ad majorem dei gloriam

Ateneo de Manila University

Law school is tough enough as it is. Let’s lift each

Reviewer in other up. A candle loses nothing by lighting another
candle.
SPECIAL PROBLEMS IN ---
BUSINESS LAW It’s not about the big things that you do the week or
the night before the exams, but the little things that
you do patiently and consistently every day.

Joanne Marie R. Valles, CPA - Joval

with help from

carlo anton del mundo

PAY IT FORWARD.
Cases from the course outline of Atty. Jose Cochingyan, III
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Table of Contents

SECURITY OF TENURE .................................................................................................................................................5

CONSTITUTIONAL BASIS .............................................................................................................................................5

REGULAR, CASUAL, AND PROBATIONARY EMPLOYMENT .............................................................................................6
REGULAR EMPLOYEES .................................................................................................................................................................... 6
PROJECT EMPLOYEES ..................................................................................................................................................................... 8
SEASONAL EMPLOYEES ................................................................................................................................................................ 11
CASUAL EMPLOYEES .................................................................................................................................................................... 12
FIXED TERM EMPLOYEES .............................................................................................................................................................. 12
PROBATIONARY EMPLOYMENT ...................................................................................................................................................... 13
CONCEPTS APPLIED TO TEACHERS .................................................................................................................................................. 14
PAKYAW EMPLOYEES ................................................................................................................................................................... 15

LABOR CONTRACTING .............................................................................................................................................. 16

CONTRACTING AND SUBCONTRACTING ARRANGEMENTS .......................................................................16

PRELIMINARIES .......................................................................................................................................................................... 16
PERMISSIBLE CONTRACTING ARRANGEMENTS .................................................................................................................................. 17
ILLICIT EMPLOYMENT ARRANGEMENTS ........................................................................................................................................... 17
RIGHTS, REGISTRATION, LIABILITY ............................................................................................................................ 20
RIGHTS OF CONTRACTOR’S/SUBCONTRACTOR’S EMPLOYEES .............................................................................................................. 20
REGISTRATION AND OTHER REQUIREMENTS .................................................................................................................................... 21
SOLIDARY LIABILITY ..................................................................................................................................................................... 22
APPLICABILITY OF RULES TO OTHER CONTRACTUAL RELATIONS ................................................................................. 23
WHERE IRR [ DO 174-17] IS NOT APPLICABLE ............................................................................................................................... 23
COOPERATIVES........................................................................................................................................................................... 29

LABOR STANDARDS.................................................................................................................................................. 29

GENERAL PRINCIPLES ON WAGES .............................................................................................................................. 29

WAGES ..................................................................................................................................................................................... 29
NON-DIMINUTION OF BENEFITS .................................................................................................................................................... 29
TRANSFER OF POSITION ............................................................................................................................................................... 31
DEMOTION................................................................................................................................................................................ 32
RIGHT TO A WORK SCHEDULE OR FULL WORKWEEK ........................................................................................................................... 32
RIGHT TO A BONUS ..................................................................................................................................................................... 33
PAYMENT IN FOREIGN CURRENCY .................................................................................................................................................. 33
RIGHT TO RETIREMENT BENEFITS ................................................................................................................................................... 34
RIGHT TO SIT ON A CHAIR AT THE PRODUCTION AREA ........................................................................................................................ 34
INCREASING DIVISOR ................................................................................................................................................................... 34
FORM, PLACE, TIME OF PAYMENT ............................................................................................................................. 34
FORMS OF PAYMENT ................................................................................................................................................................... 34
PLACE OF PAYMENT .................................................................................................................................................................... 37
TIME OF PAYMENT ...................................................................................................................................................................... 38
PAYMENT AS TO RESULTS ............................................................................................................................................................. 39
DIRECT PAYMENT OF WAGES ........................................................................................................................................................ 39
PROHIBITION REGARDING WAGES .................................................................................................................................................. 40
WAGE FIXING ........................................................................................................................................................... 41
MINIMUM WAGES ...................................................................................................................................................................... 41
NATIONAL WAGE COMMISSION AND THE REGIONAL WAGES AND PRODUCTIVITY BOARD ...................................................................... 41
WAGE ORDER; STANDARDS AND CRITERIA FOR FIXING MINIMUM WAGE .............................................................................................. 42
WAGE DISTORTION ..................................................................................................................................................................... 43
EXEMPTED FROM WAGE RATIONALIZATION ACT.............................................................................................................................. 44
PENALTY FOR REFUSAL OR FAILURE TO COMPLY WITH RA 6727 ......................................................................................................... 45
WAGE ORDER NCR-22 ............................................................................................................................................................... 46
TWO-TIERED WAGE SYSTEM ......................................................................................................................................................... 47
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HOURS OF WORK, NIGHT SHIFT, OVERTIME............................................................................................................... 48
LABOR CODE PROVISIONS ............................................................................................................................................................ 49
OMNIBUS RULES IMPLEMENTING LABOR CODE BOOK 3.................................................................................................................... 50
RA 10028 AN ACT EXPANDING THE PROMOTION OF BREASTFEEDING ................................................................................................ 53
REST DAYS AND HOLIDAYS .......................................................................................................................................53
REST DAYS ................................................................................................................................................................................. 53
HOLIDAYS.................................................................................................................................................................................. 55
SUGGESTED FORMULA FOR COMPUTING STATUTORY MINIMUM WAGE RATES ....................................................................................... 58
GUIDELINES ON THE COMPUTATION OF THE ESTIMATED EQUIVALENT MONTHLY RATES OF MONTHLY -PAID AND DAILY-PAID EMPLOYEES......... 59
LEAVES ....................................................................................................................................................................60
SERVICE INCENTIVE LEAVE ............................................................................................................................................................ 60
PATERNITY LEAVE ....................................................................................................................................................................... 61
MATERNITY LEAVE...................................................................................................................................................................... 61
SOLO PARENTS........................................................................................................................................................................... 68
SPECIAL LEAVE BENEFITS FOR WOMEN............................................................................................................................................ 71
VIOLENCE AGAINST WOMEN AND CHILDREN .................................................................................................................................... 73
SICK LEAVE ................................................................................................................................................................................ 73
13TH MONTH PAY...................................................................................................................................................... 73
SERVICE CHARGES .................................................................................................................................................... 76
BURDEN OF PROOF .................................................................................................................................................. 78

TAXATION................................................................................................................................................................ 79

BASIC INCOME TAX ON INDIVIDUAL CITIZENS ............................................................................................................79

INDIVIDUAL CITIZENS ................................................................................................................................................................... 79
GRADUATED RATES ..................................................................................................................................................................... 79
MARRIED INDIVIDUALS ................................................................................................................................................................ 79
MINIMUM WAGE EARNERS .......................................................................................................................................................... 80
PURELY SELF-EMPLOYED/PROFESSIONALS ....................................................................................................................................... 80
MIXED INCOME EARNERS ............................................................................................................................................................. 80
TAX ON CERTAIN PASSIVE INCOME ................................................................................................................................................. 81
CASH AND/OR PROPERTY DIVIDENDS.............................................................................................................................................. 82
CAPITAL GAINS TAX ON SALES OF UNTRADED SHARES ........................................................................................................................ 82
CAPITAL GAINS TAX ON SALE OF REAL PROPERTY .............................................................................................................................. 82
GROSS INCOME INCLUSIONS ....................................................................................................................................84
GROSS INCOME EXCLUSIONS ....................................................................................................................................84
FRINGE BENEFIT TAXES .............................................................................................................................................85
(1) HOUSING PRIVILEGE ......................................................................................................................................................... 87
(2) EXPENSE ACCOUNT ........................................................................................................................................................... 88
(3) MOTOR VEHICLE OF ANY KIND ............................................................................................................................................ 89
(4) HOUSEHOLD EXPENSES...................................................................................................................................................... 89
(5) INTEREST ON LOAN AT LESS THAN MARKET RATE .................................................................................................................... 90
(6) MEMBERSHIP DUES .......................................................................................................................................................... 90
(7) EXPENSES FOR FOREIGN TRAVEL.......................................................................................................................................... 90
(8) HOLIDAY AND VACATION EXPENSES ..................................................................................................................................... 90
(9) EDUCATIONAL ASSISTANCE TO THE EMPLOYEE OR HIS DEPENDENTS .......................................................................................... 90
(10) LIFE OR HEALTH INSURANCE AND OTHER NON-LIFE INSURANCE PREMIUMS OR SIMILAR AMOUNTS IN EXCESS OF WHAT THE LAW ALLOWS
............................................................................................................................................................................................... 91
(C) FRINGE BENEFITS NOT SUBJECT TO FRINGE BENEFITS TAX ....................................................................................................... 91
DE MINIMIS ............................................................................................................................................................. 92
13TH MONTH PAY AND OTHER BENEFITS .................................................................................................................... 96
MATERNITY LEAVE BENEFITS ....................................................................................................................................97
TAX TREATMENT OF STOCK OPTION PLANS AND OTHER STOCK INCENTIVE PLANS ...........................................................................98
REVENUE MEMORANDUM CIRCULAR NO. 079-14 .......................................................................................................................... 98
PRELIMINARIES .......................................................................................................................................................................... 98
TAX TREATMENT OF GRANT OF OPTION .......................................................................................................................................... 98
TAX TREATMENT OF SALE OR TRANSFER OF OPTION .......................................................................................................................... 98
TAX TREATMENT OF SETTLEMENT OF OPTION .................................................................................................................................. 98
REPORTORIAL REQUIREMENTS ...................................................................................................................................................... 99
SPECIAL TAX TREATMENT OF THE MINIMUM WAGE ................................................................................................ 101
WITHHOLDING TAX ON COMPENSATION INCOME ................................................................................................... 103
DEFINITIONS ............................................................................................................................................................................ 103
EMPLOYER’S DUTY: WITHHOLDING AT SOURCE .............................................................................................................................. 104

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EMPLOYEES’ DUTY WITH RESPECT TO WITHHOLDING INCOME TAX ..................................................................................................... 107
PAYROLL ................................................................................................................................................................................. 109
EXEMPTIONS FROM WITHHOLDING TAX ON COMPENSATION ............................................................................................................ 109
BOARD DIRECTORS’ FEES ............................................................................................................................................................ 110
WITHHOLDING FOR MIXED INCOME EARNERS ................................................................................................................................ 111
WITHHOLDING FOR MARRIED COUPLES ........................................................................................................................................ 111
WITHHOLDING FOR NRAS ......................................................................................................................................................... 111
DONATIONS TO MISSIONARIES .................................................................................................................................................... 111
JURISDICTION OF LABOR ARBITER IN WITHHOLDING CASES ............................................................................................................... 111
REFUNDS AND TAX CREDITS ........................................................................................................................................................ 112
INDIVIDUAL RETURNS .......................................................................................................................................................... 113
SUBSTITUTED FILING ................................................................................................................................................................. 114
FILING OF RETURNS AND PAYMENT OF TAXES WITHHELD ................................................................................................................. 115

THE CORPORATION AND TAXES .............................................................................................................................. 119

PRELIMINARIES ...................................................................................................................................................... 119

STATE POLICY ........................................................................................................................................................................... 119
DEFINITION OF TERMS ............................................................................................................................................................... 119
GENERAL PRINCIPLES OF INCOME TAXATION .................................................................................................................................. 119
GROSS INCOME AND TAXABLE INCOME......................................................................................................................................... 120
CAPITAL VS ORDINARY ASSET ...................................................................................................................................................... 120
INCOME TAX FOR CORPORATIONS .......................................................................................................................... 124
TAX: DEFINITION OF TERMS........................................................................................................................................................ 124
CORPORATIONS................................................................................................................................................ 125
STOCK CORPORATIONS .............................................................................................................................................................. 125
NON-STOCK CORPORATIONS ...................................................................................................................................................... 125
SEC MEMORANDUM CIRCULAR 15-18 ........................................................................................................................................ 128
BRANCHES/OFFICES/ROHQS/RAHQS ........................................................................................................................................ 129
INDUSTRIES RESERVED TO PH NATIONALS .................................................................................................................................... 130
FOREIGN CORPORATION ............................................................................................................................................................ 131
PERMANENT ESTABLISHMENTS .............................................................................................................................. 134
FOREIGN INVESTMENTS ......................................................................................................................................... 135
EXPORT ENTERPRISE .................................................................................................................................................................. 135
DOMESTIC MARKET ENTERPRISE .................................................................................................................................................. 135
FOREIGN INVESTMENT NEGATIVE LIST .......................................................................................................................................... 136
FORMER NATURAL BORN FILIPINOS.............................................................................................................................................. 138
EXEMPTION/DEDUCTIONS ..................................................................................................................................... 139
EXEMPTIONS IN GENERAL........................................................................................................................................................... 139
EXTENT OF TAX EXEMPTION OF NON-STOCK NON-PROFIT CORPORATIONS .......................................................................................... 141
TAX EXEMPTION RULING ........................................................................................................................................................... 142
REVENUE MEMORANDUM ORDER NO. 38-2019 .......................................................................................................................... 142
CORPORATE PURPOSE ............................................................................................................................................................... 144
PROHIBITION AGAINST INUREMENT ............................................................................................................................................. 147
DEDUCTIONS FROM GROSS INCOME............................................................................................................................................. 148
DEDUCTIBILITY OF DONATIONS TO NGOS ..................................................................................................................................... 149
EXEMPTION FROM DONOR’S TAX................................................................................................................................................. 150
LOCAL BUSINESS TAXES .......................................................................................................................................... 151
CITIES AND MUNICIPALITIES ................................................................................................................................................ 151
BARANGAY ........................................................................................................................................................................... 158
COMMUNITY TAX ................................................................................................................................................................. 158
CORPORATE INCOME TAX....................................................................................................................................... 159
TAX ON DOMESTIC CORPORATIONS .............................................................................................................................................. 159
TAX ON RESIDENT FOREIGN CORPORATIONS .................................................................................................................................. 160
TAX ON NON-RESIDENT FOREIGN CORPORATION ............................................................................................................................ 162
SPECIAL RULES: MCIT ............................................................................................................................................................... 163
SPECIAL RULES: RAHQS AND ROHQS ......................................................................................................................................... 166
SPECIAL RULES: INSURANCE COMPANIES ....................................................................................................................................... 167
SPECIAL RULES: BOI AND PEZA .................................................................................................................................................. 167
CAPITAL GAINS TAX ................................................................................................................................................ 168
CONCEPT OF CAPITAL ASSET ....................................................................................................................................................... 168
COMPUTATION OF NET CAPITAL GAINS/LOSSES .............................................................................................................................. 169
TAXATION OF NET CAPITAL GAINS/LOSSES ..................................................................................................................................... 169

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INCOME FROM SOURCES WITHIN THE PH ................................................................................................................ 170
ALLOCATION OF INCOME AND DEDUCTIONS ........................................................................................................... 174
AUDIT GUIDELINES AND PROCEDURES IN THE EXAMINATION OF INTERRELATED GROUP OF COMPANIES ................................................. 174
DETERMINATION OF TAXABLE INCOME ON INTER-COMPANY LOANS OR ADVANCES ............................................................................. 176
ALLOWABLE DEDUCTIONS ...................................................................................................................................... 177
SUMMARY............................................................................................................................................................................... 177
EXPENSES ................................................................................................................................................................................ 177
(1) ORDINARY AND NECESSARY TRADE, BUSINESS OR PROFESSIONAL EXPENSES. .................................................................................. 177
(2) EXPENSES ALLOWABLE TO PRIVATE EDUCATIONAL INSTITUTIONS ................................................................................................ 179
INTEREST................................................................................................................................................................................. 179
TAXES ..................................................................................................................................................................................... 180
LOSSES ................................................................................................................................................................................... 181
BAD DEBTS .............................................................................................................................................................................. 184
DEPRECIATION ......................................................................................................................................................................... 185
DEPLETION .............................................................................................................................................................................. 186
CHARITABLE AND OTHER CONTRIBUTIONS ..................................................................................................................................... 187
RESEARCH AND DEVELOPMENT ................................................................................................................................................... 189
PENSION TRUSTS ...................................................................................................................................................................... 189
ADDITIONAL REQUIREMENT FOR DEDUCTIBILITY ............................................................................................................................. 189
OPTIONAL STANDARD DEDUCTION .............................................................................................................................................. 189
PPHI ...................................................................................................................................................................................... 191
FRINGE BENEFITS ...................................................................................................................................................................... 191
ITEMS NOT DEDUCTIBLE ......................................................................................................................................... 192

VALUE-ADDED TAX ................................................................................................................................................ 193

BASICS .................................................................................................................................................................... 193

VAT ON GOODS/PROPERTIES.................................................................................................................................. 194
VAT ON IMPORTATIONS ......................................................................................................................................... 196
SPECIAL PROVISIONS .............................................................................................................................................. 196
DEEMED SALE TRANSACTIONS ..................................................................................................................................................... 196
CHANGE OR CESSATION OF VAT STATUS....................................................................................................................................... 198
VAT ON SERVICES ................................................................................................................................................... 198
INTEREST CHARGED BY PARENT/HOLDING COMPANY ........................................................................................................... 200
EXEMPT TRANSACTIONS ........................................................................................................................................ 200
IN RELATION TO INDIVIDUALS ...................................................................................................................................................... 207
ZERO RATED GOODS............................................................................................................................................... 210
EFFECTIVELY ZERO-RATED ...................................................................................................................................... 213
ZERO-RATED VS EFFECTIVELY ZERO-RATED EXEMPT ................................................................................................. 214
DESTINATION PRINCIPLE ........................................................................................................................................ 215
TAX CREDITS .......................................................................................................................................................... 216
NATURE OF INPUT VAT ............................................................................................................................................................. 216
INPUT VAT ON DEPRECIABLE GOODS ........................................................................................................................................... 218
EXCESS INPUT/OUTPUT VAT ...................................................................................................................................................... 219
TRANSITIONAL/PRESUMPTIVE INPUT TAX CREDITS .......................................................................................................................... 220
APPORTIONING INPUT VAT IN MIXED TRANSACTIONS ..................................................................................................................... 222
SUBSTANTIATION .................................................................................................................................................. 222
INVOICING AND ACCOUNTING REQUIREMENTS FOR VAT-REGISTERED PERSONS................................................................................... 222
CONSEQUENCES ....................................................................................................................................................................... 224
REFUNDS ................................................................................................................................................................................ 226

CORPORATE TAX MANAGEMENT............................................................................................................................ 230

REGISTRATION REQUIREMENTS IN GENERAL ........................................................................................................... 230

REGISTRATION OF ONLINE BUSINESS ...................................................................................................................... 231
ACCOUNTING REQUIREMENTS FOR VAT.................................................................................................................. 232
REGISTRATION REQUIREMENTS ................................................................................................................................................... 232
SUBSIDIARY JOURNALS............................................................................................................................................................... 234
RETURNS................................................................................................................................................................................. 234
CORPORATE RETURNS ............................................................................................................................................ 236
EXPANDED WITHHOLDING TAX............................................................................................................................... 238
RATES ..................................................................................................................................................................................... 238

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RETURNS AND PAYMENT ............................................................................................................................................................ 240
INVENTORIES ......................................................................................................................................................... 242
POWER OF THE COMMISSIONER TO SUSPEND ......................................................................................................... 242
PRESERVATION OF BOOKS ............................................................................................................................. 243
ROYALTIES, SERVICES, AND LEASE ........................................................................................................................... 243

OTHER TOPICS ....................................................................................................................................................... 248

DISMISSAL ............................................................................................................................................................................... 248

ABANDONMENT ....................................................................................................................................................................... 248
BACKWAGES ............................................................................................................................................................................ 248

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SECURITY OF TENURE AND ENDO
SECURITY OF TENURE
CONSTITUTIONAL BASIS
History. For a long time, the worker's security of tenure had
only the protective mantle of statutes and their interpretative
rules and regulations. It was as uncertain protection that
sometimes yielded to the political permutations of the times. It
took labor nearly four decades of sweat and tears to persuade
our people thru their leaders, to exalt the worker's right to
security of tenure as a sacrosanct constitutional right. BPI
Credit Corp. v. National Labor Relations Commission, G.R.
No. 106027
Article II, Section 2, 1973 Constitution. The defense of the
State is a prime duty of the Government and the people, and in
the fulfillment of this duty all citizens may be required by law
to render personal military or civil service. [relevance???]
Article II, Section 4, 1987 Constitution. The prime duty of the
Government is to serve and protect the people. The
Government may call upon the people to defend the State and,
in the fulfillment thereof, all citizens may be required, under
conditions provided by law, to render personal military or civil
service. [RELEVANCE???]
Article II, Section 9, 1973 Constitution. The State shall afford
protection to labor, promote full employment and equality in
employment, ensure equal work opportunities regardless of
sex, race, or creed, and regulate the relations between workers
and employers. The State shall assure the rights of workers to
self-organization, collective bargaining, security of tenure,
and just and humane conditions of work. The State may provide
for compulsory arbitration.
Article XIII, Section 3, 1987 Constitution
The State shall:
1. afford full protection to labor, local and overseas,
organized and unorganized, and
5 Last Edit: 23 December 2020
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2. promote full employment and equality of employment
opportunities for all.
It shall guarantee the rights of all workers to:
1. self-organization,
2. collective bargaining and negotiations, and
3. peaceful concerted activities, including the right to
strike in accordance with law.
They shall be entitled to
1. security of tenure,
2. humane conditions of work, and
3. a living wage.
4. They shall also participate in policy and decision-
making processes affecting their rights and benefits as
may be provided by law.
The State:
1. shall promote the principle of shared responsibility
between workers and employers and the preferential
use of voluntary modes in settling disputes, including
conciliation, and
2. shall enforce their mutual compliance therewith to
foster industrial peace.
The State shall regulate the relations between workers and
employers, recognizing
1. the right of labor to its just share in the fruits of
production and
2. the right of enterprises to reasonable returns on
investments, and to expansion and growth.
That the employee occupies a position of trust is not
justification to terminate him without just cause. The thesis
that the dismissal can be justified as long as it has some basis
since the position of private respondent calls for trust. Time
does not stand still and petitioners ought to know that this thesis
has long been entombed by our Constitution which has
elevated the security of tenure to a constitutional right. We hold
that this right cannot be eroded, let alone be forfeited except
upon a clear and convincing showing of just and lawful cause.
BPI Credit Corp. v. National Labor Relations Commission,
G.R. No. 106027, [July 25, 1994], 304 PHIL 606-620)
SPBUS
Substantive and procedural due process must be observed
in termination of employees. The right to security of tenure is
protected from undue infringement both by our substantive and
procedural laws. Thus, the causes for dismissing employees
were more defined and restricted; on the other hand, the
procedure of termination was also more clearly delineated.
These substantive and procedural laws must be strictly
complied with before a worker can be dismissed from his
employment. BPI Credit Corp. v. National Labor Relations
Commission, G.R. No. 106027, [July 25, 1994], 304 PHIL 606-
620)
Employer-employee relationship required for right to
security of tenure to accrue. The right of labor to security of
tenure as guaranteed in the Constitution arises only if there is
an employer-employee relationship under labor laws. Not
every performance of services for a fee creates an employer-
employee relationship. To hold that every person who renders
services to another for a fee is an employee — to give meaning
to the security of tenure clause — will lead to absurd results.
Sonza v. ABS-CBN Broadcasting Corp., G.R. No. 138051,
[June 10, 2004]
Security of tenure does not deprive a person with freedom
to contract. Individuals with special skills, expertise or talent
enjoy the freedom to offer their services as independent
contractors. The right to life and livelihood guarantees this
freedom to contract as independent contractors. The right of
labor to security of tenure cannot operate to deprive an
individual, possessed with special skills, expertise and talent,
of his right to contract as an independent contractor. An
individual like an artist or talent has a right to render his
services without any one controlling the means and methods by
which he performs his art or craft. This Court will not interpret
the right of labor to security of tenure to compel artists and
talents to render their services only as employees. If radio and
television program hosts can render their services only as
employees, the station owners and managers can dictate to the
radio and television hosts what they say in their shows. This is
not conducive to freedom of the press. Sonza v. ABS-CBN
Broadcasting Corp., G.R. No. 138051, [June 10, 2004]
JO VALLES
SECURITY OF TENURE AND ENDO
REGULAR, CASUAL, AND PROBATIONARY
EMPLOYMENT
Article 295, Labor Code of the Philippines. [280]
Regular and Casual Employment. — The provisions of
written agreement to the contrary notwithstanding and
regardless of the oral agreement of the parties, an employment
shall be deemed to be regular where the employee has been
engaged to perform activities which are usually necessary or
desirable in the usual business or trade of the employer, except
where the employment has been fixed for a specific project or
undertaking the completion or termination of which has been
determined at the time of the engagement of the employee or
where the work or service to be performed is seasonal in nature
and the employment is for the duration of the season.
An employment shall be deemed to be casual if it is not covered
by the preceding paragraph: Provided, That, any employee who
has rendered at least one year of service, whether such service
is continuous or broken, shall be considered a regular employee
with respect to the activity in which he is employed and his
employment shall continue while such actually exists.
Kinds of employees. The foregoing contemplates four (4)
kinds of employees:
a. regular employees or those who have been engaged to
perform activities which are usually necessary or
desirable in the usual business or trade of the employer;
b. project employees or those whose employment has
been fixed for a specific project or undertaking[,] the
completion or termination of which has been
determined at the time of the engagement of the
employee;
c. seasonal employees or those who work or perform
services which are seasonal in nature, and the
employment is for the duration of the season; and
d. casual employees or those who are not regular,
project, or seasonal employees.
e. Jurisprudence has added a fifth kind — a fixed-term
employee. (Leyte Geothermal Power Progressive
Employees Union-ALU-TUCP v. PNOC-EDC, G.R.
No. 170351, [March 30, 2011], 662 PHIL 225-242)
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Broad distinctions. Pursuant to the above-quoted Article 280
of the Labor Code, employees performing activities which are
usually necessary or desirable in the employer's usual business
or trade can either be regular, project or seasonal employees,
while, as a general rule, those performing activities not usually
necessary or desirable in the employer's usual business or trade
are casual employees. (GMA Network, Inc. v. Pabriga, G.R.
No. 176419, [November 27, 2013])
• Reason for distinction. The reason for this distinction
may not be readily comprehensible to those who have
not carefully studied these provisions: only employers
who constantly need the specified tasks to be
performed can be justifiably charged to uphold the
constitutionally protected security of tenure of the
corresponding workers. (GMA Network, Inc. v.
Pabriga, G.R. No. 176419, [November 27, 2013])
• Consequence of regularization; security of tenure.
In cases of regular employment, the employer shall not
terminate the services of an employee except for a just
cause or when authorized by this Title. An employee
who is unjustly dismissed from work shall be entitled
to:
1. reinstatement without loss of seniority rights
and other privileges and
2. to his full backwages, inclusive of allowances,
and to his other benefits or their monetary
equivalent computed from the time his
compensation was withheld from him up to the
time of his actual reinstatement. Article 279,
Labor Code of the Philippines
Nature over stipulation. Article 280 of the Labor Code, as
worded, establishes that the nature of the employment is
determined by law, regardless of any contract expressing
otherwise. The supremacy of the law over the nomenclature of
the contract and the stipulations contained therein is to bring to
life the policy enshrined in the Constitution to afford full
protection to labor. (Leyte Geothermal Power Progressive
Employees Union-ALU-TUCP v. PNOC-EDC, G.R. No.
170351, [March 30, 2011], 662 PHIL 225-242)
SPBUS
Regular employees
Kinds of regular employees. Simply stated, regular employees
are classified into: (1) regular employees by nature of work;
and (2) regular employees by years of service. The former
refers to those employees who perform a particular activity
which is necessary or desirable in the usual business or trade of
the employer, regardless of their length of service; while the
latter refers to those employees who have been performing the
job, regardless of the nature thereof, for at least a year.(Basan
v. Coca-Cola Bottlers Philippines, G.R. Nos. 174365-66,
[February 4, 2015], 753 PHIL 74-92 citing Goma v. Pamplona
Plantation Incorporated, 579 Phil. 402, 411-412 (2008);
Regular employees #1; Regular employees by nature of
work; performing activities that are usually necessary or
desirable in the usual business. The provisions of written
agreement to the contrary notwithstanding and regardless of the
oral agreement of the parties, an employment shall be deemed
to be regular where the employee has been engaged to perform
activities which are usually necessary or desirable in the usual
business or trade of the employer, except where the
employment has been fixed for a specific project or undertaking
the completion or termination of which has been determined at
the time of the engagement of the employee or where the work
or service to be performed is seasonal in nature and the
employment is for the duration of the season. Article 295,
Labor Code of the Philippines. [280]
• Test in determining regularity of employment;
reasonable connection. In determining whether an
employment should be considered regular or non-
regular, the applicable test is the reasonable connection
between the particular activity performed by the
employee in relation to the usual business or trade of
the employer. This can be assessed by looking into the
nature of the services rendered and its relation to the
general scheme under which the business or trade is
pursued in the usual course. The nature of the work
performed must be viewed from a perspective of the
business or trade in its entirety and not on a
confined scope. (Magsalin v. National Organization of
JO VALLES
SECURITY OF TENURE AND ENDO
Working Men, G.R. No. 148492, [May 9, 2003], 451
PHIL 254-264)
• Example; activities that are necessary or desirable
in the usual business. The nature of work of route
helpers hired by Coca-Cola Bottlers Philippines, Inc. is
necessary and desirable in its usual business or trade
thereby qualifying them as regular employees. The
argument that its usual business or trade is softdrink
manufacturing and that the work assigned to
respondent workers as sales route helpers so involves
merely postproduction activities, one which is not
indispensable in the manufacture of its products,
scarcely can be persuasive. If, only those whose work
are directly involved in the production of softdrinks
may be held performing functions necessary and
desirable in its usual business or trade, there would
have then been no need for it to even maintain regular
truck sales route helpers. The repeated rehiring of
respondent workers and the continuing need for their
services clearly attest to the necessity or desirability of
their services in the regular conduct of the business or
trade of petitioner company. (Magsalin v. National
Organization of Working Men, G.R. No. 148492, [May
9, 2003], 451 PHIL 254-264)
• Example; activities that are necessary or desirable
in the usual business. Relating petitioners' tasks to the
nature of the business of CCBPI — which involved the
manufacture, distribution, and sale of soft drinks and
other beverages — it cannot be denied that mixing and
segregating as well as loading and bringing of CCBPI's
products to its customers involved distribution and sale
of these items. Simply put, petitioners' duties were
reasonably connected to the very business of CCBPI.
They were indispensable to such business because
without them the products of CCBPI would not reach
its customers. ||| (Lingat v. Coca-Cola Bottlers
Philippines, Inc., G.R. No. 205688, [July 4, 2018])
• Regular employees regardless of period of service
as long as work is necessary or desirable. As route
7 Last Edit: 23 December 2020
ad majorem dei gloriam
helpers who are engaged in the service of loading and
unloading softdrink products of respondent company
to its various delivery points, which is necessary or
desirable in its usual business or trade, petitioners are
considered as regular employees. That they merely
rendered services for periods of less than a year is of
no moment since for as long as they were performing
activities necessary to the business of respondent, they
are deemed as regular employees under the Labor
Code, irrespective of the length of their
service.||| (Basan v. Coca-Cola Bottlers Philippines,
G.R. Nos. 174365-66, [February 4, 2015], 753 PHIL
74-92)
• Example; compared to a project employee. An
employee who was hired to perform accounting duties
which were not shown as distinct, separate and
identifiable from the usual undertakings of the
company was considered a regular employee and not a
project employee [although essentially a telephone
company, it maintains its own accounting department
for the payroll of employees]. Despite the supposed
expiration of the employee’s project employment
contract, she continued to work for PLDT after signing
up with CESI. To add, PLDT did not report the
termination of her supposed project employment to
DOLE, which is required under D.O No. 19. Failure to
do so was an indication that the employee was not just
a project employee but a regular employee. (Philippine
Long Distance Telephone Co. v. Ylagan, G.R. No.
155645, [November 24, 2006], 537 PHIL 840-848)
• Example; compared to a project employee. The
nature of one's employment does not depend on the will
or word of the employer nor on the procedure of hiring
and the manner of designating the employee, but on the
nature of the activities to be performed by the
employee, considering the employer's nature of
business and the duration and scope of the work to be
done. If without specifying the duration and scope, the
work to be undertaken is usually necessary or
desirable in the usual business or trade of the
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employer, then it is regular employment and not just
"project" much less "casual" employment. (San Miguel
Corp. v. National Labor Relations Commission, G.R.
No. 125606, [October 7, 1998], 357 PHIL 954-965)
• Pakyaw workers are regular employees for as long
as their employers [have the right to] exercise
control over them. (A. Nate Casket Maker v. Arango,
G.R. No. 192282, [October 5, 2016], 796 PHIL 597-
617)
Regular employees #2; Regular employees by years of
service; casual employees who have rendered at least one
year of service. Provided that any employee who has rendered
at least one year of service, whether such service is continuous
or broken, shall be considered a regular employee with respect
to the activity in which he is employed and his employment
shall continue while such activity exists. Article 295, Labor
Code of the Philippines. [280]
• Repeated hiring; regularized casual employees in a
nutshell. The primary standard to determine a regular
employment is the reasonable connection between the
particular activity performed by the employee in
relation to the business or trade of the employer. The
test is whether the former is usually necessary or
desirable in the usual business or trade of the employer.
If the employee has been performing the job for at least
one year, even if the performance is not continuous or
merely intermittent, the law deems the repeated and
continuing need for its performance as sufficient
evidence of the necessity, if not indispensability of that
activity to the business of the employer. Hence, the
employment is also considered regular, but only with
respect to such activity and while such activity exists.
Philips Semiconductors (Phils.) Inc. v. Fadriquela,
G.R. No. 141717, [April 14, 2004], 471 PHIL 355-379
• Casual employees regularized by operation of law.
The law does not provide the qualification that the
employee must first be issued a regular appointment or
must be declared as such before he can acquire a
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SECURITY OF TENURE AND ENDO
regular employee status. Philips Semiconductors
(Phils.) Inc. v. Fadriquela, G.R. No. 141717, [April 14,
2004], 471 PHIL 355-379
• Project employees not covered in the proviso that
one-year service results to regularization. A proviso
qualifies or modifies only the phrase immediately
preceding it. Thus, it has been held that a proviso is to
be construed with reference to the immediately
preceding part of the provision to which it is attached,
and not to the statute itself or to other sections thereof.
The only exception to this rule is where the clear
legislative intent is to restrain or qualify not only the
phrase immediately preceding it (the proviso) but also
earlier provisions of the statute or even the statute itself
as a whole. Hence, the proviso is applicable only to the
employees who are deemed casuals but not to the
project employees nor the regular employees treated in
paragraph one of Art. 280||| (Mercado, Sr. v. National
Labor Relations Commission, G.R. No. 79869,
[September 5, 1991], 278 PHIL 345-357)
• Project employees not covered in the proviso that
one-year service results to regularization. PNOC-
EDC hired hundreds of project employees whereby
their employment was only good up to the completion
or termination of a specific project. The workers have
been working for a total of 17 years without interval in
the contracts and are, therefore, claiming to have been
regularized under the proviso in the 2nd paragraph of
Article 280. The employees say that the lack of interval
negates their status as project employees. Following
the ruling in Mercado above, the SC said that
considering that they were project employees, they are
not covered by the proviso. Their employment for more
than a year does equate to their regular
employment.||| (Leyte Geothermal Power Progressive
Employees Union-ALU-TUCP v. PNOC-EDC, G.R.
No. 170351, [March 30, 2011], 662 PHIL 225-242)
• Reckoning point is date of hiring. Considering that
an employee becomes regular with respect to the
8 Last Edit: 23 December 2020
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activity in which he is employed one year after he is
employed, the reckoning date for determining his
regularization is his hiring date. Kimberly Clark
Philippines vs Secretary of Labor
Regular employees #3; probationary turned regular. An
employee who is allowed to work after a probationary period
shall be considered a regular employee. Article 296, Labor
Code of the Philippines. [281]
Project employees
Project employees. A project employee is assigned to carry
out a specific project or undertaking the duration and scope of
which are specified at the time the employee is engaged in the
project.||| (Philippine Long Distance Telephone Co. v. Ylagan,
G.R. No. 155645, [November 24, 2006], 537 PHIL 840-848)
• Project contracts. Project contracts that fix the
employment for a specific project or undertaking
remain valid under the law. By entering into such a
contract, an employee is deemed to understand that his
employment is coterminous with the project. He may
not expect to be employed continuously beyond the
completion of the project. Villa v. NLRC, 348 PHIL
116, 140-141
• Project. A project is a job or undertaking which is
distinct, separate and identifiable from the
undertakings of the company. A project employee is
assigned to a project which begins and ends at
determined or determinable times. (Philippine Long
Distance Telephone Co. v. Ylagan, G.R. No. 155645,
[November 24, 2006], 537 PHIL 840-848)
• Requisites to be regarded as project-based. For
employment to be regarded as project-based, it is
incumbent upon the employer to prove that
1. the employee was hired to carry out a specific
project or undertaking, and
2. the employee was notified of the duration and
scope of the project.
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In order to safeguard the rights of workers against the
arbitrary use of the word project as a means to prevent
employees from attaining regular status, employers
must prove that the duration and scope of the
employment were specified at the time the employees
were engaged, and prove the existence of the
project. (Minsola v. New City Builders, Inc., G.R. No.
207613, [January 31, 2018])
• Project employees must be informed beforehand;
contract can be proof that they were informed.
These contracts would have shed light to what projects
or undertakings they were engaged; but all the same,
none were submitted. As case law holds, the absence
of the employment contracts puts into serious question
the issue of whether the employees were properly
informed of their employment status as project
employees at the time of their engagement, especially
if there were no other evidence offered. (Mirandilla v.
Jose Calma Development Corp., G.R. No. 242834,
[June 26, 2019])
• Principal distinction from regular employees. As is
evident from the provisions of Article 280 of the Labor
Code, the principal test for determining whether
particular employees are properly characterized as
project employees as distinguished from regular
employees, is whether or not the project employees
were assigned to carry out a specific project or
undertaking, the duration (and scope) of which were
specified at the time the employees were engaged for
that project.||| (ALU-TUCP v. NLRC G.R. No. 109902,
[August 2, 1994], 662 511 SCRA 44, 54.)
• Principal distinction between project employees
and regular employees. Plainly, the litmus test to
determine whether an individual is a project employee
lies in setting a fixed period of employment involving
a specific undertaking which completion or
termination has been determined at the time of the
particular employee's engagement.||| (Leyte
Geothermal Power Progressive Employees Union-
JO VALLES
SECURITY OF TENURE AND ENDO
ALU-TUCP v. PNOC-EDC, G.R. No. 170351, [March
30, 2011], 662 PHIL 225-242)
• Types of project; 1st type; within the regular
business. Project covers 2 types. The first includes
one that is within the regular or usual business of the
employer company, but which is distinct and separate
and identifiable as such, from the other undertakings of
the company. Such job or undertaking begins and ends
at determined or determinable times.
o Example. The typical example of this first
type of project is a particular construction job
or project of a construction company. A
construction company ordinarily carries out
two or more [distinct] identifiable construction
projects: e.g., a 25-storey hotel in Makati; a
residential condominium building in Baguio
City; and a domestic air terminal in Iloilo City.
Employees who are hired for the carrying out
of one of these separate projects, the scope and
duration of which has been determined and
made known to the employees at the time of
employment, are properly treated as project
employees, and their services may be lawfully
terminated at completion of the project. (ALU-
TUCP v. NLRC G.R. No. 109902, [August 2,
1994], 662 511 SCRA 44, 54.)
o Example of specific project or undertaking
related to business. The term specific project
or undertaking under Article 280 of the Labor
Code contemplates an activity which is not
commonly or habitually performed or such
type of work which is not done on a daily basis
but only for a specific duration of time or until
completion; the services employed are then
necessary and desirable in the employer's usual
business only for the period of time it takes to
complete the project. Pure Foods Corp. v.
National Labor Relations Commission, G.R.
9 Last Edit: 23 December 2020
ad majorem dei gloriam
No. 122653, [December 12, 1997], 347 PHIL
434-446)
o Example of specific project or undertaking
related to business; project employees in
construction industry. Minsola was hired in
the structural phase of the Avida 3 project.
Upon completion, he was again employed for
the architectural phase of the project. He was
adequately informed that his tenure would
only last as long as the specific phase he was
assigned. The fact that his continuous work
and that he performed tasks that are necessary
and vital to the employer’s business did not
make him a regular employee because a
project may be within the regular business of
the employer or not. Accordingly, it is not
uncommon for a construction firm to hire
project employees to perform work necessary
and vital for its business. ||| (Minsola v. New
City Builders, Inc., G.R. No. 207613, [January
31, 2018])
o The project, while within the regular
business of the employer, must still be
distinct and separate therefrom. If the
particular job or undertaking is within the
regular or usual business of the employer
company and it is not identifiably distinct or
separate from the other undertakings of the
company, there is clearly a constant necessity
for the performance of the task in question, and
therefore said job or undertaking should not be
considered a project. In this case, the
employees were hired and rehired for the
manning of the operations center to air
commercials, acting as transmitter/VTR men,
maintaining the equipment, and acting as
cameramen are not undertakings separate or
distinct from the business of a broadcasting
company. This is true notwithstanding the fact
that the employees were hired merely as pinch-
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hitters or substitutes for legal employees who
were on leave or sick. (GMA Network, Inc. v.
Pabriga, G.R. No. 176419, [November 27,
2013])
• Types of project; 2nd type; not within regular
business. The second one includes a particular job or
undertaking that is not within the regular business of
the corporation. Such a job or undertaking must also be
identifiably separate and distinct from the ordinary or
regular business operations of the employer. The job or
undertaking also begins and ends at determined or
determinable times. (ALU-TUCP v. NLRC G.R. No.
109902, [August 2, 1994], 662 511 SCRA 44, 54.)
o Example. The company was a manufacturer of
glass. It hired an employee for the repair and
upgrade of its furnace then terminated the
latter’s services upon completion of the
undertaking. After a few days, the employee
was again contracted but this time for the
draining/cooling and emergency repair of
another furnace. Upon completion, the
employee’s services were again terminated.
Clearly, private respondent was hired for a
specific project that was not within the regular
business of the corporation for the company is
not engaged in the business of repairing
furnaces. Although the activity was necessary
to enable it to continue manufacturing glass,
the necessity therefor arose only when a
particular furnace reached the end of its life or
operating cycle. Or, as in the second
undertaking, when a particular furnace
required an emergency repair. In other words,
the undertakings where private respondent was
hired primarily as helper/bricklayer have
specified goals and purposes which are
fulfilled once the designated work was
completed. Moreover, such undertakings were
also identifiably separate and distinct from the
usual, ordinary or regular business operations
JO VALLES
SECURITY OF TENURE AND ENDO
of petitioner, which is glass manufacturing.
These undertakings, the duration and scope of
which had been determined and made known
to private respondent at the time of his
employment, clearly indicated the nature of his
employment as a project employee. Thus, his
services were terminated legally after the
completion of the project. ||| (San Miguel
Corp. v. National Labor Relations
Commission, G.R. No. 125606, [October 7,
1998], 357 PHIL 954-965)
• Project employees in the construction industry;
repeated rehiring does not automatically lead to
regularization. Generally, length of service provides a
fair yardstick for determining when an employee
initially hired on a temporary basis becomes a
permanent one, entitled to the security and benefits of
regularization. But this standard will not be fair, if
applied to the construction industry, simply because
construction firms cannot guarantee work and funding
for its payrolls beyond the life of each project. And
getting projects is not a matter of course. Construction
companies have no control over the decisions and
resources of project proponents or owners. (William Uy
Construction Corp. v. Trinidad, G.R. No. 183250,
[March 12, 2010], 629 PHIL 185-191)
o Contra: continuous rehiring + No. 19 required employers to submit a report of an
indispensable = regularization. In this case,
the evidence on record shows that respondents
were employed and assigned continuously to
the various projects of petitioners. As painters,
they performed activities which were
necessary and desirable in the usual business
of petitioners, who are engaged in
subcontracting jobs for painting of residential
units, condominium and commercial
buildings. Thus, even assuming that
respondents were initially hired as project
employees, they have attained the status of
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regular employees. Exodus International
Construction vs Biscocho [February 23, 2011]
• 2 types of employees in construction industry;
project and regular.There are two types of employees
in the construction industry. The first is referred to as
project employees or those employed in connection
with a particular construction project or phase thereof
and such employment is coterminous with each project
or phase of the project to which they are assigned. The
second is known as non-project employees or those
employed without reference to any particular
construction project or phase of a project. The second
category is where respondents are classified. As such
they are regular employees of petitioners. It is clear
from the records of the case that when one project is
completed, respondents were automatically transferred
to the next project. Exodus International Construction
vs Biscocho [February 23, 2011]
• Failure to file termination report is an indication of
regular employment; extension of employment
after project completion removes the employee
from the scope of project employment. Most
important of all, based on the records, PLDT did not
report the termination of respondent's supposed project
employment to the Department of Labor and
Employment as project employee. Department Order
employee's termination to the nearest public
employment office every time his employment was
terminated due to a completion of a project. PLDT's
failure to file termination reports was an indication that
the respondent was not a project employee but a regular
employee. ||| (Philippine Long Distance Telephone Co.
v. Ylagan, G.R. No. 155645, [November 24, 2006], 537
PHIL 840-848)
• When a project employee is regularized. Once [a
project employee] has been:
Last Edit: 23 December 2020
SPBUS
(1) continuously, as opposed to intermittently, re-
hired by the same employer for the same tasks
or nature of tasks and
(2) these tasks are vital, necessary and
indispensable to the usual business or trade of
the employer,
then the employee must be deemed a regular
employee. Integrated Contractor and Plumbing
Works, Inc. v NLRC and Glen Solon, G.R. No. 152427,
9 August 2005, 466 SCRA 265, 271
• Hiring project employees to work on a different
project from the one they signed up for brings them
out of the project employees category. The fact is
IKSI actually hired respondents to work, not only on
the ACT Project, but on other similar projects such as
the Bloomberg. When respondents were required to
work on the Bloomberg project, without signing a new
contract for that purpose, it was already outside of the
scope of the particular undertaking for which they were
hired; it was beyond the scope of their employment
contracts. The fact that the same happened only once is
inconsequential. What matters is that IKSI required
respondents to work on a project which was separate
and distinct from the one they had signed up for. This
act by IKSI indubitably brought respondents outside
the realm of the project employees
category.||| (Innodata Knowledge Services, Inc. v.
Inting, G.R. No. 211892, [December 6, 2017])
• Hiring project employees to work on a different
project from the one they signed up for brings them
out of the project employees category. The Court
said that the employee was regular when Weekly Time
Reports actually show that Ramon was engaged as an
all-purpose carpenter who was made to work at JCDC's
several project sites on a regular basis, as his working
assignments were just re-shuffled from one project to
another without any clear showing that his engagement
for each project site was constitutive of a particular
contract of project employment. Ramon should be
deemed as a regular employee, as he was actually
JO VALLES
SECURITY OF TENURE AND ENDO
tasked to perform work which is usually necessary and
desirable to the trade and business of his employer, and
not merely engaged for a specific project or
undertaking. (Mirandilla v. Jose Calma Development
Corp., G.R. No. 242834, [June 26, 2019])
• Extension without specification as to duration
makes the employee a regular employee. Petitioner
worked continuously for more than two years after the
supposed three-month duration of his project
employment for the NAIA II Project. While his
appointment for said project allowed such extension
since it specifically provided that in case his "services
are still needed beyond the validity of the contract, the
Company shall extend his services," there was no
subsequent contract or appointment that specified a
particular duration for the extension. His services were
just extended indefinitely While for first three months,
petitioner can be considered a project employee of
PNCC, his employment thereafter, when his services
were extended without any specification of as to the
duration, made him a regular employee of PNCC. Asos
vs PNCC
• Specific date of completion of project not necessary;
only day certain essential. Evidently, although the
employment contract did not state a particular date, it
did specify that the termination of the parties'
employment relationship was to be on a "day certain"
— the day when the phase of work termed "Lifting &
Hauling of Materials" for the "World Finance Plaza"
project would be completed. Thus, respondent cannot
be considered to have been a regular employee. He was
a project employee. Filipinas Pre-fabricated Building
Systems vs Puente
• No notice of termination required upon termination
of project. If the termination is brought about by the
completion of the contract or phase thereof, no prior
notice is required. In the case of Cioco, Jr. vs. C.E.
Construction Corporation, it is explained that this is
because completion of the work or project
11
ad majorem dei gloriam
automatically terminates the employment, in which
case, the employer is, under the law, only obliged to
render a report to the DOLE on the termination of the
employment. DM Consunji vs. Gobres
Seasonal employees
Seasonal employees. These are those who work or perform
services which are seasonal in nature, and the employment is
for the duration of the season. Article 295, Labor Code of the
Philippines. [280]
• Seasonal workers can be regular employees if they
perform tasks necessary for the business;
considered on leave until re-employed. Although
petitioners do not work throughout the year and their
employment depends upon a specific season, inasmuch
as they have been performing services necessary and
desirable to private respondents' business, serve as
badges of regular employment. It is well-entrenched in
our jurisprudence that seasonal workers who are called
from time to time and are temporarily laid off during
off-season are not separated from service in said
period, but are merely considered on leave until re-
employed. (Ramiro Lim & Sons Agricultural Co., Inc.
v. Guilaran, G.R. No. 221967, [February 6, 2019])
• Seasonal workers can be regular employees if they
perform tasks necessary for the business;
considered on leave until re-employed. Petitioner
argues that respondents were not her regular employees
as they were merely "pakiao" workers who did not
work continuously in the sugar plantation. They
performed such tasks as weeding, cutting and loading
canes, planting cane points, fertilizing, cleaning the
drainage, etc. These functions allegedly do not require
respondents' daily presence in the sugarcane 􏰑eld as it
is not everyday that one weeds, cuts canes or applies
fertilizer. The NLRC, CA, and SA held that
respondents attained the status of regular seasonal
workers, having worked therein from 1964-1985.
Benares vs Pancho
Last Edit: 23 December 2020
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• Must be employed for one season only; otherwise,
regular. Although the seasonal employment
arrangement involves work that is seasonal or periodic
in nature, the employment itself is not automatically
considered seasonal so as to prevent the employee from
attaining regular status. To exclude the asserted
"seasonal" employee from those classified as regular
employees, the employer must show that: (1) the
employee must be performing work or services that are
seasonal in nature; and (2) he had been employed for
the duration of the season. Hence, when the "seasonal"
workers are continuously and repeatedly hired to
perform the same tasks or activities for several seasons
or even after the cessation of the season, this length of
time may likewise serve as badge of regular
employment. Hence, when the workers were tasked to
perform duties regularly and habitually needed in
URSUMCO's operations during the milling season and
not in a specific phase of URSUMCO's strict milling
operations that would ultimately cease upon
completion of a particular phase in the milling of sugar,
and that they were repeatedly hired from one season to
another, the SC said that they were regular seasonal
employees. Abbott Laboratories vs Alcaranz
• Must be employed for one season only; otherwise,
regular. Primary standard for determining regular
employment is the reasonable connection between the
particular activity performed by the employee in
relation to the usual trade or business of the employer.
For farmers to be excluded from classification as
regular employees, it is not enough that they perform
work or services that are seasonal in nature. They must
have been employed only for the duration of one
season. While the records sufficiently show that the
respondents' work in the hacienda was seasonal in
nature, there was, however, no proof that they were
hired for the duration of one season only. In fact, the
payrolls, submitted in evidence by the petitioners,
show that they availed the services of the respondents
JO VALLES
SECURITY OF TENURE AND ENDO
since 1991. Thus, the farmers are regular employees.
Hacienda Bino/Hortencia Starke vs Cuenca
• Farm workers may be regular seasonal employees.
Farm workers generally fall under the definition of
seasonal employees. We have consistently held that
seasonal employees may be considered as regular
employees. Regular seasonal employees are those
called to work from time to time. The nature of their
relationship with the employer is such that during the
off season, they are temporarily laid off; but
reemployed during the summer season or when their
services may be needed. They are in regular
employment because of the nature of their job, and not
because of the length of time they have worked.
Gapayao vs Fulo
o Exception 1. In Hacienda Fatima v. National
Federation of Sugarcane Workers-Food &
General Trade, the Court held that seasonal
workers who have worked for one season only
may not be considered regular employees.
o Exception 2. In Mercado, Sr. v. NLRC, it was
held that when seasonal employees are free to
contract their services with other farm owners,
then the former are not regular employees.
• But regular seasonal employees not lumped with
regular employees. To reiterate, the respondents are
regular seasonal employees, as the CA itself opined
when it declared that private respondents who are
regular workers with respect to their seasonal tasks or
activities and while such activities exist, cannot
automatically be governed by the CBA between
petitioner URSUMCO and the authorized bargaining
representative of the regular and permanent employees.
Citing jurisprudential standards, it then proceeded to
explain that the respondents cannot be lumped with the
regular employees due to the differences in the nature
of their duties and the duration of their work vis-Ã -vis
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the operations of the company. Abbott Laboratories vs
Alcaranz
Casual employees
Casual employee. An employment shall be deemed to be
casual if it is not covered by the preceding paragraph. Article
295, Labor Code of the Philippines. [280]
Fixed term employees
Fixed term employment is a jurisprudential creation. A fifth
classification, that of a fixed term employment, is not expressly
mentioned in the Labor Code. Nevertheless, this Court ruled
in Brent School, Inc. v. Zamora, 8 that such a contract, which
specifies that employment will last only for a definite period, is
not per se illegal or against public policy. (GMA Network, Inc.
v. Pabriga, G.R. No. 176419, [November 27, 2013])
Casual employees; fixed-period employment not
necessarily unconstitutional. This Court has upheld the
legality of fixed-term employment. It ruled that the decisive
determinant in term employment should not be the activities
that the employee is called upon to perform but the day certain
agreed upon by the parties for the commencement and
termination of their employment relationship. But, xxx where
from the circumstances it is apparent that the periods have been
imposed to preclude acquisition of tenurial security by the
employee, they should be struck down or disregarded as
contrary to public policy and morals. Brent School, Inc. v
Zamora, 181 SCRA 702 (1990)
• Criteria so that the duration of employment will not
be considered to be in circumvention of the
Constitution. Brent School, Inc. v Zamora laid down
the criteria under which term employment cannot be
said to be in circumvention of the law on security of
tenure:
1. The fixed period of employment was
knowingly and voluntarily agreed upon by
the parties without any force, duress, or
improper pressure being brought to bear
Last Edit: 23 December 2020
SPBUS
upon the employee and absent any other
circumstances vitiating his consent; or
2. It satisfactorily appears that the employer
and the employee dealt with each other on
more or less equal terms with no moral
dominance exercised by the former or the
latter.
• The agreement for a fixed period is not illicit when
no intent to circumvent the law is shown: where it is
indeed the employee himself who insists upon a period
or where the nature of the engagement is such that,
without being seasonal or for a specific project, a
definite date of termination is a sine qua non, would an
agreement fixing a period essentially evil or illicit.
Brent School, Inc. v Zamora, 181 SCRA 702 (1990)
o Example: period set to circumvent the law.
When the employers did not renew the contract
of the employees, saying that they were legally
dismissed since they were hired only because
of the shift in their selling system, but the facts
showed that the employees were in fact hired
even before the shift in systems, the Supreme
Court said that the shift of SMC to the Pre-
Selling System was not the real basis for the
forging of fixed-term contracts of employment
with petitioners and that the periods were fixed
only as a means to preclude petitioners from
acquiring security of tenure.||| (Fabela v. San
Miguel Corp., G.R. No. 150658, [February 9,
2007], 544 PHIL 223-236)
• Casual workers usually not in an equal footing to
bargain with employer. [I]t could not be supposed
that private respondents and all other so-called "casual"
workers xxx knowingly and voluntarily agreed to the
5-month employment contract. Cannery workers are
never on equal terms with their employers. Almost
always, they agree to any terms of an employment
contract just to get employed considering that it is
difficult to find work given their ordinary
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SECURITY OF TENURE AND ENDO
qualifications. Their freedom to contract is empty and
hollow because theirs is the freedom to starve if they
refuse to work as casual or contractual workers.
Indeed, to the unemployed, security of tenure has no
value. It could not then be said that petitioner and
private respondents dealt with each other on more or
less equal terms with no moral dominance whatever
being exercised by the former over the latter. Pure
Foods Corp. v. National Labor Relations Commission,
G.R. No. 122653, [December 12, 1997], 347 PHIL
434-446)
• Employment on as need basis due to demand
fluctuations not sufficient to escape regularization.
The operation of every business establishment
naturally depends on the law of supply and demand. It
cannot be invoked as a reason why a person performing
an activity, which is usually desirable and necessary in
the usual business, should be placed in a wobbly status.
In reiteration, the relation between capital and labor is
not merely contractual. It is so impressed with public
interest that labor contracts must yield to the common
good.||| (Philips Semiconductors (Phils.) Inc. v.
Fadriquela, G.R. No. 141717, [April 14, 2004], 471
PHIL 355-379)
Why fixed-period contracts are allowed. Article 280 of the
Labor Code does not proscribe or prohibit an employment
contract with a fixed period provided the same is entered into
by the parties, without any force, duress or improper pressure
being brought to bear upon the employee and absent any other
circumstance vitiating consent. It does not necessarily follow
that where the duties of the employee consist of activities
usually necessary or desirable in the usual business of the
employer, the parties are forbidden from agreeing on a period
of time for the performance of such activities. There is thus
nothing essentially contradictory between a definite period of
employment and the nature of the employee's duties. (Brent
School, Inc. v. Zamora, G.R. No. L-48494, [February 5, 1990],
260 PHIL 747-765)
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ad majorem dei gloriam
Fixed-term employment. Project employment and fixed-term
employment are not the same. While the former requires a
particular project, the duration of a fixed-term employment
agreed upon by the parties may be any day certain, which is
understood to be that which must necessarily come although it
may not be known when. The decisive determinant in fixed-
term employment is not the activity that the employee is called
upon to perform but the day certain agreed upon by the parties
for the commencement and termination of the employment
relationship. ||| (Innodata Knowledge Services, Inc. v. Inting,
G.R. No. 211892, [December 6, 2017])
• Fixed-term employment is valid but more of an
exception. The Court has previously recognized the
validity of fixed-term employment contracts, but it has
consistently held that this is more of an exception
rather than the general rule. Aware of the possibility of
abuse in the utilization of fixed-term employment
contracts, the Court has declared that where from the
circumstances it is apparent that the periods have been
imposed to preclude acquisition of tenurial security by
the employee, they should be struck down as contrary
to public policy or morals.||| (Innodata Knowledge
Services, Inc. v. Inting, G.R. No. 211892, [December
6, 2017])
Example; fixed term contract but regular in substance. The
workers were school physicians and dentists who were
contracted for a 1-year period and the contract has been
consistently renewed for 15 years already. Because of the (1)
repeated renewal of petitioners' contract for 15 years,
interrupted only by the close of the school year; (2) the
necessity of the work performed by petitioners as school
physicians and dentists; and (3) the existence of LSGI's power
of control over the means and method pursued by petitioners in
the performance of their job, we rule that petitioners attained
regular employment, entitled to security of tenure who could
only be dismissed for just and authorized causes. Samonte vs
La Sall Greenhills
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Probationary employment
Article 296, Labor Code of the Philippines. [281]
Probationary employment. Probationary employment shall
not exceed six (6) months from the date the employee started
working, unless it is covered by an apprenticeship agreement
stipulating a longer period.
Termination of a probationary employee. The services of an
employee who has been engaged on a probationary basis may
be terminated
1) for a just cause or
2) when he fails to qualify as a regular employee in
accordance with reasonable standards made known by
the employer to the employee at the time of his
engagement.
Omnibus Rules Implementing the Labor Code
Book 6, Section 6
Probationary Employment. There is probationary
employment where the employee, upon his engagement, is made
to undergo a trial period during which the employer determines
his fitness to qualify for regular employment based on reasonable
standards made known to him at the time of engagement.
Probationary employment shall be governed by the following
rules:
a. Where the work for which the employee has been
engaged is learnable or apprenticable in accordance
with the standards prescribed by the Department of
Labor and Employment. The period of probationary
employment shall be limited to the authorized
learnership or apprenticeship period, whichever is
applicable.
b. Where the work is neither learnable nor
apprenticeable, the period of probationary employment
shall not exceed 6 months reckoned from the date the
employee actually started working.
c. The services of any employee who has been engaged on
probationary basis may be terminated only for a just or
JO VALLES
SECURITY OF TENURE AND ENDO
authorized cause, when he fails to qualify as a regular
employee in accordance with reasonable standards
prescribed by the employer.
d. In all cases of probationary employment, the employer
shall make known to the employee the standards under
which he will qualify as a regular employee at the time
of his engagement. Where no standards are made
known to the employee at that time, he shall be
deemed a regular employee.
Standards must be communicated at the time of
engagement; must be presented as evidence. AMACC, by its
submissions, admits that it did not renew the petitioners'
contracts because they failed to pass the Performance Appraisal
System for Teachers (PAST) and other requirements for
regularization that the school undertakes to maintain its high
academic standards. While we can grant that the standards were
duly communicated to the petitioners and could be applied
beginning the 1st trimester of the school year 2000-2001,
glaring and very basic gaps in the school's evidence still exist.
The exact terms of the standards were never introduced as
evidence; neither does the evidence show how these standards
were applied to the petitioners. Without these pieces of
evidence, we have nothing to consider and pass upon as valid
or invalid for each of the petitioners. Inevitably, the non-
renewal lacks the supporting finding of just cause that the law
requires and, hence, is illegal. Mercado vs AMA Computer
College
Concepts applied to teachers
Section 63, DepEd Order No. 88 s. 2010
Required probationary period in private schools for basic
education. A probationary period of not more than three years
in the case of the school teaching personnel and not more than
six months for non-teaching personnel shall be required for
employment in all private schools.
• A school personnel who has successfully undergone
the probationary period herein specified and who is
fully qualified under the existing rules and standards of
the school shall be considered permanent.
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ad majorem dei gloriam
Section 114, CHED Memorandum Order No. 40 s. 2008
Private higher education; conditions of employment. Every
private higher education institution shall promote the
improvement of the economic, social and professional status of
all its personnel.
In recognition of their special employment status and their
special role in the promotion of education, the employment of
the academic and the academic support personnel, or the
teaching and non-teaching academic personnel, shall be
governed by the policies and rules of the Commission,
promulgated from time to time in coordination with the
Department of Education (DepEd), the Technical Education
and Skills Development Authority (TESDA), and the
Department of Labor and Employment (DOLE).
Conditions of employment of non-academic and other
personnel of the institution, including compensation, hours of
work, security of tenure and labor relations, shall be governed
by appropriate labor laws and regulations, and by institutional
policies, rules and regulations.
Section 115, CHED Memorandum Order No. 40 s. 2008
Compensation. Every private higher education institution
shall provide for a compensation policy that shall be graded or
scaled taking into account performance, merit earned,
qualifications, and responsibilities of the various positions.
Section 116, CHED Memorandum Order No. 40 s. 2008
Employment contract; must be written regardless of type
of employment. Before or at the start of school term, the
institution shall execute a written employment contract with its
teaching and non-teaching academic employees, whether
permanent, probationary or part-time. The contract with a
permanent teaching and non-teaching academic employee does
not affect his/her tenure or status, but binds him/her to work for
the entire school term and to complete the requirements thereof,
including the submission of final grades.
Every contract of employment shall specify the:
1. designation,
2. qualification,
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3. salary rate,
4. the term and nature of service,
5. the date of effectivity,
6. such terms and conditions or employment as may be
consistent with laws, and the institutional policies,
rules and regulations.
A copy of the contract shall be furnished the personnel
concerned .
Section 117, CHED Memorandum Order No. 40 s. 2008
Part-time only if not fully qualified; part-time cannot be
regularized. An academic teaching personnel, who does not
possess the minimum academic qualifications prescribed under
Sections 35 and 36 of this Manual shall be considered as a part-
time employee, and therefore cannot avail of the status and
privileges of a probationary employment. A part-time
employee cannot acquire regular or permanent status, and
hence, may be terminated when a qualified teacher becomes
available.
• Part-timers cannot be regularized. Since there is no
showing that respondent worked on a full-time basis
for at least three years, he could not have acquired a
permanent status. A part-time employee does not attain
permanent status no matter how long he has served the
school. And as a part-timer, his services could be
terminated by the school without being held liable for
illegal dismissal. Moreover, the requirement of twin-
notice applicable only to regular or permanent
employees could not be invoked by respondent. St.
Mary’s University vs CA
Probationary period; 6 sems or 9 trimesters. The
probationary employment of academic teaching personnel shall
not be more than a period of 6 consecutive semesters or nine
consecutive trimesters of satisfactory service, as the case may
be.
• Can have fixed term employment during teachers’
probationary period; how probationary system
works for teachers. The use of employment for fixed
periods during the teachers' probationary period is
JO VALLES
SECURITY OF TENURE AND ENDO
likewise an accepted practice in the teaching
profession. The common practice is for the employer
and the teacher to enter into a contract, effective for one
school year. At the end of the school year, the employer
has the option not to renew the contract, particularly
considering the teacher's performance. If the contract
is not renewed, the employment relationship
terminates. If the contract is renewed, usually for
another school year, the probationary employment
continues. Again, at the end of that period, the parties
may opt to renew or not to renew the contract. If
renewed, this second renewal of the contract for
another school year would then be the last year of
probationary employment. At the end of this third year,
the employer may now decide whether to extend a
permanent appointment to the employee, primarily on
the basis of the employee having met the reasonable
standards of competence and efficiency set by the
employer. For the entire duration of this three-year
period, the teacher remains under probation. Upon the
expiration of his contract of employment, being simply
on probation, he cannot automatically claim security of
tenure and compel the employer to renew his
employment contract. Mercado vs AMA Computer
College
• But fixed term period must be reconciled with
Article 281; there must be reasonable standards
made known at the time of engagement or else
regular. In a situation where the probationary status
overlaps with a fixed-term contract not specifically
used for the fixed term it offers, Article 281 should
assume primacy and the fixed-period character of the
contract must give way. The services of an employee
who has been engaged on a probationary basis may be
terminated for a just cause or when he fails to qualify
as a regular employee in accordance with reasonable
standards made known by the employer to the
employee at the time of his engagement. Corollarily,
should the teachers not have been apprised of such
reasonable standards at the time specified above, they
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ad majorem dei gloriam
shall be deemed regular employees. Colegio des
Santisimo Rosario vs Rojo
• Must specify period. It is important that the contract
of probationary employment specify the period or term
of its effectivity. The failure to stipulate its precise
duration could lead to the inference that the contract is
binding for the full three-year probationary period.
Mercado vs AMA Computer College
Section 118, CHED Memorandum Order No. 40 s. 2008
Regular or permanent status. A full-time academic teaching
personnel who has satisfactorily completed his/her
probationary employment, and who possesses the minimum
qualifications prescribed by the Commission and the
institution, shall acquire a regular or permanent status if he/she
is re-hired or re-appointed immediately after the end of his/her
probationary employment.
Requisites to be regularized:
1. full-time
2. completion of probationary employment
3. possesses the minimum qualifications
4. re-hired or re-appointed immediately after
completion of probationary employment
Considered resigned of regular teacher requests for load
equivalent to a part-time load. However, a regular or
permanent academic teaching personnel who requests a
teaching load equivalent to a part-time load, shall be considered
resigned, and hence, may forfeit his/her regular or
permanent status at the discretion of the management of the
higher education institution and shall thereby be covered by a
term-contract employment.
Probationary employees enjoy security of tenure during
probation period. Probationary employees enjoy security of
tenure during the term of their probationary employment such
that they may only be terminated for cause as provided for by
law, or if at the end of the probationary period, the employee
failed to meet the reasonable standards set by the employer at
the time of the employee's engagement. In this case, the
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SPBUS
termination of respondent was effected by that letter stating that
she was being relieved from employment because the school
authorities allegedly decided, as a cost-cutting measure, that the
position of "Principal" was to be abolished. Nowhere in that
letter was respondent informed that her performance as a school
teacher was less than satisfactory. She was illegally dismissed.
Magis Young Achievers’ Learning Center v. Manalo
Full-time load is 15-24; part-time load is 12 or less. A perusal
of the various orders of the then Department of Education,
Culture and Sports prescribing teaching loads shows that the
regular full-time load of a faculty member is in the range of 15
units to 24 units a semester or term, depending on the courses
taught. Part-time instructors carry a load of not more than 12
units. St. Mary’s University vs CA
Part-timers have security of tenure. Yet, this is not to say that
part-time teachers may not have security of tenure. The school
could not lawfully terminate a part-timer before the end of the
agreed period without just cause. But once the period, semester,
or term ends, there is no obligation on the part of the school to
renew the contract of employment for the next period, semester,
or term. St. Mary’s University vs CA
No vested right to regular employment until after serving
probationary period satisfactorily. No vested right to a
permanent appointment shall accrue until the employee has
completed the prerequisite three-year period necessary for the
acquisition of a permanent status. [However, it must be
emphasized that] mere rendition of service for three
consecutive years does not automatically ripen into a
permanent appointment. It is also necessary that the employee
be a full-time teacher, and that the services he rendered are
satisfactory. Colegio del Santisimo Rosario vs Rojo
Pakyaw employees
Pakyaw employees. In a payment by pakyaw basis, the
emphasis is on the task itself, in the sense that payment is
reckoned in terms of completion of the work, not in terms of
the number of hours spent in the completion of the work. A
distinguishing characteristic of a task basis engagement
JO VALLES
SECURITY OF TENURE AND ENDO
or pakyaw, as opposed to straight-hour wage payment, is the
non-consideration of the time spent in working. ||| (Ramiro Lim
& Sons Agricultural Co., Inc. v. Guilaran, G.R. No. 221967,
[February 6, 2019])
• Pakyaw workers are regular employees for as long
as their employers [have the right to] exercise
control over them. The employees worked as
carpenters, painters, and mascilladors, which were
necessary in the usual place of the employer, who was
engaged in the manufacture and selling of caskets.
They have been working there for 9 years, and the
power of control of the employer is clearly present
since the employees follow the steps in making a casket
as instructed by the employer. The same would be
checked as basis for compensation. Thus, for as long as
their employers exercise control over them, pakyaw
workers are regular employees. (A. Nate Caske aet
Maker v. Arango, G.R. No. 192282, [October 5, 2016],
796 PHIL 597-617)
o Test to determine the existence of employer-
employee relationship. A regular
employment, whether it is one or not, is aptly
gauged from the concurrence, or the non-
concurrence, of the following factors
1. the manner of selection and
engagement of the putative employee;
2. the mode of payment of wages;
3. the presence or absence of the power
of dismissal; and
4. the presence or absence of the power
to control the conduct of the putative
employee or the power to control the
employee with respect to the means or
methods by which his work is to be
accomplished. Paguio v. NLRC, 451
PHIL 243, 252-253 (2003)
o 2-tiered alternative test. However, in cases
where there is no written agreement to base the
relationship on and where the various tasks
16
ad majorem dei gloriam
performed by the worker bring complexity to
the relationship with the employer, the better
approach would therefore be to adopt a two-
tiered test involving: a) the putative
employer's power to control the employee with
respect to the means and methods by which the
work is to be accomplished; and b) the
underlying economic realities of the activity or
relationship.||| (Maricalum Mining Corp. v.
Florentino, G.R. Nos. 221813 & 222723, [July
23, 2018])
• Pakyaw workers; control test. The "control test"
assumes primacy in the overall consideration. Under
this test, an employment relation obtains where work is
performed or services are rendered under the control
and supervision of the party contracting for the service,
not only as to the result of the work but also as to the
manner and details of the performance
desired. Gapayao v. Fulo, 711 PHIL 179, 196 (2013).
o Exercise of control not necessary; mere
existence is enough. It should be remembered
that the control test merely calls for the
existence of the right to control, and not
necessarily the exercise thereof. It is not
essential that the employer actually supervises
the performance of duties by the employee. It
is enough that the former has a right to wield
the power. ||| (A. Nate Casket Maker v.
Arango, G.R. No. 192282, [October 5, 2016],
796 PHIL 597-617)
LABOR CONTRACTING
CONTRACTING AND SUBCONTRACTING
ARRANGEMENTS
Preliminaries
Contractor or Subcontractor. Whenever an employer
enters into a contract with another person for the performance
of the former's work, the employees of the contractor and of
the latter's subcontractor, if any, shall be paid in accordance
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with the provisions of this Code [Labor Code]. Article 106
(1), Labor Code of the Philippines
• Contracting or subcontracting. This refers to an
arrangement whereby a principal agrees to farm out
to a contractor the performance or completion of a
specific job or work within a definite or
predetermined period, regardless of whether such job
or work is to be performed or completed within or
outside the premises of the principal. Section 3(c),
DOLE D.O. 174-17
• Principal. This refers to any natural or juridical
entity, whether an employer or not, who puts out or
farms out a job or work to a contractor. Section 3(i),
DOLE D.O. 174-17
• Contractor. This refers to any person or entity
engaged in legitimate contracting or subcontracting
arrangement providing services for a specific job or
undertaking framed out by principal under a Service
Agreement. Section 3(d), DOLE D.O. 174-17
Labor-only contracting. There is labor-only contracting
where the person supplying workers to an employer does not
have substantial capital or investment in the form of tools,
equipment, machineries, work premises, among others, AND
the workers recruited and placed by such person are
performing activities which are directly related to the
principal business of such employer. In such cases, the
person or intermediary shall be considered merely as an agent
of the employer who shall be responsible to the workers in
the same manner and extent as if the latter were directly
employed by him. Article 106(4), Labor Code of the
Philippines
• Labor-only contracting; as defined in the IRR.
This refers to arrangement where the contractor or
subcontractor merely recruits, supplies or places
workers to perform a job or work for a
principal, and the elements enumerated in Section 5
hereunder are present framed out by principal under
JO VALLES
SECURITY OF TENURE AND ENDO
a Service Agreement. Section 3(h), DOLE D.O. 174-
17
• Substantial capital. This refers to pad-up capital at
least P5,000,000.00 in the case of corporations,
partnerships and cooperatives; in the case of single
proprietorship, a net worth of at least P5,000,000.00.
Section 3(l), DOLE D.O. 174-17
Presumption of labor-only contracting; burden of proof.
Generally, the contractor is presumed to be a labor-only
contractor, unless such contractor overcomes the burden of
proving that it has the substantial capital, investment, tools and
the like. However, where the principal is the one claiming that
the contractor is a legitimate contactor, as in the present case,
said principal has the burden of proving that supposed status.
Alilin vs Petron Corporation
Article 107, Labor Code of the Philippines
Indirect Employer. The provisions of the immediately
preceding article shall likewise apply to any person,
partnership, association or corporation which, not being an
employer, contracts with an independent contractor for the
performance of any work, task, job or project.
Article 108, Labor Code of the Philippines
Posting of Bond; equal to cost of labor. An employer or
indirect employer may require the contractor or subcontractor
to furnish a bond equal to the cost of labor under contract, on
condition that the bond will answer for the wages due the
employees should the contractor or subcontractor, as the case
may be, fail to pay the same.||
Permissible contracting arrangements
Permissible contracting or subcontracting arrangements.
Notwithstanding Sections 5 and 6 hereof, contracting or
subcontracting shall only be allowed if all the following
circumstances concur:
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ad majorem dei gloriam
a. The contractor or subcontractor is engaged in a
distinct and independent business and undertakes to
perform the job or work on its own responsibility,
according to its own manner and method;
b. The contractor or subcontractor has substantial
capital to carry out the job farmed out by the
principal on his account, manner and method,
investment in the form of tools, equipment,
machinery and supervision;
c. In performing the work farmed out, the contractor or
subcontractor is free from the control and/or
direction of the principal in all matters connected
with the performance of the work except as to the
result thereto; and
d. The Service Agreement ensures compliance with all
the rights and benefits for all the employees of the
contractor or subcontractor under the labor laws.
Legitimate labor contractor. A legitimate job contractor
enters into an agreement with the employer for the supply of
workers for the latter but the employer-employee relationship
between the employer and the contractor's employees [is] only
for a limited purpose, i.e., to ensure that the employees are paid
their wages. (Lingat v. Coca-Cola Bottlers Philippines, Inc.,
G.R. No. 205688, [July 4, 2018])
Full-time medical personnel in company clinic does not
negate the existence of independent contractorship. Any
agreement may provide that one party shall render services for
and in behalf of another, no matter how necessary for the latter's
business, even without being hired as an employee. This set-up
is precisely true in the case of an independent contractorship as
well as in an agency agreement. Indeed, Article 280 of the
Labor Code is not the yardstick for determining the existence
of an employment relationship. As it is, the provision merely
distinguishes between two (2) kinds of employees, i.e., regular
and casual.(Philippine Global Communications, Inc. v. De
Vera, G.R. No. 157214, [June 7, 2005], 498 PHIL 301-317)
Full-time medical personnel in company clinic does not
negate the existence of independent contractorship. The
phrase "services of a full-time registered nurse" should thus be
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taken to refer to the kind of services that the nurse will render
in the company's premises and to its employees, not the manner
of his engagement. Hence, a full-time nurse in a company clinic
does not of itself establish an employer-employee relationship
between such nurse and the company, nor does it negate the
existence of an independent contractorship between the
company doctor who employed the nurse, and the company.
(Escasinas v. Shangri-la's Mactan Island Resort, G.R. No.
178827, [March 4, 2009], 599 PHIL 746-758)
Illicit employment arrangements
Section 5, DOLE D.O 174-17
Absolute Prohibition against Labor-only
Contracting. Labor-only contracting, which is totally
prohibited, refers to an arrangement where:
a)
i. The contractor or subcontractor does not
have substantial capital, or
ii. The contractor or subcontractor does not
have investments in the form of tools,
equipment, machineries, supervision, work
premises, among others, and
iii. The contractor's or subcontractor's
employees recruited and placed are
performing activities which are directly
related to the main business operation of the
principal; or
b) The contractor or subcontractor does not exercise the
right to control over the performance of the
work of the employee.
The existence of any of the 2 elements in Section 5 will make
one a LOC. For labor-only contracting to exist, Section 5 of
D.O. No. 18-02 requires any of two elements to be present:
1. The contractor or subcontractor does not have
substantial capital or investment which relates to the
job, work or service to be performed and the
employees recruited, supplied or placed by such
contractor or subcontractor are performing activities
which are directly related to the main business of the
principal, OR
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SECURITY OF TENURE AND ENDO
2. The contractor does not exercise the right to control
over the performance of the work of the contractual
employee.
• Example LOC; all elements present. PAL and
Synergy entered into an agreement whereby Synergy
will provide loading, unloading, delivery of baggage
and cargo and other related services to and from PAL's
aircraft at the Mactan Station. The SC said that Mactan
was engaged in LOC because the work performed by
almost all of the respondents is directly related to the
main business of the petitioner. And the equipment
used by respondents as station loaders, such as trailers
and conveyors, are owned by PAL. PAL also exercised
control over the employees of Synergy in the form of
work schedules, countersign in their IDs, and requiring
them to wear uniforms. PAL vs Ligan
• Example LOC; all elements present. SMC and
Sunflower entered into a contract whereby the latter
will engage personnel for the Bacolod Shrimp
Processing Plant of the former. In saying that
Sunflower was engaged in LOC and therefore its
employees were actually that of SMC’s, the court noted
that SMC exercised control over the employees
because it signed the daily time records and sunflower
did not have an independent business. It did not have
substantial capitalization (only Php 2, 000 paid-up
capital) and the lot, building, machineries and all other
working tools utilized by private respondents in
carrying out their tasks were owned and provided by
SMC, along with the regular employees with identical
jobs. Lastly, the employees were performing work that
was directly related to the principal business of SMC.
San Miguel Corporation vs Aballa.
Contra: Requirements; capital and direct relation to work
of contractor. The possession of substantial capital is only one
element. Labor-only contracting exists when any of the two
elements is present. Thus, even if the Court would indulge
Coca-Cola and admit that Interserve had more than sufficient
capital or investment, it cannot be denied that the employees
18
ad majorem dei gloriam
were performing activities which were directly related to the
principal business of such employer. To determine whether a
person or entity is indeed a legitimate labor contractor, it is
necessary to prove not only substantial capital or investment in
tools, equipment, work premises, among others, but also that
the work of the employee is directly related to the work that
contractor is required to perform for the principal. Hence,
Interserve is a labor-only contractor. Quintanar v. Coca-Cola
Bottlers, Philippines, Inc., G.R. No. 210565, June 28, 2016,
794 SCRA 654. en banc
• FLJ. This ruling is more stringent in that to remove a
contractor outside the realm of LOC, it must show not
only that it has substantial capital/investment, but also
that the employees are performing work that is directly
related to the work that the contractor is required to do
for the principal. This is contrary to the traditional
rulings that in order to remove a contractor outside the
realm of LOC, the showing of either substantial
capital/investment or that the employees are
performing activities directly related to the business of
the principal) is enough. In this case, the contractor was
considered as engaged in LOC even if it had substantial
capital, because the employees were performing
activities directly related to the business of the
principal. But since this is an en banc case and was
reiterated in Lingat, this case is still important.
Registration only disputable presumption of job
contracting. Unlike the registration requirement, which serves
only to raise a disputable presumption of job contracting, the
possession of substantial capital or investments is indispensable
in proving a contractor's legitimacy.||| (Alaska Milk Corp. v.
Paez, G.R. Nos. 237277 & 237317, [November 27, 2019])
The contractor must have control over the work. The
requirement of the law in determining the existence of
independent contractorship is that the contractor should
undertake the work on his own account, under his own
responsibility, according to his own manner and method, free
from the control and direction of the employer except as to the
results thereof. ||| (Garden of Memories Park and Life Plan,
Last Edit: 23 December 2020
SPBUS
Inc., v. National Labor Relations Commission, G.R. No.
160278, [February 8, 2012], 681 PHIL 299-314)
Contractor presumed to be a labor-only contractor; burden
of proof. A contractor is presumed to be a labor-only
contractor, unless it proves that it has the substantial capital,
investment, tools and the like. However, where the principal is
the one claiming that the contractor is a legitimate contractor,
the burden of proving the supposed status of the contractor rests
on the principal. (Garden of Memories Park and Life Plan, Inc.,
v. National Labor Relations Commission, G.R. No. 160278,
[February 8, 2012], 681 PHIL 299-314)
Substantial capital; must be used for business of principal.
Although the contractor PASAKA had property, plant, and
equipment net of accumulated depreciation in its financial
statements, there was no showing that the properties covered
thereby were actually and directly used in the conduct of
PASAKA's business or that they were actually used in the
performance or completion of the job, work, or service that it
was contracted to render under its supposed job
contract.|||(Norkis Trading Corp. v. Buenavista, G.R. No.
182018, [October 10, 2012], 697 PHIL 74-105)
Substantial capitalization must exist at the time that the
service agreement is entered into. The records showed that
the multi-million assets of CAMPCO were amassed in the years
following its establishment. When CAMPCO was established
and the Service Contract between petitioner and CAMPCO was
entered into, CAMPCO only had P6,600.00 paid-up capital,
which could hardly be considered substantial. It only managed
to increase its capitalization and assets in the succeeding years
by engaging in what had been declared by authorized DOLE
officials as labor-only contracting. The SC ruled that CAMPCO
was engaged in LOC. Dole Phils vs Esteva
Labor-only contractor when the only client is principal.
SAPS supplied merchandisers to P&G. When P&G terminated
its contract with SAPS, the latter also terminated its employees.
It is obvious from its act that SAPS had no other clients and had
no intention of seeking other clients in order to further its
merchandising business. From all indications SAPS, existed to
JO VALLES
SECURITY OF TENURE AND ENDO
cater solely to the need of P&G for the supply of employees in
the latter's merchandising concerns only. Under the
circumstances prevailing in the instant case, we cannot consider
SAPS as an independent contractor. Aliviado vs Procter and
Gamble
Consequence of labor-only contracting; creates employer-
ee relationship between principal and contractor’s
employees. Finally, a finding that a contractor is a labor-only
contractor is equivalent to declaring that there is an employer-
employee relationship between the principal and the employees
of the supposed contractor, and the labor-only contractor is
considered as a mere agent of the principal, the real employer.
The former becomes solidarily liable for all the rightful claims
of the employees. ||| (Superior Packaging Corp. v. Balagsay,
G.R. No. 178909 (Resolution), [October 10, 2012], 697 PHIL
62-74)
Consequence of labor-only contracting. Where a labor-only
contracting exists, the principal shall be deemed the employer
of the contractual employee; and the principal and the labor-
only contractor shall be solidarily liable for any violation of
the Labor Code.||| (Lingat v. Coca-Cola Bottlers Philippines,
Inc., G.R. No. 205688, [July 4, 2018])
Consequence of labor-only contracting. Where labor-only
contracting exists, the Labor Code itself establishes an
employer-employee relationship between the employer and the
employees of the labor-only contractor. The statute establishes
this relationship for a comprehensive purpose: to prevent a
circumvention of labor laws. The contractor is considered
merely an agent of the principal employer and the latter is
responsible to the employees of the labor-only contractor as if
such employees had been directly employed by the principal
employer. (Norkis Trading Corp. v. Buenavista, G.R. No.
182018, [October 10, 2012], 697 PHIL 74-105)
Example; labor-only contractor. It was shown that supposed
contractor RDG had sufficient capital only for one year and not
for the entire duration of the employment, that the work
performed by the employees was directly related to principal
Petron’s business, and that Petron exercised control over the
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ad majorem dei gloriam
said employees in that it could order the latter to work outside
their regular maintenance/utility job, observe an 8-5 work
schedule, and wear proper uniform and safety helmets. The SC
held that RDG was merely a labor-only contractor and treated
the same as Petron’s agent. The SC said that an employer-
employee relationship was thus present between Petron and the
employees. RDG and Petron were held solidarily liable for the
employees’ illegal dismissal and monetary claims. (Alilin v.
Petron Corp., G.R. No. 177592, [June 9, 2014], 735 PHIL 509-
529)
Example; labor-only contractor. PASAKA failed to prove
that the cooperative had substantial capital or investment
sufficient to enable it to perform the functions of an
independent contractor. Although it reported property and
equipment in its financial statements, there was no showing that
the properties covered thereby were actually and directly used
in the conduct of PASAKA's business or that they were actually
used in the performance or completion of the job, work, or
service that it was contracted to render under its supposed job
contract. In addition, the employees performed work that are
directly related and vital to the principal’s business of
manufacturing of Yamaha motorcycles. (Norkis Trading Corp.
v. Buenavista, G.R. No. 182018, [October 10, 2012], 697 PHIL
74-105)
Section 6, DOLE D.O 174-17
Other Illicit Forms of Employment Arrangements. In
addition to Section 5 of these Rules, the following are hereby
declared prohibited for being contrary to law or public policy:
a. When the principal farms out work to a "Cabo".
• Cabo. This refers to a person or group of
persons or to a labor group which, under the
guise of a labor organization, cooperative
or any entity, supplies workers to an
employer, with or without any monetary or
other consideration, whether in the capacity
of an agent of the employer or as an
independent contractor. Section 3(a), DOLE
D.O. 174-17
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SPBUS
b. Contracting out of job or work through an in-house
agency.
• In-house agency. This refers to a contractor
which is owned, managed, or controlled
directly or indirectly by the principal or one
where the principal owns/represents any
share of stock, and which operates solely or
mainly for the principal.|| Section 3(f), DOLE
D.O. 174-17
c. Contracting out of job or work through an in-house
cooperative which merely supplies workers to the
principal.
• In-house cooperative. This refers to a
cooperative which is managed, or controlled
directly or indirectly by the principal or one
where the principal or any of its officers
owns/represents any equity or
interest, and which operates solely or mainly
for the principal.|| Section 3(g), DOLE D.O.
174-17|
d. Contracting out of a job or work by reason of a strike
or lockout whether actual or imminent.
e. Contracting out of a job or work being performed by
union members and such will interfere with, restrain
or coerce employees in the exercise of their rights to
self-organization as provided in Article 259 of the
Labor Code, as amended.
f. Requiring the contractor's/subcontractor's employees
to perform functions which are currently being
performed by the regular employees of the principal.
g. Requiring the contractor's/subcontractor's employees
to sign, as a precondition to employment or
continued employment:
i. an antedated resignation letter;
ii. a blank payroll;
iii. a waiver of labor standards including
minimum wages and social or welfare
benefits;
iv. or a quitclaim releasing the principal or
contractor from liability as to
payment of future claims; or
JO VALLES
SECURITY OF TENURE AND ENDO
v. require the employee to become
member of a cooperative.
h. Repeated hiring by the
contractor/subcontractor of employees under
an employment contract of short duration.
i. Requiring employees under a
contracting/subcontracting arrangement to sign a
contract fixing the period of employment to a term
shorter than the term of the Service Agreement,
unless the contract is divisible into phases for which
substantially different skills are required and this is
made known to the employee at the
time of engagement.
j. Such other practices, schemes
or employment arrangements designed to
circumvent the right of workers to security of tenure.
Section 27, DOLE D.O 174-17. Retaliatory measures.
Pursuant to Article 118 of the Labor Code, as amended, it
shall be unlawful for the principal, contractor, or any party
privy to the contract or services provided to:
1. refuse to pay or reduce the wages and benefits, and
2. discharge or in any manner discriminate against any
worker who has filed any complaint or instituted any
proceeding on wages (under Title II, Book III of the
Labor Code), labor standards violation, or has
testified or is about to testify in such proceedings.
Summary. When the principal is deemed the direct
employer of the contractor’s employees:
1. In the event that there is a finding that the contractor
or subcontractor is engaged in labor-only contracting
under Section 5 and other illicit forms of
employment arrangements under Section 6 of these
Rules. Section 7, DO 174-17
2. In the event that there is a violation of labor laws,
including payment of wages. Section 9, DO 174-17
3. A finding of violation of either Sections 10 (rights of
employees) or 11 (required contracts) shall render
the principal the direct employer of the employees of
the contractor or subcontractor. Section 12, DO 174-
17
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ad majorem dei gloriam SPBUS
4. Contracting with a delisted contractor. Section 26, provisions on general labor standards. It shall include the
DO 174-17 following stipulations:
RIGHTS, REGISTRATION, LIABILITY 1. The specific description of the job or work to be
performed by the employee; and
Rights of contractor’s/subcontractor’s employees 2. The place of work and terms and conditions
of employment, including a statement of the wage
Section 10, DOLE D.O. 174-17 rate applicable to the individual employee.
Rights of contractor's/subcontractor's employees. All
contractor's/subcontractor's employees shall be entitled to Inform of the stipulations on or before first day. The
security of tenure and all the rights and privileges as provided contractor/subcontractor shall inform the employee of the
for in the Labor Code, as amended, to include the following: foregoing stipulations in writing on or before the first
day of his/her employment.
a. Safe and healthful working conditions;
b. Labor standards such as but not limited to:
Service Agreement between the principal and the
a. service incentive leave, contractor
b. rest days,
c. overtime pay, The Service Agreement shall include the following:
d. holiday pay, 1. The specific description of the job or work being
e. 13th month pay, and
subcontracted, including its term or duration;
f. separation pay; 2. The place of work and terms and conditions
c. Retirement benefits under the SSS or retirement governing the contracting arrangement, to include
plans of the contractor/subcontractor, whichever is the agreed amount of the contracted job or work as
higher; well as the standard administrative fee of not less
d. Social security and welfare benefits; and
than ten percent (10%) of the total contract cost; and
e. Self-organization, collective 3. A provision on the issuance of the bond/s as defined
bargaining and peaceful concerted activities in Section 3 (a) renewable every year.
including the right to strike.
Section 12, DOLE D.O. 174-17
Section 11, DOLE D.O. 174-17
Effect of violation of the provisions on the
Required contracts under these rules rights of contractor's employees and required contracts. A
a. Employment contract between finding of violation of either Sections 10 or 11 hereof, shall
contractor/subcontractor and employees render the principal the direct employer of the
b. Service agreement between the principal and the employees of the contractor or subcontractor, pursuant to
contractor Article 109 of the Labor Code, as amended.
Employment contract between the Section 13, DOLE D.O. 174-17
contractor/subcontractor and its employees Effect of termination of employment. The termination of
employment of the contractor's/subcontractor's employee prior
Notwithstanding any oral or written stipulations to the contrary, to the expiration of the Service Agreement shall be governed
the contract between the contractor/subcontractor and its by Articles 297, 298 and 299 of the Labor Code.
employees shall be governed by the provisions of Articles
294 and 295 of the Labor Code, as amended, including the
Last Edit: 23 December 2020 JO VALLES
SECURITY OF TENURE AND ENDO
Pre-termination of Service Agreement due to causes not
authorized; unpaid wages and benefits borne by party at
fault. In case the termination of employment is caused by the
pre-termination of the Service Agreement not due to authorized
causes under Article 298, the right of the
contractor's/subcontractor's employee to unpaid
wages and other unpaid benefits including unremitted legal
mandatory contributions, e.g., SSS, PhilHealth, Pag-IBIG,
ECC, shall be borne by the party at fault, without prejudice to
the solidary liability of the parties to the Service Agreement.
Termination as a result of expiration of SA or completion
of job; wait for re-employment within 3 months to resign.
Where the termination results from the expiration of the
Service Agreement, or from the completion of the
phase of the job or work for which the employee is engaged,
the latter may opt to wait for re-employment within three (3)
months to resign and transfer to another contractor-
employer.
• Failure to provide new employment after
expiration of SA entitles employee to separation
benefits. Failure of the contractor to provide
new employment for the employee shall entitle the
latter to payment of separation benefits as may be
provided by law or the Service Agreement,
whichever is higher, without prejudice to his/her
entitlement to completion bonuses or other
emoluments, including retirement benefits whenever
applicable.
• Mere expiration of SA not deemed as termination
of employment. The mere expiration of the Service
Agreement shall not be deemed as a
termination of employment of the
contractor's/subcontractor's employees who are
regular employees of the latter.
Registration and other requirements
Restriction and prohibition by DOLE Secretary. The
Secretary of Labor and Employment may, by appropriate
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ad majorem dei gloriam
regulations, restrict or prohibit the contracting-out of labor to
protect the rights of workers established under this Code.
• In so prohibiting or restricting, he may:
1. make appropriate distinctions
between labor-only contracting and job
contracting as well as
2. differentiations within these types of
contracting and
3. determine who among the parties involved
shall be considered the employer for
purposes of this Code,
to prevent any violation or circumvention of any provision of
this Code. Article 106(3), Labor Code of the Philippines
Section 14, DOLE D.O 174-17.
Mandatory registration and registry of legitimate
contractors. Consistent with the authority of the
Secretary of Labor and Employment to restrict or prohibit
the contracting out of labor to protect the rights of workers, it
shall be mandatory for all persons or entities acting as
contractors to register with the Regional
Office of the Department of Labor and Employment (DOLE
) where it principally operates.
Presumption of labor-only contracting. Failure to
register shall give rise to the presumption that the
contractor is engaged in labor-only contracting.
• Accordingly, the registration system, governing
contracting arrangements and implemented by the
Regional Offices of the DOLE is hereby
established, with the Bureau of Working
Conditions (BWC) as the central registry.
CoR not conclusive proof of status as legitimate job
contractor. A Certificate of Registration issued by the
Department of Labor and Employment is not conclusive
evidence of such status. The fact of registration simply
prevents the legal presumption of being a mere labor-only
contractor from arising. Babas vs Lorenzo Shipping
Section 20, DOLE D.O 174-17.
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SPBUS
Validity of certificate of registration. The contractor shall
be deemed registered only on the date of issuance of its
Certificate of Registration.
2 years effectivity. The Certificate of Registration shall be
effective for two (2) years, unless cancelled after due process.
The same shall be valid in the region where it is registered.
Operation in a jurisdiction outside where the certificate
was registered. In case the contractor has Service
Agreements or operates outside the jurisdiction of the
Regional Office where it is registered, it shall request a duly
authenticated copy of its Certificate of Registration from the
registering Regional Office and submit the same to
the DOLE Regional Office where it seeks to operate together
with a copy of its Service Agreement/s in the area, for
purposes of monitoring compliance with these Rules.
Section 23, DOLE D.O 174-17.
Grounds for revocation of registration. The Regional
Director shall, upon a verified complaint, cancel or revoke
the registration of a contractor after due process, based on
any of the following grounds:
a. Misrepresentation of facts in the application;
b. Submission of falsified or tampered application or
supporting documents to the application for
registration;
c. Non-submission of Service Agreement between the
principal and the contractor when required to do so;
d. Non-submission of the required semi-annual report
as provided in Section 22 (Semi-Annual reporting)
thereof;
e. Final findings that the contractor has engaged
in labor-only contracting and/or other illicit
forms of employment arrangements as provided in
Section 6 hereof;
f. Non-compliance with labor standards and working
conditions;
g. Findings of violation of Section 10
(Rights of contractor's employees), and Section 11
(Required contracts);
JO VALLES
SECURITY OF TENURE AND ENDO
h. Non-compliance with SSS, the HDMF, Pag-IBIG,
PhilHealth, and ECC Laws;
i. Collecting any fees not authorized by law and other
applicable rules and regulations; and
j. Violations of any provisions of the Labor Code.
Section 26, DOLE D.O 174-17.
Effects of Cancellation of Registration. A final Order of
cancellation shall divest the contractor of its legitimate status
to engage in contracting/subcontracting.
Such Order of cancellation shall be a ground to deny
registration an application for renewal of registration to a
contractor under the Rules.
No contractor whose registration is cancelled under these
Rules or any of its officers shall be allowed to operate and
apply for new registration as contractor under either the
same or different name.
The cancellation of the registration of the contractor for
engaging in labor-only contracting or for violation of any of
the provisions of these Rules involving a particular service
agreement will not, however, impair the validity of
existing legitimate job-contracting arrangements the
contractor may have entered into with other principal prior to
the cancellation of its registration. Any valid and subsisting
Service Agreement shall be respected until its expiration;
thereafter, contracting with a delisted contractor shall make
the principal direct employer of all employees under the
Service Agreement pursuant to Articles 106 and 109 of the
Labor Code, as amended.
Section 28, DOLE D.O 174-17.
Enforcement of labor standards and working conditions.
Consistent with Article 128 of the Labor Code, as amended,
the Regional Director through his/her duly authorized
representatives, shall conduct routine
inspection of establishments engaged in contracting
arrangement regardless of the number of employees engaged
by the principal or by the contractor.
22
ad majorem dei gloriam SPBUS
Solidary liability
They shall:
Article 106(2), Labor Code of the Philippines. Solidary
1. have access to employer's
liability among employer, contractor, and subcontractor.
records and premises at any time of the day or night
In the event that the contractor or subcontractor fails to pay
whenever work is being undertaken therein, and
the wages of his employees in accordance with this Code, the
2. the right to copy therefrom,
employer shall be jointly and severally liable with his
3. to question any employee and investigate any fact,
contractor or subcontractor to such employees to the extent
condition or matter which may be necessary to
of the work performed under the contract, in the same manner
determine violations or which may aid in the
and extent that he is liable to employees directly employed
enforcement of the Labor Code, and of any labor
by him.
law, wage order, or rules and regulations issued
pursuant thereto.
Article 109, Labor Code of the Philippines. Solidary
Liability. The provisions of existing laws to the contrary
The findings of the duly authorized representative shall be
notwithstanding, every employer or indirect employer shall
referred to the Regional Director for appropriate action as
be held responsible with his contractor or subcontractor for
provided for in Article 128, and shall be furnished the
any violation of any provision of this Code. For purposes of
collective bargaining agent, if any.
determining the extent of their civil liability under this
Chapter, they shall be considered as direct employers.
Based on the visitorial and enforcement power of the
Secretary of Labor and Employment in Article 128 (a), (b),
2 kinds of solidary liability:
(c), and (d), the Regional Director shall issue compliance
orders to give effect to the labor standards
1. Solidary liability; to employees. It also refers to the
provisions of the Labor Code,
liability of the principal, in the same
other labor legislation, and these Rules.
manner and extent that he/she is liable to his/her
direct employees, to the extent of the work performed
Section 29, DOLE D.O 174-17.
under the contract when the contractor fails to pay
Duty to produce copy of contract between the
the waged of his/her employees, as provided in
principal and the contractor. The principal or the
Article 106 of the Labor Code, as amended. Section
contractor shall be under an obligation to produce a
3(k), DOLE D.O. 174-17
copy of the Service Agreement in the ordinary
course of inspection. The contractor shall likewise be under
2. Solidary liability; with contractor. This refers to
an obligation to produce a copy of any
the liability of the principal, pursuant to the
contract of employment when directed to do so by the
provision of Article 109 of the Labor Code, as direct
Regional Office Director or his/her authorized representative.
employer together with the contractor for any
violation of any provision of the Labor Code.
Section 34, DOLE D.O 174-17.
Section 3(k), DOLE D.O. 174-17
Prohibition on DOLE Officials or Employees. Any
1. official or employee of the DOLE or Solidary liable only for non-payment of wages; not all
2. its attached agencies labor code violations. MIESCOR and OPLGS entered into
is prohibited from engaging or having any interest in any an agreement whereby the latter will provide janitors in the
contracting or subcontracting business. plant of the former. When the employees sued them both for
separation pay and backwages due to illegal dismissal, the SC
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SECURITY OF TENURE AND ENDO ad majorem dei gloriam SPBUS
denied the claim. Reading Articles 106, 107, and 109 together APPLICABILITY OF RULES TO OTHER
will give us the conclusion that an indirect employer can only CONTRACTUAL RELATIONS • Exception #1: Violations of labor standards;
be held solidarily liable to pay with the independent DO 174 applies. However, findings of violations
contractor or subcontractor in the event that the latter fails to Where IRR [ DO 174-17] is not applicable on labor standards and occupational
pay the wages of its employees. Hence, while it is true that Section 33, DOLE D.O. 174-17. PCAB-covered not health and safety standards shall be coordinated
the MIESCOR was the indirect employer of the covered by these rules. Contracting or subcontracting with PCAB for its appropriate action, including
complainants, it cannot be held liable in the same way as the arrangements in the Construction Industry, under the possible cancellation/suspension of the
employer in every respect. The petitioner may be considered licensing coverage of the Philippine Construction contractor’s license.
an indirect employer only for purposes of unpaid Accreditation Board (PCAB), shall not be covered by the
wages. MERALCO Industrial Engineering Services vs • Exception #2: Engaging in contracting
provisions of these Rules and shall continue to be governed arrangements apart from construction; DO 174
NLRC by: applies. Contractors licensed by PCAB which are
1. Department Order No. 19, Series of 1993 engaged in other contracting or subcontracting
Principal not solidarily liable with contractor for (Guidelines Governing the Employment of Workers
backwages and separation pay. The only instance when the arrangement in addition to, or other than construction
in the Construction Industry) and activities shall be required to register
principal can also be held liable with the independent 2. Department Order No. 13, Series of 1998
contractor or subcontractor for the backwages and separation under Department Order No. 174, Series of 2017.
(Guidelines Governing the Occupational Safety and
pay of the latter's employees is when there is proof that the Health in the Construction Industry) and
principal conspired with the independent contractor or 3. DOLE-DPWH-DILG-DTI and PCAB Memorandum Not applicable to IT-enabled services. DO 174
subcontractor in the illegal dismissal of the of Agreement-Joint Administrative Order No. 1, Series of 2017, applies only to trilateral relationship which
employees. MERALCO Industrial Engineering Services vs Series of 2011 (on characterizes contracting or subcontracting arrangement. It
NLRC coordination and harmonization of policies and prog does not contemplate to cover information technology-
rams on occupational safety and health in the enabled services involving an entire or specific business
The principal can still be solidarily liable with the construction industry). process such as:
contractor. Even if MERALCO is not an employer, it still 4. Administrative Order No. 1, Series of 2011 In 1. Business Process Outsourcing
solidarily liable with contractor ASDAI under Articles 106 industries covered by a separate 2. Knowledge Process Outsourcing
and 109. The fact that there is no actual and direct employer- regulation of the DOLE or other government 3. Legal Process Outsourcing
employee relationship between MERALCO and the agency, contracting therein shall be governed by 4. IT Infrastructure Outsourcing
employees of ASDAI does not exonerate MERALCO from these Rules unless expressly provided otherwise. 5. Application Development
liability as to the monetary claims of the individual 6. Hardware and/or Software Support
respondents. When MERALCO contracted for security 7. Medical Transcription
services with ASDAI as the security agency that hired DOLE Department Circular No. 001-17 8. Animation Services
individual respondents to work as guards for it, MERALCO General rule; not applicable to construction industry. 9. Back Office Operations/Support
became an indirect employer of individual respondents Pursuant to PD No. 1746, Series of 1980, licensing and the
pursuant to Article 107 of the Labor Code. When ASDAI as exercise of regulatory powers over the construction industry Private security agencies. Except for the registration
contractor failed to pay the individual respondents, is lodged with the Philippine Contractors Accreditation requirements as provided for in D.O. No. 174, Series of 2017,
MERALCO as principal becomes jointly and severally liable Board (PCAB) of the Construction Industry Authority of the contracting or subcontracting arrangements in the private
for the individual respondents' wages, under Articles 106 and Philippines (CIAP).The PCAB registers all security industry shall be governed by Department Order No.
109 of the Labor Code. MERALCO vs Benamira types of contractors in the construction 150, Series of 2016 (Revised Guidelines Governing
industry and regulates the same by ensuring compliance the Employment and Working Conditions of Security
with DOLE issuances. Thus, the DOLE through its Regional Guards and other Private Security Personnel in the Private
Offices shall not require contractors licensed by PCAB to Security Industry).|||
register under D.O. 174, Series of 2017.
23 Last Edit: 23 December 2020 JO VALLES
SECURITY OF TENURE AND ENDO
Applicable only to trilateral relationship. D.O. No. 174,
Series of 2017, applies only to trilateral relationship which
characterizes contracting or subcontracting arrangement. It
does not contemplate to cover contractual relationships such
as in:
1. contract of sale or purchase,
2. contract of lease,
3. contract of carriage,
4. contract growing/growership agreement,
5. toll manufacturing,
6. contract of management,
operation and maintenance and
7. such other contracts governed by the Civil Code
of the Philippines and other special laws.
8. D.O. No. 174, Series of 2017 does not also cover the
contracting out of job or work to a professional, or
individual with unique skills and talents who himself
or herself performs the job or work for the principal
Discussion. growership agreement; one will give input to
another so that the latter will grow/raise something and the
former will buy the output.
Discussion; toll manufacturing. Toll manufacturing can be
simply defined as an arrangement, where a company with
specialized equipment processes raw materials or unfinished
goods for a different company. If you haven’t heard of this
before, you might have come across toll processing, which is
the exact same thing, only a different name. It’s also
important to note that, although contract manufacturing has
some similarities to toll manufacturing, they are different
things. In contract manufacturing, the manufacturing
company also provides the materials, whereas in toll
manufacturing, that’s the customers job. There are a few
things you’ll need to know about this process before you
agree to an arrangement.
DOLE DEPARTMENT ORDER NO. 150-16
(Revised Guidelines Governing Employment and Working
Conditions of Security Guards and Other Private Security
Personnel, DOLE Department Order No. 150-16,
[February 9, 2016])
24
ad majorem dei gloriam
Section 2
Duty Detail Order refers to a written
order/schedule/assignment issued to a security guard and other
private security personnel by a superior officer, usually the
private security agency or branch manager or operation's
officer, for the performance of security and/or detective service
duty/ies.
Net Financial Contracting Capacity (NFCC) refers to the
formula to determine the financial capacity of the contractor to
carry out the job, work, or services sought to be undertaken
under a Service Agreement.
• [(CA-CL) * K] less ongoing projects value. NFCC is
current assets minus current liabilities multiplied by K,
which stands for contract duration equivalent to:
o ten (10) for one year or less;
o fifteen (15) for more than one (1) year up to
two (2) years; and
o twenty (20) for more than two (2) years,
minus the value of all outstanding or ongoing projects
including contracts to be started.
Principal refers to any individual, company, cooperative, or
establishment, including government agencies and
government-owned and controlled-corporations, who or which
puts out or farms out a security and/or detective job, service, or
work to a private Security Service Contractor.
Private Security Personnel refers to natural persons,
including private detectives, security consultants and security
officers, employed by private security agency or firm, to render
security and/or detective services.
Right to Control refers to the right reserved to the Security
Service Contractor to determine
1. not only the end to be achieved as required by the
principal,
2. but also the manner and means to be used in reaching
that end within the limits of the law.
Security Guard refers to any person who offers or renders
personal service to watch or secure a residence, business
establishment, building, compound, any other area or
property; or inspects, monitors, or performs body checks or
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searches of individuals or baggage and other forms of
security inspection.
Security Service Contractor (SSC) is synonymous with
Private Security Agency (PSA) which refers to any person,
association, partnership, firm, or private corporation engaged
in contracting, recruitment, training, furnishing, or posting of
security guard and other private security personnel to
individuals, corporations, offices and organizations, whether
private or public, for their security needs as the Philippine
National Police (PNP) may approve.
Service Agreement refers to the contract between the principal
and the SSC/PSA containing the terms and conditions
governing the performance or completion of security service,
job, or work being farmed out for a definite or predetermined
period.
Solidary Liability refers to the liability of the principal, in the
same manner and extent that he/she is liable to his/her direct
employees, to the extent of the work performed under the
contract when the SSC/PSA fails to pay the wages of his/her
employees, as provided for in Article 106 of the Labor Code,as
amended.
Total Contract Cost refers to the payment of wage and wage-
related benefits including social welfare benefits of security
guards and other private security personnel in conformity with
the Standard Computation of the Department of Labor and
Employment using the form prescribed in this Guidelines.
Trilateral Relationship refers to the relationship in
contracting or subcontracting arrangement where there is a
contract for a specific security job, work, or service between
the principal and the SSC/PSA, and a contract of employment
between the latter and its security guards.
Parties. There are three (3) parties involved in these
arrangements:
1. the principal who decides to farm out a security job,
work, or service to a security service contractor;
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SECURITY OF TENURE AND ENDO
2. the SSC/PSA who has the capacity to independently
undertake the performance of the security job, work, or
service; and
3. the security guards and other private security personnel
engaged by the SSC/PSA to accomplish the security
job, work, or service.
Section 3
Employment Status
3.1. Employer-Employee Relationship. The SSC/PSA is the
employer of its security guards and other private security
personnel on duty detail to a principal or client under a Service
Agreement.
3.2. Probationary Employment. The probationary period of
newly-hired security guard and other private security personnel
in the private security industry shall not exceed six (6) months.
While engaged on probationary basis, their services may be
terminated
• for failure to meet reasonable standards or criteria
made known by the SSC/PSA to the security guards
and other private security personnel at the time of their
engagement or
• for any just cause contained in the probationary
contract.
3.3. Regular Employment. Any security guard or other private
security personnel
1. who is allowed to work after the probationary
period or in the absence of a valid probationary
contract shall be considered a regular employee.
2. Security guards and other private security personnel
affected by repeated hiring-firing-rehiring scheme for
short periods of time, the aggregate duration of which
is at least six (6) months, shall be considered regular
employees.
Section 4
Service Agreements
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ad majorem dei gloriam
The SSC/PSA and/or the principal shall produce or submit the
original copy of the Service Agreement when directed to do so
by the Regional Director or his/her duly authorized
representative. The Service Agreement must conform to the
DOLE Standard Computation and Standard Service
Agreement, as provided for under this Guidelines. The Service
Agreement shall stipulate, among others:
a. Kind/nature. The specific description of the kind or
nature of security job, work, or service being
subcontracted;
b. Place. The place of work and terms and
c. TC. conditions governing the contracting arrangement
which shall include
a. the agreed amount of the security services to
be rendered and
b. the standard administrative fee of not less than
twenty percent (20%) of the total contract cost;
c. The basic equipment to be provided by the
SSC/PSA which shall be as follows:
i. For every two (2) security guards and
other private security personnel, one
(1) handgun as prescribed by R.A.
5487; but in no case shall a security
guard be posted without a firearm,
unless required otherwise by the
client; and
ii. One (1) handheld radio; provided that,
if the principal requires more than
these basic equipment, it shall be
shouldered by the principal
d. An automatic crediting provision which shall
immediately give effect to the common
provision in wage orders that prescribed
increases in wage rates and other wage-related
benefits of security guards and other private
security personnel shall be borne by the
principals or clients of the SSC/PSAs and the
Service Agreements shall be deemed amended
accordingly;
e. Provisions which shall ensure that the
principal and the SSC/PSA shall uphold the
rights and provide all the benefits of security
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guards and other private security personnel
under the Labor Code,as amended, and other
existing laws, and that violation of which will
render the service contractor ineligible to
participate in any bidding and the principal
ineligible to engage the services of such
SSC/PSA;
f. A provision on the NFCC of the SSC/PSA,
which must be equal to the total contract cost
per month, provided that posting of the
corresponding bond shall be required only
when the NFCC is less than the total contract
cost;
g. An undertaking that the SSC/PSA shall
directly remit monthly the employers' share
and employees' contribution to the Social
Security System (SSS), Employees'
Compensation Commission (ECC), Philippine
Health Insurance Corporation (PhilHealth),
and Home Development Mutual Fund (Pag-
IBIG); and
h. An undertaking that the expenses for any
training required by the principal or other
government instrumentalities, in addition to
those required by the PNP, shall be shouldered
by the principal.
Section 5
Employment Contracts
5.1. Status of Employment. Notwithstanding any oral or
written stipulations to the contrary, the contract between the
SSC/PSA and its security guards and other private security
personnel shall be governed by the provisions of Articles 294
(formerly 279) and 295 (formerly 280) of the Labor Code, as
renumbered. The SSC/PSA shall provide his/her security
guards and other private security personnel a copy of the
employment contract duly signed by the parties, which shall
contain the terms and conditions of employment, such as those
provided under Section 7 hereof.
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SECURITY OF TENURE AND ENDO
5.2. Contents of Duty Detail Order. For every assignment of
security guards and other private security personnel to a
principal, the Duty Detail Order shall contain the following,
among others:
a. Name, address, and telephone number of agency;
b. Issue serial number and date of the Duty Detail Order;
c. Complete name and designation of grantee;
d. Purpose;
e. Inclusive dates of detail;
f. Firearms description and license number;
g. Authorized uniform to be used;
h. Other specific instructions or remarks; and
i. Signature and designation of issuing officer.
Section 6
Rights of Security Guards and Other Private Security
Personnel. All security guards and other private security
personnel, whether deployed or assigned as reliever, seasonal,
week-ender, or temporary, shall be entitled to all the rights and
privileges as provided for in the Labor Code, as amended,
which shall include the following:
a. Safe and healthful working conditions;
b. Labor standards such as but not limited to service
incentive leave, premium pay, overtime pay, holiday
pay, night shift differential, 13th month pay, and
separation pay as may be provided in the Service
Agreement or under the Labor Code,as amended;
c. Retirement benefits under Republic Act No. 7641,
Republic Act No. 1161, as amended by Republic Act
No. 8282, and retirement plans of the security service
contractor, if any;
d. Social security and welfare benefits;
e. Right to self-organization and collective bargaining,
subject to the provisions of existing laws; and
f. Security of tenure.
Section 7
Terms and Conditions of Employment.
7.1. Requirements for Pre-employment and Continued
Employment. The security guards and other private security
personnel in the employ of any SSC/PSA or firm should be
1. duly licensed and
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ad majorem dei gloriam
2. must have passed the physical and neuro-psychiatric
examination and drug test required by the PNP for pre-
employment and for continued employment.
• Expenses for these examinations and test shall
be shouldered by the security guards.
• Any additional test may be required at the
expense of the requesting party.
7.2. Obligations of Government Agencies. Government
agencies or instrumentalities engaging security services from
SSC/PSA shall comply with all labor standards and shall
require the submission, among other requirements and as part
of the bid, an undertaking from the SSC/PSA to pay their
security guards and other private security personnel the
prescribed benefits.
7.3. Entitlement to Minimum Wage. Unless a higher
minimum wage is agreed upon by the parties, the security
guards and other private security personnel shall be entitled to
receive a salary of not less than the minimum wage rate
prescribed for non-agricultural sector or industry in the region
where he/she is assigned, regardless of the nature of business
of the principal.
7.4. Transfer of Assignment. In case of transfer, the wage rate
most favorable to the security guards and other private security
personnel shall apply. Thus, transfer of security guards and
other private security personnel to areas outside the region of
the domicile or head office of the SSC/PSA shall not result to
reduction of the wage rate being enjoyed by the security guards
and other private security personnel prior to such transfer.
Transfer to an area or region with higher wage rate shall render
the higher rate the applicable wage rate for the transferred
security guards and other private security personnel.
7.5. Statutory Benefits. Security guards and other private
security personnel are entitled to not less than the following
benefits depending on the working hours, work shift and
workdays and other analogous conditions, which benefits
should be included in the cost distribution in the Service
Agreement:
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a. Basic salary for all actual workdays and for the twelve
(12) regular holidays (as holiday pay) which must not
be lower than the minimum wage rates described in
Subsection 7.3, to be computed by using the factors
recommended herein. Whenever work is rendered on a
regular holiday, an additional pay of one hundred
percent (100%) of the minimum wage rate should be
paid;
b. Allowance in addition to the basic salary, if prescribed
by the applicable Regional Wage Order;
c. Premium pay of thirty percent (30%) of the daily rate
for work on special days or on rest days, which is
increased to fifty percent (50%) whenever work is
performed coinciding the rest days and special days;
d. Overtime pay for work rendered in excess of eight (8)
hours a day, equivalent to at least twenty-five percent
(25%) of the regular hourly rate on ordinary days and
thirty percent (30%) of the hourly rate on regular
holidays, special days and rest days;
e. Night shift differential equivalent to ten percent
(10%) of the regular hourly rate for work rendered
between 10:00 p.m. and 6:00 a.m. of the following day;
f. Five (5) days service incentive leave for every year of
service which benefits can be availed of during days of
absence and, if not used, are convertible into its cash
equivalent. A proportionate leave benefit per month
may be derived by dividing five (5) days by twelve (12)
months multiplied by the current daily rate;
g. Maternity leave as provided for under Republic Act
No. 1161, as amended by Republic Act No. 8282,
otherwise known as the "Social Security Law," for
female security guards and other private security
personnel who are unable to work due to childbirth or
miscarriage, up to the first four (4) deliveries or
miscarriages;
h. Paternity leave of seven (7) days with full pay for
male security guards and other private security
personnel under Republic Act No. 8187, otherwise
known as the "Paternity Leave Act of 1996," which
shall be granted after the delivery, without prejudice to
an employer's policy of allowing the employee to avail
of the benefit before or during the delivery. The
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SECURITY OF TENURE AND ENDO
paternity leave with pay is granted for the first four
deliveries, including miscarriages, of the male
employee's lawful wife with whom he is cohabiting;
i. Parental leave of seven (7) days every year for solo
parents security guards and other private security
personnel who are left alone with the responsibility of
parenthood as defined under Republic Act No. 8972,
otherwise known as the "Solo Parents' Welfare Act of
2000";
j. Leave for Victims of Violence Against Women and
their Children of ten (10) days for qualified victim-
female security guards and other private security
personnel under Republic Act No. 9262, otherwise
known as "Anti-Violence Against Women and Their
Children Act of 2004";
k. Special Leave for Women of not more than two (2)
months with full pay based on her gross monthly
compensation following surgery caused by
gynecological disorders, under Republic Act No. 9710,
otherwise known as "The Magna Carta of Women";
l. 13th month pay which is one-twelfth (1/12) of the
total basic salary earned within a calendar year;
m. Separation Pay if the termination of employment is
for authorized cause as provided by law and as
enumerated below:
1. One-half (1/2)-month pay per year of service,
but guaranteed to one (1) month pay if
separation is due to:
i. Retrenchment or reduction of
personnel effected by management to
prevent serious losses;
ii. Closure or cessation of operation of an
establishment not due to serious losses
or financial reverses;
iii. Illness or disease not curable within a
period of six (6) months and continued
employment is prohibited by law or
prejudicial to the employee's health or
that of his/her co-employees; or
iv. Lack of service assignment for a
continuous period of six (6) months.
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2. One (1) month pay per year of service if
separation is due to:
i. Installation of labor-saving device,
such as replacement of employees by
equipment/machinery;
ii. Redundancy, as when the position has
been found to be a surplusage or
unnecessary in the operation of the
agency;
iii. Impossible reinstatement of the
employee to his/her former position or
to a substantially equivalent position
for reasons not attributable to the fault
of the employer, as when the
reinstatement ordered by a competent
authority cannot be implemented due
to closure or cessation of operations of
the establishment/security service
contractor, or the position to which the
employee is to be reinstated no longer
exists and there is no substantially
equivalent position to which he/she
can be assigned; or
iv. Lack of service assignment by reason
of age.
n. Benefits under the Employees Compensation
Program pursuant to Presidential Decree 626;
o. PhilHealth benefits under Republic Act No. 7875, as
amended by Republic Act No. 9241;
p. Social Security benefits under Republic Act No. 1161,
as amended by Republic Act No. 8282;
q. Safe and healthful working conditions as provided in
the Occupational Safety and Health Standards;
r. Retirement pay granted under Republic Act No. 7641
to any security guard and other private security
personnel which shall be billable monthly to the
principal or client of the SSC/PSA.
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• Administration of fund. The fund shall be
administered and maintained by a trust company bank,
investment house, pre-need company, or corporation
duly authorized to perform trust function exclusively
for collective investment or re-investment of certain
money received in its capacity as trustee, or similar
arrangement as may be agreed upon in accordance with
law.
• Retirement plan. The SSC/PSA may establish a
retirement plan for the payment of the retirement
benefits of its security guards or other private security
personnel. From this a Retirement Trust Fund (RTF)
shall be created out of contributions from the principal.
The trust fund agreement shall be executed by and
between the SSC/PSA as trustor and a trust entity as
trustee in favor of security guards or other private
security personnel employed by the trustor. The trust
entity as trustee shall administer the retirement plan
and manage the trust fund in accordance with the
retirement plan agreed upon by the SSC/PSA and its
security guards or other private security personnel.
• Non-stock retirement fund company. The SSC/PSA
may also register with the Securities and Exchange
Commission (SEC), a non-stock Retirement Fund
Company (RFC) owned and managed by its members
who are officers, employees, security guards, or other
private security personnel. The RFC shall manage and
reinvest the retirement fund, and shall pay the
retirement benefits of its members upon his/her
retirement.
• As such, any payment for retirement benefits collected
in advance from the principal shall immediately be
deposited by the SSC/PSA or trustor to the trustee or
retirement fund company in favor of the security guard
and other private security personnel as benefit upon
retirement; and
s. Other benefits granted by law, individual or collective
agreement, or company policy or practice.
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SECURITY OF TENURE AND ENDO
Section 9
Liability and Responsibilities of Security Service
Contractors/Private Security Agencies and Principals
9.1. Solidary Liability. The SSC/PSA and its principal or
client shall be jointly and solidarily liable with each other in
any of the following circumstances:
a. When the SSC/PSA fails to pay the wages of its
security guards and other private security personnel,
the principal or client shall be considered the "indirect
employer" and shall be jointly and severally liable with
the SSC/PSA to the extent of the work performed by
such security guards and other private security
personnel under the Service Agreement, in the same
manner and extent that the principal is liable to its
direct employees.
b. If there are wage increases or adjustments after the
execution of the Service Agreement, the prescribed
increases in the wage rates of security guards and other
private security personnel shall be borne by the
principal and the Service Agreement shall be deemed
amended accordingly. In the event that the principal
fails to pay the prescribed increases, the SSC/PSA shall
be jointly and solidarily liable with the principal.
• The immediate recourse is to the SSC/PSA.
The immediate recourse of security guards and
other private security personnel for payment of
wage increase before litigation is with their
employer, the SSC/PSA. To enable the
SSC/PSA to comply with the new rates, the
consideration paid by the principal for the
security guards' wages has to be adjusted in
conformity with the mandated wage increase.
c. When the SSC/PSA is found to be engaged in labor-
only contracting, the principal shall be jointly and
solidarily liable with it in the same manner that the
principal is liable to employees directly hired by
him/her.
d. When the SSC/PSA is found to be an in-house agency,
the principal shall be the direct employer of the security
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ad majorem dei gloriam
guards and/or other private security personnel
deployed with it.
e. When a violation of the relevant provisions of the
Labor Code,as amended, has been established by the
DOLE Secretary or his/her duly authorized
representative in the exercise of his/her enforcement
power, the principal shall be deemed solidarily liable
with the SSC/PSA to the extent of accrued wage and
wage-related benefits that the latter may owe to its
security guards and other private security personnel in
the following instances:
1. When the certificate of registration of the
SSC/PSA is cancelled, revoked, or not
renewed by the competent authority; o
2. When the contract between the principal and
the SSC/PSA is pre-terminated for reasons not
attributable to the fault of the latter.
9.2. Mandatory Registration and Registry of Legitimate
Security Service Contractors. Consistent with the authority
of the Secretary of Labor and Employment to protect the rights
of security guards and other private security personnel, it shall
be mandatory for all SSC/PSA to register pursuant to the
provisions of Department Order 18-A, Series of 2011. In
addition to the requirements set forth under said Department
Order, the applicant shall submit the following documents:
a. Certificate of Membership issued by the Philippine
Association of Detective and Protective Agency
Operators, Inc. (PADPAO) or other associations
recognized by the PNP-CSG-SOSIA, and License to
Operate issued by the latter;
b. A certificate of pending or no pending labor standards
violation case/s issued by the National Labor Relations
Commission (NLRC) and DOLE.
The pendency of a case will not prejudice the renewal of the
registration, unless a Compliance Order has already been issued
by the Regional Director and remained unsatisfied.
9.3. Enforcement of Labor Standards and Working
Conditions. Consistent with Article 128 of the Labor Code, as
amended, the Secretary of Labor and Employment, or his/her
duly authorized representatives, shall conduct assessment of
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establishments engaged by the principal or by the SSC/PSA.
They shall have
a. access to employer's records and premises at any time
of the day or night whenever work is being undertaken
therein, and
b. the right to copy therefrom,
c. to question any security guard and other private
security personnel, and
d. investigate any fact, condition or matter which may be
necessary to determine violations or which may aid in
the enforcement of the Labor Code, as amended, any
labor law, wage order, or rules and regulations issued
pursuant thereto.
Referral to RD; compliance orders. The findings of the duly
authorized representative shall be referred to the Regional
Director for appropriate action. The Regional Director shall
have the power to issue Compliance Orders to give effect to the
labor standards provisions of the Labor Code, as amended,
other labor legislation, and this Guidelines.
9.4. Keeping of Records. The principals, as indirect
employers, shall keep and maintain their own separate records
or files on the assignment of security guards in their premises
during the period of the service contract, which shall be open
for inspection and verification by this Department.
o Keep records for 3 years. All employment records
shall be kept and maintained in and about the premises
of all workplaces for at least three (3) years, unless the
establishment has been in existence for less than three
(3) years, in which case it shall be required to maintain
employment records only during such shorter duration.
o However, SSC/PSA with a centralized recording
system shall inform the Labor Laws Compliance
Officer (LLCO) of the Regional Office where their
central or head office is located of such fact.
9.5. Duty to Produce Copy of Service Agreement between
the Principal and the Security Service Contractor/Private
Security Agency during Assessment. The principal and
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SECURITY OF TENURE AND ENDO
SSC/PSA shall have obligation to produce a copy of the Service
Agreement in the ordinary course of assessment. The SSC/PSA
shall likewise have an obligation to produce a copy of any
contract of employment when directed to do so by the Regional
Director or his/her authorized representative.
Cooperatives
Article 3, Philippine Cooperative Code of 2008
Cooperative defined. A cooperative is:
1. an autonomous and duly registered association of
persons,
2. with a common bond of interest,
3. who have voluntarily joined together to achieve their
social, economic, and cultural needs and aspirations by
a. making equitable contributions to the capital
required,
b. patronizing their products and services and
c. accepting a fair share of the risks and benefits
of the undertaking
in accordance with universally
accepted cooperative principles. |
Article 26, Philippine Cooperative Code of 2008
Kinds of membership. A cooperative may have two (2) kinds
of members, to wit:
1. regular members and
2. associate members.
Regular. A regular member is one who has complied with all
the membership requirements and entitled to all the rights and
privileges of membership.
Associate. An associate member is one who has no right to vote
nor be voted upon and shall be entitled only to such rights and
privileges as the bylaws may provide:
• Provided, That an associate who meets the minimum
requirements of regular membership, continues to
patronize the cooperative for two (2) years, and
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ad majorem dei gloriam
signifies his/her intention to remain a member shall be
considered a regular member.
Cooperative organized by minors. A cooperative organized
by minors shall be considered a laboratory cooperative and
must be affiliated with a registered cooperative. A laboratory
cooperative shall be governed by special guidelines to be
promulgated by the Authority.
To apply the rules on job contracting, it must be shown that
a principal has farmed out to a contractor the performance
of work. DFI did not farm out to the Cooperative the
performance of a specific job, work, or service. Instead, it
entered into a Banana Production and Purchase Agreement
with the Cooperative, under which the Cooperative would
handle and fund the production of bananas and operation of the
plantation covering lands owned by its members in
consideration of DFI's commitment to provide financial and
technical assistance as needed, including the supply of
information and equipment in growing, packing, and shipping
bananas. The Cooperative would hire its own workers and pay
their wages and benefits, and sell exclusively to DFI all export
quality bananas produced that meet the specifications agreed
upon. To the Court, the Contract between the Cooperative and
DFI, far from being a job contracting arrangement, is in essence
a business partnership that partakes of the nature of a joint
venture. The rules on job contracting are, therefore, inapposite.
(Traveño v. Bobongon Banana Growers Multi-purpose
Cooperative, G.R. No. 164205, [September 3, 2009], 614 PHIL
222-236)
LABOR STANDARDS
GENERAL PRINCIPLES ON WAGES
Wages
Wages. The remuneration or earnings, however designated,
capable of being expressed in terms of money, whether fixed or
ascertained on a time, task, piece, or commission basis, or other
method of calculating the unwritten contract of employment for
work done or to be done, or for services rendered or to be
Last Edit: 23 December 2020
SPBUS
rendered and includes the fair and reasonable value, as
determined by the Secretary of Labor, of board, lodging, or
other facilities customarily furnished by the employer to the
employee. Article 97(f) of the Labor Code.
Where title on wages not applicable; application of Title. This
Title shall not apply to
a. farm tenancy or leasehold,
b. domestic service and
c. persons working in their respective homes
a. in needle work or
b. in any cottage industry duly registered in
accordance with law. Article 98 of the Labor
Code
Minimum wages in depressed areas. To the extent necessary
to relieve serious unemployment situation in welfare areas,
such as squatter relocation centers, the Secretary of Labor may,
1. on his own initiative or
2. upon petition of any interested party,
authorize the payment of sub-minimum wages by enterprises
and institutions that may be established in such areas to provide
employment opportunities to the residents therein. The
authorization of the Secretary of Labor shall be subject to such
terms and conditions as he may prescribe to insure the protection
and welfare of the workers as well as the industries that may be
affected thereby. Section 2, Omnibus Rules, Book III, Rule VII
Payment of wages in case of bankruptcy. Unpaid wages
earned by the employees before the declaration of
bankruptcy or judicial liquidation of the employer's
business shall be given first preference and shall be paid
in full before other creditors may establish any claim to a
share in the assets of the employer. Section 10, Book III,
Rule VIII Omnibus Rules Implementing the Labor Code
Non-diminution of benefits
Article 100. Prohibition against Elimination or Diminution
of Benefits. Nothing in this Book shall be construed to
eliminate or in any way diminish supplements, or other
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SECURITY OF TENURE AND ENDO
employee benefits being enjoyed at the time of promulgation of
this Code.
• Discussion. Read the provision again. This provision
is merely a transitory provision and no longer has any
effect in present times. This is oftenly misquoted to
hold management liable for diminution of benefits,
when in fact the rule on non-diminution is merely a
jurisprudential creation.
• Rule on non-diminution is merely a jurisprudential
creation. This is not a statutory creation.
Article 127. Non-Diminution of Benefits. No wage order
issued by any regional board shall provide for wage rates lower
than the statutory minimum wage rates prescribed by Congress.
Elements of diminution of benefits. There is diminution of
benefits when it is shown that:
1. the grant or benefit is founded on a policy or has
ripened into a practice over a long period;
2. the practice is consistent and deliberate;
3. the practice is not due to error in the construction or
application of a doubtful or difficult question of law;
4. the diminution or discontinuance is done unilaterally
by the employer.
Company practice; elements. To be considered as company
practice, there must be proof that aside from being practiced
over a long period of time, it must also be consistent and
deliberate. Since it was not proved that it was company practice
to compute the cost of living allowance on a 30-day basis rather
than a 22-day basis, the employees cannot invoke the company
practice doctrine to prevent the company from unilaterally
withdrawing the grant. Globe Mackay Cable and Radio Corp.
v. NLRC
• Test of long practice. To be considered as a company
practice, the act must have been practiced for a long
period of time and must be shown to be consistent and
deliberate. The test on long practice requires an
indubitable showing that the employer agreed to
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continue giving the benefits knowing fully well that
said employees are not covered by the law requiring
payment thereof. Thus, in the absence of proof that it
was company practice to extend to managerial
employees the benefits granted to R&F employees
under the CBA, managerial employees are not entitled
to them. Societe Internationale De
Telecommunications Aeronotiques v. Huliganga
Company practice; erroneous application of law due to lack
of guidelines cannot ripen into practice. The company also
computed the COLA on a 30-day basis before the guidelines
for the Wage Order were issued. They were operating on an
erroneous application of the law. The Court said that the grant
by the employer of benefits through an erroneous application
of the law due to absence of clear administrative guidelines is
not considered a voluntary act which cannot be unilaterally
discontinued. Globe Mackay Cable and Radio Corp. v. NLRC
Company practice; show that employer gave benefits even
if it knew that it was more than what the law requires. The
test or rationale of this rule on long practice requires an
indubitable showing that the employer agreed to continue
giving the benefits knowing fully well that said employees are
not covered by the law requiring payment thereof. MERALCO,
aside from complying with the regular 13th month bonus, has
further been giving its employees an additional Christmas
bonus at the tail-end of the year since 1988. While the special
bonuses differed in amount and bore different titles, it cannot
be denied that these were given voluntarily and continuously
on or about Christmas time. The considerable length of time
MERALCO has been giving the special grants to its employees
indicates a unilateral and voluntary act on its part, to continue
giving said benefits knowing that such act was not required by
law. Manila Electric Company v. Quisumbing
Company practice elements. It was not shown that the
practice of giving bonus was company practice. On the
contrary, the 2-month special bonus being claimed by the union
was given in 1995 in recognition of the employees’ prompt
response during the calamities. To be considered as company
practice, there must be proof that aside from being practiced
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over a long period of time, it must also be consistent and
deliberate. It was only an act of generosity on the part of
MERALCO. While the bonuses claimed were usually given
around Christmas time, these awards were not given uniformly
as Christmas bonuses or special Christmas grants. Manila
Electric Company v. Quisumbing
Cannot invoke company practice if agreed to be bound by
other terms. The employees invoked company practice in
seeking for their separation pay to be computed at one month
per year of service. SC said that they cannot invoke company
policy when in their CBA, they have already agreed to be bound
by the provisions of the Labor Code—that the separation is one
month pay or one-half month for every year of service,
whichever is higher, and that a fraction of at least 6 months is
considered as one year. Since the employees have been
working for more than 6 months, the pay shall be computed at
½ month per year of service as provided in the Labor Code.
National Federation of Labor (NFL), et al. v. CA
Mistake can constitute company practice. For 6 years
already, the company has included premium for work done on
holidays, on top of basic salary, in the computation of the 13th
month pay. Alleging mistake, the company reduced this
amount to exclude the premiums. The SC denied this, saying
that the considerable length of time the questioned items had
been included by petitioner indicates a unilateral and voluntary
act on its part, sufficient in itself to negate any claim of mistake.
Likewise, this cannot be likened to the case of Globe Mackay
because the government guidelines were clear in this case. The
inclusion of other benefits in the computation is already
company practice favorable to the employees, and as such,
payments made pursuant thereto ripened into benefits enjoyed
by them. And any benefit and supplement being enjoyed by the
employees cannot be reduced, diminished, discontinued or
eliminated by the employer, pursuant to Article 100. Sevilla
Trading Company vs Semana
Without a written contract, employee can only anchor his
claims on company policy. Company assistant manager
Kondo was given a company car and a driver, and also a Caltex
Card for the gasoline expenses. When these were revoked after
JO VALLES
SECURITY OF TENURE AND ENDO
a new President of Toyota took over, Kondo filed a case for
illegal diminution of benefits. The SC said that there was no
illegal diminution. Considering that petitioner did not sign an
employment contract, he can only anchor his claim on company
practice. However, he also failed to prove that the car, driver,
and card were being enjoyed by other employees or officials
similarly situated as him, as would indicate Toyota's intention
to give the benefit consistently and deliberately. Also, the car
and driver benefit ostensibly sprung only from the
magnanimity of his former superior rather than actual company
practice. Thus, he cannot demand to continue availing of such
benefits. Kondo vs Toyota Boshoku
Error rectified immediately cannot ripen into company
practice. The companies deducted from the employees’ salary
the overpayments that the former had made in the previous
periods. This error was immediately rectified upon its
discovery. No vested right accrued to individual respondents
when the company corrected its error by crediting the salary
increase for the year 2001 against the salary increase granted
under WO No. 8, all in accordance with the CBA. Hence, any
amount given to the employees in excess of what they were
entitled to, as computed above, may be legally deducted from
their salaries. TSPIC Corporation vs TSPIC Employees Union
• Note. This case cited the Globe case but I do not think
that the case was squarely applicable in this case
because the present case does not involve the erroneous
application of a law due to lack of guidelines. What
should apply is the Sevilla ruling.
Consistent actions, regardless of the fact that only a few
benefited, can ripen into company practice. In the years
1992, 1993, 1994, 1999, 2002 and 2003, Arco had adopted a
policy of freely, voluntarily and consistently granting full
benefits to its employees regardless of the length of service
rendered. Even though only 7 employees had benefited in the
alleged company practice of paying the benefits in full, it has
still ripened into company practice. Jurisprudence has not laid
down any rule specifying a minimum number of years within
which a company practice must be exercised in order to
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constitute voluntary company practice. ARCO Metal Products,
Co. v. SAMARM-NAFLU
Not a benefit if subject to condition. The Company was not
obliged to allow all its employees to render overtime work
everyday for the whole year, but only those employees whose
services were needed after their regular working hours and only
upon the instructions of management. The overtime pay was
not given to each employee consistently, deliberately and
unconditionally, but as a compensation for additional services
rendered. Thus, overtime pay does not fall within the definition
of benefits under Article 100 of the Labor Code on prohibition
against elimination or diminution of benefits. Manila Jockey
Club Employees Labor Union vs Manila Jockey Club
Only monetary benefits are contemplated. The term benefits
mentioned in the non- diminution rule refers to monetary
benefits or privileges given to the employee with monetary
equivalents. Stated otherwise, the employee benefits
contemplated by Article 100 are those which are capable of
being measured in terms of money. Thus, it can be readily
concluded from past jurisprudential pronouncements that these
privileges constituted money in themselves or were convertible
into monetary equivalents. Royal Plant Workers Union v.
Coca-Cola Bottlers Philippines, Inc.-Cebu Plant
Transfer of position
Transfer. A transfer is defined as a movement from one
position to another which is of equivalent rank, level or salary,
without break in service.
Promotion. Promotion is the advancement from one position
to another with an increase in duties and responsibilities as
authorized by law, and usually accompanied by an increase in
salary.
Demotion. Demotion involves a situation in which an
employee is relegated to a subordinate or less important
position constituting a reduction to a lower grade or rank, with
a corresponding decrease in duties and responsibilities, and
usually accompanied by a decrease in salary.
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Transfer of employees jurisprudential guidelines:
1. a transfer is a movement from one position to another
of equivalent rank, level or salary without break in the
service or a lateral movement from one position to
another of equivalent rank or salary;
2. the employer has the inherent right to transfer or
reassign an employee for legitimate business
purposes;
3. a transfer becomes unlawful where it is motivated by
discrimination or bad faith or is effected as a form of
punishment or is a demotion without sufficient cause
4. the employer must be able to show that the transfer is
not unreasonable, inconvenient, or prejudicial to the
employee. Rural Bank of Cantilan, Inc. vs Julve
Doctrine of management prerogative. Every employer has
the inherent right to regulate, according to his own discretion
and judgment, all aspects of employment, including hiring,
work assignments, working methods, the time, place and
manner of work, work supervision, transfer of employees, lay-
off of workers, and discipline, dismissal, and recall of
employees. The only limitations to the exercise of this
prerogative are those imposed by labor laws and the principles
of equity and substantial justice. Rural Bank of Cantilan, Inc.
vs Julve
• Security of tenure does not deprive management of
its right to exercise business judgement; limited by
fair play and justice. In the pursuit of its legitimate
business interests, management has the prerogative to
transfer or assign employees from one office or area of
operation to another – provided there is no demotion in
rank or diminution of salary, benefits, and other
privileges; and the action is not motivated by
discrimination, made in bad faith, or effected as a form
of punishment or demotion without sufficient cause.
Philippine American Life and General Insurance vs.
Gramaje
• Managerial prerogatives are subject to limitations
provided by law, collective bargaining agreements,
JO VALLES
SECURITY OF TENURE AND ENDO
and general principles of fair play and justice. When
the transfer of the head of pensions department to the
legal department was attended with bad faith and
discrimination, the court said that there was
constructive dismissal and that the transfer went
beyond the limits of management prerogative. In this
case, the position was already advertised as vacant way
before she was transferred, the employee met the
standards meet by the company, and upon transfer, she
found out that she was not even in the list of company
employees. Philippine American Life and General
Insurance vs. Gramaje
Transfer with legitimate purposes is proper exercise of
management prerogative; no constructive dismissal. When
the company reshuffled its bank employees to familiarize the
latter with the various phases of bank operations and to
strengthen internal control, the Court ruled that the transfer was
done in pursuit of legitimate business interest. Mendoza vs
Rural Bank of Lucban
Constructive dismissal. Constructive dismissal is defined as a
quitting because continued employment is rendered
impossible, unreasonable or unlikely; when there is a demotion
in rank or a diminution of pay. Likewise, constructive dismissal
exists when an act of clear discrimination, insensibility or
disdain by an employer becomes unbearable to the employee,
leaving him with no option but to forego his continued
employment.
Transfer to another position with same duties and salary is
not constructive dismissal. When the company decided to
abolish the current position of Julve as planning and marketing
manager but appointed him as bookkeeper and as assistant
branch head, the latter position also being supervisory and
having the same salary, the court said that there was no
constructive dismissal. The new position was not only charged
with the preparation of financial position but it also meant being
head of the accounting department. It was a proper exercise of
management prerogative. Rural Bank of Cantilan, Inc. vs Julve
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• Discussion. Julve was in Marketing but then she was
transferred to the Legal Department, a field on which
she did not have any background at all. She was placed
as a head of a team full of lawyers when se herself was
not a lawyer. It was as if the company was setting up
Julve to fail.
Transfer of position amounting to demotion tantamount to
constructive dismissal. The court held that there was
constructive dismissal when a former credit and collecting
manager was transferred to the position of marketing assistant
since the scope of the latter’s duties is less than that of the
former. A manager exercises discretion in his duties and is in
charge of his subordinates while a marketing assistant’s
position involves neither of the 2. While the transfer did not
result in the reduction of his salary, there was a reduction in his
duties and responsibilities which amounted to a demotion
tantamount to a constructive dismissal. Norkis Trading Co. Inc
v. Gnilo
Demotion
Demotion. Demotion involves a situation in which an
employee is relegated to a subordinate or less important
position constituting a reduction to a lower grade or rank, with
a corresponding decrease in duties and responsibilities, and
usually accompanied by a decrease in salary.
Management prerogative to demote. An employer is entitled
to impose productivity standard for its workers, and non-
compliance may be visited with penalty even more severe than
demotion. This management prerogative of requiring standards
may be availed of so long as they are exercised in good faith
for the advancement of the employer’s interest. Danilo
Leonardo vs NLRC
• Dure process in demotions. While due process
required by law is applied on dismissals, the same is
also applicable to demotions as demotions likewise
affect the employment of a worker whose right to
continued employment, under the same terms and
conditions, is also protected by law. Moreover,
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considering that demotion is, like dismissal, also a
punitive action, the employee being demoted should as
in cases of dismissals. be given a chance to contest the
same. Gaco v. National Labor Relations Commission
Management prerogative to demote; demotion with cause.
The court upheld the validity of the demotion of an employee
when the same was shown to be with a cause because the
employee had been unable to meet the quota for 5 consecutive
months already. The demotion was pursuant to company policy
that supervisors were required to meet quotas and failure to do
so will result to demotion and withdrawal of allowance, but
subject to re-appointment when the set quotas are met again.
Danilo Leonardo vs NLRC
• Discussion. Compare with Norkis vs Gnilo. In this
case, due process was proved by the company, while in
Norkis it was not.
Demotion without cause is constructive dismissal. The court
said that management was guilty of constructive dismissal
when it transferred its food technologist from the laboratory to
the vegetable processing section without cause. The reason was
the employee’s alleged utilization of company vehicle for
personal purposes, but the same was only based on the driver’s
testimony and was not proven. Moreover, even if true, the
Rules of the company, the commensurate penalty was only a
15-day suspension. Blue Dairy vs NLRC
Right to a work schedule or full workweek
CBA is the contract between parties. A CBA is the negotiated
contract between a legitimate labor organization and the
employer concerning wages, hours of work, and all other terms
and conditions of employment in a bargaining unit. Where the
CBA is clear and unambiguous, it, becomes the law between
the parties and compliance therewith is mandated by the
express policy of the law. Management also has its own rights
which may arise from a CBA, such as the right to schedule a
work day, which, as such, are entitled to respect and
enforcement in the interest of simple fair play. Coca- Cola
Bottlers vs ICCPELU
JO VALLES
SECURITY OF TENURE AND ENDO
CBA is the contract among the parties; must be respected.
The CBA provided that the company has the sole prerogative
to schedule work on Saturdays on the basis of operational
necessity. For a time, the company scheduled work on
Saturdays, but decided to stop in order to save on operational
costs. The workers complained and interpreted the CBA
provision as giving the workers the right to compel
management to give work on Saturdays since management
prerogative was only on the schedule of work hours, and not
the option not to give work. The Court rejected this argument
saying that the provision was clear, that the company had the
prerogative to schedule work on a Saturday, and the option not
to if not warranted by the circumstances. Had the prerogative
been only for scheduling time, then the provision would have
said working hours instead of only the word work. The CBA is
the contract between the company and the union. It must be
respected. Hence, when the company chose not to give work on
Saturdays, the employees were not illegally prevented from
working. Coca- Cola Bottlers vs ICCPELU
Management prerogative to change work schedule must be
exercised in good faith. Management changed the working
days of the employees from 6 to 3 days a week, saying that it
was its prerogative to do so. In ruling that there was
constructive dismissal in this case, the Court said that
management prerogative must be exercised in good faith and
with due regard to the rights of labor. It cannot be utilized as an
implement to circumvent our laws and oppress employees. For
the rotation scheme, it should have been proven that such was
a genuine business necessity. However, in this case, it was an
attempt to circumvent the law since the employees were singled
out as they were union officers. Unicorn Safety Glass, Inc. vs
Basarte
Right to a bonus
Bonus. A bonus is an amount granted and paid to an employee
for his industry and loyalty which contributed to the success of
the employer’s business and made possible the realization of
profits. It is an act of generosity granted by an employer to
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greater efforts for the success of the business and realization of
bigger profits. Producers Bank of the Philippines vs NLRC
Granting of bonus is a management prerogative. The
granting of a bonus is a management prerogative, something
given in addition to what is ordinarily received by or strictly
due the recipient. Thus, a bonus is not a demandable and
enforceable obligation, except when it is made part of the wage,
salary or compensation of the employee.
Bonus is a management prerogative; cannot be forced
especially if company is not in a financial position to pay.
Jurisprudence has held that the granting of a bonus is basically
a management prerogative which cannot be forced upon the
employer who may not be obliged to assume the onerous
burden of granting bonuses or other benefits aside from the
employees basic salaries or wages, especially so if it is
incapable of doing so. In holding that the complaining
employees of the company were not entitled to their bonuses,
the court took into account the depressed financial conditions
of the bank brought about by bank runs. Furthermore, the CBA
itself stated that bonuses were merely acts of grace by the
company. Hence, non-giving thereof will not amount to
diminution of benefits. Producers Bank of the Philippines vs
NLRC
Bonuses can become enforceable rights; incorporated in the
CBA without any condition + company practice. The side
agreement to the CBA provided for the payment of 14th, 15th,
and 16th month pay in addition to 13th month pay. However, the
company decided to defer 2003 payments due to deteriorating
financial position, saying that it is under no legal compulsion
to pay the bonuses since they are not part of the demandable
wage or salary and that their grant is conditional based on the
availability of company profits. The Court rejected this
argument and said that by virtue of its incorporation in the CBA
Side Agreements without a condition for its grant, the grant of
14th, 15th and 16th month bonuses has become more than just
an act of generosity on the part of the company but a contractual
obligation it has undertaken. The considerable length of time
the company has been giving the special grants to its employees
indicates a unilateral and voluntary act on its part to continue
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giving said benefits knowing that such act was not required by
law. Accordingly, a company practice in favor of the
employees has been established and the payments made by the
company pursuant thereto ripened into benefits enjoyed by the
employees. The giving of the subject bonuses cannot be
peremptorily withdrawn by the company without violating the
prohibition against elimination or diminution of benefits.
Eastern Telecommunications Philippines Inc v Eastern
Telecoms Employees Union
• Discussion. Difference between Producers Bank and
Eastern Telecommunications
Summary for bonuses. Whether or not a bonus forms part of
wages depends upon the circumstances and conditions for its
payment. If it is additional compensation which the employer
promised and agreed to give without any conditions imposed
for its payment, such as success of business or greater
production or output, then it is part of the wage. But if it is paid
only if profits are realized or if a certain level of productivity is
achieved, it cannot be considered part of the wage. Eastern
Telecommunications Philippines Inc v Eastern Telecoms
Employees Union
Payment in foreign currency
Payment in foreign currency only if agreed upon or in the
absence of agreement, it has become company practice. In
the absence of written agreement between the employer and the
employee that sales commissions shall be paid in a foreign
currency, the latter has to be paid in such foreign currency once
the same has become an established practice of the company.
The exchange rate at the time of payment, and not the exchange
rate at the time of sale is controlling. With the payment of US
dollar commissions having ripened into a company practice,
there is no way that the commissions due to Delmo were to be
paid in US dollars or their equivalent in Philippine currency
determined at the time of the sales. To rule otherwise would be
to cause an unjust diminution of the commissions due and
owing to Delmo. Netlink Computer Inc., vs Delmo
JO VALLES
SECURITY OF TENURE AND ENDO
Right to retirement benefits
Managerial employees not covered in CBA provision
granting retirement benefits unless company practice.
Those who are not rank and file employees are not part of the
collecting bargaining unit and are not entitled to the CBA
benefits. Hence, as a general rule, De Guzman and Quirante
should not be entitled to the optional retirement plan in the
CBA. However, since it was shown in this case that it has been
company practice of PJI to grant retirement benefits to all its
employees even those who are excluded from the coverage, the
denial would amount to diminution of benefits. Philippine
Journalists Inc. vs De Guzman.
When retirement benefits part of company practice. It was
shown that it was an established practice of giving two
retirement benefits. Hence, when the company announced its
plan of implementing a one-retirement policy, the court said
that the university cannot, without the consent of the faculty,
eliminate the two-retirement policy and implement a one-
retirement policy as this would violate the rule on non-
diminution of benefits. The non-diminution rule explicitly
prohibits employers from eliminating or reducing benefits
received by employees based on an express policy, a written
contract, or company practice. Wesleyan University-
Philippines vs Wesleyan University-Faculty and Staff
Association
Right to sit on a chair at the production area
No right to sit on a chair; removal of chair is a management
prerogative. The court upheld the removal of the chairs of the
bottling operators as within the management prerogative of
CCBPI. There was no provision in the CBA requiring CCBPI
to provide the bottlers with chairs, and is no law that requires
employers to provide chairs for bottling operators. Article 132
of the Labor Code only requires employers to provide seats for
women. In this case, all concerned bottling operators are men.
Furthermore, the removal was not done indiscriminately since
it was pursuant to its I Operate, I maintain, I Clean Program,
launched for a more efficient performance and for their safety.
The program was carefully studied with due regard to the
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welfare of the workers since it was compensated by (a) a
reduction of the operating hours of the bottling operators from
a 2 1⁄2-hour rotation period to a 1 1⁄2-hour rotation period; and
(b) an increase of the break period from 15 to 30 minutes
between rotations. Royal Plant Workers Union vs Coca Cola
Bottlers Philippines Cebu Plant
Non-diminution rule applies to monetary benefits. The
operator’s chairs cannot be considered as one of the employee
benefits covered in Article 106 of the Labor Code. The term
benefits mentioned in the non-diminution rule which refers to
monetary benefits or privileges given to the employee with
monetary equivalents. Such benefits or privileges form part of
the employees’ wage, salary or compensation making them
enforceable obligations. Royal Plant Workers Union vs Coca
Cola Bottlers Philippines Cebu Plant
Increasing divisor
Increase in divisor only for purposes favorable to the
employee. It has been company practice to use 286 as the
divisor in the computation of its employee’s benefits and
deductions. However, following the law and its IRR, the proper
divisor should have been 287. Seeing that the resulting daily
rate for purposes of overtime pay, holiday pay, and conversions
of accumulated leaves would be diminished, the use of the
proper divisor would be violative of the proscription on the
non- diminution of benefits under Section 100 of the Labor
Code. On the other hand, the use of the divisor of 287 days
would be to the advantage of petitioners if it is used for
purposes of computing for deductions due to the employee's
absences. In view of this situation, the Court ruled that the
adjusted divisor of 287 days should only be used by Trans-Asia
for computations which would be advantageous to petitioners,
i.e., deductions for absences, and not for computations which
would diminish the existing benefits of the employees, i.e.,
overtime pay, holiday pay and leave conversions. Trans-Asia
Philippines Employees Association v. NLRC
Change in divisor to comply with law. There is nothing
wrong with the substantial diminution of their salary on account
of the divisor used by the University in its computation – 314
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days instead of 365 days. Sundays being un-worked and
considered unpaid rest days, while regular holidays as well as
special holidays considered as paid days, the factor used by the
University merely complies with the basic rule in this
jurisdiction of no work, no pay. The right to be paid for un-
worked days is generally limited to the ten legal holidays in a
year. Arellano University Employees and Workers Union vs CA
FORM, PLACE, TIME OF PAYMENT
Forms of payment
Article 102
Forms of Payment. No employer shall pay the wages of an
employee by means of
1. promissory notes,
2. vouchers,
3. coupons,
4. tokens,
5. tickets,
6. chits, or
7. any object other than legal tender,
even when expressly requested by the employee.
When checks or money orders allowed. Payment of wages
by check or money order shall be allowed when such manner
of payment
1. is customary on the date of effectivity of this Code, or
2. is necessary because of special circumstances
a. as specified in appropriate regulations to be
issued by the Secretary of Labor and
Employment or
b. as stipulated in a collective bargaining
agreement.
Book III, Rule VIII, Omnibus Rules Implementing the
Labor Code
Section 1. Manner of wage payment. As a general rule,
wages shall be paid in legal tender and the use of tokens,
promissory notes, vouchers, coupons, or any other form alleged
JO VALLES
SECURITY OF TENURE AND ENDO
to represent legal tender is absolutely prohibited even when
expressly requested by the employee.
Section 2. Payment by check. Payment of wages by
1. bank checks,
2. postal checks or
3. money orders
is allowed
1. where such manner of wage payment is customary on
the date of the effectivity of the Code,
2. where it is so stipulated in a collective agreement, or
3. where all of the following conditions are met
a. There is a bank or other facility for encashment
within a radius of one (1) kilometer from the
workplace;
b. The employer or any of his agents or
representatives does not receive any pecuniary
benefit directly or indirectly from the
arrangement;
c. The employees are given reasonable time
during banking hours to withdraw their wages
from the bank which time shall be considered
as compensable hours worked if done during
working hours; and
d. The payment by check is with the written
consent of the employees concerned if there is
no collective agreement authorizing the
payment of wages by bank checks.
Lumping in one check allowed in this case for convenience;
150 employees. When the plantation ceased its operations, the
150 employees who were laid off received their separation pay
and other benefits in a single Metrobank check. This was
allowed in this case considering that the payment of check was
the most convenient for both the employer and the employees
in view of the amount involved. National Federation of Labor
vs CA
Book III, Rule VII A, Omnibus Rules Implementing the
Labor Code
Cash Wage
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Section 4. Cash wage. The minimum wage rates prescribed in
Section 1 hereof shall be basic cash wages without deducting
therefrom whatever benefits, supplements or allowances which
the employees enjoy free of charge aside from the basic pay.
• An employer may provide subsidized meals and snacks
to his employees provided that the subsidy shall not be
less than 30% of the fair and reasonable value of such
facilities.
• In such case, the employer may deduct from the wages
of the employees not more than 70% of the value of the
meals and snacks enjoyed by the employees, provided
that such deduction is with the written authorization
of the employees concerned.
Facilities
Section 5. Facilities. The term facilities as used in this Rule
shall include articles or services for the benefit of the employee
or his family but shall not include tools of the trade or articles
or service
1. primarily for the benefit of the employer or
2. necessary to the conduct of the employer’s business.
What are included in the term facilities. The term shall
include:
1. Meals;
2. Housing for dwelling purposes;
3. Fuel including electricity, water, gas furnished for the
non-commercial personal use of the employee;
4. transportation furnished to the employee between his
home and work where the travel time does not
constitute hours worked compensable under the Labor
Code and other laws;
5. School, recreation and sanitation when operated
exclusively for the benefit of the worker or his family;
6. Medical and dental services rendered to the non-
industrial cases; and
7. Other articles and services given primarily for the
benefit of the worker or his family. Section 4(e),
DOLE DO 126-13.
Section 6. Value of facilities. The Secretary of Labor may
from time to time fix in appropriate issuances the fair and
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reasonable value of board, lodging and other facilities
customarily furnished by an employer to his employees both in
agricultural and non-agricultural enterprises.
The fair and reasonable value of facilities is hereby determined
to be the:
1. cost of operation and maintenance, including adequate
depreciation plus reasonable allowance (but not more
than 5 1/2% interest on the depreciated amount of
capital invested by the employer);
2. provided that if the total so computed is more than the
fair rental value (or the fair price of the commodities or
facilities offered for sale) the fair rental valued (or the
fair price of the commodities or facilities offered for
sale) shall be the reasonable cost of the operation and
maintenance.
3. The rate of depreciation and depreciated amount
computed by the employer shall be those arrived at
under good accounting practices.
a. Good accounting practices. The term good
accounting practices shall not include
accounting practices which have been rejected
by the Bureau of Internal Revenue for income
tax purposes.
b. Depreciation. The term depreciation shall
include obsolescence.
Section 7. Acceptance of facilities. In order that the cost of
facilities furnished by the employer may be charged against the
employee, his acceptance of such facilities must be voluntary.
Facility evaluation. Facility evaluation refers to an evaluation
conducted by the appropriate Regional Tripartite Wages and
Productivity Board (RTWPB) to determine the fair and
reasonable value of facilities furnished by the employer to
his/her employees. Section 4(f), Rule I, DOLE DO 126-13,
1. How filed. Application may be filed personally, by
registered mail, or electronic mail
2. Who may file. The application may be filed by the
union, worker or owner/manager or the duly authorized
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SECURITY OF TENURE AND ENDO
representative of a micro, small, or medium
establishments in person, by registered mail, or by
email.
3. Where to file. The application shall be filed with the
RTWPB having jurisdiction over the workplace.
4. When to file. Applications may be filed either before
the introduction of the proposed facilities or at any time
in the case of existing facilities. Section 1, Rule II,
DOLE DO 126-13
Deductibility of the Value of Facilities. In order that the fair
and reasonable value of the facilities may be deducted from the
wages of employees, the following requisites must concur:
a. Facilities subject of valuation are customarily
furnished by the employer;
b. Deductibility of the value of the facilities must have
been voluntarily accepted in writing by the employee;
and
c. Facilities must be charged at a fair and reasonable
value. Section 1, Rule III, DOLE DO 126-13
Standards for Fair and Reasonable Value of Meals. For the
value of meals to be deductible from the wages of employees,
1. the meals provided must be nutritionally adequate.
2. In determining the fair and reasonable value of meals,
at least 30% of the actual cost shall be subsidized by
the employer. Section 2, Rule III, DOLE DO 126-13
Standards for fair and reasonable value of housing
facilities. For the value of housing facilities to be deductible
from the wages of the employees,
1. the same must be used exclusively for the living
quarters of employees.
2. In determining the fair and reasonable value of housing
facilities,
a. the total yearly expenses of the employer
comprising of 5 1/2% of the depreciated
amount
b. plus the cost of operation and maintenance and
payment of electric and water bills
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ad majorem dei gloriam
are deducted from the total cost of expenses
incurred in the construction or acquisition of the
housing facility. Section 3, Rule III, DOLE DO
126-13
Facility evaluation order. Evaluation Order refers to the Order
issued by the DOLE Regional Director as Chairperson of
RTWPB authorizing an employer to consider the monetary
value of the facilities availed of as part of the wages of his/her
employees pursuant to Article 97 (f) of the Labor Code. Section
4(g), Rule I, DOLE DO 126-13,
1. Issuance of facility evaluation order. The DOLE
Regional Director shall issue a Facility Evaluation
Order within 5 days from submission by the RTWPB
of its recommendation.
2. Contents. The Facility Evaluation Order shall
expressly state the following conditions, wherever
appropriate:
a. Voluntary acceptance of the facilities by the
worker/employees
b. Cost of each facility, e.g., breakfast, lunch,
supper, snacks and lodging.
c. The amount to be charged based on the actual
expenses incurred by the employer.
d. The meals actually served should be
nutritionally adequate.
e. The deduction for housing/lodging facilities
should not be more than the cost of rentals in
the vicinity.
f. Unless the cost of living so warrants, the cost
of facility in subsequent Orders shall not be
more than the cost of the same facility
previously fixed by the RTWPB in the same
vicinity.
g. Where the facilities are given free of charge by
the employer and there is no prior agreement
to deduct the cost of said facilities from the
wages of the employees, the employer cannot
subsequently charge the cost of the facilities or
otherwise avail of the order.
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h. Acceptance of the reasonable rates deducted
from the wages of the employees/workers
should be written and voluntary.
3. Duration of facility evaluation order. The duration
of a Facility Evaluation Order shall remain valid and
effective unless sooner revoked or suspended or
revised or reviewed.
4. Posting of order. The employer and union/workers
shall be furnished a copy of the Order. The employer is
required to post a copy of the Order in the bulletin
board or in a conspicuous place in its establishment and
shall submit a certificate of posting to the RTWPB. The
posting shall form part of the monitoring activity of the
DOLE Regional Office. Sections 1-4, Rule IV, DOLE
DO 126-13
Availments of Facilities
1. Provision of Facilities. The employer and the
union/workers shall agree on the facilities that may be
provided by the former to the latter.
2. Non-availment of Facilities. If the union/workers
desire not to avail the facilities, the employer shall not
be allowed to credit or make deductions against the
wages of its employees the value of said facilities.
Sections 1-2, Rule VII, DOLE DO 126-13
Submission of reports. The RTWPBs shall submit to the
National Wages and Productivity Council (NWPC) a monthly
report on the data of facility evaluation applications acted upon
including the studies conducted, for purposes of program
monitoring and evaluation. The report shall be submitted not
later than the 10th day of the month preceding the reference
month.
• All Orders and their corresponding FE documentation
should be filed at the RTWPB. One complete copy
shall be sent to NWPC, who shall maintain a database
of all FE studies. Section 1, Rule VIII, DOLE DO 126-
13
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SECURITY OF TENURE AND ENDO
Requisites for deduction of facilities. Granting that meals and
lodging were provided and indeed constituted facilities, such
facilities could not be deducted without the employer
complying first with certain legal requirements. Without
satisfying these requirements, the employer simply cannot
deduct the value from the employee's wages.
1. First, proof must be shown that such facilities are
customarily furnished by the trade.
2. Second, the provision of deductible facilities must be
voluntarily accepted in writing by the employee.
3. Finally, facilities must be charged at fair and
reasonable value. Mabeza vs NLRC
Furnished by the trade; company or industry practice. One
of the badges to show that a facility is customarily furnished by
the trade is the existence of a company policy or guideline
showing that provisions for a facility were designated as part of
the employees' salaries. Apart from company policy, the
employer may also prove compliance with the first requirement
by showing the existence of an industry-wide practice of
furnishing the benefits in question among enterprises engaged
in the same line of business. Our Haus Realty Development
Corporation vs Parian
DOLE DO 126-13, Revised Guidelines on the
Conduct of Facility Evaluation
Supplements
Supplements. Supplements constitute extra remuneration or
special privileges or benefits given to or received by laborers
over and above their ordinary earnings or wages.
What are covered. It shall include:
1. Emergency medical and dental services furnished by
employer by virtue of the requirement of the Labor
Code, as amended and its Implementing Rules and
Regulations;
2. Cost, rental and/or laundry of uniform where the nature
of the business requires the employees to wear a
uniform;
3. Transportation charges where such transportation is in
incident to or necessary to the employment;
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ad majorem dei gloriam
4. Shares of capital stock of the employee in an
employer's company;
5. Paid vacation, sick and maternity leaves; and
6. Tools of the trade or articles or services primarily for
the benefit of the employer or necessary to the conduct
of the employer's business. Section 4(i)
Wages. Wages means
1. remuneration or earnings, however designated,
2. capable of being expressed in terms of money,
3. whether
a. fixed or
b. ascertained on a time, task, piece or
commission basis or other method of
calculating the same,
4. which is payable by an employer to an employee under
a written or unwritten contract of employment for work
done or to be done, or for services rendered or to be
rendered and
5. includes the fair and reasonable value of board, lodging
or other facilities customarily furnished by the
employer to the employee as determined by the
Secretary of Labor. Section 4(j)
Jo. So facilities are subsumed under the term wages.
Supplements are received on top of wages.
o Discussion. Easiest test: Is it something that the
employee will normally buy for himself?
Facilities vs supplements; purpose test. The criterion in
making a distinction between the two not so much lies in the
kind (food, lodging) but the purpose. Considering, therefore,
that hotel workers are required to work different shifts and are
expected to be available at various odd hours, their ready
availability is a necessary matter in the operations of a small
hotel, such as the private respondent's hotel. Hence, the food
and lodging furnished by the employer to the employees cannot
be considered and deducted as facilities. Mabeza vs NLRC
Facilities vs supplements; purpose test. Ultimately, the real
difference lies not on the kind of the benefit but on the purpose
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why it was given by the employer. If it is primarily for the
employee's gain, then the benefit is a facility; if its provision is
mainly for the employer's advantage, then it is a supplement.
Again, this is to ensure that employees are protected in
circumstances where the employer designates a benefit as
deductible from the wages even though it clearly works to the
employer's greater convenience or advantage. Our Haus is
engaged in the construction business, a labor-intensive
enterprise. The success of its projects is largely a function of
the physical strength, vitality and efficiency of its laborers. Its
business will be jeopardized if its workers are weak, sickly, and
lack the required energy to perform strenuous physical
activities. Thus, by ensuring that the workers are adequately
and well fed, the employer is actually investing on its business.
The meals given are supplements and not facilities. Our Haus
Realty Development Corporation vs Parian
• Note: Under the purpose test, substantial consideration
must be given to the nature of the employer's business
in relation to the character or type of work performed
by the employees involved.
Place of payment
Article 104
Place of Payment. Payment of wages shall be made at or near
the place of undertaking, except as otherwise provided by such
regulations as the Secretary of Labor and Employment may
prescribe under conditions to ensure greater protection of
wages.
Section 4, Book II, Rule VIII, Omnibus rules Implementing
the Labor Code
Place of payment. As a general rule, the place of payment shall
be at or near the place of undertaking. Payment in a place other
than the work place shall be permissible only under the
following circumstances:
a. When payment cannot be effected at or near the place
of work
JO VALLES
SECURITY OF TENURE AND ENDO
i. by reason of the deterioration of peace and
order conditions, or
ii. by reason of actual or impending emergencies
caused by fire, flood, epidemic or other
calamity rendering payment thereat
impossible;
b. When the employer provides free transportation to the
employees back and forth; and
c. Under any other analogous circumstances; provided,
that the time spent by the employees in collecting their
wages shall be considered as compensable hours
worked;
Prohibited places. No employer shall pay his employees in
any
1. bar,
2. night or day club,
3. drinking establishment,
4. massage clinic,
5. dance hall, or
6. other similar places or in places where games are
played with stakes of money or things representing
money
except in the case of persons employed in said places.
Section 7, RA 6727 Wage Rationalization Act
Payment of wages through banks. Upon
1. written permission of
2. the majority of the employees or workers concerned,
3. all private establishments, companies, businesses, and
other entities with 25 or more employees and
4. located within one (1) kilometer radius to a
commercial, savings or rural bank
shall pay the wages and other benefits of their employees
through any of said banks and within the period of payment of
wages fixed by Presidential Decree No. 442, as amended,
otherwise known as the Labor Code of the Philippines.
Chapter I. Rules implementing RA 6727
Effective July 1, 1989
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ad majorem dei gloriam
Payment of wages through banks. Upon
1. written petition of
2. the majority of the workers and employees concerned,
3. all private establishments, companies, businesses and
other entities with at least twenty-five workers and
4. located within one kilometer radius to a commercial,
savings or rural bank,
shall pay the wages and other benefits of their workers through
any of said banks within the period and in the manner and form
prescribed under the Labor Code as amended. Section 19
Duty of Bank. Whenever applicable and upon request of a
concerned worker or union, the bank through which wages and
other benefits are paid shall issue a certification of the record
of payment of said wages and benefits of a particular worker or
workers for a particular payroll period. Section 20
Labor Advisory on Payment thru ATM
25 November 1996
When system of payment other than in the workplace
allowed. Article 104 of the Labor Code, as amended requires
that payment of wages shall be made at or near the place of
undertaking, except as otherwise provided by such regulations
as the Secretary of Labor and Employment may prescribe under
condition that would ensure prompt payment and protection of
wages.
Based on Article 104, as well as the provision of Sec. 4 Rule
VIII, Book III of the Code's Implementing Rules and,
considering present-day circumstances, practices and
technology, employers may adopt a system of payment other
than in the workplace, such as through automated teller
machine (ATM) of banks, provided that the following
conditions are met:
1. The ATM system of payment is with the written
consent of the employees concerned.
2. The employees are given reasonable time to withdraw
their wages from the bank facility their wages from the
bank facility which time, if done during hours, shall be
considered compensable hours worked.
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3. The system shall allow workers to receive their wages
within the period or frequency and in the amount
prescribe under the labor Code, as amended.
4. There is a bank or ATM facility within a radius of one
kilometer to the place of work.
5. Upon request of the concerned employee/s, the
employer shall issue a record of payment of wages,
benefits and deduction for particular period.
6. There shall be no additional expenses and no
diminution of benefits and privileges as a result of the
ATM system of payment.
7. The employer shall assume responsibility in case the
wage protection provisions of law and regulation are
not complied with under the arrangement.
Time of payment
Article 103
Time of Payment. Wages shall be paid
1. at least once every 2 weeks or
2. twice a month at intervals not exceeding 16 days.
Force majeure. If on account of force majeure or
circumstances beyond the employer’s control, payment of
wages on or within the time herein provided cannot be made,
the employer shall pay the wages immediately after such force
majeure or circumstances have ceased.
Minimum; once a month. No employer shall make payment
with less frequency than once a month.
• Not contradictory with the provision that wages shall
be paid in 2 weeks interval. Employer can pay in
advance 1.5 month’s salary on the first month, and 1
month salary for the succeeding months to be able to
legally pay once a month.
• If you look at the IRR, the 3rd sentence has already been
removed.
Section 3, Book III, Rule VIII Omnibus Rules Implementing
the Labor Code
JO VALLES
SECURITY OF TENURE AND ENDO
Time of payment.
a. Wages shall be paid
i. not less than once every two (2) weeks or
ii. twice a month at intervals not exceeding
sixteen (16) days,
unless payment cannot be made with such regularity
due to force majeure or circumstances beyond the
employer's control in which case the employer shall
pay the wages immediately after such force majeure or
circumstances have ceased.
b. In case of payment of wages by results involving work
which cannot be finished in two (2) weeks, payment
shall be made at intervals not exceeding sixteen days in
proportion to the amount of work completed.
i. Final settlement shall be made immediately
upon completion of the work.
Payment as to results
Article 101
Payment by Results. The Secretary of Labor and Employment
shall regulate the payment of wages by results, including
1. pakyao,
2. piecework, and
3. other non-time work,
in order to ensure the payment of fair and reasonable wage
rates,
1. preferably through time and motion studies or
2. in consultation with representatives of workers’ and
employers’ organizations.
Section 8, Book III, Rule VII A, Omnibus Rules
Implementing the Labor Code
(amendment introduced Memo Circular 2 4 Nov. 1992)
Payment by result.
a. On petition of any interested party, or upon its
initiation, the Department of Labor shall use all
available devices including the use of time and motion
studies and consultation with representatives of
employers' and workers' organizations, to determine
39
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whether the employees in any industry are being
compensated in accordance with the minimum wage
requirements of this Rule.
b. The basis for the establishment of rates for piece,
output or contract work shall be the performance of an
ordinary worker of minimum skill or ability.
c. An ordinary worker of minimum skill or ability is
a. the average worker
b. of the lowest producing group
i. representing 50% of the total number
of employees engaged in similar
employment in a particular
establishment,
ii. excluding learners, apprentices and
handicapped workers employed
therein.
d. Where the output rates established by the employer do
not conform with the standards prescribed herein, or
with the rates prescribed by the Department of Labor
in an appropriate order, the employees shall be entitled
to the difference between the amount to which they are
entitled to receive under such prescribed standards or
rates and that actually paid them by the employer.
Discussion. These are relevant only for minimum wage-
setting; not relevant if already pain minimum wage or higher.
Direct payment of wages
Article 105
Direct Payment of Wages. Wages shall be paid directly to
the workers to whom they are due, except:
a. In cases of
a. force majeure rendering such payment
impossible or
b. under other special circumstances to be
determined by the Secretary of Labor and
Employment in appropriate regulations,
in which case, the worker may be paid through
another person under written authority given by the
worker for the purpose; or
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b. Where the worker has died, in which case, the
employer may pay the wages of the deceased worker to
the heirs of the latter without the necessity of intestate
proceedings.
a. The claimants, if they are all of age, shall
execute an affidavit attesting to their
relationship to the deceased and the fact that
they are his heirs, to the exclusion of all other
persons.
b. If any of the heirs is a minor, the affidavit shall
be executed on his behalf by his natural
guardian or next-of-kin.
c. The affidavit shall be presented to the
employer who shall make payment through the
Secretary of Labor and Employment or his
representative.
d. The representative of the Secretary of Labor
and Employment shall act as referee in
dividing the amount paid among the heirs.
e. The payment of wages under this Article shall
absolve the employer of any further liability
with respect to the amount paid.
Book III, Rule VIII Omnibus Rules Implementing the Labor
Code
Direct payment of wages. Payment of wages shall be made
direct to the employee entitled thereto except in the following
cases:
a. Where the employer is authorized in writing by the
employee to pay his wages to a member of his family;
b. Where payment to another person of any part of the
employee's wages is authorized by existing law,
including payments for the insurance premiums of the
employee and union dues where the right to check-off
has been recognized by the employer in accordance with
a collective agreement or authorized in writing by the
individual employees concerned; or
c. In case of death of the employee as provided in the
succeeding Section. Section 5
JO VALLES
SECURITY OF TENURE AND ENDO
Wages of deceased employee. The payment of the wages of a
deceased employee shall be made to his heirs without the
necessity of intestate proceedings.
a. When the heirs are of age, they shall execute an affidavit
attesting to their relationship to the deceased and the fact
that they are his heirs to the exclusion of all other
persons.
b. In case any of the heirs is a minor, such affidavit shall
be executed in his behalf by his natural guardian or next
of kin.
c. Employer as representative of Secretary. Upon
presentation of the affidavit to the employer, he shall
make payment to the heirs as representative of the
Secretary of Labor and Employment. Section 6
Prohibition regarding wages
1. Interference in the disposal of wages
2. Wage deductions under certain conditions
3. Deposit for loss or damage
4. Withholding wages and kickbacks
5. Deduction to ensure employment
6. Retaliatory measures
7. False reporting
Article 112. Non-Interference in Disposal of Wages. No
employer shall
1. limit or otherwise interfere with the freedom of any
employee to dispose of his wages.
2. He shall not in any manner force, compel, or oblige his
employees to purchase merchandise, commodities or
other property from any other person, or otherwise
make use of any store or services of such employer or
any other person.
Non-interference in disposal of wages. No employer shall
limit or otherwise interfere with the freedom of any employee
to dispose of his wages and no employer shall in any manner
oblige any of his employees to patronize any store or avail of
the services offered by any person. Section 9, Book III, Rule
VIII, Omnibus Rules Implementing the Labor Code
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ad majorem dei gloriam
Regardless of the noble cause, employer cannot interfere
with the employee’s disposal of his wages. In order to prevent
the employees from being saddled with wages, the company
imposed a limit on the total amount of loan which the
employees may obtain from the company and other sources.
However, this was in violation of the CBA provisions which
states that it shall process all SSS loans of its employees,
despite any outstanding company loan of such employees,
subject only to SSS rules and regulations. While its cause for
putting a limitation sympathetic, it is in violation of Art. 112 of
the Labor Code which states that “No employer shall limit or
otherwise interfere with the freedom of any employee to
dispose of his wages.” In carrying out the 50% cap policy,
petitioner effectively limits its employees on the utilization of
their salaries when it is apparent that as long as the employee is
qualified to avail the same, he/she may apply for an SSS loan.
Coca-cola Bottlers Philippines vs CCBPI Sta. Rosa Plant
Employees’ Union
Article 113. Wage Deduction. No employer, in his own behalf
or in behalf of any person, shall make any deduction from the
wages of his employees, except:
a. In cases where the worker is insured with his consent
by the employer, and the deduction is to recompense
the employer for the amount paid by him as premium
on the insurance;
b. For union dues, in cases where the right of the worker
or his union to check-off has been recognized by the
employer or authorized in writing by the individual
worker concerned; and
c. In cases where the employer is authorized by law or
regulations issued by the Secretary of Labor and
Employment.
Wages deduction; when can be made. Deductions from the
wages of the employees may be made by the employer in any
of the following cases:
a. When the deductions are authorized by law, including
deductions for the insurance premiums advanced by
the employer in behalf of the employee as well as union
dues where the right to check-off has been recognized
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by the employer or authorized in writing by the
individual employee himself.
b. When the deductions are with written authorization of
the employees for payment to THE EMPLOYER or a
third person and the employer agrees to do so, provided
that the latter does not receive any pecuniary benefit,
directly or indirectly, from the transaction. Section 10,
Book III, Rule VIII, Omnibus Rules Implementing the
Labor Code (as amended by DOLE DO No. 195-18)
Article 114. Deposits for Loss or Damage. No employer shall
require his worker to make deposits from which deductions
shall be made for the reimbursement of loss of or damage to
tools, materials, or equipment supplied by the employer, except
when the employer is engaged in such trades, occupations or
business where the practice of making deductions or requiring
deposits
1. is a recognized one, or
2. is necessary or desirable as determined by the
Secretary of Labor and Employment in appropriate
rules and regulations.
Article 115. Limitations. No deduction from the deposits of an
employee for the actual amount of the loss or damage shall be
made unless the employee has been heard thereon, and his
responsibility has been clearly shown.
Deductions for loss or damages. Where the employer is
engaged in a trade, occupation or business where the practice
of making deductions or requiring deposits is recognized to
answer for the reimbursement of loss or damage to tools,
materials, or equipment supplied by the employer to the
employee, the employer may make wage deductions or require
the employees to make deposits from which deductions shall
be made, subject to the following conditions:
a. That the employee concerned is clearly shown to be
responsible for the loss or damage;
b. That the employee is given reasonable opportunity to
show cause why deduction should not be made;
c. That the amount of such deduction is fair and
reasonable and shall not exceed the actual loss or
damage; and
JO VALLES
SECURITY OF TENURE AND ENDO
d. That the deduction from the wages of the employee
does not exceed 20 percent of the employee's wages in
a week. Section 11, Book III, Rule VIII, Omnibus Rules
Implementing the Labor Code
Article 116. Withholding of Wages and Kickbacks
Prohibited. It shall be unlawful for any person, directly or
indirectly, to
1. withhold any amount from the wages of a worker or
2. induce him to give up any part of his wages
by
1. force,
2. stealth,
3. intimidation,
4. threat or by
5. any other means whatsoever without the worker's
consent.
• Management prerogative does not include
withholding of wages. When the employee’s
supervisor could not contact the former for half a
month, the latter withheld the former’s salary until he
was able to explain his failure to report to work and
prove that he indeed worked during the period in
question. In finding that there was non-payment of
wages, the SC said that management’s right to regulate
all aspects of employment cannot be understood to
include the right to temporarily withhold wages
without the worker’s consent as this would violate
Article. 116. Any withholding may only be allowed in
the form of wage deductions under circumstances
provided in Article 113. SHS Perforated Materials vs
Diaz
• Exception; may withhold where debt is due.
Requiring clearance before the release of last payments
to the employee is a standard procedure among
employers, whether public or private. This is
supported by Article 1706 of the Civil Code in relation
to Article 113(c) of the Labor Code. Clearance
procedures are instituted to ensure that the properties,
real or personal, belonging to the employer but are in
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ad majorem dei gloriam
the possession of the separated employee, are returned
to the employer before the employee’s departure. As
long as the debt or obligation was incurred by virtue of
the employer-employee relationship, generally, it shall
be included in the employee’s accountabilities that are
subject to clearance procedures. Hence, Solid Mills
was justified in withholding its employees’ salaries
when they refused to vacate the premises that the
company let them use while working. Milan vs NLRC
Article 117. Deduction to Ensure Employment. It shall be
unlawful to make any deduction from the wages of any
employee for the benefit of the employer or his representative
or intermediary as consideration of a promise of employment
or retention in employment.
Article 118. Retaliatory Measures. It shall be unlawful for an
employer to refuse to pay or reduce the wages and benefits,
discharge or in any manner discriminate against any employee
who has
1. filed any complaint or instituted any proceeding under
this Title or
2. has testified or is about to testify in such proceedings.
Article 119. False Reporting. It shall be unlawful for any
person to make any statement, report, or record filed or kept
pursuant to the provisions of this Code knowing such
statement, report or record to be false in any material respect.
WAGE FIXING
Minimum wages
Article 99. Regional Minimum Wages. The minimum wage
rates for agricultural and non-agricultural employees and
workers in each and every region of the country shall be those
prescribed by the Regional Tripartite Wages and Productivity
Boards.
Article 101. Payment by Results. (a) The Secretary of Labor and
Employment shall regulate the payment of wages by results,
including
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SPBUS
a. pakyao,
b. piecework, and
c. other non-time work,
in order to ensure the payment of fair and reasonable wage rates,
preferably through
a. time and motion studies or
b. in consultation with representatives of workers' and
employers' organizations.
National Wage Commission and the Regional Wages and
Productivity Board
National Wage Commission
Article 120. Creation of National Wages and Productivity
Commission. There is hereby created a National Wages and
Productivity Commission, hereinafter referred to as the
Commission, which shall be attached to the Department of
Labor and Employment for policy and program coordination.
Article 121. Powers and Functions of the Commission. The
Commission shall have the following powers and functions:
a. To act as the national consultative and advisory body
to the President of the Philippines and Congress on
matters relating to wages, incomes and productivity;
b. To formulate policies and guidelines on wages,
incomes and productivity improvement at the
enterprise, industry and national levels;
c. To prescribe rules and guidelines for the determination
of appropriate minimum wage and productivity
measures at the regional, provincial, or industry levels;
d. To review regional wage levels set by the Regional
Tripartite Wages and Productivity Boards to determine
if these are in accordance with prescribed guidelines
and national development plans;
e. To undertake studies, researches and surveys necessary
for the attainment of its functions and objectives, and
to collect and compile data and periodically
disseminate information on wages and productivity
and other related information, including, but not
limited to, employment, cost-of-living, labor costs,
investments and returns;
JO VALLES
SECURITY OF TENURE AND ENDO
f. To review plans and programs of the Regional
Tripartite Wages and Productivity Boards to determine
whether these are consistent with national development
plans;
g. To exercise technical and administrative supervision
over the Regional Tripartite Wages and Productivity
Boards;
h. To call, from time to time, a national tripartite
conference of representatives of government, workers
and employers for the consideration of measures to
promote wage rationalization and productivity; and
i. To exercise such powers and functions as may be
necessary to implement this Act.
Composition. The Commission shall be composed of
1. the Secretary of Labor and Employment as ex-officio
chairman,
2. the Director-General of the National Economic and
Development Authority (NEDA) as ex-officio vice-
chairman, and
3. two (2) members each from workers and employers
sectors who shall be appointed by the President of the
Philippines upon recommendation of the Secretary of
Labor and Employment to be made on the basis of the
list of nominees submitted by the workers and
employers sectors, respectively, and who shall serve
for a term of five (5) years.
4. The Executive Director of the Commission shall also
be a member of the Commission.
The Commission shall be assisted by a Secretariat to be headed
by an Executive Director and two (2) Deputy Directors, who
shall be appointed by the President of the Philippines, upon the
recommendation of the Secretary of Labor and Employment.
The Executive Director shall have the same rank, salary,
benefits and other emoluments as that of a Department
Assistant Secretary, while the Deputy Directors shall have the
same rank, salary, benefits and other emoluments as that of a
Bureau Director. The members of the Commission representing
labor and management shall have the same rank, emoluments,
allowances and other benefits as those prescribed by law for
42
ad majorem dei gloriam
labor and management representatives in the Employees'
Compensation Commission.
Regional Wages and Productivity Board
Article 122. Creation of Regional Tripartite Wages and
Productivity Boards. There is hereby created Regional
Tripartite Wages and Productivity Boards, hereinafter referred
to as Regional Boards, in all regions, including autonomous
regions as may be established by law. The Commission shall
determine the offices/headquarters of the respective Regional
Boards.
The Regional Boards shall have the following powers and
functions in their respective territorial jurisdictions:
a. To develop plans, programs and projects relative to
wages, incomes and productivity improvement for
their respective regions;
b. To determine and fix minimum wage rates applicable
in their regions, provinces or industries therein and to
issue the corresponding wage orders, subject to
guidelines issued by the Commission;
c. To undertake studies, researches, and surveys
necessary for the attainment of their functions,
objectives and programs, and to collect and compile
data on wages, incomes, productivity and other related
information and periodically disseminate the same;
d. To coordinate with the other Regional Boards as may
be necessary to attain the policy and intention of this
Code;
e. To receive, process and act on applications for
exemption from prescribed wage rates as may be
provided by law or any Wage Order; 87 and
f. To exercise such other powers and functions as may be
necessary to carry out their mandate under this Code.
Implementation of the plans, programs, and projects of the
Regional Boards referred to in the second paragraph, letter (a)
of this Article, shall be through the respective regional offices
of the Department of Labor and Employment within their
territorial jurisdiction;
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• Provided, however, That the Regional Boards shall
have technical supervision over the regional office of
the Department of Labor and Employment with respect
to the implementation of said plans, programs and
projects.
Composition. Each Regional Board shall be composed of
1. the Regional Director of the Department of Labor and
Employment as chairman, t
2. he Regional Directors of the National Economic and
Development Authority and the Department of Trade
and Industry as vice-chairmen and
3. two (2) members each from workers' and employers'
sectors who shall be appointed by the President of the
Philippines, upon the recommendation of the Secretary
of Labor and Employment, to be made on the basis of
the list of nominees submitted by the workers' and
employers' sectors, respectively, and who shall serve
for a term of five (5) years.
Each Regional Board to be headed by its chairman shall be
assisted by a Secretariat.
Wage order; standards and criteria for fixing minimum
wage
Article 123
Wage Order. Whenever conditions in the region so warrant, the
Regional Board shall investigate and study all pertinent facts; and
based on the standards and criteria herein prescribed, shall
proceed to determine whether a Wage Order should be issued.
Any such Wage Order shall take effect after fifteen (15) days
from its complete publication in at least one (1) newspaper of
general circulation in the region.
Hearings. In the performance of its wage-determining functions,
the Regional Board shall conduct public hearings/consultations,
giving notices to employees' and employers' groups, provincial,
city and municipal officials and other interested parties.
JO VALLES
SECURITY OF TENURE AND ENDO
Appeal. Any party aggrieved by the Wage Order issued by the
Regional Board may appeal such order to the Commission within
ten (10) calendar days from the publication of such order. It
shall be mandatory for the Commission to decide such appeal
within sixty (60) calendar days from the filing thereof.
Appeal does not stay the order. The filing of the appeal does
not stay the order unless the person appealing such order shall
file with the Commission, an undertaking with a surety or
sureties satisfactory to the Commission for the payment to the
employees affected by the order of the corresponding increase,
in the event such order is affirmed.
Article 124
Standards/Criteria for Minimum Wage Fixing. The regional
minimum wages to be established by the Regional Board shall
be as nearly adequate as is economically feasible to maintain
the minimum standards of living necessary for the:
1. health,
2. efficiency and
3. general well-being of the employees
within the framework of the national economic and social
development program. Paragraph 1
Factors to be considered. In the determination of such
regional minimum wages, the Regional Board shall, among
other relevant factors, consider the following:
a. The demand for living wages;
b. Wage adjustment vis-à-vis the consumer price index;
c. The cost of living and changes or increases therein;
d. The needs of workers and their families;
e. The need to induce industries to invest in the
countryside;
f. Improvements in standards of living;
g. The prevailing wage levels;
h. Fair return of the capital invested and capacity to pay
of employers;
i. Effects on employment generation and family income;
and
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ad majorem dei gloriam
j. The equitable distribution of income and wealth along
the imperatives of economic and social development.
Paragraph 1
Different for every region. The wages prescribed in
accordance with the provisions of this Title shall be the
standard prevailing minimum wages in every region. These
wages shall include wages varying with industries, provinces
or localities if in the judgment of the Regional Board,
conditions make such local differentiation proper and necessary
to effectuate the purpose of this Title. Paragraph 2
Any person, company, corporation, partnership or any other
entity engaged in business shall file and register annually with
the appropriate Regional Board, Commission and the National
Statistics Office, an itemized listing of their labor component,
specifying the names of their workers and employees below the
managerial level, including learners, apprentices and
disabled/handicapped workers who were hired under the terms
prescribed in the employment contracts, and their
corresponding salaries and wages. Paragraph 3
Across-the-board increase without floor or ceiling is void,
RTWBP RII issued a wage order that granted an across-the-
board increase in wages amounting to P15 per day regardless
of employment status. The court declared this provision void
insofar as it grants a wage increase to employees earning more
than the minimum wage rate. the RTWBP exceeded its
authority by extending the coverage of the Wage Order to wage
earners receiving more than the prevailing minimum wage rate,
without a denominated salary ceiling. Metropolitan Bank and
Trust Company, Inc. vs NWPC and RTWPB
2 ways of fixing minimum wage:
a. Floor-wage method. This involves the fixing of a
determinate amount to be added to the prevailing
statutory minimum wage. (Ex: current minimum wage
+ P15)
b. Salary-ceiling method. The wage adjustment is to be
applied to employees receiving a certain denominated
ceiling, including those already being paid more than
the existing minimum wage. (Ex: wage order states a
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specific salary, such as P250, and only those earning
below it shall be entitled to the salary increase).
Metropolitan Bank and Trust Company, Inc. vs NWPC
and RTWPB
Wage-fixing is a valid delegation of legislative power. It is
true that wage-fixing, like rate-fixing, constitutes an act
Congress; it is also true, however, that Congress may delegate
the power to fix rates provided that, as in all delegations cases,
Congress leaves sufficient standards. As this Court has
indicated, it is impressed that the above-quoted standards
[Article 124] are sufficient. ECOP vs NWPC and RTWPB-NCR
Wage distortion
Wage distortion defined. As used herein, a wage distortion
shall mean a situation where an increase in prescribed wage
rates results in the elimination or severe contraction of
intentional quantitative differences in wage or salary rates
between and among employee groups in an establishment as to
effectively obliterate the distinctions embodied in such wage
structure based on skills, length of service, or other logical
bases of differentiation. Paragraph 7
Elements of wage distortion. The 4 elements of wage
distortion are:
1. An existing hierarchy of positions with corresponding
salary rates;
2. A significant change in the salary rate of a lower pay
class without a concomitant increase in the salary rate
of a higher one;
3. The elimination of the distinction between the two
levels; and
4. The existence of the distortion in the same region of the
country. Bankard Employees Union-Workers vs NLRC
• 4 elements must concur; there is no wage distortion
if there is no hierarchy of positions. The company
classifies is employees by levels from I-V. The BOD
approved a new salary scale where the hiring rates of
new employees were increased by P!000 in Levels I
and V, and by P900 in levels II-IV. Accordingly, the
JO VALLES
SECURITY OF TENURE AND ENDO
salaries of old employees who fell below the new
minimum rates were also adjusted to reach the new
rates under their levels. The union pressed for the
increase in the salary rates of its old employees, saying
that there was wage distortion. The court said that the
classification of levels I-V was not based on length of
service, but based on levels. Thus, there is no hierarchy
of positions between the newly hired and regular
employees. The employees cannot create their own
independent classification [newly-hired and the old]
and use it as a basis to demand an across-the-board
salary increase. The formulation of wage structure
through the classification of employees is management
prerogative. Bankard Employees Union-Workers vs
NLRC
• Intention of the law. Article 124 is to be construed and
correlated in relation to minimum wage fixing, the
intention of the law being that in the event of an
increase in minimum wage, the distinction embodied
in the wage structure based on skills, length of service,
or other logical bases of differentiation will be
preserved. Bankard Employees Union-Workers vs
NLRC
• Wage distortion does not arise when one region
provides higher compensation than another region
for the same rank of employees. Wage distortion
presupposes an increase in the compensation of lower
ranks without a corresponding increase for higher
ranks in the same region, resulting to the elimination or
severe diminution of the quantitative distinction
between 2 groups. Such distortion does not arise when
a wage order gives employees in one branch of a bank
higher compensation than the same rank of employees
in branches of other regions. In short, the
implementation of wage orders in one region but not in
others does not in itself necessarily result in wage
distortion. Prubankers Association vs Prudential Bank
and Trust Company
44
ad majorem dei gloriam
o Rationale. RA 6727 recognizes that different
regions have different needs. It also provides
for the different factors to be considered in
ascertaining the wage rates in each region.
Prubankers Association vs Prudential Bank
and Trust Company
Employer and union must negotiate to correct distortions.
Where the application of any prescribed wage increase by
virtue of a law or wage order issued by any Regional Board
results in distortions of the wage structure within an
establishment, the employer and the union shall negotiate to
correct the distortions. Any dispute arising from wage
distortions shall be resolved through
1. the grievance procedure under their collective
bargaining agreement and,
2. if it remains unresolved, through voluntary arbitration.
• Unless otherwise agreed by the parties in
writing, such dispute shall be decided by the
voluntary arbitrators within ten (10) calendar
days from the time said dispute was referred to
voluntary arbitration. Paragraph 4
Employers and workers to correct distortion if no union. In
cases where there are no collective agreements or recognized
labor unions, the employers and workers shall endeavor to
correct such distortions.
1. Any dispute arising therefrom shall be settled through
the National Conciliation and Mediation Board and,
2. if it remains unresolved after ten (10) calendar days of
conciliation, shall be referred to the appropriate branch
of the National Labor Relations Commission (NLRC).
• It shall be mandatory for the NLRC to conduct
continuous hearings and decide the dispute
within twenty (20) calendar days from the time
said dispute is submitted for compulsory
arbitration. Paragraph 5
Dispute in wage distortion does not delay wage increase.
The pendency of a dispute arising from a wage distortion shall
not in any way delay the applicability of any increase in
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SPBUS
prescribed wage rates pursuant to the provisions of law or wage
order. Paragraph 6
Wages for workers paid by result. All workers paid by result,
including those who are paid on piecework, takay, pakyaw or
task basis, shall receive not less than the prescribed wage rates
per eight (8) hours of work a day, or a proportion thereof for
working less than eight (8) hours. Paragraph 8
Applies to apprenticeship. All recognized learnership and
apprenticeship agreements shall be considered automatically
modified insofar as their wage clauses are concerned to reflect
the prescribed wage rates. Paragraph 9
Exempted from Wage Rationalization Act
Section 4 (c)
Exempted from the provisions of this Act are:
1. household or domestic helpers and
2. persons employed in the personal service of another,
including family drivers
Not more than 10 workers; so 10 max. Retail/service
establishments regularly employing not more than ten (10)
workers may be exempted from the applicability of this Act
upon application with and as determined by the appropriate
Regional Board in accordance with the applicable rules and
regulations issued by the Commission.
• Whenever an application for exemption has been duly
filed with the appropriate Regional Board, action on
any complaint for alleged non-compliance with this
Act shall be deferred pending resolution of the
application for exemption by the appropriate Regional
Board.
Also excepted are BMBEs. Barangay Micro Business
Enterprise or BMBE, refers to any business entity or
enterprise engaged in the production, processing or
manufacturing of products or commodities, including agro-
processing, trading and services, whose total assets
JO VALLES
SECURITY OF TENURE AND ENDO ad majorem dei gloriam SPBUS
including those arising from loans but exclusive of the land NWPC approval is to arrogate unto it a power vested to NWPC applicability of the increase in the wage rates
on which the particular business entity's office, plant and by Article 121 of the Labor Code. Nasipit Lumber Co. vs prescribed under this Section.
equipment are situated, shall not be more than Three NWPC
Million Pesos (P3,000,000.00). Section 3(a) of RA 9178 Penalty for refusal or failure to comply with RA 6727
Section 4 (d)
• BMBE employees entitled to regular benefits. Section 12
The BMBEs shall be exempt from the coverage of When increases prior to effectivity of RA 6727 considered
the Minimum Wage Law provided that their as compliance. If expressly provided for and agreed upon in Penalty. Any person, corporation, trust, firm, partnership,
employees shall be entitled to the same benefits the collective bargaining agreements, all increases in the daily association or entity which refuses or fails to pay any of the
basic wage rates granted by the employers three (3) months prescribed increases or adjustments in the wage rates made in
given to any regular employee such as social
before the effectivity of this Act shall be credited as compliance accordance with this Act shall be punished by:
security and healthcare benefits. Section 8 of RA with the increases in the wage rates prescribed herein, provided 1. a fine not less than Twenty-five thousand pesos
9178
that, where such increases are less than the prescribed increases (P25,000) nor more than One hundred thousand pesos
in the wage rates under this Act, the employer shall pay the (P100,000) or
Denied applications; employees to receive compensation
difference. 2. imprisonment of not less than two (2) years nor more
plus 1% monthly interest from effectivity of this Act. In the
than four (4) years, or
event that applications for exemptions are not granted,
Excluded from computation of increase. Such increases shall 3. both such fine and imprisonment at the discretion of
employees shall receive the appropriate compensation due
not include: the court.
them as provided for by this Act plus interest of one per cent
1. anniversary wage increases,
(1%) per month retroactive to the effectivity of this Act.
2. merit wage increases and No benefits of probation law. Provided, That any person
3. those resulting from the regularization or promotion of convicted under this Act shall not be entitled to the benefits
List of exempt establishments not exclusive; RTWPBs of
employees. provided for under the Probation Law.
each region may make exemptions in its wage order. The
RTWPBs are the thinking group of men and women guided by
When distortion results. Where the application of the Employer will pay 2x unpaid benefits. The employer
statutory standards and bound by the rules and guidelines
increases in the wage rates under this Section results in concerned shall be ordered to pay an amount equivalent to
prescribed by the NWPC. In the nature of their functions, the
distortions as defined under existing laws in the wage structure double the unpaid benefits owing to the employees.
RTWPBs investigate and study all the pertinent facts to
within an establishment and gives rise to a dispute therein: • Provided, That payment of indemnity shall not absolve
ascertain the conditions in their respective regions. Hence, they
1. such dispute shall first be settled voluntarily between the employer from the criminal liability imposable
are logically vested with the competence to determine the
the parties and under this Act.
applicable minimum wages to be imposed as well as the
2. in the event of a deadlock, the same shall be finally
industries and sectors to exempt from the coverage of their
resolved through compulsory arbitration by the Imprisonment imposed on responsible officers. If the
wage orders. NWPC and RTWPB vs APL
regional branches of the National Labor Relations violation is committed by a corporation, trust or firm,
Commission (NLRC) having jurisdiction over the partnership, association or any other entity, the penalty of
Exemption guidelines of RTWPBs subject to guidelines of
workplace. imprisonment shall be imposed upon the entity's responsible
NWPC. While the Boards may issue supplementary guidelines
o It shall be mandatory for the NLRC to conduct officers, including, but not limited to, the president, vice-
on exemption, the same should first pass the Commission for
continuous hearings and decide any dispute president, chief executive officer, general manager, managing
the purpose of determining its conformity to the latter's general
arising under this Section within twenty (20) director or partner.
policies and guidelines relative thereto. Hence, when the
calendar days from the time said dispute is
RTWPB granted exemptions to certain establishments pursuant
formally submitted to it for arbitration. The
to guidelines it issued without NWPC approval, and contrary to
pendency of a dispute arising from a wage
the latter’s issued guidelines, the Court said that the RTWPB
distortion shall not in any way delay the
guidelines cannot be a basis for granting an application for
exemption. To allow its guidelines to take effect without
45 Last Edit: 23 December 2020 JO VALLES
SECURITY OF TENURE AND ENDO
Wage Order NCR-22
New minimum wage rates. Upon effectivity of this Wage
Order, the new daily minimum wage rates of covered workers
in the private sector in the National Capital Region shall be as
follows: Section 1.
• Date issued. 28 November 2019;
• Date published. Published at Philippine Star on 18
December 2019.
• Effectivity. January 2, 2020 [15 days after its
publication in a newspaper of general circulation.
Section 23]
Coverage. The wage rates per day prescribed in this Order shall
apply to all minimum wage earners in the private sector in the
region,
1. regardless of their
a. position,
b. designation or
c. status of employment and
2. irrespective of the method by which they are paid.
Not covered. This Wage Order shall not cover
1. kasambahay/domestic workers;
2. persons in the personal service of another and
3. workers of duly registered Barangay Micro Business
Enterprises (BMBEs) with Certificates of Authority
pursuant to Republic Act No. 10644. Section 2
Basis of Minimum Wage Rates. The minimum wage rates
prescribed under this Order shall be for the normal working
hours which shall not exceed eight (8) hours of work a day.
Section 3
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ad majorem dei gloriam
Application to Contractors. In the case of:
a. contracting out of projects and for
b. security,
c. janitorial and
d. similar services,
the wage rates prescribed in this Order shall be borne by the
principals or clients of the service contractors and the contract
shall be deemed amended accordingly. Section 4
In the event, however, that the principals or clients fail to pay
the prescribed wage rates, the service contractor shall be jointly
and severally liable with his respective principal or client.
Application to Private Educational Institutions. In the case
of private educational institutions, the share of covered
workers and employees in the increase in tuition fees for School
Year 2018-2019 shall be considered as compliance with the
wage rates prescribed herein. However, payment of any
shortfall in the wage increase set forth herein shall be covered
starting School Year 2019-2020. Section 5
• Private educational institutions which have not
increased their tuition fees for School Year 2018-2019
may defer compliance with the wage rates prescribed
herein until the beginning of School Year 2019-2020.
• In any case, all private educational institutions shall
implement the wage rates prescribed herein starting
School Year 2019-2020.
Workers Paid by Result. All workers paid by result, including
those who are paid on:
1. piecework,
2. "takay,"
3. "pakyaw" or
4. task basis,
shall be entitled to receive
1. the prescribed wage rates per eight (8) hours work a
day, or
2. a proportion thereof for working less than eight (8)
hours. Section 6
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Wages of Special Groups of Workers. Wages of apprentices
and learners shall in no case be less than seventy-five percent
(75%) of the applicable minimum wage rates prescribed in this
Order.
• All recognized learnership and apprenticeship
agreements entered into before the effectivity of this
Order shall be considered automatically modified
insofar as their wage clauses are concerned to reflect
the new minimum wage rates.
All qualified handicapped workers shall receive the full
amount of the minimum wage rate prescribed herein pursuant
to Republic Act No. 7277, otherwise known as the Magna Carta
for Disabled Persons. Section 7
Exemptions. Upon application with and as determined by the
Board, based on documentation and other requirements in
accordance with applicable rules and regulations issued by
NWPC, the following may be exempted from the applicability
of this Order:
1. Distressed Establishments;
2. Retail/Service Establishments Regularly Employing
Not More Than Ten (10) workers; and
3. Establishments Adversely Affected by Calamities such
as Natural and Human-induced disasters. Section 8
Appeal to the Commission. Any party aggrieved by this Wage
Order may file an appeal to NWPC, through the Board, in three
(3) printed copies, not later than ten (10) days from the
publication of this Wage Order. Section 9
Creditable Wage Increase. Any increase granted by an
employer in an organized establishment within three (3)
months prior to the effectivity of this Order shall be credited as
compliance with the prescribed increase set forth herein,
provided that:
1. an agreement to this effect has been forged between the
parties or
2. a collective bargaining agreement provision allowing
such creditability exists.
JO VALLES
SECURITY OF TENURE AND ENDO
• No agreement, no credit. In the absence of such an
agreement or provision in the CBA, any increase
granted by the employer shall not be credited as
compliance with the wage rates prescribed in this
Order.
• 5 months for unorganized establishments. In
unorganized establishments, any increase granted by
the employer within five (5) months prior to the
effectivity of this Order shall be credited as compliance
therewith.
• Employer pays in case of deficiency. In case the
increases given are less than the prescribed wage rates,
the employer shall pay the difference.
• Increases not included. Such increases shall not
include
1. anniversary increases,
2. merit wage increases and
3. those resulting from the regularization or
promotion of employees. Section 10
Effects on Existing Wage Structure. Where the application of
the wage rates prescribed in this Order results in distortions in
the wage structure within the establishment, it shall be
corrected in accordance with the procedure provided for under
Article 124 of Presidential Decree No. 442, as amended,
otherwise known as the Labor Code of the Philippines. Section
11
Complaints for Non-Compliance. Complaints for non-
compliance with this Order shall be filed with the Regional
Office of the Department of Labor and Employment having
jurisdiction over the workplace and shall be subject to the
mandatory thirty (30)-day conciliation and mediation process
under Single Entry Approach (SEnA). However, if settlement
fails, the case becomes subject of enforcement proceedings
under Articles 128 and 129 of the Labor Code, as amended.
Section 12
Productivity and Other Performance Incentive Programs.
In order to sustain rising levels of wages and enhance
47
ad majorem dei gloriam
competitiveness, labor and management as partners are
encouraged to adopt productivity improvement schemes that
will improve the quality of life of workers and in turn enable
them to produce more and earn more, such as time and motion
studies, good housekeeping, quality circles, labor and
management cooperation as well as implement gain-sharing
and other performance incentive programs. Section 13
Non-Diminution of Benefits. Nothing in this Order shall be
construed to reduce any existing wage rates, allowances and
benefits of any form under existing laws, decrees, issuances,
executive orders and/or under any contract or agreement
between the workers and employers. Section 14
Prohibition against Injunction. No preliminary or permanent
injunction or temporary restraining order may be issued by any
court, tribunal or other entity against any proceedings before
the Board. Section 15
Freedom to Bargain. This Order shall not be construed to
prevent workers in particular firms or enterprises or industries
from bargaining for higher wages with their respective
employers. Section 16
Reporting Requirement. Any person, company, corporation,
partnership or any entity engaged in business shall submit a
verified report on their wage structure to the Board not later
than January 31st of each year and every year thereafter in
accordance with the form prescribed by the National Wages
and Productivity Commission. Section 17
Implementing Rules. The RTWPB-NCR shall submit to the
Commission the necessary Rules and Regulations to implement
this Order subject to approval of the Secretary of Labor and
Employment not later than ten (10) days from the publication
of the Wage Order. Section 21
Advisory on Productivity Based Pay. Pursuant to the Two-
Tiered Wage System, Wage Advisories have been issued to
guide private establishments in the formulation, adoption and
implementation of productivity programs and performance and
productivity-based incentive schemes that an enterprise may
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SPBUS
provide based on agreement between workers and
management. Section 22
Two-tiered wage system
NWPC Guidelines No. 2, s. 2012
Two-Tiered Wage System refers to a pay system
consisting of:
1. minimum wage; and
2. incentive pay based on productivity improvement
and gainsharing. Section 2(e)
Minimum Wage refers to the lowest wage rate fixed by
law. Section 2(f)
Regional Average Wage refers to the average basic wage
of workers in the private sector in the region. Section 2(g)
Regional Poverty Threshold refers to the minimum
income/expenditure required for a family/individual to
meet the basic food and non-food requirements. Section 2(h)
Productivity Incentive refers to bonuses given to workers
as a result of increases in productivity. Section 2(i)
First tier
Section 3
The first tier shall be the regional minimum wage rates provided
in a Wage Order issued by the Boards.
Concept. The setting of a minimum wage aims to protect
vulnerable workers. It shall be set higher than the poverty
threshold without creating negative effects of minimum wage
policies. Reference shall be made to the poverty threshold,
average wage and socioeconomic indicators, considering the
criteria prescribed in RA 6727.
• Poverty threshold reflects demand for living wages,
wage adjustments vis-Ã -vis the consumer prices, cost of
JO VALLES
SECURITY OF TENURE AND ENDO ad majorem dei gloriam SPBUS
living and changes or increases therein, needs of workers Review and update. The weights shall be reviewed, as industry/sub-industry/sector-specific data on labor
and their families and improvements in standards of appropriate, and may be modified to achieve a structure productivity, wages, profitability, outlook and other
living. where minimum wages are kept above poverty threshold. relevant information; and a recommendation on a range of
productivity incentives.
• Average wage reflects prevailing wage levels, equitable Second Tier
distribution of income and wealth along the imperatives Section 4 HOURS OF WORK, NIGHT SHIFT, OVERTIME
of economic and social developments.
The second tier shall consist of productivity bonuses and EDS= Employee daily salary
• Other socioeconomic indicators include need to induce
incentives based on agreement between workers and HER= Employee hourly rate
industries to invest in the countryside, fair return of the
management.
capital invested and capacity to pay of employers Summary:
and effects on employment generation and family Let x be the employee hourly rate (EHR) on a regular day
Concept. The Boards shall issue an Advisory to guide R: Regular hours
income. enterprises or industries on a range of productivity NSD: Night shift differential
incentives. The Advisory may be used as basis for employer OT: Overtime
Formula. Regional Minimum [Floor] Wage = x (Poverty
Threshold) + y (Average Wage) + (socio-economic indicators) initiatives or enterprise-level negotiations.
The second tier shall consist of productivity bonuses and
Where: incentives based on agreement between workers and General formula:
x — is the weight for poverty threshold, expressed in percent management.
Reg Special Special holiday Regular Regular
y — is the weight for average wage, expressed in percent holiday/rest on rest day holiday holiday on
The sum of x and y should be equal to 1. Identification of Priority Industry. The Board may day (not reg rest day
identify a priority industry or sub-industry or sector (based holiday)
R x 0.3 1.3x 0.5 1.5x 2 2x 2.6 2.6x
Weighting system. A weighting system for poverty on the 2009 Philippine Standard Industrial Classification) NSD 1.1x 0.1 1.3x + 0.1 1.5x + 0.1 2x+ 0.1 2.6x +
threshold and average wage shall be used to reflect the as the subject of an Advisory. As criteria for selecting a (1.3x)
(0.1)
(1.5x)
(0.1)
(2x)
(0.1)
(2.6x)
(0.1)
relative importance of each indicator. The weights may priority industry, the Board may consider the industry's OT 1.25x 0.3 1.3x + 0.3 1.5x + 0.3 2x + 0.3 2.6x +
(1.3x) (1.5x) (2x) (2.6x)
vary across regions depending on the gap between share to employment; contribution to economic output; 1.3x (0.3) (0.3) (0.3) (0.3)
minimum wages, poverty threshold and average wage and growth in labor productivity; wages and other relevant for
HWs
the impact of the socioeconomic indicators. factors.
Easier formula:
• For instance, the Board may assign the biggest Conduct of Industry Study and Consultation. The Board
weight to poverty threshold if minimum wages are shall undertake studies on the performance and outlook of Reg Special Special holiday Regular Regular
holiday/rest on rest day holiday holiday on
already close to or have exceeded average wage and the industry. The Board may undertake these studies on its day (not reg rest day
the Board may want to consider moderate increases own or commission the academe or a research institution to holiday)
R x 0.3 1.3x 0.5 1.5x 2 2x 2.6 2.6x
in minimum wages; or conduct these studies for them. The Board shall involve NSD 1.1x 0.1 1.3*1.1 0.1 1.5*1.1 0.1 2*1.1 0.1 2.6*1.1

• the Board may assign the biggest weight to average industry stakeholders in these studies.
OT 1.25x 0.3 1.3*1.3 0.3 1.5*1.3 0.3 2*1.3 0.3 2.6*1.3
wage if minimum wages are close to or are below
Issuance of an Advisory. The Board shall issue an 1.3x
poverty threshold and the Board may want to for
consider more substantial increases in the minimum Advisory based on the results of the studies and HWs

wages to keep them above the poverty threshold. consultations with industry stakeholders. It shall contain an
assessment of the region's overall economic performance; Multipliers

48 Last Edit: 23 December 2020 JO VALLES

SECURITY OF TENURE AND ENDO ad majorem dei gloriam SPBUS
6. persons in the personal service of another, and 6. social workers,
Reg Special Special holiday Regular Regular 7. workers who are paid by results as determined by the 7. laboratory technicians,
holiday/rest on rest day holiday holiday on
day (not reg rest day Secretary of Labor in appropriate regulations. Article 8. paramedical technicians,
holiday) 82 9. psychologists,
R x 0.3 1.3x 0.5 1.5x 2 2x 2.6 2.6x
NSD 1.1x 0.1 1.43x 0.1 1.65x 0.1 2.2x 0.1 2.86x 10. midwives,
OT 1.25x 0.3 1.69 0.3 1.95x 0.3 2.6x 0.3 3.38x • Managerial employees refer to those whose primary 11. attendants and
1.3x duty consists of the management of the establishment 12. all other hospital or clinic personnel. Article 83
for in which they are employed or of a department or
HWs Hours Worked. Hours worked shall include
subdivision thereof, and to other officers or members
of the managerial staff. a. all time during which an employee is required to be on
Sample exercise: (Assume Sundays are rest days) duty or to be at a prescribed workplace; and
• Field personnel shall refer to non-agricultural b. all time during which an employee is suffered or
What is the OT rate per hour x * 1.3 * 1.3 employees who regularly perform their duties away permitted to work.
on a Sunday? from the principal place of business or branch office of
What is the hourly rate on a 2x * 1.3 the employer and whose actual hours of work in the • Rest period included. Rest periods of short duration
Sunday falling on a regular field cannot be determined with reasonable certainty. during working hours shall be counted as hours
holiday? worked. Article 84
What is the hourly rate on a 1.5x Normal Hours of Work; 8hrs/d. The normal hours of work of
Sunday falling on a special any employee shall not exceed eight (8) hours a day. Meal Periods; 1hr. Subject to such regulations as the Secretary
holiday? of Labor may prescribe, it shall be the duty of every employer
What is the hourly OT rate 1.5 * 1.3 Health personnel: to give his employees not less than sixty (60) minutes time-off
of a special holiday falling 1. in cities and municipalities with a population of at least for their regular meals. Article 85
on a rest day one million (1,000,000) or
What is the OT rate on 2x * 1.3 * 1.3 2. in hospitals and clinics with a bed capacity of at least Night-Shift Differential; +10% per hr; 10pm to 6am. Every
Sundays falling on a regular one hundred (100) employee shall be paid a night shift differential of not less than
holiday? shall hold regular office hours for ten percent (10%) of his regular wage for each hour of work
1. eight (8) hours a day, performed between ten o'clock in the evening and six o'clock
2. for five (5) days a week, in the morning. Article 86
Labor Code Provisions 3. exclusive of time for meals,
BOOK THREE Conditions of Employment except where the exigencies of the service require that such Overtime Work; +25%. Work may be performed beyond
TITLE I Working Conditions and Rest Periods personnel work for six (6) days or forty-eight (48) hours, in eight (8) hours a day provided that the employee is paid for the
CHAPTER I Hours of Work which case, they shall be entitled to an additional compensation overtime work, an additional compensation equivalent to his
of at least thirty percent (30%) of their regular wage for work regular wage plus at least twenty-five percent (25%) thereof.
Coverage. The provisions of this Title shall apply to employees on the sixth day.
in all establishments and undertakings whether for profit or not, • OT on holidays/rest days; +30%. Work performed
but not to: Health personnel. For purposes of this Article, health beyond eight hours on a holiday or rest day shall be
1. government employees, personnel shall include paid an additional compensation equivalent to the rate
2. managerial employees, 1. resident physicians, of the first eight hours on a holiday or rest day plus at
3. field personnel, 2. nurses, least thirty percent (30%) thereof. Article 87
4. members of the family of the employer who are 3. nutritionists,
dependent on him for support, 4. dieticians,
5. domestic helpers, 5. pharmacists,
49 Last Edit: 23 December 2020 JO VALLES
SECURITY OF TENURE AND ENDO
Undertime Not Offset by Overtime. Undertime work on any
particular day shall not be offset by overtime work on any other
day.
• Permission given to the employee to go on leave on
some other day of the week shall not exempt the
employer from paying the additional compensation
required in this Chapter. Article 88
Emergency Overtime Work. Any employee may be required
by the employer to perform overtime work in any of the
following cases:
a. When the country is at war or when any other national
or local emergency has been declared by the National
Assembly 73 or the Chief Executive;
b. When it is necessary to prevent loss of life or property
or in case of imminent danger to public safety due to
an actual or impending emergency in the locality
caused by serious accidents, fire, flood, typhoon,
earthquake, epidemic, or other disaster or calamity;
c. When there is urgent work to be performed on
machines, installations, or equipment, in order to avoid
serious loss or damage to the employer or some other
cause of similar nature;
d. When the work is necessary to prevent loss or damage
to perishable goods; and
e. Where the completion or continuation of the work
started before the eighth hour is necessary to prevent
serious obstruction or prejudice to the business or
operations of the employer. Article 89
• Any employee required to render overtime work under
this Article shall be paid the additional compensation
required in this Chapter.
Computation of Additional Compensation. For purposes of
computing overtime and other additional remuneration as
required by this Chapter, the "regular wage" of an employee
shall include the cash wage only, without deduction on account
of facilities provided by the employer. Article 90
Omnibus Rules implementing Labor Code Book 3
Rule 1: Hours of Work
50
ad majorem dei gloriam
General statement on coverage. The provisions of this Rule
shall apply to all employees in all establishments and
undertakings, whether operated for profit or not, except to those
specifically exempted under Section 2 hereof. Section 1
Exemption. The provisions of this Rule shall not apply to the
following persons if they qualify for exemption under the
conditions set forth herein:
a. Government employees whether employed by the
National Government or any of its political
subdivision, including those employed in government-
owned and/or controlled corporations;
b. Managerial employees, if they meet all of the following
conditions:
a. Their primary duty consists of the
management of the establishment in which
they are employed or of a department or sub-
division thereof.
b. They customarily and regularly direct the work
of two or more employees therein.
c. They have the authority to hire or fire
employees of lower rank; or their suggestions
and recommendations as to hiring and firing
and as to the promotion or any other change of
status of other employees, are given particular
weight.
c. Officers or members of a managerial staff if they
perform the following duties and responsibilities:
1) The primary duty consists of the performance
of work directly related to management
policies of their employer;
2) Customarily and regularly exercise discretion
and independent judgment; and
3) they
i. Regularly and directly assist a
proprietor or a managerial employee
whose primary duty consists of the
management of the establishment in
which he is employed or subdivision
thereof; or
Last Edit: 23 December 2020
SPBUS
ii. execute under general supervision
work along specialized or technical
lines requiring special training,
experience, or knowledge; or
iii. execute, under general supervision,
special assignments and tasks; and
b. Who do not devote more than 20 percent of
their hours worked in a work week to activities
which are not directly and closely related to the
performance of the work described in
paragraphs (1), (2) and (3) above.
d. Domestic servants and persons in the personal service
of another if
a. they perform such services in the employer's
home which are usually necessary or desirable
for the maintenance and enjoyment thereof, or
b. minister to the personal comfort, convenience,
or safety of the employer as well as the
members of his employer's household.
e. Workers who are paid by results, including those who
are paid on piece-work, "takay," "pakiao" or task basis,
and other non-time work if their output rates are in
accordance with the standards prescribed under
Section 8, Rule VII, Book Three of these regulations,
or where such rates have been fixed by the Secretary of
Labor and Employment in accordance with the
aforesaid Section.
f. Non-agricultural field personnel if they regularly
perform their duties away from the principal or branch
office or place of business of the employer and whose
actual hours of work in the field cannot be determined
with reasonable certainty.
Not included in the IRR but included in the Labor Code:
members of the family dependent for support;
Hours worked. The following shall be considered as
compensable hours worked:
a. All time during which an employee is required to be on
duty or to be at the employer's premises or to be at a
prescribed work place; and
JO VALLES
SECURITY OF TENURE AND ENDO
b. All time during which an employee is suffered or
permitted to work. Section 3
Principles in determining hours worked. The following
general principles shall govern in determining whether the time
spent by an employee is considered hours worked for purposes
of this Rule:
a. All hours are hours worked which the employee is
required to give his employer, regardless of whether or
not
a. such hours are spent in productive labor or
b. involve physical or mental exertion.
b. An employee need not leave the premises of the
workplace in order that his rest period shall not be
counted, it being enough that
a. he stops working,
b. may rest completely and
c. may leave his workplace, to go elsewhere,
whether within or outside the premises of his
workplace.
c. If
a. the work performed was necessary, or
b. it benefited the employer, or
c. the employee could not abandon his work at
the end of his normal working hours because
he had no replacement,
all time spent for such work shall be considered as
hours worked, if the work was with the knowledge
of his employer or immediate supervisor.
d. The time during which an employee is inactive by
reason of interruptions in his work beyond his control
shall be considered working time either
a. if the imminence of the resumption of work
requires the employee's presence at the place
of work or
b. if the interval is too brief to be utilized
effectively and gainfully in the employee's
own interest. Section 4
Waiting time.
a. Waiting time spent by an employee shall be considered
as working time if
51
ad majorem dei gloriam
a. waiting is an integral part of his work or
b. the employee is required or engaged by the
employer to wait.
b. An employee who is required to remain on call in the
employer's premises or so close thereto that he cannot
use the time effectively and gainfully for his own
purpose shall be considered as working while on call.
An employee who is not required to leave word at his
home or with company officials where he may be
reached is not working while on call. Section 5
Lectures, meetings, training programs. Attendance at
lectures, meetings, training programs, and other similar
activities shall not be counted as working time if all of the
following conditions are met:
a. Attendance is outside of the employee's regular
working hours;
b. Attendance is in fact voluntary; and
c. The employee does not perform any productive work
during such attendance. Section 6
Meal and Rest Periods. Every employer shall give his
employees, regardless of sex, not less than one (1) hour time-
off for regular meals, except in the following cases when a meal
period of not less than twenty (20) minutes may be given by the
employer provided that such shorter meal period is credited as
compensable hours worked of the employee:
a. Where the work is non-manual work in nature or does
not involve strenuous physical exertion;
b. Where the establishment regularly operates not less
than sixteen (16) hours a day;
c. In case of actual or impending emergencies or there is
urgent work to be performed on machineries,
equipment or installations to avoid serious loss which
the employer would otherwise suffer; and
d. Where the work is necessary to prevent serious loss of
perishable goods.
• Short duration. 5-20 mins. Rest periods or coffee
breaks running from five (5) to twenty (20) minutes
shall be considered as compensable working time.
Section 7
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SPBUS
Overtime pay. Any employee covered by this Rule who is
permitted or required to work beyond eight (8) hours on
ordinary working days shall be paid an additional
compensation for the overtime work in the amount equivalent
to his regular wage plus at least twenty-five percent (25%)
thereof. Section 8
Premium and overtime pay for holiday and rest day work.
a. Premium pay. Except employees referred to under
Section 2 of this Rule, an employee who is permitted
or suffered to work on
a. special holidays or
b. on his designated rest days not falling on
regular holidays,
shall be paid with an additional compensation as premium
pay of not less than thirty percent (30%) of his regular
wage.
OT pay. For work performed in excess of eight (8) hours
on special holidays and rest days not falling on regular
holidays, an employee shall be paid an additional
compensation for the overtime work equivalent to his rate
for the first eight hours on a special holiday or rest day plus
at least thirty percent (30%) thereof.
b. Public utility and non-profit orgs included.
Employees of public utility enterprises as well as those
employed in non-profit institutions and organizations
shall be entitled to the premium and overtime pay
provided herein, unless they are specifically excluded
from the coverage of this Rule as provided in Section
2 hereof.
c. The payment of additional compensation for work
performed on regular holidays shall be governed by
Rule IV, Book Three, of these Rules. Section 9
Compulsory overtime work. In any of the following cases, an
employer may require any of his employees to work beyond
eight (8) hours a day, provided that the employee required to
render overtime work is paid the additional compensation
required by these regulations:
JO VALLES
SECURITY OF TENURE AND ENDO
a. When the country is at war or when any other national
or local emergency has been declared by Congress or
the Chief Executive;
b. When overtime work is necessary to prevent loss of life
or property, or in case of imminent danger to public
safety due to actual or impending emergency in the
locality caused by serious accident, fire, floods,
typhoons, earthquake, epidemic or other disaster or
calamities;
c. When there is urgent work to be performed on
machines, installations, or equipment, in order to avoid
serious loss or damage to the employer or some other
causes of similar nature; cda
d. When the work is necessary to prevent loss or damage
to perishable goods;
e. When the completion or continuation of work started
before the 8th hour is necessary to prevent serious
obstruction or prejudice to the business or operations
of the employer; or
f. When overtime work is necessary to avail of favorable
weather or environmental conditions where
performance or quality of work is dependent thereon.
In cases not falling within any of these enumerated in this
Section, no employee may be made to work beyond eight hours
a day against his will. Section 10
Rule IA: Hours of work of hospital or clinic personnel
General statement on coverage. This Rule shall apply to:
a. All hospitals and clinics, including those with a bed
capacity of less than one hundred (100) which are
situated in cities or municipalities with a population of
one million (1M) or more; and
b. All hospitals and clinics with a bed capacity of at least
one hundred (100), irrespective of the size of the
population of the city or municipality where they may
be situated. Section 1
Hospitals or clinics within the meaning of this Rule. The
terms hospitals and clinics as used in this Rule shall mean:
52
ad majorem dei gloriam
a. a place devoted primarily to the maintenance and
operation of facilities for the diagnosis, treatment and
care of individuals suffering from illness, disease,
injury, or deformity, or in need of obstetrical or other
medical and nursing care.
b. Either term shall also be construed as any institution,
building, or place where there are installed beds, or
cribs, or bassinets for twenty-four (24) hours use or
longer by patients in the treatment of disease, injuries,
deformities, or abnormal physical and mental states,
maternity cases or sanitorial care; or infirmaries,
nurseries, dispensaries, and such other similar names
by which they may be designated. Section 2
Determination of bed capacity and population.
a. Actual capacity not occupancy; BMS. For purposes
of determining the applicability of this Rule, the actual
bed capacity of the hospital or clinic at the time of such
determination shall be considered, regardless of the
actual or bed occupancy. The bed capacity of hospital
or clinic as determined by the Bureau of Medical
Services pursuant to Republic Act No. 4226, otherwise
known as the Hospital Licensure Act, shall prima facie
be considered as the actual bed capacity of such
hospital or clinic.
b. Size or population; BCS. The size of the population
of the city or municipality shall be determined from the
latest official census issued by the Bureau of the
Census and Statistics. Section 3
Personnel covered by this Rule; public and private. This
Rule applies to all persons employed by any private or public
hospital or clinic mentioned in Section 1 hereof, and shall
include, but not limited to,
1. resident physicians,
2. nurses,
3. nutritionists,
4. dieticians,
5. pharmacists,
6. social workers,
7. laboratory technicians
8. paramedical technicians,
Last Edit: 23 December 2020
SPBUS
9. psychologists,
10. midwives, and
11. attendants. Section 4
Regular working hours; 8hrs/d or 40hrs/w. The regular
working hours of any person covered by this Rule shall not be
more than eight (8) hours in any one day nor more than forty
(40) hours in any one week. Section 5
• Day. For purposes of this Rule a day shall mean a work
day of twenty-four (24) consecutive hours beginning at
the same time each calendar year.
• Week. A week shall mean the work of 168 consecutive
hours, or seven consecutive 24-hour work days,
beginning at the same hour and on the same calendar
day each calendar week.
Regular working days; 5 days including weekends. The
regular working days of covered employees shall not be more
than five days in a work week. The work week may begin at
any hour and on any day, including Saturday or Sunday,
designated by the employer. Section 6
Employers are not precluded from changing the time at which
the work day or work week begins, provided that the change is
not intended to evade the requirements of this Rule.
Overtime work; 30%. Where the exigencies of the service so
require as determined by the employer, any employee covered
by this Rule may be scheduled to work for more than five (5)
days or forty (40) hours a week, provided that the employee is
paid for the overtime work an additional compensation
equivalent to his regular wage plus at least thirty percent (30%)
thereof, subject to the provisions of this Book on the payment
of additional compensation for work performed on special and
regular holidays and on rest days. Section 7
Hours worked. In determining the compensable hours of work
of hospital and clinic personnel covered by this Rule, the
pertinent provisions of Rule 1 of this Book shall apply. Section
8
JO VALLES
SECURITY OF TENURE AND ENDO
Additional compensation. Hospital and clinic personnel
covered by this Rule, with the exception of those employed by
the Government, shall be
a. entitled to an additional compensation for work
performed on regular and special holidays and rest
days as provided in this Book.
b. Such employees shall also be entitled to overtime pay
for services rendered
a. in excess of forty hours a week, or
b. in excess of eight hours a day,
whichever will yield the higher additional
compensation to the employee in the work week.
Section 9
Relation to Rule I. All provisions of Rule I of this Book which
are not inconsistent with this Rule shall be deemed applicable
to hospital and clinic personnel. Section 10
Rule 2: Night Shift Differential
Coverage. This Rule shall apply to ALL employees except:
a. Those of the government and any of its political
subdivisions, including government-owned and/or
controlled corporations;
b. Those of retail and service establishments regularly
employing not more than five (5) workers;
c. Domestic helpers and persons in the personal service
of another;
d. Managerial employees as defined in Book Three of this
Code;
e. Field personnel and other employees whose time and
performance is unsupervised by the employer
including those who are engaged on task or contract
basis, purely commission basis, or those who are paid
a fixed amount for performing work irrespective of the
time consumed in the performance thereof. Section 1
Night shift differential; 10% 10pm to 6am. An employee
shall be paid night shift differential of no less than ten per cent
(10%) of his regular wage for each hour of work performed
53
ad majorem dei gloriam
between ten o'clock in the evening and six o'clock in the
morning. Section 2
Additional compensation after work schedule; 25% + 10%.
Where an employee is permitted or suffered to work on the
period covered after his work schedule, he shall be entitled to
his regular wage plus at least twenty-five per cent (25%) and
an additional amount of no less than ten per cent (10%) of such
overtime rate for each hour or work performed between 10 p.m.
to 6 a.m. Section 3
• So bale the basis for 10% is the overtime rate, or 1.25
of regular wage.
Additional compensation on scheduled rest day/special
holiday. An employee who is required or permitted to work on
the period covered during rest days and/or special holidays not
falling on regular holidays, shall be paid a compensation
equivalent to his regular wage plus at least thirty (30%) per cent
and an additional amount of not less than ten (10%) per cent of
such premium pay rate for each hour of work performed.
Section 4
• So bale the basis for 10% is the premium pay, or 1.3.
of regular wage.
Additional compensation on regular holidays. For work on
the period covered during regular holidays, an employee shall
be entitled to his regular wage during these days plus an
additional compensation of no less than ten (10%) per cent of
such premium rate for each hour of work performed. Section 5
Relation to agreements. Nothing in this Rule shall justify an
employer in withdrawing or reducing any benefits,
supplements or payments as provided in existing individual or
collective agreements or employer practice or policy. Section 6
RA 10028 An Act Expanding the Promotion of
Breastfeeding
Section 12. Lactation Periods. Nursing employees shall be
granted break intervals in addition to the regular time-off for
Last Edit: 23 December 2020
SPBUS
meals to breastfeed or express milk. These intervals, which
shall include the time it takes an employee to get to and from
the workplace lactation station, shall be counted as
compensable hours worked.
• The Department of Labor and Employment (DOLE)
may adjust the same: Provided, That such intervals
shall not be less than a total of forty (40) minutes for
every eight (8)-hour working period.
Section 12 of the IRR. Lactation Periods. Nursing employees
are entitled to break intervals in addition to the regular time-off
for meals to breastfeed or express milk.
a. The employee shall notify their immediate supervisor
before leaving their station.
b. These intervals which include the time it takes an
employee to get to and from the workplace lactation
station shall be counted as compensable hours worked.
c. The DOLE may adjust the same but in no case shall
such intervals be less than 40 minutes for every 8-hour
working period.
d. Duration and frequency of breaks may be agreed upon
by employees and employers with the minimum being
40 minutes.
e. Usually, there could be 2-3 breastmilk expressions
lasting to 15-30 minutes each within a workday.
REST DAYS AND HOLIDAYS
Rest days
Chapter II. Labor Code
Weekly Rest Periods
Article 91. Right to Weekly Rest Day.
a. 24 hours every 6 consecutive days. It shall be the duty
of every employer, whether operating for profit or not,
to provide each of his employees a rest period of not
less than twenty-four (24) consecutive hours after
every six (6) consecutive normal work days.
b. CBA or DOLE rules. The employer shall determine
and schedule the weekly rest day of his employees
subject to collective bargaining agreement and to such
JO VALLES
SECURITY OF TENURE AND ENDO
rules and regulations as the Secretary of Labor and
Employment may provide.
o However, the employer shall respect the
preference of employees as to their weekly rest
day when such preference is based on religious
grounds.
Article 92. When Employer May Require Work on a Rest
Day. The employer may require his employees to work on any
day:
a. In case of actual or impending emergencies caused by
serious accident, fire, flood, typhoon, earthquake,
epidemic or other disaster or calamity to prevent loss
of life and property, or imminent danger to public
safety;
b. In cases of urgent work to be performed on the
machinery, equipment, or installation, to avoid serious
loss which the employer would otherwise suffer
c. In the event of abnormal pressure of work due to
special circumstances, where the employer cannot
ordinarily be expected to resort to other measures;
d. To prevent loss or damage to perishable goods;
e. Where the nature of the work requires continuous
operations and the stoppage of work may result in
irreparable injury or loss to the employer; and
f. Under other circumstances analogous or similar to the
foregoing as determined by the Secretary of Labor and
Employment.
Article 93. Compensation for Rest Day, Sunday or Holiday
Work.
a. +30% on rest day. Where an employee is made or
permitted to work on his scheduled rest day, he shall
be paid an additional compensation of at least thirty
percent (30%) of his regular wage.
o An employee shall be entitled to such
additional compensation for work performed
on Sunday only when it is his established rest
day.
b. +30% on Sundays and holidays if no rest day.
When the nature of the work of the employee is such
that he has no regular workdays and no regular rest
54
ad majorem dei gloriam
days can be scheduled, he shall be paid an additional
compensation of at least thirty percent (30%) of his
regular wage for work performed on Sundays and
holidays.
c. +30% on special holiday; +50% if special holiday
is on rest day. Work performed on any special holiday
shall be paid an additional compensation of at least
thirty percent (30%) of the regular wage of the
employee. Where such holiday work falls on the
employee's scheduled rest day, he shall be entitled to
an additional compensation of at least fifty per cent
(50%) of his regular wage.
d. Follow CBA if CBA provides for higher rates.
Where the collective bargaining agreement or other
applicable employment contract stipulates the
payment of a higher premium pay than that prescribed
under this Article, the employer shall pay such higher
rate.
RULE III, Omnibus Rules Implementing the Labor Code Book
3 conspicuously in the work place at least one week
Weekly Rest Periods
General statement on coverage. This Rule shall apply to all
employers whether operating for profit or not, including public
utilities operated by private persons. Section 1.
Business on Sundays/Holidays. All establishments and
enterprises may operate or open for business on Sundays and
holidays provided that the employees are given the weekly rest
day and the benefits as provided in this Rule. Section 2.
Weekly rest day. Every employer shall give his employees a
rest period of not less than twenty-four (24) consecutive hours
after every six consecutive normal work days. Section 3.
Preference of employee. The preference of the employee as to
his weekly day of rest shall be respected by the employer if the
same is based on religious grounds. The employee shall make
known his preference to the employer in writing at least seven
(7) days before the desired effectivity of the initial rest day so
preferred. Section 4.
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SPBUS
1. Where, however, the choice of the employee as to his
rest day based on religious grounds will inevitably
result in serious prejudice or obstruction to the
operations of the undertaking and the employer cannot
normally be expected to resort to other remedial
measures, the employer may so schedule the weekly
rest day of his choice for at least two (2) days in a
month.
Schedule of rest day.
a. Where the weekly rest is given to all employees
simultaneously, the employer shall make known such
rest period by means of a written notice posted
conspicuously in the work place at least one week
before it becomes effective.
b. Where the rest period is not granted to all employees
simultaneously and collectively, the employer shall
make known to the employees their respective
schedules of weekly rest through written notices posted
before they become effective. Section 5
When work on rest day authorized. An employer may
require any of his employees to work on his scheduled rest day
for the duration of the following emergencies and exceptional
conditions:
a. In case of actual or impending emergencies caused by
serious accident, fire, flood, typhoon, earthquake,
epidemic or other disaster or calamity, to prevent loss
of life or property, or in cases of force majeure or
imminent danger to public safety;
b. In case of urgent work to be performed on machineries,
equipment or installations to avoid serious loss which
the employer would otherwise suffer;
c. In the event of abnormal pressure of work due to
special circumstances, where the employer cannot
ordinarily be expected to resort to other measures;
d. To prevent serious loss of perishable goods;
e. Where the nature of the work is such that the
employees have to work continuously for seven (7)
days in a week or more, as in the case of the crew
JO VALLES
SECURITY OF TENURE AND ENDO
members of a vessel to complete a voyage and in other
similar cases; and
f. When the work is necessary to avail of favorable
weather or environmental conditions where
performance or quality of work is dependent thereon.
Section 6
No employee shall be required against his will to work on his
scheduled rest day except under circumstances provided in this
Section.
2. Employee may volunteer to work on rest days by
written permission. Provided, However, that where an
employee volunteers to work on his rest day under
other circumstances, he shall express such desire in
writing, subject to the provisions of Section 7 hereof
regarding additional compensation.
Compensation on rest day/Sunday/holiday.
a. Except those employees referred to under Section 2,
Rule I, Book Three, an employee who is made or
permitted to work on his scheduled rest day shall be
paid with an additional compensation of at least 30%
of his regular wage. An employee shall be entitled to
such additional compensation for work performed on a
Sunday only when it is his established rest day.
b. Where the nature of the work of the employee is such
that he has no regular work days and no regular rest
days can be scheduled, he shall be paid an additional
compensation of at least 30% of his regular wage for
work performed on Sundays and holidays.
c. Work performed on any special holiday shall be paid
with an additional compensation of at least 30% of the
regular wage of the employees. Where such holiday
work falls on the employee's scheduled rest day, he
shall be entitled to additional compensation of at least
50% of his regular wage.
d. The payment of additional compensation for work
performed on regular holiday shall be governed by
Rule IV, Book Three, of these regulations.
e. Where the collective bargaining agreement or other
applicable employment contract stipulates the payment
of a higher premium pay than that prescribed under this
55
ad majorem dei gloriam
Section, the employer shall pay such higher rate.
Section 7
Paid-off days. Nothing in this Rule shall justify an employer
in reducing the compensation of his employees for the
unworked Sundays, holidays, or other rest days which are
considered paid-off days or holidays by agreement or practice
subsisting upon the effectivity of the Code. Section 8
Relation to agreements. Nothing herein shall prevent the
employer and his employees or their representatives in entering
into any agreement with terms more favorable to the employees
than those provided herein, or be used to diminish any benefit
granted to the employees under existing laws, agreements, and
voluntary employer practices. Section 9
Holidays
Chapter III. Labor Code
Holidays, Service Incentive Leaves, and Service Charges
Article 94. Right to Holiday Pay.
a. Unworked holidays = regular wage rate. Every
worker shall be paid his regular daily wage during
regular holidays, except in retail and service
establishments regularly employing less than ten (10)
workers;
b. Worked holidays = 2x regular wage rate. The
employer may require an employee to work on any
holiday but such employee shall be paid a
compensation equivalent to twice his regular rate; and
c. As used in this Article, "holiday" includes:
a. New Year's Day,
b. Maundy Thursday,
c. Good Friday,
d. the ninth of April,
e. the first of May,
f. the twelfth of June,
g. the fourth of July,
h. the thirtieth of November,
i. the twenty-fifth and thirtieth of December and
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SPBUS
j. the day designated by law for holding a
general election.
Rule IV, Omnibus Rules Implementing the Labor Code Book 3
Holidays with Pay
Coverage. This rule shall apply to ALL employees except:
a. Those of the government and any of the political
subdivision, including government-owned and
controlled corporation;
b. Those of retail and service establishments regularly
employing less than ten (10) workers;
c. Domestic helpers and persons in the personal service
of another;
d. Managerial employees as defined in Book Three of the
Code;
e. Field personnel and other employees whose time and
performance is unsupervised by the employer
including those who are engaged on task or contract
basis, purely commission basis, or those who are paid
a fixed amount for performing work irrespective of the
time consumed in the performance thereof. Section 1
Must be a field personnel engaged by pakyaw basis to
not be entitled. If the worker is simply engaged on pakyaw
or task basis, then the general rule is that he is entitled to a
holiday pay and SIL pay unless exempted from the
exceptions specifically provided under Article 94 (holiday
pay) and Article 95 (SIL pay) of the Labor Code. However,
if the worker engaged on pakyaw or task basis also falls
within the meaning of field personnel under the law, then
he is not entitled to these monetary benefits. David vs
Macasio
Status of employees paid by the month. Employees who are
uniformly paid by the month, irrespective of the number of
working days therein, with a salary of not less than the statutory
or established minimum wage shall be paid for all days in the
month whether worked or not. Section 2
JO VALLES
SECURITY OF TENURE AND ENDO
o For this purpose, the monthly minimum wage shall not
be less than the statutory minimum wage multiplied by
365 days divided by twelve.
Holiday Pay. Every employer shall pay his employees their
regular daily wage for any worked regular holidays.
• Regular holidays (10). As used in the rule, the term
'regular holiday' shall exclusively refer to:
o New Year's Day,
o Maundy Thursday,
o Good Friday,
o the ninth of April,
o the first of May,
o the twelfth of June,
o the last Sunday of August,
o the thirtieth of November,
o the twenty-fifth and thirtieth of December.
• Special holidays (2). Nationwide special days shall
include:
o the first of November and
o the last day of December.
• As used in this Rule legal or regular holiday and special
holiday shall now be referred to as 'regular holiday' and
'special day', respectively. Section 3
Compensation for holiday work; 2x regular pay. Any
employee who is permitted or suffered to work on any regular
holiday, not exceeding eight (8) hours, shall be paid at least two
hundred percent (200%) of his regular daily wage.
• Regular holiday on a rest day; +30% of 2x regular
pay. If the holiday work falls on the scheduled rest day
of the employee, he shall be entitled to an additional
premium pay of at least 30% of his regular holiday rate
of 200% based on his regular wage rate. Section 4
Overtime pay for holiday work; +30% of 2x regular pay.
For work performed in excess of eight hours on a regular
holiday, an employee shall be paid an additional compensation
56
ad majorem dei gloriam
for the overtime work equivalent to his rate for the first eight
hours on such holiday work plus at least 30% thereof.
• Overtime on a holiday that falls on the rest day;
+30% of [2x regular pay +30%]. Where the regular
holiday work exceeding eight hours falls on the
scheduled rest day of the employee, he shall be paid an
additional compensation for the overtime work
equivalent to his regular holiday-rest day for the first 8
hours plus 30% thereof. The regular holiday rest day
rate of an employee shall consist of 200% of his regular
daily wage rate plus 30% thereof. Section 5
Absences.
a. All covered employees shall be entitled to the benefit
provided herein when they are on leave of absence
with pay. Employees who are on leave of absence
without pay on the day immediately preceding a
regular holiday may not be paid the required holiday
pay if he has not worked on such regular holiday.
b. Employees shall grant the same percentage of the
holiday pay as the benefit granted by competent
authority in the form of employee's compensation or
social security payment, whichever is higher, if they
are not reporting for work while on such benefits.
c. Where the day immediately preceding the holiday is a
non-working day in the establishment or the scheduled
rest day of the employee, he shall not be deemed to be
on leave of absence on that day, in which case he shall
be entitled to the holiday pay if he worked on the day
immediately preceding the non-working day or rest
day. Section 6
Rule IV, Omnibus rules Implementing the Labor Code Book
III
Absences.
a. All covered employees shall be entitled to the benefit
provided herein when they are on leave of absence with
pay. Employees who are on leave of absence without
pay on the day immediately preceding a regular
holiday may not be paid the required holiday pay if he
has not worked on such regular holiday.
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SPBUS
b. Employees shall grant the same percentage of the
holiday pay as the benefit granted by competent
authority in the form of employee's compensation or
social security payment, whichever is higher, if they
are not reporting for work while on such benefits.
c. Where the day immediately preceding the holiday is a
non-working day in the establishment or the scheduled
rest day of the employee, he shall not be deemed to be
on leave of absence on that day, in which case he shall
be entitled to the holiday pay if he worked on the day
immediately preceding the non-working day or rest
day. Section 6
Temporary or periodic shutdown and temporary cessation
of work.
a. In cases of temporary or periodic shutdown and
temporary cessation of work of an establishment, as
when a yearly inventory or when the repair or cleaning
of machineries and equipment is undertaken, the
regular holidays falling within the period shall be
compensated in accordance with this Rule.
b. The regular holiday during the cessation of operation
of an enterprise due to business reverses as authorized
by the Secretary of Labor and Employment may not
be paid by the employer. Section 7
Holiday pay of certain employees.
a. Private school teachers, including faculty members of
colleges and universities, may not be paid for the
regular holidays during semestral vacations. They
shall, however, be paid for the regular holidays during
Christmas vacation;
b. Where a covered employee, is paid by results or
output, such as payment on piece work, his holiday pay
shall not be less than his average daily earnings for the
last seven (7) actual working days preceding the
regular holiday;
o Provided, However, that in no case shall the
holiday pay be less than the applicable
statutory minimum wage rate.
JO VALLES
SECURITY OF TENURE AND ENDO ad majorem dei gloriam SPBUS
c. Seasonal workers may not be paid the required August twenty-one of every year is hereby declared as the Immaculate conception December 8
holiday pay during off-season when they are not at Ninoy Aquino day which shall be a national nonworking Last day of the year December 31
work. holiday. Section 1, RA 9256 (February 25, 2004)
d. Workers who have no regular working days shall be • Jo. Regular holidays are paid 2x regular wage; special
entitled to the benefits provided in this Rule. Section 8 RA 9849 holidays paid 1.3x regular wage.
Signed December 11, 2009
Regular holiday falling on rest days or Sundays. If Wed, observe on Mon; if Sunday, observe Mon. In the
a. A regular holiday falling on the employee's rest day Eidul Adha; national holiday. The tenth day of Zhul Hijja, the event the holiday falls on a Wednesday, the holiday will be
shall be compensated accordingly. twelfth month of the Islamic Calendar, is hereby declared as a observed on the Monday of that week. If the holiday falls on a
b. Where a regular holiday falls on a Sunday, the national holiday for the observance of Eidul Adha. Eidul Adha Sunday, the holiday will be observed on the Monday that
following day shall be considered a special holiday for is a tenth day in the month of Hajj or Islamic Pilgrimage to follows:
purposes of the Labor Code, unless said day is also a Mecca wherein Muslims pay homage to Abraham's supreme
regular holiday. Section 9 act of sacrifice and signifies mankind's obedience to God. For movable dates, president will issue proclamation 6
Section 1, RA 9849 months before. Provided, That for movable holidays, the
Successive regular holidays. Where there are two (2) President shall issue a proclamation, at least six (6) months
successive regular holidays, like Holy Thursday and Good Section 2 Amended Section 26, Chapter 7, Book I of Executive prior to the holiday concerned, the specific date shall be
Friday, an employee may not be paid for both holidays if he Order No. 292, otherwise known as "The Administrative Code declared as a nonworking day."
absents himself from work on the day immediately preceding of 1987:
the first holiday, unless he works on the first holiday, in which OMA supervises. The implementation of this Act shall be
case he is entitled to his holiday pay on the second holiday. Regular Holidays and Nationwide Special Days. Unless supervised by the Office on Muslim Affairs (OMA) which shall
Section 10 otherwise modified by law, order, or proclamation, the promulgate the rules and regulations pursuant to the provisions
following regular holidays and special days shall be observed of this Act. Section 3, RA 9849
Relation to agreements. Nothing in this Rule shall justify an in the country:
employer in withdrawing or reducing any benefits, All laws, presidential decrees, executive orders, issuances,
supplements or payments for unworked holidays as provided in Regular holidays (12) rules and regulations and any part thereof regarding national
existing individual or collective agreement or employer New Year's Day January 1 nonworking holidays which are inconsistent with the
practice or policy. Section 11 Maundy Thursday Movable date provisions of this Act are hereby repealed or modified
Good Friday Movable date accordingly. Section 4, RA 9849
List of holidays Eidul Fitr Movable date
Eidul Adha Movable date This Act shall take effect fifteen (15) days after its complete
Special non-working holidays: Araw ng Kagitingan(Bataan Monday nearest April 9 publication in the Official Gazette or at least two (2) national
1. December 8 and Corregidor Day) newspapers of general circulation. Section 5, RA 9849
2. August 21 Labor Day Monday nearest May 1
Independence Day Monday nearest June 12 RA 9492
Dec 8; special non-working holiday. December 8 of every National Heroes Day Last Monday of August Signed July 24, 2007
year is hereby declared a special nonworking holiday in the Bonifacio Day Monday nearest Nov 30
entire country to commemorate the Feast of the Immaculate An act rationalizing the celebration of national holidays
Christmas Day December 25
Conception of Mary, the Principal Patroness of the Philippines. amending for the purpose Section 26, Chapter 7, Book 1 of
Rizal Day Monday nearest Dec 30
Section 1, RA 10966 (July 24, 2017) EO No. 292, as amended, otherwise known as THE
Nationwide special holidays (4)
Ninoy Aquino Day Monday nearest August 21 Administrative Code of 1987
Ninoy Aquino Day. In order to commemorate the death
anniversary of former Senator Benigno "Ninoy" S. Aquino, Jr., All saints day November 1

57 Last Edit: 23 December 2020 JO VALLES

SECURITY OF TENURE AND ENDO ad majorem dei gloriam SPBUS
Section 1. Section 26, Chapter 7, Book 1 of Executive Order Eidul adha only in ARMM. Provided, however, That Eidul Nationwide special holidays (2)
No. 292, as amended, otherwise known as the Administrative Adha shall be celebrated as a regional holiday in the Ninoy Aquino Day Monday nearest August 21
Code of 1987, is hereby amended to read as follows: Autonomous Region in Muslim Mindanao." All saints day November 1
Last day of the year December 31
Regular Holidays and Nationwide Special Days. Unless RA 9177
otherwise modified by law, order or proclamation, the Signed November 13, 2002 Suggested formula for computing statutory minimum
following regular holidays and special days shall be observed Regular holidays (11) wage rates
in the country: New Year's Day January 1
Maundy Thursday Movable date Summary
Regular holidays (11) Good Friday Movable date New Old
New Year's Day January 1 Eidul Fitr Movable date Ordinary working days 298 302
Maundy Thursday Movable date Eidul Adha Movable date Rest days 52 51
Good Friday Movable date Araw ng Kagitingan(Bataan Monday nearest April 9 Regular holidays 12 10
Eidul Fitr Movable date and Corregidor Day) Special days 3 2
Eidul Adha Movable date Labor Day Monday nearest May 1 Total (constant lmao) 365 365
Araw ng Kagitingan(Bataan Monday nearest April 9 Independence Day Monday nearest June 12
and Corregidor Day) National Heroes Day Last Monday of August Chapter 1, Rules Implementing RA 6727
Labor Day Monday nearest May 1 Bonifacio Day Monday nearest Nov 30
Independence Day Monday nearest June 12 Christmas Day December 25 Note: di na to controlling kasi DOLE 001-10 na ngayon but
National Heroes Day Last Monday of August Rizal Day Monday nearest Dec 30 nilagay ko na kasi nasa syllabus tas nagawa ko na to before ko
Bonifacio Day Monday nearest Nov 30 Nationwide special holidays (2) pa Nakita na di na sya updated tas sayang naman effort ko
Christmas Day December 25 Ninoy Aquino Day Monday nearest August 21 diba???
Rizal Day Monday nearest Dec 30 All saints day November 1
Nationwide special holidays (3) Last day of the year December 31 Section 6. Suggested Formula in Determining the
Ninoy Aquino Day Monday nearest August 21 Equivalent Monthly Statutory Minimum Wage Rates.
All saints day November 1 EO 203 Without prejudice to existing company practices, agreements
Last day of the year December 31 June 30, 1987 or policies, the following formula may be used as guides in
Regular holidays (10) determining the equivalent monthly statutory minimum wage
If Wed, observe on Mon; if Sunday, observe next Mon. In New Year's Day January 1 rates:
the event the holiday falls on a Wednesday, the holiday will be Maundy Thursday Movable date
observed on the Monday of that week. If the holiday falls on a Good Friday Movable date a. For those who are required to work every day
Sunday, the holiday will be observed on the Monday that Eidul Fitr Movable date including Sundays or rest days, special days and
follows: Eidul Adha Movable date regular holidays:
Araw ng Kagitingan (Bataan Monday nearest April 9
For movable dates, president will issue proclamation 6 and Corregidor Day) Equivalent Monthly Rate = ( Applicable daily wage rate or
months before. Provided, That for movable holidays, the ADR * 390 ) ÷ 12
Labor Day Monday nearest May 1
President shall issue a proclamation, at least six months prior Independence Day Monday nearest June 12
to the holiday concerned, the specific date that shall be declared Computation of 390. Where 390.90 days =
National Heroes Day Last Monday of August
as a nonworking day: Bonifacio Day Monday nearest Nov 30
302 days Ordinary working days
Christmas Day December 25
66.3 days 51 rest days * 130 %
Rizal Day Monday nearest Dec 30
58 Last Edit: 23 December 2020 JO VALLES
SECURITY OF TENURE AND ENDO ad majorem dei gloriam SPBUS
20 days 10 regular holidays * 200% 250 days Ordinary working days compute their Estimated Equivalent Monthly Rate (EEMR),
2.6 days 2 special days * 130* 10 days Regular holidays the procedure is as follows:
390.90 days Total equivalent # of days 2 days Special days (if considered paid; if
actually worked, equivalent to 2.6 days Equivalent Monthly Rate = ( Applicable daily wage rate
b. For those who do not work but considered paid on 262 days Total equivalent # of days or ADR * 365 ) ÷ 12
rest days, special days and regular holidays:
Computation of 365. Where 365 days =
Equivalent Monthly Rate = ( Applicable daily wage rate or Note. For workers whose rest days fall on Sundays, the number
ADR * 365 ) ÷ 12 of rest days in a year is reduced from 52 to 51 days, the last 298 days Ordinary working days
Sunday of August being a regular holiday under Executive 52 days Rest days
Computation of 365. Where 365 days = Order No. 203. 12 days Regular holidays
• For purposes of computation, said holiday, although 3 days Special days
302 days Ordinary working days still a rest day for them, is included in the ten regular 365 days Total equivalent # of days
51 days Rest days holidays.
10 days Regular holidays • For workers whose rest days do not fall on Sundays, For daily-paid employees:
2 days Special days the number of rest days is 52 days, as there are 52
365 days Total equivalent # of days weeks in a year. The following factors and formula may be used in computing
the EEMR of different groups of daily-paid employees for
c. For those who do not work and are not considered Nothing herein shall be construed as authorizing the reduction purposes of entitlement to minimum wages and allied benefits
paid on Sundays or rest days: of benefits granted under existing agreements or employer under existing laws.
practices/policies.
Equivalent Monthly Rate = ( Applicable daily wage rate or a. For those who are required to work every
ADR * 314 ) ÷ 12 Guidelines on the computation of the estimated equivalent day, including Sundays or rest days,
monthly rates of monthly-paid and daily-paid employees special days, and regular holidays.
Computation of 314. Where 314 days =
DOLE Advisory No. 001-10 Equivalent Monthly Rate = ( Applicable daily wage rate
302 days Ordinary working days March 5, 2010 or ADR * 393.5) ÷ 12
10 days Regular holidays
With the passage of Republic Act No. 9849 (An Act Declaring Computation of 393.5. Where 393.5 days =
2 days Special days (if considered paid; if
actually worked, equivalent to 2.6 days the Tenth Day of Zhul Hijja, the Twelfth Month of the Islamic
Calendar, a National Holiday for the observance of Eidul Adha, 298 days Ordinary working days
314 days Total equivalent # of days
further amending for the purpose Section 26, Chapter 7, Book 67.6 days Rest days (52 * 130%)
I of Executive Order No. 292, otherwise known as the 24 days Regular holidays (12 * 200%)
Administrative Code of 1987, as amended), the suggested 3.9 days Special days (3 * 130%)
d. For those who do not work and are not considered
formulas in determining the estimated equivalent monthly rates 393.5 days Total equivalent # of days
paid on Saturdays and Sundays or rest days:
of monthly-paid and daily-paid employees are modified as
follows: b. For those who do not work and are not
Equivalent Monthly Rate = ( Applicable daily wage rate or
ADR * 262 ) ÷ 12 considered paid on Sundays or rest days.
For monthly-paid employees:
Computation of 262. Where 262 days = Equivalent Monthly Rate = ( Applicable daily wage rate
Factor 365 days in a year is used in determining the equivalent or ADR * 313 ) ÷ 12
annual and monthly salary of monthly-paid employees. To
59 Last Edit: 23 December 2020 JO VALLES
SECURITY OF TENURE AND ENDO
Computation of 313. Where 313 days =
298 days Ordinary working days
12 days Regular holidays
3 days Special days
313 days Total equivalent # of days
c. For those who do not work and are not
considered paid on Saturdays and Sundays
or rest days.
Equivalent Monthly Rate = ( Applicable daily wage rate
or ADR * 261 ) ÷ 12
Computation of 261. Where 261 days =
246 days Ordinary working days
12 days Regular holidays
3 days Special days
261 days Total equivalent # of days
Status of employees paid by the month. Employees who are
uniformly paid by the month, irrespective of the number of
working days therein, with a salary of not less than the statutory
or established minimum wage shall be paid for all days in the
month whether worked or not. For this purpose, the monthly
minimum wage shall not be less than the statutory minimum
wage multiplied by 365 days divided by twelve. Section 2,
Book III, Rule IV, Omnibus Rules Implementing the Labor
Code
• Struck down as unconstitutional. This provision has
already been struck down as unconstitutional in the
case of Insular Bank of Asia vs Inciong. Even if it had
not been struck down, it cannot stand because it
violates the rule on no work, no pay. In this case,
petitioners cannot be given the backwages that they
pray for, for the simple reason that they did not render
work on the Sundays and half day of Saturdays. The
right to be paid for unworked days is generally limited
to the ten legal holidays in a year. To sustain their
60
ad majorem dei gloriam SPBUS
argument will be a violation of the equal protection Regular holidays 9 (10-1) 12
clause since it will make monthly-paid workers a Special days 2 4
privileged class for being paid even without work. Total 287 287
Odango vs NLRC
LEAVES
Regular wage for regular holidays. Employees claim that
they were not paid their holiday pays since the company used Service incentive leave
314 as its divisor, thereby violating Article 94 of the Labor
Code which requires employees to be paid regular wage on Labor Code
regular holidays, and 2x such rate if they are required to work.
The Court said that clearly, holiday pay is already included in Article 95. Right to Service Incentive Leave.
the divisor. It was arrived at by deducting the unworked 51 a. Every employee who has rendered at least one year of
Sundays of the year from 365. Thus, Article 94 was complied service shall be entitled to a yearly service incentive
with. Producers Bank of the Philippines vs NLRC leave of five days with pay.
b. This provision shall not apply to:
• Jo. Note that this case was decided in 2001, and that is a. those who are already enjoying the benefit
why 51 was deducted as the number of unworked herein provided,
Sundays. Had the events occurred on or after March 5, b. those enjoying vacation leave with pay of at
2010, under DOLE Advisory 001-10, the subtrahend least five days and
would have been 52. c. those employed
i. in establishments regularly employing
Regular wage for regular holidays. Employees were required less than ten employees or
to work from Mon-Fri and half day on Sat. The company used ii. in establishments exempted from
the divisor of 286 for the computation of the daily wage rate. granting this benefit by the Secretary
The employees claim that their holiday pay was not included in of Labor and Employment after
their monthly pay. The company clearly included holiday pay considering the viability or financial
in the computation through its consistent use of 286 as a divisor, condition of such establishment.
which is arrived at by deducting the 52 unworked Sundays and c. The grant of benefit in excess of that provided herein
26 unworked Saturdays [should actually be 287 if you do the shall not be made a subject of arbitration or any court
math]. But pursuant to Section 6, Chapter 1 of the Rules or administrative action.
implementing RA 6727, the proper divisor should be 288 [365-
51 unworked Sundays -26 unworked Saturdays]. But since the Omnibus Rules Implementing the Labor Code
rest day falls on a Sunday, then the unworked but paid legal Book III; Rule V
holidays should be reduced to 9. Thus, the new divisor is 287.
Trans Asia Philippines Employees Association vs NLRC Section 1. Coverage. – This rule shall apply to ALL employees
except:
• Jo. Under DOLE Advisory 001-01, the new divisor a. Those of the government and any of its political
will be 287 still, but the computation is different. See subdivisions, including government-owned and
computation and comparison below. controlled corporations;
b. Domestic helpers and persons in the personal service
Old rules New Rules of another;
Ordinary days 276 (302-26) 271 (297-26)
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SECURITY OF TENURE AND ENDO
c. Managerial employees as defined in Book Three of
this Code;
d. Field personnel and other employees whose
performance is unsupervised by the employer
including those who are engaged on task or contract
basis, purely commission basis, or those who are paid
a fixed amount for performing work irrespective of the
time consumed in the performance thereof;
e. Those who are already enjoying the benefit herein
provided;
f. Those enjoying vacation leave with pay of at least five
days; and
g. Those employed in establishments regularly
employing less than ten employees.
Section 2. Right to Service Incentive Leave. Every employee
who has rendered at least one year of service shall be entitled
to a yearly service incentive leave of five days with pay.
Section 3. Definition of certain terms. The term "at least one-
year service" shall mean:
1. service for not less than 12 months,
2. whether continuous or broken
3. reckoned from the date the employee started working,
4. including authorized absences and paid regular
holidays
5. unless the working days in the establishment as a
matter of practice or policy, or that provided in the
employment contract is less than 12 months, in which
case said period shall be considered as one year.
Section 4. Accrual of benefit. Entitlement to the benefit
provided in this Rule shall start December 16, 1975, the date
the amendatory provision of the Code took effect.
Section 5. Treatment of benefit; commutable. The service
incentive leave shall be commutable to its money equivalent if
not used or exhausted at the end of the year.
Section 6. Relation to agreements. Nothing in the Rule shall
justify an employer from withdrawing or reducing any benefits,
61
ad majorem dei gloriam
supplements or payments as provided in existing individual or
collective agreements or employer's practices or policies.
Paternity leave
RA 8187
Paternity Leave Act of 1996
Section 2. Notwithstanding any law, rules and regulations to
the contrary, every
1. married male employee
2. in the private and public sectors
shall be entitled to a paternity leave of seven (7) days with
full pay for the
3. first four (4) deliveries
4. of the legitimate spouse
5. with whom he is cohabiting.
The male employee applying for paternity leave shall notify his
employer of the pregnancy of his legitimate spouse and the
expected date of such delivery.
For purposes of this Act, delivery shall include childbirth or any
miscarriage.
Section 3. Definition of Term. For purposes of this Act,
Paternity Leave refers to the benefits granted to a married male
employee allowing him not to report for work for seven (7)
days but continues to earn the compensation therefor, on the
condition that his spouse has delivered a child or suffered a
miscarriage for purposes of enabling him to effectively lend
support to his wife in her period of recovery and/or in the
nursing of the newly-born child.
Section 4. The Secretary of Labor and Employment, the
Chairman of the Civil Service Commission and the Secretary
of Health shall, within thirty (30) days from the effectivity of
this Act, issue such rules and regulations necessary for the
proper implementation of the provisions hereof.
Section 5. . Any person, corporation, trust, firm, partnership,
association or entity found violating this Act or the rules and
regulations promulgated thereunder shall be punished by
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SPBUS
a. a fine not exceeding Twenty-Five thousand pesos
(P25,000) or
b. imprisonment of not less than thirty (30) days nor more
than six (6) months.
Violation by a corporation. If the violation is committed by a
corporation, trust or firm, partnership, association or any other
entity, the penalty of imprisonment shall be imposed on the
entity's responsible officers, including, but not limited to, the
president, vice-president, chief executive officer, general
manager, managing director or partner directly responsible
therefor.
Paternity Leave
IRR of RA 8187 for the Private Sector
Section 2. Coverage. Every married male employee in the
private sector shall be entitled to paternity leave benefits of
seven (7) days with full pay for the first four deliveries by his
lawful spouse under such terms and conditions as hereinafter
provided.
The rules on paternity leave of employees in the public sector
shall be promulgated by the Civil Service Commission.
Civil Service Commission Memorandum Circular No 01-2016
Paternity leave of 7 days shall be non-cumulative and strictly
non-convertible to cash. The same may be enjoyed either in a
continuous or in an intermittent manner by the employee on the
days immediately before, during, and after childbirth or
miscarriage by his legitimate spouse. Said leave shall be
availed of not later than 60 days after the date of the child’s
delivery.
Maternity Leave
RA 11210
105-Day Expanded Maternity Leave Law
Summary:
General Solo parent
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Pregnancy 105 day 120 days
Miscarriage/emergency 60 days 75 days
Optional (no pay)* 30 days 30 days
*Under the implementing rules, only for live childbirth
Miscarriage Emergency termination
Miscarriage refers to Emergency termination of
pregnancy loss before the pregnancy refers to
20th week of gestation. pregnancy loss on or after
the 20th week of gestation,
including stillbirth.
Section 3. Grant of Maternity Leave. All covered female
workers
1. in government and the private sector,
2. including those in the informal economy,
3. regardless of civil status or the legitimacy of her child,
shall be granted
1. one hundred five (105) days maternity leave with full
pay and
2. an option to extend for an additional thirty (30) days
without pay:
Solo parents + 15 days with full pay. Provided, That in case
the worker qualifies as a solo parent under Republic Act No.
8972, or the "Solo Parents' Welfare Act," the worker shall be
granted an additional fifteen (15) days maternity leave with full
pay.
Cannot be deferred; continuous period. Enjoyment of
maternity leave cannot be deferred but should be availed of
either before or after the actual period of delivery in a
continuous and uninterrupted manner, not exceeding one
hundred five (105) days, as the case may be.
60 days full pay for miscarriage or emergency termination.
Maternity leave shall be granted to female workers in every
instance of pregnancy, miscarriage or emergency termination
of pregnancy, regardless of frequency: Provided, that for cases
of miscarriage or emergency termination of pregnancy, sixty
(60) days maternity leave with full pay shall be granted.
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Section 5. Maternity Leave for Female Workers in the
Private Sector. Any pregnant female worker in the private
sector shall be granted a
1. maternity leave of one hundred five (105) days with
full pay, regardless of whether she gave birth via
caesarian section or natural delivery, while
2. maternity leave of sixty (60) days with full pay shall be
granted for miscarriage or emergency termination of
pregnancy.
(a) SSS Members. A female Social Security System (SSS)
member
• who has paid at least three (3) monthly contributions
• in the twelve (12)-month period immediately
preceding the semester of her childbirth, miscarriage,
or emergency termination of pregnancy
shall be paid her daily maternity benefit which shall be
computed based on her average monthly salary credit for one
hundred five (105) days, regardless of whether she gave birth
via caesarian section or natural delivery, subject to the
following conditions:
1. That the female worker shall have notified her
employer of her pregnancy and the probable date of
her childbirth, which notice shall be transmitted to the
SSS in accordance with the rules and regulations it may
provide;
2. That the full payment shall be advanced by the
employer within thirty (30) days from the filing of the
maternity leave application;
3. That payment of daily maternity benefits shall be a bar
to the recovery of sickness benefits provided under
Republic Act No. 1161, as amended, for the same
period for which daily maternity benefits have been
received;
4. That the SSS shall immediately reimburse the
employer of one hundred percent (100%) of the
amount of maternity benefits advanced to the female
worker by the employer upon receipt of satisfactory
and legal proof of such payment; and
5. That if a female worker should give birth or suffer a
miscarriage or emergency termination of pregnancy
without the required contributions having been
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remitted for her by her employer to the SSS, or without
the latter having been previously notified by the
employer of the time of the pregnancy, the employer
shall pay to the SSS damages equivalent to the benefits
which said female member would otherwise have been
entitled to.
Solo parent +15 days maternity benefit. In case the employee
qualifies as a solo parent under Republic Act No. 8972, or the
"Solo Parents' Welfare Act," the employee shall be paid an
additional maternity benefit of fifteen (15) days.
(b)Additional 30 days without pay. An additional maternity
leave of thirty (30) days, without pay, can be availed of, at the
option of the female worker: Provided, that
1. the employer shall be given due notice,
2. in writing,
3. at least forty-five (45) days before the end of her
maternity leave
No prior notice on emergencies; subsequent notice only.
Provided, further, That no prior notice shall be necessary in the
event of a medical emergency but subsequent notice shall be
given to the head of the agency.
(c) Covered employees shall receive full pay; employers to
pay differential. Workers availing of the maternity leave
period and benefits must receive their full pay. Employers from
the private sector shall be responsible for payment of the salary
differential between the actual cash benefits received from the
SSS by the covered female workers and their average weekly
or regular wages, for the entire duration of the maternity leave,
with the following exceptions, subject to the guidelines to be
issued by the Department of Labor and Employment (DOLE):
1. Those operating distressed establishments;
2. Those retail/service establishments and other
enterprises employing not more than ten (10) workers;
3. Those considered as micro-business enterprises and
engaged in the production, processing, or
manufacturing of products or commodities including
agro-processing, trading, and services, whose total
assets are not more than Three million pesos
(P3,000,000.00); and
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4. Those who are already providing similar or more than
the benefits herein provided.
Annual justification report. Provided, That said exemptions
shall be subject to an annual submission of a justification by the
employer claiming exemption for the approval of the DOLE.
Section 7. Maternity Leave for Women Regardless of Civil
Status. All female workers in the government and female
members of the SSS, regardless of their civil status, shall be
granted maternity leave, with full pay, upon compliance with
the preceding section.
Section 8. Maternity Leave with Pay in Case of Childbirth,
Miscarriage, or Emergency Termination of Pregnancy
after the Termination of an Employee's Service. Maternity
leave with full pay shall be granted even if the childbirth,
miscarriage, or emergency termination of pregnancy occurs
not more than fifteen (15) calendar days after the
termination of an employee's service, as her right thereto has
already accrued:
• Provided, That such period is not applicable when the
employment of the pregnant woman worker has been
terminated without just cause, in which case the
employer will pay her the full amount equivalent to her
salary for one hundred five (105) days for childbirth
and sixty (60) days for miscarriage or emergency
termination of pregnancy based on her full pay, in
addition to the other applicable daily cash maternity
benefits that she should have received had her
employment not been illegally terminated.
Section 9. Maternity Leave Credits. The maternity leave can
be credited as combinations of prenatal and postnatal leave as
long as it does not exceed one hundred five (105) days and
provided that compulsory postnatal leave shall not be less than
sixty (60) days.
Section 15. Security of Tenure. Those who avail of the
benefits of this Act, whether in the government service or
private sector, shall be assured of security of tenure. As such,
the exercise of this option by them shall not be used as basis for
demotion in employment or termination. The transfer to a
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parallel position or reassignment from one organizational unit
to another in the same agency or private enterprise shall be
allowed: Provided, That it shall not involve a reduction in rank,
status, salary, or otherwise amount to constructive dismissal.
Section 16. Non-Discrimination. No employer whether in the
public or private sector shall discriminate against the
employment of women in order to avoid the benefits provided
for in this Act.
Omnibus Rules
RULE III
Section 2. What Benefits are Granted. The following benefits
are granted under the 105-Day Expanded Maternity Leave Law
(EMLL) to the corresponding sectors:
1. Paid leave benefit granted to a qualified female worker
in the public sector, for the duration of:
a. One Hundred Five (105) days for live
childbirth, regardless of the mode of delivery,
and an additional fifteen (15) days paid leave
if the female worker qualifies as a solo parent
under Republic Act No. 8972, or the "Solo
Parents' Welfare Act of 2000"; or
b. Sixty (60) days paid leave for miscarriage and
emergency termination of pregnancy.
2. Paid leave benefit granted to a qualified female worker
in the private sector covered by the SSS, including
those in the informal economy, for the duration of:
a. One Hundred Five (105) days for live
childbirth, regardless of the mode of delivery,
and an additional fifteen (15) days paid leave
if the female worker qualifies as a solo parent
under Republic Act No. 8972, or the "Solo
Parents' Welfare Act of 2000"; or
b. Sixty (60) days paid leave for miscarriage and
emergency termination of pregnancy;
Employee benefit for private. Employed female workers
shall receive full pay which consists of (i) SSS maternity
benefit computed based on their average daily salary credit
and (ii) salary differential to be paid by the employer, if
any;
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3. An option to extend for an additional thirty (30) days
without pay in case of live childbirth;
4. Paid maternity leave, allowances and benefits granted
to female national athletes; and
5. Health care services for pre-natal, delivery, postpartum
and pregnancy-related conditions granted to female
workers, particularly those who are neither voluntary
nor regular members of the SSS, as governed by the
existing rules and regulations of the Philippine Health
Insurance Corporation (PhilHealth).
RULE IV, Grant of Maternity Leave Benefits
Section 1. Grant of Maternity Leave. All covered females
regardless of civil status, employment status, and the
legitimacy of her child, shall be granted one hundred five (105)
days maternity leave with full pay, and an additional fifteen
(15) days with full pay in case the female worker qualifies as a
solo parent under Republic Act No. 8972, or the "Solo Parents'
Welfare Act of 2000."
• In cases of miscarriage or emergency termination of
pregnancy, sixty (60) days maternity leave with full
pay shall be granted.
Section 2. Manner of Enjoyment of the Benefit. Enjoyment
of maternity leave cannot be deferred but should be availed of
either before or after the actual period of delivery in a
continuous and uninterrupted manner, and such that:
a. In cases of live childbirth, one hundred five (105) days
maternity leave with full pay shall be granted; or
b. In cases of miscarriage or emergency termination of
pregnancy, sixty (60) days maternity leave shall be
granted.
In all of the above instances, the maternity leave can be credited
as combinations of prenatal and postnatal leave as long as it
does not exceed one hundred five (105) days or sixty (60) days,
as the case may be. In no case shall postnatal care be less
than sixty (60) days.
Section 3. Extended Maternity Leave. In cases of live
childbirth, an additional maternity leave of thirty (30) days,
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without pay, can be availed of, at the option of the female
worker, provided that the employer shall be given due notice.
Due notice to the employer must be in writing and must be
given at least forty-five (45) days before the end of the female
worker's maternity leave. However, no prior notice shall be
necessary in the event of a medical emergency but subsequent
notice shall be given to the employer.
The above period of extended maternity leave without pay shall
not be considered as gap in the service.
Section 4. Frequency of the Grant. Maternity leave shall be
granted to a qualified female worker in every instance of
pregnancy, miscarriage or emergency termination of pregnancy
regardless of frequency.
Section 5. Grant of Maternity Leave Benefits after
Termination of Employment. Maternity leave with full pay
shall be granted even if the childbirth, miscarriage, or
emergency termination of pregnancy occurs not more than
fifteen (15) calendar days after the termination of an
employee's service, as her right thereto has already accrued.
• Such period is not applicable when the employment of
the pregnant woman worker has been terminated
without just cause, in which case the employer will
pay her the full amount equivalent to her salary for one
hundred five (105) days for childbirth and sixty (60)
days for miscarriage or emergency termination of
pregnancy based on her full pay, in addition to the other
applicable daily cash maternity benefits that she should
have received had her employment not been illegally
terminated.
Section 6. Maternity Leave of a Female Worker with
Pending Administrative Case. The maternity leave benefits
granted under Republic Act No. 11210 and this Rules shall be
enjoyed by a female worker in the public sector and in the
private sector even if she has a pending administrative case.
Section 7. Non-Diminution of Benefits. Nothing in this Rules
shall be construed as to diminish existing maternity benefits
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currently enjoyed whether or not these are granted under
collective bargaining agreements (CBA),or present laws, if the
same are more beneficial to the female worker. Any other
working arrangement which the female worker shall agree to,
during the additional maternity leave period, shall be allowed:
Provided,That this shall be consented to in writing by the
female worker and shall primarily uphold her maternal
functions and the requirements of postnatal care.
Section 8. Security of Tenure. Those who avail of the benefits
of Republic Act No. 11210 or this Rules, whether in the public
or private sector, shall be assured of security of tenure. As such,
the exercise of this option by them shall not be used as basis for
demotion in employment or termination. The transfer to a
parallel position or reassignment from one organizational unit
to another in the same agency or private enterprise shall be
allowed: Provided that it shall not involve a reduction in rank,
status, salary, or otherwise amount to constructive dismissal.
Section 9. Non-Discrimination. No employer whether in the
public or private sector shall discriminate against the
employment of women in order to avoid the benefits provided
for in this Rules.
RULE VI, Maternity Leave for Female Workers in the Private
Sector
Section 1. Eligibility. To qualify for the grant of maternity
leave benefit, the female worker must meet the following
requirements:
a. She must have at least three (3) monthly contributions
in the twelve-month period immediately preceding the
semester of childbirth, miscarriage, or emergency
termination of pregnancy.
o In determining the female member's
entitlement to the benefit, the SSS shall
consider only those contributions paid prior to
the semester of contingency; and
b. She shall have notified her employer of her pregnancy
and the probable date of her childbirth, which notice
shall be transmitted to the SSS in accordance with the
rules and regulations it may provide.
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Section 2. Notice Requirement. The notification process for
SSS-covered female workers and/or members and employers
shall be governed by the following rules:
a. The female member, upon confirmation of pregnancy,
shall immediately inform her employer of such fact and
the expected date of childbirth;
b. The employer shall, in turn, notify the SSS through the
prescribed manner;
c. The above rules notwithstanding, failure of the
pregnant female worker to notify the employer shall
not bar her from receiving the maternity benefits,
subject to guidelines to be prescribed by the SSS; and
d. Self-employed female members, including those in the
informal economy, OFWs and voluntary SSS members
may give notice directly to the SSS.
Section 3. Amount of Benefit. Covered female workers
availing of the maternity leave benefits must receive their full
pay. Full payment of the maternity leave benefit shall be
advanced by the employer within thirty (30) days from the
filing of the maternity leave application.
• When SSS directly pays. In the case of self-employed
female members, including those in the informal
economy, OFWs and voluntary SSS members, the SSS
shall directly pay the maternity benefit.
Section 4. Reimbursement. The SSS shall immediately
reimburse to the employer the maternity benefits advanced to
the employed female member, only to the extent of one hundred
percent (100%) of her average daily salary credit for one
hundred five (105) days, one hundred twenty (120) days or
sixty (60) days, as the case may be, upon receipt of satisfactory
and legal proof of such payment.
Section 5. Salary Differential, Exceptions. Employers from
the private sector shall pay for the difference between the full
salary and the actual cash benefits received from the SSS.
• Female workers employed by exempt establishments
and enterprises, which satisfy the requirements and
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criteria listed below, shall not be entitled to the salary
differential. The said female workers shall be entitled
to receive only their SSS maternity benefits.
• Upon submission of proofs and other necessary
documents, the following establishments in the private
sector may be exempted from paying the salary
differential herein prescribed, provided the criteria
below are satisfied:
1. Those operating distressed establishments.
a. For corporation/cooperative.
i. When the actual net loss amounts to
25% of total assets or
ii. when the corporation/cooperative
registers capital deficiency,
i.e.,negative stockholders' equity
immediately preceding the application
for exemption.
b. For sole proprietorship and partnership.
i. When the accumulated net losses for
the last two (2) full accounting periods
immediately preceding application for
exemption amounts to 20% or more of
the total invested capital at the
beginning of the period under review
or
ii. when the sole
proprietorship/partnership registers
capital deficiency, i.e.,negative net
worth as of the last full accounting
period immediately preceding
application for exemption.
c. For Non-stock, non-profit organizations.
i. When the accumulated net losses for
the last two (2) full accounting periods
immediately preceding application for
exemption amounts to 20% or more of
the fund balance/members'
contribution at the beginning of the
period or
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ii. when an establishment registers
capital deficiency, i.e.,negative fund
balance/members; contribution as of
the last full accounting period or
interim period, if any, immediately
preceding application for exemption.
d. For banks and quasi-banks. When there is a
certification from the Bangko Sentral ng
Pilipinas that it is under receivership or
liquidation as provided in Section 30 of RA
7653, otherwise known as the New Central
Bank Act.
2. Those retail/service establishments and other
enterprises employing not more than ten (10)
workers. When it is engaged in the retail sale of goods
and/or services to end users for personal or household
use and it is regularly employing not more than ten (10)
workers regardless of status, except the owner/s, for at
least six (6) months in any calendar year.
3. Those considered as micro-business enterprises and
engaged in the production, processing, or
manufacturing of products or commodities including
agro-processing, trading, and services, whose total
assets are not more than Three Million Pesos
(P3,000,000.00) in accordance with the Barangay
Micro Business Enterprises (BMBE's) Act of 2002;
and
4. Those who are already providing similar or more
than the benefits herein provided under an existing
Collective Bargaining Agreement (CBA),company
practice or policy.
Annual justification report. That said exemptions shall be
subject to an annual submission of justification by the employer
claiming exemption for the approval of the Department of
Labor and Employment (DOLE).
Section 6. Bar to Recovery of Sickness Benefits. The payment
of daily SSS maternity benefits shall be a bar to recovery of
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sickness benefits provided under Republic Act No. 11199, for
the same period for which daily maternity benefits have been
received.
Section 7. Consecutive Pregnancies and Multiple
Childbirths. The payment of the SSS maternity benefits in
cases of consecutive pregnancies resulting in overlapping
maternity leaves and in cases of multiple childbirths shall be
governed by the following rules:
a. In case of the overlapping of two (2) maternity benefit
claims, the female member shall be granted maternity
benefits for the two contingencies in a consecutive
manner. However, the amount of benefit
corresponding to the period where there is an overlap
shall be deducted from the current maternity benefit
claim; and
b. The female member shall be paid only one maternity
benefit, regardless of the number of offspring, per
childbirth/delivery.
Section 8. Liability of the Employer. The employer shall pay
to the SSS damages equivalent to the benefits which said
female member would otherwise have been entitled to in any
of the following instances:
a. Failure of employer to remit to the SSS the required
contributions for the female worker; or
b. Failure of the employer to transmit to SSS the female
worker's notification on the fact of pregnancy and
probable date of childbirth.
Section 9. Dispute Resolution. Any dispute, controversy, or
claim as regards the grant of SSS maternity leave benefit
under this Rules shall be filed before the Social Security
Commission (SSC).The filing, determination, and settlement of
disputes shall be governed by the Rules and Regulations of the
SSC, which provide that all petitions shall be filed with the
Office of the Executive Clerk of the Commission or his/her
Deputy, or at any Regional Commission Legal Department.
Any dispute, controversy, or claim arising out of or relating to
the payment of salary differential shall be filed before the
DOLE Field/Provincial/Regional Office having jurisdiction
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over the workplace and shall be subject to existing enforcement
mechanisms of the DOLE.
RULE VIII, Allocation of Maternity Leave Credits
Section 1. Allocation to the Child's Father or Alternate
Caregiver. A female worker entitled to maternity leave
benefits may, at her option, allocate up to seven (7) days of said
benefits to the child's father, whether or not the same is married
to the female worker. The allocated benefit granted to the
child's father under this law is over and above that which is
provided under Republic Act No. 8187, or the "Paternity
Leave Act of 1996."
When allocation to alternate caregiver allowed. In case of
1. death,
2. absence, or
3. incapacity
of the child's father, the female worker may allocate to an
alternate caregiver who may be any of the following, upon the
election of the mother taking into account the best interests of
the child:
a. A relative within the fourth degree of consanguinity; or
b. The current partner, regardless of sexual orientation or
gender identity, of the female worker sharing the same
household.
Option not applicable in miscarriage or emergency
termination. The option to allocate maternity leave credits
shall not be applicable in case the female worker suffers
miscarriage or emergency termination of pregnancy.
• Current partner refers to a person who shares an
intimate relationship and lives with the female worker.
Rule 2, Section 1(b)
• Relative within the fourth degree of consanguinity
refers to a person who is related to the female worker
by blood and shares the same ancestry or lineage. Rule
2, Section 1(n)
Section 2. Allocation for the SSS-Covered Female Workers.
In case the female worker avails of the option to allocate, the
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SSS shall pay her the amount of the maternity benefit
corresponding to the period not allocated.
• As applicable, the father or, in his death, absence, or
incapacity, the alternate caregiver shall be granted by
his employer a leave with pay equivalent to a period
from one (1) to seven (7) days, which may be enjoyed
either in a continuous or in an intermittent manner not
later than the period of the maternity leave availed of.
• The female worker shall notify her employer of her
option to allocate with her application for maternity
leave. The father or alternate caregiver, as the case may
be, shall notify the employer concerned of his or her
availment of the allocated leave and the inclusive dates
therefor.
o Discussion; when to allocate. Sabay sa
application of maternity leave to allow the
employer time to apply from SSS for
reimbursement.
• This written notice to the employers shall be required
even if the child's father or the alternate caregiver is
employed in the public sector.
Section 3. Allocation of Maternity Leave Credits for Female
Workers in the Public Sector. In case the female worker
avails of the option to allocate, she shall submit a written notice
to the head of agency or the head of agency's authorized
representative, with her application for maternity leave.
• The allocated maternity leave may be enjoyed by the
child's father or the alternate caregiver either in a
continuous or in an intermittent manner not later than
the period of the maternity leave availed of.
• In case full pay has been given to the female worker,
the child's father or the alternate caregiver, as the case
may be, shall only be excused from work (leave
without pay). The leave without pay shall not be
considered as a gap in the service.
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Section 4. Death or Permanent Incapacity of the Female
Worker; balance accrues to father or alternate caregiver.
In the event the beneficiary female worker dies or becomes
permanently incapacitated, the balance of her maternity leave
benefits, if any, shall accrue to the child's father or to a qualified
alternate caregiver as provided in the preceding sections subject
to the following conditions:
a. That the maternity leave benefits have not yet been
commuted to cash, if applicable; and
b. That a certified true copy of the death certificate or
medical certificate or abstract is provided to the
employers of both the female worker and the child's
father or alternate caregiver.
In case the maternity leave benefits of the deceased or
permanently incapacitated female worker have already been
paid to the latter in full, the child's father or alternate caregiver
shall be entitled to enjoy the remaining unexpired leave credits
of the female worker, if there be any, without pay:
• Provided, that such leave without pay shall not be
considered as a gap in the service of the child's father
or alternate caregiver, in both the public and private
sector.
RULE X, Penalties
Section 1. Penalties. Whoever fails or refuses to comply with
the provisions of R.A. No. 11210 shall be punished by
1. a fine of not less than Twenty thousand pesos
(P20,000.00) nor more than Two hundred thousand
pesos (P200,000.00), and
2. imprisonment of not less than six (6) years and one (1)
day nor more than twelve (12) years
3. or both.
Juridical personalities as offenders. If the act or omission
penalized by R.A. No. 11210 shall be committed by an
association, partnership, corporation, or any other institution,
its managing head, directors, or partners shall be liable to the
penalties herein provided.
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SECURITY OF TENURE AND ENDO
Ground for non-renewal of business permits. Failure on the
part of any association, partnership, corporation, or private
enterprise to comply with the provisions of R.A. No. 11210
shall be a ground for non-renewal of business permits.
Maternity Leave
FAQs on RA 11210
Does the counting of the maternity leave period include
Saturdays, Sundays, and holidays?
Yes. The maternity leave period is counted in calendar days,
inclusive of Saturdays, Sundays, and holidays. This is in
consonance with the rule that maternity leave should be availed
of in a continuous and uninterrupted manner.
• Discussion. It is really 3.5 months. 105 calendar days
and not 105 working days.
Can maternity leave be availed of prior to delivery date?
Yes. A female employee can avail of maternity leave of not
more than forty-five (45) days prior to her delivery date for pre-
natal care purposes.
Can the application for maternity leave be given due course
notwithstanding the pendency of an administrative case
filed against the female employee?
Yes. A female employee is not barred under R.A. No. 11210
from enjoying maternity leave with full pay in case she has a
pending administrative case.
Can a female employee go on maternity leave pending the
completion of her clearance from money, property, and
work-related accountabilities?
Yes. The pendency of clearance from money, property, and
work-related accountabilities shall not deprive the female
employee of the availment of maternity leave benefits.
Note: CS Form No. 7 (Clearance Form) shall be used for
clearance.
Can the enjoyment of maternity leave be divided into two
(2) phases or availed of in a protracted basis?
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No. Enjoyment of maternity leave cannot be deferred to some
later time. It should be availed of in a continuous and
uninterrupted manner.
I gave birth on (or after) 11 March 2019, but I was only
granted sixty (60) days maternity leave. I have returned to
work. Can I resume and complete the remaining forty-five
(45) days of my one hundred (105) days maternity leave?
Yes. Female employees who gave birth on 11 March 2019 and
onwards are covered by R.A. No. 11210.
• As a rule, enjoyment of maternity leave cannot be
deferred to some later date since R.A. No. 11210
explicitly declares that it shall be enjoyed in a
continuous and uninterrupted manner.
• However, considering that you were only granted 60
days maternity leave based on Section 11 of the
Omnibus Rules on Leave (which was the policy in
effect prior to the approval of the IRR of R.A. No.
11210), you are still entitled to enjoy the remaining
forty-five (45) days maternity leave with full pay. This
is in consonance with the social justice principle that
the maternity leave law, being a social legislation,
should be accorded liberal interpretation in favor of
those whom the law intends to be benefited.
• However, there is a need for you to notify the head of
office/agency that you are resuming to enjoy your
maternity leave benefit.
How should the additional 15 days maternity leave for solo
parents be availed of?
The additional maternity leave of 15 days for solo parents
should be availed of in a continuous and uninterrupted manner
immediately after the expiration of the approved maternity
leave.
Apart from the Solo Parent I.D., what other proof of solo
parenthood can the female employee present?
Pursuant to Section 10, Article IV of the IRR of R.A. No. 8972
or the Solo Parents’ Welfare Act of 2000, the Solo Parent
Identification Card (ID) is an indispensable requirement to
avail of all solo parent benefits.
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There being no alternative thereto, a valid Solo Parent ID shall
be secured and presented in order to enjoy the additional fifteen
(15) days maternity leave benefit for solo parents.
Note: The Solo Parent ID is issued by the Department of Social
Welfare and Development (DSWD) through the
City/Municipal Social Welfare and Development Offices. It is
valid for one (1) year, but may be renewed subject to new
assessment and evaluation.
Is the option to avail of the extended maternity leave of up
to thirty (30) days subject to the approval of the head of
office?
Yes. The head of office shall be given due notice in writing of
the option to avail of the extended maternity leave at least forty-
five (45) days before the end of the maternity leave or through
subsequent notice in case of a medical emergency. The
requirement of prior notice will give the head of office/agency
necessary preparation for the extended leave of absence.
Moreover, the approval of the said leave is ministerial on the
part of the head of office/agency.
• The period of extended maternity leave without pay
shall not be considered
as gap in the service. (Sec. 3, Rule IV of R.A. No. 11210)
Can the extended maternity leave of up to thirty (30) days
be charged against the sick/vacation leave credits of the
female employee?
Yes. In case of live childbirth, the female worker has the option
to extend her maternity leave for an additional thirty (30) days
without pay, or use her earned sick leave credits for extended
leave with pay. In case the sick leave credits have been
exhausted, the vacation leave credits may be used.
Can the female employee return to work during the
unexpired period of her maternity leave?
No. Sec. 3 of R.A. No. 11210 provides that the enjoyment of
maternity leave shall not be deferred but shall be in a
continuous and uninterrupted manner. Thus, a female worker
shall fully enjoy her maternity leave, 105 or 60 days, as the case
may be. If she returns to work during the unexpired period of
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her maternity leave, she shall not be paid for actual services
rendered since maternity leave under R.A. No. 11210 shall no
longer be commutable or convertible to cash.
Solo Parents
RA 8972
An act providing for benefits and privileges to solo parents
and their children, appropriating funds therefor and for other
purposes or Solo Parents’ Welfare Act of 2000
Section 3(a). Solo parent — any individual who falls under
any of the following categories:
1. A woman who gives birth as a result of rape and other
crimes against chastity even without a final
conviction of the offender: Provided, That the mother
keeps and raises the child;
2. Parent left solo or alone with the responsibility of
parenthood due to death of spouse;
3. Parent left solo or alone with the responsibility of
parenthood while the spouse is detained or is serving
sentence for a criminal conviction for at least one (1)
year;
4. Parent left solo or alone with the responsibility of
parenthood due to physical and/or mental incapacity
of spouse as certified by a public medical practitioner;
5. Parent left solo or alone with the responsibility of
parenthood due to legal separation or de facto
separation from spouse for at least one (1) year, as
long as he/she is entrusted with the custody of the
children;
6. Parent left solo or alone with the responsibility of
parenthood due to declaration of nullity or
annulment of marriage as decreed by a court or by a
church as long as he/she is entrusted with the custody
of the children;
7. Parent left solo or alone with the responsibility of
parenthood due to abandonment of spouse for at least
one (1) year;
8. Unmarried mother/father who has preferred to keep
and rear her/his child/children instead of having others
care for them or give them up to a welfare institution;
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9. Any other person who solely provides parental care
and support to a child or children;
a. Under Section 6(b)(9) of the IRR, duly
licensed as a foster parent by the DSWD or
duly appointed legal guardian by the court;
10. Any family member who assumes the responsibility
of head of family as a result of the death,
abandonment, disappearance or prolonged absence of
the parents or solo parent.
a. Under Section 6(b)(10) of the IRR, the
abandonment, disappearance, or prolonged
absence must be for at least one year
Change in status = termination. A change in the status or
circumstance of the parent claiming benefits under this Act,
such that he/she is no longer left alone with the responsibility
of parenthood, shall terminate his/her eligibility for these
benefits.
Discussion. Mistress who gets pregnant and left by the
guy. Solo Parent? Yes. Under 8/9 above.
Section 3(b). Children— refer to those
1. living with and dependent upon the solo parent for
support who are
2. unmarried,
3. unemployed and
4. not more than eighteen (18) years of age, or even over
eighteen (18) years but are incapable of self-support
because of mental and/or physical defect/disability.
Section 4. Criteria for Support. — Any solo parent whose
income in the place of domicile falls below the poverty
threshold as set by the National Economic and Development
Authority (NEDA) and subject to the assessment of the DSWD
worker in the area shall be eligible for assistance.
Above poverty line. Provided, however, That any solo parent
whose income is above the poverty threshold shall enjoy the
benefits mentioned in Sections 6, 7 and 8 of this Act.
• Section 6: Flexible work schedule
• Section 7: Non-discrimination at work
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• Section 8: Parental leave
• Section 9: Educational benefits
• Section 10: Housing benefits
• Section 11: Medical assistance
Section 5. Comprehensive Package of Social Development
and Welfare Services. A comprehensive package of social
development and welfare services for solo parents and their
families will be developed by the DSWD, DOH, DECS,
CHED, TESDA, DOLE, NHA and DILG, in coordination with
local government units and a nongovernmental organization
with proven track record in providing services for solo parents.
Initial package. The DSWD shall coordinate with concerned
agencies the implementation of the comprehensive package of
social development and welfare services for solo parents and
their families. The package will initially include:
a. Livelihood development services which include
trainings on livelihood skills, basic business
management, value orientation and the provision of
seed capital or job placement.
b. Counseling services which include individual, peer
group or family counseling. This will focus on the
resolution of personal relationship and role conflicts.
c. Parent effectiveness services which include the
provision and expansion of knowledge and skills of the
solo parent on early childhood development, behavior
management, health care, rights and duties of parents
and children.
d. Critical incidence stress debriefing which includes
preventive stress management strategy designed to
assist solo parents in coping with crisis situations and
cases of abuse.
e. Special projects for individuals in need of
protection which include temporary shelter,
counseling, legal assistance, medical care, self-concept
or ego-building, crisis management and spiritual
enrichment.
Section 6. Flexible Work Schedule. The employer shall
provide for a flexible working schedule for solo parents:
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a. Provided, That the same shall not affect individual and
company productivity:
b. Provided, further, That any employer may request
exemption from the above requirements from the
DOLE on certain meritorious grounds.
• In the case of employees in the government service,
flexible working hours will be subject to the discretion
of the head of the agency.
• In no case shall the weekly working hours be reduced
in the event the agency adopts the flexible working
hours schedule format (flexi-time).
• In the adoption of flexi-time, the core working hours
shall be prescribed taking into consideration the needs
of the service. Section 16 of the IRR
Section 7. Work Discrimination. No employer shall
discriminate against any solo parent employee with respect to
terms and conditions of employment on account of his/her
status.
Section 8. Parental Leave. In addition to leave privileges
under existing laws, parental leave of not more than seven (7)
working days every year shall be granted to any solo parent
employee who has rendered service of at least one (1) year.
• The seven-day parental leave shall be non-
cumulative. Section 18 of the IRR
• Discussion. This is without pay. The law does not say
with pay.
Conditions for Entitlement of Parental Leave. A solo
parent shall be entitled to parental leave provided that:
a. He/She has rendered at least one (1) year of service
whether continuous or broken at the time of the
effectivity of the Act;
b. He/She has notified his/her employer of the
availment thereof within a reasonable time period;
and
c. He/She has presented a Solo Parent Identification
Card to his/her employer. Section 19 of the IRR
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Non-conversion of Parental Leave. In the event that the
parental leave is not availed of, said leave shall not be
convertible to cash unless specifically agreed upon
previously.
• However, if said leave were denied an employee as
a result of non-compliance with the provisions of
these Rules by an employer, the aforementioned
leave may be used as a basis for the computation
of damages. Section 20 of the IRR
Crediting of Existing Leave. If there is an existing or
similar benefit under a company policy, or a collective
bargaining agreement or collective negotiation agreement
the same shall be credited as such. If the same is greater
than the seven (7) days provided for in the Act, the greater
benefit shall prevail.
• Emergency or contingency leave not
considered as compliance. Emergency or
contingency leave provided under a company
policy or a collective bargaining agreement shall
not be credited as compliance with the parental
leave provided for under the Act and these
Rules. Section 21 of the IRR
Section 9. Educational Benefits. The DECS, CHED and
TESDA shall provide the following benefits and privileges:
1. Scholarship programs for qualified solo parents and
their children in institutions of basic, tertiary and
technical/skills education; and
2. Nonformal education programs appropriate for solo
parents and their children.
The DECS, CHED and TESDA shall promulgate rules and
regulations for the proper implementation of this program.
Application Procedure:
1. Applicant must secure application form from either
DepEd, CHED and TESDA depending on their
need;
2. Submit the duly accomplished application form
together with the required documents to the
appropriate agency.
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The following are the documents required to be attached
with the application:
1. Solo Parent Identification Card
2. Barangay Clearance
3. Birth Certificate
4. Notice of admission from the school
a. Original or Certified True Copy of the transcript of
record, or the Report Card of the last year the
applicant attended school. Section 22 of the IRR
Section 10. Housing Benefits. Solo parents shall be given
allocation in housing projects and shall be provided with liberal
terms of payment on said government low-cost housing
projects in accordance with housing law provisions prioritizing
applicants below the poverty line as declared by the NEDA.
a. Housing Benefits. Solo parents who meet the
eligibility criteria for housing assistance under R.A.
No. 7279 (Urban Development and Housing Act of
1992) and other related rules and regulations of
participating housing agencies shall be provided with
liberal terms of payment on government low-cost
housing projects, in accordance with housing law
provisions, prioritizing applicants below the poverty
line as declared by the NSCB. Section 23 of the IRR
The NHA shall make available housing units to solo
parents in its housing projects subject to existing
disposition policies or may refer them to other housing
projects, as appropriate, provided that:
a. The identified solo parent must be eligible for
assistance under the provisions of this Act;
b. Solo parents applying for housing benefits must
meet the qualification criteria for housing
assistance under Republic Act 7279, or the Urban
Development and Housing Act (UDHA) and other
NHA eligibility criteria under existing policies,
rules and regulations; and
c. Eligible solo parents shall file their application for
housing unit directly with the concerned NHA
Project Offices.
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Upon written request, the NHA shall provide the DSWD a
listing of NHA projects with available housing units for
disposition. This list shall be updated and provided semi-
annually. Section 24 of the IRR
Section 11. Medical Assistance. The DOH shall develop a
comprehensive health care program for solo parents and their
children. The program shall be implemented by the DOH
through their retained hospitals and medical centers and the
local government units (LGUs) through their
provincial/district/city/municipal hospitals and rural health
units (RHUs).
Medical Assistance. The DOH shall develop a
comprehensive health care program for solo parents and
their children. The program shall be implemented by the
DOH through their retained hospitals and medical centers
and the local government units (LGUs) through their
provincial/district/city/municipal hospitals and rural health
units (RHUs). Section 25 of the IRR
Essential Health Packages. To ensure the state of well-
being of the solo parent and his/her family, health/medical
services shall be made available at all times, in all levels of
health care delivery system as mentioned in the previous
section. These health/medical services shall be part of the
regular essential health packages being provided at various
stages of life. Section 26 of the IRR
IRR of RA 8972
ARTICLE IV, Criteria for Support
Section 8. Qualifications of Solo Parent. A solo parent
seeking benefits other than those provided for under Sections
16, 17, 18, 19, 20, 21 and 23 of these Rules shall be qualified
on the basis of the following:
a. A resident of the area where the assistance is sought, as
certified by the barangay captain;
a. Provided, that if the solo parent is a transferee
from another barangay, he/she is required to
secure a clearance from his/her previous
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barangay, indicating whether or not he/she has
availed of any benefits for solo parents, and the
nature of such benefits.
b. With an income level equal to or below the poverty
threshold as set forth by NSCB and assessed by a social
worker as provided for under Section 7 of these Rules.
Section 9. Assessment. An applicant who manifests the need
for assistance under the Act is subject to assessment by a social
worker at the city/municipal Social Welfare and Development
Office. The assessment shall cover, but not be limited to, the
following:
a. Definition of solo parents. Determination of the
applicant's category as enumerated in Article III
Section 6 paragraph (b) of these Rules;
b. Needs. Evaluation of the needs of the applicant and
his/her children as basis for provision of the
appropriate service and intervention;
c. Readiness. Identification of the level of readiness of
the applicant to receive a particular service/assistance,
which shall serve as basis for the conduct of social
preparation activities prior to the provision of such
service/assistance; and
d. Resources. Identification of existing and potentially
available resources that may support the applicant and
his/her children.
Section 10. Procedure in Accessing Services for Solo
Parents. A person who needs assistance under this Act shall
comply with the following process:
a. Visit the Social Welfare and Development Office of
the city or municipality of her/his residence to
manifest her/his need for assistance;
b. Fill up application form for the assistance, indicating
but not limited to, the following information
a. Name
b. Age
c. Address/Area of Domicile
d. Income per month
e. Source/s of income
f. Number of children
g. Circumstances of being solo;
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c. Undergo the necessary assessment process as
stipulated in Section 9 Article IV of these Rules;
d. A Social Case Study Report shall be prepared by the
social worker based on the information/data provided
for by the applicant, as well as his/her assessment of
said applicant, indicating therein the appropriate
services needed.
e. The Social Case Study Report, together with a referral
letter prepared by the social worker, shall be forwarded
by the Office of the City/Municipal Social Welfare and
Development Office to the agency concerned
providing the appropriate assistance/service.
f. The social worker shall inform the solo parent of the
status of his/her application within thirty (30) working
days from the filing of such and shall require him/her
to visit the agency/institution providing the assistance.
In case the applicant is not qualified for services under
this Act, he/she will be referred to the appropriate
agency/program for assistance.
g. Upon the favorable evaluation of the social worker, a
Solo Parent Identification Card shall be issued to the
solo parent within 30 days upon application duly
signed by the city/municipal Social Welfare Officer
and the city/municipal mayor. The Solo Parent
Identification Card is necessary for the availment of
benefits under the Act and these Rules. Such
Identification Card shall be valid for only one (1) year,
but may be renewed subject to a new assessment and
evaluation;
h. For the public's information and guidance, a list of
persons who applied and those who were able to avail
of the benefits under this Act shall be made available
by the concerned city/municipal social welfare and
development office which processed their applications.
Section 11. Procedure for Application of Benefits. An
applicant who was determined by a social worker to be eligible
for assistance may apply for benefits under this Act through the
following:
a. The solo parent may go to the agency providing such
benefit bringing with her/him the Identification Card
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issued by the Municipal/City Social Welfare and
Development Office;
b. Undergo the necessary qualifying activities required by
the agency as prescribed by these Rules; and
c. Comply with the requirements set forth by the agency
providing the service for the duration of the assistance
(e.g. schooling, housing) subject to existing rules of the
agencies concerned.
Section 12. Procedure for Termination of Benefits.
a. A solo parent shall manifest to the Social Welfare
Office his/her intention to withdraw the availment of
the benefits under this Act.
b. If the solo parent does not voluntarily manifest his/her
intention to terminate the provision of benefits and
services before the lapse of one year from the issuance
of the Solo Parent I.D., the Social Worker, based on a
report by the employer or any interested person shall
conduct the necessary assessment/evaluation to
ascertain if grounds for termination and withdrawal of
benefits exist.
a. ID renewable annually. The Identification
Card shall cease to be effective upon the lapse
of one year from issuance, unless renewed
based on a new assessment and evaluation.
Failure to renew will mean that he/she has
changed his/her status as a solo parent.
c. The solo parent shall be informed of the result of the
assessment/evaluation and termination of the
service, if warranted, through written notice. The
termination shall take effect 30 days from the receipt
of the notice of termination. In cases when the service
cannot be terminated in a period of one month, e.g.
schooling, the service shall be completed until its due
time.
d. The NHA and other participating housing agencies
shall issue the guidelines in the termination of housing
benefits provided in sections 23 and 24 of these Rules.
e. The solo parent and his/her children shall undergo
psychosocial counseling with the social worker to
prepare them for independent living.
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The termination of said benefits shall be without prejudice to
re-application should the circumstances so warrant.
Section 13. Relocation of the Family. In the event a solo
parent decides to relocate his/her family, he/she shall inform
the city/municipal Social Welfare and Development Office.
Said office shall thereupon transmit the records to the
city/municipal Social Welfare and Development Office of the
place of relocation.
Section 14. Duty to Monitor. It shall be the duty of the
city/municipal Social Welfare Officer who receives said
records, to assign a social worker to monitor the status of the
relocated solo parent and his/her family.
Moreover, it shall also be the duty of said officer to coordinate
with the concerned agencies of any changes in the status of the
solo parent receiving benefits from said agencies.
ARTICLE V. Benefits
Section 15. Comprehensive Package of Social Development
and Welfare Services. Same with Section 5 of the law
Special leave benefits for women
RA 9710, The Magna Carta for Women
Section 18. Special Leave Benefits for Women;
gynecological disorders. A woman employee having rendered
continuous aggregate employment service of at least six (6)
months for the last twelve (12) months shall be entitled to a
special leave benefit of two (2) months with full pay based on
her gross monthly compensation following surgery caused by
gynecological disorders.
Discussion. Woman underwent sex change. Later on, she had
a gynecological disorder. Entitled? Yes.
IRR for RA 9710
Section 21. Special Leave Benefits for Women.
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A. Any
a. female employee
b. in the public and private sector
c. regardless of age and civil status
shall be entitled to a special leave of two (2) months with full
pay based on her gross monthly compensation subject to
existing laws, rules and regulations due to surgery caused by
gynecological disorders under such terms and conditions:
1. She has rendered at least six (6) months continuous
aggregate employment service for the last twelve (12)
months prior to surgery;
2. In the event that an extended leave is necessary, the
female employee may use her earned leave credits; and
3. This special leave shall be non-cumulative and non-
convertible to cash.
B. The CSC, in the case of the public sector including LGUs
and other State agencies, and the DOLE, in the case of the
private sector, shall issue further guidelines and appropriate
memorandum circulars within sixty (60) days from the
adoption of these Rules and Regulations to operationalize said
policy, and monitor its implementation and act on any
violations thereof.
DO 112-11 as amended by DO 112-A-12
Guidelines Governing the Implementation of the Special
Leave Benefits for Women Employees in the Private Sector
Pursuant to Section 21 (B) of the Implementing Rules and
Regulations of Republic Act 9710, otherwise known as the
"Magna Carta of Women", the following guidelines relative to
the application of the special leave benefits for women is
hereby issued for the guidance and compliance of all
concerned.
Section 1(a). Special leave benefits for women. Special leave
benefits for women refers to a female employee's leave
entitlement of two (2) months with full pay from her employer
based on her gross monthly compensation following surgery
caused by gynecological disorders, provided that she has
rendered continuous aggregate employment service of at least
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SECURITY OF TENURE AND ENDO
six (6) months for the last 12 months. This two-month leave is
in addition to leave privileges under existing laws.
Section 1(b). Gynecological disorders refer to disorders that
would require surgical procedures such as, but not limited to,
dilatation and curettage and those involving female
reproductive organs such as the vagina, cervix, uterus, fallopian
tubes, ovaries, breast, adnexa and pelvic floor, as certified by a
competent physician. For purposes of the Act and the Rules and
Regulations of this Act, gynecological surgeries shall also
include hysterectomy, ovariectomy, and mastectomy.
Section 1(c). Gross monthly compensation means the
1. monthly basic pay plus
2. mandatory allowances fixed by the regional wage
boards.
Section 1(d). Two (2) months means sixty (60) calendar days
pursuant to Article 13 of the New Civil Code.
Section 1(e). At least six (6) months continuous aggregate
employment service for the last twelve (12) months prior to
surgery means that the woman employee should have been
with the company for twelve (12) months, prior to surgery. An
aggregate service of at least six (6) months within the said 12-
month period is sufficient to entitle her to avail of the special
leave benefit (SLB).
Section 1(f). Employment service includes absences with pay
such as use of other mandated leaves, company granted leaves
and maternity leave.
Section 1(g). Competent physician means a medical doctor
preferably specializing in gynecological disorders or is in the
position to determine the period of recuperation of the woman
employee.
Section 2. Conditions to Entitlement of Special Leave
Benefits. Any female employee, regardless of age and civil
status, shall be entitled to a special leave, provided she has
complied with the following conditions:
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a. She has rendered at least six (6) months continuous
aggregate employment service for the last twelve (12)
months prior to surgery;
b. She has filed an application for special leave in
accordance with Section 3 hereof;
c. She has undergone surgery due to gynecological
disorders as certified by a competent physician.
Section 3. Application for Special Leave. The employee shall
file her application for leave with her employer
1. within a reasonable period of time from the expected
date of surgery, or
2. within such period as may be provided by company
rules and regulations or by collective bargaining
agreement.
Prior application not necessary for emergency cases; verbal
notice enough. Prior application for leave shall not be
necessary in cases requiring emergency surgical procedure
1. provided that the employer shall be notified verbally or
in written form within a reasonable period of time and
2. provided further that after the surgery or appropriate
recuperating period, the female employee shall
immediately file her application using the prescribed
form.
Section 4. The special leave benefit. The two (2) months
special leave is the maximum period of leave with pay that a
woman employee may avail of under RA 9710.
• For purposes of determining the period of leave with
pay that will be allowed to a woman employee, the
certification of a competent physician as to the required
period of recuperation shall be controlling.
Section 5. Availment. Special leave benefits shall be granted
to the qualified employee after she has undergone surgery,
without prejudice to an employer allowing an employee to
receive her pay before or during the surgery.
Section 6. Frequency of availment. A woman employee can
avail of the special leave benefit for every instance of surgery
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due to gynecological disorder for a maximum total period of
two (2) months per year.
Section 7. Special leave benefit vis-à-vis SSS sickness
benefit. The special leave benefit is different from the SSS
sickness benefit. The former is granted by the employer in
accordance with RA 9710, as implemented under this Rules. It
is granted to a woman employee who has undergone surgery
due to gynecological disorder. The SSS sickness benefit, on the
other hand, is administered and given by the SSS in accordance
with the SSS law or RA 1161 as amended by RA 8282.
Section 8. Special leave benefit vis-à-vis existing statutory
leaves. — The special leave benefit cannot be taken from
existing statutory leaves (i.e., 5-day Service Incentive Leave,
Leave for victims of VAWC, Parental Leave for Solo Parents).
The grant of the special leave benefit under the law is in
recognition of the fact that patients with gynecological disorder
needing surgery require a longer period for recovery. The
benefit is considered an addition to the leave benefits granted
under existing laws and should be added on top of said
statutory leave entitlements.
• If the special leave benefit has already been exhausted,
the company leave and other mandated leave benefits
may be availed of by the woman employee.
Section 9. Special leave benefit vis-à-vis maternity leave
benefit. Where the woman employee had undergone surgery
due to gynecological disorder during her maternity leave, she
is entitled only to the difference between the SLB and
maternity leave benefit.
Section 10. Crediting of existing or similar benefits. If there are
existing or similar benefits under a company policy, practice or
collective bargaining agreement (CBA) providing similar or
equal benefits to what is mandated by law, the same shall be
considered as compliance, unless the company policy, practice
or CBA provides otherwise.
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SECURITY OF TENURE AND ENDO
• In the event the company policy, practice or CBA
provides lesser benefits, the company shall grant the
difference.
• More liberal existing or similar benefits cannot be
withdrawn or reduced by reason of the mandate of RA
9710.
• The term "similar or equal benefits" refers to leave
benefits which are of the same nature and purpose as
that of the SLB.
Section 11. Mode of payment. The special leave benefit is a
leave privilege. The woman employee shall not report for work
for the duration of the leave but she will still receive her salary
covering said period. The employer, in its discretion, may allow
said employee to receive her pay for the period covered by the
approved leave before or during the surgery. The computation
of her "pay" shall be based on her prevailing salary at the time
of the surgery.
Section 12. Non-commutation of the benefit. The special
leave shall be non-cumulative and non-convertible to cash
unless otherwise provided by a collective bargaining agreement
(CBA).
Section 13. Retroactive application. The woman employee
whose leave period for surgery and recuperation due to
gynecological disorders after the effectivity of the Magna Carta
of Women (RA No. 9710) on 15 September 2009 and before
the promulgation of its Guidelines (DO 112-11) on April 6,
2011, was deducted against her sick or vacation leave credits
shall be entitled to the restoration of said leave credits and/or
payment of appropriate compensation or salary at the time of
surgery, as the case may be.
Section 14. Monitoring of compliance. The DOLE-Regional
Office shall be responsible for monitoring compliance as
provided herein and related rules and issuances. It shall submit
a separate quarterly monitoring report to the Bureau of
Working Conditions (BWC), copy furnished the Tripartite
Industrial Peace Council (TIPC), for purposes of evaluation.
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Violence against women and children
RA 9262
Section 43. Entitlement to Leave. Victims under this act shall
be entitled to take a paid leave of absence up to 10 days in
addition to other paid leaves under the Labor Code and Civil
Service Rules and Regulations, extendible when the necessity
arises as specified in the protection order.
Any employer who shall prejudice the right of the person under
this section shall be penalized in accordance with the provisions
of the Labor Code and Civil Service Rules and Regulations.
Likewise, an employer who shall prejudice any person for
assisting a co-employee who is a victim under this Act shall
likewise be liable for discrimination.
IRR of RA 9262
Section 42. Ten-day paid leave in addition to other leave
benefits. At any time during
1. the application of any protection order,
2. investigation,
3. prosecution and/or
4. trial of the criminal case,
a victim of VAWC who is employed shall be entitled to a paid
leave of up to ten (10) days in addition to other paid leaves
under the Labor Code and Civil Service Rules and Regulations
and other existing laws and company policies, extendible when
the necessity arises as specified in the protection order.
Certification is the sole requirement. The
1. Punong Barangay/kagawad or
2. prosecutor or
3. the Clerk of Court,
as the case may be, shall issue a certification at no cost to the
woman that such an action is pending, and this is all that is
required for the employer to comply with the 10-day paid
leave.
For gov’t employees; certification + application for leave.
For government employees, in addition to the aforementioned
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certification, the employee concerned must file an application
for leave citing as basis R.A. 9262.
Governing agency. The administrative enforcement of this
leave entitlement shall be considered within the jurisdiction of
1. the Regional Director of the DOLE under Article 129
of the Labor Code of the Philippines, as amended, for
employees in the private sector, and
2. the Civil Service Commission, for government
employees.
Optional; non-cumulative; non-refundable. The availment
of the ten day-leave shall be at the option of the woman
employee, which shall cover the days that she has to attend to
medical and legal concerns. Leaves not availed of are non-
cumulative and not convertible to cash.
The employer/agency head who denies the application for
leave, and who shall prejudice the victim-survivor or any
person for assisting a co-employee who is a victim-survivor
under the Act shall be held liable for discrimination and
violation of R.A. 9262.
The provision of the Labor Code and the Civil Service Rules
and Regulations shall govern the penalty to be imposed on the
said employer/agency head.
Sick leave
13TH MONTH PAY
13th month pay law
All R&F to be given 13th month pay. All employers are
hereby required to pay all their rank and file employees a
13th-month pay not later than December 24 of every year.
Section 1 of PD 851 as emended by Memorandum Oder No.
28
• Employers already paying their employees a 13th-
month pay or its equivalent are not covered by this
Decree. Section 1 of PD 851
JO VALLES
SECURITY OF TENURE AND ENDO
Revised guidelines in the implementation of the 13th month
pay law
Removal of salary ceiling; all R&F who worked for at least
1 month during the calendar year. With the removal of the
salary ceiling of P1,000.00, all rank and file employees are now
entitled to a 13th month pay regardless of the amount of basic
salary that they receive in a month if their employers are not
otherwise exempted from the application of P.D. No. 851. Such
employees are entitled to the benefit
a. regardless of their designation or employment status,
and
b. irrespective of the method by which their wages are
paid,
provided that they have worked for at least one (1) month
during a calendar year. Section 1
Exempted employers. The following employers are still not
covered by P.D. No. 851:
a. The Government and any of its political subdivisions,
including government-owned and controlled
corporations, excepts those corporations operating
essentially as private subsidiaries of the Government;
b. Employers already paying their employees a 13th
month pay or more in a calendar year or its equivalent
at the time of this issuance;
c. Employers of household helpers and persons in the
personal service of another in relation to such workers;
and
d. Employers of:
a. those who are paid on purely commission,
boundary, or task basis, and
b. those who are paid a fixed amount for
performing specific work, irrespective of the
time consumed in the performance thereof,
except where the workers are paid on piece-rate
basis in which case the employer shall grant the
required 13th month pay to such workers. Section
2 workers"with at least one (1) year of continuous
74
ad majorem dei gloriam
Note: Under (a), check if the corporation has original charter.
If with original charter, treated as employed by government
corporation—not entitled to 13th month pay. If no original
charter, treated as employed by private corporation—entitled to
13th month pay.
Piece-rate basis. As used herein, workers paid on piece-rate
basis shall refer to those who are paid a standard amount for
every piece or unit of work produced that is more or less
regularly replicated, without regard to the time spent in
producing the same. Section 2
Or its equivalent meaning. It shall include:
1. Christmas bonus,
2. mid-year bonus,
3. cash bonuses and
4. other payments amounting to not less than 1/12 of the
basic salary
but shall NOT include
1. cash and stock dividends,
2. cost of living allowances and all other allowances
regularly enjoyed by the employee, as well as
3. non-monetary benefits.
Where an employer pays less than required 1/12th of the
employees’ basic salary, the employer shall pay the difference.
Section 2
• The grant of the equivalent must be unconditional.
In the CBA, the company agreed to grant all regular
workers within the bargaining unit, with at least one
year of continuous service, a Christmas bonus
equivalent to the regular wages for seven working
days. Company argued that the payment of the
Christmas bonus was in compliance with the 13th
month pay law. The SC rejected the argument and said
that the Christmas bonus provided in the collective
bargaining agreement accords a reward, in this case,
for loyalty, to certain employees. This is evident from
the stipulation granting the bonus in question to
service. This is a purpose not found in P.D.
851. Universal Corn Products vs NLRC
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Those who are not managerial employees are rank and file
employees. The Labor Code distinguishes a rank-and-file
employee from a managerial employee. It provides that a
managerial employee is one who is vested with powers or
prerogatives
a. to lay down and execute management policies and/or
b. to hire, transfer, suspend, lay-off, recall, discharge,
assign or discipline employees, or
c. to effectively recommend such managerial actions.
All employees not falling within this definition are considered
rank-and-file employees. The above distinction shall be used as
guide for the purpose of determining who are rank-and-file
employees entitled to the mandated 13th month pay. Section 3
Minimum of the amount; one- month salary plus integrated
COLA. The minimum 13th month pay required by law shall
not be less than one-twelfth of the total basic salary earned by
an employee within a calendar year. For the year 1987, the
computation of the 13th month pay shall include the cost of
living allowances (COLA) integrated into the basic salary of a
covered employee pursuant to Executive Order 178.
• E.O. No. 178 provides, among other things, that the
P9.00 of the daily COLA of P17.00 for non-
agricultural workers shall be integrated into the basic
pay of covered employees effective 1 May 1987, and
the remaining P8.00 effective 1 October 1987.
• For establishments with less than 30 employees and
paid-up capital of P500,000 or less, the integration of
COLAs shall be as follows: P4.50 effective on 1 May
1987; P4.50 on 1 October 1987; and P8.00 effective 1
January 1988. Thus, in the computation of the 13th
month pay for 1987, the COLAs integrated into the
basic pay shall be included as of the date of their
integration.
• Where the total P17.00 daily COLA was integrated
effective 1 May 1987 or earlier the inclusion of said
COLA as part of the of the basic pay for the purpose of
computing the 13th month pay shall be reckoned from
the date of actual integration. Section 4(a)
JO VALLES
SECURITY OF TENURE AND ENDO
Basic salary. The basic salary of an employee for the purpose
of computing the 13th month pay shall include all
remunerations or earning paid by this employer for services
rendered but does not include allowances and monetary
benefits which are not considered or integrated as part of the
regular or basic salary, such as the
1. cash equivalent of unused vacation and sick leave
credits,
2. overtime, premium, night differential and holiday pay,
and
3. cost-of-living allowances.
However, these salary-related benefits should be included as
part of the basic salary in the computation of the 13th month
pay if by
1. individual or collective agreement,
2. company practice or policy,
the same are treated as part of the basic salary of the employees.
Section 4(a)
Time of payment; not later than 12/24. The required 13th
month pay shall be paid not later than December 24 of each
year. An employer, however, may give to his employees one
half (½) of the required 13th month pay before the opening of
the regular school year and the other half on before the 24th of
December of every year. The frequency of payment of this
monetary benefit may be the subject of agreement between the
employer and the recognized/collective bargaining agent of the
employees. Section 4(b)
Employees paid by results. Employees who are paid on piece
work basis are by law entitled to the 13th month pay.
• Employees with fixed wage + commission.
Employees who are paid a fixed or guaranteed wage
plus commission are also entitled to the mandated 13th
month pay, based on their total earnings during the
calendar year, i.e., on both their fixed or guaranteed
wage and commission. Section 5(a)
• Section 5(a) Declared void in Boie-Takeda Chemicals
vs Dela Serna for having unduly expanded the concept
75
ad majorem dei gloriam
of "basic salary" as defined in P.D. 851 by including
commissions in the computation of the 13th month pay.
Those with multiple employers also entitled. Government
employees working part time in a private enterprise, including
private educational institutions, as well as employees working
in two or more private firms, whether on full or part time basis,
are entitled to the required 13th month pay from all their private
employers regardless of their total earnings from each or all
their employers. Section5(b)
Private school teachers. Private school teachers, including
faculty members of universities and colleges, are entitled to the
required 13th month pay, regardless of the number of months
they teach or are paid within a year, if they have rendered
service for at least one (1) month within a year. Section 5(c)
Resigned employees; pro-rate. An employee who has
resigned or whose services were terminated at any time before
the time for payment of the 13th month pay is entitled to this
monetary benefit in proportion to the length of time he worked
during the year, reckoned from the time he started working
during the calendar year up to the time of his resignation or
termination from the service. Thus, if he worked only from
January up to September his proportionate 13th month pay
should be equivalent of 1/12 his total basic salary he earned
during that period.
• Employee may demand. The payment of the 13th
month pay may be demanded by the employee upon
the cessation of employer-employee relationship. This
is consistent with the principle of equity that as the
employer can require the employee to clear himself of
all liabilities and property accountability, so can the
employee demand the payment of all benefits due him
upon the termination of the relationship. Section 6
Non-inclusion in regular wage. The mandated 13th month pay
need not be credited as part of regular wage of employees for
purposes of determining overtime and premium pays, fringe
benefits insurance fund, Social Security, Medicare and private
retirement plans. Section 7
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Prohibitions against reduction or elimination of benefits.
Nothing herein shall be construed to authorize any employer to
eliminate, or diminish in any way, supplements, or other
employee benefits or favorable practice being enjoyed by the
employee at the time of promulgation of this issuance. Section
8
Employees paid salaries + commissions; profit-sharing
payments are not commissions included as part of basic
salary. Additional payments made to employees, to the extent
they partake of the nature of profit-sharing payments, are
properly excluded from the ambit of the term basic salary for
purposes of computing the 13th month pay due to the
employees. Such additional payments are not commissions
within the meaning of the second paragraph of Section 5 (a) of
the Revised Guidelines Implementing 13th Month Pay. Boie-
Takeda Chemicals, Inc., vs. Hon. Dionisio de la Serna
Employees paid salaries + commissions; sales commission
of salesmen forming an integral part of basic salary
structure included in the computation of 13th month pay. In
this case, the SC held that the sales commissions were an
integral part of the basic salary of the employees, and should
therefore be included as part of the computation of the 13th
month pay because (1) the sales commissions received for
every duplicating machine sold constituted part of the basic
compensation or remuneration of the salesmen of Philippine
Duplicators for doing their job; (2) the portion of the salary
structure representing commissions simply comprised an
automatic increment to the monetary value initially assigned to
each unit of work rendered by a salesman; and (3) the fixed or
guaranteed portion of the wages paid to the Philippine
Duplicators' salesmen represented only 15%-30% of an
employee's total earnings in a year. These commissions are not
overtime payments, nor profit-sharing payments nor any other
fringe benefit. Philippine Duplicators, Inc. vs NLRC
• Discussion. This case is problematic because it makes
the payment of bonuses when the salary scheme
includes commissions, dependent on a percentage
basis. The problem is this, following PDI, when the
JO VALLES
SECURITY OF TENURE AND ENDO ad majorem dei gloriam SPBUS
employee earns more commissions than fixed salary are deemed not part of the basic pay is excluded as basis in the for cash payments must be taken to come in the nature of
(70% to 85% in this case), commission is considered computation of the mandatory bonus. Hence, payments for overriding commission, not sales commission. The latter is not
integrated as part of the basic salary and included in the a. sick, vacation or maternity leaves, properly includable in the basic salary as it must be earned by
computation of 13th month pay. If we take it to the b. premium for work done on rest days and special actual market transactions attributable to the claimant. The
extreme and the employee s paid on 100% commission holidays, including pay for regular holidays and night alleged commissions were profit-sharing payments and had no
basis, then the commission must be included in the differentials clear, direct or necessary relation to the amount of work he
computation of 13th month pay following the PDI are NOT included in the computation of 13th month pay. San actually performed. Philippine Spring Water vs Court of
ruling. But under the law, we see that those who are Miguel Corporation vs Inciong Appeals
paid on a commission basis are excluded from the
coverage of the 13th month pay law. Items not part of basic salary not included in 13th month Financial losses exempt a company from PD 851 only upon
pay; included if company practice or policy. Generally, authorization by DOLE Secretary. Petitioner cannot use the
Difference between Boie and PDI. In Boie, the commissions overtime pay, earnings, and other remuneration that are not part argument that it is suffering from financial losses to claim
were paid as productivity bonuses. In PDI, the commissions of the basic salary shall not be included in the computation of exemption from the coverage of the law on 13th-month pay, or
were an integral part of the salary structure of the employees. the 13th month pay. However, these salary-related benefits to spare it from its erroneous unilateral computation of the 13th-
The difference between productivity bonuses and sales should be included as part of the basic salary in the computation month pay of its employees. Under Section 7 of the Rules and
commissions are as follows: of the 13th-month pay if, by individual or collective agreement, Regulations Implementing P.D. No. 851, distressed employers
company practice or policy, the same are treated as part of the shall qualify for exemption from the requirement of the Decree
Productivity bonuses Sales Commissions basic salary of the employees. Here, the practice of petitioner only upon prior authorization by the Secretary of Labor. In this
Generally tied to the These are intimately related in giving 13th-month pay based on the employees' gross annual case, no such prior authorization has been obtained by
productivity or profit to or directly proportional to earnings which included the basic monthly salary, premium pay petitioner; thus, it is not entitled to claim such exemption.
generation of the employer the extent or energy of an for work on rest days and special holidays, night shift Central Azucarera de Tarlac vs Central Azucarera de Tarlac
corporation. employee's endeavors. differential pay and holiday pay continued for almost thirty (30) Labor Union-NL
years and has ripened into a company policy or practice which
Productivity bonuses are not Commissions are paid upon cannot be unilaterally withdrawn. Central Azucarera de Tarlac SERVICE CHARGES
directly dependent on the the specific results achieved vs Central Azucarera de Tarlac Labor Union-NLU
extent an individual by a salesman-employee. Labor Code, as amended by RA 11360
employee exerts himself. The drivers and conductors in this case are compensated on a
It is a percentage of the sales purely commission basis as described in their CBA, but should Article 96. Service Charges. All service charges collected by
A productivity bonus is closed by a salesman and said commission be less than their basic minimum for 8 hours hotels, restaurants and similar establishments shall be
something extra for which no operates as an integral part of work, they are entitled to the minimum pay required by law. distributed completely and equally among the covered workers
specific additional services such salesman's basic pay. The SC said that they are entitled to 13th month pay and that except managerial employees.
are rendered by any the13th month pay of the bus drivers and conductors who are
particular employee and paid a fixed or guaranteed minimum wage in case their SCs not considered compliance with MW increases. In the
hence not legally commissions be less than the statutory minimum, and event that the minimum wage is increased by law or wage
demandable, absent a commissions only in case where the same is over and above the order, service charges paid to the covered employees shall not
contractual undertaking to statutory minimum, must be equivalent to one-twelfth (1/12) of be considered in determining the employer's compliance with
pay it. their total earnings during the calendar year. Philippine the increased minimum wage.
Agricultural vs NLRC
Items not part of basic salary not included in 13 th month Grievance mechanism; conciliation. To facilitate resolution
pay; leaves and premium pay excluded. The basic salary of Overriding commissions not part of basic salary; not of any dispute between the management and the employees on
an employee is used as the basis in the determination of his related to work actually performed. Mahilum’s 0.25% the distribution of service charges, a grievance mechanism
13th-month pay. Any compensations or remunerations which commission based on the monthly sales and 0.25% commission shall be established. If no grievance mechanism is established

76 Last Edit: 23 December 2020 JO VALLES

SECURITY OF TENURE AND ENDO
or if inadequate, the grievance shall be referred to the regional
office of the Department of Labor and Employment which has
jurisdiction over the workplace for conciliation.
Managerial employees. For purposes of this Article,
managerial employees refer to any person vested with powers
or prerogatives to:
1. lay down and execute management policies or
2. hire, transfer, suspend, lay-off, recall, discharge, assign
or discipline employees or
3. to effectively recommend such managerial actions.
Discussion-FLJ; managerial staff share in SC. Note that
Article 96 is under Book III, Title I of the Labor Code. Under
82, managerial employees include officers and members of the
managerial staff. However, the members and officers of
managerial staff are no longer included in the definition of
managerial employees under latest law, RA 11360. Hence, they
are entitled to share in service charge distribution.
Labor Advisory 12-2019. Section 2. all employees who are
already receiving service charge prior to, or at the time of
effectivity of Republic Act No. 11360 and its IRR, including
contractor’s employees, shall continue to be entitled to the
distribution of collected service charge.
DO 206-19
Implementing Rules and Regulations of RA 11360
[new rule]
Section 1. Coverage. This Rule shall apply to all
establishments collecting service charges such as
a. hotels,
b. restaurants, and
c. other similar establishments including those entities
operating primarily as private subsidiaries of the
Government.
• Service charge. Service charge refers to the amount
that is added to the bill for work or service rendered.
Section 2(e)
77
ad majorem dei gloriam
• Other similar establishments. Other similar
establishments refer to those entities that collect
service charge for work or service rendered, such as,
but not limited to,
1. lodging houses,
2. night clubs,
3. cocktail lounges,
4. massage clinics,
5. bars,
6. casinos and gambling houses, and
7. sports clubs. Section 2(d)
Section 3. Distribution of Service Charges. All service
charges actually collected by covered establishments shall be
distributed completely and equally, based on actual hours or
days of work or service rendered, among the covered
employees, including those already receiving the benefit of
sharing in the service charges.
• Covered establishments. Covered establishments
refer to those that collect service charge for work or
service they offer. Section 2(b)
• Covered employees refer to all employees, except
managerial employees as defined herein, under the
direct employ of the covered establishment,
o regardless of their positions, designations or
employment status, and
o irrespective of the method by which their
wages are paid. Section 2(a)
• Managerial employees. Managerial employees refer
to any person vested with powers or prerogatives to lay
down and execute management policies or hire,
transfer, suspend, lay-off, recall, discharge, assign or
discipline employees or to effectively recommend such
managerial actions. Section 2(c)
Section 4. Frequency of Distribution. The shares referred to
herein shall be distributed and paid to the covered employees
not less than
Last Edit: 23 December 2020
SPBUS
1. once every two (2) weeks or
2. twice a month at intervals not exceeding sixteen (16)
days.
Section 5. Increase in Minimum Wage. In the event that the
minimum is increased by law or wage order, service charges
paid to the covered employees shall not be considered in
determining the covered establishment's compliance with the
increased minimum wage.
Section 6. Dispute Resolution. Any dispute or difference on
the distribution of service charges shall be settled through the
grievance machinery as provided in the Collective Bargaining
Agreement (CBA).
Conciliation if no grievance mechanism. In unorganized
establishments, where no grievance mechanism is established
or the grievance mechanism is inadequate, the grievance shall
be referred to the DOLE Regional Office which has jurisdiction
over the workplace, for conciliation.
Unresolved grievances shall be resolved in accordance with
existing rules and regulations on the visitorial and enforcement
power of the Secretary of Labor and Employment and his/her
duly authorized representatives.
Omnibus Rules Implementing the Labor Code
Rule VI; Service Charges
[old rule]
Section 1. Coverage. This rule shall apply only to
establishments collecting service charges such as
1. hotels,
2. restaurants,
3. lodging houses,
4. night clubs,
5. cocktail lounge,
6. massage clinics,
7. bars,
8. casinos and gambling houses, and
9. similar enterprises, including those entities operating
primarily as private subsidiaries of the Government.
JO VALLES
SECURITY OF TENURE AND ENDO
Section 2. Employees covered. This rule shall apply to all
employees of covered employers,
1. regardless of their positions, designations or
employment status, and
2. irrespective of the method by which their wages are
paid
except to managerial employees.
Managerial employee. As used herein, a managerial employee
shall mean one who is vested with powers or prerogatives
1. to lay down and execute management policies and/or
2. to hire, transfer, suspend, lay-off, recall, discharge,
assign, or discipline employees or
3. to effectively recommend such managerial actions.
All employees not falling within this definition shall be
considered rank-and-file employees.
Section 3. Distribution of service charges; 85-15. All service
charges collected by covered employers shall be distributed at
the rate of 85% for the employees and 15% for the
management.
• The 85% shall be distributed equally among the
covered employees.
• The 15% shall be for the disposition by management to
o answer for losses and breakages and
o distribution to managerial employees at the
discretion of the management in the latter case.
Section 4. Frequency of distribution. The shares referred to
herein shall be distributed and paid to the employees not less
than
1. once every two (2) weeks or
2. twice a month at intervals not exceeding sixteen (16)
days.
Section 5. Integration of service charges. In case the service
charges are abolished the share of covered employees shall be
considered integrated in their wages. The basis of the amount
to be integrated shall be the average monthly share of each
employee for the past twelve (12) months immediately
preceding the abolition of withdrawal of such charges.
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ad majorem dei gloriam
• Integration presupposes prior collection of service
charges and then termination thereof. In this case,
the CA found that the PPHI had not in fact been
collecting services charges on the specified
entries/transactions that we pointed out as either falling
under "negotiated contracts" and/or "special rates" or
did not involve a "sale of food, beverage, etc."
Accordingly, Article 96 of the Labor Code finds no
application in this case; the PPHI did not abolish or
terminate the implementation of any company policy
providing for the collection of service charges on
specified entries/transactions that could have otherwise
rendered it liable to pay an amount representing the
covered employees’ share in the alleged abolished
service charges. NUWHRAIN-APL-IUF vs Philippine
Plaza Holdings
Section 6. Relation to agreements. Nothing in this Rule shall
prevent the employer and his employees from entering into any
agreement with terms more favorable to the employees than
those provided herein or be used to diminish any benefit
granted to the employees under existing laws, agreement and
voluntary employer practice.
Section 7. This rule shall be without prejudice to existing,
future collective bargaining agreements.
Nothing in this rule shall be construed to justify the reduction
or diminution of any benefit being enjoyed by any employee at
the time of effectivity of this rule.
BURDEN OF PROOF
Minsola vs New City Builders
Burden of proof depends on monetary claim sought. In
determining the employee's entitlement to monetary claims, the
burden of proof is shifted from the employer or the employee,
depending on the monetary claim sought.
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1. Employer; salary + SIL + Holiday + 13th. In claims
for payment of salary differential, service incentive
leave, holiday pay and 13th month pay, the burden rests
on the employer to prove payment.
o This standard follows the basic rule that in all
illegal dismissal cases the burden rests on the
defendant to prove payment rather than on the
plaintiff to prove non-payment.
o This likewise stems from the fact that all
pertinent personnel files, payrolls, records,
remittances and other similar documents —
which will show that the differentials, service
incentive leave and other claims of workers
have been paid — are not in the possession of
the worker but are in the custody and control
of the employer.
2. Employee; OT + premium. for overtime pay,
premium pays for holidays and rest days, the burden is
shifted on the employee, as these monetary claims are
not incurred in the normal course of business.
o It is thus incumbent upon the employee to first
prove that he actually rendered service in
excess of the regular eight working hours a
day, and that he in fact worked on holidays and
rest days.
JO VALLES
TAXATION ad majorem dei gloriam SPBUS
2. Section C- capital gains on sale of shares not traded in Over 250, 000 but not 50, 000 + 30% of the excess
TAXATION the SE over 500, 000 over 250, 000
3. Section C- capital gains from sale of real property. Over 500, 000 125, 000 + 32% of the excess
over 500, 000
BASIC INCOME TAX ON INDIVIDUAL CITIZENS
Summary:
Kind of Income Income RR 8-2018, Section 3(A)
Individual citizens taxpayer within without January 1, 2018 until December 31, 2022
Section 24(A)(1)(a-c), as amended by RA 10963 Section 5 Resident Citizen √ √ Not over 250, 000 0%
Non-resident citizen √ x Over 250, 000 but not 15% in excess over 250, 000
(A) Rates of Income Tax on Individual Citizen and Overseas contract worker √ x over 400, 000
Individual, Resident Alien of the Philippines: Over 400, 000 but not 22, 500 + 20% of the excess over
Resident alien √ x
over 800,000 400, 000
(1) An income tax is hereby imposed:
Non-resident alien ETB √ x
Over 800, 000 but not 102, 500 + 25% of the excess
Non-resident alien NETB √ x over 2, 000, 000 over 800, 000
a. Resident citizen (RC) on income worldwide. On the Over 2, 000, 000 but not 402, 500 + 30% of the excess
taxable income defined in Section 31 of this Code, Graduated rates over 8, 000, 000 over 2, 000, 000
other than income subject to tax under Subsections (B), Section 24(A)(2)(a), as amended by RA 10963 Section 5 Over 8, 000, 000 2, 202, 500 + 35% of the excess
(C), and (D) of this Section, derived for each taxable over 8, 000, 000
year from all sources within and without the Graduated rates. AKA schedular tax rates or normal tax rates.
Philippines by every individual citizen of the • Jo: So every time I refer to 24(A)(2)(a), I am referring January 1, 2023:
Philippines residing therein; to the schedular tax rates. These rates do not include Not over 250, 000 0%
passive income, capital gains on sale of shares not Over 250, 000 but not 20% in excess over 250, 000
b. Non-resident citizen (NRC) on income within. On traded in the SE, and capital gains from sale of real over 400, 000
the taxable income defined in Section 31 of this Code, property. Over 400, 000 but not 30, 000 + 25% of the excess over
other than income subject to tax under Subsections (B), over 800,000 400, 000
(C), and (D) of this Section, derived for each taxable Rates of Tax on Taxable Income of Individuals. The tax shall Over 800, 000 but not 130, 000 + 30% of the excess
year from all sources within the Philippines by an be computed in accordance with and at the rates established in over 2, 000, 000 over 800, 000
individual citizen of the Philippines who is residing the following schedule: Over 2, 000, 000 but not 490, 000 + 32% of the excess
outside of the Philippines including overseas contract over 8, 000, 000 over 2, 000, 000
workers referred to in Subsection (C) of Section 23 Old Over 8, 000, 000 2, 410, 000 + 35% of the excess
hereof; and over 8, 000, 000
Not over 10, 000 5%
Over 10, 000 but not over 500 + 10% of the excess over
c. Resident alien (RA) on income without. On the
30, 000 10, 000 • Jo: Tax base. The tax base is the taxable income.
taxable income defined in Section 31 of this Code,
other than income subject to tax under Subsections (B),
(C), and (D) of this Section, derived for each taxable Married individuals
year from all sources within the Philippines by an Over 30, 000 but not over 2, 500 + 15% of the excess over
70, 000 30, 000 Section 24(A)(2)(a), as amended by RA 10963 Section 5
individual alien who is a resident of the Philippines.
Over 70, 000 but not over 8, 500 + 20% of the excess over
140, 000 70, 000 For married individuals. For married individuals, the husband
Items not covered: and wife, subject to the provision of Section 51 (D) hereof:
1. Section B- certain types of passive income Over 140, 000 but not 22, 500 + 25% of the excess
over 250, 000 over 140, 000
79 Last Edit: 23 December 2020 JO VALLES
TAXATION
1. Rule: separate computation. shall compute
separately their individual income tax based on their
respective total taxable income:
2. Divide if unidentifiable. Provided that if any income
cannot be definitely attributed to or identified as
income exclusively earned or realized by either of the
spouses, the same shall be divided equally between the
spouses for the purpose of determining their respective
taxable income.
Minimum wage earners
Section 24(A)(2)(a), as amended by RA 10963 Section 5
See more discussion under Special Tax Treatment of
Minimum Wage
Minimum wage earners. Minimum wage earners as defined
in Section 22(HH) of this Code shall be exempt from the
payment of income tax on their
1. taxable income
2. holiday pay
3. overtime pay
4. night shift differential pay and
5. hazard pay
Section 22(HH), as amended by RA 9504. Minimum wage
earners. The term minimum wage earner shall refer to
1. Private sector. a worker in the private sector paid the
statutory minimum wage, or
2. Public sector. to an employee in the public sector with
compensation income of not more than the statutory
minimum wage in the non-agricultural sector where
he/she is assigned.
Section 22(GG), as amended by RA 9504. Statutory
minimum wage. The term 'statutory minimum wage' earner
shall refer to rate fixed by the Regional Tripartite Wage and
Productivity Board, as defined by the Bureau of Labor and
Employment Statistics (BLES) of the Department of Labor and
Employment (DOLE)
Purely self-employed/professionals
Section 24(A)(2)(b); RR 8-2018
80
ad majorem dei gloriam
Those who do not exceed VAT threshold of 3M. Self-
employed individuals and/or professionals whose gross sales or
gross receipts and other non-operating income does not exceed
the VAT threshold as provided in section 109(bb) shall have
the option between:
1. graduated income tax rates under Subsection (A)(2)(a)
of Section 24; OR
2. to avail of an eight percent (8%) tax on gross sales or
gross receipts and other non-operating income in
excess of Two hundred fifty thousand pesos
(₱250,000)
Tax base
1. Graduated rates: net income
2. 8% income tax option: gross sales/receipts and
other non-operating income in excess of 250, 000.
8% income tax rate option is in lieu of the graduated rate.
A taxpayer who signifies the intention to avail of the 8%
income tax rate option and is qualified for said option shall
compute the final annual income tax due based on the actual
annual gross sales/receipts and other non-operating income,
which shall be in lieu of the graduated income tax rates.
• Sample computation of taxable income under the
second option. If A is a purely self-employed and has
gross sales of P800, 000 from her convenience store
and gross receipts of P200, 000 from her private
practice of law, her taxable income is P750, 000
computed as follows:
Gross Sales 800,000
Gross Receipts 200, 000
Total Sales/Receipts 1, 000, 000
Less: Allowable deduction* 250, 000
Taxable Income 750, 000
*Note. The law says gross sales/receipts in excess of
P250, 000.
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SPBUS
What happens when a taxpayer is initially qualified for the
8% option but subsequently exceeds the 3M VAT threshold
during the year? A taxpayer shall automatically be subject to
the graduated rates even if the flat 8% income tax rate option is
initially selected, when taxpayer's gross sales/receipts and other
non-operating income exceeded the VAT threshold during the
taxable year. In such case, his income tax shall be computed
under the graduated income tax rates and shall be allowed a tax
credit for the previous quarter/s income tax payment/s under
the 8% income tax rate option.
Option not available to VAT-registered taxpayer, those
subject to OPT, and partners of GPP. The option to be taxed
at 8% income tax rate is not available to:
1. a VAT-registered taxpayer, regardless of the amount of
gross sales/receipts,
2. a taxpayer who is subject to Other Percentage Taxes
under Title V of the Tax Code, as amended, except
those subject under Section 116 of the same Title; and
to
3. Partners of a General Professional Partnership (GPP)
by virtue of their distributive share from GPP which is
already net of cost and expenses cannot avail of the 8%
income tax rate option.
Presumption of election of graduated rates; irrevocable for
the taxable year. Unless the taxpayer signifies the intention to
elect the 8% income tax rate in the 1st Quarter Percentage and/or
lncome Tax Return, or on the initial quarter return of the taxable
year after the commencement of a new business/practice of
profession, the taxpayer shall be considered as having availed
of the graduated rates. Such election shall be irrevocable and
no amendment of option shall be made for the said taxable year.
Mixed income earners
Section 24(A)(2)(c); RR 8-2018
Taxpayers earning both compensation income and income from
business or practice of profession shall be subject to the
following taxes:
JO VALLES
TAXATION ad majorem dei gloriam SPBUS
1. All Income from Compensation. The compensation 2. Tax due from self-employment/practice of profession Interests, royalties, prizes, and other winnings
income shall be subject to graduated income tax rates
prescribed under Subsection (A)(2)(a) of this Section. If they opt to be taxed under the graduated tax rates, they Type of passive income RC, NRA- NRA-
AND shall combine the taxable income from both compensation and NRC, ETB NETB
2. All Income from Business or Practice of Profession. business/practice of profession in computing for the total RA
If total gross sales and/or gross receipts and other non- taxable income and consequently, the income tax due. Interest under expanded 15% Exempt Exempt
operating income FCD system Now
a. Do not exceed the VAT Threshold as Q25. What tax rates are applicable for individuals who are - only for residents (NRC:
Provided in Section 109(BB) of this Code. earning income from both compensation and Exempt)
i. Graduated tax rates under Subsection self/employment (business or practice of profession)? Royalty: 10% 10%; 25%
(A)(2)(a) of this Section on taxable Compensation income shall be subject to the graduated income a. books, except
income [for both compensation and tax rates under Section 24 (A) (2) (a) of the Tax Code, as b. literary works, cinema-
profession], OR amended. The income from business or practice of a profession c. musical tograph
ii. 8% income tax based on gross sales or shall be subject to the graduated income tax rates or if qualified, compositions
gross receipts and other non-operating at taxpayer's option, be subject to the 8% income tax rate based Royalty: others 20% 20% 25%
income in lieu of the graduated on gross sales/receipts. Revenue Memorandum Circular No. Interest on any: 20% 20% 25%
income tax rates under Subsection 050-18 (May 11, 2018) a. current bank
(A)(2)(a) of this Section and the deposit,
percentage tax under Section 116 of Tax on certain passive income b. yield or
this Code. c. other monetary
b. Exceed the VAT Threshold as Provided in Some principles benefits from
Section 109(BB) of this Code. The rates deposit
prescribed under Subsection (A)(2)(a) of this Passive income within; final tax. The income sources referred substitute, trust
Section. to by the Tax Code, which are subjected to the final tax rates fund, or other
below, are those derived within the PH. similar
250, 000 deduction not available to mixed income earners; arrangements
only to purely self-employed individuals or professionals. Discussion (Atty. Montero); income subject to final Prizes exceeding 10, 000 20% 20% 25%
The provision under Section 24(A)(2)(b) of the Tax Code, as tax no longer included in gross income. These
- prizes 10, 000
amended, which allows an option of 8% income tax rate on passive incomes subject to final withholding tax are no
and below are
gross sales/receipts and other non-operating income in excess longer included in the computation of the income of the subject to the
of P250,000.00 is available only to purely self-employed taxpayer subject to the graduated rates.
schedular tax
individuals and/or professionals. rate
Passive income without. The treatment differs on the taxpayer:
Other winnings 20% 20% 25%
• Rationale for the rule. The 250, 000 is already a. Resident citizens- passive income from outside the PH
- PCSO and lotto no lotto
incorporated in the first tier of the graduated income by resident citizens forms part of the gross income and
are exempt to exemption
tax rates applicable to compensation income. are subject to the graduated tax rates
the extent of 10,
b. Others- passive income sourced outside the PH are not
000. In excess,
Total tax due for mixed income earners taxable in the PH
subject to 20%
FwTx
If they elect to be taxed under the 8% income tax rate. The Section 24(B)(1); Section 25(A)(2); Section 25(B);
Interest on LT deposit or Exempt 25%
total tax due shall be the sum of: RR 14-2012
investment in banks
1. Tax due from compensation (graduated rates)
81 Last Edit: 23 December 2020 JO VALLES
TAXATION ad majorem dei gloriam SPBUS
(with maturity of 5 years (5) days to cover deficiency in reserves against deposit 5. on the share of an individual in the distributable net
or more) liabilities, including those between or among banks income after tax of a partnership (except a general
and quasi-banks, shall not be considered as deposit professional partnership) of which he is a partner, or
Long-term deposits; when taxable. In case of pre-termination substitute debt instruments. RR 14-2012 6. on the share of an individual in the income after tax of
before the 5th year, final tax shall be imposed on the entire an association, a joint account, or a joint venture or
income and shall be deducted and withheld by the depository Cash and/or property dividends consortium taxable as a corporation of which he is a
bank from the proceeds based on the remaining maturity Section 24(B)(2); Section 25(A)(2) member or co-venturer.
thereof:
Type of passive income RC, NRA- NRA- Capital gains tax on sales of untraded shares
4 years to less than 5 years 5% NRC, ETB NETB Section 24(C); Section 25(A)(3); Section 7, RR 6-2008
3 years to less than 4 years 12% RA
Less than 3 years 20% Dividend from a domestic 10% 20% 25% 15% on NCG for the year. The provisions of Section 39(B)
corporation, or from a joint notwithstanding, a final tax at the rate of fifteen percent (15%)
stock company, insurance is hereby imposed upon the net capital gains realized during the
Discussion: prizes vs winnings. Winnings pertain to games of
or mutual fund company, taxable year from the
chances such as gambling in casinos; prizes refer to those
and regional operating HQ 1. sale,
earned when participating in activities such as a competition or
of MNC or share in the 2. barter,
raffle draw.
distributive NI after tax of 3. exchange or
• Basically, it’s more on the effort you put into earning
a partnership (except GPP), 4. other disposition
the income.
joint stock or JV or of shares of stock in a domestic corporation, except shares sold,
consortium taxable as a or disposed of through the stock exchange.
Deposit substitutes. This means:
corporation
1. an alternative from of obtaining funds from the public Capital gains tax on sale of real property
(the term 'public' means borrowing from twenty (20) Dividend from foreign RC: Not Not
corporation Schedular taxable taxable Section 24(D); Section 25(A)(3); RR 8-1998
or more individual or corporate lenders at any one
time) on on
NRC & income income Summary.
2. other than deposits,
3. through the issuance, endorsement, or acceptance of RA: Not WO WO
taxable General rule: capital gains presumed, CGT to be paid.
debt instruments for the borrower’s own account, for Since the tax base is the higher between the GSP and the CMV,
the purpose of relending or purchasing of receivables income
WO it follows that capital gains are presumed. CGT is to be paid
and other obligations, or financing their own needs or regardless of WON the transaction results to a gain.
the needs of their agent or dealer.
Tax base. Cash or property dividends actually or constructively
received. On sale of real property in the PH held as a capital asset
• These instruments may include, but need not be limited Sale of real property in the 6% of the gross selling price, or
to bankers' acceptances, promissory notes, repurchase What codal says. A final tax at the rate of ten percent (10%)
shall be imposed upon the cash and/or property dividends PH the current market value at the
agreements, including reverse repurchase agreements time of sale, whichever is
entered into by and between the BSP and any actually or constructively received by an individual from a
1. domestic corporation or higher
authorized agent bank, certificates of assignment or If the sale was made to the Either:
participation and similar instruments with recourse: 2. from a joint stock company,
3. insurance or mutual fund companies and government or GOCCs - 6% of the GSP or CMV
4. regional operating headquarters of multinational or
• Maturity must be at least 5 days for interbank calls. - Normal income tax rate
companies, or
Provided, however, That debt instruments issued for At the option of the taxpayer
interbank call loans with maturity of not more than five
82 Last Edit: 23 December 2020 JO VALLES
TAXATION
Exception: CGT need not be paid at all or partially in case
of sale, exchange or disposition of a principal residence.
• Principal residence. This is the dwelling house, where
the husband or wife of unmarried individual resides;
actual occupancy is not interrupted or abandoned by
temporary absence due to travel, studies, or work
abroad. If the ownership of the land and the dwelling
house belong to different persons, only the dwelling
house shall be treated as the principal residence
• Not necessarily the family home. The residential
address shown in the latest income tax return filed by
the vendor/transferor immediately preceding the date
of sale of said real property shall be treated, for
purposes of these Regulations, as a conclusive
presumption about his true residential address, the
certification of the Barangay Chairman, or Building
Administrator (in case of condominium unit), to the
contrary notwithstanding, in accordance with the
doctrine of admission against interest or the principle
of estoppel. RR 14-2000
(1) In General. The provisions of Section 39(B)
notwithstanding, a final tax of six percent (6%) based on the
gross selling price or current fair market value as determined in
accordance with Section 6(E) of this Code, whichever is higher,
is hereby imposed upon capital gains presumed to have been
realized from the
1. sale,
2. exchange, or
3. other disposition
of real property located in the Philippines, classified as capital
assets, including pacto de retro sales and other forms of
conditional sales, by individuals, including estates and trusts:
Sale to GOCC. Provided, That the tax liability, if any, on gains
from sales or other dispositions of real property to the
government or any of its political subdivisions or agencies or
to government-owned or controlled corporations shall be
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ad majorem dei gloriam
determined either under Section 24 (A) or under this
Subsection, at the option of the taxpayer.
Requisites for application of this provision
1. There is a sale, exchange, or other disposition of
real property
2. located in the Philippines,
3. classified as capital assets
(2) Exception. The provisions of paragraph (1) of this
Subsection to the contrary notwithstanding, capital gains
presumed to have been realized from the sale or disposition of
their principal residence by natural persons, the proceeds of
which is fully utilized in acquiring or constructing a new
principal residence within eighteen (18) calendar months from
the date of sale or disposition, shall be exempt from the capital
gains tax imposed under this Subsection: Provided, That the
historical cost or adjusted basis of the real property sold or
disposed shall be carried over to the new principal residence
built or acquired: Provided, further, That the Commissioner
shall have been duly notified by the taxpayer within thirty (30)
days from the date of sale or disposition through a prescribed
return of his intention to avail of the tax exemption herein
mentioned: Provided, still further, That the said tax exemption
can only be availed of once every ten (10) years: Provided,
finally, that if there is no full utilization of the proceeds of sale
or disposition, the portion of the gain presumed to have been
realized from the sale or disposition shall be subject to capital
gains tax. For this purpose, the gross selling price or fair market
value at the time of sale, whichever is higher, shall be
multiplied by a fraction which the unutilized amount bears to
the gross selling price in order to determine the taxable portion
and the tax prescribed under paragraph (1) of this Subsection
shall be imposed thereon.
When CGT need not be paid. The following requisites must
be complied with based on Section 24(D):
1. Proceeds FULLY utilized
2. in acquiring or constructing a new principal residence
3. within eighteen (18) calendar months from the date of
sale or disposition
Last Edit: 23 December 2020
SPBUS
4. historical cost or adjusted basis of the real property sold
or disposed shall be carried over to the new principal
residence built or acquired
5. the Commissioner shall have been duly notified by the
taxpayer within thirty (30) days from the date of sale
or disposition through a prescribed return of his
intention to avail of the tax exemption
6. the CGT otherwise due must be deposited in escrow
with an authorized agent bank, and can only be released
when sufficient proof is shown that the proceeds had
been fully utilized within 18 months. RR 13-1999
7. the said tax exemption can only be availed of once
every ten (10) years
When only a part of the CGT is to be paid. If there is no full
utilization of the proceeds of sale or disposition, the portion of
the gain presumed to have been realized from the sale or
disposition shall be subject to capital gains tax.
• Computation of tax base of 6%. The 6% capital gains
tax shall be based on the following amount.
𝑼𝒏𝒖𝒕𝒊𝒍𝒊𝒛𝒆𝒅 𝒑𝒐𝒓𝒕𝒊𝒐𝒏 𝒐𝒇 𝑮𝑺𝑷
𝑻𝒂𝒙 𝒃𝒂𝒔𝒆 = 𝑮𝑺𝑷/𝑪𝑴𝑽 𝒙
𝑮𝒓𝒐𝒔𝒔 𝒔𝒆𝒍𝒍𝒊𝒏𝒈 𝒑𝒓𝒊𝒄𝒆
CGT return and payment of CGT. The Capital Gains Tax
(CGT) Return will be filed by the seller within 30 days
following each sale or disposition of real property. Payment of
the CGT will be made to an Authorized Agent Bank (AAB)
located within the Revenue District Office (RDO) having
jurisdiction over the place where the property being transferred
is located. RR 8-98
Some rules:
1. Transfers based on dissolution of community property
not subject to CGT. BIR Ruling No. DA 029-08
2. Transfers based on duly approved compromise
agreement subject to CGT. BIR Ruling No. 423-16
3. Transfer from trustee to trustor not subject to CGT. BIR
Ruling No. 445-16
JO VALLES
TAXATION ad majorem dei gloriam
4. Exercise of right of redemption not subject to CGTRR 4. Compensation for injuries or sickness
4-99 5. Income exempt under treaty
5. Extra-judicial foreclosure subject to CGT. RR 4-99 6. Retirement benefits, pensions, gratuities
7. Miscellaneous items
GROSS INCOME INCLUSIONS
Life Insurance. The proceeds of life insurance policies paid
Section32(A)
to the heirs or beneficiaries upon the death of the insured,
Gross Income. General Definition. Except when otherwise whether in a single sum or otherwise,
provided in this Title, gross income means all income derived • but if such amounts are held by the insurer under an
from whatever source, including (but not limited to) the agreement to pay interest thereon, the interest
following items: payments shall be included in gross income.
1. Compensation for services in whatever form paid,
including, but not limited to: Amount Received by Insured as Return of Premium. The
a. fees, amount received by the insured, as a return of premiums paid
b. salaries, by him under life insurance, endowment, or annuity contracts,
c. wages, either during the term or at the maturity of the term mentioned
d. commissions, and in the contract or upon surrender of the contract.
e. similar items;
2. Gross income derived from the conduct of trade or Gifts, Bequests, and Devises. The value of property acquired
business or the exercise of a profession; by gift, bequest, devise, or descent:
3. Gains derived from dealings in property; • Provided, however, That income from such property,
4. Interests; as well as gift, bequest, devise or descent of income
5. Rents; from any property, in cases of transfers of divided
6. Royalties; interest, shall be included in gross income.
7. Dividends;
8. Annuities; Compensation for Injuries or Sickness. Amounts received,
9. Prizes and winnings; through Accident or Health Insurance or under Workmen's
10. Pensions; and Compensation Acts, as compensation for personal injuries or
11. Partner's distributive share from the net income of the sickness, plus the amounts of any damages received, whether
general professional partnership. by suit or agreement, on account of such injuries or sickness.
GROSS INCOME EXCLUSIONS Income Exempt under Treaty. Income of any kind, to the
Section 32 (B) extent required by any treaty obligation binding upon the
Government of the Philippines.
Exclusions from gross income. The following items shall not
be included in gross income and shall be exempt from taxation Retirement Benefits, Pensions, Gratuities, etc.
under this title: a. Retirement benefits received under Republic Act No.
1. Life insurance
7641 and those received by officials and employees of
2. Amount received by insured as return of premium
private firms, whether individual or corporate, in
3. Gifts, bequests, and devises
84 Last Edit: 23 December 2020
SPBUS
accordance with a reasonable private benefit plan
maintained by the employer: Provided,
i. That the retiring official or employee has been
in the service of the same employer for at least
ten (10) years and
ii. is not less than fifty (50) years of age at the
time of his retirement:
iii. Provided, further, That the benefits granted
under this subparagraph shall be availed of by
an official or employee only once.
For purposes of this Subsection, the term 'reasonable
private benefit plan' means a pension, gratuity, stock
bonus or profit-sharing plan maintained by an
employer for the benefit of some or all of his officials
or employees, wherein
i. contributions are made by such employer for
the officials or employees, or both,
ii. for the purpose of distributing to such officials
and employees the earnings and principal of
the fund thus accumulated, and
iii. wherein it is provided in said plan that at no
time shall any part of the corpus or income of
the fund be used for, or be diverted to, any
purpose other than for the exclusive benefit of
the said officials and employees.
b. Any amount received by an official or employee or by
his heirs from the employer as a consequence of
separation of such official or employee from the
service of the employer because of death, sickness or
other physical disability or for any cause beyond the
control of the said official or employee.
c. The provisions of any existing law to the contrary
notwithstanding, social security benefits, retirement
gratuities, pensions and other similar benefits received
by resident or nonresident citizens of the Philippines
or aliens who come to reside permanently in the
Philippines from foreign government agencies and
other institutions, private or public.
JO VALLES
TAXATION
d. Payments of benefits due or to become due to any
person residing in the Philippines under the laws of the
United States administered by the United States
Veterans Administration.
e. Benefits received from or enjoyed under the Social
Security System in accordance with the provisions of
Republic Act No. 8282.
f. Benefits received from the GSIS under Republic Act
No. 8291, including retirement gratuity received by
government officials and employees.
Miscellaneous Items
a. Income Derived by Foreign Government. Income
derived from investments in the Philippines in loans,
stocks, bonds or other domestic securities, or from
interest on deposits in banks in the Philippines by
i. foreign governments,
ii. financing institutions owned, controlled, or
enjoying refinancing from foreign
governments, and
iii. international or regional financial institutions
established by foreign governments.
b. Income Derived by the Government or its Political
Subdivisions. Income derived from any public utility
or from the exercise of any essential governmental
function accruing to the Government of the Philippines
or to any political subdivision thereof.
c. Prizes and Awards. Prizes and awards made primarily
in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement but
only if:
i. The recipient was selected without any
action on his part to enter the contest or
proceeding; and
85
ad majorem dei gloriam
ii. The recipient is not required to render
substantial future services as a condition to
receiving the prize or award.
d. Prizes and Awards in sports Competition. All prizes
and awards granted to athletes in local and
international sports competitions and tournaments
whether held in the Philippines or abroad and
sanctioned by their national sports associations.
e. 13th Month Pay and Other Benefits. Gross benefits
received by officials and employees of public and
private entities: Provided, however, That the total
exclusion under this subparagraph shall not exceed
₱90,000* which shall cover:
i. Benefits received by officials and employees
of the national and local government pursuant
to Republic Act No. 6686;
ii. Benefits received by employees pursuant to
Presidential Decree No. 851, as amended by
Memorandum Order No. 28, dated August 13,
1986;
iii. Benefits received by officials and employees
not covered by Presidential Decree No. 851, as
amended by Memorandum Order No. 28,
dated August 13,1986; and
iv. Other benefits such as productivity incentives
and Christmas bonus: Provided, That every
three (3) years after the effectivity of this Act,
the President of the Philippines shall adjust the
amount herein stated to its present value using
the Consumer Price Index (CPI), as published
by the National Statistics Office (NSO).*
*as amended by RA 10653, July 28, 2014 [previously P82,000]
FRINGE BENEFIT TAXES
Rank and file employees. The term rank and file employees
shall mean all employees who are holding neither managerial
nor supervisory position as defined under existing provisions
Last Edit: 23 December 2020
SPBUS
of the Labor Code of the Philippines, as amended. Section 22
(AA); RR 8-2018, Section 2(m)
Trade, business, or profession. The term “trade, business, or
profession” shall not include performance of services by the
taxpayer as an employee. Section 22 (CC)
Section 33
Special Treatment of Fringe Benefit
(A) Imposition of Tax; 35% on GUMV. Effective January 1,
2018 and onwards, a final tax of thirty-five percent (35%) is
hereby imposed on the grossed-up monetary value of fringe
benefit furnished or granted to the employee
• except rank and file employees as defined herein by the
employer, whether an individual or a corporation
unless the fringe benefit is
1. required by the nature of, or necessary to the trade,
business or profession of the employer, or
2. when the fringe benefit is for the convenience or
advantage of the employer.
The tax herein imposed is payable by the employer which tax
shall be paid in the same manner as provided for under Section
57(A) of this Code. The grossed-up monetary value of the
fringe benefit shall be determined by dividing the actual
monetary value of the fringe benefit by sixty five percent (65%)
effective January 1, 2018 and onwards: Provided, however,
That fringe benefit furnished to employees and taxable under
Subsections (B), (C), (D), and (E) of Section 25 shall be taxed
at the applicable rates imposed thereat: Provided, further, That
the grossed-up value of the fringe benefit shall be determined
by dividing the actual monetary value of the fringe benefit by
the difference between one hundred percent (100%) and the
applicable rates of income tax under Subsections (B), (C), (D),
and (E) of Section 25.
(B) Fringe benefit defined. Fringe benefit means any good,
service or other benefit furnished or granted in cash or in kind
by an employer to an individual employee (except rank and file
employees as defined herein) such as, but not limited to, the
following:
JO VALLES
TAXATION
1. Housing;
2. Expense account;
3. Vehicle of any kind;
4. Household personnel, such as maid, driver and others;
5. Interest on loan at less than market rate to the extent of
the difference between the market rate and actual rate
granted;
6. Membership fees, dues and other expenses borne by
the employer for the employee in social and athletic
clubs or other similar organizations;
7. Expenses for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his
dependents; and
10. Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law
allows.
Discussion (Montero). This list is not exclusive. For
instance, a share option to purchase shares at 300 where the
shares cost 700 can be considered a fringe benefit.
(C) Fringe benefits not taxable. The following fringe benefits
are not taxable under this Section:
1. fringe benefits which are authorized and exempted
from tax under special laws;
2. Contributions of the employer for the benefit of the
employee to retirement, insurance and hospitalization
benefit plans;
3. Benefits given to the rank and file employees, whether
granted under a collective bargaining agreement or not;
and
4. De minimis benefits as defined in the rules and
regulations to be promulgated by the Secretary of
Finance, upon recommendation of the Commissioner.
The Secretary of Finance is hereby authorized to promulgate,
upon recommendation of the Commissioner, such rules and
regulations as are necessary to carry out efficiently and fairly
the provisions of this Section, taking into account the peculiar
nature and special need of the trade, business or profession of
the employer.
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fringe benefit by the following percentages and in accordance
RR 3-98 with the following schedule:
Effective January 1, 1998 - 66%
Summary of rates Effective January 1, 1999 - 67%
General Rule 35% Effective January 1, 2000 - 68%
NRA-NETB 25% The grossed-up monetary value of the fringe benefit represents
R(O/A)HQ, OBUs, foreign petroleum 15% the whole amount of income realized by the employee which
(sub)contractor includes the net amount of money or net monetary value of
SEZs 25% property which has been received plus the amount of fringe
benefit tax thereon otherwise due from the employee but paid
(A) Imposition of Fringe Benefits Tax by the employer for and in behalf of his employee, pursuant to
the provisions of this Section.
A final withholding tax is hereby imposed on the grossed-up
monetary value of fringe benefit furnished, granted or paid by Coverage; managerial and supervisory. These Regulations
the employer to the employee, except rank and file employees shall cover only those fringe benefits given or furnished to
as defined in these Regulations, whether such employer is an managerial or supervisory employees and not to the rank and
individual, professional partnership or a corporation, file.
regardless of whether the corporation is taxable or not, or
the government and its instrumentalities except when: Rank and file employees. The term rank and file employees
1. the fringe benefit is required by the nature of or means all employees who are holding neither managerial nor
necessary to the trade, business or profession of the supervisory position.
employer; or
2. when the fringe benefit is for the convenience or • Managerial employees. The Labor Code of the
advantage of the employer. Philippines, as amended, defines "managerial
employee" as one who is vested with powers or
Rates. The fringe benefit tax shall be imposed at the following prerogatives to lay down and execute management
rates: policies and/or to hire, transfer, suspend, lay-off, recall,
Effective January 1, 1998 - 34% discharge, assign or discipline employees.
Effective January 1, 1999 - 33%
Effective January 1, 2000 - 32% • Supervisory employees. Supervisory employees are
those who, in the interest of the employer, effectively
Final; withheld and paid quarterly. The tax imposed under recommend such managerial actions if the exercise of
Sec. 33 of the Code shall be treated as a final income tax on the such authority is not merely routinary or clerical in
employee which shall be withheld and paid by the employer on nature but requires the use of independent judgment.
a calendar quarterly basis as provided under Sec. 57 (A)
(Withholding of Final Tax on certain Incomes) and Sec. 58 A Do not include those benefits part of compensation.
(Quarterly Returns and Payments of Taxes Withheld) of the Moreover, these regulations do not cover those benefits
Code. properly forming part of compensation income subject to
withholding tax on compensation in accordance with Revenue
GUMV. The grossed-up monetary value of the fringe benefit Regulations No. 2-98.
shall be determined by dividing the monetary value of the
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TAXATION
• Fringe benefits which have been paid prior to January
1, 1998 shall not be covered by these Regulations.
Determination of the Amount Subject to the Fringe Benefit
Tax. In general, the computation of the fringe benefits tax
would entail
a. valuation of the benefit granted and
b. determination of the proportion or percentage of the
benefit which is subject to the fringe benefit tax.
• That the Tax Code allows for the cases where only a
portion (i.e. less than 100 per cent) of the fringe benefit
is subject to the fringe benefit tax is clearly stated in
Section 33 (a) of R.A. 8424 which stipulates that fringe
benefits which are "required by the nature of, or
necessary to the trade, business or profession of the
employer, or when the fringe benefit is for the
convenience or advantage of the employer" are not
subject to the fringe benefit tax.
Joint benefits to employer and employee; prorate. Thus, in
cases where the fringe benefits entail joint benefits to the
employer and employee, the portion which shall be subject to
the fringe benefits tax and the guidelines for the valuation of
fringe benefits are defined under these rules and regulations.
Valuation. Unless otherwise provided in these regulations, the
valuation of fringe benefits shall be 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 as determined in accordance with Sec. 6
(E) of the Code (Authority of the Commissioner to
Prescribe Real Property Values).
3. If the fringe benefit is granted or furnished by the
employer in property other than money but ownership
is not transferred to the employee, the value of the
fringe benefit is equal to the depreciation value of the
property.
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NRA-NETB; 25%. Taxation of fringe benefit received by a
non-resident alien individual who is not engaged in trade or
business in the Philippines. A fringe benefit tax of twenty-five
percent (25%) shall be imposed on the grossed-up monetary
value of the fringe benefit. The said tax base shall be computed
by dividing the monetary value of the fringe benefit by seventy-
five per cent (75%).
R(O/A)HQ, OBUs, petroleum; 15%. Taxation of fringe
benefit received by
1. an alien individual employed by regional or area
headquarters of a multinational company or by regional
operating headquarters of a multinational company;
2. an alien individual employed by an offshore banking
unit of a foreign bank established in the Philippines;
3. an alien individual employed by a foreign service
contractor or by a foreign service subcontractor
engaged in petroleum operations in the Philippines;
and
4. any of their Filipino individual employees who are
employed and occupying the same position as those
occupied or held by the alien employees.
A fringe benefit tax of fifteen per cent (15%) shall be imposed
on the grossed-up monetary value of the fringe benefit. The said
tax base shall be computed by dividing the monetary value of
the fringe benefit by eighty-five per cent (85%).
SEZs; 25%. Taxation of fringe benefit received by employees
in special economic zones. Fringe benefits received by
employees in special economic zones, including Clark Special
Economic Zone and Subic Special Economic and Free Trade
Zone, are also covered by these regulations and subject to the
normal rate of fringe benefit tax or the special rates of 25% or
15% as provided above.
(B) Definition of Fringe Benefit
In general, except as otherwise provided under these
regulations, for purposes of this Section, the term "FRINGE
BENEFIT" means any good, service, or other benefit furnished
or granted by an employer in cash or in kind, in addition to basic
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salaries, to an individual employee (except rank and file
employee as defined in these regulations) such as, but not
limited to the following:
1. Housing;
2. Expense account;
3. Vehicle of any kind;
4. Household personnel, such as maid, driver and others;
5. Interest on loan at less than market rate to the extent of
the difference between the market rate and actual rate
granted;
6. Membership fees, dues and other expenses borne by
the employer for the employee in social and athletic
clubs or other similar organizations;
7. Expenses for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his
dependents; and
10. Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law
allows.
For this purpose, the guidelines for valuation of specific types
of fringe benefits and the determination of the monetary value
of the fringe benefits are give below. The taxable value shall be
the grossed-up monetary value of the fringe benefit.
Note: Same with RR 8-2018, Section 2(f)
(1) Housing privilege
Lease of residential property; paid rent x 50%. If the
employer leases a residential property for the use of his
employee and the said property is the usual place of residence
of the employee, the value of the benefit shall be the amount of
rental paid thereon by the employer, as evidenced by the lease
contract. The monetary value of the fringe benefit shall be fifty
per cent (50%) of the value of the benefit.
Employer owns and assigns it to employee; 5% of higher
between MV as declared in the TD or ZV x 50%. If the
employer owns a residential property and the same is assigned
for the use of his employee as his usual place of residence, the
JO VALLES
TAXATION
annual value of the benefit shall be five per cent (5%) of the
market value of the land and improvement, as declared in the
Real Property Tax Declaration Form, or zonal value as
determined by the Commissioner pursuant to Section 6(E) of
the Code (Authority of the Commissioner to Prescribe Real
Property Values), whichever is higher. The monetary value of
the fringe benefit shall be fifty per cent (50%) of the value of
the benefit.
The monetary value of the housing fringe benefit is equivalent
to the following:
MV = [5% (FMV or ZONAL VALUE] X 50%
MV = monetary value
FMV = fair market value
Purchases on installment and lets employee use; 5% of
acquisition cost x 50%. If the employer purchases a residential
property on installment basis and allows his employee to use
the same as his usual place of residence, the annual value of the
benefit shall be five per cent (5%) of the acquisition cost,
exclusive of interest. The monetary value of fringe benefit shall
be fifty per cent (50%) of the value of the benefit.
Employer purchases and transfers ownership to -EE;
acquisition cost or ZV x 100%. If the employer purchases a
residential property and transfers ownership thereof in the
name of the employee, the value of the benefit shall be the
employer's acquisition cost or zonal value as determined by the
Commissioner pursuant to Section 6(E) of the Code (Authority
of the Commissioner to Prescribe Real Property Values),
whichever is higher. The monetary value of the fringe benefit
shall be the entire value of the benefit.
Employer purchases and transfers ownership at discounted
price; higher between AC and ZV less cost to employee x
100%. If the employer purchases a residential property and
transfers ownership thereof to his employee for the latter's
residential use, at a price less than the employer's acquisition
cost, the value of the benefit shall be the difference between the
fair market value, as declared in the Real Property Tax
Declaration Form, or zonal value as determined by the
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Commissioner pursuant to Sec. 6(E) of the Code (Authority of
the Commissioner to Prescribe Real Property Values),
whichever is higher, and the cost to the employee. The
monetary value of the fringe benefit shall be the entire value of
the benefit.
Housing privilege of military not subject to FBT. Housing
privilege of military officials of the Armed Forces of the
Philippines (AFP) consisting of officials of the Philippine
Army, Philippine Navy and Philippine Air Force shall not be
treated as taxable fringe benefit in accordance with the existing
doctrine that the State shall provide its soldiers with necessary
quarters which are within or accessible from the military camp
so that they can be readily on call to meet the exigencies of their
military service.
Housing unit inside or 50m from business premises; no
FBT. A housing unit which is situated inside or adjacent to the
premises of a business or factory shall not be considered as a
taxable fringe benefit. A housing unit is considered adjacent to
the premises of the business if it is located within the maximum
of fifty (50) meters from the perimeter of the business premises.
Temporary housing 3 months or less; no FBT. Temporary
housing for an employee who stays in a housing unit for three
(3) months or less shall not be considered a taxable fringe
benefit.
Summary of housing not subject to FBT:
1. For use of military officials
2. Housing inside or located 50m from the business
premises
3. Temporary housing for 3 months or less
Lease whether in the name of -er or -ee is FB. Revenue
Regulation 3-98 did not distinguish between a lease contract
entered under the name of the employer or under the name of
the employee. As long as the grant of the housing allowance
was given in addition to the basic salary of the employee, such
benefit shall be considered as a fringe benefit subject to the
fringe benefit tax. BIR Ruling 512-11
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Where the amount paid exceeds the benefit, excess treated
as part of compensation subject to income tax. The housing
privilege granted by Siemens, Inc. to its expatriate employees
holding managerial and supervisory positions in the form of a
fixed monthly allowance to the extent of the actual rent paid
by the said employees, in the maximum amount of
Php150,000.00, shall be treated as fringe benefit subject to the
fringe benefit tax imposed under Section 33 of the Tax Code,
as amended, as implemented by RR No. 3-98. However, where
the actual amount of housing allowance granted under Siemens,
Inc.'s existing policy exceeds the actual amount of rent, the
excess shall be treated as part of the expatriate employees'
compensation subject to income tax and consequently to the
withholding tax prescribed under Section 79 of the Tax Code.
BIR Ruling 512-11
Housing loan. Where the employer lends money to his
employee for his housing loan at a rate lower than twelve
percent (12%), the difference of the interest assumed by the
employee and the rate of twelve percent (12%) shall be as a
taxable fringe benefit. BIR Ruling No. Da 170-04
(2) Expense account
Paid for by employer. In general, expenses incurred by the
employee but which are paid by his employer shall be treated
as taxable fringe benefits, except when
1. the expenditures are duly receipted for and in the name
of the employer and
2. the expenditures do not partake the nature of a personal
expense attributable to the employee.
Paid for by employee but reimbursed. Expenses paid for by
the employee but reimbursed by his employer shall be treated
as taxable benefits except only when
1. the expenditures are duly receipted for and in the name
of the employer and
2. the expenditures do not partake the nature of a personal
expense attributable to the said employee.
For personal/ family consumption subject to FBT
regardless of in whose name. Personal expenses of the
JO VALLES
TAXATION
employee (like purchases of groceries for the personal
consumption of the employee and his family members) paid for
or reimbursed by the employer to the employee shall be treated
as taxable fringe benefits of the employee whether or not the
same are duly receipted for in the name of the employer.
RATA part of compensation income not FB. Representation
and transportation allowances which are fixed in amounts and
are regularly received by the employees as part of their
monthly compensation income shall not be treated as taxable
fringe benefits but the same shall be considered as taxable
compensation income subject to the tax imposed under Sec. 24
of the Code.
(3) Motor vehicle of any kind
Purchases in the name of employee; 100% acquisition cost.
If the employer purchases the motor vehicle in the name of the
employee, the value of the benefit is the acquisition cost
thereof. The monetary value of the fringe benefit shall be the
entire value of the benefit, regardless of whether the motor
vehicle is used by the employee partly for his personal purpose
and partly for the benefit of his employer.
Provides cash for purchase of vehicle in the name of
employee; 100% of cash given. If the employer provides the
employee with cash for the purchase of a motor vehicle, the
ownership of which is placed in the name of the employee, the
value of the benefits shall be the amount of cash received by
the employee. The monetary value of the fringe benefit shall be
the entire value of the benefit regardless of whether the motor
vehicle is used by the employee partly for his personal purpose
and partly for the benefit of his employer, unless the same was
subjected to a withholding tax as compensation income under
Revenue Regulations No. 2-98.
Employer purchases car on installment and named under
employee; AC/5. If the employer purchases the car on
installment basis, the ownership of which is placed in the name
of the employee, the value of the benefit shall be the acquisition
cost exclusive of interest, divided by five (5) years. The
monetary value of the fringe benefit shall be the entire value of
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the benefit regardless of whether the motor vehicle is used by
the employee partly for his personal purpose and partly for the
benefit of his employer.
Employer shoulders part of price and vehicle under
employee’s name; shouldered amount x 100%If the
employer shoulders a portion of the amount of the purchase
price of a motor vehicle the ownership of which is placed in the
name of the employee, the value of the benefit shall be the
amount shouldered by the employer. The monetary value of the
fringe benefit shall be the entire value of the benefit regardless
of whether the motor vehicle is used by the employee partly for
his personal purpose and partly for the benefit of his employer.
Employer owns and lets employees use; AC/5 x 50%. If the
employer owns and maintains a fleet of motor vehicles for the
use of the business and the employees, the value of the benefit
shall be the acquisition cost of all the motor vehicles not
normally used for sales, freight, delivery service and other
non-personal used divided by five (5) years. The monetary
value of the fringe benefit shall be fifty per cent (50%) of the
value of the benefit.
MV = [(A)/5] X 50%
MV = Monetary value
A = acquisition cost
• Discussion. Car with sticker to promote company not
a fringe benefit.
Employer leases; rental x 50%. If the employer leases and
maintains a fleet of motor vehicles for the use of the business
and the employees, the value of the benefit shall be the amount
of rental payments for motor vehicles not normally used for
sales, freight, delivery, service and other non-personal use. The
monetary value of the fringe benefit shall be fifty per cent
(50%) of the value of the benefit.
• Example. Cargill has a car program for its sales people
wherein the company shares 70% of the lease cost and
the employee, 30%. Official use takes precedence over
personal use; and that the vehicle is in the name of the
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company but at the end of the lease term, ownership is
transferred to the employee. Cargill require its sales
personnel to share at least 30% of the monthly rental,
which is deducted from their payroll subject to the
withholding tax on compensation, the BIR held that
only 20% of the monthly car rental is taxable as fringe
benefit inasmuch as the 30% share of the employee has
already been taxed as compensation. BIR Ruling No.
DA 005-04
• Car plan. Bush is granting a car plan to the managers
and sales executives. The company buys the car and
retains the title for 5 years. 60% of the cost is recorded
as asset and depreciated for 5 years in the books of
accounts. 40% of the cost is recorded as receivable
from the employee and collected within 5 years interest
free. At the end of the 5 year period, when 60% of the
cost of the car is fully depreciated and the 40% share
of the employee is fully paid, title is transferred to the
employee. The fringe benefit will consist in the motor
vehicle and the loan at an interest rate lower than the
market rate. For the motor vehicle, the formula for the
monetary value is: [(Acquisition cost * 60% *) / 5
years) * 50%]. BIR Ruling No. 076-99
• Discussion: Sir likes Cargill case better. In Bush,
employee was made to pay the half of the company.
That does not make sense.
Aircraft; no FBT. The use of aircraft (including helicopters)
owned and maintained by the employer shall be treated as
business use and not be subject to the fringe benefits tax.
Yacht; depreciation over 20 years. The use of yacht whether
owned and maintained or leased by the employer shall be
treated as taxable fringe benefit. The value of the benefit shall
be measured based on the depreciation of a yacht at an
estimated useful life of 20 years.
(4) Household expenses
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TAXATION
Expenses of the employee which are borne by the employer for
household personnel, such as salaries of household help,
personal driver of the employee, or other similar personal
expenses (like payment for homeowners association dues,
garbage dues, etc.) shall be treated as taxable fringe benefits.
(5) Interest on loan at less than market rate
Loan at < 12%; difference between interest charged and
12%. If the employer lends money to his employee free of
interest or at a rate lower than twelve per cent (12%), such
interest foregone by the employer or the difference of the
interest assumed by the employee and the rate of twelve per
cent (12%) shall be treated as a taxable fringe benefit.
• The benchmark interest rate of twelve per cent (12%)
shall remain in effect until revised by a subsequent
regulation.
Applicable starting 1/1/98. This regulation shall apply to
installment payments or loans with interest rate lower than
twelve per cent (12%) starting January 1, 1998.
• Example; loan. Bush is granting a car plan to the
managers and sales executives. The company buys the
car and retains the title for 5 years. 60% of the cost is
recorded as asset and depreciated for 5 years in the
books of accounts. 40% of the cost is recorded as
receivable from the employee and collected within 5
years interest free. At the end of the 5 year period,
when 60% of the cost of the car is fully depreciated and
the 40% share of the employee is fully paid, title is
transferred to the employee. The fringe benefit will
consist in the motor vehicle and the loan at an interest
rate lower than the market rate. For the interest, the
formula for the monetary value of annual FB is
[(Acquisition cost * 40% * 12% x 5 years) / 5 years].
BIR Ruling No. 076-99
(6) Membership dues
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Full. Membership fees, dues, and other expenses borne by the
employer for his employee, in social and athletic clubs or other
similar organizations. —These expenditures shall be treated as
taxable fringe benefits of the employee in full.
(7) Expenses for foreign travel
Business meetings and conventions. Reasonable business
expenses which are paid for by the employer for the foreign
travel of his employee for the purpose of attending business
meetings or conventions shall not be treated as taxable fringe
benefits.
• Inland expenses $300 or less per day not subject to
FBT. In this instance, inland travel expenses (such as
expenses for food, beverages and local transportation)
except lodging cost in a hotel (or similar
establishments) amounting to an average of US$300.00
or less per day, shall not be subject to a fringe benefit
tax.
• The expenses should be supported by documents
proving the actual occurrences of the meetings or
conventions.
Plane tickets for business meetings and conventions.
1. The cost of economy and business class airplane ticket
shall not be subject to a fringe benefit tax.
2. However, 30 percent of the cost of first-class airplane
ticket shall be subject to a fringe benefit tax.
If not for business meetings or conventions, everything
taxable in full. In the absence of documentary evidence
showing that the employee's travel abroad was in connection
with business meetings or conventions, the entire cost of the
ticket, including cost of hotel accommodations and other
expenses incident thereto shouldered by the employer, shall be
treated as taxable fringe benefits.
• The business meetings shall be evidenced by official
communications from business associates abroad
indicating the purpose of the meetings.
• Business conventions shall be evidenced by official
invitations/communications from the host organization
or entity abroad.
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• Otherwise, the entire cost thereof shouldered by the
employer shall be treated as taxable fringe benefits of
the employee.
Travel expenses of family members subject to FBT.
Travelling expenses which are paid by the employer for the
travel of the family members of the employee shall be treated
as taxable fringe benefits of the employee.
Unsubstantiated portion subject to tax. The flights were
booked for Ritegroup’s President and Ms. Orozco in the
amount of P169,890 as indicated in the ticket. It is also for the
purpose of visiting the Medica 2008 Exhibition. Hence, the
P169,890 is not subject to FBT but petitioner failed to explain
the discrepancy between the assessed amount of P251,850 and
the substantiated amount of P169,890. In view thereof, the
assessment on the difference of P81,960.73 shall remain in line
with the rule that tax assessments by tax examiners are
presumed correct and made in good faith, with the taxpayer
having the burden of proving otherwise. Failure to present
proof of error in the assessment will justify the judicial
affirmance of said assessment. Such amount is subject to FBT.
Ritegroup vs CIR, CTA
(8) Holiday and vacation expenses
Holiday and vacation expenses of the employee borne by his
employer shall be treated as taxable fringe benefits.
(9) Educational assistance to the employee or his
dependents
Scholarship; when not subject to FBT. The cost of the
educational assistance to the employee which are borne by the
employer shall, in general, be treated as taxable fringe benefit.
However, a scholarship grant to the employee by the
employer shall not be treated as taxable fringe benefit if
1. the education or study involved is directly connected
with the employer's trade, business or profession, and
2. there is a written contract between them that the
employee is under obligation to remain in the employ
of the employer for period of time that they have
mutually agreed upon.
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TAXATION
In this case, the expenditure shall be treated as incurred for the
convenience and furtherance of the employer's trade or
business.
Educational assistance to dependents. The cost of
educational assistance extended by an employer to the
dependents of an employee shall be treated as taxable fringe
benefits of the employee unless the assistance was provided
through a competitive scheme under the scholarship program
of the company.
• Scholarship to dependent’s employee under a
competitive scheme not subject to FBT but part of
compensation income of employee. DLSU DLSU
granted an educational assistance called “Tuition
Waiver Benefit” (TWB), to be enjoyed by the
dependents of its faculty members who have joined
DLSU before school year 1987-88. The condition for
availment is that the dependent must pass the entrance
exam, must have a GPA of not less than 1.0 for
freshmen, must not incur 15 or more units of failure by
the end of each year if an upperclassman, should not
have an accumulated failure of 24 units or more in
academic courses anytime prior to the trimester when
the only remaining load necessary for completion of
his/her degree is 57 or fewer academic units. Since the
educational benefit is granted through a competitive
scheme, i.e. qualifying exam, such educational
assistance shall not be subject to the fringe benefit tax.
However, the exemption of any fringe benefit from the
fringe benefit tax shall not be interpreted to mean
exemption from any other income tax imposed under
the Code or under any other existing law. Such being
the case, the amount of the tuition waiver benefit
granted shall be considered as part of compensation
income of faculty members which shall be subject to
withholding tax prescribed under Section 79 of the Tax
Code of 1997. BIR Ruling No. 189-99
• Education benefits granted to R&F not subject to
FBT but considered in the 90k ceiling. PLDT
granted under the CBA an Educational Assistance
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Program (EAP) which will effectively benefit the
employees and/or their children. The fringe benefit is
in all cases exempt from the imposition of fringe
benefits tax imposed by Section 33(A) of the Tax
Code of 1997 since this is one of those enumerated
under Subsection (C) item (3) thereof. The benefit is
generally includible in the gross income of the
recipient-employees pursuant to Section 32(A)(1) of
the Tax Code of 1997. The only instance these
benefits may be excluded in the gross income of the
recipients, hence, exempt from income tax, is when
the amounts received, when aggregated to amounts
received as 13th month pay and other benefits, do not
exceed the threshold limit of P30,000 [now P90, 000]
provided under Section 32(B)(7)(e) of same Code.
BIR Ruling No. 057-98
(10) Life or health insurance and other non-life
insurance premiums or similar amounts in excess of what
the law allows
The cost of life or health insurance and other non-life insurance
premiums borne by the employer for his employee shall be
treated as taxable fringe benefit, except the following [meaning
non-taxable fringe benefit tong mga to]:
a. contributions of the employer for the benefit of the
employee, pursuant to the provisions of existing law,
such as under the
a. Social Security System (SSS), (R.A. No. 8282,
as amended) or under the
b. Government Service Insurance System (GSIS)
(R.A. No. 8291), or
c. similar contributions arising from the
provisions of any other existing law; and
b. the cost of premiums borne by the employer for the
group insurance of his employees.
What is the treatment for the Premium on Health Card
paid by the employer for the "rank and file" employees, as
well as for those employees holding "managerial or
supervisory" function? Premium on Health Card paid by the
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SPBUS
employer for all employees, whether rank and file or
managerial/supervisory, under a group insurance shall be
included as part of other benefits of these employees which are
subject to the P90,000.00 threshold.
• However, individual premiums (not part of group
insurance) paid for selected employees holding
managerial or supervisory functions are considered
"fringe benefits" subject to fringe benefits tax.
Revenue Memorandum Circular 050-18, Q7
Payments to HMOs are not subject to FBT. Although
technically a health maintenance organization (HMO) is not an
insurance company subject to registration and regulation by the
insurance Commission, the service rendered by such HMOs are
akin to the service provided by insurance companies. Thus,
in Revenue Memorandum Circular No. 04-03, dated
December 31, 2002, in defining insurance and pension funding
companies, pre-need companies, including health maintenance
organizations were included. Being considered as a pre-need
company, premium payments to HMOs by a corporation under
a group insurance plan are not subject to fringe benefit tax. BIR
Ruling No. DA-469-06
(C) Fringe Benefits Not Subject to Fringe Benefits Tax
In general, the fringe benefits tax shall not be imposed on the
following fringe benefits:
1. Fringe benefits which are authorized and exempted
from income tax under the Code or under any special
law;
2. Contributions of the employer for the benefit of the
employee to retirement, insurance and
hospitalization benefit plans;
3. Benefits given to the rank and file, whether granted
under a collective bargaining agreement or not;
4. De minimis benefits as defined in these Regulations;
5. If the grant of fringe benefits to the employee is
required by the nature of, or necessary to the trade,
business or profession of the employer; or
6. If the grant of the fringe benefit is for the convenience
of the employer.
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TAXATION
Exemption from FBT not exemption from other income tax.
The exemption of any fringe benefit from the fringe benefit tax
imposed under this Section shall not be interpreted to mean
exemption from any other income tax imposed under the Code
except if the same is likewise expressly exempt from any other
income tax imposed under the Code or under any other existing
law.
• Thus, if the fringe benefit is exempted from the fringe
benefits tax, the same may, however, still form part of
the employee's gross compensation income which is
subject to income tax, hence, likewise subject to a
withholding tax on compensation income payment.
Example: transportation for the convenience of employer
not subject to FBT. EGSI grants transportation allowance at
the maximum amount of P3,000 or P136 per day to promote
the efficiency and well-being, as well as the safety of its
employees and is also necessary to enable these employees to
come to work on time without any untoward incident taking
into account the prevailing security situation in the country,
also considering the graveyard shift of its employees it would
be safer for the employees to utilize a taxi service. The
transportation allowance is not subject to the fringe benefits
tax since it is required by the nature of the business of EGSI
and under the convenience of employer rule. BIR Ruling
233-07
• Compare with RR 3-98 Sec. 2.33(A)(2)(d). Expense
account. Representation and transportation allowances
which are fixed in amounts and are regular received by
the employees as part of their monthly compensation
income shall not be treated as taxable fringe benefits
but the same shall be considered as taxable
compensation income subject to the tax imposed under
Sec. 24 of the Code.
Example: meal allowance; de minimis. EGSI grants meal
allowance to supervisory personnel in both operations and
support positions for use by the said officers during the times
that they are required to work overtime and would therefore
incur meal expenses. The meal allowance not exceeding 25%
of their respective daily minimum wage may be considered
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de minimis meal benefit and therefore, tax exempt. The
excess over this amount shall be considered "other benefits".
The excess of the meal allowance given over the de minimis
ceiling shall still be exempt provided that it, together with the
total amount of other benefits, shall not exceed PhP30,000
[now P90,000] when added to the 13th month pay. If the
employer pays more than the ceiling prescribed by the
Regulations, the excess shall be taxable to the employee
receiving the benefits only if such excess is beyond the
PhP30,000 ceiling. (P90,000 ceiling). The said meal
allowance is not subject to fringe benefits tax since it is
specifically exempted from the application thereof pursuant
to Section 33(C)(4), (5) and (6) of RR 3-98 implementing
Section 33(C) of the Tax Code. Neither is it subject to
substantiation requirement. BIR Ruling 233-07
Example; mobile allowance required by the nature of the
business of employer. Since it is granted to directors,
managers, and supervisors because the nature of their jobs
requires them to be on call 24 hours a day which is necessary
to the business of EGSI and redounds to the benefit of the
company, said fringe benefit shall not be included as part of
compensation income of the concerned employees and
neither will it be subject to the fringe benefits tax. Further, it
is also not subject to the requirement of substantiation. BIR
Ruling 233-07
DE MINIMIS
The term "DE MINIMIS" benefits which are exempt from the
fringe benefit tax shall, in general, be limited to facilities or
privileges furnished or offered by an employer to his employees
that
1. are of relatively small value and
2. are offered or furnished by the employer merely as a
means of promoting the health, goodwill,
contentment, or efficiency of his employees
RR 10-2008 Sec. 1 amending RR 2-98 Sec. 2.78.1 as further
amended by RR 005-11 with notice of erratum per Revenue
Memo Circular No. 20-2011 and further amended by RR 8-
2012
Last Edit: 23 December 2020
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The following shall be considered as "de minimis" benefits not
subject to income tax as well as withholding tax on
compensation income of both managerial and rank and file
employees:
a. Monetized unused vacation leave credits of private
employees not exceeding ten (10) days during the year;
b. Monetized value of vacation and sick leave credits paid
to government officials and employees;
c. Medical cash allowance to dependents of employees,
not exceeding P1,500 per employee per semester or
P250 per month; as amended by RR 11-2018, Sec 6
d. Rice subsidy of P2,000 or one (1) sack of 50 kg. rice
per month amounting to not more than P2,000; as
amended by RR 11-2018, Sec 6
e. Uniform and Clothing allowance not exceeding P6,000
per annum; as amended by RR 11-2018, Sec 6
f. Actual medical assistance, e.g. medical allowance to
cover medical and healthcare needs, annual
medical/executive check-up, maternity assistance, and
routine consultations, not exceeding P10,000.00 per
annum;
g. Laundry allowance not exceeding P300 per month;
h. Employees achievement awards, e.g., for length of
service or safety achievement, which must be in the
form of a tangible personal property other than cash or
gift certificate, with an annual monetary value not
exceeding P10,000 received by the employee under an
established written plan which does not discriminate in
favor of highly paid employees;
i. Gifts given during Christmas and major anniversary
celebrations not exceeding P5,000 per employee per
annum;
j. Daily meal allowance for overtime work and
night/graveyard shift not exceeding twenty-five
percent (25%) of the basic minimum wage on a per
region basis;
k. Benefits received by an employee by virtue of a
collective bargaining agreement (CBA) and
productivity incentive schemes provided that the total
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annual monetary value received from both CBA and
productivity incentive schemes combined do not
exceed ten thousand pesos (Php 10,000.00) per
employee per taxable year; RR 1-2015
De minimis not considered in ceiling of exclusions. The
amount of ‘de minimis’ benefits conforming to the ceiling
herein prescribed shall not be considered in determining the
P30,000.00* ceiling of ‘other benefits’ excluded from gross
income under Section 32(b)(7)(e) of the Code. Provided that,
the excess of the ‘de minimis’ benefits over the irrespective
ceilings prescribed by these regulations shall be considered as
part of ‘other benefits’ and the employee receiving it will be
subject to tax only on the excess over the P30,000.00* ceiling.
Provided, further, that MWEs receiving ‘other benefits’
exceeding the P30,000.00* limit shall be taxable on the excess
benefits, as well as on his salaries, wages and allowances, just
like an employee receiving compensation income beyond the
SMW.
• *Note that the ceiling is now P90, 000.
Deductible expense for employer; fringe benefit & de
minimis. Any amount given by the employer as benefits to its
employees, whether classified as “de minimis” benefits or
fringe benefits, shall constitute as deductible expense upon
such employer.
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 Bureau of Internal Revenue.
All other benefits given by employers which are not included
in the above enumeration shall not be considered as “de
minimis” benefits, and hence, shall be subject to income tax as
well as withholding tax on compensation income. RR 5-2011
In implementing Section 2.33 of RR 3-98 as last amended by
RR 5-2011 with respect to the Special Treatment of Fringe
Benefits, the income tax and withholding tax on compensation
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income referred to under Section 2 of RR 5-2011 shall refer to
fringe benefits tax.
Treatment of excess. The excess of the de minimis value shall
be subject to tax on compensation if granted to rank and file
employees and to fringe benefit tax if granted to managerial and
supervisory employees. BIR Ruling No. DA-081-03
What shall be the tax treatment of the “de minimis”
benefits given to employees which are beyond the
prescribed amount of benefits?
The benefits given in excess of the maximum amount allowed
as "de minimis" benefits shall be included as part of "other
benefits" which is subject to the P90,000.00 ceiling. Any
amount in excess of the P90,000 shall be subject to income tax,
and consequently, to the withholding tax on compensation.
Revenue Memorandum Circular No. 050-18
• Example: Ms. A received annual clothing allowance
amounting to P10,000. Her 13th month pay is P80,000.
No other benefits were received for the entire year. In
this case, since the prescribed maximum amount for
clothing allowance is only P6,000 the excess of P4,000
shall be added to the 13th month pay, thereby the entire
benefits received amounted to P84,000. In this
scenario, the same shall still be exempt from income
tax since the ceiling amount for these other benefits is
P90,000.00.
• Amounts in excess of de minimis go to the ceiling;
amounts in excess of ceiling taxable as
compensation. In your supplemental letter to this
Office, it is stated that the annual premium paid for
dependents of assistant managers is P9,890. Applying
the rate of P 125.00 per month to an annual basis, the
annual ceiling for de minimis benefits given as cash
allowance to dependents of employees is P 1,500.00
per employee per year. To this extent, therefore, the
premiums paid to HMOs by NEC Tokin are not subject
to fringe benefits tax, income tax, nor to withholding
tax on compensation. However, any amount in excess
of the ceiling may further be considered as part of other
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benefits, provided that the total benefits shall not
exceed P30,000.00. Further still, that the amount in
excess of the P30,000.00 threshold of the total of "other
benefits" shall be included as part of the taxable
compensation of the employer-taxpayer. BIR Ruling
No. DA-469-06
• Amounts in excess of de minimis go to the ceiling;
amounts in excess of ceiling taxable as
compensation. In your supplemental letter to this
Office, it is stated that the annual premium paid for
dependents of supervisors, P7,831.00, depending on
the age of the dependent, and that the premium
payment is not shouldered by NEC Tokin, but is paid
by employee-supervisor through salary deduction. The
premiums initially paid by NEC Tokin to Health
Maintenance, Inc. on behalf of the dependents of its
supervisors pursuant to the group insurance plan do not
constitute fringe benefits or income to said supervisors.
The amount of the premiums is paid by the supervisors
as salary deductions. NEC Tokin merely includes their
dependents in the group insurance package as an
accommodation. In any case, any benefit that the
supervisors derive from this accommodation does not
exceed the amount of P 1,500.00 per employee per
year. As discussed in the preceding section, such
benefit, if any, is neither subject to fringe benefit tax
nor to income and withholding tax. BIR Ruling No.
DA-469-06
Revenue Memorandum Circular No. 050-18
Is there a change in the non-taxability of “de minimis”
benefits under the TRAIN Law? No, there is no change in the
tax treatment for “de minimis” benefits. It is still considered as
compensation not subject to income tax and consequently, not
subject to withholding tax, and neither to fringe benefit tax.
Rice allowance. James Hardie Philippines intends to provide
all employees with rice allowance of P1,300 per quarter
(P433 per month) regardless of ranking and position i.e.
including supervisors and managers; and that on a quarterly
JO VALLES
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basis, it will include in the employee’s payroll the P1,300 as
rice allowance. For supervisors and managers as well as rank
and file employees, the rice allowance in the amount of P1,300
per quarter is likewise considered as of relatively small value,
and is offered or furnished by the employer merely as a means
of promoting the health, goodwill, contentment or efficiency of
his employees. It is de minimis. BIR Ruling No. DA-053-01
Meal allowance. Petron gives its rank and file employees
overtime meal allowance pursuant to their CBA and to
supervisory, professional and technical employees. The
employees who rendered overtime work for at least 2 hours are
entitled to overtime meal allowances in the following amounts:
Rank and file employees: P80/P90/P100; Supervisory,
professional and technical employees: P150) and that the
overtime meal allowances are granted to employees who
actually rendered overtime work. The overtime meal
allowances to rank and file employees are not considered as
part of compensation subject to withholding tax since the same
are of relatively small value. Likewise, the overtime meal
allowance to supervisors, professional technical employees are
not considered as part of compensation subject to withholding
tax since they are furnished for the convenience of the
employer. Both amounts are also not subject to FBT BIR
Ruling No 061-99
Medical benefits. If the medical benefits granted do not exceed
P10,000.00 per annum, the same shall be considered as de
minimis benefits that are not subject to income tax as well as to
withholding tax on compensation income of both managerial
and rank and file employees. However, if the employer pays
more than the ceiling of other benefits provided in Section
32(B)(7)(e) of the Tax Code of 1997, the excess shall be taxable
to the employee receiving the benefits only if such excess is
beyond the P30,000.00 ceiling, i.e., if pertaining to supervisory
or managerial employees, the excess shall be subject to fringe
benefit tax while those pertaining to rank and file employees,
the excess shall be subject to withholding tax on compensation.
BIR Ruling No. DA-081-03
(D) Tax Accounting for the Fringe Benefit Furnished
to the Employee and the Fringe Benefit Tax Due Thereon.
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General rule. As a general rule, the amount of taxable fringe
benefit and the fringe benefits tax shall constitute allowable
deductions from gross income of the employer.
Exception. However, if the basis for computation of the fringe
benefits tax is the depreciation value, the zonal value as
determined by the Commissioner pursuant to Section 6(E) of
the Code or the fair market value as determined in the current
real property tax declaration of a certain property, only the
actual fringe benefits tax paid shall constitute a deductible
expense for the employer.
• The value of the fringe benefit shall not be deductible
and shall be presumed to have been tacked on or
actually claimed as depreciation expense by the
employer.
Provided, however, that if the aforesaid zonal value or fair
market value of the said property is greater than its cost subject
to depreciation, the excess amount shall be allowed as a
deduction from the employer's gross income as fringe benefit
expense.
Illustrations on fringe benefit furnished or granted by the
employer to an employee (other than a rank-and-file
employee)
Example 1: During the year 1998, ABC Corporation paid for
the monthly rental of a residential house of its branch manager
(Mr. Dela Cruz) amounting to P66,000.00.
In this case, the monthly taxable grossed-up monetary value of
the said fringe benefit furnished or granted to its branch
manager (Mr. Dela Cruz) shall be P50,000.00, computed as
follows:
Monthly rental for the residential house P66,000.00
Grossed-up monetary benefit granted. P50,000.00
Fringe benefit tax due thereon (34%) P17,000.00
Journal entry. The aforesaid amounts shall be fully allowed as
deductions from the gross income of ABC Corporation
Fringe Benefit Expense P66,000
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Fringe Benefit Tax Expense P17,000
Cash P83,000
To record fringe benefit expense and fringe benefit tax paid on
rental of the residential property furnished to Mr. Dela Cruz for
his residential use. (Note: If the fringe benefit expense of
P66,000.00 has already accrued but not yet paid, use the
account title "fringe benefit payable". If the fringe benefit tax
has already accrued but not yet paid, use the account title
"fringe benefit tax payable").
Example 2: XYZ Corporation owns a condominium unit.
During the year 1998, the said corporation furnished and
granted the said property for the residential use of its Assistant
Vice-President. The fair market value of the said property as
determined by the Commissioner pursuant to Section 6(E) of
the Code amounts P10,000,000.00 while its fair market value
as shown in its current Real Property Tax Declaration amounts
to P8,000,000.00. In this case, the higher fair market value of
P10,000,000.00 as determined by the Commissioner shall be
used in computing the monetary of the fringe benefit so
furnished or granted to said employee and the fringe benefit tax
due thereon shall be computed as follows:
Monthly rental value of the property
(P10,000,000 times 5% thereof times 50%
divided by 12 months) P20,833.33
Grossed-up monetary value thereof as fringe benefit
(P20,833.33 divided by 66% factor for calendar year 1998)
P31,565.66
Fringe Benefit tax due thereon (34%) P10,732.32
In general, under this illustration, the XYZ Corporation shall
not further claim deduction for allowing its Assistant Vice-
President the use of its residential property since the cost for
the use thereof has already been recovered as deduction from
its gross income under "Depreciation Expense". However,
since the fringe benefit tax in the amount of P10,732.32,
assumed and paid by XYZ corporation has not as yet been
recovered by way of deduction from gross income, the same
shall be allowed as a deduction from its gross income. XYZ
Corporation shall take up the foregoing in its books of accounts,
as follows:
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Fringe Benefit Tax Expense P10,732.32
Cash/Fringe Benefit Tax Payable P10,732.32
However, if the cost of the aforesaid condominium unit subject
to depreciation allowance (example: its acquisition cost is only
P7,000,000.00) is lesser that its fair market value as determined
by the Commissioner (i.e. P10,000,000.00), the excess amount
(i.e. P3,000,000.00) shall be amortized throughout the
remaining estimated useful life of the residential property used
in computing the said employer's depreciation expense and
allowed as a deduction from the said employer's gross income
as fringe benefit expense. Thus, if the remaining estimated
useful life thereof during the year 1998 is fifteen (15) years, its
monthly amortization shall be computed as follows:
Monthly amortization (P3,000,000.00 divided by 15 years
divided by 12 months) P16,666.67
In this case, XYZ Corporation shall take up the foregoing in its
books of accounts as follows:
Debit: Fringe benefit expense P16,666.67
Debit: Fringe benefit tax P10,732.32
Credit: Income constructively realized P16,666.67
Credit: Cash/Fringe benefit tax payable P10,732.32
To record fringe benefit and fringe benefit tax expenses and
income constructively realized from the use of company-owned
residential property furnished to employees.
Repealing clause. All existing rules and regulations or parts
thereof which are inconsistent with the provisions of these
regulations are hereby revoked.
Effectivity. These regulations shall take effect on fringe
benefits furnished, granted or paid beginning January 1, 1998.
Transitory provision. No penalty shall be imposed for late
payment of the fringe benefit tax for the first quarter ending
March 1998: Provided, however, that the withholding tax
return for the first quarter shall be filed and the tax is paid not
later than July 25, 1998.
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Revenue Regulation No.8-2018 Sec. 7
Special Treatment of Fringe Benefits – The tax on fringe
benefits at the rate of 35% shall be imposed on the grossed-up
monetary value of fringe benefits furnished or granted to an
employee (except rank and file employees) by the employer,
whether an individual or a corporation (unless the fringe benefit
is required by the nature of, or necessary to the trade, business
or profession of the employer, or when the fringe benefit is for
the convenience of or advantage of the employer). The tax
herein imposed is payable by the employer, which tax shall be
paid in the same manner as provided for under Sec. 57(A) of
the Tax Code, as amended.
The grossed-up monetary value of the fringe benefit shall be
determined by dividing the actual monetary value of the fringe
benefit by 65%, effective January 1, 2018 and onwards:
Provided, that the grossed-up value of the benefit shall be
determined by dividing the actual monetary value of the fringe
benefit by the difference between 100% and the applicable tax
rates under the aforesaid subsections.
Example 1. MRU Company (a domestic employer/company)
granted Ms. MHLCO (a Filipino branch manager employee),
in addition to her basic salaries, P5,000 cash per quarter for her
personal membership fees at Country Golf Club. The FBT shall
be computed as follows:
Monetary value of fringe benefit: P5,000
Percentage divisor applicable: 65%
FBT rate: 35%
FBT = (monetary value of fringe benefit ÷ 65%) x 35%
FBT = (P5,000 ÷ 65%) x 35%
FBT = P7,692.31 x 35%
FBT = P2,692.31
Example 2. Same facts but the employee is a non-resident alien
individual not engaged in trade or business within the
Philippines:
Monetary value of fringe benefit: P5,000
Percentage divisor applicable: 75%
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FBT rate: 25%
FBT = (monetary value of fringe benefit ÷ 75%) x 25%
FBT = (P5,000 ÷ 75%) x 25%
FBT = P6,666.67 x 25%
FBT = P1,666.67
R No. 2-98 Sec. 2.79(D), as amended by RR 11-2018 Sec.
7(D)
Computation of Withholding Tax on Fringe Benefit
(1) Final Withholding tax on Fringe Benefits paid to
employees other than rank and file. There shall be imposed
a final tax of 35% on the grossed-up monetary value of fringe
benefits granted or furnished by the employer to his employees
(except rank and file employees) unless the fringe benefits is
a. required by the nature of or necessary to the trade,
business or profession of the employer, and
b. when the fringe benefit is for the convenience and
advantage of the employer.
The fringe benefit tax shall be paid by the employer in the same
manner as provided in Sec. 2.58 of these Regulations. It shall
not form part of the gross income of the employee.
(2) Grossed-up monetary value of Fringe Benefits. In
general the grossed-up monetary value of the fringe benefit
shall be determined by dividing the monetary value of the
fringe benefit by 65%.
• The grossed-up monetary value of the fringe benefits
furnished to the employees who are taxable under
subsection B of Sec. 25 of the Tax Code, as amended,
shall be determined by dividing the monetary value of
the fringe benefit by the difference between 100% and
the applicable rates of income tax prescribed on the
aforesaid sub-section of Sec. 25, to wit:
Subsection (B) – 25% on income derived from sources within
the Philippines by a non-resident alien individual not engaged
in trade or business in the Philippines.
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(3) Non-Taxable Fringe Benefits. The following fringe
benefits are not subject to the fringe benefits tax.
a. Fringe benefits paid to rank and file employees.
Fringe benefits furnished or granted to rank and file
employees shall form part of the employees gross
compensation income subject to the withholding tax
table on compensation under Sec. 2.79(B) of these
Regulations.
b. Fringe benefits which are authorized and exempted
from income tax and consequently from withholding
tax under the Code, as amended, or under any special
law.
c. Contributions of the employer for the benefit of the
employee to retirement, insurance and hospitalization
benefit plans.
d. De minimis benefits. For purposes of determining
whether the fringe benefit shall be considered
payments of de minimis benefits, the employer shall
submit a written representation to the Commissioner
for the issuance of a ruling taking into account the
peculiar nature and special need of the said employer’s
trade, business or profession.
De minimis. The term “de minimis benefits” which is exempt
from the fringe benefit tax shall, in general, be limited to
facilities or privileges (such as entertainment, Christmas party
and other cases similar thereto; medical and dental services; or
the so-called courtesy discount on purchases), furnished or
offered by an employer to his employees, provided such
facilities or privileges:
a. are of relatively small value and
b. are offered or furnished by the employer merely as a
means of promoting the health, goodwill, contentment,
or efficiency of his employees.
Source of FB does not affect taxability; sourced from RE.
TAP provides a housing assistance to our expatriates who are
directors and at the same time receiving a fixed salary as
officers of the company. The directors are considered as
employees holding positions other than rank and file positions,
i.e. managerial and/or supervisory positions. Such being the
case, the housing assistance granted by TAP to the expatriates
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who are directors and at the same time holding managerial and
supervisory positions, is considered as fringe benefit subject to
the FBT. The source of the fringe benefit granted to the
employees does not affect the taxability of the said fringe
benefit. Thus, the housing allowance of the director/officer of
TAP which is paid out of its Retained Earnings, is still
considered as a fringe benefit subject to the fringe benefit tax
imposed under Section 33(B) of the Tax Code of 1997 and
implemented by Revenue Regulations No. 3-98. BIR Ruling
208-99
No FBT when no EER. Section 33 of the Tax Code of 1997
on fringe benefit applies to managerial and supervisory
employees. It is a condition sine qua non that such recipients of
the fringe benefits enumerated under the law must be
employees of the company granting it. Where a director is
being paid out on a retainer basis, no employer-employee
relationship exist between the company and the director. Thus,
the housing assistance granted to him shall not be considered
as fringe benefit subject to the Fringe Benefit Tax BUT is
considered as part of his gross income which is subject to the
applicable tax rates under the Tax Code. BIR Ruling 208-99
13TH MONTH PAY AND OTHER BENEFITS
NIRC Section 32(B)(7)(e) as emended
Gross benefits received by officials and employees of public
and private entities: Provided, however, That the total
exclusion under this subparagraph shall not exceed ₱90,000*
which shall cover:
1. Benefits received by officials and employees of the
national and local government pursu ant to Republic
Act No. 6686;
2. Benefits received by employees pursuant to
Presidential Decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986;
3. Benefits received by officials and employees not
covered by Presidential Decree No. 851, as amended
by Memorandum Order No. 28, dated August 13,1986;
and
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4. Other benefits such as productivity incentives and
Christmas bonus:
o Provided, That every three (3) years after the
effectivity of this Act, the President of the
Philippines shall adjust the amount herein
stated to its present value using the Consumer
Price Index (CPI), as published by the National
Statistics Office (NSO).
*as amended by RA 10653, July 28, 2014 [previously P82,000]
RR 11-2018 Sec. 6 inserting Sec. 2.78.1(B)(11) in RR 2-98
(B) Exemption from withholding tax on compensation.
The following income payments are exempted from the
requirement of withholding tax on compensation but may be
subject to income tax depending on the nature/sources of
income earned by the individual recipient.
xxx xxx xxx
(11) Thirteenth month pay and other benefits.
a) Thirteenth month pay equivalent to the mandatory 1
month basic salary of official and employees of the
government (whether national or local), including
GOCCs, and/or private offices received after the 12th
month pay; and
b) Other benefits such as Christmas bonus, productivity
incentives, loyalty award, gift in cash or in kind, and
other benefits of similar nature actually received by
officials and employees of both government and
private offices, including the Additional Compensation
Allowance (ACA) granted and paid to all officials and
employees of the National Government Agencies
(NGAs) including State Universities and Colleges
(SUCs), Government-Owned and/or Controlled
Corporations (GOCCs), Government Financial
Institutions (GFIs) and Local Government Units
(LGUs).
Ceiling of 90,000. The above stated exclusions under (a) and
(b) shall cover benefits paid or accrued during the year,
provided that the total amount shall not exceed P90,000, which
may be increased through rules and regulations issued by the
Secretary of Finance, upon recommendation of the
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Commissioner, after considering among others, the effect on
the same of the inflation rate at the end of the taxable year.
Performance bonuses as “other benefits”; not considered
compensation income; deductible employer’s expense; not
subject to FBT. The performance bonus given by PLDT to its
rank and file employees as well as to supervisory employees
can be equated to a productivity incentive bonus which may be
considered as falling within the contemplation of "other
benefits" provided for under Section 32 (B)(7)(e)(iv) of the Tax
Code and therefore, need not form part of the employees'
taxable compensation income subject to withholding tax on
wages provided, however, that such "other benefits," inclusive
of the above allowances/benefits, shall not, in the aggregate,
exceed P30,000.00 when added to the 13th month pay. Any
amount in excess of the P30,000.00 ceiling shall be taxable to
the employee receiving the benefits. Provided, further, that any
amount given by the employer as benefits to its employees,
whether classified as "de minimis" benefits or fringe benefits,
shall constitute as deductible expense upon such employer
pursuant to Section 2.78.1(A)(3) of RR No. 8-2000, as
amended. Also, the performance bonus is not subject to the
fringe benefits tax also since it addresses PLDT's concern in
encouraging good performance as well as promoting
contentment and efficiency among its employees, which in
effect redounds to the convenience of the employer, according
to Sec. 33(C) of the Tax Code as implemented by Sec. 2.33(C)
of RR 3-98 as amended by RR 9-2000 and 10-2000. BIR
Ruling No. 001-07
Other benefits; bonus to stay in the company. Lufthansa
gives its employees, except its General Manager, a
performance bonus to encourage the employees to not leave the
company and achieve the annual company target. This is also
to compete with the high demand of aviation personnel outside
the PH where the foreign competitors offer higher salaries and
more attractive benefits.The performance bonus to be given by
Lufthansa to its employees can be equated to a productivity
incentive bonus which may be considered as falling within the
contemplation of "other benefits" provided for under Section
32(B)(7)(e)(iv) of the Tax Code of 1997, and therefore, need
not form part of the employees' taxable compensation income
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subject to withholding tax on wages under Section 79 in
relation to Section 24(A) both of the Tax Code of 1997,
provided, however, that such "other benefits," inclusive of the
above allowances/benefits, shall not, in the aggregate, exceed
P30,000.00 when added to the 13th month pay. Accordingly,
the performance bonus is not subject to the fringe benefits tax
also since it addresses LTTP's concern in encouraging its
employees/instructors not to leave the company and achieve the
annual company target, as approved by the Head Office, which
in effect redounds to the convenience of the employer. BIR
Ruling No. DA-252-06
MATERNITY LEAVE BENEFITS
RR 2-98 par. 2.78.1(B)(1)(e)
Withholding of income tax on compensation income. The
following income payments are exempted from the requirement
of withholding tax on compensation:
1) Remunerations received as an incident of employment,
as follows:
e) Payments of benefits made under the Social
Security System Act of 1954 as amended.
RMC 105-2019
Employers shoulder difference between salary and benefits
received from SSS. The provisions of Sec. 5(c) of RA 11210
prescribes among others that: Workers availing of the maternity
leave period and benefits must receive their full pay. Employers
from the private sector shall be responsible for payment of the
salary differential between the actual cash benefits received
from the SSS by the covered female workers and their average
weekly or regular wages, for the duration of the maternity
leave. xxx”
And the pertinent provisions of Sec. 2 under the IRR of said
Act jointly issued by the CSC, DOLE, and the SSS prescribe
that: Employed female workers shall receive full pay which
consists of:
i. SS Maternity benefit computed based on their average
daily salary credit and
ii. salary differential to be paid by the employer, if any.
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Full pay. Under the same IRR, the term “full pay” is defined
under Section 1.j. of Rule II as: “Full pay” refers to actual
remuneration or earnings paid by an employer to a worker for
services rendered on normal working days and hours not
lower than the wage rate fixed by the RTWPB including
allowances provided for under existing company policy of
collective bargaining agreement, if any. Full pay in the public,
on the other hand, includes the basic salary and allowances as
may be provided under existing guidelines.”
SSS Circular No. 2019-009. The SSS issued Circular No.
2019-009 to All Employers and Female Members with the
subject. "Guidelines on the Payment of the Maternity Benefit
Effective Effective March 11, 2019 prescribing Section 4 on
salary differential, as follows: “Employers from the private
sector shall pay for the difference between the full salary and
the actual cash benefits received from the SSS. xxx”
DOLE DA Guidelines. Likewise, the DOLE issued its own
DOLE issued its own DA “Guidelines on the Computation of
Salary Differential of Female Workers During Her Maternity
Leave and its Criteria for Exemption Pursuant to RA 11210 and
its IRR”, prescribing the following introductory provisions
under Item II. Computation of Salary Differential”. “The
employer shall pay the salary differential between the full
salary of female worker during her maternity leave and the
actual cash benefits received from the SSS.”
On the other hand, Sec. 2.78.1(B)(1)(e) under RR 2-98, as
amended, prescribes the ff. remuneration received by an
employee as an incident of employment that is exempt from
withholding tax:
“(e) Payments of benefits made under the Social
Security System Act of 1954 as amended.”
Accordingly, for purposes of determining whether salary
differential is taxable or not, there is a need to resolve
whether or not “salary differential” is considered as a
benefit under the SSS Act of 1954, as amended.
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Prior to these recently issued SSS law, Section l4-A of
RANo.8282, which amends RA No. 1161, otherwise known as
the Social Security Law issued on June 18, 1954, a female
member is entitled to a daily maternity benefit equivalent to
one hundred percent (100%) of her average daily salary credit
for sixty (60) days or seventy-eight (78) days in case of
caesarean delivery. The term "average daily salary credit" is
defined under Sec. 8 of the same law as the result obtained by
dividing the sum of the six (6) highest monthly salary credit in
the twelve-month period immediately preceding the semester
of contingency by one hundred eighty (l80).
Rationale why the differential paid by the employer is a
benefit. However, based on the cited provisions of the new law,
the implementing joint IRR and the respective issuances of SSS
and DOLE, the maternity benefit of the female worker has been
expanded from the previous 100% of the average daily salary,
credit to a full pay or salary which includes now the salary
differential as its component, aside from the added duration of
the maternity leave. Accordingly, it is therefore clear that
salary differential is considered a benefit.
Salary differential exempt from income and withholding
taxes. Further, since the provisions of Sec. 2.78.1(B)(1)€ under
RR No. 2-98 do not provide any qualification in granting tax
exemption on payments of benefits under the SSS law, the
salary differential is exempt from income and withholding
taxes.
All internal revenue officers, employees, and others concerned
are hereby enjoined to give this Circular as wide a publicity as
possible.
Tax treatment of stock option plans and other stock
incentive plans
Revenue Memorandum Circular No. 079-14
October 31, 2014
Preliminaries
Stock option/ equity-settlement option; option to purchase
shares at a specific price at a specific date. A stock option is
an option granted by a person, natural or juridical, to a person
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or entity entitling said person or entity to purchase shares of
stocks of a corporation, which may or may not be the shares of
stock of the grantor itself, at a specific price to be exercised at
a specific date or period (hereinafter referred to as "Equity-
settlement Option").
• Stock option; right to obtain difference between
actual FMV and fixed nominal value. It may also
occur even if no actual shares of stocks are transferred
in a situation wherein a person or entity is given the
right to obtain the difference between the actual fair
market value of a shares and the fixed nominal value
of the shares of stock set in the grant of the option, at a
specific date or period, although no actual shares of
stocks are transferred (hereinafter referred to as "Cash-
settlement Option"). The grant, sale, transfer, or
exercise of the option may result to taxable events.
• Stock options taxable as shares. Stock option are
"shares of stocks" as defined by Section 22 (L) of the
National Internal Revenue Code of 1997, as amended,
and are taxable as such.
Tax treatment of grant of option
EER; cannot claim deductions on year of grant if no
payment was made. In the event the Option was granted due
to an employee-employer relationship, and where the grantor is
the employer and the grantee is the employee, and no payment
was received for the grant of the said option, on the year an
option was granted, the grantor cannot claim deductions for
the grant of the stock option.
• EER; taxed as capital gains at full price of option.
However, if the option was granted for a price, the full
price of the option shall be considered capital gains,
and shall be taxed as such.
Issuance subject to DST; 0.75 per P200 of par or 25% of
original issue if non-par. Tax treatment of Upon the issuance
of the Option, the same is subject to a documentary stamp tax
amounting to P0.75 on each P200, or fractional part thereof, of
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the par value of the stock subject of the option, or in the case of
stock without par value the amount equivalent to 25% of the
documentary stamp tax paid upon the original issue of the stock
subject of the option, as provided for in Section 175 of the
NIRC.
Tax treatment of sale or transfer of option
Considered as S/B/E of non-listed shares; CGT of 15% on
NCG. The sale, barter, or exchange of stock options is treated
as a sale, barter, or exchange of shares of stock not listed on the
stock exchange. Thus, any grant of an option for consideration,
or transfer of the option is subject to capital gains tax imposed
under Section 24(C) of the NIRC. If the option was granted
without any consideration, the cost base of the option for
purposes of computing capital gains shall be zero.
Donation if transferred without consideration. If the option
is transferred by the grantee/subsequent owner without any
consideration, the same shall be treated as a donation of shares
of stock subject to donor's tax. The basis shall be the fair market
value of the option at the time of the donation.
Tax treatment of settlement of option
Equity-settlement Option. In equity-settled options, the
grantee/subsequent owner pays the exercise price to the grantor
and the latter is obligated to deliver the stocks to the owner of
the option.
• Grant to R&F; additional compensation income @
difference between (1) higher between BV/FV and
(2) exercise price. In the event the option was granted
by an employer involving the employer's own shares of
stock or shares it owns, upon the exercise of the option
by a rank-and-file employee, an additional
compensation equivalent to the difference of the book
value/fair market value of the shares, whichever is
higher, at the time of the exercise of the stock option
and the price fixed on the grant date, shall be
recognized and subjected to income tax and
consequently to withholding tax on compensation.
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• Grant to managerial; fringe benefit @ difference
between (1) higher between BV/FV and (2) exercise
price. However, if the employee which exercises the
option occupies a supervisory or managerial position,
the difference of the book value/fair market value of
the shares, whichever is higher, at the time of the
exercise of the stock option and the price fixed on the
grant date, shall be treated as fringe benefit subject to
fringe benefit tax imposed under Section 33 of the
National Internal Revenue Code of 1997, as amended
(NIRC).
• Grant to supplier; additional consideration @
difference between (1) higher between BV/FV and
(2) exercise price. In the event the option was granted
to a supplier of goods or services, the difference
between the book value/fair market value of the shares,
whichever is higher, at the time of the exercise of the
stock option and the price fixed on the grant date, shall
be recognized as additional consideration for the
services rendered or goods supplied by the said
supplier, and shall be subject to the relevant
withholding tax at source and other taxes applicable.
• Grant to others; donation. In the event the option was
granted to a person, natural or juridical, who is not an
employee, or a supplier of goods or services to the
grantor, the difference between the book value/fair
market value of the shares, whichever is higher, at the
time of the exercise of the stock option and the price
fixed on the grant date, shall be considered a donation,
and shall be subject to donor's tax among others.
Cash-settlement option; grantor pays difference of MV and
exercise price if MV>EP. The above rules on Equity-
settlement Option also applies in cases of Cash-settlement
Options. Cash-settled options do not require the actual delivery
of stocks. Instead, the market value, at the exercise date, of the
stock is compared to the exercise price, and the difference (if in
a favorable direction) is paid by the grantor to the holder of the
option.
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Reportorial Requirements
1. Grant of Option. Within 30 days from the grant of the
option, the issuing corporation shall submit to the
Revenue District Office where it is registered a
statement under oath indicating the following:
a. Terms and Conditions of the stock option
b. Names, TINs, positions of the grantees
c. Book value, fair market value, par value of the
shares subject of the option at the grant date
d. Exercise price, exercise date and/or period
e. Taxes paid on the grant, if any
f. Amount paid for the grant, if any.
2. Exercise of Option. During the exercise period, the
issuing corporation shall file a report on or before the
10th day of the month following the month of exercise
stating therein the following:
a. Exercise Date.
b. Names, TINs, positions of those who exercised
the option.
c. Book value, fair market value, par value of the
shares subject of the option at the exercise
date/s.
d. Mode of settlement (i.e., cash, equity).
e. Taxes withheld on the exercise, if any.
f. Fringe benefits tax paid, if any.
General applicability. The tax treatment and reportorial
requirements in this Circular are rules of general applicability
and also apply to options other than stock.
RMC 088-12
December 27, 2012
Grant of option to RF; additional compensation. In BIR
Ruling 119-2012 it was ruled that any income or gain derived
by the employees from their exercise of stock options is
considered as additional compensation subject to income tax,
and consequently, to withholding taxes on compensation. In the
said ruling, stock options were granted by domestic
corporations as part of their compensation plan. Under the plan,
the employees were given the right to buy a specified number
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of shares of a foreign corporation, up to a specified time/period
from the grant date, at a fixed price regardless of the stock's
future market price.
Grant of option to managerial; FB subject to FBT. Any
income or gain derived from stock option plans granted to
managerial and supervisory employees which qualify as fringe
benefits is subject to FBT. The additional compensation or the
taxable fringe benefit, as the case may be, is the difference of
the book value/fair market value of the shares, whichever is
higher, at the time of the exercise of thee stock option and the
price fixed on the grant date. The option has value only if, at
the time of the exercise, the stock is worth more than the price
fixed on the grant date. The additional compensation or taxable
fringe benefit arises whether the shares of stocks involved are
that of a domestic or foreign corporation.
• Original issuance subject to DST. If the shares to be
issued at the exercise of the stock options come from
the unissued shares of stock of the issuing corporation,
the original issuance of the shares is subject to DST.
S/B/E. In the event that the employee subsequently sell, barter,
exchange, or otherwise dispose of shares of stock obtained
from their exercise of the stock options, the tax treatment is as
follows:
a. Unlisted shares; CGT on higher of SP/BV/FMV and
price @ time of exercise. If the shares involved are
shares of stock in a domestic corporation not traded in
the Stock Exchange, the gain, if any, is subject to
capital gains tax imposed under Sections 24 and 25 of
the NIRC, as amended. The gain from sale or transfer
of the shares of stock is the difference between the
selling price/book value (BV)/fair market value (FMV)
of the shares, whichever is higher, at the date of sale
and the price at the time of exercise of the option.
• Subject to DST. Further, the sale or transfer of the
shares is subject to thee DST imposed under Sec. 175
of the NIRC as implemented by RR 13-2004 upon
execution of the deed transferring ownership or rights
JO VALLES
TAXATION
thereto, or upon delivery, assignment or indorsement
of such shares in favor of another.
b. Listed; STT. If the shares involved are shares of stock
listed and traded through the Local Stock Exchange,
the transaction is subject to stock transaction tax
imposed under Section 127 (A) of the NIRC, as
amended.
Foreign corporation; ordinary tax. If the shares involved are
shares of stock in a foreign corporation, the gain, if any, is
subject to ordinary income
If stock purchase plan not compulsory or automatic, not
part of compensation; subject to CGT if later on sold. SMC
granted employees stock purchase plan wherein the employees
will pay 15% less than the normal price of the stocks. The same
is not automatic or compulsory. The 15% reduction on
premium relative to the subscriptions of the employees
participating in the ESPP could not be considered as income
forming part of their compensation. The participation in the
ESPP is neither automatic nor compulsory on the part of the
SMG employees, thus, the same could be appropriately
characterized as an investment portfolio created for the benefit
of SMC and for the participating SMG employees only. The
reduction on premium is not given as a remuneration for
services performed by the SMG employees under the
employer-employee relationship, rather it is given based on a
mutual contractual relationship arising from the subscription by
the SMG employees to the authorized capital stock of SMC. In
the event, however, that the participating SMG employees sell
the SMC shares, the gain, if any, derived from the exercise of
the stock options granted under the ESPP is subject to capital
gains tax. The gain that the ESPP participants will realize is the
excess of the selling price over the subscription costs, which is
less by 15% than the price at which the SMC shares were
quoted at the time of subscription. BIR Ruling 003-07
• If not compensation taxable when sold. The
subscription to the SMC shares by the SMG employees
participating in the ESPP at a price 15% less than the
price thereof quoted in the stock exchange does not
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give rise yet to a taxable event at the time of
subscription because the said 15% difference is a
reduction of the cost of their subscriptions to the SMC
shares, therefore, it is not yet a realized income. The
taxable event will arise when the ESPP participants sell
the SMC shares and collect the proceeds thereof.
If stock purchase plan compulsory or automatic, part of
compensation when exercised. Intel grants stock purchase
plan for its employees and the employees of Intel’s subsidiaries
like ITPI as additional incentive to attract, retain, and motivate
employees by providing the opportunity to purchase common
stock shares of Intel at a discount. It is paid by the employees
through payroll deduction. Since the SPP incentive is
provided to all qualified or eligible employees, including rank
and file employees. On the Purchase Date, ITPI employee-
participants will be able purchase Intel Corporation common
shares of stock at a discount of not less than 15% of the market
price, based on the SPP's current designated discount. That
portion of the purchased price for the Intel Corporation (a
United States company) common stock funded from payroll
deductions represents an investment activity of ITPI employee-
participants, which does not have any Philippine tax
implication. However, the discount provided under the SPP is
a realized benefit actually received by the employee-
participants upon exercise or purchase of the Intel Corporation
common stock. If the employee-participants bought the shares
at market, they would have been made to pay for the shares at
prevailing market price. Consequently, the discount is
considered compensation under Section 32 of the Tax Code, as
amended, implemented by Revenue Regulation No. 2-98, as
amended, mentioned above. That the discount is a realized
benefit considered as additional compensation for the services
of employee-participants becomes more evident by the fact that
ITPI expensed out the discount. BIR Ruling DA-353-2007
If stock purchase plan contingent but virtually all
employees were given shares, part of compensation when
exercised. The P&G Philippine companies grant stock options
to their employees as part of their compensation plan. The
employees are granted stock options and they are given the
right to buy a specified number of P&G US common shares,
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at a fixed price regardless of the stock’s future market price.
The P&G Philippine companies shoulder any difference
between the market value of, and the exercise price for the
stocks paid by their respective employees. The grant of stock
options are dependent on performance, outstanding business
achievements and, exemplary organization, technical or
business accomplishments/demonstrated expertise yielding
significant effects on business/society, respectively. Under the
Future Share program, virtually all full-time and most part-time
employees were given on one-time number of shares upon
employment. Since the grant of stock options is such that
virtually all full-time and most part-time employees were given
a one-time number of shares upon employment under the
Future Shares program, then any income/gain derived by the
employees from their exercise of P&G stock options granted
under the P&G Philippine companies' compensation program
is considered as additional compensation to the employee
subject to the income tax and consequently to the withholding
tax on compensation. BIR Ruling 119-12
• When foreign stocks acquired under stock
compensation plan are sold, subject to ordinary
income tax. In the event, however, that the
participating P&G Philippine companies' employees
sell the P&G shares, the gain, if any, derived from the
exercise of the stock options granted under the SOP,
the STAR Program, BGP and the RSP is subject to
ordinary income tax. BIR Ruling 119-12
• Company subsidy treated as deductible expense.
The expenses incurred by the P&G Philippine
companies, pertaining to the difference between the
exercise price and the market value of the shares when
its employees exercised their rights on stock options,
are considered as ordinary and necessary business
expense deductible for purposes of computing the P&G
Philippine companies' taxable income. BIR Ruling
119-12
Grant to managerial employees; subject to FBT at the time
of delivery. It is clear from your representation that the grant
of Performance Share unit Plan, either in Nestlé S.A. shares or
JO VALLES
TAXATION
its cash equivalent, constitutes payment of fringe benefits
under. Its grant, including when to grant and how many shares
to grant per eligible employee, is within the sole discretion of
the Company and subject to the following conditions, as
indicated in the Nestlé Performance Share Unit Plan brochure:
a) The employee is a Nestlé Company employee at the date of
the grant; and b) The employee is holding an eligible senior
management position. Such being the case, the benefits under
are subject to the fringe benefit tax. NPI being the employer, is
liable to pay a final tax of 32% based on the grossed-up value
of the benefit granted, which represents the actual monetary
value of the aforesaid benefit under your PSUP. Accordingly,
the 32% tax is payable upon the delivery of the shares of stock
or its cash equivalent. BIR Ruling 1366-18
• Benefits also deductible business expense at the time
of delivery of stocks or cash equivalent. It is also
clear under the NIRC that the deduction shall be made
in the year when the related expense is incurred which
in this case is at the time of the delivery of the shares
of stock of Nestlé S.A. or its cash equivalent. Such
being the case, NPI can claim as deduction from gross
income the grossed-up monetary value of the benefit
that is furnished to its eligible employees under the
PSUP, which is the value of the shares of stock of
Nestlé SA at the time of its delivery to the executives
participating in the PSUP, or its cash equivalent. BIR
Ruling 1366-18
Stock options for employment in a foreign company
considered as income without. BBB was an American citizen
who worked for Google US. Part of his compensation included
Google Stock Options. He later terminated his employment and
then worked with Google PH. It was only during his stint in
Google PH that the google stock options vested. As
represented, part of BBB's compensation during his
employment with Google US included Google Stock Options.
Consequently, the aforesaid compensation of BBB, in the form
of stock options, from services rendered in the US is income
derived from sources outside the Philippines, therefore, not
subject to income tax. In other words, the gains derived from
BBB's exercise of the Google Stock Options are not considered
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to have come from sources within the Philippines, hence, not
taxable in the Philippines. BIR Ruling 523-19
Discussion: Phantom shares. Instead of granting common
shares or preferential shares that would entitle the recipient of
the shares to equity ownership (including the right to attend
stockholders’ meeting), the corporation may opt to grant
phantom shares as stock option. The nature of phantom shares
is that is non-existent such that the holder thereof is not an
equity owner, but will receive dividends due to said shares. The
tax treatment of these shares is following the normal procedure
for taxing befits as summarized in the Benefit Diamond lmao.
Discussion: Why might a company want to issue phantom
equity instead of actual equity? A. Phantom equity does not
have some of the drawbacks associated with providing actual
equity. Companies may not want to issue actual equity because
making the employee an actual shareholder might give him or
her voting rights or unforeseen minority rights under state law
Additional agreements, such as a shareholder’s agreement, may
come into play that increase complexity and legal fees
Consideration must be given to the fate of shares issued to an
employee that separates service from the company If the
company has a buyout provision that applies to a departing
shareholder, the plan can increase the company’s cost of
keeping the stock in the possession of the company
SPECIAL TAX TREATMENT OF THE MINIMUM
WAGE
Summary. For minimum wage earners, the following are
exempt from compensation income:
1. Taxable income
2. holiday pay
3. overtime pay
4. night shift differential pay
5. hazard pay
6. additional compensation in excess of 90, 000
NIRC Section 22(HH), as amended by RA 9504. Minimum
wage earners. The term minimum wage earner shall refer to
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1. Private sector. a worker in the private sector paid the
statutory minimum wage, or
2. Public sector. to an employee in the public sector with
compensation income of not more than the statutory
minimum wage in the non-agricultural sector where
he/she is assigned.
NIRC Section 22(GG), as amended by RA 9504. Statutory
minimum wage. The term 'statutory minimum wage' earner
shall refer to rate fixed by the Regional Tripartite Wage and
Productivity Board, as defined by the Bureau of Labor and
Employment Statistics (BLES) of the Department of Labor and
Employment (DOLE)
Exemptions for MWEs. Minimum wage earners as defined in
Section 22 (HH) of this Code shall be exempt from the payment
of income tax on their
1. taxable income: Provided, further, That the
2. holiday pay,
3. overtime pay,
4. night shift differential pay and
5. hazard pay
received by such minimum wage earners shall likewise be
exempt from income tax. NIRC Sec. 24(A) last paragraph
inserted by RA 9504 Sec. 2
RR 11-2018 Sec. 6 on Sec. 2.78.1 (B)(13)
(B) Exemption from withholding tax on compensation. The
following income payments are exempted from the requirement
of withholding tax on compensation but may be subject to
income tax depending on the nature/sources of income earned
by the individual recipient.
xxx xxx xxx
(13) Compensation income of Minimum Wage Earners
(MWEs) who work in the
o private sector and being paid the Statutory
Minimum Wage (SMW), as fixed by Regional
Tripartite Wage and Productivity Board
(RTWPB)/National Wages and Productivity
Commission (NWPC), applicable to the place
where he/she is assigned, as well as the
compensation of employees in the
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o public sector who are paid not more than the
SMW applicable to non-agricultural sector, as
fixed by RTWPB/NWPC, applicable to the
place where he/she is assigned.
Statutory minimum wage. Statutory Minimum Wage (SMW)
shall refer to the rate fixed by the Regional Tripartite Wage and
Productivity Board (RTWPB), as defined by the Bureau of
Labor and Employment Statistics (BLES) of the Department of
Labor and Employment (DOLE).
• The RTWPB of each region shall determine the wage
rates in the different regions based on established
criteria and shall be the basis of exemption from
income tax for this purpose.
• The NWPC shall officially submit a Matrix of Wage
Order by region, and any changes thereto, within ten
(10) days after its effectivity to the Assistant
Commissioner, Collection Service, for circularization
in the BIR.
Other exemptions for MWEs. Aside from the SMW, the
holiday pay, overtime pay, night shift differential pay, and
hazard pay, earned by the aforementioned MWE shall likewise
be covered by the above exemption.
Hazard pay; actually assigned to danger or strife-torn
areas. For purposes of these regulations, hazard pay shall mean
the amount paid by the employer to MWEs who were actually
assigned to
1. danger or strife-torn areas,
2. disease-infested places, or in
3. distressed or isolated stations and camps,
which expose them to great danger or contagion or peril to life.
Any hazard paid to MWEs which does not satisfy the above
criteria is deemed subject to income tax and consequently,
withholding tax on the said hazard pay.
Requirements for hazardous employment. In case of
hazardous employment, the employer shall
1. indicate in the Alphabetical List of Employees, the
MWEs who received the hazard pay, the period of
employment,
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2. the amount of hazard pay, and
3. the justification for such payment
as certified by the concerned DOLE/allied agency, which
certification is part of the attachment in the filing of the Annual
Information Return (BIR Form 1604-C). In the case of
employees under the public sector, the document to be attached
is the Department of Budget Management (DBM) Circular
related to such payment of hazard pay.
Additional compensation in excess of 90,000 already
taxable. Additional compensation such as commissions,
honoraria, fringe benefits, benefits in excess of the allowable
statutory amount of ₱90,000.00, taxable allowances, and other
taxable income given to an MWE by the same employer other
than those which are expressly exempt from income tax shall
be subject to withholding tax using the withholding tax table.
MWE income from other sources are taxable. Likewise,
MWEs receiving other income from other sources in addition
to compensation income, such as income
1. from other concurrent employers,
2. from the conduct of trade, business, or practice of
profession,
except income subject to final tax, are subject to income tax
only to the extent of income other than SMW, holiday pay,
overtime pay, night shift differential pay, and hazard pay
earned during the taxable year.
• Any income subject to income tax may be subject to
withholding tax; however, income exempt from
income tax is consequently exempt from withholding
tax. Further, income not subject to withholding tax
does not necessarily mean that it is not subject to
income tax.
Reduction of wage for purposes of exemption from tax =
disallowance. Any reduction or diminution of wages for
purposes of exemption from income tax shall constitute
misrepresentation and therefore, shall result to the automatic
disallowance of expense, i.e. compensation and benefits
account, on the part of the employer. The offenders may be
criminally prosecuted under existing laws.
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RR 10-2008 Sec. 2 inserting Sec. 2.78.5 in RR 2-98
Basis is 8hrs/day. The basis of the computation of the
minimum wage rates prescribed by law shall be the normal
working time of 8 hours a day.
Computation of wages is based on CBA/Labor Code. The
computation of wages shall be in accordance with the
Collective Bargaining Agreement (CBA), if any, or the
provisions of the Labor Code as implemented. Unless
otherwise amended or repealed by subsequent pertinent laws,
rules and regulations, the holiday pay, overtime pay, night shift
differential and hazard pay shall be understood to be computed
based on such agreement or labor law provisions.
In the determination of the minimum wage on a monthly basis,
the withholding agent shall be guided by the prevailing
minimum wage as reflected in the latest Matrix of Wage Order
and its own policy on whether employees are (a) not considered
paid on Saturdays and Sundays or rest days, (b) not considered
paid on Sundays or rest days, (c) considered paid on rest days,
special days and regular holidays, or (d) required to work
everyday including Sundays or rest days, special days and
regular holidays. The resulting number of days in the above
enumerated categories are referred to as the factor or number
of working/paid days in a year. (Annex “B”)
• Not paid on Saturdays, Sundays, or rest days; 261.
On the first classification, the monthly SMW is
computed by multiplying the applicable daily wage
rate by the factor of 261 days and divide the same by
twelve; the semi- monthly at one-half (½) of the
monthly rate and the weekly SMW is arrived at by
spreading the annual minimum basic wage over fifty-
two (52) weeks. Thus, on a P382.00 minimum daily
wage in Metro Manila, the monthly SMW is
P8,308.00, the semi- monthly at P4,154.00 and weekly
at P1,917.00.
• Not paid on Sundays; 313. On the second category,
the monthly SMW is computed by multiplying the
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applicable daily wage rate by the factor of 313 days and
divide the product by twelve. Hence, on a P382.00
minimum daily wage, the monthly SMW is P9,964.00,
the semimonthly at P4,982.00 and weekly at
P2,300.00.
• Paid all days; 365. On the third classification, the
monthly SMW is computed by multiplying the
applicable daily wage rate by the factor of 365 days,
divided by twelve. Thus, on a 382 minimum daily
wage, the monthly SMW is P11,619.00, the semi-
monthly at P5,810.00 and weekly at P2,681.00.
• Required to work all days; 392.5. On the fourth
classification, the monthly SMW is computed by
multiplying the applicable daily wage rate by the factor
of 392.5 days, divided by twelve. Hence, on a 382
minimum daily wage, the monthly SMW is
P12,495.00, the semi- monthly at P6,247.00 and
weekly at P2,883.00.”
o Now, it should be 393. 8.
Ordinary working days (297) 297 297
Sundays/Rest days (52) 52 * 1.3 67.6
Regular holiday (12) 12 * 2 24
Special days (4) 4 * 1.3 5.2
Total (365) 393.8
Rationale. The law exempts from income taxation the most
basic compensation an employee receives - the amount
afforded to the lowest paid employees by the mandate of law.
In a way, the legislature grants to these lowest paid employees
additional income by no longer demanding from them a
contribution for the operations of government. This is the
essence of R.A. 9504 as a social legislation. The government,
by way of the tax exemption, affords increased purchasing
power to this sector of the working class. Soriano vs Secretary
of Finance
Revenue Memo Circular 050-18
Q11: Is the MWE exempt from income tax?
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A11: The MWE is exempt from income tax on his basic SMW,
overtime pay, holiday pay, night shift differential pay and
hazard pay. However, income other than those mentioned are
subject to income tax.
Q12: What if the MWE receives service charge which is not
included in the enumerated exemptions such as holiday pay,
overtime pay, etc., will he still be exempt from income tax? If
not, how will his income tax be computed?
A12: The MWE will still be exempt from income tax on his
SMW including the other income earned specifically
enumerated as exempt under the law. However, income other
than those in the enumeration shall already be taxable. The
taxable income shall be computed by deducting the non-
taxable/exempt portion and other deductions from the gross
compensation income. Then, the resulting taxable income shall
be multiplied to the applicable income tax rate using the
prescribed tax table to get the amount of income tax due.
Q13: For those whose basic pay is more than the SMW but
does not exceed P250,000, are other income like holiday pay,
OT, NDP, hazard pay & others also tax exempt?
A13: The employee is no longer considered an MWE since his
basic pay is more than the SMW. Thus, the amount of basic
pay, OT pay, holiday pay, NDP pay and hazard pay shall be
subject to income tax, and consequently, to the withholding tax
on compensation.
WITHHOLDING TAX ON COMPENSATION INCOME
Definitions
Wages. The term wages means all remuneration (other than
fees paid to a public official) for services performed by an
employee for his employer, including the cash value of all
remuneration paid in any medium other than cash, except that
such term shall not include remuneration paid:
(1) For agricultural labor paid entirely in products of the
farm where the labor is performed, or
(2) For domestic service in a private home, or
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(3) For casual labor not in the course of the employer's
trade or business, or
(4) For services by a citizen or resident of the Philippines
for a foreign government or an international
organization. National Internal Revenue Code
§78(A)
If ½ or more is wages, everything is wages; if more than one
half not wages, everything not wages. If the remuneration
paid by an employer to an employee for services performed
during one-half (1/2) or more of any payroll period of not more
than thirty-one (31) consecutive days constitutes wages, all the
remuneration paid by such employer to such employee for such
period shall be deemed to be wages; but if the remuneration
paid by an employer to an employee for services performed
during more than one -half (1/2) of any such payroll period does
not constitute wages, then none of the remuneration paid by
such employer to such employee for such period shall be
deemed to be wages. National Internal Revenue Code §78(A)
Payroll Period. The term 'payroll period' means a period for
which payment of wages is ordinarily made to the employee by
his employer, and the term 'miscellaneous payroll period'
means a payroll period other than, a daily, weekly, biweekly,
semi-monthly, monthly, quarterly, semi-annual, or annual
period. National Internal Revenue Code §78(B)
Employee. The term 'employee' refers to any individual who is
the recipient of wages and includes an
1. officer,
2. employee or
3. elected official of the Government of the Philippines or
any political subdivision, agency or instrumentality
thereof.
4. The term 'employee' also includes an officer of a
corporation. National Internal Revenue Code §78(C)
Employer. The term 'employer' means the person for whom an
individual performs or performed any service, of whatever
nature, as the employee of such person, except that:
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1. If the person for whom the individual performs or
performed any service does not have control of the
payment of the wages for such services, the term
'employer' (except for the purpose of Subsection(A)
means the person having control of the payment of
such wages; and
2. In the case of a person paying wages on behalf of a
nonresident alien individual, foreign partnership or
foreign corporation not engaged in trade or business
within the Philippines, the term 'employer' (except for
the purpose of Subsection(A) means such person.
National Internal Revenue Code §78(D)
Revenue Regulation No. 8-2018 §2
a. Compensation Income- all renumeration for services
performed by an employee for his employer under an
employer-employee relationship, unless specifically
excluded by the code.
The name by which the remuneration for services is
designated is immaterial. Thus:
1. salaries,
2. wages,
3. emoluments and honoraria,
4. allowances,
5. commissions (e.g. transportation representation,
entertainment and the like);
6. fees including director's fees, if the director is, at
the same time, an employee of the
employer/corporation;
7. taxable bonuses and fringe benefits, except those
which are subject to the fringe benefits tax under
Sec. 33 of the Code and the allowable "de minimis"
benefits;
8. taxable pensions and retirement pay; and
9. other income of a similar nature
constitute compensation income
b. Compensation Income Earners. Individuals whose
source of income is derived purely from an employer-
employee relationship.
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c. Employee. An individual performing service under an
employer-employee relationship. • Withholding agent is constituted the agent of both
• This term covers all employees, including the Government and the taxpayer. With respect to
officers and employees, whether elected or the collection and/or withholding of the tax, he is the
appointed, of the Government of the Government’s agent. In regard to the filing of the
Philippines, or any political subdivision necessary income tax return and the payment of the tax
thereof or any agency or instrumentality. to the Government, he is the agent of the taxpayer. He
d. Employer. Any person whom an individual performs
is held personally liable for the tax he is duty bound to
or performed any service, of whatever nature, under an
withhold. Philippine Guaranty Company, Inc. v CIR
employee-employer relationship.
• It is not necessary that the services be
Requirement of Withholding. Except in the case of a
continuing at the time the wages are paid in
order that the status of employer may exist. minimum wage earner as defined in Section 22(HH) of this
code, every employer making payment of wages shall deduct
Thus, for purposes of withholding, a person for
and withhold upon such wages a tax determined in accordance
whom an individual has performed past
with the rules and regulations to be prescribed by the Secretary
services and from whom he is still receiving
of Finance, upon recommendation of the Commissioner. NIRC
compensation is an employer.
e. Employer-Employee relationship. This exists when a Section 79(A)
person for whom services were performed (employer)
Tax paid by recipient. If the employer, in violation of the
has the right to control and direct an individual who
provisions of this Chapter, fails to deduct and withhold the tax
performs the services (employee), not only as to the
as required under this Chapter, and thereafter the tax against
result of the work to be accomplished but also as to the
details, methods and means by which it is which such tax may be credited is paid, the tax so required to
be deducted and withheld shall not be collected from the
accomplished. An employee is subject to the control of
employer; but this Subsection shall in no case relieve the
the employer not only as to what shall be done, bit how
employer from liability for any penalty or addition to the tax
it shall be done.
otherwise applicable in respect of such failure to deduct and
• It is not necessary that the employer actually
withhold. NIRC Section 79(B)
exercises the right to direct or control the
manner in which the services are performed. It
Liability for tax of the employer; withholding and
is sufficient that there exists a right to control
remittance. The employer shall be liable for the withholding
the manner of doing the work.
and remittance of the correct amount of tax required to be
deducted and withheld under this Chapter. If the employer fails
Concept of withholding tax. This is implementation of the
to withhold and remit the correct amount of tax as required to
principle of administrative feasibility whereby the tax due is
be withheld under the provision of this Chapter, such tax shall
withheld at source or by the payor of the income. This is
be collected from the employer together with the penalties or
covered by section 57 of the Tax Code.
additions to the tax otherwise applicable in respect to such
Employer’s duty: withholding at source failure to withhold and remit. NIRC Section 80(A)
Withholding agent. The term withholding agent means any Final withholding tax
person required to deduct and withhold any tax under the
provisions of Section 57. NIRC Section 22(K)
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Discussion (Montero). There are 4 types of income subject to
final withholding tax:
1. Passive income
2. Income of gross income earners
3. Fringe benefits
4. Informer’s reward
NIRC Section 57(A)
Tax on the following items of income are withheld by the
payor. Subject to rules and regulations the Secretary of Finance
may promulgate, upon the recommendation of the
Commissioner, requiring the filing of income tax return by
certain income payees, the tax imposed or prescribed by the
following Sections on specified items of income shall be
withheld by payor-corporation and/or person and paid in the
same manner and subject to the same conditions as provided in
Section 58 of this Code.
• Note. The amount withheld is the amount of tax due.
RC, NRC, RA
24(B)(1). Interests, royalties, prizes and other winnings
24(B)(2). Cash and/or property dividends
24(C). Capital gains from sale of shares of stock not traded
24(D)(1). Capital gains from sale of real property
NRA-ETB
25(A)(2). Cash and/or property dividends; interests, royalties,
prizes, and other winnings
25(A)(3). Capital gains from sale of shares of stock not traded;
capital gains from sale of real property
NRA-NETB
25(B). Entire income received from all sources within the PH
25(C). Gross income received by every alien individual
employed by R/AHQ and ROHQ established in the Philippines
by multinational companies
25(D). The gross income received by every alien individual
employed by offshore banking units established in the
Philippines
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25(E). One employed and assigned in the Philippines by a
foreign service contractor or by a foreign service subcontractor
engaged in petroleum operations in the Philippines.
Domestic corporations
27(D)(1). Interest from deposits and yield or any other
monetary benefit from deposit substitutes and from trust funds
and similar arrangements, and royalties
27(D)(2). Capital gains from sale of shares of stock not traded
27(D)(3). Income derived under the expanded foreign currency
deposit system
27(D)(5). Capital gains realized from the sale, exchange or
disposition of lands and/or buildings
Resident Foreign corporations
28 (A)(4). Offshore banking units
28(A)(5). Tax on branch profit remittances
28(A)(7)(a). Interest from deposits and yield or any other
monetary benefit from deposit substitutes, trust funds and
similar arrangements and royalties
28(A)(7)(b). income derived under the expanded foreign
currency deposit system W
28(A)(7)(c). Capital gains from sale of shares of stock not
traded in the stock exchange
Non-resident foreign corporation
28(B)(1). Gross income from all sources within the PH
28(B)(2). Nonresident cinematographic film owner, lessor or
distributor
28(B)(3). Nonresident owner or lessor of vessels chartered by
Philippine nationals
28(B)(4). Nonresident owner or lessor of aircraft, machineries
and other equipment
28(B)(5)(a). Interest on foreign loans
28(B)(5)(b). Intercorporate dividends
28(B)(5)(c). Capital gains from sale of shares of stock not
traded in the stock exchange
33. Fringe benefits
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282. Informer’s reward for discovery of violations of the NIRC
and discovery and seizure of smuggled goods
Creditable withholding tax
Section 57(B)
The Secretary of Finance may, upon the recommendation of the
Commissioner, require the withholding of a tax on the items of
income payable to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons as provided for by
law, at the rate of:
• not less than one percent (1%) but not more than
• thirty-two percent (32%) thereof,
which shall be credited against the income tax liability of the
taxpayer for the taxable year.
Starting 2019, not more than 15%. Provided, That, beginning
January 1, 2019, the rate of withholding shall not be less than
one percent (1%) but not more than fifteen percent (15%) of the
income payment.
BIR Form 2307 proves withholding. BIR Form 2307 is a
statement showing the amount paid for the subject transaction
and the amount of tax withheld therefrom. Its purpose is to
establish only the fact of withholding of the claimed creditable
withholding tax. There is nothing in BIR Form No. 2307 which
would establish either utilization or non-utilization, as the case
may be, of the creditable withholding tax. Philippine National
Bank v. Commissioner of Internal Revenue
Withholding requirements
Revenue Regulation No. 2.98 §2.79 as amended by
Revenue Regulation No. 11-2018 (January 31, 2018)
§7.
Income Tax Collected at Source on Compensation Income
(A) Requirement of Withholding; all except NRA-
NETB. Every employer must withhold from compensation
paid an amount computed in accordance with these
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Regulations, whether the employee is a citizen or an alien,
except non-resident alien not engaged in trade or business.
o No withholding on the SMW of MWEs.
Provided, that no withholding of tax shall be
required on the SMW, including holiday pay,
overtime pay, night shift differential and hazard
pay of MWEs in the private/public sectors as
defined in these Regulations.
o Only excess of P90, 000 ceiling is taxed.
Provided, further, that an employee who receives
additional compensation such as commissions,
honoraria, fringe benefits, benefits in excess of the
allowable statutory amount of P90,000.00, taxable
allowances and other taxable income other than
the SMW, holiday pay, overtime pay, hazard pay,
and night shift differential pay, shall be taxable
only on such additional compensation received.
(B) Computation of Withholding Tax on Compensation
Income in General. The procedures prescribed below shall
govern the computation of withholding tax on the taxable
compensation income of the employees. Provided, however,
that taxable fringe benefits received by employees other than
rank and file, as defined in the Labor Code of the Philippines,
as amended, shall be subject to Fringe Benefits Tax pursuant to
Section 33 of the Tax Code, as amended.
1. Use of Withholding Tax Tables. In general,
every employer making payment of compensation
shall deduct and withhold from such
compensation a tax determined in accordance with
the prescribed withholding tax table, Annex "D"
for compensation paid from January 1, 2018 until
December 31, 2022 (as published under RMC 1-
2018 dated January 4, 2018) and Annex "E" for
compensation paid starting January 1, 2023.
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If the compensation is paid other than daily,
weekly, semi-monthly or monthly, the tax to be
withheld shall be computed as follows:
a. Annually — use the annualized
computation referred to in Sec. 2.79
(B)(5)(b) of these regulations;
b. Quarterly and semiannually — divide the
compensation by three (3) or six (6)
respectively, to determine the average
monthly compensation. Use the monthly
withholding tax table to compute the tax,
and the tax so computed shall be multiplied
by three (3) or six (6) accordingly.
2. Components of Withholding Tax Table.
a. Column 1 pertains to the following details:
1. Payroll period
2. Compensation range
3. Prescribed withholding tax
b. Columns 2 to 7 show the tax due for each
of the compensation range identified.
3. Steps to determine the amount of tax to be
withheld.
Step 1. Determine the total monetary and non-
monetary compensation paid to an employee for the
payroll period: monthly, semi-monthly, weekly or daily,
as the case may be, excluding non-taxable benefits and
mandatory contributions.
1. Classify taxable compensation into regular and
supplementary compensation.
a. Regular compensation includes basic
salary, fixed allowances for representation,
transportation and other allowances paid to
an employee per payroll period.
b. Supplementary compensation includes
payments to an employee in addition to the
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regular compensation, such as
commission, overtime pay, taxable
retirement, taxable bonus, and other
taxable benefits, with or without regard to
a payroll period.
2. Representation and Transportation
Allowances (RATA) granted to public officers
and employees under the General Appropriations
Act and the Personnel Economic Relief and
Allowance (PERA) which essentially constitute
reimbursement for expenses incurred in the
performance of government personnel's official
duties shall not be subject to income tax and
consequently to withholding tax.
Step 2. Use the appropriate table in Annex "D" (for
compensation paid from January 1, 2018 to December 31,
2022) or Annex "E" (for compensation paid from January 1,
2023 onwards) and select the applicable payroll period
Step 3. Determine the compensation range of the employee
by taking into account only the total amount of taxable regular
compensation income and apply the applicable tax rates
prescribed thereon.
Step 4. Compute the withholding tax due by adding the tax
predetermined in the compensation range as indicated on the
column used and the rate of tax on the excess of the total
compensation over the minimum of the compensation range.
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(2) Segregate the taxable from the non-taxable
compensation (excluding the fringe benefits) paid to
the employee.
a. The taxable income refers to all remuneration
paid to an employee not otherwise exempted
by law from income tax and consequently from
withholding tax.
b. The non-taxable income are those which are
specifically exempted from income tax by the
Code or other special laws as listed in Sec.
2.78.1(B) hereof (e.g. benefits not exceeding
P90,000), non-taxable retirement benefits and
separation pay);
(3) Segregate the taxable fringe benefit and subject the
same to withholding pursuant to Subsection D of this
section of the Regulations;
(4) Compute withholding tax on the taxable regular
and supplementary compensation in accordance
with the procedures prescribed in Sec. 2.79(B)(1) of
these regulations, for purposes of withholding per
(C) Computation of Withholding tax on Compensation and payroll period and for purposes of computing under the
Benefits Received by Employees other than Rank and File cumulative average method or for the year-end
Employees. The procedures provided herein below shall adjustment.
govern the computation of withholding tax on the taxable
Employees’ duty with respect to withholding income tax
compensation income of employees other than rank and file
pursuant to Sec. 279(B) of these regulations.
Application
(1) Determine the total monetary and non-monetary
SECTION 2.79.1.
compensation, segregating gross receipts which
Application for Registration for Individuals Earning
include 13th month pay, productivity incentives,
Compensation Income (BIR Form No. 1902)
Christmas bonus and fringe benefits received by the
employee per payroll period. When computing under
The application for registration of employees shall be
the annualized computation, the total monetary and
accomplished by both employer and employee relating to the
non-monetary compensation shall be that received for
following information and other requirements:
the calendar year. Gross benefits received by officials
A. Employee
and employees of public and private entities shall be
exempted from income tax and withholding tax;
1. Required Information.
provided that the amount of exemption shall not exceed
a. Name/Taxpayer's Identification Number
P90,000.
(TIN)/Residential Address of Employee/Other
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information required as stated in BIR Form
1902;
b. Civil Status of Employee whether single,
married, legally separated, widow or widower;
c. Occupational Status of spouse of the
employee. — If the employee is legally
married, the name and TIN, if any, of the
spouse, and whether said spouse is employed
locally or abroad, unemployed or engaged in
trade or business;
2. Required forms and attachments. The taxpayer shall
file an application for registration (BIR Form 1902). To
establish identity and status, taxpayer is required to
attach the following documents, if applicable:
a. Any identification issued by an authorized
government body (e.g., birth certificate,
passport, driver's license) that shows the name,
address, and birthdate of the applicant; In case
of alien employee, Passport and Working
Permit or photocopy of duly received
Application for Alien Employment Permit
(AEP) by the Department of Labor and
Employment (DOLE);
b. Copy of Marriage contract, if married;
c. Other documentary evidence to support
employees' identification, where the above
documents are not available.
3. Concurrent Multiple Employments. An employee
who is employed concurrently by two or more
employers within the same period of time during the
taxable year shall file the application for registration
(BIR Form No. 1902) with the main employer
(employer to whom the said employee's service is
render for most of the time during the taxable year) and
shall furnish a copy of the duly received application
with the secondary employers (2nd, 3rd, etc.
employers). The employed husband and wife shall
each file a separate application with their respective
employers
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4. Successive Multiple Employment. An employee who
transferred to another employer during the taxable
year, shall furnish the concerned new employer a copy
of the Certificate of Compensation Payment/Tax
Withheld (BIR Form No. 2316) for compensation
payment with or without withholding tax during the
taxable/calendar year issued by previous employer/s.
B. Employer
The employer with whom the Application for Registration
(BIR Form No. 1902) is filed, must indicate the date of receipt
thereon and accomplish Part IV of the said Application
pertaining to Employer's Information such as TIN, Employer's
Registered Name, and other relevant information.
C. Procedures for the filing of the Application for
Registration (BIR Form No. 1902) and/or
Application for Registration Information Update
(BIR Form No. 1905)
1. All employers shall require their concerned employees
to accomplish in triplicate the Application for
Registration BIR Form 1902 (if the employee does not
have existing TIN), distributed as follows:
1.1. Original copy — RDO;
1.2. Duplicate — employer; and
1.3. Triplicate — employee.
The said forms shall be accomplished and submitted based on
the following manner:
a. New employee/s shall accomplish the Application for
Registration for Individuals Earning Compensation
Income (BIR Form No. 1902) and submit the same to
the employer.
The employer shall file the fully accomplished
registration form of employees registering for the first
time to the BIR within ten (10) days from the date of
employment or secure the TIN of new employees using
the e-Registration System;
b. In case of changes in the information data in the
Application for Registration (BIR Form No. 1902)
previously submitted by the employee to its current
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employer, such as changes in employment, multiple
employment status and amount of compensation
income, the employee should furnish his/her employer
a copy of BIR Form No. 1905 duly stamped received
by the RDO where the employee is registered. The
employer shall then make the necessary adjustments on
the withholding tax of the employee based on the new
information;
2. Registration and information updates of employees
receiving purely compensation income shall follow the
existing policies and procedures thereon.
Failure
RR 11-2018 Section 9
SECTION 9. Section 2.79.2 of RR No. 2-98, as amended, is
hereby further amended to read as follows:
Failure to file Application for Registration (BIR Form No.
1902). Where an employee, in violation of these regulations
either fails or refuses to file an Application for Registration
(BIR Form No. 1902) together with the required attachments,
the employer shall withhold the taxes prescribed under the
revised withholding tax table (Annex "D" or "E", whichever is
applicable).
Personal exemptions
NIRC Section 79(d)
(1) In General. Unless otherwise provided by this Chapter, the
personal and additional exemptions applicable under this
Chapter shall be determined in accordance with the main
provisions of this Title.
(2) Exemption Certificate.
a. When to File. On or before the date of commencement
of employment with an employer, the employee shall
furnish the employer with a signed withholding
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exemption certificate relating to the personal and
additional exemptions to which he is entitled.
b. Change of Status. In case of change of status of an
employee as a result of which he would be entitled to a
lesser or greater amount of exemption, the employee
shall, within ten (10) days from such change, file with
the employer a new withholding exemption certificate
reflecting the change.
c. Use of Certificates. The certificates filed hereunder
shall be used by the employer in the determination of
the amount of taxes to be withheld.
d. Failure to Furnish Certificate. Where an employee,
in violation of this Chapter, either fails or refuses to file
a withholding exemption certificate, the employer shall
withhold the taxes prescribed under the schedule for
zero exemption of the withholding tax table determined
pursuant to Subsection (A) hereof.
National Internal Revenue Code, Section 80(B)
When employee fails/refuses to file the withholding
exemption certificate. Where an employee
1. fails or refuses to file the withholding exemption
certificate or
2. willfully supplies false or inaccurate information
thereunder,
the tax otherwise required to be withheld by the employer shall
be collected from him including penalties or additions to the
tax from the due date of remittance until the date of payment.
Excess taxes withheld; forfeited in favor of government. On
the other hand, excess taxes withheld made by the employer
due to:
1. failure or refusal to file the withholding exemption
certificate; or
2. false and inaccurate information
shall not be refunded to the employee but shall be forfeited in
favor of the Government.
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Payroll
National Internal Revenue Code, Section 78(B)
Payroll Period. The term “payroll period” means a period for
which payment of wages is ordinarily made to the employee by
his employer, and the term
Miscellaneous payroll period means a payroll period other
than, a
1. daily,
2. weekly,
3. biweekly,
4. semi-monthly,
5. monthly,
6. quarterly,
7. semi-annual, or
8. annual period.
Revenue Regulations No 2-98 §2.78.2
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.
o Example: if an employer ordinarily pays the weekly
wages of his employees at the end of the week, but if
for some reason a particular employee receives
payment of his salaries for the past week in the middle
of the current week and receives the remainder at the
end of the same week, the payroll period is still the
calendar week; or if, instead, the employee is sent on a
3-week trip by his employer and receives at the end of
the trip a single compensation payment for 3-week
services, the payroll period is still the calendar week,
and the compensation payment shall be treated as
though it were 3 separate weekly compensation
payments.
One payroll period. For the purpose of determining the tax,
an employee can have but one payroll period with respect to
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the compensation paid by any one employer. Thus, if an
employee is paid a regular compensation for the weekly
payroll and in addition thereto is paid supplemental
compensation (for example taxable bonuses) determined with
respect to a different period, the payroll period is the weekly
payroll period.
Exemptions from withholding tax on compensation
13th month pay and other benefits
RR 11-2018 Sec. 6 inserting Sec. 2.58(B)(11) in RR 2-98
(11) Thirteenth month pay and other benefits.
a) Thirteenth month pay and equivalent to the mandatory
one (1) month basic salary of official and employees
of the government (whether national or local),
including government-owned or controlled
corporations, and/or private offices received after the
twelfth month pay; and
b) Other benefits such as
a. Christmas bonus,
b. productivity incentives,
c. loyalty award,
d. gift in cash or in kind, and
e. other benefits of similar nature actually
received by officials and employees of both
government and private offices, including
the Additional Compensation Allowance
(ACA) granted and paid to all officials and
employees of the
i. National Government Agencies
(NGAs)
ii. including State Universities and
Colleges (SUCs),
iii. Government-Owned and/or
Controlled Corporations (GOCCs),
iv. Government Financial Institutions
(GFIs) and
v. Local Government Units (LGUs).
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Ceiling of exclusion; 90, 000. The above stated exclusions
under (a) and (b) shall cover benefits paid or accrued during the
year, provided that the total amount shall not exceed ninety
thousand pesos (₱ 90,000), which may be increased through
rules and regulations issued by the Secretary of Finance, upon
recommendation of the Commissioner, after considering
among others, the effect on the same of the inflation rate at the
end of the taxable year.
Compensation income of MWEs
RR 11-2018 Sec. 6 inserting Sec. 2.58(B)(13) in RR 2-98
(repeated in Special Tax Treatment of the Minimum Wage)
(13) Compensation income of Minimum Wage Earners
(MWEs) who work in
1. the private sector and being paid the Statutory
Minimum Wage (SMW), as fixed by Regional
Tripartite Wage and Productivity Board
(RTWPB)/National Wages and Productivity
Commission (NWPC), applicable to the place where
he/she is assigned, as well as the compensation of
employees in
2. the public sector who are paid not more than the SMW
applicable to non-agricultural sector, as fixed by
RTWPB/NWPC, applicable to the place where he/she
is assigned.
Statutory minimum wage; fixed by RTWPB as defined by
BLES. Statutory Minimum Wage' (SMW) shall refer to the rate
fixed by the Regional Tripartite Wage and Productivity Board
(RTWPB), as defined by the Bureau of Labor and Employment
Statistics (BLES) of the Department of Labor and Employment
(DOLE). The RTWPB of each region shall determine the wage
rates in the different regions based on established criteria and
shall be the basis of exemption from income tax for this
purpose.
o Matrix of wage order w/in 10 days from effectivity.
The NWPC shall officially submit a Matrix of Wage
Order by region, and any changes thereto, within ten
(10) days after its effectivity to the Assistant
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Commissioner, Collection Service, for circularization
in the BIR.
Exemption coverage. Aside from the SMW, the
1. holiday pay,
2. overtime pay,
3. night shift differential pay, and
4. hazard pay,
earned by the aforementioned MWE shall likewise be covered
by the above exemption.
Hazard pay. For purposes of these regulations, hazard pay
shall mean the amount paid by the employer to MWEs who
were actually assigned to
1. danger or strife-torn areas,
2. disease-infested places, or
3. in distressed or isolated stations and camps
which expose them to great danger or contagion or peril to life.
o Hazard pay that does not meet criteria above
subject to withholding tax. Any hazard pay paid to n
MWEs which does not satisfy the above criteria is
deemed subject to income tax and consequently,
withholding tax on the said hazard pay.
In case of hazardous employment, the employer shall indicate
in the Alphabetical List of Employees,
1. the MWEs who received the hazard pay,
2. the period of employment, the amount of hazard pay,
and
3. the justification for such payment as certified by the
concerned DOLE/allied agency, which certification is
part of the attachment in the filing of the Annual
Information Return (BIR Form 1604-C).
4. In the case of employees under the public sector, the
document to be attached is the Department of Budget
Management (DBM) Circular related to such payment
of hazard pay.
Additional compensation in excess of 90, 000 subject to
withholding tax. Additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of
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the allowable statutory amount of P90,000.00, taxable
allowances, and other taxable income given to an MWE by the
same employer other than those which are expressly exempt
from income tax shall be subject to withholding tax using the
withholding tax table.
Income from other sources subject to withholding tax.
Likewise, MWEs receiving other income from other sources in
addition to compensation income, such as
1. income from other concurrent employers,
2. from the conduct of trade, business, or practice of
profession, except income subject to final tax,
are subject to income tax only to the extent of income other than
SMW, holiday pay, overtime pay, night shift differential pay,
and hazard pay earned during the taxable year.
Rules:
1. Any income subject to income tax may be subject to
withholding tax; however,
2. income exempt from income tax is consequently
exempt from withholding tax.
3. Further, income not subject to withholding tax does not
necessarily mean that it is not subject to income tax.
Any reduction or diminution of wages for purposes of
exemption from income tax shall constitute
misrepresentation and therefore, shall result to the automatic
disallowance of expense, i.e., compensation and benefits
account, on the part of the employer. The offenders may be
criminally prosecuted under existing laws.
Board directors’ fees
Revenue Memorandum Circular No. 34-2008
(April 15, 2008)
Tax Treatment of Director’s Fees for Income Tax and
Business Tax Purposes
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Director’s fees taxable as compensation income if employee.
Director's fees are taxable, for income tax purposes, as
compensation income when the recipient/director is an
employee of the corporation which pays the same. Being
embraced within the term "compensation income",
the director's fees are subject to the withholding tax on wages
imposed under Section 79, in relation to Section 24 (A),
both of the National internal revenue code.
• Applies to directors who are at the same time
employees. The tax treatment applies whenever it is
established that the director and the corporation has an
employer-employee relationship, i.e. President of a
corporation sitting as a member of the
Board of Directors. RR 2-98 provides that "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. Thus, fees including director
fees, if the director also and employee of the
employer/corporation constitute compensation
income.
Director’s fees taxed as gross income from T/B if not
employee. If these fees are paid to a director who is not an
employee of the corporation (whose duties are confined to
things such as attendance of and participation in board
meetings) it is not treated as compensation income but rather as
gross income from the conduct of trade or business or exercise
of profession under Section 32 of the NIRC.
Revenue Memorandum Circular No. 050-18
(May 11, 2018)
What is the applicable withholding tax rate for director's
fees?
If employee, withholding tax on compensation. If the
director receiving the director's fees is also an employee of the
same entity, the fees shall form part of the compensation
subject to withholding tax on compensation.
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If not employee, E-CWT. However, if the director is not an
employee of the income payor then the subject taxpayer is
considered a professional subject to the creditable expanded
withholding tax prescribed for a professional, and subject also
to the applicable business tax.
Government employees BOD of GOCC; 10%. Moreover, in
the case of government employee who seats as board member
of other Government Owned & Controlled Corporations
(GOCCs) and is receiving director's fees, honoraria and/or
other benefits shall be subject to creditable withholding tax at
the higher rate for professional at 10%.
• The said income shall be reported by the payee as other
income to be included as part of the compensation
income in arriving at the total taxable income. The
corresponding withholding tax shall form part of the
tax credits against the income tax due.
Withholding for mixed income earners
Revenue Memorandum Circular No. 050-18 (May 11, 2018)
Q25. What tax rates are applicable for individuals who are
earning income from both compensation and
self/employment (business or practice of profession)?
• Compensation. Compensation income shall be subject
to the graduated income tax rates under Section 24 (A)
(2) (a) of the Tax Code, as amended.
• Business or profession. The income from business or
practice of a profession shall be subject to the
o graduated income tax rates or
o if qualified, at taxpayer's option, be subject to
the 8% income tax rate based on gross
sales/receipts.
Withholding for married couples
Husband and Wife. When a husband and wife each are
recipients of wages, whether from the same or from different
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employers, taxes to be withheld shall be determined on the
following bases:
1) Husband is head of the family; claimant of
additional exemption. The husband shall be deemed
to be the head of the family and proper claimant of the
additional exemption in respect to any dependent
children, unless he explicitly waives his right in favor
of his wife in the withholding exemption certificate.
2) Wife; zero exemption. Taxes shall be withheld from
the wages of the wife in accordance with the schedule
for zero exemption of the withholding tax table
prescribed in Subsection (D)(2)(d) hereof. National
Internal Revenue Code, Section 79(F)
Husband and wife; withheld separately. Where both husband
and wife are each recipients of compensation either from the
same or different employers, taxes shall be withheld separately
in accordance with the applicable revised withholding tax table
(Annex “D” or “E”). Revenue Regulations No. 2-98 §2.79.4;
as amended by Revenue Regulation 11-2018 (January 31,
2018) §9
Withholding for NRAs
Nonresident Aliens. Wages paid to nonresident alien
individuals engaged in trade or business in the Philippines shall
be subject to the provisions of this Chapter. National Internal
Revenue Code, Section 79(G)
Donations to missionaries
BIR Ruling No. DA-306-04
The Superintendent of the Norwegian Missionary Alliance is a
Norwegian citizen appointed by the mother organization in
Norway. He does not receive compensation or salary, but
receives from the mother organization only a very minimal,
very basic monthly support primarily to support their mission
and to ensure that the Norwegian missionaries in the
Philippines do not become a Financial liability in this country.
The monthly support is computed every six months and the
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amount varies depending on factors such as the amount of the
accumulated donations, the actual expenses of all the missions
worldwide and urgent needs of the mission in the Philippines
vis-à-vis other missions in the world; and that when other
missions in the world are in need of greater assistance from
NMA in Norway, the Norwegian missionaries may receive a
lesser monthly support from the organization.
BIR Ruling, exempt from payment of tax and of filing the
ITR. Superintendent of the Norwegian missionaries who does
not receive any fixed salary but only gifts and free-will
offerings from abroad and from individuals and churches, is
exempt from the payment of income tax and consequently from
the filing of the corresponding income tax return. Since the
financial support being received by the foreign missionaries are
not compensation and/or salary but mere donations, said
financial support are not, therefore subject to Philippine income
tax.
Exempt from fringe benefits tax. Inasmuch as foreign
missionaries are not employees in the strict sense of the law, as
the financial support being received by them are not
compensation or salary but mere donations, the benefits
received by the Norwegian missionaries in the Philippines
should therefore not be subject to the fringe benefit tax
prescribed in Section 33(B) of the Tax Code of 1997.
Jurisdiction of labor arbiter in withholding cases
Voluntary arbiter has no jurisdiction to rule on tax matters.
The company had a practice of treating gasoline allowance
converted to cash as part of compensation income subject to
withholding taxes. The union opposed this, and the parties
submitted the issue to a panel of voluntary arbitrators, which
rendered a decision that the converted allowance should be
considered as fringe benefits subject to FBT. The SC said that
the voluntary arbitrator has no competence to rule on the
taxability of the gas allowance and on the propriety of the
withholding of tax. These issues are clearly tax matters, and do
not involve labor disputes. To be exact, they involve tax issues
within a labor-relations setting. Thus, the voluntary arbitrator
has no competence to rule on the taxability of the gas allowance
and on the propriety of the withholding of tax. Honda Cars
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Philippines, Inc. vs Honda Cars Technical Specialist and
Supervisor’s Union
• Remedy; BIR ruling or tax refund claim. If the
company and/or the union desire/s to seek clarification
of these issues, it/they should have requested for a tax
ruling from the BIR. If the union disputes the
withholding of tax and desires a refund of the withheld
tax, it should have filed an administrative claim for
refund with the CIR.
Voluntary arbiter has no jurisdiction to rule on tax matters.
The company withheld the income tax on compensation of
those employees earning above the minimum wage as well as
those employees that earn only the minimum wage. When the
company and the union failed to reach a settlement, the case
was submitted to the Voluntary Arbitrator for resolution. Citing
Honda, the SC said that the VA has no competence to rule on
the taxability of the gas allowance and on the propriety of the
withholding of tax. These issues are clearly tax matters, and do
not involve labor disputes. To be exact, they involve tax issues
within a labor relations setting, as they pertain to questions of
law on the application of Section 33 (A) of the [Tax Code].
They do not require the application of the Labor Code or the
interpretation of the [Memorandum of Agreement] and/or
company personnel policies. Furthermore, the company and the
union cannot agree or compromise on the taxability of the gas
allowance. Taxation is the State's inherent power; its
imposition cannot be subject to the will of the parties. Victoria
Manufacturing Corporation Employees Union vs Victoria
Manufacturing Corporation
Voluntary arbitrator's jurisdiction is limited to labor
disputes. The Labor Code vests the Voluntary Arbitrator
original and exclusive jurisdiction to hear and decide all
unresolved grievances arising from the interpretation or
implementation of the Collective Bargaining Agreement and
those arising from the interpretation or enforcement of
company personnel policies. Upon agreement of the parties, the
Voluntary Arbitrator shall also hear and decide all other labor
disputes, including unfair labor practices and bargaining
deadlocks. Labor dispute means any controversy or matter
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concerning terms and conditions of employment or the
association or representation of persons in negotiating, fixing,
maintaining, changing, or arranging the terms and conditions
of employment, regardless of whether the disputants stand in
the proximate relation of employer and employee. Honda Cars
Philippines, Inc. vs Honda Cars Technical Specialist and
Supervisor’s Union
Estoppel will not confer jurisdiction; jurisdiction issue not
waived by active participation in the proceedings before
tribunal without jurisdiction. Jurisdiction is conferred by
law. As a result, absent a statutory grant, the actions,
representations, declarations, or omissions of a party will not
serve to vest jurisdiction over the subject matter in a court,
board, or officer. Simply put, "judicial or quasi-judicial
jurisdiction cannot be conferred upon a tribunal by the parties
alone. Estoppel will not operate to confer jurisdiction upon a
court, save in the most exceptional of cases. Without a law that
grants the power to hear, try, and decide a particular type of
action, a court may not, regardless of what the parties do or fail
to do, afford any sort of relief in any such action filed before it.
It follows then that, in those cases, any judgment or order other
than one of dismissal is void for lack of jurisdiction. Hence, the
argument of the union that the company had already actively
participated in the proceedings before the labor arbiter does not
operate as waiver of the latter’s lack of jurisdiction, the same
having been assailed in less than a year after the
commencement of proceedings. Victoria Manufacturing
Corporation Employees Union vs Victoria Manufacturing
Corporation
• Exception; Sibonghanoy doctrine. Nevertheless,
jurisprudence has recognized that situations may arise
where parties, as a matter of public policy, must be
bound by judgments rendered even without
jurisdiction. Such situations, however, are exceptional,
and courts must exercise the highest degree of caution
in their application of estoppel to bar jurisdictional
challenges. That said, where the circumstances of a
particular case are comparable to those attendant in
Sibonghanoy, jurisdictional issues may no longer be
entertained, and the doctrine of estoppel by laches will
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effectively bind the parties to the judgment rendered
therein regardless of whether the dispensing court was
vested with jurisdiction by statute. In such situations,
lack of jurisdiction must be invoked so belatedly so as
to give rise to "a presumption that the party entitled to
assert it either has abandoned it or declined to assert it.
The lack of jurisdiction was raised only 15 years after
the case was filed. Victoria Manufacturing
Corporation Employees Union vs Victoria
Manufacturing Corporation
Refunds and tax credits
Refunds of Credits
National Internal Revenue Code, Section 79(C)
Employer. When there has been an overpayment of tax under
this Section, refund or credit shall be made to the employer only
to the extent that the amount of such overpayment was not
deducted and withheld hereunder by the employer.
Employees. The amount deducted and withheld under this
Chapter during any calendar year shall be allowed as a credit to
the recipient of such income against the tax imposed under Sec.
24(A) of this Title. Refunds and credits in cases of excessive
withholding shall be granted under the rules and regulations
promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
Returned/ credited within 3 months from April 15; or else
6% interest. Any excess of the taxes withheld over the tax due
from the taxpayer shall be returned or credited within 3 months
from the 15th day of April. Refunds or credits made after such
time shall earn interest at the rate of 6% per annum, starting
after the lapse of the three-month period to the date the refund
of credit is made.
Refunds shall be made upon warrants drawn by the
Commissioner or by his duly authorized representative
without the necessity of counter-signature by the Chairman,
Commission on Audit or the latter’s duly authorized
representative as an exception to the requirement prescribed by
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Sec. 49, Chapter 8, Subtitle B, Title 1 of Book V of EO 292,
otherwise known as the Administrative Code of 1987.
Year-end adjustment
National Internal Revenue Code, Section 79(H)
Year-end Adjustment. On or before the end of the calendar
year but prior to the payment of the compensation for the last
payroll period, the employer shall determine the tax due from
each employee on taxable compensation income for the entire
taxable year in accordance with Section 24(A).
Difference between tax due and tax withheld. The difference
between the tax due from the employee for the entire year and
the sum of taxes withheld from January to November shall
either be
1. withheld from his salary in December of the current
calendar year or
2. refunded to the employee not later than January 25 of
the succeeding year.
Individual returns
NIRC Sec. 51(A) as amended by RA 10963 Sec. 13
Requirements:
1) Required. Except as provided in paragraph (2) of this
Subsection, the following individuals are required to
file an income tax return:
a) Every Filipino citizen residing in the Philippines;
b) Every Filipino citizen residing outside the
Philippines, on his income from sources within the
Philippines;
c) Every alien residing in the Philippines, on income
derived from sources within the Philippines; and
d) Every nonresident alien engaged in trade or
business or in the exercise of profession in the
Philippines.
2) Not required. The following individuals shall not be
required to file an income tax return;
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a) An individual whose taxable income does not
exceed Two hundred fifty thousand pesos
(₱250,000) under Section 24(A)(2)(a):
o Citizen engaged in business/practice of
profession + NRA-ETB shall file regardless
of gross income. Provided, That a citizen of
the Philippines and any alien individual
engaged in business or practice of profession
within the Philippines shall file an income tax
return, regardless of the amount of gross
income;
b) An individual with respect to pure compensation
income, as defined in Section 32 (A)(1), derived
from sources within the Philippines, the income tax
on which has been correctly withheld under the
provisions of Section 79 of this Code
• Provided, That an individual deriving
compensation concurrently from two or more
employers at any time during the taxable year
shall file an income tax return:
• Provided, further, That an individual whose
compensation income derived from sources
within the Philippines exceeds Sixty thousand
pesos (P60,000) shall also file an income tax
return;
c) An individual whose sole income has been
subjected to final withholding tax pursuant to
Section 57(A) of this Code; and
d) An individual who is exempt from income tax
pursuant to the provisions of this Code and other
laws, general or special.
3) The foregoing notwithstanding, any individual not
required to file an income tax return may nevertheless
be required to file an information return pursuant to
rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.
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4) The income tax return shall be filed in duplicate by the
following persons;
a) A resident citizen – on his income from all sources;
b) A nonresident citizen – on his income derived from
sources within the Philippines;
c) A nonresident alien – on his income derived from
sources within the Philippines; and
d) A nonresident alien engaged in trade or business in
the Philippines – on his income derived from
sources within the Philippines.
5) The income tax return (ITR) shall consist of a
maximum of four (4) pages in paper form or
electronic form, and shall only contain the following
information:
A) Personal profile and information;
B) Total gross sales, receipts or income from
compensation for services rendered, conduct of
trade or business or the exercise of a profession,
except income subject to final tax as provided
under this Code;
C) Allowable deductions under this Code;
D) Taxable income as defined in Sec. 31 of this Code;
and
E) Income tax due and payable.
Revenue Memorandum Circular No. 050-18 (May 11, 2018)
Q51: Is an employee who is earning purely compensation
income not exceeding P250,000 from a lone employer still need
to file an Annual Income Tax Return (AITR)?
A51: No, an employee earning purely compensation
income that does not exceed P250,000 from a lone employer
is not required to file an AITR. In this case, the employer
shall include the name of such employee in the alphalist to be
submitted to the BIR.
However, an employee is required to file an AITR for
compensation earned within the same taxable year from
multiple employers, whether successive or concurrent,
regardless of the amount of compensation.
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Q52: Is an employee who resigned before the year ends with
only one employer for the year required to file an AITR?
A52: No, the employee is not required to file an AITR if
1. there is only one employer during the year and
2. the amount of withheld tax is equal to the income tax
due for the taxable year.
Substituted filing
National Internal Revenue Code §51-A introduced by
Republic Act No. 10963 § 14
Substituted Filing of Income Tax Returns by Employees
Receiving Purely Compensation Income
Requisites. Individual taxpayers
1. receiving purely compensation income,
2. regardless of amount,
3. from only one employer in the Philippines for the
calendar year,
4. the income tax of which has been withheld correctly by
the said employer (tax due equals tax withheld)
shall not be required to file an annual income tax return.
Certificate of withholding = ITR. The certificate of
withholding filed by the respective employers, duly stamped
“received” by the BIR, shall be tantamount to the substituted
filing of income tax returns by said employees.
Revenue Regulations No 2-98 §2.83.4 (Substituted Filing) as
amended by Revenue Regulation 11-2018 (January 31,
2018) §13
Substituted Filing of Income Tax Returns by Employees
Receiving Purely Compensation Income
Requisites. Individual taxpayers
1. receiving purely compensation income,
2. regardless of amount,
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3. from only one employer in the Philippines for the
calendar year,
4. the income tax of which has been withheld correctly by
the said employer (tax due equals tax withheld)
shall not be required to file Annual Income Tax
Return for Individuals Earning Purely Compensation
Income (BIR Form No. 1700). In lieu of BIR Form No. 1700,
the Certified List of Employees Qualified for Substituted
Filing of ITR with information regarding the
1. name of compensation earner,
2. TIN,
3. compensation paid,
4. tax due and tax withheld,
filed by the employer with the concerned BIR office and
stamped “Received” by the latter shall be tantamount to the
substituted filing of ITRs by concerned employees.
Not qualified for substituted filing. The following
individuals, however, are not qualified for substituted filing and
therefore, still required to file Income Tax Return in accordance
with existing regulations:
(A) Individuals deriving compensation income from 2 or
more employers concurrently or successively at any
time during the taxable year.
(B) Employees deriving compensation income, regardless
of the amount, whether from a single or several
employers during the calendar year, the income tax of
which has not been withheld correctly (i.e. tax due is
not equal to the tax withheld) resulting to collectible or
refundable return.
(C) Individuals deriving other non-business, non-
professional-related income in addition to
compensation income not otherwise subject to a final
tax.
(D) Individuals receiving purely compensation income
from a single employer, although the income tax of
which has been correctly withheld, but whose spouse
falls under Section 2.83.4(A), 2.83.4(B) and 2.83.4(C)
of these regulations.
(E) Non-resident aliens engaged in trade or business in the
Philippines deriving purely compensation income, or
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compensation income and other nonbusiness, non-
professional-related income,
Revenue Regulation No. 8-2018 §9
Individuals Not Required to File Income Tax Return. The
following individuals are not required to file income tax return:
A. An individual earning purely compensation income
whose taxable income does not exceed P250,000;
The Certificate of Withholding filed by the respective
employers, duly stamped “Received” by the Bureau,
shall be tantamount to the substituted filing of income
tax returns by said employees.
B. An individual whose income tax has been correctly
withheld by his employer, provided that such
individual has only one employer for the taxable year
- the Certificate of Withholding filed by the respective
employers, duly stamped "Received" by the Bureau,
shall be tantamount to the substituted filing of income
tax returns by said employees;
C. An individual whose sole income has been subjected
to final withholding tax;
D. A minimum wage earner as defined in these
regulations – The Certificate of Withholding filed by
the respective employers, duly stamped “Received” by
the Bureau, shall be tantamount to the substituted filing
of income tax returns by said employees.
Those with 2 or more employees required to file ITR. In all
cases, all individuals deriving compensation income, regardless
of the amount, from 2 or more concurrent or successive
employers at any time during the taxable year, are not qualified
for substituted filing. Thus, they are still required to file a
return.
Revenue Memorandum Circular No. 050-18 (May 11, 2018)
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Q44: Are individuals with consecutive employers qualified to
avail of the substituted filing of annual Income Tax Return if
the latest employer will consolidate income of the individual
from previous employment to the current employment income
and the entire income is subjected to the year-end adjustment
wherein the tax due is computed prior to the payment of the last
compensation for the year?
A44: Based on existing policy, individuals with consecutive
employers are not qualified to avail of the substituted filing of
AITR. Hence, they are required to file an AITR.
Q46: Is an employee with a lone employer within a year but is
receiving retirement pension qualified for substituted filing of
the annual income tax return?
A46: Yes. The employee with a lone employer is still qualified
to avail of the substituted filing of AITR provided the income
tax has been withheld correctly. The retirement pension is not
taxable.
Q47: What form shall be used by an employee who is not
qualified for substituted filing and what is the responsibility of
the employer?
A47: An employee who is not qualified for substituted filing of
Income Tax Return is required to either use BIR Form No.
1700 (for purely compensation income earner) or BIR Form
No. 1701 (for self-employed or mixed income earner). The
responsibility of the employer is to provide the employee with
BIR Form No. 2316 (Certificate of Compensation and Tax
Withheld) not later than January 31 after the close of the
calendar year.
Q48: Are the certificates of tax withheld filed by the employers
and duly stamped “received” by the Bureau tantamount to the
substituted filing of Annual Income Tax Returns (AITR) of the
employees?
A48: Yes, it applies to all qualified employees. As discussed
under RR 11-2018, “Qualified employees are those whose
income comes from a lone employer and the tax due on the
compensation income was correctly withheld by the
employer.”
Under the same RR, the Certificates of Tax Withheld shall refer
to the Certified List of Employees Qualified for Substituted
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ad majorem dei gloriam
Filing prescribed in Annex “F” of the RR, with
accompanying soft copy of the corresponding BIR Form
No. 2316. The list shall be stamped “Received” by the Bureau,
and this stamping is tantamount to the substituted filing of
AITR of the concerned employees.
Filing of returns and payment of taxes withheld
National Internal Revenue Code §51
Filing of Return and Payment of Taxes Withheld. Except as
the Commissioner otherwise permits, taxes deducted and
withheld by the employer on wages of employees shall be
1. covered by a return and
2. paid to
a. an authorized agent bank;
b. Collection Agent, or
c. the duly authorized Treasurer of the city or
municipality where the employer has his legal
residence or principal place of business, or in
case the employer is a corporation, where the
principal office is located.
Return filed 25 days from close of calendar quarter. The
return shall be filed and the payment made within twenty-five
(25) days from the close of each calendar quarter:
• Commissioner may require payment at more
frequent intervals. Provided, however, That the
Commissioner may, with the approval of the Secretary
of Finance, require the employers to pay or deposit the
taxes deducted and withheld at more frequent intervals,
in cases where such requirement is deemed necessary
to protect the interest of the Government.
Taxes withheld are special fund until paid to collecting
officers. The taxes deducted and withheld by employers shall
be held in a special fund in trust for the Government until the
same are paid to the said collecting officers.
Revenue Regulations No 2-98 §2.81 as amended by Revenue
Regulations No. 6-01 (July 31, 2001) §4
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SPBUS
Filing of return and payment of income tax withheld on
compensation (Form No. 1601); 10th of the next month.
Every person required to deduct and withhold the tax on
compensation, including large taxpayers as determined by the
Commissioner, shall make a return and pay such tax on or
before the 10th day of the month following the month in which
withholding was made to
1. any authorized agent bank within the Revenue District
Officer or
2. in places where there are no agent banks, to the
Revenue District Officer of the City or Municipality
where the withholding agent/employer’s legal
residence or place of business or office is located;
For December withholding, January 15 of next year.
Provided, however, that taxes withheld from the last
compensation (December) for the calendar year shall be paid
not later than January 15 of succeeding year;
For EFPS; +5. Provided, however, that with respect to
taxpayers, whether large or non-large, who availed of the
EFPS, the deadline for electronically filing the aforesaid
withholding tax return and paying the tax due thereon via the
EEFPS shall be 5 days later than the deadlines set above.
Revenue Memorandum Circular No. 050-18 (May 11, 2018)
Q56
Q56: What are the withholding tax forms that we can use?
When are the due dates for their filing?
A56: The matrix below shall serve as the taxpayer's guide
on the withholding tax forms to use and their due dates:
JO VALLES
TAXATION ad majorem dei gloriam
NATIONAL INTERNAL REVENUE CODE §83;
A. Requirements. Every employer required to deduct and
withhold a tax shall furnish to each such employee in respect
of his employment during the calendar year, on or before
January 31st of the succeeding year, or if his employment is
terminated before the close of such calendar year, on the same
day of which the last payment of wages is made,
1. a written statement confirming the wages paid by the
employer to such employee during the calendar year,
and the
116 Last Edit: 23 December 2020
SPBUS
2. amount of tax deducted and withheld under this
Chapter in respect of such wages.
The statement required to be furnished by this Section in
respect of any wage shall contain such other information, and
shall be furnished at such other time and in such form as the
Secretary of Finance, upon the recommendation of the
Commissioner, may, by rules and regulation, prescribe.
B. Annual Information Returns; withholding tax on wages.
Every employer required to deduct and withhold the taxes in
respect of the wages of his employees shall, on or before
January thirty-first (31st) of the succeeding year, submit to the
Commissioner an annual information return containing
1. a list of employees,
2. the total amount of compensation income of each
employee,
3. the total amount of taxes withheld therefrom during the
year,
4. accompanied by copies of the statement referred to in
the preceding paragraph, and such other information as
may be deemed necessary.
This return, if made and filed in accordance with rules and
regulations promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, shall be sufficient
compliance with the requirements of Section 68 of this Title in
respect of such wages.
C. Extension of time. The Commissioner, under such rules and
regulations as may be promulgated by the Secretary of Finance,
may grant to any employer a reasonable extension of time to
furnish and submit the statements and returns required under
this Section.
Revenue Regulations No 2-98 §§2.83.1 as amended by
Revenue Regulation 11-2018 (January 31, 2018) §12
Employees Withholding Statements
Sec. 2.83.1 Employees Withholding Statements (BIR Form
2316). In general, every employer or other person who is
required to deduct and withhold the tax on compensation,
including fringe benefits given to rank and file employees, shall
furnish every employee from whom taxes were withheld a
JO VALLES
TAXATION
Certificate of Compensation Payment and Tax Withheld
(BIR Form No. 2316)
A. on or before January 31 of the succeeding calendar
year, or
B. if employment is terminated before the close of such
calendar year, on the day on which the last payment of
compensation is made.
BIR Form 2316 to be issued to MWEs and employees
exempt from withholding. The said BIR Form No. 2316 is
also required to be issued by every employer to employees
classified as MWEs and to other employees whose
compensation were not subjected to withholding tax.
Triplicate 2316. The employer shall prepare BIR Form No.
2316 in triplicate, which shall be distributed as follows:
1. Original – Employee’s copy;
2. Duplicate – BIR’s copy; and
3. Triplicate – Employer’s copy which shall be retained
for a period of 10 years.
The Certificate shall indicate the following information:
1. Name and address of the employee;
2. Employee’s Taxpayer Identification Number;
3. Name and address of the employer;
4. Employer’s TIN;
5. The sum of compensation paid, including the non-
taxable benefits;
6. The amount of statutory minimum wage received if
employee is MWE;
7. Overtime pay, holiday pay, night shift differential pay,
and hazard pay received if employee is MWE;
8. The amount of tax due, if any; and
9. The amount of tax withheld, if any.
Signed by -er and -ee; perjury. The Certificate must be signed
by both the employer/employer’s authorized officer and the
employee. It shall contain a written declaration that it is made
under the penalties of perjury. If the employer is the
Government of the Philippines, its political subdivision, agency
or instrumentality or government-owned or controlled
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ad majorem dei gloriam
corporation, the statement shall be signed by the duly
designated officer or employee.
Certified list of employees qualified for substituted filing;
Feb 28 of the following year. Employees qualified for the
substituted filing of his/her Income Tax Return (ITR) as
indicated under Sec 2.83.4 of RR No. 2-98, as amended, shall
immediately affix their signatures in the Certificate of
Compensation Payment and Tax Withheld to signify their
intention to avail of the substituted filing of ITR, and return to
the employer the duly signed Certificates for the latter’s
signature.
1. The employer shall give back to the employee qualified
for substituted filing of ITR the original copy while the
duplicate copy shall be submitted by the employer to
the concerned BIR office not later than February 28 of
the succeeding year, with accompanying Certified List
of Employees Qualified for Substituted Filing of
ITR (Annex “F”), reflecting the amount of income
payment, the tax due and tax withheld.
2. This list shall be stamped “Received” by the concerned
BIR office, which shall be tantamount to the
substituted filing of ITR by the qualified employees.
3. In the event that the employee will need his/her
Certificate (BIR Form No. 2316) stamped “Received”,
he/she shall request the concerned BIR office to have
the Certificate stamped “Received” accompanied with
the submission of the employer’s certification that
he/she was included in the list submitted by such
employer to the BIR.
Employees not qualified for substituted filing; 2 to
employee, one to employer. For employees not qualified for
substituted filing of Income Tax Return, two (original and
duplicate) copies of the subject certificate shall be given to the
employee to serve as proof of compensation received and tax
credit, and the other copy shall be retained by the employer.
This shall form part of the employee’s Income Tax Return to
be filed on or before April 15 of the following year.
Failure to furnish 2316 to employee = mandatory audit of
payroll. Failure of the employer to furnish the employee of the
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SPBUS
Certificate of Compensation and Tax Withheld shall be a
ground for the mandatory audit of payor’s all internal revenue
tax liabilities upon verified complaint.
Successive employments. In case of successive employments
during the taxable year, an extra copy of BIR Form No. 2316,
duly certified by the previous employer, shall be furnished by
the employee to the new employer.
Section 250 liability. Any employer/withholding agent,
including the government or any of its political subdivisions
and government owned and controlled corporations,
who/which fails to comply with the above filing/submission of
BIR Form No. 2316 within the time required by these
Regulations, may be held liable under Section 250 of the Tax
Code, as amended, for each failure.
• Failure to File Certain Information Returns; 1,000
per failure max of 25,000 in one calendar year. In
the case of each failure to file an information return,
statement or list, or keep any record, or supply any
information required by this Code or by the
Commissioner on the date prescribed therefor, unless it
is shown that such failure is due to reasonable cause
and not to willful neglect, there shall, upon notice and
demand by the Commissioner, be paid by the person
failing to file, keep or supply the same, One thousand
pesos (1,000) for each failure: Provided, however, That
the aggregate amount to be imposed for all such
failures during a calendar year shall not exceed
Twenty-five thousand pesos (P25,000). National
Internal Revenue Code, Section 250
Penalty payment does not relieve obligation to furnish
necessary documents. The imposition of any of the penalties
under the Tax Code, as amended, and the compromise of the
criminal penalty on such violations shall not in any manner
relieve the violating taxpayer from the obligation to submit the
required documents.
Section 255 liability. Any employer/withholding agent,
including the government or any of its political subdivisions
and government owned and controlled corporations,
JO VALLES
TAXATION ad majorem dei gloriam SPBUS
who/which fails to comply with the above filing/submission of
BIR Form No. 2316 within the time required by these
Regulations for two consecutive years may be dealt with in
accordance with Section 255 of the Tax Code, as amended

• Failure to File Return, Supply Correct and

Accurate Information, Pay Tax Withhold and
Remit Tax and Refund Excess Taxes Withheld on
Compensation. Any person required under this Code
or by rules and regulations promulgated thereunder to
pay any tax make a return, keep any record, or supply
correct the accurate information, who willfully fails to
pay such tax, make such return, keep such record, or
supply correct and accurate information, or withhold or
remit taxes withheld, or refund excess taxes withheld
on compensation, at the time or times required by law
or rules and regulations shall, in addition to other
penalties provided by law, upon conviction thereof, be
punished by a fine of not less than Ten thousand pesos
(P10,000) and suffer imprisonment of not less than one
(1) year but not more than ten (10) years. National
Internal Revenue Code, Section 255

2.83.2 first paragraph (Annual Information Return), & as

amended by Revenue Regulation 10-2008 §6

Annual Information Return of Income Taxes Withheld on

Compensation and Final Withholding taxes (BIR Form No.
1604-CF). Every employer or other persons required to deduct
and withhold the tax is required to file with the Large
Taxpayers Assistance Division (LTAD)/Large Taxpayers
District Office (LTDO)/RDO where the payor/employer is
registered as Withholding Agent on or before January 31 of the
following year an Annual Information Return of Income Taxes
Withheld on Compensation and Final Withholding Taxes (BIR
Form No. 1604-CF, to be submitted with the alphabetical list
of employees/payees.

118 Last Edit: 23 December 2020 JO VALLES

INTRODUCTION TO INCOME TAX
THE CORPORATION AND TAXES
PRELIMINARIES
State policy
Section 2, Republic Act 8424
State Policy. It is hereby declared the policy of the State
1. to promote sustainable economic growth through the
rationalization of the Philippine internal revenue tax
system, including tax administration;
2. to provide, as much as possible, an equitable relief to
a greater number of taxpayers in order to improve
levels of disposable income and increase economic
activity; and
3. to create a robust environment for business to enable
firms to compete better in the regional as well as the
global market, at the same time that the State ensures
that Government is able to provide for the needs of
those under its jurisdiction and care.
Section 2, Republic Act 10963
Declaration of Policy. It is hereby declared the policy of the
State:
a. To enhance the progressivity of the tax system
through the rationalization of the Philippine internal
revenue tax system, thereby promoting sustainable and
inclusive economic growth;
b. To provide, as much as possible, an equitable relief to
a greater number of taxpayers and their families in
order to improve levels of disposable income and
increase economic activity; and
c. To ensure that the government is able to provide for
the needs of those under its jurisdiction and care
through the provision of better infrastructure, health,
education, jobs, and social protection for the people.
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Definition of terms
Section 22, Republic Act 8424
Taxable year. The term taxable year means the calendar year,
or the fiscal year ending during such calendar year, upon the
basis of which the net income is computed under this Title.
'Taxable year' includes, in the case of a return made for a
fractional part of a year under the provisions of this Title or
under rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the commissioner, the
period for which such return is made. Section 22(P)
Fiscal year. The term fiscal year means an accounting period
of twelve (12) months ending on the last day of any month other
than December. Section 22(Q)
Securities. The term securities means shares of stock in a
corporation and rights to subscribe for or to receive such shares.
The term includes
a. bonds,
b. debentures,
c. notes or certificates, or
d. other evidence or indebtedness,
issued by any corporation, including those issued by a
government or political subdivision thereof, with interest
coupons or in registered form. Section 22(T)
Ordinary Income. The term ordinary income includes any
gain from the sale or exchange of property which is not a capital
asset or property described in Section 39(A)(1).
• Ordinary income treated as gain from sale or
exchange property which is not a capital asset. Any
gain from the sale or exchange of property which is
treated or considered, under other provisions of this
Title, as 'ordinary income' shall be treated as gain from
the sale or exchange of property which is not a capital
asset as defined in Section 39(A)(1). Section 22(Z)
Ordinary loss. The term ordinary loss includes any loss from
the sale or exchange of property which is not a capital asset.
• Any loss from the sale or exchange of property which
is treated or considered, under other provisions of this
Last Edit: 23 December 2020
TAXATION LAW
Title, as 'ordinary loss' shall be treated as loss from the
sale or exchange of property which is not a capital
asset. Section 22(Z)
Withholding agent. The term withholding agent means any
person required to deduct and withhold any tax under the
provisions of Section 57. Section 27(K)
General principles of income taxation
Answers the question: which income is taxable depending on
the kind of taxpayer?
Section 23, NIRC
Except when otherwise provided in this Code:
A. Resident citizen. A citizen of the Philippines residing
therein is taxable on all income derived from sources
within and without the Philippines;
B. Non-resident citizen. A nonresident citizen is taxable
only on income derived from sources within the
Philippines;
C. OCW. An individual citizen of the Philippines who is
working and deriving income from abroad as an
overseas contract worker is taxable only on income
derived from sources within the Philippines:
• Provided, That 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 shall be
treated as an overseas contract worker;
D. Aliens. An alien individual, whether a resident or not
of the Philippines, is taxable only on income derived
from sources within the Philippines;
E. Domestic corporation. A domestic corporation is
taxable on all income derived from sources within and
without the Philippines; and
F. Foreign corporation. A foreign corporation, whether
engaged or not in trade or business in the Philippines,
JO VALLES
INTRODUCTION TO INCOME TAX ad majorem dei gloriam TAXATION LAW
is taxable only on income derived from sources within where the goods Banks. In the case of Section 39(A)(1)
the Philippines. are sold banks, cost of services
d. Insurance while shall include interest Capital assets. The term capital assets means property held by
Income within Income without goods are in transit expense. the taxpayer (whether or not connected with his trade or
RC √ √ business), but does not include:
NRC √ x 1. stock in trade of the taxpayer or
Manufacturing 2. other property of a kind which would properly be
OCW √ x All costs of production of included in the inventory of the taxpayer if on hand at
RA √ x finished goods, such as: the close of the taxable year, or
NRA √ x a. raw materials 3. property held by the taxpayer primarily for sale to
Domestic Corp √ √ used, customers in the ordinary course of his trade or
Foreign Corps √ x
b. direct labor business, or
c. manufacturing 4. property used in the trade or business, of a character
Gross income and taxable income which is subject to the allowance for depreciation
overhead,
d. freight cost, provided in Subsection (F) of Section 34; or
Gross income computation 5. real property used in trade or business of the taxpayer.
e. insurance
Section 27(A); (E)(4); RR 16-2008
premiums
Trading or merchandise Service concern Capital asset if not included in the enumeration. The term
f. other costs capital asset includes all classes of property not specifically
Gross sales Gross receipts
incurred to bring excluded by Section 39(a). Section 132, RR 2-98
Less: Less:
the raw materials
a. Sales returns a. Sales returns
to the factory or RR 07-03
b. Sales discounts b. Sales discounts
warehouse. Guidelines in determining whether a particular real
c. Sales allowances c. Sales allowances property is a capital asset or an ordinary asset
d. Cost of goods sold d. Cost of services
Note: Section 27(A) defines gross income for the
Cost of goods sold Cost of services Section 1. Scope. Pursuant to Section 244 of the National
computation of the taxable income; Section 27(E)(4)
COGS. All business COS. All direct costs and Internal Revenue Code of 1997 (Code), these Regulations are
defines gross income for the computation of MCIT. Both
expenses directly incurred expenses necessarily hereby promulgated to implement Sec. 39(A)(1), in relation to
have the same definition.
to produce the incurred to provide Secs. 24(D), 25(A)(3), 25(B) and 27(D)(5), and Secs. 24(A),
merchandise to bring them services required by the 25(A) & (B), 27(A) or 27(E), 28(A)(1) or 28(A)(2), and
Taxable income. The term taxable income means the 28(B)(1), all of the said Code, providing for the purpose the
to their present location customers and clients pertinent items of gross income specified in this Code, less
and use. including: guidelines in determining whether a particular real property is
the deductions and/or personal and additional exemptions, a capital asset or an ordinary asset.
a. salaries and
if any, authorized for such types of income by this Code
Trading or employee benefits or other special laws. Section 31 Section 2. Definition Of Terms. For purposes of these
merchandising of those directly Regulations, the following terms shall be defined as follows:
a. Invoice of cost of rendering the Note: Note that personal and additional exemptions apply only
goods sold service to individuals but these have no relevance anymore due to their a. Capital assets shall refer to all real properties held by
b. Import duties b. cost of facilities removal in the TRAIN law. a taxpayer, whether or not connected with his trade or
c. Freight in directly utilized in business, and which are not included among the real
transporting the providing the Capital vs ordinary asset properties considered as ordinary assets under Sec.
goods to the place service 39(A)(1) of the Code.

120 Last Edit: 23 December 2020 JO VALLES

INTRODUCTION TO INCOME TAX
b. 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:
a. Stock in trade of a taxpayer or other real
property of a kind which would properly be
included in the inventory of the taxpayer if on
hand at the close of the taxable year; or
b. Real property held by the taxpayer primarily
for sale to customers in the ordinary course of
his trade or business; or
c. 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
d. Real property used in trade or business of the
taxpayer.
• Real properties acquired by banks through foreclosure
sales are considered as their ordinary assets.
• However, banks shall not be considered as habitually
engaged in the real estate business for purposes of
determining the applicable rate of withholding tax
imposed under Sec. 2.57.2(J) of Revenue Regulations
No. 2-98, as amended.
c. Real property shall have the same meaning attributed
to that term under Article 415 of Republic Act No. 386,
otherwise known as the "Civil Code of the Philippines.
d. Real estate dealer shall refer to any person engaged in
the business of buying and selling or exchanging real
properties
a. on his own account as a principal and
b. holding himself out as a full or part-time dealer
in real estate.
e. Real estate developer shall refer to any person
engaged in the business of
a. developing real properties into subdivisions, or
b. building houses on subdivided lots, or
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c. constructing residential or commercial units,
townhouses and other similar units
for his own account and offering them for sale or
lease.
f. Real estate lessor shall refer to any person engaged in
the business of leasing or renting real properties
a. on his own account as a principal and
b. holding himself out as lessor of real properties
being rented out or offered for rent.
g. Taxpayers engaged in the real estate business shall
refer collectively to
a. real estate dealers,
b. real estate developers, and/or
c. real estate lessors.
• Conversely, the term "taxpayers not engaged in the
real estate business" shall refer to persons other than
real estate dealers, real estate developers and/or real
estate lessors.
• A taxpayer whose primary purpose of engaging in
business, or whose Articles of Incorporation states that
its primary purpose is to engage in the real estate
business shall be deemed to be engaged in the real
estate business for purposes of these Regulations.
Section 3. Guidelines in Determining Whether a Particular
Real Property is a Capital Asset or Ordinary Asset.
a. Taxpayers engaged in the real estate
business
Real property shall be classified with respect to taxpayers
engaged in the real estate business as follows:
Real Estate Dealer. All real properties acquired by the real
estate dealer shall be considered as ordinary assets.
Real estate Developer. All
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TAXATION LAW
1. real properties acquired by the real estate developer,
whether developed or undeveloped as of the time of
acquisition, and
2. all real properties which are
a. field by the real estate developer primarily for
sale or for lease to customers in the ordinary
course of his trade or business or
b. which would properly be included in the
inventory of the taxpayer if on hand at the
close of the taxable year and
3. all real properties used in the trade or business, whether
in the form of land, building, or other improvements,
shall be considered as ordinary assets.
Real Estate Lessor. All real properties of the real estate lessor,
whether land and/or improvements, which are
1. for lease/rent or
2. being offered for lease/rent, or
3. otherwise for use or being used in the trade or business
shall likewise be considered as ordinary assets.
Taxpayers habitually engaged in the real estate business.
All real properties acquired in the course of trade or business
by a taxpayer habitually engaged in the sale of real estate shall
be considered as ordinary assets.
• Register with HLURB or HUDCC to be considered
as habitually engaged. Registration with the HLURB
or HUDCC as a real estate dealer or developer shall be
sufficient for a taxpayer to be considered as habitually
engaged in the sale of real estate.
• Sans registration substantial relevant evidence;
example is 6 taxable real estate transaction in the
preceding year regardless of amount. If the taxpayer
is not registered with the HLURB or HUDCC as a real
estate dealer or developer, he/it may nevertheless be
deemed to be engaged in the real estate business
through the establishment of substantial relevant
evidence (such as consummation during the preceding
year of at least six (6) taxable real estate sale
transactions, regardless of amount; registration as
JO VALLES
INTRODUCTION TO INCOME TAX
habitually engaged in real estate business with the
Local Government Unit or the Bureau of Internal
Revenue, etc.).
Change in purpose or discontinuance of use does not alter
classification. A property purchased for future use in the
business, even though this purpose is later thwarted by
circumstances beyond the taxpayer's control, does not lose its
character as an ordinary asset. Nor does a mere discontinuance
of the active use of the property change its character previously
established as a business property.
b. Taxpayer not engaged in the real estate
business.
Ordinary assets. In the case of a taxpayer not engaged in the
real estate business, real properties, whether land, building, or
other improvements, which are
1. used or
2. being used or
3. have been previously used
in the trade or business of the taxpayer shall be considered as
ordinary assets.
• These include buildings and/or improvements subject
to depreciation and lands used in the trade or business
of the taxpayer.
Fully depreciated asset still ordinary asset. A depreciable
asset does not lose its character as an ordinary asset, for
purposes of the instant provision, even if
1. it becomes fully depreciated, or
2. there is failure to take depreciation
during the period of ownership.
Monetary consideration or profit irrelevant. Monetary
consideration or the presence or absence of profit in the
operation of the property is not significant in the
characterization of the property. So long as the property is or
has been used for business purposes, whether for the benefit of
the owner or any of its members or stockholders, it shall still be
considered as an ordinary asset. Real property used by an
exempt corporation in its exempt operations, such as a
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ad majorem dei gloriam
corporation included in the enumeration of Section 30 of the
Code, shall not be considered used for business purposes, and
therefore, considered as capital asset under these Regulations.
Real property owned but not used in T/B by an individual
engaged in business is capital asset. Real property, whether
single or detached; townhouse; or condominium unit, not used
in trade or business as evidenced by a certification from the
Barangay Chairman or from the head of administration, in case
of condominium unit, townhouse or apartment, and as validated
from the existing available records of the Bureau of Internal
Revenue, owned by an individual engaged in business, shall be
treated as capital asset.
c. Taxpayers changing business from real estate business
to non-real estate business
Change in business odes not result to reclassification of RP
from ordinary to capital asset. In the case of a taxpayer
1. who changed its real estate business to a non-real estate
business, or
2. who amended its Articles of Incorporation from a real
estate business to a non-real estate business, such as a
holding company, manufacturing company, trading
company, etc.,
the change of business or amendment of the primary purpose
of the business shall not result in the re-classification of real
property held by it from ordinary asset to capital asset.
For purposes of issuing the certificate authorizing registration
(CAR) or tax clearance certificate (TCL), as the case may be,
the appropriate officer of the BIR shall at all times determine
whether a corporation purporting to be not engaged in the real
estate business has at any time amended its primary purpose
from a real estate business to a non-real estate business.
d. Taxpayers originally registered to be engaged in the
real estate business but failed to subsequently operate.
Non-operation does not result in reclassification. In the case
of subsequent non-operation by taxpayers originally registered
to be engaged in the real estate business, all real properties
Last Edit: 23 December 2020
TAXATION LAW
originally acquired by it shall continue to be treated as ordinary
assets.
e. Treatment of abandoned and idle real properties
Abandoned ordinary assets of those engaged in real estate
business still ordinary assets. Real properties formerly
forming part of the stock in trade of a taxpayer engaged in the
real estate business, or formerly being used in the trade or
business of a taxpayer engaged or not engaged in the real estate
business, which were later on abandoned and became idle, shall
continue to be treated as ordinary assets.
• Real property initially acquired by a taxpayer engaged
in the real estate business shall not result in its
conversion into a capital asset even if the same is
subsequently abandoned or becomes idle.
Abandoned ordinary assets of those other than engaged in
REB converted to capital assets if not used for more than 2
years. Provided however, that properties classified as ordinary
assets for being used in business by a taxpayer engaged in
business other than real estate business as defined in Section
2(g) hereof are automatically converted into capital assets
upon showing of proof that the same have not been used in
business for more than two (2) years prior to the consummation
of the taxable transactions involving said properties.
f. Treatment of real properties that have been
transferred to a buyer/transferee, whether the
transfer is through sale, barter or exchange,
inheritance, donation or declaration of property
dividends.
May change classification in the hands of transferee. Real
properties classified as capital or ordinary asset in the hands of
the seller/transferor may change their character in the hands of
the buyer/transferee. The classification of such property in the
hands of the buyer/transferee shall be determined in accordance
with the following rules:
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INTRODUCTION TO INCOME TAX
1. Real property transferred through succession or
donation to the heir or donee who is not engaged in the
real estate business with respect to the real property
inherited or donated, and who does not subsequently
use such property in trade or business, shall be
considered as a capital asset in the hands of the heir or
donee.
2. Real property received as dividend by the stockholders
who are not engaged in the real estate business and who
do not subsequently use such real property in trade or
business shall be treated as capital assets in the hands
of the recipients even if the corporation which declared
the real property dividend is engaged in real estate
business.
3. The real property received in an exchange shall be
treated as ordinary asset in the hands of the transferee
in the case of a tax-free exchange by taxpayer not
engaged in real estate business to a taxpayer who is
engaged in real estate business, or to a taxpayer who,
even if not engaged in real estate business, will use in
business the property received in the exchange.
g. Treatment of real property subject of involuntary
transfer
Involuntary transfers have no effect on the classification of
real property in the hands of the seller. In the case of
involuntary transfers of real properties, including expropriation
or foreclosure sale, the involuntariness of such sale shall have
no effect on the classification of such real property in the hands
of the involuntary seller, either as capital asset or ordinary asset,
as the case may be.
But in the hands of the , the rules in (f) apply. For example,
real properties forming part of the inventory of a real estate
dealer, which are foreclosed, shall, for purposes of determining
the applicable tax on such foreclosure sale, be treated as
ordinary assets. On the other hand, the nature of such real
property in the hands of the foreclosure buyer shall be
determined in accordance with the rules stated in sub-paragraph
(f) hereof.
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Section 4. Applicable Taxes on Sale, Exchange or Other
Disposition of Real Property. Gains/Income derived from
sale, exchange, or other disposition of real properties shall,
unless otherwise exempt, be subject to applicable taxes
imposed under the Code, depending on whether the subject
properties are classified as capital assets or ordinary assets.
a. In the case of individual citizens (including estates
and trusts), resident aliens, and non-resident aliens
engaged in trade or business in the Philippines.
On sale of real property in the PH held as a capital asset
Sale of real property in the 6% of the gross selling price, or
PH the current market value at the
time of sale, whichever is
higher
If the sale was made to the Either:
government or GOCCs - 6% of the GSP or CMV
or
- Normal income tax rate
At the option of the taxpayer
Capital asset; 6% CGT on higher between GSP or FMV.
Capital gains presumed to have been realized from the sale,
exchange, or other disposition of real property located in the
Philippines, classified as capital assets, shall be subject to the
six percent (6%) capital gains tax imposed under Sec. 24(D)(1)
or 25(A)(3) of the Code, as the case may be, based on the
1. gross selling price or
2. current fair market value as determined in accordance
with Sec. 6€ of the Code,
whichever is higher.
Capital asset but buyer is the Government; 6% CGT or
normal at the option of the taxpayer. Provided, that if the
buyer is the Government or any of its political subdivisions or
agencies or a government-owned-or-controlled corporation, the
tax liability shall, at the option of the individual seller
(including estate or trust), be computed on the basis of either
1. the six percent (6%) capital gains tax under Sec.
24(D)(1)/25(A)(3) or
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2. the graduated tax rates under Sec. 24(A)(1)(c) or
25(A)(1) of the Code.
Ordinary asset; creditable withholding tax and ordinary
income tax. The sale of real property located in the Philippines,
classified as ordinary assets, shall be subject
1. to the creditable withholding tax (expanded) under Sec.
2.57.2(J) of Rev. Regs. No. 2-98, as amended, based
on the
a. gross selling price or
b. current fair market value as determined in
accordance with Section 6(E) of the Code,
whichever is higher, and consequently,
2. to the ordinary income tax imposed under Sec.
24(A)(1)(c) or 25(A)(1) of the Code, as the case may
be, based on net taxable income.
b. In the case of non-resident aliens not engaged in
trade or business in the Philippines.
NRA-NETB; capital asset; 6% CGT on higher between
GSP or FMV. Capital gains presumed to have been realized by
non-resident aliens not engaged in trade or business in the
Philippines on the sale of real property located in the
Philippines shall be subject to the six percent (6%) capital gains
tax imposed under Sec. 25(B), in relation to Sec. 24(D)(1), of
the Code, based on the
1. gross selling price or
2. current fair market value as determined in accordance
with Sec. 6(E) of the Code,
whichever is higher.
c. In the case of domestic corporations
Domestic corporations; capital asset that is land or
building; 6% CGT on higher between GSP or FMV. Capital
gains presumed to have been realized from the sale, exchange
or disposition of lands and/or buildings located in the
Philippines, which are classified as capital assets, shall be
subject to a capital gains tax of six percent (6%) based on the
1. gross selling price or
JO VALLES
INTRODUCTION TO INCOME TAX
2. current fair market value as determined in accordance
with Sec. 6(E) of the Code,
whichever is higher, of such land and/or buildings pursuant to
Sec. 27(D)(5) of the Code.
Domestic corporations; ordinary asset and L&B not capital
asset; CWT and ordinary income tax. The sale of
1. land and/or building classified as ordinary asset and
2. other real property (other than land and/or building
treated as capital asset), regardless of the classification
thereof,
all of which are located in the Philippines, shall be subject
1. to the creditable withholding tax (expanded) under Sec.
2.57.2(J) of Rev. Regs. No. 2-98, as amended, and
consequently,
2. to the ordinary income tax under Sec. 27(A) of the
Code.
MCIT in lieu of ordinary tax if applicable. In lieu of the
ordinary income tax, however, domestic corporations may
become subject to the minimum corporate income tax (MCIT)
under Sec. 27(E) of the Code, whichever is applicable.
d. In the case of resident foreign corporations
Real property located in the Philippines, regardless of
classification, sold by a resident foreign corporation shall be
subject to the creditable withholding tax (expanded) under Sec.
2.57.2(J) of Rev. Regs. No. 2-98, as amended, and
consequently, to the ordinary income tax under Sec. 28(A)(1)
or to the MCIT under Sec. 28(A)(2), both of the Code,
whichever is applicable.
e. In the case of non-resident foreign corporations.
The gain from the sale of real property located in the
Philippines by a non-resident foreign corporation shall be
subject to the final withholding tax at the rate of thirty-two
percent (32%) imposed under Sec. 2.57.1(I) of Rev. Regs. No.
2-98, as amended, in relation to Sec. 28(B)(1) of the Code.
f. Income on sale of real property not located in the
Philippines
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Ordinary tax for properties outside PH of RC and DC. Gain
realized from the sale, exchange, or other disposition of real
property not located in the Philippines, regardless of
classification, by
1. resident citizens or
2. domestic corporations
shall be subject to the income tax imposed in Sec. 24(A)(1), or
Sec. 27(A) or (E) of the Code, as the case may be.
NRC, aliens, FCs exempt for gains on properties outside the
PH. Such income/gain shall be exempt pursuant to Sec. 23(B),
(D) and (F) of the Code, as the case may be, in the case of non-
resident citizens, alien individuals and foreign corporations,
Section 5. Repealing Clause. All existing BIR rulings, revenue
rules, regulations and other issuances or portions thereof
inconsistent with the provisions of these regulations are hereby
modified, repealed or revoked accordingly.
Section 6. Effectivity. These Regulations shall take effect after
fifteen (15) days following publication in the Official Gazette
or in any newspaper of general circulation.
INCOME TAX FOR CORPORATIONS
Tax: Definition of terms
Person. The term person means
1. an individual,
2. a trust,
3. estate or
4. corporation. Section 22(a), NIRC
Corporation. The term 'corporation' shall include
a. partnerships, no matter how created or organized,
b. joint-stock companies,
c. joint accounts (cuentas en participacion),
d. association, or
e. insurance companies,
but does not include:
a. general professional partnerships and
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b. a joint venture or consortium
a. formed for the purpose of undertaking
construction projects or
b. engaging in petroleum, coal, geothermal and
other energy operations pursuant to an
operating consortium agreement under a
service contract with the Government
General professional partnerships are partnerships 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. Section 22(b), NIRC
Domestic corporations. The term domestic, when applied to a
corporation, means created or organized in the Philippines or
under its laws. Section 22(c), NIRC
Foreign corporations. The term foreign, when applied to a
corporation, means a corporation which is not domestic.
Section 22(d), NIRC
RFC. The term 'resident foreign corporation' applies to a
foreign corporation engaged in trade or business within the
Philippines. Section 22(h), NIRC
NRFC. The term 'nonresident foreign corporation' applies to a
foreign corporation not engaged in trade or business within the
Philippines. Section 22(i), NIRC
Shareholder. The term 'shareholder' shall include holders of a
1. share/s of stock,
2. warrant/s and/or
3. option/s to purchase shares of stock of a corporation,
4. as well as a holder of a unit of participation
a. in a partnership (except general professional
partnerships)
b. in a joint stock company,
c. a joint account,
d. a taxable joint venture,
e. a member of an association, recreation or
amusement club (such as golf, polo or similar
clubs) and
JO VALLES
INTRODUCTION TO INCOME TAX
f. a holder of a mutual fund certificate,
g. a member in an association, joint-stock
company, or insurance company. Section
22(m), NIRC
Taxpayer. The term taxpayer means any person subject to tax
imposed by this Title. Section 22(n), NIRC
R/AHQ. The term regional or area headquarters shall mean a
branch established in the Philippines by multinational
companies and which headquarters do not earn or derive
income from the Philippines and which act as
1. supervisory,
2. communications and
3. coordinating center
for their affiliates, subsidiaries, or branches in the Asia-Pacific
Region and other foreign markets. Section 22(DD), NIRC
ROHQ. The term regional operating headquarters shall mean
a branch established in the Philippines by multinational
companies which are engaged in any of the following services:
1. general administration and planning;
2. business planning and coordination;
3. sourcing and procurement of raw materials and
components;
4. corporate finance advisory services;
5. marketing control and sales promotion; training and
personnel management;
6. logistic services;
7. research and development services and product
development;
8. technical support and maintenance;
9. data processing and communications; and
business development. Section 22(EE), NIRC
CORPORATIONS
Corporation Defined. A corporation is an artificial being
created by operation of law, having the right of succession and
the powers, attributes, and properties expressly authorized by
law or incidental to its existence. Revised Corporation Code,
Section 2
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Classes of Corporations. Corporations formed or organized
under this Code may be stock or nonstock corporations.
• Stock corporations are those which have capital stock
divided into shares and are authorized to distribute to
the holders of such shares, dividends, or allotments of
the surplus profits on the basis of the shares held.
• All other corporations are nonstock corporations.
Section 3, Revised Corporation Code.
Stock corporations
Minimum Capital Stock Not Required of Stock
Corporations. Stock corporations shall not be required to have
minimum capital stock, except as otherwise specially provided
by special law. Revised Corporation Code, Section 12
Contents of the Articles of Incorporation; stock
corporation. All corporations shall file with the Commission
articles of incorporation in any of the official languages, duly
signed and acknowledged or authenticated, in such form and
manner as may be allowed by the Commission, containing
substantially the following matters, except as otherwise
prescribed by this Code or by special law:
(h) If it be a stock corporation,
1. the amount of its authorized capital stock,
2. number of shares into which it is divided,
3. the par value of each, names, nationalities, and
subscribers, amount subscribed and paid by each on the
subscription, and a statement that some or all of the
shares are without par value, if applicable; Revised
Corporation Code, Section 13
Non-stock corporations
Non-stock corporation. For purposes of this Code and subject
to its provisions on dissolution, a nonstock corporation is one
where no part of its income is distributable as dividends to its
members, trustees, or officers:
• Provided, That any profit which a nonstock
corporation may obtain incidental to its operations
shall, whenever necessary or proper, be used for the
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furtherance of the purpose of purposes for which the
corporation was organized, subject to the provisions of
this Title.
• The provisions governing the stock corporations, when
pertinent, shall be applicable to nonstock corporations
except as may be covered by specific provisions of this
Title. Section 86, Revised Corporation Code.
Purposes. Nonstock corporations may be formed or organized
for
1. charitable,
2. religious,
3. educational,
4. professional,
5. cultural,
6. fraternal,
7. literary,
8. scientific,
9. social,
10. civic service, or
11. similar purposes like trade industry, agricultural and
like chambers, or any combination thereof, subject to
the special provisions of this Title governing particular
classes of nonstock corporations. Section 87, Revised
Corporation Code.
Non-stock non-profit corporation NOT required to have
capital subscription because it does not have capital that
can be subscribed. Non-stock corporations do not need capital
subscription. In defining the classes of corporations, the law
clearly states that capital stock divided into shares pertains only
to stock corporations. It is the shares of stock issued by stock
corporations that are subscribed and paid by its owners, the
stockholders. On the other hand, the law provides that capital
of non-stock corporations shall be sourced from contributions
made by its contributors and donors. In the case of NREA, it
derives its funds from admission fees, annual dues and special
assessments of members, gifts, donations or benefits. It is thus
clear from the foregoing that under the law, there cannot be an
instance where a non-stock corporation has capital subscription
since it does not have shares of stock which can be subscribed
by its members. SEC-OGC Opinion No. 07-11
JO VALLES
INTRODUCTION TO INCOME TAX
No such thing as a stock, non-profit corporation. The
Commission has allowed the incorporation of golf/country
clubs as “stock, non-profit” corporations. However, the
perpetuation of such stock, non-profits goes against legal
principle and common sense. As one author succinctly put it:
"A non-stock corporation is a non-profit corporation, while a
stock corporation is a for-profit corporation. In this case,
Fairways was organized as a stock corporation but it provided
in its Articles that no dividends shall be distributed. The SEC
said that this fact alone is not conclusive as to its non-profit
purpose. The shares are subject to market forces, they
appreciate and depreciate in value. They are an investment.
Such a "profitable business" purpose cannot co-exist with non-
profit purposes. Also, the shareholders have an inchoate right
to the assets of the corporation. : There is no such thing as a
"stock, non-profit” corporation. FAIRWAYS is a stock
corporation. It needs to amend its articles of incorporation to
reflect that it is a plain and simple stock corporation to avoid
further confusion. Fairways and Bluewater Resort Golf and
Country Club, Inc. vs Corporate Governance and Finance
Department
Nationality of non-stock corporations
SEC Memorandum Circular No. 10-16
Guidelines on the Issuance of Certification on the
Nationality of Non-Stock Corporations
The Commission En Banc, in its Resolution No. 433, series of
2016 dated 30 June 2016, resolved to issue guidelines on the
issuance of certification on the nationality of non-stock
corporations as follows:
(1) When considered a PH national. A "Non-stock"
corporation registered with the Commission is a Philippine
National:
a. If all its members are citizens of the Philippines; or
b. If at least sixty (60%) percent of its members entitled
to vote are citizens of the Philippines; or
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c. If at least sixty (60%) percent of its members' total
number of votes as broadened in the By-laws are held
by citizens of the Philippines; or
d. If all members of a foreign non-stock corporation
licensed to do business by the Commission are
citizens of the Philippines.
(2) Certification on the nationality; P5,000. A certification
on the nationality of a non-stock corporation shall be issued
upon request to the Commission's Company Registration and
Monitoring Department for a fee in the in the amount of Five
Thousand (Php5,000.00) Pesos.
(3) Docs to be submitted by Secretary. The Corporate
Secretary shall submit the following
a. Membership Book duly registered with the SEC;
b. Sworn certified list of members indicating thereon their
nationalities; and
c. Sworn certification executed by the Corporate
Secretary on voting power of the members.
(4) Effective immediately. This Memorandum Circular shall
take effect immediately after its publication in a newspaper of
general circulation.
The Foundation was established in the PH since 1991, is
organized solely to conduct charitable activities. About y 90%
percent of the total initial capital is contributed by foreign
nationals. Out of 5 incorporators, only 2 are Filipinos,
contributing less than 10% percent of the total initial capital. At
present, the Foundation has 7 board members with 4 foreigners
and 3 Filipinos. The seeks to expand the coverage of its
activities, which would, however, require it to acquire land in
the Philippines.
Rule; use place of incorporation test first. Any corporation
or association of which at least sixty per centum of the capital
stock or of any interest in said capital stock belongs wholly to
citizens of the Philippines can own land. Under Philippine
jurisdiction, the primary test is always the Place of
Incorporation Test since we adhere to the doctrine that a
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corporation is a creature of the State whose laws it has been
created. A corporation organized under the laws of a foreign
country, irrespective of the nationality of the persons who
control it is necessarily a foreign corporation. The control test
and the principal place of business test (siege social), are
merely adjunct tests, when the place of incorporation test
indicates that the subject corporation is organized under
Philippine laws.
Control test; use nationality of members in relation to their
voting power. The nationality of non-stock corporation, in
relation to the constitutional provision on land acquisition, is
computed on the basis of the nationality of its members and
not premised on the membership contribution. In computing
the above required ratio, the extent of voting power of the
members should also be taken into consideration, not only the
number of members. This is because it is the power to vote that
determines control in a corporation. To compute the required
ratio merely on the basis of the number of members without
taking into account the voting rights of the members may give
rise to a possible situation where although foreign interest is
only 40% of the total number, all or majority of the voting
powers would be held by them and none or less from the 60%
Filipino members, so that the corporation would in effect be
under alien control.
• Application; can the foundation own land?
Unfortunately, the facts are insufficient to make a
categorical opinion on whether your client can own
land. Assuming that it is so qualified, pursuant to
Section 2-A of the Anti-Dummy Law, foreigners
should not constitute more than 40% of the members
of the Board of Trustees
Can the foundation distribute its assets to a foreign-based
NGO when it ceases existence in the PH? Distribution or
liquidation of assets of a dissolved corporation is a matter of
internal concern to the corporation and falls within the power
of the directors and stockholders or duly appointed liquidation
trustee. Should there be substantial issues, the same may be
brought to court, pursuant to the case of Consuelo Metal
Corporation v. Planters Development Bank.
JO VALLES
INTRODUCTION TO INCOME TAX
Atty. Abot’s client, a non-stock non-profit foreign corporation
(the “Foundation”), was established in the Philippines in 1991
to conduct charitable activities. 90% of the total initial capital
(P37k) is contributed by foreigners; out of the 5 initial
incorporators, only 2 are Filipinos. Currently, the Foundation
has 7 board members, with 4 foreigners and 3 Filipinos. It
wants to expand the coverage of its activities, which, however,
would require it to acquire land. Atty. Abot is raising the
following queries: (1) is the Foundation a foreign corporation,
and can it acquire land; (2) if it is disqualified, how can it
change its nationality; (3) is it allowed to hold real property
while undergoing change of nationality; and (4) can it transfer
its assets to a foreign-based NGO, its main donor, should its
existence cease in the Philippines? Sec. 7 of Art. XII restricts
the ability of a corporation to own land, while Sections 22 and
23 of Commonwealth Act 141 determine that a corporation, at
least 60% Filipino- owned, may own land. The nationality of
non-stock corporations is computed on the basis of the
nationality of its members and not premised on membership
contribution. In computing the required ratio, the extent of
voting power of the members must also be taken into
consideration. Unfortunately, the facts are insufficient to make
a categorical opinion on whether the Foundation may own land.
Assuming it is qualified, pursuant to Section 2-A of the Anti-
Dummy Law, foreigners should not constitute more than 40%
of the Board of Trustees. On the second query, assuming that
the Foundation does not meet the 60% Filipino ownership
requirement, it can adjust the ownership until the 60%
requirement is met. On the third query, if the Foundation failed
to qualify with the statutory conditions, it is not a Filipino
national and cannot own land. However, it may possess the land
in a different capacity (such as lease not longer than 25 years,
or as holder by virtue of juridical title such as usufruct, or hold
the lands in trust for equitable title holders). On the fourth
query, in case of dissolution, corporate assets shall be applied
as per Section 94 of the Code, or specified in a plan of
dissolution adopted by the corporation in accordance with
Section 95. Liquidation of assets is a matter of internal concern
and falls within the power of directors, stockholders, or
liquidation trustee. Should there be substantial issues, they may
be brought to court. SEC OGC Opinion No. 16-15
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Funding of non-stock corporations
SEC Memorandum Circular No. 08-06
Revised Guidelines on Foundations
Many of the foundations registered with the Commission have
been observed to focus mainly on the fund-raising aspect of
their projects.
Funds raised must be utilized. It is essential that the funds
generated by the foundations are utilized in accordance with the
purposes stated in their Articles of Incorporation.
Foundation. A Foundation is a non-stock, non-profit
corporation established for the purpose of
a. extending grants or endowments to support its goals or
b. raising funds to accomplish charitable, religious,
educational, athletic, cultural, literary, scientific, social
welfare or other similar objectives. Section 1
1M bank deposit + willingness to allow audit + NS
corporation requirements. A Foundation applying for
registration with the Commission shall, in addition to the
requirements for non-stock, non-profit corporations, submit the
following documents:
a. Notarized Certification of Bank Deposit of the amount
of not less than One Million Pesos (P1,000,000.00);
and
b. Statement of willingness to allow the Commission to
conduct an audit. Section 2
Name. The applicant's corporate name shall contain the word
"Foundation". Section 3
GIS + audited FS + sworn statement. Upon the effectivity of
this Circular, all registered Foundations shall submit, in
addition to the General Information Sheet, its Audited
Financial Statement which shall include a sworn Statement
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of its President and Treasurer on the following information that
relates to the preceding fiscal year:
a. Source and Amount of Funds;
b. Program/Activity planned, ongoing and accomplished;
a. Complete name, address and contact number
of project officer-in-charge;
b. Complete address and contact number of
project office; and
c. Application of Funds. Section 4
Attached certification to sworn statement. A registered
Foundation shall attach to the sworn statement mentioned in the
immediately preceding paragraph a Certification from
a. the Office of the Mayor, or
b. the Office of the Barangay Captain, or
c. the Head of either the Department of Social Welfare
and Development or Department of Health, on the
existence of the subject Program/Activity in the
locality on which it exercises jurisdiction. Section 5
Statement of willingness to allow audit. In case a registered
Foundation has not yet submitted to the Commission a
statement of willingness to allow the conduct of an audit, it
shall attach such statement when it submits the documents
required in Sections 4 and 5. Section 6
Access to records during audit. For purposes of the audit to
be conducted, a registered Foundation shall allow the
Commission's representatives access to its
a. corporate and accounting books,
b. records,
c. names of beneficiaries,
d. agreements entered into,
e. correspondences and
f. all pertinent documents for the preceding five (5)
years. Section 7
BSP regulated bank. All funds of the Foundation shall be
deposited in a banking institution regulated by the Bangko
Sentral ng Pilipinas. Section 8
JO VALLES
INTRODUCTION TO INCOME TAX
Penalty. Failure to comply with any of these rules or any
violation of the provisions hereof shall render the Foundation
liable to pay a fine in an amount that shall be determined by the
Commission which shall not be less than Ten Thousand Pesos
(P10,000.00).
• Revocation in case of failure to submit docs. In case
the Foundation fails to submit the required documents
for two (2) consecutive years, the Commission may,
after due notice and hearing, revoke the registration
of the Foundation. The penalties enumerated herein
shall be without prejudice to whatever other legal
action may be available under existing laws. Section 9
Sources of funding for non-stock corporations
SEC Memorandum circular 15-18
Guidelines for the protection of SEC-registered non-profit
organizations from money laundering and terrorist
financing abuse
Non-Stock Corporation. This refers to a corporation with no
authorized capital stock and no part of its income is
distributable as dividends to its members, trustees, or officers.
Non-Profit Organization (NPO). This refers to an SEC
registered Non-Stock Corporation that primarily engages in
raising or disbursing funds for purposes such as charitable,
religious, cultural, educational, social or fraternal purposes, or
for the carrying out of other types of good works. For purposes
of these Guidelines, NPOs shall include
(1) Foundations as well as
(2) other SEC registered Non-Stock Corporations engaged
in the above mentioned activities.
NPO at risk. NPO at risk refers to an NPO classified as
medium or high risk based on an assessment of the risk factors
as stated in Section 4.2, Chapter IV of these Guidelines or in
accordance with a risk-based points system that may be
developed by the Commission. The Commission may consider
such other factors as it may deem material in the assessment of
an NPO's risk level.
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Politically Exposed Person (PEP). This refers to an individual
who is or has been entrusted with a prominent public
position/function in:
1. the Philippines with substantial authority over policy,
operations or the use or allocation of government-
owned resources;
2. a foreign state; or
3. an international organization.
Presumption of continuation of status as PEP. It shall be
presumed that a person who has been entrusted with a
prominent public position/function as referenced above shall
continue to be considered a PEP, even if he or she no longer
holds such a position, unless it is clearly shown otherwise.
Coverage of PEP. The term PEP shall include immediate
family members, and close relationships and associates that
are reputedly known to have:
1. joint beneficial ownership of a legal entity or legal
arrangement with the main/principal PEP; or
2. sole beneficial ownership of a legal entity or legal
arrangement that is known to exist for the benefit of the
main/principal PEP.
Immediate family members of PEPs refer to
1. spouse or partner,
2. children and their spouses, parents and parents-in-law,
and
3. siblings;
Close Associates of PEPs refers to persons who maintain a
particularly close relationship with the PEP, and include
persons who are in a position to conduct substantial domestic
and international financial transactions on behalf of the PEP.
Close Associates may include:
1. beneficial owners of a legal entity or legal arrangement
that is known to exist for the benefit of the
main/principal PEP;
2. business partners or associates, especially those that
share beneficial ownership of legal entities or legal
arrangements with the PEP;
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3. persons who are otherwise connected to the PEP (e.g.,
through joint membership of a company board);
4. prominent members of the same political party, civil
organization, labor or employee union as the PEP;
5. persons (sexual and/or romantic) partners outside the
family unit (e.g., girlfriends, boyfriends, mistresses,
etc.).
Risk assessment. In order to ensure that NPOs are not misused
by terrorist organizations:
1. to pose as legitimate entities;
2. to exploit legitimate entities as conduits for terrorist
financing, including for the purpose of escaping asset
freezing measures; or
3. to conceal or obscure the clandestine diversion of funds
intended for legitimate purposes, but diverted for
terrorist purposes,
the Commission adopts a risk-based approach in applying
focused measures in dealing with identified threats of
terrorist financing abuse to NPOs.
Risk-based approach. The risk-based approach for the
protection of NPOs shall include the following:
1. Identifying threats of terrorist financing abuse based on
the results of the national risk assessment of the Anti-
Money Laundering Council;
2. Identifying vulnerabilities among NPOs based on the
types and characteristic features of such NPOs; and
3. Identifying the consequences of such threats and
vulnerabilities on NPOs.
Mandatory disclosures. The following basic information, if
applicable, shall be required from all SEC registered Non-Stock
Corporations, to wit:
a. Objectives and purpose of their stated activities;
b. Identity of the person(s) who own, control or direct
their activities, including senior officers, board
members and trustees
c. Nature of operations or projects;
d. Actual raising or disbursing of funds for charitable,
religious, cultural, educational, social or fraternal
JO VALLES
INTRODUCTION TO INCOME TAX
purposes, or for the carrying out of other types of "good
works"
e. Contribution;
f. Fund Balance;
g. Location of operations which shall include the (i) head
office or branches, if any, (ii) location of
beneficiaries/projects, and (iii) other areas of
operation/activity, if any;
h. Source of Funds (as to person);
i. Source of Funds (as to geography);
j. Intended beneficiaries (as to person);
k. Intended beneficiaries (as to geography); and
l. Existing license/accreditation from another
government agency.
Preventive measures. For the purpose of protecting
themselves from money laundering and terrorist financing
abuse, all NPOs shall adopt the following preventive measures:
1. Establish a system that will enable them to know who
their donors are and where the funds are coming from;
2. Ensure that they know who their beneficiaries are and
where they are located;
3. Ensure that the funds actually reach their target
beneficiaries or that they are used for the purpose
intended; and
4. Report to the Commission any fact within its
knowledge that gives rise to a suspicion that such NPO
is being exploited for money laundering and/or terrorist
financing purposes.
Penalties. If, after due notice and hearing, the Commission
finds that:
a. There is a willful violation of these Guidelines or
related orders of the Commission;
b. Any person has, in applications, accounts, records or
documents required under these Guidelines to be filed
with the Commission, made any untrue statement of a
material fact, or omitted to state any material fact
required to be stated or necessary to make the
statements therein not misleading; or
c. Any person has refused to permit any lawful
examinations into its affairs.
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the Commission may, in its discretion, and subject to existing
laws and regulations, impose any or all of the following
sanctions as may be appropriate in light of the facts and
circumstances:
a. Fine of no less than Ten Thousand Pesos (PhP10,000)
nor more than One Million Pesos (PhP1,000,000) plus
not more than Two Thousand Pesos (PhP2,000) for
each day of continuing violation;
b. Revocation of registration of a Non-Stock Corporation
or NPO if there is a high risk of money laundering or
terrorist financing abuse within such Non-Stock
Corporation or NPO; and
c. Other penalties within the power of the Commission to
impose.
In imposing the foregoing penalties, the Commission shall be
guided by the principles of
a. effectiveness,
b. dissuasiveness and
c. proportionality.
Branches/Offices/ROHQs/RAHQs
Branch office. Branch office of a foreign company
1. carries out the business activities of the head office and
2. derives income from the host country. Rule 1, Section
1(c)(2), IRR of 7-42
Representative/liaison office. Representative or liaison office
1. deals directly with the clients of the parent company
2. but does not derive income from the host country and
3. is fully subsidized by its head office.
It undertakes activities such as but not limited to information
dissemination and promotion of the company's products as well
as quality control of products. Rule 1, Section 1(c)(3), IRR of
7-42
• Representative offices not subject to income tax.
Obtech is a Singaporean company with a license to
operate in the PH. It established a representative office
in the PH. According to the BIR, said office was
classified as a non-resident foreign corporation not
engaged in any income generation business in the
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Philippines. As can be viewed by its licensed activities,
Obtech is a representative office. Accordingly, it is not
subject to income tax. Hence, it is exempt from filing
of the corporate income tax return. DA-393-03
• Representative offices exempt from VAT. Since
Obtech Manila Office merely enables the overseas
head office to maintain some presence in the country,
and is not engaged in any income-generating activity
in the Philippines further qualifies said office for
exemption from VAT. DA-393-03
• Fees remitted by representative offices to the parent
company are considered royalties subject to income
tax. According to the BIR, if the representative office
remits technical service fees to its parent company, the
said fees are considered royalties (Section
42(A)(4)(f), 1997 Tax Code. Being Philippine source
income of a representative office, the technical service
fees are subject to Philippine corporate income tax at
the rate of 32% which the office will withhold as the
payor-corporation. DA-393-03
Multi-national companies. Multinational company shall mean
a foreign company or a group of foreign companies with
business establishments in two or more countries. Section 2(1),
RA 8756
R(A)HQ. Regional or Area Headquarters (RHQ) shall mean an
office whose purpose is to act as an administrative branch of
a multinational company engaged in international trade which
principally serves as a
1. supervision,
2. communications and
3. coordination center
for its
1. subsidiaries,
2. branches or
3. affiliates in the Asia-Pacific Region and other foreign
markets and which does not earn or derive income in
the Philippines. Section 2(2), RA 8756
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INTRODUCTION TO INCOME TAX
R(A)HQ. The term 'regional or area headquarters' shall mean
1. a branch established in the Philippines by
multinational companies and
2. which headquarters do not earn or derive income from
the Philippines
3. and which act as
a. supervisory,
b. communications and
c. coordinating center
for their
a. affiliates,
b. subsidiaries, or
c. branches
in the Asia-Pacific Region and other foreign markets.
Section 22(DD), NIRC
Industries reserved to PH Nationals
SEC. Memo Circular 8-13
TO : All Corporations Engaged in Nationalized or
Partly Nationalized Activities
SUBJECT : Guidelines on Compliance with the
Filipino-Foreign Ownership Requirements Prescribed in the
Constitution and/or Existing Laws by Corporations Engaged in
Nationalized and Partly Nationalized Activities
% of ownership for activities reserved to PH nationals.
WHEREAS, the Constitution, the Foreign Investments Act of
1991, ("FIA") as amended, and other existing laws mandate
that a certain percentage of ownership in corporations engaged
in identified areas of activities and enterprises be reserved to
Philippine Nationals;
Required provision in AoI. WHEREAS, Section 15 of the
Corporation Code of the Philippines provides that a corporation
which will engage in business or activity reserved for Filipino
citizens shall include in its Articles of Incorporation a provision
stating that no transfer of stock or interest which shall reduce
the ownership of Filipino citizens to less than the required
percentage of the capital stock as provided by existing laws,
shall be allowed;
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SEC may reject if ownership requirement not complied.
WHEREAS, Section 17 of the Corporation Code provides that
the Securities & Exchange Commission may reject or
disapprove articles of incorporation or amendments thereto if
the percentage of ownership of the capital stock to be owned by
citizens of the Philippines has not been complied with as
required by existing laws or the Constitution;
SEC can impose admin sanctions for non-compliance.
WHEREAS, Section 14 of the FIA empowers the Commission
to impose administrative sanctions provided therein for
violation of the FIA and its implementing rules and regulations
("IRR");
Only voting stocks considered in Gamboa vs Teves.
WHEREAS, the Supreme Court in Heirs of Gamboa v. Teves,
et al., 1 ruled that the term 'capital' in Section 11, Article XII of
the 1987 Constitution refers only to shares of stock entitled to
vote in the election of directors;
Full beneficial ownership required in determining
ownership. WHEREAS, Section 1 (b) of the IRR of FIA
clearly requires the existence of full beneficial ownership of the
stocks and appropriate voting rights in determining whether
stocks are owned and held by Philippine nationals;
Ownership + voting required. WHEREAS, it is essential to
ensure that full beneficial ownership and effective control of
the appropriate voting rights lie with Philippine nationals;
WHEREAS, Section 143 of the Corporation Code and Sections
5 and 72 of the Securities Regulation Code ("SRC") empower
the Commission to promulgate guidelines, rules and
regulations that will enable it to implement the provisions and
purpose of the laws it implements;
NOW, THEREFORE, the Commission hereby issues and
promulgates the following guidelines on compliance with the
ownership requirements in the Constitution and/or existing
laws by corporations engaged in nationalized or partly
nationalized activities:
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Applies to corporations engaged in activities reserved to PH
nationals. This Circular shall apply to all corporations
("covered corporations") engaged in identified areas of
activities or enterprises specifically reserved, wholly or partly,
to Philippine Nationals by the Constitution, the FIA and other
existing laws, amendments thereto and IRRs of said laws,
except as may otherwise be provided therein. Section 1
Test of ownership. All covered corporations shall, at all times,
observe the constitutional or statutory ownership requirement.
For purposes of determining compliance therewith, the
required percentage of Filipino ownership shall be applied to
BOTH
a. the total number of outstanding shares of stock entitled
to vote in the election of directors; AND
b. the total number of outstanding shares of stock,
whether or not entitled to vote in the election of
directors. Section 2
Corporations covered by special laws which provide specific
citizenship requirements shall comply with the provisions of
said law.
Corporate secretaries charged with monitoring and
compliance. All Corporate Secretaries of covered corporations
are directed to monitor and observe compliance with the
provisions on ownership requirements provided in the
Constitution, the FIA, its IRR, other applicable laws, rules and
regulations and with the provisions of this Circular.
• Non-delegable duty unless with express authority.
The Corporate Secretary cannot delegate the
responsibility of complying with the provisions of this
Circular without the express authority from the Board
of Directors or Trustees, as the case may be. Section 3
Effectivity; existing and covered corporations have 1 year
to comply. This Circular shall take effect immediately after its
publication in two (2) national newspapers of general
circulation, provided: that all existing covered corporations
which are non-compliant with Section 2 hereof shall be given a
JO VALLES
INTRODUCTION TO INCOME TAX
period of one (1) year from the effectivity of this Circular
within which to comply with said ownership requirement. The
Commission may extend the period of compliance but only in
meritorious and exceptional cases, and upon proper petition.
• Failure to comply with this Circular shall subject the
juridical entity, any person, and the corporate officers
responsible, to sanctions provided in Section 14 of the
Foreign Investments Act of 1991, as amended. Section
4 2. opening offices, whether called “liaison” offices or
Signed this 20th day of May 2013, Mandaluyong City,
Philippines.
Foreign corporation
Foreign corporation. For purposes of this Code, a foreign
corporation is
1. one formed, organized or existing under laws other
than those of the Philippines' and
2. whose laws allow Filipino citizens and corporations to
do business in its own country or State.
It shall have the right to transact business in the Philippines
after obtaining
1. a license for that purpose in accordance with this Code
and
2. certificate of authority from the appropriate
government agency. Revised Corporation Code,
Section 140
Foreign corporation. Foreign corporation shall mean one
which is formed, organized or existing under laws other
than those of the Philippines. Rule 1, Section 1(c)(1), IRR
of 7-42
Law applicable to foreign corporations. A foreign
corporation lawfully doing business in the Philippines shall be
bound by all laws, rules and regulations applicable to domestic
corporations of the same class, except those which provide for
the
1. creation,
2. formation,
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3. organization or
4. dissolution of corporations or
5. those which fix the relations, liabilities,
responsibilities, or duties of stockholders, members or
officers of corporations to each other or to the
corporation. Section 146, Revised Corporation Code.
Doing business. The phrase doing business shall include
1. soliciting orders, service contracts,
branches;
3. appointing representatives or distributors domiciled in
the Philippines or
4. who in any calendar year stay in the country for a
period or periods totaling one hundred eighty (180)
days or more;
5. participating in the management, supervision or control
of any domestic business, firm, entity or corporation in
the Philippines; and
6. any other act or acts that
a. imply a continuity of commercial dealings or
arrangements, and
b. contemplate to that extent the performance of
acts or works, or the exercise of some of the
functions normally incident to, and in
progressive prosecution of, commercial gain
or of the purpose and object of the business
organization:
Provided, however, That the phrase “doing business” shall not
be deemed to include mere investment as a shareholder by a
foreign entity in domestic corporations duly registered to do
business, and/or the exercise of rights as such investor; nor
having a nominee director or officer to represent its interests in
such corporation; nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its own
name and for its own account. Section 3(d), Foreign
Investments Act
Doing business without a license; can be sued but cannot
sue. No foreign corporation transacting business in the
Philippines without a license, or its successor or assigns, shall
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TAXATION LAW
be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the
Philippines; but such corporation may be sued or proceeded
against before the Philippine courts or administrative tribunals
on any valid cause of action recognized under Philippine laws.
Section 150, Revised Corporation Code.
Unlicensed foreign corporation not doing business in the
PH can sue in the PH; must perform commercial acts
within PH territory to be considered as doing business.
Zuiden is a HK corporation and is suing GTVL in PH courts.
GTVL argued that Zuiden does not have personality to sue
because it is not licensed. SC said that Zuiden can sue. Under
Sec. 133 of the Corp Code, an unlicensed foreign corporation
doing business in the Philippines cannot sue before Philippine
courts. However, an unlicensed foreign corporation not doing
business in the Philippines can. An essential condition to
“doing business” in the PH is actual performance of specific
commercial acts within the territory of the PH. Here, there
is no clear showing that Zuiden cperformed within Philippine
territory the specific acts of doing business, nor did Zuiden
open an office in the Philippines, appoint a representative or
distributor, or manage, supervise, or control a local business.
While Zuiden and GTVL entered into a series of transactions
implying a continuity of commercial dealings, the perfection
and consummation of the transactions were done outside of the
Philippines. The contract was that of sale wherein Zuelig will
deliver the items to another HK corporation and GTVL will pay
for it. There is no activity which Zuiden performed in the
Philippines pursuant to its purpose and object as a business
organization, nor is its desire to do business within the
Philippines discernable from the allegations of the complaint.
Van Zuiden Bros., Ltd vs GTVL Manufacturing
Unlicensed foreign corporation not doing business in the
PH can sue in the PH; must conduct profit-making
activities to be considered as doing business. A foreign
corporation without a license is not ipso facto incapacitated
from bringing an action in Philippine courts. A license is only
necessary if the foreign corporation is transacting or doing
business in the country. constitute doing business, the activity
to be undertaken in the Philippines is one that is for profit
JO VALLES
INTRODUCTION TO INCOME TAX
making. By the clear terms of the VAASA, Agilent’s activities
in the Philippines were confined to (1) maintaining a stock of
goods in the Philippines solely for the purpose of having the
same processed by Integrated Silicon and (2) consignment of
equipment with Integrated Silicon to be used in processing of
products for export. As such, Agilent cannot be deemed to be
doing business in the Philippines, and thus does not need
license before it can sue. Agilent Technologies Singapore Ltd.,
vs Integrated Silicon Technology Philippines Corporation
Principles for allowing foreign corporations to sue. The
principles regarding the right of a foreign corporation to bring
suit in Philippine courts may be condensed in the following
four statements:
1. If a foreign corporation does business in the
Philippines without a license, it cannot sue before
Philippine courts
2. If a foreign corporation is not doing business in the
Philippines, it needs no license to sue before Philippine
courts on an isolated transaction or a cause of action
entirely independent of any business transaction
3. If a foreign corporation does business in the
Philippines without a license, a Philippine citizen or
entity which has contracted with said corporation may
be estopped from challenging the foreign corporation’s
corporate personality in a suit brought before
Philippine courts
4. If a foreign corporation does business in the
Philippines with the required license, it can sue before
Philippine courts on any transaction. Agilent
Technologies Singapore Ltd., vs Integrated Silicon
Technology Philippines Corporation
Test for doing business; Mentholatum case.
1. Substance. The substance test, under which whether
the foreign corporation is continuing the body of the
business for which it was organized or whether it has
substantially retired from it and turned it over, and
2. Continuity. The continuity test, under which whether
there is a continuity of commercial dealings and
arrangements.
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To determine if doing business, may refer to nature of other
contracts entered into; having a representative. In
determining whether a corporation does business in the
Philippines or not, aside from their activities within the forum,
reference may be made to the contractual agreements entered
into by it with other entities in the country. SC concluded that
ITEC had been engaged in or doing business in the Philippines
for some time now. This is the inevitable result after a scrutiny
of the different contracts and agreements entered into by ITEC
with its various business contacts in the country, particularly
ASPAC and TESSI. The latter is a local electronics firm
engaged by ITEC to be its local technical representative, and to
create a service center for ITEC products sold locally. Its
arrangements, with these entities indicate convincingly ITEC's
purpose to bring about the situation among its customers and
the general public that they are dealing directly with ITEC, and
that ITEC is actively engaging in business in the country. In its
Master Service Agreement with TESSI, private respondent
required its local technical representative to provide the
employees of the technical and service center with ITEC
identification cards and business cards, and to correspond only
on ITEC, Inc., letterhead. TESSI personnel are instructed to
answer the telephone with "ITEC Technical Assistance
Center.", such telephone being listed in the telephone book
under the heading of ITEC Technical Assistance Center, and
all calls being recorded and forwarded to ITEC on a weekly
basis. Thus, ITEC was engaged in business without a license.
Communication Materials and Design, Inc vs CA
• Exception; estoppel. Nevertheless, the SC said that
ASPAC is estopped from questioning such personality
after having entered into a contract with it. A foreign
corporation doing business in the Philippines may sue
in Philippine Courts although not authorized to do
business here against a Philippine citizen or entity who
had contracted with and benefited by said corporation.
To put it in another way, a party is estopped to
challenge the personality of a corporation after having
acknowledged the same by entering into a contract
with it. And the doctrine of estoppel to deny corporate
existence applies to a foreign as well as to domestic
corporations. The principle will be applied to prevent a
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TAXATION LAW
person contracting with a foreign corporation from
later taking advantage of its noncompliance with the
statutes chiefly in cases where such person has
received the benefits of the contract. Communication
Materials and Design, Inc vs CA
Carries out business for the purpose for which it was
created; considered as doing business. Top Weld entered into
a licensing agreement with IRTI (Swiss) and a distributorship
agreement with ECED (Panama) but it later learned that the 2
foreign corporations were negotiating with another group to
replace it as a distributor, hence it sued the foreign corporations.
CA reversed RTC and said that the 2 corporations are not
covered by RA 5455 since they are not doing business in the
PH. SC said that they were doing business in the Philippines,
as when they entered the contracts, they were carrying out the
purposes for which they were created, and the terms of the
contracts indicated that the respondents established a
continuous business, and not one merely of a temporary
character. This fact is even more strengthened by the fact that
they are negotiating with another group for the transfer of the
distributorship and franchising rights from the petitioner. Thus,
they should have applied for licenses and are bound by the
provisions of RA 5455. Nevertheless, SC ruled that the 2
foreign corporations are by the requirement on termination
under the law and Top Weld cannot invoke the same since they
were in pari delicto—Top Weld for contracting with the
corporations knowing fully well that they did not comply with
the licensing requirement, and the foreign corporations in not
securing the required licenses and in terminating the agreement.
Top Weld Manufacturing vs ECED
Participating in bidding process constitutes doing business.
AP Trans is incorporated under the laws of Belgium. It entered
into a contract with LRTA relative to the automation of the fare
collection process. It asked for a ruling as to WON it was a
foreign corporation doing business in the PH which would
require it to obtain a license. The SC has previously held that
participating in a bidding process constitutes “doing business”
because it shows the foreign corporation’s intention to engage
in business here. The bidding for the concession contract is but
an exercise of the corporation’s reason for existence. Thus, the
JO VALLES
INTRODUCTION TO INCOME TAX
active participation in the bidding process makes AP TRANS
“doing business” within the PH in line with its main business
of selling, designing and installing automated fare collection
and ticketing machines. Moreover, based on the bidding
documents, the duration of the whole work is to be completed
within 22 months, which exceeds the 180-day period as
provided in the FIA. AP TRANS actively participated in the
bidding process and was consequently awarded the government
contract for the project. Hence, it must obtain a license. SEC
OGC Opinion 21-14
Member of a consortium [partnership among corporations]
which is not the operator thereof still required to obtain
license; except if limited partnership. The SEC opines that a
foreign corporation still needs to obtain a license to do business
in the PH notwithstanding that it holds a minority and non-
controlling interest in the consortium. It must be stressed that
the consortium, as a joint venture, is a partnership. For a foreign
corporation to be exempt from the license requirement, it must
prove that it merely invested as a shareholder in a domestic
corporation. It is settled that exceptions are strictly construed
against the one invoking the exception. Considering that the
exception from doing business applies only to investment in a
corporation, investment in any other business (like a
partnership) would not automatically constitute an exception.
The differing treatment is based on the substantial distinction
between the two entities; whereas in a corporation, the
stockholders do not manage the affairs of the corporation
(which is left to the Board of Directors), in a partnership, each
partner is considered an agent who can bind the partnership.
Only when the investment in a partnership is that of a limited
partner who in no case shall take part in the management and
control of the partnership will such be akin to investment in a
corporation. Per the stipulations in the proposed Consortium
Agreement, the Operating Committee will exercise day-to-day
control over the consortium, and each member shall have a
voting interest in the Committee equal to its participation.
Further, per the Service Agreement, the foreign corporation
appears to be a general partner of the consortium. Accordingly,
the foreign corporation is doing business in the Philippines as
defined in Section 3(d) of the FIA and must secure a license to
do business in the Philippines. SEC OGC Opinion 01-14
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Absence of physical place of business does not bar an entity
from being classified as doing business as long as there are
commercial activities. Genibrain is a Korean corporation that
publishes games online, which intends to set up game servers
in the Philippines which shall be physically located in and
connected to the internet through the facilities provided by a
value- added service provider such as ePLDT. In effect, it does
not intend to maintain a fixed place where it can conduct
business through representatives and agents. It is inquiring
whether the setting up of these servers constitutes “doing
business” in the Philippines, thereby requiring it to obtain a
license. On the first requisite, the setting up of game servers
within the Philippines may be considered as maintaining or
continuing in the Philippines the body or substance of the
business or enterprise. Although the setting up of servers does
not involve transactions beyond the mere leasing of a specific
portion of space in the Philippines to accommodate the servers,
the servers shall act as memory storage where the software and
data are stored, which is a vital component of Genibrain’s
online business. On the second requisite, one must consider not
only the mere act of setting up the servers in the Philippines but
also its continued presence. In reality, the servers will be in
continuous operation, which may be construed to mean that
Genibrain is engaged in activities which necessarily imply a
continuity of commercial dealings. While there is no physical
activity, the physical presence of the servers are essential in the
perfection of the online transactions. From these, the
Commission opines that Genibrain will be “doing business”
within the Philippines, and it is imperative that it first obtain a
license before setting up servers in the Philippines. SEC
Opinion 22-10
Absence of physical place of business does not bar an entity
from being classified as doing business in the PH. SEN is an
online platform which requires an account in order to
participate. Since it is an internet-based system, persons in the
Philippines can create a SEN account to use SEN’s services
even if SCEH does not have physical presence in the country.
A SEN accountholder can buy content and services from SEN
only by using funds from an associated SEN online wallet,
which can be funded by using a credit or debit card or a prepaid
card where available. Its employees are based in Hong Kong
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TAXATION LAW
while its servers are based in the United States. SEC opines that
the activities that SCEH proposed to undertake shall be
considered as doing business under the twin- characterization
test. First, the following activities indicate that SCEH will be
continuing the body of the business for which it was
organized: (1) funding of SEN online wallet (2) offering and
selling SEN services (3) accepting online payments in any
currency including PHP (4) marketing or advertising and (5)
hiring independent contractors for marketing, advertising, and
selling of prepaid cards. Second, the abovementioned activities
are transactions consummated within the Philippines although
done in a virtual plane. The following salient points of the
online commercial transactions, or e-commerce, will find
themselves in the Philippines: (1) creation of a new SEN
account will take place in the PH (2) offering and sale of SEN
content and services will be made to the accountholder who is
located in the PH (3) funding of SEN online wallet will take
place in the PH (4) payment will be made from the PH by the
SEN accountholder and (5) delivery of online content and
services will be made in the PH. The above salient points are
evidenced by the use of an IP address through a device, through
which the physical location of the user can be traced.
Furthermore, it must be remembered that funding of the SEN
online wallet may be done by credit and debit cards, and such
logically means that SEN will likewise have arrangements with
credit/debit card issuers in the Philippines. The permission to
use and buy from the SEN online store also clearly indicates
there is intent to continue in the main business for a period of
time. Once the SEN accountholder puts funds in the wallet, he
can resume transactions on SEN while his account is active.
Furthermore, there is intent to make available in the Philippines
the online gaming services provided by PlayStation Network.
In the United States, there is no statutory law whether operating
an online platform constitutes doing business. Courts there
apply a sliding scale test tailored to internet activities to
determine whether there is “minimum contact” for jurisdiction
purposes. At one end of the scale are “passive websites”, while
on the other are “active websites”, and interactive websites fall
in the center. Applying the Sliding Scale Test, SCEH has
“minimum contacts” with the Philippines; the SEN online
platform cannot be considered a “passive website” since it is
not merely used to post information; rather, it should be
JO VALLES
INTRODUCTION TO INCOME TAX
considered an “active website” since it offers for sale and is
engaged in the selling of SEN content and services. From the
foregoing, the Commission opines that the previously
enumerated activities of SCEH is considered as doing business
within the Philippines. SEC OGC Opinion 03-17
PERMANENT ESTABLISHMENTS
Philippines-Germany tax treaty
Article 5
Permanent Establishment
(1)Permanent establishment. For the purposes of this
Agreement, the term "permanent establishment" means a fixed
place of business through which the business of an enterprise is
wholly or partly carried on.
(2)Examples. The term permanent establishment includes
especially:
a. a place of management;
b. a branch;
c. an office;
d. a factory;
e. workshop, and
f. a mine, an oil or gas well, a quarry or any other place
of extraction of natural resources.
(3)Other examples. The term “permanent establishment” also
encompasses:
a. A building site, a construction, assembly or installation
project or supervisory activities in connection
therewith, but only if such site, project or activities last
more than six months;
b. The furnishing of services, including consultancy
services, by an enterprise through employees or other
personnel engaged by the enterprise for such purpose,
but only if activities of that nature continue (for the
same or a connected project) within a Contracting State
for a period or periods aggregating more than six
months within any twelvemonth period.
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(4)Those not included. Notwithstanding the preceding
provisions of this Article, the term “permanent establishment”
shall be deemed not to include:
a. the use of facilities solely for the purpose of storage,
display or delivery of goods or merchandise belonging
to the enterprise;
b. the maintenance of a stock of goods or merchandise
belonging to the enterprise solely for the purpose of
storage, display or delivery;
c. the maintenance of a stock of goods or merchandise
belonging to the enterprise solely for the purpose of
processing by another enterprise;
d. the maintenance of a fixed place of business solely for
the purpose of purchasing goods or merchandise or of
collecting information, for the enterprise;
e. the maintenance of a fixed place of business solely for
the purpose of carrying on, for the enterprise, any other
activity of a preparatory or auxiliary character;(
f. the maintenance of a fixed place of business solely for
any combination of activities mentioned in sub-
paragraphs (a) to (e), provided that the overall activity
of the fixed place of business resulting from this
combination is of a preparatory or auxiliary character.
(5)Notwithstanding the provisions of paragraphs 1 and 2, where
a person - other than an agent of an independent status to whom
paragraph 6 applies - is acting on behalf of an enterprise and
has, and habitually exercises, in a Contracting State an
authority to conclude contracts in the name of the enterprise,
that enterprise shall be deemed to have a permanent
establishment in that State in respect of any activities which that
person undertakes for the enterprise, unless the activities of
such person are limited to those mentioned in paragraph 4
which, if exercised through a fixed place of business, would not
make this fixed place of business a permanent establishment
under the provisions of that paragraph.
(6)Having a broker / independent agent not enough to
constitute a permanent establishment. An enterprise shall
not be deemed to have a permanent establishment in a
Contracting State merely because it carries on business in that
State through a broker, general commission agent or any other
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agent of an independent status, provided that such persons are
acting in the ordinary course of their business.
(7)The fact that a company which is a resident of a Contracting
State controls or is controlled by a company which is a resident
of the other Contracting State or which carries on business in
that other State (whether through a permanent establishment or
otherwise), shall not of itself constitute either company a
permanent establishment of the other.
Example; permanent establishment. Air Canada is a
Canadian Airline granted an authority to operate as offline air
carrier in the PH. It engaged the services of Aerotei as its
general sales agent in the PH. Under the PH-Canada Treaty, the
business profits of an enterprise of a Contracting State is
taxable only in that State unless the enterprise carries on
business in the other Contracting State through a permanent
establishment. Hence, the issue arose as to WON the
appointment of Aerotal as resident agent constituted a
permanent establishment. The court held in the affirmative. In
order that a party that contracts through an agent will not be
considered as having a permanent establishment, such agent
must act independently. In this case, Aerotei is
a dependent agent of petitioner pursuant to the terms of the
Passenger General Sales Agency Agreement executed between
the parties. It has the authority or power to conclude contracts
or bind petitioner to contracts entered into in the Philippines. A
third-party liability on contracts of Aerotei is to petitioner as
the principal, and not to Aerotei, and liability to such third party
is enforceable against petitioner. While Aerotei maintains a
certain independence and its activities may not be devoted
wholly to petitioner, nonetheless, when representing petitioner
pursuant to the Agreement, it must carry out its functions solely
for the benefit of petitioner and according to the latter's Manual
and written instructions. Aerotei is required to submit its annual
sales plan for petitioner's approval. In essence, Aerotei extends
to the Philippines the transportation business of petitioner. It is
a conduit or outlet through which petitioner's airline tickets are
sold. As such, the income of Air Canada is taxable following
the rate in the treaty—1.5% of business profits rather than 30%
RCIT. Air Canada vs CIR
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INTRODUCTION TO INCOME TAX
FOREIGN INVESTMENTS
Investment. The term investment shall mean equity
participation in any enterprise organized or existing under the
laws of the Philippines; Section 3(b), RA 7042, Foreign
Investments Act
Investment. Investment shall mean equity participation
in any enterprise organized or existing under the laws of
the Philippines. It includes
1. both original and additional investments,
2. whether made
a. directly as in stock subscription, or
b. indirectly through the transfer of equity
from one investor to another as in stock
purchase.
• Debt instruments not investments. Ownership of
bonds (including income bonds), debentures, notes
or other evidences of indebtedness does not qualify
as investment.
• Options/warrants not investment until
exercised. The purchase of stock options or stock
warrants is not an investment until the holder
thereof exercises his option and actually acquires
stock from the corporation. Rule 1, Section 1(d),
IRR of RA 7042
Paid-in equity capital. Paid-in equity capital shall mean the
total investment in a business that has been paid-in in a
1. corporation or
2. partnership or
3. invested in a single proprietorship,
which may be in cash or in property. It shall also refer to
1. inward remittance or
2. assigned capital
in the case of foreign corporations. Rule 1 Section 1(p), IRR of
RA 7042
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Foreign investment. The term foreign investment shall mean
as equity investment made by a non-Philippine national in the
form of foreign exchange and/or other assets
1. actually transferred to the Philippines and
2. duly registered with the Central Bank which shall
assess and appraise the value of such assets other than
foreign exchange; Section 3(c), RA 7042
Foreign investment. Foreign investment shall mean an equity
investment made by a non-Philippine national;
1. Provided, however, that for purposes of determining
foreign ownership, peso investments made by non-
Philippine nationals shall be considered;
2. Provided, further, that only foreign investments in the
form of foreign exchange and/or other assets actually
transferred to the Philippines and duly registered with
the Central Bank (CB) and profits derived therefrom
can be repatriated; and
3. Provided, finally, That, for purposes of Section 8 of the
Act, and Rule VIII, Section 6 of these Rules and
Regulations, Existing Foreign Investment shall mean
an equity investment made by a non-Philippine
national duly registered with the SEC or the Bureau of
Trade Regulation and Consumer Protection (BTRCP)
in the form of foreign exchange and/or other assets
transferred to the Philippines. Rule 1, Section 1(e),
IRR of RA 7042
Export enterprise
Export enterprise. The term export enterprise shall mean an
enterprise wherein
1. a manufacturer, processor or service (including
tourism) enterprise exports sixty percent (60%) or
more of its output, or wherein
2. a trader purchases product domestically and exports
sixty percent (60%) or more of such purchases.
Section 3(e), Foreign Investments Act; Rule 1,
Section 1(g), IRR of RA 7042
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TAXATION LAW
Foreign investments in export enterprises. Foreign
investment in export enterprises whose products and services
do not fall within Lists A and B of the Foreign Investment
Negative List provided under Section 8 hereof is allowed up to
one hundred percent (100%) ownership. Section 6, Foreign
Investments Act.
Foreign export enterprises. Export enterprises which are non-
Philippine nationals shall
1. register with BOI and
2. submit the reports that may be required to ensure
continuing compliance of the export enterprise with its
export requirement.
BOI shall advise SEC or BTRCP [Bureau of Trade Regulation
and Consumer Protection], as the case may be, of any export
enterprise that fails to meet the export ratio requirement.
The SEC or BTRCP shall thereupon order the non-complying
export enterprise to reduce its sales to the domestic market to
not more than forty percent (40%) of its total production;
• failure to comply with such SEC or BTRCP order,
without justifiable reason, shall subject the enterprise
to cancellation of SEC or BTRCP registration, and/or
the penalties provided in Section 14 hereof. Section 6,
Foreign Investments Act.
Domestic market enterprise
Domestic market enterprise. The term domestic market
enterprise shall mean an enterprise which products goods for
sale, or renders services
1. to the domestic market entirely or
2. if exporting a portion of its output fails to consistency
export at least sixty percent (60%) thereof. Section
3(f), Foreign Investments Act
Foreign investments in domestic market enterprises. Non-
Philippine nationals may own up to one hundred percent
(100%) of domestic market enterprises unless foreign
JO VALLES
INTRODUCTION TO INCOME TAX
ownership therein is prohibited or limited by existing law or the
Foreign Investment Negative List under Section 8 hereof.
Change in status. A domestic market enterprise may change
its status to export enterprise if over a three (3) year period it
consistently exports in each year thereof sixty per cent (60%)
or more of its output. Section 7, Foreign Investments Act
Foreign investment negative list
Foreign investments negative list. The term Foreign
Investments Negative List or Negative List shall mean a list of
areas of economic activity whose foreign ownership is limited
to a maximum of forty percent (40%) of the equity capital of
the enterprises engaged therein. Section 3(g), Foreign
Investments Act
List of Investment Areas Reserved to Philippine Nationals
(Foreign Investment Negative List). The Foreign Investment
Negative List shall have two (2) components lists; A, and B.
List A. List A shall enumerate the areas of activities reserved
to Philippine nationals by mandate of the Constitution and
specific laws.
List B. List B shall contain the areas of activities and
enterprises regulated pursuant to law:
1. which are defense-related activities, requiring prior
clearance and authorization from Department of
National Defense (DND) to engage in such activity,
such as the manufacture, repair, storage and/or
distribution of firearms, ammunition, lethal weapons,
military ordinance, explosives, pyrotechnics and
similar materials; unless such manufacturing or repair
activity is specifically authorized, with a substantial
export component, to a non-Philippine national by the
Secretary of National Defense; or
2. which have implications on public health and morals,
such as the
a. manufacture and distribution of dangerous
drugs;
b. all forms of gambling;
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c. nightclubs,
d. bars,
e. beerhouses,
f. dance halls;
g. sauna and steam bathhouses and
h. massage clinics.
SMEs < $200, 000 reserved to PH nationals. Small and
medium-sized domestic market enterprises, with paid-in equity
capital less than the equivalent two hundred thousand US
dollars (US$200,000) are reserved to Philippine nationals,
Provided that if:
1. they involve advanced technology as determined by the
Department of Science and Technology or
2. they employ at least fifty (50) direct employees,
then a minimum paid-in capital of one hundred thousand US
dollars (US$100,000.00) shall be allowed to non-Philippine
nationals.
Advanced technology. Advanced technology refers to a
higher degree or form of technology than what is
domestically available and needed for the development of
certain industries as subject to guidelines of the Department
of Science and Technology (DOST). Its introduction into
the country through foreign investments under the terms
and conditions of the Act must be linked to its
appropriateness and adaptability to local conditions with
a view towards eventual transfer and applicability
including the upgrading of the indigenous technology
available. Rule 1 Sec. 1 (o) IRR of RA 7042
Direct employees. Direct employees shall mean Filipino
personnel hired and engaged under the control and
supervision of the applicant investor/employer in the
production of goods or performance of services. Excluded
from this definition are personnel hired as
1. casual,
2. seasonal,
3. learner,
4. apprentice or
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5. any employee of subcontractor or those under
fixed term employment. Rule 1 Sec. 1 (z), IRR of
RA 7042
Amendments. Amendments to List B may be made upon
1. recommendation of the
a. Secretary of National Defense, or the
b. Secretary of Health, or the
c. Secretary of Education, Culture and Sports,
2. endorsed by the NEDA,
3. approved by the President, and
4. promulgated by a Presidential Proclamation.
Transitory list. Transitory Foreign Investment Negative List
established in Sec. 15 hereof shall be replaced at the end of the
transitory period by the first Regular Negative List to be
formulated and recommended by NEDA, following the process
and criteria provided in Sections 8 of this Act.
• The first Regular Negative List shall be published not
later than sixty (60) days before the end of the
transitory period provided in said section, and shall
become immediately effective at the end of the
transitory period.
• Subsequent Foreign Investment Negative Lists shall
become effective fifteen (15) days after publication in
a newspaper of general circulation in the Philippines:
• Provided, however, That each Foreign Investment
Negative List shall be prospective in operation and
shall in no way affect foreign investment existing on
the date of its publication.
Amendments not more often than once every 2yrs.
Amendments to List B after promulgation and publication of
the first Regular Foreign Investment Negative List at the end of
the transitory period shall not be made more often than once
every two (2) years”. (As amended by R.A. 8179)
Must not be in the negative list to be 100% foreign-owned.
API is in the business of travel and tours, serving both local and
foreign markets, and not engaged in any secondary purpose
except those related to travel and tours. Since its incorporation,
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INTRODUCTION TO INCOME TAX
it is 60% Filipino owned and 40% Singaporean owned. Total
authorized capital stock is P15M while total paid-up capital is
P11M, roughly USD 220k. Under the FIA and the IRR, foreign
nationals can 100% own domestic enterprises in areas outside
the FINL or an export enterprise whose products and services
do not fall within Lists A and B. Since API services both local
and foreign, it must be determined whether it is an export or
domestic market enterprise. Based on the definitions in FIA and
IRR, it cannot be concluded whether API is an export enterprise
or a domestic market enterprise, since there is no information
as to whether it exports 60% or more of its output to fall under
the definition of an export enterprise, or fails to do so in order
to be considered as a domestic market enterprise. Assuming it
is an export enterprise, the business of travel and tours agency
and services is not included in List A nor in List B of the FINL.
Assuming it is a domestic market enterprise, the same rule
applies (should not be under List A or List B). The business of
travel and tours agency and services is not included in List A,
nor List B because it has paid-up capital of more than USD
200k. From the foregoing, and provided API does not own land,
it may be allowed to be 100% owned by foreign nationals. SEC
OGC Opinion 18-04
Ground handling is public service and cannot be 100%
foreign-owned. Dnata, Inc is engaged in ground handling
activities in NAIA and is 99.9999% UAE-owned and the
remaining, British-owned. Under FINL-10, foreign equity
participation in corporations engaged in the operation and
management of public utilities is limited to a maximum of forty
percent (40%). Under the Constitution and the Public Service
Law, "public utility" is defined as one organized for hire or
compensation to serve the public which is given the right to
demand its service should they like to do so. It is a business or
service engaged in regularly supplying the public with some
commodity or service of public consequence such as electricity,
gas, water, transportation, telephone or telegraph service. In a
previous opinion, the Commission held that it is the nature and
not the name of the activity which determines whether or not
the business activity is covered by the Negative List. Thus,
while the FINL-10 does not expressly include a corporation
engaged in ground handling services, the same is considered a
public utility. There is no question that services to facilitate
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passenger handling and other services related to the movement
of passengers, baggages and goods, as well as the care,
convenience and security of passengers, visitors and other
airport users are necessarily part and parcel of airport
operations. Obviously, ground handling services which include
both aircraft movement and baggage handling, are activities
essential to airport operations. Thus, such activities are the
business of public utilities. Thus, corporation which is 100%
foreign owned, duly registered with the Commission,
authorized to do business in the Philippines as a domestic
market enterprise under the Foreign Investments Act of 1991,
as amended, and having a paid-in equity capital of at least
US$200,000.00, may not engage in the business of airport
ground handling services, which include moving of aircraft
and baggage handling. SEC Opinion No 04-17
For $200, 000 threshold, paid-in capital is considered; if
nationalized, cannot hire foreigner who will intervene in
management. Green Siam is engaged in the business of baling
and trading recyclable and non-toxic industrial materials. It is
60% owned by a PH company and 40% owned by a Thai
company. Thus, the general rule is that non-Philippine
nationals can own up to one hundred percent (100%) of the
equity in export as well as domestic market enterprises.
However, the 11th NFL restricts foreign ownership to a
maximum of forty percent (40%) of the equity in small and
medium-sized domestic market enterprises in cases where the
paid-in capital is less than the equivalent of Two Hundred
Thousand US Dollars (US$200,000). The company stated that
the 40% foreign equity limitation under List B of the 11th NFL
applicable to domestic market enterprises will not apply to the
Company since its paid-up capital amounts to
P127,500,000.00, which is much higher than the
US$200,000.00 threshold. However, the Company's Articles of
Incorporation shows a paid-up capital of P7,968,787.50 only,
which is less than US$200,000.00. The amount of
P127,500,000.00 pertains to the Company's authorized capital
stock, not paid-up capital. Paid-up capital is that portion of the
authorized capital stock which has been both subscribed and
paid. In this connection, the FIA requires "paid-in equity
capital" which is the total investment that has been paid-in.
Accordingly, the Company cannot hire any foreigner who will
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intervene in its management, operation, administration or
control. SEC OGC Opinion 10-19
• If nationalized, cannot hire foreigner who will
intervene in management. A partially nationalized
corporation cannot hire any foreigner to intervene in its
management, operation, administration or control,
whether as an officer, employee or laborer therein with
or without remuneration except as technical personnel
whose employment may be specifically authorized by
the Secretary of Justice, because to do otherwise is a
violation of Section 2-A of CA 108. SEC OGC
Opinion 10-19
Power distribution; if nationalized, cannot have a foreigner
as president. Cenertec is engaged in the business of power
generation, trading, supply, distribution, and transmission. It is
60% Filipino owned and 40% foreign owned. Its current
president is French. Its paid-up capital is less than USD200k.
Section 2-A of the Anti-Dummy Law prohibits a foreigner from
intervening in the management, operation, administration, or
control of a wholly or partially nationalized industry; however,
he may be director in proportion to his allowable participation
or share in the capital. The Constitution requires at least 60%
Filipino capital for public utilities, under which power
transmission and distribution to the general public fall
(although power generation does not). For this reason, Cenertec
is engaged in a public utility operation, a partly-nationalized
activity subject to 40% foreign ownership limitation.
Furthermore, since Cenertec’s paid-up capital is less than the
equivalent of USD200k, is may be classified as a domestic
market enterprise which is subject to 40% foreign equity
restriction. As such, the Anti-Dummy Law applies, and the
application of such bars Mr. David Philippe Perrin-Wenger, a
French national, from acting as President. SEC OGC Opinion
16-18
Freight forwarding is public service; international freight
forwarding not covered by the Anti-Dummy Law; can be
100% foreign-owned. FMOL Logistics is a domestic
corporation engaged in international freight forwarding. It is
owned 60% by foreign nationals and wants to increase it to
JO VALLES
INTRODUCTION TO INCOME TAX
80%. Freight forwarders are considered public utilities, and the
Constitution restricts foreign ownership in public utilities to
40%. However SEC-OGC Opinion 16-08 summarized related
DOJ and SEC opinions regarding the inapplicability of foreign
equity restrictions to international freight forwarding. Thus,
corporations engaged exclusively in international freight
forwarding are considered beyond the purview of the
nationality requirement for the operation of public utilities and
thus may be owned up to 100% by foreigners. Consequently,
the prohibition in the Anti-Dummy Law as to electing foreign
citizens as officers does not apply to corporations engaged in
international freight forwarding as they are not considered to be
engaged in any nationalized or partly nationalized activity. SEC
OGC Opinion 14-17
BPO not nationalized. Section 2-A of the Anti-Dummy Law
prohibits foreigners from being appointed to management
positions as president, VP, etc. of corporations engaged in
nationalized or partly nationalized industries. In this case, a
review of the 10th FINL reveals that engaging in business
processing outsourcing that provides internet based
bookkeeping to foreign companies is neither a wholly
nationalized or partly nationalized activity. As such, Section 2-
A of the Anti-Dummy Law is inapplicable to EcoOffices. As
such, appointment of a foreigner as director and his election as
President are allowed, but he must comply with Sections 23 and
25 of the Corp Code, which require that the foreigner must own
at least 1 share of the capital stock in order to be a director and
to be qualified to hold the position of President. SEC OGC
Opinion 28-16
Practice of profession limited only to Filipinos. Under the
constitution, the general rule is that the practice of all
professions in the country is exclusively reserved to Filipino
citizens. However, an exception is also stated in the said
provision, i.e., when there is a law which provides otherwise.
The Ninth Regular Foreign Investment Negative List (FINL-9),
pursuant to the Constitution and specific laws, provides, in List
A, that no foreign equity is allowed for the practice of
professions, including real estate services, as such practice is
limited to Filipino citizens, save in cases prescribed by
law. This means that the practice of profession by corporations
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should be done only by 100% Filipino-owned corporations, as
no foreign equity is allowed. However, we acknowledge that
there has been an amendment in the Negative List regarding the
practice of certain professions. While List A of FINL-9
expressly states that no foreign equity is allowed in the practice
of professions (save in cases provided for by law), List A of
FINL-10 indicates in a footnote, that (1) foreigners are allowed
to practice several professions, including real estate services,
subject to the reciprocity rule, and (2) real estate services allow
corporate practice by Filipinos. Thus, NEDA and PRC must be
consulted. SEC OGC Opinion 14-16
Educational institutions must follow 40% limit for foreign
ownership.
Nightingale Japan is the establishment of Nightingale PH,
which shall be 100% owned by the former, and 3/5 of its BOD
shall be Japanese nationals. It would operate an online English
tutorial service in Cebu. The online English school would also
be registered with PEZA as an export enterprise and would
cater to foreign nationals based outside the PH and it might also
cater to foreign residents in the future. Foreign equity
participation in export enterprises are allowed up to 100%
provided the products and services of such enterprises do not
fall within either List A or List B of the FINL. Given that
Nightingale Philippines would cater initially and exclusively to
foreign nationals abroad, it falls within the meaning of export
enterprise. However, it is subject to the determination WON it
is an educational institution. If a corporation wishes to engage
in the business of providing technical vocational education, it
follows that, being an educational institution, it must comply
with the 60%- 40% Filipino-foreign equity restriction in the
Constitution. All educational institutions, other than those
established by religious orders and mission boards, and those
established for foreign diplomatic personnel and their
dependents, and for other foreign temporary residents, is
subject to 40% foreign ownership limitation. Likewise,
foreigners are not allowed any control and administration of
educational institutions, and thus are barred from being
members of the Board. The facts are insufficient whether
Nightingale is an educational institution (i.e., whether it will be
offering the online tutorial class as a formal training course or
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program for a fee and shall provide Diplomas or Certificates of
Program Completion). If it shall be issuing Diplomas or
Certificates of Program Completion, it is an educational
institution, otherwise it is not. If it is an educational institution,
it must follow the 40% limit for foreign ownership. SEC OGC
Opinion 18-16
A holding company is deemed to be a domestic market
enterprise. The essential feature of a holding company is that
it holds stock, and is equivalent to a parent corporation
(controlling an affiliate or subsidiary by the ability to elect
directors). As a general rule, the primary purpose of a
corporation defines its classification. However, where a
corporation actually engages in one of its secondary purposes,
it shall be classified accordingly. Here, the primary purpose of
Waterfront is that it is a holding company. As previously
discussed by the SEC in its 11/23/2009 Opinion and reiterated
in a 11/10/2014 Opinion, a holding company is deemed a
domestic market enterprise and subject to the minimum
capitalization requirements under the FIA. It is clear that
holding companies fall under the definition of domestic market
enterprise as the act of owning and acquiring interests in other
companies by purchasing their shareholdings are considered
doing business. Hence, Waterfront is subject to Section 8 of the
FIA and Item 6, List B of the FINL, which provides that a
domestic market enterprise with paid-in capital of less than the
equivalent of USD200k is partially reserved to Filipino
nationals (up to 40% equity limit for foreigners). Otherwise, if
its capitalization is equivalent or more than USD200k, it is not
subject to foreign equity limits. SEC OGC Opinion 15-15
Former natural born Filipinos
Former natural─born Filipinos shall mean those who have
lost Philippine citizenship but were previously citizens of the
Philippines falling in either of the following categories:
a. from birth without having to perform any act to acquire
or perfect their Philippine citizenship; or
b. by having elected Philippine citizenship upon reaching
the age of majority, if born before January 17, 1973, of
JO VALLES
INTRODUCTION TO INCOME TAX
Filipino mothers. Rule 1 Sec. 1 (x), Implementing
Rules and Regulation of RA 7042
Other Rights of Natural Born Citizen Pursuant to the
Provisions of Article XII, Section 8 of the Constitution. Any
natural born citizen who has lost his Philippine citizenship and
who has the legal capacity to enter into a contract under
Philippine laws may be a transferee of a private land up to a
maximum area of
• five thousand (5,000) square meters in the case of
urban land or three
• (3) hectares in the case of rural land
to be used by him for business or other purposes.
• In the case of married couples, one of them may avail
of the privilege herein granted:
• Provided, That if both shall avail of the same, the total
area acquired shall not exceed the maximum herein
fixed.
Those already owning land can be a transferee; max total is
5000sqm/3ha. In the case the transferee already owns urban or
rural land for business or other purposes, he shall still be
entitled to be a transferee of additional urban or rural land for
business or other purposes which when added to those already
owned by him shall not exceed the maximum areas herein
authorized.
2 lots max; one class of land only. A transferee under this Act
may acquire not more than two (2) lots which should be situated
in different municipalities or cities anywhere in the Philippines:
• Provided, That the total land area thereof shall not
exceed five thousand (5,000) square meters in the case
of urban land or three (3) hectares in the case of rural
land for use by him for business or other purposes.
• A transferee who has already acquired urban land shall
be disqualified from acquiring rural land and vice
versa”. (As amended by R.A. 8179) Section 10,
Foreign Investments act
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EXEMPTION/DEDUCTIONS
Exemptions in general
Section 30, National Internal Revenue Code
Exemptions from tax on corporations. The following
organizations shall not be taxed under this Title in respect to
income received by them as such:
A. Labor, agricultural or horticultural organization not
organized principally for profit;
B. Mutual savings bank not having a capital stock
represented by shares, and cooperative bank without
capital stock organized and operated for mutual
purposes and without profit;
C. A beneficiary society, order or association, operating
fort the exclusive benefit of the members such as a
a. fraternal organization operating under the
lodge system, or
b. mutual aid association or a
c. nonstock 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 nonstock corporation or their dependents;
D. Cemetery company owned and operated exclusively
for the benefit of its members;
E. Non-stock corporation or association organized and
operated exclusively for
a. religious,
b. charitable,
c. scientific,
d. athletic, or
e. cultural purposes, or
f. for the rehabilitation of veterans, no part of its
net income or asset shall belong to or inures to
the benefit of any member, organizer, officer
or any specific person;
F. Business league chamber of commerce, or board of
trade, not organized for profit and no part of the net
income of which inures to the benefit of any private
stockholder, or individual;
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G. Civic league or organization not organized for profit
but operated exclusively for the promotion of social
welfare;
H. A nonstock and nonprofit educational institution;
I. Government educational institution;
J. Farmers' or other mutual typhoon or fire insurance
company, mutual ditch or irrigation company, mutual
or cooperative telephone company, or like organization
of a purely local character, the income of which
consists solely of assessments, dues, and fees collected
from members for the sole purpose of meeting its
expenses; and
K. Farmers', fruit growers', or like association
organized and operated as a sales agent for the purpose
of marketing the products of its members and turning
back to them the proceeds of sales, less the necessary
selling expenses on the basis of the quantity of produce
finished by them;
Income from property or activities, regardless of
disposition, shall be subject to tax. Notwithstanding the
provisions in the preceding paragraphs, the income of whatever
kind and character of the foregoing organizations
(1) from any of their properties, real or personal, or
(2) from any of their activities conducted for profit
regardless of the disposition made of such income, shall be
subject to tax imposed under this Code.
La Sallian Educational Innovators Foundation Inc., vs CIR
Requisites for tax exemption of NSNP educational
institution. The 1987 Constitution expressly exempts all
revenues and assets of non-stock, non- profit educational
institutions from taxes, provided they are actually, directly and
exclusively used for educational purposes. Such exemption is
reiterated in Sec. 30(H) of the Tax Code. Based on
jurisprudence, a taxpayer will be granted the tax exemption if
it proves
1. it falls under the classification of non-stock, non-profit
educational institution and
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INTRODUCTION TO INCOME TAX
2. the income it seeks to be exempted from taxation is
used actually, directly, and exclusively for educational
purposes.
Petitioner’s primary and secondary purposes in its Articles of
Incorporation clearly show that it is a non-stock, non-profit
educational institution. It has no capital divided into shares, no
part of its income can be distributed as dividends, and the
members of the Board do not receive any compensation.
Respondent claims that petitioner is not a non-profit
educational institution due to alleged enormous profits, but
these allegations are completely unsupported by facts and
evidence. Although P634M was received in tuition fees, the
school also had administrative and non-administrative
expenses of P528M, leaving a profit of only P60.4M or 9.4%
of operating receipts. Hence, it is a non-stock non-profit
educational institution exempt from tax. Income tax assessment
cancelled.
CIR vs De La Salle University
BIR assessed DLSU for income tax on rental earnings from
restaurants/canteens and bookstores operating within the
campus. DLSU protested and claimed exemption under Article
XIV, Section 4(3) of the Constitution. BIR, on the other hand,
relied on the last paragraph of Section 30 of the NIRC.
There are 2 seemingly conflicting provisions in this case.
Article XIV, Section 4 (3) of the 1987 Constitution
All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and duties.
Exempt from taxes and duties. Upon the dissolution or
cessation of the corporate existence of such institutions, their
assets shall be disposed of in the manner provided by law.
Proprietary educational institutions, including those
cooperatively owned, may likewise be entitled to such
exemptions subject to the limitations provided by law including
restrictions on dividends and provisions for reinvestment.
Section 30, NIRC
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The following organizations shall not be taxed under this
Title [Tax on Income] in respect to income received by them as
such:
xxx
(H) A non-stock and non-profit educational institution
xxx
Notwithstanding the provisions in the preceding paragraphs,
the income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or
from any of their activities conducted for
profit regardless of the disposition made of such income shall
be subject to tax imposed under this Code.
Reconciliation. There is no conflict between the two. The last
paragraph of Section 30 of the Tax Code is without force
and effect with respect to non-stock, non-profit educational
institutions, provided, that the non-stock, non-profit
educational institutions prove that its assets and revenues are
used actually, directly and exclusively for educational purpose
[in order that they be exempt from taxation]. Also, the tax
exemption constitutionally granted to non-stock, non-profit
educational institutions is not subject to limitations imposed by
law.
• Application. In this case, the court declared the last
paragraph of Section 30 of the Tax Code without force
and effect for being contrary to the Constitution insofar
as it subjects to tax the income and revenues of non-
stock, non-profit educational institutions used actually,
directly and exclusively for educational purpose.
Taxation of non-stock non-profit educational institutions.
Revenues and assets are exempt from tax and such exemption
is conditioned only on the actual, direct, and exclusive use of
their assets, revenues and income for educational purposes.
Unlike proprietary educational institutions, the exemption
granted to non-stock non-profit educational institutions is not
subject to limitations imposed by law.
• While a non-stock, non-profit educational institution is
classified as a tax-exempt entity under Section
30 (Exemptions from Tax on Corporations) of the Tax
Code, a proprietary educational institution is covered
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by Section 27 (Rates of Income Tax on Domestic
Corporations), subject to the 10% preferential tax rate.
Taxation of proprietary educational institutions. A
proprietary educational institution is entitled only to the
reduced rate of 10% corporate income tax. The reduced rate is
applicable only if: (1) the proprietary educational institution is
nonprofit and (2) its gross income from unrelated trade,
business or activity does not exceed 50% of its total gross
income. If it exceeds 50%, the entire income will be subjected
to the regular 30% corporate income tax rate.
Association of Non-Profit Clubs, Inc. vs BIR
BIR issued RMC No. 35-2012 which states that clubs which
are organized and operated exclusively for pleasure, recreation,
and other non-profit purposes are subject to income tax under
the NIRC of 1997,as amended. It reasoned that the provision in
the 1977 Tax Code which granted income tax exemption to
such recreational clubs was omitted in the current list of tax
exempt corporations under the 1997 NIRC, as
amended. Hence, the income of recreational clubs from
whatever source, including but not limited to membership fees,
assessment dues, rental income, and service fees are subject to
income tax.
Association of Non-Profit Clubs, Inc. (ANPC) sought to
declare RMC No. 35-2012 invalid, unjust, oppressive,
confiscatory, and in violation of the due process clause of the
Constitution.
Ruling: Income of recreational clubs subject to income tax.
Applying the doctrine of casus omissus pro omisso habendus
est (meaning, a person, object or thing omitted from an
enumeration must be held to have been omitted intentionally) ,
the fact that the 1997 NIRC omitted recreational clubs from the
list of exempt organizations under the 1977 Tax Code evinces
the deliberate intent of Congress to remove the tax income
exemption previously accorded to these clubs. As such, the
income that recreational clubs derive from whatever source is
now subject to income tax under the provisions of the 1997
NIRC.
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INTRODUCTION TO INCOME TAX
But distinguish income from capital; income taxable,
capital not taxable. However, notwithstanding the correctness
of the above-interpretation, RMC No. 35-2012 erroneously
foisted a sweeping interpretation that membership fees and
assessment dues are sources of income of recreational clubs
from which income tax liability may accrue.
• Income vs capital; fund vs flow. Income as contrasted
with capital or property is to be the test. The essential
difference between capital and income is that capital is
a fund; income is a flow. A fund of property existing at
an instant of time is called capital. A flow of services
rendered by that capital by the payment of money from
it or any other benefit rendered by a fund of capital in
relation to such fund through a period of time is called
income. Capital is wealth, while income is the service
of wealth. The Supreme Court of Georgia expresses the
thought in the following figurative language: "The fact
is that property is a tree, income is the fruit; labor is a
tree, income the fruit; capital is a tree, income the
fruit.” A tax on income is not a tax on
property. Income, as here used, can be defined as
profits or gains.
To be income, there must be realized gain. Case law provides
that in order to constitute "income," there must be realized
"gain." Clearly, because of the nature of membership fees and
assessment dues as funds inherently dedicated for the
maintenance, preservation, and upkeep of the clubs' general
operations and facilities, nothing is to be gained from their
collection. This stands in contrast to the fees received by
recreational clubs coming from their income-generating
facilities, such as bars, restaurants, and food concessionaires,
or from income-generating activities, like the renting out of
sports equipment, services, and other accommodations: In these
latter examples, regardless of the purpose of the fees' eventual
use, gain is already realized from the moment they are collected
because capital maintenance, preservation, or upkeep is not
their pre-determined purpose. As such, recreational clubs are
generally free to use these fees for whatever purpose they desire
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and thus, considered as unencumbered "fruits" coming from a
business transaction.
Collections for maintenance, preservation, and upkeep are
not income. In fine, for as long as these membership fees,
assessment dues, and the like are treated as collections by
recreational clubs from their members as an inherent
consequence of their membership, and are, by nature, intended
for the maintenance, preservation, and upkeep of the clubs'
general operations and facilities, then these fees cannot be
classified as "the income of recreational clubs from whatever
source" that are "subject to income tax." Instead, they only form
part of capital from which no income tax may be collected or
imposed. It is a well-enshrined principle in our jurisdiction that
the State cannot impose a tax on capital as it constitutes an
unconstitutional confiscation of property.
Extent of tax exemption of non-stock non-profit
corporations
Nonstock corporation or association organized and operated
exclusively for
1. religious,
2. charitable,
3. scientific,
4. athletic, or
5. cultural purposes, or
6. 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. Section 30 (e), NIRC
Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare.
Section 30 (g), NIRC
Only income received by them as such is exempt. Ninoy and
Cory Aquino Foundation is a non-stock and non-profit
corporation organized for the purpose of perpetuating the
memories of Ninoy and Cory. BIR said that this was a
corporation organized and operated exclusively for cultural
purposes, which falls under Section 30 (e) above. As the
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Foundation is a corporation contemplated under said Section, it
is exempt from the payment of tax on income received by it as
such organization. However, it is subject to taxes on income
derived from its properties or from any activity conducted for
profit, and also on interest income from bank deposits and other
similar arrangements. BIR Ruling 217-12
Documentary requirements. Further, it must submit (on or
before the 15th day of the 4th month following the end of the
accounting period):
1. a Profit and Loss Statement and Balance Sheet with
Annual Information Return under oath, and
2. a Certificate showing that there has been no change in
its Articles or By-Laws. BIR Ruling 217-12
Non-stock non-profit corporation also acts as a withholding
agent; must pay annual registration fee; should issue
receipt for unrelated activities. It is also to be understood that
1. it is also a withholding agent if it acts as an employer
and its employees receive compensation subject to
withholding tax, or makes payments to individuals or
corporations subject to withholding tax.
2. It is also subject to annual registration fee of P500, and
3. It should issue receipts or invoices for sales not directly
related to activities for which it is registered. BIR
Ruling 217-12
Subject to VAT if covered. The tax exemption only covers
income taxes; under Section 105 of the Tax Code, any person
who sells, barters, exchanges, leases goods/services, renders
services, and any person who imports goods is subject to VAT.
Notwithstanding that it is a non-stock, non- profit corporation,
if the Foundation purchases goods or properties or sells goods
or properties in course of a business pursuit or imports goods,
it will be subject to 12% VAT. Revenue from contributions and
donations [in this case], not being derived from sale of
goods/services but rather in connection with its non-stock, non-
profit activities, is exempt from the 12% VAT. BIR Ruling 217-
12
NSNP subject to VAT if covered. Section 105 of the Tax
Code of 1997 provides that any person who, in the course of
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INTRODUCTION TO INCOME TAX
trade or business, sells, barters, exchanges, leases goods or
properties, renders services, and any person who imports
goods shall be subject to VAT. The phrase "in the course of
trade or business" means the regular conduct or pursuit of a
commercial or an economic activity, including transactions
incidental thereto, by any person regardless of whether or not
the person engaged therein is a non-stock, non-profit private
organization (irrespective of the disposition of its net income
and whether or not it sells exclusively to members or their
guests), or government entity. Accordingly, if Ligaya ng
Panginoon Foundation, Inc. is engaged in the sale of goods
or services in the course of a business pursuit, including
transactions incidental thereto, in general, it shall also be
liable for VAT. Revenue from contributions and donations,
not being derived from sale of services or sale of goods made
in the course of business but rather in connection with its non-
stock, non-profit activities, is exempt from the 12% (then
10%) VAT. However, the above exemption from the 12%
VAT does not extend to its purchase of goods or properties
or services and importation of goods. Hence, notwithstanding
that it is a non-stock, non-profit corporation, its purchase of
goods or properties or services and importation of goods shall
nevertheless be subject to the 12% VAT pursuant to Section
107 of the said Code . BIR Ruling 034-17
But a non-stock non-profit institution can be indirectly
liable for VAT and cannot use its exempt status to avoid
the same. VAT is an indirect tax, thus it can be shifted or
passed on to the buyer/purchaser, transferee or lessee of the
goods, properties or services. Once shifted to the
buyer/customer as an addition to the cost of goods or services
sold, it is no longer a tax but an additional cost which the
buyer/customer has to pay in order to obtain the goods or
services. Thus, the shifting of the VAT does not make Ligaya
ng Panginoon Foundation, Inc. the person directly liable and
therefore, you cannot invoke your tax exemption privilege
under Section 30 of the Tax Code of 1997 to avoid the
passing on or shifting of the VAT. BIR Ruling 034-17
Exempt from donor’s tax if not more than 30% of gift is
used for admin purposes. Inasmuch as the Foundation is an
association registered for cultural purposes, donations to it are
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exempt from donor’s tax, subject to condition that not more
than 30% of said gifts are used for administration purposes. For
purposes of full deductibility (on the part of the donors) from
the taxable business income, the Foundation must first be
registered with the Philippine Council for NGO Certification,
Inc. (which was the duly designated accrediting entity). BIR
Ruling 217-12
NSNP subject to CGT. MIDFI is a non-stock, non-profit
corporation and a legal opinion is sought whether or not it is
exempt from paying capital gains tax. The last paragraph of
Section 30 (then Section 26) of the Tax Code, particularly, does
not leave any room for interpretation; the income from any of
the organization's properties is subject to tax under the Tax
Code, regardless of the disposition made of such income. Such
being the case, this Office hereby rules that the sale by
MIDFI of its real property is subject to capital gains tax based
on the gross selling price or current fair market value as
determined in accordance with Section 6 (E) of the Tax Code
of 1997, whichever is higher. BIR Revenue Memorandum
Circular No. 7-2012
Tax Exemption Ruling
Revenue Memorandum Order No. 38-2019
VI. Guidelines in the processing and issuance of
certificate of tax exemption
A. Documentary Requirements
1. Original application letter for issuance of Tax
Exemption Ruling. The letter shall cite the particular
paragraph of Section 30 of the NIRC as amended,
under which the application for
exemption/revalidation is being based;
2. Certified true copy of the latest Articles of
Incorporation (AOI) and By-Laws issued by the
Securities and Exchange Commission (SEC). The
AOI must expressly state the following provisions,
to wit:
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a. It is a non-stock, non-profit corporation or
association;
b. No part of the corporation or association's
net income shall inure to the benefit of any
private individual;
c. The trustees of the non-profit corporation or
association do not receive any compensation
or remuneration; and
d. In case of dissolution, its assets shall be
distributed to one or more entities formed for
the purpose/purposes similar to its own, or to
the Philippine government for public
purpose.
3. Original Certification under Oath by an executive
officer of the corporation or association as to:
a. full description of its past, present, and
proposed activities,
b. the sources and disposition of income,
c. detailed description of all revenues which it
seeks to be exempted from income tax, and
d. amount of income, compensation, salaries or
any emoluments paid by the corporation or
association to its trustees, officers and other
executive officers;
4. Original Certification issued by the RDO where the
corporation or association is registered, indicating
the TIN of the corporation, and certifying that said
corporation is not subject of any pending
investigation, on-going audit, pending tax
assessment, administrative protest, claim for refund
or issuance of tax credit certificate, collection
proceedings, or a judicial appeal; or if there be any,
the Original Certification issued by the RDO on the
status thereof; and
5. Certified true copies of the Income Tax Returns or
Annual Information Returns and Financial
Statements of the corporation or association for the
last three (3) years.
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INTRODUCTION TO INCOME TAX
B. Procedure
1. The request for CTE shall be filed with the RDO
where the corporation is registered. The RDO or his
designated Revenue Officer of the Day must pre-
evaluate the corporation's submission using the
checklist (Annex "A"). If there is incomplete
submission of the documentary requirements, the
applicant shall be notified thereof and the entire
documents shall be returned to the applicant for his
completion.
2. Upon receipt of the complete documentary
requirements (docket) in support of the application,
the concerned RDO personnel shall pre-evaluate the
same and shall determine whether or not the
applicant qualifies as an exempt corporation or
association under Section 30 of the NIRC, as
amended:
a. If based on the pre-evaluation, the RDO is of
the position that the corporation or
association is qualified, he shall prepare the
CTE (Annex "B"), together with a
memorandum stating the factual and legal
basis for recommending the issuance of the
CTE, and endorse the docket to the Office of
the Regional Director. If the Regional
Director concurs with the RDO's
recommendation, he shall sign the CTE and
issue the same to the requesting corporation.
Otherwise, he shall return the docket to the
RDO together with his findings/instructions.
b. If the RDO is of the position that the
corporation or association does not qualify,
he shall notify in writing the applicant of
such findings, stating the factual and legal
bases for the denial. The applicant may
appeal the denial to the Regional Director
within thirty (30) days from the date of
receipt of the written notice of denial.
c. If the application for tax
exemption/revalidation is denied, the
corporation or association shall be held
liable for income tax and shall be
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accordingly assessed for deficiency taxes,
inclusive of penalties and interest.
VII. Validity of tax exemption ruling
Valid for 3 years; can be revalidated for another 3 years.
A CTE issued under this Order shall be valid for a period of
three (3) years from the date of effectivity specified in the
Ruling, unless sooner revoked or cancelled. The CTE may be
revalidated for another period of three (3) years under the
same procedure set forth herein.
Exemption revoked if there are material changes. The Tax
Exemption Ruling shall be deemed revoked if there are
material changes in the character, purpose, or method of
operation of the corporation or association which are
inconsistent with the basis for its income tax exemption. The
revocation takes effect as of the date of the material change.
VIII. Quarterly report on time issuance of CTEs
RDOs; quarterly summary report of CTEs. All Regional
Directors are required to submit on or before the 20th day of
the month following the end of each quarter a Quarterly
Summary Report of all CTEs issued to Section 30
corporations together with copies of said CTEs to the
Assistant Commissioner, Legal Service, for a centralized
database of issued CTEs.
Revenue Memorandum Order 44-2016
This applies to non-stock non-profit educational institutions.
The tax exemption of non stock, non profit educational
institutions is directly conferred by paragraph 3, Section 4,
Article XIV of the 1987 Constitution, as reiterated in Section
30 (H) of the 1997 Tax Code.
And for the constitutional exemption to be enjoyed,
jurisprudence and tax rulings affirm the doctrinal rule that
there are only two requisites:
1. The school must be non-stock and non-profit; and
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2. The income is actually, directly and exclusively used
for educational purposes.
There are no other conditions and limitations.
Section 2. Application for Tax Exemption. Non-stock,
non-profit educational institutions shall file their respective
Applications for Tax Exemption with the Office of the
Assistant Commissioner, Legal Service, Attention: Law
Division.
Section 3. Documentary Requirements. The non-stock,
non-profit educational institution shall submit the following
documents:
a. Original copy of the application letter for issuance
of Tax Exemption Ruling;
b. Certified true copy of the Certificate of Good
Standing issued by the Securities and Exchange
Commission;
c. Original copy of the Certification under Oath of
the Treasurer as to the amount of the income,
compensation, salaries or any emoluments paid to its
trustees, officers and other executive officers;
d. Certified true copy of the Financial Statements of
the corporation for the last three (3) years;
e. Certified true copy of government
recognition/permit/accreditation to operate as an
educational institution issued by the Commission on
Higher Education (CHED), Department of
Education (DepEd), or Technical Education and
Skills Development Authority (TESDA);
a. Provided, that if the government
recognition/permit/accreditation to operate
as an educational institution was issued five
(5) years prior to the application for tax
exemption, an original copy of a current
Certificate of Operation/Good Standing, or
other equivalent document issued by the
appropriate government agency (i.e., CHED,
DepEd, or TESDA) shall be submitted as
proof that the non-stock and non-profit
educational institution is currently operating
as such; and
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INTRODUCTION TO INCOME TAX
f. Original copy of the Certificate of utilization of
annual revenues and assets by the Treasurer or his
equivalent of the non-stock and non-profit
educational institution.
Section 4. Request for Additional Documents. In the
course of review of the application for tax exemption, the
Bureau may require additional information or documents as
the circumstances may warrant.
Section 5. Validity of the Tax Exemption Ruling. Tax
Exemption Rulings or Certificates of Tax Exemption of non-
stock, non-profit educational institutions shall remain valid
and effective, unless recalled for valid grounds. They are not
required to renew or revalidate the Tax Exemption Rulings
previously issued to them.
The Tax Exemption Ruling shall be subject to revocation if
there are material changes in the character, purpose or
method of operation of the corporation which are inconsistent
with the basis for its income tax exemption.
Corporate purpose
Revenue Memorandum Order No. 38-2019
Characteristics and nature of organizations and
corporations under Section 30 of the NIRC, as
amended.
In order to determine the true nature, and consequently, the
taxability of a corporation claiming as a non-stock, non-profit
entity, the concerned BIR personnel shall be guided by the
following discussions:
A. Labor, agricultural or horticultural organization not
organized principally for profit
1. Characteristics:
a. It is organized as a non-stock, non-profit
corporation;
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b. Operated either as a labor, or agricultural, or
horticultural organization.
2. Corporate Purposes:
a. Labor organization refers to an association
of workers who have combined to protect
and promote the interests of its members by
bargaining collectively with their employers
to secure better working conditions, wages
and similar benefits. A legitimate labor
organization is one duly registered with the
Department of Labor and Employment
(DOLE), and includes any branch or local
thereof.
A labor organization may also be organized
to improve the grade of the workers'
products and/or develop a higher degree of
efficiency in their respective occupations.
b. Agricultural and horticultural
organization refers to an association of
persons engaged in raising livestock,
harvesting crops or aquatic resources,
cultivating useful or ornamental plants, or
similar pursuits. It may also refer to an
organization engaged in cultivating the
ground including the preparation of the soil,
the planting of seed, the raising and
harvesting of crops, and the rearing, feeding,
and management of livestock. It includes
organizations of persons involved in
harvesting aquatic resources. Horticulture
concerns the cultivation of gardens or
orchards and the growing of fruits,
vegetables, flowers and ornamental plants.
3. Actual operation. To be entitled to exemption from
income tax, the corporation must carry out activities
primarily to
a. improve the working conditions of its
members,
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b. improve the grade of their products, and/or
c. develop a higher degree of efficiency in their
respective occupations or the improvement
of production techniques.
B. Mutual savings bank not having a capital stock
represented by shares, and cooperative bank without
capital stock organized and operated for mutual
purposes and without profit
With the passage of Republic Act No. (RA) 8367, otherwise
known as "Revised Non-Stock Savings and Loan
Association Act of 1997," which grants tax exemption to
non-stock savings and loan associations, and RA 6938,
otherwise known as the "Cooperative Code of the
Philippines," as amended by RA 9520, otherwise known
as "Philippine Cooperative Code of 2008," which grants
tax incentives to cooperative banks, recognition of tax
exemptions of non-stock savings and loan associations and
cooperative banks are now governed by RA 8367 and RA
9520, respectively.
C. A beneficiary society, order or association, operating
for the exclusive benefit of the members such as a fraternal
organization operating under the lodge system, or mutual
aid association or a non-stock corporation organized by
employees providing for the payment of life, sickness,
accident, or other benefits exclusively to the members of
such society, order, or association, or non-stock corporation
or their dependents:
1. Characteristics.
a. It is organized as
i. A beneficiary society, order or
association, operating for the
exclusive benefit of the members
such as a fraternal organization
operating under the lodge system; or
ii. A mutual aid association or a non-
stock corporation organized by
employees providing for the
payment of life, sickness, accident,
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INTRODUCTION TO INCOME TAX
or other benefits exclusively to the
members of such society, order, or
association, or non-stock
corporation or their dependents.
b. It must be operating for the exclusive benefit
of the members or providing for the payment
of life, sickness, accident, or other benefits
exclusively to the members of such society,
order, or association or their dependents.
2. Corporate purposes. The organization should be
operated to assist their members through the
provision of benefits through an established system
of benefit payments to its members and their
dependents.
3. Actual operation. The association must be operated
either as
a. A fraternal organization under the lodge
system or a mutual aid association providing
for the exclusive benefit of the members, 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; and
b. It should have an established system of
benefit payments to its members and their
dependents or established system for the
payment of life, sickness, accident, or other
benefits to its members or their dependents.
D. Cemetery company owned and operated exclusively
for the benefit of its members
1. Characteristics
a. It is organized as non-stock corporation and
not operated for profit;
b. Owned by and operated exclusively for the
benefit of its lot owners;
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c. It is chartered solely for burial purposes and
not permitted by its charter to engage in any
business not necessarily incident to that
purpose; and
d. No part of its net earnings inures to the
benefit of any private shareholder or
individual.
2. Corporate purposes. The corporation is
a. organized as a cemetery company
b. for the exclusive benefit of its members,
c. solely for the purpose of the disposal of
bodies by burial and that its Articles of
Incorporation does not permit it to engage in
any business not necessarily incident to that
purpose; and
d. that no part of its net earnings inures to the
benefit of any private shareholder or
individual.
3. Actual operation. It is operated solely for burial
purposes and not permitted by its charter to engage
in any business not necessarily incident to that
purpose. No part of its net earnings should inure to
the benefit of any private shareholder or individual.
Earnings of the company may be used for the
operation, maintenance, and improvement of the
cemetery.
E. 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 belongs to or
inures to the benefit of any member, organizer, officer or
any specific person
1. Characteristics
a. A non-stock corporation or association;
b. Organized and operated exclusively for:
i. religious,
ii. charitable,
iii. scientific,
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iv. athletic, or
v. cultural purposes, or
vi. for the rehabilitation of veterans.
c. No part of its net income or asset
belongs to or inures to the benefit of
any member, organizer, officer or any
specific person.
2. Corporate purposes
a. Religious purposes refers to the promotion,
propagation and accomplishment of any
form of religion, creed or religious belief
recognized by the Government of the
Republic of the Philippines.
b. Charitable purposes refers to activities
extending relief to the poor, distressed and
underprivileged and shall include fighting
against juvenile delinquency and community
deterioration, and provision for free goods
and services to the public.
c. Scientific purposes refers to undertaking or
assisting in pure or basic, applied and
scientific research in the field of agriculture,
forestry, fisheries, industry, engineering,
energy development, food and nutrition,
medicine, environment and biological,
physical and natural sciences for the public
interest.
d. Athletic purposes refers to and include
conducting a program on physical fitness
and amateur sports development for the
country; developing and maintaining
recreational facilities, playgrounds and
sports centers; and conducting training
programs for the development of youth and
athletes for national and international
competitions.
e. Cultural purposes refers to and include
undertaking and/or assisting in research
activities on all aspects of history, social
system, customs and traditions; developing,
enriching and preserving Filipino arts and
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INTRODUCTION TO INCOME TAX
culture; developing and promoting the visual
and performing arts; and participating in
vigorous implementation of bilingual policy
through translation and wider use of
technical, scientific and creative
publications, development of an adaptive
technical dictionary and use of Filipino as
the medium of instruction.
f. Rehabilitation of veterans refers to
services extended to Philippine veterans and
members of their families because of
financial difficulties and attendant problems;
and services extended to disabled veterans
towards productive life.
3. Actual operation. A corporation is exempt from tax
on its income if it meets two tests:
a. It is organized and operated for one or more
of the above-specified purposes; and
b. no part of its net income or assets inures to
the benefit of private stockholders or
individuals.
F. Business league, chamber of commerce, or board of
trade, not organized for profit and no part of the net
income of which inures to the benefit of any private
stock-holder, or individual:
1. Characteristics:
a. Organized as a business league, chamber of
commerce, or board of trade;
b. Operated as an association of persons having
some common business interest, which
limits its activities to work for such common
interest;
c. It does not engage in a regular business of a
kind ordinarily carried on for profit;
d. It is non-profit;
e. No part of its net income or asset shall
belong to or inures to the benefit of any
member, organizer, officer or any specific
person.
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2. Corporate purposes. To promote such common
interest and not to engage in a regular business of a
kind ordinarily carried on for profit. It is an
organization of the same general class as a chamber
of commerce or board of trade;
3. Actual operations. Its activities should be directed
to the improvement of business conditions of one or
more lines of business and should not engage in a
regular business of a kind ordinarily carried on for
profit. No part of its net income or asset shall belong
to or inures to the benefit of any member, organizer,
officer or any specific person.
G. Civic league or organization not organized
for profit but operated exclusively for
the promotion of social welfare:
1. Characteristics
a. It is organized as a non-stock corporation
and not for profit;
b. It is exclusively operated for the promotion
of social welfare; and
c. It has no net earnings or assets which inure
to the benefit of any member, organizer,
officer or any specific person.
2. Corporate purposes. The organization must be
primarily engaged in promoting the common good
and general welfare of the people of the
community, i.e., for the purpose of bringing about
civic betterment and social improvement.
3. Actual operations. To be entitled to the exemption,
the regular activities of the corporation must be
exclusively for promotion of social welfare. No part
of its net income or asset shall belong to or inures to
the benefit of any member, organizer, officer or any
specific person.
H. A non-stock and nonprofit educational
institution;
I. Government educational institution:
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TAXATION LAW
1. Characteristics
a. It is established by law or a local government
unit;
b. It is administered and financially subsidized
by the government or the local government
concerned;
c. It is governed by the Board of Trustees or
Board of Regents; and
d. It is supervised by DepEd or CHED.
2. Corporate purposes. It is established as an
educational institution financed and operated by an
agency of the government which does not charge
tuition fees; instead, financing is obtained through
taxes or other government-collected revenues.
3. Actual operations. The institution operates as a
primary or secondary school, a college, or a
professional or trade school that has
a. a regularly scheduled curriculum,
b. a regular faculty, and
c. a regularly enrolled student body in
attendance
d. at a place where the educational activities are
regularly carried on.
J. 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 assessments, dues, and fees collected from
members for the sole purpose of meeting its expenses
1. Characteristics.
a. It is organized as a non-stock, non-profit
organization;
b. It is organized as a farmers' or other mutual
typhoon or fire insurance company, mutual
ditch or irrigation company, mutual or
JO VALLES
INTRODUCTION TO INCOME TAX
cooperative telephone company, or like
organization of a purely local character;
c. Income consists solely of assessments, dues,
and fees collected from members; and
d. Its income is for sole purpose of meeting its
expenses.
2. Corporate purposes. It is established for the
operation of a mutual typhoon or fire insurance
company, mutual ditch or irrigation company,
mutual or cooperative telephone company.
Organizations, other than mutual life insurance
associations, must be organized and operated on a
mutual basis i.e., it is owned by its members and
policy holders who are banded together to provide
themselves a mutually desirable service
approximately at cost and on a mutual basis.
3. Actual operations:
a. A mutual insurance company owned entirely
by its policy holders; or association of
farmers, direct beneficiaries of the operation
of an irrigation project/system; or a
telephone company owned and operated by
the members to provide telephone services
for the benefit of the members.
b. These organizations are operated on a
mutual basis and must use their income
solely to cover losses and expenses, with any
excess being returned to members or
retained to cover future losses and expenses.
c. A mutual life insurance organization cannot
have policyholders other than its members.
However, associations organized as cooperatives and
registered with the Cooperative Development Authority are
governed by R.A. 9520 or "Philippine Cooperative Code of
2008."
K. Farmers', fruit growers', or like association
organized and operated as a sales agent for the purpose
of marketing the products of its members and turning
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back to them the proceeds of sales, less the necessary
selling expenses on the basis of the quantity of produce
finished by them
1. Characteristics
a. It is organized as a non-stock, non-profit
organization;
b. It is organized as an association or
organization whose members are engaged in
farming, fruit growing, or similar
occupations;
c. Its income is for sole purpose of meeting its
expenses.
2. Corporate purposes. To act as a sales agent for the
purpose of marketing the products of its members
and turning back to them the proceeds of sales, less
the necessary selling expenses on the basis of the
quantity of produce finished by them.
3. Actual operations.
a. Associations, acting as sales agents for
farmers-members, must establish that they
have no net income for their own account.
b. It should return to the members the proceeds
of sales after deducting the necessary selling
expenses on the basis of the quantity of
produce finished by them.
c. The proceeds of the business should be
distributed on such proportionate basis.
Operational & organizational tests in determining
entitlement to exemption
Exemptions construed strictly against the taxpayer. The
requirements for the grant of tax exemption are specified by
the law granting it and such grant is strictly construed against
the taxpayer because an exemption restricts the collection of
taxes necessary for the existence of the government. Thus, a
corporation claiming tax exemption must be able to show
clearly that it is organized and operated for the purposes
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TAXATION LAW
under Section 30 of the NIRC, and that its income is derived
pursuant thereto.
• Must comply with all requirements to be entitled
to exemption. An educational institution, to be
exempt from income tax pursuant to the provisions
of paragraph 3, Section 4, Article XIV of the 1987
Constitution, in relation to Section 30 (H) of the
National Internal Revenue Code of 1997, as
amended, must be organized as a non-stock and non-
profit educational institution. The organization of the
institution refers to its corporate form, as shown by
its articles of incorporation, by-laws and other
constitutive document. In the instant case, the
submitted Articles of Incorporation of SIARGAO
ISLAND INSTITUTE OF TECHNOLOGY,
INC. disclosed that its registration with the SEC is
only as a non-stock corporation. Consequently, it
cannot be qualified as a non-profit educational
institution under the above-mentioned provisions.
Therefore, it shall be treated as a proprietary
educational institution subject to ten percent (10%)
preferential rate pursuant to Section 27 (B) of the
NIRC as amended. BIR Ruling 754-18
Organizational test. This requires that the corporation or
association's constitutive documents (SEC Registration,
Articles of Incorporation and By-Laws) must show that its
primary purpose/s of incorporation fall under Section 30 of
the NIRC.
Operational test. This requires that the regular activities of the
corporation or association be exclusively devoted to the
accomplishment of the purposes specified in Section 30 of the
NIRC. A corporation or association fails to meet this test if the
corporation has no activities conducted in furtherance of the
purpose for which it was organized, or if a substantial part of
its operations constitutes "activities conducted for profit."
Prohibition against inurement
Revenue Memorandum Order 38-2019
JO VALLES
INTRODUCTION TO INCOME TAX
Non-profit; inurement prohibition. Corporations falling
under Section 30 of the NIRC, as amended, must be non-
profit. "Non-profit" means that "no net income or asset
accrues to or benefits any member or specific person, with all
the net income or asset devoted to the institution's purposes
and all its activities conducted not for profit."
Must not inure to benefit of any person; not organized for
benefit of any person. Thus, in order for an entity to qualify
as a non-profit corporation exempt from income tax, it must
demonstrate that its earnings or assets do not inure to the
benefit of any of its trustees, organizers, officers, members or
any specific person. It must not be organized or operated for
the benefit of private interests such as specific individuals,
incorporators or his family, shareholders of the organization,
or persons controlled directly or indirectly by such private
interests. The organization must serve a public rather than a
private purpose:
Inurements. The following are considered inurements of
such nature:
1. The payment of compensation, salaries, or
honorarium to its trustees or organizers;
2. The payment of exorbitant or unreasonable
compensation to its employees;
3. The provision of welfare aid and financial assistance
to its members.
o An organization is not exempt from income
tax if its principal activity is to receive and
manage funds associated with savings or
investment programs, including pension or
retirement programs. This does not cover a
society, order, association, or non-stock
corporation under Section 30 (C) of the
NIRC providing for the payment of life,
sickness, accident and other benefits
exclusively to its members or their
dependents;
4. Donation to any person or entity (except donations
made to other entities formed for the
purpose/purposes similar to its own);
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5. The purchase of goods or services for amounts in
excess of the fair market value of such goods or value
of such services from an entity in which one or more
of its trustees, officers or fiduciaries have an interest;
and
6. When upon dissolution and satisfaction of all
liabilities, its remaining assets are distributed to its
trustees, organizers, officers or members. Its assets
must be dedicated to its exempt purpose.
Accordingly, its constitutive documents must
expressly provide that in the event of dissolution, its
assets shall be distributed to one or more entities
formed for the purpose/purposes similar to its own,
or to the Philippine government for public purpose.
Giving per diem to board members violates the prohibition
against inurement; entity not exempt from tax under
Section 30. The corporation is a non-stock, non-profit
corporation, applied with the BIR for the issuance of a tax
exemption certificate pursuant to Section 30 (J) of the Tax
Code, which exempts non-stock, non-profit corporations from
corporate income tax in respect to income received by them as
such. The by-laws of the corporation provides that the members
of the board of directors (BOD) shall receive a per diem for
every board meeting attended, the amount of which shall be
fixed by the members. BIR said that it was not entitled to a
certificate of exemption. Giving per diem to the members of the
BOD clearly violates the requirement that no part of the net
income or assets of the corporation shall inure to the benefit of
any individual or specific person. Consequently, the
corporation is not entitled to the issuance of a certificate of tax
exemption and shall be treated as an ordinary corporation
subject to the 30% income tax rate pursuant to Section 27(A)
and other internal revenue taxes imposed by the Tax Code. BIR
Ruling 718-18
Giving per diem to board members violates the prohibition
against inurement; entity not exempt from tax under
Section 30. In order for an entity to qualify as a non-stock, non-
profit corporation, no part of its income or assets should inure
to the benefit of any person. RMC 51-2014 clarified this
inurement prohibition; considered as “inurements” of this
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TAXATION LAW
nature is the payment of compensation, salaries, or honoraria to
its trustees or organizers. The amended By-Laws of GT-Metro
disclose that the directors receive per diems for attending
regular and special board meetings. These per diems are
considered distributions of the equity (including net income) of
GT-Metro. This is a form of private inurement which the law
seeks to prohibit. Thus, GT-Metro cannot be qualified as a non-
stock, non-profit corporation. As it failed to prove that it is a
non-profit corporation, GGT Metro shall be treated as an
ordinary corporation subject to thirty percent (30%) income tax
rate pursuant to Section 27 (A) and other internal revenue taxes
imposed by the NIRC, as amended. BIR Ruling 122-19
Deductions from gross income
Section 34(H), National Internal Revenue Code
Deductions from gross income. Except for taxpayers earning
compensation income arising from personal services rendered
under an employer-employee relationship where no deductions
shall be allowed under this Section, in computing taxable
income subject to income tax under Sections 24(A); 25(A); 26;
27(A), (B) and (C); and 28(A)(1), there shall be allowed the
following deductions from gross income:
(H) Charitable and Other Contributions.
(1) In general; 10% for individuals; 5% for corporations.
Contributions or gifts actually paid or made within the taxable
year to, or for the use of
1. the Government of the Philippines or any of its
agencies or
2. any political subdivision thereof exclusively for public
purposes, or
3. to accredited domestic corporations or associations
organized and operated exclusively for
a. religious,
b. charitable,
c. scientific,
d. youth and sports development,
e. cultural or educational purposes or
f. for the rehabilitation of veterans, or
JO VALLES
INTRODUCTION TO INCOME TAX
g. to social welfare institutions, or
h. to nongovernment organizations,
in accordance with rules and regulations promulgated by the
Secretary of Finance, upon recommendation of the
Commissioner, no part of the net income of which inures to the
benefit of any private stockholder or individual in an amount
not in excess of
1. ten percent (10%) in the case of an individual, and
2. five percent (5%) in the
case of a corporation,
of the taxpayer’s taxable income derived from trade,
business or profession as computed without the benefit of this
and the following subparagraphs.
(2) Contributions Deductible in Full. Notwithstanding the
provisions of the preceding subparagraph, donations to the
following institutions or entities shall be deductible in full:
(a) Donations to the government. Donations to the
Government of the Philippines or to any of its agencies or
political subdivisions, including fully-owned government
corporations, exclusively to finance, to provide for, or to be
used in undertaking priority activities in
1. education,
2. health,
3. youth and sports development,
4. human settlements,
5. science and culture, and
6. in economic development according to a National
Priority Plan determined by the National Economic
and Development Authority (NEDA), in
consultation with appropriate government
agencies, including its regional development
councils and private philanthropic persons and
institutions:
Provided, That any donation which is made to the
Government or to any of its agencies or political
subdivisions not in accordance with the said annual
priority plan shall be subject to the limitations
prescribed in paragraph (1) of this Subsection;
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(b) donations to certain foreign institutions or
international organizations. Donations to foreign
institutions or international organizations which are fully
deductible
1. in pursuance of or in compliance with agreements,
treaties, or commitments entered by the
Government of the Philippines and the foreign
institutions or international organizations or
2. in pursuance of special laws;
(c) donations to accredited nongovernment
organizations. See next section of this document. xxx
(3) Valuation. The amount of any charitable contribution of
property other than money shall be based on the acquisition cost
of said property.
(4) Proof of deductions. Contributions or gifts shall be
allowable as deduction only if verified under the rules and
regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
Deductibility of donations to NGOs
Section 34. Deductions from Gross Income:
(H) Charitable and Other Contributions
(2) Contributions Deductible in Full
(c) Donations to Accredited Nongovernment
Organizations.
The term 'nongovernment organization' means a non-profit
domestic corporation:
1. Organized and operated exclusively for
a. scientific,
b. research,
c. educational,
d. character- building and
e. youth and sports development,
f. health,
g. social welfare,
h. cultural or
i. charitable purposes, or
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TAXATION LAW
j. a combination thereof,
no part of the net income of which inures to the
benefit of any private individual;
th
2. Which, not later than the 15 day of the third month
after the close of the accredited nongovernment
organizations taxable year in which contributions are
received, makes utilization directly for the active
conduct of the activities constituting the purpose or
function for which it is organized and operated, unless
an extended period is granted by the Secretary of
Finance in accordance with the rules and regulations to
be promulgated, upon recommendation of the
Commissioner;
3. The level of administrative expense of which shall, on
an annual basis, conform with the rules and regulations
to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, but in no case
to exceed thirty percent (30%) of the total expenses;
and
4. The assets of which, in the event of dissolution, would
be distributed to another non- profit domestic
corporation organized for similar purpose or
purposes, or to the state for public purpose, or
would be distributed by a court to another
organization to be used in such manner as in the
judgment of said court shall best accomplish the
general purpose for which the dissolved
organization was organized.
Utilization. Subject to such terms and conditions as may be
prescribed by the Secretary of Finance, the term 'utilization'
means:
i. Any amount in cash or in kind (including
administrative expenses) paid or utilized to accomplish
one or more purposes for which the accredited
nongovernment organization was created or organized.
ii. Any amount paid to acquire an asset used (or held for
use) directly in carrying out one or more purposes for
which the accredited nongovernment organization
was created or organized.
JO VALLES
INTRODUCTION TO INCOME TAX
Amount set aside for a specific project; when treated as
utilization. An amount set aside for a specific project which
comes within one or more purposes of the accredited
nongovernment organization may be treated as a utilization, but
only if:
1. at the time such amount is set aside, the accredited
nongovernment organization has established to the
satisfaction of the Commissioner that the amount will
be paid for the specific project within a period to be
prescribed in rules and regulations to be promulgated
by the Secretary of Finance, upon recommendation of
the Commissioner, but not to exceed five (5) years;
AND
2. the project is one which can be better accomplished
by setting aside such amount than by immediate
payment of funds.
Full deductibility of donations to accredited NGO, not non-
stock non-profit corporations. Non-stock non-profit
corporations are enumerated under Sections 30 (e) and (f) of
the NIRC while NGOs are defined under Section 34 (h)(2)(c).
Thus, they are different and donors can avail of the full
deductibility only for donations, contributions or gifts actually
paid or made within the taxable year to accredited NGOs.
Accordingly, for purposes of full deductibility of the donation
from the taxable business income of its donor, Ninoy and Cory
Aquino Foundation, Inc. must first be accredited with the
Philippine Council for NGO Certification, Inc. (PCNC) which
has been duly designated by the Secretary of Finance as the
Accrediting Entity pursuant to Memorandum of Agreement
dated January 29, 1998 executed by and between the Secretary
of Finance and PCNC's Interim Chairman. BIR Ruling 217-12
Exemption from donor’s tax
Exemption of certain gifts
Section 101 of the National Internal Revenue Code, as
amended by RA 10963
Exemption of certain gifts. The following gifts or donations
shall be exempt from the tax provided for in this Chapter:
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ad majorem dei gloriam
(A) In the Case of Gifts Made by a Resident.
1. Gifts made to or for the use of
a. the National Government or
b. any entity created by any of its agencies which
is not conducted for profit, or
c. to any political subdivision of the said
Government; and
2. Gifts in favor of an
a. educational and/or charitable,
b. religious,
c. cultural or social welfare corporation,
institution,
d. accredited nongovernment organization, trust
or philanthropic organization or research
institution or organization:
Provided, however, That not more than thirty percent
(30%) of said gifts shall be used by such donee for
administration purposes.
Must not pay dividends; board must not be compensated;
income devoted to its purpose. For the purpose of this
exemption, a 'non-profit educational and/or charitable
corporation, institution, accredited nongovernment
organization, trust or philanthropic organization and/or
research institution or organization' is
1. a school, college or university and/or charitable
corporation, accredited nongovernment organization,
trust or philanthropic organization and/or research
institution or organization,
2. incorporated as a non-stock entity,
3. paying no dividends,
4. governed by trustees who receive no compensation,
and
5. devoting all its income, whether students' fees or gifts,
donation, subsidies or other forms of philanthropy, to
the accomplishment and promotion of the purposes
enumerated in its Articles of Incorporation.
(B) In the Case of Gifts Made by a Nonresident not a
Citizen of the Philippines.
1. Gifts made to or for the use of
a. the National Government or
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TAXATION LAW
b. any entity created by any of its agencies which
is not conducted for profit, or
c. to any political subdivision of the said
Government
2. Gifts in favor of an
a. educational and/or charitable,
b. religious,
c. cultural or social welfare corporation,
institution,
d. foundation, trust or philanthropic organization
or research institution or organization:
Provided, however, That not more than thirty percent
(30%) of said gifts shall be used by such donee for
administration purposes.
Note 1: Based on the provision, donations of NRC to NGOs are
not exempt from donor’s tax.
Donor must give notice of donation. In order to be exempt
from donor’s tax and to claim full deduction of the donation
given to qualified donee institutions duly accredited by the
Philippine Council for NGO Certification, Inc. (PCNC), the
donor engaged in business shall
(1) give a notice of donation on every donation worth at
least Fifty Thousand Pesos (P50,000) to the Revenue
District Office (RDO) which has jurisdiction over his
place of business
(2) within thirty (30) days after receipt of the qualified
donee institution’s duly issued Certificate of Donation,
(3) which shall be attached to the said Notice of Donation,
(4) stating that not more than thirty percent (30%) of the
said donation/gifts for the taxable year shall be used by
such accredited non-stock, non-profit
corporation/NGO institution (qualified-donee
institution) for administration purposes pursuant to the
provisions of Section 101(A)(3) and (B)(2) of the
Code. Revenue Regulation 02-03 §13 (C)
Accreditation system for done institutions
Brief summary. DOF has the responsibility of granting
certification of donee institution, but the PCNC has the
JO VALLES
INTRODUCTION TO INCOME TAX
responsibility of determining the qualification of such
institution.
Executive Order No. 720
PCNC or Philippine Council for NGO Certification. PCNC
has been designated to establish and operationalize a system of
accreditation. It is a private, voluntary, non-stock, non-profit
corporation established by six of the country’s largest national
NGO networks.
Section 2. The PCNC as Accrediting Entity and Its
Obligations. The PCNC, duty registered with the Securities
and Exchange Commission, shall be the government’s partner
in a system of accreditation, to determine the qualification of
domestic corporations or associations or NGOs organized and
operated exclusively for religious, charitable, scientific, youth
and sports development, cultural or educational purposes, or for
the rehabilitation of veterans, or to NGOs for accreditation as
donee institutions.
• No corporations, associations, or NGOs however shall
be processed for accreditation by the PCNC unless it
has secured a valid registration with the government
agency that exercises regulatory function over such
corporation, association or NGO.
Comply with standards of DOF and other government
agencies. In doing so, the PCNC shall comply with the existing
standards and guidelines set by the DOF, through the BIR,
relative to the accreditation of non-stock, non-profit
corporations/NGOs as provided for in Revenue Regulations
No. 13-98. The PCNC shall also be guided by the standards and
guidelines of other government departments or agencies
exercising regulatory functions over such corporations/NGOs,
such as the Department of Social Welfare and Development
(DSWD).
• In line with the mutual objectives of transparency and
accountability in public-private partnership, the PCNC
shall submit to its Board of Trustees periodic reports of
its operations, particularly, its receipts and expenses
incurred in the conduct of its mandate as the
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government accrediting entity. As a non-stock, non- yielded to higher business taxes paid. Thus, Mobil is entitled to
profit entity, the PCNC shall comply with existing a refund. Mobil Philippines vs City Treasurer of Makati
rules governing tax-exempt organizations such as the
filing of an annual information return to the BIR. CITIES AND MUNICIPALITIES
Section 4. Certification of Donee Institution Status. The Rates
responsibility of granting certification for donee institution
status remains veritably with the Department of Finance, Section 142. Municipality; scope of Taxing Powers. Except
specifically, the BIR, which shall issue a Certificate of as otherwise provided in this Code, municipalities may levy
Registration as Qualified Donee Institution. 1. taxes,
2. fees, and
LOCAL BUSINESS TAXES 3. charges not otherwise levied by provinces.
Source: Local Government Code unless otherwise indicated. Section 15. City; scope of Taxing Powers. Except as
otherwise provided in this Code, the city, may levy the taxes,
Business taxes vs income taxes. Business taxes are imposed fees, and charges which the province or municipality may
for regulatory purposes and are paid for the privilege of doing impose.
business, paid at the beginning of the year; while income taxes
are tax on income, due on or before of the 15th of the 4th month
• HUC and ICC collection accrue to them. Provided,
following the close of the taxable year, and is generally
however, That the taxes, fees and charges levied and
regarded as an excise tax levied on the right of a person to
collected by highly urbanized and independent
receive income. Mobil Philippines vs City Treasurer of Makati
component cities shall accrue to them and distributed
in accordance with the provisions of this code.
How it works. A newly-started business is already liable for
business taxes (i.e. license fees) at the start of the quarter when
City > province of municipality by 50% max; except prof
it commences operations. In computing the amount of tax due
and amusement. The rates of taxes that the city may levy may
for the first quarter of operations, the business’ capital
exceed the maximum rates allowed for the province or
investment is used as the basis. For the subsequent quarters of
municipality by not more than fifty percent (50%) except the
the first year, the tax is based on the gross sales/receipts for the
rates of
previous quarter. In the following year(s), the business is then
1. professional and
taxed based on the gross sales or receipts of the previous year.
2. amusement taxes.
The business taxes paid in the year 1998 is for the privilege of
engaging in business for the same year, and not for having
Section 143. Tax on Business. The municipality may impose
engaged in business for 1997. n the year an establishment
taxes on the following businesses:
retires or terminates its business within the municipality, it
would be required to pay the difference in the amount if the tax
(a) On
collected, based on the previous year’s gross sales or receipts,
1. manufacturers, assemblers, repackers, processors,
is less than the actual tax due based on the current year’s gross
brewers, distillers, rectifiers, and compounders of
sales or receipts. However, in this case, Mobil’s gross sales was
liquors, distilled spirits, and wines or
higher in the previous year than that of the second year such
2. manufacturers of any article of commerce of
that the computation based on the previous year’s figures
whatever kind or nature, in accordance with the
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INTRODUCTION TO INCOME TAX
following schedule: [Depending on gross sales or
receipts for the preceding calendar year] xxx
(b) On wholesalers, distributors, or dealers in any article of
commerce of whatever kind or nature in accordance with the
following schedule: xxx
(c) On exporters, and on manufacturers, millers, producers,
wholesalers, distributors, dealers or retailers of essential
commodities enumerated hereunder at a rate not exceeding
one-half (½) of the rates prescribed under subsection (a), (b)
and (d) of this Section:
1. Rice and corn;
2. Wheat or cassava flour, meat, dairy products, locally
manufactured, processed or preserved food, sugar, salt
and other agricultural, marine, and fresh water
products, whether in their original state or not;
3. Cooking oil and cooking gas;
4. Laundry soap, detergents, and medicine;
5. Agricultural implements. equipment and post-harvest
facilities, fertilizers, pesticides, insecticides, herbicides
and other farm inputs;
6. Poultry feeds and other animal feeds;
7. School supplies; and
8. Cement.
(d) On retailers.
With gross sales or receipts for the preceding calendar year in
the amount of:
P400, 000 or less 2%
More than P400, 000 2%
Provided, however, That barangays shall have the exclusive
power to levy taxes, as provided under Section 152 hereof, on
gross sales or receipts of the preceding calendar year of Fifty
thousand pesos (P50,000.00) or less, in the case of cities, and
Thirty thousand pesos (P30,000.00) or less, in the case of
municipalities.
(e) On contractors and other independent contractors, in
accordance with the following schedule:
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(f) On banks and other financial institutions, at a rate not
exceeding fifty percent (50%) of one percent (1%) on the gross
receipts of the preceding calendar year derived from
1. interest, commissions and discounts from lending
activities,
2. income from financial leasing,
3. dividends,
4. rentals on property and
5. profit from exchange or sale of property,
6. insurance premium.
(g) On peddlers engaged in the sale of any merchandise or
article of commerce, at a rate not exceeding Fifty pesos
(P50.00) per peddler annually.
(h) On any business, not otherwise specified in the preceding
paragraphs, which the sanggunian concerned may deem proper
to tax:
• Provided, That on any business subject to the excise,
value-added or percentage tax under the National
Internal Revenue Code, as amended, the rate of tax
shall not exceed two percent (2%) of gross sales or
receipts of the preceding calendar year.
The sanggunian concerned may prescribe a schedule of
graduated tax rates but in no case to exceed the rates prescribed
herein.
Section 144. Rates of Tax within the Metropolitan Manila
Area. The municipalities within the Metropolitan Manila Area
may levy taxes at rates which shall not exceed by fifty percent
(50%) the maximum rates prescribed in the preceding Section.
Presumptive income approach used only if taxpayer has no
proof of income. Redsystems is engaged in distribution and
warehousing services. It applied for renewal of its business
permit in 2016 for its Tagbilaran Branch and declared P27.6M
gross receipts. The City Treasurer, however, arrived at P42.7M
as basis of computing the local business tax using the
Presumptive Income Level Assessment Approach (PILAA).
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TAXATION LAW
Based on Section 143 of the LGC, the LGU may impose
business taxes based on gross sales/gross receipts of the
previous calendar year. However, PILAA does not give the
LGU carte blanche authority to increase the gross sales/receipts
of the taxpayer within its jurisdiction, and on that basis, assess
local business tax; it may only be used if the taxpayer is unable
to provide proof of income. Thus, the Bureau is of the opinion
that the City Treasurer has no authority to impose local
business tax on PILAA, provided Redsystems should provide
its AFS/ITR, which shall be used as basis in computing local
business tax. DOF-Bureau of Local Government Finance
Opinion, September 4, 2017
Holding company not subject to local business tax. PHI is a
holding company that owns 51% of Petrolift Inc. It uses Equity
Method of Accounting, thus, the income of Petrolift Inc. is
reported in PHI’s books as Revenue from Equity in Net
Earnings of an Associate. Muntinlupa assessed PHI of local
business taxes amounting to P3.3M, including the income of
Petrolft Inc as part of its gross receipts. The Bureau explained
equity method in accounting as a method of accounting
whereby the investment is initially recognized at cost and
adjusted thereafter for post-acquisition changes. The investor’s
profit or loss includes its share in the investee’s profit or loss.
Based on these, it can be gleaned that revenue from equity in
net earnings of an associate does not fall under the category
of gross receipts. It may be recalled that in the case of
Michigan Holdings, Inc. v City Treasurer of Makati, the CTA
eventually ruled that imposition of local business tax on
dividend income is a breach of the limitation of the taxing
powers of LGUs (such is an income tax, which can only be
imposed by the national government). Applied to the instant
case, and based on PHI’s submitted Amended Articles of
Incorporation and certification, it appears that PHI is neither a
bank nor a non-bank financial intermediary, pursuant to Sec.
143. Accordingly, the “revenue from equity in net earnings of
an associate” appearing in PHI’s income statement cannot be
considered as gross sales or receipts and shall not be subject to
local business tax. DOF-Bureau of Local Government Finance
Opinion, July 14, 2017
Retirement of business
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INTRODUCTION TO INCOME TAX
Section 145. Retirement of Business; settle balance before
official retirement. A business subject to tax pursuant to the
preceding sections shall, upon termination thereof, submit a
sworn statement of its gross sales or receipts for the current
year. If the tax paid during the year be less than the tax due on
said gross sales or receipts of the current year, the difference
shall be paid before the business is considered officially retired.
Payment
Section 146. Payment of Business Taxes
(a) Payable for every distinct establishment; payable by
person conducting business. The taxes imposed under Section
143 shall be payable for
1. every separate or distinct establishment or
2. place where business subject to the tax is conducted
and
one line of business does not become exempt by being
conducted with some other business for which such tax has
been paid.
• The tax on a business must be paid by the person
conducting the same.
(b) Combined computation for businesses subject to same
rate. In cases where a person conducts or operates two (2) or
more of the businesses mentioned in Section 143 of this Code
which are subject to the same rate of tax, the tax shall be
computed on the combined total gross sales or receipts of the
said two (2) or more related businesses.
(c) Separate computation if different rates. In cases where a
person conducts or operates two (2) or more businesses
mentioned in Section 143 of this Code which are subject to
different rates of tax, the gross sales or receipts of each business
shall be separately reported for the purpose of computing the
tax due from each business.
Situs and allocation
Section 150. Situs of the Tax
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(a) Sale recorded in the branch or outlet making the sales;
tax paid where municipality is located. For purposes of
collection of the taxes under Section 143 of this Code,
manufacturers, assemblers, repackers, brewers, distillers,
rectifiers and compounders of liquor, distilled spirits and wines,
millers, producers, exporters, wholesalers, distributors, dealers,
contractors, banks and other financial institutions, and other
businesses, maintaining or operating branch or sales outlet
elsewhere shall record the sale in the branch or sales outlet
making the sale or transaction, and the tax thereon shall accrue
and shall be paid to the municipality where such branch or sales
outlet is located.
If no branch in the city or municipality where sale is made,
recorded in the principal office. In cases where there is no
such branch or sales outlet in the city or municipality where the
sale or transaction is made, the sale shall be duly recorded in
the principal office and the taxes due shall accrue and shall be
paid to such city or municipality.
(b) The following sales allocation shall apply to manufacturers,
assemblers, contractors, producers, and exporters with
factories, project offices, plants, and plantations in the pursuit
of their business:
(1) 30% to city/municipality of principal. Thirty percent
(30%) of all sales recorded in the principal office shall
be taxable by the city or municipality where the
principal office is located; and
(2) 70% to city/municipality of factory, project office,
plant, or plantation. Seventy percent (70%) of all
sales recorded in the principal office shall be taxable
by the city or municipality where the factory, project
office, plant, or plantation is located.
(c) Plantation & factory separate; 70% divided as follows:
60 to factory, 40 to plant. In case of a plantation located at a
place other than the place where the factory is located, said
seventy percent (70%) mentioned in subparagraph (b) of
subsection (2) above shall be divided as follows:
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TAXATION LAW
(1) Sixty percent (60%) to the city or municipality where
the factory is located; and
(2) Forty percent (40%) to the city or municipality where
the plantation is located.
(d) 2 or more factories/plants; prorated according to
volumes of production. In cases where a manufacturer,
assembler, producer, exporter or contractor has two (2) or more
factories, project offices, plants, or plantations located in
different localities, the seventy percent (70%) sales allocation
mentioned in subparagraph (b) of subsection (2) above shall be
prorated among the localities where the factories, project
offices, plants, and plantations are located in proportion to their
respective volumes of production during the period for which
the tax is due.
(e) The foregoing sales allocation shall be applied irrespective
of whether or not sales are made in the locality where the
factory, project office, plant, or plantation is located.
Article 243 (a) Definition of terms
(1) Principal Office. The head or main office of the business
appearing in the pertinent documents submitted to the
Securities and Exchange Commission, or the Department of
Trade and Industry, or other appropriate agencies, as the case
may be.
• Situs is the city/municipality specified in the
Articles. The city or municipality specifically
mentioned in the articles of incorporation of official
registration papers as being the official address of said
principal office shall be considered as the situs thereof.
• Owner must notify LCE w/in 15 days after transfer
or relocation. In case there is a transfer or relocation
of the principal office to another city or municipality,
it shall be the duty of the owner, operator or manager
of the business to give due notice of such transfer or
relocation to the local chief executives of the cities or
municipalities concerned within fifteen (15) days after
such transfer or relocation is effected.
JO VALLES
INTRODUCTION TO INCOME TAX
(2) Branch or Sales Office. A fixed place in a locality which
conducts operations of the business as an extension of the
principal office. Offices used only as display areas of the
products where no stocks or items are stored for sale, although
orders for the products may be received thereat, are not branch
or sales offices as herein contemplated.
• A warehouse which accepts orders and/or issues sales
invoices independent of a branch with sales office shall
be considered as a sales office.
(3) Warehouse. A building utilized for the storage of products
for sale and from which goods or merchandise are withdrawn
for delivery to customers or dealers, or by persons acting in
behalf of the business. A warehouse that does not accept orders
and/or issue sales invoices as aforementioned shall not be
considered a branch or sales office.
(4) Plantation. A tract of agricultural land planted to trees or
seedlings whether fruit bearing or not,
(1) uniformly spaced or seeded by broadcast methods or
(2) normally arranged to allow highest production.
For purposes of this Article, inland fishing ground shall be
considered as plantation.
(5) Experimental Farms. Agricultural land utilized by a
business or corporation to conduct studies, tests, researches or
experiments involving agricultural, agribusiness, marine, or
aquatic, livestock, poultry, dairy and other similar products for
the purpose of improving the quality and quantity of goods or
products.
On-site sales of commercial quantity made in experimental
farms shall be similarly imposed the corresponding tax under
Article 233 and allocated in paragraph (b) of this Article.
Article 243 (b) Sales Allocation
Summary.
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1. Check first where the sale or transaction happens. Tax
shall be payable to the C/M where such branch or office
is located.
2. If there is no such branch or office, then the tax will be
paid to the C/M where principal office is located.
a. If there is no factory, project office, plant or
plantation, 100% of the sales is allocated to the
principal office.
b. But if there is a factory, etc., then 30% to the
principal and then 70% to such factory.
Note: The 70% allocation to such factory (etc) will exist even
if such factory does not have sales.
(1) Sale recorded in the branch or outlet making the sales;
tax paid where municipality is located. All sales made in a
locality where there is a branch or sales office or warehouse
shall be recorded in said branch or sales office or warehouse
and the tax shall be payable to the city or municipality where
the same is located.
(2) If no branch in the city or municipality where sale is
made, recorded in the principal office. In cases where there
is no such branch, sales office, or warehouse in the locality
where the sale is made, the sale shall be recorded in the
principal office along with the sales made by said principal
office and the tax shall accrue to the city or municipality where
said principal office is located.
(3) Sales recorded in principal office; 30% to city or
municipality of principal; 70% to factory, plant, project,
etc. In cases where there is a factory, project office, plant or
plantation in pursuit of business, thirty percent (30%) of all
sales recorded in the principal office shall be taxable by the city
or municipality where the principal office is located and
seventy percent (70%) of all sales recorded in the principal
office shall be taxable by the city or municipality where the
factory, project office, plant or plantation is located. LGUs
where only experimental farms are located shall not be entitled
to the sales allocation provided in this subparagraph.
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TAXATION LAW
(4) In case of a plantation located in a locality other than that
where the factory is located, the seventy percent (70%) sales
allocation shall be divided as follows:
1. Sixty percent (60%) to the city or municipality where
the factory is located; and
2. Forty percent (40%) to the city or municipality where
the plantation is located.
(5) In cases where there are two (2) or more factories, project
offices, plants or plantations located in different localities, the
seventy percent (70%) sales allocation shall be prorated among
the localities where such factories, project offices, plants, and
plantations are located in proportion to their respective volumes
of production during the period for which the tax is due.
• In the case of project offices of service and other
independent contractors, the term production shall
refer to the cost of projects actually undertaken during
the tax period.
(6) The sales allocation in paragraph (b) hereof shall be applied
irrespective of whether or not sales are made in the locality
where the factory, project office, plant or plantation is
located. In case of sales made by the factory, project office,
plant or plantation, the sale shall be covered by subparagraphs
(1) or (2) above.
(7) Independent contractor engaged to produce; warehouse
of the contractor shall be considered as
factory/plant/warehouse of the manufacturer. In case of
manufacturers or producers which engage the services of an
independent contractor to produce or manufacture some of
their products, these rules on situs of taxation shall apply except
that the factory or plant and warehouse of the contractor utilized
for the production and storage of the manufacturers' products
shall be considered as the factory or plant and warehouse of the
manufacturer.
Example. Therma mobile has a principal office in Cebu, 4
powerplants in Navotas and a purely admin office not engaged
JO VALLES
INTRODUCTION TO INCOME TAX
in any sales order nor receiving collections from sales of power
in Malabon. It asks regarding the proper sales allocation for
purpose of paying LBT. In treating the matter, reference must
be made to Sec. 150(a&b) of the LGC and Article 243(b)(1&2)
of the IRR. From these, the Malabon office is not a branch
office since it does not generate sales orders, receive
collections, or record sales, and gross receipts are recorded only
in the principal office in Cebu City. Neither may it be
considered a project office (Section 150(b,d,e) of the LGC). As
such, it should not be subject to local business tax, but Malabon
City may collect Mayor’s permit and other regulatory fees.
Based on the above, the Bureau is of the opinion that Therma
Mobile should pay local business tax based on the following
sales allocation: 30% of all sales recorded in the principal office
to Cebu City (principal office), and 70% to Navotas City
(power plant). DOF-Bureau of Local Government Finance
Opinion , October 27, 2017
Example. Real American Doughnut Company has a principal
office in Makati a factory in Pasig but has no sales in said
factory since the doughnuts are delivered to different sales
outlets or branches outside of Pasig. However, said factory is
being assessed by Pasig City of local business tax amounting to
70% of sales allocation of the consolidated sale of branches.
Under the LGC and its IRR, in case a factory with no sales or
transactions made in the LGU where it is located, and if there
are no other branch or sales outlet located in the same locality,
70% of all sales recorded in the principal office shall be taxable
by the municipality where said factory is located, and 30% shall
be taxable by the LGU where the principal office is located.
However, said allocation cannot apply to the consolidated sales
from all of its other branches, provided said sales were recorded
in the branch where it is located. To emphasize, only those
sales recorded in the principal office shall be taxable by the
City of Pasig. All sales or receipts made in a branch or outlet
shall be recorded in such branch or outlet and taxed by the LGU
where the branch or outlet is located. It may be inferred that the
Company does not maintain any branch or sales outlet in Pasig
City. Premises considered, if there are sale recorded in the
principal office (located in Makati City), Pasig City may
impose local business tax on 70% and the remaining 30% shall
be taxed by Makati City (however, if there are no sales recorded
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ad majorem dei gloriam
in its principal office, Pasig City cannot assess local business
tax on 70% of gross receipts). Likewise, Pasig City cannot get
a share on any of the sales recorded in the branch or sales office
of the Company since 100% of such sales shall accrue to the
LGU where said branch or sales office is located. DOF-Bureau
of Local Government Finance Opinion, July 20, 2017
Example. Philippine Fortune operates a buying station in
Misamis Oriental curing facility that (1) buys tobacco leaves
from farmers, (2) cures the tobacco leaves, and (3) transfers the
cured tobacco leaves to its facility in Vigan City. PMFTC also
provides farm inputs as advance purchase price to farmers who
agreed beforehand to sell their tobacco leaves to PMFTC.
PMFTC claims that it is not liable to pay business tax to the
municipality since it does not derive gross sales or receipts from
such activities. On the other hand, the Municipality believes
that PMFTC should pay local business tax even if it does not
derive gross sales from its buying station, on ground of the sales
allocation rule. The Bureau opined (1) that absence of gross
sales will render any assessment for local business tax
illegitimate for lack of legal basis. (2) Only if the buying station
is utilized as a branch or sales office may the municipality
validly impose a local business tax. Inasmuch as the buying
station only buys leaves from farmers, cures the leaves, and
transfers them, PMFTC cannot be subject to local business tax.
The municipality may only impose Mayor’s permit fees and
other regulatory fees. (3) PMFTC may be treated as a
distributor. The monetary value of the farm inputs forms part
of the payment of leaf tobacco to the farmers; however,
PMFTC should be able to substantially prove that these are
indeed deducted from the purchase price, otherwise, it is
considered engaged in business as a distributor of someone
else’s products, who may also be engaged as a manufacturer of
tobacco products. If that is the case, PMFTC will be liable to
pay local business tax on manufacturers and distributors, and a
separate permit or license for each business is required. . DOF-
Bureau of Local Government Finance Opinion, December 28,
2016
Example. Gemalto is a domestic corporation is engaged in 2
kinds of activities: (1) sale of generic cards under “sale of
goods” and sale of personalized cards under “sale of services”.
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TAXATION LAW
The personalization site is in Calamba, and Gemalto is asking
for confirmation that the same is not a branch or a sales office,
factory, project site, plant, or plantation, and therefore 100% of
the LBT should be payable in its head office in Makati. Clearly,
the acts done in the Personalization Site located in Calamba
City may be inferred as acts of altering partially
manufactured products for the purpose of being sold or
distributed to others. As such, the Site should be considered
as a manufacturing plant. For purposes of local taxation, the
70-30 allocation should therefore apply. In this case, the
Personalization Site, having the character of a plant or
plantation in pursuit of business, is liable to pay the local
business tax in Calamba City based on 70% of all sales
recorded in the principal office. In summary, it is the opinion
of the Bureau that Gemalto is subject to payment of local
business taxes and fees as follows: (1) all sales made in the
distribution of generic cards should be 100% taxable by Makati
City; (2) the Personalization Site is a manufacturing plant or
factory and thus 30% of all sales recorded in the manufacturing
and distribution of personalized cards shall be taxable in Makati
City where the principal office is located, and 70% shall be
taxable in Calamba City where the manufacturing plant is
located; (3) Gemalto shall secure a separate Mayor’s permit as
distributor for the sale of generic cards and manufacturer and
distributor of personalized cards and pay the corresponding
fees to Makati City; (4) Gemalto shall likewise secure a
Mayor’s permit as manufacturer and pay the corresponding
fees to Calamba City; and (5) both Makati and Calamba City
may collect other regulatory fees and charges. DOF-Bureau of
Local Government Finance Opinion, December 22, 2016
Example. Kawasaki’s principal office and factory are in
Muntinlupa. It has regional offices that maintain warehouses
and accept sales orders in Mandaue. Both Muntinlupa and
Mandaue claim that 100% of all sales should be taxed by their
respective LGUs. Applying the provisions of the LGC, the
Bureau expresses the following view: (1) The regional offices
are considered as branches since they maintain warehouses
[and accepts orders], in accordance with Article 243(a)(2) of
the IRR. While the regional offices, which maintain
warehouses, are the ones accepting sales orders, it cannot be
disregarded that the products being delivered to the customers
JO VALLES
INTRODUCTION TO INCOME TAX
are taken from said warehouses. Thus, warehouses serve as
integral parts of the regional offices. The issue is sales
allocation, and according to Article 243(b)(1), all sales
transacted by the regional offices shall be 100% taxable by the
LGUs where said regional offices are located. On the other
hand, all sales of the principal office for the Luzon area
operation shall be recorded thereat and the tax shall be 100%
taxable by the City of Muntinlupa, in conformity with Article
243(b)(2). DOF-Bureau of Local Government Finance
Opinion, January 6, 2016
Example; when considered a sales office. Unilever is engaged
in the manufacture of consumer goods and has its principal
office in the City of Manila. It intends to engage the services of
a third party contractor which operates a warehouse in CDO
City for the storage of goods therein. The warehouse operator
will not issue any sales invoice or accept any product orders on
behalf of Unilever, but (occasionally) will be requested to print
a copy of the sales invoice which is generated by Unilever’s
head office. All sales of Unilever products which will be stored
and passed through the CDO warehouse will be recorded and
invoiced in Manila. Unilever’s lawyer is requesting
confirmation of the opinion that Unilever is not liable to secure
a business permit and pay local business tax in the City of CDO.
From Article 243 of the IRR of the LGC, a warehouse may be
considered a sales office if it: (1) accepts orders but does not
issue sales invoices; (2) does not accept orders but issues
sales invoices; or (3) accepts orders and issues sales invoices.
In view of the foregoing, the warehouse in CDO City cannot be
considered a sales office since it does not accept orders or issue
sale invoices. Another thing to consider is that the warehouse
is owned by a 3rd party that is not authorized to accept orders
on behalf of Unilever. Even if the goods are dispatched from
the warehouse, it does not necessarily mean that it is engaged
in business activity in CDO City. Thus, Unilever is not liable
to pay business tax in CDO City, a view that is anchored on the
fact that business tax is based on gross sales or receipts, which
is not in attendance in this case. With regard to business permit,
both the owner of the warehouse (as real estate lessor) and
Unilever are liable pursuant to Sec. 147 of the LGC. Unilever
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ad majorem dei gloriam
is liable to pay 100% business tax to the City of Manila where
the principal office is located, and the City of Manila may also
collect Mayor’s permit fee and other regulatory fees. DOF-
Bureau of Local Government Finance Opinion, August 12,
2016
Example; when considered a branch. Manila North Tollways
Corp (MNTC) operates NLEX and has toll plazas and collects
toll fees. The proposition of MNTC is that 30% will be taxed
in Caloocan City, the principal place of business, while 70%
will be taxed by the LGUs, based on the actual lane kilometrage
traversed by the NLEX. The previous ruling was that 100% of
the gross receipts of the toll booths are payable where they were
located. Indispensable to the resolution of the issue is the
determination of whether toll plazas can be considered as
branch or sales offices. These toll plazas perform
functions/services that the principal or head office may
otherwise provide if not for impracticality. Needless to say, toll
plazas are vital installations in carrying out MNTC’s
contractual obligations with PNCC in operation of the NLEX.
They need not be independent with the principal or head
office to be considered a branch or sales outlet. The toll
plazas are fixed structures in the locality inside the expressway
system and they conduct the operations of MNTC as an
extension of the principal office in Caloocan City. As to the
contention that the toll booths do not generate income on their
own, they do not need to generate income on their own
because they are performing the functions as extensions of
the head office. As previously stated, not only do toll plazas
serve as ticket dispensing stations, house electronic readers,
and accept payments for reloading stored value, they also
accept cash payments from patrons. Further, during the
inspection tour at the MNTC facility in Balintawak, it was
observed that each computer is connected to the main server.
Reasonably, after having established that toll plazas may be
considered as branch or sales outlets, it is more sound to apply
Section 143(c) and Article 243(b) of the IRR. In this regard, the
30-70 share allocation is not applicable. As such, the Bureau
cannot give course to the request to reconsider the previous
ruling.
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TAXATION LAW
Example; warehouse. Colgate-Palmolive Inc. (CPI) secured
the services of PBE Industries (an independent contractor) to
provide CPI the local physical distribution facilities within
specified places within the Philippines. However, CPI may also
make deliveries of its products in other places). CPI has a
warehouse within its compound in Makati, from where finished
products are transferred to the warehouse of PBE in Tacloban.
Sales are booked with CPI’s salesmen, who submit the orders
to PBE, which processes the sales orders and prepares the
sales invoices on the basis of which goods are withdrawn from
its warehouse in Tacloban City for delivery to the various
customers. On the basis of the foregoing, the Office of the City
Treasurer of Tacloban City contends that CPI is liable for tax
on sale of goods taken from the Tacloban City warehouse for
sales within and outside the city. CPI contends that, only those
sales made within Tacloban should be paid to Tacloban and
that, sales made to customers located in places where CPI has
no warehouse should be recorded and taxes paid to CPI’s
principal office in Makati, as stipulated in Warehousing and
Physical Distribution Agreement entered into between CPI and
PBE, whereby the latter is required to remit all colelctions to
the Makati Office. The Bureau expresses the view that the
contract should not apply where a case is covered by specific
provision of law or rule, such as the warehouse of PBE in
Tacloban City where sales invoices are issued to cover goods
withdrawn therefrom. Thus, the products taken from the
warehouse of PBE in Tacloban City and delivered to CPI’s
customers outside the city should be recorded and the tax
thereon paid in Tacloban City. As to deliveries or sales made
by CPI of products taken from its Makati warehouse to places
where it does not have any branch, sales office, or another
warehouse, the same should be recorded in Makati where the
principal office is located and tax thereon also paid to Makati.
DOF-Bureau of Local Government Finance Opinion, March 7,
1994
Example. Magnolia is a subsidiary of SMC It has a principal
office in Pasig. It has a factory and sales office in QC where
route trucks withdraw their products for delivery to customers
in Pasig. Thus, the sales of the route trucks are recorded in QC
and local business taxes paid therein. Pasig insists that
Magnolia should pay business taxes in said municipality
JO VALLES
INTRODUCTION TO INCOME TAX
representing 30% of gross receipts for maintaining therein its
principal office. On the other hand, Magnolia maintains that the
principal office is only for management and administration
purposes and that no sales are made on which tax is to be based.
Considering the provisions of Article 243 of the IRR of the
LGC, it is the view of the Bureau that Magnolia should pay
business tax to QC and not to Pasig. However, the municipality
may levy and collect the annual fixed tax of P500 for every
delivery truck delivering goods within the municipality under
Section 141 of the LGC, in relation to Art. 236(b) of the IRR,
as well as Mayor’s permit fee and other regulatory fees
provided for under existing ordinances. DOF-Bureau of Local
Government Finance Opinion, February 26, 1993
Example. Nestle is maintaining a branch/sales office at
Barangay 24 of the municipality of San Nicolas, Ilocos Norte.
Said office is also distributing in Laoag City and other
municipalities within the province of Ilocos Norte. In January
1998, Nestle declared net sales of P8.1M, which is much lower
than the sales declared in 1996 in the amount of P133M. For
the sales in Laoag City in 1998, said taxes were paid in a 70-30
allocation. Hence, the query that considering the Sales Office
is located in San Nicolas, will the sales be declared and paid in
full in San Nicolas or partly in Laoag City? The applicable law
is Article 243(b)(I)(d)(2) of the IRR, which says in sum that for
route sales where there is no branch (etc), sales are recorded in
the branch, sales office or warehouse from where the route
trucks withdraw their products. Accordingly, the Bureau
expresses the following views: (1) all sales made in its sales
office in San Nicolas shall be recorded thereat and shall be
100% taxable by San Nicolas; (2) the goods sourced therein and
delivered to buyers outside said municipality where there is no
branch, sales office or warehouse, shall be considered as sales
made by route trucks and also recorded and paid in San Nicolas;
(3) City of Laoag may levy and collect an annual fixed tax for
every delivery truck of Nestle. DOF-Bureau of Local
Government Finance Opinion, September 14, 1998
Article 243 (c) Port of loading
(c) LGU where port of loading is located cannot collect
taxes under 233. The city or municipality where the port of
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ad majorem dei gloriam
loading is located shall not levy and collect the tax imposable
in Article 233 of this Rule unless the exporter maintains in said
city or municipality its principal office, a branch, sales office
or warehouse, factory, plant, or plantation in which case, the
rule on the matter shall apply accordingly.
Article 243 (d) Sales made by route trucks, vans, or vehicles
(1) Sales recorded were sales office/ warehouse is located;
tax paid to LGU where the same is located. For route sales
made in a locality where a manufacturer, producer, wholesaler,
retailer or dealer has a branch or sales office or warehouse, the
sales are recorded in the branch, sales office or warehouse and
the tax due thereon is paid to the LGU where such branch, sales
office or warehouse is located.
(2) If no branch, sales office or warehouse, sales recorded
in the where goods are withdrawn; taxes paid to LGU
where such are located. For route sales made in a locality
where a manufacturer, producer, wholesaler, retailer or dealer
has no branch, sales office or warehouse the sales are recorded
in the branch, sales office or warehouse from where the route
trucks withdraw their products for sale, and the tax due on such
sales is paid to the LGU where such branch, sales office or
warehouse is located.
(3) LGU where route trucks deliver cannot impose tax
except annual fixed tax. Based on subparagraphs (1) and (2)
above, LGUs where route trucks deliver merchandise cannot
impose any tax on said trucks except the annual fixed tax
authorized to be imposed by the province in Article 231 of this
Rule on every delivery truck or van or any motor vehicle used
by manufacturers, producers, wholesalers, dealers, or retailers,
in the delivery or distribution of distilled spirits, fermented
liquors, soft drinks, cigars and cigarettes, and other products as
may be determined by the sangguniang panlalawigan, and by
the city, pursuant to Article 223 of this Rule.
(4) Mayor’s permit fee. In addition to this annual fixed tax,
cities may also collect from same manufacturers, producers,
wholesalers, retailers, and dealers using route trucks a mayor's
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TAXATION LAW
permit fee which shall be imposed in a local tax ordinance
pursuant to Article 234 in relation to Article 223 of this Rule.
Tax Period
Section 165. Tax Period and Manner of Payment. Unless
otherwise provided in this Code, the tax period of all local
taxes, fees and charges shall be the calendar year. Such taxes,
fees and charges may be paid in quarterly installments.
Accrual of Tax
Section 166. Accrual of Tax. Unless otherwise provided in this
Code, all local taxes, fees, and charges shall accrue on the first
(1st) day of January of each year.
• New rates effective next quarter. However, new
taxes, fees or charges, or changes in the rates thereof,
shall accrue on the first (1st) day of the quarter next
following the effectivity of the ordinance imposing
such new levies or rates.
Time of payment
Section 167. Time of Payment; first 20 days of quarter.
Unless otherwise provided in this Code, all local taxes, fees,
and charges shall be paid within the first twenty (20) days of
January or of each subsequent quarter, as the case may be.
• Extension; 6 months max. The sanggunian concerned
may, for a justifiable reason or cause, extend the time
for payment of such taxes, fees, or charges without
surcharges or penalties, but only for a period not
exceeding six (6) months.
Section 168. Surcharges and Penalties on Unpaid Taxes,
Fees, or Charges. The sanggunian may impose
• 25% surcharge. a surcharge not exceeding twenty-
five (25%) of the amount of taxes, fees or charges not
paid on time and
• 2% per month interest capped at 36%. an interest at
the rate not exceeding two percent (2%) per month of
JO VALLES
INTRODUCTION TO INCOME TAX
the unpaid taxes, fees or charges including surcharges,
until such amount is fully paid but in no case shall the
total thirty-six (36%) months.
Section 169. Interests on Other Unpaid Revenues. Where the
amount of any other revenue due a local government unit,
except voluntary contributions or donations,
• is not paid on the date fixed in the ordinance, or in the
contract, expressed or implied, or
• upon the occurrence of the event which has given rise
to its collection,
there shall be collected as part of that amount an interest
thereon at the rate not exceeding two percent (2%) per month
from the date it is due until it is paid, but in no case shall the
total interest on the unpaid amount or a portion thereof exceed
thirty-six (36) months.
Note: So no surcharge on other revenues.
Collection by treasurer
Section 170. Collection of Local Revenue by Treasurer. All
local taxes, fees, and charges shall be collected by the
provincial, city, municipal, or barangay
• treasurer, or
• their duly authorized deputies.
Barangay treasurer may be deputized. The provincial, city
or municipal treasurer may designate the barangay treasurer as
his deputy to collect local taxes, fees, or charges.
• In case a bond is required for the purpose, the
provincial, city or municipal government shall pay the
premiums thereon in addition to the premiums of bond
that may be required under this Code.
Examination of Books
Section 171. Examination of Books of Accounts and
Pertinent Records of Businessmen by Local Treasurer. The
provincial, city, municipal or barangay treasurer may, by
himself or through any of his deputies duly authorized in
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ad majorem dei gloriam
writing, examine the books, accounts, and other pertinent
records of any person, partnership, corporation, or association
subject to local taxes, fees and charges in order to ascertain,
assess, and collect the correct amount of the tax, fee, or charge.
Conditions. Such examination shall be
1. made during regular business hours,
2. only once for every tax period, and
3. shall be certified to by the examining official. Such
certificate shall be made of record in the books of
accounts of the taxpayer examined.
Written authority of deputy required. In case the
examination herein authorized is made by a duly authorized
deputy of the local treasurer, the written authority of the deputy
concerned shall specifically state
1. the name, address, and business of the taxpayer whose
books, accounts, and pertinent records are to be
examined,
2. the date and place of such examination and
3. the procedure to be followed in conducting the same.
Records of RDO made available to local treasurer/deputy.
For this purpose, the records of the revenue district office of the
Bureau of Internal Revenue shall be made available to the local
treasurer, his deputy or duly authorized representative.
BARANGAY
Section 152. Scope of Taxing Powers. The barangays may
levy taxes, fees, and charges, as provided in this Article, which
shall exclusively accrue to them:
a) Taxes; 1% of gross sales or receipts of retailers. On stores
or retailers with fixed business establishments with gross sales
of receipts of the preceding calendar year of
• Fifty thousand pesos (P50,000.00) or less, in the case
of cities and
• Thirty thousand pesos (P30,000.00) or less, in the case
of municipalities,
at a rate not exceeding one percent (1%) on such gross sales or
receipts.
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TAXATION LAW
(b) Service Fees or Charges. Barangays may collect
reasonable fees or charges for services rendered in connection
with the regulations or the use of barangay-owned properties or
service facilities such as palay, copra, or tobacco dryers.
(c) Barangay Clearance; barangay clearance required
before license/permit is issued. No city or municipality may
issue any license or permit for any business or activity unless a
clearance is first obtained from the barangay where such
business or activity is located or conducted. For such clearance,
the sangguniang barangay may impose a reasonable fee.
When license/ permit barangay clearance. The application
for clearance shall be acted upon within seven (7) working
days from the filing thereof. In the event that the clearance is
not issued within the said period, the city or municipality may
issue the said license or permit.
(d) Other fees and Charges. The barangay may levy
reasonable fees and charges:
1. On commercial breeding of fighting cocks, cockfights
and cockpits;
2. On places of recreation which charge admission fees;
and
3. On billboards, signboards, neon signs, and outdoor
advertisements
COMMUNITY TAX
Section 156. Community Tax. Cities or municipalities may
levy a community tax in accordance with the provisions of this
Article.
Section 158. Juridical Persons Liable to Community Tax.
Every corporation no matter how created or organized, whether
1. domestic or
2. resident foreign, engaged in or doing business in the
Philippines
shall pay
1. an annual community tax of Five hundred pesos
(P500.00) and
JO VALLES
INTRODUCTION TO INCOME TAX
2. an annual additional tax, which, in no case, shall
exceed Ten thousand pesos (P10,000.00) in accordance
with the following schedule:
(1) P2 for every P5k worth of RP in the
preceding year. For every Five thousand
pesos (P5,000.00) worth of real property in the
Philippines owned by it during the preceding
year based on the valuation used for the
payment of real property tax under existing
laws, found in the assessment rolls of the city
or municipality where the real property is
situated - Two pesos (P2.00); and
(2) P2 for every P5k gross R/E in the preceding
year. For every Five thousand pesos
(P5,000.00) of gross receipts or earnings
derived by it from its business in the
Philippines during the preceding year - Two
pesos (P2.00).
Dividends received part of gross receipts or earnings. The
dividends received by a corporation from another corporation
however shall, for the purpose of the additional tax, be
considered as part of the gross receipts or earnings of said
corporation.
Section 160. Place of Payment. The community tax shall be
paid in the place of residence of the individual, or in the place
where the principal office of the juridical entity is located.
Section 161. Time for Payment; Penalties for Delinquency.
(a) The community tax shall accrue on the first (1st) day
of January of each year which shall be paid not later
than the last day of February of each year.
• If a person reaches the age of eighteen (18)
years or otherwise loses the benefit of
exemption on or before the last day of June, he
shall be liable for the community tax on the
day he reaches such age or upon the day the
exemption ends.
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ad majorem dei gloriam
• However, if a person reaches the age of
eighteen (18) years or loses the benefit of
exemption on or before the last day of March,
he shall have twenty (20) days to pay the
community tax without becoming delinquent.
Persons who come to reside in the Philippines or reach
the age of eighteen (18) years on or after the first (1st)
day of July of any year, or who cease to belong to an
exempt class or after the same date, shall not be subject
to the community tax for that year.
(b) Corporations established and organized on or before
the last day of June shall be liable for the community
tax for that year. But corporations established and
organized on or before the last day of March shall have
twenty (20) days within which to pay the community
tax without becoming delinquent. Corporations
established and organized on or after the first day of
July shall not be subject to the community tax for that
year.
24% p.a. simple interest. If the tax is not paid within the time
prescribed above, there shall be added to the unpaid amount an
interest of twenty-four percent (24%) per annum from the due
date until it is paid.
Section 162. Community Tax Certificate. A community tax
certificate shall be issued
(1) to every person or corporation upon payment of the
community tax.
(2) A community tax certificate may also be issued to any
person or corporation not subject to the community
tax upon payment of One peso (P1.00).
Section 163. Presentation of Community Tax Certificate On
Certain Occasions.
(a) When an individual subject to the community tax
a. acknowledges any document before a notary
public,
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TAXATION LAW
b. takes the oath of office upon election or
appointment to any position in the government
service;
c. receives any license, certificate. or permit from
any public authority;
d. pays any tax or free;
e. receives any money from any public fund;
f. transacts other official business; or
g. receives any salary or wage
from any person or corporation with whom such
transaction is made or business done or from whom any
salary or wage is received to require such individual to
exhibit the community tax certificate.
The presentation of community tax certificate shall not
be required in connection with the registration of a
voter.
(b) When, through its authorized officers, any corporation
subject to the community tax receives any license,
certificate, or permit from any public authority, pays
any tax or fee, receives money from public funds, or
transacts other official business, it shall be the duty of
the public official with whom such transaction is made
or business done, to require such corporation to exhibit
the community tax certificate.
(c) For Jan – Apr 15, last year CTC enough. The
community tax certificate required in the two
preceding paragraphs shall be the one issued for the
current year, except for the period from January until
the fifteenth (15th) of April each year, in which case,
the certificate issued for the preceding year shall
suffice.
CORPORATE INCOME TAX
Tax on domestic corporations
30% regular corporate income tax
Section 27(A)
JO VALLES
INTRODUCTION TO INCOME TAX
Rates of income tax on domestic corporations; 30% RCIT
on taxable income worldwide. Except as otherwise provided
in this Code, an income tax of thirty-five percent (35%) is
hereby imposed upon the taxable income derived during each
taxable year from all sources within and without the Philippines
by every corporation, as defined in Section 22(B) of this Code
and taxable under this Title as a corporation, organized in, or
existing under the laws of the Philippines:
• Effective January 1, 2009, the rate of income tax shall
be thirty percent (30%). RA 9337
ad majorem dei gloriam TAXATION LAW
2. A ratio of forty percent (40%) of income tax collection new rates within the fiscal year by the taxable income of the
to total tax revenues; corporation for the period, divided by twelve.
3. A VAT tax effort of four percent (4%) of GNP; and
4. A 0.9 percent (0.9%) ratio of the Consolidated Public 15% gross income tax
Sector Financial Position (CPSFP) to GNP. Section 28(A)(1)
Election is irrevocable for 3 years. The election of the gross Same discussion and conditions for domestic corporations.
income tax option by the corporation shall be irrevocable for
three (3) consecutive taxable years during which the 2% MCIT
corporation is qualified under the scheme. Section 28(A)(2)

Fiscal year accounting; transactions deemed to have evenly 2% MCIT Special rule on international carriers
occurred. In the case of corporations adopting the fiscal-year Section 27(E) Section 28(A)(3)
accounting period, the taxable income shall be computed See discussion under special rules
without regard to the specific date when specific sales, International carrier doing business in the PH; 2.5% on
purchases and other transactions occur. Tax on resident foreign corporations gross PH billings. An international carrier doing business in
• Their income and expenses for the fiscal year shall be the Philippines shall pay a tax of two and one-half percent (2
deemed to have been earned and spent equally for each 30% Regular corporate income tax 1/2%) on its Gross Philippine Billings.
month of the period. Section 28(A)
A minimum corporate income tax of two percent (2%) of gross
The corporate income tax rates shall be applied on the amount Rates of income tax on RFC; 30% RCIT on taxable income income, as prescribed under Section 27(E) of this Code, shall
computed by multiplying the number of months covered by the within. Except as otherwise provided in this Code, a be imposed, under the same conditions, on a resident foreign,
new rates within the fiscal year by the taxable income of the corporation organized, authorized, or existing under the laws of corporation taxable under, paragraph (1) of this Subsection.
corporation for the period, divided by twelve any foreign country, engaged in trade or business within the
Philippines, shall be subject to an income tax equivalent to See discussion under special rules.
15% gross income option thirty-five percent (35%) of the taxable income derived in the
Section 27(A) preceding taxable year from all sources within the Philippines: International air carrier International shipping
Provided, Refers to the amount of gross Gross revenue whether for:
Provided, however, That a resident foreign corporation shall be • That effective January 1, 2009, the rate of income tax revenue derived from 1. passenger,
granted the option to be taxed at fifteen percent (15%) on gross shall be thirty percent (30%). carriage of: 2. cargo or
income under the same conditions, as provided in Section 27 1. persons, 3. mail
Fiscal year accounting; transactions deemed to have evenly 2. excess baggage, originating from the
(A).
occurred. In the case of corporations adopting the fiscal-year 3. cargo and Philippines up to final
accounting period, the taxable income shall be computed 4. mail destination, regardless of:
To whom option available. The option to be taxed based on without regard to the specific date when specific sales,
gross income shall be available only to firms whose ratio of cost originating from the 1. the place of sale or
purchases and other transactions occur. Philippines in a continuous 2. payments
of sales to gross sales or receipts from all sources does not
• Their income and expenses for the fiscal year shall be and uninterrupted flight, of the passage or freight
exceed fifty-five percent (55%).
deemed to have been earned and spent equally for each irrespective of: documents.
month of the period. 1. the place of sale or
Requisites. In addition, the option to be taxed at 15% of gross
income is available when the following conditions are satisfied: issue and
The corporate income tax rates shall be applied on the amount 2. the place of payment
1. A tax effort ratio of twenty percent (20%) of Gross
computed by multiplying the number of months covered by the
National Product (GNP);

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INTRODUCTION TO INCOME TAX ad majorem dei gloriam TAXATION LAW
of the ticket or passage Income derived by offshore banking units from Exempt companies and which
document foreign currency transactions with: headquarters do not earn or
1. non-residents derive income from the
Revalidated tickets. Tickets 2. OBUs in the PH Philippines and which act as:
revalidated, exchanged 3. Local commercial banks including 1. supervisory,
and/or indorsed to another branches of foreign banks authorized 2. communications and
international airline form by the BSP to transact business with 3. coordinating center
part of the Gross Philippine OBUs for their affiliates,
Billings if the passenger Interest income from foreign currency loans 10% subsidiaries, or branches in
boards a plane in a port or granted by OBUs to residents other than OBUs the Asia-Pacific Region and
point in the Philippines or other depository banks authorized to other foreign markets.
transact business with OBUs Section 22(DD)
Transshipment of Any income of nonresidents, whether Exempt ROHQs. Regional operating 10% of taxable income.
passengers; use aliquot individuals or corporations, from transactions headquarters shall mean a Section 28(A)(6)
portion. For a flight which with said offshore banking units shall be branch established in the
originates from the exempt from income tax Philippines by multinational
Philippines, but companies which are
transshipment of passenger Tax on branch profit remittances engaged in any of the
takes place at any port Section 28(A)(5) following services:
outside the Philippines on 1. general
another airline, only the 15% BPRT on profit earmarked for remittance; no administration and
aliquot portion of the cost of deduction of tax component. Any profit remitted by a branch planning;
the ticket corresponding to to its head office shall be subject to a tax of fifteen (15%) which 2. business planning
the leg flown from the shall be based on the total profits applied or earmarked for and coordination;
Philippines to the point of remittance without any deduction for the tax component thereof 3. sourcing and
transshipment shall form • except those activities which are registered with the procurement of raw
part of Gross Philippine Philippine Economic Zone Authority materials and
Billings. • Tax base is profit earmarked, not profit actually components;
remitted. Tax base is profit earmarked for remittance 4. corporate finance
Income derived by OBUs and not profit actually remitted abroad. This is the 5. advisory services;
Section 28(A)(4), as amended by RA 9294; RR 14-2012 amount applied for by the branch with the Central Bank 6. marketing control
as profit to be remitted abroad. Compania General de and sales promotion;
Offshore banking unit (OBU). This is a branch of a foreign Tabacos de Filipinas v CIR 7. training and
bank which is authorized by the BSP to transact offshore personnel
banking business in the PH. Special rules on RAHQs or ROHQs management;
Section 28(A)(6) 8. logistic services;
Foreign currency deposit unit. This is a department of a local 9. research and
bank or in an existing local branch of a foreign bank which is Definitions Rates development
authorized by the BSP to operate under the foreign currency RAHQs. Regional or area Not subject to income tax. services and product
deposit system. headquarters shall mean a Section 28(A)(6) development;
branch established in the 10. technical support
Income received by OBUs Tax Rate Philippines by multinational and maintenance;

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INTRODUCTION TO INCOME TAX ad majorem dei gloriam TAXATION LAW
11. data processing and with depository banks under the expanded 7. emoluments or other fixed or determinable annual,
communications; system shall be exempt from income tax. periodic or casual gains, profits and income, and
and 8. capital gains, except capital gains subject to tax under
12. business Capital gains tax subparagraph 5(c) [pertaining to sale of untraded
development. Section 28(A)(7)(c) shares]
Section 22(EE) Effective January 1, 2009, the rate of income tax shall be thirty
Tax rate on capital gains percent (30%).
Final tax on certain passive income On sale of shares of stock of a 5% of NCG not over
Section 28(A)(7)(a); Section 28(A)(7)(d); domestic corporation NOT traded 100, 000 Discussion. Reason behind not allowing NRFCs to claim
RR 10-1998; RR 14-2012 through a LSE and held as capital deductions from their gross income. By the very nature of
asset 10% in excess of 100k deductible expenses, these are expenses directly connected to
Passive income received by RFC Tax Rate the conduct of business in the PH. Since NRFCs do not conduct
Interest on currency bank deposit and yield or 20% On sale of real property in the PH No provision for business in the PH, they are not allowed to deduct such
any other monetary benefit from deposit capital gains for sale of expenses.
substitutes and from trust funds and similar realty.
arrangements Special non-resident foreign corporations
Royalties of all types within the PH 20% Hence, subject to RCIT Section 28(B)(2)-(4)
• Royalties from outside sources: not
taxable. RFC taxable only on income Intercorporate dividends Nonresident cinematographic 25% of gross income from
within Section 28(A)(7)(d) film owner, lessor or all sources within the PH
Interest received by RFC under the expanded 15% distributor.
foreign currency deposit system Dividends received by a resident foreign corporation from a Nonresident owner or lessor 4.5% of gross rentals, lease
Dividends from a domestic corporation Exempt domestic corporation liable to tax under this Code shall not be of vessels chartered by PH or charter fees from leases
subject to tax under this Title. nationals. or charters to Filipino
Income of banks under the expanded FCD system citizens or corporations, as
Section 28(A)(7)(b), as amended by RA 9294 Tax on non-resident foreign corporation approved by the Maritime
Industry Authority.
Income received by BANKS under EFCD Tax Rate In general Nonresident owner or lessor 7.5% of gross rentals or
Income derived by a depositary bank from Exempt Section 28(B)(1) of aircraft, machineries and fees.
foreign currency transactions with: other equipment.
NRFC subject to 30% tax on gross income within. Except as
1. non-residents
otherwise provided in this Code, a foreign corporation not Tax on certain incomes received by a nonresident foreign
2. OBUs in the PH
engaged in trade or business in the Philippines shall pay a tax corporation
3. Local commercial banks including
branches of foreign banks authorized equal to thirty-five percent (35%) of the gross income received Section 28(B)(5)
during each taxable year from all sources within the
by the BSP to transact business with
Philippines, such as: These are the items not included in the bucket known as the
foreign currency
1. interests, gross income of NRFCs.
Interest income from foreign currency loans 10%
2. dividends,
granted by a bank to residents other than OBUs
3. rents, Interest on foreign loans (NRFC lends 20%
or other depository banks under the expanded
4. royalties, to DC)
system
5. salaries, premiums (except reinsurance premiums), Intercorporate dividends (dividends 15%
Any income of nonresidents, whether Exempt
6. annuities, from DC)
individuals or corporations, from transactions

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INTRODUCTION TO INCOME TAX ad majorem dei gloriam
• This is subject to the condition Requirement to be entitled to the lower rate. The
that the country in which the reduced rate is applicable if the domicile of the NRFC
NRFC is domiciled allows a shall allow a tax credit to the NRFC for taxes deemed paid
credit against the tax due from in the PH.
the NRFC taxes deemed to
have been paid in the PH
Minimum amount of tax credit. The tax credit for taxes
equivalent to 15%.
deemed paid in the PH must, as a minimum, reach an
• If they don’t, the dividends will
be taxed at 30% of gross
amount equivalent to the difference between:
income. 1. Regular dividend tax rate of 30% and
Capital gains from sale of untraded 5% of NCG not 2. The preferred 15% dividend tax rate
shares exceeding 100k; In short, the difference must at least amount to 15%, the
10% in excess tax waived by the PH government. CIR v Procter &
thereof Gamble
On sale of real property in the PH No provision for
capital gains for Automatic 15% preferential rate if domicile of NRFC
sale of realty.
does not impose tax on foreign dividends. When the
domicile of the non-resident foreign corporation does not
Hence, subject to impose any tax on dividends received from foreign
RCIT of 30% of
sources, the preferential rate of 15% on intercorporate
gross income
dividends will apply. BIR DA-145-07
Discussion. Interest on foreign loans. To come under the
purview of the provision, the interest income must fall in the Case; foreign corporation. P1/P2 and P3/P4 are wholly-
hands of the NRFC. Otherwise stated, the lender must be the owned subsidiaries of P-Four, Inc and C.I.L, Ltd. Both P-Four
NRFC. [domestic] and CIL [NRFC] are owned by ATI-US
[Pennsylvania]. ATI-US entered into an agreement with its
Discussion. When a NRFC sells real property in the PH, the affiliates to provide mechanisms for the sharing of research and
gain is subject to tax. Just because a NRFC is subject to tax on development costs. Said costs (the R&D program would be
its gross income does not mean that the gross selling price (and predominantly performed in the US) would be reimbursed by
not the gain) of the real property is taxed. What is removed the participants in proportion to derived benefits. ATI-US will
from NRFCs is the benefit of claiming deductions under undertake R&D activities for the development of technology,
Section 34, and not the benefit of deducting the cost or basis of for which the affiliates will retain all economic benefits and
the property sold. Hence, when a NRFC sells real property in legal title. In light of such, there is a request for a ruling that (1)
the PH, the tax base is the gain derived therefrom. the cost-sharing payments are not considered as royalties and
(2) such payments, being mere reimbursements, are not subject
Intercorporate dividends to withholding tax. RP-US tax treaty defines royalties as
payments of any kind received as consideration for the use of
2 tax rates: any copyright, patent, trademark, or the like. This includes
1. 30% tax on gross income payment of any kind received as consideration for
2. 15% tax on dividends received information concerning industrial, commercial, or scientific
experience. Such includes “know-how”; in a know-how
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contract, one of the parties agrees to impart to the other his
special knowledge and experience. This is different from
contracts for service. In this case, no transfer of technology or
know-how will take place, but rather a development
thereof, with corresponding rights or interest being retained by
all participants in the venture. Thus, the cost-sharing agreement
cannot be considered royalties under the treaty. As the R&D
activities are to be performed predominantly within the United
States, the tax treaty finds no application. Hence, this case is
governed by Section 28(B)(1) in relation to Section 42(A)(3) of
the NIRC. Under said provisions, a nonresident foreign
corporation is taxable only on income derived from sources
within the Philippines. Considering that the services of ATI-US
to P1/P2 and P3/P4 are rendered outside the Philippines, the
payments are considered income derived from sources outside
the Philippines. Hence, such are not subject to Philippine
income tax and consequently to withholding tax. ITAD Ruling
No. 086-05
Special rules: MCIT
Computation of MCIT
Section 27(E)(1); Section 28(A)(2)
MCIT for domestic corporation is 2% of GI; start at 4th yr
from commencement. A minimum corporate income tax of
two percent (2%) of the gross income as of the end of the
taxable year, as defined herein, is hereby imposed on a
corporation taxable under this Title, beginning on the fourth
taxable year immediately following the year in which such
corporation commenced its business operations, when the
minimum income tax is greater than the tax computed under
Subsection (A) of this Section for the taxable year. Section
27(E)(1)
Same rules for DC and RFC. A minimum corporate income
tax of two percent (2%) of gross income, as prescribed under
Section 27 (E) of this Code, shall be imposed, under the same
conditions, on a resident foreign corporation taxable under
paragraph (1) of this Subsection. Section 28(A)(2)
JO VALLES
INTRODUCTION TO INCOME TAX
Domestic corporation (2%) of the gross income as
of the end of the taxable year
Foreign corporation (2%) of the gross income as
of the end of the taxable year
Non-resident foreign corp N/A
When imposed; 4th taxable year if MCIT > RCIT. Imposed
beginning on the fourth taxable year immediately following the
year in which such corporation commenced its business
operations, when the minimum income tax is greater than the
regular corporate income tax payable
• MCIT imposed when zero or negative taxable
income; MCIT > RCIT. The MCIT shall be imposed
whenever such corporation has zero or negative taxable
income or whenever the amount of minimum-
corporate income tax is greater than the normal income
tax due from such corporation. RR 9-98, Section 2.27
(E)
• MCIT applies to activities covered by regular
income tax system. In the case of a domestic
corporation whose operations or activities are partly
covered by the regular income tax system and partly
covered under a special income tax system, the MCIT
shall apply on operations covered by the regular
income tax system. For example, if a BOI-registered
enterprise has a "registered" and an "unregistered"
activity, the MCIT shall apply to the unregistered
activity. RR 9-98, Section 2.27 (E)(1)
• Commencement of business operations. 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. RR 9-98, Section 2.27 (E)(5)
• Commencement of operations of thrift banks is
later between SEC registration or authority by
BSP. Manila Banking was registered with the BIR in
1961. In 1987, it was found insolvent by the BSP and
was placed under receivership. After 12 years, or on
June 23, 1999, the BSP authorized it to operate as a
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ad majorem dei gloriam
thrift bank. In 1999, it registered with the BIR and filed
its Articles in SEC. It also paid MCIT. It later asked
BIR if it was entitled to the 4year grace period for the
payment of MCTIT. BIR said yes, so it filed a request
for refund, which was denied by CTA. Revenue
Regulations No. 9-98, implementing R.A. No. 8424
imposing the minimum corporate income tax on
corporations, provides that for purposes of this tax, the
date when business operations commence is the year in
which the domestic corporation registered with the
BIR. However, under Revenue Regulations No. 4- 95
implementing the Thrift Banks Act, the date of
commencement of operations of thrift banks, such as
herein petitioner, is the date the particular thrift bank
was registered with the SEC or the date when the
Certi􏰀cate of Authority to Operate was issued to it by
the Monetary Board of the BSP, whichever comes
later. Clearly then, Revenue Regulations No. 4-95, not
Revenue Regulations No. 9-98, applies to petitioner,
being a thrift bank. It is, therefore, entitled to a grace
period of four (4) years counted from June 23, 1999
when it was authorized by the BSP to operate as a thrift
bank. Consequently, it should only pay its minimum
corporate income tax after four (4) years from 1999.
Manila Banking Corporation vs CIR
Global Brands Company, Inc. (GBCI) was incorporated on
June 26, 2000 and registered with the BIR on July 21, 2000. Its
fiscal years ends March 31 of each year, and accordingly, the
first taxable year when it was registered with BIR is fiscal year
ending March 31, 2001. In connection, it is requesting
confirmation of the opinion that it is not subject to 2% MCIT
for taxable year ending March 31, 2004, but will only be subject
to such for fiscal year ending March 31, 2005, because such is
the fourth taxable year immediately following its fiscal year of
registration which ended on March 31, 2001. 2% MCIT is
imposed beginning on the 4th taxable year immediately
following the year in which such corporation commenced its
business operations. Such four-year period is counted after the
end of the taxable year of the commencement of the
corporation’s business operations. For purposes of MCIT, the
taxable year in which business operations commenced shall be
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TAXATION LAW
the taxable year in which it registered with the BIR.
Accordingly, the BIR confirms the opinion that GBCI is not
subject to MCIT for taxable year ended March 31, 2004 as this
is the 3rd taxable year following its BIR registration (in fiscal
year ended March 31, 2001). However, GBCI will be subject
to MCIT effective the following fiscal year (ending March 31,
2005) because it is the 4th taxable year immediately following
its fiscal year of registration with the BIR. BIR Ruling No DA-
445-05
MCIT computed and paid quarterly; excess MCIT from
previous years not deductible in quarterly computation;
quarterly excess MCIT deductible. xxx the computation and
the payment of MCIT, shall likewise apply at the time of filing
the quarterly corporate income tax xxx. In the payment of said
quarterly MCIT, excess MCIT from the previous taxable year/s
shall not be allowed to be credited.
Deductible amounts from quarterly MCIT due.
1. Expanded withholding tax,
2. quarterly corporate income tax payments under the
normal income tax, and the
3. MCIT paid in the previous taxable quarter/s
are allowed to be applied against the quarterly MCIT due. RR
9-98, Section 2.27(E), as amended by RR No. 12-2007
Carry forward of excess minimum tax
Section 27(E)(2)
3 immediately succeeding years. Any excess of the minimum
corporate income tax over the normal income tax as computed
under Subsection (A) of this Section shall be carried forward
and credited against the normal income tax for the three (3)
immediately succeeding taxable years.
Example
RCIT MCIT Excess MCIT
2019 50, 000 75, 000 25, 000
2020 60, 000 100, 000 40, 000
2021 100, 000 60, 000 n/a
JO VALLES
INTRODUCTION TO INCOME TAX ad majorem dei gloriam TAXATION LAW
Grounds. The Secretary of Finance is hereby authorized to Less: Less:
Computation of 2019 tax payable: suspend the imposition of the minimum corporate income tax a. Sales returns a. Sales returns
Amount of tax (MCIT > RCIT) 75, 000 on any corporation which suffers losses on account of: b. Sales discounts b. Sales discounts
1. prolonged labor dispute, or c. Sales allowances c. Sales allowances
Computation of 2021 tax payable: 2. force majeure, or d. Cost of goods sold d. Cost of services
Amount of tax (MCIT > RCIT) 100, 000 3. legitimate business reverses. Cost of goods sold Cost of services
COGS. All business COS. All direct costs and
Computation of 2021 tax payable: DOF secretary makes the rules. The Secretary of Finance is expenses directly incurred toexpenses necessarily
Amount of tax (RCIT > MCIT) 100, 000 hereby authorized to promulgate, upon recommendation of the produce the merchandise to incurred to provide services
Less: Commissioner, the necessary rules and regulation that shall bring them to their present required by the customers
2019 excess (2nd year carry-over) 25, 000 define the terms and conditions under which he may suspend location and use. and clients including:
2020 excess (1st year carry-over) 40, 000 the imposition of the minimum corporate income tax in a a. salaries and
Net Amount Payable 35, 000 meritorious case. Trading or merchandising employee benefits of
a. Invoice of cost of those directly
Note. Excess MCIT can be carried over to the immediately Substantial losses because of prolonged labor dispute. goods sold rendering the service
succeeding 3 years only. This is true even if in the intervening Losses arising from a strike staged by the employees which b. Import duties b. cost of facilities
year, the corporation pays RCIT. Example, the 2019 excess lasted for more than six (6) months within a taxable period and c. Freight in directly utilized in
MCIT can be carried over only until 2022 even if in 2021, the which has caused the temporary shutdown of business transporting the providing the
corporation is liable to pay RCIT. Likewise, the 2020 excess operations. RR 9-98, Section 2.27 (E)(4)(b) goods to the place service
MCIT can be carried over only until 2023. RR 9-98, Section where the goods are
2.27 (E)(1) Force majeure. A cause due to an irresistible force as by Act sold Banks. In the case of banks,
of God like lightning, earthquake, storm, flood and the like. d. Insurance while cost of services shall include
Accounting treatment of excess MCIT This term shall also include armed conflicts like war or goods are in transit interest expense.
RR 9-98, Section 2.27 (E)(7) insurgency. RR 9-98, Section 2.27 (E)(4)(c)
Manufacturing
To record income tax liability using normal income tax rate Legitimate business reverses. This shall include substantial All costs of production of
Provision for income tax xxx losses sustained due to fire, robbery, theft or embezzlement, or finished goods, such as:
Income tax payable xxx for other economic reason as determined by the Secretary of a. raw materials used,
Finance. RR 9-98, Section 2.27 (E)(4)(d) b. direct labor
To record excess MCIT c. manufacturing
Deferred charges- MCIT xxx Gross income for MCIT Purposes overhead,
Income tax payable xxx Section 27(E)(4) d. freight cost,
e. insurance premiums
To record payment of income tax due Tax base of the MCIT; gross income. For purposes of f. other costs incurred
Income tax payable xxx applying the MCIT, the term gross income shall mean gross to bring the raw
Deferred charges- MCIT xxx sales less sales returns, discounts and allowances and cost of materials to the
Cash xxx goods sold. factory or
warehouse.
Relief from the minimum corporate income tax under certain Gross income Section 27(A); Section 27(E)(4) RR 16-
conditions 2008 Exempt entities
Section 27(E)(3) Trading or merchandise Service concern Domestic corporations
Gross sales Gross receipts RR 9-98, Section 2.27 (E)(8)

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INTRODUCTION TO INCOME TAX
Applied only to domestic corporations subject to the
normal corporate income tax. The minimum corporate
income tax (MCIT) shall apply only to domestic corporations
subject to the normal corporate income tax prescribed under
these Regulations.
Entities not subject to MCIT. Accordingly, the minimum
corporate income tax shall not be imposed upon any of the
following
a. Private schools. Domestic corporations operating as
proprietary educational institutions subject to tax at ten
percent (10%) on their taxable income;
b. Non-profit hospitals. Domestic corporations engaged
in hospital operations which are nonprofit subject to
tax at ten percent (10%) on their taxable income; and
c. FCDUs. 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 banks, authorized by the
Bangko Sentral ng Pilipinas (BSP) to transact business
with 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 RA 7916 and
7227 (the PEZA law and the Bases Conversion
Development Act, respectively).
Resident foreign corporations
RR 9-98, Section 2.28(A)(2)
Applied only to RFCs subject to the normal corporate
income tax. The minimum corporate income tax shall only
apply to resident foreign corporations which are subject to
normal income tax.
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Section 6. Chapter III of the same Code is hereby amended and
RFCs not subject to MCIT. Accordingly, the minimum designated as Chapter IV. Articles 63, 64, 65, 66 and 67 are
corporate income tax shall not apply to the following resident hereby amended to read as follows:
foreign corporations
a. International carriers. Resident foreign corporations CHAPTER IV
engaged in business as "international carrier" subject to
tax at two and one-half percent (2 ½%) of their "Gross INCENTIVES TO REGIONAL OR AREA
Philippine Billings HEADQUARTERS AND REGIONAL OPERATING
b. OBUs. Resident foreign corporations engaged in HEADQUARTERS
business as Offshore Banking Units (OBUs) on their
income from foreign currency transactions with local Article 64. Corporate Income Tax Incentive to Regional or
commercial banks, including branches of foreign Area Headquarters and Regional Operating Headquarters.
banks, authorized by the Bangko Sentral ng Pilipinas RAHQs exempt; ROHQ 10% of taxable income. Regional
(BSP) to transact business with Offshore Banking or area headquarters established in the Philippines by
Units (OBUs), including interest income from foreign multinational companies and which headquarters do not earn or
currency loans granted to residents of the Philippines, derive income from the Philippines and which act as
subject to a final income tax at ten percent (10%) of supervisory, communications and coordinating centers for their
such income; and affiliates, subsidiaries, or branches in the Asia-Pacific Region
c. ROHQs. Resident foreign corporations engaged in and other foreign markets shall not be subject to income tax.
business as regional operating headquarters subject to Regional operating headquarters shall be subject to a tax rate of
tax at ten percent (10%) of their taxable income. ten percent (10%) of their taxable income as provided for under
d. Firms that are taxed under a special income tax the National Internal Revenue Code, as amended by Republic
regime such as those in accordance with RA 7916 and Act No.
7227 (the PEZA law and the Bases Conversion
Development Act, respectively). Income derived in PH by ROHQ and remitted to parent
subject to BPRT. Provided, That any income derived from
Special rules: RAHQs and ROHQs Philippine sources by the ROHQ when remitted to the parent
company shall be subject to the tax on branch profit remittances
RAHQ ROHQ as provided for in Section 28(a)(5) of the National Internal
Income tax Exempt 10% taxable income Revenue Code.
VAT Exempt 10% VAT
Local taxes Exempt Exempt Article 65. VAT; RAHQs exempt but sale or lease to them
Import taxes of Exempt Exempt is 0% VAT. The regional or area headquarters established in
materials and eq* the Philippines by multinational companies shall be exempted
Importation of MV Pay import fees from the value-added tax.
*subject to conditions • In addition, the sale or lease of goods and property and
the rendition of services to regional or area
Section 6, RA 8756 headquarters shall be subject to zero percent (0%) VAT
rate as provided for in the National Internal Revenue
Code, as amended.
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INTRODUCTION TO INCOME TAX
ROHQ subject to 10% VAT. Regional operating
headquarters shall be subject to the ten percent (10%) value-
added tax as provided for under the National Internal Revenue
Code, as amended.
Article 66. Exemption From All Kinds of Local Taxes, Fees,
or Charges; both exempt. The regional or area headquarters
and regional operating headquarters of multinational
companies shall be exempt from all kinds of local taxes, fees,
or charges imposed by a local government unit except real
property tax on land improvements and equipment.
Article 67. Tax and Duty Free Importation of Training
Materials and Equipment. Regional or area headquarters and
regional operating headquarters shall enjoy tax and duty free
importation of equipment and materials for training and
conferences
1. which are needed and used solely for their functions as
regional or area headquarters or regional operating
headquarters and
2. which are not locally available subject to the prior
approval of the Board of Investments.
Sale within 2 years requires approval. The sale or
disposition of equipment within two (2) years after importation,
entered tax and duty free, shall require
1. prior approval of the Board of Investments and
2. prior payment of applicable taxes and duties waived in
favor of RHQ/ROHQ.
Importation of Motor Vehicles; pay import duties. Regional
or area headquarters and regional operating headquarters shall
be entitled to the importation of new motor vehicles subject to
the payment of the corresponding taxes and duties.
Section 28(6), NIRC
(6) Regional or Area Headquarters and Regional Operating
Headquarters of Multinational Companies.
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ad majorem dei gloriam
a. Regional or area headquarters as defined in Section
22(DD) shall not be subject to income tax.
b. Regional operating headquarters as defined in Section
22(EE) shall pay a tax of ten percent (10%) of their
taxable income.
Special rules: insurance companies
Special deduction allowed to insurance companies
Section 37(A)
In the case of insurance companies, whether domestic or
foreign doing business in the Philippines, the following may be
deducted from their gross income:
1. the net additions, if any, required by law to be made
within the year to reserve funds and
2. the sums other than dividends paid within the year on
policy and annuity contracts
Condition. The released reserve shall be treated as income for
the year of release.
Mutual insurance companies
Section 37(B)
In the case of mutual fire and mutual employers' liability and
mutual workmen's compensation and mutual casualty
insurance companies requiring their members to make
premium deposits to provide for losses and expenses, said
companies shall not return as income any portion of the
premium deposits returned to their policyholders, but shall
return as taxable income
1. all income received by them from all other sources plus
2. such portion of the premium deposits as are retained by
the companies for purposes other than the payment of
losses and expenses and reinsurance reserves.
Mutual marine insurance companies
Section 37(C)
Mutual marine insurance companies shall include in their
return of gross income, gross premiums collected and received
Last Edit: 23 December 2020
TAXATION LAW
by them less amounts paid to policyholders on account of
premiums previously paid by them and interest paid upon those
amounts between the ascertainment and payment thereof.
Computation:
+ gross premiums collected and received
- amounts paid to policyholders on account of premiums paid
- interest paid to policyholders on account of premiums paid
Assessment insurance companies
Section 37(D)
Deduct additions to guarantee or reserve funds. Assessment
insurance companies, whether domestic or foreign, may deduct
from their gross income the actual deposit of sums with the
officers of the Government of the Philippines pursuant to law,
as additions to guarantee or reserve funds.
Special rules: BOI and PEZA
Article 39 (a), Omnibus Investment Code
Incentives to Registered Enterprises. All registered
enterprises shall be granted the following incentives to the
extent engaged in a preferred area of investment:
(a) Income Tax Holiday.
1. For six (6) years from commercial operation for
pioneer firms and four (4) years for non- pioneer firms,
new registered firms shall be fully exempt from
income taxes levied by the national government.
Subject to such guidelines as may be prescribed by the
Board, the income tax exemption will be extended for
another year in each of the following cases:
a. The project meets the prescribed ratio of
capital equipment to number of workers set by
the Board;
b. Utilization of indigenous raw materials at rates
set by the Board;
c. The net foreign exchange savings or earnings
amount to at least US$500,000 annually during
the first three (3) years of operation.
JO VALLES
INTRODUCTION TO INCOME TAX
8 years max. The preceding paragraph notwithstanding, no
registered pioneer firm may avail of this incentive for a period
exceeding eight (8) years.
3. For a period of three (3) years from commercial
operation, registered expanding firms shall be
entitled to an exemption from income taxes levied by
the national government proportionate to their
expansion under such terms and conditions as the
Board may determine: Provided, however, That during
the period within which this incentive is availed of by
the expanding firm it shall not be entitled to additional
deduction for incremental labor expense.
4. The provision of Article 7(14) notwithstanding,
registered firms shall not be entitled to any extension
of this incentive.
Section 24, RA 7916
Exemption from National and Local Taxes. Except for real
property taxes on land owned by developers, no taxes, local and
national, shall be imposed on business establishments operating
within the ECOZONE.
No local/national tax in ECOZONES; 5% of GI; 3 to NG, 2
to LG. In lieu thereof, five percent (5%) of the gross income
earned by all business enterprises within the ECOZONE shall
be paid and remitted as follows:
a. Three percent (3%) to the National Government;
b. Two percent (2%) which shall be directly remitted by
the business establishments to the treasurer’s office of
the municipality or city where the enterprise is located.
CAPITAL GAINS TAX
Concept of capital asset
Section 39(A)(1)
Capital assets. The term capital assets means property held by
the taxpayer (whether or not connected with his trade or
business), but does not include:
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ad majorem dei gloriam
1. stock in trade of the taxpayer or
2. other 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
3. property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or
business, or
4. property used in the trade or business, of a character
which is subject to the allowance for depreciation
provided in Subsection (F) of Section 34; or
5. real property used in trade or business of the taxpayer.
Capital asset if not included in the enumeration. The term
capital asset includes all classes of property not specifically
excluded by Section 39(a). Section 132, RR 2
Depreciable property used in business. The exclusion from
the term capital assets of property used in the trade or business
of a taxpayer of a character which is subject to the allowance
for depreciation provided in Section 30(f) of the Code is limited
to property used by the taxpayer in the trade or business at the
time of the sale or exchange.
• Not applicable to g/l in sale of land; but applicable
to land improvements. It has no application to gains
or losses arising from the sale of real property used in
the trade or business to the extent that such gain or loss
is allocable to the land, as distinguished from
depreciable improvements upon the land. Section 132,
RR 2
Subsequent reclassification. A property initially classified as
a capital asset may thereafter be treated as an ordinary asset if
a combination of the factors indubitably tend to show that the
activity was in furtherance of or in the course of the taxpayer's
trade or business. Calasanz v. Commissioner of Internal
Revenue
Inherited property generally a capital asset unless shown
otherwise by existing circumstances. Thus, a sale of inherited
real property usually gives capital gain or loss even though the
property has to be subdivided or improved or both to make it
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TAXATION LAW
salable. However, if the inherited property is substantially
improved or very actively sold or both it may be treated as held
primarily for sale to customers in the ordinary course of the
heir's business. Calasanz v. Commissioner of Internal Revenue
Equity investment is a capital asset. An equity investment is
a capital, not ordinary, asset of the investor the sale or
exchange of which results in either a capital gain or a capital
loss. Shares of stock will be ordinary only to a dealer in
securities. In the hands, however, of another, who holds the
shares of stock by way of an investment, the shares would be
capital assets. Thus, when the shares become worthless, the loss
is a loss from the sale of capital assets. China Banking Corp. v.
Court of Appeals
Real property held by real estate dealer is ordinary asset.
Spencers Landholdings, Inc. is a VAT registered taxpayer. The
company has not started commercial operations from the time
of its incorporation.It held real property but the same was not
actually used in business and became idle. It then sold said real
property to De La Salle Medical and Health Sciences Institute,
a non-stock non-profit institution duly registered with CHED.
An inquiry is made as to the classification of the property
(capital or ordinary) and the tax treatment of the gains arising
from the sale. BIR said that the real property is ordinary asset
subject to VAT and corresponding CWT and ordinary income
tax rates. The Articles of Incorporation as well as Audited
Financial Statements of Spencers show that it is engaged in the
business of real estate. As such, real properties held by it are
ordinary assets. BIR Ruling No 1451-18, December 21, 2018
Real property of real estate developers are ordinary assets.
All real properties owned or acquired by a taxpayer engaged in
the business of real estate development are classified as
ordinary assets. In this case, the debtors are all property
developers, which makes their owned or acquired real
properties as ordinary assets. Thus, their transfer of lands by
way of dacion in pago to satisfy their indebtedness in favor of
their creditor SHFC is not subject to Capital Gains Tax. The
transfer, however, is subject to the regular income tax rate, as
well as VAT and DST. BIR Ruling No. 1129-18, August 22,
2018
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INTRODUCTION TO INCOME TAX
Real property of NRFC is capital asset if not used in
business. Arquitectonica, a corporation organized under the
laws of Florida, operates RHQs in the PH. It does not derive
any income from sources within the PH. It later acquired 5
condominium units in BGC to be used as temporary lodging for
its visiting architects. It intends to dispose of said units and is
inquiring as to the tax treatment of the gains arising from the
sale. BIR said that as a NRFC, it shall be subject to 35% tax on
its gross income from all sources, except capital gains. Under
Section 2.57(I)(1) of RR 2-98, gross income from the sale of
real property is the gain derived from the said sale and not the
selling price thereof. As such, only the gain from the sale of the
units shall be subject to 35% FWT. Since the units were
acquired primarily for the purpose of housing its visiting
architects and are not for sale/lease in the ordinary course of its
trade or business, the sale thereof shall not be subject to 12%
VAT. Finally, the subsequent sale of the units shall be subject
to DST at the rate of P15 for every P1,000 or fractional part
thereof. BIR Ruling No. DA-049-07, January 31, 2007
Computation of net capital gains/losses
Net capital gain. The term net capital gain means the excess of
the gains from sales or exchanges of capital assets over the
losses from such sales or exchanges. Section 39(A)(2)
Net capital loss. The term net capital loss means the excess of
the losses from sales or exchanges of capital assets over the
gains from such sales or exchanges. Section 39(A)(3)
Retirement of certificates of indebtedness; proceeds =
selling price. For purposes of this Title, amounts received by
the holder upon the retirement of:
1. bonds,
2. debentures,
3. notes or certificates
4. or other evidences of indebtedness
issued by any corporation (including those issued by a
government or political subdivision thereof) with interest
coupons or in registered form, shall be considered as amounts
received in exchange therefor. Section 39(E)
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ad majorem dei gloriam
Short sales & failure to exercise privileges or options. For
purposes of this Title:
1. Gains or losses from short sales of property shall be
considered as gains or losses from sales or exchanges
of capital assets; and
2. Gains or losses attributable to the failure to exercise
privileges or options to buy or sell property shall be
considered as capital gains or losses. Section 39(F)
Taxation of net capital gains/losses
Personal property held as a capital asset
Jo. The holding period only applies to personal property held
as capital assets because the sale of real property held as capital
asset is subject to the Capital Gains Tax (CGT), wherein the
concept of holding period is not applicable.
Note. Net capital gains or losses for the sale or disposition or
personal property held as a capital asset is included in the gross
income a part of the taxable income subject to the schedular
rates.
Holding period rule; percentage taken into account;
applicable to individuals only. In the case of a taxpayer, other
than a corporation, only the following percentages of the gain
or loss recognized upon the sale or exchange of a capital asset
shall be taken into account in computing net capital gain, net
capital loss, and net income:
1. Short-term; 100%. If the capital asset has been held
for not more than twelve (12) months; and
2. Long-term; 50%. If the capital asset has been held for
more than twelve (12) months; Section 39(B)
• Holding period rule applies to individuals only.
Note that the law is clear that the 50%/100% holding
period rule applies only to individual taxpayers. Hence,
if the seller is a corporation, the full amount is included.
Limitation on capital losses; only to the extent of gains.
Losses from sales or exchanges of capital assets shall be
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TAXATION LAW
allowed only to the extent of the gains from such sales or
exchanges.
• But instruments of indebtedness not subject to such
limitation. If a bank or trust company incorporated
under the laws of the Philippines, a substantial part of
whose business is:
o the receipt of deposits,
o sells any bond, debenture, note, or certificate
or other evidence of indebtedness issued by
any corporation (including one issued by a
government or political subdivision thereof),
with interest coupons or in registered form, any loss
resulting from such sale shall not be subject to the
foregoing limitation and shall not be included in
determining the applicability of such limitation to other
losses. Section 39(C)
Net capital loss carry-over. If any taxpayer, other than a
corporation, sustains in any taxable year a net capital loss,
such loss (in an amount not in excess of the net income for such
year) shall be treated in the succeeding taxable year as a loss
from the sale or exchange of a capital asset held for not more
than twelve (12) months. Section 39(D)
Real property held as a capital asset
Section 24(D)(1) of the NIRC;
CGT on individuals. The provisions of Section 39(B)
notwithstanding, a final tax of six percent (6%) based on the
gross selling price or current fair market value as determined in
accordance with Section 6(E) of this Code, whichever is higher,
is hereby imposed upon capital gains presumed to have been
realized from the sale, exchange, or other disposition of real
property located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of conditional
sales, by individuals, including estates and trusts xxx
BIR Ruling 27-02
JO VALLES
INTRODUCTION TO INCOME TAX ad majorem dei gloriam TAXATION LAW
6% CGT on higher between SP and FMV; presumed 2. From foreign Income within. If 50% or sources within the Philippines as determined
capital gain. If the real property is a land or building not corporation more of the gross income of under the provisions of this Section;
actually used in the business of the seller-corporation and is the foreign company for the • but only in an amount which bears the
treated as a capital asset, then a final tax of 6% shall be imposed past three years was derived same ration to such dividends as the
on the gain presumed to have been realized on its sale, from sources within the PH gross income of the corporation for
exchange or disposition based on whichever is higher of the
such period derived from sources
gross selling price or fair market value (FMV) of such land or Income without. If less than
within the Philippines bears to its
building. 50% of the gross income of
the foreign company for the gross income from all sources.
Same rate WON seller is in the real estate business. This rule past 3 years was derived 3. Services. Compensation for labor or personal services
applies whether or not the seller-corporation is engaged in real from sources within the PH. performed in the Philippines;
estate business. • In this case, pro-rate 4. Rentals and royalties. Rentals and royalties from
Service income Place of performance property located in the Philippines or from any interest
Section 27(D)(5); RR 8-1998 Rent income Location of property in such property, including rentals or royalties for:
Royalty income Place of use of intangible a. The use of or the right or privilege to use in the
On sale of real property in the PH held as a capital asset Gain on sale of real property Location of property Philippines any copyright, patent, design or
Sale of real property in the 6% of the gross selling price, or Gain on sale of personal Place of sale model, plan, secret formula or process,
PH the current market value at the property goodwill, trademark, trade brand or other like
time of sale, whichever is Gain on sale of domestic Always income within property or right;
higher shares of stock b. The use of, or the right to use in the Philippines
If the sale was made by an Either:
any industrial, commercial or scientific
individual to the - 6% of the GSP or CMV Section 42, National Internal Revenue Code equipment;
government or GOCCs or 1.
- Normal income tax rate c. The supply of scientific, technical, industrial
Gross Income From Sources Within the Philippines. The or commercial knowledge or information;
At the option of the taxpayer following items of gross income shall be treated as gross d. The supply of any assistance that is ancillary
income from sources within the Philippines:
Compare: Individuals have the and subsidiary to, and is furnished as a means
option to include this in their 1. Interests. Interests derived from sources within the of enabling the application or enjoyment of,
taxable income, but not any such property or right as is mentioned in
Philippines, and interests on bonds, notes or other
corporations. paragraph (a), any such equipment as is
interest-bearing obligation of residents, corporate or
otherwise; mentioned in paragraph (b) or any such
INCOME FROM SOURCES WITHIN THE PH
2. Dividends. The amount received as dividends: knowledge or information as is mentioned in
a. from a domestic corporation; and paragraph (c);
Quick summary.
b. from a foreign corporation, unless less than e. The supply of services by a nonresident person
Income Test Source of Income
fifty percent (50%) of the gross income of such or his employee in connection with the use of
Interest income Residence of debtor
*loan must be used in the PH foreign corporation for the three-year period property or rights belonging to, or the
or debtor must reside in the ending with the close of its taxable year installation or operation of any brand,
PH preceding the declaration of such dividends or machinery or other apparatus purchased from
Dividend income for such part of such period as the corporation such nonresident person;
1. From domestic Always income within has been in existence) was derived from f. Technical advice, assistance or services
corporation rendered in connection with technical

170 Last Edit: 23 December 2020 JO VALLES

INTRODUCTION TO INCOME TAX
management or administration of any
scientific, industrial or commercial
undertaking, venture, project or scheme; and
g. The use of or the right to use:
i. Motion picture films;
ii. Films or video tapes for use in
connection with television; and
iii. Tapes for use in connection with radio
broadcasting.
5. Sale of Real Property. Gains, profits and income from
the sale of real property located in the Philippines; and
6. Sale of Personal Property. Gains; profits and income
from the sale of personal property, as determined in
Subsection (E) of this Section.
2.
Taxable Income From Sources Within the Philippines
1. General Rule. From the items of gross income
specified in Subsection (A) of this Section, there shall
be deducted:
a. the expenses, losses and other deductions
properly allocated thereto and
b. a ratable part of expenses, interests, losses and
other deductions effectively connected with
the business or trade conducted exclusively
within the Philippines which cannot definitely
be allocated to some items or class of gross
income:
Provided, That such items of deductions shall be
allowed only if fully substantiated by all the
information necessary for its calculation. The
remainder, if any, shall be treated in full as taxable
income from sources within the Philippines.
2. Exception. No deductions for interest paid or incurred
abroad shall be allowed from the item of gross income
specified in subsection (A) unless indebtedness was
actually incurred to provide funds for use in
connection with the conduct or operation of trade or
business in the Philippines.
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ad majorem dei gloriam
(C)
Gross Income From Sources Without the Philippines
The following items of gross income shall be treated as income
from sources without the Philippines:
1. Interests other than those derived from sources within
the Philippines as provided in paragraph (1) of
Subsection (A) of this Section;
2. Dividends other than those derived from sources within
the Philippines as provided in paragraph (2) of
Subsection (A) of this Section;
3. Compensation for labor or personal services performed
without the Philippines;
4. Rentals or royalties from property located without the
Philippines or from any interest in such property
including rentals or royalties for the use of or for the
privilege of using without the Philippines, patents,
copyrights, secret processes and formulas, goodwill,
trademarks, trade brands, franchises and other like
properties; and
5. Gains, profits and income from the sale of real property
located without the Philippines.
Expenses of multinational corporation; Expenses of a multi-
national corporation directly related to the production of PH-
derived income can be deducted from gross income in the PH
without need of apportionment. CIR v CTA and Smith Kline and
French Overseas Co.,
Expenses of multinational corporation; But overhead
expenses of its parent company belong to a different category.
These are items that cannot be directly allocated or identified
with the operations of the PH branch. The company can claim
as a deduction its deductible share a ratable part of such
expenses based on the ratio of the local branch’s gross income
to the total gross income worldwide of the multinational
corporation. CIR v CTA and Smith Kline and French Overseas
Co.,
(D)
Taxable Income From Sources Without the Philippines.
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TAXATION LAW
From the items of gross income specified in Subsection (C) of
this Section there shall be deducted the expenses, losses, and
other deductions properly apportioned or allocated thereto and
a ratable part of any expense, loss or other deduction which
cannot definitely be allocated to some items or classes of gross
income. The remainder, if any, shall be treated in full as taxable
income from sources without the Philippines.
(E)
Income From Sources Partly Within and Partly Without
the Philippines
Gross income. Items of gross income, expenses, losses and
deductions, other than those specified in Subsections (A) and
(C) of this Section, shall be allocated or apportioned to sources
within or without the Philippines, under the rules and
regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
Deductions. Where items of gross income are separately
allocated to sources within the Philippines, there shall be
deducted (for the purpose of computing the taxable income
therefrom):
1. the expenses, losses and other deductions properly
apportioned or allocated thereto and
2. a ratable part of other expenses, losses or other
deductions which cannot definitely be allocated to
some items or classes of gross income.
Taxable income. The remainder, if any, shall be included in
full as taxable income from sources within the Philippines.
Partly within and partly without. In the case of gross income
derived from sources partly within and partly without the
Philippines, the taxable income may first be computed by
deducting the expenses, losses or other deductions apportioned
or allocated thereto and a ratable part of any expense, loss or
other deduction which cannot definitely be allocated to some
items or classes of gross income; and the portion of such
taxable income attributable to sources within the Philippines
may be determined by processes or formulas of general
apportionment prescribed by the Secretary of Finance.
JO VALLES
INTRODUCTION TO INCOME TAX
Personal property
Gains, profits and income from the sale of personal
property produced (in whole or in part) by the taxpayer within
and sold without the Philippines, or produced (in whole or in
part) by the taxpayer without and sold within the Philippines,
shall be treated as derived partly from sources within and partly
from sources without the Philippines.
Gains, profits and income derived from the purchase of
personal property within and its sale without the
Philippines, or from the purchase of personal property without
and its sale within the Philippines shall be treated as derived
entirely form sources within the country in which sold:
• Provided, however, That gain from the sale of shares
of stock in a domestic corporation shall be treated as
derived entirely form sources within the Philippines
regardless of where the said shares are sold.
Situs of sale of stocks in a domestic corporation
Always income within. Gains from sale of shares of stock in a
domestic corporation are treated as derived entirely from
sources within the PH regardless of where the shares were sold.
• The transfer by a nonresident alien or a foreign
corporation to anyone of any share of stock issued by a
domestic corporation shall not be effected or made in
its book unless:
o the transferor has filed with the Commissioner
a bond conditioned upon the future payment by
him of any income tax that may be due on the
gains derived from such transfer, or
o the Commissioner has certified that the taxes,
if any, imposed in this Title and due on the gain
realized from such sale or transfer have been
paid. It shall be the duty of the transferor and
the corporation the shares of which are sold or
transferred, to advise the transferee of this
requirement.
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Services rendered abroad; income without. Nomura (Japan)
as Consultant and Sunshine North (PH) entered into a service
agreement for interior design services. The services were
performed entirely in Japan. The BIR said that since under the
NIRC, a foreign corporation is subject to income tax only with
respect to income derived from sources within the Philippines
and income is derived in the Philippines only if services were
actually performed within the Philippines, the present services
are not subject to PH income tax. BIR Ruling 203-19, March 6,
2019
Services rendered abroad; income without. CBRE (SG) and
Pilipinas Shell entered into a contract under which CBRE will
render management consultancy services to Shell. The contract
does not involve the transfer of technology, know how, or other
IP. CBRE will not not engage in any day-to-day activities in the
Philippines, and it is Shell that will implement the
recommendations. Accordingly, the consultancy services that
will be rendered by CBRE are entirely outside the Philippines.
The NIRC imposes income tax on foreign corporations only
with respect to income derived from sources within the
Philippines. Concerning income from services, income is
considered derived in the Philippines only if the services are
actually performed in the Philippines. Such being the case, and
since the subject services are rendered by CBRE outside the
Philippines, the fees to be paid therefor by Shell to CBRE are
exempt from income tax and consequently from withholding
tax. BIR Ruling 1061-18, June 12, 2018
Services rendered in PH is income within; services
rendered abroad is income without. HedcorSibulan (PH) and
Socoin (Spain) entered into an electro-mechanical contract that
combines offshore and onshore portions of the services that
Socoin will render. Under the Contract, Socoin will design,
manufacture, and deliver two Powerhouses: A and B. The
parties also supplemented the Contract with two Supplemental
Agreements, which broke down the scope of work and price
into specific, distinct, and separate segments; namely, Off-
Shore Services and Off-Shore Works, for works outside the
Philippines, and On-Shore Works, for works that Socoin will
perform within the Philippines, with corresponding breakdown
of the Contract price. Gross income earned by Socoin from (i)
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TAXATION LAW
services performed outside the Philippines and (ii) supply of
equipment sold or delivered outside the Philippines constitute
income earned from sources outside the Philippine, and
consequently, not subject to Philippine income tax or
withholding tax. On the other hand, income earned by Socoin
from performance of services within the Philippines pursuant
to the on-shore portion of the E&M Contract constitutes income
from sources within the Philippines and subject to final
withholding tax of 30%, unless qualified for exemption under
the RP-Spain treaty. However, general engineering services
should be considered Off-Shore Services only if they relate to
design, engineering, manufacturing, and testing done outside of
the Philippines. Testing performed in the Philippines of the
Plant, Materials, and Equipment should be considered On-
Shore Work, and thus, payments made relative thereto are
subject to Philippine income tax. Furthermore, delivery of
equipment to the Sibulan site in Davao del Sur and rendering
of services thereon are considered On-Shore Works, and thus,
payments made relative thereto are also subject to Philippine
income tax. Likewise, the services and supply of goods should
be considered as Off-Shore only if they relate to design,
engineering, manufacturing, and testing done outside of the
Philippines, while services and supply of goods to the Sibulan
Site should be considered On-Shore, and thus, payments made
relative thereto are also subject to Philippine income tax. BIR
Ruling No. 345-11, September 22, 2011
Rental of property in HK; income without. Latitude (PH)
rented an exhibition space in HK from ITU (Swiss) for 25, 200
Swiss Francs and requested an exemption from payment of
income tax. The BIR said that ITU was exempt from income
tax in this transaction. As a foreign corporation, it is taxable
only on income derived from sources within the PH. In this
case, the property rented was in HK, and therefore according to
Section 42(C)(2) of the Tax Code, it is income without. BIR
Ruling No 39-07, March 9, 2007
Services rendered abroad; income without. Cebu Insular
(PH) entered into an International Services Agreement with
Marriott (USA) for the performance of marketing and
promotional services. Marriott later assigned its rights to
JO VALLES
INTRODUCTION TO INCOME TAX ad majorem dei gloriam TAXATION LAW
International Hotel (Luxemborg). The services will be expenses as a deduction from its gross income, it must first
performed outside the PH. Since under the BIRC, provide the necessary documents. BIR Ruling No. DA-667-06,
compensation for services rendered outside the PH are treated November 14, 2006
as income from sources without the PH and International Hotel
is a foreign corporation taxable only on income sourced within Reimbursement of costs is not income; mere returns of
the PH, the subject services in this case is not subject to PH capital. Marubeni Corporation (MC) is a Japanese Corporation
income tax. BIR Ruling DA-002-07, January 5, 2007 that operates through its Philippine branch, Marubeni
Corporation-Philippine branch (MPC). MC and MPC entered
into a Service Agreement whereby MC’s Corporate Staff
Overhead expenses of parent company abroad can be Division will perform services in favor of MPC, and MPC will
allocated to the branch in the PH, and the same are
pay MC compensation based on agreed allocation ratios
deductible as long as substantiated. Koppers is the PH
without additional mark-up or profit, to be determined on an
Branch of Koppers-Australia. The parent incurs certain arm’s-length basis, and such compensation represents
overhead expenses that directly benefit all its branches, which
allocation or reimbursement of actual costs by MC to MPC.
cannot be definitely allocated to any single branch. Due to this, BIR said that inasmuch as MPC will pay MC compensation for
KWPPL-Australia charges a ratable portion of said expenses to
services based on agreed allocation ratios without additional
its branches, including KWPPL- PH, computed based on the
mark-up or profit, the service fees are not subject to Philippine
ratio which KWPPL-PH sales bears to head office sales. income tax. Payments covering actual and direct costs and
Koppers-PH is requesting for confirmation that the branch’s
expenses without mark-up or profits are mere reimbursement
ratable share in the overhead expenses of its parent is a valid of costs and therefore do not constitute taxable income (DA-
business expense under the PH. BIR ruled in the affirmative.
053-04). By its very nature, reimbursement of costs is not
Expenditures made by a foreign corporation in conducting its
income for being mere returns of capital (DA-384-98).
business are deductible in computing its taxable income from Accordingly, the service fees are not considered taxable
sources within the Philippines only when allocable to the
income, and thus not subject to income or withholding tax.
production of income from sources within the Philippines. The Further, since the services are to be rendered by MC outside the
net income of a resident foreign corporation is determined by
Philippines, the service fees . BIR Ruling No. DAa-596-06
deducting from the items of gross income, the expenses, losses,
and other deductions properly apportioned and a ratable part of
other expenses which cannot be definitely allocated to some
other item or class of gross income. The ratable part is based
upon the ratio of gross income from sources within the
Philippines to total gross income. Expenses of a multi-national
corporation directly related to the production of PH-derived
income can be deducted from gross income in the PH without
need of apportionment. However, overhead expenses fall under
a different category. Based on the SC decision in the case of
CIR v CTA and Smith Kline and in the BIR Ruling 045-95, this
Office agrees that a branch office’s ratable share in the
overhead expenses incurred by its parent company is a valid
business expense under Philippine tax laws, rules, and
regulations. Revenue Regulations No. 16-86 provides the
guidelines in arriving at the proper ratio. Accordingly, prior to
the branch office’s claim of the share from worldwide overhead
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corporation and TAXATION
ALLOCATION OF INCOME AND DEDUCTIONS
Section 50
Allocation of Income and Deductions. In the case of two or
more
• organizations,
• trades or
• businesses (whether or not incorporated and whether or
not organized in the Philippines)
owned or controlled directly or indirectly by the same interests,
the Commissioner is authorized to distribute, apportion or
allocate gross income or deductions between or among such
organization, trade or business, if he determined that such
distribution, apportionment or allocation is
• necessary in order to prevent evasion of taxes or
• clearly to reflect the income of any such
organization, trade or business.
The purpose of Section 50 is to ensure that taxpayers clearly
reflect income attributable to controlled transactions and to
prevent the avoidance of taxes with respect to such
transactions. It places a controlled taxpayer in tax parity with
an uncontrolled taxpayer by determining the arm's-length price
of inter-company transactions. Section 2.3.2 RMO 1098
RMO 1-98
Audit Guidelines and Procedures in the Examination of
Interrelated Group of Companies
2.2 Special Audit Procedures. In addition, focus must be
made on the following audit issues (detailed audit procedures
are laid down in Section 3 of this RAMO ):
1. Use of tax shelters (such as a foundation or a tax-
exempt company) in order to avail of tax exemptions
or of lower tax rates;
2. Shifting income and/or expenses in favor of a related
company with special tax privileges (e.g. BOI
Incentives, Tax Holidays, and etc.);
3. Transfer pricing in inter-company supply of goods
(tangible and intangible) and services;
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ad majorem dei gloriam
4. Inter-company loans and advances, and financing
arrangements where the interest charged for the use of
money is not at arm's length;
5. Arbitrary cost-sharing arrangements for common
expenses;
6. Tax avoidance through resale and agency
arrangements; and
7. Thin capitalization and earning stripping.
2.4 Determination of Arm's Length Price
a. The method to be used in determining the arm's-length
price depends on the type of transaction — whether the
transaction involves a transfer of property, services,
loans, advances, rentals or other arrangements.
Accordingly, proper judgment must be used taking into
consideration the peculiarity of the transaction and the
presence of available information that would reliably
determine the correct income of a controlled taxpayer.
b. The different methods of determining the arm's length
price of a controlled transaction under the OECD Rules
on transfer pricing may be used as a reference. This
includes the use of
a. Comparable Uncontrolled Price Method,
b. Resale Method,
c. Cost-plus Method and
d. Gross Profit Margin Method (these are
discussed in detail in the next Section).
c. In addition, the following must be considered:
a. Data and Assumptions. Consider the
completeness and accuracy of available data
and information and the reliability of
assumptions that are to be made
b. Comparability. Consider similar transactions
between unrelated parties. Factors of
comparability to be considered in the
examination include:
i. Functional analysis — factors such
as product design and engineering,
manufacturing, production and
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SPBUS
process, marketing and distribution,
advertising and etc.
ii. Contractual terms — this include
sales and purchase agreements,
volume, nature of warranties, credit
and payment terms and other
commercial arrangements.
iii. Risks — market risks including
fluctuations in demand, financial
risks, collection risk and commercial
risks.
iv. Economic conditions — refers to the
prevailing conditions in the market.
2.5 Definition of Terms
Controlled. The term controlled for purposes of this RAMO
shall mean any kind of control,
• direct or indirect,
• whether legally enforceable and
• however exercisable or exercised.
It is the reality of the control which is decisive, not its form or
the mode of its exercise or ownership.
• Presumption of control. A presumption of control
arises if income and expenses have been arbitrarily
shifted.
Controlled taxpayer. The term controlled taxpayer means any
one or two or more organizations or trade, or businesses owned
or controlled directly or indirectly by the same interests;
True taxable income. The term true taxable income means, the
taxable income which would have been reported by the
controlled taxpayer, had it in the conduct of its affairs dealt with
the other member or members of the group at arm's-length.
3. Audit procedures
Transfer Pricing in interrelated supply of goods or services.
This is relevant if one of the related-party enjoys certain
privileges such as tax exemption, lower tax rates, incentives, or
is a losing company.
JO VALLES
corporation and TAXATION
In General; best judgment of examiner. The method to be
used in determining the arm's-length price of a controlled
transaction shall rely primarily on the best judgment of the
examiner after taking into consideration the prevailing
circumstances as well as the availability of information at the
time of transaction.
Transfer pricing methods. As a guide, the methods under the
OECD Guidelines on transfer Pricing may be used, as follows:
1. The comparable uncontrolled price method (CUP).
This evaluates the arm's length by reference to the
amount charged in a comparable uncontrolled
transaction. In evaluating comparability, consider the
following:
a. trademark
b. product differences
c. geographical differences, and
d. extraordinary market conditions;
2. The Resale Price Method (RPM). It evaluates arm's
length by reference to the gross profit margin realized
in comparable transactions
3. The Cost Plus Method (CPM). It evaluates the arm's-
length by adding the appropriate gross profit to the
controlled taxpayer's cost of producing the property
involved in the controlled transaction and then impose
the applicable profit rate
4. The Profit Split Method. This is done simply by
dividing the profit between the members involved in
the transaction taking into consideration the extent of
their participation in the realization of the transaction.
Loans and Advances, and financing arrangements between or
among related parties
In General. When one member of a group makes a loan or
advance directly or indirectly to, or otherwise becomes a
creditor of another member and either party charges an interest
which is not at arm's length, there may be a tax advantage to
either the lender or borrower.
Loans and advances; forms. Loans and Advances may be in
the form of :
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ad majorem dei gloriam
1. Bona fide indebtedness such as loans or advances of
money or other considerations;
2. Indebtedness arising in the ordinary course of business
from sales, leases, or the rendition of services by and
between members of the group, or any other similar
extension of credit;
3. Alleged indebtedness
Arm’s length interest rate; charged to unrelated parties
under the same circumstance. For purposes of this Section,
an arm's length rate of interest is the rate of interest which
would have been charged in independent transactions between
unrelated parties under similar circumstances.
Financing Arrangements; finance company usually present
in RP groups. A common element in related-party groups is
the presence of a finance company (usually a holding company)
to provide financial services for the members of the group.
Finance company can be a central lender or be a financial
intermediary. Financial services by a holding company may
range from serving as a central lender for the group, in which
capacity, it may borrow funds from unrelated financial
institutions and on- loan such amounts to its subsidiaries. It may
also perform financial intermediary services for the group
including factoring and hedging.
Arm’s length interest should be charged if a member of the
group lends. Where one member of a group of controlled
entities makes a loan or advance directly or indirectly, or
otherwise becomes the creditor of another member of such
group, an arm's length price for the use of money should be
charged. The same is true in the case of indebtedness arising in
the ordinary course of business such as sales, leases, provision
of services and other similar extension of credits.
Performance of Services for Another
In general. Under this scheme, one member of the group
performs marketing, managerial, administrative, technical or
other services for the benefit of, or on behalf of another member
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SPBUS
of the group without charge or at a charge which is not arm's-
length.
Benefit test; direct benefit to member must be considered
in allocation. To determine the arm's length price for the
service, the "Benefit Test" may be considered. Under this test,
the direct benefit to the member which received the service
must be considered. It is necessary to take into account on some
reasonable basis all the costs or deductions which are directly
or indirectly related to the service performed.
Services rendered to make property available must be
valued. Where tangible or intangible property is transferred,
sold, assigned, loaned, leased or otherwise made available in
any manner by one member of a group to another member of
the group and services are rendered by the transferor in
connection with such transfer, the services rendered in such
transaction, provided it is not ancillary, must be valued.
Sharing of Costs
In general; sharing in proportion to anticipated benefits. A
cost sharing arrangement is an agreement under which the
parties agree to share the costs in proportion to their respective
share of anticipated benefits. This is very common in joint
undertaking and in expenses such as research and development,
office and factory spaces, legal and consultancy services and
etc.
Factors considered. In determining the appropriateness of the
sharing arrangement, factors such as
1. benefits-received,
2. size of the company,
3. participation in the venture, and etc.
should be considered.
Thin Capitalization and Earning Stripping
In General. The most common form of tax avoidance scheme
using corporate structure is high-debt financing of thinly
capitalized controlled company. This scheme favors debt over
JO VALLES
corporation and TAXATION
equity as a form of financing mainly because of tax favored
treatment of interest payments compared to dividends.
Interest payments deductible; dividends not. Under present
laws, interest payments are fully deductible against taxable
income while dividends are not. The tax advantages of interest
payments in contrast to dividend is an outright savings of 35%
(34%-32% under CTRP) in the form of a deductible expense
against the taxable base. If interest payments are subjected to
20% Final Tax (while intercorporate dividends are at 0% tax),
financing through debt rather than equity would still have an
advantage equivalent to 15%.
Reasonable DTE ratio. In the absence of rules prescribing
guidelines and presumptions as to what constitute thin
capitalization (unlike other countries), there is a necessity to
determine the reasonable ratio of debt over equity considering
all factors surrounding the case.
RMO 63-99
Determination of Taxable Income on Inter-company
Loans or Advances
Objectives:
1. To adopt the arm's length bargaining standard as the
ultimate test for determining the correct gross income
and deductions between two or more enterprises under
common control.
2. To provide a means of redistributing or reapportioning
income and expenses of taxpayers under common
control after applying Section 50 of the NIRC, as
amended.
Coverage. This paper applies to all forms of bona fide
indebtedness and includes:
1. Loans or advances of money or other consideration
(whether or not evidence by a written instrument);
2. Indebtedness arising in the ordinary course of business
out of sales, leases, or the rendition of services by or
between members of the group, or any other similar
extension;
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3. But does not apply to alleged indebtedness which
was in fact a contribution of capital or a distribution by
a corporation with respect to its shares.
Applying Arm's Length on Section 50 of the NIRC, as
amended
1. Section 50 empowers the Commissioner to rectify
abnormalities and distortions in income brought about
by common control through the adoption of standards
considered fair, reasonable or at arm's length.
2. This Order adopts the arm's length bargaining
standard as the ultimate test for determining the
fairness of related party transactions - i.e., "the standard
to be applied in every case is that of an uncontrolled
taxpayer dealing at arm's length with another
uncontrolled taxpayer".
Determination of Taxable Income on Inter-company Loans
or Advances
1. In general. Where one member of a group of
controlled entities makes a loan or advances directly or
indirectly, or otherwise becomes a creditor of another
member of such group, and charges no interest, or
charges interest at a rate which is not equal to an arm's-
length rate as defined in subparagraph (2) of this
paragraph, the Commissioner may make appropriate
allocations to reflect an arm's length interest rate for the
use of such loan or advance.
a. If payments are made to parties under common
control according to a legally enforceable
contract, the contract may still be recognized
as valid. However, for purposes of
determining the true taxable income of the
parties involved, the interest rate charged
may be subjected to reallocation
b. Section 50 does not apply only to taxable
entities. Reallocation may also apply to tax-
exempt organizations.
2. Arm's Length interest rate.
a. In general. For purposes of this Order, the
arm's length interest rate shall be the rate of
interest which was charged or would have been
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charged at the time the indebtedness arose in
independent transaction with or between
unrelated parties under similar circumstances.
All relevant factors will be considered,
including the amount and duration of the loan,
the security involved, the credit standing of the
borrower, and the interest rate prevailing at the
situs of the lender or creditor for comparable
loans.
b. For purposes of determining the arm's length
rate in domestic transactions, the interest rate
to be used is the Bank Reference Rate (BRR)
prescribed by the Bangko Sentral ng Pilipinas
(BSP).
c. The fact that the interest rate actually charged
on a loan or advance is expressly indicated on
a written instrument does not preclude the
application of Section 50 to such loan or
advance.
Interest Period
1. Commences at the date the indebtedness arises
except for trade receivables. The interest period shall
commence at the date the indebtedness arises, except
that with respect to indebtedness arising in the ordinary
course of business out of sales, leases, or supply of
goods and services which are generally considered as
trade accounts receivables or payables, the interest
period shall not commence if the taxpayer is able to
establish that the normal trade practice in a given
industry is to allow balances, in the case of similar
transactions with unrelated parties, to remain
outstanding for a longer period without charging
interest.
2. Payments applied against earliest balance
outstanding. For purposes of determining the period
of time for which a balance is outstanding, payments
or credits shall be applied against the earliest balance
outstanding. The taxpayer may, in accordance with an
agreement, apply such payments or credits in some
other order in its books only after establishing that the
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corporation and TAXATION
arrangement is customary for parties in that particular
business.
No interest income imputed on capital infusion in the form
of interest free-loans. Marubeni owns 40% of LEPI. It
extended an interest-free loan to the latter for its day-to-day
operations. BIR opinion that no interest income should be
imputed on said interest-free loan because inter-corporate
advances which are in fact contributions to capital are not
covered by RMO 63-99. BIR Ruling No. DA-096-06
ALLOWABLE DEDUCTIONS
Summary
Allowable deductions (Itemized deduction)
1. Expense
2. Interest
3. Taxes
4. Losses
5. Bad debts
6. Depreciation
7. Depletion
8. Charitable and other contributions
9. Research and development
10. Pension trusts
Expenses
1. Ordinary expenses
2. Expenses of private educational expenses
Summary; requisites for deductibility. In CIR v Isabela
Cultural Corporation, it was held that the following are the
requisites for deductibility of ordinary and necessary trade,
business, or professional expenses:
1. expense must be ordinary and necessary
2. must have been incurred or paid during the taxable year
3. must have been incurred or paid in carrying on the trade
or business
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4. must be supported by receipts, records, or other
pertinent payers
• Ordinary. Related to the business of the taxpayer even
if non-recurring.
• Necessary. Appropriate and helpful in the
development in the taxpayer’s business.
Discussion. The process that needs to be
undertaken is by asking: Is the payment really
normal, common, usual, recurring type? And
is it appropriate, helpful, indispensable to the
business. Because once all those are complied
with, then we can say that it's considered as
complied with the requirement of ordinary and
necessary expenses.
Paid or incurred during the year. This requisite is dependent
on the method of accounting of the taxpayer.
Accrual method of accounting; must meet all-events test. If
the taxpayer uses the accrual method of accounting, the accrual
of income and expenses is permitted when the all-events test
has been met. The all-events test requires:
1. the fixing of a right to income or liability to pay
2. the availability of the reasonable accurate
determination of such income or liability
Reasonable accuracy. This implies something
less than an exact or completely accurate amount.
The propriety of an accrual must be judged by the
facts that a taxpayer knew, or could reasonably be
expected to have known, at the closing of its books
for the taxable year. CIR v Isabela Cultural
Corporation
Recording of expense in accrual accounting; year incurred,
otherwise forfeited. Under the accrual method of accounting,
expenses not being claimed as deductions by a taxpayer in the
current year when they are incurred cannot be claimed as
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deduction from income for the succeeding year. Thus, a
taxpayer who is authorized to deduct certain expenses and other
allowable deductions for the current year but failed to do so
cannot deduct the same for the next year. CIR vs Isabela
Other accounting methods. There are other methods of
accounting approved by the CIR, other than those mentioned in
the NIRC. A taxpayer may use any of those methods as long as
the method chosen reflects its income properly and the method
is used consistently. CIR v Lancaster
(1) Ordinary and necessary trade, business or professional
expenses.
In general
There shall be allowed as deduction from gross income all the:
1. ordinary and necessary expenses paid or incurred
during the taxable year
2. in carrying on or which are directly attributable to,
the development, management, operation and/or
conduct of the trade, business or exercise of a
profession, including:
a. compensation
b. travel
c. rental
d. entertainment, amusement, recreation
Compensation. A reasonable allowance for salaries, wages,
and other forms of compensation for personal services actually
rendered,
• including the grossed-up monetary value of fringe
benefit furnished or granted by the employer to the
employee: Provided, That the final tax imposed under
Section 33 hereof has been paid;
Travel. A reasonable allowance for travel expenses, here and
abroad, while away from home in the pursuit of trade, business
or profession;
Rental. A reasonable allowance for rentals and/or other
payments which are required as a condition for the continued
use or possession, for purposes of the trade, business or
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corporation and TAXATION
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;
Entertainment, amusement, and recreation. A reasonable
allowance for entertainment, amusement and recreation
expenses during the taxable year
1. that are directly connected to the development,
management and operation of the trade, business or
profession of the taxpayer, or
2. that are directly related to or in furtherance of the
conduct of his or its trade, business or exercise of a
profession
not to exceed such ceilings as the Secretary of Finance may, by
rules and regulations prescribe, upon recommendation of the
Commissioner, taking into account the needs as well as the
special circumstances, nature and character of the industry,
trade, business, or profession of the taxpayer:
• Must not be contrary to law. Any expense incurred
for entertainment, amusement or recreation that is
contrary to law, morals public policy or public order
shall in no case be allowed as a deduction
Section 4, RR 10-2002. Requisites for deductibility of EAR.
The following are the requisites for deductibility:
1. It must be paid or incurred during the taxable year
2. It must be:
a. directly connected to the development,
management and operation of the trade,
business or profession of the taxpayer
b. directly related to or in furtherance of the
conduct of his or its trade, business or exercise
of a profession
3. it must not be contrary to law, morals, good customs,
public policy or public order
4. it must not have been paid, directly or indirectly, to an
official or employee of the national government, or any
LGU, or of any GOCC, or of a foreign government or
to a private individual, corporation, or GPP, or a
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similar entity, if it constitutes a bribe, kickback or other
similar payment
5. it must be substantiated by adequate proof. The receipts
should be in the name of the taxpayer claiming
deduction.
6. The appropriate amount of withholding tax, if
applicable should have been withheld therefrom and
paid to the BIR.
Club membership generally FB. In the case particularly of a
country, golf, sports club, or any other similar club where the
employee or officer of the taxpayer is the registered member
and the expenses incurred in relation thereto are paid for by the
taxpayer, there shall be a presumption that such expenses are
fringe benefits subject to FBT unless the taxpayer can prove
that these are actually representation expenses. For purposes of
proving that said expense is a representation expense and not
fringe benefits, the taxpayer should maintain receipts and
adequate records that indicate the:
a. amount of expense
b. date and place of expense
c. purpose of expense
d. professional or business relation of expense
e. name of person and company entertained with contact
details
Section 5, RR 10-2002. Ceiling on EAR. The allowable
deduction for EAR shall be the lower between:
1. The actual entertainment, amusement and recreation
expense paid or incurred within the taxable year or
2. 0.50% of net sales (gross sales less sales
returns/allowances and sales discounts) for tax payers
engaged in the sale of goods or properties; or 1% of net
revenue (gross revenue less discounts) for tax payers
engaged in sale of services, including exercise of
profession and use or lease of properties.
If the taxpayer is deriving income from both the sale of
goods/properties and services, the EAR shall be determined by
apportioning the percentage of the net sales/revenue to the total
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sales/revenue, but which in no case shall exceed the maximum
percentage ceiling provided.
Apportionment formula:
𝑵𝒆𝒕 𝒔𝒂𝒍𝒆𝒔 𝒐𝒓 𝑵𝒆𝒕 𝒓𝒆𝒗𝒆𝒏𝒖𝒆
𝒙 𝑨𝒄𝒕𝒖𝒂𝒍 𝑬𝒙𝒑𝒆𝒏𝒔𝒆𝒔
𝑵𝒆𝒕 𝒔𝒂𝒍𝒆𝒔 + 𝑵𝒆𝒕 𝒓𝒆𝒗𝒆𝒏𝒖𝒆
Other business expenses
1. PWD discount
2. Discount to senior citizens and senior citizens center
3. Compensation in employing senior citizens
4. Advertising expense
5. Litigation costs (non-deductible)
6. Bonuses to employees
Shifting of expenses. If taxpayer tries to shift expenses to avoid
being subjected to the ceilings, the amount shifted shall be
disallowed in its totality, without prejudice to such penalties as
may be imposed by the Tax Code of 1997.
Section 4, RR 1-2009. PWD discount. Establishments
granting sales discounts to PWDs on their sale of goods and/or
services shall be entitled to deduct the said sales discount from
their gross income.
• Only the actual amount of the sales discount granted to
a sales discount not exceeding 20% of the
o gross selling price or gross receipt can be
deducted from the gross income, net of VAT,
if applicable, for income tax purposes, and
o from gross sales or gross receipts for VAT or
OPT purposes
and shall be subject to proper documentation.
Section 2, RR 7-2010. Representation expenses.
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. For purposes of
these Regulations, representation expenses shall not refer to
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corporation and TAXATION
fixed representation allowances that are subject to withholding
tax on wages pursuant to appropriate revenue regulations.
Section 3, RR 7-2010. Exclusions. The following expenses are
not considered entertainment, amusement and recreation
expenses as defined under Section 2 hereof:
a. Expenses which are treated as compensation or fringe
benefits for services rendered under an employer-
employee relationship, pursuant to Revenue
Regulations 2-98, 3-98 and amendments thereto;
b. Expenses for charitable or fund raising events;
c. Expenses for bonafide business meeting of
stockholders, partners or directors;
d. Expenses for attending or sponsoring an employee to a
business league or professional organization meeting;
e. Expenses for events organized for promotion,
marketing and advertising including concerts,
conferences, seminars, workshops, conventions, and
other similar events;
f. Other expenses of a similar nature.
Notwithstanding the foregoing, such items of exclusions may,
nonetheless, qualify as items of deduction under Section 34 of
the Tax Code of 1997, subject to conditions for deductibility
stated therein.
Substantiation requirements
Substantiation requirements. The taxpayer shall substantiate
expenses with sufficient evidence, such as official receipts or
other adequate records:
i. the amount of the expense being deducted, and
ii. the direct connection or relation of the expense being
deducted to the development, management, operation
and/or conduct of the trade, business or profession of
the taxpayer.
Bribes and kickbacks
Bribes, kickbacks and other similar payments not
deductible expenses. No deduction from gross income shall be
allowed under Subsection (A) hereof for any payment made,
directly or indirectly:
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1. to an official or employee of the national government,
or
2. to an official or employee of any local government
unit, or
3. to an official or employee of a government-owned or -
controlled corporation, or
4. to an official or employee or representative of a foreign
government, or
5. to a private corporation, general professional
partnership, or a similar entity,
if the payment constitutes a bribe or kickback.
Payment for police protection is illegal and non-deductible.
Payment for police protection is illegal as it is compensation
given to the police for the performance by the latter of the
functions required of them to be rendered by law. Calanoc v
CIR
(2) Expenses Allowable to Private Educational Institutions
In addition to the expenses allowable as deductions under this
Chapter, a private educational institution, referred to under
Section 27 (B) of this Code, may at its option elect either:
a. to deduct expenditures otherwise considered as capital
outlays of depreciable assets incurred during the
taxable year for the expansion of school facilities or
b. to deduct allowance for depreciation thereof under
Subsection (F) hereof.
• Private/proprietary educational institutions. A
proprietary educational institution is any private school
maintained and administered by private individuals or
groups with an issued permit to operate from the
DECS, CHED, or TESDA, as the case may be, in
accordance with existing laws and regulations.
Interest
Allowable deduction as interest. The amount of interest paid
or incurred within a taxable year on indebtedness in connection
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with the taxpayer's profession, trade or business shall be
allowed as deduction from gross income:
• Provided, however, That the taxpayer's otherwise
allowable deduction for interest expense shall be
reduced by forty-two percent (42%) of the interest
income subjected to final tax: Provided, That effective
January 1, 2009, the percentage shall be thirty-three
percent (33%).
• Rationale; mitigate effects of tax arbitrage schemes.
The limitation was introduced to mitigate the effects of
tax arbitrage scheme, or practice of profiting from
differences that arise from the ways transactions are
treated for tax purposes where taxpayers pay only 20%
tax on the interest derived by lending money instead of
the corporate tax that would have been imposed had the
money been used for other income-generating
activities. BIR Ruling 006-00
Exceptions. No deduction shall be allowed in respect of
interest under the succeeding subparagraphs:
a. If within the taxable year an individual taxpayer
reporting income on the cash basis incurs an
indebtedness on which an interest is paid in advance
through discount or otherwise:
i. Provided, That such interest shall be allowed a
deduction in the year the indebtedness is paid:
ii. Provided, further, That if the indebtedness is
payable in periodic amortizations, the amount
of interest which corresponds to the amount of
the principal amortized or paid during the year
shall be allowed as deduction in such taxable
year;
b. If both the taxpayer and the person to whom the
payment has been made or is to be made are persons
specified under Section 36 (B)
i. Between members of a family. For purposes of
this paragraph, the family of an individual
shall include only his brothers and sisters
JO VALLES
corporation and TAXATION
(whether by the whole or half-blood), spouse,
ancestors, and lineal descendants; or
ii. Between an individual and corporation more
than 50% in value of the outstanding stock of
which is owned, directly or indirectly, by or for
such individual; or
c. If the indebtedness is incurred to finance petroleum
exploration.
Discussion; more on ii above. Section 36 is very
precise in that the disallowance would have to be a
relationship between an individual owning a
corporation, to the extent of more than at least 50%, or
a situation where an individual, Mr. X owns
Corporation A and Corporation B, and the loan exists
between those two corporations
Optional Treatment of Interest Expense. At the option of the
taxpayer, interest incurred to acquire property used in trade
business or exercise of a profession may be
a. allowed as a deduction or
b. treated as a capital expenditure.
RR 13-2000. Requisites for deductibility of interest expense.
In general, subject to certain limitations, the following are the
requisites for the deductibility of interest expense from gross
income:
a. there must be an indebtedness
b. there should be an interest expense paid or incurred
upon such indebtedness
c. the indebtedness must be that of the taxpayer
d. the indebtedness must be connected with the taxpayer's
trade, business or exercise of profession;
e. the interest expense must have been paid or incurred
during the taxable year;
f. the interest must have been stipulated in writing;
g. the interest must be legally due;
h. the interest payment arrangement must not be between
related taxpayers;
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i. the interest must not be incurred to finance petroleum
operations; and
j. 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
Interest charges for delinquent taxes deductible as interest
expense. Interest payment for delinquent taxes or late payment
of taxes is not deductible as tax expense, but the taxpayer is not
precluded from claiming said payment as deduction on account
of interest on indebtedness. This is because a tax can be
considered as an indebtedness, the interest on which is
deductible from gross income. CIR v Consuelo Vda de Prieto
• But note that surcharges or penalties are not deductible.
Taxes
Deductible taxes. Taxes paid or incurred within the taxable
year in connection with the taxpayer's profession, trade or
business, shall be allowed as deduction, except:
Non-deductible taxes:
a. Philippine income tax;
b. Income taxes imposed by authority of any foreign
country; but this deduction shall be allowed in the case
of a taxpayer who does not signify in his return his
desire to have to any extent the benefits of paragraph
(3) of this subsection (relating to credits for taxes of
foreign countries)
c. Estate
d. Donor's taxes; and
e. Taxes assessed against local benefits of a kind tending
to increase the value of the property assessed
Other non-deductible taxes:
a. Stock transaction tax [not in NIRC]
b. VAT [Not in NIRC]
Tax refund or credit is gross income. Taxes allowed under
this Subsection, when refunded or credited, shall be included as
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part of gross income in the year of receipt to the extent of the
income tax benefit of said deduction.
Limitations on deductions; for NRA-ETB and RFC only for
income w/in PH. In the case of a nonresident alien individual
engaged in trade or business in the Philippines and a resident
foreign corporation, the deductions for taxes provided in
paragraph (1) of this Subsection (C) shall be allowed only if
and to the extent that they are connected with income from
sources within the Philippines.
Credit against tax for taxes of foreign countries. If the
taxpayer signifies in his return his desire to have the benefits of
this paragraph, the tax imposed by this Title shall be credited
with:
a. Citizen and domestic corporation. In the case of a
citizen of the Philippines and of a domestic
corporation, the amount of income taxes paid or
incurred during the taxable year to any foreign country;
and
b. Partnerships and estates. In the case of any such
individual who is a member of a general professional
partnership or a beneficiary of an estate or trust, his
proportionate share of such taxes of the general
professional partnership or the estate or trust paid or
incurred during the taxable year to a foreign country, if
his distributive share of the income of such partnership
or trust is reported for taxation under this Title.
.
• Only RC and DC affected. An alien individual and a
foreign corporation shall not be allowed the credits
against the tax for the taxes of foreign countries
allowed under this paragraph.
Limitations on credit. The amount of the credit taken under
this Section shall be subject to each of the following
limitations:
a. The amount of the credit in respect to the tax paid or
incurred to any country shall not exceed the same
proportion of the tax against which such credit is taken,
which the taxpayer's taxable income from sources
JO VALLES
corporation and TAXATION
within such country under this Title bears to his entire
taxable income for the same taxable year; and
b. 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
without the Philippines taxable under this Title bears to
his entire taxable income for the same taxable year.
Adjustments on payment of incurred taxes. If accrued taxes
when paid differ from the amounts claimed as credits by the
taxpayer, or if any tax paid is refunded in whole or in part, the
taxpayer shall notify the Commissioner; who shall redetermine
the amount of the tax for the year or years affected, and the
amount of tax due upon such redetermination, if any, shall be
paid by the taxpayer upon notice and demand by the
Commissioner, or the amount of tax overpaid, if any, shall be
credited or refunded to the taxpayer.
• In the case of such a tax incurred but not paid, the
Commissioner as a condition precedent to the
allowance of this credit may require the taxpayer to
give a bond with sureties satisfactory to and to be
approved by the Commissioner in such sum as he may
require, conditioned upon the payment by the taxpayer
of any amount of tax found due upon any such
redetermination.
• The bond herein prescribed shall contain such further
conditions as the Commissioner may require.
Year in which credit taken is the year in which the taxes in
the foreign country were incurred. The credits provided for
in Subsection (C) (3) of this Section may, at the option of the
taxpayer and irrespective of the method of accounting
employed in keeping his books, be taken in the year which the
taxes of the foreign country were incurred, subject, however, to
the conditions prescribed in Subsection (C)(5) of this Section.
• If the taxpayer elects to take such credits in the year in
which the taxes of the foreign country accrued, the
credits for all subsequent years shall be taken upon the
same basis and no portion of any such taxes shall be
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ad majorem dei gloriam
allowed as a deduction in the same or any succeeding
year.
Proof of credits. The credits provided in Subsection (C)(3)
hereof shall be allowed only if the taxpayer establishes to the
satisfaction of the Commissioner the following:
a. The total amount of income derived from sources
without the Philippines;
b. The amount of income derived from each country, the
tax paid or incurred to which is claimed as a credit
under said paragraph, such amount to be determined
under rules and regulations prescribed by the Secretary
of Finance; and
c. All other information necessary for the verification and
computation of such credits.
Discussion. Tax deduction v tax credit. When we talk about
tax deductions, these refer to amounts deducted from the gross
income in order to reduce the taxable income and ultimately
reduce the tax due. On the other hand, when we talk about tax
credits, these refer to amounts directly deducted from the tax
due itself.
Taxes paid to a foreign government may be a deduction or
a tax credit. An alien resident’s right to deduct from gross
income the taxes he paid to a foreign government is given only
as an alternative to his right to claim a tax credit for such
foreign income taxes; so that unless he has a right to claim such
tax credit if he chooses, he is precluded from said deduction. In
this case, the Lednicky do not qualify for a tax credit as their
income is derived wholly from sources within the PH. CIR v
Lednicky
Margin fees are not taxes; not deductible as tax expense.
Margin fees are not revenue measures, but an exaction designed
to curb the excessive demands upon our international reserve.
Margin fees are a police power measure and not an exercise of
the state’s power to tax. Hence, they cannot be deducted from
gross income as tax expenses. Esso Standard Eastern, Inc v
CIR
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Unutilized input VAT cannot be claimed as deductible tax
expense. Under Section 112(A) of the Tax Code, unutilized
creditable input taxes attributable to VAT zero-rated sales can
only be recovered through the application for refund or tax
credit within the reglementary period. Unutilized input VAT
attributable to VAT zero-rated sales cannot be expensed
outright or claimed as a deductible expense after the expiration
of the 2-year period to claim refund. BIR Ruling 123-13
Losses
(1) Losses. Losses actually sustained during the taxable year
and not compensated for by insurance or other forms of
indemnity shall be allowed as deductions:
a. If incurred in trade, profession or business;
b. Of property connected with the trade, business or
profession, if the loss arises from
a. fires,
b. storms,
c. shipwreck, or
d. other casualties, or
e. from robbery, theft or embezzlement.
The Secretary of Finance, upon recommendation of the
Commissioner, is hereby authorized to promulgate
rules and regulations prescribing, among other things,
the time and manner by which the taxpayer shall
submit a declaration of loss sustained from casualty or
from robbery, theft or embezzlement during the taxable
year: Provided, however, That the time limit to be so
prescribed in the rules and regulations shall not be less
than thirty (30) days nor more than ninety (90) days
from the date of discovery of the casualty or robbery,
theft or embezzlement giving rise to the loss.
• Submit declaration of loss within 45 days
from time of loss. Within 45 days from
occurrence, taxpayer who intends to claim
deduction shall file a sworn declaration of
loss with the nearest RDO. RR 12-1977
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corporation and TAXATION
• No SDL, no deduction. Without the Sworn
Declaration of Loss, no deduction for casualty
loss will be allowed. The SDL is needed to
forewarn the BIR as to the extent of the loss
and to allow it to conduct its own investigation
of the incident leading to the loss. Tambunting
Pawnshop v CIR
c. No loss shall be allowed as a deduction under this
Subsection if at the time of the filing of the return, such
loss has been claimed as a deduction for estate tax
purposes in the estate tax return.
• No deduction if already claimed by estate.
No loss shall be allowed as a deduction under
this Subsection if at the time of the filing of the
return, such loss has been claimed as a
deduction for estate tax purposes in the estate
tax return. RR 12-1977
(2) Proof of loss. In the case of a nonresident alien individual
or foreign corporation, the losses deductible shall be those
actually sustained during the year incurred in business, trade or
exercise of a profession conducted within the Philippines, when
such losses are not compensated for by insurance or other forms
of indemnity.
• Declaration of loss is subject to verification and is not
sufficient proof of loss. It must be accompanied with
evidence gathered immediately after the event causing
the loss. Section 4, RR 12-1977
Amount deductible as loss. Value before casualty less the
value after less insurance received.
• Total loss. But for property used in business that was
totally destroyed, the net book value will be the basis
of the loss, also reduced by insurance or compensation
received. [Cost less accumulated depreciation less
insurance recovered]
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• Partial loss. In case of partial loss, the replacement
cost to restore property should be used to compute loss,
but it cannot be more than the net book value before
the casualty. Any excess over the NBV should be
capitalized subject to depreciation.
• For robbery, theft, and embezzlement. The value
before the taking is the basis.
Insurance not deducible as loss; income if it exceeds value
of property. The amount of loss that shall be compensated by
insurance coverage should not be claimed as a deductible loss.
If the insurance proceeds exceed the net book value of the
damaged assets, such excess shall be subject to the regular
Income Tax. RMO 31-2009
NOLCO
(3) Net operating loss generally carried over for the next 3
years. The net operating loss of the business or enterprise for
any taxable year immediately preceding the current taxable
year, which had not been previously offset as deduction from
gross income shall be carried over as a deduction from gross
income for the next three (3) consecutive taxable years
immediately following the year of such loss.
• Net operating loss. For purposes of this subsection,
the term net operating loss shall mean the excess of
allowable deduction over gross income of the business
in a taxable year
Losses of an exempt taxpayer not allowed to be carried
over. Any net loss incurred in a taxable year during which the
taxpayer was exempt from income tax shall not be allowed as
a deduction under this Subsection:
There must be no substantial change in ownership. A net
operating loss carry-over shall be allowed only if there has been
no substantial change in the ownership of the business or
enterprise in that
i. Not less than seventy-five percent (75%) in nominal
value of outstanding issued shares, if the business is in
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the name of a corporation, is held by or on behalf of the
same persons; or
ii. Not less than seventy-five percent (75%) of the paid-
up capital of the corporation, if the business is in the
name of a corporation, is held by or on behalf of the
same persons.
• When change in ownership occurs; look at POV of
one claiming deduction. A change in the ownership of
the business occurs when the person who sustained net
operating losses enters into a merger, or consolidation
or combination with another person, thereby resulting
to the transfer or conveyance of the said net operating
losses, to another person, in the course of the said
merger or consolidation or combination.
o Substantial change. When the transferor
obtains control of at least 75% of the nominal
value of the shares or the business of the
transferee-assignee.
o No substantial change. When the transferor
obtains control of less than 75% of the nominal
value of the shares or the business of the
transferee-assignee. Section 5.2, RR 14-2001
o In short, as long as at least 75% of the business
continues to be held by the same stockholders,
there is no substantial change. NOLCO can be
claimed as a deduction. BIR Ruling 30-00
Losses of mines other than oil and gas wells incurred in its
first 10 years carried over for the next 5 years. For mines
other than oil and gas wells, a net operating loss without the
benefit of incentives provided for under the Omnibus
Investments Code of 1987, incurred in any of the first ten (10)
years of operation may be carried over as a deduction from
taxable income for the next five (5) years immediately
following the year of such loss.
• The entire amount of the loss shall be carried over to
the first of the five (5) taxable years following the loss,
and any portion of such loss which exceeds, the taxable
JO VALLES
corporation and TAXATION
income of such first year shall be deducted in like
manner form the taxable income of the next remaining
four (4) years.
Taxpayer cannot carry over losses incurred by another
entity. PICOP wanted to deduct the net operating losses
sustained by RPPM before the merger that they entered into.
CIR disallowed this and SC agreed, saying that at the time the
losses were incurred, they were separate entities, and therefore,
the losses were deductible from RRPM’s income and not
PICOP’s. RPPM was a BOI-registered company, while PICOP
was not. To allow the deduction claimed by PICOP would be
to permit PIVOP to purchase a tax deduction and to shelter its
otherwise taxable income which had not been earned by the
registered enterprise which had suffered accumulated losses.
Paper Industries Corporation of the Philippines v CA
Cannot claim NOLCO and OSD simultaneously. An
individual claiming OSD cannot simultaneously claim NOLCO
as a deduction, and the 3-year reglementary period shall
continue to run notwithstanding the fact that the individual
availed of the OSD during the intervening period. Section 2.5,
RR 14-2001
3- year period runs even if corporation paid MCIT. The 3-
year reglementary period on the NOLCO shall continue to run
notwithstanding the fact that the corporation paid its income tax
under the MCIT computation. Section 2.6, RR 14-2001
FIFO. NOLCO shall be availed of on a “first-in, first-out”
basis. Section 2.7, RR 14-2001
Section 4, RR 14-2001. Who are entitled to deduct NOLCO.
Any
1. individual including estates and trusts engaged in trade
or business or in the exercise of profession
2. domestic and foreign corporation subject to
a. normal income tax rates
b. preferential tax rates.
Section 4, RR 14-2001. Disqualified from claiming NOLCO.
The following cannot claim NOLCO as deduction:
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1. any person who is exempt from income tax
2. any person enjoying preferential tax treatment pursuant
to the provisions of special laws
a. OBU of a foreign banking corporation and
FCDU of a domestic banking corporation
b. BOI-registered and enjoying ITH
c. PEZA-registered enterprise enjoying ITH
d. SMBA-registered enterprise
e. Foreign corporations engaged in international
shipping or air carriage in the PH
Section 4, RR 25-2020. Five (5) Year Period of Entitlement
to Deduct Net Operating Loss lncurred for Taxable Years
2O2O and 2021. Unless otherwise disqualified from claiming
the deduction, the business or enterprise which incurred net
operating loss for taxable years 2020 and 2021 shall be allowed
to carry over the same as a deduction from its gross income for
the next five (5) consecutive taxable years immediately
following the year of such loss. The net operating loss for said
taxable years may be carried over as a deduction even after the
expiration of RA No. 11494 provided the same are claimed
within the next five (5) consecutive taxable years immediately
following the year of such loss.
Capital losses
Limitation. Loss from sales or Exchanges of capital assets
shall be allowed only to the extent provided in Section 39.
Securities becoming worthless. If securities as defined in
Section 22 (T) become worthless during the taxable year and
are capital assets, the loss resulting therefrom shall, for
purposes of this Title, be considered as a loss from the sale or
exchange, on the last day of such taxable year, of capital
assets.
See separate discussion of capital losses.
Losses from wash sales of stock or securities
Losses from wash sales of stock or securities as provided in
Section 38.
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Section 38
Losses from wash sales of stock or securities
61-day rule. In the case of any loss claimed to have been
sustained from any sale or other disposition of shares of stock
or securities where it appears that within a period beginning
thirty (30) days before the date of such sale or disposition and
ending thirty (30) days after such date, the taxpayer:
1. has acquired (by purchase or by exchange upon which
the entire amount of gain or loss was recognized by
law), or
2. has entered into a contact or option so to acquire,
substantially identical stock or securities, then no deduction for
the loss shall be allowed under Section 34
• Exception. Unless the claim is made by a dealer in
stock or securities and with respect to a transaction
made in the ordinary course of the business of such
dealer.
If the amount of stock or securities acquired (or covered by the
contract or option to acquire) is less than the amount of stock
or securities sold or otherwise disposed of, then the particular
shares of stock or securities, the loss form the sale or other
disposition of which is not deductible, shall be determined
under rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.
If the amount of stock or securities acquired (or covered by the
contract or option to acquire which) resulted in the non-
deductibility of the loss, shall be determined under rules and
regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
Example. A buys shares of B Corp. He then sells the shares at
a loss and purchases shares from B Corp within 20 days from
sale. The loss will not be allowed as a deduction.
Wagering losses
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corporation and TAXATION
Losses from wagering transactions shall be allowed only to the
extent of the gains from such transactions.
Abandonment losses
Accumulated E&D costs pertaining to abandoned
petroleum operations. In the event a contract area where
petroleum operations are undertaken is partially or wholly
abandoned, all accumulated exploration and development
expenditures pertaining thereto shall be allowed as a
deduction:
• Accumulated expenditures incurred in that area prior to
January 1, 1979 shall be allowed as a deduction only
from any income derived from the same contract area.
• In all cases, notices of abandonment shall be filed with
the Commissioner.
Unamortized cost and undepreciated cost of abandoned
producing well is deductible. In case a producing well is
subsequently abandoned, the unamortized costs thereof, as well
as the undepreciated costs of equipment directly used therein,
shall be allowed as a deduction in the year such well, equipment
or facility is abandoned by the contractor:
• Resumption of operations; previously recognized
loss included as part of gross income. If such
abandoned well is reentered and production is
resumed, or if such equipment or facility is restored
into service, the said costs shall be included as part of
gross income in the year of resumption or restoration
and shall be amortized or depreciated, as the case may
be.
Bad debts
Bad debts. These refer to amounts borrowed from the
taxpayer by another person, whether corporate or
individual, which have become worthless or uncollectible.
• The receivables may come from money actually
extended as a loan or from uncollectible payments
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for goods sold or services rendered by the
taxpayer. RR 5-99
Section 34 (E)
Bad debts
Bad debts. Debts due to the taxpayer actually ascertained to be
worthless and charged off within the taxable year except:
1. those not connected with profession, trade or business
and
2. those sustained in a transaction entered into between
parties mentioned under Section 36 (B) of this Code:
• Tax benefit rule; recovery of written off accounts
considered as income. Recovery of bad debts
previously allowed as deduction in the preceding years
shall be included as part of the gross income in the year
of recovery to the extent of the income tax benefit of
said deduction.
RR 25-02. Requisites for deductibility:
1. There is an existing indebtedness due to the taxpayer
which is valid and legally demandable
2. Connected with the trade, business or profession
3. Not sustained between related parties
4. Actually ascertained to be worthless and uncollectible
as of the end of the taxable year
5. Actually charged off as of the end of the taxable year
6. Taxpayer must show that it is uncollectible even in the
future. That is, taxpayer made diligent efforts to
collect. Philippine Refining Company v CTA
RR 25-02. When a taxpayer may charge off; ascertain
uncollectibility. 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.
• Consider collateral value; assign case to collection
lawyer. The Commissioner of Internal Revenue will
consider all pertinent evidence, including the value of
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the collateral, if any, securing the debt and the financial
condition of the debtor in determining whether a debt
is worthless, or the assigning of the case for collection
to an independent collection lawyer who is not under
the employ of the taxpayer and who shall report on the
legal obstacle and the virtual impossibility of collecting
the same from the debtor and who shall issue a
statement under oath showing the propriety of the
deductions thereon made for alleged bad debts.
• Evidence of worthlessness; worthless and
uncollectible + legal action not likely satisfied. Thus,
where the surrounding circumstances indicate that a
debt is worthless and uncollectible and that legal action
to enforce payment would in all probability not result
in the satisfaction of execution on a judgment, a
showing of those facts will be sufficient evidence of
the worthlessness of the debt for the purpose of
deduction.
• Same process for banks. In the case of banks, the
Commissioner of Internal Revenue shall determine
whether or not bad debts are worthless and
uncollectible in the manner provided in the
immediately preceding paragraph.
• Without prejudice to the Commissioner’s
determination of the worthlessness and uncollectibility
of debts, the taxpayer shall submit a Bangko Sentral ng
Pilipinas/Monetary Board written approval of the
writing off of the indebtedness from the banks’ books
of accounts at the end of the taxable year.
• Insurance/surety company must be declared closed
before receivable from them can be deducted. Also,
in no case may a receivable from an insurance or surety
company be written-off from the taxpayer’s books and
claimed as bad debts deduction unless such company
has been declared closed due to insolvency or for any
such similar reason by the Insurance Commissioner.
Note. Worthless debts arising from unpaid wages, salaries,
rents, and similar items of taxable income can only be deducted
JO VALLES
corporation and TAXATION
if these amounts were included in the ITR as income for the
year when such bad debt was sought, or the previous year.
Worthless securities
Securities considered as capital assets becoming worthless;
loss from sale or exchange. If securities, as defined in Section
22 (T), are ascertained to be worthless and charged off within
the taxable year and are capital assets, the loss resulting
therefrom shall, 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, for
the purpose of this Title, be considered as a loss from the sale
or exchange, on the last day of such taxable year, of capital
assets.
Depreciation
Depreciation. This is the gradual diminution in the useful
value of the tangible property resulting from wear and tear and
normal obsolescence.
Amortization. This is basically depreciation for intangible
properties like goodwill, right of lease, patent, trademark, etc.
This is also deductible.
Discussion. With that being said, the elements for us to claim
depreciation is:
a. that there must be an item or an asset that is to be
utilized for business;
b. that asset must be in existence only for a finite period;
and
c. that asset must be something that becomes obsolete or
becomes worn out.
Section 34 (F)
General Rule. There shall be allowed as a depreciation
deduction a reasonable allowance for the:
1. exhaustion,
2. wear and tear
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3. including reasonable allowance for obsolescence
of property used in the trade or business.
• In the case of property held by one person for life with
remainder to another person, the deduction shall be
computed as if the life tenant were the absolute owner
of the property and shall be allowed to the life tenant.
• Depreciation of property held in trust allocated
based on income. In the case of property held in trust,
the allowable deduction shall be apportioned between
the income beneficiaries and the trustees in accordance
with the pertinent provisions of the instrument creating
the trust, or in the absence of such provisions, on the
basis of the trust income allowable to each.
Use of certain methods and rates. The term "reasonable
allowance" as used in the preceding paragraph shall include,
but not limited to, an allowance computed in accordance with
rules and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner, under any of the
following methods:
a. The straight-line method;
b. Declining-balance method, using a rate not exceeding
twice the rate which would have been used had the
annual allowance been computed under the method
described in Subsection (F) (1);
c. The sum-of-the-years-digit method; and
d. Any other method which may be prescribed by the
Secretary of Finance upon recommendation of the
Commissioner.
Agreement as to useful life on which depreciation rate is
based. Where under rules and regulations prescribed by the
Secretary of Finance upon recommendation of the
Commissioner, the taxpayer and the Commissioner have
entered into an agreement in writing specifically dealing with
the useful life and rate of depreciation of any property, the rate
so agreed upon shall be binding on both the taxpayer and the
national Government in the absence of facts and circumstances
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not taken into consideration during the adoption of such
agreement.
• The responsibility of establishing the existence of such
facts and circumstances shall rest with the party
initiating the modification.
• Change in method not retroactive. Any change in the
agreed rate and useful life of the depreciable property
as specified in the agreement shall not be effective for
taxable years prior to the taxable year in which notice
in writing by certified mail or registered mail is served
by the party initiating such change to the other party to
the agreement:
• Provided, however, that where the taxpayer has
adopted such useful life and depreciation rate for any
depreciable and claimed the depreciation expenses as
deduction from his gross income, without any written
objection on the part of the Commissioner or his duly
authorized representatives, the aforesaid useful life and
depreciation rate so adopted by the taxpayer for the
aforesaid depreciable asset shall be considered binding
for purposes of this Subsection.
Depreciation of properties used in petroleum operations.
An allowance for depreciation in respect of all properties
directly related to production of petroleum initially placed in
service in a taxable year shall be allowed under the:
1. straight-line or
2. declining-balance method of depreciation
at the option of the service contractor.
• However, if the service contractor initially elects the
declining-balance method, it may at any subsequent
date, shift to the straight-line method.
• 10 years or less useful life for properties used in
petroleum production. The useful life of properties
used in or related to production of petroleum shall be
ten (10) years of such shorter life as may be permitted
by the Commissioner.
• Straight line method @ 5 years if not directly used
in petroleum production. Properties not used directly
JO VALLES
corporation and TAXATION
in the production of petroleum shall be depreciated
under the straight-line method on the basis of an
estimated useful life of five (5) years.
Depreciation of properties used in mining operations. An
allowance for depreciation in respect of all properties used in
mining operations other than petroleum operations, shall be
computed as follows:
a. At the normal rate of depreciation if the expected life
is ten (10) years or less; or
b. Depreciated over any number of years between five (5)
years and the expected life if the latter is more than ten
(10) years, and the depreciation thereon allowed as
deduction from taxable income:
a. Provided, That the contractor notifies the
Commissioner at the beginning of the
depreciation period which depreciation rate
allowed by this Section will be used.
Depreciation deductible by NRA-ETB or RFC; property
must be located in the PH. In the case of a nonresident alien
individual engaged in trade or business or resident foreign
corporation, a reasonable allowance for the deterioration of
Property arising out of its use or employment or its non-use in
the business trade or profession shall be permitted only when
such property is located in the Philippines.
Summary
Property directly used in 10 years
production of petroleum • Straight-line
• declining
Property not directly used in 5 years
production of petroleum • straight-line
Property used in mining If useful life is 10 years or
less, normal rate of
depreciation
If >10 years, between 5 years
and such useful life
NRA-ETB & RFCs Property must be in the PH
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RR 12-2012
Rules on deductibility of depreciation on vehicles
1. Purchase of vehicles must be substantiated
a. MV identification number, chassis number,
other registrable numbers of the vehicle
b. total price of vehicle subject to depreciation
c. There must be direct connection or relation to
the development, management, operation
and/or conduct of the trade/business or
profession of the taxpayer
2. One vehicle for land transport for an official or
employee, the value of which should not exceed 2.4M
3. No depreciation for:
a. Yachts
b. Helicopters
c. Airplanes
d. Aircrafts
e. land vehicles that exceed 2.4M
unless the taxpayer’s main line of business is transport
operations or lease of transportation equipment and the
vehicles purchased are used in said operations.
4. Maintenance expense on account of non-depreciable
vehicles for taxation purposes are disallowed entirely
5. Input taxes on the purchase of non-depreciable vehicles
and on maintenance eamsxpenses incurred thereon are
disallowed entirely
Non-deductible; loss on sale of non-depreciable MV. Any
loss that will be incurred as a result of a sale of non-depreciable
vehicle shall not be allowed as deduction from gross income.
RMC No.002-2013
Other non-deductible expenses related to non-depreciable
MV. For income tax purposes, all expenses relate to the non-
depreciable Vehicles such as but not limited to repairs and
maintenance, oil lubricants, gasoline, spare parts, tires and
accessories, premium paid for insurance covering said vehicles
and registration fees shall not be allowed as a deduction in its
entirety. For VAT purposes, all input taxes corresponding to
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the disallowed expenses mentioned above for income tax
purposes are likewise not allowed. RMC No.002-2013
Taxpayer may lengthen or shorten useful life. Based on
Section 34(F)(1-3) and Sections 105 and 109 of Revenue
Regulations No. 2, the taxpayer and the Commissioner may
agree on the estimated useful life and rate of depreciation of
any property. The rate so agreed upon shall be binding on both
the taxpayer and the BIR. However, if it develops that the
useful life of the property originally estimated is no longer
reasonable, the law allows the taxpayer to lengthen or shorten
the useful life of the property in the light of prevailing factual
considerations. In view of the assessment of the useful lives and
depreciation methods of the assets based on experience as to
actual wear and tear, this Office confirms the opinion that
Ibiden may adopt change in the useful life of its assets for both
tax and financial accounting purposes as basis for depreciation
expense.
Taxpayer may change depreciation method to reflect
income more accurately; seek permission from BIR.
Synchrony is a wholly-owned subsidiary of Synchrony
Financial and currently uses sum of the years digit method of
depreciation. It intends to adopt the straight-line method of
depreciation in order to align with the depreciation method used
by its parent company as the same is more representative of the
usage of the assets. The BIR granted permission to change the
method of depreciation. BIR Ruling No. 1188-18
Depletion
Depletion of oil and gas wells and mines. In the case of oil
and gas wells or mines, a reasonable allowance for depletion or
amortization computed in accordance with the cost-depletion
method shall be granted under rules and regulations to be
prescribed by the Secretary of finance, upon recommendation
of the Commissioner.
• When the allowance for depletion shall equal the
capital invested no further allowance shall be granted
JO VALLES
corporation and TAXATION
• After production in commercial quantities has
commenced, certain intangible exploration and
development drilling costs:
o Non-producing wells are expensed. shall be
deductible in the year incurred if such
expenditures are incurred for non-producing
wells and/or mines, or shall be deductible in
full in the year paid or incurred or
o Producing wells may be capitalized. at the
election of the taxpayer, may be capitalized
and amortized if such expenditures incurred
are for producing wells and/or mines in the
same contract area
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 wells for the production of
petroleum:
• Provided, That said costs shall not 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 under this Subsection.
• Any intangible exploration, drilling and development
expenses allowed as a deduction in computing taxable
income during the year shall not be taken into
consideration in computing the adjusted cost basis for
the purpose of computing allowable cost depletion.
Election to deduct exploration and development
expenditures. In computing taxable income from mining
operations, the taxpayer may at his option, deduct exploration
and development expenditures accumulated as cost or adjusted
basis for cost depletion as of date of prospecting, as well as
exploration and development expenditures paid or incurred
during the taxable year:
• The amount deductible for exploration and
development expenditures shall not exceed twenty-five
percent (25%) of the net income from mining
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operations computed without the benefit of any tax
incentives under existing laws.
• The actual exploration and development expenditures
minus twenty-five percent (25%) of the net income
from mining shall be carried forward to the succeeding
years until fully deducted.
Irrevocable election. The election by the taxpayer to deduct
the exploration and development expenditures is irrevocable
and shall be binding in succeeding taxable years.
Net income from mining operations, as used in this
Subsection, shall mean:
Gross income from operations
Less: allowable deductions which are necessary or
related to mining operations.
• Allowable deductions shall include mining,
milling and marketing expenses, and
depreciation of properties directly used in the
mining operations.
This paragraph shall not apply to expenditures for the
acquisition or improvement of property of a character which is
subject to the allowance for depreciation.
In no case shall this paragraph apply with respect to amounts
paid or incurred for the exploration and development of oil and
gas.
Exploration expenditures. The term 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. The term development
expenditures means expenditures paid or incurred during the
development stage of the mine or other natural deposits.
o 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
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commercial quantity and quality and shall end upon
commencement of actual commercial extraction.
Depletion of oil and gas wells and mines deductible by a
NRA-ETB or RFC. In the case of a nonresident alien
individual engaged in trade or business in the Philippines or a
resident foreign corporation, allowance for depletion of oil and
gas wells or mines under paragraph (1) of this Subsection shall
be authorized only in respect to oil and gas wells or mines
located within the Philippines.
Charitable and other contributions
Partially deductible donations; 10% or 5%. Contributions or
gifts actually paid or made within the taxable year to, or for the
use of:
1. the Government of the Philippines or any of its
agencies or any political subdivision thereof
exclusively for public purposes, or
2. to accredited domestic corporation or associations
organized and operated exclusively for
a. religious,
b. charitable,
c. scientific,
d. youth and sports development,
e. cultural or educational purposes or
f. for the rehabilitation of veterans, or
3. to social welfare institutions, or
4. to nongovernment organizations,
in accordance with rules and regulations promulgated by the
Secretary of finance, upon recommendation of the
Commissioner, no part of the net income of which inures to the
benefit of any private stockholder or individual
Amount. in an amount not in excess of:
1. ten percent (10%) in the case of an individual, and
2. five percent (5%) in the case of a corporation,
of the taxpayer's taxable income derived from trade, business
or profession as computed without the benefit of this and the
following subparagraphs.
JO VALLES
corporation and TAXATION
Contributions deductible in full. Notwithstanding the
provisions of the preceding subparagraph, donations to the
following institutions or entities shall be deductible in full;
a. Donations to the Government; priority activities.
Donations to the Government of the Philippines or to
any of its agencies or political subdivisions, including
fully-owned government corporations, exclusively to
finance, to provide for, or to be used in undertaking
priority activities in:
1. education,
2. health,
3. youth and sports development,
4. human settlements,
5. science and culture, and
6. in economic development according to a
National Priority Plan determined by the
National Economic and Development
Authority (NEDA),
In consultation with appropriate government
agencies, including its regional development
councils and private philanthropic persons and
institutions: Provided, That any donation which is
made to the Government or to any of its agencies
or political subdivisions not in accordance with the
said annual priority plan shall be subject to the
limitations prescribed in paragraph (1) of this
Subsection;
b. Donations to certain foreign institutions or
international organizations; treaty-based.
Donations to foreign institutions or international
organizations which are fully deductible in pursuance
of or in compliance with agreements, treaties, or
commitments entered into by the Government of the
Philippines and the foreign institutions or international
organizations or in pursuance of special laws;
c. Donations to accredited nongovernment
organizations. The term nongovernment organization
means a non-profit domestic corporation:
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1. 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;
2. Utilize within 15 days. Which, not later than
the 15th day of the third month after the close
of the accredited nongovernment
organizations taxable year in which
contributions are received, makes utilization
directly for the active conduct of the activities
constituting the purpose or function for which
it is organized and operated, unless an
extended period is granted by the Secretary of
Finance in accordance with the rules and
regulations to be promulgated, upon
recommendation of the Commissioner;
3. Admin expenses cannot exceed 30% of total
expenses. The level of administrative expense
of which shall, on an annual basis, conform
with the rules and regulations to be prescribed
by the Secretary of Finance, upon
recommendation of the Commissioner, but in
no case to exceed thirty percent (30%) of the
total expenses; and
4. The assets of which, in the even of dissolution,
would be distributed to another nonprofit
domestic corporation organized for similar
purpose or purposes, or to the state for public
purpose, or would be distributed by a court to
another organization to be used in such manner
as in the judgment of said court shall best
accomplish the general purpose for which the
dissolved organization was organized.
International organizations with home offices
abroad are not qualified to be granted donee
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status. RR 13-98, implementing Section 34(H),
provides that a non-stock non-profit corporation or
organization must be created or organized under
PH laws and that an NGO must be a non-profit
domestic corporation. BIR Ruling 19-01
Utilization. Subject to such terms and conditions as may be
prescribed by the Secretary of Finance, the term "utilization"
means:
i. Any amount in cash or in kind (including
administrative expenses) paid or utilized to accomplish
one or more purposes for which the accredited
nongovernment organization was created or organized.
ii. Any amount paid to acquire an asset used (or held for
use) directly in carrying out one or more purposes for
which the accredited nongovernment organization was
created or organized.
Exception to the rule on utilization; setting aside to a
maximum of 5 years. An amount set aside for a specific
project which comes within one or more purposes of the
accredited nongovernment organization may be treated as a
utilization, but only if at the time such amount is set aside, the
accredited nongovernment organization has established to the
satisfaction of the Commissioner that the amount will be paid
for the specific project within a period to be prescribed in rules
and regulations to be promulgated by the Secretary of Finance,
upon recommendation of the Commissioner, but not to exceed
five (5) years, and the project is one which can be better
accomplished by setting aside such amount than by immediate
payment of funds.
Valuation is based on acquisition cost. The amount of any
charitable contribution of property other than money shall be
based on the acquisition cost of said property.
Proof of deductions. Contributions or gifts shall be allowable
as deductions only if verified under the rules and regulations
prescribed by the Secretary of Finance, upon recommendation
of the Commissioner.
JO VALLES
corporation and TAXATION
RA 9500. Gifts and donations to UP shall be exempt from
donor’s tax and the same shall be allowable as a deduction up
to 150% of the value of the donation.
RA 9521. Contributions to the National Book Trust Fund shall
be exempt from donor’s tax and the same shall be allowable as
a deduction up to 150% of the value of the donation.
RA 10165. Donations to foster child agencies are allowed as
deductions to the extent of the amount donated; also exempt
from donor’s tax
Research and development
Option 1: fully expensed. A taxpayer may treat research or
development expenditures which are paid or incurred by him
during the taxable year in connection with his trade, business
or profession as ordinary and necessary expenses which are not
chargeable to capital account.
• Period deductible. The expenditures so treated shall
be allowed as deduction during the taxable year when
paid or incurred.
Option 2: amortization of certain research and
development expenditures. At the election of the taxpayer and
in accordance with the rules and regulations to be prescribed by
the Secretary of Finance, upon recommendation of the
Commissioner, the following research and development
expenditures may be treated as deferred expenses:
a. Paid or incurred by the taxpayer in connection with his
trade, business or profession;
b. Not treated as expenses under paragraph (1) hereof;
and
c. Chargeable to capital account but not chargeable to
property of a character which is subject to depreciation
or depletion.
Period of amortization: at least 60 months. In computing
taxable income, such deferred expenses shall be allowed as
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ad majorem dei gloriam
deduction ratably distributed over a period of not less than sixty
(60) months as may be elected by the taxpayer (beginning with
the month in which the taxpayer first realizes benefits from
such expenditures).
Limitations on deduction. This Subsection shall not apply to:
a. Any expenditure for the acquisition or improvement of
land, or for the improvement of property to be used in
connection with research and development of a
character which is subject to depreciation and
depletion; and
b. Any expenditure paid or incurred for the purpose of
ascertaining the existence, location, extent, or quality
of any deposit of ore or other mineral, including oil or
gas.
Pension trusts
Pension trusts. 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, allowed as a deduction under Subsection (A) (1)
of this Section) 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 theretofore 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 or payment is made.
2 kinds of deductions allowed in relation to pension:
1. contribution to pension trust to cover pension
liability (Subsection A)
2. reasonable amount paid to the trust in excess of
contributions (Subsection (J)
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Employer’s contribution to employee’s PERA. When
an employer makes a contribution to his employee’s
Personal Equity and Retirement Account (PERA), the
employer can claim this amount as deduction but only to
the extent of the employer’s contribution that would
complete the maximum allowable PERA contribution of
an employee. RR 2011-17
Additional requirement for deductibility
Additional requirements for deductibility of certain
payments; tax required to be withheld must be paid. Any
amount paid or payable which is otherwise deductible from, or
taken into account in computing gross income or for which
depreciation or amortization may be allowed under this
Section, shall be allowed as a deduction only if it is shown that
the tax required to be deducted and withheld therefrom has
been paid to the Bureau of Internal Revenue in accordance with
this Section 58 and 81 of this Code. Section 34(K)
Optional Standard Deduction
All individuals other than NRA; 40% gross sales or gross
receipts. In lieu of the deductions allowed under the preceding
Subsections, an individual subject to tax under Section 24,
other than a nonresident alien, may elect a standard
deduction in an amount not exceeding forty percent (40%) of
his gross sales or gross receipts, as the case may be.
Corporation other than NRFC; 40% gross income. In the
case of a corporation subject to tax under Sections 27(A) and
28(A)(l), it may elect a standard deduction in an amount not
exceeding forty percent (40%) of its gross income as defined in
Section 32 of this Code.
Default is itemized. Unless the taxpayer signifies in his return
his intention to elect the optional standard deduction, he shall
be considered as having availed himself of the deductions
allowed in the preceding Subsections.
JO VALLES
corporation and TAXATION
Irrevocable in the year made. Such election when made in the
return shall be irrevocable for the taxable year for which the
return is made: Provided, That an individual who is entitled to
and claimed for the optional standard deduction shall not be
required to submit with his tax return such financial statements
otherwise required under this Code:
GPP and members can avail only once. Provided, further,
That a general professional partnership and the partners
comprising such partnership may avail of the optional standard
deduction only once, either by the general professional
partnership or the partners comprising the partnership:
Provided, finally, That except when the Commissioner
otherwise permits, the said individual shall keep such records
pertaining to his gross sales or gross receipts, the said
corporation shall keep such records pertaining to his gross
income as defined in Section 32 of this Code during the taxable
year, as may be required by the rules and regulations
promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
Section 34(L), NIRC as amended by RA 9504
Optional Standard Deduction (OSD)
All individuals except NRA; 40% gross sales/receipts. In
lieu of the deductions allowed under the preceding Subsections,
an individual subject to tax under Section 24, other than a
nonresident alien, may elect a standard deduction in an
amount not exceeding forty percent (40%) of his gross sales or
gross receipts, as the case may be.
FC and RFC; 40% gross income. In the case of a corporation
subject to tax under Sections 27(A) and 28(A)(l), it may elect a
standard deduction in an amount not exceeding forty percent
(40%) of its gross income as defined in Section 32 of this Code.
Default is itemized unless signified. Unless the taxpayer
signifies in his return his intention to elect the optional standard
deduction, he shall be considered as having availed himself of
the deductions allowed in the preceding Subsections.
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ad majorem dei gloriam
• Irrevocable for the year. Such election when made in
the return shall be irrevocable for the taxable year for
which the return is made:
Individual; not necessary to submit FS to claim OSD.
Provided, That an individual who is entitled to and claimed for
the optional standard deduction shall not be required to submit
with his tax return such financial statements otherwise required
under this Code:
GPP and partners can avail of this once only. Provided,
further, That a general professional partnership and the partners
comprising such partnership may avail of the optional standard
deduction only once, either by the general professional
partnership or the partners comprising the partnership:
Must keep records for gross sales/receipts/income.
Provided, finally, That except when the Commissioner
otherwise permits, the said individual shall keep such records
pertaining to his gross sales or gross receipts, the said
corporation shall keep such records pertaining to his gross
income as defined in Section 32 of this Code during the taxable
year, as may be required by the rules and regulations
promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
RR 016-2008
Section 2. Persons covered.
Individuals
a. RC
b. NRC
c. RA
d. Taxable estates and trusts
Corporations
a. DC
b. RFC
Section 3. Gross sales vs gross receipts. If an individual is on
the accrual basis of accounting, the OSD is based on the gross
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sales. If the individual employs cash basis accounting, the OSD
shall be based on his gross receipts during the year.
Section 6. OSD for GPPS. If GPP availed of the itemized
deduction in computing its net income, the partners may still
either claim itemized deduction or OSD from said share,
provided that, in claiming itemized deductions, the partner is
precluded from claiming expenses already claimed by the GPP.
4 possibilities:
a. GPP and partners both claim itemized deductions
b. GPP claims OSD while partner claims itemized
deductions
c. GPP claims itemized deductions and partner claims
OSD
d. GPP and partners both claim itemized deductions
Section 7. Individual entitled to OSD not required to submit
FS; corporations required. xxx In case of a corporation, said
corporation is still required to submit its financial statements
when it files its annual ITR and to keep such records pertaining
to its gross income.
RR 8-2018
Section 8. Not covered; compensation earners + 8% on
income from business/profession. No deductions shall be
allowed to individual taxpayers earning income arising from
personal services under an EER, and those who opted to be
taxed at 8% income tax rate on their income from business or
practice of profession.
Partners of GPP can no longer claim deduction from their
distributive share. The partners comprising the GPP can no
longer claim further deduction from their distributive share in
the net income of the GPP and are not allowed to avail of the
8% income tax rate option since their distributive share from
the GPP is already net of expenses.
• Income of GPP partner from other sources may be
OSD or itemized. If the partner also derives other
JO VALLES
corporation and TAXATION
income from trade, business or practice of profession
apart and distinct from the share in the net income of
the GPP, the deduction that can be claimed from the
other income would either be the itemized deduction or
OSD.
PPHI
Premium Payments on Health and/or Hospitalization
Insurance of an Individual Taxpayer. - the amount of
premiums not to exceed Two thousand four hundred pesos
(P2,400) per family or Two hundred pesos (P200) a month
paid during the taxable year for health and/or hospitalization
insurance taken by the taxpayer for himself, including his
family, shall be allowed as a deduction from his gross income:
Provided, That said family has a gross income of not more
than Two hundred fifty thousand pesos (P250,000) for the
taxable year: Provided, finally, That in the case of married
taxpayers, only the spouse claiming the additional
exemption for dependents shall be entitled to this deduction.
Notwithstanding the provision of the preceding Subsections,
The Secretary of Finance, upon recommendation of the
Commissioner, after a public hearing shall have been held for
this purpose, may prescribe by rules and regulations,
limitations or ceilings for any of the itemized deductions under
Subsections (A) to (J) of this Section: Provided, That for
purposes of determining such ceilings or limitations, the
Secretary of Finance shall consider the following factors:
1. adequacy of the prescribed limits on the actual
expenditure requirements of each particular industry;
and
2. effects of inflation on expenditure levels:
Provided, further, That no ceilings shall further be imposed on
items of expense already subject to ceilings under present law.
Fringe benefits
Section 33(A), NIRC as amended by Section 10 of RA 10963
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(a) Imposition of Tax. Effective January 1, 2018 and onwards,
a final tax of thirty-five percent (35%) is hereby imposed on
the grossed-up monetary value of fringe benefit furnished or
granted to the employee (except rank and file employees as
defined herein) by the employer, whether an individual or a
corporation (unless the fringe benefit is required by the nature
of, or necessary to the trade, business or profession of the
employer, or when the fringe benefit is for the convenience or
advantage of the employer).
• The tax herein imposed is payable by the employer
which tax shall be paid in the same manner as provided
for under Section 57(A) of this Code.
• The grossed-up monetary value of the fringe benefit
shall be determined by dividing the actual monetary
value of the fringe benefit by sixty five percent (65%)
effective January 1, 2018 and onwards:
• Provided, however, That fringe benefit furnished to
employees and taxable under Subsections (B), (C), (D),
and (E) of Section 25 shall be taxed at the applicable
rates imposed thereat:
• Provided, further, That the grossed-up value of the
fringe benefit shall be determined by dividing the
actual monetary value of the fringe benefit by the
difference between one hundred percent (100%) and
the applicable rates of income tax under Subsections
(B), (C), (D), and (E) of Section 25.
(B) Fringe Benefit Defined. For purposes of this Section, the
term 'fringe benefit' means any good, service or other benefit
furnished or granted in cash or in kind by an employer to an
individual employee (except rank and file employees as defined
herein) such as, but not limited to, the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of
the difference between the market rate and actual rate
granted;
(6) Membership fees, dues and other expenses borne by
the employer for the employee in social and athletic
clubs or other similar organizations;
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(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his
dependents; and
(10) Life or health insurance and other non-life
insurance premiums or similar amounts in excess of
what the law allows.
(C) Fringe Benefits Not Taxable. The following fringe
benefits are not taxable under this Section:
1. Fringe benefits which are authorized and exempted
from tax under special laws;
2. Contributions of the employer for the benefit of the
employee to retirement, insurance and hospitalization
benefit plans;
3. Benefits given to the rank and file employees, whether
granted under a collective bargaining agreement or not;
and
4. De minimis benefits as defined in the rules and
regulations to be promulgated by the Secretary of
Finance, upon recommendation of the Commissioner.
The Secretary of Finance is hereby authorized to promulgate,
upon recommendation of the Commissioner, such rules and
regulations as are necessary to carry out efficiently and fairly
the provisions of this Section, taking into account the peculiar
nature and special need of the trade, business or profession of
the employer.
Revenue Regulations No. 03-98 Section 2.33(d)
Tax Accounting for the Fringe Benefit Furnished to the
Employee and the Fringe Benefit Tax Due Thereon. As a
general rule, the amount of taxable fringe benefit and the fringe
benefits tax shall constitute allowable deductions from gross
income of the employer.
• If depreciation value is basis, only actual fringe
benefits tax paid is deductible as expense. However,
if the basis for computation of the fringe benefits tax is
the depreciation value, the zonal value as determined
by the Commissioner pursuant to Section 6(E) of the
JO VALLES
corporation and TAXATION
Code or the fair market value as determined in the
current real property tax declaration of a certain
property, only the actual fringe benefits tax paid shall
constitute a deductible expense for the employer.
• The value of the fringe benefit shall not be deductible
and shall be presumed to have been tacked on or
actually claimed as depreciation expense by the
employer.
• If FV/ZV > cost, excess is gross income. Provided,
however, that if the aforesaid zonal value or fair market
value of the said property is greater than its cost subject
to depreciation, the excess amount shall be allowed as
a deduction from the employer's gross income as fringe
benefit expense.
Example 1. During the year 1998, ABC Corporation paid for
the monthly rental of a residential house of its branch manager
Mr. Dela Cruz amounting to P66,000.00. Compute grossed-up
monetary value and the fringe benefit tax. Prepare the journal
entry.
a. GUMV. In this case, the monthly taxable grossed-up
monetary value of the said fringe benefit furnished or
granted to its branch manager (Mr. Dela Cruz) shall be
P50,000.00, computed as follows: [66,000 / 0.66*] x
50%. *Note that this was under the old law. Now, the
rate is 0.65, therefore, the GUMV would be 50,769.
b. FBT. 50, 000 x 34%*= 17,000. Since the FBT rate is
now 35%, the fringe benefit tax is now 50, 769 x 35%=
17,769.15.
c. Journal entry.
Fringe benefit expense 66,000
Fringe benefit tax expense 17, 769.15
Cash or FBT payable 83, 769.15
Example 2. XYZ Corporation owns a condominium unit.
During the year 1998, the said corporation furnished and
granted the said property for the residential use of its Assistant
Vice-President. The fair market value of the said property as
determined by the Commissioner pursuant to Section 6(E) of
the Code amounts P10,000,000.00 while its fair market value
as shown in its current Real Property Tax Declaration amounts
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to P8,000,000.00. Compute grossed-up monetary value and the
fringe benefit tax. Prepare the journal entry.
a. GUMV. In this case, the higher FMV of
P10,000,000.00 as determined by the Commissioner
shall be used in computing the monetary of the fringe
benefit. The rental value is 10M * 5% * 50%= 250K
per year or 20,833.33 per month. The GUMV using
35% is 32, 051.28.
b. FBT. 32, 051.28 * 35%= 11, 217.95
c. Journal entry. XYZ Corporation shall not further
claim deduction for allowing its Assistant Vice-
President the use of its residential property since the
cost for the use thereof has already been recovered as
deduction from its gross income under "Depreciation
Expense". However, since the fringe benefit tax in the
amount of P10,732.32, assumed and paid by XYZ
corporation has not as yet been recovered by way of
deduction from gross income, the same shall be
allowed as a deduction from its gross income.
Fringe benefit expense 11, 217.95
Cash or FBT payable 11, 217.95
If cost of condominium > FMV. However, if the cost of the
aforesaid condominium unit subject to depreciation allowance
(example: its acquisition cost is only P7M) is lesser that its
FMV as determined by the Commissioner (i.e. P10M), the
excess amount (i.e. P3M) shall be amortized throughout the
remaining estimated useful life of the residential property used
in computing the said employer's depreciation expense and
allowed as a deduction from the said employer's gross income
as fringe benefit expense. So 3M / 15 years = 200k per year or
16,666.67 per month. The entry is:
Fringe benefit expense 16, 666.67
Income constructively realized 16, 666.67
Section 7, RR 8-2018
Special treatment of fringe benefits. The tax on fringe
benefits at the rate of THIRTY-FIVE PERCENT (35%) shall
be imposed on the grossed-up monetary value of fringe benefits
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furnished or granted to an employee (except rank and file
employees) by the employer, whether an individual or a
corporation unless
• the fringe benefit is required by the nature of, or
necessary to tire trade, business or profession of the
employer, or
• when the fringe benefit is for the convenience of or
advantage of the employer
Tax payable by employer. The tax herein imposed is payable
by the employer, which tax shall be paid in the same manner as
provided for under Section 57 (A) of the Tax Code, as
amended.
GUMV; AMV / 65%. The grossed-up monetary value of the
fringe benefit shall be determined by dividing the actual
monetary value of the fringe benefit by SIXTY-FIVE
PERCENT (65%), effective January 1, 2018 and onwards:
• Provided, that the grossed-up value of the benefit shall
be determined by dividing the actual monetary value of
the fringe benefit by the difference between one
hundred percent (100%) and the applicable tax rates
under the aforesaid subsections.
ITEMS NOT DEDUCTIBLE
Section 36. Items not Deductible.
(A) General Rule. In computing net income, no deduction
shall in any case be allowed in
respect to:
1. Personal, living or family expenses;
2. Any amount paid out for new buildings or for
permanent improvements, or betterments made to
increase the value of any property or estate;
a. This Subsection shall not apply to intangible
drilling and development costs incurred in
petroleum operations which are deductible
under Subsection (G) (1) of Section 34 of this
Code.
3. Any amount expended in restoring property or in
making good the exhaustion thereof for which an
allowance is or has been made; or
JO VALLES
corporation and TAXATION
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.
(B) Losses from Sales or Exchanges of Property. In
computing net income, no deductions shall in any case be
allowed in respect of losses from sales or exchanges of property
directly or indirectly
1. Between members of a family. For purposes of this
paragraph, the family of an individual shall include
only his
a. brothers and sisters (whether by the whole or
half- blood),
b. spouse,
c. ancestors, and
d. lineal descendants; or
2. Except in the case of distributions in liquidation,
between an individual and corporation more than fifty
percent (50%) in value of the outstanding stock of
which is owned, directly or indirectly, by or for such
individual; or
3. Except in the case of distributions in liquidation,
between two corporations more than fifty percent
(50%) in value of the outstanding stock of which is
owned, directly or indirectly, by or for the same
individual if either one of such corporations, with
respect to the taxable year of the corporation preceding
the date of the sale of exchange was under the law
applicable to such taxable year, a personal holding
company or a foreign personal holding company;
4. Between the grantor and a fiduciary of any trust; or
5. Between the fiduciary of and the fiduciary of a trust
and the fiduciary of another trust if the same person is
a grantor with respect to each trust; or
6. Between a fiduciary of a trust and beneficiary of such
trust.
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VALUE-ADDED TAX
Basics
Section 105. Persons Liable
Any person who, in the course of trade or business,
1. sells,
2. barters,
3. exchanges,
4. leases goods or properties,
5. renders services, and
6. any person who imports goods
shall be subject to the value-added tax (VAT) imposed in
Sections 106 to 108 of this Code.
Indirect tax. The value-added tax is an indirect tax and the
amount of tax may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services. This
rule shall likewise apply to existing contracts of sale or lease of
goods, properties or services at the time of the effectivity of
Republic Act No. 7716.
In the course of trade or business; rule of regularity. The
phrase in the course of trade or business means the regular
conduct or pursuit of a commercial or an economic activity,
including transactions incidental thereto, by any person
regardless of
1. whether or not the person engaged therein is a non-
stock, nonprofit private organization (irrespective of
the disposition of its net income and
2. whether or not it sells exclusively to members or their
guests), or government entity.
NRFC included. The rule of regularity, to the contrary
notwithstanding, services as defined in this Code rendered in
the Philippines by nonresident foreign persons shall be
considered as being rendered in the course of trade or business.
Section 106.
Value-Added Tax on Sale of Goods or Properties
(A) Rate and Base of Tax; 12% GSP. There shall be levied,
assessed and collected on every sale, barter or exchange of
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goods or properties, value-added tax equivalent to twelve
percent (12%) of the gross selling price or gross value in money
of the goods or properties sold, bartered or exchanged, such tax
to be paid by the seller or transferor.
Section 108.
Value-added Tax on Sale of Services and Use or Lease of
Properties
(A) Rate and Base of Tax; 12% gross receipts. There shall
be levied, assessed and collected, a value-added tax equivalent
to twelve percent (12%) of gross receipts derived from the sale
or exchange of services,
Gross receipts. The term gross receipts means the total amount
of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including the
amount charged for materials supplied with the services and
deposits and advanced payments actually or constructively
received during the taxable quarter for the services performed
or to be performed for another person, excluding value-added
tax.
RMO No 7-2006
Approving recommendation of Secretary of Finance to increase
vat rate from 10% to 12%
RMO Circular No. 035-12
Clarifying the Taxability of Clubs Organized and
Operated Exclusively for Pleasure, Recreation, and other
Non-profit Purposes
Income tax; not exempt. Clubs which are organized and
operate exclusively for pleasure recreation and other non-profit
purposes or subject to income tax under the national Internal
Revenue Code of 1997, as amended. According to the doctrine
of casus omissus pro omisso habendus est, a person A person
object or thing omitted from an in numeration must be held to
have been omitted intentionally. the provision of the national
Internal Revenue Code of 1977 which granted income tax
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corporation and TAXATION ad majorem dei gloriam SPBUS
exemption to such recreational clubs was omitted in the current course of trade or business, even if the performance of services
list of tax-exempt corporations under the national internal code Taxable person refers to any person liable for the payment of is not regular.
of 1997, as amended. Hence the income of recreational clubs VAT, whether registered or registrable in accordance with Sec.
from whatever source including but not limited to 236 of the Tax Code. Delay Liquidated Damages not subject to VAT. DPI, DP and
• membership fees DICL are engaged in the business of construction services. The
• assessment dues VAT-registered person refers to any person who is registered first 2 are DCs, the last is a NRFC. They entered into a contract
• rental income and as a VAT taxpayer under Sec. 236 of the Tax Code. His status with PEC for the construction of a Coal Fired Power Project.
• service fees as a VAT-registered person shall continue until the cancellation On the guaranteed completion date, the contractors committed
are subject to income tax. of such registration. delay, and consequently, PEC sustained anticipated loss of
profits. At a compromise settlement, the Delay Liquidated
VAT; subject. Section 105 of the NIRC of 1997 is clear—even Taxable sale refers to the sale, barter, exchange and/or lease of Damages was determined to be USD 10M, exclusive of VAT,
a non-stock, non-profit organization or government entity is goods or properties, including transactions “deemed sale” and which is for the account of DICL. Is the Delay Liquidated
liable to pay VAT on the sale of goods or services. Clearly the the performance of service for a consideration, whether in cash Damages subject to VAT? No. Delay Liquidated Damages
gross receipts of recreational clubs including but not limited to or in kind, all of which are subject to tax under Secs. 106 and represent indemnification for failure of the contractors to meet
• membership fees 108 of the Tax Code. the guaranteed completion date, and is not considered as sale,
• assessment dues barter, exchange, or lease of goods or properties or services in
Section 4.105-2. Nature and Characteristics of VAT; seller the Philippines, or importation of goods into the Philippines,
• rental income and
statutorily liable but may be shifted to the buyer or and hence, are not subject to VAT. DAELM BIR Ruing No.
• service fees are
transferee. VAT is a tax on consumption levied on the sale, 1211-18
subject to VAT.
barter, exchange or lease of goods or properties and services in
the Philippines and on importation of goods into the VAT ON GOODS/PROPERTIES
RR No 16-05
Philippines. The seller is the one statutorily liable for the
payment of the tax but the amount of the tax may be shifted or Section 106.
Section 4.105-1. Persons Liable. Any person who, in the Value-Added Tax on Sale of Goods or Properties.
passed on to the buyer, transferee or lessee of the goods,
course of his trade or business, sells, barters, exchanges or
properties or services. This rule shall likewise apply to existing
leases goods or properties, or renders services, and any person
contracts of sale or lease of goods, properties or services at the (c) Rate and Base of Tax; 12% GSP. There shall be
who imports goods, shall be liable to VAT imposed in Secs.
time of the effectivity of RA No. 9337. However, in the case of levied, assessed and collected on every sale, barter or
106 to 108 of the Tax Code.
importation, the importer is the one liable for the VAT. exchange of goods or properties, value-added tax
However, in the case of importation of taxable goods, the
equivalent to twelve percent (12%) of the gross selling
importer, whether an individual or corporation and whether or
Section 4.105-3. Meaning of In the Course of Trade or price or gross value in money of the goods or properties
not made in the course of his trade or business, shall be liable
Business. The term “in the course of trade or business” means sold, bartered or exchanged, such tax to be paid by the
to VAT imposed in Sec. 107 of the Tax Code.
the regular conduct or pursuit of a commercial or economic seller or transferor.
activity, including transactions incidental thereto, by any
Person. Person refers to any
person regardless of whether or not the person engaged therein 1. Goods or Properties. The term “goods” or “properties“
• individual, shall mean all tangible and intangible objects which are
is a non-stock, non- profit private organization (irrespective of
• trust, the disposition of its net income and whether or not it sells capable of pecuniary estimation and shall include:
• estate, exclusively to members or their guests), or government entity. a. Real properties held primarily for sale to
• partnership, customers or held for lease in the ordinary
• corporation, NRA who perform services are deemed to be making sale course of trade or business;
• joint venture, in the course of business. Non-resident persons who perform b. The right or the privilege to use patent,
• cooperative or services in the Philippines are deemed to be making sales in the copyright, design or model, plan, secret
• association.

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corporation and TAXATION
formula or process, goodwill, trademark, trade
brand or other like property or right;
c. The right or the privilege to use in the
Philippines of any industrial, commercial or
scientific equipment;
d. The right or the privilege to use motion picture
films, tapes and discs; and
e. Radio, television, satellite transmission and
cable television time.
Section. 4.106-1, RR 16-05. VAT on Sale of Goods or
Properties. VAT is imposed and collected on every sale, barter
or exchange, or transactions “deemed sale” of taxable goods or
properties at the rate of twelve percent (12%) (starting February
1, 2006) of the gross selling price or gross value in money of
the goods or properties sold, bartered, or exchanged, or deemed
sold in the Philippines.
RR 16-05, Section 4.106-2. Meaning of the Term “Goods or
Properties”. The term “goods or properties” refers to all
tangible and intangible objects which are capable of pecuniary
estimation and shall include, among others:
1. Real properties held primarily for sale to customers or
held for lease in the ordinary course of trade or
business;
2. The right or the privilege to use patent, copyright,
design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like property
or right;
3. The right or the privilege to use any industrial
commercial or scientific equipment;
4. The right or the privilege to use motion picture films,
films, tapes and discs; and
5. Radio, television, satellite transmission and cable
television time.
Gross selling price
Section 106 (A)(1), last paragraph. Gross selling price;
excludes VT but includes excise tax. The term “gross selling
price” means the total amount of money or its equivalent which
the purchaser pays or is obligated to pay to the seller in
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ad majorem dei gloriam
consideration of the sale, barter or exchange of the goods or
properties, excluding the value-added tax. The excise tax, if
any, on such goods or properties shall form part of the gross
selling price xxx
RR 16-05, Section 4.106-4. Meaning of the Term “Gross
Selling Price”. The term gross selling price means the total
amount of money or its equivalent which the purchaser pays or
is obligated to pay to the seller in consideration of the sale,
barter or exchange of the goods or properties, excluding VAT.
The excise tax, if any, on such goods or properties shall form
part of the gross selling price.
Real property subject to VAT; consideration stated or
FMV, whichever is higher. In the case of sale, barter or
exchange of real property subject to VAT, gross selling price
shall mean the consideration stated in the sales document or the
fair market value whichever is higher.
• If not billed separately, VAT deemed included in
consideration. If the VAT is not billed separately in
the document of sale, the selling price or the
consideration stated therein shall be deemed to be
inclusive of VAT.
FMV; higher of zonal value and RPT declaration. The
term “fair market value” shall mean whichever is the higher
of:
1. the fair market value as determined by the
Commissioner (zonal value), or
2. the fair market value as shown in schedule of
values of the Provincial and City Assessors (real
property tax declaration).
If no zonal value, GSP = RPT declaration or
consideration, whichever is higher. However, in the
absence of zonal value, gross selling price refers to the
market value shown in the latest real property tax
declaration or the consideration, whichever is higher.
• Zonal value or market value deemed exclusive of
VAT. If the gross selling price is based on the zonal
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value or market value of the property, the zonal or
market value shall be deemed exclusive of VAT. Thus,
the zonal value/market value, net of the output VAT,
should still be higher than the consideration in the
document of sale, exclusive of the VAT.
Sale of real property on installment and ZV/FMV higher
than consideration; VAT is collection over selling price. If
the sale of real property is on installment plan where the zonal
value/fair market value is higher than the consideration/selling
price, exclusive of the VAT, the VAT shall be based on the ratio
of actual collection of the consideration, exclusive of the VAT,
against the agreed consideration, exclusive of the VAT,
appearing in the Contract to Sell/Contract of Sale applied to the
zonal value/fair market value of the property at the time of the
execution of the Contract to Sell/Contract of Sale at the
inception of the contract.
• Thus, since the output VAT is based on the market
value of the property which is higher than the
consideration/selling price in the sales document,
exclusive of the VAT, the input VAT that can be
claimed by the buyer shall be the separately-billed
output VAT in the sales document issued by the seller.
Therefore, the output VAT which is based on the
market value must be billed separately by the seller in
the sales document with specific mention that the VAT
billed separately is based on the market value of the
property.
Selling price is the amount of consideration in a contract of
sale between the buyer and seller or the total price of the sale
which may include cash or property and evidence of
indebtedness issued by the buyer, excluding the VAT.
Allowable deductions
Section 106 (D), NIRC. Sales returns and allowances. The
value of goods or properties sold and subsequently returned or
for which allowances were granted by a VAT-registered person
may be deducted from the gross sales or receipts for the quarter
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corporation and TAXATION
in which a refund is made or a credit memorandum or refund is
issued.
Sales discounts. Sales discount
1. granted and indicated in the invoice at the time of
sale and the
2. grant of which does not depend upon the
happening of a future event
may be excluded from the gross sales within the same
quarter it was given.
Section 4.106-9. Allowable Deductions from Gross Selling
Price. In computing the taxable base during the month or
quarter, the following shall be allowed as deductions from
gross selling price:
a. Discounts. Discounts determined and granted at the
time of sale, which are expressly indicated in the
invoice, the amount thereof forming part of the gross
sales duly recorded in the books of accounts.
Sales discount indicated in the invoice at the
time of sale, the grant of which is not
dependent upon the happening of a future
event, may be excluded from the gross sales
within the same month/quarter it was given.
b. Returns and allowances. Sales returns and allowances
for which a proper credit or refund was made during
the month or quarter to the buyer for sales previously
recorded as taxable sales.
VAT ON IMPORTATIONS
Section 107
Value-Added Tax on Importation of Goods
(a) In General; 12% on value used by BOC to compute
duties; paid prior to release of goods from customs.
There shall be levied, assessed and collected on every
importation of goods a value-added tax equivalent to
twelve percent (12%) based on the total value used by
the Bureau of Customs in determining tariff and
customs duties plus customs duties, excise taxes, if
any, and other charges, such tax to be paid by the
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ad majorem dei gloriam
importer prior to the release of such goods from
customs custody:
• If customs duties determined on quantity/volume,
VAT is based on landed cost + excise tax. Provided,
That where the customs duties are determined on the
basis of the quantity or volume of the goods, the value-
added tax shall be based on the landed cost plus excise
taxes, if any.
(B) Transfer of Goods by Tax-exempt Persons; subsequent
transferee liable for the VAT on importation. In the case of
tax-free importation of goods into the Philippines by persons,
entities or agencies exempt from tax, where such goods are
subsequently sold, transferred or exchanged in the Philippines
to non-exempt persons or entities, the purchasers, transferees
or recipients shall be considered the importers thereof, who
shall be liable for any internal revenue tax on such importation.
The tax due on such importation shall constitute a lien on the
goods superior to all charges or liens on the goods, irrespective
of the possessor thereof.
RR 16-05, Section 4.107-1
(b) In general; whether for use in business or not. VAT
is imposed on goods brought into the Philippines,
whether for use in business or not. The tax shall be
based on the total value used by the BOC in
determining tariff and customs duties, plus customs
duties, excise tax, if any, and other charges, such as
postage, commission, and similar charges, prior to the
release of the goods from customs custody.
Discussion: This is the difference with sale of goods/services.
Item need not be used for business to be subject to VAT.
Discussion: Balikbayan box not exceeding 150,000 pesos now
exempt from duties.
If customs duties determined on quantity/volume, VAT is
based on landed cost. In case the valuation used by the BOC
in computing customs duties is based on volume or quantity of
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the imported goods, the landed cost shall be the basis for
computing VAT.
• Landed cost. Landed cost consists of the invoice
amount, customs duties, freight, insurance and other
charges. If the goods imported are subject to excise tax,
the excise tax shall form part of the tax base.
• The same rule applies to technical importation of goods
sold by a person located in a Special Economic Zone
to a customer located in a customs territory.
• No VAT shall be collected on importation of goods
which are specifically exempted under Sec. 109 (1) of
the Tax Code.
(c) Applicability and payment. The rates prescribed
under Sec. 107 (A) of the Tax Code shall be applicable
to all importations withdrawn from customs custody.
• The VAT on importation shall be paid by the importer
prior to the release of such goods from customs
custody.
• Importer. Importer refers to any person who brings
goods into the Philippines, whether or not made in the
course of his trade or business. It includes non- exempt
persons or entities who acquire tax-free imported
goods from exempt persons, entities or agencies.
SPECIAL PROVISIONS
Deemed sale transactions
Section 106(B), NIRC
Transactions Deemed Sale. The following transactions shall
be deemed sale:
1. Transfer, use or consumption not in the course of
business of goods or properties originally intended for
sale or for use in the course of business;
2. Distribution or transfer to:
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corporation and TAXATION
a. Shareholders or investors as share in the profits
of the VAT-registered persons; or
b. Creditors in payment of debt;
3. Consignment of goods if actual sale is not made within
sixty (60) days following the date such goods were
consigned; and
4. Retirement from or cessation of business, with respect
to inventories of taxable goods existing as of such
retirement or cessation.
RR 16-05, Section 4.106-7
Transactions Deemed Sale.
(a) The following transactions shall be “deemed sale”
pursuant to
Sec. 106 (B) of the Tax Code:
1. Transfer, use or consumption not in the course of
business of goods or properties originally intended for
sale or for use in the course of business.
a. Transfer of goods or properties not in the
course of business can take place when VAT-
registered person withdraws goods from his
business for his personal use;
2. Distribution or transfer to:
a. Shareholders or investors share in the profits
of VAT- registered person; Property dividends
which constitute stocks in trade or properties
primarily held for sale or lease declared out of
retained earnings on or after January 1, 1996
and distributed by the company to its
shareholders shall be subject to VAT based on
the zonal value or fair market value at the time
of distribution, whichever is applicable.
b. Creditors in payment of debt or obligation.
3. Consignment of goods if actual sale is not made within
60 days following the date such goods were consigned.
Consigned goods returned by the consignee within the
60-day period are not deemed sold;
4. Retirement from or cessation of business with respect
to all goods on hand, whether capital goods, stock-in-
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trade, supplies or materials as of the date of such
retirement or cessation, whether or not the business is
continued by the new owner or successor. The
following circumstances shall, among others, give rise
to transactions “deemed sale” for purposes of this
Section;
a. Change of ownership of the business. There is
a change in the ownership of the business
when a single proprietorship incorporates; or
the proprietor of a single proprietorship sells
his entire business.
b. Dissolution of a partnership and creation of a
new partnership which takes over the business.
(d) The Commissioner of Internal Revenue shall
determine the appropriate tax base in cases
1. where a transaction is deemed a sale, barter or
exchange of goods or properties under Sec. 4.106-7
paragraph (a) hereof, or
2. where the gross selling price is unreasonably lower
than the actual market value.
GSP unreasonably lower than MV if lower by >30%. The
gross selling price is unreasonably lower than the actual market
value if it is lower by more than 30% of the actual market value
of the same goods of the same quantity and quality sold in the
immediate locality on or nearest the date of sale.
• Exception; output VAT is based on actual SP if sold
to government. Nonetheless, if one of the parties in
the transaction is the government as defined and
contemplated under the Administrative Code, the
output VAT on the transaction shall be based on the
actual selling price.
Others; MV of goods at time of occurrence. For transactions
deemed sale, the output tax shall be based on the market value
of the goods deemed sold as of the time of the occurrence of
the transactions enumerated in Sec. 4.106-7(a)(1),(2), and (3)
of these Regulations.
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Retirement; acquisition cost or current market price.
However, in the case of retirement or cessation of business, the
tax base shall be the acquisition cost or the current market price
of the goods.
RR 16-05, Section 4.113-2
Invoicing and Recording Deemed Sale Transactions
Personal consumption; memorandum entry in subsidiary
SJ. In the case of Sec. 4.106-7(a) (1) of these Regulations, a
memorandum entry in the subsidiary sales journal to record
withdrawal of goods for personal use is required.
Distribution to SH/creditors and consignment; invoice at
time of occurrence. In the case of Sec. 4.106-7(a) (2) and (3)
of these Regulations, an invoice shall be prepared at the time of
the occurrence of the transaction, which should include, all the
information prescribed in Sec. 4.113-1.
• The data appearing in the invoice shall be duly
recorded in the subsidiary sales journal.
• The total amount of “deemed sale” shall be included in
the return to be filed for the month or quarter.
Cessation; prepare and submit inventory not later than 30
days from cessation. In the case of Sec. 4.106-7(a) (4) an
inventory shall be prepared and submitted to the RDO who has
jurisdiction over the taxpayer’s principal place of business not
later than 30 days after retirement or cessation from business.
Invoice prepared for entire inventory. An invoice shall be
prepared for the entire inventory, which shall be the basis of the
entry into the subsidiary sales journal. The invoice need not
enumerate the specific items appearing in the inventory, but it
must show the total amount. It is sufficient to just make a
reference to the inventory regarding the description of the
goods.
• However, the sales invoice number should be indicated
in the inventory filed and a copy thereof shall form part
of this invoice.
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corporation and TAXATION
• If the business is to be continued by the new owners or
successors, the entire amount of output tax on the
amount deemed sold shall be allowed as input taxes.
• If the business is to be liquidated and the goods in the
inventory are sold or disposed of to VAT-registered
buyers, an invoice or instrument of sale or transfer shall
be prepared citing the invoice number wherein the tax
was imposed on the deemed sale.
• At the same time the tax paid corresponding to the
goods sold should be separately indicated in the
instrument of sale.
Example. “A”, at the time of retirement, had 1,000 pieces of
merchandise which was deemed sold at a value of P20,000.00
with an output tax of P2,000.00. After retirement, “A” sold to
“B”, 500 pieces for P12,000.00. In the contract of sale or
invoice, “A” should state the sales invoice number wherein the
output tax on “deemed sale” was imposed and the
corresponding tax paid on the 500 pieces is P1,000.00, which
is included in the P12,000.00, or he should indicate it separately
as follows:
Gross selling price P11,000.00
VAT previously paid on “deemed sale” 1,000.00
Total P 12,000.00
In this case, “B” shall be entitled only to P1,000 as
input tax and not 12/112x P12,000.00
Change or cessation of VAT status
Section 106(D), NIRC
Changes in or Cessation of Status of a VAT-registered
Person. The tax imposed in Subsection (A) of this Section shall
also apply to goods disposed of or existing as of a certain date
if under circumstances to be prescribed in rules and regulations
to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, the status of a person as
a VAT-registered person changes or is terminated.
RR 16-05, Section 4.106-8
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Change or Cessation of Status as VAT-registered Person
(a) Subject to output tax. The VAT provided for in Sec. 106
of the Tax Code shall apply to goods or properties originally
intended for sale or use in business, and capital goods which
are existing as of the occurrence of the following:
1. Change of business activity from VAT taxable
status to VAT-exempt status. An example is a VAT-
registered person engaged in a taxable activity like
wholesaler or retailer who decides to discontinue such
activity and engages instead in life insurance business
or in any other business not subject to VAT;
2. Approval of a request for cancellation of registration
due to reversion to exempt status.
3. Approval of a request for cancellation of registration
due to a desire to revert to exempt status after the lapse
of three (3) consecutive years from the time of
registration by a person who voluntarily registered
despite being exempt under Sec. 109 (2) of the Tax
Code.
4. Approval of a request for cancellation of registration of
one who commenced business with the expectation of
gross sales or receipts exceeding P1,500,000.00, but
who failed to exceed this amount during the first twelve
months of operation.
(b)Not subject to output tax. The VAT shall not apply to
goods or properties which are originally intended for sale or for
use in the course of business existing as of the occurrence of
the following:
(1) Change of control of a corporation by the acquisition
of the controlling interest of such corporation by
another stockholder (individual or corporate)or group
of stockholders.
a. The goods or properties used in business
(including those held for lease) or those
comprising the stock-in-trade of the
corporation, having a change in corporate
control, will not be considered sold, bartered
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or exchanged despite the change in the
ownership interest in the said corporation.
b. However, the exchange of goods or
properties including the real estate properties
used in business or held for sale or for lease by
the transferor, for shares of stocks, whether
resulting in corporate control or not, is
subject to VAT.
Illustration: Abel Corporation (transferee)is a merchandising
concern and has an inventory of goods for sale amounting to
Php1 million. Nel Corporation(transferor), a real estate
developer, exchanged its real estate properties for the shares of
stocks of Abel Corporation resulting to the acquisition of
corporate control. The inventory of goods owned by Abel
Corporation (Php1 million worth) is not subject to output tax
despite the change in corporate control because the same
corporation still owns them. This is in recognition of the
separate and distinct personality of the corporation from its
stockholders. However, the exchange of real estate properties
held for sale or for lease by Nel Corporation, for the shares of
stocks of Abel Corporation, whether resulting to corporate
control or not, is subject to VAT. This is an actual exchange of
properties which makes the transaction taxable.
2. Change in the trade or corporate name of the
business;
3. Merger or consolidation of corporations. The
unused input tax of the dissolved corporation, as of the
date of merger or consolidation, shall be absorbed by
the surviving or new corporation.
VAT ON SERVICES
Value-added Tax on Sale of Services and Use or Lease of
Properties
Section 108(A), first paragraph. Rate and Base of Tax; 12%
gross receipts. There shall be levied, assessed and collected, a
value-added tax equivalent to twelve percent (12%) of gross
receipts derived from the sale or exchange of services,
including the use or lease of properties.
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corporation and TAXATION
RR 16-05, Section 4.108-1. VAT on the Sale of
Services and Use or Lease of Properties. Sale or
exchange of services, as well as the use or lease of
properties, as defined in Sec. 108 (A) of the Tax Code
shall be subject to VAT, equivalent to twelve percent
(12%) of the gross receipts (excluding VAT) starting
February 1, 2006.
Sale or exchange of services
Section 108(A), second paragraph; RR 16-05, Section 4.108-
4. Sale or exchange of services. The phrase sale or exchange
of services means the performance of all kinds of services in
the Philippines for others for a fee, remuneration or
consideration, including those performed or rendered by
1. construction and service contractors;
2. stock, real estate, commercial, customs and
immigration brokers;
3. lessors of property, whether personal or real;
4. warehousing services;
5. lessors or distributors of cinematographic films;
6. persons engaged in milling processing, manufacturing
or repacking goods for others;
7. proprietors, operators or keepers of hotels, motels, rest
houses, pension houses, inns, resorts;
8. proprietors or operators of restaurants, refreshment
parlors, cafes and other eating places, including clubs
and caterers;
9. dealers in securities;
10. lending investors;
11. transportation contractors on their transport of goods or
cargoes, including persons who transport goods or
cargoes for hire another domestic common carriers by
land relative to their transport of goods or cargoes;
12. common carriers by air and sea relative to their
transport of passengers, goods or cargoes from one
place in the Philippines to another place in the
Philippines;
13. sales of electricity by generation companies,
transmission, and distribution companies;
14. services of franchise grantees of electric utilities,
telephone and telegraph, radio and television
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broadcasting and all other franchise grantees except
those under section 119 of this Code, and
15. non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity, and
bonding companies; and
16. similar services regardless of whether or not the
performance thereof calls for the exercise or use of the
physical or mental faculties.
Sale or exchange of services. The phrase sale or exchange of
services shall likewise include:
1. The lease or the use of or the right or privilege to use
any copyright, patent, design or model, plan secret
formula or process, goodwill, trademark, trade brand or
other like property or right;
2. The lease of the use of, or the right to use of any
industrial, commercial or scientific equipment;
3. The supply of scientific, technical, industrial or
commercial knowledge or information;
4. The supply of any assistance that is ancillary and
subsidiary to and is furnished as a means of enabling
the application or enjoyment of any such property, or
right as is mentioned in subparagraph (2) or any such
knowledge or information as is mentioned in
subparagraph (3);
5. The supply of services by a nonresident person or his
employee in connection with the use of property or
rights belonging to, or the installation or operation of
any brand, machinery or other apparatus purchased
from such nonresident person.
6. The supply of technical advice, assistance or services
rendered in connection with technical management or
administration of any scientific, industrial or
commercial undertaking, venture, project or scheme;
7. The lease of motion picture films, films, tapes and
discs; and
8. The lease or the use of or the right to use radio,
television, satellite transmission and cable television
time.
Section 108(A), third paragraph. Irrespective of place of
execution of lease contract. Lease of properties shall be
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subject to the tax herein imposed irrespective of the place where
the contract of lease or licensing agreement was executed if the
property is leased or used in the Philippines.
Gross receipts
Section 108(A), fourth paragraph. Gross receipts. The term
gross receipts means the total amount of money or its
equivalent representing the
1.
contract price,
2.
compensation,
3.
service fee,
4.
rental or
5.
royalty,
6.
including the amount charged for materials supplied
with the services and deposits and advanced payments
actually or constructively received during the taxable
quarter for the services performed or to be performed
for another person, excluding value-added tax.
RR 16-05, Section 4.108-4. Definition of Gross Receipts.
Gross receipts refers to the total amount of money or its
equivalent representing the contract price, compensation,
service fee, rental or royalty, including the amount charged for
materials supplied with the services and deposits applied as
payments for services rendered and advance payments actually
or constructively received during the taxable period for the
services performed
or to be performed for another person, excluding the VAT,
except those amounts earmarked for payment to unrelated third
(3rd) party or received as reimbursement for advance payment
on behalf of another which do not redound to the benefit of the
payor.
Payment made to a third party. A payment is a payment to a
third party if the same is made to settle an obligation of another
person, e.g., customer or client, to the said third party, which
obligation is evidenced by the sales invoice/official receipt
issued by said third party to the obligor/debtor (e.g., customer
or client of the payor of the obligation).
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corporation and TAXATION
Advance payment. An advance payment is an advance
payment on behalf of another if the same is paid to a third (3rd)
party for a present or future obligation of said another party
which obligation is evidenced by a sales invoice/official
receipt issued by the obligee/creditor to the obligor/debtor (i.e.,
the aforementioned “another party”) for the sale of goods or
services by the former to the latter.
Unrelated party. For this purpose ‘unrelated party’ shall not
include taxpayer’s
1. employees,
2. partners,
3. affiliates (parent, subsidiary and other related
companies),
4. relatives by consanguinity or affinity within the fourth
(4th) civil degree, and
5. trust fund where the taxpayer is the trustor, trustee or
beneficiary, even if covered by an agreement to the
contrary.
Constructive receipt. Constructive receipt occurs when the
money consideration or its equivalent is placed at the control of
the person who rendered the service without restrictions by the
payor. The following are example s of constructive receipts:
1. deposits in banks which are made available to the seller
of services without restrictions;
2. issuance by the debtor of a notice to offset any debt or
obligation and acceptance thereof by the seller as
payment for services rendered; and
3. transfer of the amounts retained by the payor to the
account of the contractor.”
Interest charged by parent/holding company
Providing assistance to affiliated companies and receiving
reimbursement without any intention of profit is subject to
VAT on services rendered. Lapanday is engaged in managing,
promoting, administering, or assisting in any business or
activity of corporations, partnerships, associations, individual,
or firm. It extended loans to its affiliates and earned interest
income in relation thereto, and for which it was assessed
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deficiency VAT. CTA said that said interest income is subject
to VAT since the loans were extended in the course of trade or
business. When Lapanday extended loans to its affiliates, it
provided assistance to corporations, and thus provided services
identical to its business. Furthermore, said loan assistance,
being incidental to its business, is deemed a transaction “in the
course of trade and business”. Such phrase means the regular
conduct or pursuit of a commercial or economic activity,
including transactions incidental thereto. Considering the
foregoing, the CTA en Banc holds that the income generated
from the loans is subject to VAT. Lapanday Foods Corporation
vs CIR, CTA EB Case No. 367
Remuneration received by members of BOD not subject to
VAT. VAT provisions generally pertain to those persons whose
undertakings are intended to be pursued on a going-concern
basis. Directors are not such kinds of individuals, as (1) they do
not freely offer their services to any corporation, (2) their term
of office is limited to 1 year, (3) such remuneration is subject
to the ceiling in the Corporation Code, (4) as a director, an
individual is generally precluded from entering into a contract
with the corporation of which he is a director. Hence, fees
received by directors as such cannot be considered as derived
from an economic or commercial activity that has been pursued
“in the course of trade or business”. Likeiwse, it is clear that the
performance of the functions of a director does not equate to
engaging in trade or business, especially if said director is not
an employee of the corporation. CIR vs Ongtenco, CTA EB
Case No. 995
Interest income of intercompany loans subject to VAT
because incidental to main line of business. A transaction is
characterized as having been entered into by a person in the
course of trade or business if it is (1) regularly conducted and
(2) undertaken in pursuit of a commercial or economic activity.
Transactions undertaken incidental to the pursuit of a
commercial or economic activity are, according to law, entered
in the course of trade or business. The loans granted to the
affiliates, KepcoIlijan Corporation and Kepco Philippines
Holdings, Inc. are incidental to Kepco’s primary business of
power generation of its Malaya Power Complex in Rizal and
other power generating plants, because these loans are intended
Last Edit: 23 December 2020
SPBUS
to be used for the construction of the generating power plant to
be located in Ilijan, Batangas, and for the purchase of shares of
stock in SALCON Power Corporation, a publicly listed
generation company in Cebu, respectively. These are in
furtherance of Kepco’s main line of business of “other power
generating plants and related facilities for the conversion into
electricity of fuel. Thus, the interest income on loans extended
to Kepco’s affiliates are subject to VAT. Kepco Philippines
Corporation, CTA EB Case No. 1155
Interest income of parent from subsidiary subject to VAT
regardless of profit. PNOC utilizes its own credit facility to
secure funds on behalf of its subsidiaries, and then extends the
same as advances to the subsidiaries. BIR assessed PNOC for
deficiency VAT on interest income received from its affiliates.
PNOC refused. CIR said, following the pronouncement
Lapanday, that the loan assistance provided to its affiliates,
being incidental to its business, is deemed a transaction in the
course of trade and business. The phrase ‘in the course of trade
and business’ means the regular conduct or pursuit of a
commercial or an economic activity, including transactions
incidental thereto. ‘Incidental’ means depending upon or
appertaining to something else primary; something necessary
appertaining to, or depending upon another, which is termed
the principal. Whether petitioner has realized profit or not is
insignificant. Thus, the present transaction is subject to VAT.
PNOC vs CIR, CTA EB Case No. 587
EXEMPT TRANSACTIONS
Section 109
(1) Subject to the provisions of Subsection (2) hereof, the
following transactions shall be exempt from the value-added
tax.
A. Sale or importation of agricultural and marine food
products in their original state, livestock and poultry
of or kind generally used as, or yielding or producing
foods for human consumption; and breeding stock and
genetic materials therefor.
JO VALLES
corporation and TAXATION
a. Products classified under this paragraph shall
be considered in their original state even if
they have undergone the simple processes of
preparation or preservation for the market,
such as freezing, drying, salting, broiling,
roasting, smoking or stripping. Polished and/or
husked rice, corn grits, raw cane sugar and
molasses, ordinary salt and copra shall be
considered in their original state;
B. Sale or importation of fertilizers; seeds, seedlings and
fingerlings; fish, prawn, livestock and poultry feeds,
including ingredients, whether locally produced or
imported, used in the manufacture of finished feeds
a. except specialty feeds for race horses, fighting
cocks, aquarium fish, zoo animals and other
animals generally considered as pets;
C. Importation of personal and household effects
belonging to the residents of the Philippines returning
from abroad and nonresident citizens coming to resettle
in the Philippines:
a. Provided, That such goods are exempt from
customs duties under the Tariff and Customs
Code of the Philippines;
D. Importation of professional instruments and
implements, tools of trade, occupation or employment,
wearing apparel, domestic animals, and personal and
household effects belonging to persons coming to settle
in the Philippines or Filipinos or their families and
descendants who are now residents or citizens of other
countries, such parties hereinafter referred to as
overseas Filipinos, in quantities and of the class
suitable to the profession, rank or position of the
persons importing said items, for their own use and not
for barter or sale, accompanying such persons, or
arriving within a reasonable time: Provided, That the
Bureau of Customs may, upon the production of
satisfactory evidence that such persons are actually
coming to settle in the Philippines and the goods are
brought from their former place of abode, exempt such
goods from payment of duties and taxes: Provided,
further, That the vehicles, vessels, aircrafts,
machineries and other similar goods for use in
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manufacture, shall not fall within this classification and
shall therefore be subject to duties, taxes and other
charges;
E. Services subject to percentage tax under Title V;
F. Services by agricultural contract growers and milling
for others of palay into rice, corn into grits and sugar
cane into raw sugar;
G. Medical, dental, hospital and veterinary services
except those rendered by professionals;
H. Educational services rendered by private educational
institutions, duly accredited by the Department of
Education(DepED), the Commission on Higher
Education (CHED), the Technical Education and Skills
Development Authority (TESDA) and those rendered
by government educational institutions;
I. Services rendered by individuals pursuant to an
employer-employee relationship;
J. Services rendered by regional or area headquarters
established in the Philippines by multinational
corporations which act as supervisory,
communications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia-Pacific
Region and do not earn or derive income from the
Philippines;
K. Transactions which are exempt under international
agreements to which the Philippines is a signatory or
under special laws, except those under Presidential
Decree No. 529;
L. Sales by agricultural cooperatives duly registered with
the Cooperative Development Authority to their
members as well as sale of their produce, whether in its
original state or processed form, to non-members; their
importation of direct farm inputs, machineries and
equipment, including spare parts thereof, to be used
directly and exclusively in the production and/or
processing of their produce;
M. Gross receipts from lending activities by credit or
multi-purpose cooperatives duly registered with the
Cooperative Development Authority;
N. Sales by non-agricultural, non- electric and non-credit
cooperatives duly registered with the Cooperative
Development Authority: Provided, That the share
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SPBUS
capital contribution of each member does not exceed
Fifteen thousand pesos (P15,000) and regardless of the
aggregate capital and net surplus ratably distributed
among the members;
O. Export sales by persons who are not VAT-registered;
P. Sale of real properties not primarily held for sale to
customers or held for lease in the ordinary course of
trade or business or real property utilized for low-cost
and socialized housing as defined by Republic Act No.
7279, otherwise known as the Urban Development and
Housing Act of 1992, and other related laws,
residential lot valued at One million five hundred
thousand pesos (P1,500,000) and below, house and lot,
and other residential dwellings valued at Two million
five hundred thousand pesos (P2,500,000) and below:
Provided, That beginning January 1, 2021, the VAT
exemption shall only apply to sale of real properties not
primarily held for sale to customers or held for lease in
the ordinary course of trade or business, sale of real
property utilized for socialized housing as defined by
Republic Act No. 7279, sale of house and lot, and other
residential dwellings with the selling price of not more
than Two million pesos (P2,000,000): Provided,
further, That every three (3) years thereafter, the
amount herein stated shall be adjusted to its present
value using the Consumer Price Index, as published by
the Philippine Statistics Authority(PSA);
Q. Lease of a residential unit with a monthly rental not
exceeding Fifteen thousand pesos (₱15,000);
R. Sale, importation, printing or publication of books and
any newspaper, magazine review or bulletin which
appears at regular intervals with fixed prices for
subscription and sale and which is not devoted
principally to the publication of paid advertisements;
S. Transport of passengers by international carriers;
T. Sale, importation or lease of passenger or cargo vessels
and aircraft, including engine, equipment and spare
parts thereof for domestic or international transport
operations;
U. Importation of fuel, goods and supplies by persons
engaged in international shipping or air transport
operations: Provided, That the fuel, goods, and
JO VALLES
corporation and TAXATION
supplies shall be used for international shipping or air
transport operations;
V. Services of bank, non-bank financial intermediaries
performing quasi-banking functions, and other non-
bank financial intermediaries;
W. Sale or lease of goods and services to senior citizens
and persons with disability, as provided under
Republic Act Nos. 9994 (Expanded Senior Citizens
Act of 2010) and 10754 (An Act Expanding the
Benefits and Privileges of Persons With Disability),
respectively
X. Transfer of property pursuant to Section 40(C)(2) of
the NIRC, as amended;
Y. Associations dues, membership fees, and other
assessments and charges collected by homeowners’
associations and condominium corporations;
Z. Sale of gold to the Banko Sentral ng Pilipinas (BSP);
AA. Sale of or importation of prescription drugs
and medicines for:
a. Diabetes, high cholesterol, and hypertension
beginning January 1, 2020; and
b. Cancer, mental illness, tuberculosis, and
kidney diseases beginning January 1, 2023.
Provided, That the DOH shall issue a list of
approved drugs and medicines for this purpose
within sixty (60) days from the effectivity of
this Act; and
BB. Sale or lease of goods or properties or the performance
of services other than the transactions mentioned in the
preceding paragraphs, the gross annual sales and/or
receipts do not exceed the amount of Three million
pesos (P3,000,000).
Section 116
Tax on Persons Exempt from VAT
Any person
1. whose sales or receipts are exempt under Section
109(BB) of this Code from the payment of value-added
tax and
2. who is not a VAT-registered person
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shall pay a tax equivalent to three percent (3%) of his gross
quarterly sales or receipts: Provided, That
• cooperatives, and
• beginning January 1, 2019, self-employed and
professionals with total annual gross sales and/or gross
receipts not exceeding Five hundred thousand pesos
(₱500,000)
shall be exempt from the three percent (3%) gross receipts tax
herein imposed.
Note: The P500K exemption above was vetoed by the
president.
Section 4.109-1, Revenue Regulations No. 16-05
as amended by Revenue Regulations No. 04-07 Section 14
(February 7, 2007), as further amended by Revenue
Regulation No. 16-2011 (October 27, 2011) as further
amended by Revenue Regulation 13-2018 Section 2; Revenue
Memorandum Circular No. 055-14 (June 17, 2014)
(A) In genera; VAT-exempt transactions. VAT-exempt
transactions refer to the sale of goods or properties and/or
services and the use or lease of properties that is not subject to
VAT (output tax) and the seller is not allowed any tax credit of
VAT (input tax) on purchases.
The person making the exempt sale of goods, properties or
services shall not bill any output tax to his customers because
the said transaction is not subject to VAT.
(B) Exempt transactions.
(1)
Subject to the provisions of Subsection (2) hereof, the
following
transactions shall be exempt from VAT:
(a) Sale or importation of agricultural and marine food
products in their original state, livestock and poultry of a
kind generally used as, or yielding or producing foods for
human consumption; and breeding stock and genetic
materials therefor.
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SPBUS
Livestock. Livestock shall include cows, bulls and calves, pigs,
sheep, goats and rabbits.
Poultry shall include fowls, ducks, geese and turkey. Livestock
or poultry does not include fighting cocks, race horses, zoo
animals and other animals generally considered as pets.
Marine food products. Marine food products shall include fish
and crustaceans, such as, but not limited to, eels, trout, lobster,
shrimps, prawns, oysters, mussels and clams.
Original state. Meat, fruit, fish, vegetables and other
agricultural and marine food products classified under this
paragraph shall be considered in their original date even if they
have undergone the simple processes of preparation or
preservation for the market, such as
(1) freezing,
(2) drying,
(3) salting,
(4) broiling,
(5) roasting,
(6) smoking or
(7) stripping,
(8) including those using advanced technological means of
packaging, such as shrink wrapping in plastics, vacuum
packing, tetra-pack, and other similar packaging
methods.
Polished and/or husked rice, corn grits, raw cane sugar and
molasses, ordinary salt and copra shall be considered as
agricultural food products in their original state.
Sugar whose content of sucrose by weight, in the dry state, has
a polarimeter reading of 99.5o and above are presumed to be
refined sugar.
Refined sugar. Cane sugar produced from the following shall
be presumed, for internal revenue purposes, to be refined sugar:
1. product of a refining process,
2. products of a sugar refinery, or
3. product of a production line of a sugar mill accredited
by the BIR to be producing and/or capable of
JO VALLES
corporation and TAXATION
producing sugar with polarimeter reading of 99.5o and
above, and for which the quedan issued therefor, and
verified by the Sugar Regulatory Administration,
identifies the same to be of a polarimeter reading of
99.5o and above.
Bagasse is not included in the exemption provided for under
this section.
(b) Sale or importation of fertilizers, seeds, seedlings and
fingerlings, fish, prawn, livestock and poultry feeds,
including ingredients, whether locally produced or
imported, used in the manufacture of finished feeds (except
specialty feeds for race horses, fighting cocks, aquarium
fish, zoo animals and other animals generally considered as
pets);
Specialty feeds. Specialty feeds refers to non-agricultural feeds
or food for race horses, fighting cocks, aquarium fish, zoo
animals and other animals generally considered as pets.
(c) Importation of personal and household effects belonging
to residents of the Philippines returning from abroad and
non-resident citizens coming to resettle in the Philippines;
• Provided, that such goods are exempt from customs
duties under the Tariff and Customs Code of the
Philippines;
(d) Importation of professional instruments and
implements, tools of trade, occupation or employment,
wearing apparel, domestic animals, and personal and
household effects
• belonging to persons coming to settle in the Philippines
or Filipinos or their families and descendants who are
now residents or citizens of other countries, such
parties hereinafter referred to as overseas Filipinos,
• in quantities and of the class suitable to the profession,
rank or position of the persons importing said items,
for their own use and not for barter or sale,
• accompanying such persons, or arriving within a
reasonable time:
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ad majorem dei gloriam
• Provided, That the Bureau of Customs may, upon the
production of satisfactory evidence that such persons
are actually coming to settle in the Philippines and that
the goods are brought from their former place of abode,
exempt such goods from payment of duties and taxes:
• Provided, further, that vehicles, vessels, aircrafts,
machineries and other similar goods for use in
manufacture, shall not fall within this classification and
shall therefore be subject to duties, taxes and other
charges;
(e)Services subject to percentage tax under Title V of the
Tax Code, as enumerated below:
1. Sale or lease of goods or properties or the performance
of services of non-VAT-registered persons, other than
the transactions mentioned in paragraphs (A) to (U) of
Sec. 109(1) of the Tax Code, the gross annual sales
and/or receipts of which does not exceed the amount of
Three Million Pesos (P3,000,000.00).
(Provided, That every three (3) years
thereafter, the amount herein stated shall be
adjusted to its present value using the
Consumer Price Index, as published by the
National Statistics Office (NSO) (Sec. 116 of
the Tax Code); Provided, further, that such
adjustment shall be published through revenue
regulations to be issued not later than March
31 of each year;
2. Services rendered by domestic common carriers by
land, for the transport of passengers and keepers of
garages (Sec.117);
3. Services rendered by international air / shipping
carriers (Sec.118);
4. Services rendered by franchise grantees of radio and/or
television broadcasting whose annual gross receipts of
the preceding year do not exceed Ten Million Pesos
(P10,000,000.00), and by franchise grantees of gas and
water utilities (Sec.119);
5. Service rendered for overseas dispatch, message or
conversation originating from the Philippines
(Sec.120);
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SPBUS
6. Services rendered by any person, company or
corporation (except purely cooperative companies or
associations) doing life insurance business of any sort
in the Philippines (Sec.123);
7. Services rendered by fire, marine or miscellaneous
insurance agents of foreign insurance companies
(Sec.124);
8. Services of proprietors, lessees or operators of
cockpits, cabarets, night or day clubs, boxing
exhibitions, professional basketball games, Jai-Alai
and race tracks (Sec. 125); and
9. Receipts on sale, barter or exchange of shares of stock
listed and traded through the local stock exchange or
through initial public offering (Sec.127).
(f) Services by agricultural contract growers and milling for
others of palay into rice, corn into grits, and sugar cane into
raw sugar;
Agricultural contract growers refers to those persons
producing for others poultry, livestock or other agricultural and
marine food products in their original state.
(g) Medical, dental, hospital and veterinary services, except
those rendered by professionals.
• Laboratory services are exempted. If the hospital or
clinic operates a pharmacy or drug store, the sale of
drugs and medicine is subject to VAT.
(h) Educational services rendered by private educational
institutions duly accredited by
• the Department of Education (DepED),
• the Commission on Higher Education (CHED) and
• the Technical Education and Skills Development
Authority (TESDA) and those rendered by government
educational institutions;
Educational services shall refer to academic, technical or
vocational education provided by private educational
institutions duly accredited.
(i) Services rendered by individuals pursuant to an employer-
employee relationship;
JO VALLES
corporation and TAXATION
(j) Services rendered by regional or area headquarters
established in the Philippines by multinational corporations
which act as supervisory, communications and coordinating
centers for their affiliates, subsidiaries or branches in the Asia
Pacific Region and do not earn or derive income from the
Philippines;
(k) Transactions which are exempt under international
agreements to the which Philippines is a signatory or under
special laws
• except those granted under PD No.529--Petroleum
Exploration Concessionaires under the Petroleum Act
of 1949; and
(l) Sales by agricultural cooperatives duly registered and in
good standing with the Cooperative Development Authority
(CDA) to their members, as well as sale of their produce,
whether in its original state or processed form, to non-
members; their importation of direct farm inputs,
machineries and equipment, including spare parts thereof,
to be used directly and exclusively in the production and/or
processing of theirproduce;
• Sale to non-members exempt if produce. Sale by
agricultural cooperatives to non-members can only be
exempted from VAT if the producer of the agricultural
products sold is the cooperative itself.
• Sale to members of produce or not; exempt. If the
cooperative is not the producer (e.g., trader), then only
those sales to its members shall be exempted from
VAT;
• It is to be reiterated however, that sale or importation
of agricultural food products in their original state is
exempt from VAT irrespective of the seller and buyer
thereof, pursuant to Subsection (a)hereof.
(m) Gross receipts from lending activities by credit or
multi-purpose cooperatives duly registered and in good
standing with the Cooperative Development Authority,
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ad majorem dei gloriam
(n) Sales by non-agricultural, non-electric and non-credit
cooperatives duly registered with and in good standing with
the CDA;
• Provided, That the share capital contribution of each
member does not exceed Fifteen Thousand Pesos
(P15,000.00) and
• regardless of the aggregate capital and net surplus
ratably distributed among the members.
• Importation by non-agricultural, non-electric and non-
credit cooperatives of machineries and equipment,
including spare parts thereof, to be used by them are
subject to VAT.
(o) Export sales by persons who are not VAT-registered;
(p) The following sales of real properties are exempt from
VAT, namely:
1. Sale of real properties not primarily held for sale to
customers or held for lease in the ordinary course
of trade or business.
o However, even if the real property is not
primarily held for sale to customers or held for
lease in the ordinary course of trade or
business but the same is used in the trade or
business of the seller, the sale thereof shall be
subject to VAT being a transaction incidental
to the taxpayer’s main business.
2. Sale of real properties utilized for low-cost housing as
defined by RA No. 7279, otherwise known as the
“Urban Development and Housing Act of 1992” and
other related laws, such as RA No. 7835 and RA
No.8763.
o Low-cost housing refers to housing projects
intended for homeless low- income family
beneficiaries, undertaken by the Government
or private developers, which may either be a
subdivision or a condominium registered and
licensed by the Housing and Land Use
Regulatory Board/Housing (HLURB) under
BP Blg. 220, PD No. 957 or any other similar
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SPBUS
law, wherein the unit selling price is within the
selling price per unit as set by the Housing and
Urban Development Coordinating Council
(HUDCC) pursuant to RA No. 7279, otherwise
known as the “Urban Development and
Housing Act of 1992” and other laws, such as
RA No. 7835 and RA No. 8763.
3. Sale of real properties utilized for socialized housing
as defined under RA No. 7279, and other related laws,
such as RA No. 7835 and RA No. 8763, wherein the
price ceiling per unit is P225,000.00 or as may from
time to time be determined by the HUDCC and the
NEDA and other related laws.
o Socialized housing refers to housing
programs and projects covering houses and
lots or home lots only undertaken by the
Government or the private sector for the
underprivileged and homeless citizens which
shall include sites and services development,
long-term financing, liberated terms on
interest payments, and such other benefits in
accordance with the provisions of RA No.
7279, otherwise known as the “Urban
Development and Housing Act of 1992” and
RA No. 7835 and RA No. 8763. “Socialized
housing” shall also refer to projects intended
for the underprivileged and homeless wherein
the housing package selling price is within the
lowest interest rates under the Unified Home
Lending Program (UHLP) or any equivalent
housing program of the Government, the
private sector or non- government
organizations.
4. Sale of residential lot valued at One Million Five
Hundred Thousand Pesos (P1,500,000.00) and below,
or house & lot and other residential dwellings valued
at Two Million Five Hundred Thousand Pesos
(P2,500,000.00) and below, as adjusted in 2011 using
the 2010 Consumer Price Index values.;
o If two or more adjacent residential lots are sold
or disposed in favor of one buyer, for the
purpose of utilizing the lots as one residential
JO VALLES
corporation and TAXATION
lot, the sale shall be exempt from VAT only if
the aggregate value of the lots do not exceed
P1,500,000.00.
o Adjacent residential lots, although covered by
separate titles and/or separate tax declarations,
when sold or disposed to one and the same
buyer, whether covered by one or separate
Deed of Conveyance, shall be presumed as a
sale of one residential lot.
Provided, That beginning January 1, 2021, the VAT exemption
shall only apply to sale of real properties not primarily held for
sale to customers or held for lease in the ordinary course of
trade or business, sale of real property utilized for socialized
housing as defined by Republic Act No. 7279, sale of house and
lot, and other residential dwellings with selling price of not
more than Two Million Pesos (P2,000,000.00): Provided,
further, That every three (3) years thereafter, the amounts stated
herein shall be adjusted to its present value using the Consumer
Price Index, as published by the Philippine Statistics Authority
(PSA)
(q) Lease of residential units with a monthly rental per unit
not exceeding Fifteen Thousand Pesos (P15,000.00);
o The foregoing notwithstanding, lease of
residential units where the monthly rental per
unit exceeds Fifteen Thousand Pesos
(P15,000.00), but the aggregate of such rentals
of the lessor during the year do not exceed
Three Million Pesos (P3,000,000.00) shall
likewise be exempt from VAT; however, the
same shall be subject to three percent (3%)
percentage tax under Section 116 of the Tax
Code.
Mixed above and below 15k. In cases where a lessor has
several residential units for lease, some are leased out for a
monthly rental per unit of not exceeding P15,000.00 while
others are leased out for more than P15,000.00 per unit, his tax
liability will be as follows:
1. The gross receipts from rentals not exceeding
P15,000.00 per month per unit shall be exempt from
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ad majorem dei gloriam
VAT regardless of the aggregate annual gross receipts.
It is also exempt from the 3% percentage tax.
2. The gross receipts from rentals exceeding P15,000.00
per month per unit shall be subject to VAT if the
aggregate annual gross receipts from said units only
exceeds P3,000,000.00. Otherwise, the gross receipts
will be subject to the 3% tax imposed under Section
116 of the Tax Code.
Residential units. The term residential units shall refer to
apartments and houses & lots used for residential purposes, and
buildings or parts or units thereof used solely as dwelling places
(e.g., dormitories, rooms and bed spaces) except motels, motel
rooms, hotels, hotel rooms, lodging houses, inns and
pensionhouses.
Unit. The term unit shall mean an apartment unit in the case of
apartments, house in the case of residential houses; per person
in the case of dormitories, boarding houses and bed spaces; and
per room in case of rooms for rent.
Illustration 1: A lessor rents his 15 residential units for
P14,500 per month. During the taxable year, his accumulated
gross receipts amounted to P2,610,000. He is not subject to
VAT since the monthly rent per unit does not exceed P15,000.
He is also not subject to 3% Percentage Tax.
Using the same example, assuming he has 20 residential units
with the same monthly rent per unit and his accumulated gross
receipts during the taxable year amounted to P3,480,000, he is
still not subject to VAT even if the accumulated earnings
exceeded P3,000,000 since the monthly rent per unit does not
exceed P15,000. He is also not subject to 3% Percentage Tax.
Illustration 2: A lessor rents his 15 residential units for
P15,500 per month. During the taxable year, his accumulated
gross receipts amounted to P2,790,000. He is not subject to
VAT since his accumulated gross receipts did not exceed
P3,000,000. He is, however, subject to 3% Percentage Tax
since the monthly rent per unit is more than P15,000.00.
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SPBUS
Using the same example, assuming he has 20 residential units
with the same monthly rent per unit and his accumulated gross
receipts during the taxable year amounted to P3,720,000, he is
already subject to VAT since the accumulated earnings
exceeded P3,000,000 and the monthly rent per unit is more than
P15,000.00.
Illustration 3: A lessor rents his 2 commercial and 10
residential units for monthly rent of P60,000 and P15,000 per
unit, respectively. During the taxable year, his accumulated
gross receipts amounted to P3,240,000 (P1,440,000 from
commercial units and P1,800,000 from residential units). The
P1,440,000 from commercial units is not subject to VAT since
it did not exceed P3,000,000. It is, however, subject to 3%
Percentage Tax. On the other hand, the P1,800,000
accumulated receipts from the residential units are not subject
to Percentage Tax and exempt from VAT since the monthly
rent is not more than P15,000.
Using the same example, assuming the lessor has 5 commercial
units and his accumulated gross receipts during the taxable year
amounted to P5,400,000 (P3,600,000 from commercial units
and P1,800,000 from residential units), he is subject to VAT
with respect to P3,600,000 since it exceeded P3,000,000. The
P1,800,000 accumulated receipts from residential units are not
subject to Percentage Tax and exempt from VAT since the
monthly rent is not more than P15,000.
Illustration 4: A lessor rents his 5 commercial and 10
residential units for monthly rent of P60,000 and P15,500 per
unit, respectively. During the taxable year, his accumulated
gross receipts amounting to P5,460,0000 (P3,600,000 from
commercial units and P1,860,000 from residential units) shall
be subject to VAT since it exceeded the P3,000,000 threshold
and the monthly rent of residential units is more than P15,000.
Jo: So you include the gross receipts for residential units in the
total gross receipts for purposes of computing if it reached the
ceiling, only if the rent per unit exceeds 15k.
(r) Sale, importation, printing or publication of books and
any newspaper, magazine, review, or bulletin
JO VALLES
corporation and TAXATION
1. which appears at regular intervals
2. with fixed prices for subscription and sale and
3. which is not devoted principally to the publication of
paid advertisements;
(s) Transport of passengers by international carriers;
(t) Sale, importation or lease of passenger or cargo vessels
and aircraft, including engine, equipment and spare parts
thereof for domestic or international transport operations;
o Provided, that the exemption from VAT on the
importation and local purchase of passenger and/or
cargo vessels shall be limited to those of one hundred
fifty (150) tons and above, including engine and spare
parts of said vessels;
o Provided, further, that the vessels to be imported shall
comply with the age limit requirement, at the time of
acquisition counted from the date of the vessel’s
original commissioning, as follows:
a. for passenger and/or cargo vessels, the age
limit is fifteen (15) years old,
b. for tankers, the age limit is ten (10) years old,
and
c. For high-speed passenger crafts, the age limit
is five (5) years old; Provided, finally, that
exemption shall be subject to the provisions of
Section 4 of Republic Act No. 9295, otherwise
known as “The Domestic Shipping
Development Act of2004”;
(u) Importation of fuel, goods and supplies by persons
engaged in international shipping or air transport
operations;
o Provided, that the said fuel, goods and supplies shall be
used exclusively or shall pertain to the transport of
goods and/or passenger from a port in the Philippines
directly to a foreign , or vice versa, without docking or
stopping at any other port in the Philippines unless the
docking or stopping at any other Philippine port is for
the purpose of unloading passengers and/or cargoes
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that originated from abroad, or to load passengers
and/or cargoes bound for abroad;
o Provided, further, that if any portion of such fuel,
goods or supplies is used for purposes other than that
mentioned in this paragraph, such portion of fuel,
goods and supplies shall be subject to twelve percent
(12%)VAT starting February 1, 2006;
(v) Services of banks, non-bank financial intermediaries
performing quasi-banking functions, and other non-bank
financial intermediaries, such as money changers and
pawnshops, subject to percentage tax under Secs. 121 and 122,
respectively, of the Tax Code, such as money changers and
pawnshops;
(w) Sale or lease of goods and services to senior citizens and
persons with disabilities, as provided under Republic Act Nos.
9994 (Expanded Senior Citizens Act of 2010) and 10754 (An
Act Expanding the Benefits and Privileges of Persons with
Disability), respectively;
(x) Transfer of Property pursuant to Section 40(C)(2) of the
Tax Code, as amended;
(y) Association dues, membership fees, and other assessments
and charges collected on a purely reimbursement basis by
homeowners’ associations and condominium corporations
established under Republic Act No. 9904 (Magna Carta for
Homeowners and Homeowners’ Association) and Republic
Act No. 4726 (The Condominium Act), respectively;
(z) Sale of gold to the Bangko Sentral ng Pilipinas;
(aa) Sale of drugs and medicines prescribed for diabetes, high
cholesterol, and hypertension to beginning January 1, 2020;
and Cancer, mental illness, tuberculosis, and kidney diseases
beginning January 1, 2023.
o Provided, That the DOH shall issue a list of approved
drugs and medicines for this purpose within sixty (60)
days from the effectivity of this Act;
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(bb) Sale or lease of goods or properties or the performance of
services other than the transactions mentioned in the preceding
paragraphs, the gross annual sales and/or receipts do not
exceed the amount of Three Million Pesos (P3,000,000.00)
Self-employed individuals and professionals availing of the 8%
tax on gross sales and/or receipts and other non-operating
income, under Sections 24(A)(2)(b) and 24(A)(2)(c)(2)(a) of
this Code shall also be exempt from the payment of twelve
(12%) VAT.
Illustration 5: Mr. JMLH signified his intention to be taxed at
“8% income tax in lieu of the graduated income tax rates and
percentage tax under Section 116” in his 1st Quarter Income
Tax. However, his gross sales/receipts during November of the
taxable year have exceeded the VAT threshold.
Mr. JMLH lost the option to pay the 8% commuted tax rate
when his gross sales/receipts exceeded the P3M threshold
during the 4th quarter. ForBusiness tax purposes, he is subject
to the 12% VAT prospectively starting November 2018. He is
also required to update his registration from non-VAT to VAT
on or before November 30 2018.
RR 8-2015
Section 2(a). Raw Cane Sugar. This is the natural sugar
extracted from sugarcane through simple mechanical process
by pressing for the juice; boiled to crystallize; filtered using
centrifuge to separate these crystals, and dried, resulting to
crystallize brown sugar (brown color due to natural molasses
content present in sugar cane):
o Provided, that it shall refer to raw cane sugar produced
from conducting only one (1) stage of filtering and
centrifugal without any other further process applied
thereto, such as but not limited to washing, bleaching,
etc.
o Provided further, that its color is greater than 800 ICU
and that its content of sucrose by weight in dry state
corresponds to a polarimeter reading of less than 99.5°.
o The above definition includes muscovado which has
standard specifications as produced, namely: Powder
JO VALLES
corporation and TAXATION
Class A – polarization of 86° minimum; Powder Class
B – polarization of 77° minimum; and, Lump –
polarization of 57° minimum.
Thus, only those falling under the above-definition of Raw
Cane Sugar, including muscovado, are exempt from VAT, or
from Percentage Tax, pursuant to Section 109 (1)(A) of the Tax
Code.
Section 3. Requirements to Pay in Advance Business Taxes,
such as VAT or Percentage Tax on Sale of Sugar. In general,
the business tax (VAT or Percentage Tax) on the sale of sugar,
shall be paid in advance by the owner/seller before any
warehouse receipt or quedans are issued or before the sugar
is withdrawn from any sugar refinery/mill.
o Moreover, any person whose sales or receipts are
exempt under Section 109(1)(V) of the NIRC from the
payment of VAT and who is not a VAT-registered
person shall pay an advance percentage tax equivalent
to THREE PERCENT (3%) of the gross monthly sales
or receipts of sugar.
Section 4. Basis for Determining the Amount of Advance
Tax Payment.
a. Base Price; P1400 per 50kg bag of sugar. The
amount of advance VAT payment shall be determined
by applying the VAT rate of twelve percent (12%) on
the applicable base price of ONE THOUSAND FOUR
HUNDRED PESOS (P1,400.00) per 50 kg. bag for
Sugar.
b. Subsequent Base Price Adjustments. The base price
upon which the advance payment of VAT will be
computed under the preceding paragraph shall be
adjusted when deemed necessary by the
Commissioner, depending on the prevailing market
price of sugar.
c. Advance Percentage Tax. For taxpayers exempted
under Section 109(1)(V) of the NIRC from the
payment of VAT who are not a VAT-registered person,
the amount of advance Percentage Tax shall be
determined by applying the Percentage Tax rate
equivalent to THREE PERCENT (3%) of the gross
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ad majorem dei gloriam
sales or receipts: Provided, that cooperatives shall be
exempt from the THREE PERCENT (3%) gross
receipts.
Section 5. Exemption from the Payment of the Advance
VAT. The following withdrawals shall be exempt from the
payment of the advance VAT:
a. Withdrawal of Raw Cane Sugar. Sale of Raw Cane
Sugar, including muscovado, is always exempt from
VAT irrespective of the seller and buyer pursuant to
Sec. 109 (1) (A) of the Tax Code.
b. Withdrawal of Sugar by Duly Accredited and
Registered Agricultural Cooperative of Good
Standing. In the event the Sugar is owned and
withdrawn from the Sugar Refinery/Mill by an
agricultural cooperative of good standing duly
accredited and registered with the Cooperative
Development Authority (CDA), the withdrawal of
Sugar for sale to members is not subject to advance
VAT. The same shall also not be subject to advance
Percentage Tax.
o Provided, however, that withdrawal of Sugar
for sale to non-members is subject to
payment of advance VAT or percentage tax
if the agricultural cooperative is not the
producer of Sugar.
o Provided, however, that any quedan or
evidence of ownership showing the name of
the cooperative together with another entity,
natural or juridical, shall not be considered
sales by an agricultural cooperative but by the
other entity named therein, and are, therefore,
not covered herein and are subject to advance
business tax required under this Regulations.
o A cooperative must be a holder of a valid,
current and subsisting Certificate of Tax
Exemption which is issued in accordance with
Revenue Memorandum Order No. 76-2010
dated September 27, 2010.
c. Withdrawal of Sugar by Duly Accredited and
Registered Agricultural Cooperative which is sold
to another Agricultural cooperative. If the owner of
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the Sugar as reflected in the quedan is an agricultural
cooperative, the sale of the resulting Sugar to another
agricultural cooperative is not subject to VAT pursuant
to Sec. 109 (L) of the Tax Code. It shall also not be
subject to advance Percentage Tax.
o Thus, if the seller-cooperative is not an
agricultural producer but merely purchases the
Sugar from planter, whether members or non-
members, or transfer the Sugar to cooperative
through assignment, its sale of the resulting
sugar to another agricultural cooperative shall
be subject to VAT and its withdrawal from the
Sugar Refinery/Mill will only be allowed upon
payment of the advance VAT or Percentage
Tax in the RDO having jurisdiction over the
place of business of the cooperative.
o Any quedan or evidence of ownership issued
to cooperative together with another entity,
natural or juridical, shall not be considered sale
by the cooperative, but the entity named
therein and are, therefore, not exempted from
the advance business taxes required under this
Regulations.
Section 6. Withdrawal or Transfer of Ownership of Sugar.
The proprietor of a Sugar Refinery/Mill shall not allow the
issuance of quedan/warehouse receipts or other evidence of
ownership or allow any withdrawal of sugar from its premises
without proof of payment of advance VAT/Percentage Taxes
required in these Regulations. Any person making the
withdrawal or transfer shall submit proof of such payment or
exemption from payment thereof.
In relation to individuals
(bb) Sale or lease of goods or properties or the performance of
services other than the transactions mentioned in the preceding
paragraphs, the gross annual sales and/or receipts do not
exceed the amount of Three Million Pesos (P3,000,000.00)
Self-employed individuals and professionals availing of the 8%
tax on gross sales and/or receipts and other non-operating
JO VALLES
corporation and TAXATION
income, under Sections 24(A)(2)(b) and 24(A)(2)(c)(2)(a) of
this Code shall also be exempt from the payment of twelve
(12%) VAT.
Section 24(A)(2)(b). Rate of Tax on Income of "Purely
Self-employed Individuals and/ or Professionals
Whose Gross Sales or Gross Receipts and Other Non-
operating Income Does Not Exceed the Value-added
Tax (VAT) Threshold as Provided in Section
109(BB).— Self-employed individuals and/or
professionals shall have the option to avail of an eight
percent (8%) tax on gross sales or gross receipts and
other non-operating income in excess of Two hundred
fifty thousand pesos (₱250,000) in lieu of the graduated
income tax rates under Subsection (A)(2)(a) of this
Section and the percentage tax under Section 116 of
this Code.
Section 24(A)(2)(c)(2). Rate of Tax for Mixed
Income Earners. Taxpayers earning both
compensation income and income from business or
practice of profession shall be subject to the following
taxes:
(2) All Income from Business or Practice of Profession
a. If Total Gross Sales and/or Gross Receipts and
Other Non-operating Income Do Not Exceed
the VAT Threshold as Provided in Section
109(BB) of this Code. The rates prescribed
under Subsection (A)(2)(a) of this Section on
taxable income, or eight percent (8%) income
tax based on gross sales or gross receipts and
other non-operating income in lieu of the
graduated income tax rates under Subsection
(A)(2)(a) of this Section and the percentage tax
under Section 116 of this Code.
b. If Total Gross Sales and/or Gross Receipts and
Other Non-operating Income Exceeds the
VAT Threshold as Provided in Section
109(BB) of this Code.— The rates prescribed
under Subsection (A)(2)(a) of this Section.
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RR 8-2018. Section 3(c) .Self-Employed Individuals
Earning Income Purely from Self-Employment or Practice
of Profession. Individuals earning income purely from self-
employment and/or practice of profession whose gross
sales/receipts and other non-operating income does not exceed
the value-added tax (VAT) threshold as provided under Section
109 (BB) of the Tax Code, as amended, shall have the option
to avail of:
1. The graduated rates under Section 24(A)(2)(a) of the
Tax Code, as amended; OR
2. An eight percent (8%) tax on gross sales or receipts and
other non-operating income in excess of two hundred
fifty thousand pesos (P250,000.00) in lieu of the
graduated income tax rates under Section 24(A) and
the percentage tax under Section 1 16 all under the Tax
Code, as amended.
Default rule is graduated rates. Unless the taxpayer
signifies the intention to elect the 8% income tax rate in the
1st Quarter Percentage and/or Income Tax Return, or on
the initial quarter return of the taxable year after the
commencement of a new business/practice of profession,
the taxpayer shall be considered as having availed of the
graduated rates under Section 24(A)(2)(a) of the Tax Code,
as amended. Such election shall be irrevocable and no
amendment of option shall be made for the said taxable
year.
Option to be taxed at 8% of gross receipts not available
to VAT-registered or those subject to OPT or partners
of GPP. The option to be taxed at 8% income tax rate is
not available to a VAT-registered taxpayer, regardless of
the amount of gross sales/receipts, and to a taxpayer who is
subject to Other Percentage Taxes under Title V of the Tax
Code, as amended, except those subject under Section 116
of the same Title. Likewise, partners of a General
Professional Partnership (GPP) by virtue of their
distributive share from GPP which is already net of cost
and expenses cannot avail of the 8% income tax rate option.
Tax base of 8%; annual gross sales/receipts + other
non-operating income. A taxpayer who signifies the
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intention to avail of the 8% income tax rate option, and is
conclusively qualified for said option at the end of the
taxable year [annual gross sales/receipts and other non-
operating income did not exceed the VAT threshold
(P3,000,000.00)], shall compute the final annual income
tax due based on the actual annual gross sales/receipts
and other non-operating income. The said income tax
due shall be in lieu of the graduated rates of income tax and
the percentage tax under Sec. 116 of the Tax Code, as
amended. The Financial Statements (FS) is not required to
be attached in filing the final income tax return. However,
existing rules and regulations on bookkeeping and
invoicing/receipting shall still apply.
Automatically subject to graduated rates if exceed VT
threshold during the year; tax credit. A taxpayer shall
automatically be subject to the graduated rates under
Section 2a(A)(2)(a) of the Tax Code, as amended, even if
the flat 8% income tax rate option is initially selected, when
taxpayer's gross sales/receipts and other non-operating
income exceeded the VAT threshold during the taxable
year. In such case, his income tax shall be computed under
the graduated income tax rates and shall be allowed a tax
credit for the previous quarter/s income tax payment/s
under the 8% income tax rate option.
Graduated rates + business tax. In addition, a taxpayer
subject to the graduated income tax rates (either selected
this as the income tax regime. or failed to signify chosen
intention or failed to qualify to be taxed at the 8% income
tax rate) is also subject to the applicable business tax, if
any, Subject to the provisions of Section 8 of these
Regulations, an FS shall be required as an attachment to the
annual income tax return even if the gross sales/receipts
and other non-operating income is less than the VAT
threshold.
o However, the annual income tax return of a
taxpayer with gross sales/receipts and other non-
operating income of more than the said VAT
threshold shall be accompanied by an audited FS.
JO VALLES
corporation and TAXATION
o Taxable income for individuals earning income
from self-employment/practice of profession shall
be the net income, if taxpayer opted to be taxed at
graduated rates or has failed to signify the chosen
option.
o However, if the option availed is the 8% income
tax rate, the taxable base is the gross sales/receipts
and other non-operating income.
RR 8-2018. Section(d). Individuals Earning Income Both from
Compensation and from Self-Employment (business or
practice of profession). For mixed income earners, the income
tax rates applicable are:
1. The compensation income shall be subject to the tax
rates prescribed under Section 24(A)(2)(a) of the Tax
Code, as amended; AND
2. The income from the business or practice of
profession shall be subject to the following:
1. If the gross sales/receipts and other non-
operating income do not exceed the VAT
threshold, the individual has the option to be
taxed at:
1. Graduated income tax rates prescribed
under Section 24(A)(2)(a) of the Tax
Code, as amended; OR
2. Eight percent (8%) income tax rate
based on gross sales/receipts and other
non-operating income in lieu of the
graduated income tax rates and
percentage tax under Section 116 of
the Tax Code, as amended.
2. If the gross sales/receipts and other non-
operating income exceeds the VAT threshold,
the individual shall be subject to the graduated
tax rates prescribed under Section 24(A)(2)(a)
of the Tax Code, as amended.
P250K deduction under 8% tax available only to
purely self-employed. The provision under Section
24(A)(2)(a) of the Tax Code, as amended, which
allows an option of 8% income tax rate on gross
sales/receipts and other non-operating income in
excess of P250,000.00 is available only to purely self-
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employed individuals and/or professionals. The
P250,000 mentioned is not applicable to mixed income
earners since it is already incorporated in the first tier
of the graduated income tax rates applicable to
compensation income. Under the said graduated rates,
the excess of the P250,000 over the actual taxable
compensation income is not deductible against the
taxable income from business/practice of profession
under the 8% income tax rate option.
Total tax due of mixed income earners if elected
8%. The total tax due shall be the sum of:
1. tax due from compensation, computed using
the graduated income tax rates; and
2. tax due from self-employment/practice of
profession, resulting from the multiplication of
the 8% income tax rate with the total of the
gross sales/receipts and other non-operating
income.
Total tax due of mixed income earners who elected
graduated tax rates. Mixed income earner who opted
to be taxed under the graduated income tax rates for
income from business/practice of profession, shall
combine the taxable income from both compensation
and business/practice of profession in computing for
the total taxable income, and consequently, the income
tax due.
RR 13-2018. Section 4.109-2. Exempt Transactions May be
Registered for VAT Purposes. A VAT-registered person may,
in relation to Sec. 236 (H) of the 1997 Tax Code, as amended,
elect that the exemption in Sec. 4.109-1(B) hereof shall not
apply to his sales of goods or properties or services. Once the
election is made, it shall be irrevocable for a period of three (3)
years counted from the quarter when the election was made
except for franchise grantees of radio and TV broadcasting
whose annual gross receipts for the preceding year do not
exceed ten million pesos (P10,000,000.00) where the option
becomes perpetually irrevocable.
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RR 13-2018, Section 4-116. Tax on Persons Exempt from
Value-added Tax (VAT). Any person whose sales or receipts
are exempt under Section 109 (1) (BB) of the Tax Code from
the payment of value-added tax and who is not a VAT-
registered person shall pay a tax equivalent to three percent
(3%) of his gross quarterly sales or receipts: Provided,
however, that the following shall be exempt from the payment
of three percent (3%) percentage tax:
1. Cooperatives: and
2. Self-employed individuals and professionals availing
of the 8% tax on gross sales and/or receipts and other
non-operating income, under Sections 24(A)(2)(b) and
24(A)(2)(c)(2)(a) of the Tax Code, as amended..
RR 13-2018, Transitory Provisions
1. Optional VAT registration; irrevocable for 3 yrs. In
relation to Section 109(1)(BB), an existing VAT-
registered taxpayer whose gross sales/receipts in the
preceding taxable year did not exceed the VAT
threshold of P3,000,000.00 may continue to be VAT-
registered taxpayer and avail of the “Optional
Registration for Value- Added Tax of Exempt Person”
provided by Section 236(H). Once availed, the
taxpayer shall not be entitled to cancel the VAT
registration for the next three (3)years.
2. A VAT-registered taxpayer who opted to register as
Non- VAT as a result of the implementation of the
TRAIN Law, shall immediately:
a. submit an inventory list of unused invoices
and/or receipts as of the date of filing of
application for update of registration from
VAT to Non- VAT, indicating the number of
booklets and its corresponding serial numbers
b. surrender the said invoices and/or receipts for
cancellation.
A number of unused invoices/receipts, as determined by the
taxpayer with the approval of the appropriate BIR Office, may
be allowed for use, provided the phrase “Non-VAT registered
JO VALLES
corporation and TAXATION
as of (date of filing an application for update of registration).
Not valid for claim of input tax.” shall be stamped on the face
of each and every copy thereof, until new registered non-VAT
invoices or receipts have been received by the taxpayer. Upon
such receipt, the taxpayer shall submit a new inventory list of,
and surrender for cancellation, all unused previously-stamped
invoices/receipts.
ZERO RATED GOODS
Exemption vs zero-rated. Under the VAT system, exemption
from VAT and 0% are distinguished as follows: zero rating
should be used when the authorities really wish to ensure that a
product is to be free of VAT. Using an exemption for VAT
means that the tax is borne by the trader, and if that trader sells
to the public, he must pass on the tax on input to the public in
his price or cut payments to his factors of production (capital
and labor). This suggests that countries that generally wish to
pass on to the consumer the benefits of VAT-free goods and
services should be allowed to use the zero rate.
Section 106 (A)(2)(a)
Value-Added Tax on Sale of Goods or Properties
(A) Rate and Base of Tax; 12% GSP. There shall be levied,
assessed and collected on every sale, barter or exchange of
goods or properties, value-added tax equivalent to twelve
percent (12%) of the gross selling price or gross value in money
of the goods or properties sold, bartered or exchanged, such tax
to be paid by the seller or transferor.
(2) The following sales by VAT-registered persons shall be
subject to zero percent (0%) rate:
a. Export Sales. The term “export sales” means:
i. The sale and actual shipment of goods from the
Philippines to a foreign country, irrespective of
any shipping arrangement that may be agreed
upon which may influence or determine the
transfer of ownership of the goods so exported
and paid for in acceptable foreign currency or its
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equivalent in goods or services, and accounted
for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas (BSP);
ii. [VETOED] Sale and delivery of goods to:
a. Registered enterprises within a
separate customs territory as
provided under special laws; and
b. Registered enterprises within
tourism enterprises zones as
declared by the Tourism
Infrastructure and Enterprise Zone
Authority(TIEZA) subject to the
provisions under Republic Act No.
9593 or The Tourism Act of 2009.
iii. Sale of raw materials or packaging materials to a
nonresident buyer for delivery to a resident local
export-oriented enterprise to be used in manufacturing,
processing, packing or repacking in the Philippines of
the said buyer's goods and paid for in acceptable
foreign currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP);
iv. Sale of raw materials or packaging materials to export-
oriented enterprise whose export sales exceed seventy
percent (70%) of total annual production;
v. Those considered export sales under Executive Order
NO. 226, otherwise known as the “Omnibus
Investment Code of 1987”, and other special laws;
Export sales under EO 226. Considered export sales under
Executive Order No. 226" shall mean
1. the Philippine port F.O.B. value determined from
invoices, bills of lading, inward letters of credit,
landing certificates, and other commercial documents,
of export products exported directly by a registered
export producer, or
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2. the net selling price of export products sold by a
registered export producer to another export producer,
or to an export trader that subsequently exports the
same: Provided, That sales of export products to
another producer or to an export trader shall only be
deemed export sales when actually exported by the
latter, as evidenced by landing certificates or similar
commercial documents:
Constructive exports. Provided, further, That without actual
exportation the following shall be considered constructively
exported for purposes of these provisions:
1. sales to bonded manufacturing warehouses of export-
oriented manufacturers;
2. sales to export processing zones;
3. sales to registered export traders operating bonded
trading warehouses supplying raw materials in the
manufacture of export products under guidelines to be
set by the Board in consultation with the Bureau of
Internal Revenue (BIR) and the Bureau of Customs
(BOC);
4. sales to diplomatic missions and other agencies and/or
instrumentalities granted tax immunities, of locally
manufactured, assembled or repacked products
whether paid for in foreign currency or not.
Commission income included. For purposes of zero-rating,
the export sales of registered export traders shall include
commission income.
Export sales when sold by consignee. The exportation of
goods on consignment shall not be deemed export sales until
the export products consigned are in fact sold by the consignee;
and
Zero-rated; VAT supplier to BOI 100% exporter. Provided,
finally, that sales of goods, properties or services made by a
VAT-registered supplier to a BOI-registered
manufacturer/producer whose products are 100% exported are
considered export sales. A certification to this effect must be
issued by the Board of Investment (BOI) which shall be good
JO VALLES
corporation and TAXATION
for one year unless subsequently re- issued by the BOI. Section
4-106-5, RR No. 16-05
and
vi. The sale of goods, supplies, equipment and fuel to
persons engaged in international shipping or
international air transport operations: Provided, That
the goods, supplies, equipment and fuel shall be used
for international shipping or air transport operations.
• Exclusive for international shipping.
Provided, That the goods, supplies, equipment,
and fuel shall be used exclusively for
international shipping or air transport
operations. Section 4-106-5, RR No. 16-05
Provided, That subparagraphs (3), (4), and (5) hereof shall
be subject to the twelve percent (12%) value-added tax and
no longer be considered export sales subject to zero percent
(0%) VAT rate upon satisfaction of the following
conditions:
1. The successful establishment and implementation
of an enhanced VAT refund system that grants
refunds of creditable input tax within ninety (90)
days from the filing of the VAT refund application
with the Bureau: Provided, That, to determine the
effectivity of item no. 1, all applications filed from
January 1, 2018 shall be processed and must be
decided within ninety (90) days from the filing of
the VAT refund application; an
2. All pending VAT refund claims as of December
21, 2017 shall be fully paid in cash by December
31, 2019.
VAT refund center. Provided, That the Department of
Finance shall establish a VAT refund center in the Bureau
of Internal Revenue(BIR) and in the Bureau of
Customs(BOC) that will handle the processing and
granting of cash refunds of creditable input tax.
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5% VAT collection automatically appropriated as
special account or trust receipt. An amount equivalent to
five percent (5%) of the total VAT collection of the BIR
and the BOC from the immediately preceding year shall be
automatically appropriated annually and shall be treated as
a special account in the General Fund or as trust receipts
for the purpose of funding claims for VAT refund:
Provided, That any unused fund, at the end of the year shall
revert to the General Fund.
BIR and BOC to submit quarterly report to the
COCCTRP. Provided, further, That the BIR and the BOC
shall be required to submit to the Congressional Oversight
Committee on the Comprehensive Tax Reform Program
(COCCTRP) a quarterly report of all pending claims for
refund and any unused fund.
b. Effectively zero-rated. Sales to persons or entities
whose exemption under special laws or international
agreements to which the Philippines is a signatory
effectively subjects such sales to zero rate.
Section 108 (B)
Value-added Tax on Sale of Services and Use or Lease of
Properties
(B) Transactions Subject to Zero Percent (0%) Rate. The
following services performed in the Philippines by VAT-
registered persons shall be subject to zero percent (0%) rate.
1. Processing, manufacturing or repacking goods for
other persons doing business outside the Philippines
which goods are subsequently exported, where the
• services are paid for in acceptable foreign
currency and
• accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas
(BSP);
2. Services other than those mentioned in the preceding
paragraph, rendered to a person engaged in business
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conducted outside the Philippines or to a nonresident
person not engaged in business who is outside the
Philippines when the services are performed, the
consideration for which is
• paid for in acceptable foreign currency and
• accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas
(BSP);
3. Services rendered to persons or entities whose
exemption under special laws or international
agreements to which the Philippines is a signatory
effectively subjects the supply of such services to
zero percent (0%) rate;
4. Services rendered to persons engaged in international
shipping or international air transport operations,
including leases of property for use thereof:
• Provided, That these services shall be
exclusive for international shipping or air
transport operations;
• PH-PH not included. Thus, the services
referred to herein shall not pertain to those
made to common carriers by air and sea
relative to their transport of passengers, goods
or cargoes from one place in the Philippines to
another place in the Philippines, the same
being subject to twelve percent (12%) VAT
under Sec. 108 of the Tax Code. Section 4-
108-5, RR 16-05
5. Services performed by subcontractors and/or
contractors in processing, converting, or
manufacturing goods for an enterprise whose export
sales exceed seventy percent (70%) of total annual
production;
6. Transport of passengers and cargo by air or sea vessels
from the Philippines to a foreign country;
JO VALLES
corporation and TAXATION
• Still liable to 3% OPT. However, they are
still liable to a percentage tax of three percent
(3%) based on their gross receipts derived
from transport of cargo from the Philippines to
another country as provided for in Sec.118 of
the Tax Code; Section 4-108-5, RR 16-05
and
7. Sale of power or fuel generated through renewable
sources of energy such as, but not limited to, biomass,
solar, wind, hydropower, geothermal, ocean energy,
and other emerging energy sources using technologies
such as fuel cells and hydrogen fuels.
8. [VETOED] Services rendered to:
i. Registered enterprises within a separate customs
territory as provided under special law; and
ii. Registered enterprises within tourism enterprise
zones as declared by TIEZA subject to the
provisions under Republic Act No. 9593 or the
Tourism Act of 2009.
Reason for veto. The above provisions go against the
principle of limiting the VAT zero-rating to direct
exporters. The proliferation of separate customs
territories, which include buildings, creates significant
leakages in our tax system. This makes the tax system
highly inequitable and significantly reduces the
revenues that could be better used for the poor. As to
tourism enterprises, the current law only allows for
duty and tax free importation of capital equipment,
transportation equipment and other goods. The TIEZA
Law explicitly allows only duty and tax free
importation of capital equipment, transportation
equipment and other goods (in certain cases and always
subject to rules provided by the DOF). Thus, this
provision actually grants a new incentive to suppliers
of registered tourism enterprises. At any rate, TIEZA
law, which is still in effect for two more years, can be
used to avail of the above-mentioned incentives.)
212
ad majorem dei gloriam
Provided, That subparagraphs (B)(1) and (B)(5) hereof
shall be subject to the twelve percent (12%) value-
added tax and no longer subject to zero percent (0%)
VAT rate upon satisfaction of the following conditions:
1. The successful establishment and
implementation of an enhanced VAT refund
system that grants refund of creditable input
tax within ninety (90) days from the filing of
the VAT refund application with the Bureau;
Provided, That, to determine the effectivity of
item no. 1, all applications filed from January
1, 2018 shall be processed and must be decided
within ninety (90) days from the filing of the
VAT refund application; and
2. All pending VAT refund claims as of
December 31, 2017 shall be fully paid in cash
by December 31, 2019.
VAT refund center. Provided, That the Department of
Finance shall establish a VAT refund center in the
Bureau of Internal Revenue(BIR) and in the Bureau of
Customs(BOC) that will handle the processing and
granting of cash refunds of creditable input tax.
5% VAT collection automatically appropriated as
special account or trust receipt. An amount
equivalent to five percent (5%) of the total value-added
tax collection of the BIR and the BOC from the
immediately preceding year shall be automatically
appropriated annually and shall be treated as a special
account in the General Fund or as trust receipts for the
purpose of funding claims for VAT Refund: Provided,
That any unused fund, at the end of the year shall revert
to the General Fund.
BIR and BOC to submit quarterly report to the
COCCTRP. Provided, further, That the BIR and the
BOC shall be required to submit to the COCCTRP a
quarterly report of all pending claims for refund and
any unused fund.
Last Edit: 23 December 2020
SPBUS
Export sales made by VAT-registered; zero-rated. Cebu
Toyo Corporation is VAT-registered and an export enterprise
registered with PEZA. As an export enterprise, it sells 80% of
its products to its mother corporation in Japan, and the rest to
other enterprises doing business in the MEPZ. Inasmuch as
both sets of sales are considered export sales subject to 0% tax,
respondent filed its quarterly VAT returns, showing total input
VAT, but subsequently filed for refund. It subsequently filed
petition before CTA to toll the running of the 2-year
prescriptive period. CIR argues that Cebu Toyo is not entitled
to a refund because it was VAT exempt. SC said that Cebu Toyo
was not VAT exempt, and correctly registered itself as a VAT
taxpayer. RA 7916 gives PEZA-registered enterprises the
option to avail of income tax holiday pursuant to the provisions
of EO 226, or avail of tax exemptions on all taxes and pay only
preferential tax rate of 5%. That Cebu Toyo elected the first
option (ITH) is clear in its Annual Corporate Income Tax
Returns, where respondent specified that it was availing of the
tax relief under E.O. No. 226. Hence, respondent is not exempt
from VAT and it correctly registered itself as a VAT taxpayer.
In fine, it is engaged in taxable rather than exempt transactions.
Now, having determined that respondent is engaged in taxable
transactions subject to VAT, let us then proceed to determine
whether it is subject to 10% or zero (0%) rate of VAT.
Generally, sale of goods and supply of services performed in
the Philippines are taxable at the rate of 10%. However, export
sales, or sales outside the Philippines, shall be subject to value-
added tax at 0% if made by a VAT-registered person. In this
case, it is undisputed that respondent is engaged in the export
business and is registered as a VAT taxpayer per Certificate of
Registration of the BIR. Thus, it is subject to VAT at 0% rate
and is entitled to a refund or credit of the unutilized input taxes.
CIR vs Cebu Toyo Corporation
Non-registered activities not zero-rated; subject to 12%
VAT. Branders is a domestic corporation. It leases the 17th and
30th floors of Union Bank Plaza, and subleases the latter to the
ROHQ of Branders, US. It also owns equipment which it
likewise leases to the ROHQ. For the payments, it issues VAT
OR and records the same as rental income. BIR said that since
the rental income is not derived from a registered activity, it
shall be subject to the regular corporate income tax as well as
JO VALLES
corporation and TAXATION
12% VAT. lt also pays for expenses that are common to
Branders and the ROHQ (such as electricity and water) that the
ROHQ reimburses on a cost basis. BIR said that since
reimbursement of expenses is not income but merely a return
of capital, the same is not subject to tax. BIR Ruling No. DA-
053-08
Offsetting of payables as mode of payment is not equal to
payment in foreign currency. Grundfos earns commission
income from indent sales, or the sales executed by its Singapore
parent company to the Philippine customer. It participates only
as a mediator in securing the order; once it gets the order, it
forwards the order to the Singapore office, and that finishes its
role. The parent company will invoice the order directly to the
customer. The commission income that Grundfos
constructively receives, which is deducted from its payable to
the parent company, is booked as part of its other income. It is
asking whether the service it renders to its parent company is a
zero-rated VAT transaction. Pursuant to Section 108(A) of the
Tax Code, VAT shall be imposed on gross receipts derived
from the sale or exchange of services, and use or lease of
properties. Nevertheless, under Section 108(B)(2) of the same
Code the transaction may be subject to 0% VAT. Under said
provision, 2 requisites must concur in order that the services
qualify for 0% VAT rating: (1) the services must be rendered
to persons engaged in business conducted outside the
Philippines or to non-resident foreign clients not engaged in
business who are outside the Philippines when the services are
performed; and (2) the fees to be paid are in acceptable foreign
currency and accounted for in compliance with the rules and
regulations of the BSP. Grundfos is not covered by said section
since its commissions for services to its parent company (a
foreign company outside the Philippines at the time the services
were rendered), are not paid in foreign currency inwardly
remitted to the Philippines in accordance with the rules and
regulations of the BSP. Rather, said commissions are deducted
from its payables to its parent company. Such being the case,
the commissions are subject to 12% VAT and forms part of its
compensation subject to income tax. BIR Ruling No. 048-11
Hotel services to pilots/crew not 0-rated; must be directly
related to aircraft itself. The rule on zero-rating of a sale of
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ad majorem dei gloriam
service to international air carriers in Section 108(B)(4) of the
NIRC (which must be read together with Section 4.108- 5(b)(4)
of RR 16-2005 is further clarified by Question 11 of RMC 046-
0832 dated February 1, 2008. Based on the above, in order to
qualify for zero-rating, the services rendered by a VAT-
registered person to a person engaged in international air
transport operations must pertain to or must be attributable to
the transport of goods and passengers from a port in the
Philippines directly to a foreign port without docking or
stopping at any port in the Philippines. It is worthy to
mention that for international vessels, this Office held that the
VAT-zero-rated services only refer to services rendered to the
international vessel itself. Inasmuch as this rule also applies to
international air carriers, such service must be rendered to the
aircraft itself. In this case, the services provided by DELTA
AIR pertain to room accommodations and food and beverage
services offered to international airlines. As they are rendered
within the hotel’s premises, they have no direct connection with
the transport of goods and passengers, and cannot be
considered as services directly attributable to the transport of
goods and passengers from a Philippine port directly to a
foreign port entitled to zero-rating. Such being the case, they
are subject to 12% VAT. BIR Ruling No. 099-2011
Services rendered to the pilots do not cross PH territory
hence cannot be zero-rated. The CTA agrees with the
Division when it said that “According to the Destination
Principle, goods and services are taxed only in the country
where these are consumed. In connection with the said
principle, the Cross Border Doctrine mandates that no VAT
shall be imposed to form part of the cost of the goods destined
for consumption outside the territorial border of the taxing
authority. Precisely, under our VAT Law, goods, property or
services destined, used or consumed in the Philippines are
subject to the 12% VAT whereas those destined, used or
consumed abroad are subject to 0% VAT”. The services
rendered to the pilots and cabin crew did not cross Philippine
territory, nor can they be considered as services directly used
in connection with international air transport operation. Manila
Peninsula Hotel, Inc. vs CIR [CTA Caso No. 8519]
Last Edit: 23 December 2020
SPBUS
EFFECTIVELY ZERO-RATED
RR 16-05
Section 4.106-6. Meaning of the term ‘effectively zero-rated
sale of goods and properties’. The term ‘effectively zero-rated
sale of goods and properties’ shall refer to
1. the local sale of goods and properties
2. by a VAT- registered person
3. to a person or entity who was granted indirect tax
exemption under special laws or international
agreement.
Prior application with BIR office required. Except for
1. Export Sale under Sec. 4.106-5(a) and
2. Foreign Currency Denominated Sale under Sec. 4.106-
5(b),
other cases of zero-rated sales shall require prior application
with the appropriate BIR office for effective zero-rating.
Effect of lack of approved application; considered exempt.
Without an approved application for effective zero-rating, the
transaction otherwise entitled to zero-rating shall be considered
exempt. The foregoing rule notwithstanding, the
Commissioner may prescribe such rules to effectively
implement the processing of applications for effective zero-
rating.
Section 4.108-6. Meaning of the term ‘effectively zero-rated
sale of services’. The term ‘effectively zero-rated sales of
services’ shall refer to
1. the local sale of services
2. by a VAT - registered person
3. to a person or entity who was granted indirect tax
exemption under special laws or international
agreement.
Prior approval for 0-rating not required; (1) S&B both
VAT registered; (2) buyer is BOI- registered 100%
exporter. Diamond is a duly-registered VAT taxpayer and a
BOI-registered producer whose products are 100% exported.
Pursuant to Revenue Regulations 16- 2005, sale of goods,
JO VALLES
corporation and TAXATION ad majorem dei gloriam SPBUS
products, or services made by VAT-registered suppliers to a services, and not the qualification of the supplier itself. It bears
BOI- registered manufacturer whose products are 100% emphasis that effective zero-rating is not intended as a benefit Exempt Zero-rated
exported are considered export sales, which are subject to 0% to the person legally liable to pay the tax, but to relieve certain An exemption means that the A zero-rated sale by a VAT-
VAT rate, and hence, the purchases of Diamond should be entities from the burden of indirect tax so as to encourage the sale of goods, properties or registered person, which is a
subject to VAT at 0%. However, some of its suppliers were development of particular industries. In fine, respondent is services and the use or lease taxable transaction for VAT
denied by some BIR personnel the status of VAT zero-rate entitled to refund of its unutilized input VAT attributable to its of properties is not subject to purposes, shall not result in
because they failed to secure an approved application for effectively zero-rated sale of electricity for the period covering VAT (output tax) and the any output tax. However, the
VAT zero-rating. Diamond argues that in view of the issuance January 1 – October 31, 2005, pursuant to Section 108(B)(3) of seller is not allowed any tax input tax on his purchase of
of Revenue Regulations No. 4-2007, the approval for VAT the Tax Code, in relation to Section 13 of the NPC Charter. CIR credit on VAT (input tax) goods, properties or services
zero-rating of VAT-registered suppliers is no longer required. vs Team Energy Corporation previously paid. related to such zero-rated
In VAT Ruling No. 028-00, BIR ruled that “sales of goods, sale shall be available as tax
properties or services by VAT-registered suppliers to BOI- ZERO-RATED vs EFFECTIVELY ZERO-RATED credit or refund
registered exporters shall be treated as automatically zero- EXEMPT An exempted transaction is A zero-rated sale is a taxable
rated sales, without need of prior approval from this Office, not subject to the output tax transaction but does not
provided that supplier and the BOI-registered buyer are Zero-rated vs effectively zero-rated result in an output tax
both VAT-registered taxpayers and provided further that the The seller in an exempt The input VAT on the
buyer is classified as 100% exporter by the Board of Effectively zero-rated Zero-rated transaction is not entitled to purchases of a VAT-
Investments (BOI). Thus, sales of goods, materials, properties Source. Effectively zero- Source. Zero-rated any input tax on his registered person with zero-
and services by VAT-registered suppliers to DIAMOND being rated transactions refer to transactions generally refer purchases despite the rated sales may be allowed
considered export sales shall be subject to zero percent (0%) sale of goods or supply of to export sales, where the tax issuance of a VAT invoice or as tax credits or refunded
VAT rate without the necessity of applying for and securing services to entities whose rate is set at zero, and results receipt.
prior approval for VAT zero-rating. BIR Ruling No. DA 066-08 exemption (under special in no tax chargeable against Registration is optional for Persons engaged in
laws or international the purchaser. The seller VAT-exempt persons. transactions which are zero-
Basis for zero-rating is status of the purchaser, NOT seller. agreements) effectively charges no output tax, but rated, being subject to VAT,
Team Energy Corp is a VAT taxpayer. It filed with the BIR an subjects such transactions to can claim a refund for the are required to register
Application for the Effective Zero-Rate for the supply of a zero rate. VAT previously charged by
electricity to NPC. It filed an administrative claim for refund suppliers. Jo: Because zero-rated transactions give rise to an input VAT
corresponding to the input VAT for the following quarter. The that might later on be refunded, applying a zero percent (0%)
judicial claim was later filed and the same was granted (albeit Benefits purchaser. Benefits seller. Automatic rate on a taxable transaction is the only true way to ensure that
with issues regarding the amount). CIR argues that the refund Effective zero rating is zero rating is primarily goods are provided free of VAT.
should be denied for lack of Certificate of Compliance issued intended to benefit the intended to be enjoyed by the
by the Energy Regulatory Commission, citing the case of CIR purchaser who will seller who is directly liable Pass-on exemption of PAGCOR treated as automatically 0-
v Toledo. SC disagreed, saying that the case is not applicable, ultimately bear the burden of for VAT, making such seller rated. Acesite is the owner and operator of Holiday Inn Manila
as it talked about the requirements of the EPIRA must be the tax shifted by the internationally competitive Pavilion. It leases a portion to PAGCOR, and also caters
complied with only if the claim for refund is based on the suppliers. beverages to the casino patrons. For the period January 1996 to
EPIRA. In this case, since the claim for tax refund is anchored April 1997, it had output VAT of P30,152,892.02 from its
on Section 108(B)(3) of the Tax Code, it cannot be required to Both no output VAT. As applied to the tax base, the rate rental income and sale of food. It tried to shift the taxes to
comply with the requirements under EPIRA to qualify for does not yield any tax chargeable against the purchaser, and PAGCOR, but the latter refused on account of its tax exempt
VAT-zero-rating. Section 108(B)(3) clearly provides that the the seller who charges zero output tax can also claim a status. Acesite thus paid the VAT, but later on filed an
sale of electricity to NPC is effectively zero-rated for VAT refund. administrative claim for refund with the CIR. CIR, CTA, and
purposes. As correctly argued by respondent, the basis for the CA all ruled in favor of Acesite. SC agrees. PAGCOR’s charter
VAT zero-rating is the tax exemption of the purchaser of Zero-rated vs exempt gives PAGCOR a blanket exemption, which extends also to
214 Last Edit: 23 December 2020 JO VALLES
corporation and TAXATION
entities contracting with it. By extending the exemption to
entities dealing with PAGCOR, the legislature also granted
exemption from indirect taxes. Thus, while it was proper for
PAGCOR to not pay the VAT to Acesite, the latter is also not
liable for payment as it is exempt in this particular transaction
by operation of law (Section 102(B)(3), now Section
108(B)(3)). Considering the above, there are undoubtedly
erroneous payments of VAT pertaining to the effectively zero-
rated transactions between Acesite and PAGCOR. Acesite
clearly showed that it paid under mistake of fact because it did
not know at the time that it made the payment that the
transactions with PAGCOR were exempt. Such payment can
thus be recovered. Solution indebiti applies to the government.
Since Acesite was able to prove its actual VAT payments
subject to refund, which was never disputed by CIR, and thus
BIR must release the refund. Commissioner of Internal
Revenue v Acesite (Philippines) Hotel Corporation
o (3) Services rendered to persons or entities whose
exemption under special laws or international
agreements to which the Philippines is a signatory
effectively subjects the supply of such services to zero
percent (0%) rate.
DESTINATION PRINCIPLE
Gist of the destination principle; goods taxed in the place
where consumed. Our VAT law follows the destination
principle. The country taxes all value-added, at home and
abroad, of goods that have as their destination the consumers of
that country. Exports are exempt, imports are taxable. The onus
of taxation under the VAT system is in that country where
goods, property, or services are destined, used, or consumed.
This is the reason why goods, property, or services destined to,
used, or consumed in the Philippines are subject to 10% VAT
while those exported are subject to 0% VAT. The sale of
services subject to 0% VAT are limited to such sales which are
destined for consumption outside the Philippines.
o Application; resident agent of foreign corporation
not zero-rated. In this case, GEC is a domestic
215
ad majorem dei gloriam
corporation that acts as the general agent of GAC, a
foreign air carrier. As resident sales agent of GAC,
GEC is paid commission for its services rendered in the
Philippines in behalf of its foreign principal. The situs
of services rendered is within the Philippines and it is
here where said services are used or consumed.
Therefore, GEC’s sale of services must be subject to
10% VAT rather than 0% VAT, regardless of whether
its compensation be paid in foreign currency actually
or constructively remitted. VAT Ruling 005-99
o Application; services rendered by travel agents to
foreign tourists not zero-rated. The sales of services
subject to zero percent (0%) VAT under Section
108(B)(2), of the Tax Code of 1997, are limited to such
sales which are destined for consumption outside of the
Philippines in that such services are tacked-in as part
of the cost of goods exported. The zero-rating also
extends to project studies, information services,
engineering and architectural designs and other similar
services sold by a resident of the Philippines to a non-
resident foreign client because these services are
likewise destined to be consumed abroad. The phrase
project studies, information services, engineering and
architectural designs and other similar services does
not include services rendered by travel agents to
foreign tourists in the Philippines following the
doctrine of ejusdem generis, since such services by
travel agents are not of the same class or of the same
nature as those enumerated under the aforesaid section.
Considering that the services by Marsman Tours to
foreign tourists are basically and substantially rendered
within the Philippines, it follows that the onus of
taxation of the revenue arising therefore, for VAT
purposes, is also within the Philippines. For this reason,
the tour package services and individual of Marsman
to foreign tourists in the Philippines cannot legally
qualify for zero-rated (0%) VAT but rather subject to
the regular VAT rate of 10%. However, Marsman shall
be entitled to input tax credit on their purchases of
goods and services from VAT- registered suppliers and
facilities providers provided the same are covered by
Last Edit: 23 December 2020
SPBUS
VAT- registered sales invoices or receipts. Relative its
sale of tickets or passage documents to customers as
travel agents, wherein its margin does not exceed 9%
of the gross selling price of such tickets or passage
documents, your gross receipts therefrom shall,
likewise, be subject to 10% VAT (limited to the said
margin) pursuant to RMC No. 7- 98. VAT Ruling No.
040-98
Exception to the destination principle; service rendered in
the PH but paid for in acceptable foreign currency and in
accordance w/ BSP rules. The law provides a clear exemption
to the destination principle; that is, for a 0% VAT rate for
services that are performed in the Philippines, “paid for in
acceptable foreign currency and accounted for in accordance
with the rules and regulations of the BSP.” Thus, for the
services to be zero-rated, the law merely requires that (1) it be
performed in the Philippines (2) be any of the categories in
Section 102(b) of the Tax Code and (3) be paid for in acceptable
foreign currency duly accounted for in accordance with the
BSP rules. CIR v American Express International
o Application; consumption does not imply that
service should likewise be rendered abroad; in
service, consumption=rendering of service. Amex
Philippines is the Philippine branch of American
Express, a Delaware-based company. It is a servicing
unit of American Express International, Inc. –
Hongkong branch and is engaged primarily to
facilitate collections of Amex-HK from card members
in the Philippines and payment to service
establishments in the Philippines. It registered itself
with the BIR as a VAT taxpayer, and filed its VAT
returns for year 1997. However, in 1999, it amended its
returns, and subsequently filed for refund of the excess
input taxes. SC said that it is entitled to a refund
because it is zero-rated. The consumption
contemplated by law, does not imply that the service
has to be done abroad in order to be zero-rated. In this
case, the facilitation is performed in the Philippines,
while the consumption is not. The facilitation of the
collection of revenues is different from the utilization
JO VALLES
corporation and TAXATION
or consumption of the outcome of such service.
Consumption is the use of a thing in a way that thereby
exhausts it. Applied to services, the term means the
performance or successful completion of a
contractual duty, usually resulting in the
performer’s release from any past or future
liability. The services rendered by respondent are
performed or successfully completed upon its sending
to its foreign client the drafts and bills it has gathered
from service establishments here. Its services, having
been performed in the Philippines, are therefore also
consumed in the Philippines. Unlike goods, services
cannot be physically used in or bound for a specific
place when their destination is determined. Instead,
there can only be a "predetermined end of a
course" when determining the service "location or
position for legal purposes." Respondent’s facilitation
service has no physical existence, yet takes place upon
rendition, and therefore upon consumption, in the
Philippines. Under the destination principle, as
petitioner asserts, such service is subject to VAT at the
rate of 10 percent. CIR v American Express
International
o Application; place of rendering service, the test is
the place where it was rendered and not the
consumption of goods related to it. Placer Dome Inc.,
through a subsidiary PDTSL (non-resident), undertook
to cleanup mine tailings in the Boac Rivers. PDTSL
engaged the services of respondent, a domestic
corporation and VAT taxpayer, to implement the
project. PDTSL and PDTS-Ph entered into an
agreement, which stipulated that PDTSL would pay it
an amount of money, in U.S. funds. PDTSL Ph claims
that the transaction is zero-rated. SC said no.
Consumption is the use of a thing in a way that thereby
exhausts it. Applied to services, the term means the
performance or successful completion of a contractual
duty, usually resulting in the performer's release from
any past or future liability. Unlike goods, services
cannot be physically used in or bound for a specific
place when their destination is determined. Instead,
216
ad majorem dei gloriam
there can only be a "predetermined end of a course"
when determining the service "location or position x x
x for legal purposes. In this case, the services are
rendered in the PH and are therefore consumed in the
PH. It is thus subject to 10% VAT.
Application; recipient must be doing business abroad.
NAPOCOR entered into a contract with a consortium for the
operation and maintenance of the latter’s power barges. The
consortium appointed BWSC-Denmark as the coordination
manager, which established BWSC-Mindanao. NAPOCOR
paid the consortium in a mix of currencies. On the other hand,
the consortium pays respondent in foreign currency inwardly
remitted to the Philippines. BWSC Mindanao claims to be zero-
rated. The Tax Code not only requires that the services be other
than “processing, manufacturing, or repacking of goods” and
that the payment for such services be in acceptable foreign
currency accounted for in accordance with the BSP rules.
Another essential qualification for the exemption to apply is
that the recipient be doing business outside of the
Philippines. This is the only logical interpretation of Section
102(b), because otherwise, those subject to regular VAT (if
both provider and recipient are in the Philippines) can avoid
paying VAT simply by stipulating payment in a foreign
currency inwardly remitted. In this case, the payor-recipient is
the consortium which is doing business in the Philippines
(although its principal members are non-resident foreign
corporations). Concerning the 15-year term of the contract, the
consortium’s operation and maintenance of the power barges
cannot be classified as a single or isolated transaction. The
consortium does not fall under Section 102(b) which requires
that the recipient of the services must be a person doing
business outside the Philippines, and thus the services cannot
qualify for 0% VAT. The payment scheme of foreign currency
inwardly remitted does not entitle respondent to 0% VAT. CIR
vs Burmeister and Wain Scandinavian Contractor Mindanao,
Inc.
Coral Bay is a domestic corporation engaged in the
manufacture of nickel and/or cobalt mixed sulphide. It is a VAT
entity registered with the BIR, and is also registered with PEZA
at the Rio Tuba Export Processing Zone. In 2003, it filed its
Last Edit: 23 December 2020
SPBUS
Amended VAT Return declaring unutilized input tax from
domestic purchases. It now claims to be entitled to refund of
unutilized input taxes incurred before it became a PEZA
registered entity. SC said no. According to RMC 74-99, all
sales of goods, properties, and services made by a VAT-
registered supplier from the Customs Territory to an ecozone
enterprise shall be subject to VAT at 0%, regardless of the type
or class of PEZA registration, and thus affirming the nature of
a PEZA-registered enterprise as a VAT-exempt entity. Further,
Section 8 of RA 7916 mandates that PEZA shall operate the
ecozone as a separate customs territory, thereby creating the
legal fiction that it is a territory separate and distinct from
customs territory. Following the cross border doctrine and
destination principle, the VAT implications are that no VAT
shall be imposed to form part of the cost of goods destined for
consumption outside the territorial border of the taxing
authority. As petitioner’s principal office was located in the Rio
Tuba Export Processing Zone in Palawan, the purchases of
goods and services by petitioner that were destined for
consumption within the ecozone should be free of VAT; hence,
no input VAT should then be paid on said purchases, rendering
the petitioner not entitled to claim a VAT refund or credit. This
means that since no input VAT was paid, then taxpayer not
entitled to refund of input VAT. Coral Bay Nickel Corporation
vs CIR
TAX CREDITS
Nature of input VAT
VAT; indirect tax. VAT is a tax on spending or consumption,
levied on the sale. Being an indirect tax on expenditure, the
seller of goods or services may pass on the amount of tax to the
buyer, with the seller acting as a tax collector. In contrast, a
direct tax is a tax for which a taxpayer is directly liable on the
transaction or business it engages in.
o Input VAT; paid by buyer. The VAT due from or
paid by a VAT registered person on the importation of
goods or local purchase of goods and services,
including lease or use of property in the course of trade
or business from another VAT registered person. This
JO VALLES
corporation and TAXATION
is the tax that is paid by the buyer of goods, when the
seller passes it on to him.
Output VAT; paid by the seller. This is the VAT due on the
sale of taxable goods or properties or services by any person
registered or required to register under the law. This is the tax
due that a seller must pay.
Section 110(a), NIRC as amended by RA 10963
Creditable Input Tax
(1) Any input tax evidenced by a VAT invoice or official
receipt issued in accordance with Section 113 hereof on the
following transactions shall be creditable against the output tax:
a. Purchase or importation of goods:
i. For sale; or
ii. For conversion into or intended to form part of a
finished product for sale including packaging
materials; or
iii. For use as supplies in the course of business; o
iv. For use as materials supplied in the sale of service;
or
v. For use in trade or business for which deduction
for depreciation or amortization is allowed under
this Code.
b. Purchase of services on which a value-added tax has
been actually paid.
(2) The input tax on domestic purchase or importation of goods
or properties by a VAT-registered person shall be creditable:
a. To the purchaser upon consummation of sale and on
importation of goods or properties; and
b. To the importer upon payment of the value-added tax
prior to the release of the goods from the custody of the
Bureau of Customs.
Purchase/importation of depreciable goods; spread over 60
months if cost excluding VAT > 1M. Provided, that the input
tax on goods purchased or imported in a calendar month for use
in trade or business for which deduction for depreciation is
allowed under this Code shall be spread evenly over the a
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month of acquisition and the fifty-nine (59) succeeding months
if the aggregate acquisition cost for such goods, excluding the
VAT component thereof, exceeds One million pesos
(P1,000,000):
o
Spread over 60 months or useful life, whichever is
shorter. Provided, however, That if the estimated
useful life of the capital good is less than five (5) years,
as used for depreciation purposes, then the input VAT
shall be spread over such a shorter period:
o Provided, further, That the amortization of the input
VAT shall only be allowed until December 31, 2021
after which taxpayers with unutilized input VAT on
capital goods purchased or imported shall be allowed
to apply the same as scheduled until fully utilized:
o For purchase of services or lease of property;
credited upon payment of compensation. Provided,
finally, That in the case of purchase of services, lease
or use of properties, the input tax shall be creditable to
the purchaser, lessee or licensee upon payment of the
compensation, rental, royalty or free.
(3) Mixed. A VAT-registered person who is also engaged in
transactions not subject to the value-added tax shall be allowed
tax credit as follows:
a. Total input tax which can be directly attributed to
transactions subject to value-added tax; and
b. A ratable portion of any input tax which cannot be
directly attributed to either activity.
Input tax Output tax
Consumer. The term “input Seller. The term “output
tax” means the value-added tax” means the value-added
tax due from or paid by a tax due on the sale or lease of
VAT-registered person in taxable goods or properties
the course of his trade or or services by any person
business on importation of registered or required to
goods or local purchase of register under Section 236 of
goods or services, including this Code.
Last Edit: 23 December 2020
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lease or use of property, from
a VAT-registered person.
It shall also include the
transitional input tax
determined in accordance
with Section 111 of this
Code.
RR 16-05
Section 4.110-1. Credits For Input Tax. Input tax means the
VAT due on or paid by a VAT-registered person on importation
of goods or local purchases of goods, properties, or services,
including lease or use of properties, in the course of his trade
or business. It shall also include the transitional input tax and
the presumptive input tax determined in accordance with Sec.
111 of the Tax Code.
Directly attributed + ratable. It includes input taxes which
can be directly attributed to transactions subject to the VAT
plus a ratable portion of any input tax which cannot be directly
attributed to either the taxable or exempt activity.
Any input tax on the following transactions evidenced by a
VAT invoice or official receipt issued by a VAT-registered
person in accordance with Secs. 113 and 237 of the Tax Code
shall be creditable against the output tax:
(a) Purchase or importation of goods
1. For sale; or
2. For conversion into or intended to form part of a
finished product for sale, including packaging
materials; or
3. For use as supplies in the course of business; or
4. For use as raw materials supplied in the sale of
services; or
5. For use in trade or business for which deduction for
depreciation or amortization is allowed under the Tax
Code,
JO VALLES
corporation and TAXATION
(b) Purchase of real properties for which a VAT has actually
been paid;
(c) Purchase of services in which a VAT has actually been
paid;
(d) Transactions “deemed sale” under Sec. 106 (B) of the Tax
Code;
(e) Transitional input tax allowed under Sec. 4.111 (a) of
these Regulations;
(f) Presumptive input tax allowed under Sec. 4.111 (b) of
these Regulations;
(g) Transitional input tax credits allowed under the transitory
and other provisions of these Regulations.
Section 4-110-2. Persons Who Can Avail of the Input Tax
Credit. The input tax credit on importation of goods or local
purchases of goods, properties or services by a VAT-registered
person shall be creditable:
a. To the importer upon payment of VAT prior to the
release of goods from customs custody;
b. To the purchaser of the domestic goods or properties
upon consummation of the sale; or
c. To the purchaser of services or the lessee or licensee
upon payment of the compensation, rental, royalty or
fee.
Input VAT in construction not part of construction costs if
offset against output VAT. Malayan and St. Francis executed
a joint project development of what was then known as the ASB
Malayan Tower. However, St. Francis was unable to finish the
project. They then entered into a MOA under which Malayan
undertook to complete the condo project. However, after the
completion of the project, the actual costs of construction had
not been resolved to the parties’ satisfaction. Part of their
dispute involved the inclusion (or non-inclusion) of interest and
VAT as part of the costs. St. Francis argues that that input VAT
should not be part of the Actual Remaining Construction Cost
(ARCC) because it cannot be considered an expense but rather
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an asset. Since Malayan admitted that the input VAT was used
to offset its output VAT, it can no longer be charged as part of
the ARCC. The SC said that input VAT cannot be considered
within the scope of the ARCC, which should be considered in
the traditional “construction” sense rather than “investment”.
Considering that Malayan had admitted to offsetting its input
VAT against its output VAT, it is deemed to have decided to
pass the burden to the buyers of the condo units, and virtually
incurred no actual expenditure which could be included in the
computation of the ARCC. Therefore, since it already benefited
from the crediting of the input VAT against the ARCC, to allow
Malayan to claim input VAT as part of the ARCC will result in
unjust enrichment (its proportionate share in the reserved units
will increase while the proportionate share of St. Francis will
decrease). Malayan Insurance Company, Inc. vs St. Francis
Square Realty Corporation
Allocation of condo units to partners in a JV is a return of
capital; not subject to VAT. Part of the agreement between
Malayan and St. Francis was that upon completion of the
condo, part thereof will be allocated to St. Francis. SC said that
this is not subject to input VAT. There is no actual transfer or
sale of said units from Malayan to St. Francis that would cause
the latter to incur input VAT. Under the MOA, St. Francis will
only be entitled to the reserved units in the event that the actual
remaining construction costs exceed the remaining
construction costs, and that Malayan pays for such excess. It is
only after final determination of the ARCC, that the reserved
units will be allocated and transferred to St. Francis. Since St.
Francis is entitled to a proportionate share in the reserved units,
the allocation or transfer is not subject to VAT, as it does not
entail a sale, barter, exchange or lease of goods, properties, or
services in the course of trade or business. The allocation of
condo units to partners in a joint venture as a return of
contribution is not subject to VAT, since such allocation is not
a sale, barter, or exchange of real property done in the ordinary
course of business. Malayan Insurance Company, Inc. vs St.
Francis Square Realty Corporation
Input VAT on depreciable goods
See Section 110(A)(2)(b) above.
Last Edit: 23 December 2020
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RR 16-05, Section 4-110-3
Claims for Input Tax on Depreciable Goods
Aggregate cost in a calendar month >1M. Where a VAT-
registered person purchases or imports capital goods, which are
depreciable assets for income tax purposes, the aggregate
acquisition cost of which (exclusive of VAT) in a calendar
month exceeds One Million pesos (P1,000,000.00), regardless
of the acquisition cost of each capital good, shall be claimed as
credit against output tax in the following manner:
a. If the estimated useful life of a capital good is five
(5) years or more. The input tax shall be spread evenly
over a period of sixty (60) months and the claim for
input tax credit will commence in the calendar month
when the capital good is acquired. The total input
taxes on purchases or importations of this type of
capital goods shall be divided by 60 and the quotient
will be the amount to be claimed monthly.
b. If the estimated useful life of a capital good is less
than five (5) years. The input tax shall be spread
evenly on a monthly basis by dividing the input tax by
the actual number of months comprising the estimated
useful life of the capital good. The claim for input tax
credit shall commence in the calendar month that the
capital goods were acquired.
Aggregate cost in a calendar month 1M or less; all in the
month of acquisition. Where the aggregate acquisition cost
exclusive of that on the existing or finished depreciable capital
goods purchased or imported during any calendar month does
not exceed 1,000,000 pesos, the total input taxes will be
allowable as credit against output tax in the month of
acquisition.
Capital goods or properties refers to goods or properties with
estimated useful life greater than one (1) year and which are
treated as depreciable assets under Sec. 34(F) of the Tax Code,
used directly or indirectly in the production or sale of taxable
goods or services.
JO VALLES
corporation and TAXATION
Aggregate acquisition cost; excluding VAT. The aggregate
acquisition cost of depreciable assets in any calendar month
refers to the total price, excluding the VAT, agreed upon for
one or more assets acquired and not on the payments actually
made during the calendar month. Thus, an asset acquired on
installment for an acquisition cost of more than P1,000,000.00,
excluding the VAT, will be subject to the amortization of input
tax despite the fact that the monthly payments/installments may
not exceed P1,000,000.00.
Construction in progress (CIP). Construction in progress is
the cost of construction work which is not yet completed. CIP
is not depreciated until the asset is placed in service. Normally,
upon completion, a CIP item is reclassified and the reclassified
asset is capitalized and depreciated.
o CIP is purchase of service; based on progress
billings. CIP is considered, for purposes of claiming
input tax, as a purchase of service, the value of which
shall be determined based on the progress billings.
o Not capital goods until complete; input VAT
recognized on month of payment. Until such time the
construction has been completed, it will not qualify as
capital goods as herein defined, in which case, input
tax credit on such transaction can be recognized in the
month the payment was made: Provided, that an
official receipt of payment has been issued based on
the progress billings.
If contractor ONLY supplies services, input tax for services
on payment; materials at time of purchase. In case of
contract for the sale of service where only the labor will be
supplied by the contractor and the materials will be purchased
by the contractee from other suppliers, input tax credit on the
labor contracted shall still be recognized on the month the
payment was made based on a progress billings while input tax
on the purchase of materials shall be recognized at the time the
materials were purchased.
If input tax claimed while CIP, no more when completed.
Once the input tax has already been claimed while the
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ad majorem dei gloriam
construction is still in progress, no additional input tax can be
claimed upon completion of the asset when it has been
reclassified as a depreciable capital asset and depreciated.
(c) The amortization of the input VAT shall only be allowed
until December 31, 2021 after which taxpayers with
unutilized input VAT on capital goods purchased or
imported shall be allowed to apply the same as scheduled
until fully utilized: Provided, That in the case of purchase of
services, lease or use of properties, the input tax shall be
creditable to the purchaser, lessee or licensee upon payment of
the compensation, rental, royalty or fee.
CIP is considered purchase of service; value determined by
progress billings. First Gas entered into Operation and
Maintenance Agreements with Siemens Power Operations, Inc.
whereby Siemens is responsible for day-to-day operations and
repairs. Siemens is paid a monthly Fixed Operating Fee and a
monthly Variable Operating Fee, and issues a monthly VAT
invoice and monthly VAT official receipt to First Gas. The cost of
Gas Turbine Strategic Spares, which are usual items replaced
during major overhauls, form part of the Fixed Operating Fee and
are booked as non-current assets. What is included in the Monthly
Fixed Operating Fee is a small part of the total cost of the Gas
Turbine Strategic Spares, as Siemens builds up a fund over a
period of time to fund the cost needed to acquire the parts. Can
First Gas claim the input VAT credits pertaining to the Monthly
Fixed Operation Fee on the same month the payments are made
and received by Siemens, given that the payments are for services
and such payments are Construction In Progress cost of First Gas?
If input taxes paid on importation and local purchase of parts
which are not existing or of finished depreciable assets to be
assembled into a depreciable asset or equipment and on spare parts
which are likewise not existing or finished depreciable assets for
the maintenance of a project, such input taxes are not subject to
amortization, but may be claimed as credit against output tax in
the month of acquisition. This position is embodied in Section
4.110-3 of RR 16-2005, as amended by RR 4-2007. CIP is
considered, for the purpose of claiming input tax, as a purchase of
service, the value of which shall be determined based on the
progress billings. Until the time the construction is completed,
it will not qualify as capital goods and input tax credits on the
transaction can be recognized in the month the payment was
Last Edit: 23 December 2020
SPBUS
made, provided that an official receipt of payment has been issued
on the progress billings. In this case, while First Gas pays the
Monthly Fixed Operating Fee, the Gas Turbine Strategic Spares
will not be installed yet until the anticipated major overhaul takes
place. In effect, First Gas is making an advance payment with
respect to the cost of the Gas Turbine Strategic Spares. In view of
this, the payments fall within the definition of the term CIP, and
this Office confirms the opinion that the input VAT credits
incurred on payments of the Monthly Fixed Operation Fee can be
claimed during the month in which payments were made. BIR
Ruling No. DA-(VAT-007)
Excess input/output VAT
Section 110(b), NIRC as amended by RA 10963
Excess output or input tax
Excess output VAT must be paid; excess input VAT shall
be carried over to next quarter. If at the end of any taxable
quarter the output tax exceeds the input tax, the excess shall be
paid by the VAT-registered person. If the input tax exceeds the
output tax, the excess shall be carried over to the succeeding
quarter or quarters.
0-rated; excess input VAT may be refunded or credited.
Provided, however, That any input tax attributable to zero-rated
sales by a VAT-registered person may at his option be refunded
or credited against other internal revenue taxes, subject to the
provisions of Section 112.
Section 110(c), NIRC as amended by RA 10963
Determination of Creditable Input Tax
The sum of the excess input tax carried over from the preceding
month or quarter and the input tax creditable to a VAT-
registered person during the taxable month or quarter shall be
reduced by the amount of claim for refund or tax credit for
value-added tax and other adjustments, such as purchase
returns or allowances and input tax attributable to exempt sale.
JO VALLES
corporation and TAXATION
The claim for tax credit referred to in the foregoing paragraph
shall include not only those filed with the Bureau of Internal
Revenue but also those filed with other government agencies,
such as the Board of Investments and the Bureau of Customs.
RR 16-05
Section 4.110-5. Determination of input tax creditable
during a taxable month or quarter. The amount of input
taxes creditable during a month or quarter shall be determined
in the manner illustrated above by adding all creditable input
taxes arising from the transactions enumerated under the
preceding subsections of Sec. 4.110 during the month or quarter
plus any amount of input tax carried-over from the preceding
month or quarter, reduced by the amount of claim for VAT
refund or tax credit certificate (whether filed with the BIR, the
Department of Finance, the Board of Investments or the BOC)
and other adjustments, such as purchases returns or allowances,
input tax attributable to exempt sales and input tax attributable
to sales subject to final VAT withholding.
SEC. 4.110-6. Determination of the Output Tax and VAT
Payable and Computation of VAT Payable or Excess Tax
Credits. In a sale of goods or properties, the output tax is
computed by multiplying the gross selling price as defined in
these Regulations by the regular rate of VAT. For sellers of
services, the output tax is computed by multiplying the gross
receipts as defined in these Regulations by the regular rate of
VAT.
If VAT erroneously billed in invoice total invoice amount
presumed to include VAT. In all cases where the basis for
computing the output tax is either the gross selling price or the
gross receipts, but the amount of VAT is erroneously billed in
the invoice, the total invoice amount shall be presumed to be
comprised of the gross selling price/gross receipts plus the
correct amount of VAT.
o Output VAT= invoice amount * (x/1.x). Hence, the
output tax shall be computed by multiplying the total
invoice amount by a fraction using the rate of VAT as
numerator and one hundred percent (100%) plus rate
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ad majorem dei gloriam
of VAT as the denominator. Accordingly, the input tax
that can be claimed by the buyer shall be the corrected
amount of VAT computed in accordance with the
formula herein prescribed.
VAT payable = output VAT – input VAT. There shall be
allowed as a deduction from the output tax the amount of input
tax deductible as determined under Sec.4.110-1 to 4.110-5 of
these Regulations to arrive at VAT payable on the monthly
declaration and the quarterly VAT returns.
Section 4.110-7. VAT Payable (Excess Output) or Excess
Input Tax.
(a) VAT payable; output > input. If at the end of any taxable
quarter the output tax exceeds the input tax, the excess shall be
paid by the VAT-registered person.
o Illustration. For a given taxable quarter ABC Corp.
has output VAT of 100 and input VAT of 80. Since
output tax exceeds the input tax for such taxable
quarter, all of the input tax may be utilized to offset
against the output tax. Thus, the net VAT payable is
100 minus 80 = 20.
(b) VAT carry-over; input > output. If the input tax inclusive
of input tax carried over from the previous quarter exceeds the
output tax, the excess input tax shall be carried over to the
succeeding quarter or quarters; Provided, however, that any
input tax attributable to zero- rated sales by a VAT-registered
person may at his option be refunded or applied for a tax credit
certificate which may be used in the payment of internal
revenue taxes, subject to the limitations as my be provided for
by law, as well as, other implementing rules.
o Illustration. For a given taxable quarter, XYZ
Corporation has output VAT of 100 and input VAT of
110. Since input tax exceeds the output tax for such
taxable quarter, there is an excess input tax at the end
of the quarter of 10 which may be carried over to the
next quarter or quarters.
Last Edit: 23 December 2020
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Itisnoted,basedontheabove- citedprovisions,that
Unutilized input VAT from 0-rated sales non-deductible;
refund or credit only. Unutilized creditable input taxes
attributable to zero- rated sales can only be recovered through
the application for refund or tax credit. Nowhere in the Tax
Code can we find a specific provision expressly providing for
another mode of recovering unapplied input taxes, particularly
your proposition that unapplied input taxes may be treated
outright as deductible expense for income tax purposes.
Revenue Memorandum Circular 57-2013
Cannot claim refund if you fail to offset input and output
VAT. Coke filed a claim for refund because it failed to apply
its undeclared input VAT against the output VAT. SC said that
Coke cannot claim a refund because input VAT is not
“excessively” collected. At the time the input VAT is collected,
the amount paid is correct. If input VAT is in fact “excessively”
collected, then it is the person legally liable to pay the input
VAT, and not the person to whom the tax is passed and who is
applying the input VAT as credit for his own output VAT, who
can file the judicial claim for refund. Thus, if and when the
input tax exceeds the output tax, the excess shall be carried
over; it is only when the sales of a VAT-registered person are
zero-rated or effectively zero-rated that he may have the option
of applying for the issuance of a tax credit certificate or refund
of creditable input tax. As shown above, Coke’s claim is not
governed by Section 229 as it does not involve a tax that is
“erroneously, illegally, excessively, or in any manner
wrongfully collected.” Neither is the claim authorized under
Sections 110(B) or 112(A) as the same does not seek to refund
or credit input tax due or paid attributable to zero-rated or
effectively zero-rated sales. Coca-Cola Bottlers Philippines,
Inc. vs CIR
Transitional/presumptive input tax credits
Section 111, NIRC
(A) Transitional input tax credits
JO VALLES
corporation and TAXATION
8% of beginning inventory or actual VAT paid, whichever
is higher. A person who becomes liable to value-added tax or
any person who elects to be a VAT-registered person shall,
subject to the filing of an inventory according to rules and
regulations prescribed by the Secretary of finance, upon
recommendation of the Commissioner, be allowed input tax on
his beginning inventory of goods, materials and supplies
equivalent for eight percent (8%) of
1. the value of such inventory or
2. the actual value-added tax paid on such goods,
materials and supplies,
whichever is higher, which shall be creditable against the
output tax.
(B) Presumptive input tax credits
(1) Persons or firms engaged in the
a. processing of
a. sardines,
b. mackerel and
c. milk, and in
b. manufacturing
a. refined sugar and
b. cooking oil,
shall be allowed a presumptive input tax, creditable against the
output tax, equivalent to one and one-half percent (1 1/2%) of
the gross value in money of their purchases of primary
agricultural products which are used as inputs to their
production.
Processing. As used in this Subsection, the term 'processing'
shall mean pasteurization, canning and activities which through
physical or chemical process alter the exterior texture or form
or inner substance of a product in such manner as to prepare it
for special use to which it could not have been put in its original
form or condition.
(2) Public works contractors shall be allowed a presumptive
input tax equivalent to one and one-half percent (1 1/2%) of
the contract price with respect to government contracts only in
lieu of actual input taxes therefrom.
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Section 4.111-1, RR 16-05
(a) Transitional Input Tax Credits on Beginning
Inventories
Taxpayers who
1. became VAT-registered persons upon exceeding the
minimum turnover of P1,500,000.00 in any 12-month
period, or
2. who voluntarily register even if their turnover does not
exceed P1,500,000.00 (except franchise grantees of
radio and television broadcasting whose threshold is
P10,000,000.00)
shall be entitled to a transitional input tax on the inventory on
hand as of the effectivity of their VAT registration, on the
following:
1. goods purchased for resale in their present condition;
2. materials purchased for further processing, but which
have not yet undergone processing;
3. goods which have been manufactured by the taxpayer;
4. goods in process for sale; or
5. goods and supplies for use in the course of the
taxpayer’s trade or business as a VAT-registered
person.
2% of beginning inventory or actual VAT paid, whichever
is higher. The transitional input tax shall be two percent (2%)
of the value of the beginning inventory on hand or actual VAT
paid on such, goods, materials and supplies, whichever is
higher, which amount shall be creditable against the output tax
of VAT-registered person. The value allowed for income tax
purposes on inventories shall be the basis for the computation
of the 2% transitional input tax, excluding goods that are
exempt from VAT under Sec. 109 of the Tax Code.
The threshold amount of P1,500,000.00 shall be adjusted, not
later than January 31, 2009 and every three years thereafter, to
its present value using the Consumer Price Index as published
by the NSO.
Discussion: Use 2% presumptive input VAT rate.
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(b) Presumptive Input Tax Credits
Persons or firms engaged in the
1. processing of
a. sardines,
b. mackerel, and
c. milk, and in
2. manufacturing
a. refined sugar,
b. cooking oil and
c. packed noodle-based instant meals,
shall be allowed a presumptive input tax, creditable against the
output tax, equivalent to four percent (4%) of the gross value in
money of their purchases of primary agricultural products
which are used as inputs to their production.
Processing. As used in this paragraph, the term processing
shall mean pasteurization, canning and activities which through
physical or chemical process alter the exterior texture or form
or inner substance of a product in such manner as to prepare it
for special use to which it could not have been put in its original
form or condition.
Prior payment of input Vat not necessary for transitional
input VAT. In 1996, RA 7716 extended coverage of VAT to
real properties held primarily for sale. The same year, petitioner
Fort Bonifacio Development Corporation submitted to the BIR
an inventory of all its real properties, and claimed that it is
entitled to (8%) transitional input tax credit of P5.7M. When it
started selling the lots it purchased from the NG in BGC, it
incurred output VAT of P368.5M. It paid P359.6M and
credited its unutilized input tax credit on purchases of goods of
P8.9M. Realizing that its transitional input tax credit was not
applied in computing output VAT, it claimed refund. However,
both CTA and CA denied, holding that petitioner is not entitled
to the tax credit since it did not pay any VAT when it purchased
the property, and transitional input tax credit is allowed only
when business taxes have been paid and passed-on as part of
the purchase price. Contrary to the view of the CTA and the
CA, there is nothing in the NIRC that indicates that prior
payment of taxes is necessary for the availment of the 8%
transactional tax credit. All that is required is for the taxpayer
to file a beginning inventory with the BIR. Limiting the value
JO VALLES
corporation and TAXATION
of the beginning inventory only to goods, materials, and
supplies where prior taxes were paid was not the intention of
the law, otherwise, the law would have specifically said so.
Moreover, prior payment of taxes is not required to avail of the
transitional input tax credit because it is not a tax refund per se
but a tax credit. They are not the same; tax refund is defined as
money that a taxpayer overpaid and is returned by the taxing
authority, while tax credit is an amount subtracted directly from
the total tax liability. Thus, unlike a tax refund, prior payment
is not necessary to avail of a tax credit. Entitled to refund. Fort
Bonifacio Development Corporation vs CIR
Apportioning Input VAT in mixed transactions
RR 16-05, Section 4.110-4. Apportionment of Input Tax on
Mixed Transactions. A VAT- registered person who is also
engaged in transactions not subject to VAT shall be allowed to
recognize input tax credit on transactions subject to VAT as
follows:
1. Directly attributed to certain transactions can be
recognized. All the input taxes that can be directly
attributed to transactions subject to VAT may be
recognized for input tax credit;
a. But those attributable to sales to the
government cannot be credited against
those attributable to non-government.
Provided, that input taxes that can be directly
attributable to VAT taxable sales of goods and
services to the Government or any of its
political subdivisions, instrumentalities or
agencies, including government-owned or
controlled corporations (GOCCs) shall not be
credited against output taxes arising from sales
to non-Government entities.
b. Claims for VAT refund/Tax Credit Certificate
(TCC) with the Bureau of Internal Revenue,
Board of Investment, and One-Stop-Shop and
Duty Drawback Center of the Dept. of Finance
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should be deducted from the allowable input
tax that are attributable to zero-rated sales.
2. Cannot be directly attributed; pro-rate between
VATable and non-VATable sales. If any input tax
cannot be directly attributed to either a VAT taxable or
VAT- exempt transaction, the input tax shall be pro-
rated to the VAT taxable and VAT- exempt
transactions and only the ratable portion pertaining to
transactions subject to VAT may be recognized for
input tax credit.
a. Attributable to VAT-exempt; expensed. The
input tax attributable to VAT-exempt sales
shall not be allowed as credit against the output
tax but should be treated as part of cost or
expense.
b. Attributable to VATable; pro-rate between
0-rated and non-0-rated, if any.
Notwithstanding the foregoing provisions, for
persons engaged in both zero-rated sales under
Sec. 108(B)(6) of the Tax Code and non-zero
rated sales, the aggregate input taxes shall be
allocated ratably between the zero-rated sale
and non-zero-rated sale.
The words zero-rated need not be printed; may be stamped
on the face of the invoice. CTA claims that the words “zero-
rated” should be reflected in respondent’s [PH Gold Processing
and Refining] sales invoices but only by written or printed
means. The Court disagrees; the requirement in Section
113(B)(2)(c) of the NIRC (in relation to 4.113-1(B) of RR 16-
05) of imprinting the word “zero-rated” was added merely to
distinguish sales that are subject to the regular 12% VAT to
those that are subject to 0% and those that are VAT-exempt. In
this case, the term “zero-rated” appears on the face of the sale
invoices, albeit rubber stamped. However, respondent has
substantially complied with the requirement that the word
“zero-rated” must prominently appear on the face of the sales
invoices covering zero-rated sales. Such serves the purpose of
preventing its buyers from falsely claiming input VAT from
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their purchases when no VAT was actually paid. Respondent
entitled to refund.
SUBSTANTIATION
Invoice vs receipt. The CTA disallowed zero-rated sales for
not being supported by VAT official receipts (P278k), Section
113(A)&(B) state the invoicing requirements for VAT
taxpayers and the information that should be indicated therein.
113(A)(1)&(2) explicitly state that sale of goods or properties
must be supported by VAT invoice while sale of services must
be supported by VAT official receipt, in consonance with
Section 106(A) and 108(B). VAT on sale of goods or properties
accrues upon consummation of sale regardless of receipt of
consideration while VAT on sale of services accrues on
actual/constructive receipt of consideration regardless of action
rendition of service. Thus, the taxpayer’s sale of goods or
properties must be supported by an invoice while sale of
services must be supported by a receipt.
o The VAT invoice is the seller’s best proof of sale of
goods or services to the buyer, while
o the VAT receipt is the buyer’s best evidence of
payment of goods or services received from the seller.
Petitioner is engaged in the sale of services, and thus must
present appropriate VAT official receipts. For failure to do so,
input taxes related to zero-rated sales were properly disallowed
for lack of substantiation. Deutsche Knowledge Services Pte.
Ltd. vs CIR
Invoicing and accounting requirements for VAT-
registered persons
Section 113, NIRC
(A) Invoicing Requirements. A VAT-registered person shall,
for every sale, issue an invoice or receipt. In addition to the
information required under Section 237, the following
information shall be indicated in the invoice or receipt:
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corporation and TAXATION
1. A statement that the seller is a VAT-registered person,
followed by his taxpayer's identification number
(TIN); and
2. The total amount which the purchaser pays or is
obligated to pay to the seller with the indication that
such amount includes the value-added tax.
(B) Information contained in the vat invoice or vat official
receipt. The following information shall be indicated in the
VAT invoice or VAT official receipt:
1. A statement that the seller is a VAT-registered person,
followed by his Taxpayer's Identification Number
(TIN); and
2. The total amount which the purchaser pays or is
obligated to pay to the seller with the indication that
such amount includes the value-added tax. Provided,
That:
a. The amount of the tax shall be known as a
separate item in the invoice or receipt;
b. If the sale is exempt from value-added tax, the
term VAT-exempt sale: shall be written or
printed prominently on the invoice or receipt
c. If the sale is subject to zero percent (0%)
value-added tax, the term “zero-rated sale”
shall be written or printed prominently on the
invoice or receipt.
d. If the sale involved goods, properties or
services some of which are subject to and some
of which are VAT zero-rated or Vat exempt,
the invoice or receipt shall clearly indicate the
break-down of the sale price between its
taxable, exempt and zero-rated components,
and the calculation of the value-added tax on
each portion of the sale shall be known on the
invoice or receipt: Provided, That the seller
may issue separate invoices or receipts for the
taxable, exempt, and zero-rated components of
the sale.
3. The date of transaction, quantity, unit cost and
description of the goods or properties or nature of the
service; and
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4. In the case of sales in the amount of One thousand
pesos (P1,000) or more where the sale or transfer is
made to a VAT-registered person, the name, business
style, if any, address and Taxpayer Identification
Number (TIN) of the purchaser, customer or client.
(C) Accounting Requirements. Notwithstanding the
provisions of Section 233, all persons subject to the value-
added tax under Sections 106 and 108 shall, in addition to the
regular accounting records required, maintain a subsidiary sales
journal and subsidiary purchase journal on which the daily sales
and purchases are recorded. The subsidiary journals shall
contain such information as may be required by the Secretary
of Finance.
Section 4.110-8, RR 16-05
Substantiation of Input Tax Credits
(a) Input taxes for the importation of goods or the domestic
purchase of goods, properties or services is made in the course
of trade or business, whether such input taxes shall be
1. credited against zero-rated sale,
2. non-zero-rated sales, or
3. subjected to the 5% Final Withholding VAT,
must be substantiated and supported by the following
documents, and must be reported in the information returns
required to be submitted to the Bureau:
1. For the importation of goods - import entry or other
equivalent document showing actual payment of VAT
on the imported goods.
2. For the domestic purchase of goods and properties –
invoice showing the information required under Secs.
113 and 237 of the Tax Code.
3. For the purchase of real property – public instrument
i.e., deed of absolute sale, deed of conditional sale,
contract/agreement to sell, etc., together with VAT
invoice issued by the seller.
4. For the purchase of services – official receipt showing
the information required under Secs. 113 and 237 of
the Tax Code.
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Cash register machine tape. A cash register machine tape
issued to a registered buyer shall constitute valid proof of
substantiation of tax credit only if it shows the information
required under Secs. 113 and 237 of the Tax Code.
(b) Transitional input tax shall be supported by an inventory of
goods as shown in a detailed list to be submitted to the BIR.
(c) Input tax on “deemed sale” transactions shall be
substantiated with the invoice required under Sec. 4.113-2 of
these Regulations.
(d) Input tax from payments made to non-residents (such as for
services, rentals and royalties) shall be supported by a copy of
the Monthly Remittance Return of Value Added Tax Withheld
(BIR Form 1600) filed by the resident payor in behalf of the
non-resident evidencing remittance of VAT due which was
withheld by the payor.
(e) Advance VAT on sugar shall be supported by the Payment
Order showing payment of the advance VAT.
Section 4.113-1. RR 16-05
Invoicing Requirements
(A) A VAT-registered person shall issue:
1. A VAT invoice for every sale, barter or exchange of
goods or properties; and
2. A VAT official receipt for every lease of goods or
properties, and for every sale, barter or exchange of
services.
Only Vat-registered required to print TIN followed by the
word VAT. Only VAT-registered persons are required to print
their TIN followed by the word “VAT” in their invoice or
official receipts. Said documents shall be considered as a “VAT
Invoice” or VAT official receipt.
o No VST invoice, no VT input Tax. All purchases
covered by invoices/receipts other than VAT
Invoice/VAT Official Receipt shall not give rise to any
input tax.
JO VALLES
corporation and TAXATION
o VAT invoice /official receipt shall be prepared at least
in duplicate, the original to be given to the buyer and
the duplicate to be retained by the seller as part of his
accounting records.
(B) Information contained in VAT invoice or VAT official
receipt. The following information shall be indicated in VAT
invoice or VAT official receipt:
1. A statement that the seller is a VAT-registered person,
followed by his TIN;
2. The total amount which the purchaser pays or is
obligated to pay to the seller with the indication that
such amount includes the VAT; Provided, That:
a. The amount of tax shall be shown as a separate
item in the invoice or receipt;
b. If the sale is exempt from VAT, the term
“VAT-exempt sale” shall be written or printed
prominently on the invoice or receipt;
c. If the sale is subject to zero percent (0%) VAT,
the term “zero-rated sale” shall be written or
printed prominently on the invoice or receipt;
d. If the sale involves goods, properties or
services some of which are subject to and some
of which are VAT zero-rated or VAT-exempt,
the invoice or receipt shall clearly indicate the
break-down of the sale price between its
taxable, exempt and zero- rated components,
and the calculation of the VAT on each portion
of the sale shall be shown on the invoice or
receipt. The seller has the option to issue
separate invoices or receipts for the taxable,
exempt, and zero-rated components of the sale.
3. In the case of sales in the amount of one thousand pesos
(P1,000.00) or more where the sale or transfer is made
to a VAT-registered person, the
a. name,
b. business style, if any,
c. address and
d. TIN
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of the purchaser, customer or client, shall be indicated
in addition to the information required in (1) and (2) of
this Section.
Section 237
Issuance of Receipts or Sales or Commercial Invoices
(A) Issuance; P100 or more. All persons subject to an internal
revenue tax shall, at the point of each sale and transfer of
merchandise or for services rendered valued at One hundred
pesos (P100.00) or more, issue duly registered receipts or sales
or commercial invoices, showing the
1. date of transaction,
2. quantity,
3. unit cost and
4. description of merchandise or nature of service:
Provided, however, That where the receipt is issued to cover
payment made as rentals, commissions, compensations, fees,
receipts or invoices shall be issued which shall show the name,
business style, if any, and address of the purchaser, customer or
client:
If VAT registered; show TIN. Provided, further, That where
the purchaser is a VAT-registered person, in addition to the
information herein required, the invoice or receipt shall further
show the Taxpayer Identification Number (TIN) of the
purchaser.
Electronic receipts/invoices. Within five(5) years from the
effectivity of this Act and upon the establishment of a system
capable of storing and processing the required data, the Bureau
shall require
1. taxpayers engaged in the export of goods and services,
2. taxpayers engaged in e-commerce, and
3. taxpayers under the jurisdiction of the Large Taxpayers
Service
to issue electronic receipts or sales or commercial invoices in
lieu of manual receipts or sales or commercial invoices, subject
to the rules and regulations to be issued by the Secretary of
Finance upon recommendation of the Commissioner and after
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a public hearing shall have been held for this purpose:
Provided, That taxpayers not covered by the mandate of this
provision may issue electronic receipts or sales or commercial
invoices, in lieu of manual receipts, and sales and commercial
invoices.
Kept for 3 years from close of taxable year. The original of
each receipt or invoice shall be issued to the purchaser,
customer or client at the time the transaction is effected, who,
if engaged in business or in the exercise of profession, shall
keep and preserve the same in his place of business for a period
of three (3) years from the close of the taxable year in which
such invoice or receipt was issued, while the duplicate shall be
kept and preserved by the issuer, also in his place of business,
for a like period:
o Same period for electronic. Provided, That in case of
electronic receipts or sales or commercial invoices, the
digital records of the same shall be kept by the
purchaser, customer or client and the issuer for the
same period above stated.
The Commissioner may, in meritorious cases, exempt any
person subject to internal revenue tax from compliance with the
provisions of this Section.
Consequences
Section 113, NIRC
(D) Consequence of Issuing Erroneous VAT Invoice or
VAT Official Receipt
1. If a person who is not a VAT-registered person issues
an invoice or receipt showing his Taxpayer
Identification Number (TIN), followed by the word
“VAT”;
a. The issuer shall, in addition to any liability to
other percentage taxes, be liable to:
JO VALLES
corporation and TAXATION
i. The tax imposed in Section 106 or 108
without the benefit of any input tax
credit; and
ii. A 50% surcharge under Section
248(B) of this Code;
b. The VAT shall, if the other requisite
information required under Subsection (B)
hereof is shown on the invoice or receipt, be
recognized as an input tax credit to the
purchaser under Section 110 of this Code.
2. If a VAT-registered person issues a VAT invoice or
VAT official receipt for a VAT-exempt transaction,
but fails to display prominently on the invoice or
receipt the term ‘VAT exempt sale,’ the issuer shall be
liable to account for the tax imposed in section 106 or
108 as if Section 109 did not apply.
Section 4-113-4, RR 16-05
Consequences of Issuing Erroneous VAT Invoice or VAT
Official Receipt
(A) Issuance of a VAT Invoice or VAT Receipt by a non-
VAT person. If a person who is not VAT-registered issues an
invoice or receipt showing his TIN, followed by the word
“VAT”, the erroneous issuance shall result to the following:
1. The non-VAT person shall be liable to:
a. pay the percentage taxes applicable to his
transactions;
b. VAT due on the transactions under Sec. 106 or
108 of the Tax Code, without the benefit of any
input tax credit; and
c. a 50% surcharge under Sec. 248 (B) of the Tax
Code;
2. VAT shall be recognized as an input tax credit to the
purchaser under Sec. 110 of the Tax Code, provided
the requisite information required under Subsection
4.113 (B) of these Regulations is shown on the invoice
or receipt.
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(B) Issuance of a VAT Invoice or VAT Receipt on an
Exempt Transaction by a VAT-registered Person. If a VAT-
registered person issues a VAT invoice or VAT official receipt
for a VAT-exempt transaction, but fails to display prominently
on the invoice or receipt the words “VAT-exempt sale”,
1. the transaction shall become taxable and the issuer
shall be liable to pay VAT thereon.
2. The purchaser shall be entitled to claim an input tax
credit on his purchase.
Failure to comply with invoicing requirements;
disallowance of input tax claim. CIR disallowed respondent’s
claim for input tax for not meeting the invoicing requirements.
Under Section 113(B)(4) of the NIRC, as amended, it is
indispensable that the sales invoice and official receipt
supporting a claim for input tax must bear the pertinent
information, such as TIN of purchaser in this case, before it can
be applied against petitioner’s output tax. Without such
information, the invoices or official receipts cannot be allowed
as proper support for an input tax credit. Petitioner should have
been vigilant in ensuring that the pertinent invoices and ORs
issued against it are compliant with the invoicing requirements
provided by law and regulations.
Failure to indicate VAT-exempt; treated as VAT sales.
Philmay received an assessment for deficiency VAT. On the
VAT covering consummated sales of real property, there was
an unsupported discrepancy of P1.26M that shall be considered
sales for the 4th quarter. While there were sales transactions
that fall within the P1.5M threshold, the same should be subject
to VAT for petitioner’s failure to indicate the term “VAT-
exempt sale” in the Official Receipts it issued for said
transactions, in accordance with Section 113 of the NIRC.
Philmay Property Incorporated vs CIR [CTA Case No. 8764]
Failure to indicate 0-rated; does not subject the sale to 12%
VAT. Section 108 clearly imposes 0% VAT on services
performed in the Philippines by VAT-registered persons to
persons engaged in international air transport operations. Here,
there is no dispute that Euro-Phil is VAT- registered, and
provides services to a person engaged in international air
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transport operations. By application, Section 108 subjects the
services of Euro-Phil to 0% VAT. While the CIR contends that
Euro-Phil’s failure to present and offer any proof to show
compliance with invoicing requirements deems its sale of
services to 12% VAT, it does not negate the established fact
that British Airways PLC is engaged in international air
transport operations. Moreover, as dictated by Section 113 of
the NIRC, on the provisions on the “Consequences of Issuing
Erroneous VAT Invoice or VAT Official Receipt”, nowhere is
a presumption created by law that the failure to print the word
“zero-rated” deems the transaction subject to 12% VAT. In
addition, Sec. 4.113-4 of RR 16-2005 also does not state that
the failure to print of the word “zero-rated” deems the
transaction subject to 12% VAT. Thus, in this case, failure to
comply with invoicing requirements as mandated by law does
not deem the transaction subject to 12% VAT. Deficiency VAT
cancelled. Cir vs Euro-Philippines Airline Services, Inc.
Issuance of VAT receipt after issuing VAT invoice on same
transaction; no double VAT. CIR assessed Process
Machinery deficiency VAT, based on undeclared sales from
issued official receipts, among others. SC ruled in favor of
Process Machinery. Sec. 113(A) of the NIRC prescribes
invoicing and accounting requirements. It is not disputed that
petitioner is engaged in distribution of minerals processing
equipment; in essence, it is primarily engaged in sale of goods,
and the issuance of VAT invoice for sale is therefore in
accordance with law. Respondent’s basis for assessment should
properly have been VAT invoices and not VAT official
receipts. Nowhere does the law allow respondent to impose
12% VAT twice on the same transaction as a consequence
to the taxpayer who issues both VAT invoice and VAT
official receipt to cover the same. Furthermore, the provision
is inapplicable to petitioner as it is a VAT-registered taxpayer
and the sales of its processing equipment are not VAT-exempt.
By presenting its quarterly sales and VAT output tax schedule
and corresponding Quarterly VAT Return, petitioner
successfully proved that the sales transactions identified by
respondent as undeclared sales were in fact supported by VAT
invoices and correctly reported. To allow this item of
assessment to prosper would be tantamount to sanctioning
JO VALLES
corporation and TAXATION
unjust enrichment, which is not allowed. Process Machinery
Co., Inc vs CIR [CTA Case No. 9217]
BIR authority to print need not be indicated in the receipt.
Intel is VAT-registered and is registered with PEZA as an
ECOZONE export enterprise. When it filed a claim for refund
of its input taxes, the same was denied. CIR said that although
petitioner is legally entitled to the refund, the export invoices
could not be considered as competent evidence to prove its
zero-rated sales because no BIR authority to print said invoices
was indicated thereon. SC disagreed. There is no law or BIR
rule or regulation requiring authority from the BIR to print its
sales invoices to be reflected or indicated therein. While under
the provisions of the Tax Code and the issuances of the BIR
entities engaged in business must secure an authority to print
invoices/receipts and issue duly registered invoices/receipts, it
is not required that the BIR authority to print be indicated
therein. Only the following items are required to be indicated:
1. statement that the seller is a VAT-registered entity
2. total amount which buyer has to pay with indication
that such amount includes VAT
3. date of transaction
4. quantity of merchandise
5. unit cost
6. description of merchandise/nature of service
7. name, business style, and address of buyer if sale is
made to another person also liable for VAT
8. TIN of buyer if he is also a VAT-registered person.
Intel Technology Inc. vs CIR
Refunds
Period; one year means 12 calendar months. On September
30, 2004, Aichi Forging filed a claim for refund of input VAT
for the period ending September 30, 2002. CTA granted this,
but CIR opposed, saying that the claim was filed out of time,
that year being a leap year. The CIR claims that, based on the
Civil Code, which provides that a year is 365 days, the 2-year
period expired on September 29, 2004. SC said that between
the Civil Code and the Administrative Code of 1987, which
states that a year is 12 calendar months, it is the latter that
prevails following the case of CIR vs Primetown Property.
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Therefore, Aichi’s claim, which was filed on the last day of the
24th calendar month from the day it filed its final adjusted
return, was filed within the reglementary period. However,
notwithstanding the timely filing of the administrative claim,
the SC is constrained to deny the claim for tax refund for having
been filed in violation of Section 112(D) of the NIRC, which
provides that the CIR has 120 days to decide the claim, and if
the CIR fails to act after the 120 days, the taxpayer has 30 days
within which to appeal the inaction to the CTA. In this case,
both the admin and the judicial claim were filed on the same
day. Obviously, respondent did not wait for the decision of the
CIR or the lapse of the 120-day period, and the filing of the
judicial claim is thus premature. CIR vs Aichi Forging
Company of Asia, Inc.
Written claim for refund; filing an amended return
indicating overpayment not enough. Respondent, an
employee of Intel Manufacturing Philippines, was assigned in
a foreign country for the period January 1, 1996 to December
31, 1996. During that period,
Intel withheld taxes due on Acosta’s compensation income and
remitted them to the BIR. In 1997, she filed an amended return
indicating an overpayment. Claiming that the income taxes
withheld and paid resulted in overpayment, she filed a petition
for review with the CTA, which, however, dismissed for her
failure to file a written claim for refund before the BIR. Upon
review, CA reversed, holding that the filing of an amended
return indicating an overpayment is sufficient compliance with
the requirement of a written claim for refund. SC does not
agree. The requirements under Sec. 230 are written claim for
refund which must be a categorical demand and filed within 2
years of date of payment of tax. As tax refunds are in the
nature of tax exemptions, strict compliance with conditions
imposed for the return of revenue collected is necessary. Hence,
an amended return indicating an overpayment does not
constitute a written claim for refund, CIR vs Rosemarie Acosta
Section 112, NIRC
Refunds or Tax Credits of Input Tax
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(A) Zero-rated or Effectively Zero-rated Sales. Any VAT-
registered person, whose sales are zero-rated or effectively
zero-rated may, within two (2) years after the close of the
taxable quarter when the sales were made, apply for the
1. issuance of a tax credit certificate or
2. refund of creditable input tax due or paid attributable
to such sales,
except transitional input tax, to the extent that such input tax
has not been applied against output tax:
o Foreign currency must be duly accounted for in
accordance with rules and regulations of BSP.
Provided, however, That in the case of zero-rated sales
under Section 106(A)(2)(a)(1), (2) and (b) and Section
108 (B)(1) and (2), the acceptable foreign currency
exchange proceeds thereof had been duly accounted for
in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP):
o Input tax not directly attributable to any type of
sale; pro-rated. Provided, further, That where the
taxpayer is engaged in zero-rated or effectively zero-
rated sale and also in taxable or exempt sale of goods
of properties or services, and the amount of creditable
input tax due or paid cannot be directly and entirely
attributed to any one of the transactions, it shall be
allocated proportionately on the basis of the volume of
sales.
o Attributable to VATable sales; pro-rate between 0-
rated and non-0-rated. Provided, finally, That for a
person making sales that are zero-rated under Section
108(B) (6), the input taxes shall be allocated ratably
between his zero-rated and non-zero-rated sales.
(B) Cancellation of VAT Registration. A person whose
registration has been cancelled due to retirement from or
cessation of business, or due to changes in or cessation of status
under Section 106(C) of this Code may, within two (2) years
from the date of cancellation, apply for the issuance of a tax
JO VALLES
corporation and TAXATION
credit certificate for any unused input tax which may be used
in payment of his other internal revenue taxes.
(C) Period within which Refund or Tax Credit of Input
Taxes shall be Made. In proper cases, the Commissioner shall
grant a refund for creditable input taxes within ninety (90) days
from the date of submission of the official receipts or invoices
and other documents in support of the application filed in
accordance with Subsections (A) and (B) hereof:
o Due process in denial; state in writing the basis.
Provided, That should the Commissioner find that the
grant of refund is not proper, the Commissioner must
state in writing the legal and factual basis for the denial.
o RMC 54-2014. New rules; 120 days to act; failure to
act is presumed to be a denial. The Commissioner
Shall have 120 days from date of submission of
complete documents to decide whether or not to Grant
the claim for tax credit or refunded. If the claim is not
acted upon by the commissioner within the statutory
120-days, such in action shall be deemed a denial of
the application for tax credit or refund. Further, it
requires that the application or claim must already be
accompanied by complete supporting documents and
the taxpayer is barred from submitting additional
documents after he has filed his administrative claim
this takes away from the taxpayer claimant the
reckoning of the one the 120-day period.
Taxpayer may appeal denial to CTA within 30 days. In case
of full or partial denial of the claim for tax refund, the taxpayer
affected may, within thirty (30) days from the receipt of the
decision denying the claim, appeal the decision with the Court
of Tax Appeals:
o Provided, however, That failure on the part of any
official, agent, or employee of the BIR to act on the
application within ninety (90) days period shall be
punishable under Section 269 of this Code.
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(D) Manner of Giving Refund. Refunds shall be made upon
warrants drawn by the Commissioner or by his duly
authorized representative without the necessity of being
countersigned by the Chairman, Commission on audit, the
provisions of the Administrative Code of 1987 to the contrary
notwithstanding: Provided, That refunds under this paragraph
shall be subject to post audit by the Commission on Audit.
Note; only the admin claim for refund must fall within the
2yr period. Only the administrative claim for refund of input
VAT must be filed within the 2-year period; the judicial claim
need not be. Reading together subsections (A) and (D) of
Section 112, the Court in San Roque Power declared that the
30- day period does not have to fall within the 2-year period, as
long as the administrative claim is filed within the 2-year
period. State Power Inc. vs CIR
Section 229, NIRC
Recovery of Tax Erroneously or Illegally Collected
Exhaustion of administrative remedies; claim for refund or
credit before suit. No suit or proceeding shall be maintained
in any court for the recovery
1. of any national internal revenue tax hereafter alleged to
have been erroneously or illegally assessed or
collected, or
2. of any penalty claimed to have been collected without
authority,
3. of any sum alleged to have been excessively or in any
manner wrongfully collected without authority, or
4. of any sum alleged to have been excessively or in any
manner wrongfully collected,
until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained,
whether or not such tax, penalty, or sum has been paid under
protest or duress.
2 years from payment of tax. In any case, no such suit or
proceeding shall be filed after the expiration of two (2) years
from the date of payment of the tax or penalty regardless of any
supervening cause that may arise after payment: Provided,
however, That the Commissioner may, even without a written
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claim therefor, refund or credit any tax, where on the face of
the return upon which payment was made, such payment
appears clearly to have been erroneously paid.
Refund for input tax not the same as refund for erroneously
paid taxes. MPC sold power to NPC, a tax-exempt entity. MPC
sought a refund of input taxes paid pertaining to sales during
the last quarter of 1996. Given that the last creditable input
VAT due for the period is the third quarter of 1996, ending
September 30, 1996, any claim should have been filed before
September 30, 1998. Consequently, MPC’s claim of refund
filed on December 10, 1999 had already prescribed. Neither
may MPC avail itself of the provisions of Sec. 204(C) or 229,
which prescribe a different starting point. Notably, they also
contain a 2-year prescriptive period, and they apply only to
instances of erroneous payment or illegal collection of internal
revenue taxes. The creditable input VAT was not erroneously
paid. VAT is an indirect tax which can be shifted to the buyer
of the taxpayer. The fact that the subsequent sale or transaction
involves a wholly tax-exempt client does not, alone, deprive the
taxpayer of its right to a refund of any unutilized creditable
input VAT, absent erroneous, illegal, or wrongful payment. It
is clear that Sec. 112(A), providing a 2-year prescriptive period
reckoned from the close of the taxable quarter when the
relevant transactions were made pertaining to the creditable
input VAT, applies to this case, and not the other actions which
refer to erroneous payment of taxes. Refund denied. CIR vs
Mirant Pagbilao Corporation
Section 4-112-1, RR 16-05
Claims for Refund/Credit of Input Tax
(a) Zero-rated and Effectively Zero-rated Sales of Goods,
Properties or Services. A VAT-registered person whose sales
of goods, properties or services are zero- rated or effectively
zero-rated may apply for the issuance of a tax refund of input
tax attributable to such sales. The input tax that may be subject
of the claim shall exclude the portion of input tax that has
been applied against the output tax. The application should
be filed within two (2) years after the close of the taxable
quarter when such sales were made.
JO VALLES
corporation and TAXATION
Foreign currency must be duly accounted for in accordance
with rules and regulations of BSP. In case of zero-rated sales
under Secs. 106(A)(2)(a)(1) and (3), Secs. 108(B)(1) and (2) of
the Tax Code, the payments for the sales must have been made
in acceptable foreign currency duly accounted for in
accordance with the BSP rules and regulations.
Input tax not directly attributable to any type of sale; pro-
rated. Where the taxpayer is engaged in both zero-rated or
effectively zero- rated sales and in taxable (including sales
subject to final withholding VAT) or exempt sales of goods,
properties or services, and the amount of creditable input tax
due or paid cannot be directly and entirely attributed to any one
of the transactions, only the proportionate share of input taxes
allocated to zero-rated or effectively zero-rated sales can be
claimed for refund or issuance of a tax credit certificate.
In the case of a person engaged in the transport of passenger
and cargo by air or sea vessels from the Philippines to a foreign
country, the input taxes shall be allocated ratably between his
zero-rated sales and non-zero-rated sales (sales subject to
regular rate, subject to final VAT withholding and VAT-
exempt sales).
(b) Cancellation of VAT registration. A VAT-registered
person whose registration has been cancelled due to retirement
from or cessation of business, or due to changes in or cessation
of status under Sec. 106 (C) of the Tax Code may, within two
(2) years from the date of cancellation, apply for the issuance
of tax credit certificate for any unused input tax which he may
use in payment of his other internal revenue taxes:
o Refunded if not internal revenue taxes. Provided,
however, that he shall be entitled to a refund if he has
no internal revenue tax liabilities against which the tax
credit certificate may be utilized:
o Date of cancellation is date of issuance of tax
clearance. Provided, further, that the date of
cancellation being referred hereto is the date of
issuance of tax clearance by the BIR, after full
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ad majorem dei gloriam
settlement of all tax liabilities relative to cessation of
business or change of status of the concerned taxpayer:
o Provided, finally, that the filing of the claim shall be
made only after completion of the mandatory audit of
all internal revenue tax liabilities covering the
immediately preceding year and the short period return
and the issuance of the applicable tax clearance/s by
the appropriate BIR Office which has jurisdiction over
the taxpayer.
(c) Where to file the claim for refund/credit. Claims for
refunds shall be filed with the appropriate Bureau of Internal
Revenue (BIR) Office (Large Taxpayers Service (LTS),
Revenue District Office (RDO)) having jurisdiction over the
principal place of business of the taxpayer.
o Direct exporters; exclusively to VCAD. Claims for
input tax refund of direct exporters shall be exclusively
filed with the VAT Credit Audit Division(VCAD).
(d) Period within which refund/credit of input taxes shall be
made. In proper cases, the Commissioner of Internal Revenue
shall grant refund for creditable input taxes within ninety (90)
days from the date of submission of the official receipts or
invoices and other documents in support of the
application filed in accordance with subsections (A) and (B)
hereof:
o Due process in denial; state in writing the basis.
Provided, That should the Commissioner find that the
grant of refund is not proper, the Commissioner must
state in writing the legal and factual basis for the denial.
The 90-day period to process and decide, pending the
establishment of the enhanced VAT Refund System shall only
be up to the date of approval of the Recommendation Report on
such application for VAT refund by the Commissioner or his
duly authorized representative:
o Provided, That all claims for refund/tax credit
certificate filed prior to January 1, 2018 will be
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governed by the one hundred twenty (120)- day
processing period.
Taxpayer may appeal denial to CTA within 30 days. In case
of full or partial denial of the claim for tax refund, the taxpayer
affected may, within thirty (30) days from the receipt of the
decision denying the claim, appeal the decision with the Court
of Tax Appeals:
Provided, however, that failure on the part of any official,
agent, or employee of the BIR to act on the application within
the ninety (90)- day period shall be punishable under Section
269 of the Tax Code, as amended.
(e) Manner of giving refund. Refund shall be made upon
warrants drawn by the Commissioner of Internal Revenue or
by his duly authorized representative without the necessity of
being countersigned by the Chairman, Commission on Audit
(COA), the provision of the Revised Administrative Code to
the contrary notwithstanding:
o Provided, That refunds under this paragraph shall be
subject to post audit by the COA.
(f) VAT Refund Center. The Department of Finance shall
establish a VAT refund center in the BIR and in the Bureau of
Customs (BOC) that will handle the processing and granting of
cash refunds of creditable input tax.
(g) Automatic Appropriation. An amount equivalent to five
percent (5%) of the total VAT collection of the BIR and the
BOC from the immediately preceding year shall be
automatically appropriated annually and shall be treated
1. as a special account in the general fund or
2. as trust receipts for the purpose of funding claims for
VAT refund:
Unused fund reverts to general fund. Provided, That any
unused fund, at the end of the year shall revert to the general
fund.
(h) Quarterly Report. The BIR and BOC shall be required to
submit to the Congressional Oversight Committee on the
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corporation and TAXATION ad majorem dei gloriam SPBUS
Comprehensive Tax Reform Program(COCCTRP) a quarterly
report of all pending claims for refund and any unused fund.

229 Last Edit: 23 December 2020 JO VALLES

corporate Tax Management
CORPORATE TAX MANAGEMENT
REGISTRATION REQUIREMENTS IN GENERAL
(A) Requirements
When to register. 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.
Contents. The registration shall contain the taxpayer's
1. name,
2. style,
3. place of residence,
4. business and
5. such other information as may be required by the
Commissioner in the form prescribed therefor.
Simplified for SE/P. Provided, That the Commissioner shall
simplify the requirements of self-employed individuals and/or
professionals.
Register with RDO having jurisdiction. A person
maintaining a head office, branch or facility shall register with
the Revenue District Officer having jurisdiction over the head
office, branch or facility. For purposes of this Section, the term
'facility' may include but not be limited to sales outlets, places
of production, warehouses or storage places.
(B) Annual Registration Fee
500 for every separate or distinct establishment; Jan 31
annually. An annual registration fee in the amount of Five
hundred pesos (P500) for every separate or distinct
establishment or place of business, including facility types
where sales transactions occur, shall be paid upon registration
and every year thereafter on or before the last day of January:
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ad majorem dei gloriam
Exempt from registration fee. Provided, however, That
1. cooperatives,
2. individuals earning purely compensation income,
whether locally or abroad, and
3. overseas workers
are not liable to the registration fee herein imposed.
To whom paid. The registration fee shall be paid
1. to an authorized agent bank located within the revenue
district, or
2. to the Revenue Collection Officer, or
3. duly authorized Treasurer of the city or municipality
where each place of business or branch is registered.
(C) Registration of Each Type of Internal Revenue Tax.
Every person who is required to register with the Bureau of
Internal Revenue under Subsection (A) hereof,
1. shall register each type of internal revenue tax for
which he is obligated,
2. shall file a return and shall pay such taxes, and
3. shall update such registration of any changes in
accordance with Subsection (E) hereof.
(D) Transfer of Registration
Application for registration information update. 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 filing an application for registration
information update in the form prescribed therefor.
(E) Other Updates
Any person registered in accordance with this Section shall,
whenever applicable, update his registration information with
the Revenue District Office where he is registered, specifying
therein any change in type and other taxpayer details.
(F) Cancellation of Registration
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(1) General Rule. The registration of any person who ceases
to be liable to a tax type shall be cancelled upon filing with the
Revenue District Office where he is registered an application
for registration information update in a form prescribed
therefor.
(2) Cancellation of Value-Added Tax Registration. A VAT-
registered person may cancel his registration for VAT if:
a. He makes written application and can demonstrate to
the Commissioner’s satisfaction that his gross sales or
receipts for the following twelve (12) months, other
than those that are exempt under Section 109 (A) to (U)
(sic), will not exceed One million five hundred
thousand pesos (P1,500,000) or
b. He has ceased to carry on his trade or business, and
does not expect to recommence any trade or business
within the next (12) months.
Effective first day of the following month. The cancellation
of registration will be effective from the first day of the
following month.
(G) Persons Required to Register for Value-Added Tax.
1. When required to register as VAT. Any person who,
in the course of trade or business, sells, barters or
exchanges goods or properties, or engages in the sale
or exchange of services, shall be liable to register for
value-added tax if:
a. Gross sales >3M in the previous 12months.
His gross sales or receipts for the past twelve
(12) months, other than those that are exempt
under Section 109(A) to (BB), have exceeded
Three million pesos (P3,000,000); or
b. Reasonable grounds to believe gross sales
>3M next 12 months. There are reasonable
grounds to believe that his gross sales or
receipts for the next twelve (12) months, other
than those that are exempt under Section
109(A) to (BB), will exceed Three million
pesos (P3,000,000).
2. Register with RDO having jurisdiction. Every
person who becomes liable to be registered under
JO VALLES
corporate Tax Management
paragraph (1) of this Subsection shall register with the
Revenue District Office which has jurisdiction over the
head office or branch of that person, and shall pay the
annual registration fee prescribed in Subsection (B)
hereof.
a. Failure to register; liable for output VAT
but no input VAT. If he fails to register, he
shall be liable to pay the tax under Title IV as
if he were a VAT-registered person, but
without the benefit of input tax credits for the
period in which he was not properly registered.
(H) Optional Registration for Value-Added Tax of Exempt
Person.
1. Any person who is not required to register for value-
added tax under Subsection (G) hereof may elect to
register for value-added tax by registering with the
Revenue District Office that has a jurisdiction over the
head office of that person, and paying the annual
registration fee in Subsection (B) hereof.
2. Irrevocable for next 3 yrs. Any person who elects to
register under this Subsection shall not be entitled to
cancel his registration under Subsection (F)(2) for the
next three (3) years.
One paying 8% tax on GR not allowed to register as VAT
taxpayer. Provided, That any person taxed under Section
24(A)(2)(b) and 24(A)(2)(c)(2)(a) of the NIRC who elected to
pay the eight percent (8%) tax on gross sales or receipts shall
not be allowed to avail of this option.
VAT registered person. For purposes of Title IV of this code,
any person who has registered value-added tax as a tax type in
accordance with the provisions of Subsection (C) hereof shall
be referred to as a “VAT-registered person” who shall be
assigned only one Taxpayer Identification Number (TIN).
(I) Supplying of Taxpayer Identification Number (TIN)
Any person required under the authority of this Code to make,
render or file a return, statement or other document shall be
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ad majorem dei gloriam
supplied with or assigned a Taxpayer Identification Number
(TIN) which he shall indicate in such return, statement or
document filed with the Bureau of Internal Revenue for his
proper identification for tax purposes, and which he shall
indicate in certain documents, such as, but not limited to the
following:
1. Sugar quedans, refined sugar release order or similar
instruments;
2. Domestic bills of lading;
3. Documents to be registered with the Register of Deeds
or Assessor's Office
4. Registration certificate of transportation equipment by
land, sea or air;
5. Documents to be registered with the Securities and
Exchange Commission;
6. Building construction permits;
7. Application for loan with banks, financial institutions,
or other financial intermediaries;
8. Application for mayor's permit;
9. Application for business license with the Department
of Trade & Industry; and
10. Such other documents which may hereafter be required
under rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the
Commissioner.
Estate of deceased has a different TIN. In cases where a
registered taxpayer dies, the administrator or executor shall
register the estate of the decedent in accordance with
Subsection (A) hereof and a new Taxpayer Identification
Number (TIN) shall be supplied in accordance with the
provisions of this Section.
Nonresident deceased; estate registered in the place where
E/A is registered or if E/A not registered, place of residence.
In the case of a nonresident decedent, the executor or
administrator of the estate shall register the estate with the
Revenue District Office where he is registered:
Provided, however, That in case such executor or administrator
is not registered, registration of the estate shall be made with
the Taxpayer Identification Number (TIN) supplied by the
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Revenue District Office having jurisdiction over his legal
residence.
Only one Taxpayer Identification Number (TIN) shall be
assigned to a taxpayer. Any person who shall secure more
than one Taxpayer Identification Number shall be criminally
liable under the provision of Section 275 on “Violation of Other
Provisions of this Code or Regulations in General”.
REGISTRATION OF ONLINE BUSINESS
Date of registration without penalty; 31 July 2020. All those
who will register their business activity and/or update their
registration status not later than July 31, 2020 shall not be
imposed with penalty for late registration. Likewise, they are
encouraged to voluntarily declare their past transactions subject
to pertinent taxes and pay the taxes due thereon, without
corresponding penalty, when declared and paid on or before the
said date.
Registration guidelines
Persons doing business online with no TIN yet. Register
business following existing policies in securing TIN and
registration of business.
Persons doing business online who already have TINs but
the business is not yet registered.
a. Individual; register with RDO having jurisdiction
over place of business; if none, use residence.
Whether the TIN was issued due to ONETT or
employment, register the business, using BIR Form
1901, with the RDO having jurisdiction over place of
business, if with physical establishment. Otherwise,
with the RDO having jurisdiction over the place of
residence. The concerned RDO shall effect the update
of taxpayer classification (e.g., employee to sole
proprietor, ONETT to sole proprietor); and include the
business activity of online selling.
JO VALLES
corporate Tax Management
b. Non-individual. Update business registration, using
BIR Form 1905, details to include additional business
activity (online selling).
Documents that taxpayer will receive:
1. Certificate of registration
2. Copy of the BIR-received Registration Form (1901 or
1903),
3. Notice to Issue Receipt/Invoice (NIRI), BPR/BPI or
4. ATP (per taxpayer's choice), and
5. the proof of registration fee.
ACCOUNTING REQUIREMENTS FOR VAT
Registration requirements
RR 16-05
Section. 9.236-1. Registration of VAT Taxpayers
(a) In general; 500 for every separate or distinct
establishment except warehouse w/o sale transactions;
before start of business and Jan 31 annually. Any person
who, in the course of trade or business, sells, barters,
exchanges goods or properties, or engages in the sale of
services subject to VAT imposed in Secs. 106 and 108 of the
Tax Code shall register with the appropriate RDO using the
appropriate BIR forms and pay an annual registration fee in the
amount of Five Hundred Pesos (P500) using BIR Form No.
0605 for every separate or distinct establishment or place of
business (save a warehouse without sale transactions) before
the start of such business and every year thereafter on or before
the 31st day of January.
o Separate or distinct establishment shall mean any
branch or facility where sale transactions occur.
o Branch means a fixed establishment in a locality
which conducts sales operation of the business as an
extension of the principal office.
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o Principal place of business refers to the place where
the head or main office is located as appearing in the
corporation’s Articles of Incorporation.
o Individual. In the case of an individual, the
principal place of business shall be the place
where the head or main office is located and
where the books of accounts are kept.
o Warehouse means the place or premises
where the inventory of goods for sale are kept
and from which such goods are withdrawn for
delivery to customers, dealers, or persons
acting in behalf of the business.
Separate registration for HO and branch. Any person who
maintains a head or main office and branches in different places
shall register with the RDO which has jurisdiction over the
place wherein the main or head office or branch is located.
Where reg fee is paid. However, the registration fee shall be
paid to any accredited bank in the Revenue District where the
head office or branch is registered provided that in areas where
there are no accredited banks, the same shall be paid to the
1. RDO,
2. collection agent, or
3. duly authorized treasurer
of the municipality where each place of business or branch is
situated.
One TIN per VAT-registered person; +3 digit branch code.
Each VAT-registered person shall be assigned only one TIN.
The branch shall use the 9-digit TIN of the Head Office plus a
3-digit Branch Code.
VAT-registered vs VAT-registrable. VAT-registered person
refers to any person registered in accordance with this section.
VAT-registrable person refers to any person who is required
to register under the provisions of this section but failed to
register.
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(b) Mandatory. Any person who, in the course of trade or
business, sells, barters or exchanges goods or properties or
engages in the sale or exchange of services shall be liable to
register if:
i. His gross sales or receipts for the past twelve (12)
months, other than those that are exempt under Sec.
109 (1)(A) to (U) of the Tax Code, have exceeded One
million five hundred thousand pesos
(P1,500,000.00);or
ii. There are reasonable grounds to believe that his gross
sales or receipts for the next twelve (12) months, other
than those that are exempt under Sec. 109 (1)(A) to (U)
of the Tax Code, will exceed One million five hundred
thousand pesos(P1,500,000.00).
Failure to register; liable for output VAT but no input
VAT. Every person who becomes liable to be registered under
paragraph (1) of this subsection shall register with the RDO
which has jurisdiction over the head office or branch of that
person, and shall pay the annual registration fee prescribed in
subsection 9.236-1(a) hereof. If he fails to register, he shall be
liable to pay the output tax under Secs. 106 and/or 108 of the
Tax Code as if he were a VAT-registered person, but without
the benefit of input tax credits for the period in which he was
not properly registered.
Franchisee of radio and TV w/ gross receipts >P10M;
register within 30days from end of taxable yr. Moreover,
franchise grantees of radio and television broadcasting, whose
gross annual receipt for the preceding taxable year exceeded
P10,000,000.00 shall register within thirty (30) days from the
end of the taxable year.
(c) Optional VAT Registration
1. Any person who is VAT-exempt under Sec. 4.109-1
(B) (1) (V) not required to register for VAT may, in
relation to Sec. 4.109-2, elect to be VAT- registered by
registering with the RDO that has jurisdiction over the
head office of that person, and pay the annual
registration fee of P500.00 for every separate and
distinct establishment.
JO VALLES
corporate Tax Management
2. Any person who is VAT-registered but enters into
transactions which are exempt from VAT (mixed
transactions) may opt that the VAT apply to his
transactions which would have been exempt under
Section 109(1) of the Tax Code, as amended.
[Sec.109(2)]
3. Franchise grantees of radio and/or television
broadcasting whose annual gross receipts of the
preceding year do not exceed ten million pesos
(P10,000,000.00) derived from the business covered by
the law granting the franchise may opt for VAT
registration. This option, once exercised, shall be
irrevocable. (Sec. 119, Tax Code)
Irrevocable for 3 yrs. Any person who elects to register under
this subsections (1) and (2) above shall not be allowed to cancel
his registration for the next three (3) years.
Register 10days before start of taxable quarter. The above-
stated taxpayers may apply for VAT registration not later than
ten (10) days before the beginning of the taxable quarter and
shall pay the registration fee prescribed under sub-paragraph
(a) of this Section, unless they have already paid at the
beginning of the year.
o In any case, the Commissioner of Internal Revenue
may, for administrative reason deny any application for
registration.
o Effective first day of month following registration.
Once registered as VAT person, the taxpayer shall be
liable to output tax and be entitled to input tax credit
beginning on the first day of the month following
registration.
Section. 9.236-2. Registration of Non-VAT or Exempt
Taxpayer
Register 10 days from commencement. Every person, other
than those required to be registered as VAT persons, engaged
in any business, shall, on or before the commencement of his
business, or whenever he transfers to another revenue district,
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register with the RDO concerned within 10 days from the
commencement of business or transfer in the manner
prescribed under this Section and shall pay the applicable
registration fee of Five Hundred Pesos (P500.00) for every
separate or distinct establishment or place of business, if he has
not paid the registration fee in the beginning of the taxable year.
The fee shall be paid to any AAB, where each place of business
or branch is situated. In areas where there is no AAB, such
person shall pay the fee prescribed herein with the RDO, RCO,
or authorized municipal treasurer. The registration shall contain
his name or style, place of residence, business, the place where
such business is carried on, and such information as may be
required by the Commissioner of Internal Revenue in the form
prescribed therefor.
Required to register as non-VAT. The following are required
to register as non-VAT persons and pay the applicable
registration fee:
1. VAT-exempt persons under Sec. 109 of the Tax Code
who did not opt to register as VAT taxpayers;
2. Individuals engaged in business where the gross sales
or receipts do not exceed One Hundred Thousand
Pesos P100,000.00 during any 12-month period. They
are required to register but will not be made to pay the
registration fee of P500.00.
3. Non-stock, non-profit organizations and associations
engaged in trade or business whose gross sales or
receipts do not exceed P1,500,000.00 for any 12-month
period or in an amount as adjusted thereafter every
three (3) years depending on the annual Consumer
Price Index as published by the NSO;
4. Cooperatives other than electric cooperatives.
However, they are not required to pay the registration
fee imposed in these Regulations.
5. Radio and TV broadcasting whose gross annual
receipts do not exceed ten million pesos (P10,000,000)
and which do not opt to be VAT registered;
6. PEZA and other ecozone registered enterprises
enjoying the preferential tax rate of 5% in lieu of all
taxes;
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7. SBMA and other free port zone-registered enterprises
enjoying the preferential tax rate of 5% in lieu of all
taxes.
Section 9.236-3. Application for Registration. The
application shall be filed with the RDO where the principal
place of business, branch, storage place or premises is located,
as the case may be, before commencement of business or
production or qualification as a withholding agent.
o Storge places; 30 days prior to use as storage. In the
case of storage places, the application shall be filed
within thirty (30) days from the date the aforesaid
premises have been used for storage.
o In any case, the Commissioner of Internal Revenue
may, for administrative and meritorious reasons, deny
or revoke any application for registration.
Section 9.236-4. Certificate of Registration. The certificate
shall be issued to the applicant by the BIR office concerned
upon compliance with the requirements for registration.
SEC. 9-236-5. Posting of Registration Certificate. Every
registered taxpayer shall post or exhibit his
1. Registration Certificate and
2. duly validated Registration Fee Return
at
1. a conspicuous place in his principal place of busines
and
2. at each branch in such a way that is clearly and easily
visible to the public.
Section 9.236-6. Cancellation of VAT Registration. A VAT-
Registered person may cancel his registration for VAT if:
a. He makes written application and can demonstrate to
the Commissioner of Internal Revenue’s satisfaction
that his gross sales or receipts for the following twelve
(12) months, other than those that are exempt under
Sec. 109 (1) (A) to (U) of the Tax Code, will not exceed
One Million Five Hundred Thousand pesos
(P1,500,000.00);or
JO VALLES
corporate Tax Management
b. He has ceased to carry on his trade or business, and
does not expect to recommence any trade or business
within the next twelve (12)months.
Others. Some other instances where a VAT-registered person
may apply for cancellation of registration are:
1. A change of ownership, in the case of a single
proprietorship;
2. Dissolution of a partnership or corporation;
3. Merger or consolidation with respect to the dissolved
corporation(s);
4. A person who has registered prior to planned business
commencement, but failed to actually start his
business;
Update of registration. Some instances where taxpayer will
update his registration by submitting a duly accomplished
Registration Update Form (BIR Form No. 1905):
1. A person’s business has become exempt in accordance
with Sec. 4.109-1(B) (1) of these Regulations,
2. A change in the nature of the business itself from sale
of taxable goods and/or services to exempt sales
and/orservices;
3. A person whose transactions are exempt from VAT
who voluntarily registered under VAT system, who
after the lapse of three years after his registration,
applies for cancellation of his registration as such; and
4. A VAT-registered person whose gross sales or receipts
for three consecutive years did not exceed
P1,500,000.00 beginning November 1, 2005, which
amount shall be adjusted to its present value every
three years using the Consumer Price Index, as
published by the NSO.
Liable to pay OPT; file short period return as VAT w/in 25
days from cancellation. Upon updating his registration, the
taxpayer shall become liable to the percentage tax imposed in
Sec. 116 of the Tax Code. A short period return for the
remaining period that he was VAT- registered shall be filed
within twenty five (25) days from the date of cancellation of his
registration.
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Monthly return for OPT; initial return for the month
following the cancellation / update. For purposes of the
percentage tax, the taxpayer shall file a monthly return. An
initial return shall be filed for the month following the month
of cancellation / update of his registration.
All applications for cancellation of registration due to
closure/cessation or termination of business shall be subjected
to immediate investigation by the BIR office concerned to
determine the taxpayer’s tax liabilities.
Minor changes; Registration Update Form. Any minor
change in the original registration (such as change of address
within the same RDO, typographical errors, and etc.) which
may not necessitate cancellation of the registration shall be
effected by accomplishing the Registration Update Form (BIR
Form No. 1905).
Irrevocable election for radio or TV franchisees; all others
may revoke. Any person, who opted to be registered as a VAT
taxpayer, may apply for cancellation of such registration.
However, the optional registration as a VAT taxpayer of a
franchise grantee of radio and/or television broadcasting whose
gross receipts for the preceding year did not exceed
P10,000,000.00 shall not be revocable.
Subsidiary journals
Section 113(c), NIRC. Invoicing and Accounting
Requirements for VAT-Registered Persons; Accounting
Requirements. Notwithstanding the provisions of Section 233,
all persons subject to the value-added tax under Sections 106
and 108 shall, in addition to the regular accounting records
required, maintain a
1. subsidiary sales journal and
2. subsidiary purchase journal
on which the daily sales and purchases are recorded. The
subsidiary journals shall contain such information as may be
required by the Secretary of Finance.
Section 4.113-3. Accounting Requirements. Notwithstanding
the provisions of Sec. 233, all persons subject to VAT under
Sec. 106 and 108 of the Tax Code shall, in addition to the
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SPBUS
regular accounting records required, maintain a subsidiary sales
journal and subsidiary purchase journal on which every sale or
purchase on any given day is recorded. The subsidiary journal
shall contain such information as may be required by the
Commissioner of Internal Revenue.
Subsidiary record for acquisition of depreciable assets &
capital goods. A subsidiary record in ledger form shall be
maintained for the
1. acquisition,
2. purchase or
3. importation
of depreciable assets or capital goods which shall contain,
among others, information on the
1. total input tax thereon as well as
2. the monthly input tax claimed in VAT declaration or
return.
Returns
Section 114, NIRC as amended by Section 37, RA 10963
(A) In General; file VAT return 25 days following close of
quarter. Every person liable to pay the value-added tax
imposed under this Title shall file a quarterly return of the
amount of his gross sales or receipts within twenty-five (25)
days following the close of each taxable quarter prescribed for
each taxpayer:
Pay VAT monthly. Provided, however, That VAT-registered
persons shall pay the value-added tax on a monthly basis:
Filing and payment w/in 25days after close of quarter
starting Jan 1, 2023. Provided, finally, That beginning January
1, 2023, the filing and payment required under this Subsection
shall be done within twenty-five (25) days following the close
of each taxable quarter.
Cancellation; pay tax due 25 days after cancellation. Any
person, whose registration has been cancelled in accordance
with Section 236, shall file a return and pay the tax due thereon
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corporate Tax Management
within twenty-five (25) days from the date of cancellation of
registration:
o File one consolidated return for HO and branches.
Provided, That only one consolidated return shall be
filed by the taxpayer for his principal place of business
or head office and all branches.
(B) Where to File the Return and Pay the Tax. Except as the
Commissioner otherwise permits, the return shall be filed with
and the tax paid to
1. an authorized agent bank,
2. Revenue Collection Officer or
3. duly authorized city or municipal Treasurer in the
Philippines located within the revenue district where
the taxpayer is registered or required to register.
(C) Withholding of Value-added Tax; government
withholds final VAT of 5% of gross payment. The
Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or
- controlled corporations (GOCCs) shall, before making
payment on account of each purchase of goods and services
which are subject to the value-added tax imposed in Sections
106 and 108 of this Code, deduct and withhold the value- added
tax imposed in Sections 106 and 108 of this Code, deduct and
withhold a final value-added tax at the rate of five percent (5%)
of the gross payment thereof:
Creditable starting January 1, 2021. Provided, That
beginning January 1, 2021, the VAT witholding system under
this Subsection shall shift from final to a creditable system:
12% withholding tax at time of payment to nonresident
owners for lease. Provided, further, That the payment for lease
or use of properties or property rights to nonresident owners
shall be subject to twelve percent (12%) withholding tax at the
time of payment:
Payments for purchases for ODA not subject to final
withholding tax system. Provided, finally, That payments for
purchases of goods and services arising from projects funded
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ad majorem dei gloriam
by Official Development Assistance (ODA) as defined under
Republic Act No. 8182, otherwise known as the ‘Official
Development Assistance Act of 1996’, as amended, shall not
be subject to the final withholding tax system as imposed in this
Subsection. For purposes of this Section, the payor or person in
control of the payment shall be considered as the withholding
agent.
VAT remitted 10 days following end of month of
withholding. The value-added tax withheld under this Section
shall be remitted within ten (10) days following the end of the
month the withholding was made.
RR 16-05, as amended by RR 04-07, as further amended by
RR 13-2008
Section 4.114-1(A). Filing or Return; quarterly; every 25
days following close of quarter . Every person liable to pay
the value-added tax imposed under this Title shall file a
quarterly return of the amount of his gross sales or receipts
within twenty-five (25) days following the close of each taxable
quarter prescribed for each taxpayer.
o Taxable quarter; synchronized with income tax
quarter of taxpayer. The term “taxable quarter” shall
mean that quarter that is synchronized with the income
tax quarter of the taxpayer (i.e., the calendar quarter or
fiscal quarter):
o Provided, however, That VAT-registered persons shall
pay the value-added tax on a monthly basis:
o Provided, finally That beginning January 1, 2023, the
filing and payment required under the Tax Code shall
be done within twenty-five (25) days following the
close of each taxable quarter.
Amounts reflected in the monthly VAT declarations for the first
2 months of the quarter shall still be included in the quarterly
VAT return which reflects the cumulative figures for the
taxable quarter. Payments in the monthly VAT declarations
shall, however, be credited in the quarterly VAT return to arrive
at the net VAT payable or excess input tax/ over-payment as of
the end of a quarter.
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Example. Example. — Suppose the accounting period adopted
by the taxpayer is fiscal year ending October 2003, the taxpayer
has to file monthly VAT declarations for the months of
November 2002, December 2002, and for the months of
February, March, May, June, August, and September for Year
2003, on or before the 20th day of the month following the
close of the taxable month. His quarterly VAT returns
corresponding to the quarters ending January, April, July, and
October 2003 shall, on the other hand, be filed and taxes due
thereon be paid, after crediting payments reflected in the
Monthly VAT declarations, on or before February 25, May 25,
August 25, and November 25, 2003, respectively.
Monthly VAT declarations not later than 20th of every
month. The monthly VAT Declarations (BIR Form 2550M) of
taxpayers whether large or non- large shall be filed and the
taxes paid not later than the 20th day following the end of each
month.
Section 4.114-2. Withholding of VAT on Government
Money Payments and Payments to Non-Residents.
a. Withholding of Value-added Tax. The Government
or any of its political subdivisions, instrumentalities or
agencies, including government-owned or -controlled
corporations (GOCCs) shall, before making payment
on account of each purchase of goods and services
which are subject to the value-added tax imposed in
Sections 106 and 108 of this Code,
a. deduct and withhold the value-added tax
imposed in Sections 106 and 108 of this Code,
b. deduct and withhold a final value-added tax at
the rate of five percent (5%) of the gross
payment thereof:
b. provided, that beginning January 1, 2021, the VAT
withholding system under this subsection shall shift
from final to a creditable system:
a. Provided, That the payment for lease or use of
properties or property rights to nonresident
owners shall be subject to twelve percent
(12%) withholding tax at the time of payment:
JO VALLES
corporate Tax Management
b. Provided, however, that payments for purchase
of goods and services arising from projects
funded by Official Development Assistance
(ODA) as defined under Republic Act No.
8182, Otherwise known as the “Official
Development Assistance Act of 1996,” as
amended, shall not be subject to the
Final/Creditable Withholding Taxes as
imposed in this subsection.
The five percent (5%) final VAT withholding rate shall
represent the net VAT payable of the seller. The remaining
seven percent (7%) effectively accounts for the standard input
VAT for sales of goods or services to government or any of its
political subdivisions, instrumentalities or agencies including
GOCCs in lieu of the actual input VAT directly attributable or
ratably apportioned to such sales.
o Actual input VAT > 7%; form part of cost. Should
actual input VAT attributable to sale to government
exceeds seven percent (7%) of gross payments, the
excess may form part of the sellers’ expense or cost.
o Actual input VAT < 7%; closed to expense or cost.
On the other hand, if actual input VAT attributable to
sale to government is less than seven percent (7%) of
gross payment, the difference must be closed to
expense or cost.
(a) The government or any of its political subdivisions,
instrumentalities or agencies including GOCCs, as well as
private corporation, individuals, estates and trusts, whether
large or non-large taxpayers, shall withhold twelve percent
(12%) VAT, starting February 1, 2006, with respect to the
following payments:
(1) Lease or use of properties or property rights owned by non-
residents; and
(2) Other services rendered in the Philippines by non-residents.
In remitting VAT withheld, the withholding agent shall use
BIR Form No. 1600- Remittance Return of VAT and Other
Percentage Taxes Withheld.
VAT withheld and paid for the non-resident recipient (remitted
using BIR Form No. 1600), which VAT is passed on to the
resident withholding agent by the non-resident recipient of the
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ad majorem dei gloriam
income, may be claimed as input tax by said VAT-registered
withholding agent upon filing his own VAT Return, subject to
the rule on allocation of input tax among taxable sales, zero-
rated sales and exempt sales. The duly filed BIR Form No. 1600
is the proof or documentary substantiation for the claimed input
tax or input VAT.
Nonetheless, if the resident withholding agent is a non-VAT
taxpayer, said passed-on VAT by the non-resident recipient of
the income, evidenced by the duly filed BIR Form No. 1600,
shall form part of the cost of purchased services, which may be
treated either as an "asset" or "expense", whichever is
applicable, of the resident withholding agent.
VAT withheld under this Section shall be remitted within ten
(10) days following the end of the month the withholding was
made.
CORPORATE RETURNS
Section 52, NIRC
Corporation Returns
(A) Requirements. Every corporation subject to the tax herein
imposed, except foreign corporations not engaged in trade or
business in the Philippines, shall render, in duplicate, a true
and accurate
a. quarterly income tax return and
b. final or adjustment return
in accordance with the provisions of Chapter XII of this Title.
4 pages max. The income tax return shall consist of a
maximum of four (4) pages in paper form or electronic form,
be filed by the president, vice president or other principal
officer, shall be sworn to by such officer and by the treasurer or
assistant treasurer, and shall only contain the following
information:
1. Corporate profile and information;
2. Gross sales, receipts or income from services rendered,
or conduct of trade or business, except income subject
to final tax as provided under this Code;
3. Allowable deductions under this Code;
4. Taxable income as defined in Section 31 of this Code;
and
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5. Income tax due and payable.
Provided, That the foregoing provisions shall not affect the
implementation of Republic Act No. 10708 or TIMTA.
(B) Taxable Year of Corporation. A corporation may employ
either calendar year or fiscal year as a basis for filing its annual
income tax return:
o Approval of Commissioner required to change
accounting period. Provided, That the corporation
shall not change the accounting period employed
without prior approval from the Commissioner in
accordance with the provisions of Section 47 of this
Code.
(C) Return of Corporation Contemplating Dissolution or
Reorganization. Every corporation shall, within thirty (30)
days after the adoption by the corporation of a resolution or
plan for its dissolution, or for the liquidation of the whole or
any part of its capital stock, including a corporation which has
been notified of possible involuntary dissolution by the
Securities and Exchange Commission, or for its reorganization,
render a correct return to the Commissioner, verified under
oath, setting forth the terms of such resolution or plan and such
other information as the Secretary of Finance, upon
recommendation of the commissioner, shall, by rules and
regulations, prescribe.
Dissolving or reorganizing corporation must secure
certificate of tax clearance from BIR; submit to SEC which
will issue certificate of dissolution or reorganization. The
dissolving or reorganizing corporation shall, prior to the
issuance by the Securities and Exchange Commission of the
Certificate of Dissolution or Reorganization, as may be defined
by rules and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner, secure a
certificate of tax clearance from the Bureau of Internal
Revenue which certificate shall be submitted to the Securities
and Exchange Commission.
(D) Return on Capital Gains Realized from Sale of Shares
of Stock not Traded in the Local Stock Exchange; 30 days
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corporate Tax Management
after every transaction + final consolidated 15 th day of the
4th month following close of year. Every corporation deriving
capital gains from the sale or exchange of shares of stock not
traded thru a local stock exchange as prescribed under Sections
24(C), 25(A)(3), 27(E)(2), 28(A)(8)(c) and 28 (B)(5)(c) shall
file a return
1. within thirty (30) days after each transactions and
2. a final consolidated return of all transactions during the
taxable year on or before the fifteenth (15th) day of the
fourth (4th) month following the close of the taxable
year.
Only NRFC exempt from filing ITR under Section 52(A);
representative office is a RFC. IP Integration is a
representative office, a company organized and existing under
the laws of UK with License to do business in the Philippines.
It is requesting for exclusion of corporate income tax in the
registered tax types, pursuant to the ruling in CIR vs. Shinko
Electric Industries Co. Ltd., where the CTA EB said that a
representative office is a non-resident foreign corporation not
engaged in any income generating business in the Philippines.
BIR denied the request because the decision [a CTA decision]
has not yet attained finality; the doctrine of stare decisis applies
only to rulings of the Supreme Court and not the judgments of
lower courts or tribunals. In addition, only foreign corporations
not engaged in trade or business in the Philippines are exempt
from the filing of income tax return. Under the Foreign
Investments Act of 1991 the phrase doing business shall
include soliciting orders, service contracts, opening offices,
whether called "liaison" offices or branches. As such, a
representative office is considered a resident foreign
corporation engaged in trade or business in the Philippines. It
is not exempt from the filing of ITR. BIR Ruling No. 1266-18
Section 75
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 for the preceding quarter or quarters upon which the
income tax, as provided in Title II of this Code, shall be levied,
collected and paid.
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o Paid 60 days from close of each quarter. The tax so
computed shall be decreased by the amount of tax
previously paid or assessed during the preceding
quarters and shall be paid not later than sixty (60) days
from the close of each of the first three (3) quarters of
the taxable year, whether calendar or fiscal year.
Section 76
Final Adjustment Return
Every corporation liable to tax under Section 27 shall file a final
adjustment return covering the total taxable income for the
preceding calendar or fiscal year.
If tax payments ≠ tax due. 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,
as the case may be.
If tax paid > tax due, refund/tax credit or carry over to next
quarter or next year. In case the corporation is entitled to a
tax credit or refund of the excess estimated quarterly income
taxes paid, the excess amount shown on its final adjustment
return may be carried over and credited against the estimated
quarterly income tax liabilities for the taxable quarters of the
succeeding taxable years.
Carry-over option irrevocable for the tax period. Once the
option to carry-over and apply the excess quarterly income tax
against income tax due for the taxable quarters of the
succeeding taxable years has been made, such option shall be
considered irrevocable for that taxable period and no
application for cash refund or issuance of a tax credit certificate
shall be allowed therefor.
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Alternative options. Mirant filed its ITR for the fiscal year
ending June 30, 1999 showing net loss and indicating its option
to carry over as a tax credit to the succeeding taxable year its
unutilized input tax credits. It secured an approval to change to
calendar year ending December 31, hence, it filed an ITR for
the interim period July 1, 1999 to December 31, 1999, wherein
it indicated its option to carry over as a tax credit to the
succeeding taxable year its unutilized input tax credits. On
April 10, 2001, it filed an ITR reflecting a net loss of P57M and
unutilized tax credits of P87M. It subsequently wrote the BIR
claiming a refund of the P87M. As the 2-year prescriptive
period was about to lapse without action on the part of the BIR,
Mirant filed a petition for review before the CTA, which
partially granted the claim for P39M, representing unutilized
tax credits for taxable year 2000, and denied the claim for
refund of unutilized tax credits for taxable year 1999 (totaling
P48M). SC said that under Section 76 of the NIRC, once
exercised, the option to carry over is irrevocable. Having
chosen to carry-over the excess quarterly income tax, the
corporation cannot thereafter choose to apply for a tax refund
or issuance of tax credit certificate. This is as opposed to the
predecessor provision in Section 79 of the old Tax Code, which
did not have this qualification. The options in Section 76 (1) to
get a refund, (2) to apply the excess amount to the estimated
quarterly tax liabilities for the succeeding year are alternative
in nature; one cannot get a tax credit and a tax refund at the
same time for the same excess income taxes paid. In this case,
as Mirant clearly indicated in its ITR that the excess was to be
carried over, is now barred from applying for the refund of the
same amount. CIR vs Mirant (Philippines) Operations
Corporation
Section 77
Place and Time of Filing and Payment of Quarterly
Corporate Income Tax
(A) Place of Filing. Except as the Commissioner otherwise
permits, the quarterly income tax declaration required in
Section 75 and the final adjustment return required in Section
76 shall be filed with the
1. authorized agent banks or
2. Revenue District Officer or
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corporate Tax Management
3. Collection Agent or
4. duly authorized Treasurer of the city or municipality
having jurisdiction over the location of the principal
office of the corporation filing the return or place
where its main books of accounts and other data from
which the return is prepared are kept.
(B) Time of Filing the Income Tax Return; 60 days from
close of each taxable quarter. The corporate quarterly
declaration shall be filed within sixty (60) days following the
close of each of the first three (3) quarters of the taxable year.
o Fina;; April 15 or 15th day of the 4th month after
close of the year. The final adjustment return shall be
filed on or before the fifteenth (15th) day of April, or
on or before the fifteenth (15th) day of the fourth (4th)
month following the close of the fiscal year, as the case
may be.
(C) Time of Payment of the Income Tax. The income tax due
on the corporate quarterly returns and the final adjustment
income tax returns computed in accordance with Sections 75
and 76 shall be paid at the time the declaration or return is
filed in a manner prescribed by the Commissioner.
EXPANDED WITHHOLDING TAX
Rates
Section 57(A)
Tax on the following items of income are withheld by the
payor. Subject to rules and regulations the Secretary of Finance
may promulgate, upon the recommendation of the
Commissioner, requiring the filing of income tax return by
certain income payees, the tax imposed or prescribed by the
following Sections on specified items of income shall be
withheld by payor-corporation and/or person and paid in the
same manner and subject to the same conditions as provided in
Section 58 of this Code.
RC, NRC, RA
24(B)(1). Interests, royalties, prizes and other winnings
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24(B)(2). Cash and/or property dividends
24(C). Capital gains from sale of shares of stock not traded
24(D)(1). Capital gains from sale of real property
NRA-ETB
25(A)(2). Cash and/or property dividends; interests, royalties,
prizes, and other winnings
25(A)(3). Capital gains from sale of shares of stock not traded;
capital gains from sale of real property
NRA-NETB
25(B). Entire income received from all sources within the PH
25(C). Gross income received by every alien individual
employed by R/AHQ and ROHQ established in the Philippines
by multinational companies
25(D). The gross income received by every alien individual
employed by offshore banking units established in the
Philippines
25(E). One employed and assigned in the Philippines by a
foreign service contractor or by a foreign service subcontractor
engaged in petroleum operations in the Philippines.
Domestic corporations
27(D)(1). Interest from deposits and yield or any other
monetary benefit from deposit substitutes and from trust funds
and similar arrangements, and royalties
27(D)(2). Capital gains from sale of shares of stock not traded
27(D)(3). Income derived under the expanded foreign currency
deposit system
27(D)(5). Capital gains realized from the sale, exchange or
disposition of lands and/or buildings
Resident Foreign corporations
28 (A)(4). Offshore banking units
28(A)(5). Tax on branch profit remittances
28(A)(7)(a). Interest from deposits and yield or any other
monetary benefit from deposit substitutes, trust funds and
similar arrangements and royalties
28(A)(7)(b). income derived under the expanded foreign
currency deposit system
28(A)(7)(c). Capital gains from sale of shares of stock not
traded in the stock exchange
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Non-resident foreign corporation
28(B)(1). Gross income from all sources within the PH
28(B)(2). Nonresident cinematographic film owner, lessor or
distributor
28(B)(3). Nonresident owner or lessor of vessels chartered by
Philippine nationals
28(B)(4). Nonresident owner or lessor of aircraft, machineries
and other equipment
28(B)(5)(a). Interest on foreign loans
28(B)(5)(b). Intercorporate dividends
28(B)(5)(c). Capital gains from sale of shares of stock not
traded in the stock exchange
33. Fringe benefits
282. Informer’s reward for discovery of violations of the NIRC
and discovery and seizure of smuggled goods
Note. Section 2.52.2 (s) of RR 2-98 imposes 1% CWT on
income payments made to suppliers of agricultural products,
but the same has been suspended by RR 03-04, effective March
1, 2004.
Section 2.57.2(M), RR 2-98 as amended by RR 014-08. EWT
on payments made by top 20k corporations. Income
payments made by any of the top twenty thousand (20,000)
private corporations, as determined by the Commissioner, to
their local/resident supplier of goods and local/resident supplier
of services, including non-resident alien engaged in trade or
business in the Philippines
o Supplier of goods — One percent (1%)
o Supplier of services — Two percent (2%).
RR 06-09. For purchases involving products in their original
state, the tax required to be withheld shall only apply to
purchases in excess of P300K within the taxable year. For this
purpose, agricultural products in their original state shall only
include corn, coconut, copra, palay, rice, cassava, sugar cane,
coffee, fruits, vegetables, marine food products poultry, and
livestock.
RR 11-14. Sugar cane was removed from the list of agricultural
products in their original state.
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corporate Tax Management ad majorem dei gloriam SPBUS
Certain income payments made by credit 1% Interest income on refund of meter deposits-
card companies gross amount of interest paid directly to
Section 2(a), RR 11-2018. Creditable withholding tax rate on Income payment by top withholding agents customers or applied against their billings 10%
professional fees, talent fees, etc. for services rendered: Supplier of goods 1% - Residential 15%
Supplier of services 2% - Non-residential
Individual payee Interest income on the refund paid to direct
• If gross income <= 3M 5% - top withholding agents shall refer to payment or application against customer’s
• If gross income > 3M 10% those taxpayers whose gross billings by other electric distribution utilities
• If VAT-registered regardless of amt* 10% sales/receipts or gross purchases or (DUs) 10%
Non-individual payee claimed deductible itemized expenses, - Residential 15%
• If gross income <= 720K 10% as the case may be, amounted to P12M - Non-residential
• If gross income > 720K 15% during the preceding taxable year. Interest Income derived from any other debt 15%
Section 2, RR 7-2019 instruments not within the coverage of deposit
*as amended by Section 2, RR 14-2018 Income payments made by a government substitutes
office, national or local, including brgys or
Rentals their attached agencies/bodies, GOCCs
Real property 5% Supplier of goods 1% Obligation to withhold; buyer-payor of income. The
Personal property (gross rental >10K) 5% Supplier of services 2% obligation to withhold is imposed upon the buyer-payor of
Poles, satellites and transmission facilities 5% Tolling fees to refineries 5% income although the burden of tax is really upon the seller-
Billboards 5% Payments made by pre-need companies to 1% income/payee; hence, unjustifiable refusal of the latter to be
Cinematographic film rentals & other payments 5% funeral parlors subjected to withholding shall be a ground for mandatory audit
Payments made to embalmers 1% of all internal revenue tax liabilities, as well as the imposition
Income payments to certain contractors
Income payments made to suppliers of 1% of penalties pursuant to Section 275 of the Tax Code, as
General engineering contractors
General building contractors 2% agricultural products amended, upon verified complaint of the buyer-payor.
Specialty contractors Purchases of minerals, mineral products and 5%
quarry resources Individual seller-income earner/payee earning less than
Other contractors
- but BSP is required to withhold 1% and 250k per year from lone payor not subject to withholding.
Income distribution to beneficiaries of trust 15%
remit the same to the government An individual seller-income earner/payee may not be subjected
To partners of GPP
Income payments made by political parties 5% to withholding if the source of income comes from a lone
Gross income for the year >720k 15%
and candidates of local and national elections income payor and the total income payment is less than P250k
Gross income for the year < 720k 10%
on all their purchase of goods and services in a taxable year. In this case the concerned individual shall
Sale, exchange or transfer of RP- ordinary
related to campaign execute an income payee’s sworn declaration of gross
asset
Interest income derived from debt 20% receipt/sales that shall be submitted to the lone payor.
Sellor/transferor exempt from CWT Exempt
If seller is habitually engaged in real estate instruments not within the coverage of
deposit substitutes Section 57(B)
- SP 500k or less 1.5%
- SP >500k to 2M 3% Income payments made to Real Estate 1%
Investment Trust The Secretary of Finance may, upon the recommendation of the
- SP >2M 5%
MERALCO payments (Section 2, RR 1-2019) Commissioner, require the withholding of a tax on the items of
Seller not habitually engaged 6%
Gross amount of refund given by MERALCO 15% income payable to natural or juridical persons, residing in the
Payments to govt personnel from importers, 15% Philippines, by payor-corporation/persons as provided for by
shipping and airline companies or their to customers arising from GR No 141314
law, at the rate of:
agents
• not less than one percent (1%) but not more than
239 Last Edit: 23 December 2020 JO VALLES
corporate Tax Management
• thirty-two percent (32%) thereof,
which shall be credited against the income tax liability of the
taxpayer for the taxable year.
Provided, That, beginning January 1, 2019, the rate of
withholding shall not be less than one percent (1%) but not
more than fifteen percent (15%) of the income payment.
Returns and payment
Section 58, NIRC as amended by Section 18 RA 10963
Returns and Payment of Taxes Withheld at Source
Quick summary. Duties of a person or entity withholding:
1. Withhold tax
2. Make a return
a. BIR Form 1601EQ- CWT
b. BIR Form 1602- Final tax on deposits
c. BIR Form 1603- Fringe benefits tax
d. BIR Form 1601FQ- Final Tax
3. [Added by the IRR]. Monthly remittance form: BIR
Form 0619E or BIR Form 0619F not later than
a. 10th day of next month if non-EFPS
b. 15th day of next month if EFPS
4. Remit not later than last day of the month following
quarter of withholding
a. not later than last day of the month following
close of quarter of withholding
5. Make a statement of income payments and taxes
withheld not later than
a. CWT [BIR Form 2307]
i. Corporate payee- +20d after close of
quarter
ii. Individual payee- March 1 next year
b. FWT [BIR Form 2306]- January 31 next year
6. File annual information return
a. CWT- 1604E; March 1
b. FWT- 1604F; January 31 next year
7. Refund excess or collect deficiency
(A) Quarterly Returns and Payments of Taxes Withheld
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ad majorem dei gloriam
Taxes withheld must be covered by a return and then paid.
Taxes deducted and withheld under Section 57 by withholding
agents shall be covered by a return and paid to, except in cases
where the Commissioner otherwise permits,
1. an authorized agent bank,
2. Revenue District Officer,
3. Collection Agent, or
4. duly authorized Treasurer of the city or municipality
where the withholding agent has his legal residence or
principal place of business, or where the withholding
agent is a corporation, where the principal office is
located.
Taxes withheld; special fund in trust for the government.
The taxes deducted and withheld by the withholding agent shall
be held as a special fund in trust for the government until paid
to the collecting officers.
Final and creditable withholding taxes; last day of the
month following quarter of withholding. The return for final
and creditable withholding taxes shall be filed and the payment
made not later than the last day of the month following the close
of the quarter during which withholding was made.
(B) Statement of Income Payments Made and Taxes
Withheld
Given to recipient of income. Every withholding agent
required to deduct and withhold taxes under Section 57 shall
furnish each recipient, in respect to his or its receipts during the
calendar quarter or year, a written statement showing
1. the income or other payments made by the withholding
agent during such quarter or year, and
2. the amount of the tax deducted and withheld therefrom,
simultaneously upon payment at the request of the payee,
but
1. not later than
a. the twentieth (20th) day following the close of
the quarter in the case of corporate payee, or
b. not later than March 1 of the following year
in the case of individual payee for creditable
withholding taxes.
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2. For final withholding taxes, the statement should be
given to the payee on or before January 31 of the
succeeding year.
(C) Annual Information Return
Every withholding agent required to deduct and withhold taxes
under Section 57 shall submit to the Commissioner an annual
information return containing the
1. list of payees and income payments,
2. amount of taxes withheld from each payee and
3. such other pertinent information as may be required by
the Commissioner.
CWT March 1; FWT Jan 31. In the case of final withholding
taxes, the return shall be filed on or before January 31 of the
succeeding year, and for creditable withholding taxes, not later
than March 1 of the year following the year for which the
annual report is being submitted.
• This return, if made and filed in accordance with the
rules and regulations approved by the Secretary of
Finance, upon recommendation of the Commissioner,
shall be sufficient compliance with the requirements of
Section 68 of this Title in respect to the income
payments.
CIR may extend deadlines. The Commissioner may, by rules
and regulations, grant to any withholding agent a reasonable
extension of time to furnish and submit the return required in
this Subsection.
(D) Income of Recipient
Excess refunded; deficiency collected. Income upon which
any creditable tax is required to be withheld at source under
Section 57 shall be included in the return of its recipient but
• the excess of the amount of tax so withheld over the tax
due on his return shall be refunded to him subject to the
provisions of Section 204;
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corporate Tax Management
• if the income tax collected at source is less than the tax
due on his return, the difference shall be paid in
accordance with the provisions of Section 56.
Taxes withheld; trust funds not to be mingled with other
funds. All taxes withheld pursuant to the provisions of this
Code and its implementing rules and regulations are hereby
considered trust funds and shall be maintained in a separate
account and not commingled with any other funds of the
withholding agent.
(E) Registration with Register of Deeds
No registration of any document transferring real property shall
be effected by the Register of Deeds unless the Commissioner
or his duly authorized representative has certified that
1. such transfer has been reported, and the capital gains
or
2. creditable withholding tax, if any, has been paid:
Annotation in the title. Provided, however, That the
information as may be required by rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation
of the Commissioner, shall be annotated by the Register of
Deeds in the Transfer Certificate of Title or Condominium
Certificate of Title:
Information required in accordance w/ Section 40 must also
be annotated. Provided, further, That in cases of transfer of
property to a corporation, pursuant to a merger, consolidation
or reorganization, and where the law allows deferred
recognition of income in accordance with Section 40, the
information as may be required by rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation
of the Commissioner, shall be annotated by the Register of
Deeds at the back of the Transfer Certificate of Title or
Condominium Certificate of Title of the real property involved:
Provided, finally, That any violation of this provision by the
Register of Deeds shall be subject to the penalties imposed
under Section 269 of this Code.
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Section 2.58, R 2-98
Returns and Payment of Taxes Withheld at Source
(A) Manner, Venue and Time of Filing of Withholding
Tax Returns and Payment of Taxes Withheld at
Source
Filing of withholding tax returns not later than last day of
the month after close of quarter of withholding. Taxpayers
mandated to electronically file and pay shall use the BIR’s
electronic system, while those not mandated has the option to
either use the said electronic system, or file with the Authorized
Agent Banks (AABs) under the jurisdiction of the Revenue
District Office where they are registered.
• Withholding agents located at municipalities where
there is no AAB, the returns shall be filed with the
Revenue Collection Officer assigned in the said
municipality.
• The filing of the withholding tax returns (BIR Form
No. 1601EQ for creditable withholding tax and Form
Nos. 1602 for final tax on interest on bank deposits,
1603 for final tax withheld on fringe benefits, and
1601FQ for all other final withholding taxes) and
payment of the taxes withheld at source shall be made
not later than the last day of the month following
the close of the quarter during which the
withholding was made.
Quarter shall mean calendar quarter;. For this purpose, the
quarter shall follow the calendar quarter, e.g., for taxes
withheld during the quarter ending March 31, the same shall be
remitted by the withholding agent on or before April 30. The
return filed shall be accompanied by the Quarterly Alphabetical
List of Payees (QAP), reflecting the name of income payees,
Taxpayer Identification Number (TIN), the amount of income
paid segregated per month with total for the quarter (all income
payments prescribed as subject to withholding tax under these
regulations, whether actually subjected to withholding tax or
not subjected due to exemption), and the total amount of taxes
withheld, if any.
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BIR Form 0619E/F; Monthly remittance form every 10 th
day of next month regardless of amount withheld; 15th day
for EFPS. Considering that taxes withheld by the withholding
agents are held in trust for the government and its availability
is an imperious necessity to ensure sufficient cash inflow to the
National Treasury, withholding agents shall file BIR Monthly
Remittance Form (BIR Form No. 0619E and/or 0619F) every
tenth (10th) day of the following month when the withholding
is made, regardless of the amount withheld. For withholding
agents using EFPS facility, the due date is on the fifteenth
(15th) day of the following month. Withholding agents with
zero remittance are still required to use and file the same
form.
In the case of sale of shares of stocks not traded thru a local
stock exchange and sale of real property considered as capital
asset, the filing and payment of the tax due thereon shall be
made within thirty (30) days after the sale or disposition using
BIR Form No. 1707 and 1706, respectively. For sale of real
property considered as ordinary asset, the remittance of tax
withheld shall be made on or before the tenth (10th) day
following the month of transaction using BIR Form No. 1606.
(B) Withholding Tax Statement for Taxes Withheld
Triplicate; 2307 for CWT; 2306 for FWT. Every payor
required to deduct and withhold taxes under this subsection
shall furnish each payee, a withholding tax statement, in
triplicate, within twenty (20) days from the close of the quarter.
The prescribed form (BIR Form No, 2307 for creditable
withholding tax and BIR Form 2306 for final withholding tax)
shall be used, showing
1. the monthly income payments made,
2. the quarterly total, and
3. the amount of taxes withheld.
Upon payee’s request, furnish simultaneous with payment.
Provided, however, that upon request of the payee, the payor
must furnish such statement, simultaneously with the income
payment.
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corporate Tax Management
C) Annual Information Return and Annual Alphabetical
List of Payees for income tax withheld at source
The withholding agent is required to file with the concerned
office of the LTS/RR/RDO where the withholding agent is
registered, the following:
1. Creditable; BIR Form 1604E; March 1. Annual
Information Return of Creditable Taxes Withheld
(Expanded)/Income Payments Exempt from
Withholding Tax (BIR Form No. 1604E) including the
corresponding Annual Alphabetical List of Payees - on
or before March 1 of the following year in which
payments were made; and
2. Final; BIR Form 1604F; Jan 31. Annual Information
Return on Final Income Taxes Withheld (BIR Form
1604F) including the corresponding Annual
Alphabetical List of Payees – On or before January 31
of the following year in which payments were made.”
Section 2, RR 6-2018
Requirements for deductibility
General rule: Requirement of withholding the necessary
taxes before deduction from gross income. Any income
payment which is otherwise deductible under the code shall be
allowed as a deduction from the payer's gross income only if it
is shown that the income tax required to be withheld has been
paid to the Bureau in accordance with Sections 57 and 58 on
the Code.
Exceptions: A deduction will also be allowed in the
following cases where no withholding of tax was made:
1. The payee reported the income and pays the tax due
there on and the withholding agent pays the tax
including the interest incident to the failure to withhold
tax and surcharges, if applicable, at the time of the
audit/investigation or re-investigation/reconsideration.
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2. The recipient/payee failed to report the income on the
due date their thereof but the withholding agent or
taxpayer pays the tax including the interest incident to
the failure to withhold the tax, and surcharges, if
applicable at, the time of audit/investigation or
reinvestigation/reconsideration.
3. The withholding agent erroneously under withheld tax
but pays the difference between the correct amount and
the amount of tax withheld including the interest
incident to such error, and surcharges, if applicable, at
the time of the audit/reinvestigation or
reconsideration/reinvestigation.
Items of deduction representing return of capital such as those
pertaining to purchases of raw materials forming part of
finished product or purchases of goods for resale, shall be
allowed as deductions upon withholding agent’s payment of the
basic withholding tax and penalties incident to non-
withholding or under withholding.
INVENTORIES
Section 41. Inventories. Whenever in the judgment of the
Commissioner, the use of inventories is necessary in order to
determine clearly the income of any taxpayer, inventories shall
be taken by such taxpayer upon such basis as the Secretary of
Finance, upon recommendation of the Commissioner, may, by
rules and regulations, prescribe as conforming as nearly as may
be to the best accounting practice in the trade or business and
as most clearly reflecting the income.
Consistent use of inventory valuation method; exceptions.
If a taxpayer, after having complied with the terms and a
conditions prescribed by the Commissioner, uses a particular
method of valuing its inventory for any taxable year, then such
method shall be used in all subsequent taxable years unless:
1. With the approval of the Commissioner, a change to a
different method is authorized; or
2. The Commissioner finds that the nature of the stock on
hand (e.g., its scarcity, liquidity, marketability and
price movements) is such that inventory gains should
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be considered realized for tax purposes and, therefore,
it is necessary to modify the valuation method for
purposes of ascertaining the income, profits, or loss in
a more realistic manner:
Change in inventory valuation method; once every 3 years.
Provided, however, That the Commissioner shall not exercise
his authority to require a change in inventory method more
often than once every three (3) years:
Change in valuation method must be approved by SoF.
Provided, further, That any change in an inventory valuation
method must be subject to approval by the Secretary of
Finance.
POWER OF THE COMMISSIONER TO SUSPEND
Section 115
Power of the Commissioner to Suspend the Business
Operations of a Taxpayer. The Commissioner or his
authorized representative is hereby empowered to suspend the
business operations and temporarily close the business
establishment of any person for any of the following violations:
(a) In the case of a VAT-registered Person
1. Failure to issue receipts or invoices;
2. Failure to file a value-added tax return as required
under Section 114; or
3. Understatement of taxable sales or receipts by thirty
percent (30%) or more of his correct taxable sales or
receipts for the taxable quarter.
(b) Failure of any Person to Register as Required under
Section 236.
Not less than 5 days; until compliance. The temporary
closure of the establishment shall be for the duration of not less
than five (5) days and shall be lifted only upon compliance with
whatever requirements prescribed by the Commissioner in the
closure order.
Section 4.115-1
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corporate Tax Management
Administrative and Penal Provisions
(a) Suspension of business operations. In addition to other
administrative and penal sanctions provided for in the Tax
Code and implementing regulations, the Commissioner of
Internal Revenue or his duly authorized representative may
order suspension or closure of a business establishment for a
period of not less than five (5) days for any of the following
violations:
1. Failure to issue receipts and invoices.
2. Failure to file VAT return as required under the
provisions of Sec. 114 of the Tax Code.
3. Understatement of taxable sales or receipts by 30% or
more of his correct taxable sales or receipt for the
taxable quarter.
4. Failure of any person to register as required under the
provisions of Sec. 236 of the Tax Code.
(b) Surcharge, interest and other penalties. The interest on
unpaid amount of tax, civil penalties and criminal penalties
imposed in Title XI of the Tax Code shall also apply to
violations of the provisions of Title IV of the Tax Code.
PRESERVATION OF BOOKS
Section 235, NIRC
Preservation of books and accounts and other accounting
records; from last entry until end of 3 years from last day
of filing of return or actual filing, whichever is later. All the
books of accounts, including the subsidiary books and other
accounting records of corporations, partnerships, or persons,
shall be preserved by them for a period beginning from the last
entry in each book until the last day prescribed by Section 203
within which the Commissioner is authorized to make an
assessment. The said books and records shall be subject to
examination and inspection by internal revenue officers:
For income tax, examination is once a year; exception.
Provided, That for income tax purposes, such examination and
inspection shall be made only once in a taxable year, except in
the following cases:
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a. Fraud, irregularity or mistakes, as determined by the
Commissioner;
b. The taxpayer requests reinvestigation;
c. Verification of compliance with withholding tax laws
and regulations;
d. Verification of capital gains tax liabilities; and
e. In the exercise of the Commissioner's power under
Section 5(B) to obtain information from other persons
in which case, another or separate examination and
inspection may be made.
Where done; place of business or BIR office. Examination
and inspection of books of accounts and other accounting
records shall be done
1. in the taxpayer's office or place of business or
2. in the office of the Bureau of Internal Revenue.
Submit books 10 days from retirement; not dissolved until
cleared of tax liability. All corporations, partnerships or
persons that retire from business shall, within ten (10) days
from the date of retirement or within such period of time as may
be allowed by the Commissioner in special cases, submit their
books of accounts, including the subsidiary books and other
accounting records to the Commissioner or any of his deputies
for examination, after which they shall be returned.
Corporations and partnerships contemplating dissolution must
notify the Commissioner and shall not be dissolved until
cleared of any tax liability.
Books of tax-exempt entities also subject to examination.
Any provision of existing general or special law to the contrary
notwithstanding, the books of accounts and other pertinent
records of tax-exempt organizations or grantees of tax
incentives shall be subject to examination by the Bureau of
Internal Revenue for purposes of ascertaining compliance with
the conditions under which they have been granted tax
exemptions or tax incentives, and their tax liability, if any.
Section 203, NIRC
Period of Limitation Upon Assessment and Collection; 3
years from date prescribed for filing or 3 years from actual
filing, whichever is later. Except as provided in Section 222,
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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 the expiration of
such period:
Provided, That in a case where a return is filed beyond the
period prescribed by law, the three (3)-year period shall be
counted from the day the return was filed. For purposes of this
Section, a return filed before the last day prescribed by law for
the filing thereof shall be considered as filed on such last day.
Section 1, RR 5-2013
Retention periods; 10 years from deadline of filing
return or from actual filing, whichever is later. All
taxpayers required to preserve their books of accounts,
including subsidiary books and other accounting records,
for a period of 10 years reckoned from the day following
the deadline in filing a return, or if filed after the deadline
from the date of the filing of the return, for the taxable
year when the last entry was made in the books of
accounts.
Hard copy for the first 5 years; soft copy thereafter.
Provided, that, within the 1st five years reckoned from the
day following the deadline in filing a return, or if filed
after deadline, from the date of the filing of the return, for
the taxable year when the last entry was made in the books
of accounts, the taxpayer shall retain hard copies of the
books of accounts, including subsidiary books and other
accounting records. Thereafter, the taxpayer may retain
only an electronic copy of the hard copy of the books of
accounts common subsidiary books and other accounting
records in an electronic storage system which complies
with the requirements set forth under Section 2 dash 8 here
off.
ROYALTIES, SERVICES, AND LEASE
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corporate Tax Management
Section 108, NIRC
Value-added Tax on Sale of Services and Use or Lease of
Properties.
(A) Rate and Base of Tax.
12% gross receipts. There shall be levied, assessed and
collected, a value-added tax equivalent to twelve percent (12%)
of gross receipts derived from the sale or exchange of services,
including the use or lease of properties.
Sale or exchange of services. The phrase sale or exchange of
services means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration,
including those performed or rendered by
1. construction and service contractors;
2. stock, real estate, commercial, customs and
immigration brokers;
3. lessors of property, whether personal or real;
4. warehousing services;
5. lessors or distributors of cinematographic films;
6. persons engaged in milling processing, manufacturing
or repacking goods for others;
7. proprietors, operators or keepers of hotels, motels, rest
houses, pension houses, inns, resorts;
8. proprietors or operators of restaurants, refreshment
parlors, cafes and other eating places, including clubs
and caterers;
9. dealers in securities;
10. lending investors;
11. transportation contractors on their transport of goods or
cargoes, including persons who transport goods or
cargoes for hire another domestic common carriers by
land relative to their transport of goods or cargoes;
12. common carriers by air and sea relative to their
transport of passengers, goods or cargoes from one
place in the Philippines to another place in the
Philippines;
13. sales of electricity by generation companies,
transmission, and distribution companies;
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14. services of franchise grantees of electric utilities,
telephone and telegraph, radio and television
broadcasting and all other franchise grantees except
those under section 119 of this Code, and non-life
insurance companies (except their crop insurances),
including surety, fidelity, indemnity, and bonding
companies; and
15. similar services regardless of whether or not the
performance thereof calls for the exercise or use of the
physical or mental faculties.
Sale or exchange of services. The phrase sale or exchange of
services shall likewise include:
1. The lease or the use of or the right or privilege to use
any copyright, patent, design or model, plan secret
formula or process, goodwill, trademark, trade brand or
other like property or right;
2. The lease of the use of, or the right to use of any
industrial, commercial or scientific equipment;
3. The supply of scientific, technical, industrial or
commercial knowledge or information;
4. The supply of any assistance that is ancillary and
subsidiary to and is furnished as a means of enabling
the application or enjoyment of any such property, or
right as is mentioned in subparagraph (2) or any such
knowledge or information as is mentioned in
subparagraph (3);
5. The supply of services by a nonresident person or his
employee in connection with the use of property or
rights belonging to, or the installation or operation of
any brand, machinery or other apparatus purchased
from such nonresident person.
6. The supply of technical advice, assistance or services
rendered in connection with technical management or
administration of any scientific, industrial or
commercial undertaking, venture, project or scheme;
7. The lease of motion picture films, films, tapes and
discs; and
8. The lease or the use of or the right to use radio,
television, satellite transmission and cable television
time.
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Irrespective of place of execution of lease contract. Lease of
properties shall be subject to the tax herein imposed
irrespective of the place where the contract of lease or licensing
agreement was executed if the property is leased or used in the
Philippines.
Gross receipts. The term gross receipts means the total
amount of money or its equivalent representing the contract
price, compensation, service fee, rental or royalty, including the
amount charged for materials supplied with the services and
deposits and advanced payments actually or constructively
received during the taxable quarter for the services performed
or to be performed for another person, excluding value-added
tax.
(B) Transactions Subject to Zero Percent (0%) Rate
The following services performed in the Philippines by VAT-
registered persons shall be subject to zero percent (0%) rate.
(1) Processing, manufacturing or repacking goods for other
persons doing business outside the Philippines which goods are
subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance
with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP);
(2) Services other than those mentioned in the preceding
paragraph, rendered to a person engaged in business conducted
outside the Philippines or to a nonresident person not
engaged in business who is outside the Philippines when the
services are performed, the consideration for which is paid for
in acceptable foreign currency and accounted for in accordance
with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP);
(3) Services rendered to persons or entities whose exemption
under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of such
services to zero percent (0%) rate;
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corporate Tax Management
(4) Services rendered to persons engaged in international
shipping or international air transport operations,
including leases of property for use thereof: Provided, That
these services shall be exclusive for international shipping or
air transport operations;
(5) Services performed by subcontractors and/or contractors
in processing, converting, or manufacturing goods for an
enterprise whose export sales exceed seventy percent (70%)
of total annual production;
(6) Transport of passengers and cargo by air or sea vessels
from the Philippines to a foreign country; and
(7) Sale of power or fuel generated through renewable
sources of energy such as, but not limited to, biomass, solar,
wind, hydropower, geothermal, ocean energy, and other
emerging energy sources using technologies such as fuel cells
and hydrogen fuels.
(8) Services rendered to:
i. Registered enterprises within a separate customs
territory as provided under special law; and
ii. Registered enterprises within tourism enterprise zones
as declared by TIEZA subject to the provisions under
Republic Act No. 9593 or the Tourism Act of 2009.
NOTE: The amendment (8) introduced by the TRAIN Law was
vetoed by the President.
Provided, That subparagraphs (B)(1) and (B)(5) hereof shall be
subject to the twelve percent (12%) value-added tax and no
longer subject to zero percent (0%) VAT rate upon satisfaction
of the following conditions:
1. The successful establishment and implementation of an
enhanced VAT refund system that grants refund of
creditable input tax within ninety (90) days from the
filing of the VAT refund application with the Bureau;
Provided, That, to determine the effectivity of item no.
1, all applications filed from January 1, 2018 shall be
processed and must be decided within ninety (90) days
from the filing of the VAT refund application; and
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2. All pending VAT refund claims as of December 31,
2017 shall be fully paid in cash by December 31, 2019.
Provided, That the Department of Finance shall establish a
VAT refund center in the Bureau of Internal Revenue(BIR) and
in the Bureau of Customs(BOC) that will handle the processing
and granting of cash refunds of creditable input tax.
An amount equivalent to five percent (5%) of the total value-
added tax collection of the BIR and the BOC from the
immediately preceding year shall be automatically
appropriated annually and shall be treated as a special account
in the General Fund or as trust receipts for the purpose of
funding claims for VAT Refund: Provided, That any unused
fund, at the end of the year shall revert to the General Fund.
Provided, further, That the BIR and the BOC shall be required
to submit to the COCCTRP a quarterly report of all pending
claims for refund and any unused fund.
Royalty payments subject to 10% VAT; payor of royalty
deemed as resident withholding agent. Jose Cochingyan III,
on behalf of client CTS Australia, requested confirmation that
royalty payments made by CTS PH to CTS Australia is subject
only to the 25% preferential rate, pursuant to the Philippines-
Australia tax treaty. In their arrangement, CTS Australia agreed
to grant CTS Philippines a non-exclusive license to market its
software in the Philippines and to license any person to use the
software in the Philippines, and that CTS Philippines agreed to
pay CTS Australia 70% of the revenue, net of tax, received by
CTS Philippines from licensed users of the software. Under
Article 12 of the Philippines-Australia tax treaty, royalties
arising in the Philippines and paid to a resident of Australia may
be subject to Philippine income tax at a rate not to exceed 15%
of gross amount of royalties when such are paid by an
enterprise registered with the Philippine BOI and engaged in
preferred areas of activities, or 25% of gross amount of
royalties in all other cases, where the recipient is the beneficial
owner of the royalties. The license fees paid by CTS
Philippines to CTS Australia are considered royalties within the
meaning of the Article. Since CTS Philippines is not registered
with the BOI, the Office is of the opinion that the subject
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license fees are subject to the preferential 25% tax rate pursuant
to the Philippines-Australia tax treaty. Moreover, the royalty
payments are subject to 10% VAT pursuant to Section 108
of the Tax Code. ITAD Ruling No. 78-04
• Procedure; if payor is VAT-reg, may claim input
VAT; if not, cost of service. CTS Philippines, being
the resident withholding agent and payor, shall be
responsible for withholding of the VAT before paying
to CTS Australia, and shall use BIR Form 1600 in
remitting the tax withheld. Such shall be proof for the
claim of input tax upon filing its own VAT if it is a
VAT-registered taxpayer, or if it is a non-VAT-
registered taxpayer, the passed on VAT shall form part
of the cost of service purchased which may be treated
as expense or asset whichever is applicable. In
addition, it is also required to issue BIR Form 2306
(Certificate of Final Tax Withheld at Source). In view
of all the foregoing, CTS Philippines shall be
responsible for the withholding of the 10% VAT and
income tax at the preferential rate of 25%, based on the
gross amounts of royalty payments. ITAD Ruling No.
78-04
Royalty payments subject to 10% VAT; payor of royalty
deemed as resident withholding agent. Jose Cochingyan III,
on behalf of client Puratos S.A, requested confirmation that
royalty payments made by Puratos PH to Puratos S.A. pursuant
to their Production Contract is subject only to 15% preferential
rate, pursuant to the (amended) Philippines-Belgium tax treaty.
Puratos S.A. entered into a Production Contract with Puratos
PH wherein the former authorized the latter to manufacture and
sell its products, and that Puratos Phils will pay royalties
calculated on net sales of its products. The royalties cover
know-how, right to use trademarks, and technical assistance.
Considering that Puratos S.A. is the beneficial owner of the
royalties arising in the Philippines, the royalty fees paid are
subject to Philippine income tax at the preferential rate of 15%
of the gross amount thereof, pursuant to Article V of the
Superseding Protocol on Article 12 of the Philippines-Belgium
tax treaty. Also, Sec. 108(A)(1) of the Tax Code provides that
"the lease or the use of the right or privilege to use any
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corporate Tax Management
copyright, patent, design or model, plan, secret formula or
process, goodwill, trademark, trade brand or other like property
or right" falls within the definition of "sale or exchange of
services" subject to the 10% VAT, and thus the royalties paid
by Puratos PH to Puratos S.A. are subject to VAT. Moreover,
Puratos Phils, being the resident withholding agent and payor
in control of the payment, shall be responsible for the
withholding of the VAT on such royalty payment before paying
them to Puratos S.A. ITAD Ruling No. 109-05
• Procedure; if payor is VAT-reg, may claim input
VAT; if not, cost of service. In remitting the VAT
withheld, Puratos PH shall use BIR Form No. 1600
(Monthly Remittance Return of Value- Added Tax and
Other Percentage Taxes Withheld). If Puratos Phils. is
a VAT- registered taxpayer, the duly filed BIR Form
No. 1600 and proof of payment thereof shall serve as
documentary substantiation for the claim of input VAT
by Puratos Phils. upon filing its own VAT return. On
the other hand, if Puratos Phils. is not a VAT-registered
taxpayer, the passed-on VAT withheld shall form part
of the cost of the service purchased which may be
treated as an "expense" or "asset" on the part of the
PuratosPhils., whichever is applicable. In addition,
Puratos Phils. is required to issue the Certificate of
Final Tax Withheld at Source (BIR Form No. 2306) in
quadruplicate, upon the request of Puratos S.A., the
first three copies to be kept by the Puratos S.A. and the
fourth copy by Puratos Phils. as its file copy. ITAD
Ruling No. 109-05
Important case; requisites for most favored nation clause.
ACI Worldwide and ACI Philippines entered into a
Distribution Agreement whereby the former granted the
following licenses: (1) Intellectual Property; (2) Trademarks;
and (3) Localization, and pursuant to which ACI Philippines
would pay royalty fees equivalent to 65% of net revenues,
which could be adjusted periodically. In accordance with
Section 28(B)(1) and 32(B)(5) of the Tax Code, the provisions
of the Philippines-United States tax treaty may apply to the
subject payments. According to paragraph 2(B) of Article 11,
royalties arising in the Philippines derived by a resident of the
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United States are subject to either (a) 25% of the gross amount
of royalties for royalties in general, (b) 15% of the gross amount
of the royalties if they are paid by a corporation registered with
the Philippine Board of Investments and engaged in preferred
areas of activities, or (c) the lowest rate of Philippine tax that
may be imposed on royalties of the same kind paid under
similar circumstances to a resident of a third States. Being
royalties, the payments to ACI Worldwide by ACI Philippines
under the Distribution Agreement are subject to the income tax
rates mentioned in paragraph 2 (b), Article 13 of the
Philippines-United States tax treaty; subparagraph (iii) thereof
provides that the payments are subject to the lowest rate of
income tax that may be imposed on the royalties of the same
kind paid under similar circumstances to a resident of a third
State (commonly known as the most-favored-nation tax
treatment of royalties. In relation to the most-favored-nation tax
treatment of royalties, the Supreme Court has cited two
conditions for royalties arising in the Philippines and derived
by a resident of another country (in this case, the United States)
to be subject to a most-favored- nation tax treatment.
1. First, the royalties in question derived by a resident
of the other country (the United States) must be of
the same kind as those derived by a resident of the
third country which are subject to a most-favored-
nation tax treatment under the existing tax treaty
between the Philippines and the third country.
2. Secondly, the mechanism employed by the other
country (the United States) in mitigating the effects
of double taxation of foreign-sourced income
derived by its residents must be the same with that
employed by the third country, which can be
determined by taking into account and comparing the
respective articles on Elimination of Double Taxation
of the other country (the United States) and the third
country under their respective tax treaties with the
Philippines.
In looking for a third country that grants a most-favored-nation
tax treatment on royalties, you cited the Czech Republic tax
treaty, paragraph 2 of which provides that royalties arising in
the Philippines and derived by a resident of Czech are subject
to income tax at the rate of (a) 10% of the gross amount of the
royalties arising from the use of, or the right to use, any
Last Edit: 23 December 2020
SPBUS
copyright of literary, artistic or scientific work (except those for
cinematograph films, and films or tapes for television or radio
broadcasting), any patent, trade mark, design or model, plan,
secret formula or process, or from the use of, or the right to use,
industrial, commercial or scientific equipment, or for
information concerning industrial, commercial or scientific
experience, or (b) 15% of the gross amount of the royalties for
royalties arising from the use of, or the right to use, any
copyright of cinematograph films, and films or tapes for
television or radio broadcasting. Applying this tax treaty in
relation to the most-favored-nation clause of the Philippines-
United States tax treaty, the royalty fee to be paid by ACI
Philippines to ACI Worldwide for the use or the right to use of
intellectual properties, patents and trademarks, may be subject
to 10% based on the gross amount thereof, provided the two
conditions for the most-favored-nation tax treatment of
royalties are both satisfied.
• On whether the first condition is satisfied, we note that
under paragraph 3, Article 13 of the Philippines-United
States tax treaty quoted below, payments received as a
consideration for the use or the right to use of patents,
information concerning industrial, commercial or
scientific experience (know-how), and copyright of
literary, artistic or scientific work are all considered
royalties, while, although lacking a separate paragraph
for the definition of royalties in its article, paragraph 2
(a), Article 12 of the Philippines-Czech tax treaty, as
quoted above, provides that royalties arising from the
use or the right to use of patents, information
concerning industrial, commercial or scientific
experience (know-how), and copyright of literary,
artistic or scientific work, among others, are subject to
income tax rate of 10% of the gross amount thereof.
This being the case, the first condition for the most-
favored-nation tax treatment of royalties is satisfied,
which requires that royalties derived by a resident of
the United States must be of the same kind as those
derived by a resident of Czech.
• As regards the second condition, under paragraph 1,
Article 23 of the Philippines-United States tax treaty
below, the mechanism employed in mitigating the
effects of double taxation of income derived from
JO VALLES
corporate Tax Management ad majorem dei gloriam SPBUS
foreign sources is the ordinary credit method, while in entitled to 5% gross income tax incentive in lieu of all national
the same manner, under paragraph 2, Article 22 of the and local taxes, duty-free and tax-free importation of raw
Philippines-Czech tax treaty below, it can be seen that materials, machinery, and equipment, and to incentives under
the mechanism employed by Czech in mitigating the the Omnibus Investments Code and applicable provisions of
effects of double taxation of income derived by its PEZA rules and regulations, and to other remaining incentives
residents from foreign sources is also the ordinary under its BOI registration. Swedish Match is a wholly-owned
credit method, and thus the second condition for the subsidiary of SMLBV, and manufactures and sells the latter’s
most-favored-nation tax treatment of royalties, which lighters under a Trademark License Agreement where Swedish
requires that the mechanism employed by the United match will pay royalties. The company is now requesting
States in mitigating the effects of double taxation of confirmation of the opinion that the royalty payments are
income derived by its residents from foreign sources deductible from gross revenues for purposes of computing its
must be the same with that employed by Czech, is also taxable income under the 5% preferential tax rate. In reply,
satisfied. Section 2 of Rule 1 of the IRR of RA 7916 defines gross
Moreover, as provided in Section 108 of the National Internal income, while Section 2 Rule XX of the PEZA IRR provides
Revenue Code of 1997, the said royalty payments are subject for the allowable deductions. Expressio unius estex exclusio
to value-added tax (VAT). With regard to the procedures for alterius. The exceptions are exclusive, and this officer
withholding and paying the VAT, pursuant to Section 4 and 6 regretfully informs you that the royalty payments under the
of Revenue Regulations No. 4-2002, Section 3 or Revenue Trademark Licensing Agreement are not deductible from gross
Regulations No. 8- 2002, and Section 7 of Revenue Regulations revenues for purposes of computing its taxable income under
No. 14-2002, ACI Philippines shall be responsible for the the 5% preferential tax rate based on gross income earned.
withholding of VAT on the royalties fee before remitting it to ITAD Ruling 014-12
ACI Worldwide. In remitting to the Bureau of Internal Revenue
the VAT withheld, ACI Philippines shall use BIR Form No.
1600 (Monthly Remittance Return of Value- Added Tax &
Other Percentage Taxes Withheld). If it is a VAT-registered
taxpayer, ACI Philippines may use as documentary
substantiation for its claim of input VAT the duly filed BIR
Form No. 1600 and the proof of payment accompanying such
form. On the other hand, if it is a non-VAT-registered taxpayer,
ACI Philippines may include as part of the cost of the royalty
fees it paid to ACI Worldwide the VAT consequently shifted
or passed on to it. In addition, ACI Philippines is required to
issue the Certificate of Final Tax Withheld at Source (BIR
Form No. 2306) in quadruplicate, the first three copies for ACI
Worldwide and the fourth copy for ACI Philippines as its file
copy. ITAD Ruling No. 024-09

Royalties paid by PEZA registered entities are not

deductible from gross income. Swedish Match is a domestic
corporation that used to be registered with BOI but is currently
registered as an ecozone export enterprise with PEZA. Under
its PEZA registration agreement with PEZA, Swedish Match is

247 Last Edit: 23 December 2020 JO VALLES

TOPIC 2
OTHER TOPICS
Dismissal
Dismissal is management prerogative that must be
exercised with caution. The power to dismiss is a formal
prerogative of the employer. However, this is not without
limitations. The employer is bound to exercise caution in
terminating the services of his employees. Dismissals must not
be arbitrary and capricious. Due process must be observed in
dismissing an employee because it affects not only his position
but also his means of livelihood. Employers should respect and
protect the rights of their employees which include the right to
labor. (Liberty Cotton Mills Workers Union v. Liberty Cotton
Mills, Inc., 90 SCRA 391 [1979]
Conference or dialogue is not substantial compliance with
the requirement of notice and investigation. To rule that the
mere dialogue between private respondent and petitioner
sufficiently complied with the demands of due process is to
disregard the strict mandate of the law. A conference is not a
substitute for the actual observance of notice and hearing. The
failure of private respondent to give petitioner the benefit of a
hearing before she was dismissed constitutes an infringement
on her constitutional right to due process of law and not to be
denied the equal protection of the laws. Pepsi Cola Bottling
Co., Inc. v. National Labor Relations Commission, 210 SCRA
277 [1992]
Procedural due process in labor cases. The right of a person
to his labor is deemed to be his property within the meaning of
the constitutional guarantee [to due process of law and not to
be denied the equal protection of the laws]. This is his means
of livelihood. He cannot be deprived of his labor or work
without due process of law. Batangas Laguna Tayabas Bus
Co. v. Court of Appeals, 71 SCRA 470 [1976].
Dismissal is a last resort. As to the alleged absences, we are
convinced that the same do not constitute sufficient ground for
dismissal. Dismissal is just too stern a penalty. No less than the
Supreme Court mandates that where a penalty less punitive
would suffice, whatever missteps may be committed by labor
ought not to be visited with a consequence so severe. (Meracap
248
ad majorem dei gloriam SPBUS
v. International Ceramics Manufacturing Co., Inc., 92 SCRA
412 [1979]).||| (Philips Semiconductors (Phils.) Inc. v.
Fadriquela, G.R. No. 141717, [April 14, 2004], 471 PHIL 355-
379)
Abandonment
Requisites for abandonment. For abandonment to exist, two
factors must be present:
1. the failure to report for work or absence without valid
or justifiable reason; and
2. a clear intention to sever employer-employee
relationship, with the second element as the more
determinative factor being manifested by some overt
acts.
It has been said that abandonment of position cannot be lightly
inferred, much less legally presumed from certain equivocal
acts. Mere absence is not sufficient. (Garden of Memories Park
and Life Plan, Inc., v. National Labor Relations Commission,
G.R. No. 160278, [February 8, 2012], 681 PHIL 299-314)
Backwages
No backwages if dismissal is legal. Jurisprudence is filled to
the brim with cases wherein backwages were awarded to an
employee illegally dismissed. But where, as in this case of a
pitiful employee rendered hapless by her lawyer's inaction or
ignorance, the dismissal has been adjudged valid and lawful,
the challenged award of backwages is decidedly improper and
contrary to law and jurisprudence. (St. Theresa's School of
Novaliches Foundation v. National Labor Relations
Commission, G.R. No. 122955, [April 15, 1998], 351 PHIL
1038-1045
Last Edit: 23 December 2020 JO VALLES