Income Taxation – Notes

A. Gross Income – means all income derived from whatever source, including (but not limited) to the
items:

 Compensation for services in whatever form paid, including but not limited to fees, salaries,
wages, commissions, and similar items;
It means any remuneration for rendering of personal services
Compensation income obtained from an employer-employee relationship between
payor and recipient
The basis upon which the remuneration is paid is immaterial in determining whether the
constitutes compensation
It may be paid on the basis of piecework, or a percentage of profits an may be be paid
hourly, daily, weekly, monthly and annually.
There is no determination of compensation until the service in rendered.
In general, every form of compensation income is taxable regardless of how it is earned,
by whom it is paid, the label by which it is designated, the basis upon which it is determined,
or the form in which it is received.

When does an Employer – Employee Relationship Exist?

 Generally, an employer-employee relationship exists when the person to whom
services as rendered has the right to oontrol and direct the individual who
performs the services, not only as to the result in accomplishing the work but also
as to the details and means by which the result is accomplished..

Classification of Gross Compensation Income

1. Basic salary or wage
Salary refers to earning received periodically for a regular work other than manual
labor, such as a monthly salary of an employee.
Wages on the other hand, are earnings received usually according to specified
intervals of work, as by the hour, day, or week An example is a carpenter’s daily
wage.
Backwages are subject to income tax and the withholding tax on wages.

2. Honoraria
Are payments given in recognition for services performed for which established
practice discourages charging a fixed fee.

Example: the honorarium of a guest lecturer

3. Fixed or variable allowances

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

 Any amount paid specifically, either as advances or reimbursements for

 traveling, representation and other bonafide ordinary and necessary
expenses incurred or reasonably expected to be incurred by the
employee in the performance of his duties are not compensation subject
to withholding tax, if the following conditions are satisfied:

a. it is ordinary and necessary traveling and representation or

entertainment expenses paid or incurred by the employee in the pursuit
of the employer’s trade, business or profession, and
b. the employee is required to account/liquidate for the foregoing
expenses pursuant to substantiation requirements of Section 34 of the
Tax Code

(* The excess of actual expenses over advances made shall constitute

taxable income if such amount is not returned to the employer.)

4. Commissions
It is usually a percentage of total sales or on certain quota of sales volume
attained as part of incentive, such as sales commission.

5. Fees
Are received by an employee for the services rendered to the employer
including a director’s fee of the company, fees paid to the public officials, such
as clerks of court or sheriffs for services rendered in the performance of their
official duty over and above their regular salaries.
 Legal fees paid by a union on behalf of its president constitute
compensation.
 Marriage fees, baptismal offerings, sums paid for conducting masses for
the dead, and other contributions received by a clergyman, evangelist, or
religious worker for services rendered are considered compensation.

6. Tips and gratuities

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

7. Hazard or emergency pay

 This is an additional payment received due to workers’ exposure to
danger or harm while working. This is normally added to the basic
salary together with the overtime pay and night differential pay to
arrive at gross salary
 Hazard, overtime, night shift differential and holiday pay of a
minimum wage earner (MWE) is nontaxable, as long as the MWE has
no other reportable income.
 8. Retirement pay
(Is retirement pay taxable? Generally, retirement pay is taxable.)

 It refers to a lump sum payment received by an employee who has served

a company for a considerable period of time and has decided to withdraw
from work into privacy.

 In general, retirement pay is taxable except in the following instances:

a. SSS or GSIS retirement pays – not taxable
b. Retirement pay due to old age provided that the following requisites
are met: (all the conditions given below must be observed – not
taxable)

1. The retirement program is approved by the BIR plan.

2. It must be a reasonable benefit plan. Its implementation must be
fair and equitable for the benefit of all employees (e.g.
from president to laborer),
3. The retiree should have been employed for 10 years in the said
company.
4. The retiree should have been 50 years old at the time of
retirement; and
5. It should have been availed of for the first time.

9. Separation pay
Separation pay is taxable if voluntarily availed of. It shall not be taxable if
involuntary.

*Voluntary resignation of the employee – its’ the decision personally of

the employee to be out of the company

*Involuntary resignation of the employee – its’ beyond the control of the

employee and employer

Examples of involuntary separation are

1. Death
2. Sickness
3. Disability
4. Reorganization/merger of company;
5. Company at the brink of bankruptcy

• When a company is at the brink of bankruptcy, the sequence of satisfying the

company’s indebtedness should be in this order:
1. BIR
2. Employee
3. Creditors
 As a rule, any amount received by an official or employee or by his heirs from
 the employer due to death, sickness or other physical disability or for any
cause beyond the control of the said official or employee (such as
retrenchment, redundancy or cessation of business) are exempted from tax.

 The phrase “for any cause beyond the control of the said official or employee”
connotes involuntariness on the part of the official or employee. The
separation from the service of the official or employee must not be asked for
or initiated by him.

Sample Problem:

The following statements are correct, EXCEPT

A. Mr Agnes received P300,000 as separation pay from Hyper Company in
view of the company’s reorganization. The amount is excluded in the gross
taxable income of Mr. Agnes.

B. As a result of her new employment abroad, Ms. Cristy voluntary resigned

from Apple Corporation and received separation pay for her 15 th years of
service amounting to P500,000. The amount is excluded in computing her
gross taxable income for the year.

C. Mr. Rivera received P350,000 as separation pay from Cloudy Company

that was declared recently by competent court as bankrupt. The P350,000
shall not be included as part of gross taxable income of Mr. Rivera.

D. Because of poor health, Ms. Lugay was paid by Prima Company P500,000
as separation pay for her 30 years of productive services with the company
Ms. Lugay will not include the P500,000 when she determines her gross
taxable income for the year.

10. Pensions
*(How we really differentiate retirement from pension?)

 This is a stated allowance paid regularly to a person on his retirement or

to his dependents on his death, in consideration of past services,
meritorious work, age, loss or injury.
 Pension pay is taxable unless the law states otherwise, or unless the BIR
approves the pension plan of a private company.

SSS
Employee/Employer contribution to the SSS
Monthly credit - maximum 20,000
 If the employee has a monthly salary of 20,000, therefore pasok ka
sa monthly credit ng SSS, therefore, u will contribute this amount
example, P3,000, that P3,000 will be partly shared by you and your
company.
The basis of computing your pension will be based on the monthly
credit of P20,000, pero only up to 80% of that amount. Therefore,
P20,000@ 80% = your pension now is only P16,000 monthly.

11. Vacation and sick leave

The following rules shall be observed in determining whether money
received for vacation and sick leave is taxable or not:

Vacation leave – applicable for the staff/administrators

Sabbatical leave – applicable for the faculty
Sickleave – applicable for all
Maternity leave – applicable for pregnant employee (the employee is not
being paid by the company but instead it’s the SSS – private, GSIS – government
will the one pays her salary. Not taxable.

Paternity leave – to assist the wife in giving birth to a child.

 If paid or availed of as salary of an employee who is on vacation or on sick

leave notwithstanding his absence from work, it constitutes taxable compensation
income.
 Monetized value of unutilized vacation leave credits of ten days or less
which were paid to private employees during the year are not subject to tax and to the
withholding tax.
 Monetized value of vacation and sick leave credits paid to government
officials and employees are not subject to income tax and to the withholding tax.
12. Thirteenth month pay and other benefits
 13th month and other benefits are not taxable if the amount is
P90,000 or less. Any amount exceeding P90,000 is taxable.

Private – 13th month pay (mid year – half; end of the year – half), cash gift

Government – 13th month (full amount of monthly salary will be given as

bonus) – May; 14th month pay (another full amount of salary – Dec), aside
from there’s what we call as Cash gift.

Thirteenth month pay and other benefits is P89,000. Is P89,000 taxable or

not? P89,000 is not taxable.

Thirteenth month pay and other benefits is P95,000. Is P95,000 taxable or

not? The P90,000 is not taxable, only the excess of P90,000 is taxable. Therefore,
the taxable amount is P5,000.

Sample Problem:
After working for 30 years and due to old age, Alex retired from his
employment on December 31, 2020 as a rank and file employee of ABC
Corporation. As a consequence of his retirement, he received the following from
his employer:
Basic salary for 2020 P250,000
13th month pay 25,000
Anniversary bonus 2,500
Loyalty award 10,000
Retirement pay 750,000
Based on the above data, compute the amount subject to tax?

Solution:
Salary P250,000
Add: Taxable other benefits
13th month pay P25,000
Loyalty award 10,000
Total benefits 35,000
Less: Exemption 90,000 -
Taxable amount 250,000

13. Fringe Benefits and De Minimis

Fringe benefit defines as “any good, service, or other benefit furnished or
granted by an employer, in cash or in kind, in addition to basic salaries of
an individual employee.
 The purpose of this benefit is to encourage productivity and
 loyalty/commitment to the company.

Classification of employees:
Rank and File – not part of the decision making of the
company
Supervisory/Managerial position – member of the decision
maker of the company

If the benefits are given to managerial/supervisory position – subject

to Fringe Benefit Tax
If the benefits are given to rank and file – not subject to Fringe
Benefit Tax

*If the P1,000,000 fringe benefit is given to rank and file taxable or
not? Not taxable on that particular tax, the treatment is
addition to salaries.
*If the P1,000,000 fringe benefit is given to supervisor and manager
taxable or not? Taxable, therefore subject to FB tax.

De minimis benefits are privileges of relatively small value as given by the

employer to his employees. Under Revenue Regulations No. 5-2011 as
amended, they are not considered as compensation subject to income
tax and consequently to withholding tax.

14. Overtime pay

This refers to premium payment received for working beyond regular
hours of work which is included in the computation of gross salary of employee.
Back pay and overtime pay constitute compensation.

15. Profit sharing

It is the proportionate share in the profits of the business received by the
employee in addition to his wages.

In partnership accounting, in terms of sharing the profit, the way profit is

to be shared is based on the agreement of the partners. Then the sharing is
based on the capital invested (interest on capital), salaries (it is based on the
extent of time and services being offered by the partner), bonus (based on
managing the business).
Interest on capital
Salaries
Bonus
Remainder
Total XXX

Partnership: Trading partnership - Taxable partnership

Non Trading partnership (General Professional Partnership) –
not taxable as partnership, provided the shared profits between and among
partners will be reported under the income tax return.
 16. Awards for special services
The amount received as an award for special services of employee, or
suggestions to employer resulting in the prevention of theft or robbery. Awards
for past services and the like are also compensations.

17. Beneficial payments

Beneficial payments such as where an employer pays the income tax owed by an
employee are additional compensation income.

18. Other forms of compensation

Other forms received due to service rendered are compensation paid in
kind. It is to be noted that compensation can be paid in kind but taxes
are generally paid in money.
For example, an insurance premium paid by employer for the insurance
coverage where the heirs of employee are the beneficiaries is the
employee’ s income.

Illustration: Miss Pina Palad, single, reported the following income for the taxable
year 20A:
Salary for the year P384,000
th
13 month pay 33,000
Honorarium as a speaker 2,000
Commissions 5,000
Fees as a director 50,000
Availed vacation leave pay (included in the salary) 12,000
Cost of living allowances 9,000
Interest income from time deposit in the BPI 3,000
Royalty income from mining, net of final tax 70,000

Miss Palad retired at the age of forty-five as of December 31, 20A, receiving a
retirement pay of P1,000,000. What is the gross taxable compensation income of Miss
Palad for 200A?

Solution: The gross taxable compensation income of Miss Palad for 200A would be:
Salary for the 200A P384,000
Honorarium as a speaker 2,000
Commissions 5,000
Fees as a director 50,000
Cost of living allowances 9,000
Retirement pay 1,000,000
Gross taxable compensation income 1,450,000

*Why is it that 13th month is not included in the computation?

Answer: The total benefits is not more than P90,000, therefore, not taxable.
 *Why is it that availed leave is not included?
Answer: Included already in the salary

*Why is it the retirement is part of the taxable compensation income?

Answer: Not met the conditions given in the retirement provision.

*Why is it that interest income from time deposit and royalty income from mining
not included?
Answer: These items are considered as passive income.

 Gross income derived from the conduct of trade or business or the exercise of a profession;
Business means any commercial activity engaged in as a means of livelihood or
profit of an individual or group of individuals. Examples are trading, merchandising,
manufacturing and other similar activities.
Profession is primarily any endeavor or work requiring specialized training in the
field of learning, art or science engaged in as a means of livelihood or profit of an
individual or group of individuals.
In general, a practice of profession is a service business.
Examples are CPA, Lawyers, Medical Doctors, and the like

*Business Income
Gross income derived from business shall be equivalent to gross sales less sales
returns, discounts and allowances and cost of cost of goods sold.

Gross sales and receipts XXX

Less: Sales returns and allowances XXX
Sales discounts XXX XXX
Net sales XXX
Less: Cost of sales XXX
Gross income XXX

 Gains derived from dealings in property;

 Interests;
Interest income on bank deposits
 Earned within the Philippines – subject to 20% final tax
 Earned outside the Philippines 0 included in gross taxable income subject to
schedular tax rate
 Interest income arising other than those from bank deposits – included in
gross taxable income subject to schedular tax rate.
 Rents;
Taxable rent income is the sum of
 Current rent or lease payment
  Advance rent payment or security deposit without restriction in the year
received regardless of the accounting method used
 Payment of the lessee to third parties in behalf of the lessor;
 Uncollected rent income earned already (accruals) at the end of the period
and
 Income from leasehold improvements
 Royalties
 Dividends;
 Annuities;
 Prizes and winnings
 Pensions; and
 Partners’ distributive share from the net income of the general professional partnership.

B. Special Rules on gross income

1. Compensation for personal services
 Paid in cash – actual amount paid is taxable
 Paid in kind – compensation income is the fair market value of the property received
 Tips and gratuities – taxable

2. Compensation paid in promissory notes

 If the note can be discounted, the fair market value of note upon receipt is the fair
discounted value.

Forms of Payment Valuation or Taxable Amount

1. Cash
2. Property other than cash
3. Services
4. Promissory notes or other
forms of indebtedness
Total amount received
FMV of the property at the time of payment
FMV of the services at the time services are rendered.
FMV of the notes determined as follows:
a. Interest bearing note
Year received – Face value of the note
Year collected – Maturity value less face value

b. Non interest bearing note

5. Company’s own stock
6. Cancellation of debt
Year received – Present value of the note
Year collected – Face value less present value
FMV of stock at the time services rendered
a. Presence of employee – employer relationship taxable
amount is equal to the debt cancelled.
b. Cancellation of debt without consideration – amount
cancelled is a gift or donation
c. Cancelation of debt of stockholder without consideration
– debt cancelled represents dividend payment.
 Sample Problem: The accountant of Shine Company receives a monthly salary of P45,000. On
January 5, 2021, he/she received the following items as bonus for 2020 services:
 800 shares of stock, par value, P100 per share and a fair market value at the time of
receipt of P250. In 2020, the fair market value of the shares was P230.
 Non-interest bearing note of P200,000, payable in three years. The prevailing market
rate of a similar note is 12%.
Compute for the gross compensation income of the accountant in the year 2020?

Solution:
Monthly salary (P45,000@ 12 months) P540,000
Shares of stock (800 shares @ P250) 200,000
Non interest bearing note (P200,000 x 0.712) 142,400
Gross compensation income P882,400

3. Transportation, representation and other allowances received by officials or employees

 General rule: Taxable as compensation income
 Exception: If the are –
 Ordinary and necessary expenses of the employer
 Paid or incurred in the pursuit of trade, business or profession;
 The employee is required to account/liquidate.
 The excess of advances over the actual expenses incurred - taxable income if such
amount is not returned to the employer.
 Vacation and sick leave allowances -taxable, except monetized value of unutilized
vacation leave credits not exceeding ten (10) days of employees of private firms

4. Condonation of debt /cancellation of debt

 Debtor rendered services to creditor – taxable income to the debtor
 No services rendered – taxable to the creditor as gift given to the debtor
 Creditor is a corporation while the debtor is a stockholder – it has the effect of a payment
of dividend.
 Creditor is the stockholder while debtor is the corporation – amount condoned is
considered as an additional investment.

5. Recovery of bad debts previously deducted (application of the tax benefit rule)
 Taxable – if deduction of bad debt has reduced the tax liability of taxpayer.
 Not taxable – if there was no reduction in the tax liability of the taxpayer.

6. Dividend income
 Received by domestic corporation from another domestic corporation – not taxable
 Received by resident foreign corporation from a domestic corporation – not taxable
 Received by nonresident foreign corporation from a domestic corporation – 15% to
tax sparing credit
 7. Rules on lease contracts and leasehold improvements
a. Rent for the use of property – taxable income to the lessor; deductible expense to the lessee.
b. Taxes and other expenses assumed by lessee on behalf of the lessor – constitutes additional
rent and taxable income to the lessor.
c. If ownership of leasehold improvements on leased premises will be transferred without cost to
the lessor upon termination – income to the lessor which may be reported using either:
 Outright method – the fair market value of the improvements in the year of completion is
reported as income.
 Spread out method – the book value of the improvements at the termination of the lease
contract is spread over the remaining term of the lease.
d. Depreciation on the improvements – the lessee may claim depreciation of the improvements
over the remaining term of the lease or the life of the improvements, whichever is shorter.
e. Premature termination of lease – the income to be reported by the lessor shall be computed by
subtracting the amounts already reported as income by the lessor from the book value upon
termination.
Sample Problem: Ms. Bonbon rented the vacant lot owned by Mr. Joven for a monthly rental of
P15,000. The lease contract took effect on April 1, 2021 for a lease period of 25 years. The
lessee, right after the consummation of the lease contract, constructed a commercial building
on the lot costing P8,000,000 with an estimated useful life of 50 years and a residual value of
P500,000. When the building was completed on January 1, 2022, the fair market value of the
property was P9,500,000 per valuation made by an independent appraiser. The building will
become the property of the lessor after the expiration of the lease. In addition, the annual
rental property tax on the lot of P8,000 will be paid by the lessee. Compute the taxable rent
income in 2021?

Outright method:
Year 2021 rental (P15,000 x 9) P135,000
Real property tax (P8,000/12*9) 6,000
Taxable rent income – 2021 P141,000

Spread out method:

Cost of the improvement P8,000,000
Less: Accu dep end of lease (P8,000,000 – P500,000)/50} x 25 3,750,000
Book value 4,250,000
Divide by term of lease 25
Annual income on improvement 170,000

Income for 9 months on the improvements (P170,000/12*9) 127,500

Add: Rent 135,000
Real property tax 6,000
Total taxable rent P268,500

C. Exclusions from gross income (Exempt from income tax)

1. Proceeds of life insurance policy payable upon the death of the insured. It is taxable if (a) the
insured outlives the policy, or (2) the insured assigned the policy.
 2. Return of premiums either during the term, at the maturity, or upon surrender of the contract.
3. The value of the property acquired by gift, bequest, devise or descent.
4. Compensation for personal injuries or sickness received from insurance plus damages.
5. Income of any kind which are contained in a treaty binding upon the Philippine government.
6. Retirement benefits, pensions, etc.
A. Retirement benefits – requisites
a. The employer must maintain a private pension plan which is approved by the BIR;
b. The employee has been in the service of the same employer for at least 10 years;
c. The retiring employee must not be less than 50 years old upon retirement.
d. The benefit of the exemption can be availed of only once.

B. Separation pay – separation of employee from service must be due to:

a. Death, sickness, physical disability, or
b. Any cause beyond the control of the employee.
Examples: Dismissal due to installation of labor saving device, retrenchment, bankruptcy and
redundancy

7. Prizes and awards – given to religious, charitable, scientific, educational, artistic, literacy, or civic
achievement, provided that:
a. The recipient did not join the contest; and
b. He is not required to render substantial future services.

8. Benefits received by persons residing in the Philippines under U.S laws administered by U.S. Veterans
Administration;

9. Benefits received from SSS, GSIS including retirement gratuity received by government officials and
employees.

10. Income derived by foreign governments;

11. Income derived by the government or its political subdivisions from public utility or any essential
governmental function.

12. Prizes and awards granted to athletes in -

a. local and international sports competitions,
b. in the Philippines or abroad,
c. sanctioned by their national sports associations
d. and the sports association must be recognized by the Philippine Olympic Committee (POC)

13. 13th month pay and other benefits up to 90,000;

14. GSIS, SSS, Philhealth, Pag-ibig contributions and unions dues of individuals;

15. Gain from sale of bonds, debentures and other certificate of indebtedness with a maturity period of
more than 5 years;

16.Gains realized by investors upon redemption of shares in a mutual fund company.

17. Compensation income of Minimum Wage Earners (MWEs) who work in the private sector (and
public sector not exceeding the minimum in the non-agricultural sector) and being paid the Statutory
Minimum Wage (SMW), as fixed by the Regional Tripartite Wages & Productivity Board
(RTWPB)/National Wages and Productivity Commission (NWPC), applicable to the place where he/she is
assigned, including their holiday pay, overtime pay, night shift differential pay and hazard pay.

D. Non-Recognition of Gain or Loss on Exchange of Property

No gain or loss shall be recognized on a corporation or on its stock or securities if such corporation
is a party to a reorganization and exchanges property in pursuance of a plan or reorganization solely for
stock certificates in another corporation that is a party to the reorganization.
The gain or loss shall also be recognized if property is transferred to a corporation by a person, alone
or together with others, not exceeding four (4) persons, in exchange for stock or unit of participation in
such corporation of which as a result of such exchange, the transferor/s, collectively, gains or maintains
control of said corporation. Provided, that stocks issued for services shall not be considered as issued in
return for property.

*Tax on Individuals

1. Rules on situs
a. Only resident citizens are taxable on income derived from sources within and without the
Philippines.
b. Resident aliens, nonresident citizens and nonresident aliens are taxable on income within only.

2. Tax on NRA NETB – final withholding tax of 25% from all sources within.
Exceptions:
a. Capital gains on sale, exchange or other disposition of real property (capital asset) located in the
Philippines

Rate: 6%
Based: Whichever is the highest among:
1. Selling price
2. FMV as determined by the Commissioner (zonal value)
3. FMV as determined by Provincial or City Assessor (Assessor’s value)
b. Sale of shares of stocks not listed and traded in the stock exchange.

3. Income earned by special groups of aliens

Tax Rate and Base: 15% of gross income coming from salaries, wages, annuities, compensation,
remuneration and other emoluments, such as honoraria and allowances received by:
a. Aliens employed by Regional or Area Headquarters and Regional Operating Headquarters of
multinational companies;
b. Aliens employed of Offshore Banking Units (OBU);
 c. Aliens employed by Foreign Petroleum Service Contractor and Subcontractor.

*This special tax rate shall entitle only the employee who have been availing of this preferential
tax rate before January 1, 2018.

4. Rates of Tax on Certain Passive Incomes

a. Income payments to resident citizen, resident alien, nonresident citizen and nonresident alien
ETB) taxpayers:

1. 20% Final tax on income derived from sources within

a. Interest from Philippine currency bank deposit;
b. Yield or any other monetary benefit from deposit substitutes and from trusts and similar
arrangements;
c. Royalties (except on books and other literary works and musical composition which shall be
subject to 10% tax)
d. Prizes (except prizes amounting to P10,000 or less which shall be subject to the graduated tax);
e. Winnings
f. Sweepstakes and lotto winnings (except amounts not exceeding P10,000)
g. Interest income from long -term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management accounts and other
investments evidenced by certificate which was pre terminated by the holder before the 5 th year
at the rates herein prescribed:
Holding Period Rate
4 years to less than 5 years 5%
3 years to less than 4 years 12%
Less than 3 years 20%
*Note: If the maturity is more than 5 years – tax exempt

b. Income payments to citizen or resident alien individuals.

1. 15% on interest income received from a depository bank under the Foreign Currency Deposit
System
2. 10% final tax on cash/or property dividends actually or constructively received from any of the
following:
a. domestic corporation
b. joint stock company
c. insurance or mutual fund companies
d. on the share of an individual partner in the distributable net income after tax of a partnership
(except general professional partnership).
e. on the share of an individual in the net income after tax of an association, a joint account or a
joint venture or consortium of which he is a member or a co-venture.

c. 20% final tax on income payment to NRA-ETB out of income from sources within.
1. Cash and/or property dividend from a domestic corporation;
2. Share of a partner in the distributable net income after tax of a partnership (except general
professional partnership);
3. Share in the net income after tax of an association, a joint account, or a joint venture of which he
is a member or a co-venture;
 4. Interest from Philippine currency bank deposit (foreign current – exempt).

The 8% Income Tax Option

1. This is allowed is:
a. The taxpayer is individual.
b. Earning self-employment income
c. Annual gross sales/receipts do not exceed P3,000,000 and is not VAT-registered.

2. Other important points:

a. If the income is a pure compensation, the 8% option is not allowed;
b. If the taxpayer is a mixed income earner, the compensation income shall be subject to the
graduated tax rates;
c. Non-operating incomes are included in the determination of the P3 million threshold and the
computation of the 8% income tax, unless exempt;
d. Businesses which are not subject to the percentage tax under Sec 116 cannot avail of the 8%
income tax;
e. Self-employment incomes that were subjected to the 8% income tax are no longer subject to
business tax.
f. Those who claimed deductions (either OSD or itemized) cannot avail of the 8% income tax option.

*Tax on Corporations
1. Situs on taxable income

Income
Within Without Tax Base
a. Domestic corporation Yes Yes Taxable income
b. Resident foreign corporation Yes No Taxable income
c. Nonresident foreign corporation Yes No Gross income

Tax Rate - 25% of taxable income

*20% income tax rate shall be imposed of the corporation has complied with the following
requirements:
a. With net taxable income not exceeding P5 million; and
b. The total assets do not exceed P100 million (excluding land on which the particular
business entity’s office, plant, and equipment are situated)

2. Minimum Corporate Income Tax (MCIT) - 2% of gross income if higher than Normal Income Tax
(NIT).
a). Effectivity: 4 th taxable year immediately following the year the corporation has commenced
business.

b). Carry forward of excess minimum corporate income tax – three (3) immediately succeeding
taxable years.
 c). Limitations on carry over – the excess of MCIT over the NIT can be carried forward only to the
next three (3) succeeding years when the normal income tax is greater than the MCIT. I cannot be
claimed as credit against the MCIT itself or against any other losses.

Application of Minimum Corporate Income Tax (MCIT)

Corporation Rate Effectivity
Domestic corporation and 1% July 1, 2020 to June 30, 2023
Resident foreign corporation 2% July 1, 2023
Offshore Banking Units (OBUs) 1% Upon effectivity of the CREATE
2% July 1, 2023
Regional Operating Headquarters 1% Jan 1, 2022 to June 30, 2023
2% July 1, 2023

3. Special Corporations
Proprietary educational institutions 1% Taxable income
and hospitals (from July 1, 2020 to
June 30, 2023
Exception: If income from unrelated
activity is more than 50% of entire
gross income 25% Taxable income
International carrier 2.5% Gross Phil. Billings
Nonresident cinematographic film 25% Gross income within
owner, lessor or distributor
NR owner or lessor of vessels 4.5% Gross rental, lease or charter fees within
charted by Phil. Nationals
NR owner or lessor of aircraft, 7.5% Gross rentals or fees within
machineries and other equipment
Interest on foreign loans 20% Interest on loans contracted on or after August 1,
1986.

4. Resident Foreign Corporations

Tax rate and tax base: 25% of taxable income effective July 1, 2020
1. Offshore Banking Units (OBUs) – taxable as resident foreign corporation; 25% of taxable income
upon effectivity of CREATE.
2. Regional Operating Headquarters (ROHQ) – tax rate of 25% effective January 1, 2022.
3. 25% of interest income from a depository bank under the expanded foreign currency deposit
system.
4. Final tax of 15% of capital gains from sale of shares of stock not traded in the stock exchange.

5. Non-Resident Foreign Corporations

1. Tax rate and tax base: 25% of entire gross income within effective January 1, 2021.
2. 25% intercorporate dividend received from a domestic corporation. However, if the country in
which the NFRC is domiciled, allows a tax credit equivalent to the difference between the regular
income tax rate of 25% and the 15% tax on intercorporate dividends or does not impose tax on
dividends, the rate to be imposed shall be 15%.
 3. Final tax of 15% of capital gains from sale of shares of stock not traded in the stock exchange
4. Passive income subject to final withholding tax

Income within of domestic and resident foreign corporation subject to 20% final tax:
a. Interest on bank deposit
b. Yield or any other monetary benefit from deposit substitutes
c. Yield from trust funds and similar arrangements
d. Royalties

6. Tax Exempt Corporations:

a. Government Service Insurance System
b. Social Security System
c. Local water districts
d. Home Development Mutual Fund

7. Dividends received from foreign source – Exempt, subject to the following conditions:
a. The dividend actually received or remitted into the Philippines are reinvested in the business
operations of the domestic corporation within the next taxable year from the time the foreign-
source dividends were received or remitted.
b. The dividends received shall only be used to funds the working capital requirement, capital
expenditures, dividends payments, investment in domestic subsidiaries and infrastructures project;
c. The domestic corporation holds directly at least 20% in value of the outstanding shares of the
foreign corporation and has held the shareholdings uninterrupted for a minimum of two years at
the time of the dividends declaration.

8. Exemptions from Tax on Corporations – The following organizations are not taxable 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 for the exclusive benefit of the members such
as fraternal organization operating under the lodge system, or a mutual aid association or a 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. Nonstock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income
or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific
person;
f. Business league, chamber of commerce, or board of trade, not organized for profit and no part of
the net income of which inures to the benefit of any private stockholder or individual;
g. Civic league or organization for profit but operated exclusively for the promotion of general
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 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;

 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 the code.

*Tax on Partnerships
1. General professional partnership – tax exempt, but required to file income tax return.
2. Business partnership – taxable as a corporation, subject to corporate tax.
3. Share of partners in the net income of business partnership – subject to a final tax of 10%
4. Share of partners in the net income of professional partnership – taxable to the partners as ordinary
income, whether distributed to them or not (principle of constructive receipt).
5. Income payments to partners in a professional partnership in the form of drawings, advances,
sharings, allowances, stipends, etc. – subject to creditable withholding tax of 15% if the income
payments to the partner for the current year exceeds P720,000 and 10% of otherwise.
6. Co-ownership refers to the ownership of undivided thing or right which belongs to two (2) or more
persons.
 Exempt from income tax if the activities of the co-owners are limited to the preservation of the
property and collection of income therefrom
 Taxable as a corporation of the co-owners make contribution of efforts, or new capital, or f the
co-ownership income is reinvested.
7. Partnership formation
a. There must be an unmistakable intention among the partners to form a partnership.
b. Mere sharing of gross returns does not in itself establish a partnership.

*Estates and Trusts

1. Estate – All property, rights and obligations of a person which are not extinguished by his death and
also those which have accrued thereto since the opening of the succession,
Rules:
a. taxable only if it is under judicial settlement
b. Taxed in the same manner as individual.

2. Trust – The arrangement created by will or an agreement under which title to property is passed to
another for conservation or investment with the income therefrom and ultimately the corpus
(principal) to be distributed in accordance with the directions of the creator as expressed in the
governing instrument.
Rules:
a. Taxable if the trust is irrevocable;
 b. Taxed in the same way as estates under judicial settlement, including exemptions and rule of
accrual.

*Sources of Income

Income Test of Source of Income

1. Income from services Place of performance
2. Rent Location of property
3. Royalties Place of use of intangible
4. Gain on sale of real property Location of property
5. Gain on sale of personal property Place of sale
purchased in one country and sold in
another
6. Gain on sale of domestic shares of stock Income within
7. Interest Residence of debtor
8. Dividend
a. From domestic company Income within

b. From foreign company Partly income within and partly without if 50% or more
of the gross income of the company for the preceding 3
years prior to declaration of dividend was derived from
sources within.
Income without if less than 50% of the gross income of
the company for the preceding 3 years prior to
declaration of dividend was derived from sources
within.
Formula to compute income within:
Phil Gross Income (3years)
Income Within = _________________________

Total Gross Income (3 years)

*Capital Assets – means property held by the taxpayer (whether or not connected with his business) but
does notinclude the following because they are classified as ordinary assets:
1. Stock in trade
2. Property which would be included in the inventory if on hand at the close of taxable year;
3. Property primarily for sale in the ordinary course of his trade business;
4. Personal property used in business and subject to allowance for depreciation;
5. Real property used in trade or business.

A. Rules on Sale or Exchange of Personal Property (Capital Asset)

1. Capital losses – deductible only from capital gain.
2. Corporations – no holding period, no carry over
3. Holding period (not applicable on corporations)
a. Short term (not more than 12 months) – 100%
b. Long term (more than 12 months) – 50%
 4. Carry over
a. The amount allowed is limited to the net income during the year in which the loss was
sustained.
b. Carry over is good only for one year.

B. Sale of Real Property (Capital Asset)

1. By individual – 6% final tax
Tax Base: Whichever is the highest among:
- Selling price
- FMV as determined by CIR (zonal value)
- FMV as determined by the City or Provincial Assessor (assessor’s value)
Exemption: Capital gains realized from sale of principal residence if –
a. The proceeds are utilized in acquiring new residence within 18 calendar months from the
date of sale;
b. Commissioner is notified within 30 days from the sale of disposition;
c. The exemption can be availed of only once in every 10 years.
d. The 6% capital gains tax due on the presumed capital gains shall be deposited in interest
bearing account with an authorized bank under an escrow agreement.

2. By corporation – 6% final tax on sale of lands and/or buildings not used in the business.

C. Sale of Shares of Stocks

1. Not traded shares
Tax Base and tax rate” 15% of Net Capital Gain
2. Traded Shares – the sale is exempt from income tax, but subject to Other Percentage Taxes (Stock
Transaction Tax)

D. Transactions Resulting to Capital Gains or Losses even if there is no sale of capital assets:
1. Retirement of bonds, etc
2. Short sales of property
3. Option gains or losses
4. Worthless securities
5. Liquidating dividend
6. Liquidation of partnership

E. Wash Sales occur when substantially identical securities are acquired within a 61-day period
beginning 30 days before the sale and ending 30 days after sale.
Wash sales are not deductible from gross income. However, the wash sales provisions do not
apply to:
a. Dealers in stocks or securities if the sale or disposition is made in the ordinary course of trade or
business.
b. Short sale transactions – A sale of stock which the seller does not own(he merely borrows the
stock certificate through or from the broker) and subsequently buys or covers the stock to
complete the transaction.
*Deductions from Gross Income
I. Itemized Deductions
A. Expenses in general
1. Requisites for deductibility
a. Must be ordinary and necessary;
b. Paid or incurred during the taxable year;
c. Connected with trade, business or profession;
d. Supported by sufficient evidence; and
e. Not against the law or public policy.

2. Travelling expenses
- include transportation expenses, meals, lodging and laundry expenses
- incurred while away from taxpayer’s home.

3. Entertainment, amusement and recreation expenses

Requisites for deductibility
a. Paid or incurred during the taxable year;
b. Directly connected to the development, management and operation or directly related to or
in furtherance of the conduct of his or its trade business or profession;
c. Must not have been paid directly or indirectly to an official of the government (including
foreign) or private entity if it constitutes a bribe, kickback or profession;
d. Not contrary to law, morals, public policy or public order.
e. Duly substantiated by proof.
f. Must not exceed ½ % of net sales or 1% of net revenue for taxpayers engaged in sales of
goods or properties, or sale of services, respectively. However, if the taxpayer is deriving
income from both the allowable deduction shall be based on an apportionment formula taking
into consideration the percentage of the net sales/net revenue to the total net sales/net
revenue, but in no case shall exceed the maximum percentage ceiling.

4. Bribes, kickbacks and other similar payments – not deductible if paid, directly or indirectly, to
official or employee of the government or private entity.

5. Private educational institutions

a. Capitalize and claim the annual depreciation as deduction or
b. Deduct as expenditures during the taxable year

6. Non-deductible expenses:
a. Personal living and family expenses;
b. Amount paid out for new buildings or for permanent improvements or betterments made to
increase the value of any property or estate;
c. Amount expended in restoring property or in making good exhaustion thereof for which an
allowance is or has been made; or
d. Premiums paid on any life insurance policy covering the life of an 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.

7. Additional deduction from taxable income

 An additional deduction from taxable income of ½ of the value of labor training
expense incurred for skills development of enterprise-based trainees enrolled in Public Senior
High Schools, Public Higher Education Institutions, or Public Technical and Vocational
Institutions and duly covered by an apprenticeships agreement under the Labor Code of the
Philippines shall be granted to enterprises, provided that:
a). For the additional deduction for enterprise-based training of students from public
educational institution, the enterprise shall secure proper certification from the DepEd, TESDA
or CHED, or
b). Such deduction shall not exceed 10% of direct labor wage.

B. INTEREST
1. Requisites for deductibility
a. There must be an indebtedness
b. The indebtedness must be that of the taxpayer;
c. The indebtedness is connected with taxpayer’s trade, business or profession
d. Legal liability to pay interest
e. Interest must be paid or incurred during the taxable year.

2. Reduction of interest expense by interest income

a. The taxpayers’ interest expense shall be reduced by an amount equivalent to 20% of interest
income subjected to final tax. However, if the final withholding tax rate on interest income of
20% will be adjusted in the future, the interest expense reduction rate shall be adjusted
accordingly.

Corporation subject to tax rate of 20%, the deduction is 0% since there is no difference in
the income tax rate on the taxable income with the tax rate applied on the interest income
subjected to final tax.

b. Interest incurred or paid by the taxpayer on all unpaid business related taxes shall be fully
deductible from gross income and shall not be subject to the limitation on deduction.

3. Optional treatment of interest – at the option of the taxpayer, interest incurred to acquire
property used in trade, business of exercise of profession may be allowed as a deduction or as a
capital expenditure.

4. Non-deductible interest
a. Interest on loan between related taxpayers.
b. Interest on loan paid in advance through discount by individual taxpayer reporting income
on cash basis.
c. If indebtedness is incurred to finance petroleum operations.
C. TAXES – pertains to taxes proper which does not include surcharges, penalties or fines incident to
delinquency

1. Requisites for deductibility

a. Paid or incurred within the taxable year:
b. Connected with taxpayer’s profession, trade or business;
c. Imposed directly on the taxpayer.

2. Non-deductible taxes
a. Philippine income tax
b. Foreign income tax, if claimed as tax credit
c. Estate and donor’s tax
d. Special assessments

3. Tax credit – the taxpayer’s right to deduct from income tax due to amount of tax he has paid
to a foreign country, subject to limitations.

The following taxpayers are allowed to claim tax credit:

a. Resident citizens
b. Domestic corporations
c. Members of general professional partnerships
d. Beneficiaries of estate or trust

4. Tax benefit rule- taxes claimed as deduction, when refunded or credited shall be included as
part of gross income in the year of receipt to the extent of the income tax benefit of said
deduction.

D. LOSSES

1. Requisites for deductibility

a. Actually sustained during the taxable year;
b. Not compensated by insurance of other forms of indemnity
c. Incurred in connection with trade, profession or business;
d. Sustained in a closed and completed transaction.
e. Arose from fires, storms, shipwreck, or other casualties, or from robbery, theft or
embezzlement.
f. Not claimed as a deduction for estate tax purposes
g. Reported to the BIR within 45 days from the occurrence of such loss.

2. Special Rules on Losses

a. Wagering losses – deductible only to the extent of the gains from such transactions.
b. Loss on sale between related taxpayers is not deductible.
c. Voluntary removals of buildings
 1. Taxpayer purchased the land without intending to use the building – the value of old
building razed plus other costs are added to the cost of the land.
2. An old building is demoralized to construct new one – the value of the building
demolished plus demolition costs are deductible as losses.
d. Loss on shrinkage in value of stocks due to fluctuation in market – not deductible, the loss
allowed is that actually suffered when the stocks are disposed of.
e. Abandonment losses – when a producing well is abandoned, the unamortized costs
thereof and the undepreciated costs of equipment directly used therein are deductible in
the year of abandonment, but if the service is restored later, said costs shall be included as
part of gross income and shall be amortized or depreciated.
f. Net operating loss – the excess pf allowable deduction over gross income of the business
in aa taxable year can be carried over as deduction from gross income of the next three (3)
succeeding years. However, operating losses incurred in 2020 & 2021 shall be allowed as
carry – over and deducted from gross income in the next five (5) consecutive taxable years.

Rules:
1. Net loss in a taxable year during which the taxpayer was exempt from income tax are not
deductible.
2. Deduction is allowed only if there is no substantial change in the ownership of business.
3. Not less than 75% in nominal value of outstanding issued shares if the business is held by
or on behalf of the same persons;
4. Not less than 75% of the paid up capital of the corporation, if the business is in the name
of the corporation, is held by or on behalf of the same persons.
5. Carry-over is not allowed of the taxpayer availed of the optional standard deduction in
computing taxable income.

E. BAD DEBTS
1. Requisites for deductibility
a. Valid and subsisting debt
b. Debt is ascertained to be worthless and uncollectible;
c. Charged-off during the taxable year;
d. Connected with profession, trade or business;
e. Not sustained in a transaction entered into between members of the same family or
related taxpayers.

*Tax benefit rule (equitable doctrine of tax benefit) – 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.

F. DEPRECIATION
Requisites for deductibility
1. There must be an exhaustion, wear and tear (including reasonable allowance for
depreciation);
 2. Property is used in business
3. Reasonable allowance for depreciation.

Methods of depreciation allowed

1. Straight line method
2. Declining balance method
3. Sum-of-years digit method
4. Other methods prescribed by Secretary of Finance, upon the recommendation of the
Commissioner of Internal Revenue

G. DEPLETION
- the removal, extraction or exhaustion of a natural resource like mines and gas wells as a
result of production or severance from such mines or wells.

Rules:
1. The method of depletion allowed is Cost Depletion Method
2. When the allowance shall equal the capital invested, no additional allowance shall be
granted.
3. In the case of a foreign corporation, depletion of oil and gas wells and mines shall be only oil
and gas wells and mines located in the Philippines.

H. PENSIONS TRUST
Requisites for deductibility
1. Employer must have established a pension or retirement plan;
2. Pension plan must be reasonable
3. Funded by the employer
4. Amount contributed by the employer must no longer be subject to his control.

I. RESEARCH AND DEVELOPMENT

Requisites for deductibility:
a. Paid or incurred during the taxable year;
b. Connected with trade, business and profession

Alternatives:
1. Treat as ordinary and necessary expenses – deductions from gross income in the year paid or
incurred
2. Treat as deferred expenses – deduction ratably distributed over a period of not less than 60
months.

J. CHARITABLE AND OTHER CONTRIBUTIONS

Requisites for deductibility
1. Contribution or gift must be actually paid or made within the taxable year,
2. Given to entity or institution specified by law;
 3. Net income of the institution must be not inure to the benefit of any private individual or
stockholder;
4. Taxpayer making contribution must be engaged in trade, profession or business.

 Contributions deductible in full

1. Donations to the –
a. Government of the Philippines, or
b. Any of its agencies, or
c. Political subdivisions, or
d. Fully owned government corporations

2. Donations to certain foreign institutions or international organizations

3. Donations to Nongovernment Organizations accredited by Philippine Council for NGO

Certification (PCNC) – A nonprofit domestic corporation organized and operated exclusively
for –
a. Scientific
b. Research
c. Educational
d. Character building and youth and sports development
e. Health
f. Social welfare
g. Cultural
h. Charitable
i. Or a combination thereof

*Conditions for deductibility:

a. The donation must be utilized not later than 15 th day of the 3rd month after the close of
taxable year;
b. Administration expenses must not exceed 30% of total expenses;
c. Upon dissolution, the assets must be distributed to another nonprofit domestic
corporation, to the state or by a court to another similar organization.
d. If the above conditions are not complied, contribution shall be subject to limit.

 Contributions subject to limit – Contributions or gifts actually paid to or for the use of the:
1. Government of the Philippines
2. Agencies or political subdivisions of the government
3. Accredited domestic corporations or associations organized and operated exclusively for –
a. religious
b. charitable
c. scientific
d. youth and sports development
 e. cultural
f. educational
g. rehabilitation of veterans
h. social welfare institutions
i. nongovernment organizations
j. limitations on deduction of contribution:
Individual taxpayer – 10%
Corporation - 5%

*The rate shall be multiplied by the taxable income derived from trade, business or
profession before deducting the contributions.

II. OPTIONAL STANDARD DEDUCTION - in lieu of itemized deductions from business or

profession

1. On Individual-
Rate and Base: Not exceeding 40% of gross sales or receipts from business or
profession

2. On Corporation
Rate and Base: Not exceeding 40% of its Gross Income

Requisites :
a). The taxpayer signified in the return its intention to elect optional standard deduction;
b). Such election shall be irrevocable for the taxable year for which the return is made;
c). That 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 the Code;
d). Except when the Commission otherwise permits, said individual shall keep such
records pertaining to his gross sales or gross receipts or the said corporation shall keep
such records pertaining to his gross income.

III. FRINGE BENEFITS TAX

Fringe benefit means any good, service or other benefit furnished or granted by an employer
in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file
employee).

Fringe benefits not subject to fringe benefits tax:

1. Those authorized and exempted from income tax under the Code, or 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;
 5. The fringe benefits given to the employee is required by the nature of, or necessary to the
trade, business or profession of employer; or
6. If the fringe benefit is for the convenience of the employer

Applicable rates:
Monetary value 65%
Fringe benefit tax rate 35%

If the P1,000,000 cash is given as benefits in addition to the basic salaries of the
manager.
Monetary value P1,000,000 (actual benefit received by the manager)
Divided by 65%
Grossed up MV 1,538,461.54 (total benefits of the manager)
Multiplied by 35%
Fringe benefit tax 538,461.54

*Who will be liable for the remittance of the fringe benefit tax? Employer
*Who will be the actual paying the FBT, is it employer or employee? Employee.

*On the part of the company, total fringe benefit expenses is P1,538,461.54. The
company will give only the 65% of the amount, its because the company withheld the
35% of the amount as tax FBT.

BIR Form 1603 – FBT

If the rank and file employee receives the benefit of P1,000,000, is it the full amount of
P1,000,000 will be received by such employee free of fringe benefit tax? Yes
po. That will be considered as addition to his/her compensation.

IV. DE MINIMIS BENEFITS

De minimis benefits in general are milted to facilities or privileges furnished or offered by an
employer to his employees that are of relatively small value and are offered or furnished by the
employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his
employees, such as the following:
1. Monetized unused vacation leave credits of private employees not exceeding 10 days during
the year;
2. Monetized value of leave credits paid to government officials and employees;
3. Medical cash allowance to dependents of employees not exceeding P1,500 per semester or
P250 per month;
4. Rice subsidy of P2,000 or one sack of 50 kg rice per month amounting to not more than
P2,000.
5. Uniforms and clothing allowance not exceeding P6,000 per annum;
6. Actual yearly medical benefits not exceeding P10,000 per annum;
7. Laundry allowance of P300 per month;
8. Employees achievement awards, e.g.. for length of service or safely achievement, which must
be in the form of a tangible property other than cash or gift certificate, with an annual
monetary value not exceeding P10,000 received by an employee under an established written
plan which does not discriminate in favor of highly paid employees;
9. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per
employee per annum;
10. Flowers, fruits, books or similar items given to employees under special circumstances, e.g.
on account of illness, marriage, birth if a baby, etc., and
11. Daily meal allowance for overtime work not exceeding 25% of the basic minimum wage.
12. Benefits received by an employee by virtue of a Collective Bargaining Agreement (CBA) and
productivity incentives schemes provided that the total annual monetary value received from
both CBA and productivity incentives schemes combined, do not exceed P10,000 per employee
per taxable year.

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.

Employer gives benefit beyond the ceiling. – The amount of de minimis benefits
conforming to the ceilings here prescribed shall not be considered in determining the P90,000 of
other benefits. However, if the employer pays more than the ceiling, the excess shall be taxable
to the employee if such excess is beyond P90,000.

Situation 1: What if the 13th month pay and other benefits does not exceed of P90,000.
Benefits De Minimis Total benefits of
P90,000
th
13 month pay P40,000
14th month pay 40,000
 Uniform allowance, P10,000 P6,000 4,000
Rice allowance, P25,000 per year (P2,000 per 24,000 1,000
month)
Laundry allowance, P500 per month (allowed 3,600 2,400
as de minimis is P300 per month only @ 12
mos) P6,000 – P3,600 = P2,400
Total 33,600 – not 87,400 – not taxable
taxable

Situation 2: What if the 13th month pay and other benefits exceeds P90,000.
Benefits De Minimis Total benefits of
P90,000
13th month pay P45,000
th
14 month pay 45,000
Uniform allowance, P10,000 P6,000 4,000
Rice allowance, P25,000 per year 24,000 1,000
Laundry allowance, P500 per month (allowed 3,600 2,400
as de minimis benefit is P300 per month @
12 mos = P6,000). P6,000 – P3,600 = P2,400
Total 33,600 – not 97,400, therefore,
taxable P90,000 is not taxable,
and the excess of that,
P7,400 is taxable as
part of the
compensation.

V. ACCOUNTING PERIODS AND METHODS

1. Fiscal year or calendar year
a. Fiscal year – Accounting period or 12 months ending on the last day of any month other
than December.
b. Calendar year – Accounting period of 12 months which starts on the 1 st day of January
and ends on the last day of December.

2. Taxable income shall be computed on the basis of calendar year if

a. Annual accounting period is other than fiscal year, or
b. Taxpayer has no annual accounting period; or
c. He does not keep books, or
d. Taxpayer is an individual.

3. Accounting Methods – A rule that is used to determine the year in which income are
reported and expenses are deducted for tax purposes.
a. Cash basis – (cash receipts and disbursements method) – taxpayer is required to report
income for the tax year in which payments are actually or constructively received while
expenses are deducted in the year it is paid.
 b. Accrual method – income is reported in the year earned while expenses are deducted
in the year incurred.

c. Constructive receipt of income – taxpayers are required to report taxable income

though no cash is actually received, it includes the following:
1. Interest credited to a bank savings deposit;
2. Matured bond interest coupons which have not been redeemed.
3. Salary available to an employee who does not accept payment
4. Share of partners in the profits of general professional partnership

d. Percentage of completion method – taxpayers reports a percentage of gross income

from a long-term contract based on the portion of work that has been completed.

e. Completed contract method – income from contract Is reported in the taxable year in
which contract is completed.
Note: In long-term contracts, percentage of completion is used instead of completed
contract method.

f. Installment method – is a special method of accounting under which the taxpayer

reports as income only in part of the gross profit to be realized from the sale in the
installment plan equivalent to that portion of the amount of installments received every
year which the gross profit realized or to be realized when payment is completed bears to
the contract price.

g. Deferred payment sales – sales in which the payments received in cash or property
other than evidence of indebtedness of the purchases during the taxable year in which the
sale is made exceed 25% of the selling price (the obligations of the purchases received by
the vendor are to be considered as equivalent of cash).

*Persons entitled to use installment method

1. Dealers in personal property – those who regularly sell or otherwise dispose of personal
property on the installment plan.

2. Casual sellers of personal property – those who make casual sale or other casual
disposition of personal property on the installment plan where the:
a. Selling price is over P1,000
b. Initial payments do not exceed 25% of selling price, and
c. Property is not of a kind which would be included in the taxpayer’s inventory if on
hand at the close of the taxable year.

3. Sellers of real property – those who make a sale or disposition of real property (whether
capital or ordinary asset) on the installment plan where the initial payments do no
exceed 25% of S.P.

Formulas:
Selling Price:
Cash received by the seller PXXX
 Add: FMV of property received (if any) PXX
Installment obligation of buyer XX
Mortgage assumed by buyer XX XXX
Selling price XXX

Initial Payment:
Down payment PXXX
Add: Installment received (year of sale) XXX
Excess of mortgage over cost (if any) XXX
Initial payment XXX

Contract Price:
Selling price PXXX
Add: Excess of mortgage over cost XXX
Total XXX
Less: Mortgage assumed by buyer (if any) XXX
Contract price XXX

VI. RETURNS AND PAYMENT

1. Individuals required to file
a. Every Filipino citizen residing in the Philippines
b. Non-resident citizen on income within
c. Resident alien on income within
d. Nonresident alien engaged in trade or business or in the exercise of profession in the
Philippines

2. Individuals not required to file income tax returns

a. An individual earning purely compensation income whose taxable income does not
exceed P250,000.
b. Regardless of amount of income –
1. If the sole income has been subjected to final tax.
2. Exempt pursuant to provisions of tax code and other laws.

c. Purely compensation income earner regardless of the amount, from one employer in
the Philippines for the calendar year if the income tax has been withheld correctly (this is
known as substituted filing), except:
1. When deriving compensation income from two or more employers concurrently or
successively at any time during the taxable year;
2. When the income tax has not been withheld correctly;
3. Those deriving other non-business, non-profession-related income in addition to
compensation income not otherwise subject to a final tax;
 4. Individuals receiving purely compensation income from a single employer, although
the income tax of which has been correctly withheld, but whose spouse falls under
any of the three (3) enumerated classification above;
5. Nonresident aliens engaged in trade or business in the Philippines deriving purely
compensation income or compensation income and other non-business, non-
profession-related income.

3. A minimum wage earner

4. Others:
a). Husband and wife
1. If they are still required to file returns, only one returns for the taxable year shall
be filed which return shall be signed by the husband and wife unless physically
impossible to do so, in which case signature of one of the spouses would suffice.
2. In case of unidentifiable income – it shall be divided equally between the spouses.

b).Parent – children
Income of unmarried minors derived from property received from living parent
shall be included in the tax return of parent, except when:
1. Donor’s tax has been pair, or
2. The transfer of such property is exempt from donor’s tax

c). Disabled persons

The return may be made by a duly authorized agent or representative, by guardian
or other person charged with the care of his person or property.

4. Time for filing – to be filed in duplicate setting forth specifically the gross amount of
income from all sources.
a). Purely compensation income – on or before 15th day of April
b). Self-employment income (including mixed income) – declare an estimated income
on or before April 15 of the same taxable year.
c). Corporations shall file a true and accurate quarterly income tax return on a
cumulative bass and a final return.

5. Place of filing
 Authorized agent bank, Revenue District Officer, Collection Agent or duly authorized Treasurer
of the city or municipality in which the taxpayer has legal residence or place of employment/business or
if there be no legal residence or place of business in the Philippines, with the Office of the
Commissioner.
End of the notes!