INCOME TAXATION

Susan Ballada,
CPA Author

Win Lu Ballada, CPA

Co-Author and
Editor
 Chapter1
BASIC PRINCIPLES
TAXATION
Definition, Nature and Basis of Taxation

Taxation - is the process or means by which the sovereign, through its

lawmaking body, raises income to defray the necessary expenses of the
government. Taxation, as a power of the State, is inherent in
sovereignty. A government cannot continue to exist and operate
without financial means. This inherent power gives the government
the right to tax citizens and properties within its jurisdiction.

In the Philippines, the premier tax agency is the Bureau of Internal

Revenue (BIR)
Objectives of Taxation

Taxation is much more than just a means of raising revenue for the
government. It is also one of the major means by which the national
government attempts to achieve various economic and social objectives.

This objective includes:


shifting wealth from the rich to the poor

maintaining price stability

Stimulating economic growth,

encouraging full employment
State of Powers
1. Taxation. The power of the state by which the sovereign raises
revenue to defray the necessary expenses of the government.
2. Eminent Domain. The power of the state to take private property
for public use upon payment of just compensation.
3. 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
4. Levying of the tax. The imposition of tax requires legislative
intervention. In the Philippines, it is congress that levies taxes; and
5. Collection of the tax levied. This is essentially an administrative function.
Basic Principles of a Sound Tax System
1. Fiscal adequacy. Sources of revenue are sufficient to meet
government expenditures;
2. Equality or theoretical justice. The tax imposed must be
proportionate to taxpayer’s ability to pay; and
3. Administrative feasibility. The law must be capable of convenient,
just and effective administration.
Limitations on the Power of Taxation
Constitutional Limitations are those provided for in the constitution or
implied from its provisions while,
Inherent Limitations are restrictions to the power to tax attached to its
nature.
The following are the inherent limitations:
1. Purpose
2. Territoriality
3. International comity
4. Exemption
5. Non-delegation

Situs of Taxation
The situs of taxation is the place of taxation. The rule is that the State
may rightfully levy and collect the tax where the subject being taxed has
a situs under its jurisdiction.
Situs of taxation is determined by a number of factors:
1. Subject matter – or what is being taxed. He maybe 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 taxpayer; and
4. Residence of the taxpayer.
The following situs of taxation apply:
5. Persons – Residence of the taxpayer.
6. Real property or tangible personal property – Location of the property.
7. Intangible personal property – As a rule, situs is the domicile of the owner unless he has acquired
a situs elsewhere.
8. Income – Taxpayer’s residence or citizenship, or place where the income was earned.
9. Business, occupation and transaction – Place where business is being operated, occupation being
practiced and transaction completed.
10. 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 of virtue of its sovereignty for the
support of the government and all public needs.
Essential Characteristics of a Tax
1. It is an enforced contribution;
2. It is levied by the lawmaking body;
3. It is proportionate in character;
4. It is generally payable in money;
5. It is imposed for the purpose of raising revenue; and
6. It is to be used for public purpose.
Classification of Taxes
1. As to subject matter or object
a. Personal, poll or capitation – Example: community tax
b. Property – Example: real estate tax
c. Excise – Examples: estate tax, donor’s tax, income tax, value-added tax
2. As to whom bears the burden
a. Direct – Examples: community tax, income tax, estate tax, donor’s tax
b. Indirect –Examples: customs duties, value-added tax, some percentage taxes
3. As to determination of amount
a. Specific – Examples: tax on distilled spirits, fermented liquors, cigars,
wines, fireworks, etc.
b. Ad valorem – Examples: real estate tax, certain customs duties, excise taxes
on cigarettes, gasoline and others.
4. As to purpose
a. General, fiscal, or revenue – Tax with no particular purpose or object for the
purpose or object for which the revenue is raised, but is simply raised for
whatever need may arise. Examples: income tax, value-added tax.
b. b. Special or regulatory – Tax imposed for a special purpose regardless of whether
revenue is raised or not, or is intended to achieve some social or economic end.
Example: protective tariffs or customs duties on certain imported goods to protect
local industries against foreign competition.

5. As to authority imposing the tax or scope

c. National – Tax imposed by the national government. Examples: internal revenue
taxes, tariff and customs duties.
d. Municipal or local – Tax imposed by municipal governments for specific needs.
Examples: real estate taxes, municipal licences.
6. As to graduation or rate
a. Proportional – Tax based on a fixed percentage of the amount of property income or
other basis to be taxed. Examples: value-added tax, percentage taxes, real estate taxes.
b. Progressive or graduated – Tax rate increases as the tax base increases. Examples:
income tax, estate tax, donor’s tax.
c. Regressive – Tax decreases as the tax base increases. There is no regressive tax in the
Philippines.

Tax Distinguished from Other Fees

1. From toll. Toll is a 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.

2. From penalty. Penalty is any sanction imposed as a punishment for violation of law or
acts deemed injuries. Violation of tax laws may give rise to imposition of penalty.
3. From special assessment. Special assessment is an enforced proportional contribution
from owners of lands for special benefits resulting from public improvements.
4. From permit or license fee. Permit or license fee is a charge imposed under the police
power for the purposes of regulation.
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 Evasion Versus Tax Avoidance

Tax avoidance happens when the taxpayer minimizes his tax liability by taking
advantage or legally available tax planning opportunities. This is otherwise
known as tax minimization; others call it tax planning. It is the process of
controlling one’s actions so as to avoid undesirable tax consequences.

Tax evasion occurs when the taxpayer resorts to unlawful means to lessen
or to get away with his tax liability. This is also known as tax dodging.
Examples of tax evasion are underdeclaration of sales, overstatement of
expenses and backdating an important document.
Tax evasion connotes the integration of three factors:

1. The end to be achieved (i.e., payment of less than the amount known by the taxpayer to be legally due, or nonpayment
of the tax when it is shown that a tax is due);
2. An accompanying state of mind that is described as being in bad faith, willful, or deliberate and not accidental; and
3. A course of action or failure of action that is unlawful (Commissioner of Internal Revenue v. The Estate of Benigno
P. Toda, Jr., GR No, 147188, Sept. 14, 2004).

TAX LAWS

Sources of Tax Authority

The three branches of the national government are:

•
the Congress,
•
the President and his administration,
•
And the Courts.

Congress creates statutory law. The National Internal Revenue Code (NIRC) of 1997 is a statutory law.
Sources of Tax Laws

1. Constitution;
2. Statutes and Presidential Decrees ;
3. Revenue Regulations by the Department of Finance;
4. Rulings issued by the Commissioner of Internal Revenue and Opinions
by the Secretary of Justice;
5. Decisions of the Supreme Court and the Court of Tax Appeals;
6. Provincial, city, municipal, and barangay ordinances subject to
limitations set forth in the Local Government Code; and
7. Treaties or international agreements the purpose of which is to avoid
or minimize double taxation.
Philippine Tax Laws and Taxes

1. National Internal Revenue Code of 1997 (PD 1158, as amended);

a. Income taxes (individual and corporate);
b. Estate and donor’s taxes;
c. value-added tax;
d. Other percentage taxes;
e. Excise tax; and
f. Documentary stamp tax
2. Tariff and Customs Code of 1978 (PD 1464, as amended);
a. Import duties; and
b. Export duties
3. Local Government Code of 1991 (RA 7160);
a. Real property tax;
b. Business taxes, fees and charges;
c. Professional tax;
d. Community tax; and
e. Tax on banks and other financial institutions.

4. Special Laws
a. Motor Vehicle Law (RA 4136)
b. Private motor vehicle tax law (PD 1958)-
c. Philippine immigration act of 1940
d. Travel tax law
BIR Rulings are official position of the Bureau to queries raised by taxpayers and other stakeholders relative to
clarification and interpretation of tax laws.

Revenue Bulletins (RBs) refer to periodic issuances, notices and official announcements of the Commissioner
of Internal Revenue that consolidate the Bureau of Internal Revenue’s position on certain specific issues of
law or administration in relation to the provisions of the Tax Code, relevant to tax laws and other issuances
for the guidance of the public.

The BIR also issues Revenue Audit Memorandum Orders (RAMOs).

Powers and Duties of the Bureau of Internal Revenue

the chief officials of the Bureau are the Commissioner and four (4) Deputy Commissioners. Its powers and
duties follows:
1. Assessment and collection of all national internal revenue taxes, fees, and charges;
2. Enforcement of all forfeitures, penalties and fines;
3. Execution of judgments in all cases decided in its favor by the Court of tax Appeals and ordinary
courts; and
4. Administration of supervisory and police powers conferred to it.
Powers of the Commissioner

1. Interpret tax laws and decide tax cases;

2. Obtain information, and to summon, examine and take testimony of persons;
3. Make assessments and prescribe additional requirements for tax administration and enforcement.

Tax Incentives
A pre-qualified adopting private entity which enters into an Agreement with a public school shall be entitled
to the following tax incentives:
•
Deduction from gross income of the amount of contribution/donation that were actually, directly, and
exclusively incurred for the Program, subject to limitations plus an additional amount equivalent to fifty
percent (50%) of such contributions/donation;
•
Exemption of the assistance made by the donor from payment of donor’s tax.
INCOME AND INCOME TAXES

Income Defined and Distinguished from Capital

Income means all wealth, which flows into the taxpayer other than a mere return of capital. It is the return in
money from one’s business, labor, or capital invested e.g. gains, profits, salary and wages.

Income is also defined as the amount of money coming to a person or corporation within a specified time,
whether as payment for services, interest or profit from investment. Unless otherwise specified, it means
cash or equivalent. Income may also be thought of as flow of the fruits one’s labor.

Capital is a fund or property existing at one distinct point of time. Income on the other hand denotes of
wealth during a definite period of time. While is wealth, income is the service of wealth.

Income tax defined based on nature, either gross or net, realized in one taxable year.
Chapter 2

TAXATION
OF
INDIVIDUALS
Classification of Individual Income
Taxpayers
1. Citizen
a. Resident
b. Non-resident
2. Alien
a. Resident
b. Non-resident
1. Engaged in trade or business in the Philippines
2. Not engaged in trade or business in the Philippines
3. Employed by
a. Regional or area headquarters and regional operating headquarters of multinational
entities in the Phils. that are engaged in international trade.
b. Offshore banking units.
c. Petroleum contractors and sub-contractors.
1. Citizen. The following shall be considered citizens of the Philippines:
•
Those who are citizens of the Philippines at the time of the adoption of the February
2, 1987 Constitution;
•
Those whose fathers or mothers are citizens of the Philippines;
•
Those born before January 17, 1973, the date of the adaptation of the 1973
Constitution, of Filipino mothers, who elect Philippines citizenship upon reaching
the age of majority; and
•
Those who are naturalized in accordance with law.
2. Resident citizen is a Filipino citizen who permanently resides in the Philippines.
3. Non-resident citizen means:
•
A citizen of the Philippines who establishes to the satisfaction of the Commissioner
the fact of his physical presence abroad with a definite intention to reside therein.
•
A citizen of the Philippines who leaves the Philippines during the taxable years to
reside abroad, either as an immigrant or for employment on a permanent basis.
•
A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time
during the taxable year. “Most of the time” is interpreted to mean presence abroad
for at least 183 days during the taxable year. (BIR Ruling 128-99, Aug. 18, 1999)
•
A citizen who has been previously considered as non-resident citizen and who arrives
in the Philippines at any time during the taxable year to reside permanently in the
Philippines shall likewise be treated as a non-resident citizen for the taxable year in
which he arrives in the Philippines with respect to his income derived from sources
abroad until the date of his arrival in the Philippines.
•
The taxpayer shall proof to the Commissioner to show his intention of leaving the
Philippines to reside permanently abroad or to return to and reside in the
Philippines, as the case may be.
4. Resident alien. Means an individual whose residence is within the Philippines and
who is not a citizen thereof. He is one who is actually present in the Philippines and
who is not a mere transient or sojourner. But residence does not means mere
physical presence. An alien is considered a resident or a non-resident depending on
his intention with regard to the length and nature of his stay.
5. Non-resident alien. Means an individual whose residence is not within the Philippines
and who is not a citizen thereof.
6. Non-resident alien engaged in trade or business (NRA-ETB). Means that the alien is
carrying on a business in the Philippines. It connotes more than a single act or
isolated transactions. It involves some continuity of action. The term trade, business
or profession shall not include performance of services by the taxpayer as an
employee but it includes the performance of the functions of a public office. A non-
resident alien who has stayed in the Philippines for more than 180 days during any
calendar year shall be deemed doing business in the Philippines. If he stayed for 180
days or less, he is considered a non-resident alien not doing business in the
Philippines (NRA-NETB).
7. Foreign currency deposit system (FCDS) shall refer to the conduct of banking
transactions whereby any person, whether natural or juridical, may deposit foreign
currencies forming part of the Philippine international reserves, in accordance with
the provisions of R>A No. 6426 entitled “An Act Instituting a Foreign Currency
Deposit System in the Philippines, and For Other Purpose.”

8. Foreign currency deposit unit (FCD) shall refer to that unit of a local bank or a local
branch of a foreign bank authorized by the Bangko Sentral ng Philipinas (BSP) to
engaged in foreign currency-denominated transactions, pursuant to the provisions of
R.A. No. 6426, as amended. Local bank shall refer to a thrift bank or a commercial
bank organized under the law of the Republic of the Philippines. Local branch of a
foreign bank shall refer to a branch of a foreign bank doing business in the
Philippines, pursuant to the provisions of R.A. No. 337, as amended.
9. Offshore banking system shall refer to the conduct of banking transactions in foreign
currencies involving the receipt of funds principally from external and internal sources
and the utilization of such fund pursuant to Presidential Degree No. 1034 as
implemented by Central Bank (now Bangko Sentral ng Pilipinas (BSP)) circular No.
1389, as amended.

10. Offshore banking unit (OBU) shall means a branch, subsidiary or affiliate of a foreign
banking corporation which is duly authorized by the BSP to transact offshore banking
business in the Philippines in accordance with the provisions of Presidential Decree
No. 1034 as implemented by Central Bank (now BSP) Circular No. 1389, as amended.

11. Deposits shall means funds in foreign currencies which are accepted and held by an
Offshore Banking Unit or Foreign Currency Deposit Unit in the regular course of
business, with the obligation to return an equivalent amount to the owner thereof,
with or without interest.
Sources of Income
•
the property, activity or service that produced the income.
•
It is important to know the sources of income of an individual taxpayer –
whether from within the Philippines or without – because not all individual
taxpayers are taxed on all their income.
Rules Apply:
1. Resident citizen are taxable on all income derived from sources within
and without.
2. Non-resident citizens and alien individuals – resident and non-resident –
are taxable only on income derived from sources within the Philippines.
An overseas contract worker is taxable only on his income from sources
within.
Categories of Income and Tax Rates
1. Compensation income
In general, the term “compensation” means all remuneration for services
performed by an employee for his employer under an employer-employee
relationship, unless specially excluded by the Code.
2. Business income
-arises from self-employment or practice of profession. This shall not
include income from performance of services by the taxpayer as an
employee.
3. Passive income
-are subjected to a separate and final tax. These are taxed at fixed rates
ranging from 5% to 25%.
Examples:
interest, royalties, prizes, winnings and dividends.
4. Capital gains from sale of shares of stock, not traded through the stock
exchange.
-taxed at 5% and 10% final taxes on a per transaction basis.

5. Capital gains from sales of real property.

-taxed at 6% final tax on the gross selling price or current fair market
value at the time of sale, whichever is higher.

6. Fringed benefits
-means any goods, service, or other benefit furnished or granted by an
employer in cash or in kind in addition to basic salaries, to an individual
employee (except rank in file employee) under an employer-employee
relationship.
PASSIVE INCOME
-is subject to a separate and final tax rates ranging from 5% to 25%. They
are not included in the computation of taxable income from compensation or
business/professional income.

ALLOWABLE DEDUCTIONS
-are items or amounts, which the law allows to be deducted from gross
income in order to arrive at the taxable income.

PERSONAL EXEMPTIONS
-are arbitrary amounts allowed as deductions from gross income of the
individual taxpayer from compensation, business (self-employment) or
practice of profession. Personal exemption is a sense representing the
personal, living or family expenses of the taxpayer.
Kinds of Personal Exemptions

1. Basic personal exemption

This exemption is allowed on account of the civil status of the taxpayer.

2. Additional exemption
This exemption is further allowed to the taxpayer by reason of his
qualified dependent children.
Head of the family
-is an individual who actually supports and maintains in one household
one or more individuals, who are closely connected with him by blood
relationship, relationship by marriage, or by adoption, and whose right to
exercise family control and provide for these dependent individuals is
based upon some moral or legal obligation.

Head of the family means an unmarried or legally separated man or woman with:
1. One or both parents, or
2. One or more brothers or sisters whether of the whole or half blood, or
3. One or more legitimate or illegitimate, recognized natural or legally adopted
children who meet the following qualifications:
 Parent/s Brother/s or Children
Sister/s
1. Living with the taxpayer
2. Dependent upon the
taxpayer for chief support

3. Not more than 21 years old

4. Unmarried
5. Not gainfully employed
6. Mentally or physically
defective regardless of
age
The term head of the family also includes an unmarried or legally separated
man or woman who is the benefactor of a senior citizen.

A senior citizen is any resident citizen of the Philippines of at least sixty (60)
years old, including those who have retired from both government offices
and private enterprises, and has an income of not more than sixty thousand
pesos (P60,000.00) per annum subject to the review of the National
Economic Development Authority (NEDA) every three years.

Chief support means principal or main support (such as paying for the rent
and spending for the food of the dependent). It is more than one half of the
support required by the dependent.
Additional Exemption
There should be allowed an additional exemption of eight thousand pesos (P8,000.00) for
each dependent child not exceeding four (4) children.

A dependent means a legitimate, illegitimate or legally adopted child chiefly dependent

upon and living with the taxpayer if such dependent is not more than twenty-one (21)
age, is incapable of self-support because of mental or physical defect.

In the case of married individuals, the additional exemption for dependents shall be
claimed by only one of the spouses. The husband shall be deemed the proper claimant of
the additional exemption unless he waives his right in favor of his wife. But if the spouse
of the employee is unemployed or is a non-resident citizen deriving income from foreign
sources, the employed spouse within the Philippines shall be automatically entitled to
claim the additional exemptions for children.
In the case of legally separated spouses, additional exemptions may be claimed only by
the spouse who has custody of the child or children. The total amount of additional
exemptions that may be claimed by both shall not exceed the maximum additional
exemptions allowed for four (4) children.

Rules on Changing Status

1. If the taxpayer dies during the taxable year, his death shall not affect the amount of
personal and additional exemptions his estate may claim. It is as if he died at the end
of such year.
2. If the taxpayers marries or should have additional dependents during the taxable
year, he may claim the personal exemption of a married individual for such year.
3. I the spouse dies or any of the dependents dies or becomes twenty-one years of age,
or gets gainfully employed during the taxable year, the taxpayer may still claim the
same exemption as if the change occurred at the end of the year.
Individual Taxpayers Allowed Personal Exemptions
1. Citizen
2. Resident alien
3. Non-resident alien
Non-resident alien engaged in trade or business in the Philippines is allowed basic
exemptions under certain conditions but is not allowed additional exemptions. His
basic personal exemption shall be the lesser amount between that allowed by the
income tax law of the alien’s country to Filipino citizens not residing therein and that
allowed by our Tax Code to Filipino citizens and resident aliens. On the other hand,
non-resident aliens not engaged in trade or business in the Philippines are not allowed
basic and additional exemptions.
4. Estate and trusts, which are, for the purpose of personal exemptions, treated as a
single individual.
Premium Payments on Health and/or Hospitalization Insurance

The following conditions must be met:

1. The insurance shall be taken by the individual taxpayer himself for

his family;
2. The amount being claimed shall not exceed P2,400 a year or P300 a
month per family;
3. The family has gross income of P250,000 or less for the taxable year.

For married taxpayers, only the spouse entitled to claim for additional
exemption is allowed this deduction.
Taxable Income and Tax Due
Taxable income is defined as the pertinent items of gross income less the deductions and/or
personal and additional exemptions, if any, authorized for such types of income, by the Tax
Code or other special laws. Taxable income is the amount or tax upon which tax rate is
applied to arrive at the tax due.

Depending on the taxpayer involved, taxable income may refer to either of the following:
1. Net compensation income. The compensation income arrived at after subtracting from
gross compensation income derived by resident citizens or resident aliens, basic personal
and additional exemptions; and premium payments, if any, on health and hospitalization
insurance under certain conditions.
2. Gross compensation income. The gross compensation income derived by aliens including
Filipinos employed by regional and area headquarters and regional operating
headquarters of multinational companies, by offshore banking units, or by foreign
petroleum service contractors and sub-contractors.
3. Net income. The income arrived at after subtracting from the gross income (from
business or profession including compensation income) of a citizen, resident alien, and
non-resident alien if the latter is engaged in trade or business in the Philippines the
deductions of the taxpayer, including the basic personal and additional exemptions, if any.

4. Entire or gross income. The entire or gross income (from business or profession,
including compensation income) without any deduction with respect to non-resident
aliens not engaged in trade or business in the Philippines.
Declaration of Income Tax for Individuals
Self-employed and professionals are required to file a declaration of their estimated
income for the current taxable year on or before April 15 of the same taxable year.
Generally, self-employment income consists of the earnings derived by the individual from
the practice of profession or conduct of trade or business carried on by him as a sole
proprietorship or by a partnership of which he is a member. This estimated tax shall be
paid in four instalments a follows:
Installment Date
First April 15
SecondAugust 15
Third November 15
Fourth April 15
The final adjusted income tax return is supposed to be filed and paid in time for the fourth
installment on or before April 15 of the following calendar year.
Estimated tax means the amount which the individual declared as income
tax in his final adjusted and annual income tax return for the preceding
taxable year minus the credits allowed. If, during the taxable year, the
taxpayer reasonably expects to pay a bigger income tax, he shall file an
amended declaration during any interval of installment payment dates.
The return shall be filed with and the income tax shall be paid in the
accredited bank in the city or municipality where the principal place of
business is located.

Non-resident Filipino citizens, with respect to income from without the

Philippines, and non-resident aliens not engaged in trade or business in the
Philippines, are not required to render a declaration of estimated income tax.
Individual Exempt from Income Tax
A. Non-resident citizen who is:
1. A citizen of the Philippines who establishes to the satisfaction of the Commissioner
the fact of his physical presence abroad with a definite intention to reside therein.
2. A citizen of the Philippines who leaves the Philippines during the taxable year to
reside abroad, either as an immigrant or of employment on a permanent basis.
3. A citizen of the Philippines who works and drives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time
during the taxable year.
4. A citizen who has been previously considered as a non-resident citizen and who
arrives in the Philippines at any time during the year to reside permanently in the
Philippines will likewise be treated as a non-resident citizen during the taxable year in
which he arrives in the Philippines, with respect to his income derived from sources
abroad until the date of his arrival in the Philippines.
B. Overseas Contact Worker, Including Overseas Seaman
An individual citizen of the Philippines who is working and deriving income
from abroad as an overseas contract worker is taxable only to income from
sources within the Philippines. A seaman who is a citizen of the Philippines
and who receives compensation for services rendered abroad as a member of
the complement of a vessel engaged exclusively in international trade will be
treated as an overseas contact worker.

Note that a Filipino employed as Philippine Embassy/Consulate service

personnel of the Philippine Embassy/consulate is not to be treated as a non-
resident citizen, hence his income is taxable.
C. Barangay Micro Business Enterprises (RA 9178 or BMBE Law)
More than two years after the passage of the Act, the Department of Finance (DOF) issued Department
Order No. 17-04 – the Guidelines to Implement the Registration of Barangay Micro Business Enterprises and
the Availment of Tax Incentives under Republic Act. 9178 otherwise known as the Barangay Micro Business
Enterprises (BMBEs) Act of 2002 (passed into law on Nov. 13). Do 17-04 took effect on May 14, 2004; the BIR
circularized the same through RMC 40-2004 dated May 26, 2004.
BMBEs refer to any business enterprise engaged in the production, processing or manufacturing of
products or commodities, including agro-processing, trading and services, whose total assets including
those arising from loans but exclusive of the land on which the particular business entity’s office, plant and
equipment are situated, should not be more than P3 million. Services shall exclude the practice of a licensed
profession.
It is believed that BMBEs like small sari-sari stores, bakeries, and handicraft shops will boost the
economic development of the country, hence, BMBEs are grated incentives and benefits. One incentive is
the exemption from income tax on income arising from the discounts derived from loans by credit
institutions to BMBEs from the gross receipts tax (GRT).
All the BMBEs need to do is to register as a BMBE with the Office of the City or Municipal Treasure. The
certificate of the authority issued to the BMBE is valid for two years and may be renewed for the same
period.
Chapter 3
Taxation
of
Corporation
CLASSIFICATION OF INCOME TAXPAYERS (other than
individuals)
1. 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
3. Taxable partnership
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.
2. General professional partnership
3. Estates and trusts

DEFINITION OF TERMS:
1. Corporation
It includes partnerships, no matter how created or organized, joint stock companies,
joint accounts (cuentas en participacion), associations, or insurance companies, but does
not include general professional partnership and a joint venture or consortium formed for
the purpose of undertaking construction projects or engaging in petroleum, coal,
geothermal and other energy operations pursuant to an operating or consortium
agreement under a service contract with the Government.

2. Domestic
When applied to a corporation, means created or organized in the Philippines or under
its law.
3. Foreign
When applied to a corporation, means a corporation which is not domestic.

4. Resident Foreign Corporation

Applies 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.

SOURCES OF INCOME
1. Domestic Corporations are taxable on income from sources within or without the
Philippines.
2. Foreign Corporations whether resident or non-resident, are taxable only on income
from Philippine sources.
 A partnership other than a general professional partnership is considered a
corporation and is taxable as such.
Sources of Income
Corporation Within the Phil. Without the Phil.
1. Domestic
2. Foreign
CATEGORIES OF INCOME AND TAX RATES
1. Business Income
Generally, business income earned by a corporation is taxed at the following
rates:
Year Tax Rate
1997 35%
1998 34%
1999 33%
2000-2004 32%
2005 35%
2009 30%
The table below shows the specific tax rates on business income of corporate taxpayers ( domestic and
resident foreign):
Description Tax Rate Tax Base
DOMESTIC CORPORATION
1. 35% Taxable Income from all
a. In general 2% sources Gross Income
b. Minimum Corporate Income Tax 10% Improperly Accum. Taxable Income
c. Improperly Accumulated Earnings

2. Proprietary Educational Institution 10% Taxable Income from all sources

3. Non-stock, Non-profit Hospital 10% Taxable Income from all sources
4. GOCC, Agencies and Instrumentalities (see 1a-1c)
5. National Government and LGUs (see 1a-1c)
6. Taxable Partnership (see 1a-1c)
7. Exempt Corporation
a. On Exempt Activities 0% Taxable Income
b. On Taxable Activities (see 1a)
8. General Professional Partnerships 0%
9. Corporation covered by Special Laws Rate specified under the
respective special laws.
 RESIDENT FOREIGN CORPORATION
1.
a. In general 35% Taxable Income from all sources
b. Minimum Corporate Income Tax 2% Gross Income
c. Improperly Accumulate Earnings 10% Improperly Accum. Taxable Income
2. International Carriers 25% Gross Philippine Billings
3. Regional Operating Headquarters 10% Taxable Income
4. Corporation Covered by Special Laws Rate specified under the
respective special laws
5. Offshore Banking Units (OBUs) 10% Gross Taxable Income on Foreign
Currency Transaction
35% On Taxable Income Other than
Foreign Currency Transaction
6. Foreign Currency Deposit 10% Gross Taxable Income on
Units (FCDU) Foreign Currency Transaction
35% On Taxable Income Other
than Foreign Currency
Transaction
2. Passive Income
Passive income are subject to a separate and final tax. These are taxed at fixed rates
ranging from 5% t0 20%. Passive income are not to be included in gross income
computation.
On Passive Income Domestic Resident Foreign
Interests
Interest from deposits and yield or any other monetary
benefit from deposit substitutes and from trust funds and
similar arrangements. 20% 20%
Interest income from a depository bank under the expanded
foreign currency deposit system. 7 ½% 7 ½%

Income derived by a depository bank under the expanded

foreign currency deposit system from foreign currency
transactions with local commercial banks, including
branches of foreign banks that may be authorized by the
Bangko Sentral ng Pilipinas (BSP), including interest income
from foreign currency loans. 10% 10%

Royalties 20% 20%

Dividends
Dividends received by a domestic/resident
foreign corporation from a domestic corporation. Exempt Exempt
Capital Gains
On the net capital gain from sale, exchange or
other disposition of shares of stock in a domestic
corporation not traded in the stock exchange
Not over P 100,000 5% 5%
Amount in excess of P 100,000 10% 10%
On the capital gain presumed to have been
realized on the sale, exchange or disposition of
lands and/or buildings not actually used in the
business and treated as capital assets, the higher
value between
Gross selling price, and
Fair market value as determined by 6%
the Commissioner

Note that the income tax treatments for domestic and resident foreign corporations are almost the same. But
remember that resident foreign corporations are taxed only on their income within the Philippines. Passive income
of non-resident corporation is discussed near the end of this chapter.
Domestic and Resident Foreign Corporations, in General
Generally, the pro-forma computation of the normal income tax of domestic and resident foreign corporations
follows:
Gross Income xxx
Less: Allowable Deductions xxx
Net Income xxx
Multiply by: Tax rate (2000) 32%
Tax Due xxx
For domestic and resident corporations adopting the fiscal-year accounting period, the taxable income shall be
computed without regard to the specific date when specific sales, purchases and other transactions occur. Their
income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month
of the period. The reduced corporate income tax rates shall be applied on the amount computed by multiplying
the number of months covered by the new rates within the fiscal year by the taxable income of the corporation
Tfoarxathbelepienrcioomd,edxivideNdob. yoftwmeolvneth, os rcovered by new tax rates x New tax rates =
Income tax payable
12

Domestic Corporations, in Particular

Proprietary Educational Institutions and Non-Profit Hospitals. The 10% tax on the taxable income is subject to
limitation. If the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the
total gross income derived from all sources, the tax prescribed under Section 27A shall be imposed on the entire
taxable income.
Unrelated trade, business or other activity means any trade, business or other activity, the conduct of which is not
substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or
function.
A primary educational institution is any private school maintained and administered by private individuals or groups with an
issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher
Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance
with existing laws and rules and regulations.

Government-Owned or Controlled Corporations, Agencies or Instrumentalities.

Subject to the provisions of existing special laws or general laws, all corporations, agencies, or instrumentalities owned or
controlled by the Government shall pay such rate of tax upon their taxable income as are imposed by the Code upon
corporations or associations engaged in a similar business, industry or activity. The following are exempt:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health and Insurance Corporation (PHIC)
4. Philippine Charity Sweepstakes Office (PCSO)
5. Philippine Amusement and Gaming Corporation (PAGCOR). Note that PAGCOR is no longer exempt from income tax
effective 2005 (RA 9337).

Mutual Life Insurance Companies. These companies are mow subject to the regular corporate income tax rates.
Resident Foreign Corporations, In Particular

International Shipping. Gross Philippine billings in the case of international shipping means gross revenue whether for
passenger, cargo or mail originating from the Philippines up to final destination regardless of the place of sale or payments of
the passage or freight documents.

Offshore Banking Units. Income derived by offshore banking units authorized by the BSP, from foreign currency transactions
with local commercial banks, including branches of foreign banks that may be authorized by the BSP to transact business with
offshore banking units, including any interest income derived from foreign currency loans granted to residents, shall be
subject to a final income tax at ten percent (10%) of such income.

Branch Profits Remittances. Any profit remitted by a branch to its head office shall be subject to a tax of fifteen percent
(15%) which shall be based on the total profits applied or earmarked for remittance without deductions for the tax
component thereof (except those activities which are registered with Philippine Economic Zone Authority).

Regional Operating Headquarters shall mean a branch established in the Philippines by multinational companies which are
engaged in any of the following services: general administration and planning; business planning and coordination; sourcing
and procurement of raw materials, and components; corporate finance advisory services; marketing control and sales
promotion; training and personnel management; logistic services; research and development services and product
development; technical support and maintenance; data processing and communication; and business development. Regional
operating headquarters shall pay a tax of ten percent (10%) of their taxable income.
Regional or Area Headquarters shall mean a branch established in the Philippines by multinational companies and which
headquarters do not earn or derived income from the Philippines and which act as supervisory, communications and
coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets.
Regional or area headquarters as such shall not be subject to income tax.

Multinational Company means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or
branch offices in the Asia-Pacific Region and other foreign markets.

International Air Carrier shall refer to a foreign airline corporation doing business in the Philippines having been granted
landing rights in any Philippine port to perform international air transportation services/ activities or flight operations
anywhere in the world.
Gross Philippine Billings Tax. An international air carrier having flights originating from any port or point in the
Philippines, irrespective of the place where passage documents or sold or issued, is subject to the Gross Philippine
Billings Tax of 2 ½% unless subject to a different tax rate under the applicable tax treaty to which the Philippines is
a signatory.
All items of income other than income from international air transport services shall be subject to tax under the
pertinent provisions of the Code.

Determination of Gross Philippine Billings. In computing for Gross Philippine Billings there shall be included the total
amount of gross revenue derived from passage of persons, excess baggage, cargo and/or mail, originating from the
Philippines in a continuous and uninterruptible flight, irrespective of the place of sale or issue and the place of payment of
passage documents.
Non-resident Foreign Corporation, in General
The basis of tax for non-resident foreign corporations is gross income from sources within the Philippines, such as
interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments, or other
fixed or determinable annual, periodic or casual gains, profits and income, and capital gains.
Generally, the pro-forma computation of the income tax of non-resident foreign corporations follows:

Gross Income xxx

Multiply by: Tax rate (2000) 32%
Tax Due xxx

Non-resident Foreign Corporation, in Particular

Non-resident Cinematographic Film Owner, Lessor or Distributor is taxed at 25% of gross income.

Non-resident Owner or Lessor of Vessels Chartered by Philippine Nationals is taxed at four and one-half percent (4 ½%) of
gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime
Industry Authority.

Non-resident Owner or Lessor of Aircraft, Machinery and other Equipment is taxed at seven and one-half percent (7 ½%)
of gross rentals, charters and other fees.
Passive Income of Non-resident Foreign Corporation
1. Interests on foreign loans contracted on or after August 1, 1986 are taxed at 20%.
2. Income derived by a depository bank under the expanded foreign currency deposit system from foreign
currency transactions with local commercial banks, including branches of foreign banks that may be authorized
by the BSP, including interests income from foreign currency loans are exempt.
3. Dividends received from a domestic corporation is subject to a final withholding tax at 15% on the condition that the
country in which the non-resident foreign corporation is domiciled, shall allow a credit against the tax due from the
non- resident foreign corporations taxes deemed to have been paid in the Philippines equivalent to:
20% for 1997
19% for 1998
18% for 1999
17% for 2000-2004
20% for 2005
15% for 2009
4. Capital gains from sale of shares of stock not traded in the stock exchange. A final tax at the rates prescribed below is
imposed upon the next capital gains realized during the taxable year from the sale, barter, exchange, or other
disposition of shares stock in a domestic corporation, except shares sold, or disposed of through the stock exchange:

Not over P100,000 5%

on any amount in excess of P100,000 10%
ALLOWABLE DEDUCTIONS
Allowable deductions are items or amounts which the law allows to be deducted from gross income in order to arrive at the
taxable income. A domestic or resident foreign corporation may deduct from its business income, itemized deductions
under the Tax Code. Non-resident foreign corporations are not allowed deductions from gross income.

TAXABLE INCOME AND TAX DUE

In case of corporations, taxable income is the pertinent items of gross income less the deductions authorized for such types
of income. Taxable income is the amount or tax base upon which tax rate is applied to arrive at the tax due. Depending on
the taxpayer involved and for purposes of computing the income tax liability of a corporation, taxable income may refer to
either one of the following:
1. Net income. The income arrived at after subtracting from the gross income from business the deductions of the
taxpayer. For domestic and resident foreign corporations, in general; and other corporations from whose gross income
deductions are allowed.
Gross Income xxx
Less: Allowable deductions xxx
Net Income xxx
Multiply by: Tax rate x%
Tax Due xxx

2. Gross Income. The entire or gross income from business without any deduction.
For domestic and resident foreign corporations subject to the MCIT; non-resident foreign corporation not subject to the
normal income tax rate.
 Gross Income xxx
Multiply by tax rate x%
Tax Due xxx

Note: in computing for the taxable income, fraction of a peso is disregarded. For the tax due, a fraction amounting to fifty
centavos or more is rounded off to a peso while a fraction amounting to less than fifty centavos is disregarded.

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 of association, operating for the exclusive benefit of the members such as fraternal
organization operating under the lodge system, or a mutual aid association or a non-stock corporation organized by
employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such
society, order, or association, or non-stock corporation or their dependents;
4. Cemetery company owned and operated exclusively for the benefits of its members;
5. Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the
benefit of any member, organizer, officer, or any specific person;
6. Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of
which inures to the benefit of any private stock holder or individual;
7. Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;
8. A non-stock and non-profit educational institution;
9. Government educational institution;
10. Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative
telephone company, or like organization of a purely local character, the income of which consists solely of assessment,
dues, and fees collected from members for the sole purpose of meeting its expenses; and
11. Farmers’, fruit growers’ or like association organized and operated as a sales agent for the purpose of marketing the
marketing the products of its member and turning back to them the proceeds of sales, less the necessary selling expenses
on the basis of the quantity of produced finished by them.

Corporations may also be declared exempt from income tax or any other tax under special laws.

DECLARATION OF QUARTERLY CORPORATE INCOME TAX

Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative
basis or the preceding quarter/s upon which the income shall levied, collected and paid. The income tax computed decreased
by the amount of tax previously paid or assessed during the preceding quarters shall be paid and the return filed not later
than 60 days from the close of each of the first three quarters of the taxable years, whether calendar or fiscal.

A return showing the cumulative income and deductions shall still be filed even if the operation for the quarter and the
preceding quarters yielded no tax due.

Every taxable corporation is likewise required to file a final adjustment return covering the total taxable income of the
corporation for the preceding calendar or fiscal year, which is required to be filed and paid on or before April 15, or on or
before the 15th day of the fourth 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
that year, the corporation shall either:
1. Pay the balance of tax still due; or
2. Carry over the excess credit; or
3. Be credited or refunded with the excess amount paid.
 Chapter 4

MCIT,
Improperly Accumulated Earnings Tax
and GIT
MINIMUM CORPORATE INCOME TAX
DOMESTIC CORPORATIONS
A minimum corporate income tax (MCIT) of two percent (2%) of the gross income as of the end of the taxable year (whether
calendar or fiscal year, depending on the accounting period employed) is imposed upon any domestic corporation beginning
the fourth (4th ) taxable year immediately following the taxable year in which such corporation commends its business
operations. The MCIT shall be imposed whenever:

a. Such corporation has zero or negative taxable income; or

b. The amount of minimum corporate income tax is greater than the normal income tax due from such corporation.

DEFINITION OF TERMS
Gross Income
The computation of gross income and tax due for a trading/ merchandising concern and manufacturing concern
follows: Gross sales xxx
Less: Sales returns xxx
Sales discounts xxx
Sales Allowances xxx xxx
Net sales xxx
Less: Cost of Goods sold/
Cost of goods manufactured and sold xxx
Gross Income xxx
Multiply by 2%
Minimum corporate income tax xxx
 • Gross sales shall include only sales contributory to income taxable under Sec. 27A of the Code.
• Cost of goods sold shall include all business expenses directly incurred to produce the merchandise to bring them to their
present location and use.
For the trading or merchandising concern, “cost of goods sold” means the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where the goods are actually sold, including insurance while the
goods are in transit.

For a manufacturing concern, “cost of goods manufactured and sold” shall include all costs of production of finished
goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other
costs incurred to bring the raw materials to the factory or warehouse.

The computation of gross income and tax due for taxpayers engaged in the sale of service under the cash basis follows:
Gross Receipts xxx
Less: Sales returns xxx
Sales discounts xxx
Sales Allowances xxx xxx
Net receipts xxx
Cost of services xxx
Gross Income xxx
Multiply by 2%
Minimum corporate income tax xxx
• Gross receipts as used herein means amounts actually or constructively received during the taxable year.
• For taxpayer employing the accrual basis of accounting, the term “gross receipts” shall mean amounts earned as
gross income.
Gross receipts xxx
Multiply by 2%
Minimum corporate income tax xxx
• Cost of services means all direct costs and expenses necessarily incurred to provide the services required by the
customers and clients including:

1. salaries and employee benefits of personnel, consultants and specialists directly rendering the service; and

2. cost of facilities directly utilized in providing service such as depreciation or rental of equipment used and cost
of supplies.

• In the case of banks and other financial institutions, “cost of services” shall include interests expense.

Passive income, which has been subject to a final tax at source, shall not form part of gross income for purposes of
the MCIT.
Substantial losses from a prolonged labor dispute means losses arising from a strike staged by the employees which lasted for more than 6 months
within a taxable period and which has caused the temporary shutdown of business operations.

Force majeure means a cause due to an irresistible force as by “act of God” like lightning, earthquake, storm, flood, and the like. This term shall also
include armed conflicts like war or insurgency.

Legitimate business reverses shall include substantial losses sustained due to fire, robbery, theft, or embezzlement, or for other economic reason as
determined by the Secretary of Finance.

Gross Receipts And Cost Of Services Per Industry

Revenue Memorandum Circular (RMC) No. 4-2003 dated December 31, 2002 clarifies items that should comprise “gross receipts” and corresponding
“cost of services” for purposes of computing the gross income on sale of services which shall be the basis of the 2% Minimum Corporate Income Tax
(MCIT). In said circular, the BIR explicitly enumerated the items that shall comprise the gross receipts and costs of services of the following entities:

• Banks and non-bank financial intermediaries performing quasi-banking activities

• Insurance and pension funding companies – refer to those engaged in life and non-life insurance business as defined under the Insurance Code and pre-
need companies including health maintenance organizations.
• Finance companies and other financial intermediaries not performing quasi-banking activities – refer to those engaged in the business of extending
credit facilities to consumers and to industrial, commercial, or agricultural enterprises, including lending investors.
• Brokers of Securities (excluding banks)
• Customs, insurance, real state, immigration and commercial banks
• General engineering and/or building contractors – refer to those engaged in contracting business in
connection with fixed works requiring specialized engineering knowledge and skill (e.g. reclamation
works, railroads, highways, street roads, tunnels, airports), or with any structure built, for the
support, shelter and enclosure of persons, animals, chattels, or movable property of any kind,
requiring in its construction the use of more than two unrelated building trades or crafts, or to do or
superintend the whole or any part thereto (e.g. sewers and sewerage, disposal plants and systems,
parks, playgrounds, refineries).
• Common carriers or transportation contractors
• Hotel, motel, rest/pension/lodging house and resort operators
• Foods service establishments
• Lessors of property – those engaged in the business of leasing out properties, such real properties,
equipment, and other movable properties.
• Telephone and telegraph, electric, gas, and water utilities
• Radio and/or television broadcasting
Recent BIR Issuances on Vital
Industries Local Water Districts
Local Water Districts are subject to income taxes and franchise taxes effective August 13, 1996 or 5 years from the
effectivity of RA No. 7109

PAL and Other Franchise Grantees Similarly

Section 13 of PD 1590 grants the Philippine Airlines (PAL) two options to pay its income tax liability. PAL’s income tax liability
shall be the lower amount between:
(1) normal income tax or MCIT whichever is higher; and
(2) 2% franchise tax
For purposes of applying the MCIT on the gross income of PAL, its “gross revenue” and “cost of service” shall consists of the
following items:

Gross Revenue
1. Passenger revenue;
2. Cargo revenue;
3. Other transport revenue; and
Cost of Service
1. Salaries, wages, and other employee benefits directly engaged in the transport of
passenger, cargo or mail;
2. Commissions paid to sales agents;
3. Fuel and oil used in transport equipment/aircraft;
4. Insurance expenses incurred which are directly connected to transport activities (e.g.
hull insurance, passenger liability insurance, and the like);
5. Traffic servicing expenses;
6. Aircraft servicing expenses;
7. Passenger service expenses;
8. Depreciation of and/or lease/rental charges for aircraft, flight equipment and ground
equipment; and
9. Maintenance and repairs of aircraft, flight and ground equipment.
Electric Coops Registered with NEA and CDA

There are tax implications of Electric Cooperatives (ECs) registered with the National Electrification
Administration (NEA) and Cooperative Authority (CDA)
EC Registration Exemption from
A. NEA-registered ECs Income taxes for which they are
directly liable
B.CDA-registered ECs
1. ECs that do not transact with Income tax on income from operations
nonmembers or the general public
2. ECs that transact with both members
and nonmembers
a. W/ members
b. W/ nonmembers; ECs have -do-
accumulated reserves and undivided interest -do-
of P10 million. Income tax for 10 years from date of
c. W/ nonmembers; ECs have registration with CDA; at least 25% of net
accumulated reserves and undivided net income of EC must be returned to members
savings of > P10 million as interest &/or patronage refund.
Enterprises Registered under the Bases Conversion & Development Act of 1992 % the Philippine Economic
Zone Act of 1995
Revenue Regulations No. 20-2002 dated October 14, 2002 clarifies the tax treatment of income earned from
unregistered activities by enterprises registered under the Bases Conversion and Development Act of 1992 and
the Philippine Economic Zone Act of 1995.

Enterprises that are registered with the Subic Bay Metropolitan Authority (SBMA), the Clark Development
Authority (CBA) or the Philippine Economic Zone Authority (PEZA) engaged in registered as well as unregistered
activities.
Registered activity/ies
Income derived by such enterprises from registered activity/ies shall be subject to such tax treatment as may be
specified in the terms of registration, i.e.:

• 5 % preferential tax rate

• Income tax holiday
• Regular income tax rate
Unregistered activity/ies
Income derived from unregistered activity/ies shall be subject to the regular internal revenue taxes such as the following:
Interests
Interest income from Philippine currency bank deposits,
yield or any other monetary benefit from deposit
substitutes, from trust funds and similar arrangements 20% Final income
Interest income from foreign currency deposits 7 ½% tax Final
income tax
Sale of Shares of Stock
Not traded in the stock exchange
On the net capital gain from sale, exchange or other
disposition of shares of stock in a domestic corporation
Not over P1,000,000 5% Capital gains tax
Amount in excess of P100,000 10%
Traded in the stock exchange
On the gross selling price ½% Stock transaction tax

Income payments made by a registered enterprise to an entity in the Customs territory shall not be subject to the
preferential tax rates or tax exemption enjoyed by the registered enterprise. They shall be subject to the appropriate
rate of tax imposable on the recipient of such income.
 The following are examples:
• Dividends paid to the shareholders
• Interest payments to creditors
• Other similar payments
Normal Tax Versus MCIT
Gross income and tax due for trading/merchandising and manufacturing concerns:
Normal tax Minimum corporate income tax
Gross sales xxx Gross sales xxx
Less: Sales returns xxx Less: Sales returns xxx
Sales discounts xxx Sales discounts xxx
Sales allowances xxx xxx Sales allowances xxx xxx
Net sales xxx Net sales xxx
Less: Cost of goods sold/ Less: Cost of goods sold/
manufactured and sold xxx manufactured and sold xxx
Gross profit from sales xxx
Add: Other gross income xxx
Gross income xxx Gross income xxx
Less: Deductions xxx
Net income xxx
Multiply by tax rate 32% Multiply by 2%
(2000) Normal tax xxx Minimum corporate income tax xxx
Gross income and tax due for taxpayers engaged in the sale of service under the cash basis:
Normal tax Minimum corporate income tax
Gross receipts xxx Gross receipts xxx
Less: Sales xxx Less: Sales xxx
returns xxx returns xxx
Sales discounts xxx xxx Sales discounts xxx xxx
Sales allowances xxx Sales allowances xxx
Net receipts xxx Net receipts xxx
Add: Other gross xxx Less: Cost of services xxx
income Gross income xxx Gross income
Less: Deductions xxx
Net income xxx 2%
Multiply by tax rate xxx Multiply by xxx
(2000) Normal tax Minimum corporate income tax

Period Subject to MCIT

For purposes of the MCIT, the taxable year in which business operations commenced shall be the year in which the domestic
corporation registered with the BIR. Firms which were registered with BIR in 1994 and earlier years shall be covered by the
MCIT beginning January 1, 1998. firms which were registered with BIR in any month in 1998 shall be covered by the MCIT in
2002 after the lapse of three calendar years from 1998.
Domestic Corporations not Subject to MCIT
The minimum corporate income tax(MCIT) shall apply only to domestic corporations subject to the normal corporate
income tax. Accordingly, the minimum corporate income tax shall not be imposed upon any of the following:
a. Domestic corporations operating a proprietary educational institutions subject to tax at ten percent (10%) on their
taxable income; or
b. Domestic corporation engaged in hospital operations which are non-profit subject to tax at ten percent (10%) on
their taxable income; and
c. Domestic corporations engaged in business as depository banks under the expanded foreign currency deposit
system, otherwise known as Foreign Currency Deposit Units (FCDUs), on their income from foreign currency
transactions with local commercial banks, including branches of foreign currency deposit system units and other
depository banks under the foreign currency deposit system, including their interest income from foreign currency
loans granted to residents of the Philippines under the expanded foreign currency deposit system, subject to final
income tax at ten percent (10%) of such income.
d. Firms that are taxed under a special income tax regime such as those in accordance with R.A 7916 and 7227 (the
PEZA law and the Bases Conversion Development Act, respectively).
Suspension of the MCIT
In order that cessation of business activities as a result of being placed under involuntarily receivership may be a basis
for the recognition of the suspension of the MCIT, such a situation should be properly defined and included in the
regulations. Pending such inclusion, the same cannot yet be invoked.
RESIDENT FOREIGN CORPORATION
A minimum corporate income tax (MCIT) of two percent (2%) of the gross income from sources within the Philippines is
imposed upon any resident foreign corporation, beginning on the fourth (4th) taxable year (whether calendar or fiscal
year, depending on the accounting period employed) immediately following the taxable year in which the corporation
commenced its business operations, whenever the amount of the MCIT is greater than the normal income tax due for
such year.

In computing for the MCIT due from a resident foreign corporation, the rules prescribed on domestic corporations apply
provided that only the gross income from sources within the Philippines shall be considered for such purposes.

Resident Foreign Corporations Not Subject to MCIT

The minimum corporate income tax shall only apply to resident foreign corporations which are subject to normal income
tax. Accordingly, the MCIT shall not apply to the following resident foreign corporations:
a. Resident foreign corporations engaged in business as “international carrier” subject to tax at two and one-half
percent (2 ½%) of their “Gross Philippine Billings”.
b. Resident foreign corporations engaged in business as Offshore Banking Units (OBUs) on their income from foreign
currency transactions with local commercial banks, including branches of foreign banks, authorized by the Bangko
Sentral ng Pilipinas (BSP) to transact business with OBUs, including interest income from foreign currency loans
granted to residents of the Philippines, subject to a final income tax at ten percent (10%) of such income; and
c. Resident foreign corporations engaged in business as regional operating headquarters subject to tax at ten percent
(10%) of their taxable income.
d. Firms that are taxed under a special income tax regime such as those in accordance with R.A. 7916 and 7227 (the
PEZA law and the Bases Conversion Development Act, respectively).
IMPROPERLY ACCUMULATED EARNINGS TAX
The BIR issued on March 9, 2001, Rev. Reg. 2-2001 prescribing the rules and regulations in the implementation of the
provisions on improperly accumulated earnings tax.
The rationale is that if the earnings and profits were distributed, the shareholders would then be liable to income tax
thereon, whereas if the distribution were not made to them, they would incur no tax in respect to the undistributed
earnings and profits of the corporation. Thus, a tax is being imposed in the nature of a penalty to the corporation for the
improper accumulation of its earnings, and as form of deterrent to the avoidance tax upon shareholders who are
supposed to pay dividends tax on the earnings distributed to them by the corporation.

Coverage
the 10% Improperly Accumulated Earnings Tax (IAET) is imposed on improperly accumulated taxable income
earned starting January 1, 1998 by domestic corporations as defined under the Tax Code and which are
classified as closely-held corporations. The Improperly Accumulated Earnings Tax shall not apply to the
following corporations:
a. Banks and other non-bank financial intermediaries;
b. Insurance companies;
c. Publicly-held corporations
d. Taxable partnerships;
e. General professional partnerships;
f. Non-taxable joint ventures; and
g. Enterprises duly registered with the Philippine Economic Zone Authority (PEZA) under R.A. 7916, and
enterprises registered pursuant to the Bases Conversation and Development Act of 1992 under R.A. 7227,
as well as other enterprises duly registered under special economic zones declared by law which enjoy payment of special
tax rate on their registered operations or activities in lieu of other taxes, national or local.

Tax Base of Improperly Accumulated Earnings Tax

for corporations found subject to the tax, the “Improperly Accumulated Taxable Income” for a particular year is first
determined by adding to that year’s taxable income the following:
a. Income exempt from tax;
b. Income excluded from gross income;
c. Income subject to final tax; and
d. The amount of net operating loss carry-over (NOLCO) deducted.

The taxable income as thus determined shall be reduced by the sum of:
e. Income tax paid/payable for the taxable year;
f. Dividends actually or constructively paid/issued from the applicable year’s taxable income;
g. Amount reserved for the reasonable needs of the business emanating from the covered year’s taxable income.

The resulting “Improperly Accumulated Taxable Income” is thereby multiplied by 10% to get the Improperly Accumulated
Earnings Tax (IAET).
Period for Payment of Dividend /Payment of IAET
The dividends must be declared and paid or issued not later than one year following the close of the taxable year,
otherwise, the IAET, if any, should be paid within fifteen (15) days thereafter.

Determination of Purpose to Avoid Income Tax

The fact that a corporation is a mere holding company or investment company shall be prima facie evidence of a purpose
to avoid the tax upon its shareholders or members. Likewise, the fact that the earnings or profits of a corporation are
permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the
tax upon its shareholders or members. In both instances, the corporation may, by clear preponderance of evidence in its
favor, prove the contrary.

The term “holding or investment company” shall refer to a corporation having practically no activities except holding
property, and collecting the income therefrom or investing the same.

The following are prima facie instances of accumulation of profits beyond the reasonable needs of a business and
indicative of purpose to avoid income tax upon shareholders:
a. Investment of substantial earnings and profits of the corporation in unrelated business or in stock or securities of
unrelated business;
b. Investments in bonds and other long-term securities;
c. Accumulation of earnings in excess of 100% of paid-up capital, not otherwise intended for the reasonable needs of the
business.
GROSS INCOME TAX FOR CORPORATIONS
The President, upon the recommendation of the Secretary of Finance, may allow corporations to be taxed at 15% of gross
income effective January 1, 2000 after the following conditions have been satisfied:

1. A tax effort ratio of 20 % of Gross National Product (GNP);

2. A ratio of 40% of income tax collection to total tax revenues;
3. A VAT tax effort of 4% of GNP; and
4. A 0.9% ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.

The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to gross sales or
receipts from all sources does not exceed 55%. The lection of the gross income tax option by the corporation shall be
irrevocable for three (3) consecutive taxable years during which the corporation is qualified under the scheme.

Resident foreign corporations engaged in trade or business within the Philippines have the option to be taxed at 15% of
gross income under the same conditions required of domestic corporations.

Gross income and Tax

GROSS INCOME TAX FOR CORPORATIONS
The President, upon the recommendation of the Secretary of Finance, may allow corporations to be taxed at 15% of gross
income effective January 1, 2000 after the following conditions have been satisfied:

1. A tax effort ratio of 20 % of Gross National Product (GNP);

2. A ratio of 40% of income tax collection to total tax revenues;
3. A VAT tax effort of 4% of GNP; and
4. A 0.9% ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.

The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to gross sales or
receipts from all sources does not exceed 55%. The lection of the gross income tax option by the corporation shall be
irrevocable for three (3) consecutive taxable years during which the corporation is qualified under the scheme.

Resident foreign corporations engaged in trade or business within the Philippines have the option to be taxed at 15% of
gross income under the same conditions required of domestic corporations.

CORPORATIONS AND DOUBLE TAXATION

With the exception of voting privileges, corporations enjoy most of the same legal rights as human beings. Such rights
include the ability to own property and to bring suit in the courts. Likewise, corporations generally have the same legal
responsibilities as human beings. Being afforded separate legal existence under the law, corporations are thus treated as
distinct taxpaying entities, separate and apart from their owners.
Corporate shareholders often complain of the “double taxation” of corporate income. First, income is taxed
when earned by the corporation. Second, when corporate after-tax income is paid to shareholders, the income is
taxed again at the individual level as dividend income.

The double-taxation aspect of corporate taxation does not impose as much of an economic hardship on many
shareholders as might first appear. Double taxation applies to the distributed portion of corporate income. If any
of the income had been retained by the corporation beyond the limit set by the Code, it might later be subject to
the 10% improperly accumulated earnings tax (IAET).

Double taxation can be completely avoided if some way can be found to distribute the earnings of the
corporation in such a way that the corporation receives a current deduction (dividend distributions are not
deductible by the corporation.
 Chapter 5
Estates and Trusts
DEFINITIONS OF TERMS

Estate or Inheritance. Refers to all the properties, right and obligations of a person which are not
extinguished by his death and also those which have accrued thereto since the opening of the succession.

Trust is an agreement created by will or an agreement under which title to property is passed to another
for conservation or investment with the income therefrom and ultimately the corpus or principal to be
distributed in accordance with the directives of the creator as expressed in the governing instrument.\

Trustor or grantor is the person who establishes a trust.

Beneficiary is the person for whose benefit the trust has been created. A beneficiary has equitable title to
the property transferred to the trust, including, generally, the possession and use of the property.

Fiduciary is the general term which applies to all persons or corporations that occupy positions of peculiar
confidence towards others, such as trustees, executors, guardians, or administrators, receivers, or
conservators. For income tax purposes, a fiduciary is any person or corporation that holds in trust an
estate of another person or persons.
TAXABLE ESTATES
When an individual is alive, income on his or her property (e.g., interest income on bonds, dividend income
on stocks, rental income on an apartment complex) is taxed to that individual. When the individual dies,
future income on that property will be taxed to those who inherit the property. However, income on
property is taxable to the heirs only after they receive the property. The receipt of the property itself is
excluded from income. Often there are considerable time lag between the time a person dies and when final
settlement of the estate occurs. Thus, a relevant question to ask is who is taxed on income realized from the
decedent’s property during this interval. The answer provided by the Code is that the estate itself is taxed.
Estates are legal entities that exist for the purpose of managing and distributing the deceased person’s
property to the heirs. While this property is in the estate, the property might earn some income. The income
will be taxed to the estate.

Taxable estates are estates of deceased persons under judicial settlement. Taxation of an estate begins from
the time of death. Hence, any income received after the death shall form part of the income of the estate.

Income of estates not under judicial settlement are not taxable to the estate. In this case, a co-ownership is
created and the co-owners, after actual of constructive receipt of the income are the ones liable to income
tax in their individual capacities.
TAXABLE TRUSTS
An individual may want another family member, such as a son or daughter, to become the owner of some
particular piece of the individual’s property (e.g., stocks, rental property). However, the individual may feel
that the son or daughter is not capable of managing the property, in this situation, the individual could
transfer the property to a trustee in order to have the trustee manage the property for the benefit of the
son or daughter. This legal arrangement is known as a trust, and the son or daughter would called the
beneficiaries of the trust.

Trusts are a unique form of legal entity, being neither pure taxpayer nor pure conduit. For taxpayers such as
corporations, all income is taxed to the income-earning organization. For conduits such as general
professional partnerships, no income is taxed to the income=earning organization. Rather, income is taxed
to the owners of the partnerships when earned, regardless of whether that income is distributed to them.
The taxation of trusts and their beneficiaries falls between these two extremes, having element in common
with the tax treatments of both taxpayers and conduits.

For a trust to be taxable, it must be irrevocable, meaning it cannot be changed by recall or cancellation,
both as to corpus or principal and income. In a revocable trust, where title to income may be revested in the
grantor, the trust itself is not subject to income tax. It is the grantor who is taxable. In case of trust where
the income may be held or distributed for the benefit of the grantor, such income is likewise taxable directly
to the grantor.
GROSS INCOME
The items of gross income of estates and trusts are the same items of gross income of individuals as
provided in the Tax Code. They include:

1. Income accumulated in trust for the benefit of unborn or unascertained person or persons with
contingent interests, and income accumulated or held for future distribution under the terms of the will
or trust.
2. Income which is to bedistribu7ted currently by the fiduciary to the beneficiaries, and income collected
by a guardian of an infant which is to be held or distributed as the court may direct.
3. Income received by estates of deceased persons during the period od administration or settlement of
the estate.
4. Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or
accumulated.

ALLOWABLE DEDUCTIONS
Estate or trust is allowed a personal exemption of P20,000. this is regardless of the number of trusts a
beneficiary may receive income from. Aside from the personal exemption of P20,000 allowed, income of
trust or estate may be deductible from gross income.
Income which is to be distributed currently by the fiduciary to the beneficiaries; and income collected by a
guardian of an infant which is to be held or distributed as the court may direct, are deductible from gross
income of the fiduciary. This is so because such income is taxable directly to the beneficiary, whether distributed
or not.

Income received by estates of deceased persons during the period of administration or settlement of the
estate; and income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or
accumulated, are taxable either to the fiduciary or beneficiary, depending on the amounts paid or credited to
the legatee, heir or beneficiary.

If taxable to the fiduciary (meaning no income has been distributed to the beneficiary), the income is nor
deductible from the gross income of the fiduciary. But if taxable to the beneficiary, such income shall form part
of the gross income of the fiduciary and is deductible from such gross income. The income thus distributed is to
be included in the gross income of the beneficiary.

The deductions just discussed shall not be allowed in the case of a trust administered in a foreign country.
CONSOLIDATION OF INCOME OF TWO OR MORE TRUSTS
When two or more trusts are created by the same grantor and the beneficiary in both trusts is the same, the
taxable income of all the trusts shall be consolidated and the tax computed on such consolidated income.

Consolidated gross income xxx

Less: Consolidated deductions xxx
Consolidated taxable income xxx
Less: Personal exemption xxx
Taxable income xxx
Multiply by: Tax rate in Sec. 24A x%
Amount of income tax on
consolidated taxable income xxx

Each trustee shall compute his share of the income tax on the consolidated taxable income based on the
formula below:

Taxable income of a trust

before exemption x Income tax on consolidated = Income tax
payable Consolidated taxable income of taxable incomeby
each trustee
all trusts before exemption
 Chapter 6
Taxation of
Partnerships or
Partners
CLASSIFICATION OF GENERAL PARTNERSHIPS IN TAXATION

1. General Professional Partnership. One formed by persons for the sole purpose of exercising their
common profession, no part of the income of which is derived from engaging in any trade or business.
2. General co-partnership (compania colectiva). A general partnership which is not a general professional
partnership.

General Professional Partnership

A general professional partnership as such shall not be subject to the income tax but is required to file
returns of its income for the purpose of furnishing information as to the share in the net income of the
partnership which each partner shall include in his individual return.

Persons engaging in business as partners in a general professional partnership shall be liable for income tax in
their separate and individual capacities. 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. Each partner shall
report as gross income in his return, his distributive share in the net income of the partnership whether
actually or constructively received.

If the partner elects the itemized deductions, his tax shall be based on his share of the net income of the
partnership, whether distributed or not; otherwise, he can avail of the 10% optional standard deduction
(OSD). To avail of the 10% OSD, a partner must declare his distributive share of the gross income of the
general professional partnership, undiminished by his share of the deduction.

Where the result of partnership operation is a loss, the loss will be divided as agreed upon by the partners. If
there is no agreement as to division of losses but there is as to profits, the losses shall be distributed
according to the profit sharing ratio. Such share in the losses may be taken up by the individual partners in
their respective income tax returns.

If a general professional partnership uses the accrual basis of accounting, and a partner on his own
transactions, is on the cash basis, the partner may consolidate his share of the net income of the partnership
with his own income.

General Co-partnership
Partnerships (other than general professional partnerships), whether registered or not, are considered as
corporations and are therefore taxed as corporations. Consequently, the partners are considered as
stockholders and, therefore, profits distributed to them by the partnership are considered as dividends. The
share of an individual partner in a taxable partnership is subject to a final tax of 6% to be increased to 8% in
1999 and 10% in 2000.
The distributive share of a partner in the net income of a partnership is equal to each partner’s distributive
share of the net income declared by the partnership for a taxable year after deducting the corresponding
corporate income tax. Such share shall be included in the individual returns of the partners, whether
actually distributed or not. The taxable income declared by the partnership for a taxable year shall be
deemed to have been actually or constructively received by the partners in the same taxable year.

If the partnership sustains a net operating loss, the partners shall be entitled to deduct their respective
shares in the net operating loss from their individual gross income.

CO-OWNERSHIP
A co-ownership shall not be subject to income tax if the activities of the co-owners are limited to the
preservation of the property and the collection of the income therefrom. Such being the case, it is the co-
owners who are taxed individually on their distributive share in the income of the co-ownership.

However, should the co-owners invest the income in business for profit, they would be constituting
themselves into a partnership and as such shall be taxable as a corporation.
 Chapter 7
Gross Income
DEFINITION
Gross income as defined in the Tax Code means all income derived from whatever source including but not
limited to the following items:

1. Compensation for services, in whatever form paid, including but not limited to fees, salaries, wages,
commissions and similar item.
2. Gross income derived from the conduct of trade or business or from the exercise of a profession
3. Gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partner’s distributive share from the net income of a general professional partnership.
COMPENSATION INCOME
In general, the term “”compensation” means all remuneration for services performed by an employee for
his employer under an employer-employee relationship, unless specifically excluded by the Code. The term
used to designate the remuneration 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; taxable pensions and
retirement pay; and other income of a similar nature constitute compensation income.

The timing or the basis upon which the remuneration is paid is immaterial in determining whether the
remuneration constitutes compensation. Thus, it may be paid on the basis of piece-work, or a percentage of
profits; and may be paid hourly, daily, weekly, monthly or annually.

If services are paid for in a medium other than money (e.g, stocks, bonds or other forms of property), such is
to be treated as compensation in kind. The fair market value of the thing taken in payment is the amount to
be included as compensation.
Definition of Terms
1. Payroll Period. The term “payroll period” means the period of services for which a payment of
compensation is ordinarily made to an employee by his employer. It is immaterial that the compensation
is not always paid at regular intervals.
2. Employee. The term “employee” is an individual performing services under an employer-employee
relationship. The term covers all employees, including officers and employees, whether elected or
appointed, of the Government of the Philippines political subdivision thereof or any agency or
instrumentality.
3. Employer. The term “employer” means any person for whom an individual performs or performed any
service, of whatever nature, under an employer-employee relationship. It is not necessary that the
services be continuing at the time the wages are paid in order that the status of employer may exist. A
person for whom an individual has performed past services and from whom he is still receiving
compensation is an “employer”.
The term “employer” is also defined as any person paying compensation in behalf of a non-resident
alien individual, foreign partnership, or foreign corporation, who is not engaged in trade or business within
the Philippines.
Forms of Compensation
Compensation does not always come in the form of money or is always termed as much.
compensation has various forms, as follows:

1. Compensation paid in kind. Compensation may be in some medium other than money, as for example,
stocks, bonds, or other forms of property. In this case, the fair market value of the thing taken in payment is
the amount to be included as compensation subject to withholding. Where compensation is paid in property
other than money, the employer shall make necessary arrangements to ensure that the amount of the tax
required to be withheld is available for payment to the Commissioner.

2. Living quarters and meals. If a person receives salary as remuneration for services rendered, and in
addition thereto, living quarters or meals are provided, the value to such person of the quarters and meals so
furnished shall be added to the remuneration paid for the purpose of determining the amount of
compensation subject withholding. However, if living quarters or meals are furnished to an employee for the
convenience of the employer, the value thereof need to be included as part of compensation income.

3. Facilities and privileges of a relatively small value. Ordinarily, facilities and privileges (such as
entertainment, medical services, or so called “courtesy” discounts on purchases), otherwise known as “de
minimis benefits”, furnished or offered by an employer to his employees, are not considered as compensation
subject to income tax and consequently to withholding tax if such facilities are offered or furnished by the
employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees.
The following shall be considered “de minimis” benefits not subject to withholding tax on compensation
income of both managerial and rank and file employees:
a. Monetized unused vacation leave credi8ts of employees not exceeding ten (10) days during the
year;
b. Medical cash allowance to dependents of employees not exceeding P750.00 per employer per
semester or P125 per month;
c. Rice subsidy of P1000.00 or one (1) sack of 50-kg. Rice per month amounting to not more than
P1000.00;
d. Uniforms and clothing not exceeding P3000 per annum;
e. Actual yearly medical benefits not exceeding P10,000 per annum;
f. Laundry allowance not exceeding P300 per month;
g. Employees achievement awards, e.g., for lent 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;
h. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee
per annum;
i. Flowers, fruits, books or similar items given to employees under special circumstances, e.g., on
account of illness, marriage, birth of a baby, etc.; and
j. daily meal allowance for overtime work not exceeding twenty –five (25%) of the basic minimum
wage.
4. 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 as taxable income but not subject
to withholding.

5. Pensions, Retirement and Separation pay. Pensions, retirement, and separation pay
constitutes compensation subject to withholding, except those provided.

6. Fixed or Variable Transportation, Representation and other Allowances.

a. In general, fixed or variable transportation, representation, and other allowances which are
received by a public officer or employee or a private entity, in addition to the regular compensation
fixed for his position or office, is compensation subject to withholding.

b. Any amount paid specifically, either as advances or reimbursement for travelling,

representation and other bonafide ordinary and necessary expenses incurred or reasonably expected
to be incurred by the employee in the performance of his duties are not compensation subject to
withholding, if the following conditions are satisfied:
-
It is for ordinary and necessary travelling and representation or entertainment expenses paid or
incurred by the employee in the pursuit of the trade, business or profession; and
-
The employee is required to account/liquidate for the forgoing expenses in accordance for the
specific requirements of substantiation for each category of expenses pursuant to Section 34 of the
code.
 The excess of actual expenses over advances made shall constitute taxable income if such amount is not return
to the employer. Reasonable amounts of reimbursement/ advances for travelling and entertainment expenses
which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty need not
be subject to the requirements of substantiation and to withholding.

7. Vacation and sick leave allowances. Amounts of “vacation allowances or sick leave credits” which are paid to an
employee constitute compensation. Thus, the salary of an employee on vacation or on sick leave, which are paid
not withstanding his absence from work, constitute compensation. However, the monetized value of unutilized
vacation leave credits of ten days or less which were paid to the employee during the year are not subject to
income tax and to the withholding tax.

8. Deductions made by employer from compensation of employee. Any amount which is required by law to be
deducted by the employer from the compensation of an employee including the withheld tax is considered as part
of the employee’s compensation and is deemed to be paid to the employee as compensation at the time and
deduction is made.

9. Remuneration for services as employee of a non-resident alien individual or foreign entity. The term
“compensation” includes remuneration for services performed by an employee of a non-resident alien individual,
foreign partnership or foreign corporation, whether or not such alien individual or foreign entity is engaged in trade
or business within the Philippines. Any person paying compensation on behalf of a non-resident alien individual,
foreign partnership, or foreign corporation which is not engaged in trade or business within the Philippines is
subject to all provision of law and regulation applicable to an employer.
10. Compensation for services performed outside the Philippines. Remuneration for services performed outside
the Philippines by a resident citizen for a domestic or resident foreign corporation or partnership, or for a non-
resident corporation or partnership, or for a non-resident individual not engaged in trade or business in the
Philippines shall be treated as compensation which is subject to tax.

BUSINESS INCOME

Manufacturing, Merchandising, or Mining

In the case of a manufacturing, merchandising or mining business, gross income means total sales, less cost of goods
sold plus any income from investment and from incidental or outside operation or sources.
Gross sales xxx
Less: Cost of goods sold xxx
Gross Profit from Sales xxx
Add: Other income xxx
Gross Income xxx

In determining gross income, subtractions are not allowed for depreciation, depletion, selling expenses or losses or
for items not ordinarily used in computing the cost of goods sold.
FARMING
Gross income from farming includes gain or profit derived from the operations of farm, such as stock, dairy, poultry,
fruits and truck farms; plantations; ranches; etc. Income of farmers maybe reported using either the cash basis,
accrual basis, or crop year basis.

CASH BASIS
Cash Sales (or value of merchandise or property
received) of livestock and farm products raised in the farm xxx
Sales of livestock and other items purchased xxx
Less: Cost of Sales xxx
Gross Profit xxx
Miscellaneous Income xxx
Gross Income xxx

ACCRUAL BASIS. Beginning and ending inventories of livestock and farm products raised and purchased are
considered to arrived at the gross income.
 Ending Inventory xxx
Cash sales (or value of merchandise or other property received) of
livestock or farm products raised in the farm xxx
Sales of livestock and other items purchased xxx
Miscellaneous Income xxx
Total xxx
Less: Beginning Inventory xxx
Cost of livestock and other items purchased xxx xxx
Gross Income xxx

CROP YEAR BASIS. This basis is used by farmers whose crop take more than one year from planting up to harvesting
and disposing. The entire cost of production is deducted from the gross income in the year it was realized.

GAINS DERIVED FRO DEALINGS IN PROPERTY

Gross income derived from dealings in property includes all income derived from the disposition of property – real
personal, or mixed – for money (sale) or for other property (exchange) or for a combination of both, which results in
gain (or loss) because of the difference between the taxpayer’s investment in what he disposed of and the value in
what he received. The general rule is that, the entire amount of the gain (or loss, as the case may may be) arising
therefrom is a taxable gain (or a deductible loss).
INTERESTS
Gross income derived from interest s only such interest as arising from indebtedness, that is, compensation for
the loan or forbearance of money, goods, or credits. Unless exempted by law, interest received by a taxpayer is
taxable. Interest includes those arising from indebtedness, whether business or non-business, legal or illegal.

To recapitulate, interests from deposits and yield or any other monetary benefit from deposit substitutes and
from trust funds and similar arrangements are subject to 20% final tax for domestic and resident foreign
corporations, resident and non-resident citizens and resident aliens.

Inter-company Advances
Inter-company advances more properly pertain to transactions between affiliated companies and between
parent and subsidiaries. These are not limited to financial distress situations. Common financing is resorted to
even among corporations that are financially sound.
Rents
Rent is the amount paid for the use or enjoyment of a thing or right. Gross income derived from rent comes
not only from real estate but also from the use of personal property. For income arising from rentals of
property, a taxpayer must report as part of gross income advance rentals receives during the taxable year,
including rentals actually earned but uncollected as of the end of such period (BIR Ruling 3-2000, Jan.5,2000).
Normally, a lease contract is executed between the lessor and the lessee specifically providing for the term and
consideration of the lease. This consideration is taxable to the lessor in the form of rent income. Other
considerations which the lessee may pay to third parties (e.g., interest, taxes, dividends and insurance
premiums) are likewise taxable to the lessor.

Advance rental when there is no restriction as to its disposal by the lessor is taxable income to the lessor in the
year received regardless of the accounting method employed (i.e., cash or accrual). But if it is a security
deposit so that the term of the lease contract are complied with, it is not taxable to the lessor unless the lessee
violets a term this forfeiting the deposit in favor of the lessor. If it is in the nature of a loan, there is no taxable
income to the lessor when received.

Improvements on the property or leasehold improvements made by the lessee where both parties agree that
these shall belong to the lessor must be recognized by the lessor using either of the two methods – income
over the term of lease basis (spread-out) and income in the year of completion basis (outright).
Royalties
Gross income derived from royalties includes earnings from copyrights, trademarks, patents, and natural
resources under lease. It involves not only the use of the property but also its exhaustion. Royalties for
properties which produce coal, gas, oil, copper, timber or other similar product shall form part of gross
income for purposes of computing the income tax liability of the taxpayer under Sections 24A, 27 and 28.

Software
In view of rapid development of computer technology in recent years and the extent of transfers of such
technology across national borders, the BIR issued on November 18, 2003 RMC 77-03. The circular classifies
payments for software for income tax purposes.

Definition of Terms
1. Software – is a program, or series of programs, containing instructions for a computer required either for
the operational processes of the computer itself (operational software) or for the accomplishment of other
tasks (application software). It can be transferred through a variety of media, for example in writing or
electronically, on a magnetic tape, diskette, or compact disks, or it can be downloaded through the Internet
or through a network. It may be standardized with a wide range of application or be customized for specific
users. It can be transferred as an integral part of computer hardware or in an independent form available
for use on a variety of hardware.
2. Royalties – as generally used means payment of any kind received as a consideration for the use of, or the
right to use, any copyright of literally, artistic or scientific work including cinematograph films, or films or
tapes used for radio or television broadcasting, any patent, trade mark, design, or industrial, commercial or
scientific equipment, or for information concerning industrial, commercial or scientific experience.

The term “use” (underscored) as containing herein shall include the reselling or distribution of software.
Software is generally assimilated as a literally, artistic or scientific work protected by the copyright laws of
various countries including the Philippines, thus, payments in consideration for the use of, or the right to use,
a copyright or a copyrighted article relating to software are generally royalties.

DIVIDENDS
Dividends are distributions made by a corporation out of its earnings or profits accrued since March1, 1913,
and payable to its shareholders, whether in money or in other property.

Cash and property dividends declared and distributed by domestic corporations to individual stockholders
who are residents of the Philippines on or after Jan. 1, 1998, but forming part of retained earnings as of Dec.
31, 1997, as shown by a Board Resolution stating said dividends as such as established by the corporation’s
books of accounts, shall not be subject to income tax.
Forms of Dividends and Income Tax Treatment

1. Cash dividend. It is paid to shareholders or members in cash and is taxable at 6%, 8%, and 10% final
tax, beginning January 1, 1998, 1999, and 2000, respectively.
2. Property dividend. It is paid in property of the corporation such as bonds, securities or stock
investments held by the corporation paying the dividend and is taxable at the same rate as
cash dividend.
3. Stock dividend. It is paid in stock and is not taxable unless it represents a distribution of earnings
or profits.
4. Scrip dividend. It is issued in the form of a promissory note and is taxable at the same rate as
cash dividend.
5. Liquidating dividend. In itself, liquidating dividend, does not constitute income. But when a
corporation distributes all its assets in complete liquidation or dissolution, the transaction is deemed a
sale or exchange between the corporation and the stockholder. As such, the difference between the
amount received from the corporation and the cost of the shares surrendered by the stockholder is a
taxable capital gain or deductible capital loss to the extent of the capital gain.
6. Indirect dividends. These are other payments or rights received by the taxpayer which in reality, are
dividends. Thus, if a corporation to which the stockholder is indebted forgives his debt, the
transaction has the effect of payment of cash dividend.
Tax Rates on Dividend Distribution

If a domestic corporation distributes dividends to:

a. Resident citizen, non-resident citizen and resident

alien 1998 -6% final tax
1999 - 8% final tax
2000 - 10% final tax
b. Non-resident alien engaged in business in the Philippines – 20% final tax.
c. Non-resident alien not engaged in business in the Philippines – 25% final tax.
d. Domestic corporation and resident foreign corporation – income tax exempt.
e. Non-resident foreign corporation, under certain conditions – 15% final tax.

Taxable and Non-Taxable Stock Dividend

1. A non-taxable stock dividend does not constitute income if the new certificates plus the old ones do
not change the proportionate interest of the stockholder in the net assets of the corporation.

2. A taxable stock dividend constitutes income if it gives the shareholder a greater proportionate interest
in the corporation after its distribution. If a stockholder receives a taxable stock dividend, the measure
of income on his part is the fair market value of the shares on the date the stockholder received the
shares.
ANNUITIES
These refer to annuity policies sold by insurance companies, which provide installment payments for life, or
for a guaranteed fixed period of time whichever is longer or for life and guaranteed fixed period. The portion
of each annuity payment that represents interest is taxable.

PRIZES AND WINNINGS

Contest awards or prizes for commercial or non-commercial contests are generally taxable. Such payments
constitute gains derived from labor.

If the amount of prize is P10,000 or less, it is taxable under section 24A. If it is above P10,000, a final tax of
20% applies. Philippine Charity Sweepstakes Office (PCSO) and lotto winnings are tax exempt.

Prizes and awards received in recognition of religious, charitable, scientific, educational, artistic, literary, or
civic achievement are not taxable if:
a. The recipient was selected without any action on his part to enter the contest or proceedings; and
b. The recipient is not required to render substantial future services as a condition to receiving the prize
or award.

Prizes and awards granted to athletes in local and international sports competitions and tournaments held in
the Philippines or abroad and sanctioned by their national sports associations are exempt from income tax.
Prizes and awards in the nature of gifts are not taxable.
PENSIONS
Amount of money received in lump sum or on staggered basis in consideration of services rendered.
Pensions are being given after the individual reaches the age of retirement. It is taxable to the extent of the
amount received except if there is an approved pension plan by the Bureau of Internal Revenue.

INCOME FROM WHATEVER SOURCE

These include all other incomes not expressly exempt under the laws.
Examples:

1. Income derived from illegal sources, such as gambling, extortion, theft, bribes, embezzlement,
and smuggling are taxable.
2. Compensation from damages if it represents payment for loss of expected profits. Compensatory
damages constituting returns of capital are not taxable. Examples are amounts received as moral
damages for libel, slander, and breach of promise to marry. But damages for recovery of lost profits
are taxable such as damage recovered in a patent infringement suit.
3. The amount of the debt of a stockholder to a corporation when forgiven. This is in effect a payment of
dividend. If the debt is cancelled in exchange for personal services by the debtor, it shall amount to
compensation income. If for no consideration at all, the debt is cancelled, it maybe considered as a
gift. If this is the case, the amount is not to be included as income.
4. Bad debts previously charged off but later recovered. According to the tax benefit rule, recovery of
accounts previously written off constitutes a receipt of a taxable income if in the year of recognition
of
its being worthless, the write-off resulted in a tax benefit, that is a reduction of taxable income).

5. Taxes paid and subsequently refunded. For income tax purposes, tax refunds are generally taxable. A
tax which was previously deducted as an expense should be reported as income when a refund of the
same is received in a subsequent year. However, a tax that is not deductible like income tax, when
refunded to the taxpayer, is not an income subject to tax. The following tax refunds are not taxable:
a. Philippine income tax (except fringe benefit tax)
b. Estate or donor’s tax
c. Special assessment
d. Stock transaction tax
e. Income tax paid to a foreign country, if the taxpayer claimed a credit for such tax in the year it was paid.

6. Tax informer’s reward to persons instrumental in the discovery of violations of the National
Internal Revenue Code and the discovery and seizure of smuggled goods.
a. Those given to persons except an internal revenue official or employee, or other public official or
employee or his relative within the sixth degree of consanguinity, who voluntarily gives definite and sworn
information not yet in the possession of the Bureau of Internal Revenue, leading to the discovery of frauds
upon the Internal Revenue Laws or violations of any of the provisions thereof, thereby resulting in the
recovery of revenues, surcharges and fees and/or the conviction of the guilty party and/or imposition of
any fine or penalty.
b. Those given to an informer where the offender has offered to compromise the violation of law
committed by him and his offer has been accepted by the Commissioner and collected from the offender.
The amount of reward shall be equivalent to 10% of the revenues, surcharges or fees recovered and/or fine
or penalty imposed and collected or P1,000,000.00 per case, whichever is lower.

c. Those given to persons instrumental to the discovery and seizure of such smuggled goods. The amount
of reward shall be equivalent to 10% of the market value of the smuggled and confiscated goods or
P1,000,000.00 per case, whichever is lower.

SOURCES OF INCOME

1. Within the Philippines

2. Without the Philippines

3. Partly within and partly without

Determination of Source of Income
Income Sources of income
1. Compensation income Place of performance of service
2. Merchandising business Place of business
3. Manufacturing business
a. If produced in whole and sold within Purely within
b. If produced in whole and sold without Purely without
c. If produced in whole or in part within and
sold without Partly within and partly without
d. If produced in whole or in part without and
sold within Partly within and partly without
4. Mining Place where mine is located
5. Farming Place where farm is located
6. Interest income Location of property
7. Rent income Location of property
8. Royalties Place where intangible is used
9. Dividend from
a. Domestic corporation Within
b. Foreign corporation
EXCLUSIONS FROM GROSS INCOME
The following items shall not be included in the computation of gross income and shall be exempt from
income taxation.

1. Life Insurance. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death
of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under
an agreement to pay interest thereon, the interest payments shall be included in gross income. Also
excludible is 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.
2. Gifts, Bequests, and Devises. The value of property acquired by gift, bequest, devise, or descent.
Provided, however, that income from such property, as well as gift, bequest, devise, or descent of
income from any property, in cases of transfers of divided interest, shall be included in gross income.
3. Compensation for Injuries or Sickness. Amounts received, through Accident or Health Insurance or
under Workmen’s Compensation Acts, as compensation for personal injuries or sickness, plus the
amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness.
4. Income Exempt Under Treaty. Income of any kind, to the extent required by any treaty obligation
binding upon the Government of the Philippines.
5. Retirement Benefits, Pensions, Gratuities, etc.
6. Miscellaneous Items.
 Chapter 8
Special Treatment of Fringe
Benefits
DEFINITION OF TERMS
1. Fringe Benefit. Means any good, service, or other benefit furnished or granted by an employer in
cash or in kind in addition to basic salaries, to an individual employee (except rank and file
employee).
2. Rank and File Employees. Means all employees who are holding neither managerial nor
supervisory position.
3. Managerial Employee. Is one who is vested with powers or prerogatives to lay down and execute
management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or
discipline employees.
4. Supervisory Employees. Are those who, in the interest of the employer, effectively recommend
such managerial actions if the exercise of such authority is not merely routinely or clerical in nature
but requires the use of independent judgment.
5. Grossed-Up Monetary Value. The whole amount of income realized by the employee which includes
the net amount of money or net monetary value of property which has been received plus the
amount of fringe benefit tax due thereon.
6. De Minimis Benefits. 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.
 TAX BASE

Fringe benefit tax is imposed on the grossed-up monetary value of the fringe benefit furnished,
granted or paid by the employer to managerial and supervisory employees ( meaning rank and file
employees are not covered ). The employer may be an individual professional partnership or a
corporation.

1. Generally, the fringe benefit tax which shall be with held by the employer is imposed at
the following rates:

Effective January 1, 1998 – 34%

Effective January 1, 1999 – 33%
Effective January 1, 2000 – 32%

The grossed-up monetary value of the benefit shall be determined by dividing the monetary value
of the fringe benefit by the following percentages:

Effective January 1, 1998 – 66%

Effective January 1, 1999 – 67%
Effective January 1, 2000 – 68%
2. Fringe benefit received by a non-resident alien individual not engaged in trade or business in the Philippines
is subject to a fringe benefit tax of 25% based on the grossed-up monetary value of the fringe benefit. The
grossed-up monetary value is computed by dividing the monetary value of the fringe benefit by 75%.

3. A fringe benefit tax of 15% is imposed on the grossed-up monetary value of the fringe benefit of the
following individuals:

a. An alien individual employed by regional or area headquarters of multinational company or by

regional operating headquarters of a multinational company.

b. An alien individual employed by an offshore banking unit of a foreign bank established in the Philippines.

c. An alien individual employed by a foreign service contractor or by a foreign service subcontractor engaged
in petroleum operations in Philippines.

d. Any of their Filipino individual employees who are employed and occupying the same position as those
occupied or held by the alien employees.

The grossed-up monetary value is computed by dividing the monetary value of the benefit by 85%.
4. Employees in special economic zones, including Clark Special Economic Zone and Subic Special Economic and

Free Trade Zone are taxed at the normal rate ( 34%, 33%, 32% ) or at special rates ( 25% and 15% ) as the case

may be.

MONETARY VALUE

The monetary value of the fringe benefit is not always equal to the actual amount received by the employee. When
the fringe benefit is beneficial to both the employee and the employer, certain guidelines are observed to determine
the monetary value of the fringe benefit to be grossed up. Generally, these guidelines are as follows:

1. 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.
2. If the fringe benefit is granted or furnished by the employer in property other than money and ownership is
transferred to the employee, then the value of the fringe benefit shall be equal to the fair market value of the
property.

3. If the fringe benefit is granted or furnished by the employer in property other than money but ownerships not
transferred to the employee, the value of the fringe benefits is equal to the depreciation value of the property.
Fringe Benefit and Monetary Value

Fringe benefits include but are not limited to the following:

1. Housing Privilege

a. If the employer leases a residential property where the employee resides, monetary value is 50% of
the rental paid.

b. If the employer owns a residential property where the employee resides, the monetary value of the
fringe benefit is

Market value or Zonal value,*

whichever is higher Pxxx
Multiply by 5%
Annual value Pxxx
Multiply by 50%
Monetary value(annual) Pxxx

*fair market value is the value as declared in the real Property Tax Declarations Form while zonal value is determined
by the Commissioner pursuant to his authority prescribe real property values.
c. If the employer purchases a residential property where the employee resides, the monetary value of the fringe benefit is

Acquisition cost, exclusive of interest Pxxx

Multiply by 5%
Annual value Pxxx
Multiply by 50%
Monetary value(annual) Pxxx

d. If the employer purchases a residential property and transfers ownership to the employee, the monetary value of
the fringe benefit is acquisition cost or zonal value, whichever is higher.

e. If the employer purchases a residential property and transfers ownership to the employee for residential use at a
price less than the employer’s acquisition cost, the monetary value is

Fair market value or Zonal value,

whichever is higher Pxxx
Less: Cost of employee xxx
Monetary value Pxxx
2. Expense account. Expenses incurred by the employee but which are paid for or reimbursed by the employer
are taxable fringe benefits, except when the expenditures are duly receipted for and in the name of the
employer and the expenditures do not partake the nature of a personal expense attributable to the employee.

3. Motor vehicle of any

kind. 4.Household expenses.
5. Interest on loan at less than market rate.
6. Membership fee, dues and other expenses borne by the employer
7. Expenses for foreign travel.
8. Holiday and vacation expenses of the employee borne by his employer
9. Educational assistance to the employee or his dependents.
10. Life or health insurance and other non-life insurance premiums.
 Chapter 9

Gains and Losses from

Dealings in Property
GAINS AND LOSSES ON SALE OR EXCHANGE OF PROPERTY
Gains and losses may arise from disposition of real and personal property for money, in case of a sale, or for
property, in case of an exchange. As a general rule, the entire amount of gain or loss shall be recognized such
that a gain is taxable while a loss is deductible.

Gain or Loss in a Sale

Gain or loss from sale of property is the difference between the selling price of the property and its cost
computed as follows:
Selling price Pxxx
Less: Cost xxx
Gain(Loss) xxx

Gent’s commission and other selling expenses are reductions from the selling price.
Gain or Loss in an Exchange
Gain or loss from exchange of property is the difference between the fair market value of the property
received and the cost of the property given in exchange. Thus,

Fair market value of the property

received in exchange xxx
Less: Cost or basis of property
Given in exchange xxx
Gain (Loss) from the exchange xxx
For an exchange to transpire, it is not necessary that the property received is essentially different from the
property disposed of. It is sufficient that the property received has a fair market value for gain or loss to
be recognized.
CAPITAL GAINS AND LOSSES ON SALE OR EXCHANGE OF PROPERTY
Of vital importance when disposing of a property is to determine the nature of the property, i.e., a capital asset
or an ordinary asset. This is so because gains and losses from sales or exchanges of capital assets are given
preferential tax treatment that do not apply to gains or losses from sales or exchanges of ordinary assets.

Ordinary Gain vs. Ordinary

Loss Capital Gain or
Capital Loss

Ordinary Gain is the gain derived from the sale or exchange of ordinary assets. It includes all gains other than
capital gain such as those derived from the performance of services, whether personal or professional, and
those accruing from business. Ordinary loss is the excess of expenses and losses over the income of the
taxpayer excluding capital gains and capital losses; or the loss incurred from the sale or exchange of an
ordinary asset.

Capital gain is the gain derived from the sale or exchange of capital assets. Capital loss is the loss incurred
from the sale or exchange of capital assets. Net capital gain is the excess of the gains from sales or exchange of
capital assets over the losses from such sales or exchanges. Net capital loss is the excess of the losses from
sales or exchanges of capital assets over the gains from such sales of exchanges.
Definition of terms
• Capital assets- shall refer to all real properties held by a taxpayer, whether or not connected with his trade
or business, and which are not included among the real properties considered as ordinary assets under Sec.
39(A)(1) of the Code.
• Ordinary assets- shall refer to all real properties specifically excluded from the definition of capital
assets under Sec.39(A)(1) of the Code, namely:
1. Stock in trade of a taxpayer or other real property of a kind which would properly be included in
the inventory of the taxpayer if on hand at the close of the taxable year; or
2. real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade
or business; or
3. Real property used in trade or business (i.e. buildings and/or improvements) of a character which
is subject to the allowance for depreciation provided for under Sec. 34(F) of the Code; or
4. Real property used in trade or business of the taxpayer.

• Real estate dealer- shall refer to any person engaged in the business of buying and selling of exchanging
real properties on his own account as a principal and holding himself out as a full or part-time dealer in real
estate.
• Real estate developer- shall refer to any person engaged in the business of developing real properties into
subdivisions, or building houses on subdivided lots, or constructing residential or commercial units, townhouses and
other similar units for his own account and offering them for sale or lease.
• Real estate lessor- shall refer to any person engaged in the business of leasing or renting real properties on his
own account as a principal and holding himself out as lessor of real properties being rented out or offered for rent.
• Taxpayers engaged in the real estate business- shall refer collectively to real estate dealers, real estate developers,
and/or real estate lessors.

Kinds of Capital Asset as to Holding Period

Holding period is the duration for which the taxpayer held the capital asset.

1. Short-term. One which has been held by the taxpayer for 12 months or less; and
2. Long-term. One which has been held by the taxpayer for more than 12 months.
Transactions Deemed Sale or Exchange
The following are considered sales or exchanges of capital assets hence the rules on capital gains and losses
apply:
1. Retirement of bonds. Amounts received by the holder upon the retirement of bonds, debentures, notes,
or certificates or other evidences of indebtedness issued by any corporation (including those issued by the
government or political subdivision thereof) with the interest coupons or in registered form, shall be
considered as amounts received in exchange therefor.
2. Short sales of property. Gains or losses from such sales shall be considered as (short-term) gains or losses
from sales or exchanges of capital assets.
3. Failure to exercise privilege or option to buy or sell property. Gains or losses attributable to such
failure shall be considered as capital gains and losses.
4. Securities becoming worthless. If securities, which are capital assets, are ascertained to be worthless and
written off during the taxable year, the loss resulting therefrom in the case of a taxpayer other than a bank
or trust company incorporated under the laws of the Philippines, a substantial part of whose business is
the receipt of deposits, is considered a capital loss.
5. Distributions in liquidation of a corporation. In all cases where a corporation distributes all of its
properties or assets in complete liquidation or dissolution, the gain realized or loss sustained from the
transaction by the stockholder, whether individual or corporate, is taxable or deductible, as the case may
be, in the percentages recognized by the Code. Such distributions are treated, in effect, as a sale of the
stock. The gain or loss is measured by the difference between the liquidating dividend received and cost
or other basis to the taxpayer of his holding in the corporation.
6. Readjustment of interest in a general professional partnership. An example of this is when a
partner retires from the partnership.

CAPITAL GAINS TAX ON DISPOSITION OF REAL PROPERTY

Sales, exchanges or other dispositions of real property classified as capital assets, including pacto de retro
sales and other forms of conditional sale, by individuals, including estates and trusts, shall be taxed at the
rate of 6% based on the gross selling price or current fair market value as determined by the Commissioner,
whichever is higher.

Persons subject to Capital Gains Tax

1. Individuals
2. Domestic corporations

Tax Consequence
If the seller fails to utilize the proceeds of sale or disposition in full or in part within the 18-month
reglementary period, his right or exemption from the capital gains tax did not arise to the extent of the
unutilized amount, in which event, the tax due thereon shall immediately become due and demandable on
the 31st day after the date of the sale, exchange or disposition of principal residence.
As such, he shall file his capital gains tax return covering the sale, exchange or disposition of his principal residence and
pay the deficiency capital gains tax inclusive of the 25% surcharge for late payment of the tax plus 20% delinquency
interest per annum incident to such late payment computed on the basis of the basic tax assessed. The interests shall be
imposed from the 31st day after the date of the sale of principal residence until the date of payment. The date of sale shall
mean the date of notarization of the document of sale, exchange, or disposition of principal residence.

Tax Base
Valuation of the shares of stock will be based on the net capital gain realized from the sale, barter, exchange or
other disposition of shares of stock in a domestic corporation, considered as capital assets not trade through the
local stock exchange.
Capital gains tax should be based on selling price or fair market value of stock sold/traded, whichever is higher.

Allowable Deductions
Only the following costs/expenses will be allowed as deductions:
1. Acquisition cost of share of stocks sold/transferred
2. Incident selling expenses

Tax Rates
Total net capital gains realized from sale, exchange, transfer or other disposition of shares of stock not traded through the
local stock exchange shall be taxed as follows:
Capital gains Rate
Not over P100,000 5%
Any amount over P100,000 10%
Tax Due
1. Cash Sale/Foreclosure Sale
2. Installment Sale

Persons Subject to Capital Gains Tax

3. Individuals;
4. Corporations;
5. Trust, estate, trust funds, pension funds

Rules on the Deductibility of Losses

6. There is no holding period hence the entire amount of capital gains and losses are considered;
7. Net capital loss for a quarter is deductible in the same taxable year only; and
8. Capital losses when the transaction is deemed a “wash sale” are not deductible.
Wash sale is a sale or other disposition of stock or securities where substantially identical securities are
acquired or purchased within a 61-day period, beginning 30 days before the sale and ending 30 days after a
sale. But gain from wash sale is taxable.
PERSONS EXEMPT FROM PAYMENT OF CAPITAL GAINS TAX
1. Dealer in securities, regularly engaged in the buying and selling of securities.
2. An entity exempt from the payment of income tax under existing investment incentives and other
special laws.
3. An individual or non-individual exchanging real property solely for shares of stocks resulting in
corporate control.
4. An government entity or government-owned or controlled corporation selling real property.
5. If the disposition of the real property is gratuitous in nature.
6. Where the disposition is pursuant to the CARP law.

Natural persons who dispose their principal residence shall be conditionally exempt provided that the criteria
set by the Tax Code are met.
Chapter 10
Allowable
Deduction
DEDUCTION FROM GROSS INCOME
1. Itemized Deductions. The following deductions are called itemized deductions. Note hat item “k” is available to
individual taxpayers only.
a. Expenses
•
Ordinary and necessary trade, business or professional expenses.
•
Expenses allowable to private educational institutions
b. Interest
c. Taxes
d. Losses
e. Bad Debts
f. Depreciation
g. Depletion of Oil and Gas Wells and Mines
h. Charitable and Other Contributions
i. Research and Development
j. Pension Trust
k. Premium Payments on Health and/or Hospitalization Insurance
2. Optional Standard Deduction (OSD). In place of item “a” to “j” above, resident
citizens, non-resident citizens and resident aliens may be deduct from their gross
income from trade, business or profession, an optional standard deduction
equivalent to 10% of gross income. This means that in addition to the OSD, said
taxpayers may still deduct premium payment on health and/or hospitalization
insurance.
A. Business Expense
In general, all the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on or which are directly distributed attributable to the
development , management, operation and/or conduct of the trade, business or
the exercise of a profession are deductible. For an expense to be allowed, the
reasonableness of the amount being claimed is a prime consideration. Payments,
which constitute bribes, kickbacks and other similar nature , shall not be allowed as
deduction from gross income.
Compensation Payments. Compensation payments must be for personal services
actually rendered by employees under an employer-employee relationship.
Fringe Benefits. The grossed-up monetary value of fringe benefit furnished or granted by the employer to
the employee is deductible provided that the final tax has been paid.

Travel Expenses. Travel Expenses here and abroad while away from home in pursuit of a trade, business,
or profession

Deductibility of Travel Expense and Freight Charges

The amount of expense to be claimed by International Air Carriers shall be actual cost incurred for
the purchase of the plane ticket/airway bill which I the net amount of the ticket fare/airway bill after
deducting the corresponding fare/freight adjustments. If plane tickets are purchased from travel agents ,
travel expenses as claimed by the passengers shall be validated on the basis of the sales invoice/official
receipt issued by the travel agent representing the actual cost of the ticket and the reasonable margin
added by the travel agent as payment for services .

Rentals. Rentals include other payments required to be made as a condition to the continued use or
possession, for the purpose of the trade, business or profession, of property to which the taxpayer has
not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor
 Where a leasehold is acquired for a business purpose for a specified sum , he may take as a
deduction an aliquot part of such sum each year based on the number of years the lease has to run.

Taxes paid by a lessee to or for a lessor for business property are treated as additional rent and
constitute a deductible item to the lessee and taxable income to the lessor. The amount of tax paid by
the lessee is deductible by the lessor as tax expense.

Leasehold improvements by a lessee (i.e. erecting a building or making permanent improvement on

land) shall be treated as capital investment and not deductible as a business expense.

In order to return to such taxpayer his investment of capital, an annual deduction for
depreciation may be made from gross income for an amount equal to the cost of such improvement
divided by the number of years remaining of the term of lease.

If the reminder of the term of lease is greater than the probable life of the buildings erected or of the
improvements made, this deduction shall take from of an allowance for depreciation.
Entertainment, Amusement and Recreation Expenses. Expenses during the taxable year that are directly
connected or related to the operation or conduct of the trade, business, or exercise of a profession, or
that are directly related to or in furtherance of the conduct of his/its trade, business, or exercise of a
profession not to exceed such ceilings prescribed by rules and regulations.

Coverage

•
Individuals engaged in trade/ business, including estates and trusts
•
Individuals engaged in the practice of profession
•
Domestic corporations
•
Resident foreign corporation
•
General professional partnership, including its members

Definition of terms
•
Entertainment, amusement and recreation expenses – includes representation expenses and/ or
depreciation or rental expense relating to entertainment facilities, as described below:
•
Representation expenses – shall refer to expenses incurred by a taxpayer in connection
with the conduct of his trade, business or exercise of profession, in entertaining,
providing amusement and recreation to, or meeting with, a guest or guests at a dining
place, place of amusement, country club, theater, concert, play, sporting event, and
similar events or places.
•
Entertainment facilities – shall refer to (1) a yacht, vacation home or condominium; and
(2) any similar item of real or personal property used by the taxpayer primarily for the
entertainment, amusement, or recreation of guest or employees. To be considered an
entertainment facility, such yacht, vacation home or condominium, or item of real or
personal property must be owned or form part of the taxpayer’s trade, business or
profession, or rented by such taxpayer, for which the taxpayer claims a depreciation or
rental expense.
•
Guest – shall mean persons or entities with which the taxpayer ha direct business
relations, such as but not limited to, clients/customers or prospective clients/customer.
The term shall not include employees, officers, partners, directors, stockholders, or
trustees of the taxpayer.
 b. It must be
1. directly connected to the development, management and operation of the trade, business or
profession of the taxpayer; or
2. directly related to or in furtherance of the conduct of his or its trade, business or exercise of a
profession;

c. It must not be contrary to law, morals, good customs, public policy or public order;

d. It must be paid, directly or indirectly, to an official or employee of a national government, or any

local government unit, or of any government-owned or controlled corporation (GOCC), or of a foreign
government, or to a private individual, or corporation, or general professional partnership (GPP), or a
similar entity, if it constitutes a bribe, kickback or other similar payment;

e. It must be duly substantiated by adequate proof. The official receipts, or invoices, or bills or
statements of accounts should be in the name of the taxpayer claiming the deduction; and

f. The appropriate amount of withholding tax, if applicable, should have been withheld there from
and paid to the Bureau of Internal Revenue.
Ceiling on entertainment, amusement and recreation expense
There shall be allowed as deduction from gross income for entertainment, amusement
and recreation expense, as defined in these Regulations, in an amount equivalent to the
actual entertainment, amusement and recreation expense paid or incurred within the
taxable year by the taxpayer, but in no case shall such deduction exceed 0.50% of net
sales (i.e., gross sales less sales returns/allowances and sales discounts) for tax payers
engaged in sale of goods or properties; or 1.00 percent (%) of net revenue (i.e., gross
revenue less discounts) for taxpayers engaged in sale of services, including exercise of
profession and use or lease of properties.

Reporting
The taxpayer is required to use in its financial statements and income tax return the
account title ‘entertainment, amusement and recreation expense,’ or in the alternative,
B. Interest
Interest shall refer to the payment for the use of forbearance or detention of money, regardless of the name it
is called or denominated. It includes the amount paid for the borrower’s use of money during the term of the
loan, as well as for his detention of money after the due date for its repayment.

Said regulations define taxpayer as a person, whether natural or juridical, engaged in trade, business or in the
exercise of profession, except one earning compensation income arising from personal services rendered under
an employer-employee relationship.

Requisites for Deductibility

1. There must be an indebtedness;
2. There should be an interest expense paid or incurred upon such indebtedness;
3. The indebtedness must be that of the taxpayer;
4. The indebtedness must be connected with the taxpayer’s trade, business or exercise of profession:
5. The interest expense must have been paid or incurred during the taxable year;
6. The interest must have been stipulated in writing;
7. The interest must b e legally due;
8. The interest payment arrangement must not be between related taxpayers;
9. The interest must not be incurred to finance petroleum operations; and
10. In case of interest incurred to acquire property used in trade, business or exercise of profession, the same
was not treated as a capital expenditure.
C. Taxes
Taxes deductible from gross income are taxes proper only. Interests and penalties incident to tax delinquency
are not deductible from gross income. As a general rule, all taxes, national or local, paid or incurred within the
taxable year in connection with the taxpayer’s trade, business or profession are deductible from gross income.
Exceptions:
The following are taxes not deductible from gross income:
1. Philippine income tax.
2. Income taxes imposed by authority of any foreign country. But in case a taxpayer does not signify in his
return his desire to avail of the foreign tax credit, this may be deductible from gross income.
3. Estate’s and donor’s taxes
4. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.

Taxes when refunded or credited shall be included as part of the gross income of the year of receipt to the
extent of the income tax benefit of said deduction.
D. Losses
Losses of property arising from fire, storms, shipwreck, other casualties, robbery, theft or embezzlement; and
other losses, if incurred in connection with trade, business, or profession actually sustained during the taxable
year and not compensated for by insurance or other forms of indemnity, shall be allowed as deductions.

Definition of Terms
Nominal Value of Outstanding Issued Shares. It refers to the par value (in case of par value shares of stock) or
stated value (in case of no par value shares of stock) of shares of stock issued to the stockholders of the
corporation.
Substantial Change in Ownership of the Business or Enterprise. It refers to a change in the ownership of the
business or enterprise as a result of or arising from its merger or consolidation or combination with another
person.
By or On Behalf of the Same Person. It refers to the maintenance of ownership despite change as when: 1) No
actual change in ownership is involved in case the transfer involves change from direct ownership to indirect
ownership, or vice versa; 2) No actual change in ownership is involved as in the case of merger of the
subsidiary into the parent company.
E. Bad Debts
Bad debts shall refer to those debts resulting from the worthlessness or uncollectibility, in whole or in part, of
amounts due to the taxpayer by others, arising from money lent or from uncollectible amounts of income from
goods sold or services rendered. Before a taxpayer may charge off and deduct a debt, he must ascertain and be
able to demonstrate with reasonable degree of certainty the uncollectibility of the debt. The determination of
worthlessness in a given case must depend upon the particular facts and he circumstances of the case.

F. Depreciation
Property, plant and equipment are normally usable for a number of years. A point will be reached when such
property may not be useful anymore in the business due to exhaustion, wear and tear. The difference between
the cost of the property and its value when worn out or retired (salvage value) is the amount which shall be
subject to depreciation considering the estimated useful life of the property. Depreciation is that portion of the
cost of the property allocated or charged as expense for a specific period.

G. Depletion
Wasting assets or natural resources usually include coal, oil, ore, precious metals like gold, silver and timber.
Wasting assets are physically consumable and irreplaceable. Only nature may be able to replace the same. The
allocation of the cost or other basis of a wasting asset over the period the natural resource is extracted or
produced is called depletion. Depletion allowance enables the taxpayer to recover that capital interest-free
from income tax, at its cost or some other basis.
Definition of Terms
Intangible costs in petroleum operations refers to any cost incurred in petroleum operations which in itself has
no salvage value and which is incidental to and necessary for the drilling of wells and preparation of dwells for
the production of petroleum. Said costs shall pertain to the acquisition or improvement of property of a
character subject to the allowance for depreciation except that the allowances for depreciation on such
property shall be deductible.

Net income from mining operations means gross income from operations less allowable deductions.
Allowable deductions which are necessary or related to mining operations shall include mining, milling and
marketing expenses, and depreciation of properties.

Exploration expenditures means expenditures paid or incurred for the purpose of ascertaining the existence,
location, extent, or quality of any deposit of ore or other mineral, and paid or incurred before the beginning
of the development stage of the mine or deposit.

Development expenditures means expenditures paid or incurred during the development stage of the mine
or other natural deposits. The development stage of a mine or other natural deposit shall begin at the time
when deposits of ore or other minerals are shown to exist in sufficient commercial quantity and quality and
shall end upon commencement of actual commercial extraction.
H. Charitable and Other Contributions

Definition of Terms
1. Non-stock, non-profit corporation or organization shall refer to a corporation or
association/organization created or organized under Philippine laws exclusively for one or more of the
following purposes:
a. religious
b. charitable
c. scientific
d. athletic
e. cultural
f. rehabilitation of veterans
g. social welfare
2. Non-government organization (NGO) shall refer to a non-stock, non-profit domestic corporation or
organization organized and operated exclusively for scientific, research, educational, character-building
and youth and sports development, health, social welfare, cultural or charitable purposes, or a
combination thereof, no part of the net income of which inures to the benefit of any private individual.
3. Accrediting entity shall refer to a non-stock, non-profit organization composed of NGO networks, duly
designated by the Secretary of Finance to establish and operationalize a system of accreditation to
determine the qualification of non-stock, non-profit corporations or organization and NGOs for qualification
as qualified done institutions.
I. Research and Development
Research and development costs are cost of materials, equipment, facilities, personnel, purchased
intangibles, contract services and a reasonable allocation of indirect costs that are specifically related to
research and development activities and that have no alternative future uses. Research activities are those
undertaken to discover new knowledge that will be useful in developing new product service or process.
Development activities involve the application of research findings to develop a product, service or process.

J. Pension Trusts
An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to
his employees shall be allowed as a deduction (in addition to the contributions to such trust during the
taxable year to cover the pension liability accruing during the year which is allowed as a deduction) a
reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions,
but only if such amount:
1. Has not been allowed as a deduction; and
2. Is apportioned in equal parts over a period of ten(10) consecutive years beginning with the year in
which the transfer of payment is made.
ITEMS NOT DEDUCTIBLE

1. Personal, living or family expenses.

2. Any amount paid out for new buildings or for permanent improvements, or betterment made to
increase the value of any property or estate, except that intangible drilling and development cost
incurred in petroleum operations are deductible. This is a capital expenditure.

3. Any amount expended in restoring property or in making good the exhaustion thereof for which
an allowance is or has been made. This is a capital expenditure.

4. Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person
financially interested in any trade or business carried on by the taxpayer, individual or corporate, when
the taxpayer is directly or indirectly a beneficiary under such policy.

5. Losses from sales or exchanges of property between related taxpayers.

 Chapter 11
Withholding Taxes
TYPES OF WITHHOLDING TAXES
1. Withholding tax on Compensation is the tax withheld from individuals receiving purely
compensation income.
2. Expanded Withholding Tax is a kind of withholding tax which is prescribed only for certain payors and
is creditable against the income tax of the payee for the taxable year.
3. Final Withholding Tax is a kind of withholding tax which is prescribed only for certain payors and is
creditable against the income of the payee for the taxable year. Income tax withheld constitutes the full
and final payment of the income tax due from the payee on the said income.
4. Withholding Tax on Government Money Payments is the withholding tax withheld by government
bureaus, offices and instrumentalities, including government owned or controlled corporations and
local government units, before making any payments to private individuals, corporations, partnerships
and/or associations.

Withholding of Tax at Source

1. Final Withholding Tax. Under the final withholding tax system the amount of income tax withheld by the
withholding agent is constituted as a full and final payment of the income tax due from the payee on the said
income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case
of his failure to withhold the tax or in case of underwithholding, the deficiency tax shall be collected from the
payor/withholding agent. The payee is not required to file an income tax return for the particular income.
2. Creditable Withholding Tax. Under the creditable withholding tax system, taxes
withheld on certain income payments are intended to equal or at least
approximate the tax due of the payee on said income. The income recipient is still
required to file an income tax to report the income and/or pay the difference
between the tax withheld and the tax due on the income. Taxes withheld on
income payments covered by the expanded withholding tax and compensation
income are creditable in nature.

Persons Required to Deduct and Withhold Creditable Tax on income Payments

a. In general, any juridical person, whether or not engaged in trade or business.
b. An individual, with respect to payments made in connection with his trade
or business.
c. All government offices including government-owned or controlled
corporations, as well as provincial, city and municipal governments, and
barangays.
Time of Withholding
The obligation of the payor to deduct and withhold the tax arises at the time an
income is [aid or payable, whichever comes first. The term “payable” refers to the
date obligation becomes due, demandable or legally enforceable.

Exemption From Withholding

The withholding of creditable withholding tax prescribed shall not apply to income
payments made to the following:
a. National government and its instrumentalities, including provincial, city
or municipal governments an barangays excepts government-owned and
controlled corporations.
b. Persons enjoying exemption from payment of income taxes pursuant to
the provision of any law, general or special.
Withholding Tax on Compensation
Compensation means any remuneration received for services performed by an
employee from his employer under an employee-employer relationship.

The withholding of tax on compensation income is a method of collecting the

income tax at source upon receipt of the income. It applies to all employed
individuals whether citizens or aliens, deriving income from compensation
for services rendered in the Philippines. The employer is constituted as the
withholding agent.

Kinds of compensation
1. Regular Compensation – includes basic salary, fixed allowances
for representation, transformation and others paid to an
employee.
Supplemental Compensation – includes payments to an employee in addition
to the regular compensation such as but not limited to the following:
a. Overtime Pay
b. Fees, including director’s fees
c. Commission
d. Profit Sharing
e. Monetized Vacation and Sick Leave
f. Fringe benefit received by rank & file employee
g. Hazard Pay
h. Taxable 13th month pay and other benefits
i. Other remunerations received from an employee-
employer relationship
Items Exempt from Withholding Tax on Compensation
1. Remuneration as an incident of employment
2. Retirement benefits received under RA 7641
3. Any amount received by an official or employee or by his heirs from the employer
due to death, sickness or other physical disability or for any cause beyond the
control of the said official or employee such as retrenchment, redundancy or
cessation of business.
4. Social security benefits, retirement gratuities, pensions and other similar benefits.
5. Payment of benefits due or to become due to any person residing in the
Philippines under the law of the US administered Veterans Administration.
6. Payment of benefits made under the SSS Act of 1954, as amended
7. Benefits received from the GSIS Act of 1937, as amended, and the retirement
gratuity received by the government employee.
8. Remuneration paid for agricultural labor.
9. Remuneration for domestic services
10. Remuneration for casual labor not in the course of an employer’s trade
or business.
11. Compensation for services by citizen or resident of the Philippines for
foreign government or an international organization.
12. Payments for damages
13. Proceeds of Life Insurance
14. Amount received by the insured as a return of premium
15. Compensation for injuries or sickness
16. Income exempt under Treaty
17. Thirteen (13th) month pay and other benefits (not to exceed P30,000)
 Chapter 12
Foreign Tax
Credit
TAX DEDUCTION VERSUS TAX CREDIT

Tax deduction is a deduction from gross income. Tax credit on the other hand is a deduction from Philippine income
tax itself. While there are numerous taxes that may be deducted from gross income, there is only this foreign
income tax that may be claimed against Philippine income tax.

TAXPAYERS ENTITLED TO TAX CREDIT

1. Resident citizens;
2. Domestic corporations;
3. Members of general professional partnerships; and
4. Beneficiaries of estate and trusts.

The basis of foreign tax credits against Philippine income tax in case of a resident Filipino citizen and a domestic
corporation shall be the amount of any income tax paid or incurred during a taxable year to any foreign country. In
the case of any individual who is a member of a general professional partnership or a beneficiary of an estate or
trust, the basis shall be his proportionate share of any such tax of the partnership, estate or trust paid or incurred
during the taxable year to a foreign country if his distributive share of the income of such partnership, estate or
trust is reported for Philippine income taxation.
TAXPAYERS NOT ENTITLED TO TAX CREDIT

1. Non-resident citizens;
2. Alien individuals, whether resident or non-resident; and
3. Foreign corporations, whether resident or non-resident
Note that the taxpayers not entitled to tax credit are neither subject to Philippine income tax on income
derived from sources outside the Philippines.

LIMITATIONS ON CREDIT FOR FOREIGN TAXES

The amount of tax credit shall be subject to the following limitations:
4. For taxes paid to one foreign country. The amount of the credit shall not exceed the same proportion of
the tax against which such credit is taken, which the tax payer’s taxable income from sources within such
country taxable under the Tax Code bears to his entire taxable income for the same taxable year.
5. For taxes paid to two or more foreign countries. The total amount of the credit shall not exceed the
same proportion of the tax against which such credit is taken, which the taxpayer’s taxable income from
sources outside the Philippines taxable under the Tax Code bears to his entire taxable income for the
same taxable year.
YEAR OF CREDIT FOR FOREIGN TAXES

At the option of the taxpayer and irrespective of the method of accounting

employed in keeping his books, the law may allow him to claim tax credit in the
year in which the taxes for the foreign country accrued, provided that such
election must be followed in returns for all subsequent years. This means that no
portion of any such tax shall be allowed a deduction from gross income.
Chapter 13

Penalties
Surcharge and Interest

1. A surcharge of 25% of the tax due is imposed in the following cases:

a. Failure to file any return and pay the amount of tax or installment due on
or before the due date.

b. Unless otherwise authorized by the Commissioner, filing a return with a

person or office other than those with whom it is required to be filed.

c. Failure to pay the full or part of the amount of tax shown on the return, or
the full amount of the tax due for which no return is required to be filed on or
before the due date.

d. Failure to pay the deficiency tax within the time prescribed for its payment in
the notice of assessment.
2. A surcharge of 50% of the tax or of the deficiency tax, in case any payment has been made on the
basis of such return before the discovery of the falsity or fraud, for each of the following violations:

a. Willful neglect to file the return within the period prescribed by the Tax Code or by rules and
regulations; or
b. In case a false or fraudulent return is willfully made.

3. Interest for late payment is computed at 20% per annum from the date the payment is due up to the
date of full payment based on the basic tax.

Criminal Penalties
The fines to be imposed for any violation of the Code shall no be lower than P30,000 or twice the
amount of taxes, interest, and surcharge due from the taxpayer, whichever is higher.
Any person convicted of a crime penalized by the Code shall be liable not only for the payment of the tax but for
the penalties imposed as well. Any person who willfully aids or abets in the commission of such crime or who
causes the commission of any offense by another, shall be equally liable as the principal.

If the other offender is not a citizen of the Philippines, he shall be deported immediately after serving the sentence
without further proceedings for deportation. If he is a public officer or employee, the maximum penalty prescribed
for the offense shall be imposed and, in addition, he shall be dismissed from public service and shall be perpetually
disqualified from holding any public office. He is likewise disqualified to vote and participate in any election.

If the offender is a Certified Public Account (CPA), his certificate as a CPA shall, upon conviction, be automatically
revoked or cancelled.

In the case of associations, partnerships or corporations, the penalty shall be imposed on the partner, president,
general manager, branch manager, treasurer, officer-in-charge, and employees responsible for the violation.

Any person who willfully attempts to evade tax under the Code shall, upon conviction and in addition to other
penalties under the law, be fined for not less than P30,000 but not more than P100,000 and shall suffer
imprisonment of not less than 2 years but not more than 4 years. The conviction or acquittal obtained shall not be
a bar to the filing of a civil suit for the collection of taxes.
SUGGESTED COMPROMISE PENALTY

All criminal violations may be compromised except:

1. those already filed in court; or

2. those involving fraud.

This means that the taxpayer’s criminal liability arising from his violation of the pertinent provision
of the Code shall be settled extra-judicially instead of the BIR instituting a criminal action, in
Court, against the taxpayer . A compromise in extra –judicial settlement of the taxpayer’s
criminal liability for his violation is consensual in character, hence, may not be imposed on the
taxpayer without his consent. The BIR may only suggest settlement of the taxpayer’s liability
through a compromise.
Chapter 14
Returns and
Payment of
Tax
 Under the pay as you file system, the total amount of income tax due shall be paid at the time the return
is filed. Hence, the date prescribed for the filing of the return is the date prescribed for the payment of
the tax. This rule does not, however, apply in the following cases:

1. Tax is without at source.

2. Tax is without on wages.
3. Tax period is terminated.
4. Tax corporation is contemplating dissolution, liquidation or organization.
5. There is deficiency assessment.

INCOME TAX RETURN

Income tax return is a sworn statement or declaration in which the taxpayer discloses the nature and
extent of his tax liability by formally making a report of his income and allowable deductions for the
taxable year in the prescribed form.
Individuals Returns

Generally , the following individuals are required to file an income tax return:

1. Every Filipino citizen residing outside the Philippines.

2. Every Filipino citizen residing outside the Philippines, on his income from sources within the Philippines.

3. Every alien residing in the Philippines on income derived from sources within the Philippines.

4. Every non-resident alien engaged in trade or business or in the exercise of profession in the Philippines.

Individual Exempt from Filing Income Tax Return

1. An individual whose gross income does not exceed his total personal and additional exemptions for the
dependents, except a citizen of the Philippines and an alien individual engaged in business or practice
of profession in the Philippines.
2. An individual with respect to pure compensation income derived from sources within the Philippines,
which does not exceed an aggregate amount of P60,000 for the calendar year and the income tax on
which has been withheld correctly by the employer (tax withheld equals tax due) shall no longer file an
income tax return required under the Code. The following individuals, however, are still required to file
the income tax return:

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

b. Individuals whose purely compensation income for the taxable year exceeds P60,000.

c. Individuals receiving a combination of compensation and business income (mixed income). This includes a
married individual receiving purely compensation income whose spouse derives income from business. In case of
married individuals who are still required to file returns, only one return for the taxable year shall be filed by
either spouse to cover the income of both spouses.

d. Employees whose total compensation income, regardless of the amount, whether from a single or several
employers during the calendar year, the income tax of which has not the been withheld correctly, that is, that
total withholding tax does not equal the total tax due on the total compensation income for the taxable year.
3. An individual whose sole income has been subjected to final withholding tax.

4. An individual who is exempt from income tax.

Substituted Filing of Individual ITR

`Substituted Filing’ is when the employer’s annual return (BIR form 1604CF) may be considered as the
“substitute” Income Tax Return (ITR) of employee in as much as the information provided in his income tax
return (BIR Form 1700) would exactly be the same information contained in the employer’s annual return (BIR
Form No. 1604-CF).

Substitute filing is different from `Non-Filing.’ Under substitute filing , an individual taxpayer although required
under the law to his income tax return, will no longer have to personally file his own income tax return but
instead the employer’s annual information return filed will be considered as the `substitute.’

Non-filing is applicable to certain types of individual taxpayers who are not required under the law to file a
income tax return.
Where to File

The return shall be files with an Authorized Agent Bank (AAB), Revenue District Officer, Collection Agent or
duly authorized Treasurer of the city or municipality in which such person has his legal residence or
principal place of business in the Philippines, or if there be no legal residence or place of business in the
Philippines, with the Office of the Commissioner.

However for individuals earning purely compensation income without cash or check payment, BIR Revenue
Memorandum Order NO. 17-99 provides that all income tax returns (BIR Form 1700) shall be filed
directly with the Revenue District Officer (RDO) where the taxpayer is registered. But if the individual
earning purely compensation income files a tax return with a tax due and payable, the return shall be
filed with the AAB under the jurisdiction of the RDO where the taxpayer is required.
Corporation Returns
Every corporation subject to the tax except foreign corporation not engaged in the trade or business in
the Philippines shall file a true and accurate quarterly income tax return and final or adjustment
returns. The return shall be filed by the president , vice-president, or other principal officer. The
attachments shall include, among others, the Certificate of the Independent CPA in case the gross sale,
earnings, receipts or output of the corporation exceed P150,000.

A corporation may employ either calendar year or fiscal year as basis for filing its annual income tax
return. This basis, however cannot be changed without prior approval from the Commissioner.

Returns of General Professional Partnerships

Every general professional partnership shall file a return of its income except income exempted by law,
showing the items of gross income and of deductions allowed; and the names, TIN, addresses and
shares of each of the partners. General professional partnerships as such are not subject to income
tax. It is the partners who are liable for income tax in their separate and individual capacities. The
partner shall report as gross income his distributive share, actually and constructively received from
the net income of the partnership.
MODE OF PAYMENT

The Electronic Filing and Payment System (EFPS) is an alternative mode of filing returns and
payment of taxes which deviates from the conventional manual process of encoding paperbound
tax returns filed which is highly susceptible to human errors and intervention. The system allows
the taxpayers to directly encode, submit their tax returns and pay their taxes due online over the
internet through the BIR website.

Definition of terms:
Electronic Filing and Payment System ( EFPS or system)- refers to the system developed and
maintained by the BIR for electronically filing tax returns, including attachments, if any, and
paying taxes due thereon, specifically through internet.
Authorized Agent Bank (AAB) – refers to any bank as certified by the Bangko Sentral ng Pilipinas
(BSP) which has satisfied the criteria on accreditation and is actually accredited to collect the
internal revenue taxes.
EFPS AAB – refers to a BIR authorized agent bank (AAB) that has passed the accreditation criteria for EFPS AAB such as
being an internet- ready bank, indorsed by the Bureau of Treasury (BIR) for EFPS accreditation, certified by the
information Systems Group of the BIR that the applicable and compatible with the EFPS of the BIR.

e- Filling – means the process of electronically filling returns including attachments if any, specifically through the internet.

e- Payment – means the process of electronically paying a tax liability through the internet banking facilities of AABs.

Large Taxpayer – refers to a taxpayer who has been classified and duly notified by the Commissioner of Internal Revenue
(CIR) for having satisfied any or a combination of set criteria as prescribed in Revenue Regulations No. 1- 98 or any
amendatory regulations. This include all large taxpayer s under the jurisdiction of the Large Taxpayers by the Large
Taxpayer Service ( LTS) and Large Taxpayers District Office/s ( LTDO).

Non- Large Taxpayer- refers to a taxpayer whose tax payments and financial conditions do not satisfy the set criteria as
per Revenue Regulation No. 1- 98 or any amendatory regulations and/ or have not been classified and notified as a Large
Taxpayer by the CIR.

Due Date – the date prescribed by law regulations within which to file a particular return and pay the tax due thereon.
Coverage

1. Large Taxpayers
a. Beginning the calendar year 2001 and all fiscal year as well as calendar years thereafter. Large
Taxpayers shall e- file their final adjusted income tax returns for the said calendar or fiscal years and
e- pay the taxes thereon through the EFPS on or before the 15th day of the fourth month following
the close of the taxable year. Nonetheless, e-payment shall be optional for the tax returns that will
be filed until July 31,2002. Thus, until July31.2002, if a taxpayer does not opt to pay electrically,
payment shall be made manually.
b. beginning July 1,2002, Large Taxpayers shall e-file all the tax returns that can be filed
electronically through the EFPS but e-payment shall nonetheless remain optional until July 31,2002.
However, unless otherwise notified by the Commissioner of Internal Revenue (CIR), for all returns
that will be filed starting August 1,2002, e-payment of the taxes due thereon thru EFPS shall become
mandatory.
2. Non-Large Taxpayers. Beginning July 1, 2002, two hundred (200) Non-Large Taxpayers identified by
the BIR shall have the option to avail of the EFPS in filing their returns which taxes due thereon may
be paid manually or via EFPS.
LARGE TAXPAYERS CLASSIFIED
In line with the Bureau of Internal Revenue’s drive to increase
collections , it has been continuously expanding the selection of large
taxpayers. It shall continue doing so until such time that 85% of its total
collections shall have been captured and monitored through the
database of large taxpayers.

A large taxpayer is an individual or corporate taxpayer who has been

classified as such in accordance with the criteria set forth by the BIR,
and has been duly notified by the Commissioner. He/ it shall continue
to be such until otherwise notified by the Commissioner.
 Criteria
The taxpayer must satisfy any or a combination of the following for him/it to be considered a large taxpayer.
1. As to tax payment:
a. Value-added tax (VAT). Any taxpayer with net VAT paid or payable of at least P100,000 per quarter.
b. Excise tax. Any taxpayer with annual excise tax paid or payable of ate least P1,000,000.
c. Withholding tax. Any taxpayer with annual withholding tax payment/ remittance for all kinds of withholding
taxes (i.e. On compensation, expended, final and government money payment) of at least P1,000,000. for
taxpayers, business establishments and government officers with branches/ units, the basis is the total annual taxes
withheld by the Head Office and all the branches/ units.
d. Percentage taxes. Any taxpayer with percentage taxes of at least P100,000 per quarter.
e. Documentary Stamp Taxes. Any taxpayer with aggregate annual documentary stamp taxes of at least P1,000,000.

2. As to financial condition and results of operations:

a. Gross Sales/Receipts. Any taxpayer with total annual gross sales/ receipts of P1,000,000,000; and
b. Net worth. Any taxpayer with a total net worth at the close of each calendar or fiscal year of at least P300,000,000.
 Chapter 15
Accounting Methods and
Periods
ACCOUNTING METHODS RECOGNIZED BY THE TAX CODE

1. Principal methods
a. Cash basis
b. Accrual basis
c. Hybrid method

2. Crop-year basis

3. Deferred payment sales

a. Installment basis
b. Deferred payment basis

4. Percentage of completion basis (long-term contracts)

5. Leasehold improvements
a. Income over the term of the lease basis
b. Income in the year of completion basis

6. In general, any method of accounting that correctly reflects the income of the taxpayer for each taxable year.
Principal Methods

Cash basis is the method under which income,, profits and gains earned by the taxpayer are not included in
gross income until received and expenses are not deducted until paid within the taxable year.

Accrual basis is the method under which income, gains and profits are included in gross income when earned,
whether received or not, and expenses are not allowed as deductions when incurred, although not yet paid. It
is the right to receive and not the actual receipt that determines the inclusion of the amount in gross income.
Examples are interest or rent income earned but not yet received; rent expenses accrued but not yet paid;
and wages or salaries due but remaining unpaid.

Hybrid method is the method of accounting under which the taxpayer reports his income and expenses by
employing the combination of cash and accrual methods. Its use is impliedly authorized by the provision of
the Tax Code which gives the taxpayer the option to adopt such form or system of accounting as in his
judgment is best suited for his purpose subject to the limitation that it clearly reflects his true income.

Crop Year Basis

The crop year basis is the method under which expenses in the production of crops are deducted in the year
in which the gross income from the crop has been realized. It is applicable only to farmers engaged in
producing crops which may take more than a year from the time of planting to the process of gathering and
disposal.
Installment and Deferred Payment Sales

1. Installment method of reporting income

under the installment method of reporting income, the amount of income which may be reported by the
taxpayer during a taxable year from the sale on the installment plan is only that proportion of the installment
payments actually received every year which the gross profit realized or to be realized when payment is
completed bears to the contract price. This method is allowed when the selling price is to be paid over a
period of more than one (1) year. As formula,

Gross profit x Installment payment = Income to be

reported Contract price actually received for
the year

Note: If the sale is made by an individual and the property sold is a personal property classified as a capital asset, the
income to be reported may only be 50 % depending on the holding period.

The following may elect the installment basis of reporting income:

2. Dealers in personal property. Those who regularly sell or otherwise dispose of personal property on the
installment plan.

3. Casual seller of personal property. Those who make a casual sale or other casual disposition of personal
property on the installment plan provided the following requisites are present:
 a. The sale or disposition is casual.

b. The personal property sold is of a kind which would not properly be included in the inventory.

c. The selling price exceeds P1,000.00.

d. The initial payments do not exceed 25% of the selling price.

3. Sellers of real property. Those who make a sale or disposition of real property on installment if the initial
payments do not exceed 25% of the selling price.

4. Individual seller of real property considered as capital asset. If otherwise qualified to report the gain
therefrom under the installment method, he may pay the capital gains in installment.

Definition of Terms
Initial payments means the payments received in cash or property excluding evidences of indebtedness like
promissory notes issued by the purchaser during the taxable year in which the sale or other disposition is
made. It includes the down payment plus all other payments received by the seller during the taxable year
of sale. It includes also the excess of the mortgage assumed over the cost or other basis of the property sold.
Selling price is the total amount or price of the sale including the cash or property received and including all
the notes of the buyer or mortgages assumed by him.

Contract price is the amount which the purchaser contracts to pay the seller in cash. It includes the excess of
the mortgage assumed over the cost or other basis of the property sold.

Mortgage, whether the property is merely taken subject to the mortgage, or the mortgage is assumed by the
purchaser, shall be included as part of the selling price. However, the amount of the mortgage to the extent
that it does not exceed the basis to the vendor of the property sold, shall not be considered as a part of the
initial payments or of the contract price. Where such mortgage exceeds the basis to the vendor, such excess
shall be considered as part of the initial payments for purposes of the 25% requirement.

2. Deferred Sales method of reporting income

The deferred sales method of reporting income shall be used although the payments of the selling price
extends over one (1) where the payments received by the seller in cash or property other than evidences of
indebtedness of the purchaser during the taxable year in which the sale is made exceed 25% of the selling
price. Ina deferred payment plan, the taxable gain or income returnable during the year of the sale is the
difference between the selling or contract price and the cost of the property. A deferred sale is considered
equivalent to cash. If the initial payments received by the seller in the year of sale do not exceed 25%, the sale
is on the installment plan.
Long-Term Contracts

Long-term contracts means building, installation or construction contracts covering a period in excess of one
(1) year. Persons whose gross income is derived in whole or in part from such contracts shall report such
income upon the basis of percentage of completion. The return should be accompanied by the certificate of
architects or engineers showing the percentage of completion during the taxable year of the entire work
performed under contract.

Leasehold Improvements

Improvements on the property or leasehold improvements made by the lessee where both parties agree that
these shall belong to the lessor at the end of the term must be recognized by the lessor using either of the
two methods—income over the term of lease basis and income in the year of completion basis.
ACCOUNTING PERIODS

Accounting period is the taxable year. It is a fixed period of time, consisting of twelve (12) months, upon the
basis of which the taxable income is computed and the income tax imposed. Taxable year means the calendar
year, of the fiscal year ending during such calendar year, upon the basis of which the net income is computed.
Under the Tax Code, there are two kinds of accounting period:

1. Calendar year. A period of 12 months beginning January 1 and ending December 31, of every year; and

2. Fiscal year. A period of 12 months ending on the last day of any month other than December.

ALLOCATION OF GROSS INCOME

The Commissioner of Internal Revenue is authorized to distribute, apportion, or allocate gross income
between or among organizations, trades or business if je sees it necessary to prevent tax evasion or to clearly
reflect the income of such organizations controlled directly or indirectly by same interests. The purpose is to
place a controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining, according to the
standard of an uncontrolled taxpayer, the true taxable income from the property and business of a controlled
taxpayer.
Chapter 16
Remedies
PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION

Internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the
filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be
begun after expiration of such period. However, in case of a false or fraudulent return with intent to evade
tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such
tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud
or omission.

Any internal revenue tax, which has been assessed within the period prescribed shall be collected within
three (3) years from date of assessment. However, tax fraud cases may be collected by distraint or levy or by
the court proceeding within five (5) years from assessment of the tax or from the last waiver.

Validity of a Waiver of the Statute of Limitation

1. A waiver of the statute of limitations under the Tax Code must conform strictly with the provisions of
Revenue Memorandum Order (RMO) No. 20-90 in order to be valid and binding:

1.1 The waiver must be specify a definite agreed date between the BIR and the taxpayer within which
the former may assess and collect revenue taxes
 2.2 The waiver must be accepted by the Commissioner of Internal Revenue or his duly authorized
representative, and the date of acceptance must be indicated; and

1.3 The taxpayer must be furnished a copy of the waiver accepted by the BIR.

2. A waiver of the statute of limitation under the Tax Code, to a certain extent, as a derogation of the
taxpayer’s right to security against prolonged and unscrupulous investigation and must therefore be
carefully and strictly construed.

3. A waiver of the statute of limitations is not a waiver of the right to invoke the defense of prescription. It is
an agreement between the taxpayer and the BIR that the period to issue an assessment and collect the taxes
due is extended to a date certain.

4. A waiver of the statute of limitations is not a unilateral act by the taxpayer or the BIR, but a bilateral
agreement between two parties.

AUTHORITY TO COMPROMISE, ABATE AND REFUND OR CREDIT TAXES

The Commissioner of Internal Revenue has the authority to compromise, abate, refund or credit taxes.
Authority to Compromise Taxes
The Commissioner is authorized to compromise the payment of internal revenue tax liabilities of certain
taxpayers with outstanding receivable accounts and disputed assessments with the Bureau of Internal
Revenue and the Courts.

Cases Which May Be Compromised

1. Delinquent accounts;

2. Cases under administrative protest after issuance of the Final Assessment Notice to the taxpayer which are
still pending in the Regional Offices, Revenue District Offices, Legal Service, Large Taxpayer Service (LTS),
Collection Service, Enforcement Service and other offices in the National Office;

3. Civil tax cases being disputed before the courts;

4. Collection cases filed in courts;

5. Criminal violations, other than those already filed in court or those involving criminal tax fraud.
Exceptions
1. Withholding tax cases, unless the applicant-taxpayer invokes provisions of law that cast doubt on the
taxpayer’s obligation to withhold;

2. Criminal tax fraud cases confirmed as such by the Commissioner of Internal Revenue of his duly
authorized representative;

3. Criminal violations already filed in court;

4. Delinquent accounts with duly approved schedule of installment payments;

5. Cases where final reports of reinvestigation or reconsideration have been issued resulting to
reduction in the original assessment and the taxpayer is agreeable to such decision by signing the
required agreement form for the purpose. On the other hand, other protested cases shall be handled
by the Regional Evaluation Board (REB) or the National Evaluation Board (NEB) on a case to case basis;

6. Cases which become final and executory after final judgment of a court, where compromise
is requested on the ground of doubtful validity of the assessment; and

7. Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer.
REMEDIES OF THE GOVERNMENT FOR THE COLLECTION OF DELINQUENT TAXES

Once an assessment becomes final and demandable, the Government may employ any, or all, of the following
remedies for the collection of delinquent accounts:

1. Distraint of personal property. It involves the seizure by the Government of personal property, tangible
or intangible, to enforce the payment of taxes, followed by the public sale of such property, if the
taxpayer fails to pay the taxes voluntarily.

2. Levy of real property belonging to the taxpayer. It refers to the same act of seizure, but in this case, it is
seizure of real property, interest in or rights to such property in order to enforce the payment of taxes.
As in the distraint of personal property, the real property under levy shall be sold in a public sale, if the
taxes involved are not voluntarily paid following such levy.

3. Civil Action

4. Criminal Action

Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged
with the collection of such taxes provided, however, that the remedies of distraint and levy shall not be
availed of where the amount of tax involved is not more the one hundred pesos (P100).
Constructive Distraint of Property

Distraint is the seizure by the government of personal property, tangible or intangible, to enforce the
payment of taxes, to be followed by its public sale, if the taxes are not voluntarily paid. In actual distraint, the
government takes possession of the personal property while in constructive distraint, the owner is merely
prohibited from disposing of his properties.

1. Distraint Of Personal Property. Upon failure of the person owing any delinquent tax or delinquent
revenue to pay the same at the time required, the Commissioner or his duly authorized representative,
if the amount involved is in excess of one million pesos (1,000,000), or the Revenue District Officer, if the
amount involved is one million pesos (1,000,000) or less, shall seize and distrain any goods chattels, or
effects, and the personal property, including stocks and other securities, debts, credits, bank accounts,
and interest in and rights to personal property of such person in sufficient quantity to satisfy the tax,
or charge, together with any increment thereto incident to delinquency, and the expenses of the
distraint and the cost of the subsequent sale.
2. Levy on Real Property. After the expiration of the time required to pay the delinquent tax or delinquent
revenue, real property may be levied upon, before, simultaneously or after the distraint of personal
property belonging to the delinquent. To this end, any internal revenue officer designated by the
Commissioner or his duly authorized representative shall prepare a duly authenticated certificate
showing the name of the taxpayer and the amounts of the tax and penalty due from him. Said
certificate shall operate with the force of a legal execution throughout the Philippines.
REMEDIES OF THE TAXPAYER

1. Letter Noticed
The term Letter Notice was first introduced in Revenue Regulations No. 12-2002. The regulations were issued to give
opportunity to erring taxpayers to settle their tax liabilities by availing of the voluntary assessment and abatement
program (VAAP) of the BIR. Along this line, the BIR issued Revenue Memorandum Order (RMO) 42-03 prescribing the
additional guidelines governing the rules on assessment of national internal revenue taxes covered by a Letter Noticed
issued under RELIEF system.
2. Informal Conference
The assessment process starts with the tax investigation by a revenue officer, who, after auditing the taxpayer’s records
makes a report of his investigation. The taxpayer is given a preliminary report of his findings. If the taxpayer does not
agree with the revenue officer’s findings, he will be informed in writing, of the discrepancies in the taxpayer’s payment
of his taxes for the purpose of an ‘’ informal conference.’’ This is to give the taxpayer an opportunity to air his side. If the
taxpayer does not respond within 15 days from the date of receipt of notice for informal conference, he will be
considered in default and his case will be endorsed to the assessment division or to the Commissioner or his
representative for appropriate review and issuance of a deficiency tax assessment.
3. Preliminary Assessment Notice
If after review and evaluation it is found that there is sufficient basis to assess the taxpayer for deficiency tax, a
Preliminary Assessment Notice (PAN) will be issued at least by registered mail, which will contain in detail, the facts and
the law on which the proposed assessment is based.
if the taxpayer does not respond within 15 days, he will be considered in default and his time, a formal letter of demand
and assessment will be issued to him requiring to him requiring him to pay the deficiency tax liability and applicable
penalties.
 The notice for informal conference and the PAN however, are not required and a formal assessment notice and
automatically cases issued in the following cases:

1. When the finding for any deficiency tax is the result of mathematical error in the computation of the
tax appearing on the face of the tax return filed by the taxpayer; or
2. When a discrepancy has been determined between the tax withheld and the amount actually remitted by
the withholding agent; or
3. When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a
taxable period was determined to have carried over and automatically applied the same amount claimed against
the
estimated tax liabilities for the taxable quarter or quarter or quarters of the succeeding taxable year; or
4. When the excess tax due on excisable articles has not been paid; or
5. When an article locally purchased or imported by an exempt person, such as, but not limited to,
vehicles, capital equipment, machinery and spare parts, has been sold, traded or transferred to non-exempt
persons.

4. Formal Assessment
The formal letter demand and assessment is issued by the Commissioner or his authorized representative and is
required to state the facts and the law on which the assessment is based, otherwise, the formal letter of demand
and assessment notice is void.

5. Protest of the Assessment

The taxpayer may dispute the formal assessment by filing a protest within 30 days from date of receipt. In case
there are several issues involved in the formal assessment and the taxpayer only disputes a few, he will be required to
pay the ones he did not dispute and a collection letter will be issued to him on the undisputed issued.
 Until the taxpayer has paid the deficiency tax on the undisputed issues, no action should be taken on the disputed issues
and the prescriptive period for assessment and collection on the disputed issues should also be suspended.

In his protest, the taxpayer is required to state the facts and the law on which his protest is based, otherwise it will also be
considered void. If no valid protest is filed against the formal assessment within 30 days from receipt, the assessment
will become final and executory. On the other hand, in case there are several issues involved and he does not state the
facts and the law in support of his protest on some issues, these should be considered undisputed and taxpayer should
be required to pay the deficiency tax and the applicable penalty.

The supporting documents for the protest should be submitted for scrutiny and evaluation by the revenue officer within 60
days from the filing of the protest, otherwise, the assessment will also become final and executory.

6. Appeal
If the protest is not acted upon by the BIR within 180 days from submission of the required supporting documents by
the taxpayer, the same may be brought to the Court of Board Appeals (CTA) within 30 days from the lapse of the 180-
day period, or else the assessment becomes final and executory.

the protest may also be appealed to the CTA within 30 days from date of receipt of decision, in case the protest is
denied, in whole or in part, by the Commissioner. Otherwise, the decision will become final.

On the other hand, if the decision is made by a representative of the Commissioner, the taxpayer may elevate his protest
to the Commissioner within 30 days from receipt of the decision and the former’s decision will be stayed until the protest
is decided by the Commissioner.
 The decision of the Commissioner or his representative should also state (a) the facts and law on which the
decision is based, otherwise, the decision shall be void and the same shall not be considered a decision on the
disputed assessment; and (b) that the same is his final decision.

7. Constructive Service of Notice

in the event the notice is sent by registered mail and there is no response from the taxpayer within the period
prescribed, it will be considered constructively or actually received. On the other hand, in case the notice is
sent by personal service and the taxpayer gets wise and refuses to receive the notice, the same will also be
considered constructively received by the taxpayer.
In addition, there should be constructive service by leaving the notice in the premises of the taxpayer and is
attested to, witnessed and signed by at least two revenue officers other than the one who served the notice.

8. Extrajudicial Compromise
A violation of the Tax Code may bring with it either criminal liability or civil liability. In case of criminal
violations under the Tax Code, the Code provides that the same be extrajudicially compromised in court
instead of a criminal action being filed in court provided the case does not involved fraud and the same has
not yet been filed in court.

Forfeiture of Refund
A refund check or warrant issued in accordance with the pertinent provisions of this Code, which shall remain
unclaimed or uncashed within five (5) years from the date the said warrant or check was mailed or delivered,
shall be forfeited in favor of the Government and the amount thereof shall revert to the general fund.
Forfeiture of Tax Credit.

A tax credit certificate issued in accordance with the pertinent provisions of this code,
which shall remain unutilized after five (5) years from the date of issue, shall, unless
revalidated, be considered be invalid, and shall not be allowed as payment for internal
revenue tax liabilities of the taxpayer, and the amount covered by the certificate shall
revert to the general fund.
 Chapter 17
Compliance Requirements
KEEPING OF BOOKS OF ACCOUNTS

All corporations, companies, partnerships or persons required by law to pay internal revenue taxes shall keep a
journal and a ledger, or their equivalents.

1. Those whose gross quarterly sales, earnings receipts or output do not exceed fifty thousand pesos
(P50,000) shall keep and use a simplified set of bookkeeping records duly authorized by the Secretary
of Finance wherein all transactions and results of operations are shown.

2. Those whose gross quarterly sales, earnings, receipts or output exceed one hundred fifty thousand
pesos (P150,000), shall have their books of accounts audited and examined yearly by independent
Certified Public Accountants and their income tax returns accompanied with a duly accomplished
Account Information Form (AIF).

Miller, Owner or Dealer of Molasses

Every miller, owner or dealer of molasses shall maintain an Official Register Book (ORB) wherein all molasses
produced and removed shall be recorded. Likewise, for every removal of molasses, an Official Delivery Invoice
(ODI) shall be issued to cover the shipment.
All distilleries are also required to keep an Official Register Book wherein to record, in liters or metric ton, the
molasses received for use in the production of alcohol as well as those removed for domestic sale or export.
PRESERVATION OF BOOKS OF ACCOUNTS
All the books of accounts, including the subsidiary books and other accounting records of corporations,
partnerships or persons shall be preserved by them within three (3) years (except in case of a false or
fraudulent return) from the last entry in each book and for which period the Commissioner is authorized to
make an assessment. The said books and records shall be subject to examination and inspection by internal
revenue officers made only once in a taxable year, except in the following cases:

1.Fraud, irregularity or mistakes as determined by the Commissioner;

2.The taxpayer requests reinvestigation;
3. Verification or compliance with withholding tax laws and regulations; and
4. In the exercise of the Commissioner’s power to obtain information from other persons, in which
case, another or separate examination and inspection may be made.

REGISTRATION REQUIREMENTS
Every person subject to any internal revenue tax shall register once with the appropriate Revenue District
Officer:
1. Within ten (10) days from date of employment, or
2. On or before the commencement of business, or
3. Before payment of any tax due, or
4. Upon filing of a return, statement or declaration as required in this Code.
Annual Registration Fee. An annual registration fee of P500 for every separate or distinct
establishment or place of business, including facility types where sales transactions occur,
shall be paid upon the registration and every year thereafter on or before the last day of
January. Not liable to this fee are cooperatives, individuals earning purely compensation
income (whether locally or abroad) and overseas workers.

Transfer of Registration. In case a registered person decides to transfer his place of

business or his head office or branches, it shall be his duty to update his registration status
by filling an application for registration information update in the form prescribed therefor.

Other Updates. Any person registered shall update his registration information with the
Revenue District Office where he is registered, specifying therein any change in tax type and
other taxpayer details.

Cancellation of Registration. The registration of any person who ceases to be liable to a

certain tax shall be cancelled upon filing with the Revenue District Officer where he is
registered, an application for registration information update in a form prescribed therefor.
Taxpayer Identification Number (TIN). Any person required under the Code to make, render or file a
return, statement or other document shall be supplied with or assigned a TIN which he shall indicate in
such return, statement or document filed with the BIR for his proper identification for tax purposes.

ISSUANCE OF RECEIPTS, SALES INVOICE OR COMMERCIAL INVOIVE

All persons subject to an internal revenue tax shall, for each sale or transfer of merchandise or for services
rendered valued at twenty five pesos (P25.00) or more, issue duly registered receipts, sales invoice or
commercial invoice, prepared at least in duplicate, showing the date of transaction, quantity unit cost and
description of merchandise or nature of service.