ACC311

UNIVERSITY OF MINDANAO
Tagum College
Department of Accounting Education

Accountancy Program
Physically Distanced but Academically Engaged
Self-Instructional Manual (SIM) for Self-Directed Learning (SDL)
Course/Subject: ACC 311 – Income Taxation
Name of Teacher: Joe Mari N. Flores, CPA
THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY; NOT FOR

REPRODUCTION AND DISTRIBUTION OUTSIDE OF ITS INTENDED USE.
THIS IS INTENDED ONLY FOR THE USE OF THE STUDENTS WHO ARE
OFFICIALLY ENROLLED IN THE COURSE/SUBJECT.
EXPECT REVISIONS OF THE MANUAL.
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116
Table of Contents
Page
Part 1. Course Outline and Policies ...................................................... 1

Part 2. Instruction Delivery
CC’s Voice ............................................................................…….. 11
Course Outcomes ........................................................................... 11
Big Picture A: Unit Learning Outcomes ..........................................12
Big Picture in Focus:ULOa ………………………………………………12
Metalanguage .......................................................................... 12
Essential Knowledge ............................................................... 13
Self-Help .................................................................................... 30
Let’s Check .................................................................................... 30
Let’s Analyze ......................................................................... 30
In a Nutshell .................................................................................... 31
Q&A List .................................................................................... 33
Keywords Index ......................................................................... 33
Big Picture in Focus:ULOb ………………………………………….... 33

Metalanguage .......................................................................... 33
Self-Help .................................................................................... 49
Let’s Check .................................................................................... 49
Let’s Analyze ......................................................................... 51
In a Nutshell .................................................................................... 53
Q&A List .................................................................................... 55
Keywords Index ......................................................................... 55
Big Picture in Focus:ULOc ………………………………………………55

Metalanguage .......................................................................... 55
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Self-Help .................................................................................... 74
Let’s Check .................................................................................... 74
Let’s Analyze ......................................................................... 75
In a Nutshell .................................................................................... 77
Q&A List .................................................................................... 79
Keywords Index ......................................................................... 79
Big Picture B: Unit Learning Outcomes ..........................................80

Big Picture in Focus:ULOa ………………………………………………80
Metalanguage .......................................................................... 80
Self-Help .................................................................................... 85
Let’s Check .................................................................................... 85
Let’s Analyze ......................................................................... 86
In a Nutshell .................................................................................... 87
Q&A List .................................................................................... 89
Keywords Index ......................................................................... 89
Big Picture in Focus:ULOb …………………………………………… 89

Metalanguage .......................................................................... 89
Self-Help .................................................................................... 94
Let’s Check .................................................................................... 95
Let’s Analyze ......................................................................... 95
In a Nutshell .................................................................................... 97
Q&A List .................................................................................... 98
Keywords Index ......................................................................... 98
Big Picture in Focus:ULOc …………………………………………… 99

Metalanguage ......................................................................... 99
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Essential Knowledge ...............................................................94

Self-Help .................................................................................... 110
Let’s Check .................................................................................... 115
Let’s Analyze ......................................................................... 115
In a Nutshell .................................................................................... 115
Q&A List .................................................................................... 118
Keywords Index ......................................................................... 118
Big Picture C: Unit Learning Outcomes ..........................................119

Big Picture in Focus:ULOa ……………………………………………… 119
Metalanguage .......................................................................... 119
Self-Help .................................................................................... 130
Let’s Check .................................................................................... 130
Let’s Analyze ......................................................................... 131
In a Nutshell .................................................................................... 133
Q&A List .................................................................................... 134
Keywords Index ......................................................................... 135
Big Picture in Focus:ULOb …………………………………………… 135

Metalanguage .......................................................................... 135
Self-Help .................................................................................... 140
Let’s Check .................................................................................... 140
Let’s Analyze ......................................................................... 141
In a Nutshell .................................................................................... 142
Q&A List .................................................................................... 142
Keywords Index ......................................................................... 142
Big Picture in Focus:ULOc ………………………………………………143
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Metalanguage .......................................................................... 143

Self-Help .................................................................................... 153
Let’s Check .................................................................................... 154
Let’s Analyze ......................................................................... 154
In a Nutshell .................................................................................... 156
Q&A List .................................................................................... 156
Keywords Index ......................................................................... 157
Big Picture in Focus:ULOd ………………………………………………157

Metalanguage .......................................................................... 157
Self-Help .................................................................................... 161
Let’s Check .................................................................................... 162
Let’s Analyze ......................................................................... 162
In a Nutshell .................................................................................... 162
Q&A List .................................................................................... 163
Keywords Index ......................................................................... 163
Big Picture D: Unit Learning Outcomes .............................................164

Big Picture in Focus:ULOa ……………………………………………… 164
Metalanguage .......................................................................... 164
Self-Help .................................................................................... 167
Let’s Check .................................................................................... 168
Let’s Analyze ......................................................................... 168
In a Nutshell .................................................................................... 169
Q&A List .................................................................................... 170
Keywords Index ......................................................................... 171
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Big Picture in Focus:ULOb ………………………………………………171

Metalanguage .......................................................................... 171
Self-Help .................................................................................... 173
Let’s Check .................................................................................... 173
Let’s Analyze ......................................................................... 174
In a Nutshell .................................................................................... 175
Q&A List .................................................................................... 176
Keywords Index ......................................................................... 176
Part 3. Course Schedule ......................................................................... 177

Online Code of Conduct .............................................................. 178
Monitoring of OBD and DED............................................................ 179
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Telefax: (084) 655-9591, Local 116
Course Outline: ACC 311 – Income Taxation
Course Facilitator : Joe Mari N. Flores, CPA

Email : floresjoemari1495@gmail.com
Student Consultation : Done online (LMS) or traditional contact
(calls, text,emails)
Mobile : 09773877098
Phone : None
Effectivity Date : June 2020
Mode of Delivery : Distance Education Delivery (DED)
Time Frame : 54 hours
Student Workload : Expected Self-Directed Learning
Pre-requisite : ACC 221
Credit : 3 units
Attendance Requirement : For online sessions: minimum of 95% attendance
For 1-day on campus/onsite review: 100%
attendance; for 1-day on-campus/on-site final
exam: 100% attendance
Course Outline Policies
Areas of Concern Details

Contact and Non-contact Hours This 3-unit course self-instructional manual is
designed for distant learning mode of instructional
delivery with scheduled face to face or virtual
sessions which can be done using LMS, traditional
contact (via cellphone/telephone and SMS) and
social media platforms (e.g. email, private
messenger, Facebook, Viber, WhatsApp, Line,
Zoom and other similar applications) depending
on what is available for both teachers and
students. The expected number of hours will be 54
including the face to face or virtual sessions. The
face to face sessions shall include the summative
assessment tasks (exams) since this course is
included in the licensure exam for CPAs.
Assessment Task Submission Submission of assessment tasks shall be on the

2nd, 4th and 6th week of the summer class.
Moreover, specific dates of submission are
specified in the Course Schedules Section of this
manual. The assessment paper shall be attached
with cover page including the title of assessment
task (if the task is performance), the name of the
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course coordinator, date of submission and name

of the student. The document shall be submitted
to the course coordinator thru LMS (Quipper),
email, FB messenger or thru any means
accessible to students. It is also expected that you
already paid your tuition and other fees before the
submission of the assessment task.
If the assessment task is done in real time through

the features of LMS accessible to students, the
schedule shall be arranged ahead of time by the
course coordinator.
Since this course is included in the licensure

examination for CPAs, you will be required to take
the Multiple Choice Question Exam inside the
school. This should be scheduled ahead of time
by your course coordinator. This is non-negotiable
for all licensure-based programs.
Turnitin Submission To ensure honesty and authenticity, all

(if necessary) assessment tasks are required to be submitted
thru Turnitin with a maximum similarity index of
30% allowed. This means that if your paper goes
beyond 30%, the students will either opt to redo
her/his paper or explain in writing addressed to the
course coordinator the reasons for similarity. In
addition, if the paper has reached more than 30%
similarity index, the student may be called for a
disciplinary action in accordance with the
University’s OPM on Intellectual and Academic
Honesty.
Please note that academic dishonesty such as

cheating and commissioning other students or
people to complete the task for you have severe
punishments (reprimand, warning, expulsion).
Penalties for Late Assignments/ There will be a 5% reduction based on the

Assessments possible maximum score of the evaluation or
assessment if it is submitted after the deadline or
designated time without an approved extension.
However, if the late submission of assessment

paper has valid reason, a letter of explanation
should be submitted and approved by the course
coordinator, If necessary, you will also be required
to present/attach evidences.
Return of Assignments / Assessment tasks will be returned to you one (1)
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Assessments week after the submission. This will be returned by

LMS, email, FB messenger or any other
communication platforms available for both
teacher and students.
For some group assessment tasks, the course

coordinator will require some or few of the
students for online or virtual sessions to ask
clarificatory questions to validate the originality of
the assessment task submitted and to ensure that
all the group members are involved.
Assignment Resubmission You should request in writing addressed to the

course coordinator his/her intention to resubmit an
assessment task. The resubmission is premised
on the student’s failure to comply with the
similarity index and other standards or other
reasonable circumstances e.g. illness, accidents,
and financial constraints.
Re-marking of Assessment You should request in writing addressed to the

Papers and Appeal program coordinator your intention to appeal or
contest the score given to an assessment task.
The letter should explicitly explain the
reasons/points to contest the grade. The program
coordinator shall communicate with the students
on the approval or disapproval of the request.
If disapproved by the course coordinator, you can

elevate your case to the program head or the
dean with the original letter of request. The final
decision will come from the Dean of College.
Grading System You shall be evaluated based on the following:
Assessment methods Weights

EXAMINATIONS 60%
A. Exam - Prelims & Midterm 30%
B. Final Exam 30%
CLASS PARTICIPATIONS 40%
C. Quizzes 10%
D. Assignments 5%
E. Research/Requirement 15%
F. Oral recitation 10%
Total 100%
Submission of the final grades shall follow the

usual University system and procedures.
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Preferred Referencing Style Use the general practice of APA 6th edition.
Student Communication The course coordinator shall create Group Chat in

FB messenger for the class. Each student shall
create a Quipper account. The course coordinator
will then provide a Quipper access code to the
students for them to enrol to have access to the
materials and resources of the course. All
communication formats: chat, submission of
assessment tasks, request, etc. may be done thru
any platforms available for the convenience of
teacher and students.
You can also meet the course coordinator in

person through the scheduled face to face
sessions to raise your issues and concerns.
Contact Details of the Dean Dr. Gina Fe G,Israel

Email: deansofficetagum@umindanao.edu.ph
Mobile: 09099942314
Contact Details of the Program For Accountancy:

Heads
Mary Cris L. Luzada, CPA, MSA
Email: luzadacris@umindanao.edu.ph
Mobile: 09228321794
For Accounting Technology:
Maria Teresa A. Ozoa, CPA, MBA

Email: ozoamateresa@umindanao.edu.ph
Mobile: 09472657119
Students with Special Needs Students with special needs shall communicate
with the course coordinator about the nature of his
or her special needs. Depending on the nature of
the need, the course coordinator with the approval
of the program coordinator may provide alternative
assessment tasks or extension of deadline of
submission of assessment tasks. However, the
alternative assessment tasks should still be in the
service of achieving the desired course learning
outcomes.
Library Contact Details Clarissa R. Donayre, MSLS

Chief Librarian
Email: lictagum@umindanao.edu.ph
Mobile: 09273951639
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Well Being Welfare Support Rochen D. Yntig, RGC

Help Desk Contact Details Head
Email: chenny.yntig@gmail.com
Number: 0932 7717 219
Mersun Faith A. Delco, RPm

Psychometrician
E-mail: mersunfaithdelco@gmail.com
Phone: 0927 608 6037
Alfred Joshua M. Navarro

Facilitator
E-mail: is40fotb@gmail.com
Phone: 0977 341 6064
Course Information –see/download course syllabus from

Quipper or other available platforms
CC’s Voice:
Hello there! Welcome to this course ACC 311: Income Taxation. This course is
covered in the Taxation subject in the CPA board exam. As future accountants, it
is important for you to gain understanding on what and how taxation works and its
relevance to business entities and the government. This course will help you
evaluate different types of income which may be subject to tax or not, and
eventually this will help you compute tax dues for individual and corporate
taxpayers. I am confident that you will find this course relevant as this applies to
all people not to mention earning business organizations. I hope that you enjoy
while learning this course!
Course Outcome (CO):
As a student of this course you are expected to (1) Describe the nature, scope,
characteristics, principles and limitations of a sound system of taxation and
identify the classification of taxpayers, corporations, partnership and estates and
trusts; (2) Point out the sources of taxable income and allowable deductions,
calculate tax due and use the appropriate income tax forms for individual and
corporation income tax return and other administrative compliance requirements.
Let us begin!
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Big Picture A
Week 1–2: Unit Learning Outcomes (ULO): At the end of the unit, you are
expected to:
a. Discuss the principles of taxation and its importance.
b. Demonstrate mastery on rules of individual taxation.
c. Demonstrate mastery on rules of corporate taxation.
Big Picture in Focus: ULOa. Discuss the principles of

taxation and its importance.
Metalanguage
In this section, the most essential terms relevant to the study of curriculum
and to demonstrate ULOa will be operationally defined to establish a common frame
of refence as to how the texts work in your chosen field or career. You will encounter
these terms as we go through the study of taxation. Please refer to these definitions
in case you will encounter difficulty in the understanding educational concepts.
1. Taxation. A legislative process and a mode of government cost distribution.
1.1 An inherent power of the State to enforce proportional contribution from
its subjects for public purpose.
1.2 A process of laying taxes by the legislature of the State to enforce
proportional contributions from its subjects for public purpose.
1.3 A mode by which a State allocates its costs or burden to its subjects who
are benefited by its spending.
2. Taxes. The enforced proportional contribution by persons and property levied

by the lawmaking body of the State by virtue of its sovereignty for the support
of the government and all public needs.
3. Income. It is the return in money from one’s business, labor or capital

invested. All revenues that comes to the taxpayer except return of capital.
3.1 The amount of money coming to a person or corporation within a specified

time, whether as payment for services, interest or profit from investment.
Unless otherwise specified, it means cash or its equivalent.
4. Income Tax. Tax on all yearly profits arising from property, profession, trade
or business, or is a tax on person’s income, emoluments, profits and the like.
4.1 Usually considered as an excise (privilege) tax. It is levied upon the right
of a person to receive income or profits instead on upon persons, property,
funds, or profits as such but
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5. Tax Laws. Laws that provide for the assessment and collection of taxes.
5.1 Tax laws including rules, regulations and rulings prescribe the criteria for
tax reporting, a special form of financial reporting which is intended to meet
specific needs of tax authorities.
6. Taxpayers. This are entities which are subjected to pay tax may it be an
individual, corporation, estate & trusts and partners & partnerships.
7. Tax Administration. Refers to the management of tax system. Tax

administration of the national tax system in the Philippines is entrusted to the
BIR which is under the control (supervision and administration) of the
Department of Finance.
8. Bureau of Internal Revenue (BIR). Is a government agency that is mandated

to assess and collect taxes.
Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for the first two
(2) weeks of the course, you need to fully understand the following essential
knowledge that will be laid down in the succeeding pages. Please note that you are
not limited to exclusively refer to these resources. Thus, you are expected to utilize
other books, research articles and other resources that are available in the
university’s library e.g. ebrary, search.proquest.com etc.
I. BASIC PRINCIPLES
1.1 Lifeblood doctrine

The power of taxation is essential or necessary since the government can neither
exist, nor endure without taxation. Taxes are the lifeblood of the government and
their prompt and certain availability is an superior need.
Cases:
a. In matters of taxation, the government cannot be estopped by the
mistakes, errors, or omissions of its agents for upon it depends the
ability of the government to serve the people. (CIR v Nippon Express).
b. Tax laws must be strictly and faithfully implemented as they are NOT
to be liberally construed. (CIR v Dash Engineering).
c. Collection of taxes CANNOT be curtailed by injunction or any like
action. Otherwise, the government shall be crippled in dispensing the
needed services to the people. (Camp John Hay Devt. v CBAA).
d. Taxes are the lifeblood of the government and should be collected
without unnecessary hindrance. On the other hand, such collection
should be made in accordance with law as any arbitrariness will negate
the very reason for government itself. (CIR v Algue Inc).
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e. Any claim of statutory exemption from taxation should be manifest and

unmistakable from the language of the law on which it is based. (YMCA
v CIR).
f. Statutes that allow exemptions are construed strictly against the
grantee, and liberally in favor of the government. (Davao Lumber v
CIR).
g. Constitution does NOT require judicial proceedings in tax cases. It is
upon taxation that the government chiefly relies to obtain the means to
carry on its operations. The modes to enforce collection of taxes levied
should be summary and interfered with as little as possible. (Philippine
Bank of Communications v CIR).
1.2. PURPOSE OF TAXATION

a. Primarily, to raise revenue
b. To regulate (inflation, economic and social stability, social control, etc.)
c. To compensate the benefits provided by the government to the people
1.3. INHERENT POWERS OF THE GOVERNMENT (Similarities and Differences)
1.3.1 Inherent Powers of the State
a. Police Power – power to make and implement laws for the general
welfare
b. Taxation Power – power to enforce contribution to raise government
funds; it is an inherent power by which the sovereign through its law-
making body raises revenue to defray the necessary expenses of the
government.
c. Eminent Domain Power–power to take private property for public use
with just compensation.
POLICE TAXATION EMINENT DOMAIN
Power to MAKE and Power to ENFORCE Power to TAKE private

IMPLEMENT laws for the contribution to raise property for public use
general welfare government funds with just compensation
Plenary,
comprehensive, and Merely to take private
Broader in application
supreme BUT NOT property
ABSOLUTE
Property is taken or
Money is taken to Property is taken and
destroyed to promote
support the government used for public use
general welfare
Can be expressly Cannot be delegated, if Can be expressly

delegated delegated, it should be delegated
to the legislative
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department of the LGU

(e.g. to make
ordinances)
Not specific as to
Limited to the cost of amount, instead, it is the
regulation, license and Generally, NO maximum Government which is to
other necessary (limit) on amount compensate the
expense
property taken.
Relatively FREE from Subject to Superior to and may

Constitutional Constitutional and override Constitutional
limitations Inherent limitations impairment provision
Superior to Non- Inferior to Non-

Impairment Clause Impairment Clause
1.4 PRINCIPLES OR CANONS OF A SOUND TAXATION SYSTEM (FEA)

1.4.1 Fiscal Adequacy – enough or sufficient to used in meeting the
government expenditures and other public needs (Government Budget
Balance). This is in consonance of the Lifeblood Theory.
a. Budget Deficit = Government Revenues < Government Expenditures
b. Budget Surplus = Government Revenues > Government Expenditures
1.4.2 Equality or Theoretical Justice – based on the taxpayer’s ability to pay; It
should be progressive
1.4.3 Administrative Feasibility – capability of being effectively enforced. Tax
laws should not obstruct business growth and economic development.
1.5 INHERENT AND CONSTITUTIONAL LIMITATIONS

1.5.1. INHERENT LIMITATIONS (PENIT)
a. PUBLIC PURPOSE- Does NOT only pertain to those purposes
traditionally viewed as essentially governmental functions, but also
includes those purposes designed to promote social justice (Planters v
Fertiphil 2008).
- Broadened to cover uses which redound to the general public’s indirect

advantage.
Who may determine “public purpose”

This is a legislative prerogative, hence such power resides in Congress.
However, this does not prevent the court from questioning the propriety of
a statute on the ground that the law is not for public purpose.
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b. EXEMPTION OF THE GOVERNMENT

b.a Government entities- Refers to corporate governmental entity
through which the functions of the government are exercised throughout
the Philippines.
Reason for exemption:- Properties of the national government as well

as those of the LGU are NOT subject to tax, otherwise, it will result in an
absurd situation where the government is taking money from one pocket
and putting it in another.
b.b Government agencies-Refers to various units of the government,

including a department, bureau, office, instrumentality, or GOCC, or
LGU.
Taxability:
a. Agencies performing governmental functions are exempt from tax
unless expressly taxed;
b. Agencies performing proprietary functions are subject to tax
unless expressly exempted.
b.c Government Instrumentality-Refers to any agency in the National

Government, not integrated within the department framework, vested
with special functions or jurisdiction by law.
Reasons for exemption:

a. So that functions of government shall NOT be unduly impeded
b. To reduce the amount of money that has to be handled by the
government in the course of its operations.
GOCC’s
Generally subject to tax, except:
a. GSIS
b. SSS
c. PHIC
d. LWD
e. PCSO (as amended by RA10026 TRAIN LAW)
c. NON-DELEGABILITY OF TAXING POWER- The power to tax is

exclusively vested in the legislative body.
Matters that cannot be delegated:
1) Selection of property or transaction to be taxed;
2) Determination of purposes;
3) Rate of taxation; and
4) Rules of taxation. (ABAKADA Party list v Ermita 2005)
Exceptions: (PAL)
1) Delegation to the President of tariff powers under the flexible tariff
clause.
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2) Delegation to Administrative agencies, such as authority to fix rates

within the limits specified by law.
3) Delegation to LGUs as local governments are granted the
autonomous authority to create their own sources of revenue.
d. INTERNATIONAL COMITY
Basis
The Philippines adopts the generally accepted principles of
international law as part of the law of the land, and adheres to the
policy of peace, equality, justice, freedom, cooperation, and amity with
all nations. (Sec. 2, Art. II of the 1987 Constitution)
e. TERRITORIALITY
Power to tax is limited to the territorial jurisdiction of the State. Except:
Where privity of relationship exists between the taxpayer and the State.
1.5.2 CONSTITUTIONAL LIMITATIONS

a. DUE PROCESS- Tax laws and enforcements must comply with both
substantive and procedural due process.
Substantive – law must be reasonable and for public purpose
Procedural – there must be NO arbitrariness in the assessment and
collection; prescribed rules must be followed.
b. EQUAL PROTECTION- Does NOT require territorial uniformity of laws. As

long as there is actual and material differences between territories, there is
no violation of constitutional limitation.
Valid classification:
a. Rests on substantial distinctions;
b. Germane to the purpose of the law
c. Not limited to existing conditions; and
d. Applies equally to all members of the same class.
c. FREEDOM OF RELIGION
2 Clauses
 Non-establishment clause – NO law shall be made respecting an
establishment of religion or prohibiting the free exercise thereof.
 Free exercise clause – The free exercise and enjoyment of
religious profession and worship without discrimination or
preference, shall forever be allowed.
d. NON-IMPAIRMENT OF CONTRACTS- Tax exemptions protected are

those contractual tax exemptions, which are:
a) Entered into by the taxing authority
b) Lawfully entered by them under enabling laws
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c) Government acts in its private capacity and sheds its cloak of

immunity.
e. PROHIBITION AGAINST IMPRISONMENT FOR NON-PAYMENT OF

POLL TAX
f. UNIFORMITY AND EQUALITY OF TAXATION

All taxable articles or kinds of property of the same class shall be taxed at
the same rate.
 Reasonable classifications do NOT violate the uniformity and
equality of taxation.
f. PROGRESSIVE SYSTEM OF TAXATION

Rate goes up depending on the resources of the person affected.
g. DELEGATED AUTHORITY TO THE PRESIDENT TO IMPOSE TARIFF

RATES
h. PROHIBITION AGAINST TAXATION OF REAL PROPERTY OF

CHARITABLE INSTITUTIONS, CHURCHES, PARSONAGES OR
CONVENTS, MOSQUES, AND NON-PROFIT CEMETERIES
- Applies only to real property tax.
- Properties (real estate) must be actually, directly, and exclusively used
for religious, charitable, or for the purpose of education education.
- “Actual, direct, and exclusive use” is the direct, immediate, and actual
application of the property to the purposes for which the institution is
organized.
i. PROHIBITION AGAINST TAXATION OF NON-STOCK, NON-PROFIT

EDUCATIONAL INSTITUTIONS
- “All revenues and assets” are exempt under this provision.
- Hence, the provision exempts non-stock non-profit educational
institutions from:
 Income tax
 Real property tax
 Donor’s tax
 Customs duties
- Revenues and assets must be used actually, directly, and exclusively for
educational purposes.
- Income from cafeteria, canteens, and bookstores are also exempt if
located within school premises. (RMC 76-2003)
j. MAJORITY VOTE OF CONGRESS FOR GRANTS OF TAX EXEMPTION

- Includes grant of “tax amnesty” being a general pardon by the State of
its authority to impose penalties on persons guilty of evasion or violation of
a tax law.
k. PROHIBITION ON USE OF TAX LEVIED FOR SPECIAL PURPOSE
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-Tax levied for a special purpose shall be treated as a special fund and
paid out for such purpose only.
- If purpose is fulfilled or abandoned, the balance shall be transferred to
the general funds of the Government.
l. TAX BILLS SHALL ORIGINATE FROM HOUSE OF REPRESENTATIVE

- Senate may propose or concur with amendments.
m. PRESIDENT’S VETO POWER ON APPROPRIATION, REVENUE, AND

TARIFF BILLS (ART)
- President has the power to item veto ART bills.
n. JUDICIAL POWER TO REVIEW LEGALITY OF TAX

- Supreme Court may review all cases involving legality of any tax, impost,
toll, or any penalty imposed in relation thereto.
o. GRANT OF POWER TO LGU TO CREATE ITS OWN SOURCES OF

REVENUE
- Subject to limitations as Congress may provide
1.6. DOCTRINES OF TAXATION
1.6.1. CONSTRUCTION AND INTERPRETATION OF TAX LAWS
 Any claim of tax exemption should be strictly construed against the
taxpayer, and liberally in favor of the government. (Luzon Stevedoring v
CA)
 A taxcannot be imposed unless it is supported by clear and express

language of a statute. A tax statute is strictly construed against the
government, and liberally in favor of the tax payer.
 The “in lieu of all taxes” clause only applies to national taxes and does
NOT apply to local taxes. (Smart Communications v Davao 2008)
1.6.2. PROSPECTIVITY OF TAX LAWS

Tax laws are prospective in application. Except, when the language of the
statute clearly demands it shall have retroactive effect. Retroactive
application of laws may also be allowed if it will not deny due process.
Non-retroactivity of Rulings
Any revocation, modification, or reversal of any of the rules and
regulations, rulings, and circulars shall NOT be given retroactive
application if it will be prejudicial to taxpayers.
Exceptions:
1. When taxpayer deliberately misstates or omits material facts
from his return or any document;
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2. Where facts subsequently gathered by BIR are materially

different from the facts on which the ruling is based; or
3. Where taxpayer is in bad faith. (Sec. 246, NIRC)
1.6.3. IMPRESCRIPTIBILITY OF TAXES

General rule: Right to assess and collect taxes are imprescriptible.
Exception: When the laws provide for statute of limitations.
 Assessment of internal revenue taxes within 3 years from the last
day prescribed by law for filing of the return. (Sec. 203, NIRC)
 In cases of fraud, at any time within 10 years from the discovery of
fraud. (Sec. 222, NIRC)
 For LGUs, 5 years prescriptive period for assessment and
collection. (Sec. 194 and 270, LGC)
1.6.4. DOUBLE TAXATION

Double taxation – An act of the sovereign by taxing twice for the same
purpose in the same year upon the same property or activity of the same
person.
Kinds of double taxation

1. Direct double taxation – an objectionable kind of double taxation in its
prohibited sense, since it violates the equal protection clause. (City of
Baguio v De Leon)
Elements:
a) The same property or subject matter taxed twice when it should
be taxed only once;
b) Both taxes levied for the same purpose; and
c) Imposed by the same taxing authority within the same
jurisdiction, during the same taxing period, and covering the
same kind or character of tax.
Local business tax imposed by a City on manufacturers and retailers of

liquors and local business tax on businesses subject to excise, VAT, or
percentage tax under the NIRC.
The Court held that there is double taxation because the taxes are
imposed: 1) on the same subject matter - both taxes are being imposed
on the privilege of doing business in the City but the other only
identified such person with particularity; 2) for the same purpose - to
make persons conducting business within the City contribute to city
revenues; 3) by the same taxing authority - the City; 4) within the same
taxing jurisdiction - the territorial jurisdiction of the City; 5) for the same
taxing period; and 6) of the same kind of tax - a local business tax
imposed on gross sales or receipts of the business. (Nursey Care
Corp. v Acevedo and City of Manila 2014)
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2. Indirect double taxation – all cases where there is a burden of 2 or

more pecuniary impositions. Usually allowed as long as there is NO
violation of the equal protection and uniformity clause.
Examples
 Tax upon a corporation for its property and upon its
shareholders for their shares;
 Tax upon the same property imposed by 2 different States.
3. International double taxation – imposition of comparable taxes in 2

or more States on the same taxpayer in respect to the same subject
matter for identical periods. (CIR v SC Johnson)
To eliminate double taxation, States enter into a tax treaty.
4. Local double taxation – happens when the LGU impose a tax that is
already imposed by the National Government or by another LGU that
has territorial jurisdiction over such LGU.
Pre-emption rule
To avoid local double taxation, Congress prevents LGUs from
imposing taxes which are already imposed by the National
Government, unless otherwise provided in the LGC.
Modes of Relief from Double Taxation (CREDT)

1. Tax credit – amount is subtracted from the tax liability.
2. Reduction of Philippine Income Tax Rate – an example is the
tax sparing rule.
3. Tax exemptions – a grant of immunity from obligations to pay
taxes.
4. Tax deductions – amount of tax deducted from the gross
income on which the amount of tax liability is calculated.
5. Tax treaties – agreement between 2 States specifying what
items of income will be taxed by the authorities where the
income is earned.
 Exemption method – income or capital taxable in the
State of source is exempt in the State of residence.
 Credit method – tax paid in the State of source is
credited against the tax levied by the State of residence.
1.6.5. ESCAPE FROM TAXATION

A. SHIFTING OF TAX BURDEN
The transfer of burden of tax by the original payer or the one on whom the tax
was assessed to another. Only indirect taxes may be shifted. (CIR v PLDT
2005)
Indirect taxes – the liability for the payment of the tax remains with the
seller on whom the tax is assessed, but the burden is passed to the
purchaser.
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Indirect tax NOT a violation of the principle that taxes are personal
liabilities which cannot be transferred
When the seller passes the tax on the buyer, he is only shifting the tax
burden as part of the costs of goods sold, NOT the liability to pay it.
Impact of taxation – point on which the tax is originally imposed. It

falls on one on whom the tax is formally assessed.
Incidence of taxation – point on which the tax burden is finally settled.
Essence of knowing where the impact of taxation lies

1. To determine the proper party to claim a refund of erroneously
imposed indirect taxes;
2. To determine whether indirect taxes can be passed on to an
exempt buyer.
Kinds of shifting
1. Forward – burden is transferred from factors of production
through the factors of distribution until it finally settles on the
ultimate consumer.
2. Backward – burden is transferred from the consumer through
factors of distribution to the factors of production.
3. Onward – when tax is shifted 2 or more times, backward or
forward.
B. TAX AVOIDANCE
 Tax Minimization is the other term. It uses legally permissible
means in reducing or avoiding payment of taxes.
 Tax avoidance is a tax saving device within the means sanctioned

by law. Must be used in good faith and at arm’s length. (CIR v
Benigno Toda 2014)
 Example: Availing or Exhausting all deductions allowed by law or

refraining from engaging in activities subject to tax.
C. TAX EVASION- Sometimes referred to as tax dodging. An illegal means of

escaping taxation. It connotes fraud and subjects the taxpayer to civil and
criminal liabilities. A scheme outside of those lawful means.
Elements: ESC
1. The end to be achieved, such as the payment of less than that
legally due or the non-payment of tax when tax is due;
2. An accompanying state of mind which is evil, in bad faith, willful, or
deliberate; and
3. Course of action or failure of action which is unlawful to achieve the
end. (CIR v Benigno Toda 2014)
Willful blindness doctrine
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A taxpayer can NO longer raise the defense that tax returns errors are
not their responsibility nor fault of their employees or accountants.
6. EXEMPTION FROM TAXATION- The essence of tax exemption is the immunity

or freedom from a charge or burden to which others are subjected. It is a waiver of
the government’s right to collect what would have been otherwise collectible. (Sec. of
Finance v Lazatin 2016)
 Hence, a Revenue Regulation requiring a tax-exempt entity to pay taxes

with possibility of refund is invalid. Even if the possibility of subsequent
refund exists, the fact remains that the entity should still spend money and
other resources to pay for something they should be immune to in the first
place. It is entirely in contradiction to the essence of taxation. (Id)
Principle of strictissimi juris in tax exemption

Laws granting tax exemption are construed strictly against the taxpayer and
liberally in favor of the taxing authority. Taxation is the rule, exemption is the
exception. Those who claim tax exemptions should justify such claim or right.
Exceptions:
1. Statute granting tax exemptions provide for liberal construction thereof;
2. Special taxes affecting only special classes of persons;
3. If exemptions refer to public property;
4. Exemptions granted to religious, charitable, and educational institutions or
their property;
5. Exemptions in favor of government, its political subdivisions, or
instrumentalities.
Revocation of tax exemption

Since taxation is the rule, and exemption is the exception, the exemption may
thus be revoked or withdrawn at the pleasure of the taxing authority. (MCIAA v
Marcos)
Except: If the tax exemption constitutes a binding contract and for valuable
consideration. The government cannot unilaterally revoke the exemption.
Limitations on Revocation
1. Non-impairment clause
2. Adherence to form – a tax exemption granted by the Constitution may be
revoked through Constitutional amendments only;
Important Notes:
a. Tax refunds and Tax exclusions are in the nature of tax exemptions and
are likewise strictly construed against the taxpayer.
b. Tax-exempt entity on payment of Indirect Taxes. The tax exemption does

NOT exempt the entity from payment of indirect taxes because such
person is NOT the one statutorily liable for the payment of tax in the first
place.
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Except: If the buyer is specifically exempted from payment of indirect

taxes.In this case, the seller will have to absorb the economic burden of
the tax. (Maceda v Macaraig)
c. Tax refund for payment of indirect taxes. The proper party to seek a refund
is the seller who is the statutory taxpayer even if he shifts the burden to
another. (Silkair v CIR 2008). The buyer cannot seek a refund as the buyer
is NOT the statutory taxpayer, he merely absorbs the burden of the tax.
Exception: When the law clearly grantsthe party to which the burden is
shifted an exemption of bothdirect and indirect taxes. In this case, the
buyer is deemed the proper party to seek a refund. (PAL v CIR 2013)
7. DOCTRINE OF EQUITABLE RECOUPMENT- This doctrine states that a tax

claim for refund which is prevented by prescription, may be allowed to be used as
payment for unsettled tax liabilities if both taxes arise from the same transaction in
which overpayment is made and underpayment is due.
8. PROHIBITION ON COMPENSATION AND SET-OFF- General rule: There can

be NO off-setting of taxes against the claims that the taxpayer may have against the
government. Reason: Taxes are NOT in the nature of contracts between parties.
They grow out of duty and are positive acts of the government, the making and
enforcement of which is not subject to the consent of the taxpayer. (Republic v
Mambulao)
Exception:
When the obligation to pay taxes and the taxpayer’s claim against the
government are both:
a) Overdue
b) Demandable
c) Fully liquidated
Compensation shall take place by operation of law.
9. COMPROMISE AND TAX AMNESTY

Compromise
Allowed when:
a) The subject matter thereof is NOT prohibited from being compromised;
and
b) The person entering such compromise is authorized by law to do so.
Tax amnesty
A general pardon or intentional overlooking of the State of its authority to
impose penalties on persons guilty of violating a tax law.
Rules:
1. Never favored and strictly construed against the taxpayer.
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2. The government is NOT estopped from questioning the tax liability

even if amnesty tax payments were already received.
3. Defense of tax amnesty is a personal defense.
Grant of tax amnesty cannot be made by the President. It is in the nature of

tax exemption which could be granted only by a concurrence of Congress.
(People v Castaneda)
1.7 SITUS OF TAXATION

1.7.1 Gross income derived within the Philippines:
a. Interests – on bonds, notes, and other interest bearing obligations:
a. If the loan was used here in the Philippines; OR
b. The debtor is in the Philippines.
b. Dividends
a. From a domestic corporation; and
b. Foreign corporation
i. Except: If less than 50% of the gross income was derived
within the Philippines for the 3-year period ending close of
the taxable year.
c. Services – labor performed in the Philippines

d. Rentals and Royalties – fromproperty located in the Philippines or from
any interest in such property including rentals or royalties for the use or
privilege of using within Philippines;
e. Sale of real property – located in the Philippines;
f. Sale of personal property– see Sec. 42(E)
1.7.2 Gross income without the Philippines

a. Interest derived from sources without;
b. Dividends derived from sources without;
c. Compensation for labor or personal services performed outside the
Philippines;
d. Rentals or royalties from property located outside the Philippines or any
interest in such property;
e. Gains, profits, or income from sale of real property located outside the
Philippines. (Sec. 42(C), NIRC)
1.7.3 Expenses, Interests, Losses and Other Deductions from Gross Income
of multi-national corporation
a. If directly related to the production of Philippine-derived income and
those properly allocated thereto –may be deducted from gross income in
the Philippines;
b. If effectively connected but cannot be definitely allocated – a ratable

part of such may be deducted from gross income. (Sec. 42(B), NIRC)
1.7.4 Income from sources partly within and partly without the Philippines
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a. Sale of personal property produced within and sold without the Philippines;
or
b. Sale of personal property produced without and sold within the Philippines.
(Sec 42(E) par. 1)
1.8 CHARACTERISTICS OF TAXES

a. Forced charge
b. Generally payable in money
c. Exclusively levied by the legislative body
d. Assessed in accordance with some reasonable rule of apportionment
(ability-to-pay principle)
e. Imposed by the State within its jurisdiction
f. Levied for public purpose
1.9 TAX DISTINGUISHED FROM OTHER FEES
Impositions Other Than Tax
a. Toll – charged for the cost and maintenance of the property used
b. Penalty – punishment for the commission of a crime
c. Compromise Penalty – amount collected in lieu of criminal prosecution in
cases of tax violation
d. Special Assessment – levied on land based entirely on the benefit
accruing thereon as a result of the improvements or public works
undertaken by the government within the vicinity
e. License or Fee – regulatory imposition in the exercise of the police power
f. Margin Fee – exaction designed to stabilize the currency
g. Debt – a sum of money due upon contract or one which is evidenced by
judgment
h. Subsidy – a legislative grant of money in aid of a private enterprise
deemed to promote the public welfare
i. Custom Duties and fees – duties charged upon commodities on their
being transported into or exported from the country.
j. Impost – in general sense, it signifies any tax, tribute or duty; in limited
sense, it means a duty on imported goods and merchandise
k. Tithe– contributions given to a church or sect
l. Tribute – imposed by a monarch.
1.10 CLASSIFICATION OF TAXES

a. As to subject matter:
i. Personal tax – imposed upon persons of certain class with fixed
amount (e.g. Community tax or poll tax)
ii. Property tax – assessed on property of certain class (e.g. Real
Property tax)
iii. Excise tax – imposed on the exercise of privilege (e.g. income tax,
donor’s tax, estate tax, etc.)
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iv. Custom duties – charged upon the commodities being imported into or
exported from a country (e.g. tariffs)
b. As to burden:
i. Direct tax – both incidence or liability for the payment of tax as well as
the impact or burden of the tax falls on the same person (e.g. income
tax)
ii. Indirect tax – the incidence or liability for the payment of tax falls on
one person but the impact or burden of the tax falls on another person
(e.g. VAT)
c. As to purpose
i. General tax – levied for the general or ordinary purposes of the
government
ii. Special tax – levied for special purpose
d. As to measure of application
i. Specific tax – imposes a specific sum by the head or number or by
some standard of weight or measurement (e.g. excise tax on
cigarettes)
ii. Ad Valorem tax – tax upon the value of the article or thing subject to
taxation (e.g. VAT of 12% regardless of the value of sales)
e. As to taxing authority
i. National tax – levied by the National Government (e.g. income tax,
business taxes, transfer taxes)
ii. Local tax – imposed by the Local Government (e.g. Poll tax, real
property taxes)
f. As to rate
i. Progressive tax – rate or amount of tax increases as the amount of
income increases (e.g. normal/tabular/schedular tax of 5% - 32%,
tabular tax for donor’s tax and estate tax)
ii. Regressive tax – rate decreases as the amount of income to be taxed
increases (not applicable in the Philippines)
iii. Proportionate tax – based on fixed proportion or rate of the value of the
property assessed (e.g. VAT of 12%)
1.11 TAX LAWS, BIR RULINGS AND REVENUE REGULATIONS

1. Tax laws
- A tax law is a set of rules that provide means for the State to raise
revenues.
- All revenue bills must originate from the House of Representatives
(Congress). After passing 3 readings by a majority vote in technical
committee, it shall be elevated to the Senate which needs to pass the
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same 3 readings. The President’s signature is necessary so that the bill

becomes a law.
- In case of doubt, tax statutes are construed against the Government in
favor of the taxpayer.
- In case of doubt, tax exemptions are construed against the taxpayer in
favor of the Government.
2. Revenue Regulations
- These are interpretations of an administrative body (BIR) intended to
clarify or explain the tax laws and carry into effect its general provisions by
providing details of administration and procedure.
- It is promulgated (made) by the Secretary of Finance, upon the
recommendation of the Commissioner of Internal Revenue (quasi-
legislative function).
- It must be reasonable, within the authority conferred, not contrary to laws,
must be published and prospective in application.
3. BIR Rulings
- The BIR issues a general interpretation of tax laws usually upon a request
of a taxpayer to clarify a provision of law.
1.12 INCOME AND INCOME TAXES

Income tax - a tax on all yearly profits arising from property, professions,
trade, or offices. (Fisher v Trinidad)
1.12.1Criteria in imposing Philippine Income Tax

1. Citizenship or Nationality Principle – Basis of imposition of income tax
is the taxpayer’s citizenship. Thus, all citizens of the Philippines,
resident or non-resident, are subject to our income tax law.
2. Residence or Domicile Principle – Basis of imposition of income tax is

the residence of taxpayer. All income derived by persons residing in
the Philippines shall be subject to income tax on the income derived
within the Philippines.
3. Source Principle – basis is the source of the income. All income

derived within the Philippines shall be subject to income tax.
1.12.2Types of Philippine Income Taxes

1. Compensation Income – income derived from the rendering of services
under an employment relationship.
2. Professional Income – fees derived from engaging in an endeavor
requiring special training as a professional as a means of livelihood.
(I.e. CPAs, lawyers, doctors, etc.)
3. Business Income – derived from rendering services, selling
merchandise, manufacturing products, farming, construction, etc.
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4. Passive Income – income in which the taxpayer merely waits for the
amount to come in.
5. Capital Gain – gain from dealings of capital assets.
1.12.3 Income – In the broad sense, it means all wealth that flows into the
taxpayer, other than mere return of capital.
1.12.4 When Income is Taxable (PRN)

1. There must be a gain or Profit;
2. The gain must be Realized or received, actually or constructively;
3. The gain must NOT be excluded by law or treaty.
1.12.5 Realization of Income

1. Actual Receipt – when income is actually reduced to possession.
2. Constructive Receipt – when income is credited to the account or set
apart for the taxpayer and which may be drawn upon by him at any
time.
1.12.6 Recognition of Income

1. Cash method – reports income upon cash collection and reports
expenses upon payment.
2. Accrual method – reports income when earned and reports expense
when incurred.
1.12.6 Tests in determining whether income is earned

1. Realization test
Income is recognized when both conditions are met:
a) Earning is complete or virtually complete; and
b) An exchange has taken place.
2. Economic Benefit Test

Anything that benefits a person materially or economically in whatever
way is taxable under the law.
 Mere increase in the value of property, without actual realization,
is NOT taxable. Such increase constitutes and can be treated
merely as increase in capital, NOT income.
3. Severance Test Theory

Income is recognized when there is separation of something which is of
exchangeable value.
 Hence, mere increase in the value of the asset is NOT income
as it has NOT yet been exchanged or transferred for something
else. Once exchanged, a severance of the gain from its original
value takes place, resulting in taxable income.
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Self Help: You can also refer to the sources below to help
you further understand the lesson.
Ampongan, O. (2015). CPA Reviewer in taxation. Manila: Conanan Educational

Supply.
Ballada, W., & Ballada, S. (2019). Income taxation: made easy (17th ed.).
Philippines: DomDane Publishers & Made Easy Books.
Valencia, E., & Roxas, G. (2016). Income taxation: Principles and laws with
accounting application. Baguio: Valencia Educational Supply.
Let’s Check
Activity 1. Now that you have undergone and known matters regarding principles of
taxation, let us try to check your understanding. Determine whether the statement is
True or False.
1. Taxes are the lifeblood of the government.

2. Taxation is a mode of apportionment of government costs to the people.
3. The reciprocal duty of support between the government and the people
underscores the basis of taxation.
4. There should be direct receipt of benefit before one could be compelled to pay
taxes.
5. Taxation is inherent in sovereignty.
6. The government should tax itself.
7. No one shall be imprisoned for non-payment of tax.
8. Taxpayers under the same circumstance should be taxed differently.
9. Toll is a demand of ownership; it is paid for the use of another’s property and
may be imposed only by the government.
10. The Bureau of Internal Revenue functions under the supervision and control
of the Bureau of Treasury.
Let’s Analyze
Activity 1. Getting acquainted with the essential terms in the study of taxation
principles is not enough, what also matters is you should also be able to explain its
concepts. Now, I will require you to explain thoroughly your answers.
1. Discuss the Lifeblood Doctrine.
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2. Distinguish the three powers of the State and enumerate their similarities.
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3. What are the categories of escape from taxation? Enumerate and explain each
means of escapes under each category.
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4. What are the requisites for an income to be taxable?

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In a Nutshell
Activity 1. The study of the principles of taxation is indeed pre-requisite to

understand more in depth topics in taxation. It is a very complicated and highly
scientific document which requires content and teaching expertise including
knowledge outside the classroom and school.
Based from the discussion of the basic principles of taxation and the learning
exercises that you have done, please feel free to write your arguments or lessons
learned below. I have indicated my arguments or lessons learned.
1. The government cannot fulfill all its duty to the general public without the
collection of taxes
2. Taxes collected should be for the general purpose.
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Your Turn
3.
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6.
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Q and A
In this section you are going to list what boggles you in this unit. You may indicate
your questions but noting you have to indicate the answers after your questions is
being raised and clarified. You can write your questions below:
Questions/ Issues Answers

1.
2.
3.
4.
5.
Keywords Index
 Bureau of Internal Revenue (BIR)

 Income
 Income Tax
 Tax Administration
 Tax Laws
 Taxation
 Taxes
 Taxpayers
Big Picture in Focus: ULOb. Demonstrate mastery on

rule of individual taxation.
Metalanguage
and to demonstrate ULOb will be operationally defined to establish a common frame
1. Individual Taxpayer. Individuals who are subject to final tax, capital gains
tax and regular income tax
2. Citizen. Those who are citizens of the Philippines during the adaptation of
the Feb. 2, 1987 constitution.
2.1 Those whose fathers or mothers are citizen of the Philippines.
2.2 Those born before Jan. 17, 1973, the date of the adaptation of the
1973 Constitution, of Filipino mothers, who elect Philippine citizenship
upon reaching the age of majority.
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2.3 Those who are naturalized in accordance with law.
3. Resident Citizen. A citizen residing in the Philippines.
4. Non-resident Citizen. A citizen staying abroad for at least 183 days.

4.1 Immigrant – leaves the PH to reside abroad as an immigrant for which
a foreign visa has been secured.
4.2 Permanent employee – leaves the PH to reside abroad for
employment on a permanent basis.
4.3 Contract worker – leaves the PH on account of a contract of
employment which requires him to be physically present abroad most of
the time (shall NOT be less than 183 days).
Citizens who work outside of PH for at least 183 days due to a contract of
employment with a Philippine employer are NOT considered NRC
because they are NOT considered employed abroad. (BIR Ruling 116-12)
5. Resident Alien. An alien/foreigner staying in the Philippines for more

than one year.
6. Non-resident Alien. An alien/foreigner who stayed for less than one year.
5.1 Engaged in trade or business (NRA-ETB). An alien/foreigner who
stayed in the Philippines for more than 180 days in any calendar year.
5.2 Not engaged in trade or business (NRA-NETB). An alien/foreigner
who stays in the Philippines for an aggregate period not exceeding 180
days in any calendar year.
7. Special Alien. Aliens, including qualified Filipinos, employed by:

6.1 Regional or area headquarters (RAH or RHQs) or regional operating
headquarters (ROH or ROHQs) of multinational companies.
6.2 Offshore Banking units
6.3 Petroleum service contractor or sub-contractor.
8. Mixed Income earner refers to an individual that earns a compensation

income , income from business or practice of profession and other types of
income.
9. Marginal Income earner refers to an individual who don’t have more than
P100, 000 as gross sales or receipts for any 12 month period.
10. Minimum wage earner

Private sector – those paid the statutory minimum wage
Public sector – those with income of not more than the statutory
minimum wage in the non-agricultural sector where he is assigned.
Rules:
 Exempt in paying their income tax.
 Holiday pay, OT pay, ND pay, and hazard pay are likewise
exempt from income tax.
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 MWE who receives taxable income in excess of the minimum

wage will be taxed on the excess, but will NOT lose his/her
status as MWE.
 Receipt of other income during the year does NOT disqualify
them as MWEs. (Sec. 24A)
 Taxable income received NOT as MWEs may be subjected to
appropriate taxes.
12. Senior Citizens- Resident citizens and must be at least 60 years old.
 NOT exempt from income tax unless they are considered
minimum wage earners.
 Granted 20% discount from select establishments.
 Discount granted to Senior Citizens are treated as tax
deductions. (Manila Memorial Park v Sec. of DSWD 2013)
 Sale of goods and services to Senior Citizens by select
establishments are exemptfrom VAT. (R.R. 7-2010)
13. PWD - Granted 20% discount to be claimed as deduction for businesses.
Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for the first two (2)
weeks of the course, you need to fully understand the following essential knowledge
that will be laid down in the succeeding pages. Please note that you are not limited
to exclusively refer to these resources. Thus, you are expected to utilize other books,
research articles and other resources that are available in the university’s library e.g.
ebrary, search.proquest.com etc.
I. Taxation of Individuals
1.1 KINDS OF INDIVIDUAL TAXPAYERS

Individual Sources of Taxable Income
Within Without
Resident citizen (RC) √ √
Non-resident citizen (NRC √
Resident alien (RA) √
Non-resident Alien
Engaged to trade and business (NRA- ETB) √
Not |Engaged to trade and business (NRA- ETB) √
Note: It is important to determine the source of income of an individual taxpayer-

whether from within the Philippines or without- because not all individual
taxpayers are taxed on all their income, as illustrated above.
1.2. SOURCES OF INCOME
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1. COMPENSATION INCOME- All compensation payment for services

performed under an employer-employee relationship. Taxed using the tax
table.
2. BUSINESS INCOME- arises from self-employment or practice of profession.
This shall not include income from performance of services by the taxpayer as
an employee. Taxed using the tax table.
3. MIXED INCOME-Those earning both compensation income and income from
business or practice of profession.
4. PASSIVE INCOME- income subject to separate and final tax. These are
taxed at fixed rates from 5% to 25%.
Rates of Tax Certain Passive Income

1) Sec. 24 (B) – For residents or citizens;
2) Sec. 25 (A) (2) – For non-resident aliens engaged in trade or
business.
a. Interest from any currency bank deposit 20%

b. Yield or any other monetary benefit from deposit substitute 20%
c. Yield or any other monetary benefit from trust funds and similar 20%
arrangements
d. Royalties, in general 20%
e. Prizes [except prizes amounting to P10,000 or less which shall be 20%
subject to tax under Sec. 24 (A) (graduated tax rates.
f. Philippine Charity Sweepstakes and Lotto winnings- 10, 000 or Exempt
less
g. Philippine Charity Sweepstakes and Lotto winnings- more than 10, Basic
000 Tax
Sec
21(a)
g. Royalties on books, as well as other literary works and musical 10%
compositions
3) Sec. 25 (B) – For non-resident aliens not engaged in trade or

business
a. Interest from any currency bank deposit 25%

b. Yield or any other monetary benefit from deposit substitute 25%
c. Yield or any other monetary benefit from trust funds and similar 25%
arrangements
d. Royalties, in general 25%
e. Royalties on books, as well as other literary works and musical 25%
compositions
f. Prizes 25%
g. Other winnings (except Philippine Charity Sweepstakes and Lotto 25%
winnings)
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RES/CI NRA- NRA-

T ETB NETB
a. Interest income received from a depositary
bank under expanded foreign currency deposit 15% Exemp Exemp
system t* t*
b. Interest income from long-term deposit or
investment evidenced by Exempt Exemp 25%
certificates prescribed by BSP t
If pre-terminated before fifth year, a final tax
shall be imposed based on
remaining maturity:
4 years to less than 5 years 5% 5% 25%
3 years to less than 4 years 12% 12% 25%
Less than 3 years 20% 20% 25%
*also applies to non-resident citizens
Cash and/or Property Dividends
a. Cash and/or property dividends actually or
constructively received from a
DOMESTIC CORP. or from JOINT STOCK
CO., INSURANCE or MUTUAL FUND 10% 20% 25%
COMPANIES and REGIONAL OPERATING
HEADQUARTERS of multinationals (beginning
January 1, 2000}
b. Share of an individual in the distributable net
income after tax of a
PARTNERSHIP (OTHER THAN a general 10% 20% 25%
professional partnership) of which he is a partner
(beginning January 1, 2000)
c. Share of an individual in the net income after
tax of an ASSOCIATION, a JOINT ACCOUNT,
or a JOINT VENTURE or CONSORTIUM 10% 20% 25%
taxable as a corporation of which he is a member
or co-venturer (beginning January 1, 2000)
Provided, however, that the tax on dividends shall apply only on income earned on or after
January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even
if declared or distributed on or after January 1, 1998, be subject to this tax.
Note: All passive income abroad earned by a Resident Citizen shall be subject to
regular tax or taxed under Sec 24 (A).
5. CAPITAL GAINS- This topic is discussed in a separate lesson.

a. Capital gains from sale of shares of stock not traded through local
stock exchange. Taxed at 15% on capital gains
b. Capital gains from sale of real property. Taxed at 6% on fair market
value or zonal value whichever is higher.
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*Capital Gains Tax (CGT) is a final tax.
SHARES OF STOCKS Tax Rate

Sale of Shares of Stock not traded in the Stock CGT: 15% of the net
Exchange capital gains
Sale of Shares of Stock listed and traded in the Stock transaction tax:
Stock Exchange 6/10 of 1% or 0.006% of
GSP or Gross Value in
money of shares of stock
REAL PROPERTY(Lands and Buildings only) Tax Rate

Sale of Real Property in the Philippines held as CGT: 6% of GSP or
Capital Asset CMV, whichever is
higher
Sale made to Government or to GOCCs Taxpayer may choose

either: 6% or Graduated
Rates
6. FRINGE BENEFITS- benefits furnished or granted by an employer in cash or

in kind in addition to basic salaries, to an individual employee (except rank
and file) under an employee and employer relationship. This topic is
discussed in a separate lesson.
FORMATS OF COMPUTATION (ANNUAL RETURN)
1 Gross compensation income P xxx

Less: (Non- Taxabale Deductions) SSS/GSIS Cont. xxx
Pag-ibig Cont. xxx
PhilHealth Cont. xxx
Union Dues xxx xxx
Taxable compensation income P xxx
Tax due [Sec. 24 (A)] P xxx
Less: Tax withheld on compensation xxx
Foreign tax credits xxx xxx
Tax payable (overpayment) Pxxx
b. Pure Gross business/professional income Pxxx
busines Less: Allowable deductions xxx
s or Taxable net income Pxxx
professi Tax due [Sec. 24 (A)] Pxxx
onal Less: Tax credits/payments
income Prior years’ excess credits xxx
Tax payments for the previous quarters xxx
Creditable tax withheld xxx xxx
Tax payable (overpayment) Pxxx
Tax rate:
Taxpayer may choose either:
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a) Graduated rates, 0-35%

b) 8% income tax rate
Tax base:
Graduated rates – Taxable income
8% income tax rate – gross sales/receipts to be reduced by P250, 000.
Rules on availing 8% tax rate:

a) Gross sales/receipts must NOT exceed the VAT threshold of P3,000,000;
b) Taxpayer must signify his intention to avail of the 8% tax rate in the 1 st quarter of tax
return. If not, he is deemed to have chosen the graduated rates.
c) The first P250,000 is NOT subject to tax since what is taxed is in excess of P250,000.
 This P250,000 bonus is NOT available to mixed income earners.
8% NOT available to the ff.:

 Purely compensation income earners
 VAT-registered taxpayers
 Non-VAT registered whose gross sales/receipts exceed the 3Million VAT threshold
 Taxpayers subject to OPT
 Partners of a GPP
 Individuals enjoying tax exemptions (RMC 50-2018)
c. Gross compensation income Pxxx

Mixed Gross business income xxx
income Less: Allowable deductions xxx
Net income xxx
Total taxable income Pxxx
Tax due [Sec. 24 (A)] Pxxx
Less: Tax credits/payments
Prior years’ excess credits xxx
Tax payments for the first three quarters xxx
Creditable tax withheld for the first 3 quarters xxx
Creditable tax withheld for the 4th quarter xxx
Tax withheld from compensation xxx
Foreign tax credits xxx xxx
Tax payable (overpayments) Pxxx
Tax rates:
 Compensation income – Graduated rates, 0-35%
 Income from business or practice of profession
o Exceeds VAT threshold – Graduated rate
o Does NOT exceed VAT threshold – taxpayer has a choice to use either:
 Graduated rates; or
 8% income tax rate based on gross sales/receipts
8% income tax rate
Mixed earners NOT entitled to the P250,000 reduction because this has already been applied
in computing the tax on compensation income.
**TRAIN LAW (RA 10963) has NO longer allows personal, additional exemptions
and premiums on health insurances.
1.3 DEDUCTIONS- Are items or amounts, which the law allows to be deducted from
gross income in order to arrive at the taxable income. Deductions from gross income
from business will be discussed in a separate lesson.
1. Individuals, NOT purely compensation earners, may claim deductions in 2

ways:
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 Itemized deduction (discussed later)

 Optional standard deduction (OSD)
Optional Standard Deductions (OSD) (RR No. 16-2008 as amended by RR No. 2-2010)
1) Persons The following may be allowed to claim OSD in lieu of the

covered itemized deductions (i.e. items of ordinary and necessary
expenses allowed under Section 34 (A) to (J) and (M),
Section 37, other special laws, if applicable):
a) Individuals b) Corporations
(1) Resident citizen (1) Domestic
corporation
(2) Non-resident citizen (2) Resident
foreign corporation
(3) Resident alien
(4) Taxable estates and trusts
2) a) The OSD allowed to individual taxpayers shall be a
Determinati maximum of forty percent (40%) of gross sales (if on
on of the accrual basis) or gross receipts (if on cash basis) during
amount of the taxable year.
OSD for b) The “cost of sales” in case of individual seller of goods, or
individuals the “cost of services” in the case of individual seller of
services, are not allowed to be deducted for purposes of
determining the basis of the OSD
c) For other individual taxpayers allowed by law to report
their income and deductions under a different method of
accounting (e.g. percentage of completion basis, etc.)
other than cash and accrual method of accounting, the
“gross sales” or “gross receipts” shall be determined in
accordance with said acceptable method.
Tax rates (revised Section 24(A) per R.A 10963) :
Not over 250,000 0%
250,000 – 400,000 20% of the excess over 250k
400,000 – 800,000 30,000 plus 25%of the excess over
400k
800,000 – 2,000,000 130,000 plus 30%of the excess over
800k
2,000,000 – 8,000,000 490,000 plus 32%of the excess over
2M
Over 8,000,000 2,410,000 plus 35%of the excess
over 8M
Illustration 1: Mr. Adrianne F., the taxpayer is married with 6 qualified

dependent children. Taxable year is 2019. The following data are available:
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Gross Compensation P540, 000

Premium payment on insurance 10, 000
Compute the taxable income and tax due if Mr. Adrianne is a resident citizen.
Taxable compensation income P 540, 000
Tax Due: (See tax table)

400, 000* – 30, 000
140, 000**x 25% – 35, 000
P 65, 000
*Taxable income of 540, 000 belongs to the 400, 000 – 800, 000 range, therefore 30,
000 will be the tax due for the first 400, 000.
** (540, 000 – 400, 000)
Note: Since RA 10963 (TRAIN LAW) has amended the Basic Exemption,
Additional Exemption and Premium payment as allowable deductions for
individual taxation, Gross compensation income will automatically be the
taxable income for purely compensation income earners.
Illustration 2: Mr. Antonio F., married had the following data for the taxable
year 2019.
Gross Income, Philippines P1, 057, 588

Gross Income, United Sates 413, 143
Expenses, Philippines 588, 475
Expenses, United States 325, 143
Compute for the taxable income and tax due, using itemized deduction if Mr.
Antonio is a Resident Citizen, using (1) graduated tax rate and (2) 8% tax
rate.
A. Using graduated tax rates

Gross Business Income:
Philippines 1, 557, 588
United States 413, 143 P1, 970, 731
Less: Allowable Deductions
Philippines 588, 475
United States 325, 143 913, 618
Taxable Income P1 ,057, 113

800, 000* – 130, 000
257, 113**x 30% – 77, 134
P 207, 134
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*Taxable income of 1, 057, 113 belongs to the 800, 000 – 2, 000, 000 range,
therefore 130, 000 will be the tax due for the first 800, 000.
** (1, 057, 113 – 800, 000)
Note: Since the taxpayer is a resident citizen, it is taxable on its income within
and without the Philippines or its global income.

Not over 250,000 0%

400k
800k
2M
Over 8,000,000 2,410,000 plus 35%of the excess over
8M
B. Using 8% preferential tax rate
Assuming the gross sales of Mr. Antonio from Philippines and United
States are 2, 000, 000 and 750, 000 respectively.
Gross Sales
United States 750, 000 P2, 750, 000
Less: Exemption 250, 000
Total 2, 500, 000
Multiply: 8%
Tax Due P 200, 000
Note: It is important to note that the basis for preferential tax is its gross
sales/ receipts.
Illustration 3: Assuming that Antonio is a Non-resident Citizen (RC),

Resident Alien (RA) or Non-resident Alien engaged to trade and
business (NRA-ETB), compute for the taxable income and tax due.

Philippines 588, 475
Taxable Income P 969, 113
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800, 000* – 130, 000
169, 113**x 30% – 50, 734
P 180, 734
*Taxable income of 969, 113 belongs to the 800, 000 – 2, 000, 000 range, therefore
130, 000 will be the tax due for the first 800, 000.
** (969, 113 – 800, 000)
Note: Since the taxpayer is considered as either a non-resident citizen,
resident alien or non-resident alien engaged to trade, therefore it is only
taxable on its income within the Philippines only.

Not over 250,000 0%

400k
800k
2M
8M
Illustration 4: Assuming that Antonio is a Non-resident Alien not engaged

to trade and business (NRA-NETB), Compute for the taxable income and
tax due.

Taxable Income 1, 557, 588
Multiply by tax rate 25%
Tax Due P 389, 397
Note: This time since the taxpayer is considered as NRA-NETB, it is

important to note that (1) they are only taxable on their income within the
Philippines (2) they are not allowed to deduct expenses and (3) they will be
taxed at 25% tax rate.
Illustration 5: Mr. Cade, had the following in 2019:
Sales 3, 400, 000

Cost of Sales 1, 200, 000
Administrative Expenses 300, 000
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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
Compute for the taxable income and tax due assuming that the taxpayer
opted the Optional Standard Deduction (OSD).
(Step 1) Compute for the Optional Standard Deduction
Sales 3, 400, 000

Add: Other taxable income from operations
not subject to final tax 120, 000
Total sales/revenues/receipts/fees 3, 520, 000
Multiply by OSD Rate 40%
Optional Standard Deduction 1, 408, 000
Note: Revenues or receipts arising from incidental or secondary operations of

business or profession are added in computing the total
sales/revenues/receipts as basis for computing OSD.
(Step 2) Compute for the taxable income and tax due.

Sales 3, 400, 000
Add: Other taxable income from operations
not subject to final tax 120, 000
Total sales/revenues/receipts/fees 3, 520, 000
Less: Cost of service -________
Gross Income from business 3, 520, 000
Add: Non-operating Income 80, 000
Gross Income 3, 600, 000
Less: Optional Standard Deduction 1, 408, 000

2, 000, 000 – 490, 000
192, 000 x 32% – 61, 440
P 551, 440
Note: For the basis of computing the taxable income under optional standard
deduction, cost of service can no longer be claimed, including all other
itemized expenses.
Not over 250,000 0%
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400k
800k
2M
8M
Illustration 6: Henrie, resident citizen, married without dependent, had the

following income in the Philippines.
Compensation Income P580, 000

Gross Sales 2, 000, 000
Cost of Sales 750, 000
Itemized Business Expenses 780, 000
Royalties- Books 100, 000
Domestic Dividends 50, 000
Compute for the (1) Tax due using graduated tax rates, (2) Tax due using 8%
preferential tax (3) Final Tax.
A. Using graduated tax rates
Compensation Income P 580, 000

Gross Business Income: 1, 250, 000
(2, 000, 000 – 750, 000)
Less: Business Expenses
United States 780, 000 470, 000
Taxable Income P1 ,050, 000

800, 000 – 130, 000
250, 000x 30% – 75, 000
P205, 000

Not over 250,000 0%

400k
800k
2M
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over 8M
B. Using preferential tax rate
If a taxpayer has multiple earnings and opted to use 8% preferential tax

on its business income, it is important to note that the computation of
income tax due will be done separately for compensation income and
for business income.
Taxable Compensation Income P 580, 000

400, 000 – 30, 000
180, 000x 25% – 45, 000
75, 000

Preferential Tax 160, 000
Total tax due 235, 000
Note: In computing for the tax due using preferential tax under multiple
earnings, 250, 000 will no longer be deducted because needless to say it is
already applied in the compensation income,
C. Final tax
Royalties- Books (100, 000 x 10%*) 10, 000

Domestic dividends ( 50, 000 x 10%*) 5, 000
Total Final tax 15, 000
*See final tax schedule
Notes:
1. For married individuals, the husband and wife shall compute
separately the tax due on their respective taxable 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 income.
2. In computing for the taxable income, fraction of a peso is

disregarded. For the tax due, a fraction amounting to fifty
centavos or more is rounded off to a peso while a fraction
amounting to fifty centavos is disregarded.
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3. Creditable withholding tax withheld from income and/or tax

credit is deducted from the tax due; penalties, if any shall be
added to the tax due. (These are discussed in later chapters.)
1.4 Return and Payment of Taxes

1. Withholding agents must file a return and pay to:
 Authorized agent bank (AAB)
 Revenue district officer (RDO)
 Collection agent
 Duly authorized treasurer of the city or municipality where he resides or
has his principal place of business
2. Taxes must be maintained in a separate account and NOT commingled with
any other funds of the withholding agent.
3. When to file and pay taxes withheld at source:
 Must NOT be later than the last day of the month following the close of
the quarter during which the withholding was made.
Example: If withholding was made in February, return must be filed and
tax must be paid not later than the last day of April.
1.4.1Withholding of Wages
Applies to ALL employed individuals, whether citizens or aliens, deriving income
from compensation for services rendered in the Philippines.
Except: NRA-NETB (RR 11-2018)
1.4.2Requirement of Withholding
Every employer making payment of wages shall deduct and withhold upon such
wages a tax.
Except: Minimum wage earners.
1.4.3 INDIVIDUAL RETURNS

a. Who are required to file
1. RC – all sources of income
2. NRC – income within Philippines
3. RA – income within Philippines
4. NRA-ETB – income within Philippines
b. Who are NOT required to file

1. Individual whose taxable income does NOT exceed P250,000;
Except:
Citizen or alien engaged in business or practice of profession in the
Philippines, must file ITR regardless of amount of gross income.
2. Pure compensation earner

Except:
Individual concurrently deriving compensation from 2 or more
employers
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3. Individual whose sole income is subject to Final Tax
4. Minimum wage earner or individual exempt from income tax under Tax
Code and Special Laws.
1.4.4 Where to file

1. Authorized agent bank
2. Revenue district officer
3. Collection agent
4. Duly authorized treasure of city or municipality where he resides or has his
principal place of business
5. In case he has no legal residence or place of business, at the Office of the
Commissioner
1.4.5 When to file

1. Individuals specified above – annually on or before April 15
2. Individuals subject to CGT:
a. Shares not traded – within 30 days after each transaction and a
final consolidated return on or before April 15
b. Real property – within 30 days from sale or disposition
 Husband and Wife

If NOT purely compensation earners, shall file a return including the
income of both spouses.
If impracticable, may file separate returns which shall be consolidated
by BIR.
 Parents and kids

Parents must include in their ITR, the income of unmarried children
derived from property received from a living parent.
Except:
 When donor’s tax has been paid on such property; or
 When transfer of such property is exempt from donor’s tax.
1.4.6 SUBSTITUTED FILING

For individual employees who are:
1. Purely compensation earners
2. Deriving income from only ONE employer
3. Income tax has been withheld correctly by employer
The said individual shall NOT be required to file ITR. The certificate of
withholding filed by employer, duly stamped “received” by BIR shall be
tantamount to substituted filing.
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Supply.
Let’s Check
Activity 1. Now that you have understood matters regarding Individual Taxation, let
us try to check your understanding. Determine whether the statement is True or
False.
1. Creditable withholding tax withheld from income is added to the tax due to
arrive at tax payable.
2. If any income cannot be definitely attributed to a 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 income.
3. Taxable income is defined as the pertinent items of gross income less the
deduction and/or personal and additional exemptions authorized for such
types of income.
4. Allowable deductions are amounts which the law allows to be added to the
gross income in order to arrive at the taxable income.
5. Resident citizens are taxable only on income derived from sources within the
Philippines.
6. Per R.A. 9504, in place of the itemized deductions, the individual taxpayer
may opt for the optional standard deduction not to exceed 40% of his gross
income.
7. Passive income is included in the computation of taxable income from
compensation or business/professional income.
8. From business income of an individual may be deducted basic personal
and/or additional exemptions, and itemized deduction under the R.A. 10963
(Train Law).
9. Passive income is subject to a separate and final tax.
10. All income received by non-resident alien not engaged in trade or business in
the Philippines including capital gains from sales of shares of stocks not
traded in stock exchange and of real property constitutes gross income taxed
25% final tax.
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Activity 2: Classify the individual taxpayer by indicating the appropriate letter.
a. Resident Citizen
b. Non-resident Citizen
c. Resident Alien
d. Non-resident Alien in business in the Philippines
1. Anita, B., a citizen, stayed in Japan for more than one hundred eighty days.
2. Ruby, S., an alien, stayed in the Philippines for more than on year.
3. Merry, S. a citizen, maintained her residence in Australia.
4. Janelle, W., departed from the Philippines to work as a physical therapist in the
US.
5. Cyril, G., a Filipino, overseas contract worker, on vacation in the Philippines for
one month.
6. Janine. R., non-resident citizen, after two years of working as entertainer
under contract in Japan, returns during the year to reside in the Philippines.
7. Maria. C., a Filipino singer, visited Canada for three days to sing for her
cousin’s wedding.
8. Ading J., a non-resident alien, finding the beauty of the Philippines, stayed
therein for more than one hundred eighty days.
9. Justin. C., a resident alien, stayed in the Philippines as manager of a domestic
airline from January to September.
10. Jose. H, a British, left Manila for Europe for vacation. He has a re-entry permit.
Activity 3: Identify whether the following are subject to final tax or not. Taxpayer is RESIDENT
CITIZEN unless otherwise stated (Y/N).
Final Rate
tax?
1) Interest from peso bank deposit, Equitable – PCIB, Makati
2) Interest from US dollar bank deposit, BPI-Makati
3) Interest from Japanese yen bank deposit, Sumitomo Bank,
Japan
4) Interest from USA dollar bank deposit, First USA Bank, New
York
5) Interest from money market placement, PCIB Investment House
6) Interest from overdue accounts receivable, Philippines
7) Royalties, in general, Manila
8) Royalties, books published in Manila
9) Prize amounting to P30,000, Philippines
10) Prize amounting to P10,000, Philippines
11) Prize amounting to P40,000, USA
12) Winnings amounting to P30,000, Philippines
13) Winnings amounting to P10,000, Philippines
14) USA Sweepstakes winnings
15) Philippine Lotto winnings
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16) Interest received from depository bank under expanded

foreign currency deposit system
17) Interest income from long-term deposit or investment
evidenced by certificates issued by BSP
18) Dividend from a domestic corporation received on April 15,
2019
19) Share in distributive net income of local business partnership
received on May 15, 2019
20) Share in net income after tax of an association, a joint
account, or a joint venture or consortium received on August 15,
2019
Let’s Analyze
Activity 1. Getting acquainted with the essential terms in the study of individual
taxation is not enough, what also matters is you should also be able to explain its
1. Explain the extent of tax liabilities of the different individual taxpayers.
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
2. Distinguish Active income from Passive income.
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
3. Distinguish Itemized deduction from Optional Standard Deduction (OSD)
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
4. Discuss how the taxable income of the following is determined
a. Purely compensation earner
b. Purely business or professional income earner
c. Mixed income earner
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_________________________________________________________________________
___ _____________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
Activity 2. Answer the given problems.
1. Mr. Julian, a chief accountant of a private company earns P750, 000 as

compensation. Aside from its compensation, he also manages and runs his
consultancy firm which has gross receipts of 650, 000 and has 100, 000 and
200,000 as cost of service and allowed itemized expenses respectively.
Assuming that the taxpayer is a resident citizen, compute for the following:
a. Taxable income and tax due using graduated tax rates.
b. Tax due using 8% preferential tax rate.
c. Taxable income and tax due using graduated tax rates, assuming the
taxpayer opted the OSD instead of itemized deductions.
2. Mr. Brendan, resident citizen had the following data in 2019:

Philippines Abroad
Gross Income from Sales 4, 000, 000 6, 000, 000
Business Expenses 2, 000, 000 3, 600, 000
Rent Income 1, 000, 000 1, 200, 000
Dividend- Domestic 50, 000 -
Royalties 80, 000 200, 000
Compute for the following:

a. Taxable income and Tax due
b. Final Tax
a. Taxable income and Tax due, assuming Brendan is a non-resident
citizen.
b. Taxable income and Tax due, assuming Brendan is a non-resident
alien not engaged to trade and business.
3. Jaja derived the following income in 2019:
Business Income 200, 000

Compensation Income 300, 000
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 shares directly to buyer 40, 000
Ordinary gain on sale of old office furniture 10, 000
Dividend Income 50, 000
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a. Total Passive Income subject to final tax.
b. Total Final Tax
c. Total Income subject to regular tax
d. Regular Tax due
4. A husband and wife, resident citizens, with one (1) qualified dependent child,
had the following income and expenses for the year 2019.
Salary of the husband, net of P50,000 withholding tax P 450,000

Salary of the wife, gross of P60,00 withholding tax 600,000
Gross professional income, husband, gross of 15% withholding tax 500,000
Cost of services, husband 500,000
Expenses, practice of profession 300,000
Gross sales, wife 800,000
Cost of sales, wife’s business 300,000
Business expenses, wife 100,000
Gross rent income, lease of common property,
gross of 5% withholding tax 700,000
Expenses, leased common property 200,000
Business income, Singapore 600,000
Business expenses, Singapore 150,000

a. How much was the taxable income of the husband and wife using
itemized deduction?
b. How much was the taxable income of the husband and wife using
optional standard deduction?
In a Nutshell
Activity 1. The study of the individual taxation is indeed pre-requisite to understand

more in depth topics in taxation. It is a very complicated and highly scientific
document which requires content and teaching expertise including knowledge
outside the classroom and school.
Based from the discussion of the individual taxation and the learning exercises that
you have done, please feel free to write your arguments or lessons learned below
1.
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2.
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3.
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4.
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5.
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6.
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7.
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8.
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9.
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10.
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Q and A

1.
2.
3.
4.
5.
Keywords
 Citizen
 Contract worker
 Immigrant
 Individual Taxpayer
 Marginal Income earner
 Minimum wage earner
 Mixed Income earner
 Non-resident Alien
 Non-resident Citizen
 Permanent employee
 PWD
 Resident Alien
 Resident Citizen
 Senior Citizens
 Special Alien
Big Picture in Focus: ULOc. Demonstrate mastery on

rule of individual taxation.
Metalanguage
and to demonstrate ULOc will be operationally defined to establish a common frame
of reference as to how the texts work in your chosen field or career. You will
encounter these terms as we go through the study of taxation. Please refer to these
definitions in case you will encounter difficulty in the understanding educational
concepts.
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1. Corporation. An artificial being created by operation of law, having the

right of succession and the powers, attributes and properties expressly
authorized by law or incident to its existence.
2. Domestic Corporation. One incorporated under the laws of the
Philippines.
2.1 Domestic Corporation, in general
2.2 Government-owned and controlled corporations.
2.3Taxable Partnerships
2.4Proprietary Educational Institutions
2.5 Non-profit Hospital
3. Foreign Corporation. One formed, organized, or exiting under any laws
other than those of the Philippines
3.1 Resident. Those engaged in trade or business within the Philippines.
3.2 Non-resident. Those not engaged in trade or business within the
Philippines.
I. TAXATION OF CORPORATIONS
1.1. KINDS OF CORPORATE TAXPAYERS

Corporation Sources of Taxable Income
Within Without
Domestic Corporation √ √
Foreign Corporation
Resident Foreign Corporation √
Non-Resident Foreign Corporation √
Note: Just like in individual taxation, it is important to determine the source of

income of corporate taxpayer- whether from within the Philippines or without-
because not all corporate taxpayers are taxed on all their income, as illustrated
above.
1.1.1. DOMESTIC CORPORATION (Sec. 27)

1.1.1.2 IN GENERAL
Tax rates:
 30% of taxable income from all sources within and without the PH; or
Sales/Revenues/Receipts/Fees xxx
Less: Cost of sales/services xxx
Gross income from operations xxx
Add: Non-operating and taxable other income xxx
Total gross income xxx
Less: Deductions (Itemized or OSD)
xxx
Taxable income xxx
Regular corporate income tax xxx
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 2% of gross income if MCIT applies; (See discussion and illustration

later)
Sales/Revenues/Receipts/Fees xxx
Less: Cost of sales/services xxx
Gross income from operations xxx
Add: Non-operating and taxable other income xxx
Less: Deductions Itemized or OSD) xxx
Taxable income xxx
Regular corporate income tax xxx
Minimum corporate income tax xxx
Tax due (whichever is higher) xxx
 15% of gross income if the ratio of COGS to Gross sales/receipts does

NOT exceed 55% and the ff. conditions are met:
o Tax effort ratio of 20% GNP
o Ratio of 40% of income tax collection to total tax revenues
o VAT effort of 4% of GNP; and
o 0.9% ratio of CPSFP to GNP
Illustration 1: JEJAMNFLIG, a domestic corporation has the following data

on its income and expenses for 2019.
Gross income, Philippines P7,000,000
Gross income, USA 5,000,000
Business expenses, Philippines 2,000,000
Business expenses, USA 1,000,000
Royalties on Philippine copyrights 500,000
Interest on time deposit, PNB-Manila, Philippines 100,000
Payments, first three (3) quarters 100,000
Compute the taxable income and tax due

Philippines P7, 000, 000
United States 5, 000, 000 12, 000, 000
United States 1, 000, 000 3, 000, 000
Taxable Income P 9, 000, 000
Tax Due 9, 000, 000

Multiply by tax rate: _ 30%
Tax Due 2, 700, 000
Less: Payments, 3 quarters 100, 000
Tax Payable 2, 600, 000
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Notes:
(1) Since the taxpayer is a domestic corporation, it is taxable on its income
within and without the Philippines.
(2) Interest on time deposit and Royalties were not included in the
computation of taxable income because this two are passive income and
therefore subject to separate final tax.
(3) In computing for the total tax payable, any taxes paid in the previous
quarters are deducted to the total annual tax due.
Illustration 2: Jean Company opted to use Optional Standard Deduction

(OSD) in computing its tax due. The following relates to its results of
operations.

Sales Return and Allowances 100, 000
Sales Discounts 50, 000
Cost of Sales 2, 500, 000
Recorded Admin. & Selling ex. 760, 000
Dividend from domestic corp. 50, 000

Less:Sales Return and Allowances 100, 000
Sales Discounts 50, 000 150, 000
Net Sales 3, 850, 000
Less: Cost of Sales 2, 500, 000
Less: OSD (1, 350, 000 x 40%) 540, 000
Taxable Income 810, 000
Tax due 243, 000
Note Unlike in the computation of the taxable income under OSD for
individual taxation, Cost of Sales is deducted to compute the gross income for
corporate taxpayer.
Optional Standard Deductions for Corporations (OSD) (RR No. 16-2008 as amended by RR No. 2-
2010)
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Determination of a) In the case of corporate taxpayers, the OSD

the allowed shall be in an amount not exceeding forty
amount of OSD for percent (40%) of their gross income.
domestic
corporation and b) “Gross income” shall mean the gross sales less
resident foreign sales returns, discounts and allowances and cost of
corporation goods sold, unlike OSD in individual taxpayer.
c) In the case of sellers of services, the term “gross

income” means “gross receipts” less sales returns,
allowances, discounts and cost of services.
d) The items of gross income under Section 32 (A)

of the Tax Code, as amended, which are required to
be declared in the income tax return of the taxpayer
for the taxable year are part of the gross income
against which the OSD may be deducted in arriving
at taxable income. Passive income which have
been subjected to a final tax at source shall not
form part of the gross income for purposes of
computing the forty percent (40%) optional standard
deduction.
Illustration 3: Mia Corp., a domestic corporation opts to be taxed under the

gross income taxation for the taxable year 2019. Its financial records show the
following:
Gross Sale P15, 000, 000

Sales Returns and Allowances 600, 000
Cos of Goods Sold 6, 750, 000
Deductions 3, 375, 000
Compute for the gross income and the gross income tax.
(Step 1) Test whether the cost of goods sold ratio does not exceed 55% of the
gross sales or receipts.
(6, 750, 000/ 15, 000, 000) 45%
(Step 2) Compute for the gross income and gross income tax.
Gross Sales P15, 000, 000

Less: Sales Returns and allowances 600, 000
Sales Discounts 450, 000 1, 050, 000
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Net Sales 13, 950, 000

Less: Cost of Goods Sold 6, 750, 000
Multiply by 15%
Gross Income Tax Due P 1, 080, 000
Note: The gross income computation for purposes of gross income tax is the
same in the case of Trading or Merchandising; and Manufacturing concerns
But in the case of service business using cash basis, to arrive at a gross
income, cost of service is no longer deducted to the gross receipts or net
receipts.
Illustration 4: For taxable year 2019, JJ Company providing massage

services opts for gross income taxation and has the following data:
Gross Receipts P11, 200, 000

Cos of Services 4, 450, 000
Compute for the gross income and the gross income tax.
(Step 1) Test whether the cost of goods sold ratio does not exceed 55% of the
gross sales or receipts.
(4, 450, 000/ 11, 200, 000) 44.20%
(Step 2) Compute for the gross income and gross income tax.
Gross Receipts P11, 200, 000

Multiply by 15%
Gross Income Tax Due P 1, 612, 500
A. PROPRIETARY NON-PROFIT EDUCATIONAL INSTITUTION AND

HOSPITAL
Tax rate:
 10% of taxable income except for passive income; or
 30% on entire taxable income if gross income from unrelated trade or
activities exceed 50% of the total gross income.
Proprietary – private
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Non-profit – NO net income or asset accrues to any member or specific

person. All net income or asset are devoted to the institution’s purposes and
all its activities conducted not for profit. (CIR v St. Lukes 2012)
Proprietary educational institution

Refers to any private school maintained by private individuals with an issued
permit from DECS or CHED or TESDA.
Requisites to be entitled to reduced 10% corporate income tax:

1. Must be both proprietary and non-profit;
2. Income from unrelated activities must NOT exceed 50% of total gross
income
Unrelated trade, business or activity- means any trade, business or other

activity, the conduct of which is not substantially related to the exercise or
performance by such educational institution or hospital from its primary
purpose or function.
Illustration 4: Abakada University, a non-profit educational institution

reported the following during the year:
Related Activities Unrelated Activities Total

Gross Income 1, 700, 000 1, 500, 000 3, 200, 000
Less: Deductions 900, 000 1, 000, 000 1, 900, 000
Net Income 800, 000 500, 000 1, 300, 000
Compute for tax due.
(Step 1) Predominance Test
(1,500, 000 / 3, 200, 000) 41.66%
It is qualified to use 10% tax rate because the income from unrelated
activities does not exceed 50%
(Step 2) Compute for the tax due.
Total taxable income 1, 300, 000

Tax due 130, 000
Illustration 5: Romantic Doctor Hospital, a non-profit hospital institution

reported the following during the year:
Related Activities Unrelated Activities Total
Gross Income 1, 600, 000 3, 500, 000 5, 100, 000
Less: Deductions 900, 000 1, 000, 000 1, 900, 000
Net Income 700, 000 2, 500, 000 3, 200, 000
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(Step 1) Predominance Test
(3,500, 000 / 5, 100, 000) 68.63%
It is not qualified to use 10% tax rate because the income from
unrelated activities exceeds 50%, therefore it will use 30% in
computing its tax due
(Step 2) Compute for the tax due.
Total taxable income 3, 200, 000

Tax due 960, 000
B. GOCCs, AGENCIES, INSTRUMENTALITIES

Tax rate: 30% corporate income tax rate on taxable income
Except:
 GSIS
 SSS
 PHIC
 LWD
PASSIVE INCOME
DOMESTIC CORPORATION Final Tax

Rate
Interest income on any current bank deposit, deposit 20%
substitute etc.
Royalties of all types within Philippines 20%
Interest income on FCD 15%
Dividends received from another domestic corporation Exempt
DEPOSITORY BANK Final Tax

Rate
Interest income on FCD from transaction with non- Exempt
residents, OBUs, etc.
Interest income on foreign currency loans granted to 10%
residents other than OBUs
CAPITAL GAINS
SHARES OF STOCKS Tax Rate

Sale of Shares of Stock not traded in the Stock CGT: 15% of the net
Exchange capital gains
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Sale of Shares of Stock listed and traded in the Stock transaction tax:
Stock Exchange 6/10 of 1% or 0.006%
of GSP or Gross Value
in money of shares of
stock
REAL PROPERTY(Lands and Buildings only) Tax Rate

Sale of Real Property in the Philippines held as CGT: 6% of GSP or
Capital Asset CMV, whichever is
higher
Sale made to Government or to GOCCs Taxpayer may choose

either: 6% or
Graduated Rates
SALE OF REAL PROPERTIES HELD AS ORDINARY ASSETS
RC, NRC, RA AND DC Creditable

Withholding Tax
Seller is habitually engaged in real estate Selling price:
business  Less than 500k –
1.5%
 500k to 2M – 3%
 Above 2M – 5% of
GSP or CMV,
whichever is higher
Seller is NOT habitually engaged in real estate 7.5% of GSP or CMV,
business whichever is higher
If seller is exempt from CWT Exempt
MINIMUM CORPORATE INCOME TAX (MCIT) – applicable to both DC and

RFC
MCIT is implemented on domestic and resident foreign corporations when:
a. They have zero or negative taxable income; or
b. MCIT is greater than the regular corporate income tax due.
Beginning with the 4th year of operations, a DC and RFC is taxed by

whichever is higher between:
 RCIT or normal tax of 30% of taxable income; or
 MCIT of 2% of gross income
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Illustration 6: A corporate taxpayer, operated on its 5th year of operation has

the following data:
Gross Sale P15, 000, 000

Cos of Goods Sold 6, 750, 000
Interest income from bank deposits 20, 000
Rental income from vacant premises 60, 000
Compute for the Regular Corporate Income Tax (RCIT), Minimum Corporate
Income Tax (MCIT) and Tax due.
Regular Corporate Income Tax (RCIT)

Sales Discounts 450, 000 1, 050, 000
Net Sales 13, 950, 000
Gross Income from operations 7, 200, 000
Add: Other taxable income not subject to final tax

Rental Income 60, 000
Total Gross Income 7, 260, 000
Less: Deductions 3, 375, 000
Multiply by Regular tax rate 30%
Regular Corporate Tax 1, 165, 500
 The interest income is not included because it is subject to final tax.
Minimum Corporate Income Tax (MCIT)

Sales Discounts 450, 000 1, 050, 000
Net Sales 13, 950, 000
Gross Income from operations 7, 200, 000
Add: Other taxable income not subject to final tax
Rental Income 60, 000
Total Gross Income 7, 260, 000
Multiply by MCIT rate 2%
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Minimum Corporate Income Tax 145, 200
Tax due
Regular Corporate Income Tax (RCIT) 1, 165, 500

Minimum Corporate Income Tax (MCIT) 145, 200
Tax due is higher between RCIT or MCIT, therefore tax due is 1, 165,
500.
Any excess of the MCIT over the normal tax of a year shall be carried
forward and credited against the normal tax for the 3 immediately succeeding
taxable years.
Hence, compute both MCIT and RCIT first; then apply whichever is higher:
Year 4 Year 5 Year 6 Year 7

MCIT (2% on GI) 200 400 100 100
RCIT (30% on TI) 100 200 300 200
Tax payable 200 400 0 200
Excess MCIT (100) Y4(100) 0 0
Y5(200)
Relief from MCIT

Secretary of Finance may suspend imposition of MCIT when a corporation
suffers losses on account of:
1. Prolonged labor dispute
2. Force majeure
3. Legitimate business reverses
Entities exempted from MCIT:

a. RFC engaged in international carriers
b. RFC engaged in OBU
c. ROHQ
d. Firms taxed under special income tax regime (i.e. those under PEZA)
e. Proprietary Non-profit Educational Institution
f. Non-profit hospitals
g. Depositary banks under FCDS
h. Real Estate Investment Trusts
i. NRFC
1.1.2 RESIDENT FOREIGN CORPORATION (RFC) (Sec. 28A)

IN GENERAL
Tax rates:
 30% of Taxable Income from all sources within the PH;
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 2% of Gross Income, if MCIT applies.
**TRAIN Law did NOT amend Sec. 28 of NIRC which covers both RFC and
NRFC. Tax rates from old code applies.
Illustration 7: JEJAMNFLIG, a resident foreign corporation has the following

data on its income and expenses for 2019.

Payments in the PHI, first three (3) quarters 100,000
Gross Business Income: Philippines P7, 000, 000

Less: Allowable Deductions Philippines 2 , 000, 000
Taxable Income P 5, 000, 000

Multiply by tax rate: _ 30%
Tax Due 1, 500, 000
Less: Payments, 3 quarters 100, 000
Tax Payable 1, 400, 000
Note: Since tha tax payer is a resident foreign corporation, therefore it is taxable
on their income only within the Philippines and is allowed to deduct business
expenses.
PASSIVE INCOME
RFC Final Tax
Rate
Interest income from deposits and yield from deposit subs, 20%
trust funds, similar arrangements
Royalties of all types within Philippines 20%
Interest income from FCD 7.5%
Intercorporate dividends from domestic corporation Exempt
DEPOSITORY BANK Final Tax

Rate
Interest income on FCD from transaction with non-residents, Exempt
OBUs, etc.
Interest income on foreign currency loans granted to 10%
residents other than OBUs
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CAPITAL GAINS
Sale of shares of stock not traded in the  Not over 100k – 5%
Stock Exchange  Over 100k – 10%
Sale of real property held as capital 30% - since there is no
provision for capital gains on
sale of realty.
INTERNATIONAL CARRIER
Tax rate: 2.5% of Gross Philippine billings.
Gross Philippine billings

 Gross revenue derived from carriage of persons, excess baggage, cargo,
and mail;
 Originating from Philippines in a continuous and uninterrupted flight;
 Irrespective of place of sale and payment of ticket or passage documents.
Passenger flights from any point in the Philippines and back

The portion of revenue pertaining to the return trip to the Philippines is NOT
included in the GPB. (RR 15-2002)
OFF-SHORE BANKING UNITS

Income from foreign currency transactions with non-residents, Exempt
other OBU, local commercial banks, etc.
Interest income from foreign currency loans granted to Final tax rate
residents, other than OBU or local commercial banks of 10%
OBU – a branch of a foreign bank authorized by BSP to transact offshore

banking business in the Philippines.
FOREIGN CURRENCY DEPOSIT

Tax Rate on Interest Income from FCD
Interest income received by RC, RA, and DC Final tax 15%
Interest income received by NRC, OCW, and NRA Exempt
Interest income received by RFC Final tax 7.5%
Bank account in joint names of an OCW and spouse 50% exempt
and 50%
subject to 15%
final tax.
BRANCH PROFIT REMITTANCES

Tax rate: 15% of total profits applied or earmarked for remittance to the head
office without any deduction for the tax component.
Except: those registered within PEZA
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NOT treated as branch profits:

 Passive income (interest, royalties, rents, and dividends)
 Remuneration for technical services
 Salaries and wages
 Premiums, annuities, emoluments and other periodic or casual gains,
profits, income, and capital gains
Except if the above are connected with the conduct of a foreign corporation’s
trade or business in the Philippines.
RAHQs and ROHQs

Tax rates:
1. RAHQ – exempt
2. ROHQ – 10% on taxable income
RAHQ – branch established by multi-national companies and which headquarters

do NOT derive income from the Philippines and merely acts as supervisory,
communications, and coordinating center for their affiliates and subsidiaries.
ROHQ – branch established by multi-national companies engaged in any of the

ff.
 General admin and business planning
 Sourcing and procurement of materials
 Corporate finance advisory services
 Marketing
 Training
 Logistics
 R&D and Product development
 Tech support and maintenance
 Data processing and communications
 Business development
MCIT
Same with DC.
1.1.3 NON-RESIDENT FOREIGN CORPORATION (NRFC) (Sec. 28B)

IN GENERAL
Tax rate: 30% on Gross Income.
Foreign corporation that transacts business in the Philippines independently

of its branch in the country, the principal-agent relationship is set aside. The
foreign corporation is considered a non-resident foreign corporation for that
isolated and independent transaction. (Marubeni v CIR)
Illustration 8: JEJAMNFLIG, a non resident foreign corporation has the

following data on its income and expenses for 2019.
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Tax due 2, 100, 000
*Royalties and Interest in deposits are subject to final tax.
Note: Since the taxpayer is a non resident foreign corporation, it is only

taxable only to its income within the Philippines but is not allowed to deduct
business expenses.
Engaged in trade or business

Business transactions must be continuous. (Royal Interocean Lines v CIR)
PASSIVE INCOME
NRFC Final Tax Rate
Interest on foreign loans 20%
Intercorporate dividends received 15% subject to the condition that the
from domestic corporation domicile country of NRFC allows a
15% tax credit due to NRFC taxes
deemed paid in the Philippines.
Otherwise, dividends will be taxed at
30% RCIT.
If the domicile of the NRFC does NOT impose any tax on dividends received
from foreign sources, preferential tax rate of 15% on intercorporate dividends
will apply. (BIR Ruling DA-145-07)
CAPITAL GAINS
Sale of shares of stock not traded Not over 100k – 5% of net capital
in the Local Stock Exchange gains
Over 100k – 10% of net capital gains
Sale of real property in the 30%
Philippines held as capital asset
SPECIAL CORPORATIONS
Non-resident cinematographic film 25% of gross income from all sources
owner, lessor, or distributor within the Philippines
Non-resident owner or lessor of 4.5% of gross rentals from leases to
vessels chartered by PH Filipinos
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nationals
Non-resident owner or lessor of 7.5% of gross rentals or fees

aircraft, machineries and other
equipments
Proprietary non-profit educational 10% of Taxable Income
institution and hospitals
Resident international carriers 2.5% of Gross Philippine Billings
ROHQ 10% of PH Taxable Income
RAHQ Exempt
Domestic and Resident Foreign  Interest income from foreign
depository banks (FCDU) currency transactions with non-
residents – Exempt
 Interest income on foreign
currency transactions granted to
residents other than OBUs – 10%
Final tax
Off-shore Banking Units  Income from foreign currency
transactions with non-residents,
other OBUs, or local commercial
banks, etc. – Exempt
 Income from foreign currency
loans granted to residents, other
than OBUs and local commercial
banks – 10% final tax
**NOMCIT for Special Corporations.
1.2 IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) (Sec. 29)
Tax rate: 10% of the Improperly Accumulated Taxable Income
Improperly accumulated taxable income – earnings or profits accumulated

beyond the reasonable needs of the business.
(Read Sec. 29 D)
Immediacy test
Reasonable needs means thee immediate needs of the business including
reasonably anticipated needs.
Reasonable: 100%-EIR-LID
 Accumulated earnings up to 100% of the paid-up capital
 Earnings reserved for expansion, improvement, and repairs
approved by the BOD
 Earnings reserved for compliancy with any loan obligation under a
legitimate business agreement (debt retirement)
 Earnings required by law to be retained.
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 In case of subsidiaries of foreign corporations – undistributed earnings

reserved for investments in the Philippines
Who are covered:

All domestic corporations classified as closely-held corporations.
 Closely-held corporation – one where at least 50% of OCS or at least
50% of total voting shares is owned, directly or indirectly, by not more
than 20 individuals.
NOT applicable to: (PBI)

 Publicly-held corporations;
 Banks and other nonbank financial intermediaries; and
 Insurance companies
 Enterprises registered with PEZA, BCDA, or with other special
economic zones (RR 2-2001)
 Taxable partnerships
 GPP
 Non-taxable joint ventures
1.3 TAX-EXEMPT CORPORATIONS and CORPORATE RETURNS
a. Filing of quarterly Every corporation subject to tax shall

and final or render, in duplicate a true and accurate
adjustment return quarterly return and final or adjustment
return.
b. Non-resident Corporations not engaged in trade or
foreign business in the Philippines (NRFC) shall
corporations not be required to file income tax return.
c.Who shall file the 1) President; 3) Other
corporate return? principal officers.
2) Vice – President; or
The return shall be sworn to by above
officer and by the Treasurer or Assistant
Treasurer.
d.Corporate Declaration of quarterly corporate income
declarations and tax on a cumulative basis not later than
returns 60 days from the close of each of the first
three quarters of the taxable year,
whether, calendar or fiscal year. The tax
so computed shall be decreased by the
amount of tax previously paid or
assessed during the preceding quarters.
e. Final adjustment Covers the total taxable income for the
return preceding calendar or fiscal year filed on
or before 15th day of the 4th month
following the close of the taxable year.
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f. Sum of quarterly If the sum of the quarterly tax payments

payments not equal to made during the taxable year is not equal
the total tax due for to the total tax due on the entire taxable
the year income of that year, the corporation shall
either pay the balance of tax still due, or
carry over the excess credit, or be
credited or refunded with the excess
amount paid.
g. Corporation is 1) In case the corporation is entitled to

entitled to tax refund a tax refund or credit of the excess
or credit estimated quarterly income taxes
paid, the excess amount shown on its
final adjustment return may be carried
over and credited against the
estimated quarterly income tax
liabilities for the taxable quarters of
the succeeding taxable years.
2) Once the option to carry-over has
been made, such option shall be
considered irrevocable for that taxable
period.
h. Filing of the return The quarterly income tax declaration
and the final adjustment shall be filed
with:
1) Authorized agent banks, or
2) Revenue District Office, or
3) Collection Agent, or Duly authorized
Treasurer of the city or municipality
having jurisdiction over the location of
the principal office of the corporation
filing the return or place where the
main books of accounts and other
data from which the return is prepared
are kept.
i. Payment of the The income tax due shall be paid at
income tax the time the declaration or return is
filed.
Sec. 30 Exemption from Tax on Corporation. – The following organizations

shall not be taxed in respect to income received by them as such:
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(A) Labor, agricultural or horticultural organizations not organized

principally for profits;
(B) Mutual savings bank not having a capital stock represented by
shares, and cooperative bank without capital stock, organized and
operated for mutual purposes and without profit;
(C) A beneficiary society, order or association, operating for the
exclusive benefit of the members such as fraternal organization
operating under the lodge system, or a mutual aid association or a
non-stock corporation organized by employees providing for the
payment of life, sickness, or other benefits exclusively to the members
of such society, order, or association, or non-stock corporations or
their dependents;
(D) Cemetery company owned and operated exclusively for the
benefit of its members;
(E) Non-stock corporation or association organized and operated
exclusively for religious, charitable, scientific, athletic, or cultural
purposes, or rehabilitation of veterans, no part of its net income or
asset shall belong or inure to the benefit of any member, organizer,
officer or any specific person;
(F) Business league, chamber of commerce, or board of trade, not
organized for profit and no part of the net income of which inures to
the benefit of any private stockholder or individual;
(G) Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare;
(H) A non-stock nonprofit educational institution;
(I) Government educational institution;
(J) Farmers or other mutual typhoon or fire insurance company,
mutual ditch or irrigation company, mutual or cooperative telephone
company, or like organizations of a purely local character, the income
of which consists solely of assessments, dues, and fees collected from
members for the sole purpose of meeting its expenses; and
(K) Farmers, fruit growers, or like association organized and
operated as a sales agent for the purpose of marketing the products of
its members and turning back to them the proceeds of sales, less the
necessary selling expenses on the basis of the quantity of produce
finished by them.
Note: Notwithstanding the provisions in the preceding paragraphs, the

income of whatever kind and character of the foregoing organizations
from any of their properties, real or personal or from any of their
activities conducted for profit regardless of the disposition made of
such income, shall be subject to corporation tax.
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Supply.
Let’s Check
Activity 1. Now that you have understood matters regarding Corporate Taxation, let
us try to check your understanding. Determine whether the statement is True or
False.
1. Foreign corporation, whether engaged in business in the Philippines or not, is

taxable on income derived from sources within and without the Philippines.
2. Domestic, resident foreign and non-resident foreign corporations may deduct
from their business income, itemized deductions under the Tax Code.
3. Non-resident foreign corporation receives the same tax treatment as domestic
and resident foreign corporations with regard to capital gains from sale of
shares of stock not traded in a stock exchange.
4. The 10% on the taxable income of a proprietary educational institution and
non-profit hospital is absolute.
5. Subject to provisions of existing special laws or general laws, all corporations,
agencies, or instrumentalities owned or controlled by the government shall
pay such rate of tax upon their taxable income as are imposed by the Code
upon corporations or associations engaged in a similar business, industry or
activity.
6. Non-resident cinematographic film owner, lessor or distributor is taxed and
15% of gross income.
7. International carrier and international shipper doing business in the
Philippines shall pay a tax of 10% on its gross Philippines billings.
8. Every corporation shall file in duplicate a quarterly summary declaration of its
gross income and deductions on a cumulative basis for the preceding quarter
or quarters upon which the income tax shall be levied, collected and paid.
9. If the gross income from the unrelated trade, business other activity of
proprietary educational institution or non-profit hospital exceeds 50% of the
total gross income derived from all sources, the tax prescribed under Section
27(A) shall be imposed on the entire taxable income.
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10. Domestic corporation is created or organized under Philippine laws.
Let’s Analyze
Activity 1. Getting acquainted with the essential terms in the study of corporate
1. Explain the extent of tax liabilities of the different corporate taxpayers.

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2. Differentiate the computation of Optional Standard Deduction (OSD) under

individual taxpayer and corporate taxpayer.
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3. When can a corporate taxpayer be taxed under Minimum Corporate Income Tax
(MCIT)?
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4. Why does Improperly Accumulated Earnings Tax being imposed?

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1. Mr. ABC Company had the following data in 2019:

Philippines Abroad
Gross Income from Sales 4, 000, 000 6, 000, 000
Business Expenses 2, 000, 000 3, 600, 000
Rent Income 1, 000, 000 1, 200, 000
Dividend- Domestic 50, 000 -
Royalties 80, 000 -

a. Taxable income and Tax due
a. Domestic Corporation
b. Resident Foreign Corporation
c. Non-Resident Foreign Corporation
b. Final tax if the taxpayer is a Domestic Corporation.
2. Brighter Minds College, a private educational corporation, has the following

financial data for the year 2019:
Income from tuition fees P6,000,000

Other income derived from
School activities 3,000,000
Rental income from commercial spaces
Located outside the school 2,000,000
Business expenses allowed as deductions 5,000,000

a. How much is the income tax due of the corporation?
b. If aside from the above income and expenses, the school also
owns a dormitory and earned gross income of P 7,500.000 and
incurred related expenses of P2,000,000, the income tax due of the
corporation is
3. In 2018, the company’s fourth year of operations, Forever Inc., a domestic

corporation has the following financial data:
Business Expenses 975, 000

Minimum Corporate Income Tax (MCIT) 25, 000

a. Gross Income
b. Normal tax taxable income
c. Income tax due
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4. In 2018, Corona Inc., a resident foreign corporation, was on its sixth year of
operation. The following data pertain to its operation in the Philippines for the
years 2018 and 2019:
2018 2019
Gross profit from sales 1, 620, 000 1, 720, 000
Business Expenses 730, 000 850, 000

a. Normal Income tax for 2018
b. Income tax due for 2018
c. Normal Income tax for 2019
d. Income tax due for 2019
5. For the taxable year 2019, the company’s sixth year of operations, the
records of Magic Power Corporation., a domestic corporation, show the
following:
Gross sales 5,000,000

Sales returns & allowances 20,000
Sales discounts 225,000
Cost of goods manufactured and sold 1,500,000
Operating expenses 980,000
Interest from Philippines savings 3,000,000
Royalty income 1,000,000
Capital gain (sale of shares) 500,000
Answer the following:

a. The gross income at the end of the taxable year 2019 is?
b. What is the minimum corporate income tax due of Magic
Power Corp. for 2019?
c. How much is the normal tax?
d. How much is the tax due?
e. If Magic Power Corporation opted to used for year 2019 the
gross income taxation, what is the income tax due for 2019:
f. Total passive income.
In a Nutshell

1.
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2.
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3.
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4.
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5.
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6.
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7.
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8.
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9.
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10.
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Q and A

1.
2.
3.
4.
5.
Keywords
 Corporation
 Domestic Corporation
 Foreign Corporation
 Government-owned and controlled corporations.
 Non-profit Hospital
 Non-resident Foreign Corporation
 Proprietary Educational Institutions
 Resident Foreign Corporation
 Taxable Partnerships
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Big Picture B
Week 4–5 (Unit 2): Unit Learning Outcomes (ULO): At the end of the unit, you
are expected to:
1. Demonstrate mastery on rules of estate and trust taxation.
2. Demonstrate mastery on rules of partnership taxation.
3. Master the components of Gross Income.
Big Picture in Focus: ULOa. Demonstrate mastery on

rules of Estate and Trust taxation.
Metalanguage
1. Estate or Inheritance. Refers to all the properties, rights and obligations
of a person which are not extinguished by his death and also those which
have accrued thereto since the opening of the succession.
2. Taxable Estate. An estate is an income taxpayer if under judicial

settlements or administration
3. Trust. An agreement created by will or an agreement under which title to

property is passed to another for conservation or investment with the
income there from and ultimately the corpus or principal to be distributed in
accordance with the directives of the creator as expressed in governing
instrument.
4. Taxable Trust. To be taxable it must be irrevocable.
5. Trustor or grantor. Is the person who establishes a trust.
6. Beneficiary. Is the person whose benefit the trust has been created. A
beneficiary has equitable title to the property transferred to the trust,
including, generally, the possession and use of the property.
7. Fiduciary. Is the general term which applies to all persons or corporations

that occupy positions of peculiar confidence towards others, such as
trustees, executors, guardians or administrators.
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I. TAXATION OF ESTATE AND TRUSTS
1.1 Taxable estates and trusts

Taxed in the same manner and on same basis as in the case of individual.
1.2 Allowed deductions

 Amount distributed to beneficiaries; or
 Amount collected by guardian to be held or distributed as the court may
direct.
The amount allowed shall be included in computing the taxable income of the
beneficiaries, whether distributed to them or not.
1.3 Income of a Trust will be taxed to:

 Trustor – if revocable
 Trustee – if irrevocable
Employee’s Trust
NOT taxable
a. Estate as a An estate is a taxpayer if it is under settlement or

taxpayer administration.
b. Trust as a 1) A trust is a taxpayer if under the terms of the trust the
taxpayer fiduciary must accumulate the income.
2) A trust is a taxpayer if under the terms of the trust the
fiduciary may accumulate or distribute the income, in his
discretion.
c. When is the 1) If under the term of the trust the title to any part of the
income of the corpus or principal of the trust may be revested to the
trust taxable to grantor, the income of the part of the corpus or principal
the grantor? shall be taxable to the grantor.
2) If under the term of the trust the income of the trust shall
be applied for the benefit of the grantor, the income that
shall be applied for the benefit of the grantor shall be
taxable to the grantor.
d. Treatment When an estate or a trust is a taxpayer, a distribution of the
of income year’s income to an heir or beneficiary is:
distribution of 1) A special item of deduction for the estate/trust;
the year’s 2) A special item of income to the heir/beneficiary.
income to heir
or beneficiary
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e. Gross income xxx

Computation Less: Deductions
of taxable Business expenses xxx Dist
income of the Taxable net income xxx
estate or trust Tax due [Sec. 24 (A)] xxx
*Personal exemptions has been amended by TRAIN LAW
Several Trusts with a Common Grantor and a Common Beneficiary

a. Filing of A separate return will have to be filed for each trust by the
separate respective trustee or fiduciary.
returns
b. The separate returns filed by the different fiduciaries shall
Consolidation be consolidated in the BIR allowing against the
of the separate consolidated taxable income one exemption only of
returns P50,000.
c. An income tax shall be computed on the consolidated
Consolidated income.
income tax
d. The tax computed on the consolidated income shall be
Apportionment apportioned to the different trusts, such that each trust
of the shall have a share in the income tax on consolidated
consolidated income.
income tax to
the different The format of computation follows:
Taxable income of the trust x Consolidated income tax
trusts
Taxable income of all trusts
e. Tax payable Each trust shall pay an income tax still due computed as
of each trust follows:
Income tax apportioned to the trust xxx
Less:
Income tax already paid by the fiduciary of the trust xxx
Income tax still due xxx

Not over 250,000 0%

400k
800k
2M
8M
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Illustration 1: The estate of Mr. Indiano has 800, 000 gross income before
business expenses of 200, 000. The estate administrator distributed 300, 000 to
the heirs in accordance with the will of Mr. Indiano.
The taxable income and tax due will be computed as follows:
Gross Income P 800, 000
Business expenses 200, 000
Distribution to heirs 300, 000 500, 000
Tax due (See tax table)

250, 000 – 0
50, 000 x 20% – 10, 000
P 10, 000
Illustration 2: Kevin designated in irrevocable trust a property in favour of Jay

and appointed KJ as trustee. The property earned 1, 500, 000 income before
expenses of 200, 000 and trust fees of 50, 000. In accordance with the trust
indenture, kj distributed 100, 000 to jay.
The taxable income and tax due will be computed as follows:
Gross Income P1, 500, 000
Expenses 200, 000
Trust Fees 50, 000
Distribution to heirs 100, 000 350, 000
Taxable Income 1,150, 000

800, 000 – 130,000
350, 000 x 30% – 105, 000
P 235, 000

Not over 250,000 0%

400k
800k
2,000,000 – 8,000,000 490,000 plus 32%of the excess over 2M
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8M
Illustration 3: Don Jose designated three trusts all in favour to his son, Joe.
Trust Designation Trustee Income Distributions

1 Irrevocable AJ 300, 000 30, 000
2 Irrevocable BJ 400, 000 40, 000
3 Revocable CJ 500, 000 50, 000
For purposes of income taxation, the income of Trust 1 and Trust 2 will be
consolidated.
Operating Income P 700, 000

(300, 000 + 400, 000)
Distribution to heirs (30, 000 + 40, 000) 70, 000
400, 000 – 30,000
230, 000 x 25% – 57, 500
P 87, 500
Tax due will be apportioned to Trust 1 and Trust 2 as follows:
Trust 1 (270, 000*/630, 000) x 87, 500 = 37, 500

Trust 2 (360, 000**/630, 000) x 87, 500 = 50, 000
*(300, 000- 30, 000)

**( 400, 000 – 400, 000)
Note: Trust 3 is not taxable as it is a revocable. The entire 500, 000 of trust 3
including the 50, 000 income distribution will be included in the taxable income of
Don Jose.

Not over 250,000 0%
400k
800k
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2M
over 8M

Supply.
Let’s Check
Activity 1. Now that you have understood matters regarding Estate and Trust
Taxation, let us try to check your understanding. Determine whether the statement is
True or False.
1. 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.
2. Revocable trust and estates undergoing extrajudicial settlement can claim
personal exemption of P20, 000.
3. Two or more trusts are consolidated as a single trust when both designated
for the same beneficiary without regard to their grantor.
4. A consolidated trust shall claim only P50, 000 personal exemptions.
5. When the grantor reserved for him part of the income of the trust, the same
shall be treated as income upon the grantor.
6. A trusted employee pension fund does not pay income tax.
7. The substituted filing of tax return does not apply when there is concurrent or
successive employment of the employee during the year.
8. An employee trust fund must be managed by the employer to be tax exempt.
9. For a trust to be taxable, it must be revocable both as to corpus and income.
10. Income which is to distributed currently by the fiduciary to the beneficiaries,
and income collected by a guardian of infant which is to be held or distributed
as the court may direct, are not deductible from the gross income of the
fiduciary.
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Let’s Analyze
1. Explain the extent of tax liabilities of an estate income and a trust income.
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2. How would you compute the tax payable of a particular trust on a multiple trust?
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3. Who pays for the tax due on estate and trust income?
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1. Mr. Mendeleyve passed away on June 30, 2018. His estate, which is under
judicial settlement, accumulated P1, 800, 000 gross income for the remaining
half of the year. Deductions attributable to the income amount to P800, 000.
Compute for the taxable income and tax due of the estate by 2018.
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2. Lady Gaga created two irrevocable trusts naming her favorite daughter,
Kunnikka as beneficiary of both trusts. It is provided in the trust document that
starting the year 2018, when Kunnikka turns 18, she is to receive 25% of the
net income of both trusts for her education. Below are additional information:
Trust 1 Trust 2
Gross Income 1, 600, 000 1, 900, 000
Deductions 320, 000 420, 000

a. Consolidated tax due.
b. Share of each trust on the consolidated tax due.
3. Mr. James Santiago created two (2) trusts designating Atty. Mars Bonafe and
the Philippine Trust Company as trustees. The common beneficiary of the
two (2) trusts was his son, James II, married, and with two (2) qualified
dependent children. The following data were made available for the year
2019:
Trust No. 1 Trust No. 2

Gross income P600, 000 P700, 000
Business expenses 300,000 400,000
Income distribution to beneficiary100,000 200,000
James Santiago II
Gross income P800, 000
Business expenses 250, 000
Income distribution received 300, 000
Compute the tax due from:

a. Each trust.
b. James Santiago II.
In a Nutshell

1.
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2.
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3.
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4.
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5.
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6.
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7.
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8.
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9.
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10.
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Q and A

1.
2.
3.
4.
5.
Keywords
 Beneficiary
 Estate or Inheritance
 Fiduciary
 Taxable Estate
 Taxable Trust
 Trust
 Trustor or grantor
Big Picture in Focus: ULOb. Demonstrate mastery on

rules of Partnership and Partners taxation.
Metalanguage
and to demonstrate ULObwill be operationally defined to establish a common frame
1. Partnership. By contract of partnership two or more persons bind
themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves.
2. General Professional Partnership (GPP). One formed by persons for the

sole purpose of exercising their common profession, no part of the income
of which is derived from engaging in any trade or business.
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3. General Co-Partnership (GCP). A general partnership which is not a

general professional partnership
I. TAXATION OF PARNERSHIP AND PARTNERS
1.1 Partnership NOT subject to Final Tax (Sec. 26):

1. GPP
2. Joint venture or Consortium agreement formed for the purpose of:
a. Undertaking construction projects; or
b. Petroleum, coal, geothermal, and other energy operations under a
service contract with the government.
1.1.1 GPP
 Partner’s distributive share forms part of his gross income subject to
graduated income tax rates;
 GPP is NOT a taxable entity because it only acts as a “pass-through”
entity where its income is ultimately passed to the partners;
 GPP may avail of either itemized deductions or OSD then distribute the
net income to the partners.
 If the GPP avails of either itemized deductions or OSD, the Partners
CANNOT claim any further deductions and may NOT avail the 8% tax rate
because the distributive share is already net of cost and expenses.
o However, if partner derives income from other sources other than
the share in GPP, he may claim either itemized or OSD from the
other source of income. (RR 8-18)
Important Pointers in Non-Taxable Partnerships

a. General professional A general professional partnership is one formed for the
partnership defined sole purpose of exercising a common profession, no
part of income of which is derived from engaging in
trade or business.
b. Liability of partners in a Persons engaging in business as partners in a general
general professional professional partnership shall be liable for income tax
partnership only in their separate and individual capacities.
c. General professional Every general professional partnership shall file, in
partnership required to duplicate, a return of its income, except income exempt
file return under the Tax Code, setting forth the items of gross
income and deductions and the names, TIN, addresses
and shares of each of the partners.
d. Manner of computing For purposes of computing the distributive share of the
the net income of partners, the net income of the general professional
general professional partnership shall be computed in the same manner as a
partnership corporation.
e. Basis of the income Each partner shall report as gross income his
that distributive share, actually or constructively received, in
a partner will report the net income of the partnership.
f. Income payments to Income payments to partners of general professional
partners of a general partnership are subject to 15% creditable withholding
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professional tax, if the income payment to the partner for the current
partnership year exceeds P720,000; and 10%, if otherwise.
subject to creditable
withholding tax
1.1.2 Joint Venture

For a JV formed to undertake construction projects be exempt from tax, the JV
should be:
1. For the undertaking of a construction;
2. Should involve pooling of resources by licensed local contractors;
3. Contractors are engaged in construction business; and
4. The JV itself must be licensed under PCAB. (RR 10-2012)
Illustration 1: For the taxable year 2019, Jaja and Dindin, partners of a general
professional partnership agreed to divide profits and losses 50:50, respectively.
Both are married without qualified dependents. The following are the details of
the account:
Sale of Service, GPP P2, 500,000
Cost of Service, GPP 875, 000
Itemized Deductions, GPP 825, 000
Partner Jaja Partner

Dindin
Travelling Expenses (not liquidated by the GPP) P34, 500 P16, 500
Representation Expenses (personal credit card
Of Partner used) 14, 250 23, 500
Cost of Car, to be depreciated over 5 yrs. (used in the
Practice, registered under the Partner) 750, 000 580, 000
Salaries from the GPP 360, 000 300, 000
Lotto Winnings 900, 000 -
Interest on the Bank Deposits 25, 000 20, 000
Book Royalties - 250, 000
The Distributable net income of the GPP, share of each partner and taxable
income are computed as follows:
GPP GPP
If OSD-- If Itemized—
Sale of Services P 2, 500, 000 P 2, 500, 000
Less: Cost of Services 875, 000 875, 000
Gross Income P 1, 625, 000 P 1, 625, 000
Less: Deductions
40% Optional Standard Deduction or 650, 000
Itemized Deductions 825, 000
Distributable Net Income P975, 000 P800, 000
Share of Each Partner (50:50) P487, 500 P400, 000
Note: Since the partnership is a General Professional Partnership (GPP), therefore it Is
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not subject to 30%. That is why the should be taxable income is the same as the
distributable income.
GPP GPP
If OSD, then- - If Itemized, then- -
Partner Jaja Partner Dindin Partner Jaja Partner Dindin
OSD OSD Itemized Itemized
Share of Each Partner to
The GPP (50:50) P487, 500 P487, 500 P400, 000 P400, 000
Less: Additional
Itemized Deduction-
Travelling Expenses - - 34, 500 16, 500
Representation Expenses- - 14, 250 23, 500
Depreciation of Car 150, 000 116, 000
Net Share of Each
partner in the GPP P487, 500 P487, 500 P201, 250 P244, 000
Add: Salaries from the GPP 360, 000 300, 000 360, 000 300, 000
Taxable Income P847, 500 P787, 500 P561, 250 P544, 000
Notes:
(1) Lotto winnings is subject to a 20% final tax, interest on the bank deposits is subject to
a 20% final tax while book royalties to a 10% final tax. This comprehensive illustration
applies the rules as stated in the regulations except the last where the partner also has
other gross income apart from his share in net income of the GPP.
(2) Under OSD, all other unliquidated expenses of the partners are no longer allowed to
be deducted, following the concept that the OSD is in lieu of all itemized deductions.
(3) The computed taxable income is returnable to the individual income tax of the
partners, hence, subject to graduated tax, Sec. 24(a).
Continuing Illustration: Assuming that Jaja, has income from business other
than that of the partnership and has the following data:
Gross sales 5,000,000
Sales returns & allowances 20,000
Sales discounts 225,000
Cost of goods manufactured and sold 1,500,000
Itemized expenses 980,000
Compute for Jaja’s Taxable income and tax due:

Net Sales 4, 755, 000
Gross Income from business 3, 255, 000
Less: Deductions 980, 000
Taxable Business Income 2, 275, 000
Add: Share of net income from partnership
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(see Illustration1, assuming that the

Partnership uses itemized deduction) 561, 250
Total Taxable Income 2, 836, 250

2, 000, 000 – 490,000
836, 250 x 32% – 267, 600
Tax due P 757, 600
Note: Needless to say, share of net income from a general professional

partnership is simply added from income from other sources of the taxpayer in
computing for the taxable income and tax due.

Not over 250,000 0%

400k
800k
2,000,000 – 8,000,000 490,000 plus 32%of the excess over 2M

8M
1.2 Partnership subject to Tax (Sec. 73D)

Those whose income is derived from trade or business. Considered as
“corporations” under the Tax Code.
 Partner’s distributive share is subject to final tax of 10%(RC, NRC, and
RA) and 20%(NRA-ETB)
 NOT allowed to claim deductions since they are subject to final tax;
 The Partnership itself is subject to 30% corporate income tax
 Co-owners using their common fund or property to produce profits for
themselves are taxable as unregistered partnership. To be considered
such, there must be unmistakable intention to form a partnership.
Important Pointers in Taxable Partnerships
a. Taxable partnerships Taxable partnerships are required to file a cumulative

required to file quarterly declaration and a final return just like
cumulative corporations.
declaration and annual
return
b. Share of partner in a The share of partners in the net income of a taxable
taxable partnership partnership shall be subject to 10% final tax.
subject to final tax
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Illustration 2: Kianna, single is a pertner in KM Partnership, a general co-

partnership. Kianna derive income from her profession as auditor. It is agreed
upon that Partner Kiana is to receive 60% share in the profit and loss of KM
Partnership while Partner Mark will receive 40%. Compute for the taxable
income, regular income tax due and final tax of Kianna using the following data:
Gross Income of KM Partnership 3, 500, 000
Gross Income of Kianna from Profession 800, 000
Income tax withheld on Professional income 20, 000
Expenses of KM Partnership 1, 200, 000
Expenses of Kianna in Profession 130. 000
Taxable income and tax due of the partnership
Gross Income P3, 500, 000

Less: Partnership expenses 1, 200, 000
Net Income before Income Tax 2, 300, 000
Less: Income Tax (2,300,000 x 30%) 690, 000
Net Income after tax/ Distributable Income 1, 610, 000
Taxable income, regular income tax and final tax due of Partner Kiana
Final Tax:
Share of Partner Kianna in KM P 966, 000

(1,610,000 x 60%)
96, 600
Regular Income Tax (Sec. 24(a)):
Gross Income from profession P 800, 000

Less: Expenses from profession 130, 000
Taxable Net Income 1, 610, 000

800, 000 – 130, 000
810, 000 x 30% – 243, 000
Tax due P 373, 000

Supply.
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Let’s Check
Activity 1. Now that you have understood matters regarding Partnership and
Partners’ Taxation, let us try to check your understanding. Determine whether the
statement is True or False.
1. It a taxable partnership sustains a net operating loss, the parthers shall be

entitled to deduct their respective shares in the net operating loss from their
individual gross income.
2. The share of an individual partner in taxable partnership is subject to a final
tax of 6% to be increased to 8% in 1999 and 10% in 2000.
3. The distributive share of a partner in the net income of a taxable partnership is
equal to each partner’s distributive share of the net income declared by the
partnership for the taxable year before deducting the corresponding corporate
income tax.
4. Where the result of partnership operation is a loss, the loss will be divided as
agreed upon by the partners but if no agreement as to division of losses but
there is as to profit to profits, the losses shall be distributed according to the
profit sharing ratio.
5. Persons engaging in business as partners in a general professional
partnership shall be liable for income tax in their separate and individual
capacities.
6. If co-owners invest the income a co-ownership in business for profit, they
would constitute themselves into a partnership and such shall be taxable as a
corporation.
7. Partners of a taxable partnership are considered as stockholders and profits
distributed to them by the partnership are considered as dividends.
8. A general professional partnership as such is not subject to income tax but is
required to file returns to its income.
9. For purposes of computing the distributive share of the partners of a general
professional partnership, the net income of the partnership shall be computed
at the same manner as a corporation.
10. A general co-partnership is one which is not a professional partnership.
Let’s Analyze
1. Explain the extent of tax liabilities of a General Professional Partnership (GPP)

and General Co-Partnership (GCP).
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2. Explain the tax treatment on the partner’s share in the net income of a General
Professional Partnership (GPP) and General Co-Partnership (GCP).
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3. How shall be the income of a partner other than that of the share of the net
income be treated?
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1. Jaimee, married, has two dependent minor brothers. She is a partner of a general
professional partnership. She also has a trading business of her own. The
following data are made available for the year 2019:
Gross income, trading business P500,000

Expenses, trading business 100,000
Interest income, BPI-Makati 20,000
Share from the net income of a general professional partnership 300,000
Royalty, books published in the USA 150,000
Salaries as part-time teacher, gross of withholding tax 100,000
For income tax purposes, how much is Jaimee’s taxable net income?
2. A business partnership organized by partners Tin and Cris, equal partners, has the
following data for the calendar year ended 2019:
Gross business income P 1,000,000
Deductible expenses 300,000
Yield from deposit substitute, net of final withholding tax 50,000
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Interest income derived from a depository bank under EFCDS, net of

withholding tax 100,000
Gain from sale of shares of stock not traded in the local stock exchange, net of
capital gains tax 80,000
Rent income 300,000
Payments of quarterly taxes, first 3 quarters 120,000
Question 1 – How much is the taxable net income of the business partnership?
2 – How much is the tax payable of the business partnership?
3 – How much is the distributable net income of the partnership?
4 – How much is the final withholding tax on the share of the partners, if
any?
In a Nutshell

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6.
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Q and A

1.
2.
3.
4.
5.
Keywords
 General Co-Partnership (GCP)

 General Professional Partnership (GPP)
 Partnership
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Big Picture in Focus: ULOc. Master the components of

Gross Income
Metalanguage
1. Gross Income. As defined in the Tax Code means all income derived from
whatever source including but not limited to the following:
1.1 Compensation Income
1.2 Business Income
1.3 Gains derived from dealings in property
1.4 Interest
1.5 Royalties
1.6 Dividends
1.7 Annuities
1.8 Prizes and winnings
1.9 Pensions
1.10 Partner’s distributive share from the net income of a general professional
partnership.
I. Gross Income
1.0 INCLUSIONS OF GROSS INCOME (CGGIRRDAPPP)
1.1.1 COMPENSATION INCOME
Convenience of employer rule – allowances granted to an employee used
for the benefit of the employer, and NOT for the employee’s personal benefit,
shall NOT be part of the employee’s income subject to tax.
EXAMPLES All kinds of compensation for services rendered constitute gross income. They include:
OF
COMPENSAT A) Salaries, wages and fees;
B) Commissions paid to salesmen;
ION FOR
C) Compensation for services on the basis of a percentage of profits;
SERVICES
D) Commissions on insurance premiums;
RENDERED
E) Tips;
F) Pensions or retiring allowances paid by private persons or by the government
(except pension exempt from tax); and
G) Marriage fees, baptismal offerings, sums paid for saying masses for the dead,
and other contributions received by a clergyman, evangelist, or religious worker
for services rendered.
FORMS OF Forms of compensation Taxable amount
COMPENSAT
ION A) payments made in cash The full amount received
B) services paid for with The fair market value (fmv) of the thing taken in payme
something other than money
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(in kind)
C) services rendered at a In the absence of evidence to the contrary, the stipulate

stipulated price price shall be presumed to be the fair market value (fmv
Examples of Payments in kind Taxable amount

payments in
kind A) Compensation paid to an employee Fair market value of the stock at the time re
OF A CORPORATION IN ITS STOCK the employee
A) promissory note is not interest bearing
B) promissory note and other evidence of
indebtedness in payment of services, and year received - fair discounted value
not merely as security for such payment
year collected- face value less fair discounted value
B) Promissory note is interest bearing

YEAR RECEIVED -FACE VALUE
YEAR COLLECTED - MATURITY VALUE LESS FACE VALUE
Personal and Equity Retirement Account (PERA) – refers to the voluntary

retirement account established by and for the exclusive use and benefit of the
Contributor for the purpose of being invested solely in PERA investment
products in the Philippines.
PERA contributions from employer do NOT form part of employee’s gross
income.
Representation and Transportation Allowance (RATA)

Generally taxable as part of gross income. Exempt if:
 Expenses are ordinary and necessary in pursuit of trade or business;
and
 Employee must account for the expense and liquidate with receipts and
other documents.
RATA of government officials is considered reimbursement of expenses

and are therefore exempt. NO need to substantiate or liquidate.
Additional Compensation Allowance (ACA) of government officials are

considered as “other benefits”. Hence, only the excess of P90,000 is subject
to tax.
**TRAIN increased the non-taxable benefits to P90,000.
1.1.2 GROSS INCOME FROM BUSINESS, TRADE AND PRACTICE OF

PROFESSION
Format of Gross sales/receipts

computation xxx
Less: sales returns and allowances xxx
sales discount xxx xxx
Net sales/receipts xxx
Less: cost of sales/services xxx
Gross income from operation xxx
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Add: other income xxx

1.1.3 GAINS FROM DEALINGS IN PROPERTY

Recognized when the property received in exchange is essentially different
from the property disposed and the property received has market value.
A. Property Selling price xxx

acquired by Less: cost xxx
purchase on Gain xxx
or after
march 1,
1913.
B. Property Selling price xxx
acquired by Less: fmv, date of inheritance xxx
inheritance Gain xxx
C. Property Selling price xxx

acquired by Less: value in the hands of the donor xxx
gift Gain xxx
1.1.4 INTEREST
Interest income subject to final tax are NOTincluded in the computation for
gross income.
A. Include Interest includes such interest arising from indebtedness,

d in whether business or non-business. Unless exempted by law,
interest interests received by a taxpayer, whether or not usurious,
income are taxable.
B. Subject Interest income from philippine sources subject to final tax
to final (not included in the taxable net income subject to tax rates in
tax general)
A. Interest from any currency bank deposit;
B. Yield or any other monetary benefit from deposit
substitute;
C. Yield or any other monetary benefit from trust funds
and similar arrangements;
D. Interest income received from a depository bank
under expanded foreign currency deposit system;
E. Interest income from long-term deposit or investment
evidenced by certificates prescribed by Bangko
Sentral ng Pilipinas if pre-terminated before fifth year.
C. exempt Interest income from Philippine sources exempt from tax:
from A. Interest income received from a depository bank
income under expanded foreign currency deposit system by
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tax non-residents (individuals or corporations);

B. Interest income from long-term deposit or investments
evidenced by certificates prescribed by Bangko
Sentral ng Pilipinas.
Illustration: Jade has the following income in 2019:
Interest income from loans 3, 000, 000

Interest income from deposits with other banks 400, 000
Interest income from notes rediscounting 100, 000
Interest income from treasury shares 50, 000
Only the interest income from loans and notes rediscounting are items of
gross income subject to regular income tax. The interest on deposits and
treasury notes are items of gross income subject to final tax.
1.1.5 RENTS
Rents deposited by tenants in a bank because lessor refused to accept the
same are included in lessor’s gross income. They are deemed constructively
received by lessor. (Limpan Investment Corp. v CIR)
1) Income of lessor under lease agreement

Payments made Lessor Lessee
A. Rent Income Expense
B. Obligation of
lessor to third
Income Expense
person paid by
lessee
C. Advance rent Income in full in the year received Expense to be
regardless of accounting method prorated over
used the period
covered
regardless of
accounting
method
D. Leasehold Income reported under lump sum Expense
improvement or annual method (depreciation)
over the term
of the lease or
estimated life
whichever is
shorter
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2) Advance payment not representing rent

A. Loan Advance payment representing loan to the lessor is
not taxable unless applied to unpaid rent.
B. Security deposit Advance payment representing security deposit is
not taxable unless violation in the lease contract
arises.
3) Leasehold improvement
A. Additional Leasehold improvement is a source of additional
income to the income to the lessor if it shall become his upon the
lessor expiration of the lease.
B. Recognition of (1) lump sum or outright method - lessor may
income from report as income, at the time when such buildings
leasehold or improvements are completed, the fair market
improvement value (fmv) of such buildings or improvements
subject to the lease.
(2) annual or spread out method

Cost of leasehold improvement xxx
Less: Acc. Dep. (remaining term of lease) xxx
Book value, end of lease xxx
Annual income
Book value, end of lease/remaining term of
lease xxx
(3) computation of income resulting from
premature termination of Lease
FMV of improvement when lessor took
possession xxx
Less: amount already reported as income
xxx
Income, year of termination
xxx
C. Computation of
loss due to Amount already reported as income xxx
destruction of Less: insurance recovery xxx
leasehold Salvage value xxx xxx
improve-ment Loss xxx
before the term
of the lease
expires
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Improvements by Lessee
 When lessee erects improvements per agreement with lessor, lessor may
report the income:
o At the time the improvement is completed, the FMV of the
improvement (outright method); or
o Spread out over the life of the lease the estimated depreciated
value of the improvement at the termination of lease. (spread out
method)
 If lease is terminated, so that the lessor comes into possession of the
property prior to the time originally fixed, lessor is considered to have
received additional income if the value of the improvement exceeds the
amount already reported as income.
 If improvement is destroyed before expiration of lease, lessor may deduct
as loss the amount previously reported as income less any salvage value
to the extent not compensated by insurance.
 If useful life is less than remaining term of lease, lessor will NOT report
any income since he will get it fully depreciated.
Prepaid rent – reported as taxable income in the year when prepayment is

received.
Illustration1: Under the Iba Leasing Corporation’s standard lease contract,

lease shall run for a non-pre-terminable 12-month period at monthly rental of
25, 000. The lessee shall pay three-month rent in advance plus one month
security deposit. The rent for the last two months of the lease shall be taken
from the advance while the security deposits will be return if there are no
damages sustained by the property during the lease term.
The entire P75, 000 rental payments for the current month and the advanced
rental for the last two months is an item of income subject to regular tax. The
P25, 000 security deposits is not an income.
Illustration 2: In January 1, 2018, Covido leased a vacant lot to Nineteen

under a 20 year lease contract. Covido immediately constructed a building on
the lot at a total cost of 4, 500, 000. The building has useful life of 30 years.
Outright Method:
Under outright method, Covido shall recognize the entire 4, 500, 000 fair
value of the improvement as gross income upon completion of the
improvement in 2018.
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Spread Out Method
The depreciation 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:
User Year of Usage Allocation Cost

Lessee 20 years 20/30 x 4, 500, 000 3, 000, 000
Lessor 10 years 10/30 x 4, 500, 000 1, 500, 000
4, 500, 000
The 1, 500, 000 depreciated value of the improvement at the termination of

the lease is an income from leasehold improvement by the lessor.
Under the spread-out method, Covido shall spread the 1, 500, 000 income
over 20 periods or recognized an annual income P75, 000 from the leasehold
improvement from 2018 to 2037.
1.1.6 ROYALTIES
A. Subject to final Royalties earned in the PHI
tax
B. Subject to tax Royalties earned outside in the PHI
rates in general
Illustration 1: Flowersoftwares is a distributor of a computer program and

earns royalties from its licensed users. Computer programs are specifically
tailored to each client and regular continuing maintenance services are
provided. During the year, client-users remitted a total of 500, 000 royalty
payments.
The entire 500, 000 is subject income tax since the royalty is an active income
(basic income) to Flowersoftwares.
Illustration 2: Mang Dammy has the following royalties:

Royalties from mining properties in the Philippines 550, 000
Royalties from books published in the Philippines 200, 000
Royalties from books published abroad 300, 000
Royalties from franchise exercise abroad 400, 000
The royalties from mining properties and from books in the Philippines is
subject to final tax. The royalties from sources abroad aggregating P700, 000
are items of gross income subject to regular income tax. Remember that the
withholding tax inherently do not apply to foreign income.
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1.1.7 DIVIDENDS
Cash and Property Dividends – taxable
Stock Dividends – NOT taxable
o Except: Whereby the proportional interest of the SH after the
distribution is essentially different from his former interest.
Sale of stock received as dividends

Seller may realize gain or loss which is treated as capital asset. (Subject to
CGT or STT)
Stock declaration and Subsequent redemption by Corporation

The amount received shall be considered as taxable dividend. Subject to 10%
final tax. (RR 2-1940)
Liquidating dividends – taxable

When a corporation distributes all its assets in complete liquidation, the gain
realized from this is taxable as capital gains.
Such gain is the difference between the FMV of the liquidating dividends and
the adjusted cost:
o If SH held his share for more than 12 months – only 50% of capital
gains is taxable
o If less than 12 months– 100% of the capital gains is taxable.
Dividend income (including shares in the net income of certain entities)

A. Difference between A direct dividend is one where the paying
direct and indirect corporation acknowledges that the distribution
dividends is a dividend payment.
An indirect dividend is a distribution of profits

disguised as payment of services, properties,
etc.
B. Dividends/shares in a. Cash and/or property dividends
net income subject actually or constructively received by
to final tax individuals from domestic corporation
or from a joint stock company,
insurance or mutual fund company and
regional operating headquarters of
multinationals;
b. Inter-corporate dividends received from
domestic corporation by non-resident
foreign corporations;
c. Share of an individual in the
distributable net income after tax of a
partnership (other than a general
professional partnership) of which he is
a partner;
d. Share of an individual in the net
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income after tax of an association, a

joint account, or a joint venture or
consortium taxable as a corporation of
which he is a member or co- venturer.
C. Dividends/shares in a. Dividends from foreign corporations;
net income subject b. Share in the net income of a general
to tax rates in professional partnership.
general
D. dividends that are A. Inter-corporate dividends received from
exempt from tax domestic corporation by other domestic
corporation and resident foreign
corporation.
Illustration
Caloocan Corporation, a domestic corporation, received cash dividends from
the following corporations:
Domestic corporation P 400, 000

Resident foreign corporations 200, 000
Non-resident foreign corporations 300, 000
The P400, 000 inter-corporate dividends declared by a domestic corporation

is exempted from final tax. Therefore, it is not an item of gross income subject
to regular income tax.
The P500, 000 total dividends from the resident and non-resident foreign
corporations are items of regular income subject to regular income tax and
shall be reported as follows:
Scenario 1: Assuming Caloocan Corporation is a domestic corporation, the

P500, 000 total dividends from foreign corporations shall be included in gross
income because domestic corporation are taxable on world income.
Scenario 2: Assuming Caloocan Corporation is a resident foreign

corporation, only a portion of the P200, 000 dividends from the resident
foreign corporation determined as earned with by the Pre-dominance test
discussed in Chapter 3 shall be included in gross income. Note that the situs
of dividends from the non-resident foreign corporation is abroad.
1.1.8 ANNUITIES
Sum of money payable at regular intervals.
 Life insurance annuities are excluded from gross income.
A. Meaning of An annuity is a specified income payable at stated

annuity intervals for a fixed or a contingent period, often for
the recipient’s life, in consideration of a stipulated
premium paid either in prior installment payments
or in a single payment.
B. Non-taxable Annuity representing return of premium
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annuity
C. Taxable annuity Excess of the amount returned as premium
Illustration: Andrew purchased an annuity contract for P100, 000 which shall
pay him P10, 000 annually until he dies.
The receipt of the first 10 annual annuity payments is a return of capital. Any
further receipt from year 11 and onward is an item of gross income subject to
regular income tax.
1.1.9 PRIZES AND WINNINGS

Generally taxable.
Except:
1. If the recipient was selected without any action on his part and was
NOT required to render substantial future services as a condition for
receiving the prize or award;
2. Those granted to athletes in local and international sports competitions
sanctioned by the National Sports Association; and
3. Those in the nature of gifts.
A. Subject to tax rates in a. Prizes and winnings from foreign

general sources received by individuals
and corporations;
b. Prizes and winnings from
Philippine sources received by
corporations;
c. Prizes from Philippines sources
received by individuals amounting
to P10,000 or less.
B. Subject to final tax a. Prizes received by individuals from
Philippine sources [except prizes
amounting to P10,000 or less
which shall be subject to tax under
Sec. 24 (A)];
b. Other winnings of individuals from
Philippine sources (except
Philippine Charity sweepstakes
and Lotto winnings)
C. Exempt/excludedfrom a. Philippine Charity sweepstakes
gross income and Lotto winnings (Amended by
TRAIN LAW);
b. Prizes and awards made primarily
in recognition of achievements in
the following fields:
1. Religious;
2. Scientific;
3. Artistic;
4. Civic.
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5. Charitable;
6. Educational;
7. Literary;
Conditions for the exemption of prizes and

awards:
1. The recipient was selected without
any action on his part to enter the
contest or proceedings; and
2. The recipient is not required to
render substantial future services
as a condition to receiving the
prize or award.
3. All prizes and awards granted to
athletes to local and international
sports competitions and
tournaments whether held in the
Philippines or abroad and
sanctioned by their national sports
association.
Illustration
The City of Baguio held its Panagbenga flower festival. During the festivities,
Mr. Erorita, the proprietor of Mr. Sexy Body Gym, won the P500, 000 second
prize in the flower float competition. John Hay Management Corporation won
the P600, 000 first prize.
The City of Baguio shall withhold 20% final tax on the winnings of Mr. Erorita.
The prize of John Hay Management 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.
1.1.10 PENSIONS
Pensions and retirement benefits under R.A. 7641 are excluded from gross
income.
1.1.11 PARTNER’S DISTRIBUTIVE SHARE IN GPP’S INCOME
Each partner shall report as gross income his distributive share in the net
income of the GPP.
1.1.12 INCOME FROM WHATEVER SOURCE

 Just compensation received from government for the expropriation of
private properties should be included in the gross income. This is
embraced within the meaning of “sale or disposition of property”.
 Damages, depends:
o Compensation for loss of income and exemplary damages –
taxable
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o Moral and actual damages – NOT taxable

 However, moral damages NOT arising from physical
injuries are taxable as income. (Murphy v Internal
Revenue Service)
 Refunds
Taxes paid in connection with taxpayer’s business or profession, that were
previously claimed and allowed as deductions but were subsequently
refunded or granted as tax credit shall be included as part of gross income to
the extent of the income tax benefit.
Except:
o Estate and donor’s tax
o Income, war-profit and excess profit taxes imposed by a foreign
country
o Taxes assessed against local benefits tending to increase the value
of property assessed
o Stock transaction tax
o Taxes NOT allowable as deductions under the law.
 Cash deposits or advances received by taxpayers (except GPP) from

clients and customers shall form part of gross receipts.
 Income or gain derived from exercise of stock options is considered
additional income and subject to income tax.
o Additional compensation – the difference in the book value or
FMV of the share the time of the exercise of stock option and
the price fixed on the grant date.
2.0 EXCLUSIONS FROM GROSS INCOME (LAGCIRMM) (Sec. 32B)
2.1 LIFE INSURANCE PROCEEDS

Except: if the proceeds are held by the insurer under an agreement to pay
interest thereon. The interest payments shall be included in gross income.
Proceeds of life Insurance

1) Proceeds of life Proceeds of life insurance policies paid to the heirs
insurance policies or beneficiaries upon the death of the insured,
excluded from gross whether in a single sum or otherwise are excluded
income from gross income.
2) Interest on proceeds is If such proceeds are held by the insurer under an
included in the gross agreement to pay interest thereon, the interest
income payment shall be included in the gross income.
Illustration: (CPA Exam) Mr. J. Cruz insured his life with his estate as beneficiary.
In 2019, after Mr. Cruz had paid P65,000 in premiums, he assigned the policy to
Mr. S. Santos for P60,000, and Mr. Santos collected the total proceeds of
P200,000. Mr. Santos, after the assignment, and before Mr. Cruz’s death, paid
total premiums of P80,000.
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a. Exempted amount;
b. The taxable amount.
2.2 AMOUNT RECEIVED AS RETURN OF PREMIUM
Amount received by insured as return of premium

1) Excluded return of The amount received by the insured, as a return
premium of premium paid by him under life insurance,
endowment, or annuity contracts, either during
the term or at the maturity of the term mentioned
in the contract or upon surrender of the contract.
2) Excess of premium If the amounts, when added to amounts
returned shall be received before the taxable year under such
included in gross income contract, exceed the aggregate premium paid,
whether or not paid during the taxable year, then
the excess shall be included in gross income
3) Excluded amount in case In the case of a transfer for a valuable
of consideration by assignment or otherwise, of a
a transfer for a valuable life insurance, endowment or annuity contract or
consideration by any interest therein, only the actual value of
assignment or otherwise, such consideration and the amount of the
of life insurance premiums and the sums subsequently paid by
the transferee are exempt from taxation.
4) Participating dividends Participating dividends are not income to the
insured. They are treated as return of capital.
2.3 GIFTS, BEQUESTS, AND DEVISES

Except: Income from such property.
1) Subject to transfer taxes Gifts, bequests and devises are subject to
transfer taxes (estate tax or donor’s tax.)
2) Income from transferred Income from property derived from its
properties included in investment, sale or otherwise shall be included
gross income in the gross income.
3) Gift, bequest, devise or Gift, bequest, devise or descent of income from
descent of income any property, in cases of transfers of divided
included in gross income interest, shall be included in the gross income.
4) Alimony or an allowance Neither alimony nor an allowance based on a
based on a separation separation agreement is taxable income.
agreement
2.4 COMPENSATION FOR PERSONAL INJURIES AND SICKNESS

Including amount of damages received on account of such.
1) Excluded compensation The following compensation for injuries or

for injuries or sickness sickness shall not be included in the gross
income:
1) Amounts received through Accident or
Health Insurance or Under Workmen’s
Compensation Act;
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2) Amounts of any damages received, whether

by suit or agreement on account of such
injuries or sickness.
2) Recoveries of certain Recoveries of damages, representing
damages compensation for personal injuries arising from
libel, defamation, slander, breach of promise to
marry, alienation of affection are not subject to
income tax and shall not be included in gross
income.
2.5 INCOME EXEMPT UNDER ANY TREATY
1) Excluded income Income of any kind to the extent required by any

treaty obligation binding upon the Government
of the Philippines is exempt from taxation.
2) Examples of income 1) Salaries of officials of the United Nations
exempt under treaty assigned in the Philippines if paid by the
United Nations and certified by the Secretary
General of the United Nations;
2) Salaries, allowances, fees, or wages received
by citizens of the United States of America
working in consular offices in the Philippines
are exempt from all taxes;
3) Salaries of diplomatic officials and agents.
2.6 RETRIREMENT BENEFITS, PENSIONS, GRATUITIES ETC.
1) Retirement benefits Retirement benefits received under R.A No. 7641

received under R.A No. and those received by officials and employees of
7641 and those private firms whether individual or corporate in
received by officials and accordance with a reasonable private pension
employees of private plan maintained by the employer.
firms 1) The retiring official or employee has been in
the service of the same employer for at least
10 years and is not less than 50 years of
age at the time of his retirement;
The benefits granted shall be availed of by an

official or employee only once.
2) Any amount received by Any amount received by an official or employee of
an official or employee by his heirs from the employer as a consequence
as a consequence of of separation of such official or employee from the
separation service of the employer because of death,
sickness or physical disability or for any cause
beyond the control of the said official or
employee is not included in the gross income
3) Social security benefits, The provisions of any existing law to the contrary
retirement gratuities, notwithstanding, social security benefits,
pensions and other retirement gratuities, pensions and other similar
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similar benefits received benefits received from foreign government

from foreign government agencies and other institutions, private or public
agencies and other by resident or nonresident citizen of the
institutions, private or Philippines or aliens who come to reside
public permanently in the Philippines are not included in
the gross income.
4) United States Veterans Payments of benefits due or to become due
Administration benefits under United States Veterans Administration are
not included in the gross income
5) Social Security System Benefits received from or enjoyed under the
(SSS) benefits Social Security System (SSS) are not included in
the gross income.
6) Government Service Benefits received from the GSIS including
Insurance System (GSIS) retirement gratuity received by government
benefits officials and employees are not included in the
gross income.
2.7 MISCELLANEOUS TAX-EXEMPT ITEMS
1) Income derived by a) Income derived by foreign governments,

Governments financing institutions owned, controlled or
enjoying refinancing from foreign governments,
and international or regional financial
institutions established by foreign governments
from investment in loans, stocks, bonds or
other domestics securities, or from interest
on deposits in banks in the Philippines.
b) Income accruing to the Government of the
Philippines derived from any public utility or
from the exercise of any essential government
functions.
2) Prizes and awards a) Prizes and awards made primarily in
recognition of achievements in the
following fields:
1) Religious; 3) Scientific; 5)
Artistic; 7) Civic.
2) Charitable; 4) Educational; 6)
Literary;
Conditions for the exemption of prizes and

awards:
a. The recipient was selected without any
action on his part to enter the contest or
proceedings; and
b. The recipient is not required to render
substantial future services as a condition to
receiving the prize or award.
b) All prizes and awards granted to athletes to
local and international sports competitions
and tournaments whether held in the
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Philippines or abroad and sanctioned by their

national sports association.
3) 13th month and other Gross benefits received by officials and
benefits employees of public and private entities provided
that the total exemption shall not exceed
P90,000.
4) GSIS, SSS, Medicare and GSIS, SSS, Medicare and Pag-IBIG
Pag-ibig contributions, contributions, and union dues of individuals shall
and union dues not be included in gross income.
5) Gains realized a) Gains realized from the sale or exchange or
retirement of bonds debentures or other
certificate of indebtedness with a maturity of
more than 5 years shall not be included in
the gross income.
b) Gains realized by the investor upon
redemption of shares of stock in a mutual
fund company.
Note: Mutual fund company is an open-end

and close-end investment company.
Illustration: A rank and file employee received the following benefits from his
employer:
13th month pay
P20,000
14th month pay
20,000
Christmas bonus
10,000
Productivity incentives
15,000
Total 13th month and other benefits
P65,000
How much was the taxable benefits?
Illustration:The following were received by a resident citizen employee, married,

and with four (4) qualified dependent children for the year 2011: Salary (net of
P20,000 withholding tax; P3,000 SSS contribution; P2,000 union dues),
P275,000; 13th month pay, P25,000; 14th month pay, P25,000.
How much was the taxable compensation income?
Illustration: Based on the following data compute the total of exclusions from gross
income:
Salary, gross of withholding tax P480,000
Allowance 20,000
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Thirteenth month pay 20,000

Christmas bonus 20,000
Reimbursement for transportation expenses 5,000
Payroll deductions:
SSS contributions 4,000
Philhealth contributions 3,000
Pag-IBIG contributions 2,400
Loan payment 20,000

Supply.
Let’s Check
Activity 1. Now that you have understood matters regarding Gross Income, let us
try to check your understanding. Determine whether the statement is True or False.
1. In general, the situs of the income whether within the Philippines, without the
Philippines, is determined by the place where the service is rendered.
2. Source of income is either within the Philippines, without the Philippines or
partly within and partly without the Philippines.
3. Pensions are taxable to the extent of the amount received expect if there is an
approved pension plan by the Bureau of International Revenue.
4. Prizes and awards granted to athletes in local and international sports
competitions and tournaments held in the Philippines or abroad and
sanctioned by their national sports associations are not exempt from income
tax.
5. Compensation from damages if its represents payment for loss of expected
profits are taxable but compensatory damages constituting returns of capital
are not taxable.
Let’s Analyze
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1. Explain the procedures in computing taxes for regular income tax, passive income
and capital gains.
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2. Give at least 3 examples of income considered as regular income, passive income

and capital gains.
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1. Mr. C. Conte bought a 2,000 square meter land at a cost of P500,000. He
leased the land to Mr. D. Damian at an annual rental of P40,000. The term of
the contract of lease was 15 years. The contract of lease provided that Mr.
Damian will construct a building on the land, which will belong to the lessor at
the end of the term of the lease or at the termination of the lease. The building
was constructed for a total cost of P400,000 and has an estimated useful life of
20 years which was the basis of a straight-line method of depreciation. The
remaining term of the lease when the building was completed was 14 years.
Compute the following:

A. Income from lease contract in the year the improvement was
completed assuming mr. Conte will report his income from leasehold
improvement using outright or lump sum method.
B. Yearly income assuming mr. Conte will spread his income from
leasehold improvement over the term of the contract of lease.
C. Income of mr. Conte in the 11th year assuming the contract of lease
was terminated after the 10th year or at the beginning of the 11th year
due to the fault of the lessee.
D. Deductible loss of the lessor assuming the leasehold improvement was
destroyed at the beginning of the 9th year of the lease contract
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In a Nutshell

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9.
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10.
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Q and A

1.
2.
3.
4.
5.
Keywords
 Annuities
 Business Income
 Compensation Income
 Dividends
 Gains derived from dealings in property
 Gross Income
 Interest
 Partner’s distributive share
 Pensions
 Prizes and winnings
 Royalties
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Big Picture C
are expected to:
1. Master the rules on Fringe Benefits and Fringe Benefits Tax.
2. Master the rules on Gains & Losses from Dealings in Property
3. Master the rules on Allowable Deductions
4. Understand the concept of Withholding taxes
Big Picture in Focus: ULOa. Master the tax rules on Fringe

Benefits
Metalanguage
1. Fringe Benefit. Means any good, service or other benefit furnished or
granted by an employer in cash or in kind in addition to basic salaries, to an
individual employee except rank and file.
2. Managerial Employees. Is one who is vested with powers or prerogatives to

lay down and execute management policies and/or to hire, transfer, suspend,
lay-off, recall, discharge, assign or discipline employees.
3. Supervisory Employees. Are those who, in the interest of the employer,

effectively recommend such managerial actions if the exercise of such
authority is not merely routinary or c lerical in nature but requires the use of
independent judgement.
4. Grossed-Up Monetary Value. The whole amount of income realized by the

employee which includes the net amount of money or net monetary value of
property which has been received plus the amount of fringe benefit tax due
thereon.
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I. FRINGE BENEFITS
1.0 FRINGE BENEFITS TAX

Tax Rate: 35% of grossed-up monetary value.
Except:
 NRA-NETB – 25%
1.1 Grossed up monetary value:

Actual monetary value/ (100% less FBT rate)
1.2 Fringe Benefit Tax

- A final tax.
- Imposed on managerial and supervisory employees.
1.3 Fringe Benefit (HEV-HIM-EHEL)

- Any good, service, or benefit granted in cash or in kind by an employer to an
employee, except rank-and-file employees.
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel
5. Interest on loan lower than market rates
6. Membership fees in social and athletic clubs
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to Ee or dependents
10. Life and health insurance in excess of what is allowed by law
**List is NOT exclusive
- Grossed-up monetary value of the FB and amount of de minimis may be

claimed by employer as deduction from his gross income.
Imposition of Fringe Benefit Tax

a. A final tax Fringe benefit tax is a final tax.
b. Imposed on the Fringe benefit tax is imposed on the grossed-up monetary value of
grossed-up fringe benefits furnished granted or paid by employer to employees
monetary value except rank and file employees.
c. Imposed Fringe benefit tax is imposed whether the employer is an individual,
regardless professional partnership or corporation, regardless of whether the
of who the corporation is taxable or not, or the government or its
employer instrumentalities.
d. Withheld by Fringe benefit tax shall be treated as a final tax on the employee,
employer which shall be withheld and paid by the employer on a calendar
quarterly basis.
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e. Tax base and tax Monetary value of fringe benefit P xxx

rate Divided by 65%
Grossed-up monetary value xxx
Tax rate 35%
Fringe benefit tax P xxx
f. Tax base and tax Monetary value of the fringe benefit P xxx
rate for NRA- Divided by 75%
NETB Grossed-up monetary value xxx
Tax rate 25%
Fringe benefits tax P xxx
g. Tax base and tax Monetary value of the fringe benefit P xxx
rate for special Divided by 85%
aliens and their Grossed-up monetary value xxx
Filipino counter- Tax rate 15%
parts and Fringe benefits tax P xxx
employees in
Special
Economic Zone
Tax Accounting for the Fringe Benefit Furnished to the Employee and
the Fringe Benefit Tax Due Thereon. Deductible fringe benefits and
fringe benefits tax.
Basis of fringe benefits tax Amount deductible from
employer’s gross income
1) General rule Taxable fringe benefits and the fringe
benefit tax
2) Depreciation value Actual fringe benefit tax paid
3) Zonal value per BIR Commissioner Actual fringe benefit tax paid
4) FMV per current real property tax Actual fringe benefit tax paid
declaration
Notes: 1) In cases where the basis of fringe benefit tax is the depreciation
value, zonal value or FMV per current real property tax declaration, the
value of fringe benefit is not deductible because it is presumed to have
been tacked on or actually claimed as depreciation expense by the
employer.
2) If the zonal value per BIR or the FMV per current real property tax
declaration of the property is greater than its cost subject to depreciation,
the amortized excess amount shall be allowed as a deduction from
employer’s gross income as fringe benefit expense.
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Computation of Monetary Value

a. In case of housing privilege and motor vehicle:
Basic rules 1) If there is no transfer of ownership, the monetary value of
benefit is 50% of the value of benefit.
2) If there is transfer of ownership, the monetary value of the
benefit is the same as the value of the benefit.
b. In case of other fringe benefits – The monetary value of the
benefit is the same as the value of the benefit.
Monetary value of housing privilege
Value of the benefit Monetary

value of the
benefit
a. Employer leases residential Rental paid 50% of the
property for the use of the value of the
employee benefits
b. Employer owns residential 5% of the FMV of the land 50% of the
property which was assigned to and improvements value of the
an officer for his use as benefits
residence
c. Employer purchases residential 5% of the acquisition cost 50% of the
property on the installment exclusive of interest value of the
basis and allows the employee benefits
to use the same as his
residence
d. Employer purchases a residential Employer’s acquisition Entire value
property and transfers the
cost or FMV, whichever is of the benefit
ownership in the name of the
higher
employee
e. Employer purchases a FMV xxx Entire value
residential property and transfers Less: Payment by of the benefit
ownership to his employee for employee xxx
the latter’s residential use at a Value of benefit
price less than the employer’s xxx
acquisition cost
Taxable Housing Benefits

1. Employer leases a residential property for the use of his employee and the
said property is the usual residence of the employee.
Monetary value = 50% of the benefit
Illustration
A sole proprietorship business leases a residential house and lot for the
use of his business manager for P20, 000 /month.
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The monetary value shall be:

Quarterly value = (P20, 000 x 3 months) = P 60, 000
Quarterly monetary value = P 60, 000 x 50% = P 30, 000
2. Employer owns a residential property and assigns the same for the use of
his employee as his usual place of residence, and annual value of the
benefit is 5% of whichever is higher of the zonal or assessed value of the
land and improvement
Monetary value = 50% of the annual value of the benefit
Illustration
Chamberly, Inc. allowed one of its unused realty investment costing P3,
500,000 with zonal value of P4, 000, 000 and assessed value of P3, 000,
000 to be used by its vice president.
The monetary value shall be determined as:
Annual depreciation value = P4, 000, 000 x 5% P 200, 000

Quarterly value = P200,000 /4 quarters P 50, 000
Quarterly monetary value = P50, 000 x 50% P 25,000
3. The employer purchases a residential property on instalment basis and

allows his employee to use the same as his usual place of residence, the
annul value is 5% or 1/20 of the acquisition cost, exclusive of interest
Monetary value = 50% of the annual value of the benefit
This is the same with no. 2 except that the basis is the purchase price of
the property.
Illustration
Cotabato Corporation purchased a resident property for the use of its
production manager. The property is payable over 11 annual instalment of
P2, 000, 000. For accounting purposes, Cotabato Corporation opted to
capitalize the interest and recorded the P2, 200, 000 contract price as
acquisition cost of the property.
Annual depreciation value = P2, 000,000 x 5% P 100, 000

Quarterly 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
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4. Purchase by the employer of residential property and transfer of ownership

in the name of the employee, the value of the benefit is whichever is
higher of the acquisition cost or zonal value
Monetary value = 100% of the value of the benefit
Illustration
A 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 the book value(i.e. cost in the case) 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, whichever is higher) less consideration paid by employee.
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 fair value less the P2, 000, 000
consideration paid.
Exempt housing privileges:

1) Military officials of the Armed Forces of the Philippines (AFP), Philippines
AirForce (PAF), Philippine Army, Philippine Navy on their quarters which
are within or accessible from the military camp so they can be readily
available on call to meet the exigencies of their military service.
2) Housing unit situated or adjacent to the premises of a business or factory
(within a maximum of 50 meters) from the perimeter of business premises.
The 50-meter rule may be relaxed when upon the basis of health or safety
requirements such as in the case of chemical manufacturing, the housing
needs to be located at a farther location.
3) Temporary housing for an employee in a housing unit for 3 months or less

(i.e. not exceeding one quarter)
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Monetary value of vehicles of any kind

Monetary
value of the
Value of the benefit
benefit
a. Employer owns and maintains Acquisition cost of all 50% of the
a fleet of motor vehicles for the motor vehicles not value of the
use of the business and normally used for business benefit
employees divided by 5 years
b. Employer leases and maintains Amount of rental 50% of the

a fleet of motor vehicles for the payments for motor value of the
use of the business and the vehicle not normally used benefit
employees for business purposes
c. Employer purchases the motor Acquisition cost Entire value

vehicle in the name of the of the benefit
employee
d. Employer provides the Amount of cash received Entire value
employee with cash for the by the employee of the benefit
purchase of a motor vehicle in
the name of the employee
e. Employer shoulders a portion Amount shouldered by the Entire value
of the amount of the purchase employer of the benefit
price of a motor vehicle in the
name of the employee
f. Employer purchases the car on Acquisition cost exclusive Entire value
installment in the name of the of interest divided by 5 of the benefit
employee years
g. Use of yacht, whether owned Depreciation of a yacht at
and maintained or leased by an estimated useful life of
employer 20 years
Motor Vehicles of Any Kind

1) Purchase by employer of motor vehicle in the name of the employee
regardless of whether the same is used partially in the business of the
employer.
Monetary value = 100% of the cost of the motor vehicle

Note that the monetary value shall be reported in the quarter of purchase.
2) Cash benefit to employee for the purchase of vehicle, even if the vehicle is
partly used in the business of the employer
Monetary value = 100% of the cash benefit, except when the amount
is subjected to withholding tax on compensation
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Car benefits that are paid in cash and are subjected to withholding tax on
compensation are subject to regular tax not to fringe benefit tax. If subject
to fringe benefit tax, the monetary value shall be reported in the quarter of
payment.
3) Purchases of car on instalment basin by the employer with ownership

placed in the name of the employee even if the car is used partly for the
employer’s business, the benefit is the acquisition cost devided by 5 years
Monetary value = (1/5) or 20% of the acquisition cost
Illustration
An employer purchased a car for P1, 000, 000 payable in four instalment
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 until 5 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.
4) 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 employee

Illustration
An employer assisted its managerial employee to purchase a brand new
car for P4, 000, 000. 60% of the value is deductible against future salaries
of managerial employee.
The monetary value shall be P1, 600, 000 computed as P4, 000, 000 x
40% representing the portion shouldered by the the employer. This will be
reported in the quarter the employer’s share is paid.
5) Fleet of motor vehicles owned for the use of the businmess 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 is
amorized over 5 years. There being no transfer of title, 50% of the benefit
is recognize as monetary value. The quarterly recognition of monetary
value continues until the free usage is terminated.
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It must be noted that the because of the inherent difficulty of tracing the
realization of fringe benefits to a particular employee considering the
collective enjoyment of the benefit by thje employees (managerial,
supervisory or possibly including rank and file alike). The regulations
simply subjected it to the final fringe benefit tax.
6) Fleet of motor vehicles leased for the use of the business and the
employee, the value of the benefits is the rental payments for motor
vehicles not normally used for sales, freight, delivery, service and other
non-personal use
7) Aircraft including helicopters are deemed solely for business use; hence,
not subject to fringe benefit tax.
8) Yacht whether owned and maintained or leased by the employer are
presumed not for business use; hence, taxable fringe benefit. If owned or
maintaintained, the value of the benefit is measured as the depreciation
value over 20 years
Illustration
Assume a corporation acquired a P10, 000, 000 yacht for the use of its
executives.
Annual depreciation value = P10, 000, 000/20 P 500,000

Quarterly monetary value = P500, 000/4 P 125, 000
Yacht is considered immovable by virtue of the fact that it is fixed and cannot be
removed on water. Hence, the 20-year presumptive useful life for real properties
is used. If this is leased, the entire rental payment is the monetary value. Note
that the 50% rule is not applied by the regulation.
Supposing the yact is purchased and transferred in the name of the executive,
the monetary value shall be the entire P10, 000, 000.
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Other fringe benefits

Monetary
value of the
Value of the benefit
benefit
a. Expense account Amount given or paid Entire value of
b. Household personnel, such as by employer the benefit
maid, driver and others
c. Interest on loan at less than
market rate to the extent of the
difference between the market
rate and actual rate granted
(12% benchmark rate)
d. Membership fees, dues and
other expenses borne by the
employer for the employee in
social and athletic clubs and
similar organizations
e. Expenses for foreign travel
f. Holiday and vacation expenses
g. Educational assistance to the
employee or his dependents
h. Life or health insurance and
other non-life insurance
premiums or similar amounts in
excess of what the law allows.
Expense Account
Expense incurred by an employee but which are paid by his employer or
incurred and paid by employee but reimbursed or advanced by the employer
are taxable fringe benefits. The monetary value is the amount paid by the
employer.
Properly documented employer expense

When the expense is receipted for and in the name of the employer and the
expenditure do not partake the nature of a personal expense attributable to
the employee, it is not a taxable fringe benefits. It is a business expense.
Personal expenses of the employee such as groceries for the personal

consumption of the employee and or his family, if paid or reimbursed by the
employer, are taxable fringe benefits whether or not receipted in the name of
the employer.
Fixed and regular RATA are treated as part of regular compensation income
and are subjected to creditable withholding taxes not to fringe benefit tax.
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Illustration
Denver Corporation paid for the following expenses which were liquidated by
its managerial employee;
Water and electricity bill at manager’s home P 15, 000

Meals and groceries at manager’s home 18, 000
Bill on business telephone 2, 000
Bill on personal phone 1, 000
Transportation - office to and from clients 12, 000
Transportation – 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:
Water and electricity bill at director’s home 15, 000

Meals and groceries at director’d home 18, 000
Bill on personal phone 1, 000
Transportation – office to home 10, 000
Total monetary value 44, 000
Note: Business telephone bill, office to client transportation and food and
beverages for client visitor are business expenses – not fringe benefits to the
manager.
Benefits NOT subject to FBT:

1. Fringe benefits authorized and exempted under the Tax Code or Special
Law;
2. Contributions of employer for the benefit of employee to retirement,
insurance, and hospitalization benefit plans;
3. Benefits given to rank-and-file employees;
4. De minimis benefits;
5. Granted to employees as required by the nature or necessary to the trade,
business, or profession of the employer;
6. Benefits granted for the convenience of employer
De Minimis Benefits
- Facilities and privileges of relatively small value furnished by the employer to his
employees.
- Offered to promote goodwill, health, contentment, or efficacy of the employees.
- NOT subject to income tax and withholding tax.
The ff. are de minimis benefits for ALL types of employees (rank-and-file,
managerial, and supervisory):
 Monetized unused vacation leave credits of private employees not
exceeding 10 days per year.
 Monetized vacation and sick leave credits of government employees.
 Medical cash allowance not exceeding P1500/employee per sem OR
P250/month
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 Rice subsidy of P2000 OR 1 sack of 50 kg. rice per month amounting to

not more than P2000
 Uniform and clothing allowance not exceeding P6,000/month
 Actual yearly medical benefits not exceeding P10,000/month
 Employee achievement awards not exceeding P10,000
 Christmas and major anniversary gifts not exceeding P5,000/year
 Daily meal allowance not exceeding 25% of basic minimum wage
 Benefits received under CBA or Productivity Incentive Schemes provided
that the total for both do not exceed P10,000
- The list is exclusive

- ALL other benefits NOT included in the enumeration are NOT de minimis
benefits, hence subject to income taxand withholding tax.
- When de minimis benefit has a ceiling, the benefit is exempt from FBT up to the
ceiling.
The excessshall form part of “other benefits” exempt up to P90,000 under Sec.
32B(7)(e).
Anything in excess of P90,000 shall be subject to tax.

Supply.
Let’s Check
Activity 1. Now that you have understood matters regarding Fringe Benefits, let us
try to check your understanding. Determine whether the statement is True or False.
1. If the fridge benefits is granted in money, or is directly paid for by the

employer, them the value is the amount granted or paid for.
2. Household of the employee borne by the employer such as salaries of
household help, personal ddriver or other similar personal expenses are
taxable fringe benefits.
3. Fringe benefi tax is subject to final withholding tax
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4. If the fringe benefit is granted or furnished by the employer in property other

than money but ownership is not transferred to the employee, the value of the
fringe benefit is equal to the depreciation value of the property.
5. Expenses incurred by the employee but which are paid for or reimbursed by
the employer are taxable fringe benefits, except when the expenditures are
duly receipted for and the name of the employer and the expenditures do not
partake the nature of a personal expense attributable to the employee.
6. Holiday and vacation expences of the employee borne by his employer shall
be treated as taxable fringe benefit.
7. Membership fees, dues and other expenses borne by the employer for his
employee in social and athletic clubs or other similar organizations are taxable
fringe benefits of the employee in full.
8. Fringe benefit received by a non-resident alien individual not engaged in trade
or business in the Philippines is subject to fringe benefit tax of 25% based on
the grossed-up monetary value of the fringe benefit.
9. Fringe benefits subject to the finge benefit tax is not among the items of gross
income for purposes of computing the income tax liability under Section 24(A)
of an individual employee.
10. Generally, the amount of taxable fringe benefit and the fringe benefit tax
constitute allowable deduction from the gross income of the employer.
Let’s Analyze
1. Discuss the process of computing Fringe Benefits Tax.

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Other Benefits
1) In 2019, ReSA Corporation paid the P50,000 vacation expenses of its
President, Ms. Rita Ube a resident citizen to Dayag Rezzort.
Questions:
a. How much is the monetary value of the fringe benefit?
b. How much is grossed-up monetary value of the fringe benefit?
c. How much is the fringe benefit tax?
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2) Bruce Lee, an executive of the ReSA Bank, was granted a loan by the bank.
The amount of the loan was P2,000,000 at 8% interest per annum. The loan
was payable in four (4) months. How much is the total fringe benefit tax?
Housing Benefits
3) During the year 2019, ABC Corporation paid for the monthly rental of a
residential house of its branch manager, Mr. J. de la Cruz, amounting to
P68,0000. Compute for the Fringe Benefits Tax for the year.
4) XYZ Corp. owns a condominium unit. During the year 2019, the said
corporation furnished and granted the said property for the residential use of
its Assistant Vice President. The fair market value of the property per BIR
amounts to P10,000,000 while its fair market value as shown in its current
Real Property Declaration amounts to P8,000,000. Compute for the Fringe
Benefits Tax.
5) SB Corporation bought a residential property in installment for the use of its

President. The total amount paid by the corporation was P5,500,000
(inclusive of P500,000 interest.) How much was the fringe benefits tax?
6) A house and lot were owned by Bonafe Laundry Corporation. The ownership
of the said house and lot was transferred to its President, Mars Bonafe, in
2019. The following data were made available:
Cost P5,000,000
Fair market value per BIR 4,500,000
Fair market value per Assessor's Office 3,000,000
How much was the fringe benefits tax, if any?
7) In 2019, Taprolani Corporation purchased a residential house and lot for

P2,300,000. The property was sold to the President of the corporation for
P1,980,000. The fair market value per BIR is P2,500,000. How much was
fringe benefits tax, if any?
Motor and other Vehicle Benefits

8) In 2011, Mata Optical Shop, sole proprietorship, purchased a motor vehicle
for the use of its Manager, Dr. Malachi Mata. It was registered in Dr. Mata's
name. The cost of the vehicle was P400,000. The vehicle was used partly for
the benefit of the company. How much is the fringe benefits tax?
9) Eyes Drop, maker of the best-selling ice cream, owns a fleet of motor vehicles
for use of the business and its employees. One of the motor vehicles costing
P450,000 is not used for business purposes, but for the employees' personal
needs. How much is the annual fringe benefits tax?
10) In 2019, Therese, sales manager of PGA Cars, was provided by her
employee a car. Assume the following figures to answer the requirement:
Cash given to Therese to own a car 500, 000
Acquisition cost, exclusive of interest 450, 000
Portion of acquisition cost shouldered by employer 300, 000
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Questions:
a. If the employer gave Therese cash to purchase and own the car,
what is the monetary value of the benefit?
b. If the employer purchased the car on installment under
Therese’s name, what is the fringe benefit tax?
c. If the purchase price of the car was partially shouldered by the
employer with Therese being the owner, what is the grossed up
monetary value of the fringe benefit for the year?
11) A resident rank-and-file employee has three (3) qualified dependent children
at the beginning of the year. The following date are made available for the
year 2019:
Salary, net of P10,000 withholding tax, P2,400 SSS contributions,

P2,000 Philhealth contributions and P1,500 union dues P306,000
13th month pay 68,000
Rice subsidy (P3,000 x 12) 18,000
Uniform and clothing allowance (1 month) 7,000
Monetized unused vacation leave credits (12 days) 12,000
Actual medical benefits (1 month) 15,000
Christmas gift 10,000
Compute the following:

a) Tax-exempt de minimis benefits
b) Total exclusions/exemptions (including de minimis benefits)
d) Taxable compensation income
In a Nutshell

1.
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3.
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Q and A

1.
2.
3.
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4.
5.
Keywords
 Fringe Benefit
 Grossed-Up Monetary Value
 Managerial Employees
 Supervisory Employees
Big Picture in Focus: ULOb. Master the components of

Gross Income
Metalanguage
and to demonstrate ULOb will be operationally defined to establish a common frame
1. Capital gains.
II. GAINS AND LOSSES FROM DEALINGS IN PROPERTY
**NOTE: These rules discussed here do NOT apply to:

 Sale or exchange of stocks not traded in the stock exchange
 Sale or exchange of real property held as capital asset
As the sale of either are subject to final tax.
1.0 CAPITAL ASSETS

All assets which are NOT ordinary assets are capital assets.
Ordinary assets are enumerated in Sec. 39A(1).
Guidelines (RR 7-2003)

 Engaged in Real Estate Business:
Only transfer of ordinary assets to another person can convert the nature of
property from ordinary to capital asset.
Involuntary transfers (expropriation or foreclosure) do NOT affect the
classification of such property. It is still considered as sale or exchange of
ordinary assets.
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 NOT engaged in Real Estate business

Nature of property may be changed from ordinary to capital assets provided they
show proof that the same has NOT been used in business for more than 2 years.
 EXEMPT Corporations
Real property used in exempt transactions are considered capital assets.
1.1 Rules on capital gains and losses

1. Determine if asset is a capital asset;
2. Remember that these rules do not apply to properties subject to capital gains tax
(CGT);
3. Transaction should be a sale or exchange;
4. If the taxpayer is an INDIVIDUAL (NOT a corporation), the following

percentages of the gain or loss shall be taken into account:
o 100% - if property is held not more than 12 months
o 50% - if property is held for more than 12 months
**For CORPORATIONS, it is always 100%. Holding period is NOT applicable.
5. Net capital loss can only be deducted from capital gains, NOT ordinary gains.
Except:
If taxpayer is a domestic bank or trust company, the substantial part of business
is the receipt of deposits, sells any bond, debentures, notes, and other certificate
of indebtedness with interest coupon or in registered form.
6. If the INDIVIDUAL taxpayer sustains a net capital loss NOT in excess of the net
taxable income of such year, it shall be treated as a net capital loss (100%) in the
succeeding year. (Net capital loss carry over)
 Corporations do NOT have NCLCO.
2.0 Rules on the Recognition of Capital Gains and Losses

2.1 Individuals
Where the taxpayer is an individual, the following rules as to recognition of capital
gains or losses from the disposition of personal property classified as capital asst
shall apply:
1. Depending on the holding period, the percentages of gain or loss to be taken
into account follows:
a. 100% if the capital asset has been held for 12 months or less; and
b. 50% if the capital asset has been held for more than 12 months.
2. Capital Losses are deductible only to the extent of the capital gains; hence, a
net capital loss is not a deductible.
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3. Ordinary losses are deductible from capital gains but net capital loss cannot
be deducted from ordinary gain.
4. “Net Capital Loss Carry Over” is recognized on the following condition:

a. Net Capital Loss in a taxable year does not exceed the net income
before exemptions for such year.
b. Such net capital loss may be deducted from net capital gains of the
next taxable year.
Illustration: Sophia, an individual taxpayer, had the following income and losses for
calendar year 2018 and 2019:
2018
Ordinary Taxable Income 30, 000
Short-term Capital Gain 12, 000
Long-term Capital Loss 27, 000
2019
Ordinary taxable income 36, 000
Long-term capital gain 48,000
The taxable income of Sophia, before personal and additional exemptions for two
year, is computed as follows:
2018
Capital asset transactions:
Short-term capital gain (at 100%) 12,000
Less: Short-term capital loss (at 100%) 27,000
Net short-term capital gain (loss) (15,000)
Taxable income (before exemptions) 30,000
Note that the net capital loss is not deductible.
2019
Ordinary taxable income 36,000
Long-term capital gain (P48,000 x 50%) 24,000
Less: Net capital loss carried over from 2018 15,000
Net capital gain 9,000
Assuming that the ordinary taxable income of Sophia in 2013 is P12,000, the entire
net loss of P15,000 in that year cannot be carried over in 2019 –only to the extent of
P12, 000-the taxable income for 2018. The taxable income for 2019 will be P48,000
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[36,000 + (24,000 – 12,000)]. The balance in the net capital loss of 3,000 (P15,000 –
12,000 recognized in 2019) cannot be carried over in any succeeding year.
The law allows the carry-over of net capital loss only once.
2018
Short-term capital gain (at 100%) 12,000
Less: Short-term capital loss (at 100%) 27,000
Net short-term capital gain (loss) (15,000)
2019
Ordinary taxable income 36,000
Long-term capital gain (P48,000 x 50%) 24,000
Less: Net capital loss carried over from 2018 12,000
Net capital gain 12,000
2.2 Corporations
Where the taxpayer is a corporation, the following rules as to recognition of capital
gains or losses from the disposition of property classified as capital asset shall apply:
1. The holding period does not apply to corporations. Hence, capital gains and
losses are recognized 100%
2. The capital losses are deductible only to the extent of capital gains;
3. Ordinary losses are deductible from capital gains but net capital loss cannot
be deducted from ordinary gain; and
4. Net capital loss carry-over is not applicable.
Illustration: A domestic corporation has the following data on its operations for the
current year.
Capital gains from sale of capital assets held:

10 months 45,000
14 months 75,000
Capital losses from sales of capital assets held:

12 months 30,000
18 months 60,000
In the preceding year, it had net capital loss of 15,000. The computation of the net
taxable income for the current year follows:
Ordinary net income 300,000

Add: Capital gains (at 100%) 45,000
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75,000 120,000
Less: Capital losses (at 100%) 30,000
60,000 90,000
Net capital gains 30,000
Taxable income 330,000
The net capital loss of 15,000 cannot be carried over. If the capital gains amount to
90,000 and the capital losses 120,000, the net income subject to tax is 300,000.
Cost Basis for determining Gain or Loss from Sale or Disposition of

Property
Mode of Acquisition Cost Basis
By purchase Actual cost
By inheritance FMV
By gift Same as if it would be at the
hands of the donor or last
preceding owner.
Except if cost basis is
greater than FMV, then cost
basis shall be the FMV. (so,
whichever is lower)
Acquired for less than adequate Amount paid by transferee
consideration
If acquisition cost is increased by the Adjusted basis of 1 to 4
improvements materially added
Acquired under a previous tax-free Substituted basis
exchange
Tax-Free Exchanges
NO gain or loss shall be realized in a sale or exchange of property pursuance to a
plan of merger or consolidation
a) Where a corporation exchanges property solely for stock in another
corporation which is also a party to the m/c;
b) Where a shareholder exchanges stock in a corporation for the stock of
another corporation which is also a party to the m/c;
c) Where a security holder of a corporation exchanges his securities solely for
stocks or securities in another corporation which is also a party to the m/c;
d) Where property is transferred to a corporation by a person, in exchange for
stocks in the corporation, and the result of such exchange is that the person,
alone or together with not more than 4 persons, gains control of the
corporation.
Cost basis for tax-free exchange:

Original basis of property
Less: Any money or FMV of property received except shares of stock)
Add: Any amount treated as dividend or any gain recognized on the exchange if any
Substituted basis
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Supply.
Let’s Check
Activity 1. Now that you have understood matters regarding Dealings with
Properties, let us try to check your understanding. Determine whether the statement
is True or False.
1. Net capital gain is the excess of the gains from sales or exchanges of capital
assets over the losses from such sales or exchanges while net capital loss is
the excess of the losses from sales or exchanges of capital assets over the
gains from such sales exchanges.
2. Ordinary gain includes capital gains such as those derived from the
performance of services, whether personal or professional, and those
accruing from business.
3. An individual tax payer may elect to declat=re gains realized from a sale or
disposition of real property to the government under Section 24(A) of the
code.
4. Capital assets include all properties held by the taxpayer whether or not
connected in trade or business including those enumerated as ordinary
assets.
5. The net capital gains realized on stock transactions shall be included in the
gross income or the seller in computing his normal income tax liability.
6. As a general rule, the entire amount of gain or loss arising from sale or
exchange of real or personal property shall be recognized such that a gain is
taxable while a loss is deductible.
7. An individual is qualified to account for his gain on installment basis if the
initial payment exceeds 25% of the selling price.
8. Stocks held by dealers in securities are classified as capital assets.
9. Expenses of disposition such as agent’s commission and other selling
expenses are additions to the selling price.
10. Capital gains realized during each taxable year by individual or corporations
from sale, exchange or disposition of shares of stock in any domestic
corporation not traded through a local stock exchange are subject to final tax
of 5% for the first P100,000, and 10% for amount in excess of P100,000.
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Let’s Analyze
1. What is the difference between capital gains with active income and passive
income?
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In a Nutshell

1.
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5.
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Q and A

1.
2.
3.
4.
5.
Keywords
 Capital Gain
 Capital Loss
 Holding Period
 Ordinary Gain
 Ordinary Loss
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Big Picture in Focus: ULOc. Master the components of

Gross Income
Metalanguage
1. Allowable deductions. Amounts allowed by law to reduce the gross income
to taxable income.
III. ALLOWABLE DEDUCTIONS
1.0 Deductions from Gross Income

a. Kinds of deductions 1) Itemized deductions;
2) Special deductions;
3) Optional standard deduction.
b. Itemized deductions a) Ordinary and necessary trade, business or professional expenses;
(Sec. 34) b) Interest;
c) Taxes;
d) Losses;
e) Bad debts;
f) Depreciation;
g) Depletion of oil and gas wells and mines;
h) Charitable and other contributions;
i) Research and development;
j) Pension trusts;
k) Additional requirements for deductibility of certain payments
l) Optional standard deduction
m) Premium payments on health and/or hospitalization insurance of an
individual taxpayer.
Note:
The above deductible items shall be allowed as deduction only if it is
shown that the tax required to be deducted and withheld therefrom
has been paid to the BIR
[(Sec. 34 (K)].
c. Special deductions (A) Insurance companies
(Sec. 37) (a) Net additions required by law to be made within the year to reserve
funds; and
(b) The sums other than dividends paid within the year on policy and
annuity contracts.
(B) Mutual insurance companies – any portion of the premium deposits

returned to their policy holders.
(C) Mutual marine insurance companies

(a) Amounts paid for reinsurance;
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(b) Amounts repaid to policyholders on account of premiums previously

paid by them and interest paid upon those amount between the
ascertainment and payment thereof.
(D) Assessment insurance companies - Actual deposit of sums with the

officers of the
Government of the Philippines pursuant to law, as additions to guarantee
or reserve fund
2.0 Itemized Deductions Amplified

a. Expenses in General
1) Requisites for a) Ordinary and necessary;
deductibility of b) Paid or incurred during the taxable year;
expenses, in general c) Directly attributable to the development, management, operation and/or
conduct of the trade, business or exercise of profession;
d) Substantiated with sufficient evidence, such as official receipts or other
adequate records.
2) Requisites for a) Reasonable;
deductibility of b) Personal services actually rendered;
salaries, wages, and c) Withholding tax imposed has been paid.
other forms of
compensation
including
the grossed-up
monetary value of
fringe benefits
deductibility of travel b) Incurred or paid while away from home;
expenses, here and c) Incurred or paid in the pursuit of trade, business or profession.
abroad
deductibility of b) For purposes of trade, business or profession;
rentals c) Taxpayer has not taken or is not taking title or in which he has no equity
other than that of a lessee, user or possessor.
5) Requisites for a) Must be paid or incurred during the taxable year;
deductibility of
entertainment, b) Must be directly connected to the development, management and
amusement and operation or to conduct of trade, business or profession or directly
recreation expenses related to or in furtherance of the conduct of his or its trade, business or
exercise of profession;
c) Must not be contrary to law, morals, public policy or public order;
d) Must not have been paid, directly or indirectly, to an official or employee

of the national government, or any local government unit, or of any
government-owned or controlled corporation (GOCC), or of a foreign
government, or to a private individual, or corporation, or general
professional partnership, or a similar entity if it constitutes a bribe,
kickback or other similar payments;
e) Must be duly substantiated by adequate proof. The official receipts or

invoices or bills or statements of accounts must be in the name of
taxpayer claiming the deduction;
f) The appropriate amount of withholding tax, if applicable, should have

been withheld therefrom and paid to the BIR.
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6) Ceiling on deductible a) Sales of goods or properties – One-half percent (0.50%) of net sales
entertainment, (gross sales less sales returns/allowances and sales discount)
amusement and
recreation expenses b) Sale of services, including exercise of profession and use or lease
of property – One percent (1%) of net revenue (gross revenue less
discounts)
7) Exercise
ERA Corporation is engaged in the sale of goods and services with net sales/net revenue of
P200,000 and P100,000 respectively. The actual entertainment, amusement and recreation
expense for the taxable quarter totaled to P3,000.
How much is the amount of the deductible entertainment, amusement and recreation expense?
b. Interest Expense
1) Requisites for a) There must be an indebtedness;
deductibility of interest b) Paid or incurred upon such indebtedness;
expense c) The indebtedness must be that of the taxpayer;
d) Connected with taxpayer’s trade or business or exercise of
profession;
e) Must have been paid or incurred during the taxable year;
f) Must have been stipulated in writing;
g) Must be legally due;
h) Must not be between related taxpayers;
i) Must not be incurred to finance petroleum operation;
j) In case of interest incurred to acquire property used in trade,
business or exercise of profession, the same was not treated as
capital expenditure.
2) Reduction of deductible The allowable deduction for interest shall be reduced by an amount
interest expense equal to the following percentages of the interest income subject to
final tax.
Beginning January 1, 2000 – 38%
Beginning November 1, 2005 to December 31 2008 – 42%
Beginning January 1, 2009 – 33%
3) Interest incurred or paid Interest incurred or paid by the taxpayer on all unpaid business-
on all unpaid business- related taxes shall be fully deductible from the gross income and shall
related taxes not be subject to reduction by an amount equal to certain percentage
of the interest income subject to final tax.
4) Prepaid interest of an Deductible not in the year that the interest was paid in advance but in
individual under cash the year that the indebtedness was paid.
basis
5) Exercises
a) In 2018, an individual taxpayer, using cash basis of accounting, obtained a P500,000 loan from a
bank for business use. The bank deducted in advance an interest of P50,000. In 2019, the
P500,000 loan was paid in full by the taxpayer.
How much was the deductible interest in 2018 and 2019?
b) Using the same information in letter a. except that payments were made as follows: 2018,
P300,000; 2019, P200,000. How much was the deductible interest expense in 2018, 2019 and
2020?
c) COU Corporation paid the following during the year 2018:

Interest for late payment of income tax for 2017 5,000
Surcharge and compromise penalty for late payment of income tax for 2017 7,250
Interest on bonds issued by COU Corporation 100,000
Interest on money borrowed by the Corporation from Conrad Uberita,
60% owner of COU Corporation 50,000
Interest on preferred stock which in reality is a dividend 20,000
How much is the deductible interest?
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c. Taxes
1) Requisites for a. Paid or incurred within the taxable year;
deductibility b. Connected with the taxpayer’s profession, trade or business.
2) Meaning of the term a. The term “taxes” includes national and local taxes, and means tax
“taxes” proper only.
b. No deduction shall be claimed for any surcharge or penalty on
delinquent taxes.
3) Interest on delinquent Deductible as interest expense, not as taxes.
taxes
4) Non-deductible Taxes a. Philippine income; d. Foreign income tax claimed as tax
credit;
b. Estate and donor’s taxes; e. Stock transaction tax
c. Special assessment; f. Value-added tax
5) Credit against tax for Allowable income tax credit – Lower between:
taxes in foreign a. Actual foreign income tax paid; and
countries b. Statutory limitation.
6) Year in which tax credit a. At the option of the taxpayer and irrespective of the method of
is taken accounting used, tax credit shall be taken in the year in which the
taxes of the foreign country were incurred;
b. Once the option to credit the foreign taxes in the year incurred is
made, the credits for all subsequent years shall be taken upon the
same basis;
c. No portion of any such foreign taxes shall be allowed as deduction
in the same or any succeeding year.
7) Exercise
Mr. Jose San Jose, resident citizen, married, derived income from sources within and without the
Philippines.
The following were the data on his taxable income and foreign taxes for the year 2019:
Net income, Philippines P150,000
Net income, Country A (before P50,000 income tax) 200,000
Net income, Country B (after P30,000 income tax) 70,000
Net income, Country C (before P32,000 income tax) 150,000
Net income, Country D (no income tax paid) 50,000
The taxes paid by Mr. San Jose when he filed the quarterly declarations for the first three (3)
quarters in 2018 were P10,000.
How much was the tax payable in the Philippines when the taxpayer filed his annual return,
assuming he opted to claim foreign income taxes as: 1) tax credit? 2) deduction?
d. Losses
1) Requisites for a) Actually sustained during the taxable year;
deductibility of losses
b) Not compensated for by insurance or other forms of indemnity;
c) Incurred in trade, profession or business;
d) Property is connected with trade, business or profession;
e) Arising from fires, storms, shipwreck, or other casualties, or from

robbery, theft or embezzlement;
f) Declaration of loss is submitted within 45 days from the date of

discovery of the casualty or robbery, theft or embezzlement giving rise
to the loss;
g) Not claimed as deduction for estate tax purposes in the estate tax
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return.
2) Net operating loss a) Meaning of net operating loss - Excess of allowable deduction
over gross income of the business in a taxable year.
b) Net operating loss carry over - Pertains to net operating loss of

the business or enterprise for any taxable year immediately
preceding the current taxable year.
c) Requisites for deductibility of NOLCO

(1) The operating loss had not been previously offset as deduction
from gross income;
(2) There has been no substantial change in the ownership of the
business or enterprise in that:
(a) not less than 75% in nominal value of outstanding issued
shares, if the business is in the name of a corporation, is
held by or on behalf of the same persons;
(b) not less than 75% of the paid up capital of the corporation, if
the business is in the name of a corporation, is held by or on
behalf of the same persons.
d) Carry over period - The net operating loss shall be carried over as
a deduction from gross income for the next 3 succeeding
taxable years immediately following the year of such loss.
e) Net operating loss for mines other than oil and gas wells
(1) For mines other than oil and gas wells, a net operating loss
incurred in any of the first 10 years of operation may be carried
over as a deduction from the taxable income for the next 5 years
immediately following the year of such loss.
(2) The entire amount of the loss shall be carried over to the first 5
taxable years following the loss, and any portion of such loss
which exceeds the taxable income of such first year shall be
deducted in like manner from the taxable income of the next
remaining 4 years.
3) Capital loss Deductible from capital gain only
4) Loss on wash sales a. Losses from wash sales are not deductible
b. Gains from wash sales are taxable
5) Wagering losses Deductible to the extent of the gains from wagering transactions
6) Abandonment losses a. If contract area where petroleum operations are undertaken is
partially or wholly abandoned, all accumulated exploration and
development expenditures pertaining to contract area shall be
allowed as a deduction.
b. If producing well is subsequently abandoned, the unamortized
costs, as well as the undepreciated costs of equipment directly
used, shall be allowed as deduction in the year such well,
equipment or facility is abandoned.
7) Loss due to voluntary
removal of building Deductible
incident to renewal
8) Real estate bought Not deductible expense on account of cost of removal, the value of the
upon which is located a real estate, exclusive of the old improvements, being presumably
building equal to the purchase price of the land and building plus the cost of
removal
9) Loss of useful life Actual loss is deductible
10) Shrinkage in the value Not deductible. But if a stock of a corporation becomes worthless, the
of stock cost or other basis may be deducted in the taxable year the stock
became worthless.
11) Corporate readjustment a. Loss is not deductible
(merger and b. Gain may be recognized if the taxpayer received cash and property
consolidation)
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12) Transfer of property a. Loss is not recognized

for stock that led to b. Gain may be recognized if the taxpayer received cash and property
control of corporation in addition to the shares received
e. Bad Debts
1) Requisites for a) There must be an existing indebtedness due to the taxpayer which
deductibility must be valid and legally demandable;
b) Connected with taxpayer’s profession, trade or business;
c) Not sustained in a transaction entered into between related parties;
d) Actually charged off the books of accounts of the taxpayer as of the

end of the taxable year;
e) Actually ascertained to be worthless and uncollectible as of the end

of the taxable year.
2) Measure of bad debts a. If a corporation computes the income upon the basis of valuing its
notes or accounts receivable at their fair market value, the amount
deductible for bad debts in any case is limited to such original
valuation.
b. A purchaser of accounts receivable which cannot be collected and
are consequently charged off the books as bad debts is entitled to
deduct them, the amount of deduction being based upon the price
paid for them and not upon their face value.
c. Only the difference between the amount received in distribution of
the assets of a bankrupt company and the amount of the claim may
be deducted as bad debt.
d. The difference between the amount received by a creditor of
decedent in the distribution of the assets of the decedent’s estate
and the amount of the claim may be considered a worthless debt.
f. Depreciation
1) Requisites for a. Reasonable;
deductibility b. Property is used in the trade or business;
c. Property must have a limited useful life;
d. Allowance must be charged off during the year.
2) Methods of a. Straight line method;
depreciation b. Declining balance method;
c. Sum-of-the-years-digit method;
d. Other methods which may be prescribed by the Secretary of Finance
upon recommendation of the Commissioner.
3) Depreciation of a. Depreciation of properties directly related to production of petroleum
properties used in initially placed in service in a taxable year shall be allowed under
petroleum operations straight-line method or declining balance method on the basis of an
estimated life of 10 years or such shorter life as may be permitted by
the Commissioner.
b. Properties not used directly in the production of petroleum shall
depreciated under the straight-line method on the basis of an
estimated life of 5 years.
4) Depreciation of a. At the normal rate of depreciation if the expected life is 10 years or
properties used in less;
mining operations other b. Depreciated over any number of years between 5 years and the
than petroleum expected life if the latter is more than 10 years.
operations
g. Depletion of Oil and Gas Wells and Mines
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1) Method of depletion Cost-depletion method

2) Limitation of depletion It cannot exceed the capital invested in the mine.
3) Intangible exploration a. Deductible in the year incurred if such expenditures are incurred for
and development non-producing wells and/or mines;
drilling costs b. Deductible in full or may be capitalized and amortized if such
expenditures incurred are for producing wells and/or mines in the same
contract area.
4) Total amount deductible a. Not to exceed 25% of the net income from mining operations computed
for exploration and without the benefit of any tax incentives under existing laws.
development
expenditures (if the b. Actual exploration and development expenditures minus 25% of the net
taxpayer elects to income from mining shall be carried forward to the succeeding years
deduct exploration and until fully deducted.
development
expenditures)
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h. Charitable and Other Contributions

1) Requisites for a. Actually paid or made within the taxable year;
deductibility b. Made to the Philippine Government or any political subdivisions or to
any non-profit organizations or institutions specified in the Tax Code;
c. Must be evidenced by adequate records or receipts.
2) Contributions a. Those made for the use of the Government of the Philippines or any of
deductible with limit its agencies or
any political subdivision exclusively for public purpose;
b. Those made to accredited domestic corporation or associations
organized and operated
exclusively for:
1) religious;
2) charitable;
3) scientific;
4) youth and sports development;
5) cultural or educational purposes; or
6) rehabilitation of veterans.
c. Those made to social welfare organizations;
d. Those made to non-government organizations.
3) Contributions a. Donations to Government of the Philippines or to any of its agencies
deductible in full or political
subdivisions, including fully owned government corporations,
exclusively to finance, to
provide for, or to be used in undertaking priority activities in education,
health, youth
and sports development, human settlements, science and culture, and
economic
development.
b. Donations to certain foreign institutions or international organizations;
c. Donations to accredited non-government organizations (nonprofit
domestic corporations):
1) Organized and operated exclusively for scientific, research,
educational, character building and youth and sports development,
health, social welfare, cultural and charitable purposes, or a
combination of these;
2) Which not later than the 15th day of the 3rd month after the close of
the taxable year in which the contributions are received, makes
utilization of the contributions directly for the purpose or function for
which the organization is organized and operated;
3) The administrative expense shall, on annual basis, not exceed 30%
of the total expenses;
4) The assets of which, in the event of dissolution, would be distributed
to another nonprofit domestic corporation organized for similar
purpose or purposes, or to the state for public purpose, or would be
distributed by a court to another organization to be used in such
manner as in the judgment of said court shall best accomplish the
general purpose for which the dissolved organization was organized.
4) Limitation on the a. Individual – 10% of taxable income derived from trade, business or
deductible amount profession before charitable and other contributions.
b. Corporation – 5% of taxable income derived from trade, business of
profession before charitable and other contributions.
5) Valuation The amount of any charitable contribution of property other than money
shall be based on the acquisition cost of said property.
6) Contributions a. In determining its net income, the general professional partnership can
deductible by a general deduct
professional contributions deductible in full;
partnership b. Contributions subject to limit shall be claimed and deducted by the
partners in proportion
to their respective interest in the partnership.
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7) Exercise
An individual taxpayer, married, and with two (2) qualified dependent children, has the following
data for the year 2018:
Gross business income P500,000
Long term capital gain 20,000
Short term capital loss 5,000
Deductions (excluding charitable and other contributions) 124,200
Contributions to University of the Philippines 10,000
Contributions to a non-profit religious domestic corporation 25,000
Contribution of office equipment to a non-profit organization for the rehabilitation of veterans
(acquisition cost, P20,000; FMV, P15,000)
How much is the taxable net income?

i. Research and Development
1) Requisites for a. Paid or incurred by the taxpayer in connection with his trade, business
deductibility or profession;
b. Not treated as ordinary and necessary expenses;
c. Chargeable to capital account but not chargeable to property of a
character which is
subject to depreciation or depletion.
2) Amortization period of Ratably distributed over a period of not less than sixty (60) months as
deferred research and may be elected by the taxpayer (beginning with the month in which the
development taxpayer first realizes benefits from such expenditures).
3) Limitations on a. Any expenditure for the acquisition or improvement of land, or for the
deduction of research improvement of property to be used in connection with research and
and development development of a character which is subject to depreciation and
depletion; and
b. Any expenditure paid or incurred for the purpose of ascertaining the
existence, location, extent, or quality of any deposit or ore or other
mineral, including oil or gas.
j. Pension Trusts
1) Requisites for a. Reasonable;
deductibility b. Established and maintained by employer;
c. For the payment of pensions to employees.
2) Amount deductible a. Contribution for current pension –
In full (considered ordinary and necessary expense);
b. Contribution for past pension –
Apportioned in equal parts over a period of 10 years.
3) Exercise: An employer maintains pension trust for its employees. The following contributions are
made:
2016 2017 2018
Current service costs P100,000 P100,000 P100,000
Past service costs 80,000 60,000 -
Total contributions P180,000 P160,000 P100,000
How much is the deductible pension contributions for the year 2016, 2017 and 2018?
k. Optional Standard Deductions (OSD) (RR No. 16-2008 as amended by RR No. 2-2010)
1) Persons covered The following may be allowed to claim OSD in lieu of the itemized
deductions (i.e. items of ordinary and necessary expenses allowed under
Section 34 (A) to (J) and (M), Section 37, other special laws, if
applicable):
a) Individuals b) Corporations
(1) Resident citizen (1) Domestic corporation
(2) Non-resident citizen (2) Resident foreign
corporation
(3) Resident alien
(4) Taxable estates and trusts
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2) Determination of the a) The OSD allowed to individual taxpayers shall be a maximum of forty
amount of OSD for percent (40%) of gross sales (if on accrual basis) or gross receipts (if
individuals on cash basis) during the taxable year.
b) The “cost of sales” in case of individual seller of goods, or the “cost of
services” in the case of individual seller of services, are not allowed to
be deducted for purposes of determining the basis of the OSD
c) For other individual taxpayers allowed by law to report their income
and deductions under a different method of accounting (e.g.
percentage of completion basis, etc.) other than cash and accrual
method of accounting, the “gross sales” or “gross receipts” shall be
determined in accordance with said acceptable method.
3) Determination of the a) In the case of corporate taxpayers, the OSD allowed shall be in an
amount of OSD for amount not exceeding forty percent (40%) of their gross income.
corporations
b) “Gross income” shall mean the gross sales less sales returns,
discounts and allowances
and cost of goods sold.
c) “Gross sales” shall include only sales contributory to income taxable

under Section 27(A) of the Tax Code.
d) “Cost of goods sold” shall include the purchase price or cost to

produce the merchandise and all expenses directly incurred in bringing
them to their present location and use.
e) In the case of sellers of services, the term “gross income” means

“gross receipts” less sales returns, allowances, discounts and cost of
services.
f) “Cost of services” means all direct costs and expenses necessarily

incurred to provide the services required by the customers and clients
such as:
(1) Salaries and employee benefits of personnel, consultants and
specialists directly rendering the services, and
(2) Cost of facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of supplies.
g) “Cost of services” shall not include interest expense except in the case
of banks and other financial institutions.
h) “Gross receipts” means amounts actually or constructively received

during the taxable year.
i) For taxpayers engaged as sellers of services but employing the accrual

basis of accounting for their income, the term “gross receipts” shall
mean amounts earned as gross revenue during the taxable year.
j) The items of gross income under Section 32 (A) of the Tax Code, as
amended, which are required to be declared in the income tax return
of the taxpayer for the taxable year are part of the gross income
against which the OSD may be deducted in arriving at taxable income.
Passive income which have been subjected to a final tax at source
shall not form part of the gross income for purposes of computing the
forty percent (40%) optional standard deduction.
4) Determination of the a) Since the taxable income is in the hands of the partner, as a rule apart
OSD for general from the expenses claimed by GPP in determining its net income, the
professional individual partner can still claim deductions incurred or paid by him that
partnerships (GPP) and contributed to the earning of the income taxable to him.
partners of GPP b) If the GPP availed of the itemized deductions in computing its net
income, the partners may still claim itemized deductions from said
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share, provided, that, in claiming itemized deductions, the partner is

precluded from claiming the same expenses already claimed by the
GPP.
c) If the GPP availed of itemized deductions, the partners are not allowed
to claim the OSD from their shares in the net income because OSD is
a proxy for all the items of deduction allowed in arriving taxable
income. This means that the OSD is in lieu of the items of deductions
claimed by the GPP and the items of deductions claimed by the
partners.
d) If the GPP avails of OSD in computing its net income, the partners
comprising it can no longer claim further deductions from their share in
the said net income for the following reasons:
1) The partners’ distributive share in the GPP is treated as his gross
income not his gross sales/receipts and the 40% OSD allowed to
individuals is specifically mandated to be deducted not from his
gross income but from his gross sales/receipts, and,
2) The OSD being in lieu of the itemized deductions allowed in
computing taxable income, it will answer for both the items of
deductions allowed to the GPP and its partners.
e) Since one-layer of income tax is imposed on the income of the GPP

and the individual partners when the law placed the statutory incidence
of the tax in the hands of the latter, the type of deduction chosen by
the GPP must be the same type of deduction that can be availed of by
the partners.
f) If the partner also derives other gross income from trade, business or
practice of profession apart from and distinct from his share in the net
income of the GPP, the deduction that he can claim from his other
gross income would follow the same deductions availed of from his
partnership income.
g) If the GPP opts for the OSD, the individual partner may still claim 40%
of its gross income from trade, business or practice of profession but
not to include his share from the net income of the GPP.

Supply.
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Let’s Check
Activity 1. Now that you have understood matters regarding Allowable Deductions,
let us try to check your understanding. Determine whether the statement is True or
False.
1. In the event a contract area where petroleum operations are undertaken is

partially or wholly abandoned, all accumulated exploration and development
expenditures pertaining thereto shall be allowed as deduction.
2. The taxpayer shall submit a declaration of loss sustained from casualty,
robbery theft or embezzlement during the taxable year in not less than 30
days nor more than 90 days from the date of discovery of such loss.
3. The grossed-up monetary value of fringe benefit furnished or granted by the
employer to the employee is deductible even if the final tax thereon is yet to
be paid.
4. Taxes deductible from gross income are taxes proper, interests, and penalties
incident to tax delinquency.
5. As a general rule, all taxes, national or local, paid or incurred within the
taxable year in connection with the taxpayer’s trade, business or profession
are deductible from gross income.
6. Net operating loss means the excess of gross income over allowable
deduction of the business in a taxable year.
7. Payments which constitute bribes, kickbacks and others of similar nature are
allowed as deduction from gross income.
8. No loss shall be allowed as a deduction if at the time of filing of the return,
such loss has been claimed as a deduction for estate tax purposes in the
estate tax return.
9. Interests, to qualify for deductibility must be stipulated in writing and must
have been paid or accrued within the taxable year.
10. If a taxpayer did not benefit from the deduction of a bad debt written off
because it did not result to any reduction of his income tax in year of such
deduction, then his subsequent recovery thereof shall be treated as a mere
recovery or a return of capital.
Let’s Analyze
1. What is the effect of having allowable deductions?.

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Activity 2. Answer the following.
1. ERA Corporation is engaged in the sale of goods and services with net sales/net
revenue of P200,000 and P100,000 respectively. The actual entertainment,
amusement and recreation expense for the taxable quarter totaled to P3,000.
How much is the amount of the deductible entertainment, amusement and
recreation expense?
2. In 2018, an individual taxpayer, using cash basis of accounting, obtained a

P500,000 loan from a bank for business use. The bank deducted in advance an
interest of P50,000. In 2019, the P500,000 loan was paid in full by the taxpayer.
How much was the deductible interest in 2018 and 2019?
3. Using the same information in letter a. except that payments were made as
follows: 2018, P300,000; 2019, P200,000. How much was the deductible interest
expense in 2018, 2019 and 2020?
4. COU Corporation paid the following during the year 2018:

Interest for late payment of income tax for 2017 P 5,000
Surcharge and compromise penalty for late payment of income tax for 2017
7,250
Interest on bonds issued by COU Corporation 100,000
Interest on money borrowed by the Corporation from Conrad Uberita, 60%
owner of COU Corporation 50,000
Interest on preferred stock which in reality is a dividend 20,000
How much is the deductible interest?
5. An individual taxpayer, married, and with two (2) qualified dependent children,
has the following data for the year 2018:
Gross business income P500,000
Long term capital gain 20,000
Short term capital loss 5,000
Deductions (excluding charitable and other contributions) 124,200
Contributions to University of the Philippines 10,000
Contributions to a non-profit religious domestic corporation 25,000
Contribution of office equipment to a non-profit organization for the
rehabilitation of veterans
(acquisition cost, P20,000; FMV, P15,000)
How much is the taxable net income?
6. An employer maintains pension trust for its employees. The following

contributions are made:
2016 2017 2018
Current service costs P 100,000 P 100,000 P 100,000
Past service costs 80,000 60,000 -
Total contributions P 180,000 P 160,000 P 100,000
How much is the deductible pension contributions for the year 2016, 2017 and
2018?
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In a Nutshell

1.
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2.
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3.
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4.
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5.
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Q and A

1.
2.
3.
4.
5.
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Keywords
 Bad debts
 Charitable and other contributions
 Depletion
 Depreciation
 Interest
 Itemized deductions
 Losses
 Optional standard deduction
 Optional standard deduction
 Ordinary and necessary trade, business or professional expenses
 Pension trusts
 Research and development
 Special deductions
 Taxes
Big Picture in Focus: ULOd. Understand the concept of

Withholding taxes
Metalanguage
In this section, the most essential terms relevant to the study of withholding
taxes and to demonstrate ULOd will be operationally defined to establish a common
frame of refence as to how the texts work in your chosen field or career. You will
concepts.
1. Withholding tax on compensation.
2. Expanded withholding tax.
3. Final withholding tax.
4. Withholding tax on Government Money Payments.
IV. WITHHOLDING TAXES
1.0 CONCEPT
Withholding tax system is simply a way of collecting taxes from the source. It is
NOT a separate kind of tax.
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2.0 Kinds of Withholding Taxes

1. Creditable withholding tax – income subject to CWT forms part of gross
income to be reported in the ITR.
2. Final withholding tax – NO longer part of the gross income to be reported in
the ITR. Being a final tax, it represents the true and actualtax due.
2.1 FINAL WITHHOLDING TAX

Income subject to final tax– refers to income where tax due is fully collected
through withholding tax system.
Once full payment has been withheld and remitted, there is NO more tax
obligation.
Principles:
- Amount of tax withheld is full and final.
- Liability for payment of tax rests primarily on the withholding agent as
payor.
- Withholding agent shall be liable for any deficiency.
- Payee is NOT required to file any ITR on the particular income subject to
final tax.
- Finality of withheld tax is limited to that particular income and does not
extend to other tax liability of the taxpayer.
- Items under passive income are subject to Final Tax. Also those income
subject to other final tax such as FBT, CGT, Branch Profit Remittance Tax,
etc.
2.2 CREDITABLE WITHHOLDING TAX

- Creditable tax must be withheld at source, but should still be included in the
ITR.
- Any excess, shall be refunded.
Any deficiency, shall be paid by the taxpayer.
- CWT intends to approximate the tax on the payee.
- The subsequent remittal does NOT remove the burden on the income
recipient. He still has to file for the credit.
Liability to withhold tax

Arises upon the accrual, NOT upon actual remittance.
Thus, it is when the right to receive income arises that determines when to
include that income as gross income, and when to apply withholding tax.
(Filipinas Synthetic Fiber v CA)
3 Types of CWT
1. Expanded withholding tax
2. Withholding tax on compensation income
3. Withholding tax on money payments of government.
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2.3 WITHHOLDING AGENT

The person required to deduct and withhold any tax.
The withholding agent has the legal interest to file a claim for refund for 2
reasons:
1. He is considered a taxpayer under the NIRC as he is personally liable
for the withholding tax should the amount of tax withheld is less than
what is required by law; and
2. As an agent of the taxpayer, his authority to file the necessary ITR and
to remit the tax withheld to the government includes authority to file a
claim for refund and bring action for recovery of such claim. (CIR v
Smart Communications 2010)
2.4 Return and Payment of Taxes

1. Withholding agents must file a return and pay to:
 Authorized agent bank (AAB)
 Revenue district officer (RDO)
 Collection agent
 Duly authorized treasurer of the city or municipality where he resides or
has his principal place of business
2. Taxes must be maintained in a separate account and NOT commingled with
any other funds of the withholding agent.
3. When to file and pay taxes withheld at source:
 Must NOT be later than the last day of the month following the close of
the quarter during which the withholding was made.
Example: If withholding was made in February, return must be filed and
tax must be paid not later than the last day of April.
2.5 Withholding of Wages

Applies to ALL employed individuals, whether citizens or aliens, deriving
income from compensation for services rendered in the Philippines.
Except: NRA-NETB (RR 11-2018)
2.6 Requirement of Withholding

Every employer making payment of wages shall deduct and withhold upon
such wages a tax.
Except: Minimum wage earners.
3.0 FILING OF RETURNS AND PAYMENT OF TAXES

3.1 INDIVIDUAL RETURNS
Who are required to file
1. RC – all sources of income
2. NRC – income within Philippines
3. RA – income within Philippines
4. NRA-ETB – income within Philippines
Who are NOT required to file

1. Individual whose taxable income does NOT exceed P250,000;
Except:
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Citizen or alien engaged in business or practice of profession in the

Philippines, must file ITR regardless of amount of gross income.
2. Pure compensation earner

Except:
Individual concurrently deriving compensation from 2 or more employers
3. Individual whose sole income is subject to Final Tax
4. Minimum wage earner or individual exempt from income tax under Tax Code
and Special Laws.
3.2 Where to file

3. Collection agent
4. Duly authorized treasure of city or municipality where he resides or has his
principal place of business
5. In case he has no legal residence or place of business, at the Office of the
Commissioner
3.3 When to file

1. Individuals specified above – annually on or before April 15
2. Individuals subject to CGT:
a. Shares not traded – within 30 days after each transaction and a final
consolidated return on or before April 15
b. Real property – within 30 days from sale or disposition
3.4 Husband and Wife

If NOT purely compensation earners, shall file a return including the income of
both spouses.
If impracticable, may file separate returns which shall be consoli ted by BIR.
Parents and kids

Parents must include in their ITR, the income of unmarried children derived
from property received from a living parent.
Except:
 When donor’s tax has been paid on such property; or
 When transfer of such property is exempt from donor’s tax.
3.5 SUBSTITUTED FILING

For individual employees who are:
4. Purely compensation earners
5. Deriving income from only ONE employer
6. Income tax has been withheld correctly by employer
The said individual shall NOT be required to file ITR. The certificate of
withholding filed by employer, duly stamped “received” by BIR shall be
tantamount to substituted filing.
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3.6 CORPORATE RETURNS

Who are required to file:
Every corporation subject to tax.
Except: FC-NETB
Where to file:
3. Collection agent
4. Duly authorized treasurer of the city or municipality of the principal
place of business or where the main books of accounts are kept
3.7 When to file

Quarterly
 Corporate quarterly declaration – filed within 60 days following the close
of each of the first 3 quarters
 Final adjustment return – on or before 15th day of April or 15th day of the
4th month following the close of FY.
3.8 PAYMENT OF TAXES

Corporate and Individual
At the time the return is filed.
Individual
If the tax exceeds P2,000, may opt to file in 2 equal installments.
First, to be paid at the time return is filed.
Second, on or before October 15 following close of calendar year.
Any installment not paid, whole amount of tax becomes due and payable.

Supply.
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Let’s Check
False.
1. The employer, in case of withholding tax on compensation is constituted as

withholding agent.
2. Withholding of tax on income applies only to citizens deriving income fom
compensation for services rendered in the Philippines.
3. The obligation of the payor to deduct and withhold the tax arises at the time
an income is paid or payable, whichever comes first.
4. Tax credits refer to amounts allowed as deduction from the gross income.
5. Withholding taxes on income are being deducted from the income tax due and
not from the gross income.
Let’s Analyze
1. How do taxes reach to the government with the presence of withholding agents?
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In a Nutshell

1.
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3.
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Q and A

1.
2.
3.
4.
5.
Keywords
 Creditable withholding tax

 Final withholding tax
 Withholding Taxes
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Big Picture D
are expected to:
1. Demonstrate mastery of the procedures of computing foreign tax credits.
2. Gain familiarization and demonstrate mastery on assessing penalties and
surcharges.
Big Picture in Focus: ULOa. Demonstrate mastery of

the procedures of computing foreign tax credits.
surcate
Metalanguage mastery of the procedures of computing
foreign tax credits.
taxes and to demonstrate ULOa will be operationally defined to establish a common
concepts.
1. Tax deduction. Is a deduction in gross income.
2. Tax credit. Refers to amounts as deductions from tax due in the form or
creditable withholding taxes and foreign income tax paid or accrued.
I. FOREIGN TAX CREDIT
1.0 FOREIGN INCOME TAX

Income taxes paid in a foreign country can either be claimed as:
1. Deduction
2. Tax credit
Illustration 1: One foreign country

A domestic corporation reported the following result of operation:
Taxable income from the Philippines P 1,800, 000

Taxable income from Japan 1,200, 000
Quarterly estimated income tax paid in the Philippines 200, 000
Income Tax paid in Japan 300, 000
Deduction Approach
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The Taxable income and income tax liability will simply be computed as:
Taxable income from the Philippines P1, 800, 000

Taxable income from Japan 1, 200, 000
Total P3, 000, 000
Less: Foreign income tax expense 300, 000
Taxable income – world P2, 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
Taxable income from Japan P 1, 200, 000
Taxable income – world P 3, 000, 000
Multiply by: Corporate Tax rate 30%
Corporate world income tax due P 900, 000
Less: Tax credit
Philippines income credit P 200, 000
Foreign tax credit* 300, 000 500, 000
Income Tax payable P 400, 000
Limit: Foreign income tax/ Worldwide Income x Philippine Corporate Income Tax
: 1, 200, 000/ 3, 000, 000 x 900, 000
: 360, 000
Actual: 300, 000

Limit: 360, 000
Illustration 2: More than one foreign country.
A domestic corporation had the following data on its Philippine and foreign
operations:
Taxable Income in the Philippines 1, 800, 000

Taxable Income in Japan 1, 200, 000
Taxable Income in Taiwan 1, 000, 000
Quarterly income tax paid in PH 300, 000
Income Tax paid in Japan 400, 000
Income Tax paid in Taiwan 200, 000
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Tax Credit
Per country tax credit:
Japan:
Actual amount paid P 400, 000
Country limit (P1.2M/4M x P1.2M) P 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:
[(1.2M+1.0M)/4.0M x P1.2M tax due] 600, 000
Foreign income tax credit (LOWER) P 560, 000
Note readers: Readers are advised to master the tax credit computational
procedures herein because they also apply to Estate Tax and Donor’s tax.
2.0 Can claim tax credit or deduction for foreign taxes paid?
Consistent with the matching rule, only taxpayers taxable on world income
such as domestic corporation’s resident citizens can claim deduction or tax
credit for foreign income taxes paid.
3.0 Tax treatment or refunds or credit of taxes

The refund or credit of deductible taxes must be reverted back to gross
income to extent of their tax benefit. Incidentally, the refund of non-deductible
taxes is exempt from income tax.

Supply.
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Let’s Check
False.
1. If the taxpayer is entitled to a foreign tax credit and he did not choose to
exercise such right, such tax credit may be allowed as deduction from his
gross income.
2. For purposes of determining the tax credit that may be allowed a taxpayer,
foreign income taxes shall mean taxes proper only, hence, interest, surcharge
or penalty relative to tax delinquency shall not be credited.
3. If a taxpayer signifies in his return his desire to claim a credit for foreign taxes,
it Is understood that it shall apply to income taxes paid to all foreign countries
and no portion of such tax shall be allowed as a deduction to gross income.
4. The amount of foreign tax credit shall not exceed the same proportion of the
tax against which such credit is taken, which the taxpayer’s taxable income
from sources within such country taxable under the code bears to his entire
taxable income for the same taxable year
5. Tax credit refers to the taxpayer’s right to deduct from the income tax due the
amount of tax he/it has paid to a foreign country subject to limitations.
.
Let’s Analyze
1. What is the effect of having foreign tax payments?
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Activity 2. Compute the following:

Dynasty Company, a domestic corporation, has the following data for 2019:
Taxable income, Philippines P 500, 000

Taxable income, X Foreign Country 300, 000
Taxable income, Y Foreign Country 200, 000
Income tax paid to X Foreign Country 125, 000
Income tax paid to Y Foreign Country 55, 000
Philippine income tax paid, Three quarters of the year 105, 000
1. Tax credit for foreign income taxes paid is _________________.
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2. The Philippine income tax still due, after credit for foreign income taxes paid
is ______________________.
Assume that Ms. Doubtfire, a resident citizen and single, has the following data in
her net income and income taxes for 2019:
+
Foreign Income
Sources of income Taxable Income Tax paid
Philippines P 120, 000

Country F 80, 000 P 20, 000
Country G 40, 000 4, 000
Total 240, 000 24, 000
3. The income tax payable by Ms. Doubtfire before tax credit assuming that
foreign income taxes are claimed as tax credit is __________________.
4. The allowable tax credit is ________________.
5. The income tax still due is ________________.
In a Nutshell

1.
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Q and A

1.
2.
3.
4.
5.
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Keywords
 Foreign Income
 Refund
 Tax Credit
 World Income
Big Picture in Focus: ULOb. Gain familiarization and

demonstrate mastery on assessing penalties and
surcharges.
Metalanguage
taxes and to demonstrate ULOb will be operationally defined to establish a common
concepts.
1. Penalty. Additional payment for non-compliance of the payment amount,
schedule and the likes
II. PENALTIES
1.0 PENALTIES FOR LATE FILING OR PAYMENT AND NON-WITHHOLDING OR

NON-REMITTANCE OF WITHHELD 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 wilful neglect to file and taxes
The non-filings is considered ‘wilful neglect’ if the BIR discovered

the non-filing first. This is the case when the tax payer received a
notice from the BIR to file return. If the taxpayer filed a return before
the receipt of such notice, the same is considered simple neglect
subject to the 25% surcharge.
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2. Interest – 20% per annum

3. Compromise penalty –
Compromise penalty is an amount paid in lieu of criminal prosecution
over a tax violation.
Illustration 1: Late filing and payment of tax
An individual taxpayer filed his 2014 income tax with a computed tax due of P100,
000 on July 15, 2015.
The total amount to be paid by the tax payer including penalties shall be:
Tax due P 100, 000

Plus: Penalties
Surcharge (P100, 000 x 25%) 25, 000
Interest (P100, 000 x 20% x 91 days/360 days 5, 055
Compromise* 15, 000
Total tax due P 145, 000
Note:
1. The deadline of the 2014 income tax return is April 15, 2015. April 15, 2015 to
July 15, 2015 is a 90-day delay.
2. Interest is computed from the basic tax due surcharge.
3. The 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:*
If the amount of tax unpaid

Exceeds But not exceed Compromise is
P 10, 000 P 20, 000 5, 000
20, 000 50, 000 10, 000
50, 000 100, 000 15, 000
100, 000 500, 000 20, 000
Illustration 2: Non-withholding and non-remittance of withholding tax

On March 1, 2015, the taxpayer paid rental expenses to a lessor but failed to
withhold the P25, 000 creditable withholding tax on the rental expense which should
have been remitted to the government on April 1, 2015. The Taxpayer discovered
the oversight on April 1, 2016 and wished to settle the same.
The Total amount to be paid by the taxpayer on April 1, 2016 shall be:
Withholding tax due P 25, 000

Plus: Penalties
Surcharge (25, 000 x 25%) 6, 250
Interest (P25, 000 x 20% x 360 days/360 days) 5, 000
Compromise* 10, 000
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Total Tax due 46, 250
Note: The compromise penalty is take from the table of compromise

penalties for failure to withhold or remit withheld tax at the time or times
required by law, as follows:*
If the amount not withheld or remitted

Exceeds But not exceed Compromise is
P 0 P 5, 000 P 1, 000
5, 000 15, 000 3, 000
15, 000 20, 000 5, 000
20, 000 50, 000 10, 000
50, 000 500, 000 15, 000
2.0 PENALTIES FOR NON-FILING OR LATE FILING OF INFORMATION RETURN

 For each failure to file a separate information return, statement or list, or keep
my record, or supply any information required by the Code or by the
Commissioner on the date prescribe therefore, unless it is shown that such
failure is due to reasonable cause not to willful neglect, shall be subject to a
penalty off P1, 000 for each such failure. Provided that the amount imposed
for all such failure during a calendar year shall not exceed P25, 000. 00

Self

Help: You can also refer to the sources below to help
 you further understand the lesson.
 Ballada, W., & Ballada, S. (2019). Income taxation: made easy (17th ed.).
 Valencia, E., & Roxas, G. (2016). Income taxation: Principles and laws with
 Ampongan, O. (2015). CPA Reviewer in taxation. Manila: Conanan

Educational Supply.
Let’s Check
False.
1. Willful filing of a false or fraudulent return makes the taxpayer liable to a 25%
penalty based on tax or on the deficiency tax.
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2. Failure to report sales, receipts or income in an amount exceeding 50% of

that declared per return, and a claim of deductions in amount exceeding 50%
of actual deductions shall render the taxpayer liable for substantial under
declaration or overstatement, as the case may be.
3. On any unpaid amount of tax, an interest at the rate of 25% per annum shall
be assessed and collected, from the date prescribed for payment until the
amount is fully paid.
4. The 20% interest rate may apply to deficiency interest computed on the
deficiency tax.
5. Substantial under declaration of sales, receipts or income and substantial
overstatement of deductions constitute prima facie evidence of a false or a
fraudulent return.
Let’s Analyze
1. What causes penalties?

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Activity 2: Compute for the following:
Stiefel Johnson’s income tax return for the calendar year 2018 was due for filing on
April 15, 2190. She failed to file her return on the due date and filed the same only
on July 31, 2019. The tax due per return is P 100, 000.
1. Delinquency surcharge: _______________________.

2. Delinquency interest: ______________________.
Stiefel Johnson’s income tax return is required to be field through the authorized
agent bank (AAB) under the jurisdiction of RDO Quezon City. She, instead, filed the
same on time but through an AAB under the jurisdiction of RDO Cebu City even
without prior authorization from the BIR. Her income tax return showed P 100, 000
as tax due and paid.
3. Delinquency surcharge: _______________________.
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4. Delinquency interest: ______________________.
Antonia Bernardo, a taxpayer, did not file here income tax return for the calendar
year 2018 on April 15, 2019, the last day of filing. Upon receipt of notice from the BIR
because of such failure, she filed her tax return only on July 31, 2020. The tax due
per return is P 100, 000.
5. Delinquency surcharge: ____________________.

6. Delinquency interest: ____________________.
Antonio Bernardo, a taxpayer, filed her 2018 income tax return on April 15, 2019 and
paid P100, 000. Upon pre-audit of her return, it was disclosed that she erroneously
computed the tax due. The correct amount of tax due is P120, 000. On July 31,
2020, she received a letter of demand and assessment notice from the BIR.
7. Deficiency income tax: ____________________.

8. Deficiency surcharge: ___________________.
9. Deficiency interest: ___________________.
In a Nutshell

1.
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2.
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3.
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4.
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5.
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6.
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7.
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8.
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9.
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10.
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Q and A

1.
2.
3.
4.
5.
Keywords
 Interest
 Penalty
 Surcharge
 Tax Deficiency
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Course Schedules
Activities Date Where to Submit

Big Picture (Week 1-3) ULOa: Let’s Check and August 20, 2020 CF email/Quipper
Lets Analyze Activities
Big Picture (Week 1-3) ULOa: In a Nutshell August 21, 2020 CF email/Quipper
Activity
Big Picture (Week 1-3) ULOb: Let’s Check and August 27, 2020 CF email/Quipper
Big Picture (Week 1-3) ULOb: In a Nutshell August 28, 2020 CF email/Quipper
Activity
Big Picture (Week 1-3) ULOc: Let’s Check and September 2, CF email/Quipper
Lets Analyze Activities 2020
Big Picture (Week 1-3) ULOc: In a Nutshell September 3, CF email/Quipper
Activity 2020
FIRST EXAM September 4, Quipper
2020
Big Picture (Week 4-5) ULOa: Let’s Check and September 8, CF email/Quipper
Big Picture (Week 4-5) ULOa: In a Nutshell September 9, CF email/Quipper
Activity 2020
Big Picture (Week 4-5) ULOb: Let’s Check and September 12, CF email/Quipper
Big Picture (Week 4-5) ULOb: In a Nutshell September 14, CF email/Quipper
Activity 2020
Activity 2020
SECOND EXAM September 18, Quipper
2020
Big Picture (Week 6-7) ULOa: Let’s Check and September 22, CF email/Quipper
Big Picture (Week 6-7) ULOa: In a Nutshell September 23, CF email/Quipper
Activities 2020
Big Picture (Week 6-7) ULOb: Let’s Check and September 24, CF email/Quipper
Big Picture (Week 6-7) ULOb: In a Nutshell September 25, CF email/Quipper
Activities 2020
Activities 2020
Big Picture (Week 6-7) ULOd: Let’s Check and September 29, CF email/Quipper
Big Picture (Week 6-7) ULOd: In a Nutshell September 30, CF email/Quipper
Activities 2020
THIRD EXAM October 2, 2020 Quipper
Big Picture (Week 8-9) ULOa: Let’s Check and October 6, 2020 CF email/Quipper
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Big Picture (Week 8-9) ULOa: In a Nutshell October 7, 2020 CF email/Quipper

Activities
Big Picture (Week 8-9) ULOb: Let’s Check and October 9, CF email/Quipper
Big Picture (Week 8-9) ULOb: In a Nutshell October 10, CF email/Quipper
Activities 2020
Big Picture (Week 8-9) ULOb: Let’s Check and October 12, CF email/Quipper
Big Picture (Week 8-9) ULOb: In a Nutshell October 13, CF email/Quipper
Activities 2020
FINALS October 15-16, Quipper
2020
Online Code of Conduct
1) All teachers/Course Facilitators and students are expected to abide by an

honor code of conduct, and thus everyone and all are exhorted to exercise
self-management and self-regulation.
2) Faculty members are guided by utmost professional conduct as learning

facilitators in holding OBD and DED conduct. Any breach and violation shall
be dealt with properly under existing guidelines, specifically on social media
conduct (OPM 21.15) and personnel discipline (OPM 21.11).
3) All students are likewise guided by professional conduct as learners in

attending OBD or DED courses. Any breach and violation shall be dealt with
properly under existing guidelines, specifically in Section 7 (Student
Discipline) in the Student Handbook.
4) Professional conduct refers to the embodiment and exercise of the

University’s Core Values, specifically in the adherence to intellectual
honesty and integrity; academic excellence by giving due diligence in virtual
class participation in all lectures and activities, as well as fidelity in doing
and submitting performance tasks and assignments; personal discipline in
complying with all deadlines; and observance of data privacy.
5) Plagiarism is a serious intellectual crime and shall be dealt with accordingly.

The University shall institute monitoring mechanisms online to detect and
penalize plagiarism.
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6) All borrowed materials uploaded by the teachers/Course Facilitators shall be

properly acknowledged and cited; the teachers/Course Facilitators shall be
professionally and personally responsible for all the materials uploaded in
the online classes or published in SIM/SDL manuals.
7) Teachers/Course Facilitators shall devote time to handle OBD or DED

courses and shall honestly exercise due assessment of student
performance.
8) Teachers/Course Facilitators shall never engage in quarrels with students

online. While contentions intellectual discussions are allowed, the
teachers/Course Facilitators shall take the higher ground in facilitating and
moderating these discussions. Foul, lewd, vulgar and discriminatory
languages are absolutely prohibited.
9) Students shall independently and honestly take examinations and do

assignments, unless collaboration is clearly required or permitted. Students
shall not resort to dishonesty to improve the result of their assessments (e.g.
examinations, assignments).
10) Students shall not allow anyone else to access their personal LMS account.
Students shall not post or share their answers, assignment or examinations
to others to further academic fraudulence online.
11) By handling OBD or DED courses, teachers/Course Facilitators agree and

abide by all the provisions of the Online Code of Conduct, as well as all the
requirements and protocols in handling online courses.
12) By enrolling in OBD or DED courses, students agree and abide by all the
provisions of the Online Code of Conduct, as well as all the requirements
and protocols in handling online courses.
Monitoring of OBD and DED
(1) The Deans, Asst. Deans, Discipline Chairs and Program Heads shall be
responsible in monitoring the conduct of their respective OBD classes through
the Blackboard LMS. The LMS monitoring protocols shall be followed, i.e.
monitoring of the conduct of Teacher Activities (Views and Posts) with
generated utilization graphs and data. Individual faculty PDF utilization reports
shall be generated and consolidated by program and by college.
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(2) The Academic Affairs and Academic Planning & Services shall monitor the
conduct of LMS sessions. The Academic Vice Presidents and the Deans shall
collaborate to conduct virtual CETA by randomly joining LMS classes to check
and review online the status and interaction of the faculty and the students.
(3) For DED, the Deans and Program Heads shall come up with monitoring
instruments, taking into consideration how the programs go about the conduct
of DED classes. Consolidated reports shall be submitted to Academic Affairs
for endorsement to the Chief Operating Officer.
Course prepared by:
JOE MARI N. FLORES, CPA

Name of Course Facilitator/Faculty
Course reviewed by:
MARY CRIS L. LUZADA, CPA, MSA

Program Head, Accountancy
Approved by:
GINA FE G. ISRAEL, EdD

Name of Dean
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UNIVERSITY OF MINDANAO

Department of Accounting Education

Physically Distanced but Academically Engaged

Self-Instructional Manual (SIM) for Self-Directed Learning (SDL)

Course/Subject: ACC 311 – Income Taxation

Name of Teacher: Joe Mari N. Flores, CPA

THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY; NOT FOR

Part 1. Course Outline and Policies ...................................................... 1

Big Picture in Focus:ULOb ………………………………………….... 33

Big Picture in Focus:ULOc ………………………………………………55

Big Picture B: Unit Learning Outcomes ..........................................80

Big Picture in Focus:ULOb …………………………………………… 89

Big Picture in Focus:ULOc …………………………………………… 99

Essential Knowledge ...............................................................94

Big Picture C: Unit Learning Outcomes ..........................................119

Big Picture in Focus:ULOb …………………………………………… 135

Big Picture in Focus:ULOc ………………………………………………143

Metalanguage .......................................................................... 143

Big Picture in Focus:ULOd ………………………………………………157

Big Picture D: Unit Learning Outcomes .............................................164

Big Picture in Focus:ULOb ………………………………………………171

Part 3. Course Schedule ......................................................................... 177

Course Outline: ACC 311 – Income Taxation

Course Facilitator : Joe Mari N. Flores, CPA

Course Outline Policies

Areas of Concern Details

Assessment Task Submission Submission of assessment tasks shall be on the

course coordinator, date of submission and name

If the assessment task is done in real time through

Since this course is included in the licensure

Turnitin Submission To ensure honesty and authenticity, all

Please note that academic dishonesty such as

Penalties for Late Assignments/ There will be a 5% reduction based on the

However, if the late submission of assessment

Return of Assignments / Assessment tasks will be returned to you one (1)

Assessments week after the submission. This will be returned by

For some group assessment tasks, the course

Assignment Resubmission You should request in writing addressed to the

Re-marking of Assessment You should request in writing addressed to the

If disapproved by the course coordinator, you can

Grading System You shall be evaluated based on the following:

Assessment methods Weights

Submission of the final grades shall follow the

Student Communication The course coordinator shall create Group Chat in

You can also meet the course coordinator in

Contact Details of the Dean Dr. Gina Fe G,Israel

Contact Details of the Program For Accountancy:

For Accounting Technology:

Maria Teresa A. Ozoa, CPA, MBA

Library Contact Details Clarissa R. Donayre, MSLS

Well Being Welfare Support Rochen D. Yntig, RGC

Mersun Faith A. Delco, RPm

Alfred Joshua M. Navarro

Course Information –see/download course syllabus from

Course Outcome (CO):

Big Picture in Focus: ULOa. Discuss the principles of

2. Taxes. The enforced proportional contribution by persons and property levied

3. Income. It is the return in money from one’s business, labor or capital

3.1 The amount of money coming to a person or corporation within a specified

7. Tax Administration. Refers to the management of tax system. Tax

8. Bureau of Internal Revenue (BIR). Is a government agency that is mandated

1.1 Lifeblood doctrine

e. Any claim of statutory exemption from taxation should be manifest and

1.2. PURPOSE OF TAXATION