DLSU College of Law Atty. Martin Ignacio D.

Mijares
Taxation Law Review First Semester, AY 2019-2020

LAST MEETING
 Income Taxation
 Kinds of income
 Taxable income
 Gross income
TAXATION LAW REVIEW  Deductions
 Ordinary and necessary business expenses
 Interest

Martin Ignacio D. Mijares 1

Session Five – 09/05/2019

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TODAY TODAY
 Income Taxation  Income Taxation
 Deductions  Deductions
 Taxes  Optional standard deduction
 Losses  Personal and additional exemption*
 Bad debts  Change of status*
 Depreciation  Non-deductible expenses
 Depletion  Taxpayers, Tax Rates, and Tax Bases
 Charitable contributions  Individual taxpayers
 Research and development  Tax on citizens and resident aliens
 Pension trusts  Tax on NRAETB
 Premium payments on health/hospitalization insurance*  Tax on NRANETB
 Additional requirements for deductibility
* Deleted by the TRAIN Law
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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

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ALLOWABLE 6
ALLOWABLE
DEDUCTIONS DEDUCTIONS

Taxes

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TAXES TAXES
 Section 34(C), Tax Code  Taxes not deductible
 Taxes paid or incurred within the taxable year in  Philippine income tax
connection with the taxpayer's profession, trade or  Income taxes imposed by the authority of any foreign
business government (but this is allowed in case the taxpayer who
 Taxes that are deductible is entitled to tax credit but does not avail of the same)
 Import duties, if the importation of the article is in  Estate and donor’s taxes
connection with the trade or business of the taxpayer  Special assessments or levies assessed against local
 Business taxes, e.g., other percentage taxes, and excise benefits of a kind tending to increase the value of the
taxes property assessed
 License taxes  Energy tax on electrical power consumption imposed by
 Privilege taxes BP Blg. 36
 Documentary stamp taxes  Taxes which are not in connection with the trade,
business, or profession of the taxpayer
 Any other taxes of every amount and nature paid directly
to the government or any political subdivision 7  Taxes which are final 8

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

TAXES TAXES
 “Taxes” refer to tax proper and deductions in amounts  Limitation on deductions
representing surcharges, penalties, or fines incident to  In case of a NRAETB and a resident foreign corporation,
delinquency are not allowed the deduction for taxes shall be allowed only if and to the
 Taxes are deductible as such only by the taxpayer extent that they are connected with income from sources
upon which they are imposed within the Philippines

 Income tax refund or credit

 A tax refund may or may not constitute taxable income
depending on whether or not the tax was previously
deducted as an expense in computing income tax
 Tax which was previously deducted as an expense should
be reported as income when a refund of the same is
received in a subsequent year
 A tax which is not deductible (e.g., income tax) when
refunded to the taxpayer is not an income subject to tax
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TAXES TAXES
 Tax credit for taxes of foreign countries  Tax credit for taxes of foreign countries
 In the case of a citizen of the Philippines and of a  It is allowed to lessen the rigor of international double or
domestic corporation, the amount of income taxes paid or multiple income taxation
incurred during the taxable year to any foreign country  Persons entitled to tax credit:
may be used as credit against the income tax due in the
 Resident citizens
Philippines provided that:
 Domestic corporations
 The taxpayer is qualified to avail of the tax credit; and
 Members of GPPs
 He signifies in its return his desire to avail of the tax credit
 Beneficiaries of estates and trusts
 Refers to the taxpayer’s right to deduct from the income
tax due, the amount of tax he has paid to a foreign
country subject to limitations

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

TAXES TAXES
 Tax credit for taxes of foreign countries  Limitation on tax credit
 Persons not entitled to tax credit:  For taxes paid to one foreign country
 Non-resident citizens  The amount of the credit in respect of the tax paid or
 Aliens, whether resident or non-residents incurred to any country shall not exceed the same proportion
of the tax against which such credit is taken, which the
 Foreign corporations, whether resident or nonresident taxpayer’s net income from sources within such country
 Tax deduction v. tax credit bears to his entire taxable income for the same year

Tax Deduction Tax Credit Net income from

Taxes are deducted from gross income in Taxes are deducted from the Philippine income foreign country Philippine Income Limit on amount of
X =
computing the taxable income tax itself Net income from all Tax tax credit
All taxes are generally allowed as deduction Only foreign taxes may be claimed as tax sources
with the exception of the seven kinds of taxes credits against Philippine income tax
expressly disallowed

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TAXES TAXES
 Limitation on tax credit  Foreign income taxes claimed as deduction
 For taxes paid to two or more foreign countries  Income taxes paid to a foreign country are allowed as
 The total amount of the credit shall not exceed the same deductions only if the taxpayer does not signify in its
proportion of the tax against which such credit is taken, return its desire to have to any extent the benefits of the
which the taxpayer’s net income from sources outside the provisions of law allowing credit against Philippine
Philippines bears to his entire income for the same taxable income tax for taxes of foreign country
year  The taxpayer is qualified to avail of the tax credit; and
Net income from sources  He does not signify in its return his desire to avail of the tax
outside the Philippines credit
Philippine Limit on amount of
X =  The right to deduct income taxes paid to a foreign
Income Tax tax credit
Net income from government or from the taxpayer’s gross income is given
all sources only as an alternative or substitute to his right to claim a
tax credit for such foreign income tax

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

TAXES TAXES
 Illustration: One foreign country  Illustration: One foreign country
 MDM, Inc., a domestic corporation, has the following data
Computation of PH income tax:
Taxable income from PH sources P300,000 Income tax (P400,000 x 30%) P120,000
Taxable income from Italy 100,000 P400,000 Less: Tax Credit 25,000
Income tax paid in Italy P25,000 Income tax payable P95,000

Computation of tax credit:

P100,000 P120,000
X = P30,000
P400,000 (P400,000 x 30%)

The credit to be taken: the lower amount between

The amount paid to the foreign country P25,000
and
The computed tax credit limitation P30,000 17 18

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TAXES TAXES
 Illustration: More than one foreign country  Illustration: More than one foreign country
 MDM, Inc., a domestic corporation, has the following data
Computation of tax credit:
Taxable income Income tax Ceiling Foreign tax Allowable
paid/payable paid tax credit
Philippines (tax rate at 30%) P55,000 P30,000 USA:
USA 25,000 10,000 P25,000
X P30,000 P7,500 P10,000 P7,500
Switzerland 20,000 2,000 P100,000
Taxable income before deducting foreign Switzerland:
income taxes P100,000 P42,000 P20,000
X P30,000 6,000 2,000 2,000
P100,000
Allowable tax credit P9,500

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

TAXES TAXES
 Illustration: More than one foreign country  Illustration: Foreign taxes taken as deduction

Computation of PH income tax: Computation of PH income tax:

Taxable income P100,000 Taxable income before foreign taxes P100,000
Income tax (P100,000 x 30%) P30,000 Less: Foreign income taxes paid
Less: Allowable tax credit 9,500 USA P10,000
Income tax due P20,500 Switzerland 2,000 12,000
Taxable income P88,000
Income tax at 30% P26,400

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TAXES
 Year in which credit may be claimed
 A taxpayer on the accrual method of accounting should
take the tax credit in the year in which the income from
the foreign country is accrued
 A taxpayer on the cash method of accounting should take
the tax credit for the year in which the taxes were paid
 The law allows the taxpayer in his option and irrespective
of the method of accounting employed in keeping his
books, to take such credit for taxes in the year in which
the taxes for the foreign country were incurred subject to
redetermination or adjustment
 An election thus made must be followed in returns for all
subsequent years, and no portion of any such taxes would
be allowed as a deduction from gross income
TAXES
 Proof of tax credits
 Tax credits for foreign income taxes are available if the
taxpayer establishes to the satisfaction of the CIR
 The total amount of income derived from sources without the
Philippines;
 The amount of income derived from each country, the tax
paid or incurred to which is claimed as a credit under the
law; and
 All other information necessary for the verification and
computation of such credit

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

TAXES CIR V. LEDNICKY, ET AL.

 Conditions for the allowance of tax credits
 The taxpayer must signify in his income tax returns his
desire to claim tax credit;
 The return must be accompanied by the appropriate form
prescribed by the CIR duly signed and sworn to or
affirmed;
 The form must be carefully filled in with all the information
and with the calculations of credits;
 He must furnish any additional information that may be
required by the CIR;
 If the credit is sought for taxes already paid, the form
must have attached to it the receipt for each tax payment
or if for taxes accrued, the return on which such accrued
tax was based
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 Issue: WON a citizen of the US residing in the PH,
who derives income wholly from sources within the
PH, may deduct from his gross income the income
taxes he has paid to the US government for the
taxable year on the strength of section 30 (c-1) [now,
34(C)] of the Philippine Internal Revenue Code
 An alien resident who derives income wholly from
sources within the Philippines may not deduct from
gross income the income taxes he paid to his home
country for the taxable year.
 Note: See Section 34(C)(3), 1997 Tax Code
 An alien individual and a foreign corporation shall not be
allowed the credits against the tax for the taxes of foreign
countries allowed under this paragraph.
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CIR V. LEDNICKY, ET AL. CIR V. BICOLANDIA DRUG

 Intention of the law: the right to deduct income taxes  Issue: WON the tax credit provision under Rev. Regs.
paid to foreign government from the taxpayer's gross No. 2-94 is valid
income is given only as an alternative or substitute to  Held:
his right to claim a tax credit for such foreign income  Tax Credit vs. Tax Deduction
taxes under section 30 (c) (3) and (4)
Tax Credit Tax Deduction
 So that unless the alien resident has a right to claim
An amount subtracted from an An amount subtracted from income
such tax credit if he so chooses, he is precluded from individual's or entity's tax liability to before the tax is computed
deducting the foreign income taxes from his gross arrive at the total tax liability
income. It reduces the taxpayer's liability It reduces taxable income upon
which the tax liability is calculated

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

LOSSES
 Section 34(D), Tax Code
 Losses actually sustained during the taxable year and not
compensated for by insurance or other forms of

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ALLOWABLE indemnity shall be allowed as deduction
 What are losses?

DEDUCTIONS  The term “losses” implies an unintentional parting with

something of value
 For income tax purposes, it is used in a very broad sense
to comprehend all losses which are not general or natural
to the ordinary course of business and not covered under
some other heading of the Tax Code (e.g., bad debts,
Losses inventory losses, depreciation)

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LOSSES LOSSES
 Losses deductible from gross income:  Requisites for deductibility:
 A taxpayer may deduct all losses actually sustained and  The loss must be that of the taxpayer;
charged off during the taxable year and not compensated  It must be actually sustained and charged off within the
for by insurance or other forms of indemnity: taxable year;
 Loss incurred in trade, business, or profession; and
 It must be incurred in the trade, business, or profession;
 Loss of property connected with the trade, business, or
 It must be evidenced by a closed and completed
profession, if such loss arises from fires, storms, shipwrecks,
or other casualties, or from robbery, theft, or embezzlement transaction; and
 Nonresident alien and resident foreign corporation: only  It must not be compensated for by insurance or other
those losses actually sustained or incurred in trade, forms of indemnity.
business, or exercise of profession conducted within the
Philippines shall be allowed

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DLSU College of Law
Taxation Law Review
LOSSES
 Closed and completed transaction
 There should be an identifiable event which justifies the
loss
 Illustrations:
 Plantation destroyed by insect infestation starting 2013. By
the end of 2013, more than 2/3 of the plantation was
worthless. Towards the middle of 2014, the plantation was
totally destroyed. When should the loss be deducted?
 The loss should be deducted in 2014 when the plantation was
completely destroyed – the year when the loss was sustained in
a closed and completed transaction
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LOSSES
 When loss is compensated for by insurance
 Allowable deduction is limited to the unrecovered cost
(book value) of the property lost or destroyed
 Excess of the amount of insurance proceeds over the net
book value of the insured assets
 General rule: It is taxable receipt
 Exception: It is not taxable income if it is used in restoring the
destroyed property
 Other forms of indemnity – compensation due under a
title analogous or similar to insurance
 The loss sustained by the taxpayer must be covered by a
judicially enforceable right arising from any of the sources of
obligations (law, contract, quasi-contract, tort, or crime)
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Atty. Martin Ignacio D. Mijares
First Semester, AY 2019-2020
LOSSES
 Closed and completed transaction
 Illustrations:
 During Typhoon “Yolanda”, a building was destroyed in 2013.
The owner filed a claim of P1M, the book value of the
building, against the insurance company. The insurance
company was willing to pay P600,000. In 2014, the claim
was settled for P750,000 with the insurance company paying
that amount in 2014. Is there a recognizable loss? If yes,
when is it deductible?
 There is a loss to the extent of P250,000 or the amount not
recovered from the insurance company
 It is deductible in 2014, when the loss was finally ascertained.
The loss could not be deducted in 2013 inasmuch as there was
still a controversy as to the amount of the damage to be paid by
the insurance company. It was only in 2014 that the transaction
was closed and completed and the actual loss finally ascertained
and fixed. 34
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LOSSES
 Declaration of loss
 Period of filing: a corporation that sustained loss and
which intends to claim the loss as a deduction for the
taxable year in this the loss was sustained shall file a
sworn declaration of loss within 45 days after the date of
the occurrence of casualty or robbery, theft, or
embezzlement. The sworn declaration shall be filed with
the nearest RDO
 Nature of the event giving rise to the loss and the time of its
occurrence
 A description of the damaged property and its location
 The items needed to compute the loss
 Amount of insurance or other compensation received or
receivable
 Failure to file will result in the disallowance of the 36
casualty loss claimed
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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

LOSSES NET OPERATING LOSS CARRY-OVER

 Shrinkage in value of securities
 Shrinkage in value of shares of stock due to fluctuation of
the market or otherwise is not deductible.
 Loss allowed as deduction is that actually suffered when
the shares are disposed of
 Securities becoming worthless
 If shares of stock held as investment or otherwise
become worthless, the cost or other basis may be
deducted in the taxable year in which the stock became
worthless, provided a satisfactory showing of its
worthlessness is made
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 “Net Operating Loss” – excess of allowable deduction
over gross income of the business in a taxable year
 Rule: the NOL of the business or enterprise for any
taxable year immediately preceding the current taxable
year, which had not been previously offset as deduction
from gross income, shall be carried over as a deduction
from gross income for the next 3 consecutive taxable
years immediately following the year of such loss
 NOLCO shall be allowed as a deduction from the gross
income of the same taxpayer who sustained and
accumulated the NOL regardless of the change in its
ownership
 The 3-year carry over period shall continue to run even if the
corporation is under MCIT
 NOL shall be availed off on a “first-in, first-out” basis
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NET OPERATING LOSS CARRY-OVER NET OPERATING LOSS CARRY-OVER

 Illustration:  General Rule: NOLCO of the taxpayer shall not be
Year Gross Income Deductions NOLCO Carryover Year
transferred or assigned to another person, directly or
indirectly, such as by transfer or assignment in a
2010 P100,000 P200,000 P100,000 2013 merger, consolidation or other forms of business
2011 P150,000 P250,000 P100,000 2014 combination
2012 P250,000 P100,000 --
 NOLCO shall be allowed only if there is no substantial
 For 2012, NOL from 2010 and 2011 may be used a
change in the ownership of the business or enterprise
deduction to the extent of P150,000 resulting in
in that –
breakeven
 Not less than 75% in nominal value of outstanding issued
 The remaining NOL is P50,000, which may be utilized as
shares, if the business is in the name of a corporation, is
a deduction until 2014 since it arose in 2011 held by or on behalf of the same persons; or
 Any net loss incurred in a taxable year during which  Not less than 75% of the paid-up capital of the
the taxpayer was exempt from income tax shall not be corporation, if the business is in the name of a
allowed a deduction corporation, is held by or on behalf of the same persons
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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

NET OPERATING LOSS CARRY-OVER NET OPERATING LOSS CARRY-OVER

 Illustrations:  Taxpayers entitled to deduct NOLCO
 Any individual (including estates or trusts) engaged in
P R trade or business or in the exercise of his profession, and
100%
X X domestic and resident foreign corporations subject to
RCIT or preferential tax rates (e.g., private educational
Q 100% 100%
institutions, hospitals, and ROHQ)
P Y
Y  Taxpayers not entitled to deduct NOLCO
NOLCO
100%  OBU of a foreign banking corporation and FCDU of a
R domestic or foreign banking corporation
Z NOLCO
100%  An enterprise registered with BOI with respect to its BOI-
Q
registered activity enjoying ITH
 An enterprise registered with PEZA with respect to its
NOLCO PEZA-registered activity
NOLCO
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NET OPERATING LOSS CARRY-OVER LOSSES

 Taxpayers not entitled to deduct NOLCO
 An enterprise registered with BCDA with respect to its
registered activity
 Foreign corporations engaged in international shipping or
air carriage business in the Philippines; and
 Any person, natural or juridical, enjoying exemption form
income tax with respect to its operation during the period
for which the exemption is applicable
 Rev. Regs. No. 12-77
 Substantiation requirements for losses arising from
casualty, robbery, theft, or embezzlement
 Rev. Regs. No. 14-01
 Implementing Section 34(D)(3), Tax Code relative to the
allowance of net operating loss carry-over as a deduction
from gross income [NOLCO Regulations]
 RMO No. 031-09
 Policies and guidelines for the reporting of casualty
losses
 Issued after Typhoons Ondoy and Pepeng

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

BAD DEBTS
 What are bad debts?
 Those debts due to the taxpayer when actually
ascertained to be worthless and charged off within the

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ALLOWABLE taxable year
 Those debts resulting from the worthlessness or

DEDUCTIONS uncollectibility, in whole or in part, of amounts due the

taxpayer by others, arising from money lent or from
uncollectible amounts of income from goods sold or
services rendered

Bad Debts

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BAD DEBTS BAD DEBTS

 Requisites for deductibility:
 There must be an existing indebtedness due to the
taxpayer which must be valid and legally demandable;
 The same must be connected with the taxpayer’s trade,
business or practice of profession;
 The same must not be sustained in a transaction entered
into between related parties enumerated under Section
36(B), Tax Code;
 The same must be actually charged off the books of
accounts of the taxpayer as of the end of the taxable
year; and
 The same must be actually ascertained to be worthless
and uncollectible as of the end of the taxable year
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 Valid and subsisting debt
 The collection of the debt may be enforced by law
 A debt which had prescribed is no longer valid and
subsisting
 Year in which charge off must be made
 Actual ascertainment of worthlessness and charging off
should happen within the taxable year
 The law does not allow the charging off and the deduction of
a bad debt in a year other than the year in this it was
determined to be worthless
 A mere recording in the taxpayer’s books of account of
estimated uncollectible accounts does not constitute a write-
off of the receivable
 It shall not be a valid basis for deduction as bad debts expense
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DLSU College of Law
Taxation Law Review
BAD DEBTS
 Amount of debt deductible
 The amount of the bad debt is not necessarily also the
amount deductible
 A worthless debt partially secured by a mortgage may be
written off to that portion not covered by the mortgage
 A debt which was compromised may be deducted to the
extent of the amount not to be paid any more, provided that
the debtor is insolvent
 Only the difference between the amount received in
distribution of the assets of a bankrupt and the amount of
claim may be deducted as a bad debt
 The difference between the amount received by a creditor of
a decedent in distribution of the assets of the decedent’s
estate and the amount of the claim may be considered a
worthless bad debt
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BAD DEBTS
 Recovery of bad debt previously written off
 A debt which was previously found to be worthless and
written off in a prior year and subsequently collected
does not render the deduction unallowable or illegal
 Tax benefit rule: the 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
 If, in the year the taxpayer claimed deduction of bad debts
written off, he realized a reduction of the income tax due
from him on account of the deduction, his subsequent
recovery thereof from his debtor shall be treated as a receipt
of realized taxable income
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Atty. Martin Ignacio D. Mijares
First Semester, AY 2019-2020
BAD DEBTS
 Provision for bad debts not deductible
 Mere provision for bad debt is not an allowable expenses
because it is just an estimate and not an actual expense
or loss
 For financial accounting purposes, provision for bad debts
are deductible following the principle of conservatism and to
state the receivables at their net realizable value
 Deduction by foreign corporations
 Foreign corporations engaged in trade or business in the
Philippines, bad debts are deductible if they have arisen
in the course of business or trade conducted in the
Philippines and actually ascertained to be worthless and
charged off within the year
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BAD DEBTS
 Tax benefit rule
 If the taxpayer did not benefit from the deduction of the bad
debt written off because it did not result to any reduction of
his income tax in the year of such deduction, then his
subsequent recovery thereof shall be treated as a mere
recovery or a return of capital, and not treated as receipt of
realized taxable income
 Example: if the income of the taxpayer is P40,000 and his
expenses, including P20,000 bad debts written off, amount to
P60,000, so that his net loss is P20,000, no tax benefit is
received by him, hence, it shall not be included as part of gross
income in the year of its recovery
 Where such bad debt expense was disallowed by the BIR as
a deduction, the subsequent collection of the debt is not
taxable
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DLSU College of Law
Taxation Law Review
REV. REGS. NO. 5-99, AS AMENDED
 "Actually ascertained to be worthless"
 In general, a debt is not worthless simply because it is of
doubtful value or difficult to collect
 The taxpayer must ascertain and be able to demonstrate
with reasonable degree of certainty the uncollectibility of the
debt
 The determination of worthlessness in a given case must
depend upon the particular facts and the circumstances of
the case.
 A taxpayer may not postpone a bad debt deduction on the basis
of a mere hope of ultimate collection or because of a
continuance of attempts to collect notes which have long
become overdue
 A taxpayer is not required to be an "incorrigible optimist” or
to be unduly pessimistic
 Sound business judgment based on complete information as is
reasonably ascertainable
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REV. REGS. NO. 5-99, AS AMENDED
 "Actually charged off from the taxpayers books of
accounts"
 The amount of money lent by the taxpayer (in the course
of his business, trade or profession) to his debtor had
been recorded in his books of account as a receivable
and that the the receivable has been cancelled and
written-off from the said taxpayer's books of account
 A mere recording in the taxpayer's books of account of
estimated uncollectible accounts does not constitute a write-
off of the said receivable, hence, shall not be a valid basis for
its deduction as a bad debt expense
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Atty. Martin Ignacio D. Mijares
First Semester, AY 2019-2020
REV. REGS. NO. 5-99, AS AMENDED
 The CIR will consider all pertinent evidence in
determining whether a debt is worthless, including –
 The value of the collateral, if any, securing the debt and the
financial condition of the debtor
 The assigning of the case for collection to an independent
collection lawyer who is not under the employ of the taxpayer
and who shall report on the legal obstacle and the virtual
impossibility of collecting the same from the debtor and who
shall issue a statement under oath showing the propriety of
the deductions thereon made for alleged bad debts
 Thus, where the surrounding circumstances indicate that a debt
is worthless and uncollectible and that legal action to enforce
payment would in all probability not result in the satisfaction of
execution on a judgment, a showing of those facts will be
sufficient evidence of the worthlessness of the debt for the
purpose of deduction
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PHILIPPINE REFINING COMPANY V. CA,
CTA, CIR
 Before a debt can be considered worthless, the
taxpayer must show that it is indeed uncollectible even
in the future
 Taxpayer must prove that he exerted diligent effort to
collect the debts
 Sending of of statement of accounts;
 Sending of collection letters;
 Giving the account to a lawyer for collection; and
 Filing a collection case in court
 Such deduction cannot be supported by mere testimony
of the financial accountant explaining the worthlessness
of the debts which are, at most, self-serving testimony
lacking in probative value
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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

DEPRECIATION
 What is depreciation?
 It is the gradual diminution in the useful value of tangible
property used in trade or business resulting from

57
ALLOWABLE exhaustion, wear and tear, and normal obsolescence
 Necessity and theory of depreciation allowance

DEDUCTIONS  Certain property used in the business provide benefits

not only in the year when purchased but also in
subsequent years until its eventual worthlessness due to
exhaustion, wear and tear, or obsolescence
 Certain property used in the business gradually
approaches a point where its usefulness is exhausted
Depreciation
 When the property is disposed of after years of use, it is
no longer the whole thing originally used

58

57 58

DEPRECIATION
 Requisites for deductibility
 The allowance for depreciation must be reasonable
 It must be for property arising out of its use or
employment in the business or trade, or out of its not
being used temporarily during the year
 It must be charged off during the taxable year
DEPRECIATION
 Reasonableness of allowance
 “Reasonable allowance” includes, but not limited to, an
allowance computed in accordance with regulations prescribed
by the SoF under any of the following methods:
 Straight-line method
 Declining balance method
 Sum of the years-digits method
 Any other method which may be prescribed by the SoF upon
recommendation of the CIR
 The reasonableness of the allowance must have due regard to
the conditions during the taxable year
 Question of fact and is not measured by a theoretical yardstick
but should be determined by a consideration of actual facts

59 60

59 60

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

DEPRECIATION
 Depreciable property
 Tangible property
 Intangible property used in the business of definitely
limited duration
 Property not subject to depreciation
 Inventories or stock in trade
 Land, except the improvements thereon
 Bodies of minerals which are subject to depletion
 Building (including furniture and fixtures therein) used
solely by the taxpayer as his residence
 Intangibles, the use of which is not of limited duration
 Incidental repairs that do not materially add value or
prolong the life
DEPRECIATION
 Charging off depreciation
 Manner: the allowance for depreciation shall either be
deducted from the book value of the assets or preferably
credited to a depreciation reserve account, which must
be reflected in the annual balance sheet
 Records: the taxpayer should keep such records as to
each item of depreciable property as will permit ready
verification
 Time: the taxpayer should deduct the proper depreciation
in the year in which the wear and tear occurs
 Depreciation begins with the acquisition of the
property

61 62

61 62

DEPRECIATION DEPRECIATION
 Basis of depreciation  Methods of computing depreciation allowance
 Cost or other basis of the property  Any method of depreciation may be used provided it is
 Plus: cost of improvements, additions, betterment reasonable and must have due regard to operating
conditions during the taxable period
 Less: definite loss or damage sustained through casualty
 Straight-line method
 Recovery limited to the capital invested in the assets
Cost (or other basis)
less scrap value (if any) = Annual depreciation
Estimated useful life

 Declining balance method

1
X 2 (or 1.5) = Depreciation rate
Estimated useful life

Book value X Dep. Rate = Depreciation expense

63 64

63 64

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

DEPRECIATION DEPRECIATION
 Methods of computing depreciation allowance  Deduction for obsolescence
 Sum of the years digits method  Allowed in addition to depreciation: if the whole or any
No. of remaining years of portion of physical property is clearly shown by the
life of asset Cost (or other taxpayer as being affected by economic conditions that
Sum of nos. of each of X basis) less scrap = Annual depreciation will result in its being abandoned at a future date prior to
remaining years of life of value (if any) the end of its natural life, such that depreciation
asset deduction alone would be insufficient to return the cost at
the end of the economic term of usefulness
 Adjustments for depreciation
 Where the useful life of the property will be longer or shorter
than the useful life as originally estimated under all the then
known facts
 The portion of the cost or other basis of the property not already
provided for through depreciation allowance should be spread
over the remaining useful life of the property as re-estimated in
the light of the subsequent facts and depreciation deductions
taken accordingly 65 66

65 66

LIMPAN INVESTMENT V. CIR BULLETIN “F”

 Issue: WON the BIR erred in disallowing Limpan’s  Table of Useful Lives of Depreciable Property
depreciation expense
 Held:
 Depreciation is a question of fact and is not measured by
theoretical yardstick, but should be determined by a
consideration of actual facts
 The Court affirmed the use of rates of depreciation in
accordance with Bulletin "F" of the U.S. Federal Internal
Revenue Service, which this Court pronounced as having
strong persuasive effect in this jurisdiction, for having
been the result of scientific studies and observation for a
long period in the United States, after whose Income Tax
Law ours is patterned

67 68

67 68

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

BASILAN ESTATES, INC. V. CIR BASILAN ESTATES, INC. V. CIR

 Issue: WON depreciation shall be determined on the
acquisition cost or on the reappraised value of the
assets
 Depreciation is the gradual diminution in the useful
value of tangible property resulting from the wear and
tear and normal obsolescence
 Depreciation commences with the acquisition of the
property and its owner is not bound to see his property
gradually waste, without making provision out of earnings
for its replacement
 The law permits the taxpayer to recover gradually his
capital investment in wasting assets free from income tax
 The income tax law does not authorize the
depreciation of an asset beyond its acquisition cost
 A deduction over and above such cost cannot be claimed
and allowed
 Deductions from gross income are privileges, and not
matters of right
 They are not created by implication but upon clear
expression in the law
 The recovery of an amount more than the invested
capital in an asset will transgress the underling purpose
of a depreciation allowance
 For then, what the taxpayer would recover will be, not only
the acquisition cost, but also some profit which s not the
reason for the allowance for depreciation

69 70

69 70

DEPRECIATION
 Rev. Regs. No. 012-12
 Deductibility of depreciation expense as it relates to
purchase of vehicles and other expenses related thereto
 Bulletin “F”: Table of Useful Lives of Depreciable
Property by the US IRS 72
ALLOWABLE
 Annex “A” of Rev. Regs. No. 19-86
 Rev. Regs. No. 19-86 covers Taxation of Leases
DEDUCTIONS
 Annex “A” provides a Schedule of Depreciation

Depletion

71

71 72

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

DEPLETION
 What is depletion?
 It is the exhaustion of natural resources, such as mines
and oil or gas wells, as a result of production or
severance from such mines or wells
 Theory and purpose of depletion allowance
 As the product of the mine is sold, a gradual sale is being
made of the taxpayer’s capital interest in the property.
 Depletion allowance enables the taxpayer to recover that
capital interest free of income, at its cost or on some
other basis
DEPLETION
 Persons allowed to claim depletion allowance
 Allowed only to mining entities which own an economic
interest in mineral deposits
 A corporation which has no capital investment in the mineral
deposit does not possess an economic interest merely
because through a contractual relation; it possesses a mere
economic or pecuniary advantage derived from production
 In the case of resident foreign corporation or an alien
individual engaged in trade or business in the Philippines,
allowance shall be authorized for oil and gas wells or
mines located in the Philippines

73 74

73 74

DEPLETION
 Allowable cost depletion allowance
 A reasonable allowance for depletion shall be computed
in accordance with the cost depletion method allowed
under the rules and regulations prescribed by the SoF
 See Rev. Regs. No. 5-76
76
ALLOWABLE
 When the allowances equal the capital invested, no
further allowance shall be granted DEDUCTIONS

Charitable and Other Contributions

75

75 76

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

CHARITABLE AND OTHER CHARITABLE AND OTHER

CONTRIBUTIONS
 Tax treatment of charitable contributions:
 Certain charitable contributions are deductible up to a
maximum amount, i.e., must not exceed 10% of the
taxable income of an individual, or 5% of a corporation,
before deducting the contribution
 Certain charitable contributions are deductible in full
 Requisites for deductibility
 The contribution must actually be paid or made to the
Philippine government or any political subdivision thereof
or to any of the domestic corporations or associations
specified by the Tax Code
 It must be paid or incurred within the taxable year
 It must be supported by adequate records or receipts
CONTRIBUTIONS
 Contributions deductible in full
 Donations to the Government
 To the government or any of its agencies or political
subdivisions including fully-owned government corporations
 Exclusively to finance, to provide for, or to be used in
undertaking priority activities in education, health, youth
and sports development, human settlements, science
and culture, and in economic development according to
the national priority plan determined by NEDA
 If not in accordance with the annual priority plan, the
donation to the Government will be subject to the 5%/10%
limitation

77 78

77 78

CHARITABLE AND OTHER CHARITABLE AND OTHER

CONTRIBUTIONS CONTRIBUTIONS
 Contributions deductible in full  Contributions deductible in full
 Donations to certain foreign institution or international  Donations to certain accredited non-government
organizations organization
 In compliance with agreements, treaties, or commitments  Non-profit domestic corporation
entered into by the Philippines; foreign laws on international  Purpose/s: Organized and operated exclusively for scientific;
organizations; or special laws research; educational; character-building and youth and
sport development; health; social welfare; cultural or
charitable purposes; or a combination
 No part of its taxable (net) income inures to the benefit of
any private individual
 Utilization requirement: Not later than the 15th day of the third
month after the close of its taxable year in which
contributions are received, makes a utilization for the active
conduct of its activities constituting the purpose or function
for which it is organized and operated
79 80

79 80

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

CHARITABLE AND OTHER CHARITABLE AND OTHER

CONTRIBUTIONS
 Contributions deductible in full
 Donations to certain accredited non-government
organization
 Administrative expenses: level of administrative expenses on
an annual basis should conform to the rules and regulations
prescribed by the SoF but in no case to exceed 30% of the
total expense
 In the event of dissolution, the assets will be distributed:
 To another non-profit domestic corporation organized for similar
purpose or purposes; or
 To the State for public purpose; or
 To another organization by a court to be used in such a manner
as in the judgment of the court will best accomplish the general
purposes for which the dissolved organization was organized
81
CONTRIBUTIONS
 Contributions deductible in full
 Donations to certain accredited non-government
organization
 “Utilization” means
 Any amount in cash or in kind (including administrative expense)
paid or utilized to accomplish one or more purposes for which
the accredited NGO was created or organized
 Any amount paid to acquire an asset used (or held for use)
directly in carrying out one or more purposes for which the
accredited NGO was created or organized
 Any amount set aside for a specific project which comes within
one or more purposes of the accredited NGO
 If, at the time such amount is set aside, the accredited NGO has
established to the satisfaction of the CIR that the amount will be paid
for the specific project within a period not to exceed five (5) years, and
the project is one which can be better accomplished by setting aside
such amount than by immediate payment of funds
82

81 82

CHARITABLE AND OTHER CHARITABLE AND OTHER

CONTRIBUTIONS CONTRIBUTIONS
 Contributions deductible in full  Contributions deductible in full
 Under PD No. 507  Under PD No. 507
 Contributions, gifts and bequests to social welfare, cultural,  Charitable institution
and charitable institutions, no part of the net income of which  Exists to carry out a purpose recognized in law as charitable, such as,
inures to the benefit of any individual, are deductible in full in the relief and comfort of the poor, the sick and the afflicted and, in
general, to promote the welfare of others in need
computing the donor’s taxable income and are exempt from
donor’s and estate tax  Under special laws
 Social welfare organization  International Rice Research Institute (RA No. 2707)
 Generally engaged in promoting the welfare of mankind, such as the
 University of the Philippines and other state colleges and
improvement of the living conditions and standard of members of a
community universities
 Cultural organization  Philippine Rural Reconstruction Movement
 Generally engaged in the cultivation, improvement, or development by  Cultural Center of the Philippines
study, training, refining, etc., of the minds, emotions, manners, tastes,
habits, concepts, and arts of the people  Integrated Bar of the Philippines (PD No. 181)
 Development Academy of the Philippines (PD No. 205)
83 84
 National Museum, Library, and Archives (PD No. 373)

83 84

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

CHARITABLE AND OTHER CHARITABLE AND OTHER

CONTRIBUTIONS
 Deductible contributions subject to maximum amount
 To, or for the use of, the government of the Philippines, or
any its agencies or political subdivisions exclusively for
public purposes
 To accredited domestic corporations or associations
organized and operated exclusively for religious,
charitable, scientific, youth and sports development,
cultural or educational purposes, or rehabilitation of
veterans
 To non-government organizations in accordance with the
rules and regulations promulgated by the SoF
 No part of the taxable income of which inures to the benefit
of any private stockholder or individual
CONTRIBUTIONS
 Amount of deduction
 Limitation in amount: 5% if corporation, 10% if individual
of taxpayer’s income derived from trade, business or
profession before charitable and other contributions
 All other deductions claimed by the taxpayer should be
deducted from gross income
 The difference will then be the basis of computing the
deductible contributions subject to the 5%/10% limitations
 After determining the deductible contributions subject to
limitation, the taxpayer may then deduct such
contributions deductible in full

85 86

85 86

CHARITABLE AND OTHER CHARITABLE AND OTHER

CONTRIBUTIONS CONTRIBUTIONS
 Illustration:  BIR-NEDA Regulations No. 001-82

Gross income P100,000

 Amends BIR-NEDA Regulations No. 1-81 on charitable
and other contributions
Less: Deductions
Salaries P30,000
Rent & light 12,000
Repairs & maintenance 8,000
Taxes 2,000
Depreciation 4,000
Other expenses 4,000 60,000
Net income before contributions with limitation P40,000
Less: Allowable contributions with limitation (5% x P40,000) P2,000

Contributions deductible in full 7,500 9,500

Taxable income P30,500
87 88

87 88

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

RESEARCH AND DEVELOPMENT

 Section 34(I), Tax Code
 A taxpayer may treat R&D expenses which are paid or
incurred during the taxable year in connection with his

89
ALLOWABLE trade, business, or profession as ordinary and necessary
expenses which are not chargeable to capital account

DEDUCTIONS  The expense so treated shall be allowed as deduction

during the taxable year when paid or incurred

Research and Development

90

89 90

RESEARCH AND DEVELOPMENT RESEARCH AND DEVELOPMENT

 Option to amortize certain R&D expenses
 R&D expenses may be deferred or amortized over a
period of not less than 60 months
 The option and the period shall be irrevocable and can
only be changed with the approval of the CIR
 When amortization will be preferred
 Amortization will be preferred by a company with less
revenue against which the expenses can be deducted as
usually expected in the initial years
 Outright deduction may be advisable if the taxable revenue
will materialize within a period shorter than the minimum
period
91
 The following R&D expenses may be treated as deferred
expenses
 Paid or incurred by the taxpayer in connection with trade,
business, or profession
 Not treated as ordinary and necessary expenses
 Chargeable to capital account but not chargeable to property
of a character which is subject to depreciation or depletion
 The following are not treated as R&D:
 Any expenditure for the acquisition or improvement of
land, or for the improvement of property to be used in
connection with research and development of a character
which is subject to depreciation and depletion
 Any expenditure paid or incurred for the purpose of
ascertaining the existence, location, or quality of any
deposit of ore or other mineral, including oil or gas
92

91 92

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

PENSION TRUSTS
 General rule
 An employer establishing or maintaining a pension trust
to provide for the payment of reasonable pensions to its

93
ALLOWABLE employees shall be allowed as a deduction from its gross
income:

DEDUCTIONS  Contributions to such trusts during the taxable year to cover

the pension liability accruing during the year; and
 A reasonable amount transferred or paid into such trust
during the taxable year in excess of the contributions but
only if such amount
 Has not theretofore been allowed as a deduction; and

Pension Trusts  Is apportioned in equal parts over a period of ten (10)

consecutive years beginning with the year in which the transfer
or payment is made

94

93 94

PENSION TRUSTS PENSION TRUSTS

 Requisites for deductibility
 The employer must have established a pension or
retirement plan to provide for the payment of reasonable
pensions to its employees;
 The pension plan is reasonable and actuarially sound;
 It must be funded by the employer, i.e., the employer
contributes cash to the plan;
 The amount contributed must no longer be subject to its
control or disposition;
 The payment has not been allowed before as a
deduction; and
 The amount is apportioned in equal parts over a period of
10 consecutive years beginning with the year in which
the transfer or payment is made
 Payments deductible
 Amounts contributed by the employer during the taxable
year into the pension plan to cover the pension liability
accruing during the year
 These payments are considered ordinary and necessary
expenses
 1/10 of the reasonable amount paid by the employer to
cover pension liability applicable to the years prior to the
taxable year, or so paid to place the trust in a sound
financial basis
 This payment is the pension trust expense deductible from
gross income under Section 34(J), Tax Code

95 96

95 96

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

PENSION TRUSTS PENSION TRUSTS

 Illustration:  Answer
 ABC Bank, which was incorporated in 2000, put up a qualified
First Year Second Year Third Year
retirement plan for its employees. It appointed its trust department to
administer the plan. The actuarial report on the plan required the Current contribution P400,000 P400,000 P400,000
payment to the retirement fund the amount of P1,500,000 cover the Contribution for past
retirement of employees for past services rendered. The bank also services
has to contribute to the plan the amount of P400,000 per year. It paid
First Year – 10% of
the following amount to the trustee for the first three years of the
P750,000 75,000 75,000 75,000
plan’s operations:
Second Year – 10% of
Current Contribution for P500,000 50,000 50,000
Contribution Past Years Services
Third Year – 10% of
First Year P400,000 P750,000 P250,000 25,000
Second Year P400,000 P500,000 Total Deductions P475,000 P525,000 P550,000
Third Year P400,000 P250,000

 How much is the deductible pension expense for the three years of
the plan’s operations?
97 98

97 98

PENSION TRUSTS PENSION TRUSTS

 Private retirement benefit plan
 Under RA No. 4917, retirement benefits received by
employees of private firms in accordance with a
reasonable private benefit plan maintained by the
employer are exempt from all taxes, provided:
 The retiring employee –
 Has been in the service of the same employer for at least 10
year; and
 Is not less than 50 years old at the time of his retirement
 The benefits shall be availed of by an official or employee
only once
 Private retirement benefit plan
 “Reasonable private benefit plan” – pension, gratuity,
stock, bonus, or profit sharing plan maintained by an
employer for the benefit of some or all of his employees –
 Wherein contributions are made by such employers or
employees, or both, for the purpose of distributing to such
employee the earnings and principal of the fund thus
accumulated; and
 Wherein the plan provides that at no time shall any part of
the principal or income of the fund be used for, or be diverted
to, any purpose other than for the exclusive benefit of said
employees

99 100

99 100

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DLSU College of Law
Taxation Law Review
PENSION TRUSTS
 Requisites of a reasonable retirement benefit plan
 It must be a definite written program setting forth all
provisions essential for qualification
 It must be a permanent and continuing program unless
sooner terminated by virtue of a valid business reason
 It must cover at least 70% of all officials and employees
 If the plan provides eligibility requirements and at least 70% of all
officials and employees meet the eligibility requirements, at least
80% of those eligible must be covered
 It must provide for the non-diversion of the corpus (principal)
or income of the trust fund to any purpose other than for the
exclusive benefit of officials and employees;
 It must not provide for discrimination in contributions or
benefits in favor of officials and employees who are officers,
shareholders, supervisors, or highly compensated officers
101
101
103
ALLOWABLE
DEDUCTIONS
Premium Payments
103
Atty. Martin Ignacio D. Mijares
First Semester, AY 2019-2020
PENSION TRUSTS
 Requisites of a reasonable retirement benefit plan
 It must provide for the contribution to the trust fund by the
employer of officials and employees, or both for the purpose
of distributing to the officials and employees or their
beneficiaries, the corpus and income of the fund
accumulated by the trust in accordance with the plan; and
 It must provide for non-forfeitable rights, i.e., upon the
termination of the plan or upon complete discontinuance of
contributions under the plan, the rights of each official or
employer to benefits accrued to the date of such termination,
to the extent then funded, or the rights of each employer to
the amounts credited to his account at such time are non-
forfeitable
102
102
PREMIUM PAYMENTS
 Section 24(M), Tax Code
 Deduction available only to individual taxpayers
 The amount of premium not to exceed P2,400 per family
or P200 a month paid during the taxable year for health
and/or hospitalization insurance taken by the taxpayer for
himself, including his family, shall be allowed as a
deduction from his gross income
 The family must have a gross income of not more than
P250,000 for the taxable year
 In the case of married taxpayers, only the spouse
claiming the additional exemption for dependents shall be
entitled to this deduction
 Repealed by the TRAIN Law
104
104
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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

ADDITIONAL REQUIREMENTS FOR

DEDUCTIBILITY
 Section 34(K), Tax Code
 Any amount paid or payable which is otherwise
deductible from, or taken into account in computing gross

105
ALLOWABLE income or for which depreciation or amortization may be
allowed

DEDUCTIONS  Shall be allowed as a deduction only if is is shown that

the tax required to be deducted and withheld therefrom
has been paid to the BIR in accordance with Sections 58
and 81, Tax Code
 Purpose: to compel the withholding and remittance of taxes

Additional Requirements for Deductibility

106

105 106

ADDITIONAL REQUIREMENTS FOR ADDITIONAL REQUIREMENTS FOR

DEDUCTIBILITY DEDUCTIBILITY
 RMO No. 38-83  Rev. Regs. No. 12-2013
 Any amount claimed as deduction on which a tax is  No deduction will also be allowed notwithstanding
supposed to have been withheld shall be allowed if in the payments of withholding tax at the time of the audit
course of the audit, the examiner discovers that investigation or reinvestigation/reconsideration in cases
 Payee reported the income and withholding agent/taxpayer where no withholding of tax was made
pays the surcharges, interest, penalties for failure to withhold  Rev. Regs. No. 6-2018
the tax
 Revokes Rev. Regs. No. 12-2013
 Withholding agent/taxpayer pays the tax supposed to have
been withheld plus surcharges, interest, and penalties
 Withholding agent/taxpayer pays the deficiency withholding
tax plus surcharges, interest, and penalties

107 108

107 108

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

OPTIONAL STANDARD DEDUCTION

 Section 34(L), Tax Code
 Option available to individual and corporate taxpayers
 In lieu of the itemized deductions allowed (from business

109
ALLOWABLE expenses to pension trusts), an individual subject to
income tax, other than on with pure compensation

DEDUCTIONS income and a non-resident alien, may elect a standard

deduction in an amount not exceeding 40% of his gross
sales or receipts, the case may be
 Domestic corporations and resident foreign corporations
may elect a standard deduction in an amount not
exceeding 40% of gross income
Optional Standard Deduction

110

109 110

OPTIONAL STANDARD DEDUCTION OPTIONAL STANDARD DEDUCTION

 Unless the taxpayer signifies in his return his intention  Rev. Regs. No. 016-08
to elect the OSD, he shall be considered as having  Implementing Section 34(L), Tax Code on the OSD
availed himself of the itemized deductions allowed to individuals and corporations in computing their
 Such election when made in the return shall be taxable income
irrevocable for the taxable year for which the return is  Persons covered
made  Individuals
 An individual who is entitled to and claimed the OSD  Resident citizens

shall not be required to submit with his tax return such  Nonresident citizens
financial statements otherwise required under the Tax  Resident aliens
Code  Taxable estates and trusts

 Required to keep record of his gross sales or receipts  Corporations

during the taxable year  Domestic corporations
 Resident foreign corporations

111 112

111 112

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

OPTIONAL STANDARD DEDUCTION OPTIONAL STANDARD DEDUCTION

 Rev. Regs. No. 016-08  Illustration:
 Basis of OSD for individuals
Individual Corporation
 “Gross sales” or “gross receipts” not “gross income” Gross sales P1,000,000 P1,000,000
 Cost of sales or cost of services are not allowed to be Less: Cost of goods sold 800,000
deducted for purposes of determining the basis of the OSD Basis of OSD P1,000,000 P200,000
 Basis of OSD for corporations X OSD Rate 40% 40%
 “Gross income” which means gross sales less sales returns, OSD amount P400,000 P80,000
discounts and allowances and cost of goods sold/cost of
services Individual Corporation
Gross sales P1,000,000 P1,000,000
Less: Cost of goods sold 800,000
Gross sales/Gross income P1,000,000 P200,000
Less: OSD 400,000 80,000
Taxable income P600,000 P120,000
113 114

113 114

OPTIONAL STANDARD DEDUCTION OPTIONAL STANDARD DEDUCTION

 RMC No. 16-2010 (February 26, 2010)
 The election to claim either OSD or itemized deductions
for the taxable year must be signified by checking the
appropriate box in the income tax return for the first
quarter of the taxable year
 Once the election is made, the same type of deduction must
be consistently applied for all the succeeding quarterly
returns and the final adjustment return for the taxable year
 Any taxpayer who is required but fails to file the quarterly
income tax return for the first quarter shall be considered as
having availed of the itemized deductions option for the
taxable year
 Rev. Regs. No. 2-2014
 New Income Tax Forms
 Mandatory Itemized Deductions
 Corporations, partnerships and other non-individuals are
mandated to use the itemized deductions in the following
cases:
 Those exempt under the Tax Code, as amended [Section 30
and those exempted under Section 27(C)] and other special
laws, with no other taxable income;
 Those with income subject to special/preferential tax rates;
and
 Those with income subject to income tax rate under Section
27(A) and 28(A)(1) of the Tax Code, as amended, and also
with income subject to special/preferential tax rates.

115 116

115 116

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

OPTIONAL STANDARD DEDUCTION OPTIONAL STANDARD DEDUCTION

 Rev. Regs. No. 2-2014
 Mandatory Itemized Deductions
 Juridical entities whose taxable base is the gross
revenue or receipts (e.g., non-resident foreign
international carriers) are not entitled to the itemized
deductions nor to the optional standard deduction (OSD)
under Section 34(L) of the Tax Code, as amended.
 Rev. Regs. No. 2-2014
 Mandatory Itemized Deductions
 Individual taxpayers who are not entitled to avail of the
OSD and thus use only the itemized deduction method
are as follows:
 Those exempt under the Tax Code, as amended, and other
special laws with no other taxable income [e.g., Barangay
Micro Business Enterprise (BMBE)];
 Those with income subject to special/preferential tax rates;
and
 Those with income subject to income tax rate under Section
24, Tax Code, as amended, and also with income subject to
special/preferential tax rates.

117 118

117 118

PERSONAL AND ADDITIONAL

EXEMPTIONS
 Section 35, Tax Code
 Provides the allowable personal exemptions for individual
taxpayers and the additional exemptions for their

119
ALLOWABLE dependents
 Also provides the rules on changes in status of the

DEDUCTIONS taxpayer within the calendar year

 Repealed by the TRAIN Law

Personal and Additional Exemptions

120

119 120

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

NON-DEDUCTIBLE EXPENSES
 Section 36, Tax Code
 Items not deductible
 Personal, living, or family expenses

121
ALLOWABLE  Any amount paid out for new buildings or for permanent
improvements, or betterments made to increase the value of

DEDUCTIONS any property or estate

 Any amount expended in restoring property or in making
good the exhaustion thereof for which an allowance is or has
been made
 Premiums paid on any life insurance policy covering the life
of any officer or employee, or of any person financially
Non-deductible Expenses 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

122

121 122

TAXPAYERS, TAX RATES, AND TAX BASE

TAXPAYERS, TAX TAX

x TAX RATE =
TAX
BASE DUE
123
RATES, TAX
BASE • Gross income • Kind of taxpayer • Pay as you file
• Taxable income • Nature of income • Pay through
withholding
(final or
Individual Taxpayers creditable)

124

123 124

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

RELEVANT TAX CODE PROVISIONS INDIVIDUAL TAXPAYERS

 Section 22:  Citizens [Section 1, Article IV, Constitution]
 (E): Definition of “nonresident citizen”  Who are citizens?
 (F): Definition of “resident alien”  Those who are citizens of the Philippines at the time of the
adoption of the Constitution (February 2, 1987)
 (G): Definition of “nonresident alien”
 Those whose fathers or mothers are citizens of the
 Section 24: Income tax on citizens and resident aliens Philippines
 Section 25: Income tax on nonresident aliens  Those born before January 17, 1973 (date of adoption of the
 (A): NRAETB 1973 Constitution) of Filipino mothers who elect Philippine
citizenship upon reaching the age of majority
 (B): NRANETB
 Those who are naturalized in accordance with law
 (C) to (E): Other nonresident aliens
 Philippine citizenship may be lost or reacquired in the
manner provided by law

125 126

125 126

INDIVIDUAL TAXPAYERS INDIVIDUAL TAXPAYERS

 Resident citizens – those residing in the Philippines
 Nonresident citizens – those not residing in the
Philippines [Section 22(E)]
 A citizen of the Philippines who
 Establishes to the satisfaction of the CIR the fact of his
physical presence abroad with a definite intention to reside
therein
 Leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a
permanent basis
 Nonresident citizens – those not residing in the
Philippines [Section 22(E)]
 A citizen of the Philippines who
 Works and derives income from abroad and whose
employment thereat require him to be physically present
abroad most of the time during the taxable year
 To be considered physically present abroad most of the time
during the taxable year, a contract worker must have been
outside the Philippines for not less than 183 days during such
taxable year

127 128

127 128

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DLSU College of Law
Taxation Law Review
INDIVIDUAL TAXPAYERS
 Nonresident citizens
 Any such Filipino shall be considered a non-resident
citizen for such taxable year with respect to the income
he derived from foreign sources from the date he actually
departed from the Philippines
 A Filipino citizen who has been previously considered a
nonresident citizen and who arrives in the Philippines at
any time during the year to reside permanently in the
Philippines shall be treated as a nonresident citizen with
respect to his income derived from sources abroad until
the date of his arrival in the Philippines
129
129
INDIVIDUAL TAXPAYERS
 Alien or foreigners
 Resident alien – an individual whose residence is in the
Philippines and who is not a citizen thereof
 Nonresident alien – an individual whose resident is not
within the Philippines and who is not a citizen thereof
131
131
Atty. Martin Ignacio D. Mijares
First Semester, AY 2019-2020
INDIVIDUAL TAXPAYERS
 Nonresident citizen
 Shall submit to the CIR proof of his intention of leaving
the Philippines to reside permanently abroad or to return
to and reside in the Philippines as the case may be
 Section 2, Rev. Regs. No. 5-01: Non-resident citizens
who are exempt from tax with respect to income derived
from sources outside the Philippines shall no longer be
required to file information returns (BIR Form 1701C or
the new computerized BIR Form 1703) on their income
derived from sources outside the Philippines beginning
taxable year 2001
130
130
INDIVIDUAL TAXPAYERS
 How to determine residence [Section 5, Rev. Regs. No
2]
 Resident alien – is an alien actually present in the
Philippines who is not a mere transient or sojourner
 Whether he is a transient or not is determined by his
intentions with regard to the length and nature of his stay
 Mere physical presence is not enough
132
132
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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

INDIVIDUAL TAXPAYERS INDIVIDUAL TAXPAYERS

 How to determine residence  How to determine residence
 Thus:  An alien who has acquired residence in the Philippines
 An alien who lives in the Philippines and has no definite retains his status as a resident until he abandons the
intention as to his stay, he is a resident same and actually departs from the Philippines.
 A mere floating intention indefinite as to time, to return to
another country is not sufficient to constitute him a transient  An intention to change his residence does not change his
 One who comes to the Philippines for a definite purpose
status as a resident alien to that of a nonresident alien.
which in its nature may be promptly accomplished is a  Thus, an alien who has acquired a residence in the
transient Philippines is taxable as a resident for the remainder of
 But if his purpose is of such a nature that an extended stay his stay in the Philippines. [Section 6, Rev. Regs. No 2]
may be necessary for its accomplishment, and to that end
the alien makes his home temporarily in the Philippines, he
becomes a resident, though it may be his intention at all
times to return to his domicile abroad when the purpose for
which he came has been consummated or abandoned

133 134

133 134

INDIVIDUAL TAXPAYERS
 Nonresident alien – an individual whose resident is not
within the Philippines and who is not a citizen of the
Philippines
 Engaged in trade or business in the Philippines – an NRA
TAXPAYERS, TAX
who shall come to the Philippines and stay therein for an
aggregate period of more than 180 days in any calendar
year
136
RATES, TAX
 Includes the performance of services within the Philippines
[Section 8, Rev. Regs. No. 2]
BASE
 Not engaged in trade or business in the Philippines – an
NRA who shall come to the Philippines and stay therein
for an aggregate period of 180 days or less in any Tax on Citizens and Resident Aliens
calendar year

135

135 136

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

TAX ON CITIZENS AND RESIDENT ALIENS TAX ON CITIZENS AND RESIDENT ALIENS
 Section 24(A), Tax Code  Tax base
 Imposition of the tax  Taxable income
 On resident citizens – on their taxable income (except  Section 31, Tax Code
certain passive incomes and certain capital gains)
derived for each taxable year from all sources within and
Pertinent items of gross income specified in the Tax Code
without the Philippines
 On nonresident citizens, including OCW – on their
Less: Allowable deductions, if any, authorized for each type
taxable income (except certain passive incomes and
of income by the Tax Code or other special laws
certain capital gains) derived for each taxable year from
all sources within the Philippines
 On resident aliens – on their taxable income (except
certain passive incomes and certain capital gains)
TAXABLE INCOME
derived for each taxable year from all sources within the
Philippines
137 138

137 138

TAX ON CITIZENS AND RESIDENT ALIENS TAX ON CITIZENS AND RESIDENT ALIENS
 Tax Rate
R.A. No. 10963
1997 Tax Code R.A. No. 10963 1997 Tax Code Tax Schedule Tax Schedule
Annual Salary
(2018-2022) (2023 onwards)
Lowest bracket:
Lowest bracket: Not over Php10,000 5% Not over Php250,000 0% 0%
Below
Below Over 10,000 but P500 + 10% of the Over Php250,000 but 20% of the excess 15% of the excess
Php10,000 5% Php250,000 0% not over 30,000 excess over 10,000 not over Php400,000 over Php250,000 over Php250,000
Php30,000 + 25% of Php22,500 + 20% of
Highest bracket: Php250k to 400k 20% Over 30,000 but P2,500 + 15% of the Over Php400,000 but
the excess over the excess over
not over 70,000 excess over 30,000 not over Php800,000
Above Php400,000 Php400,000
Highest bracket: Php130,000 + 30% of Php102,500 + 25% of
Php500,000 32% Over 70,000 but P8,500 + 20% of the Over Php800,000 but
the excess over the excess over
Above not over 140,000 excess over 70,000 not over Php2,000,000
Php800,000 Php800,000
Php8,000,000 35% Php490,000 + 32% of Php402,500 + 30% of
Deductions: Over 140,000 but P22,500 + 25% of the Over Php2,000,000 but
the excess over the excess over
Additional and not over 250,000 excess over 140,000 not over Php8,000,000
Deductions: Php2,000,000 Php2,000,000
Personal Exemptions Php2,410,000 + 35% Php2,202,500 + 35%
Repealed Over 250,000 but P50,000 + 30% of the
Over Php8,000,000 of the excess over of the excess over
not over 500,000 excess over 250,000
Php8,000,000 Php8,000,000
Note: The amendment exempted the first 5 brackets of the old tax
Over 500,000 P125,000 + 32% of the
schedule from income tax and expanded the last brackets from
139 excess over 500,000 140
two to five ranges.

139 140

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

PURE COMPENSATION INCOME EARNERS MINIMUM WAGE EARNERS

 Minimum wage earners (MWE)
Use graduated rates Section 24(A)(2)(a), Tax Code
• Taxable income = gross compensation income less non-
taxable income/benefits, e.g., 13th month pay, de minimis
benefits, and employee’s share in SSS, GSIS, PHIC, Pag-
ibig contributions and union dues
• Husband and wife shall separately compute their
individual income tax based on their respective
individual total taxable income
• If any income cannot be attributed to or identified as
income exclusively earned or realized by either of the
spouses, it shall be divided equally between the
spouses
 Section 22(HH), Tax Code
 Worker in the private sector paid the statutory minimum
wage; or
 An employee in the public sector with compensation income
of not more than the statutory minimum wage in the non-
agricultural sector where he/she is assigned
 Section 24(A), Tax Code
 MWE shall be exempt from the payment of income tax on
their taxable income
 Holiday pay, overtime pay, night shift differential pay, and
hazard pay received by MWE are exempt from income tax

141 142

141 142

CURRENT DAILY MINIMUM WAGE – NCR MINIMUM WAGE EARNERS

 Example:
 Mr. ABC, a minimum wage earner, works for XYZ, Inc. He is
not engaged in business nor has any other source of income
other than his employment. For 2018, Mr. ABC earned a total
compensation income of P135,000. In addition, he had
additional pay of P140,000, consisting of: overtime pay of
P80,000; night differential of P30,000; hazard pay of P15,000;
and holiday pay of P15,000.

Total compensation income 135,000

Add: OT, NSD, HZDP, HP 140,000
Total income 275,000
Tax due EXEMPT

143 144

143 144

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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

SELF-EMPLOYED INDIVIDUALS SELF-EMPLOYED INDIVIDUALS

 Not over the VAT Threshold of Php3,000,000.00 (but
not VAT-registered)
1997 Tax Code R.A. No. 10963
Option 1: Graduated Income Tax Rates
Lowest bracket:
Below New Option: Graduated income tax rates - and - Percentage tax
Php10,0000 5% 8% income tax on gross 0% to 35% 3% on gross sales or
sales/receipts receipts
Highest bracket: Deductions:
Above Conditions: OSD (40%) or Itemized Deduction
1. Gross sales/receipts and non-
Php500,0000 32%
2.
3.
operating income is < Php3M
Non-VAT registered
Taxpayer not subject to other
OR
Deductions:
percentage taxes Option 2: Fixed Income Tax Rate
OSD (40%) or 4. 8% tax is elected in the 1st quarter
Itemized Deduction ITR or BIR registration Fixed income tax rate - and - Percentage tax
8% on gross sales or 0%
receipts and other income
in excess of Php250,000

147 Deductions: None 148

147 148

SELF-EMPLOYED INDIVIDUALS SELF-EMPLOYED INDIVIDUALS

 Not over the VAT Threshold of Php3,000,000.00 (but
not VAT-registered)
 Unless the taxpayer signifies the intention to elect the 8%
income tax rate in the 1st Quarter Percentage and/or
Income Tax Return, or on the initial quarter return of the
taxable year after the commencement of a new
business/practice of profession, the taxpayer shall be
considered as having availed of the graduated rates
under Section 24(A)(2)(a), Tax Code
 Such election shall be irrevocable and no amendment of
option shall be made for the taxable year
 Not over the VAT Threshold of Php3,000,000.00 (but
not VAT-registered)
 The option to be taxed at 8% income tax rate is not
available to a VAT-registered taxpayer, regardless of the
amount of gross sales/receipts, and to a taxpayer who is
subject to Other Percentage Taxes under Title V, Tax
Code, except those subject under Section 116, Tax Code
[Tax on Persons Exempt from VAT]
 Partners of GPPs by virtue of their distributive share from
GPP which is already net of cost and expenses cannot
avail of the 8% income tax rate option.

149 150

149 150

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DLSU College of Law
Taxation Law Review
SELF-EMPLOYED INDIVIDUALS
 Not over the VAT Threshold of Php3,000,000.00 (but
not VAT-registered)
 A taxpayer who signifies the intention to avail of the 8%
income tax rate option, and is conclusively qualified for
the option at the end of the year (i.e., annual gross
sales/receipts and other non-operating income did not
exceed P3 million) shall compute the final annual income
tax due based on the actual gross sales/receipts and
other non-operating income
 The income tax due shall be in lieu of the graduated rates of
income tax and the percentage tax under Section 116, Tax
Code
 The Financial Statements (FS) is not required to be attached
in the filing of the final income tax return
151
151 152
SELF-EMPLOYED INDIVIDUALS
 Not over the VAT Threshold of Php3,000,000.00 (but
not VAT-registered)
 A taxpayer subject to the graduated income tax rates
(either selected this as the income tax regime, or failed to
signify chosen intention or failed to qualify to be taxed at
the 8% income tax rate) is also subject to the applicable
business tax, if any.
 An FS shall be required as an attachment to the annual
income tax return even if the gross sales/receipts and other
non-operating income is less than the VAT threshold.
153
153 154
Atty. Martin Ignacio D. Mijares
First Semester, AY 2019-2020
SELF-EMPLOYED INDIVIDUALS
 Not over the VAT Threshold of Php3,000,000.00 (but
not VAT-registered)
 A taxpayer shall automatically be subject to graduated
rates under Section 24(A)(2)(a), Tax Code, even if the flat
8% income tax rate option is initially selected, when
taxpayer’s gross sales/receipts and other non-operating
income exceeded the VAT threshold during the taxable
year.
 In such case, his income tax shall be computed under the
graduated income tax rates and shall be allowed a tax credit
for the previous quarter/s income tax payment/s under the
8% income tax rate options
152
SELF-EMPLOYED INDIVIDUALS
 Not over the VAT Threshold of Php3,000,000.00 (but
not VAT-registered)
 Tax Base
 If taxpayer opted to be taxed at graduated rates or failed to
signify the chosen option – taxable income (gross income
less allowable deductions)
 If the option availed is the 8% income tax rate – gross
sales/receipts and other non-operating income
154
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DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

SELF-EMPLOYED INDIVIDUALS SELF-EMPLOYED INDIVIDUALS

 Mixed income earner but not over the VAT Threshold  Mixed income earner but not over the VAT Threshold
of Php3,000,000.00 (and not VAT-registered) of Php3,000,000.00 (and not VAT-registered)
Option 1: Graduated Income Tax Rates  If the gross sales/receipts and other non-operating
Compensation Income:
income exceeds the VAT threshold, the individual shall be
Graduated income tax Graduated income tax rates - and - Percentage tax
rates subject to the graduated income tax rates prescribed
0% to 35% 3% on gross
sales or receipts
under Section 24(A)(2)(a), Tax Code
Business Income: Deductions:  The Php250,000 deduction is not applicable to mixed
Option 1 or 2 OSD (40%) or Itemized Deduction
income earners since it is already incorporated in the first
tier of the graduated income tax rates applicable to
OR compensation income
Option 2: Fixed Income Tax Rate
 The total tax due shall be the sum of:
Fixed income tax rate - and - Percentage tax
8% on gross sales or 0%  Tax due from compensation, computed using the graduated
receipts and other income tax rates; and
 Tax due from self-employment/practice of profession
Deductions: None 155 156

155 156

SELF-EMPLOYED INDIVIDUALS
 Above VAT Threshold of Php3,000,000.00 (and those
VAT-registered)

Only Option: Graduated Income Tax Rates

Graduated income tax rates - and - Value-Added tax

0% to 35% 12% on gross sales or
receipts
158
THANK YOU
Deductions:
OSD (40%) or Itemized Deduction

157

157 158

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