rental of equipment used and cost of supplies
the cost of services of banks includes interest expense.
filustra tion 1
REO Review Center Inc. provides preparatory review services for professional
examinees. REO had the following expenses:
salaries of reviewers P 800,000
Administrative staff salaries 80,000
Marketing salaries and other expenses 150,000
Rent expense on review rooms 300,000
Rent on administrative offices 100,000
Printing costs of reviewee handouts 100,000
Classroom & library electricity expense 30,000
Classroom supplies expense 5,000
Loss on sale of old chairs 15,000
Interest expense 50,000
The following shall be the direct cost of services:
Salaries of reviewers P 800,000
Rent expense on review rooms 300,000
Printing costs of reviewee handouts 100,000
qsoom & library electricity expense 30,000
Cost nom supplies expense __5,000
Services P_ 1,235,000
Ote. s
tes Administrative and marketing expenses are excluded.
583
> Scanned with CamScanner

OE —~—
ion
Chapter 13-C - Optional Standard Deduct
Illustration 2
during a year:
KLA Construction Corp. has the following expenses
Materials used P 3,000,000
Salaries expense
Engineers and architects P 400,000
Construction workers 2,000,000
General Manager 200,000
Office staff 300,000 2,900,000
Supplies expense
Construction supplies P 300,000
Office supplies 50,000 350,000
Depreciation expense
Equipment and machineries P 800,000
Office building 400,000
Office equipment 300,000 1,500,000
Utilities expense (electricity, water and gas)
On-site utilities P 250,000
Office utilities 150,000 400,000
Taxes and licenses 500,000
Total expenses P_8.850,000
The following shall constitute the direct cost of services:

Materials used P 3,000,000
Construction salaries expense
Project engineers and architects P 400,000
Construction workers 2,000,000 2,400,000
Construction supplies expense 300,000
Depreciation on equipment and machineries 800,000
On-site utilities expense 250,000
Cost of services P_6,750,000
Taxpayers with complex operations are advised to secure a ruling from the BIR on
the composition of their direct cost of services.
OSD FOR GENERAL PROFESSIONAL PARTNERSHIPS

A general professional partnership (GPP) is not a taxable entity. It is merely
viewed as a “pass-through” entity where income is ultimately taxed to the
partners. Each partner shall report as gross income his distributive share, actually
or constructively received, in the net income of the GPP.
584
TP tee cn

s
craptel 43-C - Optional Standard Deduction
rermination of net income of a GPP

urposes of computing the distributive share of the partners, the net income
af the partnership shall be computed in the same manner as a corporation.
(sec 26, NIRC)
al standard
Thus, 4 GPP can choose either the itemized deduction or the option
eduction in computing its distributable net income. The allowable deduction for
, GPP electing to deduct OSD shall be 40% of gross income similar to the OSD
allowed for corporations,
peductions against partner’s share in net income from GPP

The TRAIN law provides that either the GPP or the partner may avail of OSD.
However, the TRAIN law retained the old rule which based individual OSD on
gross receipts or gross sales and did not adopt the proposal to revert it back on
gross income. This rendered the OSD option of GPP partners under the TRAIN law
their share
purely academic. Thus, partners in GPP cannot claim OSD against
in net income. The share in the net income of the GPP is not gross receipt but
rather a gross income. Gross receipt refers to collection from rendering of
services. GPP partners are not rendering their services to the GPP as a client.
sales
it must be clarified however that partners may use OSD against their gross
or receipts from business or profession. They are only precluded from claiming
OSD against their share in net income of the GPP.
No more allowed deduction against share in the net income of GPP
Before the TRAIN law revision, a partner can claim itemized deductions from his
share in the net income of a GPP, provided that the GPP also uses itemized
deductions in computing its distributive net income and not OSD. Under RR8-
can no longer claim deductions from their share in GPP net
2018, a partner
income.
Share in the net income vs. Actual profit distribution

GPP as
The share in the net income is computed from the net income of the
determined by tax rules. The actual profit distribution is computed from net
income as determined by generally accepted accounting rules. The latter is the
actual amount of profit that will be transferred to the capital of each partner.
These two normally differ because of the following:
a. Deductibility limits or requirements on some items of deductions
b. Use of OSD by the general professional partnership
Deduction limits, deductibility requirements, and OSD
Any tax rule which will allow deductions at an amount different from the actual
expense will make the taxable net income different from the accounting net
income. For instance, an expense that is allowed only as a deduction in part or is
585

Oe

disallowed in totality will result in higher tax net income over accounting net
. income.
It must be noted that the amount to be included in the gross income of the partner
is the share in net income for purposes of the regular tax and not the actual profit
distribution.
Atty. Garcia is a partner in BCBC Company, a general professional partnership, owning
¥, of the firm. Atty. Garcia also derives separate professional income from his
accounting profession.
The following data pertain to the GPP and income and expenses of Atty. Garcia during
a year:
GPP Garcia
Professional fees P 4,000,000 P 500,000
Interest on bank deposit 32,000 8,000
Direct cost of services 1,900,000 120,000
Other deductible expenses 700,000 240,000
The following expenses were incurred by Garcia for the general professional
partnership but were not reimbursed by the firm:
a. P20,000 receipted in the name of the partnership but was not reimbursed for lack
of secondary approval
b. P15,000 receipted in the name of Garcia, not in the name of the firm
Case A: The GPP uses itemized deduction
The net income of the GPP shall be computed as follows:
Net Sales/Revenues/Receipt/Fees P 4,000,000

Less: Direct cost of services __
1,900,000
Add: Interest on bank deposits 32,000
Less: Regular allowable itemized deductions 700,000
Distributable net income P_1,432,000
The distributive net income of the GPP is not taxable to the GPP. It shall be taxable to
the partners in their individual capacity. Atty. Garcia’s share in the net income shall be
computed as P1,432,000 x % = P 358,000.
Note: GPPs are not subject to final tax. The interest income from bank deposits which is not
subjected to final tax shall be added as part of the distributable income subject to regular tax to
the partners in their individual capacities.
586
CTL ews

equired: Determine the net income of Atty. Garcia assuming he uses:
Itemized deduction
9, Optional standard deduction
jIlustration 1: Partner uses itemized deductions

Atty. Garcia’s taxable net income shall be computed as follows:
Net Sales/revenues/receipts/fees P 500,000

Add: Other taxable income from operations -
Total Sales/Revenues/Receipts/Fees P 500,000
Less: Cost of services 120,000
Gross Income from Business/Profession P 380,000
Share in net income of a GPP 358,000
Total Gross Income P 738,000
Other deductible expense P 240,000
Unreimbursed GPP expense 0 240,000
Taxable net income P__ 498,000
Note:
1. Note that interest from bank deposit is subject to final tax to an individual taxpayer hence
the same is not included in gross income subject to regular tax.
2. The share in the net income of the GPP is presented as “non-operating taxable income” in
the income tax return of the partner.
3. Nomore deduction is allowed against share in GPP net income.
Illustration 2: Garcia uses optional standard deduction


L
Add: Other taxable income from operations
Less: Cost of services 2 ee
sy
P 500,000
Gross Income from Business/Profession
358,000
Share in GPP net income
Less: Optional Standard Deduction (40% x P500,000 ) 200,0
__ 00
Taxable net income P___ 658,000
Case B: The GPP uses Optional standard deduction

The distributive net income of the GPP shall be computed as follows:
587

Professional fees P 4,000,000

Less: Direct cost of services 1,900,000
Add: Interest from bank 32,000
Less: Optio nal Stand ard Deduc tion (P2,1 32,00 0 x 40%) 852,800
Distributive net income P_1,279,200
Note in this case that the distributable net income is different with the actual
accounting net income (P1,432,000). Despite this, the amount taxable to Atty. Garcia
shall be based on the distributive net income as computed, hence, P1,279,200/4 =
P319,800. ;
Illustration 1: Garcia uses itemized deduction
Sales/revenues/receipts/fees P 500,000
Add: Other taxable income from operations _
Less: Cost of services ___120,000
Share in net income of a GPP 319,800

Other deductible expense P 240,000
Unreimbursed GPP expense 0 240,000
Illustration 2: Garcia uses optional standard deduction

Add: Other taxable income from operations St se
Less: Cost of services -
Add: Non-operating taxable income
Share in the net income of a GPP 319,800
Less: Optional standard deduction (40% x P500,000) 200,000
588

optional Standard Deduction and NOLCO

is an item of
NOLCO cannot be claimed simultaneously with OSD because NOLCO
NOLCO is deemed
deduction while OSD is a proxy for all itemized deductions.
included in the claimable OSD.
optional Standard Deduction and Net Capital Loss Carry Over
of individual taxpayers. The net
gsD does not replace net capital loss carry-over gain which is an
capital loss carry-over is used in the measurement of net capital net
is not an item of deduction. Hence, a
item of gross income. In other words, it against the net
capital loss carry-over from the prior year can still be deducted
to deduct optional
capital gain of the current year even if the taxpayer opted
standard deduction for the current year.
OSD?
WHEN TO INDICATE THE OPTION TO USE
can be indicated only in the annual
For individual taxpayers, the option to use OSD
returns are mere estimates of gross
income tax return since quarterly income tax
income and deductions. be
taxpayers, the option to use OSD for the taxable year must
For corporate
be applied to all subsequent quarters
indicated in the first quarter return and shall
use either itemized deduction or OSD is
and in the annual return. The option to
made.
irrevocable only for the current year it is
589

n
te r 13 -C - Op ti on al St andard Deductio a
Chap
EXERCISES
CHAPTER 13-C: SELF-TEST
d deduction?
1, What is optional sta ndar im OSD? ; —
Wh o cannot claim ome.
2. Who can cla im OS D?
erating in operating inc
come and a Dnon-bas ate
on be tw een an op e for a Cor por
3. Explain the distincti and the OS
an individual taxpay|er
4 Discuss the OSD base for .
i an dth e partners,
taxpayer. essional partnership
OSD for a general prof
5. Discuss the rules of
in his
True or False
rd ded uct ion is pre sum ed unless the taxpayer signified
1. The optional sta nda
itemized deductions. for OSD can claim deduction for
return his intention to claim
, corporations opting
Unlike individual taxpayers i
cost of goods sold or cost of services. income including personal
against gross
OSD is in lieu of all deductions
exemptions. oss income.
to 40% of gross sa les or receipts OF gr
OSD up
Individuals can claim
are not req uir e dt o su bm it financial statements.
OSD
Taxpayers opting to use the
for qua rte rly ret u rns , then use the itemized
Taxpayers may use the OSD
deductions for the annual return. of their gross sales or receipts.
of ind ivi dua ls is 60%
The taxable net income will hav e taxable income equivalent to
opt ing to use OSD
Corporate taxpayers
60% of their gross income. nts.
urns, allowances, and discou
“Gross sales” is net of sales ret the primary operations of the
“Gross receipts” inc lude other receipts inci dental to
business. receipts.
are included in gross sales or
11. Gains in dealings in properties excluding
and non-operating gross income
12. Corporate OSD is 40% of operating and exempt income.
gains tax
only those subject to final tax or capital shall
For taxpayers using the accrual basis in the sales of services, gross receipts
13.
mean revenue. ”
14. Administrative and selling exp
enses are included in “cost of services.
cla im ite miz ed ded uct ion aga inst his share in the net income of a
LS. A partner can
ed the partnership is using the OSD.
general professional partnership provid ral
16. A partner can claim OSD out
of his share in the net income of a gene
professional partnership. l
his share in the net income of a genera
17. A partner can claim OSD out of
is not using the OSD.
professional partnership provided the partnership income, except
18, No deduction of whatever nature is allo
wed against compensation
its.
mandatory deductions and exempt benef
and net capital loss carry-over are items of
19. Net operating loss carry-over
eously with OSD.
deductions; hence, both are not claimable simultan
operating loss carry over.
20. The option to elect OSD may result into a net
590

|
ill No. 1:
gxercise Dr
c a t e d a x p a y e r c a n c l a i m o p t i o n a l standard deductions:
check the box if the ind i t
7, Resident citizen
9, Resident alien _
Kz Non-resident citizen
-4, Non-resident alien
-zRegular domestic corporation
6. Regular resident foreign corporation
7,_ Special corporation
g, Corporations subject to special tax regime
9, Business partnership
10. General professional partnership
exercise Drill No. 2

The gross income of a taxpayer who opted to use the optional standard deductions is
presented below:

Less: sales discounts, allowances, and returns 180,000
Net sales P 5,020,000
Less: Cost of goods sold 00.000
Gross income P_2,520.000
Required:
Determine the Optional Standard Deductions assuming the taxpayer is:
1. An individual
2. Acorporation

A taxpayer had the following results of operations:
Professional fees, P5,200,000 collected P 6,000,000

Less: Cost of services, including P200,000
accrued and unpaid 100,000
Gross income P2,900,000
Recorded expenses, P200,000 accrued and unpaid 1,400,000
Net income P1,500,000
Required:
Determine the net income of the taxpayer under each of the following conditions
under the OSD:
Cash basis Accrual basis
591

The income statement ofa taxpayer which opted for OSD is disclosed as follows:
Sales, net of returns, allowances and discounts P5,000,000

Less: Cost of sales _3,000,000
Add: Other income
Gain on sale of machinery P 100,000
Gain on sale of domestic stocks 92,000 192,000
Less: Deductions 1,300,000
Net income P_ 892,000
Required:
Compute the optional standard deductions assuming the taxpayer is:
1. anindividual taxpayer
2. acorporate taxpayer

1. When purely employed, who of the following can claim OSD?
a. Resident citizen c. Resident alien
b. Non-resident citizen d. None of these
2. The optional standard deduction for corporate taxpayers is

a. 40% of gross income
b. 40% of gross sales or gross receipts
c. 40% of total deductions claimed with or without support
d. 40% of cost of goods sold or direct cost of services
3. Which of the following individuals engaged in business cannot claim optional

standard deduction?
b. Non-resident citizen d. NRA-NETB
4. Which is correct with optional standard deduction?

a. Itreplaces itemized deduction.
b. Itreplaces P250,000 annual exemption for individuals.
c. Bothaandb.
d. Neither anor b.
5. The optional standard deduction for individual taxpayers is

40% of gross income
ao op
40% of gross sales or gross receipts

40% of total deductions claimed with or without support
40% of the lower of actual deductible expenses and 40% of gross sales or
gross receipts
592

a ee
one of the following can claim OSD. Which is it?

6.
a, A self-employed individual taxpayer
p. A taxpayer earning mix of passive income and compensation income
c, Ataxpayer earning purely passive income
d. A taxpayer earning purely compensation income
7, Which is not covered by the optional standard deduction?

a. Premium for health and hospitalization insurance
bp. Senior citizen’s discount
c. Contribution expense
d. Salaries expense
g. Which can claim deduction by itemized deduction only?

a. Employed taxpayers
b. Non-resident alien engaged in trade or business
c. General professional partnership
d. Business partnership
9. Which is not included in corporate OSD?

a. Costof sales c. Administrative expenses
b. Selling expenses d. Creditable withholding tax
10. Corporate OSD is in lieu of all expenses such as the following except
a. Cost of sales or cost of services
b. Regular itemized allowable deductions
c. Special itemized allowable deductions
d. Net operating loss carry over
11. Individual OSD is in lieu of all expenses, such as but not including
a. cost of sales or cost of services.
b. regular itemized allowable deductions.
c. special itemized allowable deductions.
d. net capital loss carry over.

1. The OSD of individuals under the cash basis is based on
a. gross sales. c. total gross income.
b. gross receipts. d. gross income from operations. .
2. The OSD of corporations under the cash basis is based on

a. Gross sales c. Total gross income
b. Gross receipts d. Gross income from operations
is irrevocable
3. The option to elect OSD
made.
a. inthe year it was
years.
b. over the next three
593

ae
rd Deduction
Chapter 13-C - Optional Standa
c, inthe quarter it was made.
option was made.
d._ effective the quarter in the year the
In the income tax return:
?
Which is presented as operating income

' £ q i .
7
a. Gain on sale of ordinary assets ssional part ners hip
general profe
b. Share in the distributive net income of
a business partnership
c. Share in the distributive net income of
d. Gross profit from the sale of goods
uring concern?
Which is not part of cost of services for a manufact
a. Wages of plant employees
b. Factory supplies
c. Depreciation on plant equipment
d. Interest expense
The OSD of corporations under the accrual basis is based on

a. Gross sales c. Total gross income
b. Gross receipts d. Total gross income from operations
Which is not deducted in the determination of gross sales?

a. Sales returns
b. Allowances for defective merchandise
c. Sales discounts
d. Bad debt expense
For purposes of the OSD, which is not deducted in the determination of gross
receipts?
a. Sales returns c. Discounts
b. Allowances d. Cost of services
Non-operating income subject to regular tax is excluded in the OSD base of

a. individual taxpayers.
b. corporate taxpayers.
c. both individual taxpayers and corporate taxpayers.
d. neither individual taxpayers nor corporate taxpayers.
10, Cost of services of banks excludes the following except

a. Advertising expense c. Interest expense on depositors accounts
b. Local tax expense d. Loss on sale of assets
11, In the determination of the distributive net income of the general professional
partnership,
a. Partners can claim OSD on their share in the net income of a general
professional partnership.
b. Partners can claim OSD on their share in the net income of a general
professional partnership provided the latter uses itemized deductions.
594

partners can claim OSD on their share in the net income of a general
professional partnership provided the latter uses OSD.
qd. Partners cannot claim OSD on their share in the net income of a general
professional partnership.
12 Which is correct with respect to the deduction claimable by a partner against his
" share in the distributive net income of a general professional partnership?
a. The partner can claim OSD provided the general professional partnership also
claims OSD.
b, The partner can claim OSD provided the general professional partnership also
claims OSD. :
c. The partner can claim itemized deduction provided the general professional
partnership also uses itemized deductions.
d. The partner can claim itemized deduction provided the general professional
partnership does not use itemized deductions.
13. Individual income taxpayer must indicate his or her option to claim OSD on
a. the first quarter return during the year.
b. or before July 1 of the current year.
c. the annual income tax return.
d. annual or quarterly return at his or her option.
14. Corporate income taxpayers must indicate their options to claim OSD on
a. the first quarter return during the year.
b. or before July 1 of the current year.
c. the annual income tax return.
d. annual or quarterly return at his or her option.

1. Anindividual taxpayer, reported P800,000 net income after the following:
Cost of sales P 600,000
Administrative expense 300,000
Selling expenses 400,000
Compute the optional standard deductions.
a. P320,000 c. P600,000
b. P560,000 d. P840,000
2. Inthe immediately preceding problem, what is the net income under OSD?
a. P1,260,000 c. P1,540,000
P1,500,000 d. P1,780,000
3. An individual taxpayer opted to claim optional standard deduction in his first
quarter income tax return in 2021. Total recorded sales before P150,000 sales
discounts and returns were P2,350,000. Total recorded expenses were
595
ag

n
Chapter 13-C - Optional Standard Deductio
of sales
P1,180,000 of which only P340,000 were adequately supported. The cost
was P900,000.
er wants to
What is the total allowable deduction for 2021 assuming the taxpay
claim itemized deduction in the annual return?
a. P340,000 c. P1,240,000
b. P900,000 d. P1,180,000
ng:
4. The claimable deduction ofa taxpayer during the year consisted of the followi
Cost of sales P 600,000
Regular itemized allowable deductions 400,000
Special itemized deductions, including P100,000
deduction incentives 300,000
Net operating loss carry-over 150,000
is in lieu of
To an individual taxpayer, optional standard deduction
a. P750,000 c. P1,300,000
b. P850,000 d. P1,450,000
in the immediately preceding problem is a
5. Assuming that the taxpayer
corporation, OSD is in lieu of
a. P750,000 c. P1,300,000
b. P850,000 d. P1,450,000
6. Mrs. Vicky had the following in 2021:
Sales P 3,400,000
Administrative expenses 300,000
Selling expenses 500,000
Other taxable income from operations 120,000
Other non-operating income 80,000
Passive income, net of final taxes
70,000
Assuming Mrs. Vicky elects to deduct OSD, compute the OSD.

a. P800,000 c. P1,408,000
b. P1,360,000 d. P1,440,000
the taxpayer is
7. Inthe immediately preceding problem, compute the OSD assuming
a corporation.
a. P1i,440,000 c. P928,000
b. P960,000 d. P880,000
practitioner and part-time employee derived the following

8. A self-employed
income in 2021:
596

chapte + 13-C - Optional Standard Deduction
Gross receipts P 800,000
Compensation income 300,000
pividend income from a Real Estate Investment Trust 20,000
Assuming the taxpayer opted to avail of OSD, what is the OSD?

_ P320,000 c. P440,000
b. P328,000 d. P448,000
9, The following relate to collections upon billings, receipts, and unpaid billings of a
practitioner during the year:
Receipts from current year billings P 800,000
Receipts from last year’s billings 200,000
Current year uncollected billings 100,000
Reimbursement for out-of-pocket expenses 20,000
Compute the OSD if the taxpayer is under the accrual basis.

a. P408,000 c. P360,000
b. P368,000 d. P320,000
10. Compute the OSD if the taxpayer is under the cash basis.
a. P408,000 c. P368,000
b. P368,000 d. P360,000

1. A private educational institution subject to a 10% preferential corporate tax
reported the following in the first quarter of 2021:
Gross tuition revenues P13,800,000
Less: Tuition discounts and remissions 400,000
Gross income from canteen and bookstores 600,000
Compute the allowable OSD if the school wants to claim OSD.

a. PO c. P5,600,000
b. P2,920,000 d. P5,760,000
2. The results of operations of the taxpayer resulted in the following:

Gross sales revenue P 7,200,000
Beginning inventory 300,000
Purchases 5,800,000
Ending inventory 1,400,000
Other operating revenues 100,000
Non-operating income 20,000
597

Assuming the taxpayer is an individual, what is the optional standard deductlon?
a, P1,040,000 c. P2,920,000
b. P1,048,000 d. P2,928,000
preceding problem, what is the OSD if the taxpayer fs a

3. In the immediately
corporation?
a. P1,040,000 c. P2,920,000
b. P1,048,000 d. P2,928,000
the year-
4. A professional practitioner has total uncollected billings of P200,000 at
end of 2021. Additional billings totaling P2,500,000 were made in 2021,
Uncollected billings at the year-end of 2020 were P400,000.
If he chooses to claim OSD, determine the gross receipts.

a. P2,100,000 c. P2,500,000
b. P2,300,000 d. P2,700,000
5. In the second quarter of 2021, Mr. Mariano reported total gross income of
claimed
P2,000,000 after P1,500,000 direct cost of services. If Mr. Mariano
le OSD in the
itemized deduction in the first quarter, what is the amount of claimab
second quarter if he wishes to change to the OSD?
a PO c. P800,000
b. P600,000 d. P1,400,000
6. Mr. Mimaropa reported the following data in 2021:
Sales P 1,000,000
Cost of sales 600,000
Interest income from bank deposits 40,000
Deductible expenses 300,000
Non-deductible expenses 200,000
Answer the following questions:

Compute the optional standard deduction.
a. P440,000 c. P400,000
b. P424,000 d. P160,000
7. Compute the taxable income of Mr. Mimaropa.

a. P700,000 c. P340,000
b. P660,000 d. P300,000
rd
8. Assuming that Mimaropa is a corporate taxpayer, compute the optional standa
deduction.
a. P440,000 c. P 184,000
b. P424,000 d. P160,000
598

pter 14 - Regular Income Taxation: Individuals
cha
HAPTER 14
REGULAR INCOME TAXATION: INDIVIDUALS
—_
chapter Overview and Objectives
All tax rules relevant to income taxation of individuals are already covered in
revious chapters. This chapter aims to provide an integration of all income tax
rules which are specifically relevant to individual taxpayers in order to simulate a
closer to reality depiction of individual income taxation in practice.
After this chapter, readers are expected to demonstrate mastery on the following:
Determination of tax under the regular income tax option
Determination of tax under the 8% income tax option
jsrerer
Preparation of quarterly and consolidated or adjustment return

Rules relevant to taxable estates and trusts
Rules on installment payment of the regular tax
INDIVIDUAL INCOME TAXATION
The Regular Income Tax for Individuals

The income tax of individuals is determined through the following tax table:
Year 2018 to Year 2022

/ -‘Taxableincome = | Tax due
.P250,000andbelow | Nome(O%) ss
| Above P250,000 to P400,000 20% of excess above P250,000 3 Ss
| Above P400,000 to P800,000 _P30,000
+ 25% of excess over P400,000
_Above P800,000
to P2,000,000__|_P130,000
+ 30% of excess
over P800,000
|Above P2,000,000
to P8,000,000_| P490,000 + 32% of excess over P2,000,000
“Above P8,000,000_ | 2,410,000
+ 35% of excess over P8,000,000
Year 2023 Onwards
| Taxableincome. | SSS Traxdlue

P250,000andbelow | None(0%) SCS
to P400,000__| 15% of excess above P250,000
Above P250,000
Above P400,000 to P800,000_
_|_ P22,500 + 20% of excess over P400,000 |
Above P800,000 to P2,000,000
_| P102,500
+ 25% of excess over P800,000 |
Above P 2,000,000 to P8,000,000 _ _P402,500+ 30% of excess over P2,000,000
Above P8,000,000 _P2,205,500
+ 35%
599

duals
la r In co me Taxation: Indivi
gu
Chapter 14 - Re
;
der to simplify
nal exemption in s or net spersbnal ;
onc be denied that in dividua’ i
e ae nnPeEoe
ivdav er :tl re
it cannot nuts
a
Thce e TR AI N
ng in order to survive. Theoretica y: t ie
the ances suct as cost of livi os e that lays the golden
no t to ki ll th e go
e to ma ke pr ov is ion for this in order
na
egg. TRAIalN Tlahw
the e
ns es . of in di
St vi etalers,y C
du
and cost of liivivingng ex
pe
e x X P
In lii eu of personal i come exe mption (
00 annual in d for every
roviides for the P250,0 table and is automatically of
grante
amount is inserted in the tax
Th er e is no mo re separate accounting
regular income tax.
individual subject to
.
personal exemptions
X
ER S SU BJ EC T TO PR OGRESSIVE INCOME TA
TAXP AY vers the following:
The progressive inco me tax for individuals co
1. Citizens
zen
g. Resident citi
b. Non-resident citizen
2. Aliens
a. Resident alien
business
b. Non-resident alien engaged in
3. Taxable estate
4. Taxable trust
OME TAXPAYERS
CLASSIFICATION OF INDIVIDUAL INC
al income taxpayers are classified as:
For purposes of the regular tax, individu
er
1, Pure compensation income earn
earner
2. Pure business or professional income
3. Mixed income earner
PURE COMPENSATION EARNER

imum wage earners, is subject
The compensation income of employees, except min
torily required to
to withholding tax on compensation. Every employer is manda
employees.
deduct the withholding tax from the compensation income of their
Treatment of the withholding tax on compensation

tly
1. Full payment - if the employee has no other income and the tax is correc
withheld
2. Tax credit - if the employee has other taxable income or if the tax is not
correctly withheld
600

a
_
chapter 44 - Regular Income Taxation: Individuals

)
em ployees with no other income

wrthe employee has no other taxable income, he may avail of the substituted filing
stem. Under this system, the withholding tax on compensation is considered
enough evidence of tax compliance of the employee, provided that the employer
withheld the correct tax.
conditions of the Substituted Filing System

1, The employee received purely compensation income during the year.
2. The employee received the income from only one employer in the Philippines
during the taxable year.
3, The amount of tax due from the employee at the end of the year equals the
amount of tax withheld by the employer (i.e., correct tax is withheld).
4, The employee's spouse also complies with all 3 conditions stated above.
5. The employer files the annual information return (BIR Form No. 1604-CF).
6. The employer issues BIR Form No. 2316 to each employee.
Employees who do not meet the conditions of the substituted filing system shall
file the annual or final adjustment return not later than April 15 of the following
year and claim Form 2316 as tax credit.
Consolidated or Adjustment Return

Consolidated or adjustment return is needed when:
1. Correct tax is not withheld
2. Employee or his spouse has other income
Correct tax due not withheld by employer

The correct tax due of the employee will least likely to be withheld by the
employer in the following cases:
1. Concurrent employment
2. Successive employment during the year
3. Incurrence of error by the employer
An annual return needs to be filed to adjust the tax due to the correct amount of
tax. This is referred to as an adjustment return. The employee shall claim Form
2316 as tax credit and pay residual tax due or claim excess withheld amount as tax
credit or tax refund.
employment
Illustration 1: Concurrent
Vic Luna is both employed in Yousee Company and in Youbee Company. He has the
following income and withheld tax during the year:
_Yousee_ _Youbee
Taxable compensation income P450,000 P_350,000
Withheld tax P_ 42,500 P_20,000
601

Ae igege tS e EI SE UL eee EE ee NL
Chapter 14 = Regular Income Taxation: Individuals
Mr, Estoque’s consolidated Income tax shall be computed as follows:

Taxable compensation income (P?450,0004+P350,000) P_800,000
Income tax due, per Individual tax table P 130,000

Less: Tax withheld by employers (P42,500+P20,000) 62,500
Income tax payable or (refundable)
Hlustration 2: Successive Employment

In 2021, Emerald resigned from Blue Moon Company and transferred employment to
Gagamba Company. The following were his income:
BlueMoon _Gagamba_
Taxable compensation income P 300,000 P 400,000
Tax withheld from compensation 10,000 30,000
Zeus shall file a consolidated return covering his total 2020 income from both
employment and pay the residual tax as follows:
Taxable compensation income (P300,000 + P400,000) P__700,000

Income tax due, per individual tax table P 105,000
Less: Tax withheld by both employers 40,000
Income tax payable or (refundable) P__ 65,000
Hlustration 3: Employer error

In 2021, Jeffs employer withheld a total of P 56,000 out of his P460,000 taxable
Since the tax withheld is erroneous, Jeff shall file an annual adjustment return and pay
residual tax due or claim refund or tax credit for excess withholding, as follows:
Taxable compensation income P_460,000

Income tax due, per individual tax table P 45,000
Less: Tax withheld by employers (_ 56,000)
Income tax payable or (refundable) (P__11,000)
Jeff shall use BIR Form 1700 as adjustment return.
Employees has other taxable income

Employees other income subject to regular tax may come from:
a. Casual sources
b. Engagement in business or practice ofa profession
602

chapter 44 — Regular Income Taxation: Individuals
torily required to
yethe employee has other taxable income, the employee is manda
sources in his return.
fle an annual income tax return to incorporate other income
.
ris is referred as a consolidated income tax return
urn may either be:

the consolidated income tax ret
ss or profession
1, BIR Form 1700 - if the employee is not engaged in busine
ee is also engaged in
BIR Form 1701 for mixed income earners - if the employ
" pusiness and or profession
(B IR Fo rm 23 16 ) given by the employer

wi th ho ld in g aseontax meccredco . ensation
itmp
th e
shall be cl ai me d
r casual income
illustration - With othe ceived the following compensati
on and benefits
Mr. Su ng Ki is a sal es ex ec ut iv e. He re
from his employer:
P 987,000
Gross compensation income 84,000
Exempt benefits 81,000
vacation)
Fringe benefits (paid personal HDMF
40,000
Mandatory deduction for SSS, PhilHealth, 145,750
under Form 2316
Total withholding tax deducted
er income:
He also derived the following oth
P 76,500
s, net of 15% withholding tax
Interest income from corporate bond 16,000
of 20% final tax
Interest income from bank deposits, net 124,000
d 3 years)
Gain on sale of arts collection (hel P__216,500
Total income
his other income subject to regular tax:
Mr. Ki shall file BIR Form 1700 to include
) P 90,000
Interest income from bonds (P76,500 / 85% 62,000
- long term)
Gain on sale of arts collection (P124,000 x 50%
P_152,000
Other income
income from
ge bene fits of an exec utiv e - a mana gerial employee and the interest
Note: The frin ect to regular tax. The
tax. These are excluded in gross income subj
deposits are subject to final cred itable.
associated final taxes are not-
The tax credits shall be:

P 145,750
Withholding tax on compensation (Form 2316)
Withholding tax on the interest (P9OK x 15% under Form 2307) 13,500
603

: Individuals
Chapter 14 — Regular Income Taxation
ed as:
Mr. Ki’s taxable income shall be comput
P 987,000
P 40,000
Less: Mandatory deductions 124,000
84,000
Exempt benefits
P 863,000
152,000
Add: Other income subject to regular tax P1,015,000
Taxable income
Mr. Ki’s income tax still due shall be computed as:
Income tax due P 194,500
Less: Tax credit
Form 2316 P 145,750
Form 2307 13.500 159,250
p_ _ 35,250
Income tax still due
a
The consolidation procedures of employees engaged in business or practice of
profession will be discussed under mixed income earners.
PURE BUSINESS AND/OR PROFESSIONAL INCOME EARNER

file
Individual taxpayers engaged in business or practice of profession shall
quarterly income tax returns (BIR Form 1701Q) and an annual tax return:
Quarterly Tax Returns Deadline
1st Quarter ITR - 1701Q May 15 of the same calendar year
2d Quarter ITR- 1701Q August 15 of the same calendar year
3rd Quarter ITR- 1701Q November 15 of the same calendar year
Annual ITR- 1701A April 15, next year
The taxable income from business or profession may be computed using:

1. Itemized deductions
2. Optional standard deduction
Illustration 1 - Itemized deduction

Mrs. Macipag, a self-employed taxpayer, had the following quarterly income details:
Jan.- March _April-June _July-Sept.. _ Oct .
- Dec.
Gross receipts P 500,000 P 520,000 P 550,000 P 580,000
Less: Cost of services 120,000 200,000 250,000 270,000
Gross income P_ 380,000 P 320,000 P__ 300,000 P__310,000
Less: Expenses
- Business expenses P 100,000 P 130,000 P 120,000 P 140,000
- Personal expenses 60,000 63,000 58,000 85,000
Total P__160,000 93,000 P__178,000 P___225,000
Net income P_220,000 P__127,000 P__122,000 P___85,000
604

chapter 14 - Regular Income Taxation: Individu
als
Jan.-March _April - June uly -

withholding tax P 4,000 Pp 10,000 P 15,000 P_—-14,000
Her quarterly and annual taxable income and tax due shall be comput
cumulative year-to-date taxable income as follows: asin her
1st Qtr. 2nd Otr. 3rd Otr. Annual ITR

Gross receipts P 500,000 P 1,020,000 P 1,570,000 P 2,150,000
Less: Cost of sales —120,000 _ 320,000 570,000 840,000
Gross income P 380,000 P 700,000 P 1,000,000 P 1,310,000
Less: Deductions 100,000 __ 230,000 350,000 490,000
Taxable net income P280,000 P_470,000 P__650,000 P820,000
Income tax due P 6,000 P 47,500 P 92,500 P 136,000
Less: Tax credits
- CWT this quarter P 4,000 P 10,000 P 15,000 P 14,000
- CWT prior quarters 0 4,000 14,000 29,000
Total credits P4000 P__14,000 P__—-29,000 P —-43.000
P 2,000P_ 33,500P 63,500P 93,000
Less: Estimated tax paid XN ‘ XN
in prior quarters 0 4 2000 “4 33500 4 63500

Illustration 2 - Optional standard deduction

Let us assume the same data in the preceding problem, except that the taxpayer opted
to use the optional standard deduction.
The quarterly and annual taxable income and tax due shall be computed as follows:
_istQtr. _2ndQtr. _ 3rd Qtr. _Annual ITR_

Gross receipts P 500,000 P1,020,000 P 1,570,000 P 2,150,000
Less: OSD - 40% 200,000 __ 408,000 628,000 __ 860,000
Taxable net income P_300,000P 612,000 P___942,000 P_ 1,290,000
Income tax due P 10,000 P 83,000 P 172,600 P 277,000

Less: Tax credits
- CWT this quarter P 4,000P 10,000 P 15,000 P 14,000
- CWT prior quarters 0 4,000 14,000 29,000
Total credits
P_ 4,000 P__14,000 P__ 29.000 P__43,000
P 6,000P 69,000P 143,600 P 234,000
Less: Estimated tax paid
0_“
‘, N NK
in prior quarters
6000 4 69000 4 143600
Pp6,000 P__63,000 P 74,600 P 90,400
605
LP
Eh t—~™t
Chapter 14 — Regular Income Taxation: Individuals
Excess quarterly estimated tax

at
The excess quarterly estimated tax payments over the quarterly tax due may,
the option of the taxpayer, be carried forward to quarters of the succeeding
taxable year or claimed through tax refund. The option must be indicated in the
annual adjustment return. Once the option to carry-over is made, it becomes
irrevocable for that period.
The option to refund

The option to refund may be in the form of cash or a tax credit certificate. If the
option to refund is selected, the excess refundable amount should not be carried
over as tax credit to the succeeding quarters of the following year.
MIXED INCOME EARNER

The compensation income of mixed income earners will be subjected to the
withholding tax on compensation by their employers. Mixed income earners
would report their business or professional income on a quarterly basis under
Form 1701Q. The compensation income shall not be reported in the quarterly
return. It shall be included only in the annual consolidated return. Mixed income
taxpayers shall use BIR Form 1701.
Illustration
To facilitate our discussion, let us assume the same data in the previous illustration,
except that Mrs. Macipag is also employed with the following income during the year:
Employment Jan.-March April-June - Sept.

_July Oct. - Dec.
Taxable compensation P 250,000 P 260,500 P 245,250 P 231,250
Withholding tax on compensation (Form 2316) - 93,750
Business
Gross income P 380,000 P 320,000 P 300,000 P 310,000
Itemized deductions 100,000 130,000 120,000 140,000
Net income P_280,000 P__190,000 P__180,000 P___170,000
Form 2307s P 4,000 P 10,000 P 15,000 P 14,000
Quarterly tax
Mrs. Macipag shall report her quarterly income from business or profession and pay
the same quarterly income tax due as computed in the previous illustration:
Jan.- March - June
_April July-Sept.. _Annual ITR
Quarterly income tax due P____2,000 P31,500 P 30,000 P 222
606

ome t
the taxable income of Mrs. Macipag for the year shall be computed as:
taxable compensation income
¢ P_ 987,000

Less! anand 190,000
Net incom P_ 820,000
Taxable income P__1,807,000
Mrs. Macipag shall file BIR Form 1701 for her consolidated income. Her annual income
tax still due shall be computed as:

Less: Tax credit
WH tax on compensation (Form 2316) P 93,750
Expanded withholding tax (Form 2307s) 43,000
Estimated tax payments (Form 1701Qs) 63,500 200,250
Income tax still due P____ 231,850
THE 8% INCOME TAX OPTION

The TRAIN law introduced a new tax scheme for individual taxpayers - the 8%
optional income tax. The option to be taxed at 8% must be indicated in the first
quarter income tax return or in the first quarter percentage tax return. When
made, the option shall be irrevocable for the calendar year.
Nature:
1. A bundled tax - it is in lieu of:
a. Regular income tax, determined through the income tax table
b. 3% general percentage tax (now temporarily 1% during this pandemic)
2. An annual option
g
It is valid for as long as the taxpayer remained as a non-VAT taxpayer durin
the year. It will be invalidated in favor of the regular income tax once the
taxpayer becomes a VAT taxpayer during the year.
ly
3. Paid quarterly and annual
Scope:
earners
a. Pure business or professional income
b. Mixed income earners
607

Business Tax: A Basic Overview

Aside from income tax, individuals engaged in business or exercise of a profession
are also required to pay a business tax which is either a 3% percentage tax or g
12% value added tax (VAT).
Types of business taxpayers:

1. Exempt businesses - not subject to VAT or percentage tax —
Examples:
a. Businesses selling agricultural products in original state
b. Agricultural contract growers
c. Book publishers or bookstores
2. Business specifically subject to other percentage taxes - not subject to VAT
but subject to percentage tax of various rates
Examples:
a. Common carriers by land, such as taxi, jeepney, bus and car for hire
b. Operators of cockpits, cabarets, clubs, jai-alai or horse race track
3. Vatable businesses - other businesses
Vatable businesses either pay:
a. 12% value added tax - if their annual sales exceed P3,000,000 or when
they registered as VAT taxpayers
b. 3% general percentage tax - if their annual sales do not exceed the
P3,000,000 and did not opt to voluntary register as VAT taxpayers
Business taxation is an advanced tax topic which will be discussed under Business
& Transfer Taxation by the same author.
Normally, businesses or professional practitioners start small as non-VAT
taxpayers. As their business or practice gains traction and reach the P3M VAT
threshold, they are mandatorily required to register as VAT taxpayers.
Covered businesses:
Only vatable businesses who are below the P3M annual VAT threshold and did not
register as VAT taxpayer can opt to be taxed under the 8% income tax.
Thus, the option is not available to:

1. VAT-registered business taxpayers
2. VAT-exempt business taxpayers such as:
a. Exempt businesses
b. Businesses specifically subject to other percentage taxes
3. Individuals receiving income not subject to business tax, such as:
a. Partners receiving share in net income of a general professional partnership
608

Tax obligations of individual non
-VAT taxpayers:
| “yal
Regular tax opti
Regular income tax on 8% Income tax op
3 quarterly 1701Qs tion
and 1 3 quarterly 1701Qs
annual 1701 and 1
Percentage tax annual 1701A
4 quarterly 15519
i None
VAT-registered taxpay
ers pay VAT and regula
r income tax.
Tax basis:
ax shall be based upon
of the individual taxpay the gross sales or gross
er that is Subject to receipt
subject to regular tax are 3% percentage tax. Other
added to the basis. income
Illustration
Assume a taxpa yer who is pur
ely engaged in busi ness had
P100,000 other i ncome subjec sales of P2,000,000,
t to regular tax and expe nses ofP
840,000.
The 8% income tax would be computed as:
Gross sales or gross receipts

Add: Other taxable income subject to regular tax P 2,000,000
Total 100,000
Less: Annual exempt income P 2,100,000
(___250,000)
Net total
Multiply by: Optional income tax rate P 1,850,000
89
8% income tax
P__148,000
Mixed income earner
Compensation income is not subject
to business tax. Hence, it cannot be
to the 8% income tax. Due to this, the subjected
income ta x due from compen
separately determined using the inc sa ti on shall be
ome tax table while the 8% income
tax from
609

the business or profession shall be separately computed. For this purpose, the
classification rule as discussed in prior chapters must be observed.
Since the use of the income tax table in computing the tax due from compensation
effectively allowed the taxpayer claim of P250,000 annual income exemption as
embedded in the tax table, there will be no more P250,000 deduction allowable
against the basis of the 8% income tax. Furthermore, if the amount of
compensation income does not exceed P250,000, the unutilized deduction cannot
be deducted against business income since the TRAIN law did not contemplate a
deduction cross-over.
Illustration 1
A mixed income earner realized P920,000 from compensation, P2,000,000 in sales,
P100,000 other income subject to regular tax and incurred P480,000 in expenses.
The income tax due under the 8% income tax option shall be computed as:
Income Tax due
Less: Lower tax bracket in tax table 800,000 P 130,000
Residual income P 120,000
Multiply by: Incremental tax rate 30% 36,000
Income tax due on compensation income P 166,000
Gross sales or gross receipts P 2,000,000

Add: Other income subject to regular tax 100,000
Total P 2,100,000
Multiply by: Optional income tax rate 8% 168,000
Income tax due P_- 334,000
Illustration 2
A mixed income earner realized P2,000,000 in sales, P100,000 in other income subject
to regular tax and earned P150,000 compensation from part-time employment.
Income Tax due
Taxable net income P 150,000
Less: Lower tax bracket in tax table _—__ 250,000 P 0
Excess ( 100,000)
Income tax due from compensation P 0
Gross sales or gross receipts P 2,000,000
Add: Other income subject to regular tax 100,000
Total P 2,100,000
Multiply by: Optional income tax rate 8% 168,000
Income tax due P___168.000
610

note: . The P10

100,000 excess of P250 ,000 over the ion i
against the basis of the 8%. No deduction cross-over is allowed, eek aaa
INTEGRATED ILLUSTRATION
Integrated Illustration 1 - Pure business or professional income earner
Mr. ment
Mr Cardenas, a proprietor
in 2021: of a furniture sho p, recorded the following
ing i
income
Net sales of finished goods, net of P 18,000 CWTs P 2,382,000

200,000
sales of scraps and trimmings P 2.582.000
Total Sales/Revenues/Receipts/Fees
1200.0 00
Less: Cost of sales or services
P 1,382,000
Gross Income from Business/Profession Pears
Add: Other income
P 12,000
Dividend income
Gain from sale of stocks, net of capital gains tax 68,000
Interest income from deposits 16,000
Gain on sale of machinery held for 6 years 40,000
Gain on sale of bonds held for 2 years 20,000
14,000 170,000
Interest income from bonds
P 1,552,000
Total Income
600,000
Less: Administrative and selling expenses
P__952,000
Net income
Regular Tax Option

Cardenas shall be computed as follows:
The 2021 taxable net income of Mr.
s (P2 ,382,000 + P1 8,000) P 2,400,000
Net Sal es/ Rev enu es/ Rec eip ts/ Fee
200,000
er tax abl e inc ome fro m operations - Scrap sales
Add: Oth P 2,600,000
es/ Rec eip ts/ Fee s
Total Sales/Revenu 1.200,000
sal es or ser vic es
Less: Cost of P 1,400,000
ome fro m Bus ine ss/ Pro fession
Gross Inc
ome subject to regular tax
Add: Non-operating inc P 40,000
mac hin ery
Gain on sale of 10,000
20Kx 50% - long-term)
Gain on sale of bonds (P 14,000 64,000
ds
Interest income from bon P 1,464,000
Total Gro ss Inc ome
enses) ____ 600,000
uct ion s (Bu sin ess exp
Less: Allowable ded P__ 864,000
me
Taxable net inco
for 2021:
the reg ula r tax opt ion , he would pay the following
Under
611

a. Regular income tax:

where the taxable income qualifies 800,000 P 130,000
Excess . P 64,000
Multiply by: bracket marginal rate 30% 19,200
Income tax due P___149,200
b. 3% business tax:
Multiply by: Percentage tax rate 3%
Total percentage tax due Pp 78,000
Total taxes under the regular tax option P__ 227,200
The regular income tax would be paid in three quarterly tax filing (1701Q) and an
annual income tax return (1701). The 3% percentage tax will be paid in four
quarterly percentage tax returns (2551Q).
The 8% Income Tax Option

Under the 8% income tax option, he would pay the following:
Total Sales/Revenues/Receipts/Fees P 2,600,000
Add: Non-operating income subject to regular tax
Gain on sale of machinery P 40,000
Gain on sale of bonds (P20Kx 50% - long-term) 10,000
Interest income from bonds 14,000 64,000
Total Gross Income P 2,664,000
Less: Individual income exemption on income tax 250,000
Total P 2,414,000
Multiply by: Optional income tax rate 8%
Income tax due P__ 193,120
While it appears that the 8% option is the better option in the illustration, it is not
always the case. At the start of the year wherein the option is made, you could not tell
for sure which option would yield the lesser tax, except only if you have accurate
information systems that enables accurate forecasting of future performance.
Integrated Illustration 2 -Mixed income earner

To facilitate our illustration, we shall assume the same data in the previous illustration
except Mr. Cardenas also earned P1,200,000 in compensation income in 2021.
Regular Tax Option

Under the regular tax option, he would pay the following for 2021:
612

qin
napter 14 - Regular Income Taxation: Individuals
, Regular income tax:

o

P 1,200,000
saxable net income
Jaxable income ——864,000
Lower limi : P 2,064,000
where the taxable income i
qualifies _2,000,000 P 490,000
Excess
: oo :
Multiply by: bracket marginal rate —_—20,420
Total income tax due
3% business tax:
P 2.600,000
= 3%;
Multiply by: Percentage tax rate
P__78,000
Total percentage tax due
P588,480
Total tax paid under the regular option
The 8% Income Tax Option

g:
Under the 8% income tax option, he would pay the followin
a. Regular income tax:
g00,000 P 130,000
where the taxable income qualifies
P 400,000
Excess
30% 120,000
Multiply by: bracket marginal rate P___250,000
ome
Total income tax due on compensation inc
3% business tax:
P 2,600,000
Net Sales/Revenues/ Receipts/Fees
Add: Other income subject to regular tax
P 40,000
Gain on sale of machinery
10,000
Gain on sale of bonds
____ 14,000
Interest income from bonds
P 2,664,000
Total 8% 213,120
Multiply by: Percentage tax rate
on p___463,120
Total tax paid under the regular opti
INTERIM TRANSITION TO THE VAT VALUE ADDED TAX ily

ex ce ed in g t he P3M threshold during the year a re mandator
Indi vi du al s be fore the end of
required t o change registration from non-VAT to a VAT taxpayer
yer exceeded the P3,000,000 threshold.
the month following the month the taxpa
613
LO,
Sanne sd with CamSeanner
Chapter 14 ~ Regular Income Taxation: Individuals
The taxpayer shall pay regular income tax for his income during the entire year
and pay VAT prospectively starting the month he became a VAT taxpayer. The 8%
income tax payments shall be considered as tax credit against the regular income
tax due. The taxpayer shall be required to pay the 3% percentage tax for sales or
receipts generated before becoming a VAT taxpayer. |
Illustration
Mr. Chinito, a pure business income earner, opted to the 8% income tax in the first
quarter of 2020. In June of 2020, he exceeded the P3M VAT threshold.
Jan.-March April-June. _July - Sept.
Sales P 1,200,000 P 2,000,000 P 1,000,000
Cost of sales 600,000 1,000,000 500,000
Gross profit P 600,000 P 1,000,000 P 500,000
Gain on sale of domestic stocks 20,000 30,000
Gain on sale of used equipment 40,000
Total income P 620,000 P 1,040,000 P 530,000
Less: Expenses 320,000 450,000 300,000
Net income P__ 300,000 P__590,000 P__230,000
1st Quarter (January to March)

Mr. Chinito’s first quarter total tax due under the 8% income tax shall be:
Sales P 1,200,000
Less: 250,000
Total P 950,000
Multiply by: Optional income tax rate B%
Total income tax due P__76,000
24 Quarter (April to June)

Mr. Chinito exceeded the P3M VAT threshold. He shall be subject to regular tax and
required to pay percentage tax on sales or receipts made since January 1.
The percentage tax due shall be:
Total sales from January to June P 3,200,000

Multiply by: Percentage tax rate 3%
Total percentage tax due p__96,000
as follows:
The taxable income of Mr. Chinito in the second quarter shall be computed
Sales P 3,200,000
614

FS alll
er 14- Regular Income Taxation: Individuals

chapt
oer income subject to regular tax 40,000
Toral income subject to regular tax P 1,640,000
Les}: .
peductions (business expenses) P 770,000
Percentage tax expense 96,000 866,000
Taxable income P___774,000

The 2“ quarter income tax due of Mr. Chinito shall be computed as:
Income Tax due
Less: Lower tax bracket 400,000 P 30,000
Excess P 374,000
Multiply by: Incremental tax rate 25% 93,500
Total tax due P 123,500
Less: Tax due in 15 Quarter 76,000
Income tax still due Pp 47,500
Mr. Chinito shall separately pay the P96,000 percentage tax which shall be assessed
upon VAT registration with the P47,500 income tax. Mr. Chinito shall pay the VAT
effective July 2020. The VAT system will be discussed extensively under Business &
Transfer Taxation.
3 Quarter (July to September)
Sales P 4,200,000
40,000
Other income subject to regular tax
P 2,140,000
Total income subject to regular tax
Less:
Deductions (business expenses) P 1,070,000
Percentage tax expense __96,000 ____ 1,166,000
Taxable income P__974,000
The 3" quarter income tax due of Mr. Chinito shall be computed as:
Ine Tax d
Less: Lower tax bracket —___ 800,000 P 130,000
Excess P= 174,000
_ 30% 52.200
Multiply by: Incremental tax rate
P 182,200
Total tax due 123.500
Less: Tax due in 24 Quarter
P____58,700
615

Chapter 14 ~ Regular Income Taxation: Individuals
Mr. Chinito shall separately pay the quarterly VAT aside from the P58,700 income tax.
tax return.
The same process will be followed until the annual income
TAXABLE ESTATES AND TRUSTS
Taxable Estates
t inistration. An
An estate is an income taxpayer if under judicial settlemen or adm
estate under extra-judicial settlement is not a taxpayer. The income of the estate
under extra-judicial settlement is taxable to the heirs.
Taxable Trusts
se
A revocable trust is not a taxpayer and is treated as a pass-through entity who
income is taxable to the grantor-trustor.
An irrevocable trust is a separate and distinct taxable entity (B/R Ruling 003-05,
July 22, 2005). A taxable trust is treated as an individual taxpayer and is allowed
P20,000 personal exemption.
Income taxable to an estate or trust under the NIRC

d
1. Income accumulated in trust for the benefit of unborn or unascertaine
person or persons with contingent interests and income accumulated or held
for future distribution under the terms of the will or trust
2. Income which is to be distributed currently by the fiduciary to the
beneficiaries and income collected by a guardian of an infant which is to be
held or distributed as the court may direct
3. Income received by estates of deceased persons during the period of
administration or settlement of the estate
4. Income which, in the discretion of the fiduciary, may be either distmbuted to
the beneficiaries or accumulated
Taxable income of the deceased taxpayers

In the case of the death of a taxpayer, there shall be included in computing taxable
income for the taxable period in which falls the date of his death, amounts accrued
up to the date of his death if not otherwise properly includible in respect of such
period or a prior period. (Sec. 44, NIRC)
Illustration 1: Deceased taxpayer
Miss X died on July 15, 2021. Her estate underwent judicial settlement. She had the
following income in 2021:

Rental income __.. __
9 60,000
Total P_ 1,280,000
The decedent leases a property which earns P80,000 monthly rental.

616

oter 4- Regular Income Taxation: Individuals
“nh \
> accounting period of the decedent shall be terminated at the date of death. Since
, estate is under judicial administration, the estate of the decedent shall be
tn tered qs an individual taxpayer.
Thus, the following income shall be reported to the income tax return of the:
te of th
Decedent decedent
compensation income P 320,000 -
Renta income (6.5 months x P 80,000) 520,000 -
Renta income (5.5 months x P 80,000) P_440,000
Taxabie income P_ 840,000 P_440,000
Note:
j, Janvary 1 to July 15, 2021 is 6.5 months while July 16 to December 31 is 5.5 months.
2. Cut-off of income at the date of death is necessary not only for proper accounting of income
taxes but also for estate taxes. In estate taxation, income accruing before death are part of
gross estate while those accruing after that are excluded.
If the estate of the decedent is administered extra-judicially, her heirs will report their
share in the P440,000 net rentals in their individual tax returns.
Illustration 2: Estate
The estate of Mr. Barbel has P850,000 gross income before business expenses of
P200,000. The estate administrator distributed P300,000 to the heirs in accordance
with the will of Mr. Barbel.
The taxable income of the estate will be computed as follows:

Less:
Regular allowable deductions P200,000
Income distribution to heirs 300,000 500,000
Taxable net income P.350,000
Note: It must be recalled that income distribution from the estate is a special deduction against
the gross income of the estate. The heirs shall include the P300,000 income distribution in their
taxable income.
Illustration 3: Trust
Mr. Batman designated in irrevocable trust a property in favor of Robin and appointed
Superman as trustee. The property earned P720,000 income before expenses of
P200,000 and trust fees of P50,000. In accordance with the trust indenture, , $ superman
distributed P100,000 to Robin.
The taxable income of the trust shall be computed as follows:
617


Less: Regular allowable deductions P250,000
Income distribution to beneficiaries _100,000 _ 350,000
Taxable net income P_370,000
Note: Robin will report the P100,000 income distribution in his taxable income. Superman
will
report the P50,000 trust fees in his gross income.
Consolidation of two or more trusts

Multiple irrevocable trusts designated by the same grantor for the benefit of
the
same beneficiary shall be consolidated for purposes of income tax.
The consolidation of irrevocable trusts is necessary to eliminate
tax savings which
the grantor may derive by deliberately splitting the corpus
of the trusts into
several trusts.
Illustration 1
Don Ambrocio designated three trusts all in favor of his daughter,
Cindy:
Operating Distribution
Trust Designation Trustee income to Cindy
Trust 1 Irrevocable AJ P 400,000 P 40,000
Trust 2 Irrevocable BJ 600,000 60,000
Trust 3 Revocable C] 400,000 80,000
The trustees of Trust 1 and Trust 2 shall prepare tax returns
covering the income of
the property held under their control as follows:
Trust 1 Trust 2
Operating income P 400,000 P 600,000
Less: Special itemized deduction
Income distribution to beneficiary 40,000 60,000
Taxable income P__ 360,000 P540,000
Income tax due per tax table P___22,000 P 65,000
For purposes of income taxation, the income of Trust 1 and Trust
2 will be
consolidated as follows:
Consolidated
Trust 1 Trust 2 Trust
Taxable net income P 360,000 P540,000 P 900,000
Income tax due
P 160,000
Allocated tax due P 64,000 P 96,000
Less: Income tax paid 22,000 65,000 87,000
Income tax still due P 42.000 P _31,000 =P 73,000
618

chante’ 44 — Regular Income Taxation: Individuals
idated tax due is allocated to o T Trust 1 and Trust 2 as follows:

a consolidate
Th Trust 1 = P360,000/P900,000 x P160,000 = P64,000 _
Trust 2 = P540,000/P900,000 x P160,000 = P96,000
rust 3 is not taxable as it is revocable. The entire P400,000 income of Trust 3
including the P80,000 income distribution to Cindy will be included in the taxable
income of Don Ambrocio.
[Illustration 2: Trusts with retention of certain rights

Mr. Masagana designated two trusts as follows:
|Trust_| Beneficiary | Designation

—— .
Irrevocable as to corpus and income, however,

Trust | Cassandra Mr. Masagana reserves the power to revest to
1 (daughter) himself 1/4 of the corpus upon the happening of
ae some specified contingencies.
Irrevocable as to corpus and income except that
Trust Alexander P30,000 of the annual income will be used to pay
|2 4 (son) the life insurance premium of Mr. Masagana.
Both trusts made
Trust 1 and Trust 2 earned P200,000 and P300,000 during the year.
P50,000 and P100,000,
distributions to their respective beneficiaries amounting to
respectively.
involve separate beneficiaries.
The two trusts will not be consolidated because they
e any income pertaining to that
However, the grantor shall include in his taxable incom
ved power to revoke. Any income
part of the corpus over which the grantor has reser
or shall likewise be included in the
of trusts reserved for the benefit of the grant
taxable income of the grantor.
2 shall be computed as follows:
The taxable income of Trust 1 and Trust
Trust 1 Trust 2 -
P 200,000 P 300,000
Operating income
deductions
Less: Special regular itemized *50,000 30,000
Income pertaining to grantor 100,000
50,000
Distribution to beneficiaries
p__100,000 P__170,000
Taxable net income
Note:
er of the corpus in Trust 1.
1. The grantor has reserved power to revoke one quart
x %4), shall be taxable
2. The P50,000 incom e pertaining to such part, computed as (P200,000
upon the grantor. t of the life insurance of the
3. The P30,000 income which shall be reserved for the paymen
grantor shall be likewise taxable to the grantor.
619

Employee trust funds

An employees’ trust which forms part of a pension, stock bonus, or profit sharing
plan of an employer for the benefit of some or all of his employees is exempt from
income taxes imposed under the NIRC. (Sec. 60(B), NIRC) It must be emphasized
that this exemption covers final tax, capital gains tax, and regular income tax.
Requisite of Exemption of Employee’s trust

1. Contributions are made to the trust by the employer, employees, or both for
the purpose of distributing to such employees the earnings and principal of
the fund accumulated by the trust in accordance with such plan.
2. Under the trust instrument, it is impossible at any time prior to the
satisfaction of all liabilities with respect to employees under the trust, for any
part of the corpus or income to be (within the taxable year or thereafter) used
for or diverted to purposes other than for the exclusive benefit of his
employees.
3. Any amount actually distributed to any employee or distributee shall be
taxable to him in the year in which so distributed to the extent that it exceeds
the amount contributed by such employee or distributee.
Return of Married Taxpayers

Married individuals shall file a return for the taxable year to include the income of
both spouses, computing separately their individual income tax based on their
respective total taxable income. Where it is impracticable for the spouses to file
one return, each spouse may file a separate return of income. If any income cannot
be definitely attributed to or identified as income exclusively earned or realized
by either of the spouses, the same shall be divided equally between the spouses
for the purpose of determining their respective taxable incomes.
Illustration
Mr. and Mrs. Cruz have a house which they rent to tenants earning them P1,400,000 a
year. Mr. Cruz is an accountant while Mrs. Cruz is an employed nurse. Mr. Cruz earned
P 2,800,000 before P900,000 direct costs and P600,000 expenses. Mrs. Cruz also
earned P1,200,000 compensation. Mr. and Mrs. Cruz compiled the following:
Mr. Cruz Mrs. Cruz
Form 2307s P 140,000
Payments under 1701Qs 340,000
Form 2316s P_ 250,000
Total P_480,000 P_250,000
The income tax and still due from the spouses shall be reported as follows:
620

—Mr.Cruz _ Mrs, Cruz

et Sales/ Revenues/Receipts/Fees P. 2,800,000
da: Other taxable income from operation i i 0
Total sales/revenues/receipts/fees P 2,800,000
Less: Cost of sales or services _ 900,000
Gross Income from business/profession P 2,700,000 P 0
Add: Non-operating income (rental income) 700,000 700,000
Total Gross income P 3,400,000 P 700,000
—Mr. Cruz __Mrs. Cruz
P 3,400,000 P 700,000
Total Gross income
ns
Less: Allowable deductio 600,000 -
P 2,800,000 P 700,000
Net income
Compensation income
P 0 P_1,200,000
Taxable income P__2,800,000 P1,900,000
P 746,000 P 460,000
Income tax due
480,000 250,000
Less: Tax credit
P 266,000 P 110,000
Tax still due
Aggregate amount payable P__ 376,000
Income of unmarried minors from property received from parents

The income of unmarried minors derived from property received from a living
parent shall be included in the return of the parent except when:
1. The donor’s tax has been paid on such property.
2. The transfer of such property is exempt from donor's tax.
INDIVIDUALS WITH PERSONAL EQUITY RETIREMENT ACCOUNTS (PERA)

It must be recalled from Chapter 8 that individuals which contributes to a PERA
account is exempt from income tax on said contribution and are entitled to a tax
credit equivalent to 5% of said contributions.
Illustration
Mr. and Mrs. Black have four qualified dependents. The spouses had the following data
during 2021:
Mr. Black Mrs. Black
Gross compensation, net SSS, PhilHealth & HDMF 500,000 P 420,000
Withholding tax on compensation income 23,000 13,000
Contributions to PERA account 120,000 80,000
Payments for health insurance 5,000 3,000
The taxable income and tax due of Mr. and Mrs. Black shall be computed as follows:
621

Gross compensation, net mandatory deductions P 500,000 P 420,000

Less: Exempt Qualified PERA contribution ———100,000 ___80,000 |
Taxable compensation income P___ 400,000 P33 40,000
Income tax due, per tax table P 30,000 P 18,000
Less: Tax credits
CWT on compensation P 23,000 13,000
5% on Qualified PERA contribution 5,000 4,000
Total tax credits P 28,000 P 17,000
Tax still due and payable P 2,000 P 1,000
Note:
1, Only up to the P100,000 maximum allowable contributions per year could qualify as PERA
contributions. The limit is applied on the basis of per individual contributo
r.
2. The 5% tax credit must be supported by certificate from the PERA
account administrator.
Return of Persons under Disability

If the taxpayer is unable to make his own return, the return may
be made by his
duly authorized agent or representative or by the guardian
or other person
charged with the care of his person or property. The princi
pal and _ his
representative or guardian assuming the responsibility of makin
g the return shall
be responsible for penalties provided for erroneous, false,
or fraudulent returns.
Signature in the return is presumed correct

The fact that an individual's name is signed to a filed
return shall be prima facie
evidence for all purposes that the return was actually signe
d by him.
ATTACHMENT TO THE ANNUAL INCOME TAX RETURN
For taxpayers claiming the itemized deduction, taxpayers shall fill-up an
attachment form. The attachment form shows the composition
of the itemized
deductions in the annual income tax returns plus required discl
osures by law or
regulations. This is mandatory and shall be filed together with
the income tax
return. The required attachments were discussed in Chapter 7.
WHEN AND WHERE TO FILE AND PAY TAX

1. For Electronic Filing and Payment System
(eFPS) taxpayers
The return shall be e-filed and the tax e-paid on
or before the 15¢ day of April
of each year covering the income for the preceding year
using the eFPS
facilities through the BIR website.
For Non-Electronic Filing and Payment Syst
em (non-eFPS) taxpayers
The return shall be filed and the tax paid on or befo
re the 15 day of April of
each year cove ring the income for the preceding year with:
622
OP eee.

3, Any authorized agent banks (AAB ) located within the jurisdiction of

the
Revenue District Officer (RDO) where the taxpayer is registered
pb, Revenue Collection Officer (RCO) under the jurisdicti where
the taxpayer is registered, if there is no AAG jurisdiction of the RDO
In case of “no payment returns,” the same shall be filed with the RDO where
the taxpayer is registered or has his legal residence or place of business in the
Philippines or with the concerned RCO under the same RDO
A “No payment return” pertains to tax returns without tax payable such as those
with negative or zero taxable income, those with exempt or nowit operation during
or refundable, or those
the period, those with tax creditable se with balance payable
only on the second installment.
3, For non-resident taxpayers
In case the taxpayer has no legal residence or place of business in the
Philippines, the return shall be filed with the Office of the Commissioner or
Revenue District Office No. 39, South Quezon City.
INSTALLMENT PAYMENT OF THE REGULAR INCOME TAX

(except
When the tax due is in excess of P2,000, individual taxpayers
corporations) may elect to pay the tax in two equal installments:
a. The first installment shall be paid at the time the return is filed.
the close of
b. The second installment is due on or before October 15 following
the calendar year.
payment, the whole
If any installment is not paid on or before the date fixed for its
with the delinquency
amount of the tax unpaid becomes due and payable together
penalties.
Illustration 1
of his income tax had a tax
An individual taxpayer availing of the installment payment and was
tax payments of P2,400
due of P10,000 in 2021. He made quarterly estimated
withheld with P2,000 in creditable withholding taxes.
l income tax return on
The first installment which shall be due upon filing of the annua
or before April 15, 2022 shall be:
Tax due on first installment (P10,000/2) P 5,000
Less:
Creditable withholding taxes P 2,000
Quarterly estimated tax payments 2,400 4,400
Tax payable P 600
623

TT
The second installment which shall be due on or before October 15, 2022 shall be:
Tax due on first installment (P10,000/2) P__5.000
Illustration 2
An individual taxpayer availing of the installment payment of his 2022 income tax had
a tax due of P7,000 and was subjected to creditable withholding tax of P4,000..
The first installment is nil. The taxpayer shall file a return, but with no payment.
Less: Creditable withholding tax 4,000
Tax payable (R 9.00)
The second installment due on or before October 15, 2022 shall be:

Less: Excess withholding tax in first installment _( 500)
Tax payable P__ 3,000
Illustration 3 - Late payment

Assume the same facts in the preceding illustration, except that the second installment
was paid on November 15, 2022.
The delay in payment shall result in the imposition of the penalties discussed in
Chapter 4. The taxpayer shall pay the following before compromise penalties:
Tax still due P 3,000

Add: Surcharge (25% x P3,000) 750
Interest (12% x 31/365 x P3,000) 31
Total amount due P__3,7810
WHO SHALL FILE THE INCOME TAX RETURN?

1. A resident citizen engaged in trade, business, or practice of profession within
and without the Philippines.
2. Aresident alien, non-resident citizen, or non-resident alien individual
engaged
in trade, business, or practice of profession within the Philippines.
3. A trustee of a trust, guardian of a minor, executor/administrator of an estate,
or any person acting in any fiduciary capacity for any person where such
trust,
estate, minor, or person is engaged in trade or business.
4. An individual engaged in trade or business or in the
exercise of their
profession and receiving compensation income as well.
624
re cere,

Vv Se x
+3" oe
wHO ARE NOT REQUIRED TO FILE INCOME TAX RETURN?

1 Minimum wage earners
2, An individual whose gross income does not exceed P250,000
3, An individual whose compensation income derived from one employer does
not exceed P60,000 and the income tax on which has been correctly withheld
4, Individuals whose income has been subjected to final withholding tax such as
in the case of non-resident aliens not engaged in trade or business
s, Pure compensation earners qualified under the substituted filing system
AMENDMENT OF INCOME TAX RETURN

The amounts indicated by the taxpayer in the income tax return are his assertions.
The same are deemed final unless amended by the taxpayer. Within three years
from the required date of filing of the return, the taxpayer can amend the same so
long as no Letter of Authority for investigation is issued by the BIR for the
examination of his tax return.
Amended returns shall not be subject to surcharges for late filing or late payment
but shall be imposed the interest penalties.
625
all

Chapter 14 - Regular Income Taxation: Individuals
Enumerate the conditions of the substituted filing system.
Discuss how the regular tax is computed for each type of individual taxpayer.
PONANMRYNE
Discuss the requisites of the 8% optional income tax.

Demonstrate how the computation of the 8% optional income tax.
Discuss the taxation of deceased taxpayers, the estate and trusts.
Demonstrate the consolidation of multiple trusts.
Discuss the exemption conditions of an employee trust fund.
When and where do individuals file and pay the regular income tax?
Discuss the conditions and rules of the installment payment of the regular income
tax.
10. Who are required to file income tax returns?
11. Who are not required to file income tax returns?
True or False
1, The husband and the wife are treated as separate taxable units. Each spouse shall
compute his or her taxable income, but both of them shall file a single return to
include the income of both spouses.
Arevocable trust does not pay income tax.
Estates under judicial administration are considered individual taxpayers.
Wh
Non-resident persons shall file their tax return to the Office of the Commissioner
of Internal Revenue.
The income distribution by a taxable estate or trust is a special deduction to the
estate or trust, but is an item of gross income to the recipient heir or beneficiary.
The income of minors from properties received as donations from parents is
taxable to the minor if the donation is exempt from the donor's tax .
The income of minors from properties received as donations from parents is
taxable to the parents if the donor’s tax on the donation is not paid.
A disabled person need not file a return by virtue of his disability.
The taxpayer’s signature in the income tax return is presumed prima facie correct.
Oo
Large taxpayers shall e-file their tax returns through the BIR Electronic Filing and
Payment System.
11. Two or more trusts are consolidated as a single trust when both are designated
for the same beneficiary without regard to their grantor.
12. When the grantor reserved for himself part of the income of the trust, the same
shall be treated as income of the grantor.
13. A trusteed employee pension fund does not pay income tax.
14. The substituted filing of tax returns does not apply when there is concurrent or
successive employment of the employee during the year.
15. An employee trust fund must be managed by the employer to be tax-exempt.
626
ST rere rere ee

oter 14 - Regular Income Taxation: Individuals
cha
qultiple-Choice: Theory - Part 1
An individual whose residence is not within the Philippines and who is not a
1.
citizen thereof
g, Resident citizen c. Resident alien
p. Non-resident alien d. Non-resident citizen
Who is a resident citizen?

a. Acitizen who went on tour abroad
b. A citizen of the Philippines who establishes to the satisfaction of the CIR the
fact of his physical presence abroad with a definite intention to reside therein
A citizen of the Philippines who leaves the Philippines during the taxable year
to reside abroad
A citizen of the Philippines who works and derives income abroad and whose
employment requires him to be physically present abroad most of the time
during the year
Which of the following is an individual whose residence is within the Philippines

but who is not a citizen thereof?
b. Non-resident alien d. Non-resident citizen
A non-resident alien is considered en gaged in trade or business in the

Philippines
if he stayed therein for
a. atleast 183 days. c. more than 183 days.
b. atleast 180 days. d. more than 180 days.
On which of the following dates shall a citizen who left
the Philippines during the
year be classified as a non-resident citizen for the year?
a. May 31 c. July 15
b. July 31 d. November 30
An alien shall be classified as resident in 2019 if he
arrived in the Philippines on
which of the following dates?
a. December 30, 2018 c. July 15, 2019
b. January 1, 2019 d. December 31, 2019
How long does a citizen have to
stay abroad before being classified as a non-
resident?
a. Atleast 183 days c. More than 183 days
b. Atleast 180 days d. More than 180 days
How long shall an alien have to stay in th ilipn}
resident alien? y i
€ Philippines before bein .
g classified as a
a. Atleast 183 days c. At least 1 year
b. More than 183 days d. More than 1 year
627

Chapter 14 - Regular Income Taxation: Individuals b
9. The length of stay of individuals for purposes of taxpayer classification js d.

reckoned as of
a. December 31 of the current year. A
b. December 31 of the prior year.
c. the day the alien individual leaves the Philippines.
d. the day the individual taxpayer files his income tax return.
10. Which of the following is not subject to regular income tax?

a. Resident citizen
b. Resident alien
c. Non-resident alien engaged in trade or business iN
11. In 2021, an alien who has been in the country since July 1, 2020 is classified as a ;
a. Resident citizen c. NRA- ETB
b. Resident alien d. NRA - NETB
|
12. In 2021, an American who had been a resident in the Philippines since August 14,
2021 isa
a. resident citizen. c. NRA - ETB
b. resident alien. d. NRA - NETB
Multiple-Choice: Theory - Part 2

,
1. A taxpayer who is both engaged in business and employment is not
a. subject to the withholding tax on salaries by his employer.
b. required to file quarterly income tax on business income.
quarterly tax
c. required to consolidate his quarterly mixed income for
reporting.
d. required to file an annual consolidated income tax return.
2. Which of the following may be subject to final tax?

13t month pay and other benefits
Supplemental compensation
ao op
Fringe benefits
Regular compensation income
e?
3. Which of the following cannot claim deduction from gross incom
a. Resident citizens deriving income solely from employment
b. Non-resident citizens engaged in business
oyment and business
c. Resident citizens deriving mixed income from empl
and business income
d. Resident aliens deriving a mix of passive income
m apply?
4. To which of the following does the substituted filing syste
a. Purely employed taxpayers
628
a te Se EE |

. 1a
Ef
ter 14 - Regular Income Taxation: Individuals
oe
cha p
p. Taxpayers purely engaged in business
<. Mixed income taxpayers
d. Any of these
Which is not a requisite of the substituted filing system?

° 3. The taxpayer must have only one source of business income.
b, The taxpayer must have only one employer during the year.
c. The taxpayer has no other source of gross income subject to regular tax other
than compensation.
d. The employer did not commit errors in the computation of the employee's
income tax.
6. Which of the following employees is not required to file an annual consolidated

income tax return?
a. Those with concurrent employment during the year
b. Those with successive employment during the year
c. Those deriving income distribution from a general professional partnership,
taxable trusts, or taxable estates
d. Those earning purely compensation income when the employer correctly
withheld the tax
7. Which individual income taxpayer can claim tax credit for foreign taxes paid?
a. Resident citizen c. Non-resident citizen
b. Resident alien d. All of these
8. What is the optional standard deduction claimable by individual income taxpayers

who are engaged in business?
a. 25% of gross income c. 40% of gross income
b. 25% of sales or receipt d. 40% of gross receipt or sales
9. When should individual income taxpayers submit their annual or consolidated
return for the year 2021?
a. April 15,2021
b. November 15, 2021
c. April 15,2022
d. 15 day of the fourth month following the fiscal year of the taxpayer
10. Which of the following taxes is a resident citizen or alien subject?

a. Final tax c. Regular tax
b. Capital gains tax d. All of these
11. Anon-resident alien, not engaged in trade or business
is not subject to
a. final tax. c. regular tax.
b. capital gains tax. d. None of these
629

ation: Individuals
Chapter 14 — Regular Income Tax
Multiple-Choice: Theory - Part 3

1. Who is not required to file quarterl
y income tax return?
a. Pure compensation income earner
b. Pure business income earner
c. Pure professional income earner
Who is not subject to withholding tax on compensation?

a. Mixed income earner
b. Pure compensation income earner
c. Minimum wage earner
d. None of these
An individual who want to pay the regular income tax using optional standard
deductions shall use
a. Form1700 c. Form 1701A
b. Form1701 d. Form 1702
Individuals opting to be taxed under 8% income tax shall use

Trusts and estates shall use which tax form

An adjustment return is least likely to be required when

a. The employee receives compensation from multiple employers
b. The employee has two successive employers during the year
c. The employer has under-withheld the tax
d. The employer has over-withheld the tax
A minimum wage earner who is subjected to withholding tax shall

a. file an adjustment return and pay residual tax.
b. file a quarterly income tax return.
c. file an adjustment return and claim tax refund.
d. do nothing.
If husband and wife are both employed, which is correct regarding their income
tax exemption in the tax table?
a. pac spouse shall be entitled to a P250,000 income tax exemption in the tax
table.
b. Each family is allowed P500,000 income tax exemption in the tax table.
630

or 144 - Regular Income Taxation: Individuals
chapt
C. . } e tax table
z oa lyy the
the husband shall be e allowed
al the P250,000 income
i tax exemption in the
husband
AAe income. is true? taxable income.
WhichP450,000
earned His wif
vife also earned P100,000
9.
a. There will be no aggregate tax due for the spouses.

bp. The husband pays tax while the wife is exempt.
c. The wife pays the tax while the husband is exempt.
d. Both spouses will report tax due.
is employed with P 700,000 taxable income while his wife is

10. If the husband
unemployed, he shall will be actually subject to tax on
qa. P 700,000 of income. c. P 350,000 of income.
b. P 450,000 of income. d. P 200,000 of income.
require an adjus tment return from the

11. Which of the following scenario will still
tax on their compensation
employee even if the employers correctly withheld the
payments?
a. Employee has concurrent employment
the year
b. Employees had successive employees during
sources
c. The employee earned income from other
d. All of these
from other sources shall use which annual
12. An employee who earned income
return?
Form 1700 c. Form 1701A
a.
Form1701 d. Form 1702
b.
1
inst the tax due under Form 170
13. Which is a source of tax credit aga
c.1701Q
a. Form 2316
these d. All of
b. Form 2307
0?
the tax due under Form 170
14. Which is a tax credit against
c.1701Q
a. Form 2316
of these d. All
b. Form 2307
due
come tax return is
15. The first quarter in
year
April 15 of the same
year
April 25 of the same
oP
year
May 15 of the same
year
May 25 of the same
ao
631

Taxation: Individuals
Chapter 14 — Regular Income
is due
16. The third quarter income tax return
a. August 15 of the same year
b. August 25 of the same year
c. November 15 of the same year
d. November 25 of the same year
8% optional income tax?

17. Which is incorrect regarding the ge tax.
a. regular income tax and the 3% percenta
Itsubstitutes the
for the year it is made.
b. The 8% income tax option is irrevocable
standard deduction.
c. May be opted to if the taxpayer claimed optional
oyee.
d. May be used even if the taxpayer is also an empl
of the 8% income tax?

18. Which will not be included in the tax basis
a. Gross sales c. Gross income from operation
b. Gross receipts d. Other gross income subject to regular tax
regular tax?
19. Which is an item of income subject to
a. Dividend income c. Gain on sale of domestic stocks
b. Royalty income d. Gain on sale of equipment
at 8%?
20. Who is not allowed the option to be taxed
a. Compensation income earner
b. Business income earner
c. Professional income earner
the withholding tax ,
21. Statement 1: There is no need to file a consolidated return if
ld.
on compensation and the expanded withholding tax is correctly withhe
er need
Statement 2: A businessman who is deriving income from a sole custom
ed
not file a consolidated return if the customer correctly withheld any expand
withholding tax.
a. True; True c. False; True
b. True; False d. False; False
Multiple Choice: Problems - Part 1

1. Trixie’s business uses a fiscal year accounting period starting July 1 and ending
June 30 for internal reporting. Her business reported the following quarterly net ‘
income on a fiscal year basis:
FISCAL YEAR 2020-2021 | 2021-2022
- 1st Quarter (July 1 to September 30) P 190,000 210,000
- 2d Quarter (October 1 to December 31) 220,000 250,000
- 3rd Quarter (1/1/2022 - 3/31/2022) 180,000
- 4th Quarter (4/1/2022 - 6/30/2022) 200,000
632
rte

br
ss
{
viduals
chapter 44 — Regular Income Taxation, Indi
15, 20237
compute the taxable net income to be reported April
4, 790,000 ¢. PB40,000
b, P810,000 d. P 850,000
within and outside the
erson, married 15 dependents, had the following Income
a ’ ’
“ya 5
philippines:
Phillippines Abroad
;
P 280,000
Compensation income
50,000 100,000
32,000
Royalties ~ books .
9,000
Domestic dividends ° 40,000
Foreign dividends
ming she is a resident citizen.
Compute his taxable income assu
_ P330,000 c, P 495,000
d. P 536,000
b. P371,000
en.
assuming she is a resident ali
Compute his taxable income
P 330,000 c. P 495,000
a.
P 371,000 d. P 536,000
b.
in
age ria l emp loy ee, rec eiv ed the following employee benefits
Henry Sy, a man
2020:
exempt benefits P 4,000,000
Salaries, net of mandatory and 800,000
Stock bonus 200,000
Director's fees 2,500,000
Henry
Car designated for the use of 5,000,000
name Henry
House and lot, transferred in the
ry.
Compute the taxable income of Hen
a. P12,500,000 c. P 5,000,000
b. P 7,500,000 d. P 4,8000,000
tax for the year.
blem, compute the fringe benefit
In the immediately preceding pro
c. P 2,826,923
a. P 1,346,153
b. P 2,692,308 d. P 4,038,462
firm of Mr. Oda:

The following relate to the net income of the
P 600,000
Professional fees
Long-term capital gain 80,000
45,000
Short-term capital gain 50,000
Ordinary gain
( 90,000)
Long-term capital loss
‘
Short-term capital loss a000)
Ordinary loss
633

00
Other business expenses See GoD.
Net income Fe
Compute his taxable income.

a. P385,000 c. P 410,000
b. P390,000 d. P 435,000
Shown below is the summarized result of operations of Mr. Chiz Mozo’s business.
Sales P 900,000
Cost of sales 300,0
Gross profit P 600,000
Other deductible expenses 100,000
Contributions expenses:
- Government priority project 50,000
- Non-accredited non-profit institution 55,000
- Foreign foundation __ 25,000
Compute his taxable income.
a. P 400,000 c. P 420,000
b. P 405,000 d. P 450,000
During the year, Celeen received compensation income of P455,000 after P15,000
withholding tax on compensation. Compute her income tax still due.
a. P 48,750 c. P 28,750
b. P 47,500 d. P 32,500
A Filipino citizen has P400,000 Philippine income and P300,000 foreign income.
He paid P55,000 income taxes abroad. Compute the allowable tax credit for the
income taxes paid abroad.
a PO c. P 45,000
b. P 40,000 d. P 55,000
10. In the preceding problem, what is the tax credit if the taxpayer was a non-resident °
citizen or a resident alien?
a. PO c. P 45,000
b. P 40,000 d. P 55,000

1. An individual taxpayer recorded sales of P 2,500,000, cost of sales of P1,000,000
and expenses of P700,000. He is also a partner in various partnership and
received the following share in their net income:
General professional Business

_partnership partnership
Share in net income P 200,000 P 400 000
634

chapter 14 — Regular Income Taxation: individuals
coComp31
ute0,00
the0 income tax due if.P9 Pp ted to 0 Ite
190,000j mized ded
eduuct
ctii on.
b. P 250,000
d.P 130,000
Compute the income
so 216,000 tax due if opted tot
: P i9600n" 8%9 option
i al in
i come tax.
b. P 200,000
d. P 180,000
Karen Kaled received the
following income from her
employment in 2021:
Deductions for:
i
- SSS
- P 10,000
PhilHealth
8.000
- Pag-Ibig
_ +
7,000
Union dues
2,000
- Withholding tax
67,400
- Loans repayment
50,000
- Tardiness and absences
—___15,000
Net pay
P 240,600
Compute Karen Kaled’s taxable compensa
tion income.
a. P 240,600 c. P 358,000
b. P 290,600 d. P 400,000
Magdalene made the following computations of her

annual financial savings from
employment, her sole source of income:
Salaries, net of P59,000 withholding tax

and P12,000 mandatory payroll deductions P 321,000
Expenses:
- Load expenses P 10,000
- Medical expenses 8,000
Transportation expenses 25,000
- Food, rent & utilities 100,000
- Bank loan repayments 20,000
- Miscellaneous expenses 15,000
Net savings for 2020 P143,000
What is Magdalene’s taxable compensation income in 2021?
a. P280,000 c. P 380,000
P 321,000 d. P 392,000
2021:
Mr. Roger presented the following schedule of income in
635

iu itil
Individuals
Chapter 14 — Regular Income Ta xation:
P 617,500
Service fees, net of 5% withholding tax 20,000
Dividends from a domestic corporation 10,000
Interest income from bank
Expenses:
P 30,000
- Office utilities expenses
120,000
- Staff salaries
80,000
- Rent & miscellaneous expenses
100,000
- Tuition fees of5 dependent children
15,000
- Personal medical expenses
—
Net business income P_297,500

Total deductible expense against gross income is
a PO c. P 330,000
b. P 230,000 d. P 345,000
Compute Roger’s taxable net income.

a. P 305,000 c. P 387,500
b. P 320,000 d, P 420,000
Compute the tax still due.

a. P 21,500 refundable c. P 5,000 refundable
b. P18,500 refundable d. P 2,500 payable
Compute the tax still due if Mr, Roger opted to the 8% optional tax.
a. P 31,800 payable c. P 4,400 refundable
b. P 32,000 payable d. P 500 refundable
Clyde Jerik, a self-employed employee with ten dependent children, had the
following items of income and expenses in 2021:
Sales P 900,000
Less: Cost of sales 400,000
Gross profit P 500,000
Interest income, net of 20% final tax 16,000
Interest income from clients notes 12,000
Expenses:
- Salaries expense P 100,000
- Depreciation expense 15,000
- Rent & other expenses 50,000
- Interest expense 30,000
Net Income P_333,000
Compute the deductible business expense.
a. P 165,000 c. P 189,720
b. P 188,400 d. P 191,000
636
eee” i a
bo _—_,
chapter 4° Reqular Income Taxation: Individuals
10 clyde jertk shall report a taxable Income of

a PP 322,280 GP 310,200
p, P324,000 dP 311,600
11, Compute the taxable income if Clyde Jerik opted to use the optional standard
deduction
a P552,000 ¢ P 540,000
b, P547,200 d. P307,200
12. Compute the income tax due if Clyde Jerik opted to use the 8% optional income
tax.
a P 72,960 cP 52,960
bP 72,000 d. P $2,000
13, An individual income tax payer had the following income:

Mandatory payroll deductions 20,000
Gross receipts 1,800,000
Direct cost of services 500,000
Expenses 300,000
Other income subject to regular tax 100,000
Other income subject to final tax 200,000
Withholding tax on compensation 130,000
Expanded withholding tax on receipts 14,000
Estimated tax payments made 94,000
Compute the income tax still due if the taxpayer opted to the itemized deduction,
-a. =P 351,000 c. P 222,000
b. P 322,000 d. P 192,000
14. Compute the income tax still due if the taxpayer opted to the optional standard
deduction.
a. P 351,000 c. P 222,000
b. P 246,000 d. P 192,000
15. Compute the income tax due if the taxpayer opted to the 8% optional income tax.
a. P 282,000 c. P 262,000
b. P 278,000 d. P 254,000
_ 637

Chapter 15-A — Regular Income Taxation: Special Corporations
CHAPTER 15-A
REGULAR INCOME TAXATION: Special Corporations

ee ee ee ee ee ee Bee eRe EE SESE NRE SEO ORS ROE EOS Seem
ee.
=. -
This chapter covers income tax rules applicable to special corporations.

After this chapter, readers are expected to have obtained mastery of the following.
The general income tax rule for regular corporate taxpayers
PWNE
The nature and types of exempt corporations

The classification rule for exempt corporations
Cost and expense allocation between exempt and taxable activities
The dominance test on private schools and non-profit hospitals
ONAN
The taxation rules for FCDU/EFCDU and offshore banking units

The special rules on international carriers
The different tax rates for special non-resident foreign corporate taxpayers
CORPORATE INCOME TAXATION

Corporations are subject to final tax, capital gains tax, and the regular income tax,
The final tax and capital gains tax of corporate taxpayers are discussed in the
previous Chapters. This chapter focuses on the regular income tax of special
corporation taxpayers and provides integration of the three tax schemes.
As established in previous chapters, the regular income tax of corporations covers

any income not subject to the final tax or capital gains tax for corporations.
What are corporations?

The term corporation shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts, associations, or insurance
companies.
The term corporation excludes general professional partnerships and a joint

ventures or consortium 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.
GENERAL CLASSIFICATION AND TAXATION OF CORPORATIONS

A. Domestic corporations - 25% regular corporate tax on world taxable
income
638
Bn,

chapter 15-A ~ Regular Income Taxation: Special Corporations
- 25% : rey
t cofomereign corporation - 25%
ssidenin regular corporat
e tax on Philippi
taxable ble
poration
C,' Non-resident foreign corporation - 25% final tax on Philippine gross
income
the CREATE law reduced the regular corporate income tax from 30% to 25% of
1.2020.
taxable income effective July
Lower corporate tax for domestic corporations

Under the CREATE law, domestic corporations are subject to a 20% regular
corporate income tax under the following conditions:
a. Asset test - Total assets, excluding land on which their office, plant and
equipment are situated, does not exceed P100,000,000; and
b. Income test - Taxable income does not exceed P5,000,000
Entities with assets not exceeding P100 million are referred to as micro-, small-,
and medium-sized enterprises (MSMEs), The domestic corporation must be an
MSME by asset size. The MSMEs must also qualify the income test to avail of the
lower corporate tax.
Domestic corporations are mandated to separately account in their Annual

Financial Statements (AFS) the cost of the land on which their office, plant and
equipment are situated. They are prohibited to lump the same in one account or
consolidate its costs with other fixed asset accounts.
Illustration
of
A domestic corporation has the following partial detail of the costs and fair values
its assets in its AFS:
Book value Fair value

Land where the office building stands P 30,000,000 P 35,000,000
Land where equipment warehouse stands 20,000,000 25,000,000
Vacant land (investment property) 10,000,000 12,000,000
30,000,000 40,000,000
Land held for sale (inventory)
House and lots for sale (inventory) 20,000,000 27,000,000
10,000,000 11,000,000
Office building
Factory building 15,000,000 14,000,000
Equipment 10,000,000 9,000,000
Other assets __5,000,000 __7,000,000
Total assets P150,000,000 . P.180,00,000
The corporation also have the following analysis of its reported pre-tax income for the
taxable year:
639
PTAs,
Fee
on e Pets.
a& i “pee

ation: Special Corporations
Chapter 15 -A — Regular Income Tax
es P 1,000,000
Passive income subject to final tax 2,000,000
taxes
Capital gains subject to capital gains 4,000,000
Taxable income subject to regular tax 3,000,000
Income exempt from income tax
P_10,000,000
Total pre-tax income
s as reflected in the AFS are
For purposes of the asset test, accounting book value
and equipment:
considered less the cost of lands used for office, plant
Total assets per AFS P 150,000,000
Less: land held for use
- Land used for the office building P 30,000,000
- Land used for the equipment warehouse 20,000,000 _50,000,000
Adjusted total assets P100,000,000
For purposes of the asset test, the domestic corporation is a MSME since its total
assets do not exceed P100 million. For purposes of the income test, only the taxable
income subject to regular tax (i.e. P4 million) is considered. Since this is less than the
P5M threshold, the corporation is a qualified MSME subject to 20% corporate tax.
Summary of regular corporate tax rates
Domestic | Resident foreign
Taxpayer type corporation corporation
MSME corporate taxpayers
- With < P5M taxable income 20% 25%
- With > P5M taxable income 25% 25%
Large corporate taxpayers
- With < P5M taxable income 25% 25%
- With>P5M taxable income 25% 25%
Illustration
A corporation with P100M assets had the following income and expense for 2021:
Philippines Abroad Total
Gross revenues/receipts P 1,800,000 P 1,200,000 P 3,000,000
Less: Business expenses 1,200,000 800,000 2,000,000
Net income from operation P 600,000 P 400,000 P 1,000,000
Add: Interest from deposit 150,000 50,000 200,000
Net income P__750,000 P450,000 P1,200,000
The regular income tax of a domestic corporation shall be computed as follows:
Net income from operations (P600,000 + P400,000) P 1,000,000
Other income not subject to final tax 50,000
Taxable net income P 1,050,000
Multiply by: Corporate tax rate : 20%
Regular corporate income tax (RCIT) due P__210,000
640

chapter 15-A — Regular Income Taxati
on: Special Corporations
since foreign Corporations are not allo wed the low 0,

income tax of a resident foreign corpo ration shal er 20% cor porate tax, the regular
l be computed as follows:
Taxable net income (Philippines only)
Multiply by: Corporate tax rate P 600,000
Regular corporate income tax (RCIT) Seat
159 wt
Anon-r1esi dentfinal
25% fortax
eignby corporation is not sub ject
to the regular corporate income tax
a sliwithhala the flowing: Bross income from all sources within. Resident
payors
Gross revenues/receipts
P 1,800,000
Interest income from deposit
7 50,000
Total gross income within
P 1,950,000
Multiply by:
25%
Total final tax
P__ 487,500
Note that for purposes of final tax, gross income on the sale of services means revenue
or receipts without deduction for cost of services.
SPECIAL CORPORATIONS
Certain corporations are subject to a special tax treatments or preferential tax
rates lower than the 25% regular corporate income tax. These are generally
referred to as “special corporations.”
For easier understanding, we will further sub-classify the three broad

classifications of corporations.
SUB-CLASSIFICATION OF CORPORATE INCOME TAXPAYERS

A. Domestic corporations
1. Exempt domestic corporations
a. Exempt non-profit corporations under the NIRC
b. Government agencies and instrumentalities
c. Certain government-owned and controlled corporations
d. Cooperatives
2. Special domestic corporations
a. Proprietary educational institutions and non-profit hospitals
b. Foreign currency deposit units (FCDUs) and Expanded FCDUs
c. PEZA or BOl-registered enterprises
3. Regular domestic corporations
B. Resident foreign corporations

1. Special resident foreign corporations
641

a Expanded FCDUs
b. Regional Area Headquarters and Regional Operating Headquarters of
Multinational Companies
c. International carrier
d. BOI or PEZA-registered enterprises
2. Regular resident foreign corporations
C. Non-resident foreign corporations
1. Special non-resident foreign corporations
a. Non-resident cinematographic film owner, lessor or distributor
b. Non-resident lessor of vessels, chartered by Philippine nationals
c. Non-resident owner or lessor of aircraft, machineries, and other
equipment
2. Regular non-resident foreign corporations
The following section discusses in detail all relevant tax rules on exempt and
special corporations. |
EXEMPT DOMESTIC CORPORATIONS

The following corporations are exempt from the regular corporate tax:
1. Exempt non-profit corporations under the NIRC
2. Government agencies and instrumentalities
3. Exempt government-owned and controlled corporations
4. Cooperatives
Qualification of Tax Exemption

Income tax exemption relates only to income from related activities. Income from
activities unrelated to the purposes for which an exempt corporation is organized
and income from activities conducted for profit including income from properties
are taxable regardless of the disposition made of such income.
The Classification Rule

Since exemption applies only to income from related activities, the income of
exempt corporations are classified into income from related activities and income
from unrelated activities. The income from unrelated activities is subjected to
regular income tax.
Exempt corporations under the NIRC:

1) Labor, agricultural, or horticultural organizations not organized principally
for profit
642

,
2) Mutual savings banks not having a capital stock represented by shares, and
cooperative bank, without capital stock organized and
purposes and without profit operated for mutual
.
3) A beneficiary society, order, or association operating for the exclusive benefit
of the members such as a fraternal organization operating under the lodge
system, or mutual aid association or a non-stock 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
non-stock corporation or their dependents
4) Cemetery company owned and operated exclusively for the benefit of its
members
5) Non-stock 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;
6) 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
7) Civic league or organization not organized for profit but operated exclusively
for the promotion of social welfare
8) Anon-stock and nonprofit educational institution
9) Government educational institution
company, mutual ditch or
10) Farmers’ or other mutual typhoon or fire insurance
company, or like
irrigation company, mutual or cooperative telephone
which consists solely of
organization of a purely local character, the income of
for the sole purpose of
assessments, dues, and fees collected from members
meeting its expenses
organized and operated as a sales
11) Farmers’, fruit growers’, or like association
of its members and turning
agent for the purpose of marketing the products the
necessary selling expenses on
back to them the proceeds of sales, less the
finished by them
basis of the quantity of produce
Illustration 1 .
non-profit corporation, reported the
Bahay Kalinga, 4 social welfare charitable
and expenses:
following statement of income
643

Related Unrelated
_Activities _ Activities _Total_
Gross receipts P 1,200,000 P 800,000 P 2,000,000
Less: Cost of services ___ 400,000 400,000 800,000
Gross income P 800,000 P 400,000 P 1,200,000
Less: Expenses 400,000 150,000 _550,000
Net surplus P__ 400,000 P250,000 P650,000
The income tax due of the corporation shall be:
Net income or surplus from unrelated activities P 250,000

Multiply by: Corporate tax rate —__ 25%
Regular corporate income tax P___62,500
Note: Exempt corporations are treated as regular domestic corporations with regard to their
income from unrelated sources.
_ Illustration 2
Toma Sengla Tumba, a not-profit fraternal organization, received total membership
dues of P300,000. To finance its community development project, it conducted a fund-
raising drive by selling souvenir items to local tourists. The fund raising generated
P200,000 income.
The organization shall pay income tax on the fund raising income:
Net income from fund-raising activities P 200,000
Regular corporate income tax p__50,000
Note: Fund raising activities, being commercial in nature, are taxable. The membership dues
are exempt.
Requisites for exemption of non-stock, non-profit corporations

1. It must be a non-stock corporation or association organized and operated
exclusively for religious, charitable, scientific, athletic, or cultural purposes,
or for the rehabilitation of veterans.
2. Itshould meet the following tests:
limit its
a. Organizational test - Its constitutive documents exclusively
purposes to one or more of the following: religious, charitable, scientific,
athletic or cultural purposes, or for the rehabilitation of veterans.
or association
b. Operational test - The regular activities of the corporation
aforementioned
must be exclusively devoted to the accomplishment of the
part of its operations
purposes. A corporation fails this test if a substantial
is considered “activities conducted for profit.”
644

chapter 15-A — Regular Income Taxation: Special Corporations
3, All net income or assets of the corporation or association must be devoted to

its purposes and . no part of its net income or
asset a
ccrues to or benefits any
member or specific pers on.
4, Itmustnot be a branch of a foreign non-stock, non-profit corporation
A non-profit organization is still allowed to engage in activities conducted fo
profit without losing its tax exemption but the consequence is being subject to ne
only on income conducted for profit, regardless of the disposition made of such
income.
[IJustration
et Me di ca l Ce nt er is or ga ni ze d as a non-stock, non-profit hospital catering to ethnic
Da nts in
mm un it y me mb er s. M e m b e r s pa y mi no r charges which are velinburseme
co
cal center. Daet Medical Center
nature to replenish the working capital of the medi t.
s s reign aid for facilities improvemen
relies on contribution from member and fo
over and above the costs,” Daet Medical
Since there is no “purpose to make a profit
services from paying members.
Center is exempt from income tax on
Non-profit educational institutions
Exception to the Classification rule: it
Under the Constitution, revenues and assets of non-stock non-prof
all
directly, and exclusively for educational
educational institutions used actually,
and duties. Hence, the income from
purposes shall be exempt from taxes
d oper atio ns of thes e inst itut ions is still exempt from income tax if used
unrelate
for educational purposes.
Illustration 1 ted P4,000,000
d Uni ver sit y, a non -pr ofi t educational institution, collec
Sutherlan 0,000 from the rent
fees and ass ess men ts fro m its students. It also earned P20
school properties.
00 in the sale of its
of its properties and realized P400,0
P200,000 rentals to fund an undergraduate
University utilized the
Sutherland P400,000 for the retirement benefits of
and invested the
scholarship program
university directors.
0,000 rentals and
is an income from related activities. The P20
In this case the P4M activities. The P4M
n on the sal e of pro per ties are income from unrelated
P400,0 00 gai still exempt
The P20 0,0 00, eve n if ari sin g from unrelated activities, is
income is exempt. is subject to regular
cat ion al purpose. The P400,000
it 6 div ert ed to an edu ion al pur pose.
an educat
omee tax because It Is not used for
incaus
bec
.
Illustration 2
ed in the imm edi ate ly preceding illustration if
tax
itHoisw a:would
Sutherland University be
school
a. Government
b. Private school
645

Answer:
If Sutherland University is a government school:

The classification rule would apply because the Constitutional exemption appli
would be oe Only
to non-stock, non-profit educational institutions. As such, the P4M
but the P200,000 and P400,000 income would be taxable.
*mpt
If Sutherland University is a private school:

The dominance test for private schools will apply. This will be discussed later in thi is
Chapter.
Certificate of Tax Exemption Ruling

Non-profit corporations or associations must secure a Tax Exemption Ruling frop,
the BIR to enjoy the tax exemption. The ruling shall be valid for a period of 3 year.
unless sooner revoked or cancelled.
The Tax Exemption Ruling shall be deemed revoked on the date there are materia]
changes in the character, purpose, or method of operation of the corporation or
association which are inconsistent with the basis of the income tax exemption. In
addition, it shall be revoked also on the basis of non-renewal of the tax exemption
ruling or non-revalidation of previously issued rulings. Failure to file an income
tax return shall also result in the loss of the tax exempt status.
Government agencies and instrumentalities

tments and bureaus are
Government agencies and instrumentalities such as depar
functions; hence, they are
inherently non-profit because of their public service
agencies and instrumentalities from
However, the income of government
ct to income tax.
unrelated activities or from their properties is subje
ions (GOCCs)
Government-Owned and Controlled Corporat
GOCCs are generally proprietary or comm
ercial in nature and are subject to the
following exempt GOCCs:
regular corporate income tax except t he
S)
Government Service Insurance System (GSI
TR WN Pp
Social Security System (SSS)

PHIC)
Philippine Health and Insurance Corporation(
- RA 11534
Home Development Mutual Fund (HDMF)
Local water districts - RA No. 10026
the TRAIN law effective January 1, 2018.
*PCSO was removed from the NIRC lis t by
646

cooperatives
joined
A cooperative is an autonomous association of persons who voluntarily
together to achieve their social, economic, and cultural needs and aspirations by
izing their products
making equitable contributions to the capital required, patron
undertaking.
and services, and accepting a fair share of risks and benefits of the
ses:
Classification of registered cooperatives for taxation purpo
A. Cooperatives which transact business only with members
and
These cooperatives are not subject to any taxes and fees under the NIRC
other tax laws, such as the following:
Income tax (on related regular income)
PE
VAT and Percentage tax

rwWnN
Donor’s tax
Excise tax
nw
Annual registration fee

business with both members and non-
B. Cooperatives which transact
members
ve and undivided net
1. Those with not more than P10M accumulated reser
from taxes, similar to cooperatives transacting
savings are exempt
business only with members. net
Those with more than P10M accumulated reserve and undivided
2.
savings are subject to the following tax at full rate:
a. Income tax on the full amount allocated for interest on capital
Value Added Tax (VAT) on transactions with non-members
b.
c. Percentage Tax on all sales of goods or services rendered to non-
members
d. All other internal revenue taxes unless otherwise provided by the law
rred to as the reserve fund, refers to the

The accumulated reserve, commonly refe from the annual
amounts legally required to be deducted annually
totality of the
ection and stability.
net surplus (income) of the cooperative for its prot
of every cooperative shall be distributed as
Under RA 9520, the net surplus
follows:
s must not be less than 50% of
1. Reserve fund - at least 10% of the net surplu but
s of operation
the net surplus in the first five year
10% of net surplus
2. Education and training fund - not more than
net surplus
3, Community development fund - not less than 3% of
4. Optional land and building fund - not to exceed 7% of net surplus
647

5. Interest, which shall not exceed normal rate of return on investments, and
patronage refunds which must not be less than 30% of the net surplus after
_ deducting the statutory reserves
6. Any excess to reserve fund
Taxability of Cooperatives to Internal Revenue Tax
All cooperatives regardless of classification are subject to the following:
The applicable income tax on unrelated income
NAN PWNP
Capital gains tax

VAT on purchases of goods or services except VAT exempt importations
Withholding tax on wages except for minimum wage employees
All other taxes for which cooperatives are directly liable and not otherwise
expressly exempted by any law
The taxable income of cooperatives is determined after provision for the general
reserve fund.
Illustration
Jaro Farmers Cooperative (JFC) is a marketing cooperative with more than P300M in
total assets. It sells the vegetable productions of its members. In compliance with legal
requirements, JFC reserves the following percentage of net surplus:
- Reserve fund - 10%
- | Education and training fund - 10%
- Community development fund - 5%
- Optional building fund - 5%
Per by laws, the net surplus after the reserves is distributed as follows:
- 50% as interest to capital, but must not exceed 18% normal return on average
capital of members
- 50% as patronage refunds to members
- Residual balance to reserve fund
Members have P1,200,000 weighted average capital as of year-end.
JFC’s income statement on its sixth year of operation is presented below:

Sales P 3,100,000
Operating expenses ____ 600,000
Operating surplus P 900,000
648

i _—
~~
operating surplus P 900,000

dd: non-operating income:
Rental of vacant facilities 200,000
Interest on investment in bonds 20,000
_ Interest on bank account, net of final tax 4,000
qotal surplus P_1,124,000
required: Compute the taxable income assuming JFC is trading:
g, Only with members
p. With both members and non-members
Solution:
Only with members
irements if
The net income from unrelated sources after the statutory reserve requ
income tax. Hence,
any, constitutes taxable income for purposes of the regular
Rental income P 200,000

Interest on bonds investment 20,000
P 220,000
Total income
Less: Reserve fund requirement (10%) __ 22,000
P___198,000
Taxable income
Note:
members.
1. JFCis exempt from any tax on its transactions with
ded as it is alrea dy subjected to final tax.
2. The interest on banks must be exclu but
if it transacts business with non-members
3. JFC shall report the same taxable income
than P10,000,000.
with an accumulated reserve of less
mbers
With both members and non-me and JFC has more than
e from non-members,
Assume that 20% of the sales wer
es.
P10,000,000 accumulated reserv
(P900K x 20%) P 180,000
Operating surplus - non-members
Unrelated income: 200,000
Rent income, net 20,000
vestment
Interest on bonds in P 400,000
Total taxable surplus 40,000
ement (10%)
Less: Reserve fund requir P__360,000
m non-members
Net surplus after reserve fro
P 720,000
members (P900K x 80%)
Operating surplus from
Less: P 72,000
Reserve fund (10%) 72,000
fund (10%)
Education and training
Community dev’t fund (5%) 36,000
36,000 216.000
)
Optional building fund (5% P__504,000
Net surplus distributable
649
om
al Corporations
Chapter 15-A ~ Regular Income Taxation: Speci
ws:
Net surplus is distributable per by-laws as follo
As interest on members’ capital* P 216,000
As patronage refunds (50%) 252,000
36,000
Excess balance to reserve fund
Net surplus as distributed P__504,000
*Per JFC by-laws, interest on capital is the lower of:
50% of distributable surplus = 50% x P504,000 = P252,000
18% normal return on capital = 18% x P1,200,000 = P216,000
The taxable income and income tax due shall be computed as follows:
Net surplus after reserve from non-members P 360,000
Net surplus distributed as interest to members ___216,000
Taxable income -P 576,000
Multiply by: Corporate tax rate —____25%
Note:
1. Under RA 9520, the ultimate distribution of the P216,000 interest to members shall no
longer be subjected to final tax.
2. The patronage refund is not deemed income by law as it is a mere return of savings to the
members.
ALLOCATION OF COMMON EXPENSES OF EXEMPT CORPORATIONS

Expenses of an exempt corporation that are not directly traceable to either related
_ and unrelated activities are allocated based on gross income.
Illustration
A non-profit entity presented the following analysis of its net surplus:
Related Unrelated
Activities Activities Total
Less: Cost of services 400,000 400,000 800,000
Gross income P 800,000 P 400,000 P 1,200,000
Less: Direct expenses 280,000 70,000 350,000
Common expenses 180,000
Surplus P__670,000
The taxable income from unrelated activities will be computed as follows:
Gross income from unrelated activities P 400,000
Less:
Direct expenses P 70,000
Allocated common expense
(P400K/(P400K+P800K)) x P180K 60,000 _ 130,000
Taxable netincome ~ Pp 270,000
650

pO
Corporations
chapter 45-A — Regular Income Taxation: Special
also applicable to corporations with
Note: This common expense allocation procedure is
rates.
income subject to special tax regimes or to preferential
IONS
REPORTING REQUIREMENTS FOR EXEMPT CORPORAT
file BIR Form 1702-EX using
exempt corporations with no taxable income shall
in filing their return or have
itemized deductions only. If they are not delinquent information
pay any tax. The
no violations on withholding taxes, they will not
tax mapping effort and a
furnished by BIR Form 1702-EX is essential to the BIR’s
ration to the withholding tax regulations on income
test of compliance of the corpo
payments.
to regular tax shall file B/R Form
Exempt corporations with taxable income subject file
1702-RT. If they also earnincome subject to special tax rates, they are must
BIR Form 1702-MxX.
SPECIAL DOMESTIC CORPORATIONS

1. Private educational institutions
2. Non-profit hospitals
nded Foreign Currency Deposit Units
3, Foreign Currency Deposit Units or Expa
4. PEZA or BOI-Registered Enterprises
AND NON-PROFIT HOSPITAL
PRIVATE EDUCATIONAL INSTITUTION subject
institution and non-profit hospitals are
Private or proprietary educational
subject to the pre-dominance test.
to 10% tax on world taxable income
d
viat e the imp act of the pan demic, the 10% tax rate is temporarily lowere
To alle
2023. The same shall revert back to 10%
to 1% starting July 1, 2020 to June 30,
effective July 1, 2023.
n?
at e or pr op ri et ar y educational institutio
What is a pr iv intained and
y ed uc at io na l ins tit uti on is any private school ma
A propri et ar
di vi du al s or gr ou ps wi th an issued permit to operate
administered by private in
owing:
from any of the foll
ion (DepEd)
1. Department of Educat
Education (CHED)
2. Commission on Higher ent Authority (TESDA).
3, l ucation and Skills Developm
Technica Ed
inan ce Test
The pre-dom
ness or other activity exceeds fifty
If the gross income from unrelated trade, busi nal institutions
gross income derived by such educatio
ercent (50%) of the total corporate income tax applies.
or hospitals from all sources, the 25% regular
651

orations
Chapter 15-A — Regular Income Taxation: Special Corp
Unrelated trade, business or activity

Unrelated trade, business or other activity means any trade, business or oth
not subst antia lly relat ed to the exercise 7
activity, the conduct of which is
from its primary Purpose
performance by such educational institution or hospital
or function.
Illustrations 1
A private educational institution reported the following during the year 2021:
Related Unrelated
Activities Activities Total_
__
Gross income P 700,000 P 500,000 P 1,200,000
Less: Deductions 400,000 100,000 500,000
Net income P___300.000 P__400,000 P__700,000
The gross income from related activities (P700K/P1,200K = 58%) passes the
predominance test. The income tax due shall be computed as follows:
Multiply by: Corporate tax rate ____ 1%
Illustration 2
A non-profit hospital with more than P200M in total assets, net of cost of landholdings,
reported the following during a year:
Related Unrelated
Activities Activities Total
Gross receipts P 1,000,000 P 1,100,000 P 2,100,000
Gross income P 500,000 P 700,000 P 1,200,000
Less: Deductions 100,000 400,000 500,000
Net income P__ 400,000 P__ 300,000 P 700,000
The gross income failed the pre-dominance test (PS00K/P1,200K = 42%); hence, the
non-profit hospital shall be taxable as a regular corporation:
Regular corporate income tax P__ 175,000
652 |

a, — el
ane
1 15-A — Regular Income Taxation: Special Corporations

chapte
sa mmary of Tax Rules on Educational Institutions and Hospitals

own Educational institutions Hospitals
private 10% (1%) of taxable income 25% (20%) of taxable income
Net profi Exempt 10% (1%) of taxable income
Exempt Exempt
government
IG N/ EX PA ND ED CU RR EN CY DE POSIT UNIT
poRE
FCDUs (EFCDUs) refer
foreign currency deposit units (FCDUs) and Expanded gn bank
nt of a local bank or a local branch of a forei
to a unit or departme
ency-denominated transactions
authorized by the BSP to engage in foreign curr
pursuant to RA 6426, as amended.
bank, universal bank, and a thrift bank
A local bank refers to a commercial re a
pines (RR10-98). The bank shall secu
organized under the laws of the Philip the
Taxpayer Identification Number (TIN ) for its EFCDU or FCDU separate from
unit (RBU).
TIN of its regular business
of FCDU
Authorized transactions or t- te rm foreign currency-denomin
ated
de r the ir lic ens e to sh
FCDUs are limited un , borrow on-
to accept deposits and trusts accounts
transactions. They are authorized ketable
matu rity , and inve st in sho rt- term maturity deposits, readily mar
short-term authorized to
secu riti es, and sho rt- ter m fore ign currency loans. They are also
debt s, enter into
BSP, other FCDUs/EFCDUs or OBU
enter into currency swap with the ign
ing acti viti es as lend er, and eng age in repurchase agreement on fore
security lend
currency denominated securities.
Authorized transactions of EFCDU sactions

orizes engagements in the same tran
The license to operate an EFCDU auth issue
to enter into foreign exchange trading,
allowed to FCDUs plus authorization of
of cred it for non- resi dent expo rter s, accept or negotiate drafts or bills
letters
or make payments to the order of a non-
exchange drawn under letters of credits
ign correspondent bank, purchase export
resident exporter upon request of their fore
rities lending activities, and repurchase
bills of resident exporters, enter into secu
nated securities.
agreements involving foreign currency denomi
Distinction of FCDU, OBU and EFCDU

actions while EFCDUs are
FCDUs are limited to short-term foreign currency trans
currency-denominated
allowed both short-term and longer-term foreign
transactions.
ra nt a dom est ic loca l bank . An Off sho re Ban kin g Unit (OBU) isa
an ea
ce nominated transactions. beri is authorized to conduct foreign currency
or a
- An EFCDU may be a division of a domestic bank
653
er OE | eee
Chapter 15-A ~ Regular Income Taxation: Special Corporations
resident foreign bank authorized to conduct banking under the expanded fore;
currency deposit system. gn
Tax on EFCDUs
The income of depositary banks under the Expanded Foreign Currency De
Posit
System from foreign currency transactions with:
A. Non-residents (offshore income) - exempt from income tax

B. Residents
1. Banks under the foreign currency deposit system such as:
a. Offshore banking units (OBUs)
b. local commercial banks and branches of foreign banks authorizeq by
the BSP to transact business with FCDUs
- exempt from income tax
2. Other residents (onshore income)
a. interest income only - 10% final tax
b. other income, such as commissions and gains - regular corporate
income tax (Deutsche Bank AG Manila Branch vs. Commissioner of Interng|
Revenue, CTA Case No. 6566, May 17, 2005)
If the interest income is not subjected to final tax by the borrower, the FCDU or
EFCDU shall report the same in its gross income in the income tax return and shall
be subject to the same 10% tax. It shall be separately presented from other
income subject to the 25% regular corporate income tax.
Taxation of FCDUs
In practice, the BIR does not distinguish EFCDU from FCDUs. Consequently, FCDUs
are taxed the same way as EFCDUs.
Summary of Tax Rules on FCDUs/EFCDUs

FROM
Residents
(E)FCDUs Other Non-
NATURE OF INCOME or OBUs_ _Residents_ _Residents
Income from forex transactions
Interest income from:
- Forex loans & receivables exempt 10% FIT exempt
- Forex deposits exempt - exempt
Other forex income exempt RCIT exempt
Income from non-forex
transactions RCIT RCIT RCIT
654

tax on income of depositors under the EFCDS

depository banks under the
Any income of nonresidents from transactions with
of residents
ex yanded system shall be exempt from income tax. Interest income
from depositary bank under the FCDS/EFCDS is subject to 15% final tax.
tax on Regular Banking Units or RBUs

25%
rhe income from the regular banking unit of domestic banks is subject to the
regular corporate income tax.
illustration
cial bank derived
the expanded foreign currency deposit unit of a domestic commer
the following income from its foreign currency and other transactions:
Received from
Residents
FCDUs/ Non-
Income items EFCDUs Other residents
Residents
Interest income from
loans & receivables P5,000,000 P10,000,000 | P4,000,000
Interest income - foreign
currency deposits 200,000
Forex trading gains 300,000 200,000 100,000
Consultancy fees 250,000 500,000 100,000
Rent income 50,000 120,000 80,000
Required: Identify the exempt income, gross income subject to final tax, and those
Solution:
Exempt income items are indicated in italics, income items subject to final tax are in
bold-italics and those subject to regular tax in bold font.
Received from
Residents
OBUs or. Non-
Income items FCDUs/ Other residents
EFCDUs Residents |.
“Tnterest income from forex loans P 5,000,000 | P10,000,000 | P4,000,000
Interest income from forex deposits 200,000
Consultancy ; fees
250,000 500,000 100,000
| Rent income 50,000 120,000 80,000
The total final tax on the P10,000,000 shall be withheld by Philippine resident
borrowers.
655

al Corporations
Chapter 15-A — Regular Income Taxation: Speci
in its gross income sub;

The FCDU of the domestic bank shall include the following ject
to the regular corporate income tax:
P 200,000
Forex trading gains to other residents
On-shore income from non-forex transactions
Consultancy fees (P250,000 + P500,000) P 750,000
Rent income (P50,000 + P120,000) 170,000 920,000
Off-shore income from non-forex transactio ns
Consultancy fees P 100,000
Rent income 80,000 180,000
Gross income P_1,300,000
Allocation of Cost and Expenses of Banks

RR4 - 2011 prescribes the allocation method of cost and expenses of bank,
between their exempt and taxable operations as follows:
a. Specific identification - Expenses directly traceable to an income are allocateg
to that income.
b. Pro-rata allocation - Expenses that are not directly traceable to an income are
allocated pro-rata on the ratio of all income.
Under the matching principle, only expenses traceable or reasonably allocable to

RBU and FCDU income subject to regular tax are deductible in the determination
of taxable net income.
Illustration 1
A domestic bank with P400M in total assets reported the following summary of
income and expense as to source:
Resident Non-
OBU/FCDU__ Others _ Residents Total
RBU gross income P - P 1,200,000 P 150,000 P 1,350,000
FCDU interest income 1,000,000 800,000 400,000 2,200,000
RBU expenses - 600,000 50,000 650,000

FCDU expenses 300,000 200,000 60,000 560,000
Net income P2.340,000
Required: Determine the final income tax and the income tax due.
Solution:
The final tax withheld is P80,000 computed as 10% x P800,000. The P1M income from
OBU and FCDUs and the P400,000 FCDU income from non-residents is tax-exempt
The income tax due of the bank shall be computed as follow:
656

.15-A — Regular Income Taxation: Special Corporations
U gross income P 1,350,000

Less: RBU expenses —650,000
raxable net income P 700,000
Multiply by: corporate tax rate 25%
regular corporate income tax P___175,000
Any cost or expense related to or incurred for the operations of FCDU/EFCDU is not
allowed as deduction from the RBU’s taxable income. (RR4-2011)
illustration 2
A domestic multinational bank reported the following summary of income and
expense:
Residents Non-
OBU/FCDU___Others_ Residents __ Total
RBU total grossincome_ P - P 2,000,000 P 750,000 P 2,750,000
FCDU interest income 800,000 800,000 400,000 2,000,000
FCDU rent fees __100,000 ___ 120,000 30,000 ___250,000
Total gross income P 900,000 P 2,920,000 P 1,180,000 P 5,000,000
Direct expenses:
RBU Expenses P - P 900,000 P 400,000 P 1,300,000
FCDU Expenses:
Interest income 450,000 350,000 150,000 950,000
Rent fees 20,000 10,000 15,000 45,000
Total direct expenses P 2,295,000
Indirect/common expenses __ 315,000
Total expenses P.2,610,000
Required: Determine the tax due of the FCDU and RBU.
Solution:
FCDU RBU
RBU total gross income P - P2,750,000
FCDU rent fees* —— 250,000 _
Gross income P 250,000 P2,750,000
Less: Deductions
Directly traceable expense 45,000 1,300,000
Common expenses** ——15.750 ___173,250
Total deductions P__60,750 P1,473,250
Taxable net income P 189,250 P1,276,750
Multiply by 25% 25%
Regular corporate income tax P__ 47.313 P_319,188
vote ae non-forex income of FCDU is subject to regular tax.*
657

2 The common expenses are allocated on the ratio of total gross income subject to regular
income tax and final tax including those exempt from income tax.**
FCDU = P250,000/P5,000,000 x P315,000 = P15,750
RBU = P2,750,000/P5,000,000 x P315,000 = P173,250
The expense allocable to the exempt income and income subject to final tax shall not be
deductible against gross income subject to regular tax.
SPECIAL RESIDENT FOREIGN CORPORATIONS

The following section discusses the special tax rules on the following special
resident foreign corporations:
1. Expanded FCDUs
2. Regional Area Headquarters and Regional Operating Headquarters of
Multinational Companies
3. International carriers
4. PEZA-registered foreign corporations
EXPANDED FCDUs
The EFCDU ofa resident foreign bank is subject to the same tax rules applicable to
FCDUs/EFCDUs of domestic local banks, except that all their offshore income is
exempt from income tax because foreign corporations are taxable only on income
Illustration
The EFCDU of a resident foreign bank reported the following:
Received from
Residents
OBUs or Non-
EFCDUs Residents
Interest income from
loans & receivables P5,000,000 P10,000,000 | P4,000,000
Interest income - foreign
currency deposits 200,000
Consultancy fees 250,000 500,000 100,000
Rent income 50,000 120,000 80,000
Required: Determine the exempt income, gross income subject to final tax and gross
income subject to regular tax.
658
an

oter 15-A — Regular Income Taxation: Special Corporations
cha
gxempt income items are in italics font, gross income subject to final tax in bold-italic
font and gross incom e subject to regular
tax in bold font.
~ Received f rom |
_____ Residents __ LO
OBUs or | Non-
EFCDUs Residents
nterestincome from |
forex loans P 5,000,000 | P10,000,000 | P4,000,000 |
‘interest income from -
s |
200,000
forexdep|osit
Forex tradinggains_| «300,000 | _ —- 200,000 | __—100,000_
‘Consultancy fees | _—-250,0 | 500,00000 | __ 100,000"
| Rent income 50,000 | 120,000 | 80,000"|
Note: Resident foreign corporations are taxable only on income within hence those marked
with asterisks(*) are exempt.
Taxation of OBUs
Offshore banking shall refer to the conduct of banking transactions in foreign

currencies involving the receipt of funds from external sources and the utilization
of such funds (PD 1034).
Offshore Banking Unit shall mean a branch, subsidiary or affiliate of a foreign

banking corporation which is duly authorized by the Central Bank of the
Philippines to transact offshore banking business in the Philippines. (PD 1035)
Before the passage of the CREATE law, OBUs are enjoying the same tax treatment
privileges of FCDUs and EFCDUs. OBUs are now treated as regular foreign
corporations subject to the 25% regular corporate income tax and other
taxes upon the effectivity of the CREATE law.
RS
REGIONAL AREA HEADQUARTERS AND REGIONAL OPERATING HEADQUARTE
OF MULTINATIONAL COMPANIES
Regional or area headquarters (RAH or RHQ) mean a branch established in the
Philippines by multinational companies which headquarters do not earn or derive
income from the Philippines and which acts as a supervisory, communication, and
coordinating center for their affiliates, subsidiaries, or branches in the Asia Pacific
Regional and other foreign markets.
659

orations
r in co m e Ta xation: Special Corp
Regula
Chapter 15-A -
OHQ) mean2an aa brDr anch establj ished ,
or R
gi on al op er at in g headonqu
ie al arters
co mp an ieOH
(R s wh ich are engaged in any of the folloya®
Re , np
Philippines by mu
lt
an ni ng ; bu si ne ss planning and coordinay
ad ministration an
d pl
services: general an d components; corpor ate finan
nt of ra w ma te ri al s an d Persons:
sourcing and proc
ure me
nt ro l an d sal es pr om otion; training
r keting co
advisory services; ma d de velopment, Services and Prod
si ME ang
se rv ic es ; re se ar ch an pr oc es
management; logistic su pport an d ma in te na nc e,
development, technical
ent.
d business developm
communications; an
for eig n c om pa ny or gr oup of foreign companies With
isa
A multinational company countries.
ts in two or mor e
business establishmen
ties
of RH Qs and RO HQ s
Taxation strative Offices
fro m inc ome tax since they are merely admini
and coordination center 9
RHQs are exe mpt
erv isi on, com mun ica tio n,
which serve as a sup .
sid iar ies , bra nch es, or aff ili ate s of the ir home office. They do not earn income
sub
trary to RHQs
at 10% of taxable income. Con
ROHQs are subject to income tax
r services to their affiliates
ROHQs are allowed to derive income on thei pany in the com
of their home office or parent
subsidiaries, or branches will be subjected to the 25%
2, ROHQs
Philippines. Effective January 1, 202
to the CREATE law.
regular corporate income tax pursuant
taxes, fees or charges imposed
RHQs and ROHQs are exempt from all kinds of local
land improvements and
by a local government unit, except real property tax on
equipment.
INTERNATIONAL CARRIERS
carrier, refers to
The term international carrier, also called international common
the
entities that transport passengers, mails and excess cargoes or baggage from
Philippines to any destination abroad and vice versa.
In the Philippine setting, international carriers are only of two types:

a. International air carrier
b. International sea or shipping carrier
eee tax rates to international carriers

Generalrule : 2 %2% of the Gross Philippine Billings |
Exceptionrule :: P Preferential; . -rocity
¥ rate or exemptio no eciprocly |
applici able tax treaty or reciprocity . n the basis of reciP
660

r on: Special Corporations
ter '15-A — Reg¥ular Income Taxati
cnapter
LU:
ational carrier subjects

exc ept ion rule , if the home country of the intern
under the
rate or exe mptsSuesthem fro m anetax, .thesae Philippine
etl ppine , carriers the ret o at a low er .
pili .
, as the case may be,
ern men t will ren
. der . them the same lower rate or exemption
10
a the basis of reciprocity,

¢
that the 2.5% tax shall expire
eaders should be advised that RA10378 provides Hence,
in 2014, But this sunset provision was vetoed by then President Aquino.
to this day.
the tax is still collected by the government
the amendments introduced by RA
According to RR15-2013 which implements
me tax is intended to improve the
10378, the exceptional minimal gross inco
Industry by encouraging more
competitiveness of the Philippine Tourism
operations in the country.
international carriers to maintain flight and shipping
natio nal carri ers shou ld be dist ingu ishe d from Philippine carriers. The latter
inter
income.
isa domestic carrier taxable at 25% of world taxable
Meaning of Gross Philippine billings
q. International air carriers
revenue derived from
Gross Philippine Billings refers to the amount of gross
inating from the
carriage of persons, excess baggage, cargo, and mail orig
tive of the place of
Philippines in a continuous and uninterrupted flight, irrespec
ment.
sale or issue and the place of payment of the ticket or passage docu
b. International shipping carrier
cargo or
Gross Philippine Billings means gross revenue, whether for passenger,
mail originating from the Philippines up to final destination, regardless of the
place of sale or payments of the passage or freight documents.
Continuous and uninterrupted flight or voyage means a flight or voyage from the Philippines up
to the point of final destination of the passenger, excess baggage, cargo, and/or mails.
Rule on revalidated, exchanged, or endorsed tickets
Tickets revalidated, exchanged and/or endorsed to another international airline
form part of the Gross Philippine Billings of the carrying airline if the passenger
boards a plane or a port or point in the Philippines.
Exclusion in Gross Philippine Billings
1. Non-revenue passengers - those passengers qualifying under the free mileage
programs of the air carriers
2. Refunded tickets
Illustration 1
Pacific Ring. Air,aes
a resident foreign air carrier, , reported th e followingi s i
results of its Philippine operations during a quarter: ¢ a erized
i 661

In co me Ta xa ti on : Special Corporations
lar
Chapter 15-A — Regu
ota
Outbound
Inbound
Flights ____Total
Flights 00 0, 00 0 P17,000,000
P 9,000,0 00 P 8,
Gross receipts
Less: — 000 4,000,000 9,000,000
Direct expenses 5,000,
— 2,000,000
Other common expenses
Net income oo
income tax:
Green Air shall pay the following
wy: ae P 8,000,.000
Gross Philippine Billings
. —_—42.59%
Multiplyply by:by Income tax rate
Income tax due
hts.
the gross receipts from outbound flig
Note: The Gross Philippine Billings is
Illustration 2 .
shows the followi ng analysis of its
Nevergreen, a resident foreign shipping company,
during a month:
gross receipts from passengers and cargoes
Incoming Outgoing
Flights Flights Total
Fares billed in the Philippines | P 9,000,000 P10,000,000 P19,000,000
Fares billed abroad 9,000,000 5,000,000 _14,000,000
Total billings P18,000,000 P15,000,000 P33,000,000
Value of fares on non-revenue

Passengers P 700,000 P 800,000 P 1,500,000
500,000 800,000 1,300,000
Fares cancelled and refunded
Nevergreen shall pay the following income tax:

Total billings for outbound flights P15,000,000
Less: Tickets refunded 800,000
Gross Philippine billings P14,200,000
2.5%
Multiply by: Income tax rate
Income tax due P___ 355,000
Note:
1. The Gross Philippine Billings is the total receipts from outgoing flights, regardless of the
less refunded
place where they are actually billed or paid. The gross receipt is the billing
tickets.
of fares on non-revenve
2. Non-revenue passengers are not billed. Hence, the value
passengers is not deducted from the gross Philippine Billings.
Rule on transshipments or interrupted flights or voyages

For a flight which originates from the Philippines, but transshipment of passenge!
takes place at any port outside the Philippines on another airline, only the aliquot
662

chapter 15-A ~ Regular Income Taxation: Special Corporations
ortion of the cost of the ticket corresponding to the leg flown from the
philippines to the point of transshipment shall form part of Gross Philippine
pillings:
slustration
ope Kiko Airways, an international air carrier, had the following gross receipts on
outgoing flights for the quarter:
pestination Computation Amount

Hongkong P1,500 x 10,000 passengers P15,000,000
Thailand P2,000 x 500 passengers 1,000,000
UAE P4,000 x 300 passengers 1,200,000
China P2,500 x 400 passengers 1,000,000
Total gross receipts P18,200,000
The flight to Thailand was transshipped in Vietnam to another plane of Pope Kiko
Airways. The flight to UAE is endorsed to another air carrier which airlifted them in
the Philippines. The flight to China was transshipped to another carrier which airlifted
them in Hongkong.
The Gross Philippine Billings of Pope Kiko Airways and its income tax due shall be:
Direct outgoing flights - Philippines to Hongkong P15,000,000
Flight to Thailand! 1,000,000
Endorsed flights - Philippines to UAE? -
Re-transshipped flights - Philippines to China? 600,000
Gross Philippine Billings P16,600,000
Multiply by: income tax rate 2.5%
Note:
receipts from the entire
1. In foreign transshipment involving the same carrier, the gross
flight is included in gross income and is not split.!
they are excluded in the Gross
2. Endorsed tickets are taxable to the carrying airline. Hence,
s.”
Philippine Billings of Pope Kiko Airway leg
the portion pertaining to the
3. In foreign transshipment involving another carrier, only
flown from the Philippine port to an immediate foreign port (i.e. Hong Kong) is included in
= P600,000.3
Gross Philippine billings. Hence, P1,500 x 400
The “48-hour” rule on transient passengers

Flights or voyages of passengers, mails, or excess baggage commencing from
foreign countries which will be interconnected in the Philippine for continuance of
the flight or voyage to a foreign destination by the same international carrier shall
not be considered originating from the Philippines if the actual departure is made
within 48 hours from embarkation in the country, except only when delayed by
663

force majeure. As such, the portion of the ticket pertaining to the outgoing flight
voyage shall be excluded from the Gross Philippine Billings. or
However, if continuation of the flight or voyage to a foreign destination is made b
another airline company or international sea carrier, the cost of the outgoing fj h
or voyage shall be included in the Gross Philippine Billings of that airline i
carrier regardless of the intervening period of time between the arrival and
departure from the Philippines.
Illustration
Fair Airways, an international carrier, had the following summary of flights during a
quarter:
Direct outgoing flights
To Guam (P2,400 x 5,000 passengers) P 12,000,000
To USA (P6,000 x 4,000 passengers) 24,000,000
Inter-connecting flights
The following inter-connecting flights were continued in the Philippines:
of
passengers.
—_Flights______ Nos. Status
KoreaforGuam 600passengers Continued after 96 hours as scheduled
ChinaforGuam 400 passengers Delayed 52 hours; due to storm
Taiwan forUSA 500passengers Continued after 40 hours as scheduled
Guam for USA 300 passengers Delayed 52 hours; due to storm*
Korea for USA 200 passengers Continued after 24 hours*
*Endorsed to Fresh Airlines, another international air carrier, which airlifted the passengers to
their final destination
The gross receipts from inter-connecting flights to be included in the Gross Philippine
Billings of Fair Airways shall be:
KoreaforGuam 600 passengers x P2,400* P__1,440,000
Note:
1. Fares for transient passengers staying herein for more than 48 hours are included in Gross
Philippine Billings, except when they are delayed by force majeure. Hence, the fares of 400
passengers stranded by storm shall not be included.
2. The applicable average fair rate from Philippines to Guam is P2,400 similar to the average
used in direct flights.*
3. Fares on endorsed flights are excluded as they are part of the gross receipts of the carrying
airline.
The following shall be included in the Gross Philippine Billings of Fresh Airlines:
Guam for USA 300 passengers x P6,000* P 1,800,000

Korea for USA 200 passengers x P6,000 1,200,000
Total P__3,000,000
664

= “
ote: The 48-hour exemption rule on force majeure applies only to flights continued by the
5 ame
international carrier
due of Fair Airways for the quarter

The Gross Philippine Billings and the income tax
shall be:
pirect flight to Guam P 12,000,000

Direct flight to USA 24,000,000
connected flight from Korea for Guam 1,440,000
cross Philippine Billings P 37,440,000
Multiply by: Income tax rate 2.9%
Note to readers
All previous illustrations on international carriers are made in the context of
international air carriers, but it must be noted that the same principles and
procedures apply to international sea carriers on their voyages.
Foreign currency translation

In the computation of the Gross Philippine billings, tickets in foreign currencies
are translated at whichever is higher of the following conversion rates:
1. Monthly average Airline Rate in the Bank Settlement Plan (BSP) Monthly sales
report
2. Bankers Association of the Philippines (BAP) rate
Treaty or Reciprocity Consideration

International carriers may avail of a preferential rate or exemption from income
tax on the basis of applicable tax treaty or international agreement to which the
such that an international
Philippines is a signatory or on the basis of reciprocity
carrier whose home country exempts Philippine carriers shall likewise be exempt
from income tax in the Philippines.
Treatment of Income Other Than Income from International Transport
The other income of international carriers other than from international transport
is subject to the appropriate type of income tax. Active income such as demurrage
in the
fees, which are in the nature of a rent for the use of property of the carrier
Philippines, detention fees, and other charges relating to outbound and inbound
cargoes as charge for the use of property or rendition of services are subject to the
tax.
regular corporate income
riers :
Off-line international car
Off-line international carriers are those without flights or voyage starting from or
passing through any point in the Philippines (i.e., no landing rights). The branch or
sales agent in the Philippines of off-line international carriers which sells passage
665

——e ——_—
ns
Chapter 15-A - Regular Income Taxation: Special Corporatio
documents for compensation or commission to cover off-line flights or voyages of

its head office or other airline or sea carriers covering flight or voyages originating
from Philippine ports or off-line flights or voyages is subject to the regular
corporate income tax.
BOI OR PEZA-REGISTERED ENTERPRISES

Corporations, domestic or foreign, may register with the Board of Investments
(BOI) or to various economic zones such the Philippine Economic Zone Authority
(PEZA) to avail of preferential tax incentives. BOI-registered enterprises are given
tax holidays whereas PEZA and other economic zones offers tax holidays and or
5% gross income tax in lieu of all taxes, national or local.
Details of these preferential tax treatments will be discussed under Local and
Preferential Taxation by the same author.
REPORTING OF SPECIAL CORPORATIONS TAXABLE ON NET INCOME

Special corporations, domestic or resident foreign, subject to tax on net income
are mandatorily required to use the itemized deduction. They are not allowed the
optional standard deduction. They file their income using B/R Form 1702-Mx.
SPECIAL NON-RESIDENT FOREIGN CORPORATION

Non-resident foreign corporations are generally subject to 25% final tax. This
section discusses the tax rules on the following special non-resident foreign
corporations which are subject to lower final taxes:
1. Non-resident cinematographic film owner, lessor, or distributor
2. Non-resident lessor of vessels chartered by Philippine nationals
3. Non-resident owner or lessor of aircraft, machineries, and other equipment
NON-RESIDENT CINEMATOGRAPHIC FILM OWNER, LESSOR OR DISTRIBUTOR

Cinematographic film includes motion picture films, films, tapes, discs and such
other similar or related products (RR6-2001).
Under the NIRC, owners, lessors, or distributors of cinematographic films are
subject to a 25% final tax on their gross income from all sources within the
Philippines. The phrase “from all sources within” is broad to encompass any
taxable income, passive or active, other than those arising from rentals of
cinematographic films.
NON-RESIDENT LESSOR OF VESSELS CHARTERED BY PHILIPPINE NATIONALS

These are subject to a 4 4% final tax on gross rentals, lease, or charter fees from
leases or charters to Filipino residents or corporations as approved by the
Maritime Industry Authority.
666

chapter 15-A - Regular Income Taxation: Special Corporations
sjlustration
changeOil, a domestic corporation, wished to import a scientific deep sea drilling
yessel but wanted to rent a unit to assess its capabilities first. ChangeOil chartered a
ynit from Explorer Lab, Inc. a non-resident foreign lessor, at a total charter fee of
p2,000,000. Satisfied with the unit, ChangeOil contracted Explorer Lab to provide
training for its employees at a training fee of P1,000,000 before buying a new one.
Required: Compute the final tax to be withheld by ChangeOil.
Solution:
The total final tax shall be computed as follows:
Charter fees (P2,000,000 x 4.5%) P 90,000
Training fees (P1,000,000 x 25%) 250,000
Total final withholding tax P__ 340,000
Note: Only rental, lease, or charter fees are covered by the 4.5% final tax. The normal 25% final
tax to a non-resident foreign corporation applies to other items of gross income earned within
the Philippines such as the training fees in this case.
NON-RESIDENT OWNER OR LESSOR OF AIRCRAFT, MACHINERIES, AND OTHER

EQUIPMENT
These are subject to a 7 14% final tax on rentals, charters, and other fees.
Illustration
NotSoRich Mining, a resident corporation, rented specialized mining equipment from
abroad. The non-resident lessor billed NotSoRich the following amounts in peso
equivalents:
Equipment rental P10,000,000
Set-up and training fee 1,000,000
Initial service and maintenance fee 500,000
50,000
Interest on rent in arrears
Total bill P11,550,000
Required: Compute the total final tax to be withheld by NotSoRich Mining
Solution:
is:
The total final tax to be withheld
x 7.5%)
Equipment rental (P10,000,000 x 7.5%) P pono
750,000
(P1,000,000
Set-up and training fee fee (P500,000 x 7.5%)
het
Initial service and maintenance ee
(P50,000 x 25%)
Interest on rent in arrears
es
tax
Total final withholding
Note: Exemption
sore erest incomeis iNlimited to charter, rentals, and other fees. Other inco
this. case ithi such as
is subject to the 25% : me from within
final income tax, .
667

A Differentiation:
Lease or charter of:
Lessor Cinema Other
films Vessels Aircraft | equipments
Domestic 25%WTI 25%WTI 25%WTI 25% WTI
Resident foreign 25%PTI 2.5%GPB 2.5%GPB 25%PTI
Non-resident foreign 25%PGI 4.5%PGI 7.5%PGI 7.9%PGI
Legend:
WTI = World taxable income; PTI = Philippine Taxable income
PGI = Philippine gross income
GPB = Gross Philippine billings
Note that gross income is gross receipts less the direct cost of services while Gross
Philippine Billings relates to gross receipts.
Non-resident foreign corporations, special or resident, do not file income tax

returns. Philippine residents who make income payments to them must withhold
the final tax and remit the same to the government through B/R Form 1601-F.
E
Md
668

CHAPTER 15-A: SELF-TEST EXERCISES

—_—_—
1 State the general income tax rules for regular types of corporations.
2. Enumerate the different types of resident foreign corporations and_ their
corresponding tax rates,
3. What are exempt corporations? What is their primary distinguishing feature?
4. Explain the classification rule.
Explain the dominance test. What types of taxpayers are covered by the
wm
dominance test?
Discuss the taxation rules for FCDU and offshore banking units.
Explain the meaning of Gross Philippine billings.
~
meee are the special types of non-resident foreign corporations and their tax
rates:
True or False 1
1. Foreign and domestic banks may have an EFCDU.
2. The income of FCDU, OBU, and EFCDU from residents other than depositary banks
in the EFCDS or FCDS is subject to a 10% final tax.
The income of FCDU or EFCDU from foreign sources is subject to regular income
tax.
corporations.
Corporations subject to a rate below 25% are referred to as special
partnerships.
Corporation includes joint ventures, associations, and
Ot
construction projects or
Joint ventures formed for the purpose of undertaking
corporations.
engaging in energy operations are taxable as
Exempt corporations are never subject to
are subject to corporate income
~
Government-owned and controlled corporations

tax.
taxable only on income from
A non-profit hospital is an exempt corporation
are exempt from tax.
10. PEZA-registered enterprises
11. BOl-registered enterprises enjoy
income tax holiday for 20 years.
ofa foreign bank.
12. FCDU and OBU are divisions
sources is exempt from income tax.
13. The income of OBU from foreign
to a tax of 2.5% on taxable income.
14, International carriers are subject
to 25% tax on Philippine taxable income.
15. A domestic carrier is subject
claim optional standard deduction.
16. Special corporations can
to file income tax returns because they do
17. Exempt corporations are not required
not pay tax. ; to use the itemized
Exempt corporations and special corporations are mandated
18.
deductions. ve
ations who filed late are not subject to penalties because they ha
19. Exempt corpor
no tax due.
669

20. Exempt corporations filing BIR Form 1702-EX will not pay tax as a rule,
True or False 2
1. The classification rule is applied to private schools and non-profit hospitals,
2. The dominance test is applied to non-profit schools and private hospitals.
3. A government school is exempt from income tax.
4 A non-resident owner or lessor of vessel is subject to tax at 7.5% of the
gross
rental.
A regional area headquarters is exempt from tax because it does not derive
income.
A regional operating headquarter of a multinational company is subject to 10% on
world income.
A non-resident cinematographic film owner, lessor, or distributor is subject
to
25% tax on taxable income.
A non-resident owner or lessor of aircraft, machineries and other equipment is
subject to tax at 4.5% of gross rentals.
A farmers’ or fruit growers’ association is exempt from income tax.
. Exempt corporations are subject to income tax on their income from unrelated
activities.
11. A non-stock, non-profit institution must be organized for religious, charitable,
scientific, athletic, cultural, or for the rehabilitation of veterans.
12. To be exempt, all of the net income or asset of a non-profit corporation or
association must be devoted to its purposes, and no part of its net income or asset
accrues to benefit any member or a specific person.
13, The unrelated income of non-profit corporations is exempt from income tax if the
same is diverted to its non-profit purpose.
14. The exemption of non-stock and non-profit corporations or associations shall
commence when they secure their tax exemption ruling.
15. The certificate of tax exemption ruling is valid for one year and renewable every
year thereafter.
True or False 3
1. The FCDUs, OBUs and EFCUs are never subject to regular income tax.
Z, Persons and service establishments inside an ECOZONE are subject to the regular
tax.
3. The Gross Philippine Billings of international carriers includes receipts from
outgoing voyage or flights which must be billed in the Philippines.
Expenses of an exempt corporation not directly traceable to either related or
unrelated operations are allocated based on the ratio of gross income.
Local water districts are exempt from income tax.
wm
Cooperatives that transacts business with non-members are taxable on income

allocated to interest on members’ capital when their accumulated reserve exceeds
P10,000,000.
670

an
£ a ae
oter 45-A — Regular Income Taxation: Special Corporations

cha
All cooperatives, regardless of classification, are subject to income tax on their
income from unrelated activities.
The expenses of exempt corporations from exempt operations are deductible to
its gross income from unrelated operations.
When the income from related activities constitutes at least 50% of total income,
rivate schools are subject to tax at 10% of taxable income from related and
10. When the income from
unrelated activities exceeds 50% of total income, only the
income from unrelated activities of private schools and non-profit hospitals is
subject to 25% tax.
11. Refunded tickets and tickets of
non-revenue passengers are excluded in the Gross
Philippine Billings.
passengers are excluded from Gross Philippine
12. The gross receipts from transient
same carrier within 48
Billings if they depart from the Philippines through the
hours from their arrival.
13. The 48-hour rule does not apply
when another carrier continued the flight or
voyage of transient passengers.
14. The 48-hour rule may be extended by force majeure
.
shall be subject to 25% tax on gross
15. Domestic film owners, lessors or distributors
income from all sources within.

taxable on
1. A non-resident foreign corporation is
taxable income.
a. worldtaxable income. — c. Philippine
b. world gross income d. Philippine gross income.
cations do not apply to
The resident and non-resident classifi
a. domestic corporation.
b. foreign corporation.
corporations.
c. both domestic and foreign
eign corporations.
d. neither domestic nor for
porate taxpayer?
Which of these is a special cor ip
a. Aprivate school c. A business partnersh
b. A private hospital d. A trading corporation
tax. Which
Asa rule non-profit, non-stoc
k corporations are exempt from income
tax?
to income
of these non-profit entities is subject
a. Association c. Farmer’s cooperative
b. School d. Hospital
pertains to income from
The exemption of non-profit corporations specifically
q. related parties. c. related activities.
b. unrelated activities. d. both related and unrelated activities.
671

ee
me Ta xa ti on : Sp ecial Corporations
gular Inco
Chapter 15-A — Re
on
or a tion is taxable come.
6. A do me st ic co rp
me . c. Ph il ippine taxable in
inco income.
a, world taxable d. Philippine gross
in co me .
b. world gross
ble on
corporation is taxa come.
Aresident foreign c. Ph il ippine taxable in
e in co me .
4. world taxabl d. Philippine gross
income.
os s in co me .
b. world gr
ion, is
er si ty , a pu bl ic educational institut
Bingit State Univ te.
tax at preferential ra
a. subject to income te.
tax at the regular ra
b. subject to income erential inco me tax.
r and pref
c. subject to both regula tax.
d. exempt fr om corporate income
ora tions are
, go ve rn me nt -o w ne d and controlled corp
Generally
income tax.
a. subject to preferential
tax.
subject to regular income .
b.
to bot h reg ula r and preferential income tax
c. subject
.
d. exempt from income tax
are
e pr op ri et ar y ed uc ational institutions
10. Generally, privat
ial income tax.
a. subject to preferent
income tax.
b. subject to regular income taxes.
sub jec t to bot h reg ular and pre ferential
c.
tax.
d. exempt from income
pt corporation?
11. Which is not an exem
a. Social Security System
surance System
b. Philippine Health In
c. Government-owned and
Mutual Fund
d. Home Development
ati ons is sub jec t to the 25% regular corporate tax?
cor por
12. Which of these foreign
3. Offshore banking units
b. International carrier company
dquarters ofa multinational
c. Regional operating hea
d. Call center
n corporation is
13. A non-resident foreig
able income.
subject to 25% tax on tax
ss income.
subject to 25% tax on gro
oP
gross income.
not subject to 25% tax on
gross income abroad.
never subject to 25% tax on
ao
672

vr
14, Aresident foreign corporation is

a. subject to 10% tax on global taxable income.
b. subject to 10% tax on Philippine taxable income.
c. not subject to 25% tax on foreign income.
d. not subject to 25% tax on Philippine taxable income.
15. A domestic corporation is not subject to the 25% regular income tax on
a. foreign income. c. Philippine income.
b. global income. d. gross income.

1. An allocation of common expenses between related and unrelated activities is
made to properly reflect taxable income. This procedure is required only of
a. domestic corporations.
b, resident foreign corporations.
c. exempt corporations.
d. non-profit hospitals.
2. What percentage of profit will shareholders ultimately receive from the corporate
earnings?
a. 70%oftaxableincome c.63% of taxable income
b. 7O%ofgrossincome d.63% of gross income
3. Which of these concepts is not relevant to corporations?

a. Exclusion c. Deduction
b. Gross income d. Personal exemptions
4. The preferential tax rate of 10% on taxable income applies to

a. proprietary hospital. c. non-profit school.
b. proprietary school. d. non-profit association.
5. When applicable, the 10% preferential tax rate applies to income from
a. related activities.
b. unrelated activities.
c. bothrelated and unrelated activities.
d. neither related and unrelated activities.
6. Exempt corporations are nevertheless subject to 25% tax on income from

related activities.
ao oD
both related and unrelated activities.
neither related and unrelated activities.

ial Corporations
_ Chapter 15-A — Regular Income Taxation: Spec
7. Which is not taxable on unrelated activities?

a. Government agencies
b. Non-profit corporations
c. Government-owned and controlled corporations
d. None of these
The income from properties of exempt corporations is considered income from

related sources.
of
unrelated sources.
either related or unrelated activities at the discretion of the examiner.
unrelated activities depending on the nature of the
ao
either related or
properties concerned.
The classification rule is not relevant to a

a. cooperative.
b. farmers’ association.
c. government school.
d. profit-oriented agricultural organization.
10. Which is subject to corporate income tax?

a. Joint venture engaged in construction
b. Joint venture engaged in oil exploration
c. Philippine Charity Sweepstakes Office
d. Acharitable medical hospital
11. International carriers are taxable on their gross income or receipt from
a. incoming shipment or flight.
b. outgoing shipment or flight.
c. both incoming and outgoing flight.
d. any sources.
12. A domestic carrier is subject to tax on

a. Philippine gross income.
b. world gross income.
c. Philippine taxable income.
d. world taxable income.
13. A non-resident lessor of vessels chartered by Filipino nationals is subject to

a. 25% tax on its gross rentals from Filipino nationals.
b. 25% tax on its worldwide rentals.
c. 4.5% tax on its gross rentals from Filipino nationals.
d. 7.5% tax on its gross rentals from Filipino nationals.
14. A domestic cinematographic film owner, distributor, or lessor is subject to

a. 25% tax on Philippine gross income.
b. 25% tax on global taxable income.
674

chapter 15-A — Regular Income Taxation:
Special Corporations
c. 25% tax on global taxable
income.
d. 25% tax on Philippine gross income
.
45. Anon-resident film owner, dis
tri
a. 25% tax on Philippine gro butor or lessor is subject to
ss income.
b. 25% tax on global taxable
income.
c. 25% tax on global taxable
income.
d. 25% tax on Philippine gross
income.
16. Anon-resident lessor of aircraft is subject to
a. 7.5% tax on Philippine gross income.
b. 4.5% tax on global taxable income.
c. 25% tax on global taxable income.
d. 25% tax on Philippine gross income.
17. Adomestic lessor of aircraft and other equipments
is subject to
a. 4.5% tax on Philippine gross income.
b. 25% tax on global taxable income.
c. 7.5% tax on global taxable income.
d. 25% tax on Philippine gross income.
18. An exempt corporation with no taxable income is delinquent in filing its tax
return. Which penalty is it liable to?
a. Surcharge
b. Interest
c. Compromise
d. All ofthese
Multiple Choice: Case Problems

Problems 1
Dark Desire Corporation, a MSME, reported the following gross income and expenses
in 2022:
Gross income P 400,000 P 300,000 P 700,000
Deductions 200,000 150,000 350,000
Taxable income P200,000 P150,000 P.350.000
Compute the income tax due if the corporation is a/an:

1. domestic corporation
a. P100,000 c. P50,000
b. P70,000 d. P40,000
2. resident foreign corporation

a. P100,000 c. P50,000
b. P70,000 d. P40,000
675

orations
15- — Regular Income Taxation: Special Corp
Chapter 5-A
n
3. non-resident foreign corporatio
a. P175,000 c. P75,000
b. P100,000 d. P50,000
hospital majority oti
4. private proprietary educational institution or a non-profit
income is from related activities
a. P105,000 c. P70,000
b. P35,000 d. P3,500
5. non-profit entity
a. P105,000 c. P35,000
b. P60,000 d.P0
6. government-owned and controlled corporation

a. P70,000 c. P35,000
b. P60,000 d.P0
7. international carrier
a. P105,000 c. P17,500
b. P10,000 d. P5,000
8. offshore banking unit
a. P70,000 c. P40,000
b. P50,000 d. P20,000
9. non-resident cinematographic film owner, distributor or lessor
a. P120,000 c. P100,000
b. P87,500 d. P50,000
10. non-resident owner or lessor of vessels
a. P18,000 c. P120,000
b. P31,500 d. P15,750
11. non-resident owner or lessor of aircraft, machineries and other equipment

a. P120,000 c. P30,000
b. P52,500 d. P26,250
12. non-profit association, 60% of its income was derived from unrelated activities
a. P70,000 c. P42,000
b. P63,000 d.P0
676

napte! 45-A — Regular Income Taxation: Special Corporations
0
prcblem oratin, aa larlarge

rakina Corporation, Corporation, reported the following in 2020:
;
Ha
—Related__ _Unrelated_ ___
Total__
-ossincome P 300,000 P 200,000 P 500,000
or qucions __100,000 _ 100,000 ___200.000
qaxable income P200,000 P 100,000 P 300,000
compute the tax due if the corporation is a/an:
1 regular domestic corporation
‘ 4 P82,500 c. P50,000
b. P75,000 d. P25,000
2, proprietary educational institution or non-profit hospital
qa. P75,000 c. P16,500
b. P60,000 d. P3,000
exempt non-profit corporation
a. P75,000 c. P27,500
b. P50,000 d.P0
Problem 3
A large domestic bank reports the following income from its regular banking (RBU)
and foreign currency deposit unit (FCDU):
RBU FCDU
Interest from lending with FCDUs/OBUs_ P - P 300,000
Interest from lending to other residents 2,000,000 3,000,000
Interest from lending to non-residents 1,000,000 1,500,000
Less: Business expenses __ 1,800,000 2,000,000
Net income P_
1,200,000 P2,800,000
Answer the following:
1. Compute the total final tax.
a. P500,000 c. P 390,000
b. P 300,000 d. P 150,000
2. Compute the regular income tax due.
a. P 750,000 c. P 300,000
b. P 360,000 d. P 240,000
Problems 4
The following data pertains to a MSME corporate taxpayer in 2021:
P Philippines Abroad Total

i, income P 500,000 P 700,000 P 1,200,000
cuect deductions 200,000 300,000 500,000
°mmon expenses 150,000
677

— Re gu la r In co me Ta xa tion: Special Corporations
Chapter 15-A
taxpayer is a:
Compute the income tax if the
anized in the Philippines
1. Business partnership org
P 47,500 c.P 71,250
a.
b. P59,375 d, P. 90,000
2. General professional partnership

a. P165,000 c. P 71,250
b. P90,000 d. P 0
3. A joint venture formed for the unde rtaking of construction projects or gj

government
exploration under service contracts with the
a. P165,000 c. P71,250
b. P90,000 d.P0
4, A business joint venture organized in the Philippines

a. P 47,500 c. P 71,250
b. P59,375 d. P 90,000
the
5. Aco-ownership which is limited to the collection of income and preservation
properties co-owned
a. P165,000 c. P71,250
b. P 90,000 d.P 0
6. A co-ownership which re-invested the income of the property in other income-

producing properties
a. P 47,500 c. P 71,250
b. P59,375 d. P 90,000
7. Resident foreign corporation

a. P 47,500 c. P 71,250
b. P59,375 d. P 90,000
8. Non-resident foreign corporation

a. P 360,000 c.P 125,000
b. P 150,000 d. P 90,000
Problem 5
Musk, a large shipping company, reported the following gross receipts and deductions
during the year:
Shipments
Incoming Outgoing Total
Gross receipts P 2,000,000 P 3,000,000 P 5,000,000
Less: Deductions 1,500,000 _2,000,000 3,500,000
Net income P500,000 P_1,000,000 P_1,500,000
678

chapter 15-A - Regular Income Taxation: Special Corporations
canpute the tax due assuming the corporate taxpayer is a:

Domestic shipping carrier
"3. P30,000 c. P 375,000
>. P 125,000 d. P450,000
2, kesident international shipping carrier
a. P450,000 c. P 125,000
b. P 75,000 d. P 30,000
Problem 6
An air carrier reported the following for its air transport operations:
Destination Fares
Philippines - Australia P1,000,000 (1,000 tickets)
Australia - Philippines P1,250,000 (1,000 tickets)
Philippines - Russia* P2,000,000 (1,000 tickets)
Philippines - Japan P1,500,000 (2,000 tickets)
*The flight was referred to another airliner in Japan. The Japanese airliner airlifted passengers
for Russia.
Determine the income tax due assuming that the carrier is a/an:
1. International carrier
a. P 143,750 c. P62,500
b. P112,500 d. P81,250
2. Domestic carrier with P3,000,000 global expenses

a. P 825,000 c. P 143,750
b. P 687,500 d. P 112,500
Problem 7
VisitNow.Phl is engaged in the business of sea transport. It arranged the transport of
various cargoes with a shipping company to bring the cargoes from the Philippines to
Afghanistan for a total charter fee of P4,000,000.
Compute the income tax on this transaction assuming that the shipping company is
a/an:
4. International shipping carrier
a. P 300,000 c. P 100,000
b. P 180,000 d.P0
2. Non-resident shipping carrier

a. P 1,200,000 c. P 180,000
b. P 300,000 d. P 100,000
679

In co me Ta xa ti on : Special Corporations
r
Chapter 15-A - Regula
|
; only/40% ‘
problem 8 has a gro ss in come of P4,000,000,
non-stock school 2xpé 000,000, 50% .
A large non-profit {
ate d act ivi tie s and total expenses of P3,
ntri yuted by rel ties.
which was co
co nn ec ti on wi th non-related activi
ed in
which was incurr activi ties is not Used
tot al inc ome tax if the income from non-related
1. Compute the
ational purposes.
exclusively for educ c. P 100,000
a, P300,000
d. P 270,000
b. P 225,000
due if all income
at el y pr ec e ding pro blem, compute the income tax
Inthe immedi oses.
2.
n- pr of it sch ool is us ed for educational purp
of the no 0,000
c. P 27
a PO
d. P 300,000
b. P 100,000
itable
tota l inc ome tax ass umi ng the taxpayer is a non-profit char
3. Compute the
institution.
P 270,000 c. P 225,000
a.
P 300,000 d. P 90,000
b.
private school.
assuming the taxpayer is a
4, Compute the total income tax
a. P100,000 c. P 300,000
b. P 250,000 d. P 90,000
pital.
ng the taxpayer is a private hos
5. Compute the income tax assumi
a. P90,000 c. P 100,000
b. P 250,000 d. P 300,000
taxpayer is a non-profit hospital.
6. Compute the income tax assuming the
a. P 250,000 c. P 100,000
b. P 300,000 d. P 90,000
er is a government hospital.
7. Compute the income tax assuming the taxpay
a. P 300,000 c. P 225,000
b. P270,000 d. P 90,000
Problem 9
00 gross income in 2021. 60% 0
A private school with P80 million assets has P5,000,0
of P2,000,000, 60% 0
this represents tuition and miscellaneous fees. It has net income
which was contributed by sources not related to academic instruction.
1. Compute the total income tax.
a. P 440,000 c. P 200,000
b. P 360,000 d. P 20,000
680

y
9. Compute the total income tax if the school uses all its income for educational
purposes.
a, P900,000 c. P 200,000
b, P 440,000 d. P 20,000
integrated Case 1
The following are the income and expenses of a private school:
Philippi \broad
Gross profit from educational services P 2,000,000 P 500,000
Dividend from a domestic corporation 40,000 0
Dividend from a foreign corporation - 200,000
Interest income from a bank deposit 30,000 40,000
Interest expense from bank borrowings 100,000 0
Business expenses 1,000,000 280,000
Income taxes paid 150,000 45,000
Required: Compute the tax due assuming that:

a. The foreign taxes are claimed as tax credit
b. The foreign taxes are claimed as deductions
Integrated Case 2
the following gross
Baguio Medical Center is a non-profit hospital. In 2021, it reported
income and expenses:
Activities
Related Unrelated Total
P 4,000,000 P 5,000,000 P 9,000,000
Gross income
3,075,000 3,000,000 6,075,000
Directly traceable expenses
1,125,000
Common expenses of both activities
P_1,800,000
Net income
Required: Compute the tax due assuming

1. the given facts.
hospital.
2. that Baguio Medical Center is a private
nt hospital.
3, that Baguio Medical Center is a governme
Integrated Case 3
wned and con tro lle d cor por ati on, had the following items of
Dan umco, a government-o
income during the year:
P 8,000,000
Service charges to clients
800,000
Rental on properties
45,000
Interest on bank deposits, net
50,000
Dividend income
Gain on the sale of stocks directly to a buyer 250,000
Expenses 7,000,000
681

., Required: Compute the following:

1. Final tax withheld on the interest income
2. Capital gains tax due on the sale of domestic stocks
3. Regular income tax
a. Assuming the given facts
b. Assuming Danumco is a local water district
Integrated Case 4
A private school had the following list of transactions during the year:
Tuition fees and assessments P80,000,000

Rentals from various concessionaries 4,000,000
Fees from a parking lot maintained by the school 2,400,000
Interest on savings account and time deposit 1,600,000
Dividend from stocks 400,000
Salaries expenses (10% to senior citizens) 50,000,000
Contribution to pension fund of employees
(40% to prior service cost) 400,000
General utilities and maintenance 24,000,000
Research and development 2,000,000
Miscellaneous expenses 1,000,000
Contributions to various accredited NPOs 5,000,000
Contributions to government priority activities 2,000,000
Required: Compute the following:

a. Total final tax withheld at source
b. Total gross income subject to regular tax
c. Total claimable deductions
d. Corporate income tax due
682

4 ee hk ee — E Oe — -
chapter 15-B - Regular Income Taxation: Regular Corporations
CHAPTER 15-B
REGULAR INCOME TAXATION: Regular Corporations
chapter covers taxation of regular domestic. and resident foreign

This.
the branch profit
corporations, the improperly accumulated earnings tax, and
remittance tax.
mastery of the following:
After this chapter, readers are expected to have obtained
n
1, The regular corporate income tax (RCIT) for domestic and resident foreig
corporations
2. The minimum corporate income tax (MCIT)
3. The scope and coverage of Branch profit remittance tax
4. The procedural computation of Branch Profit Remittance Tax
THE REGULAR CORPORATE INCOME TAX

to all corporations in general. It covers
The regular corporate income tax applies s
are not subject to final tax or capital gain
all taxable income of corporations that
tax.
corporations
Income tax rules on regular
ct to
Domestic 20% or 25% Regular Corporate income tax subje
| Corporation —_ the Minimum Corporate Income Tax
Resident 25% Regular Corporate Income Tax subject to the
| Corporation __ Minimum Corporate Income Tax
X
ORATE INCOME TA
THE MINIMUM CORP taxation is the Minimu
m
ur e of co rp or at e in co me
The most peculiar feat or at io ns ar e su bj ect to a minimum corporat
e
Tax (MCI T) . Corp
Corporate Income is temporarily
os s in co me . Du ri ng these pandemic, the MCIT
income tax of 2% of gr
2020 to June 30, 2023. It will
reduced to 1% of gross income starting July 1,23.
2 % st ar ti ng July 1, 20
to
revert back
jnimum tax, the MCIT is payable when:
n has zero or negative taxable income.
The corporatio
a
b MCIT is greater than the regular corporate income tax (RCIT).
scopes fthe Minimum Corporate Income Tax

cop CIT is applicable to every corporation taxable to the regular corporate
tax (25% oF 20%) including non-profit, exempt, and special corporations
683

Chapter 15-B - Regular Income Taxation: Regular Corporations
with respect to their taxable income subject to regular corporate income tax, p
not to their income subject to special tax rates. yout
MCIT Exempt entities:

1. Real Estate Investment Trusts or REITs under RA 9856
2. Domestic corporations which opted to be taxed under the 15% corporat
income tax (gross income tax) .
3. Domestic or resident corporations subject to special tax rates
a. Proprietary educational institutions, and non-profit hospitals
b. FCDUs and EFCDUs
c. International carriers
d. Firms subject to special income tax such as PEZA and BCDA locators
4. Allnon-resident foreign corporations
Timing of Imposition of MCIT

MCIT is imposed beginning on the fourth taxable year immediately following the
year in which such corporation commenced its operations, when it is greater than
the regular income tax computed for the taxable year. Simply stated, MCIT applies
on the X + 4¢4 year of operations.
will be
For instance, a corporation which started operations on any day in 2017
enable the business
covered by MCIT in 2021. The rule is apparently intended to
to obtain competitive traction before being subjected to MCIT.
MCIT Gross income under the NIRC
For corporation involved in: | “Gross income” means

1. Sale of goods Gross sales less sales returns, discounts,
allowances, and cost of goods sold
2. Sale of service Gross receipts less sales returns,
allowances, discounts, and cost of services
the tota | consideration agreed upon by the buyer and the seller
Gross sales - means
for the sale of goods. Gross sales include cash (collected) sales an d account
(uncollected) sales.
rend ered or to be rendered. Gross
Gross receipts - means cash collections for services
f- pocket expenses incurred by
receipts include reimbursements by the client for out-o
the service provider.
directly incurre d to prod
uce
Cost of goods sold (COGS) includes all business expenses
use.
the merchandise and to bring them to their present location and
684
ere
na [3 te: e——
orations
chapter 15-B - Regular Income Taxation: Regular Corp
y, Fora trading or merchandising concern, COGS shall include the invoice cost of the
the
goods sold, import duties, freight in transporting the goods to the place where
goods are actually sold, and insurance while the goods are in transit
p, Fora manufacturing concern, COGS shall include all costs of production of finished
goods such as raw materials used, direct labor and manufacturing overhead,
freight cost, insurance premiums, and other costs incurred to bring the raw
materials to the factory or warehouse.
necessarily incurred to
Cost of services shall mean all direct costs and expenses
provide the services required by the customers and clients including:

directly
a. Salaries and employee benefits of personnel, consultants, and specialists
rendering the service; and
iation or
b. Cost of facilities directly utilized in providing the service such as deprec
rental of equipment used and cost of supplies.
e.
In the case of banks, 'cost of services' shall include interest expens
NIRC is the gross income
It is submitted that the “gross income” referred to by the
from operations.
MCIT Gross income under the regulations

le income not subjected to final tax
RR12-2007 included all other items of taxab
me.
and capital gains tax as part of gross inco
may be que sti one d as an imp rop er introduction of legislation, it is an
While this
rule in taxa tion that rev enu e regulations and rulings are presumed
established ts.
ret ati ons of the law unle ss chal lenged and reversed before the cour
valid int erp
be com put ed as 1% of the total gross income subject to
Thus, MCIT shall “gross income” is the
to say, the MCIT concept of
regular income tax. Needless
ncept of gross income.
same with the OSD co
IT COMPUTATION
ILLUSTRATIVE MC
n
ofa trading concer
Illustration 1: MCIT owing for 2021:
e ta xp ay er su bj ec t to MCIT reported the foll
A corporat 0,000
000,
P 1,,00
Gross sales 30,000
fects
s di sc ou nt s & allowances for de 20,000
Sa le
Sales returned by
customers 20,000
Interest income from bank deposit 60,000
vacant premises
Rental income from
220,000
ntory, at the start of the year 700,000
handise
ass purchases of merc ng the year
25,000
Ne t freight on purchases duri
s on
purchase discounts and allowance
685
fhe Oss, . \
ns
Chapter 15-B - Regular Income Taxation: Regular Corporatio
defective merchandise 40,000
Purchases returned to suppliers 50,000
Inventory, at the end.of the year 160,000
The cost of goods sold shall first be computed as follows:

Add: Net purchases
Gross purchases P 700,000
Add: Freight in 25,000
Less: Purchase disc. and allowances 40,000
Purchase returns __ 50,000 ___ 635,000
Total goods available for sale P 855,000
Less: Ending inventory ___160,000
Cost of goods sold P___695,000
The minimum corporate income tax shall be computed as follows:
Less: Sales discounts and allowances P 30,000
Sales returns 20,000 50,000
Net sales P 950,000
Less: Cost of goods sold 695,000
Rental income from vacant premises 60,000
Total gross income . P 315,000
Multiply by: MCIT rate 1%
Minimum Corporate Income Tax (MCIT) Pp 3.150
Note: The interest income from banks is excluded in total gross income because it is subject to final
tax.
Illustration 2: MCIT of a Manufacturing Concern

A foreign corporation had the following data in 2022, its fourth year of operation:
Sales, net of discounts and allowances P 2,400,000
Gain on sale of machineries 100,000
Dividend income from domestic corporations 20,000
Material purchased 980,000
Conversion costs incurred:
Direct labor used 350,000
Factory overhead 280,000
Physical counts conducted at the start and end of the year revealed the following
balances in inventory:
January 1 December 31
Raw materials ~P 120,000 P 180,000
Work-in-process 230,000 170,000
Finished goods 130,000 160,000
686

ws:
The cost of goods sold shall be determined as follo
P 120,000
Raw materials, beginning
980.000
Net purchases of materials
Less: Raw materials, end ; 1 80,000
P 920,000
Raw materials used
,
Add: Conversion costs
Direct labor P 350,000
Factory overhead 280,000 630,000
P 1,550,000
Total manufacturing costs incurred
Add: Work in process, beginning
Total manufacturing costs placed into process P 1,780,000
170,000
Less: Work in process, end
Cost of goods manufactured or finished P 1,610,000
Add: Finished goods, beginning 130,000
Total cost of goods available for sale P 1,740,000
Less: Finished goods, end ____ 160,000
Cost of goods sold P_1,580,000
as follows:
The minimum corporate income tax shall be computed
P 2,400,000
Sales, net of discounts and allowances
1,580,000
Less: Cost of goods sold
P 820,000
Gross income from operations
to final tax
Add: Other taxable income not subject 100,000
Gain on sale of machineries
P 920,000
Total gross income __ 1%
Multiply by: MCIT rate p__ 9,200
tax
Minimum corporate income
gross income because
stic corporation is excluded in total
Note: The dividend income froma dome
it is exempt from tax.
a Service Provider
Illustration 3: MCIT of ed the
or at io n pro vid es co ns ul ta nc y ser vices to various clients. It report
Lacoste Corp operation:
year of
following in 2021, its fifth
llings
Collections and bi P 3,200,000
ed net of discounts
Collections on services render 800,000
ed
Uncollected bills for services render 600,000
to be provided
Advanced collections for services
out-of-pocket expenses
Client reimbursements for 400,000
incurred by consulting staff
client expenses paid
Client reimbursements for 150,000
or advanced by Lacoste
30,000
Royalties from a software developed by Lacoste
687
ETE
Le RE, A : x pe,
=. Pil ase a ay
“pe
ME Ee ai | eae

Expenses:
Salaries of consulting staff P 1,600,000
Salaries of administrative employees 700,000
Office rent and utilities expense . 420,000
Office depreciation expense 50,000
Office supplies expense 35,000
Insurance expense 40,000
Local tax expense 14,000
The gross receipts of Lacoste shall be determined as follows:

Net collections on services rendered P 3,200,000
Collections on services to be provided (advances) 600,000
Reimbursement for firm’s out-of-pocket costs ____400,000
Gross receipts P_
4,200,000
The direct cost of services of Lacoste shall be as follows:

Consulting salaries expense P 1,600,000
Office rent and utilities expense 420,000
Office depreciation expense 50,000
Office supplies expense 35,000
Direct cost of services P_2,105,000
The minimum corporate income tax shall be computed as follows:

Gross receipt P 4,200,000
Less: Cost of services 2,105,000
Add: Other gross income not subject to final tax 0
Multiply by: MCIT rate 1%
Minimum corporate income tax P 20,950
MCIT AND RCIT: BASIC APPLICATION
Illustrative 1
A big corporate taxpayer started operations in 2018. It had the following results of
operations in 2021 and 2022:
2021 2022
Total gross income P2,100,000 P 4,000,000
Dividend income - domestic - 50,000
Business expenses 2,600,000 3,400,000
Net income (Net loss) (P_
500,000) 650,000
P_
688

chapter 15-B - Regular Income Tax
ation: Regular Corporations
ha taxMCIpay
The T abl
wille co
formm202
en1ce isinm 2022 (i.e. 2018 + 4).
). Si Since there is no MCIT yet in 202
1,
The 2022 income tax due of the Cor
poration shall be determined as:
Total gross income
P 4,000 000
Less: Itemized deductions
Regular allowable deduction ren
s P 3,400,000
NOLCO - 2021
500,000 __ 3,900,000
Taxable net income
P 100,000
Multiply by: Corporate income tax rate
Regular corporate income tax - 2 2%
2022 P___25,000
Total gross income
Multiply by: MCIT rate P 4,000,000
Minimum corporate income tax -20 _ iy
22 (HIGHER) P___ 40,000
The P40,000 MCIT is the income t
ax due in 2022. Note that the dividend income is
exemp from tax.
t
Illustrative 2
A corporation which started operation in 2017 reported the following:
202) 2022
Total gross income P 3,000,000 P3,200,000
Less: Regular allowable deductions 1,600,000 2,800,000
Special allowable deductions 400,000 500,000
Taxable net income P_1,000,000 (P_100,000)
The RCIT and MCIT are as follows:
2020 2021
RCIT (25% of taxable net income) P 250,000 P 0
MCIT (1% of gross income) p__ 30,000 P___32,000
The income tax due shall be P_ 250,000 P___ 32,000
ANNUAL RCIT AND MCIT: INTEGRATIVE ILLUSTRATION
tegration 1 i be
ave Corp, a MSME, reported the following on its fifth year of operation:
Sales,
Cost of
net of 1% withholding tax P 4,950,000
sales . 2,000,000
Interest from deposit, net of tax 75,000
Gain on sale of domestic stocks directly to buyer 150,000
Casual rent income, net of 5% creditable withholding tax 95,000
Interest income from advances to employees 50,000
Business expenses 3,100,000
Estimated quarterly tax payments 10,000
689

: Regular Corporations
Chapter 15-B - Regular Income Taxation
e tax shall be computed as
The regular income tax and minimum corporate incom
follows:
P 5,000,000
Sales (P4,950,000/99%)
2,000,000
Less: Cost of sales
P 3,000,000
Add: Other gross income not subject to final tax
Casual rent income (P95,000/95%) P 100,000
50,000 150,000
Interest from employee advances
Total gross income P_3,150,000
P 3,150,000
Total gross income
Less: Regular allowable deductions 3,100,000
P 50,000
Taxable net income
Multiply by: Corporate income tax rate ____ 20%
Regular corporate income tax | p__10,000
P 3,150,000
Total gross income
Multiply by: MCIT rate ____ 1%
Minimum corporate income tax P___3 1,500
:
The income tax payable of La-View Corp. shall be computed as follows
Income tax due - MCIT P 31,500

Less: Tax credits
Creditable withholding tax withheld on gross income:
Sales (1% x P5,000,000) P 50,000
Rent income (5% x P100,000) 5,000
Total creditable withholding tax P 55,000
Estimated quarterly tax payments 10,000 65,000
Income tax payable or (refundable) (P__ 33,500)
Illustration 2
reported
PC Repair, a MSME business partnership providing computer repair services,
the following on its sixth year of operation:
Service fees, net of P100,000 withholding tax P 1,900,000

Salaries of staff, supplies, and other direct costs 1,000,000
Interest from bank deposits, net 50,000
Gain on sale of land classified as capital asset 400,000
Gain on sale of used equipment 150,000
Administrative business expenses 500,000
Estimated quarterly income tax payments 25,000
690
|
fat BART a amen

The RCIT and MCIT shall be computed as follows:
service fees (P1,900,000+P100,000) P 2,000,000
Less: Direct cost of services 1.000.000
Add: Other gross income not subject to final tax “4
Ordinary gain on sale of equipment 150,000
Less: Regular allowable deductions 500,000

Multiply by: Corporate income tax rate ___ 20%
Multiply by: MCIT rate ot 1%
Minimum corporate income tax P___11,500
The income tax due and payable of PC Repair shall be computed as:
Income tax due — RCIT P 130,000
Less: Tax credits
Withholding tax on grossincome P 100,000
Quarterly estimated tax payments 25,000 125,000
Income tax payable P__5,000
EXCESS MCIT CARRY-OVER

tax credit that is deductible
The excess of the MCIT over the RCIT in any year is a
eeding three years.
against any RCIT tax due in the immediately succ
Rules
Excess MCIT Carry-Over
e Excess MCIT can be used only as a tax cre
dit against RCIT tax due in any of the
three s ubsequent years. Excess MCIT cannot be deducted against MCIT tax
due.
taken up to the full amount
e Credit for the Excess MCIT from prior years can be me tax
of RCIT tax due in the next three years. This means that the inco
of MCIT for that year.
payable when credit is made can get below the amount
tax crediting shall be
e When there are several Excess MCITs from prior years,
made in a first in-first out basis.
shall expire and can
e Unused Excess MCIT at the end of the three-year period
used.
no longer be
n 1 : Excess MCIT - Basic Application
{Illustratioio 2018:
A corporat n had the following MCIT and RCIT data since
691

ons
Taxation: Regular Corporati
Chapter 15-B - Regular Income
2019_ __2020 2021
2018 P_ 60,000
P 80,000 P 95,000 P 20,000
MCIT 40,000 80,000
20,000 85,000
RCIT P 40,000 P 80,000
P 80,000 P 95,000
Income tax due
60,000 P 10,000
MCIT Excess (MCIT-RCIT) P
withholding tax and estimated t,,
creditable
Required: Ignoring the effects of ‘
payable.
payments, compute the income tax
Solution:
P60,000 Excess MCIT is 2
In 2018, the income tax payable is the P80,000 MCIT. The
2021.
and is valid unti]
tax credit referred as Excess MCIT-2018
0 Excess MCrIt,
In 2019, the income tax payable is the p95,000 MCIT. The P10,00 made since
No tax credit shall be
referred to as Excess MCIT-2019, is valid until 2022.
tax due.
Excess MCIT cannot be credited against MCIT
In 2020, the income tax payable is nil.

2018 2019 2020
P 60,000 P_ 10,000
Excess MCIT prior year
P 40,000
Income Tax due
(_ _ 40,000) ~72==="" +> (___40,000)
Tax credit
p_20,000 P 10,000 P 0
Remaining Excess MCIT
due is taken. Since there are two
Note that full credit against the available RCIT tax
is employed.
Excess MCITs, first-in first out (FIFO) crediting
In 2021, the income tax payable is P50,000.

2018 2019 2020 2021
Adjusted MCIT Excess P 20,000 P 10,000
P 80,000
RCIT Tax due
Tax credit (_20,000) (_10,000)------ +> (_ 30,000)
- P50,000
Illustration 2: Expired Excess MCIT
data through the years
lligan, Inc. became subject to MCIT in 2017. MCIT and RCIT
were:
2017 2018 -_2019 2020 2021
MCIT P 400P 620P 200P 350 P 350
RCIT 0 500 300 200 400
Income tax due P 400 P__620 P__300 P__350 P__400
Excess MCIT Pp 400 P_ 120 P - P 150 P_-__=-
Required: Compute the income tax payable in each year.
692

solution: .
The income tax payable (still due) in each year is indicated in bold font.
2017 2018 2019 2020 2021
Income tax due P400 P620 P 300 P_350 P 400
excess MCIT © P 400 P 120 P 150
MCIT application (__300) -----» ( 300)
Remaining Excess MCIT P*100 P 120
a P__0
MCIT application (Expired) (__120) (__150) (__270)
‘oo A P1380
Note:
1. *The P100 unused Excess MCIT-2017 cannot be used in 2020 since the tax due for that year
is the MCIT (i.e., P350). Excess MCIT prior year cannot be credited against MCIT tax due.
2. The P100 unused Excess MCIT-2017 expired at the end of 2020 and cannot be carried over
as tax credit in 2021. Thus, only the 2018 and 2020 excess MCITs are credited in 2021.
Illustration 3: NOLCO and MCIT

A small corporate enterprise which became subject to MCIT in 2021 had the following
statement of income in 2021 and 2022:
2021 2022
Gross income P 300,000 P 500,000
Business expenses 420,000 250,000
Net income (P_120,000) P_250,000
Required: Compute the income tax payable in each year.
Solution:
The 2022 taxable net income and RCIT shall be computed as follows:
2021 2022
Total gross income P 300,000 P 500,000
Less: Allowable deductions 420,000 _ 250,000
Net income (NOLCO) (P 120,000) P 250,000
Less: NOLCO-2021 application —_—- (__120,000)
Taxable income (P.120,000) P130,000
2021 2022
Taxable income 0 P 130,000
Multiply by: 20% 20%
Regular corporate income tax Q
Pp P_26,000
Minimum corporate income tax p3,000 P5,000
Excess MCIT P__3,000
693
Sea
Osho ER! 20569

lar Corporations
Chapter 15-B - Regular Income Taxation: Regu
in bold font.
The income tax payable in each year is indicated
2021 2022
P__ 3,000 P 26,000
Income tax due
Less: Excess MCIT - 2021 (___ 3.000)
Income tax payable (still due) P_23,000
Recall that net operating loss is carried over as a deduction over 3 years afte; its
incurrence, except losses sustained between July 1, 2020 to June 30, 2023 which win
be carried over five years. Excess MCIT is likewise creditable over a 3-year period,
SCHEDULES OF EFFECTIVITY OF NEW TAX RATES

Regular CIT MCIT
DOMESTIC CORPORATIONS | Rate | _Effectivity _| Rate | __Effectivity
Domestic corporation, in 1% 7/1/2020 to
general 25% 7/1/2020 6/30/2023
2% 7/1/2023]
MSME with <P5M taxable 1% 7/1/2020 to
income 20% 7/1/2020 6/30/2023
2% 7/1/2023|
Special CIT MCIT |
Proprietary Educational 1% 7/1/2020 to i
Institutions and Hospitals 6/20/2023 Not applicable.
10% 7/1/2023
RCIT MCIT
FOREIGN CORPORATIONS Rate Effectivity Rate Effectivity
Resident foreign 1% 7/1/2020 to
corporations 25% 7/1/2020 6/30/2023
2% 7/1/2023
Upon effectivity of
Offshore banking units 25% | Upon effectivity of | 1% the CREATE law
the CREATE law until 6/20/2023_|
(4/11/2021) 2% 7/1/2023 _|
Regional Operating 1% 1/1/2022 to
Headquarters (ROHQ) 25% 1/1/2022 6/30/2023
2% 7/1/2023
Final Income Tax MCIT
Non-resident foreign 25% 1/1/2021 Not applicable.
corporations
TRANSITIONAL TREATMENT FOR CORPOR

ATE TAXES
Be it for purposes of the RCIT, SCIT or MCIT
, RR5-2021 employed the pro-rata
treatment in implementing transition to the new tax rates under the CREATE
la:
694
ili ib ane

jlustration 1
A large domestic corporate enterprise had the following data in 2020, its fourth
taxable calendar year of operation:
Sales P 2,500,000.
Add: Other gross income not subject to final tax 300,000
Less: Allowable deductions 1,600,000
Taxable income P___200,000
Distribution of transition months:

Months covered by the NIRC 6 (January to June 2020)
Months covered by the CREATE 6 (July to December 2020)
The RCIT shall be computed as follows:
Tax due - NIRC (P200,000 x 6/12 x 30%) P 30,000

Tax due -CREATE (P200,000 x 6/12 x 25%) ___ 25,000
Tax due - regular P___55,000 -
Alternatively, the RCIT may be computed by using the transitory RCIT rate. The
effective transitory tax rate is 6/12 x 30% + 6/12 x 25% = 27.50%. The RCIT may then

Multiply by: Transitory RCIT rate 27.50%
Tax due - regular P__55,000
The MCIT shall be computed as follows:
MCIT —- NIRC (P1.8M x 6/12 x 2%) P 18,000

MCIT - CREATE (P1.8M x 6/12 x 1%) 9,000
Tax due - MCIT Pp__27,000
Alternatively, the MCIT may be computed using the transitory MCIT rate. The effective
transi tory
ted
tax
as rate
follows : is 6/12 x 2% + 6/12 x 1% = 150%. The MCIT may then be
compu
ct to RIT P 1,800,000
nal aly by: inco
] gross sitosubje
Tranme ry MCIT rate "150%
aT
Tax due - regular
695

i A

The income tax due shall be the P55,000 tax due-regular. Should there be tay credit
during the year, the same shall be deducted from this amount. S
Illustration 2
Assume the following information for a corporate taxpayer:
Types of enterprise Large domesticenterprise _|

Type of accounting period Fiscal year
Current taxable year Fourth year ending April 30, 2021

Months covered by the NIRC 2 (May to June 2020)
Months covered by the CREATE 10 (July 2020 to April 30, 2021)
Tax due - NIRC (P100,000 x 2/12 x 30%) P 5,000

Tax due -CREATE (P100,000 x 10/12 x 25%) __
20,833
Tax due - regular P__25,833
MCIT — NIRC (P3Mx 2/12 x 2%) P 10,000

MCIT - CREATE (P3M x 10/12 x 1%) 25,000
Tax due - MCIT P__35,000
The income tax payable shall be the P35,000 tax due-MCIT. Should there be tax credits
during the year, the same shall be deducted from this amount.
Note:
If you are using the transitory rates, they would be computed as follows:
1. Transitory RCIT rate = 2/12 x 30% + 10/12 x 25% = 25.83%.
2. Transitory MCIT rate = 2/12 x 2% + 10/12 x 1% =1.17%.
Illustration 3
Types of enterprise Proprietary school
Current taxable year Fifth year ending May 31, 2021
Gross income (60% related) P 10,000,000
Taxable income P 2,400,000
696

pistribution of transition months:
Months covered by the NIRC 1 (June 2020)
Months covered by the CREATE | 11 (July 2020 to May 2021)
The SCIT shall be computed as follows:
Tax due - NIRC (P2.4M x 1/12 x 10%) P 20,000

Tax due -CREATE (P2.4M x 11/12 x 1%) 22,000
Tax due P___ 42,000
Note:
1. Note that proprietary schools or non-profit hospitals are not subject to MCIT.
2. The transitory SCIT rate shall be 1/12 x 10% + 11/12 x 1% = 1.75%.
Illustration 4
Types of enterprise Domestic MSME
Current taxable year Third year ending Sept. 31, 2020

Months covered by the NIRC 9 (Oct. 2019 to June 2020)
Months covered by the CREATE | 3 (July 2020 to Sept. 2020)
The SCIT shall be computed as follows:
Tax due - NIRC (P5.2M x 9/12 x 30%) P 1,170,000

Tax due -CREATE (P5.2M x 3/12 x 25%) 325,000
Tax due - regular P_1.495,000
Note:
income.
1. The 25% RCIT applies since it isa MSME with more than PSM taxable
ons.
2. That there is no MCIT yet as it applies on the X + 4" year of operati
Illustration 5
Types of enterprise Resident foreign MSME
Type of accounting period Calendar year
Current taxable year Sixth year ending 2020
Taxable income P_ 4,800,000
on months:
Distribution of transiti
Months covered by the NIRC 6 (January 2020 to June 2020)
eS covered by the CREATE _| 6 (July 2020 to December 2020)
697
oy
soo SE : a “
op” NS Ry fa ’
é & 4 jal. ¥ _f i. os: i % oa

Taxation: Regular Corporations
Chapter 15-B - Regular Income
follows:
The SCIT shall be computed as
P 720/000
Tax due - NIRC (P4.8M x 6/12 x 30%) ___ 600,000
Tax due -CREATE (P4.8M x 3/12 x 25%) 0
P_1,320,000
Tax due - regular
MCIT - NIRC (P10M x 6/12 x 2%) P ane

MCIT - CREATE (P10M x 6/12 x 1%) > as0.00n
Tax due - MCIT P__150,000
The income tax due for the year shall be the higher P1,320,000 tax due-regular,
Note: The lower 20% corporate tax rate do not apply to foreign corporations.
Illustration 6
Types of enterprise Domestic MSME
Type of accounting period Calendar year
Current taxable year Fourth year ending 2023

Months covered by 1% MCIT 6 (January 2023 to June 2023)
Months covered by 2% MCIT 6 (July 2023 to December 2023)

Taxable income for 2023 P 4,800,000
Multiply by: RCIT tax rate 20%
Tax due - regular P___960,000
MCIT at 1% (Px10
6/12 M
x 1%) P 50,000
MCIT at 2% (P1
x 0M
6/12 x 1%) 100,000
Tax due
- MCIT P__ 150.000
The income tax due for the year shall be the higher P960,000 tax due-regular.
vee ae 25% or 20% corporate tax remain as is. Only the MCIT will revert back to 2% by ly
698
a a ype ne —
a td tet 8 60 8 a

The procedures as discussed herein will produce the correct amount of tax less
the effect of rounding differences. The taxpayer may opt to use the transitory rates
table provided by the BIR for purposes for convenience.
QUARTERLY FILING OF INCOME TAX RETURN
Corporations shall file their quarterly income tax returns for the first three
quarters of the year due on or before 60 days from the end of each quarter.
Illustration
Henry, Inc., a large scale enterprise, had the following quarterly gross income and
deductions in million pesos for year 2022:
_istQtr. _2ndQtr. _3rdQtr. _4'? Qtr.
Gross income P 200 P 250 P 220 P 280
Itemized deductions 100 130 120 140
Withholding tax 22 20 18 31
The quarterly estimated tax payable in million pesos shall be computed as follows:
1st Otr. 2nd Qtr. _3rdQtr.. _Annual_
Gross income P 200 P 250 P 220 P 280
Less: Itemized deductions 100 130 120 140
100 P 120 P 100 P 140
Netincome, this quarter P
0 100 220 320
Net income, prior quarters
P 100 P 220 P 320 P 460
Taxable income
25% 25% 25% 25%
Multiply by:
P 25 P 55 P 80 P 115
Income tax due
Less: Tax credits: 31
P 22 P 20 P 18 P
CWT this quarter 60
Ox 22 2 42 =
CWT prior quarters P 91
P 22° P. 42 P 60°
Total credits P 24
P 3. P 13. P 20.
‘Ne ‘NG S
Less: Estimated tax paid 20
0 _3 13
in prior quarters
P 3 P 10 P 1 P 4
Quarterly tax payable
QUARTERLY MCIT
Illustration :
quarterly RCIT and MCIT during 2021
Binorongan Inc. had the following
2nd grd Ath
1st
Quarter Quarter Quarter Total
Quarter
RCIT Pg0,000 P50,000 P80,000 P60,000 270,000
MCIT 50,000 100,000 40,000 120,000 310,000
| P10,000
Excess MCIT prior year
holding
creditable with 62,000
00 12 ,0 00 + = 10,000 20,000
on withho 20
lding ,0 tax prior year 30,000
699

—_———
Chapter 15-B - Regular Income Taxation: Regular Corporations:

The cumulative balances of RCIT, MCIT, and prior quarter CWTs shall first4
determined. The income tax due per quarter is indicated in bold italics. :
1st Otr 2nd Qtr 3rd Qtr 4th Otr Total

RCIT P 80,000 P 130,000 P 210,000 P 270,000 P 270,000
MCIT 50,000 150,000 190,000 310,000 310,000
Excess MCIT prior years 10,000
Excess CWT prior year 30,000
Creditable withholding tax:
This quarter P 20,000 P 12,000 P 10,000 P 20,000
Prior quarters . 20,000 32,000 42,000
The quarterly income tax payable shall be computed as follows:

_1stQtr_ _2nd Qtr. _3rdQtr_ _4th Qtr__
Quarterly income taxdue P 80,000 P 150,000 P 210,000 P 310,000
Less: Tax credits
MCIT- prior year! P 10,000 P - P 10,000 P -
Excess CWT - prior year 30,000 30,000 30,000 30,000
CWT - current quarter 20,000 12,000 10,000 20,000
CWT - prior quarters - 20,000 32,000 42,000
Estimated tax payments
in prior quarters? - 20,000 88,000 __ 128,000
Total P__60,000 P__82,000 P_170,000 P 220,000
Income tax payable P_20,000 P_
68,000 P_
40,000 P_90,000
Note:
1. The Excess MCIT prior year is deductible in any of the quarters of the current year when
RCIT is higher than MCIT.!
2. The excess CWT prior year is always deductible this period.?
3. The balance of the estimated tax payments in prior quarters is the total of the quarterly
payments in the prior quarters.
RELIEF FROM THE MINIMUM CORPORATE INCOME TAX

Upon recommendation of the Commissioner of Internal Revenue, the Secretary of
Finance may suspend the imposition of MCIT upon submission of proof that the
corporation sustained substantial losses on account of:
a. prolonged labor dispute
b. force majeure
c. legitimate business reverses
REPORTING FOR CORPORATIONS SUBJECT TO REGULAR TAX

Regular corporations, domestic or resident foreign, may choose either itemized
deductions or optional standard deductions in reporting their income using BIR
Form 1702-RT. If they also derive income subject to special tax rates, they shall
report their income using BIR Form 1702-Mx.
700

7 HE IMPROPERLY ACCUMULATED EARNINGS TAX

The improperly Accumulated Earnings Tax (1AET) previously imposed on
undistributed earnings of domestic corporatio n wut valid reasons for such
retention is repealed by the CREATE law. The s ame shall no longer be imposed for
all taxable years ending after Apr il 11, 2021, the effectivity of the CREATE law.
BRANCH PROFIT REMITTANCE TAX
Any profit remitted by a branch to its head office abroad shall be subject to a tax of
15% based on the total profits applie d or earmarked for remittance without an y
deduction for the tax component thereof.
The 15% branch profit remittance tax is a final tax which is required to be
withheld at source by the branch of a foreign corporation.
Interest, dividends, rents, royalties, remuneration for technical services, salaries,
wages, premiums, annuities, emoluments or other fixed or determinable annual,
periodic or casual gains, profits, income, and capital gains received by a foreign
corporation during each taxable year from all sources within the Philippines shall
not be treated as branch profit unless the same are effectively connected with the
conduct of the taxpayer's trade or business in the Philippines.
The term “effectively connected with the conduct of the taxpayer's trade, or
from the
business” does not necessarily mean that the income must be derived
it is sufficient
actual operation of the taxpayer-corporation’s trade or business,
the corporation is
that the income arises from the business activity in which
engaged (RMC No. 55-80).
es that are
The income should be an active income or an income from sourc
taxpayer’s trade or business of the
effectively connected with the conduct of the
to the branch profit remittance tax.
resident foreign corporation to be subjected
gains are excluded.
Passive investment income and
Remittance Tax
Scope of the Branch Profit foreign corporations including
the remittance of all resident and
The tax covers OBUs of foreign banks,
companies, FCDUs or
ROHQs of multinational entities.
ati ona l car rie rs, except PEZA-registered
intern
ation 1 ed goods had
rprise engaged in wholesale of import
Aare scale resident foreign ente 22:
20
it statement for
the following prof P 5,000,000
fro m sal e of goods
Gross in co me 80,000
net of fin al tax
Interest income, 120,000
Domestic dividends
P2,500,000
eS operating expenses 3,125,000
625,000
Corporate income tax
P_2,075,000
Net profit
701
, OTT,
“ \ a eeeeee ae
ation: Regular Corporations
Chapter 15-B - Regular In come Tax
oration earmarked the entire profits for remit ta
Required: Assuming that the corp Neg
tax.
abroad, compute the branch profit r emittance
Solution:
P 2,075,000
Net profit
Less: Investment income
Interest income P 80,000
Dividend income 120,000 200,000
Taxable profit P 1,875,000
Multiply by: portion remitted __ 100%
Actual profit remittance P 1,875,000
Multiply by: Profit remittance tax rate ____15%
Branch profit remittance tax P__281,250
base,
Note: Investment income such as interest and dividends are excluded in the tax
Illustration 2
A branch of a foreign corporation engaged in servicing reported the following income
statement in 2021:
Service fees P 4,000,000
Gain on the sale of fully depreciated properties 400,000
Dividend income 50,000
Capital gain on the sale of stocks, net of tax 90,000
Less: Business expenses 3,600,000
Profits before income tax P 940,000
Less: Income tax due - RCIT 200,000
Net profits P__740,000
The branch earmarked 40% of the entire profits for remittance to the home office
abroad.
The branch profit remittance tax shall be determined as follows:
Net profits P 740,000
Less: Investment income
Dividend income P 50,000
Capital gain on the sale of stocks 90,000 140,000
Taxable profit P 600,000
Multiply by: portion remitted 40%
Profit remittance P 240,000
Multiply by: 15%
Branch profit remittance tax P 36,000
Note:
1, The gain on sale of equipment is included in the base of the branch profit remittance ta
because it is an income effectively connected with the business of the taxpayer.
2. The portion of the branch remittance representing capital gains and dividend ince me is
excluded from the Branch Profit Remittance Tax base.
702

Corporations
chapter 15-B - Regular Income Taxation: Regular
n 3
jlustratio leasing and sale of
foreign corporation is engaged in the financial
A resident
relates to its net income
equipment on a deferred payment basis. The following data
for the year:
P 4,000,000
Gross profit on sale
600,000
Interest income on installment notes
50,000
Dividend income
1,800,000
| Rental of equipment
P 6,450,000
Total income
Less:
Business expense P 3,400,000
750,000 4,150,000
Corporate income tax
P_2,300,000
Net income
to its head office abroad. The branch profit
Assume the branch remitted all its profits
remittance tax shall be computed as follows:
P 4,000,000
Gross profit on sale 600,000
Interest on installment notes 1,800,000
Rental of equipment P 6,400,000
Less:
P 3,400,000
Business expenses 750,000 4,150,000
Corporate income tax P 2,250,000
Net income from operations 100%
Multiply by: Portion remitted P 2,250,000
Gro ss re mi tt an ce 15% |
Multiply by: Br an ch pro fit re mi tt ance tax
p__337,500 |
ce tax
Branch profit remittan the
and ren t in com e are active from business operations of
Note: The interest
income
hence, they are included in the basis of the branch profit
not passive income;
taxpayer,
.
remittance (ax
a ble
year earnings is still tax
Remittance from prior se “Any profit remitted” without limiting the same to
the phra
The NIRC used rem itt anc e. The bra nch profi t remittance tax therefore
is
t year pr of i t
curren nings.
d to app ly to rem itt ance of prior year ear
understoo
Illustration income reported the following
esi den t fore ign corporation earning purely active
Ar
operation in 2021:
since it started
2021 2022
P 200,000 P 150,000
profit after tax 80,000 300,000
Remittance
703
mi,Veta N
oaaa ae \
<r ee Ce
SEs > ae
ations
Re gu la r In co me Ta xa tio n; Regular Corpor
Chapter 15-B - be P12,000, computed as
(P80,099
tax in 20 21 sha ll X
The branch profit remittance
15%). tax as follows.
can be analyzed with the branch profit remittance
The 2022 remittance
x
Source of remittance: Pp 150,000 x 15% P 22,500
2022 profit 18,000
120,000 x 15%
2021 unremitted profit balance
30,000
Excess - return of capital* —————
p_-_ 300,000
Total remittance
p___40,500
Note:
accumulate d profits is a re turn of the home office’s capita,
The excess of remittance over
1.
a return 0 f capital not su bject to tax. The tax applies only
investment in the branch. This is
ttance.
to profit remittance not to capital remi 009
, computed as P200,000 profit less P80,
2. The unremitted profit in 2021 is P120,000
remittance.
Indirect Remittance such as the

wit hou t actu al rem itt anc e of prof i ts abroad, indirect remittance
Even
profit remittance tax:
following are still subject to branch Philippine regional
to a resident affiliate or to a
1. Remittance of profits
office
operating headquarters of the home
the branch assigned capital account (BIR
2. Transfer of net profits to increase
Ruling No. 039-2005).
trued as indirect profit remittance if the
The remittance to affiliates will be cons in the affiliate,
home o ffice’s capital or investment
same was used to increase the
when the same was treated as borr
owings by the affiliate from the home office.
or
tes a loan from the branch, it is not an
If the remittance to the affiliate constitu
indirect remittance.
Branch Capital Accounts

nch is common ly referred to as the
In accounting, the capital or equity of a bra
ponents:
“home office” account. This account has two com
tal) of the home
a. Assigned capital account - represents the net investment (capi
office to the branch
balance of unremitted, retained,
b. Accumulated profits (losses) - contains the net
or accumulated profits or losses o f the branch
since inception of operation.
Change in assigned capital account

office to the branch
This account increases by additional investment of the home
and decreases by capital withdrawal of the home office.
704

change in accumulated profits account
This account increases by the amount of profits and decreases when the branch
incurs a net loss or when profit is remitted by the branch to the home office.
The transfer of profits from the accumulated profit account to the assigned capital
account of the branch operates as if the branch remitted the profits to the home
office which the latter invested to the branch. This profit capitalization is a form of
indirect remittance subject to the branch profit remittance tax.
It should be noted, however, that the mere existence of income does not
automatically mean there is a branch profit remittance tax. There must be an
actual transfer to the assigned capital account or actual earmarking of profits or
remittance before branch profit remittance tax is imposable. (CIR vs. United Parcel
Service Co., CTA, EB No. 721 re CTA Case No. 7667, May 16, 2012)
Illustration
A branch of a foreign corporation reports the following comparative figures in its
statement of changes in equity in 2022:
2021 2022
Assigned capital P 3,000,000 P 3,500,000
Accumulated profits 1,000,000 500,000
ng:
The net changes in the 2022 capital accounts were due to the followi
1. Branch profit of P700,000 in 2021
2. Remittance of:
a. P400,000 to the home office
to the home office’s investment
b. P300,000 to a resident affiliate as an addition
therein
the assigned capital
3. Transfer of P500,000 accumulated profit to
remittance tax.
Required: Determine the branch profit
Solution: Tax
P 400,000 x15% _ P 60,000
Remittance to home office 45,000
Remittance to resident affiliate 300,000 x 15%
500,000 x 15% 75,000
Profit transferred to capital P__ 180,000
t the act ual am ou nt to be rem itt ed to the home office and the affiliate shall be
Note tha e tax.
net ofthe branch profit remittanc
profit remittance:
A Differentiation on foreign
Tax Rate
Remittin entity to its head office
Branch of resident foreign corporation 15% of branch remittance
—~ Subsidiary of a foreign corporation - 25% final tax, 15% if the
through dividend declaration tax sparing rule applies
Branch of domestic corporation Not subject to tax
705

CHAPTER 15-B: SELF-TEST EXERCISES
Discuss the scope and conditions of the gross income tax.
Discuss the scope, tax base, and the timing of imposition of the MCIT.
WNP
What are the conditions for the suspension of the MCIT?

Discuss the branch profit remittance tax.
What corporations are subject to the branch profit remittance tax?
DAM
What are the transactions considered indirect remittance?
True or False 1
1. Domestic corporations are subject to either gross income tax or regular corporate
income tax.
2. A partnership organized under Philippine law is a domestic corporation for
purposes of taxation.
3. Exempt corporations are subject to MCIT with respect to their income subject to
regular corporate income tax.
MCIT does not apply to foreign corporations.
Ot
As a rule, corporations always pay tax even if there is a loss effective from the
fourth year of their operations.
Resident foreign corporations are subject to either gross income tax or regular
Foreign MSMEs can claim 20% corporate income tax.
so ON
Non-resident foreign corporation are subject to minimum corporate income tax.

The 20% corporate income tax cannot apply if the gross profit exceeds
P5,000,000.
10. Large corporations with taxable income not exceeding P5,000,000 can claim the
20% corporate income tax.
11. The MCIT applies only when income is zero or when there is an operating loss.
12. MSMEs and REITs are exempt from MCIT.
13. Special domestic corporations and special resident foreign corporations are
exempt from MCIT.
14. MCIT is generally computed as 2% of the gross income from
operations starting
July 1, 2023.
15. Ifan entity started operations on June 2021, MCIT shall commence on June 2025.
True or False 2
1. The cost of services of banks includes interest expense.
2. MCIT is applied on a quarterly, but not on an annual basis.
3. MCIT excess can be deducted only against the excess of RCIT over
the MCIT in any
of the succeeding three years.
4. When there are several excess MCIT in prior years, the credit
ing of MCIT is made
in a first-in first-out (FIFO) basis.
The MCIT gross income includes only those arising from operations
while the OSD
gross Income covers all items of gross income subject
706

On

6.
For purposes of the MCIT, cost of services includes all direct costs and expenses
jncurred in acquiring or manufacturing the goods.
7. Items of passive income subject to final tax and capital gains tax incl i
the basis of the MCIT. Pee are included in
8. For accrual basis taxpayers, the cost of services shall include unpaid expenses
directly incurred in the provision of services.
9. The gross receipts of service providers include advances from clients or
customers.
10. Corporations with income subject to special tax are mandatorily required to use
the itemized deductions.
11. Whenever MCIT is payable, there is a Net Operating Loss Carry-Over.
12. An unused excess MCIT will expire on the fourth year of operation.
13. The excess MCIT of previous years can be deducted against the RCIT of any
quarter of the year if RCIT is greater than MCIT.
14. The MCIT rules are applied on the cumulative balances of the RCIT and MCIT
during the quarters of the taxable year.
15. MCIT can be suspended for a taxpayer suffering from prolonged labor dispute,
force majeure, or legitimate business reverses.
16. The Commissioner of Internal Revenue may suspend the imposition of MCIT upon
submission of the required proof.
17. The branch profit remittance tax covers remittance of special resident foreign
corporations except PEZA-registered entities.
Multiple-Choices: Theory - Part 1

1. Which is a correct statement?
a. Domestic corporations shall elect either MCIT or RCIT.
RCIT.
b. Resident foreign corporations are liable to either 20% or 25%
c. MSMEs may still be taxable like large corpo ratio ns.
and MCIT.
d. Resident foreign corporations are elect either RCIT
2. Resident foreign corporations

a. shall elect either RCIT or MCIT.
b. may be subject to 20% RCIT.
c. are limited to 25% RCIT subject to the 1% or 2% MCIT.
d. are required to withhold the dividend tax.
tax?
3. Which is exempt from the corporate income
a. Non-profit corporations
b. Joint venture
c. Partnership
d. Government-owned and controlled corporations
A. Which of these can claim the corporate OSD against gross income?
qa. Private schools
p. Non-profit hospital
c. Exempt corporations
_ 707
é ay
jin Sake
d. Retail stores
5. Which is subject to or can be subjected to MCIT?

a. Private schools
b. Non-resident lessors of aircraft or vessels
c. Non-profit hospitals
d. Exempt corporations
6. Which is nota requisite of the 20% RCIT?

a. Total assets excluding land must not exceed P100M
b. Must not be a foreign corporation
c. Taxable income must be P5,000,000 or less
d. Corporation must not be subject to special tax rates
7. The regular corporate income tax is

a. 25% of gross income.
b. 2% or 1% of taxable income.
25% of taxable income.
a9
2% of gross income.
8. The minimum tax for corporate taxpayers is

a. 15% of gross income.
b. 2% or 1% of taxable income.
c. 2% of gross income.
d. 15% of taxable income.
9. The MCIT applies to

a. domestic and resident corporations.
b. domestic corporations only.
c. special corporations.
d. non-resident foreign corporation.
10. The gross income for MCIT purposes covers

a. those from related activities only.
b. all items of income subject to regular tax.
c. all items of income subject to any tax scheme.
d. any of these.
11. The maximum cost ratio for corporations to avail of the gross income tax is
a. 60% c. 55%
b. 40% d.45%
12. The minimum lock-in period under the corporate gross income tax is
a. five years. c. three years.
b. four years. d. two years.
13. The MCIT is not due when

a. MCIT is greater than RCIT.
708

|
on

b. taxable income is zero.
c. taxable income is negative.
d. RCIT is greater than MCIT.
Multiple Choice: Theory - Part 2

4. Which is included in the MCIT base?
a. Dividend income from domestic corporations
b. Royalty income
c. Interest income from banks
d. Ordinary gains
2. Which taxpayer is subject to the MCIT?

a. Private schools
corporations
b. Government-owned and controlled
c. Home Development Mutual Fund
d. International carriers
from
pt cor por ati ons are sub ject to MCIT on their income
3. Exem
a. related activities.
unrelated activities. nance test.
b.
and un re la te d act ivi ties if they pass the domi
bothrelate d test.
c.
la te d act ivi tie s if the y fail the dominance
unre
d. both related and
on the
4. MCIT shall commence
a. St year of operation.
b. 3'year of operation. t of operation.
e ye ar fo llowing the year of star
4th ta xa bl of start of operation.
following the year
Cc.
d. 3" taxable year
next
cr ed it th at ca n be carried over to the
5. Excess MCIT is a tax
years.
a. 3 consecutive
ive years:
b. 4 consecut g the year it aris
es.
in cl ud in
3years income.
c.
ns ec ut iv e ye ar s when there is
d. 3 co
e MCIT?
hi s de du ct ib le in the computation of th
6. Whic
expenses
a. Marketing
ies
b. Office utilit ce
Losson sale
of as sets
e n g a g e d in r e n dering the servi
c.
oyees directly
d. Salaries of empl
MCIT?
es e m a y gr an t relief from the
7 which of th y of Finance
Secretar e
“a, of Internal Revenujur
Office of the Commissioner tri ct Office r havi ng isdicti
e Dis
office of the Rev enu
the BIR
vin
g jurisdiction
c.
National off ice of
709

on: Regular Corporations
Chapter 15-B - Regular Inco me Taxati
als may be subject to MCIT when
8. Private schools and non-pro fit hospit
RCIT.
a. they are subject to the 25%
b. they are subject to the 10% (now
1%) preferential rate.
vities ex ceeds 50% of their total reven Ue fro
c. their income from related acti
all sources. oo. m
related activi ties.
d. they are exempt from income on
If a foreign corp oration operates a branch in the Philippines but tran
the corporation is
business directly with Philippine residents,
taxable on net income.
corporation,
automatically reclassified into a non-resident foreign
op
saction only
a non-resident foreign corporation with respect to the tran
, including those
a non-resident foreign corporation for all transactions
ao
Made
by its branch in the Philippines.
10. For taxpayers involved in the sale of goods, gross
income means
cost of goods sold.
a. gross sales less sales returns, discounts and
b. gross receipts less returns, allowances, discounts and cost of goods sold,
and cost of services.
c. gross sales less sales returns, discounts
of services,
d.gross receipts less returns, allowances, discounts and cost
income means
a1. For taxpayers involved in the s ale of services, gross
a. less sales retur ns, discounts and cost of goods sold.
gross Sales
b. gross receipts less returns, allowances, discounts and cost of goods sold.
ices.
c. gross sales less sales returns, discounts and cost of serv
of services.
d. gross receipts less returns, all owances, discounts and cost
de
12. Gross receipts, as compared with gross sales, inclu
a. cash collections only.
b. transactions on account sales only.
c. both cash and on account transactions.
d. cash collections on completed contracts only.
13. Which is not included in gross receipts?

Reimbursements for out-of-pocket cost of the service provider
Repayment of loan by the client
of
Advanced collection of income

Cash collection for services rendered
ao
“cost of services” for a bank’

14. Which of the following is least likely included in the
Bad debt expense on loans
Interest expense
aarp
Depreciation of bank premises

Salaries of tellers
710

7

Multiple Choice: Theory - Part 3
1. in he quarterly income tax return, Excess MCIT prior year is deductible only
when
a. the MCIT exceeds the RCIT for that quarter.
b, the RCIT exceeds the MCIT for that quarter.
c. the cumulative MCIT exceeds the cumulative RCIT as of the end of that
quarter.
d. the cumulative RCIT exceeds the cumulative MCIT as of the end of that
quarter.
The quarterly income tax return is due on or before

a. 60 days following the end of the quarter.
b. 30 days following the end of the quarter.
c. 15% day of the fourth month following the end of the quarter.
d. 45 days following the end of the quarter.
The optional standard deduction for corporations

a. excludes cost of goods sold and cost of services.
b. includes cost of goods sold and cost of services.
c. includes personal exemption.
d. excludes actual items deductions.
Which of the following is not a direct cost of service of a corporate car-parking

operator?
a. Marketing expenses
b. Cashier salaries
c. Depreciation of parking building
d. Security guard salaries
Which of the following is not a deduction in the computation of the income tax
payable or refundable?
a. Estimated quarterly income tax payment
b. Final withholding tax on passive income
c. Excess MCIT prior year
d. Creditable withholding tax on gross income
Which of the following tax credit is not always creditable in the current
accounting period?
a. MCIT Excess prior year
b. Excess creditable withholding tax in prior years
c. Creditable withholding tax in the current year
d. Estimated quarterly income tax payment
7 Excess MCIT is valid as a tax credit over

a. five years. c. three years.
b. four years. d. two years.
711

8. Which is subject to the Improperly Accumulated Earnings tax?
a. Domestic corporations
b. Resident foreign corporations
c. Non-resident foreign corporations
d. All ofthese
9. Which of these is deducted in the computation of the improperly accumyl

profits? nated
a. Profits from passive income
b. Profits from capital gains
c. NOLCO
d. Corporate income tax
10. The branch profit remittance tax is 15% of the total profits
a. ofthe current year.
b. ofthe current year earmarked for remittance, including investment income
c. earmarked for remittance without deducting the tax.
d. actually remitted to the home office abroad, net of the tax.
11. Which of these entities is exempt from the branch profit remittance tax?
a. OBUs and FCDUs
b. Regional operating headquarters of multinational companies
c. International carriers
d. PEZA-registered entities
12. The branch profit remittance tax is imposed

a. upon all foreign corporations, resident or non-resident.
b. whenever the foreign branch reports income.
c. when there is profit remittance by the branch to the home office.
d. upon resident corporations, domestic or foreign.

1. A MSME corporation reported its first profits in 2021 since its start-up in 2018
The following summarizes its results of operations:

Regular allowable deductions P1,200,000
Special allowable deductions 200,000
NOLCO 500,000 __ 1,900,000
Net income P___100,000
What is the income tax due?
a. P 20,000 c. P30,000
b. P 25,000 d. P60,000
712

eee OO—™
A ya
2. The following relates to a corporation on its fourth year of operation in 2021:

Deductions 6,000,000
Taxable income P___4,000,000
Compute the tax due if the taxpayer is a large corporation.

a. P800,000 c. P 1,200,000
b. P 1,000,000 d. P 1,500,000
3. Compute the tax due if the taxpayer is a large corporation using OSD.
a. P 800,000 c. P 1,200,000
b. P 1,000,000 d. P 1,500,000
4. Compute the tax due if the taxpayer is a MSME corporation.

a. P 800,000 c. P 1,200,000
b. P 1,000,000 d. P 1,500,000
5. Compute the tax due if the taxpayer is a MSME corporation using OSD.
a. P800,000 c. P 1,200,000
b. P 1,000,000 d. P 1,500,000
6. The following are the composition of the total gross income of a MSME domestic
corporation which is subject to MCIT in 2021:

Royalty income 250,000
150,000
Gain on sale of building
Total gross income P_2.100,000
What is the minimum corporate income tax?

a. P 42,000 c, P32,000
b. P 35,000 d. P17,500
7. Inthe immediately preceding problem, what is the regular corporate income tax if
the corporation has a total allowable deduction of P1,700,000?
a. P10,000 c. P15,000
b. P 12,500 d. P90,000
713
\
Be, ‘SN fr
ye .
Bie. \ 5
FRR eet) > erst aaa
fos pi A LE \
ions
Chapter 15-B - Regular Income Taxation: Regular Corporat
ical MCIT and nerd aan
Lin gko dBa yan Cor por ation had the following histor
8. The
2018 2019 2020 2021
crt 110,000 220,000 P 0 180,000
Basing solely on the information provided, what is the tax due and Payable
respectively in 2018 and 2019?
a. P120,000; P220,000 c. P120,000; P210,000
b. P120,000; P100,000 d. P110,000; P220,000
9, In the immediately preceding problem, what is the tax due and Payable
respectively in 2020 and 2021?
a. P190,000; P 0 c.P0;P0
b. P190,000; P180,000 d. P170,000; P 0
10, Shown below are the operating results of Bulalacao Company, a large corporation,
since its start of operations:
Gross income Deductions.

2016 P 4,000,000 P 5,000,000
2017 4,500,000 5,200,000
2018 5,500,000 5,000,000
2019 6,000,000 5,800,000
2020 6,500,000 6,100,000
2021 7,000,000 6,200,000
What is the income tax due respectively in 2019 and 2020?

a, P120,000;P 0 c. PO; P97,500
b. P120,000; P70,000 d. PO; P130,000
11. In the immediately preceding problem, what is the income tax due in 2021?
a. P240,000 c. P110,000
b. P142,500 d. P102,500
12. A large corporate taxpayer had the following data in 2022, its fifth year of ©
operation:
Sales P 2,000,000 P 3,000,000 P 5,000,000
Less: Cost of services 1,200,000 1,800,000 3,000,000
Gross income from operationP 800,000 P 1,200,000 P 2,000,000
Interest on deposits 50,000 250,000 300,000
Total Income P 850,000 P 1,450,000 P 2,300,000
Less: Business expenses 800,000 1,300,000 _2,100,000
Net income P_ _ 50,000 P 150,000 P200,000
714

What is the MCIT?
a. P45,000 c. P 35,500
b. P37,500 d. P 22,500
S tpas
13. Wha eo tax due assuming the34taxp
is the y r isis a ad domestici corporation?
reayer i
b. P 37,500 d. P22,500
a
14. | n the immediately preceding problem, what is the tax due if the corporation is
resident foreign corporation?
a. P 8,000 c. P12,000
b. P8,500 d. P12,500
tic MSME corporation reported
15. On this fourth year of operation in 2021, a domes
the following income:
P40,000,000 P000 0000

000, 000,al
Pe poap 000
Gross income
Less: Deductions 35,000,000 _34,000,000
Gross income ) 00.000
P_5,000,000 (P_4.000,000P.0
Compute the income tax due.
a. P 200,000 c. P300,000
b. P 250,000 d. P1,050,000
assuming the
edi ate ly pre ced ing pro ble m, what is the income tax due
16. in the imm
n corporation?
taxpayer isa resident foreig
c. P1,250,000
a. P 600,000
d. P1,500,000
b. P 1,000,000
ch sta rte d ope rat ion s in 201 7 had the following results of
17. A MSME corporati
on whi
operations:
2019 2020 2021
7,000,000
P 5,000, 000 P 6,
P 3,500,000 __ 400,000
Gross income 3,400,000 5,300,000
0
Less: Business expe
nses
p__100,000 (P 300,000) P___ 600,00
Net in co me
tax due in 2020?
What is the income c. P75,000
a. PO d. P100,000
b. 60,000
ed in g pr
p ob le m, wh at is the tax due in 2021?
diately prec
18. : the imme c. P70,000
PO d. P140,000
b. p 60,000
715
, \. <
¢ eS. Mise q
AT ay

eee
ons
ome Taxation: Regular Corporati
Chapter 15-B - Re gular Inc
following.
ch st arted operations in 2016 reported the
19. A MSME corporation whi
__2020_ 2021
P 500,000 P 10,000,000
Gross income from operations 2,000,000
200,000
Rent income 6,500,000
820,000
Less: Business expenses
What is the tax due in 2020?
a. PO c, P10,500
b. P7,500 d. P14,000
20. In the immediately preceding problem, wha

t is the tax due and payable in 2923)
a. P 1,065,500 c. P 1,345,000
b. P 1,334,500 d. P 1,364,500
ing show,
21. Enteng Unlimited, a MSME, started operations in 2014. The follow
details of its income in 2021:
2019 2020 2021
P 1,000,000 P 2,000,000 P 8,000,000
Gross income
2,000,000 2,500,000 6,000,000
Expenses
Operation had been profitable since start of operation except that a major strike in
Unlimited
2019 and 2020 caused major problems in business operations. Enteng
requested for lifting of the MCIT which was granted for the years 2019 and 2020,
Compute the income tax payable in 2021.
a. P 400,000 c. P 100,000
b. P 125,000 d. P 80,000
optional
22. Compute the tax due of Excellence Unlimited in 2021 if it opted to use
standard deduction.
a. P450,000 c. P 960,000
b. P600,000 d. P 1,200,000

1. A resident foreign corporation branch had the following results of operations in
2021, the fifth year of its operations:
Gross income from sales of goods P 5,000,000
Less: Allowable deductions 4,850,000
Net income P_150,000
The branch intends to remit all profits after applicable taxes to the home office.
What is the branch profit remittance tax?
a. PO c. P15,000
b. P 7,500 d. P16,875
716

eo
2, Calatrava Corporation had the following data in 2021:

MCIT RCIT CWTs
First quarter P 500,000 P 480,000 P 150,000
450,000 490,000 120,000
Second quarter
500,000 520,000 140,000
Third quarter
700,000 480,000 160,000
Fourth quarter
.
P130,000 respectively in 2018 and 2019
There were excess MCIT of P70,000 and
ter?
What is the income tax payable in the second quar
a. P350,000 c. P150,000
b. P240,000 d. P120,000
h quarter?
3. What is the income tax payable in the fourt
a. P380,000 c. P600,000
b. P400,000 d. P700,000
operations:
ary sch ool rep ort ed a net operating loss on its fifth year of
4. Apropriet
P 4,000,000
Gross receipts 2,800,000
es
Less: Direct cost of servic 1,500,000
Other business expenses
What is the tax due?

c. P100,000
a. PO
d. P120,000
b. P24,000
aran Corporation:
fol low ing rel ate s to the MCIT and RCIT of Tamp
s. The
MCIT RCIT
80,000 P 0
P
2017 120,000 50,000
2018 90,000
110,000
2019 105,000
100,000
2020 120,000 140,000
2021
due in 2020?
What is the tax still P25,000
p100,000 c.
_
d. PO
b. P75,000
t is the tax still due in 2021?
6. Inthe immediately preceding problem, wha
c. P 20,000
a. P95,000 d.P0
b. P 75,000
2015 through 2020:
The following were the MCIT and RCIT ofa corporation from
7
717
~
faa...
ig eeCpe
Lm _
————
b

ns
Chapter 15-B - Regular Income Taxation: Regular Corporatio
MCIT RCIT
2015 P 90,000 P 0
2016 120,000 60,000
2017 115,000 80,000
2018 70,000 75,000
2019 35,000 40,000
2020 85,000 100,000
What is the tax still due in 2020?

a. P100,000 c. P45,000
b. P65,000 d.P0
8. The income statement of Tubigon Corporation, a large corporation, js shown

below:
Sales, net of 2% creditable withholding tax P 2,940,000
Cost of sales __
1,900,000
Rental income, net of P5,000 ___ 95,000
Less: Allowable deductions __
1,000,000
The corporation made an estimated tax payment of P10,000 during the year. What
is the income tax refundable?
a. P 31,250 refundable c. P 15,000 refundable
b. P 12,000 payable d. P 25,000 refundable
9. The Paluan Corporation had the following excess MCIT in prior years:
Excess MCIT - 2017 P 80,000

Excess MCIT - 2018 40,000
Excess MCIT - 2019 50,000
Excess MCIT - 2020 * 10,000
In 2021, the RCIT and MCIT were respectively P230,000 and P210,000. What is
the income tax due and payable?
a. P 30,000 c. P110,000
b. P50,000 d. P130,000
10. The quarterly MCIT, RCIT and creditable withholding tax of Taraka Corporation
are shown below:
MCIT RCIT CWTs
First quarter P 800,000 P 700,000 P 250,000
Second quarter 600,000 900,000 220,000
Third quarter 1,000,000 600,000 340,000
Fourth quarter 500,000 800,000 260,000
718

lar Corporations
Chapter 15-B - Regular Income Taxation: Regu
excess creditable withholding tax and

Taraka Corporation also had P1 20,000
the prior year.
P180,000 excess MCIT still outstanding from
ter?
What is the income tax payable in the second quar
a. P400,000 c. P470,000
b. P430,000 d, P520,000
h quarter?
41. What is the income tax payable in the fourt
a. P140,000 c. P180,000
b. P160,000 d. P210,000
abroad:
following profits to its head office
12. A foreign branch remitted the
P 1,200,000
Taxable income 100,000
stocks, net of CGT
Capital gains on sale of domestic
e tax?
What is the branch profit remittanc
a. PO c. P180,000
b. P135,000 d. P200,250
2016 reported the

lar ge cor por ati on whi ch started operation in
13. A closely-held
following data:
Year 2020: P 2,000,000

ions
Gross income from operat 2,800,000
Less: expenses (p__800,000)
Net operating loss
Year 2021: P 6,000,000
Gross income 5,000,000
Less: Expenses 100,000
withholding tax
Rent income, gross of 5%
ket placement,
Interest on money mar 160,000
net of 20% final tax 800,000
received
Inter-corporate dividends 45,000
rs
Tax paid, first three quarte
pectively in 2020 and 2021.
Compute the income tax still due res
a. P0;P 25,000 c. P 30,000; P 25,000
b. P0;P 72,000 d. P 30,000; (P 5,000)
719

Integrated Cases
Integrated Case 1
A corporation reported the following income and expenses data in 2020:
Philippi
__Abroad_
Gross income from operations P 2,000,000 P 500,000
Gain on the sale of real property capital asset 400,000 200,000
Gain on sale of stocks directly to buyer 270,000
Dividends from a domestic corporation 50,000
Dividends from a foreign corporation : 200,000
Interest income from bank deposit 40,000 50,000
Royalty income 100,000 200,000
Business expenses 1,000,000 280,000
The real property has a tax basis of P2,000,000 and a fair value of P2,200,000,
Required:
Indicated the amount of taxes in the corresponding boxes:
Total final | Total

capital
Assuming the corporation is a: tax gains tax Regular tax
Resident foreign corporation
Non-resident foreign corporation
Integrated Case 2
A domestic corporation reported the following on its fifth year of operations:
Philippines
Rent income, net of P10,000 CWT 200,000
Gain on sale of real property capital asset 400,000
Taxable fringe benefits paid to managerial employees 340,000
Salaries expense 1,200,000
Depreciation expense 200,000
Interest expense, net of P40,000 bank interest income 60,000
Contribution expenses subject to limit 300,000
Miscellaneous expenses 80,000
Total estimated tax payments during the year was P125,000. The interest income from
bank is net of final tax.
Required:
Compute the income tax still due or refundable assuming the corporation opted for:
a. Itemized deduction
b. Optional standard deduction
720

| Integrated Case 3
The books of a corporation show the following for the taxable year 2020:
Gross income _Deductions
Philippines P 400,000 P 200,000
United States of America 300,000 100,000
Singapore 200,000 150,000
Malaysia 100,000 50,000
The corporation paid tax on net income of P70,000 in the US, P19,000 in Singapore
and P15,000 in Malaysia.
Required: Compute the tax still due assuming that the corporation is a:
as tax credit)
a. Domestic corporation (foreign income taxes are claimed
b. Resident foreign
c. Non-resident foreign
721

INDIVIDUAL
Alien CORPORATION
Citizen Non-resident. Foreign
RC NRC RA ETB. _NETB) __DC RFC _NRFC.
INTEREST INCOME
Local Currency Deposit
Short term interest or yield 20% 20% 20% 20% 25% 20% 20% 25%
Long term interest or yield exempt exempt exempt exempt 25% RIT RIT 25%
Pre-termination interest rate
- Less than 3 years 20% 20% 20% 20% 25% 20% 20% 25%
- 3 to less than 4 years 12% 12% 12% 12% 25% 20% 20% 25%
- 4to less than 5 years 5% 5% 5% 5% 25% 20% 20% 25%
Foreign Currency Deposit
Interest income from FCDUs/OBU
depositary banks 15% Exempt 15% exempt exempt 15% 15% Exempt
Interest income of FCDU/EFCDU 10% Exempt 10% exempt exempt 10% 10% Exempt
Interest income on foreign loans N/A N/A N/A N/A N/A N/A N/A 20%
Tax-free covenant bonds 30% 30% 30% 30% 30% N/A N/A N/A
DIVIDEND INCOME
From domestic corporations, in general
- January 1, 1998 earnings 6% 6% 6% 20% 25% exempt exempt 15%*
- January 1, 1999 earnings 8% 8% 8% 20% 25% exempt exempt 15%*
- January 1, 2000 earnings and thereafter 10% 10% 10% 20% 25% exempt exempt 15%*
From Real Estate Investment Trust or REIT 10% Exempt 10% <10%** <10%* exempt exempt <10%%*
From foreign corporations [<----------------- regular income tax (RIT) rules applies --------------------- >]
-:
a
2 deg
Ree
> art A
Mar are Wem ts
or
Rt te a et ory —————
Appendix 1— Summary of final tax rates
INDIVIDUAL
Alien CORP ION
Citizen Non-resident Foreign
RC NRC RA ETB NETB DC RFC NRFC
SHARE IN NET INCOME of taxable partnership, 10% 10% 10% 20% 25% 10% 10% 25%
joint venture and co-ownership
ROYALTIES
Passive royalties
In general 20% 20% 20% 20% 25% 20% 20% 25%
Passive royalties from cinematographic
films and similar works 20% 20% 20% 25% 25% 20% 20%
Passive royalties from books,
literary works & musical compositions 10% 10% 10% 10% 25% 20% 20% 25%
Active royalties [<------------- regular tax ------------- >] 25% _ = [<------ RIT------ >] 25%
TAXABLE PRIZES, amounting to:
P10,000 and below [<------------- regular tax ---------- >] 25% _ = [<------ RIT------ >] 25%
Above P10,000 20% 20% 20% 20% 25% = [<------ RIT------>] _ 25%
WINNINGS
In general 20% 20% 20% 20% 25% = [<------- RIT------ >] 25%
PCSO & lotto winnings > P10,000 [<—————— ZO ~----=------n2-== >] 25% — [<-------20%------>]_ 25%
PCSO and lotto winnings < P10,000 [<--------ennen==- Exempt --------------- >] 25% [<-----Exempt---->] 25%
INFORMER’S TAX REWARD 22° 10% ------------------ >]
[<---n---------2 25% 10% 10% 25%,
Note:
1. ‘Subject to preferential tax rate under applicable tax treaty
2. *Subject to tax sparing rule; otherwise 30%
3. Item of income that may arise sources marked as “N/A” shall be subject to regular income tax
a
Appendix 2 — Creditable withholding tax on compensation

REVISED WITHHOLDING TAX TABLES
Effective JANUARY 1, 2019 to December 31, 2022
DAILY 1 2 3 4 5 6
685 and
Compensation level (CL) below 685 1,096 2,192 5,479 21,918
82.19 + 356.16 + 1,342.47 6,602.74 +
0.00 + 20% | 25% over 30% over | +32% over | 35% over
Prescribed minimum withholding tax 0.00 over CL CL CL CL CL
WEEKLY 1 2 3 4 5 6
4,808 and
Compensation level (CL) below 4,808 7,692 15,385 38,462 153,846
576.92 + 2,500.00 + | 9,423.08+ | 46,346.15
0.00 + 20% | 25% over 30% over 32% over | + 35% over
SEMI-MONTHLY 1 2 3 4 5 6
10,417 and
Compensation level (CL) below 10,417 16,667 33,333 83,333 333,333 -
1,250.00 + | 5,416.67+ | 20,416.67 | 100,416.67
0.00 + 20% | 25% over 30% over | + 32% over | + 35% over
MONTHLY 1 2 3 4 5 6
20,833 and
Compensation level (CL) below 20,833 33,333 66,667 166,667 666,667
2,500.00 + | 10,833.33 40,833.33 | 200,833.33
0.00+ 20% | 25% over | + 30% over | + 32% over | + 35% over
Se re rer ee rer er nr gee Eye tp rer
Eg er mE IETF
ETE
Appendix 3 — Income tax table for Individual Taxpayers
REVISED INCOME TABLES FOR INDIVIDUAL TAXPAYERS
Year 2018 to Year 2022
Taxable income = | } Tax due ememeilS 2
|P250,000 and below | None (0%) |
“Above P250,000 ttoP400,000 | 20%ofexcessaboveP250,000. —
| “Above P400, 000 to P80oo, 000 = P30, 000 + 25% of excess over P400, 000
| Above P800,000 to P2,000,000 | | P130,000 + 30% of excess over P800,000 |
| Above P2,000,000 to P8,000, 000 | P490,000 + 32% of excess over P2,000,000
o-ssencnnesosmennsssnenessumuessnetsceessunesssnseissmseinessssesssensesScanneloi ae cities sy stemamemnenereevvam perreenmreeienimrrniretet
Above P8, 000,000 | P2,410,000 + 35% of excess over P8,000,000 |
Year 2023 Onwards
‘Taxable income | ‘Tax due
| P250,000 and below None (0%)
- Above P250,000 to P400,000 15% of excess above P250,000
“Above P400,000 to P800,000 P22,500 + 20% of excessoverP400,000
| Above P800, 000 to P2, 000, 000 -P102, 500+ 25% of excess over P800, ,000
' Above P2,000, 000 to P8, 000, 000 | P402, 500 + 30% of excess over P2, 000, 000 a |
ove P8,000,000
Above: P2, 205, 500 + 35% of excess over PS, 000, 000 |
Appendix 4 — Schedule of compromise penalty relevant to income tax
SCHEDULE OFCOMPROMISE PENALTY RELEVANT TO INCOME TAX
(See RMO7-2015 for complete listing)
Criminal penalty
Nature of violation imposed Amount of compromise
If the gross sales, earnings or receipt
Exceeds But not Compromise is
exceed
P 0 P 50,000 P 1,000
Failure to keep/preserve records required by | Fine of not less than P1K or 50,000 100,000 3,000
law or regulations imprisonment of not more 100,000 500,000 5,000
than 6 months, or both 500,000 5,000,000 10,000
5,000,000 10,000,000 15,000
10,000,000 20,000,000 20,000
20,000,000 50,000,000 30,000
50,000,000 XXX 50,000
P 25,000 (forany | P 200,000
Failure to have books of accounts audited and | Fine of not more than quarter) | (for the year) P 3,000
have the financial statements attached tothe | P1,000 or imprisonment of
income tax return certified by an independent | not more than 6 months, or 200,000 500,000 5,000
CPA duly accredited by the BIR both. 500,000 5,000,000 10,000
5,000,000 10,000,000 15,000
10,000,000 25,000,000 20,000
——a
25,000,000 XXX 25,000
ations
we re ek ee ee ee te ee ee
ete ee ae eee oo ee
Criminal penalty
Failure to make, file, or submit the complete One Thousand Pesos (#1,000) for each failure to make,
quarterly Summary Lists of Sales and file, or submit the said information returns. Provided,
Purchases-Local & Imported (SLSP), the however, that the aggregate amount to be imposed for
Annual Alpha List of Payees and/or such failures during a calendar year shall not exceed
Employees subjected to withholding taxes, or Twenty-Five Thousand Pesos (P25,000)
supply correct and accurate information For this purpose, failure to supply the required
therein at the time or times required by the information for each buyer or seller of goods and
Tax Code, as amended, or other existing services shall constitute a single punishable act or
rules and regulations omission pursuant to Revenue Memorandum Circular
(RMC) No. 51-2009.
Failure to make, file or submit information One Thousand Pesos (?1,000) for each information
returns, schedules, reports, sworn statements, return, schedule, report, sworn statement, certification
certifications and other documents, (except and other document not made, filed or submitted, or for
quarterly SLS/P/I, and the Annual Alpha List each record not maintained. Provided, however, that
of Payees and/or the Annual Alpha List of the aggregate amount to be imposed for such failures
Employees subjected to withholding taxes), or during a calendar year shall not exceed Twenty Five
keep any record required by the Tax Code, as Thousand Pesos (25,000).
amended, or other existing rules and
regulations
Failure to supply correct and accurate One Thousand Pesos (P 1,000) for each incorrect or
information in the information returns, erroneous information supplied in the information
schedules, reports, sworn statements, return, schedule, report, sworn statement, certification
certifications and other documents (except and other document. Provided, however, that the
quarterly SLS/P/I, and the Annual Alpha List aggregate amount to be imposed for such failures
of Payees and/or the Annual Alpha List of during a calendar year shall not exceed Twenty Five
Employees subjected to withholding taxes) Thousand Pesos (P25,000).
required by the Tax
Criminal penalty
Willful attempt to evade or defeat any tax Fine of not less than This violation cannot be compromised because it
imposed by the National Internal Revenue P30,000 but not more than involves fraud. (Sec 204, NIRC)
Code or the payment thereof. P100,000 and
imprisonment of not less
than two (2) years but not
more than four (4) years
Failure to make/file/submit any return or Fine of not less than If the gross sales, earnings or receipt (based on the
supply correct information at the time or P10,000 and imprisonment subject return/information for filing/submission)
times required by law or regulation of not less than one (1) year Exceeds But not Compromise is
but not more than ten (10) exceed
years P 0; P 50,000 P 1,000
50,000 100,000 3,000
100,000 500,000 5,000
500,000 5,000,000 10,000
5,000,000 10,000,000 15,000
10,000,000 25,000,000 20,000
25,000,000 XXX 25,000
If the amount not withheld or remitted
Failure to withhold or remit withheld taxes at Fine of not less than Exceeds But not Compromise is
the time or times required by law or P10,000 and imprisonment exceed
regulations of not less than one (1) year P 0 P 5,000 P 1,000
but not more than ten (10) 5,000 15,000 3,000
years 15,000 20,000 5,000
20,000 50,000 10,000
50,000 500,000 15,000
500,000 1,000,000 20,000
1,000,000 XXX 25,000
af Appendix 4 — Schedule of compromise penalty relevant to income tax
| Criminal penalty
If the amount of excess withholding tax not refunded
Failure to refund excess taxes withheld on Fine of not less than Exceeds But not Compromise is
compensation P10,000 and imprisonment exceed
of not less than one (1) year P 0 P 5,000 P 1,000
| but not more than ten (10) 5,000 15,000 3,000
years 15,000 20,000 5,000
20,000 50,000 10,000
50,000 500,000 15,000
500,000 1,000,000 20,000
1,000,000 XXX 25,000
Misrepresentation as to actual filing of return Fine of not less than This violation cannot be compromised because it
or statement or withdrawal of return or P10,000 but not more than involves fraud. (Sec. 204, NIRC)
statement already filed P20,000 and imprisonment
of not less than one (1) year
but not more than three (3)
years
If the amount of tax unpaid
. Exceeds But not Compromise is
Failure to file and/or pay any internal Fine of not less than exceed
revenue tax at the time or times required by P10,000 and P 0 P 5.000 P 1.000
law or regulation imprisonment of not less 5,000 10,000 3,000
than one (1) year but not 10,000 20.000 5 000
more than 10 years 20,000 50,000 10,000
50,000 100,000 15,000
100,000 500,000 20,000
500,000 1,000,000 30,000
1,000,000 5,000,000 40,000
5,000,000 XXX 50,000
REAL EXCELLENCE ONLINE CPA REVIEW
(REO CPA REVIEW)
74 We are the pioneer and the o
nly CPA review school in the
aos Philippines that has develo ped com
plete hybrid mobile app and
website.
REO is known for its effective, efficient and

convenient CPA review service
delivered through a revoluti onary hybrid mobile platform which enab
to study anywhere anytime. The tech les students
nology is a game changer for its student
lifestyle empowerment never seen
before in the j ndustry. Our platform is proven
to
reduce the total costs of professional review b y 70% to 80% not
to mention the
tremendous reduction in time and effort of stud ents
to review for the board exam.
Our Advantages
1. High caliber reviewers and dedicated technical support
2, Dual mode review strategy just like a two-in-one review
center
a. Zero-based pre-recorded lectures; and
b. Mastery live weekly classes
9-month review period same as a double review
WwW
Review anywhere, anytime with our proprietary mobile app

AND
Flexible access and shifting between phones, desktop, laptop or iPad

Reliable and fast customer service
Download features for offline viewing for those with poor internet connectivity
Hard copy handouts to be sent to your residence anywhere in the Philippines
The best gift you can to give your parents is not your diploma, but your professional
license. The best exam preparation is done through the process not after the
process. This will give you a margin of safety for probable future adjustments. It is
best to program for success early. Start your licensure exam preparation while you
are still in the undergrad with the help of our complete CPA Reviewer app.
Download here for a limited free access of our contents:
lt "5
ve
For more details, kindly message:
Wency Giron, CPA

Chief Marketing Officer, REO
sales@reocpareview.ph
www. facebook.com/reocpareview.ph
Mobile: 09190938620 / 09168400661

up in the province of
se be gdnaugti er challenges Tae a
aati ee an early interest and strong ert d in
education. His industry and excellence is
demonstrated by his consistent Slee uae record
since his elementary grades. He is valedictorian in
Elementary, valedictorian in High School, Cum Laude
in College and Top 6 in the October 2006 CPA Board
Exam. He served as auditor at Punong Bayan &
Araullo and as professor of accountancy in various
universities and colleges where he garnered
consistent “excellent” rating in his class evaluations
by accountancy and business students in taxation
throughout his teaching career. He taught Taxation
review in various review centers and university
undergrad review programs nationwide. He is highly
appreciated for his methods of teaching taxation. He
co-founded NFCPAR Baguio and is the current -
chairman of the board. In 2017, he founded the Real
Excellence Group to revolutionize the’ professional
review industry through information technology. He
is currently serving as the president of Real
Excellence Publishing and the review director of Real
Excellence Online CPA Review or REO.
The book is a principle-based structural presentation

of Income Taxation. It is aimed to provide readers
with a thorough understanding and mastery of
income Taxation by teaching taxation as a whole
body of interconnected concepts. Its concept-based
orientation assists readers to understand rather than
simply memorize tax rules. The accounting and legal
technicalities of taxation are comprehensively
discussed and illustrated making it highly
comprehensible even to non-technical readers. The
ae eel
book is comprehensive and well organized. The
elie iu ale [eee (ale ltrelakel mentBel elas promote
easier understanding, mastery and long term
retention. The book thoroughly discussed updates
in
pe Ct and connects theory and Practice by ==
providing detailed practical application of tax.rules.
it
"
's self-taught. Readers can learn Income

adel
Taxation
even with minimal teacher supervision.
koe
as
For comment, Suggestions, or inqu

iries, please feel
free to reach us at-
Pa
Sut a tare ete lat) @yahoo.com

re
eri sms ey,

—
ioe
Mobile No.-pee RLS) 0) a
*
ss]
Address: Nation’s Foremost CPA
“AL
Review Inc.
4th floor Pelizioy Centrum, Lower Session Road,
certo etary
ii
:

CTRL F Banggawan-Income Taxation (2021)

Uploaded by

Copyright:

Available Formats

You might also like

CTRL F Banggawan-Income Taxation (2021)

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CTRL F Banggawan-Income Taxation (2021)

Uploaded by

Copyright:

Available Formats

aol olga ae

A guide to understanding and

For Accountancy, Finance,

REX B. BANGGAWAN, CPA, MBA

An Integrated Principle-based Approach

A Guide to Understanding and Mastering Income Tax Principles and

CPA Board Exam candidates

Finance & Business students

REX B. BANGGAWAN, CPA, MBA

Scanned with CamScanner

Introductory concepts to taxation

The concept of tax, tax laws and tax administration

The concept of gross income under taxation

Taxation schemes, accounting period, methods and income reporting

Final income taxes

Capital gains taxes

Overview of the regular income tax

Exclusions and exempt income

Income subject to regular income tax

Fringe benefits and the fringe benefits tax

Dealings in properties subject to regular tax

Allowable deductions from gross income

Specific regular tax rules applicable individuals

Specific regular tax rules applicable to corporations

Scanned with CamScanner

Final Income Capital Gains Regular Income

'-->| Gross income P XXX

Special individual tax rules: Special corporate tax rules:

Scanned with CamScanner

CHAPTER 1 Introduction to Taxation 1-34

CHAPTER 2 Taxes, Tax Laws, and Tax Administration 35-62

CHAPTER 3 Introduction to Income Taxation 63-99

Scanned with CamScanner

Mode of realization of benefits 69

Taxable estates and trusts 74

CHAPTER 4 Tax Schemes, Periods, and Methods and Reporting 100-135

Scanned with CamScanner

CHAPTER 7 Introduction to Regular Income Taxation 228-258

‘Scanned with CamSeanner

CHAPTER 8 Regular Income Taxation ~ Exclusions in Gross Income 259-288

CHAPTER 9 Regular Income Taxation - Inclusions in Gross Income 289-331

Scanned with CamScanner

CHAPTER 10 Compensation income 332-378

CHAPTER 11 Fringe Benefits Taxation 379-409

CHAPTER 12 Dealings in Properties 410-449

‘Scanned with CamSeanner

UNIT 3 - DEDUCTIONS ON GROSS INCOME

CHAPTER 13 Principles of Deductions 450-493

CHAPTER 13-A Regular Allowable Itemized Deductions 494-536

Scanned with CamScanner

CHAPTER 13-C Optional Standard Deduction SS

UNIT 4— SPECIFIC REGULAR TAX RULES PER TAXPAYER CLASS

Scanned with CamScanner

CHAPTER 15-A Corporate Income Taxation - Special Corporations 638-682

CHAPTER 15-B Corporate Income Taxation - Regular Corporations 683-721

Appendix 1 = Table summary for final income tax rates

‘Scanned with CamSeanner

Chapter Overview and Objectives

This chapter discusses the fundamental principles ---