Income TaxatIon Notes
 other tax rules provide
TAXATION:
 Means by which the sovereign/government
raises income.
 As a power of the State, is inherent in
sovereignty.
TAXES:
 Lifeblood of the government.
 Government cannot continue to exist and
operate without financial means.
PURPOSES OF TAXATION:
1. Primary – To raise revenue.
2. Secondary – To regulate.
OBJECTIVES OF TAXATION:
 It is more than a means of raising revenue.
 Also a means by which the national
government attempts to achieve economic
and social objectives.
o Objectives include;
 Shifting wealth from rich to
poor.
 Maintaining price stability.
 Stimulating economic
growth.
 Encouraging full employment
 To achieve these objectives,
congress tends to use tax provisions in
two different ways:
 tax rules are enacted for
the purposes of mitigating
certain undesirable
economic and social
conditions already existing.
For example – low income
individuals often pay little
or no national income
taxes because of the
elaborate systems of
exclusions, deductions, and
credits of current law
incentives for certain
desirable activities.
Example – business can
claim deductions for
depreciation of productive
assets much faster that
the assets actually wear
out. This provides
incentives for businesses
to invest in these
activities, leading to
increased employment of
low-and middle-income
workers
STATE POWERS
 Taxation - The power of the state by
which the sovereign raises revenue to
defray the necessary expenses of the
government.
 Eminent Domain - The power of the state
to take private property for public use
upon payment of just compensation.
 Police Power - The power of the state to
enact laws to promote public health, public
morals, public safety and the general
welfare of the people.
ASPECTS OF TAXATION:
 Levying of the tax – the imposition of tax
required. Done by the congress.
 Collection of the tax levied – essentially an
administrative function.
BASIC PRINCIPLES OF A SOUND TAX SYSTEM:
 Fiscal Adequacy – sufficient to meet
government expenditures.
 Equality or Theoretical Justice – tax
imposed must be proportionate to
taxpayer’s ability to pay.
 Administrative Feasibility – the law must be
capable of convenient, just and effective
administration.
 Income TaxatIon Notes
LIMITATIONS ON THE POWER OF TAXATION:
- The power of taxation is subject to
Constitutional limitations. Constitutional
limitations are those provided for in the
constitution or implied from its provisions.
- Inherent limitations are restrictions to the
power to tax attached to its nature.
The Constitutional Limitations:
1. Due process of law;
2. Equal protection of law;
3. Rule of uniformity and equity;
4. President’s power to veto separate items in
revenue or tariff bills;
5. Exemption from property taxation of religious,
charitable or educational entities, non-profit
cemeteries, churches and convents appurtenant
thereto;
6. No public money shall be appropriated for
religious purposes;
7. Majority of all the members of the Congress
granting tax exemptions;
8. The Congress may not deprive the Supreme Court
of its jurisdiction in all cases involving the
legality of any tax , impost or assessment or toll or
any penalty imposed in relation to tax;
9. No imprisonment for nonpayment of poll tax; and
10. Tax collections shall generally be treated as
general funds of the government.
Inherent Limitations
Taxes may be levied only for public
purpose;
The State may tax persons and
properties under its jurisdiction;
The property of a foreign
State may not be taxed by another.
Governmental agencies performing
governmental functions are exempt from
taxation;
Non-delegation. The power to tax being legislative
in nature may not be delegated.
DOCTRINE IN TAXATION
Prospectivity of Tax Laws – “Taxes may be imposed
retroactively by law but, unless so expressed
by such law, these taxes must only be imposed
prospectively – a law applicable to cases arising
after its enactment.” Supreme Court rulings (Hydro
Resources vs. Court of Appeals).
Direct double taxation – Where, the same subject is
taxed twice;
• By the same taxing authority;
• For the same purpose;
• Within the same jurisdiction;
• During the same taxing period; and
• Covering the same kind or character of tax
Indirect double taxation – example:
1) When a business tax is imposed by the
municipality government prior to the issuance
of a business license to a tax payer for engaging
in an advertising business. His income from his
advertising business shall later be imposed
income tax by the national government.
2) When an item of income is taxed in the
Philippines and the same income is taxed in
another country, there is a case of indirect
duplicate taxation which is not legally prohibited
because the taxes are imposed by different taxing
authority.
The usual method of avoiding the occurrence of
double taxation are:
1) allowing reciprocal exemptions either by
law or by treaty;
2) allowance of tax credit for foreign taxes
paid;
3) allowance of deduction for foreign taxes
paid;
4) reduction of the Philippine tax rate.
 Income TaxatIon Notes
EXCAPE FROME TAXES
– it happens when tax payer
minimizes his tax liability by taking advantage of
legally available tax planning opportunities or called
tax minimization. This is avoiding the charging of
tax and this is legal.
– it is the process of controlling
one’s actions so as to avoid undesirable tax
consequences. Taxes can be avoided by not engaging
in those activities that are taxed.
– occurs when the taxpayer resorts
to unlawful means to lessen or get away with
hiss tax liability. This is also called tax dodging.
Ex. Under-declaration of sales, overstatement
of expenses, and backdating important
document. Tax Evasion avoiding the payment of
tax and is illegal.
SITUS OF TAXATION
The situs of taxation is the place of taxation. The
rule is that the State may rightfully levy and
collect taxes where the subject being taxed has a
situs under its jurisdiction. The situs of taxation
is determined by a number of factors:
1) Subject matter or what is being taxed – He
may be a person or it may be a property, an act
or activity.
2) Nature of tax – or which tax to impose. It
may be an income tax, an import duty or a real
property tax.
3) Citizenship of the taxpayers
4) Residence of the taxpayer
APPLICATION OF SITUS OF TAXATION
 Person – residence of the taxpayer.
 Real Property or tangible personal property –
location of the property.
 Intangible personal property – As a rule, situs
is the domicile of the owner unless he has
acquired a situs elsewhere.
 increases as the tax bases increases.
 Income – Taxpayer’s residence or citizenship,
or place where the income was earned.
 Business, occupation and transaction – place
where business is being operated, occupation
being practiced and transaction being
completed.
 Gratuitous transfer of property – taxpayer’s
residence or citizenship, or location of the
property.
TAXES
 Taxes are enforced proportional
contributions from 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.
 Is any contribution imposed by the
government upon individuals, for the use
and service of the state, whether under the
name of toll, tribute, tallage, gabel, impost,
duty, custom, excise, subsidy, aid, supply, or
other name.
 Tax, in its essential characteristics is not a
debt.
Essential Characteristics of a Tax





revenues; and

Types of rates structures
 Regressive – average rate decreases as the
tax base increases.
 Proportional or uniform taxes – the
average rate remains constant for all levels
of the tax base.
 Progressive – the average rate of tax
 Income TaxatIon Notes
CLASSIFICATION OF TAXES
 As to subject matter
1. Personal, poll or capitation – tax of a fixed
amount imposed on individual whether
citizens or not, residing within a specified
territory without regard to their property
or the occupation in which they may be
engaged.
Example: community tax.
2. Property – tax imposed on property,
whether real or personal, in proportion
either to its value or in accordance with
some other reasonable method of
apportionment.
Example: real estate tax.
3. Excise – tax imposed upon the performance
of an act, the enjoyment of a privilege or
the engaging in an occupation.
Examples: fuel producers,
importers.
 As to who bears the burden
a. Direct – tax demanded from persons who
are intended or bound by law to pay the tax.
Examples: community tax, income tax, estate tax,
donor’s tax.
b. Indirect – tax which the taxpayer can shift
to another.
Examples: customs duties, value-added tax, some
percentage taxes.
 As to determination of amount
a. Specific – tax imposed based on a physical
measurement, as by head or number,
weight, or length or volume.
Examples: tax on distilled spirits, fermented liquors,
cigars, wines, fuel products,etc.
b. Ad valorem – Tax of fixed proportion of the
property; needs an independent appraiser to
determine its value.
Examples: real estate tax, certain customs duties,
income tax, transfer taxes, etc.
 As to purpose
a. General, Fiscal or Revenue – tax with no
particular or object for which the revenue
is raised for whatever need may arise.
Examples: income tax, value-added tax.
b. Special or Regulatory – tax imposed for a
special purpose regardless of whether
revenue is raised or not, and is intended to
achieve some social or economic end.
Example: protective tariff or customs duties on
certain imported goods to protect local industries
against foreign competition.
 As to authority imposing the tax or scope
a. National – tax imposed by the national
government.
Examples: internal revenue taxes, tariff and
customs duties.
b. Municipal or Local – Tax imposed by
municipal governments for specific needs.
Examples: real estate taxes, municipal licenses.
 As to graduation or rate
1. Proportional – tax based on a fixed
percentage of the amount of property
income or other basis to be taxed.
Examples: percentage taxes, real estate taxes,
estate and donor’s tax
2. Progressive or Graduated – tax rate
increases as the tax base increases.
Example: income tax.
3. Regressive – tax rate decreases as the tax
base. Not true in the Philippines.
TAX DISTINGUISH FROM OTHER FEES
1. From toll
Toll is the sum of money for the use of something,
generally applied to the consideration which
is paid for the use of a road, bridge, or the like, of a
public nature.
 Income TaxatIon Notes
A toll is a demand for proprietorship, is paid for the
use another’s property and may be imposed
by the government or private individuals or entities;
while a tax is a demand for sovereignty, is
paid for the support of the government and maybe
imposed only by the State.
2. From Penalty
Penalty is any sanction imposed as a punishment
for violation of law or acts deemed injurious.
Violation of tax laws may give rise to the imposition
of penalty.
A penalty is designed to regulate conduct and may
be imposed by the government or private
individuals or entities. Tax, on the other hand, is
primarily aimed at raising revenue and may be
imposed only by the government.
3. From special Assessment
Special assessment is an enforced proportional
contribution from the owners of lands for special
benefits resulting from public improvements.
Special assessment is levied only on land, is not a
personal liability of the person assessed, is
based wholly on benefits and is exceptional both as
to time and place. Tax levied on persons, or
exercise of privilege, which may be made a personal
liability of the person assessed, is based on
necessity and is of general application.
4. From Permit or license fee
Permit or license fee is a charge imposed under the
police power for purposes of regulation.
License fee is imposed for regulation and involves
the exercise of police power while tax is levied
for revenue and involves the exercise of the taxing
power. Failure to pay a license fee makes an
act or business illegal while failure to pay a tax
does not necessarily make an act or business
illegal.
5. From debt
A debt is generally based on contract, is assignable
and may be paid in kind while a tax is based
on law, cannot generally be assigned and is generally
payable in money. A person cannot be
imprisoned for non-payment of debt while he can
be for non-payment of tax (except poll tax).
6. From Revenue
Revenue is broader than tax since it refers to all
funds or income derived by the government
taxes included. Other sources of revenues are
government services, income from public
enterprises and foreign loans.
7. From customs duties
Customs duties are taxes imposed on goods
exported from or imported to a country. Customs
duties are actually taxes but the latter is broader in
scope.
TAX LAWS
SOURCES OF TAX AUTHORITY
 The three branches of the national government
o The President and his administration
(executive)
o The Congress (legislative)
o Courts (judicial)
 Congress creates statutory law.
o House Bill 5636 – amending the NIRC of
1997
o Republic act 10963 – Tax Reform for
Accelaration and Inclusion(TRAIN Law) –
(effective Jan 2018)
o RA 11534 – Corporate Recovery and Tax
Incentives forEnterprise Act (CREATE)-
(effective July 2020)
 Income TaxatIon Notes
 The administration branch of the national
government includes:
o Department of Finance (DOF) of which
the Bureau of Internal (BIR) is a bureau.
o Two commonly type of administrative
tax authorities are:
 Revenue Regulations – administrative
interpretations of statutes enacted by
Congress to end to be somewhat more
detailed than the Code itself.
 Revenue Rulings – much more
detailed, as they are issued in order to
explain the tax results of every
specific transaction.
SOURCES OF TAX LAWS
 Constitution;
 Statutes and Presidential Decrees;
 Revenue Rulings by the Department of
Finances
 Rulings issued by the Commissioner of
Internal Revenue and options by the
Secretary of
 Justice;
 Decisions of the Supreme Court and the
Court of Tax Appeals;
 Provincial, city, municipal and barangay
ordinances subject to limitations set forth
in the
 Local Government Code; and
 Treaties or international agreements the
purpose of which is to avoid or minimize
double
 taxation.
PHILIPPINE TAX LAWS
 National Internal Revenue Code of 1997
(P.D. 1158 as amended)
 TRAIN Law – (RA 10963)
1) Income taxes (individual and corporate);
2) Estate and donor’s taxes;
3) value-added tax;
4) other percentage taxes;
5) excise tax; and
6) documentary stamp tax
 CREATE Law (RA 11534)
 Tariff and Customs Code of 1978 (P.D. 1464
as amended)
1) import duties; and
2) export duties
 Local Government Code of 1991 (R.A. 7160)
1) real property tax;
2) business taxes, fees and charges;
3) professional tax;
4) community tax; and
5) tax on banks and other financial
institutions.
 Special Laws
1) Motor Vehicle Law (R.A. 4136)
2) Private Motor Vehicle Tax Law
3) Philippine Immigration Act of 1940 (C.A.
613 as amended) – immigration tax and
4) Travel Tax Law (P.D. 1183, as amended)
travel tax
TAX LAWS VS. GAAP & GAAS
 All returns required to be files by the Tax
Code shall be prepared always in conformity
with the provisions of the Tax Code, and the
rules and regulations issued implementing
sais Tax Code.
 Taxability of income and deductibility of
expenses shall be determined strictly in
accordance with the provisions of the Tax
Code and the rules implementing the said
Tax code.
 In case there is conflict between the GAAP
and GAAS on the other side and the Tax Code
on the other side, the provisions of the Tax
Code and rules and regulations issued
implementing the said Tax Code shall
 Income TaxatIon Notes tax liability for reason of his
prevail. (Revenue Memorandum Circular 22-04, incapacity; and
april 12, 2004) o A specific taxpayer subject of a
POWERS AND DUTIES OF BIR request for the supply of tax
 Composed of Commissioner and seven (7) information from a foreign tax
Deputy Commissioners. authority pursuant to an
 Powers and duties: international convention or
1) Assessment and collection of all national agreement on tax matters to which
internal revenue taxes, fees, and charges; the Philippine is a signatory or a
2) Enforcement of all forfeitures, penalties, party.
and fines; INCOME AND INCOME TAXES
3) Execution of judgments in all cases decided  Income
in its favor by the Court of Tax Appeals and o means all wealth, which flows into
ordinary courts; the taxpayer other than a mere
4) Administration of supervisory and police return of capital.
powers conferred to it. o It is a return of money from one’s
POWERS OF THE COMMISIONER business, labor, or capital invested
 e.g. Gains, profits, salary and wages.
 to summon, o as the amount of money coming to a
examine, and take testimonies of persons; person or corporation within a
 specified time, whether as payment
requirement for tax administration and of services, interest or profit from
enforcement investment.
 o unless otherwise specified, it means
to any subordinate officer with rank cash or its equivalent.
equivalent to a division chief or higher;

Some terms:
taxpayer;
  Rank and file - refers to an
taxes. employee who does not fall under
 the definition of managerial and
6(f) of R.A. 8424 or Tax Reform Act of supervisory employee
1997, provides the Commissioner with the  Non-rank and file – opposite of a
authority to inquire into bank deposit rank and file employee.
accounts and other related information held
 Withholding tax - the amount of an
by financial institutions of
employee's pay withheld by the
o
employer and sent directly to the
estate;
government as partial payment of
o
income tax.
application for compromise of his
 Income TaxatIon Notes
Tax Exempt Compensation
Sample Problems from Passive income: I. De Minimis Benefits
1. Helena, single and a resident citizen, has the 1. Monetized unused vacation leave credits of
following passive income for the year 2018: private employees not exceeding ten (10) days
during the year;
Interest from BPI Savings Deposit 2. Monetized value of vacation and sick leave credits
P75,000 20% -P15000 paid to government officials and employees;
Royalty from Invention 3. Medical cash allowance to dependents of
80,000 20% - 16,000 employees, not exceeding P1,500 per employee per
Prize in a Painting Competition semester or P250 per month;
50,000 20% -10,000 4. Rice subsidy of 2K/month, 24k/annum, 1
Dividends Received from a Domestic Corp sack/month
30,000 10% - 3,000 5. Uniform and Clothing allowance P6,000/annum;
6.Actual medical assistance, e.g. medical allowance
Computation of Final Tax: to cover medical and healthcare needs, annual
P44,000 medical/executive check-up, maternity assistance,
and routine consultations, P10,000.00/annum
2. In 2018, Uri, a resident citizen, owns and holds 7. Laundry allowance not exceeding 300/month
as capital assets, shares of stocks of Prudential 3.6k/year
Guarantee and Assurance, Inc. a domestic 8.Employees achievement awards, e.g., for length of
corporation, costing P40,000. He sold all the shares service or safety achievement, which must be in the
directly to Lilibeth for P160,000. How much final form of a tangible personal property other than
tax must be paid? cash or gift certificate, with an annual monetary
value not exceeding P10,000 received by the
Computation of Capital Gains Tax: employee under an established written plan which
Selling price - 160,000 does not discriminate in favor of highly paid
Cost 40,000 employees;
Gain 120,000 9. Gifts given during Christmas and major
15% anniversary celebrations 5k/employee/annum;
Final Tax 18,000 10. Daily meal allowance for overtime work and
night/graveyard shift not exceeding twenty-five
3. Nicolas, a resident citizen, sold his residential percent (25%) of the basic minimum wage on a per
house and lot in Manila for P2,500,000. The cost of region basis;
the house and lot three years ago when he acquired 11. Benefits received by an employee by virtue of a
the property was P1,500,000 and the fair market collective bargaining agreement (CBA) and
value at the time of sale is P2,300,000. productivity incentive schemes provided that the
total monetary value received from both CBA and
How much is the capital gains tax from sale? productivity incentive schemes combined do not
exceed P10,000.00 per employee per taxable year.
(2,500,000 x 6%) 150,000
 Income TaxatIon Notes
12. APPLICATION OF THE “DE MINIMIS” CONCEPT 2. Income from Business or Practice of Profession
An employer who give a monthly rice subsidy to its
employees are allowed only P2,000 monthly
allowance per employee to be considered as “de
minimis” as listed above. If the employer granted
more than this amount, the excess might be
included as taxable compensation income. The
limitation stated in the above list are very
important. Any excess on the limit will be taxable
and, therefore, be subjected to the withholding tax.
It is in the case when the employee is a rank-and-
file employee, that the benefits be subjected to the
withholding tax and the normal income tax rate.
However, if the employee is a managerial or
supervisory employee, it will be subjected to the
35% fringe benefit tax. But before you consider it 3. Mixed Income (Income from compensation and
being taxable under normal income tax rate or business/practice of profession) – Tax Table (Sec
fringe benefit tax, you have to consider first the 24a) or 8% Gross Receipts Tax (if gross receipts did
13th month pay, bonuses plus the “excess of the de not exceed 3M). (if 8%is used, the 250,000
minimis” benefits received by the employee and deduction is not applicable)
compare it to the limit of P90,000 (TRAIN Law).
II. 13th month and other benefits of not exceeding
P90,000.
III. Separation pay beyond the control of the
employee.
IV. Retirement pay for serving the employer for at
least 10 years and with at least 50 years of age.
V. Minimum Wage Earners (MWE) – statutory
minimum wage, including holiday pay, overtime pay
night shift differential pay and hazard pay.
VI. Income of Overseas Contract Workers in their
income from other country
Tax Rates Application – INDIVIDUALS Note: If the taxpayer opted for 8% GRT, the
(Citizen and Resident Alien, including Non-resident 250,000 deduction is not applicable to mixed
Alien Engaged in Trade or Business). income earners since it was already incorporated in
1. Income from compensation - Tax Table (Sec 24a) the Tax Table.
NOTE: If the taxpayer did not
decide on whether to use the
section24a or the 8%, the section
24a will govern.
 Income TaxatIon Notes computing for the total taxable income and
TAX RULES FOR INDIVIDUALS EARNING INCOME BOTH consequently, the income tax due.
FROM COMPENSATION AND FROM SELF-EMPLOYMENT Sample Computation: Illustration 1
Mr. Madz, a Financial comptroller of JAC Company,
Section (D). Individuals Earning Income Both from
earned annual compensation in 2018 of
Compensation and from Self-Employment (business
P1,500,000.00, inclusive of 13th month and other
or practice of profession).
benefits in the amount of P120,000.00 but net of
For mixed income earners, the income tax rates
mandatory contributions to SSS and Philhealth.
applicable are:
Aside from employment income, he owns a
1. Tax table Section 24A
convenience store, with gross sales of P2,400,000.
2. They may opt the ff:
His cost of sales and operating expenses are
a. Gross receipts/sales and other non-
P1,000,000.00 and P600,000.00, respectively, and
operating income do not exceed 3M,
with non-operating income of P100,000.00
they may be taxed at:
Option 1: Eight Percent (8%) income tax rate on
i. Itemized, 40% OSD, Tax table
Gross Sales His tax due for 2018 shall be computed
ii. 8%
as follows if he opted to be taxed at eight percent
b. Gross receipts/sales and other non-
(8%) income tax rate on his gross sales for his
operating income exceed VAT
income from business:
threshold, Itemized, 40% OSD
 The 250,000 deduction on 8% is not
applicable to mixed earners since it is
already incorporated in the first tier of the
tax table. Thus 250k deduction isonly
applicable to purely self-employed
individuals and/or professionals.

 The total tax due shall be the sum of:

(1) tax due from compensation, computed using
the graduated income tax rates; and
(2) tax due from self-employment/practice of
profession, resulting from the multiplication of
the 8% income tax rate with the total of the
gross sales /receipts and other non-operating
income.
Option 1 CONCLUSIONS:
 Mixed income earner who opted to be taxed
under the graduated income tax rates for  The option of 8% income tax rate is applicable
only to taxpayer’s income from business, and
income from business/practice of
the same is in lieu of the income tax under the
profession, shall combine the taxable
graduated income tax rates and the percentage
income from both compensation and
tax under Section 116 of the Tax Code, as
business/practice of profession in amended.
 
Income TaxatIon Notes
The amount of P250,000.00 allowed as a
deduction under the law for taxpayers earning
solely from self-employment/practice of
profession, is not applicable for mixed-income
earner under the 8% income tax rate option.
 The P250,000.00 mentioned above is already
incorporated in the first tier of the graduated
income tax rates applicable to compensation
income.
Option 2: NOT Opting for 8% income tax on Gross
Sales/Receipts and other non-operating income
His tax due for 2020 shall be computed as follows if he
did not opt for the eight percent (8%) income tax based
on gross sales/receipts and other non-operating income:
Option 2 CONCLUSIONS:
 The taxable income from both compensation and
business shall be combined for purposes of
computing the income tax due if the taxpayer
chose to be subject under the graduated income
tax rates.
 In addition to the income tax, Mr. Madz is
likewise liable to pay percentage tax of
P72,000.00, which is 3% of P2,400,000.00.
Sample Illustration 1 Continued:
On February 2020, taxpayer tendered his
resignation to concentrate on his business. His total
compensation income amounted to P150,000.00,
inclusive of benefits of P20,000.00. His business
operations for the taxable year 2020 remains the
same. He opted for the eight percent (8%) income
tax rate.
 The option of 8% income tax rate is applicable
only to taxpayer’s income from business, and
the same is in lieu of the income tax under the
graduated income tax rates and the percentage
tax under Section 116 of the Tax Code, as
amended.
 The amount of P250,000.00 which is allowed as
deduction under the law for taxpayers earning
solely from self-employment/practice of
profession, is not applicable for mixed-income
earner under the 8% income tax rate option.
 The P250,000.00 mentioned above is already
incorporated in the first tier of the graduated
income tax rates applicable to compensation
income. The excess of the P250,000.00 over the
actual taxable compensation income is not
creditable against the taxable income from
business/practice of profession under the 80%
income tax rate option.
 Income TaxatIon Notes
Sample Computation: Illustration 2
Mr. Wayne, an officer of BATS International Corp.,
earned in 2018 an annual compensation of
P1,200,000.00, inclusive of the 13th month and other
benefits in the amount of P120,000.00. Aside from
employment income, he owns a farm, with gross sales
of P3,500,000. His cost of sales and operating expenses
are P1,000,000.00 and P600,000.00, respectively, and
with non-operating income of P100.000.00.
His tax due for 2018 shall be computed as follows:
CONCLUSION:
The taxpayer has no option to avail of the 8% income tax
rate on his income from business since his gross sales
exceed the VAT threshold. However, he is still not
subject to business tax since the nature of his business
transactions is VAT exempt.
more example:
HOW TO COMPUTE TAXES OF PROFESSIONALS AND
SELF-EMPLOYED
Sample Computation: Illustration 1
Ms. Terry operates a convenience store while she offers
bookkeeping services to her clients. In 2018, her gross
sales amounted to P800,000.00, in addition to her
receipts from bookkeeping services of P300,000.00. She
already signified her intention to be taxed at 8% income
tax rate in her 1st quarter return. Her income tax
liability for the year will be computed as follows
CONCLUSIONS:
 The total of gross sales and gross receipts is
below the VAT threshold of P3,000,000.00.
 Taxpayer’s source of income is purely from
self-employment, thus she is entitled to the
amount allowed as deduction of P250,000.00
under Sec. 24(A) of the Tax Code, as amended.
 Income tax imposed herein is based on the total
of gross sales and gross receipts.
 Income tax payment is in lieu of the graduated
income tax rates under subsection (A) hereof
and percentage tax due, by express provision of
law.
 Income TaxatIon Notes
Sample Computation: Illustration 2
Ms. Terry above, failed to signify her intention to be
taxed at 8% income tax rate on gross sales in her initial
Quarterly Income Tax Return, and she incurred cost of
sales and operating expenses amounting to P600,000.00
and P200,000.00, respectively, or a total of
P800,000.00, the income tax shall be computed as
follows
CONCLUSION: Aside from the income tax due above, Ms.
Terry is likewise liable to pay business tax.
Sample Computation: Illustration 3
Mr. Yoso signified his intention to be taxed at 8% income
tax rate on gross sales in his 1st Quarter Income Tax
Return. He has no other source of income, His total sales
for the first three (3) quarters amounted to
P3,000,000.00 with 4th quarter sales of P3,500,000.00.
Computation of tax due:
Computed as: (P3,000,000.00 – P250,000.00) x 8% =
P220,000.00
CONCLUSIONS:
 The gross receipts exceeded the VAT threshold
of P3,000,000.00. Taxpayer shall be liable to pay
income tax under graduated rates pursuant to
Section 2(A)(2)(a) of the Tax Code, as amended
 Taxpayer shall be allowed an income tax credit
of quarterly payments initially made under the
8% income tax option computed net of the
allowable deduction of P250,000.00 granted for
purely business income.
 Taxpayer is likewise liable for business tax(es),
in addition to income tax. For this purpose, the
taxpayer is required to update his registration
from non-VAT to VAT taxpayer. Percentage tax
pursuant to Section 116 of the Tax Code, as
amended, shall be imposed from the beginning
of the year until taxpayer is liable to VAT. VAT
shall be imposed prospectively.
 Percentage tax due on the non-VAT portion of
the sales/receipts shall be collected without
penalty, if timely paid on the due date
immediately following the month/quarter when
taxpayer ceases to be a non-VAT
Sample Computation: Illustration 4
Ms. RSVP is a prominent independent contractor who
offers architectural and engineering services. Since her
career flourished, her total gross receipts amounted to
P4,250,000.00 for taxable year 2018. Her recorded cost
of service and operating expenses were P2,150,000.00
and P1,000,000.00, respectively. Her income tax liability
will be computed as follows
CONCLUSION: The gross receipts exceeded the VAT threshold
of P3,000,000.00; subject to graduated income tax rates;
liable for business tax – VAT, in addition to income tax.
 Income TaxatIon Notes
Sample Computation: Illustration 5
In 2018, Mr. Swabe owns a nightclub and videoke bar,
with gross sales/receipts of P2,500,000.00. His cost of
sales and operating expenses are P1,000,000.00 and
P600,000.00, respectively, and with non operating
income of P100,000.00. His tax due for 2018 shall be
computed as follows:
CONCLUSIONS:
 The taxpayer has no option to avail of the 8%
income tax rate on his income from business
since his business income is subject to Other
Percentage Tax under Section 125 of the Tax
Code, as amended.
 Aside from income tax, taxpayer is liable to pay
the prescribed business tax, which in this case
is percentage tax of 18% on the gross receipts
as prescribed under Sec. 125 of the Tax Code, as
amended
FRINGE BENEFITS TAX (“FBT”)
 The term “fringe benefit” means any good,
service, or benefit other than the regular salary
and allowances received by an employee, and
which may be furnished or granted in cash or in
kind by an employer to an individual employee
COVERAGE
 Fringe benefits subject to FBT are those
benefits given or furnished to managerial or
supervisory employees, and not to the rank
and file.
GENERAL RULES IN THE VALUATION OF FRINGE BENEFITS
(a) If the fringe benefit is granted in money, or is
directly paid for by the employer, then the value is
the amount granted or paid for.
(b) If the fringe benefit is granted or furnished by
the employer in property and ownership is
transferred to the employee, then the value of the
fringe benefit shall be equal to the fair market
value (“FMV”) of the property.
Note: The FMV of the property is the FMV
determined by the BIR Commissioner or the
FMV determined by the Provincial or City
Assessor, whichever is higher.
(c) If the fringe benefit is granted or furnished by
the employer in property but the ownership is not
transferred to the employee (i.e., only the
“usufruct” or the right to use the property is
transferred), the value of the fringe benefit is
equal to the depreciation value of the property
RATE OF TAX AND TAX BASE
Tax rate = Final Tax of 35%
Tax base = Grossed up monetary value (“GUMV”) of
the fringe benefit
GUMV = Monetary value of the fringe benefit ÷ 65%
Notes:
a) The final tax is imposed whether the employer is
an individual, partnership, or corporation,
regardless of whether the employer is taxable or
not, or the government or its instrumentalities.
b) The fringe benefit tax is a tax of the employee. It
is a tax on the income or benefit received by
the employee. However, for convenience, the tax is
imposed on the employer. The employer is
required by law to pay the tax for and in behalf of
the employee
 Income TaxatIon Notes Note: The above expenses shall not be taxable
Taxable FBs and Specific Valuation Guidelines provided:
The guidelines for valuation of specific types of fringe (a) The expenditures are duly
benefits and the determination of the monetary value of receipted for and in the name of the
the fringe benefits are as follows: employer, and
(A) Housing Privilege (b) The expenditures are connected
with the trade or business of the
taxpayer, that is, they are not personal
expenses attributable to the employee.
(3) Personal expenses of the employee (like purchases of
groceries for the personal consumption of the
employee and his family) paid for or reimbursed by the
employer to the employee shall be treated as
taxable fringe benefits of the employee whether or not
the same are duly receipted for in the name of
the employer
Note: Representation and transportation
allowances which are fixed in amounts and are
regularly received by the employees as part of
their monthly compensation income shall not be
treated as taxable fringe benefits.
Such allowances are taxable as compensation income
subject to regular tax rates
(C) Motor Vehicle of Any Kind

(B) Expense Accounts

1) Expenses incurred by the employee which are paid by
his employer. In this case, the employee receives an
entertainment or representation allowance which is
subject to liquidation.
(2) Expenses paid for by the employee but reimbursed by
his employer. In this case, the employee pays
for the expense and gets reimbursement from the
employer.
 Income TaxatIon Notes
(D) Household Expenses
The following personal expenses of the employee which
are borne by the employer shall be treated as taxable
fringe benefits:
(1) Salaries of household help, personal driver
of the employee, or other.
(2) Similar expenses like payment for
homeowners’ association dues, garbage dues,
etc.
(E) Interest on Loans at Less Than Market Rate
(1) If the employer lends money to his employee
free of interest or at a rate lower than 12%,
such interest forgone by the employer
(difference of the interest assumed by the
employee and the rate of 12%) shall be treated
as a taxable fringe benefit.
(2) The benchmark rate of 12% shall remain in
effect until revised by a subsequent regulation.
(F) Social and Athletic Club Fees
Membership fees, dues, and other expenses borne by the
employer for his employee, in social and athletic clubs
or other similar organization shall be treated as tangible
fringe benefits of the employee in full.
(G) Expenses for Foreign Travel
(H) Holiday and Vacation Expenses
Holiday and vacation expenses of the employee borne by
his employer shall be treated as taxable fringe benefits.
(I) Educational Assistance
(J) Cost of Insurance
(K) Stock Options
 Stock options granted by an employer to its
employee(s) involving the employer’s own
shares or the shares of another corporation are
considered compensation. The amount of such
compensation shall be the FMV of the stock
options at the time the services were rendered.
 If the grantee exercises the option in the
future, additional income may be recognized the
grantee which shall give rise to the following
tax consequences
 When the option is granted by an employer
(involving its own shares of stock or shares of
another corporation) to its rank-and-file
employee, and the latter actually exercises the
option by paying the exercise price, additional
taxable compensation shall be recognized by the
employee and shall be subjected to the
creditable withholding tax on compensation.
Such additional compensation shall be
equivalent to the difference of the higher of the
book value or FMV of the underlying shares at
the time of the exercise of the option, and the
exercise price.
 However, if the employee exercising the option
is a supervisory or managerial employee, such
additional
 Income TaxatIon Notes
compensation shall be treated as a fringe benefit
subject to the final fringe benefit tax (“FBT”) under
Section 33 of the Tax Code (RMC 79-2014).
TAX ACCOUNTING FOR FB EXPENSE AND FB TAX
(a) The “fringe benefit expense” and “fringe
benefit tax” shall constitute allowable
deductions from gross income of the employer.
Ex. The fringe benefit expense of
P35,000 and fringe benefit tax of
P18,846 are deductible from gross
income of the employer, and shall be
taken up in the employer’s books of
accounts as follows:
Debit – Fringe benefit expense 35,000
Debit – Fringe benefit tax expense 18,846
Credit – Cash 53,846
(b) If the basis of the computation of the fringe
benefits (“FB”) tax is the depreciation value of
the property, only the FB tax shall constitute a
deductible expense of the employer.
 Provided, however, if the zonal value or
FMV of the said property is greater
than its cost subject to depreciation,
the excess amount shall be allowed as a
deduction from the employer’s gross
income as a fringe benefit expense
OTHER FRINGE BENEFITS NOT SUBJECT TO FRINGE BENEFITS
TAX (SEC 33 (A), (C), NIRC)
(A) Fringe benefits which are authorized and exempted
from income tax under the Tax Code or under special
law;
(B) Contributions of the employer of the benefit of the
employee to retirement, insurance, and hospitalization
benefit plans;
(C) Benefits given to the rank and file, whether granted
under a collective bargaining agreement or not;
(D) If the grant of the fringe benefit is for the
convenience or advantage of the employer.
(1) In the case of meals, they must be furnished
on the business premises of the employer
(2) In the case of lodging, the lodging must be
furnished on the business premises of the
employer and
the employee must be required to accept such
lodging as a condition of his employment in
order for the employee to properly perform the
duties of his employment.
(E) “De minimis” Benefits
“De minimis” benefits which are exempt from the
income tax on compensation as well as from the fringe
benefit tax shall be limited to facilities or privileges
furnished or offered by an employer to his employees
that are of relatively small value and are offered or
furnished by the employer merely as a means of
promoting the health, goodwill, contentment, or
efficiency of his employees, such as the following:
(1) Monetized unused vacation leave credits of
employees (in the private sector) not exceeding
10 days during the year;
(2) Monetized value of vacation and sick leave
credits paid to government officials and
employees;
(3) Medical cash allowance to dependents of
employees not exceeding P1,500 per semester
or P250 per month (or P3,000 per year);
(4) Rice subsidy of P2,000 or one (1) sack of 50
kg. of rice per month amounting to not more
than P2,000 (or P24,000 per year);
(5) Uniform and clothing allowance not
exceeding P6,000 per annum;
(6) Actual medical assistance, e.g. medical
allowance to cover medical and healthcare
needs, annual medical/executive check-up,
maternity assistance, and routine consultations,
not exceeding P10,000 per annum;
(7) Laundry allowance of P300 per month (or
P3,600 per year);
(8) Employee achievement awards, e.g. for
length of service, loyalty, safety achievement,
etc. To be exempt:
(a) The award must be in the form of
tangible personal property other than
cash or gift certificates;
(b) The annual monetary value must not
exceed P10,000; and
(c) The award must be given under an
established written plan which does not
 Income TaxatIon Notes
discriminate in favor of highly paid
employees.
(9) Gifts given during Christmas and major
anniversary celebrations not exceeding P5,000
per employee per annum;
(10) Daily meal allowance for overtime work
and night/graveyard shift not exceeding twenty
five percent (25%) of the basic minimum wage
on a per region basis;
(11) Benefits received by an employee by virtue
of a collective bargaining agreement (“CBA”)
and productivity incentive schemes. Provided,
the total annual monetary value received from
both the CBA and productivity incentive
schemes combined, do not exceed Ten Thousand
Pesos (P10,000) per employee per taxable Year
(Rev. Regs. No. 3-98, as amended by Rev. Regs.
Nos. 5-2011 and 1-2015)
Notes:
a) The abovementioned eleven (11) items are
not only exempt from the FBT but also from the
withholding tax on compensation income of
managerial, supervisory and rank and file
employees.
b) The amount of “de minimis” benefits
conforming to the abovementioned prescribed
ceilings shall not be considered in determining
the P90,000 ceiling of “13th month pay and
other benefits” excluded from gross income
under Section 32 (B)(7)(e) of the Tax Code.
Provided that, the excess of the “de
minimis” benefits over their respective
ceilings shall be considered as
part of “13th month pay and other
benefits” and the employee receiving it
will be subject to tax only on the excess
over the P90,000 ceiling.
c) Minimum wage earners (“MWEs”) receiving
“13th month pay and other benefits” exceeding
the P90,000 limit shall be taxable on the excess
benefits over P90,000.
TAXATION OF FRINGE BENEFITS OF NRANETB
A non-resident alien not engaged in trade or business in
the Philippines who receives a fringe benefits is subject
to the fringe benefit tax as follows:
Rate - twenty-five percent (25%)
Tax Base - the grossed-up monetary value of the fringe
benefit computed by dividing the monetary value of the
fringe benefit by seventy-five percent (75%)
TAXATION FOR ESTATES AND TRUST
ESTATES
Estates Defined:
- Estate refers to the mass of all the property,
rights, and obligations of a person which are
not extinguished by hisdeath (Art. 776, Civil
Code). It includes not only the property and
transmissible rights and obligations existing
at the time of his death, but also those which
have accrued thereto since the opening of the
succession (Art 78 h Civil Code).
Decedent Defined:
- Decedent is the general term applied to the
person whose property is transmitted
through succession whether or not he left a
will. If he left a will, he is also called the
testator (Art. 775, Civil Code).
Heir Defined:
- An heir is a person called to the succession
either by the provision of a will or by
operation of law (Art. 782, Civil Code).
Devisee Defined:
- A devisee is a person to whom a gift of real
property is given by virtue of a will.
Legatee Defined:
- A legatee is a person to whom a gift of
personal property is given by virtue of a will
(Art, 782, Civil Code).
 Income TaxatIon Notes
An Estate reported following:
Sales ………………………. P 3,500,000
Expenses …...…………….. 1,800,000
1. Income tax of the estate is P__________
TI = P1,700,0
Income Tax:
800,000 ………………….. P130,000
900,000 x 30%........…….. 270,000
2. OSD is used
TI = P2,100,000 (3,500,000 x 60%)
2,000,000 ………….. P 490,000
100,000 x 32% ……….. 32,000
Income Tax ………….. 522,000
3. Can the estate use the 8% gross receipts tax?
Why? (No, over 3M sales)
B. An Estate reported the following income:
Trust I Trust II Total
Sales …1,600,000 1,200,000 2,800,000
Expenses 1,300,000 800,000 2,100,000
Net Income 300,000 400,000 700,000
4. TI = 700,000
Income Tax:
400,000 ……………………… 30,000
300,000 x 25% …………….. 75,000
Total ………………………… 105,00
Trust I = 300/700 x 105,000 = 45,000
Trust II = 400/700 x 105,000 = 60,000
5. 8% GRT is used:
Income Tax P204,000 (2,800,000 – 250,000) x 8%
T I = 1.6/2.8 x 204,000
T II = 1.2/2.8 x 204,000
6. OSD is used:
Taxable Income
T I …….. P960,000 (1,600,000 x 60%)
T II ……. P720,000 (1,200,000 x 60%)
Total …….. P1,680,000
Basic ……………………. P130,000
Excess …………………. 264,000
Total …………………… 394,000
T I = 960/1,680 x 394,000 = 225,143
T II = 720,1,680 x 394,000 =168,857
C. An Estate reported net income from estate of
P850,000. P400,000 of the income was given to
the heirs.
Net Income from Estate …………. P850,000
Less: Amount given to heirs …... 800,000
Taxable Income …………………. 50,000
No Income tax (below 250,000)
INCOME TAX ON PARTNERSHIPS
Purposes of the income tax, partnerships are classified
into:
(a) partnership not subject to income tax; and
(b) Partnership subject to income tax.
A. Partnerships Not Subject to Income Tax
The following partnerships are not subject to income
tax:
1. General professional partnership (“GPP”) – A
partnership formed by persons for the sole
purpose of exercising their common profession,
no part of the income of which is derived
engaging in trade or business (Sec. 22 (B), NIRC)
Note: Because of the exemption of GPPs from the
income tax, income payments to them by their clients
are exempt from creditable withholding tax (RMC No. 3-
2012)
 Income TaxatIon Notes
Filing of Return
Exempt partnerships are required to file an “annual
information return.” However, the purpose is to
furnish information (Form No. 1702 EX) as to the share
each partner shall report and include in his personal
income tax return.
Tax Liability of Partners in Exempt Partnership
(a) Persons engaging in business as partners in a
general professional partnership shall be liable
for income tax only in their separate and
individual capacities.
(b) Each partner shall report as gross income his
distributive share, actually, or constructively
received, in the net income of the partnership
(Sec. 26, NIRC)
The share of a partner in the net profits of the
partnership shall be taxable to the partner,
whether distributed or not.
But where the result of the partnership
operation is a loss, the loss will be divided
among the partners in the same proportion as
the net income, or as provided in the
partnership agreement. Each individual partner
may then take up his share in the loss in his
income tax return as a deductible loss.
(c) The share of a partner shall be subject to
creditable withholding tax of 10% if the current
year’s income payments to the partner total
P720 000 or below, or 15% if the same exceeds
P720 000.
(d) For purposes of computing the distributive
share of the partners, the net income of the
partnership shall be computed in the same
manner as a corporation.
(1) The Partners comprising the GPP can no
longer claim further deductions from
their distributive shares in the net
income of the GPP.
(2) The partners of a GPP are also not
allowed to avail of the 8% income tax rate
option since their distributive share from
the GPP is already net of costs and
expenses.
(3) If a partner also derives other income
from trade, business, or practice of
profession apart and distinct from his
share in the net income of the GPP, the
deduction that can be claimed from this
other income would either be the
Itemized Deductions or OSD.
B. Partnerships Subject to Income Tax
All other partnerships, except those mentioned above
(item A), no matter how created or organized, are
considered corporations subject to income tax (Sec.
22(B), NIRC).
Filing of Tax Return
Taxable partnerships, like ordinary corporations, are
required to file quarterly income tax returns for the
first, second, third quarters, and an annual return based
on their accounting periods.

The distributable net income of the GPP may be

determined by claiming either Itemized
Deductions or OSD: Also please refer to RR 8-
2018 (pages 21-23).
 Income TaxatIon Notes
Example: A & B are partners in a GPP who will divide the
profits equally. The GPP reported the following:
Sales ……………………………… P2,300,000
COS ……………………………… 1,200,000
GrossIncome…………………… 1,100,000
Operating Expenses …………... 300,000
Net Income ………………………. 800,000
In addition, Partner B spent P45,00 for his food and fuel
expenses while attending the affairs of the partnership
(GPP)
1. Share of A using itemized deductions is P 400,000
Income tax of A – P30,000
2. Share of B in the GPP – P400,000 (Partner B can
not deduct the P45,000 expenses incurred).
Income Tax of B is – P30,000
Example: Alma and Lorna are partners in a GPP who will
divide profits at 4:6 respectively.
The GPP posted a Gross Receipts of P2,600,000; cost of
services of P900,000 and operating cost of P700,000.
In addition:
Alma is teaching having a taxable compensation of
P340,000
Lorna is operating a convenient store with Sales of
P1,500,000; COS of 600,000 and operating cost of
P300,000.
3. Income tax of the GPP? P 0 (Exempt)
4. Income tax of Alma is (assuming the GPP use the
Itemized Deduction)
NI of GPP = P1,000,000 (2,600,000 – 900,000 – 700,000)
Share in the GPP – P400,000 (1,000,000 x 4/10)
TI in compensation 340,000
Total TI ………… 740,000
Income tax …….. P115,000
5. Income tax of Lorna (assuming the GPP used the
OSD and she used OSD in her convenient store)
Net Income of GPP (OSD) GR ………. P2,600,000
COS …………………………………... 900,000
GI ……………………………………... 1,700,000
OSD (40%) ………………… 680,000 If individual,
40% OSD based on GI
NI …………………………. 1,020,000
Share in the GPP (6/10 x 1,020,000) = P612,000
Net Income Store (1,500,000 – 40%) - 900,000
Total ………………………………… 1,512,000
Income Tax ………………………… 343,600
6. Income tax of Lorna (assuming the GPP use the
OSD and she use Itemized Deductions in her
convenient store).
Share in GPP ………………………. P612,000
Net Income (Store) ………………… 600,000 (1,500,000
– 600,000 – 300,000)
Total TI ……………………………..1,212,000
Income Tax ……………………….. P 253,600
7. Income tax of Lorna assuming the GPP used the
Itemized Deduction and Store used the OSD .
Share in the GPP ……………………. P600,000
Store ……………………………….. 900,000
Total TI ……………………………. P1,500,000
Income …………………………….. P 340,000
TAXATION OF CORPORATIONS
A. Classification of Income Taxpayers (Other
Than Individuals)
1. Estates and Trusts
2. General Professional Partnership
3. CORPORATIONS
a. Domestic . Those created or organized
under and by virtue of Philippine laws.
1. Domestic corporation, in general
2. Government-owned and controlled
corporations (GSIS,SSS,PHIC, Water
District)
3. Taxable partnerships
4. Proprietary educational institutions
5. Non-profit hospitals
 Income TaxatIon Notes
b. Foreign. Those organized in accordance
with laws of their respective countries
1. Resident. Those engaged in trade or
business within the Philippines
2. Non-resident. Those not engaged in
trade or business within the
Philippines
B. Definition of Terms
1. Corporation. It includes partnerships, no
matter how created or organized, joint-
stock companies, joint accounts,
associations, or insurance companies
(except GPP)
2. Domestic. When applied to a corporation,
means created or organized in the
Philippines or under its laws.
3. Foreign. When applied to a corporation,
means a corporation which is not domestic.
4. Resident Foreign Corporation. Applies to a
foreign corporation engaged in trade or
business within the Philippines.
5. Non-resident Foreign Corporation. Applies
to a foreign corporation not engaged in
trade or business within the Philippines
C. Sources of Income
Sources of Income
Corporation Within the Phil. Without the Phil
1. Domestic / /
2. Foreign / members
D. Normal Income Tax – Rate is 30%
E. Allowable Deduction
1. Optional Standard Deductions (OSD)
40% of Gross Income
2. Itemized Deductions
 Amortization
 Bad Debts
 Charitable Contributions
 Depreciation
 Fringe Benefit
 Losses Ordinary Expenses:
 Interest
 Representation and
Entertainment
F. Corporations Exempt From Income Tax
1. Labor , agricultural or horticultural
organization not organized principally
for profit
2. 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
3. A beneficiary society, order or
association, operation exclusive benefit
of the members, organized by employees
or their dependents providing for the
payment of life, sickness
4. Cemetery company owned and operated
exclusively for the benefit of its
5. Non-stock corporation or association
organized and operated exclusively for
religious, charitable, scientific, athletic,
or cultural purposes
6. Business league, civic league, chamber
of commerce, not organized for profit
and no part of the net income of which
inures to the benefit of any private
stockholder or individual
 Income TaxatIon Notes
7. A non-stock and non-profit educational
institution
8. Cooperatives – which transact Business
with Members only.
(Except: Cooperatives which Transact
Business with members and non-
members with accumulated reserves
and undivided savings of more than
P10M- Taxable with non-members)
G. Declaration of Quarterly Corporate Income
Tax
Every Corporation shall file a quarterly
summary declaration of its gross income
and deductions on a cumulative basis for
the preceding quarters shall be paid and the
return filed not later than sixty (60) days
from close of each of the first three (3)
quarters.
Every taxable corporation is likewise
required to file the total taxable income of
the corporation which is required to be filed
and paid on or before April 15, or on or
before 15th day of the 4th month following
the close of the fiscal year, as the case may
be.
If the sum of the quarterly tax payments
made during the said taxable year is not
equal to the total tax due on the entire
taxable income of the year, the corporation
shall either:
1. Pay the balance of the tax still due;
2. Carry over the excess credits;
3. Be credited or refundable with excess
amount paid
H. Minimum Corporate Income Tax (MCIT). The
MCIT was conceived to address the problem
on the non-declaration and under-
declaration of corporate income and
revenues. Even if the operations of a
corporation result in a net loss, it will still
be subject to the MCIT.
A minimum corporate income tax (MCIT)
of two percent (2%) of the gross income
(beginning the fourth (4) taxable year.
Feature of MCIT:
a. Start on the 4th year from
operation.
b. Tax rate is 2% of Gross Income.
c. Payable is MCIT or Normal Tax
whichever is higher.
d. Excess MCIT may be carried over as
deduction from normal tax the next
three (3) years.
I. IMPROPERLY ACUMULATED EARNINGS TAX
(IAET)
The 10% Improperly Accumulated Earnings Tax
(IAET) is imposed on improperly accumulated
taxable income. The rationale is that if the earnings
and profits were distributed, the shareholders
would then be liable to income tax thereon. Thus, a
tax is being imposed in the nature of a penalty to
the corporation for the improper accumulation of
earnings. An accumulation of earnings or profits
(including undistributed earnings or profits of prior
years). CANCELLED UNCER CREATE LAW
J. Net Operating Loss Carry-Over (NOLCO)
The net operating loss (excess of allowable
deductions over gross income) of the business or
enterprise for any taxable year immediately
preceding the current taxable year, which had not
been previously offset as deduction from gross
income shall be carried over as deduction from
gross income for the next three (3) consecutive
taxable years immediately following the year of
such loss (NOLCO 2020 & 2021 extended to 5 years
under the Bayanihan Act.). Any net loss incurred in
a taxable year during which the taxpayer was
exempt from income tax shall not be allowed as a
deduction.
 TAXATION OF CORPORATIONS

A. Classification of Income Taxpayers (Other Than Individuals)

1. Estates and Trusts

2. General Professional Partnership
3. CORPORATIONS

a. Domestic . Those created or organized under and by virtue of Philippine laws.

1. Domestic corporation, in general
2. Government-owned and controlled corporations (GSIS,SSS,PHIC, Water
District)
3. Taxable partnerships
4. Proprietary educational institutions
5. Non-profit hospitals
b. Foreign. Those organized in accordance with laws of their respective
countries
1. Resident. Those engaged in trade or business within the Philippines
2. Non-resident. Those not engaged in trade or business within the
Philippines

B. Definition of Terms
1. Corporation. It includes partnerships, no matter how created or organized, joint-
stock companies, joint accounts, associations, or insurance companies (except
GPP)
2. Domestic. When applied to a corporation, means created or organized in the
Philippines or under its laws.
3. Foreign. When applied to a corporation, means a corporation which is not
domestic.
4. Resident Foreign Corporation. Applies to a foreign corporation engaged in trade
or business within the Philippines.
5. Non-resident Foreign Corporation. Applies to a foreign corporation not engaged
in trade or business within the Philippines

C. Sources of Income
Sources of Income
Corporation Within the Phil. Without the Phil
1. Domestic / /
2. Foreign /

D. Normal Income Tax – Rate is 30% CREATE Law 25%/20%

Corporate Income Tax Gross Sales/Revenue …………………XXX

Less: Cost of Sales/Service Other Expenses ………… XXX
NOLCO …………………………………………XXX XXX
Taxable Income ……………………………………………… XXX
Provision for IT ……………………………………………… XXX
Less: WT Certificates ……………………………….. XXX
Tax Credits ……………………………………. XXX XXX
Income Tax Due …………………………………………… XXX

E. Allowable Deduction
1. Optional Standard Deductions (OSD) 40% of Gross Income
2. Itemized Deductions
  Amortization
 Bad Debts
 Charitable Contributions
 Depreciation
 Fringe Benefit
 Losses Ordinary Expenses:
 Interest
 Representation and Entertainment

F. Corporations Exempt From Income Tax

1. Labor , agricultural or horticultural organization not organized principally for
profit
2. 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
3. A beneficiary society, order or association, operation exclusive benefit of the
members, organized by employees or their dependents providing for the
payment of life, sickness
4. Cemetery company owned and operated exclusively for the benefit of its
members
5. Non-stock corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, or cultural purposes
6. Business league, civic league, chamber of commerce, not organized for profit
and no part of the net income of which inures to the benefit of any private
stockholder or individual
7. A non-stock and non-profit educational institution
8. Cooperatives – which transact Business with Members only.
(Except: Cooperatives which Transact Business with members and non-
members with accumulated reserves and undivided savings of more than
P10M- Taxable with non-members)

G. Declaration of Quarterly Corporate Income Tax

Every Corporation shall file a quarterly summary declaration of its gross income
and deductions on a cumulative basis for the preceding quarters shall be paid
and the return filed not later than sixty (60) days from close of each of the first
three (3) quarters.
Every taxable corporation is likewise required to file the total taxable income of
the corporation which is required to be filed and paid on or before April 15, or on
or before 15th day of the 4th month following the close of the fiscal year, as the
case may be.
If the sum of the quarterly tax payments made during the said taxable year is
not equal to the total tax due on the entire taxable income of the year, the
corporation shall either:
1. Pay the balance of the tax still due;
2. Carry over the excess credits;
3. Be credited or refundable with excess amount paid

H. Minimum Corporate Income Tax (MCIT). The MCIT was conceived to address the
problem on the non-declaration and under-declaration of corporate income and
revenues. Even if the operations of a corporation result in a net loss, it will still
be subject to the MCIT.

A minimum corporate income tax (MCIT) of two percent (2%/1%) of the

gross income (beginning the fourth (4) taxable year. Feature of MCIT:
a. Start on the 4th year from operation.
 b. Tax rate is 2%/1% of Gross Income.
c. Payable is MCIT or Normal Tax whichever is higher.
d. Excess MCIT may be carried over as deduction from normal tax the next
three (3) years.

I. IMPROPERLY ACUMULATED EARNINGS TAX (IAET)

The 10% Improperly Accumulated Earnings Tax (IAET) is imposed on improperly

accumulated taxable income. The rationale is that if the earnings and profits were
distributed, the shareholders would then be liable to income tax thereon. Thus, a tax is
being imposed in the nature of a penalty to the corporation for the improper
accumulation of earnings. An accumulation of earnings or profits (including
undistributed earnings or profits of prior years). CANCELLED UNDER CREATE LAW

J. Net Operating Loss Carry-Over (NOLCO)

The net operating loss (excess of allowable deductions over gross income) of the
business or enterprise for any taxable year immediately preceding the current taxable
year, which had not been previously offset as deduction from gross income shall be
carried over as deduction from gross income for the next three (3) consecutive taxable
years immediately following the year of such loss (NOLCO 2020 & 2021 extended to 5
years under the Bayanihan Act. per RR 25-2020). Any net loss incurred in a taxable
year during which the taxpayer was exempt from income tax shall not be allowed as a
deduction.

GROSS INCOME

EXCLUSIONS FROM GROSS INCOME

What are Exclusions?

Exclusions are income or receipts which are excluded from gross income, i.e. these are not included in the
determination of a taxpayer's gross income.

Hence, these incomes or receipts are not subject to income tax. However, despite their non-inclusion from
gross income, such income items may be subject to taxes other than the income tax.

Exclusions Under the Tax Code

The following items shall not be included in gross income and shall be exempt from income tax:

A. Proceeds of Life Insurance Upon Death of the Insured

The proceeds of life insurance policies paid to the heirs or beneficiaries upon death of the insured
shall be exempt from income tax. The proceeds of life insurance are treated more as an indemnity for
the life lost instead of as gain, profit, or income.

Note: Interest payments made by the insurer constitutes income to the recipient.

B. Amount Received by Insured as Return of Premium

 The amount received by the insured, as a return of premiums paid by him under life insurance,
endowment, or annuity contracts, either during the term, or at the maturity of the term mentioned in
the contract, or upon surrender of the contract.

Notes:
a) The excess of the proceeds received over the premiums paid is included in gross income

b) Participating dividends distributed to life insurance policy holders are actually a return of
overpaid premiums. They are therefore excluded from gross income of the insured.

C. Gifts, Bequests, and Devices

The value of property acquired by gift, bequest, devise or descent are exempt from income taxation.

Note: The income from the lease, sale, exchange, investment, or other disposition of such property
shall be subject to income tax.

D. Compensation for Injury or Sickness

a) Amounts received, through accident or health insurance, or under Workmen’s Compensation

Acts, as compensation for personal injuries or sickness; Plus

b) The amounts of any damages received, whether by suit or agreement, on account of such injuries
or sickness.

c) Damages representing compensation for personal injuries arising from libel, defamation, slander,
breach of promise to marry, or alienation of affection.

- Includes moral damages. Moral damages include physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury.

- Includes exemplary or corrective damages. These are imposed by way of example or

correction for the public good.

E. Income Exempt Under Treaties

Income of any kind, to the extent required by any treaty obligation or international agreement to be
exempt from taxation by the Republic of the Philippines.

F. Retirement Benefits, Pensions, Gratuities, Separation Pay Which Are Exempt From Income
Tax

a) Social security benefits, retirement gratuities, pensions and other similar benefits received by
resident or non-resident citizens of the Philippines, or aliens who come to reside in the
Philippines, from foreign agencies and other institutions private or public.

b) Payment of benefits due or to become due to any person residing in the Philippines under the
laws of the United States administered by the United States Veteran Administration.

c) Benefits received from or enjoyed under the Social Security System (SSS) in accordance with
the provisions of Republic Act 8282.

d) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity
received by government officials and employees.

e) Maternity benefits advanced by the employer to the employee are excluded from gross income,
and are therefore exempt from withholding tax.
 GROSS INCOME

Concept of Gross Income

Gross income means the total income of a taxpayer subject to tax. It includes the gains, profits, and
income DERIVED FROM WHATEVER SOURCE, whether legal or illegal.

It does not include income excluded by law, or which are exempt from income tax.

Gross Income Defined

Gross income means all income derived from whatever source, including, but not limited to the
following items:
(1) Compensation for services;
- Including pensions and retiring allowances (except those exempt by law)
(2) Gross income derived from the conduct of trade or business or the exercise of profession;
(3) Partner’s distributive share from the net income of a general professional partnership;
(4) Rents
(5) Annuities (excess over premium paid);
(6) Gains derived from dealings in property;
(7) Interest income;
(8) Royalties;
(9) Dividends;
(10) Prizes and winnings;

Note: The above enumeration is not exclusive. Gross income may also include other forms of
income which are not even mentioned in the list above. An example of this would be income from
illegal sources.

Items of Gross Income

1. Compensation For Services

Compensation for services, of whatever kind and in whatever form paid, forms part of gross income.
The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages,
emoluments and honoraria, allowances, commissions (e g. transportation, representation,
entertainment, and the like); fees, including director’s fees, if the director is, at the same time, an
employee of the employer/corporation; taxable bonuses and fringe benefits, except those which are
subject to the fringe benefits tax under Section 33 of the Tax Code; taxable pensions and retirement
pay; and other income of a similar nature constitute compensation income.

(A) Fees

Fees received by an employee for the performance of a service for the employer, including
director’s fees (including per diems and allowances), are regarded as compensation income.

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 are
considered compensation.

Exception: Authorized fees paid to public officials, such as notaries public, clerks of court,
sheriffs, etc., for services rendered in the performance of their official duties, are not
considered wages.

(B) Dismissal Payment

Any payment made by an employer to an employee on account of dismissal, that is, involuntary
separation from the service of the employer, constitutes wages, regardless of whether the
employer is legally bound by contract statute, or otherwise to make such payment
 (C) Tips and Gratuities

Tips or gratuities paid directly to an employee (by a customer of the employer) which are not
accounted for by the employee to the employer are considered taxable income, but not subject
to withholding tax.

2. Gross Income From Business

1) In general, “gross income” means total sales less COGS, plus any income from investments and
from any incidental or outside operations or sources.

Formula: Merchandising-ACCRUAL

Gross Sales P xxx

Less: Cost of good sold ( xx)
Gross profit from sales P xxx
Add: Other Income P xxx
(a) Income from investment P xxx
(b) Income from incidental or outside operations or
sources xxx xxx
Gross Income P xxx

Gross Sales – total consideration agreed upon by the buyer and seller for the sale of goods.
Gross sales include cash (collected) and receivables (uncollected).

Gross Receipts – means cash collections for services rendered or to be rendered. Gross receipts
include reimbursements by the client for out-of-pocket expenses incurred by the service provider.

“Cost of Sale” shall include the invoice cost, import duties, freight in transporting goods
to place of sale including insurance while goods are in transit.

Formula: Service type of business-CASH BASIS

Gross Receipts ……………………………………………….XXX

Less: Cost of Services ……………………………………… XXX
Gross Profit ………………………………………………… XXX
Add: Other Income ……………………………………….. XXX
Gross Income …………………………………………….. XXX

“Cost of Services” shall include direct cost and expenses necessary to provide the service,
including salaries and employee benefit, consultants/specialist directly rendering the service and
cost of facilities, depreciation or rental of equipment used and cost of supplies.

2) Income from Long-Term Contracts

The term “long-term contracts” refers to construction, installation, or building contracts

requiring a period longer than one (1) year for completion.

Income therefrom is reported under the percentage of completion basis.******

Ex. Contract is P100M (2 years starting 2018)

Contract completed (2018) 40%
L,M,OH used ……(2018) P35M
L.M.OH used …….(2019) P50M
Gross Income?
(2018) (2019)
 Value of contract completed (40% x 100M) = P40M P 60M
Cost …………………………………………. 35M 50M
GI ………………………………………….. 5M 10M

COMPLETED CONTRACT *******

Value 100M
Cost 85M
GI 15M
(To be recognized in 2019)

3) Gross Income From Farming

The income tax regulations prescribe three (3) methods of reporting the gross income from
farming, namely:

(a) Cash basis, or receipts and disbursements basis. Under this method, no inventory is
used to determine profits.

Formula –

Cash from sales of livestock and other products raised in the farm
+ Value of property received from sales
+ Profits/Gains from the sale of livestock or other items purchased
+ Gross income from all other sources
TOTAL gross income

(b) Accrual basis. Under this method, inventory is used to determine profits

Formula –

Sales xxx
Ending Inventory xxx
Less beginning inventory (xx)
Less purchases (xx) (xx)
Gross Income xxx

or

Cash from sales of livestock and other products raised in the farm
+ Value of property received from sales
+ Profits/Gains from the sale of livestock or other items purchased
+ Gross income from all other sources
TOTAL
+ Inventory, End
- Inventory, Beginning
GROSS INCOME

(c) Crop basis. This method of reporting income may be used by a farmer engaged in
producing crops which take more than (1) year from the time of planting to the time of
gathering and disposing of the crop.

In such cases, the entire cost of producing the crop must be taken as a deduction in the
year in which the gross income from the crop is realized.

Cash sales of farm products ……………….. P 300,000

Ending Invty of farm products ……………. 200,000
Beg. Invty of farm products ………………. 150,000
Rental Income of Farm Eqpt. ……………. 50,000

GI – Cash Basis …………………… P 350,000

 GI – Accrual Basis ………………..
Cash Proceeds ………………. P350,000
Add: Invty End …………….. 200,000
Less: : Invty, Beg ………….. (150,000)
GI -..------------------------------- P400,00

3. Rent or Lease Income

Reporting of Income by a Lessor

Rent paid by the lessee for the use or lease of property is taxable income to the lessor.

Rent income may be in the following forms:

(1) Cash, at the stipulated price;

(2) Obligations of the lessor to third persons paid or assumed by the lessee in consideration
of the contract of lease. An example is the real estate tax on the property leased assumed by
the lessee.

(3) Advance payment which must be pre-paid rentals and not (a) a loan to the lessor, or (b)
option money for the property, or (c) security deposit for the faithful performance of the
lessee’s obligations

However, a security deposit that is applied to rentals is taxable income to the lessor.

Pre-paid rent must be reported in full in the year of receipt, regardless of the accounting
method used by the lessor.

(4) Leasehold improvement

The contract of lease may provide that the lessee may make permanent improvements on the
lease property and said improvements will belong to the lessor upon termination of the lease.

Income and Deduction from Leasehold Improvement

(a) Income of Lessor

The lessor, in such a case, may, at his option, report income under any of the following
methods:

1) Outright method – lessor reports as income the FMV of the improvement in the year
of completion.

2) Spread-out method –

The lessor shall spread over the remaining term of the lease the estimated depreciated
(book) value of such buildings or improvements at the termination of the lease, and
report as income for each remaining term of the lease an aliquot part thereof

Formula:

Cost of leasehold improvements P xxx

Less: Depreciation for remaining term of lease (xx)
Book value, end of lease P xxx

Book value end of lease = Income per year P xxx

Example:
 Lease on land for P240,000/year starting Jan 1 2017 for 10 years
Building constructed on the lease property worth P10M completed on Jan 1, 2019
Est Life of Bldg. is 10 years

Rental Income (2019)?

1. Outright Method – Rent land ………….. P240,00
Improvement ………………………….. 10,000,000
Total Rent …………………………….. P10,240,000 (2019)

Rent 2017………………………………. 240,000

Rent 2018 …………………………….. 240,000
Rent 2019 …………………………. P10,240,000
Rent 2020 ……………………………. 240,000

2. Spread-out Method (2019)

Rent on Land …………………………… P240,000
Improvement …………………………. 250,000*
Rental Income …………………………. P490,000

*Improvement
Cost …………………P10,000,000
Accu Dpn ETL …. 8,000,000
10,000,000/10 x 8
BV ETL ……………. 2,000,000 ETL = end of term of lease

RI = 2,000,000/8 = 250,000 RI = rental income

2017 RI = 240,000
2018 RI – 240,000
2019 RI = 490,000
2020 RI = 490,000

(b) Deduction of Lessee (Depreciation expense)

The lessee may claim depreciation of the improvements over the remaining term of the
lease or the life of the improvements, whichever is shorter.

(c) Computation of Income from Leasehold Improvement Arising from the Pre-
termination of Lease Contract

The lessor receives additional income for the year in which the lease is so terminated to
the extent that the value of such building when he became entitled to such possession
exceeds the amount already reported as income on account of the erection of such
building.

Formula –

BV of Leasehold Improvement at termination of Lease P xxx

Less: Amounts of income previously recognized (xx)
Additional income in year of termination P xxx

(d) Loss of Lessor if Leasehold Improvement is Destroyed Before Termination of

Lease

If the building or other leasehold improvement is destroyed before the expiration of the
lease, the lessor is entitled to deduct as a loss for the year when such destruction takes
place the amount previously reported as income because of the erection of the
improvement, less any salvage value, to the extent that such loss was not compensated
by insurance.
4. Gains Derived From Dealings in Property

Sale of 3 types of property which may give rise to taxable events:

Ordinary asset – 100% of the gain or loss shall be recognized in the ITR
Capital asset – subject to final taxes (capital gains tax)

Other capital asset – holding period of the asset shall be taken into consideration if the seller is
an individual, and only the net capital gain shall be included in the ITR.

Asset

Ordinary Capital

Real Real
Personal Personal

Capital Gains Tax

Income Tax

Ordinary Assets:
1. Assets purchased primarily held for sale
2. Assets included in inventory
3. Assets used in business

Rules: Individual
Corporate
1. Capital loss can only be deducted from capital gain / /
2. Capital loss can not be deducted from ordinary gain / /
3. Ordinary loss may be deducted from ordinary gain and capital gain / /
4. Holding period / X
100% on capital asset held for 12 months or less
50% on capital asset held for over 12 months
5. Net capital loss may be deducted from capital gain the following year. / X

Note: carry over on the next year only ( 1 yr only)

Example 1:
2018 2019
Capital Gain ……….. 50,000
Capital Loss ……….. (20,000)
Ordinary Gain…………………………. 40,000
Ordinary Loss ……… (10,000) ……. (10,000)
Capital Loss ………………………….. (20,000)

Gross Income……….. 20,000 30,000

Example 2:
2018
Capital Gain (asset held for 10 mos.).. 50,000 Gain – 50,000
Capital Loss (asset held for 24 mos.) (20,000) Loss – (10,000)
Ordinary Gain (asset held for 30 mos.) 40,000
 Gross Income if taxpayer is an Individual ?…P 80,000
Gross Income if taxpayer is a corporation ?...P 70,000

Example 3: An taxpayer reported:

2018
Capital Gain (asset held for 18 mos.).. 50,000 25,000
Capital Loss (asset held for 4 mos.) .. (30,000) 30,000) (5,000) = net capital loss
Ordinary Gain (asset held for 30 mos) 40,000

2019
Capital Gain (asset held for 10 mos.).. 5,000
Ordinary Gain (asset held for 30 mos) 40,000

2018 Gross Income if taxpayer is an Individual…? P40,000

2018 Gross Income if taxpayer is a corporation ...? P60,000
2019 Gross Income if taxpayer is an Individual…? P40,000
2019 Gross Income if taxpayer is a corporation ...? P45,000

Example 4: An individual taxpayer reported:

2017 2018 2019

Capital Loss (20,000)
Capital gain …………………………………………..10,000 30,000
Ordinary gain 30,000 …………. 5,000
Ordinary Loss …………………………………………………… (25,000)

Gross Income:? P30,000 5,000 5,000

Using the above-data (in Ex 4), assume that the taxpayer is a corporation, GI?
2047
Gross Income ………………….. P30,000 P15,000 P 5,000

5. Income From Other Sources

(1) Recovery of damages representing compensation for loss of profits or income are
includible in gross income
Note: Recoveries that are to compensate for damage to property, injury to person, or loss of
life are not taxable.

Included in Gross Income Not Taxable

1) Damages for loss profits
2) Damages for lost income
1) Damages to compensate for damage or
injury to the person or his property
2) Damages for lost capital
3) Moral damages
4) Exemplary damages
5) Punitive damages

(2) Recovery of Bad Debts Previously Deducted

 The “Tax Benefit Rule” is the doctrine observed in the Philippines in bad debt recoveries.

Rules on Bad Debt Recovery:

(a) Taxable – if the deduction of the bad debt in prior year resulted in an income tax benefit
to the taxpayer, the bed debt recovered is taxable income in the year of recovery.

(b) Not Taxable – if the deduction of the bad debt did not result in an income tax benefit to
the taxpayer (i.e., where the result of the business operation was net loss even without
the bad debt deduction), the bad debt recovered is not taxable income but is treated as a
mere recovery or return or capital.

(c) Income From Bad Debt Recovery – the recovered amount of the previously deducted
bad debt which resulted in an income tax benefit.

(3) Forgiveness of Indebtedness

Included in the ITR: When a creditor cancels the debt as part of a business transaction, or
in consideration of personal services of the debtor, the condoned debt is taxable income to
the debtor.

Taxed as a dividend: But where the debtor is a stockholder of the corporation which
condoned the debt, the condonation is considered an indirect payment of dividend.

Subject to donor’s tax: If a creditor merely desires to benefit a debtor, and without any
consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to
the debtor.

Example: At the testimonial dinner for new CPAs, Christian, a reviewer was requested to sing the
theme song of the movie “Ghost”. Pauline, a new CPA, was so delighted that she felt she was
falling in love with Christian so she decided to cancel Christian’s indebtedness to her. As a result,
a. Christian realized a taxable income as compensation for services
b. If Christian accepts the cancellation, he will pay donor’s tax
c. Christian received a gift from Pauline and therefore is not part of his taxable income ***
d. The amount of indebtedness cancelled is partly taxable, partly exempt

(4) Income from Illegal Sources

All unlawful gains are taxable and includible in the ITR. However, actual repayment of
such illegal gains will give rise to a deduction. (James vs. United States, 366 US 213)

(5) Unutilized/Excess Campaign Funds

Unutilized/excess campaign funds, that is, campaign contributions net of the candidate’s
campaign expenditures, shall be considered as subject to income tax. As such, the same
must be included in the candidate’s gross income as stated in his Income Tax Return (“ITR”)
for the subject taxable year.

Any candidate who fails to file with the COMELEC the appropriate Statement of
Expenditures required under the Omnibus Election Code, shall be automatically precluded
from claiming such expenditures as deductions from his campaign contributions. As such,
the entire amount of his campaign contributions shall be considered as directly subject to
income tax.

DEDUCTIONS
DEDUCTIONS

- Amounts allowed to be subtracted from Gross Income to arrive at taxable income in the ITR.

- Taxpayers may choose NOT TO AVAIL of the deduction

- If deductions are claimed, the burden of proving the legality and correctness of the deductions
rests upon the taxpayer. The taxpayer has the obligation to substantiate with receipts and other
evidences every item of deduction when required.

Kinds of Deductions:

BEFORE TRAIN AFTER TRAIN

1) Personal Exemptions (Basic and Additional)
(for individuals, and estates in year of
decedent’s death)
Income distributed to heirs/beneficiaries (for
2) Income distributed to heirs/beneficiaries (for estates and trusts)
estates and trusts)

3) P20,000 special exemption (for estates after

year of decedent’s death, and for trusts)

4) Health and/or Hospitalization Insurance

Premium (“H/H premium”) under Section
34 (M) of the Tax Code)
Itemized Deductions (“ID”) or Optional
5) Itemized Deductions (“ID”) or Optional Standard Deduction (“OSD”)
Standard Deduction (“OSD”)

Notes:

a) Individuals engaged in trade or business, or profession can select the ID of the OSD, if they are
being taxed under the graduated rates. If they are taxed under the 8% tax regime, no deductions
shall be available in computing their tax bases.

b) Individuals earning compensation income are not allowed any deduction from their compensation
income.

c) Estates and trust can claim the ID or the OSD, only if they are taxed under the graduated rates.

d) Domestic corporations, resident foreign corporations, and partnerships can claim ID or OSD.

Summary of Allowable Deductions (BEFORE TRAIN)

Deduction Individuals Estates Trusts Corp. Partnerships

EE Self-
Decedent Died
employed
w/in At least
taxable 1 year
year ago
1) ID or OSD ✔ ✔ ✔ ✔ ✔ ✔
2) H/H ✔ ✔
3) Income distributed to heirs/beneficiaries ✔ ✔ ✔
4) Personal/Additional Exemptions ✔ ✔ ✔
5) P20,000 special exemption ✔ ✔

Summary of Allowable Deductions (AFTER TRAIN)

 Deduction Individuals Estates Trusts Corps. Partnerships
EE Self-employed
taxed under
graduated rates
1) ID or OSD ✔ ✔ ✔ ✔ ✔
2) Income distributed to ✔ ✔
heirs/beneficiaries

OPTIONAL STANDARD DEDUCTION (OSD)

OSD is the deduction which can be taken in lieu of Itemized Deductions (both ordinary and special IDs)

Who may claim the OSD?

1) For Individuals: a) Citizens;

b) Resident aliens; Who compute their income tax under the
c) Estates and Trusts; graduated rates

Amount of OSD = 40% of [Gross sales, net of returns, allowances, and discounts (accrual basis)
+ Other taxable income from operations not subject to FTs]
Or
40% of [Gross receipts, net of returns, allowances, and discounts (cash basis)
+ Other taxable income from operations not subject to FTs]

For individuals, OSD is in lieu of Cost of Goods Sold or Cost of Sales + the Itemized Deductions

2) Corporations: ONLY Domestic Corporations and Subject to 30% of net taxable income
Resident Foreign Corporations

Amount of OSD = 40% of [Gross Income (GI)1 + Other taxable income not subject to FTs]

For corporations, OSD is in lieu of the Itemized Deductions only.

Election of the OSD

- Made in the 1st Quarterly Return. Failure by taxpayer to indicate OSD election in the 1st
Quarterly Return means that taxpayer is claiming Itemized Deductions;

- When made, it is irrevocable for the entire year;

- Failure to file the 1st Quarterly Return is equivalent to availing Itemized Deductions for the year.

ITEMIZED DEDUCTIONS (IDs)

1
GI = Gross Sales – Sales Returns – Sales Allowances – Discounts – Cost of Goods Sold
When a taxpayer claims IDs, the taxpayer is specifying the particular expenses to be deducted from gross
income.

Who may claim IDs? a) Domestic corporations including partnerships and GOCCs
b) Resident foreign corporations
c) Individuals engaged in trade, business, profession
d) Estates and trusts

Items of IDs: Business expenses Depletion of oil and gas wells

Interest expenses Charitable and other contributions
Deductible taxes Research and development expenses
Losses Pension trust contributions
Bad Debts
Depreciation

I. ORDINARY ITEMIZED DEDUCTIONS (under the Tax Code)

A) BUSINESS EXPENSES

Requisites for deductibility:

1) Ordinary and necessary for the business;

2) Incurred or paid during the taxable year;
3) Connected with the trade, profession, or business of the taxpayer;
4) Reasonable expenses of the business;
5) Substantiated by official receipts/records;
6) The withholding tax required to be withheld has been withheld and remitted to the BIR.2

Notes: a) Bribes and kickbacks (to both local and foreign officials) are not allowed as
deductions.
b) Deductible business expenses of non-resident citizens, resident aliens, NRAETBs, and
RFCs constitute expenses paid or incurred in carrying out its business in the Philippines.

Allowed/Not allowed (A/NA):

1. Last year expenses – NA
2. Expenses for travel abroad – Official – allowed, personal - NA
3. Penalties imposed by BIR for Non-payment of taxes – NA
4. Rent expenses not subjected to withholding – NA
5. Depreciation – A
6. Allowance for Bad debts – NA
7. Bonus given to employees – A
8. Employer Contributions to SSS - A

(1) Compensation expenses (of employer) for personal services actually rendered;

(a) Includes salaries and other forms of compensation, including bonuses, and the
Grossed-up Monetary Value of fringe benefits subject to Final Tax.
(b) Includes management and labor expenses, commissions, and pension payments.
(c) Includes compensation for injuries paid by the employer less any insurance
proceeds.
(d) Includes premiums of life insurance of the employee where the beneficiary is not
the employer, but the employee.
(e) Includes salaries paid after death of the employee, but does not include donations
for coffin and wake expenses

2
Under RR 6-2018, a deduction shall be allowed even if no withholding tax was made if the withholding tax + surcharges are
paid at the time of the audit/investigation or reconsideration/reinvestigation.
 (2) Travelling Expenses;

- Includes transportation expenses, meals, and lodging

Additional requisites for deductibility:

- Must be incurred while away from home (“tax home”). Tax home refers to the
place of work, business, or employment.

(3) Entertainment, Amusement, and Recreational (EAR);

Also known as Representation Expenses

- Expenses in entertaining or meeting with guests, or clients (called representation

expenses)
- Includes depreciation or rental expenses relating to entertainment facilities.

Subject to the following ceilings:

1) For taxpayers engaged in the sale of goods and properties: ½ of 1% of net
sales
2) For taxpayers engaged in the sale of services/leasing of properties: 1% of
net revenues.

Example:
Sales …………………………… P2,000,000
Allowable (Maximum) ……….. 10,000

Gross Receipts ………………… P 3,000,000

Allowable (max) …………….. 30,000

(4) Materials and supplies actually consumed in business;

(5) Maintenance and repairs which do not add to the value of the property nor
appreciably prolong its life;

(6) Rental expense (of the lessee) of property used in business;

Notes:
(a) Advance or prepaid rentals are not allowed to be deducted in year of payment.
Instead, advance rentals shall be apportioned over the term of the lease.
(b) Taxes and other obligations of the lessor which are paid by the lessee, are allowed
as deductions.
(c) Depreciation of leasehold improvement is available as deduction to the lessee.

(7) Advertising and other selling expenses;

(8) Operating expenses of transportation equipment used in the trade, profession, or

business;

(9) Insurance premiums against fire, storm, theft, accident, or other similar losses in the
trade or business;

(10) Miscellaneous expenses;

a) Amortization of pre-operating expenses, which are treated as deferred expenses, for

not more than 60 months;
b) Costs of suits are allowed as deductions;
c) Judgments against the taxpayer less any amount compensated for by insurance or
otherwise;
d) Loss upon a corporation’s retirement of its own bonds.
 (11) Special Expense Allowed to Private Educational Institutions under Sec. 27(B)

Capital outlays for expansion of school facilities can either be:

a) Expensed immediately; or
b) Capitalized and depreciated.

School Bldg ……………………….. P50M

B) INTEREST EXPENSE

(1) Requisites

(a) Must be connected with the trade or business of the taxpayer;

Note: Interest on home mortgage is not allowed as deduction.
(b) There must be a liability to pay interest. The obligation to pay interest must be
stipulated in writing and must be legally due
(c) Must be paid or accrued within the taxable year
(d) Interest expense must be the obligation of the taxpayer
(e) Interest payment must not be between related taxpayers in Sec. 36 (B) of NIRC.

(2) Reduction of Allowable Deduction for Interest Expense By:

33% of interest income subject to Final Tax beginning January 2009

Example:

Interest income …………………………. 20,000

Interest Expense ……………………… 300,000

Allowable Interest Expense:

Interest Expense ………………………… 300,000
Less (20,000 x 33%) …………………….. 6,600
Allowable Interest Expense …………….. 293,400

Exceptions: Where Interest Expense is Deductible in Full

a) If taxpayer has no interest income subject to Final Tax;

b) Interest on all unpaid business-related taxes (RR 13-2000);
c) Interest payments of an occupant of a socialized housing project incurred for the
construction or purchase of the house (R.A. No. 7279)

(3) Optional Treatment of Interest Incurred to Acquire Property Used in Trade or

Business

a) Immediately expensed; or
b) Capitalized as part of the cost of the property.

(4) Non-Deductible Interest (Sec. 34 (B)(2))

a) Interest paid in advance (thru discount) by a cash-basis taxpayer. The interest

expense is not allowed to be deducted in the year the cash-basis taxpayer takes out
the loan.

The interest expense will be deducted only in the year the debt is paid.
 b) Interest Paid Between Members of a Family or Related Taxpayers under Section
36(B)

1) Between the taxpayer and his brothers/sisters, spouse, ancestors, and lineal
descendants;
2) Between a corporation and an individual who owns, directly or indirectly,
more than 50% in value of the outstanding stock of such corporation
(except in cases of distribution in corporate liquidation);
3) Between 2 corporations where more than 50% in value of the outstanding
capital stock of each corporation is owned, directly or indirectly, by the
same individual (except in cases of distribution in corporate liquidation);
4) Between grantor and a fiduciary (trustee) of a trust;
5) Between the fiduciaries of 2 trusts having the same grantor;
6) Between the fiduciary and a beneficiary of a trust.

c) If debt is incurred to finance petroleum exploration

d) Interest expense attributable to income without the Philippines of an alien or

foreign corporation

e) Interest on preferred stock which is actually a dividend

f) Interest on debt incurred to purchase a tax-exempt security

g) Interest which is not stipulated in writing

C) DEDUCTIBLE TAXES

Requisites:
(1) Paid or incurred within the taxable year;
(2) Must be connected with the profession, trade, or business of the taxpayer; and
(3) Is directly imposed on the taxpayer.

Examples of deductible taxes: import duties; business taxes (like percentage taxes); local
business taxes; community tax; privilege and license taxes; excise taxes, Documentary Stamp Tax
(DST); automobile registration fees; real property tax; fringe benefit tax (FBT)

Examples of non-deductible taxes: income tax, foreign income tax if claimed as a tax credit;
estate tax; donor’s tax; special assessments; VAT; final taxes; stock transaction tax under Sec.
127; capital gains tax.

Notes:
(a) VAT is non-deductible except input VAT allocated to exempt sales (is deductible)
(b) Fines and penalties imposed due to late payment of tax are not deductible. But interest
imposed due to the same is deductible
(c) Tax benefit rule applies to refund of deductible taxes

D) LOSSES

ORDINARY LOSSES

1) Casualty losses due to mishap, accident, fortuitous event, robbery, theft, embezzlement of
property used in the trade, profession, or business of the taxpayer.

Requisites:
(1) Must involve ordinary properties;
(2) Actually sustained;
(3) Not claimed as a deduction for estate tax purposes;
(4) Not compensated for by insurance or by other forms of indemnity;
(5) Must be reported to the BIR within 45 days from the date of loss.
 If loss is total, the deductible amount is the book value of the asset less any amount of
insurance proceeds or compensation received.

If loss is partial, the deductible amount is the replacement cost or book value of the asset,
whichever is lower. If replacement cost is greater than the book value, the excess shall be
capitalized and depreciated over the remaining useful life of the property.

2) Business losses – losses incurred in the trade, profession, or business of the taxpayer.

(a) Losses from sale of ordinary assets

(b) Partner’s share in the losses of a GPP.

3) Net Operating Loss Cary-Over (“NOLCO”) – excess of allowable deductions (excludes

NOLCO and any item of incentive deduction under special laws that does not involve any
cash outlay) over gross income in a taxable year;

a) Can be availed of by individual taxpayers engaged in trade, business, or a

profession, estates and trust, domestic and resident foreign corporations subject to
the normal income tax, and special corporations subject to preferential tax rates
(hospital corporations, proprietary educational corporations, and regional operating
headquarters of MNCs)

Taxpayers not entitled to NOLCO:

(1) OBUs and FCDUs of domestic or foreign banking corporations;

(2) PEZA, SBMA, CDA, etc. registered enterprises with respect to their
registered businesses;
(3) Foreign corporations engaged in international shipping or air carriage
business in the Philippines.

b) No NOLCO if net operating loss was incurred in a year during which taxpayer
was exempt from income tax.

Ex. Corporations enjoying income tax holiday incentives from the BOI or PEZA
are not entitled to NOLCOs.

A loss in one line of business which is tax-exempt is not permitted as a deduction

in another line of business which is taxable.

Ex. Foreign corporations are allowed only losses sustained in business in the
Philippines or losses of property within the Philippines because foreign
corporations are taxable only on income within the Philippines.

c) Net operating loss can be carried over and deducted from gross income for the
next 3 consecutive years.

d) NOLCO shall be allowed only if there has been no substantial change in the
ownership of the business.

“No substantial change” means ≥ 75% in value of the outstanding shares or ≥ 75%
of the paid-up capital of a corporation is held by or on behalf of the same persons
(Sec. 34 (D)(3)).

Note: Applies to transfers of NOLs as a result of a merger, consolidation or

business combination. This means that the transferee is not entitled to the
NOLCO unless the transferor owns at least 75% of the outstanding shares or
at least 75% of the paid up capital of the transferee.

e) For mines, other than oil and gas wells, NOL incurred without the benefit of
incentives provided under the Omnibus Investment Code, in any of the first 10
years of operations, can be carried over as deductions for the next 5 years
following the year of loss.
 The net operating loss of a Registered Tourism Enterprise (registered with the
Tourism Infrastructure and Enterprise Zone Authority but taxed under the
regular rates) for any taxable year may be carried over as a deduction from gross
income for the next six (6) consecutive taxable years immediately following the
year of loss.

SPECIAL LOSSES

a) Loss of income which was previously reported under the accrual method.

b) Wagering losses – deductible only to the extent of gains or winnings.

Note: Cost of Lotto or Sweepstakes ticket will not be deductible from Lotto or
Sweepstakes winnings if such winnings are exempt from tax (not more than
P10,000 if won by a citizen or RA or regardless of the amount if won by a
NRAETB)

c) Loss due to the voluntary removal of old buildings or old machinery

However, No deduction: Where a taxpayer buys land on which structures are erected, and
then such taxpayer proceeds to remove the structures. It is presumed that the price of the
land already includes the cost of such removal.

d) Loss of Useful Value – loss of usefulness of an asset or property used in business due to
changes in business conditions.

Amount of loss = BV – Accumulated Depreciation – Salvage Value

Loss must be charged off the books

e) Securities, shares of stock (classified as ordinary assets) becoming worthless

- Becoming worthless means value is close to zero; mere shrinkage in value is not
deductible
- Amount of loss = cost or basis of the shares of stock

Note: if shares of stock are held as capital assets, and have become worthless during
the taxable year, such loss shall be treated as capital losses which can be
deducted only against “other capital gains” in the ITR.

f) Abandonment Losses in Petroleum Operations

- When petroleum operations are abandoned, all accumulated exploration and

development expenditures, as well as unamortized costs and undepreciated costs of
equipment can be deducted;

g) Losses from Sales of Shares of Stock Where the Seller is a Dealer in Securities

NON-DEDUCTIBLE LOSSES

a) Exchanges solely in kind pursuant to mergers/consolidations under Section 40(C)(2)

b) Losses from sales/exchanges between related taxpayers under Section 36 (B)
c) Losses from wash sales3 where the seller is NOT a dealer in securities

E) BAD DEBTS
3
Wash sale is a sale of a security if, within a period of 30 days before the date of sale and ending 30 days after such sale, the
taxpayer purchased the same identical shares.
 Requisites: a) There must be a valid and subsisting debt owed the taxpayer;
b) The debt must be connected with the trade, business, or profession of the taxpayer;
c) The debt must be ascertained to be worthless or uncollectible;
d) The debt must be charged off within the taxable year.

Note: Recovery of bad debts previously allowed as a deduction is governed by the Tax Benefit
Rule. The recovery of a bad debt is included in gross income if its deduction in a previous
year resulted in an income tax benefit to the taxpayer (i.e., a decrease in tax)

Example: Allow. For B/D is 3% of Sales and Sales is = to P5M

B/D …………………. 150,000

Allow for B/D …………… 150,000

(Direct write-off) Write Off: P50,000 of A/R shall be written-off

B/D ……… 50,000

A.R ……………………….. 50,000

Non-deductible Debts:

1) Bad debts not connected with the trade, business, or profession of the taxpayer.
2) Bad debts between related parties under Section 36 (B)
3) When mortgage is foreclosed and the collateral is bought by the mortgagee in foreclosure
sale, the difference between the amount of the loan and purchase price of the collateral is
not allowed as a bad debt deduction. Any loss deferred until the property is eventually
sold by the mortgagee.

F) DEPRECIATION/DEPLETION

- Gradual decrease in the useful value of an asset/property from wear or tear, or obsolescence
- Also includes amortization of intangible assets (patents, copyrights, etc.)
- Limited to the cost or amount invested in the asset/property
- Depletion (for oil and gas wells) refers to the exhaustion of natural resources

Requisites:
1) Asset must be used in trade, business, or profession of the taxpayer;
2) Asset has a limited useful life;
3) Allowance for depreciation must be reasonable;
4) Allowance for depreciation must be charged off during the year.

Methods of Depreciation Allowed under Section 34(F)(1)

1) Straight-line method
2) Declining-balance method
3) Sum of the years digits method
4) Units of production/hours of use method
5) Any reasonable method of measuring obsolescence approved by the Secretary of Finance

Depreciation of petroleum operations

Properties used directly in the production of petroleum shall be depreciated over 10 years or
such shorter life as may be permitted by the CIR.

Properties not directly used in the production of petroleum (such as cars, office equipment)
shall be depreciated over 5 years)

Favorable depreciation rate for mining operations

If the property used in mining has an expected life of more than 10 years, the cost can be
depreciated over any number of years between 5 years and the expected life of the asset.
 If the property has an expected life of not more than 10 years, the cost shall be depreciated at
the normal rate of depreciation.

Irrevocable election to deduct exploration and development expenditures in mining

operations
Provided, the total amount deductible for exploration and development expenditures shall not
exceed twenty-five percent (25%) of the net income from mining operations computed
without the benefit of any tax incentives under existing laws.

The actual exploration and development expenditures minus twenty-five percent (25%) of the
net income from mining shall be carried forward to the succeeding years until fully deducted.

Intangible exploration and drilling costs (for both mines and wells)

After the production in commercial quantities has commenced, certain intangible exploration and
development drilling costs:

(a) Shall be deductible in the year incurred if such expenditures are incurred for non-
producing wells and/or mines, or

(b) Shall be deductible in full in the year paid or incurred or, at the election of the taxpayer,
may be capitalized and amortized if such expenditures incurred are for producing wells
and/or mines in the same contract area.

Depreciation/Depletion by NRAETB and RFCs

- Only if the property/mine/well is located within the Philippines.

No Depreciation for Certain Transportation Vehicles

No depreciation shall be allowed for (a) yachts, (b) helicopters, (c) airplanes and/or aircrafts,
and (d) land vehicles which have a value of more than P2.4 Million. However, this
prohibition does not apply if the taxpayer’s main line of business is transportation or the lease
of transport equipment, and the vehicles purchased are used in said operations.

Maintenance expenses of non-depreciable vehicles are NOT allowed as deductions.

G) PENSION TRUST CONTRIBUTIONS

- To provide for reasonable pensions to employees

Payment Deductibility
Present service cost contributions – paid to In FULL
cover current pension liabilities accruing
during the taxable year
Past service cost contributions – Prorated over 10 years beginning with the year
contributions in excess of the present service in which the payment is made
cost contribution in a taxable year

H) CHARITABLE CONTRIBUTIONS

Requisites:
1) Contributions or gifts are actually paid;
2) Given to entities specified by law;
3) Net income of the recipient does not inure to benefit of any stockholder or individual
owner;
 4) Taxpayer making the charitable contribution must be engaged in trade, business, or
profession.

Valuation: The amount of any charitable contribution of property other than money shall be
based on the net book value of the said property as reflected in the financial
statements of the donor.

NOT SUBJECT TO LIMIT – deductible in FULL

(1) Donations to the government or to GOCCs for PRIORITY ACTIVITIES in education,

health, youth and sports development, human settlements, science and culture, or economic
development as determined by the NEDA;

(2) Donations to foreign institutions and organizations pursuant to treaties or agreements

entered into by the Philippine government;

(3) Donations to entities pursuant to special law;

Examples: State colleges and universities; CCP; National Commission for Culture and the
Arts, Integrated Bar of the Philippines, IRRI; Philippine Red Cross (RA 10072); Any child-
caring or child-placing institutions accredited by the DSWD (RA 10165).

(4) Donations to accredited NGOs

“NGOs” refers to a non-profit corporation:

(a) Organized and operated exclusively for scientific, research, educational, character-
building, youth and sports development, heath, social welfare, cultural, or
charitable purposes;
(b) No part of the net income of such NGO inures to the benefit of any private
individual;
(c) Uses the donation not later than the 15th day of the 3rd month after the close of its
taxable year;
(d) It administrative expenses ≤ 30% of total expenses;
(e) Its assets, upon dissolution, shall be given or distributed to another NGO organized
for a similar purpose, or to the state for a public purpose.

SUBJECT TO LIMIT

(1) Donations to the government or GOCCs exclusively for public purpose, but not for
PRIORITY activities;

(2) Donations to accredited domestic corporations or associations organized and operated

exclusively for religious, charitable, scientific, youth and sports development, cultural,
educational, or the rehabilitation of veterans;

(3) Donations to social welfare institutions;

(4) Donations to non-governmental organizations (“NGOs”)

Limit of Contributions

Corporations: 5%
Individuals: 10%

Of taxable income derived from trade, profession, or business without the benefit of
the charitable deductions (both subject and not subject to the limit)
Note: Taxable income from trade, profession, or business does not include non-business
income (example, capital gains derived from assets not used in business)

Net Income (Before donation) ………………………… P5M

 Individual taxpayer (Maximum) P500,000
Corporate taxpayer (Maximum) P250,000

I) RESEARCH AND DEVELOPMENT EXPENDITURES

- Must be connected with the trade, business, or profession of the taxpayer

Options of taxpayer:

1. Deduct as ordinary and necessary expenses. However, the taxpayer cannot use this
option if the expenditure is

a) For the acquisition of land or improvement of property which is subject to

depreciation or depletion; or
b) For the purpose of ascertaining the existence of location, extent, quality of a
deposit ore or other mineral, such as oil and gas.

OR

2. Treat as deferred expenses and amortize over a period of ≥ 60 months beginning in the
month that benefits are first realized from the expenditure.
J) FOREIGN INCOME TAXES PAID TAKEN AS DEDUCTIONS BY RESIDENT
CITIZENS OR DOMESTIC CORPORATIONS

II. SPECIAL ITEMIZED DEDUCTIONS

K) SPECIAL DEDUCTIONS OF INSURANCE COMPANIES

1) The net additions, if any, required by law to be made within the year to reserve funds.
Provided, “released reserves” are treated as income in the year of release.
2) The sums paid within the year on policy and annuity contracts including matured
endowments, payments on installment policies and surrender values actually paid.

L) SPECIAL DEDUCTIONS OF REAL ESTATE INVESTMENT TRUSTS (“REITs”)

Dividends paid by a REIT shall be deductible.

Requirements:
1) The REIT must be a corporation whose shares are traded in the stock exchange.
2) The REIT must maintain a minimum public ownership of forty percent (40%) for its first
two (2) years, and sixty-seven percent (67% on or before the 3rd year and thereafter.
3) The REIT must distribute at least 90% of its distributable income.

M) DEDUCTIONS OF ESTABLISHMENTS GRANTING SALES DISCOUNTS TO

PERSONS WITH DISABILITY (PWDs4)

Such establishments shall be entitled to deduct the said sales discount from their gross income for
income tax purposes, subject to the following conditions

1) The total amount of the claimed tax deduction, net of VAT if applicable, shall be
included in the gross sales receipts;

2) The sales discounts shall be deducted from gross income after deducting the cost of
goods sold or the cost of services;

4
PWD must be a Filipino or dual citizen.
 3) Only the actual amount of the sales discount granted or a sales discount not exceeding
20% of the gross selling price or gross receipts can be deducted from gross income, net
of VAT;

4) Only that portion of the gross sales exclusively used, consumed, or enjoyed by the
persons with disability shall be eligible for the deductible sales discount;

5) PWDs shall be entitled to at least a twenty percent (20%) discount on payments for the
following sales of goods and services for their exclusive use and enjoyment or availment:
a) On the fees and charges relative to the utilization of all services in hotels and
similar lodging establishments, restaurants, and recreational centers;
b) On admission fees charged by theaters, cinema houses, concert halls, circuses,
carnivals, and other similar places of culture, leisure, and amusement;
c) On the purchase of medicines in all drugstores;
d) On medical and dental services including diagnostic and laboratory fees such as,
but not limited to x-rays, computerized tomography scans and blood tests, and
professional fees of attending doctors in all government and private hospitals
and medical facilities subject to guidelines to be issued by the DOH, in
coordination with the PHIC;
e) On fares for domestic air and sea travel except promotional fares;
f) On actual fares for land transportation travel such as, but not limited to (1)
public utility buses or jeepneys (“PUBs/PUJs”), (2) taxis, (3) Asian utility
vehicles (“AUVs”), (4) shuttle services, (5) public railways including Light Rail
Transit (“LRT”), Metro Rail Transit (“MRT”), and Philippine National Railways
(“PNR”), (6) Transportation Network Vehicle Services (“TNVS”) such as Grab,
Uber, and the like, and (7) such other similar infrastructure that will be
constructed, established, and operated by a public or private entity;
g) On funeral and burial services for the death of the PWD.

Note: “No double discount” means that in the purchase of goods and services which
are on promotional discount, PWDs can avail of the establishment’s offered
discount, or the 20% discount provided under R.A. No. 10754, whichever is
higher or more favorable.

In cases where the PWD is also a senior citizen entitled to a 20% discount
under a valid Senior Citizen ID, the PWD shall use either his PWD ID card or
his Senior Citizen ID to avail of the 20% discount. Thus, a PWD who is also
a senior citizen can only claim one 20% discount on a particular sales
transaction.

N) TAX INCENTIVES FOR EMPLOYERS OF DISABLED PERSONS

(1) Private entities that employ disabled persons either as regular employee, apprentice or
learner shall be entitled to an additional deduction from gross income equivalent to
twenty-five percent (25%) of the total amount paid as salaries and wages to disabled
persons;

(2) Private entities that improve or modify their physical facilities in order to provide
reasonable accommodation for disabled persons shall be entitled to an additional
deduction from their net taxable income, equivalent to fifty percent (50%)of the direct
costs of the improvements or modifications.

Note: The above provision does not apply to improvements or modifications of facilities
required under B.P. Bilang 344, otherwise known as “An Act To Enhance The
Mobility Of Disabled Persons By Requiring Certain Buildings, Institutions,
Establishments, and Public Utilities To Install Facilities And Other Devices.” (R.A.
No. 7277)

O) TAX INCENTIVES FOR ESTABLISHMENTS GRANTING SALES DISCOUNTS TO

SENIOR CITIZENS

All establishments supplying any of the goods and services below (in Rev. Reg. No. 7-2010) may
claim the discounts granted to Senior Citizens as a tax deduction.
 (a) The following sales to Senior Citizens shall be given the Senior Citizens’ discount of
20%:
(1) Medicines, medical supplies, and medical equipment;
(2) Professional fees of physicians and licensed professional health workers;
(3) Medical and dental diagnostic and laboratory services;
(4) Actual fares for land transportation in public utility buses, jeepneys, taxis, asian
utility vehicles, LRT, MRT, PNR (except toll fees);
(5) Actual fees for domestic air transport and sea vessels;
(6) Services and other amenities in hotels and similar lodging establishments,
restaurants, and recreation centers;
(7) Admission to theaters, concert halls, circuses, carnivals, and similar places of
culture, leisure, and entertainment; and
(8) Funeral and burial services.

Public utilities supplying water and electricity to senior citizens shall grant a 5%
discount on their monthly bill.

Public utilities supplying water, electricity or telephone services to Senior Citizen

Centers and care or group homes run by the government or a non-profit corporation
shall grant a 50% discount.

(b) The total amount of the claimed tax deduction, net of VAT, if applicable, shall be
included in the establishment’s gross sales receipts for tax purposes. This means that, for
the discount to be allowed as a deduction, the amount of sales that must be reported for
tax purposes by the establishment is the undiscounted selling price.

(c) The income statement of the seller must reflect the discount not as a reduction of sales to
arrive at net sales, but as a deduction from its gross income (sales less cost of sales).

(d) Only that portion of the gross sales exclusively used, consumed, or enjoyed by the
Senior Citizen shall be eligible for the deductible sales discount.

The following sales are not subject to the Senior Citizen discount: bulk orders; set orders
for children; “pasalubong” food items; non-consumable items sold in restaurants; cigars
and cigarettes; delivery fees which are billed separately.

(e) The actual amount of the discount granted or the statutory rate based on the gross selling
price (the 20% discount, the 5% discount on water and electric consumption by Senior
Citizens, or the 50% discount on electricity, water, and telephone consumption by a
Senior Citizen Center) can be deducted from gross income (Rev. Reg. No. 7-2010)

Note: Senior citizens like PWDs shall also follow the “No Double Discount Rule” in
availing discounts.

P) ADDITIONAL DEDUCTIONS FROM GROSS INCOME OF PRIVATE

ESTABLISHMENTS FOR COMPENSATION PAID TO SENIOR CITIZENS

Private establishments employing Senior Citizens shall be entitled to an additional deduction

from their gross income equivalent to fifteen percent (15%) of the total amount paid as salaries
and wages to Senior Citizens subject to the following conditions:

1) The employment shall have to continue for a period of at least six (6 months;
2) The annual taxable income of the Senior Citizen does not exceed the poverty level as
may be determined by the National Economic and Development Authority (NEDA) thru
the National Statistical Coordinating Board (“NSCB”)

Q) TAX INCENTIVES FOR ESTABLISHMENTS AND INSTITUTIONS WITH ROOMING-

IN AND BREASTFEEDING PRACTICES

Expenses incurred by a private health or non-health facility, establishment, or institution in:

 (a) The provision of facilities for rooming-in and breastfeeding, including equipment,
facilities, and supplies for breastmilk collection, storage, and utilization; or
(b) The provision of lactation stations including the necessary equipment and facilities such
as: lavatory for hand-washing, unless there is an easily-accessible lavatory nearby;
refrigeration or appropriate cooling facilities for storing expressed breatmilk; electrical
outlets for breast bumps; a small table comfortable seats; and other items,

Shall be deductible expenses for income tax purposes up to twice (2x) the actual amount
incurred. Provided, such facilities, establishments, or institutions shall secure a “Working
Mother-Baby-Friendly Certificate” from the DOH to be filed with the BIR.

R) TAX INCENTIVES FOR LAWYERS or GPPs RENDERING FREE LEGAL SERVICES

A lawyer or professional partnership rendering actual free legal services shall be entitled to an
allowable deduction from gross income equivalent to the lower of (a) amount that could have
been collected for the actual free legal services, or (b) ten percent (10%) of the gross income
derived from the provision of legal services

(1) The actual free legal services mentioned above shall not include the minimum sixty (60)-
hour mandatory legal aid services rendered to indigent litigants as required under the Rule
on Mandatory Legal Aid Service for Practicing Lawyers, under Bar Matter No. 2012,
issued by the Supreme court; and

(2) The lawyer or professional partnership shall secure a certification from the Public
Attorney’s Office, the Department of Justice, or any accredited association of the Supreme
court, indicating tha the aforementioned agencies cannot provide the legal services to be
provided by the private counsel

S) TAX INCENTIVES FOR ESTABLISHMENTS PARTICIPATING IN THE DUAL

TRAINING SYSTEM UNDER REPUBLIC ACT NO. 7686 (“DUAL TRAINING SYSTEM
ACT OF 1994”)

A participating agricultural, industrial, or business establishment shall be allowed to deduct from

its taxable income the amount of fifty percent (50%) of the system expenses paid to the
accredited educational institution for its trainees. Provided, that such expenses shall not
exceed five percent (5%) of the establishment’s direct labor expenses, but in no case shall it
exceed Twenty Five Million Pesos (P25,000,000) a year (R.A. No. 7686)

T) TAX INCENTIVES FOR ENTERPRISES ADOPTING PRODUCTIVITY INCENTIVES

PROGRAMS UNDER REPUBLIC ACT 6971 (“AN ACT TO ENCOURAGE
PRODUCTIVITY AND MAINTAIN INDUSTRIAL PEACE BY PROVIDING
INCENTIVES TO BOTH LABOR AND CAPITAL”)

Tax Incentives In Adopting a Productivity Incentives Program

(a) A business enterprise which adopts a productivity incentives program, duly and mutually
agreed upon by the parties to its labor-management committee, shall be granted a special
deduction from gross income equivalent to fifty percent (50%) of the total productivity
bonuses given to employees under the program over and above the total allowable
ordinary and necessary business deductions for said bonuses.
(b) Grants for manpower training and special studies given to rank-and-file employees
pursuant to a program prepared by the labor-management committee of the enterprise for
the development of skills identified as necessary by the appropriate government agencies
shall entitle the business enterprise to a special deduction from gross income equivalent
to fifty percent (50%) of the total grants over and above the allowable ordinary and
necessary business deductions for said grants.

U) DONATION TO PUBLIC SCHOOLS

Under RA 8525 and Rev. Reg. 10-2003, the amount of assistance, contribution, or donation to
public schools (elementary secondary, or tertiary) made by private entities, that were actually,
 directly, and exclusively incurred for the program in team up with the Department of Education,
Commission on Higher Education, or with TESDA, may be deducted from gross income.

If the program is a priority project, the actual amount of the donation, contribution, or assistance
plus fifty percent (50%) of said donation shall be available for deduction.

Note: If the program is not a priority project, the lower of five percent (5%) of the net income of
the corporation (10% if an individual) before charitable contributions, or the actual
contribution, plus fifty percent (50%) of said amount shall be available for deduction.

V) QUALIFIED EMPLOYER’S CONTRIBUTION TO EMPLOYEE’S PERSONAL EQUITY

AND RETIREMENT ACCOUNT (PERA)

An employer can claim as deduction the actual amount of its or his contribution that would
complete the maximum allowable PERA contribution of an employee.

The maximum allowable PERA contribution shall not exceed P200,000 per year for an Overseas
Filipino, or P100,000 per year for a non-Overseas Filipino.

For example, an Overseas Filipino employee made PERA contributions amounting to P110,000
for the year. His employer decides to make a matching contribution of P110,000 for the same
period. In such case, the employer can only claim P90,000 as deduction.

W) TAX INCENTIVES GRANTED TO REGISTERED TOURISM ENTERPRISES (“RTEs”)

IN TOURISM ENTERPRISES ZONES (“TEZs”) UNDER THE REPUBLIC ACT NO.
9593 (“TOURISM ACT OF 2009”)

Tourism Enterprises registered with the Tourism Infrastructure and Enterprise Zone (“TIEZA”)
and which are within the Tourism Enterprise Zones (“TEZs”) shall be entitled to a tax deduction
of up to fifty percent (50%) of the cost of:

(a) Environmental protection activities in the surrounding areas of the enterprise or the TEZ as
certified by the Department of Environment and Natural Resources (“DENR”);
(b) Cultural heritage preservation activities in the surrounding areas of the enterprise or the TEZ,
conducted pursuant to K.A. No. 10066, as certified by the appropriate cultural agency and the
Local Culture and Arts Council in the local government unit, the RTE is located; and
(c) Sustainable livelihood programs for local communities in the surrounding areas of the
enterprise or the TEZ which may be chosen from the list of activities identified by the
National Anti-Poverty Commission (“NAPC”).

X) TAX INCENTIVES GRANTED TO QUALIFIED TO JEWELRY ENTERPRISES

(“QJEs”) UNDER R.A. NO. 8502 (“JEWELRY INDUSTRY DEVELOPMENT ACT OF
1998”)

A Qualified Jewelry Enterprise (“QJE”) is a natural or juridical entity, either a single

proprietorship, cooperative, partnership, or corporation, organized and existing under Philippine
laws which is issued a Board of Investments accreditation under R.A. No. 8502 and its
Implementing Rules and Regulations.

A QJE providing training to its employees may avail of the additional deduction equivalent to
fifty percent (50%) of the expenses incurred in training schemes for the purpose of computing the
net taxable income.

Y) TAX DEDUCTION FOR HOSPITALS OR MEDICAL CLINICS UNDER R.A. NO. 10932
(AN ACT STRENGHTHENING THE ANTI-HOSPITAL DEPOSIT LAW)

RA No. 10932 amended Section 1 of BP No 702 otherwise known as “An Act Prohibiting The
Demand of Deposits or Advance Payments for the Confinement or Treatment of Patients in
Hospitals and Medical Clinics in Certain Cases”
 Section 7 of B.P. No. 702 now provides that PhilHealth shall reimburse the cost of basic
emergency care and transportation services incurred by the hospital or medical clinic for the
emergency services given to poor and indigent patients.

Tax Deduction

Under Section 8 of the same amended law, expenses incurred by a hospital or medical clinic in
providing basic emergency care to poor and indigent patients which are not reimbursed by
PhilHealth, shall be tax deductible.

NON-DEDUCTIBLE ITEMS

1) Personal, living, and family expenses

2) Expenditures which are capitalized, except intangible drilling and development costs incurred in
petroleum operations which may be deducted in full

3) Premiums paid by an employer:

a) Covering life of an employee; and
b) The beneficiary is the employer.
Note: IF the employee is the beneficiary, the premiums paid by the employer are deductible,
and are fringe benefits to the employee.

4) Losses from sales/exchanges of property between related parties under Sec. 36 (B)
5) Interest expense between related parties under Sec. 36 (B)
6) Bed debts between related parties under Sec. 36 (B)
7) Fines and penalties due to late payments of tax

FOREIGN INCOME TAX CREDITS

Amount of Tax Credit

The tax credit allowed is equivalent to the amount of income tax paid or incurred to any foreign country
during the taxable year but not to exceed the limitations prescribed by law.

Limitation on Tax Credit (Sec. 24. (C) (4), NIRC)

(A) 1st limitation

Taxable Income (per foreign country)

X Philippine Income Tax = Limit
Total Taxable Income

(B) 2nd limitation

Taxable Income (all foreign country)

X Philippine Income Tax = Limit
Total Taxable Income

Tax credit is the amount of income tax paid or incurred to the foreign country but not to exceed the
limit. In other words, tax credit is the income tax paid to the foreign country or the limit,
WHICHEVER IS LOWER.

Rules in the Application of Limits Formula

(1) if there is one foreign country involved, use only the formula for the first limitation
(2) if there are two or more foreign countries involved, use both formulas
 (3) in case both formulas are used, two tax credits will be computed. One based on the first limit, and
the other based on the second limit.

The final tax credit is whichever is the lower between the two amounts.

Example: The records of a domestic company show the following data:

Gross Business Foreign

Income Expenses Tax
Philippines P 350,000 P 150,000
U.S. 500,000 200,000 P 98,000
Canada 100,000 50,000 20,000
Japan 250,000 300,000 -

Required: Compute the tax due claiming the foreign taxes as tax credits.

Gross income, Philippines P 350,000

Less: Business expenses, Philippines (350,000) P 200,000

Gross income, U.S. P 500,000

Less: Business expenses, U.S. (200,000) 300,000

Gross income, Canada P 100,000

Less: Business expenses, U.S. (50,000) 50,000

Gross Income, Japan P 250,000

Less: Business expenses, Japan (300,000) (50,000)

Total Taxable Income P 500,000

Tax due (P500,000 x 30%) P 150,000

Less: Tax Credit (1st limit)

(a) Tax paid in U.S. P 98,000
Limit: (P300,000/P500,000) x P150,000 90,000
Tax Credit (lower) P 90,000

(b) Tax paid in Canada P 20,000

Limit: (P50,000/P500,000) x P150,000 15,000
Tax Credit (lower) 15,000

Total tax credit, 1st limit P 105,000

Tax Credit (2nd limit)

Total taxes paid in foreign countries P 118,000
Limit: (P300,000/P500,000) x P150,000 90,000
Tax Credit (2nd limit), lower) P 90,000

Tax Credit Allowed (lower) (90,000)

Tax Due After Tax Credit P 60,000

Example 1: A corporation reported:

Gross Profit from merchandising business …………………….. P 1,200,000
Other income/(loss) are as follows:
Interest Income (peso deposit) ………………… P25,000 FT
Net capital loss …………………………………( 15,000) (can not be deducted fr.
ordinary gain)
Gain on sale of old machines ………………….. 30,000
Dividends ………………………………………. 50,000 FT

Gross Income is : P1,230,000

 Gross Profit ………………… 1,200,000
Add: Other Income ……….. 30,000
Gross Income …………….. 1,230,000

Example 2:

A Bookkeeper of presented and Income Statement as follows:

Mariposa Trading Corporation
Income Statement
December 31, 2018

Sales 3,600,000
Cost of Sales 1,254,000
Gross Income 2,346,000
Less: Expenses
Salaries and Wages 850,000
Repair and Maintenance 210,000
Rent (not subjected to withholding) 120,000
Depreciation 245,000
Bad Debts (2% of Receivables) 25,000
* Taxes and Licenses 100,000
Donation (subject to limitation) 500,000
Representation Expenses 35,000
Interest Expense (from bank loan) 120,000
Miscellaneous (not supported with documents) 25,000
Total Expenses 2,230,000
Net Income from Operation 116,000
Add: Interest Income (on peso deposit) 25,000
NET INCOME 141,000

* Included in the taxes and licenses account was P75,000 payment

for penalties and surcharge for late-payment of prior year's tax.

Taxes and Licenses: Allowed (100,000-75,000) = 25,000

Representation: Allowed (3,600,000 x 1% x ½) = 18,000

Interest Expense ……………………………………. 120,000

Less (33% x 25,000) …………………………….. 8,250
Allowed ……………………………………………….. 111,750

Gross Income …………………………………….. P 2,346,000

Less: Expenses (Adjusted) ………………………. 1,459,750
Net Income (Adjusted) Before Donation ………… 886,250
Donation …………………………………………. 44.313
Net Taxable Income is …………………………… P 841,938

Example 3: A taxpayer reported Net income before donation of P3,000,000. The taxpayer made
donation (subject to limitation) of P250,000.

a. Taxable Income if taxpayer is an individual is (3,000,000 – 250,000) =

P2,750,000
b. Taxable Income if taxpayer is a corporation is (3,000,000 – 150,000) = P
2,850,000
Creditable Withholding Tax:

1. Withholding tax on compensation – taxes withheld during payment of salaries.

2. Withholding tax at source – taxes withheld on payments to suppliers.

Example 1: The company paid salaries to employees …………………………… 730,000

Computed withholding tax ………….. 25,000

Entry:
Payroll
Salaries and Wages …………………………… P730,000
Withholding Tax Payable – Wages ……………..P 25,000
Cash …………………………………………….. 705,000

Pays BIR
Withholding Tax Payable – Wages …………P 25,000
Cash ………………………………………………. 25,000

Example 2: The company paid office rent of P20,000/month. The required withholding tax is 5%

Entry: (upon payment of rent per month)

Rent Expense………………………….. 20,000

Withholding Tax Payable - at source ……… 1,000
Cash …………………………………….. 19,000

Annual Rent ………………………… 240,000

Total Withholding ………………… 12,000 (Creditable withholding)

Assume Lessor (corporation) has taxable income of P100,000 during the year.

LESSOR ………….. Net Taxable Income ……………………… P100,000

Income Tax …………………………(30%) 30,000

Less: Creditable withholding ……………. 12,000
Income tax still payable ………………… 18,000

Tax Exempt Compensation

1. De Minimis Benefits

1. Monetized unused vacation leave credits of private employees not exceeding ten (10)
days during the year; (RR No. 11-2018)
2. Monetized value of vacation and sick leave credits paid to government officials and
employees; (RR No. 5-2011)
3. Medical cash allowance to dependents of employees, not exceeding P1,500 per employee
per semester or P250 per month; (RR No. 11-2018)
4. Rice subsidy of P2,000 or one (1) sack of 50 kg. rice per month amounting to not more
than P2,000; (RR No. 11-2018)
5. Uniform and Clothing allowance not exceeding P6,000 per annum; (RR No. 11-2018)
6. Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs,
annual medical/executive check-up, maternity assistance, and routine consultations, not
exceeding P10,000.00 per annum; (RR No. 5-2011)
7. Laundry allowance not exceeding P300 per month; (RR No. 5-2011)
8. Employees achievement awards, e.g., for length of service or safety achievement, which
must be in the form of a tangible personal property other than cash or gift certificate, with
 an annual monetary value not exceeding P10,000 received by the employee under an
established written plan which does not discriminate in favor of highly paid employees;
(RR No. 5-2011)
9. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000
per employee per annum; (RR No. 5-2011)
10. Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty-
five percent (25%) of the basic minimum wage on a per region basis; (RR No. 5-2011)
11. Benefits received by an employee by virtue of a collective bargaining agreement (CBA)
and productivity incentive schemes provided that the total monetary value received from
both CBA and productivity incentive schemes combined do not exceed P10,000.00 per
employee per taxable year. (RR No 1-2015)
12. APPLICATION OF THE “DE MINIMIS” CONCEPT
An employer who give a monthly rice subsidy to its employees are allowed only P2,000
monthly allowance per employee to be considered as “de minimis” as listed above. If the
employer granted more than this amount, the excess might be included as taxable
compensation income. The limitation stated in the above list are very important. Any
excess on the limit will be taxable and, therefore, be subjected to the withholding tax. It is
in the case when the employee is a rank-and-file employee, that the benefits be subjected
to the withholding tax and the normal income tax rate. However, if the employee is a
managerial or supervisory employee, it will be subjected to the 35% fringe benefit tax.
But before you consider it being taxable under normal income tax rate or fringe
benefit tax, you have to consider first the 13th month pay, bonuses plus the “excess of
the de minimis” benefits received by the employee and compare it to the limit of P90,000
(TRAIN Law).

II. 13th month and other benefits of not exceeding P90,000.

III. Separation pay beyond the control of the employee.

IV. Retirement pay for serving the employer for at least 10 years and with at least 50 years of
age.

V. Minimum Wage Earners (MWE) – statutory minimum wage, including holiday pay, overtime
pay night shift differential pay and hazard pay.

VI. Income of Overseas Contract Workers in their income from other country

FRINGE BENEFITS TAX (“FBT”)

Non-Rank and File Rank and File

FBT Income Tax

Fringe Benefit Subject to the Fringe Benefits Tax (“FBT”)

The term “fringe benefit” means any good, service, or benefit other than the regular salary and
allowances received by an employee, and which may be furnished or granted in cash or in kind by an
employer to an individual employee.

Coverage

Fringe benefits subject to FBT are those benefits given or furnished to managerial or supervisory
employees, and not to the rank and file.

General Rules in the Valuation of Fringe Benefits

(a) If the fringe benefit is granted in money, or is directly paid for by the employer, then the value is
the amount granted or paid for.

(b) If the fringe benefit is granted or furnished by the employer in property and ownership is
transferred to the employee, then the value of the fringe benefit shall be equal to the fair market
value (“FMV”) of the property.

Note: The FMV of the property is the FMV determined by the BIR Commissioner or the FMV
determined by the Provincial or City Assessor, whichever is higher.

(c) If the fringe benefit is granted or furnished by the employer in property but the ownership is not
transferred to the employee (i.e., only the “usufruct” or the right to use the property is transferred),
the value of the fringe benefit is equal to the depreciation value of the property.

Rate of Tax and Tax Base

Tax rate = Final Tax of 35%

Tax base = Grossed up monetary value (“GUMV”) of the fringe benefit

GUMV = Monetary value of the fringe benefit ÷ 65%

Therefore, FBT = GUMV x 35%

Notes:
a) The final tax is imposed whether the employer is an individual, partnership, or
corporation, regardless of whether the employer is taxable or not, or the government or its
instrumentalities.

b) The fringe benefit tax is a tax of the employee. It is a tax on the income or benefit
received by the employee. However, for convenience, the tax is imposed on the
employer. The employer is required by law to pay the tax for and in behalf of the
employee.

Filing of Return and Payment of Tax

The fringe benefit tax is a final income tax on the employee to be “withheld” by the employer. The
employer shall file a Quarterly Remittance Return of Final Income Taxes Withheld on Fringe Benefits
Paid to Employees Other Than Rank and File (BIR Form No. 1603Q) and pay the tax “withheld” on or
before the last day of the month following the close of the calendar quarter which “withholding” was
made.
With respect to employers enrolled with the Electronic Filing and Payment System (“eFPS”), the deadline
for e-filing BIR Form No. 1603Q and e-paying the tax due thereon shall be five (5) days later than the
deadline for manual filing.5

Note: No actual withholding of the tax can take place because the payments are generally made to
persons/entities (ex. Store, school, club, etc.) who are not the taxpayers subject to the fringe benefit tax.

Taxable FBs and Specific Valuation Guidelines

The guidelines for valuation of specific types of fringe benefits and the determination of the monetary
value of the fringe benefits are as follows:

(A) Housing Privilege

Case 1 – The employer leases (as lessee) residential property for the use of the employee.

Value of the benefit – Rental paid by the employer under the lease
contract.

Monetary value of the benefit – 50% of the value of the benefit

MV / .65% x 35% = FBT

Rent -= 15,000 FBT = (15,000 x 50%) /65% = GUMV x 35% = P4,038

Fringe Benefits ,,,, 15,000

FBT …………. 4,038
Cash ……………. 19,038

Case 2 – The employer owns residential property which was assigned to an officer for his use
as residence.

Annual Value of the benefit – 5% of the FMV of the land and improvements as
determined by the BIR Commissioner or the
Assessor, whichever is higher.

Monetary value of the benefit – 50% of the value of the benefit

FMV = 1,200,000
ZV = P 1,500,000
Monetary Value = P1,500,000 x 5% x 50% = P37,500
FBT = P37,500 / 65% x 35% = P20,192

Case 3 – The employer purchases residential property on the installment basis and allows the
employee to use the same as his residence.

Annual Value of the benefit – 5% of the acquisition cost exclusive of interest.

5
Despite the provisions of the Tax Code mandating the quarterly payment of the FBT, the BIR has obligated withholding agents/employers to remit the
FBT monthly by filing BIR Form No. 0619F every tenth (10th) day of the following month when the withholding was made, regardless of the amount
withheld. For employers using the eFPS facility, the due date is on the fifteenth (15th) day of the following month. Employers with zero remittance are still
required to use and file the same form.
Employers shall thus pay the FBT monthly by filing BIR Form No. 0619F for the first 2 months of the quarter.

The quarterly FBT remittance return (BIR Form No. 1603Q) shall reflect therein the total fringe benefits paid/given during the quarter and the
resulting FBT due for the quarter. Whatever FBTs were previously paid in the first 2 months shall be available as tax credits against the FBT due for the
quarter. The resulting amount payable shall be the FBT payable for cue last month of the quarter.
 Monetary value of the benefit – 50% of the value of the benefit

Case 4 – The employer purchases residential property and transfers ownership thereof in the
name of the employee.

Value of the benefit – Employer’s acquisition cost or FMV, whichever is

higher. The FMV is the higher between the BIR
Commissioner’s value and the Assessor’s value.

Monetary value – The entire value of the benefit

Case 5 – The employer purchases residential property and transfers ownership thereof to his
employee for the latter’s residential use at a price less than the employer’s
acquisition cost.

Value of the benefit – The difference between the FMV of the BIR
Commissioner or the FMV of the Assessor,
whichever is higher, and the cost to the employee.

Monetary value of the benefit – Entire value of the benefit

Case 6 – Housing Benefits Which Are Not Taxable – The following housing benefits provided by
the employer to its employees are not considered as taxable fringe benefits:

(a) Housing privilege of military officials of the Armed Forces of the Philippines consisting
of officials of the Philippine Army, Philippine Navy, and Philippine Air Force.

(b) A housing unit which is situated inside or adjacent to the premises of a business or
factory. A housing unit is considered adjacent to the premises of the business if it is
located within the maximum of fifty (50) meters from the perimeter of the business
premises.

(c) Temporary housing for an employee who stays in a housing unit for three (3) months or
less.

(B) Expense Accounts

(1) Expenses incurred by the employee which are paid by his employer. In this case, the
employee receives an entertainment or representation allowance which is subject to
liquidation.
(2) Expenses paid for by the employee but reimbursed by his employer. In this case, the
employee pays for the expense and gets reimbursement from the employer.

Note: The above expenses shall not be taxable provided:

(a) The expenditures are duly receipted for and in the name of the employer, and
(b) The expenditures are connected with the trade or business of the taxpayer, that is,
they are not personal expenses attributable to the employee.

(3) Personal expenses of the employee (like purchases of groceries for the personal consumption
of the employee and his family) paid for or reimbursed by the employer to the employee shall
be treated as taxable fringe benefits of the employee whether or not the same are duly
receipted for in the name of the employer

Note: Representation and transportation allowances which are fixed in amounts and are
regularly received by the employees as part of their monthly compensation income shall not
be treated as taxable fringe benefits.
 Such allowances are taxable as compensation income subject to regular tax rates.

(C) Motor Vehicle of Any Kind

Case 1 – The employer purchases the motor vehicle in the name of the employee.

Value of the benefit – Acquisition cost

Monetary value of the benefit – Entire value of the benefit

Case 2 – The employer provides the employee with cash for the purchase of a motor vehicle in
the name of the employee.

Value of the benefit – Amount of cash received by the employee

Monetary value of the benefit – Entire value of the benefit

Case 3 – The employer shoulders a portion of the amount of the purchase price of the motor
vehicle in the name of the employee.

Value of the benefit – Amount of shouldered by the employer

Monetary value of the benefit – Entire value of the benefit

Case 4 – The employer purchases the car on installment in the name of the employee.

Value of the benefit – Acquisition cost (exclusive of interest) divided by

five (5) years

Monetary value of the benefit – Entire value of the benefit

Note: In Cases 1 to 4, the monetary value of the fringe benefit shall be the entire value of the
benefit, regardless of whether the motor vehicle is used by the employee partly for personal
purposes and partly for the benefit of the employer.

Case 5 – The employer owns and maintains a fleet of motor vehicles for the use of the business
and the employees.

Value of the benefit – Acquisition cost of all motor vehicles not normally
used for business purposes divided by 5 years

Monetary value of the benefit – 50% of the value of the benefit

Case 6 – The employer leases and maintains a fleet of motor vehicles for the use of the
business and the employees.

Value of the benefit – Amount of rental payments for motor vehicles not
normally used for business purposes

Monetary value of the benefit – 50% of the value of the benefit

 Case 7

(a) The use of aircraft or helicopters owned and maintained by the employer shall not be
subject to the fringe benefits tax. The use shall be treated as a business use.

(b) The use of a yacht, whether owned and maintained or leased by the employer shall be
treated as a taxable fringe benefit. The value of the benefit shall be measured based on the
depreciation of the yacht at an estimated useful life of 20 years.

(D) Household Expenses

The following personal expenses of the employee which are borne by the employer shall be treated
as taxable fringe benefits:

(1) Salaries of household help, personal driver of the employee, or other.

(2) Similar expenses like payment for homeowners’ association dues, garbage dues, etc.

(E) Interest on Loans at Less Than Market Rate

(1) If the employer lends money to his employee free of interest or at a rate lower than 12%, such
interest forgone by the employer (difference of the interest assumed by the employee and the
rate of 12%) shall be treated as a taxable fringe benefit.
(2) The benchmark rate of 12% shall remain in effect until revised by a subsequent regulation.

(F) Social and Athletic Club Fees

Membership fees, dues, and other expenses borne by the employer for his employee, in social and
athletic clubs or other similar organization shall be treated as tangible fringe benefits of the
employee in full.

(G) Expenses for Foreign Travel

Not subject to FBT – reasonable expenses of Subject to FBT

the employee paid by the employer of the
purpose of attending business meetings or
foreign conventions:

(a) Inland travel expenses such as expenses for (a) 30% of the coast of first class airplane
food, beverage, and local transportation; tickets;

(b) The cost of lodging in a hotel or similar
establishment amounting to an average of
US$300 or less per day;
(c) The cost of economy and business class
airplane tickets;
(b) Lodging cost in a hotel or similar
establishment in excess of US$300 per day;
(c) Travelling expenses paid by the employer
for the travel of the family members of the
employee;

(d) 70% of the cost of first class airplane
tickets.
(d) When there is no documentary evidence
showing that the employee’s travel abroad
was in connection with business meetings
or conventions, the entire cost of the ticket,
including the cost of hotel accommodations
and other expenses incident thereto
shouldered by the employer, shall be treated
as taxable fringe benefits.

(H) Holiday and Vacation Expenses

 Holiday and vacation expenses of the employee borne by his employer shall be treated as taxable
fringe benefits.

(I) Educational Assistance

Subject to FBT Not Subject to FBT

Cost of education assistance to the employee IF:
which is borne by the employer (a) The education or study involved is directly
connected with the employer’s trade,
business, or profession; AND
(b) There is a written contract that the
employee is under obligation to remain in
the employ of the employer for a period of
time mutually agreed upon.

Cost of educational assistance extended by an When the assistance is provided through a

employer to the dependents of an employee competitive scheme under a scholarship
program of the company

(J) Cost of Insurance

Subject to FBT Not Subject to FBT

Cost of life or health insurance and other non- (a) Contributions of the employer for the
life insurance premiums borne by the employer benefit of the employee pursuant to the
for his employee provisions of existing laws, such as
contributions to the Social Security System,
the Government Service Insurance System,
and similar contributions under the
provisions of any other existing law.

(b) The cost of premiums borne by the

employer for the group insurance of his
employee.

(K) Stock Options

Stock options granted by an employer to its employee(s) involving the employer’s own shares or
the shares of another corporation are considered compensation. The amount of such compensation
shall be the FMV of the stock options at the time the services were rendered.

If the grantee exercises the option in the future, additional income may be recognized the grantee
which shall give rise to the following tax consequences6:

When the option is granted by an employer (involving its own shares of stock or shares of another
corporation) to its rank-and-file employee, and the latter actually exercises the option by paying the
exercise price, additional taxable compensation shall be recognized by the employee and shall be
subjected to the creditable withholding tax on compensation. Such additional compensation shall be
equivalent to the difference of the higher of the book value or FMV of the underlying shares at the
time of the exercise of the option, and the exercise price.

However, if the employee exercising the option is a supervisory or managerial employee, such
additional compensation shall be treated as a fringe benefit subject to the final fringe benefit tax
(“FBT”) under Section 33 of the Tax Code (RMC 79-2014).

Tax Accounting for FB Expense and FB Tax

6
It goes without saying that the exercise of the option will result to additional income only if the stock is worth more than the exercise price on the date the option
is exercised. Otherwise, the option will not even be exercised, and no additional income will be realized.
 (a) The “fringe benefit expense” and “fringe benefit tax” shall constitute allowable deductions from
gross income of the employer.

Ex. The fringe benefit expense of P35,000 and fringe benefit tax of P18,846 are deductible from
gross income of the employer, and shall be taken up in the employer’s books of accounts as
follows:

Debit – Fringe benefit expense 35,000

Debit – Fringe benefit tax expense 18,846
Credit – Cash 53,846

(b) If the basis of the computation of the fringe benefits (“FB”) tax is the depreciation value of the
property, only the FB tax shall constitute a deductible expense of the employer.

Provided, however, if the zonal value or FMV of the said property is greater than its cost subject
to depreciation, the excess amount shall be allowed as a deduction from the employer’s gross
income as a fringe benefit expense

Other Fringe Benefits Not Subject to Fringe Benefits Tax (Sec 33 (A), (C), NIRC)

(A) Fringe benefits which are authorized and exempted from income tax under the Tax Code or under
special law;

(B) Contributions of the employer of the benefit of the employee to retirement, insurance, and
hospitalization benefit plans;

(C) Benefits given to the rank and file, whether granted under a collective bargaining agreement or not;

(D) If the grant of the fringe benefit is for the convenience or advantage of the employer.

(1) In the case of meals, they must be furnished on the business premises of the employer

(2) In the case of lodging, the lodging must be furnished on the business premises of the
employer and the employee must be required to accept such lodging as a condition of his
employment in order for the employee to properly perform the duties of his employment.

(E) “De minimis” Benefits (already discussed)

Taxation of Fringe Benefits of NRANETB

A non-resident alien not engaged in trade or business in the Philippines who receives a fringe benefits is
subject to the fringe benefit tax as follows:

Rate - twenty-five percent (25%)

Tax Base - the grossed-up monetary value of the fringe benefit computed by
dividing the monetary value of the fringe benefit by seventy-five percent
(75%).

Valuation of FBs subject to FBT

FB Value of Benefit Monetary Value

of Benefit
(A) Housing Privilege
Case 1: ER lets EE use ER-leased property Rent paid by ER 50% of Value
Case 2: ER lets EE use ER-owned property 5% of FMV (higher of zonal 50% of Value
and assessor’s value)
Case 3: ER buys property in installment and lets the 5% of acquisition cost 50% of Value
EE use the same exclusive of interest
Case 4: Transfer to EE of ER’s property Higher of cost or FMV Value
Case 5: Transfer to EE of ER’s property at less than Difference between the Value
the acquisition cost of ER FMV and the cost of EE

(B) Expense Accounts

(1) Allowance subject to liquidation Amounts paid by ER Value
(2) Amounts reimbursed by ER Amounts reimbursed by ER Value

(C) Motor Vehicle

Case 1: ER buys vehicle in the name of EE Cost Value
Case 2: ER gives EE cash to buy vehicle Cash received Value
Case 3: ER shoulders portion of cost Amount shouldered by ER Value
Case 4: ER purchases vehicle on installment in the 20% of acquisition cost Value
name of EE (exclusive of interest)
Case 5: ER lets EE use ER-owned vehicle 20% of acquisition cost 50% of Value
Case 6: ER lets EE use ER-leased vehicle Rentals paid for vehicle 50% of Value
Case 7: ER lets EE use ER-owned yacht 5% of acquisition cost Value

(D) Household Expenses

(1) Salaries of household help, driver, etc. Amount of salaries paid Value
(2) Payment for other similar expenses like Amount paid Value
association dues, garbage dues, etc.

(E) Less than Marker Rate Interest on Loans Difference between 12% Value
and the interest charged

(F) Social and Athletic Club Fees Amounts paid by ER for EE Value

(G) Expenses for Foreign Travel

(1) No documentary evidence that the foreign Amounts shouldered by ER Value
travel was in connection with business meeting
or convention
(2) There is documentary evidence that the
foreign travel was in connection with business
meeting or convention:

i. 30% of cost of first class ticket;

ii. Excess of lodging cost over $300/day Amounts paid by ER Value
iii. Travelling expenses for the travel of EE’s
family

(H) Holiday and Vacation Expenses Amounts borne by ER Value

(I) Educational Assistance

(1) Education of EE UNLESS education is Amount paid by ER Value
connected with the ER’s business and EE is
obligated to remain in the employ of the ER
for a certain period of time
(2) Education of EE’s dependents UNLESS Amount pay by ER Value
assistance is provided through a competitive
scheme under a scholarship program of the ER

(J) Cost of Insurance borne by ER for the EE Premiums or contributions Value

UNLESS the contribution is pursuant to paid by ER
existing law (ex. SSS, GSIS, PhilHealth), or if
the ER

(K) Stock Options: Upon exercise of the stock Higher of book value or Value
option FMV of the shares less the
exercise price
Tax 41 - Income Taxation

True or False

1. Gross income includes wealth that comes into the hands of a taxpayer
including the return of capital. FALSE

Gross income means all income derived from whatever source, including,
but not limited to the following items:
(1) Compensation for services;
- Including pensions and retiring allowances (except those
exempt by law)
(2) Gross income derived from the conduct of trade or business or the
exercise of profession;
(3) Partner’s distributive share from the net income of a general professional
partnership;
(4) Rents
(5) Annuities (excess over premium paid);
(6) Gains derived from dealings in property;
(7) Interest income;
(8) Royalties;
(9) Dividends;
(10) Prizes and winnings;

2. Income earned illegally is taxable. TRUE

Gross income means the total income of a taxpayer subject to tax. It

includes
the gains, profits, and income DERIVED FROM WHATEVER SOURCE, whether
legal or illegal.
 It does not include income excluded by law, or which are exempt from
income tax.

3. Tax laws are judiciary in nature. FALSE

Tax laws are legislative in nature.

4. Real property tax may be paid at the residence of the taxpayer

regardless of the location of the property. FALSE

Situs of taxation literally means place of taxation. The general rule is

that the taxing power cannot go beyond the territorial limits of the taxing
authority. Basically, the state where the subject to be taxed has a situs may
rightfully levy and collect the tax.
Real property tax is calculated by a local government where the property
is located and paid by the owner of the property.

5. Ordinary loss can only be deducted from ordinary gain. FALSE

Rules: Individual
Corporate
● Capital loss can only be deducted from capital gain / /
● Capital loss can not be deducted from ordinary gain / /
● Ordinary loss may be deducted from ordinary gain and capital gain /
/
● Holding period /
X
○ 100% on capital asset held for 12 months or less
○ 50% on capital asset held for over 12 months
● Net capital loss may be deducted from capital gain the following year. /
X

Note: carry over on the next year only ( 1 yr only)

6. For individuals earning both compensation income and income from

business and/or practice of profession, their income taxes shall be
computed based on graduated income tax rates for both sources of
income. FALSE

For Individuals Earning Both Compensation Income and Income from Business
and/or Practice of Profession, their income taxes shall be:
a. For Income from Compensation: Based on Graduated Income Tax Rates;
and
b. For Income from Business and/or Practice of Profession:
i. If the total Gross Sales/Receipts Do Not Exceed VAT Threshold
of P3,000,000, the Individual Taxpayer May Opt to Avail:
1. 8% Income Tax on Gross Sales/Receipts and Other Non-
Operating Income in Lieu of the Graduated Income Tax
Rates and the Percentage Tax (without deduction of 250k);
Or
2. Income Tax Based on Graduated Income Tax Rates
 ii. If the total Gross Sales/Receipts Exceed VAT Threshold of
P3,000,000
1. Income Tax Based on Graduated Income Tax Rates
* However, the option to be taxed at 8% rate is not available to a VAT-
registered taxpayer (TP) and TP who is subject to Other Percentage Taxes.

7. Excess MCIT may be carried over as a deduction from normal tax for
the three (3) years. TRUE
The MCIT was conceived to address the problem of non-declaration and
under-declaration of corporate income and revenues. Even if the operations of a
corporation result in a net loss, it will still be subject to the MCIT.

8. Income from the business is a passive income. FALSE

On Certain Passive Income of Individual Citizens and Resident Aliens

Passive Income Tax Rate

1. Interest from currency deposits, trust funds and deposit substitutes 20%

2. Royalties (on books as well as literary & musical compositions) 10%

- In general 20%

3. Prizes (P10,000 or less ) Graduated

Income Tax
Rates

- Over P10,000 20%

4. Winnings (except from PCSO and Lotto amounting to P10,000 or less ) 20%

- From PCSO and Lotto amounting to P10,000 or less exempt

5. Interest Income from a Depository Bank under the Expanded Foreign Currency Deposit 15%
System

6. Cash and/or Property Dividends received by an individual from a domestic corporation/ 10%
joint stock company/ insurance or mutual fund companies/ Regional Operating
Headquarter of multinational companies

7. Share of an individual in the distributable net income after tax of a partnership (except 10%
GPPs)/ association, a joint account, a joint venture or consortium taxable as corporation
of which he is a member or co-venture

8. Capital gains from sale, exchange or other disposition of real property located in the 6%
Philippines, classified as capital asset

9. Net Capital gains from sale of shares of stock not traded in the stock exchange 15%
10. Interest Income from long-term deposit or investment in the form of savings, Exempt
common or individual trust funds, deposit substitutes, investment management accounts
and other investments evidenced by certificates in such form prescribed by the Bangko
Sentral ng Pilipinas (BSP)
Upon pre-termination before the fifth year, there should be imposed on the entire income
from the proceeds of the long-term deposit based on the remaining maturity thereof:
Holding Period

- Four (4) years to less than five (5) years 5%

- Three (3) years to less than four (4) years 12%

- Less than three (3) years 20%

9. The corporate income tax rate on net income from all sources of
domestic corporations with total assets not exceeding P100 million and
total net taxable income not exceeding P5 million is 25%. FALSE

Effective July 1, 2020, corporate income tax of domestic corporations shall

either be 20% or 25%. The 20% rate applies to domestic corporations with a
net taxable income not exceeding P5 million AND with total assets not exceeding
P100 million. In computing the total assets, the value of the land where the
office, plant and equipment are situated during the taxable year is to be
excluded.

All other domestic corporations are subject to the 25% corporate income
tax rate. Resident foreign corporations are subject to 25% income tax effective
July 1, 2020.

10.An individual engaged in business and partner in a GPP shall use either
OSD or Itemized deduction regardless of the manner of deduction used
by the GPP. FALSE

GPP is not subject to income tax. However, the partners shall be liable to
pay income tax on their separate and individual capacities for their respective
distributive shares in the net income of the GPP.
Taxpayer is not allowed to avail of the 8% income tax rate option since
their distributive share from GPP is already net of cost and expenses.
GPP may avail of the Optional Standard Deduction (OSD), either by the
GPP or the partners comprising the partnership. However, the partners
comprising the GPP can no longer claim further deduction from their distributive
share in the net income of the GPP.

MC Theory

1. Which of the following taxpayers is taxable on all income derived from

sources within and outside the Philippines?
a. Non-resident alien engaged in trade and business in the Philippines
b. Non-resident citizen
c. Overseas contract worker
 d. Answer not given

Resident citizen/alien

2. Effective July 1, 2020 to June 30, 2023, MCIT is

a. 1% of net income
b. 1% of gross income less expenses
c. 1% of gross income plus other income
d. 1% of gross income

Previously and starting July 1, 2023, 2% of gross income

3. The requisites of deductibility of business expenses are the following,

except
a. It must be ordinary and necessary.
b. It must be substantiated with proof regardless of the period incurred.
c. It must not be against moral or public order.
d. If subject to withholding, the same must have applied.

4. The deadline for the filing of annual income tax is

a. Every December 31
b. Every January 25 of the following year
c. Every April 15 of the following year
d. Every March 31 of the following year

5. On gains derived from dealings in property, the holding period does not
apply to
a. Individual taxpayers
b. Corporate taxpayers
c. Both individual and corporate taxpayers
d. Neither of the two

6. Which of the following statements is correct?

a. MCIT will start in the 4th year from the date of incorporation.
b. Payable is MCIT or normal tax whichever is lower.
c. The improperly accumulated earnings tax of 10% is repealed under the
CREATE law.
d. All statements are wrong.

Formerly, this improperly accumulated earnings tax (IAET) is imposed as a

penalty on corporations which allow accumulation of earnings for the purpose of
avoiding tax liability for their shareholders if they decide to distribute profits in
the form of dividends.

7. Effective July 1, 2020 to June 30, 2023, the rate of proprietary

educational institutions and hospitals is reduced from 10% to
a. 1%
b. 2%
c. 3%
d. 5%

8. Which of the following is subject to final tax

a. Interest income from dollar deposit of a non-resident citizen
b. Prizes of ₱10,000 or less.
 c. Sale of merchandise.
d. Sale of real property (capital asset) at a loss

For sale of real property, basis is Selling Price, FMV, or Zonal

Value whichever is higher.

9. A non-minimum wage employee (rank and file) receives basic salary

and overtime pay of ₱255,000. The tax is
a. Zero because the employee is a non-minimum wage employee
b. Final tax
c. Fringe benefits tax
d. 20% of excess over ₱250,000

Minimum wage earners’ basic salary and overtime pay are

exempt from tax.
Final tax is applied on passive income.
Fringe benefits tax is applied only to managerial and supervisory
employees.

10. Under the TRAIN law, winning from Lotto is

a. Subject to 10% final tax
b. Subject to income tax on winning of over ₱10,000
c. Subject to income tax on winning of ₱10,000 or less
d. Exempt from any tax

3. Prizes (P10,000 or less ) Graduated Income Tax Rates

- Over P10,000 20%

4. Winnings (except from PCSO and Lotto amounting to P10,000 or less ) 20%

- From PCSO and Lotto amounting to P10,000 or less exempt

MC Problems

A. Mr. Manuel Mercado, resident citizen, working as a Teller (rank and file) in a
bank reported the following for the year:

Salary ₱475,000
Overtime pay 40,000
13th month 30,000
Rice allowance 35,000
Bonus 50,000
Christmas gift 20,000
 1. The total taxable income
a. ₱531,000
b. ₱515,000
c. ₱491,000
d. ₱475,000

2. The income tax

a. ₱52,750
b. ₱58,750
c. ₱48,750
d. ₱62,750

Salary ₱475,000 30,000 13th month

Overtime
pay 40,000 50,000 Bonus
Rice allowance if managerial or
16,000 11,000 (35k-24k) supervisory employee,
Total
taxable Christmas gift subjected to 35%
income 531,000 15,000 (20k-5k) fringe benefit tax
-400,000 106,000
131,000 -90,000
25% 16,000
32,750
30,000
Income
tax ₱62,750

It is also worth mentioning that any amount of de minimis benefits in excess of the
threshold can still be exempt as “other benefits,” together with the employees’ 13th
month pay, but not to exceed P90,000. Thus, providing de minimis benefits can also be
a way of fully exhausting the P90,000 tax exemption.

The following are considered de minimis benefits for private employees:

a. Monetized unused vacation leave credits of private employees not exceeding 10 days
during the year;

b. Medical cash allowance to dependents of employees, not exceeding P1,500 per

employee per semester or P250 per month;

c. Rice subsidy of P2,000 or one 50-kg sack of rice per month worth not more
than P2,000;
d. Uniforms and clothing allowance not exceeding P6,000 per annum;

e. Actual medical assistance not exceeding P10,000 per annum;

f. Laundry allowance not exceeding P300 per month;

g. Employees’ achievement awards, which must be in the form of tangible personal

property other than cash or gift certificates, with an annual monetary value not
exceeding P10,000 received by the employee under an established written plan which
does not discriminate in favor of highly paid employees;

h. Gifts given during Christmas and major anniversary celebrations not

exceeding P5,000 per employee per annum;

i. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25%
of the basic minimum wage; and

j. Benefits received by an employee by virtue of a Collective Bargaining Agreement

(CBA) and productivity incentive schemes, provided the total annual monetary value
received from both CBA and productivity incentive schemes combined do not exceed
P10,000 per employee per taxable year.

B. Ping Lak Soon, a Korean living in the Philippines put up “Ping Beauty Parlor” in
the Philippines and reported the following for 2018:

Gross receipts ₱975,500

Cost of Service 430,000
Administrative expenses 215,300
Prize from a raffle 50,000

Ping Lak Soon is also employed as a tour guide with a taxable salary of ₱375,000.
 3. The total income tax using itemized deduction is
a. ₱103,040
b. ₱106,300
c. ₱178,090
d. ₱118,800

Gross receipts ₱975,500

Cost of Service -430,000
Administrative expenses -215,300
Net income 330,200
Salary 375,000
Total taxable income 705,200
-400,000
305,200
25%
76,300
30,000
Income tax ₱106,300

Annual Tax Table

EFFECTIVE DATE JANUARY 1, 2018 to DECEMBER 31, 2022

Not over P250,000 0%
Over P250,000 but not over P400,000 20% of the excess over P250,000
Over P400,000 but not over P800,000 P30,000 + 25% of the excess over P400,000
Over P800,000 but not over P2,000,000 P130,000 + 30% of the excess over P800,000
Over P2,000,000 but not over P8,000,000 P490,000 + 32% of the excess over P2,000,000
Over P8,000,000 P2,410,000 + 35% of the excess over P8,000,000
EFFECTIVE DATE JANUARY 1, 2023
Not over P250,000 0%
Over P250,000 but not over P400,000 15% of the excess over P250,000
Over P400,000 but not over P800,000 P22,500 + 20% of the excess over P400,000
Over P800,000 but not over P2,000,000 P102,500 + 25% of the excess over P800,000
Over P2,000,000 but not over P8,000,000 P402,500 + 30% of the excess over P2,000,000
Over P8,000,000 P2,202,500 + 35% of the excess over P8,000,000
4. A corporation operating for a decade presented the following information for
2021:

Gross income ₱3,000,000

Net income 400,000
Total assets 60,000,000

Income tax due for 2021 is

a. ₱80,000
b. ₱30,000
c. ₱60,000
 d. ₱120,000

Normal tax MCIT

₱400,000 ₱3,000,000
Rate 20% 1%
₱80,000 ₱30,000
Income tax ₱80,000

If,

Gross
income ₱10,000,000 Normal tax MCIT
₱10,000,00
Net income 6,000,000 ₱6,000,000 0
(excluding
Total assets 120,000,000 land) Rate 25% 1%
₱1,500,000 ₱100,000
Income
tax ₱1,500,000
C. A corporate taxpayer reported the following:
2017 2018
Capital gain on asset held for 18 months 20,000
Capital loss on asset held for 5 months 15,000
Ordinary gain 30,000
Ordinary loss 5,000
Capital gain on asset held for 20 months 50,000
Ordinary loss on asset held for 14
months 10,000

5. Gross income for 2017 is

a. ₱25,000
b. ₱30,000
c. ₱10,000
d. ₱40,000

6. Gross income for 2018 is

a. ₱25,000
b. ₱30,000
c. ₱10,000
d. ₱40,000

7. If the taxpayer is an individual,

gross income for 2017 is
a. ₱25,000
b. ₱30,000
c. ₱10,000
d. ₱40,000

8. If the taxpayer is an individual,

gross income for 2018 is
a. ₱25,000
b. ₱30,000
c. ₱10,000
d. ₱40,000
 2017 Corporation Individual (w/ holding period)

Capital gain on asset held for 18 months 20,000 20,000 10,000

Capital loss on asset held for 5 months 15,000 -15,000 -10,000

Ordinary gain 30,000 30,000 30,000

Ordinary loss 5,000 -5,000 -5,000

Gross income 30,000 25,000

2018 Corporation Individual (w/ holding period)

Capital gain on asset held for 20 months 50,000 50,000 25,000

Ordinary loss on asset held for 14 months 10,000 -10,000 -10,000

NOLCO -5,000

Gross income 40,000 10,000

● TRAIN LAW (RA 10963)
○ On December 19, 2017, President Rodrigo R. Duterte signed into law Package 1
of the Comprehensive Tax Reform Program (CTRP) also known as the Tax
Reform for Acceleration and Inclusion (TRAIN) as Republic Act (RA) No.
10963. The Law took effect on January 1, 2018
● Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law (RA
11534)
○ The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Bill,
though with vetoed provisions, was finally signed by the President on March 26
as Republic Act No. 11534.
○ The CREATE Act was previously known as the Corporate Income Tax and
Incentives Reform Act (CITIRA) bill. The law became effective on 11 April 2021.
● Bayanihan to Recover as One Act (RA 11494)
○ One of the features to help the businesses’ growing uncertainties and losses is a
provision relative to Net Operating Loss Carry-Over (NOLCO) where the net
operating loss of the business or enterprise for taxable years 2020 and 2021
shall be carried over as a deduction from gross income for the next five
(5) consecutive taxable years immediately following the year of such loss
○ However, this is only applicable to the registered Corporation and taxable
partnerships and not including the businesses operating under a “Sole Proprietor”
set up.

● Income from Long-Term Contracts

Page 53 of 62
 The term “long-term contracts” refers to construction, installation, or building contracts
requiring a period longer than one (1) year for completion.

Income therefrom is reported under the percentage of completion basis.******

Ex. Contract is P100M (2 years starting 2018)

Contract completed (2018) 40%
L,M,OH used ……(2018) P35M
L.M.OH used …….(2019) P50M
Gross Income?
(2018) (2019)
Value of contract completed (40% x 100M) = P40M P 60M
Cost …………………………………………. 35M 50M
GI ………………………………………….. 5M 10M

COMPLETED CONTRACT *******

Value 100M
Cost 85M
GI 15M
(To be recognized in 2019)

● Gross Income From Farming

The income tax regulations prescribe three (3) methods of reporting the gross income
from farming, namely:

(a) Cash basis, or receipts and disbursements basis. Under this method, no
inventory is used to determine profits.

Formula –

Cash from sales of livestock and other products raised in the farm
+ Value of property received from sales
+ Profits/Gains from the sale of livestock or other items purchased
+ Gross income from all other sources
TOTAL gross income

(b) Accrual basis. Under this method, inventory is used to determine profits

Formula –

Sales xxx
Ending Inventory xxx
Less beginning inventory (xx)
Less purchases (xx) (xx)
Gross Income xxx

or

Cash from sales of livestock and other products raised in the farm
+ Value of property received from sales
+ Profits/Gains from the sale of livestock or other items purchased

Page 54 of 62
 + Gross income from all other sources
TOTAL
+ Inventory, End
- Inventory, Beginning
GROSS INCOME

(c) Crop basis. This method of reporting income may be used by a farmer
engaged in producing crops which take more than (1) year from the time of
planting to the time of gathering and disposing of the crop.

In such cases, the entire cost of producing the crop must be taken as a
deduction in the year in which the gross income from the crop is realized.

Cash sales of farm products ……………….. P 300,000

Ending Invty of farm products ……………. 200,000
Beg. Invty of farm products ………………. 150,000
Rental Income of Farm Eqpt. ……………. 50,000

GI – Cash Basis …………………… P 350,000

GI – Accrual Basis ………………..

Cash Proceeds ………………. P350,000
Add: Invty End …………….. 200,000
Less: : Invty, Beg ………….. (150,000)
GI -..------------------------------- P400,000

● Rent or Lease Income

(a) Income of Lessor

The lessor, in such a case, may, at his option, report income under any of the
following methods:

1) Outright method – lessor reports as income the FMV of the improvement in

the year of completion.

2) Spread-out method –

The lessor shall spread over the remaining term of the lease the estimated
depreciated (book) value of such buildings or improvements at the
termination of the lease, and report as income for each remaining term of the
lease an aliquot part thereof

Formula:

Cost of leasehold improvements P xxx

Less: Depreciation for remaining term (xx)
of lease
Book value, end of lease P xxx

Book value end of lease = Income per P xxx

year

Page 55 of 62
Example:
Lease on land for P240,000/year starting Jan 1 2017 for 10 years
Building constructed on the lease property worth P10M completed on Jan 1,
2019
Est Life of Bldg. is 10 years

Rental Income (2019)?

1. Outright Method – Rent land ………….. P240,00
Improvement ………………………….. 10,000,000
Total Rent …………………………….. P10,240,000 (2019)

Rent 2017………………………………. 240,000

Rent 2018 …………………………….. 240,000
Rent 2019 …………………………. P10,240,000
Rent 2020 ……………………………. 240,000

2. Spread-out Method (2019)

Rent on Land …………………………… P240,000
Improvement …………………………. 250,000*
Rental Income …………………………. P490,000

*Improvement
Cost …………………P10,000,000
Accu Dpn ETL …. 8,000,000
10,000,000/10 x 8
BV ETL ……………. 2,000,000 ETL = end of term of lease

RI = 2,000,000/8 = 250,000 RI = rental income

2017 RI = 240,000
2018 RI – 240,000
2019 RI = 490,000
2020 RI = 490,000

3. Est Life of Bldg. is 5 years

Spread-out Method (2019)
Rent on Land …………………………… P240,000
Improvement …………………………. 0*
Rental Income …………………………. P240,000

*Improvement
Cost …………………P10,000,000
Accu Dpn ETL …. 10,000,000
10,000,000/5 x 5

Page 56 of 62
 BV ETL ……………. 0 ETL = end of term of lease

RI = 0 RI = rental income

2017 RI = 240,000
2018 RI – 240,000
2019 RI = 240,000
2022 RI = 240,000

The lessee may claim depreciation of the improvements over the remaining
term of the lease or the life of the improvements, whichever is shorter.

Page 57 of 62
Central Philippine University
Tax 41 - Quiz

Name:__________________________________ Course:______________ Score:___________

A. ABC Construction agreed to construct the shopping mall of SM (Sulod Mercado) for
P300M for three years starting year 2015. Data related to the construction are as
follows:

Year % completed Construction cost applied during the

year
2015 15% P 40M
2016 60% 129M
2017 100% 125M

1. Gross Income in 2015 using the completed contract is P0

2. Gross Income in 2015 using the percentage of completion is P5M
Value of contract completed …………….. P 45,000,000 (300M x 15%)
Cost ……………………………………… 40,000,000
Gross Income …………………………… P 5,000,000
3. Gross Income in 2016 using the percentage of completion method is
P____________.
Value of contract completed …………….. P 135.000,000 (300M x 45%)
Cost ……………………………………… 129,000,000
Gross Income …………………………… P 6,000,000

4. Gross Income using completed contract method – 2016 = P0

2017 = P6,000,000

B. Gloria leased her Bodega to Miriam. Miriam has to pay the following as agreed in the
lease contract:
Annual rental …………………………………. P120,000
Real property tax on bodega …………………. 15,000
Annual amortization of Loan …………………. 8,000

4. Gross Income is P143,000.

C. A Security Agency operating since a decade reported the following in 2018: Security Fee
collected P 1,000,000; cost of security service of P 800,000 and administrative expenses
of P180,000. The said security agency has receivables from Alpha Corporation of
P120,000.

5. Gross Income is P 200,000. (P1,000,000 – 800,000)

D. A taxpayer reported the following for 2020:

Sales …………………………………………. P 650,000
Cost of Sales ………………………………… 420,000
Gross Income ………………………………. P 230,000
Operating Expenses ………………………… 180,000
Net Income …………………………………. P 50,000
Total Assets …………………………………. P5,000,000

Page 58 of 62
 Using Optional Standard Deduction,

6. Income tax if taxpayer is a corporation is P34,500. (230,000 – 40%) X 25%

7. If taxpayer is sole proprietor, income tax is P 28,000. TI = (650,000 – 40%)

E. A Farmer reported the following:

Sales of farm products …………………. P 850,000
Rental income of farm equipment .……. 200,000
Ending Inventory of farm products …… 180,000
Beginning inventory of farm products …. 210,000

8. Gross Income using cash basis … P 1,050,000

9. Gross income using accrual basis … P1,020,000 (P1,050,000+180,000-210,000)

F. Lease per contract per year ………………..P 20,000

Real property tax paid by lessee ………….. 5,000
Contract resumes: Jan 1, 2013
Term of contract: 15 years
Value of building completed: P5,000,000
Date building was constructed: Jan 1, 2015
Estimated life of building: 20 years

10. Rental income in 2013 using spread-out method is P25,000

11. Rental income in 2014 using spread-out method is P25,000
12. Rental income in 2015 using outright method is P5,025,000
13. Rental income in 2015 using spread-out method is P159,615
Cost …………………………………..…… P 5,000,000
Less: Accu. Depn, End of Term of Lease
P5,000,000/20 X 13 ………………… 3,250,000
BV-End of Term of Lease ……………….. P 1,750,000

Rental Income Improvement = 1,750,000/13 = P134,615

Others ………………………………………… 25,000
Total ………………………………………….. P159,615

Page 59 of 62
Central Philippine University
Quiz – Tax 41

Name:__________________________________ Course: ____________Time: ___________

Score:_______________

G. A contractor corporation built a portion of the Iloilo Airport for 2 years for P100M. The
construction started in year 2017 and related data are as follows (figures are
cumulative):
Labor Materials % of Completion
2017 P10M P25M 40%
2018 P25M P45M 100%

1. Using percentage of percentage of completion method, total gross income for year
2017 is P5M.

Value of the contract completed …………. P 40,000,000

L & M …………………………………… 35,000,000
Gross Income ………………………….. 5,000,000

2. Using completed contract method, total gross income for year 2017 is P 0.

3. Using percentage of completion method, total gross income for year 2018 is P25M.
VCC ……………… P60M
L ………… 15M
M ………. 20M 35M
GI ………………… 25M
4. Using completed contract method, total gross income for year 2018 is (P 30M).
Contract …………….. P 100M
L & M ……………… 70M
GI ………………….. 30M

A.1 - A contractor corporation built a portion of the Iloilo Airport for 2 years for P100M @
(20% & 100%). The construction started in year 2017 and related data are as follows :
Labor Materials
2017 P10M P15M applied
2018 P15M P35M applied

GI = % of completion 2017 (20M – 25M) = (5M)

GI = % of completion 2018 (80M – 50M) = 30M
GI = Completed contract method 2018 (100 – 25 – 50) = 25M

B. Lease per contract a year …………….……………. P 70,000

Annual Real property tax paid by lessee ………….. 15,000
Contract resumes: Jan 1, 2015
Term of contract: 15 years
Value of building completed: P10,000,000
Date building was constructed/completed: Jan 1, 2016
Estimated life of building: 20 years
6. Rental income in 2015 using spread-out method is P85,000
7. Rental income in 2016 using spread-out method is P________________
Cost ……………………………… P 10,000,000

Page 60 of 62
 Less Accu, Dpn – RTL ………….. 7,000,000
10,000,000/20 x 14
BV – ETL …………………………. 3,000,000
Rental income on Bldg (3M/14) = 214,286
Others ………………………….. 85,000
GI ……………………………… 299,286
8. Rental income in 2017 using spread-out method is P299,286
9. Rental income in 2017 using outright method is P 85,000

Example:
Lease to start in 2019
Lease per contract a year …………….……………. P 70,000 (increased @ 5% per year)
Annual Real property tax paid by lessee ………….. 15,000

Using spread-out method GI for 2020

Lease (P70,000 + 5% ) = P73,500
RPT ………………….. 15,000
GI …………………… 88,500

Using spread-out method GI for 2021 = (73,500 + 5%) + 15,000 = 92,175

D. A taxpayer provided the following:
2016 2017
Capital gain on asset held for 18 months 20,000
Capital loss on asset held for 5 months 15.000 2016 Net capital
loss P5,000
Ordinary gain 30,000
Ordinary loss 5,000
Capital gain on asset held for 20 months 40,000
Ordinary loss on asset held for 14 months 10,000

10. Gross income for 2016 if taxpayer is an individual is P 25,000

11. Gross income for 2016 if taxpayer is a corporation is P30,000

12. Gross income for 2017 if taxpayer is an individual is P5,000

13. Gross income for 2017 if taxpayer is a corporation is P30,000

G. A farmer reported the following:

Sale of farm products ……………………… P 250,000
Rental income of farm equipment ………... 30,000
Beginning Inventory ………………………. 200,000
Ending Inventory …………………………. 50,000

14. Gross Income using cash method is P280,000.

15. Gross Income using accrual method is P130,000 (280,000 + 50,000 – 200,000)

Page 61 of 62
………………………………………………………………………………………………………..

FS presentation (for income tax purpose)

Sales ……………………………….. P250
COS ………………………………… 150
GI (Merchandising) ………………… P100
Add/(Less) Capital gain ……………. 20
Total Gross Income ………………… P120
Less: Operating Expenses………….. xxx
NET INCOME ……………………… xxx

Page 62 of 62
Tax on
Corpor
ations
(CREA
TE
Law)

Non-
Resident resident
Gross Income Domestic Foreign Foreign
30% June 2020 and prior
I. On taxable income from business period 30% GI
General 25%
NI of not over P5M and total assets of not over
P100M (excluding land) 20%
25% Gross RR 5-
Taxable Income 25% Income 2021
(eff. Jan 1,
(eff. July 1, 2020) (eff. July 1, 2020) 2021)
MCIT:
Starting June 30, 2020 and prior period/years 2% of GI 2% of GI n.a.
RR 5-
Starting July 1, 2020 to June 30, 2023 1% of GI 1% of GI n.a. 2021
RR 5-
Starting July 1, 2023 2% of GI 2% of GI n.a. 2021

RR 5-
Improperly Accumulated Earnings repealed repealed n.a. 2021

II. Passive Income

a. Interest on Local Currency Dep. 20%FT 20%FT 25%

b. Expanded Foreign Currency Deposit 15%FT 15%FT exempt

c. Royalties 20%FT 20%FT 25%

 d. Long-term Deposits
- 5 years or over exempt exempt exempt
4 years to less than 5 years 5% FT 5% FT 5% FT
3 years to less than 4 years 12%FT 12%FT 12%FT
Less than 3 years 20%FT 20%FT 20%FT

RR 5-
f. Dividends (received from a domestic Corp.) exempt exempt 25%/15% 2021

If the country where the NRFC allows tax credit or exemption

g. Dividends received from FC in General Inc. Tax 25%/20% na na

Dividends received from FC - Reinvested Exempt
Dividends received from FC - used as
working capital, CAPEX, & the like Exempt
Dividends received from FC - at least
20% owned by DC Exempt
III.
Cap
ital
Gai
ns
a. Sale of shares of stocks not traded 15% FT 15% FT 15% FT
in the stock Exchange

b. Real Property 6%FT na na

- Based on Selling Price, FMV or
Zonal Value whichever is higher

IV. Other Corporations

(provided gross income
a. Proprietary Educational Institutions and 1% from unrelated
activities did not exceed 50% of
Hospitals total gross income)
10% effective July 1, 2023
 b. OBUs and RHQ 25%
MCIT 1%/2%

V. Special Non-resident Foreign Corporations

a. Cinematographic film owner, lessor of 25% Gross
distributor Income

b. Lessor of machinery, equipment, aircraft and 7.5% Gross

others Income

c. Lessor of vessels chartered by Philippine 4.5% gross

nationals Income

Itemized OSD
Sales/Gross Receipts XXX XXX
Cost of Sales/Services XXX XXX
Gross Income XXX XXX
Less: Operating Expenses XXX 40%
Net Income XXX XXX

Example 1 - Net Income of a domestic corp is

P1,500,000 and Assets was below 100M in year
2020.
Tax rates - Jan - June 2020 = 30%
July - Dec 2020 = 20%
Income Tax effective rate = 25%
Income tax = P1,500,000 x 25% =
P375,000

Example 2 - Net Income is P2M Total Assets is

P120M (excluding land) in year 2020)
Jan - June 2020 tax rate is 30%
July - Dec 2020 tax rate is 25%
Effective tax rate = 27.5%
 Income Tax is = P2,000,0000 x 27.5%
= P550,000

Example 3 - A corporation reported net income of

8M in year 2020
Income tax = P8M x 27.5% =
P2,200,000

Example 4 A corp reported NI of P7M in 2021

Income Tax = 7M x 25%

Example 5 - A corp reported NI of P3M and Total

assets of P20M in 2021
Income tax = P3M x 20%

Example 6 - A corp reported NI of P1,500,000 in

year 2019
Income tax = P1,500,000 x 30% =
P450,000

Example 7 - A corp reported NI of P7,500,000 in

year 2019
Income tax = P7,500,000 x 30% =
P2,250,000
Tax on
Individu
als

Citizen Alien
Non- Non-
Non res. res.
Reside Reside
Gross Income Resident nt nt ETB NETB
I. On taxable income - income from
compensation, business or practice
Sec Sec Sec
of profession Sec 24A 24A 24A 24A 20%

II. Passive Income

20%F
a. Interest on Local Currency Dep. 20%FT 20%FT 20%FT T

exemp exemp
b. Foreign Currency Deposit 15%FT exempt 15%FT t t

20%F 20%F
c. Royalties in General 20%FT 20%FT 20%FT T T
c.1. Royalty from books, literary works,
10%F 10%F
and musical compositions 10%FT 10%FT 10%FT T T

d. Prizes & winnings (except 10,000 &

below,
20%F 20%F RR 5-
subj to sec 24a) 20%FT 20%FT 20%FT T T 2021
Winnings PCSO (except 10,000 and
below
20%F 20%F RR 5-
that is exempt from from tax) 20%FT 20%FT 20%FT T T 2021

e. Long-term Deposits
exemp exemp
- 5 years or over exempt exempt exempt t t
 4 years to less than 5 years 5% FT 5% FT 5% FT 5% FT 5% FT
12%F 12%F
3 years to less than 4 years 12%FT 12%FT 12%FT T T
20%F 20%F
Less than 3 years 20%FT 20%FT 20%FT T T

f. Cash/Property Dividends from Domestic 20%F RR 2-

Corp. 10%FT 10%FT 10%FT T 2021

III.
Capita
l
Gains
a. Gain on Sale of shares of stocks not
15% 15%
traded at stock exchange/market 15% FT FT 15% FT FT

b. Real Property 6%FT 6%FT 6%FT 6%FT 6%FT

- Based on Selling Price, FMV or
Zonal Value whichever is higher

Income tax rate under Sec. 24A

On taxable income: (effective Jan 1, 2018 - Dec. 31, 2022)
Not over P250,000 0% 620,000
Over P250,000 but not over P400,000 - 20% of excess over P250,000
- P30,000 + 25% of excess over
Over P400,000 but not over P800,000 P400,000
- P130,000 + 30% of excess over
Over P800,000 but not over P2,000,000 P800,0000
- P490,000 + 32% of excess over
Over P2,000,000 but not over P8,000,000 P2,000,000
- P2,410,00 + 35% of excess over
Over P8,000,000 P8,000,000

On taxable income: (effective Jan 1, 2023 and onwards)

Not over P250,000 0%
Over P250,000 but not over P400,000 - 15% of excess over P250,000
Over P400,000 but not over P800,000 - P22,500 + 20% of excess over
 P400,000
- P102,500 + 25% of excess over
Over P800,000 but not over P2,000,000 P800,000
- P402,500 + 30% of excess over
Over P2,000,000 but not over P8,000,000 P2,000,000
- P2,202,500 + 35% of excess over
Over P8,000,000 P8,000,000

Year 2019 2020 2021 2022 2023 2024 2025

Total Assets 10,000,000 12,000,000 12,500,000 13,000,000 13,000,000 15,000,000 15,000,000
Sales 2,000,000 2,500,000 3,000,000 3,600,000 4,320,000 5,184,000 6,220,800
Cost of Sales 970,000 1,270,000 2,300,000 2,875,000 3,593,750 4,492,188 5,166,016
Gross Income 1,030,000 1,230,000 700,000 725,000 726,250 691,813 1,054,784
Opex 530,000 1,250,000 580,000 638,000 701,800 771,980 895,497
NI 500,000 -20,000 120,000 87,000 24,450 -80,168 159,288
NOLCO -20,000 -80,168
Taxable Net Income 500,000 0 100,000 87,000 24,450 0 79,120
MCIT Rate 2% 1.5% 1% 1% 1.5% 2% 2%
MCIT 20,600 18,450 7,000 7,250 10,894 13,836 21,096
NT Rate 30% 25% 20% 20% 25% 30% 30%
Normal Tax 150,000 20,000 17,400 6,113 23,736

MCIT 20,600 18,450 7,000 7,250 10,894 13,836 21,096

Normal Tax 150,000 - 20,000 17,400 6,113 - 23,736
Excess MCIT 18,450 4,781 13,836

Payable 150,000 18,450 20,000 17,400 10,894 13,836 23,736

Excess MCIT 18,450 18,618
Tax Due 150,000 18,450 1,550 17,400 10,894 13,836 5,119
 Feature
s of
MCIT
1. Start on the 4th yr of operation/incorporation
2 Rate is 2% or 1% of GI
3 Payable is the NT or MCIT whichever is higher
Excess MCIT may be carried over the next 3 yrs. (as deduction
4 from NT)

(4,781 +
13,836)
Problem 1. A corporartion reported the following for
the years 2019 and 2020:
Compute the tax due for each quarter.
Excess MCIT in 2018 was P20,000
Compute the Income Tax due for the quarters of 2019
and 2020
Normal
2019 Income Tax MCIT Tax Due NT MCIT

First Quarter 120,000 100,000 100,000 120,000 100,000

Second Quarter 140,000 130,000 140,000 260,000 230,000

3rd Quarter 145,000 160,000 145,000 405,000 390,000

4th Quarter 150,000 190,000 195,000 555,000 580,000

580,000

Normal
2020 Income Tax MCIT Tax Due NT MCIT

First Quarter 130,000 125,000 85,000 130,000 125,000

Second Quarter 140,000 130,000 140,000 270,000 255,000

3rd Quarter 150,000 180,000 210,000 420,000 435,000

4th Quarter 175,000 150,000 115,000 595,000 585,000

550,000 45,000

550,000
 25,000 Excess MCIT 2019
20,000 Excess MCIT 2018
45,000
What if?
2020 Normal
Income Tax MCIT Tax Due NT MCIT
First Quarter 130,000 125,000 85,000 130,000 125,000
Second Quarter 140,000 180,000 220,000 270,000 305,000
3rd Quarter 150,000 180,000 180,000 420,000 485,000
40,000 4th Quarter 175,000 150,000 150,000 595,000 635,000 40,000
85,000 635,000

Problem 2.
A
corporation
existing
since 2012
reported:
Compute the income tax due for 2015 to 2018
2015 2016 2017 2018

1,000,00 1,500,00 1,600,00

Gross Income 0 1,200,000 0 0
Net Income (75,000) 150,000 140,000 115,000
 Income Tax due: 24,000 40,500 34,500
NOLCO (75,000)
Taxable Income 75,000
MCIT - 24,000 30,000 32,000
NT/CIT - 22,500 42,000 34,500
Excess MCIT 1,500

Problem 3. A medical laboratory clinic reported the following in

2020

6,244,00 6,244,00
Gross Receipts 0 Sales 0

2,480,00 4,235,00
Salaries of laboratory technician 0 COS 0

2,009,00
Office Salaries 350,000 GI 0
Depreciation of lab equipment 250,000 Opex 434,260

1,574,74
Rental of laboratory clinic 300,000 NI 0
Telephone 54,260
Laboratory Equipment 500,000
Office Supplies Used 30,000

1,205,00
Laboratory supplies used 0

5,169,26
0
MCIT is? 30,135
NT/CIT is? 393,685
Income tax due is? 393,685
Problem 4: A corporation operating since a 2018
2020 2021 2022 2023 2024 2025 2026

1,000,00 1,500,00 1,800,00 1,850,00 1,900,00 2,000,00

GI 0 1,200,000 0 0 0 0 0
NI (50,000) (60,000) (75,000) 100,000 350,000 380,000 150,000
MCIT Rate 1.5% 1.0% 1.0% 1.5% 2.0% 2.0% 2.0%
NT Rate 25% 20% 20% 25% 30% 30% 30%
MCIT - - 15,000 27,000 37,000 38,000 40,000
NT - - - - 79,500 114,000 45,000
(bal
NI 10,000) 0 100,000 350,000
(100,00
NOLCO (50,000) (60,000) (75,000) 0) (85,000)
Taxable Income - 265,000
Tax Due - - 15,000 27,000 37,500 114,000 45,000
Excess MCIT 15,000 27,000
Proprietary Educational Institution -
refers to any private schools which are
non-profits, maintained and
administered by private individuals or
group, registered with DepEd or CHED
or TESDA

- refers to any private hospitals, which are

non-profit, maitained and administered by
Proprietary Hospitals private individuals
or groups.

Tax rates: June 2020 and prior periods =

10%
Effective July 2020 - June 2023 = 1%
Effective July 2023 and thereafter = 10%

(provided gross income from unrelated

activities did not exceed 50% of the total
Gross Income)

Vision Hospital reported the following: 2021 2020 2019

Unrelated
Hospital Related Activities Total Total Total
Sales 10,000,000 8,000,000 18,000,000 18,000,000 18,000,000
Cost of Services/Sales 2,000,000 3,000,000 5,000,000 5,000,000 5,000,000
Gross Income 8,000,000 5,000,000 13,000,000 13,000,000 13,000,000
Less: Allowable Deductions 1,000,000 2,000,000 3,000,000 3,000,000 3,000,000
Taxable Net Income 7,000,000 3,000,000 10,000,000 10,000,000 10,000,000
Regular Tax Rate 1% 5.5% 10.0%
Income Tax Due 100,000 550,000 1,000,000
Note: The Tax Rate is 1% since gross
income from unrelated activities did not
exceed 50% of Total GI

PCU, a proprietary school reported: 2021 2020 2019

Unrelated
School Related Activities Total Total Total

Sales 15,000,000 18,000,000 33,000,000 33,000,000 33,000,000

Cost of Services/Sales 6,000,000 5,000,000 11,000,000 11,000,000 11,000,000

Gross Income 9,000,000 13,000,000 22,000,000 22,000,000 22,000,000

Less: Allowable Deductions 3,250,000 2,000,000 5,250,000 5,250,000 5,250,000

Taxable Net Income 5,750,000 11,000,000 16,750,000 16,750,000 16,750,000

Regular Tax Rate/Normal tax/Corp.
Income Tax 25.0% 27.5% 30.0%
Income Tax 4,187,500 4,606,250 5,025,000
MCIT 220,000 330,000 440,000
Income Tax Due 4,187,500 4,606,250 5,025,000
Note: The Tax Rate is Normal Tax Rate
since gross income from unrelated
activities exceeded 50% of Total GI
 GROSS INCOME

EXCLUSIONS FROM GROSS INCOME

What are Exclusions?

Exclusions are income or receipts which are excluded from gross income, i.e. these are not included in the
determination of a taxpayer's gross income.

Hence, these incomes or receipts are hot subject to income tax. However, despite their non-inclusion from gross
income, such income items may be subject to taxes other than the income tax.

Exclusions Under the Tax Code

The following items shall not be included in gross income and shall be exempt from income tax:

A. Proceeds of Life Insurance Upon Death of the Insured

The proceeds of life insurance policies paid to the heirs or beneficiaries upon death of the insured shall be
exempt from income tax. The proceeds of life insurance are treated more as an indemnity for the life lost
instead of as gain, profit, or income.

Note: Interest payments made by the insurer constitutes income to the recipient.

B. Amount Received by Insured as Return of Premium

The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or
annuity contracts, either during the term, or at the maturity of the term mentioned in the contract, or upon
surrender of the contract.

Notes:
a) The excess of the proceeds received over the premiums paid is included in gross income

b) Participating dividends distributed to life insurance policy holders are actually a return of overpaid
premiums. They are therefore excluded from gross income of the insured.

C. Gifts, Bequests, and Devices

The value of property acquired by gift, bequest, devise or descent are exempt from income taxation.

Note: The income from the lease, sale, exchange, investment, or other disposition of such property shall be
subject to income tax.

D. Compensation for Injury or Sickness

a) Amounts received, through accident or health insurance, or under Workmen’s Compensation Acts, as
compensation for personal injuries or sickness; Plus

b) The amounts of any damages received, whether by suit or agreement, on account of such injuries or
sickness.

c) Damages representing compensation for personal injuries arising from libel, defamation, slander, breach
of promise to marry, or alienation of affection.

- Includes moral damages. Moral damages include physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and
similar injury.

Page 1 of 12
 - Includes exemplary or corrective damages. These are imposed by way of example or
correction for the public good.

E. Income Exempt Under Treaties

Income of any kind, to the extent required by any treaty obligation or international agreement to be exempt
from taxation by the Republic of the Philippines.

F. Retirement Benefits, Pensions, Gratuities, Separation Pay Which Are Exempt From Income Tax

As a general rule, retirement benefits, pensions, separation pay are all taxable.

As exceptions, the following benefits and payments are EXEMPT from income tax:

a) Retirement benefits and/or pensions which are exempt from income tax:

Under RA No. 7641 (Retirement Pay Law). In the
absence of a retirement plan for employees,
employers are required to pay a retirement benefit
equal to at least ½ month salary for every year of
service.
Under the Tax Code, retirement benefits and/or
pension amounts received by officials and
employees of private firms, whether individual or
corporate, shall be exempt from income tax when
the requisites for exemption in the Tax Code are
complied with.

Requisites for exemption: Requisites for exemption:

i. The employee has reached the age of 60 or i. There must be a reasonable private benefit
more, but not beyond 65; and plan maintained by the employer;
ii. The employee has served for at least 5 ii. The retiring official or employee has been
years in the same establishment. in the service of the same employer for at
least 10 years;
iii. The retiring official or employee is not less
than 50 years of age at the time of his
retirement;
iv. The benefits of exemption granted shall be
availed of by an official or employee only
once.

b) Separation pay due to a cause beyond the control of the employee

Any amount received by an official or employee, or his heirs, from the employer as a consequence of
separation of such official or employee from the service of the employer due to:

(1) Death;
(2) Sickness;
(3) Other physical disability; or
(4) For any cause beyond the control of the said official or employee.

Note: Separation pay due to the above-mentioned causes are exempt from income tax regardless of the
age or length of service of the employee.

The exemption does not cover salaries, 13th month pay and other benefits in excess of P90,000, and
other payments which are properly taxable to the employee.

c) Social security benefits, retirement gratuities, pensions and other similar benefits received by resident
or non-resident citizens of the Philippines, or aliens who come to reside in the Philippines, from foreign
agencies and other institutions private or public.

Page 2 of 12
 d) Payment of benefits due or to become due to any person residing in the Philippines under the laws of the
United States administered by the United States Veteran Administration.

e) Benefits received from or enjoyed under the Social Security System (SSS) in accordance with the
provisions of Republic Act 8282.

f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by
government officials and employees.

g) Maternity benefits advanced by the employer to the employee are excluded from gross income, and are
therefore exempt from withholding tax.

G. Miscellaneous Items

a) Income derived by foreign governments, financing institutions owned or controlled by foreign

governments, and international or regional financial institutions established by foreign
governments from investments or deposits in the Philippines.

b) Income derived by the Philippine Government or its Political Subdivisions from the exercise of any
governmental function.

c) Prizes and awards primarily in recognition of religious, charitable, scientific, educational, artistic,
literary, or civic achievement but only if:
(1) The recipient was selected without any action on his part to enter the contest or proceeding; and
(2) The recipient is not required to render substantial future services as a condition to receiving the
prize or award.

d) Prizes and awards granted to athletes in local and international sports competitions and tournaments
whether in the Philippines or abroad and sanctioned by their national sports association.

e) 13th Month Pay and Other Benefits received by officials and employees of public and private entities as
“13th month pay and other benefits” which shall include:

(1) The 13th month pay, and other incentives such as productivity incentives and Christmas bonus; and
(2) The excess of the de minimis fringe benefits over their respective ceilings.

Provided, however, that the total exclusion shall not exceed Ninety Thousand (P90,000) Pesos
(P82,000 before the TRAIN law).

f) Compulsory or mandatory contributions of employees to GSIS, SSS, Medicare (PHIC), and PAG-
IBIG, and union dues of individuals.

Note: Contributions in excess of the mandatory contributions are not deductible from gross income.
Moreover, GSIS Educational Plan, GSIS Optional Insurance, GSIS Unlimited Optional Insurance, and
GSIS Memorial Plan premiums shall not be deductible.

g) Gains from the sale, exchange or retirement of bonds, debentures, or other certificates of
indebtedness with a maturity of more that 5 years.

h) Gains from Redemption of Shares in Mutual Fund

i) Income of non-residents from transaction with Domestic Depository Banks and OBUs Under the
Expanded Foreign Currency Deposit System

j) Personal Equity and Retirement Account (“PERA”)

PERA refers to the voluntary retirement account of an individual (called a “Contributor”) established
from his own Qualified PERA Contributions and/or Qualified Employer Contributions, for the purpose of
being invested solely in qualified or eligible PERA investment products.

Page 3 of 12
 k) Representation and transportation allowances (“RATA”) granted under Section 34 of the General
Appropriation Act to certain officials and employees of the government from the rank of Department
Secretaries to Division Chiefs are not subject to income tax and to the withholding tax.

l) Personnel Economic Relief Allowance (“PERA”) granted to all employees of the National
Government, Local Government Units, including government owned or controlled corporations, is
considered remuneration/compensation for services performed by the employees in the performance of
official duties, hence, not taxable income.

m) Capital contributions to corporations/partnerships are not income of the corporation/partnership, and

hence not subject to income tax.

n) Project-related income from the development of socialized housing sites. The private sector (ex.
contractors) shall be exempt from payment of project-related income taxes (including CGT) on a per
project basis on income realized from the development of socialized housing sites.

Yield or income from any low-cost or socialized housing-related asset-backed security.

o) Income from the commercialization of technologies developed by local inventors or researchers

under R. A. No. 7459 during the first ten (10) years from the date of the first sale.

p) Proceeds which constitute a fund held in trust by the taxpayer, and which do not redound to the
benefit of the taxpayer.

GROSS INCOME

Concept of Gross Income

Gross income means the total income of a taxpayer subject to tax. It includes the gains, profits, and income
DERIVED FROM WHATEVER SOURCE, whether legal or illegal.

It does not include income excluded by law, or which are exempt from income tax.

Gross Income Defined

Gross income means all income derived from whatever source, including, but not limited to the following
items:
(1) Compensation for services;
- Including pensions and retiring allowances (except those exempt by law)
(2) Gross income derived from the conduct of trade or business or the exercise of profession;
(3) Partner’s distributive share from the net income of a general professional partnership;
(4) Rents
(5) Annuities (excess over premium paid);
(6) Gains derived from dealings in property;
(7) Interest income;
(8) Royalties;
(9) Dividends;
(10) Prizes and winnings;

Note: The above enumeration is not exclusive. Gross income may also include other forms of income which
are not even mentioned in the list above. An example of this would be income from illegal sources.

Items of Gross Income

1. Compensation For Services

Compensation for services, of whatever kind and in whatever form paid, forms part of gross income. The
name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments

Page 4 of 12
and honoraria, allowances, commissions (e g. transportation, representation, entertainment, and the like); fees,
including director’s fees, if the director is, at the same time, an employee of the employer/corporation; taxable
bonuses and fringe benefits, except those which are subject to the fringe benefits tax under Section 33 of the
Tax Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation
income.

(A) Compensation Income which may be in the following forms:

a) Cash
b) Allowances
c) Property – the FMV of the thing taken in payment is the amount of compensation
d) Employer’s stock – the FMV of the shares at the time the services were rendered.
e) Promissory notes – the fair discounted value of the note as of the time of receipt. The employee
shall also record additional income upon the recovery of the discount.
f) Forgiveness of debt for services rendered to ta creditor
Note: Where the debtor is a stockholder of the corporation condoning the debt, the condonation of
the debt amounts to an indirect payment of dividend.
g) Income tax of the employee assumed or paid by the employer, in consideration of the latter’s
services.
h) Pensions and retiring allowances – except those exempt by law
i) Stock options – the FMV of the stock option at the time the services were rendered by the
employee.

(B) Stock Options

1) The amount of compensation shall be the FMV of the stock options at the time the services were
rendered.

2) When the employee exercises the option by paying the exercise price (equity-settlement option), it
results in additional income. Such additional income shall equal the higher of the book value or
FMV of the shares, less the exercise price.
(a) If the employee is a rank-and-file employee, the additional income shall be recognized by
the employee as taxable compensation and shall be subject to the CWT on compensation.
(b) If the employee is a supervisory or managerial employee the additional income shall be
treated as a fringe benefit subject to the final FBT
3) When the grantor (the corporation) simply pays the difference between the FMV of the shares and
the exercise price (cash-settlement option), the same rules in (2) above apply.

(C) Fringe Benefits which may be in the form of (1) meals furnished or subsidized by the employer; (2)
living quarters; (3) life insurance premiums paid by the employer where the insured employee is the
beneficiary; (4) facilities or privileges provided by the employer; or allowances.

Fringe benefits are classified under the following categories, namely:

Those subject to the fringe benefits tax (“FBT”)

- Fringe benefits given to employees holding managerial or supervisory positions, and which
are listed in RR No. 3-98, as amended

Those included in gross income in the ITR

- Fringe benefits given to rank and file employees

- Fringe benefits given to employees holding managerial or supervisory employees and which
are not listed in RR No. 3-98, as amended

Those which are not taxable

- Fringe benefits given to employees for the convenience of the employee, or if incurred by the
employee in the pursuit of the trade, business, or profession of the employer and is liquidated
and accounted for by the employee.
- “De minimis” fringe benefits

Page 5 of 12
 (D) Salaries and Allowances During Leaves of Absence

(E) Separation Pay NOT Due to a Cause Beyond the Control of the Employee

General Rule: Separation pay is included in gross income of separated employee

Exception: If separation is caused by something not of the employee’s making. For example, if
separation is due to cessation of the business, or as a consequence of death, sickness, other
physical disability, or for any cause beyond his control, the separation shall be exempt from
tax.

(F) Fees

Fees received by an employee for the performance of a service for the employer, including director’s
fees (including per diems and allowances), are regarded as compensation income.

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 are considered
compensation.

Exception: Authorized fees paid to public officials, such as notaries public, clerks of court, sheriffs, etc.,
for services rendered in the performance of their official duties, are not considered wages.

(G) Dismissal Payment

Any payment made by an employer to an employee on account of dismissal, that is, involuntary
separation from the service of the employer, constitutes wages, regardless of whether the employer is
legally bound by contract statute, or otherwise to make such payment

(H) Tips and Gratuities

Tips or gratuities paid directly to an employee (by a customer of the employer) which are not accounted
for by the employee to the employer are considered taxable income, but not subject to withholding
tax.

2. Gross Income From Business

1) In general, “gross income” means total sales less COGS, plus any income from investments and from
any incidental or outside operations or sources.

Formula:

Gross Sales P xxx

Less: Cost of good sold xx)
Gross profit from sales P xxx
Add: Other Income P xxx
(a) Income from investment P xxx
(b) Income from incidental or outside
operations or sources xxx xxx
Gross Income P xxx

2) Income from Long-Term Contracts

Page 6 of 12
 The term “long-term contracts” refers to construction, installation, or building contracts requiring a
period longer than one (1) year for completion.

Income therefrom is reported under the percentage of completion basis.

3) Gross Income From Farming

The income tax regulations prescribe three (3) methods of reporting the gross income from farming,
namely:

(a) Cash basis, or receipts and disbursements basis. Under this method, no inventory is used to
determine profits.

Formula –

Cash from sales of livestock and other products raised in the farm
+ Value of property received from sales
+ Profits/Gains from the sale of livestock or other items purchased
+ Gross income from all other sources
TOTAL gross income

(b) Accrual basis. Under this method, inventory is used to determine profits

Formula –

Sales xxx
Ending Inventory xxx
Less beginning inventory (xx)
Less purchases (xx) (xx)
Gross Income xxx

(c) Crop basis. This method of reporting income may be used by a farmer engaged in producing
crops which take more than (1) year from the time of planting to the time of gathering and
disposing of the crop.

In such cases, the entire cost of producing the crop must be taken as a deduction in the year in
which the gross income from the crop is realized.

4) Gross Income From Petroleum Operations

Gross income from petroleum operations means its total entitlement of the gross proceeds from the sale
at market price, during the taxable year, of petroleum produced under the service contract, and such
other income incidental to and arising from any one or more of the petroleum operations of the
contractor.

Provided, the amount of Filipino participation incentive allowance received by a Philippine corporation
pursuant to an operating agreement under a petroleum service contract between a service contractor and
the Government under P.D. No. 87 shall not be included in the gross income of the Philippine
corporation.

3. Payments Made by a GPP to a Partner, and the Distributive Share of Partners in the Net Income of a GPP

4. Rent or Lease Income

Reporting of Income by a Lessor

Page 7 of 12
Rent paid by the lessee for the use or lease of property is taxable income to the lessor.

Rent income may be in the following forms:

(1) Cash, at the stipulated price;

(2) Obligations of the lessor to third persons paid or assumed by the lessee in consideration of the
contract of lease. An example is the real estate tax on the property leased assumed by the lessee.

(3) Advance payment which must be pre-paid rentals and not (a) a loan to the lessor, or (b) option
money for the property, or (c) security deposit for the faithful performance of the lessee’s obligations

However, a security deposit that is applied to rentals is taxable income to the lessor.

Pre-paid rent must be reported in full in the year of receipt, regardless of the accounting method
used by the lessor.

(4) Leasehold improvement

The contract of lease may provide that the lessee may make permanent improvements on the lease
property and said improvements will belong to the lessor upon termination of the lease.

Income and Deduction from Leasehold Improvement

(a) Income of Lessor

The lessor, in such a case, may, at his option, report income under any of the following methods:

1) Outright method – lessor reports as income the FMV of the improvement in the year of
completion.

2) Spread-out method –

The lessor shall spread over the remaining term of the lease the estimated depreciated (book)
value of such buildings or improvements at the termination of the lease, and report as income
for each remaining term of the lease an aliquot part thereof

Formula:

Cost of leasehold improvements P xxx

Less: Depreciation for remaining term of lease (xx)
Book value, end of lease P xxx

Book value end of lease = Income per year P xxx

Remaining term of lease

(b) Deduction of Lessee (Depreciation expense)

The lessee may claim depreciation of the improvements over the remaining term of the lease or
the life of the improvements, whichever is shorter.

(c) Computation of Income from Leasehold Improvement Arising from the Pre-termination of
Lease Contract

The lessor receives additional income for the year in which the lease is so terminated to the
extent that the value of such building when he became entitled to such possession exceeds the
amount already reported as income on account of the erection of such building.

Page 8 of 12
 Formula –

BV of Leasehold Improvement at termination of Lease P xxx

Less: Amounts of income previously recognized (xx)
Additional income in year of termination P xxx

(d) Loss of Lessor if Leasehold Improvement is Destroyed Before Termination of Lease

If the building or other leasehold improvement is destroyed before the expiration of the lease,
the lessor is entitled to deduct as a loss for the year when such destruction takes place the
amount previously reported as income because of the erection of the improvement, less any
salvage value, to the extent that such loss was not compensated by insurance.

5. Annuities and Life Insurance Policies

(a) Annuities – Annuities paid under an annuity contract in excess of the consideration paid are includible in
gross income

(b) Life Insurance Policies – Where insured outlives the term of the policy, amounts received by an insured
in excess of the premiums paid are included in gross income.

Note: Distributions on paid-up policies, which are made out of earnings of the insurance company
subject to tax, are in the nature of corporate dividends and should be taxed accordingly.

6. Gains Derived From Dealings in Property

Sale of 3 types of property which may give rise to taxable events:

Ordinary asset – 100% of the gain or loss shall be recognized in the ITR
Capital asset – subject to final taxes (capital gains tax)
Other capital asset – holding period of the asset shall be taken into consideration if the seller is an
individual, and only the net capital gain shall be included in the ITR.

(1) Sale of Tangible Assets

(2) Sale of Intangible Assets (ex. patents, copyrights, and goodwill)
(3) Corporate Sinking Fund
(4) Sale of Real Property

Gain from the sale of real properties classified as ordinary assets shall be included in gross income in the
ITR of the taxpayer.

Note: Real properties acquired by banks through foreclosure sales are considered as their ordinary
assets. However, banks shall not be considered as habitually engaged in the real estate business
for purposes of determining the applicable rate of creditable withholding tax imposed under Sec.
2.57.2 of Rev. Reg. No. 2-98, as amended (Rev. Reg. No. 7-2003).

7. Interest Income

Interest income, as a rule is taxable income included in the ITR.

EXC. (1) Interest income from bank deposits or deposit substitutes in the Philippines subject to FT
(passive income);
(2) Interest income which are exempt from tax:
i. Interest income from long-term deposit or investment in the form of savings, trust funds,
deposit substitutes, investment management accounts;
ii. Interest income earned from passive investments of foreign governments, financing
institutions owned by foreign governments, and international financial institutions
established by foreign governments.

Page 9 of 12
 Note: Interest income on Government securities is subject to final tax on passive income as such securities
are considered deposit substitutes.

8. Royalties

Royalties derived from sources within the Philippines are subject to a final tax of 20%, except royalties on
books, other literary works, and musical compositions which shall be subject to a final tax of 10%.

Royalties received by resident citizens and domestic corporations from sources without the Philippines
shall be included in the ITR.

9. Dividends

Dividends subject to FT: Cash or property dividends received by individuals and NRFCs from domestic
corporations.

Dividends included in gross income in the ITR:

1) Generally, cash and/or property dividends received by a resident citizen or domestic corporation from
a foreign corporation.

2) Liquidating Dividend

Liquidating dividends represent distribution of all the property or assets of a corporation in complete
liquidation or dissolution.

The difference between the cost or other basis of the stock and the amount received in liquidation of
the stock is a capital gain or a capital loss. Where property is distributed in liquidation, the amount
received is the fair market value of such property.

Liquidating dividend P xxx

Less: Cost of stock investment or other basis (xx)
Capital gain or (Capital loss) P xxx

If the shareholder is a corporation, the capital gain is taxable in full.

If the shareholder is an individual and the stocks were held for more than 12 moths, the capital gain is
taxable only to the extent of 50% thereof (Sec. 39 (B), NIRC)

Dividends not subject to income tax

1) Intercorporate dividends from a domestic corporation to another domestic corporation or a RFC.

2) Generally, stock dividends.

10. Prizes and Winnings

Subject to FT: (a) Prizes over P10,000 and winnings1 derived within the Philippines.
(b) Prizes received by a NRANETB and by a NRFC within the Philippines.

Included in the ITR:

1) Prizes amounting to P10,000 or less received by a citizen, resident alien, or NRAETB
2) Prizes received by domestic corporations
3) Prized received by RFCs within the Philippines
4) Prizes and winnings received by resident citizens from sources without the Philippines

1Except PCSO and Lotto winnings of P10,000 or less of an individual citizen or resident alien, and PCSO and Lotto winnings of a NRAETB regardless of
amount, which is EXEMPT.

Page 10 of 12
11. Income From Other Sources

(1) Recovery of damages representing compensation for loss of profits or income are includible in
gross income
Note: Recoveries that are to compensate for damage to property, injury to person, or loss of life are
not taxable.

Included in Gross Income Not Taxable

1) Damages for loss profits
2) Damages for lost income
1) Damages to compensate for damage or
injury to the person or his property
2) Damages for lost capital
3) Moral damages
4) Exemplary damages
5) Punitive damages

(2) Recovery of Bad Debts Previously Deducted

The “Tax Benefit Rule” is the doctrine observed in the Philippines in bad debt recoveries.

Rules on Bad Debt Recovery:

(a) Taxable – if the deduction of the bad debt in prior year resulted in an income tax benefit to the
taxpayer, the bed debt recovered is taxable income in the year of recovery.

(b) Not Taxable – if the deduction of the bad debt did not result in an income tax benefit to the
taxpayer (i.e., where the result of the business operation was net loss even without the bad debt
deduction), the bad debt recovered is not taxable income but is treated as a mere recovery or
return or capital.

(c) Income From Bad Debt Recovery – the recovered amount of the previously deducted bad debt
which resulted in an income tax benefit.

(3) Refund of Deductible Tax

The tax benefit doctrine also applies with respect to refund or credit of taxes which were claimed
and deducted in a previous year.

Rules on Refund of Taxes Previously Deducted:

(a) Taxable – if the tax paid is a deductible tax. The refund or credit thereof is taxable in the year of
receipt.

(b) Not Taxable – if the tax paid is not a deductible tax. The refund or credit thereof is not taxable.

(c) Income From Tax Refund – The refunded amount of the tax which was previously deducted and
which resulted to an income tax benefit.

Examples of deductible taxes are: percentage taxes (except VAT and stock transaction tax under
Sec. 127 the Tax Code), excise taxes, occupation or professional taxes, real property taxes.

Examples of non-deductible taxes are income tax, donor’s tax, estate tax, VAT, stock transaction tax
under Section 127 of the Tax Code)

(4) Tournament Prizes

Included in the ITR: Cash prizes won by local players/participants in tournaments are not passive
income inasmuch as participating in such tournaments is their profession and/or occupation.

Page 11 of 12
 Subject to FT: Cash prizes of foreign players/participants, shall be subject to a final tax of 25%.

Exempt from income tax: Prizes and awards granted to athletes in local and international sports
competitions and tournaments whether held in the Philippines or abroad, and sanctioned by their
national sports associations.

(5) Forgiveness of Indebtedness

Included in the ITR: When a creditor cancels the debt as part of a business transaction, or in
consideration of personal services of the debtor, the condoned debt is taxable income to the debtor.

Taxed as a dividend: But where the debtor is a stockholder of the corporation which condoned the
debt, the condonation is considered an indirect payment of dividend.

Subject to donor’s tax: If a creditor merely desires to benefit a debtor, and without any
consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the
debtor.

(6) Income from Illegal Sources

All unlawful gains are taxable and includible in the ITR. However, actual repayment of such illegal
gains will give rise to a deduction. (James vs. United States, 366 US 213)

(7) Unutilized/Excess Campaign Funds

Unutilized/excess campaign funds, that is, campaign contributions net of the candidate’s
campaign expenditures, shall be considered as subject to income tax. As such, the same must be
included in the candidate’s gross income as stated in his Income Tax Return (“ITR”) for the subject
taxable year.

Any candidate who fails to file with the COMELEC the appropriate Statement of Expenditures
required under the Omnibus Election Code, shall be automatically precluded from claiming such
expenditures as deductions from his campaign contributions. As such, the entire amount of his
campaign contributions shall be considered as directly subject to income tax.

(8) Early Withdrawals from a Personal Equity and Retirement Account (“PERA”) which do not
qualify for exclusion from taxable gross income

(9) Gain in the Sale or Retirement by a Corporation of Its Own Bonds

- Where the corporation is able to buy back its own bonds for less than the value of such bonds
as reflected in the corporation’s books.

(10) Stock options granted to a supplier of goods or services

Page 12 of 12
 DEDUCTIONS

DEDUCTIONS

- Amounts allowed to be subtracted from Gross Income to arrive at taxable income in the ITR.

- Taxpayers may choose NOT TO AVAIL of the deduction

- If deductions are claimed, the burden of proving the legality and correctness of the deductions rests upon
the taxpayer. The taxpayer has the obligation to substantiate with receipts and other evidences every item
of deduction when required.

Kinds of Deductions:

BEFORE TRAIN AFTER TRAIN

1) Personal Exemptions (Basic and Additional) (for
individuals, and estates in year of decedent’s death)

2) Income distributed to heirs/beneficiaries (for Income distributed to heirs/beneficiaries (for

estates and trusts) estates and trusts)

3) P20,000 special exemption (for estates after year

of decedent’s death, and for trusts)

4) Health and/or Hospitalization Insurance

Premium (“H/H premium”) under Section 34
(M) of the Tax Code)

5) Itemized Deductions (“ID”) or Optional Itemized Deductions (“ID”) or Optional Standard

Standard Deduction (“OSD”) Deduction (“OSD”)

Notes:

a) Individuals engaged in trade or business, or profession can select the ID of the OSD, if they are being
taxed under the graduated rates. If they are taxed under the 8% tax regime, no deductions shall be
available in computing their tax bases.

b) Individuals earning compensation income are not allowed any deduction from their compensation
income.

c) Estates and trust can claim the ID or the OSD, only if they are taxed under the graduated rates.

d) Domestic corporations, resident foreign corporations, and partnerships can claim ID or OSD.

Summary of Allowable Deductions (BEFORE TRAIN)

Deduction Individuals Estates Trusts Corp. Partnerships

EE Self-
Decedent Died
employed
w/in At least
taxable 1 year
year ago
1) ID or OSD ✔ ✔ ✔ ✔ ✔ ✔
2) H/H ✔ ✔
3) Income distributed to heirs/beneficiaries ✔ ✔ ✔
4) Personal/Additional Exemptions ✔ ✔ ✔
5) P20,000 special exemption ✔ ✔

Page 1 of 18
 Summary of Allowable Deductions (AFTER TRAIN)

Deduction Individuals Estates Trusts Corps. Partnerships

EE Self-employed
taxed under
graduated rates
1) ID or OSD ✔ ✔ ✔ ✔ ✔
2) Income distributed to ✔ ✔
heirs/beneficiaries

OPTIONAL STANDARD DEDUCTION (OSD)

OSD is the deduction which can be taken in lieu of Itemized Deductions (both ordinary and special IDs)

Who may claim the OSD?

1) For Individuals: a) Citizens;

b) Resident aliens; Who compute their income tax under the
c) Estates and Trusts; graduated rates

Amount of OSD = 40% of [Gross sales, net of returns, allowances, and discounts (accrual basis) + Other
taxable income from operations not subject to FTs]
Or
40% of [Gross receipts, net of returns, allowances, and discounts (cash basis) + Other
taxable income from operations not subject to FTs]

For individuals, OSD is in lieu of Cost of Goods Sold or Cost of Sales + the Itemized Deductions

2) Corporations: ONLY Domestic Corporations and Subject to 30% of net taxable income
Resident Foreign Corporations

Amount of OSD = 40% of [Gross Income (GI)1 + Other taxable income not subject to FTs]

For corporations, OSD is in lieu of the Itemized Deductions only.

Election of the OSD

- Made in the 1st Quarterly Return. Failure by taxpayer to indicate OSD election in the 1st Quarterly Return
means that taxpayer is claiming Itemized Deductions;

- When made, it is irrevocable for the entire year;

- Failure to file the 1st Quarterly Return is equivalent to availing Itemized Deductions for the year.

1 GI = Gross Sales – Sales Returns – Sales Allowances – Discounts – Cost of Goods Sold

Page 2 of 18
ITEMIZED DEDUCTIONS (IDs)

When a taxpayer claims IDs, the taxpayer is specifying the particular expenses to be deducted from gross income.

Who may claim IDs? a) Domestic corporations including partnerships and GOCCs
b) Resident foreign corporations
c) Individuals engaged in trade, business, profession
d) Estates and trusts

Items of IDs: Business expenses Depletion of oil and gas wells

Interest expenses Charitable and other contributions
Deductible taxes Research and development expenses
Losses Pension trust contributions
Bad Debts
Depreciation

I. ORDINARY ITEMIZED DEDUCTIONS (under the Tax Code)

A) BUSINESS EXPENSES

Requisites for deductibility:

1) Ordinary and necessary for the business;

2) Incurred or paid during the taxable year;
3) Connected with the trade, profession, or business of the taxpayer;
4) Reasonable expenses of the business;
5) Substantiated by official receipts/records;
6) The withholding tax required to be withheld has been withheld and remitted to the BIR.2

Notes: a) Bribes and kickbacks (to both local and foreign officials) are not allowed as deductions.
b) Deductible business expenses of non-resident citizens, resident aliens, NRAETBs, and RFCs
constitute expenses paid or incurred in carrying out its business in the Philippines.

(1) Compensation expenses (of employer) for personal services actually rendered;

(a) Includes salaries and other forms of compensation, including bonuses, and the Grossed-up
Monetary Value of fringe benefits subject to Final Tax.
(b) Includes management and labor expenses, commissions, and pension payments.
(c) Includes compensation for injuries paid by the employer less any insurance proceeds.
(d) Includes premiums of life insurance of the employee where the beneficiary is not the
employer, but the employee.
(e) Includes salaries paid after death of the employee, but does not include donations for coffin
and wake expenses

(2) Travelling Expenses;

- Includes transportation expenses, meals, and lodging

Additional requisites for deductibility:

- Must be incurred while away from home (“tax home”). Tax home refers to the place of
work, business, or employment.

(3) Entertainment, Amusement, and Recreational (EAR);

- Expenses in entertaining or meeting with guests, or clients (called representation expenses)

2Under RR 6-2018, a deduction shall be allowed even if no withholding tax was made if the withholding tax + surcharges
are paid at the time of the audit/investigation or reconsideration/reinvestigation.

Page 3 of 18
 - Includes depreciation or rental expenses relating to entertainment facilities.

Subject to the following ceilings:

1) For taxpayers engaged in the sale of goods and properties: ½ of 1% of net sales
2) For taxpayers engaged in the sale of services/leasing of properties: 1% of net
revenues.

(4) Materials and supplies actually consumed in business;

(5) Maintenance and repairs which do not add to the value of the property nor appreciably
prolong its life;

(6) Rental expense (of the lessee) of property used in business;

Notes:
(a) Advance or prepaid rentals are not allowed to be deducted in year of payment. Instead,
advance rentals shall be apportioned over the term of the lease.
(b) Taxes and other obligations of the lessor which are paid by the lessee, are allowed as
deductions.
(c) Depreciation of leasehold improvement is available as deduction to the lessee.

(7) Advertising and other selling expenses;

(8) Operating expenses of transportation equipment used in the trade, profession, or business;

(9) Insurance premiums against fire, storm, theft, accident, or other similar losses in the trade or
business;

(10) Miscellaneous expenses;

a) Amortization of pre-operating expenses, which are treated as deferred expenses, for not
more than 60 months;
b) Costs of suits are allowed as deductions;
c) Judgments against the taxpayer less any amount compensated for by insurance or
otherwise;
d) Loss upon a corporation’s retirement of its own bonds.

(11) Special Expense Allowed to Private Educational Institutions under Sec. 27(B)

Capital outlays for expansion of school facilities can either be:

a) Expensed immediately; or
b) Capitalized and depreciated.

B) INTEREST EXPENSE

(1) Requisites

(a) Must be connected with the trade or business of the taxpayer;

Note: Interest on home mortgage is not allowed as deduction.
(b) There must be a liability to pay interest. The obligation to pay interest must be stipulated in
writing and must be legally due

Page 4 of 18
 (c) Must be paid or accrued within the taxable year
(d) Interest expense must be the obligation of the taxpayer
(e) Interest payment must not be between related taxpayers in Sec. 36 (B) of NIRC.

(2) Reduction of Allowable Deduction for Interest Expense By:

33% of interest income subject to Final Tax beginning January 2009

Exceptions: Where Interest Expense is Deductible in Full

a) If taxpayer has no interest income subject to Final Tax;

b) Interest on all unpaid business-related taxes (RR 13-2000);
c) Interest payments of an occupant of a socialized housing project incurred for the
construction or purchase of the house (R.A. No. 7279)

(3) Optional Treatment of Interest Incurred to Acquire Property Used in Trade or Business

a) Immediately expensed; or
b) Capitalized as part of the cost of the property.

(4) Non-Deductible Interest (Sec. 34 (B)(2))

a) Interest paid in advance (thru discount) by a cash-basis taxpayer. The interest expense is
not allowed to be deducted in the year the cash-basis taxpayer takes out the loan.

The interest expense will be deducted only in the year the debt is paid.

b) Interest Paid Between Members of a Family or Related Taxpayers under Section 36(B)

1) Between the taxpayer and his brothers/sisters, spouse, ancestors, and lineal
descendants;
2) Between a corporation and an individual who owns, directly or indirectly, more
than 50% in value of the outstanding stock of such corporation (except in cases of
distribution in corporate liquidation);
3) Between 2 corporations where more than 50% in value of the outstanding capital
stock of each corporation is owned, directly or indirectly, by the same individual
(except in cases of distribution in corporate liquidation);
4) Between grantor and a fiduciary (trustee) of a trust;
5) Between the fiduciaries of 2 trusts having the same grantor;
6) Between the fiduciary and a beneficiary of a trust.

c) If debt is incurred to finance petroleum exploration

d) Interest expense attributable to income without the Philippines of an alien or foreign

corporation

e) Interest on preferred stock which is actually a dividend

f) Interest on debt incurred to purchase a tax-exempt security

g) Interest which is not stipulated in writing

C) DEDUCTIBLE TAXES

Requisites:
(1) Paid or incurred within the taxable year;
(2) Must be connected with the profession, trade, or business of the taxpayer; and

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 (3) Is directly imposed on the taxpayer.

Examples of deductible taxes: import duties; business taxes (like percentage taxes); local business
taxes; community tax; privilege and license taxes; excise taxes, Documentary Stamp Tax (DST);
automobile registration fees; real property tax; fringe benefit tax (FBT)

Examples of non-deductible taxes: income tax, foreign income tax if claimed as a tax credit; estate tax;
donor’s tax; special assessments; VAT; final taxes; stock transaction tax under Sec. 127; capital gains tax.

Notes:
(a) VAT is non-deductible except input VAT allocated to exempt sales (is deductible)
(b) Fines and penalties imposed due to late payment of tax are not deductible. But interest imposed
due to the same is deductible
(c) Tax benefit rule applies to refund of deductible taxes

D) LOSSES

ORDINARY LOSSES

1) Casualty losses due to mishap, accident, fortuitous event, robbery, theft, embezzlement of
property used in the trade, profession, or business of the taxpayer.

Requisites:
(1) Must involve ordinary properties;
(2) Actually sustained;
(3) Not claimed as a deduction for estate tax purposes;
(4) Not compensated for by insurance or by other forms of indemnity;
(5) Must be reported to the BIR within 45 days from the date of loss.

If loss is total, the deductible amount is the book value of the asset less any amount of insurance
proceeds or compensation received.

If loss is partial, the deductible amount is the replacement cost or book value of the asset,
whichever is lower. If replacement cost is greater than the book value, the excess shall be
capitalized and depreciated over the remaining useful life of the property.

2) Business losses – losses incurred in the trade, profession, or business of the taxpayer.

(a) Losses from sale of ordinary assets

(b) Partner’s share in the losses of a GPP.

3) Net Operating Loss Cary-Over (“NOLCO”) – excess of allowable deductions (excludes

NOLCO and any item of incentive deduction under special laws that does not involve any cash
outlay) over gross income in a taxable year;

a) Can be availed of by individual taxpayers engaged in trade, business, or a profession,

estates and trust, domestic and resident foreign corporations subject to the normal income
tax, and special corporations subject to preferential tax rates (hospital corporations,
proprietary educational corporations, and regional operating headquarters of MNCs)

Taxpayers not entitled to NOLCO:

(1) OBUs and FCDUs of domestic or foreign banking corporations;

(2) PEZA, SBMA, CDA, etc. registered enterprises with respect to their registered
businesses;
(3) Foreign corporations engaged in international shipping or air carriage business in the
Philippines.

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 b) No NOLCO if net operating loss was incurred in a year during which taxpayer was
exempt from income tax.

Ex. Corporations enjoying income tax holiday incentives from the BOI or PEZA are not
entitled to NOLCOs.

A loss in one line of business which is tax-exempt is not permitted as a deduction in

another line of business which is taxable.

Ex. Foreign corporations are allowed only losses sustained in business in the Philippines or
losses of property within the Philippines because foreign corporations are taxable only
on income within the Philippines.

c) Net operating loss can be carried over and deducted from gross income for the next 3
consecutive years.

d) NOLCO shall be allowed only if there has been no substantial change in the ownership of
the business.

“No substantial change” means ≥ 75% in value of the outstanding shares or ≥ 75% of the
paid-up capital of a corporation is held by or on behalf of the same persons (Sec. 34
(D)(3)).

Note: Applies to transfers of NOLs as a result of a merger, consolidation or business

combination. This means that the transferee is not entitled to the NOLCO unless the
transferor owns at least 75% of the outstanding shares or at least 75% of the paid up
capital of the transferee.

e) For mines, other than oil and gas wells, NOL incurred without the benefit of incentives
provided under the Omnibus Investment Code, in any of the first 10 years of operations,
can be carried over as deductions for the next 5 years following the year of loss.

The net operating loss of a Registered Tourism Enterprise (registered with the Tourism
Infrastructure and Enterprise Zone Authority but taxed under the regular rates) for
any taxable year may be carried over as a deduction from gross income for the next six (6)
consecutive taxable years immediately following the year of loss.

SPECIAL LOSSES

a) Loss of income which was previously reported under the accrual method.

b) Wagering losses – deductible only to the extent of gains or winnings.

Note: Cost of Lotto or Sweepstakes ticket will not be deductible from Lotto or Sweepstakes
winnings if such winnings are exempt from tax (not more than P10,000 if won by a citizen
or RA or regardless of the amount if won by a NRAETB)

c) Loss due to the voluntary removal of old buildings or old machinery

However, No deduction: Where a taxpayer buys land on which structures are erected, and then
such taxpayer proceeds to remove the structures. It is presumed that the price of the land already
includes the cost of such removal.

d) Loss of Useful Value – loss of usefulness of an asset or property used in business due to changes
in business conditions.

Amount of loss = BV – Accumulated Depreciation – Salvage Value

Loss must be charged off the books

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 e) Securities, shares of stock (classified as ordinary assets) becoming worthless

- Becoming worthless means value is close to zero; mere shrinkage in value is not deductible
- Amount of loss = cost or basis of the shares of stock

Note: if shares of stock are held as capital assets, and have become worthless during the
taxable year, such loss shall be treated as capital losses which can be deducted only
against “other capital gains” in the ITR.

f) Abandonment Losses in Petroleum Operations

- When petroleum operations are abandoned, all accumulated exploration and development
expenditures, as well as unamortized costs and undepreciated costs of equipment can be
deducted;

g) Losses from Sales of Shares of Stock Where the Seller is a Dealer in Securities

NON-DEDUCTIBLE LOSSES

a) Exchanges solely in kind pursuant to mergers/consolidations under Section 40(C)(2)

b) Losses from sales/exchanges between related taxpayers under Section 36 (B)
c) Losses from wash sales3 where the seller is NOT a dealer in securities

E) BAD DEBTS

Requisites: a) There must be a valid and subsisting debt owed the taxpayer;
b) The debt must be connected with the trade, business, or profession of the taxpayer;
c) The debt must be ascertained to be worthless or uncollectible;
d) The debt must be charged off within the taxable year.

Note: Recovery of bad debts previously allowed as a deduction is governed by the Tax Benefit Rule.
The recovery of a bad debt is included in gross income if its deduction in a previous year resulted
in an income tax benefit to the taxpayer (i.e., a decrease in tax)

Non-deductible Debts:

1) Bad debts not connected with the trade, business, or profession of the taxpayer.
2) Bad debts between related parties under Section 36 (B)
3) When mortgage is foreclosed and the collateral is bought by the mortgagee in foreclosure sale,
the difference between the amount of the loan and purchase price of the collateral is not allowed
as a bad debt deduction. Any loss deferred until the property is eventually sold by the
mortgagee.

F) DEPRECIATION/DEPLETION

- Gradual decrease in the useful value of an asset/property from wear or tear, or obsolescence
- Also includes amortization of intangible assets (patents, copyrights, etc.)
- Limited to the cost or amount invested in the asset/property
- Depletion (for oil and gas wells) refers to the exhaustion of natural resources

Requisites:
1) Asset must be used in trade, business, or profession of the taxpayer;
2) Asset has a limited useful life;

3 Wash sale is a sale of a security if, within a period of 30 days before the date of sale and ending 30 days after such sale, the
taxpayer purchased the same identical shares.

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 3) Allowance for depreciation must be reasonable;
4) Allowance for depreciation must be charged off during the year.

Methods of Depreciation Allowed under Section 34(F)(1)

1) Straight-line method
2) Declining-balance method
3) Sum of the years digits method
4) Units of production/hours of use method
5) Any reasonable method of measuring obsolescence approved by the Secretary of Finance

Depreciation of petroleum operations

Properties used directly in the production of petroleum shall be depreciated over 10 years or such
shorter life as may be permitted by the CIR.

Properties not directly used in the production of petroleum (such as cars, office equipment) shall be
depreciated over 5 years)

Favorable depreciation rate for mining operations

If the property used in mining has an expected life of more than 10 years, the cost can be depreciated
over any number of years between 5 years and the expected life of the asset.

If the property has an expected life of not more than 10 years, the cost shall be depreciated at the
normal rate of depreciation.

Irrevocable election to deduct exploration and development expenditures in mining operations

Provided, the total amount deductible for exploration and development expenditures shall not exceed
twenty-five percent (25%) of the net income from mining operations computed without the benefit of
any tax incentives under existing laws.

The actual exploration and development expenditures minus twenty-five percent (25%) of the net
income from mining shall be carried forward to the succeeding years until fully deducted.

Intangible exploration and drilling costs (for both mines and wells)

After the production in commercial quantities has commenced, certain intangible exploration and
development drilling costs:

(a) Shall be deductible in the year incurred if such expenditures are incurred for non-producing wells
and/or mines, or

(b) Shall be deductible in full in the year paid or incurred or, at the election of the taxpayer, may be
capitalized and amortized if such expenditures incurred are for producing wells and/or mines in
the same contract area.

Depreciation/Depletion by NRAETB and RFCs

- Only if the property/mine/well is located within the Philippines.

No Depreciation for Certain Transportation Vehicles

No depreciation shall be allowed for (a) yachts, (b) helicopters, (c) airplanes and/or aircrafts, and (d)
land vehicles which have a value of more than P2.4 Million. However, this prohibition does not
apply if the taxpayer’s main line of business is transportation or the lease of transport equipment, and
the vehicles purchased are used in said operations.

Maintenance expenses of non-depreciable vehicles are NOT allowed as deductions.

Page 9 of 18
G) PENSION TRUST CONTRIBUTIONS

- To provide for reasonable pensions to employees

Payment Deductibility
Present service cost contributions – paid to cover In FULL
current pension liabilities accruing during the
taxable year
Past service cost contributions – contributions in Prorated over 10 years beginning with the year in
excess of the present service cost contribution in a which the payment is made
taxable year

H) CHARITABLE CONTRIBUTIONS

Requisites:
1) Contributions or gifts are actually paid;
2) Given to entities specified by law;
3) Net income of the recipient does not inure to benefit of any stockholder or individual owner;
4) Taxpayer making the charitable contribution must be engaged in trade, business, or profession.

Valuation: The amount of any charitable contribution of property other than money shall be based on the
net book value of the said property as reflected in the financial statements of the donor.

NOT SUBJECT TO LIMIT – deductible in FULL

(1) Donations to the government or to GOCCs for PRIORITY ACTIVITIES in education, health, youth
and sports development, human settlements, science and culture, or economic development as
determined by the NEDA;

(2) Donations to foreign institutions and organizations pursuant to treaties or agreements entered into
by the Philippine government;

(3) Donations to entities pursuant to special law;

Examples: State colleges and universities; CCP; National Commission for Culture and the Arts,
Integrated Bar of the Philippines, IRRI; Philippine Red Cross (RA 10072); Any child-caring or
child-placing institutions accredited by the DSWD (RA 10165).

(4) Donations to accredited NGOs

“NGOs” refers to a non-profit corporation:

(a) Organized and operated exclusively for scientific, research, educational, character-building,
youth and sports development, heath, social welfare, cultural, or charitable purposes;
(b) No part of the net income of such NGO inures to the benefit of any private individual;
(c) Uses the donation not later than the 15th day of the 3rd month after the close of its taxable
year;
(d) It administrative expenses ≤ 30% of total expenses;
(e) Its assets, upon dissolution, shall be given or distributed to another NGO organized for a
similar purpose, or to the state for a public purpose.

SUBJECT TO LIMIT

(1) Donations to the government or GOCCs exclusively for public purpose, but not for PRIORITY
activities;

(2) Donations to accredited domestic corporations or associations organized and operated exclusively
for religious, charitable, scientific, youth and sports development, cultural, educational, or the
rehabilitation of veterans;

Page 10 of 18
 (3) Donations to social welfare institutions;

(4) Donations to non-governmental organizations (“NGOs”)

Limit of Contributions

Corporations: 5%
Individuals: 10%

Of taxable income derived from trade, profession, or business without the benefit of the
charitable deductions (both subject and not subject to the limit)

Note: Taxable income from trade, profession, or business does not include non-business income
(example, capital gains derived from assets not used in business)

I) RESEARCH AND DEVELOPMENT EXPENDITURES

- Must be connected with the trade, business, or profession of the taxpayer

Options of taxpayer:

1. Deduct as ordinary and necessary expenses. However, the taxpayer cannot use this option if the
expenditure is

a) For the acquisition of land or improvement of property which is subject to depreciation or

depletion; or
b) For the purpose of ascertaining the existence of location, extent, quality of a deposit ore
or other mineral, such as oil and gas.

OR

2. Treat as deferred expenses and amortize over a period of ≥ 60 months beginning in the month that
benefits are first realized from the expenditure.

J) FOREIGN INCOME TAXES PAID TAKEN AS DEDUCTIONS BY RESIDENT CITIZENS OR

DOMESTIC CORPORATIONS

II. SPECIAL ITEMIZED DEDUCTIONS

K) SPECIAL DEDUCTIONS OF INSURANCE COMPANIES

1) The net additions, if any, required by law to be made within the year to reserve funds. Provided,
“released reserves” are treated as income in the year of release.
2) The sums paid within the year on policy and annuity contracts including matured endowments,
payments on installment policies and surrender values actually paid.

L) SPECIAL DEDUCTIONS OF REAL ESTATE INVESTMENT TRUSTS (“REITs”)

Dividends paid by a REIT shall be deductible.

Requirements:
1) The REIT must be a corporation whose shares are traded in the stock exchange.

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 2) The REIT must maintain a minimum public ownership of forty percent (40%) for its first two (2)
years, and sixty-seven percent (67% on or before the 3rd year and thereafter.
3) The REIT must distribute at least 90% of its distributable income.

M) DEDUCTIONS OF ESTABLISHMENTS GRANTING SALES DISCOUNTS TO PERSONS

WITH DISABILITY (PWDs4)

Such establishments shall be entitled to deduct the said sales discount from their gross income for income
tax purposes, subject to the following conditions

1) The total amount of the claimed tax deduction, net of VAT if applicable, shall be included in the
gross sales receipts;

2) The sales discounts shall be deducted from gross income after deducting the cost of goods sold or
the cost of services;

3) Only the actual amount of the sales discount granted or a sales discount not exceeding 20% of the
gross selling price or gross receipts can be deducted from gross income, net of VAT;

4) Only that portion of the gross sales exclusively used, consumed, or enjoyed by the persons with
disability shall be eligible for the deductible sales discount;

5) PWDs shall be entitled to at least a twenty percent (20%) discount on payments for the following
sales of goods and services for their exclusive use and enjoyment or availment:
a) On the fees and charges relative to the utilization of all services in hotels and similar
lodging establishments, restaurants, and recreational centers;
b) On admission fees charged by theaters, cinema houses, concert halls, circuses,
carnivals, and other similar places of culture, leisure, and amusement;
c) On the purchase of medicines in all drugstores;
d) On medical and dental services including diagnostic and laboratory fees such as, but not
limited to x-rays, computerized tomography scans and blood tests, and professional fees
of attending doctors in all government and private hospitals and medical facilities
subject to guidelines to be issued by the DOH, in coordination with the PHIC;
e) On fares for domestic air and sea travel except promotional fares;
f) On actual fares for land transportation travel such as, but not limited to (1) public
utility buses or jeepneys (“PUBs/PUJs”), (2) taxis, (3) Asian utility vehicles (“AUVs”),
(4) shuttle services, (5) public railways including Light Rail Transit (“LRT”), Metro Rail
Transit (“MRT”), and Philippine National Railways (“PNR”), (6) Transportation
Network Vehicle Services (“TNVS”) such as Grab, Uber, and the like, and (7) such other
similar infrastructure that will be constructed, established, and operated by a public or
private entity;
g) On funeral and burial services for the death of the PWD.

Note: “No double discount” means that in the purchase of goods and services which are on
promotional discount, PWDs can avail of the establishment’s offered discount, or the
20% discount provided under R.A. No. 10754, whichever is higher or more favorable.

In cases where the PWD is also a senior citizen entitled to a 20% discount under a
valid Senior Citizen ID, the PWD shall use either his PWD ID card or his Senior
Citizen ID to avail of the 20% discount. Thus, a PWD who is also a senior citizen can
only claim one 20% discount on a particular sales transaction.

N) TAX INCENTIVES FOR EMPLOYERS OF DISABLED PERSONS

(1) Private entities that employ disabled persons either as regular employee, apprentice or learner shall
be entitled to an additional deduction from gross income equivalent to twenty-five percent
(25%) of the total amount paid as salaries and wages to disabled persons;

4 PWD must be a Filipino or dual citizen.

Page 12 of 18
 (2) Private entities that improve or modify their physical facilities in order to provide reasonable
accommodation for disabled persons shall be entitled to an additional deduction from their net
taxable income, equivalent to fifty percent (50%)of the direct costs of the improvements or
modifications.

Note: The above provision does not apply to improvements or modifications of facilities required
under B.P. Bilang 344, otherwise known as “An Act To Enhance The Mobility Of Disabled
Persons By Requiring Certain Buildings, Institutions, Establishments, and Public Utilities
To Install Facilities And Other Devices.” (R.A. No. 7277)

O) TAX INCENTIVES FOR ESTABLISHMENTS GRANTING SALES DISCOUNTS TO SENIOR

CITIZENS

All establishments supplying any of the goods and services below (in Rev. Reg. No. 7-2010) may claim
the discounts granted to Senior Citizens as a tax deduction.

(a) The following sales to Senior Citizens shall be given the Senior Citizens’ discount of 20%:
(1) Medicines, medical supplies, and medical equipment;
(2) Professional fees of physicians and licensed professional health workers;
(3) Medical and dental diagnostic and laboratory services;
(4) Actual fares for land transportation in public utility buses, jeepneys, taxis, asian utility
vehicles, LRT, MRT, PNR (except toll fees);
(5) Actual fees for domestic air transport and sea vessels;
(6) Services and other amenities in hotels and similar lodging establishments, restaurants, and
recreation centers;
(7) Admission to theaters, concert halls, circuses, carnivals, and similar places of culture,
leisure, and entertainment; and
(8) Funeral and burial services.

Public utilities supplying water and electricity to senior citizens shall grant a 5% discount on
their monthly bill.

Public utilities supplying water, electricity or telephone services to Senior Citizen Centers and
care or group homes run by the government or a non-profit corporation shall grant a 50%
discount.

(b) The total amount of the claimed tax deduction, net of VAT, if applicable, shall be included in the
establishment’s gross sales receipts for tax purposes. This means that, for the discount to be
allowed as a deduction, the amount of sales that must be reported for tax purposes by the
establishment is the undiscounted selling price.

(c) The income statement of the seller must reflect the discount not as a reduction of sales to arrive at
net sales, but as a deduction from its gross income (sales less cost of sales).

(d) Only that portion of the gross sales exclusively used, consumed, or enjoyed by the Senior
Citizen shall be eligible for the deductible sales discount.

The following sales are not subject to the Senior Citizen discount: bulk orders; set orders for
children; “pasalubong” food items; non-consumable items sold in restaurants; cigars and
cigarettes; delivery fees which are billed separately.

(e) The actual amount of the discount granted or the statutory rate based on the gross selling price
(the 20% discount, the 5% discount on water and electric consumption by Senior Citizens, or the
50% discount on electricity, water, and telephone consumption by a Senior Citizen Center) can be
deducted from gross income (Rev. Reg. No. 7-2010)

Note: Senior citizens like PWDs shall also follow the “No Double Discount Rule” in availing
discounts.

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P) ADDITIONAL DEDUCTIONS FROM GROSS INCOME OF PRIVATE ESTABLISHMENTS
FOR COMPENSATION PAID TO SENIOR CITIZENS

Private establishments employing Senior Citizens shall be entitled to an additional deduction from their
gross income equivalent to fifteen percent (15%) of the total amount paid as salaries and wages to Senior
Citizens subject to the following conditions:

1) The employment shall have to continue for a period of at least six (6 months;
2) The annual taxable income of the Senior Citizen does not exceed the poverty level as may be
determined by the National Economic and Development Authority (NEDA) thru the National
Statistical Coordinating Board (“NSCB”)

Q) TAX INCENTIVES FOR ESTABLISHMENTS AND INSTITUTIONS WITH ROOMING-IN

AND BREASTFEEDING PRACTICES

Expenses incurred by a private health or non-health facility, establishment, or institution in:

(a) The provision of facilities for rooming-in and breastfeeding, including equipment, facilities, and
supplies for breastmilk collection, storage, and utilization; or
(b) The provision of lactation stations including the necessary equipment and facilities such as:
lavatory for hand-washing, unless there is an easily-accessible lavatory nearby; refrigeration or
appropriate cooling facilities for storing expressed breatmilk; electrical outlets for breast bumps; a
small table comfortable seats; and other items,

Shall be deductible expenses for income tax purposes up to twice (2x) the actual amount incurred.
Provided, such facilities, establishments, or institutions shall secure a “Working Mother-Baby-
Friendly Certificate” from the DOH to be filed with the BIR.

R) TAX INCENTIVES FOR LAWYERS or GPPs RENDERING FREE LEGAL SERVICES

A lawyer or professional partnership rendering actual free legal services shall be entitled to an allowable
deduction from gross income equivalent to the lower of (a) amount that could have been collected for the
actual free legal services, or (b) ten percent (10%) of the gross income derived from the provision of legal
services

(1) The actual free legal services mentioned above shall not include the minimum sixty (60)-hour
mandatory legal aid services rendered to indigent litigants as required under the Rule on Mandatory
Legal Aid Service for Practicing Lawyers, under Bar Matter No. 2012, issued by the Supreme
court; and
(2) The lawyer or professional partnership shall secure a certification from the Public Attorney’s
Office, the Department of Justice, or any accredited association of the Supreme court, indicating tha
the aforementioned agencies cannot provide the legal services to be provided by the private counsel

S) TAX INCENTIVES FOR ESTABLISHMENTS PARTICIPATING IN THE DUAL TRAINING

SYSTEM UNDER REPUBLIC ACT NO. 7686 (“DUAL TRAINING SYSTEM ACT OF 1994”)

A participating agricultural, industrial, or business establishment shall be allowed to deduct from its
taxable income the amount of fifty percent (50%) of the system expenses paid to the accredited
educational institution for its trainees. Provided, that such expenses shall not exceed five percent (5%)
of the establishment’s direct labor expenses, but in no case shall it exceed Twenty Five Million Pesos
(P25,000,000) a year (R.A. No. 7686)

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T) TAX INCENTIVES FOR ENTERPRISES ADOPTING PRODUCTIVITY INCENTIVES
PROGRAMS UNDER REPUBLIC ACT 6971 (“AN ACT TO ENCOURAGE PRODUCTIVITY
AND MAINTAIN INDUSTRIAL PEACE BY PROVIDING INCENTIVES TO BOTH LABOR
AND CAPITAL”)

Tax Incentives In Adopting a Productivity Incentives Program

(a) A business enterprise which adopts a productivity incentives program, duly and mutually agreed
upon by the parties to its labor-management committee, shall be granted a special deduction from
gross income equivalent to fifty percent (50%) of the total productivity bonuses given to
employees under the program over and above the total allowable ordinary and necessary business
deductions for said bonuses.
(b) Grants for manpower training and special studies given to rank-and-file employees pursuant to a
program prepared by the labor-management committee of the enterprise for the development of
skills identified as necessary by the appropriate government agencies shall entitle the business
enterprise to a special deduction from gross income equivalent to fifty percent (50%) of the total
grants over and above the allowable ordinary and necessary business deductions for said grants.

U) DONATION TO PUBLIC SCHOOLS

Under RA 8525 and Rev. Reg. 10-2003, the amount of assistance, contribution, or donation to public
schools (elementary secondary, or tertiary) made by private entities, that were actually, directly, and
exclusively incurred for the program in team up with the Department of Education, Commission on
Higher Education, or with TESDA, may be deducted from gross income.

If the program is a priority project, the actual amount of the donation, contribution, or assistance plus fifty
percent (50%) of said donation shall be available for deduction.

Note: If the program is not a priority project, the lower of five percent (5%) of the net income of the
corporation (10% if an individual) before charitable contributions, or the actual contribution, plus
fifty percent (50%) of said amount shall be available for deduction.

V) QUALIFIED EMPLOYER’S CONTRIBUTION TO EMPLOYEE’S PERSONAL EQUITY AND

RETIREMENT ACCOUNT (PERA)

An employer can claim as deduction the actual amount of its or his contribution that would complete the
maximum allowable PERA contribution of an employee.

The maximum allowable PERA contribution shall not exceed P200,000 per year for an Overseas Filipino,
or P100,000 per year for a non-Overseas Filipino.

For example, an Overseas Filipino employee made PERA contributions amounting to P110,000 for the
year. His employer decides to make a matching contribution of P110,000 for the same period. In such
case, the employer can only claim P90,000 as deduction.

W) TAX INCENTIVES GRANTED TO REGISTERED TOURISM ENTERPRISES (“RTEs”) IN

TOURISM ENTERPRISES ZONES (“TEZs”) UNDER THE REPUBLIC ACT NO. 9593
(“TOURISM ACT OF 2009”)

Tourism Enterprises registered with the Tourism Infrastructure and Enterprise Zone (“TIEZA”) and
which are within the Tourism Enterprise Zones (“TEZs”) shall be entitled to a tax deduction of up to fifty
percent (50%) of the cost of:

(a) Environmental protection activities in the surrounding areas of the enterprise or the TEZ as certified
by the Department of Environment and Natural Resources (“DENR”);

Page 15 of 18
 (b) Cultural heritage preservation activities in the surrounding areas of the enterprise or the TEZ,
conducted pursuant to K.A. No. 10066, as certified by the appropriate cultural agency and the Local
Culture and Arts Council in the local government unit, the RTE is located; and
(c) Sustainable livelihood programs for local communities in the surrounding areas of the enterprise or
the TEZ which may be chosen from the list of activities identified by the National Anti-Poverty
Commission (“NAPC”).

X) TAX INCENTIVES GRANTED TO QUALIFIED TO JEWELRY ENTERPRISES (“QJEs”)

UNDER R.A. NO. 8502 (“JEWELRY INDUSTRY DEVELOPMENT ACT OF 1998”)

A Qualified Jewelry Enterprise (“QJE”) is a natural or juridical entity, either a single proprietorship,
cooperative, partnership, or corporation, organized and existing under Philippine laws which is issued a
Board of Investments accreditation under R.A. No. 8502 and its Implementing Rules and Regulations.

A QJE providing training to its employees may avail of the additional deduction equivalent to fifty
percent (50%) of the expenses incurred in training schemes for the purpose of computing the net taxable
income.

Y) TAX DEDUCTION FOR HOSPITALS OR MEDICAL CLINICS UNDER R.A. NO. 10932 (AN
ACT STRENGHTHENING THE ANTI-HOSPITAL DEPOSIT LAW)

RA No. 10932 amended Section 1 of BP No 702 otherwise known as “An Act Prohibiting The Demand
of Deposits or Advance Payments for the Confinement or Treatment of Patients in Hospitals and Medical
Clinics in Certain Cases”

Section 7 of B.P. No. 702 now provides that PhilHealth shall reimburse the cost of basic emergency care
and transportation services incurred by the hospital or medical clinic for the emergency services given to
poor and indigent patients.

Tax Deduction

Under Section 8 of the same amended law, expenses incurred by a hospital or medical clinic in providing
basic emergency care to poor and indigent patients which are not reimbursed by PhilHealth, shall be tax
deductible.

NON-DEDUCTIBLE ITEMS
1) Personal, living, and family expenses

2) Expenditures which are capitalized, except intangible drilling and development costs incurred in
petroleum operations which may be deducted in full

3) Premiums paid by an employer:

a) Covering life of an employee; and
b) The beneficiary is the employer.
Note: IF the employee is the beneficiary, the premiums paid by the employer are deductible, and are
fringe benefits to the employee.

4) Losses from sales/exchanges of property between related parties under Sec. 36 (B)
5) Interest expense between related parties under Sec. 36 (B)
6) Bed debts between related parties under Sec. 36 (B)

7) Fines and penalties due to late payments of tax

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 FOREIGN INCOME TAX CREDITS

Amount of Tax Credit

The tax credit allowed is equivalent to the amount of income tax paid or incurred to any foreign country during
the taxable year but not to exceed the limitations prescribed by law.

Limitation on Tax Credit (Sec. 24. (C) (4), NIRC)

(A) 1st limitation

Taxable Income (per foreign country)

X Philippine Income Tax = Limit
Total Taxable Income

(B) 2nd limitation

Taxable Income (all foreign country)

X Philippine Income Tax = Limit
Total Taxable Income

Tax credit is the amount of income tax paid or incurred to the foreign country but not to exceed the limit. In
other words, tax credit is the income tax paid to the foreign country or the limit, WHICHEVER IS LOWER.

Rules in the Application of Limits Formula

(1) if there is one foreign country involved, use only the formula for the first limitation
(2) if there are two or more foreign countries involved, use both formulas
(3) in case both formulas are used, two tax credits will be computed. One based on the first limit, and the other
based on the second limit.

The final tax credit is whichever is the lower between the two amounts.

Example: The records of a domestic company show the following data:

Gross Business Foreign

Income Expenses Tax
Philippines P 350,000 P 150,000
U.S. 500,000 200,000 P 98,000
Canada 100,000 50,000 20,000
Japan 250,000 300,000 -

Required: Compute the tax due claiming the foreign taxes as tax credits.

Gross income, Philippines P 350,000

Less: Business expenses, Philippines (350,000) P 200,000

Gross income, U.S. P 500,000

Less: Business expenses, U.S. (200,000) 300,000

Gross income, Canada P 100,000

Less: Business expenses, U.S. (50,000) 50,000

Gross Income, Japan P 250,000

Less: Business expenses, Japan (300,000) (50,000)

Total Taxable Income P 500,000

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Tax due (P500,000 x 30%) P 150,000

Less: Tax Credit (1st limit)

(a) Tax paid in U.S. P 98,000
Limit: (P300,000/P500,000) x P150,000 90,000
Tax Credit (lower) P 90,000

(b) Tax paid in Canada P 20,000

Limit: (P50,000/P500,000) x P150,000 15,000
Tax Credit (lower) 15,000

Total tax credit, 1st limit P 105,000

Tax Credit (2nd limit)

Total taxes paid in foreign countries P 118,000
Limit: (P300,000/P500,000) x P150,000 90,000
Tax Credit (2nd limit), lower) P 90,000

Tax Credit Allowed (lower) (90,000)

Tax Due After Tax Credit P 60,000

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