Basic Taxation Law: Income Tax
2. Schedular tax system- all income is classified;
Income- all the wealth which flows into the taxpayer
other than as mere return of capital
Severance test- For income to exist, there must be
severance or separation from capital or something of
exchangeable value
Indirect payments- payment of an obligation made by a
third party constitutes taxable income
Discharge of indebtedness- gain exists once there is a
relief from such liability
 When the discharge/condonation was
gratuitous- subject to donor’s tax
Tax benefit principle- bad debts, taxes, and losses are
deductible to gross income, unless they are
subsequently recovered
1. Bad debt
2. Taxes
3. Abandonment losses (Abandoned well re-
entered and production is resumed)
Claim of right doctrine- if a taxpayer receives money or
property and treats it as his own absolutely, to
contingently, the amount thereof shall be included in
the taxpayer’s income
Taxable income:
A. Realization (receipt): Income is not taxable until
it is realized
1. Actual
2. Constructive- by all events test
a. The right to the income or the liability to
pay is fixed
b. The amount is determined with reasonable
certainty
B. Recognition- formal process of subjecting
realized gains to taxation
Presuppositions:
1. There is gain or profit
2. It must be realized or received
3. It must not be exempt from tax by law or
treaty
Income tax systems:
1. Global tax system- income is not classified;
there is only one tax return
1
each classification has its own set of graduated
or flat income tax rates
3. Semi-global/Semi-schedular tax system- all
income not subject to final tax is governed by
the global system. Meanwhile, other incomes
which are subject to final tax are subjected to
different sets of tax rates and are covered by
different tax returns
Classification of income:
1. Compensation income- earned through
performance of services under an employment
contract
2. Professional or business income- Derived from
exercise of profession or business or from
utilization of capital
3. Passive income- acquired without action or
effort on the part of the taxpayer
4. Capital gains is derived from the sale or
disposition of capital assets
Situs of taxation: whether an object is taxable by
Philippine taxing authority (jurisdiction)
Gross income from sources within the Philippines
1. Compensation for labor or personal services
performed within the Philippines
2. Interests derived from sources within the
Philippines
3. Dividends from a domestic corporation
4. Dividends from a foreign corporation
 50% of its gross income before dividends of 3
years were derived from sources within the
Philippines
5. Rentals and royalties from property or interest
located in the Philippines (situs: place derived)
a. The use or the right or privilege to use
copyright, patent, design or model, plan,
secret, formula or process, goodwill,
trademark, trade brand or other like
property or right
b. The use or right to use industrial
commercial, or scientific equipment
c. The supply of scientific, technical, industrial
or commercial knowledge or information
d. The supply of any assistance that is ancillary
and subsidiary to and furnished as a mean
of enabling the application or enjoyment of
any such property or right in pars (a), (b),
and (c)
e. The supply of services by a non-resident
person or his equipment…or the installation
or operation of any brand, machinery or
Basic Taxation Law: Income Tax
other apparatus purchased from such non-
resident person
f. Technical advice, assistance or services
rendered in connection with technical
management or administration of any
scientific, industrial or commercial
undertaking, venture, project and scheme
g. The use or the right to use:
i. Motion picture films
ii. Films or video tapes for use in
connection with television
iii. Tapes for use in connection with
radio broadcasting
6. Gains from sale of real property
7. Gains from the sale of shares of stock in a
domestic corporation
Kinds of taxpayers
 Resident citizens and domestic corporation are
taxable on their worldwide income
 Other types are taxable only on income derived
from sources within the Philippines
 Instances where the kind of taxpayer is not
relevant:
a. Sale of shares of stock:
- 15% final tax rate, regardless of seller
- 0.006% stock transaction tax, if traded in
the stock exchange
b. Sale of real property
- 6% final tax rate on gross selling price or
current fair market value, whichever is
higher
1. Resident citizens
- Semi-global/semi-schedular tax system
2. Non-resident citizens
 Taxed like resident citizens with respect to
income in the Philippines
a. A citizen of the Philippines who establishes to
the satisfaction of the Commissioner the fact of
his physical presence abroad with a definite
intention to reside therein
b. A citizen of the Philippines who leaves the
Philippines during the taxable year to reside
abroad either as an immigrant or for
employment on a permanent basis
c. A citizen of the Philippines who works and
derives income from abroad and whose
employment threat requires him to be
physically present abroad most of the time
during the taxable year
d. A citizen who has been previously considered as
a non-resident citizens and who arrives in the
Philippines at any time during the taxable year
2
to reside permanently in the Philippines shall
likewise be treated as a non-resident for the
taxable year which he arrive in the Philippines
with respect to his income with respect to
sources derived abroad until the date of his
arrival in the Philippines
3. Resident aliens
- Taxable by income from sources within the
Philippines
- Not mere transients or sojourners
a. There is definite intention as to his stay
b. The purpose for his stay is capable of being
promptly accomplished
4. Non-resident aliens engaged in trade or
business
 Taxed like resident aliens
a. Those actually conducting trade or business in
the Philippines
b. Those deemed engaged in trade or business,
having stayed in the Philippines for an aggregate
period of more than 180 days.
5. Non-resident aliens no engaged in trade or
business
- Taxed through income from sources in the
Philippines
- Subject to 25% final withholding tax
a. Salaries, wages, compensation, remuneration
and emoluments
b. Interests, premiums, annuities, rents
c. Cash, property, dividends
d. Other fixed and determinable annual or periodic
casual gains
 Capital gains in Sales of shares of stock in a
domestic corporation and real property subject
to income tax
Corporations:
 Includes one person corporations, partnerships,
association or insurance companies
 Exclusion from the term
a. General professional partnerships
b. Joint venture or joint consortium
formed for the purpose of undertaking
construction projects, engaging in
petroleum and energy operations
1. Domestic corporations
- Taxable for income from sources within and
without the Philippines
Basic Taxation Law: Income Tax
2. Resident foreign corporations  Sec. 26 Tax Code: the net income of a general
- Taxable only for income from sources within professional partnership is computed in the
the Philippines same manner as a corporation
 Doing business (RA No. 7042, or the Foreign
Investments Act of 1991)
Joint Ventures:
Contemplates the performance of functions normally
incident to an in progressive prosecution of commercial 1. Those formed for the purpose of undertaking
gain construction projects
2. Those engaged in petroleum and energy
a. Soliciting orders and service contracts
operation
b. Opening offices (liaison offices or branches)
c. Appointing representatives or distributors Characteristics:
domiciled in the Philippines
d. Staying in the country for 180 aggregate days or 1. Contribution by its partners or members
more whether capital or industrial
e. Participating in the management of any 2. Sharing of profits
domestic business 3. Joint proprietary interest
 Not included: 4. Singles business transaction
a. Mere investment as a shareholder in a domestic
corporation and the exercise of rights as such
investor or having a nominee director or officer Co-ownership
to represent his interest in a domestic  Not a taxable entity
corporation  Unregistered partnerships form when co-
b. Appointment of a representative or distributor owners allows profit in their property
domiciled in the Philippines which transact
business in his own account The ownership of an undivided thing or right belongs to
different persons.

3. Non-resident foreign corporations

- Taxed with 25% final tax through income Estates and Trusts:
from sources within the Philippines
 Estate- created by operation of law when a
- System followed: semi-global/semi-
individual dies and leaves properties to his heirs
schedular
 Trust- arises by virtue of a legal agreement
 15% Final tax rate of income due to sale, barter,
whereby trustor transfers ownership of property
exchange or other disposition of shares o stock
to a trustee, who is to hold and control the
 0.006% stock transaction tax
same according to the instructions for the
a. Interests, annuities, rents, and royalties
benefit of the beneficiary.
b. Dividends
c. Premiums except reinsurance premiums Sec. 26 Tax Code: person
d. Other fixed and determinable annual or periodic
a. Individual
casual gains
b. Trust
c. Estate
d. Corporation
Partnerships:

 Taxed like corporation, regardless of creation or

organization
 Partners taxed in their individual capacity

Exception: General professional partnership

Partnership formed for the sole purpose of exercising

ther common profession

3
Basic Taxation Law: Income Tax
Gross income (Sec. 32, Tax Code)- income derived from
whatever source, including (but not limited to):
1. Compensation for services in whatever form
a. Salaries
b. Wages
c. Commissions
d. Similar items
2. Gross income derived from the conduct of trade
or business, or exercise of profession
3. Gains derived from dealings in property
4. Interests, rents, royalties, dividends, annuities,
prizes and winnings, and pensions
5. Partner’s distributive share from the net
income of the general professional partnership
Taxable income (Sec. 31)- all pertinent items of gross
income specified in the tax code less authorized
deductions
Gross sales/receipts
- Exclusions
Gross income
- Deductions
Taxable Income
x Applicable tax rate
Tax due
- Tax credits, if any
Tax payable
Exclusions: items not considered in determining gross
income
Deductions: items subtracted from the gross income to
arrive at the taxable income
Tax credits: amounts subtracted from the tax due to get
at the taxes payable
Sec. 32(B): Exclusions are not included in gross income
and exempt from income tax
1. Life insurance
 If insurer holds such proceeds under an
agreement to pay interests thereon, the interest
payouts shall be included in the income tax
2. Amount received as return of premium
3. Gifts, bequests, devises
 Donor’s tax applies
 Must be given with donative intent (animus
donandi), or out of disinterested or detached
generosity
 Exemption does not include income from the
properties
 Person or entity granting them may be subject
to donor’s tax, unless exempt by law
a. Those made in recognition of charitable,
religious, scientific, educational, artistic, literary,
or civic achievement, provided
i. The recipient was selected without action on his
part to enter the contest or proceeding
ii. The recipient was not required to render
substantial future services as a condition for
receiving the prize or reward
b. Those granted to athletes in international sports
competitions, whether held in the Philippines or
abroad, and sanctioned by their national sports
associations
5. Income exempt under treaty
 Failure to comply to administrative issuance will
cannot impair entitlement to tax relief; though
susceptible to fine or penalty
6. Income derived by foreign government
 Including financing institutions established by a
foreign government
7. Income derived by the government
- From public utilities or political subdivisions
exercising essential governmental functions
8. Compensation from injuries or sickness
a. Accident or health insurance
b. Workmen’s compensation
c. Damages acquired from either suitor agreement
9. Retirement benefits, pensions, and gratuities
a. Retirement benefits under a reasonable private
benefit plan subject to the following conditions
i. The retiring employee has served the same
employer for at least 10 years
ii. The retiring employee has reached the
retirement age of not less than 50 years old
iii. The benefit of income tax exemption is availed
only once
iv. At not time is any part of the corpus or income
of the plan used or diverted to any purpose
other than the exclusive benefit of employees
b. Statutory benefits under Republic Act No. 7641
in the absence of a retirement plan, provided
i. The retiring employee has served in the
establishment for at least 5 years
ii. The retiring employee has reached the age of 60
years old or more, but not beyond the
compulsory retirement age of 65 years old

c. Involuntary separation benefits of such amounts

4. Prizes and awards received by an employee or his heirs from the

4
Basic Taxation Law: Income Tax
employer as a consequence of separation from
service due to
i. Death
ii. Sickness
iii. Physical disability
iv. Any cause beyond the control of the employee
d. Social security benefits, retirement gratuities,
pensions, and other similar benefits received
from resident citizens, non-resident citizens, and
resident aliens from foreign government
agencies and other institutions whether private
or public.
e. Benefits due under the laws of the United States
administered by the United States Veterans
Administration
f. Benefits received from the Social Security
System, or the Government Service Insurance
System
10. GSIS, SSS, Medicare, and Pag-Ibig
contributions, and union dues of individuals
11. 13th month pay and other benefits
 Officials and employees of public and private
entities
 Up to P 90,000
12. Gains from sale of long-term bonds or either
certificate of indebtedness
 Maturity of more than 5 years
13. Gains from redemption of shares in a mutual
fund
14. Income derived from sale of gold pursuant to
Republic Act No. 7076 (People’s Small-scale
Mining Act of 1991)
a. Sale of gold to the Bangko Sentral ng Pilipinas by
registered small-scale miners and accredited
traders
b. Sale of gold by registered small-scale miners to
accredited traders for eventual sale to the BSP
Deductions:
 Exception:
a. compensation income under an employer-
employee relationship
b. non-resident aliens
c. non-resident foreign corporations (final
withholding tax)
Methods:
1. claim itemized deductions from gross income:
Sec. 34 (A) to (J)
2. avail of the 40% optional standard deduction:
Sec. 34 (L)
Common characteristics:
5
1. [excluding charitable contributions] directly
attributable or connected with the taxpayer’s
trade, business or profession
2. [excluding interests] must be paid, incurred,
sustained, or charged of in the same taxable
year in which they are claimed as deductions
3. All taxes on the itemized deduction claimed, if
any, must have been deducted, withheld, or
paid as required
4. All itemized deductions must properly be
substantiated
1. Expenses
 Directly attributable in the conduct of trade,
business, or exercise of profession
a. Reasonable allowances for salaries, wages, and
other forms of compensation for personal
services actually rendered
 Fringe benefits: provided fringe benefit tax has
been paid
b. Reasonable allowances for travel (abroad
included)
c. Reasonable allowances for rentals and
payments for continued use or possession
 Person has no equity in the property (i.e., owner
of the commercial lot; otherwise rent is not tax
deductible
d. Reasonable allowances for entertainment,
amusement, and recreational expenses (EAR
Expenses)
 Revenue Regulation No. 10-02: EAR expenses
must not exceed ceilings prescribed by the
Secretary of Finance, upon recommendation of
the Commissioner of Internal Revenue
i. 0.5% of net sales
ii. 1% of net revenues
e. ½ of the value of labor training expenses
incurred for skills development in public
educational and technical and vocational
institutions, provided
i. Covered by an apprenticeship agreement
ii. Institution accredited by either DepEd, TESDA,
or CHED
iii. Deduction not exceeding 10% of the direct labor
wage
 Research or development expenditures:
requisites
i. Reasonable
ii. Ordinary and necessary
iii. Directly attributable in the conduct of trade,
business, or exercise of profession
iv. Incurred within the taxable year
Basic Taxation Law: Income Tax
v. Substantiated ii. Submitted not less than 30 days nor
vi. Legitimately paid (bribes and kickbacks more than 90 days
excluded)  Rules promulgated by the Secretary of Finance
vii. Subject to fringe tax upon recommendation of the Commissioner of
viii. Subject to withholding tax; already remitted to Internal Revenue
BIR
Kinds:
a. Business loss- incurred in business, trade, or
2. Interests profession
Requisites: b. Causality loss- incurred from fire, storm,
a. It must be paid on an indebtedness (valid shipwreck, casualties, robbery, theft, or
existing debt embezzlement (directly attributable)
 If not, it becomes an investment
b. In connection with the trade, business, or
Net operating loss is the excess of allowable deductions
profession of taxpayer
over gross income in a taxable year.
 Not a persona loan
c. Not sustained in a related-party transaction Net operating loss of the preceding the current taxable
d. Stipulated in writing year may be carried over as deduction for the next 3
e. Not a capital expenditure consecutive taxable years, following the year of loss,
provided:
Anti-tax arbitrage: the deduction for interest expense
shall be reduced by 20% of the interest income a. The loss has not been offset as deduction from
subjected to final tax, if any. gross income
b. The taxpayer is not exempt from income tax
Non-deductible interests: during the year the loss occurred
a. Prepaid or advance interest- deductible in the c. There had been no substantial change in the
year the indebtedness is paid ownership of the taxpayer’s business
i. At least 75% of the nominal value of the
 Periodic amortizations: amount of principal or
outstanding issued shares are held by the same
amortized paid during the taxable year allowed
person
as deduction
ii. At least 75% of the paid up capital is held by or
b. Indebtedness to finance petroleum exploration
for the same persons
c. Indebtedness incurred by a taxpayer in a
related-party transaction  Change of corporate ownership exceeding 25%
is substantial
3. Taxes
Exceptions:
a. Income tax Capital loss:
b. Estate and donor’s taxes  Deductible only to the extent of capital gains
c. Special assessments  Excluding domestic banks and trusts companies
d. Foreign income taxes (electing foreign tax engaged in the receipt of deposits or sales of
credits) bonds

4. Losses Carried over to the succeeding taxable year as either

Requisites:
a. Either a business loss or causality loss
connected with business, trade, or profession
b. Sustained during the taxable year the deduction
is claimed
c. Not compensated by insurance or other forms
of indemnity
d. Not sustained in a related-party transaction
e. Not claimed as deduction to estate tax purposes
f. [Causality loss] RR No. 12-77 submission of a
declaration of loss:
i. Filed within 45 days
6
loss from sale or exchange of short-term capital asset,
provided
a. The taxpayer is not a corporation
b. The loss carried over does not exceed the net
income for such succeeding year
Loss from securities becoming worthless considered
loss from sale or exchange of assets on the last day
of the taxable year
 Deduction from wash sales not allowed
(disposition of shares at a loss), unless made by
a dealer in stock or securities in the ordinary
course of business
Basic Taxation Law: Income Tax
Wagering loss:
Deductible only to the extent of gains
5. Bad debts
Uncollectible debt despite diligent efforts
a. Sending statement of accounts and collection
letters
b. Giving the account to a lawyer for collection
c. Demanding payment by judicial action
 Conclusive evidence not required if:
a. Amount is insignificant
b. Collection would be more costly
Requisites:
a. Valid and legally demandable
b. Connected with the profession, business, or
trade
c. Actually ascertained to be worthless
d. Charged off within the taxable year
e. Not sustained in a related-party transaction
6. Depreciation
Reasonable allowance for wear and tear, exhaustion,
obsolesce of property (directly attributable)
 Non-resident aliens engaged in trade or
business in the country- the property must be
so located
 Depreciation of vehicles, yachts, helicopters and
planes with a value exceeding P2,400,000
allowed, provided
i. Main line of business is transport
operations or lease of transport
equipment
ii. Used in operations
Methods of computing depreciation allowance:
a. Straight-line method: difference between the
asset’s cost and its expected salvage value;
divided by the number of years it is expected to
be used
b. Declining-balance method: recording a larger
amount during the earlier years of the asset’s
useful life and recording a smaller amount
during the later years
c. Sum-of-the-years digit method:
Divide the number of years remaining in the
asset’s useful life by the sum of all of the years
of its useful life
d. Any other method prescribed by the Secretary
of Finance upon recommendation of the
Commissioner of Internal Revenue
7
7. Pension trusts
An amount deductible for employers in excess of normal
contributions; apportioned in equal parts for 10
consecutive years
Normal contributions: covering pension liability is
deductible as a necessary expense under No. 1
Past service contributions- incurred to cover pension of
employees employed for several years; also apportioned
in equal parts for 10 consecutive years
8. Charitable and other contributions
1. Contributions deductible in full (100%)
a. Donations to the Government covered by a
priority plan by the National Economic
Development Authority
 Education
 Youth and Sports development
 Science and Culture
 Health
 Economic Development Human Settlements
b. Donations to foreign institutions or international
organizations in accordance/compliance with a
treaty, international agreement, or special law
c. Donations to NGOs accredited by the Philippine
Council for NGO Certification
2. Contributions subject to statutory limit not
exceeding
a. 5% of the corporate taxable income
b. 10% of an individual taxable income
i. Donations to the Government for purposes not
covered by contributions deductible in full
ii. Donations to accredited domestic corporations
or associations organized and operated
exclusively for the following purposes
 Religious
 Charitable
 Scientific
 Educational
 Cultural
 Rehabilitation of veterans
iii. Donations to social welfare institutions
iv. Donations to NGOs, no part of the net income
of which inures to any private individual
Basic Taxation Law: Income Tax
Transfer pricing: Sec. 50 Tax Code
Power of the Commissioner of Internal Revenue to
apportion, allocate, or distribute gross income or
deductions on two or more corporations owned or
controlled directly by the same interests to:
a. Prevent tax evasion
b. Clearly reflect income
Sec. 36(A) Items not deductible
1. Personal living or family expenses: since they
are unrelated to trade, business, or profession
2. Capital expenditures
a. New buildings
b. Permanent improvements
c. Amounts expended in restoring property or
making good exhaustion thereof
3. Premiums paid on any life insurance policy
4. Related party transactions
a. Family members
b. Individual owning 50% in value of the
outstanding stock of a corporation
c. 2 corporations 50% in value of the
outstanding stock which is owned by the
same individual directly or indirectly
d. Grantor and fiduciary of a trust
e. Fiduciary and beneficiary of a trust
f. Fiduciary of trusts with the same grantor
Optional Standard Deduction: Sec. 34(L)
40% deduction from
a. Gross sales/receipts of individual taxpayers
b. Gross income of a corporation
 Signified in the tax return, otherwise taxpayer is
considered to have availed itemized deductions
 General professional partnership:
Either the partnership or its partners avail the
OSD; excluding the other of the benefit
Compensation Income Tax:
Covers renumeration of services performed by an
employee under an employer-employee relationship*
 Outlives the employee by the moment of
payment
 Tax schedule effective January 1, 2023 and
onwards
Not over P250k 0%
P250k-P400k 15% of the excess over
P250k
P400k-P800k P22,500+20% of the
excess over P400k
P800k-P2M P102,500+ 25% of the
8
excess over P800k
P2M-P8M P402,500+30% of the
excess of P2M
Over P8M P2,202,500+ 35% of the
excess over P8M
Exceptions:
1. Fees paid to a director
2. Sec, 32(A) (2): gross income derived from trade,
business, or profession
3. Minimum wage earners
a. Taxable income
b. Holiday pay
c. Overtime pay
d. Night shift differential pay
e. Hazard pay
4. Convenience of the employer rule: value of
living quarters or meals provided for the benefit
of the employer not included for determining
compensation income
5. De minimis benefits: facilities and privileges as
means of promoting health, goodwill,
contentment, or efficiency of employees
a. Monetized unused vacation leave credits not
exceeding 10 days during the year for private
employees
b. Monetized value of vacation and sick leave
credits paid to government officials and
employees
c. Medical cash allowance to dependents or
employees not exceeding P1500 per semester
or P250 per month
d. Rice subsidy of P2000 or one sack of 50kg per
month
e. Uniform and clothing allowance not exceeding
P6000 per annum
f. Actual yearly medical benefits not exceeding
P10,000 per annum
g. Laundry allowance worth P300 per month
h. Employee achievement awards in the form of
tangible personal property other than cash or
gift certificates (e.g. wrist watch, gold ring, etc.)
the value of which does not exceed P10,000 per
annum, established under a written plan which
does not discriminate in favor of highly paid
employees
i. Gifts during Christmas and major anniversary
celebration not exceeding P5,000 per annum
j. Flowes, fruits, books, and similar items for
special events
k. Daily meal allowance for overtime work not
exceeding 25% of the basic minimum wage
l. Benefits received by virtue of a collective
bargaining agreement and under productivity
incentive schemes not exceeding P10,000 in
monetary value for each taxable year
Basic Taxation Law: Income Tax
Also: Sec. 32 (B)(7)(e)- benefits not exceeding P90,000

6. Fringe Benefits: good, service, or benefit Corporate income tax:

granted in cash or in kind by an employer,
excluding rank-and-file employees
 Subject to fringe benefit tax
35% of the grossed-up monetary value of the
fringe benefit
Grossed-up monetary value= actually monetary
value of the fringe benefit divided by 65%
 Fringe benefits of rank-and-file employees for
the employer’s benefit is not included in
compensation income
Regular corporate income tax (RCIT):
Domestic corporations: 25% rate on taxable income
from sources within and without the Philippines
 20% rate only, given the following conditions:
1. Net taxable income not exceeding P5 M
2. Total assets not exceeding P100M, excluding
land on which its office, plant, and equipment
are situated

Resident Foreign Corporations: 25% rate on taxable

income from sources within the Philippines
Purely self-employed individuals and professionals:
Non-resident foreign corporations: 25% final tax on
General rule: subject to graduated income taxes under taxable income from sources within the Philippines
Sec. 24(A)(2)(a); and entitled to deductions under Sec.
34

Exception: those with gross sales and non-operating Branch profit remittance tax (BPRT):
income not exceeding P3 Million has 2 options: Additional 15% final tax on the total profits earmarked
1. Graduated income tax Sec. 24(A)(2)(a) for remittance by a branch of a resident foreign
2. 8% tax on gross sales or receipts and other non- corporation to its head office
operating income in excess of P250,000  Annual or periodic causal income not
considered branch profit, unless directly related
Income above Income below P3M VAT Threshold
P3M VAT to the conduct of trade and business in the
Threshold Philippines
Subject to Subject to Subject to Applicable whether remittance of branch profit is done
graduated graduated optional 8% tax
actually or constructively.
income tax rate income tax
Liable for VAT VAT Exempt VAT Exempt
Not subject to Subject to Not subject to
percentage tax percentage tax percentage tax Minimum corporate income tax (MCIT):

2% of gross income charged in lieu of the RCIT at the 4th

Mixed income earners: [income from both business- taxable year from the year the corporation commenced
profession] Graduated income tax rate for… business; when the amount of RCIT is less than the MCIT

Income above P3M VAT Income below P3M VAT Excess of the MCIT over the RCIT shall be credited
Threshold Threshold against the RCIT for the next 3 immediately succeeding
1. Compensation 1. Compensation taxable years (i.e., MCIT excess of the previous year
income income added to MCIT excess of the following year)
2. Business or 2. *Optional 8% with
practice of respect to income  Suspending importation by SOF, on CIR’s
profession from business or recommendation based on losses:
profession - Force majeure
- Legitimate business reverses
- Prolonged labor dispute
General professional partners:

General professional Taxable partnership

partnership
Net income computed similarly with corporations
Nonprofit hospital and proprietary educational
Not a taxable entity Taxed with regular
institutions:
(flow-through entity) corporate tax
Partner’s distributive Partner’s distributive Preferential 10% rate on taxable income
shares taxed as business shares taxed as corporate
and professional income dividends (dividends tax)
9
Basic Taxation Law: Income Tax
 Entire income incurs 25% regular corporate
income tax: when more than 50% of its income
b. International shipping: avail preferential rate or
comes from unrelated trade, business, or other
exemption on the basis of:
activity
 Applicable tax treaty or international agreement
Regional and area headquarters: to which the Philippines is a signatory
 Reciprocity, such that international carrier
Not tax income
whose home country grants income tax
A branch established in the Philippines by a exemption shall likewise be exempt
multinational company

- Does not derive income in the Philippines

Income tax on certain non-resident foreign
- Act as supervisory, communications, and
corporations:
coordinating center for their affiliates,
subsidiaries, or branches in the Asia-Pacific Cinematographic, film owner, lessor, or distributor
regional and other foreign markets
25% of gross income from sources within the Philippines
Regional operating headquarters:
Lessor or vessels chartered by Philippine nationals
A branch established in the Philippines by a
4 1/2 % on gross rentals, lease, or other charter fees
multinational company engaged in any of the following
from leases or charters to Filipino citizens or domestic
services:
corporations
 General administration and planning
 7 ½% when derived from non-resident lessor of
 Business planning and coordination
aircraft, machineries, and other equipment
 Sourcing and procurement of raw materials and
components Exempt corporations: Sec. 30
 Corporate finance advisory services
These organizations are generally characterized by their
 Marketing control and sales promotion
being organized for non-profit purposes, and covers only
 Training and personnel management
income derived from such activities
 Logistic services
 Research and development services and Income still subject of income tax:
product development
 From properties, real or personal
 Technical support and maintenance
 activities conducted for profit
 Data processing and communications
 Business development Exception: Art. XIV Sec. 4(3) 1987 Constitution
Preferential rate of 10% on taxable income Assets and revenues of non-stock non-profit educational
institutions actually, directly, and exclusively used for
Banks under the expanded foreign currency deposit
educational purposes
system:
a. Government Service Insurance System
Exempt from all tax except net income as specified by
b. Social Security System
the SF upon recommendation of the Monetary Board
c. Philippine Health Insurance System
Likewise, income of non-residents (individual or d. Home Development Mutual Find
corporation) from transactions with depositary banks e. Local Water Districts
are exempt from income tax
Final withholding tax on passive income:

Final tax withheld at the source (withholding agent)

International carriers:
Passive income includes rents, dividends, and prizes,
2 ½% tax on “Gross Philippine Billings” awards, and other winnings—it is ordinarily acquired
without action or effort from the tax payer.
a. International air carrier:
 Tickets indorsed to another international airline:  Subject to income tax if derived from the
only if the passenger boards a plane in a port or ordinary course of trade or business of the
point within the Philippines taxpayer
 Transshipment: only the leg flown from the
Philippines to the point of transshipment
a. Interests: 20% final tax rate
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Basic Taxation Law: Income Tax
Deposit substitutes: alternative form of obtaining funds
from the public (at least 20 individuals or corporate
lenders) other than through deposits, such as issuance,
endorsement, or acceptance of debt instruments
a. From foreign currency deposits: final income tax
rate of 10%
b. From long-term deposit or investment: exempt
from final tax
Features of long-term deposits or investments:
1. Int must be issued by banks only, not non-bank
financial intermediaries or finance companies
2. It must be issued to individuals in
denominations of P10,000 and other
denominations as may be prescribed by BSP
3. It must be evidenced by certificates in such form
prescribed by BSP
4. It must have a maturity period of less than 5
years
In case of pre-termination: final tax rates depending on
the remaining maturity
 4 years to less than 5 years: 5%
 3 years to less than 4 years: 12%
 Less than 3 years: 20%
b. Royalties: 20% rate
Exception: 10% rate for royalties from books, other
literary works, and musical compositions
c. Prizes, awards, and other winnings: 20% final
tax rate
Exceptions:
1. Winnings from the Philippine Charity
Sweepstakes and Lotto worth P10k or less
2. Prizes worth P10k or less, exempt from
graduated income tax rates
3. Prizes exempt from income tax according to Sec.
32(B)
a. Prizes primarily in recognition for charitable,
educational, scientific, artistic, literary,
religious, or civic arrangement
b. The recipient was selected without any
action
c. The recipient is not required to render
substantial future services as a condition to
receive the prize
4. Prizes granted to athletes in local and
international sports competitions sanctioned by
the national sports association, whether in the
Philippines or abroad
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d. Dividends
Any distribution made by a corporation to its
shareholders out of its earnings or profits, whether in
money or property
a. Cash and property dividends
Domestic corporation by citizens and non-
resident aliens: 10% final tax rate
Non-resident aliens engaged in trade or
business in the Philippines: 20%
Otherwise: 25% final withholding tax
b. Intercorporate dividends
Domestic corporation by domestic corporations
and resident foreign corporation: not subject to
tax
Dividends received by resident foreign corporations not
taxable only when:
 The domestic corporation directly holds at least
20% of the outstanding shares of the foreign
corporation for a minimum of 2 years at the
time of the dividend distribution
 The funds from such dividends actually received
or remitted into the Philippines are reinvested
into the Philippine operations of the domestic
corporation in the Philippines
 The reinvestment is made within the next
taxable year from the time the foreign-sourced
dividends were received
 The reinvestment is limited to funding the
working capital requirements, capital
expenditures, infrastructure projects, dividend
payments, and investment in domestic
subsidiaries
Tax sparing rule: cash and property dividends received
from a domestic corporation by a non-resident foreign
corporation are subject to the preferential final
withholding tax of 15% (instead of 25%), provided that
its domicile allows a credit against the tax due from said
corporation equivalent to 15%
b. Stock dividends
They represent mere transfer of surplus to capital
account
 Cancelled or redeemed stocks become taxable
income if the cancellation or redemption was
made in such time and such manner as to make
it essentially equivalent to the distribution of a
taxable dividend.
Factors:
Basic Taxation Law: Income Tax
 The presence of a real business purpose
 The amount of corporate earnings and profits
available for declaration of regular dividends
 The corporation’s history of declaring regular
dividends
 The effect of the distributions, as compared
with the declaration of regular dividends
 The lapse of time between the issuance of the
stock dividends and its redemption
Tax income from dealings in property:
1. Ordinary assets:
a. stocks in trade, or those properly included in the
inventory if still on hand at the close of the
taxable year
b. Properties primarily for sale in the ordinary
course of trade or business
c. Properties used in trade or business and subject
to allowance depreciation under Sec. 34(F)
d. Real property used in the trade or business of
the taxpayer
2. Capital assets
Property held by the taxpayer, whether or not
connected with his trade or business, which do not
constitute an ordinary asset
1. Real property located in the Philippines:
proceeds from sale or disposition subject to 6%
final tax rate based on gross selling prince or fair
market value as determined by the CIR,
whichever is higher
 Even if sold at a loss
Exceptions:
 Dispositions of property to the government or
government owned or controlled corporations:
taxpayer’s option to apply the graduated tax
income
 Sale of principal residence of a natural person,
provided
- The proceeds from the sale are fully utilized
in the construction or acquisition of a new
principal residence within 18 calendar
months; otherwise, subject to capital gains
tax
- CIR is duly notified of the taxpayer’s
intention to avail the exemption within 30
days from date of sale
- The exemption is availed only once within
10 years
2. Shares of stock in a domestic corporation
12
15% final tax for disposition of shares of stock
Exception: if listed and traded in the stock exchange in
the following manner
 If the sale is made by a non-dealer in securities,
it shall be exempt from income tax, but subject
to the 0.0006% stock transaction tax
 If the sale is made by a dealer in securities, it
shall be subject to regular income tax since the
sale involves ordinary assets of taxpayer
3. Other capital assets
Capital assets not located in the Philippines not
subject to final tax; added to ordinary fain
 Banks and trusts companies incorporated under
Philippines laws, capital losses from such sale
may be deducted only from their capital gains
Holding period rule: Gains and losses from the sale of
other capital assets made by an individual taxpayer are
also subject to the holding period rule
 100% of the fain or loss shall be recognized if
the property is a short-term capital asset. A
short-term capital asset is one in which has
been held by the taxpayer for 12 months or less
 50% of the gain or loss shall be recognized if the
property is a long-term capital asset. A long-
term capital asset is one in which has been held
by the taxpayer for more than 12 months
Non-recognition transactions:
Recognition of income refers to the formal process of
subjecting the realized gains tot taxation
The rational behind the non-recognition of income of
these transactions is the presence of the continuity of
interests. The law treats these transactions as mere
changes in the form of investment
Gains or loss shall be recognized upon the sale or
exchange of property
Exception: non-recognition of gains or loss on
corporation or its stocks or securities, if
1. Such corporation is a party to a reorganization
2. It exchanges property solely for stock or
securities in another corporation that is also a
party to the organization
3. The exchange is pursuant to a plan of
reorganization
Reorganization: Sec. 40(C)(2)
a. Merger or consolidation
Basic Taxation Law: Income Tax
b. The acquisition in exchange for stock of another
corporation whereby immediately after the
acquisition, the acquiring corporation has
control of the other corporation, whether or not
the former already had control prior to the
acquisition
c. The acquisition in exchange of stock of
substantially all the properties of another
corporation. In determining whether the
exchange is solely for stock, the assumption by
the acquiring corporation of a liability shall be
disregarded
d. A recapitalization, whereby the stock and bonds
of a corporation are readjusted as to the
amount, income, or priority, or an agreement of
all stockholders and creditors to increase or
decrease the corporation’s capitalization, debts,
or both
e. The reincorporation, which means the
formation of the same corporate business with
the same stockholders and assets, surviving
under the new charter.
No gain or loss shall be recognized in the transfer of
property by a person alone, or with others not
exceeding 4 persons whereby
1. The property is exchanged for stock or unit of
participation in a corporation
2. As a result of the exchange, the transferor/s
collectively gains or maintains control of the
corporation
Income tax returns:
A tax return is a formal report prepared by the taxpayer,
showing the enumeration of its taxable transactions,
their amounts, and the taxes due and payable.
Sec. 51(A)(5): the individual tax return shall consist of a
maximum of 4 pages in paper, or electronic form and
shall contain only the following
1. Personal profile and information
2. Total gross sales and gross receipts, or income
from compensation, exercise of profession, or
conduct of trade or business, except income
subject to final tax
3. Allowable deductions under the tax code
4. Taxable income
5. Income tax due and payable
Sec. 52(A): corporate return-- contents
1. Corporate profile and information
2. Total gross sales and gross receipts, or income
from compensation, exercise of profession, or
conduct of trade or business, except income
subject to final tax
3. Allowable deductions under the tax code
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Taxable income
Persons required to file
1. Every Filipino citizen residing in the Philippines
2. Every Filipino citizen residing outside the
Philippines, on his income or sources within the
Philippines
3. Every alien residing in the Philippines on income
derived from sources within the Philippines
4. Every non-resident alien residing or engaged in
trade or business or in the exercise of profession
in the Philippines
Also: every corporation, except foreign corporations not
engaged in trade or business in the Philippines
Persons not required to file: but required to file an
information return subject to the rules and regulations
prescribed by the SF on recommendation of CIR:
1. Individuals exempt from income tax
2. Minimum wage earners
3. Individuals whose taxable income does not
exceed P250k, unless engaged in business or
practice of profession in the Philippines
 Mixed income earners required to file ITR
4. Individuals whose sole income has been
subjected to final withholding tax
5. Individuals earning purely compensation
income who is eligible for substituted filing
Substituted filing: regardless of gross income
1. When he is earning purely compensation
income from only one employer during the
taxable year
2. The income tax thereon has been correctly
withheld
3. The employer properly files the Annual
Information Tax Return on Income Taxes
Withheld, which is considered s the substitute
of the employee’s ITR
Filing and payment:
In the taxpayer’s legal residence or principal place of
business on any of the following:
 Authorized agent bank
 Revenue district officer
 Collection agent
 Duly authorized treasurer of the city or
municipality
If no legal residence or place of business: Office of the
Commissioner
Basic Taxation Law: Income Tax

Pay-as-you-file

 When the tax due is more than P2k: payment in

2 equal instalments: one during the filing, the
other on or before October 15

Period to file: On or before April 15, covering income for

the preceding taxable year

 For mixed income earners and purely self-

employed individuals

1st quarter May 15

2nd quarter August 15
3rd quarter November 15
4th quarter April 15 of the next
taxable year

Fiscal year: the accounting period of 12 months ending

on the last day of any month other than December

The corporate quarterly declaration shall be filed within

60 days following the close of each of the first 3 quarters
of the taxable year, and the final adjusted return shall be
filed on or before April 15, or the 15th day of the 4th
month following the close of the fiscal year.

Final adjustment return:

Every corporation liable to tax shall file a final

adjustment return covering the total taxable income for
the preceding calendar or fiscal year

 If the sum of the quarterly tax payments made

during the said taxable year is not equal to the
total tax due to the same year:
a. Pay the balance in case of deficiency
b. Carry-over the excess credit and apply it against
the income tax due for the succeeding taxable
quarters of the next calendar year, or be
credited/refunded with the excess payment

Irrevocability rule: Sec. 76

Once the option to carry-over has been made, it shall be

irrevocable for that taxable period, and no application
for tax refund or tax credit shall be applied.

14